o MS P-1
SUPPLEMENT DATED JANUARY 1, 2000
TO THE PROSPECTUS OF
FRANKLIN MUTUAL SERIES FUND INC.
dated May 1, 1999
The prospectus is amended as follows:
I. The following sentence is added after the minimum investments table on
page 59:
Please note that you may only buy shares of a fund eligible for sale in your
state or jurisdiction.
II. In the Selling Shares table on page 65 the section "By Wire" is replaced
with the following:
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By Electronic Funds Transfer (ACH)
You can call or write to have redemption proceeds sent to a bank account.
See the policies above for selling shares by mail or phone.
Before requesting to have redemption proceeds sent to a bank account, please
make sure we have your bank account information on file. If we do not have
this information, you will need to send written instructions with your
bank's name and address, a voided check or savings account deposit slip, and
a signature guarantee if the ownership of the bank and fund accounts is
different.
If we receive your request in proper form by 1:00 p.m. Pacific time,
proceeds sent by ACH generally will be available within two to three
business days.
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III. The sections "Waivers for investments from certain payments," "Waivers
for certain investors," "CDSC waivers" and "Retirement plans," on pages 57
and 58, are replaced with the following:
SALES CHARGE WAIVERS Class A shares may be purchased without an initial
sales charge or CDSC by various individuals, institutions and retirement
plans or by investors who reinvest certain distributions and proceeds within
365 days. Certain investors also may buy Class C shares without an initial
sales charge. The CDSC for each class may be waived for certain redemptions
and distributions. If you would like information about available sales
charge waivers, call your investment representative or call Shareholder
Services at 1-800/632-2301. For information about retirement plans, you may
call Retirement Plan Services at 1-800/527-2020. A list of available sales
charge waivers also may be found in the Statement of Additional Information
(SAI).
IV. The section "Dealer compensation" on page 68 is replaced with the
following:
DEALER COMPENSATION Qualifying dealers who sell fund shares may receive
sales commissions and other payments. These are paid by Franklin Templeton
Distributors, Inc. (Distributors) from sales charges, distribution and
service (12b-1) fees and its other resources.
Class A Class B Class C
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Commission (%) -- 4.00 2.00
Investment under $50,000 5.00 -- --
$50,000 but under $100,000 3.75 -- --
$100,000 but under $250,000 2.80 -- --
$250,000 but under $500,000 2.00 -- --
$500,000 but under $1 million 1.60 -- --
$1 million or more up to 1.00 1 -- --
12b-1 fee to dealer 0.252 0.253 1.004
A dealer commission of up to 1% may be paid on Class A NAV purchases by
certain retirement plans1 and on Class C NAV purchases. A dealer commission
of up to 0.25% may be paid on Class A NAV purchases by certain trust
companies and bank trust departments, eligible governmental authorities, and
broker-dealers or others on behalf of clients participating in comprehensive
fee programs.
1. During the first year after purchase, dealers may not be eligible to
receive the 12b-1 fee.
2. Each fund may pay up to 0.35% to Distributors or others, out of which
0.10% generally will be retained by Distributors for its distribution
expenses.
3. Dealers may be eligible to receive up to 0.25% from the date of purchase.
After 8 years, Class B shares convert to Class A shares and dealers may then
receive the 12b-1 fee applicable to Class A.
4. Dealers may be eligible to receive up to 0.25% during the first year
after purchase and may be eligible to receive the full 12b-1 fee starting in
the 13th month.
V. The section "Statements and reports" on page 66 is replaced with the
following:
STATEMENTS AND REPORTS You will receive quarterly account statements that
show all your account transactions during the quarter. You also will receive
written notification after each transaction affecting your account (except
for distributions and transactions made through automatic investment or
withdrawal programs, which will be reported on your quarterly statement).
You also will receive the fund's financial reports every six months. To
reduce fund expenses, we try to identify related shareholders in a household
and send only one copy of the financial reports. If you need additional
copies, please call 1-800/DIAL BEN.
If there is a dealer or other investment representative of record on your
account, he or she also will receive copies of all notifications and
statements and other information about your account directly from the fund.
Please keep this supplement for future reference.
FRANKLIN MUTUAL
SERIES FUND INC.
MUTUAL BEACON FUND
MUTUAL FINANCIAL SERVICES FUND
MUTUAL QUALIFIED FUND
MUTUAL SHARES FUND
MUTUAL DISCOVERY FUND
MUTUAL EUROPEAN FUND
CLASS A, B & C
STATEMENT OF ADDITIONAL INFORMATION
MAY 1, 1999, AS AMENDED JANUARY 1, 2000
[INSERT FRANKLIN TEMPLETON BEN HEAD]
FRANKLIN TEMPLETON
P.O. BOX 33030
ST. PETERSBURG, FL 33733-8030 1-800/DIAL BEN(R)
This Statement of Additional Information (SAI) is not a prospectus. It
contains information in addition to the information in the funds' prospectus.
The funds' prospectus, dated May 1, 1999, which we may amend from time to
time, contains the basic information you should know before investing in a
fund. You should read this SAI together with the funds' prospectus.
The audited financial statements and auditor's report in the Franklin Mutual
Series Fund Inc.'s (Mutual Series) Annual Report to Shareholders, for the
fiscal year ended December 31, 1998, are incorporated by reference (are
legally a part of this SAI).
For a free copy of the current prospectus or annual report, contact your
investment representative or call
1-800/DIAL BEN (1-800/342-5236).
CONTENTS
Goals and Strategies 2
Risks 12
Officers and Directors 17
Management and Other Services 19
Portfolio Transactions 21
Distributions and Taxes 22
Organization, Voting Rights
and Principal Holders 24
Buying and Selling Shares 25
Pricing Shares 31
The Underwriter 32
Performance 34
Miscellaneous Information 36
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MUTUAL FUNDS, ANNUITIES, AND OTHER INVESTMENT PRODUCTS:
o ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE
FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY OF THE U.S. GOVERNMENT;
o ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY, ANY
BANK;
o ARE SUBJECT TO INVESTMENT RISKS, INCLUDING THE POSSIBLE LOSS OF
PRINCIPAL.
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MS SAI 01/00
GOALS AND STRATEGIES
The principal investment goal of Beacon, Financial Services, Qualified,
Shares, and European is capital appreciation, which occasionally may be
short-term. Their secondary goal is income. The principal investment goal of
Discovery is long-term capital appreciation. Discovery does not have a
secondary investment goal. These goals are fundamental, which means they may
not be changed without shareholder approval.
The funds may invest in equity securities, debt securities and securities
convertible into common stock (including convertible preferred and
convertible debt securities) (convertible securities). 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. The funds reserve freedom of action to invest in these
securities in such proportions as the manager deems advisable. In addition,
the funds may also invest in restricted debt and equity securities, in
foreign securities, and in other investment company securities.
The general investment policy of each fund is to invest in securities if, in
the opinion of the manager, they are available at prices less than their
intrinsic value, as determined by the manager 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 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. The manager examines each security separately and does not
apply these factors according to any predetermined formula. The manager 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.
While Beacon, Qualified, Shares, Discovery and European have identical basic
investment restrictions and Beacon, Financial Services, Qualified, Shares,
and European have identical investment goals, the manager seeks to retain
certain historical differences among the funds on an informal basis.
The funds may invest in securities of companies of any size, however, due to
the relatively large size of Beacon, Qualified and Shares, these funds have
generally invested in larger and medium size companies with large trading
volumes and market capitalizations in excess of $1.5 billion. Discovery,
Financial Services and European, on the other hand, tend to invest
proportionately more of their assets in smaller size companies than the other
funds. Discovery may also invest more than 50% of its assets in foreign
securities.
Generally, Financial Services and European utilize the same investment
philosophy as the other funds, but Financial Services will do so by investing
in securities of financial services companies and European will do so by
investing primarily in European securities.
Qualified was originally intended for purchase by pension and profit sharing
plans and other non-tax paying entities. Therefore, its portfolio was
intended to have greater flexibility due to the reduced concerns about the
tax effects on shareholders. The manager expects that the securities it will
purchase for Qualified will satisfy this goal, depending on market conditions
and any changes in tax law. Currently, however, Qualified operates in the
same fashion as Beacon and Shares. Allocation of investments among the funds
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.
The funds may invest in any industry although no fund will concentrate its
investments in any industry except Financial Services. Financial Services
will concentrate its investments in the financial services industry by
investing more than 25% of the value of its assets in securities of financial
services companies. Financial Services' concentration policy may not be
changed without the approval of Financial Services' shareholders.
The funds 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. The
OTC market refers to all other avenues whereby brokers bring together buyers
and sellers of securities.
The following is a description of the various types of securities the funds
may buy.
EQUITY SECURITIES generally entitle the holder to participate in a company's
general operating results. 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 these 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 are
either common stock or preferred stock. Preferred stockholders usually
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 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 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.
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 which the funds may purchase may either be unrated, or
rated in any rating category established by one or more independent rating
organizations, such as Standard & Poor's Corporation (S&P) or Moody's
Investors Service, Inc. (Moody's). Securities are given ratings by
independent rating organizations, which grade the company issuing the
securities based upon its financial soundness. Each fund may invest in
securities that are rated in the medium to lowest rating categories by S&P
and Moody's. Generally, lower rated and unrated debt securities are riskier
investments. Debt securities rated BBB or lower by S&P or Moody's are
considered to be high yield, high risk debt securities, commonly known as
"junk bonds." The lowest rating category established by Moody's is "C" and by
S&P is "D." Debt securities with a D rating are in default as to the payment
of principal and interest, which means that the issuer does not have the
financial soundness to meet its interest payments or its repayment schedule
to security holders. The funds may invest to an unlimited degree in junk
bonds.
The funds will generally invest in debt securities under circumstances
similar to those under which they will invest in equity securities; namely,
when, in the manager's opinion, such debt securities are available at prices
less than their intrinsic value. Investing in fixed-income securities under
these circumstances may lead to the potential for capital appreciation.
Consequently, when investing in debt securities, a debt security's rating is
given less emphasis in the manager's investment decision-making process.
Historically, the funds have invested in debt securities issued by domestic
or foreign companies (i) which are involved in mergers, acquisitions,
consolidations, liquidations, spinoffs, reorganizations or financial
restructurings, and (ii) that are distressed companies or in bankruptcy
(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, these debt securities typically rank senior to the equity securities
of Reorganizing Companies and may offer the potential for certain investment
opportunities.
CONVERTIBLE SECURITIES are debt securities, or in some cases preferred stock,
which have the additional feature of converting into, or being exchanged for,
common stock of a company after certain periods of time or under certain
circumstances. Holders of convertible securities gain the benefits of being a
debt holder or preferred stockholder and receiving regular interest payments,
in the case of debt securities, or higher dividends, in the case of preferred
stock, with the expectation of becoming a common stockholder in the future. A
convertible security's value usually 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.
NON-U.S. SECURITIES The funds may purchase securities of non-U.S. issuers
whose values are quoted and traded in any currency in addition to the U.S.
dollar. Where a security's value is quoted and traded in a non-U.S. dollar
currency, the funds bear the risk of a decrease (or gain the benefit of an
increase) in the value of the security as a result of changes in the value of
the currency as compared to the U.S. dollar in addition to typical market
price movements related to certain trading markets or the financial strength
or weakness of the security's issuer. In order to avoid these unexpected
fluctuations in value as a result of relative currency values, the funds
expect to employ an investment technique called "hedging," which attempts to
reduce or eliminate changes in a security's value resulting from changing
currency exchange rates. Hedging is further described below.
