PROSPECTUS & APPLICATION
FRANKLIN
MUTUAL
SERIES FUND INC.
MAY 1, 1998
AS AMENDED NOVEMBER 1, 1998
INVESTMENT STRATEGIES
GROWTH AND INCOME o VALUE 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
GLOBAL o VALUE MUTUAL EUROPEAN FUND
GLOBAL o VALUE MUTUAL DISCOVERY FUND
Please read this prospectus before investing, and keep it for future
reference. It contains important information, including how each fund invests
and the services available to shareholders.
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
FUND CURRENTLY OFFERS ANOTHER SHARE CLASS WITH A DIFFERENT SALES CHARGE AND
EXPENSE STRUCTURE, WHICH AFFECTS PERFORMANCE.
To learn more about each fund and its policies, you may request a copy of the
funds' Statement of Additional Information ("SAI"), dated May 1, 1998, which
we may amend from time to time. We have filed the SAI with the SEC and have
incorporated it by reference into this prospectus.
For a free copy of the SAI or a larger print version of this prospectus, or
to receive a free copy of the prospectus for the funds' other share class,
contact your investment representative or call 1-800/DIAL BEN.
MUTUAL FUND SHARES 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. MUTUAL FUND SHARES INVOLVE INVESTMENT RISKS, INCLUDING THE
POSSIBLE LOSS OF PRINCIPAL.
LIKE ALL MUTUAL FUND SHARES, THE SEC HAS NOT APPROVED OR DISAPPROVED THESE
SECURITIES OR PASSED UPON THE ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
FRANKLIN MUTUAL SERIES FUND INC.
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.
TABLE OF CONTENTS
ABOUT THE FUNDS
Expense Summary .................................................. 2
Financial Highlights ............................................. 4
How Do the Funds Invest Their Assets? ............................ 16
What Are the Risks of Investing in the Funds? .................... 27
Who Manages the Funds? ........................................... 32
How Taxation Affects the Funds
and Their Shareholders ........................................... 37
How Are the Funds Organized? ..................................... 41
ABOUT YOUR ACCOUNT
How Do I Buy Shares? ............................................. 42
May I Exchange Shares for Shares of Another Fund? ................ 51
How Do I Sell Shares? ............................................ 53
What Distributions Might I Receive From the Funds? ............... 56
Transaction Procedures and Special Requirements .................. 57
Services to Help You Manage Your Account ......................... 61
What If I Have Questions About My Account? ....................... 64
GLOSSARY
Useful Terms and Definitions ..................................... 64
FRANKLIN
MUTUAL SERIES
FUND INC.
MAY 1, 1998
AS AMENDED NOVEMBER 1, 1998
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(R)
ABOUT THE FUNDS
EXPENSE SUMMARY
This table is designed to help you understand the costs of investing in a fund.
It is based on the historical expenses of each class for the fiscal year ended
December 31, 1997. The expenses for Financial Services have been annualized.
Each fund's actual expenses may vary.
<TABLE>
<CAPTION>
A. SHAREHOLDER TRANSACTION EXPENSES+
MUTUAL FINANCIAL
SHARES QUALIFIED BEACON DISCOVERY EUROPEAN SERVICES
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
CLASS I
Maximum Sales Charge
(as a percentage of Offering Price) 5.75% 5.75% 5.75% 5.75% 5.75% 5.75%
Paid at time of purchase++ 5.75% 5.75% 5.75% 5.75% 5.75% 5.75%
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%** 0.18%*
Rule 12b-1 Fees*** 0.35% 0.35% 0.35% 0.35% 0.35% 0.35%
Other Expenses 0.15% 0.18% 0.17% 0.20% 0.24% 0.82%
----------------------------------------------------------
Total Fund Operating Expenses 1.10%** 1.13%** 1.12%** 1.35%** 1.39%** 1.35%*
==========================================================
CLASS II
Management Fees 0.60%** 0.60%** 0.60%** 0.80%** 0.80%** 0.18%*
Rule 12b-1 Fees*** 1.00% 1.00% 1.00% 1.00% 1.00% 1.00%
Other Expenses 0.15% 0.18% 0.17% 0.20% 0.25% 0.82%
----------------------------------------------------------
Total Fund Operating Expenses 1.75%** 1.78%** 1.77%** 2.00%** 2.05%** 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 a
fund.
MUTUAL FINANCIAL
SHARES QUALIFIED BEACON DISCOVERY EUROPEAN SERVICES
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
CLASS I
1 Year**** $ 68 $ 68 $ 68 $ 70 $ 71 $70
3 Years $ 90 $ 91 $ 91 $ 98 $ 99 $98
5 Years $115 $116 $116 $127 $129 -
10 Years $184 $187 $186 $211 $215 -
CLASS II
1 Year$ 37 $ 38 $ 38 $ 40 $ 40 $40
3 Years $ 65 $ 65 $ 65 $ 72 $ 74 $72
5 Years $104 $105 $105 $117 $119 -
10 Years $214 $217 $216 $240 $246 -
</TABLE>
For the same Class II investment, you would pay projected expenses of $28
(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.
Each 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? - CHOOSING A SHARE CLASS."
++++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 YOU WOULD PAY IS THE SAME. SEE "HOW DO I SELL SHARES? -
CONTINGENT DEFERRED SALES CHARGE" FOR DETAILS.
*FRANKLIN MUTUAL HAS AGREED IN ADVANCE TO LIMIT ITS MANAGEMENT FEE AND TO
ASSUME AS ITS OWN EXPENSE CERTAIN OTHER EXPENSES OTHERWISE
PAYABLE BY FINANCIAL SERVICES SO THAT FINANCIAL SERVICES' 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,
MANAGEMENT FEES WERE 0.80% AND TOTAL OPERATING EXPENSES WERE 1.97% FOR CLASS
I AND 2.62% FOR CLASS II FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997. AFTER
THE FIRST TWENTY-FOUR MONTHS OF OPERATIONS, FRANKLIN MUTUAL MAY TERMINATE
THIS ARRANGEMENT AT ANY TIME.
**FOR THE PERIOD SHOWN, FRANKLIN MUTUAL HAD AGREED IN ADVANCE TO LIMIT ITS
MANAGEMENT FEES DURING EACH 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 0.57% 0.57% 0.57% 0.78% 0.78%
TOTAL OPERATING EXPENSES:
CLASS I 1.07% 1.10% 1.09% 1.33% 1.37%
CLASS II 1.72% 1.75% 1.74% 1.98% 2.02%
*** 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 RULES OF THE NATIONAL
ASSOCIATION OF SECURITIES DEALERS, INC.
****ASSUMES A CONTINGENT DEFERRED SALES CHARGE WILL NOT APPLY.
FINANCIAL HIGHLIGHTS
This table summarizes each fund's financial history. The information has been
audited by Ernst & Young LLP, each fund's independent auditor. The audit report
covering the periods shown below appears in the fund's Annual Report to
Shareholders for the fiscal year ended December 31, 1997. The Annual Report to
Shareholders also includes more information about the fund's performance. For a
free copy, please call Fund Information.
PERIOD ENDED DECEMBER 31,
-------------------------------
MUTUAL SHARES - CLASS I 1997+++++ 1996+
- ------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE++
(For a share outstanding throughout the period)
Net Asset Value, beginning of period........... $18.56 $18.90
----------------------------
Income from investment operations:
Net investment income......................... .34 .21
Net realized and unrealized gain ............. 4.43 1.08
----------------------------
Total from investment operations............... 4.77 1.29
----------------------------
Less distributions from:
Net investment income......................... (.49) (.47)
Net realized gains............................ (1.58) (1.16)
-----------------------------
Total distributions............................ (2.07) (1.63)
-----------------------------
Net Asset Value, end of period................. $21.26 $18.56
============================
Total Return*.................................. 26.03% 6.91%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's)..............$1,043,262 $35,634
Ratios to average net assets:
Expenses...................................... 1.07% 1.09%**
Expenses, excluding waiver
and payments by affiliate.................... 1.10% 1.18%**
Net investment income......................... 1.58% 2.44%**
Portfolio turnover rate........................ 49.61% 58.35%
Average commission rate paid***................ $.0350 $.0410
PERIOD ENDED DECEMBER 31,
-------------------------------
MUTUAL SHARES - CLASS II 1997+++++ 1996+
- ------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE++
(For a share outstanding throughout the period)
Net Asset Value, beginning of period........... $18.56 $18.90
----------------------------
Income from investment operations:
Net investment income......................... .20 .20
Net realized and unrealized gain ............. 4.42 1.08
----------------------------
Total from investment operations............... 4.62 1.28
----------------------------
Less distributions from:
Net investment income......................... (.42) (.46)
Net realized gains............................ (1.58) (1.16)
-----------------------------
Total distributions............................ (2.00) (1.62)
-----------------------------
Net Asset Value, end of period................. $21.18 $18.56
=============================
Total Return*.................................. 25.17% 6.82%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's).............. $636,838 $16,873
Ratios to average net assets:
Expenses...................................... 1.72% 1.71%**
Expenses, excluding waiver and
payments by affiliate ....................... 1.75% 1.80%**
Net investment income......................... 0.92% 1.69%**
Portfolio turnover rate........................ 49.61% 58.35%
Average commission rate paid***................ $.0350 $.0410
PERIOD ENDED DECEMBER 31,
-------------------------------
QUALIFIED - CLASS I 1997+++++ 1996+
- ------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE+++
(For a share outstanding throughout the period)
Net Asset Value beginning of period............ $16.23 $16.40
----------------------------
Income from investment operations:
Net investment income......................... .28 .16
Net realized and unrealized gain ............. 3.63 .89
----------------------------
Total from investment operations............... 3.91 1.05
----------------------------
Less distributions from:
Net investment income......................... (.60) (.41)
Net realized gains............................ (1.40) (.81)
-----------------------------
Total distributions............................ (2.00) (1.22)
-----------------------------
Net Asset Value, end of period................. $18.14 $16.23
============================
Total Return*.................................. 24.44% 6.47%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000's).............. $452,590 $20,381
Ratios to average net assets:
Expenses...................................... 1.10% 1.13%**
Expenses, excluding waiver and
payments by affiliate ........................ 1.13% 1.28%**
Net investment income......................... 1.48% 3.19%**
Portfolio turnover rate........................ 52.76% 65.03%
Average commission rate paid***................ $.0365 $.0357
PERIOD ENDED DECEMBER 31,
-------------------------------
QUALIFIED - CLASS II 1997+++++ 1996+
- ------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE+++
(For a share outstanding throughout the period)
Net Asset Value, beginning of period........... $16.23 $16.40
------------------------------
Income from investment operations:
Net investment income......................... .16 .13
Net realized and unrealized gain ............. 3.63 .91
------------------------------
Total from investment operations............... 3.79 1.04
------------------------------
Less distributions from:
Net investment income......................... (.53) (.39)
Net realized gains............................ (1.40) (.82)
------------------------------
Total distributions............................ (1.93) (1.21)
------------------------------
Net Asset Value, end of period................. $18.09 $16.23
==============================
Total Return*.................................. 23.66% 6.37%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000's).............. 231,721 $9,963
Ratios to average net assets:
Expenses...................................... 1.75% 1.78%**
Expenses, excluding waiver
and payments by affiliate 1.78% 1.93%**
Net investment income......................... .84% 2.59%**
Portfolio turnover rate........................ 52.76% 65.03%
Average commission rate paid***................ $.0365 $.0357
PERIOD ENDED DECEMBER 31,
-------------------------------
BEACON - CLASS I 1997+++++ 1996+
- ------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE++++
(For a share outstanding throughout the period)
Net Asset Value, beginning of period........... $12.98 $13.21
------------------------------
Income from investment operations:
Net investment income......................... .23 .16
Net realized and unrealized gain ............. 2.65 .69
------------------------------
Total from investment operations............... 2.88 .85
------------------------------
Less distributions from:
Net investment income......................... (.51) (.33)
Net realized gains............................ (1.26) (.75)
------------------------------
Total Distributions............................ (1.77) (1.08)
------------------------------
Net Asset Value, end of period................. $14.09 $12.98
==============================
Total Return*.................................. 22.52% 6.51%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000's).............. $753,519 $52,070
Ratios to average net assets:
Expenses...................................... 1.09% 1.03%**
Expenses, excluding waiver
and payments by affiliate ................... 1.12% 1.13%**
Net investment income......................... 1.58% 1.33%**
Portfolio turnover rate........................ 54.72% 66.87%
Average commission rate paid***................ $.0230 $.0469
PERIOD ENDED DECEMBER 31,
-------------------------------
BEACON - CLASS II 1997+++++ 1996+
- ------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE++++
(For a share outstanding throughout the period)
Net Asset Value, beginning of period........... $12.98 $13.21
------------------------------
Income from investment operations:
Net investment income......................... .14 .13
Net realized and unrealized gain ............. 2.63 .71
-------------------------------
Total from investment operations............... 2.77 .84
-------------------------------
Less distributions from:
Net investment income......................... (.45) (.32)
Net realized gains............................ (1.26) (.75)
-------------------------------
Total distributions............................ (1.71) (1.07)
-------------------------------
Net Asset Value, end of period................. $14.04 $12.98
===============================
Total Return*.................................. 21.65% 6.45%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000's).............. $362,425 $16,263
Ratios to average net assets:
Expenses...................................... 1.74% 1.75%**
Expenses, excluding waiver and
payments by affiliate ...................... 1.77% 1.85%**
Net investment income......................... .92% .84%**
Portfolio turnover rate........................ 54.72% 66.87%
Average commission rate paid***................ $.0230 $.0469
PERIOD ENDED DECEMBER 31,
-------------------------------
DISCOVERY - CLASS I 1997+++++ 1996+
- ------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(For a share outstanding throughout the period)
Net Asset Value, beginning of period........... $17.15 $17.66
------------------------------
Income from investment operations:
Net investment income......................... .27 .11
Net realized and unrealized gain ............. 3.54 .74
------------------------------
Total from investment operations............... 3.81 .85
------------------------------
Less distributions from:
Net investment income......................... (.77) (.29)
Net realized gains............................ (1.36) (1.07)
------------------------------
Total distributions............................ (2.13) (1.36)
------------------------------
Net Asset Value, end of period................. $18.83 $17.15
==============================
Total Return*.................................. 22.54% 4.85%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000's).............. $693,952 $29,903
Ratios to average net assets:
Expenses...................................... 1.33% 1.38%**
Expenses, excluding waiver and
payments by affiliate ....................... 1.35% 1.51%**
Net investment income......................... 1.39% 0.74%**
Portfolio turnover rate........................ 58.15% 80.18%
Average commission rate paid***................ $.0201 $.0257
PERIOD ENDED DECEMBER 31,
-------------------------------
DISCOVERY - CLASS II 1997+++++ 1996+
- ------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(For a share outstanding throughout the period)
Net Asset Value, beginning of period........... $17.17 $17.66
------------------------------
Income from investment operations:
Net investment income......................... .15 .09
Net realized and unrealized gain ............. 3.52 .76
------------------------------
Total from investment operations............... 3.67 .85
------------------------------
Less distributions from:
Net investment income......................... (.69) (.27)
Net realized gains............................ (1.36) (1.07)
-------------------------------
Total distributions............................ (2.05) (1.34)
-------------------------------
Net Asset Value, end of period................. $18.79 $17.17
===============================
Total Return*.................................. 21.70% 4.90%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000's).............. $402,625 $18,038
Ratios to average net assets:
Expenses...................................... 1.98% 2.00%**
Expenses, excluding waiver and
payments by affiliate ....................... 2.00% 2.13%**
Net investment income......................... 0.74% 0.13%**
Portfolio turnover rate........................ 58.15% 80.18%
Average commission rate paid***................ $.0201 $.0257
PERIOD ENDED DECEMBER 31,
-------------------------------
EUROPEAN - CLASS I 1997+++++ 1996+
- ------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(For a share outstanding throughout the period)
Net Asset Value, beginning of period........... $11.38 $10.84
------------------------------
Income from investment operations:
Net investment income......................... .24 .03
Net realized and unrealized gain ............. 2.31 .58
------------------------------
Total from investment operations............... 2.55 .61
------------------------------
Less distributions from:
Net investment income......................... (.81) (.05)
Net realized gains............................ (.56) (.02)
------------------------------
Total distributions............................ (1.37) (.07)
------------------------------
Net Asset Value, end of period................. $12.56 $11.38
==============================
Total Return*.................................. 22.61% 5.61%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000's).............. $93,231 $9,200
Ratios to average net assets:
Expenses...................................... 1.37% 1.32%**
Expenses, excluding waiver
and payments by affiliate ................... 1.39% 1.42%**
Net investment income......................... 1.84% 1.44%**
Portfolio turnover rate........................ 98.12% 36.75%
Average commission rate paid***................ $.0172 $.0233
PERIOD ENDED DECEMBER 31,
-------------------------------
EUROPEAN - CLASS II 1997+++++ 1996+
- ------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(For a share outstanding throughout the period)
Net Asset Value, beginning of period........... $11.38 $10.84
------------------------------
Income from investment operations:
Net investment income......................... .13 .02
Net realized and unrealized gain ............. 2.33 .58
------------------------------
Total from investment operations............... 2.46 .60
------------------------------
Less distributions from:
Net investment income......................... (.76) (.04)
Net realized gains............................ (.56) (.02)
------------------------------
Total distributions............................ (1.32) (.06)
------------------------------
Net Asset Value, end of period................. $12.52 $11.38
==============================
Total Return*.................................. 21.79% 5.52%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000's).............. $49,174 $2,754
Ratios to average net assets:
Expenses...................................... 2.02% 1.94%**
Expenses, excluding waiver
and payments by affiliate ................... 2.05% 2.04%**
Net investment income......................... 1.03% 0.79%**
Portfolio turnover rate........................ 98.12% 36.75%
Average commission rate paid***................ $.0172 $.0233
AUGUST 19, 1997
(COMMENCEMENT OF OPERATIONS)
FINANCIAL SERVICES - CLASS I TO DECEMBER 31, 1997
- ------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(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........................ 2.26%
Average commission rate paid***............... $.0241
AUGUST 19, 1997
(COMMENCEMENT OF OPERATIONS)
FINANCIAL SERVICES - CLASS II TO DECEMBER 31, 1997
- ------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(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*.................................. 3.57%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000's).............. 43,207
Ratios to average net assets:
Expenses..................................... 2.00%**
Expenses, excluding waiver and payments by affiliate 2.62%**
Net investment income........................ 0.37%**
Portfolio turnover rate........................ 2.26%
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 purchase and sales of equity securities.
+For the period November 1, 1996 (effective date) to December 31, 1996
++Per share amounts for the period ended December 31, 1996, have been
restated to reflect a 5-for-1 stock split effective February 3, 1997.
+++Per share amounts for the period ended December 31, 1996, have been
restated to reflect a 2-for-1 stock split effective February 3, 1997.
++++Per share amounts for the period ended December 31, 1996, have been
restated to reflect a 3-for-1 stock split effective February 3, 1997.
+++++Based on average weighted shares outstanding.
HOW DO THE FUNDS INVEST THEIR ASSETS?
WHAT ARE THE FUNDS' GOALS?
The principal investment goal of Mutual Shares, Qualified, Beacon, European,
and Financial Services is capital appreciation, which may occasionally be
short-term. The secondary investment goal of each is income. The principal
investment goal of Discovery is long-term capital appreciation. Discovery
does not have a secondary investment goal.
These goals are fundamental, which means that they may not be changed without
shareholder approval.
WHAT KINDS OF SECURITIES DO THE FUNDS BUY?
Each fund may invest in equity securities, debt securities and securities
convertible into common stock (including convertible preferred and
convertible debt securities) ("convertible securities"). The features of each
type of security are described below. The funds generally invest in
securities which, in the opinion of Franklin Mutual, are available at prices
less than their actual value based on certain recognized objective criteria
("intrinsic value").
There are no limitations on the percentage of a fund's assets which may be
invested in equity securities, debt securities, convertible securities or
cash equivalent investments.
EQUITY SECURITIES are securities which entitle the holder to participate in a
company's general operating success or failure. The purchaser of an equity
security typically receives an ownership interest in the company as well as
certain voting rights. The owner of an equity security may participate in a
company's success through the receipt of dividends which are distributions of
earnings by the company to its owners. Equity security owners may also
participate in a company's success or lack of success through increases or
decreases in the value of the company's shares as traded in the public
trading market for such shares. The public trading market for such shares is
typically a stock exchange but can also be a market which arises between
broker-dealers seeking buyers and sellers of a particular security. Equity
securities generally take the form of common stock or preferred stock.
Preferred stockholders typically receive greater dividends but may receive
less appreciation than common stockholders and may have greater voting rights
as well.
DEBT SECURITIES are securities issued by a company which represent a loan of
money by the purchaser of the securities to the company. A debt security
typically has a fixed payment schedule which obligates the company to pay
interest to the lender and to return the lender's money over a certain time
period. A company typically meets its payment obligations associated with its
outstanding debt securities before it declares and pays any dividends to
holders of its equity securities. While debt securities are typically used as
an investment to produce income to an investor as a result of the fixed
payment schedule, debt securities may also increase or decrease in value
depending upon factors such as interest rate movements and the success or
lack of success of a company. See "Debt Securities" below.
