As filed with the Securities and Exchange Commission on March 2, 1998.
File Nos.
33-18516
811-5387
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Pre-Effective Amendment No. _____
Post-Effective Amendment No 25 (X)
and/or
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1940
Amendment No. 26 (X)
FRANKLIN MUTUAL SERIES FUND INC.
(Exact Name of Registrant as Specified in Charter)
51 JOHN F. KENNEDY PARKWAY, SHORT HILLS, NJ 07078
----------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code (201)912-2100
ELIZABETH N. COHERNOUR, 51 JOHN F. KENNEDY PARKWAY, SHORT HILLS, NJ 07078
- ---------------------------------------------------------------------------
(Name and Address of Agent for Service of Process)
Approximate Date of Proposed Public Offering:
It is proposed that this filing will become effective on (check appropriate
box)
[ ]immediately upon filing pursuant to paragraph b
[ ]on (date) pursuant to paragraph b
[ ]60 days after filing pursuant to paragraph (a)(1)
[x]on May 1, 1998 pursuant to paragraph (a) (1)
[ ]75 days after filing pursuant to paragraph (a)(2)
[ ]on (date) pursuant to paragraph (a)(2) of Rule 485
If appropriate, check the following box:
[ ] This post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
Title of Securities Being Registered:
Common Stock of:
Mutual Shares Fund - Class I
Mutual Shares Fund - Class II
Mutual Shares Fund - Class Z
Mutual Qualified Fund - Class I
Mutual Qualified Fund - Class II
Mutual Qualified Fund - Class Z
Mutual Beacon Fund - Class I
Mutual Beacon Fund - Class II
Mutual Beacon Fund - Class Z
Mutual Financial Services Fund - Class I
Mutual Financial Services Fund - Class II
Mutual Financial Services Fund - Class Z
Mutual European Fund - Class I
Mutual European Fund - Class II
Mutual European Fund - Class Z
Mutual Discovery Fund - Class I
Mutual Discovery Fund - Class II
Mutual Discovery Fund - Class Z
FRANKLIN MUTUAL SERIES FUND INC.
CROSS REFERENCE SHEET
FORM N-1A
Part A: Information Required in the Prospectus
(All Series Prospectus - Class I and II)
N-1A Location in
ITEM NO. ITEM REGISTRATION STATEMENT
- --------------------------------------------------------------------------------
1. Cover Page Cover Page
2. Synopsis "Expense Summary"
3. Condensed Financial "Financial Highlights"; "How Does
Information the Fund Measure Performance?"
4. General Description of "How Is the Fund Organized?"; "How
Registrant Does the Fund Invest Its Assets?"
5. Management of the Fund "Who Manages the Fund?"
5A. Management's Discussion of Contained in Registrant's Annual
Fund Performance Report to Shareholders
6. Capital Stock and Other "How Is the Fund Organized?";
Securities "Services to Help You Manage Your
Account"; "What Distributions Might
I Receive From the Fund?" "How
Taxation Affects the Fund and Its
Shareholders"; "What If I Have
Questions About My Account?"
7. Purchase of Securities "How Do I Buy Shares?"; "May I
Being Offered Exchange Shares for Shares of
Another Fund?"; "Transaction
Procedures and Special
Requirements"; "Services to Help
You Manage Your Account"; "Useful
Terms and Definitions"; "What If I
Have Questions About My Account?";
"Who Manages the Fund?"
8. Redemption or Repurchase "May I Exchange Shares for Shares
of Another Fund?"; "How Do I Sell
Shares?"; "Transaction Procedures
and Special Requirements";
"Services to Help You Manage Your
Account"; "Useful Terms and
Definitions"
9. Pending Legal Proceedings Not Applicable
FRANKLIN MUTUAL SERIES FUND INC.
CROSS REFERENCE SHEET
FORM N-1A
Part A: Information Required in the Prospectus
(All Series Prospectus - Class Z)
N-1A Location in
ITEM NO. ITEM REGISTRATION STATEMENT
- ------------------------------------------------------------------------------
1. Cover Page Cover Page
2. Synopsis "Expense Summary"
3. Condensed Financial "Financial Highlights"; "How Does
Information the Fund Measure Performance?"
4. General Description of "How Is the Fund Organized?"; "How
Registrant Does the Fund Invest Its Assets?"
5. Management of the Fund "Who Manages the Fund?"
5A. Management's Discussion of Contained in Registrant's Annual
Fund Performance Report to Shareholders
6. Capital Stock and Other "How Is the Fund Organized?";
Securities "Services to Help You Manage Your
Account"; "What Distributions Might
I Receive From the Fund?" "How
Taxation Affects the Fund and Its
Shareholders"; "What If I Have
Questions About My Account?"
7. Purchase of Securities "How Do I Buy Shares?"; "May I
Being Offered Exchange Shares for Shares of
Another Fund?"; "Transaction
Procedures and Special
Requirements"; "Services to Help
You Manage Your Account"; "Useful
Terms and Definitions"; "What If I
Have Questions About My Account?";
"Who Manages the Fund?"
8. Redemption or Repurchase "May I Exchange Shares for Shares
of Another Fund?"; "How Do I Sell
Shares?"; "Transaction Procedures
and Special Requirements";
"Services to Help You Manage Your
Account"; "Useful Terms and
Definitions"
9. Pending Legal Proceedings Not Applicable
FRANKLIN MUTUAL SERIES FUND INC.
CROSS REFERENCE SHEET
FORM N-1A
Part B: Information Required in the
Statement of Additional Information
(All Series SAI - Class I and II)
N-1A Location in
ITEM NO. ITEM REGISTRATION STATEMENT
- --------------------------------------------------------------------------------
10. Cover Page Cover Page
11. Table of Contents Contents
12. General Information and Not Applicable
History
13. Investment Objectives and "How Does the Fund Invest Its
Policies Assets?"; "Restrictions and
Limitations"
14. Management of the Fund "Officers and Directors"
15. Control Persons and "Officers and Directors";
Principal Holders of "Investment Management and Other
Securities Services"; "Miscellaneous
Information"
16. Investment Advisory and "Investment Management and Other
Other Services Services; "The Fund's Underwriter"
17. Brokerage Allocation and "How Does the Fund Buy Securities
Other Practices for Its Portfolio?"
18. Capital Stock and Other Not Applicable
Securities
19. Purchase, Redemption, and "How Do I Buy, Sell and Exchange
Pricing of Securities Shares?"; "How Are Fund Shares
Valued?"; "Financial Statements"
20. Tax Status "Additional Information on
Distributions and Taxes"
21. Underwriters "The Fund's Underwriter"
22. Calculation of Performance "How Does the Fund Measure
Data Performance?"
23. Financial Statements "Financial Statements"
FRANKLIN MUTUAL SERIES FUND INC.
CROSS REFERENCE SHEET
FORM N-1A
Part B: Information Required in the
Statement of Additional Information
(All Series SAI - Class Z)
N-1A Location in
ITEM NO. ITEM REGISTRATION STATEMENT
- --------------------------------------------------------------------------------
10. Cover Page Cover Page
11. Table of Contents Contents
12. General Information and Not Applicable
History
13. Investment Objectives and "How Does the Fund Invest Its
Policies Assets?"; "Restrictions and
Limitations"
14. Management of the Fund "Officers and Directors";
15. Control Persons and "Officers and Directors";
Principal Holders of "Investment Management and Other
Securities Services"; "Miscellaneous
Information"
16. Investment Advisory and "Investment Management and Other
Other Services Services; "The Fund's Underwriter"
17. Brokerage Allocation and "How Does the Fund Buy Securities
Other Practices for Its Portfolio?"
18. Capital Stock and Other Not Applicable
Securities
19. Purchase, Redemption, and "How Do I Buy, Sell and Exchange
Pricing of Securities Shares?"; "How Are Fund Shares
Valued?"; "Financial Statements"
20. Tax Status "Additional Information on
Distributions and Taxes"
21. Underwriters "The Fund's Underwriter"
22. Calculation of Performance "How Does the Fund Measure
Data Performance?"
23. Financial Statements "Financial Statements"
FRANKLIN MUTUAL SERIES FUND INC.
PROSPECTUS & APPLICATION
FRANKLIN MUTUAL SERIES FUND INC.
MAY 1, 1998
INVESTMENT STRATEGIES
MUTUAL SHARES FUND GROWTH AND INCOME o VALUE
MUTUAL QUALIFIED FUND GROWTH AND INCOME o VALUE
MUTUAL BEACON FUND GROWTH AND INCOME o VALUE
MUTUAL EUROPEAN FUND GLOBAL o VALUE
MUTUAL DISCOVERY FUND GLOBAL o VALUE
MUTUAL FINANCIAL SERVICES
FUND GROWTH AND INCOME o VALUE
This prospectus describes Class I and Class II shares of the six series of
Franklin Mutual Series Fund Inc. ("Mutual Series"): Mutual Shares Fund ("Mutual
Shares"), Mutual Qualified Fund ("Qualified"), Mutual Beacon Fund ("Beacon"),
Mutual European Fund ("European"), Mutual Discovery Fund ("Discovery") and
Mutual Financial Services Fund ("Financial Services"). Each of these series may,
individually or together, be referred to as the "Fund(s)." This prospectus
contains information you should know before investing in the Fund. Please keep
it for future reference.
The Fund currently offers another class of shares with a different sales charge
and expense structure, which affects performance. This class is described in a
separate prospectus. For more information, contact your investment
representative or call 1-800/DIAL BEN.
The Fund has a Statement of Additional Information ("SAI") for its Class I and
Class II shares, dated May 1, 1998, which may be amended from time to time. It
includes more information about the Fund's procedures and policies. It has been
filed with the SEC and is incorporated by reference into this prospectus. For a
free copy or a larger print version of this prospectus, call 1-800/DIAL BEN.
SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED
BY, ANY BANK, AND ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY OF THE U.S.
GOVERNMENT. SHARES OF THE FUND INVOLVE INVESTMENT RISKS, INCLUDING THE POSSIBLE
LOSS OF PRINCIPAL.
LIKE ALL MUTUAL 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.
THIS PROSPECTUS IS NOT AN OFFERING OF THE SECURITIES HEREIN DESCRIBED IN ANY
STATE, JURISDICTION OR COUNTRY IN WHICH THE OFFERING IS NOT AUTHORIZED. NO SALES
REPRESENTATIVE, DEALER, OR OTHER PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR
MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS. FURTHER
INFORMATION MAY BE OBTAINED FROM DISTRIBUTORS.
The principal investment objective of Mutual Shares, Qualified, Beacon, European
and Financial Services is capital appreciation, which may occasionally be
short-term. A secondary objective of each is income. Discovery's investment
objective is long-term capital appreciation.
FRANKLIN MUTUAL SERIES FUND INC.
May 1, 1998
When reading this prospectus, you will see certain terms beginning with capital
letters. This means the term is explained in our glossary section.
TABLE OF CONTENTS
ABOUT THE FUND
Expense Summary..........................................
Financial Highlights.....................................
How Does the Fund Invest Its Assets?.....................
What Are the Risks of Investing in the Fund?.............
Who Manages the Fund?....................................
How Does the Fund Measure Performance?...................
How Taxation Affects the Fund and Its Shareholders.......
How Is the Fund Organized?.......................
ABOUT YOUR ACCOUNT
How Do I Buy Shares?.....................................
May I Exchange Shares for Shares of Another Fund?........
How Do I Sell Shares?....................................
What Distributions Might I Receive From the Fund?........
Transaction Procedures and Special Requirements..........
Services to Help You Manage Your Account.................
What If I Have Questions About My Account?...............
GLOSSARY
Useful Terms and Definitions.............................
51 John F. Kennedy Parkway
Short Hills, NJ 07078
1-800/DIAL BEN
ABOUT THE FUND
EXPENSE SUMMARY
This table is designed to help you understand the costs of investing in the
Fund. 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. The Funds' 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 4.50% 4.50% 4.50% 4.50% 4.50% 4.50%
Price)
Paid at time of purchase++ 4.50% 4.50% 4.50% 4.50% 4.50% 4.50%
Paid at redemption++++ None None None None None None
CLASS II
Maximum Sales Charge
(as a percentage of 1.99% 1.99% 1.99% 1.99% 1.99% 1.99%
Offering Price)
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%*
</TABLE>
C. EXAMPLE
Assume the annual return for each class is 5%, operating expenses are as
described above, and you sell your shares after the number of years shown.
These are the projected expenses for each $1,000 that you invest in the Fund.
MUTUAL FINANCIAL
SHARES QUALIFIED BEACON DISCOVERY EUROPEAN SERVICES
CLASS I
1 Year**** $56 $56 $56 $58 $59 $58
3 Years $78 $79 $79 $86 $87 $86
5 Years $103 $104 $104 $116 $118 -
10 Years $173 $176 $175 $200 $204 -
CLASS II
1 Year $38 $38 $38 $40 $41 $40
3 Years $65 $65 $65 $72 $74 $72
5 Years $104 $105 $105 $117 $119 -
10 Years $214 $217 $216 $240 $246 -
For the same Class II investment, you would pay projected expenses of $28
(Mutual Shares), $28 (Qualified), $28 (Beacon), $30 (Discovery), $40
(European) and $30 (Financial Services) if you did not sell your shares at the
end of the first year. Your projected expenses for the remaining periods would
be the same.
THIS IS JUST AN EXAMPLE. IT DOES NOT REPRESENT PAST OR FUTURE EXPENSES OR
RETURNS. ACTUAL EXPENSES AND RETURNS MAY BE MORE OR LESS THAN THOSE SHOWN. The
Fund pays its operating expenses. The effects of these expenses are reflected
in the Net Asset Value or dividends of each class and are not directly charged
to your account.
+If your transaction is processed through your Securities Dealer, you may be
charged a fee by your Securities Dealer for this service. ++There is no
front-end sales charge if you invest $1 million or more in Class I shares.
+++Although Class II has a lower front-end sales charge than Class I, its Rule
12b-1 fees are higher. Over time you may pay more for Class II shares. Please
see "How Do I Buy Shares? - 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 paid by you
would be the same. See "How Do I Sell Shares? - Contingent Deferred Sales
Charge" for details.
*Franklin Mutual has agreed in advance to waive its management fee and to assume
as its own expense certain other expenses otherwise payable by the Financial
Services Fund so that the Financial Services Fund's aggregate annual operating
expenses do not exceed 1.35% for Class I and 2.00% for Class II for the Fund's
initial twenty-four months of operations. Absent this reduction, contractual
management fees would equal 0.80% and total expected operating expenses would
equal 1.97% for Class I and 2.62% for Class II for the current fiscal year.
After the first twenty-four months of operations, Franklin Mutual may terminate
this arrangement at any time. **For the period shown, Franklin Mutual and its
affiliates had agreed in advance to limit its management fees during the Fund's
previous fiscal year. This agreement, which expires October 31, 1999, did not
apply to Financial Services, which was not in existence during the previous
fiscal year. With this reduction, management fees and total operating expenses
were as follows: MUTUAL SHARES QUALIFIED BEACON DISCOVERY EUROPEAN
- ---------------------------------------------------------------------------
Management Fees 0.57% 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 NASD's rules.
****Assumes a Contingent Deferred Sales Charge will not apply.
FINANCIAL HIGHLIGHTS
This table summarizes the Fund's financial history for Class I and II. The
information has been audited by Ernst & Young LLP, the Fund's independent
auditors. Their 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*** $0.0350 $0.0410
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 0.24 0.03
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 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 42.26%
Average commission rate paid*** $.0241
AUGUST 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* 23.57%
RATIOS/SUPPLEMENTAL DATA:
Net assets,
end of period (000's) $43,207
Ratios to average net assets:
Expenses 2.00%**
Expenses, excluding waiver
and payments by affiliate 2.62%**
Net investment income 0.37%**
Portfolio turnover rate 42.26%
Average commission rate paid*** $.0241
*Total return does not reflect sales commissions or the Contingent Deferred
Sales Charge and is not annualized.
**Annualized.
***Relates to 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 DOES THE FUND INVEST ITS ASSETS?
WHAT ARE THE FUNDS' GOALS?
The principal investment goal of Mutual Shares Fund ("Mutual Shares"), Mutual
Qualified Fund ("Qualified"), Mutual Beacon Fund ("Beacon"), Mutual European
Fund ("European"), and Mutual Financial Services Fund ("Financial Services") is
capital appreciation, which may occasionally be short-term. The secondary
investment goal of each is income. The principal investment goal of Mutual
Discovery Fund ("Discovery") is long-term capital appreciation. Discovery does
not have a secondary investment goal.
The investment goal of each Fund is fundamental which means that it may not be
changed without the approval of that Fund's shareholders.
WHAT KINDS OF SECURITIES DO THE FUNDS PURCHASE?
GENERAL POLICIES AND STRATEGIES. 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."
CONVERTIBLE SECURITIES are debt securities, or in some cases preferred stock,
which have the additional feature of converting into 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.
Franklin Mutual selects investments for each Fund based upon its analysis and
research. This analysis and research takes into account the factors the Adviser
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 percent 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, a Fund may use its 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 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, rather than as a result of 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 shares.
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 Standard & Poor's
Corporation ("S&P") or Moody's Investor Services ("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 more risky is 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 payments 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 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. Consequently, in such circumstances, 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 "Investment Objectives and Policies - Medium and
Lower Rated Corporate Debt Securities" in the SAI.
WHAT ARE SOME OF THE FUNDS' OTHER INVESTMENT POLICIES AND STRATEGIES?
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 U.S. Securities
and Exchange Commission 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 (1) borrow the security to deliver the security to the purchaser;
and (2) 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 "Investment Objectives and Policies - Short Sales" 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 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. 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.
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 adviser (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. 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.
FUNDAMENTAL RESTRICTIONS. Each Fund has adopted a number of restrictions on its
investments which may not be changed for a particular Fund without the approval
of that Fund's shareholders. These restrictions are set forth in the SAI.
PERCENTAGE RESTRICTIONS. If in purchasing a security, a Fund has complied with a
percentage restriction, a later increase or decrease in the percentage resulting
from changes in the market value of the security or illiquidity of its portfolio
securities, or the amount of the Fund's net assets will not be considered a
violation of any of the foregoing policies.
WHAT ARE THE RISKS OF INVESTING IN THE FUND?
GENERAL. There is no assurance that a Fund's goals will be achieved. 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 transactions, 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. The Fund's investment 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. The 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.
WHO MANAGES THE FUND?
THE BOARD. The Board oversees the management of the Fund and elects its
officers. The officers are responsible for the Fund's day-to-day operations. The
Board also monitors the Fund to ensure no material conflicts exist among the
Fund's classes of shares. While none is expected, the Board will act
appropriately to resolve any material conflict that may arise.
INVESTMENT MANAGER. Franklin Mutual manages the Fund's assets and makes its
investment decisions. It is wholly owned by Resources, a publicly owned company
engaged in the financial services industry through its subsidiaries. Charles B.
Johnson and Rupert H. Johnson, Jr. are the principal shareholders of Resources.
Together, Franklin Mutual and its affiliates manage over $221 billion in assets.
Please see "Investment Management and Other Services" and "Miscellaneous
Information" in the SAI for information on securities transactions and a summary
of the Fund's Code of Ethics.
MANAGEMENT TEAM. The team responsible for the day-to-day management of the
Fund's portfolio is: Michael F. Price since 1975, Jeffrey A. Altman since 1988,
Robert L. Friedman since 1988, Raymond Garea since 1991, Peter A. Langerman
since 1986 and Lawrence N. Sondike since 1984.
Michael F. Price
Chief Executive Officer and President of Franklin Mutual
Mr. Price has a Bachelor of Arts degree in Business Administration from the
University of Oklahoma. Prior to November 1996, Mr. Price was President and
Chairman of Heine, the former investment manager for Franklin Mutual Series Fund
Inc. He became Chief Executive Officer of Franklin Mutual in November 1996. He
is Chairman of the Board and President of Franklin Mutual Series Fund Inc.
Jeffrey A. Altman
Senior Vice President of Franklin Mutual
Mr. Altman has a Bachelor of Science degree from Tulane University. Prior to
November 1996, Mr. Altman was employed as a Research Analyst and Trader for
Heine, the former investment manager for Franklin Mutual Series Fund Inc. He
joined Franklin Mutual in November 1996. He is a Vice President of Franklin
Mutual Series Fund Inc.
Robert L. Friedman
Senior Vice President of Franklin Mutual
Mr. Friedman has a Bachelor of Arts degree in Humanities from Johns Hopkins
University and a Masters in Business Administration from the Wharton School,
University of Pennsylvania. Prior to November 1996, Mr. Friedman was a Research
Analyst for Heine, the former investment manager for Franklin Mutual Series Fund
Inc. He joined Franklin Mutual in November 1996. He is a Vice President of
Franklin Mutual Series Fund Inc.
Raymond Garea
Senior Vice President of Franklin Mutual
Mr.Garea has a Bachelor of Science degree in Engineering from Case Institute of
Technology and a Masters in Business Administration from the University of
Michigan. Prior to November 1996, he was a Research Analyst for Heine, the
former investment manager for Franklin Mutual Series Fund Inc. He joined
Franklin Mutual in November 1996. He is a Vice President of Franklin Mutual
Series Fund Inc.
Peter A. Langerman
Chief Operating Officer and Senior Vice President of Franklin Mutual
Mr.Langerman has a Bachelor of Arts degree from Yale University, a Masters in
Science from New York University Graduate School of Business and a Juris Doctor
from Stanford University Law School. Prior to November 1996, he was a Research
Analyst for Heine, the former investment manager for Franklin Mutual Series Fund
Inc. He joined Franklin Mutual in November 1996. Mr. Langerman is a director and
Executive Vice President of Franklin Mutual Series Fund Inc.
Lawrence N. Sondike
Senior Vice President of Franklin Mutual
Mr.Sondike has a Bachelor of Arts degree from Cornell University and a Masters
in Business Administration from New York University Graduate School of Business.
Prior to November 1996, he was a Research Analyst for Heine, the former
investment manager for Franklin Mutual Series Fund Inc. He joined Franklin
Mutual in November 1996. He is a Vice President of Franklin Mutual Series Fund
Inc.
MANAGEMENT FEES. During the fiscal year ended December 31, 1997, Franklin Mutual
had agreed in advance to waive or limit its fees and to make certain payments to
reduce expenses. The table below shows the management fees and total operating
expenses paid by the 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
- -------------------------------------------------------------------------------
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
The Fund pays its own operating expenses. These expenses include Franklin
Mutual's management fees; taxes, if any; custodian, legal and auditing fees; the
fees and expenses of Board members who are not members of, affiliated with, or
interested persons of Franklin Mutual; fees of any personnel not affiliated with
Franklin Mutual; insurance premiums; trade association dues; expenses of
obtaining quotations for calculating the Fund's Net Asset Value; and printing
and other expenses that are not expressly assumed by Franklin Mutual. The Board
has determined the method and procedure for allocating expenses between the
series and the classes of Mutual Series and reserves the right to modify such
method and procedures.
Under their management agreements, the Funds pay Franklin Mutual a management
fee equal to an annual rate of 0.60% of the average daily net assets of Mutual
Shares, Qualified and Beacon and 0.80% of the average daily net assets of
Discovery, European and Financial Services. The fee is computed at the close of
business on the last business day of each month.
PORTFOLIO TRANSACTIONS. Franklin Mutual 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 of the Funds owns more than 5% of the securities of a broker-dealer, that
broker-dealer may be considered to be an affiliated person of such Fund. If such
Fund places any portfolio transactions through that broker-dealer, 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
Does the Fund Buy Securities for Its Portfolio?" in the SAI for more
information.
ADMINISTRATIVE SERVICES. FT Services provides certain administrative services
and facilities for the Fund. Under its administration agreement, the Fund pays
FT Services a monthly administration fee equal to an annual rate of 0.15% of the
Fund's average daily net assets up to $200 million, 0.135% of average daily net
assets over $200 million up to $700 million, 0.10% of average daily net assets
over $700 million up to $1.2 billion, and 0.075% of average daily net assets
over $1.2 billion. During the fiscal year ended December 31, 1997,
administration fees totaling 0.08% of the average daily net assets of each
series were paid to FT Services. These fees are included in the amount of total
expenses shown above. The administration fees for Financial Services has been
annualized. Please see "Investment Management and Other Services" in the SAI for
more information.
THE RULE 12B-1 PLANS
Class I and Class II have separate distribution plans or "Rule 12b-1 Plans"
under which they may pay or reimburse Distributors or others for the expenses of
activities that are primarily intended to sell shares of the class. These
expenses may include, among others, distribution or service fees paid to
Securities Dealers or others who have executed a servicing agreement with the
Fund, Distributors or its affiliates; a prorated portion of Distributors'
overhead expenses; and the expenses of printing prospectuses and reports used
for sales purposes, and preparing and distributing sales literature and
advertisements.
Payments by the Fund under the Class I plan may not exceed 0.35% per year of
Class I's average daily net assets. Of this amount, the Fund may reimburse up to
0.35% 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, the Fund may pay Distributors up to 0.75% per year of
Class II's average daily net assets to pay Distributors or others for providing
distribution and related services and bearing certain Class II expenses. All
distribution expenses over this amount will be borne by those who have incurred
them. During the first year after a purchase of Class II shares, Securities
Dealers may not be eligible to receive this portion of the Rule 12b-1 fees
associated with the purchase.
The Fund may also pay a servicing fee of up to 0.25% per year of Class II's
average daily net assets under the Class II plan. This fee may be used to pay
Securities Dealers or others for, among other things, helping to establish and
maintain customer accounts and records, helping with requests to buy and sell
shares, receiving and answering correspondence, monitoring dividend payments
from the Fund on behalf of customers, and similar servicing and account
maintenance activities.
The Rule 12b-1 fees charged to each class are based only on the fees
attributable to that particular class. For more information, please see "The
Fund's Underwriter" in the SAI.
HOW DOES THE FUND MEASURE PERFORMANCE?
From time to time, each class of the Fund advertises its performance. A commonly
used measure of performance is total return. Performance figures are usually
calculated using the maximum sales charges, but certain figures may not include
sales charges.
Total return is the change in value of an investment over a given period. It
assumes any dividends and capital gains are reinvested.
The investment results of each class will vary. Performance figures are always
based on past performance and do not guarantee future results. For a more
detailed description of how the Fund calculates its performance figures, please
see "How Does the Fund Measure Performance?" in the SAI.
HOW TAXATION AFFECTS THE FUND AND ITS SHAREHOLDERS
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.
<TABLE>
<CAPTION>
TAXATION OF THE FUND'S INVESTMENTS.
<S> <C>
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The Fund invests your money in the stocks, HOW DOES THE FUND EARN INCOME AND GAINS?
bonds and other securities that are The Fund earns dividends and interest (the
described in the section "How Does the Fund's "income") on its investments. When
Fund Invest Its Assets?" Special tax the Fund sells a security for a price that is
rules may apply in determining the income higher than it paid, it has a gain. When the
and gains that the Fund earns on its Fund sells a security for a price that is
investments. These rules may, in turn, lower than it paid, it has a loss. If the
affect the amount of distributions that Fund has held the security for more than one
the Fund pays to you. These special tax year, the gain or loss will be a long-term
rules are discussed in the SAI. capital gain or loss. If the Fund has held
the security for one year or less, the
TAXATION OF THE FUND. As a regulated gain or loss will be a long-term capital gain
investment company, the Fund generally or loss. If the Fund has held the security for
pays no federal income tax on the one year or less, the gain or loss will be a
income and gains that it distributes short-term capital gain or loss. The Fund's gains
to you. or 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.
-----------------------------------------------
</TABLE>
FOREIGN TAXES. Foreign governments may impose taxes on the income and gains from
the 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.
The Fund may also invest in the securities of foreign companies that are
"passive foreign investment companies" ("PFICs"). These investments in PFICs may
cause the Fund to pay income taxes and interest charges. If possible, the Fund
will adopt strategies to avoid PFIC taxes and interest charges.
<TABLE>
<CAPTION>
<S> <C>
TAXATION OF SHAREHOLDERS.
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DISTRIBUTIONS. Distributions from the WHAT IS A DISTRIBUTION?
Fund, whether you receive them in cash or As a shareholder, you will receive your share
in additional shares, are generally of the Fund's income and gains on its
subject to income tax. The Fund will send investments in stocks, bonds and other
you a statement in January of the current securities. The Fund's income and short term
year that reflects the amount of ordinary capital gains are paid to you as ordinary
dividends, capital gain distributions and dividends. The Fund's long-term capital
non-taxable distributions you received gains are paid to you as capital gain
from the Fund in the prior year. This distributions. If the Fund pays you an
statement will include distributions amount in excess of its income and gains,
declared in December and paid to you in this excess will generally be treated as a
January of the current year, but which are non-taxable distribution. These amounts,
taxable as if paid on December 31 of the taken together, are what we call the Fund's
prior year. The IRS requires you to distributions to you.
report these amounts on your income tax ----------------------------------------------
return for the prior year. The Fund's
statement for the prior year will tell you
how much of your capital gain distribution
represents 28% rate gain. The remainder
of the capital gain distribution
represents 20% rate gain.
</TABLE>
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 the Fund.
<TABLE>
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REDEMPTIONS AND EXCHANGES. If you redeem WHAT IS A REDEMPTION?
your shares or if you exchange your shares A redemption is a sale by you to the Fund of
in the Fund for shares in another Franklin some or all of your shares in the Fund. The
Templeton Fund, you will generally have a price per share you receive when you redeem
gain or loss that the IRS requires you to Fund shares may be more or less than the
report on your income tax return. If you price at which you purchased those shares.
exchange Fund shares held for 90 days or An exchange of shares in the Fund for shares
less and pay no sales charge, or a reduced of another Franklin Templeton Fund is treated
sales charge, for the new shares, all or a as a redemption of Fund shares and then a
portion of the sales charge you paid on purchase of shares of the other fund. When
the purchase of the shares you exchanged you redeem or exchange your shares, you will
is not included in their cost for purposes generally have a gain or loss, depending upon
of computing gain or loss on the whether the basis in your shares is more or
exchange. If you hold your shares for six less than your cost or other basis in the
months or less, any loss you have will be shares. Call Fund Information for a free
treated as a long-term capital loss to the shareholder Tax Information Handbook if you
extent of any capital gain distributions need more information in calculating the gain
received by you from the Fund. All or a or loss on the redemption or exchange of your
portion of any loss on the redemption or shares.
exchange of your shares will be disallowed ----------------------------------------------
by the IRS if you purchase other shares in
the Fund within 30 days before or after
your redemption or exchange.
-----------------------------------------------
FOREIGN TAXES. If more than 50% of the WHAT IS A FOREIGN TAX CREDIT?
value of the Fund's assets consist of A foreign tax credit is a tax credit for the
foreign securities, the Fund may elect to amount of taxes imposed by a foreign country
pass-through to you the amount of foreign on earnings of the Fund. When a foreign
taxes it paid. If the Fund makes this company in which the Fund invests pays a
election, your year-end statement will dividend to the Fund, the dividend will
show more taxable income than was actually generally be subject to a withholding tax.
distributed to you. However, you will be The taxes withheld in foreign countries
entitled to either deduct your share of create credits that you may use to offset
such taxes in computing your taxable your U.S. federal income tax.
income or claim a foreign tax credit for ------------------------------------------------
such taxes against your U.S. federal
income tax. Your year-end statement,
showing the amount of deduction or credit
available to you, will be distributed to
you in January along with other
shareholder information records including
your Fund Form 1099-DIV.
</TABLE>
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 IS 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 the 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 the Fund.
<TABLE>
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BACKUP WITHHOLDING. When you open an WHAT IS A BACKUP WITHHOLDING?
account, IRS regulations require that you Backup withholding occurs when the Fund is
provide your taxpayer identification required to withhold and pay over to the IRS
number ("TIN"), certify that it is 31% of your distributions and redemption
correct, and certify that you are not proceeds. You can avoid backup withholding
subject to backup withholding under IRS by providing the Fund with your TIN, and by
rules. If you fail to provide a correct completing the tax certifications on your
TIN or the proper tax certifications, the shareholder application that you were asked
Fund is required to withhold 31% of all to sign when you opened your account.
the distributions (including ordinary However, if the IRS instructs the Fund to
dividends and capital gain distributions), begin backup withholding, it is required to
and redemption proceeds paid to you. The do so even if you provided the Fund with your
Fund is also required to begin backup TIN and these tax certifications, and backup
withholding on your account if the IRS withholding will remain in place until the
instructs the Fund to do so. The Fund Fund is instructed by the IRS that it is no
reserves the right not to open your longer required.
account, or, alternatively, to redeem your ------------------------------------------------------
shares at the current net asset value, less
any taxes withheld, if you fail to
provide a correct TIN, fail to provide the
proper tax certifications, or the IRS
instructs the Fund to begin backup
withholding on your account.
</TABLE>
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 IS THE FUND ORGANIZED?
Each Fund is a diversified series of Mutual Series, an open-end management
investment company, commonly called a mutual fund. Mutual Series was organized
as a Maryland corporation on November 12, 1987, and is registered with the SEC.
Each Fund, with the exception of Financial Services, which was not effective
until August 19, 1997, began offering three classes of shares on November 1,
1996: Mutual Shares Fund - Class Z, Mutual Shares Fund - Class I, Mutual Shares
Fund - Class II, Mutual Qualified Fund - Class Z, Mutual Qualified Fund - Class
I, Mutual Qualified Fund - Class II, Mutual Beacon Fund - Class Z, Mutual Beacon
Fund - Class I, Mutual Beacon Fund - Class II, Mutual European Fund - Class Z,
Mutual European Fund Class I, Mutual European Fund - Class II, Mutual Discovery
Fund - Class Z, Mutual Discovery Fund - Class I, and Mutual Discovery Fund -
Class II. All shares outstanding before the offering of Class I and Class II
shares on November 1, 1996, are considered Class Z shares. Financial Services
was created initially with, and offers, three classes of shares: Class I, Class
II, and Class Z. Additional series and classes of shares may be offered in the
future.
Shares of each class represent proportionate interests in the assets of the Fund
and have the same voting and other rights and preferences as any other class of
the Fund for matters that affect the Fund as a whole. For matters that only
affect one class, however, only shareholders of that class may vote. Each class
will vote separately on matters affecting only that class, or expressly required
to be voted on separately by state or federal law. Shares of each class of a
series have the same voting and other rights and preferences as the other
classes and series of Mutual Series for matters that affect Mutual Series as a
whole.
Mutual Series has noncumulative voting rights. This gives holders of more than
50% of the shares voting the ability to elect all of the members of the Board.
If this happens, holders of the remaining shares voting will not be able to
elect anyone to the Board.
Mutual Series does not intend to hold annual shareholder meetings. Mutual Series
or a Fund may hold special meetings, however, for matters requiring shareholder
approval. A meeting may also be called by the Board in its discretion or by
shareholders holding at least 10% of the outstanding shares. In certain
circumstances, we are required to help you communicate with other shareholders
about the removal of a Board member.
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 FUND DOES NOT
CURRENTLY ALLOW INVESTMENTS BY MARKET TIMERS.
1. Read this prospectus carefully.
2. Determine how much you would like to invest. The Fund's minimum
investments are:
oTo open your account: $1,000*,**
oTo add to your account: $25*
*We may waive these minimums for retirement plans. We also reserve
the right to refuse any order to buy shares.
**$500 for accounts opened pursuant to an automatic investment plan.
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 initial investments 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 Class II shares. There are than 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
purchases of $1 million or more on on purchases sold within 18
within one year months sold
Lower annual expenses than Class o Higher annual expenses than
II shares Class 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 OFFERING NET AMOUNT PERCENTAGE OF
AT OFFERING PRICE PRICE INVESTED OFFERING PRICE
- --------------------------------------------------------------------------
CLASS I
Under $100,000 4.50% 4.71% 4.00%
$100,000 but less than 3.75% 3.90% 3.25%
$250,000
$250,000 but less than 2.75% 2.83% 2.50%
$500,000
$500,000 but less than 2.25% 2.30% 2.00%
$1,000,000
$1,000,000 or more* None None None
CLASS II
Under $1,000,000* 1.00% 1.01% 1.00%
*A Contingent Deferred Sales Charge of 1% may apply to Class I purchases of $1
million or more and any Class II purchase. Please see "How Do I Sell Shares? -
Contingent Deferred Sales Charge." Please also see "Other Payments to Securities
Dealers" below for a discussion of payments Distributors may make out of its own
resources to Securities Dealers for certain purchases. Purchases of Class II
shares are limited to purchases below $1 million. Please see "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
i nvestments to the Fund, 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 originally paid a sales charge on the shares and you reinvest the
money in the same class of shares. This waiver does not apply to
exchanges.
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, the Templeton Variable Annuity Fund,
or the Templeton Variable Products Series Fund. You should contact your
tax advisor for information on any tax consequences that may apply.
5. Distributions from an existing retirement plan invested in the Franklin
Templeton Funds
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.
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
4. Registered Securities Dealers and their affiliates, for their investment
accounts only
5. Current employees of Securities Dealers and their affiliates and their
family members, as allowed by the internal policies of their employer
6. 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
7. Investment companies exchanging shares or selling assets pursuant to a
merger, acquisition or exchange offer
8. Accounts managed by the Franklin Templeton Group
9. Certain unit investment trusts and their holders reinvesting distributions
from the trusts
10. Group annuity separate accounts offered to retirement plans
11. Chilean retirement plans that meet the requirements described under
"Retirement Plans" below
RETIREMENT PLANS. Retirement plans that (i) are sponsored by an employer with at
least 100 employees, or (ii) have plan assets of $1 million or more, or (iii)
agree to invest at least $500,000 in the Franklin Templeton Funds over a 13
month period may buy Class I shares without a front-end sales charge. Retirement
plans that are not Qualified Retirement Plans, SIMPLEs or SEPs must also meet
the requirements described under "Group Purchases - Class I Only" above to be
able to buy Class I shares without a front-end sales charge. We may enter into a
special arrangement with a Securities Dealer, based on criteria established by
the Fund, to add together certain small Qualified Retirement Plan accounts for
the purpose of meeting these requirements.
For retirement plan accounts opened on or after May 1, 1997, a Contingent
Deferred Sales Charge may apply if the retirement plan is transferred out of the
Franklin Templeton Funds or terminated within 365 days of the retirement plan
account's initial purchase in the Franklin Templeton Funds. Please see "How Do I
Sell Shares? - Contingent Deferred Sales Charge" for details.
HOW DO I BUY SHARES IN CONNECTION WITH RETIREMENT PLANS?
Your individual or employer-sponsored retirement plan may invest in the Fund.
Plan documents are required for all retirement plans. Trust Company can provide
the plan documents for you and serve as custodian or trustee.
Trust Company can provide you with brochures containing important information
about its plans. To establish a Trust Company retirement plan, you will need an
application other than the one included in this prospectus. For a retirement
plan brochure or application, call Retirement Plan Services.
Please consult your legal, tax or retirement plan specialist before choosing a
retirement plan. Your investment representative or advisor can help you make
investment decisions within your plan.
OTHER PAYMENTS TO SECURITIES DEALERS
The payments described below may be made to Securities Dealers who initiate and
are responsible for Class II purchases and certain Class I purchases made
without a sales charge. The payments are subject to the sole discretion of
Distributors, and are paid by Distributors or one of its affiliates and not by
the Fund or its shareholders.
1. Class II purchases - up to 1% of the purchase price.
2. Class I purchases of $1 million or more - up to 1% of the amount invested.
3. Class I purchases made without a front-end sales charge by certain
retirement plans described under "Sales Charge Reductions and Waivers
Retirement Plans" above - up to 1% of the amount invested.
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 the Fund
should determine, or have a broker-dealer determine, the applicable laws and
regulations of the relevant jurisdiction. Investors are responsible for
compliance with tax, currency exchange or other regulations applicable to
redemption and purchase transactions in any jurisdiction to which they may be
subject. Investors should consult appropriate tax and legal advisors to obtain
information on the rules applicable to these transactions.
MAY I EXCHANGE SHARES FOR SHARES OF ANOTHER FUND?
We offer a wide variety of funds. If you would like, you can move your
investment from your Fund account to an existing or new account in another
Franklin Templeton Fund (an "exchange"). Because it is technically a sale and a
purchase of shares, an exchange is a taxable transaction.
If you own Class I shares, you may exchange into any of our money funds except
Franklin Templeton Money Fund II ("Money Fund II"). Money Fund II is the only
money fund exchange option available to Class II shareholders. Unlike our other
money funds, shares of Money Fund II may not be purchased directly and no drafts
(checks) may be written on Money Fund II accounts.
Before making an exchange, please read the prospectus of the fund you are
interested in. This will help you learn about the fund, its investment objective
and policies, and its rules and requirements for exchanges. For example, some
Franklin Templeton Funds do not accept exchanges and others may have different
investment minimums. Some Franklin Templeton Funds do not offer Class II shares.
- --------------------------------------------------------------------------------
METHOD STEPS TO FOLLOW
- --------------------------------------------------------------------------------
BY MAIL 1. Send us 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 you have never paid a sales charge on your shares
because, for example, they have always been held in a money fund, you will pay
the Fund's applicable sales charge no matter how long you have held your shares.
These charges may not apply if you qualify to buy shares without a sales charge.
We will not impose a Contingent Deferred Sales Charge when you exchange shares.
Any shares subject to a Contingent Deferred Sales Charge at the time of
exchange, however, will remain so in the new fund. See the discussion on
Contingent Deferred Sales Charges below and under "How Do I Sell Shares?"
CONTINGENT DEFERRED SALES CHARGE. 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.
EXCHANGE RESTRICTIONS
Please be aware that the following restrictions apply to exchanges:
oYou may only exchange shares within the SAME CLASS.
oThe 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."
oTrust 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.
oThe fund you are exchanging into must be eligible for sale in your state.
oWe may modify or discontinue our exchange policy if we give you 60 days'
written notice.
oCurrently, the Fund does not allow investments by Market Timers.
Because excessive trading can hurt Fund performance, operations and
shareholders, we may refuse any exchange purchase if (i) we believe the Fund
would be harmed or unable to invest effectively, or (ii) the Fund receives or
anticipates simultaneous orders that may significantly affect the Fund.
HOW DO I SELL SHARES?
You may sell (redeem) your shares at any time.
- --------------------------------------------------------------------------------
METHOD STEPS TO FOLLOW
- --------------------------------------------------------------------------------
BY MAIL 1. Send us 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 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 1:00 p.m. Pacific time, your wire payment will be
sent the next business day. For requests received in proper form after 1:00 p.m.
Pacific time, the payment will be sent the second business day. By offering this
service to you, the Fund is not bound to meet any redemption request in less
than the seven day period prescribed by law. Neither the Fund nor its agents
shall be liable to you or any other person if, for any reason, a redemption
request by wire is not processed as described in this section.
If you sell shares you recently purchased with a check or draft, we may delay
sending you the proceeds for up to 15 days or more to allow the check or draft
to clear. A certified or cashier's check may clear in less time.
Under unusual circumstances, we may suspend redemptions or postpone payment for
more than seven days as permitted by federal securities law.
Please refer to "Transaction Procedures and Special Requirements" for other
important information on how to sell shares.
TRUST COMPANY RETIREMENT PLAN ACCOUNTS
To comply with IRS regulations, you need to complete additional forms before
selling shares in a Trust Company retirement plan account. Tax penalties
generally apply to any distribution from these plans to a participant under age
59 1/2, unless the distribution meets an exception stated in the Code. To obtain
the necessary forms, please call Retirement Plan Services.
CONTINGENT DEFERRED SALES CHARGE
For Class I purchases, if you did not pay a front-end sales charge because you
invested $1 million or more or agreed to invest $1 million or more under a
Letter of Intent, a Contingent Deferred Sales Charge may apply if you sell all
or a part of your investment within the Contingency Period. Once you have
invested $1 million or more, any additional Class I investments you make without
a sales charge may also be subject to a Contingent Deferred Sales Charge if they
are sold within the Contingency Period. For any Class II purchase, a Contingent
Deferred Sales Charge may apply if you sell the shares within the Contingency
Period. The charge is 1% of the value of the shares sold or the Net Asset Value
at the time of purchase, whichever is less.
Certain retirement plan accounts opened on or after May 1, 1997, and that
qualify to buy Class I shares without a front-end sales charge may also be
subject to a Contingent Deferred Sales Charge if the retirement plan 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 Tax-free returns of excess contributions from employee benefit plans
o Redemptions by Trust Company employee benefit plans or employee
benefit plans serviced by ValuSelect(R)
o Participant initiated distributions from employee benefit plans or
participant initiated exchanges among investment choices in employee
benefit plans
WHAT DISTRIBUTIONS MIGHT I RECEIVE FROM THE FUND?
The Fund declares dividends from its net investment income semi-annually. The
distributions are frequently declared at mid-year and during late December.
Capital gains, if any, may be distributed twice a year, usually once in December
and once at mid-year.
Dividends and capital gains are calculated and distributed the same way for each
class. The amount of any income dividends per share will differ, however,
generally due to the difference in the Rule 12b-1 fees of Class I and Class II.
Dividend payments are not guaranteed, are subject to the Board's discretion and
may vary with each payment. THE FUND DOES NOT PAY "INTEREST" OR GUARANTEE ANY
FIXED RATE OF RETURN ON AN INVESTMENT IN ITS SHARES.
If you buy shares shortly before the record date, please keep in mind that any
distribution will lower the value of the Fund's shares by the amount of the
distribution and you will then receive a portion of the price you paid back in
the form of a taxable distribution.
DISTRIBUTION OPTIONS
You may receive your distributions from the Fund in any of these ways:
1. BUY ADDITIONAL SHARES OF THE FUND - You may buy additional shares of the 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 account, you may need a signature guarantee. If you send
the money to a checking account, please see "Electronic Fund Transfers - Class I
Only" 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 Fund is open for business each day the NYSE is open. We determine the Net
Asset Value per share of each class as of the close of the NYSE, normally 4:00
p.m. Eastern time. You can find the prior day's closing Net Asset Value and
Offering Price for each class in many newspapers.
The Net Asset Value of all outstanding shares of each class is calculated on a
pro rata basis. It is based on each class' proportionate participation in the
Fund, determined by the value of the shares of each class. Each class, however,
bears the Rule 12b-1 fees payable under its Rule 12b-1 plan. To calculate Net
Asset Value per share of each class, the assets of each class are valued and
totaled, liabilities are subtracted, and the balance, called net assets, is
divided by the number of shares of the class outstanding. The Fund's assets are
valued as described under "How Are Fund Shares Valued?" in the SAI.
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 Fund. 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 $500. We will only do this
if the value of your account fell below this amount because you voluntarily sold
your shares and your account has been inactive (except for the reinvestment of
distributions) for at least six months. Before we close your account, we will
notify you and give you 30 days to increase the value of your account to $500.
SERVICES TO HELP YOU MANAGE YOUR ACCOUNT
AUTOMATIC INVESTMENT PLAN
Our automatic investment plan offers a convenient way to invest in the Fund.
Under the plan, you can have money transferred automatically from your checking
account to the Fund each month to buy additional shares. If you are interested
in this program, please refer to the shareholder application included with this
prospectus or contact your investment representative. If you start the automatic
investment plan when you open your account, your initial investment amount may
be as little as $500. The market value of the Fund's shares may fluctuate and a
systematic investment plan such as this will not assure a profit or protect
against a loss. You may discontinue the program at any time by notifying
Investor Services by mail or phone.
SYSTEMATIC WITHDRAWAL PLAN
Our systematic withdrawal plan allows you to sell your shares and receive
regular payments from your account on a monthly, quarterly, semiannual or annual
basis. The value of your account must be at least $5,000 and the minimum payment
amount for each withdrawal must be at least $50. For retirement plans subject to
mandatory distribution requirements, the $50 minimum will not apply.
If you would like to establish a systematic withdrawal plan, please complete the
systematic withdrawal plan section of the shareholder application included with
this prospectus and indicate how you would like to receive your payments. You
may choose to direct your payments to buy the same class of shares of another
Franklin Templeton Fund or have the money sent directly to you, to another
person, or to a checking account. Once your plan is established, any
distributions paid by the Fund will be automatically reinvested in your account.
You will generally receive your payment by the end of the month in which a
payment is scheduled. When you sell your shares under a systematic withdrawal
plan, it is a taxable transaction.
To avoid paying sales charges on money you plan to withdraw within a short
period of time, you may not want to set up a systematic withdrawal plan if you
plan to buy shares on a regular basis. Shares sold under the plan may also be
subject to a Contingent Deferred Sales Charge. Please see "Contingent Deferred
Sales Charge" under "How Do I Sell Shares?"
You may discontinue a systematic withdrawal plan, change the amount and schedule
of withdrawal payments, or suspend one payment by notifying us in writing at
least seven business days before the end of the month preceding a scheduled
payment. Please see "How Do I Buy, Sell and Exchange Shares? - Systematic
Withdrawal Plan" in the SAI for more information.
TELEFACTS(R)
From a touch-tone phone, you may call our TeleFACTS(R) system (day or night) at
1-800/247-1753 to:
o obtain information about your account;
o obtain price and performance information about any Franklin Templeton
Fund;
o exchange shares (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 CLASS I CLASS II
- ---------------------------------------
Mutual Shares 474 574
Qualified 475 575
Beacon 476 576
Discovery 477 577
European 478 578
Financial Services 479 579
STATEMENTS AND REPORTS TO SHAREHOLDERS
We will send you the following statements and reports on a regular basis:
o Confirmation and account statements reflecting transactions in your
account, including additional purchases and dividend reinvestments.
PLEASE VERIFY THE ACCURACY OF YOUR STATEMENTS WHEN YOU RECEIVE THEM.
o Financial reports of the Fund will be sent every six months. To reduce
Fund expenses, we attempt to identify related shareholders within a
household and send only one copy of a report. Call Fund Information if
you would like an additional free copy of the Fund's financial
reports.
INSTITUTIONAL ACCOUNTS
Additional methods of buying, selling or exchanging shares of the Fund may be
available to institutional accounts. Institutional investors may also be
required to complete an institutional account application. For more information,
call Institutional Services.
AVAILABILITY OF THESE SERVICES
The services above are available to most shareholders. If, however, your shares
are held by a financial institution, in a street name account, or networked
through the NSCC, the Fund may not be able to offer these services directly to
you. Please contact your investment representative.
WHAT IF I HAVE QUESTIONS ABOUT MY ACCOUNT?
If you have any questions about your account, you may write to Investor Services
at 100 Fountain Parkway, P.O. Box 33030, St. Petersburg, Florida 33733-8030. The
Fund and Franklin Mutual are located at 51 John F. Kennedy Parkway, Short Hills,
New Jersey 07078. Distributors is located at 777 Mariners Island Blvd., P.O. Box
7777, San Mateo, California 94403-7777. You may also contact us by phone at one
of the numbers listed below.
HOURS OF OPERATION
(EASTERN TIME)
DEPARTMENT NAME TELEPHONE NO. (MONDAY THROUGH FRIDAY)
- --------------------------------------------------------------------------
Shareholder Services 1-800/632-2301 8:30 a.m. to 8:00 p.m.
Dealer Services 1-800/524-4040 8:30 a.m. to 8:00 p.m.
Fund Information 1-800/DIAL BEN 8:30 a.m. to 11:00 p.m.
(1-800/342-5236) 9:30 a.m. to 5:30 p.m.
(Saturday)
Retirement Plan Services 1-800/527-2020 8:30 a.m. to 8:00 p.m.
Institutional Services 1-800/321-8563 9:00 a.m. to 8:00 p.m.
TDD (hearing impaired) 1-800/851-0637 8:30 a.m. to 8:00 p.m.
Your phone call may be monitored or recorded to ensure we provide you with high
quality service. You will hear a regular beeping tone if your call is being
recorded.
GLOSSARY
USEFUL TERMS AND DEFINITIONS
BOARD - The Board of Directors of the Fund
CD - Certificate of deposit
CLASS I, CLASS II AND CLASS Z - The Fund offers three classes of shares,
designated "Class I," "Class II," and "Class Z." The three classes have
proportionate interests in the Fund's portfolio. They differ, however, primarily
in their sales charge and expense structures.
