As filed with the Securities and Exchange Commission on April 28, 2000.
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 28 (X)
and/or
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1940
Amendment No. 29 (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
MURRAY L. SIMPSON, 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
[x] on May 1, 2000 pursuant to paragraph b
[ ] 60 days after filing pursuant to paragraph (a)(1)
[ ] on (date) 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.
Prospectus
Franklin Mutual Series Fund Inc.
CLASS A, B & C
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
MAY 1, 2000
[Insert Franklin Templeton Ben Head]
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]
2 Mutual Beacon Fund; Mutual
Qualified Fund; Mutual Shares Fund;
Mutual Discovery Fund
17 Mutual Financial Services Fund
29 Mutual European Fund
40 Management
43 Distributions and Taxes
44 Financial Highlights
YOUR ACCOUNT
[Begin callout]
INFORMATION ABOUT SALES CHARGES, ACCOUNT TRANSACTIONS AND SERVICES
[End callout]
56 Choosing a Share Class
60 Buying Shares
62 Investor Services
65 Selling Shares
67 Account Policies
70 Questions
FOR MORE INFORMATION
[Begin callout]
WHERE TO LEARN MORE ABOUT EACH FUND
[End callout]
Back Cover
MUTUAL BEACON FUND
MUTUAL QUALIFIED FUND
MUTUAL SHARES FUND
MUTUAL DISCOVERY FUND
[Insert graphic of bullseye and arrows] GOALS AND STRATEGIES
GOALS The principal investment goal of Mutual Beacon, Mutual Qualified and
Mutual Shares is capital appreciation, which may occasionally be short-term.
Their secondary goal is income. Mutual Discovery's investment goal is capital
appreciation.
MAIN INVESTMENT STRATEGIES Under normal market conditions, the funds invest
mainly in equity securities of companies that the manager believes are
available at market prices less than their value based on certain recognized
or objective criteria (intrinsic value). Following this value-oriented
strategy, the funds primarily invest in:
o UNDERVALUED STOCKS Stocks trading at a discount to intrinsic value.
And to a much smaller extent, the funds also invest in:
o RESTRUCTURING COMPANIES Securities of companies that are involved in
restructurings such as mergers, acquisitions, consolidations, liquidations,
spinoffs, or tender or exchange offers.
o DISTRESSED COMPANIES Securities of companies that are, or are about to be,
involved in reorganizations, financial restructurings, or bankruptcy.
[Begin callout]
The funds invest primarily in securities of companies the manager believes
are undervalued.
[End callout]
The funds invest primarily in mid- and large-cap companies with market
capitalization values (share price times the number of common stock shares
outstanding) greater than $1.5 billion. Each fund also may invest a
significant portion of its assets in small-cap companies. An equity security,
or stock, represents a proportionate share of the ownership of a company; its
value is based on the success of the company's business, any income paid to
stockholders, the value of its assets, and general market conditions. Common
stocks and preferred stocks, and securities convertible into common stock,
are examples of equity securities.
While the funds generally purchase securities for investment purposes, the
manager may seek to influence or control management, or invest in other
companies that do so, when the manager believes the fund may benefit.
Each fund may invest in debt securities to a lesser extent than its
investments in equity securities. Debt securities represent the obligation of
the issuer to repay a loan of money to it, and generally pay interest to the
holder. Bonds, notes and debentures are examples of debt securities. The
funds may invest in debt securities in any rating category established by an
independent rating agency, including lower rated (or comparable unrated) or
defaulted debt securities ("junk bonds").
The funds' investments in Restructuring and Distressed Companies typically
involve the purchase of junk bonds, or comparable unrated debt securities, or
the purchase of direct indebtedness (or participations in the indebtedness)
of such companies. Indebtedness generally represents a specific commercial
loan or portion of a loan made to a company by a financial institution such
as a bank or insurance company. Loan participations represent fractional
interest in a company's indebtedness and are generally made available by
banks or insurance companies. By purchasing all or a part of a company's
direct indebtedness, a fund, in effect, steps into the shoes of the lender.
If the loan is secured, the fund will have a priority claim to the assets of
the company ahead of unsecured creditors and stockholders. The funds
generally make such investments to achieve capital appreciation, rather than
to seek income.
The funds also may purchase trade claims and other similar direct obligations
or claims against companies in bankruptcy. Trade claims are generally
purchased from creditors of the bankrupt company and typically represent
money due to a supplier of goods or services to the company.
The funds may invest a substantial portion (up to 35%) of their assets in
foreign securities and Mutual Discovery generally invests a majority (more
than 50%) of its assets in foreign, equity and debt securities, which may
include sovereign debt and participations in foreign government debt. The
funds generally seek to hedge (protect) against currency risks, largely using
forward foreign currency exchange contracts, where available and when, 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.
PORTFOLIO SELECTION The manager employs a research driven, fundamental value
strategy. In choosing equity investments, the manager focuses on the market
price of a company's securities relative to the manager's own evaluation of
the company's asset value, including an analysis of book value, cash flow
potential, long-term earnings, and multiples of earnings of comparable
securities of both public or private companies. Value stock prices are
considered "cheap" relative to the company's perceived value and are often
out of favor with other investors. The prices of debt obligations of
Restructuring or Distressed Companies also may be "cheap" relative to the
value of the company's assets. The funds may invest in such securities if the
manager believes the market may have overreacted to adverse developments or
failed to appreciate positive changes. The manager examines each investment
separately and there are no set criteria as to specific value parameters,
asset size, earnings or industry type.
DIFFERENCES BETWEEN THE FUNDS While the manager follows the same strategy in
choosing investments for all of the funds, there are certain differences
among the funds. First, the funds themselves vary in size and each fund has
different teams of portfolio managers who have primary responsibility for
selecting investments. Mutual Beacon and Mutual Qualified tend to invest more
of their assets in small-cap stocks than Mutual Shares or Mutual Discovery.
While all four funds may invest a portion of their assets in foreign
securities, the proportion of their assets so invested will vary: Mutual
Shares will generally have the lowest portion of assets in foreign
securities, with Mutual Qualified and Mutual Beacon each respectively having
increasingly larger portions in foreign securities. Mutual Discovery may
invest most of its assets in foreign securities. In addition the funds may
allocate foreign investments in different geographic areas. As a result of
these differences, the performance of the four funds will vary.
TEMPORARY INVESTMENTS The manager may keep a portion of each fund's assets in
cash or invested in short-term, highly liquid money market instruments, when
it believes that insufficient investment opportunities meeting the fund's
investment criteria exist. For example, when prevailing market valuations for
securities are high, there may be fewer securities available at prices below
their intrinsic value. In addition, when the manager believes market or
economic conditions are unfavorable for investors, the manager may invest up
to 100% of each fund's assets in a temporary defensive manner or hold a
substantial portion of the fund's portfolio in cash. In these circumstances,
a fund may be unable to achieve its investment goals.
[Insert graphic of chart with line going up and down] MAIN RISKS
STOCKS While stocks historically have outperformed other asset classes over
the long term, they tend to go up and down more dramatically over the short
term. These price movements may result from factors affecting individual
companies, industries or the securities market as a whole.
VALUE INVESTING Value investments may not increase in price as anticipated
by the manager, and may decline even further if other investors fail to
recognize the company's value, or favor investing in faster-growing
companies, or if the factors that the manager believes will increase the
price do not occur.
The funds' bargain-driven focus may result in a fund choosing securities that
are not widely followed by other investors. "Cheaply" priced securities may
also include companies reporting poor earnings, companies whose share prices
have declined sharply (sometimes growth companies that have recently stumbled
but have good "fundamentals"), turnarounds, cyclical companies, or companies
emerging from bankruptcy, all of which may have a higher risk of continuing
to be ignored or rejected, and therefore, undervalued by the market or losing
more value.
RESTRUCTURING AND DISTRESSED COMPANIES A merger or other restructuring or
tender or exchange offer proposed at the time a fund invests in a
Restructuring Company may not be completed on the terms contemplated and,
therefore, benefit the fund as anticipated. Also, debt obligations of
Distressed Companies typically are unrated, lower rated, in default or close
to default and may become worthless.
[Begin callout]
Because the securities the funds hold fluctuate in price, the value of your
investment in a fund will go up and down. This means you could lose money
over short or even extended periods.
[End callout]
FOREIGN SECURITIES Investing in foreign securities, including securities of
foreign governments, typically involves more risks than investing in U.S.
securities. Certain of these risks also may apply to securities of U.S.
companies with significant foreign operations. These risks can increase the
potential for losses in the funds and affect their share price.
CURRENCY EXCHANGE RATES. Foreign securities may be issued and traded in
foreign currencies. As a result, their values may be affected by changes in
exchange rates between foreign currencies and the U.S. dollar, as well as
between currencies of countries other than the U.S. For example, if the value
of the U.S. dollar goes up compared to a foreign currency, an investment
traded in that foreign currency will go down in value because it will be
worth less U.S. dollars. The impact of the euro, a relatively new currency
adopted by certain European countries to replace their national currencies,
is unclear at this time.
POLITICAL AND ECONOMIC DEVELOPMENTS. The political, economic and social
structures of some foreign countries may be less stable and more volatile
than those in the U.S. Investments in these countries may be subject to the
risks of internal and external conflicts, currency devaluations, foreign
ownership limitations and tax increases. It is possible that a government may
take over the assets or operations of a company or impose restrictions on the
exchange or export of currency or other assets. Some countries also may have
different legal systems that may make it difficult for the funds to vote
proxies, exercise shareholder rights, and pursue legal remedies with respect
to their foreign investments.
TRADING PRACTICES. Brokerage commissions and other fees generally are higher
for foreign securities. Government supervision and regulation of foreign
stock exchanges, currency markets, trading systems and brokers may be less
than in the U.S. The procedures and rules governing foreign transactions and
custody (holding of the funds' assets) also may involve delays in payment,
delivery or recovery of money or investments.
AVAILABILITY OF INFORMATION. Foreign companies may not be subject to the same
disclosure, accounting, auditing and financial reporting standards and
practices as U.S. companies. Thus, there may be less information publicly
available about foreign companies than about most U.S. companies.
LIMITED MARKETS. Certain foreign securities may be less liquid (harder to
sell) and more volatile than many U.S. securities. This means the funds may
at times be unable to sell foreign securities at favorable prices.
SMALLER COMPANIES While smaller companies, and to some extent mid-cap
companies, may offer greater opportunities for capital growth than larger,
more established companies, they also have more risk. Historically,
smaller-company securities have been more volatile in price and have
fluctuated independently from larger-company securities, especially over the
short term. Smaller or relatively new companies can be particularly sensitive
to changing economic conditions and increases in interest rates, their growth
prospects are less certain and their securities are less liquid. These
companies may suffer significant losses, and can be considered speculative.
CREDIT An issuer may be unable to make interest payments and repay
principal. Changes in an issuer's financial strength or in a security's
credit rating may affect a security's value and, thus, impact fund
performance.
LOWER-RATED AND UNRATED DEBT SECURITIES. Securities rated below investment
grade, sometimes called "junk bonds," and the type of unrated debt securities
purchased by the funds, generally have more risk than higher-rated securities.
They also may fluctuate more in price, and are less liquid than higher rated
securities. Prices are especially sensitive to developments affecting the
company's business and to ratings changes, and typically rise and fall in
response to factors that affect the company's stock prices. Companies issuing
such lower-rated debt securities are not as strong financially, and are more
likely to encounter financial difficulties and be more vulnerable to changes
in the economy, such as a recession or a sustained period of rising interest
rates.
INDEBTEDNESS, PARTICIPATIONS AND TRADE CLAIMS. The purchase of indebtedness
or loan participations of a troubled company always involves a risk as to the
creditworthiness of the issuer and the possibility that principal invested
may be lost. Purchasers of participations, such as the funds, must rely on
the financial institution issuing the participation to assert any rights
against the borrower with respect to the underlying indebtedness. In
addition, the funds take on the risk as to the creditworthiness of the bank
or other financial intermediary issuing the participation, as well as that of
the company issuing 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.
DERIVATIVE SECURITIES Forward foreign currency exchange contracts are
considered derivative investments, since their value depends on the value of
an underlying asset to be purchased or sold. The funds' investments in
derivatives may involve a small investment relative to the amount of risk
assumed. To the extent the funds enter into these transactions, their success
will depend on the manager's ability to predict market movements, and their
use may have the opposite effect of that intended. Risks include potential
loss due to the imposition of controls by a government on the exchange of
foreign currencies, delivery failure, default by the other party, or
inability to close out a position because the trading market became illiquid.
LIQUIDITY Each fund may invest up to 15% of its net assets in securities with
a limited trading market. Reduced liquidity may have an adverse impact on
market price and a fund's ability to sell particular securities when
necessary to meet the fund's liquidity needs or in response to a specific
economic event, such as the deterioration in the creditworthiness of an
issuer. Reduced liquidity in the secondary market for certain securities also
may make it more difficult for a fund to obtain market quotations based on
actual trades for the purpose of valuing the fund's portfolio.
More detailed information about the funds, their policies and risks can be
found in the funds' Statement of Additional Information (SAI).
[Begin callout]
Mutual fund shares are not deposits or obligations of, or guaranteed or
endorsed by, any bank, and are not 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]
[Insert graphic of a bull and a bear] PERFORMANCE
These bar charts and tables show the volatility of each 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.
MUTUAL BEACON FUND
CLASS A ANNUAL TOTAL RETURNS1
[Insert bar graph]
- -8.57% 17.08% 22.42% 22.42% 5.20% 25.43% 20.74% 22.55% 2.02% 16.40%
90 91 92 93 94 95 96 97 98 99
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, 1999
1 YEAR 5 YEARS 10 YEARS
- ---------------------------------------------------------------------------
Mutual Beacon Fund - Class A2 9.69% 15.74% 13.37%
S&P 500(R)Index3 21.04% 28.56% 18.21%
1 YEAR 5 YEARS 10 YEARS
- ---------------------------------------------------------------------------
Mutual Beacon Fund - Class B2 11.33% 16.16% 13.37%
- ---------------------------------------------------------------------------
S&P 500(R)Index3 21.04% 28.56% 18.21%
- ---------------------------------------------------------------------------
- ---------------------------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS
- ---------------------------------------------------------------------------
Mutual Beacon Fund - Class C2 13.52% 16.12% 13.11%
S&P 500(R)Index3 21.04% 28.56% 18.21%
1. Figures do not reflect sales charges. If they did, returns would be lower.
As of March 31, 2000, the fund's year-to-date return was 4.13% for Class A.
2. Figures reflect sales charges.
All fund performance assumes reinvestment of dividends and capital gains.
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.
3. Source: Standard & Poor's 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.
MUTUAL QUALIFIED FUND
CLASS A ANNUAL TOTAL RETURNS1
[Insert bar graph]
- -10.57% 20.62% 22.17% 22.13% 5.32% 26.12% 20.75% 24.44% 0.15% 13.27%
90 91 92 93 94 95 96 97 98 99
YEAR
[Begin callout]
BEST QUARTER:
Q2 '99 13.31%
WORST QUARTER:
Q3 '98 -17.73%
[End callout]
AVERAGE ANNUAL TOTAL RETURNS
For the periods ended December 31, 1999
1 YEAR 5 YEARS 10 YEARS
- ---------------------------------------------------------------------------
Mutual Qualified Fund - Class A2 6.77% 15.17% 13.13%
S&P 500(R)Index3 21.04% 28.56% 18.21%
1 YEAR 5 YEARS 10 YEARS
- ---------------------------------------------------------------------------
Mutual Qualified Fund - Class B2 8.55% 15.64% 13.12%
- ---------------------------------------------------------------------------
S&P 500(R)Index3 21.04% 28.56% 18.21%
- ---------------------------------------------------------------------------
- ---------------------------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS
- ---------------------------------------------------------------------------
Mutual Qualified Fund - Class C2 10.39% 15.54% 12.85%
S&P 500(R)Index3 21.04% 28.56% 18.21%
1. Figures do not reflect sales charges. If they did, returns would be
lower. As of March 31, 2000, the fund's year-to-date return was 2.79% for
Class A.
2. Figures reflect sales charges.
All fund performance assumes reinvestment of dividends and capital gains.
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.
3. Source: Standard & Poor's 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.
MUTUAL SHARES FUND
CLASS A ANNUAL TOTAL RETURNS1
[Insert bar graph]
- -10.28% 20.47% 20.81% 20.47% 4.13% 28.60% 20.32% 26.01% 0.01% 14.63%
90 91 92 93 94 95 96 97 98 99
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, 1999
1 YEAR 5 YEARS 10 YEARS
- ---------------------------------------------------------------------------
Mutual Shares Fund - Class A2 8.03% 16.07% 13.18%
S&P 500(R)Index3 21.04% 28.56% 18.21%
1 YEAR 5 YEARS 10 YEARS
- ---------------------------------------------------------------------------
Mutual Shares Fund - Class B2 9.82% 16.56% 13.16%
- ---------------------------------------------------------------------------
S&P 500(R)Index3 21.04% 28.56% 18.21%
- ---------------------------------------------------------------------------
- ---------------------------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS
- ---------------------------------------------------------------------------
Mutual Shares Fund - Class C2 11.72% 16.45% 12.91%
S&P 500(R)Index3 21.04% 28.56% 18.21%
1. Figures do not reflect sales charges. If they did, returns would be lower.
As of March 31, 2000, the fund's year-to-date return was 2.26% for Class A.
2. Figures reflect sales charges.
All fund performance assumes reinvestment of dividends and capital gains.
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.
3. Source: Standard & Poor's 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.
MUTUAL DISCOVERY FUND
CLASS A ANNUAL TOTAL RETURNS1
[Insert bar graph]
[]%
35.33% 3.20% 28.17% 24.41% 22.46% -2.37% 26.38%
93 94 95 96 97 98 99
YEAR
[Begin callout]
BEST QUARTER:
Q4 '99 14.13%
WORST QUARTER:
Q3 '98 -19.55%
[End callout]
AVERAGE ANNUAL TOTAL RETURNS
For the periods ended December 31, 1999
SINCE
INCEPTION
1 YEAR 5 YEARS 12/31/92
- ---------------------------------------------------------------------------
Mutual Discovery Fund - Class A2 19.11% 17.82% 17.93%
S&P 500(R)Index3 21.04% 28.56% 21.53%
MSCI World Index4 25.34% 20.25% 18.43%
SINCE
INCEPTION
1 YEAR 5 YEARS 12/31/92
- ---------------------------------------------------------------------------
Mutual Discovery Fund - Class B2 21.55% 18.33% 18.18%
- ---------------------------------------------------------------------------
S&P 500(R)Index3 21.04% 28.56% 21.53%
- ---------------------------------------------------------------------------
MSCI World Index4 25.34% 20.25% 18.43%
- ---------------------------------------------------------------------------
SINCE
INCEPTION
1 YEAR 5 YEARS 12/31/92
- ---------------------------------------------------------------------------
Mutual Discovery Fund - Class C2 23.28% 18.24% 17.99%
S&P 500(R)Index3 21.04% 28.56% 21.53%
MSCI World Index4 25.34% 20.25% 18.43%
1. Figures do not reflect sales charges. If they did, returns would be lower.
As of March 31, 2000, the fund's year-to-date return was 7.14% for Class A.
2. Figures reflect sales charges.
All fund performance assumes reinvestment of dividends and capital gains.
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.
3. Source: Standard & Poor's 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 Micropal. The unmanaged Morgan Stanley Capital
International (MSCI) World Index tracks the performance of approximately 1500
securities in 22 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)
<TABLE>
<CAPTION>
BEACON QUALIFIED MUTUAL DISCOVERY
SHARES
- -------------------------------------------------------------------------------------------
CLASS A
Maximum sales charge (load) as a
<S> <C> <C> <C> <C>
percentage of offering price 5.75% 5.75% 5.75% 5.75%
Load imposed on purchases 5.75% 5.75% 5.75% 5.75%
Maximum deferred sales charge (load)1 None None None None
Exchange fee None None None None
CLASS B
- -------------------------------------------------------------------------------------------
Maximum sales charge (load) as a
percentage of offering price 4.00% 4.00% 4.00% 4.00%
Load imposed on purchases None None None None
Maximum deferred sales charge (load)2 4.00% 4.00% 4.00% 4.00
Exchange fee None None None None
CLASS C
- -------------------------------------------------------------------------------------------
Maximum sales charge (load) as a
percentage of offering price 1.99% 1.99% 1.99% 1.99%
Load imposed on purchases 1.00% 1.00% 1.00% 1.00%
Maximum deferred sales charge (load)3 0.99 0.99 0.99 0.99%
Exchange fee None None None None
</TABLE>
Please see "Choosing a Share Class" on page 56 for an explanation of how and
when these sales charges apply.
ANNUAL FUND OPERATING EXPENSES (EXPENSES DEDUCTED FROM FUND ASSETS)
<TABLE>
<CAPTION>
BEACON QUALIFIED MUTUAL DISCOVERY
SHARES
- -------------------------------------------------------------------------------------------
CLASS A
<S> <C> <C> <C> <C>
Management fees 0.60% 0.60% 0.60% 0.80%
Distribution and service
(12b-1) fees 0.34% 0.34% 0.35% 0.35%
Other expenses 0.24% 0.25% 0.21% 0.31%
------------------------------------------------
Total annual fund operating expenses4 1.18% 1.19% 1.16% 1.46%
------------------------------------------------
CLASS B
- -------------------------------------------------------------------------------------------
Management fees 0.60% 0.60% 0.60% 0.80%
Distribution and service
(12b-1) fees 1.00% 1.00% 1.00% 1.00%
Other expenses 0.24% 0.26% 0.21% 0.31%
------------------------------------------------
Total annual fund operating expenses4 1.84% 1.86% 1.81% 2.11%
------------------------------------------------
CLASS C
- -------------------------------------------------------------------------------------------
Management fees 0.60% 0.60% 0.60% 0.80%
Distribution and service
(12b-1) fees 0.99% 0.99% 0.99% 0.99%
Other expenses 0.24% 0.25% 0.21% 0.31%
------------------------------------------------
Total annual fund operating expenses4 1.83% 1.84% 1.80% 2.10%
------------------------------------------------
</TABLE>
1. Except for investments of $1 million or more (see page 56)and purchases by
certain retirement plans without an initial sales charge.
2. Declines to zero after six years.
3. This is equivalent to a charge of 1% based on net asset value.
4. For the fiscal year ended December 31, 1999, the manager had agreed in
advance to limit its management fees. With this reduction, management fees
and total operating expenses were as follows:
<TABLE>
<CAPTION>
BEACON QUALIFIED MUTUAL DISCOVERY
SHARES
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Management fees 0.58% 0.55% 0.56% 0.74%
Total annual operating expenses
Class A 1.14% 1.14% 1.12% 1.40%
Class B 1.79% 1.81% 1.77% 2.05%
Class C 1.78% 1.80% 1.76% 2.08%
</TABLE>
After June 30, 2000, 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. It assumes:
o You invest $10,000 for the periods shown;
o Your investment has a 5% return each year; and
o 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:
<TABLE>
<CAPTION>
BEACON QUALIFIED MUTUAL DISCOVERY
SHARES
- -------------------------------------------------------------------------------------------
If you sell your shares at the end of the
period:
CLASS A1
<S> <C> <C> <C> <C>
1 Year $688 $689 $686 $715
3 Years $928 $931 $922 $1,010
5 Years $1,187 $1,192 $1,177 $1,327
10 Years $1,924 $1,935 $1,903 $2,221
CLASS B
1 Year $587 $589 $584 $614
3 Years $879 $885 $869 $961
5 Years $1,195 $1,206 $1,180 $1,334
10 Years2 $1,986 $2,005 $1,956 $2,276
CLASS C
1 Year $383 $384 $380 $410
3 Years $670 $673 $661 $751
5 Years $1,080 $1,086 $1,065 $1,218
10 Years $2,226 $2,237 $2,195 $2,507
If you do not sell your shares:
CLASS B
1 Year $187 $189 $184 $214
3 Years $579 $585 $569 $661
5 Years $995 $1,006 $980 $1,134
10 Years2 $1986 $2,005 $1,956 $2,276
CLASS C
1 Year $284 $285 $281 $311
3 Years $670 $673 $661 $751
5 Years $1,080 $1,086 $1,065 $1,218
10 Years $2,226 $2,237 $2,195 $2,507
</TABLE>
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.
MUTUAL FINANCIAL SERVICES FUND
[Insert graphic of bullseye and arrows] GOALS AND STRATEGIES
GOALS The fund's principal investment goal is capital appreciation, which
may occasionally be short-term. Its secondary goal is income.
MAIN INVESTMENT STRATEGIES Under normal market conditions, the fund invests
at least 65% of its total assets in equity securities of financial services
companies that the manager believes are available at market prices less than
their value based on certain recognized or objective criteria (intrinsic
value). Following this value-oriented strategy, the fund primarily invests in:
o UNDERVALUED STOCKS Stocks trading at a discount to intrinsic value.
And to a much smaller extent, the fund also invests in:
o RESTRUCTURING COMPANIES Securities of companies that are involved in
restructurings such as mergers, acquisitions, consolidations, liquidations,
spinoffs, or tender or exchange offers.
o DISTRESSED COMPANIES Securities of companies that are, or are about to be,
involved in reorganizations, financial restructurings, or bankruptcy.
[Begin callout]
The fund invests primarily in equity securities of financial services
companies the manager believes are undervalued.
[End callout]
The fund concentrates its investments in equity securities of companies in
the financial services industry. An equity security, or stock, represents a
proportionate share of the ownership of a company; its value is based on the
success of the company's business, any income paid to stockholders, the value
of its assets, and general market conditions. Common stocks and preferred
stocks, and securities convertible into common stocks, are examples of equity
securities.
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 that meet the
manager's investment criteria are smaller capitalization companies, the fund
may invest most 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.
While the fund generally purchases securities for investment purposes, the
manager may seek to influence or control management, or invest in other
companies that do so, when the manager believes the fund may benefit.
The fund may invest in debt securities to a lesser extent than its
investments in equity securities. Debt securities represent the obligation of
the issuer to repay a loan of money to it, and generally pay interest to the
holder. Bonds, notes and debentures are examples of debt securities. The fund
may invest in debt securities in any rating category established by an
independent rating agency, including lower rated (or comparable unrated) or
defaulted debt securities ("junk bonds").
The fund's investments in Restructuring and Distressed Companies typically
involve the purchase of junk bonds, or comparable unrated debt securities, or
the purchase of direct indebtedness (or participations in the indebtedness)
of such companies. Indebtedness generally represents a specific commercial
loan or portion of a loan made to a company by a financial institution such
as a bank or insurance company. Loan participations represent fractional
interest in a company's indebtedness and are generally made available by
banks or insurance companies. By purchasing all or a part of a company's
direct indebtedness, the fund in effect, steps into the shoes of the lender.
If the loan is secured, the fund will have a priority claim to the assets of
the company ahead of unsecured creditors and stockholders. The fund generally
makes such investments to achieve capital appreciation, rather than to seek
income.
The fund also may purchase trade claims and other similar direct obligations
or claims against companies in bankruptcy. Trade claims are generally
purchased from creditors of the bankrupt company and typically represent
money due to a supplier of goods or services to the company.
The fund may invest a substantial portion (up to 35%) of its assets in
foreign securities. The fund generally seeks to hedge (protect) against
currency risks, largely using forward foreign currency exchange contracts,
where available and when, 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.
PORTFOLIO SELECTION The manager employs a research driven, fundamental value
strategy. In choosing equity investments, the manager focuses on the market
price of a company's securities relative to the manager's own evaluation of
the company's asset value, including an analysis of book value, cash flow
potential, long-term earnings, and multiples of earnings of comparable
securities of both public or private companies. Value stock prices are
considered "cheap" relative to the company's perceived value and are often
out of favor with other investors. The prices of debt obligations of
Restructuring or Distressed Companies also may be "cheap" relative to the
value of the company's assets. The funds may invest in such securities if the
manager believes the market may have overreacted to adverse developments or
failed to appreciate positive changes. The manager examines each investment
separately and there are no set criteria as to specific value parameters,
asset size, earnings or industry type. The smaller companies in which the
fund invests may not be as well known as the larger companies in which the
fund invests, 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 keep a portion of the fund's assets in
cash or invested in short-term, highly liquid money market instruments, when
it believes that insufficient investment opportunities meeting the fund's
investment criteria exist. For example, when prevailing market valuations for
securities are high, there may be fewer securities available at prices below
their intrinsic value. In addition, when the manager believes market or
economic conditions are unfavorable for investors, the manager may invest up
to 100% of the fund's assets in a temporary defensive manner or hold a
substantial portion of the fund's portfolio in cash. In these circumstances,
the fund may be unable to achieve its investment goals.
[Insert graphic of chart with line going up and down] MAIN RISKS
STOCKS While stocks historically have outperformed other asset classes over
the long term, they tend to go up and down more dramatically over the short
term. These price movements may result from factors affecting individual
companies, industries or the securities market as a whole.
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. For example,
increases in interest rates can have a negative effect on the profitability
of financial services companies.
Financial services companies are subject to extensive government regulation
which tends to limit both the amount and types of loans and other financial
commitments a financial services company can make, and the interest rates and
fees it can charge. 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 may be subject to heavy 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.
The financial services industry is currently undergoing rapid change as
existing distinctions between banking, insurance and brokerage businesses
become blurred. The Gramm-Leach-Bliley Act, which was made effective March
11, 2000, repealed the sections of the Glass-Steagall Act prohibiting banks
and bank holding companies from engaging in certain securities-related
businesses under certain circumstances. In addition, the financial services
industry continues to experience 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, but it is not possible to predict whether the effect will be
beneficial or adverse. That depends not only upon how these changes affect
the industry, but also how the particular securities in the fund's portfolio
are affected.
VALUE INVESTING Value investments may not increase in price as anticipated
by the manager, and may decline even further if other investors fail to
recognize the company's value, or favor investing in faster-growing
companies, or if the factors that the manager believes will increase the
price do not occur.
The fund's bargain-driven focus may result in a fund choosing securities that
are not widely followed by other investors. "Cheaply" priced securities may
also include companies reporting poor earnings, companies whose share prices
have declined sharply (sometimes growth companies that have recently stumbled
but have good "fundamentals"), turnarounds, cyclical companies, or companies
emerging from bankruptcy, all of which may have a higher risk of continuing
to be ignored or rejected, and therefore, undervalued by the market or losing
more value.
SMALLER COMPANIES While smaller companies, and to a lesser extent mid-cap
companies, may offer greater opportunities for capital growth than larger,
more established companies, they also have more risk. Historically,
smaller-company securities have been more volatile in price and have
fluctuated independently from larger-company securities, especially over the
short term. Smaller or relatively new companies can be particularly sensitive
to changing economic conditions and increases in interest rates, their growth
prospects are less certain and their securities are less liquid. These
companies may suffer significant losses, and can be considered speculative.
RESTRUCTURING AND DISTRESSED COMPANIES A merger or other restructuring or
tender or exchange offer proposed at the time the fund invests in a
Restructuring Company may not be completed on the terms contemplated and,
therefore, benefit the fund as anticipated. Also, debt obligations of
Distressed Companies typically are unrated, lower rated, in default or close
to default and may become worthless.
[Begin callout]
Because the securities the fund holds fluctuate in price, 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]
FOREIGN SECURITIES Investing in foreign securities, including securities of
foreign governments, typically involves more risks than investing in U.S.
securities. Certain of these risks also may apply to securities of U.S.
companies with significant foreign operations. These risks can increase the
potential for losses in the fund and affect its share price.
CURRENCY EXCHANGE RATES. Foreign securities may be issued and traded in
foreign currencies. As a result, their values may be affected by changes in
exchange rates between foreign currencies and the U.S. dollar, as well as
between currencies of countries other than the U.S. For example, if the value
of the U.S. dollar goes up compared to a foreign currency, an investment
traded in that foreign currency will go down in value because it will be
worth less U.S. dollars. The impact of the euro, a relatively new currency
adopted by certain European countries to replace their national currencies,
is unclear at this time.
POLITICAL AND ECONOMIC DEVELOPMENTS. The political, economic and social
structures of some foreign countries may be less stable and more volatile
than those in the U.S. Investments in these countries may be subject to the
risks of internal and external conflicts, currency devaluations, foreign
ownership limitations and tax increases. It is possible that a government may
take over the assets or operations of a company or impose restrictions on the
exchange or export of currency or other assets. Some countries also may have
different legal systems that may make it difficult for the fund to vote
proxies, exercise shareholder rights, and pursue legal remedies with respect
to its foreign investments.
TRADING PRACTICES. Brokerage commissions and other fees generally are higher
for foreign securities. Government supervision and regulation of foreign
stock exchanges, currency markets, trading systems and brokers may be less
than in the U.S. The procedures and rules governing foreign transactions and
custody (holding of the fund's assets) also may involve delays in payment,
delivery or recovery of money or investments.
AVAILABILITY OF INFORMATION. Foreign companies may not be subject to the same
disclosure, accounting, auditing and financial reporting standards and
practices as U.S. companies. Thus, there may be less information publicly
available about foreign companies than about most U.S. companies.
LIMITED MARKETS. Certain foreign securities may be less liquid (harder to
sell) and more volatile than many U.S. securities. This means the fund may at
times be unable to sell foreign securities at favorable prices.
CREDIT An issuer may be unable to make interest payments and repay
principal. Changes in an issuer's financial strength or in a security's
credit rating may affect a security's value and, thus, impact fund
performance.
LOWER-RATED AND UNRATED DEBT SECURITIES. Securities rated below investment
grade, sometimes called "junk bonds," and the type of unrated debt securities
purchased by the fund, generally have more risk than higher-rated securities.
They also may fluctuate more in price, and are less liquid than higher rated
securities. Prices are especially sensitive to developments affecting the
company's business and to ratings changes, and typically rise and fall in
response to factors that affect the company's stock prices. Companies issuing
such lower-rated debt securities are not as strong financially, and are more
likely to encounter financial difficulties and be more vulnerable to changes
in the economy, such as a recession or a sustained period of rising interest
rates.
INDEBTEDNESS, PARTICIPATIONS AND TRADE CLAIMS. The purchase of indebtedness
or loan participations of a troubled company always involves a risk as to the
creditworthiness of the issuer and the possibility that principal invested
may be lost. 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. In addition, the
fund takes on the risk as to the creditworthiness of the bank or other
financial intermediary issuing the participation, as well as that of the
company issuing the underlying indebtedness. When the fund purchases a trade
claim, there is no guarantee that the debtor will ever be able to satisfy the
obligation on the trade claim.
DERIVATIVE SECURITIES Forward foreign currency exchange contracts are
considered derivative investments, since their value depends on the value of
an underlying asset to be purchased or sold. The fund's investments in
derivatives may involve a small investment relative to the amount of risk
assumed. To the extent the fund enters into these transactions, their success
will depend on the manager's ability to predict market movements, and their
use may have the opposite effect of that intended. Risks include potential
loss due to the imposition of controls by a government on the exchange of
foreign currencies, delivery failure, default by the other party, or
inability to close out a position because the trading market became illiquid.
LIQUIDITY The fund may invest up to 15% of its net assets in securities with
a limited trading market. Reduced liquidity may have an adverse impact on
market price and the fund's ability to sell particular securities when
necessary to meet the fund's liquidity needs or in response to a specific
economic event, such as the deterioration in the creditworthiness of an
issuer. Reduced liquidity in the secondary market for certain securities also
may make it more difficult for the fund to obtain market quotations based on
actual trades for the purpose of valuing the fund's portfolio.
More detailed information about the fund, its policies and risks can be found
in the fund's Statement of Additional Information (SAI).
[Begin callout]
Mutual fund shares are not deposits or obligations of, or guaranteed or
endorsed by, any bank, and are not 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]
[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 RETURNS1
[Insert bar graph]
6.81% 4.35%
98 99
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, 1999
SINCE
1 YEAR INCEPTION
(8/19/97)
- -------------------------------------------------------------
Mutual Financial Services - Class -1.68% 11.79%
A2
S&P 500(R) Index3 21.04% 23.64%
KBW 50 Total Return Index4 -3.47% 6.71%
SINCE
1 YEAR INCEPTION
(1/1/99)
- -------------------------------------------------------------
Mutual Financial Services Fund - -0.31% 12.94%
Class B2
S&P 500(R)Index3 21.04% 23.64%
KBW 50 Total Return Index4 -3.47% 6.71%
SINCE
1 YEAR INCEPTION
(8/19/97)
- -------------------------------------------------------------
Mutual Financial Services Fund - 1.64% 13.41%
Class C2
S&P 500(R)Index3 21.04% 23.64%
KBW 50 Total Return Index4 -3.47% 6.71%
1. Figures do not reflect sales charges. If they did, returns would be lower.
As of March 31, 2000, the fund's year-to-date return was -1.84% for Class A.
2. Figures reflect sales charges.
All fund performance assumes reinvestment of dividends and capital gains.
Class B shares were first offered on January 1, 1999. Performance for that
share class reflects a restatement of the original class to include the Rule
12b-1 fees as though in effect from the fund's inception.
3. Source: Standard & Poor's 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: Keefe, Bruyette & Woods, Inc. The unmanaged Keefe, Bruyette &
Woods Index (KBW 50) tracks the stocks of the 50 largest U.S. banks. The
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 CLASS B CLASS C
- -------------------------------------------------------------------------------
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) None1 4.00%2 0.99%3
Exchange fee None None None
Please see "Choosing a Share Class" on page 56 for an explanation of how and
when these sales charges apply.
ANNUAL FUND OPERATING EXPENSES (EXPENSES DEDUCTED FROM FUND ASSETS)
CLASS A CLASS B CLASS C
- -------------------------------------------------------------------------------
Management fees4 0.80% 0.80% 0.80%
Distribution and service
(12b-1) fees 0.35% 1.00% 0.99%
Other expenses 0.40% 0.41% 0.40%
------------------------------------
Total annual fund operating expenses4 1.55% 2.21% 2.19%
------------------------------------
1. Except for investments of $1 million or more (see page 56)and purchases by
certain retirement plans without an initial sales charge.
2. Declines to zero after six years.
3. This is equivalent to a charge of 1% based on net asset value.
4. For the fiscal year ended December 31, 1999, the manager had agreed in
advance to limit its management fees. With this reduction, management fees
were 0.75% and total annual fund operating expenses were 1.42%, 2.08% and
2.06% for Class A, Class B, and Class C respectively. After June 30, 2000,
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. It assumes:
o You invest $10,000 for the periods shown;
o Your investment has a 5% return each year; and
o 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
- --------------------------------------------------------------------------------
If you sell your shares at the end
of the period:
CLASS A $724 1 $1,036 $1,371 $2,314
CLASS B $624 $991 $1,385 $2,378 2
CLASS C $419 $778 $1,263 $2,598
If you do not sell your shares:
CLASS B $224 $691 $1,185 $2,378 2
CLASS C $320 $778 $1,263 $2,598
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.
MUTUAL EUROPEAN FUND
[Insert graphic of bullseye and arrows] GOALS AND STRATEGIES
GOALS The fund's principal investment goal is capital appreciation, which
may occasionally be short-term. Its secondary goal is income.
MAIN INVESTMENT STRATEGIES Under normal market conditions, the fund invests
at least 65% of its total assets in equity securities of European companies
that the manager believes are available at market prices less than their
value based on certain recognized or objective criteria (intrinsic value).
Following this value-oriented strategy, the fund primarily invests in:
o UNDERVALUED STOCKS Stocks trading at a discount to intrinsic value.
And to a much smaller extent, the fund also invests in:
o RESTRUCTURING COMPANIES Securities of companies that are involved in
restructurings such as mergers, acquisitions, consolidations, liquidations,
spinoffs, or tender or exchange offers.
o DISTRESSED COMPANIES Securities of companies that are, or are about to be,
involved in reorganizations, financial restructurings, or bankruptcy.
[Begin callout]
The fund invests primarily in equity securities of European companies that
the manager believes are undervalued.
[End callout]
The fund invests primarily in mid- and large-cap companies with market
capitalization values (share price times the number of common stock shares
outstanding) greater than $1.5 billion. The fund also may invest a
significant portion of its assets in small-cap companies. An equity security,
or stock, represents a proportionate share of the ownership of a company; its
value is based on the success of the company's business, any income paid to
stockholders, the value of its assets, and general market conditions. Common
stocks and preferred stocks, and securities convertible into common stock,
are examples of equity securities.
The fund defines European companies as issuers (i) organized under the laws
of, or (ii) whose principal business operations are located in, or (iii) who
earn at least 50% of their revenue 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.
The fund 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. The fund 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.
While the fund generally purchases securities for investment purposes, the
manager may seek to influence or control management, or invest in other
companies that do so, when the manager believes the fund may benefit.
The fund may invest in debt securities to a lesser extent than its
investments in equity securities. Debt securities represent the obligation of
the issuer to repay a loan of money to it, and generally pay interest to the
holder. Bonds, notes and debentures are examples of debt securities. The fund
may invest in debt securities in any rating category established by an
independent rating agency, including lower rated (or comparable unrated) or
defaulted debt securities ("junk bonds").
The fund's investments in Restructuring and Distressed Companies typically
involve the purchase of junk bonds, or comparable unrated debt securities, or
the purchase of direct indebtedness (or participations in the indebtedness)
of such companies. Indebtedness generally represents a specific commercial
loan or portion of a loan made to a company by a financial institution such
as a bank or insurance company. Loan participations represent fractional
interest in a company's indebtedness and are generally made available by
banks or insurance companies. By purchasing all or a part of a company's
direct indebtedness, the fund, in effect, steps into the shoes of the lender.
If the loan is secured, the fund will have a priority claim to the assets of
the company ahead of unsecured creditors and stockholders. The fund generally
makes such investments to achieve capital appreciation, rather than to seek
income.
The fund also may purchase trade claims and other similar direct obligations
or claims against companies in bankruptcy. Trade claims are generally
purchased from creditors of the bankrupt company and typically represent
money due to a supplier of goods or services to the company.
The fund generally seeks to hedge (protect) against currency risks, largely
using forward foreign currency exchange contracts, where available and when,
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.
PORTFOLIO SELECTION The manager employs a research driven, fundamental value
strategy. In choosing equity investments, the manager focuses on the market
price of a company's securities relative to the manager's own evaluation of
the company's asset value, including an analysis of book value, cash flow
potential, long-term earnings, and multiples of earnings of comparable
securities of both public or private companies. Value stock prices are
considered "cheap" relative to the company's perceived value and are often
out of favor with other investors. The prices of debt obligations of
Restructuring or Distressed Companies also may be "cheap" relative to the
value of the company's assets. The funds may invest in such securities if the
manager believes the market may have overreacted to adverse developments or
failed to appreciate positive changes. The manager examines each investment
separately and there are no set criteria as to specific value parameters,
asset size, earnings or industry type.
TEMPORARY INVESTMENTS The manager may keep a portion of the fund's assets in
cash or invested in short-term, highly liquid money market instruments, when
it believes that insufficient investment opportunities meeting the fund's
investment criteria exist. For example, when prevailing market valuations for
securities are high, there may be fewer securities available at prices below
their intrinsic value. In addition, when the manager believes market or
economic conditions are unfavorable for investors, the manager may invest up
to 100% of the fund's assets in a temporary defensive manner or hold a
substantial portion of the fund's portfolio in cash. In these circumstances,
the fund may be unable to achieve its investment goals.
[Insert graphic of chart with line going up and down] MAIN RISKS
STOCKS While stocks historically have outperformed other asset classes over
the long term, they tend to go up and down more dramatically over the short
term. These price movements may result from factors affecting individual
companies, industries or the securities market as a whole.
VALUE INVESTING Value stock prices are considered "cheap" relative to the
company's perceived value and are often out of favor among investors. The
prices of debt obligations of Restructuring or Distressed Companies also may
be "cheap" relative to the perceived value of the company's assets. The fund
may invest in such securities if the manager believes the market may have
overreacted to adverse developments or failed to appreciate positive changes.
Value investments may not, however, increase in price as anticipated by the
manager, and may decline even further if other investors fail to recognize
the company's value, or favor investing in faster-growing companies, or if
the factors that the manager believes will increase the price do not occur.
The fund's bargain-driven focus may result in a fund choosing securities that
are not widely followed by other investors. "Cheaply" priced securities may
also include companies reporting poor earnings, companies whose share prices
have declined sharply (sometimes growth companies that have recently stumbled
but have good "fundamentals"), turnarounds, cyclical companies, or companies
emerging from bankruptcy, all of which may have a higher risk of continuing
to be ignored or rejected, and therefore, undervalued by the market or losing
more value.
FOREIGN SECURITIES Investing in foreign securities, including securities of
foreign governments, typically involves more risks than investing in U.S.
securities. Certain of these risks also may apply to securities of U.S.
companies with significant foreign operations. These risks can increase the
potential for losses in the fund and affect its share price.
REGION. Investment in a single region, even though representing a number of
different countries within the region, may be affected by common economic
forces and other factors. The fund is subject to greater risks of adverse
events which occur in the region and may experience greater volatility than a
fund that is more broadly diversified geographically. Political or economic
disruptions in European countries, even in countries in which the fund is not
invested, may adversely affect security values and thus the fund's holdings.
CURRENCY EXCHANGE RATES. Foreign securities may be issued and traded in
foreign currencies. As a result, their values may be affected by changes in
exchange rates between foreign currencies and the U.S. dollar, as well as
between currencies of countries other than the U.S. For example, if the value
of the U.S. dollar goes up compared to a foreign currency, an investment
traded in that foreign currency will go down in value because it will be
worth less U.S. dollars.
EURO. On January 1, 1999, the European Economic and Monetary Union introduced
a new single currency called the euro. By July 1, 2002, the euro will have
replaced the national currencies of a number of European countries.
The change to the euro as a single currency is new and untested. It is not
possible to predict the impact of the euro on currency values or on the
business or financial condition of European countries and issuers and issuers
in other regions whose securities the fund may hold, or the impact, if any,
on fund performance.
POLITICAL AND ECONOMIC DEVELOPMENTS. The political, economic and social
structures of some foreign countries may be less stable and more volatile
than those in the U.S. Investments in these countries may be subject to the
risks of internal and external conflicts, currency devaluations, foreign
ownership limitations and tax increases. It is possible that a government may
take over the assets or operations of a company or impose restrictions on the
exchange or export of currency or other assets. Some countries also may have
different legal systems that may make it difficult for the fund to vote
proxies, exercise shareholder rights, and pursue legal remedies with respect
to its foreign investments.
TRADING PRACTICES. Brokerage commissions and other fees generally are higher
for foreign securities. Government supervision and regulation of foreign
stock exchanges, currency markets, trading systems and brokers may be less
than in the U.S. The procedures and rules governing foreign transactions and
custody (holding of the fund's assets) also may involve delays in payment,
delivery or recovery of money or investments.
AVAILABILITY OF INFORMATION. Foreign companies may not be subject to the same
disclosure, accounting, auditing and financial reporting standards and
practices as U.S. companies. Thus, there may be less information publicly
available about foreign companies than about most U.S. companies.
LIMITED MARKETS. Certain foreign securities may be less liquid (harder to
sell) and more volatile than many U.S. securities. This means the fund may at
times be unable to sell foreign securities at favorable prices.
RESTRUCTURING AND DISTRESSED COMPANIES A merger or other restructuring or
tender or exchange offer proposed at the time the fund invests in a
Restructuring Company may not be completed on the terms contemplated and,
therefore, benefit the fund as anticipated. Also, debt obligations of
Distressed Companies typically are unrated, lower rated, in default or close
to default and may become worthless.
[Begin callout]
Because the securities the fund holds fluctuate in price, 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]
SMALLER COMPANIES While smaller companies, and to some extent mid-cap
companies, may offer greater opportunities for capital growth than larger,
more established companies, they also have more risk. Historically,
smaller-company securities have been more volatile in price and have
fluctuated independently from larger-company securities, especially over the
short term. Smaller or relatively new companies can be particularly sensitive
to changing economic conditions and increases in interest rates, their growth
prospects are less certain and their securities are less liquid. These
companies may suffer significant losses, and can be considered speculative.
CREDIT An issuer may be unable to make interest payments and repay
principal. Changes in an issuer's financial strength or in a security's
credit rating may affect a security's value and, thus, impact fund
performance.
LOWER-RATED AND UNRATED DEBT SECURITIES. Securities rated below investment
grade, sometimes called "junk bonds," and the type of unrated debt securities
purchased by the fund, generally have more risk than higher-rated securities.
They also may fluctuate more in price, and are less liquid than higher rated
securities. Prices are especially sensitive to developments affecting the
company's business and to ratings changes, and typically rise and fall in
response to factors that affect the company's stock prices. Companies issuing
such lower-rated debt securities are not as strong financially, and are more
likely to encounter financial difficulties and be more vulnerable to changes
in the economy, such as a recession or a sustained period of rising interest
rates.
INDEBTEDNESS, PARTICIPATIONS AND TRADE CLAIMS. The purchase of indebtedness
or loan participations of a troubled company always involves a risk as to the
creditworthiness of the issuer and the possibility that principal invested
may be lost. 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. In addition, the
fund takes on the risk as to the creditworthiness of the bank or other
financial intermediary issuing the participation, as well as that of the
company issuing the underlying indebtedness. When the fund purchases a trade
claim, there is no guarantee that the debtor will ever be able to satisfy the
obligation on the trade claim.
DERIVATIVE SECURITIES Forward foreign currency exchange contracts are
considered derivative investments, since their value depends on the value of
an underlying asset to be purchased or sold. The fund's investments in
derivatives may involve a small investment relative to the amount of risk
assumed. To the extent the fund enters into these transactions, their success
will depend on the manager's ability to predict market movements, and their
use may have the opposite effect of that intended. Risks include potential
loss to the fund due to the imposition of controls by a government on the
exchange of foreign currencies, delivery failure, default by the other party,
or inability to close out a position because the trading market became
illiquid.
LIQUIDITY The fund may invest up to 15% of its net assets in securities with
a limited trading market. Reduced liquidity may have an adverse impact on
market price and the fund's ability to sell particular securities when
necessary to meet the fund's liquidity needs or in response to a specific
economic event, such as the deterioration in the creditworthiness of an
issuer. Reduced liquidity in the secondary market for certain securities also
may make it more difficult for the fund to obtain market quotations based on
actual trades for the purpose of valuing the fund's portfolio.
More detailed information about the fund, its policies and risks can be found
in the fund's Statement of Additional Information (SAI).
[Begin callout]
Mutual fund shares are not deposits or obligations of, or guaranteed or
endorsed by, any bank, and are not 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]
[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 3 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]
22.72% 4.07% 46.05%
97 98 99
YEAR
[Begin callout]
BEST QUARTER:
Q4 '99 27.28%
WORST QUARTER:
Q3 '98 -20.38%
[End callout]
AVERAGE ANNUAL TOTAL RETURNS
For the periods ended December 31, 1999
SINCE
1 YEAR INCEPTION
(7/3/96)
- -------------------------------------------------------------
Mutual European Fund - Class A2 37.66% 22.11%
MSCI All Country Europe Index3 17.35% 24.03%
SINCE
1 YEAR INCEPTION
(7/3/96)
- -------------------------------------------------------------
Mutual European Fund - Class B2 41.17% 23.05%
- -------------------------------------------------------------
MSCI All Country Europe Index3 17.35% 24.03%
- -------------------------------------------------------------
SINCE
1 YEAR INCEPTION
(7/3/96)
- -------------------------------------------------------------
Mutual European Fund - Class C2 42.90% 23.21%
MSCI All Country Europe Index3 17.35% 24.03%
1. Figures do not reflect sales charges. If they did, returns would be lower.
As of March 31, 2000, the fund's year-to-date return was 11.70% for Class A.
2. Figures reflect sales charges.
All fund performance assumes reinvestment of dividends and capital gains.
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.
3. Source: Standard & Poor's Micropal. The unmanaged Morgan Stanley Capital
International (MSCI) All Country 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). 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 CLASS B1 CLASS C
- -------------------------------------------------------------------------------
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) None2 4.00% 0.99%3
Exchange fee None None None
Please see "Choosing a Share Class" on page 56 for an explanation of how and
when these sales charges apply.
ANNUAL FUND OPERATING EXPENSES (EXPENSES DEDUCTED FROM FUND ASSETS)
CLASS A CLASS B1 CLASS C
- -------------------------------------------------------------------------------
Management fees4 0.80% 0.80% 0.80%
Distribution and service
(12b-1) fees 0.35% 1.00% 0.99%
Other expenses 0.29% 0.29% 0.29%
------------------------------------
Total annual fund operating expenses4 1.44% 2.09% 2.08%
------------------------------------
1. Declines to zero after six years.
2. Except for investments of $1 million or more (see page 56)and purchases by
certain retirement plans without an initial sales charge.