CONVERTIBLE SECURITIES are debt securities, or in some cases preferred stock,
which have the additional feature of converting into, or being exchanged for,
common stock of a company after certain periods of time or under certain
circumstances. Holders of convertible securities gain the benefits of being a
debt holder or preferred stockholder and receiving regular interest payments, in
the case of debt securities, or higher dividends, in the case of preferred
stock, with the expectation of becoming a common stockholder in the future. A
convertible security's value typically reflects changes in the company's
underlying common stock value.
CASH EQUIVALENT INVESTMENTS are investments in certain types of short-term
debt securities. A fund making a cash equivalent investment expects to earn
interest at prevailing market rates on the amount invested and there is
little, if any, risk of loss of the original amount invested. The funds' cash
equivalent investments are typically made in U.S. Treasury bills and
high-quality commercial paper issued by banks or others. U.S. Treasury bills
are direct obligations of the U.S. government and have initial maturities of
one year or less. Commercial paper consists of short-term debt securities
issued by a bank or other financial institution which carry fixed or floating
interest rates. A fixed interest rate means that interest is paid on the
investment at the same rate for the life of the security. A floating interest
rate means that the interest rate varies as interest rates on newly issued
securities in the marketplace vary.
GENERAL POLICIES AND STRATEGIES. Franklin Mutual selects investments for each
fund based upon its analysis and research. This analysis and research takes
into account the factors Franklin Mutual determines are relevant, which may
include, among other factors, (i) the relationship of a security's book value
to market value, (ii) cash flow and (iii) multiples of earnings of comparable
securities. The relationship of a security's "book value to market value" is
an analysis of the difference between the price at which a security is
trading in the market, as compared to the value of that security based upon
an analysis of certain information contained in a company's financial
statements. Cash flow analysis considers the inflow and outflow of money into
and out of a company. An analysis of "multiples of earnings of comparable
securities" involves a review of the market values of comparable companies as
compared to their earnings, and then comparing the results of this review
with a comparison of the earnings of the company in question with its market
value. These factors are not applied according to a predetermined formula.
Rather, Franklin Mutual examines each security separately. Franklin Mutual
has not established guidelines as to the size of an issuer, its earnings or
the industry in which it operates in order for a security to be excluded as
unsuitable for purchase by a fund.
Each fund may invest in securities that are traded on U.S. or foreign
securities exchanges, the National Association of Securities Dealers
Automated Quotation System ("NASDAQ") national market system or in any
domestic or foreign over-the-counter ("OTC") market. U.S. or foreign
securities exchanges typically represent the primary trading market for U.S.
and foreign securities. A securities exchange brings together buyers and
sellers of the same securities. The NASDAQ national market system also brings
together buyers and sellers of the same securities through an electronic
medium which facilitates a sale and purchase of the security. Typically, the
companies whose securities are traded on the NASDAQ national market system
are smaller than the companies whose securities are traded on a securities
exchange. Finally, the OTC market refers to all other avenues whereby brokers
bring together buyers and sellers of securities.
Each fund may invest in any industry although no fund will concentrate its
investments in any one industry with the exception of Financial Services
which will concentrate its investments in the financial services industry.
Concentration is defined as investment by a fund of more than 25% of the
value of its assets in any one industry.
Financial Services will normally invest at least 65% of its total assets in
the securities issued by companies operating in the financial services
industry. For fund purposes, companies in the financial services industry are
considered to be companies 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. Companies 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 companies within the
financial services industry are smaller capitalized companies and therefore
may be subject to certain risks not associated with larger companies.
Financial Services' investment policy of concentrating in the financial
services industry may not be changed without the approval of Financial
Services' shareholders.
INVESTMENT IN THE SECURITIES OF REORGANIZING COMPANIES AND COMPANIES SUBJECT
TO TENDER OR EXCHANGE OFFERS. Each fund also seeks to invest in the
securities of domestic or foreign companies which are in the process of
reorganizing or restructuring ("Reorganizing Companies") or as to which there
exist outstanding tender or exchange offers. The funds may from time to time
participate in such tender or exchange offers. A tender offer is an offer by
the company itself or by another company or person to purchase a company's
securities at a higher (or lower) price than the market value for such
securities. An exchange offer is an offer by the company or by another
company or person to the holders of the company's securities to exchange
those securities for different securities. Although there are no restrictions
limiting the extent to which each fund may invest in Reorganizing Companies,
no fund presently anticipates committing more than 50% of its assets to such
investments. In addition to typical equity and debt investments, the funds'
investments in Reorganizing Companies may include Indebtedness,
Participations and Trade Claims, as further described below.
INVESTING TO INFLUENCE OR CONTROL MANAGEMENT. The funds generally purchase
securities for investment purposes and not for the purpose of influencing or
controlling management of a company. However, in certain circumstances when
Franklin Mutual perceives that a fund may benefit, Franklin Mutual may use
the fund's ownership interest in a company to seek to influence or control
management. A fund also may invest in entities whose business is to acquire
securities of companies for the purpose of influencing or controlling
management or with the expectation of taking over such companies. The funds
may also invest in a particular company which Franklin Mutual believes may be
an attractive company to be taken over by another entity.
NON-U.S. SECURITIES. The funds may purchase securities of non-U.S. issuers
and Discovery may invest 50% or more of its assets in such securities.
European will normally invest at least 65% of its total assets in the
securities of issuers (i) organized under the laws of, (ii) whose principal
business operations are located in, or (iii) at least 50% of whose revenue is
earned from, European countries. For purposes of the fund's investments,
European countries means all of the countries that are members of the
European Union, the 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 total assets in
securities of U.S. issuers as well as in securities of issuers from the
Levant, the Middle East and the remaining regions of the world.
It is currently anticipated that European will invest primarily in securities
of issuers in Western Europe and Scandinavia. European will normally invest
in securities from at least five different countries although, from time to
time, it may invest all of its assets in a single country. Under normal
circumstances, European, at the close of each taxable year, will have at
least 50% of its assets invested in securities of foreign issuers.
The funds other than European expect to invest a lesser percentage of their
respective assets in securities of non-U.S. issuers than Discovery. Beacon
intends to invest the next largest percentage, followed by Qualified,
Financial Services and finally Mutual Shares. The funds may purchase
securities whose values are quoted and traded in any currency in addition to
the U.S. dollar. Where a security's value is quoted and traded in a non-U.S.
dollar currency, the funds bear the risk of a decrease (or gain the benefit
of an increase) in the value of the security as a result of changes in the
value of the currency as compared to the U.S. dollar in addition to typical
market price movements related to certain trading markets or the financial
strength or weakness of the security's issuer. In order to avoid these
unexpected fluctuations in value as a result of relative currency values, the
funds expect to employ an investment technique called "hedging," which
attempts to reduce or eliminate changes in a security's value resulting from
changing currency exchange rates. Hedging is further described below.
Each fund may invest in securities commonly known as American Depositary
Receipts, European Depositary Receipts and Global Depositary Receipts of
non-U.S. issuers. Such depositary receipts are interests in a pool of a
non-U.S. company's securities which have been deposited with a bank or trust
company. The bank or trust company then sells interests in the pool to
investors in the form of depositary receipts. Depositary receipts can be
unsponsored or sponsored by the issuer of the underlying securities or by the
issuing bank or trust company.
DIFFERENCES BETWEEN THE FUNDS. 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 goals, Franklin Mutual seeks to retain certain
historical differences among the funds on an informal basis. Specifically,
Mutual Shares, Qualified and Beacon have generally invested in larger and
medium sized companies with large share trading volume. Discovery seeks to
achieve its objective by investing proportionately more of its assets in
smaller sized companies than the other funds and may also invest more than
50% of its assets in foreign securities. Qualified was originally intended
for purchase by pension plans, profit sharing plans and other nontaxpaying
entities. Consequently, it was intended that its investment portfolio would
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,
generally. Allocation of investments among the funds also depends 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 fund.
Although the funds may invest in securities of companies of any size, Mutual
Shares, Qualified and Beacon tend to invest in securities of companies with
market capitalizations in excess of $1 billion due to the larger size of
these funds. The term "market capitalization" refers to the value of a
company as determined by the market price of its issued and outstanding
common stock. A company's market capitalization is calculated by multiplying
the number of outstanding shares of a company by the current market price of
a share. Discovery may invest 50% or more of its assets in foreign issuers
and expects to invest proportionately more of its assets in smaller
capitalized companies than the other funds. Investing in smaller capitalized
companies may involve greater risks than investing in securities of larger
companies. The smaller companies in which Discovery invests often are not
well known, their securities may trade in the securities markets below their
book values and may not be followed by established securities analysts.
DEBT SECURITIES. The funds may invest in a variety of debt securities,
including bonds and notes issued by domestic or foreign corporations and the
U.S. or foreign governments. Bonds and notes differ in the length of the
issuer's repayment schedule. Bonds typically have a longer payment schedule
than notes. Typically, debt securities with a shorter repayment schedule pay
interest at a lower rate than debt securities with a longer repayment
schedule.
The debt securities in which the funds may invest may be either unrated or
rated by one or more independent rating organizations such as S&P or Moody's.
Securities are given ratings by independent rating organizations which grade
the company issuing the securities based upon its financial soundness.
The debt securities which the funds may purchase may be rated in any rating
category established by the independent rating organizations. Generally, the
lower the rating category, the riskier the investment. Debt securities rated
BBB or lower by S&P or Moody's are considered to be high yield, high risk
debt securities, commonly known as "junk bonds." The lowest rating category
established by Moody's is "C," and by S&P, is "D." Debt securities with a D
rating are in default as to the payment of principal and interest which means
that the issuer does not have the financial soundness to meet its interest
payments or its repayment schedule to security holders. The funds may invest
to an unlimited degree in junk bonds.
The funds will generally invest in debt securities under circumstances
similar to those under which they will invest in equity securities; namely,
when, in Franklin Mutual's opinion, such debt securities are available at
prices less than their intrinsic value. Investment in fixed-income securities
under these circumstances may lead to the potential for capital appreciation.
Consequently, when investing in debt securities, a debt security's rating is
given less emphasis in Franklin Mutual's investment decision-making process.
Historically, the funds have invested in debt securities issued by
Reorganizing Companies because such securities often are available at less
than their intrinsic value. Debt securities of such companies typically are
unrated, lower rated, in default or close to default. While posing a greater
risk than higher rated securities with respect to payment of interest and
repayment of principal at the price at which the debt security was originally
issued, such debt securities typically rank senior to the equity securities
of Reorganizing Companies and may offer the potential for certain investment
opportunities. See "More Information About the Kinds of Securities the Funds
Buy - Medium and Lower Rated Corporate Debt Securities" under "How Do the
Funds Invest Their Assets?" in the SAI.
WHAT ARE SOME OF THE FUNDS' OTHER INVESTMENT STRATEGIES AND PRACTICES?
DIRECT INVESTMENT IN INDEBTEDNESS, PARTICIPATIONS AND TRADE CLAIMS. From time
to time, the funds may purchase the direct indebtedness of various companies
("Indebtedness"), or participations in such Indebtedness. Indebtedness can be
distinguished from traditional debt securities in that debt securities are
part of a large issue of securities to the general public which is typically
registered with a securities registration organization, such as the SEC, and
which is held by a large group of investors. Indebtedness may not be a
security, but rather, may represent a specific commercial loan or portion of
a loan which has been given to a company by a financial institution such as a
bank or insurance company. The company is typically obligated to repay such
commercial loan over a specified time period. By purchasing the Indebtedness
of companies, a fund steps into the shoes of the financial institution which
made the loan to the company prior to its restructuring or refinancing.
Indebtedness purchased by a fund may be in the form of loans, notes or bonds.
The length of time remaining until maturity on the Indebtedness is one factor
Franklin Mutual considers in purchasing a particular Indebtedness.
Indebtedness which represents a specific indebtedness of the company to a
bank is not considered to be a security issued by the bank selling it. The
funds purchase loans from national and state chartered banks as well as
foreign banks. The funds normally invest in the Indebtedness of a company
which Indebtedness has the highest priority in terms of payment by the
company, although on occasion lower priority Indebtedness also may be
acquired.
The funds may also purchase participation interests in Indebtedness
("Participations"). Participations represent fractional interests in a
company's Indebtedness. The financial institutions which typically make
Participations available are banks or insurance companies, governmental
institutions, such as the Resolution Trust Corporation, the Federal Deposit
Insurance Corporation or the Pension Benefit Guaranty Corporation, or certain
organizations such as the World Bank which are known as "supranational
organizations." Supranational organizations are entities established or
financially supported by the national governments of one or more countries to
promote reconstruction or development.
The funds may also purchase trade claims and other direct obligations or
claims ("Trade Claims") of Reorganizing Companies. Trade Claims generally
represent money due to a supplier of goods or services to such Reorganizing
Company.
Indebtedness, Participations and Trade Claims may be illiquid (as defined
below).
ILLIQUID SECURITIES. An illiquid security is a security that cannot be sold
within seven days in the normal course of business for approximately the
amount at which a fund has valued the security and carries such value on its
financial statements. Examples of illiquid securities are most restricted
securities, and repurchase agreements which terminate more than seven days
from their initial purchase date, as further described below. No fund may
purchase an illiquid security if, at the time of purchase, the fund would
have more than 15% of its net assets invested in such securities.
RULE 144A SECURITIES. The funds may invest in certain unregistered securities
which may be sold under Rule 144A of the Securities Act of 1933 ("144A
securities"). 144A securities are restricted, which generally means that a
legend has been placed on the share certificates representing the securities
which states that the securities were not registered with the SEC when they
were initially sold and may not be resold except under certain circumstances.
In spite of the legend, certain securities may be sold to other institutional
buyers provided that the conditions of Rule 144A are met. In the event that
there is an active secondary institutional market for 144A securities, the
144A securities may be treated as liquid. As permitted by the federal
securities laws, the Board has adopted procedures in accordance with Rule
144A which govern when specific 144A securities held by the funds may be
deemed to be liquid.
MORTGAGE-BACKED SECURITIES. Each fund may invest in securities representing
interests in an underlying pool of real estate mortgages ("mortgage-backed
securities"). The mortgage-backed securities which the funds may purchase may
be issued or guaranteed by the U.S. government, certain U.S. government
agencies or certain government sponsored corporations or organizations or by
certain private, non-government corporations, such as banks and other
financial institutions. Two principal types of mortgage-backed securities are
collateralized mortgage obligations (CMOs) and real estate mortgage
investment conduits (REMICs).
CMOs are debt securities issued by the entities listed above. The payment of
interest on the debt securities is dependent upon the scheduled payments on
the underlying mortgages and, thus, the CMOs are said to be "collateralized"
by the pool of mortgages. CMOs are issued in a number of classes or series
with different maturities. The classes or series are paid off completely in
sequence as the underlying mortgages are repaid. Certain of these securities
may have variable interest rates which adjust as interest rates in the
securities market generally rise or fall. Other CMOs may be stripped, which
means that only the principal or interest feature of the underlying security
is passed through to the fund.
REMICs, which were authorized under certain tax laws, are private entities
formed for the purpose of holding a fixed pool of mortgages. The mortgages
are, in turn, backed by an interest in real property. REMICs are similar to
CMOs in that they issue multiple classes of securities.
CMOs and REMICs issued by private entities are not government securities and
are not directly guaranteed by any government agency. They are secured by the
underlying collateral of the private issuer. Certain of these private-backed
securities are 100% collateralized at the time of issuance by securities
issued or guaranteed by the U.S. government, its agencies, or
instrumentalities.
The funds may also invest directly in distressed mortgage obligations. A
direct investment in a distressed mortgage obligation involves the purchase
by the fund of a lender's interest in a mortgage granted to a borrower, where
the borrower has experienced difficulty in making its mortgage payments, or
for which it appears likely that the borrower will experience difficulty in
making its mortgage payments. As is typical with mortgage obligations,
payment of the loan is secured by the real estate underlying the loan. By
purchasing the distressed mortgage obligation, a fund steps into the shoes of
the lender from a risk point of view.
REAL ESTATE INVESTMENT TRUST ("REIT") INVESTMENTS. Among the funds' equity
investments may be investments in shares issued by REITs. A REIT is a pooled
investment vehicle which purchases primarily income-producing real estate or
real estate related loans or other real estate related interests. The pooled
vehicle, typically a trust, then issues shares whose value and investment
performance are dependent upon the investment experience of the underlying
real estate related investments.
SHORT SALES. The funds may engage in two types of short sale transactions,
"naked short sales" and "short sales against the box" transactions. In a
naked short sale transaction, a fund sells a security which it does not own
to a purchaser at a specified price. In order to complete the short sale
transaction, the fund must (i) borrow the security to deliver the security to
the purchaser; and (ii) buy the same security in the market in order to
return it to the borrower. In buying the security to replace the borrowed
security, the fund expects to buy the security in the market for less than
the amount it earned on the short sale, thereby yielding a profit. In some
circumstances, the fund may receive the security in connection with a
reorganization and, consequently, need not buy the security to be returned to
the borrower. Each fund may engage in naked short sale transactions up to 5%
of its assets.
The funds may also sell securities "short against the box" without limit. In
a short sale against the box, the fund actually holds in its portfolio the
securities which it has sold short. In replacing the borrowed securities in
the transaction, the fund may either buy securities in the open market or use
those in its portfolio. See "More Information About the Kinds of Securities
the Funds Buy - Short Sales" under "How Do the Funds Invest Their Assets?" in
the SAI for more discussion of these practices.
INVESTMENT COMPANY SECURITIES. Each fund may invest from time to time in
other investment company securities, subject to applicable law which
restricts such investments. Such laws generally restrict a fund's purchase of
another investment company's securities to three percent (3%) of the other
investment company's securities, no more than five percent (5%) of the fund's
assets in any single investment company's securities and no more than ten
percent (10%) of the fund's assets in all investment company securities.
REPURCHASE AGREEMENTS. Each fund may invest up to 10% of its assets in
repurchase agreements, including tri-party repurchase agreements. In a
repurchase agreement transaction, a fund purchases a U.S. Government security
from a bank or broker-dealer. The agreement provides that the security must
be sold back to the bank or broker-dealer at an agreed-upon price and date.
The bank or broker-dealer must transfer to the fund's custodian bank
securities with an initial value, including any earned but unpaid interest,
equal to at least 100% of the dollar amount invested by the fund in each
repurchase agreement. The value of the underlying U.S. government securities
is determined daily so that there is on deposit with the fund's custodian
bank at least 100% of the value of the repurchase agreement. In a tri-party
repurchase agreement, the security is maintained at the bank or
broker-dealer's custodian bank, as opposed to being transferred to and
maintained at the fund's custodian bank. There are certain risks associated
with such transactions which are described in the SAI.
LOANS OF SECURITIES. Each fund may also lend its portfolio securities to
banks or broker-dealers in order to realize additional income which the fund
receives as a loan premium. If a fund lends portfolio securities, for each
loan the fund must receive in return securities with a value at least equal
to 100% of the current market value of the loaned securities. Each fund
presently does not anticipate loaning more than 5% of its respective
portfolio securities. There are certain risks associated with loan
transactions which are described in the SAI.
BORROWING. While the funds are permitted to borrow under certain
circumstances as described in the SAI, under no circumstances will a fund
make additional investments while any amounts borrowed exceed 5% of the
fund's total assets.
SECURITIES OF COMPANIES IN THE FINANCIAL SERVICES INDUSTRY. Under the federal
securities law, each fund may not invest more than 5% of its total assets in
the securities of any company that receives more than 15% of its revenues
from securities related activities which means activities as a broker,
dealer, underwriter or investment advisor (a "securities issuer"). Further,
immediately after a purchase of equity securities of a securities issuer, a
fund may not own more than 5% of the outstanding securities of any class of
equity securities of a securities issuer, and immediately after a purchase of
debt securities of a securities issuer, a fund may not own more than 10% of
the outstanding principal amount of the securities issuer's debt securities.
HEDGING AND INCOME TRANSACTIONS. The funds may use various hedging
strategies. Hedging is a technique designed to reduce a potential loss to a
fund as a result of certain economic or market risks, including risks related
to fluctuations in interest rates, currency exchange rates between U.S. and
foreign securities or between different foreign currencies, and broad or
specific market movements. The hedging strategies that the funds may use are
also used by many mutual funds and other institutional investors. When
pursuing these hedging strategies, the funds may engage in the following
types of transactions among others: 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"). Each of these Hedging Transactions is
described more fully in the SAI. From time to time, the funds may engage in
other hedging strategies with qualities similar to those described in this
prospectus.
Some examples of situations in which Hedging Transactions may be used are:
(i) 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; (ii) to
protect a fund's gains in the value of portfolio securities which have not
yet been sold; (iii) to facilitate the sale of certain securities for
investment purposes; and (iv) as a temporary substitute for purchasing or
selling particular securities.