CODE - Internal Revenue Code of 1986, as amended
CONTINGENCY PERIOD - For Class I shares, the 12 month period during which a
Contingent Deferred Sales Charge may apply. For Class II shares, the contingency
period is 18 months. Regardless of when during the month you purchased shares,
they will age one month on the last day of that month and each following month.
CONTINGENT DEFERRED SALES CHARGE (CDSC) - A sales charge of 1% that may apply if
you sell your shares within the Contingency Period.
DISTRIBUTORS - Franklin/Templeton Distributors, Inc., the Fund's principal
underwriter. The SAI lists the officers and Board members who are affiliated
with Distributors. See "Officers and Directors."
ELIGIBLE GOVERNMENTAL AUTHORITY - Any state or local government or any
instrumentality, department, authority or agency thereof that has determined the
Fund is a legally permissible investment and that can only buy shares of the
Fund without paying sales charges.
FRANKLIN MUTUAL - Franklin Mutual Advisers, Inc., the Fund's investment manager
FRANKLIN TEMPLETON FUNDS - The U.S. registered mutual funds in the Franklin
Group of Funds(R) and the Templeton Group of Funds except Franklin Valuemark
Funds, Templeton Capital Accumulator Fund, Inc., Templeton Variable Annuity
Fund, and Templeton Variable Products` Series Fund
FRANKLIN TEMPLETON GROUP - Franklin Resources, Inc., a publicly owned holding
company, and its various subsidiaries
FRANKLIN TEMPLETON GROUP OF FUNDS - All U.S. registered investment companies in
the Franklin Group of Funds(R) and the Templeton Group of Funds
FT SERVICES - Franklin Templeton Services, Inc., the Fund's administrator
HEINE - Heine Securities Corporation, the Fund's former investment manager that
was acquired by Resources on October 31, 1996
INVESTOR SERVICES - Franklin/Templeton Investor Services, Inc., the Fund's
shareholder servicing and transfer agent
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.
NASD - National Association of Securities Dealers, Inc.
NET ASSET VALUE (NAV) - The value of a mutual fund is determined by deducting
the fund's liabilities from the total assets of the portfolio. The net asset
value per share is determined by dividing the net asset value of the fund by the
number of shares outstanding.
NSCC - National Securities Clearing Corporation
NYSE - New York Stock Exchange
OFFERING PRICE - The public offering price is based on the Net Asset Value per
share of the class and includes the front-end sales charge. The maximum
front-end sales charge is 4.50% for Class I and 1% for Class II.
QUALIFIED RETIREMENT PLANS - An employer sponsored pension or profit-sharing
plan that qualifies under section 401 of the Code. Examples include 401(k),
money purchase pension, profit sharing and defined benefit plans.
RESOURCES - Franklin Resources, Inc.
SAI - Statement of Additional Information
S&P - Standard & Poor's Corporation
SEC - U.S. Securities and Exchange Commission
SECURITIES DEALER - A financial institution that, either directly or through
affiliates, has an agreement with Distributors to handle customer orders and
accounts with the Fund. This reference is for convenience only and does not
indicate a legal conclusion of capacity.
SEP - An employer sponsored simplified employee pension plan established under
section 408(k) of the Code
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.
U.S. - United States
WE/OUR/US - Unless the context indicates a different meaning, these terms refer
to the Fund and/or Investor Services, Distributors, or other wholly owned
subsidiaries of Resources.
PROSPECTUS & APPLICATION
FRANKLIN MUTUAL SERIES FUND INC. - CLASS Z
MAY 1, 1998
INVESTMENT STRATEGIES:
MUTUAL SHARES FUND GROWTH AND INCOME o VALUE
MUTUAL QUALIFIED FUND GROWTH AND INCOME o VALUE
MUTUAL BEACON FUND GROWTH AND INCOME o VALUE
MUTUAL FINANCIAL SERVICES FUND GROWTH AND INCOME o VALUE
MUTUAL EUROPEAN FUND GLOBAL o VALUE
MUTUAL DISCOVERY FUND GLOBAL o VALUE
This prospectus describes the Class Z shares of the six series of Franklin
Mutual Series Fund Inc. ("Mutual Series"): Mutual Shares Fund ("Mutual Shares"),
Mutual Qualified Fund (Qualified"), Mutual Beacon Fund ("Beacon"), Mutual
European Fund ("European"), Mutual Discovery Fund ("Discovery") and Mutual
Financial Services Fund ("Financial Services"). Each of these series may,
individually or together, be referred to as the "Fund(s)." This prospectus
contains information you should know before investing in the Fund. Please keep
it for future reference.
The Fund currently offers other classes of shares with different sales charge
and expense structures, which affect performance. These classes are described in
a separate prospectus. For more information, contact your investment
representative or call 1-800/DIAL BEN.
The Fund has a Statement of Additional Information ("SAI") for its Class Z
shares, dated May 1, 1998, which may be amended from time to time. It includes
more information about the Fund's procedures and policies. It has been filed
with the SEC and is incorporated by reference into this prospectus. For a free
copy or a larger print version of this prospectus, call 1-800/DIAL BEN.
SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED
BY, ANY BANK, AND ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY OF THE U.S.
GOVERNMENT. SHARES OF THE FUND INVOLVE INVESTMENT RISKS, INCLUDING THE POSSIBLE
LOSS OF PRINCIPAL.
LIKE ALL MUTUAL 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.
THIS PROSPECTUS IS NOT AN OFFERING OF THE SECURITIES HEREIN DESCRIBED IN ANY
STATE, JURISDICTION OR COUNTRY IN WHICH THE OFFERING IS NOT AUTHORIZED. NO SALES
REPRESENTATIVE, DEALER, OR OTHER PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR
MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS. FURTHER
INFORMATION MAY BE OBTAINED FROM DISTRIBUTORS.
The principal investment objective of Mutual Shares, Qualified, Beacon, European
and Financial Services is capital appreciation, which may occasionally be
short-term. A secondary objective of each is income. Discovery's investment
objective is long-term capital appreciation.
Franklin Mutual Series Fund Inc. - Class Z
May 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.
TABLE OF CONTENTS
ABOUT THE FUND
Expense Summary.......................................
Financial Highlights..................................
How Does the Fund Invest Its Assets?..................
What Are the Risks of Investing in the Fund?..........
Who Manages the Fund?.................................
How Does the Fund Measure Performance?................
How Taxation Affects the Fund and Its Shareholders....
How Is the Fund Organized?............................
ABOUT YOUR ACCOUNT
How Do I Buy Shares?..................................
May I Exchange Shares for Shares of Another Fund?.....
How Do I Sell Shares?.................................
What Distributions Might I Receive From the Fund?.....
Transaction Procedures and Special Requirements.......
Services to Help You Manage Your Account..............
What If I Have Questions About My Account?............
GLOSSARY
Useful Terms and Definitions.........................
51 John F. Kennedy Parkway
Short Hills, NJ 07078
1-800/DIAL BEN
ABOUT THE FUND
EXPENSE SUMMARY
This table is designed to help you understand the costs of investing in the
Fund. It is based on the historical expenses of Class Z for the fiscal year
ended December 31, 1997. The Funds' actual expenses may vary.
A. SHAREHOLDER TRANSACTION EXPENSES+
Mutual Financial
Shares Qualified Beacon Discovery European Services
- -------------------------------------------------------------------------------
Maximum Sales Charge
Imposed on Purchases None None None None None None
B. ANNUAL FUND OPERATING EXPENSES*
(as a percentage of
average net assets)
Management Fees** 0.60%*** 0.60%*** 0.60%*** 0.80%*** 0.80%*** 0.18%**
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%**
=======================================================
C. EXAMPLE
Assume the annual return for the class is 5%, operating expenses are as
described above, and you sell your shares after the number of years shown.
These are the projected expenses for each $1,000 that you invest in the
Fund.
Mutual Financial
Shares Qualified Beacon Discovery European Services
- ----------------------------------------------------------------------------
1 Year $ 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 -
THIS IS JUST AN EXAMPLE. IT DOES NOT REPRESENT PAST OR FUTURE EXPENSES OR
RETURNS. ACTUAL EXPENSES AND RETURNS MAY BE MORE OR LESS THAN THOSE SHOWN.
The Fund pays its operating expenses. The effects of these expenses are
reflected in its 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
the Fund's investment manager, Franklin Mutual made a commitment to the Fund's
Board not to seek an increase in the rate of investment advisory fees for a
three year period beginning November 1, 1996. This agreement applies only to
those series which existed at that time. The parties also agreed that for the
same period the ordinary expenses of each series' (based on a percentage of net
assets) will not be higher than they were expected to be as of November 1, 1996,
based on the annualized expense ratios of each series as of that date. Increases
in expenses beyond these expense ratios will be permitted, however, if the Board
is satisfied that such expenses also would have been higher (based upon such
considerations as the amount and composition of assets under management, the
number of security transactions, the number of shareholder accounts, regulatory
requirements and general economic conditions) had the transaction not taken
place. This expense limitation does not include items such as litigation
expenses, interest, taxes, insurance, brokerage commissions and expenses of an
extraordinary nature.
**Franklin Mutual has agreed in advance to waive its management fee and to
assume as its own expense certain other expenses otherwise payable by the
Financial Services Fund so that the Financial Services Fund's aggregate annual
operating expenses do not exceed 1.00% of Class Z's average net assets for its
initial twenty-four months of operation. Absent this reduction, contractual
management fees and total expected operating expenses for the current fiscal
year would equal 0.80% and 1.62%, respectively, of Class Z's average net assets.
After the first twenty-four months of operations, Franklin Mutual may terminate
this arrangement at any time.
***For the period shown, Franklin Mutual and its affiliates had agreed in
advance to limit its management fees during the Fund's previous fiscal year.
This agreement, which expires October 31, 1999, did not apply to Financial
Services which was not in existence during the previous fiscal year. With this
reduction, management fees and total operating expenses were as follows:
MUTUAL
SHARES QUALIFIED BEACON DISCOVERY EUROPEAN
Management
Fees 0.57% 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 the Fund's financial history for Class Z. The information
has been audited by Ernst & Young LLP, the Fund's independent auditors. Their
audit report covering each of the most recent five years appears in the
financial statements 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.
<TABLE>
<CAPTION>
MUTUAL SHARES - CLASS Z
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
- -----------------------------------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE+
(For a share outstanding throughout the year)
Net asset value, Beginning of Year $18.57 $17.2 $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) $7.9 $6.5 $5.2 $3.7 $3.5 $2.9 $2.6 $2.5 $3.4 $2.6
Ratio 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, 1997 have been restated to
reflect a 5-for-1 stock split effective February 3, 1997.
</TABLE>
QUALIFIED - CLASS Z
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
- --------------------------------------------------------------------------------------------------------------------------
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) $5.2 $4.3 $3.0 $1.8 $1.5 $1.3 $1.1 $1.1 $1.5 $1.1
Ratio 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, 1997 have been restated to
reflect a 2-for-1 stock split effective February 3, 1997.
</TABLE>
BEACON - CLASS Z
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
- ----------------------------------------------------------------------------------------------------------------------------------
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, -------------------------------------------------------------------------------------------
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
Ratio 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, 1997 have been restated
to reflect a 3-for-1 stock split effective February 3, 1997.
</TABLE>
DISCOVERY - CLASS Z
YEAR ENDED DECEMBER 31, 1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------
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 $.026 - - -
*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+
- ----------------------------------------------------------------------------
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) $546 $450
Ratio 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 $.023
*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
- ----------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE - CLASS Z
(For a share outstanding throughout
the period) Net asset value,
beginning of period $10.00
Income from investment ----------
operations:
Net investment income .04
Net realized and unrealized gain 2.35
---------
Total from investment operations 2.39
Less distributions from: -----------
Net investment income (.03)
Net realized gains (.09)
-----------
Total distributions (.12)
-----------
Net asset value, end of period $12.27
===========
Total Return* 23.92%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) $136,350
Ratios to average net assets:
Expenses 1.00%**
Expenses, excluding waiver
and payments by affiliate 1.62%**
Net investment income 1.37%**
Portfolio turnover rate 42.26%
Average commission rate paid*** $.0241
*Total return is not annualized.
**Annualized.
***Relates to purchases and sales of equity securities.
HOW DOES THE FUND INVEST ITS ASSETS?
WHAT ARE THE FUNDS' GOALS?
The principal investment goal of Mutual Shares Fund ("Mutual Shares"), Mutual
Qualified Fund ("Qualified"), Mutual Beacon Fund ("Beacon"), Mutual European
Fund ("European"), and Mutual Financial Services Fund ("Financial Services") is
capital appreciation, which may occasionally be short-term. The secondary
investment goal of each is income. The principal investment goal of Mutual
Discovery Fund ("Discovery") is long-term capital appreciation. Discovery does
not have a secondary investment goal.
The investment goal of each Fund is fundamental which means that it may not be
changed without the approval of that Fund's shareholders.
WHAT KINDS OF SECURITIES DO THE FUNDS PURCHASE?
GENERAL POLICIES AND STRATEGIES. 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."
CONVERTIBLE SECURITIES are debt securities, or in some cases preferred stock,
which have the additional feature of converting into 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.
Franklin Mutual selects investments for each Fund based upon its analysis and
research. This analysis and research takes into account the factors the Adviser
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 percent 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, a Fund may use its 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 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, rather than as a result of 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 shares.
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 Standard & Poor's
Corporation ("S&P") or Moody's Investor Services ("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 more risky is 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 payments 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 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. Consequently, in such circumstances, 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 "Investment Objectives and Policies - Medium and
Lower Rated Corporate Debt Securities" in the SAI.
WHAT ARE SOME OF THE FUNDS' OTHER INVESTMENT POLICIES AND STRATEGIES?
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 U.S. Securities
and Exchange Commission 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 (1) borrow the security to deliver the security to the purchaser;
and (2) 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 "Investment Objectives and Policies - Short Sales" 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 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. 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.
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 adviser (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. 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.
FUNDAMENTAL RESTRICTIONS. Each Fund has adopted a number of restrictions on its
investments which may not be changed for a particular Fund without the approval
of that Fund's shareholders. These restrictions are set forth in the SAI.
PERCENTAGE RESTRICTIONS. If in purchasing a security, a Fund has complied with a
percentage restriction, a later increase or decrease in the percentage resulting
from changes in the market value of the security or illiquidity of its portfolio
securities, or the amount of the Fund's net assets will not be considered a
violation of any of the foregoing policies.
WHAT ARE THE RISKS OF INVESTING IN THE FUND?
GENERAL. There is no assurance that a Fund's goals will be achieved. 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 transactions, 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. The Fund's investment 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. The 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.
WHO MANAGES THE FUND?
THE BOARD. The Board oversees the management of the Fund and elects its
officers. The officers are responsible for the Fund's day-to-day operations. The
Board also monitors the Fund to ensure no material conflicts exist among the
Fund's classes of shares. While none is expected, the Board will act
appropriately to resolve any material conflict that may arise.
INVESTMENT MANAGER. Franklin Mutual manages the Fund's assets and makes its
investment decisions. It is wholly owned by Resources, a publicly owned company
engaged in the financial services industry through its subsidiaries. Charles B.
Johnson and Rupert H. Johnson, Jr. are the principal shareholders of Resources.
Together, Franklin Mutual and its affiliates manage over $221 billion in assets.
Please see "Investment Management and Other Services" and "Miscellaneous
Information" in the SAI for information on securities transactions and a summary
of the Fund's Code of Ethics.
MANAGEMENT TEAM. The team responsible for the day-to-day management of the
Fund's portfolio is: Michael F. Price since 1975, Jeffrey A. Altman since 1988,
Robert L. Friedman since 1988, Raymond Garea since 1991, Peter A. Langerman
since 1986 and Lawrence N. Sondike since 1984.
Michael F. Price
Chief Executive Officer and President of Franklin Mutual
Mr. Price has a Bachelor of Arts degree in Business Administration from the
University of Oklahoma. Prior to November 1996, Mr. Price was President and
Chairman of Heine, the former investment manager for Franklin Mutual Series Fund
Inc. He became Chief Executive Officer of Franklin Mutual in November 1996. He
is Chairman of the Board and President of Franklin Mutual Series Fund Inc.
Jeffrey A. Altman
Senior Vice President of Franklin Mutual
Mr. Altman has a Bachelor of Science degree from Tulane University. Prior to
November 1996, Mr. Altman was employed as a Research Analyst and Trader for
Heine, the former investment manager for Franklin Mutual Series Fund Inc. He
joined Franklin Mutual in November 1996. He is a Vice President of Franklin
Mutual Series Fund Inc.
Robert L. Friedman
Senior Vice President of Franklin Mutual
Mr. Friedman has a Bachelor of Arts degree in Humanities from Johns Hopkins
University and a Masters in Business Administration from the Wharton School,
University of Pennsylvania. Prior to November 1996, Mr. Friedman was a Research
Analyst for Heine, the former investment manager for Franklin Mutual Series Fund
Inc. He joined Franklin Mutual in November 1996. He is a Vice President of
Franklin Mutual Series Fund Inc.
Raymond Garea
Senior Vice President of Franklin Mutual
Mr. Garea has a Bachelor of Science degree in Engineering from Case Institute of
Technology and a Masters in Business Administration from the University of
Michigan. Prior to November 1996, he was a Research Analyst for Heine, the
former investment manager for Franklin Mutual Series Fund Inc. He joined
Franklin Mutual in November 1996. He is a Vice President of Franklin Mutual
Series Fund Inc.
Peter A. Langerman
Chief Operating Officer and Senior Vice President of Franklin Mutual
Mr. Langerman has a Bachelor of Arts degree from Yale University, a Masters in
Science from New York University Graduate School of Business and a Juris Doctor
from Stanford University Law School. Prior to November 1996, he was a Research
Analyst for Heine, the former investment manager for Franklin Mutual Series Fund
Inc. He joined Franklin Mutual in November 1996. Mr. Langerman is a director and
Executive Vice President of Franklin Mutual Series Fund Inc.
Lawrence N. Sondike
Senior Vice President of Franklin Mutual
Mr. Sondike has a Bachelor of Arts degree from Cornell University and a Masters
in Business Administration from New York University Graduate School of Business.
Prior to November 1996, he was a Research Analyst for Heine, the former
investment manager for Franklin Mutual Series Fund Inc. He joined Franklin
Mutual in November 1996. He is a Vice President of Franklin Mutual Series Fund
Inc.
MANAGEMENT FEES. During the fiscal year ended December 31, 1997, Franklin Mutual
had agreed in advance to waive or limit its fees and to make certain payments to
reduce expenses. The table below shows the management fees and total operating
expenses paid by the Fund, as a percentage of average daily net assets.
MANAGEMENT TOTAL OPERATING
FEES BEFORE MANAGEMENT EXPENSES BEFORE TOTAL OPERATING
ADVANCE WAIVER FEES PAIDE 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
The Fund pays its own operating expenses. These expenses include Franklin
Mutual's management fees; taxes, if any; custodian, legal and auditing fees; the
fees and expenses of Board members who are not members of, affiliated with, or
interested persons of Franklin Mutual; fees of any personnel not affiliated with
Franklin Mutual; insurance premiums; trade association dues; expenses of
obtaining quotations for calculating the Fund's Net Asset Value; and printing
and other expenses that are not expressly assumed by Franklin Mutual. The Board
has determined the method and procedure for allocating expenses between the
series and the classes of Mutual Series and reserves the right to modify such
method and procedures.
Under their management agreements, the Funds pay Franklin Mutual a management
fee equal to an annual rate of 0.60% of the average daily net assets of Mutual
Shares, Qualified and Beacon, and 0.80% of the average daily net assets of
Discovery, European and Financial Services. The fee is computed at the close of
business on the last business day of each month.
PORTFOLIO TRANSACTIONS. Franklin Mutual seeks to obtain the best execution on
all transactions. If Franklin Mutual believes more than one broker or dealer can
provide the best execution, it may consider research and related services and
the sale of Fund shares, as well as shares of other funds in the Franklin
Templeton Group of Funds, when selecting a broker or dealer. To the extent that
any of the Funds owns more than 5% of the securities of a broker-dealer, that
broker-dealer may be considered to be an affiliated person of such Fund. If such
Fund places any portfolio transactions through the broker-dealer, the Fund would
be required to comply with certain rules of the SEC relating to the payment of
brokerage commissions to an affiliated broker-dealers. Please see "How Does the
Fund Buy Securities for Its Portfolio?" in the SAI for more information.
ADMINISTRATIVE SERVICES. FT Services provides certain administrative services
and facilities for the Fund. Under its administration agreement, the Fund pays
FT Services a monthly administration fee equal to an annual rate of 0.15% of the
Fund's average daily net assets up to $200 million, 0.135% of average daily net
assets over $200 million up to $700 million, 0.10% of average daily net assets
over $700 million up to $1.2 billion, and 0.075% of average daily net assets
over $1.2 billion. During the fiscal year ended December 31, 1997,
administration fees totaling 0.08% of the average daily net assets of each
series were paid to FT Services. These fees are included in the amount of total
expenses shown above. Please see "Investment Management and Other Services" in
the SAI for more information.
PRIOR SERVICES. Before November 1, 1996, Heine managed the Fund's assets and
made its investment decisions under separate investment management agreements
that were substantially the same as the management agreement currently in effect
with Franklin Mutual.
HOW DOES THE FUND MEASURE PERFORMANCE?
From time to time, Class Z of the Fund advertises its performance. A commonly
used measure of performance is total return.
Total return is the change in value of an investment over a given period. It
assumes any dividends and capital gains are reinvested.
The investment results of Class Z will vary. Performance figures are always
based on past performance and do not guarantee future results. For a more
detailed description of how the Fund calculates its performance figures, please
see "How Does the Fund Measure Performance?" in the SAI.
HOW TAXATION AFFECTS THE FUND AND ITS SHAREHOLDERS
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.
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TAXATION OF THE FUND'S INVESTMENTS.
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The Fund invests your money in the stocks, HOW DOES THE FUND EARN INCOME AND GAINS?
bonds and other securities that are The Fund earns dividends and interest (the
described in the section "How Does the Fund's "income") on its investments. When
Fund Invest Its Assets?" Special tax the Fund sells a security for a price that is
rules may apply in determining the income higher than it paid, it has a gain. When the
and gains that the Fund earns on its Fund sells a security for a price that is
investments. These rules may, in turn, lower than it paid, it has a loss. If the
affect the amount of distributions that Fund has held the security for more than one
the Fund pays to you. These special tax year, the gain or loss will be a long-term
rules are discussed in the SAI. capital gain or loss. If the Fund has held
the security for one year or less, the gain
TAXATION OF THE FUND. As a regulated or loss will be a short-term capital gain or
investment company, the Fund generally loss. The Fund's gains and losses are netted
pays no federal income tax on the income together, and, if the Fund has a net gain and
gains that it distributes to you. (the Fund's "gains"), that gain will
generally be distributed to you.
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</TABLE>
FOREIGN TAXES. Foreign governments may impose taxes on the income and gains from
the 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.
The Fund may also invest in the securities of foreign companies that are
"passive foreign investment companies" ("PFICs"). These investments in PFICs may
cause the Fund to pay income taxes and interest charges. If possible, the Fund
will adopt strategies to avoid PFIC taxes and interest charges.
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TAXATION OF SHAREHOLDERS.
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DISTRIBUTIONS. Distributions from the WHAT IS A DISTRIBUTION?
Fund, whether you receive them in cash or As a shareholder, you will receive your share
in additional shares, are generally of the Fund's income and gains on its
subject to income tax. The Fund will send investments in stocks, bonds and other
you a statement in January of the current securities. The Fund's income and short term
year that reflects the amount of ordinary capital gains are paid to you as ordinary
dividends, capital gain distributions and dividends. The Fund's long-term capital
non-taxable distributions you received gains are paid to you as capital gain
from the Fund in the prior year. This distributions. If the Fund pays you an
statement will include distributions amount in excess of its income and gains,
declared in December and paid to you in this excess will generally be treated as a
January of the current year, but which are non-taxable distribution. These amounts,
taxable as if paid on December 31 of the taken together, are what we call the Fund's
prior year. The IRS requires you to distributions to you.
report these amounts on your income tax -----------------------------------------------
return for the prior year. The Fund's
statement for the prior year will tell you
how much of your capital gain distribution
represents 28% rate gain. The remainder
of the capital gain distribution
represents 20% rate gain.
</TABLE>
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 the Fund.
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REDEMPTIONS AND EXCHANGES. If you redeem WHAT IS A REDEMPTION?
your shares or if you exchange your shares A redemption is a sale by you to the Fund of
in the Fund for shares in another Franklin some or all of your shares in the Fund. The
Templeton Fund, you will generally have a price per share you receive when you redeem
gain or loss that the IRS requires you to Fund shares may be more or less than the
report on your income tax return. If you price at which you purchased those shares.
hold your shares for six months or less, An exchange of shares in the Fund for shares
any loss you have will be treated as a of another Franklin Templeton Fund is treated
long-term capital loss to the extent of as a redemption of Fund shares and then a
any capital gain distributions received by purchase of shares of the other fund. When
you from the Fund. All or a portion of you redeem or exchange your shares, you will
any loss on the redemption or exchange of generally have a gain or loss, depending upon
your shares will be disallowed by the IRS whether the basis in your shares is more or
if you purchase other shares in the Fund less than your cost or other basis in the
within 30 days before or after your shares. Call Fund Information for a free
redemption or exchange. shareholder Tax Information Handbook if you
need more information in calculating the gain
or loss on the redemption or exchange of your
shares.
-----------------------------------------------
-----------------------------------------------
FOREIGN TAXES. If more than 50% of the WHAT IS A FOREIGN TAX CREDIT?
value of the Fund's assets consist of A foreign tax credit is a tax credit for the
foreign securities, the Fund may elect to amount of taxes imposed by a foreign country
pass-through to you the amount of foreign on earnings of the Fund. When a foreign
taxes it paid. If the Fund makes this company in which the Fund invests pays a
election, your year-end statement will dividend to the Fund, the dividend will
show more taxable income than was actually generally be subject to a withholding tax.
distributed to you. However, you will be The taxes withheld in foreign countries
entitled to either deduct your share of create credits that you may use to offset
such taxes in computing your taxable your U.S. federal income tax.
income or claim a foreign tax credit for ------------------------------------------------
such taxes against your U.S. federal
income tax. Your year-end statement,
showing the amount of deduction or credit
available to you, will be distributed to
you in January along with other
shareholder information records including
your Fund Form 1099-DIV.
</TABLE>
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 IS 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 the 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 the Fund.
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BACKUP WITHHOLDING. When you open an WHAT IS A BACKUP WITHHOLDING?
account, IRS regulations require that you Backup withholding occurs when the Fund is
provide your taxpayer identification required to withhold and pay over to the IRS
number ("TIN"), certify that it is 31% of your distributions and redemption
correct, and certify that you are not proceeds. You can avoid backup withholding
subject to backup withholding under IRS by providing the Fund with your TIN, and by
rules. If you fail to provide a correct completing the tax certifications on your
TIN or the proper tax certifications, the shareholder application that you were asked
Fund is required to withhold 31% of all to sign when you opened your account.
the distributions (including ordinary However, if the IRS instructs the Fund to
dividends and capital gain distributions), begin backup withholding, it is required to
and redemption proceeds paid to you. The do so even if you provided the Fund with your
Fund is also required to begin backup TIN and these tax certifications, and backup
withholding on your account if the IRS withholding will remain in place until the
instructs the Fund to do so. The Fund Fund is instructed by the IRS that it is no
reserves the right not to open your longer required.
account, or, alternatively, to redeem ----------------------------------------------
your shares at the current net asset
value, less any taxes withheld, if
you fail to provide a correct TIN,
fail to provide the proper tax
certifications, or the IRS instructs
the Fund to begin backup withholding
on your account.
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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 IS THE FUND ORGANIZED?
Each Fund is a diversified series of Mutual Series, an open-end management
investment company, commonly called a mutual fund. Mutual Series was organized
as a Maryland corporation on November 12, 1987, and is registered with the SEC.
Each Fund, with the exception of Financial Services, which was not effective
until August 19, 1997, began offering three classes of shares on November 1,
1996: Mutual Shares Fund - Class Z, Mutual Shares Fund - Class I, Mutual Shares
Fund - Class II, Mutual Qualified Fund - Class Z, Mutual Qualified Fund - Class
I, Mutual Qualified Fund - Class II, Mutual Beacon Fund - Class Z, Mutual Beacon
Fund - Class I, Mutual Beacon Fund - Class II, Mutual European Fund - Class Z,
Mutual European Fund Class I, Mutual European Fund - Class II, Mutual Discovery
Fund - Class Z, Mutual Discovery Fund - Class I, and Mutual Discovery Fund -
Class II. All shares outstanding before the offering of Class I and Class II
shares on November 1, 1996, are considered Class Z shares. Financial Services
was created initially with, and offers, three classes of shares: Mutual
Financial Services Fund - Class I, Mutual Financial Services Fund - Class II,
and Mutual Financial Services Fund - Class Z. Additional series and classes of
shares may be offered in the future.
Shares of each class represent proportionate interests in the assets of the Fund
and have the same voting and other rights and preferences as any other class of
the Fund for matters that affect the Fund as a whole. For matters that only
affect one class, however, only shareholders of that class may vote. Each class
will vote separately on matters affecting only that class, or expressly required
to be voted on separately by state or federal law. Shares of each class of a
series have the same voting and other rights and preferences as the other
classes and series of Mutual Series for matters that affect Mutual Series as a
whole.
Mutual Series has noncumulative voting rights. This gives holders of more than
50% of the shares voting the ability to elect all of the members of the Board.
If this happens, holders of the remaining shares voting will not be able to
elect anyone to the Board.
Mutual Series does not intend to hold annual shareholder meetings. Mutual Series
or a Fund may hold special meetings, however, for matters requiring shareholder
approval. A meeting may also be called by the Board in its discretion or by
shareholders holding at least 10% of the outstanding shares. In certain
circumstances, we are required to help you communicate with other shareholders
about the removal of a Board member.
ABOUT YOUR ACCOUNT
HOW DO I BUY SHARES?
OPENING YOUR ACCOUNT
Shares of the Fund may be purchased without a sales charge. Please note that as
of January 1, 1998, shares of the Fund are not available to retirement plans
through Franklin Templeton's ValuSelect(R) program. Retirement plans in Franklin
Templeton's ValuSelect program before January 1, 1998, however, may continue to
invest in the Fund.
To open your account, please follow the steps below. This will help avoid any
delays in processing your request. PLEASE KEEP IN MIND THAT THE FUND DOES NOT
CURRENTLY ALLOW INVESTMENTS BY MARKET TIMERS.
1. Read this prospectus carefully.
2. Determine how much you would like to invest. The Fund's minimum
investments are:
o To open your account: $5,000,000*
o To add to your account: $25*
*We may waive or lower these minimums for certain investors. Please see
"Minimum Investments" below. We also reserve the right to refuse any
order to buy shares.
3. Carefully complete and sign the enclosed shareholder application,
including the optional shareholder privileges section. By applying for
privileges now, you can avoid the delay and inconvenience of having to
send an additional application to add privileges later. It is important
that we receive a signed application since we will not be able to process
any redemptions from your account until we receive your signed
application.
4. Make your investment using the table below.
- ------------------------------------------------------------------------------
METHOD STEPS TO FOLLOW
- ------------------------------------------------------------------------------
BY MAIL For an initial investment:
o Return the application to the Fund with your
check made payable to the Fund.
For additional investments:
o Send a check made payable to the Fund.
Please include your account number on the
check.
- ------------------------------------------------------------------------------
BY PHONE Call the Fund at 1-800/448-FUND before 4:00 p.m. (For additional
Eastern time or the close of the NYSE, whichever is purchases only) earlier.
This privilege is only available to current Fund
shareholders for purchases of at least $1,000. The
purchase also must be for an account with an existing
balance of at least one-half of the telephone
purchase. Please see section 7 of the shareholder
application.
- ------------------------------------------------------------------------------
THROUGH YOUR DEALER Call your investment representative
- -----------------------------------------------------------------------------
MINIMUM INVESTMENTS
- -------------------
To determine if you meet the minimum initial investment requirement of $5
million, the amount of your current purchase is added to the cost or current
value, whichever is higher, of your existing shares in the Franklin Templeton
Funds. At least $1 million of this amount, however, must be invested in Advisor
Class or Class Z shares of any of the Franklin Templeton Funds.
The Fund may waive or lower its minimum investment requirement for certain
purchases. A lower minimum initial investment requirement applies to purchases
by:
1. Existing shareholders of any series as of October 31, 1996, and their
immediate family members residing at the same address, subject to the
other terms and conditions of this prospectus and a $1,000 minimum initial
investment requirement
2. Partnership shareholders who had an account on October 31, 1996, whether
or not they are listed on the registration, subject to a $1,000 minimum
initial investment requirement
3. Corporate shareholders invested in the Fund as of October 31, 1996, using
the same registration, or new companies of such corporate shareholders
that have been reorganized into smaller, independent companies, subject to
a $1,000 minimum initial investment requirement
4. Shareholders who owned shares of the Fund through a broker-dealer or
service agent omnibus account on October 31, 1996, subject to a $1,000
minimum initial investment requirement
5. Employees who owned Fund shares through an employer-sponsored retirement
plan as of October 31, 1996, and who wish to open new individual Class Z
accounts in their own names, subject to a $1,000 minimum initial
investment requirement. The minimum initial investment requirement does
not apply, however, to employees who wish to open new retirement accounts,
including IRAs.
6. Broker-dealers, registered investment advisors or certified financial
planners who have entered into an agreement with Distributors for clients
participating in comprehensive fee programs, subject to a $250,000 minimum
initial investment requirement or a $100,000 minimum initial investment
requirement for an individual client
7. Qualified registered investment advisors or certified financial planners
who have clients invested in the Franklin Mutual Series Fund Inc. on
October 31, 1996, or who buy through a broker-dealer or service agent who
has entered into an agreement with Distributors, subject to a $1,000
minimum initial investment requirement
8. Officers, trustees, directors and full-time employees of the Franklin
Templeton Funds or the Franklin Templeton Group and their immediate family
members, subject to a $100 minimum investment requirement
9. Each series of the Franklin Templeton Fund Allocator Series, investing in
Mutual Shares or Discovery, subject to a $1,000 minimum initial and
subsequent investment requirement
10. Governments, municipalities, and tax-exempt entities that meet the
requirements for qualification under Section 501 of the Code, subject to a
$1 million initial investment in Class Z shares
No minimum initial investment requirement applies to purchases by:
1. Investors buying shares with redemption proceeds from a sale of Class Z
shares of the Fund if reinvested in the same class of shares of any series
within 365 days of the redemption date
2. A direct rollover to an IRA by employees of a company with a non-custodial
pension plan set up as an omnibus account on October 31, 1996
3. Investment companies exchanging shares or selling assets pursuant to a
merger, acquisition, or exchange offer or other business combination
transaction
4. New participants and accounts of employer-sponsored retirement plans
invested in the Fund as of October 31, 1996
5. Accounts managed by the Franklin Templeton Group
6. The Franklin Templeton Profit Sharing 401(k) Plan
7. Defined contribution plans such as employer stock, bonus, pension or
profit sharing plans that meet the requirements for qualification under
Section 401 of the Code, including salary reduction plans qualified under
Section 401(k) of the Code, and that (i) are sponsored by an employer with
at least 10,000 employees, or (ii) have plan assets of $100 million or
more
8. Trust companies and bank trust departments initially investing in the
Franklin Templeton Funds at least $1 million of assets held in a
fiduciary, agency, advisory, custodial or similar capacity and over which
the trust companies and bank trust departments or other plan fiduciaries
or participants, in the case of certain retirement plans, have full or
shared investment discretion
9. Shareholders of the Fund as of October 31, 1996, who wish to open new
retirement accounts, including IRAs
10. Any other investor, including a private investment vehicle such as a
family trust or foundation, who is a member of a qualified group, if the
group as a whole meets the $5 million minimum investment requirement. A
qualified group is one that:
o Was formed at least six months ago,
o Has a purpose other than buying Fund shares at a discount,
o Has more than 10 members,
o Can arrange for meetings between our representatives and group
members,
o Agrees to include Franklin Templeton Fund sales and other materials
in publications and mailings to its members at reduced or no cost to
Distributors,
o Agrees to arrange for payroll deduction or other bulk transmission of
investments to the Fund, and
o Meets other uniform criteria that allow Distributors to achieve cost
savings in distributing shares.
HOW DO I BUY SHARES IN CONNECTION WITH RETIREMENT PLANS?
Your individual or employer-sponsored retirement plan may invest in the Fund.
Plan documents are required for all retirement plans. Trust Company can provide
the plan documents for you and serve as custodian or trustee.
Trust Company can provide you with brochures containing important information
about its plans. To establish a Trust Company retirement plan, you will need an
application other than the one included in this prospectus. For a retirement
plan brochure or application, call Retirement Plan Services.
Please consult your legal, tax or retirement plan specialist before choosing a
retirement plan. Your investment representative or advisor can help you make
investment decisions within your plan.
PAYMENTS TO SECURITIES DEALERS
Securities Dealers who initiate and are responsible for purchases of Class Z
shares may receive up to 0.25% of the amount invested. The payment is subject to
the sole discretion of Distributors, and is paid by Distributors or one of its
affiliates and not by the Fund or its shareholders.
For information on additional compensation payable to Securities Dealers in
connection with the sale of Fund shares, please see "How Do I Buy, Sell and
Exchange Shares? - Other Payments to Securities Dealers" in the SAI.
MAY I EXCHANGE SHARES FOR SHARES OF ANOTHER FUND?
We offer a wide variety of funds. If you would like, you can move your
investment from your Fund account to an existing or new account in another
Franklin Templeton Fund (an "exchange"). Because it is technically a sale and a
purchase of shares, an exchange is a taxable transaction.
Before making an exchange, please read the prospectus of the fund you are
interested in. This will help you learn about the fund, its investment objective
and policies, and its rules and requirements for exchanges. For example, some
Franklin Templeton Funds do not accept exchanges and some do not offer Class Z
or Advisor Class shares.
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METHOD STEPS TO FOLLOW
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BY MAIL 1. Send us 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.
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THROUGH YOUR DEALER Call your investment representative
- ------------------------------------------------------------------------------
Please refer to "Transaction Procedures and Special Requirements" for other
important information on how to exchange shares.
EXCHANGE RESTRICTIONS
Please be aware that the following restrictions apply to exchanges:
You may only exchange shares within the SAME CLASS, except as noted below.
o The accounts must be identically registered. You may, however, exchange
shares from a Fund account requiring two or more signatures into an
identically registered money fund account requiring only one signature for
all transactions. PLEASE NOTIFY US IN WRITING IF YOU DO NOT WANT THIS
OPTION TO BE AVAILABLE ON YOUR ACCOUNT. Additional procedures may apply.
Please see "Transaction Procedures and Special Requirements."
o Trust Company IRA or 403(b) retirement plan accounts may exchange shares
as described above. Restrictions may apply to other types of retirement
plans. Please contact Retirement Plan Services for information on
exchanges within these plans.
o The fund you are exchanging into must be eligible for sale in your state.
o We may modify or discontinue our exchange policy if we give you 60 days'
written notice.
o Currently, the Fund does not allow investments by Market Timers.
o Mutual Series Class Z shareholders of record on October 31, 1996, and
others who would not qualify to buy Class I shares of Franklin Templeton
Funds at Net Asset Value, may exchange their shares for Class I shares at
Net Asset Value of other Franklin Templeton Funds, as permitted by each
fund's current prospectus, provided those shares have been held at least
six consecutive months in any one Fund prior to the exchange.
Because excessive trading can hurt Fund performance, operations and
shareholders, we may refuse any exchange purchase if (i) we believe the Fund
would be harmed or unable to invest effectively, or (ii) the Fund receives or
anticipates simultaneous orders that may significantly affect the Fund.
LIMITED EXCHANGES BETWEEN DIFFERENT CLASSES OF SHARES
If you 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 do not qualify to buy Advisor Class shares of Templeton
Developing Markets Trust, Templeton Foreign Fund or Templeton Growth Fund, you
may exchange the Class Z shares you own for Class I shares of those funds or of
Templeton Institutional Funds, Inc. at Net Asset Value. If you do so and you
later decide you would like to exchange into a fund that offers a Class Z or
Advisor Class, you may exchange your Class I shares for Class Z or Advisor Class
shares of that fund.
HOW DO I SELL SHARES?
You may sell (redeem) your shares at any time.
- ------------------------------------------------------------------------------
METHOD STEPS TO FOLLOW
- ------------------------------------------------------------------------------
BY MAIL 1. Send us 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 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.
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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.
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THROUGH YOUR DEALER Call your investment representative
- ------------------------------------------------------------------------------
We will send your redemption check within seven days after we receive your
request in proper form. If you would like the check sent to an address other
than the address of record or made payable to someone other than the registered
owners on the account, send us written instructions signed by all account
owners, with a signature guarantee. We are not able to receive or pay out cash
in the form of currency.
The wiring of redemption proceeds is a special service that we make available
whenever possible for redemption requests of $1,000 or more. If we receive your
request in proper form before 1:00 p.m. Pacific time, your wire payment will be
sent the next business day. For requests received in proper form after 1:00 p.m.
Pacific time, the payment will be sent the second business day. By offering this
service to you, the Fund is not bound to meet any redemption request in less
than the seven day period prescribed by law. Neither the Fund nor its agents
shall be liable to you or any other person if, for any reason, a redemption
request by wire is not processed as described in this section.
If you sell shares you recently purchased with a check or draft, we may delay
sending you the proceeds for up to 15 days or more to allow the check or draft
to clear. A certified or cashier's check may clear in less time.
Under unusual circumstances, we may suspend redemptions or postpone payment for
more than seven days as permitted by federal securities law.
Please refer to "Transaction Procedures and Special Requirements" for other
important information on how to sell shares.
TRUST COMPANY RETIREMENT PLAN ACCOUNTS
To comply with IRS regulations, you need to complete additional forms before
selling shares in a Trust Company retirement plan account. Tax penalties
generally apply to any distribution from these plans to a participant under age
59 1/2, unless the distribution meets an exception stated in the Code. To obtain
the necessary forms, please call Retirement Plan Services.
WHAT DISTRIBUTIONS MIGHT I RECEIVE FROM THE FUND?
The Fund declares dividends from its net investment income semi-annually. The
distributions are frequently declared at mid-year and during late December.
Capital gains, if any, may be distributed twice a year, usually once in December
and once at mid-year.
Dividend payments are not guaranteed, are subject to the Board's discretion and
may vary with each payment. THE FUND DOES NOT PAY "INTEREST" OR GUARANTEE ANY
FIXED RATE OF RETURN ON AN INVESTMENT IN ITS SHARES.
If you buy shares shortly before the record date, please keep in mind that any
distribution will lower the value of the Fund's shares by the amount of the
distribution and you will then receive a portion of the price you paid back in
the form of a taxable distribution.
DISTRIBUTION OPTIONS
You may receive your distributions from the Fund in any of these ways:
1. BUY ADDITIONAL SHARES OF THE FUND - You may buy additional shares of the same
class of the Fund by reinvesting capital gain distributions, or both dividend
and capital gain distributions. This is a convenient way to accumulate
additional shares and maintain or increase your earnings base.
2. BUY SHARES OF OTHER FRANKLIN TEMPLETON FUNDS - You may direct your
distributions to buy the Advisor Class of another Franklin Templeton Fund. You
may also direct your distributions to buy Class I shares of another Franklin
Templeton Fund. Many shareholders find this a convenient way to diversify their
investments.
3. RECEIVE DISTRIBUTIONS IN CASH - You may receive dividends, or both dividend
and capital gain distributions, in cash. If you have the money sent to another
person or to a checking account, you may need a signature guarantee.
TO SELECT ONE OF THESE OPTIONS, PLEASE COMPLETE SECTIONS 6 AND 7 OF THE
SHAREHOLDER APPLICATION INCLUDED WITH THIS PROSPECTUS OR TELL YOUR INVESTMENT
REPRESENTATIVE WHICH OPTION YOU PREFER. IF YOU DO NOT SELECT AN OPTION, WE WILL
AUTOMATICALLY REINVEST DIVIDEND AND CAPITAL GAIN DISTRIBUTIONS IN THE SAME CLASS
OF THE FUND. You may change your distribution option at any time by notifying us
by mail or phone. Please allow at least seven days before the record date for us
to process the new option. For Trust Company retirement plans, special forms are
required to receive distributions in cash.
TRANSACTION PROCEDURES AND SPECIAL REQUIREMENTS
SHARE PRICE
You buy and sell Class Z shares at the Net Asset Value per share. The Net Asset
Value we use when you buy or sell shares is the one next calculated after we
receive your transaction request in proper form. If you buy or sell shares
through your Securities Dealer, however, we will use the Net Asset Value next
calculated after your Securities Dealer receives your request, which is promptly
transmitted to the Fund. Your redemption proceeds will not earn interest between
the time we receive the order from your dealer and the time we receive any
required documents.
HOW AND WHEN SHARES ARE PRICED
The Fund is open for business each day the NYSE is open. We determine the Net
Asset Value per share as of the 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. The 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 Fund. 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 $300, or $100 for IRA
accounts. We will only do this if the value of your account fell below this
amount because you voluntarily sold your shares and your account has been
inactive (except for the reinvestment of distributions) for at least six months.
Before we close your account, we will notify you and give you 30 days to
increase the value of your account to $300, or $100 for IRA accounts. These
minimums do not apply if you fall within categories 12, 13, 14 or 15 under "How
Do I Buy Shares? - Opening Your Account."
SERVICES TO HELP YOU MANAGE YOUR ACCOUNT
AUTOMATIC INVESTMENT PLAN
Our automatic investment plan offers a convenient way to invest in the Fund.
Under the plan, you can have money transferred automatically from your checking
account to the Fund each month to buy additional shares. If you are interested
in this program, please refer to the shareholder application included with this
prospectus or contact your investment representative. The market value of the
Fund's shares may fluctuate and a systematic investment plan such as this will
not assure a profit or protect against a loss. You may discontinue the program
at any time by notifying Investor Services by mail or phone.
SYSTEMATIC WITHDRAWAL PLAN
Our systematic withdrawal plan allows you to sell your shares and receive
regular payments from your account on a monthly, quarterly, semiannual or annual
basis. The value of your account must be at least $5,000 and the minimum payment
amount for each withdrawal must be at least $50. For retirement plans subject to
mandatory distribution requirements, the $50 minimum will not apply.
If you would like to establish a systematic withdrawal plan, please complete the
systematic withdrawal plan section of the shareholder application included with
this prospectus and indicate how you would like to receive your payments. You
may choose to direct your payments to buy the same class of shares of another
Franklin Templeton Fund or have the money sent directly to you, to another
person, or to a checking account. Once your plan is established, any
distributions paid by the Fund will be automatically reinvested in your account.
You will generally receive your payment by the end of the month in which a
payment is scheduled. When you sell your shares under a systematic withdrawal
plan, it is a taxable transaction.
You may discontinue a systematic withdrawal plan, change the amount and schedule
of withdrawal payments, or suspend one payment by notifying us in writing at
least seven business days before the end of the month preceding a scheduled
payment. Please see "How Do I Buy, Sell and Exchange Shares? - Systematic
Withdrawal Plan" in the SAI for more information.
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 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 Fund will be sent every six months. To reduce
Fund expenses, we attempt to identify related shareholders within a
household and send only one copy of a report. Call Fund Information if
you would like an additional free copy of the Fund's financial reports.
INSTITUTIONAL ACCOUNTS
Additional methods of buying, selling or exchanging shares of the Fund may be
available to institutional accounts. Institutional investors may also be
required to complete an institutional account application. For more information,
call Institutional Services.
AVAILABILITY OF THESE SERVICES
The services above are available to most shareholders. If, however, your shares
are held by a financial institution, in a street name account, or networked
through the NSCC, the Fund may not be able to offer these services directly to
you. Please contact your investment representative.
WHAT IF I HAVE QUESTIONS ABOUT MY ACCOUNT?
If you have any questions about your account, you may write to Investor Services
at P.O. Box 997151, Sacramento, California 95899-9983. The Fund and Franklin
Mutual are located at 51 John F. Kennedy Parkway, Short Hills, New Jersey 07078.
Distributors is located at 777 Mariners Island Blvd., San Mateo, California
94403-7777. You may also contact us by phone at one of the numbers listed below.
HOURS OF OPERATION
(PACIFIC TIME)
DEPARTMENT NAME TELEPHONE NO. (MONDAY THROUGH FRIDAY)
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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 the Fund
CD - Certificate of deposit
CLASS I, CLASS II AND CLASS Z - The Fund offers three classes of shares,
designated "Class I," "Class II," and "Class Z." The three classes have
proportionate interests in the Fund's portfolio. They differ, however, primarily
in their sales charge and expense structures.
CODE - Internal Revenue Code of 1986, as amended
DISTRIBUTORS - Franklin/Templeton Distributors, Inc., the Fund's principal
underwriter. The SAI lists the officers and Board members who are affiliated
with Distributors. See "Officers and Directors."
FRANKLIN MUTUAL - Franklin Mutual Advisers, Inc., the Fund's investment manager
FRANKLIN TEMPLETON FUNDS - The U.S. registered mutual funds in the Franklin
Group of Funds(R) and the Templeton Group of Funds except Franklin Valuemark
Funds, Templeton Capital Accumulator Fund, Inc., Templeton Variable Annuity
Fund, and Templeton Variable Products Series Fund
FRANKLIN TEMPLETON GROUP - Franklin Resources, Inc., a publicly owned holding
company, and its various subsidiaries
FRANKLIN TEMPLETON GROUP OF FUNDS - All U.S. registered investment companies in
the Franklin Group of Funds(R) and the Templeton Group of Funds
FT SERVICES - Franklin Templeton Services, Inc., the Fund's administrator
HEINE - Heine Securities Corporation, the Fund's former investment manager that
was acquired by Resources on October 31, 1996
INVESTOR SERVICES - Franklin/Templeton Investor Services, Inc., the Fund's
shareholder servicing and transfer agent
IRS - Internal Revenue Service
MARKET TIMERS - Market Timers generally include market timing or asset
allocation services, accounts administered so as to buy, sell or exchange shares
based on predetermined market indicators, or any person or group whose
transactions seem to follow a timing pattern or whose transactions include
frequent or large exchanges.
MOODY'S - Moody's Investors Service, Inc.
NASD - National Association of Securities Dealers, Inc.
NET ASSET VALUE (NAV) - The value of a mutual fund is determined by deducting
the fund's liabilities from the total assets of the portfolio. The net asset
value per share is determined by dividing the net asset value of the fund by the
number of shares outstanding.
NSCC - National Securities Clearing Corporation
NYSE - New York Stock Exchange
RESOURCES - Franklin Resources, Inc.
SAI - Statement of Additional Information
S&P - Standard & Poor's Corporation
SEC - U.S. Securities and Exchange Commission
SECURITIES DEALER - A financial institution that, either directly or through
affiliates, has an agreement with Distributors to handle customer orders and
accounts with the Fund. This reference is for convenience only and does not
indicate a legal conclusion of capacity.
TELEFACTS(R) - Franklin Templeton's automated customer servicing system
TRUST COMPANY - Franklin Templeton Trust Company. Trust Company is an affiliate
of Distributors and both are wholly owned subsidiaries of Resources.
U.S. - United States
WE/OUR/US - Unless the context indicates a different meaning, these terms refer
to the Fund and/or Investor Services, Distributors, or other wholly owned
subsidiaries of Resources.
FRANKLIN MUTUAL SERIES FUND INC.
STATEMENT OF ADDITIONAL INFORMATION
MAY 1, 1998
51 JOHN F. KENNEDY PARKWAY
SHORT HILLS, NJ 07078
1-800/DIAL BEN
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TABLE OF CONTENTS
How Does the Fund Invest Its Assets? ...............
Restrictions and Limitations .......................
Officers and Directors .............................
Investment Management
and Other Services ................................
How Does the Fund Buy
Securities for Its Portfolio? .....................
How Do I Buy, Sell and Exchange Shares? ............
How Are Fund Shares Valued? ........................
Additional Information on
Distributions and Taxes............................
The Fund's Underwriter..............................
How Does the Fund
Measure Performance? ..............................
Miscellaneous Information ..........................
Financial Statements ...............................
Useful Terms and Definitions .......................