3. This is equivalent to a charge of 1% based on net asset value.
4. For the fiscal year ended December 31, 1999, the manager had agreed in
advance to limit its management fees. With this reduction, management fees
were 0.76% and total annual fund operating expenses were 1.40%, 2.05% and
2.04% for Class A, Class B, and Class C respectively. After June 30, 2000,
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. It assumes:
o You invest $10,000 for the periods shown;
o Your investment has a 5% return each year; and
o 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
- --------------------------------------------------------------------------------
If you sell your shares at the end
of the period:
CLASS A $713 1 $1,004 $1,317 $2,200
CLASS B $612 $955 $1,324 $2,255 2
CLASS C $408 $745 $1,207 $2,486
If you do not sell your shares:
CLASS B $212 $655 $1,124 $2,255 2
CLASS C $309 $745 $1,207 $2,486
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.
[Insert graphic of briefcase] MANAGEMENT
Franklin Mutual Advisers, LLC (Franklin Mutual), 51 John F. Kennedy Parkway,
Short Hills, NJ 07078, is the funds' investment manager. Together, Franklin
Mutual and its affiliates manage over $229 billion in assets.
Michael F. Price is Chairman of the Boards of Directors that oversee the
management of the funds and Franklin Mutual.
The team responsible for the funds' management is:
JEFFREY A. ALTMAN, SENIOR VICE PRESIDENT OF FRANKLIN MUTUAL
Mr. Altman has been a manager of the funds since 1988. He joined the Franklin
Templeton Group in 1996. Before November 1996, Mr. Altman was employed as a
research analyst and trader for Heine Securities Corporation, the funds'
former manager.
ROBERT L. FRIEDMAN, SENIOR VICE PRESIDENT OF FRANKLIN MUTUAL
Mr. Friedman has been a manager of the funds since 1988. He joined the
Franklin Templeton Group in 1996. Before November 1996, Mr. Friedman was
employed as a research analyst for Heine Securities Corporation, the funds'
former manager.
RAYMOND GAREA, SENIOR VICE PRESIDENT OF FRANKLIN MUTUAL
Mr. Garea has been a manager of the funds since 1991. He joined the Franklin
Templeton Group in 1996. Before November 1996, Mr. Garea was employed as a
research analyst for Heine Securities Corporation, the funds' former manager.
PETER A. LANGERMAN, CHIEF EXECUTIVE OFFICER AND
PRESIDENT OF FRANKLIN MUTUAL
Mr. Langerman has been a manager of the funds since 1986. He joined the
Franklin Templeton Group in 1996. Before November 1996, Mr. Langerman was
employed as a research analyst for Heine Securities Corporation, the funds'
former manager.
LAWRENCE N. SONDIKE, SENIOR VICE PRESIDENT OF FRANKLIN MUTUAL
Mr. Sondike has been a manager of the funds since 1984. He joined the
Franklin Templeton Group in 1996. Before November 1996, Mr. Sondike was
employed as a research analyst for Heine Securities Corporation, the funds'
former manager.
DAVID J. WINTERS CFA, SENIOR VICE PRESIDENT OF FRANKLIN MUTUAL AND DIRECTOR
OF RESEARCH
Mr. Winters has been a manager of the funds since 1987. He joined the
Franklin Templeton Group in 1996. Before November 1996, Mr. Winters was
employed as a research analyst for Heine Securities Corporation, the funds'
former manager.
In addition, the following Franklin Mutual employees serve as assistant
portfolio managers:
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.
SUSAN POTTO, VICE PRESIDENT of FRANKLIN MUTUAL
Ms. Potto has been a manager of the funds since January 2000. She joined the
Franklin Templeton Group in 1996. Before November 1996, Ms. Potto was
employed as an equity analyst for Heine Securities Corporation, the funds'
former manager.
The following portfolio and assistant portfolio managers have primary
responsibility for investments in the following funds:
- --------------------------------------------------------------------------------
Mutual Beacon Fund Larry Sondike and David Winters
- --------------------------------------------------------------------------------
Mutual Discovery Fund David Winters
- --------------------------------------------------------------------------------
Mutual European Fund Robert Friedman
- --------------------------------------------------------------------------------
Mutual Financial Services Fund Ray Garea
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Mutual Qualified Fund Ray Garea and Assistant Portfolio Manager Jeff
Diamond
- --------------------------------------------------------------------------------
Mutual Shares Fund Larry Sondike and Assistant Portfolio Manager
Susan Potto
- --------------------------------------------------------------------------------
Each fund pays Franklin Mutual a fee for managing the fund's assets. For the
fiscal year ended December 31, 1999, Franklin Mutual agreed in advance to
limit its fees. After June 30, 2000, the manager may end this arrangement at
any time upon notice to the funds' Board of Directors. The table below shows
the management fees paid by each fund to the manager for its services, as a
percentage of average daily net assets.
MANAGEMENT
FEES BEFORE MANAGEMENT
ADVANCE WAIVER(%) FEES PAID (%)
Beacon 0.60 0.58
Discovery 0.80 0.74
European 0.80 0.76
Financial Services 0.80 0.75
Qualified 0.60 0.55
Shares 0.60 0.56
[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 fund 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 fund shares 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 redemption
proceeds if you do not provide your correct social security or taxpayer
identification number and certify that you are not subject to backup
withholding, 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.
Fund distributions and gains from the sale or exchange of your shares
generally will be subject to state and local income tax. Any foreign taxes a
fund pays on its investments 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.
[Insert graphic of a dollar bill] FINANCIAL HIGHLIGHTS
These tables present the funds' financial performance since their inception.
This information has been audited by Ernst & Young LLP.
MUTUAL BEACON FUND
CLASS A YEAR ENDED DECEMBER 31,
- ------------------------------------------------------------------------------
1999 2 1998 2 1997 2 1996 1
- ------------------------------------------------------------------------------
PER SHARE DATA3 ($)
Net asset value,
beginning of year 13.09 14.09 12.98 13.21
------------------------------------
Net investment income .17 .27 .23 .16
Net realized and unrealized
gains 1.95 -- 2.65 .69
------------------------------------
Total from investment operations 2.12 .27 2.88 .85
------------------------------------
Dividends from net
investment income (.21) (.40) (.51) (.33)
Distributions from net
realized gains (1.19) (.87) (1.26) (.75)
------------------------------------
Total distributions (1.40) (1.27) (1.77) (1.08)
------------------------------------
Net asset value, end of year 13.81 13.09 14.09 12.98
------------------------------------
Total return (%)4 16.40 2.02 22.52 6.51
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year
($ x 1,000) 760,769 947,444 753,519 52,070
Ratios to average net
assets: (%)
Expenses(a) 1.14 1.13 1.14 1.03 5
Expenses excluding waiver and
payments by affiliate 1.18 1.16 1.17 1.13 5
Net investment income 1.18 1.89 1.58 1.33 5
Portfolio turnover rate (%) 67.61 65.27 54.72 66.87
(a)Excluding dividend expense on
securities sold short, ratios to
average net assets: (%)
Expenses 1.13 1.11 1.09 1.03 5
Expenses excluding waiver and
payments by affiliate 1.17 1.14 1.12 1.13 5
CLASS B
- --------------------------------------------------
PER SHARE DATA ($)
Net asset value,
beginning of year 13.09
---------
Net investment income .05
Net realized and unrealized
gains 1.93
---------
Total from investment operations 1.98
---------
Dividends from net
investment income (.19)
Distributions from net
realized gains (1.19)
---------
Total distributions (1.38)
---------
Net asset value, end of year 13.69
---------
Total return (%)4 15.33
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year
($ x 1,000) 8,956
Ratios to average net
assets: (%)
Expenses(a) 1.79
Expenses excluding waiver and
payments by affiliate 1.84
Net investment income .37
Portfolio turnover rate (%) 67.61
(a)Excluding dividend expense on
securities sold short, ratios to
average net assets: (%)
Expenses 1.78
Expenses excluding waiver and 1.83
payments by affiliate
CLASS C
- -----------------------------------------------------------------------------
PER SHARE DATA3 ($)
Net asset value,
beginning of year 13.04 14.04 12.98 13.21
------------------------------------
Net investment income .07 .18 .14 .13
Net realized and unrealized
gains 1.94 .01 2.63 .71
------------------------------------
Total from investment operations 2.01 .19 2.77 .84
------------------------------------
Dividends from net
investment income (.12) (.32) (.45) (.32)
Distributions from net
realized gains (1.18) (.87) (1.26) (.75)
------------------------------------
Total distributions (1.30) (1.19) (1.71) (1.07)
------------------------------------
Net asset value, end of year 13.75 13.04 14.04 12.98
------------------------------------
Total return (%)4 15.65 1.40 21.65 6.45
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year
($ x 1,000) 459,807 500,404 362,425 16,263
Ratios to average net
assets: (%)
Expenses(a) 1.78 1.78 1.79 1.755
Expenses excluding waiver and
payments by affiliate 1.83 1.81 1.82 1.855
Net investment income .52 1.24 .92 .845
Portfolio turnover rate (%) 67.61 65.27 54.72 66.87
(a)Excluding dividend expense on
securities sold short, ratios to
average net assets: (%)
Expenses 1.77 1.76 1.74 1.755
Expenses excluding waiver and
payments by affiliate 1.82 1.79 1.77 1.855
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 QUALIFIED FUND
CLASS A YEAR ENDED DECEMBER 31,
- --------------------------------------------------------------------------------
19992 1998 19972 19961
- --------------------------------------------------------------------------------
PER SHARE DATA3 ($)
Net asset value,
beginning of year 16.42 18.14 16.23 16.40
------------------------------------------
Net investment income .17 .35 .28 .16
Net realized and unrealized 3.63 .89
gains 1.99 (.35)
------------------------------------------
Total from investment operations 2.16 .00 3.91 1.05
------------------------------------------
Dividends from net
investment income (.23) (.39) (.60) (.41)
Distributions from net
realized gains (1.48) (1.33) (1.40) (.81)
------------------------------------------
Total distributions (1.71) (1.72) (2.00) (1.22)
------------------------------------------
Net asset value, end of year 16.87 16.42 18.14 16.23
------------------------------------------
Total return (%)4 13.27 .15 24.44 6.47
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year
($ x 1,000) 471,313 570,143 452,590 20,381
Ratios to average net
assets: (%)
Expenses(a) 1.14 1.12 1.14 1.13 5
Expenses excluding waiver and
payments by affiliate 1.19 1.15 1.17 1.28 5
Net investment income .97 1.66 1.48 3.19 5
Portfolio turnover rate (%) 59.84 66.84 52.76 65.03
(a)Excluding dividend expense on
securities sold short, ratios to
average net assets: (%)
Expenses 1.11 1.11 1.10 1.13 5
Expenses excluding waiver and
payments by affiliate 1.16 1.14 1.133 1.28 5
CLASS B
- ------------------------------------------------
PER SHARE DATA ($)
Net asset value,
beginning of year 16.42
----------
Net investment income .03
Net realized and unrealized
gains 2.01
----------
Total from investment operations 2.04
----------
Dividends from net
investment income (.20)
Distributions from net
realized gains (1.48)
----------
Total distributions (1.68)
----------
Net asset value, end of year 16.78
----------
Total return (%)3 12.55
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year
($ x 1,000) 4,168
Ratios to average net
assets: (%)
Expenses(a) 1.81
Expenses excluding waiver and
payments by affiliate 1.86
Net investment income .20
Portfolio turnover rate (%) 59.84
(a)Excluding dividend expense on
securities sold short, ratios to
average net assets: (%)
Expenses 1.78
Expenses excluding waiver and
payments by affiliate 1.83
CLASS C
- --------------------------------------------------------------------------------
PER SHARE DATA3 ($)
Net asset value,
beginning of year 16.35 18.09 16.23 16.40
------------------------------------------
Net investment income .05 .24 .16 .13
Net realized and unrealized
gains 1.98 (.37) 3.63 .91
------------------------------------------
Total from investment operations 2.03 (.13) 3.79 1.04
------------------------------------------
Dividends from net
investment income (.10) (.28) (.53) (.39)
Distributions from net
realized gains (1.48) (1.33) (1.40) (.82)
------------------------------------------
Total distributions (1.58) (1.61) (1.93) (1.21)
------------------------------------------
Net asset value, end of year 16.80 16.35 18.09 16.23
------------------------------------------
Total return (%)4 12.54 (.58) 23.66 6.37
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year
($ x 1,000) 264,902 322,609 231,721 9,963
Ratios to average net
assets: (%)
Expenses(a) 1.80 1.77 1.79 1.78 5
Expenses excluding waiver and
payments by affiliate 1.84 1.80 1.82 1.93 5
Net investment income .32 1.01 .84 2.59 5
Portfolio turnover rate (%) 59.84 66.84 52.76 65.03
(a)Excluding dividend expense on
securities sold short, ratios to
average net assets: (%)
Expenses 1.77 1.76 1.75 1.78 5
Expenses excluding waiver and
payments by affiliate 1.81 1.79 1.78 1.93 5
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 2-for-1 stock split effective February 3, 1997.
4. Total return does not include sales charges, and is not annualized.
5. Annualized.
<TABLE>
<CAPTION>
MUTUAL SHARES FUND
CLASS A YEAR ENDED DECEMBER 31,
- -----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1999 2 1998 1997 2 1996 1
- -----------------------------------------------------------------------------------
PER SHARE DATA3 ($)
Net asset value,
beginning of year 19.50 21.26 18.56 18.90
--------------------------------------------
Net investment income .26 .40 .34 .21
Net realized and unrealized
gains 2.54 (.41) 4.43 1.08
--------------------------------------------
Total from investment operations 2.80 (.01) 4.77 1.29
--------------------------------------------
Dividends from net
investment income (.34) (.46) (.49) (.47)
Distributions from net
realized gains (1.58) (1.29) (1.58) (1.16)
--------------------------------------------
Total distributions (1.92) (1.75) (2.07) (1.63)
--------------------------------------------
Net asset value, end of year 20.38 19.50 21.26 18.56
--------------------------------------------
Total return (%)4 14.57 .06 26.03 6.91
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year
($ x 1,000) 1,365,694 1,509,647 1,043,262 35,634
Ratios to average net
assets: (%)
Expenses(a) 1.12 1.11 1.11 1.09 5
Expenses excluding waiver and
payments by affiliate 1.16 1.15 1.14 1.18 5
Net investment income 1.23 1.78 1.58 2.44 5
Portfolio turnover rate (%) 66.24 69.46 49.61 58.35
(a)Excluding dividend expense on
securities sold short, ratios to
average net assets: (%)
Expenses 1.10 1.08 1.07 1.09 5
Expenses excluding waiver and
payments by affiliate 1.14 1.12 1.10 1.18 5
</TABLE>
CLASS B
- ---------------------------------------------------
PER SHARE DATA ($)
Net asset value,
beginning of year 19.50
------------
Net investment income .09
Net realized and unrealized
gains 2.55
------------
Total from investment operations 2.64
------------
Dividends from net
investment income (.30)
Distributions from net
realized gains (1.58)
------------
Total distributions (1.88)
------------
Net asset value, end of year 20.26
------------
Total return (%)4 13.76
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year
($ x 1,000) 21,634
Ratios to average net
assets: (%)
Expenses(a) 1.77
Expenses excluding waiver and
payments by affiliate 1.81
Net investment income .46
Portfolio turnover rate (%) 66.24
(a)Excluding dividend expense on
securities sold short, ratios to
average net assets: (%)
Expenses 1.75
Expenses excluding waiver and
payments by affiliate 1.79
<TABLE>
<CAPTION>
CLASS C
- -----------------------------------------------------------------------------------
PER SHARE DATA3 ($)
Net asset value,
<S> <C> <C> <C> <C>
beginning of year 19.41 21.18 18.56 18.90
--------------------------------------------
Net investment income .12 .28 .20 .20
Net realized and unrealized
gains 2.53 (.43) 4.42 1.08
--------------------------------------------
Total from investment operations 2.65 (.15) 4.62 1.28
--------------------------------------------
Dividends from net
investment income (.20) (.33) (.42) (.46)
Distributions from net
realized gains (1.57) (1.29) (1.58) (1.16)
--------------------------------------------
Total distributions (1.77) (1.62) (2.00) (1.62)
--------------------------------------------
Net asset value, end of year 20.29 19.41 21.18 18.56
--------------------------------------------
Total return (%)4 13.87 (.59) 25.17 6.82
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year
($ x 1,000) 890,712 993,931 636,838 16,873
Ratios to average net
assets: (%)
Expenses(a) 1.76 1.76 1.76 1.71 5
Expenses excluding waiver and
payments by affiliate 1.80 1.80 1.79 1.80 5
Net investment income .59 1.12 .92 1.69 5
Portfolio turnover rate (%) 66.24 69.46 49.61 58.35
(a)Excluding dividend expense on
securities sold short, ratios to
average net assets: (%)
Expenses 1.74 1.73 1.72 1.71 5
Expenses excluding waiver and
payments by affiliate 1.78 1.77 1.75 1.80 5
</TABLE>
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
CLASS A YEAR ENDED DECEMBER 31,
- -----------------------------------------------------------------------------
1999 2 1998 1997 2 1996 1
- -----------------------------------------------------------------------------
PER SHARE DATA ($)
Net asset value,
beginning of year 17.19 18.83 17.15 17.66
-------------------------------------------
Net investment income .18 .32 .27 .11
Net realized and unrealized
gains 4.30 (.74) 3.54 .74
-------------------------------------------
Total from investment operations 4.48 (.42) 3.81 .85
-------------------------------------------
Dividends from net
investment income (.35) (.41) (.77) (.29)
Distributions from net
realized gains (.32) (.81) (1.36) (1.07)
-------------------------------------------
Total distributions (.67) (1.22) (2.13) (1.36)
-------------------------------------------
Net asset value, end of year 21.00 17.19 18.83 17.15
-------------------------------------------
Total return (%)3 26.38 (2.37) 22.54 4.85
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year
($ x 1,000) 844,462 859,848 693,952 29,903
Ratios to average net
assets: (%)
Expenses(a) 1.40 1.36 1.33 1.38 4
Expenses excluding waiver and
payments by affiliate 1.46 1.39 1.35 1.51 4
Net investment income .98 1.46 1.39 .74 4
Portfolio turnover rate (%) 87.67 83.57 58.15 80.18
(a)Excluding dividend expense on
securities sold short, ratios to
average net assets: (%)
Expenses 1.38 1.35 1.33 1.38 4
Expenses excluding waiver and
payments by affiliate 1.44 1.38 1.35 1.51 4
CLASS B
- --------------------------------------------------
PER SHARE DATA ($)
Net asset value,
beginning of year 17.19
---------
Net investment income .01
Net realized and unrealized
gains 4.33
---------
Total from investment operations 4.34
---------
Dividends from net
investment income (.31)
Distributions from net
realized gains (.32)
---------
Total distributions (.63)
---------
Net asset value, end of year 20.90
---------
Total return (%)3 25.55
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year
($ x 1,000) 8,090
Ratios to average net
assets: (%)
Expenses(a) 2.05
Expenses excluding waiver and
payments by affiliate 2.11
Net investment income .08
Portfolio turnover rate (%) 87.67
(a)Excluding dividend expense on
securities sold short, ratios to
average net assets: (%)
Expenses 2.03
Expenses excluding waiver and
payments by affiliate 2.09
<TABLE>
<CAPTION>
CLASS C
- ------------------------------------------------------------------------------------
PER SHARE DATA ($)
Net asset value,
<S> <C> <C> <C> <C>
beginning of year 17.15 18.79 17.17 17.66
-------------------------------------------
Net investment income .06 .23 .15 .09
Net realized and unrealized
gains 4.28 (.75) 3.52 .76
-------------------------------------------
Total from investment operations 4.34 (.52) 3.67 .85
-------------------------------------------
Dividends from net
investment income (.22) (.31) (.69) (.27)
Distributions from net
realized gains (.32) (.81) (1.36) (1.07)
-------------------------------------------
Total distributions (.54) (1.12) (2.05) (1.34)
-------------------------------------------
Net asset value, end of year 20.95 17.15 18.79 17.17
-------------------------------------------
Total return (%)3 25.57 (2.97) 21.70 4.90
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year
($ x 1,000) 541,919 563,761 402,625 18,038
Ratios to average net
assets: (%)
Expenses(a) 2.04 2.01 1.98 2.00 4
Expenses excluding waiver and
payments by affiliate 2.10 2.03 2.00 2.13 4
Net investment income .35 .81 .74 .13 4
Portfolio turnover rate (%) 87.67 83.57 58.15 80.18
(a)Excluding dividend expense on
securities sold short, ratios to
average net assets: (%)
Expenses 2.02 2.00 1.98 2.00 4
Expenses excluding waiver and
payments by affiliate 2.08 2.08 2.00 2.13 4
</TABLE>
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.
<TABLE>
<CAPTION>
MUTUAL FINANCIAL SERVICES FUND
CLASS A YEAR ENDED DECEMBER 31,
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
1999 2 1998 1997 1
- ----------------------------------------------------------------------------------------
PER SHARE DATA ($)
Net asset value,
beginning of year 12.87 12.27 10.00
-----------------------------------------
Net investment income .11 .17 .03
Net realized and unrealized
gains .45 .69 2.35
-----------------------------------------
Total from investment operations .56 .86 2.38
-----------------------------------------
Dividends from net
investment income (.14) (.15) (.02)
Distributions from net
realized gains (.22) (.11) (.09)
-----------------------------------------
Total distributions (.36) (.26) (.11)
-----------------------------------------
Net asset value, end of year 13.07 12.87 12.27
-----------------------------------------
Total return (%)3 4.35 6.90 23.83
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year
($ x 1,000) 107,935 164,989 78,249
Ratios to average net
assets: (%)
Expenses(a) 1.42 1.36 1.35 4
Expenses excluding waiver and payments by
affiliate 1.55 1.45 1.97 4
Net investment income .82 1.42 1.02 4
Portfolio turnover rate (%) 81.81 136.76 42.26
(a)Excluding dividend expense on securities
sold short, ratios to average net assets: (%)
Expenses 1.40 1.35 1.35 4
Expenses excluding waiver and payments
by affiliate 1.53 1.44 1.97 4
</TABLE>
CLASS B
- -----------------------------------------------------------
PER SHARE DATA ($)
Net asset value,
beginning of year 12.87
------------
Net investment income .03
Net realized and unrealized
gains .44
------------
Total from investment operations .47
------------
Dividends from net
investment income (.12)
Distributions from net
realized gains (.22)
------------
Total distributions (.34)
------------
Net asset value, end of year 13.00
------------
Total return (%)3 3.69
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year
($ x 1,000) 1,065
Ratios to average net
assets: (%)
Expenses(a) 2.08
Expenses excluding waiver and payments by
affiliate 2.21
Net investment income .19
Portfolio turnover rate (%) 81.81
(a)Excluding dividend expense on securities
sold short, ratios to average net assets: (%)
Expenses 2.06
Expenses excluding waiver and
payments by affiliate 2.19
<TABLE>
<CAPTION>
CLASS C
- ----------------------------------------------------------------------------------------
PER SHARE DATA ($)
Net asset value,
<S> <C> <C> <C>
beginning of year 12.83 12.26 10.00
-----------------------------------------
Net investment income .02 .08 .01
Net realized and unrealized
gains .46 .68 2.35
-----------------------------------------
Total from investment operations .48 .76 2.36
-----------------------------------------
Dividends from net
investment income (.04) (.08) (.01)
Distributions from net
realized gains (.22) (.11) (.09)
-----------------------------------------
Total distributions (.26) (.19) (.10)
-----------------------------------------
Net asset value, end of year 13.05 12.83 12.26
-----------------------------------------
Total return (%)3 3.75 6.13 23.57
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year
($ x 1,000) 88,773 127,717 43,207
Ratios to average net
assets: (%)
Expenses(a) 2.06 2.01 2.00 4
Expenses excluding waiver
and payments by affiliate 2.19 2.10 2.62 4
Net investment income .18 .77 .37 4
Portfolio turnover rate (%) 81.81 136.76 42.26
(a)Excluding dividend expense on securities
sold short, ratios to average net assets: (%)
Expenses 2.04 2.00 2.00 4
Expenses excluding waiver and payments
by affiliate 2.17 2.09 2.62 4
</TABLE>
1. For the period August 19, 1997 (effective date) to December 31, 1997.
2. Based on average weighted shares outstanding.
3. Total return does not include sales charges, and is not annualized.
4. Annualized.
MUTUAL EUROPEAN FUND
CLASS A YEAR ENDED DECEMBER 31,
- -------------------------------------------------------------------------------
1999 2 1998 1997 2 1996 1
- -------------------------------------------------------------------------------
PER SHARE DATA ($)
Net asset value,
beginning of year 12.47 12.56 11.38 10.84
---------------------------------------
Net investment income .19 .27 .24 .03
Net realized and unrealized
gains 5.43 .29 2.31 .58
---------------------------------------
Total from investment operations 5.62 .56 2.55 .61
---------------------------------------
Dividends from net
investment income (.45) (.29) (.81) (.05)
Distributions from net
realized gains (.89) (.36) (.56) (.02)
---------------------------------------
Total distributions (1.34) (.65) (1.37) (.07)
---------------------------------------
Net asset value, end of year 16.75 12.47 12.56 11.38
---------------------------------------
Total return (%)3 46.05 4.15 22.61 5.61
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year
($ x 1,000) 177,217 170,486 93,231 9,200
Ratios to average net
assets: (%)
Expenses(a) 1.40 1.40 1.37 1.32 4
Expenses excluding waiver and
payments by affiliate 1.44 1.40 1.39 1.42 4
Net investment income 1.36 1.68 1.84 1.44 4
Portfolio turnover rate (%) 127.05 97.62 98.12 36.75
(a)Excluding dividend expense on
securities sold short, ratios to
average net assets: (%)
Expenses 1.39 1.40 1.37 1.32 4
Expenses excluding waiver and
payments by affiliate 1.43 1.40 1.39 1.42 4
CLASS B
- --------------------------------------------------
PER SHARE DATA ($)
Net asset value,
beginning of year 12.47
---------
Net investment income .01
Net realized and unrealized
gains 5.50
---------
Total from investment operations 5.51
---------
Dividends from net
investment income (.43)
Distributions from net
realized gains (.89)
---------
Total distributions (1.32)
---------
Net asset value, end of year 16.66
---------
Total return (%)3 45.17
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year
($ x 1,000) 1,039
Ratios to average net
assets: (%)
Expenses(a) 2.05
Expenses excluding waiver and
payments by affiliate 2.09
Net investment income .04
Portfolio turnover rate (%) 127.05
(a)Excluding dividend expense on
securities sold short, ratios to
average net assets: (%)
Expenses 2.04
Expenses excluding waiver and
payments by affiliate 2.08
CLASS C
- -------------------------------------------------------------------------------
PER SHARE DATA ($)
Net asset value,
beginning of year 12.45 12.52 11.38 10.84
---------------------------------------
Net investment income .10 .21 .13 .02
Net realized and unrealized
gains 5.44 .31 2.33 .58
---------------------------------------
Total from investment operations 5.54 .52 2.46 .60
---------------------------------------
Dividends from net
investment income (.35) (.23) (.76) (.04)
Distributions from net
realized gains (.89) (.36) (.56) (.02)
---------------------------------------
Total distributions (1.24) (.59) (1.32) (.06)
---------------------------------------
Net asset value, end of year 16.75 12.45 12.52 11.38
---------------------------------------
Total return (%)3 45.40 3.74 21.79 5.52
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year
($ x 1,000) 103,987 96,555 49,174 2,754
Ratios to average net
assets: (%)
Expenses(a) 2.04 2.05 2.02 1.94 4
Expenses excluding waiver and
payments by affiliate 2.08 2.05 2.05 2.04 4
Net investment income .71 1.00 1.03 0.79 4
Portfolio turnover rate (%) 127.05 97.62 98.12 36.75
(a)Excluding dividend expense on
securities sold short, ratios to
average net assets: (%)
Expenses 2.03 2.05 2.02 1.94 4
Expenses excluding waiver and
payments by affiliate 2.07 2.05 2.05 2.04 4
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.
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% on charge of 1% on
purchases of $1 shares you sell shares you sell
million or more sold within the first within 18 months
within 12 months year, declining to
1% within six years
and eliminated
after that
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.
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 59), 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 58).
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 58). 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 place 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 available to certain retirement plans,
including 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 PLACE 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 or capital gains
distributions.
[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 63 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 Templeton Variable Insurance
Products Trust and Templeton Capital Accumulator Fund, Inc.
[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
also may 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 also may 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.
SALES CHARGE WAIVERS Class A shares may be purchased without an initial
sales charge or CDSC by various individuals, institutions and retirement
plans or by investors who reinvest certain distributions and proceeds within
365 days. Certain investors also may buy Class C shares without an initial
sales charge. The CDSC for each class may be waived for certain redemptions
and distributions. If you would like information about available sales charge
waivers, call your investment representative or call Shareholder Services at
1-800/632-2301. For information about retirement plans, you may call
Retirement Services at 1-800/527-2020. A list of available sales charge
waivers also may be found in the Statement of Additional Information (SAI).
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
- ----------------------------------------------------------------------------
Automatic investment plans $50 ($25 for $50 ($25 for
an Education an Education
IRA) IRA)
- ----------------------------------------------------------------------------
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
- ----------------------------------------------------------------------------
PLEASE NOTE THAT YOU MAY ONLY BUY SHARES OF A FUND ELIGIBLE FOR SALE IN YOUR
STATE OR JURISDICTION.
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 place 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 63 for (Please see page 63 for
TeleFACTS(R) information on exchanges.) information on exchanges.)
1-800/247-1753
(around-the-clock
access)
- --------------------------------------------------------------------------------
FRANKLIN TEMPLETON INVESTOR SERVICES, P.O. BOX 33030,
ST. PETERSBURG, FL 33733-8030
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 and mail it to Investor
Services. If you are opening a new account, please include the minimum
initial investment of $50 ($25 for an Education IRA) with your application.
AUTOMATIC PAYROLL DEDUCTION You may invest in a fund automatically by
transferring money from your paycheck to the fund by electronic funds
transfer. If you are interested, indicate on your application that you would
like to receive an Automatic Payroll Deduction Program kit.
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 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 68).
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. Please keep in mind that a contingent
deferred sales charge (CDSC) may apply.
SELLING SHARES IN WRITING Generally, requests to sell $100,000 or less can 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 also may 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 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 sent to a bank account. See the
policies above for selling shares by mail or
phone.
Before requesting to have redemption proceeds
BY ELECTRONIC FUNDS sent to a bank account, please make sure we
TRANSFER (ACH) have your bank account information on file. If
we do not have this information, you will need
to send written instructions with your bank's
name and address, a voided check or savings
account deposit slip, and a signature
guarantee if the ownership of the bank and
fund accounts is different.
If we receive your request in proper form by
1:00 p.m. Pacific time, proceeds sent by ACH
generally will be available within two to
three business days.
- --------------------------------------------------------------------------
[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, P.O. BOX 33030,
ST. PETERSBURG, FL 33733-8030
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 quarterly account statements that
show all your account transactions during the quarter. You also will receive
written notification after each transaction affecting your account (except
for distributions and transactions made through automatic investment or
withdrawal programs, which will be reported on your quarterly statement). You
also will receive the 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 also will receive copies of all notifications and
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 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, wire or electronic funds transfer
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 0.25 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 on Class C NAV purchases. A dealer commission
of up to 0.25% may be paid on Class A NAV purchases by certain trust
companies and bank trust departments, eligible governmental authorities, and
broker-dealers or others on behalf of clients participating in comprehensive
fee programs.
1. During the first year after purchase, dealers may not be eligible to
receive the 12b-1 fee.
2. Each fund may pay up to 0.35% to Distributors or others, out of which
0.10% generally will be retained by Distributors for its distribution
expenses.
3. Dealers may be eligible to receive up to 0.25% from the date of purchase.
After 8 years, Class B shares convert to Class A shares and dealers may then
receive the 12b-1 fee applicable to Class A.
4. Dealers may be eligible to receive up to 0.25% during the first year after
purchase and may be eligible to receive the full 12b-1 fee starting in the
13th month.
[Insert graphic of question mark]QUESTIONS
If you have any questions about the funds or your account, you can write to
us at P.O. Box 33030, St. Petersburg, FL 33733-8030. 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 Services 1-800/527-2020 5:30 a.m. to 5:00 p.m.
Advisor 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.franklintempleton.com
You can also obtain information about each fund by visiting the SEC's Public
Reference Room in Washington, D.C. (phone 1-202/942-8090) or the EDGAR
Database on the SEC's Internet site at http://www.sec.gov. You can obtain
copies of this information, after paying a duplicating fee, by writing to the
SEC's Public Reference Section, Washington, D.C. 20549-0102 or by electronic
request at the following E-mail address: [email protected].
Investment Company Act file #811-5387 MS P 05/00
Prospectus
Franklin Mutual Series Fund Inc.
CLASS Z
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
MAY 1, 2000
[Insert Franklin Templeton Ben Head]
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]
2 Mutual Beacon Fund; Mutual Qualified Fund; Mutual Shares Fund;
Mutual Discovery Fund
16 Mutual Financial Services Fund
26 Mutual European Fund
36 Management
39 Distributions and Taxes
40 Financial Highlights
YOUR ACCOUNT
[Begin callout]
INFORMATION ABOUT QUALIFIED INVESTORS, ACCOUNT TRANSACTIONS AND SERVICES
[End callout]
46 Qualified Investors
49 Buying Shares
50 Investor Services
53 Selling Shares
55 Account Policies
57 Questions
FOR MORE INFORMATION
[Begin callout]
WHERE TO LEARN MORE ABOUT EACH FUND
[End callout]
Back Cover
MUTUAL BEACON FUND
MUTUAL QUALIFIED FUND
MUTUAL SHARES FUND
MUTUAL DISCOVERY FUND
[Insert graphic of bullseye and arrows] GOALS AND STRATEGIES
GOALS The principal investment goal of Mutual Beacon, Mutual Qualified and
Mutual Shares is capital appreciation, which may occasionally be short-term.
Their secondary goal is income. Mutual Discovery's investment goal is capital
appreciation.
MAIN INVESTMENT STRATEGIES Under normal market conditions, the funds invest
mainly in equity securities of companies that the manager believes are
available at market prices less than their value based on certain recognized
or objective criteria (intrinsic value). Following this value-oriented
strategy, the funds primarily invest in:
o UNDERVALUED STOCKS Stocks trading at a discount to intrinsic value.
And to a much smaller extent, the funds also invest in:
o RESTRUCTURING COMPANIES Securities of companies that are involved in
restructurings such as mergers, acquisitions, consolidations, liquidations,
spinoffs, or tender or exchange offers.
o DISTRESSED COMPANIES Securities of companies that are, or are about to be,
involved in reorganizations, financial restructurings, or bankruptcy.
[Begin callout]
The funds invest primarily in securities of companies the manager believes
are undervalued.
[End callout]
The funds invest primarily in mid- and large-cap companies with market
capitalization values (share price times the number of common stock shares
outstanding) greater than $1.5 billion. Each fund also may invest a
significant portion of its assets in small-cap companies. An equity security,
or stock, represents a proportionate share of the ownership of a company; its
value is based on the success of the company's business, any income paid to
stockholders, the value of its assets, and general market conditions. Common
stocks and preferred stocks, and securities convertible into common stock,
are examples of equity securities.
While the funds generally purchase securities for investment purposes, the
manager may seek to influence or control management, or invest in other
companies that do so, when the manager believes the fund may benefit.
Each fund may invest in debt securities to a lesser extent than its
investments in equity securities. Debt securities represent the obligation of
the issuer to repay a loan of money to it, and generally pay interest to the
holder. Bonds, notes and debentures are examples of debt securities. The
funds may invest in debt securities in any rating category established by an
independent rating agency, including lower rated (or comparable unrated) or
defaulted debt securities ("junk bonds").
The funds' investments in Restructuring and Distressed Companies typically
involve the purchase of junk bonds, or comparable unrated debt securities, or
the purchase of direct indebtedness (or participations in the indebtedness)
of such companies. Indebtedness generally represents a specific commercial
loan or portion of a loan made to a company by a financial institution such
as a bank or insurance company. Loan participations represent fractional
interest in a company's indebtedness and are generally made available by
banks or insurance companies. By purchasing all or a part of a company's
direct indebtedness, a fund, in effect, steps into the shoes of the lender.
If the loan is secured, the fund will have a priority claim to the assets of
the company ahead of unsecured creditors and stockholders. The funds
generally make such investments to achieve capital appreciation, rather than
to seek income.
The funds also may purchase trade claims and other similar direct obligations
or claims against companies in bankruptcy. Trade claims are generally
purchased from creditors of the bankrupt company and typically represent
money due to a supplier of goods or services to the company.
The funds may invest a substantial portion (up to 35%) of their assets in
foreign securities and Mutual Discovery generally invests a majority (more
than 50%) of its assets in foreign, equity and debt securities, which may
include sovereign debt and participations in foreign government debt. The
funds generally seek to hedge (protect) against currency risks, largely using
forward foreign currency exchange contracts, where available and when, 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.
PORTFOLIO SELECTION The manager employs a research driven, fundamental value
strategy. In choosing equity investments, the manager focuses on the market
price of a company's securities relative to the manager's own evaluation of
the company's asset value, including an analysis of book value, cash flow
potential, long-term earnings, and multiples of earnings of comparable
securities of both public or private companies. Value stock prices are
considered "cheap" relative to the company's perceived value and are often
out of favor with other investors. The prices of debt obligations of
Restructuring or Distressed Companies also may be "cheap" relative to the
value of the company's assets. The funds may invest in such securities if the
manager believes the market may have overreacted to adverse developments or
failed to appreciate positive changes. The manager examines each investment
separately and there are no set criteria as to specific value parameters,
asset size, earnings or industry type.
DIFFERENCES BETWEEN THE FUNDS While the manager follows the same strategy in
choosing investments for all of the funds, there are certain differences
among the funds. First, the funds themselves vary in size and each fund has
different teams of portfolio managers who have primary responsibility for
selecting investments. Mutual Beacon and Mutual Qualified tend to invest more
of their assets in small-cap stocks than Mutual Shares or Mutual Discovery.
While all four funds may invest a portion of their assets in foreign
securities, the proportion of their assets so invested will vary: Mutual
Shares will generally have the lowest portion of assets in foreign
securities, with Mutual Qualified and Mutual Beacon each respectively having
increasingly larger portions in foreign securities. Mutual Discovery may
invest most of its assets in foreign securities. In addition the funds may
allocate foreign investments in different geographic areas. As a result of
these differences, the performance of the four funds will vary.
TEMPORARY INVESTMENTS The manager may keep a portion of each fund's assets in
cash or invested in short-term, highly liquid money market instruments, when
it believes that insufficient investment opportunities meeting the fund's
investment criteria exist. For example, when prevailing market valuations for
securities are high, there may be fewer securities available at prices below
their intrinsic value. In addition, when the manager believes market or
economic conditions are unfavorable for investors, the manager may invest up
to 100% of each fund's assets in a temporary defensive manner or hold a
substantial portion of the fund's portfolio in cash. In these circumstances,
a fund may be unable to achieve its investment goals.
[Insert graphic of chart with line going up and down] MAIN RISKS
STOCKS While stocks historically have outperformed other asset classes over
the long term, they tend to go up and down more dramatically over the short
term. These price movements may result from factors affecting individual
companies, industries or the securities market as a whole.
VALUE INVESTING Value investments may not increase in price as anticipated by
the manager, and may decline even further if other investors fail to
recognize the company's value, or favor investing in faster-growing
companies, or if the factors that the manager believes will increase the
price do not occur.
The funds' bargain-driven focus may result in a fund choosing securities that
are not widely followed by other investors. "Cheaply" priced securities may
also include companies reporting poor earnings, companies whose share prices
have declined sharply (sometimes growth companies that have recently stumbled
but have good "fundamentals"), turnarounds, cyclical companies, or companies
emerging from bankruptcy, all of which may have a higher risk of continuing
to be ignored or rejected, and therefore, undervalued by the market or losing
more value.
RESTRUCTURING AND DISTRESSED COMPANIES A merger or other restructuring or
tender or exchange offer proposed at the time a fund invests in a
Restructuring Company may not be completed on the terms contemplated and,
therefore, benefit the fund as anticipated. Also, debt obligations of
Distressed Companies typically are unrated, lower rated, in default or close
to default and may become worthless.
[Begin callout]
Because the securities the funds hold fluctuate in price, the value of your
investment in a fund will go up and down. This means you could lose money
over short or even extended periods.
[End callout]
FOREIGN SECURITIES Investing in foreign securities, including securities of
foreign governments, typically involves more risks than investing in U.S.
securities. Certain of these risks also may apply to securities of U.S.
companies with significant foreign operations. These risks can increase the
potential for losses in the funds and affect their share price.
CURRENCY EXCHANGE RATES. Foreign securities may be issued and traded in
foreign currencies. As a result, their values may be affected by changes in
exchange rates between foreign currencies and the U.S. dollar, as well as
between currencies of countries other than the U.S. For example, if the value
of the U.S. dollar goes up compared to a foreign currency, an investment
traded in that foreign currency will go down in value because it will be
worth less U.S. dollars. The impact of the euro, a relatively new currency
adopted by certain European countries to replace their national currencies,
is unclear at this time.
POLITICAL AND ECONOMIC DEVELOPMENTS. The political, economic and social
structures of some foreign countries may be less stable and more volatile
than those in the U.S. Investments in these countries may be subject to the
risks of internal and external conflicts, currency devaluations, foreign
ownership limitations and tax increases. It is possible that a government may
take over the assets or operations of a company or impose restrictions on the
exchange or export of currency or other assets. Some countries also may have
different legal systems that may make it difficult for the funds to vote
proxies, exercise shareholder rights, and pursue legal remedies with respect
to their foreign investments.
TRADING PRACTICES. Brokerage commissions and other fees generally are higher
for foreign securities. Government supervision and regulation of foreign
stock exchanges, currency markets, trading systems and brokers may be less
than in the U.S. The procedures and rules governing foreign transactions and
custody (holding of the funds' assets) also may involve delays in payment,
delivery or recovery of money or investments.
AVAILABILITY OF INFORMATION. Foreign companies may not be subject to the same
disclosure, accounting, auditing and financial reporting standards and
practices as U.S. companies. Thus, there may be less information publicly
available about foreign companies than about most
U.S. companies.
LIMITED MARKETS. Certain foreign securities may be less liquid (harder to
sell) and more volatile than many U.S. securities. This means the funds may
at times be unable to sell foreign securities at favorable prices.
SMALLER COMPANIES While smaller companies, and to some extent mid-cap
companies, may offer greater opportunities for capital growth than larger,
more established companies, they also have more risk. Historically,
smaller-company securities have been more volatile in price and have
fluctuated independently from larger-company securities, especially over the
short-term. Smaller or relatively new companies can be particularly sensitive
to changing economic conditions and increases in interest rates, their growth
prospects are less certain and their securities are less liquid. These
companies may suffer significant losses, and can be considered speculative.
CREDIT An issuer may be unable to make interest payments and repay
principal. Changes in an issuer's financial strength or in a security's
credit rating may affect a security's value and, thus, impact fund
performance.
LOWER-RATED AND UNRATED DEBT SECURITIES. Securities rated below investment
grade, sometimes called "junk bonds," and the type of unrated debt securities
purchased by the funds, generally have more risk than higher-rated securities.
They also may fluctuate more in price, and are less liquid than higher rated
securities. Prices are especially sensitive to developments affecting the
company's business and to ratings changes, and typically rise and fall in
response to factors that affect the company's stock prices. Companies issuing
such lower-rated debt securities are not as strong financially, and are more
likely to encounter financial difficulties and be more vulnerable to changes
in the economy, such as a recession or a sustained period of rising interest
rates.
INDEBTEDNESS, PARTICIPATIONS AND TRADE CLAIMS. The purchase of indebtedness
or loan participations of a troubled company always involves a risk as to the
creditworthiness of the issuer and the possibility that principal invested
may be lost. Purchasers of participations, such as the funds, must rely on
the financial institution issuing the participation to assert any rights
against the borrower with respect to the underlying indebtedness. In
addition, the funds take on the risk as to the creditworthiness of the bank
or other financial intermediary issuing the participation, as well as that of
the company issuing 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.
DERIVATIVE SECURITIES Forward foreign currency exchange contracts are
considered derivative investments, since their value depends on the value of
an underlying asset to be purchased or sold. The funds' investments in
derivatives may involve a small investment relative to the amount of risk
assumed. To the extent the funds enter into these transactions, their success
will depend on the manager's ability to predict market movements, and their
use may have the opposite effect of that intended. Risks include potential
loss due to the imposition of controls by a government on the exchange of
foreign currencies, delivery failure, default by the other party, or
inability to close out a position because the trading market became illiquid.
LIQUIDITY Each fund may invest up to 15% of its net assets in securities with
a limited trading market. Reduced liquidity may have an adverse impact on
market price and a fund's ability to sell particular securities when
necessary to meet the fund's liquidity needs or in response to a specific
economic event, such as the deterioration in the creditworthiness of an
issuer. Reduced liquidity in the secondary market for certain securities also
may make it more difficult for a fund to obtain market quotations based on
actual trades for the purpose of valuing the fund's portfolio.
More detailed information about the funds, their policies and risks can be
found in the funds' Statement of Additional Information (SAI).
[Begin callout]
Mutual fund shares are not deposits or obligations of, or guaranteed or
endorsed by, any bank, and are not 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]
[Insert graphic of a bull and a bear] PERFORMANCE
These bar charts and tables show the volatility of each 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.
MUTUAL BEACON FUND
CLASS Z ANNUAL TOTAL RETURNS1
[Insert bar graph]
- -8.13% 17.60% 22.92% 22.93% 5.61% 25.89% 21.19% 22.99% 2.37% 16.79%
90 91 92 93 94 95 96 97 98 99
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, 1999
1 YEAR 5 YEARS 10 YEARS
- ---------------------------------------------------------------------------
Mutual Beacon Fund - Class Z 16.79% 17.54% 14.49%
S&P 500(R)Index2 21.04% 28.56% 18.21%
1. As of March 31, 2000, the fund's year-to-date return was 4.26%.
All fund performance assumes reinvestment of dividends and capital gains.
2. Source: Standard & Poor's 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.
MUTUAL QUALIFIED FUND
CLASS Z ANNUAL TOTAL RETURNS1
[Insert bar graph]
- -10.12% 21.13% 22.70% 22.71% 5.73% 26.60% 21.19% 24.92% 0.50% 13.64%
90 91 92 93 94 95 96 97 98 99
YEAR
[Begin callout]
BEST QUARTER:
Q2 '99 13.41%
WORST QUARTER:
Q3 '98 -17.70%
[End callout]
AVERAGE ANNUAL TOTAL RETURNS
For the periods ended December 31, 1999
1 YEAR 5 YEARS 10 YEARS
- ---------------------------------------------------------------------------
Mutual Qualified Fund - Class Z 13.64% 16.96% 14.26%
S&P 500(R)Index2 21.04% 28.56% 18.21%
1. As of March 31, 2000, the fund's year-to-date return was 2.90%.
All fund performance assumes reinvestment of dividends and capital gains.
2. Source: Standard & Poor's 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.
MUTUAL SHARES FUND
CLASS Z ANNUAL TOTAL RETURNS1
[Insert bar graph]
- -9.82% 20.99% 21.33% 20.99% 4.55% 29.11% 20.76% 26.38% 0.45% 15.00%
90 91 92 93 94 95 96 97 98 99
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, 1999
1 YEAR 5 YEARS 10 YEARS
- ---------------------------------------------------------------------------
Mutual Shares Fund - Class Z 15.00% 17.88% 14.32%
S&P 500(R)Index2 21.04% 28.56% 18.21%
1. As of March 31, 2000, the fund's year-to-date return was 2.35%.
All fund performance assumes reinvestment of dividends and capital gains.
2. Source: Standard & Poor's 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.
MUTUAL DISCOVERY FUND
CLASS Z ANNUAL TOTAL RETURNS1
[Insert bar graph]
35.85% 3.62% 28.63% 24.93% 22.94% -1.90% 26.80%
93 94 95 96 97 98 99
YEAR
[Begin callout]
BEST QUARTER:
Q4 '98 14.23%
WORST QUARTER:
Q3 '98 -19.44%
[End callout]
AVERAGE ANNUAL TOTAL RETURNS
For the periods ended December 31, 1999
SINCE
INCEPTION
1 YEAR 5 YEARS 12/31/92
- ---------------------------------------------------------------------------
Mutual Discovery Fund - Class Z 26.80% 19.70% 19.40%
S&P 500(R)Index2 21.04% 28.56% 21.53%
MSCI World Index3 25.34% 20.25% 18.43%
1. As of March 31, 2000, the fund's year-to-date return was 7.20%.
All fund performance assumes reinvestment of dividends and capital gains.
2. Source: Standard & Poor's 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.
3. Source: Standard & Poor's Micropal. The unmanaged Morgan Stanley Capital
International (MSCI) World Index tracks the performance of approximately 1500
securities in 22 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)
<TABLE>
<CAPTION>
BEACON QUALIFIED MUTUAL DISCOVERY
SHARES
- -------------------------------------------------------------------------------------------
CLASS Z
Maximum sales charge (load) imposed on
<S> <C> <C> <C> <C>
purchases None None None None
Exchange fee None None None None
ANNUAL FUND OPERATING EXPENSES (EXPENSES DEDUCTED FROM FUND ASSETS)
BEACON QUALIFIED MUTUAL DISCOVERY
SHARES
- -------------------------------------------------------------------------------------------
Management fees1 0.60% 0.60% 0.60% 0.80%
Distribution and service
(12b-1) fees None None None None
Other expenses 0.23% 0.25% 0.21% 0.31%
------------------------------------------------
Total annual fund operating expenses1 0.83% 0.85% 0.81% 1.11%
------------------------------------------------
</TABLE>
1. For the fiscal year ended December 31, 1999, the manager had agreed in
advance to limit its management fees. With this reduction, management fees
and total operating expenses were as follows:
<TABLE>
<CAPTION>
BEACON QUALIFIED MUTUAL DISCOVERY
SHARES
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Management fees 0.58% 0.55% 0.56% 0.74%
Total annual operating expenses 0.79% 0.80% 0.77% 1.05%
</TABLE>
After June 30, 2000, 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. It assumes:
o You invest $10,000 for the periods shown;
o Your investment has a 5% return each year;
o The fund's operating expenses remain the same; and
o You sell your shares at the end of the periods shown.
Although your actual costs may be higher or lower, based on these assumptions
your costs would be:
<TABLE>
<CAPTION>
BEACON QUALIFIED MUTUAL DISCOVERY
SHARES
- -------------------------------------------------------------------------------------------
If you sell your shares at the end of the
period:
<S> <C> <C> <C> <C>
1 Year $85 $87 $83 $113
3 Years $265 $271 $259 $353
5 Years $460 $471 $450 $612
10 Years $1,025 $1,049 $1,002 $1,352
</TABLE>
MUTUAL FINANCIAL SERVICES FUND
[Insert graphic of bullseye and arrows] GOALS AND STRATEGIES
GOALS The fund's principal investment goal is capital appreciation, which
may occasionally be short-term. Its secondary goal is income.
MAIN INVESTMENT STRATEGIES Under normal market conditions, the fund invests
at least 65% of its total assets in equity securities of financial services
companies that the manager believes are available at market prices less than
their value based on certain recognized or objective criteria (intrinsic
value). Following this value-oriented strategy, the fund primarily invests in:
o UNDERVALUED STOCKS Stocks trading at a discount to intrinsic value.
And to a much smaller extent, the fund also invests in:
o RESTRUCTURING COMPANIES Securities of companies that are involved in
restructurings such as mergers, acquisitions, consolidations, liquidations,
spinoffs, or tender or exchange offers.
o DISTRESSED COMPANIES Securities of companies that are, or are about to be,
involved in reorganizations, financial restructurings, or bankruptcy.
[Begin callout]
The fund invests primarily in equity securities of financial services
companies the manager believes are undervalued.
[End callout]
The fund concentrates its investments in equity securities of companies in
the financial services industry. An equity security, or stock, represents a
proportionate share of the ownership of a company; its value is based on the
success of the company's business, any income paid to stockholders, the value
of its assets, and general market conditions. Common stocks and preferred
stocks, and securities convertible into common stocks, are examples of equity
securities.
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 that meet the
manager's investment criteria are smaller capitalization companies, the fund
may invest most 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.