Any combination of Hedging Transactions may be used at any time as determined
by Franklin Mutual. Use of any Hedging Transaction is a function of numerous
variables, including market conditions and the investment manager's expertise
in utilizing such techniques. The ability of a fund to utilize Hedging
Transactions successfully cannot be assured. Each fund will comply with
applicable regulatory requirements when implementing these strategies,
including the establishment of certain isolated accounts at the fund's
custodian bank. Hedging Transactions involving financial futures and options
on futures will be purchased, sold or entered into generally for bona fide
hedging, risk management or portfolio management purposes.
The various techniques described above as "Hedging Transactions" may also be
used by the funds for non-hedging purposes. For example, these techniques may
be used to produce income to a fund where the fund's participation in the
transaction involves the payment of a premium to the fund. A fund may also
use a hedging technique if Franklin Mutual has a view about the fluctuation
of certain indices, currencies or economic or market changes such as a
reduction in interest rates. No more than 5% of a fund's
assets will be exposed to risks of such types of instruments when entered
into for non-hedging purposes.
Any material changes in or to the Hedging Transactions used by the funds will
be described in the funds' prospectuses before being utilized.
TEMPORARY INVESTMENTS. Franklin Mutual typically keeps a portion of the
assets of each fund invested in short-term debt securities although it may
choose not to do so when circumstances dictate. These temporary investments
permit the funds to react quickly to market movements. The funds also may
make temporary investments while awaiting the accumulation of additional
monies to make larger investments. Temporary investments tend to be less
risky and less subject to fluctuations due to general market conditions than
other investments.
OTHER POLICIES AND RESTRICTIONS. Each fund has a number of additional
investment policies and restrictions that govern its activities. Those that
are identified as "fundamental" may only be changed with shareholder
approval. The others may be changed by the Board alone. For a list of these
restrictions and more information about each fund's investment policies,
including those described above, please see "How Do the Funds Invest Their
Assets?" and "Restrictions and Limitations" in the SAI.
Generally, the policies and restrictions discussed in this prospectus and in
the SAI apply when a fund makes an investment. In most cases, the fund is not
required to sell a security because circumstances change and the security no
longer meets one or more of the fund's policies or restrictions.
WHAT ARE THE RISKS OF INVESTING IN THE FUNDS?
GENERAL. There is no assurance that a fund will meet its investment goal.
Generally, if the securities owned by a fund increase in value, the value of
the shares of the fund which you own will increase. Similarly, if the
securities owned by a fund decrease in value, the value of your shares will
also decline. In this way, you participate in any change in the value of the
securities owned by a fund.
SHORT SALES. Short sales carry risks of loss if the price of the security
sold short increases after the sale. In this situation, when a fund replaces
the borrowed security by buying the security in the securities markets, the
fund may pay more for the security than it has received from the purchaser in
the short sale. A fund may, however, profit from a change in the value of the
security sold short, if the price decreases.
COMMON STOCKS. To the extent that a fund's investments consist of common
stocks, a decline in the market, expressed for example by a drop in any
securities index that is based on equity securities, such as the Dow Jones
Industrial or the Standard & Poor's 500 average, may also be reflected in a
fund's share price. Historically, there have been both increases and
decreases in securities prices generally and such increases and decreases may
reoccur unpredictably in the future.
DEBT SECURITIES GENERALLY. To the extent that a fund's investments consist of
debt securities, changes in interest rates will affect the value of the
fund's portfolio and its share price. Increased rates of interest which
frequently accompany higher inflation and/or a growing economy are likely to
have a negative effect on the value of your shares.
LOWER-RATED DEBT SECURITIES. To the extent a fund invests in lower-rated debt
securities, it will be subject to risks which are greater than those to which
a fund which limits its investments to higher grade debt securities would be
subject. Such risks include limitations on a fund's ability to re-sell the
lower-rated debt securities and less readily available market quotations for
such securities. If there are not readily available market quotations for a
debt security, its value is determined largely by the investment manager's
judgment. When and if the debt security is sold, the investment manager may
find that its estimation of the debt security's value is substantially
different than the sale price effected in the market.
144A SECURITIES. Due to changing markets or other factors, 144A securities
may be subject to a greater possibility of becoming illiquid than securities
which have been registered with the SEC for sale.
NON-U.S. SECURITIES. Investments in securities of non-U.S. issuers involve
certain risks not ordinarily associated with investments in securities of
U.S. issuers. Such risks include: fluctuations in the value of the currency
in which the security is traded or quoted as compared to the U.S. dollar;
unpredictable political, social and economic developments in the foreign
country where the security is issued or where the issuer of the security is
located; and the possible imposition by a foreign government of limits on the
ability of a fund to obtain a foreign currency or to convert a foreign
currency into U.S. dollars; or the imposition of other foreign laws or
restrictions. Since each fund may invest in securities issued, traded or
quoted in currencies other than the U.S. dollar, changes in foreign currency
exchange rates will affect the value of securities in the fund's portfolio.
Franklin Mutual generally attempts to reduce such risk, known as "currency
risk," by using Hedging Transactions. In addition, in certain countries, the
possibility of expropriation of assets, confiscatory taxation, or diplomatic
developments could adversely affect investments in those countries.
Expropriation of assets refers to the possibility that a country's laws will
prohibit the return to the U.S. of any monies which a fund has invested in
the country. Confiscatory taxation refers to the possibility that a foreign
country will adopt a tax law which has the effect of requiring the fund to
pay significant amounts, if not all, of the value of the fund's investment to
the foreign country's taxing authority. Diplomatic developments means that
because of certain actions occurring within a foreign country such as
significant civil rights violations or because of the United States' actions
during a time of crisis in the particular country, all communications and
other official governmental relations between the country and the United
States could be severed. This could result in the abandonment of any U.S.
investors', such as the funds', money in the particular country, with no
ability to have the money returned to the United States.
There may be less publicly available information about a foreign company than
about a U.S. company. Foreign issuers may not be subject to accounting,
auditing and financial reporting standards and requirements comparable to or
as uniform as those of U.S. issuers. The number of securities traded, and the
frequency of such trading, in non-U.S. securities markets, while growing in
volume, is for the most part, substantially less than in U.S. markets. As a
result, securities of many foreign issuers are less liquid and their prices
more volatile than securities of comparable U.S. issuers. Transaction costs,
the costs associated with buying and selling securities, 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 fund's foreign investments may include both
voting and non voting securities, sovereign debt and participations in
foreign government deals. The funds may 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.
INVESTMENT COMPANY SECURITIES. Investors should recognize that a fund's
purchase of the securities of investment companies results in layering of
expenses. This layering may occur because investors in any investment
company, such as a fund, indirectly bear a proportionate share of the
expenses of the investment company, including operating costs, and investment
advisory and administrative fees.
DEPOSITARY RECEIPTS. Receipts of non-U.S. issuers may 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. 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.
SPECIAL CONSIDERATIONS RELATING TO FINANCIAL SERVICES. As stated above,
Financial Services concentrates its investments in the financial service
industry. The fund's 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. This regulation may
limit both the amount and types of loans and other financial commitments a
financial services company can make, and the interest rates and fees it can
charge. Such limitations may have a significant impact on the profitability
of a financial services company since that profitability is attributable, at
least in part, to the company's ability to make financial commitments such as
loans. Profitability of a financial services company is largely dependent
upon the availability and cost of the company's funds, and can fluctuate
significantly when interest rates change. The financial difficulties of
borrowers can negatively impact the industry to the extent that borrowers may
not be able to repay loans made by financial services companies.
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 inadequate reserve funds to pay claims and the
inability to collect from the insurance companies which insure insurance
companies, so-called reinsurance carriers.
Congress is currently considering legislation that would reduce the
separation between commercial and investment banking businesses. Commercial
banks typically have been limited to certain non-securities activities such
as making loans and accepting deposits. Investment banks have typically
engaged in more extensive securities activities. If enacted, the proposed
legislation 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. Such changes have resulted
from various consolidations as well as the continual development of new
products, structures and a regulatory framework that is anticipated to be
subject to further change.
HEDGING TRANSACTIONS. Hedging Transactions, whether entered into as a hedge
or for gain, have risks associated with them. The three most significant
risks associated with Hedging Transactions are: (i) possible default by the
other party to the transaction; (ii) illiquidity; and (iii) 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 (i) result in
losses to a fund, (ii) force the purchase or sale of portfolio securities at
inopportune times or for prices higher than or lower than current market
values, (iii) limit the amount of appreciation the fund can realize on its
investments, (iv) increase the cost of holding a security and reduce the
returns on securities or (v) cause a fund 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 controls by a
foreign or the U.S. government on the exchange of foreign currencies, the
inability of foreign securities transactions to be completed with the
security being delivered to the fund, or the inability to deliver or receive
a specified currency.
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, these transactions also tend to limit any potential gain which
might result from an increase in value of the position taken. As compared to
options contracts, futures contracts create greater ongoing potential
financial risks to a fund because the fund is required to make ongoing
monetary deposits with futures brokers. In an options transaction, a fund's
exposure is limited to the cost of the initial premium paid by the fund to
the broker to engage in the transaction. Losses resulting from the use of
Hedging Transactions can 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 a
fund's total return to investors.
REORGANIZING COMPANIES. 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 in a Reorganizing Company
will be consummated or will be consummated on the terms and within the time
period contemplated by Franklin Mutual.
INDEBTEDNESS AND PARTICIPATIONS. 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.
Participations are typically issued by financial institutions on a
non-recourse basis, which means that purchasers of the Participations must
rely on the financial institution issuing the Participation to assert any
rights against the Borrower with respect to the underlying Indebtedness.
Thus, when a fund purchases a Participation, it assumes the risk associated
with the financial soundness of the bank or other financial intermediary
issuing the Participation, as well as the credit risk associated with the
financial soundness of the issuer of the underlying Indebtedness.
RISKS RELATED TO REAL ESTATE-RELATED INVESTMENTS. The funds' investments in
real estate-related securities are subject to certain risks related to the
real estate industry in general. These risks include, among others: changes
in general and local economic conditions; possible declines in the value of
real estate; the possible lack of availability of money for loans to purchase
real estate; overbuilding in particular areas; prolonged vacancies in rental
properties; property taxes; changes in laws related to the use of real estate
in certain areas; costs resulting from the clean-up of, and liability to
third parties resulting from, environmental problems; the costs associated
with damage to real estate resulting from floods, earthquakes or other
material disasters not covered by insurance; and limitations on and
variations in rents and changes in interest rates.
DISTRESSED MORTGAGE OBLIGATIONS. Unlike mortgage-backed securities, which
generally represent an interest in a pool of loans backed by real estate,
investing in direct mortgage obligations involves the risks of a lender.
These risks include the ability or inability of a borrower to make its loan
payments and the possibility that the borrower will prepay the loan in
advance of its scheduled payment time period, curtailing an expected rate and
timing of return for the lender. Investments in direct mortgage obligations
of distressed borrowers involve substantially greater risks and are highly
speculative due to the fact that the borrower's ability to make timely
payments has been identified as questionable. Borrowers that are in
bankruptcy or restructuring may never pay off their loans, or may pay only a
small fraction of the amount owed. If, because of a lack of payment, the real
estate underlying the loan is foreclosed, which means that the borrower takes
possession of the real estate, a fund could become part owner of such real
estate. As an owner, a fund would bear any costs associated with owning and
disposing of the real estate and also may encounter difficulties in disposing
of the real estate in a timely fashion. In addition, there is no assurance
that a fund would be able profitably to dispose of properties in foreclosure.
TAX CONSIDERATIONS. Each fund's investments in options, futures, and forward
contracts, including foreign currency options and futures, foreign securities
and other complex securities are subject to special tax rules that may affect
the amount, timing or character of the income earned by the fund and
distributed to you. Each fund may also be subject to withholding taxes on
earnings from certain of its foreign securities. These special tax rules are
discussed in the "Additional Information on Distributions and Taxes" section
of the SAI.
EURO. On January 1, 1999, the European Monetary Union (EMU) plans to
introduce a new single currency, the Euro, which will replace the national
currency for participating member countries. If the fund holds investments in
countries with currencies replaced by the Euro, the investment process,
including trading, foreign exchange, payments, settlements, cash accounts,
custody and accounting will be impacted.
The process to establish the Euro may result in market volatility. It is not
possible to predict the impact of the Euro on the business or financial
condition of European issuers or on the fund. The transition and the
elimination of currency risk among EMU countries may change the economic
environment and behavior of investors, particularly in European markets. To
the extent the fund holds non-U.S. dollar (Euro or other) denominated
securities, it will still be exposed to currency risk due to fluctuations in
those currencies versus the U.S. dollar.
Resources has created an interdepartmental team to handle all Euro-related
changes to enable the Franklin Templeton Funds to process transactions
accurately and completely with minimal disruption to business activities.
While there can be no assurance that the fund will not be adversely affected,
Franklin Mutual and its affiliated service providers are taking steps that
they believe are reasonably designed to address the Euro issue.
WHO MANAGES THE FUNDS?
THE BOARD. The Board oversees the management of each fund and elects its
officers. The officers are responsible for each fund's day-to-day operations.
The Board also monitors each fund to ensure no material conflicts exist among
the fund's classes of shares. While none is expected, the Board will act
appropriately to resolve any material conflict that may arise.
Michael F. Price is Chairman of the Boards of Directors which oversee the
management of the funds and the investment manager.
INVESTMENT MANAGER. Franklin Mutual manages each 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 funds' Code of Ethics.
MANAGEMENT TEAM. The team responsible for the day to day management of the
fund portfolios is led by Peter Langerman, Chief Executive Officer, and
Robert Friedman, Chief Investment Officer, of Franklin Mutual. The team is
comprised of the following investment professionals who have portfolio
responsibility for all of the Franklin Mutual Series Fund Inc. portfolios.
These professionals have been associated with Franklin Mutual since:
Jeffrey A. Altman 1988
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
is a Vice President of Franklin Mutual Series Fund Inc.
Robert L. Friedman 1988
Chief Investment Officer and 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 is a Vice President of Franklin Mutual Series Fund Inc.
Raymond Garea 1991
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 is a Vice
President of Franklin Mutual Series Fund Inc.
Peter A. Langerman 1986
Chief Executive 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 is a Director and Executive Vice President of Franklin
Mutual Series Fund Inc.
David E. Marcus 1988
Senior Vice President of Franklin Mutual
Mr. Marcus has a Bachelor of Science degree in Business
Administration/Finance from Northeastern University. Prior to November 1996,
he was a Research Analyst for Heine, the former investment manager for
Franklin Mutual Series Fund Inc.
Lawrence N. Sondike 1984
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 is a Vice President
of Franklin Mutual Series Fund Inc.
David J. Winters 1987
Senior Vice President of Franklin Mutual
Mr. Winters has a Bachelor of Arts degree in Economics from Cornell University.
He is a Chartered Financial Analyst (CFA). Prior to November 1996, he was a
Research Analyst for Heine, the former investment manager for Franklin Mutual
Series Fund Inc.
In addition, Franklin Mutual employees Jim Agah and Jeff Diamond as Assistant
Portfolio Managers.
Jim Agah 1997
Assistant Portfolio Manager of Franklin Mutual
Mr. Agah has a Bachelor of Science degree in Business Administration from the
University of Michigan and a Masters of Management from the Kellogg Graduate
School of Managmenet at Northwestern University. He is both a Chartered
Financial Analyst (CFA) and a Certified Public Accountant (CPA). Prior to
joining Franklin Mutual in 1997, he was a Vice President of Equity Sales for
Keefe, Bryette & Woods.
Jeff Diamond 1998
Assistant Portfolio Manager of Franklin Mutual
Mr. Diamond has a Bachelor of Science degree in Engineering from Cornell
University and a Masters in Business Administration/Finance from Columbia
University. Prior to joining Franklin Mutual in March of 1998, he was Vice
President and Co-Manager of Prudential Conservative Stock Fund.
The following Portfolio and Assistant Portfolio Managers have primary
responsibility for investments in the following funds:
Mutual Shares Fund ..... Larry Sondike and David Marcus
Mutual Qualified Fund .. Ray Garea
and Assistant Portfolio Manager Jeff Diamond
Mutual Beacon Fund ..... Larry Sondike and David Winters
Mutual Discovery Fund .. Rob Friedman and David Marcus
Mutual European Fund ... David Marcus
Mutual Financial
Services Fund .......... Ray Garea
and Assistant Portfolio Manager Jim Agah
MANAGEMENT FEES. During the fiscal year ended December 31, 1997, Franklin
Mutual had agreed in advance to limit its fees and to make certain payments
to reduce expenses. The table below shows the management fees and total
operating expenses paid by each fund, as a percentage of average daily net
assets.
<TABLE>
<CAPTION>
MANAGEMENT TOTAL OPERATING
FEES BEFORE MANAGEMENT EXPENSES BEFORE TOTAL OPERATING
ADVANCE WAIVER FEES PAID ADVANCE WAIVER EXPENSES PAID
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CLASS I
Mutual Shares........ 0.60% 0.57% 1.10% 1.07%
Qualified............ 0.60 0.57 1.13 1.10
Beacon............... 0.60 0.57 1.12 1.09
European............. 0.80 0.78 1.39 1.37
Discovery............ 0.80 0.78 1.35 1.33
Financial Services*.. 0.80 0.18 1.97 1.35
CLASS II
Mutual Shares........ 0.60% 0.57% 1.75% 1.72%
Qualified............ 0.60 0.57 1.78 1.75
Beacon............... 0.60 0.57 1.77 1.74
European............. 0.80 0.78 2.05 2.02
Discovery............ 0.80 0.78 2.00 1.98
Financial Services*.. 0.80 0.18 2.62 2.00
</TABLE>
*Annualized
Each 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.
During Financial Services' start-up period, Franklin Mutual has agreed in
advance to limit its management fees and to assume as its own expense certain
expenses otherwise payable by the fund so that Financial Services' total
operating expenses do not exceed 1.35% of Class I's average daily net assets
and 2.00% of Class II's average daily net assets for the fund's initial
twenty-four months of operations. After the first twenty-four months of
operations, Franklin Mutual may end this agreement at any time.
PORTFOLIO TRANSACTIONS. Franklin Mutual tries to obtain the best execution on
all transactions. If Franklin Mutual believes more than one broker or dealer
can provide the best execution, 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 fund owns more than 5% of the voting securities of a broker-dealer,
that broker-dealer may be considered an affiliated person of such fund. If
such fund places any portfolio transactions through that broker-dealer, the
fund would be required to comply with certain rules of the SEC relating to
the payment of brokerage commissions to an affiliated broker-dealer. Please
see "How Do the Funds Buy Securities for Their Portfolios?" in the SAI for
more information.
ADMINISTRATIVE SERVICES. FT Services provides certain administrative services
and facilities for each fund. Under its administration agreement, each fund
pays FT Services a monthly administration fee equal to an annual rate of
0.15% of the fund's average daily net assets up to $200 million, 0.135% of
average daily net assets over $200 million up to $700 million, 0.10% of
average daily net assets over $700 million up to $1.2 billion, and 0.075% of
average daily net assets over $1.2 billion. During the fiscal year ended
December 31, 1997, administration fees totaling 0.08% of the average daily
net assets of each fund were paid to FT Services. These fees are included in
the amount of total expenses shown above. The administration fees for
Financial Services have been annualized. Please see "Investment Management
and Other Services" in the SAI for more information.
YEAR 2000 ISSUE. Like other mutual funds, the fund could be adversely
affected if the computer systems used by Franklin Mutual and other service
providers do not properly process date-related information on or after
January 1, 2000 ("Year 2000 Issue"). The Year 2000 Issue, and in particular
foreign service providers' responsiveness to the issue, could affect
portfolio and operational areas including securities trade processing,
interest and dividend payments, securities pricing, shareholder account
services, reporting, custody functions, and others. While there can be no
assurance that the fund will not be adversely affected, Franklin Mutual and
its affiliated service providers are taking steps that they believe are
reasonably designed to address the Year 2000 Issue, including seeking
reasonable assurances from the fund's other major service providers.
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 each 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 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,
Securities Dealers may not be eligible to receive the Rule 12b-1 fees
associated with the purchase.
Under the Class II plan, each 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, Securities Dealers may not be eligible to receive this portion of the
Rule 12b-1 fees associated with the purchase.
Each 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 TAXATION AFFECTS THE FUNDS AND THEIR SHAREHOLDERS
ON AUGUST 5, 1997, PRESIDENT CLINTON SIGNED INTO LAW THE TAXPAYER RELIEF ACT
OF 1997 (THE "1997 ACT"). THIS NEW LAW MAKES SWEEPING CHANGES IN THE CODE.
BECAUSE MANY OF THESE CHANGES ARE COMPLEX THEY ARE DISCUSSED IN THE SAI.
