As filed with the Securities and Exchange Commission on March 2, 1999
File Nos.
33-18516
811-5387
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Pre-Effective Amendment No. _____
Post-Effective Amendment No 27 (X)
and/or
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1940
Amendment No. 28 (X)
FRANKLIN MUTUAL SERIES FUND INC.
(Exact Name of Registrant as Specified in Charter)
51 JOHN F. KENNEDY PARKWAY, SHORT HILLS, NJ 07078
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code (201)912-2100
DEBORAH R. GATZEK, 777 MARINERS ISLAND BLVD., SAN MATEO, CA 94403
(Name and Address of Agent for Service of Process)
Approximate Date of Proposed Public Offering:
It is proposed that this filing will become effective on (check appropriate
box)
[ ] immediately upon filing pursuant to paragraph b
[ ] on (date) pursuant to paragraph b
[ ] 60 days after filing pursuant to paragraph (a)(1)
[x] on May 1, 1999 pursuant to paragraph (a) (1)
[ ] 75 days after filing pursuant to paragraph (a)(2)
[ ] on (date) pursuant to paragraph (a)(2) of Rule 485
If appropriate, check the following box:
[ ] This post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
Title of Securities Being Registered:
Common Stock of:
Mutual Shares Fund - Class 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 Financial Services Fund - Class A
Mutual Financial Services Fund - Class B
Mutual Financial Services Fund - Class C
Mutual Financial Services 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
Prospectus
FRANKLIN MUTUAL SERIES FUND INC.
INVESTMENT STRATEGY
GROWTH & INCOME o VALUE MUTUAL BEACON FUND
MUTUAL FINANCIAL SERVICES FUND
MUTUAL QUALIFIED FUND
MUTUAL SHARES FUND
GLOBAL o VALUE MUTUAL DISCOVERY FUND
MUTUAL EUROPEAN FUND
CLASS A, B & C
MAY 1, 1999
[Insert Franklin Templeton Ben Head]
[Insert Franklin Templeton Ben Head]
LIKE ALL MUTUAL FUND SHARES, THE SEC HAS NOT APPROVED OR DISAPPROVED THESE
SECURITIES OR PASSED UPON THE ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
CONTENTS
THE FUNDS
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INFORMATION ABOUT EACH FUND YOU SHOULD KNOW BEFORE INVESTING
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[insert page #] Mutual Beacon Fund
[insert page #] Mutual Financial Services Fund
[insert page #] Mutual Qualified Fund
[insert page #] Mutual Shares Fund
[insert page #] Mutual Discovery Fund
[insert page #] Mutual European Fund
[insert page #] Management
[insert page #] Distributions and Taxes
YOUR ACCOUNT
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INFORMATION ABOUT SALES CHARGES, ACCOUNT TRANSACTIONS AND SERVICES
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[insert page #] Choosing a Share Class
[insert page #] Buying Shares
[insert page #] Investor Services
[insert page #] Selling Shares
[insert page #] Account Policies
[insert page #] Questions
FOR MORE INFORMATION
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WHERE TO LEARN MORE ABOUT EACH FUND
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Back Cover
MUTUAL BEACON FUND
[Insert graphic of bullseye and arrows] GOALS AND STRATEGIES
GOALS The fund's investment goal is capital appreciation, which may
occasionally be short-term. Its secondary goal is income.
PRINCIPAL INVESTMENTS The fund will primarily invest in domestic and foreign
equity securities. Equity securities generally entitle the holder to
participate in a company's general operating results. These include common
stocks, preferred stocks and convertible securities.
The fund invests primarily in the securities of companies with market
capitalization values (share price times the number of common stock shares
outstanding) of more than $1.5 billion. The fund may invest a portion of its
assets in the securities of domestic or foreign companies involved in
mergers, consolidations, liquidations, reorganizations or financial
restructurings (Reorganizing Companies), or as to which there are outstanding
tender or exchange offers. Investments in Reorganizing Companies may, but
are not expected to, exceed 50% of the fund's assets.
The fund may invest a significant portion of its assets in foreign equity
securities. The fund tends to invest in foreign securities to a greater
extent than either Mutual Shares Fund or Mutual Qualified Fund. To hedge
(protect) against currency exchange rate fluctuations, the fund enters into
forward foreign currency exchange contracts to the extent that hedging is
available and, in the manager's opinion, it is economical to do so. A
forward foreign currency exchange contract is an agreement to buy or sell a
specific currency at a future date and at a price set at the time of the
contract. Forward foreign currency exchange contracts may reduce the risk of
loss from a change in value of a currency, but they also limit any potential
gains and do not protect against fluctuations in the value of the underlying
position.
The fund invests to a lesser extent in domestic and foreign debt securities.
Debt securities represent an obligation of the issuer to repay a loan of
money to it, and generally provide for the payment of interest. These include
bonds, including those convertible into common stock, notes and debentures.
The fund may invest in debt securities rated in any rating category
established by an independent rating organization, including lower rated or
defaulted debt securities ("junk bonds"), or in unrated debt securities. The
Fund typically invests in unrated debt securities of Reorganizing Companies.
The fund may invest in the direct indebtedness, or participation interests in
the indebtedness, of Reorganizing Companies. 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 direct
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.
Participation interests in indebtedness represent fractional interests in a
company's indebtedness. The financial institutions which typically make
participations available are banks or insurance companies or governmental
institutions or 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 fund may also purchase trade claims and other direct obligations or
claims (Trade Claims) of Reorganizing Companies. Trade Claims generally are
purchased from creditors of Reorganizing Companies, and represent money due
to a supplier of goods or services to the Reorganizing Company.
While the fund generally purchases securities for investment purposes and not
for the purpose of influencing or controlling management of a company, the
manager may use the fund's ownership interest in a company to seek to
influence or control management when the manager perceives a benefit. The
fund may invest in entities whose business is to acquire securities of
companies for the purpose of influencing or controlling management or with
the expectation of taking over such companies. The fund also may invest in
the securities of a particular company which the manager believes may be an
attractive company to be taken over by another entity.
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The fund invests primarily in equity securities that the manager believes are
available at prices less than their actual value based on certain recognized
objective criteria (intrinsic value).
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PORTFOLIO SELECTION In choosing investments for the fund, the manager bases
its opinions upon the analysis and research of certain factors, including:
the relationship of a security's book value to market value; cash flow; and
multiples of earnings of comparable securities. Each security is examined
separately and there is no set criteria as to the size of an issuer, its
earnings or the industry in which it operates. Debt securities are generally
selected based on the manager's opinion that the securities are available at
less than their intrinsic value, and the manager's own analysis of the
security has greater influence over the investment decision than the coupon
rate or rating of the security.
TEMPORARY INVESTMENTS The manager may take a temporary defensive position
when it believes the markets or the economy are experiencing excessive
volatility or a prolonged general decline, or other adverse conditions exist.
Under these circumstances, the fund may be unable to pursue its investment
goals because it may not invest or may invest less in equity and debt
securities that the manager believes are available at prices less than their
intrinsic value.
[Insert graphic of chart with line going up and down] MAIN RISKS
VALUE INVESTING The fund's general policy of investing in securities that
the manager believes are available at prices less than their intrinsic value
differs from the approach followed by many other managers, and may result in
the fund choosing securities that are not widely followed by other
investors. There is always the possibility that the manager may be incorrect
in its assessment of a particular company or that the manager may not buy
these securities at their lowest possible price or sell them at their highest.
[Begin callout]
Because the stocks the fund holds fluctuate in price with market conditions,
the value of your investment in the fund will go up and down. This means you
could lose money over short or even extended periods.
[End callout]
STOCKS While stocks have historically outperformed other asset classes over
the long term, they tend to go up and down more dramatically over the shorter
term. These price movements may result from factors affecting individual
companies, industries or the securities market as a whole.
REORGANIZING COMPANIES There can be no assurance that any merger,
consolidation, liquidation, reorganization or tender or exchange offer
proposed at the time the fund makes its investment in a Reorganizing Company
will be consummated or will be consummated on the terms and within the time
period contemplated and, therefore, that the fund's performance will benefit
from its investment in a Reorganizing Company. Debt securities of
Reorganizing Companies typically are unrated, lower rated, in default or
close to default.
FOREIGN SECURITIES Securities of companies and governments located outside
the U.S. may involve risks that can increase the potential for losses in the
fund.
COUNTRY. General securities market movements in any country where the fund
has investments are likely to affect the value of the securities the fund
owns which trade in that country. These movements will affect the fund's
share price and fund performance.
The political, economic and social structures of some countries the fund
invests in may be less stable and more volatile than those in the U.S. The
risks of investing in these countries include the possibility of the
imposition of exchange controls, currency devaluations, foreign ownership
limitations, expropriation, restrictions on removal of currency or other
assets, nationalization of assets, punitive taxes and certain custody and
settlement risks.
The fund's investments in developing or emerging markets are subject to all
of the risks of foreign investing generally, and have additional heightened
risks due to a lack of established legal, business and social frameworks to
support securities markets. Foreign securities markets, including emerging
markets, may have substantially lower trading volumes than U.S. markets,
resulting in less liquidity and more volatility than experienced in the U.S.
While short-term volatility in these markets can be disconcerting, declines
in excess of 50% are not unusual.
COMPANY. Foreign companies are not subject to the same disclosure,
accounting, auditing and financial reporting standards and practices as U.S.
companies and their securities may not be as liquid as securities of similar
U.S. companies. Foreign stock exchanges, trading systems, brokers and
companies generally have less government supervision and regulation than in
the U.S. The fund may have greater difficulty voting proxies, exercising
shareholder rights, pursuing legal remedies and obtaining judgments with
respect to foreign investments in foreign courts than with respect to U.S.
companies in U.S. courts.
CURRENCY. To the extent the fund's investments are denominated in foreign
currencies, changes in foreign currency exchange rates will affect the value
of what the fund owns and the fund's share price. Generally, when the U.S.
dollar rises in value against a foreign currency, an investment in that
country loses value because the currency is worth fewer U.S. dollars.
Devaluation of a currency by a country's government or banking authority also
will have a significant impact on the value of any securities denominated in
that currency. Currency markets generally are not regulated as securities
markets.
EURO. On January 1, 1999, the European Monetary Union (EMU) introduced a new
single currency, the euro, which replaced the national currency for the
eleven participating member countries. If the fund holds investments in
countries with currencies replaced by the euro, the investment process,
including trading, foreign exchange, payments, settlements, cash accounts,
custody and accounting will be impacted.
Because this change to a single currency is new and untested, the
establishment of the euro may result in market volatility. For the same
reason, it is not possible to predict the impact of the euro on the business
or financial condition of European issuers which the fund may hold in its
portfolio, and their impact on the value of fund shares and fund performance.
To the extent the fund holds non-U.S. dollar (euro or other) denominated
securities, it will still be exposed to currency risk due to fluctuations in
those currencies versus the U.S. dollar.
DERIVATIVE SECURITIES Forward foreign currency exchange contracts are
considered derivative investments, since their value depends on the value of
an underlying asset. The fund's investment in derivatives may involve a
small investment relative to the amount of risk assumed. The fund can incur
a loss in these transactions due to the imposition of controls by a foreign
or the U.S. government on the exchange of foreign currencies or the inability
to deliver or receive a foreign currency. The success of forward foreign
currency exchange contracts will depend on the manager's ability to predict
market movements. Losses resulting from the use of forward foreign currency
exchange contracts can reduce the fund's share price, and possibly income,
and such losses can be greater than if the contract had not been entered into
by the fund.
INDEBTEDNESS, PARTICIPATIONS AND TRADE CLAIMS The purchase of indebtedness
of a troubled company always involves a risk as to the creditworthiness of
the issuer and the possibility that the investment may be lost. There are no
established markets for indebtedness and, thus, it is less liquid than
securities that are heavily traded. Typically, purchasers of participations,
such as the fund, must rely on the financial institution issuing the
participation to assert any rights against the borrower with respect to the
underlying indebtedness. When a fund purchases a participation, it takes on
the risk associated with the financial soundness of the bank or other
financial intermediary issuing the participation, as well as the credit risk
associated with the financial soundness of the issuer of the underlying
indebtedness. When a fund purchases a Trade Claim, there is no guarantee
that the debtor will ever be able to satisfy the obligation on the Trade
Claim.
CREDIT This is the possibility that an issuer will be unable to make
interest payments or repay principal. Changes in an issuer's financial
strength or in a security's credit rating may affect its value and, thus,
impact the value of fund shares.
Securities rated below investment grade, sometimes called "junk bonds" or
"high yield debt securities," generally have more risk than higher-rated
securities. The principal risks of investing in these securities include:
o SUBSTANTIAL CREDIT RISK. Companies issuing high yield 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.
o DEFAULTED DEBT RISK. 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.
o VOLATILITY RISK. The prices of high yield debt securities fluctuate more
than higher-quality securities. Prices are especially sensitive to
developments affecting the company's business and to changes in the
ratings assigned by ratings organizations. 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.
ILLIQUID SECURITIES The fund may invest up to 15% of its net assets in
illiquid securities. Illiquid securities are securities with a limited
trading market. Investments by the fund in illiquid securities involve the
possibility that the securities cannot be readily sold or can only be resold
at a price significantly lower than their value, which may have a negative
effect on the value of the fund's shares.
YEAR 2000 When evaluating current and potential portfolio positions, Year
2000 is one of the factors the fund's manager considers.
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Mutual fund shares are not deposits or obligations of, or guaranteed or
endorsed by, any bank, and are not federally insured by the Federal Deposit
Insurance Corporation, the Federal Reserve Board, or any other agency of the
U.S. government. Mutual fund shares involve investment risks, including the
possible loss of principal.
[End callout]
The manager will rely upon public filings and other statements made by
companies about their Year 2000 readiness. Issuers in countries outside the
U.S., particularly in emerging markets, may not be required to make the same
level of disclosure about Year 2000 readiness as is required in the U.S. The
manager, of course, cannot audit each company and its major suppliers to
verify their Year 2000 readiness.
If a company in which the fund is invested is adversely affected by Year 2000
problems, it is likely that the price of its security will also be adversely
affected. A decrease in the value of one or more of the fund's portfolio
holdings will have a similar impact on the price of the fund's shares and the
fund's performance. Please see page ___ for more information.
More detailed information about the fund, its policies, including temporary
investments, risks and the bond ratings can be found in the fund's Statement
of Additional Information (SAI).
[Insert graphic of a bull and a bear] PERFORMANCE
This bar chart and table show the volatility of the fund's returns, which is
one indicator of the risks of investing in the fund. The bar chart shows
changes in the fund's returns from year to year over the past 10 calendar
years. The table shows how the fund's average annual total returns compare to
those of a broad-based securities market index. Of course, past performance
cannot predict or guarantee future results.
CLASS A ANNUAL TOTAL RETURNS1
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16.72% -8.57% 17.08% 22.42% 22.42% 5.20% 25.43% 20.74% 22.55% 2.02%
89 90 91 92 93 94 95 96 97 98
YEAR
[Begin callout]
BEST QUARTER:
Q4 '98 12.57%
WORST QUARTER:
Q3 '98 -17.67%
[End callout]
AVERAGE ANNUAL TOTAL RETURNS
For the periods ended December 31, 1998
1 YEAR 5 YEARS 10 YEARS
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Mutual Beacon Fund - Class A2 -3.85% 13.42% 13.40%
S&P 500(R)Index3 28.58% 24.06% 19.21%
1 YEAR 5 YEARS 10 YEARS
- --------------------------------------------------------------------------
Mutual Beacon Fund - Class B2 -2.32% 13.78% 13.35%
S&P 500(R)Index3 28.58% 24.06% 19.21%
1 YEAR 5 YEARS 10 YEARS
- --------------------------------------------------------------------------
Mutual Beacon Fund - Class C2 -0.52% 13.79% 13.09%
S&P 500(R)Index3 28.58% 24.06% 19.21%
1. Figures do not reflect sales charges. If they did, returns would be lower.
2. Figures reflect sales charges.
Before November 1, 1996, only a single class of fund shares was offered
without a sales charge and Rule 12b-1 fees. All fund returns shown reflect a
restatement of the original class to include the Rule 12b-1 fees as though in
effect from the fund's inception and assume reinvestment of dividends and
capital gains.
3. Source: Standard & Poor's(R) Micropal. The S&P 500(R) Index is an unmanaged
group of widely held common stocks covering a variety of industries. It
includes reinvested dividends. One cannot invest directly in an index, nor is
an index representative of the fund's portfolio.
[Insert graphic of percentage sign] FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and
hold shares of the fund.
SHAREHOLDER FEES (FEES PAID DIRECTLY FROM YOUR INVESTMENT)
CLASS A 1 CLASS B 2 CLASS C 1
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Maximum sales charge (load) as a
percentage of offering price % 4.00% 1.99%
Load imposed on purchases 5.75% None 1.00%
Maximum deferred sales charge (load) None3 4.00% 0.99%4
Exchange fee None None None
Please see "Choosing a Share Class" on page [#] for an explanation of how and
when these sales charges apply.
ANNUAL FUND OPERATING EXPENSES (EXPENSES DEDUCTED FROM FUND ASSETS)
CLASS A 1 CLASS B 2 CLASS C 1
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Management fees 5 0.60% 0.60% 0.60%
Distribution and service
(12b-1) fees 6 0.35% 1.00% 1.00%
Other expenses 0.19% 0.19% 0.19%
------------------------------------
Total annual fund operating expenses5 1.14% 1.79% 1.79%
====================================
1. Before January 1, 1999, Class A shares were designated Class I and Class C
shares were designated Class II.
2. The fund began offering Class B shares on January 1, 1999. Annual fund
operating expenses are based on the expenses for Class A and C for the fiscal
year ended December 31, 1998. The distribution and service (12b-1) fees are
based on the maximum fees allowed under Class B's Rule 12b-1 plan.
3. Except for investments of $1 million or more (see page [#])and purchases
by certain retirement plans without an initial sales charge.
4. This is equivalent to a charge of 1% based on net asset value.
5. For the fiscal year ended December 31, 1998, the manager had agreed in
advance to limit its management fees. With this reduction, management fees
were 0.57% and total annual fund operating expenses were 1.11% for Class A
and 1.76% for Class C. After October 31, 1999, the manager may end this
arrangement at any time.
6. Because of the distribution and service (12b-1) fees, over the long term
you may indirectly pay more than the equivalent of the maximum permitted
initial sales charge.
EXAMPLE
This example can help you compare the cost of investing in the fund with the
cost of investing in other mutual funds.
The example assumes you invest $10,000 for the periods shown and then sell
all of your shares at the end of those periods. The example also assumes your
investment has a 5% return each year and the fund's operating expenses remain
the same. Although your actual costs may be higher or lower, based on these
assumptions your costs would be:
1 YEAR 3 YEARS 5 YEARS 10 YEARS
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CLASS A $685 1 $916 $1,167 $1,881
CLASS B
Assuming you sold your shares
at the end of the period $582 $863 $1,170 $1,938 2
Assuming you stayed in the fund
$182 $563 $ 970 $1,938 2
CLASS C $378 3 $658 $1,060 $2,184
1. Assumes a contingent deferred sales charge (CDSC) will not apply.
2. Assumes conversion of Class B shares to Class A shares after eight years,
lowering your annual expenses from that time on.
3. For the same Class C investment, your costs would be $280 if you did not
sell your shares at the end of the first year. Your costs for the remaining
periods would be the same.
[Insert graphic of a dollar bill] FINANCIAL HIGHLIGHTS
This table presents the fund's financial performance for the past three
years. This information has been audited by Ernst & Young LLP.
CLASS A YEAR ENDED DECEMBER 31,
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1998 2 1997 2 1996 1
- -------------------------------------------------------------------------
PER SHARE DATA3 ($)
Net asset value,
beginning of year 14.09 12.98 13.21
---------------------------------
Net investment income .27 .23 .16
Net realized and unrealized
gains -- 2.65 .69
---------------------------------
Total from investment operations .27 2.88 .85
---------------------------------
Dividends from net
investment income (.40) (.51) (.33)
Distributions from net
realized gains (.87) (1.26) (.75)
---------------------------------
Total distributions (1.27) (1.77) (1.08)
---------------------------------
Net asset value, end of year 13.09 14.09 12.98
=================================
Total return (%)4 2.02 22.52 6.51
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year
($ x 1,000) 947,444 753,519 52,070
Ratios to average net
assets: (%)
Expenses 1.11 1.09 1.03 5
Expenses excluding waiver and
payments by affiliate 1.14 1.12 1.13 5
Net investment income 1.89 1.58 1.33 5
Portfolio turnover rate (%) 65.27 54.72 66.87
CLASS C
- -------------------------------------------------------------------------
PER SHARE DATA3 ($)
Net asset value,
beginning of year 14.04 12.98 13.21
---------------------------------
Net investment income .18 .14 .13
Net realized and unrealized
gains .01 2.63 .71
---------------------------------
Total from investment operations .19 2.77 .84
Dividends from net
investment income (.32) (.45) (.32)
Distributions from net
realized gains (.87) (1.26) (.75)
---------------------------------
Total distributions (1.19) (1.71) (1.07)
---------------------------------
Net asset value, end of year 13.04 14.04 12.98
=================================
Total return (%)4 1.40 21.65 6.45
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year
($ x 1,000) 500,404 362,425 16,263
Ratios to average net
assets: (%)
Expenses 1.76 1.74 1.75 5
Expenses excluding waiver and
payments by affiliate 1.79 1.77 1.85 5
Net investment income 1.24 .92 .84 5
Portfolio turnover rate (%) 65.27 54.72 66.87
1. For the period November 1, 1996 (effective date) to December 31, 1996.
2. Based on average weighted shares outstanding.
3. Per share amounts for the period ended December 31, 1996, have been
restated to reflect a 3-for-1 stock split effective February 3, 1997.
4. Total return does not include sales charges, and is not annualized.
5. Annualized.
MUTUAL FINANCIAL SERVICES FUND
[Insert graphic of bullseye and arrows] GOALS AND STRATEGIES
GOALS The fund's investment goal is capital appreciation, which may
occasionally be short-term. Its secondary goal is income.
PRINCIPAL INVESTMENTS The fund will primarily invest in domestic and foreign
equity securities. Equity securities generally entitle the holder to
participate in a company's general operating results. These include common
stocks, preferred stocks and convertible securities.
The fund concentrates its investments in the financial services industry by
investing more than 25% of its total assets in that industry. Normally, the
fund will invest at least 65% of its total assets in securities issued by
financial services companies. Financial services companies are companies
which, in the manager's view, derive at least 50% of their assets or revenues
from the creation, purchase and sale of financial instruments. These
companies include banks, savings and loan organizations, credit card
companies, brokerage firms, finance companies, sub-prime lending
institutions, investment advisers, investment companies and insurance
companies.
Because many companies in the financial services industry are smaller
capitalization companies, the fund invests up to 50% of its assets in the
securities of companies with market capitalization values (share price times
the number of common stock shares outstanding) of $1.5 billion or less. The
fund may invest a portion of its assets in the securities of domestic or
foreign companies involved in mergers, consolidations, liquidations,
reorganizations or financial restructurings (Reorganizing Companies), or as
to which there are outstanding tender or exchange offers. Investments in
Reorganizing Companies may, but are not expected to, exceed 50% of the fund's
assets.
The fund may also invest a significant portion of its assets in foreign
equity securities. To hedge (protect) against currency exchange rate
fluctuations, the fund enters into forward foreign currency exchange
contracts to the extent that hedging is available and, in the manager's
opinion, it is economical to do so. A forward foreign currency exchange
contract is an agreement to buy or sell a specific currency at a future date
and at a price set at the time of the contract. Forward foreign currency
exchange contracts may reduce the risk of loss from a change in value of a
currency, but they also limit any potential gains and do not protect against
fluctuations in the value of the underlying position.
The fund invests to a lesser extent in domestic and foreign debt securities.
Debt securities represent an obligation of the issuer to repay a loan of
money to it, and generally provide for the payment of interest. These include
bonds, including those convertible into common stock, notes and debentures.
The fund may invest in debt securities rated in any rating category
established by an independent rating organization, including lower rated or
defaulted debt securities ("junk bonds"), or in unrated debt securities. The
fund typically invests in unrated debt securities of Reorganizing Companies.
The fund may invest in the direct indebtedness, or participation interests in
the indebtedness, of Reorganizing Companies. 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 direct
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.
Participation interests in indebtedness represent fractional interests in a
company's indebtedness. The financial institutions which typically make
participations available are banks or insurance companies or governmental
institutions or 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 fund may also purchase trade claims and other direct obligations or
claims (Trade Claims) of Reorganizing Companies. Trade Claims generally are
purchased from creditors of Reorganizing Companies, and represent money due
to a supplier of goods or services to the Reorganizing Company.
While the fund generally purchases securities for investment purposes and not
for the purpose of influencing or controlling management of a company, the
manager may use the fund's ownership interest in a company to seek to
influence or control management when the manager perceives a benefit. The
fund may invest in entities whose business is to acquire securities of
companies for the purpose of influencing or controlling management or with
the expectation of taking over such companies. The fund also may invest in
the securities of a particular company which the manager believes may be an
attractive company to be taken over by another entity.
[Begin callout]
The fund invests primarily in financial services companies such as banks,
savings and loans, credit card, brokerage, investment adviser, investment and
insurance companies.
[End callout]
PORTFOLIO SELECTION The Fund invests primarily in equity and debt securities
that the manager believes are available at prices less than their actual
value based on certain recognized objective criteria (intrinsic value). In
choosing investments for the fund, the manager bases its opinions upon the
analysis and research of certain factors, including: the relationship of a
security's book value to market value; cash flow; and multiples of earnings
of comparable securities. Each security is examined separately and there is
no set criteria as to the size of an issuer, its earnings or the industry in
which it operates. Debt securities are generally selected based on the
manager's opinion that the securities are available at less than their
intrinsic value, and the manager's own analysis of the security has greater
influence over the investment decision than the coupon rate or rating of the
security. The smaller companies in which the fund invests are not well known,
their securities may trade in the securities markets below their book values
and may not be followed by established securities analysts.
TEMPORARY INVESTMENTS The manager may take a temporary defensive position
when it believes the markets or the economy are experiencing excessive
volatility or a prolonged general decline, or other adverse conditions exist.
Under these circumstances, the fund may be unable to pursue its investment
goals because it may not invest or may invest less in financial services
companies and equity and debt securities that the manager believes are
available at prices less than their intrinsic value.
[Insert graphic of chart with line going up and down] MAIN RISKS
FINANCIAL SERVICES COMPANIES The fund concentrates its investments in the
financial service industry. As a result, general market and economic
conditions as well as other risks specific to the financial services industry
will impact the fund's investments and its performance.
Financial services companies are subject to extensive government regulation
which tends to limit both the amount and types of loans and other financial
commitments the company can make, and the interest rates and fees it can
charge. These limitations can have a significant impact on the profitability
of a financial services company since profitability is impacted by the
company's ability to make financial commitments such as loans.
Insurance companies in which the fund invests may also have an impact on the
fund's performance as insurers may be subject to severe price competition,
claims activity, marketing competition and general economic conditions.
Certain lines of insurance can be significantly influenced by specific
events. For example, property and casualty insurer profits may be affected
by certain weather catastrophes and other disasters; and life and health
insurer profits may be affected by mortality risks and morbidity rates.
Pending legislation, if enacted, will also likely have an impact on the
profitability of financial services companies and on the performance of the
fund. It would reduce the separation between commercial and investment
banking businesses and permit banks to expand their services. This expansion
could expose banks to increased competition from well-established
competitors.
The financial services industry is currently undergoing a number of changes
such as continuing consolidations, development of new products and structures
and changes to its regulatory framework. These changes are likely to have a
significant impact on the financial services industry and the fund.
VALUE INVESTING The fund's general policy of investing in securities that
the manager believes are available at prices less than their intrinsic value
differs from the approach followed by many other managers, and may result in
the fund choosing securities that are not widely followed by other
investors. There is always the possibility that the manager may be incorrect
in its assessment of a particular company or that the manager may not buy
these securities at their lowest possible price or sell them at their highest.
[Begin callout]
Because the stocks the fund holds fluctuate in price with market conditions,
the value of your investment in the fund will go up and down. This means you
could lose money over short or even extended periods.
[End callout]
STOCKS While stocks have historically outperformed other asset classes over
the long term, they tend to go up and down more dramatically over the shorter
term. These price movements may result from factors affecting individual
companies, industries or the securities market as a whole.
SMALLER COMPANIES Historically, smaller company securities 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, small 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.
Therefore, while smaller companies may offer greater opportunities for
capital growth than larger, more established companies, they also involve
greater risks and should be considered speculative.
REORGANIZING COMPANIES There can be no assurance that any merger,
consolidation, liquidation, reorganization or tender or exchange offer
proposed at the time the fund makes its investment in a Reorganizing Company
will be consummated or will be consummated on the terms and within the time
period contemplated and, therefore, that the fund's performance will benefit
from its investment in a Reorganizing Company. Debt securities of
Reorganizing Companies typically are unrated, lower rated, in default or
close to default.
FOREIGN SECURITIES Securities of companies and governments located outside
the U.S. may involve risks that can increase the potential for losses in the
fund.
COUNTRY. General securities market movements in any country where the fund
has investments are likely to affect the value of the securities the fund
owns which trade in that country. These movements will affect the fund's
share price and fund performance.
The political, economic and social structures of some countries the fund
invests in may be less stable and more volatile than those in the U.S. The
risks of investing in these countries include the possibility of the
imposition of exchange controls, currency devaluations, foreign ownership
limitations, expropriation, restrictions on removal of currency or other
assets, nationalization of assets, punitive taxes and certain custody and
settlement risks.
The fund's investments in developing or emerging markets are subject to all
of the risks of foreign investing generally, and have additional heightened
risks due to a lack of established legal, business and social frameworks to
support securities markets. Foreign securities markets, including emerging
markets, may have substantially lower trading volumes than U.S. markets,
resulting in less liquidity and more volatility than experienced in the U.S.
While short-term volatility in these markets can be disconcerting, declines
in excess of 50% are not unusual.
COMPANY. Foreign companies are not subject to the same disclosure,
accounting, auditing and financial reporting standards and practices as U.S.
companies and their securities may not be as liquid as securities of similar
U.S. companies. Foreign stock exchanges, trading systems, brokers and
companies generally have less government supervision and regulation than in
the U.S. The fund may have greater difficulty voting proxies, exercising
shareholder rights, pursuing legal remedies and obtaining judgments with
respect to foreign investments in foreign courts than with respect to U.S.
companies in U.S. courts.
CURRENCY. To the extent the fund's investments are denominated in foreign
currencies, changes in foreign currency exchange rates will affect the value
of what the fund owns and the fund's share price. Generally, when the U.S.
dollar rises in value against a foreign currency, an investment in that
country loses value because the currency is worth fewer U.S. dollars.
Devaluation of a currency by a country's government or banking authority also
will have a significant impact on the value of any securities denominated in
that currency. Currency markets generally are not regulated as securities
markets.
EURO. On January 1, 1999, the European Monetary Union (EMU) introduced a new
single currency, the euro, which replaced the national currency for the
eleven participating member countries. If the fund holds investments in
countries with currencies replaced by the euro, the investment process,
including trading, foreign exchange, payments, settlements, cash accounts,
custody and accounting will be impacted.
Because this change to a single currency is new and untested, the
establishment of the euro may result in market volatility. For the same
reason, it is not possible to predict the impact of the euro on the business
or financial condition of European issuers which the fund may hold in its
portfolio, and their impact on fund performance. To the extent the fund holds
non-U.S. dollar (euro or other) denominated securities, it will still be
exposed to currency risk due to fluctuations in those currencies versus the
U.S. dollar.
DERIVATIVE SECURITIES Forward foreign currency exchange contracts are
considered derivative investments, since their value depends on the value of
an underlying asset. The fund's investment in derivatives may involve a
small investment relative to the amount of risk assumed. The fund can incur
a loss in these transactions due to the imposition of controls by a foreign
or the U.S. government on the exchange of foreign currencies or the inability
to deliver or receive a foreign currency. The success of forward foreign
currency exchange contracts will depend on the manager's ability to predict
market movements. Losses resulting from the use of forward foreign currency
exchange contracts can reduce the fund's share price, and possibly income,
and such losses can be greater than if the contract had not been entered into
by the fund.
INDEBTEDNESS, PARTICIPATIONS AND TRADE CLAIMS The purchase of indebtedness
of a troubled company always involves a risk as to the creditworthiness of
the issuer and the possibility that the investment may be lost. There are no
established markets for indebtedness and, thus, it is less liquid than
securities that are heavily traded. Typically, purchasers of participations,
such as the fund, must rely on the financial institution issuing the
participation to assert any rights against the borrower with respect to the
underlying indebtedness. When a fund purchases a participation, it takes on
the risk associated with the financial soundness of the bank or other
financial intermediary issuing the participation, as well as the credit risk
associated with the financial soundness of the issuer of the underlying
indebtedness. When a fund purchases a Trade Claim, there is no guarantee
that the debtor will ever be able to satisfy the obligation on the Trade
Claim.
CREDIT This is the possibility that an issuer will be unable to make
interest payments or repay principal. Changes in an issuer's financial
strength or in a security's credit rating may affect its value and, thus,
impact the value of fund shares.
Securities rated below investment grade, sometimes called "junk bonds" or
"high yield debt securities," generally have more risk than higher-rated
securities. The principal risks of investing in these securities include:
o SUBSTANTIAL CREDIT RISK. Companies issuing high yield 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.
o DEFAULTED DEBT RISK. 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.
o VOLATILITY RISK. The prices of high yield debt securities fluctuate more
than higher-quality securities. Prices are especially sensitive to
developments affecting the company's business and to changes in the
ratings assigned by ratings organizations. 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.
ILLIQUID SECURITIES The fund may invest up to 15% of its net assets in
illiquid securities. Illiquid securities are securities with a limited
trading market. Investments by the fund in illiquid securities involve the
possibility that the securities cannot be readily sold or can only be resold
at a price significantly lower than their value, which may have a negative
effect on the value of the fund's shares.
YEAR 2000 When evaluating current and potential portfolio positions, Year
2000 is one of the factors the fund's manager considers.
[Begin callout]
Mutual fund shares are not deposits or obligations of, or guaranteed or
endorsed by, any bank, and are not federally insured by the Federal Deposit
Insurance Corporation, the Federal Reserve Board, or any other agency of the
U.S. government. Mutual fund shares involve investment risks, including the
possible loss of principal.
[End callout]
The manager will rely upon public filings and other statements made by
companies about their Year 2000 readiness. Issuers in countries outside the
U.S., particularly in emerging markets, may not be required to make the same
level of disclosure about Year 2000 readiness as is required in the U.S. The
manager, of course, cannot audit each company and its major suppliers to
verify their Year 2000 readiness.
If a company in which the fund is invested is adversely affected by Year 2000
problems, it is likely that the price of its security will also be adversely
affected. A decrease in the value of one or more of the fund's portfolio
holdings will have a similar impact on the fund's performance. Please see
page __ for more information.
More detailed information about the fund, its policies, including temporary
investments, risks and bond ratings can be found in the fund's Statement of
Additional Information (SAI).
[Insert graphic of a bull and a bear] PERFORMANCE
This information gives some indication of the risks of investing in the fund
by comparing the fund's performance with a broad-based securities market
index. Of course, past performance cannot predict or guarantee future
results. Of course, past performance cannot predict or guarantee future
results.
CLASS A ANNUAL TOTAL RETURN1
[Insert bar graph]
6.81%
98
YEAR
[Begin callout]
BEST QUARTER:
Q1 '98 17.43%
WORST QUARTER:
Q3 '98 -17.80%
[End callout]
AVERAGE ANNUAL TOTAL RETURNS
For the periods ended December 31, 1998
SINCE
INCEPTION
1 YEAR (8/19/97)
- -------------------------------------------------------------
Mutual Financial Services Fund -
Class A2 0.66% 17.57%
KBW 50 Total Return Index3 8.27% 14.83%
SINCE
INCEPTION
1 YEAR (8/19/97)
- -------------------------------------------------------------
Mutual Financial Services Fund -
Class B2 2.12% 19.27%
KBW 50 Total Return Index3 8.27% 14.83%
SINCE
INCEPTION
1 YEAR (8/19/97)
- -------------------------------------------------------------
Mutual Financial Services Fund -
Class C2 4.10% 20.44%
KBW 50 Total Return Index3 8.27% 14.83%
1. Figure does not reflect sales charges. If it did, return would be lower.
2. Figures reflect sales charges.
Before November 1, 1996, only a single class of fund shares was offered
without a sales charge and Rule 12b-1 fees. All fund returns shown reflect a
restatement of the original class to include the Rule 12b-1 fees as though in
effect from the fund's inception and assume reinvestment of dividends and
capital gains.
3. Source: Standard & Poor's(R) Micropal. The Keefe, Bruyette & Woods (KBW 50)
index tracks the 50 largest U.S. banks' stocks. The unmanaged index differs
from the fund in composition, does not pay management fees or expenses and
includes reinvested dividends. One cannot invest directly in an index, nor is
an index representative of the fund's portfolio.
[Insert graphic of percentage sign] FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and
hold shares of the fund.
SHAREHOLDER FEES (FEES PAID DIRECTLY FROM YOUR INVESTMENT)
CLASS A 1 CLASS B 2 CLASS C 1
- -------------------------------------------------------------------------------
Maximum sales charge (load) as a
percentage of offering price 5.75% 4.00% 1.99%
Load imposed on purchases 5.75% None 1.00%
Maximum deferred sales charge (load) None3 4.00% 0.99%4
Exchange fee None None None
Please see "Choosing a Share Class" on page [#] for an explanation of how and
when these sales charges apply.
ANNUAL FUND OPERATING EXPENSES (EXPENSES DEDUCTED FROM FUND ASSETS)
CLASS A 1 CLASS B 2 CLASS C 1
- -------------------------------------------------------------------------------
Management fees5 0.80% 0.80% 0.80%
Distribution and service
(12b-1) fees6 0.35% 1.00% 1.00%
Other expenses 0.29% 0.29% 0.29%
------------------------------------
Total annual fund operating expenses5 1.44% 2.09% 2.09%
===================================
1. Before January 1, 1999, Class A shares were designated Class I and Class C
shares were designated Class II.
2. The fund began offering Class B shares on January 1, 1999. Annual fund
operating expenses are based on the expenses for Class A and C for the fiscal
year ended December 31, 1998. The distribution and service (12b-1) fees are
based on the maximum fees allowed under Class B's Rule 12b-1 plan.
3. Except for investments of $1 million or more (see page [#])and purchases
by certain retirement plans without an initial sales charge.
4. This is equivalent to a charge of 1% based on net asset value.
5. For the fiscal year ended December 31, 1998, the manager had agreed in
advance to limit its management fees so that the fund's aggregate annual
operating expenses do not exceed 1.35% for Class A and 2.00% for Class B and
C for the fund's initial twenty-four months of operations. With this
reduction, management fees were 0.71% and total annual fund operating
expenses were 1.35% for Class A and 2.00% for Class C. After the first
twenty-four months, the manager may end this arrangement at any time.
6. Because of the distribution and service (12b-1) fees, over the long term
you may indirectly pay more than the equivalent of the maximum permitted
initial sales charge.
EXAMPLE
This example can help you compare the cost of investing in the fund with the
cost of investing in other mutual funds.
The example assumes you invest $10,000 for the periods shown and then sell
all of your shares at the end of those periods. The example also assumes your
investment has a 5% return each year and the fund's operating expenses remain
the same. Although your actual costs may be higher or lower, based on these
assumptions your costs would be:
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- --------------------------------------------------------------------------------
CLASS A $7131 $1,004 $1,317 $2,200
CLASS B
Assuming you sold your shares
at the end of the period $612 $955 $1,324 $2,260 2
Assuming you stayed in the fund
$212 $655 $1,124 $2,260 2
CLASS C $4083 $748 $1,212 $2,497
1. Assumes a contingent deferred sales charge (CDSC) will not apply.
2. Assumes conversion of Class B shares to Class A shares after eight years,
lowering your annual expenses from that time on.
3. For the same Class C investment, your costs would be $310 if you did not
sell your shares at the end of the first year. Your costs for the remaining
periods would be the same.
[Insert graphic of a dollar bill] FINANCIAL HIGHLIGHTS
This table presents the fund's financial performance for the past two years.
This information has been audited by Ernst & Young LLP.
CLASS A YEAR ENDED DECEMBER 31,
- -----------------------------------------------------------------------
1998 1997 1
- -----------------------------------------------------------------------
PER SHARE DATA ($)
Net asset value,
beginning of year 12.27 10.00
-------------------------
Net investment income .17 .03
Net realized and unrealized
gains .69 2.35
-------------------------
Total from investment operations .86 2.38
-------------------------
Dividends from net
investment income (.15) (.02)
Distributions from net
realized gains (.11) (.09)
-------------------------
Total distributions (.26) (.11)
-------------------------
Net asset value, end of year 12.87 12.27
==========================
Total return (%)2 6.90 23.83
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year
($ x 1,000) 164,989 78,249
Ratios to average net
assets: (%)
Expenses 1.35 1.35 3
Expenses excluding waiver and payments by
affiliate 1.44 1.97 3
Net investment income 1.42 1.02 3
Portfolio turnover rate (%) 136.76 42.26
CLASS C
- -----------------------------------------------------------------------
PER SHARE DATA ($)
Net asset value,
beginning of year 12.26 10.00
-------------------------
Net investment income .08 .01
Net realized and unrealized
gains .68 2.35
-------------------------
Total from investment operations .76 2.36
Dividends from net
investment income (.08) (.01)
Distributions from net
realized gains (.11) (.09)
-------------------------
Total distributions (.19) (.10)
-------------------------
Net asset value, end of year 12.83 12.26
=========================
Total return (%)2 6.13 23.57
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year
($ x 1,000) 127,717 43,207
Ratios to average net
assets: (%)
Expenses 2.00 2.003
Expenses excluding waiver and payments by 2.09
affiliate 2.623
Net investment income .77 .373
Portfolio turnover rate (%) 136.76 42.26
1. For the period August 19, 1997 (effective date) to December 31, 1997.
2. Total return does not include sales charges, and is not annualized.
3. Annualized.
MUTUAL QUALIFIED FUND
[Insert graphic of bullseye and arrows] GOALS AND STRATEGIES
GOALS The fund's investment goal is capital appreciation, which may
occasionally be short-term. Its secondary goal is income.
PRINCIPAL INVESTMENTS The fund will primarily invest in domestic and foreign
equity securities. Equity securities generally entitle the holder to
participate in a company's general operating results. These include common
stocks, preferred stocks and convertible securities.
The fund invests primarily in the securities of companies with market
capitalization values (share price times the number of common stock shares
outstanding) of more than $1.5 billion. The fund may invest a portion of its
assets in the securities of domestic or foreign companies involved in
mergers, consolidations, liquidations, reorganizations or financial
restructurings (Reorganizing Companies), or as to which there are outstanding
tender or exchange offers. Investments in Reorganizing Companies may, but
are not expected to, exceed 50% of the fund's assets.
The fund may invest a significant portion of its assets in foreign equity
securities. The fund tends to invest in foreign securities to a greater
extent than Mutual Shares Fund and to a lesser extent than Mutual Beacon
Fund. To hedge (protect) against currency exchange rate fluctuations, the
fund enters into forward foreign currency exchange contracts to the extent
that hedging is available and, in the manager's opinion, it is economical to
do so. A forward foreign currency exchange contract is an agreement to buy
or sell a specific currency at a future date and at a price set at the time
of the contract. Forward foreign currency exchange contracts may reduce the
risk of loss from a change in value of a currency, but they also limit any
potential gains and do not protect against fluctuations in the value of the
underlying position.
The fund invests to a lesser extent in domestic and foreign debt securities.
Debt securities represent an obligation of the issuer to repay a loan of
money to it, and generally provide for the payment of interest. These include
bonds, including those convertible into common stock, notes and debentures.
The fund may invest in debt securities rated in any rating category
established by an independent rating organization, including lower rated or
defaulted debt securities ("junk bonds"), or in unrated debt securities. The
Fund typically invests in unrated debt securities of Reorganizing Companies.
The fund may invest in the direct indebtedness, or participation interests in
the indebtedness, of Reorganizing Companies. 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 direct
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.
Participation interests in indebtedness represent fractional interests in a
company's indebtedness. The financial institutions which typically make
participations available are banks or insurance companies or governmental
institutions or 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 fund may also purchase trade claims and other direct obligations or
claims (Trade Claims) of Reorganizing Companies. Trade Claims generally are
purchased from creditors of Reorganizing Companies, and represent money due
to a supplier of goods or services to the Reorganizing Company.
While the fund generally purchases securities for investment purposes and not
for the purpose of influencing or controlling management of a company, the
manager may use the fund's ownership interest in a company to seek to
influence or control management when the manager perceives a benefit. The
fund may invest in entities whose business is to acquire securities of
companies for the purpose of influencing or controlling management or with
the expectation of taking over such companies. The fund also may invest in
the securities of a particular company which the manager believes may be an
attractive company to be taken over by another entity.
[Begin callout]
The fund invests primarily in equity securities that the manager believes are
available at prices less than their actual value based on certain recognized
objective criteria (intrinsic value).
[End callout]
PORTFOLIO SELECTION In choosing investments for the fund, the manager bases
its opinions upon the analysis and research of certain factors, including:
the relationship of a security's book value to market value; cash flow; and
multiples of earnings of comparable securities. Each security is examined
separately and there is no set criteria as to the size of an issuer, its
earnings or the industry in which it operates. Debt securities are generally
selected based on the manager's opinion that the securities are available at
less than their intrinsic value, and the manager's own analysis of the
security has greater influence over the investment decision than the coupon
rate or rating of the security.
TEMPORARY INVESTMENTS The manager may take a temporary defensive position
when it believes the markets or the economy are experiencing excessive
volatility or a prolonged general decline, or other adverse conditions exist.
Under these circumstances, the fund may be unable to pursue its investment
goals because it may not invest or may invest less in equity and debt
securities that the manager believes are available at prices less than their
intrinsic value.
[Insert graphic of chart with line going up and down] MAIN RISKS
VALUE INVESTING The fund's general policy of investing in securities that
the manager believes are available at prices less than their intrinsic value
differs from the approach followed by many other managers, and may result in
the fund choosing securities that are not widely followed by other
investors. There is always the possibility that the manager may be incorrect
in its assessment of a particular company or that the manager may not buy
these securities at their lowest possible price or sell them at their highest.
[Begin callout]
Because the stocks the fund holds fluctuate in price with market conditions,
the value of your investment in the fund will go up and down. This means you
could lose money over short or even extended periods.
[End callout]
STOCKS While stocks have historically outperformed other asset classes over
the long term, they tend to go up and down more dramatically over the shorter
term. These price movements may result from factors affecting individual
companies, industries or the securities market as a whole.
REORGANIZING COMPANIES There can be no assurance that any merger,
consolidation, liquidation, reorganization or tender or exchange offer
proposed at the time the fund makes its investment in a Reorganizing Company
will be consummated or will be consummated on the terms and within the time
period contemplated and, therefore, that the fund's performance will benefit
from its investment in a Reorganizing Company. Debt securities of
Reorganizing Companies typically are unrated, lower rated, in default or
close to default.
FOREIGN SECURITIES Securities of companies and governments located outside
the U.S. may involve risks that can increase the potential for losses in the
fund.
COUNTRY. General securities market movements in any country where the fund
has investments are likely to affect the value of the securities the fund
owns which trade in that country. These movements will affect the fund's
share price and fund performance.
The political, economic and social structures of some countries the fund
invests in may be less stable and more volatile than those in the U.S. The
risks of investing in these countries include the possibility of the
imposition of exchange controls, currency devaluations, foreign ownership
limitations, expropriation, restrictions on removal of currency or other
assets, nationalization of assets, punitive taxes and certain custody and
settlement risks.
The fund's investments in developing or emerging markets are subject to all
of the risks of foreign investing generally, and have additional heightened
risks due to a lack of established legal, business and social frameworks to
support securities markets. Foreign securities markets, including emerging
markets, may have substantially lower trading volumes than U.S. markets,
resulting in less liquidity and more volatility than experienced in the U.S.
While short-term volatility in these markets can be disconcerting, declines
in excess of 50% are not unusual.
COMPANY. Foreign companies are not subject to the same disclosure,
accounting, auditing and financial reporting standards and practices as U.S.
companies and their securities may not be as liquid as securities of similar
U.S. companies. Foreign stock exchanges, trading systems, brokers and
companies generally have less government supervision and regulation than in
the U.S. The fund may have greater difficulty voting proxies, exercising
shareholder rights, pursuing legal remedies and obtaining judgments with
respect to foreign investments in foreign courts than with respect to U.S.
companies in U.S. courts.
CURRENCY. To the extent the fund's investments are denominated in foreign
currencies, changes in foreign currency exchange rates will affect the value
of what the fund owns and the fund's share price. Generally, when the U.S.
dollar rises in value against a foreign currency, an investment in that
country loses value because the currency is worth fewer U.S. dollars.
Devaluation of a currency by a country's government or banking authority also
will have a significant impact on the value of any securities denominated in
that currency. Currency markets generally are not regulated as securities
markets.
EURO. On January 1, 1999, the European Monetary Union (EMU) introduced a new
single currency, the euro, which replaced the national currency for the
eleven participating member countries. If the fund holds investments in
countries with currencies replaced by the euro, the investment process,
including trading, foreign exchange, payments, settlements, cash accounts,
custody and accounting will be impacted.
Because this change to a single currency is new and untested, the
establishment of the euro may result in market volatility. For the same
reason, it is not possible to predict the impact of the euro on the business
or financial condition of European issuers which the fund may hold in its
portfolio, and their impact on the value of fund shares and fund performance.
To the extent the fund holds non-U.S. dollar (euro or other) denominated
securities, it will still be exposed to currency risk due to fluctuations in
those currencies versus the U.S. dollar.
DERIVATIVE SECURITIES Forward foreign currency exchange contracts are
considered derivative investments, since their value depends on the value of
an underlying asset. The fund's investment in derivatives may involve a
small investment relative to the amount of risk assumed. The fund can incur
a loss in these transactions due to the imposition of controls by a foreign
or the U.S. government on the exchange of foreign currencies or the inability
to deliver or receive a foreign currency. The success of forward foreign
currency exchange contracts will depend on the manager's ability to predict
market movements. Losses resulting from the use of forward foreign currency
exchange contracts can reduce the fund's share price, and possibly income,
and such losses can be greater than if the contract had not been entered into
by the fund.
INDEBTEDNESS, PARTICIPATIONS AND TRADE CLAIMS The purchase of indebtedness
of a troubled company always involves a risk as to the creditworthiness of
the issuer and the possibility that the investment may be lost. There are no
established markets for indebtedness and, thus, it is less liquid than
securities that are heavily traded. Typically, purchasers of participations,
such as the fund, must rely on the financial institution issuing the
participation to assert any rights against the borrower with respect to the
underlying indebtedness. When a fund purchases a participation, it takes on
the risk associated with the financial soundness of the bank or other
financial intermediary issuing the participation, as well as the credit risk
associated with the financial soundness of the issuer of the underlying
indebtedness. When a fund purchases a Trade Claim, there is no guarantee
that the debtor will ever be able to satisfy the obligation on the Trade
Claim.
CREDIT This is the possibility that an issuer will be unable to make
interest payments or repay principal. Changes in an issuer's financial
strength or in a security's credit rating may affect its value and, thus,
impact the value of fund shares.
Securities rated below investment grade, sometimes called "junk bonds" or
"high yield debt securities," generally have more risk than higher-rated
securities. The principal risks of investing in these securities include:
o SUBSTANTIAL CREDIT RISK. Companies issuing high yield 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.
o DEFAULTED DEBT RISK. 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.
VOLATILITY RISK. The prices of high yield debt securities fluctuate more
o than higher-quality securities. Prices are especially sensitive to
developments affecting the company's business and to changes in the
ratings assigned by ratings organizations. 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.
ILLIQUID SECURITIES The fund may invest up to 15% of its net assets in
illiquid securities. Illiquid securities are securities with a limited
trading market. Investments by the fund in illiquid securities involve the
possibility that the securities cannot be readily sold or can only be resold
at a price significantly lower than their value, which may have a negative
effect on the value of the fund's shares.
YEAR 2000 When evaluating current and potential portfolio positions, Year
2000 is one of the factors the fund's manager considers.
[Begin callout]
Mutual fund shares are not deposits or obligations of, or guaranteed or
endorsed by, any bank, and are not federally insured by the Federal Deposit
Insurance Corporation, the Federal Reserve Board, or any other agency of the
U.S. government. Mutual fund shares involve investment risks, including the
possible loss of principal.
[End callout]
The manager will rely upon public filings and other statements made by
companies about their Year 2000 readiness. Issuers in countries outside the
U.S., particularly in emerging markets, may not be required to make the same
level of disclosure about Year 2000 readiness as is required in the U.S. The
manager, of course, cannot audit each company and its major suppliers to
verify their Year 2000 readiness.
If a company in which the fund is invested is adversely affected by Year 2000
problems, it is likely that the price of its security will also be adversely
affected. A decrease in the value of one or more of the fund's portfolio
holdings will have a similar impact on the price of the fund's shares and the
fund's performance. Please see page ___ for more information.
More detailed information about the fund, its policies, including temporary
investments, risks and the bond ratings can be found in the fund's Statement
of Additional Information (SAI).
[Insert graphic of a bull and a bear] PERFORMANCE
This bar chart and table show the volatility of the fund's returns, which is
one indicator of the risks of investing in the fund. The bar chart shows
changes in the fund's returns from year to year over the past 10 calendar
years. The table shows how the fund's average annual total returns compare to
those of a broad-based securities market index. Of course, past performance
cannot predict or guarantee future results.
CLASS A ANNUAL TOTAL RETURNS 1
[Insert bar graph]
13.64% -10.57% 20.62% 22.17% 22.13% 5.32% 26.12% 20.75% 24.44% 0.15%
89 90 91 92 93 94 95 96 97 98
YEAR
[Begin callout]
BEST QUARTER:
Q4 '98 12.56%
WORST QUARTER:
Q3 '98 -17.73%
[End callout]
AVERAGE ANNUAL TOTAL RETURNS
For the periods ended December 31, 1998
1 YEAR 5 YEARS 10 YEARS
- --------------------------------------------------------------------------
Mutual Qualified Fund - Class A 2 -5.62% 13.50% 13.17%
S&P 500(R)Index 3 28.58% 24.06% 19.21%
1 YEAR 5 YEARS 10 YEARS
- --------------------------------------------------------------------------
Mutual Qualified Fund - Class B 2 -4.19% 13.84 13.07%
S&P 500(R)Index 3 28.58% 24.06% 19.21%
1 YEAR 5 YEARS 10 YEARS
- --------------------------------------------------------------------------
Mutual Qualified Fund - Class C 2 -2.45% 13.85% 12.81%
S&P 500(R)Index 3 28.58% 24.06% 19.21%
1. Figures do not reflect sales charges. If they did, returns would be lower.
2. Figures reflect sales charges.
Before November 1, 1996, only a single class of fund shares was offered
without a sales charge and Rule 12b-1 fees. All fund returns shown reflect a
restatement of the original class to include the Rule 12b-1 fees as though in
effect from the fund's inception and assume reinvestment of dividends and
capital gains.
3. Source: Standard & Poor's(R) Micropal. The S&P 500(R) Index is an unmanaged
group of widely held common stocks covering a variety of industries. It
includes reinvested dividends. One cannot invest directly in an index, nor is
an index representative of the fund's portfolio.
[Insert graphic of percentage sign] FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and
hold shares of the fund.
This table describes the fees and expenses that you may pay if you buy and
hold shares of the fund.
SHAREHOLDER FEES (FEES PAID DIRECTLY FROM YOUR INVESTMENT)
CLASS A 1 CLASS B 2 CLASS C 1
- -------------------------------------------------------------------------------
Maximum sales charge (load) as a
percentage of offering price 5.75% 4.00% 1.99%
Load imposed on purchases 5.75% None 1.00%
Maximum deferred sales charge (load) None 3 4.00% 0.99% 4
Exchange fee None None None
Please see "Choosing a Share Class" on page [#] for an explanation of how and
when these sales charges apply.
ANNUAL FUND OPERATING EXPENSES (EXPENSES DEDUCTED FROM FUND ASSETS)
CLASS A 1 CLASS B 2 CLASS C 1
- -------------------------------------------------------------------------------
Management fees5 0.60% 0.60% 0.60%
Distribution and service
(12b-1) fees6 0.35% 1.00% 1.00%
Other expenses 0.19% 0.19% 0.19%
------------------------------------
Total annual fund operating expenses5 1.14% 1.79% 1.79%
====================================
1. Before January 1, 1999, Class A shares were designated Class I and Class C
shares were designated Class II.
2. The fund began offering Class B shares on January 1, 1999. Annual fund
operating expenses are based on the expenses for Class A and C for the fiscal
year ended December 31, 1998. The distribution and service (12b-1) fees are
based on the maximum fees allowed under Class B's Rule 12b-1 plan.
3. Except for investments of $1 million or more (see page [#])and purchases
by certain retirement plans without an initial sales charge.
4. This is equivalent to a charge of 1% based on net asset value.
5. For the fiscal year ended December 31, 1998, the manager had agreed in
advance to limit its management fees. With this reduction, management fees
were 0.57% and total annual fund operating expenses were 1.11% for Class A
and 1.76% for Class C. After October 31, 1999, the manager may end this
arrangement at any time.
6. Because of the distribution and service (12b-1) fees, over the long term
you may indirectly pay more than the equivalent of the maximum permitted
initial sales charge.
EXAMPLE
This example can help you compare the cost of investing in the fund with the
cost of investing in other mutual funds.
The example assumes you invest $10,000 for the periods shown and then sell
all of your shares at the end of those periods. The example also assumes your
investment has a 5% return each year and the fund's operating expenses remain
the same. Although your actual costs may be higher or lower, based on these
assumptions your costs would be:
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- --------------------------------------------------------------------------------
CLASS A $685 1 $916 $1,167 $1,881
CLASS B
Assuming you sold your shares
at the end of the period $582 $863 $1,170 $1,938 2
Assuming you stayed in the fund
$182 $563 $ 970 $1,938 2
CLASS C $378 3 $658 $1,060 $2,184
1. Assumes a contingent deferred sales charge (CDSC) will not apply.
2. Assumes conversion of Class B shares to Class A shares after eight years,
lowering your annual expenses from that time on.
3. For the same Class C investment, your costs would be $280 if you did not
sell your shares at the end of the first year. Your costs for the remaining
periods would be the same.
[Insert graphic of a dollar bill] FINANCIAL HIGHLIGHTS
This table presents the fund's financial performance for the past three
years. This information has been audited by Ernst & Young LLP.
CLASS A YEAR ENDED DECEMBER 31,
- -------------------------------------------------------------------------
1998 1997 2 1996 1
- -------------------------------------------------------------------------
PER SHARE DATA3 ($)
Net asset value,
beginning of year 18.14 16.23 16.40
---------------------------------
Net investment income .35 .28 .16
Net realized and unrealized 3.63 .89
gains (.35)
---------------------------------
Total from investment operations (.00) 3.91 1.05
---------------------------------
Dividends from net
investment income (.39) (.60) (.41)
Distributions from net
realized gains (1.33) (1.40) (.81)
---------------------------------
Total distributions (1.72) (2.00) (1.22)
---------------------------------
Net asset value, end of year 16.42 18.14 16.23
=================================
Total return (%) 4 .15 24.44 6.47
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year
($ x 1,000) 570,143 452,590 20,381
Ratios to average net
assets: (%)
Expenses 1.11 1.10 1.13 5
Expenses excluding waiver and
payments by affiliate 1.14 1.13 1.28 5
Net investment income 1.66 1.48 3.19 5
Portfolio turnover rate (%) 66.84 52.76 65.03
CLASS C
- -------------------------------------------------------------------------
PER SHARE DATA 3 ($)
Net asset value,
beginning of year 18.09 16.23 16.40
---------------------------------
Net investment income .24 .16 .13
Net realized and unrealized
gains (.37) 3.63 .91
---------------------------------
Total from investment operations (.13) 3.79 1.04
Dividends from net
investment income (.28) (.53) (.39)
Distributions from net
realized gains (1.33) (1.40) (.82)
---------------------------------
Total distributions (1.61) (1.93) (1.21)
---------------------------------
Net asset value, end of year 16.35 18.09 16.23
==================================
Total return (%)4 (.58) 23.66 6.37
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year
($ x 1,000) 322,609 231,721 9,963
Ratios to average net
assets: (%)
Expenses 1.76 1.75 1.785
Expenses excluding waiver and
payments by affiliate 1.79 1.78 1.935
Net investment income 1.01 .84 2.595
Portfolio turnover rate (%) 66.84 52.76 65.03
1. For the period November 1, 1996 (effective date) to December 31, 1996.
2. Based on average weighted shares outstanding.
3. Per share amounts for period ended December 31, 1996, have been restated
to reflect a 2-for-1 stock split effective February 3, 1997.
4. Total return does not include sales charges, and is not annualized.
5. Annualized.
MUTUAL SHARES FUND
[Insert graphic of bullseye and arrows] GOALS AND STRATEGIES
GOALS The fund's investment goal is capital appreciation, which may
occasionally be short-term. Its secondary goal is income.
PRINCIPAL INVESTMENTS The fund will primarily invest in domestic and foreign
equity securities. Equity securities generally entitle the holder to
participate in a company's general operating results. These include common
stocks, preferred stocks and convertible securities.
The fund invests primarily in the securities of companies with market
capitalization values (share price times the number of common stock shares
outstanding) of more than $1.5 billion. The fund may invest a portion of its
assets in the securities of domestic or foreign companies involved in
mergers, consolidations, liquidations, reorganizations or financial
restructurings (Reorganizing Companies), or as to which there are outstanding
tender or exchange offers. Investments in Reorganizing Companies may, but
are not expected to, exceed 50% of the fund's assets.
The fund may invest a significant portion of its assets in foreign equity
securities. The fund tends to invest in foreign securities to a lesser extent
than Mutual Qualified Fund and Mutual Beacon Fund. To hedge (protect)
against currency exchange rate fluctuations, the fund enters into forward
foreign currency exchange contracts to the extent that hedging is available
and, in the manager's opinion, it is economical to do so. A forward foreign
currency exchange contract is an agreement to buy or sell a specific currency
at a future date and at a price set at the time of the contract. Forward
foreign currency exchange contracts may reduce the risk of loss from a change
in value of a currency, but they also limit any potential gains and do not
protect against fluctuations in the value of the underlying position.
The fund invests to a lesser extent in domestic and foreign debt securities.
Debt securities represent an obligation of the issuer to repay a loan of
money to it, and generally provide for the payment of interest. These include
bonds, including those convertible into common stock, notes and debentures.
The fund may invest in debt securities rated in any rating category
established by an independent rating organization, including lower rated or
defaulted debt securities ("junk bonds"), or in unrated debt securities. The
Fund typically invests in unrated debt securities of Reorganizing Companies.
The fund may invest in the direct indebtedness, or participation interests in
the indebtedness, of Reorganizing Companies. 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 direct
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.
Participation interests in indebtedness represent fractional interests in a
company's indebtedness. The financial institutions which typically make
participations available are banks or insurance companies or governmental
institutions or 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 fund may also purchase trade claims and other direct obligations or
claims (Trade Claims) of Reorganizing Companies. Trade Claims generally are
purchased from creditors of Reorganizing Companies, and represent money due
to a supplier of goods or services to a Reorganizing Company.
While the fund generally purchases securities for investment purposes and not
for the purpose of influencing or controlling management of a company, the
manager may use the fund's ownership interest in a company to seek to
influence or control management when the manager perceives a benefit. The
fund may invest in entities whose business is to acquire securities of
companies for the purpose of influencing or controlling management or with
the expectation of taking over such companies. The fund also may invest in
the securities of a particular company which the manager believes may be an
attractive company to be taken over by another entity.
[Begin callout]
The fund invests primarily in equity securities that the manager believes are
available at prices less than their actual value based on certain recognized
objective criteria (intrinsic value).
[End callout]
PORTFOLIO SELECTION In choosing investments for the fund, the manager bases
its opinions upon the analysis and research of certain factors, including:
the relationship of a security's book value to market value; cash flow; and
multiples of earnings of comparable securities. Each security is examined
separately and there is no set criteria as to the size of an issuer, its
earnings or the industry in which it operates. Debt securities are generally
selected based on the manager's opinion that the securities are available at
less than their intrinsic value, and the manager's own analysis of the
security has greater influence over the investment decision than the coupon
rate or rating of the security.
TEMPORARY INVESTMENTS The manager may take a temporary defensive position
when it believes the markets or the economy are experiencing excessive
volatility or a prolonged general decline, or other adverse conditions exist.
Under these circumstances, the fund may be unable to pursue its investment
goals because it may not invest or may invest less in equity and debt
securities that the manager believes are available at prices less than their
intrinsic value.
[Insert graphic of chart with line going up and down] MAIN RISKS
VALUE INVESTING The fund's general policy of investing in securities that
the manager believes are available at prices less than their intrinsic value
differs from the approach followed by many other managers, and may result in
the fund choosing securities that are not widely followed by other
investors. There is always the possibility that the manager may be incorrect
in its assessment of a particular company or that the manager may not buy
these securities at their lowest possible price or sell them at their highest.
[Begin callout]
Because the stocks the fund holds fluctuate in price with market conditions,
the value of your investment in the fund will go up and down. This means you
could lose money over short or even extended periods.
[End callout]
STOCKS While stocks have historically outperformed other asset classes over
the long term, they tend to go up and down more dramatically over the shorter
term. These price movements may result from factors affecting individual
companies, industries or the securities market as a whole.
REORGANIZING COMPANIES There can be no assurance that any merger,
consolidation, liquidation, reorganization or tender or exchange offer
proposed at the time the fund makes its investment in a Reorganizing Company
will be consummated or will be consummated on the terms and within the time
period contemplated and, therefore, that the fund's performance will benefit
from its investment in a Reorganizing Company. Debt securities of
Reorganizing Companies typically are unrated, lower rated, in default or
close to default.
FOREIGN SECURITIES Securities of companies and governments located outside
the U.S. may involve risks that can increase the potential for losses in the
fund.
COUNTRY. General securities market movements in any country where the fund
has investments are likely to affect the value of the securities the fund
owns which trade in that country. These movements will affect the fund's
share price and fund performance.
The political, economic and social structures of some countries the fund
invests in may be less stable and more volatile than those in the U.S. The
risks of investing in these countries include the possibility of the
imposition of exchange controls, currency devaluations, foreign ownership
limitations, expropriation, restrictions on removal of currency or other
assets, nationalization of assets, punitive taxes and certain custody and
settlement risks.
The fund's investments in developing or emerging markets are subject to all
of the risks of foreign investing generally, and have additional heightened
risks due to a lack of established legal, business and social frameworks to
support securities markets. Foreign securities markets, including emerging
markets, may have substantially lower trading volumes than U.S. markets,
resulting in less liquidity and more volatility than experienced in the U.S.
While short-term volatility in these markets can be disconcerting, declines
in excess of 50% are not unusual.
COMPANY. Foreign companies are not subject to the same disclosure,
accounting, auditing and financial reporting standards and practices as U.S.
companies and their securities may not be as liquid as securities of similar
U.S. companies. Foreign stock exchanges, trading systems, brokers and
companies generally have less government supervision and regulation than in
the U.S. The fund may have greater difficulty voting proxies, exercising
shareholder rights, pursuing legal remedies and obtaining judgments with
respect to foreign investments in foreign courts than with respect to U.S.
companies in U.S. courts.
CURRENCY. To the extent the fund's investments are denominated in foreign
currencies, changes in foreign currency exchange rates will affect the value
of what the fund owns and the fund's share price. Generally, when the U.S.
dollar rises in value against a foreign currency, an investment in that
country loses value because the currency is worth fewer U.S. dollars.