DEPOSITARY RECEIPTS Each fund may invest in securities commonly known as
American Depositary Receipts (ADRs), European Depositary Receipts (EDRs) or
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 depository receipts.
Depository receipts can be unsponsored or sponsored by the issuer of the
underlying securities or by the issuing bank or trust company. 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 under-
lying security.
TEMPORARY INVESTMENTS The manager 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.
SECURITIES OF REORGANIZING COMPANIES AND COMPANIES SUBJECT TO TENDER OR
EXCHANGE OFFERS The funds also seek to invest in the securities of
Reorganizing Companies, or of companies 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.
INDEBTEDNESS, PARTICIPATIONS AND TRADE CLAIMS From time to time, the funds
may purchase the direct indebtedness of various companies (Indebtedness), or
participation interests in Indebtedness (Participations) including
Indebtedness and Participations of Reorganizing Companies. 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
the manager 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.
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.
Indebtedness, Participations and Trade Claims may be illiquid as described
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. The funds may
not purchase an illiquid security if, at the time of purchase, the fund would
have more than 15% of its net assets invested in such securities.
RULE 144A SECURITIES The funds may invest in certain unregistered securities
which may be sold under Rule 144A of the Securities Act of 1933 (144A
securities). 144A securities are restricted, which generally means that a
legend has been placed on the share certificates representing the securities
which states that the securities were not registered with the SEC when they
were initially sold and may not be resold except under certain circumstances.
In spite of the legend, certain securities may be sold to other institutional
buyers provided that the conditions of Rule 144A are met. In the event that
there is an active secondary institutional market for 144A securities, the
144A securities may be treated as liquid. As permitted by the federal
securities laws, the Board has adopted procedures in accordance with Rule
144A which govern when specific 144A securities held by the funds may be
deemed to be liquid.
SHORT SALES Each fund may make short sales of securities. There are two types
of short sale transactions in which the funds may engage, "naked short sales"
and "short sales against the box." In a naked short sale transaction, 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 (i) as a
form of hedging to offset potential declines in long positions in similar
securities, (ii) in order to maintain portfolio flexibility and (iii) 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.
A fund's obligation to replace the borrowed security will be secured by
collateral deposited with the broker-dealer or the fund's custodian bank,
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 bank 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 a 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. 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.
The funds may also engage in "short sales against the box." In a short sale
against the box, at the time of the sale, the fund owns or has the immediate
and unconditional right to acquire the identical security at no additional
cost. In replacing the borrowed securities in the transaction, the fund may
either buy securities in the open market or use those in its portfolio.
Each fund may engage in naked short sale transactions only if, after giving
effect to such sales, the market value of all securities sold short does not
exceed 5% of the value of its total assets or the fund's aggregate short
sales of a particular class of securities does not exceed 25% of the
outstanding securities of that class. The funds may sell securities short
against the box without limit.
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 depends 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 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.
Distressed mortgage obligations 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 The funds' equity investments
may include 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.
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 generally will have a portion of its assets
in cash or cash equivalents for a variety of reasons, including waiting for a
special investment opportunity or taking a defensive position. To earn income
on this portion of its assets, each fund may invest up to 10% of its assets
in repurchase agreements. Under a repurchase agreement, the fund agrees to
buy securities guaranteed as to payment of principal and interest by the U.S.
government or its agencies from a qualified bank or broker-dealer and then to
sell the securities back to the bank or broker-dealer after a short period of
time (generally, less than seven days) at a higher price. The bank or
broker-dealer must transfer to the fund's custodian securities with an
initial market value of at least 102% of the dollar amount invested by the
fund in each repurchase agreement. The manager will monitor the value of such
securities daily to determine that the value equals or exceeds the repurchase
price.
Repurchase agreements may involve risks in the event of default or insolvency
of the bank or broker-dealer, including possible delays or restrictions upon
the fund's ability to sell the underlying securities. The fund will enter
into repurchase agreements only with parties who meet certain
creditworthiness standards, i.e., banks or broker-dealers that the manager
has determined present no serious risk of becoming involved in bankruptcy
proceedings within the time frame contemplated by the repurchase transaction.
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 will primarily engage in forward
foreign currency exchange contracts. However, the funds may also engage in
the following currency transactions: currency futures contracts; currency
swaps; or options on currencies or currency futures. The funds may also
engage in other types of transactions, such as the purchase and sale of
exchange-listed and OTC put and call options on securities, equity and
fixed-income indices and other financial instruments; and the purchase and
sale of financial futures contracts and options on financial futures
contracts (collectively, all of the above are called Hedging Transactions).
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 the manager. 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. The funds will comply with
applicable regulatory requirements when implementing these strategies,
including the establishment of certain isolated accounts at the fund's
custodian bank. Hedging Transactions involving financial futures and options
on futures will be purchased, sold or entered into generally for bona fide
hedging, risk management or portfolio management purposes.
The various techniques described above as Hedging Transactions may also be
used by the funds for non-hedging purposes. For example, these techniques may
be used to produce income to a fund where the fund's participation in the
transaction involves the payment of a premium to the fund. A fund may also
use a hedging technique if the manager 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.
CURRENCY TRANSACTIONS Each fund will engage in currency transactions with
securities dealers, financial institutions or other parties (each a
Counterparty and collectively, 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 foreign currency exchange contracts,
exchange-listed currency futures, exchange-listed and OTC options on
currencies, and currency swaps.
A forward foreign currency exchange 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.
A fund will usually enter into swaps on a net basis, which means 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. To the extent these
swaps are entered into for good faith hedging purposes, the manager and the
funds believe such obligations are not senior securities under the Investment
Company Act of 1940 and, accordingly, will not treat them as being subject to
a fund's borrowing restrictions. The funds 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-1
or P-1 by S&P or Moody's, respectively, or that have an equivalent rating
from a nationally recognized statistical rating organization (NRSRO) or are
determined to be of equivalent credit quality by the manager. 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 funds will limit their dealings in forward foreign currency exchange
contracts and other currency transactions such as futures, options, options
on futures and swaps to either specific transactions or portfolio positions.
Transaction hedging is entering into a currency transaction with respect to
specific assets or liabilities of a fund, which will generally arise in
connection with the purchase or sale of its portfolio securities or the
receipt of income from portfolio securities. Position hedging is entering
into a currency transaction with respect to portfolio security positions
denominated or generally quoted in that currency.
A fund will not enter into a transaction to hedge currency exposure if the
fund's exposure, after netting all transactions intended to wholly or
partially offset other transactions, is greater 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 on, that foreign currency or currently convertible into such
currency other than with respect to proxy hedging, which is described below.
Each 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 funds 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 a 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 the manager considers the Austrian
schilling to be linked to the German deutsche mark (the D-mark), and a fund
holds securities denominated in schillings and the manager believes that the
value of schillings will decline against the U.S. dollar, the manager 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.
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.
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, a 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. A 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. Each 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 an example, but the discussion 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.
A fund's ability to close out its position as a purchaser or seller of an
OCC-issued 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 Counterparties through a 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 negotiated by the
parties. A 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 funds expect to enter into OTC options that have cash
settlement provisions, although they are 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 a 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, the manager 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 funds 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 NRSRO or which the
manager determines is of comparable credit quality. The staff of the SEC
currently takes the position that OTC options purchased by a 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 a 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.
Each 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 funds 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 a 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.
Each 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. A
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.
OPTIONS ON SECURITIES INDICES AND OTHER FINANCIAL INDICES The funds 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, instead of 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.
FUTURES The funds 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 a 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 funds' use of financial futures and options on financial futures will be
consistent with applicable regulatory requirements and, in particular, the
rules of the Commodity Futures Trading Commission and such transactions will
be entered into only for bona fide hedging, risk management (including
duration management) or other portfolio management purposes. Typically,
maintaining a futures contract or selling an option on a futures contract,
requires a 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 a 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 on
futures contracts 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.
A fund will only 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 not exceed 5% of the fund's total current asset 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.
COMBINED TRANSACTIONS The funds may enter into multiple transactions,
including multiple options transactions, multiple futures transactions,
multiple currency transactions (including forward foreign currency exchange
contracts) and any combination of futures, options and currency transactions
(each individually a Transaction and collectively in combinations of two or
more, Combined Transactions), instead of a single Hedging Transaction, as
part of a single or combined strategy when, in the opinion of the manager, 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.
Use of segregated and other special accounts Many Hedging Transactions, in
addition to other requirements, require that the funds segregate liquid
assets with their 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 a 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
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
a 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 securities sufficient to purchase and
deliver the securities if the call is exercised. A call option sold by a fund
on an index will require the fund to own portfolio securities which correlate
with the index or to segregate liquid assets equal to the excess of the index
value over the exercise price on a current basis. A put option written by a
fund requires the fund to segregate liquid assets equal to the exercise price.
A currency contract which obligates a 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 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 funds, 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 a
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 a 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 a 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, a 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 funds may also enter into offsetting
transactions so that a combined position, coupled with any segregated assets,
equals its net outstanding obligation in related options and Hedging
Transactions. For example, a 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 a 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.
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. No fund
presently anticipates loaning more than 5% of its respective portfolio
securities.
BORROWING While the funds are permitted to borrow under certain
circumstances, as described in "Investment restrictions" below, under no
circumstances will a fund make additional investments while any amounts
borrowed exceed 5% of the fund's total assets.
SECURITIES OF COMPANIES IN THE FINANCIAL SERVICES INDUSTRY 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. Purchases of securities of a
company that derived 15% or less of gross revenues during its most recent
fiscal year from securities-related activities (i.e., broker, dealer,
underwriting, or investment advisory activities) are subject only to the same
percentage limitations as would apply to any other security a fund may
purchase.
Each fund, including Financial Services, may also 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, if the following conditions are met: (1)
immediately after the purchase of any securities issuer's equity and debt
securities, the purchase cannot cause more than 5% of the fund's total assets
to be invested in securities of that securities issuer; (2) immediately after
a purchase of equity securities of a securities issuer, a fund may not own
more than 5% of the outstanding securities of that class of the securities
issuer's equity securities; and (3) 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.
In applying the gross revenue test, an issuer's gross revenues from its own
securities-related activities should be combined with its ratable share of
the securities-related activities of enterprises of which it owns a 20% or
greater voting or equity interest. All of the above percentage limitations
are applicable at the time of purchase as well as the issuer's gross revenue
test. 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 demand
features or guarantees (puts) under certain circumstances.
The funds also are not permitted to acquire any security issued by the
manager or any affiliated company (including Franklin 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.
Generally, the policies and restrictions discussed here apply when a fund
makes an investment. In most cases, a fund is not required to sell a security
because circumstances change and the security no longer meets one or more of
the fund's policies or restrictions.
INVESTMENT RESTRICTIONS Each fund has adopted the following restrictions as
fundamental policies. This means they may only be changed if the change is
approved by (i) more than 50% of the fund's outstanding shares or (ii) 67% or
more of the fund's shares present at a shareholder meeting if more than 50%
of the fund's outstanding shares are represented at the meeting in person or
by proxy, whichever is less.