TAXATION OF THE FUNDS' INVESTMENTS ---------------------------------------
HOW DO THE FUNDS EARN
Each fund invests your money in the INCOME AND GAINS?
stocks, bonds and other securities ---------------------------------------
that are described in the section "How
Do the Funds Invest Their Assets?" Each fund earns dividends and interest
Special tax rules may apply in (the fund's "income") on its
determining the income and gains that investments. When a fund sells a
each fund earns on its investments. security for a price that is higher
These rules may, in turn, affect the than it paid, it has a gain. When a
amount of distributions that a fund fund sells a security for a price that
pays to you. These special tax rules is lower than it paid, it has a loss.
are discussed in the SAI. If a fund has held the security for
more than one year, the gain or loss
TAXATION OF THE FUNDS. As a regulated will be a long-term capital gain or
investment company, each fund loss. If a fund has held the security
generally pays no federal income tax for one year or less, the gain or loss
on the income and gains that it will be a short-term capital gain or
distributes to you. loss. Each fund's gains and losses are
netted together, and, if the fund has
a net gain (the fund's "gains"), that
gain will generally be distributed to
you.
FOREIGN TAXES. Foreign governments may impose taxes on the income and gains
from a fund's investments in foreign stocks and bonds. These taxes will reduce
the amount of the fund's distributions to you, but, depending upon the amount
of the fund's assets that are invested in foreign securities and foreign taxes
paid, may be passed through to you as a foreign tax credit on your income tax
return. Each fund may also invest in the securities of foreign companies that
are "passive foreign investment companies" ("PFICs"). These investments in
PFICs may cause a fund to pay income taxes and interest charges. If possible,
each fund will adopt strategies to avoid PFIC taxes and interest charges.
TAXATION OF SHAREHOLDERS ------------------------------------
WHAT IS A DISTRIBUTION?
DISTRIBUTIONS. Distributions from a fund, ------------------------------------
whether you receive them in cash or in
additional shares, are generally subject As a shareholder, you will receive
to income tax. The fund will send you a your share of a fund's income and
statement in January of the current year gains on its investments in stocks,
that reflects the amount of ordinary bonds and other securities. The
dividends, capital gain distributions and fund's income and short term
non-taxable distributions you received capital gains are paid to you as
from the fund in the prior year. This ordinary dividends. The fund's
statement will include distributions long-term capital gains are paid to
declared in December and paid to you in you as capital gain distributions.
January of the current year, but which If the fund pays you an amount in
are taxable as if paid on December 31 of excess of its income and gains,
the prior year. The IRS requires you to this excess will generally be
report these amounts on your income tax treated as a non-taxable
return for the prior year. The fund's distribution. These amounts, taken
statement for the prior year will tell together, are what we call the
you how much of your capital gain fund's distributions to you.
distribution represents 28% rate gain.
The remainder of the capital gain
distribution represents 20% rate gain.
DISTRIBUTIONS TO RETIREMENT PLANS. Fund distributions received by your
qualified retirement plan, such as a Section 401(k) plan or IRA, are generally
tax-deferred; this means that you are not required to report fund
distributions on your income tax return when paid to your plan, but, rather,
when your plan makes payments to you. Be aware, however, that special rules
apply to payouts from Roth and Education IRAs.
DIVIDENDS-RECEIVED DEDUCTION. Corporate investors may be entitled to a
dividends-received deduction on a portion of the ordinary dividends they
receive from a fund.
REDEMPTIONS AND EXCHANGES. If you redeem ------------------------------------
your shares or if you exchange your WHAT IS A REDEMPTION?
shares of a fund for shares in another ------------------------------------
Franklin Templeton Fund, you will
generally have a gain or loss that the A redemption is a sale by you to
IRS requires you to report on your income the fund of some or all of your
tax return. If you exchange fund shares shares in the fund. The price per
held for 90 days or less and pay no sales share you receive when you redeem
charge, or a reduced sales charge, for fund shares may be more or less
the new shares, all or a portion of the than the price at which you
sales charge you paid on the purchase of purchased those shares. An exchange
the shares you exchanged is not included of shares in the fund for shares of
in their cost for purposes of computing another Franklin Templeton Fund is
gain or loss on the exchange. If you hold treated as a redemption of fund
your shares for six months or less, any shares and then a purchase of
loss you have will be treated as a shares of the other fund. When you
long-term capital loss to the extent of redeem or exchange your shares, you
any capital gain distributions received will generally have a gain or loss,
by you from the fund. All or a portion of depending upon whether the basis in
any loss on the redemption or exchange of your shares is more or less than
your shares will be disallowed by the IRS your cost or other basis in the
if you purchase other shares in the fund shares. Call Fund Information for a
within 30 days before or after your free shareholder Tax Information
redemption or exchange. Handbook if you need more
information on calculating the gain
or loss on the redemption or
exchange of your shares.
FOREIGN TAXES. If more than 50% of the ------------------------------------
value of a fund's assets consist of WHAT IS A FOREIGN TAX CREDIT?
foreign securities, the fund may elect to ------------------------------------
pass-through to you the amount of foreign
taxes it paid. If the fund makes this A foreign tax credit is a tax
election, your year-end statement will credit for the amount of taxes
show more taxable income than was imposed by a foreign country on
actually distributed to you. However, you earnings of a fund. When a foreign
will be entitled to either deduct your company in which a fund invests
share of such taxes in computing your pays a dividend to the fund, the
taxable income or claim a foreign tax dividend will generally be subject
credit for such taxes against your U.S. to a withholding tax. The taxes
federal income tax. Your year-end withheld in foreign countries
statement, showing the amount of create credits that you may use to
deduction or credit available to you, offset your U.S. federal income tax.
will be distributed to you in January
along with other shareholder information
records including your fund Form 1099-DIV.
The 1997 Act includes a provision that allows you to claim these credits
directly on your income tax return (Form 1040) and eliminates the previous
requirement that you complete a detailed supporting form. To qualify, you must
have $600 or less in joint return foreign taxes ($300 or less on a single
return), all of which are reported to you on IRS Form 1099-DIV. THIS
SIMPLIFIED PROCEDURE APPLIES ONLY FOR CALENDAR YEARS 1998 AND BEYOND, AND WAS
NOT AVAILABLE IN 1997.
NON-U.S. INVESTORS. Ordinary dividends generally will be subject to U.S.
income tax withholding. Your home country may also tax ordinary dividends,
capital gain distributions and gains arising from redemptions or exchanges of
your fund shares. Fund shares held by the estate of a non-U.S. investor may be
subject to U.S. estate tax. You may wish to contact your tax advisor to
determine the U.S. and non-U.S. tax consequences of your investment in the
fund.
STATE TAXES. Ordinary dividends and capital gain distributions that you
receive from a fund, and gains arising from redemptions or exchanges of your
fund shares will generally be subject to state and local income tax. The
holding of fund shares may also be subject to state and local intangibles
taxes. You may wish to contact your tax advisor to determine the state and
local tax consequences of your investment in a fund.
BACKUP WITHHOLDING. When you open an ------------------------------------
account, IRS regulations require that you WHAT IS A BACKUP WITHHOLDING?
provide your taxpayer identification ------------------------------------
number ("TIN"), certify that it is
correct, and certify that you are not Backup withholding occurs when the
subject to backup withholding under IRS fund is required to withhold and
rules. If you fail to provide a correct pay over to the IRS 31% of your
TIN or the proper tax certifications, the distributions and redemption
fund is required to withhold 31% of all proceeds. You can avoid backup
the distributions (including ordinary withholding by providing the fund
dividends and capital gain distributions) with your TIN, and by completing
and redemption proceeds paid to you. The the tax certifications on your
fund is also required to begin backup shareholder application that you
withholding were asked to sign when you opened
on your account if the IRS instructs the your account. However, if the IRS
fund to do so. The fund reserves the instructs the fund to begin backup
right not to open your account, or, withholding, it is required to do
alternatively, to redeem your shares at so even if you provided the fund
the current Net Asset Value, less any with your TIN and these tax
taxes withheld, if you fail to provide a certifications, and backup
correct TIN or the proper tax withholding will remain in place
certifications, or if the IRS instructs until the fund is instructed by the
the fund to begin backup withholding on IRS that it is no longer required.
your account.
THIS TAX DISCUSSION IS FOR GENERAL INFORMATION ONLY. PROSPECTIVE INVESTORS
SHOULD CONSULT THEIR OWN TAX ADVISORS CONCERNING THE FEDERAL, STATE, LOCAL OR
FOREIGN TAX CONSEQUENCES OF AN INVESTMENT IN THE FUND. A MORE COMPLETE
DISCUSSION OF THESE RULES AND RELATED MATTERS IS CONTAINED IN THE SECTION
ENTITLED "ADDITIONAL INFORMATION ON DISTRIBUTIONS AND TAXES" IN THE SAI. THE
TAX TREATMENT TO YOU OF DIVIDENDS, CAPITAL GAIN DISTRIBUTIONS, FOREIGN TAXES
PAID AND INCOME TAXES WITHHELD IS ALSO DISCUSSED IN A FREE FRANKLIN TEMPLETON
TAX INFORMATION HANDBOOK, WHICH YOU MAY REQUEST BY CONTACTING FUND
INFORMATION.
HOW ARE THE FUNDS 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 offers three classes of shares: 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, Mutual Discovery Fund -
Class II, Mutual Financial Services Fund - Class Z, Mutual Financial Services
Fund - Class I and Mutual Financial Services Fund - Class II. For all funds
except Financial Services, 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 initially created with all three classes of
shares. 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.
ABOUT YOUR ACCOUNT
HOW DO I BUY SHARES?
OPENING YOUR ACCOUNT
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 FUNDS DO 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:
o To open a regular, non-retirement account...................$1,000
o To open an IRA, IRA Rollover,
o Roth IRA, or Education IRA ................................. $ 250*
o To open a custodial account for a minor
(an UGMA/UTMA account)..................................... $ 100
o To open an account with an automatic
investment plan .......................................... $ 50**
o To add to an account........................................ $ 50***
*For all other retirement accounts, there is no minimum investment
requirement.
**$25 for an Education IRA.
***For all retirement accounts except IRAs, IRA Rollovers, Roth IRAs, or
Education IRAs, there is no minimum to add to an account.
We reserve the right to change the amount of these minimums from time to time
or to waive or lower these minimums for certain purchases. 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. PLEASE ALSO
INDICATE WHICH CLASS OF SHARES YOU WANT TO BUY. IF YOU DO NOT SPECIFY A
CLASS, WE WILL AUTOMATICALLY INVEST YOUR PURCHASE IN CLASS I SHARES. 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
include your account number on the check.
- --------------------------------------------------------------------------------
BY WIRE 1. Call Shareholder Services or, if that number
is busy, call 1-650/312-2000 collect, to
receive a wire control number and wire
instructions. You need a new wire control
number every time you wire money into your
account. If you do not have a currently
effective wire control number, we will return
the money to the bank, and we will not credit
the purchase to your account.
2. For an initial investment you must also return
your signed shareholder application to the
fund.
IMPORTANT DEADLINES: If we receive your call before
1:00 p.m. Pacific time and the bank receives the
wired funds and reports the receipt of wired funds
to the fund by 3:00 p.m. Pacific time, we will
credit the purchase to your account that day.
If we receive your call after 1:00 p.m. or the bank
receives the wire after 3:00 p.m., we will credit
the purchase to your account the following business
day.
- --------------------------------------------------------------------------------
THROUGH YOUR DEALER Call your investment representative
- --------------------------------------------------------------------------------
CHOOSING A SHARE CLASS
Each class has its own sales charge and expense structure, allowing you to
choose the class that best meets your situation. The class that may be best
for you depends on a number of factors, including the amount and length of
time you expect to invest. Generally, Class I shares may be more attractive
for long-term investors or investors who qualify to buy Class I shares at a
reduced sales charge. Your financial representative can help you decide.
CLASS I CLASS II
- --------------------------------------------------------------------------------
o Higher front-end sales charges o Lower front-end sales charges than
than Class II shares. There are Class I shares
several ways to reduce these
charges, as described below. There
is no front-end sales charge for
purchases of $1 million or more.*
o Contingent Deferred Sales Charge o Contingent Deferred Sales Charge
on purchases of $1 million or more on purchases sold within 18 months
sold within one year
o Lower annual expenses than Class o Higher annual expenses than Class
II shares I shares
*If you are investing $1 million or more, it is generally more beneficial for
you to buy Class I shares because there is no front-end sales charge and the
annual expenses are lower. Therefore, ANY PURCHASE OF $1 MILLION OR MORE IS
AUTOMATICALLY INVESTED IN CLASS I SHARES. You may accumulate more than $1
million in Class II shares through purchases over time. If you plan to do
this, however, you should determine if it would be better for you to buy
Class I shares through a Letter of Intent.
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 AT OFFERING NET AMOUNT PERCENTAGE OF
OFFERING PRICE PRICE INVESTED OFFERING PRICE
- ------------------------------------------------------------------------------
CLASS I
Under $50,000......................... 5.75% 6.10% 5.00%
$50,000 but less than $100,000........ 4.50% 4.71% 3.75%
$100,000 but less than $250,000....... 3.50% 3.63% 2.80%
$250,000 but less than $500,000....... 2.50% 2.56% 2.00%
$500,000 but less than $1,000,000..... 2.00% 2.04% 1.60%
$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 "Choosing a Share Class."
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 funds, and
o Meets other uniform criteria that allow Distributors to achieve cost
savings in distributing shares.
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.
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 2 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. 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.
2. Redemption proceeds from the sale of shares of any Franklin Templeton
Fund if you reinvest the money in the same class of shares. This waiver
does not apply to exchanges. Shares purchased with proceeds from a
money fund may be subject to a sales charge.
If you paid a Contingent Deferred Sales Charge when you redeemed your
shares from a Franklin Templeton Fund, a Contingent Deferred Sales
Charge will apply to your purchase of fund shares and a new Contingency
Period will begin. We will, however, credit your fund account with
additional shares based on the Contingent Deferred Sales Charge you
paid and the amount of redemption proceeds that you reinvest.
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.
3. Dividend or capital gain distributions from a real estate investment
trust (REIT) sponsored or advised by Franklin Properties, Inc.
4. 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 or the Templeton Variable Products
Series Fund. You should contact your tax advisor for information on any
tax consequences that may apply.
5. Redemption proceeds from a repurchase of shares of Franklin Floating
Rate Trust, if the shares were continuously held for at least 12 months.
If you immediately placed your redemption proceeds in a Franklin Bank
CD or a Franklin Templeton money fund, you may reinvest them as
described above. The proceeds must be reinvested within 365 days from
the date the CD matures, including any rollover, or the date you redeem
your money fund shares.
6. Redemption proceeds from the sale of Class A shares of any of the
Templeton Global Strategy Funds if you are a qualified investor.
If you paid a contingent deferred sales charge when you redeemed your
Class A shares from a Templeton Global Strategy Fund, a Contingent
Deferred Sales Charge will apply to your purchase of fund shares and a
new Contingency Period will begin. We will, however, credit your fund
account with additional shares based on the contingent deferred sales
charge you paid and the amount of the redemption proceeds that you
reinvest.
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.
7. Distributions from an existing retirement plan invested in the Franklin
Templeton Funds
Various individuals and institutions also may buy Class I shares without a
front-end sales charge or Contingent Deferred Sales Charge, including:
1. 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.
2. 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.
3. Broker-dealers, registered investment advisors or certified financial
planners who have entered into an agreement with Distributors for
clients participating in comprehensive fee programs. The minimum
initial investment is $250.
4. Qualified registered investment advisors who buy through a
broker-dealer or service agent who has entered into an agreement with
Distributors.
5. Registered Securities Dealers and their affiliates, for their
investment accounts only
6. Current employees of Securities Dealers and their affiliates and their
family members, as allowed by the internal policies of their employer
7. 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. The minimum initial
investment is $100.
8. Investment companies exchanging shares or selling assets pursuant to a
merger, acquisition or exchange offer
9. Accounts managed by the Franklin Templeton Group
10. Certain unit investment trusts and their holders reinvesting
distributions from the trusts
11. Group annuity separate accounts offered to retirement plans
12. Chilean retirement plans that meet the requirements described under
"Retirement Plans" below
RETIREMENT PLANS. Retirement plans sponsored by an employer (i) with at least
100 employees, or (ii) with retirement plan assets of $1 million or more, or
(iii) that agrees 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.
HOW DO I BUY SHARES IN CONNECTION WITH RETIREMENT PLANS?
Your individual or employer-sponsored retirement plan may invest in the
funds. 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.
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.
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 a 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.
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 goal
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 signed written instructions
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 the difference is more than 0.25%. 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.
CONTINGENT DEFERRED 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.
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.
For more information about the Contingent Deferred Sales Charge, please see
"How Do I Sell Shares?"
EXCHANGE RESTRICTIONS
Please be aware that the following restrictions apply to exchanges:
o You must meet the applicable minimum investment amount of the fund you
are exchanging into, or exchange 100% of your fund shares
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 funds do 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 signed written instructions. 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
If you are using a savings and loan or credit union, the
name of the corresponding bank and the account number
2. Include any outstanding share certificates for the
shares you are selling
3. Provide a signature guarantee if required
4. Corporate, partnership and trust accounts may need to
send additional documents. Accounts under court
jurisdiction may have other requirements.
- --------------------------------------------------------------------------------
BY PHONE Call Shareholder Services. If you would like your redemption
proceeds wired to a bank account, other than an escrow
account, you must first sign up for the wire feature. To sign
up, send us written instructions, with a signature guarantee.
To avoid any delay in processing, the instructions should
include the items listed in "By Mail" above.
Telephone requests will be accepted:
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 4:00 p.m. Eastern time, your wire payment
will be sent the next business day. For requests received in proper form
after 4:00 p.m. Eastern time, the payment will be sent the second business
day. By offering this service to you, the funds are not bound to meet any
redemption request in less than the seven day period prescribed by law.
Neither the funds nor their 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 until your check or draft has cleared, which may
take seven business days or more. A certified or cashier's check may clear in
less time.
Under unusual circumstances, we may suspend redemptions or postpone payment
for more than seven days as permitted by federal securities law.
Please refer to "Transaction Procedures and Special Requirements" for other
important information on how to sell shares.
TRUST COMPANY RETIREMENT PLAN ACCOUNTS
To comply with IRS regulations, you need to complete additional forms before
selling shares in a Trust Company retirement plan account. Tax penalties
generally apply to any distribution from these plans to a participant under
age 59 1/2, unless the distribution meets an exception stated in the Code. To
obtain the necessary forms, please call Retirement Plan Services.
CONTINGENT DEFERRED SALES CHARGE
For Class I purchases, if you did not pay a front-end sales charge because
you invested $1 million or more or agreed to invest $1 million or more under
a Letter of Intent, a Contingent Deferred Sales Charge may apply if you sell
all or a part of your investment within the Contingency Period. Once you have
invested $1 million or more, any additional Class I investments you make
without a sales charge may also be subject to a Contingent Deferred Sales
Charge if they are sold within the Contingency Period. For any Class II
purchase, a Contingent Deferred Sales Charge may apply if you sell the shares
within the Contingency Period. The charge is 1% of the value of the shares
sold or the Net Asset Value at the time of purchase, whichever is less.
Certain retirement plan accounts opened on or after May 1, 1997, and that
qualify to buy Class I shares without a front-end sales charge may also be
subject to a Contingent Deferred Sales Charge if the retirement plan is
transferred out of the Franklin Templeton Funds or terminated 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 Account fees
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, or (iv) the Securities Dealer of
record has entered into a supplemental agreement with Distributors
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 IRAs due to death or disability or upon periodic
distributions based on life expectancy
o 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 FUNDS?
Each fund declares dividends from its net investment income semiannually. 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 FUNDS DO NOT PAY "INTEREST" OR GUARANTEE
ANY FIXED RATE OF RETURN ON AN INVESTMENT IN THEIR 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 a fund in any of these ways:
1. BUY ADDITIONAL SHARES OF THE FUND - You may buy additional shares of the
fund (without a sales charge or imposition of a Contingent Deferred Sales
Charge) 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 shares of another Franklin Templeton Fund (without a
sales charge or imposition of a Contingent Deferred Sales Charge). 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 or savings account, you may need a
signature guarantee. If you send the money to a checking or savings account,
please see "Electronic Fund Transfers" under "Services to Help You Manage
Your Account."
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.
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 funds are open for business each day the NYSE is open. We determine the
Net Asset Value per share of each class as of the close of the NYSE, normally
1:00 p.m. Pacific 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. Each
fund's assets are valued as described under "How Are Fund Shares Valued?" in
the SAI.
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.
JOINT ACCOUNTS. For accounts with more than one registered owner, we accept
written instructions signed by only one owner for certain types of
transactions or account changes. These include transactions or account
changes that you could also make by phone, such as certain redemptions of
$50,000 or less, exchanges between identically registered accounts, and
changes to the address of record. For most other types of transactions or
changes, written instructions must be signed by all registered owners.
Please keep in mind that if you have previously told us that you do not want
telephone exchange or redemption privileges on your account, then we can only
accept written instructions to exchange or redeem shares if they are signed
by all registered owners on the account.