- -----------------------------------------------------------------------------
When reading this SAI, you will see certain terms beginning with capital
letters. This means the term is explained under "Useful Terms and
Definitions."
- -----------------------------------------------------------------------------
Mutual Shares Fund ("Mutual Shares"), Mutual Qualified Fund ("Qualified"),
Mutual Beacon Fund ("Beacon"), Mutual Discovery Fund ("Discovery"), Mutual
European Fund ("European") and Mutual Financial Services Fund ("Financial
Services") are diversified series of Franklin Mutual Series Fund Inc. ("Mutual
Series"), an open-end management investment company. Each series may
individually or together be referred to as the "Fund(s)." The principal
investment objective of Mutual Shares, Qualified, Beacon, European and Financial
Services is capital appreciation, which may occasionally be short-term. A
secondary objective of each is income. Discovery's investment objective is
long-term capital appreciation.
The Prospectus, dated May 1, 1998, as may be amended from time to time, contains
the basic information you should know before investing in the Fund. For a free
copy, call 1-800/DIAL BEN.
This SAI describes the Fund's Class I and Class II shares. The Fund currently
offers another class of shares with a different sales charge and expense
structure, which affects performance. This class is described in a separate SAI
and prospectus. For more information, contact your investment representative or
call 1-800/DIAL BEN.
THIS SAI IS NOT A PROSPECTUS. IT CONTAINS INFORMATION IN ADDITION TO AND IN MORE
DETAIL THAN SET FORTH IN THE PROSPECTUS. THIS SAI IS INTENDED TO PROVIDE YOU
WITH ADDITIONAL INFORMATION REGARDING THE ACTIVITIES AND OPERATIONS OF THE FUND,
AND SHOULD BE READ IN CONJUNCTION WITH THE PROSPECTUS.
- ----------------------------------------------------------------------------
MUTUAL FUNDS, ANNUITIES, AND OTHER INVESTMENT PRODUCTS:
o ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION,
THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY OF THE U.S. GOVERNMENT;
o ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY, ANY
BANK;
o ARE SUBJECT TO INVESTMENT RISKS, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.
- ------------------------------------------------------------------------------
HOW DOES THE FUND INVEST ITS ASSETS?
- -------------------------------------
The following provides more detailed information about some of the securities
the Fund may buy and its investment policies. You should read it together with
the section in the Prospectus entitled "How Does the Fund Invest Its Assets?"
The general investment policy of the Fund is to invest in securities if, in the
opinion of Franklin Mutual, they are available at prices less than their
intrinsic value, as determined by Franklin Mutual after careful analysis and
research, taking into account, among other factors, the relationship of book
value to market value of the securities, cash flow, and multiples of earnings of
comparable securities. The Fund reserves freedom of action to invest in common
stock, preferred stock, debt securities and other securities in such proportions
as Franklin Mutual deems advisable. Without committing any fixed portion of the
Fund's assets, Franklin Mutual typically maintains a portion of the assets of
the Fund invested in debt securities and preferred stocks (which may be
convertible). In addition, the Fund may also invest in restricted debt and
equity securities, in foreign securities, and in other investment company
securities.
REPURCHASE AGREEMENTS AND LOANS OF SECURITIES
The Fund may invest in repurchase agreements with domestic banks or
broker-dealers. Repurchase agreements are considered loans by the Fund
collateralized by the underlying securities. As with loans of portfolio
securities which the Fund may make, these transactions must be fully
collateralized at all times. Franklin Mutual will monitor the creditworthiness
of the other party and will monitor the value of the collateral by marking to
market daily in order to confirm that its value is at least 100% of the agreed
upon sum to be paid to the Fund.
Repurchase agreements and lending of portfolio securities involve some credit
risk to the Fund. If the other party defaults on its obligations, the Fund could
be delayed or prevented from receiving payment or recovering its collateral.
Even if the Fund recovers the collateral in such a situation, the Fund may
receive less than its purchase price upon resale.
GENERAL CHARACTERISTICS OF OPTIONS
Put options and call options typically have similar structural characteristics
and operational mechanics regardless of the underlying instrument on which they
are purchased or sold. Thus, the following general discussion relates to each of
the particular types of options discussed in greater detail below. In addition,
many hedging transactions involving options require segregation of Fund assets
in special accounts, as described below under "Use of Segregated and Other
Special Accounts."
A put option gives the purchaser of the option, upon payment of a premium, the
right to sell, and the seller of the option, the obligation to buy, the
underlying security, commodity, index, currency or other instrument at the
exercise price. For instance, the Fund's purchase of a put option on a security
might be designed to protect its holdings in the underlying instrument (or, in
some cases, a similar instrument) against a substantial decline in the market
value by giving the Fund the right to sell such instrument at the option
exercise price. A call option, upon payment of a premium, gives the purchaser of
the option the right to buy, and the seller the obligation to sell, the
underlying instrument at the exercise price. The Fund's purchase of a call
option on a security, financial future, index, currency or other instrument
might be intended to protect the Fund against an increase in the price of the
underlying instrument that it intends to purchase in the future by fixing the
price at which it may purchase such instrument.
An American style put or call option may be exercised at any time during the
option period while a European style put or call option may be exercised only
upon expiration or during a fixed period prior thereto. The Fund is authorized
to purchase and sell exchange-listed options and over-the-counter options ("OTC
options"). Exchange-listed options are issued by a regulated intermediary such
as the Options Clearing Corporation ("OCC"), which guarantees the performance of
the obligations of the parties to such options. The discussion below uses the
OCC as a paradigm, but is also applicable to other financial intermediaries.
With certain exceptions, OCC-issued and exchange-listed options generally settle
by physical delivery of the underlying security or currency, although in the
future cash settlement may become available. Index options and Eurodollar
instruments are cash settled for the net amount, if any, by which the option is
"in-the-money" (i.e., where the value of the underlying instrument exceeds, in
the case of a call option, or is less than, in the case of a put option, the
exercise price of the option) at the time the option is exercised. Frequently,
rather than taking or making delivery of the underlying instrument through the
process of exercising the option, listed options are closed by entering into
offsetting option transactions.
The Fund's ability to close out its position as a purchaser or seller of an OCC
or exchange-listed put or call option is dependent, in part, upon the liquidity
of the option market. Among the possible reasons for the absence of a liquid
option market on an exchange are: (i) insufficient trading interest in certain
options; (ii) restrictions on transactions imposed by an exchange; (iii) trading
halts, suspensions or other restrictions imposed with respect to particular
classes or series of options or underlying securities including reaching daily
price limits; (iv) interruption of the normal operations of the OCC or an
exchange; (v) inadequacy of the facilities of an exchange or OCC to handle
current trading volume; or (vi) a decision by one or more exchanges to
discontinue the trading of options (or a particular class or series of options),
in which event the relevant market for that option on that exchange would cease
to exist, although outstanding options on that exchange would generally continue
to be exercisable in accordance with their terms.
The hours of trading for listed options may not coincide with the hours during
which the underlying financial instruments are traded. To the extent that the
option markets close before the markets for the underlying financial
instruments, significant price and rate movements can take place in the
underlying markets that cannot be reflected in the option markets.
OTC options are purchased from or sold to securities dealers, financial
institutions or other parties (each a "Counterparty," and collectively,
"Counterparties") through direct bilateral agreement with the Counterparty. In
contrast to exchange-listed options, which generally have standardized terms and
performance mechanics, all the terms of an OTC option, including such terms as
method of settlement, term, exercise price, premium, guarantees and security,
are set by negotiation of the parties. The Fund will only sell OTC options
(other than OTC currency options) that are subject to a buy-back provision
permitting the Fund to require the Counterparty to sell the option back to the
Fund at a formula price within seven days. The Fund expects generally to enter
into OTC options that have cash settlement provisions, although it is not
required to do so.
Unless the parties provide for it, there is no central clearing or guaranty
function in an OTC option. As a result, if the Counterparty fails to make or
take delivery of the security, currency or other instrument underlying an OTC
option it has entered into with the Fund or fails to make a cash settlement
payment due in accordance with the option, the Fund will lose any premium it
paid for the option as well as any anticipated benefit of the transaction.
Accordingly, Franklin Mutual must assess the creditworthiness of each such
Counterparty or any guarantor or credit enhancement of the Counterparty's credit
to determine the likelihood that the terms of the OTC option will be satisfied.
The Fund will engage in OTC option transactions only with U.S. government
securities dealers recognized by the Federal Reserve Bank of New York as
"primary dealers" or broker-dealers, domestic or foreign banks or other
financial institutions which have received (or the guarantors of the obligations
of which have received) a short-term credit rating of "A-l" from S&P or "P-l"
from Moody's, an equivalent rating from any nationally recognized statistical
rating organization ("NRSRO") or which Franklin Mutual determines is of
comparable credit quality. The staff of the SEC currently takes the position
that OTC options purchased by the Fund, and portfolio securities "covering" the
amount of the Fund's obligation pursuant to an OTC option sold by it (the cost
of the sell-back plus the in-the-money amount, if any) are illiquid, and are
subject to the Fund's limitations on investments in illiquid securities.
If the Fund sells a call option, the premium that it receives may serve as a
partial hedge, to the extent of the option premium, against a decrease in the
value of the underlying securities or instruments in its portfolio or will
increase the Fund's income. The sale of put options can also provide income.
The Fund may purchase and sell call options on securities, including U.S.
Treasury and agency securities, mortgage-backed securities, corporate debt
securities, equity securities (including convertible securities) and Eurodollar
instruments that are traded on U.S. and foreign securities exchanges and in the
over-the-counter markets and on securities indices, currencies and futures
contracts. All calls sold by the Fund must be "covered" (i.e., the Fund must own
the securities or futures contract subject to the call) or must meet the asset
segregation requirements described below as long as the call is outstanding.
Even though the Fund will receive the option premium to help protect it against
loss, a call sold by the Fund exposes the Fund during the term of the option to
possible loss of opportunity to realize appreciation in the market price of the
underlying security or instrument and may require the Fund to hold a security or
instrument which it might otherwise have sold.
The Fund may purchase and sell put options on securities including U.S. Treasury
and agency securities, mortgage-backed securities, corporate debt securities,
equity securities (including convertible securities) and Eurodollar instruments
(whether or not it holds the above securities in its portfolio) and on
securities indices, currencies and futures contracts other than futures on
individual corporate debt and individual equity securities. The Fund will not
sell put options if, as a result, more than 50% of the Fund's assets would be
required to be segregated to cover its potential obligations under such put
options other than those with respect to futures and options thereon. In selling
put options, there is a risk that the Fund may be required to buy the underlying
security at a disadvantageous price above the market price.
GENERAL CHARACTERISTICS OF FUTURES
The Fund may enter into financial futures contracts or purchase or sell put and
call options on such futures as a hedge against anticipated interest rate,
currency or equity market changes, for duration management and for risk
management purposes. Futures are generally bought and sold on the commodities
exchanges where they are listed with payment of initial and variation margin as
described below. The sale of a futures contract creates a firm obligation by the
Fund, as seller, to deliver to the buyer the specific type of financial
instrument called for in the contract at a specific future time for a specified
price (or, with respect to index futures and Eurodollar instruments, the net
cash amount). Options on futures contracts are similar to options on securities
except that an option on a futures contract gives the purchaser the right in
return for the premium paid to assume a position in a futures contract and
obligates the seller to deliver such option.
The Fund's use of financial futures and options thereon will in all cases be
consistent with applicable regulatory requirements and in particular the rules
and regulations of the Commodity Futures Trading Commission and will be entered
into only for a bona fide hedging, risk management (including duration
management) or other portfolio management purposes. Typically, maintaining a
futures contract or selling an option thereon requires the Fund to deposit with
a financial intermediary as security for its obligations an amount of cash or
other specified assets ("initial margin") which initially is typically 1% to 10%
of the face amount of the contract (but may be higher in some circumstances).
Additional cash or assets ("variation margin") may be required to be deposited
thereafter on a daily basis as the mark-to-market value of the contract
fluctuates. The purchase of an option on financial futures involves payment of a
premium for the option without any further obligation on the part of the Fund.
If the Fund exercises an option on a futures contract, it will be obligated to
post initial margin (and potential subsequent variation margin) for the
resulting futures positions just as it would for any position. Futures contracts
and options thereon are generally settled by entering into an offsetting
transaction, but there can be no assurance that the position can be offset prior
to settlement at an advantageous price nor that delivery will occur.
The Fund will not enter into a futures contract or related option (except for
closing transactions) if, immediately thereafter, the sum of the amount of its
initial margin and premiums on open futures contracts and options thereon would
exceed 5% of the Fund's total assets (taken at current value); however, in the
case of an option that is in-the-money at the time of the purchase, the
in-the-money amount may be excluded in calculating the 5% limitation. The
segregation requirements with respect to futures contracts and options thereon
are described below.
OPTIONS ON SECURITIES INDICES AND OTHER FINANCIAL INDICES
The Fund may also purchase and sell call and put options on securities indices
and other financial indices and in so doing can achieve many of the same
objectives it would achieve through the sale or purchase of options on
individual securities or other instruments. Options on securities indices and
other financial indices are similar to options on a security or other instrument
except that, rather than settling by physical delivery of the underlying
instrument, they settle by cash settlement, i.e., an option on an index gives
the holder the right to receive, upon exercise of the option, an amount of cash
if the closing level of the index upon which the option is based exceeds, in the
case of a call, or is less than, in the case of a put, the exercise price of the
option (except if, in the case of an OTC option, physical delivery is
specified). This amount of cash is equal to the excess of the closing price of
the index over the exercise price of the option, which also may be multiplied by
a formula value. The seller of the option is obligated, in return for the
premium received, to make delivery of this amount. The gain or loss on an index
depends on price movements in the instruments making up the market, market
segment, industry or other composite on which the underlying index is based,
rather than price movements in individual securities, as is the case with
respect to options on securities.
CURRENCY TRANSACTIONS
The Fund may engage in currency transactions with Counterparties in order to
hedge the value of portfolio holdings denominated in particular currencies
against fluctuations in relative value between those currencies and the U.S.
dollar. Currency transactions include forward currency contracts,
exchange-listed currency futures, exchange-listed and OTC options on currencies,
and currency swaps. A forward currency contract involves a privately negotiated
obligation to purchase or sell (with delivery generally required) a specific
currency at a future date, which may be any fixed number of days from the date
of the contract agreed upon by the parties, at a price set at the time of the
contract. A currency swap is an agreement to exchange cash flows on a notional
amount of two or more currencies based on the relative value differential among
them.
The Fund will usually enter into swaps on a net basis, i.e., the two payment
streams are netted out in a cash settlement on the payment date or dates
specified in the instrument, with the Fund receiving or paying, as the case may
be, only the net amount of the two payments. Inasmuch as these swaps are entered
into for good faith hedging purposes, Franklin Mutual and the Fund believe such
obligations do not constitute senior securities under the 1940 Act and,
accordingly, will not treat them as being subject to its borrowing restrictions.
The Fund may enter into currency transactions with Counterparties which have
received (or the guarantors of the obligations of such Counterparties have
received) a credit rating of A-l or P-l by S&P or Moody's, respectively, or that
have an equivalent rating from an NRSRO or are determined to be of equivalent
credit quality by Franklin Mutual. If there is a default by the Counterparty,
the Fund may have contractual remedies pursuant to the agreements related to the
transaction. The swap market has grown substantially in recent years with a
large number of banks and investment banking firms acting both as principals and
as agents utilizing standardized swap documentation. As a result, the swap
market has become relatively liquid.
The Fund's dealings in forward currency contracts and other currency
transactions such as futures, options, options on futures and swaps will be
limited to either specific transactions or portfolio positions. Transaction
hedging is entering into a currency transaction with respect to specific assets
or liabilities of the Fund, which will generally arise in connection with the
purchase or sale of its portfolio securities or the receipt of income therefrom.
Position hedging is entering into a currency transaction with respect to
portfolio security positions denominated or generally quoted in that currency.
The Fund will not enter into a transaction to hedge currency exposure to an
extent greater, after netting all transactions intended to wholly or partially
offset other transactions, than the aggregate market value (at the time of
entering into the transaction) of the securities held in its portfolio that are
denominated or generally quoted in or whose value is based upon such foreign
currency or currently convertible into such currency other than with respect to
proxy hedging as described below.
The Fund may also cross-hedge currencies by entering into transactions to
purchase or sell one or more currencies that are expected to decline in value
relative to other currencies to which the Fund has or in which the Fund expects
to have portfolio exposure.
To reduce the effect of currency fluctuations on the value of existing or
anticipated holdings of portfolio securities, the Fund may also engage in proxy
hedging. Proxy hedging is often used when the currency to which the Fund's
portfolio is exposed is difficult to hedge or to hedge against the U.S. dollar.
Proxy hedging entails entering into a forward contract to sell a currency whose
changes in value are generally considered to be linked to a currency or
currencies in which some or all of the Fund's portfolio securities are or are
expected to be denominated, and to buy U.S. dollars. The amount of the contract
would not exceed the value of the Fund's securities denominated in linked
currencies. For example, if Franklin Mutual considers the Austrian schilling to
be linked to the German deutsche mark (the "D-mark"), the Fund holds securities
denominated in schillings and Franklin Mutual believes that the value of
schillings will decline against the U.S. dollar, Franklin Mutual may enter into
a contract to sell D-marks and buy dollars. Currency hedging involves some of
the same risks and considerations as other transactions with similar
instruments. Currency transactions can result in losses to the Fund if the
currency being hedged fluctuates in value to a degree or in a direction that is
not anticipated. Further, there is the risk that the perceived linkage between
various currencies may not be present during the particular time that the Fund
is engaging in proxy hedging. If the Fund enters into a currency hedging
transaction, the Fund will comply with the asset segregation requirements
described below.
RISKS OF CURRENCY TRANSACTIONS
Currency transactions are subject to risks different from those of other
portfolio transactions. Because currency control is of great importance to the
issuing governments and influences economic planning and policy, purchases and
sales of currency and related instruments can be negatively affected by
government exchange controls, blockages, and manipulations or exchange
restrictions imposed by governments. These can result in losses to the Fund if
it is unable to deliver or receive currency or funds in settlement of
obligations and could also cause hedges it has entered into to be rendered
useless, resulting in full currency exposure as well as incurring transaction
costs. Buyers and sellers of currency futures are subject to the same risks that
apply to the use of futures generally. Further, settlement of a currency futures
contract for the purchase of most currencies must occur at a bank based in the
issuing nation. Trading options on currency futures is relatively new, and the
ability to establish and close out positions on such options is subject to the
maintenance of a liquid market which may not always be available. Currency
exchange rates may fluctuate based on factors extrinsic to that country's
economy.
COMBINED TRANSACTIONS
The Fund may enter into multiple transactions, including multiple options
transactions, multiple futures transactions, multiple currency transactions
(including forward currency contracts) and any combination of futures, options
and currency transactions ("component transactions"), instead of a single
hedging transaction, as part of a single or combined strategy when, in the
opinion of Franklin Mutual, it is in the best interests of the Fund to do so. A
combined transaction will usually contain elements of risk that are present in
each of its component transactions. Although combined transactions are normally
entered into based on Franklin Mutual's judgment that the combined strategies
will reduce risk or otherwise more effectively achieve the desired portfolio
management goal, it is possible that the combination will instead increase such
risks or hinder achievement of the portfolio management objective.
RISKS OF HEDGING TRANSACTIONS OUTSIDE THE U.S.
When conducted outside the U.S., hedging transactions may not be regulated as
rigorously as in the U.S., may not involve a clearing mechanism and related
guarantees, and are subject to the risk of governmental actions affecting
trading in, or the prices of, foreign securities, currencies and other
instruments. The value of such positions also could be adversely affected by:
(i) other complex foreign political, legal and economic factors, (ii) lesser
availability than in the U.S. of data on which to make trading decisions, (iii)
delays in the Fund's ability to act upon economic events occurring in foreign
markets during nonbusiness hours in the U.S., (iv) the imposition of different
exercise and settlement terms and procedures and margin requirements than in the
U.S., and (v) lower trading volume and liquidity.
USE OF SEGREGATED AND OTHER SPECIAL ACCOUNTS
Many hedging transactions, in addition to other requirements, require that the
Fund segregate liquid high grade assets with its custodian bank to the extent
Fund obligations are not otherwise "covered" through ownership of the underlying
security, financial instrument or currency. In general, either the full amount
of any obligation by the Fund to pay or deliver securities or assets must be
covered at all times by the securities, instruments or currency required to be
delivered, or, subject to any regulatory restrictions, an amount of cash or
liquid high grade securities at least equal to the current amount of the
obligation must be segregated with the custodian bank. The segregated assets
cannot be sold or transferred unless equivalent assets are substituted in their
place or it is no longer necessary to segregate them. For example, a call option
written by the Fund will require the Fund to hold the securities subject to the
call (or securities convertible into the needed securities without additional
consideration) or to segregate liquid high grade securities sufficient to
purchase and deliver the securities if the call is exercised. A call option sold
by the Fund on an index will require the Fund to own portfolio securities which
correlate with the index or to segregate liquid high grade assets equal to the
excess of the index value over the exercise price on a current basis. A put
option written by the Fund requires the Fund to segregate liquid high grade
assets equal to the exercise price.
A currency contract which obligates the Fund to buy or sell currency will
generally require the Fund to hold an amount of the currency or liquid
securities denominated in that currency equal to the Fund's obligations or to
segregate liquid high grade assets equal to the amount of the Fund's obligation.
However, the segregation requirement does not apply to currency contracts which
are entered in order to "lock in" the purchase or sale price of a trade in a
security denominated in a foreign currency pending settlement within the time
customary for such securities.
OTC options entered into by the Fund, including those on securities, currency,
financial instruments or indices and OCC-issued and exchange-listed index
options will generally provide for cash settlement. As a result, when the Fund
sells these instruments it will only segregate an amount of assets equal to its
accrued net obligations, as there is no requirement for payment or delivery of
amounts in excess of the net amount. These amounts will equal 100% of the
exercise price in the case of a noncash settled put, the same as an OCC
guaranteed listed option sold by the Fund, or the in-the-money amount plus any
sell-back formula amount in the case of a cash-settled put or call. In addition,
when the Fund sells a call option on an index at a time when the in-the-money
amount exceeds the exercise price, the Fund will segregate, until the option
expires or is closed out, cash or cash equivalents equal in value to such
excess. OCC-issued and exchange-listed options sold by the Fund other than those
above generally settle with physical delivery, or with an election of either
physical delivery or cash settlement, and the Fund will segregate an amount of
assets equal to the full value of the option. OTC options settling with physical
delivery, or with an election of either physical delivery or cash settlement,
will be treated the same as other options settling with physical delivery.
In the case of a futures contract or an option thereon, the Fund must deposit
initial margin and possible daily variation margin in addition to segregating
assets sufficient to meet its obligation to purchase or provide securities or
currencies, or to pay the amount owed at the expiration of an index-based
futures contract. Such assets may consist of cash, cash equivalents, liquid debt
or equity securities or other acceptable assets.
Hedging transactions may be covered by other means when consistent with
applicable regulatory policies. The Fund may also enter into offsetting
transactions so that its combined position, coupled with any segregated assets,
equals its net outstanding obligation in related options and hedging
transactions. For example, the Fund could purchase a put option if the strike
price of that option is the same or higher than the strike price of a put option
sold by the Fund. Moreover, instead of segregating assets if the Fund held a
futures or forward contract, it could purchase a put option on the same futures
or forward contract with a strike price as high or higher than the price of the
contract held. Other hedging transactions may also be offset in combinations. If
the offsetting transaction terminates at the time of or after the primary
transaction, no segregation is required, but if it terminates prior to such
time, assets equal to any remaining obligation would need to be segregated.
DEPOSITARY RECEIPTS
The Fund may invest in securities commonly known as American Depositary Receipts
("ADRs"), and in European Depositary Receipts ("EDRs") or other securities
representing interests in securities of foreign issuers. ADRs are certificates
issued by a U.S. bank or trust company and represent the right to receive
securities of a foreign issuer deposited in a domestic bank or foreign branch of
a U.S. bank and traded on a U.S. exchange or in an over-the-counter market. EDRs
are receipts issued in Europe generally by a non-U.S. bank or trust company that
evidence ownership of non-U.S. or domestic securities. Generally, ADRs are in
registered form and EDRs are in bearer form. There are no fees imposed on the
purchase or sale of ADRs or EDRs although the issuing bank or trust company may
impose charges for the collection of dividends and the conversion of ADRs and
EDRs into the underlying securities. Investment in ADRs has certain advantages
over direct investment in the underlying non-U.S. securities, since: (i) ADRs
are U.S. dollar denominated investments which are easily transferable and for
which market quotations are readily available and (ii) issuers whose securities
are represented by ADRs are subject to the same auditing, accounting and
financial reporting standards as domestic issuers. EDRs are not necessarily
denominated in the currency of the underlying security.
MEDIUM AND LOWER RATED
CORPORATE DEBT SECURITIES
The Fund may invest in securities that are rated in the medium to lowest rating
categories by S&P and Moody's, some of which may be so-called "junk bonds." The
Fund has historically invested in securities of distressed issuers when the
intrinsic values of such securities have, in the opinion of Franklin Mutual,
warranted such investment. Corporate debt securities rated Baa are regarded by
Moody's as being neither highly protected nor poorly secured. Interest payments
and principal security appears adequate to Moody's for the present, but certain
protective elements may be lacking or may be characteristically unreliable over
any great length of time. Such securities are regarded by Moody's as lacking
outstanding investment characteristics and having speculative characteristics.
Corporate debt securities rated BBB are regarded by S&P as having adequate
capacity to pay interest and repay principal. Such securities are regarded by
S&P as normally exhibiting adequate protection parameters, although adverse
economic conditions or changing circumstances are more likely to lead to a
weakened capacity to pay interest and repay principal for securities in this
rating category than in higher rated categories.
Corporate debt securities which are rated B are regarded by Moody's as generally
lacking characteristics of the desirable investment. In Moody's view, assurance
of interest and principal payments or of maintenance of other terms of the
security over any long period of time may be small. Corporate debt securities
rated BB, B, CCC, CC and C are regarded by S&P on balance as predominantly
speculative with respect to capacity to pay interest and repay principal in
accordance with the terms of the obligation. In S&P's view, although such
securities likely have some quality and protective characteristics, these are
outweighed by large uncertainties or major risk exposures to adverse conditions.
BB and B are regarded by S&P as indicating the two lowest degrees of speculation
in this group of ratings. Securities rated D by S&P or C by Moody's are in
default and are not currently performing. The Fund will rely on Franklin
Mutual's judgment, analysis and experience in evaluating such debt securities.
In this evaluation, Franklin Mutual will take into consideration, among other
things, the issuer's financial resources, its sensitivity to economic conditions
and trends, its operating history, the quality of the issuer's management and
regulatory matters as well as the price of the security. Franklin Mutual may
also consider, although it does not rely primarily on, the credit ratings of
Moody's and S&P in evaluating lower rated corporate debt securities. Such
ratings evaluate only the safety of principal and interest payments, not market
value risk. Additionally, because the creditworthiness of an issuer may change
more rapidly than is able to be timely reflected in changes in credit ratings,
Franklin Mutual monitors the issuers of corporate debt securities held in the
Fund's portfolio. The credit rating assigned to a security is a factor
considered by Franklin Mutual in selecting a security for a series, but the
intrinsic value in light of market conditions and Franklin Mutual's analysis of
the fundamental values underlying the issuer are of at least equal significance.
Because of the nature of medium and lower rated corporate debt securities,
achievement by each series of its investment objective when investing in such
securities is dependent on the credit analysis of Franklin Mutual. If the Fund
purchased primarily higher rated debt securities, such risks would be
substantially reduced.
A general economic downturn or a significant increase in interest rates could
severely disrupt the market for medium and lower grade corporate debt securities
and adversely affect the market value of such securities. Securities in default
are relatively unaffected by such events or by changes in prevailing interest
rates. In addition, in such circumstances, the ability of issuers of medium and
lower grade corporate debt securities to repay principal and to pay interest, to
meet projected business goals and to obtain additional financing may be
adversely affected. Such consequences could lead to an increased incidence of
default for such securities and adversely affect the value of the corporate debt
securities in the Fund's portfolio. The secondary market prices of medium and
lower grade corporate debt securities are less sensitive to changes in interest
rates than are higher rated debt securities, but are more sensitive to adverse
economic changes or individual corporate developments. Adverse publicity and
investor perceptions, whether or not based on rational analysis, may also affect
the value and liquidity of medium and lower grade corporate debt securities,
although such factors also present investment opportunities when prices fall
below intrinsic values. Yields on debt securities in a series' portfolio that
are interest rate sensitive can be expected to fluctuate over time. In addition,
periods of economic uncertainty and changes in interest rates can be expected to
result in increased volatility of market price of any medium to lower grade
corporate debt securities in the Fund's portfolio and thus could have an effect
on the Net Asset Value of the Fund if other types of securities did not show
offsetting changes in values. The secondary market value of corporate debt
securities structured as zero coupon securities or payment in kind securities
may be more volatile in response to changes in interest rates than debt
securities which pay interest periodically in cash. Because such securities do
not pay current interest, but rather, income is accreted, to the extent that a
series does not have available cash to meet distribution requirements with
respect to such income, it could be required to dispose of portfolio securities
that it otherwise would not. Such disposition could be at a disadvantageous
price. Failure to satisfy distribution requirements could result in the Fund
failing to qualify as a pass-through entity under the Code. Investment in such
securities also involves certain other tax considerations.
Franklin Mutual values the Fund's investments pursuant to guidelines adopted and
periodically reviewed by the Board. See "How Are Fund Shares Valued?" in this
SAI. To the extent that there is no established retail market for some of the
medium or low grade corporate debt securities in which the Fund may invest,
there may be thin or no trading in such securities and the ability of Franklin
Mutual to accurately value such securities may be adversely affected. Further,
it may be more difficult for a Fund to sell such securities in a timely manner
and at their stated value than would be the case for securities for which an
established retail market did exist. The effects of adverse publicity and
investor perceptions may be more pronounced for securities for which no
established retail market exists as compared with the effects on securities for
which such a market does exist. During periods of reduced market liquidity and
in the absence of readily available market quotations for medium and lower grade
corporate debt securities held in the Fund's portfolio, the responsibility of
Franklin Mutual to value the Fund's securities becomes more difficult and
Franklin Mutual's judgment may play a greater role in the valuation of the
Fund's securities due to a reduced availability of reliable objective data. To
the extent that the Fund purchases illiquid corporate debt securities or
securities which are restricted as to resale, the Fund may incur additional
risks and costs. Illiquid and restricted securities may be particularly
difficult to value and their disposition may require greater effort and expense
than more liquid securities. Further, a Fund may be required to incur costs in
connection with the registration of restricted securities in order to dispose of
such securities, although under Rule 144A under the Securities Act of 1933
certain securities may be determined to be liquid pursuant to procedures adopted
by the Board under applicable guidelines.
SHORT SALES
The Fund may make short sales of securities. A short sale is a transaction in
which the Fund sells a security it does not own in anticipation that the market
price of that security will decline. Each Fund expects to make short sales as a
form of hedging to offset potential declines in long positions in similar
securities, in order to maintain portfolio flexibility and for profit.
When a Fund makes a short sale, it must borrow the security sold short and
deliver it to the broker-dealer through which it made the short sale as
collateral for its obligation to deliver the security upon conclusion of the
sale. The Fund may have to pay a fee to borrow particular securities and is
often obligated to pay over any payments received on such borrowed securities.
The Fund's obligation to replace the borrowed security will be secured by
collateral deposited with the broker-dealer, usually cash, U.S. government
securities or other high grade liquid securities similar to those borrowed. The
Fund will also be required to deposit similar collateral with its custodian to
the extent, if any, necessary so that the value of both collateral deposits in
the aggregate is at all times equal to at least 100% of the current market value
of the security sold short.
If the price of the security sold short increases between the time of the short
sale and the time the Fund replaces the borrowed security, the Fund will incur a
loss; conversely, if the price declines, the Fund will realize a gain. Any gain
will be decreased, and any loss increased, by the transaction costs described
above. Although the Fund's gain is limited to the price at which it sold the
security short, its potential loss is theoretically unlimited.
The Fund will not make a short sale if, after giving effect to such sale, the
market value of all securities sold short exceeds 5% of the value of its total
assets or the Fund's aggregate short sales of a particular class of securities
exceeds 25% of the outstanding securities of that class. The Fund may also make
short sales "against the box" without respect to such limitations. In this type
of short sale, at the time of the sale, the Fund owns or has the immediate and
unconditional right to acquire at no additional cost the identical security.
SPECIAL CONSIDERATIONS RELATED TO SECURITIES IN THE FINANCIAL SERVICES INDUSTRY
Certain provisions of the federal securities laws permit investment portfolios,
including Financial Services, to invest in companies engaged in
securities-related activities only if certain conditions are met. Purchase of
securities of a company that derived 15% or less of gross revenues during its
most recent fiscal year from securities-related activities (i.e., broker,
dealer, underwriting, or investment advisory activities) are subject only to the
same percentage limitations as would apply to any other security a Fund may
purchase. Each Fund, including Financial Services, may purchase securities (not
limited to equity or debt individually) of an issuer that derived more than 15%
of its gross revenues in its most recent fiscal year from securities-related
activities, subject to the following conditions:
a. the purchase cannot cause more than 5% of the Fund's total assets to be
invested in securities of that issuer;
b. for an equity security, the purchase cannot result in the Fund owning more
than 5% of the issuer's outstanding securities in that class;
c. for a debt security, the purchase cannot result in the Fund owning more
than 10% of the outstanding principal amount of the issuer's debt
securities.
In applying the gross revenue test, an issuer's own securities-related
activities must be combined with its ratable share of securities-related
revenues from enterprises in which it owns a 20% or greater voting or equity
interest. All of the above percentage limitations, as well as the issuer's gross
revenue test, are applicable at the time of purchase. With respect to warrants,
rights, and convertible securities, a determination of compliance with the above
limitations must be made as though such warrant, right, or conversion privilege
had been exercised.
The following transactions would not be deemed to be an acquisition of
securities of a securities-related business: (i) receipt of stock dividends on
securities acquired in compliance with the conditions described above; (ii)
receipt of securities arising from a stock-for-stock split on securities
acquired in compliance with the conditions described above; (iii) exercise of
options, warrants, or rights acquired in compliance with the federal securities
laws; (iv) conversion of convertible securities acquired in compliance with the
conditions described above; (v) the acquisition of puts under certain
circumstances.
The Funds also are not permitted to acquire any security issued by Franklin
Mutual or any affiliated company (including Resources) that is a
securities-related business. The purchase of a general partnership interest in a
securities-related business is also prohibited.
In addition, the Funds are generally prohibited from purchasing or otherwise
acquiring any security (not limited to equity or debt individually) issued by
any insurance company if such Fund and any company controlled by such Fund own
in the aggregate or, as a result of the purchase, will own in the aggregate more
than 10% of the total outstanding voting stock of the insurance company. Certain
state insurance laws impose similar limitations.
RESTRICTIONS AND LIMITATIONS
- -------------------------------
Mutual Shares, Qualified, Beacon, Discovery, European and Financial Services,
except as noted, have each adopted the following fundamental investment
restrictions which may not be changed without the affirmative vote of the
holders of a majority of the outstanding voting securities of such series, which
means the lesser of (1) the holders of more than 50% of the outstanding shares
of voting stock of such securities or (2) 67% of the shares if more than 50% of
the shares are present at a meeting of shareholders in person or by proxy.
Unless otherwise noted, all percentage restrictions are as of the time of
investment after giving effect to the transaction. Pursuant to such restrictions
each series MAY NOT:
1. Purchase or sell commodities, commodity contracts (except in conformity with
regulations of the Commodities Futures Trading Commission such that the series
would not be considered a commodity pool), or oil and gas interests or real
estate. Securities or other instruments backed by commodities are not considered
commodities or commodity contracts for purposes of this restriction. Debt or
equity securities issued by companies engaged in the oil, gas, or real estate
businesses are not considered oil or gas interests or real estate for purposes
of this restriction. First mortgage loans and other direct obligations secured
by real estate are not considered real estate for purposes of this restriction.
2. Make loans, except to the extent the purchase of debt obligations of any
type are considered loans and except that the series may lend portfolio
securities to qualified institutional investors in compliance with requirements
established from time to time by the SEC and the securities exchanges on which
such securities are traded.
3. Issue securities senior to its stock or borrow money or utilize leverage in
excess of the maximum permitted by the 1940 Act which is currently 33 1/3% of
total assets (plus 5% for emergency or other short-term purposes) from banks on
a temporary basis from time to time to provide greater liquidity for redemptions
or for special circumstances.
4. Invest more than 25% of the value of its assets in a particular industry
(except that U.S. government securities are not considered an industry and
except that Financial Services will invest more than 25% of its assets in the
financial services industry).
5. Act as an underwriter except to the extent the series may be deemed to be an
underwriter when disposing of securities it owns or when selling its own shares.
6. Purchase the securities of any one issuer, other than the U.S. government or
any of its agencies or instrumentalities, if immediately after such purchase
more than 5% of the value of its total assets would be invested in such issuer,
or such series would own more than 10% of the outstanding voting securities of
such issuer, except that up to 25% of the value of such series' total assets may
be invested without regard to such 5% and 10% limitations.
7. Except as may be described in the Prospectus, engage in short sales,
purchase securities on margin or maintain a net short position.
If a percentage restriction is met at the time of investment, a later increase
or decrease in the percentage due to a change in the value or liquidity of
portfolio securities or the amount of assets will not be considered a violation
of any of the foregoing restrictions.
NONFUNDAMENTAL POLICIES
The following policies apply to all Funds with the exception of Financial
Services.
As a matter of policy that is not fundamental, no Fund will invest more than 5%
of its assets in warrants, and that no more than 2% of such assets may be
invested in warrants which are not listed on the NYSE or American Stock
Exchange. Also, as a matter of policy, the Fund will not purchase securities for
purposes of short term trading and will not invest more than 5% of its assets in
securities of issuers (together with any predecessors) in existence for less
than three years, provided that the aggregate percentage of assets invested in
such issuers, combined with illiquid investments, does not exceed 15%. The Fund
will not purchase the securities of any issuer of which any officer or director
of the Fund owns more than 1/2 of 1% of the outstanding securities or in which
the officers and directors in the aggregate own more than 5%. The Fund does not
borrow for leveraging purposes.
In order to permit the sale of shares in certain states, the Fund may make
commitments more restrictive than the operating restrictions described above.
Should the Fund determine that any such commitment is no longer in the best
interests of a particular series and its shareholders, the Fund will revoke the
commitment by terminating sales of such Fund's shares in the state involved.
OFFICERS AND DIRECTORS
- ----------------------------
The Board has the responsibility for the overall management of the Fund,
including general supervision and review of its investment activities. The
Board, in turn, elects the officers of the Fund who are responsible for
administering the Fund's day-to-day operations. The affiliations of the officers
and Board members and their principal occupations for the past five years are
shown below. Members of the Board who are considered "interested persons" of the
Fund under the 1940 Act are indicated by an asterisk (*).
POSITIONS AND OFFICES PRINCIPAL OCCUPATION
NAME, AGE AND ADDRESS WITH MUTUAL SERIES DURING THE PAST FIVE YEARS
- ------------------------------------------------------------------------------
Edward I. Altman, Ph.D. (56)
New York University
44 West 4th Street
New York, NY 10012
Director
Max L. Heine Professor of Financing and Vice Director, NYU Salomon Center, Stern
School of Business, New York University; editor and author of numerous financial
publications; and financial consultant.
Ann Torre Grant (40)
2369 N. Danville Street
Arlington, VA 22207
Director
Independent Director for SLM Holding Corporation (Sallie Mae), Manor Care
Realty, Inc. (nursing care companies) and condor Technology Solutions, Inc.
(information technology consulting); independent strategic and financial
consultant; from February 1995 until its sale in December 1997, was Executive
Vice President and Chief Financial Officer, NHP Incorporated (manager of
multifamily housing); prior to February 1995, was Vice President and Treasurer,
U.S. Air.
Andrew H. Hines, Jr. (75)
150 2nd Avenue N.
St. Petersburg, FL 33701
Director
Consultant for the Triangle Consulting Group; Executive-in-Residence of Eckerd
College (1991-present); formerly, Chairman of the Board and Chief Executive
Officer of Florida Progress Corporation (1982-1990) and director of various of
its subsidiaries; and director or trustee, as the case may be, of 24 of the
investment companies in the Franklin Templeton Group of Funds.
*Peter A. Langerman (42)
51 John F. Kennedy Pkwy.
Short Hills, NJ 07078
Executive Vice President and Director
Chief Operating Officer and Senior Vice President of Franklin Mutual Advisers,
Inc.; Director of Sunbeam Oster and Lancer Industries; Manager (Director) of MB
Motori, L.L.C. and MWCR, L.L.C.; and formerly, employee of Heine Securities
Corporation, June 1986 to October 1996.
*William J. Lippman (73)
One Parker Plaza
Fort Lee, NJ 07024
Director
Senior Vice President, Franklin Resources, Inc. and Franklin Management, Inc.;
President and Director, Franklin Advisory Services, Inc.; and officer and/or
director or trustee, as the case may be, of six of the investment companies in
the Franklin Templeton Group of Funds.
Bruce A. MacPherson (68)
1 Pequot Way
Canton, MA 02021
Director
Chairman of A.A. MacPherson, Inc. Boston, MA (representative for electrical
manufacturers).
Fred R. Millsaps (69)
2665 NE 37th Drive
Fort Lauderdale, FL 33394
Director
Manager of personal investments (1978-present); director of various business and
nonprofit organizations; formerly, Chairman and Chief Executive Officer of
Landmark Banking Corporation (1969-1978), Financial Vice President of Florida
Power and Light (1965-1969) and Vice President of the Federal Reserve Bank of
Atlanta (1958-1965); and director or trustee, as the case may be, of 24 of the
investment companies in the Franklin Templeton Group of Funds.
*Michael F. Price (46)
51 John F. Kennedy Pkwy.
Short Hills, NJ 07078
Chief Executive Officer and President
President, Chief Executive Officer, and Director of Franklin Mutual Advisers,
Inc.; Principal Executive Officer and majority owner of Compliance Solutions,
Inc. (developer of compliance monitoring software for money managers); Director
and owner of Clearwater Securities, Inc. (registered securities dealer); and
formerly, President, Chief Executive Officer, and Director of Heine Securities
Corporation, January 1987 to October 1996.
Leonard Rubin (72)
2 Executive Drive
Suite 560
Fort Lee, NJ 07024
Director
Partner in LDR Equities, LLC (manages various personal investments); Vice
President, Trimtex Co., Inc. (manufactures and markets specialty fabrics); and
trustee or director, as the case may be, of three of the investment companies in
the Franklin Templeton Group of Funds.
Barry F. Schwartz (49)
35 East 62nd Street
New York, NY 10021
Director
Executive Vice President and General Counsel, MacAndrews & Forbes Holdings, Inc.
(a diversified holding company).
Vaughn R. Sturtevant, M.D. (74)
6 Noyes Avenue
Waterville, ME 04901
Director
Practicing physician.
Robert E. Wade (52)
225 Hardwick Street
Belvidere, NJ 07823
Director
Practicing attorney.
Jeffrey A. Altman (31)
51 John F. Kennedy Pkwy.
Short Hills, NJ 07078
Vice President
Senior Vice President of Franklin Mutual Advisers, Inc.; Manager (Director), MB
Metropolis, L.L.C.; Manager (Director) of MB Motori, L.L.C., MWCR, L.L.C. and
S.H. Mortgage Acquisition, L.L.C.; Trustee of Resurgence Properties, Inc.; and
Chairman of the Board of Trustees, Value Property Trust; and formerly, employee
of Heine Securities Corporation, August 1988 to October 1996.
James R. Baio (44)
500 East Broward Blvd.
Fort Lauderdale, FL 33701
Treasurer
Certified Public Accountant; Treasurer, Franklin Mutual Advisers, Inc.; Senior
Vice President, Templeton Worldwide, Inc., Templeton Global Investors, Inc. and
Templeton Funds Trust Company; formerly, Senior Tax Manager for Ernst & Young
(certified public accountants) (1977-1989); and officer of 24 of the investment
companies in the Franklin Templeton Group of Funds.
Elizabeth N. Cohernour (48)
51 John F. Kennedy Pkwy.
Short Hills, NJ 07078
General Counsel and Secretary
Vice President, General Counsel and Assistant Secretary of Franklin Mutual
Advisers, Inc.; Secretary and General Counsel of Compliance Solutions, Inc.
(developer of compliance monitoring software for money managers and Clearwater
Securities, Inc. (registered securities dealer); and formerly, Secretary and
General Counsel of Heine Securities Corporation, May 1988 to October 1996.
Robert L. Friedman (38)
51 John F. Kennedy Pkwy.
Short Hills, NJ 07078
Vice President
Senior Vice President of Franklin Mutual Advisers, Inc.; and formerly, employee
of Heine Securities Corporation, August 1988 to October 1996.
Raymond Garea (48)
51 John F. Kennedy Pkwy.
Short Hills, NJ 07078
Vice President
Senior Vice President of Franklin Mutual Advisers, Inc.; and formerly, employee
of Heine Securities Corporation, March 1991 to October 1996; prior thereto, Vice
President and Analyst with Donaldson, Lufkin & Jenrette; Manager (Director), MB
Metropolis, L.L.C. and S.H. Mortgage Acquisition.
Lawrence N. Sondike (40)
51 John F. Kennedy Pkwy.
Short Hills, NJ 07078
Vice President
Senior Vice President of Franklin Mutual Advisers, Inc.; and formerly, employee
of Heine Securities Corporation, March 1984 to October 1996.
The Fund's independent Board members have standing audit, pension, nominating
and director's compensation and performance committees. The audit committee is
composed of Ms. Grant and Messrs. Altman and Wade. The pension committee is
composed of Messrs. Altman, Schwartz and Sturtevant. The nominating committee is
responsible for nominating candidates for independent Board member positions and
is composed of Messrs. MacPherson and Schwartz. The Board members' compensation
and performance committee is composed of Ms. Grant and Messrs. Wade and
Sturtevant.
The table above shows the officers and Board members who are affiliated with
Distributors and Franklin Mutual. Nonaffiliated members of the Board are
currently paid $45,000 per year plus $2,000 per meeting attended. Board members
are paid $500 plus out-of-pocket expenses for each committee meeting attended.
In 1993, the Board members approved a retirement plan which generally provides
payments to directors who have served 7 years and retire at age 70. At the time
of retirement, Directors are entitled to annual payments equal to one-half of
the retainer in effect as of the time of retirement. As shown above, some of the
nonaffiliated Board members also serve as directors or trustees of other
investment companies in the Franklin Templeton Group of Funds. They may receive
fees from these funds for their services. The following table provides the total
fees paid to nonaffiliated Board members by Mutual Series and by other funds in
the Franklin Templeton Group of Funds.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------
TOTAL FEES NUMBER OF BOARDS
RECEIVED FROM IN THE FRANKLIN
TOTAL FEES PENSION ANNUAL THE FRANKLIN TEMPLETON GROUP
RECEIVED FROM RETIREMENT BENEFITS TEMPLETON GROUP OF FUNDS ON WHICH
NAME MUTUAL SERIES* ACCRUED RETIREMENT OF FUNDS** EACH SERVES***
- -------------------------------------------------------------------------------
Edward I. Altman.......$23,250 0 $22,500 $ 23,250 1
Ann Torre Grant+.......$24,000 0 $22,500 $ 24,000 1
Bruce A. MacPherson....$18,500 0 $22,500 $ 18,500 1
Barry F. Schwartz+.....$18,000 0 $22,500 $ 18,000 1
Vaughn R.
Sturtevant, M.D. ......$17,750 0 $22,500 $ 17,750 1
Robert E. Wade+........$28,500 0 $22,500 $ 28,500 1
Andrew H. Hines, Jr.+ $18,500 0 $22,500 $144,175 24
Fred R. Millsaps+......$18,500 0 $22,500 $144,175 24
Leonard Rubin+.........$18,500 0 $22,500 $ 40,400 3
+Not vested in retirement plan
*For the fiscal year ended December 31, 1997.
**For the calendar year ended December 31, 1997.
***We base the number of boards on the number of registered investment companies
in the Franklin Templeton Group of Funds. This number does not include the total
number of series or funds within each investment company for which the Board
members are responsible. The Franklin Templeton Group of Funds currently
includes 57 registered investment companies, with approximately 170 U.S. based
funds or series.
</TABLE>
Nonaffiliated members of the Board are reimbursed for expenses incurred in
connection with attending board meetings, paid pro rata by each fund in the
Franklin Templeton Group of Funds for which they serve as director or trustee.
No officer or Board member received any other compensation, including pension or
retirement benefits, directly or indirectly from the Fund or other funds in the
Franklin Templeton Group of Funds. Certain officers or Board members who are
shareholders of Resources may be deemed to receive indirect remuneration by
virtue of their participation, if any, in the fees paid to its subsidiaries.
As of February 2, 1998, the officers and Board members, as a group, owned of
record and beneficially the following shares of Mutual Series: 270,955.590
shares of Mutual Shares - Class Z; 119,485.602 shares of Qualified - Class Z;
161,795.585 shares of Beacon - Class Z; 176,912.438 shares of Discovery - Class
Z; or less than 1% of the total outstanding Class Z shares of each of those
Funds. As of February 2, 1998, the officers and Board members as a group, owned
of record and beneficially 8,489,585.730 shares of European - Class Z and
123,541.206 shares of Financial Services - Class Z or 19.76% and 1.00%,
respectively, of the total outstanding Class Z shares of European and Financial
Services. Some of the Board members also own shares in other funds in the
Franklin Templeton Group of Funds.
INVESTMENT MANAGEMENT AND OTHER SERVICES
- -----------------------------------------------------------------------------
INVESTMENT MANAGER AND SERVICES PROVIDED. The Fund's investment manager is
Franklin Mutual. On October 31, 1996, pursuant to an agreement between Resources
and Heine Securities, Inc. ("Heine"), the assets of Heine were transferred to
Franklin Mutual and Mutual Series Fund Inc.'s name was changed to Franklin
Mutual Series Fund Inc.
Franklin Mutual provides investment research and portfolio management services,
including the selection of securities for the Fund to buy, hold or sell and the
selection of brokers through whom the Fund's portfolio transactions are
executed. Franklin Mutual's activities are subject to the review and supervision
of the Board to whom Franklin Mutual renders periodic reports of the Fund's
investment activities. Franklin Mutual and its officers, directors and employees
are covered by fidelity insurance for the protection of the Fund.
Franklin Mutual and its affiliates act as investment manager to numerous other
investment companies and accounts. Franklin Mutual may give advice and take
action with respect to any of the other funds it manages, or for its own
account, that may differ from action taken by Franklin Mutual on behalf of the
Fund. Similarly, with respect to the Fund, Franklin Mutual is not obligated to
recommend, buy or sell, or to refrain from recommending, buying or selling any
security that Franklin Mutual and access persons, as defined by the 1940 Act,
may buy or sell for its or their own account or for the accounts of any other
fund. Franklin Mutual is not obligated to refrain from investing in securities
held by the Fund or other funds that it manages. Of course, any transactions for
the accounts of Franklin Mutual and other access persons will be made in
compliance with the Fund's Code of Ethics. Please see "Miscellaneous Information
- - Summary of Code of Ethics."
MANAGEMENT FEES. For the fiscal years ended December 31, 1995, 1996 and 1997,
management fees, before any advance waiver, totaled $27,500,952, $35,687,092,
and $48,600,626, respectively, for Mutual Shares; $14,607,723, $22,515,334, and
$31,224,924, respectively, for Qualified; $17,720,127, $26,083,112, and
$36,299,616, respectively, for Beacon; $7,930,967, $17,795,530, and $33,584,048,
respectively, for Discovery. For the fiscal years ended December 31, 1996 and
1997, management fees, before any advance waiver totaled $949,616 and $5,372,334
for European. For the period August 19, 1997, to December 31, 1997, management
fees, before any advance waiver totaled $419,994 for Financial Services. Under
an agreement by Franklin Mutual to limit its fees for the fiscal years ended
December 31, 1996 and 1997, the Funds paid management fees totaling $34,719,646
and $46,093,507 for Mutual Shares; $21,439,007 and $29,584,910 for Qualified;
$25,260,160 and $34,477,321 for Beacon; $17,154,254 and $32,685,124 for
Discovery; and $876,464 and $5,167,675 for European. Under an agreement by
Financial Services to limit its fees for the period August 19, 1997 to December
31, 1997, the Fund paid management fees totaling $92,762. For the fiscal year
ended December 31, 1995, the investment manager did not waive or limit its fees.