While the fund generally purchases securities for investment purposes, the
manager may seek to influence or control management, or invest in other
companies that do so, when the manager believes the fund may benefit.
The fund may invest in debt securities to a lesser extent than its
investments in equity securities. Debt securities represent the obligation of
the issuer to repay a loan of money to it, and generally pay interest to the
holder. Bonds, notes and debentures are examples of debt securities. The fund
may invest in debt securities in any rating category established by an
independent rating agency, including lower rated (or comparable unrated) or
defaulted debt securities ("junk bonds").
The fund's investments in Restructuring and Distressed Companies typically
involve the purchase of junk bonds, or comparable unrated debt securities or
the purchase of direct indebtedness (or participations in the indebtedness)
of such companies. Indebtedness generally represents a specific commercial
loan or portion of a loan made to a company by a financial institution such
as a bank or insurance company. Loan participations represent fractional
interest in a company's indebtedness and are generally made available by
banks or insurance companies. By purchasing all or a part of a company's
direct indebtedness, the fund, in effect, steps into the shoes of the lender.
If the loan is secured, the fund will have a priority claim to the assets of
the company ahead of unsecured creditors and stockholders. The fund generally
makes such investments to achieve capital appreciation, rather than to seek
income.
The fund also may purchase trade claims and other similar direct obligations
or claims against companies in bankruptcy. Trade claims are generally
purchased from creditors of the bankrupt company and typically represent
money due to a supplier of goods or services to the company.
The fund may invest a substantial portion (up to 35%) of its assets in
foreign securities. The fund generally seeks to hedge (protect) against
currency risks, largely using forward foreign currency exchange contracts,
where available and when, 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.
PORTFOLIO SELECTION The manager employs a research driven, fundamental value
strategy. In choosing equity investments, the manager focuses on the market
price of a company's securities relative to the manager's own evaluation of
the company's asset value, including an analysis of book value, cash flow
potential, long-term earnings, and multiples of earnings of comparable
securities of both public or private companies. Value stock prices are
considered "cheap" relative to the company's perceived value and are often
out of favor with other investors. The prices of debt obligations of
Restructuring or Distressed Companies also may be "cheap" relative to the
value of the company's assets. The funds may invest in such securities if the
manager believes the market may have overreacted to adverse developments or
failed to appreciate positive changes. The manager examines each investment
separately and there are no set criteria as to specific value parameters,
asset size, earnings or industry type. The smaller companies in which the
fund invests may not be as well known as the larger companies in which the
fund invests, 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 keep a portion of the fund's assets
in cash or invested in short-term, highly liquid money market instruments,
when it believes that insufficient investment opportunities meeting the
fund's investment criteria exist. For example, when prevailing market
valuations for securities are high, there may be fewer securities available
at prices below their intrinsic value. In addition, when the manager believes
market or economic conditions are unfavorable for investors, the manager may
invest up to 100% of the fund's assets in a temporary defensive manner or
hold a substantial portion of the fund's portfolio in cash. In these
circumstances, the fund may be unable to achieve its investment goals.
[Insert graphic of chart with line going up and down] MAIN RISKS
STOCKS While stocks historically have outperformed other asset classes over
the long term, they tend to go up and down more dramatically over the short
term. These price movements may result from factors affecting individual
companies, industries or the securities market as a whole.
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. For example,
increases in interest rates can have a negative effect on the profitability
of financial services companies.
Financial services companies are subject to extensive government regulation
which tends to limit both the amount and types of loans and other financial
commitments a financial services company can make, and the interest rates and
fees it can charge. 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 may be subject to heavy 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.
The financial services industry is currently undergoing rapid change as
existing distinctions between banking, insurance and brokerage businesses
become blurred. The Gramm-Leach-Bliley Act, which was made effective March
11, 2000, repealed the sections of the Glass-Steagall Act prohibiting banks
and bank holding companies from engaging in certain securities-related
businesses under certain circumstances. In addition, the financial services
industry continues to experience 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, but it is not possible to predict whether the effect will be
beneficial or adverse. That depends not only upon how these changes affect
the industry, but also how the particular securities in the fund's portfolio
are affected.
VALUE INVESTING Value investments may not increase in price as anticipated by
the manager, and may decline even further if other investors fail to
recognize the company's value, or favor investing in faster-growing
companies, or if the factors that the manager believes will increase the
price do not occur.
The fund's bargain-driven focus may result in a fund choosing securities that
are not widely followed by other investors. "Cheaply" priced securities may
also include companies reporting poor earnings, companies whose share prices
have declined sharply (sometimes growth companies that have recently stumbled
but have good "fundamentals"), turnarounds, cyclical companies, or companies
emerging from bankruptcy, all of which may have a higher risk of continuing
to be ignored or rejected, and therefore, undervalued by the market or losing
more value.
SMALLER COMPANIES While smaller companies, and to a lesser extent mid-cap
companies, may offer greater opportunities for capital growth than larger,
more established companies, they also have more risk. Historically,
smaller-company securities have been more volatile in price and have
fluctuated independently from larger-company securities, especially over the
short-term. Smaller or relatively new companies can be particularly sensitive
to changing economic conditions and increases in interest rates, their growth
prospects are less certain and their securities are less liquid. These
companies may suffer significant losses, and can be considered speculative.
RESTRUCTURING AND DISTRESSED COMPANIES A merger or other restructuring or
tender or exchange offer proposed at the time the fund invests in a
Restructuring Company may not be completed on the terms contemplated and,
therefore, benefit the fund as anticipated. Also, debt obligations of
Distressed Companies typically are unrated, lower rated, in default or close
to default and may become worthless.
[Begin callout]
Because the securities the fund holds fluctuate in price, 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]
FOREIGN SECURITIES Investing in foreign securities, including securities of
foreign governments, typically involves more risks than investing in U.S.
securities. Certain of these risks also may apply to securities of U.S.
companies with significant foreign operations. These risks can increase the
potential for losses in the fund and affect its share price.
CURRENCY EXCHANGE RATES. Foreign securities may be issued and traded in
foreign currencies. As a result, their values may be affected by changes in
exchange rates between foreign currencies and the U.S. dollar, as well as
between currencies of countries other than the U.S. For example, if the value
of the U.S. dollar goes up compared to a foreign currency, an investment
traded in that foreign currency will go down in value because it will be
worth less U.S. dollars. The impact of the euro, a relatively new currency
adopted by certain European countries to replace their national currencies,
is unclear at this time.
POLITICAL AND ECONOMIC DEVELOPMENTS. The political, economic and social
structures of some foreign countries may be less stable and more volatile
than those in the U.S. Investments in these countries may be subject to the
risks of internal and external conflicts, currency devaluations, foreign
ownership limitations and tax increases. It is possible that a government may
take over the assets or operations of a company or impose restrictions on the
exchange or export of currency or other assets. Some countries also may have
different legal systems that may make it difficult for the fund to vote
proxies, exercise shareholder rights, and pursue legal remedies with respect
to its foreign investments.
TRADING PRACTICES. Brokerage commissions and other fees generally are higher
for foreign securities. Government supervision and regulation of foreign
stock exchanges, currency markets, trading systems and brokers may be less
than in the U.S. The procedures and rules governing foreign transactions and
custody (holding of the fund's assets) also may involve delays in payment,
delivery or recovery of money or investments.
AVAILABILITY OF INFORMATION. Foreign companies may not be subject to the same
disclosure, accounting, auditing and financial reporting standards and
practices as U.S. companies. Thus, there may be less information publicly
available about foreign companies than about most U.S. companies.
LIMITED MARKETS. Certain foreign securities may be less liquid (harder to
sell) and more volatile than many U.S. securities. This means the fund may at
times be unable to sell foreign securities at favorable prices.
CREDIT An issuer may be unable to make interest payments and repay
principal. Changes in an issuer's financial strength or in a security's
credit rating may affect a security's value and, thus, impact fund
performance.
LOWER-RATED AND UNRATED DEBT SECURITIES. Securities rated below investment
grade, sometimes called "junk bonds," and the type of unrated debt securities
purchased by the fund, generally have more risk than higher-rated securities.
They also may fluctuate more in price, and are less liquid than higher rated
securities. Prices are especially sensitive to developments affecting the
company's business and to ratings changes, and typically rise and fall in
response to factors that affect the company's stock prices. Companies issuing
such lower-rated debt securities are not as strong financially, and are more
likely to encounter financial difficulties and be more vulnerable to changes
in the economy, such as a recession or a sustained period of rising interest
rates.
INDEBTEDNESS, PARTICIPATIONS AND TRADE CLAIMS. The purchase of indebtedness
or loan participations of a troubled company always involves a risk as to the
creditworthiness of the issuer and the possibility that principal invested
may be lost. 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. In addition, the
fund takes on the risk as to the creditworthiness of the bank or other
financial intermediary issuing the participation, as well as that of the
company issuing the underlying indebtedness. When the fund purchases a trade
claim, there is no guarantee that the debtor will ever be able to satisfy the
obligation on the trade claim.
DERIVATIVE SECURITIES Forward foreign currency exchange contracts are
considered derivative investments, since their value depends on the value of
an underlying asset to be purchased or sold. The fund's investments in
derivatives may involve a small investment relative to the amount of risk
assumed. To the extent the fund enters into these transactions, their success
will depend on the manager's ability to predict market movements, and their
use may have the opposite effect of that intended. Risks include potential
loss due to the imposition of controls by a government on the exchange of
foreign currencies, delivery failure, default by the other party, or
inability to close out a position because the trading market became illiquid.
LIQUIDITY The fund may invest up to 15% of its net assets in securities with
a limited trading market. Reduced liquidity may have an adverse impact on
market price and the fund's ability to sell particular securities when
necessary to meet the fund's liquidity needs or in response to a specific
economic event, such as the deterioration in the creditworthiness of an
issuer. Reduced liquidity in the secondary market for certain securities also
may make it more difficult for the fund to obtain market quotations based on
actual trades for the purpose of valuing the fund's portfolio.
More detailed information about the fund, its policies and risks can be found
in the fund's Statement of Additional Information (SAI).
[Begin callout]
Mutual fund shares are not deposits or obligations of, or guaranteed or
endorsed by, any bank, and are not 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]
[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 RETURNS1
[Insert bar graph]
7.08% 4.70%
98 99
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, 1999
SINCE
1 YEAR INCEPTION
(8/19/97)
- -------------------------------------------------------------
Mutual Financial Services - Class 4.70% 14.94%
Z
KBW 50 Total Return Index2 -3.47% 6.71%
S&P 500(R) Index3 21.04% 23.64%
1. As of March 31, 2000, the fund's year-to-date return was -1.76%.
All fund performance assumes reinvestment of dividends and capital gains.
2. Source: Keefe, Bruyette & Woods, Inc. The unmanaged Keefe, Bruyette &
Woods Index (KBW 50) tracks the stocks of the 50 largest U.S. banks. The
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.
3. Source: Standard & Poor's 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)
CLASS Z
- ---------------------------------------------------------------------
Management fees1 0.80%
Distribution and service (12b-1) fees None
Other expenses 0.40%
----------------
Total annual fund operating expenses1 1.20%
----------------
1. For the fiscal year ended December 31, 1999, the manager had agreed in
advance to limit its management fees. With this reduction, management fees
were 0.75% and total annual fund operating expenses were 1.07%. After June
30, 2000, 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. It assumes:
o You invest $10,000 for the periods shown;
o Your investment has a 5% return each year;
o The fund's operating expenses remain the same; and
o You sell your shares at the end of the periods shown.
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
- ---------------------------------------------
$122 $381 $660 $1,455
MUTUAL EUROPEAN FUND
[Insert graphic of bullseye and arrows] GOALS AND STRATEGIES
GOALS The fund's principal investment goal is capital appreciation, which
may occasionally be short-term. Its secondary goal is income.
MAIN INVESTMENT STRATEGIES Under normal market conditions, the fund invests
at least 65% of its total assets in equity securities of European companies
that the manager believes are available at market prices less than their
value based on certain recognized or objective criteria (intrinsic value).
Following this value-oriented strategy, the fund primarily invests in:
o UNDERVALUED STOCKS Stocks trading at a discount to intrinsic value.
And to a much smaller extent, the fund also invests in:
o RESTRUCTURING COMPANIES Securities of companies that are involved in
restructurings such as mergers, acquisitions, consolidations, liquidations,
spinoffs, or tender or exchange offers.
o DISTRESSED COMPANIES Securities of companies that are, or are about to be,
involved in reorganizations, financial restructurings, or bankruptcy.
[Begin callout]
The fund invests primarily in equity securities of European companies that
the manager believes are undervalued.
[End callout]
The fund invests primarily in mid- and large-cap companies with market
capitalization values (share price times the number of common stock shares
outstanding) greater than $1.5 billion. The fund also may invest a
significant portion of its assets in small-cap companies. An equity security,
or stock, represents a proportionate share of the ownership of a company; its
value is based on the success of the company's business, any income paid to
stockholders, the value of its assets, and general market conditions. Common
stocks and preferred stocks, and securities convertible into common stock,
are examples of equity securities.
The fund defines European companies as issuers (i) organized under the laws
of, or (ii) whose principal business operations are located in, or (iii) who
earn at least 50% of their revenue 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.
The fund 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. The fund 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.
While the fund generally purchases securities for investment purposes, the
manager may seek to influence or control management, or invest in other
companies that do so, when the manager believes the fund may benefit.
The fund may invest in debt securities to a lesser extent than its
investments in equity securities. Debt securities represent the obligation of
the issuer to repay a loan of money to it, and generally pay interest to the
holder. Bonds, notes and debentures are examples of debt securities. The fund
may invest in debt securities in any rating category established by an
independent rating agency, including lower rated (or comparable unrated) or
defaulted debt securities ("junk bonds").
The fund's investments in Restructuring and Distressed Companies typically
involve the purchase of junk bonds, or comparable unrated debt securities, or
the purchase of direct indebtedness (or participations in the indebtedness)
of such companies. Indebtedness generally represents a specific commercial
loan or portion of a loan made to a company by a financial institution such
as a bank or insurance company. Loan participations represent fractional
interest in a company's indebtedness and are generally made available by
banks or insurance companies. By purchasing all or a part of a company's
direct indebtedness, the fund, in effect, steps into the shoes of the lender.
If the loan is secured, the fund will have a priority claim to the assets of
the company ahead of unsecured creditors and stockholders. The fund generally
makes such investments to achieve capital appreciation, rather than to seek
income.
The fund also may purchase trade claims and other similar direct obligations
or claims against companies in bankruptcy. Trade claims are generally
purchased from creditors of the bankrupt company and typically represent
money due to a supplier of goods or services to the company.
The fund generally seeks to hedge (protect) against currency risks, largely
using forward foreign currency exchange contracts, where available and when,
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.
PORTFOLIO SELECTION The manager employs a research driven, fundamental value
strategy. In choosing equity investments, the manager focuses on the market
price of a company's securities relative to the manager's own evaluation of
the company's asset value, including an analysis of book value, cash flow
potential, long-term earnings, and multiples of earnings of comparable
securities of both public or private companies. Value stock prices are
considered "cheap" relative to the company's perceived value and are often
out of favor with other investors. The prices of debt obligations of
Restructuring or Distressed Companies also may be "cheap" relative to the
value of the company's assets. The funds may invest in such securities if the
manager believes the market may have overreacted to adverse developments or
failed to appreciate positive changes. The manager examines each investment
separately and there are no set criteria as to specific value parameters,
asset size, earnings or industry type.
TEMPORARY INVESTMENTS The manager may keep a portion of the fund's assets in
cash or invested in short-term, highly liquid money market instruments, when
it believes that insufficient investment opportunities meeting the fund's
investment criteria exist. For example, when prevailing market valuations for
securities are high, there may be fewer securities available at prices below
their intrinsic value. In addition, when the manager believes market or
economic conditions are unfavorable for investors, the manager may invest up
to 100% of the fund's assets in a temporary defensive manner or hold a
substantial portion of the fund's portfolio in cash. In these circumstances,
the fund may be unable to achieve its investment goals.
[Insert graphic of chart with line going up and down] MAIN RISKS
STOCKS While stocks historically have outperformed other asset classes over
the long term, they tend to go up and down more dramatically over the short
term. These price movements may result from factors affecting individual
companies, industries or the securities market as a whole.
VALUE INVESTING Value investments may not increase in price as anticipated
by the manager, and may decline even further if other investors fail to
recognize the company's value, or favor investing in faster-growing
companies, or if the factors that the manager believes will increase the
price do not occur.
The fund's bargain-driven focus may result in a fund choosing securities that
are not widely followed by other investors. "Cheaply" priced securities may
also include companies reporting poor earnings, companies whose share prices
have declined sharply (sometimes growth companies that have recently stumbled
but have good "fundamentals"), turnarounds, cyclical companies, or companies
emerging from bankruptcy, all of which may have a higher risk of continuing
to be ignored or rejected, and therefore, undervalued by the market or losing
more value.
FOREIGN SECURITIES Investing in foreign securities, including securities of
foreign governments, typically involves more risks than investing in U.S.
securities. Certain of these risks also may apply to securities of U.S.
companies with significant foreign operations. These risks can increase the
potential for losses in the fund and affect its share price.
REGION. Investment in a single region, even though representing a number of
different countries within the region, may be affected by common economic
forces and other factors. The fund is subject to greater risks of adverse
events which occur in the region and may experience greater volatility than a
fund that is more broadly diversified geographically. Political or economic
disruptions in European countries, even in countries in which the fund is not
invested, may adversely affect security values and thus the fund's holdings.
CURRENCY EXCHANGE RATES. Foreign securities may be issued and traded in
foreign currencies. As a result, their values may be affected by changes in
exchange rates between foreign currencies and the U.S. dollar, as well as
between currencies of countries other than the U.S. For example, if the value
of the U.S. dollar goes up compared to a foreign currency, an investment
traded in that foreign currency will go down in value because it will be
worth less U.S. dollars.
EURO. On January 1, 1999, the European Economic and Monetary Union introduced
a new single currency called the euro. By July 1, 2002, the euro will have
replaced the national currencies of a number of European countries.
The change to the euro as a single currency is new and untested. It is not
possible to predict the impact of the euro on currency values or on the
business or financial condition of European countries and issuers and issuers
in other regions whose securities the fund may hold, or the impact, if any,
on fund performance.
POLITICAL AND ECONOMIC DEVELOPMENTS. The political, economic and social
structures of some foreign countries may be less stable and more volatile
than those in the U.S. Investments in these countries may be subject to the
risks of internal and external conflicts, currency devaluations, foreign
ownership limitations and tax increases. It is possible that a government may
take over the assets or operations of a company or impose restrictions on the
exchange or export of currency or other assets. Some countries also may have
different legal systems that may make it difficult for the fund to vote
proxies, exercise shareholder rights, and pursue legal remedies with respect
to its foreign investments.
TRADING PRACTICES. Brokerage commissions and other fees generally are higher
for foreign securities. Government supervision and regulation of foreign
stock exchanges, currency markets, trading systems and brokers may be less
than in the U.S. The procedures and rules governing foreign transactions and
custody (holding of the fund's assets) also may involve delays in payment,
delivery or recovery of money or investments.
AVAILABILITY OF INFORMATION. Foreign companies may not be subject to the same
disclosure, accounting, auditing and financial reporting standards and
practices as U.S. companies. Thus, there may be less information publicly
available about foreign companies than about most U.S. companies.
LIMITED MARKETS. Certain foreign securities may be less liquid (harder to
sell) and more volatile than many U.S. securities. This means the fund may at
times be unable to sell foreign securities at favorable prices.
RESTRUCTURING AND DISTRESSED COMPANIES A merger or other restructuring or
tender or exchange offer proposed at the time the fund invests in a
Restructuring Company may not be completed on the terms contemplated and,
therefore, benefit the fund as anticipated. Also, debt obligations of
Distressed Companies typically are unrated, lower rated, in default or close
to default and may become worthless.
[Begin callout]
Because the securities the fund holds fluctuate in price, 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]
SMALLER COMPANIES While smaller companies, and to some extent mid-cap
companies, may offer greater opportunities for capital growth than larger,
more established companies, they also have more risk. Historically,
smaller-company securities have been more volatile in price and have
fluctuated independently from larger-company securities, especially over the
short-term. Smaller or relatively new companies can be particularly sensitive
to changing economic conditions and increases in interest rates, their growth
prospects are less certain and their securities are less liquid. These
companies may suffer significant losses, and can be considered speculative.
CREDIT An issuer may be unable to make interest payments and repay
principal. Changes in an issuer's financial strength or in a security's
credit rating may affect a security's value and, thus, impact fund
performance.
LOWER-RATED AND UNRATED DEBT SECURITIES. Securities rated below investment
grade, sometimes called "junk bonds," and the type of unrated debt securities
purchased by the fund, generally have more risk than higher-rated securities.
They also may fluctuate more in price, and are less liquid than higher rated
securities. Prices are especially sensitive to developments affecting the
company's business and to ratings changes, and typically rise and fall in
response to factors that affect the company's stock prices. Companies issuing
such lower-rated debt securities are not as strong financially, and are more
likely to encounter financial difficulties and be more vulnerable to changes
in the economy, such as a recession or a sustained period of rising interest
rates.
INDEBTEDNESS, PARTICIPATIONS AND TRADE CLAIMS. The purchase of indebtedness
or loan participations of a troubled company always involves a risk as to the
creditworthiness of the issuer and the possibility that principal invested
may be lost. 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. In addition, the
fund takes on the risk as to the creditworthiness of the bank or other
financial intermediary issuing the participation, as well as that of the
company issuing the underlying indebtedness. When the fund purchases a trade
claim, there is no guarantee that the debtor will ever be able to satisfy the
obligation on the trade claim.
DERIVATIVE SECURITIES Forward foreign currency exchange contracts are
considered derivative investments, since their value depends on the value of
an underlying asset to be purchased or sold. The fund's investments in
derivatives may involve a small investment relative to the amount of risk
assumed. To the extent the fund enters into these transactions, their success
will depend on the manager's ability to predict market movements, and their
use may have the opposite effect of that intended. Risks include potential
loss to the fund due to the imposition of controls by a government on the
exchange of foreign currencies, delivery failure, default by the other party,
or inability to close out a position because the trading market became
illiquid.
LIQUIDITY The fund may invest up to 15% of its net assets in securities with
a limited trading market. Reduced liquidity may have an adverse impact on
market price and the fund's ability to sell particular securities when
necessary to meet the fund's liquidity needs or in response to a specific
economic event, such as the deterioration in the creditworthiness of an
issuer. Reduced liquidity in the secondary market for certain securities also
may make it more difficult for the fund to obtain market quotations based on
actual trades for the purpose of valuing the fund's portfolio.
More detailed information about the fund, its policies and risks can be found
in the fund's Statement of Additional Information (SAI).
[Begin callout]
Mutual fund shares are not deposits or obligations of, or guaranteed or
endorsed by, any bank, and are not 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]
[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 3 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 RETURNS1
[Insert bar graph]
23.16% 4.74% 46.81%
97 98 99
YEAR
[Begin callout]
BEST QUARTER:
Q4 '99 27.47%
WORST QUARTER:
Q3 '98 -20.16%
[End callout]
AVERAGE ANNUAL TOTAL RETURNS
For the periods ended December 31, 1999
SINCE
1 YEAR INCEPTION
(7/3/96)
- -------------------------------------------------------------
Mutual European Fund - Class Z 46.81% 24.81%
MSCI All Country Europe Index2 17.35% 24.03%
1. As of March 31, 2000, the fund's year-to-date return was 11.78%.
All fund performance assumes reinvestment of dividends and capital gains.
2. Source: Standard & Poor's Micropal. The unmanaged Morgan Stanley Capital
International (MSCI) All Country 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). 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)
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, 1999, the manager had agreed in
advance to limit its management fees. With this reduction, management fees
were 0.76% and total annual fund operating expenses were 1.05%. After June
30, 2000, 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. It assumes:
o You invest $10,000 for the periods shown;
o Your investment has a 5% return each year;
o The fund's operating expenses remain the same; and
o You sell your shares at the end of the periods shown.
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 briefcase] MANAGEMENT
Franklin Mutual Advisers, LLC (Franklin Mutual), 51 John F. Kennedy Parkway,
Short Hills, NJ 07078, is the funds' investment manager. Together, Franklin
Mutual and its affiliates manage over $229 billion in assets.
Michael F. Price is Chairman of the Boards of Directors that oversee the
management of the funds and Franklin Mutual.
The team responsible for the funds' management is:
JEFFREY A. ALTMAN, SENIOR VICE PRESIDENT OF FRANKLIN MUTUAL
Mr. Altman has been a manager of the funds since 1988. He joined the Franklin
Templeton Group in 1996. Before November 1996, Mr. Altman was employed as a
research analyst and trader for Heine Securities Corporation, the funds'
former manager.
ROBERT L. FRIEDMAN, SENIOR VICE PRESIDENT OF FRANKLIN MUTUAL
Mr. Friedman has been a manager of the funds since 1988. He joined the
Franklin Templeton Group in 1996. Before November 1996, Mr. Friedman was
employed as a research analyst for Heine Securities Corporation, the funds'
former manager.
RAYMOND GAREA, SENIOR VICE PRESIDENT OF FRANKLIN MUTUAL
Mr. Garea has been a manager of the funds since 1991. He joined the Franklin
Templeton Group in 1996. Before November 1996, Mr. Garea was employed as a
research analyst for Heine Securities Corporation, the funds' former manager.
PETER A. LANGERMAN, CHIEF EXECUTIVE OFFICER AND
PRESIDENT OF FRANKLIN MUTUAL
Mr. Langerman has been a manager of the funds since 1986. He joined the
Franklin Templeton Group in 1996. Before November 1996, Mr. Langerman was
employed as a research analyst for Heine Securities Corporation, the funds'
former manager.
LAWRENCE N. SONDIKE, SENIOR VICE PRESIDENT OF FRANKLIN MUTUAL
Mr. Sondike has been a manager of the funds since 1984. He joined the
Franklin Templeton Group in 1996. Before November 1996, Mr. Sondike was
employed as a research analyst for Heine Securities Corporation, the funds'
former manager.
DAVID J. WINTERS CFA, SENIOR VICE PRESIDENT OF FRANKLIN MUTUAL AND DIRECTOR
OF RESEARCH
Mr. Winters has been a manager of the funds since 1987. He joined the
Franklin Templeton Group in 1996. Before November 1996, Mr. Winters was
employed as a research analyst for Heine Securities Corporation, the funds'
former manager.
In addition, the following Franklin Mutual employees serve as assistant
portfolio managers:
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.
SUSAN POTTO, VICE PRESIDENT of FRANKLIN MUTUAL
Ms. Potto has been a manager of the funds since January 2000. She joined the
Franklin Templeton Group in 1996. Before November 1996, Ms. Potto was
employed as an equity analyst for Heine Securities Corporation, the funds'
former manager.
The following portfolio and assistant portfolio managers have primary
responsibility for investments in the following funds:
- --------------------------------------------------------------------------------
Mutual Beacon Fund Larry Sondike and David Winters
- --------------------------------------------------------------------------------
Mutual Discovery Fund David Winters
- --------------------------------------------------------------------------------
Mutual European Fund Robert Friedman
- --------------------------------------------------------------------------------
Mutual Financial Services Fund Ray Garea
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Mutual Qualified Fund Ray Garea and Assistant Portfolio Manager Jeff
Diamond
- --------------------------------------------------------------------------------
Mutual Shares Fund Larry Sondike and Assistant Portfolio Manager
Susan Potto
- --------------------------------------------------------------------------------
Each fund pays Franklin Mutual a fee for managing the fund's assets. For the
fiscal year ended December 31, 1999, Franklin Mutual agreed in advance to
limit its fees. After June 30, 2000, the manager may end this arrangement at
any time upon notice to the funds' Board of Directors. The table below shows
the management fees paid by each fund to the manager for its services, as a
percentage of average daily net assets.
MANAGEMENT
FEES BEFORE MANAGEMENT
ADVANCE WAIVER(%) FEES PAID (%)
- -------------------------------------------------------------------
Beacon 0.60 0.58
Discovery 0.80 0.74
European 0.80 0.76
Financial Services 0.80 0.75
Qualified 0.60 0.55
Shares 0.60 0.56
[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 fund 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 fund shares 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 redemption
proceeds if you do not provide your correct social security or taxpayer
identification number and certify that you are not subject to backup
withholding, 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.
Fund distributions and gains from the sale or exchange of your shares
generally will be subject to state and local income tax. Any foreign taxes a
fund pays on its investments 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.
[Insert graphic of a dollar bill] FINANCIAL HIGHLIGHTS
These tables present the financial performance for Class Z for the past five
years or since its inception. This information has been audited by Ernst &
Young LLP.
MUTUAL BEACON FUND
CLASS Z YEAR ENDED DECEMBER 31,
- --------------------------------------------------------------------------------
19992 1998 1997 1996 1995
- --------------------------------------------------------------------------------
PER SHARE DATA1 ($)
Net asset value,
beginning of year 13.12 14.12 12.98 11.98 10.34
-----------------------------------------------
Net investment income .22 .33 .31 .40 .29
Net realized and unrealized
gains 1.95 (.01) 2.63 2.08 2.36
-----------------------------------------------
Total from investment operations
2.17 .32 2.94 2.48 2.65
-----------------------------------------------
Less distributions from:
Net investment income (.27) (.45) (.54) (.35) (.28)
Net realized gains (1.18) (.87) (1.26) (1.13) (.73)
-----------------------------------------------
Total distributions (1.45) (1.32) (1.80) (1.48) (1.01)
-----------------------------------------------
Net asset value, end of year 13.84 13.12 14.12 12.98 11.98
Total return (%) 16.79 2.37 23.03 21.19 25.89
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year ($ x 1
million) 3,218 4,031 5,679 4,920 3,573
Ratios to average net assets:
(%)
Expenses(a) .79 .78 .79 .73 .75
Expenses excluding waiver
and payments by affiliate .83 .81 .82 .75 .75
Net investment income 1.52 2.28 1.92 3.21 2.89
Portfolio turnover rate (%) 67.61 65.27 54.72 66.87 73.18
(a)Excluding dividend expense
on securities sold short,
ratios to average net assets:
(%)
Expenses .78 .76 .74 .73 .72
Expenses excluding waiver
and payments by affiliate .82 .79 .77 .75 .72
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.
2. Based on average weighted shares outstanding.
<TABLE>
<CAPTION>
MUTUAL QUALIFIED FUND
CLASS Z YEAR ENDED DECEMBER 31,
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1999 2 1998 1997 1996 1995
- --------------------------------------------------------------------------------------
PER SHARE DATA1 ($)
Net asset value,
beginning of year 16.46 18.19 16.24 14.87 13.34
-----------------------------------------------------
Net investment income .23 .43 .37 .47 .33
Net realized and unrealized
gains 1.99 (.38) 3.62 2.62 3.17
-----------------------------------------------------
Total from investment operations
2.22 .05 3.99 3.09 3.50
-----------------------------------------------------
Less distributions from:
Net investment income (.29) (.45) (.64) (.43) (.33)
Net realized gains (1.48) (1.33) (1.40) (1.29) (1.64)
-----------------------------------------------------
Total distributions (1.77) (1.78) (2.04) (1.72) (1.97)
-----------------------------------------------------
Net asset value, end of year 16.91 16.46 18.19 16.24 14.87
-----------------------------------------------------
Total return (%) 13.64 .45 24.95 21.19 26.60
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year ($ x 1
million) 3,152 3,943 5,240 4,288 3,002
Ratios to average net assets:
(%)
Expenses(a) .80 .77 .79 .75 .76
Expenses excluding waiver
and payments by affiliate .85 .80 .82 .78 .76
Net investment income 1.31 2.05 1.85 3.06 2.71
Portfolio turnover rate (%) 59.84 66.84 52.76 65.03 75.59
(a)Excluding dividend expense
on securities sold short,
ratios to average net assets:
(%)
Expenses .77 .76 .75 .75 .72
Expenses excluding waiver
and payments by affiliate .82 .79 .78 .78 .72
</TABLE>
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.
2. Based on average weighted shares outstanding.
<TABLE>
<CAPTION>
MUTUAL SHARES FUND
CLASS Z YEAR ENDED DECEMBER 31,
- -----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1999 2 1998 1997 1996 1995
- -----------------------------------------------------------------------------------
PER SHARE DATA1 ($)
Net asset value,
beginning of year 19.55 21.30 18.57 17.29 15.74
--------------------------------------------------
Net investment income .33 .53 .42 .55 .40
Net realized and unrealized
gains 2.55 (.46) 4.43 2.96 4.10
--------------------------------------------------
Total from investment operations
2.88 .07 4.85 3.51 4.50
--------------------------------------------------
Less distributions from:
Net investment income (.42) (.53) (.54) (.50) (.39)
Net realized gains (1.58) (1.29) (1.58) (1.73) (2.56)
--------------------------------------------------
Total distributions (2.00) (1.82) (2.12) (2.23) (2.95)
--------------------------------------------------
Net asset value, end of year 20.43 19.55 21.30 18.57 17.29
--------------------------------------------------
Total return (%) 14.95 .45 26.44 20.76 29.11
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year ($ x 1
million) 5,572 6,279 7,919 6,543 5,230
Ratios to average net assets:
(%)
Expenses(a) .77 .76 .76 .70 .73
Expenses excluding waiver
and payments by affiliate .81 .80 .79 .72 .73
Net investment income 1.58 2.15 1.92 3.02 2.47
Portfolio turnover rate (%) 66.24 69.46 49.61 58.35 79.32
(a)Excluding dividend expense
on securities sold short,
ratios to average net assets:
(%)
Expenses .75 .73 .72 .70 .69
Expenses excluding waiver
and payments by affiliate .79 .77 .75 .72 .69
</TABLE>
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.
2. Based on average weighted shares outstanding.
<TABLE>
<CAPTION>
MUTUAL DISCOVERY FUND
CLASS Z YEAR ENDED DECEMBER 31,
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1999 1 1998 1997 1996 1995
- -----------------------------------------------------------------------------------------
PER SHARE DATA ($)
Net asset value,
beginning of year 17.27 18.89 17.18 15.16 12.55
--------------------------------------------------------
Net investment income .25 .38 .39 .34 .17
Net realized and unrealized
gains 4.32 (.71) 3.49 3.39 3.40
--------------------------------------------------------
Total from investment operations
4.57 (.33) 3.88 3.73 3.57
--------------------------------------------------------
Less distributions:
Net investment income (.42) (.48) (.81) (.31) (.14)
Net realized gains (.32) (.81) (1.36) (1.40) (.82)
--------------------------------------------------------
Total distributions .74 (1.29) (2.17) (1.71) (.96)
--------------------------------------------------------
Net asset value, end of year 21.10 17.27 18.89 17.18 15.16
--------------------------------------------------------
Total return (%) 26.80 (1.90) 22.94 24.93 28.63
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year ($ x 1
million) 2,038 2,514 3,880 2,976 1,370
Ratios to average net assets:
(%)
Expenses(a) 1.05 1.01 .98 .96 1.01
Expenses excluding waiver
and payments by affiliate 1.11 1.04 1.00 .99 1.01
Net investment income 1.33 1.81 1.82 2.24 2.00
Portfolio turnover rate (%) 87.67 83.57 58.15 80.18 73.23
(a)Excluding dividend expense
on securities sold short,
ratios to average net assets:
(%)
Expenses 1.03 1.00 .98 .96 .99
Expenses excluding waiver
and payments by affiliate 1.09 1.03 1.00 .99 .99
</TABLE>
1. Based on average weighted shares outstanding.
<TABLE>
<CAPTION>
MUTUAL FINANCIAL SERVICES FUND
CLASS Z YEAR ENDED DECEMBER 31,
- -----------------------------------------------------------------------------------
<S> <C> <C> <C>
1999 2 1998 2 1997 1
- -----------------------------------------------------------------------------------
PER SHARE DATA ($)
Net asset value,
beginning of year 12.85 12.27 10.00
---------------------------------
Net investment income .16 .24 .04
Net realized and unrealized gains .45 .64 2.35
---------------------------------
Total from investment operations .61 .88 2.39
---------------------------------
Less distributions from:
Net investment income (.19) (.19) (.03)
Net realized gains (.22) (.11) (.09)
---------------------------------
Total distributions (.41) (.30) (.12)
---------------------------------
Net asset value, end of year 13.05 12.85 12.27
---------------------------------
Total return (%)3 4.78 7.08 23.92
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year ($ x 1000) 76,916 143,132 136,350
Ratios to average net assets: (%)
Expenses(a) 1.07 1.01 1.00 4
Expenses excluding waiver and
payments by affiliate 1.20 1.10 1.62 4
Net investment income 1.17 1.76 1.37 4
Portfolio turnover rate (%) 81.81 136.76 42.26
(a)Excluding dividend expense on securities sold
short, ratios to average net assets: (%)
Expenses 1.05 1.00 1.00 4
Expenses excluding waiver and
payments by affiliate 1.18 1.09 1.62 4
</TABLE>
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 EUROPEAN FUND
CLASS Z YEAR ENDED DECEMBER 31,
- -----------------------------------------------------------------------------
1999 2 1998 1997 2 1996 1
- -----------------------------------------------------------------------------
PER SHARE DATA ($)
Net asset value,
beginning of year 12.54 12.60 11.39 10.00
--------------------------------------------
Net investment income .24 .31 .33 .06
Net realized and unrealized
gains 5.50 .33 2.28 1.40
--------------------------------------------
Total from investment operations
5.74 .64 2.61 1.46
--------------------------------------------
Less distributions from:
Net investment income (.50) (.34) (.84) (.05)
Net realized gains (.89) (.36) (.56) (.02)
--------------------------------------------
Total distributions (1.39) (.70) (1.40) (.07)
--------------------------------------------
Net asset value, end of year 16.89 12.54 12.60 11.39
--------------------------------------------
Total return (%)3 46.81 4.74 23.16 14.61
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year ($ x 1
million) 524 484 547 450
Ratios to average net assets:
(%)
Expenses(a) 1.05 1.05 1.02 1.09 4
Expenses excluding waiver
and payments by affiliate 1.09 1.05 1.05 1.15 4
Net investment income 1.69 2.02 2.53 1.87 4
Portfolio turnover rate (%) 127.05 97.62 98.12 36.75
(a)Excluding dividend expense
on securities sold short,
ratios to average net assets:
(%)
Expenses 1.04 1.05 1.02 1.09 4
Expenses excluding waiver
and payments by affiliate 1.08 1.05 1.05 1.15 4
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.
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 Current shareholders who owned shares of any Mutual Series fund on October
31, 1996, and their immediate family members residing at the same address
o Partnership shareholders who owned shares of any Mutual Series fund on
October 31, 1996, whether or not they are listed on the registration
o Corporate shareholders who owned shares of 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 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
- -----------------------------------------------------------------------------
Automatic investment plans $50 ($25 for $50 ($25 for
an Education an Education
IRA) IRA)
- -----------------------------------------------------------------------------
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 Templeton Variable Insurance
Products Trust and Templeton Capital Accumulator Fund, Inc.
[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 within 365 days of the redemption date. For investors
who owned shares of any Mutual Series fund on October 31, 1996, the 365 day
requirement does not apply. 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 generally are not available to
retirement plans through Franklin Templeton's ValuSelect(R) program. Retirement
plans in the ValuSelect program before January 1, 1998, however, may 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 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 If you have another Franklin Before requesting a
phone] Templeton account with your telephone purchase, please
bank account information on make sure we have your bank
BY PHONE file, you may open a new account information on file.
account by phone. The If we do not have this
1-800/448-FUND accounts must be identically information, you will need
registered. to send written instructions
with your bank's name and
To make a same day address, your bank account
investment, please call us number, and the ABA routing
by 1:00 p.m. Pacific time or number.
the close of the New York
Stock Exchange, whichever is To make a same day
earlier. investment, please call us
by 1:00 p.m. Pacific time or
the close of the New York
Stock Exchange, whichever is
earlier.
- --------------------------------------------------------------------------------
[Insert graphic of Call Shareholder Services at Call Shareholder Services at
two arrows the number below, or send the number below, or send
pointing in signed written instructions. signed written instructions.
opposite (Please see page 51 for (Please see page 51 for
directions] information on exchanges.) information on exchanges.)
BY EXCHANGE
- --------------------------------------------------------------------------------
FRANKLIN TEMPLETON INVESTOR SERVICES P.O. BOX 997151,
SACRAMENTO, CA 95899-9983
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 and mail it to Investor
Services. If you are opening a new account, please include your minimum
initial investment with your application.
AUTOMATIC PAYROLL DEDUCTION You may invest in a fund automatically by
transferring money from your paycheck to the fund by electronic funds
transfer. If you are interested, indicate on your application that you would
like to receive an Automatic Payroll Deduction Program kit.
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 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 fund 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 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 or Templeton Foreign Fund, but you qualify to buy Advisor Class
shares of other Franklin Templeton Funds, you also may exchange your shares
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 56).
*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 Generally, requests to sell $100,000 or less can 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 also may 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 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 sent to a bank account. See the
lightning bolts] policies above for selling shares by mail or
phone.
Before requesting to have redemption proceeds
sent to a bank account, please make sure we
BY ELECTRONIC have your bank account information on file. If
FUNDS TRANSFER we do not have this information, you will need
(ACH) to send written instructions with your bank's
name and address, a voided check or savings
account deposit slip, and a signature
guarantee if the ownership of the bank and
fund accounts is different.
If we receive your request in proper form by
1:00 p.m. Pacific time, proceeds sent by ACH
generally will be available within two to
three business days.
- -------------------------------------------------------------------
[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 P.O. BOX 997151,
SACRAMENTO, CA 95899-9983
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 quarterly account statements that
show all your account transactions during the quarter. You also will receive
written notification after each transaction affecting your account (except
for distributions and transactions made through automatic investment or
withdrawal programs, which will be reported on your quarterly statement). You
also will receive the 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 also will receive copies of all notifications and
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, wire or electronic funds transfer
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 P.O. Box 997151, Sacramento, CA 95899-9983. 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 Services
1-800/527-2020 5:30 a.m. to 5:00 p.m.
Advisor 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.franklintempleton.com
You can also obtain information about each fund by visiting the SEC's Public
Reference Room in Washington, D.C. (phone 1-202/942-8090) or the EDGAR
Database on the SEC's Internet site at http://www.sec.gov. You can obtain
copies of this information, after paying a duplicating fee, by writing to the
SEC's Public Reference Section, Washington, D.C. 20549-0102 or by electronic
request at the following E-mail address: [email protected].
Investment Company Act file #811-5387 MS PZ 05/00
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, 2000
[Insert Franklin Templeton Ben Head]
P.O. BOX 33030, ST. PETERSBURG, FL 33733-8030 1-800/DIAL BEN(R)
This Statement of Additional Information (SAI) is not a prospectus. It
contains information in addition to the information in the funds' prospectus.
The funds' prospectus, dated May 1, 2000, 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, 1999, are incorporated by reference (are
legally a part of this SAI).
For a free copy of the current prospectus or annual report, contact your
investment representative or call 1-800/DIAL BEN (1-800/342-5236).
CONTENTS
Goals and Strategies 2
Risks 13
Officers and Directors 18
Management and Other Services 21
Portfolio Transactions 22
Distributions and Taxes 23
Organization, Voting Rights and Principal Holders 25
Buying and Selling Shares 26
Pricing Shares 33
The Underwriter 33
Performance 35
Miscellaneous Information 38
- ------------------------------------------------------------------------------
MUTUAL FUNDS, ANNUITIES, AND OTHER INVESTMENT PRODUCTS:
o ARE NOT 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, which occasionally may be
short-term. Their secondary goal is income. The investment goal of Discovery
is long-term capital appreciation. Discovery does not have a secondary
investment goal. These goals are fundamental, which means they may not be
changed without shareholder approval.
The funds may invest in equity securities, debt securities and securities
convertible into common stock (including convertible preferred and
convertible debt securities) (convertible securities). There are no
limitations on the percentage of a fund's assets which may be invested in
equity securities, debt securities, convertible securities or cash equivalent
investments. The funds reserve freedom of action to invest in these
securities in such proportions as the manager deems advisable. In addition,
the funds may also invest in restricted debt and equity securities, in
foreign securities, and in other investment company securities.
The general investment policy of each fund is to invest in securities if, in
the opinion of the manager, they are available at prices less than their
intrinsic value, as determined by the manager after careful analysis and
research, taking into account, among other factors, the relationship of book
value to market value of the securities, cash flow, and multiples of earnings
of comparable securities. The relationship of a security's "book value to
market value" is an analysis of the difference between the price at which a
security is trading in the market, as compared to the value of that security
based upon an analysis of certain information contained in a company's
financial statements. Cash flow analysis considers the inflow and outflow of
money into and out of a company. An analysis of "multiples of earnings of
comparable securities" involves a review of the market values of comparable
companies as compared to their earnings, and then comparing the results of
this review with a comparison of the earnings of the company in question with
its market value. The manager examines each security separately and does not
apply these factors according to any predetermined formula. The manager has
not established guidelines as to the size of an issuer, its earnings or the
industry in which it operates in order for a security to be excluded as
unsuitable for purchase by a fund.
While Beacon, Qualified, Shares, Discovery and European have identical basic
investment restrictions and Beacon, Financial Services, Qualified, Shares,
and European have identical investment goals, the manager seeks to retain
certain historical differences among the funds on an informal basis.
The funds may invest in securities of companies of any size, however, due to
the relatively large size of Beacon, Qualified and Shares, these funds have
generally invested in larger and medium size companies with large trading
volumes and market capitalizations in excess of $1.5 billion. Discovery,
Financial Services and European, on the other hand, tend to invest
proportionately more of their assets in smaller size companies than the other
funds. Discovery may also invest more than 50% of its assets in foreign
securities.
Generally, Financial Services and European utilize the same investment
philosophy as the other funds, but Financial Services will do so by investing
in securities of financial services companies and European will do so by
investing primarily in European securities.
Qualified was originally intended for purchase by pension and profit sharing
plans and other non-tax paying entities. Therefore, its portfolio was
intended to have greater flexibility due to the reduced concerns about the
tax effects on shareholders. The manager expects that the securities it will
purchase for Qualified will satisfy this goal, depending on market conditions
and any changes in tax law. Currently, however, Qualified operates in the
same fashion as Beacon and Shares. Allocation of investments among the funds
depends upon, among other things, the amount of cash in, and relative size
of, each fund's portfolio. In addition, the factors outlined above are not
mutually exclusive and a particular security may be owned by more than one
fund.
The funds may invest in any industry although no fund will concentrate its
investments in any industry except Financial Services. Financial Services
will concentrate its investments in the financial services industry by
investing more than 25% of the value of its assets in securities of financial
services companies. Financial Services' concentration policy may not be
changed without the approval of Financial Services' shareholders.
The funds may invest in securities that are traded on U.S. or foreign
securities exchanges, the National Association of Securities Dealers
Automated Quotation System (Nasdaq) national market system or in any domestic
or foreign over-the-counter (OTC) market. U.S. or foreign securities
exchanges typically represent the primary trading market for U.S. and foreign
securities. A securities exchange brings together buyers and sellers of the
same securities. The Nasdaq national market system also brings together
buyers and sellers of the same securities through an electronic medium which
facilitates a sale and purchase of the security. Typically, the companies
whose securities are traded on the Nasdaq national market system are smaller
than the companies whose securities are traded on a securities exchange. The
OTC market refers to all other avenues whereby brokers bring together buyers
and sellers of securities.
The following is a description of the various types of securities the funds
may buy.
EQUITY SECURITIES generally entitle the holder to participate in a company's
general operating results. The purchaser of an equity security typically
receives an ownership interest in the company as well as certain voting
rights. The owner of an equity security may participate in a company's
success through the receipt of dividends, which are distributions of earnings
by the company to its owners. Equity security owners may also participate in
a company's success or lack of success through increases or decreases in the
value of the company's shares as traded in the public trading market for such
shares. The public trading market for these shares is typically a stock
exchange but can also be a market which arises between broker-dealers seeking
buyers and sellers of a particular security. Equity securities generally are
either common stock or preferred stock. Preferred stockholders usually
receive greater dividends but may receive less appreciation than common
stockholders and may have greater voting rights as well.
DEBT SECURITIES are securities issued by a company which represent a loan of
money by the purchaser of the securities to the company. A debt security has
a fixed payment schedule which obligates the company to pay interest to the
lender and to return the lender's money over a certain time period. A company
typically meets its payment obligations associated with its outstanding debt
securities before it declares and pays any dividends to holders of its equity
securities. While debt securities are used as an investment to produce income
to an investor as a result of the fixed payment schedule, debt securities may
also increase or decrease in value depending upon factors such as interest
rate movements and the success or lack of success of a company.
The funds may invest in a variety of debt securities, including bonds and
notes issued by domestic or foreign corporations and the U.S. or foreign
governments. Bonds and notes differ in the length of the issuer's repayment
schedule. Bonds typically have a longer payment schedule than notes.
Typically, debt securities with a shorter repayment schedule pay interest at
a lower rate than debt securities with a longer repayment schedule.
The debt securities which the funds may purchase may either be unrated, or
rated in any rating category established by one or more independent rating
organizations, such as Standard & Poor's Ratings Group (S&P(R)) or Moody's
Investors Service, Inc. (Moody's). Securities are given ratings by
independent rating organizations, which grade the company issuing the
securities based upon its financial soundness. Each fund may invest in
securities that are rated in the medium to lowest rating categories by S&P
and Moody's. Generally, lower rated and unrated debt securities are riskier
investments. Debt securities rated BBB or lower by S&P or Moody's are
considered to be high yield, high risk debt securities, commonly known as
"junk bonds." The lowest rating category established by Moody's is "C" and by
S&P is "D." Debt securities with a D rating are in default as to the payment
of principal and interest, which means that the issuer does not have the
financial soundness to meet its interest payments or its repayment schedule
to security holders. The funds may invest to an unlimited degree in junk
bonds.
The funds will generally invest in debt securities under circumstances
similar to those under which they will invest in equity securities; namely,
when, in the manager's opinion, such debt securities are available at prices
less than their intrinsic value. Investing in fixed-income securities under
these circumstances may lead to the potential for capital appreciation.
Consequently, when investing in debt securities, a debt security's rating is
given less emphasis in the manager's investment decision-making process.
Historically, the funds have invested in debt securities issued by domestic
or foreign companies (i) which are involved in mergers, acquisitions,
consolidations, liquidations, spinoffs, reorganizations or financial
restructurings, and (ii) that are distressed companies or in bankruptcy
(Reorganizing Companies), because such securities often are available at less
than their intrinsic value. Debt securities of such companies typically are
unrated, lower rated, in default or close to default. While posing a greater
risk than higher rated securities with respect to payment of interest and
repayment of principal at the price at which the debt security was originally
issued, these debt securities typically rank senior to the equity securities
of Reorganizing Companies and may offer the potential for certain investment
opportunities.
CONVERTIBLE SECURITIES are debt securities, or in some cases preferred stock,
which have the additional feature of converting into, or being exchanged for,
common stock of a company after certain periods of time or under certain
circumstances. Holders of convertible securities gain the benefits of being a
debt holder or preferred stockholder and receiving regular interest payments,
in the case of debt securities, or higher dividends, in the case of preferred
stock, with the expectation of becoming a common stockholder in the future. A
convertible security's value usually reflects changes in the company's
underlying common stock value.
CASH EQUIVALENT INVESTMENTS are investments in certain types of short-term
debt securities. A fund making a cash equivalent investment expects to earn
interest at prevailing market rates on the amount invested and there is
little, if any, risk of loss of the original amount invested. The funds' cash
equivalent investments are typically made in U.S. Treasury bills and
high-quality commercial paper issued by banks or others. U.S. Treasury bills
are direct obligations of the U.S. government and have initial maturities of
one year or less. Commercial paper consists of short-term debt securities
issued by a bank or other financial institution which carry fixed or floating
interest rates. A fixed interest rate means that interest is paid on the
investment at the same rate for the life of the security. A floating interest
rate means that the interest rate varies as interest rates on newly issued
securities in the marketplace vary.
NON-U.S. SECURITIES The funds may purchase securities of non-U.S. issuers
whose values are quoted and traded in any currency in addition to the U.S.
dollar. Where a security's value is quoted and traded in a non-U.S. dollar
currency, the funds bear the risk of a decrease (or gain the benefit of an
increase) in the value of the security as a result of changes in the value of
the currency as compared to the U.S. dollar in addition to typical market
price movements related to certain trading markets or the financial strength
or weakness of the security's issuer. In order to avoid these unexpected
fluctuations in value as a result of relative currency values, the funds
expect to employ an investment technique called "hedging," which attempts to
reduce or eliminate changes in a security's value resulting from changing
currency exchange rates. Hedging is further described below.