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 and changes to your account 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.
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.
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. We also will not be liable for
any loss if we follow instructions by phone that we reasonably believe are
genuine or if you are unable to execute a transaction by phone.
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, we cannot accept instructions to change owners on
the account unless ALL owners agree in writing, even if the law in your state
says otherwise. 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
funds. Telephone instructions directly from your representative will be
accepted unless you have told us that you do not want telephone privileges to
apply to your account.
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 $250, or less than $50
for employee accounts and custodial accounts for minors. 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 $1,000, or $100 for employee accounts and custodial accounts
for minors. These minimums do not apply to IRAs and other retirement plan
accounts or to accounts managed by the Franklin Templeton Group.
SERVICES TO HELP YOU MANAGE YOUR ACCOUNT
AUTOMATIC INVESTMENT PLAN
Our automatic investment plan offers a convenient way to invest in a fund.
Under the plan, you can have money transferred automatically from your
checking or savings 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 each 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 calling
Shareholder Services.
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 or savings account. If you choose to
have the money sent to a checking or savings account, please see "Electronic
Fund Transfers" below. 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 by
mail or by phone 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.
ELECTRONIC FUND TRANSFERS
You may choose to have dividend and capital gain distributions or payments
under a systematic withdrawal plan sent directly to a checking or savings
account. If the account is with a bank that is a member of the Automated
Clearing House, the payments may be made automatically by electronic funds
transfer. If you choose this option, please allow at least fifteen days for
initial processing. We will send any payments made during that time to the
address of record on your account.
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 (within the same class) between identically registered
Franklin Templeton Class I and Class II accounts; and
o request duplicate statements and deposit slips for Franklin Templeton
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 funds 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 funds' 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 100 Fountain Parkway, P.O. Box 33030, St. Petersburg, Florida
33733-8030. The funds 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 (PACIFIC TIME)
DEPARTMENT NAME TELEPHONE NO. (MONDAY THROUGH FRIDAY)
- ------------------------------------------------------------------------------
Shareholder Services 1-800/632-2301 5:30 a.m. to 5:00 p.m.
Dealer Services 1-800/524-4040 5:30 a.m. to 5:00 p.m.
Fund Information 1-800/DIAL BEN 5:30 a.m. to 8:00 p.m.
(1-800/342-5236) 6:30 a.m. to 2:30 p.m. (Saturday)
Retirement Plan Services 1-800/527-2020 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.
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 Mutual Series
CD - Certificate of deposit
CLASS I, CLASS II AND CLASS Z - The funds offer three classes of shares,
designated "Class I," "Class II," and "Class Z." The three classes have
proportionate interests in each 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. The holding period begins on the day you buy
your shares. For example, if you buy shares on the 18th of the month, they
will age one month on the 18th day of the next 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 funds' 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 funds are legally permissible investments and that can only buy shares of
the funds without paying sales charges.
FRANKLIN MUTUAL - Franklin Mutual Advisers, Inc., the funds' 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, Templeton Capital Accumulator Fund, Inc., 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 funds' administrator
HEINE - Heine Securities Corporation, the funds' former investment manager
that was acquired by Resources on October 31, 1996
INVESTOR SERVICES - Franklin/Templeton Investor Services, Inc., the funds'
shareholder servicing and transfer agent
IRA - Individual retirement account or annuity qualified under section 408 of
the Code
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.
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 5.75% for Class I and 1% for Class II. We calculate
the offering price to two decimal places using standard rounding criteria.
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 funds. 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
SIMPLE (SAVINGS INCENTIVE MATCH PLAN FOR EMPLOYEES) - An employer sponsored
salary deferral plan established under section 408(p) 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.
WE/OUR/US - Unless the context indicates a different meaning, these terms
refer to the funds and/or Investor Services, Distributors, or other wholly
owned subsidiaries of Resources.
PROSPECTUS & APPLICATION
FRANKLIN
MUTUAL
SERIES FUND INC.
CLASS Z
MAY 1, 1998
AS AMENDED NOVEMBER 1, 1998
Investment Strategies
GROWTH AND INCOME o VALUE 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
GLOBAL o VALUE MUTUAL EUROPEAN FUND
GLOBAL o VALUE MUTUAL DISCOVERY FUND
Please read this prospectus before investing, and keep it for future
reference. It contains important information, including how each fund invests
and the services available to shareholders.
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 FUND CURRENTLY
OFFERS OTHER SHARE CLASSES WITH DIFFERENT SALES CHARGE AND EXPENSE
STRUCTURES, WHICH AFFECT PERFORMANCE.
To learn more about each fund and its policies, you may request a copy of the
funds' Statement of Additional Information ("SAI"), dated May 1, 1998, which
we may amend from time to time. We have filed the SAI with the SEC and have
incorporated it by reference into this prospectus.
For a free copy of the SAI or a larger print version of this prospectus, or
to receive a free copy of the prospectus for the funds' other share classes,
contact your investment representative or call 1-800/DIAL BEN.
MUTUAL FUND SHARES 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. MUTUAL FUND SHARES INVOLVE INVESTMENT RISKS, INCLUDING THE
POSSIBLE LOSS OF PRINCIPAL.
LIKE ALL MUTUAL FUND SHARES, THE SEC HAS NOT APPROVED OR DISAPPROVED THESE
SECURITIES OR PASSED UPON THE ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
FRANKLIN MUTUAL SERIES FUND INC.
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.
TABLE OF CONTENTS
ABOUT THE FUNDS
Expense Summary ..................................................... 2
Financial Highlights ................................................ 4
How Do the Funds Invest Their Assets? ............................... 9
What Are the Risks of Investing in the Funds? ....................... 20
Who Manages the Funds? .............................................. 26
How Taxation Affects the Funds and Their Shareholders ............... 30
How Are the Funds Organized? ....................................... 33
ABOUT YOUR ACCOUNT
How Do I Buy Shares? ................................................ 34
May I Exchange Shares for Shares of Another Fund? ................... 38
How Do I Sell Shares? ............................................... 40
What Distributions Might I Receive From the Funds? ................. 41
Transaction Procedures and Special Requirements ..................... 42
Services to Help You Manage Your Account ............................ 46
What If I Have Questions About My Account? .......................... 49
GLOSSARY
Useful Terms and Definitions ........................................ 49
FRANKLIN
MUTUAL SERIES
FUND INC. -
CLASS Z
MAY 1, 1998
AS AMENDED NOVEMBER 1, 1998
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(R)
ABOUT THE FUNDS
EXPENSE SUMMARY
This table is designed to help you understand the costs of investing in a
fund. It is based on the historical expenses of Class Z for the fiscal year
ended December 31, 1997. The expenses for Financial Services have been
annualized. Each fund's actual expenses may vary.
<TABLE>
<CAPTION>
MUTUAL FINANCIAL
SHARES QUALIFIED BEACON DISCOVERY EUROPEAN SERVICES
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
A. SHAREHOLDER TRANSACTION EXPENSES+
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%*** 0.18%**
Rule 12b-1 Fees ............................ None None None None None None
Other Expenses ............................. 0.15% 0.18% 0.17% 0.20% 0.25% 0.82%
---------------------------------------------------------------
Total Fund Operating Expenses .............. 0.75%*** 0.78%*** 0.77%*** 1.00%*** 1.05%*** 1.00%**
===============================================================
</TABLE>
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 a fund.
<TABLE>
<CAPTION>
MUTUAL FINANCIAL
SHARES QUALIFIED BEACON DISCOVERY EUROPEAN SERVICES
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1 Year .................................. $ 8 $ 8 $ 8 $ 10 $ 11 $10
3 Years ................................. $24 $25 $25 $ 32 $ 33 $32
5 Years ................................. $42 $43 $43 $ 55 $ 58 -
10 Years ................................ $93 $97 $95 $122 $128 -
</TABLE>
THIS IS JUST AN EXAMPLE. IT DOES NOT REPRESENT PAST OR FUTURE EXPENSES OR
RETURNS. ACTUAL EXPENSES AND RETURNS MAY BE MORE OR LESS THAN THOSE SHOWN.
Each fund pays its operating expenses. The effects of these expenses are
reflected in the Net Asset Value or dividends 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 each fund's investment manager, Franklin Mutual made a commitment to
the funds' Board not to seek an increase in the rate of investment management
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 limit its management fee and to
assume as its own expense certain other expenses otherwise payable by
Financial Services so that Financial Services' 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, annualized management
fees and total operating expenses for the fiscal year ended December 31,
1997, were 0.80% and 1.62%, respectively, of Class Z's average net assets.
After the first twenty-four months of operations, Franklin Mutual may end
this agreement at any time.
***For the period shown, Franklin Mutual had agreed in advance to limit its
management fees. This agreement, which expires October 31, 1999, did not
apply to Financial Services which was not in existence when the agreement was
made. With this reduction, management fees and total operating expenses were
as follows:
<TABLE>
<CAPTION>
MUTUAL
SHARES QUALIFIED BEACON DISCOVERY EUROPEAN
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
MANAGEMENT FEES 0.57% 0.57% 0.57% 0.78% 0.78%
TOTAL OPERATING EXPENSES 0.72% 0.75% 0.74% 0.98% 1.02%
FINANCIAL HIGHLIGHTS
This table summarizes each fund's financial history. The information has been audited by Ernst & Young LLP, each
fund's independent auditor. The audit report covering each of the most recent five years appears in the fund's
Annual Report to Shareholders for the fiscal year ended December 31, 1997. 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
YEAR ENDED DECEMBER 31,
1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE+
(For a share outstanding throughout the year)
Net asset value,
beginning of year $18.57 $17.29 $15.74 $16.19 $14.67 $12.90 $11.28 $13.43 $13.55 $11.57
--------------------------------------------------------------------------------------
Income from investment
operations:
Net investment income .42 .55 .40 .27 .28 .31 .41 .67 .81 .53
Net realized and
unrealized gains 4.43 2.96 4.10 .46 2.78 2.41 1.94 (1.97) 1.20 2.99
--------------------------------------------------------------------------------------
Total from investment operations 4.85 3.51 4.50 .73 3.06 2.72 2.35 (1.30) 2.01 3.52
--------------------------------------------------------------------------------------
Less distributions from:
Net investment income (.54) (.50) (.39) (.27) (.28) (.32) (.40) (.67) (.82) (.53)
Net realized gains (1.58) (1.73) (2.56) (.91) (1.26) (.63) (.33) (.18) (1.31) (1.01)
--------------------------------------------------------------------------------------
Total distributions (2.12) (2.23) (2.95) (1.18) (1.54) (.95) (.73) (.85) (2.13) (1.54)
--------------------------------------------------------------------------------------
Net asset value, end of year $21.30 $18.57 $17.29 $15.74 $16.19 $14.67 $12.90 $11.28 $13.43 $13.55
======================================================================================
Total Return 26.44% 20.76% 29.11% 4.53% 21.00% 21.33% 20.99% (9.82)% 14.93% 30.69%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period
(millions) $7,919 $6,543 $5,230 $3,746 $3,527 $2,913 $2,640 $2,521 $3,403 $2,551
Ratios to average net assets:
Expenses .72% .70% .69% .72% .74% .78% .82% .85% .65% .67%
Expenses, excluding waiver
and payments by affiliate .75% .72% .69% .72% .74% .78% .82% .85% .67% .74%
Net investment income 1.92% 3.02% 2.47% 1.80% 1.90% 2.18% 3.08% 4.88% 5.57% 4.16%
Portfolio turnover rate 49.61% 58.35% 79.32% 66.55% 48.78% 41.06% 47.89% 43.41% 71.54% 89.67%
Average commission rate paid* $.035 $.041 - - - - - - - -
*RELATES TO PURCHASES AND SALES OF EQUITY SECURITIES. PRIOR TO FISCAL YEAR 1996
DISCLOSURE OF AVERAGE COMMISSION RATE WAS NOT REQUIRED.
+PER SHARE AMOUNTS FOR ALL PERIODS TO DECEMBER 31, 1996, HAVE BEEN RESTATED TO
REFLECT A 5-FOR-1 STOCK SPLIT EFFECTIVE FEBRUARY 3, 1997.
QUALIFIED - CLASS Z
YEAR ENDED DECEMBER 31,
1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE+
(For a share outstanding throughout the year)
Net asset value,
beginning of year $16.24 $14.87 $13.34 $13.50 $12.22 $10.59 $9.19 $11.11 $11.36 $9.69
--------------------------------------------------------------------------------------
Income from investment
operations:
Net investment income .37 .47 .33 .22 .19 .25 .34 .61 .67 .42
Net realized and
unrealized gain 3.62 2.62 3.17 .55 2.56 2.14 1.59 (1.72) .96 2.48
--------------------------------------------------------------------------------------
Total from investment operations 3.99 3.09 3.50 .77 2.75 2.39 1.93 (1.11) 1.63 2.90
--------------------------------------------------------------------------------------
Less distributions from:
Net investment income (.64) (.43) (.33) (.21) (.19) (.25) (.34) (.62) (.68) (.42)
Net realized gains (1.40) (1.29) (1.64) (.72) (1.28) (.51) (.19) (.19) (1.20) (.81)
---------------------------------------------------------------------------------------
Total distributions (2.04) (1.72) (1.97) (.93) (1.47) (.76) (.53) (.81) (1.88) (1.23)
---------------------------------------------------------------------------------------
Net asset value, end of year $18.19 $16.24 $14.87 $13.34 $13.50 $12.22 $10.59 $9.19 $11.11 $11.36
======================================================================================
Total Return 24.95% 21.19% 26.60% 5.73% 22.71% 22.70% 21.13% (10.12)% 14.44% 30.15%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year
(millions) $5,240 $4,288 $3,002 $1,792 $1,511 $1,251 $1,110 $1,075 $1,470 $1,094
Ratios to average net assets:
Expenses .75% .75% .72% .73% .78% .82% .87% .89% .70% .62%
Expenses, excluding waiver
and payments by affiliate .78% .78% .72% .73% .78% .82% .87% .89% .71% .69%
Net investment income 1.85% 3.06% 2.71% 1.91% 1.65% 2.10% 3.09% 5.40% 5.61% 3.96%
Portfolio turnover rate 52.76% 65.03% 75.59% 67.65% 56.22% 47.39% 51.99% 46.12% 73.41% 85.05%
Average commission rate paid* $.0365 $.0357 - - - - - - - -
*RELATES TO PURCHASES AND SALES OF EQUITY SECURITIES. PRIOR TO FISCAL YEAR 1996
DISCLOSURE OF AVERAGE COMMISSION RATE WAS NOT REQUIRED.
+PER SHARE AMOUNTS FOR ALL PERIODS TO DECEMBER 31, 1996, HAVE BEEN RESTATED TO
REFLECT A 2-FOR-1 STOCK SPLIT EFFECTIVE FEBRUARY 3, 1997.
BEACON - CLASS Z
YEAR ENDED DECEMBER 31,
1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE+
(For a share outstanding throughout the year)
Net asset value,
beginning of year $12.98 $11.98 $10.34 $10.36 $9.03 $7.79 $6.93 $8.03 $7.62 $6.50
--------------------------------------------------------------------------------------
Income from investment
operations:
Net investment income .31 .40 .29 .15 .12 .15 .25 .36 .37 .26
Net realized and
unrealized gain 2.63 2.08 2.36 .43 1.94 1.62 .96 (1.01) .95 1.60
--------------------------------------------------------------------------------------
Total from investment operations 2.94 2.48 2.65 .58 2.06 1.77 1.21 (.65) 1.32 1.86
--------------------------------------------------------------------------------------
Less distributions:
Net investment income (.54) (.35) (.28) (.15) (.12) (.15) (.24) (.36) (.39) (.27)
Net realized gains (1.26) (1.13) (.73) (.45) (.61) (.38) (.11) (.09) (.52) (.47)
--------------------------------------------------------------------------------------
Total distributions (1.80) (1.48) (1.01) (.60) (.73) (.53) (.35) (.45) (.91) (.74)
--------------------------------------------------------------------------------------
Net asset value, end of year $14.12 $12.98 $11.98 $10.34 $10.36 $9.03 $7.79 $6.93 $8.03 $7.62
=====================================================================================
Total Return 23.03% 21.19% 25.89% 5.61% 22.93% 22.92% 17.60% (8.17)% 17.46% 28.79%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year
(millions) $5,679 $4,920 $3,573 $2,060 $1,062 $534 $398 $388 $409 $214
Ratios to average net assets:
Expenses .74% .73% .72% .75% .73% .81% .85% .85% .67% .59%
Expenses, excluding waiver
and payments by affiliate .77% .75% .72% .75% .73% .81% .85% .85% .68% .66%
Net investment income 1.92% 3.21% 2.89% 1.96% 1.53% 1.90% 3.07% 4.59% 4.98% 3.64%
Portfolio turnover rate 54.72% 66.87% 73.18% 70.63% 52.88% 57.52% 56.63% 57.74% 67.18% 86.79%
Average commission rate paid* $.023 $.047 - - - - - - - -
*RELATES TO PURCHASES AND SALES OF EQUITY SECURITIES. PRIOR TO FISCAL YEAR 1996
DISCLOSURE OF AVERAGE COMMISSION RATE WAS NOT REQUIRED.
+PER SHARE AMOUNTS FOR ALL PERIODS PRIOR TO DECEMBER 31, 1996, HAVE BEEN
RESTATED TO REFLECT A 3-FOR-1 STOCK SPLIT EFFECTIVE FEBRUARY 3, 1997.
DISCOVERY - CLASS Z
YEAR ENDED DECEMBER 31,
-----------------------------------------------
1997 1996 1995 1994 1993
-----------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
(For a share outstanding throughout the year)
Net asset value, beginning of year .............. $17.18 $15.16 $12.55 $13.05 $10.00
-----------------------------------------------
Income from investment operations:
Net investment income .......................... .39 .34 .17 .15 .10
Net realized and unrealized gain ............... 3.49 3.39 3.40 .32 3.48
-----------------------------------------------
Total from investment operations ................ 3.88 3.73 3.57 .47 3.58
-----------------------------------------------
Less distributions from:
Net investment income .......................... (.81) (.31) (.14) (.16) (.09)
Net realized gains ............................. (1.36) (1.40) (.82) (.81) (.44)
------------------------------------------------
Total distributions ............................. (2.17) (1.71) (.96) (.97) (.53)
------------------------------------------------
Net asset value, end of year .................... $18.89 $17.18 $15.16 $12.55 $13.05
===============================================
Total Return .................................... 22.94% 24.93% 28.63% 3.62% 35.85%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (millions) .............. $3,880 $2,976 $1,370 $725 $548
Ratios to average net assets:
Expenses ....................................... 0.98% 0.96% 0.99% 0.99% 1.07%
Expenses, excluding waiver and payments by affiliate 1.00% 0.99% 0.99% 0.99% 1.07%
Net investment income .......................... 1.82% 2.24% 2.00% 1.64% 1.17%
Portfolio turnover rate ......................... 58.15% 80.18% 73.23% 72.70% 90.37%
Average commission rate paid* ................... $.0201 $.0257 - - -
*RELATES TO PURCHASES AND SALES OF EQUITY SECURITIES. PRIOR TO FISCAL YEAR 1996
DISCLOSURE OF AVERAGE COMMISSION RATE WAS NOT REQUIRED.
EUROPEAN - CLASS Z
YEAR ENDED
DECEMBER 31,
--------------------
1997++ 1996+
--------------------
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE
(For a share outstanding throughout the year)
Net asset value, beginning of year .................................... $11.39 $10.00
--------------------
Income from investment operations:
Net investment income ................................................ .33 .06
Net realized and unrealized gain ..................................... 2.28 1.40
--------------------
Total from investment operations ...................................... 2.61 1.46
--------------------
Less distributions from:
Net investment income ................................................ (.84) (.05)
Net realized gains ................................................... (.56) (.02)
---------------------
Total distributions ................................................... (1.40) (.07)
---------------------
Net asset value, end of year .......................................... $12.60 $11.39
====================
Total Return* ......................................................... 23.16% 14.61%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (millions) .................................. $547 $450
Ratios to average net assets:
Expenses ............................................................. 1.02% 1.09%**
Expenses, excluding waiver and payments by affiliate ................. 1.05% 1.15%**
Net investment income ................................................ 2.53% 1.87%**
Portfolio turnover rate ............................................... 98.12% 36.75%
Average commission rate paid*** ....................................... $.0172 $.0233
*TOTAL RETURN IS NOT ANNUALIZED.
**ANNUALIZED.
***RELATES TO PURCHASES AND SALES OF EQUITY SECURITIES.
+FOR THE PERIOD JULY 3, 1996, (COMMENCEMENT OF OPERATIONS) TO DECEMBER 31, 1996.
++BASED ON AVERAGE WEIGHTED SHARES OUTSTANDING.