MANAGEMENT AGREEMENT. The management agreement for all Funds except Financial
Services is in effect until [June 30, 1998]. The management agreement for
Financial Services is in effect until June 30, 1999. They may continue in effect
for successive annual periods if their continuance is specifically approved at
least annually by a vote of the Board or by a vote of the holders of a majority
of the Fund's outstanding voting securities, and in either event by a majority
vote of the Board members who are not parties to the management agreement or
interested persons of any such party (other than as members of the Board), cast
in person at a meeting called for that purpose. The management agreement may be
terminated without penalty at any time by the Board or by a vote of the holders
of a majority of the Fund's outstanding voting securities on 60 days' written
notice to Franklin Mutual, or by Franklin Mutual on 60 days' written notice to
the Fund, and will automatically terminate in the event of its assignment, as
defined in the 1940 Act.
ADMINISTRATIVE SERVICES. FT Services provides certain administrative services
and facilities for the Fund. These include preparing and maintaining books,
records, and tax and financial reports, and monitoring compliance with
regulatory requirements. FT Services is a wholly owned subsidiary of Resources.
During the fiscal year ended December 31, 1997, and for the two-month period
ended December 31, 1996, administration fees totaling $6,267,404 and $840,707
for Mutual Shares, $4,026,600 and $553,904 for Qualified, $4,682,986 and
$634,856 for Beacon, $3,248,131 and $380,772 for Discovery, and $519,493 and
$57,060 for European, respectively, were paid to FT Services. For the period
August 19, 1997 to December 31, 1997, administration fees totaling $40,704 were
paid to FT Services for Financial Services.
SHAREHOLDER SERVICING AGENT. Investor Services, a wholly owned subsidiary of
Resources, is the Fund's shareholder servicing agent and acts as the Fund's
transfer agent and dividend-paying agent. Investor Services is compensated on
the basis of a fixed fee per account. The Fund may also reimburse Investor
Services for certain out-of-pocket expenses, which may include payments by
Investor Services to entities, including affiliated entities, that provide
sub-shareholder services, recordkeeping and/or transfer agency services to
beneficial owners of the Fund. The amount of reimbursements for these services
per benefit plan participant Fund account per year may not exceed the per
account fee payable by the Fund to Investor Services in connection with
maintaining shareholder accounts.
CUSTODIAN. State Street Bank and Trust Company, 225 Franklin Street, Boston, MA
02110, acts as custodian of the securities and other assets of the Fund. The
custodian does not participate in decisions relating to the purchase and sale of
portfolio securities.
AUDITORS. Ernst & Young LLP, 200 Clarendon Street, Boston, MA 02116, are the
Fund's independent auditors. During the fiscal year ended December 31, 1997,
their auditing services consisted of rendering an opinion on the financial
statements of the Fund included in the Fund's Annual Report to Shareholders for
the fiscal year ended December 31, 1997.
HOW DOES THE FUND BUY
SECURITIES FOR ITS PORTFOLIO?
- -----------------------------------------------------------------------------
Franklin Mutual selects brokers and dealers to execute the Fund's portfolio
transactions in accordance with criteria set forth in the management agreement
and any directions that the Board may give.
When placing a portfolio transaction, Franklin Mutual seeks to obtain prompt
execution of orders at the most favorable net price. For portfolio transactions
on a securities exchange, the amount of commission paid by the Fund is
negotiated between Franklin Mutual and the broker executing the transaction. The
determination and evaluation of the reasonableness of the brokerage commissions
paid are based to a large degree on the professional opinions of the persons
responsible for placement and review of the transactions. These opinions are
based on the experience of these individuals in the securities industry and
information available to them about the level of commissions being paid by other
institutional investors of comparable size. Franklin Mutual will ordinarily
place orders to buy and sell over-the-counter securities on a principal rather
than agency basis with a principal market maker unless, in the opinion of
Franklin Mutual, a better price and execution can otherwise be obtained.
Purchases of portfolio securities from underwriters will include a commission or
concession paid by the issuer to the underwriter, and purchases from dealers
will include a spread between the bid and ask price.
Franklin Mutual may pay certain brokers commissions that are higher than those
another broker may charge, if Franklin Mutual determines in good faith that the
amount paid is reasonable in relation to the value of the brokerage and research
services it receives. This may be viewed in terms of either the particular
transaction or Franklin Mutual's overall responsibilities to client accounts
over which it exercises investment discretion. The services that brokers may
provide to Franklin Mutual include, among others, supplying information about
particular companies, markets, countries, or local, regional, national or
transnational economies, statistical data, quotations and other securities
pricing information, and other information that provides lawful and appropriate
assistance to Franklin Mutual in carrying out its investment advisory
responsibilities. These services may not always directly benefit the Fund. They
must, however, be of value to Franklin Mutual in carrying out its overall
responsibilities to its clients.
It is not always possible to place a precise dollar value on the special
executions or on the research services Franklin Mutual receives from dealers
effecting transactions in portfolio securities. The allocation of transactions
in order to obtain additional research services permits Franklin Mutual to
supplement its own research and analysis activities and to receive the views and
information of individuals and research staffs of other securities firms. As
long as it is lawful and appropriate to do so, Franklin Mutual and its
affiliates may use this research and data in their investment advisory
capacities with other clients. If the Fund's officers are satisfied that the
best execution is obtained, the sale of Fund shares, as well as shares of other
funds in the Franklin Templeton Group of Funds, may also be considered a factor
in the selection of broker-dealers to execute the Fund's portfolio transactions.
Because Distributors is a member of the NASD, it may sometimes receive certain
fees when the Fund tenders portfolio securities pursuant to a tender-offer
solicitation. As a means of recapturing brokerage for the benefit of the Fund,
any portfolio securities tendered by the Fund may be tendered through
Distributors if it is legally permissible and Franklin Mutual believes it would
be in the best interests of the Fund to do so. In turn, the next management fee
payable to Franklin Mutual will be reduced by the amount of any fees received by
Distributors in cash, less any costs and expenses incurred in connection with
the tender.
If purchases or sales of securities of the Fund and one or more other investment
companies or clients supervised by Franklin Mutual are considered at or about
the same time, transactions in these securities will be allocated among the
several investment companies and clients in a manner deemed equitable to all by
Franklin Mutual, taking into account the respective sizes of the funds and the
amount of securities to be purchased or sold. In some cases this procedure could
have a detrimental effect on the price or volume of the security so far as the
Fund is concerned. In other cases it is possible that the ability to participate
in volume transactions and to negotiate lower brokerage commissions will be
beneficial to the Fund.
During the fiscal years ended December 31, 1995, 1996 and 1997, the Fund paid
brokerage commissions as follows:
<TABLE>
<CAPTION>
MUTUAL SHARES QUALIFIED BEACON DISCOVERY EUROPEAN FINANCIAL SERVICES
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<S> <C> <C> <C> <C> <C> <C>
1995 ...$8,028,205 $5,182,736 $6,269,829 $3,040,751 n/a n/a
1996 ...$8,095,501 $6,090,786 $7,418,388 $7,928,860 $734,682 n/a
1997....$7,248,461 $6,474,952 $8,259,140 $9,085,394 $1,500,199 $371,076
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As of December 31, 1997, the Funds owned securities issued by Bear Stearns & Co.
valued in the aggregate at $23,749,994. Except as noted, the Funds did not own
any securities issued by their regular broker-dealers as of the end of the
fiscal year.
Clearwater, an indirect affiliate of Franklin Mutual, is a registered securities
dealer and a member of the NASD. Transactions in some Fund portfolio securities
(particularly transactions involving floor brokers) were effected through
Clearwater before November 1, 1996. During the fiscal years ended December 31,
1995 and 1996, Mutual Shares paid brokerage commissions to Clearwater of
$1,192,230 and $755,142, respectively; Qualified paid $640,588 and $439,926,
respectively; Beacon paid $764,323 and $607,402, respectively; and Discovery
paid $217,609 and $384,267, respectively. During the fiscal year ended December
31, 1996, European paid $4,037.
Because the Funds may, from time to time, invest in broker-dealers, it is
possible that a fund will own in excess of 5% of the voting securities of one or
more broker-dealers through whom such Fund places portfolio brokerage
transactions. In such circumstances, the broker-dealer would be considered to be
an affiliated person of such Fund. To the extent that such Fund places brokerage
transactions through such a broker-dealer at a time when the broker-dealer is
considered to be an affiliate of such Fund, such Fund will be required to adhere
to certain rules relating to the payment of commissions to an affiliated
broker-dealer. These rules require the Fund to adhere to procedures adopted by
the Board relating to ensuring that the commissions paid to such broker-dealers
do not exceed what would otherwise be the usual and customary broker's
commissions for similar transactions. The same rules apply to each Fund's use of
Clearwater.
SOFT DOLLAR ARRANGEMENTS. The Fund receives research services from persons who
act as brokers or dealers for the Fund. The discussion below relates in general
to these brokers or dealers who pursuant to various arrangements pay for certain
computer hardware and software and other research and brokerage services to
Franklin Mutual and/or the Fund for transactions effected by it for the Fund.
Commission soft dollars may be used only for brokerage and research services
provided by brokers to whom commissions are paid and under no circumstances will
cash payments be made by any such broker to Franklin Mutual. To the extent that
commission soft dollars do not result in the provision of any "brokerage and
research services" by brokers to whom such commissions are paid, the
commissions, nevertheless, are the property of such broker. Although,
potentially, Franklin Mutual could be influenced to place Fund brokerage
transactions with a broker in order to generate soft dollars for Franklin
Mutual's benefit, Franklin Mutual believes that the requirement that it achieve
best execution on Fund portfolio transactions, and the Fund's negotiated
commission structure with brokers, mitigate these concerns as the cost of
transactions effected through brokers, before consideration of any soft dollar
benefits that may be received, generally will be comparable to that available
elsewhere. During the fiscal years ended December 31, 1995, 1996 and 1997, the
Fund paid brokerage commissions of $3,355,180, $2,539,782 and $xx, respectively,
to brokers who provided research services. This amount represented 14.90%, 8.50%
and xx%, respectively, of total commissions paid for the periods.
HOW DO I BUY, SELL AND EXCHANGE SHARES?
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ADDITIONAL INFORMATION ON BUYING SHARES
The Fund continuously offers its shares through Securities Dealers who have an
agreement with Distributors. Securities Dealers may at times receive the entire
sales charge. A Securities Dealer who receives 90% or more of the sales charge
may be deemed an underwriter under the Securities Act of 1933, as amended.
Securities laws of states where the Fund offers its shares may differ from
federal law. Banks and financial institutions that sell shares of the Fund may
be required by state law to register as Securities Dealers. Financial
institutions or their affiliated brokers may receive an agency transaction fee
in the percentages indicated in the table under "How Do I Buy Shares? - Purchase
Price of Fund Shares" in the Prospectus.
When you buy shares, if you submit a check or a draft that is returned unpaid to
the Fund we may impose a $10 charge against your account for each returned item.
Under agreements with certain banks in Taiwan, Republic of China, the Fund's
shares are available to these banks' trust accounts without a sales charge. The
banks may charge service fees to their customers who participate in the trusts.
A portion of these service fees may be paid to Distributors or one of its
affiliates to help defray expenses of maintaining a service office in Taiwan,
including expenses related to local literature fulfillment and communication
facilities.
Class I shares of the Fund may be offered to investors in Taiwan through
securities advisory firms known locally as Securities Investment Consulting
Enterprises. In conformity with local business practices in Taiwan, Class I
shares may be offered with the following schedule of sales charges:
SALES
SIZE OF PURCHASE - U.S. DOLLARS CHARGE
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Under $30,000 .................. 3.0%
$30,000 but less than $50,000 .. 2.5%
$50,000 but less than $100,000 . 2.0%
$100,000 but less than $200,000 1.5%
$200,000 but less than $400,000 1.0%
$400,000 or more ............... 0%
OTHER PAYMENTS TO SECURITIES DEALERS. Distributors may pay the following
commissions, out of its own resources, to Securities Dealers who initiate and
are responsible for purchases of Class I shares of $1 million or more: 1% on
sales of $1 million to $2 million, plus 0.80% on sales over $2 million to $3
million, plus 0.50% on sales over $3 million to $50 million, plus 0.25% on sales
over $50 million to $100 million, plus 0.15% on sales over $100 million.
Either Distributors or one of its affiliates may pay the following amounts, out
of its own resources, to Securities Dealers who initiate and are responsible for
purchases of Class I shares by certain retirement plans without a front-end
sales charge, as discussed in the Prospectus: 1% on sales of $500,000 to $2
million, plus 0.80% on sales over $2 million to $3 million, plus 0.50% on sales
over $3 million to $50 million, plus 0.25% on sales over $50 million to $100
million, plus 0.15% on sales over $100 million. Distributors may make these
payments in the form of contingent advance payments, which may be recovered from
the Securities Dealer or set off against other payments due to the dealer if
shares are sold within 12 months of the calendar month of purchase. Other
conditions may apply. All terms and conditions may be imposed by an agreement
between Distributors, or one of its affiliates, and the Securities Dealer.
These breakpoints are reset every 12 months for purposes of additional
purchases.
Distributors and/or its affiliates provide financial support to various
Securities Dealers that sell shares of the Franklin Templeton Group of Funds.
This support is based primarily on the amount of sales of fund shares. The
amount of support may be affected by: total sales; net sales; levels of
redemptions; the proportion of a Securities Dealer's sales and marketing efforts
in the Franklin Templeton Group of Funds; a Securities Dealer's support of, and
participation in, Distributors' marketing programs; a Securities Dealer's
compensation programs for its registered representatives; and the extent of a
Securities Dealer's marketing programs relating to the Franklin Templeton Group
of Funds. Financial support to Securities Dealers may be made by payments from
Distributors' resources, from Distributors' retention of underwriting
concessions and, in the case of funds that have Rule 12b-1 plans, from payments
to Distributors under such plans. In addition, certain Securities Dealers may
receive brokerage commissions generated by fund portfolio transactions in
accordance with the NASD's rules.
Distributors routinely sponsors due diligence meetings for registered
representatives during which they receive updates on various Franklin Templeton
Funds and are afforded the opportunity to speak with portfolio managers.
Invitation to these meetings is not conditioned on selling a specific number of
shares, however, those who have shown an interest in the Franklin Templeton
Funds are more likely to be considered. To the extent permitted by their firm's
policies and procedures, a registered representative's expenses in attending
these meetings may be covered by Distributors.
LETTER OF INTENT. You may qualify for a reduced sales charge when you buy Class
I shares, as described in the Prospectus. At any time within 90 days after the
first investment that you want to qualify for a reduced sales charge, you may
file with the Fund a signed shareholder application with the Letter of Intent
section completed. After the Letter is filed, each additional investment will be
entitled to the sales charge applicable to the level of investment indicated on
the Letter. Sales charge reductions based on purchases in more than one Franklin
Templeton Fund will be effective only after notification to Distributors that
the investment qualifies for a discount. Your holdings in the Franklin Templeton
Funds acquired more than 90 days before the Letter is filed will be counted
towards completion of the Letter, but they will not be entitled to a retroactive
downward adjustment in the sales charge. Any redemptions you make during the 13
month period, except in the case of certain retirement plans, will be subtracted
from the amount of the purchases for purposes of determining whether the terms
of the Letter have been completed. If the Letter is not completed within the 13
month period, there will be an upward adjustment of the sales charge, depending
on the amount actually purchased (less redemptions) during the period. The
upward adjustment does not apply to certain retirement plans. If you execute a
Letter before a change in the sales charge structure of the Fund, you may
complete the Letter at the lower of the new sales charge structure or the sales
charge structure in effect at the time the Letter was filed.
As mentioned in the Prospectus, five percent (5%) of the amount of the total
intended purchase will be reserved in Class I shares of the Fund registered in
your name until you fulfill the Letter. This policy of reserving shares does not
apply to certain retirement plans. If total purchases, less redemptions, equal
the amount specified under the Letter, the reserved shares will be deposited to
an account in your name or delivered to you or as you direct. If total
purchases, less redemptions, exceed the amount specified under the Letter and is
an amount that would qualify for a further quantity discount, a retroactive
price adjustment will be made by Distributors and the Securities Dealer through
whom purchases were made pursuant to the Letter (to reflect such further
quantity discount) on purchases made within 90 days before and on those made
after filing the Letter. The resulting difference in Offering Price will be
applied to the purchase of additional shares at the Offering Price applicable to
a single purchase or the dollar amount of the total purchases. If the total
purchases, less redemptions, are less than the amount specified under the
Letter, you will remit to Distributors an amount equal to the difference in the
dollar amount of sales charge actually paid and the amount of sales charge that
would have applied to the aggregate purchases if the total of the purchases had
been made at a single time. Upon remittance, the reserved shares held for your
account will be deposited to an account in your name or delivered to you or as
you direct. If within 20 days after written request the difference in sales
charge is not paid, the redemption of an appropriate number of reserved shares
to realize the difference will be made. In the event of a total redemption of
the account before fulfillment of the Letter, the additional sales charge due
will be deducted from the proceeds of the redemption, and the balance will be
forwarded to you.
If a Letter is executed on behalf of certain retirement plans, the level and any
reduction in sales charge for these plans will be based on actual plan
participation and the projected investments in the Franklin Templeton Funds
under the Letter. These plans are not subject to the requirement to reserve 5%
of the total intended purchase, or to any penalty as a result of the early
termination of a plan, nor are these plans entitled to receive retroactive
adjustments in price for investments made before executing the Letter.
REINVESTMENT DATE. Shares acquired through the reinvestment of dividends will be
purchased at the Net Asset Value determined on the business day following the
dividend record date (sometimes known as the "ex-dividend date"). The processing
date for the reinvestment of dividends may vary and does not affect the amount
or value of the shares acquired.
ADDITIONAL INFORMATION ON EXCHANGING SHARES
If you request the exchange of the total value of your account, declared but
unpaid income dividends and capital gain distributions will be exchanged into
the new fund and will be invested at Net Asset Value. Backup withholding and
information reporting may apply. Information regarding the possible tax
consequences of an exchange is included in the tax section in this SAI and in
the Prospectus.
If a substantial number of shareholders should, within a short period, sell
their shares of the Fund under the exchange privilege, the Fund might have to
sell portfolio securities it might otherwise hold and incur the additional costs
related to such transactions. On the other hand, increased use of the exchange
privilege may result in periodic large inflows of money. If this occurs, it is
the Fund's general policy to initially invest this money in short-term,
interest-bearing money market instruments, unless it is believed that attractive
investment opportunities consistent with the Fund's investment objectives exist
immediately. This money will then be withdrawn from the short-term, money market
instruments and invested in portfolio securities in as orderly a manner as is
possible when attractive investment opportunities arise.
The proceeds from the sale of shares of an investment company are generally not
available until the fifth business day following the sale. The funds you are
seeking to exchange into may delay issuing shares pursuant to an exchange until
that fifth business day. The sale of Fund shares to complete an exchange will be
effected at Net Asset Value at the close of business on the day the request for
exchange is received in proper form. Please see "May I Exchange Shares for
Shares of Another Fund?" in the Prospectus.
ADDITIONAL INFORMATION ON SELLING SHARES
SYSTEMATIC WITHDRAWAL PLAN. There are no service charges for establishing or
maintaining a systematic withdrawal plan. Payments under the plan will be made
from the redemption of an equivalent amount of shares in your account, generally
on the 25th day of the month in which a payment is scheduled. If the 25th falls
on a weekend or holiday, we will process the redemption on the next business
day.
Redeeming shares through a systematic withdrawal plan may reduce or exhaust the
shares in your account if payments exceed distributions received from the Fund.
This is especially likely to occur if there is a market decline. If a withdrawal
amount exceeds the value of your account, your account will be closed and the
remaining balance in your account will be sent to you. Because the amount
withdrawn under the plan may be more than your actual yield or income, part of
the payment may be a return of your investment.
The Fund may discontinue a systematic withdrawal plan by notifying you in
writing and will automatically discontinue a systematic withdrawal plan if all
shares in your account are withdrawn or if the Fund receives notification of the
shareholder's death or incapacity.
THROUGH YOUR SECURITIES DEALER. If you sell shares through your Securities
Dealer, it is your dealer's responsibility to transmit the order to the Fund in
a timely fashion. Any loss to you resulting from your dealer's failure to do so
must be settled between you and your Securities Dealer.
REDEMPTIONS IN KIND. In the case of redemption requests, the Board reserves the
right to make payments in whole or in part in securities or other assets of the
Fund, in case of an emergency, or if the payment of such a redemption in cash
would be detrimental to the existing shareholders of the Fund. In these
circumstances, the securities distributed would be valued at the price used to
compute the Fund's net assets and you may incur brokerage fees in converting the
securities to cash. The Fund does not intend to redeem illiquid securities in
kind. If this happens, however, you may not be able to recover your investment
in a timely manner.
GENERAL INFORMATION
If dividend checks are returned to the Fund marked "unable to forward" by the
postal service, we will consider this a request by you to change your dividend
option to reinvest all distributions. The proceeds will be reinvested in
additional shares at Net Asset Value until we receive new instructions.
Distribution or redemption checks sent to you do not earn interest or any other
income during the time the checks remain uncashed. Neither the Fund nor its
affiliates will be liable for any loss caused by your failure to cash such
checks. The Fund is not responsible for tracking down uncashed checks, unless a
check is returned as undeliverable.
In most cases, if mail is returned as undeliverable we are required to take
certain steps to try to find you free of charge. If these attempts are
unsuccessful, however, we may deduct the costs of any additional efforts to find
you from your account. These costs may include a percentage of the account when
a search company charges a percentage fee in exchange for its location services.
All checks, drafts, wires and other payment mediums used to buy or sell shares
of the Fund must be denominated in U.S. dollars. We may, in our sole discretion,
either (a) reject any order to buy or sell shares denominated in any other
currency or (b) honor the transaction or make adjustments to your account for
the transaction as of a date and with a foreign currency exchange factor
determined by the drawee bank.
SPECIAL SERVICES. Investor Services may pay certain financial institutions that
maintain omnibus accounts with the Fund on behalf of numerous beneficial owners
for recordkeeping operations performed with respect to such owners. For each
beneficial owner in the omnibus account, the Fund may reimburse Investor
Services an amount not to exceed the per account fee that the Fund normally pays
Investor Services. These financial institutions may also charge a fee for their
services directly to their clients.
Certain shareholder servicing agents may be authorized to accept your
transaction request.
HOW ARE FUND SHARES VALUED?
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We calculate the Net Asset Value per share as of the close of the NYSE, normally
4:00 p.m. Eastern time, each day that the NYSE is open for trading. As of the
date of this SAI, the Fund is informed that the NYSE observes the following
holidays: New Year's Day, Martin Luther King Jr. Day, Presidents' Day, Good
Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and
Christmas Day.
For the purpose of determining the aggregate net assets of the Fund, cash and
receivables are valued at their realizable amounts. Interest is recorded as
accrued and dividends are recorded on the ex-dividend date. Portfolio securities
listed on a securities exchange or on the NASDAQ National Market System for
which market quotations are readily available are valued at the last quoted sale
price of the day or, if there is no such reported sale, within the range of the
most recent quoted bid and ask prices. Over-the-counter portfolio securities are
valued within the range of the most recent quoted bid and ask prices. Portfolio
securities that are traded both in the over-the-counter market and on a stock
exchange are valued according to the broadest and most representative market as
determined by Franklin Mutual.
Portfolio securities underlying actively traded call options are valued at their
market price as determined above. The current market value of any option held by
the Fund is its last sale price on the relevant exchange before the time when
assets are valued. Lacking any sales that day or if the last sale price is
outside the bid and ask prices, options are valued within the range of the
current closing bid and ask prices if the valuation is believed to fairly
reflect the contract's market value.
The value of a foreign security is determined as of the close of trading on the
foreign exchange on which it is traded or as of the close of trading on the
NYSE, if that is earlier. The value is then converted into its U.S. dollar
equivalent at the foreign exchange rate in effect at noon, New York time, on the
day the value of the foreign security is determined. If no sale is reported at
that time, the foreign security is valued within the range of the most recent
quoted bid and ask prices. Occasionally events that affect the values of foreign
securities and foreign exchange rates may occur between the times at which they
are determined and the close of the exchange and will, therefore, not be
reflected in the computation of the Net Asset Value of each class. If events
materially affecting the values of these foreign securities occur during this
period, the securities will be valued in accordance with procedures established
by the Board.
Generally, trading in corporate bonds, U.S. government securities and money
market instruments is substantially completed each day at various times before
the close of the NYSE. The value of these securities used in computing the Net
Asset Value of each class is determined as of such times. Occasionally, events
affecting the values of these securities may occur between the times at which
they are determined and the close of the NYSE that will not be reflected in the
computation of the Net Asset Value. If events materially affecting the values of
these securities occur during this period, the securities will be valued at
their fair value as determined in good faith by the Board.
Other securities for which market quotations are readily available are valued at
the current market price, which may be obtained from a pricing service, based on
a variety of factors including recent trades, institutional size trading in
similar types of securities (considering yield, risk and maturity) and/or
developments related to specific issues. Securities and other assets for which
market prices are not readily available are valued at fair value as determined
following procedures approved by the Board. With the approval of the Board, the
Fund may utilize a pricing service, bank or Securities Dealer to perform any of
the above described functions.
ADDITIONAL INFORMATION ON DISTRIBUTIONS AND TAXES
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DISTRIBUTIONS
DISTRIBUTIONS OF NET INVESTMENT INCOME. The Fund receives income generally in
the form of dividends, interest, original issue, market and acquisition
discount, and other income derived from its investments. This income, less
expenses incurred in the operation of the Fund, constitute its net investment
income from which dividends may be paid to you. Any distributions by the Fund
from such income will be taxable to you as ordinary income, whether you take
them in cash or in additional shares.
DISTRIBUTIONS OF CAPITAL GAINS. The Fund may derive capital gains and losses in
connection with sales or other dispositions of its portfolio securities.
Distributions derived from the excess of net short-term capital gain over net
long-term capital loss will be taxable to you as ordinary income. Distributions
paid from long-term capital gains realized by the Fund will be taxable to you as
long-term capital gain, regardless of how long you have held your shares in the
Fund. Any net short-term or long-term capital gains realized by the Fund (net of
any capital loss carryovers) generally will be distributed once each year, and
may be distributed more frequently, if necessary, in order to reduce or
eliminate federal excise or income taxes on the Fund.
Under the Taxpayer Relief Act of 1997 (the "1997 Act"), the Fund is required to
report the capital gain distributions paid to you from gains realized on the
sale of portfolio securities using the following categories:
"28% RATE GAINS": gains resulting from securities sold by the Fund after July
28, 1997 that were held for more than one year but not more than 18 months, and
securities sold by the Fund before May 7, 1997 that were held for more than one
year. These gains will be taxable to individual investors at a maximum rate of
28%.
"20% RATE GAINS": gains resulting from securities sold by the Fund after July
28, 1997 that were held for more than 18 months, and under a transitional rule,
securities sold by the Fund between May 7 and July 28, 1997 (inclusive) that
were held for more than one year. These gains will be taxable to individual
investors at a maximum rate of 20% for individual investors in the 28% or higher
federal income tax brackets, and at a maximum rate of 10% for investors in the
15% federal income tax bracket.
The 1997 Act also provides for a new maximum rate of tax on capital gains of 18%
for individuals in the 28% or higher federal income tax brackets and 8% for
individuals in the 15% federal income tax bracket for "qualified 5-year gains."
For individuals in the 15% bracket, qualified 5-year gains are net gains on
securities held for more than 5 years which are sold after December 31, 2000.
For individuals who are subject to tax at higher rates, qualified 5-year gains
are net gains on securities which are purchased after December 31, 2000 and are
held for more than 5 years. Taxpayers subject to tax at the higher rates may
also make an election for shares held on January 1, 2001 to recognize gain on
their shares in order to qualify such shares as qualified 5-year property.
The Fund will advise you at the end of each calendar year of the amount of its
capital gain distributions paid during the calendar year that qualify for these
maximum federal tax rates. Additional information on reporting these
distributions on your personal income tax returns is available in Franklin
Templeton's Tax Information Handbook. This handbook has been revised to include
1997 Act tax law changes. Please call Fund Information to request a copy.
Questions concerning each investor's personal tax reporting should be addressed
to the investor's personal tax advisor.
CERTAIN DISTRIBUTIONS PAID IN JANUARY. Distributions which are declared in
October, November or December and paid to you in January of the following year,
will be treated for tax purposes as if they had been received by you on December
31 of the year in which they were declared. The Fund will report this income to
you on your Form 1099-DIV for the year in which these distributions were
declared.
EFFECT OF FOREIGN INVESTMENTS ON DISTRIBUTIONS. Most foreign exchange gains
realized on the sale of debt instruments are treated as ordinary income by the
Fund. Similarly, foreign exchange losses realized by the Fund on the sale of
debt instruments are generally treated as ordinary losses by the Fund. These
gains when distributed will be taxable to you as ordinary dividends, and any
losses will reduce the Fund's ordinary income otherwise available for
distribution to you. This treatment could increase or reduce the Fund's ordinary
income distributions to you, and may cause some or all of the Fund's previously
distributed income to be classified as a return of capital.
The 1997 Act also simplifies the procedures by which investors in funds that
invest in foreign securities can claim tax credits on their individual income
tax returns for the foreign taxes paid by the Fund. These provisions will allow
investors who claim a credit for foreign taxes paid of $300 or less on a single
return or $600 or less on a joint return during any year (all of which must be
reported on IRS Form 1099-DIV from the Fund to the investor) to bypass the
burdensome and detailed reporting requirements on the supporting foreign tax
credit schedule (Form 1116) and report foreign taxes paid directly on page 2 of
Form 1040. YOU SHOULD NOTE THAT THIS SIMPLIFIED PROCEDURE WILL NOT BE AVAILABLE
UNTIL CALENDAR YEAR 1998.
INFORMATION ON THE TAX CHARACTER OF DISTRIBUTIONS. The Fund will inform you of
the amount and character of your distributions at the time they are paid, and
will advise you of the tax status for federal income tax purposes of such
distributions shortly after the close of each calendar year. If you have not
held Fund shares for a full year, you may have designated and distributed to you
as ordinary income or capital gain a percentage of income that is not equal to
the actual amount of such income earned during the period of your investment in
the Fund.
TAXES
ELECTION TO BE TAXED AS A REGULATED INVESTMENT COMPANY. The Fund has elected to
be treated as a regulated investment company under Subchapter M of the Code, has
qualified as such for its most recent fiscal year, and intends to so qualify
during the current fiscal year. The Board reserves the right not to maintain the
qualification of the Fund as a regulated investment company if it determines
such course of action to be beneficial to you. In such case, the Fund will be
subject to federal, and possibly state, corporate taxes on its taxable income
and gains, and distributions to you will be taxed as ordinary dividend income to
the extent of the Fund's available earnings and profits.
In order to qualify as a regulated investment company for tax purposes, the Fund
must meet certain specific requirements, including:
o The Fund must maintain a diversified portfolio of securities, wherein
no security (other than U.S. government securities and securities of
other regulated investment companies) can exceed 25% of the Fund's
total assets, and, with respect to 50% of the Fund's total assets, no
investment (other than cash and cash items, U.S. government securities
and securities of other regulated investment companies) can exceed 5%
of the Fund's total assets;
o The Fund must derive at least 90% of its gross income from dividends,
interest, payments with respect to securities loans, and gains from
the sale or disposition of stock, securities or foreign currencies, or
other income derived with respect to its business of investing in such
stock, securities, or currencies; and
o The Fund must distribute to its shareholders at least 90% of its net
investment income and net tax-exempt income for each of its fiscal
years.
EXCISE TAX DISTRIBUTION REQUIREMENTS. The Code requires the Fund to distribute
at least 98% of its taxable ordinary income earned during the calendar year and
98% of its capital gain net income earned during the twelve month period ending
October 31 (in addition to undistributed amounts from the prior year) to you by
December 31 of each year in order to avoid federal excise taxes. The Fund
intends to declare and pay sufficient dividends in December (or in January that
are treated by you as received in December) but does not guarantee and can give
no assurances that its distributions will be sufficient to eliminate all such
taxes.
REDEMPTION OF FUND SHARES. Redemptions and exchanges of Fund shares are taxable
transactions for federal and state income tax purposes. The tax law requires
that you recognize a gain or loss in an amount equal to the difference between
your tax basis and the amount you received in exchange for your shares, subject
to the rules described below. If you hold your shares as a capital asset, the
gain or loss that you realize will be capital gain or loss, and will be
long-term for federal income tax purposes if you have held your shares for more
than one year at the time of redemption or exchange. Any loss incurred on the
redemption or exchange of shares held for six months or less will be treated as
a long-term capital loss to the extent of any long-term capital gains
distributed to you by the Fund on those shares. The holding periods and
categories of capital gain that apply under the 1997 Act are described above in
the "DISTRIBUTIONS" section.
All or a portion of any loss that you realize upon the redemption of your Fund
shares will be disallowed to the extent that you purchase other shares in the
Fund (through reinvestment of dividends or otherwise) within 30 days before or
after your share redemption. Any loss disallowed under these rules will be added
to your tax basis in the new shares you purchase.
DEFERRAL OF BASIS. All or a portion of the sales charge that you paid for your
shares in the Fund will be excluded from your tax basis in any of the shares
sold within 90 days of their purchase (for the purpose of determining gain or
loss upon the sale of such shares) if you reinvest the sales proceeds in the
Fund or in another of the Franklin Templeton Funds, and the sales charge that
would otherwise apply to your reinvestment is reduced or eliminated because of
your reinvestment in one of the Franklin Templeton Funds. The portion of the
sales charge excluded from your tax basis in the shares sold will equal the
amount that the sales charge is reduced on your reinvestment. Any portion of the
sales charge excluded from your tax basis in the shares sold will be added to
the tax basis of the shares you acquire from your reinvestment in one of the
Franklin Templeton Funds.
U.S. GOVERNMENT OBLIGATIONS. Many states grant tax-free status to dividends paid
to you from interest earned on direct obligations of the U.S. government,
subject in some states to minimum investment requirements that must be met by
the Fund. Investments in GNMA/FNMA securities, bankers' acceptances, commercial
paper and repurchase agreements collateralized by U.S. government securities do
not generally qualify for tax-free treatment. At the end of each calendar year,
the Fund will provide you with the percentage of any dividends paid that may
qualify for tax-free treatment on your personal income tax return. You should
consult with your own tax advisor to determine the application of your state and
local laws to these distributions. Because the rules on exclusion of this income
are different for corporations, corporate shareholders should consult with their
corporate tax advisors about whether any of their distributions may be exempt
from corporate income or franchise taxes.
DIVIDENDS-RECEIVED DEDUCTION FOR CORPORATIONS. As a corporate shareholder, you
should note that the percentage of the dividends paid by the Funds for their
most recent fiscal years that qualified for the dividends received deduction
were as follows: Mutual Shares - 16.78%; Qualified - 12.61%; Beacon - 10.57%;
European - 0.09%; Financial Services - 15.63%; and Discovery - 4.38%. You will
be permitted in some circumstances to deduct these qualified dividends, thereby
reducing the tax that you would otherwise be required to pay on these dividends.
The dividends-received deduction will be available only with respect to
dividends designated by the Fund as eligible for such treatment. Dividends so
designated by the Fund must be attributable to dividends earned by the Fund from
U.S. corporations that were not debt-financed.
Under the 1997 Act, the amount that the Fund may designate as eligible for the
dividends-received deduction will be reduced or eliminated if the shares on
which the dividends were earned by the Fund were debt-financed or held by the
Fund for less than a 46 day period during a 90 day period beginning 45 days
before the ex-dividend date of the corporate stock. Similarly, if your Fund
shares are debt-financed or held by you for less than this same 46 day period,
then the dividends-received deduction may also be reduced or eliminated. Even if
designated as dividends eligible for the dividends-received deduction, all
dividends (including the deducted portion) must be included in your alternative
minimum taxable income calculation.
INVESTMENT IN COMPLEX SECURITIES. The Fund's investment in options, futures
contracts and forward contracts, including transactions involving actual or
deemed short sales or foreign exchange gains or losses are subject to many
complex and special tax rules. Over-the-counter options on debt securities and
equity options, including options on stock and on narrow-based stock indexes,
will be subject to tax under section 1234 of the Code, generally producing a
long-term or short-term capital gain or loss upon exercise, lapse, or closing
out of the option or sale of the underlying stock or security. Certain other
options, futures and forward contracts entered into by the Fund are generally
governed by section 1256 of the Code. These "section 1256" positions generally
include listed options on debt securities, options on broad-based stock indexes,
options on securities indexes, options on futures contracts, regulated futures
contracts and certain foreign currency contracts and options thereon.
Absent a tax election to the contrary, each such section 1256 position held by
the Fund will be marked-to-market (i.e., treated as if it were sold for fair
market value) on the last business day of the Fund's fiscal year (and on other
dates as prescribed by the Code), and all gain or loss associated with fiscal
year transactions and mark-to-market positions at fiscal year end (except
certain currency gain or loss covered by section 988 of the Code) will generally
be treated as 60% long-term capital gain or loss and 40% short-term capital gain
or loss. Under legislation pending in technical corrections to the 1997 Act, the
60% long-term capital gain portion will qualify as 20% rate gain and will be
subject to tax to individual investors at a maximum rate of 20% for investors in
the 28% or higher federal income tax brackets, or at a maximum rate of 10% for
investors in the 15% federal income tax bracket. While foreign currency is
marked-to-market at year end, gain or loss realized as a result will always be
ordinary. Even though marked-to-market, gains and losses realized on foreign
currency and foreign security investments will generally be treated as ordinary
income. The effect of section 1256 mark-to-market rules may be to accelerate
income or to convert what otherwise would have been long-term capital gains into
short-term capital gains or short-term capital losses into long-term capital
losses within the Fund. The acceleration of income on section 1256 positions may
require the Fund to accrue taxable income without the corresponding receipt of
cash. In order to generate cash to satisfy the distribution requirements of the
Code, the Fund may be required to dispose of portfolio securities that it
otherwise would have continued to hold or to use cash flows from other sources
such as the sale of Fund shares. In these ways, any or all of these rules may
affect the amount, character and timing of income distributed to you by the
Fund.
When the Fund holds an option or contract which substantially diminishes the
Fund's risk of loss with respect to another position of the Fund (as might occur
in some hedging transactions), this combination of positions could be treated as
a "straddle" for tax purposes, possibly resulting in deferral of losses,
adjustments in the holding periods and conversion of short-term capital losses
into long-term capital losses. The Fund may make certain tax elections for mixed
straddles (i.e., straddles comprised of at least one section 1256 position and
at least one non-section 1256 position) which may reduce or eliminate the
operation of these straddle rules.
The 1997 Act has also added new provisions for dealing with transactions that
are generally called "Constructive Sale Transactions." Under these rules, the
Fund must recognize gain (but not loss) on any constructive sale of an
appreciated financial position in stock, a partnership interest or certain debt
instruments. The Fund will generally be treated as making a constructive sale
when it: 1) enters into a short sale on the same property, 2) enters into an
offsetting notional principal contract, or 3) enters into a futures or forward
contract to deliver the same or substantially similar property. Other
transactions (including certain financial instruments called collars) will be
treated as constructive sales as provided in Treasury regulations to be
published. There are also certain exceptions that apply for transactions that
are closed before the end of the 30th day after the close of the taxable year.
Distributions paid to you by the Fund of ordinary income and short-term capital
gains arising from the Fund's investments, including investments in options,
forwards, and futures contracts, will be taxable to you as ordinary income. The
Fund will monitor its transactions in such options and contracts and may make
certain other tax elections in order to mitigate the effect of the above rules.
INVESTMENTS IN FOREIGN CURRENCIES AND FOREIGN SECURITIES. The Fund is authorized
to invest in foreign currency denominated securities. Such investments, if made,
will have the following additional tax consequences:
Under the Code, gains or losses attributable to fluctuations in foreign currency
exchange rates which occur between the time the Fund accrues income (including
dividends), or accrues expenses which are denominated in a foreign currency, and
the time the Fund actually collects such income or pays such expenses generally
are treated as ordinary income or loss. Similarly, on the disposition of debt
securities denominated in a foreign currency and on the disposition of certain
options, futures, forward contracts, gain or loss attributable to fluctuations
in the value of foreign currency between the date of acquisition of the security
or contract and the date of its disposition are also treated as ordinary gain or
loss. These gains or losses, referred to under the Code as "section 988" gains
or losses, may increase or decrease the amount of the Fund's net investment
company taxable income, which, in turn, will affect the amount of income to be
distributed to you by the Fund.
If the Fund's section 988 losses exceed the Fund's other net investment company
taxable income during a taxable year, the Fund generally will not be able to
make ordinary dividend distributions to you for that year, or distributions made
before the losses were realized will be recharacterized as return of capital
distributions for federal income tax purposes, rather than as an ordinary
dividend or capital gain distribution. If a distribution is treated as a return
of capital, your tax basis in your Fund shares will be reduced by a like amount
(to the extent of such basis), and any excess of the distribution over your tax
basis in your Fund shares will be treated as capital gain to you.
INVESTMENT IN PASSIVE FOREIGN INVESTMENT COMPANY SECURITIES. The Fund may invest
in shares of foreign corporation which may be classified under the Code as
passive foreign investment companies ("PFICs"). In general, a foreign
corporation is classified as a PFIC if at least one-half of its assets
constitute investment-type assets or 75% or more of its gross income is
investment-type income.
If the Fund receives an "excess distribution" with respect to PFIC stock, the
Fund itself may be subject to U.S. federal income tax on a portion of the
distribution, whether or not the corresponding income is distributed by the Fund
to you. In general, under the PFIC rules, an excess distribution is treated as
having been realized ratably over the period during which the Fund held the PFIC
shares. The Fund itself will be subject to tax on the portion, if any, of an
excess distribution that is so allocated to prior Fund taxable years, and an
interest factor will be added to the tax, as if the tax had been payable in such
prior taxable years. In this case, you would not be permitted to claim a credit
on your own tax return for the tax paid by the Fund. Certain distributions from
a PFIC as well as gain from the sale of PFIC shares are treated as excess
distributions. Excess distributions are characterized as ordinary income even
though, absent application of the PFIC rules, certain excess distributions might
have been classified as capital gain. This may have the effect of increasing
Fund distributions to you that are treated as ordinary dividends rather than
long-term capital gain dividends.
The Fund may be eligible to elect alternative tax treatment with respect to PFIC
shares. Under an election that currently is available in some circumstances, the
Fund generally would be required to include in its gross income its share of the
earnings of a PFIC on a current basis, regardless of whether distributions are
received from the PFIC during such period. If this election were made, the
special rules, discussed above, relating to the taxation of excess
distributions, would not apply. In addition, the 1997 Act provides for another
election that would involve marking-to-market the Fund's PFIC shares at the end
of each taxable year (and on certain other dates as prescribed in the Code),
with the result that unrealized gains would be treated as though they were
realized. The Fund would also be allowed an ordinary deduction for the excess,
if any, of the adjusted basis of its investment in the PFIC stock over its fair
market value at the end of the taxable year. This deduction would be limited to
the amount of any net mark-to-market gains previously included with respect to
that particular PFIC security. If the Fund were to make this second PFIC
election, tax at the Fund level under the PFIC rules would generally be
eliminated.
The application of the PFIC rules may affect, among other things, the amount of
tax payable by the Fund (if any), the amounts distributable to you by the Fund,
the time at which these distributions must be made, and whether these
distributions will be classified as ordinary income or capital gain
distributions to you.
You should be aware that it is not always possible at the time shares of a
foreign corporation are acquired to ascertain that the foreign corporation is a
PFIC, and that there is always a possibility that a foreign corporation will
become a PFIC after the Fund acquires shares in that corporation. While the Fund
will generally seek to avoid investing in PFIC shares to avoid the tax
consequences detailed above, there are no guarantees that it will do so and it
reserves the right to make such investments as a matter of its fundamental
investment policy.
CONVERSION TRANSACTIONS. Gains realized by a Fund from transactions that are
deemed to be "conversion transactions" under the Code, and that would otherwise
produce capital gain may be recharacterized as ordinary income to the extent
that such gain does not exceed an amount defined as the "applicable imputed
income amount". A conversion transaction is any transaction in which
substantially all of the Fund's expected return is attributable to the time
value of the Fund's net investment in such transaction, and any one of the
following criteria are met:
1) there is an acquisition of property with a substantially contemporaneous
agreement to sell the same or substantially identical property in the
future;
2) the transaction is an applicable straddle;
3) the transaction was marketed or sold to the Fund on the basis that it
would have the economic characteristics of a loan but would be taxed as
capital gain; or
4) the transaction is specified in Treasury regulations to be promulgated in
the future.
The applicable imputed income amount, which represents the deemed return on the
conversion transaction based upon the time value of money, is computed using a
yield equal to 120 percent of the applicable federal rate, reduced by any prior
recharacterizations under this provision or the provisions of section 263(g) of
the Code dealing with capitalized carrying costs.
STRIPPED PREFERRED STOCK. Occasionally, the Fund may purchase "stripped
preferred stock" that is subject to special tax treatment. Stripped preferred
stock is defined as certain preferred stock issues where ownership of the stock
has been separated from the right to receive dividends that have not yet become
payable. The stock must have a fixed redemption price, must not participate
substantially in the growth of the issuer, and must be limited and preferred as
to dividends. The difference between the redemption price and purchase price is
taken into Fund income over the term of the instrument as if it were original
issue discount. The amount that must be included in each period generally
depends on the original yield to maturity, adjusted for any prepayments of
principal.
INVESTMENTS IN ORIGINAL ISSUE DISCOUNT (OID) AND MARKET DISCOUNT (MD) BONDS. The
Fund's investments in zero coupon bonds, bonds issued or acquired at a discount,
delayed interest bonds, or bonds that provide for payment of interest-in-kind
(PIK) may cause the Fund to recognize income and make distributions to you prior
to its receipt of cash payments. Zero coupon and delayed interest bonds are
normally issued at a discount and are therefore generally subject to tax
reporting as OID obligations. The Fund is required to accrue as income a portion
of the discount at which these securities were issued, and to distribute such
income each year (as ordinary dividends) in order to maintain its qualification
as a regulated investment company and to avoid income reporting and excise taxes
at the Fund level. PIK bonds are subject to similar tax rules concerning the
amount, character and timing of income required to be accrued by the Fund. Bonds
acquired in the secondary market for a price less than their stated redemption
price, or revised issue price in the case of a bond having OID, are said to have
been acquired with market discount. For these bonds, the Fund may elect to
accrue market discount on a current basis, in which case the Fund will be
required to distribute any such accrued discount. If the Fund does not elect to
accrue market discount into income currently, gain recognized on sale will be
recharacterized as ordinary income instead of capital gain to the extent of any
accumulated market discount on the obligation.
DEFAULTED OBLIGATIONS. The Fund may be required to accrue income on defaulted
obligations and to distribute such income to you even though it is not currently
receiving interest or principal payments on such obligations. In order to
generate cash to satisfy these distribution requirements, the Fund may be
required to dispose of portfolio securities that it otherwise would have
continued to hold or to use cash flows from other sources such as the sale of
Fund shares.
THE FUND'S UNDERWRITER
- ----------------------------------------------------------------------------
Pursuant to an underwriting agreement, Distributors acts as principal
underwriter in a continuous public offering of the Fund's shares. The
underwriting agreement will continue in effect for successive annual periods if
its continuance is specifically approved at least annually by a vote of the
Board or by a vote of the holders of a majority of the Fund's outstanding voting
securities, and in either event by a majority vote of the Board members who are
not parties to the underwriting agreement or interested persons of any such
party (other than as members of the Board), cast in person at a meeting called
for that purpose. The underwriting agreement terminates automatically in the
event of its assignment and may be terminated by either party on 90 days'
written notice.
Distributors pays the expenses of the distribution of Fund shares, including
advertising expenses and the costs of printing sales material and prospectuses
used to offer shares to the public. The Fund pays the expenses of preparing and
printing amendments to its registration statements and prospectuses (other than
those necessitated by the activities of Distributors) and of sending
prospectuses to existing shareholders.
In connection with the offering of the Fund's shares, aggregate underwriting
commissions received by Distributors for the two-month period ended December 31,
1996 and for the fiscal year ended December 31, 1997, the amounts retained by
Distributors after allowances to dealers and the amounts received in connection
with redemption or repurchases of shares were:
AMOUNT RECEIVED
AGGREGATE AMOUNT IN CONNECTION
UNDERWRITING RETAINED BY WITH REDEMPTIONS
COMMISSIONS DISTRIBUTORS OR REPURCHASES
- -------------------------------------------------------------------------------
1996
Mutual Shares .... $962,557 $99,326 -0-
Discovery ........ $710,492 $41,905 -0-
Beacon ........... $717,831 $68,177 -0-
Qualified ........ $494,207 $37,660 -0-
European*........ $152,732 $ 1,291 -0-
Financial
Services.......... N/A N/A N/A
1997
Mutual Shares .... $25,274,695 $1,489,247 $102,161
Discovery ........ $15,618,880 $ 662,372 $ 71,386
Beacon ........... $13,383,062 $ 925,800 $ 86,472
Qualified ........ $ 9,911,540 $ 443,102 $ 40,761
European*........ $ 1,929,443 $ 58,337 $ 18,694
Financial
Services**........ $ 1,841,471 $ 38,548 $ 7,011
*For the two-month period ended December 31, 1996.
**For the period August 19, 1997 to December 31, 1997.
Distributors may be entitled to reimbursement under the Rule 12b-1 plan for each
class, as discussed below. Except as noted, Distributors received no other
compensation from the Fund for acting as underwriter.
THE RULE 12B-1 PLANS
Class I and Class II have separate distribution plans or "Rule 12b-1 plans" that
were adopted pursuant to Rule 12b-1 of the 1940 Act.
THE CLASS I PLAN. Under the Class I plan, the Fund may pay up to a maximum of
0.35% per year of Class I's average daily net assets, payable quarterly, for
expenses incurred in the promotion and distribution of Class I shares. Of this
amount, the Fund may reimburse up to 0.35% to Distributors or others, out of
which 0.10% will generally be retained by Distributors for its distribution
expenses.
THE CLASS II PLAN. Under the Class II plan, the Fund pays Distributors up to
0.75% per year of Class II's average daily net assets, payable quarterly, for
distribution and related expenses. These fees may be used to compensate
Distributors or others for providing distribution and related services and
bearing certain Class II expenses. All distribution expenses over this amount
will be borne by those who have incurred them without reimbursement by the Fund.
Under the Class II plan, the Fund also pays an additional 0.25% per year of
Class II's average daily net assets, payable quarterly, as a servicing fee.
THE CLASS I AND CLASS II PLANS. In addition to the payments that Distributors or
others are entitled to under each plan, each plan also provides that to the
extent the Fund, Franklin Mutual or Distributors or other parties on behalf of
the Fund, Franklin Mutual or Distributors make payments that are deemed to be
for the financing of any activity primarily intended to result in the sale of
shares of each class within the context of Rule 12b-1 under the 1940 Act, then
such payments shall be deemed to have been made pursuant to the plan. The terms
and provisions of each plan relating to required reports, term, and approval are
consistent with Rule 12b-1.
In no event shall the aggregate asset-based sales charges, which include
payments made under each plan, plus any other payments deemed to be made
pursuant to a plan, exceed the amount permitted to be paid under the rules of
the NASD.
To the extent fees are for distribution or marketing functions, as distinguished
from administrative servicing or agency transactions, certain banks will not be
entitled to participate in the plans as a result of applicable federal law
prohibiting certain banks from engaging in the distribution of mutual fund
shares. These banking institutions, however, are permitted to receive fees under
the plans for administrative servicing or for agency transactions. If you are a
customer of a bank that is prohibited from providing these services, you would
be permitted to remain a shareholder of the Fund, and alternate means for
continuing the servicing would be sought. In this event, changes in the services
provided might occur and you might no longer be able to avail yourself of any
automatic investment or other services then being provided by the bank. It is
not expected that you would suffer any adverse financial consequences as a
result of any of these changes.