Each fund may not:
1. Purchase or sell commodities, commodity contracts (except in conformity
with regulations of the Commodities Futures Trading Commission such that the
series would not be considered a commodity pool), or oil and gas interests or
real estate. Securities or other instruments backed by commodities are not
considered commodities or commodity contracts for purposes of this
restriction. Debt or equity securities issued by companies engaged in the
oil, gas, or real estate businesses are not considered oil or gas interests
or real estate for purposes of this restriction. First mortgage loans and
other direct obligations secured by real estate are not considered real
estate for purposes of this restriction.
2. Make loans, except to the extent the purchase of debt obligations of any
type are considered loans and except that the series may lend portfolio
securities to qualified institutional investors in compliance with
requirements established from time to time by the SEC and the securities
exchanges on which such securities are traded.
3. Issue securities senior to its stock or borrow money
or utilize leverage in excess of the maximum permitted by the 1940 Act, which
is currently 331/3% of total assets (plus 5% for emergency or other
short-term purposes) from banks on a temporary basis from time to time to
provide greater liquidity for redemptions or for special circumstances.
4. Invest more than 25% of the value of its assets in a particular industry
(except that U.S. government securities are not considered an industry and
except that Financial Services will invest more than 25% of its assets in the
financial services industry).
5. Act as an underwriter except to the extent the series may be deemed to be
an underwriter when disposing of securities it owns or when selling its own
shares.
6. Purchase the securities of any one issuer, other than the U.S. government
or any of its agencies or instrumentalities, if immediately after such
purchase more than 5% of the value of its total assets would be invested in
such issuer, or such series would own more than 10% of the outstanding voting
securities of such issuer, except that up to 25% of the value of such series'
total assets may be invested without regard to such 5% and 10% limitations.
7. Except as may be described in the Prospectus, engage in short sales,
purchase securities on margin or maintain a net short position.
If a bankruptcy or other extraordinary event occurs concerning a particular
security a fund owns, the fund may receive stock, real estate, or other
investments that the fund would not, or could not, buy. If this happens, the
fund intends to sell such investments as soon as practicable while maximizing
the return to shareholders.
The term Prospectus as referenced in restriction 7 includes the Statement of
Additional Information.
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.
RISKS
The value of your shares will increase as the value of the securities owned
by the fund increases and will decrease as the value of the fund's
investments decreases. In this way, you participate in any change in the
value of the securities owned by the fund. In addition to the factors that
affect the value of any particular security that the fund owns, the value of
fund shares may also change with movements in the stock market as a whole.
MEDIUM AND LOWER RATED CORPORATE DEBT SECURITIES The funds have historically
invested in securities of distressed issuers when the intrinsic values of
such securities have, in the opinion of the manager, warranted such
investment. The funds 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." 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. Companies issuing lower rated higher yielding debt securities are
not as strong financially as those with higher credit ratings. These
companies are more likely to encounter financial difficulties and are more
vulnerable to changes in the economy, such as a recession or a sustained
period of rising interest rates, that could prevent them from making interest
and principal payments. If an issuer is not paying or stops paying interest
and/or principal on its securities, payments on the securities may never
resume. These securities may be worthless and the fund could lose its entire
investment.
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 funds will also invest in unrated securities. The funds will
rely on the manager's judgment, analysis and experience in evaluating such
debt securities. In this evaluation, the manager 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. The manager 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, the manager monitors the
issuers of corporate debt securities held in the funds' portfolios. The
credit rating assigned to a security is a factor considered by the manager in
selecting a security for a fund, but the intrinsic value in light of market
conditions and the manager'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 fund of
its investment objective when investing in such securities is dependent on
the credit analysis of the manager. If the funds 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 fund's 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 a 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 prices of high yield debt securities
fluctuate more than higher-quality securities. Prices are often closely
linked with the company's stock prices and typically rise and fall in
response to factors that affect stock prices. In addition, the entire high
yield securities market can experience sudden and sharp price swings due to
changes in economic conditions, stock market activity, large sustained sales
by major investors, a high-profile default, or other factors. High yield
securities are also generally less liquid than higher-quality bonds. Many of
these securities do not trade frequently, and when they do trade their prices
may be significantly higher or lower than expected. At times, it may be
difficult to sell these securities promptly at an acceptable price, which may
limit the fund's ability to sell securities in response to specific economic
events or to meet redemption requests. 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 fund 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 a fund failing to qualify as a pass-through entity under the
Internal Revenue Code of 1986, as amended (Code). Investment in such
securities also involves certain other tax considerations.
The manager values the funds' investments pursuant to guidelines adopted and
periodically reviewed by the Board. To the extent that there is no
established retail market for some of the medium or lower grade or unrated
corporate debt securities in which the funds may invest, there may be thin or
no trading in such securities and the ability of the manager 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
and unrated corporate debt securities held in a fund's portfolio, the
responsibility of the manager to value the fund's securities becomes more
difficult and the manager'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 a 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. Also, a fund may incur costs
in connection with the registration of restricted securities in order to
dispose of such securities, although under Rule 144A of the Securities Act of
1933 certain securities may be determined to be liquid pursuant to procedures
adopted by the Board under applicable guidelines.
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 a fund's portfolio. The
manager 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.
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.
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.
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.
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.
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.
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.
REPURCHASE AGREEMENTS AND LOANS OF SECURITIES Repurchase agreements and loans
of portfolio securities involve some credit risk to the funds. If the other
party defaults on its obligations, a 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.
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 the
manager'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.
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. 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.
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 a 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.
CURRENCY TRANSACTIONS Currency transactions are subject to risks different
from those of other portfolio transactions. Currency transactions can result
in losses to a 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 a
fund enters into a currency Hedging Transaction, the fund will comply with
the asset segregation requirements described above.
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 a fund if it is unable to deliver
or receive a specified 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.
The use of currency transactions can also result in a fund incurring losses
due to the inability of foreign securities transactions to be completed with
the security being delivered to the fund. 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.
EURO RISK. On January 1, 1999, the European Monetary Union (EMU) introduced a
new single currency, the euro, which will replace the national currency for
participating member countries. The transition and the elimination of
currency risk among EMU countries may change the economic environment and
behavior of investors, particularly in European markets. While the
implementation of the euro could have a negative effect on the fund, the
fund's manager and its affiliated services providers are taking steps they
believe are reasonably designed to address the euro issue.
COMBINED TRANSACTIONS Although Combined Transactions are normally entered
into based on the manager'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.
TAX Each fund's investments in options, futures, and forward contracts,
including foreign currency exchange options and futures, foreign securities
and other complex securities are subject to special tax rules that may affect
the amount, timing or character of the income earned by the fund and
distributed to you. Each fund may also be subject to withholding taxes on
earnings from certain of its foreign securities.
SMALLER COMPANIES The funds may invest in securities issued by smaller
companies. Historically, smaller companies have been more volatile in price
than larger company securities, especially over the short term. Among the
reasons for the greater price volatility are the less certain growth
prospects of smaller companies, the lower degree of liquidity in the markets
for such securities, and the greater sensitivity of smaller companies to
changing economic conditions.
In addition, smaller companies may lack depth of management, they may be
unable to generate funds necessary for growth or development, or they may be
developing or marketing new products or services for which markets are not
yet established and may never become established.
PORTFOLIO TURNOVER Financial Services commenced operations on 8/19/97. The
portfolio turnover rate for Financial Services for the fund's initial fiscal
period ended 12/31/97 was 42.26%, while the portfolio turnover rate for the
fund's fiscal year ended 12/31/98 was 136.67%. This variation in portfolio
turnover rates for 1997 and 1998 is primarily due to the fund's partial
period of portfolio trading activity in 1997. Generally, the higher a fund's
portfolio turnover rate the higher the transaction costs and brokerage
expenses. This may also generate a higher level of capital gains.
OFFICERS AND DIRECTORS
Mutual Series has a board of directors. The board is responsible for the
overall management of the funds, including general supervision and review of
each fund's investment activities. The board, in turn, elects the officers of
Mutual Series who are responsible for administering each fund's day-to-day
operations. The board also monitors each fund to ensure no material conflicts
exist among share classes. While none is expected, the board will act
appropriately to resolve any material conflict that may arise.
The name, age and address of the officers and board members, as well as their
affiliations, positions held with the Mutual Series, and principal
occupations during the past five years are shown below.
Edward I. Altman, Ph.D. (57)
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 (41)
3100 N. Dinwiddie Street, Arlington, VA 22207-2767
DIRECTOR
Independent Director, 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; and FORMERLY, Executive Vice President and Chief Financial
Officer, NHP Incorporated (manager of multifamily housing) (1995-1997) and
Vice President and Treasurer, U.S. Air (until 1995).
Andrew H. Hines, Jr. (76)
150 2nd Avenue N., St. Petersburg, FL 33701
DIRECTOR
Consultant,Triangle Consulting Group; Executive-in-Residence, Eckerd College
(1991-present); director or trustee, as the case may be, of 22 of the
investment companies in the Franklin Templeton Group of Funds; and FORMERLY,
Chairman and Director, Precise Power Corporation (1990-1997), Director,
Checkers Drive-In Restaurant, Inc. (1994-1997), and Chairman of the Board and
Chief Executive Officer, Florida Progress Corporation (holding company in the
energy area) (1982-1990) and director of various of its subsidiaries.
*Peter A. Langerman (43)
51 John F. Kennedy Pkwy., Short Hills, NJ 07078
PRESIDENT AND DIRECTOR
President and Chief Executive Officer, Franklin Mutual Advisers, LLC;
Director, Sunbeam Corporation (durable products) and Canary Wharf Group, PLC
(real estate development); Manager (Director), MB Motori, L.L.C. and MWCR,
L.L.C.; and FORMERLY, Director, Lancer Industries (industrial holding
company) and employee, Heine Securities Corporation (1986-1996).
*William J. Lippman (74)
One Parker Plaza, 16th Floor, Fort Lee, NJ 07024
DIRECTOR
Senior Vice President, Franklin Resources, Inc. and Franklin Management,
Inc.; President, Franklin Advisory Services, LLC; 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 (69)
1 Pequot Way, Canton, MA 02021
DIRECTOR
Chairman, A.A. MacPherson, Inc. Boston, MA (representative for electrical
manufacturers).
Fred R. Millsaps (70)
2665 NE 37th Drive, Fort Lauderdale, FL 33308
DIRECTOR
Manager of personal investments (1978-present); director of various business
and nonprofit organizations; director or trustee, as the case may be, of 22
of the investment companies in the Franklin Templeton Group of Funds; and
FORMERLY, Chairman and Chief Executive Officer, Landmark Banking Corporation
(1969-1978), Financial Vice President, Florida Power and Light (1965-1969),
and Vice President, Federal Reserve Bank of Atlanta (1958-1965).
*Michael F. Price (47)
51 John F. Kennedy Pkwy., Short Hills, NJ 07078
CHAIRMAN OF THE BOARD AND DIRECTOR
Chairman, Franklin Mutual Advisers, LLC; Director and majority owner,
Compliance Solutions, Inc. (developer of compliance monitoring software for
money managers); Director and owner, Clearwater Securities, Inc. (formerly a
registered securities dealer); Director, Canary Wharf Group, PLC (real estate
development); and FORMERLY, President, Chief Executive Officer and Director,
Heine Securities Corporation (1987-1996).
Charles Rubens II (69)
18 Park Road, Scarsdale, NY 10583
DIRECTOR
Private investor; and trustee of three of the investment companies in the
Franklin Templeton Group of Funds.