FINANCIAL SERVICES - CLASS Z
AUGUST 19, 1997
(COMMENCEMENT
OF OPERATIONS) TO
DECEMBER 31, 1997
---------------------
<S> <C>
PER SHARE OPERATING PERFORMANCE
(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
</TABLE>
*TOTAL RETURN IS NOT ANNUALIZED.
**ANNUALIZED.
***RELATES TO PURCHASES AND SALES OF EQUITY SECURITIES.
HOW DO THE FUNDS INVEST THEIR ASSETS?
WHAT ARE THE FUNDS' GOALS?
The principal investment goal of Mutual Shares, Qualified, Beacon, European,
and Financial Services is capital appreciation, which may occasionally be
short-term. The secondary investment goal of each is income. The principal
investment goal of Discovery is long-term capital appreciation. Discovery
does not have a secondary investment goal.
These goals are fundamental, which means that they may not be changed without
shareholder approval.
WHAT KINDS OF SECURITIES DO THE FUNDS BUY?
Each fund may invest in equity securities, debt securities and securities
convertible into common stock (including convertible preferred and
convertible debt securities) ("convertible securities"). The features of each
type of security are described below. The funds generally invest in
securities which, in the opinion of Franklin Mutual, are available at prices
less than their actual value based on certain recognized objective criteria
("intrinsic value").
There are no limitations on the percentage of a fund's assets which may be
invested in equity securities, debt securities, convertible securities or
cash equivalent investments.
EQUITY SECURITIES are securities which entitle the holder to participate in a
company's general operating success or failure. The purchaser of an equity
security typically receives an ownership interest in the company as well as
certain voting rights. The owner of an equity security may participate in a
company's success through the receipt of dividends which are distributions of
earnings by the company to its owners. Equity security owners may also
participate in a company's success or lack of success through increases or
decreases in the value of the company's shares as traded in the public
trading market for such shares. The public trading market for such shares is
typically a stock exchange but can also be a market which arises between
broker-dealers seeking buyers and sellers of a particular security. Equity
securities generally take the form of common stock or preferred stock.
Preferred stockholders typically receive greater dividends but may receive
less appreciation than common stockholders and may have greater voting rights
as well.
DEBT SECURITIES are securities issued by a company which represent a loan of
money by the purchaser of the securities to the company. A debt security
typically has a fixed payment schedule which obligates the company to pay
interest to the lender and to return the lender's money over a certain time
period. A company typically meets its payment obligations associated with its
outstanding debt securities before it declares and pays any dividends to
holders of its equity securities. While debt securities are typically used as
an investment to produce income to an investor as a result of the fixed
payment schedule, debt securities may also increase or decrease in value
depending upon factors such as interest rate movements and the success or
lack of success of a company. See "Debt Securities" below.
CONVERTIBLE SECURITIES are debt securities, or in some cases preferred stock,
which have the additional feature of converting into, or being exchanged for,
common stock of a company after certain periods of time or under certain
circumstances. Holders of convertible securities gain the benefits of being a
debt holder or preferred stockholder and receiving regular interest payments,
in the case of debt securities, or higher dividends,
in the case of preferred stock, with the expectation of becoming a common
stockholder in the future. A convertible security's value typically reflects
changes in the company's underlying common stock value.
CASH EQUIVALENT INVESTMENTS are investments in certain types of short-term
debt securities. A fund making a cash equivalent investment expects to earn
interest at prevailing market rates on the amount invested and there is
little, if any, risk of loss of the original amount invested. The funds' cash
equivalent investments are typically made in U.S. Treasury
bills and high-quality commercial paper issued by banks or others. U.S.
Treasury bills are direct obligations of the U.S. government and have initial
maturities of one year or less. Commercial paper consists of short-term debt
securities issued by a bank or other financial institution which carry fixed
or floating interest rates. A fixed interest rate means that interest is paid
on the investment at the same rate for the life of the security. A floating
interest rate means that the interest rate varies as interest rates on newly
issued securities in the marketplace vary.
GENERAL POLICIES AND STRATEGIES. Franklin Mutual selects investments for each
fund based upon its analysis and research. This analysis and research takes
into account the factors Franklin Mutual determines are relevant, which may
include, among other factors, (i) the relationship of a security's book value
to market value, (ii) cash flow and (iii) multiples of earnings of comparable
securities. The relationship of a security's "book value to market value" is
an analysis of the difference between the price at which a security is
trading in the market, as compared to the value of that security based upon
an analysis of certain information contained in a company's financial
statements. Cash flow analysis considers the inflow and outflow of money into
and out of a company. An analysis of "multiples of earnings of comparable
securities" involves a review of the market values of comparable companies as
compared to their earnings, and then comparing the results of this review
with a comparison of the earnings of the company in question with its market
value. These factors are not applied according to a predetermined formula.
Rather, Franklin Mutual examines each security separately. Franklin Mutual
has not established guidelines as to the size of an issuer, its earnings or
the industry in which it operates in order for a security to be excluded as
unsuitable for purchase by a fund.
Each fund may invest in securities that are traded on U.S. or foreign
securities exchanges, the National Association of Securities Dealers
Automated Quotation System ("NASDAQ") national market system or in any
domestic or foreign over-the-counter ("OTC") market. U.S. or foreign
securities exchanges typically represent the primary trading market for U.S.
and foreign securities. A securities exchange brings together buyers and
sellers of the same securities. The NASDAQ national market system also brings
together buyers and sellers of the same securities through an electronic
medium which facilitates a sale and purchase of the security. Typically, the
companies whose securities are traded on the NASDAQ national market system
are smaller than the companies whose securities are traded on a securities
exchange. Finally, the OTC market refers to all other avenues whereby brokers
bring together buyers and sellers of securities.
Each fund may invest in any industry although no fund will concentrate its
investments in any one industry with the exception of Financial Services
which will concentrate its investments in the financial services industry.
Concentration is defined as investment by a fund of more than 25% of the
value of its assets in any one industry.
Financial Services will normally invest at least 65% of its total assets in
the securities issued by companies operating in the financial services
industry. For fund purposes, companies in the financial services industry are
considered to be companies 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. Companies 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 companies within the
financial services industry are smaller capitalized companies and therefore
may be subject to certain risks not associated with larger companies.
Financial Services' investment policy of concentrating in the financial
services industry may not be changed without the approval of Financial
Services' shareholders.
INVESTMENT IN THE SECURITIES OF REORGANIZING COMPANIES AND COMPANIES SUBJECT
TO TENDER OR EXCHANGE OFFERS. Each fund also seeks to invest in the
securities of domestic or foreign companies which are in the process of
reorganizing or restructuring ("Reorganizing Companies") or as to which there
exist outstanding tender or exchange offers. The funds may from time to time
participate in such tender or exchange offers. A tender offer is an offer by
the company itself or by another company or person to purchase a company's
securities at a higher (or lower) price than the market value for such
securities. An exchange offer is an offer by the company or by another
company or person to the holders of the company's securities to exchange
those securities for different securities. Although there are no restrictions
limiting the extent to which each fund may invest in Reorganizing Companies,
no fund presently anticipates committing more than 50% of its assets to such
investments. In addition to typical equity and debt investments, the funds'
investments in Reorganizing Companies may include Indebtedness,
Participations and Trade Claims, as further described below.
INVESTING TO INFLUENCE OR CONTROL MANAGEMENT. The funds generally purchase
securities for investment purposes and not for the purpose of influencing or
controlling management of a company. However, in certain circumstances when
Franklin Mutual perceives that a fund may benefit, Franklin Mutual may use
the fund's ownership interest in a company to seek to influence or control
management. A fund also may invest in entities whose business is to acquire
securities of companies for the purpose of influencing or controlling
management or with the expectation of taking over such companies. The funds
may also invest in a particular company which Franklin Mutual believes may be
an attractive company to be taken over by another entity.
NON-U.S. SECURITIES. The funds may purchase securities of non-U.S. issuers
and Discovery may invest 50% or more of its assets in such securities.
European will normally invest
at least 65% of its total assets in the securities of issuers (i) organized
under the laws of, (ii) whose principal business operations are located in,
or (iii) at least 50% of whose revenue is earned from, European countries.
For purposes of the fund's investments, European countries means all of the
countries that are members of the European Union, the 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 total assets in securities of U.S. issuers, as well
as in securities of issuers from the Levant, the Middle East and the
remaining regions of the world.
It is currently anticipated that European will invest primarily in securities
of issuers in Western Europe and Scandinavia. European will normally invest
in securities from at least five different countries although, from time to
time, it may invest all of its assets in a single country. Under normal
circumstances, European, at the close of each taxable year, will have at
least 50% of its assets invested in securities of foreign issuers.
The funds other than European expect to invest a lesser percentage of their
respective assets in securities of non-U.S. issuers than Discovery. Beacon
intends to invest the next largest percentage, followed by Qualified,
Financial Services and finally Mutual Shares. The funds may purchase
securities whose values are quoted and traded in any currency in addition to
the U.S. dollar. Where a security's value is quoted and traded in a non-U.S.
dollar currency, the funds bear the risk of a decrease (or gain the benefit
of an increase) in the value of the security as a result of changes in the
value of the currency as compared to the U.S. dollar, in addition to typical
market price movements related to certain trading markets or the financial
strength or weakness of the security's issuer. In order to avoid these
unexpected fluctuations in value as a result of relative currency values, the
funds expect to employ an investment technique called "hedging," which
attempts to reduce or eliminate changes in a security's value resulting from
changing currency exchange rates. Hedging is further described below.
Each fund may invest in securities commonly known as American Depositary
Receipts, European Depositary Receipts and Global Depositary Receipts of
non-U.S. issuers. Such depositary receipts are interests in a pool of a
non-U.S. company's securities which have been deposited with a bank or trust
company. The bank or trust company then sells interests in the pool to
investors in the form of depositary receipts. Depositary receipts can be
unsponsored or sponsored by the issuer of the underlying securities or by the
issuing bank or trust company.
DIFFERENCES BETWEEN THE FUNDS. 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 goals, Franklin Mutual seeks to retain certain
historical differences among the funds on an informal basis. Specifically,
Mutual Shares, Qualified and Beacon have generally invested in larger and
medium sized companies with large share trading volume. Discovery seeks to
achieve its objective by investing proportionately more of its assets in
smaller sized companies than the other funds and may also invest more than
50% of its assets in foreign securities. Qualified was originally intended
for purchase by pension plans, profit sharing plans and other nontaxpaying
entities. Consequently, it was intended that its investment portfolio would
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,
generally. Allocation of investments among the funds also depends 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 fund.
Although the funds may invest in securities of companies of any size, Mutual
Shares, Qualified and Beacon tend to invest in securities of companies with
market capitalizations in excess of $1 billion due to the larger size of
these funds. The term "market capitalization" refers to the value of a
company as determined by the market price of its issued and outstanding
common stock. A company's market capitalization is calculated by multiplying
the number of outstanding shares of a company by the current market price of
a share. Discovery may invest 50% or more of its assets in foreign issuers
and expects to invest proportionately more of its assets in smaller
capitalized companies than the other funds. Investing in smaller capitalized
companies may involve greater risks than investing in securities of larger
companies. The smaller companies in which Discovery invests often are not
well known, their securities may trade in the securities markets below their
book values and may not be followed by established securities analysts.
DEBT SECURITIES. The funds may invest in a variety of debt securities,
including bonds and notes issued by domestic or foreign corporations and the
U.S. or foreign governments. Bonds and notes differ in the length of the
issuer's repayment schedule. Bonds typically have a longer payment schedule
than notes. Typically, debt securities with a shorter repayment schedule pay
interest at a lower rate than debt securities with a longer repayment
schedule.
The debt securities in which the funds may invest may be either unrated or
rated by one or more independent rating organizations such as S&P or Moody's.
Securities are given ratings by independent rating organizations which grade
the company issuing the securities based upon its financial soundness.
The debt securities which the funds may purchase may be rated in any rating
category established by the independent rating organizations. Generally, the
lower the rating category, the riskier the investment. Debt securities rated
BBB or lower by S&P or Moody's are considered to be high yield, high risk
debt securities, commonly known as "junk bonds." The lowest rating category
established by Moody's is "C," and by S&P, is "D." Debt securities with a D
rating are in default as to the payment of principal and interest, which
means that the issuer does not have the financial soundness to meet its
interest payments or its repayment schedule to security holders. The funds
may invest to an unlimited degree in junk bonds.
The funds will generally invest in debt securities under circumstances
similar to those under which they will invest in equity securities; namely,
when, in Franklin Mutual's opinion, such debt securities are available at
prices less than their intrinsic value. Investment in fixed-income securities
under these circumstances may lead to the potential for capital appreciation.
Consequently, when investing in debt securities, a debt security's rating is
given less emphasis in Franklin Mutual's investment decision-making process.
Historically, the funds have invested in debt securities issued by
Reorganizing Companies because such securities often are available at less
than their intrinsic value. Debt securities of such companies typically are
unrated, lower rated, in default or close to default. While posing a greater
risk than higher rated securities with respect to payment of interest and
repayment of principal at the price at which the debt security was originally
issued, such debt securities typically rank senior to the equity securities
of Reorganizing Companies and may offer the potential for certain investment
opportunities. See "More Information About the Kinds of Securities the Funds
Buy - Medium and Lower Rated Corporate Debt Securities" under "How Do the
Funds Invest Their Assets?" in the SAI.
WHAT ARE SOME OF THE FUNDS' OTHER INVESTMENT STRATEGIES AND PRACTICES?
DIRECT INVESTMENT IN INDEBTEDNESS, PARTICIPATIONS AND TRADE CLAIMS. From time
to time, the funds may purchase the direct indebtedness of various companies
("Indebtedness"), or participations in such Indebtedness. Indebtedness can be
distinguished from traditional debt securities in that debt securities are
part of a large issue of securities to the general public which is typically
registered with a securities registration organization, such as the SEC, and
which is held by a large group of investors. Indebtedness may not be a
security, but rather, may represent a specific commercial loan or portion of
a loan which has been given to a company by a financial institution such as a
bank or insurance company. The company is typically obligated to repay such
commercial loan over a specified time period. By purchasing the Indebtedness
of companies, a fund steps into the shoes of the financial institution which
made the loan to the company prior to its restructuring or refinancing.
Indebtedness purchased by a fund may be in the form of loans, notes or bonds.
The length of time remaining until maturity on the Indebtedness is one factor
Franklin Mutual considers in purchasing a particular Indebtedness.
Indebtedness which represents a specific indebtedness of the company to a
bank is not considered to be a security issued by the bank selling it. The
funds purchase loans from national and state chartered banks as well as
foreign banks. The funds normally invest in the Indebtedness of a company
which Indebtedness has the highest priority in terms of payment by the
company, although on occasion lower priority Indebtedness also may be
acquired.
The funds may also purchase participation interests in Indebtedness
("Participations"). Participations represent fractional interests in a
company's Indebtedness. The financial institutions which typically make
Participations available are banks or insurance companies, governmental
institutions, such as the Resolution Trust Corporation, the Federal Deposit
Insurance Corporation or the Pension Benefit Guaranty Corporation, or certain
organizations such as the World Bank which are known as "supranational
organizations." Supranational organizations are entities established or
financially supported by the national governments of one or more countries to
promote reconstruction or development.
The funds may also purchase trade claims and other direct obligations or
claims ("Trade Claims") of Reorganizing Companies. Trade Claims generally
represent money due to a supplier of goods or services to such Reorganizing
Company.
Indebtedness, Participations and Trade Claims may be illiquid (as defined
below).
ILLIQUID SECURITIES. An illiquid security is a security that cannot be sold
within seven days in the normal course of business for approximately the
amount at which a fund has valued the security and carries such value on its
financial statements. Examples of illiquid securities are most restricted
securities, and repurchase agreements which terminate more than seven days
from their initial purchase date, as further described below. No fund may
purchase an illiquid security if, at the time of purchase, the fund would
have more than 15% of its net assets invested in such securities.
RULE 144A SECURITIES. The funds may invest in certain unregistered securities
which may be sold under Rule 144A of the Securities Act of 1933 ("144A
securities"). 144A securities are restricted, which generally means that a
legend has been placed on the share certificates representing the securities
which states that the securities were not registered with the SEC when they
were initially sold and may not be resold except under certain circumstances.
In spite of the legend, certain securities may be sold to other institutional
buyers provided that the conditions of Rule 144A are met. In the event that
there is an active secondary institutional market for 144A securities, the
144A securities may be treated as liquid. As permitted by the federal
securities laws, the Board has adopted procedures in accordance with Rule
144A which govern when specific 144A securities held by the funds may be
deemed to be liquid.
MORTGAGE-BACKED SECURITIES. Each fund may invest in securities representing
interests in an underlying pool of real estate mortgages ("mortgage-backed
securities"). The mortgage-backed securities which the funds may purchase may
be issued or guaranteed by the U.S. government, certain U.S. government
agencies or certain government sponsored corporations or organizations or by
certain private, non-government corporations, such as banks and other
financial institutions. Two principal types of mortgage-backed securities are
collateralized mortgage obligations (CMOs) and real estate mortgage
investment conduits (REMICs).
CMOs are debt securities issued by the entities listed above. The payment of
interest on the debt securities is dependent upon the scheduled payments on
the underlying mortgages and, thus, the CMOs are said to be "collateralized"
by the pool of mortgages. CMOs are issued in a number of classes or series
with different maturities. The classes or series are paid off completely in
sequence as the underlying mortgages are repaid. Certain of these securities
may have variable interest rates which adjust as interest rates in the
securities market generally rise or fall. Other CMOs may be stripped, which
means that only the principal or interest feature of the underlying security
is passed through to the fund.
REMICs, which were authorized under certain tax laws, are private entities
formed for the purpose of holding a fixed pool of mortgages. The mortgages
are, in turn, backed by an interest in real property. REMICs are similar to
CMOs in that they issue multiple classes of securities.
CMOs and REMICs issued by private entities are not government securities and
are not directly guaranteed by any government agency. They are secured by the
underlying collateral of the private issuer. Certain of these private-backed
securities are 100% collateralized at the time of issuance by securities
issued or guaranteed by the U.S. government, its agencies, or
instrumentalities.
The funds may also invest directly in distressed mortgage obligations. A
direct investment in a distressed mortgage obligation involves the purchase
by the fund of a lender's interest in a mortgage granted to a borrower, where
the borrower has experienced difficulty in making its mortgage payments, or
for which it appears likely that the borrower will experience difficulty in
making its mortgage payments. As is typical with mortgage obligations,
payment of the loan is secured by the real estate underlying the loan. By
purchasing the distressed mortgage obligation, a fund steps into the shoes of
the lender from a risk point of view.
REAL ESTATE INVESTMENT TRUST ("REIT") INVESTMENTS. Among the funds' equity
investments may be investments in shares issued by REITs. A REIT is a pooled
investment vehicle which purchases primarily income-producing real estate or
real estate related loans or other real estate related interests. The pooled
vehicle, typically a trust, then issues shares whose value and investment
performance are dependent upon the investment experience of the underlying
real estate related investments.
SHORT SALES. The funds may engage in two types of short sale transactions,
"naked short sales" and "short sales against the box" transactions. In a
naked short sale transaction, a fund sells a security which it does not own
to a purchaser at a specified price. In order to complete the short sale
transaction, the fund must (i) borrow the security to deliver the security to
the purchaser; and (ii) buy the same security in the market in order to
return it to the borrower. In buying the security to replace the borrowed
security, the fund expects to buy the security in the market for less than
the amount it earned on the short sale, thereby yielding a profit. In some
circumstances, the fund may receive the security in connection with a
reorganization and, consequently, need not buy the security to be returned to
the borrower. Each fund may engage in naked short sale transactions up to 5%
of its assets.
The funds may also sell securities "short against the box" without limit. In
a short sale against the box, the fund actually holds in its portfolio the
securities which it has sold short. In replacing the borrowed securities in
the transaction, the fund may either buy securities in the open market or use
those in its portfolio. See "More Information About the Kinds of Securities
the Funds Buy - Short Sales" under "How Do the Funds Invest Their Assets?" in
the SAI for more discussion of these practices.
INVESTMENT COMPANY SECURITIES. Each fund may invest from time to time in
other investment company securities, subject to applicable law which
restricts such investments. Such laws generally restrict a fund's purchase of
another investment company's securities to three percent (3%) of the other
investment company's securities, no more than five percent (5%) of the fund's
assets in any single investment company's securities and no more than ten
percent (10%) of the fund's assets in all investment company securities.
REPURCHASE AGREEMENTS. Each fund may invest up to 10% of its assets in
repurchase agreements, including tri-party repurchase agreements. In a
repurchase agreement transaction, a fund purchases a U.S. Government security
from a bank or broker-dealer. The agreement provides that the security must
be sold back to the bank or broker-dealer at an agreed-upon price and date.
The bank or broker-dealer must transfer to the fund's custodian bank
securities with an initial value, including any earned but unpaid interest,
equal to at least 100% of the dollar amount invested by the fund in each
repurchase agreement. The value of the underlying U.S. government securities
is determined daily so that there is on deposit with the fund's custodian
bank at least 100% of the value of the repurchase agreement. In a tri-party
repurchase agreement, the security is maintained at the bank or
broker-dealer's custodian bank, as opposed to being transferred to and
maintained at the fund's custodian bank. There are certain risks associated
with such transactions which are described in the SAI.