Each plan has been approved in accordance with the provisions of Rule 12b-1. The
plans are renewable annually by a vote of the Board, including a majority vote
of the Board members who are not interested persons of the Fund and who have no
direct or indirect financial interest in the operation of the plans, cast in
person at a meeting called for that purpose. It is also required that the
selection and nomination of such Board members be done by the non-interested
members of the Board. The plans and any related agreement may be terminated at
any time, without penalty, by vote of a majority of the non-interested Board
members on not more than 60 days' written notice, by Distributors on not more
than 60 days' written notice, by any act that constitutes an assignment of the
management agreement with Franklin Mutual or by vote of a majority of the
outstanding shares of the class. Distributors or any dealer or other firm may
also terminate their respective distribution or service agreement at any time
upon written notice.
The plans and any related agreements may not be amended to increase materially
the amount to be spent for distribution expenses without approval by a majority
of the outstanding shares of the class, and all material amendments to the plans
or any related agreements shall be approved by a vote of the non-interested
members of the Board, cast in person at a meeting called for the purpose of
voting on any such amendment.
Distributors is required to report in writing to the Board at least quarterly on
the amounts and purpose of any payment made under the plans and any related
agreements, as well as to furnish the Board with such other information as may
reasonably be requested in order to enable the Board to make an informed
determination of whether the plans should be continued.
For the fiscal year ended December 31, 1997, Distributors had eligible
expenditures for advertising, printing and payments to underwriters and
broker-dealers pursuant to the Class I and Class II plans. The Fund paid a
portion of these expenditures to Distributors, as noted below.
DISTRIBUTORS' AMOUNT
ELIGIBLE PAID BY
FUND EXPENDITURES THE FUND
- -----------------------------------------------------------------------------
MUTUAL SHARES
Class I........... $3,328,548 $2,068,459
Class II.......... 8,364,640 $3,337,623
QUALIFIED
Class I........... 1,504,229 950,874
Class II.......... 3,018,951 1,313,624
BEACON
Class I........... 2,437,275 1,641,394
Class II.......... 4,659,675 2,160,968
DISCOVERY
Class I........... 2,427,043 1,505,617
Class II.......... 5,112,798 2,353,530
EUROPEAN
Class I........... 341,228 225,054
Class II.......... 612,364 307,122
FINANCIAL
SERVICES
Class I........... 143,534 35,128
Class II.......... 522,405 53,804
HOW DOES THE FUND MEASURE PERFORMANCE?
- -----------------------------------------------------------------------------
Performance quotations are subject to SEC rules. These rules require the use of
standardized performance quotations or, alternatively, that every
non-standardized performance quotation furnished by the Fund be accompanied by
certain standardized performance information computed as required by the SEC.
Average annual total return quotations used by the Fund are based on the
standardized methods of computing performance mandated by the SEC. If a Rule
12b-1 plan is adopted, performance figures reflect fees from the date of the
plan's implementation. An explanation of these and other methods used by the
Fund to compute or express performance follows. Regardless of the method used,
past performance does not guarantee future results, and is an indication of the
return to shareholders only for the limited historical period used.
Standardized historical performance data for Class I and Class II shares will be
restated to reflect the maximum initial front-end sales charge currently in
effect. For Class II shares such performance data will also take into account
the applicable contingent deferred sales charge in connection with redemptions
within eighteen months. Each class adopted a plan of distribution under Rule
12b-1, effective November 1, 1996, which will affect subsequent performance.
Historical performance data will not be restated to include Rule 12b-1 fees,
which will only be taken into account from the effective date of the Rule 12b-1
plan.
TOTAL RETURN
AVERAGE ANNUAL TOTAL RETURN. Average annual total return is determined by
finding the average annual rates of return over the periods indicated below that
would equate an initial hypothetical $1,000 investment to its ending redeemable
value. The calculation assumes the maximum front-end sales charge is deducted
from the initial $1,000 purchase, and income dividends and capital gain
distributions are reinvested at Net Asset Value. The quotation assumes the
account was completely redeemed at the end of each period and the deduction of
all applicable charges and fees. If a change is made to the sales charge
structure, historical performance information will be restated to reflect the
maximum front-end sales charge currently in effect. The restated average annual
total return for each class for the one-, five- and ten-year periods ended
December 31, 1997, was:
CLASS I 1 YEAR 5 YEARS 10 YEARS
- ------------------------------------------------------------------------------
Mutual Shares 20.35% 18.85% 16.78%
Qualified 18.84% 18.78% 16.77%
Beacon 17.05% 18.29% 16.63%
Discovery* 16.95% 21.45% N/A
European** 17.14% N/A N/A
Financial Services*** N/A N/A N/A
CLASS II 1 YEAR 5 YEARS 10 YEARS
- --------------------------------------------------------------------------
Mutual Shares 22.89% 19.52% 17.11%
Qualified 21.46% 19.47% 17.10%
Beacon 19.49% 18.97% 16.96%
Discovery* 19.51% 22.17% N/A
European** 19.73% N/A N/A
Financial Services*** N/A N/A N/A
*Discovery commenced operations on December 31, 1992. The restated average
annual return from inception was 21.45% for Class I and 22.17% for Class II.
**European commenced operations on July 3, 1996. The restated average annual
return from inception was 21.72% for Class I and 23.47% for Class II.
***Financial Services commenced operations August 19, 1997.
These figures were calculated according to the SEC formula:
n
P(1+T) = ERV
where:
P = a hypothetical initial payment of $1,000 T = average annual total
return
n = number of years
ERV = ending redeemable value of a hypothetical $1,000 payment made at
the beginning of each period at the end of each period
CUMULATIVE TOTAL RETURN. Like average annual total return, cumulative total
return assumes the maximum front-end sales charge is deducted from the initial
$1,000 purchase, and income dividends and capital gain distributions are
reinvested at Net Asset Value. Cumulative total return, however, is based on the
actual return for a specified period rather than on the average return over the
periods indicated above. The restated cumulative total return for each class for
the one-, five- and ten-year periods ended December 31, 1997, was:
CLASS I 1 YEAR 5 YEARS 10 YEARS
- ---------------------------------------------------------------------------
Mutual Shares 20.35% 137.15% 371.54%
Qualified 18.84% 136.41% 371.13%
Beacon 17.05% 131.62% 365.60%
Discovery* 16.95% 164.22% N/A
European** 17.14% N/A N/A
Financial Services*** N/A N/A N/A
CLASS II 1 YEAR 5 YEARS 10 YEARS
Mutual Shares 22.89% 143.95% 385.03%
Qualified 21.46% 143.33% 384.88%
Beacon 19.49% 138.33% 378.94%
Discovery* 19.51% 172.17% N/A
European** 19.73% N/A N/A
Financial Services*** N/A N/A N/A
*Discovery commenced operations on December 31, 1992. The restated cumulative
total return from inception was 164.22% for Class I and 172.17% for Class II.
**European commenced operations on July 3, 1996. The restated cumulative total
return from inception was 34.16% for Class I and 37.05% for Class II.
***Financial Services commenced operations on August 19, 1997. The cumulative
total return from inception was 18.37% for Class I and 21.46% for Class II.
VOLATILITY
Occasionally statistics may be used to show the Fund's volatility or risk.
Measures of volatility or risk are generally used to compare the Fund's Net
Asset Value or performance to a market index. One measure of volatility is beta.
Beta is the volatility of a fund relative to the total market, as represented by
an index considered representative of the types of securities in which the fund
invests. A beta of more than 1.00 indicates volatility greater than the market
and a beta of less than 1.00 indicates volatility less than the market. Another
measure of volatility or risk is standard deviation. Standard deviation is used
to measure variability of Net Asset Value or total return around an average over
a specified period of time. The idea is that greater volatility means greater
risk undertaken in achieving performance.
OTHER PERFORMANCE QUOTATIONS
The Fund may also quote the performance of shares without a sales charge. Sales
literature and advertising may quote a current distribution rate, yield,
cumulative total return, average annual total return and other measures of
performance as described elsewhere in this SAI with the substitution of Net
Asset Value for the public Offering Price.
Sales literature referring to the use of the Fund as a potential investment for
Individual Retirement Accounts (IRAs), Business Retirement Plans, and other
tax-advantaged retirement plans may quote a total return based upon compounding
of dividends on which it is presumed no federal income tax applies.
The Fund may include in its advertising or sales material information relating
to investment objectives and performance results of funds belonging to the
Franklin Templeton Group of Funds. Resources is the parent company of the
advisors and underwriter of the Franklin Templeton Group of Funds.
COMPARISONS
To help you better evaluate how an investment in the Fund may satisfy your
investment objective, advertisements and other materials about the Fund may
discuss certain measures of Fund performance as reported by various financial
publications. Materials may also compare performance (as calculated above) to
performance as reported by other investments, indices, and averages. These
comparisons may include, but are not limited to, the following examples:
a) Dow Jones Composite Average or its component averages - an unmanaged index
composed of 30 blue-chip industrial corporation stocks (Dow Jones(R) Industrial
Average), 15 utilities company stocks (Dow Jones Utilities Average), and 20
transportation company stocks. Comparisons of performance assume reinvestment of
dividends.
b) Standard & Poor's(R) 500 Stock Index or its component indices - an unmanaged
index composed of 400 industrial stocks, 40 financial stocks, 40 utilities
stocks, and 20 transportation stocks. Comparisons of performance assume
reinvestment of dividends.
c) The New York Stock Exchange composite or component indices - an unmanaged
index of all industrial, utilities, transportation, and finance stocks listed on
the NYSE.
d) Wilshire 5000 Equity Index - represents the return on the market value of all
common equity securities for which daily pricing is available. Comparisons of
performance assume reinvestment of dividends.
e) Lipper - Mutual Fund Performance Analysis and Lipper - Fixed Income Fund
Performance Analysis - measure total return and average current yield for the
mutual fund industry and rank individual mutual fund performance over specified
time periods, assuming reinvestment of all distributions, exclusive of any
applicable sales charges.
f) CDA Mutual Fund Report, published by CDA Investment Technologies, Inc.
analyzes price, current yield, risk, total return, and average rate of return
(average annual compounded growth rate) over specified time periods for the
mutual fund industry.
g) Mutual Fund Source Book, published by Morningstar, Inc. - analyzes price,
yield, risk, and total return for mutual funds.
h) Financial publications: THE WALL STREET JOURNAL, AND BUSINESS WEEK, CHANGING
TIMES, FINANCIAL WORLD, FORBES, FORTUNE, AND MONEY magazines - provide
performance statistics over specified time periods.
i) Consumer Price Index (or Cost of Living Index), published by the U.S. Bureau
of Labor Statistics - a statistical measure of change, over time, in the price
of goods and services in major expenditure groups.
j) Stocks, Bonds, Bills, and Inflation, published by Ibbotson Associates
historical measure of yield, price, and total return for common and small
company stock, long-term government bonds, Treasury bills, and inflation.
k) Savings and Loan Historical Interest Rates as published in the U.S. Savings &
Loan League Fact Book.
l) Historical data supplied by the research departments of CS First Boston
Corporation, the J. P. Morgan companies, Salomon Brothers, Merrill Lynch, Lehman
Brothers and Bloomberg L.P.
m) Standard & Poor's(R) 100 Stock Index - an unmanaged index based on the prices
of 100 blue-chip stocks, including 92 industrials, one utility, two
transportation companies, and 5 financial institutions. The S&P 100 Stock Index
is a smaller more flexible index for options trading.
n) Morningstar - information published by Morningstar, Inc., including
Morningstar proprietary mutual fund ratings. The ratings reflect Morningstar's
assessment of the historical risk-adjusted performance of a fund over specified
time periods relative to other funds within its category.
o) Salomon Brothers Broad Bond Index or its component indices - measures yield,
price and total return for Treasury, agency, corporate and mortgage bonds.
p) Lehman Brothers Aggregate Bond Index or its component indices - measures
yield, price and total return for Treasury, agency, corporate, mortgage and
Yankee bonds.
r) Salomon Brothers Composite High Yield Index or its component indices -
measures yield, price and total return for the Long-Term High-Yield Index,
Intermediate-Term High-Yield Index, and Long-Term Utility High-Yield Index.
From time to time, advertisements or information for the Fund may include a
discussion of certain attributes or benefits to be derived from an investment in
the Fund. The advertisements or information may include symbols, headlines, or
other material that highlights or summarizes the information discussed in more
detail in the communication.
Advertisements or information may also compare the Funds' performance to the
return on CDs or other investments. You should be aware, however, that an
investment in the Fund involves the risk of fluctuation of principal value, a
risk generally not present in an investment in a CD issued by a bank. For
example, as the general level of interest rates rise, the value of the Fund's
fixed-income investments, if any, as well as the value of its shares that are
based upon the value of such portfolio investments, can be expected to decrease.
Conversely, when interest rates decrease, the value of the Fund's shares can be
expected to increase. CDs are frequently insured by an agency of the U.S.
government. An investment in the Fund is not insured by any federal, state or
private entity.
In assessing comparisons of performance, you should keep in mind that the
composition of the investments in the reported indices and averages is not
identical to the Fund's portfolio, the indices and averages are generally
unmanaged, and the items included in the calculations of the averages may not be
identical to the formula used by the Fund to calculate its figures. In addition,
there can be no assurance that the Fund will continue its performance as
compared to these other averages.
MISCELLANEOUS INFORMATION
- -----------------------------------------------------------------------------
The Fund may help you achieve various investment goals such as accumulating
money for retirement, saving for a down payment on a home, college costs and
other long-term goals. The Franklin College Costs Planner may help you in
determining how much money must be invested on a monthly basis in order to have
a projected amount available in the future to fund a child's college education.
(Projected college cost estimates are based upon current costs published by the
College Board.) The Franklin Retirement Planning Guide leads you through the
steps to start a retirement savings program. Of course, an investment in the
Fund cannot guarantee that these goals will be met.
The Fund is a member of the Franklin Templeton Group of Funds, one of the
largest mutual fund organizations in the U.S., and may be considered in a
program for diversification of assets. Founded in 1947, Franklin, one of the
oldest mutual fund organizations, has managed mutual funds for over 49 years and
now services more than 2.9 million shareholder accounts. In 1992, Franklin, a
leader in managing fixed-income mutual funds and an innovator in creating
domestic equity funds, joined forces with Templeton, a pioneer in international
investing. The Mutual Series team, known for its value-driven approach to
domestic equity investing, became part of the organization four years later.
Together, the Franklin Templeton Group has over $221 billion in assets under
management for more than 6 million U.S. based mutual fund shareholder and other
accounts. The Franklin Templeton Group of Funds offers 120 U.S. based open-end
investment companies to the public. The Fund may identify itself by its NASDAQ
symbol or CUSIP number.
Currently, there are more mutual funds than there are stocks listed on the NYSE.
While many of them have similar investment objectives, no two are exactly alike.
As noted in the Prospectus, shares of the Fund are generally sold through
Securities Dealers. Investment representatives of such Securities Dealers are
experienced professionals who can offer advice on the type of investment
suitable to your unique goals and needs, as well as the types of risks
associated with such investment.
As of February 2, 1998, the principal shareholders of Mutual Series, beneficial
or of record, were as follows:
NAME AND ADDRESS SHARE AMOUNT PERCENTAGE
- --------------------------------------------------------------------
BEACON - CLASS I
Manufacturers Life Ins. Co. USA 8,737,769.066 15.33%
200 Bloor St. E
Toronto, Ontario
Canada 231 M4W 1E5
EUROPEAN - CLASS Z
Michael Price 8,439,422.451 19.64%
51 John F. Kennedy Pkwy.
Short Hills, NJ 07078
FINANCIAL SERVICES - CLASS Z
State Street Bank 661,980.365 5.38%
Cust. Markman Aggressive
1 Heritage Dr.
North Quincy, MA 02171
From time to time, the number of Fund shares held in the "street name" accounts
of various Securities Dealers for the benefit of their clients or in centralized
securities depositories may exceed 5% of the total shares outstanding.
In the event of disputes involving multiple claims of ownership or authority to
control your account, the Fund has the right (but has no obligation) to: (a)
freeze the account and require the written agreement of all persons deemed by
the Fund to have a potential property interest in the account, before executing
instructions regarding the account; (b) interplead disputed funds or accounts
with a court of competent jurisdiction; or (c) surrender ownership of all or a
portion of the account to the IRS in response to a Notice of Levy.
SUMMARY OF CODE OF ETHICS. Employees of the Franklin Templeton Group who are
access persons under the 1940 Act are permitted to engage in personal securities
transactions subject to the following general restrictions and procedures: (i)
the trade must receive advance clearance from a compliance officer and must be
completed by the close of the business day following the day clearance is
granted; (ii) copies of all brokerage confirmations and statements must be sent
to a compliance officer; (iii) all brokerage accounts must be disclosed on an
annual basis; and (iv) access persons involved in preparing and making
investment decisions must, in addition to (i), (ii) and (iii) above, file annual
reports of their securities holdings each January and inform the compliance
officer (or other designated personnel) if they own a security that is being
considered for a fund or other client transaction or if they are recommending a
security in which they have an ownership interest for purchase or sale by a fund
or other client.
FINANCIAL STATEMENTS
- ----------------------------------------------------------------------------
The audited financial statements contained in the Annual Report to Shareholders
of the Fund, for the fiscal year ended December 31, 1997, including the
auditors' report, are incorporated herein by reference.
USEFUL TERMS AND DEFINITIONS
- ----------------------------------------------------------------------------
1940 ACT - Investment Company Act of 1940,
as amended
BOARD - The Board of Directors of the Fund
CD - Certificate of deposit
CLASS I, CLASS II AND CLASS Z - The Fund offers three classes of shares,
designated "Class I," "Class II," and "Class Z." The three classes have
proportionate interests in the Fund's portfolio. They differ, however, primarily
in their sales charge and expense structures.
CODE - Internal Revenue Code of 1986, as amended
DISTRIBUTORS - Franklin/Templeton Distributors, Inc., the Fund's principal
underwriter
FRANKLIN MUTUAL - Franklin Mutual Advisers, Inc., the Fund's investment manager
FRANKLIN TEMPLETON FUNDS - The U.S. registered mutual funds in the Franklin
Group of Funds(R) and the Templeton Group of Funds except Franklin Valuemark
Funds, Templeton Capital Accumulator Fund, Inc., Templeton Variable Annuity
Fund, and Templeton Variable Products Series Fund
FRANKLIN TEMPLETON GROUP - Franklin Resources, Inc., a publicly owned holding
company, and its various subsidiaries
FRANKLIN TEMPLETON GROUP OF FUNDS - All U.S. registered investment companies in
the Franklin Group of Funds(R) and the Templeton Group of Funds
FT SERVICES - Franklin Templeton Services, Inc., the Fund's administrator
INVESTOR SERVICES - Franklin/Templeton Investor Services, Inc., the Fund's
shareholder servicing and transfer agent
IRS - Internal Revenue Service
LETTER - Letter of Intent
MOODY'S - Moody's Investors Service, Inc.
NASD - National Association of Securities Dealers, Inc.
NET ASSET VALUE (NAV) - The value of a mutual fund is determined by deducting
the fund's liabilities from the total assets of the portfolio. The net asset
value per share is determined by dividing the net asset value of the fund by the
number of shares outstanding.
NYSE - New York Stock Exchange
OFFERING PRICE - The public offering price is based on the Net Asset Value per
share of the class and includes the front-end sales charge. The maximum
front-end sales charge is 4.50% for Class I and 1% for Class II.
PROSPECTUS - The prospectus for the Fund's Class I and Class II shares dated May
1, 1998, as may be amended from time to time
RESOURCES - Franklin Resources, Inc.
SAI - Statement of Additional Information
S&P - Standard & Poor's Corporation
SEC - U.S. Securities and Exchange Commission
SECURITIES DEALER - A financial institution that, either directly or through
affiliates, has an agreement with Distributors to handle customer orders and
accounts with the Fund. This reference is for convenience only and does not
indicate a legal conclusion of capacity.
U.S. - United States
WE/OUR/US - Unless a different meaning is indicated by the context, these terms
refer to the Fund and/or Investor Services, Distributors, or other wholly owned
subsidiaries of Resources.
FRANKLIN MUTUAL SERIES FUND INC. - CLASS Z
STATEMENT OF ADDITIONAL INFORMATION
MAY 1, 1998
51 JOHN F. KENNEDY PARKWAY
SHORT HILLS, NJ 07078 1-800/DIAL BEN
TABLE OF CONTENTS
How Does the Fund Invest Its Assets?..................
Restrictions and Limitations..........................
Officers and Directors................................
Investment Management
and Other Services...................................
How Does the Fund Buy
Securities for Its Portfolio?........................
How Do I Buy, Sell and
Exchange Shares?
How Are Fund Shares Valued?...........................
Additional Information on
Distributions and Taxes..............................
The Fund's Underwriter................................
How Does the Fund
Measure Performance?.................................
Miscellaneous Information.............................
Financial Statements..................................
Useful Terms and Definitions..........................
- -----------------------------------------------------------------------------
When reading this SAI, you will see certain terms beginning with capital
letters. This means the term is explained under "Useful Terms and
Definitions."
- -----------------------------------------------------------------------------
Mutual Shares Fund ("Mutual Shares"), Mutual Qualified Fund ("Qualified"),
Mutual Beacon Fund ("Beacon"), Mutual Discovery Fund ("Discovery"), Mutual
European Fund ("European") and Mutual Financial Services Fund ("Financial
Services") are diversified series of Franklin Mutual Series Fund Inc. ("Mutual
Series"), an open-end management investment company. Each series may,
individually or together, be referred to as the "Fund(s)." The principal
investment objective of Mutual Shares, Qualified, Beacon, European and Financial
Services is capital appreciation, which may occasionally be short-term. A
secondary objective of each is income. Discovery's investment objective is
long-term capital appreciation.
This SAI describes the Fund's Class Z shares. The Prospectus, dated May 1, 1998,
as may be amended from time to time, contains the basic information you should
know before investing in the Fund. For a free copy, call 1-800/DIAL BEN.
THIS SAI IS NOT A PROSPECTUS. IT CONTAINS INFORMATION IN ADDITION TO AND IN MORE
DETAIL THAN SET FORTH IN THE PROSPECTUS. THIS SAI IS INTENDED TO PROVIDE YOU
WITH ADDITIONAL INFORMATION REGARDING THE ACTIVITIES AND OPERATIONS OF THE FUND,
AND SHOULD BE READ IN CONJUNCTION WITH THE PROSPECTUS.
- ------------------------------------------------------------------------------
MUTUAL FUNDS, ANNUITIES, AND OTHER INVESTMENT PRODUCTS:
o ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY OF T
THE U.S. GOVERNMENT;
o ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED
OR ENDORSED BY, ANY BANK;
o ARE SUBJECT TO INVESTMENT RISKS, INCLUDING THE POSSIBLE LOSS
OF PRINCIPAL.
- ---------------------------------------------------------------------------
HOW DOES THE FUND INVEST ITS ASSETS?
- ----------------------------------------
The following provides more detailed information about some of the securities
the Fund may buy and its investment policies. You should read it together with
the section in the Prospectus entitled "How Does the Fund Invest Its Assets?"
The general investment policy of the Fund is to invest in securities if, in the
opinion of Franklin Mutual, they are available at prices less than their
intrinsic value, as determined by Franklin Mutual after careful analysis and
research, taking into account, among other factors, the relationship of book
value to market value of the securities, cash flow, and multiples of earnings of
comparable securities. The Fund reserves freedom of action to invest in common
stock, preferred stock, debt securities and other securities in such proportions
as Franklin Mutual deems advisable. Without committing any fixed portion of the
Fund's assets, Franklin Mutual typically maintains a portion of the assets of
the Fund invested in debt securities and preferred stocks (which may be
convertible). In addition, the Fund may also invest in restricted debt and
equity securities, in foreign securities, and in other investment company
securities.
REPURCHASE AGREEMENTS AND LOANS OF SECURITIES
The Fund may invest in repurchase agreements with domestic banks or
broker-dealers. Repurchase agreements are considered loans by the Fund
collateralized by the underlying securities. As with loans of portfolio
securities which the Fund may make, these transactions must be fully
collateralized at all times. Franklin Mutual will monitor the creditworthiness
of the other party and will monitor the value of the collateral by marking to
market daily in order to confirm that its value is at least 100% of the agreed
upon sum to be paid to the Fund.
Repurchase agreements and lending of portfolio securities involve some credit
risk to the Fund. If the other party defaults on its obligations, the Fund could
be delayed or prevented from receiving payment or recovering its collateral.
Even if the Fund recovers the collateral in such a situation, the Fund may
receive less than its purchase price upon resale.
GENERAL CHARACTERISTICS OF OPTIONS
Put options and call options typically have similar structural characteristics
and operational mechanics regardless of the underlying instrument on which they
are purchased or sold. Thus, the following general discussion relates to each of
the particular types of options discussed in greater detail below. In addition,
many hedging transactions involving options require segregation of Fund assets
in special accounts, as described below under "Use of Segregated and Other
Special Accounts."
A put option gives the purchaser of the option, upon payment of a premium, the
right to sell, and the seller of the option, the obligation to buy, the
underlying security, commodity, index, currency or other instrument at the
exercise price. For instance, the Fund's purchase of a put option on a security
might be designed to protect its holdings in the underlying instrument (or, in
some cases, a similar instrument) against a substantial decline in the market
value by giving the Fund the right to sell such instrument at the option
exercise price. A call option, upon payment of a premium, gives the purchaser of
the option the right to buy, and the seller the obligation to sell, the
underlying instrument at the exercise price. The Fund's purchase of a call
option on a security, financial future, index, currency or other instrument
might be intended to protect the Fund against an increase in the price of the
underlying instrument that it intends to purchase in the future by fixing the
price at which it may purchase such instrument.
An American style put or call option may be exercised at any time during the
option period while a European style put or call option may be exercised only
upon expiration or during a fixed period prior thereto. The Fund is authorized
to purchase and sell exchange-listed options and over-the-counter options ("OTC
options"). Exchange-listed options are issued by a regulated intermediary such
as the Options Clearing Corporation ("OCC"), which guarantees the performance of
the obligations of the parties to such options. The discussion below uses the
OCC as a paradigm, but is also applicable to other financial intermediaries.
With certain exceptions, OCC-issued and exchange-listed options generally settle
by physical delivery of the underlying security or currency, although in the
future cash settlement may become available. Index options and Eurodollar
instruments are cash settled for the net amount, if any, by which the option is
"in-the-money" (i.e., where the value of the underlying instrument exceeds, in
the case of a call option, or is less than, in the case of a put option, the
exercise price of the option) at the time the option is exercised. Frequently,
rather than taking or making delivery of the underlying instrument through the
process of exercising the option, listed options are closed by entering into
offsetting option transactions.
The Fund's ability to close out its position as a purchaser or seller of an OCC
or exchange-listed put or call option is dependent, in part, upon the liquidity
of the option market. Among the possible reasons for the absence of a liquid
option market on an exchange are: (i) insufficient trading interest in certain
options; (ii) restrictions on transactions imposed by an exchange; (iii) trading
halts, suspensions or other restrictions imposed with respect to particular
classes or series of options or underlying securities including reaching daily
price limits; (iv) interruption of the normal operations of the OCC or an
exchange; (v) inadequacy of the facilities of an exchange or OCC to handle
current trading volume; or (vi) a decision by one or more exchanges to
discontinue the trading of options (or a particular class or series of options),
in which event the relevant market for that option on that exchange would cease
to exist, although outstanding options on that exchange would generally continue
to be exercisable in accordance with their terms.
The hours of trading for listed options may not coincide with the hours during
which the underlying financial instruments are traded. To the extent that the
option markets close before the markets for the underlying financial
instruments, significant price and rate movements can take place in the
underlying markets that cannot be reflected in the option markets.
OTC options are purchased from or sold to securities dealers, financial
institutions or other parties (each a "Counterparty," and collectively,
"Counterparties") through direct bilateral agreement with the Counterparty. In
contrast to exchange-listed options, which generally have standardized terms and
performance mechanics, all the terms of an OTC option, including such terms as
method of settlement, term, exercise price, premium, guarantees and security,
are set by negotiation of the parties. The Fund will only sell OTC options
(other than OTC currency options) that are subject to a buy-back provision
permitting the Fund to require the Counterparty to sell the option back to the
Fund at a formula price within seven days. The Fund expects generally to enter
into OTC options that have cash settlement provisions, although it is not
required to do so.
Unless the parties provide for it, there is no central clearing or guaranty
function in an OTC option. As a result, if the Counterparty fails to make or
take delivery of the security, currency or other instrument underlying an OTC
option it has entered into with the Fund or fails to make a cash settlement
payment due in accordance with the option, the Fund will lose any premium it
paid for the option as well as any anticipated benefit of the transaction.
Accordingly, Franklin Mutual must assess the creditworthiness of each such
Counterparty or any guarantor or credit enhancement of the Counterparty's credit
to determine the likelihood that the terms of the OTC option will be satisfied.
The Fund will engage in OTC option transactions only with U.S. government
securities dealers recognized by the Federal Reserve Bank of New York as
"primary dealers" or broker-dealers, domestic or foreign banks or other
financial institutions which have received (or the guarantors of the obligations
of which have received) a short-term credit rating of "A-l" from S&P or "P-l"
from Moody's, an equivalent rating from any nationally recognized statistical
rating organization ("NRSRO") or which Franklin Mutual determines is of
comparable credit quality. The staff of the SEC currently takes the position
that OTC options purchased by the Fund, and portfolio securities "covering" the
amount of the Fund's obligation pursuant to an OTC option sold by it (the cost
of the sell-back plus the in-the-money amount, if any) are illiquid, and are
subject to the Fund's limitations on investments in illiquid securities.
If the Fund sells a call option, the premium that it receives may serve as a
partial hedge, to the extent of the option premium, against a decrease in the
value of the underlying securities or instruments in its portfolio or will
increase the Fund's income. The sale of put options can also provide income.
The Fund may purchase and sell call options on securities, including U.S.
Treasury and agency securities, mortgage-backed securities, corporate debt
securities, equity securities (including convertible securities) and Eurodollar
instruments that are traded on U.S. and foreign securities exchanges and in the
over-the-counter markets and on securities indices, currencies and futures
contracts. All calls sold by the Fund must be "covered" (i.e., the Fund must own
the securities or futures contract subject to the call) or must meet the asset
segregation requirements described below as long as the call is outstanding.
Even though the Fund will receive the option premium to help protect it against
loss, a call sold by the Fund exposes the Fund during the term of the option to
possible loss of opportunity to realize appreciation in the market price of the
underlying security or instrument and may require the Fund to hold a security or
instrument which it might otherwise have sold.
The Fund may purchase and sell put options on securities including U.S. Treasury
and agency securities, mortgage-backed securities, corporate debt securities,
equity securities (including convertible securities) and Eurodollar instruments
(whether or not it holds the above securities in its portfolio) and on
securities indices, currencies and futures contracts other than futures on
individual corporate debt and individual equity securities. The Fund will not
sell put options if, as a result, more than 50% of the Fund's assets would be
required to be segregated to cover its potential obligations under such put
options other than those with respect to futures and options thereon. In selling
put options, there is a risk that the Fund may be required to buy the underlying
security at a disadvantageous price above the market price.
GENERAL CHARACTERISTICS OF FUTURES
The Fund may enter into financial futures contracts or purchase or sell put and
call options on such futures as a hedge against anticipated interest rate,
currency or equity market changes, for duration management and for risk
management purposes. Futures are generally bought and sold on the commodities
exchanges where they are listed with payment of initial and variation margin as
described below. The sale of a futures contract creates a firm obligation by the
Fund, as seller, to deliver to the buyer the specific type of financial
instrument called for in the contract at a specific future time for a specified
price (or, with respect to index futures and Eurodollar instruments, the net
cash amount). Options on futures contracts are similar to options on securities
except that an option on a futures contract gives the purchaser the right in
return for the premium paid to assume a position in a futures contract and
obligates the seller to deliver such option.
The Fund's use of financial futures and options thereon will in all cases be
consistent with applicable regulatory requirements and in particular the rules
and regulations of the Commodity Futures Trading Commission and will be entered
into only for a bona fide hedging, risk management (including duration
management) or other portfolio management purposes. Typically, maintaining a
futures contract or selling an option thereon requires the Fund to deposit with
a financial intermediary as security for its obligations an amount of cash or
other specified assets ("initial margin") which initially is typically 1% to 10%
of the face amount of the contract (but may be higher in some circumstances).
Additional cash or assets ("variation margin") may be required to be deposited
thereafter on a daily basis as the mark-to-market value of the contract
fluctuates. The purchase of an option on financial futures involves payment of a
premium for the option without any further obligation on the part of the Fund.
If the Fund exercises an option on a futures contract, it will be obligated to
post initial margin (and potential subsequent variation margin) for the
resulting futures positions just as it would for any position. Futures contracts
and options thereon are generally settled by entering into an offsetting
transaction, but there can be no assurance that the position can be offset prior
to settlement at an advantageous price nor that delivery will occur.
The Fund will not enter into a futures contract or related option (except for
closing transactions) if, immediately thereafter, the sum of the amount of its
initial margin and premiums on open futures contracts and options thereon would
exceed 5% of the Fund's total assets (taken at current value); however, in the
case of an option that is in-the-money at the time of the purchase, the
in-the-money amount may be excluded in calculating the 5% limitation. The
segregation requirements with respect to futures contracts and options thereon
are described below.
OPTIONS ON SECURITIES INDICES AND OTHER FINANCIAL INDICES
The Fund may also purchase and sell call and put options on securities indices
and other financial indices and in so doing can achieve many of the same
objectives it would achieve through the sale or purchase of options on
individual securities or other instruments. Options on securities indices and
other financial indices are similar to options on a security or other instrument
except that, rather than settling by physical delivery of the underlying
instrument, they settle by cash settlement, i.e., an option on an index gives
the holder the right to receive, upon exercise of the option, an amount of cash
if the closing level of the index upon which the option is based exceeds, in the
case of a call, or is less than, in the case of a put, the exercise price of the
option (except if, in the case of an OTC option, physical delivery is
specified). This amount of cash is equal to the excess of the closing price of
the index over the exercise price of the option, which also may be multiplied by
a formula value. The seller of the option is obligated, in return for the
premium received, to make delivery of this amount. The gain or loss on an index
depends on price movements in the instruments making up the market, market
segment, industry or other composite on which the underlying index is based,
rather than price movements in individual securities, as is the case with
respect to options on securities.
CURRENCY TRANSACTIONS
The Fund may engage in currency transactions with Counterparties in order to
hedge the value of portfolio holdings denominated in particular currencies
against fluctuations in relative value between those currencies and the U.S.
dollar. Currency transactions include forward currency contracts,
exchange-listed currency futures, exchange-listed and OTC options on currencies,
and currency swaps. A forward currency contract involves a privately negotiated
obligation to purchase or sell (with delivery generally required) a specific
currency at a future date, which may be any fixed number of days from the date
of the contract agreed upon by the parties, at a price set at the time of the
contract. A currency swap is an agreement to exchange cash flows on a notional
amount of two or more currencies based on the relative value differential among
them.
The Fund will usually enter into swaps on a net basis, i.e., the two payment
streams are netted out in a cash settlement on the payment date or dates
specified in the instrument, with the Fund receiving or paying, as the case may
be, only the net amount of the two payments. Inasmuch as these swaps are entered
into for good faith hedging purposes, Franklin Mutual and the Fund believe such
obligations do not constitute senior securities under the 1940 Act and,
accordingly, will not treat them as being subject to its borrowing restrictions.
The Fund may enter into currency transactions with Counterparties which have
received (or the guarantors of the obligations of such Counterparties have
received) a credit rating of A-l or P-l by S&P or Moody's, respectively, or that
have an equivalent rating from an NRSRO or are determined to be of equivalent
credit quality by Franklin Mutual. If there is a default by the Counterparty,
the Fund may have contractual remedies pursuant to the agreements related to the
transaction. The swap market has grown substantially in recent years with a
large number of banks and investment banking firms acting both as principals and
as agents utilizing standardized swap documentation. As a result, the swap
market has become relatively liquid.
The Fund's dealings in forward currency contracts and other currency
transactions such as futures, options, options on futures and swaps will be
limited to either specific transactions or portfolio positions. Transaction
hedging is entering into a currency transaction with respect to specific assets
or liabilities of the Fund, which will generally arise in connection with the
purchase or sale of its portfolio securities or the receipt of income therefrom.
Position hedging is entering into a currency transaction with respect to
portfolio security positions denominated or generally quoted in that currency.
The Fund will not enter into a transaction to hedge currency exposure to an
extent greater, after netting all transactions intended to wholly or partially
offset other transactions, than the aggregate market value (at the time of
entering into the transaction) of the securities held in its portfolio that are
denominated or generally quoted in or whose value is based upon such foreign
currency or currently convertible into such currency other than with respect to
proxy hedging as described below.
The Fund may also cross-hedge currencies by entering into transactions to
purchase or sell one or more currencies that are expected to decline in value
relative to other currencies to which the Fund has or in which the Fund expects
to have portfolio exposure.
To reduce the effect of currency fluctuations on the value of existing or
anticipated holdings of portfolio securities, the Fund may also engage in proxy
hedging. Proxy hedging is often used when the currency to which the Fund's
portfolio is exposed is difficult to hedge or to hedge against the U.S. dollar.
Proxy hedging entails entering into a forward contract to sell a currency whose
changes in value are generally considered to be linked to a currency or
currencies in which some or all of the Fund's portfolio securities are or are
expected to be denominated, and to buy U.S. dollars. The amount of the contract
would not exceed the value of the Fund's securities denominated in linked
currencies. For example, if Franklin Mutual considers the Austrian schilling to
be linked to the German deutsche mark (the "D-mark"), the Fund holds securities
denominated in schillings and Franklin Mutual believes that the value of
schillings will decline against the U.S. dollar, Franklin Mutual may enter into
a contract to sell D-marks and buy dollars. Currency hedging involves some of
the same risks and considerations as other transactions with similar
instruments. Currency transactions can result in losses to the Fund if the
currency being hedged fluctuates in value to a degree or in a direction that is
not anticipated. Further, there is the risk that the perceived linkage between
various currencies may not be present during the particular time that the Fund
is engaging in proxy hedging. If the Fund enters into a currency hedging
transaction, the Fund will comply with the asset segregation requirements
described below.
RISKS OF CURRENCY TRANSACTIONS
Currency transactions are subject to risks different from those of other
portfolio transactions. Because currency control is of great importance to the
issuing governments and influences economic planning and policy, purchases and
sales of currency and related instruments can be negatively affected by
government exchange controls, blockages, and manipulations or exchange
restrictions imposed by governments. These can result in losses to the Fund if
it is unable to deliver or receive currency or funds in settlement of
obligations and could also cause hedges it has entered into to be rendered
useless, resulting in full currency exposure as well as incurring transaction
costs. Buyers and sellers of currency futures are subject to the same risks that
apply to the use of futures generally. Further, settlement of a currency futures
contract for the purchase of most currencies must occur at a bank based in the
issuing nation. Trading options on currency futures is relatively new, and the
ability to establish and close out positions on such options is subject to the
maintenance of a liquid market which may not always be available. Currency
exchange rates may fluctuate based on factors extrinsic to that country's
economy.
COMBINED TRANSACTIONS
The Fund may enter into multiple transactions, including multiple options
transactions, multiple futures transactions, multiple currency transactions
(including forward currency contracts) and any combination of futures, options
and currency transactions ("component transactions"), instead of a single
hedging transaction, as part of a single or combined strategy when, in the
opinion of Franklin Mutual, it is in the best interests of the Fund to do so. A
combined transaction will usually contain elements of risk that are present in
each of its component transactions. Although combined transactions are normally
entered into based on Franklin Mutual's judgment that the combined strategies
will reduce risk or otherwise more effectively achieve the desired portfolio
management goal, it is possible that the combination will instead increase such
risks or hinder achievement of the portfolio management objective.
RISKS OF HEDGING TRANSACTIONS OUTSIDE THE U.S.
When conducted outside the U.S., hedging transactions may not be regulated as
rigorously as in the U.S., may not involve a clearing mechanism and related
guarantees, and are subject to the risk of governmental actions affecting
trading in, or the prices of, foreign securities, currencies and other
instruments. The value of such positions also could be adversely affected by:
(i) other complex foreign political, legal and economic factors, (ii) lesser
availability than in the U.S. of data on which to make trading decisions, (iii)
delays in the Fund's ability to act upon economic events occurring in foreign
markets during nonbusiness hours in the U.S., (iv) the imposition of different
exercise and settlement terms and procedures and margin requirements than in the
U.S., and (v) lower trading volume and liquidity.
USE OF SEGREGATED AND OTHER SPECIAL ACCOUNTS
Many hedging transactions, in addition to other requirements, require that the
Fund segregate liquid high grade assets with its custodian bank to the extent
Fund obligations are not otherwise "covered" through ownership of the underlying
security, financial instrument or currency. In general, either the full amount
of any obligation by the Fund to pay or deliver securities or assets must be
covered at all times by the securities, instruments or currency required to be
delivered, or, subject to any regulatory restrictions, an amount of cash or
liquid high grade securities at least equal to the current amount of the
obligation must be segregated with the custodian bank. The segregated assets
cannot be sold or transferred unless equivalent assets are substituted in their
place or it is no longer necessary to segregate them. For example, a call option
written by the Fund will require the Fund to hold the securities subject to the
call (or securities convertible into the needed securities without additional
consideration) or to segregate liquid high grade securities sufficient to
purchase and deliver the securities if the call is exercised. A call option sold
by the Fund on an index will require the Fund to own portfolio securities which
correlate with the index or to segregate liquid high grade assets equal to the
excess of the index value over the exercise price on a current basis. A put
option written by the Fund requires the Fund to segregate liquid high grade
assets equal to the exercise price.
A currency contract which obligates the Fund to buy or sell currency will
generally require the Fund to hold an amount of the currency or liquid
securities denominated in that currency equal to the Fund's obligations or to
segregate liquid high grade assets equal to the amount of the Fund's obligation.
However, the segregation requirement does not apply to currency contracts which
are entered in order to "lock in" the purchase or sale price of a trade in a
security denominated in a foreign currency pending settlement within the time
customary for such securities.
OTC options entered into by the Fund, including those on securities, currency,
financial instruments or indices and OCC-issued and exchange-listed index
options will generally provide for cash settlement. As a result, when the Fund
sells these instruments it will only segregate an amount of assets equal to its
accrued net obligations, as there is no requirement for payment or delivery of
amounts in excess of the net amount. These amounts will equal 100% of the
exercise price in the case of a noncash settled put, the same as an OCC
guaranteed listed option sold by the Fund, or the in-the-money amount plus any
sell-back formula amount in the case of a cash-settled put or call. In addition,
when the Fund sells a call option on an index at a time when the in-the-money
amount exceeds the exercise price, the Fund will segregate, until the option
expires or is closed out, cash or cash equivalents equal in value to such
excess. OCC-issued and exchange-listed options sold by the Fund other than those
above generally settle with physical delivery, or with an election of either
physical delivery or cash settlement, and the Fund will segregate an amount of
assets equal to the full value of the option. OTC options settling with physical
delivery, or with an election of either physical delivery or cash settlement,
will be treated the same as other options settling with physical delivery.
In the case of a futures contract or an option thereon, the Fund must deposit
initial margin and possible daily variation margin in addition to segregating
assets sufficient to meet its obligation to purchase or provide securities or
currencies, or to pay the amount owed at the expiration of an index-based
futures contract. Such assets may consist of cash, cash equivalents, liquid debt
or equity securities or other acceptable assets.
Hedging transactions may be covered by other means when consistent with
applicable regulatory policies. The Fund may also enter into offsetting
transactions so that its combined position, coupled with any segregated assets,
equals its net outstanding obligation in related options and hedging
transactions. For example, the Fund could purchase a put option if the strike
price of that option is the same or higher than the strike price of a put option
sold by the Fund. Moreover, instead of segregating assets if the Fund held a
futures or forward contract, it could purchase a put option on the same futures
or forward contract with a strike price as high or higher than the price of the
contract held. Other hedging transactions may also be offset in combinations. If
the offsetting transaction terminates at the time of or after the primary
transaction, no segregation is required, but if it terminates prior to such
time, assets equal to any remaining obligation would need to be segregated.
DEPOSITARY RECEIPTS
The Fund may invest in securities commonly known as American Depositary Receipts
("ADRs"), and in European Depositary Receipts ("EDRs") or other securities
representing interests in securities of foreign issuers. ADRs are certificates
issued by a U.S. bank or trust company and represent the right to receive
securities of a foreign issuer deposited in a domestic bank or foreign branch of
a U.S. bank and traded on a U.S. exchange or in an over-the-counter market. EDRs
are receipts issued in Europe generally by a non-U.S. bank or trust company that
evidence ownership of non-U.S. or domestic securities. Generally, ADRs are in
registered form and EDRs are in bearer form. There are no fees imposed on the
purchase or sale of ADRs or EDRs although the issuing bank or trust company may
impose charges for the collection of dividends and the conversion of ADRs and
EDRs into the underlying securities. Investment in ADRs has certain advantages
over direct investment in the underlying non-U.S. securities, since: (i) ADRs
are U.S. dollar denominated investments which are easily transferable and for
which market quotations are readily available and (ii) issuers whose securities
are represented by ADRs are subject to the same auditing, accounting and
financial reporting standards as domestic issuers. EDRs are not necessarily
denominated in the currency of the underlying security.
MEDIUM AND LOWER RATED CORPORATE DEBT SECURITIES
The Fund may invest in securities that are rated in the medium to lowest rating
categories by S&P and Moody's, some of which may be so-called "junk bonds." The
Fund has historically invested in securities of distressed issuers when the
intrinsic values of such securities have, in the opinion of Franklin Mutual,
warranted such investment. Corporate debt securities rated Baa are regarded by
Moody's as being neither highly protected nor poorly secured. Interest payments
and principal security appears adequate to Moody's for the present, but certain
protective elements may be lacking or may be characteristically unreliable over
any great length of time. Such securities are regarded by Moody's as lacking
outstanding investment characteristics and having speculative characteristics.
Corporate debt securities rated BBB are regarded by S&P as having adequate
capacity to pay interest and repay principal. Such securities are regarded by
S&P as normally exhibiting adequate protection parameters, although adverse
economic conditions or changing circumstances are more likely to lead to a
weakened capacity to pay interest and repay principal for securities in this
rating category than in higher rated categories.
Corporate debt securities which are rated B are regarded by Moody's as generally
lacking characteristics of the desirable investment. In Moody's view, assurance
of interest and principal payments or of maintenance of other terms of the
security over any long period of time may be small. Corporate debt securities
rated BB, B, CCC, CC and C are regarded by S&P on balance as predominantly
speculative with respect to capacity to pay interest and repay principal in
accordance with the terms of the obligation. In S&P's view, although such
securities likely have some quality and protective characteristics, these are
outweighed by large uncertainties or major risk exposures to adverse conditions.
BB and B are regarded by S&P as indicating the two lowest degrees of speculation
in this group of ratings. Securities rated D by S&P or C by Moody's are in
default and are not currently performing. The Fund will rely on Franklin
Mutual's judgment, analysis and experience in evaluating such debt securities.
In this evaluation, Franklin Mutual will take into consideration, among other
things, the issuer's financial resources, its sensitivity to economic conditions
and trends, its operating history, the quality of the issuer's management and
regulatory matters as well as the price of the security. Franklin Mutual may
also consider, although it does not rely primarily on, the credit ratings of
Moody's and S&P in evaluating lower rated corporate debt securities. Such
ratings evaluate only the safety of principal and interest payments, not market
value risk. Additionally, because the creditworthiness of an issuer may change
more rapidly than is able to be timely reflected in changes in credit ratings,
Franklin Mutual monitors the issuers of corporate debt securities held in the
Fund's portfolio. The credit rating assigned to a security is a factor
considered by Franklin Mutual in selecting a security for a series, but the
intrinsic value in light of market conditions and Franklin Mutual's analysis of
the fundamental values underlying the issuer are of at least equal significance.
Because of the nature of medium and lower rated corporate debt securities,
achievement by each series of its investment objective when investing in such
securities is dependent on the credit analysis of Franklin Mutual. If the Fund
purchased primarily higher rated debt securities, such risks would be
substantially reduced.
A general economic downturn or a significant increase in interest rates could
severely disrupt the market for medium and lower grade corporate debt securities
and adversely affect the market value of such securities. Securities in default
are relatively unaffected by such events or by changes in prevailing interest
rates. In addition, in such circumstances, the ability of issuers of medium and
lower grade corporate debt securities to repay principal and to pay interest, to
meet projected business goals and to obtain additional financing may be
adversely affected. Such consequences could lead to an increased incidence of
default for such securities and adversely affect the value of the corporate debt
securities in the Fund's portfolio. The secondary market prices of medium and
lower grade corporate debt securities are less sensitive to changes in interest
rates than are higher rated debt securities, but are more sensitive to adverse
economic changes or individual corporate developments. Adverse publicity and
investor perceptions, whether or not based on rational analysis, may also affect
the value and liquidity of medium and lower grade corporate debt securities,
although such factors also present investment opportunities when prices fall
below intrinsic values. Yields on debt securities in a series' portfolio that
are interest rate sensitive can be expected to fluctuate over time. In addition,
periods of economic uncertainty and changes in interest rates can be expected to
result in increased volatility of market price of any medium to lower grade
corporate debt securities in the Fund's portfolio and thus could have an effect
on the Net Asset Value of the Fund if other types of securities did not show
offsetting changes in values. The secondary market value of corporate debt
securities structured as zero coupon securities or payment in kind securities
may be more volatile in response to changes in interest rates than debt
securities which pay interest periodically in cash. Because such securities do
not pay current interest, but rather, income is accreted, to the extent that a
series does not have available cash to meet distribution requirements with
respect to such income, it could be required to dispose of portfolio securities
that it otherwise would not. Such disposition could be at a disadvantageous
price. Failure to satisfy distribution requirements could result in the Fund
failing to qualify as a pass-through entity under the Code. Investment in such
securities also involves certain other tax considerations.
Franklin Mutual values the Fund's investments pursuant to guidelines adopted and
periodically reviewed by the Board. See "How Are Fund Shares Valued?" in this
SAI. To the extent that there is no established retail market for some of the
medium or low grade corporate debt securities in which the Fund may invest,
there may be thin or no trading in such securities and the ability of Franklin
Mutual to accurately value such securities may be adversely affected. Further,
it may be more difficult for a Fund to sell such securities in a timely manner
and at their stated value than would be the case for securities for which an
established retail market did exist. The effects of adverse publicity and
investor perceptions may be more pronounced for securities for which no
established retail market exists as compared with the effects on securities for
which such a market does exist. During periods of reduced market liquidity and
in the absence of readily available market quotations for medium and lower grade
corporate debt securities held in the Fund's portfolio, the responsibility of
Franklin Mutual to value the Fund's securities becomes more difficult and
Franklin Mutual's judgment may play a greater role in the valuation of the
Fund's securities due to a reduced availability of reliable objective data. To
the extent that the Fund purchases illiquid corporate debt securities or
securities which are restricted as to resale, the Fund may incur additional
risks and costs. Illiquid and restricted securities may be particularly
difficult to value and their disposition may require greater effort and expense
than more liquid securities. Further, a Fund may be required to incur costs in
connection with the registration of restricted securities in order to dispose of
such securities, although under Rule 144A under the Securities Act of 1933
certain securities may be determined to be liquid pursuant to procedures adopted
by the Board under applicable guidelines.
SHORT SALES
The Fund may make short sales of securities. A short sale is a transaction in
which the Fund sells a security it does not own in anticipation that the market
price of that security will decline. Each Fund expects to make short sales as a
form of hedging to offset potential declines in long positions in similar
securities, in order to maintain portfolio flexibility and for profit.
When a Fund makes a short sale, it must borrow the security sold short and
deliver it to the broker-dealer through which it made the short sale as
collateral for its obligation to deliver the security upon conclusion of the
sale. The Fund may have to pay a fee to borrow particular securities and is
often obligated to pay over any payments received on such borrowed securities.