DEPOSITARY RECEIPTS Each fund may invest in securities commonly known as
American Depositary Receipts (ADRs), European Depositary Receipts (EDRs) or
Global Depositary Receipts of non-U.S. issuers. Such depositary receipts are
interests in a pool of a non-U.S. company's securities which have been
deposited with a bank or trust company. The bank or trust company then sells
interests in the pool to investors in the form of depository receipts.
Depository receipts can be unsponsored or sponsored by the issuer of the
underlying securities or by the issuing bank or trust company. ADRs are
certificates issued by a U.S. bank or trust company and represent the right
to receive securities of a foreign issuer deposited in a domestic bank or
foreign branch of a U.S. bank and traded on a U.S. exchange or in an
over-the-counter market. EDRs are receipts issued in Europe generally by a
non-U.S. bank or trust company that evidence ownership of non-U.S. or
domestic securities. Generally, ADRs are in registered form and EDRs are in
bearer form. There are no fees imposed on the purchase or sale of ADRs or
EDRs although the issuing bank or trust company may impose charges for the
collection of dividends and the conversion of ADRs and EDRs into the
underlying securities. Investment in ADRs has certain advantages over direct
investment in the underlying non-U.S. securities, since: (i) ADRs are U.S.
dollar denominated investments which are easily transferable and for which
market quotations are readily available and (ii) issuers whose securities are
represented by ADRs are subject to the same auditing, accounting and
financial reporting standards as domestic issuers. EDRs are not necessarily
denominated in the currency of the underlying security.
TEMPORARY INVESTMENTS When the manager believes market or economic
conditions are unfavorable for investors, the manager may invest up to 100%
of the funds' assets in a temporary defensive manner or hold a substantial
portion of the funds' portfolio in cash. Unfavorable market or economic
conditions may include excessive volatility or a prolonged general decline in
the securities markets, the securities in which the funds normally invest, or
the economies of the countries where the funds invest.
Temporary defensive investments generally may include short-term debt
securities such as U.S. Treasury bills and high quality commercial paper
issued by banks or others, as well as money market mutual funds. To the
extent allowed by exemptions granted under the Investment Company Act of
1940, as amended (1940 Act), and the funds' other investment policies and
restrictions, the manager also may invest the funds' assets in shares of one
or more money market funds managed by the manager or its affiliates. The
manager also may invest in these types of securities or hold cash while
looking for suitable investment opportunities.
SECURITIES OF REORGANIZING COMPANIES AND COMPANIES SUBJECT TO TENDER OR
EXCHANGE OFFERS The funds also seek to invest in the securities of
Reorganizing Companies, or of companies as to which there exist outstanding
tender or exchange offers. The funds may from time to time participate in
such tender or exchange offers. A tender offer is an offer by the company
itself or by another company or person to purchase a company's securities at
a higher (or lower) price than the market value for such securities. An
exchange offer is an offer by the company or by another company or person to
the holders of the company's securities to exchange those securities for
different securities. Although there are no restrictions limiting the extent
to which each fund may invest in Reorganizing Companies, no fund presently
anticipates committing more than 50% of its assets to such investments. In
addition to typical equity and debt investments, the funds' investments in
Reorganizing Companies may include Indebtedness, Participations and Trade
Claims, as further described below.
INDEBTEDNESS, PARTICIPATIONS AND TRADE CLAIMS From time to time, the funds
may purchase the direct indebtedness of various companies (Indebtedness), or
participation interests in Indebtedness (Participations) including
Indebtedness and Participations of Reorganizing Companies. Indebtedness can
be distinguished from traditional debt securities in that debt securities are
part of a large issue of securities to the general public which is typically
registered with a securities registration organization, such as the U.S.
Securities and Exchange Commission (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 in effect
steps into the shoes of the financial institution which made the loan to the
company prior to its restructuring or refinancing. Indebtedness purchased by
a fund may be in the form of loans, notes or bonds.
The length of time remaining until maturity on the Indebtedness is one factor
the manager considers in purchasing a particular Indebtedness. Indebtedness
which represents a specific indebtedness of the company to a bank is not
considered to be a security issued by the bank selling it. The funds purchase
loans from national and state chartered banks as well as foreign banks. The
funds normally invest in the Indebtedness of a company which Indebtedness has
the highest priority in terms of payment by the company, although on occasion
lower priority Indebtedness also may be acquired.
Participations represent fractional interests in a company's Indebtedness.
The financial institutions which typically make Participations available are
banks or insurance companies, governmental institutions, such as the
Resolution Trust Corporation, the Federal Deposit Insurance Corporation or
the Pension Benefit Guaranty Corporation, or certain organizations such as
the World Bank which are known as "supranational organizations."
Supranational organizations are entities established or financially supported
by the national governments of one or more countries to promote
reconstruction or development. The funds may also purchase trade claims and
other direct obligations or claims (Trade Claims) of Reorganizing Companies.
Indebtedness, Participations and Trade Claims may be illiquid as described
below.
ILLIQUID SECURITIES An illiquid security is a security that cannot be sold
within seven days in the normal course of business for approximately the
amount at which a fund has valued the security and carries such value on its
financial statements. Examples of illiquid securities are most restricted
securities, and repurchase agreements which terminate more than seven days
from their initial purchase date, as further described below. The funds may
not purchase an illiquid security if, at the time of purchase, the fund would
have more than 15% of its net assets invested in such securities.
RULE 144A SECURITIES The funds may invest in certain unregistered securities
which may be sold under Rule 144A of the Securities Act of 1933 (144A
securities). 144A securities are restricted, which generally means that a
legend has been placed on the share certificates representing the securities
which states that the securities were not registered with the SEC when they
were initially sold and may not be resold except under certain circumstances.
In spite of the legend, certain securities may be sold to other institutional
buyers provided that the conditions of Rule 144A are met. In the event that
there is an active secondary institutional market for 144A securities, the
144A securities may be treated as liquid. As permitted by the federal
securities laws, the board of directors has adopted procedures in accordance
with Rule 144A which govern when specific 144A securities held by the funds
may be deemed to be liquid.
SHORT SALES Each fund may make short sales of securities. There are two types
of short sale transactions in which the funds may engage, "naked short sales"
and "short sales against the box." In a naked short sale transaction, the
fund sells a security it does not own in anticipation that the market price
of that security will decline. Each fund expects to make short sales (i) as a
form of hedging to offset potential declines in long positions in similar
securities, (ii) in order to maintain portfolio flexibility and (iii) for
profit.
When a fund makes a naked short sale, its broker borrows the security to be
sold short and the broker-dealer maintains the proceeds of the short sale
while the short position is open. The fund must keep the proceeds account
marked to market and must post additional collateral for its obligation to
deliver securities to replace the securities that were borrowed and sold
short. 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 borrowed securities 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,
(excluding any proceeds of the short sales) 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 any
differential between the replacement price and the price at which it sold the
security short, its potential loss is theoretically unlimited. In some
circumstances, the fund may receive the security in connection with a
reorganization and, consequently, need not buy the security to be returned to
the borrower.
The funds may also engage in "short sales against the box." In a short sale
against the box, at the time of the sale, the fund owns or has the immediate
and unconditional right to acquire the identical security at no additional
cost. In replacing the borrowed securities in the transaction, the fund may
either buy securities in the open market or use those in its portfolio.
Each fund may engage in naked short sale transactions only if, after giving
effect to such sales, the market value of all securities sold short does not
exceed 5% of the value of its total assets or the fund's aggregate short
sales of a particular class of securities does not exceed 25% of the
outstanding securities of that class. The funds may sell securities short
against the box without limit.
MORTGAGE-BACKED SECURITIES Each fund may invest in securities representing
interests in an underlying pool of real estate mortgages (mortgage-backed
securities). The mortgage-backed securities which the funds may purchase may
be issued or guaranteed by the U.S. government, certain U.S. government
agencies or certain government sponsored corporations or organizations or by
certain private, non-government corporations, such as banks and other
financial institutions. Two principal types of mortgage-backed securities are
collateralized mortgage obligations (CMOs) and real estate mortgage
investment conduits (REMICs).
CMOs are debt securities issued by the entities listed above. The payment of
interest on the debt securities depends upon the scheduled payments on the
underlying mortgages and, thus, the CMOs are said to be "collateralized" by
the pool of mortgages. CMOs are issued in a number of classes or series with
different maturities. The classes or series are paid off completely in
sequence as the underlying mortgages are repaid. Certain of these securities
may have variable interest rates which adjust as interest rates in the
securities market generally rise or fall. Other CMOs may be stripped, which
means that only the principal or interest feature of the underlying security
is passed through to the fund.
REMICs, which were authorized under certain tax laws, are private entities
formed for the purpose of holding a fixed pool of mortgages. The mortgages
are backed by an interest in real property. REMICs are similar to CMOs in
that they issue multiple classes of securities.
CMOs and REMICs issued by private entities are not government securities and
are not directly guaranteed by any government agency. They are secured by the
underlying collateral of the private issuer. Certain of these private-backed
securities are 100% collateralized at the time of issuance by securities
issued or guaranteed by the U.S. government, its agencies, or
instrumentalities.
Distressed mortgage obligations The funds may also invest directly in
distressed mortgage obligations. A direct investment in a distressed mortgage
obligation involves the purchase by the fund of a lender's interest in a
mortgage granted to a borrower, where the borrower has experienced difficulty
in making its mortgage payments, or for which it appears likely that the
borrower will experience difficulty in making its mortgage payments. As is
typical with mortgage obligations, payment of the loan is secured by the real
estate underlying the loan. By purchasing the distressed mortgage obligation,
a fund steps into the shoes of the lender from a risk point of view.
REAL ESTATE INVESTMENT TRUST (REIT) INVESTMENTS The funds' equity investments
may include investments in shares issued by REITs. A REIT is a pooled
investment vehicle which purchases primarily income-producing real estate or
real estate related loans or other real estate related interests. The pooled
vehicle, typically a trust, then issues shares whose value and investment
performance are dependent upon the investment experience of the underlying
real estate related investments.
INVESTMENT COMPANY SECURITIES Each fund may invest from time to time in other
investment company securities, subject to applicable law which restricts such
investments. Such laws generally restrict a fund's purchase of another
investment company's securities to three percent (3%) of the other investment
company's securities, no more than five percent (5%) of the fund's assets in
any single investment company's securities and no more than ten percent (10%)
of the fund's assets in all investment company securities.
REPURCHASE AGREEMENTS Each fund generally will have a portion of its assets
in cash or cash equivalents for a variety of reasons, including waiting for a
special investment opportunity or taking a defensive position. To earn income
on this portion of its assets, each fund may invest up to 10% of its assets
in repurchase agreements. Under a repurchase agreement, the fund agrees to
buy securities guaranteed as to payment of principal and interest by the U.S.
government or its agencies from a qualified bank or broker-dealer and then to
sell the securities back to the bank or broker-dealer after a short period of
time (generally, less than seven days) at a higher price. The bank or
broker-dealer must transfer to the fund's custodian securities with an
initial market value of at least 102% of the dollar amount invested by the
fund in each repurchase agreement. The manager will monitor the value of such
securities daily to determine that the value equals or exceeds the repurchase
price.
Repurchase agreements may involve risks in the event of default or insolvency
of the bank or broker-dealer, including possible delays or restrictions upon
the fund's ability to sell the underlying securities. The fund will enter
into repurchase agreements only with parties who meet certain
creditworthiness standards, i.e., banks or broker-dealers that the manager
has determined present no serious risk of becoming involved in bankruptcy
proceedings within the time frame contemplated by the repurchase transaction.
HEDGING AND INCOME TRANSACTIONS The funds may use various hedging strategies.
Hedging is a technique designed to reduce a potential loss to a fund as a
result of certain economic or market risks, including risks related to
fluctuations in interest rates, currency exchange rates between U.S. and
foreign securities or between different foreign currencies, and broad or
specific market movements. The hedging strategies that the funds may use are
also used by many mutual funds and other institutional investors. When
pursuing these hedging strategies, the funds will primarily engage in forward
foreign currency exchange contracts. However, the funds may also engage in
the following currency transactions: currency futures contracts; currency
swaps; or options on currencies or currency futures. The funds may also
engage in other types of transactions, such as the purchase and sale of
exchange-listed and OTC put and call options on securities, equity and
fixed-income indices and other financial instruments; and the purchase and
sale of financial futures contracts and options on financial futures
contracts (collectively, all of the above are called Hedging Transactions).
Some examples of situations in which Hedging Transactions may be used are:
(i) to attempt to protect against possible changes in the market value of
securities held in or to be purchased for a fund's portfolio resulting from
changes in securities markets or currency exchange rate fluctuations; (ii) to
protect a fund's gains in the value of portfolio securities which have not
yet been sold; (iii) to facilitate the sale of certain securities for
investment purposes; and (iv) as a temporary substitute for purchasing or
selling particular securities.
Any combination of Hedging Transactions may be used at any time as determined
by the manager. Use of any Hedging Transaction is a function of numerous
variables, including market conditions and the investment manager's expertise
in utilizing such techniques. The ability of a fund to utilize Hedging
Transactions successfully cannot be assured. The funds will comply with
applicable regulatory requirements when implementing these strategies,
including the establishment of certain isolated accounts at the fund's
custodian bank. Hedging Transactions involving financial futures and options
on futures will be purchased, sold or entered into generally for bona fide
hedging, risk management or portfolio management purposes.
The various techniques described above as Hedging Transactions may also be
used by the funds for non-hedging purposes. For example, these techniques may
be used to produce income to a fund where the fund's participation in the
transaction involves the payment of a premium to the fund. A fund may also
use a hedging technique if the manager has a view about the fluctuation of
certain indices, currencies or economic or market changes such as a reduction
in interest rates. No more than 5% of a fund's assets will be exposed to
risks of such types of instruments when entered into for non-hedging purposes.
CURRENCY TRANSACTIONS Each fund will engage in currency transactions with
securities dealers, financial institutions or other parties (each a
Counterparty and collectively, Counterparties) in order to hedge the value of
portfolio holdings denominated in particular currencies against fluctuations
in relative value between those currencies and the U.S. dollar. Currency
transactions include forward foreign currency exchange contracts,
exchange-listed currency futures, exchange-listed and OTC options on
currencies, and currency swaps.
A forward foreign currency exchange contract involves a privately negotiated
obligation to purchase or sell (with delivery generally required) a specific
currency at a future date, which may be any fixed number of days from the
date of the contract agreed upon by the parties, at a price set at the time
of the contract. A currency swap is an agreement to exchange cash flows on a
notional amount of two or more currencies based on the relative value
differential among them.
A fund will usually enter into swaps on a net basis, which means the two
payment streams are netted out in a cash settlement on the payment date or
dates specified in the instrument, with the fund receiving or paying, as the
case may be, only the net amount of the two payments. To the extent these
swaps are entered into for good faith hedging purposes, the manager and the
funds believe such obligations are not senior securities under the 1940 Act
and, accordingly, will not treat them as being subject to a fund's borrowing
restrictions. The funds may enter into currency transactions with
Counterparties which have received (or the guarantors of the obligations of
such Counterparties have received) a credit rating of A-1 or P-1 by S&P or
Moody's, respectively, or that have an equivalent rating from a nationally
recognized statistical rating organization (NRSRO) or are determined to be of
equivalent credit quality by the manager. If there is a default by the
Counterparty, the fund may have contractual remedies pursuant to the
agreements related to the transaction. The swap market has grown
substantially in recent years with a large number of banks and investment
banking firms acting both as principals and as agents utilizing standardized
swap documentation. As a result, the swap market has become relatively liquid.
The funds will limit their dealings in forward foreign currency exchange
contracts and other currency transactions such as futures, options, options
on futures and swaps to either specific transactions or portfolio positions.
Transaction hedging is entering into a currency transaction with respect to
specific assets or liabilities of a fund, which will generally arise in
connection with the purchase or sale of its portfolio securities or the
receipt of income from portfolio securities. Position hedging is entering
into a currency transaction with respect to portfolio security positions
denominated or generally quoted in that currency.
A fund will not enter into a transaction to hedge currency exposure if the
fund's exposure, after netting all transactions intended to wholly or
partially offset other transactions, is greater than the aggregate market
value (at the time of entering into the transaction) of the securities held
in its portfolio that are denominated or generally quoted in, or whose value
is based on, that foreign currency or currently convertible into such
currency other than with respect to proxy hedging, which is described below.
Each fund may also cross-hedge currencies by entering into transactions to
purchase or sell one or more currencies that are expected to decline in value
relative to other currencies to which the fund has, or in which the fund
expects to have, portfolio exposure.
To reduce the effect of currency fluctuations on the value of existing or
anticipated holdings of portfolio securities, the funds may also engage in
proxy hedging. Proxy hedging is often used when the currency to which the
fund's portfolio is exposed is difficult to hedge or to hedge against the
U.S. dollar. Proxy hedging entails entering into a forward contract to sell a
currency whose changes in value are generally considered to be linked to a
currency or currencies in which some or all of a fund's portfolio securities
are or are expected to be denominated, and to buy U.S. dollars. The amount of
the contract would not exceed the value of the fund's securities denominated
in linked currencies. For example, if the manager considers the Austrian
schilling to be linked to the German deutsche mark (the D-mark), and a fund
holds securities denominated in schillings and the manager believes that the
value of schillings will decline against the U.S. dollar, the manager may
enter into a contract to sell D-marks and buy dollars. Currency hedging
involves some of the same risks and considerations as other transactions with
similar instruments.
OPTIONS Put options and call options typically have similar structural
characteristics and operational mechanics regardless of the underlying
instrument on which they are purchased or sold. Thus, the following general
discussion relates to each of the particular types of options discussed in
greater detail below. In addition, many Hedging Transactions involving
options require segregation of fund assets in special accounts, as described
below.
A put option gives the purchaser of the option, upon payment of a premium,
the right to sell, and the seller of the option, the obligation to buy, the
underlying security, commodity, index, currency or other instrument at the
exercise price. For instance, a fund's purchase of a put option on a security
might be designed to protect its holdings in the underlying instrument (or,
in some cases, a similar instrument) against a substantial decline in the
market value by giving the fund the right to sell such instrument at the
option exercise price. A call option, upon payment of a premium, gives the
purchaser of the option the right to buy, and the seller the obligation to
sell, the underlying instrument at the exercise price. A fund's purchase of a
call option on a security, financial future, index, currency or other
instrument might be intended to protect the fund against an increase in the
price of the underlying instrument that it intends to purchase in the future
by fixing the price at which it may purchase such instrument.
An American style put or call option may be exercised at any time during the
option period while a European style put or call option may be exercised only
upon expiration or during a fixed period prior thereto. Each fund is
authorized to purchase and sell exchange-listed options and over-the-counter
options (OTC options). Exchange-listed options are issued by a regulated
intermediary such as the Options Clearing Corporation (OCC), which guarantees
the performance of the obligations of the parties to such options. The
discussion below uses the OCC as an example, but the discussion is also
applicable to other financial intermediaries.
With certain exceptions, OCC-issued and exchange-listed options generally
settle by physical delivery of the underlying security or currency, although
in the future cash settlement may become available. Index options and
Eurodollar instruments are cash settled for the net amount, if any, by which
the option is "in-the-money" (i.e., where the value of the underlying
instrument exceeds, in the case of a call option, or is less than, in the
case of a put option, the exercise price of the option) at the time the
option is exercised. Frequently, rather than taking or making delivery of the
underlying instrument through the process of exercising the option, listed
options are closed by entering into offsetting option transactions.
A fund's ability to close out its position as a purchaser or seller of an
OCC-issued or exchange-listed put or call option is dependent, in part, upon
the liquidity of the option market. Among the possible reasons for the
absence of a liquid option market on an exchange are: (i) insufficient
trading interest in certain options; (ii) restrictions on transactions
imposed by an exchange; (iii) trading halts, suspensions or other
restrictions imposed with respect to particular classes or series of options
or underlying securities, including reaching daily price limits; (iv)
interruption of the normal operations of the OCC or an exchange; (v)
inadequacy of the facilities of an exchange or OCC to handle current trading
volume; or (vi) a decision by one or more exchanges to discontinue the
trading of options (or a particular class or series of options), in which
event the relevant market for that option on that exchange would cease to
exist, although outstanding options on that exchange would generally continue
to be exercisable in accordance with their terms.
The hours of trading for listed options may not coincide with the hours
during which the underlying financial instruments are traded. To the extent
that the option markets close before the markets for the underlying financial
instruments, significant price and rate movements can take place in the
underlying markets that cannot be reflected in the option markets.
OTC options are purchased from or sold to Counterparties through a direct
bilateral agreement with the Counterparty. In contrast to exchange-listed
options, which generally have standardized terms and performance mechanics,
all the terms of an OTC option, including such terms as method of settlement,
term, exercise price, premium, guarantees and security, are negotiated by the
parties. A fund will only sell OTC options (other than OTC currency options)
that are subject to a buy-back provision permitting the fund to require the
Counterparty to sell the option back to the fund at a formula price within
seven days. The funds expect to enter into OTC options that have cash
settlement provisions, although they are not required to do so.
Unless the parties provide for it, there is no central clearing or guaranty
function in an OTC option. As a result, if the Counterparty fails to make or
take delivery of the security, currency or other instrument underlying an OTC
option it has entered into with a fund or fails to make a cash settlement
payment due in accordance with the option, the fund will lose any premium it
paid for the option as well as any anticipated benefit of the transaction.
Accordingly, the manager must assess the creditworthiness of each such
Counterparty or any guarantor or credit enhancement of the Counterparty's
credit to determine the likelihood that the terms of the OTC option will be
satisfied.
The funds will engage in OTC option transactions only with U.S. government
securities dealers recognized by the Federal Reserve Bank of New York as
"primary dealers" or broker-dealers, domestic or foreign banks or other
financial institutions which have received (or the guarantors of the
obligations of which have received) a short-term credit rating of "A-l" from
S&P or "P-l" from Moody's, an equivalent rating from any NRSRO or which the
manager determines is of comparable credit quality. The staff of the SEC
currently takes the position that OTC options purchased by a fund, and
portfolio securities "covering" the amount of the fund's obligation pursuant
to an OTC option sold by it (the cost of the sell-back plus the in-the-money
amount, if any) are illiquid, and are subject to the fund's limitations on
investments in illiquid securities.
If a fund sells a call option, the premium that it receives may serve as a
partial hedge, to the extent of the option premium, against a decrease in the
value of the underlying securities or instruments in its portfolio or will
increase the fund's income. The sale of put options can also provide income.
Each fund may purchase and sell call options on securities, including U.S.
Treasury and agency securities, mortgage-backed securities, corporate debt
securities, equity securities (including convertible securities) and
Eurodollar instruments that are traded on U.S. and foreign securities
exchanges and in the over-the-counter markets and on securities indices,
currencies and futures contracts. All calls sold by the funds must be
"covered" (i.e., the fund must own the securities or futures contract subject
to the call) or must meet the asset segregation requirements described below
as long as the call is outstanding. Even though a fund will receive the
option premium to help protect it against loss, a call sold by the fund
exposes the fund during the term of the option to possible loss of
opportunity to realize appreciation in the market price of the underlying
security or instrument and may require the fund to hold a security or
instrument which it might otherwise have sold.
Each fund may purchase and sell put options on securities, including U.S.
Treasury and agency securities, mortgage-backed securities, corporate debt
securities, equity securities (including convertible securities) and
Eurodollar instruments (whether or not it holds the above securities in its
portfolio) and on securities indices, currencies and futures contracts other
than futures on individual corporate debt and individual equity securities. A
fund will not sell put options if, as a result, more than 50% of the fund's
assets would be required to be segregated to cover its potential obligations
under such put options other than those with respect to futures and options
thereon. In selling put options, there is a risk that the fund may be
required to buy the underlying security at a disadvantageous price above the
market price.
OPTIONS ON SECURITIES INDICES AND OTHER FINANCIAL INDICES The funds may also
purchase and sell call and put options on securities indices and other
financial indices and in so doing can achieve many of the same objectives it
would achieve through the sale or purchase of options on individual
securities or other instruments. Options on securities indices and other
financial indices are similar to options on a security or other instrument
except that, instead of settling by physical delivery of the underlying
instrument, they settle by cash settlement, i.e., an option on an index gives
the holder the right to receive, upon exercise of the option, an amount of
cash if the closing level of the index upon which the option is based
exceeds, in the case of a call, or is less than, in the case of a put, the
exercise price of the option (except if, in the case of an OTC option,
physical delivery is specified). This amount of cash is equal to the excess
of the closing price of the index over the exercise price of the option,
which also may be multiplied by a formula value. The seller of the option is
obligated, in return for the premium received, to make delivery of this
amount. The gain or loss on an index depends on price movements in the
instruments making up the market, market segment, industry or other composite
on which the underlying index is based, rather than price movements in
individual securities, as is the case with respect to options on securities.
FUTURES The funds may enter into financial futures contracts or purchase or
sell put and call options on such futures as a hedge against anticipated
interest rate, currency or equity market changes, for duration management and
for risk management purposes. Futures are generally bought and sold on the
commodities exchanges where they are listed with payment of initial and
variation margin as described below. The sale of a futures contract creates a
firm obligation by a fund, as seller, to deliver to the buyer the specific
type of financial instrument called for in the contract at a specific future
time for a specified price (or, with respect to index futures and Eurodollar
instruments, the net cash amount). Options on futures contracts are similar
to options on securities, except that an option on a futures contract gives
the purchaser the right in return for the premium paid to assume a position
in a futures contract and obligates the seller to deliver such option.
The funds' use of financial futures and options on financial futures will be
consistent with applicable regulatory requirements and, in particular, the
rules of the Commodity Futures Trading Commission and such transactions will
be entered into only for bona fide hedging, risk management (including
duration management) or other portfolio management purposes. Typically,
maintaining a futures contract or selling an option on a futures contract,
requires a fund to deposit with a financial intermediary, as security for its
obligations, an amount of cash or other specified assets (initial margin)
which initially is typically 1% to 10% of the face amount of the contract
(but may be higher in some circumstances). Additional cash or assets
(variation margin) may be required to be deposited thereafter on a daily
basis as the mark-to-market value of the contract fluctuates. The purchase of
an option on financial futures involves payment of a premium for the option
without any further obligation on the part of the fund. If a fund exercises
an option on a futures contract, it will be obligated to post initial margin
(and potential subsequent variation margin) for the resulting futures
positions just as it would for any position. Futures contracts and options on
futures contracts are generally settled by entering into an offsetting
transaction, but there can be no assurance that the position can be offset
prior to settlement at an advantageous price nor that delivery will occur.
A fund will only enter into a futures contract or related option (except for
closing transactions) if, immediately thereafter, the sum of the amount of
its initial margin and premiums on open futures contracts and options thereon
would not exceed 5% of the fund's total current asset value; however, in the
case of an option that is in-the-money at the time of the purchase, the
in-the-money amount may be excluded in calculating the 5% limitation.
COMBINED TRANSACTIONS The funds may enter into multiple transactions,
including multiple options transactions, multiple futures transactions,
multiple currency transactions (including forward foreign currency exchange
contracts) and any combination of futures, options and currency transactions
(each individually a Transaction and collectively in combinations of two or
more, Combined Transactions), instead of a single Hedging Transaction, as
part of a single or combined strategy when, in the opinion of the manager, it
is in the best interests of the fund to do so. A Combined Transaction will
usually contain elements of risk that are present in each of its component
transactions.
Use of segregated and other special accounts Many Hedging Transactions, in
addition to other requirements, require that the funds segregate liquid
assets with their custodian bank to the extent fund obligations are not
otherwise "covered" through ownership of the underlying security, financial
instrument or currency. In general, either the full amount of any obligation
by a fund to pay or deliver securities or assets must be covered at all times
by the securities, instruments or currency required to be delivered, or,
subject to any regulatory restrictions, an amount of cash or liquid
securities at least equal to the current amount of the obligation must be
segregated with the custodian bank. The segregated assets cannot be sold or
transferred unless equivalent assets are substituted in their place or it is
no longer necessary to segregate them. For example, a call option written by
a fund will require the fund to hold the securities subject to the call (or
securities convertible into the needed securities without additional
consideration) or to segregate liquid securities sufficient to purchase and
deliver the securities if the call is exercised. A call option sold by a fund
on an index will require the fund to own portfolio securities which correlate
with the index or to segregate liquid assets equal to the excess of the index
value over the exercise price on a current basis. A put option written by a
fund requires the fund to segregate liquid assets equal to the exercise price.
A currency contract which obligates a fund to buy or sell currency will
generally require the fund to hold an amount of the currency or liquid
securities denominated in that currency equal to the fund's obligations or to
segregate liquid assets equal to the amount of the fund's obligation.
However, the segregation requirement does not apply to currency contracts
which are entered in order to "lock in" the purchase or sale price of a trade
in a security denominated in a foreign currency pending settlement within the
time customary for such securities.
OTC options entered into by the funds, including those on securities,
currency, financial instruments or indices and OCC-issued and exchange-listed
index options will generally provide for cash settlement. As a result, when a
fund sells these instruments it will only segregate an amount of assets equal
to its accrued net obligations, as there is no requirement for payment or
delivery of amounts in excess of the net amount. These amounts will equal
100% of the exercise price in the case of a noncash settled put, the same as
an OCC guaranteed listed option sold by a fund, or the in-the-money amount
plus any sell-back formula amount in the case of a cash-settled put or call.
In addition, when a fund sells a call option on an index at a time when the
in-the-money amount exceeds the exercise price, the fund will segregate,
until the option expires or is closed out, cash or cash equivalents equal in
value to such excess. OCC-issued and exchange-listed options sold by the fund
other than those above generally settle with physical delivery, or with an
election of either physical delivery or cash settlement, and the fund will
segregate an amount of assets equal to the full value of the option. OTC
options settling with physical delivery, or with an election of either
physical delivery or cash settlement, will be treated the same as other
options settling with physical delivery.
In the case of a futures contract or an option thereon, a fund must deposit
initial margin and possible daily variation margin in addition to segregating
assets sufficient to meet its obligation to purchase or provide securities or
currencies, or to pay the amount owed at the expiration of an index-based
futures contract. Such assets may consist of cash, cash equivalents, liquid
debt or equity securities or other acceptable assets.
Hedging Transactions may be covered by other means when consistent with
applicable regulatory policies. The funds may also enter into offsetting
transactions so that a combined position, coupled with any segregated assets,
equals its net outstanding obligation in related options and Hedging
Transactions. For example, a fund could purchase a put option if the strike
price of that option is the same or higher than the strike price of a put
option sold by the fund. Moreover, instead of segregating assets if a fund
held a futures or forward contract, it could purchase a put option on the
same futures or forward contract with a strike price as high or higher than
the price of the contract held. Other Hedging Transactions may also be offset
in combinations. If the offsetting transaction terminates at the time of or
after the primary transaction, no segregation is required, but if it
terminates prior to such time, assets equal to any remaining obligation would
need to be segregated.
LOANS OF PORTFOLIO SECURITIES To generate additional income, each fund may
lend certain of its portfolio securities to qualified banks and
broker-dealers. These loans may not exceed 33 1/3% of the value of the fund's
total assets, measured at the time of the most recent loan, but no fund
presently anticipates loaning more than 5% of its portfolio securities. For
each loan, the borrower must maintain with the fund's custodian collateral
(consisting of any combination of cash, securities issued by the U.S.
government and its agencies and instrumentalities, or irrevocable letters of
credit) with a value at least equal to 100% of the current market value of
the loaned securities. The fund retains all or a portion of the interest
received on investment of the cash collateral or receives a fee from the
borrower. The fund also continues to receive any distributions paid on the
loaned securities. The fund may terminate a loan at any time and obtain the
return of the securities loaned within the normal settlement period for the
security involved.
Where voting rights with respect to the loaned securities pass with the
lending of the securities, the manager intends to call the loaned securities
to vote proxies, or to use other practicable and legally enforceable means to
obtain voting rights, when the manager has knowledge that, in its opinion, a
material event affecting the loaned securities will occur or the manager
otherwise believes it necessary to vote. As with other extensions of credit,
there are risks of delay in recovery or even loss of rights in collateral in
the event of default or insolvency of the borrower. The fund will loan its
securities only to parties who meet creditworthiness standards approved by
the fund's board of directors, i.e., banks or broker-dealers that the manager
has determined present no serious risk of becoming involved in bankruptcy
proceedings within the time frame contemplated by the loan.
BORROWING While the funds are permitted to borrow under certain
circumstances, as described in "Investment restrictions" below, under no
circumstances will a fund make additional investments while any amounts
borrowed exceed 5% of the fund's total assets.
SECURITIES OF COMPANIES IN THE FINANCIAL SERVICES INDUSTRY Certain provisions
of the federal securities laws permit investment portfolios, including
Financial Services, to invest in companies engaged in securities-related
activities only if certain conditions are met. Purchases of securities of a
company that derived 15% or less of gross revenues during its most recent
fiscal year from securities-related activities (i.e., broker, dealer,
underwriting, or investment advisory activities) are subject only to the same
percentage limitations as would apply to any other security a fund may
purchase.
Each fund, including Financial Services, may also purchase securities (not
limited to equity or debt individually) of an issuer that derived more than
15% of its gross revenues in its most recent fiscal year from
securities-related activities, if the following conditions are met: (1)
immediately after the purchase of any securities issuer's equity and debt
securities, the purchase cannot cause more than 5% of the fund's total assets
to be invested in securities of that securities issuer; (2) immediately after
a purchase of equity securities of a securities issuer, a fund may not own
more than 5% of the outstanding securities of that class of the securities
issuer's equity securities; and (3) immediately after a purchase of debt
securities of a securities issuer, a fund may not own more than 10% of the
outstanding principal amount of the securities issuer's debt securities.
In applying the gross revenue test, an issuer's gross revenues from its own
securities-related activities should be combined with its ratable share of
the securities-related activities of enterprises of which it owns a 20% or
greater voting or equity interest. All of the above percentage limitations
are applicable at the time of purchase as well as the issuer's gross revenue
test. With respect to warrants, rights, and convertible securities, a
determination of compliance with the above limitations must be made as though
such warrant, right, or conversion privilege had been exercised.
The following transactions would not be deemed to be an acquisition of
securities of a securities-related business: (i) receipt of stock dividends
on securities acquired in compliance with the conditions described above;
(ii) receipt of securities arising from a stock-for-stock split on securities
acquired in compliance with the conditions described above; (iii) exercise of
options, warrants, or rights acquired in compliance with the federal
securities laws; (iv) conversion of convertible securities acquired in
compliance with the conditions described above; (v) the acquisition of demand
features or guarantees (puts) under certain circumstances.
The funds also are not permitted to acquire any security issued by the
manager or any affiliated company (including Franklin Resources) that is a
securities-related business. The purchase of a general partnership interest
in a securities-related business is also prohibited.
In addition, the funds are generally prohibited from purchasing or otherwise
acquiring any security (not limited to equity or debt individually) issued by
any insurance company if such fund and any company controlled by such fund
own in the aggregate or, as a result of the purchase, will own in the
aggregate more than 10% of the total outstanding voting stock of the
insurance company. Certain state insurance laws impose similar limitations.
INVESTMENT RESTRICTIONS Each fund has adopted the following restrictions as
fundamental policies. This means they may only be changed if the change is
approved by (i) more than 50% of the fund's outstanding shares or (ii) 67% or
more of the fund's shares present at a shareholder meeting if more than 50%
of the fund's outstanding shares are represented at the meeting in person or
by proxy, whichever is less.
Each fund may not:
1. Purchase or sell commodities, commodity contracts (except in conformity
with regulations of the Commodities Futures Trading Commission such that the
series would not be considered a commodity pool), or oil and gas interests or
real estate. Securities or other instruments backed by commodities are not
considered commodities or commodity contracts for purposes of this
restriction. Debt or equity securities issued by companies engaged in the
oil, gas, or real estate businesses are not considered oil or gas interests
or real estate for purposes of this restriction. First mortgage loans and
other direct obligations secured by real estate are not considered real
estate for purposes of this restriction.
2. Make loans, except to the extent the purchase of debt obligations of any
type are considered loans and except that the series may lend portfolio
securities to qualified institutional investors in compliance with
requirements established from time to time by the SEC and the securities
exchanges on which such securities are traded.
3. Issue securities senior to its stock or borrow money
or utilize leverage in excess of the maximum permitted by the 1940 Act, which
is currently 331/3% of total assets (including 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 fund 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 fund would own more than 10% of the outstanding voting
securities of such issuer, except that up to 25% of the value of such fund's
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.
The term Prospectus as referenced in restriction 7 includes the Statement of
Additional Information.
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 trying to
maximize the return to shareholders.
Generally, the policies and restrictions discussed in this SAI and in the
prospectus apply when the 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.
If a percentage restriction or limitation 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 will not be considered a violation of the
restriction or limitation.
RISKS
The value of your shares will increase as the value of the securities owned
by the fund increases and will decrease as the value of the fund's
investments decreases. In this way, you participate in any change in the
value of the securities owned by the fund. In addition to the factors that
affect the value of any particular security that the fund owns, the value of
fund shares may also change with movements in the stock market as a whole.
MEDIUM AND LOWER RATED CORPORATE DEBT SECURITIES The funds have historically
invested in securities of distressed issuers when the intrinsic values of
such securities have, in the opinion of the manager, warranted such
investment. The funds may invest in securities that are rated in the medium
to lowest rating categories by S&P and Moody's, some of which may be
so-called "junk bonds." Corporate debt securities rated Baa are regarded by
Moody's as being neither highly protected nor poorly secured. Interest
payments and principal security appears adequate to Moody's for the present,
but certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such securities are regarded by
Moody's as lacking outstanding investment characteristics and having
speculative characteristics. Corporate debt securities rated BBB are regarded
by S&P as having adequate capacity to pay interest and repay principal. Such
securities are regarded by S&P as normally exhibiting adequate protection
parameters, although adverse economic conditions or changing circumstances
are more likely to lead to a weakened capacity to pay interest and repay
principal for securities in this rating category than in higher rated
categories. Companies issuing lower rated higher yielding debt securities are
not as strong financially as those with higher credit ratings. These
companies are more likely to encounter financial difficulties and are more
vulnerable to changes in the economy, such as a recession or a sustained
period of rising interest rates, that could prevent them from making interest
and principal payments. If an issuer is not paying or stops paying interest
and/or principal on its securities, payments on the securities may never
resume. These securities may be worthless and the fund could lose its entire
investment.
Corporate debt securities which are rated B are regarded by Moody's as
generally lacking characteristics of the desirable investment. In Moody's
view, assurance of interest and principal payments or of maintenance of other
terms of the security over any long period of time may be small. Corporate
debt securities rated BB, B, CCC, CC and C are regarded by S&P on balance as
predominantly speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligation. In S&P's view,
although such securities likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions. BB and B are regarded by S&P as indicating
the two lowest degrees of speculation in this group of ratings. Securities
rated D by S&P or C by Moody's are in default and are not currently
performing. The funds will also invest in unrated securities. The funds will
rely on the manager's judgment, analysis and experience in evaluating such
debt securities. In this evaluation, the manager will take into
consideration, among other things, the issuer's financial resources, its
sensitivity to economic conditions and trends, its operating history, the
quality of the issuer's management and regulatory matters as well as the
price of the security. The manager may also consider, although it does not
rely primarily on, the credit ratings of Moody's and S&P in evaluating lower
rated corporate debt securities. Such ratings evaluate only the safety of
principal and interest payments, not market value risk. Additionally, because
the creditworthiness of an issuer may change more rapidly than is able to be
timely reflected in changes in credit ratings, the manager monitors the
issuers of corporate debt securities held in the funds' portfolios. The
credit rating assigned to a security is a factor considered by the manager in
selecting a security for a fund, but the intrinsic value in light of market
conditions and the manager's analysis of the fundamental values underlying
the issuer are of at least equal significance. Because of the nature of
medium and lower rated corporate debt securities, achievement by each fund of
its investment objective when investing in such securities is dependent on
the credit analysis of the manager. If the funds purchased primarily higher
rated debt securities, such risks would be substantially reduced.
A general economic downturn or a significant increase in interest rates could
severely disrupt the market for medium and lower grade corporate debt
securities and adversely affect the market value of such securities.
Securities in default are relatively unaffected by such events or by changes
in prevailing interest rates. In addition, in such circumstances, the ability
of issuers of medium and lower grade corporate debt securities to repay
principal and to pay interest, to meet projected business goals and to obtain
additional financing may be adversely affected. Such consequences could lead
to an increased incidence of default for such securities and adversely affect
the value of the corporate debt securities in the fund's portfolio. The
secondary market prices of medium and lower grade corporate debt securities
are less sensitive to changes in interest rates than are higher rated debt
securities, but are more sensitive to adverse economic changes or individual
corporate developments. Adverse publicity and investor perceptions, whether
or not based on rational analysis, may also affect the value and liquidity of
medium and lower grade corporate debt securities, although such factors also
present investment opportunities when prices fall below intrinsic values.
Yields on debt securities in a fund's portfolio that are interest rate
sensitive can be expected to fluctuate over time. In addition, periods of
economic uncertainty and changes in interest rates can be expected to result
in increased volatility of market price of any medium to lower grade
corporate debt securities in a fund's portfolio and thus could have an effect
on the net asset value of the fund if other types of securities did not show
offsetting changes in values. The prices of high yield debt securities
fluctuate more than higher-quality securities. Prices are often closely
linked with the company's stock prices and typically rise and fall in
response to factors that affect stock prices. In addition, the entire high
yield securities market can experience sudden and sharp price swings due to
changes in economic conditions, stock market activity, large sustained sales
by major investors, a high-profile default, or other factors. High yield
securities are also generally less liquid than higher-quality bonds. Many of
these securities do not trade frequently, and when they do trade their prices
may be significantly higher or lower than expected. At times, it may be
difficult to sell these securities promptly at an acceptable price, which may
limit the fund's ability to sell securities in response to specific economic
events or to meet redemption requests. The secondary market value of
corporate debt securities structured as zero coupon securities or payment in
kind securities may be more volatile in response to changes in interest rates
than debt securities which pay interest periodically in cash. Because such
securities do not pay current interest, but rather, income is accreted, to
the extent that a fund does not have available cash to meet distribution
requirements with respect to such income, it could be required to dispose of
portfolio securities that it otherwise would not. Such disposition could be
at a disadvantageous price. Failure to satisfy distribution requirements
could result in a fund failing to qualify as a pass-through entity under the
Internal Revenue Code of 1986, as amended (Code). Investment in such
securities also involves certain other tax considerations.
The manager values the funds' investments pursuant to guidelines adopted and
periodically reviewed by the board. To the extent that there is no
established retail market for some of the medium or lower grade or unrated
corporate debt securities in which the funds may invest, there may be thin or
no trading in such securities and the ability of the manager to accurately
value such securities may be adversely affected. Further, it may be more
difficult for a fund to sell such securities in a timely manner and at their
stated value than would be the case for securities for which an established
retail market did exist. The effects of adverse publicity and investor
perceptions may be more pronounced for securities for which no established
retail market exists as compared with the effects on securities for which
such a market does exist. During periods of reduced market liquidity and in
the absence of readily available market quotations for medium and lower grade
and unrated corporate debt securities held in a fund's portfolio, the
responsibility of the manager to value the fund's securities becomes more
difficult and the manager's judgment may play a greater role in the valuation
of the fund's securities due to a reduced availability of reliable objective
data. To the extent that a fund purchases illiquid corporate debt securities
or securities which are restricted as to resale, the fund may incur
additional risks and costs. Illiquid and restricted securities may be
particularly difficult to value and their disposition may require greater
effort and expense than more liquid securities. Also, a fund may incur costs
in connection with the registration of restricted securities in order to
dispose of such securities, although under Rule 144A of the Securities Act of
1933 certain securities may be determined to be liquid pursuant to procedures
adopted by the board under applicable guidelines.
NON-U.S. SECURITIES Investments in securities of non-U.S. issuers involve
certain risks not ordinarily associated with investments in securities of
U.S. issuers. Such risks include: fluctuations in the value of the currency
in which the security is traded or quoted as compared to the U.S. dollar;
unpredictable political, social and economic developments in the foreign
country where the security is issued or where the issuer of the security is
located; and the possible imposition by a foreign government of limits on the
ability of a fund to obtain a foreign currency or to convert a foreign
currency into U.S. dollars; or the imposition of other foreign laws or
restrictions. Since each fund may invest in securities issued, traded or
quoted in currencies other than the U.S. dollar, changes in foreign currency
exchange rates will affect the value of securities in a fund's portfolio. The
manager generally attempts to reduce such risk, known as "currency risk," by
using Hedging Transactions. In addition, in certain countries, the
possibility of expropriation of assets, confiscatory taxation, or diplomatic
developments could adversely affect investments in those countries.
Expropriation of assets refers to the possibility that a country's laws will
prohibit the return to the U.S. of any monies which a fund has invested in
the country. Confiscatory taxation refers to the possibility that a foreign
country will adopt a tax law which has the effect of requiring the fund to
pay significant amounts, if not all, of the value of the fund's investment to
the foreign country's taxing authority. Diplomatic developments means that
because of certain actions occurring within a foreign country, such as
significant civil rights violations or because of the United States' actions
during a time of crisis in the particular country, all communications and
other official governmental relations between the country and the United
States could be severed. This could result in the abandonment of any U.S.
investors', such as the funds', money in the particular country, with no
ability to have the money returned to the United States.
There may be less publicly available information about a foreign company than
about a U.S. company. Foreign issuers may not be subject to accounting,
auditing and financial reporting standards and requirements comparable to, or
as uniform as, those of U.S. issuers. The number of securities traded, and
the frequency of such trading, in non-U.S. securities markets, while growing
in volume, is for the most part, substantially less than in U.S. markets. As
a result, securities of many foreign issuers are less liquid and their prices
more volatile than securities of comparable U.S. issuers. Transaction costs,
the costs associated with buying and selling securities, on non-U.S.
securities markets are generally higher than in the U.S. There is generally
less government supervision and regulation of exchanges, brokers and issuers
than there is in the U.S. Each fund's foreign investments may include both
voting and non-voting securities, sovereign debt and participations in
foreign government deals. The funds may have greater difficulty taking
appropriate legal action with respect to foreign investments in non-U.S.
courts than with respect to domestic issuers in U.S. courts.
DEPOSITARY RECEIPTS Receipts of non-U.S. issuers may have certain risks,
including trading for a lower price, having less liquidity than their
underlying securities and risks relating to the issuing bank or trust
company. Holders of unsponsored depositary receipts have a greater risk that
receipt of corporate information and proxy disclosure will be untimely,
information may be incomplete and costs may be higher.
144A SECURITIES Due to changing markets or other factors, 144A securities may
be subject to a greater possibility of becoming illiquid than securities
which have been registered with the SEC for sale.
SHORT SALES Short sales carry risks of loss if the price of the security sold
short increases after the sale. In this situation, when a fund replaces the
borrowed security by buying the security in the securities markets, the fund
may pay more for the security than it has received from the purchaser in the
short sale. A fund may, however, profit from a change in the value of the
security sold short, if the price decreases.
DISTRESSED MORTGAGE OBLIGATIONS Unlike mortgage-backed securities, which
generally represent an interest in a pool of loans backed by real estate,
investing in direct mortgage obligations involves the risks of a lender.
These risks include the ability or inability of a borrower to make its loan
payments and the possibility that the borrower will prepay the loan in
advance of its scheduled payment time period, curtailing an expected rate and
timing of return for the lender. Investments in direct mortgage obligations
of distressed borrowers involve substantially greater risks and are highly
speculative due to the fact that the borrower's ability to make timely
payments has been identified as questionable. Borrowers that are in
bankruptcy or restructuring may never pay off their loans, or may pay only a
small fraction of the amount owed. If, because of a lack of payment, the real
estate underlying the loan is foreclosed, which means that the borrower takes
possession of the real estate, a fund could become part owner of such real
estate. As an owner, a fund would bear any costs associated with owning and
disposing of the real estate, and also may encounter difficulties in
disposing of the real estate in a timely fashion. In addition, there is no
assurance that a fund would be able profitably to dispose of properties in
foreclosure.
REAL ESTATE-RELATED INVESTMENTS The funds' investments in real estate-related
securities are subject to certain risks related to the real estate industry
in general. These risks include, among others: changes in general and local
economic conditions; possible declines in the value of real estate; the
possible lack of availability of money for loans to purchase real estate;
overbuilding in particular areas; prolonged vacancies in rental properties;
property taxes; changes in laws related to the use of real estate in certain
areas; costs resulting from the clean-up of, and liability to third parties
resulting from, environmental problems; the costs associated with damage to
real estate resulting from floods, earthquakes or other material disasters
not covered by insurance; and limitations on, and variations in, rents and
changes in interest rates.
INVESTMENT COMPANY SECURITIES Investors should recognize that a fund's
purchase of the securities of investment companies results in layering of
expenses. This layering may occur because investors in any investment
company, such as a fund, indirectly bear a proportionate share of the
expenses of the investment company, including operating costs, and investment
advisory and administrative fees.
REPURCHASE AGREEMENTS AND LOANS OF SECURITIES Repurchase agreements and loans
of portfolio securities involve some credit risk to the funds. If the other
party defaults on its obligations, a fund could be delayed or prevented from
receiving payment or recovering its collateral. Even if the fund recovers the
collateral in such a situation, the fund may receive less than its purchase
price upon resale.
HEDGING TRANSACTIONS Hedging Transactions, whether entered into as a hedge or
for gain, have risks associated with them. The three most significant risks
associated with Hedging Transactions are: (i) possible default by the other
party to the transaction; (ii) illiquidity; and (iii) to the extent the
manager's view as to certain market movements is incorrect, the risk that the
use of such Hedging Transactions could result in losses greater than if they
had not been used. Use of put and call options may (i) result in losses to a
fund, (ii) force the purchase or sale of portfolio securities at inopportune
times or for prices higher than or lower than current market values, (iii)
limit the amount of appreciation the fund can realize on its investments,
(iv) increase the cost of holding a security and reduce the returns on
securities or (v) cause a fund to hold a security it might otherwise sell.
Although the use of futures and options transactions for hedging should tend
to minimize the risk of loss due to a decline in the value of the hedged
position, these transactions also tend to limit any potential gain which
might result from an increase in value of the position taken. As compared to
options contracts, futures contracts create greater ongoing potential
financial risks to a fund because the fund is required to make ongoing
monetary deposits with futures brokers. Losses resulting from the use of
Hedging Transactions can reduce net asset value, and possibly income, and
such losses can be greater than if the Hedging Transactions had not been
utilized. The cost of entering into Hedging Transactions may also reduce a
fund's total return to investors.
RISKS OF HEDGING TRANSACTIONS OUTSIDE THE U.S. When conducted outside the
U.S., Hedging Transactions may not be regulated as rigorously as in the U.S.,
may not involve a clearing mechanism and related guarantees, and are subject
to the risk of governmental actions affecting trading in, or the prices of,
foreign securities, currencies and other instruments. The value of such
positions also could be adversely affected by: (i) other complex foreign
political, legal and economic factors, (ii) lesser availability than in the
U.S. of data on which to make trading decisions, (iii) delays in a fund's
ability to act upon economic events occurring in foreign markets during
nonbusiness hours in the U.S., (iv) the imposition of different exercise and
settlement terms and procedures and margin requirements than in the U.S., and
(v) lower trading volume and liquidity.
CURRENCY TRANSACTIONS Currency transactions are subject to risks different
from those of other portfolio transactions. Currency transactions can result
in losses to a fund if the currency being hedged fluctuates in value to a
degree, or in a direction, that is not anticipated. Further, there is the
risk that the perceived linkage between various currencies may not be present
during the particular time that the fund is engaging in proxy hedging. If a
fund enters into a currency Hedging Transaction, the fund will comply with
the asset segregation requirements described above.
Because currency control is of great importance to the issuing governments
and influences economic planning and policy, purchases and sales of currency
and related instruments can be negatively affected by government exchange
controls, blockages, and manipulations or exchange restrictions imposed by
governments. These can result in losses to a fund if it is unable to deliver
or receive a specified currency or funds in settlement of obligations and
could also cause hedges it has entered into to be rendered useless, resulting
in full currency exposure as well as incurring transaction costs.
The use of currency transactions can also result in a fund incurring losses
due to the inability of foreign securities transactions to be completed with
the security being delivered to the fund. Buyers and sellers of currency
futures are subject to the same risks that apply to the use of futures
generally. Further, settlement of a currency futures contract for the
purchase of most currencies must occur at a bank based in the issuing nation.
Trading options on currency futures is relatively new, and the ability to
establish and close out positions on such options is subject to the
maintenance of a liquid market which may not always be available. Currency
exchange rates may fluctuate based on factors extrinsic to that country's
economy.