Leonard Rubin (73)
2460 Lemoine Ave., 3rd Floor, Fort Lee, NJ 07024
DIRECTOR
Partner in LDR Equities, LLC (manages various personal investments); Vice
President, Trimtex Co., Inc. (manufactures and markets specialty fabrics);
director or trustee, as the case may be, of three of the investment companies
in the Franklin Templeton Group of Funds; and FORMERLY, Chairman of the
Board, Carolace Embroidery Co., Inc. and President, F.N.C. Textiles, Inc.
Vaughn R. Sturtevant, M.D. (75)
6 Noyes Avenue, Waterville, ME 04901
DIRECTOR
Practicing physician.
Robert E. Wade (53)
225 Hardwick Street, Belvidere, NJ 07823
DIRECTOR
Practicing attorney.
Jeffrey A. Altman (32)
51 John F. Kennedy Pkwy., Short Hills, NJ 07078
VICE PRESIDENT
Senior Vice President, Franklin Mutual Advisers, LLC; Manager (Director), MB
Metropolis, L.L.C., MB Motori, L.L.C. and MWCR, L.L.C.; Trustee, Resurgence
Properties, Inc. (real estate investment); Director, Capital Trust (real
estate financial services); and FORMERLY, employee, Heine Securities
Corporation (1988-1996).
James R. Baio (45)
500 East Broward Blvd., Fort Lauderdale, FL 33394-3091
TREASURER AND CHIEF FINANCIAL OFFICER
Certified Public Accountant; Senior Vice President, Templeton Worldwide,
Inc., Templeton Global Investors, Inc. and Templeton Funds Trust Company;
officer of 22 of the investment companies in the Franklin Templeton Group of
Funds; and FORMERLY, Senior Tax Manager, Ernst & Young (certified public
accountants) (1977-1989).
Robert L. Friedman (39)
51 John F. Kennedy Pkwy., Short Hills, NJ 07078
VICE PRESIDENT
Senior Vice President and Chief Investment Officer, Franklin Mutual Advisers,
LLC; and FORMERLY, employee, Heine Securities Corporation (1988-1996).
Raymond Garea (49)
51 John F. Kennedy Pkwy., Short Hills, NJ 07078
VICE PRESIDENT
Senior Vice President, Franklin Mutual Advisers, LLC; Manager (Director), MB
Metropolis, L.L.C.; and FORMERLY, employee, Heine Securities Corporation
(1991-1996) and Vice President and Analyst, Donaldson, Lufkin & Jenrette.
Deborah R. Gatzek (50)
777 Mariners Island Blvd., San Mateo, CA 94404
VICE PRESIDENT AND SECRETARY
Senior Vice President and General Counsel, Franklin Resources, Inc.; Senior
Vice President, Franklin Templeton Services, Inc. and Franklin Templeton
Distributors, Inc.; Executive Vice President, Franklin Advisers, Inc.; Vice
President, Franklin Advisory Services, LLC and Franklin Mutual Advisers, LLC;
Vice President, Chief Legal Officer and Chief Operating Officer, Franklin
Investment Advisory Services, Inc.; and officer of 54 of the investment
companies in the Franklin Templeton Group of Funds.
David E. Marcus (33)
51 John F. Kennedy Pkwy., Short Hills, NJ 07078
VICE PRESIDENT
Senior Vice President, Franklin Mutual Advisers, LLC;
and FORMERLY, employee, Heine Securities Corporation (1987-1996).
Lawrence N. Sondike (41)
51 John F. Kennedy Pkwy., Short Hills, NJ 07078
VICE PRESIDENT
Senior Vice President, Franklin Mutual Advisers, LLC;
and FORMERLY, employee, Heine Securities Corporation (1984-1996).
David J. Winters (37)
51 John F. Kennedy Pkwy., Short Hills, NJ 07078
VICE PRESIDENT
Senior Vice President, Franklin Mutual Advisers, LLC;
and FORMERLY, employee, Heine Securities Corporation (1988-1996).
*This board member is considered an "interested person" under federal
securities laws.
The noninterested board members have standing audit, pension, nominating and
directors' compensation and performance committees. The audit committee is
composed of Ms. Grant and Messrs. E. Altman and Wade. The pension committee
is composed of Messrs. E. Altman and Sturtevant. The nominating committee is
responsible for nominating candidates for noninterested board member
positions and is composed of Messrs. MacPherson and Rubin. The board members'
compensation and performance committee is composed of Ms. Grant and Messrs.
Wade and Sturtevant.
Mutual Series pays noninterested board members $45,000 per year plus $2,000
per board or audit committee meeting attended. The chairman of the audit
committee is paid a retainer of $9,000 and each audit committee member is
paid a retainer of $4,000. In 1993, the board approved a retirement plan that
generally provides payments to directors who have served seven years and
retire at age 70. At the time of retirement, board members are entitled to
annual payments equal to one-half of the retainer in effect at the time of
retirement.
Noninterested board members may also serve as directors or trustees of other
funds in the Franklin Templeton Group of Funds and may receive fees from
these funds for their services. The following table provides the total fees
paid to noninterested board members by the Mutual Series and by the Franklin
Templeton Group of Funds.
<TABLE>
<CAPTION>
TOTAL FEES NUMBER OF BOARDS
ESTIMATED RECEIVED FROM IN THE FRANKLIN
TOTAL FEES PENSION ANNUAL THE FRANKLIN TEMPLETON GROUP
RECEIVED FROM RETIREMENT BENEFITS UPON TEMPLETON GROUP OF FUNDS ON WHICH
NAME MUTUAL SERIES 1 ACCRUED RETIREMENT OF FUNDS 2 EACH SERVES 3
<S> <C> <C> <C> <C> <C>
Edward I. Altman $77,000 0 $22,500 $ 77,000 1
Ann Torre Grant 4 77,000 0 22,500 77,000 1
Bruce A. MacPherson 65,000 0 22,500 65,000 1
Barry F. Schwartz 4,5 28,500 0 22,500 28,500 n/a
Vaughn R. Sturtevant, M.D. 61,000 0 22,500 61,000 1
Robert E. Wade 4 86,000 0 22,500 86,000 1
Andrew H. Hines, Jr. 4 61,000 0 22,500 208,075 22
Fred R. Millsaps 4 63,000 0 22,500 210,075 22
Leonard Rubin 4 63,000 0 22,500 84,900 3
Charles Rubens II 28,500 0 0 50,400 3
</TABLE>
1. For the fiscal year ended December 31, 1998.
2. For the calendar year ended December 31, 1998.
3. 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 54 registered investment companies, with
approximately 163 U.S. based funds or series.
4. Not vested in retirement plan.
5. Resigned, June 1998.
Noninterested board members 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
funds or other funds in the Franklin Templeton Group of Funds. Certain
officers or board members who are shareholders of Franklin Resources, Inc.
may be deemed to receive indirect remuneration by virtue of their
participation, if any, in the fees paid to its subsidiaries.
MANAGEMENT AND OTHER SERVICES
MANAGER AND SERVICES PROVIDED The funds' manager is Franklin Mutual Advisers,
LLC (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. The manager is an indirect, wholly owned
subsidiary of Franklin Resources, Inc. (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.
The manager provides investment research and portfolio management services,
and selects the securities for the funds to buy, hold or sell. The manager
also selects the brokers who execute the funds' portfolio transactions. The
manager provides periodic reports to the board, which reviews and supervises
the manager's investment activities. To protect the funds, the manager and
its officers, directors and employees are covered by fidelity insurance.
The manager and its affiliates manage numerous other investment companies and
accounts. The manager 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 the manager on behalf of the funds. Similarly, with respect
to the funds, the manager is not obligated to recommend, buy or sell, or to
refrain from recommending, buying or selling any security that the manager
and access persons, as defined by applicable federal securities laws, may buy
or sell for its or their own account or for the accounts of any other fund.
The manager is not obligated to refrain from investing in securities held by
the funds or other funds it manages. Of course, any transactions for the
accounts of the manager and other access persons will be made in compliance
with the funds' code of ethics.
Under the funds' code of ethics, employees of the Franklin Templeton Group
who are access persons may 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.
MANAGEMENT FEES Each fund pays the manager a 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 according to the terms of the management agreement. Each class of the
funds' shares pays its proportionate share of the fee.
For the last three fiscal years ended December 31, the funds paid the
following management fees:
MANAGEMENT FEES PAID ($)
1998 1997 1996
- ----------------------------------------------------------------
Beacon 37,649,906 34,477,321 25,260,160
Financial Services 3,306,470 92,762 1 n/a
Qualified 32,920,555 29,584,910 21,439,007
Mutual Shares 55,767,932 46,093,507 34,719,646
Discovery 39,735,851 32,685,124 17,154,254
European 6,843,216 5,167,675 876,464 2
1. For the period August 19, 1997 through December 31, 1997.
2. For the period July 3, 1996 through December 31, 1996.
Under an agreement by the manager to limit its fees, the funds paid the
management fees shown above. For the three fiscal years ended December 31,
management fees, before any advance waiver, totaled:
MANAGEMENT FEES BEFORE WAIVER ($)
1998 1997 1996
- ----------------------------------------------------------------
Beacon 39,589,767 36,299,616 26,083,112
Financial Services 3,742,268 419,994 1 n/a
Qualified 34,762,293 31,224,924 22,515,334
Mutual Shares 59,068,503 48,600,626 35,687,092
Discovery 41,019,712 33,584,048 17,795,530
European 6,843,216 5,372,334 949,616 2
1. For the period August 19, 1997 through December 31, 1997.
2. For the period July 3, 1996 through December 31, 1996.
ADMINISTRATOR AND SERVICES PROVIDED Franklin Templeton Services, Inc. (FT
Services) has an agreement with each fund to provide certain administrative
services and facilities for the funds. FT Services is wholly owned by
Resources and is an affiliate of the funds' manager and principal underwriter.
The administrative services FT Services provides include preparing and
maintaining books, records, and tax and financial reports, and monitoring
compliance with regulatory requirements.
ADMINISTRATION FEES The funds pay FT Services a monthly fee equal to an
annual rate of:
o 0.15% of a fund's average daily net assets up to $200 million;
o 0.135% of average daily net assets over $200 million up to $700 million;
o 0.10% of average daily net assets over $700 million up to $1.2 billion;
and
o 0.075% of average daily net assets over $1.2 billion.
During the last three fiscal years ended December 31, the funds paid FT
Services the following administration fees:
ADMINISTRATION FEES PAID ($)
1998 1997 19961
- -----------------------------------------------------------------
Beacon 5,104,507 4,766,476 634,856
Financial Services 375,860 54,548 2 n/a
Qualified 4,364,662 4,236,167 553,904
Mutual Shares 7,599,879 6,284,881 840,707
Discovery 3,941,429 3,350,745 380,772
European 652,219 716,013 57,060
1. For the period November 1, 1996 through December 31, 1996.
2. For the period August 19, 1997 through December 31, 1997.
Shareholder servicing and transfer agent Franklin/Templeton Investor
Services, Inc. (Investor Services) is the funds' shareholder servicing agent
and acts as the funds' transfer agent and dividend-paying agent. Investor
Services is located at 100 Fountain Parkway, St. Petersburg, FL 33733-8030.
Please send all correspondence to Investor Services to P.O. Box 33030, St.
Petersburg, FL 33733-8030.
For its services, Investor Services receives a fixed fee per account. The
funds also will 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
funds. The amount of reimbursements for these services per benefit plan
participant fund account per year will not exceed the per account fee payable
by the funds to Investor Services in connection with maintaining shareholder
accounts.