The Fund's obligation to replace the borrowed security will be secured by
collateral deposited with the broker-dealer, usually cash, U.S. government
securities or other high grade liquid securities similar to those borrowed. The
Fund will also be required to deposit similar collateral with its custodian to
the extent, if any, necessary so that the value of both collateral deposits in
the aggregate is at all times equal to at least 100% of the current market value
of the security sold short.
If the price of the security sold short increases between the time of the short
sale and the time the Fund replaces the borrowed security, the Fund will incur a
loss; conversely, if the price declines, the Fund will realize a gain. Any gain
will be decreased, and any loss increased, by the transaction costs described
above. Although the Fund's gain is limited to the price at which it sold the
security short, its potential loss is theoretically unlimited.
The Fund will not make a short sale if, after giving effect to such sale, the
market value of all securities sold short exceeds 5% of the value of its total
assets or the Fund's aggregate short sales of a particular class of securities
exceeds 25% of the outstanding securities of that class. The Fund may also make
short sales "against the box" without respect to such limitations. In this type
of short sale, at the time of the sale, the Fund owns or has the immediate and
unconditional right to acquire at no additional cost the identical security.
SPECIAL CONSIDERATIONS RELATED TO
SECURITIES IN THE FINANCIAL SERVICES INDUSTRY
Certain provisions of the federal securities laws permit investment portfolios,
including Financial Services, to invest in companies engaged in
securities-related activities only if certain conditions are met. Purchase of
securities of a company that derived 15% or less of gross revenues during its
most recent fiscal year from securities-related activities (i.e. broker, dealer,
underwriting, or investment advisory activities) are subject only to the same
percentage limitations as would apply to any other security a Fund may purchase.
Each Fund, including Financial Services, may purchase securities (not limited to
equity or debt individually) of an issuer that derived more than 15% of its
gross revenues in its most recent fiscal year from securities-related
activities, subject to the following conditions:
a. the purchase cannot cause more than 5% of the Fund's total assets to
be invested in securities of that issuer;
b. for an equity security, the purchase cannot result in the Fund owning
more than 5% of the issuer's outstanding securities in that class;
c. for a debt security, the purchase cannot result in the Fund owning
more than 10% of the outstanding principal amount of the issuer's
debt securities.
In applying the gross revenue test, an issuer's own securities-related
activities must be combined with its ratable share of securities-related
revenues from enterprises in which it owns a 20% or greater voting or equity
interest. All of the above percentage limitations, as well as the issuer's gross
revenue test, are applicable at the time of purchase. With respect to warrants,
rights, and convertible securities, a determination of compliance with the above
limitations must be made as though such warrant, right, or conversion privilege
had been exercised.
The following transactions would not be deemed to be an acquisition of
securities of a securities-related business: (i) receipt of stock dividends on
securities acquired in compliance with the conditions described above; (ii)
receipt of securities arising from a stock-for-stock split on securities
acquired in compliance with the conditions described above; (iii) exercise of
options, warrants, or rights acquired in compliance with the federal securities
laws; (iv) conversion of convertible securities acquired in compliance with the
conditions described above; (v) the acquisition of puts under certain
circumstances.
The Funds also are not permitted to acquire any security issued by Franklin
Mutual or any affiliated company (including Resources) that is a
securities-related business. The purchase of a general partnership interest in a
securities-related business is also prohibited.
In addition, the Funds are generally prohibited from purchasing or otherwise
acquiring any security (not limited to equity or debt individually) issued by
any insurance company if such Fund and any company controlled by such Fund own
in the aggregate or, as a result of the purchase, will own in the aggregate more
than 10% of the total outstanding voting stock of the insurance company. Certain
state insurance laws impose similar limitations.
RESTRICTIONS AND LIMITATIONS
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Mutual Shares, Qualified, Beacon, Discovery, European and Financial Services,
except as noted have each adopted the following fundamental investment
restrictions which may not be changed without the affirmative vote of the
holders of a majority of the outstanding voting securities of such series, which
means the lesser of (1) the holders of more than 50% of the outstanding shares
of voting stock of such securities or (2) 67% of the shares if more than 50% of
the shares are present at a meeting of shareholders in person or by proxy.
Unless otherwise noted, all percentage restrictions are as of the time of
investment after giving effect to the transaction. Pursuant to such restrictions
each series MAY NOT:
1. Purchase or sell commodities, commodity contracts (except in conformity with
regulations of the Commodities Futures Trading Commission such that the series
would not be considered a commodity pool), or oil and gas interests or real
estate. Securities or other instruments backed by commodities are not considered
commodities or commodity contracts for purposes of this restriction. Debt or
equity securities issued by companies engaged in the oil, gas, or real estate
businesses are not considered oil or gas interests or real estate for purposes
of this restriction. First mortgage loans and other direct obligations secured
by real estate are not considered real estate for purposes of this restriction.
2. Make loans, except to the extent the purchase of debt obligations of any type
are considered loans and except that the series may lend portfolio securities to
qualified institutional investors in compliance with requirements established
from time to time by the SEC and the securities exchanges on which such
securities are traded.
3. Issue securities senior to its stock or borrow money or utilize leverage in
excess of the maximum permitted by the 1940 Act which is currently 33 1/3% of
total assets (plus 5% for emergency or other short-term purposes) from banks on
a temporary basis from time to time to provide greater liquidity for redemptions
or for special circumstances.
4. Invest more than 25% of the value of its assets in a particular industry
(except that U.S. government securities are not considered an industry and
except that Financial Services will invest more than 25% of its assets in the
financial services industry).
5. Act as an underwriter except to the extent the series may be deemed to be an
underwriter when disposing of securities it owns or when selling its own shares.
6. Purchase the securities of any one issuer, other than the U.S. government or
any of its agencies or instrumentalities, if immediately after such purchase
more than 5% of the value of its total assets would be invested in such issuer,
or such series would own more than 10% of the outstanding voting securities of
such issuer, except that up to 25% of the value of such series' total assets may
be invested without regard to such 5% and 10% limitations.
7. Except as may be described in the Prospectus, engage in short sales, purchase
securities on margin or maintain a net short position.
If a percentage restriction is met at the time of investment, a later increase
or decrease in the percentage due to a change in the value or liquidity of
portfolio securities or the amount of assets will not be considered a violation
of any of the foregoing restrictions.
NONFUNDAMENTAL POLICIES
The following policies apply to all Funds with the exception of Financial
Services.
As a matter of policy that is not fundamental, no Fund will invest more than 5%
of its assets in warrants, and that no more than 2% of such assets may be
invested in warrants which are not listed on the NYSE or American Stock
Exchange. Also, as a matter of policy, the Fund will not purchase securities for
purposes of short term trading and will not invest more than 5% of its assets in
securities of issuers (together with any predecessors) in existence for less
than three years, provided that the aggregate percentage of assets invested in
such issuers, combined with illiquid investments, does not exceed 15%. The Fund
will not purchase the securities of any issuer of which any officer or director
of the Fund owns more than 1/2 of 1% of the outstanding securities or in which
the officers and directors in the aggregate own more than 5%. The Fund does not
borrow for leveraging purposes.
In order to permit the sale of shares in certain states, the Fund may make
commitments more restrictive than the operating restrictions described above.
Should the Fund determine that any such commitment is no longer in the best
interests of a particular series and its shareholders, the Fund will revoke the
commitment by terminating sales of such Fund's shares in the state involved.
OFFICERS AND DIRECTORS
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The Board has the responsibility for the overall management of the Fund,
including general supervision and review of its investment activities. The
Board, in turn, elects the officers of the Fund who are responsible for
administering the Fund's day-to-day operations. The affiliations of the officers
and Board members and their principal occupations for the past five years are
shown below. Members of the Board who are considered "interested persons" of the
Fund under the 1940 Act are indicated by an asterisk (*).
POSITIONS AND OFFICES PRINCIPAL OCCUPATION
NAME, AGE AND ADDRESS WITH MUTUAL SERIES DURING THE PAST FIVE YEARS
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Edward I. Altman, Ph.D. (56)
New York University
44 West 4th Street
New York, NY 10012
Director
Max L. Heine Professor of Financing and Vice Director, NYU Salomon Center, Stern
School of Business, New York University; editor and author of numerous financial
publications; and financial consultant.
Ann Torre Grant (40)
2369 N. Danville Street
Arlington, VA 22207
Director
Independent Director for SLM Holding Corporation (Sallie Mae), Manor Care
Realty, Inc. (nursing care companies) and condor Technology Solutions, Inc.
(information technology consulting); independent strategic and financial
consultant; from February 1995 until its sale in December 1997, was Executive
Vice President and Chief Financial Officer, NHP Incorporated (manager of
multifamily housing); prior to February 1995, was Vice President and Treasurer,
U.S. Air.
Andrew H. Hines, Jr. (75)
150 2nd Avenue N.
St. Petersburg, FL 33701
Director
Consultant for the Triangle Consulting Group; Executive-in-Residence of Eckerd
College (1991-present); formerly, Chairman of the Board and Chief Executive
Officer of Florida Progress Corporation (1982-1990) and director of various of
its subsidiaries; and director or trustee, as the case may be, of 24 of the
investment companies in the Franklin Templeton Group of Funds.
*Peter A. Langerman (42)
51 John F. Kennedy Pkwy.
Short Hills, NJ 07078
Executive Vice President and Director
Chief Operating Officer and Senior Vice President of Franklin Mutual Advisers,
Inc.; Director of Sunbeam Oster and Lancer Industries; Manager (Director) of MB
Motori, L.L.C. and MWCR, L.L.C.; and formerly, employee of Heine Securities
Corporation, June 1986 to October 1996.
*William J. Lippman (73)
One Parker Plaza
Fort Lee, NJ 07024
Director
Senior Vice President, Franklin Resources, Inc. and Franklin Management, Inc.;
President and Director, Franklin Advisory Services, Inc.; and officer and/or
director or trustee, as the case may be, of six of the investment companies in
the Franklin Templeton Group of Funds.
Bruce A. MacPherson (68)
1 Pequot Way
Canton, MA 02021
Director
Chairman of A.A. MacPherson, Inc. Boston, MA (representative for electrical
manufacturers).
Fred R. Millsaps (69)
2665 NE 37th Drive
Fort Lauderdale, FL 33394
Director
Manager of personal investments (1978-present); director of various business and
nonprofit organizations; formerly, Chairman and Chief Executive Officer of
Landmark Banking Corporation (1969-1978), Financial Vice President of Florida
Power and Light (1965-1969) and Vice President of the Federal Reserve Bank of
Atlanta (1958-1965); and director or trustee, as the case may be, of 24 of the
investment companies in the Franklin Templeton Group of Funds.
*Michael F. Price (46)
51 John F. Kennedy Pkwy.
Short Hills, NJ 07078
Chief Executive Officer and President
President, Chief Executive Officer, and Director of Franklin Mutual Advisers,
Inc.; Principal Executive Officer and majority owner of Compliance Solutions,
Inc. (developer of compliance monitoring software for money managers); Director
and owner of Clearwater Securities, Inc. (registered securities dealer); and
formerly, President, Chief Executive Officer, and Director of Heine Securities
Corporation, January 1987 to October 1996.
Leonard Rubin (72)
2 Executive Drive
Suite 560
Fort Lee, NJ 07024
Director
Partner in LDR Equities, LLC (manages various personal investments); Vice
President, Trimtex Co., Inc. (manufactures and markets specialty fabrics); and
trustee or director, as the case may be, of three of the investment companies in
the Franklin Templeton Group of Funds.
Barry F. Schwartz (49)
35 East 62nd Street
New York, NY 10021
Director
Executive Vice President and General Counsel, MacAndrews & Forbes Holdings, Inc.
(a diversified holding company).
Vaughn R. Sturtevant, M.D. (74)
6 Noyes Avenue
Waterville, ME 04901
Director
Practicing physician.
Robert E. Wade (52)
225 Hardwick Street
Belvidere, NJ 07823
Director
Practicing attorney.
Jeffrey A. Altman (31)
51 John F. Kennedy Pkwy.
Short Hills, NJ 07078
Vice President
Senior Vice President of Franklin Mutual Advisers, Inc.; Manager (Director), MB
Metropolis, L.L.C.; Manager (Director) of MB Motori, L.L.C., MWCR, L.L.C. and
S.H. Mortgage Acquisition, L.L.C.; Trustee of Resurgence Properties, Inc.; and
Chairman of the Board of Trustees, Value Property Trust; and formerly, employee
of Heine Securities Corporation, August 1988 to October 1996.
James R. Baio (44)
500 East Broward Blvd.
Fort Lauderdale, FL 33701
Treasurer
Certified Public Accountant; Treasurer, Franklin Mutual Advisers, Inc.; Senior
Vice President, Templeton Worldwide, Inc., Templeton Global Investors, Inc. and
Templeton Funds Trust Company; formerly, Senior Tax Manager for Ernst & Young
(certified public accountants) (1977-1989); and officer of 24 of the investment
companies in the Franklin Templeton Group of Funds.
Elizabeth N. Cohernour (48)
51 John F. Kennedy Pkwy.
Short Hills, NJ 07078
General Counsel and Secretary
Vice President, General Counsel and Assistant Secretary of Franklin Mutual
Advisers, Inc.; Secretary and General Counsel of Compliance Solutions, Inc.
(developer of compliance monitoring software for money managers and Clearwater
Securities, Inc. (registered securities dealer); and formerly, Secretary and
General Counsel of Heine Securities Corporation, May 1988 to October 1996.
Robert L. Friedman (38)
51 John F. Kennedy Pkwy.
Short Hills, NJ 07078
Vice President
Senior Vice President of Franklin Mutual Advisers, Inc.; and formerly, employee
of Heine Securities Corporation, August 1988 to October 1996.
Raymond Garea (48)
51 John F. Kennedy Pkwy.
Short Hills, NJ 07078
Vice President
Senior Vice President of Franklin Mutual Advisers, Inc.; and formerly, employee
of Heine Securities Corporation, March 1991 to October 1996; prior thereto, Vice
President and Analyst with Donaldson, Lufkin & Jenrette; Manager (Director), MB
Metropolis, L.L.C. and S.H. Mortgage Acquisition.
Lawrence N. Sondike (40)
51 John F. Kennedy Pkwy.
Short Hills, NJ 07078
Vice President
Senior Vice President of Franklin Mutual Advisers, Inc.; and formerly, employee
of Heine Securities Corporation, March 1984 to October 1996.
The Fund's independent Board members have standing audit, pension, nominating
and director's compensation and performance committees. The audit committee is
composed of Ms. Grant and Messrs. Altman and Wade. The pension committee is
composed of Messrs. Altman, Schwartz and Sturtevant. The nominating committee is
responsible for nominating candidates for independent Board member positions and
is composed of Messrs. MacPherson and Schwartz. The Board members' compensation
and performance committee is composed of Ms. Grant and Messrs. Wade and
Sturtevant.
The table above shows the officers and Board members who are affiliated with
Distributors and Franklin Mutual. Nonaffiliated members of the Board are
currently paid $45,000 per year plus $2,000 per meeting attended. Board members
are paid $500 plus out-of-pocket expenses for each committee meeting attended.
In 1993, the Board members approved a retirement plan which generally provides
payments to directors who have served 7 years and retire at age 70. At the time
of retirement, Directors are entitled to annual payments equal to one-half of
the retainer in effect as of the time of retirement. As shown above, some of the
nonaffiliated Board members also serve as directors or trustees of other
investment companies in the Franklin Templeton Group of Funds. They may receive
fees from these funds for their services. The following table provides the total
fees paid to nonaffiliated Board members by Mutual Series and by other funds in
the Franklin Templeton Group of Funds.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------
TOTAL FEES NUMBER OF BOARDS
RECEIVED FROM IN THE FRANKLIN
TOTAL FEES PENSION ANNUAL THE FRANKLIN TEMPLETON GROUP
RECEIVED FROM RETIREMENT BENEFITS TEMPLETON GROUP OF FUNDS ON WHICH
NAME MUTUAL SERIES* ACCRUED RETIREMENT OF FUNDS** EACH SERVES***
- -------------------------------------------------------------------------------
Edward I. Altman ..$23,250 0 $22,500 $ 23,250 1
Ann Torre Grant+ ..$24,000 0 $22,500 $ 24,000 1
Bruce A.
MacPherson $18,500 0 $22,500 $ 18,500 1
Barry F. Schwartz+ $18,000 0 $22,500 $ 18,000 1
Vaughn R.
Sturtevant, M.D. $17,500 0 $22,500 $ 17,750 1
Robert E. Wade+ ...$28,500 0 $22,500 $ 28,500 1
Andrew H.
Hines, Jr.+ ... $18,500 0 $22,500 $144,175 24
Fred R. Millsaps+ .$18,500 0 $22,500 $144,175 24
Leonard Rubin+ ....$18,500 0 $22,500 $ 40,400 3
</TABLE>
+Not vested in retirement plan
*For the fiscal year ended December 31, 1997.
**For the calendar year ended December 31, 1997.
***We base the number of boards on the number of registered investment companies
in the Franklin Templeton Group of Funds. This number does not include the total
number of series or funds within each investment company for which the Board
members are responsible. The Franklin Templeton Group of Funds currently
includes 57 registered investment companies, with approximately 170 U.S. based
funds or series.
Nonaffiliated members of the Board are reimbursed for expenses incurred in
connection with attending board meetings, paid pro rata by each fund in the
Franklin Templeton Group of Funds for which they serve as director or trustee.
No officer or Board member received any other compensation, including pension or
retirement benefits, directly or indirectly from the Fund or other funds in the
Franklin Templeton Group of Funds. Certain officers or Board members who are
shareholders of Resources may be deemed to receive indirect remuneration by
virtue of their participation, if any, in the fees paid to its subsidiaries.
Certain officers and Board members of the Fund are also officers of Compliance
Solutions. The Fund is not charged for the use of software designed by
Compliance Solutions.
As of February 2, 1998, the officers and Board members, as a group, owned of
record and beneficially the following shares of Mutual Series: 270,955.590
shares of Mutual Shares - Class Z; 119,485.602 shares of Qualified - Class Z;
161,795.585 shares of Beacon - Class Z; 176,912.438 shares of Discovery - Class
Z; or less than 1% of the total outstanding Class Z shares of those Funds. As of
February 2, 1998, the officers and Board members as a group, owned of record and
beneficially 8,489,585.730 shares of European - Class Z and 123,541.206 shares
of Financial Services - Class Z or 19.76% and 1.00%, respectively, of the total
outstanding Class Z shares of European and Financial Services. Some of the Board
members also own shares in other funds in the Franklin Templeton Group of Funds.
INVESTMENT MANAGEMENT AND OTHER SERVICES
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INVESTMENT MANAGER AND SERVICES PROVIDED. The Fund's investment manager is
Franklin Mutual. On October 31, 1996, pursuant to an agreement between Resources
and Heine Securities, Inc. ("Heine"), the assets of Heine were transferred to
Franklin Mutual and Mutual Series Fund Inc.'s name was changed to Franklin
Mutual Series Fund Inc.
Franklin Mutual provides investment research and portfolio management services,
including the selection of securities for the Fund to buy, hold or sell and the
selection of brokers through whom the Fund's portfolio transactions are
executed. Franklin Mutual's activities are subject to the review and supervision
of the Board to whom Franklin Mutual renders periodic reports of the Fund's
investment activities. Franklin Mutual and its officers, directors and employees
are covered by fidelity insurance for the protection of the Fund.
Franklin Mutual and its affiliates act as investment manager to numerous other
investment companies and accounts. Franklin Mutual may give advice and take
action with respect to any of the other funds it manages, or for its own
account, that may differ from action taken by Franklin Mutual on behalf of the
Fund. Similarly, with respect to the Fund, Franklin Mutual is not obligated to
recommend, buy or sell, or to refrain from recommending, buying or selling any
security that Franklin Mutual and access persons, as defined by the 1940 Act,
may buy or sell for its or their own account or for the accounts of any other
fund. Franklin Mutual is not obligated to refrain from investing in securities
held by the Fund or other funds that it manages. Of course, any transactions for
the accounts of Franklin Mutual and other access persons will be made in
compliance with the Fund's Code of Ethics. Please see "Miscellaneous Information
- - Summary of Code of Ethics."
MANAGEMENT FEES. For the fiscal years ended December 31, 1995, 1996 and 1997,
management fees, before any advance waiver, totaled $27,500,952, $35,687,092 and
$48,600,626, respectively, for Mutual Shares; $14,607,723, $22,515,334 and
$31,224,924, respectively, for Qualified; $17,720,127, $26,083,112 and
$36,299,616, respectively, for Beacon; $7,930,967, $17,795,530 and $33,584,048,
respectively, for Discovery. For the fiscal years ended December 31, 1996 and
1997, management fees, before any advance waiver totaled $949,616 and $5,372,334
for European. For the period August 19, 1997 to December 31, 1997, management
fees, before any advance waiver totaled $419,994 for Financial Services. Under
an agreement by Franklin Mutual to limit its fees for the fiscal years ended
December 31, 1996 and 1997, the Funds paid management fees totaling $34,719,646
and $46,093,507 for Mutual Shares; $21,439,007 and $29,584,910 for Qualified;
$25,260,160 and $34,477,321 for Beacon; $17,154,254 and $32,685,124 for
Discovery; and $876,464 and $5,167,675 for European. Under an agreement by
Financial Services to limit its fees for the period August 19, 1997 to December
31, 1997, the Fund paid management fees totaling $92,762. For the fiscal year
ended December 31, 1995, the investment manager did not waive or limit its fees.
MANAGEMENT AGREEMENT. The management agreement for all Funds except Financial
Services is in effect until June 30, 1998. The management agreement for
Financial Services is in effect until June 30, 1999. They may continue in effect
for successive annual periods if their continuance is specifically approved at
least annually by a vote of the Board or by a vote of the holders of a majority
of the Fund's outstanding voting securities, and in either event by a majority
vote of the Board members who are not parties to the management agreement or
interested persons of any such party (other than as members of the Board), cast
in person at a meeting called for that purpose. The management agreement may be
terminated without penalty at any time by the Board or by a vote of the holders
of a majority of the Fund's outstanding voting securities, or by Franklin Mutual
on 60 days' written notice, and will automatically terminate in the event of its
assignment, as defined in the 1940 Act.
ADMINISTRATIVE SERVICES. FT Services provides certain administrative services
and facilities for the Fund. These include preparing and maintaining books,
records, and tax and financial reports, and monitoring compliance with
regulatory requirements. FT Services is a wholly owned subsidiary of Resources.
During the fiscal year ended December 31, 1997, and for the two-month period
ended December 31, 1996, Administration fees totaling $6,267,404 and $840,707
for Mutual Shares, $4,026,600 and $553,904 for Qualified, $4,682,986 and
$634,856 for Beacon, $3,248,131 and $380,772 for Discovery, and $519,493 and
$57,060 for European, respectively, were paid to FT Services. For the period
August 19, 1997, to December 31, 1997, administration fees totaling $40,704 were
paid to FT Services for Financial Services.
SHAREHOLDER SERVICING AGENT. Investor Services, a wholly owned subsidiary of
Resources, is the Fund's shareholder servicing agent and acts as the Fund's
transfer agent and dividend-paying agent. Investor Services is compensated on
the basis of a fixed fee per account. The Fund may also reimburse Investor
Services for certain out-of-pocket expenses, which may include payments by
Investor Services to entities, including affiliated entities, that provide
sub-shareholder services, recordkeeping and/or transfer agency services to
beneficial owners of the Fund. The amount of reimbursements for these services
per benefit plan participant Fund account per year may not exceed the per
account fee payable by the Fund to Investor Services in connection with
maintaining shareholder accounts.
CUSTODIAN. State Street Bank and Trust Company, 225 Franklin Street, Boston, MA
02110, acts as custodian of the securities and other assets of the Fund. The
custodian does not participate in decisions relating to the purchase and sale of
portfolio securities.
AUDITORS. Ernst & Young LLP, 200 Clarendon Street, Boston, MA 02116, are the
Fund's independent auditors. During the fiscal year ended December 31, 1997,
their auditing services consisted of rendering an opinion on the financial
statements of the Fund included in the Fund's Annual Report to Shareholders for
the fiscal year ended December 31, 1997.
HOW DOES THE FUND BUY SECURITIES FOR ITS PORTFOLIO?
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Franklin Mutual selects brokers and dealers to execute the Fund's portfolio
transactions in accordance with criteria set forth in the management agreement
and any directions that the Board may give.
When placing a portfolio transaction, Franklin Mutual seeks to obtain prompt
execution of orders at the most favorable net price. For portfolio transactions
on a securities exchange, the amount of commission paid by the Fund is
negotiated between Franklin Mutual and the broker executing the transaction. The
determination and evaluation of the reasonableness of the brokerage commissions
paid are based to a large degree on the professional opinions of the persons
responsible for placement and review of the transactions. These opinions are
based on the experience of these individuals in the securities industry and
information available to them about the level of commissions being paid by other
institutional investors of comparable size. Franklin Mutual will ordinarily
place orders to buy and sell over-the-counter securities on a principal rather
than agency basis with a principal market maker unless, in the opinion of
Franklin Mutual, a better price and execution can otherwise be obtained.
Purchases of portfolio securities from underwriters will include a commission or
concession paid by the issuer to the underwriter, and purchases from dealers
will include a spread between the bid and ask price.
Franklin Mutual may pay certain brokers commissions that are higher than those
another broker may charge, if Franklin Mutual determines in good faith that the
amount paid is reasonable in relation to the value of the brokerage and research
services it receives. This may be viewed in terms of either the particular
transaction or Franklin Mutual's overall responsibilities to client accounts
over which it exercises investment discretion. The services that brokers may
provide to Franklin Mutual include, among others, supplying information about
particular companies, markets, countries, or local, regional, national or
transnational economies, statistical data, quotations and other securities
pricing information, and other information that provides lawful and appropriate
assistance to Franklin Mutual in carrying out its investment advisory
responsibilities. These services may not always directly benefit the Fund. They
must, however, be of value to Franklin Mutual in carrying out its overall
responsibilities to its clients.
It is not always possible to place a precise dollar value on the special
executions or on the research services Franklin Mutual receives from dealers
effecting transactions in portfolio securities. The allocation of transactions
in order to obtain additional research services permits Franklin Mutual to
supplement its own research and analysis activities and to receive the views and
information of individuals and research staffs of other securities firms. As
long as it is lawful and appropriate to do so, Franklin Mutual and its
affiliates may use this research and data in their investment advisory
capacities with other clients. If the Fund's officers are satisfied that the
best execution is obtained, the sale of Fund shares, as well as shares of other
funds in the Franklin Templeton Group of Funds, may also be considered a factor
in the selection of broker-dealers to execute the Fund's portfolio transactions.
Because Distributors is a member of the NASD, it may sometimes receive certain
fees when the Fund tenders portfolio securities pursuant to a tender-offer
solicitation. As a means of recapturing brokerage for the benefit of the Fund,
any portfolio securities tendered by the Fund will be tendered through
Distributors if it is legally permissible and Franklin Mutual believes it would
be in the best interests of the Fund to do so. In turn, the next management fee
payable to Franklin Mutual will be reduced by the amount of any fees received by
Distributors in cash, less any costs and expenses incurred in connection with
the tender.
If purchases or sales of securities of the Fund and one or more other investment
companies or clients supervised by Franklin Mutual are considered at or about
the same time, transactions in these securities will be allocated among the
several investment companies and clients in a manner deemed equitable to all by
Franklin Mutual, taking into account the respective sizes of the funds and the
amount of securities to be purchased or sold. In some cases this procedure could
have a detrimental effect on the price or volume of the security so far as the
Fund is concerned. In other cases it is possible that the ability to participate
in volume transactions and to negotiate lower brokerage commissions will be
beneficial to the Fund.
During the fiscal years ended December 31, 1995, 1996 and 1997, the Funds paid
brokerage commissions as follows:
MUTUAL FINANCIAL
SHARES QUALIFIED BEACON DISCOVERY EUROPEAN SERVICES
- -------------------------------------------------------------------------------
1995 .........$8,028,205 $5,182,736 $6,269,829 $3,040,751 -0- -0-
1996 .........$8,095,501 $6,090,786 $7,418,388 $7,928,860 $734,682 -0-
1997..........$7,248,461 $6,474,952 $8,259,140 $9,085,394 $1,500,199 $371,076*
*For the period August 19, 1997 to December 31, 1997.
As of December 31, 1997, the Funds owned securities issued by Bear Stearns & Co.
valued in the aggregate at $23,749,994. Except as noted, the Funds did not own
any securities issued by their regular broker-dealers as of the end of the
fiscal year.
Clearwater, an indirect affiliate of Franklin Mutual, is a registered securities
dealer and a member of the NASD. Transactions in some Fund portfolio securities
(particularly transactions involving floor brokers) were effected through
Clearwater before November 1, 1996. During the fiscal years ended December 31,
1994, 1995 and 1996, Mutual Shares paid brokerage commissions to Clearwater of
$313,814, $1,192,230 and $755,142, respectively; Qualified paid $147,829,
$640,588 and $439,926, respectively; Beacon paid $168,828, $764,323 and
$607,402, respectively; and Discovery paid $74,704, $217,609 and $384,267,
respectively. During the fiscal year ended December 31, 1996, European paid
$4,037.
Because the Funds may, from time to time, invest in broker-dealers, it is
possible that a fund will own in excess of 5% of the voting securities of one or
more broker-dealers through whom such Fund places portfolio brokerage
transactions. In such circumstances, the broker-dealer would be considered to be
an affiliated person of such Fund. To the extent that such Fund places brokerage
transactions through such a broker-dealer at a time when the broker-dealer is
considered to be an affiliate of such Fund, such Fund will be required to adhere
to certain rules relating to the payment of commissions to an affiliated
broker-dealer. These rules require the Fund to adhere to procedures adopted by
the Board relating to ensuring that the commissions paid to such broker-dealers
do not exceed what would otherwise be the usual and customary broker's
commissions for similar transactions. The same rules apply to each Fund's use of
Clearwater.
SOFT DOLLAR ARRANGEMENTS. The Fund receives research services from persons who
act as brokers or dealers for the Fund. The discussion below relates in general
to these brokers or dealers who pursuant to various arrangements pay for certain
computer hardware and software and other research and brokerage services to
Franklin Mutual and/or the Fund for transactions effected by it for the Fund.
Commission soft dollars may be used only for brokerage and research services
provided by brokers to whom commissions are paid and under no circumstances will
cash payments be made by any such broker to Franklin Mutual. To the extent that
commission soft dollars do not result in the provision of any brokerage and
research services by brokers to whom such commissions are paid, the commissions,
nevertheless, are the property of such broker. Although, potentially, Franklin
Mutual could be influenced to place Fund brokerage transactions with a broker in
order to generate soft dollars for Franklin Mutual's benefit, Franklin Mutual
believes that the requirement that it achieve best execution on Fund portfolio
transactions, and the Fund's negotiated commission structure with brokers,
mitigate these concerns as the cost of transactions effected through brokers,
before consideration of any soft dollar benefits that may be received, generally
will be comparable to that available elsewhere. During the fiscal years ended
December 31, 1995, 1996 and 1997, the Fund paid brokerage commissions of
$3,355,180, $2,539,782 and $, respectively, to brokers who provided research
services. This amount represented 14.90%, 8.50% and %, respectively, of total
commissions paid for the periods.
HOW DO I BUY, SELL AND EXCHANGE SHARES?
- ------------------------------------------------------------------------------
ADDITIONAL INFORMATION ON BUYING SHARES
The Fund continuously offers its shares through Securities Dealers who have an
agreement with Distributors. Securities laws of states where the Fund offers its
shares may differ from federal law. Banks and financial institutions that sell
shares of the Fund may be required by state law to register as Securities
Dealers.
When you buy shares, if you submit a check or a draft that is returned unpaid to
the Fund we may impose a $10 charge against your account for each returned item.
OTHER PAYMENTS TO SECURITIES DEALERS. Distributors and/or its affiliates provide
financial support to various Securities Dealers that sell shares of the Franklin
Templeton Group of Funds. This support is based primarily on the amount of sales
of fund shares. The amount of support may be affected by: total sales; net
sales; levels of redemptions; the proportion of a Securities Dealer's sales and
marketing efforts in the Franklin Templeton Group of Funds; a Securities
Dealer's support of, and participation in, Distributors' marketing programs; a
Securities Dealer's compensation programs for its registered representatives;
and the extent of a Securities Dealer's marketing programs relating to the
Franklin Templeton Group of Funds. Financial support to Securities Dealers may
be made by payments from Distributors' resources, from Distributors' retention
of underwriting concessions and, in the case of funds that have Rule 12b-1
plans, from payments to Distributors under such plans. In addition, certain
Securities Dealers may receive brokerage commissions generated by fund portfolio
transactions in accordance with the NASD's rules.
Distributors routinely sponsors due diligence meetings for registered
representatives during which they receive updates on various Franklin Templeton
Funds and are afforded the opportunity to speak with portfolio managers.
Invitation to these meetings is not conditioned on selling a specific number of
shares, however, those who have shown an interest in the Franklin Templeton
Funds are more likely to be considered. To the extent permitted by their firm's
policies and procedures, a registered representative's expenses in attending
these meetings may be covered by Distributors.
REINVESTMENT DATE. Shares acquired through the reinvestment of dividends will be
purchased at the Net Asset Value determined on the business day following the
dividend record date (sometimes known as the "ex-dividend date"). The processing
date for the reinvestment of dividends may vary and does not affect the amount
or value of the shares acquired.
ADDITIONAL INFORMATION ON EXCHANGING SHARES
If you request the exchange of the total value of your account, declared but
unpaid income dividends and capital gain distributions will be exchanged into
the new fund and will be invested at Net Asset Value. Backup withholding and
information reporting may apply. Information regarding the possible tax
consequences of an exchange is included in the tax section in this SAI and in
the Prospectus.
If a substantial number of shareholders should, within a short period, sell
their shares of the Fund under the exchange privilege, the Fund might have to
sell portfolio securities it might otherwise hold and incur the additional costs
related to such transactions. On the other hand, increased use of the exchange
privilege may result in periodic large inflows of money. If this occurs, it is
the Fund's general policy to initially invest this money in short-term,
interest-bearing money market instruments, unless it is believed that attractive
investment opportunities consistent with the Fund's investment objectives exist
immediately. This money will then be withdrawn from the short-term, money market
instruments and invested in portfolio securities in as orderly a manner as is
possible when attractive investment opportunities arise.
The proceeds from the sale of shares of an investment company are generally not
available until the fifth business day following the sale. The funds you are
seeking to exchange into may delay issuing shares pursuant to an exchange until
that fifth business day. The sale of Fund shares to complete an exchange will be
effected at Net Asset Value at the close of business on the day the request for
exchange is received in proper form. Please see "May I Exchange Shares for
Shares of Another Fund?" in the Prospectus.
ADDITIONAL INFORMATION ON SELLING SHARES
SYSTEMATIC WITHDRAWAL PLAN. There are no service charges for establishing or
maintaining a systematic withdrawal plan. Payments under the plan will be made
from the redemption of an equivalent amount of shares in your account, generally
on the 10th or 25th day of the month in which a payment is scheduled. If the
10th or 25th falls on a weekend or holiday, we will process the redemption on
the next business day.
Redeeming shares through a systematic withdrawal plan may reduce or exhaust the
shares in your account if payments exceed distributions received from the Fund.
This is especially likely to occur if there is a market decline. If a withdrawal
amount exceeds the value of your account, your account will be closed and the
remaining balance in your account will be sent to you. Because the amount
withdrawn under the plan may be more than your actual yield or income, part of
the payment may be a return of your investment.
The Fund may discontinue a systematic withdrawal plan by notifying you in
writing and will automatically discontinue a systematic withdrawal plan if all
shares in your account are withdrawn or if the Fund receives notification of the
shareholder's death or incapacity.
THROUGH YOUR SECURITIES DEALER. If you sell shares through your Securities
Dealer, it is your dealer's responsibility to transmit the order to the Fund in
a timely fashion. Any loss to you resulting from your dealer's failure to do so
must be settled between you and your Securities Dealer.
REDEMPTIONS IN KIND. In the case of redemption requests, the Board reserves the
right to make payments in whole or in part in securities or other assets of the
Fund, in case of an emergency, or if the payment of such a redemption in cash
would be detrimental to the existing shareholders of the Fund. In these
circumstances, the securities distributed would be valued at the price used to
compute the Fund's net assets and you may incur brokerage fees in converting the
securities to cash. The Fund does not intend to redeem illiquid securities in
kind. If this happens, however, you may not be able to recover your investment
in a timely manner.
GENERAL INFORMATION
If dividend checks are returned to the Fund marked "unable to forward" by the
postal service, we will consider this a request by you to change your dividend
option to reinvest all distributions. The proceeds will be reinvested in
additional shares at Net Asset Value until we receive new instructions.
Distribution or redemption checks sent to you do not earn interest or any other
income during the time the checks remain uncashed. Neither the Fund nor its
affiliates will be liable for any loss caused by your failure to cash such
checks. The Fund is not responsible for tracking down uncashed checks, unless a
check is returned as undeliverable.
In most cases, if mail is returned as undeliverable we are required to take
certain steps to try to find you free of charge. If these attempts are
unsuccessful, however, we may deduct the costs of any additional efforts to find
you from your account. These costs may include a percentage of the account when
a search company charges a percentage fee in exchange for its location services.
All checks, drafts, wires and other payment mediums used to buy or sell shares
of the Fund must be denominated in U.S. dollars. We may, in our sole discretion,
either (a) reject any order to buy or sell shares denominated in any other
currency or (b) honor the transaction or make adjustments to your account for
the transaction as of a date and with a foreign currency exchange factor
determined by the drawee bank.
SPECIAL SERVICES. Investor Services may pay certain financial institutions that
maintain omnibus accounts with the Fund on behalf of numerous beneficial owners
for recordkeeping operations performed with respect to such owners. For each
beneficial owner in the omnibus account, the Fund may reimburse Investor
Services an amount not to exceed the per account fee that the Fund normally pays
Investor Services. These financial institutions may also charge a fee for their
services directly to their clients.
Certain shareholder servicing agents may be authorized to accept your
transaction request.
HOW ARE FUND SHARES VALUED?
- ----------------------------------------------------------------------------
We calculate the Net Asset Value per share as of the close of the NYSE, normally
4:00 p.m. Eastern time, each day that the NYSE is open for trading. As of the
date of this SAI, the Fund is informed that the NYSE observes the following
holidays: New Year's Day, Martin Luther King Jr. Day, Presidents' Day, Good
Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and
Christmas Day.
For the purpose of determining the aggregate net assets of the Fund, cash and
receivables are valued at their realizable amounts. Interest is recorded as
accrued and dividends are recorded on the ex-dividend date. Portfolio securities
listed on a securities exchange or on the NASDAQ National Market System for
which market quotations are readily available are valued at the last quoted sale
price of the day or, if there is no such reported sale, within the range of the
most recent quoted bid and ask prices. Over-the-counter portfolio securities are
valued within the range of the most recent quoted bid and ask prices. Portfolio
securities that are traded both in the over-the-counter market and on a stock
exchange are valued according to the broadest and most representative market as
determined by Franklin Mutual.
Portfolio securities underlying actively traded call options are valued at their
market price as determined above. The current market value of any option held by
the Fund is its last sale price on the relevant exchange before the time when
assets are valued. Lacking any sales that day or if the last sale price is
outside the bid and ask prices, options are valued within the range of the
current closing bid and ask prices if the valuation is believed to fairly
reflect the contract's market value.
The value of a foreign security is determined as of the close of trading on the
foreign exchange on which it is traded or as of the close of trading on the
NYSE, if that is earlier. The value is then converted into its U.S. dollar
equivalent at the foreign exchange rate in effect at noon, New York time, on the
day the value of the foreign security is determined. If no sale is reported at
that time, the foreign security is valued within the range of the most recent
quoted bid and ask prices. Occasionally events that affect the values of foreign
securities and foreign exchange rates may occur between the times at which they
are determined and the close of the exchange and will, therefore, not be
reflected in the computation of the Net Asset Value. If events materially
affecting the values of these foreign securities occur during this period, the
securities will be valued in accordance with procedures established by the
Board.
Generally, trading in corporate bonds, U.S. government securities and money
market instruments is substantially completed each day at various times before
the close of the NYSE. The value of these securities used in computing the Net
Asset Value is determined as of such times. Occasionally, events affecting the
values of these securities may occur between the times at which they are
determined and the close of the NYSE that will not be reflected in the
computation of the Net Asset Value. If events materially affecting the values of
these securities occur during this period, the securities will be valued at
their fair value as determined in good faith by the Board.
Other securities for which market quotations are readily available are valued at
the current market price, which may be obtained from a pricing service, based on
a variety of factors including recent trades, institutional size trading in
similar types of securities (considering yield, risk and maturity) and/or
developments related to specific issues. Securities and other assets for which
market prices are not readily available are valued at fair value as determined
following procedures approved by the Board. With the approval of the Board, the
Fund may utilize a pricing service, bank or Securities Dealer to perform any of
the above described functions.
ADDITIONAL INFORMATION ON DISTRIBUTIONS AND TAXES
DISTRIBUTIONS
DISTRIBUTIONS OF NET INVESTMENT INCOME. The Fund receives income generally in
the form of dividends, interest, original issue, market and acquisition
discount, and other income derived from its investments. This income, less
expenses incurred in the operation of the Fund, constitute its net investment
income from which dividends may be paid to you. Any distributions by the Fund
from such income will be taxable to you as ordinary income, whether you take
them in cash or in additional shares.
DISTRIBUTIONS OF CAPITAL GAINS. The Fund may derive capital gains and losses in
connection with sales or other dispositions of its portfolio securities.
Distributions derived from the excess of net short-term capital gain over net
long-term capital loss will be taxable to you as ordinary income. Distributions
paid from long-term capital gains realized by the Fund will be taxable to you as
long-term capital gain, regardless of how long you have held your shares in the
Fund. Any net short-term or long-term capital gains realized by the Fund (net of
any capital loss carryovers) generally will be distributed once each year, and
may be distributed more frequently, if necessary, in order to reduce or
eliminate federal excise or income taxes on the Fund.
Under the Taxpayer Relief Act of 1997 (the "1997 Act"), the Fund is required to
report the capital gain distributions paid to you from gains realized on the
sale of portfolio securities using the following categories:
"28% RATE GAINS": gains resulting from securities sold by the Fund after July
28, 1997 that were held for more than one year but not more than 18 months, and
securities sold by the Fund before May 7, 1997 that were held for more than one
year. These gains will be taxable to individual investors at a maximum rate of
28%.
"20% RATE GAINS": gains resulting from securities sold by the Fund after July
28, 1997 that were held for more than 18 months, and under a transitional rule,
securities sold by the Fund between May 7 and July 28, 1997 (inclusive) that
were held for more than one year. These gains will be taxable to individual
investors at a maximum rate of 20% for individual investors in the 28% or higher
federal income tax brackets, and at a maximum rate of 10% for investors in the
15% federal income tax bracket.
The 1997 Act also provides for a new maximum rate of tax on capital gains of 18%
for individuals in the 28% or higher federal income tax brackets and 8% for
individuals in the 15% federal income tax bracket for "qualified 5-year gains."
For individuals in the 15% bracket, qualified 5-year gains are net gains on
securities held for more than 5 years which are sold after December 31, 2000.
For individuals who are subject to tax at higher rates, qualified 5-year gains
are net gains on securities which are purchased after December 31, 2000 and are
held for more than 5 years. Taxpayers subject to tax at the higher rates may
also make an election for shares held on January 1, 2001 to recognize gain on
their shares in order to qualify such shares as qualified 5-year property.
The Fund will advise you at the end of each calendar year of the amount of its
capital gain distributions paid during the calendar year that qualify for these
maximum federal tax rates. Additional information on reporting these
distributions on your personal income tax returns is available in Franklin
Templeton's Tax Information Handbook. This handbook has been revised to include
1997 Act tax law changes. Please call Fund Information to request a copy.
Questions concerning each investor's personal tax reporting should be addressed
to the investor's personal tax advisor.
CERTAIN DISTRIBUTIONS PAID IN JANUARY. Distributions which are declared in
October, November or December and paid to you in January of the following year,
will be treated for tax purposes as if they had been received by you on December
31 of the year in which they were declared. The Fund will report this income to
you on your Form 1099-DIV for the year in which these distributions were
declared.
EFFECT OF FOREIGN INVESTMENTS ON DISTRIBUTIONS. Most foreign exchange gains
realized on the sale of debt instruments are treated as ordinary income by the
Fund. Similarly, foreign exchange losses realized by the Fund on the sale of
debt instruments are generally treated as ordinary losses by the Fund. These
gains when distributed will be taxable to you as ordinary dividends, and any
losses will reduce the Fund's ordinary income otherwise available for
distribution to you. This treatment could increase or reduce the Fund's ordinary
income distributions to you, and may cause some or all of the Fund's previously
distributed income to be classified as a return of capital.
The 1997 Act also simplifies the procedures by which investors in funds that
invest in foreign securities can claim tax credits on their individual income
tax returns for the foreign taxes paid by the Fund. These provisions will allow
investors who claim a credit for foreign taxes paid of $300 or less on a single
return or $600 or less on a joint return during any year (all of which must be
reported on IRS Form 1099-DIV from the Fund to the investor) to bypass the
burdensome and detailed reporting requirements on the supporting foreign tax
credit schedule (Form 1116) and report foreign taxes paid directly on page 2 of
Form 1040. YOU SHOULD NOTE THAT THIS SIMPLIFIED PROCEDURE WILL NOT BE AVAILABLE
UNTIL CALENDAR YEAR 1998.
INFORMATION ON THE TAX CHARACTER OF DISTRIBUTIONS. The Fund will inform you of
the amount and character of your distributions at the time they are paid, and
will advise you of the tax status for federal income tax purposes of such
distributions shortly after the close of each calendar year. If you have not
held Fund shares for a full year, you may have designated and distributed to you
as ordinary income or capital gain a percentage of income that is not equal to
the actual amount of such income earned during the period of your investment in
the Fund.
TAXES
ELECTION TO BE TAXED AS A REGULATED INVESTMENT COMPANY. The Fund has elected to
be treated as a regulated investment company under Subchapter M of the Code, has
qualified as such for its most recent fiscal year, and intends to so qualify
during the current fiscal year. The Board reserves the right not to maintain the
qualification of the Fund as a regulated investment company if it determines
such course of action to be beneficial to you. In such case, the Fund will be
subject to federal, and possibly state, corporate taxes on its taxable income
and gains, and distributions to you will be taxed as ordinary dividend income to
the extent of the Fund's available earnings and profits.
In order to qualify as a regulated investment company for tax purposes, the Fund
must meet certain specific requirements, including:
o The Fund must maintain a diversified portfolio of securities, wherein no
security (other than U.S. government securities and securities of other
regulated investment companies) can exceed 25% of the Fund's total assets,
and, with respect to 50% of the Fund's total assets, no investment (other
than cash and cash items, U.S. government securities and securities of
other regulated investment companies) can exceed 5% of the Fund's total
assets;
o The Fund must derive at least 90% of its gross income from dividends,
interest, payments with respect to securities loans, and gains from the
sale or disposition of stock, securities or foreign currencies, or other
income derived with respect to its business of investing in such stock,
securities, or currencies; and
o The Fund must distribute to its shareholders at least 90% of its net
investment income and net tax-exempt income for each of its fiscal years.
EXCISE TAX DISTRIBUTION REQUIREMENTS. The Code requires the Fund to distribute
at least 98% of its taxable ordinary income earned during the calendar year and
98% of its capital gain net income earned during the twelve month period ending
October 31 (in addition to undistributed amounts from the prior year) to you by
December 31 of each year in order to avoid federal excise taxes. The Fund
intends to declare and pay sufficient dividends in December (or in January that
are treated by you as received in December) but does not guarantee and can give
no assurances that its distributions will be sufficient to eliminate all such
taxes.
REDEMPTION OF FUND SHARES. Redemptions and exchanges of Fund shares are taxable
transactions for federal and state income tax purposes. The tax law requires
that you recognize a gain or loss in an amount equal to the difference between
your tax basis and the amount you received in exchange for your shares, subject
to the rules described below. If you hold your shares as a capital asset, the
gain or loss that you realize will be capital gain or loss, and will be
long-term for federal income tax purposes if you have held your shares for more
than one year at the time of redemption or exchange. Any loss incurred on the
redemption or exchange of shares held for six months or less will be treated as
a long-term capital loss to the extent of any long-term capital gains
distributed to you by the Fund on those shares. The holding periods and
categories of capital gain that apply under the 1997 Act are described above in
the "Distributions" section.
All or a portion of any loss that you realize upon the redemption of your Fund
shares will be disallowed to the extent that you purchase other shares in the
Fund (through reinvestment of dividends or otherwise) within 30 days before or
after your share redemption. Any loss disallowed under these rules will be added
to your tax basis in the new shares you purchase.
U.S. GOVERNMENT OBLIGATIONS. Many states grant tax-free status to dividends paid
to you from interest earned on direct obligations of the U.S. government,
subject in some states to minimum investment requirements that must be met by
the Fund. Investments in GNMA/FNMA securities, bankers' acceptances, commercial
paper and repurchase agreements collateralized by U.S. government securities do
not generally qualify for tax-free treatment. At the end of each calendar year,
the Fund will provide you with the percentage of any dividends paid that may
qualify for tax-free treatment on your personal income tax return. You should
consult with your own tax advisor to determine the application of your state and
local laws to these distributions. Because the rules on exclusion of this income
are different for corporations, corporate shareholders should consult with their
corporate tax advisors about whether any of their distributions may be exempt
from corporate income or franchise taxes.
DIVIDENDS-RECEIVED DEDUCTION FOR CORPORATIONS. As a corporate shareholder, you
should note that the percentage of the dividends paid by the Funds for their
most recent fiscal years that qualified for the dividends-received deduction
were as follows: Mutual Shares - 16.78%; Qualified - 12.61%; Beacon - 10.57%;
European - 0.09%; Financial Services - 15.63% and Discovery 4.38%. You will be
permitted in some circumstances to deduct these qualified dividends, thereby
reducing the tax that you would otherwise be required to pay on these dividends.
The dividends-received deduction will be available only with respect to
dividends designated by the Fund as eligible for such treatment. Dividends so
designated by the Fund must be attributable to dividends earned by the Fund from
U.S. corporations that were not debt-financed.
Under the 1997 Act, the amount that the Fund may designate as eligible for the
dividends-received deduction will be reduced or eliminated if the shares on
which the dividends were earned by the Fund were debt-financed or held by the
Fund for less than a 46 day period during a 90 day period beginning 45 days
before the ex-dividend date of the corporate stock. Similarly, if your Fund
shares are debt-financed or held by you for less than this same 46 day period,
then the dividends-received deduction may also be reduced or eliminated. Even if
designated as dividends eligible for the dividends-received deduction, all
dividends (including the deducted portion) must be included in your alternative
minimum taxable income calculation.
INVESTMENT IN COMPLEX SECURITIES. The Fund's investment in options, futures
contracts and forward contracts, including transactions involving actual or
deemed short sales or foreign exchange gains or losses are subject to many
complex and special tax rules. Over-the-counter options on debt securities and
equity options, including options on stock and on narrow-based stock indexes,
will be subject to tax under section 1234 of the Code, generally producing a
long-term or short-term capital gain or loss upon exercise, lapse, or closing
out of the option or sale of the underlying stock or security. Certain other
options, futures and forward contracts entered into by the Fund are generally
governed by section 1256 of the Code. These "section 1256" positions generally
include listed options on debt securities, options on broad-based stock indexes,
options on securities indexes, options on futures contracts, regulated futures
contracts and certain foreign currency contracts and options thereon.