EURO. On January 1, 1999, the European Economic and Monetary Union (EMU)
introduced a new single currency called the euro. By July 1, 2002, the euro,
which will be implemented in stages, will have replaced the national
currencies of the following member countries: Austria, Belgium, Finland,
France, Germany, Ireland, Italy, Luxembourg, the Netherlands, Portugal and
Spain.
Currently, the exchange rate of the currencies of each of these countries is
fixed to the euro. The euro trades on currency exchanges and is available for
non-cash transactions. The participating countries currently issue sovereign
debt exclusively in euro. By July 1, 2002, euro-denominated bills and coins
will replace the bills and coins of the above countries.
The new European Central Bank has control over each country's monetary
policies. Therefore, the participating countries no longer control their own
monetary policies by directing independent interest rates for their
currencies. The national governments of the participating countries, however,
have retained the authority to set tax and spending policies and public debt
levels.
The change to the euro as a single currency is new and untested. It is not
possible to predict the impact of the euro on currency values or on the business
or financial condition of European countries and issuers, and issuers in other
regions, whose securities the fund may hold, or the impact, if any, on fund
performance. In the first six months of the euro's existence, the exchange rates
of the euro versus many of the world's major currencies steadily declined. In
this environment, U.S. and other foreign investors experienced erosion of their
investment returns on their euro-denominated securities. The transition and the
elimination of currency risk among EMU countries may change the economic
environment and behavior of investors, particularly in European markets.
While the implementation of the euro could have a negative effect on the
fund, the fund's manager and its affiliated service providers are taking
steps they believe are reasonably designed to address the euro issue.
COMBINED TRANSACTIONS Although Combined Transactions are normally entered
into based on the manager's judgment that the combined strategies will reduce
risk or otherwise more effectively achieve the desired portfolio management
goal, it is possible that the combination will instead increase such risks or
hinder achievement of the portfolio management objective.
SMALLER COMPANIES The funds may invest in securities issued by smaller
companies. Historically, smaller companies have been more volatile in price
than larger company securities, especially over the short term. Among the
reasons for the greater price volatility are the less certain growth
prospects of smaller companies, the lower degree of liquidity in the markets
for such securities, and the greater sensitivity of smaller companies to
changing economic conditions.
In addition, smaller companies may lack depth of management, they may be
unable to generate funds necessary for growth or development, or they may be
developing or marketing new products or services for which markets are not
yet established and may never become established.
PORTFOLIO TURNOVER Financial Services commenced operations on 8/19/97. The
portfolio turnover rate for Financial Services for the fund's initial fiscal
period ended 12/31/97 was 42.26%, while the portfolio turnover rate for the
fund's fiscal year ended 12/31/98 was 136.67%. This variation in portfolio
turnover rates for 1997 and 1998 is primarily due to the fund's partial
period of portfolio trading activity in 1997. Generally, the higher a fund's
portfolio turnover rate the higher the transaction costs and brokerage
expenses. This may also generate a higher level of capital gains.
OFFICERS AND DIRECTORS
- ------------------------------------------------------------------------------
Mutual Series has a board of directors. The board is responsible for the
overall management of the funds, including general supervision and review of
each fund's investment activities. The board, in turn, elects the officers of
Mutual Series who are responsible for administering each fund's day-to-day
operations. The board also monitors each fund to ensure no material conflicts
exist among share classes. While none is expected, the board will act
appropriately to resolve any material conflict that may arise.
The name, age and address of the officers and board members, as well as their
affiliations, positions held with the Mutual Series, and principal
occupations during the past five years are shown below.
Edward I. Altman, Ph.D. (58)
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 (42)
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. (77)
One Progress Plaza, Suite 290, 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 20 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 (44)
51 John F. Kennedy Pkwy., Short Hills, NJ 07078-2702
PRESIDENT AND DIRECTOR
President and Chief Executive Officer, Franklin Mutual Advisers, LLC;
Director, Sunbeam Corporation (durable products); Manager (Director), MWCR,
L.L.C.; and FORMERLY, Director, Lancer Industries, Inc. (industrial holding
company), Manager (Director), MB Motori, L.L.C. and employee, Heine
Securities Corporation (1986-1996).
*William J. Lippman (75)
One Parker Plaza, 9th Floor, Fort Lee, NJ 07024
DIRECTOR
Senior Vice President, Franklin Resources, Inc. and Franklin Management,
Inc.; President, Franklin Advisory Services, LLC; and officer and/or director
or trustee, as the case may be, of six of the investment companies in the
Franklin Templeton Group of Funds.
Bruce A. MacPherson (70)
1 Pequot Way, Canton, MA 02021
DIRECTOR
Chairman, A.A. MacPherson, Inc. Boston, MA (representative for electrical
manufacturers).
Fred R. Millsaps (71)
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 20
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 (48)
51 John F. Kennedy Pkwy., Short Hills, NJ 07078-2702
CHAIRMAN OF THE BOARD AND DIRECTOR
Chairman, Franklin Mutual Advisers, LLC; Director, Canary Wharf Group, PLC
(real estate development); and FORMERLY, President, Chief Executive Officer
and Director, Heine Securities Corporation (1987-1996) and Director,
Compliance Solutions, Inc. (developer of compliance monitoring software for
money managers) (until 1999) and Clearwater Securities, Inc. (securities
dealer) (until 1997).
Charles Rubens II (70)
18 Park Road, Scarsdale, NY 10583-2112
DIRECTOR
Private investor; and trustee or director, as the case may be, of three of
the investment companies in the Franklin Templeton Group of Funds.
Leonard Rubin (74)
2460 Lemoine Ave., 3rd Floor, Fort Lee, NJ 07024
DIRECTOR
Partner in LDR Equities, LLC (manages various personal investments); Vice
President, Trimtex Co., Inc. (manufactures and markets specialty fabrics);
director or trustee, as the case may be, of three of the investment companies
in the Franklin Templeton Group of Funds; and FORMERLY, Chairman of the
Board, Carolace Embroidery Co., Inc. (until 1996) and President, F.N.C.
Textiles, Inc.
Vaughn R. Sturtevant, M.D. (76)
6 Noyes Avenue, Waterville, ME 04901
DIRECTOR
Practicing physician.
Robert E. Wade (54)
225 Hardwick Street, Belvidere, NJ 07823
DIRECTOR
Practicing attorney.
Jeffrey A. Altman (33)
51 John F. Kennedy Pkwy., Short Hills, NJ 07078-2702
VICE PRESIDENT
Senior Vice President, Franklin Mutual Advisers, LLC; Manager (Director), MB
Metropolis, L.L.C. and MWCR, L.L.C.; Director, Capital Trust (real estate
financial services) and Fine Host Corporation (food and beverage services);
and FORMERLY, employee, Heine Securities Corporation (1988-1996), Manager
(Director), MB Motori, L.L.C. and Trustee, Resurgence Properties, Inc. (real
estate investment).
James R. Baio (46)
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 20 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 (40)
51 John F. Kennedy Pkwy., Short Hills, NJ 07078-2702
VICE PRESIDENT
Senior Vice President, Franklin Mutual Advisers, LLC; and FORMERLY, employee,
Heine Securities Corporation (1988-1996).
Raymond Garea (50)
51 John F. Kennedy Pkwy., Short Hills, NJ 07078-2702
VICE PRESIDENT
Senior Vice President, Franklin Mutual Advisers, LLC; Manager (Director), MB
Metropolis, L.L.C.; and FORMERLY, employee, Heine Securities Corporation
(1991-1996) and Vice President and Analyst, Donaldson, Lufkin & Jenrette.
Deborah R. Gatzek (51)
1840 Gateway Drive, San Mateo, CA 94404
SECRETARY
Partner, Stradley, Ronon, Stevens & Young, LLP; officer of 34 of the
investment companies in the Franklin Templeton Group of Funds; and FORMERLY,
Senior Vice President and General Counsel, Franklin Resources, Inc., Senior
Vice President, Franklin Templeton Services, Inc. and Franklin Templeton
Distributors, Inc., Executive Vice President, Franklin Advisers, Inc., Vice
President, Franklin Advisory Services, LLC and Franklin Mutual Advisers, LLC,
and Vice President, Chief Legal Officer and Chief Operating Officer, Franklin
Investment Advisory Services, Inc. (until January 2000).
David Goss (52)
777 Mariners Island Blvd., San Mateo, CA 94404
VICE PRESIDENT
President, Chief Executive Officer and Director, Franklin Select Realty
Trust, Property Resources, Inc., Property Resources Equity Trust, Franklin
Real Estate Management, Inc. and Franklin Properties, Inc.; officer and
director of some of the other subsidiaries of Franklin Resources, Inc.;
officer of 53 of the investment companies in the Franklin Templeton Group of
Funds; and FORMERLY, President, Chief Executive Officer and Director,
Franklin Real Estate Income Fund and Franklin Advantage Real Estate Income
Fund (until 1996).
Barbara J. Green (52)
777 Mariners Island Blvd., San Mateo, CA 94404
VICE PRESIDENT
Vice President and Deputy General Counsel, Franklin Resources, Inc.; Senior
Vice President, Templeton Worldwide, Inc. and Templeton Global Investors,
Inc.; officer of some of the other subsidiaries of Franklin Resources, Inc.
and of 53 of the investment companies in the Franklin Templeton Group of
Funds; and FORMERLY, Deputy Director, Division of Investment Management,
Executive Assistant and Senior Advisor to the Chairman, Counselor to the
Chairman, Special Counsel and Attorney Fellow, U.S. Securities and Exchange
Commission (1986- 1995), Attorney, Rogers & Wells, and Judicial Clerk, U.S.
District Court (District of Massachusetts).
Murray L. Simpson (62)
777 Mariners Island Blvd., San Mateo, CA 94404
VICE PRESIDENT
Executive Vice President and General Counsel, Franklin Resources, Inc.;
officer and/or director of some of the subsidiaries of Franklin Resources,
Inc.; officer of 53 of the investment companies in the Franklin Templeton
Group of Funds; and FORMERLY, Chief Executive Officer and Managing Director,
Templeton Franklin Investment Services (Asia) Limited (until January 2000)
and Director, Templeton Asset Management Ltd. (until 1999).
Lawrence N. Sondike (42)
51 John F. Kennedy Pkwy., Short Hills, NJ 07078-2702
VICE PRESIDENT
Senior Vice President, Franklin Mutual Advisers, LLC; and FORMERLY, employee,
Heine Securities Corporation (1984-1996).
David J. Winters (38)
51 John F. Kennedy Pkwy., Short Hills, NJ 07078-2702
VICE PRESIDENT
Senior Vice President, Franklin Mutual Advisers, LLC; and FORMERLY, employee,
Heine Securities Corporation (1988-1996).
*This board member is considered an "interested person" under federal
securities laws.
The noninterested board members have standing audit, pension, nominating and
directors' compensation and performance committees. The audit committee is
composed of Ms. Grant and Messrs. E. Altman and Wade. The pension committee
is composed of Messrs. E Altman and Sturtevant. The nominating committee is
responsible for nominating candidates for noninterested board member
positions and is composed of Messrs. MacPherson and Rubin. The board members'
compensation and performance committee is composed of Ms. Grant and Messrs.
Wade and Sturtevant.
Mutual Series pays noninterested board members $45,000 per year plus $2,000
per board or audit committee meeting attended. The chairman of the audit
committee is paid a retainer of $9,000 and each audit committee member is
paid a retainer of $4,000. In 1993, the board approved a retirement plan that
generally provides payments to directors who have served seven years and
retire at age 70. At the time of retirement, board members are entitled to
annual payments equal to one-half of the retainer in effect at the time of
retirement.
Noninterested board members also may 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 fees payable to certain noninterested
board members by the funds are subject to reductions resulting from fee caps
limiting the amount of fees payable to board members who serve on other
boards within the Franklin Templeton Group of Funds. 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
TOTAL FEES RECEIVED FROM IN THE FRANKLIN
RECEIVED ESTIMATED THE FRANKLIN TEMPLETON GROUP
FROM PENSION ANNUAL TEMPLETON OF FUNDS ON
MUTUAL RETIREMENT BENEFITS UPON GROUP WHICH
NAME SERIES 1 ACCRUED RETIREMENT OF FUNDS 2 EACH SERVES 3
<S> <C> <C> <C> <C> <C>
Edward I. Altman, Ph. D $73,000 0 $22,500 $ 73,000 1
Ann Torre Grant 4 73,000 0 22,500 73,000 1
Bruce A. MacPherson 55,000 0 22,500 55,000 1
Vaughn R. Sturtevant, M.D. 57,000 0 22,500 57,000 1
Robert E. Wade 4 83,000 0 22,500 83,000 1
Andrew H. Hines, Jr. 57,000 0 0 203,700 20
Fred R. Millsaps 55,000 0 0 201,700 20
Leonard Rubin 57,000 0 0 88,950 3
Charles Rubens II 57,000 0 0 88,950 3
</TABLE>
1. For the fiscal year ended December 31, 1999.
2. For the calendar year ended December 31, 1999.
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 53 registered investment companies, with
approximately 155 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
fund or other funds in the Franklin Templeton Group of Funds. Certain
officers or board members who are shareholders of Franklin Resources, Inc.
may be deemed to receive indirect remuneration by virtue of their
participation, if any, in the fees paid to its subsidiaries.
MANAGEMENT AND OTHER SERVICES
- ------------------------------------------------------------------------------
MANAGER AND SERVICES PROVIDED The funds' manager is Franklin Mutual Advisers,
LLC (Franklin Mutual). The manager is an indirect, wholly owned subsidiary of
Franklin Resources, Inc. (Resources), a publicly owned company engaged in the
financial services industry through its subsidiaries. Charles B. Johnson and
Rupert H. Johnson, Jr. are the principal shareholders of Resources.
The manager provides investment research and portfolio management services,
and selects the securities for the funds to buy, hold or sell. The manager
also selects the brokers who execute the funds' portfolio transactions. The
manager provides periodic reports to the board, which reviews and supervises
the manager's investment activities. To protect the funds, the manager and
its officers, directors and employees are covered by fidelity insurance.
The manager and its affiliates manage numerous other investment companies and
accounts. The manager may give advice and take action with respect to any of
the other funds it manages, or for its own account, that may differ from
action taken by the manager on behalf of the funds. Similarly, with respect
to the funds, the manager is not obligated to recommend, buy or sell, or to
refrain from recommending, buying or selling any security that the manager
and access persons, as defined by applicable federal securities laws, may buy
or sell for its or their own account or for the accounts of any other fund.
The manager is not obligated to refrain from investing in securities held by
the funds or other funds it manages.
The funds, their manager and principal underwriter have each adopted a code
of ethics, as required by federal securities laws. Under the code of ethics,
employees who are designated as access persons may engage in personal
securities transactions, including transactions involving securities that are
being considered for the funds or that are currently held by the funds,
subject to certain general restrictions and procedures. The personal
securities transactions of access persons of the funds, their manager and
principal underwriter will be governed by the code of ethics. The code of
ethics is on file with, and available from, the U.S. Securities and Exchange
Commission (SEC).
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 ($)
------------------------
1999 1998 1997
- --------------------------------------------------------------------------
Beacon 26,591,839 37,649,906 34,477,321
Financial Services 2,544,152 3,306,470 92,762 1
Qualified 23,163,858 32,920,555 29,584,910
Mutual Shares 45,767,107 55,767,932 46,093,507
Discovery 24,797,713 39,735,851 32,685,124
European 5,229,271 6,843,216 5,167,675
1. For the period August 19, 1997 through December 31, 1997.
Under an agreement by the manager to limit its fees, the funds paid the
management fees shown above. For the three fiscal years ended December 31,
management fees, before any advance waiver, totaled:
MANAGEMENT FEES BEFORE WAIVER ($)
1999 1998 1997
- --------------------------------------------------------------------------
Beacon 28,621,462 39,589,767 36,299,616
Financial Services 2,719,136 3,742,268 419,994 1
Qualified 25,229,854 34,762,293 31,224,924
Mutual Shares 49,291,464 59,068,503 48,600,626
Discovery 26,653,620 41,019,712 33,584,048
European 5,510,782 6,843,216 5,372,334
1. For the period August 19, 1997 through December 31, 1997.
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 each 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 $1.2 billion.
During the last three fiscal years ended December 31, the funds paid FT
Services the following administration fees:
ADMINISTRATION FEES PAID ($)
1999 1998 1997
- ---------------------------------------------------------------------------
Beacon 3,777,848 5,104,507 4,766,476
Financial Services 263,232 375,860 54,548 1
Qualified 3,327,090 4,364,662 4,236,166
Mutual Shares 6,378,121 7,599,879 6,284,881
Discovery 2,787,533 3,941,429 3,350,745
European 531,497 652,219 716,013
1. For the period August 19, 1997 through December 31, 1997.
SHAREHOLDER SERVICING AND TRANSFER AGENT Franklin/Templeton Investor
Services, Inc. (Investor Services) is the funds' shareholder servicing agent
and acts as the funds' transfer agent and dividend-paying agent. Investor
Services is located at 100 Fountain Parkway, St. Petersburg, FL 33733-8030.
Please send all correspondence to Investor Services to P.O. Box 33030, St.
Petersburg, FL 33733-8030.
For its services, Investor Services receives a fixed fee per account. The
funds also will reimburse Investor Services for certain out-of-pocket
expenses, which may include payments by Investor Services to entities,
including affiliated entities, that provide sub-shareholder services,
recordkeeping and/or transfer agency services to beneficial owners of the
fund. The amount of reimbursements for these services per benefit plan
participant fund account per year will not exceed the per account fee payable
by the fund 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 Mutual Series' Annual Report to Shareholders
and reviews Mutual Series' registration statement filed with the 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 to
obtain additional research services allows the manager to supplement its own
research and analysis activities and to receive the views and information of
individuals and research staffs of other securities firms. As long as it is
lawful and appropriate to do so, the manager and its affiliates may use this
research and data in their investment advisory capacities with other clients.
If the funds' officers are satisfied that the best execution is obtained, the
sale of fund shares, as well as shares of other funds in the Franklin
Templeton Group of Funds, also may be considered a factor in the selection of
broker-dealers to execute the funds' portfolio transactions.
Because Franklin Templeton Distributors, Inc. (Distributors) is a member of
the National Association of Securities Dealers, Inc., it may sometimes
receive certain fees when a fund tenders portfolio securities pursuant to a
tender-offer solicitation. To recapture brokerage for the benefit of a fund,
any portfolio securities tendered by the fund will be tendered through
Distributors if it is legally permissible to do so. In turn, the next
management fee payable to the manager will be reduced by the amount of any
fees received by Distributors in cash, less any costs and expenses incurred
in connection with the tender.
If purchases or sales of securities of the funds and one or more other
investment companies or clients supervised by the manager are considered at
or about the same time, transactions in these securities will be allocated
among the several investment companies and clients in a manner deemed
equitable to all by the manager, taking into account the respective sizes of
the funds and the amount of securities to be purchased or sold. In some cases
this procedure could have a detrimental effect on the price or volume of the
security so far as the funds are concerned. In other cases it is possible
that the ability to participate in volume transactions may improve execution
and reduce transaction costs to the funds.
During the last three fiscal years ended December 31, the fund paid the
following brokerage commissions:
BROKERAGE COMMISSIONS PAID ($)
1999 1998 1997
- --------------------------------------------------------------------------
Beacon 11,852,056 10,799,550 8,259,140
Financial Services 868,615 1,539,012 371,076 1
Qualified 9,244,693 8,446,273 6,474,952
Mutual Shares 17,946,320 13,931,158 7,248,461
Discovery 12,823,663 12,988,034 9,085,394
European 4,067,853 2,910,055 1,500,199
1. For the period from August 19, 1997 through December 31, 1997.
For the fiscal year ended December 31, 1999, the funds paid brokerage
commissions of $11,249, $3,250, $3,261, $44,008, $20,650 and $3,561 from
aggregate portfolio transactions of $6,148,172, $2,704,080, $8,008,743,
$18,363,368, $24,251,103 and $1,278,501 from the Beacon, Financial Services,
Mutual Shares, Qualified, Discovery and European funds, respectively to
brokers who provided research services.
As of December 31, 1999, the funds owned the following securities issued by
their regular broker-dealers:
VALUE ($)
- ---------------------------------------------------------------
Mutual Beacon
Bear Stearns Companies 53,257,000
Morgan Stanley Dean Witter & Co. 9,079,000
Mutual Qualified
Morgan Stanley Dean Witter & Co. 5,896,000
Mutual Shares
Bear Stearns Companies 120,648,000
Morgan Stanley Dean Witter & Co. 19,956,000
Mutual Discovery
Bear Stearns Companies 16,554,000
Morgan Stanley Dean Witter & Co. 1,356,000
Except as noted, the funds did not own any securities issued by their regular
broker-dealers as of the end of the fiscal year.
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 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 brokerage commissions for similar transactions.
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. Distributions are subject to approval by the board. 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 receive 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, to reduce or eliminate excise or income taxes on a
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. These gains when
distributed will be taxable to you as ordinary income, and any losses will
reduce a fund's ordinary income otherwise available for distribution to you.
This treatment could increase or decrease 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.
Each fund may be subject to foreign withholding taxes on income from certain
foreign securities. This, in turn, could reduce ordinary income distributions
to you. If more than 50% of the total assets of either the Discovery or
European Fund 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. Each fund has qualified as a regulated investment
company for its most recent fiscal year, and intends to continue to 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 distributions in December (or to pay them in January, in which case
you must treat them as received in December) but can give no assurances that
its distributions will be sufficient to eliminate all taxes.
REDEMPTION OF FUND SHARES Redemptions (including redemptions in kind) 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 any 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.
Beginning after the year 2005 (2000 for certain shareholders), gains from the
sale of fund shares held for more than five years may be subject to a reduced
tax rate.
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 any 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 SECURITIES States grant tax-free status to dividends paid to
you from interest earned on certain U.S. government securities, subject in
some states to minimum investment or reporting requirements that must be met
by a 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
generally do not 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 49.59% of the dividends paid by the Shares
Fund, 53% of the dividends paid by the Qualified Fund, 57.19% of the
dividends paid by the Beacon Fund, and 68.62% of the dividends paid by the
Financial Services Fund for the most recent fiscal year qualified for the
dividends-received deduction. You may 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 (possibly causing a fund to sell securities to raise the
cash for necessary distributions) 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 foreign securities. 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. The funds may offer additional classes of shares in the future.
The full title of each class is:
Mutual Shares Fund - Class A
Mutual Shares Fund - Class B
Mutual Shares Fund - Class C
Mutual Shares Fund - Class Z
Mutual Qualified Fund - Class A
Mutual Qualified Fund - Class B
Mutual Qualified Fund - Class C
Mutual Qualified Fund - Class Z
Mutual Beacon Fund - Class A
Mutual Beacon Fund - Class B
Mutual Beacon Fund - Class C
Mutual Beacon Fund - Class Z
Mutual European Fund - Class A
Mutual European Fund - Class B
Mutual European Fund - Class C
Mutual European Fund - Class Z
Mutual Discovery Fund - Class A
Mutual Discovery Fund - Class B
Mutual Discovery Fund - Class C
Mutual Discovery Fund - Class Z
Mutual Financial Services Fund - Class A
Mutual Financial Services Fund - Class B
Mutual Financial Services Fund - Class C
Mutual Financial Services Fund - Class Z
Shares of each class represent proportionate interests in each fund's assets.
On matters that affect the fund as a whole, each class has the same voting
and other rights and preferences as any other class. On matters that affect
only one class, only shareholders of that class may vote. Each class votes
separately on matters affecting only that class, or expressly required to be
voted on separately by state or federal law. Shares of each class of a series
have the same voting and other rights and preferences as the other classes
and series of Mutual Series for matters that affect Mutual Series as a whole.
Additional series may be offered in the future.
Mutual Series has noncumulative voting rights. For board member elections,
this gives holders of more than 50% of the shares voting the ability to elect
all of the members of the board. If this happens, holders of the remaining
shares voting will not be able to elect anyone to the board.
Mutual Series does not intend to hold annual shareholder meetings. Mutual
Series or a series of Mutual Series may hold special meetings, however, for
matters requiring shareholder approval. A meeting may be called by the board
to consider the removal of a board member if requested in writing by
shareholders holding at least 10% of the outstanding shares. In certain
circumstances, we are required to help you communicate with other
shareholders about the removal of a board member. A special meeting also may
be called by the board in its discretion.
As of April 3, 2000, the principal shareholders of the funds, beneficial or
of record, were:
SHARE CLASS PERCENTAGE
NAME AND ADDRESS %
EUROPEAN
Michael F. Price
51 John F. Kennedy Pkwy.
Short Hills, NJ 07078 Class Z 18.50
FINANCIAL SERVICES
NFSC FEBO BAH-873144
NFSC FMTC IRA
FBO Lance R. Toepper
110 142nd Ave NE
Ham Lake MN 55304 Class B 6.32
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 April 3, 2000, the officers and board members, as a group, owned of
record and beneficially 18.98% of Mutual European Fund - Class Z and less
than 1% of the outstanding shares of the other funds and classes. The board
members may own shares in other funds in the Franklin Templeton Group of
Funds.
BUYING AND SELLING SHARES
- ------------------------------------------------------------------------------
The funds continuously offer their shares through securities dealers who have
an agreement with Franklin Templeton Distributors, Inc. (Distributors). A
securities dealer includes any financial institution that, either directly or
through affiliates, has an agreement with Distributors to handle customer
orders and accounts with the funds. This reference is for convenience only
and does not indicate a legal conclusion of capacity. Banks and financial
institutions that sell shares of the funds may be required by state law to
register as securities dealers.
For investors outside the U.S., the offering of fund shares may be limited in
many jurisdictions. An investor who wishes to buy shares of the funds should
determine, or have a broker-dealer determine, the applicable laws and
regulations of the relevant jurisdiction. Investors are responsible for
compliance with tax, currency exchange or other regulations applicable to
redemption and purchase transactions in any jurisdiction to which they may be
subject. Investors should consult appropriate tax and legal advisors to
obtain information on the rules applicable to these transactions.
All checks, drafts, wires and other payment mediums used to buy or sell
shares of the funds must be denominated in U.S. dollars. We may, in our sole
discretion, either (a) reject any order to buy or sell shares denominated in
any other currency or (b) honor the transaction or make adjustments to your
account for the transaction as of a date and with a foreign currency exchange
factor determined by the drawee bank. We may deduct any applicable banking
charges imposed by the bank from your account.
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 Templeton Variable Insurance
Products Trust and Templeton Capital Accumulator Fund, Inc.
CUMULATIVE QUANTITY DISCOUNT. For purposes of calculating the sales charge on
Class A shares, you may combine the amount of your current purchase with the
cost or current value, whichever is higher, of your existing shares in the
Franklin Templeton Funds. You also may combine the shares of your spouse,
children under the age of 21 or grandchildren under the age of 21. If you are
the sole owner of a company, you also may add any company accounts, including
retirement plan accounts. Companies with one or more retirement plans may add
together the total plan assets invested in the Franklin Templeton Funds to
determine the sales charge that applies.
LETTER OF INTENT (LOI). You may buy Class A shares at a reduced sales charge
by completing the letter of intent section of your account application. A
letter of intent is a commitment by you to invest a specified dollar amount
during a 13 month period. The amount you agree to invest determines the sales
charge you pay. By completing the letter of intent section of the
application, you acknowledge and agree to the following:
o You authorize Distributors to reserve 5% of your total intended purchase in
Class A shares registered in your name until you fulfill your LOI. Your
periodic statements will include the reserved shares in the total shares
you own, and we will pay or reinvest dividend and capital gain
distributions on the reserved shares according to the distribution option
you have chosen.
o You give Distributors a security interest in the reserved shares and
appoint Distributors as attorney-in-fact.
o Distributors may sell any or all of the reserved shares to cover any
additional sales charge if you do not fulfill the terms of the LOI.
o Although you may exchange your shares, you may not sell reserved shares
until you complete the LOI or pay the higher sales charge.
After you file your LOI with the fund, you may buy Class A shares at the
sales charge applicable to the amount specified in your LOI. Sales charge
reductions based on purchases in more than one Franklin Templeton Fund will
be effective only after notification to Distributors that the investment
qualifies for a discount. Any Class A purchases you made within 90 days
before you filed your LOI also may qualify for a retroactive reduction in the
sales charge. If you file your LOI with the fund before a change in the
fund's sales charge, you may complete the LOI at the lower of the new sales
charge or the sales charge in effect when the LOI was filed.
Your holdings in the Franklin Templeton Funds acquired more than 90 days
before you filed your LOI will be counted towards the completion of the LOI,
but they will not be entitled to a retroactive reduction in the sales charge.
Any redemptions you make during the 13 month period , except in the case of
certain retirement plans, will be subtracted from the amount of the purchases
for purposes of determining whether the terms of the LOI have been completed.
If the terms of your LOI are met, the reserved shares will be deposited to an
account in your name or delivered to you or as you direct. If the amount of
your total purchases, less redemptions, is more than the amount specified in
your LOI and is an amount that would qualify for a further sales charge
reduction, a retroactive price adjustment will be made by Distributors and
the securities dealer through whom purchases were made. The price adjustment
will be made on purchases made within 90 days before and on those made after
you filed your LOI and will be applied towards the purchase of additional
shares at the offering price applicable to a single purchase or the dollar
amount of the total purchases.
If the amount of your total purchases, less redemptions, is less than the
amount specified in your LOI, the sales charge will be adjusted upward,
depending on the actual amount purchased (less redemptions) during the
period. You will need to send Distributors an amount equal to the difference
in the actual dollar amount of sales charge paid and the amount of sales
charge that would have applied to the total purchases if the total of the
purchases had been made at one time. Upon payment of this amount, the
reserved shares held for your account will be deposited to an account in your
name or delivered to you or as you direct. If within 20 days after written
request the difference in sales charge is not paid, we will redeem an
appropriate number of reserved shares to realize the difference. If you
redeem the total amount in your account before you fulfill your LOI, we will
deduct the additional sales charge due from the sale proceeds and forward the
balance to you.
For LOIs filed on behalf of certain retirement plans, the level and any
reduction in sales charge for these plans will be based on actual plan
participation and the projected investments in the Franklin Templeton Funds
under the LOI. These plans are not subject to the requirement to reserve 5%
of the total intended purchase or to the policy on upward adjustments in
sales charges described above, or to any penalty as a result of the early
termination of a plan, nor are these plans entitled to receive retroactive
adjustments in price for investments made before executing the LOI.
GROUP PURCHASES. If you are a member of a qualified group, you may buy Class
A shares at a reduced sales charge that applies to the group as a whole. The
sales charge is based on the combined dollar value of the group members'
existing investments, plus the amount of the current purchase.
A qualified group is one that:
o Was formed at least six months ago,
o Has a purpose other than buying fund shares at a discount,
o Has more than 10 members,
o Can arrange for meetings between our representatives and group members,
o Agrees to include Franklin Templeton Fund sales and other materials in
publications and mailings to its members at reduced or no cost to
Distributors,
o Agrees to arrange for payroll deduction or other bulk transmission of
investments to the funds, and
o Meets other uniform criteria that allow Distributors to achieve cost
savings in distributing shares.
A qualified group generally 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 the fund before November
17, 1997, and to Advisor Class or Class Z shareholders of a Franklin
Templeton Fund who may reinvest their distributions in the fund's Class A
shares. This waiver category also applies to Class B and C shares.
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 Templeton Variable Insurance Products Trust. You should
contact your tax advisor for information on any tax consequences that may
apply.
o Redemption proceeds from a repurchase of shares of Franklin Floating Rate
Trust, if the shares were continuously held for at least 12 months.
If you immediately placed your redemption proceeds in a Franklin Bank CD
or a Franklin Templeton money fund, you may reinvest them as described
above. The proceeds must be reinvested within 365 days from the date the
CD matures, including any rollover, or the date you redeem your money fund
shares.
o Redemption proceeds from the sale of Class A shares of any of the Templeton
Global Strategy Funds if you are a qualified investor.
If you paid a CDSC when you redeemed your Class A shares from a Templeton
Global Strategy Fund, a new CDSC will apply to your purchase of fund
shares and the CDSC holding period will begin again. We will, however,
credit your fund account with additional shares based on the CDSC you
previously paid and the amount of the redemption proceeds that you
reinvest.
If you immediately placed your redemption proceeds in a Franklin Templeton
money fund, you may reinvest them as described above. The proceeds must be
reinvested within 365 days from the date they are redeemed from the money
fund.
o Distributions from an existing retirement plan invested in the Franklin
Templeton Funds
WAIVERS FOR CERTAIN INVESTORS. Class A shares also may be purchased without
an initial sales charge or CDSC by various individuals and institutions due
to anticipated economies in sales efforts and expenses, including:
o Trust companies and bank trust departments agreeing to invest in Franklin
Templeton Funds over a 13 month period at least $1 million of assets held
in a fiduciary, agency, advisory, custodial or similar capacity and over
which the trust companies and bank trust departments or other plan
fiduciaries or participants, in the case of certain retirement plans, have
full or shared investment discretion. We may accept orders for these
accounts 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.
Effective June 1, 2000, the requirement to agree to invest at least $1
million in Franklin Templeton Funds over a 13 month period will no longer
apply.
o Any state or local government or any instrumentality, department, authority
or agency thereof that has determined a fund is a legally permissible
investment and that can only buy fund shares without paying sales charges.
Please consult your legal and investment advisors to determine if an
investment in a fund is permissible and suitable for you and the effect, if
any, of payments by the fund on arbitrage rebate calculations.
o Broker-dealers, registered investment advisors or certified financial
planners who have entered into an agreement with Distributors for clients
participating in comprehensive fee programs
o Qualified registered investment advisors who buy through a broker-dealer or
service agent who has entered into an agreement with Distributors
o Registered securities dealers and their affiliates, for their investment
accounts only
o Current employees of securities dealers and their affiliates and their
family members, as allowed by the internal policies of their employer
o Officers, trustees, directors and full-time employees of the Franklin
Templeton Funds or the Franklin Templeton Group, and their family members,
consistent with our then-current policies
o Any investor who is currently a Class Z shareholder of Franklin Mutual
Series Fund Inc. (Mutual Series), or who is a former Mutual Series Class Z
shareholder who had an account in any Mutual Series fund on October 31,
1996, or who sold his or her shares of Mutual Series Class Z within the
past 365 days
o Investment companies exchanging shares or selling assets pursuant to a
merger, acquisition or exchange offer
o Accounts managed by the Franklin Templeton Group
o Certain unit investment trusts and their holders reinvesting distributions
from the trusts
o Group annuity separate accounts offered to retirement plans
o Chilean retirement plans that meet the requirements described under
"Retirement plans" below
In addition, Class C shares may be purchased without an initial sales charge
by any investor who buys Class C shares through an omnibus account with
Merrill Lynch Pierce Fenner & Smith, Inc. A CDSC may apply, however, if the
shares are sold within 18 months of purchase.
RETIREMENT PLANS. Retirement plans sponsored by an employer (i) with at least
100 employees, or (ii) with retirement plan assets of $1 million or more, or
(iii) that agrees to invest at least $500,000 in the Franklin Templeton Funds
over a 13 month period may buy Class A shares without an initial sales
charge. Retirement plans that are not qualified retirement plans (employer
sponsored pension or profit-sharing plans that qualify under section 401 of
the Internal Revenue Code, including 401(k), money purchase pension, profit
sharing and defined benefit plans), SIMPLEs (savings incentive match plans
for employees) or SEPs (employer sponsored simplified employee pension plans
established under section 408(k) of the Internal Revenue Code) must also meet
the group purchase requirements described above to be able to buy Class A
shares without an initial sales charge. We may enter into a special
arrangement with a securities dealer, based on criteria established by the
funds, to add together certain small qualified retirement plan accounts for
the purpose of meeting these requirements.
For retirement plan accounts opened on or after May 1, 1997, a CDSC may apply
if the retirement plan is transferred out of the Franklin Templeton Funds or
terminated within 365 days of the retirement plan account's initial purchase
in the Franklin Templeton Funds.
SALES IN TAIWAN. Under agreements with certain banks in Taiwan, Republic of
China, the funds' shares are available to these banks' trust accounts without
a sales charge. The banks may charge service fees to their customers who
participate in the trusts. A portion of these service fees may be paid to
Distributors or one of its affiliates to help defray expenses of maintaining
a service office in Taiwan, including expenses related to local literature
fulfillment and communication facilities.
The funds' Class A shares may be offered to investors in Taiwan through
securities advisory firms known locally as Securities Investment Consulting
Enterprises. In conformity with local business practices in Taiwan, Class A
shares may be offered with the following schedule of sales charges:
SIZE OF PURCHASE - U.S. DOLLARS SALES CHARGE (%)
- ----------------------------------------------------------------------
Under $30,000 3.0
$30,000 but less than $50,000 2.5
$50,000 but less than $100,000 2.0
$100,000 but less than $200,000 1.5
$200,000 but less than $400,000 1.0
$400,000 or more 0
DEALER COMPENSATION Securities dealers may at times receive the entire sales
charge. A securities dealer who receives 90% or more of the sales charge may
be deemed an underwriter under the Securities Act of 1933, as amended.
Financial institutions or their affiliated brokers may receive an agency
transaction fee in the percentages indicated in the dealer compensation table
in the funds' prospectus.
Distributors may pay the following commissions, out of its own resources, to
securities dealers who initiate and are responsible for purchases of Class A
shares of $1 million or more: 1% on sales of $1 million to $2 million, plus
0.80% on sales over $2 million to $3 million, plus 0.50% on sales over $3
million to $50 million, plus 0.25% on sales over $50 million to $100 million,
plus 0.15% on sales over $100 million.
These breakpoints are reset every 12 months for purposes of additional
purchases.
Distributors or one of its affiliates may pay up to 1%, 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. These payments may be made 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.
In addition to the payments above, Distributors and/or its affiliates may
provide financial support to 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 and/or total assets with the Franklin
Templeton Group of Funds. The amount of support may be affected by: total
sales; net sales; levels of redemptions; the proportion of a securities
dealer's sales and marketing efforts in the Franklin Templeton Group of
Funds; a securities dealer's support of, and participation in, Distributors'
marketing programs; a securities dealer's compensation programs for its
registered representatives; and the extent of a securities dealer's marketing
programs relating to the Franklin Templeton Group of Funds. Financial support
to securities dealers may be made by payments from Distributors' resources,
from Distributors' retention of underwriting concessions and, in the case of
funds that have Rule 12b-1 plans, from payments to Distributors under such
plans. In addition, certain securities dealers may receive brokerage
commissions generated by fund portfolio transactions in accordance with the
rules of the National Association of Securities Dealers, Inc.
Distributors routinely sponsors due diligence meetings for registered
representatives during which they receive updates on various Franklin
Templeton Funds and are afforded the opportunity to speak with portfolio
managers. Invitation to these meetings is not conditioned on selling a
specific number of shares. Those who have shown an interest in the Franklin
Templeton Funds, however, are more likely to be considered. To the extent
permitted by their firm's policies and procedures, registered
representatives' expenses in attending these meetings may be covered by
Distributors.
CONTINGENT DEFERRED SALES CHARGE (CDSC) If you invest $1 million or more in
Class A shares, either as a lump sum or through our cumulative quantity
discount or letter of intent programs, a CDSC may apply on any shares you
sell within 12 months of purchase. For Class C shares, a CDSC may apply if
you sell your shares within 18 months of purchase. The CDSC is 1% of the
value of the shares sold or the net asset value at the time of purchase,
whichever is less.
Certain retirement plan accounts opened on or after May 1, 1997, and that
qualify to buy Class A shares without an initial sales charge also may be
subject to a CDSC if the retirement plan is transferred out of the Franklin
Templeton Funds or terminated within 365 days of the account's initial
purchase in the Franklin Templeton Funds.
For Class B shares, there is a CDSC if you sell your shares within six years,
as described in the table below. The charge is based on the value of the
shares sold or the net asset value at the time of purchase, whichever is less.
IF YOU SELL YOUR CLASS B SHARES
WITHIN THIS 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 generally will be waived for:
o Account fees
o Sales of Class A shares purchased without an initial sales charge by
certain retirement plan accounts if (i) the account was opened before May
1, 1997, or (ii) the securities dealer of record received a payment from
Distributors of 0.25% or less, or (iii) Distributors did not make any
payment in connection with the purchase, or (iv) the securities dealer of
record has entered into a supplemental agreement with Distributors
o Redemptions of Class A shares by investors who purchased $1 million or more
without an initial sales charge if the securities dealer of record waived
its commission 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 an employee benefit plan: (i) that is a customer of Franklin
Templeton Defined Contribution Services; and/or (ii) whose assets are held
by Franklin Templeton Bank & Trust as trustee or custodian (not applicable
to Class B)
o Distributions from individual retirement accounts (IRAs) due to death or
disability or upon periodic distributions based on life expectancy (for
Class B, this applies to all retirement plan accounts, not only IRAs)
o Returns of excess contributions (and earnings, if applicable) from
retirement plan accounts
o Participant initiated distributions from employee benefit plans or
participant initiated exchanges among investment choices in employee
benefit plans (not applicable to Class B)
EXCHANGE PRIVILEGE If you request the exchange of the total value of your
account, declared but unpaid income dividends and capital gain distributions
will be reinvested in the fund and exchanged into the new fund at net asset
value when paid. Backup withholding and information reporting may apply.
If a substantial number of shareholders should, within a short period, sell
their fund shares under the exchange privilege, a fund might have to sell
portfolio securities it might otherwise hold and incur the additional costs
related to such transactions. On the other hand, increased use of the
exchange privilege may result in periodic large inflows of money. If this
occurs, it is each fund's general policy to initially invest this money in
short-term, interest-bearing money market instruments, unless it is believed
that attractive investment opportunities consistent with the fund's
investment goals exist immediately. This money will then be withdrawn from
the short-term, interest-bearing money market instruments and invested in
portfolio securities in as orderly a manner as is possible when attractive
investment opportunities arise.
The proceeds from the sale of shares of an investment company generally are
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.
Each month in which a payment is scheduled, we will redeem an equivalent
amount of shares in your account, generally on the 25th day of the month. If
the 25th falls on a weekend or holiday, we will process the redemption on the
next business day. Beginning June 1, 2000, you may request to change the
processing date to the 1st, 5th, 10th, 15th or 20th of the month. For plans
set up on or after June 1, 2000, we will process redemptions on the day of
the month you have indicated on your account application or, if no day is
indicated, on the 20th day of the month (or next business day). When you sell
your shares under a systematic withdrawal plan, it is a taxable transaction.
To avoid paying sales charges on money you plan to withdraw within a short
period of time, you may not want to set up a systematic withdrawal plan if
you plan to buy shares on a regular basis. Shares sold under the plan also
may be subject to a CDSC.
Redeeming shares through a systematic withdrawal plan may reduce or exhaust
the shares in your account if payments exceed distributions received from the
fund. This is especially likely to occur if there is a market decline. If a
withdrawal amount exceeds the value of your account, your account will be
closed and the remaining balance in your account will be sent to you. Because
the amount withdrawn under the plan may be more than your actual yield or
income, part of the payment may be a return of your investment.
To discontinue a systematic withdrawal plan, change the amount and schedule
of withdrawal payments, or suspend one payment, we must receive instructions
from you at least three business days before a scheduled payment. The fund
may discontinue a systematic withdrawal plan by notifying you in writing and
will discontinue a systematic withdrawal plan automatically 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.
Sending redemption proceeds by wire or electronic funds transfer (ACH) 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 or ACH is not processed as described in the
prospectus.
Franklin Templeton Investor Services, Inc. (Investor Services) may pay
certain financial institutions that maintain omnibus accounts with the funds
on behalf of numerous beneficial owners for recordkeeping operations
performed with respect to such owners. For each beneficial owner in the
omnibus account, a fund may reimburse Investor Services an amount not to
exceed the per account fee that the fund normally pays Investor Services.
These financial institutions also may charge a fee for their services
directly to their clients.
If you buy or sell shares through your securities dealer, we use the net
asset value next calculated after your securities dealer receives your
request, which is promptly transmitted to the fund. If you sell shares
through your securities dealer, it is your dealer's responsibility to
transmit the order to the fund in a timely fashion. Your redemption proceeds
will not earn interest between the time we receive the order from your dealer
and the time we receive any required documents. Any loss to you resulting
from your dealer's failure to transmit your redemption order to the fund in a
timely fashion must be settled between you and your securities dealer.
Certain shareholder servicing agents may be authorized to accept your
transaction request.
For institutional accounts, there may be additional methods of buying or
selling fund shares than those described in this SAI or in the prospectus.
In the event of disputes involving multiple claims of ownership or authority
to control your account, each fund has the right (but has no obligation) to:
(a) freeze the account and require the written agreement of all persons
deemed by the fund to have a potential property interest in the account,
before executing instructions regarding the account; (b) interplead disputed
funds or accounts with a court of competent jurisdiction; or (c) surrender
ownership of all or a portion of the account to the IRS in response to a
notice of levy.
PRICING SHARES
- ------------------------------------------------------------------------------
When you buy shares, you pay the offering price. The offering price is the
net asset value (NAV) per share plus any applicable sales charge, calculated
to two decimal places using standard rounding criteria. When you sell shares,
you receive the NAV minus any applicable CDSC.
The value of a mutual fund is determined by deducting the fund's liabilities
from the total assets of the portfolio. The net asset value per share is
determined by dividing the net asset value of the fund by the number of
shares outstanding.
The funds calculate the NAV per share of each class each business day at the
close of trading on the New York Stock Exchange (normally 1:00 p.m. Pacific
time). The funds do not calculate the NAV on days the New York Stock Exchange
(NYSE) is closed for trading, which include New Year's Day, Martin Luther
King Jr. Day, Presidents' Day, Good Friday, Memorial Day, Independence Day,
Labor Day, Thanksgiving Day and Christmas Day.
When determining its NAV, each fund values cash and receivables at their
realizable amounts, and records interest as accrued and dividends on the
ex-dividend date. If market quotations are readily available for portfolio
securities listed on a securities exchange or on the Nasdaq National Market
System, each fund values those securities at the last quoted sale price of
the day or, if there is no reported sale, within the range of the most recent
quoted bid and ask prices. Each fund values over-the-counter portfolio
securities within the range of the most recent quoted bid and ask prices. If
portfolio securities trade both in the over-the-counter market and on a stock
exchange, each fund values them according to the broadest and most
representative market as determined by the manager.
Each fund values portfolio securities underlying actively traded call options
at their market price as determined above. The current market value of any
option the fund holds is its last sale price on the relevant exchange before
the fund values its assets. If there are no sales that day or if the last
sale price is outside the bid and ask prices, the fund values options within
the range of the current closing bid and ask prices if the fund believes the
valuation fairly reflects the contract's market value.
Trading in securities on European and Far Eastern securities exchanges and
over-the-counter markets is normally completed well before the close of
business of the NYSE on each day that the NYSE is open. Trading in European
or Far Eastern securities generally, or in a particular country or countries,
may not take place on every NYSE business day. Furthermore, trading takes
place in various foreign markets on days that are not business days for the
NYSE and on which the fund's NAV is not calculated. Thus, the calculation of
the fund's NAV does not take place contemporaneously with the determination
of the prices of many of the portfolio securities used in the calculation
and, if events materially affecting the values of these foreign securities
occur, the securities will be valued at fair value as determined by
management and approved in good faith by the board.
Generally, trading in corporate bonds, U.S. government securities and money
market instruments is substantially completed each day at various times
before the close of the NYSE. The value of these securities used in computing
the NAV is determined as of such times. Occasionally, events affecting the
values of these securities may occur between the times at which they are
determined and the close of the NYSE that will not be reflected in the
computation of the NAV. If events materially affecting the values of these
securities occur during this period, the securities will be valued at their
fair value as determined in good faith by the board.
Other securities for which market quotations are readily available are valued
at the current market price, which may be obtained from a pricing service,
based on a variety of factors including recent trades, institutional size
trading in similar types of securities (considering yield, risk and maturity)
and/or developments related to specific issues. Securities and other assets
for which market prices are not readily available are valued at fair value as
determined following procedures approved by the board. With the approval of
the board, the funds may use a pricing service, bank or securities dealer to
perform any of the above described functions.
THE UNDERWRITER
- ------------------------------------------------------------------------------
Franklin Templeton Distributors, Inc. (Distributors) acts as the principal
underwriter in the continuous public offering of the funds' shares.
Distributors is located at 777 Mariners Island Blvd., San Mateo, CA 94404.
Distributors pays the expenses of the distribution of fund shares, including
advertising expenses and the costs of printing sales material and
prospectuses used to offer shares to the public. Each fund pays the expenses
of preparing and printing amendments to its registration statements and
prospectuses (other than those necessitated by the activities of
Distributors) and of sending prospectuses to existing shareholders.
The table below shows the aggregate underwriting commissions Distributors
received in connection with the offering of the funds' shares, the net
underwriting discounts and commissions Distributors retained after allowances
to dealers, and the amounts Distributors received in connection with
redemptions or repurchases of shares for the last three fiscal years ended
December 31:
AMOUNT
RECEIVED IN
CONNECTION
WITH
TOTAL AMOUNT REDEMPTIONS
COMMISSIONS RETAINED BY AND
RECEIVED DISTRIBUTORS REPURCHASES
($) ($) ($)
- -------------------------------------------------------------------------------
1999
Beacon 1,813,349 211,455 449,626
Financial Services 302,517 69,400 241,771
Qualified 1,144,750 66,781 307,032
Mutual Shares 4,095,030 412,454 1,101,285
Discovery 2,069,077 215,102 614,861
European 408,338 33,935 137,779
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 Services1 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
1. For the period August 19, 1997 to December 31, 1997.
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 The board has adopted a separate plan
pursuant to Rule 12b-1 for each class. Although the plans differ in some ways
for each class, each plan is designed to benefit the funds and their
shareholders. The plans are expected to, among other things, increase
advertising of the funds, encourage sales of the funds and service to their
shareholders, and increase or maintain assets of the funds so that certain
fixed expenses may be spread over a broader asset base, resulting in lower
per share expense ratios. In addition, a positive cash flow into the funds is
useful in managing the funds because the manager has more flexibility in
taking advantage of new investment opportunities and handling shareholder
redemptions.
Under each plan, the funds pay Distributors or others for the expenses of
activities that are primarily intended to sell shares of the class. These
expenses also may include service fees paid to securities dealers or others
who have executed a servicing agreement with the funds, Distributors or its
affiliates who provide service or account maintenance to shareholders
(service fees); the expenses of printing prospectuses and reports used for
sales purposes, and of preparing and distributing sales literature and
advertisements; and a prorated portion of Distributors' overhead expenses
related to these activities. Together, these expenses, including the service
fees, are "eligible expenses." 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. The funds may pay up to 0.35% per year of Class A's average
daily net assets. Of this amount, the funds may pay up to 0.35% to
Distributors or others, out of which Distributors generally will retain 0.10%
for distribution expenses.
The Class A plan is a reimbursement plan. It allows the funds to reimburse
Distributors for eligible expenses that Distributors has shown it has
incurred. The funds will not reimburse more than the maximum amount allowed
under the plan.
For the fiscal year ended December 31, 1999, the amounts paid by
the funds pursuant to the plan were:
BEACON FINANCIAL MUTUAL
SERVICES SHARES
- -------------------------------------------------------------------------------
($) ($) ($)
- -------------------------------------------------------------------------------
Advertising 540,414 79,380 934,967
Printing and mailing prospectuses 103,990 28,463 172,307
other than to current shareholders
Payments to underwriters 51,952 5,758 89,776
Payments to broker-dealers 2,106,806 317,655 3,366,948
Other 310,506 49,794 549,840
Total 3,113,668 481,050 5,113,838
QUALIFIED DISCOVERY EUROPEAN
- -------------------------------------------------------------------------------
($) ($) ($)
- -------------------------------------------------------------------------------
Advertising 276,814 445,015 64,849
Printing and mailing prospectuses 63,901 102,796 23,841
other than to current shareholders
Payments to underwriters 48,507 47,934 26,913
Payments to broker-dealers 1,148,084 1,832,328 337,436
Other 248,719 406,095 84,269
Total 1,786,025 2,834,168 537,308
THE CLASS B AND C PLANS. The funds pay Distributors up to 1% per year of the
class's average daily net assets, out of which 0.25% may be used for service
fees. The Class B and C plans also may be used to pay Distributors for
advancing commissions to securities dealers with respect to the initial sale
of Class B and C shares. Class B plan fees payable to Distributors are used
by Distributors to pay third party financing entities that have provided
financing to Distributors in connection with advancing commissions to
securities dealers.