Devaluation of a currency by a country's government or banking authority also
will have a significant impact on the value of any securities denominated in
that currency. Currency markets generally are not regulated as securities
markets.
EURO. On January 1, 1999, the European Monetary Union (EMU) introduced a new
single currency, the euro, which replaced the national currency for the
eleven participating member countries. If the fund holds investments in
countries with currencies replaced by the euro, the investment process,
including trading, foreign exchange, payments, settlements, cash accounts,
custody and accounting will be impacted.
Because this change to a single currency is new and untested, the
establishment of the euro may result in market volatility. For the same
reason, it is not possible to predict the impact of the euro on the business
or financial condition of European issuers which the fund may hold in its
portfolio, and their impact on the value of fund shares and fund performance.
To the extent the fund holds non-U.S. dollar (euro or other) denominated
securities, it will still be exposed to currency risk due to fluctuations in
those currencies versus the U.S. dollar.
DERIVATIVE SECURITIES Forward foreign currency exchange contracts are
considered derivative investments, since their value depends on the value of
an underlying asset. The fund's investment in derivatives may involve a
small investment relative to the amount of risk assumed. The fund can incur
a loss in these transactions due to the imposition of controls by a foreign
or the U.S. government on the exchange of foreign currencies or the inability
to deliver or receive a foreign currency. The success of forward foreign
currency exchange contracts will depend on the manager's ability to predict
market movements. Losses resulting from the use of forward foreign currency
exchange contracts can reduce the fund's share price, and possibly income,
and such losses can be greater than if the contract had not been entered into
by the fund.
INDEBTEDNESS, PARTICIPATIONS AND TRADE CLAIMS The purchase of indebtedness
of a troubled company always involves a risk as to the creditworthiness of
the issuer and the possibility that the investment may be lost. There are no
established markets for indebtedness and, thus, it is less liquid than
securities that are heavily traded. Typically, purchasers of participations,
such as the fund, must rely on the financial institution issuing the
participation to assert any rights against the borrower with respect to the
underlying indebtedness. When a fund purchases a participation, it takes on
the risk associated with the financial soundness of the bank or other
financial intermediary issuing the participation, as well as the credit risk
associated with the financial soundness of the issuer of the underlying
indebtedness. When a fund purchases a Trade Claim, there is no guarantee
that the debtor will ever be able to satisfy the obligation on the Trade
Claim.
CREDIT This is the possibility that an issuer will be unable to make
interest payments or repay principal. Changes in an issuer's financial
strength or in a security's credit rating may affect its value and, thus,
impact the value of fund shares.
Securities rated below investment grade, sometimes called "junk bonds" or
"high yield debt securities," generally have more risk than higher-rated
securities. The principal risks of investing in these securities include:
o SUBSTANTIAL CREDIT RISK. Companies issuing high yield 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.
o DEFAULTED DEBT RISK. 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.
o VOLATILITY RISK. The prices of high yield debt securities fluctuate more
than higher-quality securities. Prices are especially sensitive to
developments affecting the company's business and to changes in the
ratings assigned by ratings organizations. 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.
ILLIQUID SECURITIES The fund may invest up to 15% of its net assets in
illiquid securities. Illiquid securities are securities with a limited
trading market. Investments by the fund in illiquid securities involve the
possibility that the securities cannot be readily sold or can only be resold
at a price significantly lower than their value, which may have a negative
effect on the value of the fund's shares.
YEAR 2000 When evaluating current and potential portfolio positions, Year
2000 is one of the factors the fund's manager considers.
[Begin callout]
Mutual fund shares are not deposits or obligations of, or guaranteed or
endorsed by, any bank, and are not federally insured by the Federal Deposit
Insurance Corporation, the Federal Reserve Board, or any other agency of the
U.S. government. Mutual fund shares involve investment risks, including the
possible loss of principal.
[End callout]
The manager will rely upon public filings and other statements made by
companies about their Year 2000 readiness. Issuers in countries outside the
U.S., particularly in emerging markets, may not be required to make the same
level of disclosure about Year 2000 readiness as is required in the U.S. The
manager, of course, cannot audit each company and its major suppliers to
verify their Year 2000 readiness.
If a company in which the fund is invested is adversely affected by Year 2000
problems, it is likely that the price of its security will also be adversely
affected. A decrease in the value of one or more of the fund's portfolio
holdings will have a similar impact on the price of the fund's shares and the
fund's performance. Please see page ___ for more information.
More detailed information about the fund, its policies, including temporary
investments, risks and the bond ratings can be found in the fund's Statement
of Additional Information (SAI).
[Insert graphic of a bull and a bear] PERFORMANCE
This bar chart and table show the volatility of the fund's returns, which is
one indicator of the risks of investing in the fund. The bar chart shows
changes in the fund's returns from year to year over the past 10 calendar
years. The table shows how the fund's average annual total returns compare to
those of a broad-based securities market index. Of course, past performance
cannot predict or guarantee future results.
CLASS A ANNUAL TOTAL RETURNS1
[Insert bar graph]
14.15% -10.28% 20.47% 20.81% 20.47% 4.13% 28.60% 20.32% 26.01% 0.01%
89 90 91 92 93 94 95 96 97 98
YEAR
[Begin callout]
BEST QUARTER:
Q4 '98 13.24%
WORST QUARTER:
Q3 '98 -17.03%
[End callout]
AVERAGE ANNUAL TOTAL RETURNS
For the periods ended December 31, 1998
1 YEAR 5 YEARS 10 YEARS
- --------------------------------------------------------------------------
Mutual Shares Fund - Class A 2 -5.75% 13.86% 13.14%
S&P 500(R)Index3 28.58% 24.06% 19.21%
1 YEAR 5 YEARS 10 YEARS
- --------------------------------------------------------------------------
Mutual Shares Fund - Class B 2 -4.21% 14.21% 13.05%
S&P 500(R)Index3 28.58% 24.06% 19.21%
1 YEAR 5 YEARS 10 YEARS
- --------------------------------------------------------------------------
Mutual Shares Fund - Class C 2 -2.43% 14.22% 12.79%
S&P 500(R)Index3 28.58% 24.06% 19.21%
1. Figures do not reflect sales charges. If they did, returns would be lower.
2. Figures reflect sales charges.
Before November 1, 1996, only a single class of fund shares was offered
without a sales charge and Rule 12b-1 fees. All fund returns shown reflect a
restatement of the original class to include the Rule 12b-1 fees as though in
effect from the fund's inception and assume reinvestment of dividends and
capital gains.
3. Source: Standard & Poor's(R) Micropal. The S&P 500(R) Index is an unmanaged
group of widely held common stocks covering a variety of industries. It
includes reinvested dividends. One cannot invest directly in an index, nor is
an index representative of the fund's portfolio.
[Insert graphic of percentage sign] FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and
hold shares of the fund.
This table describes the fees and expenses that you may pay if you buy and
hold shares of the fund.
SHAREHOLDER FEES (FEES PAID DIRECTLY FROM YOUR INVESTMENT)
CLASS A 1 CLASS B 2 CLASS C 1
- -------------------------------------------------------------------------------
Maximum sales charge (load) as a
percentage of offering price 5.75% 4.00% 1.99%
Load imposed on purchases 5.75% None 1.00%
Maximum deferred sales charge (load) None 3 4.00% 0.99% 4
Exchange fee None None None
Please see "Choosing a Share Class" on page [#] for an explanation of how and
when these sales charges apply.
ANNUAL FUND OPERATING EXPENSES (EXPENSES DEDUCTED FROM FUND ASSETS)
CLASS A 1 CLASS B 2 CLASS C 1
- -------------------------------------------------------------------------------
Management fees5 0.60% 0.60% 0.60%
Distribution and service
(12b-1) fees6 0.35% 1.00% 1.00%
Other expenses 0.17% 0.17% 0.17%
------------------------------------
Total annual fund operating expenses5 1.12% 1.77% 1.77%
====================================
1. Before January 1, 1999, Class A shares were designated Class I and Class C
shares were designated Class II.
2. The fund began offering Class B shares on January 1, 1999. Annual fund
operating expenses are based on the expenses for Class A and C for the fiscal
year ended December 31, 1998. The distribution and service (12b-1) fees are
based on the maximum fees allowed under Class B's Rule 12b-1 plan.
3. Except for investments of $1 million or more (see page [#])and purchases
by certain retirement plans without an initial sales charge.
4. This is equivalent to a charge of 1% based on net asset value.
5. For the fiscal year ended December 31, 1998, the manager had agreed in
advance to limit its management fees. With this reduction, management fees
were 0.56% and total annual fund operating expenses were 1.08% for Class A
and 1.73% for Class C. After October 31, 1999, the manager may end this
arrangement at any time.
6. Because of the distribution and service (12b-1) fees, over the long term
you may indirectly pay more than the equivalent of the maximum permitted
initial sales charge.
EXAMPLE
This example can help you compare the cost of investing in the fund with the
cost of investing in other mutual funds.
The example assumes you invest $10,000 for the periods shown and then sell
all of your shares at the end of those periods. The example also assumes your
investment has a 5% return each year and the fund's operating expenses remain
the same. Although your actual costs may be higher or lower, based on these
assumptions your costs would be:
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- --------------------------------------------------------------------------------
CLASS A $683 1 $911 $1,156 $1,860
CLASS B
Assuming you sold your shares
at the end of the period $580 $857 $1,159 $1,916 2
Assuming you stayed in the fund
$180 $557 $ 959 $1,916 2
CLASS C $376 3 $652 $1,050 $2,163
1. Assumes a contingent deferred sales charge (CDSC) will not apply.
2. Assumes conversion of Class B shares to Class A shares after eight years,
lowering your annual expenses from that time on.
3. For the same Class C investment, your costs would be $278 if you did not
sell your shares at the end of the first year. Your costs for the remaining
periods would be the same.
[Insert graphic of a dollar bill] FINANCIAL HIGHLIGHTS
This table presents the fund's financial performance for the past three
years. This information has been audited by Ernst & Young LLP.
CLASS A YEAR ENDED DECEMBER 31,
- -------------------------------------------------------------------------
1998 1997 2 1996 1
- -------------------------------------------------------------------------
PER SHARE DATA 3 ($)
Net asset value,
beginning of year 21.26 18.56 18.90
-----------------------------------
Net investment income .40 .34 .21
Net realized and unrealized
gains (.41) 4.43 1.08
-----------------------------------
Total from investment operations (.01) 4.77 1.29
-----------------------------------
Dividends from net
investment income (.46) (.49) (.47)
Distributions from net
realized gains (1.29) (1.58) (1.16)
-----------------------------------
Total distributions (1.75) (2.07) (1.63)
-----------------------------------
Net asset value, end of year 19.50 21.26 18.56
===================================
Total return (%) 4 .06 26.03 6.91
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year
($ x 1,000) 1,509,647 1,043,262 35,634
Ratios to average net
assets: (%)
Expenses 1.08 1.07 1.09 5
Expenses excluding waiver and
payments by affiliate 1.12 1.10 1.18 5
Net investment income 1.78 1.58 2.44 5
Portfolio turnover rate (%) 69.46 49.61 58.35
CLASS C
- -------------------------------------------------------------------------
PER SHARE DATA 3 ($)
Net asset value,
beginning of year 21.18 18.56 18.90
-----------------------------------
Net investment income .28 .20 .20
Net realized and unrealized
gains (.43) 4.42 1.08
-----------------------------------
Total from investment operations (.15) 4.62 1.28
Dividends from net
investment income (.33) (.42) (.46)
Distributions from net
realized gains (1.29) (1.58) (1.16)
-----------------------------------
Total distributions (1.62) (2.00) (1.62)
-----------------------------------
Net asset value, end of year 19.41 21.18 18.56
===================================
Total return (%) 4 (.59) 25.17 6.82
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year
($ x 1,000) 993,931 636,838 16,873
Ratios to average net
assets: (%)
Expenses 1.73 1.72 1.71 5
Expenses excluding waiver and
payments by affiliate 1.77 1.75 1.80 5
Net investment income 1.12 .92 1.69 5
Portfolio turnover rate (%) 69.46 49.61 58.35
1. For the period November 1, 1996 (effective date) to December 31, 1996.
2. Based on average weighted shares outstanding.
3. Per share amounts for the period ended December 31, 1996, have been
restated to reflect a 5-for-1 stock split effective February 3, 1997.
4. Total return does not include sales charges, and is not annualized.
5. Annualized.
MUTUAL DISCOVERY FUND
[Insert graphic of bullseye and arrows] GOAL AND STRATEGIES
GOAL The fund's investment goal is long-term capital appreciation.
PRINCIPAL INVESTMENTS The fund will primarily invest in domestic and foreign
equity securities of companies located in any region of the world. Equity
securities generally entitle the holder to participate in a company's general
operating results. These include common stocks, preferred stocks and
convertible securities.
Although the fund tends to invest in the securities of companies with market
capitalization values (share price times the number of common stock shares
outstanding) of more than $1.5 billion, it may also invest in securities of
companies with smaller market capitalization values. The fund may invest a
portion of its assets in the securities of domestic or foreign companies
involved in mergers, consolidations, liquidations, reorganizations or
financial restructurings (Reorganizing Companies), or as to which there are
outstanding tender or exchange offers. Investments in Reorganizing Companies
may, but are not expected to, exceed 50% of the fund's assets.
The fund invests a significant portion of its assets in foreign equity
securities. To hedge (protect) against currency exchange rate fluctuations,
the fund enters into forward foreign currency exchange contracts to the
extent that hedging is available and, in the manager's opinion, it is
economical to do so. A forward foreign currency exchange contract is an
agreement to buy or sell a specific currency at a future date and at a price
set at the time of the contract. Forward foreign currency exchange contracts
may reduce the risk of loss from a change in value of a currency, but they
also limit any potential gains and do not protect against fluctuations in the
value of the underlying position.
The fund invests to a lesser extent in domestic and foreign debt securities.
Debt securities represent an obligation of the issuer to repay a loan of
money to it, and generally provide for the payment of interest. These include
bonds, including those convertible into common stock, notes and debentures.
The fund may invest in debt securities rated in any rating category
established by an independent rating organization, including lower rated or
defaulted debt securities ("junk bonds"), or in unrated debt securities. The
Fund typically invests in unrated debt securities of Reorganizing Companies.
The fund may invest in the direct indebtedness, or participation interests in
the indebtedness, of Reorganizing Companies. 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 direct
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.
Participation interests in indebtedness represent fractional interests in a
company's indebtedness. The financial institutions which typically make
participations available are banks or insurance companies or governmental
institutions or 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 fund may also purchase trade claims and other direct obligations or
claims (Trade Claims) of Reorganizing Companies. Trade Claims generally are
purchased from creditors of Reorganizing Companies, and represent money due
to a supplier of goods or services to the Reorganizing Company.
While the fund generally purchases securities for investment purposes and not
for the purpose of influencing or controlling management of a company, the
manager may use the fund's ownership interest in a company to seek to
influence or control management when the manager perceives a benefit. The
fund may invest in entities whose business is to acquire securities of
companies for the purpose of influencing or controlling management or with
the expectation of taking over such companies. The fund also may invest in
the securities of a particular company which the manager believes may be an
attractive company to be taken over by another entity.
[Begin callout]
The fund invests primarily in equity securities that the manager believes are
available at prices less than their actual value based on certain recognized
objective criteria (intrinsic value).
[End callout]
PORTFOLIO SELECTION In choosing investments for the fund, the manager bases
its opinions upon the analysis and research of certain factors, including:
the relationship of a security's book value to market value; cash flow; and
multiples of earnings of comparable securities. Each security is examined
separately and there is no set criteria as to the size of an issuer, its
earnings or the industry in which it operates. Debt securities are generally
selected based on the manager's opinion that the securities are available at
less than their intrinsic value, and the manager's own analysis of the
security has greater influence over the investment decision than the coupon
rate or rating of the security.
The smaller companies in which the fund invests are not well known, their
securities may trade in the securities markets below their book values and
may not be followed by established securities analysts.
TEMPORARY INVESTMENTS The manager may take a temporary defensive position
when it believes the markets or the economy are experiencing excessive
volatility or a prolonged general decline, or other adverse conditions exist.
Under these circumstances, the fund may be unable to pursue its investment
goal because it may not invest or may invest less in equity and debt
securities that the manager believes are available at prices less than their
intrinsic value.
[Insert graphic of chart with line going up and down] MAIN RISKS
VALUE INVESTING The fund's general policy of investing in securities that
the manager believes are available at prices less than their intrinsic value
differs from the approach followed by many other managers, and may result in
the fund choosing securities that are not widely followed by other
investors. There is always the possibility that the manager may be incorrect
in its assessment of a particular company or that the manager may not buy
these securities at their lowest possible price or sell them at their highest.
[Begin callout]
Because the stocks the fund holds fluctuate in price with market conditions,
the value of your investment in the fund will go up and down. This means you
could lose money over short or even extended periods.
[End callout]
STOCKS While stocks have historically outperformed other asset classes over
the long term, they tend to go up and down more dramatically over the shorter
term. These price movements may result from factors affecting individual
companies, industries or the securities market as a whole.
SMALLER COMPANIES Historically, smaller company securities 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, small 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.
Therefore, while smaller companies may offer greater opportunities for
capital growth than larger, more established companies, they also involve
greater risks and should be considered speculative.
REORGANIZING COMPANIES There can be no assurance that any merger,
consolidation, liquidation, reorganization or tender or exchange offer
proposed at the time the fund makes its investment in a Reorganizing Company
will be consummated or will be consummated on the terms and within the time
period contemplated and, therefore, that the fund's performance will benefit
from its investment in a Reorganizing Company. Debt securities of
Reorganizing Companies typically are unrated, lower rated, in default or
close to default.
FOREIGN SECURITIES Securities of companies and governments located outside
the U.S. may involve risks that can increase the potential for losses in the
fund.
COUNTRY. General securities market movements in any country where the fund
has investments are likely to affect the value of the securities the fund
owns which trade in that country. These movements will affect the fund's
share price and fund performance.
The political, economic and social structures of some countries the fund
invests in may be less stable and more volatile than those in the U.S. The
risks of investing in these countries include the possibility of the
imposition of exchange controls, currency devaluations, foreign ownership
limitations, expropriation, restrictions on removal of currency or other
assets, nationalization of assets, punitive taxes and certain custody and
settlement risks.
The fund's investments in developing or emerging markets are subject to all
of the risks of foreign investing generally, and have additional heightened
risks due to a lack of established legal, business and social frameworks to
support securities markets. Foreign securities markets, including emerging
markets, may have substantially lower trading volumes than U.S. markets,
resulting in less liquidity and more volatility than experienced in the U.S.
While short-term volatility in these markets can be disconcerting, declines
in excess of 50% are not unusual.
COMPANY. Foreign companies are not subject to the same disclosure,
accounting, auditing and financial reporting standards and practices as U.S.
companies and their securities may not be as liquid as securities of similar
U.S. companies. Foreign stock exchanges, trading systems, brokers and
companies generally have less government supervision and regulation than in
the U.S. The fund may have greater difficulty voting proxies, exercising
shareholder rights, pursuing legal remedies and obtaining judgments with
respect to foreign investments in foreign courts than with respect to U.S.
companies in U.S. courts.
CURRENCY. To the extent the fund's investments are denominated in foreign
currencies, changes in foreign currency exchange rates will affect the value
of what the fund owns and the fund's share price. Generally, when the U.S.
dollar rises in value against a foreign currency, an investment in that
country loses value because the currency is worth fewer U.S. dollars.
Devaluation of a currency by a country's government or banking authority also
will have a significant impact on the value of any securities denominated in
that currency. Currency markets generally are not regulated as securities
markets.
EURO. On January 1, 1999, the European Monetary Union (EMU) introduced a new
single currency, the euro, which replaced the national currency for the
eleven participating member countries. If the fund holds investments in
countries with currencies replaced by the euro, the investment process,
including trading, foreign exchange, payments, settlements, cash accounts,
custody and accounting will be impacted.
Because this change to a single currency is new and untested, the
establishment of the euro may result in market volatility. For the same
reason, it is not possible to predict the impact of the euro on the business
or financial condition of European issuers which the fund may hold in its
portfolio, and their impact on the value of fund shares and fund performance.
To the extent the fund holds non-U.S. dollar (euro or other) denominated
securities, it will still be exposed to currency risk due to fluctuations in
those currencies versus the U.S. dollar.
DERIVATIVE SECURITIES Forward foreign currency exchange contracts are
considered derivative investments, since their value depends on the value of
an underlying asset. The fund's investment in derivatives may involve a
small investment relative to the amount of risk assumed. The fund can incur
a loss in these transactions due to the imposition of controls by a foreign
or the U.S. government on the exchange of foreign currencies or the inability
to deliver or receive a foreign currency. The success of forward foreign
currency exchange contracts will depend on the manager's ability to predict
market movements. Losses resulting from the use of forward foreign currency
exchange contracts can reduce the fund's share price, and possibly income,
and such losses can be greater than if the contract had not been entered into
by the fund.
INDEBTEDNESS, PARTICIPATIONS AND TRADE CLAIMS The purchase of indebtedness
of a troubled company always involves a risk as to the creditworthiness of
the issuer and the possibility that the investment may be lost. There are no
established markets for indebtedness and, thus, it is less liquid than
securities that are heavily traded. Typically, purchasers of participations,
such as the fund, must rely on the financial institution issuing the
participation to assert any rights against the borrower with respect to the
underlying indebtedness. When a fund purchases a participation, it takes on
the risk associated with the financial soundness of the bank or other
financial intermediary issuing the participation, as well as the credit risk
associated with the financial soundness of the issuer of the underlying
indebtedness. When a fund purchases a Trade Claim, there is no guarantee
that the debtor will ever be able to satisfy the obligation of the Trade
Claim.
CREDIT This is the possibility that an issuer will be unable to make
interest payments or repay principal. Changes in an issuer's financial
strength or in a security's credit rating may affect its value and, thus,
impact the value of fund shares.
Securities rated below investment grade, sometimes called "junk bonds" or
"high yield debt securities," generally have more risk than higher-rated
securities. The principal risks of investing in these securities include:
o SUBSTANTIAL CREDIT RISK. Companies issuing high yield 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.
o DEFAULTED DEBT RISK. 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.
o VOLATILITY RISK. The prices of high yield debt securities fluctuate more
than higher-quality securities. Prices are especially sensitive to
developments affecting the company's business and to changes in the
ratings assigned by ratings organizations. 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.
ILLIQUID SECURITIES The fund may invest up to 15% of its net assets in
illiquid securities. Illiquid securities are securities with a limited
trading market. Investments by the fund in illiquid securities involve the
possibility that the securities cannot be readily sold or can only be resold
at a price significantly lower than their value, which may have a negative
effect on the value of the fund's shares.
YEAR 2000 When evaluating current and potential portfolio positions, Year
2000 is one of the factors the fund's manager considers.
[Begin callout]
Mutual fund shares are not deposits or obligations of, or guaranteed or
endorsed by, any bank, and are not federally insured by the Federal Deposit
Insurance Corporation, the Federal Reserve Board, or any other agency of the
U.S. government. Mutual fund shares involve investment risks, including the
possible loss of principal.
[End callout]
The manager will rely upon public filings and other statements made by
companies about their Year 2000 readiness. Issuers in countries outside the
U.S., particularly in emerging markets, may not be required to make the same
level of disclosure about Year 2000 readiness as is required in the U.S. The
manager, of course, cannot audit each company and its major suppliers to
verify their Year 2000 readiness.
If a company in which the fund is invested is adversely affected by Year 2000
problems, it is likely that the price of its security will also be adversely
affected. A decrease in the value of one or more of the fund's portfolio
holdings will have a similar impact on the price of the fund's shares and the
fund's performance. Please see page ___ for more information.
More detailed information about the fund, its policies, including temporary
investments, risks and the bond ratings can be found in the fund's Statement
of Additional Information (SAI).
[Insert graphic of a bull and a bear] PERFORMANCE
This bar chart and table show the volatility of the fund's returns, which is
one indicator of the risks of investing in the fund. The bar chart shows
changes in the fund's returns from year to year over the past 6 calendar
years. The table shows how the fund's average annual total returns compare to
those of a broad-based securities market index. Of course, past performance
cannot predict or guarantee future results.
CLASS A ANNUAL TOTAL RETURNS1
[Insert bar graph]
35.33% 3.20% 28.17% 24.41% 22.46% -2.37%
93 94 95 96 97 98
YEAR
[Begin callout]
BEST QUARTER:
Q1 '93 12.21%
WORST QUARTER:
Q3 '98 -19.55%
[End callout]
AVERAGE ANNUAL TOTAL RETURNS
For the periods ended December 31, 1998
SINCE
INCEPTION
1 YEAR 5 YEARS (12/31/92)
- --------------------------------------------------------------------------
Mutual Discovery Fund - Class A 2 -7.99% 13.15% 16.57%
S&P 500(R)Index 3 28.58% 24.06% 21.61%
MSCI World 4 24.80% 16.19% 17.32%
SINCE
INCEPTION
1 YEAR 5 YEARS (12/31/92)
- --------------------------------------------------------------------------
Mutual Discovery Fund - Class B 2 -6.57% 13.53% 16.89%
S&P 500(R)Index 3 28.58% 24.06% 21.61%
MSCI World 4 24.80% 16.19% 17.32%
SINCE
INCEPTION
1 YEAR 5 YEARS (12/31/92)
- --------------------------------------------------------------------------
Mutual Discovery Fund - Class C 2 -4.79% 13.54% 16.78%
S&P 500(R)Index 3 28.58% 24.06% 21.61%
MSCI World 4 24.80% 16.19% 17.32%
1. Figures do not reflect sales charges. If they did, returns would be lower.
2. Figures reflect sales charges.
Before November 1, 1996, only a single class of fund shares was offered
without a sales charge and Rule 12b-1 fees. All fund returns shown reflect a
restatement of the original class to include the Rule 12b-1 fees as though in
effect from the fund's inception and assume reinvestment of dividends and
capital gains.
3. Source: Standard & Poor's(R) Micropal. The S&P 500(R) Index is an unmanaged
group of widely held common stocks covering a variety of industries. It
includes reinvested dividends. One cannot invest directly in an index, nor is
an index representative of the fund's portfolio.
4. Source: Standard & Poor's(R) Micropal. The unmanaged MSCI World Index tracks
the performance of approximately 1500 securities in 23 countries and is
designed to measure world stock market performance. It includes reinvested
dividends. One cannot invest directly in an index, nor is an index
representative of the fund's portfolio.
[Insert graphic of percentage sign] FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and
hold shares of the fund.
This table describes the fees and expenses that you may pay if you buy and
hold shares of the fund.
SHAREHOLDER FEES (FEES PAID DIRECTLY FROM YOUR INVESTMENT)
CLASS A 1 CLASS B 2 CLASS C 1
- -------------------------------------------------------------------------------
Maximum sales charge (load) as a
percentage of offering price 5.75% 4.00% 1.99%
Load imposed on purchases 5.75% None 1.00%
Maximum deferred sales charge (load) None3 4.00% 0.99%4
Exchange fee None None None
Please see "Choosing a Share Class" on page [#] for an explanation of how and
when these sales charges apply.
ANNUAL FUND OPERATING EXPENSES (EXPENSES DEDUCTED FROM FUND ASSETS)
CLASS A 1 CLASS B 2 CLASS C 1
- -------------------------------------------------------------------------------
Management fees 5 0.80% 0.80% 0.80%
Distribution and service
(12b-1) fees 6 0.35% 1.00% 1.00%
Other expenses 0.23% 0.23% 0.23%
------------------------------------
Total annual fund operating expenses5 1.38% 2.03% 2.03%
====================================
1. Before January 1, 1999, Class A shares were designated Class I and Class C
shares were designated Class II.
2. The fund began offering Class B shares on January 1, 1999. Annual fund
operating expenses are based on the expenses for Class A and C for the fiscal
year ended December 31, 1998. The distribution and service (12b-1) fees are
based on the maximum fees allowed under Class B's Rule 12b-1 plan.
3. Except for investments of $1 million or more (see page [#])and purchases
by certain retirement plans without an initial sales charge.
4. This is equivalent to a charge of 1% based on net asset value.
5. For the fiscal year ended December 31, 1998, the manager had agreed in
advance to limit its management fees. With this reduction, management fees
were 0.77% and total annual fund operating expenses were 1.35% for Class A
and 2.00% for Class C. After October 31, 1999, the manager may end this
arrangement at any time. Class B and C total annual fund operating expenses
differ from the ratio of expenses to average net assets shown on page [#] due
to a timing difference between the end of the 12b-1 plan year and the fund's
fiscal year end.
6. Because of the distribution and service (12b-1) fees, over the long term
you may indirectly pay more than the equivalent of the maximum permitted
initial sales charge.
EXAMPLE
This example can help you compare the cost of investing in the fund with the
cost of investing in other mutual funds.
The example assumes you invest $10,000 for the periods shown and then sell
all of your shares at the end of those periods. The example also assumes your
investment has a 5% return each year and the fund's operating expenses remain
the same. Although your actual costs may be higher or lower, based on these
assumptions your costs would be:
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- --------------------------------------------------------------------------------
CLASS A $707 1 $987 $1,287 $2,137
CLASS B
Assuming you sold your shares
at the end of the period $606 $937 $1,293 $2,196 2
Assuming you stayed in the fund
$206 $637 $1,093 $2,196
CLASS C $402 3 $730 $1,182 $2,435
1. Assumes a contingent deferred sales charge (CDSC) will not apply.
2. Assumes conversion of Class B shares to Class A shares after eight years,
lowering your annual expenses from that time on.
3. For the same Class C investment, your costs would be $304 if you did not
sell your shares at the end of the first year. Your costs for the remaining
periods would be the same.
[Insert graphic of a dollar bill] FINANCIAL HIGHLIGHTS
This table presents the fund's financial performance for the past three
years. This information has been audited by Ernst & Young LLP.
CLASS A YEAR ENDED DECEMBER 31,
- -------------------------------------------------------------------------
1998 1997 2 1996 1
- -------------------------------------------------------------------------
PER SHARE DATA ($)
Net asset value,
beginning of year 18.83 17.15 17.66
---------------------------------
Net investment income .32 .27 .11
Net realized and unrealized
gains (.74) 3.54 .74
---------------------------------
Total from investment operations (.42) 3.81 .85
---------------------------------
Dividends from net
investment income (.41) (.77) (.29)
Distributions from net
realized gains (.81) (1.36) (1.07)
---------------------------------
Total distributions (1.22) (2.13) (1.36)
---------------------------------
Net asset value, end of year 17.19 18.83 17.15
=================================
Total return (%) 3 (2.37) 22.54 4.85
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year
($ x 1,000) 859,848 693,952 29,903
Ratios to average net
assets: (%)
Expenses 1.35 1.33 1.38 4
Expenses excluding waiver and
payments by affiliate 1.38 1.35 1.51 4
Net investment income 1.46 1.39 0.74 4
Portfolio turnover rate (%) 83.57 58.15 80.18
CLASS C
- -------------------------------------------------------------------------
PER SHARE DATA ($)
Net asset value,
beginning of year 18.79 17.17 17.66
---------------------------------
Net investment income .23 .15 .09
Net realized and unrealized
gains (.75) 3.52 .76
---------------------------------
Total from investment operations (.52) 3.67 .85
Dividends from net
investment income (.31) (.69) (.27)
Distributions from net
realized gains (.81) (1.36) (1.07)
---------------------------------
Total distributions (1.12) (2.05) (1.34)
---------------------------------
Net asset value, end of year 17.15 18.79 17.17
=================================
Total return (%)3 (2.97) 21.70 4.90
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year
($ x 1,000) 563,761 402,625 18,038
Ratios to average net
assets: (%)
Expenses 2.00 1.98 2.00 4
Expenses excluding waiver and
payments by affiliate 2.02 2.00 2.13 4
Net investment income .81 .74 .13 4
Portfolio turnover rate (%) 83.57 58.15 80.18
1. For the period November 1, 1996 (effective date) to December 31, 1996.
2. Based on average weighted shares outstanding.
3. Total return does not include sales charges, and is not annualized.
4. Annualized.
MUTUAL EUROPEAN FUND
[Insert graphic of bullseye and arrows] GOALS AND STRATEGIES
GOALS The fund's investment goal is capital appreciation, which may
occasionally be short-term. Its secondary goal is income.
PRINCIPAL INVESTMENTS The fund will primarily invest in foreign equity
securities of companies located in any region of the world. Equity
securities generally entitle the holder to participate in a company's general
operating results. These include common stocks, preferred stocks and
convertible securities.
Normally, European will invest at least 65% of its total assets in the
securities of issuers (i) organized under the laws of, (ii) whose principal
business operations are located in, or (iii) at least 50% of whose revenue is
earned from, European countries. For purposes of the fund's investments,
European countries means all of the countries that are members of the
European Union, the United Kingdom, Scandinavia, Eastern and Western Europe
and those regions of Russia and the former Soviet Union that are considered
part of Europe. The fund currently intends to invest primarily in securities
of issuers in Western Europe and Scandinavia.
European will normally invest in securities from at least five different
countries, although, from time to time, it may invest all of its assets in a
single country. European may also invest up to 35% of its total assets in
securities of U.S. issuers, as well as in securities of issuers from the
Levant, the Middle East and the remaining regions of the world.
The fund invests a substantial portion of its assets in the securities of
smaller companies, which are those companies with market capitalization
values (share price times the number of common shares outstanding) of less
than $1.5 billion at the time of purchase. The fund may also invest a
portion of its assets in the securities of domestic or foreign companies
involved in mergers, consolidations, liquidations, reorganizations or
financial restructurings (Reorganizing Companies), or as to which there are
outstanding tender or exchange offers. Investments in Reorganizing Companies
may, but are not expected to, exceed 50% of the fund's assets.
The fund invests to a lesser extent in domestic and foreign debt securities,
which may include sovereign debt and participation in foreign government
debt. Debt securities represent an obligation of the issuer to repay a loan
of money to it, and generally provide for the payment of interest. These
include bonds, including those convertible into common stock, notes and
debentures. The fund may invest in debt securities rated in any rating
category established by an independent rating organization, including lower
rated or defaulted debt securities ("junk bonds"), or in unrated debt
securities. The fund typically invests in unrated debt securities of
Reorganizing Companies.
The fund may invest in the direct indebtedness, or participation interests in
the indebtedness of, Reorganizing Companies. 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 direct
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.
Participation interests in indebtedness represent fractional interests in a
company's indebtedness. The financial institutions which typically make
participations available are banks or insurance companies or governmental
institutions or 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 fund may also purchase trade claims and other direct obligations or
claims ("Trade Claims") of Reorganizing Companies. Trade Claims generally
are purchased from creditors of Reorganizing Companies and represent money
due to a supplier of goods or services to the Reorganizing Company.
To hedge (protect) against currency exchange rate fluctuations, the fund
enters into forward foreign currency exchange contracts to the extent that
hedging is available and, in the manager's opinion, it is economical to do
so. A forward foreign currency exchange contract is an agreement to buy or
sell a specific currency at a future date and at a price set at the time of
the contract. Forward foreign currency exchange contracts may reduce the
risk of loss from a change in value of a currency, but they also limit any
potential gains and do not protect against fluctuations in the value of the
underlying position.
While the fund purchases securities for investment purposes and not for the
purpose of influencing or controlling management of a company, the manager
may use the fund's ownership interest in a company to seek to influence or
control management when the manager perceives a benefit. The fund may invest
in entities whose business is to acquire securities of companies for the
purpose of influencing or controlling management or with the expectation of
taking over such companies. The fund also may invest in the securities of a
particular company which the manager believes may be an attractive company to
be taken over by another entity.
[Begin callout]
The fund invests primarily in foreign equity securities of companies in
Western Europe and Scandinavia but may invest in companies in any region of
the world.
[End callout]
PORTFOLIO SELECTION The fund invests primarily in equity securities that the
manager believes are available at prices less than their actual value based
on certain recognized objective criteria (intrinsic value). In choosing
investments for the fund, the manager bases its opinions upon the analysis
and research of certain factors, including: the relationship of a security's
book value to market value; cash flow; and multiples of earnings of
comparable securities. Each security is examined separately and there is no
set criteria as to the size of an issuer, its earnings or the industry in
which it operates. Debt securities are generally selected based on the
manager's opinion that the securities are available at less than their
intrinsic value, and the manager's own analysis of the security has greater
influence over the investment decision than the coupon rate or rating of the
security. The smaller companies in which the fund invests are not well
known, their securities may trade in the securities markets below their book
values and may not be followed by established securities analysts.
TEMPORARY INVESTMENTS The manager may take a temporary defensive position
when it believes the markets or the economy are experiencing excessive
volatility or a prolonged general decline, or other adverse conditions exist.
Under these circumstances, the fund may be unable to pursue its investment
goals because it may not invest or may invest less in equity and debt
securities that the manager believes are available at prices less than their
intrinsic value.
[Insert graphic of chart with line going up and down] MAIN RISKS
VALUE INVESTING The fund's general policy of investing in securities that
the manager believes are available at prices less than their intrinsic value
differs from the approach followed by many other managers, and may result in
the fund choosing securities that are not widely followed by other
investors. There is always the possibility that the manager may be incorrect
in its assessment of a particular company or that the manager may not buy
these securities at their lowest possible price or sell them at their highest.
[Begin callout]
Because the stocks the fund holds fluctuate in price with market conditions,
the value of your investment in the fund will go up and down. This means you
could lose money over short or even extended periods.
[End callout]
STOCKS While stocks have historically outperformed other asset classes over
the long term, they tend to go up and down more dramatically over the shorter
term. These price movements may result from factors affecting individual
companies, industries or the securities market as a whole.
FOREIGN SECURITIES Securities of companies and governments located outside
the U.S. may involve risks that can increase the potential for losses in the
fund.
COUNTRY. General securities market movements in any country where the fund
has investments are likely to affect the value of the securities the fund
owns which trade in that country. These movements will affect the fund's
share price and fund performance.
The political, economic and social structures of some countries the fund
invests in may be less stable and more volatile than those in the U.S. The
risks of investing in these countries include the possibility of the
imposition of exchange controls, currency devaluations, foreign ownership
limitations, expropriation, restrictions on removal of currency or other
assets, nationalization of assets, punitive taxes and certain custody and
settlement risks.
The fund's investments in developing or emerging markets are subject to all
of the risks of foreign investing generally, and have additional heightened
risks due to a lack of established legal, business and social frameworks to
support securities markets. Foreign securities markets, including emerging
markets, may have substantially lower trading volumes than U.S. markets,
resulting in less liquidity and more volatility than experienced in the U.S.
While short-term volatility in these markets can be disconcerting, declines
in excess of 50% are not unusual.
COMPANY. Foreign companies are not subject to the same disclosure,
accounting, auditing and financial reporting standards and practices as U.S.
companies and their securities may not be as liquid as securities of similar
U.S. companies. Foreign stock exchanges, trading systems, brokers and
companies generally have less government supervision and regulation than in
the U.S. The fund may have greater difficulty voting proxies, exercising
shareholder rights, pursuing legal remedies and obtaining judgments with
respect to foreign investments in foreign courts than with respect to U.S.
companies in U.S. courts.
CURRENCY. Many of the fund's investments are denominated in foreign
currencies. Changes in foreign currency exchange rates will affect the value
of what the fund owns and the fund's share price. Generally, when the U.S.
dollar rises in value against a foreign currency, an investment in that
country loses value because the currency is worth fewer U.S. dollars.
Devaluation of a currency by a country's government or banking authority also
will have a significant impact on the value of any securities denominated in
that currency. Currency markets generally are not regulated as securities
markets.
EURO. On January 1, 1999, the European Monetary Union (EMU) introduced a new
single currency, the euro, which replaced the national currency for the
eleven participating member countries. If the fund holds investments in
countries with currencies replaced by the euro, the investment process,
including trading, foreign exchange, payments, settlements, cash accounts,
custody and accounting will be impacted.
Because this change to a single currency is new and untested, the
establishment of the euro may result in market volatility. For the same
reason, it is not possible to predict the impact of the euro on the business
or financial condition of European issuers which the fund may hold in its
portfolio, and their impact on fund performance. To the extent the fund holds
non-U.S. dollar (euro or other) denominated securities, it will still be
exposed to currency risk due to fluctuations in those currencies versus the
U.S. dollar.
SMALLER COMPANIES Historically, smaller company securities 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, small 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.
Therefore, while smaller companies may offer greater opportunities for
capital growth than larger, more established companies, they also involve
greater risks and should be considered speculative.
REORGANIZING COMPANIES There can be no assurance that any merger,
consolidation, liquidation, reorganization or tender or exchange offer
proposed at the time the fund makes its investment in a Reorganizing Company
will be consummated or will be consummated on the terms and within the time
period contemplated and, therefore, that the fund's performance will benefit
from its investment in a Reorganizing Company. Debt securities of
Reorganizing Companies typically are unrated, lower rated, in default or
close to default.
DERIVATIVE SECURITIES Forward foreign currency exchange contracts are
considered derivative investments, since their value depends on the value of
an underlying asset. The fund's investment in derivatives may involve a
small investment relative to the amount of risk assumed. The fund can incur
a loss in these transactions due to the imposition of controls by a foreign
or the U.S. government on the exchange of foreign currencies or the inability
to deliver or receive a foreign currency. The success or forward foreign
currency exchange contracts will depend on the manager's ability to predict
market movements. Losses resulting from the use of forward foreign currency
exchange contracts can reduce the fund's share price, and possibly income,
and such losses can be greater than if the contract had not been entered into
by the fund.
INDEBTEDNESS, PARTICIPATIONS AND TRADE CLAIMS The purchase of indebtedness
of a troubled company always involves a risk as to the creditworthiness of
the issuer and the possibility that the investment may be lost. There are no
established markets for indebtedness and, thus, it is less liquid than
securities that are heavily traded. Typically, purchasers of participations,
such as the fund, must rely on the financial institution issuing the
participation to assert any rights against the borrower with respect to the
underlying indebtedness. When a fund purchases a participation, it takes on
the risk associated with the financial soundness of the bank or other
financial intermediary issuing the participation, as well as the credit risk
associated with the financial soundness of the issuer of the underlying
indebtedness. When a fund purchases a Trade Claim, there is no guarantee
that the debtor will ever be able to satisfy the obligation on the Trade
Claims.
CREDIT This is the possibility that an issuer will be unable to make
interest payments or repay principal. Changes in an issuer's financial
strength or in a security's credit rating may affect its value and, thus,
impact the value of fund shares.
Securities rated below investment grade, sometimes called "junk bonds" or
"high yield debt securities," generally have more risk than higher-rated
securities. The principal risks of investing in these securities include:
o SUBSTANTIAL CREDIT RISK. Companies issuing high yield 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.
o DEFAULTED DEBT RISK. 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.
o VOLATILITY RISK. The prices of high yield debt securities fluctuate more
than higher-quality securities. Prices are especially sensitive to
developments affecting the company's business and to changes in the
ratings assigned by ratings organizations. 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.
ILLIQUID SECURITIES The fund may invest up to 15% of its net assets in
illiquid securities. Illiquid securities are securities with a limited
trading market. Investments by the fund in illiquid securities involve the
possibility that the securities cannot be readily sold or can only be resold
at a price significantly lower than their value, which may have a negative
effect on the value of the fund's shares.
YEAR 2000 When evaluating current and potential portfolio positions, Year
2000 is one of the factors the fund's manager considers.
[Begin callout]
Mutual fund shares are not deposits or obligations of, or guaranteed or
endorsed by, any bank, and are not federally insured by the Federal Deposit
Insurance Corporation, the Federal Reserve Board, or any other agency of the
U.S. government. Mutual fund shares involve investment risks, including the
possible loss of principal.
[End callout]
The manager will rely upon public filings and other statements made by
companies about their Year 2000 readiness. Issuers in countries outside the
U.S., particularly in emerging markets, may not be required to make the same
level of disclosure about Year 2000 readiness as is required in the U.S. The
manager, of course, cannot audit each company and its major suppliers to
verify their Year 2000 readiness.
If a company in which the fund is invested is adversely affected by Year 2000
problems, it is likely that the price of its security will also be adversely
affected. A decrease in the value of one or more of the fund's portfolio
holdings will have a similar impact on the fund's performance. Please see
page [__] for more information.
More detailed information about the fund, its policies, including temporary
investments, risks and bond ratings can be found in the fund's Statement of
Additional Information (SAI).
[Insert graphic of a bull and a bear] PERFORMANCE
This bar chart and table show the volatility of the fund's returns, which is
one indicator of the risks of investing in the fund. The bar chart shows
changes in the fund's returns from year to year over the past 2 calendar
years. The table shows how the fund's average annual total returns compare to
those of a broad-based securities market index. Of course, past performance
cannot predict or guarantee future results.
CLASS A ANNUAL TOTAL RETURNS 1
[Insert bar graph]
22.72% 4.07%
97 98
YEAR
[Begin callout]
BEST QUARTER:
Q1 '98 14.64%
WORST QUARTER:
Q3 '98 -20.38%
[End callout]
AVERAGE ANNUAL TOTAL RETURNS
For the periods ended December 31, 1998
SINCE
INCEPTION
1 YEAR (7/3/96)
- -------------------------------------------------------------
Mutual European Fund - Class A 2 -1.94% 13.66%
MSCI All Countries Europe Index 3 27.18% 26.80%
SINCE
INCEPTION
1 YEAR (7/3/96)
- -------------------------------------------------------------
Mutual European Fund - Class B 2 0.32% 14.78%
MSCI All Countries Europe Index 3 27.18% 26.80%
SINCE
INCEPTION
1 YEAR (7/3/96)
- -------------------------------------------------------------
Mutual European Fund - Class C 2 1.61% 15.30%
MSCI All Countries Europe Index 3 27.18% 26.80%
1. Figures do not reflect sales charges. If they did, returns would be lower.
2. Figures reflect sales charges.
Before November 1, 1996, only a single class of fund shares was offered
without a sales charge and Rule 12b-1 fees. All fund returns shown reflect a
restatement of the original class to include the Rule 12b-1 fees as though in
effect from the fund's inception and assume reinvestment of dividends and
capital gains.
3. Source: Standard & Poor's(R) Micropal. The Morgan Stanley Capital
International (MSCI) All Countries Europe Index measures the weighted average
performance, in U.S. dollars, of about 60% of the market capitalization
listed on 21 European stock exchanges (approximately 700 securities), and
includes all dividends reinvested. One cannot invest directly in an index,
nor is an index representative of the fund's portfolio.
[Insert graphic of percentage sign] FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and
hold shares of the fund.
This table describes the fees and expenses that you may pay if you buy and
hold shares of the fund.
SHAREHOLDER FEES (FEES PAID DIRECTLY FROM YOUR INVESTMENT)
CLASS A 1 CLASS B 2 CLASS C 1
- -------------------------------------------------------------------------------
Maximum sales charge (load) as a
percentage of offering price 5.75% 4.00% 1.99%
Load imposed on purchases 5.75% None 1.00%
Maximum deferred sales charge (load) None 3 4.00% 0.99% 4
Exchange fee None None None
Please see "Choosing a Share Class" on page [#] for an explanation of how and
when these sales charges apply.
ANNUAL FUND OPERATING EXPENSES (EXPENSES DEDUCTED FROM FUND ASSETS)
CLASS A 1 CLASS B 2 CLASS C 1
- -------------------------------------------------------------------------------
Management fees 0.80% 0.80% 0.80%
Distribution and service
(12b-1) fees 5 0.35% 1.00% 1.00%
Other expenses 0.25% 0.25% 0.25%
------------------------------------
Total annual fund operating expenses5 1.40% 2.05% 2.05%
====================================
1. Before January 1, 1999, Class A shares were designated Class I and Class C
shares were designated Class II.
2. The fund began offering Class B shares on January 1, 1999. Annual fund
operating expenses are based on the expenses for Class A and C for the fiscal
year ended December 31, 1998. The distribution and service (12b-1) fees are
based on the maximum fees allowed under Class B's Rule 12b-1 plan.
3. Except for investments of $1 million or more (see page [#])and purchases
by certain retirement plans without an initial sales charge.
4. This is equivalent to a charge of 1% based on net asset value.
5. Because of the distribution and service (12b-1) fees, over the long term
you may indirectly pay more than the equivalent of the maximum permitted
initial sales charge.
EXAMPLE
This example can help you compare the cost of investing in the fund with the
cost of investing in other mutual funds.
The example assumes you invest $10,000 for the periods shown and then sell
all of your shares at the end of those periods. The example also assumes your
investment has a 5% return each year and the fund's operating expenses remain
the same. Although your actual costs may be higher or lower, based on these
assumptions your costs would be:
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- --------------------------------------------------------------------------------
CLASS A $709 1 $993 $1,297 $2,158
CLASS B
Assuming you sold your shares
at the end of the period $608 $943 $1,303 $2,218 2
Assuming you stayed in the fund
$208 $643 $1,103 $2,218 2
CLASS C $404 3 $736 $1,192 $2,455
1. Assumes a contingent deferred sales charge (CDSC) will not apply.
2. Assumes conversion of Class B shares to Class A shares after eight years,
lowering your annual expenses from that time on.
3. For the same Class C investment, your costs would be $306 if you did not
sell your shares at the end of the first year. Your costs for the remaining
periods would be the same.
[Insert graphic of a dollar bill] FINANCIAL HIGHLIGHTS
This table presents the fund's financial performance for the past three
years. This information has been audited by Ernst & Young LLP.
CLASS A YEAR ENDED DECEMBER 31,
- -------------------------------------------------------------------------
1998 1997 2 1996 1
- -------------------------------------------------------------------------
PER SHARE DATA ($)
Net asset value,
beginning of year 12.56 11.38 10.84
---------------------------------
Net investment income .27 .24 .03
Net realized and unrealized
gains .29 2.31 .58
---------------------------------
Total from investment operations .56 2.55 .61
---------------------------------
Dividends from net
investment income (.29) (.81) (.05)
Distributions from net
realized gains (.36) (.56) (.02)
---------------------------------
Total distributions (.65) (1.37) (.07)
---------------------------------
Net asset value, end of year 12.47 12.56 11.38
=================================
Total return (%) 3 4.15 22.61 5.61
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year
($ x 1,000) 170,486 93,231 9,200
Ratios to average net
assets: (%)
Expenses 1.40 1.37 1.32 4
Expenses excluding waiver and
payments by affiliate 1.40 1.39 1.42 4
Net investment income 1.68 1.84 1.44 4
Portfolio turnover rate (%) 97.62 98.12 36.75
CLASS C
- -------------------------------------------------------------------------
PER SHARE DATA ($)
Net asset value,
beginning of year 12.52 11.38 10.84
---------------------------------
Net investment income .21 .13 .02
Net realized and unrealized
gains .31 2.33 .58
---------------------------------
Total from investment operations .52 2.46 .60
Dividends from net
investment income (.23) (.76) (.04)
Distributions from net
realized gains (.36) (.56) (.02)
---------------------------------
Total distributions (.59) (1.32) (.06)
---------------------------------
Net asset value, end of year 12.45 12.52 11.38
=================================
Total return (%) 3 3.74 21.79 5.52
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year
($ x 1,000) 96,555 49,174 2,754
Ratios to average net
assets: (%)
Expenses 2.05 2.02 1.94 4
Expenses excluding waiver and
payments by affiliate 2.05 2.05 2.04 4
Net investment income 1.00 1.03 0.79 4
Portfolio turnover rate (%) 97.62 98.12 36.75
1. For the period November 1, 1996 (effective date) to December 31, 1996.
2. Based on average weighted shares outstanding.
3. Total return does not include sales charges, and is not annualized.
4. Annualized.
[Insert graphic of briefcase] MANAGEMENT
Franklin Mutual Advisers, Inc. (Franklin Mutual), 51 John F. Kennedy Parkway,
Short Hills, New Jersey 07078, is the funds' investment manager. Together,
Franklin Mutual and its affiliates manage over $220 billion in assets.
Michael F. Price is Chairman of the Boards of Directors which oversee the
management of the funds and Franklin Mutual.
The team responsible for the funds' management is led by Peter Langerman,
Chief Executive Officer, and Robert Friedman, Chief Investment Officer, of
Franklin Mutual. Mr. Friedman has the overall supervisory responsibility for
the day to day management of all of the funds' portfolios. The team is
comprised of the following individuals:
JEFFREY A. ALTMAN, SENIOR VICE PRESIDENT OF FRANKLIN MUTUAL
Mr. Altman has been a manager of the funds since 1988. Before joining the
Franklin Templeton Group in November 1996, Mr. Altman was employed as a
research analyst and trader for Heine Securities Corporation, the funds'
former investment manager.
ROBERT L. FRIEDMAN, CHIEF INVESTMENT OFFICER AND SENIOR VICE PRESIDENT OF
FRANKLIN MUTUAL
Mr. Friedman has been a manager of the funds since 1988. Before joining the
Franklin Templeton Group in November 1996, Mr. Friedman was employed as a
research analyst for Heine Securities Corporation, the funds' former
investment manager.
RAYMOND GAREA, SENIOR VICE PRESIDENT OF FRANKLIN MUTUAL
Mr. Garea has been a manager of the funds since 1991. Before joining the
Franklin Templeton Group in November 1996, Mr. Garea was employed as a
research analyst for Heine Securities Corporation, the funds' former
investment manager.
PETER A. LANGERMAN, CHIEF EXECUTIVE OFFICER AND PRESIDENT OF FRANKLIN MUTUAL
Mr. Langerman has been a manager of the funds since 1986. Before joining the
Franklin Templeton Group in November 1996, Mr. Langerman was employed as a
research analyst for Heine Securities Corporation, the funds' former
investment manager.
DAVID E. MARCUS, SENIOR VICE PRESIDENT OF FRANKLIN MUTUAL
Mr. Marcus has been a manager of the funds since 1998. Before joining the
Franklin Templeton Group in November 1996, Mr. Marcus was employed as a
research analyst for Heine Securities Corporation, the funds' former
investment manager.
LAWRENCE N. SONDIKE, SENIOR VICE PRESIDENT OF FRANKLIN MUTUAL
Mr. Sondike has been a manager of the funds since 1984. Before joining the
Franklin Templeton Group in November 1996, Mr. Sondike was employed as a
research analyst for Heine Securities Corporation, the funds' former
investment manager.
DAVID J. WINTERS CFA, SENIOR VICE PRESIDENT OF FRANKLIN MUTUAL
Mr. Winters has been a manager of the funds since 1987. Before joining the
Franklin Templeton Group in November 1996, Mr. Winters was employed as a
research analyst for Heine Securities Corporation, the funds' former
investment manager.
In addition, Franklin Mutual employees Jim Agah and Jeff Diamond as Assistant
Portfolio Managers:
JIM AGAH CFA, ASSISTANT PORTFOLIO MANAGER OF FRANKLIN MUTUAL
Mr. Agah has been a manager of the funds since 1997, when he joined the
Franklin Templeton Group. Previously, he was a vice president of equity sales
at Keefe, Bryette & Woods.
JEFF DIAMOND, VICE PRESIDENT OF FRANKLIN MUTUAL
Mr. Diamond has been a manager of the funds since 1998, when he joined the
Franklin Templeton Group. Previously, he was vice president and co-manager of
Prudential Conservative Stock Fund.
The following Portfolio and Assistant Portfolio Managers have primary
responsibility for investments in the following funds:
Mutual Shares Fund .... Larry Sondike and David Marcus
Mutual Qualified Fund . Ray Garea and Assistant Portfolio
Manager Jeff Diamond
Mutual Beacon Fund .... Larry Sondike and David Winters
Mutual Discovery Fund . Rob Friedman and David Marcus
Mutual European Fund .. David Marcus
Mutual Financial
Services Fund Ray Garea and Assistant Portfolio Manager
Jim Agah
Each fund pays the manager a fee for managing the fund's assets and making
its investment decisions. For the fiscal year ended December 31, 1998,
Franklin Mutual agreed in advance to limit its fees. After October 31, 1999,
the manager may end this arrangement at any time upon notice to the fund's
Board of Directors. The table below shows the management fees paid by each
fund, as a percentage of average daily net assets.
MANAGEMENT
FEES BEFORE MANAGEMENT
ADVANCE WAIVER FEES PAID
- ------------------------------------------------------------------------------
CLASS A
Mutual Shares....... 0.60% 0.57%
Qualified........... 0.60 0.57
Beacon.............. 0.60 0.57
European............ 0.80 0.78
Discovery........... 0.80 0.78
Financial Services*. 0.80 0.18
CLASS C
Mutual Shares....... 0.60% 0.57%
Qualified........... 0.60 0.57
Beacon.............. 0.60 0.57
European............ 0.80 0.78
Discovery........... 0.80 0.78
Financial Services*. 0.80 0.18
*Annualized
YEAR 2000 PROBLEM Each fund's business operations depend on a worldwide
network of computer systems that contain date fields, including securities
trading systems, securities transfer agent operations and stock market links.
Many of the systems currently use a two digit date field to represent the
date, and unless these systems are changed or modified, they may not be able
to distinguish the Year 1900 from the Year 2000 (commonly referred to as the
Year 2000 problem). In addition, the fact that the Year 2000 is a leap year
may create difficulties for some systems.
When the Year 2000 arrives, a fund's operations could be adversely affected
if the computer systems used by the manager, its service providers and other
third parties it does business with are not Year 2000 ready. For example, a
fund's portfolio and operational areas could be impacted, including
securities trade processing, interest and dividend payments, securities
pricing, shareholder account services, reporting, custody functions and
others. A fund could experience difficulties in effecting transactions if any
of its foreign subcustodians, or if foreign broker-dealers or foreign markets
are not ready for Year 2000.
Each fund's manager and its affiliated service providers are making a
concerted effort to take steps they believe are reasonably designed to
address their Year 2000 problems. Of course, a fund's ability to reduce the
effects of the Year 2000 problem is also very much dependent upon the efforts
of third parties over which the fund and its manager may have no control.
[Insert graphic of dollar
signs and stacks of coins] DISTRIBUTIONS AND TAXES
INCOME AND CAPITAL GAINS DISTRIBUTIONS
Each fund intends to pay a dividend at least semiannually representing its
net investment income. Capital gains, if any, may be distributed twice a
year. The amount of these distributions will vary and there is no guarantee
the funds will pay dividends.
To receive a distribution, you must be a shareholder on the record date. The
record dates for the funds' distributions will vary. Please keep in mind that
if you invest in a fund shortly before the record date of a distribution, any
distribution will lower the value of the fund's shares by the amount of the
distribution and you will receive some of your investment back in the form of
a taxable distribution. If you would like information on upcoming record
dates for the funds' distributions, please call 1-800/DIAL BEN(R).
TAX CONSIDERATIONS In general, fund distributions are taxable to you as
either ordinary income or capital gains. This is true whether you reinvest
your distributions in additional shares of a fund or receive them in cash.
Any capital gains a fund distributes are taxable to you as long-term capital
gains no matter how long you have owned your shares.
[Begin callout]
BACKUP WITHHOLDING
By law, a fund must withhold 31% of your taxable distributions and proceeds
if you do not provide your correct taxpayer identification number (TIN) or
certify that your TIN is correct, or if the IRS instructs the fund to do so.
[End callout]
Every January, you will receive a statement that shows the tax status of
distributions you received for the previous year. Distributions declared in
December but paid in January are taxable as if they were paid in December.
When you sell your shares of a fund, you may have a capital gain or loss. For
tax purposes, an exchange of your fund shares for shares of a different
Franklin Templeton Fund is the same as a sale. The individual tax rate on any
gain from the sale or exchange of your shares depends on how long you have
held your shares.
Fund distributions and gains from the sale or exchange of your shares will
generally be subject to state and local income tax. Any foreign taxes paid
by a fund that invests more than 50% of its assets in foreign securities may
be passed through to you as a foreign tax credit. Non-U.S. investors may be
subject to U.S. withholding and estate tax. You should consult your tax
advisor about the federal, state, local or foreign tax consequences of your
investment in a fund.
YOUR ACCOUNT
[Insert graphic of pencil marking an "X"] CHOOSING A SHARE CLASS
Each class has its own sales charge and expense structure, allowing you to
choose the class that best meets your situation. Your investment
representative can help you decide.
CLASS A CLASS B CLASS C
- -------------------------------------------------------------------------
o Initial sales o No initial sales o Initial sales
charge of 5.75% or charge charge of 1%
less
o Deferred sales o Deferred sales o Deferred sales
charge of 1% on charge of 4% or charge of 1% on
purchases of $1 less on shares you shares you sell
million or more sold sell within six within 18 months
within 12 months years
o Lower annual o Higher annual o Higher annual
expenses than Class expenses than Class expenses than Class
B or C due to lower A (same as Class C) A (same as Class B)
distribution fees due to higher due to higher
distribution fees. distribution fees.
Automatic No conversion to
conversion to Class Class A shares, so
A shares after annual expenses do
eight years, not decrease.
reducing future
annual expenses.
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.
SALES CHARGES - CLASS A
THE SALES CHARGE
MAKES UP THIS % OF WHICH EQUALS THIS % OF
WHEN YOU INVEST THIS AMOUNT THE OFFERING PRICE YOUR NET INVESTMENT
- -------------------------------------------------------------------------------
Under $50,000 5.75 6.10
$50,000 but under $100,000 4.50 4.71
$100,000 but under $250,000 3.50 3.63
$250,000 but under $500,000 2.50 2.56
$500,000 but under $1 million 2.00 2.04
INVESTMENTS OF $1 MILLION OR MORE If you invest $1 million or more, either
as a lump sum or through our cumulative quantity discount or letter of intent
programs (see page [#]), you can buy Class A shares without an initial sales
charge. However, there is a 1% contingent deferred sales charge (CDSC) on any
shares you sell within 12 months of purchase. The way we calculate the CDSC
is the same for each class (please see page [#]).
DISTRIBUTION AND SERVICE (12B-1) FEES Class A has a distribution plan,
sometimes known as a Rule 12b-1 plan, that allows each fund to pay
distribution fees of up to 0.35% per year to those who sell and distribute
Class A shares and provide other services to shareholders. Because these fees
are paid out of Class A's assets on an on-going basis, over time these fees
will increase the cost of your investment and may cost you more than paying
other types of sales charges.
SALES CHARGES - CLASS B
IF YOU SELL YOUR SHARES
WITHIN THIS MANY YEARS AFTER BUYING THIS % IS DEDUCTED FROM
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
With Class B shares, there is no initial sales charge. However, there is a
CDSC if you sell your shares within six years, as described in the table
above. The way we calculate the CDSC is the same for each class (please see
page [#]). After 8 years, your Class B shares automatically convert to Class
A shares, lowering your annual expenses from that time on.
MAXIMUM PURCHASE AMOUNT The maximum amount you may invest in Class B shares
at one time is $249,999. We invest any investment of $250,000 or more in
Class A shares, since a reduced initial sales charge is available and Class
A's annual expenses are lower.
RETIREMENT PLANS Class B shares are not available to all retirement plans.
Class B shares are only available to IRAs (of any type), Franklin Templeton
Trust Company 403(b) plans, and Franklin Templeton Trust Company qualified
plans with participant or earmarked accounts.
DISTRIBUTION AND SERVICE (12B-1) FEES Class B has a distribution plan,
sometimes known as a Rule 12b-1 plan, that allows each fund to pay
distribution and other fees of up to 1% per year for the sale of Class B
shares and for services provided to shareholders. Because these fees are paid
out of Class B's assets on an on-going basis, over time these fees will
increase the cost of your investment and may cost you more than paying other
types of sales charges.
SALES CHARGES - CLASS C
THE SALES CHARGE
MAKES UP THIS % OF WHICH EQUALS THIS % OF
WHEN YOU INVEST THIS AMOUNT THE OFFERING PRICE YOUR NET INVESTMENT
- -------------------------------------------------------------------------------
Under $1 million 1.00 1.01
WE INVEST ANY INVESTMENT OF $1 MILLION OR MORE IN CLASS A SHARES, SINCE THERE
IS NO INITIAL SALES CHARGE AND CLASS A'S ANNUAL EXPENSES ARE LOWER.
CDSC There is a 1% contingent deferred sales charge (CDSC) on any Class C
shares you sell within 18 months of purchase. The way we calculate the CDSC
is the same for each class (please see below).
DISTRIBUTION AND SERVICE (12B-1) FEES Class C has a distribution plan,
sometimes known as a Rule 12b-1 plan, that allows each fund to pay
distribution and other fees of up to 1% per year for the sale of Class C
shares and for services provided to shareholders. Because these fees are paid
out of Class C's assets on an on-going basis, over time these fees will
increase the cost of your investment and may cost you more than paying other
types of sales charges.
CONTINGENT DEFERRED SALES CHARGE (CDSC) - CLASS A, B & C
The CDSC for each class is based on the current value of the shares being
sold or their net asset value when purchased, whichever is less. There is no
CDSC on shares you acquire by reinvesting your dividends.
[Begin callout]
The HOLDING PERIOD FOR THE CDSC begins on the day you buy your shares. Your
shares will age one month on that same date the next month and each following
month.
For example, if you buy shares on the 18th of the month, they will age one
month on the 18th day of the next month and each following month.
[End callout]
To keep your CDSC as low as possible, each time you place a request to sell
shares we will first sell any shares in your account that are not subject to
a CDSC. If there are not enough of these to meet your request, we will sell
the shares in the order they were purchased. We will use this same method if
you exchange your shares into another Franklin Templeton Fund (please see
page [#] for exchange information).
SALES CHARGE REDUCTIONS AND WAIVERS
If you qualify for any of the sales charge reductions or waivers below,
please let us know at the time you make your investment to help ensure you
receive the lower sales charge.
QUANTITY DISCOUNTS 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 of Class A shares.
[Begin callout]
The FRANKLIN TEMPLETON FUNDS include all of the Franklin Templeton U.S.
registered mutual funds, except Franklin Valuemark Funds, Templeton Capital
Accumulator Fund, Inc., and Templeton Variable Products Series Fund.
[End callout]
o CUMULATIVE QUANTITY DISCOUNT - lets you combine all of your shares in the
Franklin Templeton Funds for purposes of calculating the sales charge. You
may also combine the shares of your spouse, and your children or
grandchildren, if they are under the age of 21. Certain company and
retirement plan accounts may also be included.
o LETTER OF INTENT (LOI) - expresses your intent to buy a stated dollar
amount of shares over a 13-month period and lets you receive the same
sales charge as if all shares had been purchased at one time. We will
reserve a portion of your shares to cover any additional sales charge that
may apply if you do not buy the amount stated in your LOI.
TO SIGN UP FOR THESE PROGRAMS, COMPLETE THE APPROPRIATE SECTION OF YOUR
ACCOUNT APPLICATION.
REINSTATEMENT PRIVILEGE If you sell shares of a Franklin Templeton Fund, you
may reinvest some or all of the proceeds within 365 days without an initial
sales charge. The proceeds must be reinvested within the same share class,
except proceeds from the sale of Class B shares will be reinvested in Class A
shares.
If you paid a CDSC when you sold your Class A or C shares, we will credit
your account with the amount of the CDSC paid but a new CDSC will apply. For
Class B shares reinvested in Class A, a new CDSC will not apply, although
your account will not be credited with the amount of any CDSC paid when you
sold your Class B shares.
Proceeds immediately placed in a Franklin Bank Certificate of Deposit (CD)
also may be reinvested without an initial sales charge if you reinvest them
within 365 days from the date the CD matures, including any rollover.
This privilege does not apply to shares you buy and sell under our exchange
program. Shares purchased with the proceeds from a money fund may be subject
to a sales charge.
WAIVERS FOR INVESTMENTS FROM CERTAIN PAYMENTS Class A shares may be
purchased without an initial sales charge or CDSC by investors who reinvest
within 365 days:
o certain payments received under an annuity contract that offers a
Franklin Templeton insurance fund option
o distributions from an existing retirement plan invested in the Franklin
Templeton Funds
o dividend or capital gain distributions from a real estate investment
trust sponsored or advised by Franklin Properties, Inc.
o redemption proceeds from a repurchase of Franklin Floating Rate Trust
shares held continuously for at least 12 months
o redemption proceeds from Class A of any Templeton Global Strategy Fund,
if you are a qualified investor. If you paid a CDSC when you sold your
shares, we will credit your account with the amount of the CDSC paid but a
new CDSC will apply.