LOANS OF SECURITIES. Each fund may also lend its portfolio securities to
banks or broker-dealers in order to realize additional income which the fund
receives as a loan premium. If a fund lends portfolio securities, for each
loan the fund must receive in return securities with a value at least equal
to 100% of the current market value of the loaned securities. Each fund
presently does not anticipate loaning more than 5% of its respective
portfolio securities. There are certain risks associated with loan
transactions which are described in the SAI.
BORROWING. While the funds are permitted to borrow under certain
circumstances as described in the SAI, under no circumstances will a fund
make additional investments while any amounts borrowed exceed 5% of the
fund's total assets.
SECURITIES OF COMPANIES IN THE FINANCIAL SERVICES INDUSTRY. Under the federal
securities law, each fund may not invest more than 5% of its total assets in
the securities of any company that receives more than 15% of its revenues
from securities related activities, which means activities as a broker,
dealer, underwriter or investment advisor (a "securities issuer"). Further,
immediately after a purchase of equity securities of a securities issuer, a
fund may not own more than 5% of the outstanding securities of any class of
equity securities of a securities issuer, and immediately after a purchase of
debt securities of a securities issuer, a fund may not own more than 10% of
the outstanding principal amount of the securities issuer's debt securities.
HEDGING AND INCOME TRANSACTIONS. The funds may use various hedging
strategies. Hedging is a technique designed to reduce a potential loss to a
fund as a result of certain economic or market risks, including risks related
to fluctuations in interest rates, currency exchange rates between U.S. and
foreign securities or between different foreign currencies, and broad or
specific market movements. The hedging strategies that the funds may use are
also used by many mutual funds and other institutional investors. When
pursuing these hedging strategies, the funds may engage in the following
types of transactions among others: 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"). Each of these Hedging Transactions is
described more fully in the SAI. From time to time, the funds may engage in
other hedging strategies with qualities similar to those described in this
prospectus.
Some examples of situations in which Hedging Transactions may be used are:
(i) 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; (ii) to
protect a fund's gains in the value of portfolio securities which have not
yet been sold; (iii) to facilitate the sale of certain securities for
investment purposes; and (iv) as a temporary substitute for purchasing or
selling particular securities.
Any combination of Hedging Transactions may be used at any time as determined
by Franklin Mutual. Use of any Hedging Transaction is a function of numerous
variables, including market conditions and the investment manager's expertise
in utilizing such techniques. The ability of a fund to utilize Hedging
Transactions successfully cannot be assured. Each fund will comply with
applicable regulatory requirements when implementing these strategies,
including the establishment of certain isolated accounts at the fund's
custodian bank. Hedging Transactions involving financial futures and options
on futures will be purchased, sold or entered into generally for bona fide
hedging, risk management or portfolio management purposes.
The various techniques described above as "Hedging Transactions" may also be
used by the funds for non-hedging purposes. For example, these techniques may
be used to produce income to a fund where the fund's participation in the
transaction involves the payment of a premium to the fund. A fund may also
use a hedging technique if Franklin Mutual has a view about the fluctuation
of certain indices, currencies or economic or market changes such as a
reduction in interest rates. No more than 5% of a fund's assets will be
exposed to risks of such types of instruments when entered into for
non-hedging purposes.
Any material changes in or to the Hedging Transactions used by the funds will
be described in the funds' prospectuses before being utilized.
TEMPORARY INVESTMENTS. Franklin Mutual typically keeps a portion of the
assets of each fund invested in short-term debt securities although it may
choose not to do so when circumstances dictate. These temporary investments
permit the funds to react quickly to market movements. The funds also may
make temporary investments while awaiting the accumulation of additional
monies to make larger investments. Temporary investments tend to be less
risky and less subject to fluctuations due to general market conditions than
other investments.
OTHER POLICIES AND RESTRICTIONS. Each fund has a number of additional
investment policies and restrictions that govern its activities. Those that
are identified as "fundamental" may only be changed with shareholder
approval. The others may be changed by the Board alone. For a list of these
restrictions and more information about each fund's investment policies,
including those described above, please see "How Do the Funds Invest Their
Assets?" and "Restrictions and Limitations" in the SAI.
Generally, the policies and restrictions discussed in this prospectus and in
the SAI apply when a fund makes an investment. In most cases, the fund is not
required to sell a security because circumstances change and the security no
longer meets one or more of the fund's policies or restrictions.
WHAT ARE THE RISKS OF INVESTING IN THE FUNDS?
GENERAL. There is no assurance that a fund will meet its investment goal.
Generally, if the securities owned by a fund increase in value, the value of
the shares of the fund which you own will increase. Similarly, if the
securities owned by a fund decrease in value, the value of your shares will
also decline. In this way, you participate in any change in the value of the
securities owned by a fund.
SHORT SALES. Short sales carry risks of loss if the price of the security
sold short increases after the sale. In this situation, when a fund replaces
the borrowed security by buying the security in the securities markets, the
fund may pay more for the security than it has received from the purchaser in
the short sale. A fund may, however, profit from a change in the value of the
security sold short, if the price decreases.
COMMON STOCKS. To the extent that a fund's investments consist of common
stocks, a decline in the market, expressed for example by a drop in any
securities index that is based on equity securities, such as the Dow Jones
Industrial or the Standard & Poor's 500 average, may also be reflected in a
fund's share price. Historically, there have been both increases and
decreases in securities prices generally and such increases and decreases may
reoccur unpredictably in the future.
DEBT SECURITIES GENERALLY. To the extent that a fund's investments consist of
debt securities, changes in interest rates will affect the value of the
fund's portfolio and its share price. Increased rates of interest which
frequently accompany higher inflation and/or a growing economy are likely to
have a negative effect on the value of your shares.
LOWER-RATED DEBT SECURITIES. To the extent a fund invests in lower-rated debt
securities, it will be subject to risks which are greater than those to which
a fund which limits its investments to higher grade debt securities would be
subject. Such risks include limitations on a fund's ability to re-sell the
lower-rated debt securities and less readily available market quotations for
such securities. If there are not readily available market quotations for a
debt security, its value is determined largely by the investment manager's
judgment. When and if the debt security is sold, the investment manager may
find that its estimation of the debt security's value is substantially
different than the sale price effected in the market.
144A SECURITIES. Due to changing markets or other factors, 144A securities
may be subject to a greater possibility of becoming illiquid than securities
which have been registered with the SEC for sale.
NON-U.S. SECURITIES. Investments in securities of non-U.S. issuers involve
certain risks not ordinarily associated with investments in securities of
U.S. issuers. Such risks include: fluctuations in the value of the currency
in which the security is traded or quoted as compared to the U.S. dollar;
unpredictable political, social and economic developments in the foreign
country where the security is issued or where the issuer of the security is
located; and the possible imposition by a foreign government of limits on the
ability of a fund to obtain a foreign currency or to convert a foreign
currency into U.S. dollars; or the imposition of other foreign laws or
restrictions. Since each fund may invest in securities issued, traded or
quoted in currencies other than the U.S. dollar, changes in foreign currency
exchange rates will affect the value of securities in the fund's portfolio.
Franklin Mutual generally attempts to reduce such risk, known as "currency
risk," by using Hedging Transactions. In addition, in certain countries, the
possibility of expropriation of assets, confiscatory taxation, or diplomatic
developments could adversely affect investments in those countries.
Expropriation of assets refers to the possibility that a country's laws will
prohibit the return to the U.S. of any monies which a fund has invested in
the country. Confiscatory taxation refers to the possibility that a foreign
country will adopt a tax law which has the effect of requiring the fund to
pay significant amounts, if not all, of the value of the fund's investment to
the foreign country's taxing authority. Diplomatic developments means that
because of certain actions occurring within a foreign country such as
significant civil rights violations or because of the United States' actions
during a time of crisis in the particular country, all communications and
other official governmental relations between the country and the United
States could be severed. This could result in the abandonment of any U.S.
investors', such as the funds', money in the particular country, with no
ability to have the money returned to the United States.
There may be less publicly available information about a foreign company than
about a U.S. company. Foreign issuers may not be subject to accounting,
auditing and financial reporting standards and requirements comparable to or
as uniform as those of U.S. issuers. The number of securities traded, and the
frequency of such trading, in non-U.S. securities markets, while growing in
volume, is for the most part, substantially less than in U.S. markets. As a
result, securities of many foreign issuers are less liquid and their prices
more volatile than securities of comparable U.S. issuers. Transaction costs,
the costs associated with buying and selling securities, 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 fund's foreign investments may include both
voting and non voting securities, sovereign debt and participations in
foreign government deals. The funds may 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.
INVESTMENT COMPANY SECURITIES. Investors should recognize that a fund's
purchase of the securities of investment companies results in layering of
expenses. This layering may occur because investors in any investment
company, such as a fund, indirectly bear a proportionate share of the
expenses of the investment company, including operating costs, and investment
advisory and administrative fees.
DEPOSITARY RECEIPTS. Receipts of non-U.S. issuers may 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. 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.
SPECIAL CONSIDERATIONS RELATING TO FINANCIAL SERVICES. As stated above,
Financial Services concentrates its investments in the financial service
industry. The fund's 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. This regulation may
limit both the amount and types of loans and other financial commitments a
financial services company can make, and the interest rates and fees it can
charge. Such limitations may have a significant impact on the profitability
of a financial services company since that profitability is attributable, at
least in part, to the company's ability to make financial commitments such as
loans. Profitability of a financial services company is largely dependent
upon the availability and cost of the company's funds, and can fluctuate
significantly when interest rates change. The financial difficulties of
borrowers can negatively impact the industry to the extent that borrowers may
not be able to repay loans made by financial services companies.
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 inadequate reserve funds to pay claims and the
inability to collect from the insurance companies which insure insurance
companies, so-called reinsurance carriers.
Congress is currently considering legislation that would reduce the
separation between commercial and investment banking businesses. Commercial
banks typically have been limited to certain non-securities activities such
as making loans and accepting deposits. Investment banks have typically
engaged in more extensive securities activities. If enacted, the proposed
legislation 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. Such changes have resulted
from various consolidations as well as the continual development of new
products, structures and a regulatory framework that is anticipated to be
subject to further change.
HEDGING TRANSACTIONS. Hedging Transactions, whether entered into as a hedge
or for gain, have risks associated with them. The three most significant
risks associated with Hedging Transactions are: (i) possible default by the
other party to the transaction; (ii) illiquidity; and (iii) 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 (i) result in
losses to a fund, (ii) force the purchase or sale of portfolio securities at
inopportune times or for prices higher than or lower than current market
values, (iii) limit the amount of appreciation the fund can realize on its
investments, (iv) increase the cost of holding a security and reduce the
returns on securities or (v) cause a fund 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 controls by a
foreign or the U.S. government on the exchange of foreign currencies, the
inability of foreign securities transactions to be completed with the
security being delivered to the fund, or the inability to deliver or receive
a specified currency.
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, these transactions also tend to limit any potential gain which
might result from an increase in value of the position taken. As compared to
options contracts, futures contracts create greater ongoing potential
financial risks to a fund because the fund is required to make ongoing
monetary deposits with futures brokers. In an options transaction, a fund's
exposure is limited to the cost of the initial premium paid by the fund to
the broker to engage in the transaction. Losses resulting from the use of
Hedging Transactions can 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 a
fund's total return to investors.
REORGANIZING COMPANIES. 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 in a Reorganizing Company
will be consummated or will be consummated on the terms and within the time
period contemplated by Franklin Mutual.
INDEBTEDNESS AND PARTICIPATIONS. 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.
Participations are typically issued by financial institutions on a
non-recourse basis, which means that purchasers of the Participations must
rely on the financial institution issuing the Participation to assert any
rights against the Borrower with respect to the underlying Indebtedness.
Thus, when a fund purchases a Participation, it assumes the risk associated
with the financial soundness of the bank or other financial intermediary
issuing the Participation, as well as the credit risk associated with the
financial soundness of the issuer of the underlying Indebtedness.
RISKS RELATED TO REAL ESTATE-RELATED INVESTMENTS. The funds' investments in
real estate-related securities are subject to certain risks related to the
real estate industry in general. These risks include, among others: changes
in general and local economic conditions; possible declines in the value of
real estate; the possible lack of availability of money for loans to purchase
real estate; overbuilding in particular areas; prolonged vacancies in rental
properties; property taxes; changes in laws related to the use of real estate
in certain areas; costs resulting from the clean-up of, and liability to
third parties resulting from, environmental problems; the costs associated
with damage to real estate resulting from floods, earthquakes or other
material disasters not covered by insurance; and limitations on and
variations in rents and changes in interest rates.
DISTRESSED MORTGAGE OBLIGATIONS. Unlike mortgage-backed securities, which
generally represent an interest in a pool of loans backed by real estate,
investing in direct mortgage obligations involves the risks of a lender.
These risks include the ability or inability of a borrower to make its loan
payments and the possibility that the borrower will prepay the loan in
advance of its scheduled payment time period, curtailing an expected rate and
timing of return for the lender. Investments in direct mortgage obligations
of distressed borrowers involve substantially greater risks and are highly
speculative due to the fact that the borrower's ability to make timely
payments has been identified as questionable. Borrowers that are in
bankruptcy or restructuring may never pay off their loans, or may pay only a
small fraction of the amount owed. If, because of a lack of payment, the real
estate underlying the loan is foreclosed, which means that the borrower takes
possession of the real estate, a fund could become part owner of such real
estate. As an owner, a fund would bear any costs associated with owning and
disposing of the real estate and also may encounter difficulties in disposing
of the real estate in a timely fashion. In addition, there is no assurance
that a fund would be able profitably to dispose of properties in foreclosure.
TAX CONSIDERATIONS. Each fund's investments in options, futures, and forward
contracts, including foreign currency options and futures, foreign securities
and other complex securities are subject to special tax rules that may affect
the amount, timing or character of the income earned by the fund and
distributed to you. Each fund may also be subject to withholding taxes on
earnings from certain of its foreign securities. These special tax rules are
discussed in the "Additional Information on Distributions and Taxes" section
of the SAI.
EURO. On January 1, 1999, the European Monetary Union (EMU) plans to
introduce a new single currency, the Euro, which will replace the national
currency for participating member countries. If the fund holds investments in
countries with currencies replaced by the Euro, the investment process,
including trading, foreign exchange, payments, settlements, cash accounts,
custody and accounting will be impacted.
The process to establish the Euro may result in market volatility. It is not
possible to predict the impact of the Euro on the business or financial
condition of European issuers or on the fund. The transition and the
elimination of currency risk among EMU countries may change the economic
environment and behavior of investors, particularly in European markets. To
the extent the fund holds non-U.S. dollar (Euro or other) denominated
securities, it will still be exposed to currency risk due to fluctuations in
those currencies versus the U.S. dollar.
Resources has created an interdepartmental team to handle all Euro-related
changes to enable the Franklin Templeton Funds to process transactions
accurately and completely with minimal disruption to business activities.
While there can be no assurance that the fund will not be adversely affected,
Franklin Mutual and its affiliated service providers are taking steps that
they believe are reasonably designed to address the Euro issue.
WHO MANAGES THE FUNDS?
THE BOARD. The Board oversees the management of each fund and elects its
officers. The officers are responsible for each fund's day-to-day operations.
The Board also monitors each fund to ensure no material conflicts exist among
the fund's classes of shares. While none is expected, the Board will act
appropriately to resolve any material conflict that may arise.
Michael F. Price is Chairman of the Boards of Directors which oversee the
management of the funds and the investment manager.
INVESTMENT MANAGER. Franklin Mutual manages each 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 funds' Code of Ethics.
MANAGEMENT TEAM. The team responsible for the day to day management of the
fund portfolios is led by Peter Langerman, Chief Executive Officer, and
Robert Friedman, Chief Investment Officer, of Franklin Mutual. The team is
comprised of the following investment professionals who have portfolio
responsibility for all of the Franklin Mutual Series Fund Inc. portfolios.
These professionals have been associated with Franklin Mutual since:
Jeffrey A. Altman 1988
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
is a Vice President of Franklin Mutual Series Fund Inc.
Robert L. Friedman 1988
Chief Investment Officer and 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 is a Vice President of Franklin Mutual Series Fund Inc.
Raymond Garea 1991
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 is a Vice
President of Franklin Mutual Series Fund Inc.
Peter A. Langerman 1986
Chief Executive 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 is a Director and Executive Vice President of Franklin
Mutual Series Fund Inc.
David E. Marcus 1988
Senior Vice President of Franklin Mutual
Mr. Marcus has a Bachelor of Science degree in Business
Administration/Finance from Northeastern University. Prior to November 1996,
he was a Research Analyst for Heine, the former investment manager for
Franklin Mutual Series Fund Inc.
Lawrence N. Sondike 1984
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 is a Vice
President of Franklin Mutual Series Fund Inc.
David J. Winters 1987
Senior Vice President of Franklin Mutual
Mr. Winters has a Bachelor of Arts degree in Economics from Cornell
University. He is a Chartered Financial Analyst (CFA). Prior to November
1996, he was a Research Analyst for Heine, the former investment manager for
Franklin Mutual Series Fund Inc.
In addition, Franklin Mutual employees Jim Agah and Jeff Diamond as Assistant
Portfolio Managers.
Jim Agah 1997
Assistant Portfolio Manager of Franklin Mutual
Mr. Agah has a Bachelor of Science degree in Business Administration from the
University of Michigan and a Masters of Management from the Kellogg Graduate
School of Managmenet at Northwestern University. He is both a Chartered
Financial Analyst (CFA) and a Certified Public Accountant (CPA). Prior to
joining Franklin Mutual in 1997, he was a Vice President of Equity Sales for
Keefe, Bryette & Woods.
Jeff Diamond 1998
Assistant Portfolio Manager of Franklin Mutual
Mr. Diamond has a Bachelor of Science degree in Engineering from Cornell
University and a Masters in Business Administration/Finance from Columbia
University. Prior to joining Franklin Mutual in March of 1998, he was Vice
President and Co-Manager of Prudential Conservative Stock Fund.
The following Portfolio and Assistant Portfolio Managers have primary
responsibility for investments in the following funds:
Mutual Shares Fund ..... Larry Sondike and David Marcus
Mutual Qualified Fund .. Ray Garea and
Assistant Portfolio Manager Jeff Diamond
Mutual Beacon Fund ..... Larry Sondike and David Winters
Mutual Discovery Fund .. Rob Friedman and David Marcus
Mutual European Fund ... David Marcus
Mutual Financial
Services Fund .......... Ray Garea and
Assistant Portfolio Manager Jim Agah
MANAGEMENT FEES. During the fiscal year ended December 31, 1997, Franklin
Mutual had agreed in advance to limit its fees and to make certain payments
to reduce expenses. The table below shows the management fees and total
operating expenses paid by each fund, as a percentage of average daily net
assets.
MANAGEMENT TOTAL OPERATING
FEES BEFORE MANAGEMENT EXPENSES BEFORE TOTAL OPERATING
ADVANCE WAIVER FEES PAID ADVANCE WAIVER EXPENSES PAID
- --------------------------------------------------------------------------------
Mutual Shares ...... 0.60% 0.57% 0.75% 0.72%
Qualified .......... 0.60 0.57 0.78 0.75
Beacon ............. 0.60 0.57 0.77 0.74
European ........... 0.80 0.78 1.05 1.02
Discovery .......... 0.80 0.78 1.00 0.98
Financial Services* 0.80 0.18 1.62 1.00
*ANNUALIZED
Each 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.
During Financial Services' start-up period, Franklin Mutual has agreed in
advance to limit its management fees and to assume as its own expense certain
expenses otherwise payable by the fund so that Financial Services' total
operating expenses do not exceed 1.00% of Class Z's average net assets for
the fund's initial twenty-four months of operations. After the first
twenty-four months of operations, Franklin Mutual may end this agreement at
any time.
PORTFOLIO TRANSACTIONS. Franklin Mutual tries to obtain the best execution on
all transactions. If Franklin Mutual believes more than one broker or dealer
can provide the best execution, 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 fund owns more than 5% of the voting securities of a broker-dealer,
that broker-dealer may be considered an affiliated person of such fund. If
such fund places any portfolio transactions through that broker-dealer, the
fund would be required to comply with certain rules of the SEC relating to
the payment of brokerage commissions to an affiliated broker-dealer. Please
see "How Do the Funds Buy Securities for Their Portfolios?" in the SAI for
more information.
ADMINISTRATIVE SERVICES. FT Services provides certain administrative services
and facilities for each fund. Under its administration agreement, each fund
pays FT Services a monthly administration fee equal to an annual rate of
0.15% of the fund's average daily net assets up to $200 million, 0.135% of
average daily net assets over $200 million up to $700 million, 0.10% of
average daily net assets over $700 million up to $1.2 billion, and 0.075% of
average daily net assets over $1.2 billion. During the fiscal year ended
December 31, 1997, administration fees totaling 0.08% of the average daily
net assets of each fund were paid to FT Services. These fees are included in
the amount of total expenses shown above. The administration fees for
Financial Services have been annualized. Please see "Investment Management
and Other Services" in the SAI for more information.