CUSTODIAN Bank of New York, Mutual Funds Division, 90 Washington Street, New
York, NY 10286, acts as custodian of the funds' securities and other assets.
AUDITOR Ernst & Young LLP, 200 Clarendon Street, Boston, MA 02116, is the
Mutual Series' independent auditor. The auditor gives an opinion on the
financial statements included in the Mutual Series' Annual Report to
Shareholders and reviews the Mutual Series' registration statement filed with
the U.S. Securities and Exchange Commission (SEC).
PORTFOLIO TRANSACTIONS
The manager selects brokers and dealers to execute the funds' 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, the manager 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 is
negotiated between the manager 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. The manager
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 the manager, 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.
The manager may pay certain brokers commissions that are higher than those
another broker may charge, if the manager 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 the manager's overall responsibilities to client
accounts over which it exercises investment discretion. The services that
brokers may provide to the manager 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 the manager in carrying out its
investment advisory responsibilities. These services may not always directly
benefit the funds. They must, however, be of value to the manager in carrying
out its overall responsibilities to its clients.
It is not possible to place a dollar value on the special executions or on
the research services the manager receives from dealers effecting
transactions in portfolio securities. The allocation of transactions in order
to obtain additional research services allows the manager 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, the manager and its affiliates may use
this research and data in their investment advisory capacities with other
clients. If the funds' 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, also may be considered a factor in the
selection of broker-dealers to execute the funds' portfolio transactions.
Because Franklin Templeton Distributors, Inc. (Distributors) is a member of
the National Association of Securities Dealers, Inc., it may sometimes
receive certain fees when a fund tenders portfolio securities pursuant to a
tender-offer solicitation. To recapture brokerage for the benefit of a fund,
any portfolio securities tendered by the fund will be tendered through
Distributors if it is legally permissible to do so. In turn, the next
management fee payable to the manager 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 funds and one or more other
investment companies or clients supervised by the manager 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 the manager, 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 funds are concerned. In other cases it is possible
that the ability to participate in volume transactions may improve execution
and reduce transaction costs to the funds.
During the last three fiscal years ended December 31, the funds paid the
following brokerage commissions:
BROKERAGE COMMISSIONS PAID ($)
1998 1997 1996
- ----------------------------------------------------------------
Beacon 10,799,550 8,259,140 7,418,388
Financial Services 1,539,012 371,076 1 n/a
Qualified 8,446,273 6,474,952 6,090,786
Mutual Shares 13,931,158 7,248,461 8,095,501
Discovery 12,988,034 9,085,394 7,928,860
European 2,910,055 1,500,199 734,682 2
1. For the period from August 19, 1997 through December 31, 1997.
2. For the period July 3, 1996 through December 31, 1996.
As of December 31, 1998, the funds owned the following securities issued by
their regular broker-dealers:
VALUE
Mutual Beacon
Bankamerica Corp. 19,571,169
Bankers Trust Corp. 9,438,750
Bear Stearns Companies 40,604,200
Morgan Stanley Dean Witter & Co. 72,228,300
Mutual Financial Services
Bankamerica Corp. 4,881,188
Bankers Trust Corp. 794,569
Mutual Qualified
Bankamerica Corp. 17,051,871
Bankers Trust Corp. 8,380,588
Morgan Stanley Dean Witter & Co. 59,029,400
Mutual Shares
Bankamerica Corp. 29,492,936
Bankers Trust Corp. 14,857,394
Bear Stearns Companies 68,474,737
Morgan Stanley Dean Witter & Co. 183,748,000
Mutual Discovery
Bankamerica Corp. 15,210,904
Bankers Trust Corp. 6,902,781
Bear Stearns Companies 13,152,263
Morgan Stanley Dean Witter & Co. 22,329,500
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, was formerly a
registered securities dealer and 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
year ended December 31, 1996, Beacon paid brokerage commissions to Clearwater
of $607,402; Qualified paid $439,926; Mutual Shares paid $755,142; Discovery
paid $384,267; and European paid $4,037.
Because the funds may, from time to time, invest in broker-dealers, it is
possible that a fund will own more than 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 an
affiliated person of the fund. To the extent that the fund places brokerage
transactions through such a broker-dealer at a time when the broker-dealer is
considered to be an affiliate of the fund, the fund will be required to
adhere to certain rules relating to the payment of commissions to an
affiliated broker-dealer. These rules require the fund to adhere to
procedures adopted by the board relating to ensuring that the commissions
paid to such broker-dealers do not exceed what would otherwise be the usual
and customary broker's commissions for similar transactions.
The funds may receive research services from persons who act as brokers or
dealers for the funds. 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
the manager and/or the funds 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 the manager. 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, the manager could be influenced to place fund brokerage
transactions with a broker in order to generate soft dollars for the
manager's benefit, the manager 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 year ended December 31, 1998, the
funds did not pay any brokerage commissions to brokers who provided research
services.
DISTRIBUTIONS AND TAXES
The funds calculate dividends and capital gains the same way for each class.
The amount of any income dividends per share will differ, however, generally
due to the difference in the distribution and service (Rule 12b-1) fees of
each class. The funds do not pay "interest" or guarantee any fixed rate of
return on an investment in their shares.
DISTRIBUTIONS OF NET INVESTMENT INCOME The funds receive income generally in
the form of dividends and interest on their investments. This income, less
expenses incurred in the operation of a fund, constitutes a fund's net
investment income from which dividends may be paid to you. Any distributions
by a 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 funds may derive capital gains and losses
in connection with sales or other dispositions of their portfolio securities.
Distributions from net short-term capital gains will be taxable to you as
ordinary income. Distributions from net long-term capital gains will be
taxable to you as long-term capital gain, regardless of how long you have
held your shares in a fund. Any net capital gains realized by a fund
generally will be distributed once each year, and may be distributed more
frequently, if necessary, in order to reduce or eliminate excise or income
taxes on the fund.
EFFECT OF FOREIGN INVESTMENTS ON DISTRIBUTIONS Most foreign exchange gains
realized on the sale of debt securities are treated as ordinary income by a
fund. Similarly, foreign exchange losses realized by a fund on the sale of
debt securities 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 a fund's ordinary income otherwise available for
distribution to you. This treatment could increase or reduce a fund's
ordinary income distributions to you, and may cause some or all of a fund's
previously distributed income to be classified as a return of capital.
The Discovery and European Funds may be subject to foreign withholding taxes
on income from certain of their foreign securities. If more than 50% of
either fund's total assets at the end of the fiscal year are invested in
securities of foreign corporations, such fund may elect to pass-through to
you your pro rata share of foreign taxes paid by it. If this election is
made, the year-end statement you receive from these funds will show more
taxable income than was actually distributed to you. However, you will be
entitled to either deduct your share of such taxes in computing your taxable
income or (subject to limitations) claim a foreign tax credit for such taxes
against your U.S. federal income tax. These funds will provide you with the
information necessary to complete your individual income tax return if they
make this election.
INFORMATION ON THE TAX CHARACTER OF DISTRIBUTIONS The funds will inform you
of the amount of your ordinary income dividends and capital gains
distributions at the time they are paid, and will advise you of their tax
status for federal income tax purposes shortly after the close of each
calendar year. If you have not held fund shares for a full year, a fund may
designate and distribute 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.
ELECTION TO BE TAXED AS A REGULATED INVESTMENT COMPANY Each fund has elected
to be treated as a regulated investment company under Subchapter M of the
Internal Revenue Code, has qualified as such for its most recent fiscal year,
and intends to so qualify during the current fiscal year. As regulated
investment companies, the funds generally pay no federal income tax on the
income and gains they distribute to you. The board reserves the right not to
maintain the qualification of a fund as a regulated investment company if it
determines such course of action to be beneficial to shareholders. In such
case, a 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 such fund's earnings and profits.
EXCISE TAX DISTRIBUTION REQUIREMENTS To avoid federal excise taxes, the
Internal Revenue Code requires a fund to distribute to you by December 31 of
each year, at a minimum, the following amounts: 98% of its taxable ordinary
income earned during the calendar year; 98% of its capital gain net income
earned during the twelve month period ending October 31; and 100% of any
undistributed amounts from the prior year. Each fund intends to declare and
pay these amounts in December (or in January that are treated by you as
received in December) to avoid these excise taxes, but can give no assurances
that its distributions will be sufficient to eliminate all taxes.
REDEMPTION OF FUND SHARES Redemptions and exchanges of fund shares are
taxable transactions for federal and state income tax purposes. If you redeem
your fund shares, or exchange your fund shares for shares of a different
Franklin Templeton Fund, the IRS will require that you report a gain or loss
on your redemption or exchange. 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 or short-term, generally depending on how long you hold your
shares. 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.
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 buy other shares in
such 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 buy.
DEFERRAL OF BASIS If you redeem some or all of your shares in a fund, and
then reinvest the sales proceeds in such fund or in another Franklin
Templeton Fund within 90 days of buying the original shares, the sales charge
that would otherwise apply to your reinvestment may be reduced or eliminated.
The IRS will require you to report gain or loss on the redemption of your
original shares in a fund. In doing so, all or a portion of the sales charge
that you paid for your original shares in a fund will be excluded from your
tax basis in the shares sold (for the purpose of determining gain or loss
upon the sale of such shares). The portion of the sales charge excluded 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.
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 Government National Mortgage
Association or Federal National Mortgage Association securities, bankers'
acceptances, commercial paper and repurchase agreements collateralized by
U.S. government securities do not generally qualify for tax-free treatment.
The rules on exclusion of this income are different for corporations.
DIVIDENDS-RECEIVED DEDUCTION FOR CORPORATIONS If you are a corporate
shareholder, you should note that only a small percentage of the dividends
paid by the funds for the most recent fiscal year qualified for the
dividends-received deduction. In some circumstances, you will be allowed 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 a
fund as eligible for such treatment. All dividends (including the deducted
portion) must be included in your alternative minimum taxable income
calculation.
INVESTMENT IN COMPLEX SECURITIES The funds may invest in complex securities.
These investments may be subject to numerous special and complex tax rules.
These rules could affect whether gains and losses recognized by a fund are
treated as ordinary income or capital gain, accelerate the recognition of
income to a fund and/or defer a fund's ability to recognize losses, and, in
limited cases, subject a fund to U.S. federal income tax on income from
certain of its foreign securities. In turn, these rules may affect the
amount, timing or character of the income distributed to you by a fund.
ORGANIZATION, VOTING RIGHTS AND PRINCIPAL HOLDERS
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.
The funds currently offer four classes of shares, Class A, Class B, Class C
and Class Z. Before January 1, 1999, Class A shares were designated Class I
and Class C shares were designated Class II. The funds began offering Class B
shares on January 1, 1999. The funds may offer additional classes of shares
in the future. The full title of each class is:
Mutual Shares Fund - Class A
Mutual Shares Fund - Class B
Mutual Shares Fund - Class C
Mutual Shares Fund - Class Z
Mutual Qualified Fund - Class A
Mutual Qualified Fund - Class B
Mutual Qualified Fund - Class C
Mutual Qualified Fund - Class Z
Mutual Beacon Fund - Class A
Mutual Beacon Fund - Class B
Mutual Beacon Fund - Class C
Mutual Beacon Fund - Class Z
Mutual European Fund - Class A
Mutual European Fund - Class B
Mutual European Fund - Class C
Mutual European Fund - Class Z
Mutual Discovery Fund - Class A
Mutual Discovery Fund - Class B
Mutual Discovery Fund - Class C
Mutual Discovery Fund - Class Z
Mutual Financial Services Fund - Class A
Mutual Financial Services Fund - Class B
Mutual Financial Services Fund - Class C
Mutual Financial Services Fund - Class Z
Shares of each class represent proportionate interests in each fund's assets.