Absent a tax election to the contrary, each such section 1256 position held by
the Fund will be marked-to-market (i.e., treated as if it were sold for fair
market value) on the last business day of the Fund's fiscal year (and on other
dates as prescribed by the Code), and all gain or loss associated with fiscal
year transactions and mark-to-market positions at fiscal year end (except
certain currency gain or loss covered by section 988 of the Code) will generally
be treated as 60% long-term capital gain or loss and 40% short-term capital gain
or loss. Under legislation pending in technical corrections to the 1997 Act, the
60% long-term capital gain portion will qualify as 20% rate gain and will be
subject to tax to individual investors at a maximum rate of 20% for investors in
the 28% or higher federal income tax brackets, or at a maximum rate of 10% for
investors in the 15% federal income tax bracket. While foreign currency is
marked-to-market at year end, gain or loss realized as a result will always be
ordinary. Even though marked-to-market, gains and losses realized on foreign
currency and foreign security investments will generally be treated as ordinary
income. The effect of section 1256 mark-to-market rules may be to accelerate
income or to convert what otherwise would have been long-term capital gains into
short-term capital gains or short-term capital losses into long-term capital
losses within the Fund. The acceleration of income on section 1256 positions may
require the Fund to accrue taxable income without the corresponding receipt of
cash. In order to generate cash to satisfy the distribution requirements of the
Code, the Fund may be required to dispose of portfolio securities that it
otherwise would have continued to hold or to use cash flows from other sources
such as the sale of Fund shares. In these ways, any or all of these rules may
affect the amount, character and timing of income distributed to you by the
Fund.
When the Fund holds an option or contract which substantially diminishes the
Fund's risk of loss with respect to another position of the Fund (as might occur
in some hedging transactions), this combination of positions could be treated as
a "straddle" for tax purposes, possibly resulting in deferral of losses,
adjustments in the holding periods and conversion of short-term capital losses
into long-term capital losses. The Fund may make certain tax elections for mixed
straddles (i.e., straddles comprised of at least one section 1256 position and
at least one non-section 1256 position) which may reduce or eliminate the
operation of these straddle rules.
The 1997 Act has also added new provisions for dealing with transactions that
are generally called "Constructive Sale Transactions." Under these rules, the
Fund must recognize gain (but not loss) on any constructive sale of an
appreciated financial position in stock, a partnership interest or certain debt
instruments. The Fund will generally be treated as making a constructive sale
when it: 1) enters into a short sale on the same property, 2) enters into an
offsetting notional principal contract, or 3) enters into a futures or forward
contract to deliver the same or substantially similar property. Other
transactions (including certain financial instruments called collars) will be
treated as constructive sales as provided in Treasury regulations to be
published. There are also certain exceptions that apply for transactions that
are closed before the end of the 30th day after the close of the taxable year.
Distributions paid to you by the Fund of ordinary income and short-term capital
gains arising from the Fund's investments, including investments in options,
forwards, and futures contracts, will be taxable to you as ordinary income. The
Fund will monitor its transactions in such options and contracts and may make
certain other tax elections in order to mitigate the effect of the above rules.
INVESTMENTS IN FOREIGN CURRENCIES AND FOREIGN SECURITIES. The Fund is authorized
to invest in foreign currency denominated securities. Such investments, if made,
will have the following additional tax consequences:
Under the Code, gains or losses attributable to fluctuations in foreign currency
exchange rates which occur between the time the Fund accrues income (including
dividends), or accrues expenses which are denominated in a foreign currency, and
the time the Fund actually collects such income or pays such expenses generally
are treated as ordinary income or loss. Similarly, on the disposition of debt
securities denominated in a foreign currency and on the disposition of certain
options, futures, forward contracts, gain or loss attributable to fluctuations
in the value of foreign currency between the date of acquisition of the security
or contract and the date of its disposition are also treated as ordinary gain or
loss. These gains or losses, referred to under the Code as "section 988" gains
or losses, may increase or decrease the amount of the Fund's net investment
company taxable income, which, in turn, will affect the amount of income to be
distributed to you by the Fund.
If the Fund's section 988 losses exceed the Fund's other net investment company
taxable income during a taxable year, the Fund generally will not be able to
make ordinary dividend distributions to you for that year, or distributions made
before the losses were realized will be recharacterized as return of capital
distributions for federal income tax purposes, rather than as an ordinary
dividend or capital gain distribution. If a distribution is treated as a return
of capital, your tax basis in your Fund shares will be reduced by a like amount
(to the extent of such basis), and any excess of the distribution over your tax
basis in your Fund shares will be treated as capital gain to you.
INVESTMENT IN PASSIVE FOREIGN INVESTMENT COMPANY SECURITIES. The Fund may invest
in shares of foreign corporation which may be classified under the Code as
passive foreign investment companies ("PFICs"). In general, a foreign
corporation is classified as a PFIC if at least one-half of its assets
constitute investment-type assets or 75% or more of its gross income is
investment-type income.
If the Fund receives an "excess distribution" with respect to PFIC stock, the
Fund itself may be subject to U.S. federal income tax on a portion of the
distribution, whether or not the corresponding income is distributed by the Fund
to you. In general, under the PFIC rules, an excess distribution is treated as
having been realized ratably over the period during which the Fund held the PFIC
shares. The Fund itself will be subject to tax on the portion, if any, of an
excess distribution that is so allocated to prior Fund taxable years, and an
interest factor will be added to the tax, as if the tax had been payable in such
prior taxable years. In this case, you would not be permitted to claim a credit
on your own tax return for the tax paid by the Fund. Certain distributions from
a PFIC as well as gain from the sale of PFIC shares are treated as excess
distributions. Excess distributions are characterized as ordinary income even
though, absent application of the PFIC rules, certain excess distributions might
have been classified as capital gain. This may have the effect of increasing
Fund distributions to you that are treated as ordinary dividends rather than
long-term capital gain dividends.
The Fund may be eligible to elect alternative tax treatment with respect to PFIC
shares. Under an election that currently is available in some circumstances, the
Fund generally would be required to include in its gross income its share of the
earnings of a PFIC on a current basis, regardless of whether distributions are
received from the PFIC during such period. If this election were made, the
special rules, discussed above, relating to the taxation of excess
distributions, would not apply. In addition, the 1997 Act provides for another
election that would involve marking-to-market the Fund's PFIC shares at the end
of each taxable year (and on certain other dates as prescribed in the Code),
with the result that unrealized gains would be treated as though they were
realized. The Fund would also be allowed an ordinary deduction for the excess,
if any, of the adjusted basis of its investment in the PFIC stock over its fair
market value at the end of the taxable year. This deduction would be limited to
the amount of any net mark-to-market gains previously included with respect to
that particular PFIC security. If the Fund were to make this second PFIC
election, tax at the Fund level under the PFIC rules would generally be
eliminated.
The application of the PFIC rules may affect, among other things, the amount of
tax payable by the Fund (if any), the amounts distributable to you by the Fund,
the time at which these distributions must be made, and whether these
distributions will be classified as ordinary income or capital gain
distributions to you.
You should be aware that it is not always possible at the time shares of a
foreign corporation are acquired to ascertain that the foreign corporation is a
PFIC, and that there is always a possibility that a foreign corporation will
become a PFIC after the Fund acquires shares in that corporation. While the Fund
will generally seek to avoid investing in PFIC shares to avoid the tax
consequences detailed above, there are no guarantees that it will do so and it
reserves the right to make such investments as a matter of its fundamental
investment policy.
CONVERSION TRANSACTIONS. Gains realized by a Fund from transactions that are
deemed to be "conversion transactions" under the Code, and that would otherwise
produce capital gain may be recharacterized as ordinary income to the extent
that such gain does not exceed an amount defined as the "applicable imputed
income amount". A conversion transaction is any transaction in which
substantially all of the Fund's expected return is attributable to the time
value of the Fund's net investment in such transaction, and any one of the
following criteria are met:
1) there is an acquisition of property with a substantially contemporaneous
agreement to sell the same or substantially identical property in the
future;
2) the transaction is an applicable straddle;
3) the transaction was marketed or sold to the Fund on the basis that it
would have the economic characteristics of a loan but would be taxed as
capital gain; or
4) the transaction is specified in Treasury regulations to be promulgated in
the future.
The applicable imputed income amount, which represents the deemed return on the
conversion transaction based upon the time value of money, is computed using a
yield equal to 120 percent of the applicable federal rate, reduced by any prior
recharacterizations under this provision or the provisions of Section 263(g) of
the Code dealing with capitalized carrying costs.
STRIPPED PREFERRED STOCK. Occasionally, the Fund may purchase "stripped
preferred stock" that is subject to special tax treatment. Stripped preferred
stock is defined as certain preferred stock issues where ownership of the stock
has been separated from the right to receive dividends that have not yet become
payable. The stock must have a fixed redemption price, must not participate
substantially in the growth of the issuer, and must be limited and preferred as
to dividends. The difference between the redemption price and purchase price is
taken into Fund income over the term of the instrument as if it were original
issue discount. The amount that must be included in each period generally
depends on the original yield to maturity, adjusted for any prepayments of
principal.
INVESTMENTS IN ORIGINAL ISSUE DISCOUNT (OID) AND MARKET DISCOUNT (MD) BONDS. The
Fund's investments in zero coupon bonds, bonds issued or acquired at a discount,
delayed interest bonds, or bonds that provide for payment of interest-in-kind
(PIK) may cause the Fund to recognize income and make distributions to you prior
to its receipt of cash payments. Zero coupon and delayed interest bonds are
normally issued at a discount and are therefore generally subject to tax
reporting as OID obligations. The Fund is required to accrue as income a portion
of the discount at which these securities were issued, and to distribute such
income each year (as ordinary dividends) in order to maintain its qualification
as a regulated investment company and to avoid income reporting and excise taxes
at the Fund level. PIK bonds are subject to similar tax rules concerning the
amount, character and timing of income required to be accrued by the Fund. Bonds
acquired in the secondary market for a price less than their stated redemption
price, or revised issue price in the case of a bond having OID, are said to have
been acquired with market discount. For these bonds, the Fund may elect to
accrue market discount on a current basis, in which case the Fund will be
required to distribute any such accrued discount. If the Fund does not elect to
accrue market discount into income currently, gain recognized on sale will be
recharacterized as ordinary income instead of capital gain to the extent of any
accumulated market discount on the obligation.
DEFAULTED OBLIGATIONS. The Fund may be required to accrue income on defaulted
obligations and to distribute such income to you even though it is not currently
receiving interest or principal payments on such obligations. In order to
generate cash to satisfy these distribution requirements, the Fund may be
required to dispose of portfolio securities that it otherwise would have
continued to hold or to use cash flows from other sources such as the sale of
Fund shares.
THE FUND'S UNDERWRITER
- -----------------------------------------------------------------------------
Pursuant to an underwriting agreement, Distributors acts as principal
underwriter in a continuous public offering of the Fund's shares. The
underwriting agreement will continue in effect for successive annual periods if
its continuance is specifically approved at least annually by a vote of the
Board or by a vote of the holders of a majority of the Fund's outstanding voting
securities, and in either event by a majority vote of the Board members who are
not parties to the underwriting agreement or interested persons of any such
party (other than as members of the Board), cast in person at a meeting called
for that purpose. The underwriting agreement terminates automatically in the
event of its assignment and may be terminated by either party on 90 days'
written notice.
Distributors pays the expenses of the distribution of Fund shares, including
advertising expenses and the costs of printing sales material and prospectuses
used to offer shares to the public. The Fund pays the expenses of preparing and
printing amendments to its registration statements and prospectuses (other than
those necessitated by the activities of Distributors) and of sending
prospectuses to existing shareholders.
Distributors does not receive compensation from the Fund for acting as
underwriter of the Fund's Class Z shares.
HOW DOES THE FUND MEASURE PERFORMANCE?
- ---------------------------------------------------------------------------
Performance quotations are subject to SEC rules. These rules require the use of
standardized performance quotations or, alternatively, that every
non-standardized performance quotation furnished by the Fund be accompanied by
certain standardized performance information computed as required by the SEC.
Average annual total return quotations used by the Fund are based on the
standardized methods of computing performance mandated by the SEC. If a Rule
12b-1 plan is adopted, performance figures reflect fees from the date of the
plan's implementation.
An explanation of these and other methods used by the Fund to compute or express
performance follows. Regardless of the method used, past performance does not
guarantee future results, and is an indication of the return to shareholders
only for the limited historical period used.
TOTAL RETURN
AVERAGE ANNUAL TOTAL RETURN. Average annual total return is determined by
finding the average annual rates of return over the periods indicated below that
would equate an initial hypothetical $1,000 investment to its ending redeemable
value. The calculation assumes income dividends and capital gain distributions
are reinvested at Net Asset Value. The quotation assumes the account was
completely redeemed at the end of each period and the deduction of all
applicable charges and fees. If a change is made to the sales charge structure,
historical performance information will be restated to reflect the maximum
front-end sales charge currently in effect.
The average annual total return for Class Z for the one-, five-, and ten-year
periods ended December 31, 1997, was:
1 YEAR 5 YEARS 10 YEARS
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Mutual Shares .... 26.38% 20.04% 17.36%
Qualified ........ 24.92% 19.98% 17.36%
Beacon ........... 22.99% 19.49% 17.22%
Discovery*........ 22.94% 22.70% N/A
European**........ 23.16% N/A N/A
Financial Services*** N/A N/A N/A
*Discovery commenced operations on December 31, 1992. The average annual return
from inception was 22.70%.
**European commenced operations on July 3, 1996. The average annual return from
inception was 25.93%.
***Financial Services commenced operations on August 19, 1997.
These figures were calculated according to the SEC formula:
n
P(1+T) = ERV
where:
P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical $1,000
payment made at the beginning of each period at the end of each period
CUMULATIVE TOTAL RETURN. Like average annual total return, cumulative total
return assumes income dividends and capital gain distributions are reinvested at
Net Asset Value. Cumulative total return, however, is based on the actual return
for a specified period rather than on the average return over the periods
indicated above. The cumulative total return for Class Z for the one-, five-,
and ten-year periods ended December 31, 1997, was:
1 YEAR 5 YEARS 10 YEARS
- -------------------------------------------------------------------------
Mutual Shares .... 26.38% 149.23% 395.51%
Qualified ........ 24.92% 148.63% 395.48%
Beacon ........... 22.99% 143.62% 389.73%
Discovery* ....... 22.94% 178.10% N/A
European** ....... 23.16% N/A N/A
Financial Services***. N/A N/A N/A
*Discovery commenced operations on December 31, 1992. The cumulative total
return from inception was 178.10%.
**European commenced operations on July 3, 1996. The cumulative total return
from inception was 41.15%.
***Financial Services commenced operations on August 19, 1997. The cumulative
total return from inception was 24.02%.
VOLATILITY
Occasionally statistics may be used to show the Fund's volatility or risk.
Measures of volatility or risk are generally used to compare the Fund's Net
Asset Value or performance to a market index. One measure of volatility is beta.
Beta is the volatility of a fund relative to the total market, as represented by
an index considered representative of the types of securities in which the fund
invests. A beta of more than 1.00 indicates volatility greater than the market
and a beta of less than 1.00 indicates volatility less than the market. Another
measure of volatility or risk is standard deviation. Standard deviation is used
to measure variability of Net Asset Value or total return around an average over
a specified period of time. The idea is that greater volatility means greater
risk undertaken in achieving performance.
OTHER PERFORMANCE QUOTATIONS
Sales literature referring to the use of the Fund as a potential investment for
Individual Retirement Accounts (IRAs), Business Retirement Plans, and other
tax-advantaged retirement plans may quote a total return based upon compounding
of dividends on which it is presumed no federal income tax applies.
The Fund may include in its advertising or sales material information relating
to investment objectives and performance results of funds belonging to the
Franklin Templeton Group of Funds. Resources is the parent company of the
advisors and underwriter of the Franklin Templeton Group of Funds.
COMPARISONS
To help you better evaluate how an investment in the Fund may satisfy your
investment objective, advertisements and other materials about the Fund may
discuss certain measures of Fund performance as reported by various financial
publications. Materials may also compare performance (as calculated above) to
performance as reported by other investments, indices, and averages. These
comparisons may include, but are not limited to, the following examples:
a) Dow Jones Composite Average or its component averages - an unmanaged index
composed of 30 blue-chip industrial corporation stocks (Dow Jones(R) Industrial
Average), 15 utilities company stocks (Dow Jones Utilities Average), and 20
transportation company stocks. Comparisons of performance assume reinvestment of
dividends.
b) Standard & Poor's(R) 500 Stock Index or its component indices - an unmanaged
index composed of 400 industrial stocks, 40 financial stocks, 40 utilities
stocks, and 20 transportation stocks. Comparisons of performance assume
reinvestment of dividends.
c) The New York Stock Exchange composite or component indices - an unmanaged
index of all industrial, utilities, transportation, and finance stocks listed on
the NYSE.
d) Wilshire 5000 Equity Index - represents the return on the market value of all
common equity securities for which daily pricing is available. Comparisons of
performance assume reinvestment of dividends.
e) Lipper - Mutual Fund Performance Analysis and Lipper - Fixed Income Fund
Performance Analysis - measure total return and average current yield for the
mutual fund industry and rank individual mutual fund performance over specified
time periods, assuming reinvestment of all distributions, exclusive of any
applicable sales charges.
f) CDA Mutual Fund Report, published by CDA Investment Technologies, Inc.
analyzes price, current yield, risk, total return, and average rate of return
(average annual compounded growth rate) over specified time periods for the
mutual fund industry.
g) Mutual Fund Source Book, published by Morningstar, Inc. - analyzes price,
yield, risk, and total return for mutual funds.
h) Financial publications: The WALL STREET JOURNAL, and BUSINESS WEEK, CHANGING
TIMES, FINANCIAL WORLD, FORBES, FORTUNE, and MONEY magazines - provide
performance statistics over specified time periods.
i) Consumer Price Index (or Cost of Living Index), published by the U.S. Bureau
of Labor Statistics - a statistical measure of change, over time, in the price
of goods and services in major expenditure groups.
j) Stocks, Bonds, Bills, and Inflation, published by Ibbotson Associates
historical measure of yield, price, and total return for common and small
company stock, long-term government bonds, Treasury bills, and inflation.
k) Savings and Loan Historical Interest Rates - as published in the U.S. Savings
& Loan League Fact Book.
l) Historical data supplied by the research departments of CS First Boston
Corporation, the J. P. Morgan companies, Salomon Brothers, Merrill Lynch, Lehman
Brothers and Bloomberg L.P.
m) Standard & Poor's(R) 100 Stock Index - an unmanaged index based on the prices
of 100 blue-chip stocks, including 92 industrials, one utility, two
transportation companies, and 5 financial institutions. The S&P 100 Stock Index
is a smaller more flexible index for options trading.
n) Morningstar - information published by Morningstar, Inc., including
Morningstar proprietary mutual fund ratings. The ratings reflect Morningstar's
assessment of the historical risk-adjusted performance of a fund over specified
time periods relative to other funds within its category.
o) Salomon Brothers Broad Bond Index or its component indices - measures yield,
price and total return for Treasury, agency, corporate and mortgage bonds.
p) Lehman Brothers Aggregate Bond Index or its component indices - measures
yield, price and total return for Treasury, agency, corporate, mortgage and
Yankee bonds.
q) Salomon Brothers Composite High Yield Index or its component indices -
measures yield, price and total return for the Long-Term High-Yield Index,
Intermediate-Term High-Yield Index, and Long-Term Utility High-Yield Index.
From time to time, advertisements or information for the Fund may include a
discussion of certain attributes or benefits to be derived from an investment in
the Fund. The advertisements or information may include symbols, headlines, or
other material that highlights or summarizes the information discussed in more
detail in the communication.
Advertisements or information may also compare the Fund's performance to the
return on CDs or other investments. You should be aware, however, that an
investment in the Fund involves the risk of fluctuation of principal value, a
risk generally not present in an investment in a CD issued by a bank. For
example, as the general level of interest rates rise, the value of the Fund's
fixed-income investments, if any, as well as the value of its shares that are
based upon the value of such portfolio investments, can be expected to decrease.
Conversely, when interest rates decrease, the value of the Fund's shares can be
expected to increase. CDs are frequently insured by an agency of the U.S.
government. An investment in the Fund is not insured by any federal, state or
private entity.
In assessing comparisons of performance, you should keep in mind that the
composition of the investments in the reported indices and averages is not
identical to the Fund's portfolio, the indices and averages are generally
unmanaged, and the items included in the calculations of the averages may not be
identical to the formula used by the Fund to calculate its figures. In addition,
there can be no assurance that the Fund will continue its performance as
compared to these other averages.
MISCELLANEOUS INFORMATION
- -----------------------------------------------------------------------------
The Fund may help you achieve various investment goals such as accumulating
money for retirement, saving for a down payment on a home, college costs and
other long-term goals. The Franklin College Costs Planner may help you in
determining how much money must be invested on a monthly basis in order to have
a projected amount available in the future to fund a child's college education.
(Projected college cost estimates are based upon current costs published by the
College Board.) The Franklin Retirement Planning Guide leads you through the
steps to start a retirement savings program. Of course, an investment in the
Fund cannot guarantee that these goals will be met.
The Fund is a member of the Franklin Templeton Group of Funds, one of the
largest mutual fund organizations in the U.S., and may be considered in a
program for diversification of assets. Founded in 1947, Franklin, one of the
oldest mutual fund organizations, has managed mutual funds for over 50 years and
now services more than 2.9 million shareholder accounts. In 1992, Franklin, a
leader in managing fixed-income mutual funds and an innovator in creating
domestic equity funds, joined forces with Templeton, a pioneer in international
investing. The Mutual Series team, known for its value-driven approach to
domestic equity investing, became part of the organization four years later.
Together, the Franklin Templeton Group has over $221 billion in assets under
management for more than 6 million U.S. based mutual fund shareholder and other
accounts. The Franklin Templeton Group of Funds offers 120 U.S. based open-end
investment companies to the public. The Fund may identify itself by its NASDAQ
symbol or CUSIP number.
As of February 2, 1998, the principal shareholders of Mutual Series, beneficial
or of record, were as follows:
NAME AND ADDRESS SHARE AMOUNT PERCENTAGE
- ----------------------------------------------------------------------
BEACON - CLASS I
Manufacturers Life Ins. Co. USA 8,737,769.066 15.33%
200 Bloor St. E
Toronto, Ontario
Canada 231 M4W 1E5
EUROPEAN - CLASS Z
Michael Price 8,439,422.451 19.64%
51 John F. Kennedy Pkwy.
Short Hills, NJ 07078
FINANCIAL SERVICES - CLASS Z
State Street Bank 661,980.365 5.38%
Cust. Markman Aggressive
1 Heritage Dr.
North Quincy, MA 02171
From time to time, the number of Fund shares held in the "street name" accounts
of various Securities Dealers for the benefit of their clients or in centralized
securities depositories may exceed 5% of the total shares outstanding.
In the event of disputes involving multiple claims of ownership or authority to
control your account, the Fund has the right (but has no obligation) to: (a)
freeze the account and require the written agreement of all persons deemed by
the Fund to have a potential property interest in the account, before executing
instructions regarding the account; (b) interplead disputed funds or accounts
with a court of competent jurisdiction; or (c) surrender ownership of all or a
portion of the account to the IRS in response to a Notice of Levy.
SUMMARY OF CODE OF ETHICS. Employees of the Franklin Templeton Group who are
access persons under the 1940 Act are permitted to engage in personal securities
transactions subject to the following general restrictions and procedures: (i)
the trade must receive advance clearance from a compliance officer and must be
completed by the close of the business day following the day clearance is
granted; (ii) copies of all brokerage confirmations and statements must be sent
to a compliance officer; (iii) all brokerage accounts must be disclosed on an
annual basis; and (iv) access persons involved in preparing and making
investment decisions must, in addition to (i), (ii) and (iii) above, file annual
reports of their securities holdings each January and inform the compliance
officer (or other designated personnel) if they own a security that is being
considered for a fund or other client transaction or if they are recommending a
security in which they have an ownership interest for purchase or sale by a fund
or other client.
FINANCIAL STATEMENTS
- -------------------------------------------------------------------------
The audited financial statements contained in the Annual Report to Shareholders
of the Fund, for the fiscal year ended December 31, 1997, including the
auditors' report, are incorporated herein by reference.
USEFUL TERMS AND DEFINITIONS
- -------------------------------------------------------------------------
1940 ACT - Investment Company Act of 1940, as amended
BOARD - The Board of Directors of the Fund
CD - Certificate of deposit
CLASS I, CLASS II AND CLASS Z - The Fund offers three classes of shares,
designated "Class I," "Class II," and "Class Z." The three classes have
proportionate interests in the Fund's portfolio. They differ, however, primarily
in their sales charge and expense structures.
CODE - Internal Revenue Code of 1986, as amended
DISTRIBUTORS - Franklin/Templeton Distributors, Inc., the Fund's principal
underwriter
FRANKLIN MUTUAL - Franklin Mutual Advisers, Inc., the Fund's investment manager
FRANKLIN TEMPLETON GROUP - Franklin Resources, Inc., a publicly owned holding
company, and its various subsidiaries
FRANKLIN TEMPLETON GROUP OF FUNDS - All U.S. registered investment companies in
the Franklin Group of Funds(R) and the Templeton Group of Funds
FT SERVICES - Franklin Templeton Services, Inc., the Fund's administrator
INVESTOR SERVICES - Franklin/Templeton Investor Services, Inc., the Fund's
shareholder servicing and transfer agent
IRS - Internal Revenue Service
MOODY'S - Moody's Investors Service, Inc.
NASD - National Association of Securities Dealers, Inc.
NET ASSET VALUE (NAV) - The value of a mutual fund is determined by deducting
the fund's liabilities from the total assets of the portfolio. The net asset
value per share is determined by dividing the net asset value of the fund by the
number of shares outstanding.
NYSE - New York Stock Exchange
Prospectus - The prospectus for Class Z shares of the Fund dated May 1, 1998 as
may be amended from time to time
RESOURCES - Franklin Resources, Inc.
SAI - Statement of Additional Information
S&P - Standard & Poor's Corporation
SEC - U.S. Securities and Exchange Commission
SECURITIES DEALER - A financial institution that, either directly or through
affiliates, has an agreement with Distributors to handle customer orders and
accounts with the Fund. This reference is for convenience only and does not
indicate a legal conclusion of capacity.
U.S. - United States
WE/OUR/US - Unless a different meaning is indicated by the context, these terms
refer to the Fund and/or Investor Services, Distributors, or other wholly owned
subsidiaries of Resources.
FORM N-1A
PART C
Other Information
Item 24 financial Statements and Exhibits
a) Financial Statements
(1) Audited Financial Statements incorporated herein by reference to
the Mutual Shares Fund's Annual Report to Shareholders dated
December 31, 1997, as filed with the SEC electronically on Form
Type N-30D on February 25, 1998.
(i) Financial Highlights
(ii) Statements of Investments, December 31, 1997
(iii) Statement of Assets and Liabilities - December 31, 1997
(iv) Statement of Operations - for the year ended December 31,
1997
(v) Statements of Changes in Net Assets - years ended December
31, 1997 and 1996
(vi) Notes to Financial Statements
(vii) Report of Ernst and Young LLP, Independent Auditors, dated
January 30, 1998
(2) Audited Financial Statements incorporated herein by reference to
the Mutual Qualified Fund's Annual Report to Shareholders dated
December 31, 1997, as filed with the SEC electronically on Form
Type N-30D on February 25, 1998.
(i) Financial Highlights
(ii) Statements of Investments, December 31, 1997
(iii) Statement of Assets and Liabilities - December 31, 1997
(iv) Statement of Operations - for the year ended December 31,
1997
(v) Statements of Changes in Net Assets - years ended December
31, 1997 and 1996
(vi) Notes to Financial Statements
(vii) Report of Ernst and Young LLP, Independent Auditors, dated
January 30, 1998
(3) Audited Financial Statements incorporated herein by reference to
the Mutual Discovery Fund's Annual Report to Shareholders dated
December 31, 1997, as filed with the SEC electronically on Form
Type N-30D on February 25, 1998.
(i) Financial Highlights
(ii) Statements of Investments, December 31, 1997
(iii) Statement of Assets and Liabilities - December 31, 1997
(iv) Statement of Operations - for the year ended December 31,
1997
(v) Statements of Changes in Net Assets - years ended December
31, 1997 and 1996
(vi) Notes to Financial Statements
(vii) Report of Ernst and Young LLP, Independent Auditors, dated
January 30, 1998
(4) Audited Financial Statements incorporated herein by reference to
the Mutual Beacon Fund's Annual Report to Shareholders dated
December 31, 1997, as filed with the SEC electronically on Form
Type N-30D on February 25, 1998.
(i) Financial Highlights
(ii) Statements of Investments, December 31, 1997
(iii)Statement of Assets and Liabilities - December 31, 1997
(iv) Statement of Operations - for the year ended December 31,
1997
(v) Statements of Changes in Net Assets - years ended December
31, 1997 and 1996
(vi) Notes to Financial Statements
(vii)Report of Ernst and Young LLP, Independent Auditors, dated
January 30, 1998
(5) Audited Financial Statements incorporated herein by reference to
the Mutual European Fund's Annual Report to Shareholders dated
December 31, 1996, as filed with the SEC electronically on Form
Type N-30D on February 25, 1998.
(i) Financial Highlights
(ii) Statements of Investments, December 31, 1997
(iii)Statement of Assets and Liabilities - December 31, 1997
(iv) Statement of Operations - for the year ended December 31,
1997
(v) Statements of Changes in Net Assets - years ended December
31, 1997 and 1996
(vi) Notes to Financial Statements
(vii) Report of Ernst and Young LLP, Independent Auditors, dated
January 30, 1998
(6) Audited Financial Statements incorporated herein by reference to
the Mutual Financial Services Fund's Annual Report to Shareholders
dated December 31, 1997, as filed with the SEC electronically on
Form Type N-30D on February 25, 1998.
(i) Financial Highlights
(ii) Statement of Investments, December 31, 1997
(iii) Statement of Assets and Liabilities - December 31, 1997
(iv) Statement of Operations - for the period August 19, 1997
(commencement of operations) to December 31, 1997
(v) Statement of Changes in Net Assets - for the period August
19, 1997 (commencement of operations) to December 31, 1997
(vi) Notes to Financial Statements
(vii) Report of Ernst & Young LLP, Independent Auditors dated
January 30, 1998
b) The following exhibits are incorporated by reference except 11(i)
and 27(i) through 27(xviii) which are attached.
(1) copies of the charter as now in effect:
(i) Articles of Incorporation dated November 12, 1987
Filing: Post-Effective Amendment No. 22 to Registration
Statement on Form N-1A
File No. 33-18516
Filing Date: April 30, 1997
(ii) Articles of Amendment dated December 30, 1987
Filing: Post-Effective Amendment No. 22 to Registration
Statement on Form N-1A
File No. 33-18516
Filing Date: April 30, 1997
(iii) Articles Supplementary dated September 18, 1992
Filing: Post-Effective Amendment No. 22 to Registration
Statement on Form N-1A
File No. 33-18516
Filing Date: April 30, 1997
(iv) Articles Supplementary dated January 26, 1996
Filing: Post-Effective Amendment No. 22 to Registration
Statement on Form N-1A
File No. 33-18516
Filing Date: April 30, 1997
(v) Articles Supplementary dated June 17, 1996
Filing: Post-Effective Amendment No. 22 to Registration
Statement on Form N-1A
File No. 33-18516
Filing Date: April 30, 1997
(2) copies of the existing By-Laws or instruments corresponding
thereto;
(i) By-Laws
Filing: Post-Effective Amendment No. 22 to Registration
Statement on Form N-1A
File No. 33-18516
Filing Date: April 30, 1997
(3) copies of any voting trust agreement with respect to more than
five percent of any class of equity securities of the Registrant
Not Applicable
(4) specimens or copies of each security issued by the Registrant,
including copies of all constituent instruments, defining the
rights of the holders of such securities and copies of each
security being registered
Not Applicable
(5) copies of all investment advisory contracts relating to the
management of the assets of the Registrant
(i) Investment Advisory Agreement between Franklin Mutual
Advisers, Inc. and Registrant on behalf of Mutual
Shares Fund dated November 1, 1996
Filing: Post-Effective Amendment No. 21 to
Registration Statement on Form N-1A
File No. 33-18516
Filing Date: January 31, 1997
(ii) Investment Advisory Agreement between Franklin Mutual
Advisers, Inc. and Registrant on behalf of Mutual
Qualified Fund dated November 1, 1996
Filing: Post-Effective Amendment No. 21 to Registration
Statement on Form N-1A
File No. 33-18516
Filing Date: January 31, 1997
(iii) Investment Advisory Agreement between Franklin Mutual
Advisers, Inc. and Registrant on behalf of Mutual Beacon
Fund dated November 1, 1996
Filing: Post-Effective Amendment No. 21 to Registration
Statement on Form N-1A
File No. 33-18516
Filing Date: January 31, 1997
(iv) Investment Advisory Agreement between Franklin Mutual
Advisers, Inc. and Registrant on behalf of Mutual
Discovery Fund dated November 1, 1996
Filing: Post-Effective Amendment No. 21 to Registration
Statement on Form N-1A
File No. 33-18516
Filing Date: January 31, 1997
(v) Investment Advisory Agreement between Franklin Mutual
Advisers, Inc. and Registrant on behalf of Mutual European
Fund dated November 1, 1996
Filing: Post-Effective Amendment No. 21 to Registration
Statement on Form N-1A File No. 33-18516
Filing Date: January 31, 1997
(vi) Investment Advisory Agreement between Franklin Mutual
Advisers, Inc. and Registrant on behalf of Mutual
Financial Services Fund dated August 1, 1997
Filing: Post-Effective Amendment No. 24 to Registration
Statement on Form N-1A
File No. 33-18516
Filing Date: February 19, 1998
(vii) Administration Agreement between Franklin Templeton
Services, Inc. and Registrant on behalf of Mutual
Shares Fund dated November 1, 1996
Filing: Post-Effective Amendment No. 22 to
Registration Statement on Form N-1A
File No. 33-18516
Filing Date: April 30, 1997
(viii) Administration Agreement between Franklin Templeton
Services, Inc. and Registrant on behalf of Mutual
Qualified Fund dated November 1, 1996
Filing: Post-Effective Amendment No. 22 to
Registration Statement on Form N-1A
File No. 33-18516
Filing Date: April 30, 1997
(ix) Administration Agreement between Franklin Templeton
Services, Inc. and Registrant on behalf of Mutual Beacon
Fund dated November 1, 1996
Filing: Post-Effective Amendment No. 22 to Registration
Statement on Form N-1A File No. 33-18516
Filing Date: April 30, 1997
(x) Administration Agreement between Franklin Templeton
Services, Inc. and Registrant on behalf of Mutual
Discovery Fund dated November 1, 1996
Filing: Post-Effective Amendment No. 22 to Registration
Statement on Form N-1A
File No. 33-18516
Filing Date: April 30, 1997
(xi) Administration Agreement between Franklin Templeton
Services, Inc. and Registrant on behalf of Mutual European
Fund dated November 1, 1996
Filing: Post-Effective Amendment No. 22 to Registration
Statement on Form N-1A
File No. 33-18516
Filing Date: April 30, 1997
(xii) Administration Agreement between Franklin Templeton
Services, Inc. and Registrant on behalf of Mutual
Financial Services Fund dated August 1, 1997
Filing: Post-Effective Amendment No. 24 to Registration
Statement on Form N-1A
File No. 33-18516
Filing Date: February 19, 1998
(6) copies of each underwriting or distribution contract between the
Registrant and principal underwriter, and specimens or copies of
all agreements between principal underwriters and dealers;
(i) Distribution Agreement between Registrant on behalf of
Mutual Financial Services Fund and Franklin/Templeton
Distributors, Inc. dated August 19, 1997
Filing: Post-Effective Amendment No. 24 to Registration
Statement on Form N-1A
File No. 33-18516
Filing Date: February 19, 1998
(ii) Distribution Agreement between Registrant on behalf of
Mutual Shares Fund and Franklin/Templeton Distributors,
Inc. dated November 1, 1996
Filing: Post-Effective Amendment No. 21 to Registration
Statement on Form N-1A
File No. 33-18516
Filing Date: January 31, 1997
(iii) Distribution Agreement between Registrant on behalf of
Mutual Beacon Fund and Franklin/Templeton Distributors,
Inc dated November 1, 1996
Filing: Post-Effective Amendment No. 21 to Registration
Statement on Form N-1A
File No. 33-18516
Filing Date: January 31, 1997
(iv) Distribution Agreement between Registrant on behalf of
Mutual Qualified Fund and Franklin/Templeton Distributors,
Inc. dated November 1, 1996 Filing: Post-Effective
Amendment No. 21 to Registration
Statement on Form N-1A
File No. 33-18516
Filing Date: January 31, 1997
(v) Distribution Agreement between Registrant on behalf of
Mutual Discovery Fund and Franklin/Templeton
Distributors, Inc. dated November 1, 1996
Filing: Post-Effective Amendment No. 21 to Registration
Statement on Form N-1A
File No. 33-18516
Filing Date: January 31, 1997
(vi) Distribution Agreement between Registrant on behalf of
Mutual European Fund and Franklin/Templeton Distributors,
Inc. dated November 1, 1996
Filing: Post-Effective Amendment No. 21 to Registration
Statement on Form N-1A
File No. 33-18516
Filing Date: January 31, 1997
(vii) Forms of Dealer Agreements between Franklin/Templeton
Distributors, Inc. and dealers
Registrant: Franklin Tax-Free Trust
Filing: Post-Effective Amendment No. 22 to Registration
Statement on Form N-1A
File No. 2-94222
Filing Date: March 14, 1996
(7) copies of all bonus, profit sharing, pension or other similar
contracts or arrangements wholly or partly for the benefit of
Trustees or officers of the Registrant in their capacity as such;
any such plan that is not set forth in a formal document, furnish a
reasonably detailed description thereof;
Not Applicable
(8) copies of all custodian agreements and depository contracts under
Section 17(f) of the Investment Company Act of 1940 (the "1940
Act"), with respect to securities and similar investments of the
Registrant, including the schedule of renumeration;
(i) Custodian Agreement between the Registrant and State Street
Bank
Filing: Post-Effective Amendment No. 22 to Registration
Statement on Form N-1A
File No. 33-18516
Filing Date: April 30, 1997
(9) copies of all other material contracts not made in the ordinary
course of business which are to be performed in whole or in part at
or after the date of filing the Registration Statement;
Not Applicable
(10) an opinion and consent of counsel as to the legality of the
securities being registered, indicating whether they will when sold
be legally issued, fully paid and nonassessable;
(i) Opinion and Consent of Miles and Stockbridge as to legality
of shares dated December 18, 1992
Filing: Post-Effective Amendment No. 22 to Registration
Statement on Form N-1A
File No. 33-18516
Filing Date: April 30, 1997
(ii) Opinion and Consent of Miles and Stockbridge as to legality of
shares dated June 17, 1996
Filing: Post-Effective Amendment No. 22 to Registration
Statement on Form N-1A
File No. 33-18516
Filing Date: April 30, 1997
(11) copies of any other opinions, appraisals or rulings and consents to
the use thereof relied on in the preparation of this registration
statement and required by Section 7 of the 1933 Act;
(i) Consent of Independent Auditors
(12) all financial statements omitted from Item 23;
Not Applicable
(13) copies of any agreements or understandings made in consideration for
providing the initial capital between or among the Registrant, the
underwriter, adviser, promoter or initial stockholders and written
assurances from promoters or initial stockholders that their
purchases were made for investment purposes without any present
intention of redeeming or reselling;
(i) Form of Subscription Agreement by Sole Shareholder
Filing: Post-Effective Amendment No. 22 to Registration
Statement on Form N-1A
File No. 33-18516
Filing Date: April 30, 1997
(14) copies of the model plan used in the establishment of any retirement
plan in conjunction with which Registrant offers its securities, any
instructions thereto and any other documents making up the model
plan. Such form(s) should disclose the costs and fees charged in
connection therewith;
(i) Copy of model retirement plan is incorporated herein by
reference to:
Registrant: Franklin High Income Trust
Filing: Post Effective Amendment No. 26 to Registration
Statement on Form N-1A
File No. 2-30203
Filing Date: August 1, 1989
(ii) *Model 403(b)(7) Plan
(iii)*Model SEP-IRA Plan
(iv) *Model Fund Sponsored Plan
(v) *Model IRA Plan
(vi) *Model IRA Plan Amendment
*Previously filed
(15) copies of any plan entered into by Registrant pursuant to Rule 12b-1
under the 1940 Act, which describes all material aspects of the
financing of distribution of Registrant's shares, and any agreements
with any person relating to implementation of such plan;
(i) Distribution Plan pursuant to Rule 12b-1 between the
Registrant on behalf of Mutual Financial Services Fund -
Class I and Franklin Templeton/Distributors, Inc. dated
August 19, 1997
Filing: Post-Effective Amendment No. 24 to Registration
Statement on Form N-1A
File No. 33-18516
Filing Date: February 19, 1998
(ii) Distribution Plan pursuant to Rule 12b-1 between the
Registrant on behalf of Mutual Financial Services Fund -
Class II and Franklin Templeton/Distributors, Inc. dated
August 19, 1997
Filing: Post-Effective Amendment No. 24 to Registration
Statement on Form N-1A
File No. 33-18516
Filing Date: February 19, 1998
(iii) Distribution Plan pursuant to Rule 12b-1 between the
Registrant on behalf of Mutual Shares Fund - Class I and
Franklin Templeton/Distributors, Inc. dated November 1, 1996
Filing: Post-Effective Amendment No. 21 to the
Registration Statement on Form N-1A
File No. 33-18516
Filing Date: January 31, 1997
(iv) Distribution Plan pursuant to Rule 12b-1 between the
Registrant on behalf of Mutual Beacon Fund - Class I and
Franklin/Templeton Distributors, Inc. dated November 1,
1996
Filing: Post-Effective Amendment No. 21 to the
Registration Statement on Form N-1A
File No. 33-18516
Filing Date: January 31, 1997
(v) Distribution Plan pursuant to Rule 12b-1 between the
Registrant on behalf of Mutual Qualified Fund - Class I
and Franklin Templeton/Distributors, Inc dated November 1,
1996
Filing: Post-Effective Amendment No. 21 to the
Registration Statement on Form N-1A
File No. 33-18516
Filing Date: January 31, 1997
(vi) Distribution Plan pursuant to Rule 12b-1 between the
Registrant on behalf of Mutual Discovery Fund - Class I
and Franklin/Templeton Distributors, Inc. dated November
1, 1996
Filing: Post-Effective Amendment No. 21 to the
Registration Statement on Form N-1A
File No. 33-18516
Filing Date: January 31, 1997
(vii) Distribution Plan pursuant to Rule 12b-1 between the
Registrant on behalf of Mutual European Fund - Class I and
Franklin/Templeton Distributors, Inc. dated November 1,
1996
Filing: Post-Effective Amendment No. 21 to the
Registration Statement on Form N-1A
File No. 33-18516
Filing Date: January 31, 1997
(viii) Distribution Plan pursuant to Rule 12b-1 between the
Registrant on behalf of Mutual Shares Fund - Class II and
Franklin/Templeton Distributors, Inc. dated November 1,
1996
Filing: Post-Effective Amendment No. 23 to the
Registration Statement on Form N-1A
File No. 33-18516
Filing Date: June 5, 1997
(ix) Distribution Plan pursuant to Rule 12b-1 between the
Registrant on behalf of Mutual Qualified Fund - Class II
and Franklin/Templeton Distributors, Inc. dated November
1, 1996
Filing: Post-Effective Amendment No. 23 to the
Registration Statement on Form N-1A
File No. 33-18516
Filing Date: June 5, 1997
(x) Distribution Plan pursuant to Rule 12b-1 between the
Registrant on behalf of Mutual Beacon Fund - Class II and
Franklin/Templeton Distributors, Inc. dated November 1,
1996
Filing: Post-Effective Amendment No. 23 to the
Registration Statement on Form N-1A
File No. 33-18516
Filing Date: June 5, 1997
(xi) Distribution Plan pursuant to Rule 12b-1 between the
Registrant on behalf of Mutual Discovery Fund - Class II
and Franklin/Templeton Distributors, Inc. dated November
1, 1996
Filing: Post-Effective Amendment No. 23 to the
Registration Statement on Form N-1A
File No. 33-18516
Filing Date: June 5, 1997
(xii) Distribution Plan pursuant to Rule 12b-1 between the
Registrant on behalf of Mutual European Fund - Class II
and Franklin/Templeton Distributors, Inc. dated November
1, 1996
Filing: Post-Effective Amendment No. 23 to the
Registration Statement on Form N-1A
File No. 33-18516
Filing Date: June 5, 1997
(16) schedule for computation of each performance quotation provided in
the registration statement in response to Item 22 (which need not be
audited);
(i) Schedule for Computation of Performance Quotation
Registrant: Franklin New York Tax-Free Trust
Filing: Post-Effective Amendment No. 12 to Registration
Statement on Form N-1A
File No. 33-7785
Filing Date: April 25, 1995
(17) Power of Attorney;
(i) Power of Attorney
Filing: Post-Effective Amendment No. 22 to Registration
Statement on Form N-1A
File No. 33-18516
Filing Date: April 30, 1997
(ii) Certificate of Secretary
Filing: Post-Effective Amendment No. 22 to Registration
Statement on Form N-1A
File No. 33-18516
Filing Date: April 30, 1997
(18) copies of any plan entered into by Registrant pursuant to Rule
18f-3 under the 1940 Act.
(i) Multiple Class Plan on behalf of Mutual Shares Fund dated
November 1, 1996
Filing: Post-Effective Amendment No. 24 to Registration
Statement on Form N-1A
File No. 33-18516
Filing Date: February 19, 1998
(ii) Multiple Class Plan on behalf of Mutual Qualified Fund
dated November 1, 1996
Filing: Post-Effective Amendment No. 24 to Registration
Statement on Form N-1A
File No. 33-18516
Filing Date: February 19, 1998
(iii) Multiple Class Plan on behalf of Mutual Discovery Fund
dated November 1, 1996
Filing: Post-Effective Amendment No. 24 to Registration
Statement on Form N-1A
File No. 33-18516
Filing Date: February 19, 1998
(iv) Multiple Class Plan on behalf of Mutual Beacon Fund dated
November 1, 1996
Filing: Post-Effective Amendment No. 24 to Registration
Statement on Form N-1A
File No. 33-18516
Filing Date: February 19, 1998
(v) Multiple Class Plan on behalf of Mutual European Fund dated
November 1, 1996
Filing: Post-Effective Amendment No. 24 to Registration
Statement on Form N-1A
File No. 33-18516
Filing Date: February 19, 1998
(27) Financial Data Schedules for Franklin Mutual Series Fund Inc.
(i) Financial Data Schedule for Mutual Shares
Fund - Class I
(ii) Financial Data Schedule for Mutual Shares
Fund - Class II
(iii) Financial Data Schedule for Mutual Shares
Fund - Class Z
(iv) Financial Data Schedule for Mutual Qualified
Fund - Class I
(v) Financial Data Schedule for Mutual Qualified
Fund - Class II
(vi) Financial Data Schedule for Mutual Qualified
Fund - Class Z
(vii) Financial Data Schedule for Mutual Beacon
Fund - Class I
(viii)Financial Data Schedule for Mutual Beacon
Fund - Class II
(ix) Financial Data Schedule for Mutual Beacon
Fund - Class Z
(x) Financial Data Schedule for Mutual Financial
Services Fund - Class I
(xi) Financial Data Schedule for Mutual Financial
Services Fund - Class II
(xii) Financial Data Schedule for Mutual Financial
Services Fund - Class Z
(xiii)Financial Data Schedule for Mutual European
Fund - Class I
(xiv) Financial Data Schedule for Mutual European
Fund - Class II
(xv) Financial Data Schedule for Mutual European
Fund - Class Z
(xvi) Financial Data Schedule for Mutual Discovery
Fund - Class I
(xvii)Financial Data Schedule for Mutual Discovery
Fund - Class II
(xviii)Financial Data Schedule for Mutual Discovery
Fund - Class Z
ITEM 25 PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
NONE
ITEM 26 NUMBER OF HOLDERS OF SECURITIES
As of December 31, 1997 the number of record holders of the only class of
securities of the Registrant was as follows:
Number of Record Holders
-----------------------------
CLASS I CLASS II CLASS Z
------- -------- --------
Mutual Shares Fund 71,707 52,323 157,578
Mutual Qualified Fund 32,679 20,676 186,489
Mutual Beacon Fund 45,848 31,641 142,293
Mutual Discovery Fund 59,294 42,034 128,201
Mutual European Fund 8,689 4,825 23,851
Mutual Financial
Services Fund 6,638 4,236 7,714
Insofar as indemnification for liabilities arising under the Securities Act of
1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
Please see the By-Laws and the Management and Distribution Agreements,
previously filed as exhibits and incorporated herein by reference.
Notwithstanding the provisions contained in the Registrant's By-Laws, in the
absence of authorization by the appropriate court on the merits pursuant to said
By-Laws, any indemnification under said Article shall be made by Registrant only
if authorized in the manner provided by such By-Laws.
ITEM 28 BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
a) The officers and directors of the Registrant's manager also serve as
officers and directors for (1) the manager's corporate parent, Franklin
Resources, Inc., and/or (2) other investment companies in the Franklin
Templeton Group of Funds. In addition Mr. Charles B. Johnson was
formerly a director of General Host Corporation. For additional
information please see Part B and Schedules A and D of Form ADV of the
Funds' Investment Manager (SEC File 801-53068), incorporated herein by
reference, which sets forth the officers and directors of the Investment
Manager and information as to any business, profession, vocation or
employment of a substantial nature engaged in by those officers and
directors during the past two years.
ITEM 29 PRINCIPAL UNDERWRITERS
a) Franklin/Templeton Distributors, Inc., ("Distributors") also acts as
principal underwriter of shares of:
Franklin Asset Allocation Fund
Franklin California Tax-Free Income Fund, Inc.
Franklin California Tax-Free Trust
Franklin Custodian Funds, Inc.
Franklin Equity Fund
Franklin Federal Money Fund
Franklin Federal Tax-Free Income Fund
Franklin Floating Rate Trust
Franklin Gold Fund
Franklin High Income Trust
Franklin Investors Securities Trust
Franklin Managed Trust
Franklin Money Fund
Franklin Municipal Securities Trust
Franklin New York Tax-Free Income Fund
Franklin New York Tax-Free Trust
Franklin Real Estate Securities Trust
Franklin Strategic Mortgage Portfolio
Franklin Strategic Series
Franklin Tax-Exempt Money Fund
Franklin Tax-Free Trust
Franklin Templeton Fund Allocator Series
Franklin Templeton Global Trust
Franklin Templeton International Trust
Franklin Templeton Money Fund Trust
Franklin Value Investors Trust
Institutional Fiduciary Trust
Franklin Templeton Japan Fund
Templeton American Trust, Inc.
Templeton Capital Accumulator Fund, Inc.
Templeton Developing Markets Trust
Templeton Funds, Inc.
Templeton Global Investment Trust
Templeton Global Opportunities Trust
Templeton Global Real Estate Fund
Templeton Global Smaller Companies Fund, Inc.
Templeton Growth Fund, Inc.
Templeton Income Trust
Templeton Institutional Funds, Inc.
b) The information required by this item 29 with respect to each director and
officer of Distributors is incorporated by reference to Part B of this N-1A and
Schedule A of Form BD filed by Distributors with the Securities and Exchange
Commission pursuant to the Securities Act of 1934 (SEC File No.8-5889).
c) Not applicable. Registrant's principal underwriter is an affiliated person
of an affiliated person of the Registrant.
ITEM 30 LOCATION OF ACCOUNTS AND RECORDS
All accounts, books and other documents required to be maintained by Section
31(a) of the Investment Company Act of 1940 and the Rules thereunder will be
maintained at the offices of Franklin Mutual Series Fund Inc., located at 51
John F. Kennedy Parkway, Short Hills, New Jersey 07078, or at the State Street
Bank and Trust Company, 1776 Heritage Drive, John Adams Building #2, North
Quincy, Massachusetts 02171 or at Franklin/Templeton Investor Services, Inc.,
777 Mariners island Boulevard, San Mateo, California 94404.
ITEM 31 MANAGEMENT SERVICES
There are no management-related service contracts not discussed in Part A or
Part B.
ITEM 32 UNDERTAKINGS
(a) The Registrant hereby undertakes to promptly call a meeting of
shareholders for the purpose of voting upon the question of removal of
any director or directors when requested in writing to do so by the
record holders of not less than 10 percent of the Registrant's
outstanding shares to assist its shareholders in the communicating with
other shareholders in accordance with the requirements of Section 16(c)
of the Investment Company Act of 1940.