WAIVERS FOR CERTAIN INVESTORS Class A shares also may be purchased without an
initial sales charge or CDSC by various individuals and institutions,
including:
o certain trust companies and bank trust departments investing $1 million
or more in assets over which they have full or shared investment discretion
o government entities that are prohibited from paying mutual fund sales
charges
o certain unit investment trusts and their holders reinvesting trust
distributions
o group annuity separate accounts offered to retirement plans
o employees and other associated persons or entities of Franklin Templeton
or of certain dealers
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 Chilean retirement plans that meet the requirements for retirement plans
described below
IF YOU THINK YOU MAY BE ELIGIBLE FOR A SALES CHARGE WAIVER,
CALL YOUR INVESTMENT REPRESENTATIVE OR CALL SHAREHOLDER SERVICES
AT 1-800/632-2301 FOR MORE INFORMATION.
CDSC WAIVERS The CDSC for each class generally will be waived:
o to pay account fees
o to make payments through systematic withdrawal plans, up to 1% monthly,
3% quarterly, 6% semiannually or 12% annually depending on the frequency
of your plan
o for redemptions of Class A shares by investors who purchased $1 million
or more without an initial sales charge if Franklin Templeton
Distributors, Inc. did not make any payment to the securities dealer of
record in connection with the purchase
o for redemptions by Franklin Templeton Trust Company employee benefit
plans or employee benefit plans serviced by ValuSelect(R) (not applicable to
Class B)
o for IRA distributions 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 to return excess contributions (and earnings, if applicable) from
retirement plan accounts
o for redemptions following the death of the shareholder or beneficial owner
o for participant initiated distributions from employee benefit plans or
participant initiated exchanges among investment choices in employee
benefit plans (not applicable to Class B)
RETIREMENT PLANS Certain retirement plans may buy Class A shares without an
initial sales charge. To qualify, the plan must be sponsored by an employer:
o with at least 100 employees, or
o with retirement plan assets of $1 million or more, or
o that agrees to invest at least $500,000 in the Franklin Templeton Funds
over a 13-month period
A CDSC may apply. Retirement plans other than SIMPLEs, SEPs, or plans that
qualify under section 401 of the Internal Revenue Code also must qualify
under our group investment program to buy Class A shares without an initial
sales charge.
FOR MORE INFORMATION, CALL YOUR INVESTMENT REPRESENTATIVE OR
RETIREMENT PLAN SERVICES AT 1-800/527-2020.
GROUP INVESTMENT PROGRAM Allows established groups of 11 or more investors
to invest as a group. For sales charge purposes, the group's investments are
added together. There are certain other requirements and the group must have
a purpose other than buying fund shares at a discount.
[Insert graphic of a paper with lines
and someone writing] BUYING SHARES
MINIMUM INVESTMENTS
- --------------------------------------------------------------------------
INITIAL ADDITIONAL
- --------------------------------------------------------------------------
Regular accounts $1,000 $50
- --------------------------------------------------------------------------
UGMA/UTMA accounts $100 $50
- --------------------------------------------------------------------------
Retirement accounts no minimum no minimum
(other than IRAs, IRA rollovers, Education
IRAs or Roth IRAs)
- --------------------------------------------------------------------------
IRAs, IRA rollovers, Education IRAs or Roth
IRAs $250 $50
- --------------------------------------------------------------------------
Broker-dealer sponsored wrap account
programs $250 $50
- --------------------------------------------------------------------------
Full-time employees, officers, trustees and
directors of Franklin Templeton entities,
and their immediate family members
$100 $50
- --------------------------------------------------------------------------
ACCOUNT APPLICATION If you are opening a new account, please complete and
sign the enclosed account application. Make sure you indicate the share class
you have chosen. If you do not indicate a class, we will invest your purchase
in Class A shares. To save time, you can sign up now for services you may
want on your account by completing the appropriate sections of the
application (see the next page).
BUYING SHARES
- -------------------------------------------------------------------------------
OPENING AN ACCOUNT ADDING TO AN ACCOUNT
- -------------------------------------------------------------------------------
[Insert graphic of
hands shaking]
Contact your investment Contact your investment
THROUGH YOUR representative representative
INVESTMENT
REPRESENTATIVE
- -------------------------------------------------------------------------------
Make your check payable to Make your check payable to
[Insert graphic of the fund. the fund. Include your
envelope] account number on the check.
Mail the check and your
BY MAIL signed application to Fill out the deposit slip
Investor Services. from your account statement.
If you do not have a slip,
include a note with your
name, the fund name, and
your account number.
Mail the check and deposit
slip or note to Investor
Services.
- -------------------------------------------------------------------------------
[Insert graphic of Call to receive a wire Call to receive a wire
three lightning control number and wire control number and wire
bolts] instructions. instructions.
Wire the funds and mail your To make a same day wire
signed application to investment, please call us
BY WIRE Investor Services. Please by 1:00 p.m. pacific time
include the wire control and make sure your wire
1-800/632-2301 number or your new account arrives by 3:00 p.m.
(or 1-650/312-2000 number on the application.
collect)
To make a same day wire
investment, please call us
by 1:00 p.m. pacific time
and make sure your wire
arrives by 3:00 p.m.
- -------------------------------------------------------------------------------
[Insert graphic of Call Shareholder Services at Call Shareholder Services at
two arrows pointing the number below, or send the number below or our
in opposite signed written instructions. automated TeleFACTS system,
directions] The TeleFACTS system cannot or send signed written
be used to open a new instructions.
BY EXCHANGE account.
(Please see page # for (Please see page # for
TeleFACTS(R) information on exchanges.) information on exchanges.)
1-800/247-1753
(around-the-clock
access)
- -------------------------------------------------------------------------------
FRANKLIN TEMPLETON INVESTOR SERVICES, 51 JOHN F. KENNEDY PARKWAY,
SHORT HILLS, NJ 07078
CALL TOLL-FREE: 1-800/632-2301
(MONDAY THROUGH FRIDAY 5:30 A.M. TO 5:00 P.M., PACIFIC TIME
SATURDAY 6:30 A.M. TO 2:30 P.M., PACIFIC TIME)
[Insert graphic of person with a headset] INVESTOR SERVICES
AUTOMATIC INVESTMENT PLAN This plan offers a convenient way for you to
invest in a fund by automatically transferring money from your checking or
savings account each month to buy shares. The minimum investment to open an
account with an automatic investment plan is $50 ($25 for an Education IRA).
To sign up, complete the appropriate section of your account application.
DISTRIBUTION OPTIONS You may reinvest distributions you receive from a fund
in an existing account in the same share class* of the fund or another
Franklin Templeton Fund. Initial sales charges and CDSCs will not apply if
you reinvest your distributions within 365 days. You can also have your
distributions deposited in a bank account, or mailed by check. Deposits to a
bank account may be made by electronic funds transfer.
[Begin callout]
For Franklin Templeton Trust Company retirement plans, special forms may be
needed to receive distributions in cash. Please call 1-800/527-2020 for
information.
[End callout]
Please indicate on your application the distribution option you have chosen,
otherwise we will reinvest your distributions in the same share class of the
fund.
*Class B and C shareholders may reinvest their distributions in Class A
shares of any Franklin Templeton money fund.
RETIREMENT PLANS Franklin Templeton offers a variety of retirement plans for
individuals and businesses. These plans require separate applications and
their policies and procedures may be different than those described in this
prospectus. For more information, including a free retirement plan brochure
or application, please call Retirement Plan Services at 1-800/527-2020.
TELEFACTS(R) Our TeleFACTS system offers around-the-clock access to
information about your account or any Franklin Templeton Fund. This service
is available from touch-tone phones at 1-800/247-1753. For a free TeleFACTS
brochure, call 1-800/DIAL BEN.
TELEPHONE PRIVILEGES You will automatically receive telephone privileges
when you open your account, allowing you and your investment representative
to sell or exchange your shares and make certain other changes to your
account by phone.
For accounts with more than one registered owner, telephone privileges also
allow the funds to accept written instructions signed by only one owner for
transactions and account changes that could otherwise be made by phone. For
all other transactions and changes, all registered owners must sign the
instructions.
As long as we take certain measures to verify telephone requests, we will not
be responsible for any losses that may occur from unauthorized requests. Of
course, you can decline telephone exchange or redemption privileges on your
account application.
EXCHANGE PRIVILEGE You can exchange shares between most Franklin Templeton
Funds within the same class, generally without paying any additional sales
charges. If you exchange shares held for less than six months, however, you
may be charged the difference between the initial sales charge of the two
funds if the difference is more than 0.25%. If you exchange shares from a
money fund, a sales charge may apply no matter how long you have held the
shares.
[Begin callout]
An EXCHANGE is really two transactions: a sale of one fund and the purchase
of another. In general, the same policies that apply to purchases and sales
apply to exchanges, including minimum investment amounts. Exchanges also have
the same tax consequences as ordinary sales and purchases.
[End callout]
Generally exchanges may only be made between identically registered accounts,
unless you send written instructions with a signature guarantee. Any CDSC
will continue to be calculated from the date of your initial investment and
will not be charged at the time of the exchange. The purchase price for
determining a CDSC on exchanged shares will be the price you paid for the
original shares. If you exchange shares subject to a CDSC into a Class A
money fund, the time your shares are held in the money fund will not count
towards the CDSC holding period.
If you exchange your Class B shares for the same class of shares of another
Franklin Templeton Fund, the time your shares are held in that fund will
count towards the eight year period for automatic conversion to Class A
shares.
Frequent exchanges can interfere with fund management or operations and drive
up costs for all shareholders. To protect shareholders, there are limits on
the number and amount of exchanges you may make (please see "Market Timers"
on page [#]).
SYSTEMATIC WITHDRAWAL PLAN This plan allows you to automatically sell your
shares and receive regular payments from your account. A CDSC may apply to
withdrawals that exceed certain amounts. Certain terms and minimums apply. To
sign up, complete the appropriate section of your application.
[Insert graphic of a certificate] SELLING SHARES
You can sell your shares at any time.
SELLING SHARES IN WRITING Requests to sell $100,000 or less can generally be
made over the phone or with a simple letter. Sometimes, however, to protect
you and the funds we will need written instructions signed by all registered
owners, with a signature guarantee for each owner, if:
[Begin callout]
A SIGNATURE GUARANTEE helps protect your account against fraud.
You can obtain a signature guarantee at most banks and securities dealers.
A notary public CANNOT provide a signature guarantee.
[End callout]
o you are selling more than $100,000 worth of shares
o you want your proceeds paid to someone who is not a registered owner
o you want to send your proceeds somewhere other than the address of
record, or preauthorized bank or brokerage firm account
We may also require a signature guarantee on instructions we receive from an
agent, not the registered owners, or when we believe it would protect the
funds against potential claims based on the instructions received.
SELLING RECENTLY PURCHASED SHARES If you sell shares recently purchased with
a check or draft, we may delay sending you the proceeds until your check or
draft has cleared, which may take seven business days or more. A certified or
cashier's check may clear in less time.
REDEMPTION PROCEEDS Your redemption check will be sent within seven days
after we receive your request in proper form. We are not able to receive or
pay out cash in the form of currency. Redemption proceeds may be delayed if
we have not yet received your signed account application.
RETIREMENT PLANS You may need to complete additional forms to sell shares in
a Franklin Templeton Trust Company retirement plan. For participants under
age 591/2, tax penalties may apply. Call Retirement Plan Services at
1-800/527-2020 for details.
SELLING SHARES
- -------------------------------------------------------------------------
TO SELL SOME OR ALL OF YOUR SHARES
- -------------------------------------------------------------------------
[Insert graphic of
hands shaking]
Contact your investment representative
THROUGH YOUR INVESTMENT
REPRESENTATIVE
- -------------------------------------------------------------------------
[Insert graphic of Send written instructions and endorsed share
envelope] certificates (if you hold share certificates)
to Investor Services. Corporate, partnership
BY MAIL or trust accounts may need to send additional
documents.
Specify the fund, the account number and the
dollar value or number of shares you wish to
sell. If you own both Class A and B shares,
also specify the class of shares, otherwise we
will sell your Class A shares first. Be sure
to include all necessary signatures and any
additional documents, as well as signature
guarantees if required.
A check will be mailed to the name(s) and
address on the account, or otherwise according
to your written instructions.
- -------------------------------------------------------------------------
[Insert graphic of As long as your transaction is for $100,000 or
phone] less, you do not hold share certificates and
you have not changed your address by phone
BY PHONE within the last 15 days, you can sell your
shares by phone.
1-800/632-2301
A check will be mailed to the name(s) and
address on the account. Written instructions,
with a signature guarantee, are required to
send the check to another address or to make
it payable to another person.
- -------------------------------------------------------------------------
[Insert graphic of You can call or write to have redemption
three lightning bolts] proceeds of $1,000 or more wired to a bank or
escrow account. See the policies above for
selling shares by mail or phone.
Before requesting a bank wire, please make
BY WIRE 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, your bank
account number, the ABA routing number, and a
signature guarantee.
Requests received in proper form by 1:00 p.m.
pacific time will be wired the next business
day.
- -------------------------------------------------------------------------
[Insert graphic of two Obtain a current prospectus for the fund you
arrows pointing in are considering.
opposite directions]
Call Shareholder Services at the number below
BY EXCHANGE or our automated TeleFACTS system, or send
signed written instructions. See the policies
TeleFACTS(R) above for selling shares by mail or phone.
1-800/247-1753
(around-the-clock If you hold share certificates, you will need
access) to return them to the fund before your
exchange can be processed.
- -------------------------------------------------------------------------
FRANKLIN TEMPLETON INVESTOR SERVICES, 51 JOHN F. KENNEDY PARKWAY,
SHORT HILLS, NJ 07078
CALL TOLL-FREE: 1-800/632-2301
(MONDAY THROUGH FRIDAY 5:30 A.M. TO 5:00 P.M., PACIFIC TIME
SATURDAY 6:30 A.M. TO 2:30 P.M., PACIFIC TIME)
[Insert graphic of paper and pen] ACCOUNT POLICIES
CALCULATING SHARE PRICE Each fund calculates the net asset value per share
(NAV) each business day at the close of trading on the New York Stock
Exchange (normally 1:00 p.m. pacific time). Each class's NAV is calculated
by dividing its net assets by the number of its shares outstanding.
[Begin callout]
When you buy shares, you pay the offering price. The offering price is the
NAV plus any applicable sales charge.
When you sell shares, you receive the NAV minus any applicable contingent
deferred sales charge (CDSC).
[End callout]
The funds' assets are generally valued at their market value. If market
prices are unavailable, or if an event occurs after the close of the trading
market that materially affects the values, assets may be valued at their fair
value. If a fund holds securities listed primarily on a foreign exchange that
trades on days when the fund is not open for business, the value of your
shares may change on days that you cannot buy or sell shares.
Requests to buy and sell shares are processed at the NAV next calculated
after we receive your request in proper form.
ACCOUNTS WITH LOW BALANCES If the value of your account falls below $250
($50 for employee and UGMA/UTMA accounts) because you sell some of your
shares, we may mail you a notice asking you to bring the account back up to
its applicable minimum investment amount. If you choose not to do so within
30 days, we may close your account and mail the proceeds to the address of
record. You will not be charged a CDSC if your account is closed for this
reason.
STATEMENTS AND REPORTS You will receive confirmations and account statements
that show your account transactions. You will also receive the funds'
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 will also receive confirmations, account statements and
other information about your account directly from the fund.
STREET OR NOMINEE ACCOUNTS You may transfer your shares from the street or
nominee name account of one dealer to another, as long as both dealers have
an agreement with Franklin Templeton Distributors, Inc. We will process the
transfer after we receive authorization in proper form from your delivering
securities dealer.
JOINT ACCOUNTS Unless you specify a different registration, accounts with
two or more owners are registered as "joint tenants with rights of
survivorship" (shown as "Jt Ten" on your account statement). To make any
ownership changes to a joint account, all owners must agree in writing,
regardless of the law in your state.
MARKET TIMERS The funds do not allow investments by market timers. You will
be considered a market timer if you have (i) requested an exchange out of a
fund within two weeks of an earlier exchange request, or (ii) exchanged
shares out of a fund more than twice in a calendar quarter, or (iii)
exchanged shares equal to at least $5 million, or more than 1% of a fund's
net assets, or (iv) otherwise seem to follow a timing pattern. Shares under
common ownership or control are combined for these limits.
ADDITIONAL POLICIES Please note that the funds maintain additional policies
and reserve certain rights, including:
o The funds may refuse any order to buy shares, including any purchase
under the exchange privilege.
o At any time, the funds may change their investment minimums or waive or
lower their minimums for certain purchases.
o The funds may modify or discontinue the exchange privilege on 60 days'
notice.
o You may only buy shares of a fund eligible for sale in your state or
jurisdiction.
o In unusual circumstances, we may temporarily suspend redemptions, or
postpone the payment of proceeds, as allowed by federal securities laws.
o For redemptions over a certain amount, each fund reserves the right to
make payments in securities or other assets of the fund, in the case of an
emergency or if the payment by check or wire would be harmful to existing
shareholders.
o To permit investors to obtain the current price, dealers are responsible
for transmitting all orders to the fund promptly.
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
- -------------------------------------------------------------------------------
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 0.35 2 0.25 3 1.00 4
A dealer commission of up to 1% may be paid on Class A NAV purchases by
certain retirement plans1 and up to 0.25% 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. Of this amount, each fund may pay up to 0.35% to Distributors or others,
out of which 0.10% will generally 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.
[Insert graphic of question mark]QUESTIONS
If you have any questions about the funds or your account, you can write to
us at 51 John F. Kennedy Parkway, Short Hills, NJ 07078. You can also call us
at one of the following numbers. For your protection and to help ensure we
provide you with quality service, all calls may be monitored or recorded.
HOURS (PACIFIC TIME,
DEPARTMENT NAME TELEPHONE NUMBER MONDAY THROUGH FRIDAY)
- ---------------------------------------------------------------------------
Shareholder Services 1-800/632-2301 5:30 a.m. to 5:00 p.m.
6:30 a.m. to 2:30 p.m.
(Saturday)
Fund Information 1-800/DIAL BEN 5:30 a.m. to 8:00 p.m.
(1-800/342-5236) 6:30 a.m. to 2:30 p.m.
(Saturday)
Retirement Plan Services
1-800/527-2020 5:30 a.m. to 5:00 p.m.
Dealer Services 1-800/524-4040 5:30 a.m. to 5:00 p.m.
Institutional Services 1-800/321-8563 6:00 a.m. to 5:00 p.m.
TDD (hearing impaired) 1-800/851-0637 5:30 a.m. to 5:00 p.m.
FOR MORE INFORMATION
You can learn more about each fund in the following documents:
ANNUAL/SEMIANNUAL REPORT TO SHAREHOLDERS
Includes a discussion of recent market conditions and fund strategies,
financial statements, detailed performance information, portfolio holdings,
and the auditor's report.
STATEMENT OF ADDITIONAL INFORMATION (SAI)
Contains more information about each fund, its investments and policies. It
is incorporated by reference (is legally a part of this prospectus).
For a free copy of the current annual/semiannual report or the SAI, please
contact your investment representative or call us at the number below.
FRANKLIN(R)TEMPLETON(R)
1-800/DIAL BEN(R) (1-800/342-5236)
TDD (Hearing Impaired) 1-800/851-0637
www.franklin-templeton.com
You can also obtain information about each fund by visiting the SEC's Public
Reference Room in Washington D.C. (phone 1-800/SEC-0330) or by sending your
request and a duplicating fee to the SEC's Public Reference Section,
Washington, DC 20549-6009. You can also visit the SEC's Internet site at
http://www.sec.gov.
Investment Company Act file #811-5387 MS P 05/99
Prospectus
FRANKLIN MUTUAL SERIES FUND INC.
INVESTMENT STRATEGY
GROWTH & INCOME o VALUE MUTUAL BEACON FUND
MUTUAL FINANCIAL SERVICES FUND
MUTUAL QUALIFIED FUND
MUTUAL SHARES FUND
GLOBAL o VALUE MUTUAL DISCOVERY FUND
MUTUAL EUROPEAN FUND
CLASS Z
MAY 1, 1999
[Insert Franklin Templeton Ben Head]
[Insert Franklin Templeton Ben Head]
LIKE ALL MUTUAL FUND SHARES, THE SEC HAS NOT APPROVED OR DISAPPROVED THESE
SECURITIES OR PASSED UPON THE ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
CONTENTS
THE FUNDS
[Begin callout]
INFORMATION ABOUT EACH FUND YOU SHOULD KNOW BEFORE INVESTING
[End callout]
[insert page #] Mutual Beacon Fund
[insert page #] Mutual Financial Services Fund
[insert page #] Mutual Qualified Fund
[insert page #] Mutual Shares Fund
[insert page #] Mutual Discovery Fund
[insert page #] Mutual European Fund
[insert page #] Management
[insert page #] Distributions and Taxes
YOUR ACCOUNT
[Begin callout]
INFORMATION ABOUT QUALIFIED INVESTORS, ACCOUNT TRANSACTIONS AND SERVICES
[End callout]
[insert page #] Qualified Investors
[insert page #] Buying Shares
[insert page #] Investor Services
[insert page #] Selling Shares
[insert page #] Account Policies
[insert page #] Questions
FOR MORE INFORMATION
[Begin callout]
WHERE TO LEARN MORE ABOUT EACH FUND
[End callout]
Back Cover
MUTUAL BEACON FUND
[Insert graphic of bullseye and arrows] GOALS AND STRATEGIES
GOALS The fund's investment goal is capital appreciation, which may
occasionally be short-term. Its secondary goal is income.
PRINCIPAL INVESTMENTS The fund will primarily invest in domestic and foreign
equity securities. Equity securities generally entitle the holder to
participate in a company's general operating results. These include common
stocks, preferred stocks and convertible securities.
The fund invests primarily in the securities of companies with market
capitalization values (share price times the number of common stock shares
outstanding) of more than $1.5 billion. The fund may invest a portion of its
assets in the securities of domestic or foreign companies involved in
mergers, consolidations, liquidations, reorganizations or financial
restructurings (Reorganizing Companies), or as to which there are outstanding
tender or exchange offers. Investments in Reorganizing Companies may, but
are not expected to, exceed 50% of the fund's assets.
The fund may invest a significant portion of its assets in foreign equity
securities. The fund tends to invest in foreign securities to a greater
extent than either Mutual Shares Fund or Mutual Qualified Fund. To hedge
(protect) against currency exchange rate fluctuations, the fund enters into
forward foreign currency exchange contracts to the extent that hedging is
available and, in the manager's opinion, it is economical to do so. A
forward foreign currency exchange contract is an agreement to buy or sell a
specific currency at a future date and at a price set at the time of the
contract. Forward foreign currency exchange contracts may reduce the risk of
loss from a change in value of a currency, but they also limit any potential
gains and do not protect against fluctuations in the value of the underlying
position.
The fund invests to a lesser extent in domestic and foreign debt securities.
Debt securities represent an obligation of the issuer to repay a loan of
money to it, and generally provide for the payment of interest. These include
bonds, including those convertible into common stock, notes and debentures.
The fund may invest in debt securities rated in any rating category
established by an independent rating organization, including lower rated or
defaulted debt securities ("junk bonds"), or in unrated debt securities. The
Fund typically invests in unrated debt securities of Reorganizing Companies.
The fund may invest in the direct indebtedness, or participation interests in
the indebtedness, of Reorganizing Companies. 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 direct
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.
Participation interests in indebtedness represent fractional interests in a
company's indebtedness. The financial institutions which typically make
participations available are banks or insurance companies or governmental
institutions or 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 fund may also purchase trade claims and other direct obligations or
claims (Trade Claims) of Reorganizing Companies. Trade Claims generally are
purchased from creditors of Reorganizing Companies, and represent money due
to a supplier of goods or services to the Reorganizing Company.
While the fund generally purchases securities for investment purposes and not
for the purpose of influencing or controlling management of a company, the
manager may use the fund's ownership interest in a company to seek to
influence or control management when the manager perceives a benefit. The
fund may invest in entities whose business is to acquire securities of
companies for the purpose of influencing or controlling management or with
the expectation of taking over such companies. The fund also may invest in
the securities of a particular company which the manager believes may be an
attractive company to be taken over by another entity.
[Begin callout]
The fund invests primarily in equity securities that the manager believes are
available at prices less than their actual value based on certain recognized
objective criteria (intrinsic value).
[End callout]
PORTFOLIO SELECTION In choosing investments for the fund, the manager bases
its opinions upon the analysis and research of certain factors, including:
the relationship of a security's book value to market value; cash flow; and
multiples of earnings of comparable securities. Each security is examined
separately and there is no set criteria as to the size of an issuer, its
earnings or the industry in which it operates. Debt securities are generally
selected based on the manager's opinion that the securities are available at
less than their intrinsic value, and the manager's own analysis of the
security has greater influence over the investment decision than the coupon
rate or rating of the security.
TEMPORARY INVESTMENTS The manager may take a temporary defensive position
when it believes the markets or the economy are experiencing excessive
volatility or a prolonged general decline, or other adverse conditions exist.
Under these circumstances, the fund may be unable to pursue its investment
goals because it may not invest or may invest less in equity and debt
securities that the manager believes are available at prices less than their
intrinsic value.
[Insert graphic of chart with line going up and down] MAIN RISKS
VALUE INVESTING The fund's general policy of investing in securities that
the manager believes are available at prices less than their intrinsic value
differs from the approach followed by many other managers, and may result in
the fund choosing securities that are not widely followed by other
investors. There is always the possibility that the manager may be incorrect
in its assessment of a particular company or that the manager may not buy
these securities at their lowest possible price or sell them at their highest.
[Begin callout]
Because the stocks the fund holds fluctuate in price with market conditions,
the value of your investment in the fund will go up and down. This means you
could lose money over short or even extended periods.
[End callout]
STOCKS While stocks have historically outperformed other asset classes over
the long term, they tend to go up and down more dramatically over the shorter
term. These price movements may result from factors affecting individual
companies, industries or the securities market as a whole.
REORGANIZING COMPANIES There can be no assurance that any merger,
consolidation, liquidation, reorganization or tender or exchange offer
proposed at the time the fund makes its investment in a Reorganizing Company
will be consummated or will be consummated on the terms and within the time
period contemplated and, therefore, that the fund's performance will benefit
from its investment in a Reorganizing Company. Debt securities of
Reorganizing Companies typically are unrated, lower rated, in default or
close to default.
FOREIGN SECURITIES Securities of companies and governments located outside
the U.S. may involve risks that can increase the potential for losses in the
fund.
COUNTRY. General securities market movements in any country where the fund
has investments are likely to affect the value of the securities the fund
owns which trade in that country. These movements will affect the fund's
share price and fund performance.
The political, economic and social structures of some countries the fund
invests in may be less stable and more volatile than those in the U.S. The
risks of investing in these countries include the possibility of the
imposition of exchange controls, currency devaluations, foreign ownership
limitations, expropriation, restrictions on removal of currency or other
assets, nationalization of assets, punitive taxes and certain custody and
settlement risks.
The fund's investments in developing or emerging markets are subject to all
of the risks of foreign investing generally, and have additional heightened
risks due to a lack of established legal, business and social frameworks to
support securities markets. Foreign securities markets, including emerging
markets, may have substantially lower trading volumes than U.S. markets,
resulting in less liquidity and more volatility than experienced in the U.S.
While short-term volatility in these markets can be disconcerting, declines
in excess of 50% are not unusual.
COMPANY. Foreign companies are not subject to the same disclosure,
accounting, auditing and financial reporting standards and practices as U.S.
companies and their securities may not be as liquid as securities of similar
U.S. companies. Foreign stock exchanges, trading systems, brokers and
companies generally have less government supervision and regulation than in
the U.S. The fund may have greater difficulty voting proxies, exercising
shareholder rights, pursuing legal remedies and obtaining judgments with
respect to foreign investments in foreign courts than with respect to U.S.
companies in U.S. courts.
CURRENCY. To the extent the fund's investments are denominated in foreign
currencies, changes in foreign currency exchange rates will affect the value
of what the fund owns and the fund's share price. Generally, when the U.S.
dollar rises in value against a foreign currency, an investment in that
country loses value because the currency is worth fewer U.S. dollars.
Devaluation of a currency by a country's government or banking authority also
will have a significant impact on the value of any securities denominated in
that currency. Currency markets generally are not regulated as securities
markets.
EURO. On January 1, 1999, the European Monetary Union (EMU) introduced a new
single currency, the euro, which replaced the national currency for the
eleven participating member countries. If the fund holds investments in
countries with currencies replaced by the euro, the investment process,
including trading, foreign exchange, payments, settlements, cash accounts,
custody and accounting will be impacted.
Because this change to a single currency is new and untested, the
establishment of the euro may result in market volatility. For the same
reason, it is not possible to predict the impact of the euro on the business
or financial condition of European issuers which the fund may hold in its
portfolio, and their impact on the value of fund shares and fund performance.
To the extent the fund holds non-U.S. dollar (euro or other) denominated
securities, it will still be exposed to currency risk due to fluctuations in
those currencies versus the U.S. dollar.
DERIVATIVE SECURITIES Forward foreign currency exchange contracts are
considered derivative investments, since their value depends on the value of
an underlying asset. The fund's investment in derivatives may involve a
small investment relative to the amount of risk assumed. The fund can incur
a loss in these transactions due to the imposition of controls by a foreign
or the U.S. government on the exchange of foreign currencies or the inability
to deliver or receive a foreign currency. The success of forward foreign
currency exchange contracts will depend on the manager's ability to predict
market movements. Losses resulting from the use of forward foreign currency
exchange contracts can reduce the fund's share price, and possibly income,
and such losses can be greater than if the contract had not been entered into
by the fund.
INDEBTEDNESS, PARTICIPATIONS AND TRADE CLAIMS The purchase of indebtedness
of a troubled company always involves a risk as to the creditworthiness of
the issuer and the possibility that the investment may be lost. There are no
established markets for indebtedness and, thus, it is less liquid than
securities that are heavily traded. Typically, purchasers of participations,
such as the fund, must rely on the financial institution issuing the
participation to assert any rights against the borrower with respect to the
underlying indebtedness. When a fund purchases a participation, it takes on
the risk associated with the financial soundness of the bank or other
financial intermediary issuing the participation, as well as the credit risk
associated with the financial soundness of the issuer of the underlying
indebtedness. When a fund purchases a Trade Claim, there is no guarantee
that the debtor will ever be able to satisfy the obligation on the Trade
Claim.
CREDIT This is the possibility that an issuer will be unable to make
interest payments or repay principal. Changes in an issuer's financial
strength or in a security's credit rating may affect its value and, thus,
impact the value of fund shares.
Securities rated below investment grade, sometimes called "junk bonds" or
"high yield debt securities," generally have more risk than higher-rated
securities. The principal risks of investing in these securities include:
o SUBSTANTIAL CREDIT RISK. Companies issuing high yield 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.
o DEFAULTED DEBT RISK. 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.
o VOLATILITY RISK. The prices of high yield debt securities fluctuate more
than higher-quality securities. Prices are especially sensitive to
developments affecting the company's business and to changes in the
ratings assigned by ratings organizations. 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.
ILLIQUID SECURITIES The fund may invest up to 15% of its net assets in
illiquid securities. Illiquid securities are securities with a limited
trading market. Investments by the fund in illiquid securities involve the
possibility that the securities cannot be readily sold or can only be resold
at a price significantly lower than their value, which may have a negative
effect on the value of the fund's shares.
YEAR 2000 When evaluating current and potential portfolio positions, Year
2000 is one of the factors the fund's manager considers.
[Begin callout]
Mutual fund shares are not deposits or obligations of, or guaranteed or
endorsed by, any bank, and are not federally insured by the Federal Deposit
Insurance Corporation, the Federal Reserve Board, or any other agency of the
U.S. government. Mutual fund shares involve investment risks, including the
possible loss of principal.
[End callout]
The manager will rely upon public filings and other statements made by
companies about their Year 2000 readiness. Issuers in countries outside the
U.S., particularly in emerging markets, may not be required to make the same
level of disclosure about Year 2000 readiness as is required in the U.S. The
manager, of course, cannot audit each company and its major suppliers to
verify their Year 2000 readiness.
If a company in which the fund is invested is adversely affected by Year 2000
problems, it is likely that the price of its security will also be adversely
affected. A decrease in the value of one or more of the fund's portfolio
holdings will have a similar impact on the price of the fund's shares and the
fund's performance. Please see page ___ for more information.
More detailed information about the fund, its policies, including temporary
investments, risks and the bond ratings can be found in the fund's Statement
of Additional Information (SAI).
[Insert graphic of a bull and a bear] PERFORMANCE
This bar chart and table show the volatility of the fund's returns, which is
one indicator of the risks of investing in the fund. The bar chart shows
changes in the fund's returns from year to year over the past 10 calendar
years. The table shows how the fund's average annual total returns compare to
those of a broad-based securities market index. Of course, past performance
cannot predict or guarantee future results.
CLASS Z ANNUAL TOTAL RETURNS
[Insert bar graph]
16.72% -8.57% 17.08% 22.42% 22.42% 5.20% 25.43% 20.74% 22.55% 2.02%
89 90 91 92 93 94 95 96 97 98
YEAR
[Begin callout]
BEST QUARTER:
Q4 '98 12.58%
WORST QUARTER:
Q3 '98 -17.54%
[End callout]
AVERAGE ANNUAL TOTAL RETURNS
For the periods ended December 31, 1998
1 YEAR 5 YEARS 10 YEARS
- -------------------------------------------------------------------------------
Mutual Beacon Fund - Class Z 2.37% 15.20% 14.55%
S&P 500(R)Index1 28.58% 24.06% 19.21%
1. Source: Standard & Poor's(R) Micropal. The S&P 500(R) Index is an unmanaged
group of widely held common stocks covering a variety of industries. It
includes reinvested dividends. One cannot invest directly in an index, nor is
an index representative of the fund's portfolio.
[Insert graphic of percentage sign] FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and
hold shares of the fund.
SHAREHOLDER FEES (FEES PAID DIRECTLY FROM YOUR INVESTMENT)
CLASS Z
- -------------------------------------------------------------------------------
Maximum sales charge (load) imposed on purchases None
Exchange fee None
ANNUAL FUND OPERATING EXPENSES (EXPENSES DEDUCTED FROM FUND ASSETS)1
CLASS Z
- -------------------------------------------------------------------------------
Management fees2 0.60%
Distribution and service (12b-1) fees None
Other expenses 0.19%
---------------------------
Total annual fund operating expenses2 0.79%
===========================
1. In connection with the transaction which resulted in Franklin Mutual
becoming each fund's investment manager, Franklin Mutual made a commitment to
the funds' board not to seek an increase in the rate of investment management
fees for a three year period beginning November 1, 1996. This agreement
applies only to those series which existed at that time. The parties also
agreed that for the same period the ordinary expenses of each series (based
on a percentage of net assets) will not be higher than they were expected to
be as of November 1, 1996, based on the annualized expense ratios of each
series as of that date. Increases in expenses beyond these expense ratios
will be permitted, however, if the board is satisfied that such expenses also
would have been higher (based upon such considerations as the amount and
composition of assets under management, the number of security transactions,
the number of shareholder accounts, regulatory requirements and general
economic conditions) had the transaction not taken place. This expense
limitation does not include items such as litigation expenses, interest,
taxes, insurance, brokerage commissions and expenses of an extraordinary
nature.
2. For the fiscal year ended December 31, 1998, the manager had agreed in
advance to limit its management fees. With this reduction, management fees
were 0.57% and total annual fund operating expenses were 0.76%. After October
31, 1999, the manager may end this arrangement at any time.
EXAMPLE
This example can help you compare the cost of investing in the fund with the
cost of investing in other mutual funds.
The example assumes you invest $10,000 for the periods shown and then sell
all of your shares at the end of those periods. The example also assumes your
investment has a 5% return each year and the fund's operating expenses remain
the same. Although your actual costs may be higher or lower, based on these
assumptions your costs would be:
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ---------------------------------------------
$81 $252 $439 $978
[[Insert graphic of a dollar bill] FINANCIAL HIGHLIGHTS
This table presents the financial performance for Class Z since its
inception. This information has been audited by Ernst & Young LLP.
CLASS Z YEAR ENDED DECEMBER 31,
- --------------------------------------------------------------------------------
1998 1997 1996 1995 1994
- --------------------------------------------------------------------------------
PER SHARE DATA1 ($)
Net asset value,
beginning of year 14.12 12.98 11.98 10.34 10.36
------------------------------------------------
Net investment income .33 .31 .40 .29 .15
Net realized and unrealized
gains (.01) 2.63 2.08 2.36 .43
------------------------------------------------
Total from investment
operations .32 2.94 2.48 2.65 .58
------------------------------------------------
Less distributions from:
Net investment income (.45) (.54) (.35) (.28) (.15)
------------------------------------------------
Net realized gains .87) (1.26) (1.13) (.73) (.45)
===============================================
Total distributions (1.32) (1.80) (1.48) (1.01) (.60)
===============================================
Net asset value, end of year 13.12 14.12 12.98 11.98 10.34
===============================================
Total return (%) 2.37 23.03 21.19 25.89 5.61
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year ($ x 1
million) 4,031 5,679 4,920 3,573 2,060
Ratios to average net assets:
(%)
Expenses .76 .74 .73 .72 .75
Expenses excluding waiver
and payments by affiliate .79 .77 .75 .72 .75
Net investment income 2.28 1.92 3.21 2.89 1.96
Portfolio turnover rate (%) 65.27 54.72 66.87 73.18 70.63
1. Per share amounts for all periods prior to December 31, 1996, have been
restated to reflect a 3-for-1 stock split effective February 3, 1997.
MUTUAL FINANCIAL SERVICES FUND
[Insert graphic of bullseye and arrows] GOALS AND STRATEGIES
GOALS The fund's investment goal is capital appreciation, which may
occasionally be short-term. Its secondary goal is income.
PRINCIPAL INVESTMENTS The fund will primarily invest in domestic and foreign
equity securities. Equity securities generally entitle the holder to
participate in a company's general operating results. These include common
stocks, preferred stocks and convertible securities.
The fund concentrates its investments in the financial services industry by
investing more than 25% of its total assets in that industry. Normally, the
fund will invest at least 65% of its total assets in securities issued by
financial services companies. Financial services companies are companies
which, in the manager's view, derive at least 50% of their assets or revenues
from the creation, purchase and sale of financial instruments. These
companies include banks, savings and loan organizations, credit card
companies, brokerage firms, finance companies, sub-prime lending
institutions, investment advisers, investment companies and insurance
companies.
Because many companies in the financial services industry are smaller
capitalization companies, the fund invests up to 50% of its assets in the
securities of companies with market capitalization values (share price times
the number of common stock shares outstanding) of $1.5 billion or less. The
fund may invest a portion of its assets in the securities of domestic or
foreign companies involved in mergers, consolidations, liquidations,
reorganizations or financial restructurings (Reorganizing Companies), or as
to which there are outstanding tender or exchange offers. Investments in
Reorganizing Companies may, but are not expected to, exceed 50% of the fund's
assets.
The fund may also invest a significant portion of its assets in foreign
equity securities. To hedge (protect) against currency exchange rate
fluctuations, the fund enters into forward foreign currency exchange
contracts to the extent that hedging is available and, in the manager's
opinion, it is economical to do so. A forward foreign currency exchange
contract is an agreement to buy or sell a specific currency at a future date
and at a price set at the time of the contract. Forward foreign currency
exchange contracts may reduce the risk of loss from a change in value of a
currency, but they also limit any potential gains and do not protect against
fluctuations in the value of the underlying position.
The fund invests to a lesser extent in domestic and foreign debt securities.
Debt securities represent an obligation of the issuer to repay a loan of
money to it, and generally provide for the payment of interest. These include
bonds, including those convertible into common stock, notes and debentures.
The fund may invest in debt securities rated in any rating category
established by an independent rating organization, including lower rated or
defaulted debt securities ("junk bonds"), or in unrated debt securities. The
fund typically invests in unrated debt securities of Reorganizing Companies.
The fund may invest in the direct indebtedness, or participation interests in
the indebtedness, of Reorganizing Companies. 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 direct
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.
Participation interests in indebtedness represent fractional interests in a
company's indebtedness. The financial institutions which typically make
participations available are banks or insurance companies or governmental
institutions or 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 fund may also purchase trade claims and other direct obligations or
claims (Trade Claims) of Reorganizing Companies. Trade Claims generally are
purchased from creditors of Reorganizing Companies, and represent money due
to a supplier of goods or services to the Reorganizing Company.
While the fund generally purchases securities for investment purposes and not
for the purpose of influencing or controlling management of a company, the
manager may use the fund's ownership interest in a company to seek to
influence or control management when the manager perceives a benefit. The
fund may invest in entities whose business is to acquire securities of
companies for the purpose of influencing or controlling management or with
the expectation of taking over such companies. The fund also may invest in
the securities of a particular company which the manager believes may be an
attractive company to be taken over by another entity.
[Begin callout]
The fund invests primarily in financial services companies such as banks,
savings and loans, credit card, brokerage, investment adviser, investment and
insurance companies.
[End callout]
PORTFOLIO SELECTION The Fund invests primarily in equity and debt securities
that the manager believes are available at prices less than their actual
value based on certain recognized objective criteria (intrinsic value). In
choosing investments for the fund, the manager bases its opinions upon the
analysis and research of certain factors, including: the relationship of a
security's book value to market value; cash flow; and multiples of earnings
of comparable securities. Each security is examined separately and there is
no set criteria as to the size of an issuer, its earnings or the industry in
which it operates. Debt securities are generally selected based on the
manager's opinion that the securities are available at less than their
intrinsic value, and the manager's own analysis of the security has greater
influence over the investment decision than the coupon rate or rating of the
security. The smaller companies in which the fund invests are not well known,
their securities may trade in the securities markets below their book values
and may not be followed by established securities analysts.
TEMPORARY INVESTMENTS The manager may take a temporary defensive position
when it believes the markets or the economy are experiencing excessive
volatility or a prolonged general decline, or other adverse conditions exist.
Under these circumstances, the fund may be unable to pursue its investment
goals because it may not invest or may invest less in financial services
companies and equity and debt securities that the manager believes are
available at prices less than their intrinsic value.
[Insert graphic of chart with line going up and down] MAIN RISKS
FINANCIAL SERVICES COMPANIES The fund concentrates its investments in the
financial service industry. As a result, general market and economic
conditions as well as other risks specific to the financial services industry
will impact the fund's investments and its performance.
Financial services companies are subject to extensive government regulation
which tends to limit both the amount and types of loans and other financial
commitments the company can make, and the interest rates and fees it can
charge. These limitations can have a significant impact on the profitability
of a financial services company since profitability is impacted by the
company's ability to make financial commitments such as loans.
Insurance companies in which the fund invests may also have an impact on the
fund's performance as insurers may be subject to severe price competition,
claims activity, marketing competition and general economic conditions.
Certain lines of insurance can be significantly influenced by specific
events. For example, property and casualty insurer profits may be affected
by certain weather catastrophes and other disasters; and life and health
insurer profits may be affected by mortality risks and morbidity rates.
Pending legislation, if enacted, will also likely have an impact on the
profitability of financial services companies and on the performance of the
fund. It would reduce the separation between commercial and investment
banking businesses and permit banks to expand their services. This expansion
could expose banks to increased competition from well-established
competitors.
The financial services industry is currently undergoing a number of changes
such as continuing consolidations, development of new products and structures
and changes to its regulatory framework. These changes are likely to have a
significant impact on the financial services industry and the fund.
VALUE INVESTING The fund's general policy of investing in securities that
the manager believes are available at prices less than their intrinsic value
differs from the approach followed by many other managers, and may result in
the fund choosing securities that are not widely followed by other
investors. There is always the possibility that the manager may be incorrect
in its assessment of a particular company or that the manager may not buy
these securities at their lowest possible price or sell them at their highest.
[Begin callout]
Because the stocks the fund holds fluctuate in price with market conditions,
the value of your investment in the fund will go up and down. This means you
could lose money over short or even extended periods.
[End callout]
STOCKS While stocks have historically outperformed other asset classes over
the long term, they tend to go up and down more dramatically over the shorter
term. These price movements may result from factors affecting individual
companies, industries or the securities market as a whole.
SMALLER COMPANIES Historically, smaller company securities 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, small 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.
Therefore, while smaller companies may offer greater opportunities for
capital growth than larger, more established companies, they also involve
greater risks and should be considered speculative.
REORGANIZING COMPANIES There can be no assurance that any merger,
consolidation, liquidation, reorganization or tender or exchange offer
proposed at the time the fund makes its investment in a Reorganizing Company
will be consummated or will be consummated on the terms and within the time
period contemplated and, therefore, that the fund's performance will benefit
from its investment in a Reorganizing Company. Debt securities of
Reorganizing Companies typically are unrated, lower rated, in default or
close to default.
FOREIGN SECURITIES Securities of companies and governments located outside
the U.S. may involve risks that can increase the potential for losses in the
fund.
COUNTRY. General securities market movements in any country where the fund
has investments are likely to affect the value of the securities the fund
owns which trade in that country. These movements will affect the fund's
share price and fund performance.
The political, economic and social structures of some countries the fund
invests in may be less stable and more volatile than those in the U.S. The
risks of investing in these countries include the possibility of the
imposition of exchange controls, currency devaluations, foreign ownership
limitations, expropriation, restrictions on removal of currency or other
assets, nationalization of assets, punitive taxes and certain custody and
settlement risks.
The fund's investments in developing or emerging markets are subject to all
of the risks of foreign investing generally, and have additional heightened
risks due to a lack of established legal, business and social frameworks to
support securities markets. Foreign securities markets, including emerging
markets, may have substantially lower trading volumes than U.S. markets,
resulting in less liquidity and more volatility than experienced in the U.S.
While short-term volatility in these markets can be disconcerting, declines
in excess of 50% are not unusual.
COMPANY. Foreign companies are not subject to the same disclosure,
accounting, auditing and financial reporting standards and practices as U.S.
companies and their securities may not be as liquid as securities of similar
U.S. companies. Foreign stock exchanges, trading systems, brokers and
companies generally have less government supervision and regulation than in
the U.S. The fund may have greater difficulty voting proxies, exercising
shareholder rights, pursuing legal remedies and obtaining judgments with
respect to foreign investments in foreign courts than with respect to U.S.
companies in U.S. courts.
CURRENCY. To the extent the fund's investments are denominated in foreign
currencies, changes in foreign currency exchange rates will affect the value
of what the fund owns and the fund's share price. Generally, when the U.S.
dollar rises in value against a foreign currency, an investment in that
country loses value because the currency is worth fewer U.S. dollars.
Devaluation of a currency by a country's government or banking authority also
will have a significant impact on the value of any securities denominated in
that currency. Currency markets generally are not regulated as securities
markets.
EURO. On January 1, 1999, the European Monetary Union (EMU) introduced a new
single currency, the euro, which replaced the national currency for the
eleven participating member countries. If the fund holds investments in
countries with currencies replaced by the euro, the investment process,
including trading, foreign exchange, payments, settlements, cash accounts,
custody and accounting will be impacted.
Because this change to a single currency is new and untested, the
establishment of the euro may result in market volatility. For the same
reason, it is not possible to predict the impact of the euro on the business
or financial condition of European issuers which the fund may hold in its
portfolio, and their impact on fund performance. To the extent the fund holds
non-U.S. dollar (euro or other) denominated securities, it will still be
exposed to currency risk due to fluctuations in those currencies versus the
U.S. dollar.
DERIVATIVE SECURITIES Forward foreign currency exchange contracts are
considered derivative investments, since their value depends on the value of
an underlying asset. The fund's investment in derivatives may involve a
small investment relative to the amount of risk assumed. The fund can incur
a loss in these transactions due to the imposition of controls by a foreign
or the U.S. government on the exchange of foreign currencies or the inability
to deliver or receive a foreign currency. The success of forward foreign
currency exchange contracts will depend on the manager's ability to predict
market movements. Losses resulting from the use of forward foreign currency
exchange contracts can reduce the fund's share price, and possibly income,
and such losses can be greater than if the contract had not been entered into
by the fund.
INDEBTEDNESS, PARTICIPATIONS AND TRADE CLAIMS The purchase of indebtedness
of a troubled company always involves a risk as to the creditworthiness of
the issuer and the possibility that the investment may be lost. There are no
established markets for indebtedness and, thus, it is less liquid than
securities that are heavily traded. Typically, purchasers of participations,
such as the fund, must rely on the financial institution issuing the
participation to assert any rights against the borrower with respect to the
underlying indebtedness. When a fund purchases a participation, it takes on
the risk associated with the financial soundness of the bank or other
financial intermediary issuing the participation, as well as the credit risk
associated with the financial soundness of the issuer of the underlying
indebtedness. When a fund purchases a Trade Claim, there is no guarantee
that the debtor will ever be able to satisfy the obligation on the Trade
Claim.
CREDIT This is the possibility that an issuer will be unable to make
interest payments or repay principal. Changes in an issuer's financial
strength or in a security's credit rating may affect its value and, thus,
impact the value of fund shares.
Securities rated below investment grade, sometimes called "junk bonds" or
"high yield debt securities," generally have more risk than higher-rated
securities. The principal risks of investing in these securities include:
o SUBSTANTIAL CREDIT RISK. Companies issuing high yield 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.
o DEFAULTED DEBT RISK. 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.
o VOLATILITY RISK. The prices of high yield debt securities fluctuate more
than higher-quality securities. Prices are especially sensitive to
developments affecting the company's business and to changes in the
ratings assigned by ratings organizations. 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.
ILLIQUID SECURITIES The fund may invest up to 15% of its net assets in
illiquid securities. Illiquid securities are securities with a limited
trading market. Investments by the fund in illiquid securities involve the
possibility that the securities cannot be readily sold or can only be resold
at a price significantly lower than their value, which may have a negative
effect on the value of the fund's shares.
YEAR 2000 When evaluating current and potential portfolio positions, Year
2000 is one of the factors the fund's manager considers.
[Begin callout]
Mutual fund shares are not deposits or obligations of, or guaranteed or
endorsed by, any bank, and are not federally insured by the Federal Deposit
Insurance Corporation, the Federal Reserve Board, or any other agency of the
U.S. government. Mutual fund shares involve investment risks, including the
possible loss of principal.
[End callout]
The manager will rely upon public filings and other statements made by
companies about their Year 2000 readiness. Issuers in countries outside the
U.S., particularly in emerging markets, may not be required to make the same
level of disclosure about Year 2000 readiness as is required in the U.S. The
manager, of course, cannot audit each company and its major suppliers to
verify their Year 2000 readiness.
If a company in which the fund is invested is adversely affected by Year 2000
problems, it is likely that the price of its security will also be adversely
affected. A decrease in the value of one or more of the fund's portfolio
holdings will have a similar impact on the fund's performance. Please see
page __ for more information.
More detailed information about the fund, its policies, including temporary
investments, risks and bond ratings can be found in the fund's Statement of
Additional Information (SAI).
[Insert graphic of a bull and a bear] PERFORMANCE
This information gives some indication of the risks of investing in the fund
by comparing the fund's performance with a broad-based securities market
index. Of course, past performance cannot predict or guarantee future
results. Of course, past performance cannot predict or guarantee future
results.
CLASS Z ANNUAL TOTAL RETURN
[Insert bar graph]
7.08%
98
YEAR
[Begin callout]
BEST QUARTER:
Q1 '98 17.35%
WORST QUARTER:
Q3 '98 -17.75%
[End callout]
AVERAGE ANNUAL TOTAL RETURNS
For the periods ended December 31, 1998
SINCE
INCEPTION
1 YEAR (8/19/97)
- -------------------------------------------------------------
Mutual Financial Services Fund -
Class Z 7.08% 23.06%
KBW 50 Total Return Index1 8.27% 14.83%
1. Source: Standard & Poor's(R) Micropal. The Keefe, Bruyette & Woods (KBW 50)
index tracks the 50 largest U.S. banks' stocks. The unmanaged index differs
from the fund in composition, does not pay management fees or expenses and
includes reinvested dividends. One cannot invest directly in an index, nor is
an index representative of the fund's portfolio.
[Insert graphic of percentage sign] FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and
hold shares of the fund.
SHAREHOLDER FEES (FEES PAID DIRECTLY FROM YOUR INVESTMENT)
CLASS Z
- -------------------------------------------------------------------------------
Maximum sales charge (load) imposed on purchases None
Exchange fee None
ANNUAL FUND OPERATING EXPENSES (EXPENSES DEDUCTED FROM FUND ASSETS)
CLASS Z
- -------------------------------------------------------------------------------
Management fees1 0.80%
Distribution and service (12b-1) fees None
Other expenses 0.29%
---------------------------
Total annual fund operating expenses1 1.09%
===========================
1. For the fiscal year ended December 31, 1998, the manager had agreed in
advance to limit its management fees so that the fund's aggregate annual
operating expenses do not exceed 1.00% for Class Z for its initial
twenty-four months of operations. With this reduction, management fees were
0.71% and total annual fund operating expenses were 1.00%. After the first
twenty-four months of operations, the manager may end this arrangement at any
time.
EXAMPLE
This example can help you compare the cost of investing in the fund with the
cost of investing in other mutual funds.
The example assumes you invest $10,000 for the periods shown and then sell
all of your shares at the end of those periods. The example also assumes your
investment has a 5% return each year and the fund's operating expenses remain
the same. Although your actual costs may be higher or lower, based on these
assumptions your costs would be:
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ---------------------------------------------
$111 $347 $601 $1,329
[Insert graphic of a dollar bill] FINANCIAL HIGHLIGHTS
This table presents the financial performance for Class Z since its
inception. This information has been audited by Ernst & Young LLP.
CLASS Z YEAR ENDED DECEMBER 31,
- ----------------------------------------------------------------------
1998 2 1997 1
- ----------------------------------------------------------------------
PER SHARE DATA ($)
Net asset value,
beginning of year 12.27 10.00
-----------------------
Net investment income .24 .04
Net realized and unrealized gains .64 2.35
-----------------------
Total from investment operations .88 2.39
Less distributions from:
Net investment income (.19) (.03)
Net realized gains (.11) (.09)
-----------------------
Total distributions (.30) (.12)
-----------------------
Net asset value, end of year 12.85 12.27
=======================
Total return (%) 3 7.08 23.92
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year ($ x 1000) 143,132 136,350
Ratios to average net assets: (%)
Expenses 1.00 1.00 4
Expenses excluding waiver and payments by
affiliate 1.09 1.62 4
Net investment income 1.76 1.37 4
Portfolio turnover rate (%) 136.76 42.26
1. For the period August 19, 1997 (effective date) to December 31, 1997.
2. Based on average weighted shares outstanding.
3. Total return is not annualized.
4. Annualized.
MUTUAL QUALIFIED FUND
[Insert graphic of bullseye and arrows] GOALS AND STRATEGIES
GOALS The fund's investment goal is capital appreciation, which may
occasionally be short-term. Its secondary goal is income.
PRINCIPAL INVESTMENTS The fund will primarily invest in domestic and foreign
equity securities. Equity securities generally entitle the holder to
participate in a company's general operating results. These include common
stocks, preferred stocks and convertible securities.
The fund invests primarily in the securities of companies with market
capitalization values (share price times the number of common stock shares
outstanding) of more than $1.5 billion. The fund may invest a portion of its
assets in the securities of domestic or foreign companies involved in
mergers, consolidations, liquidations, reorganizations or financial
restructurings (Reorganizing Companies), or as to which there are outstanding
tender or exchange offers. Investments in Reorganizing Companies may, but
are not expected to, exceed 50% of the fund's assets.
The fund may invest a significant portion of its assets in foreign equity
securities. The fund tends to invest in foreign securities to a greater
extent than Mutual Shares Fund and to a lesser extent than Mutual Beacon
Fund. To hedge (protect) against currency exchange rate fluctuations, the
fund enters into forward foreign currency exchange contracts to the extent
that hedging is available and, in the manager's opinion, it is economical to
do so. A forward foreign currency exchange contract is an agreement to buy
or sell a specific currency at a future date and at a price set at the time
of the contract. Forward foreign currency exchange contracts may reduce the
risk of loss from a change in value of a currency, but they also limit any
potential gains and do not protect against fluctuations in the value of the
underlying position.
The fund invests to a lesser extent in domestic and foreign debt securities.
Debt securities represent an obligation of the issuer to repay a loan of
money to it, and generally provide for the payment of interest. These include
bonds, including those convertible into common stock, notes and debentures.
The fund may invest in debt securities rated in any rating category
established by an independent rating organization, including lower rated or
defaulted debt securities ("junk bonds"), or in unrated debt securities. The
Fund typically invests in unrated debt securities of Reorganizing Companies.
The fund may invest in the direct indebtedness, or participation interests in
the indebtedness, of Reorganizing Companies. 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 direct
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.
Participation interests in indebtedness represent fractional interests in a
company's indebtedness. The financial institutions which typically make
participations available are banks or insurance companies or governmental
institutions or 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 fund may also purchase trade claims and other direct obligations or
claims (Trade Claims) of Reorganizing Companies. Trade Claims generally are
purchased from creditors of Reorganizing Companies, and represent money due
to a supplier of goods or services to the Reorganizing Company.
While the fund generally purchases securities for investment purposes and not
for the purpose of influencing or controlling management of a company, the
manager may use the fund's ownership interest in a company to seek to
influence or control management when the manager perceives a benefit. The
fund may invest in entities whose business is to acquire securities of
companies for the purpose of influencing or controlling management or with
the expectation of taking over such companies. The fund also may invest in
the securities of a particular company which the manager believes may be an
attractive company to be taken over by another entity.
[Begin callout]
The fund invests primarily in equity securities that the manager believes are
available at prices less than their actual value based on certain recognized
objective criteria (intrinsic value).
[End callout]
PORTFOLIO SELECTION In choosing investments for the fund, the manager bases
its opinions upon the analysis and research of certain factors, including:
the relationship of a security's book value to market value; cash flow; and
multiples of earnings of comparable securities. Each security is examined
separately and there is no set criteria as to the size of an issuer, its
earnings or the industry in which it operates. Debt securities are generally
selected based on the manager's opinion that the securities are available at
less than their intrinsic value, and the manager's own analysis of the
security has greater influence over the investment decision than the coupon
rate or rating of the security.
TEMPORARY INVESTMENTS The manager may take a temporary defensive position
when it believes the markets or the economy are experiencing excessive
volatility or a prolonged general decline, or other adverse conditions exist.
Under these circumstances, the fund may be unable to pursue its investment
goals because it may not invest or may invest less in equity and debt
securities that the manager believes are available at prices less than their
intrinsic value.
[Insert graphic of chart with line going up and down] MAIN RISKS
VALUE INVESTING The fund's general policy of investing in securities that
the manager believes are available at prices less than their intrinsic value
differs from the approach followed by many other managers, and may result in
the fund choosing securities that are not widely followed by other
investors. There is always the possibility that the manager may be incorrect
in its assessment of a particular company or that the manager may not buy
these securities at their lowest possible price or sell them at their highest.
[Begin callout]
Because the stocks the fund holds fluctuate in price with market conditions,
the value of your investment in the fund will go up and down. This means you
could lose money over short or even extended periods.
[End callout]
STOCKS While stocks have historically outperformed other asset classes over
the long term, they tend to go up and down more dramatically over the shorter
term. These price movements may result from factors affecting individual
companies, industries or the securities market as a whole.
REORGANIZING COMPANIES There can be no assurance that any merger,
consolidation, liquidation, reorganization or tender or exchange offer
proposed at the time the fund makes its investment in a Reorganizing Company
will be consummated or will be consummated on the terms and within the time
period contemplated and, therefore, that the fund's performance will benefit
from its investment in a Reorganizing Company. Debt securities of
Reorganizing Companies typically are unrated, lower rated, in default or
close to default.
FOREIGN SECURITIES Securities of companies and governments located outside
the U.S. may involve risks that can increase the potential for losses in the
fund.
COUNTRY. General securities market movements in any country where the fund
has investments are likely to affect the value of the securities the fund
owns which trade in that country. These movements will affect the fund's
share price and fund performance.
The political, economic and social structures of some countries the fund
invests in may be less stable and more volatile than those in the U.S. The
risks of investing in these countries include the possibility of the
imposition of exchange controls, currency devaluations, foreign ownership
limitations, expropriation, restrictions on removal of currency or other
assets, nationalization of assets, punitive taxes and certain custody and
settlement risks.
The fund's investments in developing or emerging markets are subject to all
of the risks of foreign investing generally, and have additional heightened
risks due to a lack of established legal, business and social frameworks to
support securities markets. Foreign securities markets, including emerging
markets, may have substantially lower trading volumes than U.S. markets,
resulting in less liquidity and more volatility than experienced in the U.S.
While short-term volatility in these markets can be disconcerting, declines
in excess of 50% are not unusual.
COMPANY. Foreign companies are not subject to the same disclosure,
accounting, auditing and financial reporting standards and practices as U.S.
companies and their securities may not be as liquid as securities of similar
U.S. companies. Foreign stock exchanges, trading systems, brokers and
companies generally have less government supervision and regulation than in
the U.S. The fund may have greater difficulty voting proxies, exercising
shareholder rights, pursuing legal remedies and obtaining judgments with
respect to foreign investments in foreign courts than with respect to U.S.
companies in U.S. courts.
CURRENCY. To the extent the fund's investments are denominated in foreign
currencies, changes in foreign currency exchange rates will affect the value
of what the fund owns and the fund's share price. Generally, when the U.S.
dollar rises in value against a foreign currency, an investment in that
country loses value because the currency is worth fewer U.S. dollars.
Devaluation of a currency by a country's government or banking authority also
will have a significant impact on the value of any securities denominated in
that currency. Currency markets generally are not regulated as securities
markets.
EURO. On January 1, 1999, the European Monetary Union (EMU) introduced a new
single currency, the euro, which replaced the national currency for the
eleven participating member countries. If the fund holds investments in
countries with currencies replaced by the euro, the investment process,
including trading, foreign exchange, payments, settlements, cash accounts,
custody and accounting will be impacted.
Because this change to a single currency is new and untested, the
establishment of the euro may result in market volatility. For the same
reason, it is not possible to predict the impact of the euro on the business
or financial condition of European issuers which the fund may hold in its
portfolio, and their impact on the value of fund shares and fund performance.
To the extent the fund holds non-U.S. dollar (euro or other) denominated
securities, it will still be exposed to currency risk due to fluctuations in
those currencies versus the U.S. dollar.
DERIVATIVE SECURITIES Forward foreign currency exchange contracts are
considered derivative investments, since their value depends on the value of
an underlying asset. The fund's investment in derivatives may involve a
small investment relative to the amount of risk assumed. The fund can incur
a loss in these transactions due to the imposition of controls by a foreign
or the U.S. government on the exchange of foreign currencies or the inability
to deliver or receive a foreign currency. The success of forward foreign
currency exchange contracts will depend on the manager's ability to predict
market movements. Losses resulting from the use of forward foreign currency
exchange contracts can reduce the fund's share price, and possibly income,
and such losses can be greater than if the contract had not been entered into
by the fund.
INDEBTEDNESS, PARTICIPATIONS AND TRADE CLAIMS The purchase of indebtedness
of a troubled company always involves a risk as to the creditworthiness of
the issuer and the possibility that the investment may be lost. There are no
established markets for indebtedness and, thus, it is less liquid than
securities that are heavily traded. Typically, purchasers of participations,
such as the fund, must rely on the financial institution issuing the
participation to assert any rights against the borrower with respect to the
underlying indebtedness. When a fund purchases a participation, it takes on
the risk associated with the financial soundness of the bank or other
financial intermediary issuing the participation, as well as the credit risk
associated with the financial soundness of the issuer of the underlying
indebtedness. When a fund purchases a Trade Claim, there is no guarantee
that the debtor will ever be able to satisfy the obligation on the Trade
Claim.
CREDIT This is the possibility that an issuer will be unable to make
interest payments or repay principal. Changes in an issuer's financial
strength or in a security's credit rating may affect its value and, thus,
impact the value of fund shares.
Securities rated below investment grade, sometimes called "junk bonds" or
"high yield debt securities," generally have more risk than higher-rated
securities. The principal risks of investing in these securities include:
o SUBSTANTIAL CREDIT RISK. Companies issuing high yield 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.
o DEFAULTED DEBT RISK. 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.
o VOLATILITY RISK. The prices of high yield debt securities fluctuate more
than higher-quality securities. Prices are especially sensitive to
developments affecting the company's business and to changes in the
ratings assigned by ratings organizations. 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.
ILLIQUID SECURITIES The fund may invest up to 15% of its net assets in
illiquid securities. Illiquid securities are securities with a limited
trading market. Investments by the fund in illiquid securities involve the
possibility that the securities cannot be readily sold or can only be resold
at a price significantly lower than their value, which may have a negative
effect on the value of the fund's shares.
YEAR 2000 When evaluating current and potential portfolio positions, Year
2000 is one of the factors the fund's manager considers.
[Begin callout]
Mutual fund shares are not deposits or obligations of, or guaranteed or
endorsed by, any bank, and are not federally insured by the Federal Deposit
Insurance Corporation, the Federal Reserve Board, or any other agency of the
U.S. government. Mutual fund shares involve investment risks, including the
possible loss of principal.
[End callout]
The manager will rely upon public filings and other statements made by
companies about their Year 2000 readiness. Issuers in countries outside the
U.S., particularly in emerging markets, may not be required to make the same
level of disclosure about Year 2000 readiness as is required in the U.S. The
manager, of course, cannot audit each company and its major suppliers to
verify their Year 2000 readiness.
If a company in which the fund is invested is adversely affected by Year 2000
problems, it is likely that the price of its security will also be adversely
affected. A decrease in the value of one or more of the fund's portfolio
holdings will have a similar impact on the price of the fund's shares and the
fund's performance. Please see page ___ for more information.
More detailed information about the fund, its policies, including temporary
investments, risks and the bond ratings can be found in the fund's Statement
of Additional Information (SAI).
[Insert graphic of a bull and a bear] PERFORMANCE
This bar chart and table show the volatility of the fund's returns, which is
one indicator of the risks of investing in the fund. The bar chart shows
changes in the fund's returns from year to year over the past 10 calendar
years. The table shows how the fund's average annual total returns compare to
those of a broad-based securities market index. Of course, past performance
cannot predict or guarantee future results.
CLASS Z ANNUAL TOTAL RETURNS
[Insert bar graph]
14.44% -10.12% 21.13% 22.70% 22.71% 5.73% 26.60% 21.19% 24.92% 0.50%
89 90 91 92 93 94 95 96 97 98
YEAR
[Begin callout]
BEST QUARTER:
Q4 '98 12.63%
WORST QUARTER:
Q3 '98 -17.70%
[End callout]
AVERAGE ANNUAL TOTAL RETURNS
For the periods ended December 31, 1998
1 YEAR 5 YEARS 10 YEARS
- -------------------------------------------------------------------------------
Mutual Qualified Fund - Class Z 0.50% 15.28% 14.34%
S&P 500(R)Index 1 28.58% 24.06% 19.21%
1. Source: Standard & Poor's(R) Micropal. The S&P 500(R) Index is an unmanaged
group of widely held common stocks covering a variety of industries. It
includes reinvested dividends. One cannot invest directly in an index, nor is
an index representative of the fund's portfolio.
[Insert graphic of percentage sign] FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and
hold shares of the fund.