On matters that affect the fund as a whole, each class has the same voting
and other rights and preferences as any other class. On matters that affect
only one class, only shareholders of that class may vote. Each class votes
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.
Additional series may be offered in the future.
Mutual Series has noncumulative voting rights. For board member elections,
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 series of Mutual Series may hold special meetings, however, for
matters requiring shareholder approval. A meeting may be called by the board
to consider the removal of a board member if requested in writing 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. A special meeting also may
be called by the board in its discretion.
As of February 5, 1999, the principal shareholders of the funds, beneficial
or of record, were:
PERCENTAGE
NAME AND ADDRESS SHARE AMOUNT %
- ----------------------------------------------------------------------
EUROPEAN
Michael F. Price
51 John F. Kennedy Pkwy.
Short Hills, NJ 07078 Class Z 23.66
Franklin Resources, Inc.1
Corporate Accounting
555 Airport Blvd. 4th Floor
Burlingame, CA 94010 Class B 30.01
PERCENTAGE
NAME AND ADDRESS SHARE AMOUNT %
- ----------------------------------------------------------------------
EUROPEAN (CONT.)
Wachovia Securities Inc.
FBO 7006257914
301 N. Main St. MC-32002
Winston-Salem, NC 27150 Class B 14.76
PaineWebber
FBO Joseph Xuereb CF
Allison Kelly Xuereb
Unif. Transfer to Minor Act NY
164 East 90th St.
New York, NY 10128-2603 Class B 15.15
PaineWebber
FBO Annunziata Xuereb CF
Jason Noel Xuereb
Unif. Transfer to Minor Act NY
164 East 90th St.
New York, NY 10128-2603 Class B 15.15
Krzysztop Pabis and Anna Pabis
JTWROS
5195 Valley Tarn
Acworth, GA 30102 Class B 7.55
MUTUAL SHARES
NFSC FEBO OKS-880310
Benjamin J. Carlson
767 Moenkopi Trail
Flagstaff, AZ 86001 Class B 14.87
QUALIFIED
Franklin Resources, Inc.
Corporate Accounting
555 Airport Blvd. 4th Fl.
Burlingame, CA 94010 Class B 12.36
Juliet Holland
640 Broadway 4 WR
New York, NY 10012 Class B 6.06
Susan R. Smith
6075 Fireside Drive
Rockford, IL 61114 Class B 6.14
BEACON
Dean Witter Reynolds Cust. for
Joe H. Howard
3700 N. Keeler
Chicago, IL 60641-3041 Class B 8.33
Fahnestock Co. Inc. Cust.
A878401361
Jane G. Bennett
125 Broad Street
New York, NY 10004 Class B 6.00
DISCOVERY
AG Edwards Sons Inc. Cust. for
Dr. Clare Ann Gnecco Rollover IRA Account
23 May Drive Apt 10A
Morristown, NJ 07960 Class B 7.02
Dain Rauscher Inc. FBO
John Scully
John Scully Char Rem Trust
427 Upper French Creek Road
Buffalo, WY 82834 Class B 10.02
PERCENTAGE
NAME AND ADDRESS SHARE AMOUNT %
- ----------------------------------------------------------------------
FINANCIAL SERVICES
Franklin Resources, Inc. 1
Corporate Accounting
555 Airport Blvd. 4th Floor
Burlingame, CA 94010 Class B 39.66
Summit Financial Services Group FBO
Keith Baczkowski
One Bethlehem Plaza
Bethlehem, PA 18018 Class B 19.98
1. Franklin Resources, Inc. is a Delaware corporation.
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.
As of February 5, 1999, the officers and board members, as a group, owned of
record and beneficially 24.12% of Mutual European Fund - Class Z and less
than 1% of the outstanding shares of the other funds and classes. The board
members may own shares in other funds in the Franklin Templeton Group of
Funds.
BUYING AND SELLING SHARES
The funds continuously offer their shares through securities dealers who have
an agreement with Franklin Templeton Distributors, Inc. (Distributors). A
securities dealer includes any financial institution that, either directly or
through affiliates, has an agreement with Distributors to handle customer
orders and accounts with the funds. This reference is for convenience only
and does not indicate a legal conclusion of capacity. Banks and financial
institutions that sell shares of the funds may be required by state law to
register as securities dealers.
For investors outside the U.S., the offering of fund shares may be limited in
many jurisdictions. An investor who wishes to buy shares of the funds 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.
All checks, drafts, wires and other payment mediums used to buy or sell
shares of the funds 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.
When you buy shares, if you submit a check or a draft that is returned unpaid
to a fund we may impose a $10 charge against your account for each returned
item.
If you buy shares through the reinvestment of dividends, the shares 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.
INITIAL SALES CHARGES The maximum initial sales charge is 5.75% for Class A
and 1% for Class C. There is no initial sales charge for Class B.
The initial sales charge for Class A shares may be reduced for certain large
purchases, as described in the prospectus. We offer several ways for you to
combine your purchases in the Franklin Templeton Funds to take advantage of
the lower sales charges for large purchases. The Franklin Templeton Funds
include the U.S. registered mutual funds in the Franklin Group of Funds(R) and
the Templeton Group of Funds except Franklin Valuemark Funds, Templeton
Capital Accumulator Fund, Inc., and Templeton Variable Products Series Fund.
CUMULATIVE QUANTITY DISCOUNT. For purposes of calculating the sales charge on
Class A shares, you may combine the amount of your current purchase with the
cost or current value, whichever is higher, of your existing shares in the
Franklin Templeton Funds. You also may combine the shares of your spouse,
children under the age of 21 or grandchildren under the age of 21. If you are
the sole owner of a company, you also may 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 (LOI). You may buy Class A shares at a reduced sales charge
by completing the letter of intent section of your account 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. By completing the letter of intent section of the
application, you acknowledge and agree to the following:
o You authorize Distributors to reserve 5% of your total intended purchase in
Class A shares registered in your name until you fulfill your LOI. Your
periodic statements will include the reserved shares in the total shares
you own, and we will pay or reinvest dividend and capital gain
distributions on the reserved shares according to the distribution option
you have chosen.
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 LOI.
o Although you may exchange your shares, you may not sell reserved shares
until you complete the LOI or pay the higher sales charge.
After you file your LOI with the fund, you may buy Class A shares at the
sales charge applicable to the amount specified in your LOI. 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. Any Class A purchases you made within 90 days
before you filed your LOI also may qualify for a retroactive reduction in the
sales charge. If you file your LOI with the fund before a change in the
fund's sales charge, you may complete the LOI at the lower of the new sales
charge or the sales charge in effect when the LOI was filed.
Your holdings in the Franklin Templeton Funds acquired more than 90 days
before you filed your LOI will be counted towards the completion of the LOI,
but they will not be entitled to a retroactive reduction 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 LOI have been completed.
If the terms of your LOI are met, the reserved shares will be deposited to an
account in your name or delivered to you or as you direct. If the amount of
your total purchases, less redemptions, is more than the amount specified in
your LOI and is an amount that would qualify for a further sales charge
reduction, a retroactive price adjustment will be made by Distributors and
the securities dealer through whom purchases were made. The price adjustment
will be made on purchases made within 90 days before and on those made after
you filed your LOI and will be applied towards the purchase of additional
shares at the offering price applicable to a single purchase or the dollar
amount of the total purchases.
If the amount of your total purchases, less redemptions, is less than the
amount specified in your LOI, the sales charge will be adjusted upward,
depending on the actual amount purchased (less redemptions) during the
period. You will need to send Distributors an amount equal to the difference
in the actual dollar amount of sales charge paid and the amount of sales
charge that would have applied to the total purchases if the total of the
purchases had been made at one time. Upon payment of this amount, 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, we will redeem an
appropriate number of reserved shares to realize the difference. If you
redeem the total amount in your account before you fulfill your LOI, we will
deduct the additional sales charge due from the sale proceeds and forward the
balance to you.
For LOIs filed 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 LOI. These plans are not subject to the requirement to reserve 5%
of the total intended purchase or to the policy on upward adjustments in
sales charges described above, 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 LOI.
GROUP PURCHASES. If you are a member of a qualified group, you may buy Class
A shares at a reduced sales charge that applies to the group as a whole. The
sales charge is based on the combined dollar value of the group members'
existing investments, plus the amount of the current purchase.
A qualified group is one that:
o Was formed at least six months ago,
o Has a purpose other than buying fund shares at a discount,
o Has more than 10 members,
o Can arrange for meetings between our representatives and group members,
o Agrees to include Franklin Templeton Fund sales and other materials in
publications and mailings to its members at reduced or no cost to
Distributors,
o Agrees to arrange for payroll deduction or other bulk transmission of
investments to the funds, and
o Meets other uniform criteria that allow Distributors to achieve cost
savings in distributing shares.
A qualified group does not include a 403(b) plan that only allows salary
deferral contributions, although any such plan that purchased a fund's Class
A shares at a reduced sales charge under the group purchase privilege before
February 1, 1998, may continue to do so.
WAIVERS FOR INVESTMENTS FROM CERTAIN PAYMENTS. Class A shares may be
purchased without an initial sales charge or contingent deferred sales charge
(CDSC) by investors who reinvest within 365 days:
o Dividend and capital gain distributions from any Franklin Templeton Fund.
The distributions generally must be reinvested in the same share class.
Certain exceptions apply, however, to Class C shareholders who chose to
reinvest their distributions in Class A shares of a fund before November
17, 1997, and to Advisor Class or Class Z shareholders of a Franklin
Templeton Fund who may reinvest their distributions in a fund's Class A
shares. This waiver category also applies to Class B and C shares.
o Dividend or capital gain distributions from a real estate investment trust
(REIT) sponsored or advised by Franklin Properties, Inc.
o Annuity payments received under either an annuity option or from death
benefit proceeds, if the annuity contract offers as an investment option
the Franklin Valuemark Funds or the Templeton Variable Products Series
Fund. You should contact your tax advisor for information on any tax
consequences that may apply.
o Redemption proceeds from a repurchase of shares of Franklin Floating Rate
Trust, if the shares were continuously held for at least 12 months.
If you immediately placed your redemption proceeds
in a Franklin Bank CD or a Franklin Templeton money fund, you may reinvest
them as described above. The proceeds must be reinvested within 365 days
from the date the CD matures, including any rollover, or the date you
redeem your money fund shares.
o 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 CDSC when you redeemed your Class A shares from a Templeton
Global Strategy Fund, a new CDSC will apply to your purchase of fund shares
and the CDSC holding period will begin again. We will, however, credit your
fund account with additional shares based on the CDSC you previously 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.
o Distributions from an existing retirement plan invested in the Franklin
Templeton Funds
WAIVERS FOR CERTAIN INVESTORS. Class A shares also may be purchased without
an initial sales charge or CDSC by various individuals and institutions due
to anticipated economies in sales efforts and expenses, including:
o 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.
o Any state or local government or any instrumentality, department, authority
or agency thereof that has determined a fund is a legally permissible
investment and that can only buy fund shares without paying sales charges.