(b) The Registrant hereby undertakes to comply with the information
requirement in Item 5A of the Form N-1A by including the required
information in the Fund's annual report and to furnish each person to
whom a prospectus is delivered a copy of the annual report upon request
and without charge.
Signatures
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, the Registrant and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized in the City of San Mateo and the State of California, on the 2nd day
of March, 1998.
FRANKLIN MUTUAL SERIES FUND INC.
(Registrant)
By: MICHAEL F. PRICE*
Michael F. Price
President
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed below by the following persons in the capacities and
on the date indicated:
Michael F. Price* Director and Principal Executive
Michael F. Price Officer
Dated: March 2, 1998
James R. Baio* Principal Financial and
James R. Baio Accounting Officer
Dated March 2, 1998
Edward I. Altman* Director
Edward I. Altman Dated March 2, 1998
Ann Torre Grant* Director
Ann Torre Grant Dated: March 2, 1998
Andrew H. Hines, Jr.* Director
Andrew H. Hines, Jr. Dated: March 2, 1998
Peter A. Langerman* Director
Peter A. Langerman Dated: March 2, 1998
William J. Lippman* Director
William J. Lippman Dated: March 2, 1998
Bruce A. MacPherson* Director
Bruce A. MacPherson Dated: March 2, 1998
Fred R. Millsaps* Director
Fred R. Millsaps Dated: March 2, 1998
Leonard Rubin* Director
Leonard Rubin Dated: March 2, 1998
Barry F. Schwartz* Director
Barry F. Schwartz Dated: March 2, 1998
Vaughn R. Sturtevant*, M.D. Director
Vaughn R. Sturtevant, M.D. Dated: March 2, 1998
Robert E. Wade* Director
Robert E. Wade Dated: March 2, 1998
*By: Larry L. Greene
Larry L. Greene, Attorney-in-Fact
(Pursuant to Powers of Attorney previously filed)
FRANKLIN MUTUAL SERIES FUND INC.
REGISTRATION STATEMENT
EXHIBITS INDEX
-----------------------------
EXHIBIT NO. DESCRIPTION LOCATION
EX-99.B1(i) Articles of Incorporation *
EX-99.B1(ii) Articles of Amendment *
EX-99.B1(iii) Articles supplementary *
EX-99.B1(iv) Articles supplementary *
EX-99.B1(v) Articles supplementary *
EX-99.B2(i) By-Laws *
EX-99.B5(i) Investment Advisory Agreement between *
Franklin Mutual Advisers, Inc. and the
Registrant on behalf of Mutual Shares
Fund dated November 1, 1996
EX-99.B5(ii) Investment Advisory Agreement between *
Franklin Mutual Advisers, Inc. and the
Registrant on behalf of Mutual
Qualified Fund dated November 1, 1996
EX-99.B5(iii) Investment Advisory Agreement between *
Franklin Mutual Advisers, Inc. and the
Registrant on behalf of Mutual Beacon
Fund dated November 1, 1996
EX-99.B5(iv) Investment Advisory Agreement between *
Franklin Mutual Advisers, Inc. and the
Registrant on behalf of Mutual
Discovery Fund dated November 1, 1996
EX-99.B5(v) Investment Advisory Agreement between *
Franklin Mutual Advisers, Inc. and the
Registrant on behalf of Mutual
European Fund dated November 1, 1996
EX-99.B5(vi) Investment Advisory Agreement between *
Franklin Mutual Advisers, Inc. and the
Registrant on behalf of Mutual
Financial Services Fund dated August
1, 1997
EX-99.B5(vii) Administration Agreement between *
Franklin Templeton Services, Inc. and
Registrant on behalf of Mutual Shares
Fund dated November 1, 1996
EX-99.B5(viii) Administration Agreement between *
Franklin Templeton Services, Inc. and
Registrant on behalf of Mutual
Qualified Fund dated November 1, 1996
EX-99.B5(ix) Administration Agreement between *
Franklin Templeton Services, Inc. and
Registrant on behalf of Mutual Beacon
Fund dated November 1, 1996
EX-99.B5(x) Administration Agreement between *
Franklin Templeton Services, Inc. and
Registrant on behalf of Mutual
Discovery Fund dated November 1, 1996
EX-99.B5(xi) Administration Agreement between *
Franklin Templeton Services, Inc. and
Registrant on behalf of Mutual
European Fund dated November 1, 1996
EX-99.B5(xii) Administration Agreement between *
Franklin Templeton Services, Inc. and
Registrant on behalf of Mutual
Financial Services Fund dated August
1, 1997
EX-99.B6(i) Distribution Agreement between *
Registrant on behalf of Mutual
Financial Services Fund and
Franklin/Templeton Distributors, Inc.
dated August 19, 1997
EX-99.B6(ii) Distribution Agreement between *
Registrant on behalf of Mutual Shares
Fund and Franklin/Templeton
Distributors, Inc. dated November 1,
1996
EX-99.B6(iii) Distribution Agreement between *
Registrant on behalf of Mutual Beacon
Fund and Franklin/Templeton
Distributors, Inc. dated November 1,
1996
EX-99.B6(iv) Distribution Agreement between *
Registrant on behalf of Mutual
Qualified Fund and Franklin/Templeton
Distributors, Inc. dated November 1,
1996
EX-99.B6(v) Distribution Agreement between *
Registrant on behalf of Mutual
Discovery Fund and Franklin/Templeton
Distributors, Inc. dated November 1,
1996
EX-99.B6(vi) Distribution Agreement between *
Registrant on behalf of Mutual
European Fund and Franklin/Templeton
Distributors, Inc. dated November 1,
1996
EX-99.B6(vii) Forms of Dealer Agreements between *
Franklin/Templeton Distributors, Inc.
and dealers
EX-99.B8(i) Custodian Agreement between Registrant *
and State Street Bank
EX-99.B10(i) Opinion and Consent of Miles and *
Stockbridge as to legality of shares
dated December 18, 1992
EX-99.B10(ii) Opinion and Consent of Miles and *
Stockbridge as to legality of shares
dated June 17, 1996
EX-99.B11(i) Consent of Independent Auditors Attached
EX-99.B13(i) Form of Subscription Agreement by Sole *
Shareholder
EX-99.B14(i) Copy of Model Retirement Plan *
EX-99.B14(ii) Model 403(b)(7) Plan **
EX-99.B14(iii) Model SEO-IRA Plan **
EX-99.B14(iv) Model Fund Sponsored Plan **
EX-99.B14(v) Model IRA Plan **
EX-99.B14(v) Model IRA Plan Amendment **
EX-99.B15(i) Distribution Plan pursuant to Rule 12b-1 *
between the Registrant on behalf of
Mutual Financial Services Fund -
Class I and Franklin/Templeton Distributors,
Inc. dated August 19, 1997
EX-99.B15(ii) Distribution Plan pursuant to Rule 12b-1 *
between the Registrant on behalf of
Mutual Financial Services Fund -
Class II and Franklin/Templeton
Distributors, Inc. dated August 19, 1997
EX-99.B15(iii) Distribution Plan pursuant to Rule 12b-1 *
between the Registrant on behalf of
Mutual Shares Fund - Class I and
Franklin/Templeton Distributors, Inc.
dated August 19, 1997
EX-99.B15(iv) Distribution Plan pursuant to Rule 12b-1 *
between the Registrant on behalf of
Mutual Qualified Fund - Class I and
Franklin/Templeton Distributors, Inc.
dated November 1, 1996
EX-99.B15(v) Distribution Plan pursuant to Rule 12b-1 *
between the Registrant on behalf of
Mutual Beacon Fund - Class I and
Franklin/Templeton Distributors, Inc.
dated November 1, 1996
EX-99.B15(vi) Distribution Plan pursuant to Rule 12b-1 *
between the Registrant on behalf of
Mutual Discovery Fund - Class I and
Franklin/Templeton Distributors, Inc.
dated November 1, 1996
EX-99.B15(vii) Distribution Plan pursuant to Rule 12b-1 *
between the Registrant on behalf of
Mutual European Fund - Class I and
Franklin/Templeton Distributors, Inc.
dated November 1, 1996
EX-99.B15(viii) Distribution Plan pursuant to Rule 12b-1 *
between the Registrant on behalf of
Mutual Shares Fund - Class II and
Franklin/Templeton Distributors, Inc.
dated November 1, 1996
EX-99.B15(ix) Distribution Plan pursuant to Rule 12b-1 *
between the Registrant on behalf of
Mutual Qualified Fund - Class II and
Franklin/Templeton Distributors, Inc.
dated November 1, 1996
EX-99.B15(x) Distribution Plan pursuant to Rule 12b-1 *
between the Registrant on behalf of
Mutual Beacon Fund - Class II and
Franklin/Templeton Distributors, Inc.
dated November 1, 1996
EX-99.B15(xi) Distribution Plan pursuant to Rule 12b-1 *
between the Registrant on behalf of
Mutual Discovery Fund - Class II and
Franklin/Templeton Distributors, Inc.
dated November 1, 1996
EX-99.B15(xii) Distribution Plan pursuant to Rule 12b-1 *
between the Registrant on behalf of
Mutual European Fund - Class II and
Franklin/Templeton Distributors, Inc.
dated November 1, 1996
EX-99.B16(i) Schedule of Computation of Performance *
Quotation
EX-99.B17(i) Power of Attorney *
EX-99.B17(ii) Certificate of Secretary *
EX-99.B18(i) Multiple Class Plan on behalf of *
Mutual Shares Fund dated November 1,
1996
EX-99.B18(ii) Multiple Class Plan on behalf of *
Mutual Qualified Fund dated November
1, 1996
EX-99.B18(iii) Multiple Class Plan on behalf of *
Mutual Discovery Fund dated November
1, 1996
EX-99.B18(iv) Multiple Class Plan on behalf of *
Mutual Beacon Fund dated November 1,
1996
EX-99.B18(v) Multiple Class Plan on behalf of *
Mutual European Fund dated November 1,
1996
EX-27.B(i) Financial Data Schedule for Mutual Attached
Shares Fund - Class I
EX-27.B(ii) Financial Data Schedule for Mutual Attached
Shares Fund - Class II
EX-27.B(iii) Financial Data Schedule for Mutual Attached
Shares Fund - Class Z
EX-27.B(iv) Financial Data Schedule for Mutual Attached
Qualified Fund - Class I
EX-27.B(v) Financial Data Schedule for Mutual Attached
Qualified Fund - Class II
EX-27.B(vi) Financial Data Schedule for Mutual Attached
Qualified Fund - Class Z
EX-27.B(vii) Financial Data Schedule for Mutual Attached
Beacon Fund - Class I
EX-27.B(viii) Financial Data Schedule for Mutual Attached
Beacon Fund - Class II
EX-27.B(ix) Financial Data Schedule for Mutual Attached
Beacon Fund - Class Z
EX-27.B(x) Financial Data Schedule for Mutual Attached
Financial Services Fund - Class I
EX-27.B(xi) Financial Data Schedule for Mutual Attached
Financial Services Fund - Class II
EX-27.B(xii) Financial Data Schedule for Mutual Attached
Financial Services Fund - Class Z
EX-27.B(xiii) Financial Data Schedule for Mutual Attached
European Fund - Class I
EX-27.B(xiv) Financial Data Schedule for Mutual Attached
European Fund - Class II
EX-27.B(xv) Financial Data Schedule for Mutual Attached
European Fund - Class Z
EX-27.B(xvi) Financial Data Schedule for Mutual Attached
Discovery Fund - Class I
EX-27.B(xvii) Financial Data Schedule for Mutual Attached
Discovery Fund - Class II
EX-27.B(xviii) Financial Data Schedule for Mutual Attached
Discovery Fund - Class Z
* Incorporated by reference
** Previously filed
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the references to our firm under the captions "Financial
Highlights" in the Class Z and Class I and II Prospectuses and "Investment
Management and Other Services" and "Financial Statements" in the Class Z and
Class I and II Statements of Additional Information, and to the incorporation by
reference in this Post-Effective Amendment No. 25 to the Registration Statement
of Franklin Mutual Series Fund Inc., Number 33-18516, on Form N-1A, of our
reports dated January 30, 1998 on Mutual Shares Fund, Mutual Qualified Fund,
Mutual Beacon Fund, Mutual Discovery Fund, Mutual European Fund and Mutual
Financial Services Fund (each a portfolio of Franklin Mutual Series Fund Inc.)
included in the 1997 Annual Reports to Shareholders.
/s/Ernst & Young LLP
Boston, Massachusetts
February 27, 1998
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
The schedule contains summary financial information extracted from the Mutual
Shares Fund December 31, 1997 annual report and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<CIK> 0000825063
<NAME> FRANKLIN MUTUAL SERIES FUND, INC.
<SERIES>
<NUMBER> 001
<NAME> MUTUAL SHARES FUND- CLASS I
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 7113090209
<INVESTMENTS-AT-VALUE> 9388777750
<RECEIVABLES> 126659492
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 166919361
<TOTAL-ASSETS> 9682356603
<PAYABLE-FOR-SECURITIES> 7683874
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 75586354
<TOTAL-LIABILITIES> 83270228
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 7166357101
<SHARES-COMMON-STOCK> 49071801
<SHARES-COMMON-PRIOR> 373178
<ACCUMULATED-NII-CURRENT> 18844839
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 119083166
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 2294801269
<NET-ASSETS> 9599086375
<DIVIDEND-INCOME> 100311857
<INTEREST-INCOME> 113737119
<OTHER-INCOME> 0
<EXPENSES-NET> 62837926
<NET-INVESTMENT-INCOME> 151211050
<REALIZED-GAINS-CURRENT> 763745787
<APPREC-INCREASE-CURRENT> 932565733
<NET-CHANGE-FROM-OPS> 1847522570
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (20965055)
<DISTRIBUTIONS-OF-GAINS> (64397717)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 45117270
<NUMBER-OF-SHARES-REDEEMED> (3362536)
<SHARES-REINVESTED> 6943889
<NET-CHANGE-IN-ASSETS> 3004516451
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 92299922
<OVERDISTRIB-NII-PRIOR> (3613636)
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 48600626
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 65345045
<AVERAGE-NET-ASSETS> 503144976
<PER-SHARE-NAV-BEGIN> 18.56<F1>
<PER-SHARE-NII> 0.34
<PER-SHARE-GAIN-APPREC> 4.43
<PER-SHARE-DIVIDEND> (0.49)
<PER-SHARE-DISTRIBUTIONS> (1.58)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 21.26
<EXPENSE-RATIO> 1.07<F2>
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
<FN>
<F1>The per share NAV has been restated to reflect a 5-for-1 stock split
effective February 3, 1997.
<F2>Ratio of expenses to average net assets without the fee waiver is 1.10%.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
The schedule contains summary financial information extracted from the Mutual
Shares Fund December 31, 1997 annual report and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<CIK> 0000825063
<NAME> FRANKLIN MUTUAL SERIES FUND, INC.
<SERIES>
<NUMBER> 002
<NAME> MUTUAL SHARES FUND- CLASS II
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 7113090209
<INVESTMENTS-AT-VALUE> 9388777750
<RECEIVABLES> 126659492
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 166919361
<TOTAL-ASSETS> 9682356603
<PAYABLE-FOR-SECURITIES> 7683874
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 75586354
<TOTAL-LIABILITIES> 83270228
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 7166357101
<SHARES-COMMON-STOCK> 30071639
<SHARES-COMMON-PRIOR> 181853
<ACCUMULATED-NII-CURRENT> 18844839
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 119083166
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 2294801269
<NET-ASSETS> 9599086375
<DIVIDEND-INCOME> 100311857
<INTEREST-INCOME> 113737119
<OTHER-INCOME> 0
<EXPENSES-NET> 62837926
<NET-INVESTMENT-INCOME> 151211050
<REALIZED-GAINS-CURRENT> 763745787
<APPREC-INCREASE-CURRENT> 932565733
<NET-CHANGE-FROM-OPS> 1847522570
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (10947344)
<DISTRIBUTIONS-OF-GAINS> (38739615)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 26987282
<NUMBER-OF-SHARES-REDEEMED> (1020690)
<SHARES-REINVESTED> 3923194
<NET-CHANGE-IN-ASSETS> 3004516451
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 92299922
<OVERDISTRIB-NII-PRIOR> (3613636)
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 48600626
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 65345045
<AVERAGE-NET-ASSETS> 280076073
<PER-SHARE-NAV-BEGIN> 18.56<F1>
<PER-SHARE-NII> 0.20
<PER-SHARE-GAIN-APPREC> 4.42
<PER-SHARE-DIVIDEND> (0.42)
<PER-SHARE-DISTRIBUTIONS> (1.58)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 21.18
<EXPENSE-RATIO> 1.72<F2>
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
<FN>
<F1>The per share NAV has been restated to reflect a 5-for-1 stock split
effective February 3, 1997.
<F2>Ratio of expenses to average net assets without the fee waiver is 1.75%.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
The schedule contains summary financial information extracted from the Mutual
Shares Fund December 31,1997 annual report and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<CIK> 0000825063
<NAME> FRANKLIN MUTUAL SERIES FUND, INC.
<SERIES>
<NUMBER> 003
<NAME> MUTUAL SHARES FUND- CLASS Z
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 7113090209
<INVESTMENTS-AT-VALUE> 9388777750
<RECEIVABLES> 126659492
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 166919361
<TOTAL-ASSETS> 9682356603
<PAYABLE-FOR-SECURITIES> 7683874
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 75586354
<TOTAL-LIABILITIES> 83270228
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 7166357101
<SHARES-COMMON-STOCK> 371790528
<SHARES-COMMON-PRIOR> 70472770
<ACCUMULATED-NII-CURRENT> 18844839
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 119083166
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 2294801269
<NET-ASSETS> 9599086375
<DIVIDEND-INCOME> 100311857
<INTEREST-INCOME> 113737119
<OTHER-INCOME> 0
<EXPENSES-NET> 62837926
<NET-INVESTMENT-INCOME> 151211050
<REALIZED-GAINS-CURRENT> 763745787
<APPREC-INCREASE-CURRENT> 932565733
<NET-CHANGE-FROM-OPS> 1847522570
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (186061271)
<DISTRIBUTIONS-OF-GAINS> (544604116)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 6313080
<NUMBER-OF-SHARES-REDEEMED> (34805380)
<SHARES-REINVESTED> 329810058
<NET-CHANGE-IN-ASSETS> 3004516451
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 92299922
<OVERDISTRIB-NII-PRIOR> (3613636)
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 48600626
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 65345045
<AVERAGE-NET-ASSETS> 7317532067
<PER-SHARE-NAV-BEGIN> 18.57<F1>
<PER-SHARE-NII> 0.42
<PER-SHARE-GAIN-APPREC> 4.43
<PER-SHARE-DIVIDEND> (0.54)
<PER-SHARE-DISTRIBUTIONS> (1.58)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 21.30
<EXPENSE-RATIO> 0.72<F2>
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
<FN>
<F1>The per share NAV has been restated to reflect a 5-for-1 stock split
effective February 3, 1997.
<F2>Ratio of expenses to average net assets without the fee waiver is 0.75%.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
The schedule contains summary financial information extracted from the Mutual
Qualified Fund December 31, 1997 annual report and is qualified in its entirety
by reference to such financial statements.
</LEGEND>
<CIK> 0000825063
<NAME> FRANKLIN MUTUAL SERIES FUND, INC.
<SERIES>
<NUMBER> 011
<NAME> MUTUAL QUALIFIED FUND-CLASS I
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 4534708662
<INVESTMENTS-AT-VALUE> 5781098720
<RECEIVABLES> 69866656
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 129699653
<TOTAL-ASSETS> 5980665029
<PAYABLE-FOR-SECURITIES> 9252316
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 47154513
<TOTAL-LIABILITIES> 56406829
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 4602323960
<SHARES-COMMON-STOCK> 24950021
<SHARES-COMMON-PRIOR> 627900
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> (9120509)
<ACCUMULATED-NET-GAINS> 71308370
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 1259746379
<NET-ASSETS> 5924258200
<DIVIDEND-INCOME> 66230062
<INTEREST-INCOME> 69098910
<OTHER-INCOME> 0
<EXPENSES-NET> 40843956
<NET-INVESTMENT-INCOME> 94485016
<REALIZED-GAINS-CURRENT> 500461624
<APPREC-INCREASE-CURRENT> 533777454
<NET-CHANGE-FROM-OPS> 1128724094
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (12569160)
<DISTRIBUTIONS-OF-GAINS> (29093524)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 22087534
<NUMBER-OF-SHARES-REDEEMED> (1640674)
<SHARES-REINVESTED> 3875261
<NET-CHANGE-IN-ASSETS> 1606938764
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 68761150
<OVERDISTRIB-NII-PRIOR> (1596000)
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 31224924
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 42483970
<AVERAGE-NET-ASSETS> 235110815
<PER-SHARE-NAV-BEGIN> 16.23<F1>
<PER-SHARE-NII> 0.28
<PER-SHARE-GAIN-APPREC> 3.63
<PER-SHARE-DIVIDEND> (0.60)
<PER-SHARE-DISTRIBUTIONS> (1.40)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 18.14
<EXPENSE-RATIO> 1.10<F2>
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
<FN>
<F1>The per share NAV has been restated to reflect a 2-for-1 stock split
effective February 3, 1997.
<F2>Ratio of expenses to average net assets without the fee waiver is 1.13%.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
The schedule contains summary financial information extracted from the Mutual
Qualified Fund December 31, 1997 annual report and is qualified in its entirety
by reference to such financial statements.
</LEGEND>
<CIK> 0000825063
<NAME> FRANKLIN MUTUAL SERIES FUND, INC.
<SERIES>
<NUMBER> 012
<NAME> MUTUAL QUALIFIED FUND-CLASS II
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 4534708662
<INVESTMENTS-AT-VALUE> 5781098720
<RECEIVABLES> 69866656
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 129699653
<TOTAL-ASSETS> 5980665029
<PAYABLE-FOR-SECURITIES> 9252316
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 47154513
<TOTAL-LIABILITIES> 56406829
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 4602323960
<SHARES-COMMON-STOCK> 12808322
<SHARES-COMMON-PRIOR> 307021
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> (9120509)
<ACCUMULATED-NET-GAINS> 71308370
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 1259746379
<NET-ASSETS> 5924258200
<DIVIDEND-INCOME> 66230062
<INTEREST-INCOME> 69098910
<OTHER-INCOME> 0
<EXPENSES-NET> 40843956
<NET-INVESTMENT-INCOME> 94485016
<REALIZED-GAINS-CURRENT> 500461624
<APPREC-INCREASE-CURRENT> 533777454
<NET-CHANGE-FROM-OPS> 1128724094
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (5635204)
<DISTRIBUTIONS-OF-GAINS> (14664407)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 11295820
<NUMBER-OF-SHARES-REDEEMED> (471298)
<SHARES-REINVESTED> 1676779
<NET-CHANGE-IN-ASSETS> 1606938764
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 68761150
<OVERDISTRIB-NII-PRIOR> (1596000)
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 31224924
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 42483970
<AVERAGE-NET-ASSETS> 112686723
<PER-SHARE-NAV-BEGIN> 16.23<F1>
<PER-SHARE-NII> 0.16
<PER-SHARE-GAIN-APPREC> 3.63
<PER-SHARE-DIVIDEND> (0.53)
<PER-SHARE-DISTRIBUTIONS> (1.40)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 18.09
<EXPENSE-RATIO> 1.75<F2>
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
<FN>
<F1>The per share NAV has been restated to reflect a 2-for-1 stock split
effective February 3, 1997.
<F2>Ratio of expenses to average net assets without the fee waiver is 1.78%.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
The schedule contains summary financial information extracted from the Mutual
Qualified Fund December 31, 1997 annual report and is qualfied in its entirety
by reference to such financial statements.
</LEGEND>
<CIK> 0000825063
<NAME> FRANKLIN MUTUAL SERIES FUND, INC.
<SERIES>
<NUMBER> 013
<NAME> MUTUAL QUALIFIED FUND-CLASS Z
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 4534708662
<INVESTMENTS-AT-VALUE> 5781098720
<RECEIVABLES> 69866656
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 129699653
<TOTAL-ASSETS> 5980665029
<PAYABLE-FOR-SECURITIES> 9252316
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 47154513
<TOTAL-LIABILITIES> 56406829
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 4602323960
<SHARES-COMMON-STOCK> 288130967
<SHARES-COMMON-PRIOR> 132024411
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> (9120509)
<ACCUMULATED-NET-GAINS> 71308370
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 1259746379
<NET-ASSETS> 5924258200
<DIVIDEND-INCOME> 66230062
<INTEREST-INCOME> 69098910
<OTHER-INCOME> 0
<EXPENSES-NET> 40843956
<NET-INVESTMENT-INCOME> 94485016
<REALIZED-GAINS-CURRENT> 500461624
<APPREC-INCREASE-CURRENT> 533777454
<NET-CHANGE-FROM-OPS> 1128724094
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (168780477)
<DISTRIBUTIONS-OF-GAINS> (369181157)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 28947428
<NUMBER-OF-SHARES-REDEEMED> (33248338)
<SHARES-REINVESTED> 160407466
<NET-CHANGE-IN-ASSETS> 1606938764
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 68761150
<OVERDISTRIB-NII-PRIOR> (1596000)
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 31224924
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 42483970
<AVERAGE-NET-ASSETS> 4856668478
<PER-SHARE-NAV-BEGIN> 16.24<F1>
<PER-SHARE-NII> 0.37
<PER-SHARE-GAIN-APPREC> 3.62
<PER-SHARE-DIVIDEND> (0.64)
<PER-SHARE-DISTRIBUTIONS> (1.40)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 18.19
<EXPENSE-RATIO> 0.75<F2>
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
<FN>
<F1>The per share NAV has been restated to reflect a 2-for-1 stock split
effective February 3, 1997.
<F2>Ratio of expenses to average net assets without the fee waiver is 0.78%.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE MUTUAL
BEACON FUND DECEMBER 31, 1997 ANNUAL REPORT AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000825063
<NAME> FRANKLIN MUTUAL SERIES FUND INC.
<SERIES>
<NUMBER> 021
<NAME> MUTUAL BEACON FUND-CLASS I
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 5475763366
<INVESTMENTS-AT-VALUE> 6642473332
<RECEIVABLES> 79531851
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 143410624
<TOTAL-ASSETS> 6865415807
<PAYABLE-FOR-SECURITIES> 6296657
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 64353199
<TOTAL-LIABILITIES> 70649856
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 5542602779
<SHARES-COMMON-STOCK> 53486802
<SHARES-COMMON-PRIOR> 1337413
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> (13240115)
<ACCUMULATED-NET-GAINS> 81862137
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 1183541150
<NET-ASSETS> 6794765951
<DIVIDEND-INCOME> 92860300
<INTEREST-INCOME> 67989645
<OTHER-INCOME> 0
<EXPENSES-NET> 48128593
<NET-INVESTMENT-INCOME> 112721352
<REALIZED-GAINS-CURRENT> 659094557
<APPREC-INCREASE-CURRENT> 443470119
<NET-CHANGE-FROM-OPS> 1215286028
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (22305892)
<DISTRIBUTIONS-OF-GAINS> (56734666)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 46602413
<NUMBER-OF-SHARES-REDEEMED> (4493034)
<SHARES-REINVESTED> 10040010
<NET-CHANGE-IN-ASSETS> 1806044896
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 76197617
<OVERDISTRIB-NII-PRIOR> (1622610)
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 36299616
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 49950888
<AVERAGE-NET-ASSETS> 409950004
<PER-SHARE-NAV-BEGIN> 12.98<F1>
<PER-SHARE-NII> 0.23
<PER-SHARE-GAIN-APPREC> 2.65
<PER-SHARE-DIVIDEND> (0.51)
<PER-SHARE-DISTRIBUTIONS> (1.26)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 14.09
<EXPENSE-RATIO> 1.09<F2>
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
<FN>
<F1>THE PER SHARE NAV HAS BEEN RESTATED TO REFLECT A 3-FOR-1 STOCK SPLIT
EFFECTIVE FEBRUARY 3, 1997.
<F2>RATIO OF EXPENSES TO AVERAGE NET ASSETS WITHOUT THE FEE WAIVER IS 1.12%.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
MUTUAL BEACON FUND DECEMBER 31, 1997 ANNUAL REPORT AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000825063
<NAME> FRANKLIN MUTUAL SERIES FUND INC.
<SERIES>
<NUMBER> 022
<NAME> MUTUAL BEACON FUND-CLASS II
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 5475763366
<INVESTMENTS-AT-VALUE> 6642473332
<RECEIVABLES> 79531851
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 143410624
<TOTAL-ASSETS> 6865415807
<PAYABLE-FOR-SECURITIES> 6296657
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 64353199
<TOTAL-LIABILITIES> 70649856
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 5542602779
<SHARES-COMMON-STOCK> 25807641
<SHARES-COMMON-PRIOR> 417780
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> (13240115)
<ACCUMULATED-NET-GAINS> 81862137
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 1183541150
<NET-ASSETS> 6794765951
<DIVIDEND-INCOME> 92860300
<INTEREST-INCOME> 67989645
<OTHER-INCOME> 0
<EXPENSES-NET> 48128593
<NET-INVESTMENT-INCOME> 112721352
<REALIZED-GAINS-CURRENT> 659094557
<APPREC-INCREASE-CURRENT> 443470119
<NET-CHANGE-FROM-OPS> 1215286028
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (9409819)
<DISTRIBUTIONS-OF-GAINS> (27054167)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 22074280
<NUMBER-OF-SHARES-REDEEMED> (926529)
<SHARES-REINVESTED> 4242110
<NET-CHANGE-IN-ASSETS> 1806044896
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 76197617
<OVERDISTRIB-NII-PRIOR> (1622610)
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 36299616
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 49950888
<AVERAGE-NET-ASSETS> 187241201
<PER-SHARE-NAV-BEGIN> 12.98<F1>
<PER-SHARE-NII> 0.14
<PER-SHARE-GAIN-APPREC> 2.63
<PER-SHARE-DIVIDEND> (0.45)
<PER-SHARE-DISTRIBUTIONS> (1.26)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 14.04
<EXPENSE-RATIO> 1.74<F2>
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
<FN>
<F1>THE PER SHARE NAV HAS BEEN RESTATED TO REFLECT A 3-FOR-1 STOCK SPLIT
EFFECTIVE FEBRUARY 3, 1997.
<F2>RATIO OF EXPENSES TO AVERAGE NET ASSETS WITHOUT THE FEE WAIVER IS 1.77%.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE MUTUAL
BEACON FUND DECEMBER 31, 1997 ANNUAL REPORT AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000825063
<NAME> FRANKLIN MUTUAL SERIES FUND, INC.
<SERIES>
<NUMBER> 023
<NAME> MUTUAL BEACON FUND-CLASS Z
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 5475763366
<INVESTMENTS-AT-VALUE> 6642473332
<RECEIVABLES> 79531851
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 143410624
<TOTAL-ASSETS> 6865415807
<PAYABLE-FOR-SECURITIES> 6296657
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 64353199
<TOTAL-LIABILITIES> 70649856
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 5542602779
<SHARES-COMMON-STOCK> 402248317
<SHARES-COMMON-PRIOR> 126316355
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> (13240115)
<ACCUMULATED-NET-GAINS> 81862137
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 1183541150
<NET-ASSETS> 6794765951
<DIVIDEND-INCOME> 92860300
<INTEREST-INCOME> 67989645
<OTHER-INCOME> 0
<EXPENSES-NET> 48128593
<NET-INVESTMENT-INCOME> 112721352
<REALIZED-GAINS-CURRENT> 659094557
<APPREC-INCREASE-CURRENT> 443470119
<NET-CHANGE-FROM-OPS> 1215286028
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (198852305)
<DISTRIBUTIONS-OF-GAINS> (463412045)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 40718198
<NUMBER-OF-SHARES-REDEEMED> (61246008)
<SHARES-REINVESTED> 296459772
<NET-CHANGE-IN-ASSETS> 1806044896
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 76197617
<OVERDISTRIB-NII-PRIOR> (1622610)
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 36299616
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 49950888
<AVERAGE-NET-ASSETS> 5455668764
<PER-SHARE-NAV-BEGIN> 12.98<F1>
<PER-SHARE-NII> 0.31
<PER-SHARE-GAIN-APPREC> 2.63
<PER-SHARE-DIVIDEND> (0.54)
<PER-SHARE-DISTRIBUTIONS> (1.26)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 14.12
<EXPENSE-RATIO> 0.74<F2>
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
<FN>
<F1>THE PER SHARE NAV HAS BEEN RESTATED TO REFLECT A 3-FOR-1 STOCK SPLIT
EFFECTIVE FEBRUARY 3, 1997.
<F2>RATIO OF EXPENSES TO AVERAGE NET ASSETS WITHOUT THE FEE WAIVER IS 0.77%.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE MUTUAL
FINANCIAL SERVICES FUND DECEMBER 31, 1997 ANNUAL REPORT AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000825063
<NAME> FRANKLIN MUTUAL SERIES FUND, INC.
<SERIES>
<NUMBER> 051
<NAME> MUTUAL FINANCIAL SERVICES FUND - CLASS I
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> AUG-19-1997<F1>
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 228031794
<INVESTMENTS-AT-VALUE> 243564475
<RECEIVABLES> 9005908
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 7897699
<TOTAL-ASSETS> 260468082
<PAYABLE-FOR-SECURITIES> 1107868
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 1554718
<TOTAL-LIABILITIES> 2662586
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 237330344
<SHARES-COMMON-STOCK> 6376348
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 108579
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 3503357
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 16863216
<NET-ASSETS> 257805496
<DIVIDEND-INCOME> 641194
<INTEREST-INCOME> 604980
<OTHER-INCOME> 0
<EXPENSES-NET> 659512
<NET-INVESTMENT-INCOME> 586662
<REALIZED-GAINS-CURRENT> 5249927
<APPREC-INCREASE-CURRENT> 16863216
<NET-CHANGE-FROM-OPS> 22699805
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (127466)
<DISTRIBUTIONS-OF-GAINS> (541128)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 7251035
<NUMBER-OF-SHARES-REDEEMED> (923852)
<SHARES-REINVESTED> 49165
<NET-CHANGE-IN-ASSETS> 257805496
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 419994
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 986744
<AVERAGE-NET-ASSETS> 41422045
<PER-SHARE-NAV-BEGIN> 10.00
<PER-SHARE-NII> 0.03
<PER-SHARE-GAIN-APPREC> 2.35
<PER-SHARE-DIVIDEND> (0.02)
<PER-SHARE-DISTRIBUTIONS> (0.09)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 12.27
<EXPENSE-RATIO> 1.35<F2>
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
<FN>
<F1>COMMENCEMENT OF OPERATIONS WAS AUGUST 19, 1997.
<F2>RATIO OF EXPENSES TO AVERAGE NET ASSETS WITHOUT THE FEE WAIVER IS 1.97%.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE MUTUAL
FINANCIAL SERVICES FUND DECEMBER 31, 1997 ANNUAL REPORT AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000825063
<NAME> FRANKLIN MUTUAL SERIES FUND, INC.
<SERIES>
<NUMBER> 052
<NAME> MUTUAL FINANCIAL SERVICES FUND - CLASS II
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> AUG-19-1997<F1>
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 228031794
<INVESTMENTS-AT-VALUE> 243564475
<RECEIVABLES> 9005908
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 7897699
<TOTAL-ASSETS> 260468082
<PAYABLE-FOR-SECURITIES> 1107868
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 1554718
<TOTAL-LIABILITIES> 2662586
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 237330344
<SHARES-COMMON-STOCK> 3524251
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 108579
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 3503357
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 16863216
<NET-ASSETS> 257805496
<DIVIDEND-INCOME> 641194
<INTEREST-INCOME> 604980
<OTHER-INCOME> 0
<EXPENSES-NET> 659512
<NET-INVESTMENT-INCOME> 586662
<REALIZED-GAINS-CURRENT> 5249927
<APPREC-INCREASE-CURRENT> 16863216
<NET-CHANGE-FROM-OPS> 22699805
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (17029)
<DISTRIBUTIONS-OF-GAINS> (289180)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 3598172
<NUMBER-OF-SHARES-REDEEMED> (97444)
<SHARES-REINVESTED> 23523
<NET-CHANGE-IN-ASSETS> 257805496
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 419994
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 986744
<AVERAGE-NET-ASSETS> 21855046
<PER-SHARE-NAV-BEGIN> 10.00
<PER-SHARE-NII> 0.01
<PER-SHARE-GAIN-APPREC> 2.35
<PER-SHARE-DIVIDEND> (0.01)
<PER-SHARE-DISTRIBUTIONS> (0.09)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 12.26
<EXPENSE-RATIO> 2.00<F2>
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
<FN>
<F1>COMMENCEMENT OF OPERATIONS WAS AUGUST 19, 1997.
<F2>RATIO OF EXPENSES TO AVERAGE NET ASSETS WITHOUT THE FEE WAIVER IS 2.62%.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE MUTUAL
FINANCIAL SERVICES FUND DECEMBER 31, 1997 ANNUAL REPORT AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000825063
<NAME> MUTUAL FINANCIAL SERVICES FUND - CLASS Z
<SERIES>
<NUMBER> 053
<NAME> MUTUAL FINANCIAL SERVICES FUND - CLASS Z
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> AUG-19-1997<F1>
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 228031794
<INVESTMENTS-AT-VALUE> 243564475
<RECEIVABLES> 9005908
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 7897699
<TOTAL-ASSETS> 260468082
<PAYABLE-FOR-SECURITIES> 1107868
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 1554718
<TOTAL-LIABILITIES> 2662586
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 237330344
<SHARES-COMMON-STOCK> 11114665
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 108579
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 3503357
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 16863216
<NET-ASSETS> 257805496
<DIVIDEND-INCOME> 641194
<INTEREST-INCOME> 604980
<OTHER-INCOME> 0
<EXPENSES-NET> 659512
<NET-INVESTMENT-INCOME> 586662
<REALIZED-GAINS-CURRENT> 5249927
<APPREC-INCREASE-CURRENT> 16863216
<NET-CHANGE-FROM-OPS> 22699805
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (312463)
<DISTRIBUTIONS-OF-GAINS> (937387)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 12843692
<NUMBER-OF-SHARES-REDEEMED> (1828659)
<SHARES-REINVESTED> 99632
<NET-CHANGE-IN-ASSETS> 257805496
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 419994
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 986744
<AVERAGE-NET-ASSETS> 80057545
<PER-SHARE-NAV-BEGIN> 10.00
<PER-SHARE-NII> 0.04
<PER-SHARE-GAIN-APPREC> 2.35
<PER-SHARE-DIVIDEND> (0.03)
<PER-SHARE-DISTRIBUTIONS> (0.09)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 12.27
<EXPENSE-RATIO> 1.00<F2>
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
<FN>
<F1>COMMENCEMENT OF OPERATIONS WAS AUGUST 19, 1997.
<F2>RATIO OF EXPENSES TO AVERAGE NET ASSETS WITHOUT THE FEE WAIVER IS 1.62%.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
The schedule contains summary financial information extracted from the Mutual
European Fund, December 31, 1997, annual report and is qualified in its entirety
by reference to such financial statements.
</LEGEND>
<CIK> 0000825063
<NAME> FRANKLIN MUTUAL SERIES FUND, INC.
<SERIES>
<NUMBER> 031
<NAME> MUTUAL EUROPEAN FUND-CLASS I
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 575139909
<INVESTMENTS-AT-VALUE> 638267350
<RECEIVABLES> 19510123
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 38969171
<TOTAL-ASSETS> 696746644
<PAYABLE-FOR-SECURITIES> 1531921
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 6029186
<TOTAL-LIABILITIES> 7561107
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 596160730
<SHARES-COMMON-STOCK> 7420423
<SHARES-COMMON-PRIOR> 808273
<ACCUMULATED-NII-CURRENT> 119297
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 24408641
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 68496869
<NET-ASSETS> 689185537
<DIVIDEND-INCOME> 16767672
<INTEREST-INCOME> 6654436
<OTHER-INCOME> 0
<EXPENSES-NET> 7291732
<NET-INVESTMENT-INCOME> 16130376
<REALIZED-GAINS-CURRENT> 74561133
<APPREC-INCREASE-CURRENT> 40060817
<NET-CHANGE-FROM-OPS> 130752326
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (5190859)
<DISTRIBUTIONS-OF-GAINS> (3590901)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 9533956
<NUMBER-OF-SHARES-REDEEMED> (3542483)
<SHARES-REINVESTED> 620677
<NET-CHANGE-IN-ASSETS> 226736581
<ACCUMULATED-NII-PRIOR> 580686
<ACCUMULATED-GAINS-PRIOR> 3364491
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 5372334
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 7496391
<AVERAGE-NET-ASSETS> 57251242
<PER-SHARE-NAV-BEGIN> 11.38
<PER-SHARE-NII> 0.24
<PER-SHARE-GAIN-APPREC> 2.31
<PER-SHARE-DIVIDEND> (0.81)
<PER-SHARE-DISTRIBUTIONS> (0.56)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 12.56
<EXPENSE-RATIO> 1.37<F1>
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
<FN>
<F1>Ratio of expenses to average net assets without the fee waiver is 1.39%.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
The schedule contains summary financial information extracted from the Mutual
European Fund, December 31, 1997, annual report and is qualified in its entirety
by reference to such financial statements.
</LEGEND>
<CIK> 0000825063
<NAME> FRANKLIN MUTUAL SERIES FUND, INC.
<SERIES>
<NUMBER> 032
<NAME> MUTUAL EUROPEAN FUND-CLASS II
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 575139909
<INVESTMENTS-AT-VALUE> 638267350
<RECEIVABLES> 19510123
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 38969171
<TOTAL-ASSETS> 696746644
<PAYABLE-FOR-SECURITIES> 1531921
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 6029186
<TOTAL-LIABILITIES> 7561107
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 596160730
<SHARES-COMMON-STOCK> 3926964
<SHARES-COMMON-PRIOR> 242005
<ACCUMULATED-NII-CURRENT> 119297
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 24408641
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 68496869
<NET-ASSETS> 689185537
<DIVIDEND-INCOME> 16767672
<INTEREST-INCOME> 6654436
<OTHER-INCOME> 0
<EXPENSES-NET> 7291732
<NET-INVESTMENT-INCOME> 16130376
<REALIZED-GAINS-CURRENT> 74561133
<APPREC-INCREASE-CURRENT> 40060817
<NET-CHANGE-FROM-OPS> 130752326
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (2628833)
<DISTRIBUTIONS-OF-GAINS> (1912553)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 3726239
<NUMBER-OF-SHARES-REDEEMED> (388267)
<SHARES-REINVESTED> 346987
<NET-CHANGE-IN-ASSETS> 226736581
<ACCUMULATED-NII-PRIOR> 580686
<ACCUMULATED-GAINS-PRIOR> 3364491
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 5372334
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 7496391
<AVERAGE-NET-ASSETS> 26964034
<PER-SHARE-NAV-BEGIN> 11.38
<PER-SHARE-NII> 0.13
<PER-SHARE-GAIN-APPREC> 2.33
<PER-SHARE-DIVIDEND> (0.76)
<PER-SHARE-DISTRIBUTIONS> (0.56)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 12.52
<EXPENSE-RATIO> 2.02<F1>
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
<FN>
<F1>Ratio of expenses to average net assets without the fee waiver is 2.05%.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
The schedule contains summary financial information extracted from the
Mutual European Fund, December 31, 1997, annual report and is qualified in
its entirety by reference to such financial statements.
</LEGEND>
<CIK> 0000825063
<NAME> FRANKLIN MUTUAL SERIES FUNDS, INC.
<SERIES>
<NUMBER> 033
<NAME> MUTUAL EUROPEAN FUND-CLASS Z
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 575139909
<INVESTMENTS-AT-VALUE> 638267350
<RECEIVABLES> 19510123
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 38969171
<TOTAL-ASSETS> 696746644
<PAYABLE-FOR-SECURITIES> 1531921
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 6029186
<TOTAL-LIABILITIES> 7561107
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 596160730
<SHARES-COMMON-STOCK> 43411737
<SHARES-COMMON-PRIOR> 39546933
<ACCUMULATED-NII-CURRENT> 119297
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 24408641
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 68496869
<NET-ASSETS> 689185537
<DIVIDEND-INCOME> 16767672
<INTEREST-INCOME> 6654436
<OTHER-INCOME> 0
<EXPENSES-NET> 7291732
<NET-INVESTMENT-INCOME> 16130376
<REALIZED-GAINS-CURRENT> 74561133
<APPREC-INCREASE-CURRENT> 40060817
<NET-CHANGE-FROM-OPS> 130752326
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (34010794)
<DISTRIBUTIONS-OF-GAINS> (22774808)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 19930968
<NUMBER-OF-SHARES-REDEEMED> (19568039)
<SHARES-REINVESTED> 3501875
<NET-CHANGE-IN-ASSETS> 226736581
<ACCUMULATED-NII-PRIOR> 580686
<ACCUMULATED-GAINS-PRIOR> 3364491
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 5372334
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 7496391
<AVERAGE-NET-ASSETS> 587242716
<PER-SHARE-NAV-BEGIN> 11.39
<PER-SHARE-NII> 0.33
<PER-SHARE-GAIN-APPREC> 2.28
<PER-SHARE-DIVIDEND> (0.84)
<PER-SHARE-DISTRIBUTIONS> (0.56)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 12.60
<EXPENSE-RATIO> 1.02<F1>
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
<FN>
<F1>Ratio of expenses to average net assets without the fee waiver is 1.05%
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL DATA INFORMATION EXTRACTED FROM THE
MUTUAL DISCOVERY FUND DECEMBER 31, 1997 ANNUAL REPORT AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000825063
<NAME> FRANKLIN MUTUAL SERIES FUND, INC.
<SERIES>
<NUMBER> 041
<NAME> MUTUAL DISCOVERY FUND - CLASS I
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 4164669124
<INVESTMENTS-AT-VALUE> 4780332515
<RECEIVABLES> 77818004
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 177116893
<TOTAL-ASSETS> 5035267412
<PAYABLE-FOR-SECURITIES> 18682365
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 40458158
<TOTAL-LIABILITIES> 59140523
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 4264994866
<SHARES-COMMON-STOCK> 36860777
<SHARES-COMMON-PRIOR> 1743246
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> (31183193)
<ACCUMULATED-NET-GAINS> 97057881
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 645257335
<NET-ASSETS> 4976126889
<DIVIDEND-INCOME> 64554775
<INTEREST-INCOME> 52450405
<OTHER-INCOME> 0
<EXPENSES-NET> 44486495
<NET-INVESTMENT-INCOME> 72518685
<REALIZED-GAINS-CURRENT> 452571045
<APPREC-INCREASE-CURRENT> 289296043
<NET-CHANGE-FROM-OPS> 814385773
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (23444470)
<DISTRIBUTIONS-OF-GAINS> (42486398)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 37372698
<NUMBER-OF-SHARES-REDEEMED> (5560327)
<SHARES-REINVESTED> 3305160
<NET-CHANGE-IN-ASSETS> 1952590145
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 55664483
<OVERDISTRIB-NII-PRIOR> (4135091)
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 33584048
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 45385419
<AVERAGE-NET-ASSETS> 374390699
<PER-SHARE-NAV-BEGIN> 17.15
<PER-SHARE-NII> 0.27
<PER-SHARE-GAIN-APPREC> 3.54
<PER-SHARE-DIVIDEND> (0.77)
<PER-SHARE-DISTRIBUTIONS> (1.36)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 18.83
<EXPENSE-RATIO> 1.33<F1>
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
<FN>
<F1>RATIO OF EXPENSES TO AVERAGE NET ASSETS WITHOUT THE FEE WAIVER IS 1.35%.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL DATA INFORMATION EXTRACTED FROM THE
MUTUAL DISCOVERY FUND DECEMBER 31, 1997 ANNUAL REPORT AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000825063
<NAME> FRANKLIN MUTUAL SERIES FUND, INC.
<SERIES>
<NUMBER> 042
<NAME> MUTUAL DISCOVERY FUND - CLASS II
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 4164669124
<INVESTMENTS-AT-VALUE> 4780332515
<RECEIVABLES> 77818004
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 177116893
<TOTAL-ASSETS> 5035267412
<PAYABLE-FOR-SECURITIES> 18682365
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 40458158
<TOTAL-LIABILITIES> 59140523
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 4264994866
<SHARES-COMMON-STOCK> 21431763
<SHARES-COMMON-PRIOR> 1050641
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> (31183193)
<ACCUMULATED-NET-GAINS> 97057881
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 645257335
<NET-ASSETS> 4976126889
<DIVIDEND-INCOME> 64554775
<INTEREST-INCOME> 52450405
<OTHER-INCOME> 0
<EXPENSES-NET> 44486495
<NET-INVESTMENT-INCOME> 72518685
<REALIZED-GAINS-CURRENT> 452571045
<APPREC-INCREASE-CURRENT> 289296043
<NET-CHANGE-FROM-OPS> 814385773
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (12030869)
<DISTRIBUTIONS-OF-GAINS> (24238635)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 19338609
<NUMBER-OF-SHARES-REDEEMED> (754555)
<SHARES-REINVESTED> 1797068
<NET-CHANGE-IN-ASSETS> 1952590145
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 55664483
<OVERDISTRIB-NII-PRIOR> (4135091)
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 33584048
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 45385419
<AVERAGE-NET-ASSETS> 203504176
<PER-SHARE-NAV-BEGIN> 17.17
<PER-SHARE-NII> 0.15
<PER-SHARE-GAIN-APPREC> 3.52
<PER-SHARE-DIVIDEND> (0.69)
<PER-SHARE-DISTRIBUTIONS> (1.36)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 18.79
<EXPENSE-RATIO> 1.98<F1>
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
<FN>
<F1>RATIO OF EXPENSES TO AVERAGE NET ASSETS WITHOUT THE FEE WAIVER IS 2.00%.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL DATA INFORMATION EXTRACTED FROM THE
MUTUAL DISCOVERY FUND DECEMBER 31, 1997 ANNUAL REPORT AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000825063
<NAME> FRANKLIN MUTUAL SERIES FUND, INC.
<SERIES>
<NUMBER> 043
<NAME> MUTUAL DISCOVERY FUND - CLASS Z
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 4164669124
<INVESTMENTS-AT-VALUE> 4780332515
<RECEIVABLES> 77818004
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 177116893
<TOTAL-ASSETS> 5035267412
<PAYABLE-FOR-SECURITIES> 18682365
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 40458158
<TOTAL-LIABILITIES> 59140523
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 4264994866
<SHARES-COMMON-STOCK> 205337909
<SHARES-COMMON-PRIOR> 173179167
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> (31183193)
<ACCUMULATED-NET-GAINS> 97057881
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 645257335
<NET-ASSETS> 4976126889
<DIVIDEND-INCOME> 64554775
<INTEREST-INCOME> 52450405
<OTHER-INCOME> 0
<EXPENSES-NET> 44486495
<NET-INVESTMENT-INCOME> 72518685
<REALIZED-GAINS-CURRENT> 452571045
<APPREC-INCREASE-CURRENT> 289296043
<NET-CHANGE-FROM-OPS> 814385773
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (152494403)
<DISTRIBUTIONS-OF-GAINS> (256049659)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 47155697
<NUMBER-OF-SHARES-REDEEMED> (36032508)
<SHARES-REINVESTED> 21035553
<NET-CHANGE-IN-ASSETS> 1952590145
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 55664483
<OVERDISTRIB-NII-PRIOR> (4135091)
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 33584048
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 45385419
<AVERAGE-NET-ASSETS> 3620381721
<PER-SHARE-NAV-BEGIN> 17.18
<PER-SHARE-NII> 0.39
<PER-SHARE-GAIN-APPREC> 3.49
<PER-SHARE-DIVIDEND> (0.81)
<PER-SHARE-DISTRIBUTIONS> (1.36)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 18.89
<EXPENSE-RATIO> 0.98<F1>
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
<FN>
<F1>RATIO OF EXPENSES TO AVERAGE NET ASSETS WITHOUT THE FEE WAIVER IS 1.00%.
</FN>
</TABLE>