SHAREHOLDER FEES (FEES PAID DIRECTLY FROM YOUR INVESTMENT)
CLASS Z
- -------------------------------------------------------------------------------
Maximum sales charge (load) imposed on purchases None
Exchange fee None
ANNUAL FUND OPERATING EXPENSES (EXPENSES DEDUCTED FROM FUND ASSETS)1
CLASS Z
- -------------------------------------------------------------------------------
Management fees2 0.60%
Distribution and service (12b-1) fees None
Other expenses 0.19%
---------------------------
Total annual fund operating expenses2 0.79%
===========================
1. In connection with the transaction which resulted in Franklin Mutual
becoming each fund's investment manager, Franklin Mutual made a commitment to
the funds' board not to seek an increase in the rate of investment management
fees for a three year period beginning November 1, 1996. This agreement
applies only to those series which existed at that time. The parties also
agreed that for the same period the ordinary expenses of each series (based
on a percentage of net assets) will not be higher than they were expected to
be as of November 1, 1996, based on the annualized expense ratios of each
series as of that date. Increases in expenses beyond these expense ratios
will be permitted, however, if the board is satisfied that such expenses also
would have been higher (based upon such considerations as the amount and
composition of assets under management, the number of security transactions,
the number of shareholder accounts, regulatory requirements and general
economic conditions) had the transaction not taken place. This expense
limitation does not include items such as litigation expenses, interest,
taxes, insurance, brokerage commissions and expenses of an extraordinary
nature.
2. For the fiscal year ended December 31, 1998, the manager had agreed in
advance to limit its management fees. With this reduction, management fees
were 0.57% and total annual fund operating expenses were 0.76%. After October
31, 1999, the manager may end this arrangement at any time.
EXAMPLE
This example can help you compare the cost of investing in the fund with the
cost of investing in other mutual funds.
The example assumes you invest $10,000 for the periods shown and then sell
all of your shares at the end of those periods. The example also assumes your
investment has a 5% return each year and the fund's operating expenses remain
the same. Although your actual costs may be higher or lower, based on these
assumptions your costs would be:
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ---------------------------------------------
$81 $252 $439 $978
[Insert graphic of a dollar bill] FINANCIAL HIGHLIGHTS
This table presents the financial performance for Class Z since its
inception. This information has been audited by Ernst & Young LLP.
CLASS Z YEAR ENDED DECEMBER 31,
- --------------------------------------------------------------------------------
1998 1997 1996 1995 1994
- --------------------------------------------------------------------------------
PER SHARE DATA 1 ($)
Net asset value,
beginning of year 18.19 16.24 14.87 13.34 13.50
------------------------------------------------
Net investment income .43 .37 .47 .33 .22
Net realized and unrealized
gains (.38) 3.62 2.62 3.17 .55
------------------------------------------------
Total from investment
operations .05 3.99 3.09 3.50 .77
------------------------------------------------
Less distributions from:
Net investment income (.45) (.64) (.43) (.33) (.21)
Net realized gains (1.33) (1.40) (1.29) (1.64) (.72)
------------------------------------------------
Total distributions (1.78) (2.04) (1.72) (1.97) (.93)
------------------------------------------------
Net asset value, end of year 16.46 18.19 16.24 14.87 13.34
------------------------------------------------
Total return (%) .45 24.95 21.19 26.60 5.73
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year ($ x 1
million) 3,943 5,240 4,288 3,002 1,792
Ratios to average net assets:
(%)
Expenses .76 .75 .75 .72 .73
Expenses excluding waiver
and payments by affiliate .79 .78 .78 .72 .73
Net investment income 2.05 1.85 3.06 2.71 1.91
Portfolio turnover rate (%) 66.84 52.76 65.03 75.59 67.65
1. Per share amounts for all periods prior to December 31, 1996, have been
restated to reflect a 2-for-1 stock split effective February 3, 1997.
MUTUAL SHARES FUND
[Insert graphic of bullseye and arrows] GOALS AND STRATEGIES
GOALS The fund's investment goal is capital appreciation, which may
occasionally be short-term. Its secondary goal is income.
PRINCIPAL INVESTMENTS The fund will primarily invest in domestic and foreign
equity securities. Equity securities generally entitle the holder to
participate in a company's general operating results. These include common
stocks, preferred stocks and convertible securities.
The fund invests primarily in the securities of companies with market
capitalization values (share price times the number of common stock shares
outstanding) of more than $1.5 billion. The fund may invest a portion of its
assets in the securities of domestic or foreign companies involved in
mergers, consolidations, liquidations, reorganizations or financial
restructurings (Reorganizing Companies), or as to which there are outstanding
tender or exchange offers. Investments in Reorganizing Companies may, but
are not expected to, exceed 50% of the fund's assets.
The fund may invest a significant portion of its assets in foreign equity
securities. The fund tends to invest in foreign securities to a lesser extent
than Mutual Qualified Fund and Mutual Beacon Fund. To hedge (protect)
against currency exchange rate fluctuations, the fund enters into forward
foreign currency exchange contracts to the extent that hedging is available
and, in the manager's opinion, it is economical to do so. A forward foreign
currency exchange contract is an agreement to buy or sell a specific currency
at a future date and at a price set at the time of the contract. Forward
foreign currency exchange contracts may reduce the risk of loss from a change
in value of a currency, but they also limit any potential gains and do not
protect against fluctuations in the value of the underlying position.
The fund invests to a lesser extent in domestic and foreign debt securities.
Debt securities represent an obligation of the issuer to repay a loan of
money to it, and generally provide for the payment of interest. These include
bonds, including those convertible into common stock, notes and debentures.
The fund may invest in debt securities rated in any rating category
established by an independent rating organization, including lower rated or
defaulted debt securities ("junk bonds"), or in unrated debt securities. The
Fund typically invests in unrated debt securities of Reorganizing Companies.
The fund may invest in the direct indebtedness, or participation interests in
the indebtedness, of Reorganizing Companies. 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 direct
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.
Participation interests in indebtedness represent fractional interests in a
company's indebtedness. The financial institutions which typically make
participations available are banks or insurance companies or governmental
institutions or 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 fund may also purchase trade claims and other direct obligations or
claims (Trade Claims) of Reorganizing Companies. Trade Claims generally are
purchased from creditors of Reorganizing Companies, and represent money due
to a supplier of goods or services to a Reorganizing Company.
While the fund generally purchases securities for investment purposes and not
for the purpose of influencing or controlling management of a company, the
manager may use the fund's ownership interest in a company to seek to
influence or control management when the manager perceives a benefit. The
fund may invest in entities whose business is to acquire securities of
companies for the purpose of influencing or controlling management or with
the expectation of taking over such companies. The fund also may invest in
the securities of a particular company which the manager believes may be an
attractive company to be taken over by another entity.
[Begin callout]
The fund invests primarily in equity securities that the manager believes are
available at prices less than their actual value based on certain recognized
objective criteria (intrinsic value).
[End callout]
PORTFOLIO SELECTION In choosing investments for the fund, the manager bases
its opinions upon the analysis and research of certain factors, including:
the relationship of a security's book value to market value; cash flow; and
multiples of earnings of comparable securities. Each security is examined
separately and there is no set criteria as to the size of an issuer, its
earnings or the industry in which it operates. Debt securities are generally
selected based on the manager's opinion that the securities are available at
less than their intrinsic value, and the manager's own analysis of the
security has greater influence over the investment decision than the coupon
rate or rating of the security.
TEMPORARY INVESTMENTS The manager may take a temporary defensive position
when it believes the markets or the economy are experiencing excessive
volatility or a prolonged general decline, or other adverse conditions exist.
Under these circumstances, the fund may be unable to pursue its investment
goals because it may not invest or may invest less in equity and debt
securities that the manager believes are available at prices less than their
intrinsic value.
[Insert graphic of chart with line going up and down] MAIN RISKS
VALUE INVESTING The fund's general policy of investing in securities that
the manager believes are available at prices less than their intrinsic value
differs from the approach followed by many other managers, and may result in
the fund choosing securities that are not widely followed by other
investors. There is always the possibility that the manager may be incorrect
in its assessment of a particular company or that the manager may not buy
these securities at their lowest possible price or sell them at their highest.
[Begin callout]
Because the stocks the fund holds fluctuate in price with market conditions,
the value of your investment in the fund will go up and down. This means you
could lose money over short or even extended periods.
[End callout]
STOCKS While stocks have historically outperformed other asset classes over
the long term, they tend to go up and down more dramatically over the shorter
term. These price movements may result from factors affecting individual
companies, industries or the securities market as a whole.
REORGANIZING COMPANIES There can be no assurance that any merger,
consolidation, liquidation, reorganization or tender or exchange offer
proposed at the time the fund makes its investment in a Reorganizing Company
will be consummated or will be consummated on the terms and within the time
period contemplated and, therefore, that the fund's performance will benefit
from its investment in a Reorganizing Company. Debt securities of
Reorganizing Companies typically are unrated, lower rated, in default or
close to default.
FOREIGN SECURITIES Securities of companies and governments located outside
the U.S. may involve risks that can increase the potential for losses in the
fund.
COUNTRY. General securities market movements in any country where the fund
has investments are likely to affect the value of the securities the fund
owns which trade in that country. These movements will affect the fund's
share price and fund performance.
The political, economic and social structures of some countries the fund
invests in may be less stable and more volatile than those in the U.S. The
risks of investing in these countries include the possibility of the
imposition of exchange controls, currency devaluations, foreign ownership
limitations, expropriation, restrictions on removal of currency or other
assets, nationalization of assets, punitive taxes and certain custody and
settlement risks.
The fund's investments in developing or emerging markets are subject to all
of the risks of foreign investing generally, and have additional heightened
risks due to a lack of established legal, business and social frameworks to
support securities markets. Foreign securities markets, including emerging
markets, may have substantially lower trading volumes than U.S. markets,
resulting in less liquidity and more volatility than experienced in the U.S.
While short-term volatility in these markets can be disconcerting, declines
in excess of 50% are not unusual.
COMPANY. Foreign companies are not subject to the same disclosure,
accounting, auditing and financial reporting standards and practices as U.S.
companies and their securities may not be as liquid as securities of similar
U.S. companies. Foreign stock exchanges, trading systems, brokers and
companies generally have less government supervision and regulation than in
the U.S. The fund may have greater difficulty voting proxies, exercising
shareholder rights, pursuing legal remedies and obtaining judgments with
respect to foreign investments in foreign courts than with respect to U.S.
companies in U.S. courts.
CURRENCY. To the extent the fund's investments are denominated in foreign
currencies, changes in foreign currency exchange rates will affect the value
of what the fund owns and the fund's share price. Generally, when the U.S.
dollar rises in value against a foreign currency, an investment in that
country loses value because the currency is worth fewer U.S. dollars.
Devaluation of a currency by a country's government or banking authority also
will have a significant impact on the value of any securities denominated in
that currency. Currency markets generally are not regulated as securities
markets.
EURO. On January 1, 1999, the European Monetary Union (EMU) introduced a new
single currency, the euro, which replaced the national currency for the
eleven participating member countries. If the fund holds investments in
countries with currencies replaced by the euro, the investment process,
including trading, foreign exchange, payments, settlements, cash accounts,
custody and accounting will be impacted.
Because this change to a single currency is new and untested, the
establishment of the euro may result in market volatility. For the same
reason, it is not possible to predict the impact of the euro on the business
or financial condition of European issuers which the fund may hold in its
portfolio, and their impact on the value of fund shares and fund performance.
To the extent the fund holds non-U.S. dollar (euro or other) denominated
securities, it will still be exposed to currency risk due to fluctuations in
those currencies versus the U.S. dollar.
DERIVATIVE SECURITIES Forward foreign currency exchange contracts are
considered derivative investments, since their value depends on the value of
an underlying asset. The fund's investment in derivatives may involve a
small investment relative to the amount of risk assumed. The fund can incur
a loss in these transactions due to the imposition of controls by a foreign
or the U.S. government on the exchange of foreign currencies or the inability
to deliver or receive a foreign currency. The success of forward foreign
currency exchange contracts will depend on the manager's ability to predict
market movements. Losses resulting from the use of forward foreign currency
exchange contracts can reduce the fund's share price, and possibly income,
and such losses can be greater than if the contract had not been entered into
by the fund.
INDEBTEDNESS, PARTICIPATIONS AND TRADE CLAIMS The purchase of indebtedness
of a troubled company always involves a risk as to the creditworthiness of
the issuer and the possibility that the investment may be lost. There are no
established markets for indebtedness and, thus, it is less liquid than
securities that are heavily traded. Typically, purchasers of participations,
such as the fund, must rely on the financial institution issuing the
participation to assert any rights against the borrower with respect to the
underlying indebtedness. When a fund purchases a participation, it takes on
the risk associated with the financial soundness of the bank or other
financial intermediary issuing the participation, as well as the credit risk
associated with the financial soundness of the issuer of the underlying
indebtedness. When a fund purchases a Trade Claim, there is no guarantee
that the debtor will ever be able to satisfy the obligation on the Trade
Claim.
CREDIT This is the possibility that an issuer will be unable to make
interest payments or repay principal. Changes in an issuer's financial
strength or in a security's credit rating may affect its value and, thus,
impact the value of fund shares.
Securities rated below investment grade, sometimes called "junk bonds" or
"high yield debt securities," generally have more risk than higher-rated
securities. The principal risks of investing in these securities include:
o SUBSTANTIAL CREDIT RISK. Companies issuing high yield 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.
o DEFAULTED DEBT RISK. 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.
o VOLATILITY RISK. The prices of high yield debt securities fluctuate more
than higher-quality securities. Prices are especially sensitive to
developments affecting the company's business and to changes in the
ratings assigned by ratings organizations. 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.
ILLIQUID SECURITIES The fund may invest up to 15% of its net assets in
illiquid securities. Illiquid securities are securities with a limited
trading market. Investments by the fund in illiquid securities involve the
possibility that the securities cannot be readily sold or can only be resold
at a price significantly lower than their value, which may have a negative
effect on the value of the fund's shares.
YEAR 2000 When evaluating current and potential portfolio positions, Year
2000 is one of the factors the fund's manager considers.
[Begin callout]
Mutual fund shares are not deposits or obligations of, or guaranteed or
endorsed by, any bank, and are not federally insured by the Federal Deposit
Insurance Corporation, the Federal Reserve Board, or any other agency of the
U.S. government. Mutual fund shares involve investment risks, including the
possible loss of principal.
[End callout]
The manager will rely upon public filings and other statements made by
companies about their Year 2000 readiness. Issuers in countries outside the
U.S., particularly in emerging markets, may not be required to make the same
level of disclosure about Year 2000 readiness as is required in the U.S. The
manager, of course, cannot audit each company and its major suppliers to
verify their Year 2000 readiness.
If a company in which the fund is invested is adversely affected by Year 2000
problems, it is likely that the price of its security will also be adversely
affected. A decrease in the value of one or more of the fund's portfolio
holdings will have a similar impact on the price of the fund's shares and the
fund's performance. Please see page ___ for more information.
More detailed information about the fund, its policies, including temporary
investments, risks and the bond ratings can be found in the fund's Statement
of Additional Information (SAI).
[Insert graphic of a bull and a bear] PERFORMANCE
This bar chart and table show the volatility of the fund's returns, which is
one indicator of the risks of investing in the fund. The bar chart shows
changes in the fund's returns from year to year over the past 10 calendar
years. The table shows how the fund's average annual total returns compare to
those of a broad-based securities market index. Of course, past performance
cannot predict or guarantee future results.
CLASS Z ANNUAL TOTAL RETURNS
[Insert bar graph]
14.93% -9.82% 20.99% 21.33% 20.99% 4.55% 29.11% 20.76% 26.38% 0.45%
89 90 91 92 93 94 95 96 97 98
YEAR
[Begin callout]
BEST QUARTER:
Q4 '98 13.34%
WORST QUARTER:
Q3 '98 -16.96%
[End callout]
AVERAGE ANNUAL TOTAL RETURNS
For the periods ended December 31, 1998
1 YEAR 5 YEARS 10 YEARS
- -------------------------------------------------------------------------------
Mutual Shares Fund - Class Z 0.45% 15.65% 14.31%
S&P 500(R)Index 1 28.58% 24.06% 19.21%
1. Source: Standard & Poor's(R) Micropal. The S&P 500(R) Index is an unmanaged
group of widely held common stocks covering a variety of industries. It
includes reinvested dividends. One cannot invest directly in an index, nor is
an index representative of the fund's portfolio.
[Insert graphic of percentage sign] FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and
hold shares of the fund.
SHAREHOLDER FEES (FEES PAID DIRECTLY FROM YOUR INVESTMENT)
CLASS Z
- -------------------------------------------------------------------------------
Maximum sales charge (load) imposed on purchases None
Exchange fee None
ANNUAL FUND OPERATING EXPENSES (EXPENSES DEDUCTED FROM FUND ASSETS)1
CLASS Z
- -------------------------------------------------------------------------------
Management fees2 0.60%
Distribution and service (12b-1) fees None
Other expenses 0.17%
---------------------------
Total annual fund operating expenses2 0.77%
===========================
1. In connection with the transaction which resulted in Franklin Mutual
becoming each fund's investment manager, Franklin Mutual made a commitment to
the funds' board not to seek an increase in the rate of investment management
fees for a three year period beginning November 1, 1996. This agreement
applies only to those series which existed at that time. The parties also
agreed that for the same period the ordinary expenses of each series (based
on a percentage of net assets) will not be higher than they were expected to
be as of November 1, 1996, based on the annualized expense ratios of each
series as of that date. Increases in expenses beyond these expense ratios
will be permitted, however, if the board is satisfied that such expenses also
would have been higher (based upon such considerations as the amount and
composition of assets under management, the number of security transactions,
the number of shareholder accounts, regulatory requirements and general
economic conditions) had the transaction not taken place. This expense
limitation does not include items such as litigation expenses, interest,
taxes, insurance, brokerage commissions and expenses of an extraordinary
nature.
2. For the fiscal year ended December 31, 1998, the manager had agreed in
advance to limit its management fees. With this reduction, management fees
were 0.56% and total annual fund operating expenses were 0.73%. After October
31, 1999, the manager may end this arrangement at any time.
EXAMPLE
This example can help you compare the cost of investing in the fund with the
cost of investing in other mutual funds.
The example assumes you invest $10,000 for the periods shown and then sell
all of your shares at the end of those periods. The example also assumes your
investment has a 5% return each year and the fund's operating expenses remain
the same. Although your actual costs may be higher or lower, based on these
assumptions your costs would be:
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ---------------------------------------------
$79 $246 $428 $954
[Insert graphic of a dollar bill] FINANCIAL HIGHLIGHTS
This table presents the financial performance for Class Z since its
inception. This information has been audited by Ernst & Young LLP.
CLASS Z YEAR ENDED DECEMBER 31,
- --------------------------------------------------------------------------------
1998 1997 1996 1995 1994
- --------------------------------------------------------------------------------
PER SHARE DATA 1 ($)
Net asset value,
beginning of year 21.30 18.57 17.29 15.74 16.19
------------------------------------------------
Net investment income .53 .42 .55 .40 .27
Net realized and unrealized
gains (.46) 4.43 2.96 4.10 .46
------------------------------------------------
Total from investment
operations .07 4.85 3.51 4.50 .73
------------------------------------------------
Less distributions from:
Net investment income (.53) (.54) (.50) (.39) (.27)
Net realized gains (1.29) (1.58) (1.73) (2.56) (.91)
------------------------------------------------
Total distributions (1.82) (2.12) (2.23) (2.95) (1.18)
------------------------------------------------
Net asset value, end of year 19.55 21.30 18.57 17.29 15.74
------------------------------------------------
Total return (%) .45 26.44 20.76 29.11 4.53
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year ($ x 1
million) 6,279 7,919 6,543 5,230 3,746
Ratios to average net assets:
(%)
Expenses .73 .72 .70 .69 .72
Expenses excluding waiver
and payments by affiliate .77 .75 .72 .69 .72
Net investment income 2.15 1.92 3.02 2.47 1.80
Portfolio turnover rate (%) 69.46 49.61 58.35 79.32 66.55
1. Per share amounts for all periods prior to December 31, 1996, have been
restated to reflect a 5-for-1 stock split effective February 3, 1997.
MUTUAL DISCOVERY FUND
[Insert graphic of bullseye and arrows] GOAL AND STRATEGIES
GOAL The fund's investment goal is long-term capital appreciation.
PRINCIPAL INVESTMENTS The fund will primarily invest in domestic and foreign
equity securities of companies located in any region of the world. Equity
securities generally entitle the holder to participate in a company's general
operating results. These include common stocks, preferred stocks and
convertible securities.
Although the fund tends to invest in the securities of companies with market
capitalization values (share price times the number of common stock shares
outstanding) of more than $1.5 billion, it may also invest in securities of
companies with smaller market capitalization values. The fund may invest a
portion of its assets in the securities of domestic or foreign companies
involved in mergers, consolidations, liquidations, reorganizations or
financial restructurings (Reorganizing Companies), or as to which there are
outstanding tender or exchange offers. Investments in Reorganizing Companies
may, but are not expected to, exceed 50% of the fund's assets.
The fund invests a significant portion of its assets in foreign equity
securities. To hedge (protect) against currency exchange rate fluctuations,
the fund enters into forward foreign currency exchange contracts to the
extent that hedging is available and, in the manager's opinion, it is
economical to do so. A forward foreign currency exchange contract is an
agreement to buy or sell a specific currency at a future date and at a price
set at the time of the contract. Forward foreign currency exchange contracts
may reduce the risk of loss from a change in value of a currency, but they
also limit any potential gains and do not protect against fluctuations in the
value of the underlying position.
The fund invests to a lesser extent in domestic and foreign debt securities.
Debt securities represent an obligation of the issuer to repay a loan of
money to it, and generally provide for the payment of interest. These include
bonds, including those convertible into common stock, notes and debentures.
The fund may invest in debt securities rated in any rating category
established by an independent rating organization, including lower rated or
defaulted debt securities ("junk bonds"), or in unrated debt securities. The
Fund typically invests in unrated debt securities of Reorganizing Companies.
The fund may invest in the direct indebtedness, or participation interests in
the indebtedness, of Reorganizing Companies. 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 direct
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.
Participation interests in indebtedness represent fractional interests in a
company's indebtedness. The financial institutions which typically make
participations available are banks or insurance companies or governmental
institutions or 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 fund may also purchase trade claims and other direct obligations or
claims (Trade Claims) of Reorganizing Companies. Trade Claims generally are
purchased from creditors of Reorganizing Companies, and represent money due
to a supplier of goods or services to the Reorganizing Company.
While the fund generally purchases securities for investment purposes and not
for the purpose of influencing or controlling management of a company, the
manager may use the fund's ownership interest in a company to seek to
influence or control management when the manager perceives a benefit. The
fund may invest in entities whose business is to acquire securities of
companies for the purpose of influencing or controlling management or with
the expectation of taking over such companies. The fund also may invest in
the securities of a particular company which the manager believes may be an
attractive company to be taken over by another entity.
[Begin callout]
The fund invests primarily in equity securities that the manager believes are
available at prices less than their actual value based on certain recognized
objective criteria (intrinsic value).
[End callout]
PORTFOLIO SELECTION In choosing investments for the fund, the manager bases
its opinions upon the analysis and research of certain factors, including:
the relationship of a security's book value to market value; cash flow; and
multiples of earnings of comparable securities. Each security is examined
separately and there is no set criteria as to the size of an issuer, its
earnings or the industry in which it operates. Debt securities are generally
selected based on the manager's opinion that the securities are available at
less than their intrinsic value, and the manager's own analysis of the
security has greater influence over the investment decision than the coupon
rate or rating of the security.
The smaller companies in which the fund invests are not well known, their
securities may trade in the securities markets below their book values and
may not be followed by established securities analysts.
TEMPORARY INVESTMENTS The manager may take a temporary defensive position
when it believes the markets or the economy are experiencing excessive
volatility or a prolonged general decline, or other adverse conditions exist.
Under these circumstances, the fund may be unable to pursue its investment
goal because it may not invest or may invest less in equity and debt
securities that the manager believes are available at prices less than their
intrinsic value.
[Insert graphic of chart with line going up and down] MAIN RISKS
VALUE INVESTING The fund's general policy of investing in securities that
the manager believes are available at prices less than their intrinsic value
differs from the approach followed by many other managers, and may result in
the fund choosing securities that are not widely followed by other
investors. There is always the possibility that the manager may be incorrect
in its assessment of a particular company or that the manager may not buy
these securities at their lowest possible price or sell them at their highest.
[Begin callout]
Because the stocks the fund holds fluctuate in price with market conditions,
the value of your investment in the fund will go up and down. This means you
could lose money over short or even extended periods.
[End callout]
STOCKS While stocks have historically outperformed other asset classes over
the long term, they tend to go up and down more dramatically over the shorter
term. These price movements may result from factors affecting individual
companies, industries or the securities market as a whole.
SMALLER COMPANIES Historically, smaller company securities 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, small 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.
Therefore, while smaller companies may offer greater opportunities for
capital growth than larger, more established companies, they also involve
greater risks and should be considered speculative.
REORGANIZING COMPANIES There can be no assurance that any merger,
consolidation, liquidation, reorganization or tender or exchange offer
proposed at the time the fund makes its investment in a Reorganizing Company
will be consummated or will be consummated on the terms and within the time
period contemplated and, therefore, that the fund's performance will benefit
from its investment in a Reorganizing Company. Debt securities of
Reorganizing Companies typically are unrated, lower rated, in default or
close to default.
FOREIGN SECURITIES Securities of companies and governments located outside
the U.S. may involve risks that can increase the potential for losses in the
fund.
COUNTRY. General securities market movements in any country where the fund
has investments are likely to affect the value of the securities the fund
owns which trade in that country. These movements will affect the fund's
share price and fund performance.
The political, economic and social structures of some countries the fund
invests in may be less stable and more volatile than those in the U.S. The
risks of investing in these countries include the possibility of the
imposition of exchange controls, currency devaluations, foreign ownership
limitations, expropriation, restrictions on removal of currency or other
assets, nationalization of assets, punitive taxes and certain custody and
settlement risks.
The fund's investments in developing or emerging markets are subject to all
of the risks of foreign investing generally, and have additional heightened
risks due to a lack of established legal, business and social frameworks to
support securities markets. Foreign securities markets, including emerging
markets, may have substantially lower trading volumes than U.S. markets,
resulting in less liquidity and more volatility than experienced in the U.S.
While short-term volatility in these markets can be disconcerting, declines
in excess of 50% are not unusual.
COMPANY. Foreign companies are not subject to the same disclosure,
accounting, auditing and financial reporting standards and practices as U.S.
companies and their securities may not be as liquid as securities of similar
U.S. companies. Foreign stock exchanges, trading systems, brokers and
companies generally have less government supervision and regulation than in
the U.S. The fund may have greater difficulty voting proxies, exercising
shareholder rights, pursuing legal remedies and obtaining judgments with
respect to foreign investments in foreign courts than with respect to U.S.
companies in U.S. courts.
CURRENCY. To the extent the fund's investments are denominated in foreign
currencies, changes in foreign currency exchange rates will affect the value
of what the fund owns and the fund's share price. Generally, when the U.S.
dollar rises in value against a foreign currency, an investment in that
country loses value because the currency is worth fewer U.S. dollars.
Devaluation of a currency by a country's government or banking authority also
will have a significant impact on the value of any securities denominated in
that currency. Currency markets generally are not regulated as securities
markets.
EURO. On January 1, 1999, the European Monetary Union (EMU) introduced a new
single currency, the euro, which replaced the national currency for the
eleven participating member countries. If the fund holds investments in
countries with currencies replaced by the euro, the investment process,
including trading, foreign exchange, payments, settlements, cash accounts,
custody and accounting will be impacted.
Because this change to a single currency is new and untested, the
establishment of the euro may result in market volatility. For the same
reason, it is not possible to predict the impact of the euro on the business
or financial condition of European issuers which the fund may hold in its
portfolio, and their impact on the value of fund shares and fund performance.
To the extent the fund holds non-U.S. dollar (euro or other) denominated
securities, it will still be exposed to currency risk due to fluctuations in
those currencies versus the U.S. dollar.
DERIVATIVE SECURITIES Forward foreign currency exchange contracts are
considered derivative investments, since their value depends on the value of
an underlying asset. The fund's investment in derivatives may involve a
small investment relative to the amount of risk assumed. The fund can incur
a loss in these transactions due to the imposition of controls by a foreign
or the U.S. government on the exchange of foreign currencies or the inability
to deliver or receive a foreign currency. The success of forward foreign
currency exchange contracts will depend on the manager's ability to predict
market movements. Losses resulting from the use of forward foreign currency
exchange contracts can reduce the fund's share price, and possibly income,
and such losses can be greater than if the contract had not been entered into
by the fund.
INDEBTEDNESS, PARTICIPATIONS AND TRADE CLAIMS The purchase of indebtedness
of a troubled company always involves a risk as to the creditworthiness of
the issuer and the possibility that the investment may be lost. There are no
established markets for indebtedness and, thus, it is less liquid than
securities that are heavily traded. Typically, purchasers of participations,
such as the fund, must rely on the financial institution issuing the
participation to assert any rights against the borrower with respect to the
underlying indebtedness. When a fund purchases a participation, it takes on
the risk associated with the financial soundness of the bank or other
financial intermediary issuing the participation, as well as the credit risk
associated with the financial soundness of the issuer of the underlying
indebtedness. When a fund purchases a Trade Claim, there is no guarantee
that the debtor will ever be able to satisfy the obligation of the Trade
Claim.
CREDIT This is the possibility that an issuer will be unable to make
interest payments or repay principal. Changes in an issuer's financial
strength or in a security's credit rating may affect its value and, thus,
impact the value of fund shares.
Securities rated below investment grade, sometimes called "junk bonds" or
"high yield debt securities," generally have more risk than higher-rated
securities. The principal risks of investing in these securities include:
o SUBSTANTIAL CREDIT RISK. Companies issuing high yield 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.
o DEFAULTED DEBT RISK. 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.
o VOLATILITY RISK. The prices of high yield debt securities fluctuate more
than higher-quality securities. Prices are especially sensitive to
developments affecting the company's business and to changes in the
ratings assigned by ratings organizations. 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.
ILLIQUID SECURITIES The fund may invest up to 15% of its net assets in
illiquid securities. Illiquid securities are securities with a limited
trading market. Investments by the fund in illiquid securities involve the
possibility that the securities cannot be readily sold or can only be resold
at a price significantly lower than their value, which may have a negative
effect on the value of the fund's shares.
YEAR 2000 When evaluating current and potential portfolio positions, Year
2000 is one of the factors the fund's manager considers.
[Begin callout]
Mutual fund shares are not deposits or obligations of, or guaranteed or
endorsed by, any bank, and are not federally insured by the Federal Deposit
Insurance Corporation, the Federal Reserve Board, or any other agency of the
U.S. government. Mutual fund shares involve investment risks, including the
possible loss of principal.
[End callout]
The manager will rely upon public filings and other statements made by
companies about their Year 2000 readiness. Issuers in countries outside the
U.S., particularly in emerging markets, may not be required to make the same
level of disclosure about Year 2000 readiness as is required in the U.S. The
manager, of course, cannot audit each company and its major suppliers to
verify their Year 2000 readiness.
If a company in which the fund is invested is adversely affected by Year 2000
problems, it is likely that the price of its security will also be adversely
affected. A decrease in the value of one or more of the fund's portfolio
holdings will have a similar impact on the price of the fund's shares and the
fund's performance. Please see page ___ for more information.
More detailed information about the fund, its policies, including temporary
investments, risks and the bond ratings can be found in the fund's Statement
of Additional Information (SAI).
[Insert graphic of a bull and a bear] PERFORMANCE
This bar chart and table show the volatility of the fund's returns, which is
one indicator of the risks of investing in the fund. The bar chart shows
changes in the fund's returns from year to year over the past 6 calendar
years. The table shows how the fund's average annual total returns compare to
those of a broad-based securities market index. Of course, past performance
cannot predict or guarantee future results.
CLASS Z ANNUAL TOTAL RETURNS
[Insert bar graph]
35.85% 3.62% 28.63% 24.93% 22.94% -1.90%
93 94 95 96 97 98
YEAR
[Begin callout]
BEST QUARTER:
Q1 '93 12.30%
WORST QUARTER:
Q3 '98 -19.44%
[End callout]
AVERAGE ANNUAL TOTAL RETURNS
For the periods ended December 31, 1998
SINCE
INCEPTION
1 YEAR 5 YEARS (12/31/92)
- -------------------------------------------------------------------------------
Mutual Discovery Fund - Class Z -1.90% 14.96% 18.21%
S&P 500(R)Index 1 28.58% 24.06% 21.61%
MSCI World2 24.80% 16.19% 17.32%
1. Source: Standard & Poor's(R) Micropal. The S&P 500(R) Index is an unmanaged
group of widely held common stocks covering a variety of industries. It
includes reinvested dividends. One cannot invest directly in an index, nor is
an index representative of the fund's portfolio.
2. Source: Standard & Poor's(R) Micropal. The unmanaged MSCI World Index tracks
the performance of approximately 1500 securities in 23 countries and is
designed to measure world stock market performance. It includes reinvested
dividends. One cannot invest directly in an index, nor is an index
representative of the fund's portfolio.
[Insert graphic of percentage sign] FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and
hold shares of the fund.
SHAREHOLDER FEES (FEES PAID DIRECTLY FROM YOUR INVESTMENT)
CLASS Z
- -------------------------------------------------------------------------------
Maximum sales charge (load) imposed on purchases None
Exchange fee None
ANNUAL FUND OPERATING EXPENSES (EXPENSES DEDUCTED FROM FUND ASSETS) 1
CLASS Z
- -------------------------------------------------------------------------------
Management fees 2 0.80%
Distribution and service (12b-1) fees None
Other expenses 0.23%
---------------------------
Total annual fund operating expenses2 1.03%
===========================
1. In connection with the transaction which resulted in Franklin Mutual
becoming each fund's investment manager, Franklin Mutual made a commitment to
the funds' board not to seek an increase in the rate of investment management
fees for a three year period beginning November 1, 1996. This agreement
applies only to those series which existed at that time. The parties also
agreed that for the same period the ordinary expenses of each series (based
on a percentage of net assets) will not be higher than they were expected to
be as of November 1, 1996, based on the annualized expense ratios of each
series as of that date. Increases in expenses beyond these expense ratios
will be permitted, however, if the board is satisfied that such expenses also
would have been higher (based upon such considerations as the amount and
composition of assets under management, the number of security transactions,
the number of shareholder accounts, regulatory requirements and general
economic conditions) had the transaction not taken place. This expense
limitation does not include items such as litigation expenses, interest,
taxes, insurance, brokerage commissions and expenses of an extraordinary
nature.
2. For the fiscal year ended December 31, 1998, the manager had agreed in
advance to limit its management fees. With this reduction, management fees
were 0.77% and total annual fund operating expenses were 1.00%. After October
31, 1999, the manager may end this arrangement at any time.
EXAMPLE
This example can help you compare the cost of investing in the fund with the
cost of investing in other mutual funds.
The example assumes you invest $10,000 for the periods shown and then sell
all of your shares at the end of those periods. The example also assumes your
investment has a 5% return each year and the fund's operating expenses remain
the same. Although your actual costs may be higher or lower, based on these
assumptions your costs would be:
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ---------------------------------------------
$105 $328 $569 $1,259
[Insert graphic of a dollar bill] FINANCIAL HIGHLIGHTS
This table presents the financial performance for Class Z since its
inception. This information has been audited by Ernst & Young LLP.
CLASS Z YEAR ENDED DECEMBER 31,
- --------------------------------------------------------------------------------
1998 1997 1996 1995 1994
- --------------------------------------------------------------------------------
PER SHARE DATA ($)
Net asset value,
beginning of year 18.89 17.18 15.16 12.55 13.05
------------------------------------------------
Net investment income .38 .39 .34 .17 .15
Net realized and unrealized
gains (.71) 3.49 3.39 3.40 .32
------------------------------------------------
Total from investment
operations (.33) 3.88 3.73 3.57 .47
Less distributions:
Net investment income (.48) (.81) (.31) (.14) (.16)
Net realized gains (.81) (1.36) (1.40) (.82) (.81)
------------------------------------------------
Total distributions (1.29) (2.17) (1.71) (.96) (.97)
------------------------------------------------
Net asset value, end of year 17.27 18.89 17.18 15.16 12.55
===============================================
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year ($ x 1
million 2,514 3,880 2,976 1,370 725
Ratios to average net assets:
(%)
Expenses 1.00 .98 .96 .99 .99
Expenses excluding waiver
and payments by affiliate 1.03 1.00 .99 .99 .99
Net investment income 1.81 1.82 2.24 2.00 1.64
Portfolio turnover rate (%) 83.57 58.15 80.18 73.23 72.70
MUTUAL EUROPEAN FUND
[Insert graphic of bullseye and arrows] GOALS AND STRATEGIES
GOALS The fund's investment goal is capital appreciation, which may
occasionally be short-term. Its secondary goal is income.
PRINCIPAL INVESTMENTS The fund will primarily invest in foreign equity
securities of companies located in any region of the world. Equity
securities generally entitle the holder to participate in a company's general
operating results. These include common stocks, preferred stocks and
convertible securities.
Normally, European will invest at least 65% of its total assets in the
securities of issuers (i) organized under the laws of, (ii) whose principal
business operations are located in, or (iii) at least 50% of whose revenue is
earned from, European countries. For purposes of the fund's investments,
European countries means all of the countries that are members of the
European Union, the United Kingdom, Scandinavia, Eastern and Western Europe
and those regions of Russia and the former Soviet Union that are considered
part of Europe. The fund currently intends to invest primarily in securities
of issuers in Western Europe and Scandinavia.
European will normally invest in securities from at least five different
countries, although, from time to time, it may invest all of its assets in a
single country. European may also invest up to 35% of its total assets in
securities of U.S. issuers, as well as in securities of issuers from the
Levant, the Middle East and the remaining regions of the world.
The fund invests a substantial portion of its assets in the securities of
smaller companies, which are those companies with market capitalization
values (share price times the number of common shares outstanding) of less
than $1.5 billion at the time of purchase. The fund may also invest a
portion of its assets in the securities of domestic or foreign companies
involved in mergers, consolidations, liquidations, reorganizations or
financial restructurings (Reorganizing Companies), or as to which there are
outstanding tender or exchange offers. Investments in Reorganizing Companies
may, but are not expected to, exceed 50% of the fund's assets.
The fund invests to a lesser extent in domestic and foreign debt securities,
which may include sovereign debt and participation in foreign government
debt. Debt securities represent an obligation of the issuer to repay a loan
of money to it, and generally provide for the payment of interest. These
include bonds, including those convertible into common stock, notes and
debentures. The fund may invest in debt securities rated in any rating
category established by an independent rating organization, including lower
rated or defaulted debt securities ("junk bonds"), or in unrated debt
securities. The fund typically invests in unrated debt securities of
Reorganizing Companies.
The fund may invest in the direct indebtedness, or participation interests in
the indebtedness of, Reorganizing Companies. 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 direct
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.
Participation interests in indebtedness represent fractional interests in a
company's indebtedness. The financial institutions which typically make
participations available are banks or insurance companies or governmental
institutions or 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 fund may also purchase trade claims and other direct obligations or
claims ("Trade Claims") of Reorganizing Companies. Trade Claims generally
are purchased from creditors of Reorganizing Companies and represent money
due to a supplier of goods or services to the Reorganizing Company.
To hedge (protect) against currency exchange rate fluctuations, the fund
enters into forward foreign currency exchange contracts to the extent that
hedging is available and, in the manager's opinion, it is economical to do
so. A forward foreign currency exchange contract is an agreement to buy or
sell a specific currency at a future date and at a price set at the time of
the contract. Forward foreign currency exchange contracts may reduce the
risk of loss from a change in value of a currency, but they also limit any
potential gains and do not protect against fluctuations in the value of the
underlying position.
While the fund purchases securities for investment purposes and not for the
purpose of influencing or controlling management of a company, the manager
may use the fund's ownership interest in a company to seek to influence or
control management when the manager perceives a benefit. The fund may invest
in entities whose business is to acquire securities of companies for the
purpose of influencing or controlling management or with the expectation of
taking over such companies. The fund also may invest in the securities of a
particular company which the manager believes may be an attractive company to
be taken over by another entity.
[Begin callout]
The fund invests primarily in foreign equity securities of companies in
Western Europe and Scandinavia but may invest in companies in any region of
the world.
[End callout]
PORTFOLIO SELECTION The fund invests primarily in equity securities that the
manager believes are available at prices less than their actual value based
on certain recognized objective criteria (intrinsic value). In choosing
investments for the fund, the manager bases its opinions upon the analysis
and research of certain factors, including: the relationship of a security's
book value to market value; cash flow; and multiples of earnings of
comparable securities. Each security is examined separately and there is no
set criteria as to the size of an issuer, its earnings or the industry in
which it operates. Debt securities are generally selected based on the
manager's opinion that the securities are available at less than their
intrinsic value, and the manager's own analysis of the security has greater
influence over the investment decision than the coupon rate or rating of the
security. The smaller companies in which the fund invests are not well
known, their securities may trade in the securities markets below their book
values and may not be followed by established securities analysts.
TEMPORARY INVESTMENTS The manager may take a temporary defensive position
when it believes the markets or the economy are experiencing excessive
volatility or a prolonged general decline, or other adverse conditions exist.
Under these circumstances, the fund may be unable to pursue its investment
goals because it may not invest or may invest less in equity and debt
securities that the manager believes are available at prices less than their
intrinsic value.
[Insert graphic of chart with line going up and down] MAIN RISKS
VALUE INVESTING The fund's general policy of investing in securities that
the manager believes are available at prices less than their intrinsic value
differs from the approach followed by many other managers, and may result in
the fund choosing securities that are not widely followed by other
investors. There is always the possibility that the manager may be incorrect
in its assessment of a particular company or that the manager may not buy
these securities at their lowest possible price or sell them at their highest.
[Begin callout]
Because the stocks the fund holds fluctuate in price with market conditions,
the value of your investment in the fund will go up and down. This means you
could lose money over short or even extended periods.
[End callout]
STOCKS While stocks have historically outperformed other asset classes over
the long term, they tend to go up and down more dramatically over the shorter
term. These price movements may result from factors affecting individual
companies, industries or the securities market as a whole.
FOREIGN SECURITIES Securities of companies and governments located outside
the U.S. may involve risks that can increase the potential for losses in the
fund.
COUNTRY. General securities market movements in any country where the fund
has investments are likely to affect the value of the securities the fund
owns which trade in that country. These movements will affect the fund's
share price and fund performance.
The political, economic and social structures of some countries the fund
invests in may be less stable and more volatile than those in the U.S. The
risks of investing in these countries include the possibility of the
imposition of exchange controls, currency devaluations, foreign ownership
limitations, expropriation, restrictions on removal of currency or other
assets, nationalization of assets, punitive taxes and certain custody and
settlement risks.
The fund's investments in developing or emerging markets are subject to all
of the risks of foreign investing generally, and have additional heightened
risks due to a lack of established legal, business and social frameworks to
support securities markets. Foreign securities markets, including emerging
markets, may have substantially lower trading volumes than U.S. markets,
resulting in less liquidity and more volatility than experienced in the U.S.
While short-term volatility in these markets can be disconcerting, declines
in excess of 50% are not unusual.
COMPANY. Foreign companies are not subject to the same disclosure,
accounting, auditing and financial reporting standards and practices as U.S.
companies and their securities may not be as liquid as securities of similar
U.S. companies. Foreign stock exchanges, trading systems, brokers and
companies generally have less government supervision and regulation than in
the U.S. The fund may have greater difficulty voting proxies, exercising
shareholder rights, pursuing legal remedies and obtaining judgments with
respect to foreign investments in foreign courts than with respect to U.S.
companies in U.S. courts.
CURRENCY. Many of the fund's investments are denominated in foreign
currencies. Changes in foreign currency exchange rates will affect the value
of what the fund owns and the fund's share price. Generally, when the U.S.
dollar rises in value against a foreign currency, an investment in that
country loses value because the currency is worth fewer U.S. dollars.
Devaluation of a currency by a country's government or banking authority also
will have a significant impact on the value of any securities denominated in
that currency. Currency markets generally are not regulated as securities
markets.
EURO. On January 1, 1999, the European Monetary Union (EMU) introduced a new
single currency, the euro, which replaced the national currency for the
eleven participating member countries. If the fund holds investments in
countries with currencies replaced by the euro, the investment process,
including trading, foreign exchange, payments, settlements, cash accounts,
custody and accounting will be impacted.
Because this change to a single currency is new and untested, the
establishment of the euro may result in market volatility. For the same
reason, it is not possible to predict the impact of the euro on the business
or financial condition of European issuers which the fund may hold in its
portfolio, and their impact on fund performance. To the extent the fund holds
non-U.S. dollar (euro or other) denominated securities, it will still be
exposed to currency risk due to fluctuations in those currencies versus the
U.S. dollar.
SMALLER COMPANIES Historically, smaller company securities 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, small 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.
Therefore, while smaller companies may offer greater opportunities for
capital growth than larger, more established companies, they also involve
greater risks and should be considered speculative.
REORGANIZING COMPANIES There can be no assurance that any merger,
consolidation, liquidation, reorganization or tender or exchange offer
proposed at the time the fund makes its investment in a Reorganizing Company
will be consummated or will be consummated on the terms and within the time
period contemplated and, therefore, that the fund's performance will benefit
from its investment in a Reorganizing Company. Debt securities of
Reorganizing Companies typically are unrated, lower rated, in default or
close to default.
DERIVATIVE SECURITIES Forward foreign currency exchange contracts are
considered derivative investments, since their value depends on the value of
an underlying asset. The fund's investment in derivatives may involve a
small investment relative to the amount of risk assumed. The fund can incur
a loss in these transactions due to the imposition of controls by a foreign
or the U.S. government on the exchange of foreign currencies or the inability
to deliver or receive a foreign currency. The success or forward foreign
currency exchange contracts will depend on the manager's ability to predict
market movements. Losses resulting from the use of forward foreign currency
exchange contracts can reduce the fund's share price, and possibly income,
and such losses can be greater than if the contract had not been entered into
by the fund.
INDEBTEDNESS, PARTICIPATIONS AND TRADE CLAIMS The purchase of indebtedness
of a troubled company always involves a risk as to the creditworthiness of
the issuer and the possibility that the investment may be lost. There are no
established markets for indebtedness and, thus, it is less liquid than
securities that are heavily traded. Typically, purchasers of participations,
such as the fund, must rely on the financial institution issuing the
participation to assert any rights against the borrower with respect to the
underlying indebtedness. When a fund purchases a participation, it takes on
the risk associated with the financial soundness of the bank or other
financial intermediary issuing the participation, as well as the credit risk
associated with the financial soundness of the issuer of the underlying
indebtedness. When a fund purchases a Trade Claim, there is no guarantee
that the debtor will ever be able to satisfy the obligation on the Trade
Claims.
CREDIT This is the possibility that an issuer will be unable to make
interest payments or repay principal. Changes in an issuer's financial
strength or in a security's credit rating may affect its value and, thus,
impact the value of fund shares.
Securities rated below investment grade, sometimes called "junk bonds" or
"high yield debt securities," generally have more risk than higher-rated
securities. The principal risks of investing in these securities include:
o SUBSTANTIAL CREDIT RISK. Companies issuing high yield 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.
o DEFAULTED DEBT RISK. 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.
o VOLATILITY RISK. The prices of high yield debt securities fluctuate more
than higher-quality securities. Prices are especially sensitive to
developments affecting the company's business and to changes in the
ratings assigned by ratings organizations. 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.
ILLIQUID SECURITIES The fund may invest up to 15% of its net assets in
illiquid securities. Illiquid securities are securities with a limited
trading market. Investments by the fund in illiquid securities involve the
possibility that the securities cannot be readily sold or can only be resold
at a price significantly lower than their value, which may have a negative
effect on the value of the fund's shares.
YEAR 2000 When evaluating current and potential portfolio positions, Year
2000 is one of the factors the fund's manager considers.
[Begin callout]
Mutual fund shares are not deposits or obligations of, or guaranteed or
endorsed by, any bank, and are not federally insured by the Federal Deposit
Insurance Corporation, the Federal Reserve Board, or any other agency of the
U.S. government. Mutual fund shares involve investment risks, including the
possible loss of principal.
[End callout]
The manager will rely upon public filings and other statements made by
companies about their Year 2000 readiness. Issuers in countries outside the
U.S., particularly in emerging markets, may not be required to make the same
level of disclosure about Year 2000 readiness as is required in the U.S. The
manager, of course, cannot audit each company and its major suppliers to
verify their Year 2000 readiness.
If a company in which the fund is invested is adversely affected by Year 2000
problems, it is likely that the price of its security will also be adversely
affected. A decrease in the value of one or more of the fund's portfolio
holdings will have a similar impact on the fund's performance. Please see
page [__] for more information.
More detailed information about the fund, its policies, including temporary
investments, risks and bond ratings can be found in the fund's Statement of
Additional Information (SAI).
[Insert graphic of a bull and a bear] PERFORMANCE
This bar chart and table show the volatility of the fund's returns, which is
one indicator of the risks of investing in the fund. The bar chart shows
changes in the fund's returns from year to year over the past 2 calendar
years. The table shows how the fund's average annual total returns compare to
those of a broad-based securities market index. Of course, past performance
cannot predict or guarantee future results.
CLASS Z ANNUAL TOTAL RETURNS
[Insert bar graph]
23.16% 4.74%
97 98
YEAR
[Begin callout]
BEST QUARTER:
Q1 '98 14.92%
WORST QUARTER:
Q3 '98 -20.16%
[End callout]
AVERAGE ANNUAL TOTAL RETURNS
For the periods ended December 31, 1998
SINCE
1 YEAR INCEPTION
(7/3/96)
- -------------------------------------------------------------------
Mutual European Fund - Class Z 4.74% 16.96%
MSCI All Countries Europe Index1 27.18% 26.80%
1. Source: Standard & Poor's(R) Micropal. The Morgan Stanley Capital
International (MSCI) All Countries Europe Index measures the weighted average
performance, in U.S. dollars, of about 60% of the market capitalization
listed on 21 European stock exchanges (approximately 700 securities), and
includes all dividends reinvested. One cannot invest directly in an index,
nor is an index representative of the fund's portfolio.
[Insert graphic of percentage sign] FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and
hold shares of the fund.
SHAREHOLDER FEES (FEES PAID DIRECTLY FROM YOUR INVESTMENT)
CLASS Z
- -------------------------------------------------------------------------------
Maximum sales charge (load) imposed on purchases None
Exchange fee None
ANNUAL FUND OPERATING EXPENSES (EXPENSES DEDUCTED FROM FUND ASSETS)1
CLASS Z
- -------------------------------------------------------------------------------
Management fees 0.80%
Distribution and service (12b-1) fees None
Other expenses 0.25%
---------------------------
Total annual fund operating expenses 1.05%
===========================
1. In connection with the transaction which resulted in Franklin Mutual
becoming each fund's investment manager, Franklin Mutual made a commitment to
the funds' board not to seek an increase in the rate of investment management
fees for a three year period beginning November 1, 1996. This agreement
applies only to those series which existed at that time. The parties also
agreed that for the same period the ordinary expenses of each series (based
on a percentage of net assets) will not be higher than they were expected to
be as of November 1, 1996, based on the annualized expense ratios of each
series as of that date. Increases in expenses beyond these expense ratios
will be permitted, however, if the board is satisfied that such expenses also
would have been higher (based upon such considerations as the amount and
composition of assets under management, the number of security transactions,
the number of shareholder accounts, regulatory requirements and general
economic conditions) had the transaction not taken place. This expense
limitation does not include items such as litigation expenses, interest,
taxes, insurance, brokerage commissions and expenses of an extraordinary
nature.
EXAMPLE
This example can help you compare the cost of investing in the fund with the
cost of investing in other mutual funds.
The example assumes you invest $10,000 for the periods shown and then sell
all of your shares at the end of those periods. The example also assumes your
investment has a 5% return each year and the fund's operating expenses remain
the same. Although your actual costs may be higher or lower, based on these
assumptions your costs would be:
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ---------------------------------------------
$107 $334 $579 $1,283
[Insert graphic of a dollar bill] FINANCIAL HIGHLIGHTS
This table presents the financial performance for Class Z since its
inception. This information has been audited by Ernst & Young LLP.
CLASS Z YEAR ENDED DECEMBER 31,
- -------------------------------------------------------------
1998 1997 2 1996 1
- -------------------------------------------------------------
PER SHARE DATA ($)
Net asset value,
beginning of year 12.60 11.39 10.00
-----------------------------
Net investment income .31 .33 .06
Net realized and unrealized
gains .33 2.28 1.40
-----------------------------
Total from investment
operations .64 2.61 1.46
-----------------------------
Less distributions from:
Net investment income (.34) (.84) (.05)
Net realized gains (.36) (.56) (.02)
-----------------------------
Total distributions (.70) (1.40) (.07)
-----------------------------
Net asset value, end of year 12.54 12.60 11.39
=============================
Total return (%)3 4.74 23.16 14.61
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year ($ x 1
million) 484 547 450
Ratios to average net assets:
(%)
Expenses 1.05 1.02 1.09 4
Expenses excluding waiver
and payments by affiliate 1.05 1.05 1.15 4
Net investment income 2.02 2.53 1.87 4
Portfolio turnover rate (%) 97.62 98.12 36.75
1. For the period July 3, 1996 (commencement of operations) to December 31,
1996.
2. Based on average weighted shares outstanding.
3. Total return is not annualized.
4. Annualized.
[Insert graphic of briefcase] MANAGEMENT
Franklin Mutual Advisers, Inc. (Franklin Mutual), 51 John F. Kennedy Parkway,
Short Hills, New Jersey 07078, is the funds' investment manager. Together,
Franklin Mutual and its affiliates manage over $220 billion in assets.
Michael F. Price is Chairman of the Boards of Directors which oversee the
management of the funds and Franklin Mutual.
The team responsible for the funds' management is led by Peter Langerman,
Chief Executive Officer, and Robert Friedman, Chief Investment Officer, of
Franklin Mutual. Mr. Friedman has the overall supervisory responsibility for
the day to day management of all of the funds' portfolios. The team is
comprised of the following individuals:
JEFFREY A. ALTMAN, SENIOR VICE PRESIDENT OF FRANKLIN MUTUAL
Mr. Altman has been a manager of the funds since 1988. Before joining the
Franklin Templeton Group in November 1996, Mr. Altman was employed as a
research analyst and trader for Heine Securities Corporation, the funds'
former investment manager.
ROBERT L. FRIEDMAN, CHIEF INVESTMENT OFFICER AND SENIOR VICE PRESIDENT OF
FRANKLIN MUTUAL
Mr. Friedman has been a manager of the funds since 1988. Before joining the
Franklin Templeton Group in November 1996, Mr. Friedman was employed as a
research analyst for Heine Securities Corporation, the funds' former
investment manager.
RAYMOND GAREA, SENIOR VICE PRESIDENT OF FRANKLIN MUTUAL
Mr. Garea has been a manager of the funds since 1991. Before joining the
Franklin Templeton Group in November 1996, Mr. Garea was employed as a
research analyst for Heine Securities Corporation, the funds' former
investment manager.
PETER A. LANGERMAN, CHIEF EXECUTIVE OFFICER AND PRESIDENT OF FRANKLIN MUTUAL
Mr. Langerman has been a manager of the funds since 1986. Before joining the
Franklin Templeton Group in November 1996, Mr. Langerman was employed as a
research analyst for Heine Securities Corporation, the funds' former
investment manager.
DAVID E. MARCUS, SENIOR VICE PRESIDENT OF FRANKLIN MUTUAL
Mr. Marcus has been a manager of the funds since 1998. Before joining the
Franklin Templeton Group in November 1996, Mr. Marcus was employed as a
research analyst for Heine Securities Corporation, the funds' former
investment manager.
LAWRENCE N. SONDIKE, SENIOR VICE PRESIDENT OF FRANKLIN MUTUAL
Mr. Sondike has been a manager of the funds since 1984. Before joining the
Franklin Templeton Group in November 1996, Mr. Sondike was employed as a
research analyst for Heine Securities Corporation, the funds' former
investment manager.
DAVID J. WINTERS CFA, SENIOR VICE PRESIDENT OF FRANKLIN MUTUAL
Mr. Winters has been a manager of the funds since 1987. Before joining the
Franklin Templeton Group in November 1996, Mr. Winters was employed as a
research analyst for Heine Securities Corporation, the funds' former
investment manager.
In addition, Franklin Mutual employees Jim Agah and Jeff Diamond as Assistant
Portfolio Managers:
JIM AGAH CFA, ASSISTANT PORTFOLIO MANAGER OF FRANKLIN MUTUAL
Mr. Agah has been a manager of the funds since 1997, when he joined the
Franklin Templeton Group. Previously, he was a vice president of equity sales
at Keefe, Bryette & Woods.
JEFF DIAMOND, VICE PRESIDENT OF FRANKLIN MUTUAL
Mr. Diamond has been a manager of the funds since 1998, when he joined the
Franklin Templeton Group. Previously, he was vice president and co-manager of
Prudential Conservative Stock Fund.
The following Portfolio and Assistant Portfolio Managers have primary
responsibility for investments in the following funds:
Mutual Shares Fund .... Larry Sondike and David Marcus
Mutual Qualified Fund . Ray Garea and Assistant Portfolio Manager Jeff Diamond
Mutual Beacon Fund .... Larry Sondike and David Winters
Mutual Discovery Fund . Rob Friedman and David Marcus
Mutual European Fund .. David Marcus
Mutual Financial
Services Fund Ray Garea and Assistant Portfolio Manager
Jim Agah
Each fund pays the manager a fee for managing the fund's assets and making
its investment decisions. For the fiscal year ended December 31, 1998,
Franklin Mutual agreed in advance to limit its fees. After October 31, 1999,
the manager may end this arrangement at any time upon notice to the fund's
Board of Directors. The table below shows the management fees paid by each
fund, as a percentage of average daily net assets.
MANAGEMENT
FEES BEFORE MANAGEMENT
ADVANCE WAIVER FEES PAID
- ------------------------------------------------------------------------------
Mutual Shares....... 0.60% 0.57%
Qualified........... 0.60 0.57
Beacon.............. 0.60 0.57
European............ 0.80 0.78
Discovery........... 0.80 0.78
Financial Services*. 0.80 0.18
*Annualized
PRIOR SERVICES Before November 1, 1996, Heine Securities Corporation managed
each fund's assets and made its investment decisions under separate
investment management agreements that were substantially the same as the
management agreement currently in effect with Franklin Mutual.
YEAR 2000 PROBLEM Each fund's business operations depend on a worldwide
network of computer systems that contain date fields, including securities
trading systems, securities transfer agent operations and stock market links.
Many of the systems currently use a two digit date field to represent the
date, and unless these systems are changed or modified, they may not be able
to distinguish the Year 1900 from the Year 2000 (commonly referred to as the
Year 2000 problem). In addition, the fact that the Year 2000 is a leap year
may create difficulties for some systems.
When the Year 2000 arrives, a fund's operations could be adversely affected
if the computer systems used by the manager, its service providers and other
third parties it does business with are not Year 2000 ready. For example, a
fund's portfolio and operational areas could be impacted, including
securities trade processing, interest and dividend payments, securities
pricing, shareholder account services, reporting, custody functions and
others. A fund could experience difficulties in effecting transactions if any
of its foreign subcustodians, or if foreign broker-dealers or foreign markets
are not ready for Year 2000.
Each fund's manager and its affiliated service providers are making a
concerted effort to take steps they believe are reasonably designed to
address their Year 2000 problems. Of course, a fund's ability to reduce the
effects of the Year 2000 problem is also very much dependent upon the efforts
of third parties over which the fund and its manager may have no control.
[Insert graphic of dollar
signs and stacks of coins] DISTRIBUTIONS AND TAXES
INCOME AND CAPITAL GAINS DISTRIBUTIONS
Each fund intends to pay a dividend at least semiannually representing its
net investment income. Capital gains, if any, may be distributed twice a
year. The amount of these distributions will vary and there is no guarantee
the funds will pay dividends.
To receive a distribution, you must be a shareholder on the record date. The
record dates for the funds' distributions will vary. Please keep in mind that
if you invest in a fund shortly before the record date of a distribution, any
distribution will lower the value of the fund's shares by the amount of the
distribution and you will receive some of your investment back in the form of
a taxable distribution. If you would like information on upcoming record
dates for the funds' distributions, please call 1-800/DIAL BEN(R).
TAX CONSIDERATIONS In general, fund distributions are taxable to you as
either ordinary income or capital gains. This is true whether you reinvest
your distributions in additional shares of a fund or receive them in cash.
Any capital gains a fund distributes are taxable to you as long-term capital
gains no matter how long you have owned your shares.
[Begin callout]
BACKUP WITHHOLDING
By law, a fund must withhold 31% of your taxable distributions and proceeds
if you do not provide your correct taxpayer identification number (TIN) or
certify that your TIN is correct, or if the IRS instructs the fund to do so.
[End callout]
Every January, you will receive a statement that shows the tax status of
distributions you received for the previous year. Distributions declared in
December but paid in January are taxable as if they were paid in December.
When you sell your shares of a fund, you may have a capital gain or loss. For
tax purposes, an exchange of your fund shares for shares of a different
Franklin Templeton Fund is the same as a sale. The individual tax rate on any
gain from the sale or exchange of your shares depends on how long you have
held your shares.
Fund distributions and gains from the sale or exchange of your shares will
generally be subject to state and local income tax. Any foreign taxes paid by
a fund that invests more than 50% of its assets in foreign securities may be
passed through to you as a foreign tax credit. Non-U.S. investors may be
subject to U.S. withholding and estate tax. You should consult your tax
advisor about the federal, state, local or foreign tax consequences of your
investment in a fund.
YOUR ACCOUNT
[Insert graphic of pencil marking an "X"]QUALIFIED INVESTORS
The following investors may qualify to buy Class Z shares of the funds.
o Existing shareholders of any Mutual Series fund on October 31, 1996, and
their immediate family members residing at the same address
o Partnership shareholders who had an account in any Mutual Series fund on
October 31, 1996, whether or not they are listed on the registration
o Corporate shareholders invested in any Mutual Series fund on October 31,
1996, using the same registration, or new companies of such corporate
shareholders that have been reorganized into smaller, independent companies
o Shareholders who owned shares of any Mutual Series fund through a
broker-dealer or service agent omnibus account on October 31, 1996
o Employees who owned shares of any Mutual Series fund through an
employer-sponsored retirement plan on October 31, 1996, and who wish to
open new individual Class Z accounts in their own names
o Qualified registered investment advisors or certified financial planners
who have clients invested in any of the Mutual Series funds on October 31,
1996, or who buy through a broker-dealer or service agent who has entered
into an agreement with Franklin Templeton Distributors Inc. (Distributors)
The investors listed above may buy Class Z shares subject to the following
minimum investment requirements:
MINIMUM INVESTMENTS
- --------------------------------------------------------------------------
INITIAL ADDITIONAL
- --------------------------------------------------------------------------
Regular accounts $1,000 $50
- --------------------------------------------------------------------------
UGMA/UTMA accounts $100 $50
- --------------------------------------------------------------------------
Retirement accounts no minimum no minimum
(other than IRAs, IRA rollovers, Education
IRAs or Roth IRAs)
- --------------------------------------------------------------------------
IRAs, IRA rollovers, Education IRAs or Roth
IRAs $250 $50
- --------------------------------------------------------------------------
- --------------------------------------------------------------------------
Accounts with automatic investment plans $50 ($25 for $50
Education
IRAs)
- --------------------------------------------------------------------------
The following investors also may qualify to buy Class Z shares of the funds.
o Broker-dealers, registered investment advisors or certified financial
planners who have an agreement with Distributors for clients participating
in comprehensive fee programs. Minimum investments: $250,000 initial
($100,000 initial for an individual client) and $50 additional.
o Officers, trustees, directors and full-time employees of Franklin
Templeton and their immediate family members. Minimum investments: $100
initial ($50 for accounts with an automatic investment plan) and $50
additional.
o Each series of the Franklin Templeton Fund Allocator Series. Minimum
investments: $1,000 initial and $1,000 additional.
[Begin callout]
The FRANKLIN TEMPLETON FUNDS include all of the Franklin Templeton U.S.
registered mutual funds, except Franklin Valuemark Funds, Templeton Capital
Accumulator Fund, Inc., and Templeton Variable Products Series Fund.
[End callout]
o Governments, municipalities, and tax-exempt entities that meet the
requirements for qualification under section 501 of the Internal Revenue
Code. Minimum investments: $1 million initial investment in Advisor Class
or Class Z shares of any of the Franklin Templeton Funds and $50
additional.
o Investors buying shares with redemption proceeds from a sale of Class Z
shares if reinvested in the same class of shares within 365 days of the
redemption date. Minimum investments: No initial minimum and $50
additional.
o Investment companies exchanging shares or selling assets pursuant to a
merger, acquisition, or exchange offer or other business combination
transaction. Minimum investments: No initial minimum and $50 additional.
o Accounts managed by the Franklin Templeton Group. Minimum investments: No
initial minimum and $50 additional.
o The Franklin Templeton Profit Sharing 401(k) Plan. Minimum investments:
No initial or additional minimums.
o Defined contribution plans such as employer stock, bonus, pension or
profit sharing plans that meet the requirements for qualification under
section 401 of the Internal Revenue Code, including salary reduction plans
qualified under section 401(k) of the Internal Revenue Code, and that are
sponsored by an employer (i) with at least 10,000 employees, or (ii) with
retirement plan assets of $100 million or more. Minimum investments: No
initial or additional minimums.
o Trust companies and bank trust departments initially investing in the
Franklin Templeton Funds at least $1 million of assets held in a
fiduciary, agency, advisory, custodial or similar capacity and over which
the trust companies and bank trust departments or other plan fiduciaries
or participants, in the case of certain retirement plans, have full or
shared investment discretion. Minimum investments: No initial or
additional minimums.
o Individual investors. Minimum investments: $5 million initial and $50
additional. You may combine all of your shares in the Franklin Templeton
Funds for purposes of determining whether you meet the $5 million minimum,
as long as $1 million is in Advisor Class or Class Z shares of any of the
Franklin Templeton Funds.
o Any other investor, including a private investment vehicle such as a
family trust or foundation, who is a member of an established group of 11
or more investors. Minimum investments: $5 million initial and $50
additional. For minimum investment purposes, the group's investments are
added together. The group may combine all of its shares in the Franklin
Templeton Funds for purposes of determining whether it meets the $5
million minimum, as long as $1 million is in Advisor Class or Class Z
shares of any of the Franklin Templeton Funds. There are certain other
requirements and the group must have a purpose other than buying fund
shares without a sales charge.
Please note that Class Z shares of the funds are no longer available to
retirement plans through Franklin Templeton's ValuSelect(R) program. Retirement
plans in the ValuSelect program before January 1, 1998, however, may continue
to invest in the funds' Class Z shares.
[Insert graphic of a paper with lines
and someone writing] BUYING SHARES
ACCOUNT APPLICATION If you are opening a new account, please complete and
sign the enclosed account application. To save time, you can sign up now for
services you may want on your account by completing the appropriate sections
of the application (see the next page).
BUYING SHARES
- -------------------------------------------------------------------------------
OPENING AN ACCOUNT ADDING TO AN ACCOUNT
- -------------------------------------------------------------------------------
[Insert graphic
of hands shaking]
Contact your investment Contact your investment
THROUGH YOUR representative representative
INVESTMENT
REPRESENTATIVE
- -------------------------------------------------------------------------------
Make your check payable to Make your check payable to
[Insert graphic the fund. the fund. Include your
of envelope] account number on the check.
Mail the check and your
BY MAIL signed application to Fill out the deposit slip
Investor Services. from your account statement.
If you do not have a slip,
include a note with your
name, the fund name, and
your account number.
Mail the check and deposit
slip or note to Investor
Services.
- -------------------------------------------------------------------------------
[Insert graphic This option is not available As long as your transaction
of phone] to open an account. is for $1,000 or more and is
for an account with an
BY PHONE existing balance equal to at
least one-half of the
1-800/448-FUND purchase amount, you can add
to your account by phone.