PRIOR SERVICES. Before November 1, 1996, Heine managed each 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.
YEAR 2000 ISSUE. Like other mutual funds, the fund could be adversely
affected if the computer systems used by Franklin Mutual and other service
providers do not properly process date-related information on or after
January 1, 2000 ("Year 2000 Issue"). The Year 2000 Issue, and in particular
foreign service providers' responsiveness to the issue, could affect
portfolio and operational areas including securities trade processing,
interest and dividend payments, securities pricing, shareholder account
services, reporting, custody functions, and others. While there can be no
assurance that the fund will not be adversely affected, Franklin Mutual and
its affiliated service providers are taking steps that they believe are
reasonably designed to address the Year 2000 Issue, including seeking
reasonable assurances from the fund's other major service providers.
HOW TAXATION AFFECTS THE FUNDS AND THEIR SHAREHOLDERS
ON AUGUST 5, 1997, PRESIDENT CLINTON SIGNED INTO LAW THE TAXPAYER RELIEF ACT
OF 1997 (THE "1997 ACT"). THIS NEW LAW MAKES SWEEPING CHANGES IN THE CODE.
BECAUSE MANY OF THESE CHANGES ARE COMPLEX THEY ARE DISCUSSED IN THE SAI.
TAXATION OF THE FUNDS' INVESTMENTS -----------------------------------
HOW DO THE FUNDS
Each fund invests your money in the EARN INCOME AND GAINS?
stocks, bonds and other securities that -----------------------------------
are described in the section "How Do the
Funds Invest Their Assets?" Special tax Each fund earns dividends and
rules may apply in determining the income interest (the fund's "income") on
and gains that each fund earns on its its investments. When a fund sells
investments. These rules may, in turn, a security for a price that is
affect the amount of distributions that a higher than it paid, it has a
fund pays to you. These special tax rules gain. When a fund sells a security
are discussed in the SAI. for a price that is lower than it
paid, it has a loss. If a fund has
TAXATION OF THE FUNDS. As a regulated held the security for more than
investment company, each fund generally one year, the gain or loss will be
pays no federal income tax on the income a long-term capital gain or loss.
and gains that it distributes to you. If a fund has held the security
for one year or less, the gain or
FOREIGN TAXES. Foreign governments may loss will be a short-term capital
impose taxes on the income and gains from gain or loss. Each fund's gains
a fund's investments in foreign stocks and and losses are netted together,
bonds. These taxes will reduce the amount and, if the fund has a net gain
of the fund's distributions to you, but, (the fund's "gains"), that gain
depending upon the amount of the fund's will generally be distributed to
assets that are invested in foreign you.
securities and foreign taxes paid, may be
passed through to you as a foreign tax
credit on your income tax return. Each
fund may also invest in the securities of
foreign companies that are "passive
foreign investment companies" ("PFICs").
These investments in PFICs may cause a
fund to pay income taxes and interest
charges. If possible, each fund will adopt
strategies to avoid PFIC taxes and
interest charges.
TAXATION OF SHAREHOLDERS -----------------------------------
WHAT IS A DISTRIBUTION?
DISTRIBUTIONS. Distributions from a fund, -----------------------------------
whether you receive them in cash or in
additional shares, are generally subject As a shareholder, you will receive
to income tax. The fund will send you a your share of a fund's income and
statement in January of the current year gains on its investments in
that reflects the amount of ordinary stocks, bonds and other
dividends, capital gain distributions and securities. The fund's income and
non-taxable distributions you received short term capital gains are paid
from the fund in the prior year. This to you as ordinary dividends. The
statement will include distributions fund's long-term capital gains are
declared in December and paid to you in paid to you as capital gain
January of the current year, but which are distributions. If the fund pays
taxable as if paid on December 31 of the you an amount in excess of its
prior year. The IRS requires you to report income and gains, this excess will
these amounts on your income tax return generally be treated as a
for the prior year. The fund's statement non-taxable distribution. These
for the prior year will tell you how much amounts, taken together, are what
of your capital gain distribution we call the fund's distributions
represents 28% rate gain. The remainder of to you.
the capital gain distribution represents
20% rate gain.
DISTRIBUTIONS TO RETIREMENT PLANS. Fund distributions received by your
qualified retirement plan, such as a Section 401(k) plan or IRA, are generally
tax-deferred; this means that you are not required to report fund
distributions on your income tax return when paid to your plan, but, rather,
when your plan makes payments to you. Be aware, however, that special rules
apply to payouts from Roth and Education IRAs.
DIVIDENDS-RECEIVED DEDUCTION. Corporate ------------------------------
investors may be entitled to a WHAT IS A REDEMPTION?
dividends-received deduction on a portion of ------------------------------
the ordinary dividends they receive from a fund.
A redemption is a sale by you
REDEMPTIONS AND EXCHANGES. If you redeem your to the fund of some or all of
shares or if you exchange your shares in a fund your shares in the fund. The
for shares of another Franklin Templeton Fund, price per share you receive
you will generally have a gain or loss that the when you redeem fund shares
IRS requires you to report on your income tax may be more or less than the
return. If you hold your shares for six months price at which you purchased
or less, any loss you have will be treated as a those shares. An exchange of
long-term capital loss to the extent of any shares in the fund for shares
capital gain distributions received by you from of another Franklin Templeton
the fund. All or a portion of any loss on the Fund is treated as a
redemption or exchange of your shares will be redemption of fund shares and
disallowed by the IRS if you purchase other then a purchase of shares of
shares in the fund within 30 days before or the other fund. When you
after your redemption or exchange. redeem or exchange your
shares, you will generally
have a gain or loss,
depending upon whether the
basis in your shares is more
or less than your cost or
other basis in the shares.
Call Fund Information for a
free shareholder Tax
Information Handbook if you
need more information on
calculating the gain or loss
on the redemption or exchange
of your shares.
FOREIGN TAXES. If more than 50% of the value of ------------------------------
a fund's assets consist of foreign securities, WHAT IS A FOREIGN
the fund may elect to pass-through to you the TAX CREDIT?
amount of foreign taxes it paid. If the fund ------------------------------
makes this election, your year-end statement
will show more taxable income than was actually A foreign tax credit is a tax
distributed to you. However, you will be credit for the amount of
entitled to either deduct your share of such taxes imposed by a foreign
taxes in computing your taxable income or claim country on earnings of a
a foreign tax credit for such taxes against fund. When a foreign company
your U.S. federal income tax. Your year-end in which a fund invests pays
statement, showing the amount of deduction or a dividend to the fund, the
credit available to you, will be distributed to dividend will generally be
you in January along with other shareholder subject to a withholding tax.
information records including your fund Form The taxes withheld in foreign
1099-DIV. countries create credits that
you may use to offset your
U.S. federal income tax.
The 1997 Act includes a provision that allows you to claim these credits
directly on your income tax return (Form 1040) and eliminates the previous
requirement that you complete a detailed supporting form. To qualify, you must
have $600 or less in joint return foreign taxes ($300 or less on a single
return), all of which are reported to you on IRS Form 1099-DIV. THIS
SIMPLIFIED PROCEDURE APPLIES ONLY FOR CALENDAR YEARS 1998 AND BEYOND, AND WAS
NOT AVAILABLE IN 1997.
NON-U.S. INVESTORS. Ordinary dividends generally will be subject to U.S.
income tax withholding. Your home country may also tax ordinary dividends,
capital gain distributions and gains arising from redemptions or exchanges of
your fund shares. Fund shares held by the estate of a non-U.S. investor may be
subject to U.S. estate tax. You may wish to contact your tax advisor to
determine the U.S. and non-U.S. tax consequences of your investment in the
fund.
STATE TAXES. Ordinary dividends and capital ------------------------------
gain distributions that you receive from a WHAT IS A BACKUP WITHHOLDING?
fund, and gains arising from redemptions or ------------------------------
exchanges of your fund shares will generally be
subject to state and local income tax. The Backup withholding occurs
holding of fund shares may also be subject to when the fund is required to
state and local intangibles taxes. You may wish withhold and pay over to the
to contact your tax advisor to determine the IRS 31% of your distributions
state and local tax consequences of your and redemption proceeds. You
investment in a fund. can avoid backup withholding
by providing the fund with
BACKUP WITHHOLDING. When you open an account, your TIN, and by completing
IRS regulations require that you provide your the tax certifications on
taxpayer identification number ("TIN"), certify your shareholder application
that it is correct, and certify that you are that you were asked to sign
not subject to backup withholding under IRS when you opened your account.
rules. If you fail to provide a correct TIN or However, if the IRS instructs
the proper tax certifications, the fund is the fund to begin backup
required to withhold 31% of all the withholding, it is required
distributions (including ordinary dividends and to do so even if you provided
capital gain distributions), and redemption the fund with your TIN and
proceeds paid to you. The fund is also required these tax certifications, and
to begin backup withholding on your account if backup withholding will
the IRS instructs the fund to do so. The fund remain in place until the
reserves the right not to open your account, fund is instructed by the IRS
or, alternatively, to redeem your shares at the that it is no longer required.
current Net Asset Value, less any taxes
withheld, if you fail to provide a correct TIN
or the proper tax certifications, or if the IRS
instructs the fund to begin backup withholding
on your account.
THIS TAX DISCUSSION IS FOR GENERAL INFORMATION ONLY. PROSPECTIVE INVESTORS
SHOULD CONSULT THEIR OWN TAX ADVISORS CONCERNING THE FEDERAL, STATE, LOCAL OR
FOREIGN TAX CONSEQUENCES OF AN INVESTMENT IN THE FUND. A MORE COMPLETE
DISCUSSION OF THESE RULES AND RELATED MATTERS IS CONTAINED IN THE SECTION
ENTITLED "ADDITIONAL INFORMATION ON DISTRIBUTIONS AND TAXES" IN THE SAI. THE
TAX TREATMENT TO YOU OF DIVIDENDS, CAPITAL GAIN DISTRIBUTIONS, FOREIGN TAXES
PAID AND INCOME TAXES WITHHELD IS ALSO DISCUSSED IN A FREE FRANKLIN TEMPLETON
TAX INFORMATION HANDBOOK, WHICH YOU MAY REQUEST BY CONTACTING FUND
INFORMATION.
HOW ARE THE FUNDS 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 offers three classes of shares: 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, Mutual Discovery Fund -
Class II, Mutual Financial Services Fund - Class Z, Mutual Financial Services
Fund - Class I, and Mutual Financial Services Fund - Class II. For all funds
except Financial Services, 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 initially created with all three classes of
shares. 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.
ABOUT YOUR ACCOUNT
HOW DO I BUY SHARES?
OPENING YOUR ACCOUNT
Shares of the funds may be purchased without a sales charge. Please note that
as of January 1, 1998, shares of the funds 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 funds.
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 FUNDS DO NOT
CURRENTLY ALLOW INVESTMENTS BY MARKET TIMERS.
1. Read this prospectus carefully.
2. Determine how much you would like to invest. The funds' minimum
investments are:
o To open your account: $5,000,000
o To add to your account: $25
We reserve the right to change the amount of these minimums from time to
time or to waive or lower these minimums for certain purchases. 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
include your account number on the check.
- --------------------------------------------------------------------------------
BY PHONE
(For additional Call the fund at 1-800/448-FUND before 4:00 p.m.
purchases only) Eastern time or the close of the NYSE, whichever is
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. FOR PURCHASES BY SHAREHOLDERS WHO OWNED SHARES OF ANY MUTUAL
SERIES FUND ON OCTOBER 31, 1996, AND CERTAIN OTHER INVESTORS LISTED BELOW,
THE FOLLOWING MINIMUMS APPLY:
o To open a regular, non-retirement account..................... $1,000
o To open an IRA, IRA Rollover,
Roth IRA, or Education IRA .................................... $ 250*
o To open a custodial account for a minor
(an UGMA/UTMA account)......................................... $ 100
o To open an account with an
automatic investment plan ..................................... $ 50**
o To add to an account.......................................... $ 50***
*For all other retirement accounts,
there is no minimum investment requirement.
**$25 for an Education IRA.
***For all retirement accounts except IRAs, IRA Rollovers, Roth IRAs, or
Education IRAs, there is no minimum to add to an account.
These minimums apply to the following investors:
1. Existing shareholders of any Mutual Series fund on October 31, 1996, and
their immediate family members residing at the same address
2. Partnership shareholders who had an account in any Mutual Series fund on
October 31, 1996, whether or not they are listed on the registration
3. Corporate shareholders invested in any Mutual Series fund on October 31,
1996, using the same registration, or new companies of such corporate
shareholders that have been reorganized into smaller, independent
companies
4. who owned shares of any Mutual Series fund through a broker-dealer or
service agent omnibus account on October 31, 1996
5. Employees who owned shares of any Mutual Series fund through an
employer-sponsored retirement plan on October 31, 1996, and who wish to
open new individual Class Z accounts in their own names
6. Qualified registered investment advisors or certified financial planners
who have clients invested in any of the Mutual Series funds on October
31, 1996, or who buy through a broker-dealer or service agent who has
entered into an agreement with Distributors
A lower minimum initial investment requirement also applies to purchases by:
1. 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
2. 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 initial investment requirement
3. Each series of the Franklin Templeton Fund Allocator Series, subject to
a $1,000 minimum initial and subsequent investment requirement
4. 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 Advisor Class or Class Z shares of
any of the Franklin Templeton Funds
No minimum initial investment requirement applies to purchases by:
1. Investors buying shares with redemption proceeds from a sale of Class Z
shares if reinvested in the same class of shares within 365 days of the
redemption date
2. Investment companies exchanging shares or selling assets pursuant to a
merger, acquisition, or exchange offer or other business combination
transaction
3. Accounts managed by the Franklin Templeton Group
4. The Franklin Templeton Profit Sharing 401(k) Plan
5. 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 are sponsored by an employer
(i) with at least 10,000 employees, or (ii) with retirement plan assets
of $100 million or more
6. 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
7. 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 funds, and
o Meets other uniform criteria that allow Distributors to achieve cost
savings in distributing shares.
HOW DO I BUY SHARES IN CONNECTION WITH RETIREMENT PLANS?
Your individual or employer-sponsored retirement plan may invest in the
funds. 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 goal
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 signed written instructions
2. Include any outstanding share certificates for
the shares you want to exchange
- --------------------------------------------------------------------------------
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 must meet the applicable minimum investment amount of the fund you
are exchanging into, or exchange 100% of your fund shares.
o You may only exchange shares within Class Z, or for Advisor Class shares
if you otherwise qualify to buy Advisor Class shares. Exceptions are 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 funds do 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.
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, but 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 an Advisor Class or Class Z, you may exchange your Class I shares for
Advisor Class or Class Z shares of that fund.
Shareholders of record on October 31, 1996, and others who do not qualify to
buy Class I shares of Franklin Templeton Funds at Net Asset Value, may
exchange their Class Z shares for Class I shares of other Franklin Templeton
Funds at Net Asset Value, as permitted by each fund's current prospectus. The
Class Z shares must have been held at least six consecutive months in any one
fund before the exchange.
HOW DO I SELL SHARES?
You may sell (redeem) your shares at any time.
METHOD STEPS TO FOLLOW
- --------------------------------------------------------------------------------
BY MAIL 1. Send us signed written instructions. 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 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 4:00 p.m. Eastern time, your wire payment
will be sent the next business day. For requests received in proper form
after 4:00 p.m. Eastern time, the payment will be sent the second business
day. By offering this service to you, the funds are not bound to meet any
redemption request in less than the seven day period prescribed by law.
Neither the funds nor their 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 until your check or draft has cleared, which may
take seven business days or more. A certified or cashier's check may clear in
less time.
Under unusual circumstances, we may suspend redemptions or postpone payment
for more than seven days as permitted by federal securities law.
Please refer to "Transaction Procedures and Special Requirements" for other
important information on how to sell shares.
TRUST COMPANY RETIREMENT PLAN ACCOUNTS
To comply with IRS regulations, you need to complete additional forms before
selling shares in a Trust Company retirement plan account. Tax penalties
generally apply to any distribution from these plans to a participant under
age 59 1/2, unless the distribution meets an exception stated in the Code. To
obtain the necessary forms, please call Retirement Plan Services.
WHAT DISTRIBUTIONS MIGHT I RECEIVE FROM THE FUNDS?
Each fund declares dividends from its net investment income semiannually. 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 FUNDS DO NOT PAY "INTEREST" OR GUARANTEE
ANY FIXED RATE OF RETURN ON AN INVESTMENT IN THEIR 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 a 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 Advisor Class shares of another Franklin Templeton
Fund if you otherwise qualify to buy Advisor Class. 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 or savings account, you may need
a signature guarantee. If you send the money to a checking or savings
account, please see "Electronic Fund Transfers" under "Services to Help
You Manage Your Account."
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 funds are open for business each day the NYSE is open. We determine the
Net Asset Value per share as of the close of the NYSE, normally 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. Each fund's
assets are valued as described under "How Are Fund Shares Valued?" in the SAI.
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.
JOINT ACCOUNTS. For accounts with more than one registered owner, we accept
written instructions signed by only one owner for certain types of
transactions or account changes. These include transactions or account
changes that you could also make by phone, such as certain redemptions of
$50,000 or less, exchanges between identically registered accounts, and
changes to the address of record. For most other types of transactions or
changes, written instructions must be signed by all registered owners.
Please keep in mind that if you have previously told us that you do not want
telephone exchange or redemption privileges on your account, then we can only
accept written instructions to exchange or redeem shares if they are signed
by all registered owners on the account.
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 and changes to your account 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. 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.
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. We also will not be liable for
any loss if we follow instructions by phone that we reasonably believe are
genuine or if you are unable to execute a transaction by phone.
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, we cannot accept instructions to change owners on
the account unless ALL owners agree in writing, even if the law in your state
says otherwise. 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
funds. Telephone instructions directly from your representative will be
accepted unless you have told us that you do not want telephone privileges to
apply to your account.
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 $250, or less than $50
for employee accounts and certain custodial accounts for minors. 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 $1,000, or $100 for employee accounts and certain
custodial accounts for minors. These minimums do not apply to IRAs, accounts
managed by the Franklin Templeton Group, the Franklin Templeton Profit
Sharing 401(k) Plan, the series of Franklin Templeton Fund Allocator Series,
or certain defined contribution plans that qualify to buy shares with no
minimum initial investment requirement.
SERVICES TO HELP YOU MANAGE YOUR ACCOUNT
AUTOMATIC INVESTMENT PLAN
Our automatic investment plan offers a convenient way to invest in a fund.
Under the plan, you can have money transferred automatically from your
checking or savings 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 each 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 calling
Shareholder Services.
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 or savings account. If you choose to
have the money sent to a checking or savings account, please see "Electronic
Fund Transfers" below. 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 by
mail or by phone 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.
ELECTRONIC FUND TRANSFERS
You may choose to have dividend and capital gain distributions or payments
under a systematic withdrawal plan sent directly to a checking or savings
account. If the account is with a bank that is a member of the Automated
Clearing House, the payments may be made automatically by electronic funds
transfer. If you choose this option, please allow at least fifteen days for
initial processing. We will send any payments made during that time to the
address of record on your account.
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 information about any Franklin Templeton Fund; and
o request duplicate statements and deposit slips for Franklin Templeton
accounts.
You will need the fund's code number to use TeleFACTS(R). The funds' code
numbers are as follows:
CODE
FUND NUMBER
- ---------------------------------------
Mutual Shares ............. 074
Qualified ................. 075
Beacon .................... 076
Discovery ................. 077
European .................. 078
Financial Services ........ 079
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 funds 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 funds' 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 funds 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.
Dealer Services 1-800/524-4040 5:30 a.m. to 5:00 p.m.
Fund Information 1-800/DIAL BEN 5:30 a.m. to 8:00 p.m.
(1-800/342-5236) 6:30 a.m. to 2:30 p.m.
(Saturday)
Retirement Plan Services 1-800/527-2020 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.
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 Mutual Series
CD - Certificate of deposit
CLASS I, CLASS II AND CLASS Z - The funds offer three classes of shares,
designated "Class I," "Class II," and "Class Z." The three classes have
proportionate interests in each 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 funds' 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 funds' 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, Templeton Capital Accumulator Fund, Inc., 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 funds' administrator
HEINE - Heine Securities Corporation, the funds' former investment manager
that was acquired by Resources on October 31, 1996
INVESTOR SERVICES - Franklin/Templeton Investor Services, Inc., the funds'
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.
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 funds. This reference is for convenience only and does not
indicate a legal conclusion of capacity.
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.
WE/OUR/US - Unless the context indicates a different meaning, these terms
refer to the funds and/or Investor Services, Distributors, or other wholly
owned subsidiaries of Resources.