The Class B and C plans are compensation plans. They allow the fund to pay a
fee to Distributors that may be more than the eligible expenses Distributors
has incurred at the time of the payment. Distributors must, however,
demonstrate to the board that it has spent or has immediate plans to spend
the amount received on eligible expenses. The funds will not pay more than
the maximum amount allowed under the plans.
Under the Class B plan, the amounts paid by the funds pursuant to the plan
for the fiscal year ended December 31, 1999, were:
BEACON FINANCIAL MUTUAL
SERVICES SHARES
- -------------------------------------------------------------------------------
($) ($) ($)
- -------------------------------------------------------------------------------
Advertising 0 0 0
Printing and mailing prospectuses
other than to current shareholders 0 0 0
Payments to underwriters 0 0 0
Payments to broker-dealers 26,402 3,109 70,488
Other 0 0 0
---------------------------------------
Total 26,402 3,109 70,488
QUALIFIED DISCOVERY EUROPEAN
- -------------------------------------------------------------------------------
($) ($) ($)
- -------------------------------------------------------------------------------
Advertising 0 0 0
Printing and mailing prospectuses
other than to current shareholders 0 0 0
Payments to underwriters 0 0 0
Payments to broker-dealers 13,048 26,267 2,436
Other 0 0 0
---------------------------------------
Total 13,048 26,267 2,436
Under the Class C plan, the amounts paid by the Beacon, Mutual Shares, and
Discovery funds pursuant to the plan for the fiscal year ended December 31,
1999, were:
BEACON MUTUAL DISCOVERY
SHARES
- -------------------------------------------------------------------------------
($) ($) ($)
- -------------------------------------------------------------------------------
Advertising 239,216 652,554 422,983
Printing and mailing prospectuses 45,141 120,190 89,832
other than to current shareholders
Payments to underwriters 23,224 67,790 31,702
Payments to broker-dealers 4,358,427 8,480,063 4,576,355
Other 114,350 288,966 156,536
---------------------------------------
Total 4,780,358 9,609,563 5,277,408
Under the Class C plan, total payments to Distributors for the fiscal year
ended December 31, 1999, were $3,000,632, $1,122,405 and $881,847, for the
Qualified, Financial Services, and European funds respectively. The eligible
expenses Distributors had incurred to that date were:
QUALIFIED FINANCIAL EUROPEAN
SERVICES
- -------------------------------------------------------------------------------
($) ($) ($)
- -------------------------------------------------------------------------------
Advertising 171,982 71,556 52,701
Printing and mailing prospectuses 39,673 25,611 19,391
other than to current shareholders
Payments to underwriters 16,188 8,522 4,536
Payments to broker-dealers 2,613,819 850,287 731,690
Other 83,660 30,925 23,255
---------------------------------------
Total 2,925,322 986,901 831,573
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 funds, the manager or Distributors or other parties on behalf of
the funds, 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.
To the extent fees are for distribution or marketing functions, as
distinguished from administrative servicing or agency transactions, certain
banks may not participate in the plans because of applicable federal law
prohibiting certain banks from engaging in the distribution of mutual fund
shares. These banks, however, are allowed to receive fees under the plans for
administrative servicing or for agency transactions.
Distributors must provide written reports to the board at least quarterly on
the amounts and purpose of any payment made under the plans and any related
agreements, and furnish the board with such other information as the board
may reasonably request to enable it to make an informed determination of
whether the plans should be continued.
Each plan has been approved according to the provisions of Rule 12b-1. The
terms and provisions of each plan also are consistent with Rule 12b-1.
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.
For each fund except Financial Services - Before November 1, 1996, only a
single class of fund shares was offered without a sales charge and Rule 12b-1
expenses. Each fund began offering Class A and Class C shares on November 1,
1996, and Class B shares on January 1, 1999. 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.
For Financial Services - This fund has offered Class A and Class C shares
since its inception. It began offering Class B shares on January 1, 1999.
Class B performance reflects a restatement of the original class to include
the Rule 12b-1 fees applicable to Class B 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 for Class A and C
shares, 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, 1999, were:
1 YEAR 5 YEARS 10 YEARS
- --------------------------------------------------------------------------------
Class A
Beacon 9.69% 15.74% 13.37%
Financial Services 1 -1.68% N/A N/A
Mutual Shares 8.03% 16.07% 13.18%
Qualified 6.77% 15.17% 13.13%
Discovery 2 19.11% 17.82% N/A
European 3 37.66% N/A N/A
1 YEAR 5 YEARS 10 YEARS
- --------------------------------------------------------------------------------
Class B
Beacon 11.33% 16.16% 13.37%
Financial Services 1 -0.31% N/A N/A
Mutual Shares 9.82% 16.56% 13.16%
Qualified 8.55% 15.64% 13.12%
Discovery 2 21.55% 18.33% N/A
European 3 41.17% N/A N/A
1 YEAR 5 YEARS 10 YEARS
- --------------------------------------------------------------------------------
Class C
Beacon 13.52% 16.12% 13.11%
Financial Services 1 1.64% N/A N/A
Mutual Shares 11.72% 16.45% 12.91%
Qualified 10.39% 15.54% 12.85%
Discovery 2 23.28% 18.24% N/A
European 3 42.90% N/A N/A
1. Financial Services commenced operations on August 19, 1997. The average
annual total return from inception was 11.79% for Class A, 12.94% for Class B
and 13.41% for Class C.
2. Discovery commenced operations on December 31, 1992. The average annual
total return from inception was 17.93% for Class A, 18.18% for Class B and
17.99% for Class C.
3. European commenced operations on July 3, 1996. The average annual total
return from inception was 22.11% for Class A, 23.05% for Class B and 23.21%
for Class C.
The following SEC formula was used to calculate these figures:
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, income dividends and capital gain distributions are
reinvested at net asset value, the account was completely redeemed at the end
of each period and the deduction of all applicable charges and fees.
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, 1999, were:
1 YEAR 5 YEARS 10 YEARS
- -------------------------------------------------------------------------------
Class A
Beacon 9.69% 107.66% 250.66%
Financial Services 1 -1.68% N/A N/A
Mutual Shares 8.03% 110.67% 245.02%
Qualified 6.77% 102.61% 243.34%
Discovery 2 19.11% 127.06% N/A
European 3 37.66% N/A N/A
1 YEAR 5 YEARS 10 YEARS
- --------------------------------------------------------------------------------
Class B
Beacon 11.33% 111.52% 250.60%
Financial Services 1 -0.31% N/A N/A
Mutual Shares 9.82% 115.11% 244.30%
Qualified 8.55% 106.84% 243.03%
Discovery 2 21.55% 131.99% N/A
European 3 41.17% N/A N/A
1 YEAR 5 YEARS 10 YEARS
- --------------------------------------------------------------------------------
Class C
Beacon 13.52% 111.16% 242.76%
Financial Services 1 1.64% N/A N/A
Mutual Shares 11.72% 114.16% 236.72%
Qualified 10.39% 105.89% 234.95%
Discovery 2 23.28% 131.14% N/A
European 3 42.90% N/A N/A
1. Financial Services commenced operations on August 19, 1997. The cumulative
total return from inception was 30.19% for Class A, 33.40% for Class B and
34.71% for Class C.
2. Discovery commenced operations on December 31, 1992. The cumulative total
return from inception was 217.18% for Class A, 222.03% for Class B and
218.27% for Class C.
3. European commenced operations on July 3, 1996. The cumulative total return
from inception was 101.03% for Class A, 106.52% for Class B and 107.44% for
Class C.
VOLATILITY Occasionally statistics may be used to show a fund's volatility
or risk. Measures of volatility or risk are generally used to compare a
fund's net asset value or performance to a market index. One measure of
volatility is beta. Beta is the volatility of a fund relative to the total
market, as represented by an index considered representative of the types of
securities in which the fund invests. A beta of more than 1.00 indicates
volatility greater than the market and a beta of less than 1.00 indicates
volatility less than the market. Another measure of volatility or risk is
standard deviation. Standard deviation is used to measure variability of net
asset value or total return around an average over a specified period of
time. The idea is that greater volatility means greater risk undertaken in
achieving performance.
OTHER PERFORMANCE QUOTATIONS The funds also may quote the performance of
shares without a sales charge. Sales literature and advertising may quote a
cumulative total return, average annual total return and other measures of
performance with the substitution of net asset value for the public offering
price.
Sales literature referring to the use of the funds as a potential investment
for IRAs, business retirement plans, and other tax-advantaged retirement
plans may quote a total return based upon compounding of dividends on which
it is presumed no federal income tax applies.
The funds may include in their advertising or sales material information
relating to investment goals and performance results of funds belonging to
the Franklin Templeton Group of Funds. Franklin Resources, Inc. is the parent
company of the advisors and underwriter of the Franklin Templeton Group of
Funds.
COMPARISONS To help you better evaluate how an investment in a fund may
satisfy your investment goal, advertisements and other materials about the
funds may discuss certain measures of fund performance as reported by various
financial publications. Materials also may compare performance (as calculated
above) to performance as reported by other investments, indices, and
averages. These comparisons may include, but are not limited to, the
following examples:
o Dow Jones(R) Composite Average and its component averages - a
price-weighted average of 65 stocks that trade on the New York Stock
Exchange. The average is a combination of the Dow Jones Industrial Average
(30 blue-chip stocks that are generally leaders in their industry), the Dow
Jones Transportation Average (20 transportation stocks), and the Dow Jones
Utilities Average (15 utility stocks involved in the production of
electrical energy).
o Standard & Poor's(R) 500 Stock Index or its component indices - a
capitalization-weighted index designed to measure performance of the broad
domestic economy through changes in the aggregate market value of 500
stocks representing all major industries.
o The New York Stock Exchange composite or component indices - an unmanaged
index of all industrial, utilities, transportation, and finance stocks
listed on the NYSE.
o Wilshire 5000 Equity Index - represents the return on the market value of
all common equity securities for which daily pricing is available.
Comparisons of performance assume reinvestment of dividends.
o Lipper - Mutual Fund Performance Analysis and Lipper - Equity Fund
Performance Analysis - measure total return and average current yield for
the mutual fund industry and rank individual mutual fund performance over
specified time periods, assuming reinvestment of all distributions,
exclusive of any applicable sales charges.
o CDA Mutual Fund Report, published by CDA Investment Technologies, Inc. -
analyzes price, current yield, risk, total return, and average rate of
return (average annual compounded growth rate) over specified time periods
for the mutual fund industry.
o Mutual Fund Source Book, published by Morningstar, Inc. - analyzes price,
yield, risk, and total return for mutual funds.
o Financial publications: The WALL STREET JOURNAL, and BUSINESS WEEK,
CHANGING TIMES, FINANCIAL WORLD, FORBES, FORTUNE, and MONEY magazines -
provide performance statistics over specified time periods.
o Consumer Price Index (or Cost of Living Index), published by the U.S.
Bureau of Labor Statistics - a statistical measure of change, over time, in
the price of goods and services in major expenditure groups.
o Stocks, Bonds, Bills, and Inflation, published by Ibbotson Associates -
historical measure of yield, price, and total return for common and small
company stock, long-term government bonds, Treasury bills, and inflation.
o Savings and Loan Historical Interest Rates - as published in the U.S.
Savings & Loan League Fact Book.
o Historical data supplied by the research departments of CS First Boston
Corporation, the J.P. Morgan(R) companies, Salomon Smith Barney Inc.,
Merrill Lynch, Lehman Brothers(R) and Bloomberg(R) 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 Smith Barney 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 Smith Barney Composite High Yield Index or its component indices -
measures yield, price and total return for the Long-Term High-Yield Index,
Intermediate-Term High-Yield Index, and Long-Term Utility High-Yield Index.
From time to time, advertisements or information for the funds may include a
discussion of certain attributes or benefits to be derived from an investment
in the funds. The advertisements or information may include symbols,
headlines, or other material that highlights or summarizes the information
discussed in more detail in the communication.
Advertisements or information also may compare the funds' performance to the
return on certificates of deposit (CDs) or other investments. You should be
aware, however, that an investment in the fund involves the risk of
fluctuation of principal value, a risk generally not present in an investment
in a CD issued by a bank. 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 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 approximately 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 $229 billion in assets under management for
more than 5 million U.S. based mutual fund shareholder and other accounts.
The Franklin Templeton Group of Funds offers 103 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.
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, 2000
[Insert Franklin Templeton Ben Head]
P.O. BOX 997151, SACRAMENTO, CA 95899-9983 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, 2000, 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, 1999, are incorporated by reference (are
legally a part of this SAI).
For a free copy of the current prospectus or annual report, contact your
investment representative or call 1-800/DIAL BEN (1-800/342-5236).
CONTENTS
Goals and Strategies 2
Risks 13
Officers and Directors 18
Management and Other Services 20
Portfolio Transactions 22
Distributions and Taxes 23
Organization, Voting Rights and Principal Holders 25
Buying and Selling Shares 26
Pricing Shares 29
The Underwriter 29
Performance 30
Miscellaneous Information 32
- ------------------------------------------------------------------------------
MUTUAL FUNDS, ANNUITIES, AND OTHER INVESTMENT PRODUCTS:
o ARE NOT 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, which occasionally may be
short-term. Their secondary goal is income. The investment goal of Discovery
is long-term capital appreciation. Discovery does not have a secondary
investment goal. These goals are fundamental, which means they may not be
changed without shareholder approval.
The funds may invest in equity securities, debt securities and securities
convertible into common stock (including convertible preferred and
convertible debt securities) (convertible securities). There are no
limitations on the percentage of a fund's assets which may be invested in
equity securities, debt securities, convertible securities or cash equivalent
investments. The funds reserve freedom of action to invest in these
securities in such proportions as the manager deems advisable. In addition,
the funds may also invest in restricted debt and equity securities, in
foreign securities, and in other investment company securities.
The general investment policy of each fund is to invest in securities if, in
the opinion of the manager, they are available at prices less than their
intrinsic value, as determined by the manager after careful analysis and
research, taking into account, among other factors, the relationship of book
value to market value of the securities, cash flow, and multiples of earnings
of comparable securities. The relationship of a security's "book value to
market value" is an analysis of the difference between the price at which a
security is trading in the market, as compared to the value of that security
based upon an analysis of certain information contained in a company's
financial statements. Cash flow analysis considers the inflow and outflow of
money into and out of a company. An analysis of "multiples of earnings of
comparable securities" involves a review of the market values of comparable
companies as compared to their earnings, and then comparing the results of
this review with a comparison of the earnings of the company in question with
its market value. The manager examines each security separately and does not
apply these factors according to any predetermined formula. The manager has
not established guidelines as to the size of an issuer, its earnings or the
industry in which it operates in order for a security to be excluded as
unsuitable for purchase by a fund.
While Beacon, Qualified, Shares, Discovery and European have identical basic
investment restrictions and Beacon, Financial Services, Qualified, Shares,
and European have identical investment goals, the manager seeks to retain
certain historical differences among the funds on an informal basis.
The funds may invest in securities of companies of any size, however, due to
the relatively large size of Beacon, Qualified and Shares, these funds have
generally invested in larger and medium size companies with large trading
volumes and market capitalizations in excess of $1.5 billion. Discovery,
Financial Services and European, on the other hand, tend to invest
proportionately more of their assets in smaller size companies than the other
funds. Discovery may also invest more than 50% of its assets in foreign
securities.
Generally, Financial Services and European utilize the same investment
philosophy as the other funds, but Financial Services will do so by investing
in securities of financial services companies and European will do so by
investing primarily in European securities.
Qualified was originally intended for purchase by pension and profit sharing
plans and other non-tax paying entities. Therefore, its portfolio was
intended to have greater flexibility due to the reduced concerns about the
tax effects on shareholders. The manager expects that the securities it will
purchase for Qualified will satisfy this goal, depending on market conditions
and any changes in tax law. Currently, however, Qualified operates in the
same fashion as Beacon and Shares. Allocation of investments among the funds
depends upon, among other things, the amount of cash in, and relative size
of, each fund's portfolio. In addition, the factors outlined above are not
mutually exclusive and a particular security may be owned by more than one
fund.
The funds may invest in any industry although no fund will concentrate its
investments in any industry except Financial Services. Financial Services
will concentrate its investments in the financial services industry by
investing more than 25% of the value of its assets in securities of financial
services companies. Financial Services' concentration policy may not be
changed without the approval of Financial Services' shareholders.
The funds may invest in securities that are traded on U.S. or foreign
securities exchanges, the National Association of Securities Dealers
Automated Quotation System (Nasdaq) national market system or in any domestic
or foreign over-the-counter (OTC) market. U.S. or foreign securities
exchanges typically represent the primary trading market for U.S. and foreign
securities. A securities exchange brings together buyers and sellers of the
same securities. The Nasdaq national market system also brings together
buyers and sellers of the same securities through an electronic medium which
facilitates a sale and purchase of the security. Typically, the companies
whose securities are traded on the Nasdaq national market system are smaller
than the companies whose securities are traded on a securities exchange. The
OTC market refers to all other avenues whereby brokers bring together buyers
and sellers of securities.
The following is a description of the various types of securities the funds
may buy.
EQUITY SECURITIES generally entitle the holder to participate in a company's
general operating results. The purchaser of an equity security typically
receives an ownership interest in the company as well as certain voting
rights. The owner of an equity security may participate in a company's
success through the receipt of dividends, which are distributions of earnings
by the company to its owners. Equity security owners may also participate in
a company's success or lack of success through increases or decreases in the
value of the company's shares as traded in the public trading market for such
shares. The public trading market for these shares is typically a stock
exchange but can also be a market which arises between broker-dealers seeking
buyers and sellers of a particular security. Equity securities generally are
either common stock or preferred stock. Preferred stockholders usually
receive greater dividends but may receive less appreciation than common
stockholders and may have greater voting rights as well.
DEBT SECURITIES are securities issued by a company which represent a loan of
money by the purchaser of the securities to the company. A debt security has
a fixed payment schedule which obligates the company to pay interest to the
lender and to return the lender's money over a certain time period. A company
typically meets its payment obligations associated with its outstanding debt
securities before it declares and pays any dividends to holders of its equity
securities. While debt securities are used as an investment to produce income
to an investor as a result of the fixed payment schedule, debt securities may
also increase or decrease in value depending upon factors such as interest
rate movements and the success or lack of success of a company.
The funds may invest in a variety of debt securities, including bonds and
notes issued by domestic or foreign corporations and the U.S. or foreign
governments. Bonds and notes differ in the length of the issuer's repayment
schedule. Bonds typically have a longer payment schedule than notes.
Typically, debt securities with a shorter repayment schedule pay interest at
a lower rate than debt securities with a longer repayment schedule.
The debt securities which the funds may purchase may either be unrated, or
rated in any rating category established by one or more independent rating
organizations, such as Standard & Poor's Ratings Group (S&P(R)) or Moody's
Investors Service, Inc. (Moody's). Securities are given ratings by
independent rating organizations, which grade the company issuing the
securities based upon its financial soundness. Each fund may invest in
securities that are rated in the medium to lowest rating categories by S&P
and Moody's. Generally, lower rated and unrated debt securities are riskier
investments. Debt securities rated BBB or lower by S&P or Moody's are
considered to be high yield, high risk debt securities, commonly known as
"junk bonds." The lowest rating category established by Moody's is "C" and by
S&P is "D." Debt securities with a D rating are in default as to the payment
of principal and interest, which means that the issuer does not have the
financial soundness to meet its interest payments or its repayment schedule
to security holders. The funds may invest to an unlimited degree in junk
bonds.
The funds will generally invest in debt securities under circumstances
similar to those under which they will invest in equity securities; namely,
when, in the manager's opinion, such debt securities are available at prices
less than their intrinsic value. Investing in fixed-income securities under
these circumstances may lead to the potential for capital appreciation.
Consequently, when investing in debt securities, a debt security's rating is
given less emphasis in the manager's investment decision-making process.
Historically, the funds have invested in debt securities issued by domestic
or foreign companies (i) which are involved in mergers, acquisitions,
consolidations, liquidations, spinoffs, reorganizations or financial
restructurings, and (ii) that are distressed companies or in bankruptcy
(Reorganizing Companies), because such securities often are available at less
than their intrinsic value. Debt securities of such companies typically are
unrated, lower rated, in default or close to default. While posing a greater
risk than higher rated securities with respect to payment of interest and
repayment of principal at the price at which the debt security was originally
issued, these debt securities typically rank senior to the equity securities
of Reorganizing Companies and may offer the potential for certain investment
opportunities.
CONVERTIBLE SECURITIES are debt securities, or in some cases preferred stock,
which have the additional feature of converting into, or being exchanged for,
common stock of a company after certain periods of time or under certain
circumstances. Holders of convertible securities gain the benefits of being a
debt holder or preferred stockholder and receiving regular interest payments,
in the case of debt securities, or higher dividends, in the case of preferred
stock, with the expectation of becoming a common stockholder in the future. A
convertible security's value usually reflects changes in the company's
underlying common stock value.
CASH EQUIVALENT INVESTMENTS are investments in certain types of short-term
debt securities. A fund making a cash equivalent investment expects to earn
interest at prevailing market rates on the amount invested and there is
little, if any, risk of loss of the original amount invested. The funds' cash
equivalent investments are typically made in U.S. Treasury bills and
high-quality commercial paper issued by banks or others. U.S. Treasury bills
are direct obligations of the U.S. government and have initial maturities of
one year or less. Commercial paper consists of short-term debt securities
issued by a bank or other financial institution which carry fixed or floating
interest rates. A fixed interest rate means that interest is paid on the
investment at the same rate for the life of the security. A floating interest
rate means that the interest rate varies as interest rates on newly issued
securities in the marketplace vary.
NON-U.S. SECURITIES The funds may purchase securities of non-U.S. issuers
whose values are quoted and traded in any currency in addition to the U.S.
dollar. Where a security's value is quoted and traded in a non-U.S. dollar
currency, the funds bear the risk of a decrease (or gain the benefit of an
increase) in the value of the security as a result of changes in the value of
the currency as compared to the U.S. dollar in addition to typical market
price movements related to certain trading markets or the financial strength
or weakness of the security's issuer. In order to avoid these unexpected
fluctuations in value as a result of relative currency values, the funds
expect to employ an investment technique called "hedging," which attempts to
reduce or eliminate changes in a security's value resulting from changing
currency exchange rates. Hedging is further described below.
DEPOSITARY RECEIPTS Each fund may invest in securities commonly known as
American Depositary Receipts (ADRs), European Depositary Receipts (EDRs) or
Global Depositary Receipts of non-U.S. issuers. Such depositary receipts are
interests in a pool of a non-U.S. company's securities which have been
deposited with a bank or trust company. The bank or trust company then sells
interests in the pool to investors in the form of depository receipts.
Depository receipts can be unsponsored or sponsored by the issuer of the
underlying securities or by the issuing bank or trust company. ADRs are
certificates issued by a U.S. bank or trust company and represent the right
to receive securities of a foreign issuer deposited in a domestic bank or
foreign branch of a U.S. bank and traded on a U.S. exchange or in an
over-the-counter market. EDRs are receipts issued in Europe generally by a
non-U.S. bank or trust company that evidence ownership of non-U.S. or
domestic securities. Generally, ADRs are in registered form and EDRs are in
bearer form. There are no fees imposed on the purchase or sale of ADRs or
EDRs although the issuing bank or trust company may impose charges for the
collection of dividends and the conversion of ADRs and EDRs into the
underlying securities. Investment in ADRs has certain advantages over direct
investment in the underlying non-U.S. securities, since: (i) ADRs are U.S.
dollar denominated investments which are easily transferable and for which
market quotations are readily available and (ii) issuers whose securities are
represented by ADRs are subject to the same auditing, accounting and
financial reporting standards as domestic issuers. EDRs are not necessarily
denominated in the currency of the under-
lying security.
TEMPORARY INVESTMENTS When the manager believes market or economic
conditions are unfavorable for investors, the manager may invest up to 100%
of the funds' assets in a temporary defensive manner or hold a substantial
portion of the funds' portfolio in cash. Unfavorable market or economic
conditions may include excessive volatility or a prolonged general decline in
the securities markets, the securities in which the funds normally invest, or
the economies of the countries where the funds invest.
Temporary defensive investments generally may include short-term debt
securities such as U.S. Treasury bills and high quality commercial paper
issued by banks or others, as well as money market mutual funds. To the
extent allowed by exemptions granted under the Investment Company Act of
1940, as amended (1940 Act), and the funds' other investment policies and
restrictions, the manager also may invest the funds' assets in shares of one
or more money market funds managed by the manager or its affiliates. The
manager also may invest in these types of securities or hold cash while
looking for suitable investment opportunities.
SECURITIES OF REORGANIZING COMPANIES AND COMPANIES SUBJECT TO TENDER OR
EXCHANGE OFFERS The funds also seek to invest in the securities of
Reorganizing Companies, or of companies as to which there exist outstanding
tender or exchange offers. The funds may from time to time participate in
such tender or exchange offers. A tender offer is an offer by the company
itself or by another company or person to purchase a company's securities at
a higher (or lower) price than the market value for such securities. An
exchange offer is an offer by the company or by another company or person to
the holders of the company's securities to exchange those securities for
different securities. Although there are no restrictions limiting the extent
to which each fund may invest in Reorganizing Companies, no fund presently
anticipates committing more than 50% of its assets to such investments. In
addition to typical equity and debt investments, the funds' investments in
Reorganizing Companies may include Indebtedness, Participations and Trade
Claims, as further described below.
INDEBTEDNESS, PARTICIPATIONS AND TRADE From time to time, the funds may
purchase the direct indebtedness of various companies (Indebtedness), or
participation interests in Indebtedness (Participations) including
Indebtedness and Participations of Reorganizing Companies. Indebtedness can
be distinguished from traditional debt securities in that debt securities are
part of a large issue of securities to the general public which is typically
registered with a securities registration organization, such as the U.S.
Securities and Exchange Commission (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 in effect
steps into the shoes of the financial institution which made the loan to the
company prior to its restructuring or refinancing. Indebtedness purchased by
a fund may be in the form of loans, notes or bonds.
The length of time remaining until maturity on the Indebtedness is one factor
the manager considers in purchasing a particular Indebtedness. Indebtedness
which represents a specific indebtedness of the company to a bank is not
considered to be a security issued by the bank selling it. The funds purchase
loans from national and state chartered banks as well as foreign banks. The
funds normally invest in the Indebtedness of a company which Indebtedness has
the highest priority in terms of payment by the company, although on occasion
lower priority Indebtedness also may be acquired.
Participations represent fractional interests in a company's Indebtedness.
The financial institutions which typically make Participations available are
banks or insurance companies, governmental institutions, such as the
Resolution Trust Corporation, the Federal Deposit Insurance Corporation or
the Pension Benefit Guaranty Corporation, or certain organizations such as
the World Bank which are known as "supranational organizations."
Supranational organizations are entities established or financially supported
by the national governments of one or more countries to promote
reconstruction or development. The funds may also purchase trade claims and
other direct obligations or claims (Trade Claims) of Reorganizing Companies.
Indebtedness, Participations and Trade Claims may be illiquid as described
below.
ILLIQUID SECURITIES An illiquid security is a security that cannot be sold
within seven days in the normal course of business for approximately the
amount at which a fund has valued the security and carries such value on its
financial statements. Examples of illiquid securities are most restricted
securities, and repurchase agreements which terminate more than seven days
from their initial purchase date, as further described below. The funds may
not purchase an illiquid security if, at the time of purchase, the fund would
have more than 15% of its net assets invested in such securities.
RULE 144A SECURITIES The funds may invest in certain unregistered securities
which may be sold under Rule 144A of the Securities Act of 1933 (144A
securities). 144A securities are restricted, which generally means that a
legend has been placed on the share certificates representing the securities
which states that the securities were not registered with the SEC when they
were initially sold and may not be resold except under certain circumstances.
In spite of the legend, certain securities may be sold to other institutional
buyers provided that the conditions of Rule 144A are met. In the event that
there is an active secondary institutional market for 144A securities, the
144A securities may be treated as liquid. As permitted by the federal
securities laws, the board of directors has adopted procedures in accordance
with Rule 144A which govern when specific 144A securities held by the funds
may be deemed to be liquid.
SHORT SALES Each fund may make short sales of securities. There are two types
of short sale transactions in which the funds may engage, "naked short sales"
and "short sales against the box." In a naked short sale transaction, the
fund sells a security it does not own in anticipation that the market price
of that security will decline. Each fund expects to make short sales (i) as a
form of hedging to offset potential declines in long positions in similar
securities, (ii) in order to maintain portfolio flexibility and (iii) for
profit.
When a fund makes a naked short sale, its broker borrows the security to be
sold short and the broker-dealer maintains the proceeds of the short sale
while the short position is open. The fund must keep the proceeds account
marked to market and must post additional collateral for its obligation to
deliver securities to replace the securities that were borrowed and sold
short. 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 borrowed securities 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,
(excluding any proceeds of the short sales) 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 any
differential between the replacement price and the price at which it sold the
security short, its potential loss is theoretically unlimited. In some
circumstances, the fund may receive the security in connection with a
reorganization and, consequently, need not buy the security to be returned to
the borrower.
The funds may also engage in "short sales against the box." In a short sale
against the box, at the time of the sale, the fund owns or has the immediate
and unconditional right to acquire the identical security at no additional
cost. In replacing the borrowed securities in the transaction, the fund may
either buy securities in the open market or use those in its portfolio.
Each fund may engage in naked short sale transactions only if, after giving
effect to such sales, the market value of all securities sold short does not
exceed 5% of the value of its total assets or the fund's aggregate short
sales of a particular class of securities does not exceed 25% of the
outstanding securities of that class. The funds may sell securities short
against the box without limit.
MORTGAGE-BACKED SECURITIES Each fund may invest in securities representing
interests in an underlying pool of real estate mortgages (mortgage-backed
securities). The mortgage-backed securities which the funds may purchase may
be issued or guaranteed by the U.S. government, certain U.S. government
agencies or certain government sponsored corporations or organizations or by
certain private, non-government corporations, such as banks and other
financial institutions. Two principal types of mortgage-backed securities are
collateralized mortgage obligations (CMOs) and real estate mortgage
investment conduits (REMICs).
CMOs are debt securities issued by the entities listed above. The payment of
interest on the debt securities depends upon the scheduled payments on the
underlying mortgages and, thus, the CMOs are said to be "collateralized" by
the pool of mortgages. CMOs are issued in a number of classes or series with
different maturities. The classes or series are paid off completely in
sequence as the underlying mortgages are repaid. Certain of these securities
may have variable interest rates which adjust as interest rates in the
securities market generally rise or fall. Other CMOs may be stripped, which
means that only the principal or interest feature of the underlying security
is passed through to the fund.
REMICs, which were authorized under certain tax laws, are private entities
formed for the purpose of holding a fixed pool of mortgages. The mortgages
are backed by an interest in real property. REMICs are similar to CMOs in
that they issue multiple classes of securities.
CMOs and REMICs issued by private entities are not government securities and
are not directly guaranteed by any government agency. They are secured by the
underlying collateral of the private issuer. Certain of these private-backed
securities are 100% collateralized at the time of issuance by securities
issued or guaranteed by the U.S. government, its agencies, or
instrumentalities.
Distressed mortgage obligations The funds may also invest directly in
distressed mortgage obligations. A direct investment in a distressed mortgage
obligation involves the purchase by the fund of a lender's interest in a
mortgage granted to a borrower, where the borrower has experienced difficulty
in making its mortgage payments, or for which it appears likely that the
borrower will experience difficulty in making its mortgage payments. As is
typical with mortgage obligations, payment of the loan is secured by the real
estate underlying the loan. By purchasing the distressed mortgage obligation,
a fund steps into the shoes of the lender from a risk point of view.
REAL ESTATE INVESTMENT TRUST (REIT) INVESTMENTS The funds' equity investments
may include investments in shares issued by REITs. A REIT is a pooled
investment vehicle which purchases primarily income-producing real estate or
real estate related loans or other real estate related interests. The pooled
vehicle, typically a trust, then issues shares whose value and investment
performance are dependent upon the investment experience of the underlying
real estate related investments.
INVESTMENT COMPANY SECURITIES Each fund may invest from time to time in other
investment company securities, subject to applicable law which restricts such
investments. Such laws generally restrict a fund's purchase of another
investment company's securities to three percent (3%) of the other investment
company's securities, no more than five percent (5%) of the fund's assets in
any single investment company's securities and no more than ten percent (10%)
of the fund's assets in all investment company securities.
REPURCHASE AGREEMENTS Each fund generally will have a portion of its assets
in cash or cash equivalents for a variety of reasons, including waiting for a
special investment opportunity or taking a defensive position. To earn income
on this portion of its assets, each fund may invest up to 10% of its assets
in repurchase agreements. Under a repurchase agreement, the fund agrees to
buy securities guaranteed as to payment of principal and interest by the U.S.
government or its agencies from a qualified bank or broker-dealer and then to
sell the securities back to the bank or broker-dealer after a short period of
time (generally, less than seven days) at a higher price. The bank or
broker-dealer must transfer to the fund's custodian securities with an
initial market value of at least 102% of the dollar amount invested by the
fund in each repurchase agreement. The manager will monitor the value of such
securities daily to determine that the value equals or exceeds the repurchase
price.
Repurchase agreements may involve risks in the event of default or insolvency
of the bank or broker-dealer, including possible delays or restrictions upon
the fund's ability to sell the underlying securities. The fund will enter
into repurchase agreements only with parties who meet certain
creditworthiness standards, i.e., banks or broker-dealers that the manager
has determined present no serious risk of becoming involved in bankruptcy
proceedings within the time frame contemplated by the repurchase transaction.
HEDGING AND INCOME TRANSACTIONS The funds may use various hedging strategies.
Hedging is a technique designed to reduce a potential loss to a fund as a
result of certain economic or market risks, including risks related to
fluctuations in interest rates, currency exchange rates between U.S. and
foreign securities or between different foreign currencies, and broad or
specific market movements. The hedging strategies that the funds may use are
also used by many mutual funds and other institutional investors. When
pursuing these hedging strategies, the funds will primarily engage in forward
foreign currency exchange contracts. However, the funds may also engage in
the following currency transactions: currency futures contracts; currency
swaps; or options on currencies or currency futures. The funds may also
engage in other types of transactions, such as the purchase and sale of
exchange-listed and OTC put and call options on securities, equity and
fixed-income indices and other financial instruments; and the purchase and
sale of financial futures contracts and options on financial futures
contracts (collectively, all of the above are called Hedging Transactions).
Some examples of situations in which Hedging Transactions may be used are:
(i) to attempt to protect against possible changes in the market value of
securities held in or to be purchased for a fund's portfolio resulting from
changes in securities markets or currency exchange rate fluctuations; (ii) to
protect a fund's gains in the value of portfolio securities which have not
yet been sold; (iii) to facilitate the sale of certain securities for
investment purposes; and (iv) as a temporary substitute for purchasing or
selling particular securities.
Any combination of Hedging Transactions may be used at any time as determined
by the manager. Use of any Hedging Transaction is a function of numerous
variables, including market conditions and the investment manager's expertise
in utilizing such techniques. The ability of a fund to utilize Hedging
Transactions successfully cannot be assured. The funds will comply with
applicable regulatory requirements when implementing these strategies,
including the establishment of certain isolated accounts at the fund's
custodian bank. Hedging Transactions involving financial futures and options
on futures will be purchased, sold or entered into generally for bona fide
hedging, risk management or portfolio management purposes.
The various techniques described above as Hedging Transactions may also be
used by the funds for non-hedging purposes. For example, these techniques may
be used to produce income to a fund where the fund's participation in the
transaction involves the payment of a premium to the fund. A fund may also
use a hedging technique if the manager has a view about the fluctuation of
certain indices, currencies or economic or market changes such as a reduction
in interest rates. No more than 5% of a fund's assets will be exposed to
risks of such types of instruments when entered into for non-hedging purposes.
CURRENCY TRANSACTIONS Each fund will engage in currency transactions with
securities dealers, financial institutions or other parties (each a
Counterparty and collectively, Counterparties) in order to hedge the value of
portfolio holdings denominated in particular currencies against fluctuations
in relative value between those currencies and the U.S. dollar. Currency
transactions include forward foreign currency exchange contracts,
exchange-listed currency futures, exchange-listed and OTC options on
currencies, and currency swaps.
A forward foreign currency exchange contract involves a privately negotiated
obligation to purchase or sell (with delivery generally required) a specific
currency at a future date, which may be any fixed number of days from the
date of the contract agreed upon by the parties, at a price set at the time
of the contract. A currency swap is an agreement to exchange cash flows on a
notional amount of two or more currencies based on the relative value
differential among them.
A fund will usually enter into swaps on a net basis, which means the two
payment streams are netted out in a cash settlement on the payment date or
dates specified in the instrument, with the fund receiving or paying, as the
case may be, only the net amount of the two payments. To the extent these
swaps are entered into for good faith hedging purposes, the manager and the
funds believe such obligations are not senior securities under the 1940 Act
and, accordingly, will not treat them as being subject to a fund's borrowing
restrictions. The funds may enter into currency transactions with
Counterparties which have received (or the guarantors of the obligations of
such Counterparties have received) a credit rating of A-1 or P-1 by S&P or
Moody's, respectively, or that have an equivalent rating from a nationally
recognized statistical rating organization (NRSRO) or are determined to be of
equivalent credit quality by the manager. If there is a default by the
Counterparty, the fund may have contractual remedies pursuant to the
agreements related to the transaction. The swap market has grown
substantially in recent years with a large number of banks and investment
banking firms acting both as principals and as agents utilizing standardized
swap documentation. As a result, the swap market has become relatively liquid.
The funds will limit their dealings in forward foreign currency exchange
contracts and other currency transactions such as futures, options, options
on futures and swaps to either specific transactions or portfolio positions.
Transaction hedging is entering into a currency transaction with respect to
specific assets or liabilities of a fund, which will generally arise in
connection with the purchase or sale of its portfolio securities or the
receipt of income from portfolio securities. Position hedging is entering
into a currency transaction with respect to portfolio security positions
denominated or generally quoted in that currency.
A fund will not enter into a transaction to hedge currency exposure if the
fund's exposure, after netting all transactions intended to wholly or
partially offset other transactions, is greater than the aggregate market
value (at the time of entering into the transaction) of the securities held
in its portfolio that are denominated or generally quoted in, or whose value
is based on, that foreign currency or currently convertible into such
currency other than with respect to proxy hedging, which is described below.
Each fund may also cross-hedge currencies by entering into transactions to
purchase or sell one or more currencies that are expected to decline in value
relative to other currencies to which the fund has, or in which the fund
expects to have, portfolio exposure.
To reduce the effect of currency fluctuations on the value of existing or
anticipated holdings of portfolio securities, the funds may also engage in
proxy hedging. Proxy hedging is often used when the currency to which the
fund's portfolio is exposed is difficult to hedge or to hedge against the
U.S. dollar. Proxy hedging entails entering into a forward contract to sell a
currency whose changes in value are generally considered to be linked to a
currency or currencies in which some or all of a fund's portfolio securities
are or are expected to be denominated, and to buy U.S. dollars. The amount of
the contract would not exceed the value of the fund's securities denominated
in linked currencies. For example, if the manager considers the Austrian
schilling to be linked to the German deutsche mark (the D-mark), and a fund
holds securities denominated in schillings and the manager believes that the
value of schillings will decline against the U.S. dollar, the manager may
enter into a contract to sell D-marks and buy dollars. Currency hedging
involves some of the same risks and considerations as other transactions with
similar instruments.
OPTIONS Put options and call options typically have similar structural
characteristics and operational mechanics regardless of the underlying
instrument on which they are purchased or sold. Thus, the following general
discussion relates to each of the particular types of options discussed in
greater detail below. In addition, many Hedging Transactions involving
options require segregation of fund assets in special accounts, as described
below.
A put option gives the purchaser of the option, upon payment of a premium,
the right to sell, and the seller of the option, the obligation to buy, the
underlying security, commodity, index, currency or other instrument at the
exercise price. For instance, a fund's purchase of a put option on a security
might be designed to protect its holdings in the underlying instrument (or,
in some cases, a similar instrument) against a substantial decline in the
market value by giving the fund the right to sell such instrument at the
option exercise price. A call option, upon payment of a premium, gives the
purchaser of the option the right to buy, and the seller the obligation to
sell, the underlying instrument at the exercise price. A fund's purchase of a
call option on a security, financial future, index, currency or other
instrument might be intended to protect the fund against an increase in the
price of the underlying instrument that it intends to purchase in the future
by fixing the price at which it may purchase such instrument.
An American style put or call option may be exercised at any time during the
option period while a European style put or call option may be exercised only
upon expiration or during a fixed period prior thereto. Each fund is
authorized to purchase and sell exchange-listed options and over-the-counter
options (OTC options). Exchange-listed options are issued by a regulated
intermediary such as the Options Clearing Corporation (OCC), which guarantees
the performance of the obligations of the parties to such options. The
discussion below uses the OCC as an example, but the discussion is also
applicable to other financial intermediaries.
With certain exceptions, OCC-issued and exchange-listed options generally
settle by physical delivery of the underlying security or currency, although
in the future cash settlement may become available. Index options and
Eurodollar instruments are cash settled for the net amount, if any, by which
the option is "in-the-money" (i.e., where the value of the underlying
instrument exceeds, in the case of a call option, or is less than, in the
case of a put option, the exercise price of the option) at the time the
option is exercised. Frequently, rather than taking or making delivery of the
underlying instrument through the process of exercising the option, listed
options are closed by entering into offsetting option transactions.
A fund's ability to close out its position as a purchaser or seller of an
OCC-issued or exchange-listed put or call option is dependent, in part, upon
the liquidity of the option market. Among the possible reasons for the
absence of a liquid option market on an exchange are: (i) insufficient
trading interest in certain options; (ii) restrictions on transactions
imposed by an exchange; (iii) trading halts, suspensions or other
restrictions imposed with respect to particular classes or series of options
or underlying securities, including reaching daily price limits; (iv)
interruption of the normal operations of the OCC or an exchange; (v)
inadequacy of the facilities of an exchange or OCC to handle current trading
volume; or (vi) a decision by one or more exchanges to discontinue the
trading of options (or a particular class or series of options), in which
event the relevant market for that option on that exchange would cease to
exist, although outstanding options on that exchange would generally continue
to be exercisable in accordance with their terms.
The hours of trading for listed options may not coincide with the hours
during which the underlying financial instruments are traded. To the extent
that the option markets close before the markets for the underlying financial
instruments, significant price and rate movements can take place in the
underlying markets that cannot be reflected in the option markets.
OTC options are purchased from or sold to Counterparties through a direct
bilateral agreement with the Counterparty. In contrast to exchange-listed
options, which generally have standardized terms and performance mechanics,
all the terms of an OTC option, including such terms as method of settlement,
term, exercise price, premium, guarantees and security, are negotiated by the
parties. A fund will only sell OTC options (other than OTC currency options)
that are subject to a buy-back provision permitting the fund to require the
Counterparty to sell the option back to the fund at a formula price within
seven days. The funds expect to enter into OTC options that have cash
settlement provisions, although they are not required to do so.
Unless the parties provide for it, there is no central clearing or guaranty
function in an OTC option. As a result, if the Counterparty fails to make or
take delivery of the security, currency or other instrument underlying an OTC
option it has entered into with a fund or fails to make a cash settlement
payment due in accordance with the option, the fund will lose any premium it
paid for the option as well as any anticipated benefit of the transaction.
Accordingly, the manager must assess the creditworthiness of each such
Counterparty or any guarantor or credit enhancement of the Counterparty's
credit to determine the likelihood that the terms of the OTC option will be
satisfied.
The funds will engage in OTC option transactions only with U.S. government
securities dealers recognized by the Federal Reserve Bank of New York as
"primary dealers" or broker-dealers, domestic or foreign banks or other
financial institutions which have received (or the guarantors of the
obligations of which have received) a short-term credit rating of "A-l" from
S&P or "P-l" from Moody's, an equivalent rating from any NRSRO or which the
manager determines is of comparable credit quality. The staff of the SEC
currently takes the position that OTC options purchased by a fund, and
portfolio securities "covering" the amount of the fund's obligation pursuant
to an OTC option sold by it (the cost of the sell-back plus the in-the-money
amount, if any) are illiquid, and are subject to the fund's limitations on
investments in illiquid securities.
If a fund sells a call option, the premium that it receives may serve as a
partial hedge, to the extent of the option premium, against a decrease in the
value of the underlying securities or instruments in its portfolio or will
increase the fund's income. The sale of put options can also provide income.
Each fund may purchase and sell call options on securities, including U.S.
Treasury and agency securities, mortgage-backed securities, corporate debt
securities, equity securities (including convertible securities) and
Eurodollar instruments that are traded on U.S. and foreign securities
exchanges and in the over-the-counter markets and on securities indices,
currencies and futures contracts. All calls sold by the funds must be
"covered" (i.e., the fund must own the securities or futures contract subject
to the call) or must meet the asset segregation requirements described below
as long as the call is outstanding. Even though a fund will receive the
option premium to help protect it against loss, a call sold by the fund
exposes the fund during the term of the option to possible loss of
opportunity to realize appreciation in the market price of the underlying
security or instrument and may require the fund to hold a security or
instrument which it might otherwise have sold.
Each fund may purchase and sell put options on securities, including U.S.
Treasury and agency securities, mortgage-backed securities, corporate debt
securities, equity securities (including convertible securities) and
Eurodollar instruments (whether or not it holds the above securities in its
portfolio) and on securities indices, currencies and futures contracts other
than futures on individual corporate debt and individual equity securities. A
fund will not sell put options if, as a result, more than 50% of the fund's
assets would be required to be segregated to cover its potential obligations
under such put options other than those with respect to futures and options
thereon. In selling put options, there is a risk that the fund may be
required to buy the underlying security at a disadvantageous price above the
market price.
OPTIONS ON SECURITIES INDICES AND OTHER FINANCIAL INDICES The funds may also
purchase and sell call and put options on securities indices and other
financial indices and in so doing can achieve many of the same objectives it
would achieve through the sale or purchase of options on individual
securities or other instruments. Options on securities indices and other
financial indices are similar to options on a security or other instrument
except that, instead of settling by physical delivery of the underlying
instrument, they settle by cash settlement, i.e., an option on an index gives
the holder the right to receive, upon exercise of the option, an amount of
cash if the closing level of the index upon which the option is based
exceeds, in the case of a call, or is less than, in the case of a put, the
exercise price of the option (except if, in the case of an OTC option,
physical delivery is specified). This amount of cash is equal to the excess
of the closing price of the index over the exercise price of the option,
which also may be multiplied by a formula value. The seller of the option is
obligated, in return for the premium received, to make delivery of this
amount. The gain or loss on an index depends on price movements in the
instruments making up the market, market segment, industry or other composite
on which the underlying index is based, rather than price movements in
individual securities, as is the case with respect to options on securities.
FUTURES The funds may enter into financial futures contracts or purchase or
sell put and call options on such futures as a hedge against anticipated
interest rate, currency or equity market changes, for duration management and
for risk management purposes. Futures are generally bought and sold on the
commodities exchanges where they are listed with payment of initial and
variation margin as described below. The sale of a futures contract creates a
firm obligation by a fund, as seller, to deliver to the buyer the specific
type of financial instrument called for in the contract at a specific future
time for a specified price (or, with respect to index futures and Eurodollar
instruments, the net cash amount). Options on futures contracts are similar
to options on securities, except that an option on a futures contract gives
the purchaser the right in return for the premium paid to assume a position
in a futures contract and obligates the seller to deliver such option.
The funds' use of financial futures and options on financial futures will be
consistent with applicable regulatory requirements and, in particular, the
rules of the Commodity Futures Trading Commission and such transactions will
be entered into only for bona fide hedging, risk management (including
duration management) or other portfolio management purposes. Typically,
maintaining a futures contract or selling an option on a futures contract,
requires a fund to deposit with a financial intermediary, as security for its
obligations, an amount of cash or other specified assets (initial margin)
which initially is typically 1% to 10% of the face amount of the contract
(but may be higher in some circumstances). Additional cash or assets
(variation margin) may be required to be deposited thereafter on a daily
basis as the mark-to-market value of the contract fluctuates. The purchase of
an option on financial futures involves payment of a premium for the option
without any further obligation on the part of the fund. If a fund exercises
an option on a futures contract, it will be obligated to post initial margin
(and potential subsequent variation margin) for the resulting futures
positions just as it would for any position. Futures contracts and options on
futures contracts are generally settled by entering into an offsetting
transaction, but there can be no assurance that the position can be offset
prior to settlement at an advantageous price nor that delivery will occur.
A fund will only enter into a futures contract or related option (except for
closing transactions) if, immediately thereafter, the sum of the amount of
its initial margin and premiums on open futures contracts and options thereon
would not exceed 5% of the fund's total current asset value; however, in the
case of an option that is in-the-money at the time of the purchase, the
in-the-money amount may be excluded in calculating the 5% limitation.
COMBINED TRANSACTIONS The funds may enter into multiple transactions,
including multiple options transactions, multiple futures transactions,
multiple currency transactions (including forward foreign currency exchange
contracts) and any combination of futures, options and currency transactions
(each individually a Transaction and collectively in combinations of two or
more, Combined Transactions), instead of a single Hedging Transaction, as
part of a single or combined strategy when, in the opinion of the manager, it
is in the best interests of the fund to do so. A Combined Transaction will
usually contain elements of risk that are present in each of its component
transactions.
USE OF SEGREGATED AND OTHER SPECIAL ACCOUNTS Many Hedging Transactions, in
addition to other requirements, require that the funds segregate liquid
assets with their custodian bank to the extent fund obligations are not
otherwise "covered" through ownership of the underlying security, financial
instrument or currency. In general, either the full amount of any obligation
by a fund to pay or deliver securities or assets must be covered at all times
by the securities, instruments or currency required to be delivered, or,
subject to any regulatory restrictions, an amount of cash or liquid
securities at least equal to the current amount of the obligation must be
segregated with the custodian bank. The segregated assets cannot be sold or
transferred unless equivalent assets are substituted in their place or it is
no longer necessary to segregate them. For example, a call option written by
a fund will require the fund to hold the securities subject to the call (or
securities convertible into the needed securities without additional
consideration) or to segregate liquid securities sufficient to purchase and
deliver the securities if the call is exercised. A call option sold by a fund
on an index will require the fund to own portfolio securities which correlate
with the index or to segregate liquid assets equal to the excess of the index
value over the exercise price on a current basis. A put option written by a
fund requires the fund to segregate liquid assets equal to the exercise price.
A currency contract which obligates a fund to buy or sell currency will
generally require the fund to hold an amount of the currency or liquid
securities denominated in that currency equal to the fund's obligations or to
segregate liquid assets equal to the amount of the fund's obligation.
However, the segregation requirement does not apply to currency contracts
which are entered in order to "lock in" the purchase or sale price of a trade
in a security denominated in a foreign currency pending settlement within the
time customary for such securities.
OTC options entered into by the funds, including those on securities,
currency, financial instruments or indices and OCC-issued and exchange-listed
index options will generally provide for cash settlement. As a result, when a
fund sells these instruments it will only segregate an amount of assets equal
to its accrued net obligations, as there is no requirement for payment or
delivery of amounts in excess of the net amount. These amounts will equal
100% of the exercise price in the case of a noncash settled put, the same as
an OCC guaranteed listed option sold by a fund, or the in-the-money amount
plus any sell-back formula amount in the case of a cash-settled put or call.
In addition, when a fund sells a call option on an index at a time when the
in-the-money amount exceeds the exercise price, the fund will segregate,
until the option expires or is closed out, cash or cash equivalents equal in
value to such excess. OCC-issued and exchange-listed options sold by the fund
other than those above generally settle with physical delivery, or with an
election of either physical delivery or cash settlement, and the fund will
segregate an amount of assets equal to the full value of the option. OTC
options settling with physical delivery, or with an election of either
physical delivery or cash settlement, will be treated the same as other
options settling with physical delivery.
In the case of a futures contract or an option thereon, a fund must deposit
initial margin and possible daily variation margin in addition to segregating
assets sufficient to meet its obligation to purchase or provide securities or
currencies, or to pay the amount owed at the expiration of an index-based
futures contract. Such assets may consist of cash, cash equivalents, liquid
debt or equity securities or other acceptable assets.
Hedging Transactions may be covered by other means when consistent with
applicable regulatory policies. The funds may also enter into offsetting
transactions so that a combined position, coupled with any segregated assets,
equals its net outstanding obligation in related options and Hedging
Transactions. For example, a fund could purchase a put option if the strike
price of that option is the same or higher than the strike price of a put
option sold by the fund. Moreover, instead of segregating assets if a fund
held a futures or forward contract, it could purchase a put option on the
same futures or forward contract with a strike price as high or higher than
the price of the contract held. Other Hedging Transactions may also be offset
in combinations. If the offsetting transaction terminates at the time of or
after the primary transaction, no segregation is required, but if it
terminates prior to such time, assets equal to any remaining obligation would
need to be segregated.