Call before 1:00 Before requesting a
p.m. Pacific time telephone purchase, please
or the close of make sure we have your bank
the New York account information on file.
Stock Exchange, If we do not have this
whichever is information, you will need
earlier. to send written instructions
with your bank's name and
address, your bank account
number, and the ABA routing
number.
- -------------------------------------------------------------------------------
[Insert graphic Call Shareholder Services at Call Shareholder Services at
of two arrows the number below, or send the number below, or send
pointing in signed written instructions. signed written instructions.
opposite (Please see page [#] for (Please see page [#] for
directions] information on exchanges.) information on exchanges.)
BY EXCHANGE
- -------------------------------------------------------------------------------
FRANKLIN TEMPLETON INVESTOR SERVICES, 51 JOHN F. KENNEDY PARKWAY,
SHORT HILLS, NJ 07078
CALL TOLL-FREE: 1-800/632-2301
(MONDAY THROUGH FRIDAY 5:30 A.M. TO 5:00 P.M., PACIFIC TIME
SATURDAY 6:30 A.M. TO 2:30 P.M., PACIFIC TIME)
[Insert graphic of person with a headset] INVESTOR SERVICES
AUTOMATIC INVESTMENT PLAN This plan offers a convenient way for you to
invest in a fund by automatically transferring money from your checking or
savings account each month to buy shares. To sign up, complete the
appropriate section of your account application.
DISTRIBUTION OPTIONS You may reinvest distributions you receive from a fund
in an existing account in the same share class of the fund or in Advisor
Class or Class A shares of another Franklin Templeton Fund. To reinvest your
distributions in Advisor Class shares of another Franklin Templeton Fund, you
must qualify to buy that fund's Advisor Class shares. For distributions
reinvested in Class A shares of another Franklin Templeton Fund, initial
sales charges and contingent deferred sales charges (CDSCs) will not apply if
you reinvest your distributions within 365 days. You can also have your
distributions deposited in a bank account, or mailed by check. Deposits to a
bank account may be made by electronic funds transfer.
[Begin callout]
For Franklin Templeton Trust Company retirement plans, special forms may be
needed to receive distributions in cash. Please call 1-800/527-2020 for
information.
[End callout]
Please indicate on your application the distribution option you have chosen,
otherwise we will reinvest your distributions in the same share class of the
fund.
RETIREMENT PLANS Franklin Templeton offers a variety of retirement plans for
individuals and businesses. These plans require separate applications and
their policies and procedures may be different than those described in this
prospectus. For more information, including a free retirement plan brochure
or application, please call Retirement Plan Services at 1-800/527-2020.
TELEFACTS(R) Our TeleFACTS system offers around-the-clock access to
information about your account or any Franklin Templeton Fund. This service
is available from touch-tone phones at 1-800/247-1753. For a free TeleFACTS
brochure, call 1-800/DIAL BEN.
TELEPHONE PRIVILEGES You will automatically receive telephone privileges
when you open your account, allowing you and your investment representative
to sell or exchange your shares and make certain other changes to your
account by phone.
For accounts with more than one registered owner, telephone privileges also
allow the funds to accept written instructions signed by only one owner for
transactions and account changes that could otherwise be made by phone. For
all other transactions and changes, all registered owners must sign the
instructions.
As long as we take certain measures to verify telephone requests, we will not
be responsible for any losses that may occur from unauthorized requests. Of
course, you can decline telephone exchange or redemption privileges on your
account application.
EXCHANGE PRIVILEGE You can exchange shares within Class Z, or for Advisor
Class shares of another Franklin Templeton Fund if you otherwise qualify to
buy that fund's Advisor Class. You also may exchange your Class Z shares for
Class A shares of a fund that does not currently offer an Advisor Class
(without any sales charge)* if you otherwise qualify to buy Advisor Class
shares of the Franklin Templeton Funds.
Shareholders of record on October 31, 1996, and others who do not qualify to
buy Class A shares of Franklin Templeton Funds without sales charges, also
may exchange their Class Z shares for Class A shares of other Franklin
Templeton Funds without any sales charges.
[Begin callout]
An EXCHANGE is really two transactions: a sale of one fund and the purchase
of another. In general, the same policies that apply to purchases and sales
apply to exchanges, including minimum investment amounts. Exchanges also have
the same tax consequences as ordinary sales and purchases.
[End callout]
If you do not qualify to buy Advisor Class shares of Templeton Developing
Markets Trust, Templeton Foreign Fund or Templeton Growth Fund, but you
qualify to buy Advisor Class shares of other Franklin Templeton Funds, you
also may exchange your shares for Class A shares of those funds (without any
sales charge)* or for shares of Templeton Institutional Funds, Inc.
Generally exchanges may only be made between identically registered accounts,
unless you send written instructions with a signature guarantee.
Frequent exchanges can interfere with fund management or operations and drive
up costs for all shareholders. To protect shareholders, there are limits on
the number and amount of exchanges you may make (please see "Market Timers"
on page [#]).
*If you exchange into Class A shares and you later decide you would like to
exchange into a fund that offers an Advisor Class or Class Z, you may
exchange your Class A shares for Advisor Class or Class Z shares if you
otherwise qualify to buy the fund's Advisor Class or Class Z shares.
SYSTEMATIC WITHDRAWAL PLAN This plan allows you to automatically sell your
shares and receive regular payments from your account. Certain terms and
minimums apply. To sign up, complete the appropriate section of your
application.
[Insert graphic of a certificate] SELLING SHARES
You can sell your shares at any time.
SELLING SHARES IN WRITING Requests to sell $100,000 or less can generally be
made over the phone or with a simple letter. Sometimes, however, to protect
you and the funds we will need written instructions signed by all registered
owners, with a signature guarantee for each owner, if:
[Begin callout]
A SIGNATURE GUARANTEE helps protect your account against fraud.
You can obtain a signature guarantee at most banks and securities dealers.
A notary public CANNOT provide a signature guarantee.
[End callout]
o you are selling more than $100,000 worth of shares
o you want your proceeds paid to someone who is not a registered owner
o you want to send your proceeds somewhere other than the address of
record, or preauthorized bank or brokerage firm account
We may also require a signature guarantee on instructions we receive from an
agent, not the registered owners, or when we believe it would protect the
funds against potential claims based on the instructions received.
SELLING RECENTLY PURCHASED SHARES If you sell shares recently purchased with
a check or draft, we may delay sending you the proceeds until your check or
draft has cleared, which may take seven business days or more. A certified or
cashier's check may clear in less time.
REDEMPTION PROCEEDS Your redemption check will be sent within seven days
after we receive your request in proper form. We are not able to receive or
pay out cash in the form of currency. Redemption proceeds may be delayed if
we have not yet received your signed account application.
RETIREMENT PLANS You may need to complete additional forms to sell shares in
a Franklin Templeton Trust Company retirement plan. For participants under
age 591/2, tax penalties may apply. Call Retirement Plan Services at
1-800/527-2020 for details.
SELLING SHARES
- -------------------------------------------------------------------
TO SELL SOME OR ALL OF YOUR SHARES
- -------------------------------------------------------------------
[Insert graphic
of hands shaking]
Contact your investment representative
THROUGH YOUR
INVESTMENT
REPRESENTATIVE
- -------------------------------------------------------------------
[Insert graphic Send written instructions and endorsed share
of envelope] certificates (if you hold share certificates)
to Investor Services. Corporate, partnership
BY MAIL or trust accounts may need to send additional
documents.
Specify the fund, the account number and the
dollar value or number of shares you wish to
sell. Be sure to include all necessary
signatures and any additional documents, as
well as signature guarantees if required.
A check will be mailed to the name(s) and
address on the account, or otherwise according
to your written instructions.
- -------------------------------------------------------------------
[Insert graphic As long as your transaction is for $100,000 or
of phone] less, you do not hold share certificates and
you have not changed your address by phone
BY PHONE within the last 15 days, you can sell your
shares by phone.
1-800/632-2301
A check will be mailed to the name(s) and
address on the account. Written instructions,
with a signature guarantee, are required to
send the check to another address or to make
it payable to another person.
- -------------------------------------------------------------------
[Insert graphic You can call or write to have redemption
of three proceeds of $1,000 or more wired to a bank or
lightning bolts] escrow account. See the policies above for
selling shares by mail or phone.
Before requesting a bank wire, please make
sure we have your bank account information on
BY WIRE file. If we do not have this information, you
will need to send written instructions with
your bank's name and address, your bank
account number, the ABA routing number, and a
signature guarantee.
Requests received in proper form by 1:00 p.m.
pacific time will be wired the next business
day.
- -------------------------------------------------------------------
[Insert graphic Obtain a current prospectus for the fund you
of two arrows are considering.
pointing in
opposite Call Shareholder Services at the number below,
directions] or send signed written instructions. See the
policies above for selling shares by mail or
BY EXCHANGE phone.
If you hold share certificates, you will need
to return them to the fund before your
exchange can be processed.
- -------------------------------------------------------------------
FRANKLIN TEMPLETON INVESTOR SERVICES, 51 JOHN F. KENNEDY PARKWAY,
SHORT HILLS, NJ 07078
CALL TOLL-FREE: 1-800/632-2301
(MONDAY THROUGH FRIDAY 5:30 A.M. TO 5:00 P.M., PACIFIC TIME
SATURDAY 6:30 A.M. TO 2:30 P.M., PACIFIC TIME)
[Insert graphic of paper and pen] ACCOUNT POLICIES
CALCULATING SHARE PRICE Each fund calculates the net asset value per share
(NAV) each business day at the close of trading on the New York Stock
Exchange (normally 1:00 p.m. pacific time). The NAV for Class Z is calculated
by dividing its net assets by the number of its shares outstanding.
The funds' assets are generally valued at their market value. If market
prices are unavailable, or if an event occurs after the close of the trading
market that materially affects the values, assets may be valued at their fair
value. If a fund holds securities listed primarily on a foreign exchange that
trades on days when the fund is not open for business, the value of your
shares may change on days that you cannot buy or sell shares.
Requests to buy and sell shares are processed at the NAV next calculated
after we receive your request in proper form.
ACCOUNTS WITH LOW BALANCES If the value of your account falls below $250
($50 for employee accounts) because you sell some of your shares, we may mail
you a notice asking you to bring the account back up to its applicable
minimum investment amount. If you choose not to do so within 30 days, we may
close your account and mail the proceeds to the address of record.
STATEMENTS AND REPORTS You will receive confirmations and account statements
that show your account transactions. You will also receive the funds'
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 will also receive confirmations, account statements and
other information about your account directly from the fund.
STREET OR NOMINEE ACCOUNTS You may transfer your shares from the street or
nominee name account of one dealer to another, as long as both dealers have
an agreement with Franklin Templeton Distributors, Inc. We will process the
transfer after we receive authorization in proper form from your delivering
securities dealer.
JOINT ACCOUNTS Unless you specify a different registration, accounts with
two or more owners are registered as "joint tenants with rights of
survivorship" (shown as "Jt Ten" on your account statement). To make any
ownership changes to a joint account, all owners must agree in writing,
regardless of the law in your state.
MARKET TIMERS The funds do not allow investments by market timers. You will
be considered a market timer if you have (i) requested an exchange out of a
fund within two weeks of an earlier exchange request, or (ii) exchanged
shares out of a fund more than twice in a calendar quarter, or (iii)
exchanged shares equal to at least $5 million, or more than 1% of a fund's
net assets, or (iv) otherwise seem to follow a timing pattern. Shares under
common ownership or control are combined for these limits.
ADDITIONAL POLICIES Please note that the funds maintain additional policies
and reserve certain rights, including:
o The funds may refuse any order to buy shares, including any purchase
under the exchange privilege.
o At any time, the funds may change their investment minimums or waive or
lower their minimums for certain purchases.
o The funds may modify or discontinue the exchange privilege on 60 days'
notice.
o You may only buy shares of a fund eligible for sale in your state or
jurisdiction.
o In unusual circumstances, we may temporarily suspend redemptions, or
postpone the payment of proceeds, as allowed by federal securities laws.
o For redemptions over a certain amount, each fund reserves the right to
make payments in securities or other assets of the fund, in the case of an
emergency or if the payment by check or wire would be harmful to existing
shareholders.
o To permit investors to obtain the current price, dealers are responsible
for transmitting all orders to the fund promptly.
DEALER COMPENSATION Qualifying dealers who sell Class Z shares may receive
up to 0.25% of the amount invested. This amount is paid by Franklin Templeton
Distributors, Inc. from its own resources.
[Insert graphic of question mark] QUESTIONS
If you have any questions about the funds or your account, you can write to
us at 51 John F. Kennedy Parkway, Short Hills, NJ 07078. You can also call us
at one of the following numbers. For your protection and to help ensure we
provide you with quality service, all calls may be monitored or recorded.
HOURS (PACIFIC TIME, MONDAY
DEPARTMENT NAME TELEPHONE NUMBER THROUGH FRIDAY)
- -------------------------------------------------------------------------------
Shareholder Services 1-800/632-2301 5:30 a.m. to 5:00 p.m.
6:30 a.m. to 2:30 p.m. (Saturday)
Fund Information 1-800/DIAL BEN 5:30 a.m. to 8:00 p.m.
(1-800/342-5236) 6:30 a.m. to 2:30 p.m. (Saturday)
Retirement Plan Services
1-800/527-2020 5:30 a.m. to 5:00 p.m.
Dealer Services 1-800/524-4040 5:30 a.m. to 5:00 p.m.
Institutional Services 1-800/321-8563 6:00 a.m. to 5:00 p.m.
TDD (hearing impaired) 1-800/851-0637 5:30 a.m. to 5:00 p.m.
FOR MORE INFORMATION
You can learn more about each fund in the following documents:
ANNUAL/SEMIANNUAL REPORT TO SHAREHOLDERS
Includes a discussion of recent market conditions and fund strategies,
financial statements, detailed performance information, portfolio holdings,
and the auditor's report.
STATEMENT OF ADDITIONAL INFORMATION (SAI)
Contains more information about each fund, its investments and policies. It
is incorporated by reference (is legally a part of this prospectus).
For a free copy of the current annual/semiannual report or the SAI, please
contact your investment representative or call us at the number below.
FRANKLIN(R)TEMPLETON(R)
1-800/DIAL BEN(R) (1-800/342-5236)
TDD (Hearing Impaired) 1-800/851-0637
www.franklin-templeton.com
You can also obtain information about each fund by visiting the SEC's Public
Reference Room in Washington D.C. (phone 1-800/SEC-0330) or by sending your
request and a duplicating fee to the SEC's Public Reference Section,
Washington, DC 20549-6009. You can also visit the SEC's Internet site at
http://www.sec.gov.
Investment Company Act file #811-5387 MS PA 05/99
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
51 JOHN F. KENNEDY PARKWAY
SHORT HILLS, NJ 07078 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
Risks
Officers and Directors
Management and Other Services
Portfolio Transactions
Distributions and Taxes
Organization, Voting Rights and Principal Holders
Buying and Selling Shares
Pricing Shares
The Underwriter
Performance
Miscellaneous Information
- ------------------------------------------------------------------------------
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.
- ------------------------------------------------------------------------------
GOALS AND STRATEGIES
- ------------------------------------------------------------------------------
The principal investment goal of Beacon, Financial Services, Qualified,
Shares, and European is capital appreciation, some of which 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 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 informal, historical differences.
The funds may invest in securities of companies of any size, however, due to
the relatively large size of these funds, Beacon, Qualified and Shares
generally invest in large and medium size companies which have a large
trading volume and market capitalizations in excess of $1.5 billion.
Discovery, on the other hand, invests proportionately more of its assets in
smaller companies. The term "market capitalization" refers to the value of a
company as determined by the market price of its issued and outstanding
common stock. A company's market capitalization is calculated by multiplying
the number of outstanding shares of a company by the current market price of
a share.
Generally, Financial Services and European utilize the same investment
philosphy as the other funds but Financial Services will do so by investing
in financial services company securities and European will do so by investing
primarily in foreign securities.
Qualified was initially 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 anticipates 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.
Each fund invests 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.
Each fund may invest in any industry although no fund will concentrate its
investments in any industry except Financial Services which will concentrate
its investments in the financial services industry which means it will
invest more than 25% of the value of its assets in that in securities of
financial services companies. Financial Service's concentration policy
cannot be changed without the approval of Financial Service's shareholders.
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 investments and each fund reserves freedom of action to invest in such
proportions as the manager deems advisable. In addition, each fund may also
invest in restricted debt and equity securities, in foreign securities, and
in other investment company securities. 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.
Below is additional information about the various types of securities the
funds may buy.
EQUITY SECURITIES are securities which entitle the holder to participate in a
company's general operating success or failure. The purchaser of an equity
security typically receives an ownership interest in the company as well as
certain voting rights. The owner of an equity security may participate in a
company's success through the receipt of dividends which are distributions of
earnings by the company to its owners. Equity security owners may also
participate in a company's success or lack of success through increases or
decreases in the value of the company's shares as traded in the public
trading market for such shares. The public trading market for 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.
INVESTMENT IN THE SECURITIES OF REORGANIZING COMPANIES AND COMPANIES SUBJECT
TO TENDER OR EXCHANGE OFFERS. Each fund also invests in the securities of
domestic or foreign companies which are in the process of reorganizing or
restructuring ("Reorganizing Companies") or as to which there exist
outstanding tender or exchange offers. The funds may from time to time
participate in such tender or exchange offers. A tender offer is an offer by
the company itself or by another company or person to purchase a company's
securities at a higher (or lower) price than the market value for such
securities. An exchange offer is an offer by the company or by another
company or person to the holders of the company's securities to exchange
those securities for different securities. Although there are no restrictions
limiting the extent to which each fund may invest in Reorganizing Companies,
no fund presently anticipates committing more than 50% of its assets to such
investments. In addition to typical equity and debt investments, the funds'
investments in Reorganizing Companies may include Indebtedness,
Participations and Trade Claims, as further described below.
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 and each fund will invest in securities that are rated in the
medium to lowest rating categories by S&P and Moody's. Generally, the lower
the rating category, the riskier the investment. Debt securities rated BBB or
lower by S&P or Moody's are considered to be high yield, high risk debt
securities, commonly known as "junk bonds." The lowest rating category
established by Moody's is "C," and by S&P, is "D." Debt securities with a D
rating are in default as to the payment of principal and interest which means
that the issuer does not have the financial soundness to meet its interest
payments or its repayment schedule to security holders. The funds may invest
to an unlimited degree in junk bonds.
The funds will generally invest in debt securities under circumstances
similar to those under which they will invest in equity securities; namely,
when, in 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
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.
DIRECT INVESTMENT IN INDEBTEDNESS, PARTICIPATIONS AND TRADE CLAIMS. From time
to time, the funds may purchase the direct indebtedness of various companies
("Indebtedness"), or participations in such Indebtedness. Indebtedness can be
distinguished from traditional debt securities in that debt securities are
part of a large issue of securities to the general public which is typically
registered with a securities registration organization, such as the SEC, and
which is held by a large group of investors. Indebtedness may not be a
security, but rather, may represent a specific commercial loan or portion of
a loan which has been given to a company by a financial institution such as a
bank or insurance company. The company is typically obligated to repay such
commercial loan over a specified time period. By purchasing the Indebtedness
of companies, a fund steps into the shoes of the financial institution which
made the loan to the company prior to its restructuring or refinancing.
Indebtedness purchased by a fund may be in the form of loans, notes or bonds.
The length of time remaining until maturity on the Indebtedness is one factor
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.
The funds may also purchase participation interests in Indebtedness
("Participations"). Participations represent fractional interests in a
company's Indebtedness. The financial institutions which typically make
Participations available are banks or insurance companies, governmental
institutions, such as the Resolution Trust Corporation, the Federal Deposit
Insurance Corporation or the Pension Benefit Guaranty Corporation, or certain
organizations such as the World Bank which are known as "supranational
organizations." Supranational organizations are entities established or
financially supported by the national governments of one or more countries to
promote reconstruction or development. 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.
NON-U.S. SECURITIES. The funds may purchase securities whose values are
quoted and traded in any currency in addition to the U.S. dollar. Where a
security's value is quoted and traded in a non-U.S. dollar currency, the
funds bear the risk of a decrease (or gain the benefit of an increase) in the
value of the security as a result of changes in the value of the currency as
compared to the U.S. dollar in addition to typical market price movements
related to certain trading markets or the financial strength or weakness of
the security's issuer. In order to avoid these unexpected fluctuations in
value as a result of relative currency values, the funds expect to employ an
investment technique called "hedging," which attempts to reduce or eliminate
changes in a security's value resulting from changing currency exchange
rates. Hedging is further described below.
HEDGING AND INCOME TRANSACTIONS. The funds may use various hedging
strategies. Hedging is a technique designed to reduce a potential loss to a
fund as a result of certain economic or market risks, including risks related
to fluctuations in interest rates, currency exchange rates between U.S. and
foreign securities or between different foreign currencies, and broad or
specific market movements. The hedging strategies that the funds may use are
also used by many mutual funds and other institutional investors. When
pursuing these hedging strategies, the funds may engage in the following
types of transactions among others: purchase and sell exchange-listed and OTC
put and call options on securities, equity and fixed-income indices and other
financial instruments; purchase and sell financial futures contracts and
options thereon; and enter into various currency transactions such as
currency forward contracts, currency futures contracts, currency swaps or
options on currencies or currency futures (collectively, all of the above are
called "Hedging Transactions"). From time to time, the funds may engage in
other hedging strategies with qualities similar to those described in this
prospectus.
Some examples of situations in which Hedging Transactions may be used are:
(i) to attempt to protect against possible changes in the market value of
securities held in or to be purchased for a fund's portfolio resulting from
changes in securities markets or currency exchange rate fluctuations; (ii) to
protect a fund's gains in the value of portfolio securities which have not
yet been sold; (iii) to facilitate the sale of certain securities for
investment purposes; and (iv) as a temporary substitute for purchasing or
selling particular securities.
Any combination of Hedging Transactions may be used at any time as determined
by 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. Each fund will comply with
applicable regulatory requirements when implementing these strategies,
including the establishment of certain isolated accounts at the fund's
custodian bank. Hedging Transactions involving financial futures and options
on futures will be purchased, sold or entered into generally for bona fide
hedging, risk management or portfolio management purposes.
The various techniques described above as "Hedging Transactions" may also be
used by the funds for non-hedging purposes. For example, these techniques may
be used to produce income to a fund where the fund's participation in the
transaction involves the payment of a premium to the fund. A fund may also
use a hedging technique if 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. Any material changes in or to the Hedging Transactions used by the
funds will be described in the funds' prospectus before being used.
DEPOSITARY RECEIPTS. Each fund may invest in securities commonly known as
American Depositary Receipts ("ADRs"), and in European Depositary Receipts
("EDRs") or other securities representing 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. These 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 underlying
security.
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.
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 shares issued by REITs. A REIT is a pooled investment
vehicle which purchases primarily income-producing real estate or real estate
related loans or other real estate related interests. The pooled vehicle,
typically a trust, then issues shares whose value and investment performance
are dependent upon the investment experience of the underlying real estate
related investments.
SHORT SALES. Each fund may make short sales of securities. A short sale is a
transaction in which the fund sells a security it does not own in
anticipation that the market price of that security will decline. Each fund
expects to make short sales (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.
Each fund will make short sales only if 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 engage in two types of short sale transactions, "naked short
sales" and "short sales against the box" transactions. In a naked short sale
transaction, a fund sells a security which it does not own to a purchaser at
a specified price. In order to complete the short sale transaction, the fund
must (i) borrow the security to deliver the security to the purchaser; and
(ii) buy the same security in the market in order to return it to the
borrower. In buying the security to replace the borrowed security, the fund
expects to buy the security in the market for less than the amount it earned
on the short sale, thereby yielding a profit. In some circumstances, the fund
may receive the security in connection with a reorganization and,
consequently, need not buy the security to be returned to the borrower. Each
fund may engage in naked short sale transactions up to 5% of its assets.
The funds may also sell securities "short against the box" without limit. In
a short sale against the box, the fund actually holds in its portfolio the
securities which it has sold short. In replacing the borrowed securities in
the transaction, the fund may either buy securities in the open market or use
those in its portfolio.
INVESTMENT COMPANY SECURITIES. Each fund may invest from time to time in
other investment company securities, subject to applicable law which
restricts such investments. Such laws generally restrict a fund's purchase of
another investment company's securities to three percent (3%) of the other
investment company's securities, no more than five percent (5%) of the fund's
assets in any single investment company's securities and no more than ten
percent (10%) of the fund's assets in all investment company securities.
REPURCHASE AGREEMENTS. Each fund may invest up to 10% of its assets in
repurchase agreements, including tri-party repurchase agreements with
domestic banks or broker-dealers. In a repurchase agreement transaction, a
fund purchases a U.S. Government security from a bank or broker-dealer. The
agreement provides that the security must be sold back to the bank or
broker-dealer at an agreed-upon price and date.
Repurchase agreements are considered loans by the funds and are
collateralized by the underlying securities and therefore must be fully
collateralized at all times. The bank or broker-dealer must transfer to the
fund's custodian bank securities with an initial value, including any earned
but unpaid interest equal to at least 100% of the dollar amount invested by
the fund in each repurchase agreement. In a tri-party repurchase agreement,
the collateral is maintained at the bank or broker-dealer's custodian bank,
instead of the fund's custodian bank. The manager monitors the
creditworthiness of the bank or broker and marks the collateral to market
daily.
Repurchase agreements and lending 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.
LOANS OF SECURITIES. Each fund may also lend its portfolio securities to
banks or broker-dealers in order to realize additional income which the fund
receives as a loan premium. If a fund lends portfolio securities, for each
loan the fund must receive in return securities with a value at least equal
to 100% of the current market value of the loaned securities. Each fund
presently does not anticipate loaning more than 5% of its respective
portfolio securities.
BORROWING. While the funds are permitted to borrow under certain
circumstances as under no circumstances will a fund make additional
investments while any amounts borrowed exceed 5% of the fund's total assets.
SECURITIES OF COMPANIES IN THE FINANCIAL SERVICES INDUSTRY. Under the
federal securities law, each fund may not invest more than 5% of its total
assets in the securities of any company that receives more than 15% of its
revenues from securities related activities which means activities as a
broker, dealer, underwriter or investment advisor (a "securities issuer").
Further, immediately after a purchase of equity securities of a securities
issuer, a fund may not own more than 5% of the outstanding securities of any
class of equity securities of a securities issuer, and immediately after a
purchase of debt securities of a securities issuer, a fund may not own more
than 10% of the outstanding principal amount of the securities issuer's debt
securities.
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 a paradigm, but is also applicable to
other financial intermediaries.
With certain exceptions, OCC-issued and exchange-listed options generally
settle by physical delivery of the underlying security or currency, although
in the future cash settlement may become available. Index options and
Eurodollar instruments are cash settled for the net amount, if any, by which
the option is "in-the-money" (i.e., where the value of the underlying
instrument exceeds, in the case of a call option, or is less than, in the
case of a put option, the exercise price of the option) at the time the
option is exercised. Frequently, rather than taking or making delivery of the
underlying instrument through the process of exercising the option, listed
options are closed by entering into offsetting option transactions.
A fund's ability to close out its position as a purchaser or seller of an OCC
or exchange-listed put or call option is dependent, in part, upon the
liquidity of the option market. Among the possible reasons for the absence of
a liquid option market on an exchange are: (i) insufficient trading interest
in certain options; (ii) restrictions on transactions imposed by an exchange;
(iii) trading halts, suspensions or other restrictions imposed with respect
to particular classes or series of options or underlying securities including
reaching daily price limits; (iv) interruption of the normal operations of
the OCC or an exchange; (v) inadequacy of the facilities of an exchange or
OCC to handle current trading volume; or (vi) a decision by one or more
exchanges to discontinue the trading of options (or a particular class or
series of options), in which event the relevant market for that option on
that exchange would cease to exist, although outstanding options on that
exchange would generally continue to be exercisable in accordance with their
terms.
The hours of trading for listed options may not coincide with the hours
during which the underlying financial instruments are traded. To the extent
that the option markets close before the markets for the underlying financial
instruments, significant price and rate movements can take place in the
underlying markets that cannot be reflected in the option markets.
OTC options are purchased from or sold to securities dealers, financial
institutions or other parties (each a "Counterparty," and collectively,
"Counterparties") through 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. Each 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.
Each fund will engage in OTC option transactions only with U.S. government
securities dealers recognized by the Federal Reserve Bank of New York as
"primary dealers" or broker-dealers, domestic or foreign banks or other
financial institutions which have received (or the guarantors of the
obligations of which have received) a short-term credit rating of "A-l" from
S&P or "P-l" from Moody's, an equivalent rating from any nationally
recognized statistical rating organization ("NRSRO") or which 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 purchases and sells 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 purchases and sells 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.
FUTURES. Each fund may enter into financial futures contracts or purchase or
sell put and call options on such futures as a hedge against anticipated
interest rate, currency or equity market changes, for duration management and
for risk management purposes. Futures are generally bought and sold on the
commodities exchanges where they are listed with payment of initial and
variation margin as described below. The sale of a futures contract creates a
firm obligation by 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 will use financial futures and options consistent with applicable
rules and regulations in particular, the rules and regulations of the
Commodity Futures Trading Commission and will only enter into these
transactions 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 future, requires a fund to deposit
with a financial intermediary 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 future 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 does
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.
OPTIONS ON SECURITIES INDICES AND OTHER FINANCIAL INDICES. Each fund will
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 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 is obligated to make delivery of this amount. The
gain or loss on an index depends on price movements in the instruments making
up the market, market segment, industry or other composite on which the
underlying index is based, rather than price movements in individual
securities, as is the case with respect to options on securities.
CURRENCY TRANSACTIONS. Each fund will engage in currency transactions with
Counterparties in order to hedge the value of portfolio holdings denominated
in particular currencies against fluctuations in relative value between those
currencies and the U.S. dollar. Currency transactions include forward
currency contracts, exchange-listed currency futures, exchange-listed and OTC
options on currencies, and currency swaps. A forward currency contract
involves a privately negotiated obligation to purchase or sell (with delivery
generally required) a specific currency at a future date, which may be any
fixed number of days from the date of the contract agreed upon by the
parties, at a price set at the time of the contract. A currency swap is an
agreement to exchange cash flows on a notional amount of two or more
currencies based on the relative value differential among them.
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 only the
net amount of the two payments. Because these swaps are entered into for good
faith hedging purposes, the manager and the funds believe such obligations
are not senior securities under the 1940 Act and, they will not treat them as
being subject to a fund's borrowing restrictions. The funds may enter into
currency transactions with Counterparties which have (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 an 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 currency 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
therefrom. 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 hedge currency 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,
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"), 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. 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 below.
COMBINED TRANSACTIONS. Each fund may enter into multiple transactions,
including multiple options transactions, multiple futures transactions,
multiple currency transactions (including forward currency contracts) and any
combination of futures, options and currency transactions ("component
transactions"), instead of a single hedging transaction, as part of a single
or combined strategy when, in the opinion of Franklin Mutual, it is in the
best interests of the fund to do so. A combined transaction will usually
contain elements of risk that are present in each of its component
transactions. Although combined transactions are normally entered into based
on Franklin Mutual's judgment that the combined strategies will reduce risk
or otherwise more effectively achieve the desired portfolio management goal,
it is possible that the combination will instead increase such risks or
hinder achievement of the portfolio management objective.
TAX CONSIDERATIONS. Each fund's investments in options, futures, and forward
contracts, including foreign currency options and futures, foreign securities
and other complex securities are subject to special tax rules that may affect
the amount, timing or character of the income earned by the fund and
distributed to you. Each fund may also be subject to withholding taxes on
earnings from certain of its foreign securities.
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.
Generally, the policies and restrictions discussed here apply when a fund
makes an investment. In most cases, the fund is not required to sell a
security because circumstances change and the security no longer meets one or
more of the fund's policies or restrictions.
INVESTMENT RESTRICTIONS Mutual Series 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.
Mutual Series may not:
1. Purchase or sell commodities, commodity contracts (except in conformity
with regulations of the Commodities Futures Trading Commission such that the
series would not be considered a commodity pool), or oil and gas interests or
real estate. Securities or other instruments backed by commodities are not
considered commodities or commodity contracts for purposes of this
restriction. Debt or equity securities issued by companies engaged in the
oil, gas, or real estate businesses are not considered oil or gas interests
or real estate for purposes of this restriction. First mortgage loans and
other direct obligations secured by real estate are not considered real
estate for purposes of this restriction.
2. Make loans, except to the extent the purchase of debt obligations of any
type are considered loans and except that the series may lend portfolio
securities to qualified institutional investors in compliance with
requirements established from time to time by the SEC and the securities
exchanges on which such securities are traded.
3. Issue securities senior to its stock or borrow money or utilize leverage
in excess of the maximum permitted by the 1940 Act which is currently 33 1/3%
of total assets (plus 5% for emergency or other short-term purposes) from
banks on a temporary basis from time to time to provide greater liquidity for
redemptions or for special circumstances.
4. Invest more than 25% of the value of its assets in a particular industry
(except that U.S. government securities are not considered an industry and
except that Financial Services will invest more than 25% of its assets in the
financial services industry).
5. Act as an underwriter except to the extent the series may be deemed to be
an underwriter when disposing of securities it owns or when selling its own
shares.
6. Purchase the securities of any one issuer, other than the U.S. government
or any of its agencies or instrumentalities, if immediately after such
purchase more than 5% of the value of its total assets would be invested in
such issuer, or such series would own more than 10% of the outstanding voting
securities of such issuer, except that up to 25% of the value of such series'
total assets may be invested without regard to such 5% and 10% limitations.
7. Except as may be described in the Prospectus, engage in short sales,
purchase securities on margin or maintain a net short position.
If a 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.
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
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GENERAL. There is no assurance that a fund will meet its investment goal.
Generally, if the securities owned by a fund increase in value, the value of
the shares of the fund which you own will increase. Similarly, if the
securities owned by a fund decrease in value, the value of your shares will
also decline. In this way, you participate in any change in the value of the
securities owned by a fund.
COMMON STOCKS. To the extent that a fund's investments consist of common
stocks, a decline in the market, expressed for example by a drop in any
securities index that is based on equity securities, such as the Dow Jones
Industrial or the Standard & Poor's 500 average, may also be reflected in a
fund's share price. Historically, there have been both increases and
decreases in securities prices generally and such increases and decreases may
reoccur unpredictably in the future.
DEBT SECURITIES - GENERALLY. Debt securities are subject to the risk of an
issuer's inability to meet principal and interest payments on the obligations
(credit risk) and may also be subject to price volatility due to factors such
as interest rate sensitivity, market perception of the creditworthiness of
the issuer, and general market liquidity (market risk). The manager
considers both credit risk and market risk in making investment decisions as
to corporate debt obligations. Debt obligations will tend to decrease in
value when prevailing interest rates rise and increase in value when
prevailing interest rates fall. Generally, long-term debt obligations are
more sensitive to interest rate fluctuations than short-term obligations.
Because investments in debt obligations are interest rate sensitive, a fund's
performance may be affected by the manager's ability to anticipate and
respond to fluctuations in market interest rates, to the extent of the fund's
investment in debt obligations.
MEDIUM AND LOWER RATED 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.
Corporate debt securities rated Baa are regarded by Moody's as being neither
highly protected nor poorly secured. Interest payments and principal security
appears adequate to Moody's for the present, but certain protective elements
may be lacking or may be characteristically unreliable over any great length
of time. Such securities are regarded by Moody's as lacking outstanding
investment characteristics and having speculative characteristics. Corporate
debt securities rated BBB are regarded by S&P as having adequate capacity to
pay interest and repay principal. Such securities are regarded by S&P as
normally exhibiting adequate protection parameters, although adverse economic
conditions or changing circumstances are more likely to lead to a weakened
capacity to pay interest and repay principal for securities in this rating
category than in higher rated categories.
Corporate debt securities which are rated B are regarded by Moody's as
generally lacking characteristics of the desirable investment. In Moody's
view, assurance of interest and principal payments or of maintenance of other
terms of the security over any long period of time may be small. Corporate
debt securities rated BB, B, CCC, CC and C are regarded by S&P on balance as
predominantly speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligation. In S&P's view,
although such securities likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions. BB and B are regarded by S&P as indicating
the two lowest degrees of speculation in this group of ratings. Securities
rated D by S&P or C by Moody's are in default and are not currently
performing. 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 secondary market value of corporate debt
securities structured as zero coupon securities or payment in kind securities
may be more volatile in response to changes in interest rates than debt
securities which pay interest periodically in cash. Because such securities
do not pay current interest, but rather, income is accreted, to the extent
that a series does not have available cash to meet distribution requirements
with respect to such income, it could be required to dispose of portfolio
securities that it otherwise would not. Such disposition could be at a
disadvantageous price. Failure to satisfy distribution requirements could
result in a fund failing to qualify as a pass-through entity under the Code.
Investment in such securities also involves certain other tax considerations.
The manager values each fund's 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 low grade 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 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 under the Securities Act of 1933 certain securities may be
determined to be liquid pursuant to procedures adopted by the Board under
applicable guidelines.
To the extent a fund invests in lower-rated debt securities, it will be
subject to risks which are greater than those to which a fund which limits
its investments to higher grade debt securities would be subject. Such risks
include limitations on a fund's ability to re-sell the lower-rated debt
securities and less readily available market quotations for such securities.
If there are not readily available market quotations for a debt security, its
value is determined largely by the investment manager's judgment. When and
if the debt security is sold, the investment manager may find that its
estimation of the debt security's value is substantially different than the
sale price effected in the market.
NON-U.S. SECURITIES. Investments in securities of non-U.S. issuers involve
certain risks not ordinarily associated with investments in securities of
U.S. issuers. Such risks include: fluctuations in the value of the currency
in which the security is traded or quoted as compared to the U.S. dollar;
unpredictable political, social and economic developments in the foreign
country where the security is issued or where the issuer of the security is
located; and the possible imposition by a foreign government of limits on the
ability of a fund to obtain a foreign currency or to convert a foreign
currency into U.S. dollars; or the imposition of other foreign laws or
restrictions. Since each fund may invest in securities issued, traded or
quoted in currencies other than the U.S. dollar, changes in foreign currency
exchange rates will affect the value of securities in the fund's portfolio.
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 means 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.
CURRENCY TRANSACTIONS. Currency transactions are subject to risks different
from those of other portfolio transactions. Because currency control is of
great importance to the issuing governments and influences economic planning
and policy, purchases and sales of currency and related instruments can be
negatively affected by government exchange controls, blockages, and
manipulations or exchange restrictions imposed by governments. These can
result in losses to a fund if it is unable to deliver or receive currency or
funds in settlement of obligations and could also cause hedges it has entered
into to be rendered useless, resulting in full currency exposure as well as
incurring transaction costs. Buyers and sellers of currency futures are
subject to the same risks that apply to the use of futures generally.
Further, settlement of a currency futures contract for the purchase of most
currencies must occur at a bank based in the issuing nation. Trading options
on currency futures is relatively new, and the ability to establish and close
out positions on such options is subject to the maintenance of a liquid
market which may not always be available. Currency exchange rates may
fluctuate based on factors extrinsic to that country's economy.
FORWARD CONTRACTS, OPTIONS ON FOREIGN CURRENCIES, AND OPTIONS ON FUTURES
CONTRACTS. Forward contracts are not traded on contract markets regulated by
the CFTC or by the SEC. The ability of the funds to use forward contracts
could be restricted to the extent that Congress authorizes the CFTC or the
SEC to regulate such transactions. Forward contracts are traded through
financial institutions acting as market makers.
The purchase and sale of exchange-traded foreign currency options are subject
to the risks of the availability of a liquid secondary market, as well as the
risks of adverse market movements, margins of options written, the nature of
the foreign currency market, possible intervention by governmental
authorities, and the effects of other political and economic events.
Futures contracts on currencies, options on futures contracts, and options on
foreign currencies may be traded on foreign exchanges. These transactions
are subject to the risk of governmental actions affecting trading in or the
prices of foreign currencies. The value of such positions could also be
adversely affected by (i) other foreign political and economic factors,
(ii) less available data than in the U.S. on which to base trading decisions,
(iii) delays in the funds' ability to act upon economic events occurring in
foreign markets during non-business hours in the U.S., (iv) the imposition of
exercise and settlement terms and procedures, and margin requirements
different from those in the U.S., and (v) lesser trading volume.
OPTIONS ON SECURITIES. The writing of covered put options is similar in
terms of risk/return characteristics to buy-and-write transactions. If the
market price of the underlying security rises or otherwise is above the
exercise price, the put option will expire worthless and a fund's gain will
be limited to the premium received. If the market price of the underlying
security declines or otherwise is below the exercise price, a fund may elect
to close the position or wait for the option to be exercised and take
delivery of the security at the exercise price. A fund's return will be the
premium received from the put option minus the amount by which the market
price of the security is below the exercise price. The funds may use
out-of-the-money, at-the-money, and in-the-money put options in the same
market environments in which they use call options in equivalent
buy-and-write transactions.
When trading options on foreign exchanges or in the over-the-counter market,
many of the protections afforded to exchange participants will not be
available. For example, there are no daily price fluctuation limits, and
adverse market movements could therefore continue to an unlimited extent over
a period of time. Although the purchaser of an option cannot lose more than
the amount of the premium plus related transaction costs, this entire amount
could be lost. Moreover, a fund as an option writer could lose amounts
substantially in excess of its initial investment, due to the margin and
collateral requirements associated with option writing.
Options on securities traded on national securities exchanges are within the
jurisdiction of the SEC, as are other securities traded on such exchanges.
As a result, many of the protections provided to traders on organized
exchanges will be available with respect to such transactions. In
particular, all option positions entered into on a national securities
exchange are cleared and guaranteed by the Options Clearing Corporation,
thereby reducing the risk of counterparty default. Further, a liquid
secondary market in options traded on a national securities exchange may be
more readily available than in the over-the-counter market, potentially
permitting a fund to liquidate open positions at a profit prior to exercise
or expiration, or to limit losses in the event of adverse market movements.
A fund's option trading activities may result in the loss of principal under
certain market conditions.
OPTIONS ON FUTURES CONTRACTS. The amount of risk a fund assumes when it
purchases an option on a futures contract is the premium paid for the option
plus related transaction costs. In addition to the correlation risks
discussed above, the purchase of an option also entails the risk that changes
in the value of the underlying futures contract will not be fully reflected
in the value of the option purchased. Fund will purchase put options on a
futures contract only to hedge the fund's portfolio against the risk of
rising interest rates or the decline in the value of securities denominated
in a foreign currency.
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.
SMALLER COMPANIES. From time to time, a number of the securities in which
the funds may invest may be 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.
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.
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.
The use of currency transactions can result in a fund incurring losses as a
result of a number of factors including the imposition of controls by a
foreign or the U.S. government on the exchange of foreign currencies, the
inability of foreign securities transactions to be completed with the
security being delivered to the fund, or the inability to deliver or receive
a specified currency.
Although the use of futures and options transactions for hedging should tend
to minimize the risk of loss due to a decline in the value of the hedged
position, these transactions also tend to limit any potential gain which
might result from an increase in value of the position taken. As compared to
options contracts, futures contracts create greater ongoing potential
financial risks to a fund because the fund is required to make ongoing
monetary deposits with futures brokers. In an options transaction, a fund's
exposure is limited to the cost of the initial premium paid by the fund to
the broker to engage in the transaction. Losses resulting from the use of
Hedging Transactions can reduce net asset value, and possibly income, and
such losses can be greater than if the Hedging Transactions had not been
utilized. The cost of entering into Hedging Transactions may also reduce a
fund's total return to investors.
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.
USE OF SEGREGATED AND OTHER SPECIAL ACCOUNTS. Many hedging transactions, in
addition to other requirements, require that the funds segregate liquid high
grade 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 high
grade securities at least equal to the current amount of the obligation must
be segregated with the custodian bank. The segregated assets cannot be sold
or transferred unless equivalent assets are substituted in their place or it
is no longer necessary to segregate them. For example, a call option written
by 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 high grade 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 high grade 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 high
grade 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 high grade assets equal to the amount of the fund's
obligation. However, the segregation requirement does not apply to currency
contracts which are entered in order to "lock in" the purchase or sale price
of a trade in a security denominated in a foreign currency pending settlement
within the time customary for such securities.
OTC options entered into by the 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. Each fund may also enter into offsetting
transactions so that its combined position, coupled with any segregated
assets, equals its net outstanding obligation in related options and hedging
transactions. For example, 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.
INVESTMENT COMPANY SECURITIES. Investors should recognize that a fund's
purchase of the securities of investment companies results in layering of
expenses. This layering may occur because investors in any investment
company, such as a fund, indirectly bear a proportionate share of the
expenses of the investment company, including operating costs, and investment
advisory and administrative fees.
DEPOSITARY RECEIPTS. Receipts of non-U.S. issuers may have certain risks,
including trading for a lower price, having less liquidity than their
underlying securities and risks relating to the issuing bank or trust
company. Holders of unsponsored Depositary Receipts have a greater risk that
receipt of corporate information and proxy disclosure will be untimely,
information may be incomplete and costs may be higher.
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.
RISKS RELATED TO REAL ESTATE-RELATED INVESTMENTS. The funds' investments in
real estate-related securities are subject to certain risks related to the
real estate industry in general. These risks include, among others: changes
in general and local economic conditions; possible declines in the value of
real estate; the possible lack of availability of money for loans to purchase
real estate; overbuilding in particular areas; prolonged vacancies in rental
properties; property taxes; changes in laws related to the use of real estate
in certain areas; costs resulting from the clean-up of, and liability to
third parties resulting from, environmental problems; the costs associated
with damage to real estate resulting from floods, earthquakes or other
material disasters not covered by insurance; and limitations on and
variations in rents and changes in interest rates.
SPECIAL CONSIDERATIONS RELATED TO SECURITIES IN THE FINANCIAL SERVICES
INDUSTRY. Certain provisions of the federal securities laws permit investment
portfolios, including Financial Services, to invest in companies engaged in
securities-related activities only if certain conditions are met. Purchase of
securities of a company that derived 15% or less of gross revenues during its
most recent fiscal year from securities-related activities (i.e., broker,
dealer, underwriting, or investment advisory activities) are subject only to
the same percentage limitations as would apply to any other security a fund
may purchase. Each fund, including Financial Services, may purchase
securities (not limited to equity or debt individually) of an issuer that
derived more than 15% of its gross revenues in its most recent fiscal year
from securities-related activities, subject to the following conditions:
a. the purchase cannot cause more than 5% of the fund's total assets to be
invested in securities of that issuer;
b. for an equity security, the purchase cannot result in the fund owning
more than 5% of the issuer's outstanding securities in that class;
c. for a debt security, the purchase cannot result in the fund owning more
than 10% of the outstanding principal amount of the issuer's debt
securities.
In applying the gross revenue test, an issuer's own securities-related
activities must be combined with its ratable share of securities-related
revenues from enterprises in which it owns a 20% or greater voting or equity
interest. All of the above percentage limitations, as well as the issuer's
gross revenue test, are applicable at the time of purchase. With respect to
warrants, rights, and convertible securities, a determination of compliance
with the above limitations must be made as though such warrant, right, or
conversion privilege had been exercised.
The following transactions would not be deemed to be an acquisition of
securities of a securities-related business: (i) receipt of stock dividends
on securities acquired in compliance with the conditions described above;
(ii) receipt of securities arising from a stock-for-stock split on securities
acquired in compliance with the conditions described above; (iii) exercise of
options, warrants, or rights acquired in compliance with the federal
securities laws; (iv) conversion of convertible securities acquired in
compliance with the conditions described above; (v) the acquisition of puts
under certain circumstances.
The funds also are not permitted to acquire any security issued by 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.
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.
Franklin Resources, Inc. has created an interdepartmental team to handle all
euro-related changes to enable the Franklin Templeton Funds to process
transactions accurately and completely with minimal disruption to business
activities. While 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.
OFFICERS AND DIRECTORS
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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 affiliations of the officers and board members and their principal
occupations for the past five years are shown below.
POSITION(S)
HELD WITH PRINCIPAL OCCUPATION(S)
NAME, AGE AND ADDRESS THE FUND DURING THE PAST FIVE YEARS
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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
Executive Vice President and Director
President, Chief Executive Officer and Director, Franklin Mutual Advisers,
Inc.; 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 and Director, Franklin Advisory Services, Inc.; and officer
and/or director or trustee, as the case may be, of six of the investment
companies in the Franklin Templeton Group of Funds.
Bruce A. MacPherson (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 of the Board and Director, Franklin Mutual Advisers, Inc.; 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)
2 Executive Drive
Suite 560
Fort Lee, NJ 07024
Director
Partner in LDR Equities, LLC (manages various personal investments); Vice
President, Trimtex Co., Inc. (manufactures and markets specialty fabrics);
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, Inc.; 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,
Inc.; 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, Inc.; Manager (Director), MB
Metropolis, L.L.C.; and FORMERLY, employee, Heine Securities Corporation
(1991-1996) and Vice President and Analyst, Donaldson, Lufkin & Jenrette.
David E. Marcus (33)
51 John F. Kennedy Pkwy.
Short Hills, NJ 07078
Vice President
Senior Vice President, Franklin Mutual Advisers, Inc.; 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, Inc.; 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, Inc.; 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 pay 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 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 $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 164 U.S. based funds or series.
4. Not vested in retirement plan.
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, Inc. 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 wholly owned by 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;
o and
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 1996 1
- ----------------------------------------------------------------------------
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 51 John F. Kennedy Parkway, Short Hills, NJ 07078.
For its services, Investor Services receives a fixed fee per account. The
funds may also reimburse Investor Services for certain out-of-pocket
expenses, which may include payments by Investor Services to entities,
including affiliated entities, that provide sub-shareholder services,
recordkeeping and/or transfer agency services to beneficial owners of the
funds. The amount of reimbursements for these services per benefit plan
participant fund account per year may not exceed the per account fee payable
by the 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, may also 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:
Mutual Shares Value
Morgan Stanley $183,748,000
Bear Stearns 68,475,000
Mutual Qualified
Morgan Stanley 59,029,000
Beacon
Morgan Stanley 72,228,000
Bear Stearns 40,604,000
Discovery
Morgan Stanley 22,330,000
Bear Stearns 13,152,000
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 may also
be called by the board in its discretion.
As of February 5, 1999, the principal shareholders of the funds, beneficial
or of record, were:
Name and Address Share Class Percentage (%)
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EUROPEAN
Michael F. Price
Peapacton Farm
P.O. Box 434
Far Hills, NJ 07931 Class Z 23.66
Franklin Resources, Inc. 1
Corporate Accounting
555 Airport Blvd. 4th Floor
Burlingame, CA 94010 Class B 30.01
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
Fahnestock Co. Inc. Cust.
A878401361
Jane G. Bennett
125 Broad Street
New York, New York 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, Wyoming 82834 Class B 10.02
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
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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 may also 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 may also add any company accounts, including
retirement plan accounts. Companies with one or more retirement plans may add
together the total plan assets invested in the Franklin Templeton Funds to
determine the sales charge that applies.
LETTER OF INTENT (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 may also 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.
o 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.
o 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.
o 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 may also 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
o Members of the Assembly of Governmental Employees (AGE). If you are a
member, please complete the supplement to the account application included
with this prospectus and return it to the fund.
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 may also 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 MANY YEARS AFTER BUYING THIS % IS DEDUCTED FROM
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 will generally 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 goal[s] 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 may
also 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 may also 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.
Each fund determines the value of a foreign security as of the close of
trading on the foreign exchange on which the security is traded or as of the
close of trading on the NYSE, if that is earlier. The value is then converted
into its U.S. dollar equivalent at the foreign exchange rate in effect at
noon, New York time, on the day the value of the foreign security is
determined. If no sale is reported at that time, the foreign security is
valued within the range of the most recent quoted bid and ask prices.
Occasionally events that affect the values of foreign securities and foreign
exchange rates may occur between the times at which they are determined and
the close of the exchange and will, therefore, not be reflected in the
computation of the NAV. If events materially affecting the values of these
foreign securities occur during this period, the securities will be valued in
accordance with procedures established by the board.
Generally, trading in corporate bonds, U.S. government securities and money
market instruments is substantially completed each day at various times
before the close of the NYSE. The value of these securities used in computing
the 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
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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:
Total Amount Amount Received
Commissions Retained by in Connection
Received Distributors with Redemptions
($) ($) and 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 quarterly, 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 may
also 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 may also terminate their respective distribution
or service agreement at any time upon written notice.
The plans and any related agreements may not be amended to increase
materially the amount to be spent for distribution expenses without approval
by a majority of the outstanding shares of the class, and all material
amendments to the plans or any related agreements shall be approved by a vote
of the 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' Eligible Amount Paid
Expenses ($) by the 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
Mutual Shares
Class A 5,611,011 5,206,450
Class C 11,998,738 9,481,190
Qualified
Class A 2,025,099 2,033,096
Class C 3,735,475 3,176,738
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
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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 Services1 4.10 N/A N/A
Mutual Shares -2.43 14.22 12.79
Qualified -2.45 13.85 12.81
Discovery2 -4.79 13.54 N/A
European3 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 may also 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 may also compare performance (as calculated
above) to performance as reported by other investments, indices, and
averages. These comparisons may include, but are not limited to, the
following examples:
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 - Fixed Income Fund
Performance Analysis - measure total return and average current yield for
the mutual fund industry and rank individual mutual fund performance over
specified time periods, assuming reinvestment of all distributions,
exclusive of any applicable sales charges.
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 may also 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 3 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 $217 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 115 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.
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 Z
STATEMENT OF
ADDITIONAL INFORMATION
MAY 1, 1999
51 JOHN F. KENNEDY PARKWAY
SHORT HILLS, NJ 07078 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
Risks
Officers and Directors
Management and Other Services
Portfolio Transactions
Distributions and Taxes
Organization, Voting Rights and Principal Holders
Buying and Selling Shares
Pricing Shares
The Underwriter
Performance
Miscellaneous Information
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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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GOALS AND STRATEGIES
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The principal investment goal of Beacon, Financial Services, Qualified,
Shares, and European is capital appreciation, some of which 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 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 informal, historical differences.
The funds may invest in securities of companies of any size, however, due to
the relatively large size of these funds, Beacon, Qualified and Shares
generally invest in large and medium size companies which have a large
trading volume and market capitalizations in excess of $1.5 billion.
Discovery, on the other hand, invests proportionately more of its assets in
smaller companies. The term "market capitalization" refers to the value of a
company as determined by the market price of its issued and outstanding
common stock. A company's market capitalization is calculated by multiplying
the number of outstanding shares of a company by the current market price of
a share.
Generally, Financial Services and European utilize the same investment
philosphy as the other funds but Financial Services will do so by investing
in financial services company securities and European will do so by investing
primarily in foreign securities.
Qualified was initially 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 anticipates 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.
Each fund invests 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.
Each fund may invest in any industry although no fund will concentrate its
investments in any industry except Financial Services which will concentrate
its investments in the financial services industry which means it will
invest more than 25% of the value of its assets in that in securities of
financial services companies. Financial Service's concentration policy
cannot be changed without the approval of Financial Service's shareholders.
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 investments and each fund reserves freedom of action to invest in such
proportions as the manager deems advisable. In addition, each fund may also
invest in restricted debt and equity securities, in foreign securities, and
in other investment company securities. 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.
Below is additional information about the various types of securities the
funds may buy.
EQUITY SECURITIES are securities which entitle the holder to participate in a
company's general operating success or failure. The purchaser of an equity
security typically receives an ownership interest in the company as well as
certain voting rights. The owner of an equity security may participate in a
company's success through the receipt of dividends which are distributions of
earnings by the company to its owners. Equity security owners may also
participate in a company's success or lack of success through increases or
decreases in the value of the company's shares as traded in the public
trading market for such shares. The public trading market for 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.
INVESTMENT IN THE SECURITIES OF REORGANIZING COMPANIES AND COMPANIES SUBJECT
TO TENDER OR EXCHANGE OFFERS. Each fund also invests in the securities of
domestic or foreign companies which are in the process of reorganizing or
restructuring ("Reorganizing Companies") or as to which there exist
outstanding tender or exchange offers. The funds may from time to time
participate in such tender or exchange offers. A tender offer is an offer by
the company itself or by another company or person to purchase a company's
securities at a higher (or lower) price than the market value for such
securities. An exchange offer is an offer by the company or by another
company or person to the holders of the company's securities to exchange
those securities for different securities. Although there are no restrictions
limiting the extent to which each fund may invest in Reorganizing Companies,
no fund presently anticipates committing more than 50% of its assets to such
investments. In addition to typical equity and debt investments, the funds'
investments in Reorganizing Companies may include Indebtedness,
Participations and Trade Claims, as further described below.
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 and each fund will invest in securities that are rated in the
medium to lowest rating categories by S&P and Moody's. Generally, the lower
the rating category, the riskier the investment. Debt securities rated BBB or
lower by S&P or Moody's are considered to be high yield, high risk debt
securities, commonly known as "junk bonds." The lowest rating category
established by Moody's is "C," and by S&P, is "D." Debt securities with a D
rating are in default as to the payment of principal and interest which means
that the issuer does not have the financial soundness to meet its interest
payments or its repayment schedule to security holders. The funds may invest
to an unlimited degree in junk bonds.
The funds will generally invest in debt securities under circumstances
similar to those under which they will invest in equity securities; namely,
when, in 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
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.
DIRECT INVESTMENT IN INDEBTEDNESS, PARTICIPATIONS AND TRADE CLAIMS. From time
to time, the funds may purchase the direct indebtedness of various companies
("Indebtedness"), or participations in such Indebtedness. Indebtedness can be
distinguished from traditional debt securities in that debt securities are
part of a large issue of securities to the general public which is typically
registered with a securities registration organization, such as the SEC, and
which is held by a large group of investors. Indebtedness may not be a
security, but rather, may represent a specific commercial loan or portion of
a loan which has been given to a company by a financial institution such as a
bank or insurance company. The company is typically obligated to repay such
commercial loan over a specified time period. By purchasing the Indebtedness
of companies, a fund steps into the shoes of the financial institution which
made the loan to the company prior to its restructuring or refinancing.
Indebtedness purchased by a fund may be in the form of loans, notes or bonds.
The length of time remaining until maturity on the Indebtedness is one factor
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.
The funds may also purchase participation interests in Indebtedness
("Participations"). Participations represent fractional interests in a
company's Indebtedness. The financial institutions which typically make
Participations available are banks or insurance companies, governmental
institutions, such as the Resolution Trust Corporation, the Federal Deposit
Insurance Corporation or the Pension Benefit Guaranty Corporation, or certain
organizations such as the World Bank which are known as "supranational
organizations." Supranational organizations are entities established or
financially supported by the national governments of one or more countries to
promote reconstruction or development. 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.
NON-U.S. SECURITIES. The funds may purchase securities whose values are
quoted and traded in any currency in addition to the U.S. dollar. Where a
security's value is quoted and traded in a non-U.S. dollar currency, the
funds bear the risk of a decrease (or gain the benefit of an increase) in the
value of the security as a result of changes in the value of the currency as
compared to the U.S. dollar in addition to typical market price movements
related to certain trading markets or the financial strength or weakness of
the security's issuer. In order to avoid these unexpected fluctuations in
value as a result of relative currency values, the funds expect to employ an
investment technique called "hedging," which attempts to reduce or eliminate
changes in a security's value resulting from changing currency exchange
rates. Hedging is further described below.
HEDGING AND INCOME TRANSACTIONS. The funds may use various hedging
strategies. Hedging is a technique designed to reduce a potential loss to a
fund as a result of certain economic or market risks, including risks related
to fluctuations in interest rates, currency exchange rates between U.S. and
foreign securities or between different foreign currencies, and broad or
specific market movements. The hedging strategies that the funds may use are
also used by many mutual funds and other institutional investors. When
pursuing these hedging strategies, the funds may engage in the following
types of transactions among others: purchase and sell exchange-listed and OTC
put and call options on securities, equity and fixed-income indices and other
financial instruments; purchase and sell financial futures contracts and
options thereon; and enter into various currency transactions such as
currency forward contracts, currency futures contracts, currency swaps or
options on currencies or currency futures (collectively, all of the above are
called "Hedging Transactions"). From time to time, the funds may engage in
other hedging strategies with qualities similar to those described in this
prospectus.
Some examples of situations in which Hedging Transactions may be used are:
(i) to attempt to protect against possible changes in the market value of
securities held in or to be purchased for a fund's portfolio resulting from
changes in securities markets or currency exchange rate fluctuations; (ii) to
protect a fund's gains in the value of portfolio securities which have not
yet been sold; (iii) to facilitate the sale of certain securities for
investment purposes; and (iv) as a temporary substitute for purchasing or
selling particular securities.
Any combination of Hedging Transactions may be used at any time as determined
by 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. Each fund will comply with
applicable regulatory requirements when implementing these strategies,
including the establishment of certain isolated accounts at the fund's
custodian bank. Hedging Transactions involving financial futures and options
on futures will be purchased, sold or entered into generally for bona fide
hedging, risk management or portfolio management purposes.
The various techniques described above as "Hedging Transactions" may also be
used by the funds for non-hedging purposes. For example, these techniques may
be used to produce income to a fund where the fund's participation in the
transaction involves the payment of a premium to the fund. A fund may also
use a hedging technique if 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. Any material changes in or to the Hedging Transactions used by the
funds will be described in the funds' prospectus before being used.
DEPOSITARY RECEIPTS. Each fund may invest in securities commonly known as
American Depositary Receipts ("ADRs"), and in European Depositary Receipts
("EDRs") or other securities representing 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. These 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 underlying
security.
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.
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 shares issued by REITs. A REIT is a pooled investment
vehicle which purchases primarily income-producing real estate or real estate
related loans or other real estate related interests. The pooled vehicle,
typically a trust, then issues shares whose value and investment performance
are dependent upon the investment experience of the underlying real estate
related investments.
SHORT SALES. Each fund may make short sales of securities. A short sale is a
transaction in which the fund sells a security it does not own in
anticipation that the market price of that security will decline. Each fund
expects to make short sales (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.
Each fund will make short sales only if 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 engage in two types of short sale transactions, "naked short
sales" and "short sales against the box" transactions. In a naked short sale
transaction, a fund sells a security which it does not own to a purchaser at
a specified price. In order to complete the short sale transaction, the fund
must (i) borrow the security to deliver the security to the purchaser; and
(ii) buy the same security in the market in order to return it to the
borrower. In buying the security to replace the borrowed security, the fund
expects to buy the security in the market for less than the amount it earned
on the short sale, thereby yielding a profit. In some circumstances, the fund
may receive the security in connection with a reorganization and,
consequently, need not buy the security to be returned to the borrower. Each
fund may engage in naked short sale transactions up to 5% of its assets.
The funds may also sell securities "short against the box" without limit. In
a short sale against the box, the fund actually holds in its portfolio the
securities which it has sold short. In replacing the borrowed securities in
the transaction, the fund may either buy securities in the open market or use
those in its portfolio.
INVESTMENT COMPANY SECURITIES. Each fund may invest from time to time in
other investment company securities, subject to applicable law which
restricts such investments. Such laws generally restrict a fund's purchase of
another investment company's securities to three percent (3%) of the other
investment company's securities, no more than five percent (5%) of the fund's
assets in any single investment company's securities and no more than ten
percent (10%) of the fund's assets in all investment company securities.
REPURCHASE AGREEMENTS. Each fund may invest up to 10% of its assets in
repurchase agreements, including tri-party repurchase agreements with
domestic banks or broker-dealers. In a repurchase agreement transaction, a
fund purchases a U.S. Government security from a bank or broker-dealer. The
agreement provides that the security must be sold back to the bank or
broker-dealer at an agreed-upon price and date.
Repurchase agreements are considered loans by the funds and are
collateralized by the underlying securities and therefore must be fully
collateralized at all times. The bank or broker-dealer must transfer to the
fund's custodian bank securities with an initial value, including any earned
but unpaid interest equal to at least 100% of the dollar amount invested by
the fund in each repurchase agreement. In a tri-party repurchase agreement,
the collateral is maintained at the bank or broker-dealer's custodian bank,
instead of the fund's custodian bank. The manager monitors the
creditworthiness of the bank or broker and marks the collateral to market
daily.
Repurchase agreements and lending 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.
LOANS OF SECURITIES. Each fund may also lend its portfolio securities to
banks or broker-dealers in order to realize additional income which the fund
receives as a loan premium. If a fund lends portfolio securities, for each
loan the fund must receive in return securities with a value at least equal
to 100% of the current market value of the loaned securities. Each fund
presently does not anticipate loaning more than 5% of its respective
portfolio securities.
BORROWING. While the funds are permitted to borrow under certain
circumstances as under no circumstances will a fund make additional
investments while any amounts borrowed exceed 5% of the fund's total assets.
SECURITIES OF COMPANIES IN THE FINANCIAL SERVICES INDUSTRY. Under the
federal securities law, each fund may not invest more than 5% of its total
assets in the securities of any company that receives more than 15% of its
revenues from securities related activities which means activities as a
broker, dealer, underwriter or investment advisor (a "securities issuer").
Further, immediately after a purchase of equity securities of a securities
issuer, a fund may not own more than 5% of the outstanding securities of any
class of equity securities of a securities issuer, and immediately after a
purchase of debt securities of a securities issuer, a fund may not own more
than 10% of the outstanding principal amount of the securities issuer's debt
securities.
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 a paradigm, but is also applicable to
other financial intermediaries.
With certain exceptions, OCC-issued and exchange-listed options generally
settle by physical delivery of the underlying security or currency, although
in the future cash settlement may become available. Index options and
Eurodollar instruments are cash settled for the net amount, if any, by which
the option is "in-the-money" (i.e., where the value of the underlying
instrument exceeds, in the case of a call option, or is less than, in the
case of a put option, the exercise price of the option) at the time the
option is exercised. Frequently, rather than taking or making delivery of the
underlying instrument through the process of exercising the option, listed
options are closed by entering into offsetting option transactions.
A fund's ability to close out its position as a purchaser or seller of an OCC
or exchange-listed put or call option is dependent, in part, upon the
liquidity of the option market. Among the possible reasons for the absence of
a liquid option market on an exchange are: (i) insufficient trading interest
in certain options; (ii) restrictions on transactions imposed by an exchange;
(iii) trading halts, suspensions or other restrictions imposed with respect
to particular classes or series of options or underlying securities including
reaching daily price limits; (iv) interruption of the normal operations of
the OCC or an exchange; (v) inadequacy of the facilities of an exchange or
OCC to handle current trading volume; or (vi) a decision by one or more
exchanges to discontinue the trading of options (or a particular class or
series of options), in which event the relevant market for that option on
that exchange would cease to exist, although outstanding options on that
exchange would generally continue to be exercisable in accordance with their
terms.
The hours of trading for listed options may not coincide with the hours
during which the underlying financial instruments are traded. To the extent
that the option markets close before the markets for the underlying financial
instruments, significant price and rate movements can take place in the
underlying markets that cannot be reflected in the option markets.
OTC options are purchased from or sold to securities dealers, financial
institutions or other parties (each a "Counterparty," and collectively,
"Counterparties") through 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. Each 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.
Each fund will engage in OTC option transactions only with U.S. government
securities dealers recognized by the Federal Reserve Bank of New York as
"primary dealers" or broker-dealers, domestic or foreign banks or other
financial institutions which have received (or the guarantors of the
obligations of which have received) a short-term credit rating of "A-l" from
S&P or "P-l" from Moody's, an equivalent rating from any nationally
recognized statistical rating organization ("NRSRO") or which 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 purchases and sells 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 purchases and sells 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.
FUTURES. Each fund may enter into financial futures contracts or purchase or
sell put and call options on such futures as a hedge against anticipated
interest rate, currency or equity market changes, for duration management and
for risk management purposes. Futures are generally bought and sold on the
commodities exchanges where they are listed with payment of initial and
variation margin as described below. The sale of a futures contract creates a
firm obligation by 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 will use financial futures and options consistent with applicable
rules and regulations in particular, the rules and regulations of the
Commodity Futures Trading Commission and will only enter into these
transactions 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 future, requires a fund to deposit
with a financial intermediary 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 future 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 does
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.