Please consult your legal and investment advisors to determine if an
investment in a fund is permissible and suitable for you and the effect, if
any, of payments by the fund on arbitrage rebate calculations.
o Broker-dealers, registered investment advisors or certified financial
planners who have entered into an agreement with Distributors for clients
participating in comprehensive fee programs
o Qualified registered investment advisors who buy through a broker-dealer or
service agent who has entered into an agreement with Distributors
o Registered securities dealers and their affiliates, for their investment
accounts only
o Current employees of securities dealers and their affiliates and their
family members, as allowed by the internal policies of their employer
o 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
o Any investor who is currently a Class Z shareholder of Franklin Mutual
Series Fund Inc. (Mutual Series), or who is a former Mutual Series Class Z
shareholder who had an account in any Mutual Series fund on October 31,
1996, or who sold his or her shares of Mutual Series Class Z within the
past 365 days
o Investment companies exchanging shares or selling assets pursuant to a
merger, acquisition or exchange offer
o Accounts managed by the Franklin Templeton Group
o Certain unit investment trusts and their holders reinvesting distributions
from the trusts
o Group annuity separate accounts offered to retirement plans
o Chilean retirement plans that meet the requirements described under
"Retirement plans" below
In addition, Class C shares may be purchased without an initial sales charge
by any investor who buys Class C shares through an omnibus account with
Merrill Lynch Pierce Fenner & Smith, Inc. A CDSC may apply, however, if the
shares are sold within 18 months of purchase.
RETIREMENT PLANS. Retirement plans sponsored by an employer (i) with at least
100 employees, or (ii) with retirement plan assets of $1 million or more, or
(iii) that agrees to invest at least $500,000 in the Franklin Templeton Funds
over a 13 month period may buy Class A shares without an initial sales
charge. Retirement plans that are not qualified retirement plans (employer
sponsored pension or profit-sharing plans that qualify under section 401 of
the Internal Revenue Code, including 401(k), money purchase pension, profit
sharing and defined benefit plans), SIMPLEs (savings incentive match plans
for employees) or SEPs (employer sponsored simplified employee pension plans
established under section 408(k) of the Internal Revenue Code) must also meet
the group purchase requirements described above to be able to buy Class A
shares without an initial sales charge. We may enter into a special
arrangement with a securities dealer, based on criteria established by the
funds, 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 CDSC 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.
SALES IN TAIWAN. Under agreements with certain banks in Taiwan, Republic of
China, the funds' 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.
The funds' Class A shares 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 A
shares may be offered with the following schedule of sales charges:
SIZE OF PURCHASE - U.S. DOLLARS SALES CHARGE (%)
- -----------------------------------------------------------------
Under $30,000 3.0
$30,000 but less than $50,000 2.5
$50,000 but less than $100,000 2.0
$100,000 but less than $200,000 1.5
$200,000 but less than $400,000 1.0
$400,000 or more 0
DEALER COMPENSATION 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.
Financial institutions or their affiliated brokers may receive an agency
transaction fee in the percentages indicated in the dealer compensation table
in the funds' prospectus.
Distributors may pay the following commissions, out of its own resources, to
securities dealers who initiate and are responsible for purchases of Class A
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 A shares by certain retirement plans
without an initial sales charge: 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 rules of the
National Association of Securities Dealers, Inc.
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. Those who have shown an interest in the Franklin
Templeton Funds, however, are more likely to be considered. To the extent
permitted by their firm's policies and procedures, registered
representatives' expenses in attending these meetings may be covered by
Distributors.
CONTINGENT DEFERRED SALES CHARGE (CDSC) If you invest $1 million or more in
Class A shares, either as a lump sum or through our cumulative quantity
discount or letter of intent programs, a CDSC may apply on any shares you
sell within 12 months of purchase. For Class C shares, a CDSC may apply if
you sell your shares within 18 months of purchase. The CDSC 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 A shares without an initial sales charge also may be
subject to a CDSC 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.
For Class B shares, there is a CDSC if you sell your shares within six years,
as described in the table below. The charge is based on the value of the
shares sold or the net asset value at the time of purchase, whichever is less.
IF YOU SELL YOUR CLASS B SHARES WITHIN THIS % IS DEDUCTED FROM
THIS MANY YEARS AFTER BUYING THEM YOUR PROCEEDS AS A CDSC
- ---------------------------------------------------------------------
1 Year 4
2 Years 4
3 Years 3
4 Years 3
5 Years 2
6 Years 1
7 Years 0
CDSC WAIVERS. The CDSC for any share class generally will be waived for:
o Account fees
o Sales of Class A shares purchased without an initial 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 of Class A shares by investors who purchased $1 million or more
without an initial sales charge if Distributors did not make any payment to
the securities dealer of record in connection with the purchase
o Redemptions by the funds 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 up to 1% monthly, 3%
quarterly, 6% semiannually or 12% annually of your account's net asset
value depending on the frequency of your plan
o Redemptions by Franklin Templeton Trust Company employee benefit plans or
employee benefit plans serviced by ValuSelect(R) (not applicable to Class
B)
o Distributions from individual retirement accounts (IRAs) due to death or
disability or upon periodic distributions based on life expectancy (for
Class B, this applies to all retirement plan accounts, not only IRAs)
o Returns of excess contributions (and earnings, if applicable) from
retirement plan accounts
o Participant initiated distributions from employee benefit plans or
participant initiated exchanges among investment choices in employee
benefit plans (not applicable to Class B)
EXCHANGE PRIVILEGE If you request the exchange of the total value of your
account, declared but unpaid income dividends and capital gain distributions
will be reinvested in the fund and exchanged into the new fund at net asset
value when paid. Backup withholding and information reporting may apply.
If a substantial number of shareholders should, within a short period, sell
their fund shares under the exchange privilege, a 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 each 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 goals exist immediately. This money will then be withdrawn from
the short-term, interest-bearing 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 seventh day following the sale. The funds you are
seeking to exchange into may delay issuing shares pursuant to an exchange
until that seventh 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.
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. There are no service charges
for establishing or maintaining a systematic withdrawal plan. Once your plan
is established, any distributions paid by the fund will be automatically
reinvested in your account.
Payments under the plan will be made from the redemption of an equivalent
amount of shares in your account, generally on the 25th day of the month in
which a payment is scheduled. If the 25th falls on a weekend or holiday, we
will process the redemption on the next business day. 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 also
may be subject to a CDSC.
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.
You may discontinue a systematic withdrawal plan, change the amount and
schedule of withdrawal payments, or suspend one payment by notifying us by
mail or by phone at least seven business days before the end of the month
preceding a scheduled payment. The funds 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.
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 funds do 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.
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.
GENERAL INFORMATION If dividend checks are returned to a 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 funds
nor their affiliates will be liable for any loss caused by your failure to
cash such checks. The funds are 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.
The wiring of redemption proceeds is a special service that we make available
whenever possible. By offering this service to you, the funds are not bound
to meet any redemption request in less than the seven day period prescribed
by law. Neither the funds nor their agents shall be liable to you or any
other person if, for any reason, a redemption request by wire is not
processed as described in the prospectus.
Franklin Templeton Investor Services, Inc. (Investor Services) may pay
certain financial institutions that maintain omnibus accounts with the funds
on behalf of numerous beneficial owners for recordkeeping operations
performed with respect to such owners. For each beneficial owner in the
omnibus account, a fund may reimburse Investor Services an amount not to
exceed the per account fee that the fund normally pays Investor Services.
These financial institutions also may charge a fee for their services
directly to their clients.
If you buy or sell shares through your securities dealer, we use the net
asset value next calculated after your securities dealer receives your
request, which is promptly transmitted to the fund. 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. 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. Any loss to you resulting
from your dealer's failure to transmit your redemption order to the fund in a
timely fashion must be settled between you and your securities dealer.
Certain shareholder servicing agents may be authorized to accept your
transaction request.
For institutional accounts, there may be additional methods of buying or
selling fund shares than those described in this SAI or in the prospectus.
In the event of disputes involving multiple claims of ownership or authority
to control your account, each 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.
PRICING SHARES
When you buy shares, you pay the offering price. The offering price is the
net asset value (NAV) per share plus any applicable sales charge, calculated
to two decimal places using standard rounding criteria. When you sell shares,
you receive the NAV minus any applicable CDSC.
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.
The funds calculate the NAV per share of each class each business day at the
close of trading on the New York Stock Exchange (normally 1:00 p.m. pacific
time). The funds do not calculate the NAV on days the New York Stock Exchange
(NYSE) is closed for trading, which include New Year's Day, Martin Luther
King Jr. Day, Presidents' Day, Good Friday, Memorial Day, Independence Day,
Labor Day, Thanksgiving Day and Christmas Day.
When determining its NAV, each fund values cash and receivables at their
realizable amounts, and records interest as accrued and dividends on the
ex-dividend date. If market quotations are readily available for portfolio
securities listed on a securities exchange or on the NASDAQ National Market
System, each fund values those securities at the last quoted sale price of
the day or, if there is no reported sale, within the range of the most recent
quoted bid and ask prices. Each fund values over-the-counter portfolio
securities within the range of the most recent quoted bid and ask prices. If
portfolio securities trade both in the over-the-counter market and on a stock
exchange, each fund values them according to the broadest and most
representative market as determined by
the manager.
Each fund values portfolio securities underlying actively traded call options
at their market price as determined above. The current market value of any
option the fund holds is its last sale price on the relevant exchange before
the fund values its assets. If there are no sales that day or if the last
sale price is outside the bid and ask prices, the fund values options within
the range of the current closing bid and ask prices if the fund believes the
valuation fairly reflects the contract's market value.
Trading in securities on European and Far Eastern securities exchanges and
over-the-counter markets is normally completed well before the close of
business of the NYSE on each day that the NYSE is open. Trading in European
or Far Eastern securities generally, or in a particular country or countries,
may not take place on every NYSE business day. Furthermore, trading takes
place in various foreign markets on days that are not business days for the
NYSE and on which the fund's NAV is not calculated. Thus, the calculation of
the fund's NAV does not take place contemporaneously with the determination
of the prices of many of the portfolio securities used in the calculation
and, if events materially affecting the values of these foreign securities
occur, the securities will be valued at fair value as determined by
management and approved in good faith 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 NAV 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 NAV. 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 funds may use a pricing service, bank or securities dealer to
perform any of the above described functions.
THE UNDERWRITER
Franklin Templeton Distributors, Inc. (Distributors) acts as the principal
underwriter in the continuous public offering of the funds' shares.
Distributors is located at 777 Mariners Island Blvd., San Mateo, CA 94404.
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. Each 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.
The table below shows the aggregate underwriting commissions Distributors
received in connection with the offering of the funds' shares, the net
underwriting discounts and commissions Distributors retained after allowances
to dealers, and the amounts Distributors received in connection with
redemptions or repurchases of shares for the last three fiscal years ended
December 31:
AMOUNT
RECEIVED IN
CONNECTION
WITH
TOTAL AMOUNT REDEMPTIONS
COMMISSIONS RETAINED BY AND
RECEIVED DISTRIBUTORS REPURCHASES
($) ($) ($)
- --------------------------------------------------------------------
1998
Beacon 7,985,594 421,852 392,395
Financial Services 4,207,312 402,189 131,584
Qualified 7,306,966 141,818 279,352
Mutual Shares 25,798,746 1,026,189 986,303
Discovery 11,267,002 672,944 486,178
European 2,648,984 81,459 92,458
1997
Beacon 13,383,062 925,800 86,472
Financial Services 1 1,841,471 38,548 7,011
Qualified 9,911,540 443,102 40,761
Mutual Shares 25,274,695 1,489,247 102,161
Discovery 15,618,880 662,372 71,386
European 1,929,443 58,337 18,694
1996 2
Beacon 717,831 68,177 -0-
Financial Services n/a n/a n/a
Qualified 494,207 37,660 -0-
Mutual Shares 962,557 99,326 -0-
Discovery 710,492 41,905 -0-
European 152,732 - 3 -0-
1. For the period August 19, 1997 to December 31, 1997.
2. For the two-month period ended December 31, 1996.
3. For the two-month period ended December 31, 1996, European paid a net
amount of $1,291 to dealers.