LOANS OF PORTFOLIO SECURITIES To generate additional income, each fund may
lend certain of its portfolio securities to qualified banks and
broker-dealers. These loans may not exceed 33 1/3% of the value of the fund's
total assets, measured at the time of the most recent loan, but no fund
presently anticipates loaning more than 5% of its portfolio securities. For
each loan, the borrower must maintain with the fund's custodian collateral
(consisting of any combination of cash, securities issued by the U.S.
government and its agencies and instrumentalities, or irrevocable letters of
credit) with a value at least equal to 100% of the current market value of
the loaned securities. The fund retains all or a portion of the interest
received on investment of the cash collateral or receives a fee from the
borrower. The fund also continues to receive any distributions paid on the
loaned securities. The fund may terminate a loan at any time and obtain the
return of the securities loaned within the normal settlement period for the
security involved.
Where voting rights with respect to the loaned securities pass with the
lending of the securities, the manager intends to call the loaned securities
to vote proxies, or to use other practicable and legally enforceable means to
obtain voting rights, when the manager has knowledge that, in its opinion, a
material event affecting the loaned securities will occur or the manager
otherwise believes it necessary to vote. As with other extensions of credit,
there are risks of delay in recovery or even loss of rights in collateral in
the event of default or insolvency of the borrower. The fund will loan its
securities only to parties who meet creditworthiness standards approved by
the fund's board of directors, i.e., banks or broker-dealers that the manager
has determined present no serious risk of becoming involved in bankruptcy
proceedings within the time frame contemplated by the loan.
BORROWING While the funds are permitted to borrow under certain
circumstances, as described in "Investment restrictions" below, under no
circumstances will a fund make additional investments while any amounts
borrowed exceed 5% of the fund's total assets.
SECURITIES OF COMPANIES IN THE FINANCIAL SERVICES INDUSTRY Certain provisions
of the federal securities laws permit investment portfolios, including
Financial Services, to invest in companies engaged in securities-related
activities only if certain conditions are met. Purchases of securities of a
company that derived 15% or less of gross revenues during its most recent
fiscal year from securities-related activities (i.e., broker, dealer,
underwriting, or investment advisory activities) are subject only to the same
percentage limitations as would apply to any other security a fund may
purchase.
Each fund, including Financial Services, may also purchase securities (not
limited to equity or debt individually) of an issuer that derived more than
15% of its gross revenues in its most recent fiscal year from
securities-related activities, if the following conditions are met: (1)
immediately after the purchase of any securities issuer's equity and debt
securities, the purchase cannot cause more than 5% of the fund's total assets
to be invested in securities of that securities issuer; (2) immediately after
a purchase of equity securities of a securities issuer, a fund may not own
more than 5% of the outstanding securities of that class of the securities
issuer's equity securities; and (3) immediately after a purchase of debt
securities of a securities issuer, a fund may not own more than 10% of the
outstanding principal amount of the securities issuer's debt securities.
In applying the gross revenue test, an issuer's gross revenues from its own
securities-related activities should be combined with its ratable share of
the securities-related activities of enterprises of which it owns a 20% or
greater voting or equity interest. All of the above percentage limitations
are applicable at the time of purchase as well as the issuer's gross revenue
test. With respect to warrants, rights, and convertible securities, a
determination of compliance with the above limitations must be made as though
such warrant, right, or conversion privilege had been exercised.
The following transactions would not be deemed to be an acquisition of
securities of a securities-related business: (i) receipt of stock dividends
on securities acquired in compliance with the conditions described above;
(ii) receipt of securities arising from a stock-for-stock split on securities
acquired in compliance with the conditions described above; (iii) exercise of
options, warrants, or rights acquired in compliance with the federal
securities laws; (iv) conversion of convertible securities acquired in
compliance with the conditions described above; (v) the acquisition of demand
features or guarantees (puts) under certain circumstances.
The funds also are not permitted to acquire any security issued by the
manager or any affiliated company (including Franklin Resources) that is a
securities-related business. The purchase of a general partnership interest
in a securities-related business is also prohibited.
In addition, the funds are generally prohibited from purchasing or otherwise
acquiring any security (not limited to equity or debt individually) issued by
any insurance company if such fund and any company controlled by such fund
own in the aggregate or, as a result of the purchase, will own in the
aggregate more than 10% of the total outstanding voting stock of the
insurance company. Certain state insurance laws impose similar limitations.
INVESTMENT RESTRICTIONS Each fund has adopted the following restrictions as
fundamental policies. This means they may only be changed if the change is
approved by (i) more than 50% of the fund's outstanding shares or (ii) 67% or
more of the fund's shares present at a shareholder meeting if more than 50%
of the fund's outstanding shares are represented at the meeting in person or
by proxy, whichever is less.
Each fund may not:
1. Purchase or sell commodities, commodity contracts (except in conformity
with regulations of the Commodities Futures Trading Commission such that the
series would not be considered a commodity pool), or oil and gas interests or
real estate. Securities or other instruments backed by commodities are not
considered commodities or commodity contracts for purposes of this
restriction. Debt or equity securities issued by companies engaged in the
oil, gas, or real estate businesses are not considered oil or gas interests
or real estate for purposes of this restriction. First mortgage loans and
other direct obligations secured by real estate are not considered real
estate for purposes of this restriction.
2. Make loans, except to the extent the purchase of debt obligations of any
type are considered loans and except that the series may lend portfolio
securities to qualified institutional investors in compliance with
requirements established from time to time by the SEC and the securities
exchanges on which such securities are traded.
3. Issue securities senior to its stock or borrow money
or utilize leverage in excess of the maximum permitted by the 1940 Act, which
is currently 331/3% of total assets (including 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 fund 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 fund would own more than 10% of the outstanding voting
securities of such issuer, except that up to 25% of the value of such fund's
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.
The term Prospectus as referenced in restriction 7 includes the Statement of
Additional Information.
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 trying to
maximize the return to shareholders.
Generally, the policies and restrictions discussed in this SAI and in the
prospectus apply when the 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.
If a percentage restriction or limitation 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 will not be considered a violation of the
restriction or limitation.
RISKS
The value of your shares will increase as the value of the securities owned
by the fund increases and will decrease as the value of the fund's
investments decreases. In this way, you participate in any change in the
value of the securities owned by the fund. In addition to the factors that
affect the value of any particular security that the fund owns, the value of
fund shares may also change with movements in the stock market as a whole.
MEDIUM AND LOWER RATED CORPORATE DEBT SECURITIES The funds have historically
invested in securities of distressed issuers when the intrinsic values of
such securities have, in the opinion of the manager, warranted such
investment. The funds may invest in securities that are rated in the medium
to lowest rating categories by S&P and Moody's, some of which may be
so-called "junk bonds." Corporate debt securities rated Baa are regarded by
Moody's as being neither highly protected nor poorly secured. Interest
payments and principal security appears adequate to Moody's for the present,
but certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such securities are regarded by
Moody's as lacking outstanding investment characteristics and having
speculative characteristics. Corporate debt securities rated BBB are regarded
by S&P as having adequate capacity to pay interest and repay principal. Such
securities are regarded by S&P as normally exhibiting adequate protection
parameters, although adverse economic conditions or changing circumstances
are more likely to lead to a weakened capacity to pay interest and repay
principal for securities in this rating category than in higher rated
categories. Companies issuing lower rated higher yielding debt securities are
not as strong financially as those with higher credit ratings. These
companies are more likely to encounter financial difficulties and are more
vulnerable to changes in the economy, such as a recession or a sustained
period of rising interest rates, that could prevent them from making interest
and principal payments. If an issuer is not paying or stops paying interest
and/or principal on its securities, payments on the securities may never
resume. These securities may be worthless and the fund could lose its entire
investment.
Corporate debt securities which are rated B are regarded by Moody's as
generally lacking characteristics of the desirable investment. In Moody's
view, assurance of interest and principal payments or of maintenance of other
terms of the security over any long period of time may be small. Corporate
debt securities rated BB, B, CCC, CC and C are regarded by S&P on balance as
predominantly speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligation. In S&P's view,
although such securities likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions. BB and B are regarded by S&P as indicating
the two lowest degrees of speculation in this group of ratings. Securities
rated D by S&P or C by Moody's are in default and are not currently
performing. The funds will also invest in unrated securities. The funds will
rely on the manager's judgment, analysis and experience in evaluating such
debt securities. In this evaluation, the manager will take into
consideration, among other things, the issuer's financial resources, its
sensitivity to economic conditions and trends, its operating history, the
quality of the issuer's management and regulatory matters as well as the
price of the security. The manager may also consider, although it does not
rely primarily on, the credit ratings of Moody's and S&P in evaluating lower
rated corporate debt securities. Such ratings evaluate only the safety of
principal and interest payments, not market value risk. Additionally, because
the creditworthiness of an issuer may change more rapidly than is able to be
timely reflected in changes in credit ratings, the manager monitors the
issuers of corporate debt securities held in the funds' portfolios. The
credit rating assigned to a security is a factor considered by the manager in
selecting a security for a fund, but the intrinsic value in light of market
conditions and the manager's analysis of the fundamental values underlying
the issuer are of at least equal significance. Because of the nature of
medium and lower rated corporate debt securities, achievement by each fund of
its investment objective when investing in such securities is dependent on
the credit analysis of the manager. If the funds purchased primarily higher
rated debt securities, such risks would be substantially reduced.
A general economic downturn or a significant increase in interest rates could
severely disrupt the market for medium and lower grade corporate debt
securities and adversely affect the market value of such securities.
Securities in default are relatively unaffected by such events or by changes
in prevailing interest rates. In addition, in such circumstances, the ability
of issuers of medium and lower grade corporate debt securities to repay
principal and to pay interest, to meet projected business goals and to obtain
additional financing may be adversely affected. Such consequences could lead
to an increased incidence of default for such securities and adversely affect
the value of the corporate debt securities in the fund's portfolio. The
secondary market prices of medium and lower grade corporate debt securities
are less sensitive to changes in interest rates than are higher rated debt
securities, but are more sensitive to adverse economic changes or individual
corporate developments. Adverse publicity and investor perceptions, whether
or not based on rational analysis, may also affect the value and liquidity of
medium and lower grade corporate debt securities, although such factors also
present investment opportunities when prices fall below intrinsic values.
Yields on debt securities in a fund's portfolio that are interest rate
sensitive can be expected to fluctuate over time. In addition, periods of
economic uncertainty and changes in interest rates can be expected to result
in increased volatility of market price of any medium to lower grade
corporate debt securities in a fund's portfolio and thus could have an effect
on the net asset value of the fund if other types of securities did not show
offsetting changes in values. The prices of high yield debt securities
fluctuate more than higher-quality securities. Prices are often closely
linked with the company's stock prices and typically rise and fall in
response to factors that affect stock prices. In addition, the entire high
yield securities market can experience sudden and sharp price swings due to
changes in economic conditions, stock market activity, large sustained sales
by major investors, a high-profile default, or other factors. High yield
securities are also generally less liquid than higher-quality bonds. Many of
these securities do not trade frequently, and when they do trade their prices
may be significantly higher or lower than expected. At times, it may be
difficult to sell these securities promptly at an acceptable price, which may
limit the fund's ability to sell securities in response to specific economic
events or to meet redemption requests. The secondary market value of
corporate debt securities structured as zero coupon securities or payment in
kind securities may be more volatile in response to changes in interest rates
than debt securities which pay interest periodically in cash. Because such
securities do not pay current interest, but rather, income is accreted, to
the extent that a fund does not have available cash to meet distribution
requirements with respect to such income, it could be required to dispose of
portfolio securities that it otherwise would not. Such disposition could be
at a disadvantageous price. Failure to satisfy distribution requirements
could result in a fund failing to qualify as a pass-through entity under the
Internal Revenue Code of 1986, as amended (Code). Investment in such
securities also involves certain other tax considerations.
The manager values the funds' investments pursuant to guidelines adopted and
periodically reviewed by the board. To the extent that there is no
established retail market for some of the medium or lower grade or unrated
corporate debt securities in which the funds may invest, there may be thin or
no trading in such securities and the ability of the manager to accurately
value such securities may be adversely affected. Further, it may be more
difficult for a fund to sell such securities in a timely manner and at their
stated value than would be the case for securities for which an established
retail market did exist. The effects of adverse publicity and investor
perceptions may be more pronounced for securities for which no established
retail market exists as compared with the effects on securities for which
such a market does exist. During periods of reduced market liquidity and in
the absence of readily available market quotations for medium and lower grade
and unrated corporate debt securities held in a fund's portfolio, the
responsibility of the manager to value the fund's securities becomes more
difficult and the manager's judgment may play a greater role in the valuation
of the fund's securities due to a reduced availability of reliable objective
data. To the extent that a fund purchases illiquid corporate debt securities
or securities which are restricted as to resale, the fund may incur
additional risks and costs. Illiquid and restricted securities may be
particularly difficult to value and their disposition may require greater
effort and expense than more liquid securities. Also, a fund may incur costs
in connection with the registration of restricted securities in order to
dispose of such securities, although under Rule 144A of the Securities Act of
1933 certain securities may be determined to be liquid pursuant to procedures
adopted by the board under applicable guidelines.
NON-U.S. SECURITIES Investments in securities of non-U.S. issuers involve
certain risks not ordinarily associated with investments in securities of
U.S. issuers. Such risks include: fluctuations in the value of the currency
in which the security is traded or quoted as compared to the U.S. dollar;
unpredictable political, social and economic developments in the foreign
country where the security is issued or where the issuer of the security is
located; and the possible imposition by a foreign government of limits on the
ability of a fund to obtain a foreign currency or to convert a foreign
currency into U.S. dollars; or the imposition of other foreign laws or
restrictions. Since each fund may invest in securities issued, traded or
quoted in currencies other than the U.S. dollar, changes in foreign currency
exchange rates will affect the value of securities in a fund's portfolio. The
manager generally attempts to reduce such risk, known as "currency risk," by
using Hedging Transactions. In addition, in certain countries, the
possibility of expropriation of assets, confiscatory taxation, or diplomatic
developments could adversely affect investments in those countries.
Expropriation of assets refers to the possibility that a country's laws will
prohibit the return to the U.S. of any monies which a fund has invested in
the country. Confiscatory taxation refers to the possibility that a foreign
country will adopt a tax law which has the effect of requiring the fund to
pay significant amounts, if not all, of the value of the fund's investment to
the foreign country's taxing authority. Diplomatic developments means that
because of certain actions occurring within a foreign country, such as
significant civil rights violations or because of the United States' actions
during a time of crisis in the particular country, all communications and
other official governmental relations between the country and the United
States could be severed. This could result in the abandonment of any U.S.
investors', such as the funds', money in the particular country, with no
ability to have the money returned to the United States.
There may be less publicly available information about a foreign company than
about a U.S. company. Foreign issuers may not be subject to accounting,
auditing and financial reporting standards and requirements comparable to, or
as uniform as, those of U.S. issuers. The number of securities traded, and
the frequency of such trading, in non-U.S. securities markets, while growing
in volume, is for the most part, substantially less than in U.S. markets. As
a result, securities of many foreign issuers are less liquid and their prices
more volatile than securities of comparable U.S. issuers. Transaction costs,
the costs associated with buying and selling securities, on non-U.S.
securities markets are generally higher than in the U.S. There is generally
less government supervision and regulation of exchanges, brokers and issuers
than there is in the U.S. Each fund's foreign investments may include both
voting and non-voting securities, sovereign debt and participations in
foreign government deals. The funds may have greater difficulty taking
appropriate legal action with respect to foreign investments in non-U.S.
courts than with respect to domestic issuers in U.S. courts.
DEPOSITARY RECEIPTS Receipts of non-U.S. issuers may have certain risks,
including trading for a lower price, having less liquidity than their
underlying securities and risks relating to the issuing bank or trust
company. Holders of unsponsored depositary receipts have a greater risk that
receipt of corporate information and proxy disclosure will be untimely,
information may be incomplete and costs may be higher.
144A SECURITIES Due to changing markets or other factors, 144A securities may
be subject to a greater possibility of becoming illiquid than securities
which have been registered with the SEC for sale.
SHORT SALES Short sales carry risks of loss if the price of the security sold
short increases after the sale. In this situation, when a fund replaces the
borrowed security by buying the security in the securities markets, the fund
may pay more for the security than it has received from the purchaser in the
short sale. A fund may, however, profit from a change in the value of the
security sold short, if the price decreases.
DISTRESSED MORTGAGE OBLIGATIONS Unlike mortgage-backed securities, which
generally represent an interest in a pool of loans backed by real estate,
investing in direct mortgage obligations involves the risks of a lender.
These risks include the ability or inability of a borrower to make its loan
payments and the possibility that the borrower will prepay the loan in
advance of its scheduled payment time period, curtailing an expected rate and
timing of return for the lender. Investments in direct mortgage obligations
of distressed borrowers involve substantially greater risks and are highly
speculative due to the fact that the borrower's ability to make timely
payments has been identified as questionable. Borrowers that are in
bankruptcy or restructuring may never pay off their loans, or may pay only a
small fraction of the amount owed. If, because of a lack of payment, the real
estate underlying the loan is foreclosed, which means that the borrower takes
possession of the real estate, a fund could become part owner of such real
estate. As an owner, a fund would bear any costs associated with owning and
disposing of the real estate, and also may encounter difficulties in
disposing of the real estate in a timely fashion. In addition, there is no
assurance that a fund would be able profitably to dispose of properties in
foreclosure.
REAL ESTATE-RELATED INVESTMENTS The funds' investments in real estate-related
securities are subject to certain risks related to the real estate industry
in general. These risks include, among others: changes in general and local
economic conditions; possible declines in the value of real estate; the
possible lack of availability of money for loans to purchase real estate;
overbuilding in particular areas; prolonged vacancies in rental properties;
property taxes; changes in laws related to the use of real estate in certain
areas; costs resulting from the clean-up of, and liability to third parties
resulting from, environmental problems; the costs associated with damage to
real estate resulting from floods, earthquakes or other material disasters
not covered by insurance; and limitations on, and variations in, rents and
changes in interest rates.
INVESTMENT COMPANY SECURITIES Investors should recognize that a fund's
purchase of the securities of investment companies results in layering of
expenses. This layering may occur because investors in any investment
company, such as a fund, indirectly bear a proportionate share of the
expenses of the investment company, including operating costs, and investment
advisory and administrative fees.
REPURCHASE AGREEMENTS AND LOANS OF SECURITIES Repurchase agreements and loans
of portfolio securities involve some credit risk to the funds. If the other
party defaults on its obligations, a fund could be delayed or prevented from
receiving payment or recovering its collateral. Even if the fund recovers the
collateral in such a situation, the fund may receive less than its purchase
price upon resale.
HEDGING TRANSACTIONS Hedging Transactions, whether entered into as a hedge or
for gain, have risks associated with them. The three most significant risks
associated with Hedging Transactions are: (i) possible default by the other
party to the transaction; (ii) illiquidity; and (iii) to the extent the
manager's view as to certain market movements is incorrect, the risk that the
use of such Hedging Transactions could result in losses greater than if they
had not been used. Use of put and call options may (i) result in losses to a
fund, (ii) force the purchase or sale of portfolio securities at inopportune
times or for prices higher than or lower than current market values, (iii)
limit the amount of appreciation the fund can realize on its investments,
(iv) increase the cost of holding a security and reduce the returns on
securities or (v) cause a fund to hold a security it might otherwise sell.
Although the use of futures and options transactions for hedging should tend
to minimize the risk of loss due to a decline in the value of the hedged
position, these transactions also tend to limit any potential gain which
might result from an increase in value of the position taken. As compared to
options contracts, futures contracts create greater ongoing potential
financial risks to a fund because the fund is required to make ongoing
monetary deposits with futures brokers. Losses resulting from the use of
Hedging Transactions can reduce net asset value, and possibly income, and
such losses can be greater than if the Hedging Transactions had not been
utilized. The cost of entering into Hedging Transactions may also reduce a
fund's total return to investors.
RISKS OF HEDGING TRANSACTIONS OUTSIDE THE U.S. When conducted outside the
U.S., Hedging Transactions may not be regulated as rigorously as in the U.S.,
may not involve a clearing mechanism and related guarantees, and are subject
to the risk of governmental actions affecting trading in, or the prices of,
foreign securities, currencies and other instruments. The value of such
positions also could be adversely affected by: (i) other complex foreign
political, legal and economic factors, (ii) lesser availability than in the
U.S. of data on which to make trading decisions, (iii) delays in a fund's
ability to act upon economic events occurring in foreign markets during
nonbusiness hours in the U.S., (iv) the imposition of different exercise and
settlement terms and procedures and margin requirements than in the U.S., and
(v) lower trading volume and liquidity.
CURRENCY TRANSACTIONS Currency transactions are subject to risks different
from those of other portfolio transactions. Currency transactions can result
in losses to a fund if the currency being hedged fluctuates in value to a
degree, or in a direction, that is not anticipated. Further, there is the
risk that the perceived linkage between various currencies may not be present
during the particular time that the fund is engaging in proxy hedging. If a
fund enters into a currency Hedging Transaction, the fund will comply with
the asset segregation requirements described above.
Because currency control is of great importance to the issuing governments
and influences economic planning and policy, purchases and sales of currency
and related instruments can be negatively affected by government exchange
controls, blockages, and manipulations or exchange restrictions imposed by
governments. These can result in losses to a fund if it is unable to deliver
or receive a specified currency or funds in settlement of obligations and
could also cause hedges it has entered into to be rendered useless, resulting
in full currency exposure as well as incurring transaction costs.
The use of currency transactions can also result in a fund incurring losses
due to the inability of foreign securities transactions to be completed with
the security being delivered to the fund. Buyers and sellers of currency
futures are subject to the same risks that apply to the use of futures
generally. Further, settlement of a currency futures contract for the
purchase of most currencies must occur at a bank based in the issuing nation.
Trading options on currency futures is relatively new, and the ability to
establish and close out positions on such options is subject to the
maintenance of a liquid market which may not always be available. Currency
exchange rates may fluctuate based on factors extrinsic to that country's
economy.
EURO. On January 1, 1999, the European Economic and Monetary Union (EMU)
introduced a new single currency called the euro. By July 1, 2002, the euro,
which will be implemented in stages, will have replaced the national
currencies of the following member countries: Austria, Belgium, Finland,
France, Germany, Ireland, Italy, Luxembourg, the Netherlands, Portugal and
Spain.
Currently, the exchange rate of the currencies of each of these countries is
fixed to the euro. The euro trades on currency exchanges and is available for
non-cash transactions. The participating countries currently issue sovereign
debt exclusively in euro. By July 1, 2002, euro-denominated bills and coins
will replace the bills and coins of the above countries.
The new European Central Bank has control over each country's monetary
policies. Therefore, the participating countries no longer control their own
monetary policies by directing independent interest rates for their
currencies. The national governments of the participating countries, however,
have retained the authority to set tax and spending policies and public debt
levels.
The change to the euro as a single currency is new and untested. It is not
possible to predict the impact of the euro on currency values or on the
business or financial condition of European countries and issuers, and
issuers in other regions, whose securities the fund may hold, or the impact,
if any, on fund performance. In the first six months of the euro's existence,
the exchange rates of the euro versus many of the world's major currencies
steadily declined. In this environment, U.S. and other foreign investors
experienced erosion of their investment returns on their euro-denominated
securities. The transition and the elimination of currency risk among EMU
countries may change the economic environment and behavior of investors,
particularly in European markets.
While the implementation of the euro could have a negative effect on the
fund, the fund's manager and its affiliated service providers are taking
steps they believe are reasonably designed to address the euro issue.
COMBINED TRANSACTIONS Although Combined Transactions are normally entered
into based on the manager's judgment that the combined strategies will reduce
risk or otherwise more effectively achieve the desired portfolio management
goal, it is possible that the combination will instead increase such risks or
hinder achievement of the portfolio management objective.
SMALLER COMPANIES The funds may invest in securities issued by smaller
companies. Historically, smaller companies have been more volatile in price
than larger company securities, especially over the short term. Among the
reasons for the greater price volatility are the less certain growth
prospects of smaller companies, the lower degree of liquidity in the markets
for such securities, and the greater sensitivity of smaller companies to
changing economic conditions.
In addition, smaller companies may lack depth of management, they may be
unable to generate funds necessary for growth or development, or they may be
developing or marketing new products or services for which markets are not
yet established and may never become established.
PORTFOLIO TURNOVER Financial Services commenced operations on 8/19/97. The
portfolio turnover rate for Financial Services for the fund's initial fiscal
period ended 12/31/97 was 42.26%, while the portfolio turnover rate for the
fund's fiscal year ended 12/31/98 was 136.67%. This variation in portfolio
turnover rates for 1997 and 1998 is primarily due to the fund's partial
period of portfolio trading activity in 1997. Generally, the higher a fund's
portfolio turnover rate the higher the transaction costs and brokerage
expenses. This may also generate a higher level of capital gains.
OFFICERS AND DIRECTORS
- ------------------------------------------------------------------------------
Mutual Series has a board of directors. The board is responsible for the
overall management of the funds, including general supervision and review of
each fund's investment activities. The board, in turn, elects the officers of
Mutual Series who are responsible for administering each fund's day-to-day
operations. The board also monitors each fund to ensure no material conflicts
exist among share classes. While none is expected, the board will act
appropriately to resolve any material conflict that may arise.
The name, age and address of the officers and board members, as well as their
affiliations, positions held with the Mutual Series, and principal
occupations during the past five years are shown below.
Edward I. Altman, Ph.D. (58)
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 (42)
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. (77)
One Progress Plaza, Suite 290, 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 20 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 (44)
51 John F. Kennedy Pkwy., Short Hills, NJ 07078-2702
PRESIDENT AND DIRECTOR
President and Chief Executive Officer, Franklin Mutual Advisers, LLC;
Director, Sunbeam Corporation (durable products); Manager (Director), MWCR,
L.L.C.; and FORMERLY, Director, Lancer Industries, Inc. (industrial holding
company), Manager (Director), MB Motori, L.L.C. and employee, Heine
Securities Corporation (1986-1996).
*William J. Lippman (75)
One Parker Plaza, 9th Floor, Fort Lee, NJ 07024
DIRECTOR
Senior Vice President, Franklin Resources, Inc. and Franklin Management,
Inc.; President, Franklin Advisory Services, LLC; and officer and/or director
or trustee, as the case may be, of six of the investment companies in the
Franklin Templeton Group of Funds.
Bruce A. MacPherson (70)
1 Pequot Way, Canton, MA 02021
DIRECTOR
Chairman, A.A. MacPherson, Inc. Boston, MA (representative for electrical
manufacturers).
Fred R. Millsaps (71)
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 20
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 (48)
51 John F. Kennedy Pkwy., Short Hills, NJ 07078-2702
CHAIRMAN OF THE BOARD AND DIRECTOR
Chairman, Franklin Mutual Advisers, LLC; Director, Canary Wharf Group, PLC
(real estate development); and FORMERLY, President, Chief Executive Officer
and Director, Heine Securities Corporation (1987-1996) and Director,
Compliance Solutions, Inc. (developer of compliance monitoring software for
money managers) (until 1999) and Clearwater Securities, Inc. (securities
dealer) (until 1997).
Charles Rubens II (70)
18 Park Road, Scarsdale, NY 10583-2112
DIRECTOR
Private investor; and trustee or director, as the case may be, of three of
the investment companies in the Franklin Templeton Group of Funds.
Leonard Rubin (74)
2460 Lemoine Ave., 3rd Floor, Fort Lee, NJ 07024
DIRECTOR
Partner in LDR Equities, LLC (manages various personal investments); Vice
President, Trimtex Co., Inc. (manufactures and markets specialty fabrics);
director or trustee, as the case may be, of three of the investment companies
in the Franklin Templeton Group of Funds; and FORMERLY, Chairman of the
Board, Carolace Embroidery Co., Inc. (until 1996) and President, F.N.C.
Textiles, Inc.
Vaughn R. Sturtevant, M.D. (76)
6 Noyes Avenue, Waterville, ME 04901
DIRECTOR
Practicing physician.
Robert E. Wade (54)
225 Hardwick Street, Belvidere, NJ 07823
DIRECTOR
Practicing attorney.
Jeffrey A. Altman (33)
51 John F. Kennedy Pkwy., Short Hills, NJ 07078-2702
VICE PRESIDENT
Senior Vice President, Franklin Mutual Advisers, LLC; Manager (Director), MB
Metropolis, L.L.C. and MWCR, L.L.C.; Director, Capital Trust (real estate
financial services) and Fine Host Corporation (food and beverage services);
and FORMERLY, employee, Heine Securities Corporation (1988-1996), Manager
(Director), MB Motori, L.L.C. and Trustee, Resurgence Properties, Inc. (real
estate investment).
James R. Baio (46)
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 20 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 (40)
51 John F. Kennedy Pkwy., Short Hills, NJ 07078-2702
VICE PRESIDENT
Senior Vice President, Franklin Mutual Advisers, LLC; and FORMERLY, employee,
Heine Securities Corporation (1988-1996).
Raymond Garea (50)
51 John F. Kennedy Pkwy., Short Hills, NJ 07078-2702
VICE PRESIDENT
Senior Vice President, Franklin Mutual Advisers, LLC; Manager (Director), MB
Metropolis, L.L.C.; and FORMERLY, employee, Heine Securities Corporation
(1991-1996) and Vice President and Analyst, Donaldson, Lufkin & Jenrette.
Deborah R. Gatzek (51)
1840 Gateway Drive, San Mateo, CA 94404
SECRETARY
Partner, Stradley, Ronon, Stevens & Young, LLP; officer of 34 of the
investment companies in the Franklin Templeton Group of Funds; and FORMERLY,
Senior Vice President and General Counsel, Franklin Resources, Inc., Senior
Vice President, Franklin Templeton Services, Inc. and Franklin Templeton
Distributors, Inc., Executive Vice President, Franklin Advisers, Inc., Vice
President, Franklin Advisory Services, LLC and Franklin Mutual Advisers, LLC,
and Vice President, Chief Legal Officer and Chief Operating Officer, Franklin
Investment Advisory Services, Inc. (until January 2000).
David Goss (52)
777 Mariners Island Blvd., San Mateo, CA 94404
VICE PRESIDENT
President, Chief Executive Officer and Director, Franklin Select Realty
Trust, Property Resources, Inc., Property Resources Equity Trust, Franklin
Real Estate Management, Inc. and Franklin Properties, Inc.; officer and
director of some of the other subsidiaries of Franklin Resources, Inc.;
officer of 53 of the investment companies in the Franklin Templeton Group of
Funds; and FORMERLY, President, Chief Executive Officer and Director,
Franklin Real Estate Income Fund and Franklin Advantage Real Estate Income
Fund (until 1996).
Barbara J. Green (52)
777 Mariners Island Blvd., San Mateo, CA 94404
VICE PRESIDENT
Vice President and Deputy General Counsel, Franklin Resources, Inc.; Senior
Vice President, Templeton Worldwide, Inc. and Templeton Global Investors,
Inc.; officer of some of the other subsidiaries of Franklin Resources, Inc.
and of 53 of the investment companies in the Franklin Templeton Group of
Funds; and FORMERLY, Deputy Director, Division of Investment Management,
Executive Assistant and Senior Advisor to the Chairman, Counselor to the
Chairman, Special Counsel and Attorney Fellow, U.S. Securities and Exchange
Commission (1986- 1995), Attorney, Rogers & Wells, and Judicial Clerk, U.S.
District Court (District of Massachusetts).
Murray L. Simpson (62)
777 Mariners Island Blvd., San Mateo, CA 94404
VICE PRESIDENT
Executive Vice President and General Counsel, Franklin Resources, Inc.;
officer and/or director of some of the subsidiaries of Franklin Resources,
Inc.; officer of 53 of the investment companies in the Franklin Templeton
Group of Funds; and FORMERLY, Chief Executive Officer and Managing Director,
Templeton Franklin Investment Services (Asia) Limited (until January 2000)
and Director, Templeton Asset Management Ltd. (until 1999).
Lawrence N. Sondike (42)
51 John F. Kennedy Pkwy., Short Hills, NJ 07078-2702
VICE PRESIDENT
Senior Vice President, Franklin Mutual Advisers, LLC; and FORMERLY, employee,
Heine Securities Corporation (1984-1996).
David J. Winters (38)
51 John F. Kennedy Pkwy., Short Hills, NJ 07078-2702
VICE PRESIDENT
Senior Vice President, Franklin Mutual Advisers, LLC; and FORMERLY, employee,
Heine Securities Corporation (1988-1996).
*This board member is considered an "interested person" under federal
securities laws.
The noninterested board members have standing audit, pension, nominating and
directors' compensation and performance committees. The audit committee is
composed of Ms. Grant and Messrs. E. Altman and Wade. The pension committee
is composed of Messrs. E Altman and Sturtevant. The nominating committee is
responsible for nominating candidates for noninterested board member
positions and is composed of Messrs. MacPherson and Rubin. The board members'
compensation and performance committee is composed of Ms. Grant and Messrs.
Wade and Sturtevant.
Mutual Series pays noninterested board members $45,000 per year plus $2,000
per board or audit committee meeting attended. The chairman of the audit
committee is paid a retainer of $9,000 and each audit committee member is
paid a retainer of $4,000. In 1993, the board approved a retirement plan that
generally provides payments to directors who have served seven years and
retire at age 70. At the time of retirement, board members are entitled to
annual payments equal to one-half of the retainer in effect at the time of
retirement.
Noninterested board members also may 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 fees payable to certain noninterested
board members by the funds are subject to reductions resulting from fee caps
limiting the amount of fees payable to board members who serve on other
boards within the Franklin Templeton Group of Funds. The following table
provides the total fees paid to noninterested board members by Mutual Series
and by the Franklin Templeton Group of Funds.
<TABLE>
<CAPTION>
TOTAL FEES NUMBER OF BOARDS
ESTIMATED RECEIVED FROM IN THE FRANKLIN
TOTAL FEES PENSION ANNUAL THE FRANKLIN TEMPLETON GROUP
RECEIVED FROM RETIREMENT BENEFITS UPON TEMPLETON GROUP OF FUNDS ON WHICH
NAME MUTUAL SERIES 1 ACCRUED RETIREMENT OF FUNDS 2 EACH SERVES 3
<S> <C> <C> <C> <C> <C>
Edward I. Altman Ph.D $73,000 0 $22,500 $ 73,000 1
Ann Torre Grant 4 73,000 0 22,500 73,000 1
Bruce A. MacPherson 55,000 0 22,500 55,000 1
Vaughn R. Sturtevant, M.D. 57,000 0 22,500 57,000 1
Robert E. Wade 4 83,000 0 22,500 83,000 1
Andrew H. Hines, Jr. 57,000 0 0 203,700 20
Fred R. Millsaps 55,000 0 0 201,700 20
Leonard Rubin 57,000 0 0 88,950 3
Charles Rubens II 57,000 0 0 88,950 3
</TABLE>
1. For the fiscal year ended December 31, 1999.
2. For the calendar year ended December 31, 1999.
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 53 registered investment companies, with
approximately 155 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
fund or other funds in the Franklin Templeton Group of Funds. Certain
officers or board members who are shareholders of Franklin Resources, Inc.
may be deemed to receive indirect remuneration by virtue of their
participation, if any, in the fees paid to its subsidiaries.
MANAGEMENT AND OTHER SERVICES
- ------------------------------------------------------------------------------
MANAGER AND SERVICES PROVIDED The funds' manager is Franklin Mutual Advisers,
LLC (Franklin Mutual). The manager is an indirect, wholly owned subsidiary of
Franklin Resources, Inc. (Resources), a publicly owned company engaged in the
financial services industry through its subsidiaries. Charles B. Johnson and
Rupert H. Johnson, Jr. are the principal shareholders of Resources.
The manager provides investment research and portfolio management services,
and selects the securities for the funds to buy, hold or sell. The manager
also selects the brokers who execute the funds' portfolio transactions. The
manager provides periodic reports to the board, which reviews and supervises
the manager's investment activities. To protect the funds, the manager and
its officers, directors and employees are covered by fidelity insurance.
The manager and its affiliates manage numerous other investment companies and
accounts. The manager may give advice and take action with respect to any of
the other funds it manages, or for its own account, that may differ from
action taken by the manager on behalf of the funds. Similarly, with respect
to the funds, the manager is not obligated to recommend, buy or sell, or to
refrain from recommending, buying or selling any security that the manager
and access persons, as defined by applicable federal securities laws, may buy
or sell for its or their own account or for the accounts of any other fund.
The manager is not obligated to refrain from investing in securities held by
the funds or other funds it manages.
The funds, their manager and principal underwriter have each adopted a code
of ethics, as required by federal securities laws. Under the code of ethics,
employees who are designated as access persons may engage in personal
securities transactions, including transactions involving securities that are
being considered for the funds or that are currently held by the funds,
subject to certain general restrictions and procedures. The personal
securities transactions of access persons of the funds, their manager and
principal underwriter will be governed by the code of ethics. The code of
ethics is on file with, and available from, the U.S. Securities and Exchange
Commission (SEC).
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 ($)
------------------------
1999 1998 1997
- --------------------------------------------------------------------------
Beacon 26,591,839 37,649,906 34,477,321
Financial Services 2,544,152 3,306,470 92,762 1
Qualified 23,163,858 32,920,555 29,584,910
Mutual Shares 45,767,107 55,767,932 46,093,507
Discovery 24,797,713 39,735,851 32,685,124
European 5,229,271 6,843,216 5,167,675
1. For the period August 19, 1997 through December 31, 1997.
Under an agreement by the manager to limit its fees, the funds paid the
management fees shown above. For the three fiscal years ended December 31,
management fees, before any advance waiver, totaled:
MANAGEMENT FEES BEFORE WAIVER ($)
1999 1998 1997
- --------------------------------------------------------------------------
Beacon 28,621,462 39,589,767 36,299,616
Financial Services 2,719,136 3,742,268 419,994 1
Qualified 25,229,854 34,762,293 31,224,924
Mutual Shares 49,291,464 59,068,503 48,600,626
Discovery 26,653,620 41,019,712 33,584,048
European 5,510,782 6,843,216 5,372,334
1. For the period August 19, 1997 through December 31, 1997.
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 each 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 $1.2 billion.
During the last three fiscal years ended December 31, the funds paid FT
Services the following administration fees:
ADMINISTRATION FEES PAID ($)
1999 1998 1997
- ---------------------------------------------------------------------------
Beacon 3,777,848 5,104,507 4,766,476
Financial Services 263,232 375,860 54,548 1
Qualified 3,327,090 4,364,662 4,236,166
Mutual Shares 6,378,121 7,599,879 6,284,881
Discovery 2,787,533 3,941,429 3,350,745
European 531,497 652,219 716,013
1. 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 777 Mariners Island Blvd., San Mateo, CA 94404. Please
send all correspondence to Investor Services to P.O. Box 997151, Sacramento,
CA 95899-9983.
For its services, Investor Services receives a fixed fee per account. The
funds also will reimburse Investor Services for certain out-of-pocket
expenses, which may include payments by Investor Services to entities,
including affiliated entities, that provide sub-shareholder services,
recordkeeping and/or transfer agency services to beneficial owners of the
fund. The amount of reimbursements for these services per benefit plan
participant fund account per year will not exceed the per account fee payable
by the fund 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 Mutual Series' Annual Report to Shareholders
and reviews Mutual Series' registration statement filed with the 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 to
obtain additional research services allows the manager to supplement its own
research and analysis activities and to receive the views and information of
individuals and research staffs of other securities firms. As long as it is
lawful and appropriate to do so, the manager and its affiliates may use this
research and data in their investment advisory capacities with other clients.
If the funds' officers are satisfied that the best execution is obtained, the
sale of fund shares, as well as shares of other funds in the Franklin
Templeton Group of Funds, also may be considered a factor in the selection of
broker-dealers to execute the funds' portfolio transactions.
Because Franklin Templeton Distributors, Inc. (Distributors) is a member of
the National Association of Securities Dealers, Inc., it may sometimes
receive certain fees when a fund tenders portfolio securities pursuant to a
tender-offer solicitation. To recapture brokerage for the benefit of a fund,
any portfolio securities tendered by the fund will be tendered through
Distributors if it is legally permissible to do so. In turn, the next
management fee payable to the manager will be reduced by the amount of any
fees received by Distributors in cash, less any costs and expenses incurred
in connection with the tender.
If purchases or sales of securities of the funds and one or more other
investment companies or clients supervised by the manager are considered at
or about the same time, transactions in these securities will be allocated
among the several investment companies and clients in a manner deemed
equitable to all by the manager, taking into account the respective sizes of
the funds and the amount of securities to be purchased or sold. In some cases
this procedure could have a detrimental effect on the price or volume of the
security so far as the funds are concerned. In other cases it is possible
that the ability to participate in volume transactions may improve execution
and reduce transaction costs to the funds.
During the last three fiscal years ended December 31, the fund paid the
following brokerage commissions:
BROKERAGE COMMISSIONS PAID ($)
1999 1998 1997
- --------------------------------------------------------------------------
Beacon 11,852,056 10,799,550 8,259,140
Financial Services 868,615 1,539,012 371,076 1
Qualified 9,244,693 8,446,273 6,474,952
Mutual Shares 17,946,320 13,931,158 7,248,461
Discovery 12,823,663 12,988,034 9,085,394
European 4,067,853 2,910,055 1,500,199
1. For the period from August 19, 1997 through December 31, 1997.
For the fiscal year ended December 31, 1999, the funds paid brokerage
commissions of $11,249, $3,250, $3,261, $44,008, $20,650 and $3,561 from
aggregate portfolio transactions of $6,148,172, $2,704,080, $8,008,743,
$18,363,368, $24,251,103 and $1,278,501 from the Beacon, Financial Services,
Mutual Shares, Qualified, Discovery and European funds, respectively to
brokers who provided research services.
As of December 31, 1999, the funds owned the following securities issued by
their regular broker-dealers:
VALUE ($)
- ------------------------------------------------------------------
Mutual Beacon
Bear Stearns Companies 53,257,000
Morgan Stanley Dean Witter & Co. 9,079,000
Mutual Qualified
Morgan Stanley Dean Witter & Co. 5,896,000
Mutual Shares
Bear Stearns Companies 120,648,000
Morgan Stanley Dean Witter & Co. 19,956,000
Mutual Discovery
Bear Stearns Companies 16,554,000
Morgan Stanley Dean Witter & Co. 1,356,000
Except as noted, the funds did not own any securities issued by their regular
broker-dealers as of the end of the fiscal year.
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 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 brokerage commissions for similar transactions.
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 any distribution and service (Rule 12b-1) fees of
each class. Distributions are subject to approval by the board. 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 receive 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, to reduce or eliminate excise or income taxes on a
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. 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 decrease 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.
Each fund may be subject to foreign withholding taxes on income from certain
foreign securities. This, in turn, could reduce ordinary income distributions
to you. If more than 50% of the total assets of either the Discovery or
European Fund 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. Each fund has qualified as a regulated investment
company for its most recent fiscal year, and intends to continue to 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 distributions in December (or to pay them in January, in which case
you must treat them as received in December) but can give no assurances that
its distributions will be sufficient to eliminate all taxes.
REDEMPTION OF FUND SHARES Redemptions (including redemptions in kind) 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 any 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.
Beginning after the year 2005 (2000 for certain shareholders), gains from the
sale of fund shares held for more than five years may be subject to a reduced
tax rate.
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 SECURITIES States grant tax-free status to dividends paid to
you from interest earned on certain U.S. government securities, subject in
some states to minimum investment or reporting requirements that must be met
by a 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
generally do not 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 49.59% of the dividends paid by the Shares
Fund, 53.00% of the dividends paid by the Qualified Fund, 57.19% of the
dividends paid by the Beacon Fund, and 68.62% of the dividends paid by the
Financial Services Fund for the most recent fiscal year qualified for the
dividends-received deduction. You may 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 (possibly causing a fund to sell securities to raise the
cash for necessary distributions) 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 foreign securities. 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. The funds may offer additional classes of shares in the future.
The full title of each class is:
Mutual Shares Fund - Class A
Mutual Shares Fund - Class B
Mutual Shares Fund - Class C
Mutual Shares Fund - Class Z
Mutual Qualified Fund - Class A
Mutual Qualified Fund - Class B
Mutual Qualified Fund - Class C
Mutual Qualified Fund - Class Z
Mutual Beacon Fund - Class A
Mutual Beacon Fund - Class B
Mutual Beacon Fund - Class C
Mutual Beacon Fund - Class Z
Mutual European Fund - Class A
Mutual European Fund - Class B
Mutual European Fund - Class C
Mutual European Fund - Class Z
Mutual Discovery Fund - Class A
Mutual Discovery Fund - Class B
Mutual Discovery Fund - Class C
Mutual Discovery Fund - Class Z
Mutual Financial Services Fund - Class A
Mutual Financial Services Fund - Class B
Mutual Financial Services Fund - Class C
Mutual Financial Services Fund - Class Z
Shares of each class represent proportionate interests in each fund's assets.
On matters that affect the fund as a whole, each class has the same voting
and other rights and preferences as any other class. On matters that affect
only one class, only shareholders of that class may vote. Each class votes
separately on matters affecting only that class, or expressly required to be
voted on separately by state or federal law. Shares of each class of a series
have the same voting and other rights and preferences as the other classes
and series of Mutual Series for matters that affect Mutual Series as a whole.
Additional series may be offered in the future.
Mutual Series has noncumulative voting rights. For board member elections,
this gives holders of more than 50% of the shares voting the ability to elect
all of the members of the board. If this happens, holders of the remaining
shares voting will not be able to elect anyone to the board.
Mutual Series does not intend to hold annual shareholder meetings. Mutual
Series or a series of Mutual Series may hold special meetings, however, for
matters requiring shareholder approval. A meeting may be called by the board
to consider the removal of a board member if requested in writing by
shareholders holding at least 10% of the outstanding shares. In certain
circumstances, we are required to help you communicate with other
shareholders about the removal of a board member. A special meeting also may
be called by the board in its discretion.
As of April 3, 2000, the principal shareholders of the funds, beneficial or
of record, were:
PERCENTAGE
NAME AND ADDRESS SHARE CLASS %
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EUROPEAN
Michael F. Price
51 John F. Kennedy Pkwy.
Short Hills, NJ 07078 Class Z 18.50
FINANCIAL SERVICES
NFSC FEBO BAH-873144
NFSC FMTC IRA
FBO Lance R. Toepper
110 142nd Ave NE
Ham Lake MN 55304 Class B 6.32
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 April 3, 2000, the officers and board members, as a group, owned of
record and beneficially 18.98% 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. We may deduct any applicable banking
charges imposed by the bank from your account.
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 may provide financial
support to 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 and/or total assets with the Franklin Templeton Group of Funds.
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 goals exist immediately. This money will then be withdrawn from
the short-term, interest-bearing money market instruments and invested in
portfolio securities in as orderly a manner as is possible when attractive
investment opportunities arise.
The proceeds from the sale of shares of an investment company generally are
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.
Each month in which a payment is scheduled, we will redeem an equivalent
amount of shares in your account, generally on the 25th day of the month. If
the 25th falls on a weekend or holiday, we will process the redemption on the
next business day. Beginning June 1, 2000, you may request to change the
processing date to the 1st, 5th, 10th, 15th or 20th of the month. For plans
set up on or after June 1, 2000, we will process redemptions on the day of
the month you have indicated on your account application or, if no day is
indicated, on the 20th day of the month (or 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.
To discontinue a systematic withdrawal plan, change the amount and schedule
of withdrawal payments, or suspend one payment, we must receive instructions
from you at least three business days before a scheduled payment. The fund
may discontinue a systematic withdrawal plan by notifying you in writing and
will discontinue a systematic withdrawal plan automatically 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.
Sending redemption proceeds by wire or electronic funds transfer (ACH) 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 or ACH is not processed as described in the
prospectus.
Franklin Templeton Investor Services, Inc. (Investor Services) may pay
certain financial institutions that maintain omnibus accounts with the funds
on behalf of numerous beneficial owners for recordkeeping operations
performed with respect to such owners. For each beneficial owner in the
omnibus account, a fund may reimburse Investor Services an amount not to
exceed the per account fee that the fund normally pays Investor Services.
These financial institutions also may charge a fee for their services
directly to their clients.
If you buy or sell shares through your securities dealer, we use the net
asset value next calculated after your securities dealer receives your
request, which is promptly transmitted to the fund. If you sell shares
through your securities dealer, it is your dealer's responsibility to
transmit the order to the fund in a timely fashion. Your redemption proceeds
will not earn interest between the time we receive the order from your dealer
and the time we receive any required documents. Any loss to you resulting
from your dealer's failure to transmit your redemption order to the fund in a
timely fashion must be settled between you and your securities dealer.
Certain shareholder servicing agents may be authorized to accept your
transaction request.
For institutional accounts, there may be additional methods of buying or
selling fund shares than those described in this SAI or in the prospectus.
In the event of disputes involving multiple claims of ownership or authority
to control your account, each fund has the right (but has no obligation) to:
(a) freeze the account and require the written agreement of all persons
deemed by the fund to have a potential property interest in the account,
before executing instructions regarding the account; (b) interplead disputed
funds or accounts with a court of competent jurisdiction; or (c) surrender
ownership of all or a portion of the account to the IRS in response to a
notice of levy.
PRICING SHARES
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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.
Trading in securities on European and Far Eastern securities exchanges and
over-the-counter markets is normally completed well before the close of
business of the NYSE on each day that the NYSE is open. Trading in European
or Far Eastern securities generally, or in a particular country or countries,
may not take place on every NYSE business day. Furthermore, trading takes
place in various foreign markets on days that are not business days for the
NYSE and on which the fund's NAV is not calculated. Thus, the calculation of
the fund's NAV does not take place contemporaneously with the determination
of the prices of many of the portfolio securities used in the calculation
and, if events materially affecting the values of these foreign securities
occur, the securities will be valued at fair value as determined by
management and approved in good faith by the board.
Generally, trading in corporate bonds, U.S. government securities and money
market instruments is substantially completed each day at various times
before the close of the NYSE. The value of these securities used in computing
the NAV is determined as of such times. Occasionally, events affecting the
values of these securities may occur between the times at which they are
determined and the close of the NYSE that will not be reflected in the
computation of the NAV. If events materially affecting the values of these
securities occur during this period, the securities will be valued at their
fair value as determined in good faith by the board.
Other securities for which market quotations are readily available are valued
at the current market price, which may be obtained from a pricing service,
based on a variety of factors including recent trades, institutional size
trading in similar types of securities (considering yield, risk and maturity)
and/or developments related to specific issues. Securities and other assets
for which market prices are not readily available are valued at fair value as
determined following procedures approved by the board. With the approval of
the board, the funds may use a pricing service, bank or securities dealer to
perform any of the above described functions.
THE UNDERWRITER
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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 fund are based on the
standardized methods of computing performance mandated by the SEC.
An explanation of these and other methods used by the fund to compute or
express performance follows. Regardless of the method used, past performance
does not guarantee future results, and is an indication of the return to
shareholders only for the limited historical period used.
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,
1999, were:
1 YEAR 5 YEARS 10 YEARS
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CLASS Z
Beacon 16.79% 17.54% 14.49%
Financial Services 1 4.70% N/A N/A
Mutual Shares 15.00% 17.88% 14.32%
Qualified 13.64% 16.96% 14.26%
Discovery 2 26.80% 19.70% N/A
European 3 46.81% N/A N/A
1. Financial Services commenced operations on August 19, 1997. The average
annual total return from inception was 14.94%.
2. Discovery commenced operations on December 31, 1992. The average annual
total return from inception was 19.40%.
3. European commenced operations on July 3, 1996. The average annual total
return from inception was 24.81%.
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, the account was completely redeemed at the end of each
period and the deduction of all applicable charges and fees. 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, 1999, were:
1 YEAR 5 YEARS 10 YEARS
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Class Z
Beacon 16.79% 124.33% 286.81%
Financial Services 1 4.70% N/A N/A
Mutual Shares 15.00% 127.61% 281.10%
Qualified 13.64% 118.88% 279.31%
Discovery 2 26.80% 145.75% N/A
European 3 46.81% N/A N/A
1. Financial Services commenced operations on August 19, 1997. The cumulative
total return from inception was 39.04%.
2. Discovery commenced operations on December 31, 1992. The cumulative total
return from inception was 245.93%.