OPTIONS ON SECURITIES INDICES AND OTHER FINANCIAL INDICES. Each fund will
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 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 is obligated to make delivery of this amount. The
gain or loss on an index depends on price movements in the instruments making
up the market, market segment, industry or other composite on which the
underlying index is based, rather than price movements in individual
securities, as is the case with respect to options on securities.
CURRENCY TRANSACTIONS. Each fund will engage in currency transactions with
Counterparties in order to hedge the value of portfolio holdings denominated
in particular currencies against fluctuations in relative value between those
currencies and the U.S. dollar. Currency transactions include forward
currency contracts, exchange-listed currency futures, exchange-listed and OTC
options on currencies, and currency swaps. A forward currency contract
involves a privately negotiated obligation to purchase or sell (with delivery
generally required) a specific currency at a future date, which may be any
fixed number of days from the date of the contract agreed upon by the
parties, at a price set at the time of the contract. A currency swap is an
agreement to exchange cash flows on a notional amount of two or more
currencies based on the relative value differential among them.
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 only the
net amount of the two payments. Because these swaps are entered into for good
faith hedging purposes, the manager and the funds believe such obligations
are not senior securities under the 1940 Act and, they will not treat them as
being subject to a fund's borrowing restrictions. The funds may enter into
currency transactions with Counterparties which have (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 an 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 currency 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
therefrom. 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 hedge currency 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,
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"), 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. 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 below.
COMBINED TRANSACTIONS. Each fund may enter into multiple transactions,
including multiple options transactions, multiple futures transactions,
multiple currency transactions (including forward currency contracts) and any
combination of futures, options and currency transactions ("component
transactions"), instead of a single hedging transaction, as part of a single
or combined strategy when, in the opinion of Franklin Mutual, it is in the
best interests of the fund to do so. A combined transaction will usually
contain elements of risk that are present in each of its component
transactions. Although combined transactions are normally entered into based
on Franklin Mutual's judgment that the combined strategies will reduce risk
or otherwise more effectively achieve the desired portfolio management goal,
it is possible that the combination will instead increase such risks or
hinder achievement of the portfolio management objective.
TAX CONSIDERATIONS. Each fund's investments in options, futures, and forward
contracts, including foreign currency options and futures, foreign securities
and other complex securities are subject to special tax rules that may affect
the amount, timing or character of the income earned by the fund and
distributed to you. Each fund may also be subject to withholding taxes on
earnings from certain of its foreign securities.
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.
Generally, the policies and restrictions discussed here apply when a fund
makes an investment. In most cases, the fund is not required to sell a
security because circumstances change and the security no longer meets one or
more of the fund's policies or restrictions.
INVESTMENT RESTRICTIONS Mutual Series 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.
Mutual Series may not:
1. Purchase or sell commodities, commodity contracts (except in conformity
with regulations of the Commodities Futures Trading Commission such that the
series would not be considered a commodity pool), or oil and gas interests or
real estate. Securities or other instruments backed by commodities are not
considered commodities or commodity contracts for purposes of this
restriction. Debt or equity securities issued by companies engaged in the
oil, gas, or real estate businesses are not considered oil or gas interests
or real estate for purposes of this restriction. First mortgage loans and
other direct obligations secured by real estate are not considered real
estate for purposes of this restriction.
2. Make loans, except to the extent the purchase of debt obligations of any
type are considered loans and except that the series may lend portfolio
securities to qualified institutional investors in compliance with
requirements established from time to time by the SEC and the securities
exchanges on which such securities are traded.
3. Issue securities senior to its stock or borrow money or utilize leverage
in excess of the maximum permitted by the 1940 Act which is currently 33 1/3%
of total assets (plus 5% for emergency or other short-term purposes) from
banks on a temporary basis from time to time to provide greater liquidity for
redemptions or for special circumstances.
4. Invest more than 25% of the value of its assets in a particular industry
(except that U.S. government securities are not considered an industry and
except that Financial Services will invest more than 25% of its assets in the
financial services industry).
5. Act as an underwriter except to the extent the series may be deemed to be
an underwriter when disposing of securities it owns or when selling its own
shares.
6. Purchase the securities of any one issuer, other than the U.S. government
or any of its agencies or instrumentalities, if immediately after such
purchase more than 5% of the value of its total assets would be invested in
such issuer, or such series would own more than 10% of the outstanding voting
securities of such issuer, except that up to 25% of the value of such series'
total assets may be invested without regard to such 5% and 10% limitations.
7. Except as may be described in the Prospectus, engage in short sales,
purchase securities on margin or maintain a net short position.
If a 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.
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
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GENERAL. There is no assurance that a fund will meet its investment goal.
Generally, if the securities owned by a fund increase in value, the value of
the shares of the fund which you own will increase. Similarly, if the
securities owned by a fund decrease in value, the value of your shares will
also decline. In this way, you participate in any change in the value of the
securities owned by a fund.
COMMON STOCKS. To the extent that a fund's investments consist of common
stocks, a decline in the market, expressed for example by a drop in any
securities index that is based on equity securities, such as the Dow Jones
Industrial or the Standard & Poor's 500 average, may also be reflected in a
fund's share price. Historically, there have been both increases and
decreases in securities prices generally and such increases and decreases may
reoccur unpredictably in the future.
DEBT SECURITIES - GENERALLY. Debt securities are subject to the risk of an
issuer's inability to meet principal and interest payments on the obligations
(credit risk) and may also be subject to price volatility due to factors such
as interest rate sensitivity, market perception of the creditworthiness of
the issuer, and general market liquidity (market risk). The manager
considers both credit risk and market risk in making investment decisions as
to corporate debt obligations. Debt obligations will tend to decrease in
value when prevailing interest rates rise and increase in value when
prevailing interest rates fall. Generally, long-term debt obligations are
more sensitive to interest rate fluctuations than short-term obligations.
Because investments in debt obligations are interest rate sensitive, a fund's
performance may be affected by the manager's ability to anticipate and
respond to fluctuations in market interest rates, to the extent of the fund's
investment in debt obligations.
MEDIUM AND LOWER RATED 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.
Corporate debt securities rated Baa are regarded by Moody's as being neither
highly protected nor poorly secured. Interest payments and principal security
appears adequate to Moody's for the present, but certain protective elements
may be lacking or may be characteristically unreliable over any great length
of time. Such securities are regarded by Moody's as lacking outstanding
investment characteristics and having speculative characteristics. Corporate
debt securities rated BBB are regarded by S&P as having adequate capacity to
pay interest and repay principal. Such securities are regarded by S&P as
normally exhibiting adequate protection parameters, although adverse economic
conditions or changing circumstances are more likely to lead to a weakened
capacity to pay interest and repay principal for securities in this rating
category than in higher rated categories.
Corporate debt securities which are rated B are regarded by Moody's as
generally lacking characteristics of the desirable investment. In Moody's
view, assurance of interest and principal payments or of maintenance of other
terms of the security over any long period of time may be small. Corporate
debt securities rated BB, B, CCC, CC and C are regarded by S&P on balance as
predominantly speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligation. In S&P's view,
although such securities likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions. BB and B are regarded by S&P as indicating
the two lowest degrees of speculation in this group of ratings. Securities
rated D by S&P or C by Moody's are in default and are not currently
performing. 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 secondary market value of corporate debt
securities structured as zero coupon securities or payment in kind securities
may be more volatile in response to changes in interest rates than debt
securities which pay interest periodically in cash. Because such securities
do not pay current interest, but rather, income is accreted, to the extent
that a series does not have available cash to meet distribution requirements
with respect to such income, it could be required to dispose of portfolio
securities that it otherwise would not. Such disposition could be at a
disadvantageous price. Failure to satisfy distribution requirements could
result in a fund failing to qualify as a pass-through entity under the Code.
Investment in such securities also involves certain other tax considerations.
The manager values each fund's 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 low grade 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 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 under the Securities Act of 1933 certain securities may be
determined to be liquid pursuant to procedures adopted by the Board under
applicable guidelines.
To the extent a fund invests in lower-rated debt securities, it will be
subject to risks which are greater than those to which a fund which limits
its investments to higher grade debt securities would be subject. Such risks
include limitations on a fund's ability to re-sell the lower-rated debt
securities and less readily available market quotations for such securities.
If there are not readily available market quotations for a debt security, its
value is determined largely by the investment manager's judgment. When and
if the debt security is sold, the investment manager may find that its
estimation of the debt security's value is substantially different than the
sale price effected in the market.
NON-U.S. SECURITIES. Investments in securities of non-U.S. issuers involve
certain risks not ordinarily associated with investments in securities of
U.S. issuers. Such risks include: fluctuations in the value of the currency
in which the security is traded or quoted as compared to the U.S. dollar;
unpredictable political, social and economic developments in the foreign
country where the security is issued or where the issuer of the security is
located; and the possible imposition by a foreign government of limits on the
ability of a fund to obtain a foreign currency or to convert a foreign
currency into U.S. dollars; or the imposition of other foreign laws or
restrictions. Since each fund may invest in securities issued, traded or
quoted in currencies other than the U.S. dollar, changes in foreign currency
exchange rates will affect the value of securities in the fund's portfolio.
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 means 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.
CURRENCY TRANSACTIONS. Currency transactions are subject to risks different
from those of other portfolio transactions. Because currency control is of
great importance to the issuing governments and influences economic planning
and policy, purchases and sales of currency and related instruments can be
negatively affected by government exchange controls, blockages, and
manipulations or exchange restrictions imposed by governments. These can
result in losses to a fund if it is unable to deliver or receive currency or
funds in settlement of obligations and could also cause hedges it has entered
into to be rendered useless, resulting in full currency exposure as well as
incurring transaction costs. Buyers and sellers of currency futures are
subject to the same risks that apply to the use of futures generally.
Further, settlement of a currency futures contract for the purchase of most
currencies must occur at a bank based in the issuing nation. Trading options
on currency futures is relatively new, and the ability to establish and close
out positions on such options is subject to the maintenance of a liquid
market which may not always be available. Currency exchange rates may
fluctuate based on factors extrinsic to that country's economy.
FORWARD CONTRACTS, OPTIONS ON FOREIGN CURRENCIES, AND OPTIONS ON FUTURES
CONTRACTS. Forward contracts are not traded on contract markets regulated by
the CFTC or by the SEC. The ability of the funds to use forward contracts
could be restricted to the extent that Congress authorizes the CFTC or the
SEC to regulate such transactions. Forward contracts are traded through
financial institutions acting as market makers.
The purchase and sale of exchange-traded foreign currency options are subject
to the risks of the availability of a liquid secondary market, as well as the
risks of adverse market movements, margins of options written, the nature of
the foreign currency market, possible intervention by governmental
authorities, and the effects of other political and economic events.
Futures contracts on currencies, options on futures contracts, and options on
foreign currencies may be traded on foreign exchanges. These transactions
are subject to the risk of governmental actions affecting trading in or the
prices of foreign currencies. The value of such positions could also be
adversely affected by (i) other foreign political and economic factors,
(ii) less available data than in the U.S. on which to base trading decisions,
(iii) delays in the funds' ability to act upon economic events occurring in
foreign markets during non-business hours in the U.S., (iv) the imposition of
exercise and settlement terms and procedures, and margin requirements
different from those in the U.S., and (v) lesser trading volume.
OPTIONS ON SECURITIES. The writing of covered put options is similar in
terms of risk/return characteristics to buy-and-write transactions. If the
market price of the underlying security rises or otherwise is above the
exercise price, the put option will expire worthless and a fund's gain will
be limited to the premium received. If the market price of the underlying
security declines or otherwise is below the exercise price, a fund may elect
to close the position or wait for the option to be exercised and take
delivery of the security at the exercise price. A fund's return will be the
premium received from the put option minus the amount by which the market
price of the security is below the exercise price. The funds may use
out-of-the-money, at-the-money, and in-the-money put options in the same
market environments in which they use call options in equivalent
buy-and-write transactions.
When trading options on foreign exchanges or in the over-the-counter market,
many of the protections afforded to exchange participants will not be
available. For example, there are no daily price fluctuation limits, and
adverse market movements could therefore continue to an unlimited extent over
a period of time. Although the purchaser of an option cannot lose more than
the amount of the premium plus related transaction costs, this entire amount
could be lost. Moreover, a fund as an option writer could lose amounts
substantially in excess of its initial investment, due to the margin and
collateral requirements associated with option writing.
Options on securities traded on national securities exchanges are within the
jurisdiction of the SEC, as are other securities traded on such exchanges.
As a result, many of the protections provided to traders on organized
exchanges will be available with respect to such transactions. In
particular, all option positions entered into on a national securities
exchange are cleared and guaranteed by the Options Clearing Corporation,
thereby reducing the risk of counterparty default. Further, a liquid
secondary market in options traded on a national securities exchange may be
more readily available than in the over-the-counter market, potentially
permitting a fund to liquidate open positions at a profit prior to exercise
or expiration, or to limit losses in the event of adverse market movements.
A fund's option trading activities may result in the loss of principal under
certain market conditions.
OPTIONS ON FUTURES CONTRACTS. The amount of risk a fund assumes when it
purchases an option on a futures contract is the premium paid for the option
plus related transaction costs. In addition to the correlation risks
discussed above, the purchase of an option also entails the risk that changes
in the value of the underlying futures contract will not be fully reflected
in the value of the option purchased. Fund will purchase put options on a
futures contract only to hedge the fund's portfolio against the risk of
rising interest rates or the decline in the value of securities denominated
in a foreign currency.
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.
SMALLER COMPANIES. From time to time, a number of the securities in which
the funds may invest may be 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.
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.
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.
The use of currency transactions can result in a fund incurring losses as a
result of a number of factors including the imposition of controls by a
foreign or the U.S. government on the exchange of foreign currencies, the
inability of foreign securities transactions to be completed with the
security being delivered to the fund, or the inability to deliver or receive
a specified currency.
Although the use of futures and options transactions for hedging should tend
to minimize the risk of loss due to a decline in the value of the hedged
position, these transactions also tend to limit any potential gain which
might result from an increase in value of the position taken. As compared to
options contracts, futures contracts create greater ongoing potential
financial risks to a fund because the fund is required to make ongoing
monetary deposits with futures brokers. In an options transaction, a fund's
exposure is limited to the cost of the initial premium paid by the fund to
the broker to engage in the transaction. Losses resulting from the use of
Hedging Transactions can reduce net asset value, and possibly income, and
such losses can be greater than if the Hedging Transactions had not been
utilized. The cost of entering into Hedging Transactions may also reduce a
fund's total return to investors.
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.
USE OF SEGREGATED AND OTHER SPECIAL ACCOUNTS. Many hedging transactions, in
addition to other requirements, require that the funds segregate liquid high
grade 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 high
grade securities at least equal to the current amount of the obligation must
be segregated with the custodian bank. The segregated assets cannot be sold
or transferred unless equivalent assets are substituted in their place or it
is no longer necessary to segregate them. For example, a call option written
by 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 high grade 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 high grade 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 high
grade 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 high grade assets equal to the amount of the fund's
obligation. However, the segregation requirement does not apply to currency
contracts which are entered in order to "lock in" the purchase or sale price
of a trade in a security denominated in a foreign currency pending settlement
within the time customary for such securities.
OTC options entered into by the 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. Each fund may also enter into offsetting
transactions so that its combined position, coupled with any segregated
assets, equals its net outstanding obligation in related options and hedging
transactions. For example, 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.
INVESTMENT COMPANY SECURITIES. Investors should recognize that a fund's
purchase of the securities of investment companies results in layering of
expenses. This layering may occur because investors in any investment
company, such as a fund, indirectly bear a proportionate share of the
expenses of the investment company, including operating costs, and investment
advisory and administrative fees.
DEPOSITARY RECEIPTS. Receipts of non-U.S. issuers may have certain risks,
including trading for a lower price, having less liquidity than their
underlying securities and risks relating to the issuing bank or trust
company. Holders of unsponsored Depositary Receipts have a greater risk that
receipt of corporate information and proxy disclosure will be untimely,
information may be incomplete and costs may be higher.
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.
RISKS RELATED TO REAL ESTATE-RELATED INVESTMENTS. The funds' investments in
real estate-related securities are subject to certain risks related to the
real estate industry in general. These risks include, among others: changes
in general and local economic conditions; possible declines in the value of
real estate; the possible lack of availability of money for loans to purchase
real estate; overbuilding in particular areas; prolonged vacancies in rental
properties; property taxes; changes in laws related to the use of real estate
in certain areas; costs resulting from the clean-up of, and liability to
third parties resulting from, environmental problems; the costs associated
with damage to real estate resulting from floods, earthquakes or other
material disasters not covered by insurance; and limitations on and
variations in rents and changes in interest rates.
SPECIAL CONSIDERATIONS RELATED TO SECURITIES IN THE FINANCIAL SERVICES
INDUSTRY. Certain provisions of the federal securities laws permit investment
portfolios, including Financial Services, to invest in companies engaged in
securities-related activities only if certain conditions are met. Purchase of
securities of a company that derived 15% or less of gross revenues during its
most recent fiscal year from securities-related activities (i.e., broker,
dealer, underwriting, or investment advisory activities) are subject only to
the same percentage limitations as would apply to any other security a fund
may purchase. Each fund, including Financial Services, may purchase
securities (not limited to equity or debt individually) of an issuer that
derived more than 15% of its gross revenues in its most recent fiscal year
from securities-related activities, subject to the following conditions:
a. the purchase cannot cause more than 5% of the fund's total assets to be
invested in securities of that issuer;
b. for an equity security, the purchase cannot result in the fund owning
more than 5% of the issuer's outstanding securities in that class;
c. for a debt security, the purchase cannot result in the fund owning more
than 10% of the outstanding principal amount of the issuer's debt
securities.
In applying the gross revenue test, an issuer's own securities-related
activities must be combined with its ratable share of securities-related
revenues from enterprises in which it owns a 20% or greater voting or equity
interest. All of the above percentage limitations, as well as the issuer's
gross revenue test, are applicable at the time of purchase. With respect to
warrants, rights, and convertible securities, a determination of compliance
with the above limitations must be made as though such warrant, right, or
conversion privilege had been exercised.
The following transactions would not be deemed to be an acquisition of
securities of a securities-related business: (i) receipt of stock dividends
on securities acquired in compliance with the conditions described above;
(ii) receipt of securities arising from a stock-for-stock split on securities
acquired in compliance with the conditions described above; (iii) exercise of
options, warrants, or rights acquired in compliance with the federal
securities laws; (iv) conversion of convertible securities acquired in
compliance with the conditions described above; (v) the acquisition of puts
under certain circumstances.
The funds also are not permitted to acquire any security issued by 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.
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.
Franklin Resources, Inc. has created an interdepartmental team to handle all
euro-related changes to enable the Franklin Templeton Funds to process
transactions accurately and completely with minimal disruption to business
activities. While 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.
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 affiliations of the officers and board members and their principal
occupations for the past five years are shown below.
POSITION(S)
HELD WITH PRINCIPAL OCCUPATION(S)
NAME, AGE AND ADDRESS THE FUND DURING THE PAST FIVE YEARS
- -------------------------------------------------------------------------------
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
Executive Vice President and Director
President, Chief Executive Officer and Director, Franklin Mutual Advisers,
Inc.; 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 and Director, Franklin Advisory Services, Inc.; and officer
and/or director or trustee, as the case may be, of six of the investment
companies in the Franklin Templeton Group of Funds.
Bruce A. MacPherson (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 of the Board and Director, Franklin Mutual Advisers, Inc.; 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)
2 Executive Drive
Suite 560
Fort Lee, NJ 07024
Director
Partner in LDR Equities, LLC (manages various personal investments); Vice
President, Trimtex Co., Inc. (manufactures and markets specialty fabrics);
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, Inc.; 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,
Inc.; 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, Inc.; Manager (Director), MB
Metropolis, L.L.C.; and FORMERLY, employee, Heine Securities Corporation
(1991-1996) and Vice President and Analyst, Donaldson, Lufkin & Jenrette.
David E. Marcus (33)
51 John F. Kennedy Pkwy.
Short Hills, NJ 07078
Vice President
Senior Vice President, Franklin Mutual Advisers, Inc.; 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, Inc.; 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, Inc.; 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 pay 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 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 $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 164 U.S. based funds or series.
4. Not vested in retirement plan.
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
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MANAGER AND SERVICES PROVIDED The funds' manager is Franklin Mutual
Advisers, Inc. 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 wholly owned by 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 1996 1
- ----------------------------------------------------------------------------
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 51 John F. Kennedy Parkway, Short Hills, NJ 07078.
For its services, Investor Services receives a fixed fee per account. The
funds may also reimburse Investor Services for certain out-of-pocket
expenses, which may include payments by Investor Services to entities,
including affiliated entities, that provide sub-shareholder services,
recordkeeping and/or transfer agency services to beneficial owners of the
funds. The amount of reimbursements for these services per benefit plan
participant fund account per year may not exceed the per account fee payable
by the 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
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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, may also 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:
Mutual Shares Value
Morgan Stanley $183,748,000
Bear Stearns 68,475,000
Mutual Qualified
Morgan Stanley 59,029,000
Beacon
Morgan Stanley 72,228,000
Bear Stearns 40,604,000
Discovery
Morgan Stanley 22,330,000
Bear Stearns 13,152,000
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
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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 any 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.
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
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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 may also
be called by the board in its discretion.
As of February 5, 1999, the principal shareholders of the funds, beneficial
or of record, were:
Name and Address Share Class Percentage (%)
EUROPEAN
Michael F. Price
Peapacton Farm
P.O. Box 434
Far Hills, NJ 07931 Class Z 23.66
Franklin Resources, Inc.1
Corporate Accounting
555 Airport Blvd. 4th Floor
Burlingame, CA 94010 Class B 30.01
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
Fahnestock Co. Inc. Cust.
A878401361
Jane G. Bennett
125 Broad Street
New York, New York 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, Wyoming 82834 Class B 10.02
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
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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.
GROUP PURCHASES As described in the prospectus, members of a qualified group
may add the group's investments together for minimum investment purposes.
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.
DEALER COMPENSATION 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.
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 goal[s] 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.
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 may also 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
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When you buy and sell shares, you pay the net asset value (NAV) per share.
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.
Each fund determines the value of a foreign security as of the close of
trading on the foreign exchange on which the security is traded or as of the
close of trading on the NYSE, if that is earlier. The value is then converted
into its U.S. dollar equivalent at the foreign exchange rate in effect at
noon, New York time, on the day the value of the foreign security is
determined. If no sale is reported at that time, the foreign security is
valued within the range of the most recent quoted bid and ask prices.
Occasionally events that affect the values of foreign securities and foreign
exchange rates may occur between the times at which they are determined and
the close of the exchange and will, therefore, not be reflected in the
computation of the NAV. If events materially affecting the values of these
foreign securities occur during this period, the securities will be valued in
accordance with procedures established by the board.
Generally, trading in corporate bonds, U.S. government securities and money
market instruments is substantially completed each day at various times
before the close of the NYSE. The value of these securities used in computing
the 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
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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.
Distributors does not receive compensation from the funds for acting as
underwriter of the funds' Class Z shares.
PERFORMANCE
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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.
AVERAGE ANNUAL TOTAL RETURN Average annual total return is determined by
finding the average annual rates of return over the periods indicated below
that would equate an initial hypothetical $1,000 investment to its ending
redeemable value. The calculation assumes income dividends and capital gain
distributions are reinvested at net asset value. The quotation assumes the
account was completely redeemed at the end of each period and the deduction
of all applicable charges and fees. If a change is made to the sales charge
structure, historical performance information will be restated to reflect the
maximum initial sales charge currently in effect.
The average annual total returns for the indicated periods ended December 31,
1998, were:
1 Year 5 Years 10 Years
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Class Z
Beacon 2.37 15.20 14.55
Financial Services 1 7.08 N/A N/A
Mutual Shares 0.45 15.65 14.31
Qualified 0.50 15.28 14.34
Discovery 2 -1.90 14.96 N/A
European 3 4.74 N/A N/A
1. Financial Services commenced operations on August 19, 1997. The average
annual total return from inception was 23.06%.
2. Discovery commenced operations on December 31, 1992. The average annual
total return from inception was 18.21%.
3. European commenced operations on July 3, 1996. The average annual total
return from inception was 16.96%.
These figures were calculated according to the SEC formula:
n
P(1+T) = ERV
where:
P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical $1,000
payment made at the beginning of each period at the end
of each period
CUMULATIVE TOTAL RETURN Like average annual total return, cumulative total
return assumes income dividends and capital gain distributions are reinvested
at net asset value. Cumulative total return, however, is based on the actual
return for a specified period rather than on the average return over the
periods indicated above. The cumulative total returns for the indicated
periods ended December 31, 1998, were:
1 Year 5 Years 10 Years
- ----------------------------------------------------------------------------
Class Z
Beacon 2.37 102.86 288.86
Financial Services 1 7.08 N/A N/A
Mutual Shares 0.45 106.91 280.84
Qualified 0.50 103.64 282.01
Discovery 2 -1.90 100.82 N/A
European 3 4.74 N/A N/A
1. Financial Services commenced operations on August 19, 1997. The cumulative
total return from inception was 32.81%.
2. Discovery commenced operations on December 31, 1992. The cumulative total
return from inception was 172.82%.
3. European commenced operations on July 3, 1996. The cumulative total return
from inception was 47.83%.
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 Sales literature referring to the use of the
fund 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 may also compare performance (as calculated
above) to performance as reported by other investments, indices, and
averages. These comparisons may include, but are not limited to, the
following examples:
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 - Fixed Income Fund
Performance Analysis - measure total return and average current yield for
the mutual fund industry and rank individual mutual fund performance over
specified time periods, assuming reinvestment of all distributions,
exclusive of any applicable sales charges.
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 may also 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 3 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 $217 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 115 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.
FRANKLIN MUTUAL SERIES FUND INC.
File Nos. 33-18516
811-5387
FORM N-1A
PART C
OTHER INFORMATION
ITEM 23. EXHIBITS. The following exhibits are incorporated by reference
to the previously filed document indicated below, except as noted:
(A) ARTICLES OF INCORPORATION
(i) Articles of Incorporation dated November 12, 1987
Filing: Post-Effective Amendment No. 22 to Registration
Statement on Form N-1A
File No. 33-18516
Filing Date: April 30, 1997
(ii) Articles of Amendment dated December 30, 1987
Filing: Post-Effective Amendment No. 22 to Registration
Statement on Form N-1A
File No. 33-18516
Filing Date: April 30, 1997
(iii) Articles Supplementary dated September 18, 1992
Filing: Post-Effective Amendment No. 22 to Registration
Statement on Form N-1A
File No. 33-18516
Filing Date: April 30, 1997
(iv) Articles Supplementary dated January 26, 1996
Filing: Post-Effective Amendment No. 22 to Registration
Statement on Form N-1A
File No. 33-18516
Filing Date: April 30, 1997
(v) Articles Supplementary dated June 17, 1996
Filing: Post-Effective Amendment No. 22 to Registration
Statement on Form N-1A
File No. 33-18516
Filing Date: April 30, 1997
(B) BY-LAWS
(i) By-Laws
Filing: Post-Effective Amendment No. 22 to Registration
Statement on Form N-1A
File No. 33-18516
Filing Date: April 30, 1997
(C) INSTRUMENTS DEFINING RIGHTS OF SECURITY HOLDERS
Not Applicable
(D) INVESTMENT ADVISORY CONTRACTS
(i) Investment Advisory Agreement between Franklin Mutual Advisers,
Inc. and Registrant on behalf of Mutual Shares Fund dated
November 1, 1996
Filing: Post-Effective Amendment No. 21 to Registration
Statement on Form N-1A
File No. 33-18516
Filing Date: January 31, 1997
(ii) Investment Advisory Agreement between Franklin Mutual Advisers,
Inc. and Registrant on behalf of Mutual Qualified Fund dated
November 1, 1996
Filing: Post-Effective Amendment No. 21 to Registration
Statement on Form N-1A
File No. 33-18516
Filing Date: January 31, 1997
(iii) Investment Advisory Agreement between Franklin Mutual Advisers,
Inc. and Registrant on behalf of Mutual Beacon Fund dated
November 1, 1996
Filing: Post-Effective Amendment No. 21 to Registration
Statement on Form N-1A
File No. 33-18516
Filing Date: January 31, 1997
(iv) Investment Advisory Agreement between Franklin Mutual Advisers,
Inc. and Registrant on behalf of Mutual Discovery Fund dated
November 1, 1996
Filing: Post-Effective Amendment No. 21 to Registration
Statement on Form N-1A
File No. 33-18516
Filing Date: January 31, 1997
(v) Investment Advisory Agreement between Franklin Mutual Advisers,
Inc. and Registrant on behalf of Mutual European Fund dated
November 1, 1996
Filing: Post-Effective Amendment No. 21 to Registration
Statement on Form N-1A
File No. 33-18516
Filing Date: January 31, 1997
(vi) Investment Advisory Agreement between Franklin Mutual Advisers,
Inc. and Registrant on behalf of Mutual Financial Services Fund
dated August 1, 1997
Filing: Post-Effective Amendment No. 24 to Registration
Statement on Form N-1A
File No. 33-18516
Filing Date: February 19, 1998
(vii) Administration Agreement between Franklin Templeton Services,
Inc. and Registrant on behalf of Mutual Shares Fund dated
November 1, 1996
Filing: Post-Effective Amendment No. 22 to Registration
Statement on Form N-1A
File No. 33-18516
Filing Date: April 30, 1997
(viii) Administration Agreement between Franklin Templeton Services,
Inc. and Registrant on behalf of Mutual Qualified Fund dated
November 1, 1996
Filing: Post-Effective Amendment No. 22 to Registration
Statement on Form N-1A
File No. 33-18516
Filing Date: April 30, 1997
(ix) Administration Agreement between Franklin Templeton Services,
Inc. and Registrant on behalf of Mutual Beacon Fund dated
November 1, 1996
Filing: Post-Effective Amendment No. 22 to Registration
Statement on Form N-1A
File No. 33-18516
Filing Date: April 30, 1997
(x) Administration Agreement between Franklin Templeton Services,
Inc. and Registrant on behalf of Mutual Discovery Fund dated
November 1, 1996
Filing: Post-Effective Amendment No. 22 to Registration
Statement on Form N-1A
File No. 33-18516
Filing Date: April 30, 1997
(xi) Administration Agreement between Franklin Templeton Services,
Inc. and Registrant on behalf of Mutual European Fund dated
November 1, 1996
Filing: Post-Effective Amendment No. 22 to Registration
Statement on Form N-1A
File No. 33-18516
Filing Date: April 30, 1997
(xii) Administration Agreement between Franklin Templeton Services,
Inc. and Registrant on behalf of Mutual Financial Services Fund
dated August 1, 1997
Filing: Post-Effective Amendment No. 24 to Registration
Statement on Form N-1A
File No. 33-18516
Filing Date: February 19, 1998
(E) UNDERWRITING CONTRACTS
(i) Distribution Agreement between Registrant on behalf of Mutual
Financial Services Fund and Franklin/Templeton Distributors, Inc.
dated August 19, 1997
Filing: Post-Effective Amendment No. 24 to Registration
Statement on Form N-1A
File No. 33-18516
Filing Date: February 19, 1998
(ii) Distribution Agreement between Registrant on behalf of Mutual
Shares Fund and Franklin/Templeton Distributors, Inc. dated
November 1, 1996
Filing: Post-Effective Amendment No. 21 to Registration
Statement on Form N-1A
File No. 33-18516
Filing Date: January 31, 1997
(iii) Distribution Agreement between Registrant on behalf of Mutual
Beacon Fund and Franklin/Templeton Distributors, Inc dated
November 1, 1996
Filing: Post-Effective Amendment No. 21 to Registration
Statement on Form N-1A
File No. 33-18516
Filing Date: January 31, 1997
(iv) Distribution Agreement between Registrant on behalf of Mutual
Qualified Fund and Franklin/Templeton Distributors, Inc. dated
November 1, 1996
Filing: Post-Effective Amendment No. 21 to Registration
Statement on Form N-1A
File No. 33-18516
Filing Date: January 31, 1997
(v) Distribution Agreement between Registrant on behalf of Mutual
Discovery Fund and Franklin/Templeton Distributors, Inc. dated
November 1, 1996
Filing: Post-Effective Amendment No. 21 to Registration
Statement on Form N-1A
File No. 33-18516
Filing Date: January 31, 1997
(vi) Distribution Agreement between Registrant on behalf of Mutual
European Fund and Franklin/Templeton Distributors, Inc. dated
November 1, 1996
Filing: Post-Effective Amendment No. 21 to Registration
Statement on Form N-1A
File No. 33-18516
Filing Date: January 31, 1997
(vii) Forms of Dealer Agreements effective as of March 1, 1998 between
Franklin/Templeton Distributors, Inc. and Securities Dealers
Filing: Post-Effective Amendment No. 26 to Registration
Statement on Form N-1A
File No. 33-18516
Filing Date: December 24, 1998
(F) BONUS OR PROFIT SHARING CONTRACTS
Not Applicable
(G) CUSTODIAN AGREEMENTS
(i) Master Custody Agreement between Registrant and Bank of New York
dated February 16, 1996
Filing: Post-Effective Amendment No. 26 to Registration
Statement on Form N-1A
File No. 33-18516
Filing Date: December 24, 1998
(ii) Amendment dated May 7, 1997 to Master Custody Agreement between
Registrant and Bank of New York dated February 16, 1996
Filing: Post-Effective Amendment No. 26 to Registration
Statement on Form N-1A
File No. 33-18516
Filing Date: December 24, 1998
(iii) Amendment dated February 27, 1998 to Master Custody Agreement
between Registrant and Bank of New York dated February 16, 1996
Filing: Post-Effective Amendment No. 26 to Registration
Statement on Form N-1A
File No. 33-18516
Filing Date: December 24, 1998
(H) OTHER MATERIAL CONTRACTS
Not Applicable
(I) LEGAL OPINION
(i) Opinion and Consent of Counsel dated February 5, 1999
(J) OTHER OPINIONS
(i) Consent of Independent Auditors
(K) OMITTED FINANCIAL STATEMENTS
Not Applicable
(L) INITIAL CAPITAL AGREEMENTS
(i) Form of Subscription Agreement by Sole Shareholder
Filing: Post-Effective Amendment No. 22 to Registration
Statement on Form N-1A
File No. 33-18516
Filing Date: April 30, 1997
(M) RULE 12B-1 PLAN
(i) Distribution Plan pursuant to Rule 12b-1 between the Registrant
on behalf of Mutual Financial Services Fund - Class I and
Franklin Templeton/Distributors, Inc. dated August 19, 1997
Filing: Post-Effective Amendment No. 24 to Registration
Statement on Form N-1A
File No. 33-18516
Filing Date: February 19, 1998
(ii) Distribution Plan pursuant to Rule 12b-1 between the Registrant
on behalf of Mutual Financial Services Fund - Class II and
Franklin Templeton/Distributors, Inc. dated August 19, 1997
Filing: Post-Effective Amendment No. 24 to Registration
Statement on Form N-1A
File No. 33-18516
Filing Date: February 19, 1997
(iii) Distribution Plan pursuant to Rule 12b-1 between the Registrant
on behalf of Mutual Shares Fund - Class I and Franklin
Templeton/Distributors, Inc. dated November 1, 1996
Filing: Post-Effective Amendment No. 21 to the Registration
Statement on Form N-1A
File No. 33-18516
Filing Date: January 31, 1998
(iv) Distribution Plan pursuant to Rule 12b-1 between the Registrant
on behalf of Mutual Beacon Fund - Class I and Franklin/Templeton
Distributors, Inc. dated November 1, 1996
Filing: Post-Effective Amendment No. 21 to the Registration
Statement on Form N-1A
File No. 33-18516
Filing Date: January 31, 1997
(v) Distribution Plan pursuant to Rule 12b-1 between the Registrant
on behalf of Mutual Qualified Fund - Class I and Franklin
Templeton/Distributors, Inc dated November 1, 1996
Filing: Post-Effective Amendment No. 21 to the Registration
Statement on Form N-1A
File No. 33-18516
Filing Date: January 31, 1997
(vi) Distribution Plan pursuant to Rule 12b-1 between the Registrant
on behalf of Mutual Discovery Fund - Class I and
Franklin/Templeton Distributors, Inc. dated November 1, 1996
Filing: Post-Effective Amendment No. 21 to the Registration
Statement on Form N-1A
File No. 33-18516
Filing Date: January 31, 1997
(vii) Distribution Plan pursuant to Rule 12b-1 between the Registrant
on behalf of Mutual European Fund - Class I and
Franklin/Templeton Distributors, Inc. dated November 1, 1996
Filing: Post-Effective Amendment No. 21 to the Registration
Statement on Form N-1A
File No. 33-18516
Filing Date: January 31, 1997
(viii) Distribution Plan pursuant to Rule 12b-1 between the Registrant
on behalf of Mutual Shares Fund - Class II and Franklin/Templeton
Distributors, Inc. dated November 1, 1996
Filing: Post-Effective Amendment No. 23 to the Registration
Statement on Form N-1A
File No. 33-18516
Filing Date: June 5, 1997
(ix) Distribution Plan pursuant to Rule 12b-1 between the Registrant
on behalf of Mutual Qualified Fund - Class II and
Franklin/Templeton Distributors, Inc. dated November 1, 1996
Filing: Post-Effective Amendment No. 23 to the Registration
Statement on Form N-1A
File No. 33-18516
Filing Date: June 5, 1997
(x) Distribution Plan pursuant to Rule 12b-1 between the Registrant
on behalf of Mutual Beacon Fund - Class II and Franklin/Templeton
Distributors, Inc. dated November 1, 1996
Filing: Post-Effective Amendment No. 23 to the Registration
Statement on Form N-1A
File No. 33-18516
Filing Date: June 5, 1997
(xi) Distribution Plan pursuant to Rule 12b-1 between the Registrant
on behalf of Mutual Discovery Fund - Class II and
Franklin/Templeton Distributors, Inc. dated November 1, 1996
Filing: Post-Effective Amendment No. 23 to the Registration
Statement on Form N-1A
File No. 33-18516
Filing Date: June 5, 1997
(xii) Distribution Plan pursuant to Rule 12b-1 between the Registrant
on behalf of Mutual European Fund - Class II and
Franklin/Templeton Distributors, Inc. dated November 1, 1996
Filing: Post-Effective Amendment No. 23 to the Registration
Statement on Form N-1A
File No. 33-18516
Filing Date: June 5, 1997
(xiii) Distribution Plan pursuant to Rule 12b-1 between the Registrant
on behalf of Mutual Shares Fund - Class B and Franklin/Templeton
Distributors,Inc. dated October 25, 1998
(xiv) Distribution Plan pursuant to Rule 12b-1 between the Registrant
on behalf of Mutual Qualified Fund - Class B and
Franklin/Templeton Distributors,Inc. dated October 25, 1998
(xv) Distribution Plan pursuant to Rule 12b-1 between the Registrant
on behalf of Mutual Discovery Fund - Class B and
Franklin/Templeton Distributors,Inc. dated October 25, 1998
(xvi) Distribution Plan pursuant to Rule 12b-1 between the Registrant
on behalf of Mutual Beacon Fund - Class B and Franklin/Templeton
Distributors,Inc. dated October 25, 1998
(xvii) Distribution Plan pursuant to Rule 12b-1 between the Registrant
on behalf of Mutual European Fund - Class B and
Franklin/Templeton Distributors,Inc. dated October 25, 1998
(xviii) Distribution Plan pursuant to Rule 12b-1 between the Registrant
on behalf of Mutual Financial Services Fund - Class B and
Franklin/Templeton Distributors,Inc. dated October 25, 1998
(O) COPIES OF ANY PLAN ENTERED INTO BY REGISTRANT PURSUANT TO RULE 18F-3
UNDER THE 1940 ACT.
(i) Multiple Class Plan dated October 25, 1998 on behalf of Mutual
Shares Fund
(ii) Multiple Class Plan dated October 25, 1998 on behalf of Mutual
Qualified Fund
(iii) Multiple Class Plan dated October 25, 1998 on behalf of Mutual
Discovery Fund
(iv) Multiple Class Plan dated October 25, 1998 on behalf of Mutual
Beacon Fund
(v) Multiple Class Plan dated October 25, 1998 on behalf of Mutual
European Fund
(vi) Multiple Class Plan dated October 25, 1998 on behalf of Mutual
Financial Services Fund
(P) POWER OF ATTORNEY;
(i) Power of Attorney
Filing: Post-Effective Amendment No. 22 to Registration Statement
on Form N-1A
File No. 33-18516
Filing Date: April 30, 1997
(ii) Certificate of Secretary
Filing: Post-Effective Amendment No. 22 to Registration Statement
on Form N-1A
File No. 33-18516
Filing Date: April 30, 1997
(27) Financial Data Schedule
(i) Financial Data Schedule for Mutual Shares Fund - Class A
(ii) Financial Data Schedule for Mutual Shares Fund - Class C
(iii) Financial Data Schedule for Mutual Shares Fund - Class Z
(iv) Financial Data Schedule for Mutual Qualified Fund - Class A
(v) Financial Data Schedule for Mutual Qualified Fund - Class C
(vi) Financial Data Schedule for Mutual Qualified Fund - Class Z
(vii) Financial Data Schedule for Mutual Beacon Fund - Class A
(viii) Financial Data Schedule for Mutual Beacon Fund - Class C
(ix) Financial Data Schedule for Mutual Beacon Fund - Class Z
(x) Financial Data Schedule for Mutual Financial Services Fund -
Class A
(xi) Financial Data Schedule for Mutual Financial Services Fund -
Class C
(xii) Financial Data Schedule for Mutual Financial Services Fund -
Class Z
(xiii) Financial Data Schedule for Mutual European Fund - Class A
(xiv) Financial Data Schedule for Mutual European Fund - Class C
(xv) Financial Data Schedule for Mutual European Fund - Class Z
(xvi) Financial Data Schedule for Mutual Discovery Fund - Class A
(xvii) Financial Data Schedule for Mutual Discovery Fund - Class C
(xviii)Financial Data Schedule for Mutual Discovery Fund - Class Z
ITEM 24 PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH THE FUND
None
ITEM 26. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
The officers and directors of the Registrant's manager also serve as officers
and directors for (1) the manager's corporate parent, Franklin Resources,
Inc., and/or (2) other investment companies in the Franklin Templeton Group
of Funds. In addition Mr. Charles B. Johnson was formerly a director of
General Host Corporation. For additional information please see Part B and
Schedules A and D of Form ADV of the Funds' Investment Manager (SEC File
801-53068), incorporated herein by reference, which sets forth the officers
and directors of the Investment Manager and information as to any business,
profession, vocation or employment of a substantial nature engaged in by
those officers and directors during the past two years.
ITEM 27. PRINCIPAL UNDERWRITERS
a) Franklin/Templeton Distributors, Inc., ("Distributors") also acts as
principal underwriter of shares of:
Franklin Asset Allocation Fund
Franklin California Tax-Free Income Fund, Inc.
Franklin California Tax-Free Trust
Franklin Custodian Funds, Inc.
Franklin Equity Fund
Franklin Federal Money Fund
Franklin Federal Tax-Free Income Fund
Franklin Floating Rate Trust
Franklin Gold Fund
Franklin High Income Trust
Franklin Investors Securities Trust
Franklin Managed Trust
Franklin Money Fund
Franklin Mutual Series Fund Inc.
Franklin Municipal Securities Trust
Franklin New York Tax-Free Income Fund
Franklin New York Tax-Free Trust
Franklin Real Estate Securities Trust
Franklin Strategic Mortgage Portfolio
Franklin Strategic Series
Franklin Tax-Exempt Money Fund
Franklin Tax-Free Trust
Franklin Templeton Fund Allocator Series
Franklin Templeton Global Trust
Franklin Templeton International Trust
Franklin Templeton Money Fund Trust
Franklin Value Investors Trust
Institutional Fiduciary Trust
Templeton American Trust, Inc.
Templeton Capital Accumulator Fund, Inc.
Templeton Developing Markets Trust
Templeton Funds, Inc.
Templeton Global Investment Trust
Templeton Global Opportunities Trust
Templeton Global Real Estate Fund
Templeton Global Smaller Companies Fund, Inc.
Templeton Growth Fund, Inc.
Templeton Income Trust
Templeton Institutional Funds, Inc.
b) The information required by this item 29 with respect to each director
and officer of Distributors is incorporated by reference to Part B of
this N-1A and Schedule A of Form BD filed by Distributors with the
Securities and Exchange Commission pursuant to the Securities Act of
1934 (SEC File No.8-5889).
c) Not applicable. Registrant's principal underwriter is an affiliated
person of an affiliated person of the Registrant.
ITEM 28. LOCATION OF ACCOUNTS AND RECORDS
All accounts, books and other documents required to be maintained by Section
31(a) of the Investment Company Act of 1940 and the rules thereunder will be
maintained at the offices of Franklin Mutual Series Fund Inc., located at 51
John F. Kennedy Parkway, Short Hills, New Jersey 07078, or at
Franklin/Templeton Investor Services, Inc., 777 Mariners island Boulevard,
San Mateo, California 94404.
ITEM 29. MANAGEMENT SERVICES
There are no management-related service contracts not discussed in Part A or
Part B.
ITEM 30. UNDERTAKINGS
Not Applicable
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, the Registrant has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized in the City of San Mateo and the State of California, on the 1st
day of March, 1999.
FRANKLIN MUTUAL SERIES FUND INC.
(Registrant)
By: PETER A. LANGERMAN*
Peter A. Langerman
Executive Vice President
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed below by the following persons in the capacities
and on the date indicated:
PETER A. LANGERMAN* Principal Executive Officer and Peter
A. Langerman Director
Dated: March 1, 1999
JAMES R. BAIO* Principal Financial and
James R. Baio Accounting Officer
Dated: March 1, 1999
EDWARD I. ALTMAN* Director
Edward I. Altman Dated: March 1, 1999
ANN TORRE GRANT* Director
Ann Torre Grant Dated: March 1, 1999
ANDREW H. HINES, JR.* Director
Andrew H. Hines, Jr. Dated: March 1, 1999
WILLIAM J. LIPPMAN* Director
William J. Lippman Dated: March 1, 1999
BRUCE A. MACPHERSON* Director
Bruce A. MacPherson Dated: March 1, 1999
FRED R. MILLSAPS* Director
Fred R. Millsaps Dated: March 1, 1999
MICHAEL F. PRICE* Director
Michael F. Price Dated: March 1, 1999
CHARLES RUBENS III Director
Charles Rubens III Dated: March 1, 1999
LEONARD RUBIN* Director
Leonard Rubin Dated: March 1, 1999
VAUGHN R. STURTEVANT*, M.D. Director
Vaughn R. Sturtevant, M.D. Dated: March 1, 1999
ROBERT E. WADE* Director
Robert E. Wade Dated: March 1, 1999
*By: /S/ LARRY L. GREENE
Larry L. Greene, Attorney-in-Fact
(Pursuant to Powers of Attorney previously filed)
FRANKLIN MUTUAL SERIES FUND INC.
REGISTRATION STATEMENT
EXHIBITS INDEX
EXHIBIT NO. DESCRIPTION LOCATION
EX-99.(a)(i) Articles of Incorporation *
EX-99.(a)(ii) Articles of Amendment *
EX-99.(a)(iii) Articles supplementary *
EX-99.(a)(iv) Articles supplementary *
EX-99.(a)(v) Articles supplementary *
EX-99.(b)(i) By-Laws *
EX-99.(d)(i) Investment Advisory Agreement between Franklin *
Mutual Advisers, Inc. and the Registrant on
behalf of Mutual Shares Fund dated November 1,
1996
EX-99.(d)(ii) Investment Advisory Agreement between Franklin *
Mutual Advisers, Inc. and the Registrant on
behalf of Mutual Qualified Fund dated November
1, 1996
EX-99.(d)(iii) Investment Advisory Agreement between Franklin *
Mutual Advisers, Inc. and the Registrant on
behalf of Mutual Beacon Fund dated November 1,
1996
EX-99.(d)(iv) Investment Advisory Agreement between Franklin *
Mutual Advisers, Inc. and the Registrant on
behalf of Mutual Discovery Fund dated November
1, 1996
EX-99.(d)(v) Investment Advisory Agreement between Franklin *
Mutual Advisers, Inc. and the Registrant on
behalf of Mutual European Fund dated November
1, 1996
EX-99.(d)(vi) Investment Advisory Agreement between Franklin *
Mutual Advisers, Inc. and the Registrant on
behalf of Mutual Financial Services Fund dated
August 1, 1997
EX-99.(d)(vii) Administration Agreement between Franklin *
Templeton Services, Inc. and Registrant on
behalf of Mutual Shares Fund dated November 1,
1996
EX-99.(d)(viii) Administration Agreement between Franklin *
Templeton Services, Inc. and Registrant on
behalf of Mutual Qualified Fund dated November
1, 1996
EX-99.(d)(ix) Administration Agreement between Franklin *
Templeton Services, Inc. and Registrant on
behalf of Mutual Beacon Fund dated November 1,
1996
EX-99.(d)(x) Administration Agreement between Franklin *
Templeton Services, Inc. and Registrant on
behalf of Mutual Discovery Fund dated November
1, 1996
EX-99.(d)(xi) Administration Agreement between Franklin *
Templeton Services, Inc. and Registrant on
behalf of Mutual European Fund dated November
1, 1996
EX-99.(d)(xii) Administration Agreement between Franklin *
Templeton Services, Inc. and Registrant on
behalf of Mutual Financial Services Fund dated
August 1, 1997
EX-99.(e)(i) Distribution Agreement between Registrant on *
behalf of Mutual Financial Services Fund and
Franklin/Templeton Distributors, Inc. dated
August 19, 1997
EX-99.(e)(ii) Distribution Agreement between Registrant on *
behalf of Mutual Shares Fund and
Franklin/Templeton Distributors, Inc. dated
November 1, 1996
EX-99.(e)(iii) Distribution Agreement between Registrant on *
behalf of Mutual Beacon Fund and
Franklin/Templeton Distributors, Inc. dated
November 1, 1996
EX-99.(e)(iv) Distribution Agreement between Registrant on *
behalf of Mutual Qualified Fund and
Franklin/Templeton Distributors, Inc. dated
November 1, 1996
EX-99.(e)(v) Distribution Agreement between Registrant on *
behalf of Mutual Discovery Fund and
Franklin/Templeton Distributors, Inc. dated
November 1, 1996
EX-99.(e)(vi) Distribution Agreement between Registrant on *
behalf of Mutual European Fund and
Franklin/Templeton Distributors, Inc. dated
November 1, 1996
EX-99.(e)(vii) Forms of Dealer Agreements effective as of *
March 1, 1998 between Franklin/Templeton
Distributors, Inc. and dealers
EX-99.(g)(i) Master Custody Agreement between Registrant *
and Bank of New York dated February 16, 1996
EX-99.(g)(ii) Amendment dated May 7, 1997 to Master Custody *
Agreementbetween Registrant and Bank of New
York dated February 16, 1996
EX-99.(g)(iii) Amendment dated February 27, 1998 to Master *
Custody Agreement between Registrant and Bank
of New York dated February 16, 1996
EX-99.(i)(i) Opinion and Consent of Counsel Attached
EX-99.(j)(i) Consent of Independent Auditors Attached
EX-99.(m)(i) Distribution Plan pursuant to Rule 12b-1 *
between the Registrant on behalf of Mutual
Financial Services Fund - Class I and
Franklin/Templeton Distributors, Inc. dated
August 19, 1997
EX-99.(m)(ii) Distribution Plan pursuant to Rule 12b-1 *
between the Registrant on behalf of Mutual
Financial Services Fund - Class II and
Franklin/Templeton Distributors, Inc. dated
August 19, 1997
EX-99.(m)(iii) Distribution Plan pursuant to Rule 12b-1 *
between the Registrant on behalf of Mutual
Shares Fund - Class I and Franklin/Templeton
Distributors, Inc. dated August 19, 1997
EX-99.(m)(iv) Distribution Plan pursuant to Rule 12b-1 *
between the Registrant on behalf of Mutual
Qualified Fund - Class I and
Franklin/Templeton Distributors, Inc. dated
November 1, 1996
EX-99.(m)(v) Distribution Plan pursuant to Rule 12b-1 *
between the Registrant on behalf of Mutual
Beacon Fund - Class I and Franklin/Templeton
Distributors, Inc. dated November 1, 1996
EX-99.(m)(vi) Distribution Plan pursuant to Rule 12b-1 *
between the Registrant on behalf of Mutual
Discovery Fund - Class I and
Franklin/Templeton Distributors, Inc. dated
November 1, 1996
EX-99.(m)(vii) Distribution Plan pursuant to Rule 12b-1 *
between the Registrant on behalf of Mutual
European Fund - Class I and Franklin/Templeton
Distributors, Inc. dated November 1, 1996
EX-99.(m)(viii) Distribution Plan pursuant to Rule 12b-1 *
between the Registrant on behalf of Mutual
Shares Fund - Class II and Franklin/Templeton
Distributors, Inc. dated November 1, 1996
EX-99.(m)(ix) Distribution Plan pursuant to Rule 12b-1 *
between the Registrant on behalf of Mutual
Qualified Fund - Class II and
Franklin/Templeton Distributors, Inc. dated
November 1, 1996
EX-99.(m)(x) Distribution Plan pursuant to Rule 12b-1 *
between the Registrant on behalf of Mutual
Beacon Fund - Class II and Franklin/Templeton
Distributors, Inc. dated November 1, 1996
EX-99.(m)(xi) Distribution Plan pursuant to Rule 12b-1 *
between the Registrant on behalf of Mutual
Discovery Fund - Class II and
Franklin/Templeton Distributors, Inc. dated
November 1, 1996
EX-99.(m)(xii) Distribution Plan pursuant to Rule 12b-1 *
between the Registrant on behalf of Mutual
European Fund - Class II and
Franklin/Templeton Distributors, Inc. dated
November 1, 1996
EX-99.(m)(xiii) Distribution Plan pursuant to Rule 12b-1 Attached
between the Registrant on behalf of Mutual
Shares Fund - Class B and Franklin/Templeton
Distributors,Inc. dated October 25, 1998
EX-99.(m)(xiv) Distribution Plan pursuant to Rule 12b-1 Attached
between the Registrant on behalf of Mutual
Qualified Fund - Class B and
Franklin/Templeton Distributors,Inc. dated
October 25, 1998
EX-99.(m)(xv) Distribution Plan pursuant to Rule 12b-1 Attached
between the Registrant on behalf of Mutual
Discovery Fund - Class B and
Franklin/Templeton Distributors,Inc. dated
October 25, 1998
EX-99.(m)(xvi) Distribution Plan pursuant to Rule 12b-1 Attached
between the Registrant on behalf of Mutual
Beacon Fund - Class B and Franklin/Templeton
Distributors,Inc. dated October 25, 1998
EX-99.(m)(xvii) Distribution Plan pursuant to Rule 12b-1 Attached
between the Registrant on behalf of Mutual
European Fund - Class B and Franklin/Templeton
Distributors,Inc. dated October 25, 1998
EX-99.(m)(xviii) Distribution Plan pursuant to Rule 12b-1 Attached
between the Registrant on behalf of Mutual
Financial Services Fund - Class B and
Franklin/Templeton Distributors, Inc. dated
October 25, 1998
EX-99.(o)(i) Multiple Class Plan dated October 25, 1998 on Attached
behalf of Mutual Shares Fund
EX-99.(o)(ii) Multiple Class Plan dated October 25, 1998 on Attached
behalf of Mutual Qualified Fund
EX-99.(o)(iii) Multiple Class Plan dated October 25, 1998 on Attached
behalf of Mutual Discovery Fund
EX-99.(o)(iv) Multiple Class Plan dated October 25, 1998 on Attached
behalf of Mutual Beacon Fund
EX-99.(o)(v) Multiple Class Plan dated October 25, 1998 on Attached
behalf of Mutual European Fund
EX-99.(o)(vi) Multiple Class Plan dated October 25 1998 on Attached
behalf of Mutual Financial Services Fund
EX-99.(p)(i) Power of Attorney *
EX-99.(p)(ii) Certificate of Secretary *
EX-27.(i) Financial Data Schedule for Mutual Shares Fund Attached
- Class A
EX-27.(ii) Financial Data Schedule for Mutual Shares Fund Attached
- Class C
EX-27.(iii) Financial Data Schedule for Mutual Shares Fund Attached
- Class Z
EX-27.(iv) Financial Data Schedule for Mutual Qualified Attached
Fund - Class A
EX-27.(v) Financial Data Schedule for Mutual Qualified Attached
Fund - Class C
EX-27.(vi) Financial Data Schedule for Mutual Qualified Attached
Fund - Class Z
EX-27.(vii) Financial Data Schedule for Mutual Beacon Fund Attached
- Class A
EX-27.(viii) Financial Data Schedule for Mutual Beacon Fund Attached
- Class C
EX-27.(ix) Financial Data Schedule for Mutual Beacon Fund Attached
- Class Z
EX-27.(x) Financial Data Schedule for Mutual Financial Attached
Services Fund - Class A
EX-27.(xi) Financial Data Schedule for Mutual Financial Attached
Services Fund - Class C
EX-27.(xii) Financial Data Schedule for Mutual Financial Attached
Services Fund - Class Z
EX-27.(xiii) Financial Data Schedule for Mutual European Attached
Fund - Class A
EX-27.(xiv) Financial Data Schedule for Mutual European Attached
Fund - Class C
EX-27.(xv) Financial Data Schedule for Mutual European Attached
Fund - Class Z
EX-27.(xvi) Financial Data Schedule for Mutual Discovery Attached
Fund - Class A
EX-27.(xvii) Financial Data Schedule for Mutual Discovery Attached
Fund - Class C
EX-27.(xviii) Financial Data Schedule for Mutual Discovery Attached
Fund - Class Z
* Incorporated by reference
Law Offices
STRADLEY, RONON, STEVENS & YOUNG, LLP
2600 One Commerce Square
Philadelphia, Pennsylvania 19103-7098
(215) 564-8000
Direct Dial: (215) 564-8115
February 5, 1999
Franklin Mutual Series Fund, Inc.
777 Mariners Island Blvd.
San Mateo, CA 94403-7777
Re: LEGAL OPINION-SECURITIES ACT OF 1933
Ladies and Gentlemen:
We have examined the Articles of Incorporation, as amended and supplemented,
(the "Articles") of the Franklin Mutual Series Fund, Inc. (the "Fund"), a series
corporation organized under the laws of the State of Maryland on November 12,
1987, the By-Laws of the Fund, and the resolutions adopted by the Fund's Board
of Directors organizing the business of the Fund, all as amended to date, and
the various pertinent proceedings we deem material. We have also examined the
Notification of Registration and the Registration Statements filed under the
Investment Company Act of 1940 (the "Investment Company Act") and the Securities
Act of 1933 (the "Securities Act"), all as amended to date, as well as other
items we deem material to this opinion.
The Fund is authorized by its Articles to issue five billion nine hundred and
fifty million (5,950,000,000) shares of common stock with a par value of $.001
per share. The Fund issues shares of series designated Mutual Shares Fund,
Mutual Qualified Fund, Mutual Beacon Fund, Mutual Discovery Fund, Mutual
European Fund and Mutual Financial Services Fund. The Articles designate, or
authorize the Directors to designate, one or more series or classes of shares of
the Fund, and allocate, or authorizes the Directors to allocate, shares of
common stock to each such series or class. The Articles also empower the
Directors to designate any additional series or classes and allocate shares to
such series or classes.
The Fund has filed with the U.S. Securities and Exchange Commission (the
"Commission"), a Registration Statement under the Securities Act, which
Registration Statement is deemed to register an indefinite number of shares of
the Fund pursuant to the provisions of Rule 24f-2 under the Investment Company
Act. You have further advised us that the Fund has filed, and each year
hereafter will timely file, a Notice pursuant to Rule 24f-2 perfecting the
registration of the shares sold by the Fund during each fiscal year during which
such registration of an indefinite number of shares remains in effect.
You have also informed us that the shares of the Fund have been, and will
continue to be, sold in accordance with the Fund's usual method of distributing
its registered shares, under which prospectuses are made available for delivery
to offerees and purchasers of such shares in accordance with Section 5(b) of the
Securities Act.
Based upon the foregoing information and examination, so long as the Fund
remains a valid and subsisting corporation under the laws of the State of
Maryland, and the registration of an indefinite number of shares of the Fund
remains effective, the authorized shares of the Fund when issued for the
consideration set by the Board of Directors pursuant to the Articles, and
subject to compliance with Rule 24f-2, will be legally outstanding, fully-paid,
and non-assessable shares, and the holders of such shares will have all the
rights provided for with respect to such holding by the Articles and the laws of
the State of Maryland.
We hereby consent to the use of this opinion as an exhibit to the Registration
Statement of the Fund, and any amendments thereto, covering the registration of
the shares of the Fund under the Securities Act and the applications,
registration statements or notice filings, and amendments thereto, filed in
accordance with the securities laws of the several states in which shares of the
Fund are offered, and we further consent to reference in the registration
statement of the Fund to the fact that this opinion concerning the legality of
the issue has been rendered by us.
Very truly yours,
STRADLEY, RONON, STEVENS & YOUNG, LLP
BY: /s/ BRUCE G. LETO
Bruce G. Leto
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the references to our firm under the captions "Financial
Highlights" in the Class Z and Class A, B and C Prospectuses and "Management and
Other Services" in the Class Z and Class A, B and C Statements of Additional
Information, and to the incorporation by reference in the Post-Effective
Amendment No. 27 to Registration Statement Number 33-18516 on Form N1-A of our
reports dated January 29, 1999, on the financial statements and financial
highlights of Mutual Shares Fund, Mutual Qualified Fund, Mutual Beacon Fund,
Mutual Discovery Fund, Mutual European Fund, and Mutual Financial Services Fund
(each a portfolio of Franklin Mutual Series Fund Inc.) included in the 1998
Annual Report to Shareholders.
/s/ERNST & YOUNG LLP
ERNST & YOUNG LLP
Boston, Massachusetts
February 26, 1999
CLASS B DISTRIBUTION PLAN
I. Investment Company: FRANKLIN MUTUAL SERIES FUND INC.
II. Fund: MUTUAL SHARES FUND
III. Maximum Per Annum Rule 12b-1 Fees for Class B Shares
(as a percentage of average daily net assets of the class)
A. Distribution Fee: 0.75%
B. Service Fee: 0.25%
PREAMBLE TO CLASS B DISTRIBUTION PLAN
The following Distribution Plan (the "Plan") has been adopted pursuant to
Rule 12b-1 under the Investment Company Act of 1940 (the "Act") by the
Investment Company named above ("Investment Company") for the class B shares
(the "Class") of the Fund named above ("Fund"), which Plan shall take effect as
of the date Class B shares are first offered (the "Effective Date of the Plan").
The Plan has been approved by a majority of the Board of Directors of the
Investment Company (the "Board"), including a majority of the Board members who
are not interested persons of the Investment Company and who have no direct, or
indirect financial interest in the operation of the Plan (the "non-interested
Board members"), cast in person at a meeting called for the purpose of voting on
such Plan.
In reviewing the Plan, the Board considered the schedule and nature of
payments and terms of the Investment Advisory Agreement between the Investment
Company and Franklin Mutual Advisers, Inc. and the terms of the Underwriting
Agreement between the Investment Company and Franklin/Templeton Distributors,
Inc. ("Distributors"). The Board concluded that the compensation of Advisers,
under the Investment Advisory Agreement, and of Distributors, under the
Underwriting Agreement, was fair and not excessive. The approval of the Plan
included a determination that in the exercise of their reasonable business
judgment and in light of their fiduciary duties, there is a reasonable
likelihood that the Plan will benefit the Fund and its shareholders.
The Board recognizes that Distributors has entered into an arrangement with
a third party in order to finance the distribution activities of the Class
pursuant to which Distributors may assign its rights to the fees payable
hereunder to such third party. The Board further recognizes that it has an
obligation to act in good faith and in the best interests of the Fund and its
shareholders when considering the continuation or termination of the Plan and
any payments to be made thereunder.
DISTRIBUTION PLAN
1. (a) The Fund shall pay to Distributors a monthly fee not to exceed the
above-stated maximum distribution fee per annum of the Class' average daily net
assets represented by shares of the Class, as may be determined by the Board
from time to time.
(b) In addition to the amounts described in (a) above, the Fund shall pay
(i) to Distributors for payment to dealers or others, or (ii) directly to
others, an amount not to exceed the above-stated maximum service fee per annum
of the Class' average daily net assets represented by shares of the Class, as
may be determined by the Investment Company's Board from time to time, as a
service fee pursuant to servicing agreements which have been approved from time
to time by the Board, including the non-interested Board members.
2. (a) The monies paid to Distributors pursuant to Paragraph 1(a) above
shall be treated as compensation for Distributors' distribution-related services
including compensation for amounts advanced to securities dealers or their firms
or others selling shares of the Class who have executed an agreement with the
Investment Company, Distributors or its affiliates, which form of agreement has
been approved from time to time by the Board, including the non-interested Board
members, with respect to the sale of Class shares. In addition, such monies may
be used to compensate Distributors for other expenses incurred to assist in the
distribution and promotion of shares of the Class. Payments made to Distributors
under the Plan may be used for, among other things, the printing of prospectuses
and reports used for sales purposes, expenses of preparing and distributing
sales literature and related expenses, advertisements, and other
distribution-related expenses, including a pro-rated portion of Distributors'
overhead expenses attributable to the distribution of Class shares, as well as
for additional distribution fees paid to securities dealers or their firms or
others who have executed agreements with the Investment Company, Distributors or
its affiliates, or for certain promotional distribution charges paid to
broker-dealer firms or others, or for participation in certain distribution
channels. None of such payments are the legal obligation of Distributors or its
designee.
(b) The monies to be paid pursuant to paragraph 1(b) above shall be used to
pay dealers or others for, among other things, furnishing personal services and
maintaining shareholder accounts, which services include, among other things,
assisting in establishing and maintaining customer accounts and records;
assisting with purchase and redemption requests; arranging for bank wires;
monitoring dividend payments from the Fund on behalf of customers; forwarding
certain shareholder communications from the Fund to customers; receiving and
answering correspondence; and aiding in maintaining the investment of their
respective customers in the Class. Any amounts paid under this paragraph 2(b)
shall be paid pursuant to a servicing or other agreement, which form of
agreement has been approved from time to time by the Board. None of such
payments are the legal obligation of Distributors or its designee.
3. In addition to the payments which the Fund is authorized to make
pursuant to paragraphs 1 and 2 hereof, to the extent that the Fund, Advisers,
Distributors or other parties on behalf of the Fund, Advisers or Distributors
make payments that are deemed to be payments by the Fund for the financing of
any activity primarily intended to result in the sale of Class shares issued by
the Fund within the context of Rule 12b-1 under the Act, then such payments
shall be deemed to have been made pursuant to the Plan.
In no event shall the aggregate asset-based sales charges which include
payments specified in paragraphs 1 and 2, plus any other payments deemed to be
made pursuant to the Plan under this paragraph, exceed the amount permitted to
be paid pursuant to Rule 2830(d) of the Conduct Rules of the National
Association of Securities Dealers, Inc.
4. Distributors shall furnish to the Board, for its review, on a quarterly
basis, a written report of the monies paid to it and to others under the Plan,
and shall furnish the Board with such other information as the Board may
reasonably request in connection with the payments made under the Plan in order
to enable the Board to make an informed determination of whether the Plan should
be continued.