Distributors may be entitled to reimbursement under the Rule 12b-1 plans, as
discussed below. Except as noted, Distributors received no other compensation
from the funds for acting as underwriter.
DISTRIBUTION AND SERVICE (12B-1) FEES Each class has a separate distribution
or "Rule 12b-1" plan. Under each plan, each fund shall pay or may 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.
The distribution and service (12b-1) fees charged to each class are based
only on the fees attributable to that particular class.
THE CLASS A PLAN. Payments by each fund under the Class A plan may not exceed
0.35% per year of Class A's average daily net assets, payable quarterly. Of
this amount, each 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.
THE CLASS B AND C PLANS. Under the Class B and C plans, each fund pays
Distributors up to 0.75% per year of the class's average daily net assets,
payable monthly, to pay Distributors or others for providing distribution and
related services and bearing certain expenses. All distribution expenses over
this amount will be borne by those who have incurred them. Each fund also may
pay a servicing fee of up to 0.25% per year of the class's average daily net
assets, payable quarterly. 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 expenses relating to each of the Class B and C plans are also used to pay
Distributors for advancing the commission costs to securities dealers with
respect to the initial sale of Class B and C shares. Further, the expenses
relating to the Class B plan may be used by Distributors to pay third party
financing entities that have provided financing to Distributors in connection
with advancing commission costs to securities dealers.
The Class A, B and C 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, the manager or Distributors or other parties on behalf of
the fund, the manager or Distributors make payments that are deemed to be for
the financing of any activity primarily intended to result in the sale of
fund shares within the context of Rule 12b-1 under the Investment Company Act
of 1940, as amended, 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 National Association of Securities Dealers, Inc.
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
noninterested members of the fund's board. The plans and any related
agreement may be terminated at any time, without penalty, by vote of a
majority of the noninterested 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 the manager
or by vote of a majority of the outstanding shares of the class. Distributors
or any dealer or other firm also may 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 noninterested board members, 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, 1998, Distributors' eligible
expenditures for advertising, printing, and payments to underwriters and
broker-dealers pursuant to the plans and the amounts the funds paid
Distributors under the plans were:
DISTRIBUTORS' AMOUNT
ELIGIBLE PAID BY THE
EXPENSES ($) FUND ($)
- ---------------------------------------------------------------
Beacon
Class A 3,359,810 3,290,086
Class C 5,467,147 4,816,118
Financial Services
Class A 789,951 556,658
Class C 1,689,652 1,058,630
Qualified
Class A 2,025,099 2,033,096
Class C 3,735,475 3,176,738
Mutual Shares
Class A 5,611,011 5,206,450
Class C 11,998,738 9,481,190
Discovery
Class A 3,582,991 3,165,116
Class C 7,126,592 5,586,320
European
Class A 729,891 567,837
Class C 1,191,631 890,040
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 a fund be accompanied by
certain standardized performance information computed as required by the SEC.
Average annual total return quotations used by the funds are based on the
standardized methods of computing performance mandated by the SEC. An
explanation of these and other methods used by the funds 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.
Before November 1, 1996, only a single class of fund shares was offered
without a sales charge and Rule 12b-1 expenses. Returns shown are a
restatement of the original class to include both the Rule 12b-1 fees and the
current sales charges applicable to each share class as though in effect from
the fund's inception.
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 initial 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 initial sales charge currently in effect.
When considering the average annual total return quotations, you should keep
in mind that the maximum initial sales charge reflected in each quotation is
a one time fee charged on all direct purchases, which will have its greatest
impact during the early stages of your investment. This charge will affect
actual performance less the longer you retain your investment in the fund.
The average annual total returns for the indicated periods ended December 31,
1998, were:
1 YEAR 5 YEARS 10 YEARS
- ---------------------------------------------------------------------
Class A
Beacon -3.85% 13.42% 13.40%
Financial Services 1 0.66% N/A N/A
Mutual Shares -5.75% 13.86% 13.14%
Qualified -5.62% 13.50% 13.17%
Discovery 2 -7.99% 13.15% N/A
European 3 -1.94% N/A N/A
1 YEAR 5 YEARS 10 YEARS
- ---------------------------------------------------------------------
Class B
Beacon -2.32% 13.78% 13.35%
Financial Services 1 2.12% N/A N/A
Mutual Shares -4.21% 14.21% 13.05%
Qualified -4.19% 13.84% 13.07%
Discovery 2 -6.57% 13.53% N/A
European 3 -0.32% N/A N/A
1 YEAR 5 YEARS 10 YEARS
- ---------------------------------------------------------------------
Class C
Beacon -0.52% 13.79% 13.09%
Financial Services 1 4.10% N/A N/A
Mutual Shares -2.43% 14.22% 12.79%
Qualified -2.45% 13.85% 12.81%
Discovery 2 -4.79% 13.54% N/A
European 3 1.61% N/A N/A
1. Financial Services commenced operations on August 19, 1997. The average
annual total return from inception was 17.57% for Class A, 19.27% for Class B
and 20.44% for Class C.
2. Discovery commenced operations on December 31, 1992. The average annual
total return from inception was 16.57% for Class A, 16.89% for Class B and
16.78% for Class C.
3. European commenced operations on July 3, 1996. The average annual total
return from inception was 13.66% for Class A, 14.78% for Class B and 15.30%
for Class C.
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 initial 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 cumulative total returns for the
indicated periods ended December 31, 1998, were:
1 YEAR 5 YEARS 10 YEARS
- ----------------------------------------------------------------------
Class A
Beacon -3.85% 87.70% 251.62%
Financial Services 1 0.66% N/A N/A
Mutual Shares -5.75% 91.38% 243.55%
Qualified -5.62% 88.39% 244.60%
Discovery 2 -7.99% 85.46% N/A
European 3 -1.94% N/A N/A
1 YEAR 5 YEARS 10 YEARS
- ----------------------------------------------------------------------
Class B
Beacon -2.32% 90.66% 250.15%
Financial Services 1 2.12% N/A N/A
Mutual Shares -4.21% 94.36% 240.92%
Qualified -4.19% 91.17% 241.68%
Discovery 2 -6.57% 88.62% N/A
European 3 -0.32% N/A N/A
1 YEAR 5 YEARS 10 YEARS
- ----------------------------------------------------------------------
Class C
Beacon -0.52% 90.74% 242.11%
Financial Services 1 4.10% N/A N/A
Mutual Shares -2.43% 94.39% 233.32%
Qualified -2.45% 91.25% 233.84%
Discovery 2 -4.79% 88.67% N/A
European 3 1.61% N/A N/A
1. Financial Services commenced operations on August 19, 1997. The cumulative
total return from inception was 24.76% for Class A, 27.24% for Class B and
28.95% for Class C.
2. Discovery commenced operations on December 31, 1992. The cumulative total
return from inception was 150.97% for Class A, 155.15% for Class B and
153.61% for Class C.
3. European commenced operations on July 3, 1996. The cumulative total return
from inception was 37.64% for Class A, 41.06% for Class B and 42.67% for
Class C.
VOLATILITY Occasionally statistics may be used to show a fund's volatility or
risk. Measures of volatility or risk are generally used to compare a 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 funds also may quote the performance of
shares without a sales charge. Sales literature and advertising may quote a
cumulative total return, average annual total return and other measures of
performance with the substitution of net asset value for the public offering
price.
Sales literature referring to the use of the funds as a potential investment
for 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 funds may include in their advertising or sales material information
relating to investment goals and performance results of funds belonging to
the Franklin Templeton Group of Funds. Franklin Resources, Inc. 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 funds may
satisfy your investment goal, advertisements and other materials about the
funds may discuss certain measures of fund performance as reported by various
financial publications. Materials also may 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:
o Dow Jones(R) Composite Average and its component averages - a
price-weighted average of 65 stocks that trade on the New York Stock
Exchange. The average is a combination of the Dow Jones Industrial Average
(30 blue-chip stocks that are generally leaders in their industry), the Dow
Jones Transportation Average (20 transportation stocks), and the Dow Jones
Utilities Average (15 utility stocks involved in the production of
electrical energy).
o Standard & Poor's(R) 500 Stock Index or its component indices - a
capitalization-weighted index designed to measure performance of the broad
domestic economy through changes in the aggregate market value of 500
stocks representing all major industries.
o The New York Stock Exchange composite or component indices - an unmanaged
index of all industrial, utilities, transportation, and finance stocks
listed on the NYSE.
o 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.
o Lipper - Mutual Fund Performance Analysis and Lipper - Equity 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.
o 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.
o Mutual Fund Source Book, published by Morningstar, Inc. - analyzes price,
yield, risk, and total return for mutual funds.
o 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.
o 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.
o 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.
o Savings and Loan Historical Interest Rates - as published in the U.S.
Savings & Loan League Fact Book.
o 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.
o 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.
o Lehman Brothers Aggregate Bond Index or its component indices - measures
yield, price and total return for Treasury, agency, corporate, mortgage and
Yankee bonds.
o 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 funds may include a
discussion of certain attributes or benefits to be derived from an investment
in the funds. 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 also may compare the funds' performance to the
return on certificates of deposit (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 a
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 funds' 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 funds to calculate their figures. In
addition, there can be no assurance that the funds will continue their
performance as compared to these other averages.
MISCELLANEOUS INFORMATION
The funds 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 a fund cannot guarantee that these goals will be met.
Each 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 is one of
the oldest mutual fund organizations and now services more than 4 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 $216 billion in assets under management for
more than 7 million U.S. based mutual fund shareholder and other accounts.
The Franklin Templeton Group of Funds offers 114 U.S. based open-end
investment companies to the public. Each fund may identify itself by its
NASDAQ symbol or CUSIP number.
Currently, there are more mutual funds than there are stocks listed on the
New York Stock Exchange. While many of them have similar investment goals, no
two are exactly alike. Shares of the funds are generally sold through
securities dealers, whose investment representatives are experienced
professionals who can offer advice on the type of investments suitable to
your unique goals and needs, as well as the risks associated with such
investments.
The Information Services & Technology division of Franklin Resources, Inc.
(Resources) established a Year 2000 Project Team in 1996. This team has
already begun making necessary software changes to help the computer systems
that service the fund and its shareholders to be Year 2000 compliant. After
completing these modifications, comprehensive tests are conducted in one of
Resources' U.S. test labs to verify their effectiveness. Resources continues
to seek reasonable assurances from all major hardware, software or
data-services suppliers that they will be Year 2000 compliant on a timely
basis. Resources is also beginning to develop a contingency plan, including
identification of those mission critical systems for which it is practical to
develop a contingency plan. However, in an operation as complex and
geographically distributed as Resources' business, the alternatives to use of
normal systems, especially mission critical systems, or supplies of
electricity or long distance voice and data lines are limited.