5.(a) Distributors may assign, transfer or pledge ("Transfer") to one or
more designees (each an "Assignee"), its rights to all or a designated portion
of the fees to which it is entitled under paragraph 1 of this Plan from time to
time (but not Distributors' duties and obligations pursuant hereto or pursuant
to any distribution agreement in effect from time to time, if any, between
Distributors and the Fund), free and clear of any offsets or claims the Fund may
have against Distributors. Each such Assignee's ownership interest in a Transfer
of a specific designated portion of the fees to which Distributors is entitled
is hereafter referred to as an "Assignee's 12b-1 Portion." A Transfer pursuant
to this Section 5(a) shall not reduce or extinguish any claims of the Fund
against Distributors.
(b) Distributors shall promptly notify the Fund in writing of each such
Transfer by providing the Fund with the name and address of each such Assignee.
(c) Distributors may direct the Fund to pay any Assignee's 12b-1 Portion
directly to each Assignee. In such event, Distributors shall provide the Fund
with a monthly calculation of the amount to which each Assignee is entitled (the
"Monthly Calculation"). In such event, the Fund shall, upon receipt of such
notice and Monthly Calculation from Distributors, make all payments required
directly to the Assignee in accordance with the information provided in such
notice and Monthly Calculation upon the same terms and conditions as if such
payments were to be paid to Distributors.
(d) Alternatively, in connection with a Transfer, Distributors may direct
the Fund to pay all or a portion of the fees to which Distributors is entitled
from time to time to a depository or collection agent designated by any
Assignee, which depository or collection agent may be delegated the duty of
dividing such fees between the Assignee's 12b-1 Portion and the balance (such
balance, when distributed to Distributors by the depository or collection agent,
the "Distributors' 12b-1 Portion"), in which case only Distributors' 12b-1
Portion may be subject to offsets or claims the Fund may have against
Distributors.
6. The Plan shall continue in effect for a period of more than one year
only so long as such continuance is specifically approved at least annually by
the Board, including the non-interested Board members, cast in person at a
meeting called for the purpose of voting on the Plan. In determining whether
there is a reasonable likelihood that the continuation of the Plan will benefit
the Fund and its shareholders, the Board may, but is not obligated to, consider
that Distributors has incurred substantial cost and has entered into an
arrangement with a third party in order to finance the distribution activities
for the Class.
7. This Plan and any agreements entered into pursuant to this Plan may be
terminated with respect to the shares of the Class, without penalty, at any time
by vote of a majority of the non-interested Board members of the Investment
Company, or by vote of a majority of outstanding Shares of such Class. Upon
termination of this Plan with respect to the Class, the obligation of the Fund
to make payments pursuant to this Plan with respect to such Class shall
terminate, and the Fund shall not be required to make payments hereunder beyond
such termination date with respect to expenses incurred in connection with Class
shares sold prior to such termination date, provided, in each case that each of
the requirements of a Complete Termination of this Plan in respect of such
Class, as defined below, are met. For purposes of this Section 7, a "Complete
Termination" of this Plan in respect of the Class shall mean a termination of
this Plan in respect of such Class, provided that: (i) the non-interested Board
members of the Investment Company shall have acted in good faith and shall have
determined that such termination is in the best interest of the Investment
Company and the shareholders of the Fund and the Class; (ii) and the Investment
Company does not alter the terms of the contingent deferred sales charges
applicable to Class shares outstanding at the time of such termination; and
(iii) unless Distributors at the time of such termination was in material breach
under the distribution agreement in respect of the Fund, the Fund shall not, in
respect of such Fund, pay to any person or entity, other than Distributors or
its designee, either the payments described in paragraph 1(a) or 1(b) or in
respect of the Class shares sold by Distributors prior to such termination.
8. The Plan, and any agreements entered into pursuant to this Plan, may not
be amended to increase materially the amount to be spent for distribution
pursuant to Paragraph 1 hereof without approval by a majority of the outstanding
voting securities of the Class of the Fund.
9. All material amendments to the Plan, or any agreements entered into
pursuant to this Plan, shall be approved by the non-interested Board members
cast in person at a meeting called for the purpose of voting on any such
amendment.
10. So long as the Plan is in effect, the selection and nomination of the
Fund's non-interested Board members shall be committed to the discretion of such
non-interested Board members.
This Plan and the terms and provisions thereof are hereby accepted and
agreed to by the Investment Company and Distributors as evidenced by their
execution hereof.
Date: October 25, 1998
----------------
FRANKLIN MUTUAL SERIES FUND INC.
By:___________________________
/s/ Elizabeth Cohernour
General Counsel & Secretary
FRANKLIN/TEMPLETON DISTRIBUTORS, INC.
By:__________________________
/s/ Deborah R. Gatzek
Senior Vice President &
Assistant Secretary
CLASS B DISTRIBUTION PLAN
I. Investment Company: FRANKLIN MUTUAL SERIES FUND INC.
II. Fund: MUTUAL QUALIFIED FUND
III. Maximum Per Annum Rule 12b-1 Fees for Class B Shares
(as a percentage of average daily net assets of the class)
A. Distribution Fee: 0.75%
B. Service Fee: 0.25%
PREAMBLE TO CLASS B DISTRIBUTION PLAN
The following Distribution Plan (the "Plan") has been adopted pursuant to
Rule 12b-1 under the Investment Company Act of 1940 (the "Act") by the
Investment Company named above ("Investment Company") for the class B shares
(the "Class") of the Fund named above ("Fund"), which Plan shall take effect as
of the date Class B shares are first offered (the "Effective Date of the Plan").
The Plan has been approved by a majority of the Board of Directors of the
Investment Company (the "Board"), including a majority of the Board members who
are not interested persons of the Investment Company and who have no direct, or
indirect financial interest in the operation of the Plan (the "non-interested
Board members"), cast in person at a meeting called for the purpose of voting on
such Plan.
In reviewing the Plan, the Board considered the schedule and nature of
payments and terms of the Investment Advisory Agreement between the Investment
Company and Franklin Mutual Advisers, Inc. and the terms of the Underwriting
Agreement between the Investment Company and Franklin/Templeton Distributors,
Inc. ("Distributors"). The Board concluded that the compensation of Advisers,
under the Investment Advisory Agreement, and of Distributors, under the
Underwriting Agreement, was fair and not excessive. The approval of the Plan
included a determination that in the exercise of their reasonable business
judgment and in light of their fiduciary duties, there is a reasonable
likelihood that the Plan will benefit the Fund and its shareholders.
The Board recognizes that Distributors has entered into an arrangement with
a third party in order to finance the distribution activities of the Class
pursuant to which Distributors may assign its rights to the fees payable
hereunder to such third party. The Board further recognizes that it has an
obligation to act in good faith and in the best interests of the Fund and its
shareholders when considering the continuation or termination of the Plan and
any payments to be made thereunder.
DISTRIBUTION PLAN
1.(a) The Fund shall pay to Distributors a monthly fee not to exceed the
above-stated maximum distribution fee per annum of the Class' average daily net
assets represented by shares of the Class, as may be determined by the Board
from time to time.
(b) In addition to the amounts described in (a) above, the Fund shall pay
(i) to Distributors for payment to dealers or others, or (ii) directly to
others, an amount not to exceed the above-stated maximum service fee per annum
of the Class' average daily net assets represented by shares of the Class, as
may be determined by the Investment Company's Board from time to time, as a
service fee pursuant to servicing agreements which have been approved from time
to time by the Board, including the non-interested Board members.
2.(a) The monies paid to Distributors pursuant to Paragraph 1(a) above
shall be treated as compensation for Distributors' distribution-related services
including compensation for amounts advanced to securities dealers or their firms
or others selling shares of the Class who have executed an agreement with the
Investment Company, Distributors or its affiliates, which form of agreement has
been approved from time to time by the Board, including the non-interested Board
members, with respect to the sale of Class shares. In addition, such monies may
be used to compensate Distributors for other expenses incurred to assist in the
distribution and promotion of shares of the Class. Payments made to Distributors
under the Plan may be used for, among other things, the printing of prospectuses
and reports used for sales purposes, expenses of preparing and distributing
sales literature and related expenses, advertisements, and other
distribution-related expenses, including a pro-rated portion of Distributors'
overhead expenses attributable to the distribution of Class shares, as well as
for additional distribution fees paid to securities dealers or their firms or
others who have executed agreements with the Investment Company, Distributors or
its affiliates, or for certain promotional distribution charges paid to
broker-dealer firms or others, or for participation in certain distribution
channels. None of such payments are the legal obligation of Distributors or its
designee.
(b) The monies to be paid pursuant to paragraph 1(b) above shall be used to
pay dealers or others for, among other things, furnishing personal services and
maintaining shareholder accounts, which services include, among other things,
assisting in establishing and maintaining customer accounts and records;
assisting with purchase and redemption requests; arranging for bank wires;
monitoring dividend payments from the Fund on behalf of customers; forwarding
certain shareholder communications from the Fund to customers; receiving and
answering correspondence; and aiding in maintaining the investment of their
respective customers in the Class. Any amounts paid under this paragraph 2(b)
shall be paid pursuant to a servicing or other agreement, which form of
agreement has been approved from time to time by the Board. None of such
payments are the legal obligation of Distributors or its designee.
3. In addition to the payments which the Fund is authorized to make
pursuant to paragraphs 1 and 2 hereof, to the extent that the Fund, Advisers,
Distributors or other parties on behalf of the Fund, Advisers or Distributors
make payments that are deemed to be payments by the Fund for the financing of
any activity primarily intended to result in the sale of Class shares issued by
the Fund within the context of Rule 12b-1 under the Act, then such payments
shall be deemed to have been made pursuant to the Plan.
In no event shall the aggregate asset-based sales charges which include
payments specified in paragraphs 1 and 2, plus any other payments deemed to be
made pursuant to the Plan under this paragraph, exceed the amount permitted to
be paid pursuant to Rule 2830(d) of the Conduct Rules of the National
Association of Securities Dealers, Inc.
4. Distributors shall furnish to the Board, for its review, on a quarterly
basis, a written report of the monies paid to it and to others under the Plan,
and shall furnish the Board with such other information as the Board may
reasonably request in connection with the payments made under the Plan in order
to enable the Board to make an informed determination of whether the Plan should
be continued.
5.(a) Distributors may assign, transfer or pledge ("Transfer") to one or
more designees (each an "Assignee"), its rights to all or a designated portion
of the fees to which it is entitled under paragraph 1 of this Plan from time to
time (but not Distributors' duties and obligations pursuant hereto or pursuant
to any distribution agreement in effect from time to time, if any, between
Distributors and the Fund), free and clear of any offsets or claims the Fund may
have against Distributors. Each such Assignee's ownership interest in a Transfer
of a specific designated portion of the fees to which Distributors is entitled
is hereafter referred to as an "Assignee's 12b-1 Portion." A Transfer pursuant
to this Section 5(a) shall not reduce or extinguish any claims of the Fund
against Distributors.
(b) Distributors shall promptly notify the Fund in writing of each such
Transfer by providing the Fund with the name and address of each such Assignee.
(c) Distributors may direct the Fund to pay any Assignee's 12b-1 Portion
directly to each Assignee. In such event, Distributors shall provide the Fund
with a monthly calculation of the amount to which each Assignee is entitled (the
"Monthly Calculation"). In such event, the Fund shall, upon receipt of such
notice and Monthly Calculation from Distributors, make all payments required
directly to the Assignee in accordance with the information provided in such
notice and Monthly Calculation upon the same terms and conditions as if such
payments were to be paid to Distributors.
(d) Alternatively, in connection with a Transfer, Distributors may direct
the Fund to pay all or a portion of the fees to which Distributors is entitled
from time to time to a depository or collection agent designated by any
Assignee, which depository or collection agent may be delegated the duty of
dividing such fees between the Assignee's 12b-1 Portion and the balance (such
balance, when distributed to Distributors by the depository or collection agent,
the "Distributors' 12b-1 Portion"), in which case only Distributors' 12b-1
Portion may be subject to offsets or claims the Fund may have against
Distributors.
6. The Plan shall continue in effect for a period of more than one year
only so long as such continuance is specifically approved at least annually by
the Board, including the non-interested Board members, cast in person at a
meeting called for the purpose of voting on the Plan. In determining whether
there is a reasonable likelihood that the continuation of the Plan will benefit
the Fund and its shareholders, the Board may, but is not obligated to, consider
that Distributors has incurred substantial cost and has entered into an
arrangement with a third party in order to finance the distribution activities
for the Class.
7. This Plan and any agreements entered into pursuant to this Plan may be
terminated with respect to the shares of the Class, without penalty, at any time
by vote of a majority of the non-interested Board members of the Investment
Company, or by vote of a majority of outstanding Shares of such Class. Upon
termination of this Plan with respect to the Class, the obligation of the Fund
to make payments pursuant to this Plan with respect to such Class shall
terminate, and the Fund shall not be required to make payments hereunder beyond
such termination date with respect to expenses incurred in connection with Class
shares sold prior to such termination date, provided, in each case that each of
the requirements of a Complete Termination of this Plan in respect of such
Class, as defined below, are met. For purposes of this Section 7, a "Complete
Termination" of this Plan in respect of the Class shall mean a termination of
this Plan in respect of such Class, provided that: (i) the non-interested Board
members of the Investment Company shall have acted in good faith and shall have
determined that such termination is in the best interest of the Investment
Company and the shareholders of the Fund and the Class; (ii) and the Investment
Company does not alter the terms of the contingent deferred sales charges
applicable to Class shares outstanding at the time of such termination; and
(iii) unless Distributors at the time of such termination was in material breach
under the distribution agreement in respect of the Fund, the Fund shall not, in
respect of such Fund, pay to any person or entity, other than Distributors or
its designee, either the payments described in paragraph 1(a) or 1(b) or in
respect of the Class shares sold by Distributors prior to such termination.
8. The Plan, and any agreements entered into pursuant to this Plan, may not
be amended to increase materially the amount to be spent for distribution
pursuant to Paragraph 1 hereof without approval by a majority of the outstanding
voting securities of the Class of the Fund.
9. All material amendments to the Plan, or any agreements entered into
pursuant to this Plan, shall be approved by the non-interested Board members
cast in person at a meeting called for the purpose of voting on any such
amendment.
10. So long as the Plan is in effect, the selection and nomination of the
Fund's non-interested Board members shall be committed to the discretion of such
non-interested Board members.
This Plan and the terms and provisions thereof are hereby accepted and
agreed to by the Investment Company and Distributors as evidenced by their
execution hereof.
Date: OCTOBER 25, 1998
FRANKLIN MUTUAL SERIES FUND INC.
By:_____________________________
/s/ Elizabeth Cohernour
General Counsel & Secretary
FRANKLIN/TEMPLETON DISTRIBUTORS, INC.
By:_____________________________
/s/ Deborah R. Gatzek
Senior Vice President &
Assistant Secretary
CLASS B DISTRIBUTION PLAN
I. Investment Company: FRANKLIN MUTUAL SERIES FUND INC.
II. Fund: MUTUAL DISCOVERY FUND
III. Maximum Per Annum Rule 12b-1 Fees for Class B Shares
(as a percentage of average daily net assets of the class)
A. Distribution Fee: 0.75%
B. Service Fee: 0.25%
PREAMBLE TO CLASS B DISTRIBUTION PLAN
The following Distribution Plan (the "Plan") has been adopted pursuant to
Rule 12b-1 under the Investment Company Act of 1940 (the "Act") by the
Investment Company named above ("Investment Company") for the class B shares
(the "Class") of the Fund named above ("Fund"), which Plan shall take effect as
of the date Class B shares are first offered (the "Effective Date of the Plan").
The Plan has been approved by a majority of the Board of Directors of the
Investment Company (the "Board"), including a majority of the Board members who
are not interested persons of the Investment Company and who have no direct, or
indirect financial interest in the operation of the Plan (the "non-interested
Board members"), cast in person at a meeting called for the purpose of voting on
such Plan.
In reviewing the Plan, the Board considered the schedule and nature of
payments and terms of the Investment Advisory Agreement between the Investment
Company and Franklin Mutual Advisers, Inc. and the terms of the Underwriting
Agreement between the Investment Company and Franklin/Templeton Distributors,
Inc. ("Distributors"). The Board concluded that the compensation of Advisers,
under the Investment Advisory Agreement, and of Distributors, under the
Underwriting Agreement, was fair and not excessive. The approval of the Plan
included a determination that in the exercise of their reasonable business
judgment and in light of their fiduciary duties, there is a reasonable
likelihood that the Plan will benefit the Fund and its shareholders.
The Board recognizes that Distributors has entered into an arrangement with
a third party in order to finance the distribution activities of the Class
pursuant to which Distributors may assign its rights to the fees payable
hereunder to such third party. The Board further recognizes that it has an
obligation to act in good faith and in the best interests of the Fund and its
shareholders when considering the continuation or termination of the Plan and
any payments to be made thereunder.
DISTRIBUTION PLAN
1.(a) The Fund shall pay to Distributors a monthly fee not to exceed the
above-stated maximum distribution fee per annum of the Class' average daily net
assets represented by shares of the Class, as may be determined by the Board
from time to time.
(b) In addition to the amounts described in (a) above, the Fund shall pay
(i) to Distributors for payment to dealers or others, or (ii) directly to
others, an amount not to exceed the above-stated maximum service fee per annum
of the Class' average daily net assets represented by shares of the Class, as
may be determined by the Investment Company's Board from time to time, as a
service fee pursuant to servicing agreements which have been approved from time
to time by the Board, including the non-interested Board members.
2.(a) The monies paid to Distributors pursuant to Paragraph 1(a) above
shall be treated as compensation for Distributors' distribution-related services
including compensation for amounts advanced to securities dealers or their firms
or others selling shares of the Class who have executed an agreement with the
Investment Company, Distributors or its affiliates, which form of agreement has
been approved from time to time by the Board, including the non-interested Board
members, with respect to the sale of Class shares. In addition, such monies may
be used to compensate Distributors for other expenses incurred to assist in the
distribution and promotion of shares of the Class. Payments made to Distributors
under the Plan may be used for, among other things, the printing of prospectuses
and reports used for sales purposes, expenses of preparing and distributing
sales literature and related expenses, advertisements, and other
distribution-related expenses, including a pro-rated portion of Distributors'
overhead expenses attributable to the distribution of Class shares, as well as
for additional distribution fees paid to securities dealers or their firms or
others who have executed agreements with the Investment Company, Distributors or
its affiliates, or for certain promotional distribution charges paid to
broker-dealer firms or others, or for participation in certain distribution
channels. None of such payments are the legal obligation of Distributors or its
designee.
(b) The monies to be paid pursuant to paragraph 1(b) above shall be used to
pay dealers or others for, among other things, furnishing personal services and
maintaining shareholder accounts, which services include, among other things,
assisting in establishing and maintaining customer accounts and records;
assisting with purchase and redemption requests; arranging for bank wires;
monitoring dividend payments from the Fund on behalf of customers; forwarding
certain shareholder communications from the Fund to customers; receiving and
answering correspondence; and aiding in maintaining the investment of their
respective customers in the Class. Any amounts paid under this paragraph 2(b)
shall be paid pursuant to a servicing or other agreement, which form of
agreement has been approved from time to time by the Board. None of such
payments are the legal obligation of Distributors or its designee.
3. In addition to the payments which the Fund is authorized to make
pursuant to paragraphs 1 and 2 hereof, to the extent that the Fund, Advisers,
Distributors or other parties on behalf of the Fund, Advisers or Distributors
make payments that are deemed to be payments by the Fund for the financing of
any activity primarily intended to result in the sale of Class shares issued by
the Fund within the context of Rule 12b-1 under the Act, then such payments
shall be deemed to have been made pursuant to the Plan.
In no event shall the aggregate asset-based sales charges which include
payments specified in paragraphs 1 and 2, plus any other payments deemed to be
made pursuant to the Plan under this paragraph, exceed the amount permitted to
be paid pursuant to Rule 2830(d) of the Conduct Rules of the National
Association of Securities Dealers, Inc.
4. Distributors shall furnish to the Board, for its review, on a quarterly
basis, a written report of the monies paid to it and to others under the Plan,
and shall furnish the Board with such other information as the Board may
reasonably request in connection with the payments made under the Plan in order
to enable the Board to make an informed determination of whether the Plan should
be continued.
5. (a) Distributors may assign, transfer or pledge ("Transfer") to one or
more designees (each an "Assignee"), its rights to all or a designated portion
of the fees to which it is entitled under paragraph 1 of this Plan from time to
time (but not Distributors' duties and obligations pursuant hereto or pursuant
to any distribution agreement in effect from time to time, if any, between
Distributors and the Fund), free and clear of any offsets or claims the Fund may
have against Distributors. Each such Assignee's ownership interest in a Transfer
of a specific designated portion of the fees to which Distributors is entitled
is hereafter referred to as an "Assignee's 12b-1 Portion." A Transfer pursuant
to this Section 5(a) shall not reduce or extinguish any claims of the Fund
against Distributors.
(b) Distributors shall promptly notify the Fund in writing of each such
Transfer by providing the Fund with the name and address of each such Assignee.
(c) Distributors may direct the Fund to pay any Assignee's 12b-1 Portion
directly to each Assignee. In such event, Distributors shall provide the Fund
with a monthly calculation of the amount to which each Assignee is entitled (the
"Monthly Calculation"). In such event, the Fund shall, upon receipt of such
notice and Monthly Calculation from Distributors, make all payments required
directly to the Assignee in accordance with the information provided in such
notice and Monthly Calculation upon the same terms and conditions as if such
payments were to be paid to Distributors.
(d) Alternatively, in connection with a Transfer, Distributors may direct
the Fund to pay all or a portion of the fees to which Distributors is entitled
from time to time to a depository or collection agent designated by any
Assignee, which depository or collection agent may be delegated the duty of
dividing such fees between the Assignee's 12b-1 Portion and the balance (such
balance, when distributed to Distributors by the depository or collection agent,
the "Distributors' 12b-1 Portion"), in which case only Distributors' 12b-1
Portion may be subject to offsets or claims the Fund may have against
Distributors.
6. The Plan shall continue in effect for a period of more than one year
only so long as such continuance is specifically approved at least annually by
the Board, including the non-interested Board members, cast in person at a
meeting called for the purpose of voting on the Plan. In determining whether
there is a reasonable likelihood that the continuation of the Plan will benefit
the Fund and its shareholders, the Board may, but is not obligated to, consider
that Distributors has incurred substantial cost and has entered into an
arrangement with a third party in order to finance the distribution activities
for the Class.
7. This Plan and any agreements entered into pursuant to this Plan may be
terminated with respect to the shares of the Class, without penalty, at any time
by vote of a majority of the non-interested Board members of the Investment
Company, or by vote of a majority of outstanding Shares of such Class. Upon
termination of this Plan with respect to the Class, the obligation of the Fund
to make payments pursuant to this Plan with respect to such Class shall
terminate, and the Fund shall not be required to make payments hereunder beyond
such termination date with respect to expenses incurred in connection with Class
shares sold prior to such termination date, provided, in each case that each of
the requirements of a Complete Termination of this Plan in respect of such
Class, as defined below, are met. For purposes of this Section 7, a "Complete
Termination" of this Plan in respect of the Class shall mean a termination of
this Plan in respect of such Class, provided that: (i) the non-interested Board
members of the Investment Company shall have acted in good faith and shall have
determined that such termination is in the best interest of the Investment
Company and the shareholders of the Fund and the Class; (ii) and the Investment
Company does not alter the terms of the contingent deferred sales charges
applicable to Class shares outstanding at the time of such termination; and
(iii) unless Distributors at the time of such termination was in material breach
under the distribution agreement in respect of the Fund, the Fund shall not, in
respect of such Fund, pay to any person or entity, other than Distributors or
its designee, either the payments described in paragraph 1(a) or 1(b) or in
respect of the Class shares sold by Distributors prior to such termination.
8. The Plan, and any agreements entered into pursuant to this Plan, may not
be amended to increase materially the amount to be spent for distribution
pursuant to Paragraph 1 hereof without approval by a majority of the outstanding
voting securities of the Class of the Fund.
9. All material amendments to the Plan, or any agreements entered into
pursuant to this Plan, shall be approved by the non-interested Board members
cast in person at a meeting called for the purpose of voting on any such
amendment.
10. So long as the Plan is in effect, the selection and nomination of the
Fund's non-interested Board members shall be committed to the discretion of such
non-interested Board members.
This Plan and the terms and provisions thereof are hereby accepted and
agreed to by the Investment Company and Distributors as evidenced by their
execution hereof.
Date: OCTOBER 25, 1998
FRANKLIN MUTUAL SERIES FUND INC.
By:__________________________
/s/ Elizabeth Cohernour
General Counsel & Secretary
FRANKLIN/TEMPLETON DISTRIBUTORS, INC.
By:__________________________
/s/ Deborah R. Gatzek
Senior Vice President &
Assistant Secretary
CLASS B DISTRIBUTION PLAN
I. Investment Company: FRANKLIN MUTUAL SERIES FUND INC.
II. Fund: MUTUAL BEACON FUND
III. Maximum Per Annum Rule 12b-1 Fees for Class B Shares
(as a percentage of average daily net assets of the class)
A. Distribution Fee: 0.75%
B. Service Fee: 0.25%
PREAMBLE TO CLASS B DISTRIBUTION PLAN
The following Distribution Plan (the "Plan") has been adopted pursuant to
Rule 12b-1 under the Investment Company Act of 1940 (the "Act") by the
Investment Company named above ("Investment Company") for the class B shares
(the "Class") of the Fund named above ("Fund"), which Plan shall take effect as
of the date Class B shares are first offered (the "Effective Date of the Plan").
The Plan has been approved by a majority of the Board of Directors of the
Investment Company (the "Board"), including a majority of the Board members who
are not interested persons of the Investment Company and who have no direct, or
indirect financial interest in the operation of the Plan (the "non-interested
Board members"), cast in person at a meeting called for the purpose of voting on
such Plan.
In reviewing the Plan, the Board considered the schedule and nature of
payments and terms of the Investment Advisory Agreement between the Investment
Company and Franklin Mutual Advisers, Inc. and the terms of the Underwriting
Agreement between the Investment Company and Franklin/Templeton Distributors,
Inc. ("Distributors"). The Board concluded that the compensation of Advisers,
under the Investment Advisory Agreement, and of Distributors, under the
Underwriting Agreement, was fair and not excessive. The approval of the Plan
included a determination that in the exercise of their reasonable business
judgment and in light of their fiduciary duties, there is a reasonable
likelihood that the Plan will benefit the Fund and its shareholders.
The Board recognizes that Distributors has entered into an arrangement with
a third party in order to finance the distribution activities of the Class
pursuant to which Distributors may assign its rights to the fees payable
hereunder to such third party. The Board further recognizes that it has an
obligation to act in good faith and in the best interests of the Fund and its
shareholders when considering the continuation or termination of the Plan and
any payments to be made thereunder.
DISTRIBUTION PLAN
1.(a) The Fund shall pay to Distributors a monthly fee not to exceed the
above-stated maximum distribution fee per annum of the Class' average daily net
assets represented by shares of the Class, as may be determined by the Board
from time to time.
(b) In addition to the amounts described in (a) above, the Fund shall pay
(i) to Distributors for payment to dealers or others, or (ii) directly to
others, an amount not to exceed the above-stated maximum service fee per annum
of the Class' average daily net assets represented by shares of the Class, as
may be determined by the Investment Company's Board from time to time, as a
service fee pursuant to servicing agreements which have been approved from time
to time by the Board, including the non-interested Board members.
2.(a) The monies paid to Distributors pursuant to Paragraph 1(a) above
shall be treated as compensation for Distributors' distribution-related services
including compensation for amounts advanced to securities dealers or their firms
or others selling shares of the Class who have executed an agreement with the
Investment Company, Distributors or its affiliates, which form of agreement has
been approved from time to time by the Board, including the non-interested Board
members, with respect to the sale of Class shares. In addition, such monies may
be used to compensate Distributors for other expenses incurred to assist in the
distribution and promotion of shares of the Class. Payments made to Distributors
under the Plan may be used for, among other things, the printing of prospectuses
and reports used for sales purposes, expenses of preparing and distributing
sales literature and related expenses, advertisements, and other
distribution-related expenses, including a pro-rated portion of Distributors'
overhead expenses attributable to the distribution of Class shares, as well as
for additional distribution fees paid to securities dealers or their firms or
others who have executed agreements with the Investment Company, Distributors or
its affiliates, or for certain promotional distribution charges paid to
broker-dealer firms or others, or for participation in certain distribution
channels. None of such payments are the legal obligation of Distributors or its
designee.
(b) The monies to be paid pursuant to paragraph 1(b) above shall be used to
pay dealers or others for, among other things, furnishing personal services and
maintaining shareholder accounts, which services include, among other things,
assisting in establishing and maintaining customer accounts and records;
assisting with purchase and redemption requests; arranging for bank wires;
monitoring dividend payments from the Fund on behalf of customers; forwarding
certain shareholder communications from the Fund to customers; receiving and
answering correspondence; and aiding in maintaining the investment of their
respective customers in the Class. Any amounts paid under this paragraph 2(b)
shall be paid pursuant to a servicing or other agreement, which form of
agreement has been approved from time to time by the Board. None of such
payments are the legal obligation of Distributors or its designee.
3. In addition to the payments which the Fund is authorized to make
pursuant to paragraphs 1 and 2 hereof, to the extent that the Fund, Advisers,
Distributors or other parties on behalf of the Fund, Advisers or Distributors
make payments that are deemed to be payments by the Fund for the financing of
any activity primarily intended to result in the sale of Class shares issued by
the Fund within the context of Rule 12b-1 under the Act, then such payments
shall be deemed to have been made pursuant to the Plan.
In no event shall the aggregate asset-based sales charges which include
payments specified in paragraphs 1 and 2, plus any other payments deemed to be
made pursuant to the Plan under this paragraph, exceed the amount permitted to
be paid pursuant to Rule 2830(d) of the Conduct Rules of the National
Association of Securities Dealers, Inc.
4. Distributors shall furnish to the Board, for its review, on a quarterly
basis, a written report of the monies paid to it and to others under the Plan,
and shall furnish the Board with such other information as the Board may
reasonably request in connection with the payments made under the Plan in order
to enable the Board to make an informed determination of whether the Plan should
be continued.
5. (a) Distributors may assign, transfer or pledge ("Transfer") to one or
more designees (each an "Assignee"), its rights to all or a designated portion
of the fees to which it is entitled under paragraph 1 of this Plan from time to
time (but not Distributors' duties and obligations pursuant hereto or pursuant
to any distribution agreement in effect from time to time, if any, between
Distributors and the Fund), free and clear of any offsets or claims the Fund may
have against Distributors. Each such Assignee's ownership interest in a Transfer
of a specific designated portion of the fees to which Distributors is entitled
is hereafter referred to as an "Assignee's 12b-1 Portion." A Transfer pursuant
to this Section 5(a) shall not reduce or extinguish any claims of the Fund
against Distributors.
(b) Distributors shall promptly notify the Fund in writing of each such
Transfer by providing the Fund with the name and address of each such Assignee.
(c) Distributors may direct the Fund to pay any Assignee's 12b-1 Portion
directly to each Assignee. In such event, Distributors shall provide the Fund
with a monthly calculation of the amount to which each Assignee is entitled (the
"Monthly Calculation"). In such event, the Fund shall, upon receipt of such
notice and Monthly Calculation from Distributors, make all payments required
directly to the Assignee in accordance with the information provided in such
notice and Monthly Calculation upon the same terms and conditions as if such
payments were to be paid to Distributors.
(d) Alternatively, in connection with a Transfer, Distributors may direct
the Fund to pay all or a portion of the fees to which Distributors is entitled
from time to time to a depository or collection agent designated by any
Assignee, which depository or collection agent may be delegated the duty of
dividing such fees between the Assignee's 12b-1 Portion and the balance (such
balance, when distributed to Distributors by the depository or collection agent,
the "Distributors' 12b-1 Portion"), in which case only Distributors' 12b-1
Portion may be subject to offsets or claims the Fund may have against
Distributors.
6. The Plan shall continue in effect for a period of more than one year
only so long as such continuance is specifically approved at least annually by
the Board, including the non-interested Board members, cast in person at a
meeting called for the purpose of voting on the Plan. In determining whether
there is a reasonable likelihood that the continuation of the Plan will benefit
the Fund and its shareholders, the Board may, but is not obligated to, consider
that Distributors has incurred substantial cost and has entered into an
arrangement with a third party in order to finance the distribution activities
for the Class.
7. This Plan and any agreements entered into pursuant to this Plan may be
terminated with respect to the shares of the Class, without penalty, at any time
by vote of a majority of the non-interested Board members of the Investment
Company, or by vote of a majority of outstanding Shares of such Class. Upon
termination of this Plan with respect to the Class, the obligation of the Fund
to make payments pursuant to this Plan with respect to such Class shall
terminate, and the Fund shall not be required to make payments hereunder beyond
such termination date with respect to expenses incurred in connection with Class
shares sold prior to such termination date, provided, in each case that each of
the requirements of a Complete Termination of this Plan in respect of such
Class, as defined below, are met. For purposes of this Section 7, a "Complete
Termination" of this Plan in respect of the Class shall mean a termination of
this Plan in respect of such Class, provided that: (i) the non-interested Board
members of the Investment Company shall have acted in good faith and shall have
determined that such termination is in the best interest of the Investment
Company and the shareholders of the Fund and the Class; (ii) and the Investment
Company does not alter the terms of the contingent deferred sales charges
applicable to Class shares outstanding at the time of such termination; and
(iii) unless Distributors at the time of such termination was in material breach
under the distribution agreement in respect of the Fund, the Fund shall not, in
respect of such Fund, pay to any person or entity, other than Distributors or
its designee, either the payments described in paragraph 1(a) or 1(b) or in
respect of the Class shares sold by Distributors prior to such termination.
8. The Plan, and any agreements entered into pursuant to this Plan, may not
be amended to increase materially the amount to be spent for distribution
pursuant to Paragraph 1 hereof without approval by a majority of the outstanding
voting securities of the Class of the Fund.
9. All material amendments to the Plan, or any agreements entered into
pursuant to this Plan, shall be approved by the non-interested Board members
cast in person at a meeting called for the purpose of voting on any such
amendment.
10. So long as the Plan is in effect, the selection and nomination of the
Fund's non-interested Board members shall be committed to the discretion of such
non-interested Board members.
This Plan and the terms and provisions thereof are hereby accepted and
agreed to by the Investment Company and Distributors as evidenced by their
execution hereof.
Date: OCTOBER 25, 1998
FRANKLIN MUTUAL SERIES FUND INC.
By: /s/ ELIZBETH COHERNOUR
Elizabeth Cohernour
General Counsel & Secretary
FRANKLIN/TEMPLETON DISTRIBUTORS, INC.
By: /s/ D.R. GATZEK
Deborah R. Gatzek
Senior Vice President &
Assistant Secretary
CLASS B DISTRIBUTION PLAN
I. Investment Company: FRANKLIN MUTUAL SERIES FUND INC.
II. Fund: MUTUAL EUROPEAN FUND
III. Maximum Per Annum Rule 12b-1 Fees for Class B Shares
(as a percentage of average daily net assets of the class)
A. Distribution Fee: 0.75%
B. Service Fee: 0.25%
PREAMBLE TO CLASS B DISTRIBUTION PLAN
The following Distribution Plan (the "Plan") has been adopted pursuant to
Rule 12b-1 under the Investment Company Act of 1940 (the "Act") by the
Investment Company named above ("Investment Company") for the class B shares
(the "Class") of the Fund named above ("Fund"), which Plan shall take effect as
of the date Class B shares are first offered (the "Effective Date of the Plan").
The Plan has been approved by a majority of the Board of Directors of the
Investment Company (the "Board"), including a majority of the Board members who
are not interested persons of the Investment Company and who have no direct, or
indirect financial interest in the operation of the Plan (the "non-interested
Board members"), cast in person at a meeting called for the purpose of voting on
such Plan.
In reviewing the Plan, the Board considered the schedule and nature of
payments and terms of the Investment Advisory Agreement between the Investment
Company and Franklin Mutual Advisers, Inc. and the terms of the Underwriting
Agreement between the Investment Company and Franklin/Templeton Distributors,
Inc. ("Distributors"). The Board concluded that the compensation of Advisers,
under the Investment Advisory Agreement, and of Distributors, under the
Underwriting Agreement, was fair and not excessive. The approval of the Plan
included a determination that in the exercise of their reasonable business
judgment and in light of their fiduciary duties, there is a reasonable
likelihood that the Plan will benefit the Fund and its shareholders.
The Board recognizes that Distributors has entered into an arrangement with
a third party in order to finance the distribution activities of the Class
pursuant to which Distributors may assign its rights to the fees payable
hereunder to such third party. The Board further recognizes that it has an
obligation to act in good faith and in the best interests of the Fund and its
shareholders when considering the continuation or termination of the Plan and
any payments to be made thereunder.
DISTRIBUTION PLAN
1. (a) The Fund shall pay to Distributors a monthly fee not to exceed the
above-stated maximum distribution fee per annum of the Class' average daily net
assets represented by shares of the Class, as may be determined by the Board
from time to time.
(b) In addition to the amounts described in (a) above, the Fund shall pay
(i) to Distributors for payment to dealers or others, or (ii) directly to
others, an amount not to exceed the above-stated maximum service fee per annum
of the Class' average daily net assets represented by shares of the Class, as
may be determined by the Investment Company's Board from time to time, as a
service fee pursuant to servicing agreements which have been approved from time
to time by the Board, including the non-interested Board members.
2. (a) The monies paid to Distributors pursuant to Paragraph 1(a) above
shall be treated as compensation for Distributors' distribution-related services
including compensation for amounts advanced to securities dealers or their firms
or others selling shares of the Class who have executed an agreement with the
Investment Company, Distributors or its affiliates, which form of agreement has
been approved from time to time by the Board, including the non-interested Board
members, with respect to the sale of Class shares. In addition, such monies may
be used to compensate Distributors for other expenses incurred to assist in the
distribution and promotion of shares of the Class. Payments made to Distributors
under the Plan may be used for, among other things, the printing of prospectuses
and reports used for sales purposes, expenses of preparing and distributing
sales literature and related expenses, advertisements, and other
distribution-related expenses, including a pro-rated portion of Distributors'
overhead expenses attributable to the distribution of Class shares, as well as
for additional distribution fees paid to securities dealers or their firms or
others who have executed agreements with the Investment Company, Distributors or
its affiliates, or for certain promotional distribution charges paid to
broker-dealer firms or others, or for participation in certain distribution
channels. None of such payments are the legal obligation of Distributors or its
designee.
(b) The monies to be paid pursuant to paragraph 1(b) above shall be used to
pay dealers or others for, among other things, furnishing personal services and
maintaining shareholder accounts, which services include, among other things,
assisting in establishing and maintaining customer accounts and records;
assisting with purchase and redemption requests; arranging for bank wires;
monitoring dividend payments from the Fund on behalf of customers; forwarding
certain shareholder communications from the Fund to customers; receiving and
answering correspondence; and aiding in maintaining the investment of their
respective customers in the Class. Any amounts paid under this paragraph 2(b)
shall be paid pursuant to a servicing or other agreement, which form of
agreement has been approved from time to time by the Board. None of such
payments are the legal obligation of Distributors or its designee.
3. In addition to the payments which the Fund is authorized to make
pursuant to paragraphs 1 and 2 hereof, to the extent that the Fund, Advisers,
Distributors or other parties on behalf of the Fund, Advisers or Distributors
make payments that are deemed to be payments by the Fund for the financing of
any activity primarily intended to result in the sale of Class shares issued by
the Fund within the context of Rule 12b-1 under the Act, then such payments
shall be deemed to have been made pursuant to the Plan.
In no event shall the aggregate asset-based sales charges which include
payments specified in paragraphs 1 and 2, plus any other payments deemed to be
made pursuant to the Plan under this paragraph, exceed the amount permitted to
be paid pursuant to Rule 2830(d) of the Conduct Rules of the National
Association of Securities Dealers, Inc.
4. Distributors shall furnish to the Board, for its review, on a quarterly
basis, a written report of the monies paid to it and to others under the Plan,
and shall furnish the Board with such other information as the Board may
reasonably request in connection with the payments made under the Plan in order
to enable the Board to make an informed determination of whether the Plan should
be continued.
5. (a) Distributors may assign, transfer or pledge ("Transfer") to one or
more designees (each an "Assignee"), its rights to all or a designated portion
of the fees to which it is entitled under paragraph 1 of this Plan from time to
time (but not Distributors' duties and obligations pursuant hereto or pursuant
to any distribution agreement in effect from time to time, if any, between
Distributors and the Fund), free and clear of any offsets or claims the Fund may
have against Distributors. Each such Assignee's ownership interest in a Transfer
of a specific designated portion of the fees to which Distributors is entitled
is hereafter referred to as an "Assignee's 12b-1 Portion." A Transfer pursuant
to this Section 5(a) shall not reduce or extinguish any claims of the Fund
against Distributors.
(b) Distributors shall promptly notify the Fund in writing of each such
Transfer by providing the Fund with the name and address of each such Assignee.
(c) Distributors may direct the Fund to pay any Assignee's 12b-1 Portion
directly to each Assignee. In such event, Distributors shall provide the Fund
with a monthly calculation of the amount to which each Assignee is entitled (the
"Monthly Calculation"). In such event, the Fund shall, upon receipt of such
notice and Monthly Calculation from Distributors, make all payments required
directly to the Assignee in accordance with the information provided in such
notice and Monthly Calculation upon the same terms and conditions as if such
payments were to be paid to Distributors.
(d) Alternatively, in connection with a Transfer, Distributors may direct
the Fund to pay all or a portion of the fees to which Distributors is entitled
from time to time to a depository or collection agent designated by any
Assignee, which depository or collection agent may be delegated the duty of
dividing such fees between the Assignee's 12b-1 Portion and the balance (such
balance, when distributed to Distributors by the depository or collection agent,
the "Distributors' 12b-1 Portion"), in which case only Distributors' 12b-1
Portion may be subject to offsets or claims the Fund may have against
Distributors.
6. The Plan shall continue in effect for a period of more than one year
only so long as such continuance is specifically approved at least annually by
the Board, including the non-interested Board members, cast in person at a
meeting called for the purpose of voting on the Plan. In determining whether
there is a reasonable likelihood that the continuation of the Plan will benefit
the Fund and its shareholders, the Board may, but is not obligated to, consider
that Distributors has incurred substantial cost and has entered into an
arrangement with a third party in order to finance the distribution activities
for the Class.
7. This Plan and any agreements entered into pursuant to this Plan may be
terminated with respect to the shares of the Class, without penalty, at any time
by vote of a majority of the non-interested Board members of the Investment
Company, or by vote of a majority of outstanding Shares of such Class. Upon
termination of this Plan with respect to the Class, the obligation of the Fund
to make payments pursuant to this Plan with respect to such Class shall
terminate, and the Fund shall not be required to make payments hereunder beyond
such termination date with respect to expenses incurred in connection with Class
shares sold prior to such termination date, provided, in each case that each of
the requirements of a Complete Termination of this Plan in respect of such
Class, as defined below, are met. For purposes of this Section 7, a "Complete
Termination" of this Plan in respect of the Class shall mean a termination of
this Plan in respect of such Class, provided that: (i) the non-interested Board
members of the Investment Company shall have acted in good faith and shall have
determined that such termination is in the best interest of the Investment
Company and the shareholders of the Fund and the Class; (ii) and the Investment
Company does not alter the terms of the contingent deferred sales charges
applicable to Class shares outstanding at the time of such termination; and
(iii) unless Distributors at the time of such termination was in material breach
under the distribution agreement in respect of the Fund, the Fund shall not, in
respect of such Fund, pay to any person or entity, other than Distributors or
its designee, either the payments described in paragraph 1(a) or 1(b) or in
respect of the Class shares sold by Distributors prior to such termination.
8. The Plan, and any agreements entered into pursuant to this Plan, may not
be amended to increase materially the amount to be spent for distribution
pursuant to Paragraph 1 hereof without approval by a majority of the outstanding
voting securities of the Class of the Fund.
9. All material amendments to the Plan, or any agreements entered into
pursuant to this Plan, shall be approved by the non-interested Board members
cast in person at a meeting called for the purpose of voting on any such
amendment.
10. So long as the Plan is in effect, the selection and nomination of the
Fund's non-interested Board members shall be committed to the discretion of such
non-interested Board members.
This Plan and the terms and provisions thereof are hereby accepted and
agreed to by the Investment Company and Distributors as evidenced by their
execution hereof.
Date: OCTOBER 25, 1998
FRANKLIN MUTUAL SERIES FUND INC.
By: /s/ ELIZABETH COHERNOUR
Elizabeth Cohernour
General Counsel & Secretary
FRANKLIN/TEMPLETON DISTRIBUTORS, INC.
By: /s/ D.R. GATZEK
Deborah R. Gatzek
Senior Vice President &
Assistant Secretary
CLASS B DISTRIBUTION PLAN
I. Investment Company: FRANKLIN MUTUAL SERIES FUND INC.
II. Fund: MUTUAL FINANCIAL SERVICES FUND
III. Maximum Per Annum Rule 12b-1 Fees for Class B Shares
(as a percentage of average daily net assets of the class)
A. Distribution Fee: 0.75%
B. Service Fee: 0.25%
PREAMBLE TO CLASS B DISTRIBUTION PLAN
The following Distribution Plan (the "Plan") has been adopted pursuant to
Rule 12b-1 under the Investment Company Act of 1940 (the "Act") by the
Investment Company named above ("Investment Company") for the class B shares
(the "Class") of the Fund named above ("Fund"), which Plan shall take effect as
of the date Class B shares are first offered (the "Effective Date of the Plan").
The Plan has been approved by a majority of the Board of Directors of the
Investment Company (the "Board"), including a majority of the Board members who
are not interested persons of the Investment Company and who have no direct, or
indirect financial interest in the operation of the Plan (the "non-interested
Board members"), cast in person at a meeting called for the purpose of voting on
such Plan.
In reviewing the Plan, the Board considered the schedule and nature of
payments and terms of the Investment Advisory Agreement between the Investment
Company and Franklin Mutual Advisers, Inc. and the terms of the Underwriting
Agreement between the Investment Company and Franklin/Templeton Distributors,
Inc. ("Distributors"). The Board concluded that the compensation of Advisers,
under the Investment Advisory Agreement, and of Distributors, under the
Underwriting Agreement, was fair and not excessive. The approval of the Plan
included a determination that in the exercise of their reasonable business
judgment and in light of their fiduciary duties, there is a reasonable
likelihood that the Plan will benefit the Fund and its shareholders.
The Board recognizes that Distributors has entered into an arrangement with
a third party in order to finance the distribution activities of the Class
pursuant to which Distributors may assign its rights to the fees payable
hereunder to such third party. The Board further recognizes that it has an
obligation to act in good faith and in the best interests of the Fund and its
shareholders when considering the continuation or termination of the Plan and
any payments to be made thereunder.
DISTRIBUTION PLAN
1. (a) The Fund shall pay to Distributors a monthly fee not to exceed the
above-stated maximum distribution fee per annum of the Class' average daily net
assets represented by shares of the Class, as may be determined by the Board
from time to time.
(b) In addition to the amounts described in (a) above, the Fund shall pay
(i) to Distributors for payment to dealers or others, or (ii) directly to
others, an amount not to exceed the above-stated maximum service fee per annum
of the Class' average daily net assets represented by shares of the Class, as
may be determined by the Investment Company's Board from time to time, as a
service fee pursuant to servicing agreements which have been approved from time
to time by the Board, including the non-interested Board members.
2. (a) The monies paid to Distributors pursuant to Paragraph 1(a) above
shall be treated as compensation for Distributors' distribution-related services
including compensation for amounts advanced to securities dealers or their firms
or others selling shares of the Class who have executed an agreement with the
Investment Company, Distributors or its affiliates, which form of agreement has
been approved from time to time by the Board, including the non-interested Board
members, with respect to the sale of Class shares. In addition, such monies may
be used to compensate Distributors for other expenses incurred to assist in the
distribution and promotion of shares of the Class. Payments made to Distributors
under the Plan may be used for, among other things, the printing of prospectuses
and reports used for sales purposes, expenses of preparing and distributing
sales literature and related expenses, advertisements, and other
distribution-related expenses, including a pro-rated portion of Distributors'
overhead expenses attributable to the distribution of Class shares, as well as
for additional distribution fees paid to securities dealers or their firms or
others who have executed agreements with the Investment Company, Distributors or
its affiliates, or for certain promotional distribution charges paid to
broker-dealer firms or others, or for participation in certain distribution
channels. None of such payments are the legal obligation of Distributors or its
designee.
(b) The monies to be paid pursuant to paragraph 1(b) above shall be used to
pay dealers or others for, among other things, furnishing personal services and
maintaining shareholder accounts, which services include, among other things,
assisting in establishing and maintaining customer accounts and records;
assisting with purchase and redemption requests; arranging for bank wires;
monitoring dividend payments from the Fund on behalf of customers; forwarding
certain shareholder communications from the Fund to customers; receiving and
answering correspondence; and aiding in maintaining the investment of their
respective customers in the Class. Any amounts paid under this paragraph 2(b)
shall be paid pursuant to a servicing or other agreement, which form of
agreement has been approved from time to time by the Board. None of such
payments are the legal obligation of Distributors or its designee.
3. In addition to the payments which the Fund is authorized to make
pursuant to paragraphs 1 and 2 hereof, to the extent that the Fund, Advisers,
Distributors or other parties on behalf of the Fund, Advisers or Distributors
make payments that are deemed to be payments by the Fund for the financing of
any activity primarily intended to result in the sale of Class shares issued by
the Fund within the context of Rule 12b-1 under the Act, then such payments
shall be deemed to have been made pursuant to the Plan.
In no event shall the aggregate asset-based sales charges which include
payments specified in paragraphs 1 and 2, plus any other payments deemed to be
made pursuant to the Plan under this paragraph, exceed the amount permitted to
be paid pursuant to Rule 2830(d) of the Conduct Rules of the National
Association of Securities Dealers, Inc.
4. Distributors shall furnish to the Board, for its review, on a quarterly
basis, a written report of the monies paid to it and to others under the Plan,
and shall furnish the Board with such other information as the Board may
reasonably request in connection with the payments made under the Plan in order
to enable the Board to make an informed determination of whether the Plan should
be continued.
5. (a) Distributors may assign, transfer or pledge ("Transfer") to one or
more designees (each an "Assignee"), its rights to all or a designated portion
of the fees to which it is entitled under paragraph 1 of this Plan from time to
time (but not Distributors' duties and obligations pursuant hereto or pursuant
to any distribution agreement in effect from time to time, if any, between
Distributors and the Fund), free and clear of any offsets or claims the Fund may
have against Distributors. Each such Assignee's ownership interest in a Transfer
of a specific designated portion of the fees to which Distributors is entitled
is hereafter referred to as an "Assignee's 12b-1 Portion." A Transfer pursuant
to this Section 5(a) shall not reduce or extinguish any claims of the Fund
against Distributors.
(b) Distributors shall promptly notify the Fund in writing of each such
Transfer by providing the Fund with the name and address of each such Assignee.
(c) Distributors may direct the Fund to pay any Assignee's 12b-1 Portion
directly to each Assignee. In such event, Distributors shall provide the Fund
with a monthly calculation of the amount to which each Assignee is entitled (the
"Monthly Calculation"). In such event, the Fund shall, upon receipt of such
notice and Monthly Calculation from Distributors, make all payments required
directly to the Assignee in accordance with the information provided in such
notice and Monthly Calculation upon the same terms and conditions as if such
payments were to be paid to Distributors.
(d) Alternatively, in connection with a Transfer, Distributors may direct
the Fund to pay all or a portion of the fees to which Distributors is entitled
from time to time to a depository or collection agent designated by any
Assignee, which depository or collection agent may be delegated the duty of
dividing such fees between the Assignee's 12b-1 Portion and the balance (such
balance, when distributed to Distributors by the depository or collection agent,
the "Distributors' 12b-1 Portion"), in which case only Distributors' 12b-1
Portion may be subject to offsets or claims the Fund may have against
Distributors.
6. The Plan shall continue in effect for a period of more than one year
only so long as such continuance is specifically approved at least annually by
the Board, including the non-interested Board members, cast in person at a
meeting called for the purpose of voting on the Plan. In determining whether
there is a reasonable likelihood that the continuation of the Plan will benefit
the Fund and its shareholders, the Board may, but is not obligated to, consider
that Distributors has incurred substantial cost and has entered into an
arrangement with a third party in order to finance the distribution activities
for the Class.
7. This Plan and any agreements entered into pursuant to this Plan may be
terminated with respect to the shares of the Class, without penalty, at any time
by vote of a majority of the non-interested Board members of the Investment
Company, or by vote of a majority of outstanding Shares of such Class. Upon
termination of this Plan with respect to the Class, the obligation of the Fund
to make payments pursuant to this Plan with respect to such Class shall
terminate, and the Fund shall not be required to make payments hereunder beyond
such termination date with respect to expenses incurred in connection with Class
shares sold prior to such termination date, provided, in each case that each of
the requirements of a Complete Termination of this Plan in respect of such
Class, as defined below, are met. For purposes of this Section 7, a "Complete
Termination" of this Plan in respect of the Class shall mean a termination of
this Plan in respect of such Class, provided that: (i) the non-interested Board
members of the Investment Company shall have acted in good faith and shall have
determined that such termination is in the best interest of the Investment
Company and the shareholders of the Fund and the Class; (ii) and the Investment
Company does not alter the terms of the contingent deferred sales charges
applicable to Class shares outstanding at the time of such termination; and
(iii) unless Distributors at the time of such termination was in material breach
under the distribution agreement in respect of the Fund, the Fund shall not, in
respect of such Fund, pay to any person or entity, other than Distributors or
its designee, either the payments described in paragraph 1(a) or 1(b) or in
respect of the Class shares sold by Distributors prior to such termination.
8. The Plan, and any agreements entered into pursuant to this Plan, may not
be amended to increase materially the amount to be spent for distribution
pursuant to Paragraph 1 hereof without approval by a majority of the outstanding
voting securities of the Class of the Fund.
9. All material amendments to the Plan, or any agreements entered into
pursuant to this Plan, shall be approved by the non-interested Board members
cast in person at a meeting called for the purpose of voting on any such
amendment.
10. So long as the Plan is in effect, the selection and nomination of the
Fund's non-interested Board members shall be committed to the discretion of such
non-interested Board members.
This Plan and the terms and provisions thereof are hereby accepted and
agreed to by the Investment Company and Distributors as evidenced by their
execution hereof.
Date: OCTOBER 25, 1998
FRANKLIN MUTUAL SERIES FUND INC.
By: /s/ ELIZABETH COHERNOUR
Elizabeth Cohernour
General Counsel & Secretary
FRANKLIN/TEMPLETON DISTRIBUTORS, INC.
By: /s/ DEBORAH R. GATZEK
Deborah R. Gatzek
Senior Vice President &
Assistant Secretary
MULTIPLE CLASS PLAN
ON BEHALF OF
MUTUAL SHARES FUND
This Multiple Class Plan (the "Plan") has been adopted by a majority of the
Board of Directors of FRANKLIN MUTUAL SERIES FUND INC. (the "Investment
Company") for its series, MUTUAL SHARES FUND (the "Fund"). The Board has
determined that the Plan, including the expense allocation, is in the best
interests of each class of the Fund and the Investment Company as a whole. The
Plan sets forth the provisions relating to the establishment of multiple classes
of shares of the Fund, and supersedes any Plan previously adopted for the Fund.
1. The Fund shall offer four classes of shares, to be known as Class A
Shares, Class B Shares, Class C Shares and Class Z Shares.
2. Class A Shares shall carry a front-end sales charge ranging from 0% -
5.75%, and Class C Shares shall carry a front-end sales charge of 1.00%. Class B
Shares and the Class Z Shares shall not be subject to any front-end sales
charges.
3. Class A Shares shall not be subject to a contingent deferred sales
charge ("CDSC"), except in the following limited circumstances. On investments
of $1 million or more, a contingent deferred sales charge of 1.00% of the lesser
of the then-current net asset value or the original net asset value at the time
of purchase applies to redemptions of those investments within the contingency
period of 12 months from the calendar month following their purchase. The CDSC
is waived in certain circumstances, as described in the Fund's prospectus.
Class B Shares shall be subject to a CDSC with the following CDSC schedule:
(a) Class B Shares redeemed within 2 years of their purchase shall be assessed a
CDSC of 4% on the lesser of the then-current net asset value or the original net
asset value at the time of purchase; (b) Class B Shares redeemed within the
third and fourth years of their purchase shall be assessed a CDSC of 3% on the
lesser of the then-current net asset value or the original net asset value at
the time of purchase; (c) Class B Shares redeemed within 5 years of their
purchase shall be assessed a CDSC of 2% on the lesser of the then-current net
asset value or the original net asset value at the time of purchase; and (d)
Class B Shares redeemed within 6 years of their purchase shall be assessed a
CDSC of 1% on the lesser of the then-current net asset value or the original net
asset value at the time of purchase. The CDSC is waived in certain circumstances
described in the Fund's prospectus.
Class C Shares redeemed within 18 months of their purchase shall be
assessed a CDSC of 1.00% on the lesser of the then-current net asset value or
the original net asset value at the time of purchase. The CDSC is waived in
certain circumstances as described in the Fund's prospectus.
Class Z Shares shall not be subject to any CDSC.
4. The distribution plan adopted by the Investment Company pursuant to Rule
12b-1 under the Investment Company Act of 1940, as amended, (the "Rule 12b-1
Plan") associated with the Class A Shares may be used to reimburse
Franklin/Templeton Distributors, Inc. (the "Distributor") or others for expenses
incurred in the promotion and distribution of the Class A Shares. Such expenses
include, but are not limited to, the printing of prospectuses and reports used
for sales purposes, expenses of preparing and distributing sales literature and
related expenses, advertisements, and other distribution-related expenses,
including a prorated portion of the Distributor's overhead expenses attributable
to the distribution of the Class A Shares, as well as any distribution or
service fees paid to securities dealers or their firms or others who have
executed a servicing agreement with the Investment Company for the Class A
Shares, the Distributor or its affiliates.
The Rule 12b-1 Plan associated with the Class B Shares has two components.
The first component is an asset-based sales charge to be retained by Distributor
to compensate Distributor for amounts advanced to securities dealers or their
firms or others with respect to the sale of Class B Shares. In addition, such
payments may be retained by the Distributor to be used in the promotion and
distribution of Class B Shares in a manner similar to that described above for
Class A Shares. The second component is a shareholder servicing fee to be paid
to securities dealers or others who provide personal assistance to shareholders
in servicing their accounts.
The Rule 12b-1 Plan associated with the Class C Shares has two components.
The first component is a shareholder servicing fee, to be paid to
broker-dealers, banks, trust companies and others who provide personal
assistance to shareholders in servicing their accounts. The second component is
an asset-based sales charge to be retained by the Distributor during the first
year after the sale of shares, and in subsequent years, to be paid to dealers or
retained by the Distributor to be used in the promotion and distribution of
Class C Shares, in a manner similar to that described above for Class A Shares.
No Rule 12b-1 Plan has been adopted on behalf of the Class Z Shares and,
therefore, the Class Z Shares shall not be subject to deductions relating to
Rule 12b-1 fees.
The Rule 12b-1 Plans for the Class A, Class B and Class C Shares shall
operate in accordance with the Rules of Fair Practice of the National
Association of Securities Dealers, Inc., Article III, section 26(d).
5. The only difference in expenses as between Class A, Class B, Class C,
and Class Z Shares shall relate to differences in Rule 12b-1 plan expenses, as
described in the applicable Rule 12b-1 Plans; however, to the extent that the
Rule 12b-1 Plan expenses of one Class are the same as the Rule 12b-1 Plan
expenses of another Class, such classes shall be subject to the same expenses.
6. There shall be no conversion features associated with the Class A, Class
C, and Class Z Shares. Each Class B Share, however, shall be converted
automatically, and without any action or choice on the part of the holder of the
Class B Shares, into Class A Shares on the conversion date specified, and in
accordance with the terms and conditions approved by the Franklin Mutual Series
Fund's Board of Directors and as described, in each fund's prospectus relating
to the Class B Shares, as such prospectus may be amended from time to time;
provided, however, that the Class B Shares shall be converted automatically into
Class A Shares to the extent and on the terms permitted by the Investment
Company Act of 1940 and the rules and regulations adopted thereunder.
7. Shares of Class A, Class B, Class C and Class Z may be exchanged for
shares of another investment company within the Franklin Templeton Group of
Funds according to the terms and conditions stated in each fund's prospectus, as
it may be amended from time to time, to the extent permitted by the Investment
Company Act of 1940 and the rules and regulations adopted thereunder.
8. Each class will vote separately with respect to any Rule 12b-1 Plan
related to, or which now or in the future may affect, that class.
9. On an ongoing basis, the Board members, pursuant to their fiduciary
responsibilities under the 1940 Act and otherwise, will monitor the Fund for the
existence of any material conflicts between the Board members interests of the
various classes of shares. The Board members, including a majority of the
independent Board members, shall take such action as is reasonably necessary to
eliminate any such conflict that may develop. Franklin Mutual Advisers, Inc. and
Franklin/Templeton Distributors, Inc. shall be responsible for alerting the
Board to any material conflicts that arise.
10. All material amendments to this Plan must be approved by a majority of
the Board members, including a majority of the Board members who are not
interested persons of the Investment Company.
11. I, Elizabeth Cohernour, Secretary of the Franklin Mutual Series Fund
Inc., do hereby certify that this Multiple Class Plan was adopted by the
Investment Company, on behalf of its series MUTUAL SHARES FUND, by a majority of
the Directors of the Fund on OCTOBER 25, 1998.
/s/ ELIZBETH COHERNOUR
Elizabeth Cohernour
General Counsel & Secretary
MULTIPLE CLASS PLAN
ON BEHALF OF
MUTUAL QUALIFIED FUND
This Multiple Class Plan (the "Plan") has been adopted by a majority of the
Board of Directors of FRANKLIN MUTUAL SERIES FUND INC. (the "Investment
Company") for its series, MUTUAL QUALIFIED FUND (the "Fund"). The Board has
determined that the Plan, including the expense allocation, is in the best
interests of each class of the Fund and the Investment Company as a whole. The
Plan sets forth the provisions relating to the establishment of multiple classes
of shares of the Fund, and supersedes any Plan previously adopted for the Fund.
1. The Fund shall offer four classes of shares, to be known as Class A
Shares, Class B Shares, Class C Shares and Class Z Shares.
2. Class A Shares shall carry a front-end sales charge ranging from 0% -
5.75%, and Class C Shares shall carry a front-end sales charge of 1.00%. Class B
Shares and the Class Z Shares shall not be subject to any front-end sales
charges.
3. Class A Shares shall not be subject to a contingent deferred sales
charge ("CDSC"), except in the following limited circumstances. On investments
of $1 million or more, a contingent deferred sales charge of 1.00% of the lesser
of the then-current net asset value or the original net asset value at the time
of purchase applies to redemptions of those investments within the contingency
period of 12 months from the calendar month following their purchase. The CDSC
is waived in certain circumstances, as described in the Fund's prospectus.
Class B Shares shall be subject to a CDSC with the following CDSC schedule:
(a) Class B Shares redeemed within 2 years of their purchase shall be assessed a
CDSC of 4% on the lesser of the then-current net asset value or the original net
asset value at the time of purchase; (b) Class B Shares redeemed within the
third and fourth years of their purchase shall be assessed a CDSC of 3% on the
lesser of the then-current net asset value or the original net asset value at
the time of purchase; (c) Class B Shares redeemed within 5 years of their
purchase shall be assessed a CDSC of 2% on the lesser of the then-current net
asset value or the original net asset value at the time of purchase; and (d)
Class B Shares redeemed within 6 years of their purchase shall be assessed a
CDSC of 1% on the lesser of the then-current net asset value or the original net
asset value at the time of purchase. The CDSC is waived in certain circumstances
described in the Fund's prospectus.
Class C Shares redeemed within 18 months of their purchase shall be
assessed a CDSC of 1.00% on the lesser of the then-current net asset value or
the original net asset value at the time of purchase. The CDSC is waived in
certain circumstances as described in the Fund's prospectus.
Class Z Shares shall not be subject to any CDSC.
4. The distribution plan adopted by the Investment Company pursuant to Rule
12b-1 under the Investment Company Act of 1940, as amended, (the "Rule 12b-1
Plan") associated with the Class A Shares may be used to reimburse
Franklin/Templeton Distributors, Inc. (the "Distributor") or others for expenses
incurred in the promotion and distribution of the Class A Shares. Such expenses
include, but are not limited to, the printing of prospectuses and reports used
for sales purposes, expenses of preparing and distributing sales literature and
related expenses, advertisements, and other distribution-related expenses,
including a prorated portion of the Distributor's overhead expenses attributable
to the distribution of the Class A Shares, as well as any distribution or
service fees paid to securities dealers or their firms or others who have
executed a servicing agreement with the Investment Company for the Class A
Shares, the Distributor or its affiliates.
The Rule 12b-1 Plan associated with the Class B Shares has two components.
The first component is an asset-based sales charge to be retained by Distributor
to compensate Distributor for amounts advanced to securities dealers or their
firms or others with respect to the sale of Class B Shares. In addition, such
payments may be retained by the Distributor to be used in the promotion and
distribution of Class B Shares in a manner similar to that described above for
Class A Shares. The second component is a shareholder servicing fee to be paid
to securities dealers or others who provide personal assistance to shareholders
in servicing their accounts.
The Rule 12b-1 Plan associated with the Class C Shares has two components.
The first component is a shareholder servicing fee, to be paid to
broker-dealers, banks, trust companies and others who provide personal
assistance to shareholders in servicing their accounts. The second component is
an asset-based sales charge to be retained by the Distributor during the first
year after the sale of shares, and in subsequent years, to be paid to dealers or
retained by the Distributor to be used in the promotion and distribution of
Class C Shares, in a manner similar to that described above for Class A Shares.
No Rule 12b-1 Plan has been adopted on behalf of the Class Z Shares and,
therefore, the Class Z Shares shall not be subject to deductions relating to
Rule 12b-1 fees.
The Rule 12b-1 Plans for the Class A, Class B and Class C Shares shall
operate in accordance with the Rules of Fair Practice of the National
Association of Securities Dealers, Inc., Article III, section 26(d).
5. The only difference in expenses as between Class A, Class B, Class C,
and Class Z Shares shall relate to differences in Rule 12b-1 plan expenses, as
described in the applicable Rule 12b-1 Plans; however, to the extent that the
Rule 12b-1 Plan expenses of one Class are the same as the Rule 12b-1 Plan
expenses of another Class, such classes shall be subject to the same expenses.
6. There shall be no conversion features associated with the Class A, Class
C, and Class Z Shares. Each Class B Share, however, shall be converted
automatically, and without any action or choice on the part of the holder of the
Class B Shares, into Class A Shares on the conversion date specified, and in
accordance with the terms and conditions approved by the Franklin Mutual Series
Fund's Board of Directors and as described, in each fund's prospectus relating
to the Class B Shares, as such prospectus may be amended from time to time;
provided, however, that the Class B Shares shall be converted automatically into
Class A Shares to the extent and on the terms permitted by the Investment
Company Act of 1940 and the rules and regulations adopted thereunder.
7. Shares of Class A, Class B, Class C and Class Z may be exchanged for
shares of another investment company within the Franklin Templeton Group of
Funds according to the terms and conditions stated in each fund's prospectus, as
it may be amended from time to time, to the extent permitted by the Investment
Company Act of 1940 and the rules and regulations adopted thereunder.
8. Each class will vote separately with respect to any Rule 12b-1 Plan
related to, or which now or in the future may affect, that class.
9. On an ongoing basis, the Board members, pursuant to their fiduciary
responsibilities under the 1940 Act and otherwise, will monitor the Fund for the
existence of any material conflicts between the Board members interests of the
various classes of shares. The Board members, including a majority of the
independent Board members, shall take such action as is reasonably necessary to
eliminate any such conflict that may develop. Franklin Mutual Advisers, Inc. and
Franklin/Templeton Distributors, Inc. shall be responsible for alerting the
Board to any material conflicts that arise.
10. All material amendments to this Plan must be approved by a majority of
the Board members, including a majority of the Board members who are not
interested persons of the Investment Company.
11. I, Elizabeth Cohernour, Secretary of the Franklin Mutual Series Fund
Inc., do hereby certify that this Multiple Class Plan was adopted by the
Investment Company, on behalf of its series MUTUAL QUALIFIED FUND, by a majority
of the Directors of the Fund on OCTOBER 25, 1998.
/s/ ELIZABETH COHERNOUR
Elizabeth Cohernour
General Counsel & Secretary
MULTIPLE CLASS PLAN
ON BEHALF OF
MUTUAL DISCOVERY FUND
This Multiple Class Plan (the "Plan") has been adopted by a majority of the
Board of Directors of FRANKLIN MUTUAL SERIES FUND INC. (the "Investment
Company") for its series, MUTUAL DISCOVERY FUND (the "Fund"). The Board has
determined that the Plan, including the expense allocation, is in the best
interests of each class of the Fund and the Investment Company as a whole. The
Plan sets forth the provisions relating to the establishment of multiple classes
of shares of the Fund, and supersedes any Plan previously adopted for the Fund.
1. The Fund shall offer four classes of shares, to be known as Class A
Shares, Class B Shares, Class C Shares and Class Z Shares.
2. Class A Shares shall carry a front-end sales charge ranging from 0% -
5.75%, and Class C Shares shall carry a front-end sales charge of 1.00%. Class B
Shares and the Class Z Shares shall not be subject to any front-end sales
charges.
3. Class A Shares shall not be subject to a contingent deferred sales
charge ("CDSC"), except in the following limited circumstances. On investments
of $1 million or more, a contingent deferred sales charge of 1.00% of the lesser
of the then-current net asset value or the original net asset value at the time
of purchase applies to redemptions of those investments within the contingency
period of 12 months from the calendar month following their purchase. The CDSC
is waived in certain circumstances, as described in the Fund's prospectus.
Class B Shares shall be subject to a CDSC with the following CDSC schedule:
(a) Class B Shares redeemed within 2 years of their purchase shall be assessed a
CDSC of 4% on the lesser of the then-current net asset value or the original net
asset value at the time of purchase; (b) Class B Shares redeemed within the
third and fourth years of their purchase shall be assessed a CDSC of 3% on the
lesser of the then-current net asset value or the original net asset value at
the time of purchase; (c) Class B Shares redeemed within 5 years of their
purchase shall be assessed a CDSC of 2% on the lesser of the then-current net
asset value or the original net asset value at the time of purchase; and (d)
Class B Shares redeemed within 6 years of their purchase shall be assessed a
CDSC of 1% on the lesser of the then-current net asset value or the original net
asset value at the time of purchase. The CDSC is waived in certain circumstances
described in the Fund's prospectus.
Class C Shares redeemed within 18 months of their purchase shall be
assessed a CDSC of 1.00% on the lesser of the then-current net asset value or
the original net asset value at the time of purchase. The CDSC is waived in
certain circumstances as described in the Fund's prospectus.
Class Z Shares shall not be subject to any CDSC.
4. The distribution plan adopted by the Investment Company pursuant to Rule
12b-1 under the Investment Company Act of 1940, as amended, (the "Rule 12b-1
Plan") associated with the Class A Shares may be used to reimburse
Franklin/Templeton Distributors, Inc. (the "Distributor") or others for expenses
incurred in the promotion and distribution of the Class A Shares. Such expenses
include, but are not limited to, the printing of prospectuses and reports used
for sales purposes, expenses of preparing and distributing sales literature and
related expenses, advertisements, and other distribution-related expenses,
including a prorated portion of the Distributor's overhead expenses attributable
to the distribution of the Class A Shares, as well as any distribution or
service fees paid to securities dealers or their firms or others who have
executed a servicing agreement with the Investment Company for the Class A
Shares, the Distributor or its affiliates.
The Rule 12b-1 Plan associated with the Class B Shares has two components.
The first component is an asset-based sales charge to be retained by Distributor
to compensate Distributor for amounts advanced to securities dealers or their
firms or others with respect to the sale of Class B Shares. In addition, such
payments may be retained by the Distributor to be used in the promotion and
distribution of Class B Shares in a manner similar to that described above for
Class A Shares. The second component is a shareholder servicing fee to be paid
to securities dealers or others who provide personal assistance to shareholders
in servicing their accounts.
The Rule 12b-1 Plan associated with the Class C Shares has two components.
The first component is a shareholder servicing fee, to be paid to
broker-dealers, banks, trust companies and others who provide personal
assistance to shareholders in servicing their accounts. The second component is
an asset-based sales charge to be retained by the Distributor during the first
year after the sale of shares, and in subsequent years, to be paid to dealers or
retained by the Distributor to be used in the promotion and distribution of
Class C Shares, in a manner similar to that described above for Class A Shares.
No Rule 12b-1 Plan has been adopted on behalf of the Class Z Shares and,
therefore, the Class Z Shares shall not be subject to deductions relating to
Rule 12b-1 fees.
The Rule 12b-1 Plans for the Class A, Class B and Class C Shares shall
operate in accordance with the Rules of Fair Practice of the National
Association of Securities Dealers, Inc., Article III, section 26(d).
5. The only difference in expenses as between Class A, Class B, Class C,
and Class Z Shares shall relate to differences in Rule 12b-1 plan expenses, as
described in the applicable Rule 12b-1 Plans; however, to the extent that the
Rule 12b-1 Plan expenses of one Class are the same as the Rule 12b-1 Plan
expenses of another Class, such classes shall be subject to the same expenses.
6. There shall be no conversion features associated with the Class A, Class
C, and Class Z Shares. Each Class B Share, however, shall be converted
automatically, and without any action or choice on the part of the holder of the
Class B Shares, into Class A Shares on the conversion date specified, and in
accordance with the terms and conditions approved by the Franklin Mutual Series
Fund's Board of Directors and as described, in each fund's prospectus relating
to the Class B Shares, as such prospectus may be amended from time to time;
provided, however, that the Class B Shares shall be converted automatically into
Class A Shares to the extent and on the terms permitted by the Investment
Company Act of 1940 and the rules and regulations adopted thereunder.
7. Shares of Class A, Class B, Class C and Class Z may be exchanged for
shares of another investment company within the Franklin Templeton Group of
Funds according to the terms and conditions stated in each fund's prospectus, as
it may be amended from time to time, to the extent permitted by the Investment
Company Act of 1940 and the rules and regulations adopted thereunder.
8. Each class will vote separately with respect to any Rule 12b-1 Plan
related to, or which now or in the future may affect, that class.
9. On an ongoing basis, the Board members, pursuant to their fiduciary
responsibilities under the 1940 Act and otherwise, will monitor the Fund for the
existence of any material conflicts between the Board members interests of the
various classes of shares. The Board members, including a majority of the
independent Board members, shall take such action as is reasonably necessary to
eliminate any such conflict that may develop. Franklin Mutual Advisers, Inc. and
Franklin/Templeton Distributors, Inc. shall be responsible for alerting the
Board to any material conflicts that arise.
10. All material amendments to this Plan must be approved by a majority of
the Board members, including a majority of the Board members who are not
interested persons of the Investment Company.
11. I, Elizabeth Cohernour, Secretary of the Franklin Mutual Series Fund
Inc., do hereby certify that this Multiple Class Plan was adopted by the
Investment Company, on behalf of its series MUTUAL DISCOVERY FUND, by a majority
of the Directors of the Fund on OCTOBER 25, 1998.
/s/ ELIZABETH COHERNOUR
Elizabeth Cohernour
General Counsel & Secretary
MULTIPLE CLASS PLAN
ON BEHALF OF
MUTUAL BEACON FUND
This Multiple Class Plan (the "Plan") has been adopted by a majority of the
Board of Directors of FRANKLIN MUTUAL SERIES FUND INC. (the "Investment
Company") for its series, MUTUAL BEACON FUND (the "Fund"). The Board has
determined that the Plan, including the expense allocation, is in the best
interests of each class of the Fund and the Investment Company as a whole. The
Plan sets forth the provisions relating to the establishment of multiple classes
of shares of the Fund, and supersedes any Plan previously adopted for the Fund.
1. The Fund shall offer four classes of shares, to be known as Class A
Shares, Class B Shares, Class C Shares and Class Z Shares.
2. Class A Shares shall carry a front-end sales charge ranging from 0% -
5.75%, and Class C Shares shall carry a front-end sales charge of 1.00%. Class B
Shares and the Class Z Shares shall not be subject to any front-end sales
charges.
3. Class A Shares shall not be subject to a contingent deferred sales
charge ("CDSC"), except in the following limited circumstances. On investments
of $1 million or more, a contingent deferred sales charge of 1.00% of the lesser
of the then-current net asset value or the original net asset value at the time
of purchase applies to redemptions of those investments within the contingency
period of 12 months from the calendar month following their purchase. The CDSC
is waived in certain circumstances, as described in the Fund's prospectus.
Class B Shares shall be subject to a CDSC with the following CDSC schedule:
(a) Class B Shares redeemed within 2 years of their purchase shall be assessed a
CDSC of 4% on the lesser of the then-current net asset value or the original net
asset value at the time of purchase; (b) Class B Shares redeemed within the
third and fourth years of their purchase shall be assessed a CDSC of 3% on the
lesser of the then-current net asset value or the original net asset value at
the time of purchase; (c) Class B Shares redeemed within 5 years of their
purchase shall be assessed a CDSC of 2% on the lesser of the then-current net
asset value or the original net asset value at the time of purchase; and (d)
Class B Shares redeemed within 6 years of their purchase shall be assessed a
CDSC of 1% on the lesser of the then-current net asset value or the original net
asset value at the time of purchase. The CDSC is waived in certain circumstances
described in the Fund's prospectus.
Class C Shares redeemed within 18 months of their purchase shall be
assessed a CDSC of 1.00% on the lesser of the then-current net asset value or
the original net asset value at the time of purchase. The CDSC is waived in
certain circumstances as described in the Fund's prospectus.
Class Z Shares shall not be subject to any CDSC.
4. The distribution plan adopted by the Investment Company pursuant to Rule
12b-1 under the Investment Company Act of 1940, as amended, (the "Rule 12b-1
Plan") associated with the Class A Shares may be used to reimburse
Franklin/Templeton Distributors, Inc. (the "Distributor") or others for expenses
incurred in the promotion and distribution of the Class A Shares. Such expenses
include, but are not limited to, the printing of prospectuses and reports used
for sales purposes, expenses of preparing and distributing sales literature and
related expenses, advertisements, and other distribution-related expenses,
including a prorated portion of the Distributor's overhead expenses attributable
to the distribution of the Class A Shares, as well as any distribution or
service fees paid to securities dealers or their firms or others who have
executed a servicing agreement with the Investment Company for the Class A
Shares, the Distributor or its affiliates.
The Rule 12b-1 Plan associated with the Class B Shares has two components.
The first component is an asset-based sales charge to be retained by Distributor
to compensate Distributor for amounts advanced to securities dealers or their
firms or others with respect to the sale of Class B Shares. In addition, such
payments may be retained by the Distributor to be used in the promotion and
distribution of Class B Shares in a manner similar to that described above for
Class A Shares. The second component is a shareholder servicing fee to be paid
to securities dealers or others who provide personal assistance to shareholders
in servicing their accounts.
The Rule 12b-1 Plan associated with the Class C Shares has two components.
The first component is a shareholder servicing fee, to be paid to
broker-dealers, banks, trust companies and others who provide personal
assistance to shareholders in servicing their accounts. The second component is
an asset-based sales charge to be retained by the Distributor during the first
year after the sale of shares, and in subsequent years, to be paid to dealers or
retained by the Distributor to be used in the promotion and distribution of
Class C Shares, in a manner similar to that described above for Class A Shares.
No Rule 12b-1 Plan has been adopted on behalf of the Class Z Shares and,
therefore, the Class Z Shares shall not be subject to deductions relating to
Rule 12b-1 fees.
The Rule 12b-1 Plans for the Class A, Class B and Class C Shares shall
operate in accordance with the Rules of Fair Practice of the National
Association of Securities Dealers, Inc., Article III, section 26(d).
5. The only difference in expenses as between Class A, Class B, Class C,
and Class Z Shares shall relate to differences in Rule 12b-1 plan expenses, as
described in the applicable Rule 12b-1 Plans; however, to the extent that the
Rule 12b-1 Plan expenses of one Class are the same as the Rule 12b-1 Plan
expenses of another Class, such classes shall be subject to the same expenses.
6. There shall be no conversion features associated with the Class A, Class
C, and Class Z Shares. Each Class B Share, however, shall be converted
automatically, and without any action or choice on the part of the holder of the
Class B Shares, into Class A Shares on the conversion date specified, and in
accordance with the terms and conditions approved by the Franklin Mutual Series
Fund's Board of Directors and as described, in each fund's prospectus relating
to the Class B Shares, as such prospectus may be amended from time to time;
provided, however, that the Class B Shares shall be converted automatically into
Class A Shares to the extent and on the terms permitted by the Investment
Company Act of 1940 and the rules and regulations adopted thereunder.
7. Shares of Class A, Class B, Class C and Class Z may be exchanged for
shares of another investment company within the Franklin Templeton Group of
Funds according to the terms and conditions stated in each fund's prospectus, as
it may be amended from time to time, to the extent permitted by the Investment
Company Act of 1940 and the rules and regulations adopted thereunder.
8. Each class will vote separately with respect to any Rule 12b-1 Plan
related to, or which now or in the future may affect, that class.
9. On an ongoing basis, the Board members, pursuant to their fiduciary
responsibilities under the 1940 Act and otherwise, will monitor the Fund for the
existence of any material conflicts between the Board members interests of the
various classes of shares. The Board members, including a majority of the
independent Board members, shall take such action as is reasonably necessary to
eliminate any such conflict that may develop. Franklin Mutual Advisers, Inc. and
Franklin/Templeton Distributors, Inc. shall be responsible for alerting the
Board to any material conflicts that arise.
10. All material amendments to this Plan must be approved by a majority of
the Board members, including a majority of the Board members who are not
interested persons of the Investment Company.
11. I, Elizabeth Cohernour, Secretary of the Franklin Mutual Series Fund
Inc., do hereby certify that this Multiple Class Plan was adopted by the
Investment Company, on behalf of its series MUTUAL BEACON FUND, by a majority of
the Directors of the Fund on OCTOBER 25, 1998.
/s/ ELIZABETH COHERNOUR
Elizabeth Cohernour
General Counsel & Secretary
MULTIPLE CLASS PLAN
ON BEHALF OF
MUTUAL EUROPEAN FUND
This Multiple Class Plan (the "Plan") has been adopted by a majority of the
Board of Directors of FRANKLIN MUTUAL SERIES FUND INC. (the "Investment
Company") for its series, MUTUAL EUROPEAN FUND (the "Fund"). The Board has
determined that the Plan, including the expense allocation, is in the best
interests of each class of the Fund and the Investment Company as a whole. The
Plan sets forth the provisions relating to the establishment of multiple classes
of shares of the Fund, and supersedes any Plan previously adopted for the Fund.
1. The Fund shall offer four classes of shares, to be known as Class A
Shares, Class B Shares, Class C Shares and Class Z Shares.
2. Class A Shares shall carry a front-end sales charge ranging from 0% -
5.75%, and Class C Shares shall carry a front-end sales charge of 1.00%. Class B
Shares and the Class Z Shares shall not be subject to any front-end sales
charges.
3. Class A Shares shall not be subject to a contingent deferred sales
charge ("CDSC"), except in the following limited circumstances. On investments
of $1 million or more, a contingent deferred sales charge of 1.00% of the lesser
of the then-current net asset value or the original net asset value at the time
of purchase applies to redemptions of those investments within the contingency
period of 12 months from the calendar month following their purchase. The CDSC
is waived in certain circumstances, as described in the Fund's prospectus.
Class B Shares shall be subject to a CDSC with the following CDSC schedule:
(a) Class B Shares redeemed within 2 years of their purchase shall be assessed a
CDSC of 4% on the lesser of the then-current net asset value or the original net
asset value at the time of purchase; (b) Class B Shares redeemed within the
third and fourth years of their purchase shall be assessed a CDSC of 3% on the
lesser of the then-current net asset value or the original net asset value at
the time of purchase; (c) Class B Shares redeemed within 5 years of their
purchase shall be assessed a CDSC of 2% on the lesser of the then-current net
asset value or the original net asset value at the time of purchase; and (d)
Class B Shares redeemed within 6 years of their purchase shall be assessed a
CDSC of 1% on the lesser of the then-current net asset value or the original net
asset value at the time of purchase. The CDSC is waived in certain circumstances
described in the Fund's prospectus.
Class C Shares redeemed within 18 months of their purchase shall be
assessed a CDSC of 1.00% on the lesser of the then-current net asset value or
the original net asset value at the time of purchase. The CDSC is waived in
certain circumstances as described in the Fund's prospectus.
Class Z Shares shall not be subject to any CDSC.
4. The distribution plan adopted by the Investment Company pursuant to Rule
12b-1 under the Investment Company Act of 1940, as amended, (the "Rule 12b-1
Plan") associated with the Class A Shares may be used to reimburse
Franklin/Templeton Distributors, Inc. (the "Distributor") or others for expenses
incurred in the promotion and distribution of the Class A Shares. Such expenses
include, but are not limited to, the printing of prospectuses and reports used
for sales purposes, expenses of preparing and distributing sales literature and
related expenses, advertisements, and other distribution-related expenses,
including a prorated portion of the Distributor's overhead expenses attributable
to the distribution of the Class A Shares, as well as any distribution or
service fees paid to securities dealers or their firms or others who have
executed a servicing agreement with the Investment Company for the Class A
Shares, the Distributor or its affiliates.
The Rule 12b-1 Plan associated with the Class B Shares has two components.
The first component is an asset-based sales charge to be retained by Distributor
to compensate Distributor for amounts advanced to securities dealers or their
firms or others with respect to the sale of Class B Shares. In addition, such
payments may be retained by the Distributor to be used in the promotion and
distribution of Class B Shares in a manner similar to that described above for
Class A Shares. The second component is a shareholder servicing fee to be paid
to securities dealers or others who provide personal assistance to shareholders
in servicing their accounts.
The Rule 12b-1 Plan associated with the Class C Shares has two components.
The first component is a shareholder servicing fee, to be paid to
broker-dealers, banks, trust companies and others who provide personal
assistance to shareholders in servicing their accounts. The second component is
an asset-based sales charge to be retained by the Distributor during the first
year after the sale of shares, and in subsequent years, to be paid to dealers or
retained by the Distributor to be used in the promotion and distribution of
Class C Shares, in a manner similar to that described above for Class A Shares.
No Rule 12b-1 Plan has been adopted on behalf of the Class Z Shares and,
therefore, the Class Z Shares shall not be subject to deductions relating to
Rule 12b-1 fees.
The Rule 12b-1 Plans for the Class A, Class B and Class C Shares shall
operate in accordance with the Rules of Fair Practice of the National
Association of Securities Dealers, Inc., Article III, section 26(d).
5. The only difference in expenses as between Class A, Class B, Class C,
and Class Z Shares shall relate to differences in Rule 12b-1 plan expenses, as
described in the applicable Rule 12b-1 Plans; however, to the extent that the
Rule 12b-1 Plan expenses of one Class are the same as the Rule 12b-1 Plan
expenses of another Class, such classes shall be subject to the same expenses.
6. There shall be no conversion features associated with the Class A, Class
C, and Class Z Shares. Each Class B Share, however, shall be converted
automatically, and without any action or choice on the part of the holder of the
Class B Shares, into Class A Shares on the conversion date specified, and in
accordance with the terms and conditions approved by the Franklin Mutual Series
Fund's Board of Directors and as described, in each fund's prospectus relating
to the Class B Shares, as such prospectus may be amended from time to time;
provided, however, that the Class B Shares shall be converted automatically into
Class A Shares to the extent and on the terms permitted by the Investment
Company Act of 1940 and the rules and regulations adopted thereunder.
7. Shares of Class A, Class B, Class C and Class Z may be exchanged for
shares of another investment company within the Franklin Templeton Group of
Funds according to the terms and conditions stated in each fund's prospectus, as
it may be amended from time to time, to the extent permitted by the Investment
Company Act of 1940 and the rules and regulations adopted thereunder.
8. Each class will vote separately with respect to any Rule 12b-1 Plan
related to, or which now or in the future may affect, that class.
9. On an ongoing basis, the Board members, pursuant to their fiduciary
responsibilities under the 1940 Act and otherwise, will monitor the Fund for the
existence of any material conflicts between the Board members interests of the
various classes of shares. The Board members, including a majority of the
independent Board members, shall take such action as is reasonably necessary to
eliminate any such conflict that may develop. Franklin Mutual Advisers, Inc. and
Franklin/Templeton Distributors, Inc. shall be responsible for alerting the
Board to any material conflicts that arise.
10. All material amendments to this Plan must be approved by a majority of
the Board members, including a majority of the Board members who are not
interested persons of the Investment Company.
11. I, Elizabeth Cohernour, Secretary of the Franklin Mutual Series Fund
Inc., do hereby certify that this Multiple Class Plan was adopted by the
Investment Company, on behalf of its series MUTUAL EUROPEAN FUND, by a majority
of the Directors of the Fund on OCTOBER 25, 1998.
/s/ ELIZABETH COHERNOUR
Elizabeth Cohernour
General Counsel & Secretary
MULTIPLE CLASS PLAN
ON BEHALF OF
MUTUAL FINANCIAL SERVICES FUND
This Multiple Class Plan (the "Plan") has been adopted by a majority of the
Board of Directors of FRANKLIN MUTUAL SERIES FUND INC. (the "Investment
Company") for its series, MUTUAL FINANCIAL SERVICES FUND (the "Fund"). The Board
has determined that the Plan, including the expense allocation, is in the best
interests of each class of the Fund and the Investment Company as a whole. The
Plan sets forth the provisions relating to the establishment of multiple classes
of shares of the Fund, and supersedes any Plan previously adopted for the Fund.
1. The Fund shall offer four classes of shares, to be known as Class A
Shares, Class B Shares, Class C Shares and Class Z Shares.
2. Class A Shares shall carry a front-end sales charge ranging from 0% -
5.75%, and Class C Shares shall carry a front-end sales charge of 1.00%. Class B
Shares and the Class Z Shares shall not be subject to any front-end sales
charges.
3. Class A Shares shall not be subject to a contingent deferred sales
charge ("CDSC"), except in the following limited circumstances. On investments
of $1 million or more, a contingent deferred sales charge of 1.00% of the lesser
of the then-current net asset value or the original net asset value at the time
of purchase applies to redemptions of those investments within the contingency
period of 12 months from the calendar month following their purchase. The CDSC
is waived in certain circumstances, as described in the Fund's prospectus.
Class B Shares shall be subject to a CDSC with the following CDSC schedule:
(a) Class B Shares redeemed within 2 years of their purchase shall be assessed a
CDSC of 4% on the lesser of the then-current net asset value or the original net
asset value at the time of purchase; (b) Class B Shares redeemed within the
third and fourth years of their purchase shall be assessed a CDSC of 3% on the
lesser of the then-current net asset value or the original net asset value at
the time of purchase; (c) Class B Shares redeemed within 5 years of their
purchase shall be assessed a CDSC of 2% on the lesser of the then-current net
asset value or the original net asset value at the time of purchase; and (d)
Class B Shares redeemed within 6 years of their purchase shall be assessed a
CDSC of 1% on the lesser of the then-current net asset value or the original net
asset value at the time of purchase. The CDSC is waived in certain circumstances
described in the Fund's prospectus.
Class C Shares redeemed within 18 months of their purchase shall be
assessed a CDSC of 1.00% on the lesser of the then-current net asset value or
the original net asset value at the time of purchase. The CDSC is waived in
certain circumstances as described in the Fund's prospectus.
Class Z Shares shall not be subject to any CDSC.
4. The distribution plan adopted by the Investment Company pursuant to Rule
12b-1 under the Investment Company Act of 1940, as amended, (the "Rule 12b-1
Plan") associated with the Class A Shares may be used to reimburse
Franklin/Templeton Distributors, Inc. (the "Distributor") or others for expenses
incurred in the promotion and distribution of the Class A Shares. Such expenses
include, but are not limited to, the printing of prospectuses and reports used
for sales purposes, expenses of preparing and distributing sales literature and
related expenses, advertisements, and other distribution-related expenses,
including a prorated portion of the Distributor's overhead expenses attributable
to the distribution of the Class A Shares, as well as any distribution or
service fees paid to securities dealers or their firms or others who have
executed a servicing agreement with the Investment Company for the Class A
Shares, the Distributor or its affiliates.
The Rule 12b-1 Plan associated with the Class B Shares has two components.
The first component is an asset-based sales charge to be retained by Distributor
to compensate Distributor for amounts advanced to securities dealers or their
firms or others with respect to the sale of Class B Shares. In addition, such
payments may be retained by the Distributor to be used in the promotion and
distribution of Class B Shares in a manner similar to that described above for
Class A Shares. The second component is a shareholder servicing fee to be paid
to securities dealers or others who provide personal assistance to shareholders
in servicing their accounts.
The Rule 12b-1 Plan associated with the Class C Shares has two components.
The first component is a shareholder servicing fee, to be paid to
broker-dealers, banks, trust companies and others who provide personal
assistance to shareholders in servicing their accounts. The second component is
an asset-based sales charge to be retained by the Distributor during the first
year after the sale of shares, and in subsequent years, to be paid to dealers or
retained by the Distributor to be used in the promotion and distribution of
Class C Shares, in a manner similar to that described above for Class A Shares.
No Rule 12b-1 Plan has been adopted on behalf of the Class Z Shares and,
therefore, the Class Z Shares shall not be subject to deductions relating to
Rule 12b-1 fees.
The Rule 12b-1 Plans for the Class A, Class B and Class C Shares shall
operate in accordance with the Rules of Fair Practice of the National
Association of Securities Dealers, Inc., Article III, section 26(d).
5. The only difference in expenses as between Class A, Class B, Class C,
and Class Z Shares shall relate to differences in Rule 12b-1 plan expenses, as
described in the applicable Rule 12b-1 Plans; however, to the extent that the
Rule 12b-1 Plan expenses of one Class are the same as the Rule 12b-1 Plan
expenses of another Class, such classes shall be subject to the same expenses.
6. There shall be no conversion features associated with the Class A, Class
C, and Class Z Shares. Each Class B Share, however, shall be converted
automatically, and without any action or choice on the part of the holder of the
Class B Shares, into Class A Shares on the conversion date specified, and in
accordance with the terms and conditions approved by the Franklin Mutual Series
Fund's Board of Directors and as described, in each fund's prospectus relating
to the Class B Shares, as such prospectus may be amended from time to time;
provided, however, that the Class B Shares shall be converted automatically into
Class A Shares to the extent and on the terms permitted by the Investment
Company Act of 1940 and the rules and regulations adopted thereunder.
7. Shares of Class A, Class B, Class C and Class Z may be exchanged for
shares of another investment company within the Franklin Templeton Group of
Funds according to the terms and conditions stated in each fund's prospectus, as
it may be amended from time to time, to the extent permitted by the Investment
Company Act of 1940 and the rules and regulations adopted thereunder.
8. Each class will vote separately with respect to any Rule 12b-1 Plan
related to, or which now or in the future may affect, that class.
9. On an ongoing basis, the Board members, pursuant to their fiduciary
responsibilities under the 1940 Act and otherwise, will monitor the Fund for the
existence of any material conflicts between the Board members interests of the
various classes of shares. The Board members, including a majority of the
independent Board members, shall take such action as is reasonably necessary to
eliminate any such conflict that may develop. Franklin Mutual Advisers, Inc. and
Franklin/Templeton Distributors, Inc. shall be responsible for alerting the
Board to any material conflicts that arise.
10. All material amendments to this Plan must be approved by a majority of
the Board members, including a majority of the Board members who are not
interested persons of the Investment Company.
11. I, Elizabeth Cohernour, Secretary of the Franklin Mutual Series Fund
Inc., do hereby certify that this Multiple Class Plan was adopted by the
Investment Company, on behalf of its series MUTUAL FINANCIAL SERVICES FUND, by a
majority of the Directors of the Fund on OCTOBER 25, 1998.
/s/ ELIZABETH COHERNOUR
Elizabeth Cohernour
General Counsel & Secretary
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
The schedule contains summary financial information extracted from the
Mutual Shares Fund December 31, 1998 annual report and is qualified in
its entirety by reference to such financial statements.
</LEGEND>
<CIK> 0000825063
<NAME> FRANKLIN MUTUAL SERIES FUND INC.
<SERIES>
<NUMBER> 011
<NAME> MUTUAL SHARES FUND - CLASS I
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<INVESTMENTS-AT-COST> 6978951819
<INVESTMENTS-AT-VALUE> 8448918130
<RECEIVABLES> 120445064
<ASSETS-OTHER> 342474412
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 8911837606
<PAYABLE-FOR-SECURITIES> 65474863
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 63759176
<TOTAL-LIABILITIES> 129234039
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 7176395096
<SHARES-COMMON-STOCK> 77429363
<SHARES-COMMON-PRIOR> 49071801
<ACCUMULATED-NII-CURRENT> 5008347
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 133700373
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 1467499751
<NET-ASSETS> 8782603567
<DIVIDEND-INCOME> 148728155
<INTEREST-INCOME> 134618671
<OTHER-INCOME> 0
<EXPENSES-NET> (86972429)
<NET-INVESTMENT-INCOME> 196374397
<REALIZED-GAINS-CURRENT> 583182217
<APPREC-INCREASE-CURRENT> (827301518)
<NET-CHANGE-FROM-OPS> (47744904)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (33970722)
<DISTRIBUTIONS-OF-GAINS> (95152617)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 46308752
<NUMBER-OF-SHARES-REDEEMED> (24191574)
<SHARES-REINVESTED> 6240384
<NET-CHANGE-IN-ASSETS> (816482808)
<ACCUMULATED-NII-PRIOR> 18844839
<ACCUMULATED-GAINS-PRIOR> 119083166
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> (59068503)
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> (90273000)
<AVERAGE-NET-ASSETS> 1487231885
<PER-SHARE-NAV-BEGIN> 21.26
<PER-SHARE-NII> 0.40
<PER-SHARE-GAIN-APPREC> (0.41)
<PER-SHARE-DIVIDEND> (0.46)
<PER-SHARE-DISTRIBUTIONS> (1.29)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 19.50
<EXPENSE-RATIO> 1.08
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0<F1><F2>
<FN>
<F1>The per share NAV has been restated to reflect a 5-for-1 stock split
effective February 3, 1997.
<F2>The expense ratio excluding waiver and payments by affiliates is 1.12%.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
The schedule conatains summary financial information extracted from the
Mutual Shares Fund December 31, 1998 annual report and is qualified in
its entirety by reference to such financial statements.
</LEGEND>
<CIK> 0000825063
<NAME> FRANKLIN MUTUAL SERIES FUND INC.
<SERIES>
<NUMBER> 012
<NAME> MUTUAL SHARES FUND - CLASS II
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<INVESTMENTS-AT-COST> 6978951819
<INVESTMENTS-AT-VALUE> 8448918130
<RECEIVABLES> 120445064
<ASSETS-OTHER> 342474412
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 8911837606
<PAYABLE-FOR-SECURITIES> 65474863
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 63759176
<TOTAL-LIABILITIES> 129234039
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 7176395096
<SHARES-COMMON-STOCK> 51209632
<SHARES-COMMON-PRIOR> 30071639
<ACCUMULATED-NII-CURRENT> 5008347
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 133700373
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 1467499751
<NET-ASSETS> 8782603567
<DIVIDEND-INCOME> 148728155
<INTEREST-INCOME> 134618671
<OTHER-INCOME> 0
<EXPENSES-NET> (86972429)
<NET-INVESTMENT-INCOME> 196374397
<REALIZED-GAINS-CURRENT> 583182217
<APPREC-INCREASE-CURRENT> (827301518)
<NET-CHANGE-FROM-OPS> (47744904)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (16236799)
<DISTRIBUTIONS-OF-GAINS> (62745269)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 28245508
<NUMBER-OF-SHARES-REDEEMED> (10921730)
<SHARES-REINVESTED> 3814215
<NET-CHANGE-IN-ASSETS> (816482808)
<ACCUMULATED-NII-PRIOR> 18844839
<ACCUMULATED-GAINS-PRIOR> 119083166
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> (56068503)
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> (90273000)
<AVERAGE-NET-ASSETS> 949181699
<PER-SHARE-NAV-BEGIN> 21.18
<PER-SHARE-NII> 0.28
<PER-SHARE-GAIN-APPREC> (0.43)
<PER-SHARE-DIVIDEND> (0.33)
<PER-SHARE-DISTRIBUTIONS> (1.29)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 19.41
<EXPENSE-RATIO> 1.73
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0<F1><F2>
<FN>
<F1>The per share NAV has been restated to reflect a 5-for-1 stock split
effective February 3, 1997.
<F2>The expense ratio excluding waiver and payments by affiliates is 1.77%.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
The schedule contains summary financial information extracted from the
Mutual Shares Fund December 31, 1998 annual report and is qualified
in its entirety by reference to such financial statements.
</LEGEND>
<CIK> 0000825063
<NAME> FRANKLIN MUTUAL SERIES FUND INC.
<SERIES>
<NUMBER> 013
<NAME> MUTUAL SHARES FUND - CLASS Z
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<INVESTMENTS-AT-COST> 6978951819
<INVESTMENTS-AT-VALUE> 8448918130
<RECEIVABLES> 120445064
<ASSETS-OTHER> 342474412
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 8911837606
<PAYABLE-FOR-SECURITIES> 65474863
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 63759176
<TOTAL-LIABILITIES> 129234039
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 7176395096
<SHARES-COMMON-STOCK> 321254341
<SHARES-COMMON-PRIOR> 371790528
<ACCUMULATED-NII-CURRENT> 5008347
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 133700373
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 1467499751
<NET-ASSETS> 8782603567
<DIVIDEND-INCOME> 148728155
<INTEREST-INCOME> 134618671
<OTHER-INCOME> 0
<EXPENSES-NET> (86972429)
<NET-INVESTMENT-INCOME> 196374397
<REALIZED-GAINS-CURRENT> 583182217
<APPREC-INCREASE-CURRENT> (827301518)
<NET-CHANGE-FROM-OPS> (47744904)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (164855136)
<DISTRIBUTIONS-OF-GAINS> (405815356)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 19502032
<NUMBER-OF-SHARES-REDEEMED> (95950368)
<SHARES-REINVESTED> 25912149
<NET-CHANGE-IN-ASSETS> (816482808)
<ACCUMULATED-NII-PRIOR> 18844839
<ACCUMULATED-GAINS-PRIOR> 119083166
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> (56068503)
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> (90273000)
<AVERAGE-NET-ASSETS> 7405126476
<PER-SHARE-NAV-BEGIN> 21.30
<PER-SHARE-NII> 0.53
<PER-SHARE-GAIN-APPREC> (0.46)
<PER-SHARE-DIVIDEND> (0.53)
<PER-SHARE-DISTRIBUTIONS> (1.29)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 19.55
<EXPENSE-RATIO> 0.73
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0<F1><F2>
<FN>
<F1>The per share NAV has been restated to reflect a 5-for-1 stock
split effective February 3, 1997.
<F2>The expense ratio excluding waiver and payments by affliates is
0.77%.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
The schedule contains summary financial information extracted from the
Mutual Qualified December 31, 1998 Annual Report and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<CIK> 0000825063
<NAME> FRANKLIN MUTUAL SERIES FUND INC.
<SERIES>
<NUMBER> 021
<NAME> MUTUAL QUALIFIED FUND - CLASS I
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<INVESTMENTS-AT-COST> 3898799501
<INVESTMENTS-AT-VALUE> 4590783030
<RECEIVABLES> 90528720
<ASSETS-OTHER> 251968000
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 4933279750
<PAYABLE-FOR-SECURITIES> 43942720
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 54066057
<TOTAL-LIABILITIES> 98008777
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 4030545992
<SHARES-COMMON-STOCK> 34721323
<SHARES-COMMON-PRIOR> 24950021
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> (6722046)
<ACCUMULATED-NET-GAINS> 121302119
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 690144908
<NET-ASSETS> 4835270973
<DIVIDEND-INCOME> 95702048
<INTEREST-INCOME> 66745646
<OTHER-INCOME> 0
<EXPENSES-NET> (49189107)
<NET-INVESTMENT-INCOME> 113258587
<REALIZED-GAINS-CURRENT> 440721475
<APPREC-INCREASE-CURRENT> (569601471)
<NET-CHANGE-FROM-OPS> (15621409)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (12591220)
<DISTRIBUTIONS-OF-GAINS> (43430197)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 18574657
<NUMBER-OF-SHARES-REDEEMED> (12017429)
<SHARES-REINVESTED> 3214074
<NET-CHANGE-IN-ASSETS> (1088987227)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 71308370
<OVERDISTRIB-NII-PRIOR> (9120509)
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> (34762293)
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> (51030845)
<AVERAGE-NET-ASSETS> 580751098
<PER-SHARE-NAV-BEGIN> 18.14
<PER-SHARE-NII> 0.35
<PER-SHARE-GAIN-APPREC> (0.35)
<PER-SHARE-DIVIDEND> (0.39)
<PER-SHARE-DISTRIBUTIONS> (1.33)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 16.42
<EXPENSE-RATIO> 1.11<F1>
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
<FN>
<F1>Expense ratio, excluding waiver and payments by affiliate is 1.14%.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
The schedule contains summary financial information extracted from the
Mutual Qualified December 31, 1998 Annual Report and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<CIK> 0000825063
<NAME> FRANKLIN MUTUAL SERIES FUND INC.
<SERIES>
<NUMBER> 022
<NAME> MUTUAL QUALIFIED FUND - CLASS II
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<INVESTMENTS-AT-COST> 3898799501
<INVESTMENTS-AT-VALUE> 4590783030
<RECEIVABLES> 90528720
<ASSETS-OTHER> 251968000
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 4933279750
<PAYABLE-FOR-SECURITIES> 43942720
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 249916762
<TOTAL-LIABILITIES> 54066057
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 4030545992
<SHARES-COMMON-STOCK> 19725821
<SHARES-COMMON-PRIOR> 12808322
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> (6722046)
<ACCUMULATED-NET-GAINS> 121302119
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 690144908
<NET-ASSETS> 4835270973
<DIVIDEND-INCOME> 95702048
<INTEREST-INCOME> 66745646
<OTHER-INCOME> 0
<EXPENSES-NET> (49189107)
<NET-INVESTMENT-INCOME> 113258587
<REALIZED-GAINS-CURRENT> 440721475
<APPREC-INCREASE-CURRENT> (569601471)
<NET-CHANGE-FROM-OPS> (15621409)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (5201123)
<DISTRIBUTIONS-OF-GAINS> (24765851)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 9583122
<NUMBER-OF-SHARES-REDEEMED> (4328390)
<SHARES-REINVESTED> 1662767
<NET-CHANGE-IN-ASSETS> (1088987227)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 71308370
<OVERDISTRIB-NII-PRIOR> (9120509)
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> (34762293)
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> (51030845)
<AVERAGE-NET-ASSETS> 318341983
<PER-SHARE-NAV-BEGIN> 18.09
<PER-SHARE-NII> 0.24
<PER-SHARE-GAIN-APPREC> (0.37)
<PER-SHARE-DIVIDEND> (0.28)
<PER-SHARE-DISTRIBUTIONS> (1.33)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 16.35
<EXPENSE-RATIO> 1.76<F1>
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
<FN>
<F1>Expense ratio, excluding waiver and payments by affiliate is 1.79%.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
The schedule contains summary financial information extracted from the
Mutual Qualified December 31, 1998 Annual Report and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<CIK> 0000825063
<NAME> FRANKLIN MUTUAL SERIES FUND INC.
<SERIES>
<NUMBER> 023
<NAME> MUTUAL QUALIFIED FUND - CLASS Z
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<INVESTMENTS-AT-COST> 3898799501
<INVESTMENTS-AT-VALUE> 4590783030
<RECEIVABLES> 90528720
<ASSETS-OTHER> 251968000
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 4933279750
<PAYABLE-FOR-SECURITIES> 43942720
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 249916762
<TOTAL-LIABILITIES> 54066057
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 4030545992
<SHARES-COMMON-STOCK> 239532404
<SHARES-COMMON-PRIOR> 288130967
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> (6722046)
<ACCUMULATED-NET-GAINS> 121302119
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 690144908
<NET-ASSETS> 4835270973
<DIVIDEND-INCOME> 95702048
<INTEREST-INCOME> 66745646
<OTHER-INCOME> 0
<EXPENSES-NET> (49189107)
<NET-INVESTMENT-INCOME> 113258587
<REALIZED-GAINS-CURRENT> 440721475
<APPREC-INCREASE-CURRENT> (569601471)
<NET-CHANGE-FROM-OPS> (15621409)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (104418623)
<DISTRIBUTIONS-OF-GAINS> (311180836)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 24990204
<NUMBER-OF-SHARES-REDEEMED> (97884948)
<SHARES-REINVESTED> 24296181
<NET-CHANGE-IN-ASSETS> (1088987227)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 71308370
<OVERDISTRIB-NII-PRIOR> (9120509)
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> (34762293)
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> (51030845)
<AVERAGE-NET-ASSETS> 4891918928
<PER-SHARE-NAV-BEGIN> 18.19
<PER-SHARE-NII> 0.43
<PER-SHARE-GAIN-APPREC> (0.38)
<PER-SHARE-DIVIDEND> (0.45)
<PER-SHARE-DISTRIBUTIONS> (1.33)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 16.46
<EXPENSE-RATIO> 0.76<F1>
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
<FN>
<F1>Expense ratio, excluding waiver and payments by affiliate is 0.79%.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
The schedule contains summary financial information extracted from the
Mutual Beacon Fund December 31, 1998 annual report and is qualified in
its entirety by reference to such financal statements.
</LEGEND>
<CIK> 0000825063
<NAME> FRANKLIN MUTUAL SERIES FUND, INC.
<SERIES>
<NUMBER> 031
<NAME> MUTUAL BEACON FUND - CLASS I
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<INVESTMENTS-AT-COST> 4460009942
<INVESTMENTS-AT-VALUE> 5221885373
<RECEIVABLES> 105637522
<ASSETS-OTHER> 246036072
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 5573558967
<PAYABLE-FOR-SECURITIES> 38473861
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 56719985
<TOTAL-LIABILITIES> 95193846
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 4656097212
<SHARES-COMMON-STOCK> 72362807
<SHARES-COMMON-PRIOR> 53486802
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> (26929334)
<ACCUMULATED-NET-GAINS> 93627496
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 755569747
<NET-ASSETS> 5478365121
<DIVIDEND-INCOME> 128502085
<INTEREST-INCOME> 71470992
<OTHER-INCOME> 0
<EXPENSES-NET> (58207240)
<NET-INVESTMENT-INCOME> 141765837
<REALIZED-GAINS-CURRENT> 391064810
<APPREC-INCREASE-CURRENT> (427971403)
<NET-CHANGE-FROM-OPS> 104859244
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (27206575)
<DISTRIBUTIONS-OF-GAINS> (59012359)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 33023123
<NUMBER-OF-SHARES-REDEEMED> (20320000)
<SHARES-REINVESTED> 6172882
<NET-CHANGE-IN-ASSETS> (1316400830)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 81862137
<OVERDISTRIB-NII-PRIOR> (13240115)
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> (39589767)
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> (60147101)
<AVERAGE-NET-ASSETS> 939801585
<PER-SHARE-NAV-BEGIN> 14.09
<PER-SHARE-NII> 0.27
<PER-SHARE-GAIN-APPREC> 0
<PER-SHARE-DIVIDEND> (0.40)
<PER-SHARE-DISTRIBUTIONS> (0.87)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 13.09
<EXPENSE-RATIO> 1.11<F1>
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
<FN>
<F1>Expense ratio, excluding waiver and payments by affiliates is 1.14%.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
The schedule contains summary financial information extracted from the
Mutual Beacon Fund December 31, 1998 annual report and is qualified in
its entirety by reference to such financal statements.
</LEGEND>
<CIK> 0000825063
<NAME> FRANKLIN MUTUAL SERIES FUND, INC.
<SERIES>
<NUMBER> 032
<NAME> MUTUAL BEACON FUND - CLASS II
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<INVESTMENTS-AT-COST> 4460009942
<INVESTMENTS-AT-VALUE> 5221885373
<RECEIVABLES> 105637522
<ASSETS-OTHER> 246036072
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 5573558967
<PAYABLE-FOR-SECURITIES> 38473861
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 56719985
<TOTAL-LIABILITIES> 95193846
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 4656097212
<SHARES-COMMON-STOCK> 38365916
<SHARES-COMMON-PRIOR> 25807641
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> (26929334)
<ACCUMULATED-NET-GAINS> 93627496
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 755569747
<NET-ASSETS> 5478365121
<DIVIDEND-INCOME> 128502085
<INTEREST-INCOME> 71470992
<OTHER-INCOME> 0
<EXPENSES-NET> (58207240)
<NET-INVESTMENT-INCOME> 141765837
<REALIZED-GAINS-CURRENT> 391064810
<APPREC-INCREASE-CURRENT> (427971403)
<NET-CHANGE-FROM-OPS> 104859244
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (11323821)
<DISTRIBUTIONS-OF-GAINS> (31235735)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 17229777
<NUMBER-OF-SHARES-REDEEMED> (7656767)
<SHARES-REINVESTED> 2985265
<NET-CHANGE-IN-ASSETS> (1316400830)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 81862137
<OVERDISTRIB-NII-PRIOR> (13240115)
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> (39589767)
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> (60147101)
<AVERAGE-NET-ASSETS> 482506881
<PER-SHARE-NAV-BEGIN> 14.04
<PER-SHARE-NII> 0.18
<PER-SHARE-GAIN-APPREC> 0.01
<PER-SHARE-DIVIDEND> (0.32)
<PER-SHARE-DISTRIBUTIONS> (0.87)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 13.04
<EXPENSE-RATIO> 1.76<F1>
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
<FN>
<F1>Expense ratio, excluding waiver and payments by affiliates is 1.79%.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
The schedule contains summary financial information extracted from the
Mutual Beacon Fund December 31, 1998 annual report and is qualified in
its entirety by reference to such financal statements.
</LEGEND>
<CIK> 0000825063
<NAME> FRANKLIN MUTUAL SERIES FUND, INC.
<SERIES>
<NUMBER> 033
<NAME> MUTUAL BEACON FUND - CLASS Z
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<INVESTMENTS-AT-COST> 4460009942
<INVESTMENTS-AT-VALUE> 5221885373
<RECEIVABLES> 105637522
<ASSETS-OTHER> 246036072
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 5573558967
<PAYABLE-FOR-SECURITIES> 38473861
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 56719985
<TOTAL-LIABILITIES> 95193846
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 4656097212
<SHARES-COMMON-STOCK> 307102017
<SHARES-COMMON-PRIOR> 402248317
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> (26929334)
<ACCUMULATED-NET-GAINS> 93627496
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 755569747
<NET-ASSETS> 5478365121
<DIVIDEND-INCOME> 128502085
<INTEREST-INCOME> 71470992
<OTHER-INCOME> 0
<EXPENSES-NET> (58207240)
<NET-INVESTMENT-INCOME> 141765837
<REALIZED-GAINS-CURRENT> 391064810
<APPREC-INCREASE-CURRENT> (427971403)
<NET-CHANGE-FROM-OPS> 104859244
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (137278406)
<DISTRIBUTIONS-OF-GAINS> (268697611)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 29538240
<NUMBER-OF-SHARES-REDEEMED> (153566842)
<SHARES-REINVESTED> 28882302
<NET-CHANGE-IN-ASSETS> (1316400830)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 81862137
<OVERDISTRIB-NII-PRIOR> (13240115)
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> (39589767)
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> (60147101)
<AVERAGE-NET-ASSETS> 5172644372
<PER-SHARE-NAV-BEGIN> 14.12
<PER-SHARE-NII> 0.33
<PER-SHARE-GAIN-APPREC> (0.01)
<PER-SHARE-DIVIDEND> (0.45)
<PER-SHARE-DISTRIBUTIONS> (0.87)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 13.12
<EXPENSE-RATIO> 0.76<F1>
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
<FN>
<F1>Expense ratio, excluding waiver and payments by affiliates is 0.79%.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
MUTUAL FINANCIAL SERVICES FUND DECEMBER 31, 1998 ANNUAL REPORTS AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000825063
<NAME> FRANKLIN MUTUAL SERIES FUND, INC.
<SERIES>
<NUMBER> 061
<NAME> MUTUAL FINANCIAL SERVICES FUND - CLASS I
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<INVESTMENTS-AT-COST> 416992736
<INVESTMENTS-AT-VALUE> 424362240
<RECEIVABLES> 15959990
<ASSETS-OTHER> 5124345
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 445446575
<PAYABLE-FOR-SECURITIES> 3251441
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 6357413
<TOTAL-LIABILITIES> 9608854
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 430766403
<SHARES-COMMON-STOCK> 12824019
<SHARES-COMMON-PRIOR> 6376348
<ACCUMULATED-NII-CURRENT> 662433
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> (1779073)
<ACCUM-APPREC-OR-DEPREC> 6187958
<NET-ASSETS> 435837721
<DIVIDEND-INCOME> 8645374
<INTEREST-INCOME> 4311789
<OTHER-INCOME> 0
<EXPENSES-NET> (6297752)
<NET-INVESTMENT-INCOME> 6659411
<REALIZED-GAINS-CURRENT> (1674796)
<APPREC-INCREASE-CURRENT> (10675258)
<NET-CHANGE-FROM-OPS> (5690643)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (1942133)
<DISTRIBUTIONS-OF-GAINS> (1546395)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 15112548
<NUMBER-OF-SHARES-REDEEMED> (8903051)
<SHARES-REINVESTED> 238174
<NET-CHANGE-IN-ASSETS> 178032225
<ACCUMULATED-NII-PRIOR> 108579
<ACCUMULATED-GAINS-PRIOR> 3503357
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> (3742268)
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> (6733550)
<AVERAGE-NET-ASSETS> 159038436
<PER-SHARE-NAV-BEGIN> 12.27
<PER-SHARE-NII> 0.17
<PER-SHARE-GAIN-APPREC> 0.69
<PER-SHARE-DIVIDEND> (0.15)
<PER-SHARE-DISTRIBUTIONS> (0.11)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 12.87
<EXPENSE-RATIO> 1.35<F1>
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
<FN>
<F1> The expense ratio excluding waiver and payments by affiliates is 1.44%
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
MUTUAL FINANCIAL SERVICES FUND DECEMBER 31, 1998 ANNUAL REPORTS AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000825063
<NAME> FRANKLIN MUTUAL SERIES FUND, INC.
<SERIES>
<NUMBER> 062
<NAME> MUTUAL FINANCIAL SERVICES FUND - CLASS II
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<INVESTMENTS-AT-COST> 416992736
<INVESTMENTS-AT-VALUE> 424362240
<RECEIVABLES> 15959990
<ASSETS-OTHER> 5124345
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 445446575
<PAYABLE-FOR-SECURITIES> 3251441
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 6357413
<TOTAL-LIABILITIES> 9608854
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 430766403
<SHARES-COMMON-STOCK> 9952021
<SHARES-COMMON-PRIOR> 3524251
<ACCUMULATED-NII-CURRENT> 662433
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> (1779073)
<ACCUM-APPREC-OR-DEPREC> 6187958
<NET-ASSETS> 435837721
<DIVIDEND-INCOME> 8645374
<INTEREST-INCOME> 4311789
<OTHER-INCOME> 0
<EXPENSES-NET> (6297752)
<NET-INVESTMENT-INCOME> 6659411
<REALIZED-GAINS-CURRENT> (1674796)
<APPREC-INCREASE-CURRENT> (10675258)
<NET-CHANGE-FROM-OPS> (5690643)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (823,564)
<DISTRIBUTIONS-OF-GAINS> (1039797)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 8626732
<NUMBER-OF-SHARES-REDEEMED> (2326399)
<SHARES-REINVESTED> 127437
<NET-CHANGE-IN-ASSETS> 178032225
<ACCUMULATED-NII-PRIOR> 108579
<ACCUMULATED-GAINS-PRIOR> 3503357
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> (3742268)
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> (6733550)
<AVERAGE-NET-ASSETS> 105980230
<PER-SHARE-NAV-BEGIN> 12.26
<PER-SHARE-NII> 0.08
<PER-SHARE-GAIN-APPREC> 0.68
<PER-SHARE-DIVIDEND> (0.08)
<PER-SHARE-DISTRIBUTIONS> (0.11)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 12.83
<EXPENSE-RATIO> 2.00<F1>
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
<FN>
<F1> The expense ratio excluding waiver and payments by affiliates is 2.09%.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
MUTUAL FINANCIAL SERVICES FUND DECEMBER 31, 1998 ANNUAL REPORTS AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000825063
<NAME> FRANKLIN MUTUAL SERIES FUND, INC.
<SERIES>
<NUMBER> 063
<NAME> MUTUAL FINANCIAL SERVICES FUND - CLASS Z
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<INVESTMENTS-AT-COST> 416992736
<INVESTMENTS-AT-VALUE> 424362240
<RECEIVABLES> 15959990
<ASSETS-OTHER> 5124345
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 445446575
<PAYABLE-FOR-SECURITIES> 3251441
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 6357413
<TOTAL-LIABILITIES> 9608854
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 430766403
<SHARES-COMMON-STOCK> 11137627
<SHARES-COMMON-PRIOR> 11114665
<ACCUMULATED-NII-CURRENT> 662433
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> (1779073)
<ACCUM-APPREC-OR-DEPREC> 6187958
<NET-ASSETS> 435837721
<DIVIDEND-INCOME> 8645374
<INTEREST-INCOME> 4311789
<OTHER-INCOME> 0
<EXPENSES-NET> (6297752)
<NET-INVESTMENT-INCOME> 6659411
<REALIZED-GAINS-CURRENT> (1674796)
<APPREC-INCREASE-CURRENT> (10675258)
<NET-CHANGE-FROM-OPS> (5690643)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (2372985)
<DISTRIBUTIONS-OF-GAINS> (1988317)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 15667428
<NUMBER-OF-SHARES-REDEEMED> (15948655)
<SHARES-REINVESTED> 304189
<NET-CHANGE-IN-ASSETS> 178032225
<ACCUMULATED-NII-PRIOR> 108579
<ACCUMULATED-GAINS-PRIOR> 3503357
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> (3742268)
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> (6733550)
<AVERAGE-NET-ASSETS> 203227817
<PER-SHARE-NAV-BEGIN> 12.27
<PER-SHARE-NII> 0.24
<PER-SHARE-GAIN-APPREC> 0.64
<PER-SHARE-DIVIDEND> (0.19)
<PER-SHARE-DISTRIBUTIONS> (0.11)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 12.85
<EXPENSE-RATIO> 1.00<F1>
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
<FN>
<F1> The expense ratio excluding waiver and paymnets by affiliates is 1.09%.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
The schedule contains summary financial information extracted from the
Mutual European Fund December 31, 1998 Annual Report and is qualified in
its entirety by reference to such financial statements.
</LEGEND>
<CIK> 0000825063
<NAME> FRANKLIN MUTUAL SERIES FUND INC.
<SERIES>
<NUMBER>051
<NAME> MUTUAL EUROPEAN FUND - CLASS I
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<INVESTMENTS-AT-COST> 682533112
<INVESTMENTS-AT-VALUE> 734876613
<RECEIVABLES> 24347321
<ASSETS-OTHER> 32598000
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 791821934
<PAYABLE-FOR-SECURITIES> 23400926
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 17506781
<TOTAL-LIABILITIES> 40907707
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 701822271
<SHARES-COMMON-STOCK> 13668766
<SHARES-COMMON-PRIOR> 7420423
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> (2431378)
<ACCUMULATED-NET-GAINS> 4578672
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 46944662
<NET-ASSETS> 750914227
<DIVIDEND-INCOME> 17964517
<INTEREST-INCOME> 8279189
<OTHER-INCOME> 0
<EXPENSES-NET> (10414444)
<NET-INVESTMENT-INCOME> 15829262
<REALIZED-GAINS-CURRENT> 6283000
<APPREC-INCREASE-CURRENT> (21552207)
<NET-CHANGE-FROM-OPS> 560055
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (3913014)
<DISTRIBUTIONS-OF-GAINS> (5010752)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 30432242
<NUMBER-OF-SHARES-REDEEMED> (24763667)
<SHARES-REINVESTED> 579768
<NET-CHANGE-IN-ASSETS> 61728690
<ACCUMULATED-NII-PRIOR> 119297
<ACCUMULATED-GAINS-PRIOR> 24408641
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> (6843216)
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> (10414444)
<AVERAGE-NET-ASSETS> 162235633
<PER-SHARE-NAV-BEGIN> 12.56
<PER-SHARE-NII> 0.27
<PER-SHARE-GAIN-APPREC> 0.29
<PER-SHARE-DIVIDEND> (0.29)
<PER-SHARE-DISTRIBUTIONS> (0.36)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 12.47
<EXPENSE-RATIO> 1.40
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
The schedule contains summary financial information extracted from the
Mutual European Fund December 31, 1998 Annual Report and is qualified in
its entirety by reference to such financial statements.
</LEGEND>
<CIK> 0000825063
<NAME> FRANKLIN MUTUAL SERIES FUND INC.
<SERIES>
<NUMBER>052
<NAME> MUTUAL EUROPEAN FUND - CLASS II
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<INVESTMENTS-AT-COST> 682533112
<INVESTMENTS-AT-VALUE> 734876613
<RECEIVABLES> 24347321
<ASSETS-OTHER> 32598000
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 791821934
<PAYABLE-FOR-SECURITIES> 23400926
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 17506781
<TOTAL-LIABILITIES> 40907707
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 701822271
<SHARES-COMMON-STOCK> 7753961
<SHARES-COMMON-PRIOR> 3926964
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> (2431378)
<ACCUMULATED-NET-GAINS> 4578672
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 46944662
<NET-ASSETS> 750914227
<DIVIDEND-INCOME> 17964517
<INTEREST-INCOME> 8279189
<OTHER-INCOME> 0
<EXPENSES-NET> (10414444)
<NET-INVESTMENT-INCOME> 15829262
<REALIZED-GAINS-CURRENT> 6283000
<APPREC-INCREASE-CURRENT> (21552207)
<NET-CHANGE-FROM-OPS> 560055
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (1783371)
<DISTRIBUTIONS-OF-GAINS> (2814880)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 6416186
<NUMBER-OF-SHARES-REDEEMED> (2903661)
<SHARES-REINVESTED> 314472
<NET-CHANGE-IN-ASSETS> 61728690
<ACCUMULATED-NII-PRIOR> 119297
<ACCUMULATED-GAINS-PRIOR> 24408641
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> (6843216)
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> (10414444)
<AVERAGE-NET-ASSETS> 89336531
<PER-SHARE-NAV-BEGIN> 12.52
<PER-SHARE-NII> 0.21
<PER-SHARE-GAIN-APPREC> 0.31
<PER-SHARE-DIVIDEND> (0.23)
<PER-SHARE-DISTRIBUTIONS> (0.36)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 12.45
<EXPENSE-RATIO> 2.05
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
The schedule contains summary financial information extracted from the
Mutual European Fund December 31, 1998 Annual Report and is qualified in
its entirety by reference to such financial statements.
</LEGEND>
<CIK> 0000825063
<NAME> FRANKLIN MUTUAL SERIES FUND INC.
<SERIES>
<NUMBER> 053
<NAME> MUTUAL EUROPEAN FUND - CLASS Z
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<INVESTMENTS-AT-COST> 682533112
<INVESTMENTS-AT-VALUE> 734876613
<RECEIVABLES> 24347321
<ASSETS-OTHER> 32598000
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 791821934
<PAYABLE-FOR-SECURITIES> 23400926
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 17506781
<TOTAL-LIABILITIES> 40907707
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 701822271
<SHARES-COMMON-STOCK> 38578050
<SHARES-COMMON-PRIOR> 43411737
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> (2431378)
<ACCUMULATED-NET-GAINS> 4578672
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 46944662
<NET-ASSETS> 750914227
<DIVIDEND-INCOME> 17964517
<INTEREST-INCOME> 8279189
<OTHER-INCOME> 0
<EXPENSES-NET> (10414444)
<NET-INVESTMENT-INCOME> 15829262
<REALIZED-GAINS-CURRENT> 6283000
<APPREC-INCREASE-CURRENT> (21552207)
<NET-CHANGE-FROM-OPS> 560055
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (13601975)
<DISTRIBUTIONS-OF-GAINS> (17368914)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 23594141
<NUMBER-OF-SHARES-REDEEMED> (30159934)
<SHARES-REINVESTED> 1732106
<NET-CHANGE-IN-ASSETS> 61728690
<ACCUMULATED-NII-PRIOR> 119297
<ACCUMULATED-GAINS-PRIOR> 24408641
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> (6843216)
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> (10414444)
<AVERAGE-NET-ASSETS> 604126306
<PER-SHARE-NAV-BEGIN> 12.60
<PER-SHARE-NII> 0.31
<PER-SHARE-GAIN-APPREC> 0.33
<PER-SHARE-DIVIDEND> (0.34)
<PER-SHARE-DISTRIBUTIONS> (0.36)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 12.54
<EXPENSE-RATIO> 1.05
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
MUTUAL DISCOVERY FUND DECEMBER 31, 1998 ANNUAL REPORT AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000825063
<NAME> FRANKLIN MUTUAL SERIES FUND INC.
<SERIES>
<NUMBER> 041
<NAME> MUTUAL DISCOVERY FUND - CLASS I
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<INVESTMENTS-AT-COST> 3450811376
<INVESTMENTS-AT-VALUE> 4019281590
<RECEIVABLES> 112279437
<ASSETS-OTHER> 239271058
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 4370832085
<PAYABLE-FOR-SECURITIES> 17201387
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 77166274
<TOTAL-LIABILITIES> 94367661
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 3722116501
<SHARES-COMMON-STOCK> 50016964
<SHARES-COMMON-PRIOR> 36860777
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> (45045911)
<ACCUMULATED-NET-GAINS> 49435922
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (211246260)
<NET-ASSETS> 3937752772
<DIVIDEND-INCOME> 92844164
<INTEREST-INCOME> 51195695
<OTHER-INCOME> 0
<EXPENSES-NET> (60061592)
<NET-INVESTMENT-INCOME> 83978267
<REALIZED-GAINS-CURRENT> 164704672
<APPREC-INCREASE-CURRENT> (434011075)
<NET-CHANGE-FROM-OPS> (185328136)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (20468910)
<DISTRIBUTIONS-OF-GAINS> (40521871)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 34825153
<NUMBER-OF-SHARES-REDEEMED> (24829893)
<SHARES-REINVESTED> 3160927
<NET-CHANGE-IN-ASSETS> (1038374117)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 97057881
<OVERDISTRIB-NII-PRIOR> (31183193)
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> (41019712)
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> (61345453)
<AVERAGE-NET-ASSETS> 904304263
<PER-SHARE-NAV-BEGIN> 18.83
<PER-SHARE-NII> 0.32
<PER-SHARE-GAIN-APPREC> (0.74)
<PER-SHARE-DIVIDEND> (0.41)
<PER-SHARE-DISTRIBUTIONS> (0.81)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 17.19
<EXPENSE-RATIO> 1.35<F1>
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
<FN>
<F1> The expense ratio excluding waiver and payments by affiliates is 1.38%.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
MUTUAL DISCOVERY FUND DECEMBER 31, 1998 ANNUAL REPORT AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000825063
<NAME> FRANKLIN MUTUAL SERIES FUND INC.
<SERIES>
<NUMBER> 042
<NAME> MUTUAL DISCOVERY FUND - CLASS II
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<INVESTMENTS-AT-COST> 3450811376
<INVESTMENTS-AT-VALUE> 4019281590
<RECEIVABLES> 112279437
<ASSETS-OTHER> 239271058
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 4370832085
<PAYABLE-FOR-SECURITIES> 17201387
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 77166274
<TOTAL-LIABILITIES> 94367661
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 3722116501
<SHARES-COMMON-STOCK> 32864405
<SHARES-COMMON-PRIOR> 21431763
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> (45045911)
<ACCUMULATED-NET-GAINS> 49435922
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (211246260)
<NET-ASSETS> 3937752772
<DIVIDEND-INCOME> 92844164
<INTEREST-INCOME> 51195695
<OTHER-INCOME> 0
<EXPENSES-NET> (60061592)
<NET-INVESTMENT-INCOME> 83978267
<REALIZED-GAINS-CURRENT> 164704672
<APPREC-INCREASE-CURRENT> (434011075)
<NET-CHANGE-FROM-OPS> (185328136)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (9767282)
<DISTRIBUTIONS-OF-GAINS> (25858757)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 16896047
<NUMBER-OF-SHARES-REDEEMED> (7286338)
<SHARES-REINVESTED> 1822933
<NET-CHANGE-IN-ASSETS> (1038374117)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 97057881
<OVERDISTRIB-NII-PRIOR> (31183193)
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> (41019712)
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> (61345453)
<AVERAGE-NET-ASSETS> 560019847
<PER-SHARE-NAV-BEGIN> 18.79
<PER-SHARE-NII> 0.23
<PER-SHARE-GAIN-APPREC> (0.75)
<PER-SHARE-DIVIDEND> (0.31)
<PER-SHARE-DISTRIBUTIONS> (0.81)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 17.15
<EXPENSE-RATIO> 2.00<F1>
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
<FN>
<F1> The expense ratio excluding waiver and payments by affiliates is 2.02%.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
MUTUAL DISCOVERY FUND DECEMBER 31, 1998 ANNUAL REPORT AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000825063
<NAME> FRANKLIN MUTUAL SERIES FUND INC.
<SERIES>
<NUMBER> 041
<NAME> MUTUAL DISCOVERY FUND - CLASS Z
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<INVESTMENTS-AT-COST> 3450811376
<INVESTMENTS-AT-VALUE> 4019281590
<RECEIVABLES> 112279437
<ASSETS-OTHER> 239271058
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 4370832085
<PAYABLE-FOR-SECURITIES> 17201387
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 77166274
<TOTAL-LIABILITIES> 94367661
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 3722116501
<SHARES-COMMON-STOCK> 145619362
<SHARES-COMMON-PRIOR> 205337909
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> (45045911)
<ACCUMULATED-NET-GAINS> 49435922
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (211246260)
<NET-ASSETS> 3937752772
<DIVIDEND-INCOME> 92844164
<INTEREST-INCOME> 51195695
<OTHER-INCOME> 0
<EXPENSES-NET> (60061592)
<NET-INVESTMENT-INCOME> 83978267
<REALIZED-GAINS-CURRENT> 164704672
<APPREC-INCREASE-CURRENT> (434011075)
<NET-CHANGE-FROM-OPS> (185328136)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (74719859)
<DISTRIBUTIONS-OF-GAINS> (138830937)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 25432957
<NUMBER-OF-SHARES-REDEEMED> (96260843)
<SHARES-REINVESTED> 11109339
<NET-CHANGE-IN-ASSETS> (1038374117)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 97057881
<OVERDISTRIB-NII-PRIOR> (31183193)
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> (41019712)
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> (61345453)
<AVERAGE-NET-ASSETS> 3660278026
<PER-SHARE-NAV-BEGIN> 18.89
<PER-SHARE-NII> 0.38
<PER-SHARE-GAIN-APPREC> (0.71)
<PER-SHARE-DIVIDEND> (0.48)
<PER-SHARE-DISTRIBUTIONS> (0.81)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 17.27
<EXPENSE-RATIO> 1.00<F1>
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
<FN>
<F1> The expense ratio excluding waiver and payments by affiliates is 1.03%.
</FN>
</TABLE>