3. European commenced operations on July 3, 1996. The cumulative total return
from inception was 117.04%.
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
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 a fund may
satisfy your investment goal, advertisements and other materials about the
funds may discuss certain measures of fund performance as reported by various
financial publications. Materials also may compare performance (as calculated
above) to performance as reported by other investments, indices, and
averages. These comparisons may include, but are not limited to, the
following examples:
o Dow Jones(R) Composite Average and its component averages - a
price-weighted average of 65 stocks that trade on the New York Stock
Exchange. The average is a combination of the Dow Jones Industrial Average
(30 blue-chip stocks that are generally leaders in their industry), the Dow
Jones Transportation Average (20 transportation stocks), and the Dow Jones
Utilities Average (15 utility stocks involved in the production of
electrical energy).
o Standard & Poor's(R) 500 Stock Index or its component indices - a
capitalization-weighted index designed to measure performance of the broad
domestic economy through changes in the aggregate market value of 500
stocks representing all major industries.
o The New York Stock Exchange composite or component indices - an unmanaged
index of all industrial, utilities, transportation, and finance stocks
listed on the NYSE.
o Wilshire 5000 Equity Index - represents the return on the market value of
all common equity securities for which daily pricing is available.
Comparisons of performance assume reinvestment of dividends.
o Lipper - Mutual Fund Performance Analysis and Lipper - Equity Fund
Performance Analysis - measure total return and average current yield for
the mutual fund industry and rank individual mutual fund performance over
specified time periods, assuming reinvestment of all distributions,
exclusive of any applicable sales charges.
o CDA Mutual Fund Report, published by CDA Investment Technologies, Inc. -
analyzes price, current yield, risk, total return, and average rate of
return (average annual compounded growth rate) over specified time periods
for the mutual fund industry.
o Mutual Fund Source Book, published by Morningstar, Inc. - analyzes price,
yield, risk, and total return for mutual funds.
o Financial publications: The WALL STREET JOURNAL, and BUSINESS WEEK,
CHANGING TIMES, FINANCIAL WORLD, FORBES, FORTUNE, and MONEY magazines -
provide performance statistics over specified time periods.
o Consumer Price Index (or Cost of Living Index), published by the U.S.
Bureau of Labor Statistics - a statistical measure of change, over time, in
the price of goods and services in major expenditure groups.
o Stocks, Bonds, Bills, and Inflation, published by Ibbotson Associates -
historical measure of yield, price, and total return for common and small
company stock, long-term government bonds, Treasury bills, and inflation.
o Savings and Loan Historical Interest Rates - as published in the U.S.
Savings & Loan League Fact Book.
o Historical data supplied by the research departments of CS First Boston
Corporation, the J.P. Morgan(R) companies, Salomon Smith Barney Inc.,
Merrill Lynch, Lehman Brothers(R) and Bloomberg(R) 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 Smith Barney 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 Smith Barney Composite High Yield Index or its component indices -
measures yield, price and total return for the Long-Term High-Yield Index,
Intermediate-Term High-Yield Index, and Long-Term Utility High-Yield Index.
From time to time, advertisements or information for the funds may include a
discussion of certain attributes or benefits to be derived from an investment
in the funds. The advertisements or information may include symbols,
headlines, or other material that highlights or summarizes the information
discussed in more detail in the communication.
Advertisements or information also may compare the funds' performance to the
return on certificates of deposit (CDs) or other investments. You should be
aware, however, that an investment in the fund involves the risk of
fluctuation of principal value, a risk generally not present in an investment
in a CD issued by a bank. 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 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 approximately 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 $229 billion in assets under management for
more than 5 million U.S. based mutual fund shareholder and other accounts.
The Franklin Templeton Group of Funds offers 103 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.
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, LLC
and Registrant on behalf of Mutual Shares Fund dated April 1, 1999
(ii) Investment Advisory Agreement between Franklin Mutual Advisers,
LLC and Registrant on behalf of Mutual Qualified Fund dated April
1, 1999
(iii) Investment Advisory Agreement between Franklin Mutual Advisers,
LLC and Registrant on behalf of Mutual Beacon Fund dated April 1,
1999
(iv) Investment Advisory Agreement between Franklin Mutual Advisers,
LLC and Registrant on behalf of Mutual Discovery Fund dated April
1, 1999
(v) Investment Advisory Agreement between Franklin Mutual Advisers,
LLC and Registrant on behalf of Mutual European Fund dated April
1, 1999
(vi) Investment Advisory Agreement between Franklin Mutual Advisers,
LLC and Registrant on behalf of Mutual Financial Services Fund
dated April 1, 1999
(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
(viii)Amendment of Distribution Agreement between Registrant on behalf
of Mutual Financial Services Fund and Franklin/Templeton
Distributors, Inc. dated March 26, 1999
(ix) Amendment of Distribution Agreement between Registrant on behalf of
Mutual Shares Fund and Franklin/Templeton Distributors, Inc.
dated March 26, 1999
(x) Amendment of Distribution Agreement between Registrant on behalf of
Mutual Beacon Fund and Franklin/Templeton Distributors, Inc.
dated March 26, 1999
(xi) Amendment of Distribution Agreement between Registrant on behalf of
Mutual Qualified Fund and Franklin/Templeton Distributors, Inc.
dated March 26, 1999
(xii)Amendment of Distribution Agreement between Registrant on behalf of
Mutual Discovery Fund and Franklin/Templeton Distributors, Inc.
dated March 26, 1999
(xiii)Amendment of Distribution Agreement between Registrant on behalf
of Mutual European Fund and Franklin/Templeton Distributors, Inc.
dated March 26, 1999
(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
(iv) Amendment dated March 21, 2000 to Exhibit A of the Master Custody
Agreement between Registrant and Bank of New York dated February
16, 1996
(H) OTHER MATERIAL CONTRACTS
Not Applicable
(I) LEGAL OPINION
(i) Opinion and Consent of Counsel dated February 5, 1999
Filing: Post-Effective Amendment No. 27 to Registration Statement
on Form N-1A
File No. 33-18516
Filing Date: March 2, 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
Filing: Post-Effective Amendment No. 27 to Registration Statement
on Form N-1A
File No. 33-18516
Filing Date: March 2, 1999
(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
Filing: Post-Effective Amendment No. 27 to Registration Statement
on Form N-1A
File No. 33-18516
Filing Date: March 2, 1999
(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
Filing: Post-Effective Amendment No. 27 to Registration Statement
on Form N-1A
File No. 33-18516
Filing Date: March 2, 1999
(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
Filing: Post-Effective Amendment No. 27 to Registration Statement
on Form N-1A
File No. 33-18516
Filing Date: March 2, 1999
(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
Filing: Post-Effective Amendment No. 27 to Registration Statement
on Form N-1A
File No. 33-18516
Filing Date: March 2, 1999
(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
Filing: Post-Effective Amendment No. 27 to Registration Statement
on Form N-1A
File No. 33-18516
Filing Date: March 2, 1999
(O) RULE 18F-3 PLAN
(i) Multiple Class Plan dated October 25, 1998 on behalf of Mutual
Shares Fund
Filing: Post-Effective Amendment No. 27 to Registration Statement
on Form N-1A
File No. 33-18516
Filing Date: March 2, 1999
(ii) Multiple Class Plan dated October 25, 1998 on behalf of Mutual
Qualified Fund
Filing: Post-Effective Amendment No. 27 to Registration Statement
on Form N-1A
File No. 33-18516
Filing Date: March 2, 1999
(iii) Multiple Class Plan dated October 25, 1998 on behalf of Mutual
Discovery Fund
Filing: Post-Effective Amendment No. 27 to Registration Statement
on Form N-1A
File No. 33-18516
Filing Date: March 2, 1999
(iv) Multiple Class Plan dated October 25, 1998 on behalf of Mutual
Beacon Fund
Filing: Post-Effective Amendment No. 27 to Registration Statement
on Form N-1A
File No. 33-18516
Filing Date: March 2, 1999
(v) Multiple Class Plan dated October 25, 1998 on behalf of Mutual
European Fund
Filing: Post-Effective Amendment No. 27 to Registration Statement
on Form N-1A
File No. 33-18516
Filing Date: March 2, 1999
(vi) Multiple Class Plan dated October 25, 1998 on behalf of Mutual
Financial Services Fund
Filing: Post-Effective Amendment No. 27 to Registration Statement
on Form N-1A
File No. 33-18516
Filing Date: March 2, 1999
(P) POWER OF ATTORNEY
(i) Power of Attorney dated February 25, 2000
(ii) Certificate of Secretary dated February 25, 2000
(Q) CODE OF ETHICS
(i) Code of Ethics
ITEM 24 PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH THE FUND
None
ITEM 25 INDEMNIFICATION
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers
and controlling persons of the Registrant pursuant to the
foregoing provisions, or otherwise, the Registrant has been
advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities
(other than the payment by the Registrant of expenses incurred or
paid by a director, officer or controlling person of the
Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling
person in connection with securities being registered, the
Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such
indemnification is against public policy as expressed in the Act
and will be governed by the final adjudication of such issue.
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 Master Trust
Franklin Floating Rate Trust
Franklin Gold and Precious Metals Fund
Franklin High Income Trust
Franklin Investors Securities Trust
Franklin Managed Trust
Franklin Money Fund
Franklin Municipal Securities Trust
Franklin New York Tax-Free Income Fund
Franklin New York Tax-Free Trust
Franklin Real Estate Securities Trust
Franklin Strategic Mortgage Portfolio
Franklin Strategic Series
Franklin Tax-Exempt Money Fund
Franklin Tax-Free Trust
Franklin Templeton Fund Allocator Series
Franklin Templeton Global Trust
Franklin Templeton International Trust
Franklin Templeton Money Fund Trust
Franklin Value Investors Trust
Franklin Templeton Variable Insurance Products Trust
Institutional Fiduciary Trust
Templeton Capital Accumulator Fund, Inc.
Templeton Developing Markets Trust
Templeton Funds, Inc.
Templeton Global Investment Trust
Templeton Global Opportunities Trust
Templeton Global Smaller Companies Fund, Inc.
Templeton Growth Fund, Inc.
Templeton Income Trust
Templeton Institutional Funds, Inc.
Templeton Variable Products Series Fund
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 certifies that it meets all of the
requirements for effectiveness of this Registration Statement pursuant to
Rule 485(b) under the Securities Act of 1933 and has duly caused this
Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized in the City of San Mateo and the State of
California, on the 27th day of April, 2000.
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: April 27, 2000
JAMES R. BAIO* Principal Financial and
James R. Baio Accounting Officer
Dated: April 27, 2000
EDWARD I. ALTMAN* Director
Edward I. Altman Dated: April 27, 2000
ANN TORRE GRANT* Director
Ann Torre Grant Dated: April 27, 2000
ANDREW H. HINES, JR.* Director
Andrew H. Hines, Jr. Dated: April 27, 2000
WILLIAM J. LIPPMAN* Director
William J. Lippman Dated: April 27, 2000
BRUCE A. MACPHERSON* Director
Bruce A. MacPherson Dated: April 27, 2000
FRED R. MILLSAPS* Director
Fred R. Millsaps Dated: April 27, 2000
MICHAEL F. PRICE* Director
Michael F. Price Dated: April 27, 2000
CHARLES RUBENS III Director
Charles Rubens III Dated: April 27, 2000
LEONARD RUBIN* Director
Leonard Rubin Dated: April 27, 2000
VAUGHN R. STURTEVANT*, M.D. Director
Vaughn R. Sturtevant, M.D. Dated: April 27, 2000
ROBERT E. WADE* Director
Robert E. Wade Dated: April 27, 2000
*By: /S/ KAREN L. SKIDMORE
Karen L. Skidmore, Attorney-in-Fact
(Pursuant to Powers of Attorney filed herewith)
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 Attached
Mutual Advisers, LLC and Registrant on behalf
of Mutual Shares Fund dated April 1, 1999
EX-99.(d)(ii) Investment Advisory Agreement between Franklin Attached
Mutual Advisers, LLC and Registrant on behalf
of Mutual Qualified Fund dated April 1, 1999
EX-99.(d)(iii) Investment Advisory Agreement between Franklin Attached
Mutual Advisers, LLC and Registrant on behalf
of Mutual Beacon Fund dated April 1, 1999
EX-99.(d)(iv) Investment Advisory Agreement between Franklin Attached
Mutual Advisers, LLC and Registrant on behalf
of Mutual Discovery Fund dated April 1, 1999
EX-99.(d)(v) Investment Advisory Agreement between Franklin Attached
Mutual Advisers, LLC and Registrant on behalf
of Mutual European Fund dated April 1, 1999
EX-99.(d)(vi) Investment Advisory Agreement between Franklin Attached
Mutual Advisers, LLC and Registrant on behalf
of Mutual Financial Services Fund dated April
1, 1999
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.(e)(viii) Amendment of Distribution Agreement between Attached
Registrant on behalf of Mutual Financial
Services Fund and Franklin/Templeton
Distributors, Inc. dated March 26, 1999
EX-99.(e)(ix) Amendment of Distribution Agreement between Attached
Registrant on behalf of Mutual Shares Fund and
Franklin/Templeton Distributors, Inc. dated
March 26, 1999
EX-99.(e)(x) Amendment of Distribution Agreement between Attached
Registrant on behalf of Mutual Beacon Fund and
Franklin/Templeton Distributors, Inc. dated
March 26, 1999
EX-99.(e)(xi) Amendment of Distribution Agreement between Attached
Registrant on behalf of Mutual Qualified Fund
and Franklin/Templeton Distributors, Inc.
dated March 26, 1999
EX-99.(e)(xii) Amendment of Distribution Agreement between Attached
Registrant on behalf of Mutual Discovery Fund
and Franklin/Templeton Distributors, Inc.
dated March 26, 1999
EX-99.(e)(xiii) Amendment of Distribution Agreement between Attached
Registrant on behalf of Mutual European Fund
and Franklin/Templeton Distributors, Inc.
dated March 26, 1999
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.(g)(iv) Amendment dated March 21, 2000 to Exhibit A of Attached
the Master Custody Agreement between
Registrant and Bank of New York dated February
16, 1996
EX-99.(i)(i) Opinion and Consent of Counsel *
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 *
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 *
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 *
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 *
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 *
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 *
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 *
behalf of Mutual Shares Fund
EX-99.(o)(ii) Multiple Class Plan dated October 25, 1998 on *
behalf of Mutual Qualified Fund
EX-99.(o)(iii) Multiple Class Plan dated October 25, 1998 on *
behalf of Mutual Discovery Fund
EX-99.(o)(iv) Multiple Class Plan dated October 25, 1998 on *
behalf of Mutual Beacon Fund
EX-99.(o)(v) Multiple Class Plan dated October 25, 1998 on *
behalf of Mutual European Fund
EX-99.(o)(vi) Multiple Class Plan dated October 25, 1998 on *
behalf of Mutual Financial Services Fund
EX-99.(p)(i) Power of Attorney Attached
EX-99.(p)(ii) Certificate of Secretary Attached
EX-99.(q)(i) Code of Ethics Attached
* Incorporated by reference
INVESTMENT ADVISORY AGREEMENT
AGREEMENT made as of the 1st day of April, 1999, between MUTUAL
SHARES FUND, a series (composed of one or more classes) of FRANKLIN MUTUAL
SERIES FUND INC., a corporation organized under the laws of the State of
Maryland (hereinafter referred to as the "Fund"), and Franklin Mutual
Advisers, LLC (hereinafter referred to as the "Investment Adviser").
In consideration of the mutual agreements herein made, the Fund
and the Investment Adviser understand and agree as follows:
(1) The Investment Adviser agrees, during the life of this
Agreement, to manage the investment and reinvestment of the Fund's assets
consistent with the provisions of the Fund's Charter, By-laws and the
investment policies adopted and approved by the Fund's Board of Directors and
shareholders pursuant to the Investment Company Act of 1940 (the "1940
Act"). In pursuance of the foregoing, the Investment Adviser shall have sole
and exclusive discretion in all determinations with respect to the purchasing
and selling of securities and other assets for the Fund and in voting and
exercising all other rights appertaining to such securities and other assets
on behalf of the Fund, and shall take all such steps as may be necessary to
implement those determinations.
(2) The Investment Adviser is not required to furnish any
personnel, overhead items or facilities for the Fund, including trading desk
facilities or daily pricing of the Fund's portfolio, but personnel employed
by the Investment Adviser may act as officers and/or directors.
(3) The Investment Adviser shall be responsible for selecting
members of securities exchanges, brokers and dealers (such members, brokers
and dealers being hereinafter referred to as "brokers") for the execution of
the Fund's portfolio transactions consistent with the Fund's brokerage policy
and, when applicable, the negotiation of commissions in connection
therewith. All decisions and placements shall be made in accordance with the
following principles:
(A) Purchase and sale orders will usually be placed with
brokers which are selected by the Investment Adviser as able to
achieve "best execution" of such orders. "Best execution" shall
mean prompt and reliable execution at the most favorable
securities price, taking into account the other provisions
hereinafter set forth. The determination of what may constitute
best execution and price in the execution of a securities
transaction by a broker involves a number of considerations,
including, without limitation, the overall direct net economic
result to the Fund (involving both price paid or received and any
commissions and other costs paid), the efficiency with which the
transaction is executed, the ability to effect the transaction at
all where a large block is involved, availability of the broker
to stand ready to execute possibly difficult transactions in the
future, and the financial strength and stability of the broker.
Such considerations are judgmental and are weighed by the
Investment Adviser in determining the overall reasonableness of
brokerage commissions.
(B) In selecting brokers for portfolio transactions, the
Investment Adviser shall take into account its past experience as
to brokers qualified to achieve "best execution", including
brokers who specialize in any foreign securities held by the Fund.
(C) The Investment Adviser is authorized to allocate
brokerage business to brokers who have provided brokerage and
research services, as such services are defined in Section 28(e)
of the Securities Exchange Act of 1934 (the "1934 Act") for the
Fund and/or other accounts, if any, for which the Investment
Adviser exercises investment discretion (as defined in Section
3(a)(35) of the 1934 Act) and, as to transactions for which fixed
minimum commission rates are not applicable, to cause the Fund to
pay a commission for effecting a securities transaction in excess
of the amount another broker would have charged for effecting
that transaction, if the Investment Adviser determines in good
faith that such amount of commission is reasonable in relation to
the value of the brokerage and research services provided by such
broker, viewed in terms of either that particular transaction or
the Investment Adviser's overall responsibilities with respect to
the Fund and the other accounts, if any, as to which it exercises
investment discretion. In reaching such determination, the
Investment Adviser will not be required to place or attempt to
place a specific dollar value on the research or execution
services of a broker or on the portion of any commission
reflecting either of said services. In demonstrating that such
determinations were made in good faith, the Investment Adviser
shall be prepared to show that all commissions were allocated and
paid for purposes contemplated by the Fund's brokerage policy;
that the research services provide lawful and appropriate
assistance to the Investment Adviser in the performance of its
investment decision-making responsibilities, and that the
commissions were within a reasonable range. Whether commissions
were within a reasonable range shall be based on any available
information as to the level of commissions known to be charged by
other brokers on comparable transactions, but there shall be
taken into account the Fund's policies that (i) obtaining a low
commission is deemed secondary to obtaining a favorable
securities price, since it is recognized that usually it is more
beneficial to the Fund to obtain a favorable price than to pay
the lowest commission; and (ii) the quality, comprehensiveness,
and frequency of research studies which are provided for the
Investment Adviser are useful to the Investment Adviser in
performing its advisory services under its Agreement. Research
services provided by brokers to the Investment Adviser are
considered to be in addition to, and not in lieu of, services
required to be performed by the Investment Adviser under this
Agreement. Research furnished by brokers through which the Fund
effects securities transactions may be used by the Investment
Adviser for any of its accounts, and not all such research may be
used by the Investment Adviser for the Fund. When execution of
portfolio transactions is allocated to brokers trading on
exchanges with fixed brokerage commission rates, account may be
taken of various services provided by the broker.
(D) Purchases and sales of portfolio securities within
the United States other than on a securities exchange shall be
executed with primary market makers acting as principal, except
where, in the judgment of the Investment Adviser, better prices
and execution may be obtained on a commission basis or from other
sources.
(E) Sales of Fund Shares (which shall be deemed to
include also Shares of other registered investment companies
which have either the same adviser or an investment adviser
affiliated with the Fund's Investment Adviser) by a broker are
one factor among others to be taken into account in deciding to
allocate portfolio transactions (including agency transactions,
principal transactions, purchases in underwritings or tenders in
response to tender offers) for the account of the Fund to that
broker; provided that the broker shall furnish "best execution,"
as defined in subparagraph A above, and that such allocation
shall be within the scope of the Fund's policies as stated above;
provided further, that in every allocation made to a broker in
which the sale of Fund Shares is taken into account, there shall
be no increase in the amount of the commissions or other
compensation paid to such broker beyond a reasonable commission
or other compensation determined, as set forth in subparagraph C
above, on the basis of best execution alone or best execution
plus research services, without taking account of or placing any
value upon such sale of Fund's Shares.
(4) The Fund agrees to pay to the Investment Adviser as
compensation for such services a fee for its services based upon a percentage
of the Fund's average daily net assets, payable at the end of each calendar
month. This fee shall be calculated daily at the following annual rate:
.60% for Mutual Shares Fund.
Notwithstanding the foregoing, if the total expenses of the Fund
(including the fee to the Investment Adviser) in any fiscal year of the Fund
exceed any expense limitation imposed by applicable State law, the Investment
Adviser shall reimburse the Fund for such excess in the manner and to the
extent required by applicable State law. The term "total expenses," as used
in this paragraph, does not include interest, taxes, litigation expenses,
distribution expenses, brokerage commissions or other costs of acquiring or
disposing of any of the Fund's portfolio securities or any costs or expenses
incurred or arising other than in the ordinary and necessary course of the
Fund's business. When the accrued amount of such expenses exceeds this
limit, the monthly payment of the Investment Adviser's fee will be reduced by
the amount of such excess, subject to adjustment month by month during the
balance of the Fund's fiscal year if accrued expenses thereafter fall below
the limit.
The Investment Adviser may waive all or a portion of its fees
provided for hereunder and such waiver shall be treated as a reduction in the
purchase price of its services. The Investment Adviser shall be
contractually bound hereunder by the terms of any publicly announced waiver
of its fee or any limitation of the Fund's expenses, as if such waiver or
limitation were fully set forth herein.
(5) This Agreement shall become effective on April 1, 1999 and
shall continue in effect through June 30, 2001. If not sooner terminated,
this Agreement shall continue in effect for successive periods of 12 months
each thereafter, provided that each such continuance shall be specifically
approved annually by the vote of a majority of the Fund's Board of Directors
who are not parties to this Agreement or "interested persons" (as defined in
the 1940 Act) of any such party, cast in person at a meeting called for the
purpose of voting on such approval and either the vote of (a) a majority of
the outstanding voting securities of the Fund, as defined in the 1940 Act, or
(b) a majority of the Fund's Board of Directors as a whole.
(6) Notwithstanding the foregoing, this Agreement may be
terminated by either party at any time, without the payment of any penalty,
on sixty (60) days' written notice to the other party, provided that
termination by the Fund is approved by vote of a majority of the Fund's Board
of Directors in office at the time or by vote of a majority of the
outstanding voting securities of the Fund (as defined by the 1940 Act).
(7) This Agreement will terminate automatically and immediately
in the event of its assignment (as defined in the 1940 Act).
(8) In the event this Agreement is terminated and the
Investment Adviser no longer acts as Investment Adviser to the Fund, the
Investment Adviser reserves the right to withdraw from the Fund the use of
the name "Franklin", "Templeton" or any name misleadingly implying a
continuing relationship between the Fund and the Investment Adviser or any of
its affiliates.
(9) Except as may otherwise be provided by the 1940 Act,
neither the Investment Adviser nor its officers, directors, employees or
agents shall be subject to any liability for any error of judgment, mistake
of law, or any loss arising out of any investment or other act or omission in
the performance by the Investment Adviser of its duties under the Agreement
or for any loss or damage resulting from the imposition by any government of
exchange control restrictions which might affect the liquidity of the Fund's
assets, or from acts or omissions of custodians, or securities depositories,
or from any war or political act of any foreign government to which such
assets might be exposed, or for failure, on the part of the custodian or
otherwise, timely to collect payments, except for any liability, loss or
damage resulting from willful misfeasance, bad faith or gross negligence on
the Investment Adviser's part or by reason of reckless disregard of the
Investment Adviser's duties under this Agreement. It is hereby understood
and acknowledged by the Fund that the value of the investments made for the
Fund may increase as well as decrease and are not guaranteed by the
Investment Adviser. It is further understood and acknowledged by the Fund
that investment decisions made on behalf of the Fund by the Investment
Adviser are subject to a variety of factors which may affect the values and
income generated by the Fund's portfolio securities, including general
economic conditions, market factors and currency exchange rates, and that
investment decisions made by the Investment Adviser will not always be
profitable or prove to have been correct.
(10) a. The Fund hereby agrees to indemnify the Investment
Adviser and each of the Investment Adviser's directors,
officers, employees, and agents (including any individual
who serves at the Investment Adviser's request as director,
officer, partner, trustee or the like of another
corporation) (each such person being an "Indemnitee")
against any liabilities and expenses, including amounts
paid in satisfaction of judgments, in compromise or as
fines and penalties, and counsel fees (all as provided in
accordance with applicable corporate law) reasonably
incurred by such Indemnitee in connection with the defense
or disposition of any action, suit or other proceeding,
whether civil or criminal, before any court or
administrative or investigative body in which he may be or
may have been involved as a party or otherwise or with
which he may be or may have been threatened, while acting
in any capacity set forth above in this Section 10 or
thereafter by reason of his having acted in any such
capacity, except with respect to any matter as to which he
shall have been adjudicated not to have acted in good faith
in the reasonable belief that his action was in the best
interest of the Fund and furthermore, in the case of any
criminal proceeding, so long as he had no reasonable cause
to believe that the conduct was unlawful, provided,
however, that (1) no Indemnitee shall be indemnified
hereunder against any expense of such Indemnitee arising by
reason of (i) willful misfeasance, (ii) bad faith, (iii)
gross negligence or (iv) reckless disregard of the duties
involved in the conduct of his position (the conduct
referred to in such clauses (i) through (iv) being
sometimes referred to herein as "disabling conduct"), (2)
as to any matter disposed of by settlement or a compromise
payment by such Indemnitee, pursuant to a consent decree or
otherwise, no indemnification either for said payment or
for any other expenses shall be provided unless there has
been a determination that such settlement or compromise is
in the best interests of the Fund and that such Indemnitee
appears to have acted in good faith in the reasonable
belief that his action was in the best interests of the
Fund and did not involve disabling conduct by such
Indemnitee and (3) with respect to any action, suit or
other proceeding voluntarily prosecuted by any Indemnitee
as plaintiff, indemnification shall be mandatory only if
the prosecution of such action, suit or other proceeding by
such Indemnitee was authorized by a majority of the full
Board of the Fund.
b. The Fund shall make advance payments in connection
with the expenses of defending any action with respect to
which indemnification might be sought hereunder in the Fund
receives a written affirmation of the Indemnitee's good
faith belief that the standard of conduct necessary for
indemnification has been met and a written undertaking to
reimburse the Fund unless it is subsequently determined
that he is entitled to such indemnification and if the
directors of the Fund determine that the facts then known
to them would not preclude indemnification. In addition, at
least one of the following conditions must be met: (A) the
Indemnitee shall provide a security for his undertaking,
(B) the Fund shall be insured against losses arising by
reason of any lawful advance, or (C) a majority of a quorum
consisting of directors of the Fund who are neither
"interested persons" of the Fund (as defined in Section
2(a)(19) of the Act) nor parties to the proceeding
("Disinterested Non-party Directors") or an independent
legal counsel in a written opinion, shall determine, based
on a review of readily available facts (as opposed to a
full trial-type inquiry), that there is reason to believe
that the Indemnitee ultimately will be found entitled to
indemnification.
c. All determinations with respect to indemnification
hereunder shall be made (1) by a final decision on the
merits by a court or other body before whom the proceeding
was brought that such Indemnitees is not liable by reason
of disabling conduct or, (2) in the absence of such a
decision, by (i) a majority vote of a quorum of the
Disinterested Directors of the Fund, or (ii) if such a
quorum is not obtainable or even, if obtainable, if a
majority vote of such quorum so directs, independent legal
counsel in a written opinion. All determinations that
advance payments in connection with the expense of
defending any proceeding shall be authorized shall be made
in accordance with the immediately preceding clause (2)
above.
The rights accruing to any Indemnitee under these provisions
shall not exclude any other right to which he may be lawfully entitled.
(11) It is understood that the services of the Investment
Adviser are not deemed to be exclusive, and nothing in this Agreement shall
prevent the Investment Adviser, or any affiliate thereof, from providing
similar services to other investment companies and other clients, including
clients which may invest in the same types of securities as the Fund, or, in
providing such services, from using information furnished by others. The
Fund acknowledges that the Investment Adviser renders services to others,
that officers and employees of the investment adviser invest for their own
accounts, and the Fund is not entitled to, and does not expect, to obtain the
benefits of any investment opportunities developed by the Investment Adviser
such officers or employees in which the Investment Adviser acting in good
faith, does not cause the Fund to invest.
(12) This Agreement shall be construed in accordance with the
laws of the State of Delaware, provided that nothing herein shall be
construed as being inconsistent with applicable Federal and state securities
laws and any rules, regulations and orders thereunder.
(13) If any provision of this Agreement shall be held or made
invalid by a court decision, statute, rule or otherwise, the remainder of
this Agreement shall not be affected thereby and, to this extent, the
provisions of this Agreement shall be deemed to be severable.
(14) Nothing herein shall be construed as constituting the
Investment Adviser an agent of the Fund.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement
to be executed by their duly authorized officers and their respective
corporate seals to be hereunto duly affixed and attested.
MUTUAL SHARES FUND, a series of
FRANKLIN MUTUAL SERIES FUND INC.
By:/s/Deborah R. Gatzek
Deborah R. Gatzek
Vice President &
Secretary
FRANKLIN MUTUAL ADVISERS, LLC
By:/s/Leslie M Kratter
Leslie M Kratter
Secretary
INVESTMENT ADVISORY AGREEMENT
AGREEMENT made as of the 1st day of April, 1999, between MUTUAL
QUALIFIED FUND, a series (composed of one or more classes) of FRANKLIN MUTUAL
SERIES FUND INC., a corporation organized under the laws of the State of
Maryland (hereinafter referred to as the "Fund"), and Franklin Mutual Advisers,
LLC (hereinafter referred to as the "Investment Adviser").
In consideration of the mutual agreements herein made, the Fund and
the Investment Adviser understand and agree as follows:
(1) The Investment Adviser agrees, during the life of this
Agreement, to manage the investment and reinvestment of the Fund's assets
consistent with the provisions of the Fund's Charter, By-laws and the
investment policies adopted and approved by the Fund's Board of Directors and
shareholders pursuant to the Investment Company Act of 1940 (the "1940 Act").
In pursuance of the foregoing, the Investment Adviser shall have sole and
exclusive discretion in all determinations with respect to the purchasing and
selling of securities and other assets for the Fund and in voting and
exercising all other rights appertaining to such securities and other assets on
behalf of the Fund, and shall take all such steps as may be necessary to
implement those determinations.
(2) The Investment Adviser is not required to furnish any
personnel, overhead items or facilities for the Fund, including trading desk
facilities or daily pricing of the Fund's portfolio, but personnel employed by
the Investment Adviser may act as officers and/or directors.
(3) The Investment Adviser shall be responsible for selecting
members of securities exchanges, brokers and dealers (such members, brokers and
dealers being hereinafter referred to as "brokers") for the execution of the
Fund's portfolio transactions consistent with the Fund's brokerage policy and,
when applicable, the negotiation of commissions in connection therewith. All
decisions and placements shall be made in accordance with the following
principles:
(A) Purchase and sale orders will usually be placed with
brokers which are selected by the Investment Adviser as able to
achieve "best execution" of such orders. "Best execution" shall
mean prompt and reliable execution at the most favorable securities
price, taking into account the other provisions hereinafter set
forth. The determination of what may constitute best execution and
price in the execution of a securities transaction by a broker
involves a number of considerations, including, without limitation,
the overall direct net economic result to the Fund (involving both
price paid or received and any commissions and other costs paid),
the efficiency with which the transaction is executed, the ability
to effect the transaction at all where a large block is involved,
availability of the broker to stand ready to execute possibly
difficult transactions in the future, and the financial strength
and stability of the broker. Such considerations are judgmental and
are weighed by the Investment Adviser in determining the overall
reasonableness of brokerage commissions.
(B) In selecting brokers for portfolio transactions, the
Investment Adviser shall take into account its past experience as
to brokers qualified to achieve "best execution", including brokers
who specialize in any foreign securities held by the Fund.
(C) The Investment Adviser is authorized to allocate
brokerage business to brokers who have provided brokerage and
research services, as such services are defined in Section 28(e) of
the Securities Exchange Act of 1934 (the "1934 Act") for the Fund
and/or other accounts, if any, for which the Investment Adviser
exercises investment discretion (as defined in Section 3(a)(35) of
the 1934 Act) and, as to transactions for which fixed minimum
commission rates are not applicable, to cause the Fund to pay a
commission for effecting a securities transaction in excess of the
amount another broker would have charged for effecting that
transaction, if the Investment Adviser determines in good faith
that such amount of commission is reasonable in relation to the
value of the brokerage and research services provided by such
broker, viewed in terms of either that particular transaction or
the Investment Adviser's overall responsibilities with respect to
the Fund and the other accounts, if any, as to which it exercises
investment discretion. In reaching such determination, the
Investment Adviser will not be required to place or attempt to
place a specific dollar value on the research or execution services
of a broker or on the portion of any commission reflecting either
of said services. In demonstrating that such determinations were
made in good faith, the Investment Adviser shall be prepared to
show that all commissions were allocated and paid for purposes
contemplated by the Fund's brokerage policy; that the research
services provide lawful and appropriate assistance to the
Investment Adviser in the performance of its investment
decision-making responsibilities, and that the commissions were
within a reasonable range. Whether commissions were within a
reasonable range shall be based on any available information as to
the level of commissions known to be charged by other brokers on
comparable transactions, but there shall be taken into account the
Fund's policies that (i) obtaining a low commission is deemed
secondary to obtaining a favorable securities price, since it is
recognized that usually it is more beneficial to the Fund to obtain
a favorable price than to pay the lowest commission; and (ii) the
quality, comprehensiveness, and frequency of research studies which
are provided for the Investment Adviser are useful to the
Investment Adviser in performing its advisory services under its
Agreement. Research services provided by brokers to the Investment
Adviser are considered to be in addition to, and not in lieu of,
services required to be performed by the Investment Adviser under
this Agreement. Research furnished by brokers through which the
Fund effects securities transactions may be used by the Investment
Adviser for any of its accounts, and not all such research may be
used by the Investment Adviser for the Fund. When execution of
portfolio transactions is allocated to brokers trading on exchanges
with fixed brokerage commission rates, account may be taken of
various services provided by the broker.
(D) Purchases and sales of portfolio securities within the
United States other than on a securities exchange shall be executed
with primary market makers acting as principal, except where, in
the judgment of the Investment Adviser, better prices and execution
may be obtained on a commission basis or from other sources.
(E) Sales of Fund Shares (which shall be deemed to include
also Shares of other registered investment companies which have
either the same adviser or an investment adviser affiliated with
the Fund's Investment Adviser) by a broker are one factor among
others to be taken into account in deciding to allocate portfolio
transactions (including agency transactions, principal
transactions, purchases in underwritings or tenders in response to
tender offers) for the account of the Fund to that broker; provided
that the broker shall furnish "best execution," as defined in
subparagraph A above, and that such allocation shall be within the
scope of the Fund's policies as stated above; provided further,
that in every allocation made to a broker in which the sale of Fund
Shares is taken into account, there shall be no increase in the
amount of the commissions or other compensation paid to such broker
beyond a reasonable commission or other compensation determined, as
set forth in subparagraph C above, on the basis of best execution
alone or best execution plus research services, without taking
account of or placing any value upon such sale of Fund's Shares.
(4) The Fund agrees to pay to the Investment Adviser as
compensation for such services a fee for its services based upon a percentage
of the Fund's average daily net assets, payable at the end of each calendar
month. This fee shall be calculated daily at the following annual rate: .60%
for Mutual Qualified Fund.
Notwithstanding the foregoing, if the total expenses of the Fund
(including the fee to the Investment Adviser) in any fiscal year of the Fund
exceed any expense limitation imposed by applicable State law, the Investment
Adviser shall reimburse the Fund for such excess in the manner and to the
extent required by applicable State law. The term "total expenses," as used in
this paragraph, does not include interest, taxes, litigation expenses,
distribution expenses, brokerage commissions or other costs of acquiring or
disposing of any of the Fund's portfolio securities or any costs or expenses
incurred or arising other than in the ordinary and necessary course of the
Fund's business. When the accrued amount of such expenses exceeds this limit,
the monthly payment of the Investment Adviser's fee will be reduced by the
amount of such excess, subject to adjustment month by month during the balance
of the Fund's fiscal year if accrued expenses thereafter fall below the limit.
The Investment Adviser may waive all or a portion of its fees
provided for hereunder and such waiver shall be treated as a reduction in the
purchase price of its services. The Investment Adviser shall be contractually
bound hereunder by the terms of any publicly announced waiver of its fee or any
limitation of the Fund's expenses, as if such waiver or limitation were fully
set forth herein.
(5) This Agreement shall become effective on April 1, 1999 and
shall continue in effect through June 30, 2001. If not sooner terminated, this
Agreement shall continue in effect for successive periods of 12 months each
thereafter, provided that each such continuance shall be specifically approved
annually by the vote of a majority of the Fund's Board of Directors who are not
parties to this Agreement or "interested persons" (as defined in the 1940 Act)
of any such party, cast in person at a meeting called for the purpose of voting
on such approval and either the vote of (a) a majority of the outstanding
voting securities of the Fund, as defined in the 1940 Act, or (b) a majority of
the Fund's Board of Directors as a whole.
(6) Notwithstanding the foregoing, this Agreement may be
terminated by either party at any time, without the payment of any penalty, on
sixty (60) days' written notice to the other party, provided that termination
by the Fund is approved by vote of a majority of the Fund's Board of Directors
in office at the time or by vote of a majority of the outstanding voting
securities of the Fund (as defined by the 1940 Act).
(7) This Agreement will terminate automatically and immediately
in the event of its assignment (as defined in the 1940 Act).
(8) In the event this Agreement is terminated and the Investment
Adviser no longer acts as Investment Adviser to the Fund, the Investment
Adviser reserves the right to withdraw from the Fund the use of the name
"Franklin", "Templeton" or any name misleadingly implying a continuing
relationship between the Fund and the Investment Adviser or any of its
affiliates.
(9) Except as may otherwise be provided by the 1940 Act, neither
the Investment Adviser nor its officers, directors, employees or agents shall
be subject to any liability for any error of judgment, mistake of law, or any
loss arising out of any investment or other act or omission in the performance
by the Investment Adviser of its duties under the Agreement or for any loss or
damage resulting from the imposition by any government of exchange control
restrictions which might affect the liquidity of the Fund's assets, or from
acts or omissions of custodians, or securities depositories, or from any war or
political act of any foreign government to which such assets might be exposed,
or for failure, on the part of the custodian or otherwise, timely to collect
payments, except for any liability, loss or damage resulting from willful
misfeasance, bad faith or gross negligence on the Investment Adviser's part or
by reason of reckless disregard of the Investment Adviser's duties under this
Agreement. It is hereby understood and acknowledged by the Fund that the value
of the investments made for the Fund may increase as well as decrease and are
not guaranteed by the Investment Adviser. It is further understood and
acknowledged by the Fund that investment decisions made on behalf of the Fund
by the Investment Adviser are subject to a variety of factors which may affect
the values and income generated by the Fund's portfolio securities, including
general economic conditions, market factors and currency exchange rates, and
that investment decisions made by the Investment Adviser will not always be
profitable or prove to have been correct.
(10) a. The Fund hereby agrees to indemnify the Investment
Adviser and each of the Investment Adviser's directors,
officers, employees, and agents (including any individual who
serves at the Investment Adviser's request as director,
officer, partner, trustee or the like of another corporation)
(each such person being an "Indemnitee") against any
liabilities and expenses, including amounts paid in
satisfaction of judgments, in compromise or as fines and
penalties, and counsel fees (all as provided in accordance
with applicable corporate law) reasonably incurred by such
Indemnitee in connection with the defense or disposition of
any action, suit or other proceeding, whether civil or
criminal, before any court or administrative or investigative
body in which he may be or may have been involved as a party
or otherwise or with which he may be or may have been
threatened, while acting in any capacity set forth above in
this Section 10 or thereafter by reason of his having acted
in any such capacity, except with respect to any matter as to
which he shall have been adjudicated not to have acted in
good faith in the reasonable belief that his action was in
the best interest of the Fund and furthermore, in the case of
any criminal proceeding, so long as he had no reasonable
cause to believe that the conduct was unlawful, provided,
however, that (1) no Indemnitee shall be indemnified
hereunder against any expense of such Indemnitee arising by
reason of (i) willful misfeasance, (ii) bad faith, (iii)
gross negligence or (iv) reckless disregard of the duties
involved in the conduct of his position (the conduct referred
to in such clauses (i) through (iv) being sometimes referred
to herein as "disabling conduct"), (2) as to any matter
disposed of by settlement or a compromise payment by such
Indemnitee, pursuant to a consent decree or otherwise, no
indemnification either for said payment or for any other
expenses shall be provided unless there has been a
determination that such settlement or compromise is in the
best interests of the Fund and that such Indemnitee appears
to have acted in good faith in the reasonable belief that his
action was in the best interests of the Fund and did not
involve disabling conduct by such Indemnitee and (3) with
respect to any action, suit or other proceeding voluntarily
prosecuted by any Indemnitee as plaintiff, indemnification
shall be mandatory only if the prosecution of such action,
suit or other proceeding by such Indemnitee was authorized by
a majority of the full Board of the Fund.
b. The Fund shall make advance payments in connection with
the expenses of defending any action with respect to which
indemnification might be sought hereunder in the Fund
receives a written affirmation of the Indemnitee's good faith
belief that the standard of conduct necessary for
indemnification has been met and a written undertaking to
reimburse the Fund unless it is subsequently determined that
he is entitled to such indemnification and if the directors
of the Fund determine that the facts then known to them would
not preclude indemnification. In addition, at least one of
the following conditions must be met: (A) the Indemnitee
shall provide a security for his undertaking, (B) the Fund
shall be insured against losses arising by reason of any
lawful advance, or (C) a majority of a quorum consisting of
directors of the Fund who are neither "interested persons" of
the Fund (as defined in Section 2(a)(19) of the Act) nor
parties to the proceeding ("Disinterested Non-party
Directors") or an independent legal counsel in a written
opinion, shall determine, based on a review of readily
available facts (as opposed to a full trial-type inquiry),
that there is reason to believe that the Indemnitee
ultimately will be found entitled to indemnification.
c. All determinations with respect to indemnification
hereunder shall be made (1) by a final decision on the merits
by a court or other body before whom the proceeding was
brought that such Indemnitees is not liable by reason of
disabling conduct or, (2) in the absence of such a decision,
by (i) a majority vote of a quorum of the Disinterested
Directors of the Fund, or (ii) if such a quorum is not
obtainable or even, if obtainable, if a majority vote of such
quorum so directs, independent legal counsel in a written
opinion. All determinations that advance payments in
connection with the expense of defending any proceeding shall
be authorized shall be made in accordance with the
immediately preceding clause (2) above.
The rights accruing to any Indemnitee under these provisions shall
not exclude any other right to which he may be lawfully entitled.
(11) It is understood that the services of the Investment Adviser
are not deemed to be exclusive, and nothing in this Agreement shall prevent the
Investment Adviser, or any affiliate thereof, from providing similar services
to other investment companies and other clients, including clients which may
invest in the same types of securities as the Fund, or, in providing such
services, from using information furnished by others. The Fund acknowledges
that the Investment Adviser renders services to others, that officers and
employees of the investment adviser invest for their own accounts, and the Fund
is not entitled to, and does not expect, to obtain the benefits of any
investment opportunities developed by the Investment Adviser such officers or
employees in which the Investment Adviser acting in good faith, does not cause
the Fund to invest.
(12) This Agreement shall be construed in accordance with the laws
of the State of Delaware, provided that nothing herein shall be construed as
being inconsistent with applicable Federal and state securities laws and any
rules, regulations and orders thereunder.
(13) If any provision of this Agreement shall be held or made
invalid by a court decision, statute, rule or otherwise, the remainder of this
Agreement shall not be affected thereby and, to this extent, the provisions of
this Agreement shall be deemed to be severable.
(14) Nothing herein shall be construed as constituting the
Investment Adviser an agent of the Fund.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement
to be executed by their duly authorized officers and their respective corporate
seals to be hereunto duly affixed and attested.
MUTUAL QUALIFIED FUND, a series of
FRANKLIN MUTUAL SERIES FUND INC.
By:/s/Deborah R. Gatzek
Deborah R. Gatzek
Vice President &
Secretary
FRANKLIN MUTUAL ADVISERS, LLC
By:/s/Leslie M. Kratter
Leslie M. Kratter
Secretary
INVESTMENT ADVISORY AGREEMENT
AGREEMENT made as of the 1st day of April, 1999, between MUTUAL
BEACON FUND, a series (composed of one or more classes) of FRANKLIN MUTUAL
SERIES FUND INC., a corporation organized under the laws of the State of
Maryland (hereinafter referred to as the "Fund"), and Franklin Mutual Advisers,
LLC (hereinafter referred to as the "Investment Adviser").
In consideration of the mutual agreements herein made, the Fund and
the Investment Adviser understand and agree as follows:
(1) The Investment Adviser agrees, during the life of this
Agreement, to manage the investment and reinvestment of the Fund's assets
consistent with the provisions of the Fund's Charter, By-laws and the investment
policies adopted and approved by the Fund's Board of Directors and shareholders
pursuant to the Investment Company Act of 1940 (the "1940 Act"). In pursuance
of the foregoing, the Investment Adviser shall have sole and exclusive
discretion in all determinations with respect to the purchasing and selling of
securities and other assets for the Fund and in voting and exercising all other
rights appertaining to such securities and other assets on behalf of the Fund,
and shall take all such steps as may be necessary to implement those
determinations.
(2) The Investment Adviser is not required to furnish any
personnel, overhead items or facilities for the Fund, including trading desk
facilities or daily pricing of the Fund's portfolio, but personnel employed by
the Investment Adviser may act as officers and/or directors.
(3) The Investment Adviser shall be responsible for selecting
members of securities exchanges, brokers and dealers (such members, brokers and
dealers being hereinafter referred to as "brokers") for the execution of the
Fund's portfolio transactions consistent with the Fund's brokerage policy and,
when applicable, the negotiation of commissions in connection therewith. All
decisions and placements shall be made in accordance with the following
principles:
(A) Purchase and sale orders will usually be placed with
brokers which are selected by the Investment Adviser as able to
achieve "best execution" of such orders. "Best execution" shall
mean prompt and reliable execution at the most favorable securities
price, taking into account the other provisions hereinafter set
forth. The determination of what may constitute best execution and
price in the execution of a securities transaction by a broker
involves a number of considerations, including, without limitation,
the overall direct net economic result to the Fund (involving both
price paid or received and any commissions and other costs paid),
the efficiency with which the transaction is executed, the ability
to effect the transaction at all where a large block is involved,
availability of the broker to stand ready to execute possibly
difficult transactions in the future, and the financial strength and
stability of the broker. Such considerations are judgmental and are
weighed by the Investment Adviser in determining the overall
reasonableness of brokerage commissions.
(B) In selecting brokers for portfolio transactions, the
Investment Adviser shall take into account its past experience as to
brokers qualified to achieve "best execution", including brokers who
specialize in any foreign securities held by the Fund.
(C) The Investment Adviser is authorized to allocate
brokerage business to brokers who have provided brokerage and
research services, as such services are defined in Section 28(e) of
the Securities Exchange Act of 1934 (the "1934 Act") for the Fund
and/or other accounts, if any, for which the Investment Adviser
exercises investment discretion (as defined in Section 3(a)(35) of
the 1934 Act) and, as to transactions for which fixed minimum
commission rates are not applicable, to cause the Fund to pay a
commission for effecting a securities transaction in excess of the
amount another broker would have charged for effecting that
transaction, if the Investment Adviser determines in good faith that
such amount of commission is reasonable in relation to the value of
the brokerage and research services provided by such broker, viewed
in terms of either that particular transaction or the Investment
Adviser's overall responsibilities with respect to the Fund and the
other accounts, if any, as to which it exercises investment
discretion. In reaching such determination, the Investment Adviser
will not be required to place or attempt to place a specific dollar
value on the research or execution services of a broker or on the
portion of any commission reflecting either of said services. In
demonstrating that such determinations were made in good faith, the
Investment Adviser shall be prepared to show that all commissions
were allocated and paid for purposes contemplated by the Fund's
brokerage policy; that the research services provide lawful and
appropriate assistance to the Investment Adviser in the performance
of its investment decision-making responsibilities, and that the
commissions were within a reasonable range. Whether commissions
were within a reasonable range shall be based on any available
information as to the level of commissions known to be charged by
other brokers on comparable transactions, but there shall be taken
into account the Fund's policies that (i) obtaining a low commission
is deemed secondary to obtaining a favorable securities price, since
it is recognized that usually it is more beneficial to the Fund to
obtain a favorable price than to pay the lowest commission; and (ii)
the quality, comprehensiveness, and frequency of research studies
which are provided for the Investment Adviser are useful to the
Investment Adviser in performing its advisory services under its
Agreement. Research services provided by brokers to the Investment
Adviser are considered to be in addition to, and not in lieu of,
services required to be performed by the Investment Adviser under
this Agreement. Research furnished by brokers through which the
Fund effects securities transactions may be used by the Investment
Adviser for any of its accounts, and not all such research may be
used by the Investment Adviser for the Fund. When execution of
portfolio transactions is allocated to brokers trading on exchanges
with fixed brokerage commission rates, account may be taken of
various services provided by the broker.
(D) Purchases and sales of portfolio securities within the
United States other than on a securities exchange shall be executed
with primary market makers acting as principal, except where, in the
judgment of the Investment Adviser, better prices and execution may
be obtained on a commission basis or from other sources.
(E) Sales of Fund Shares (which shall be deemed to include
also Shares of other registered investment companies which have
either the same adviser or an investment adviser affiliated with the
Fund's Investment Adviser) by a broker are one factor among others
to be taken into account in deciding to allocate portfolio
transactions (including agency transactions, principal transactions,
purchases in underwritings or tenders in response to tender offers)
for the account of the Fund to that broker; provided that the broker
shall furnish "best execution," as defined in subparagraph A above,
and that such allocation shall be within the scope of the Fund's
policies as stated above; provided further, that in every allocation
made to a broker in which the sale of Fund Shares is taken into
account, there shall be no increase in the amount of the commissions
or other compensation paid to such broker beyond a reasonable
commission or other compensation determined, as set forth in
subparagraph C above, on the basis of best execution alone or best
execution plus research services, without taking account of or
placing any value upon such sale of Fund's Shares.
(4) The Fund agrees to pay to the Investment Adviser as
compensation for such services a fee for its services based upon a percentage of
the Fund's average daily net assets, payable at the end of each calendar month.
This fee shall be calculated daily at the following annual rate: .60% for
Mutual Beacon Fund.
Notwithstanding the foregoing, if the total expenses of the Fund
(including the fee to the Investment Adviser) in any fiscal year of the Fund
exceed any expense limitation imposed by applicable State law, the Investment
Adviser shall reimburse the Fund for such excess in the manner and to the extent
required by applicable State law. The term "total expenses," as used in this
paragraph, does not include interest, taxes, litigation expenses, distribution
expenses, brokerage commissions or other costs of acquiring or disposing of any
of the Fund's portfolio securities or any costs or expenses incurred or arising
other than in the ordinary and necessary course of the Fund's business. When
the accrued amount of such expenses exceeds this limit, the monthly payment of
the Investment Adviser's fee will be reduced by the amount of such excess,
subject to adjustment month by month during the balance of the Fund's fiscal
year if accrued expenses thereafter fall below the limit.
The Investment Adviser may waive all or a portion of its fees
provided for hereunder and such waiver shall be treated as a reduction in the
purchase price of its services. The Investment Adviser shall be contractually
bound hereunder by the terms of any publicly announced waiver of its fee or any
limitation of the Fund's expenses, as if such waiver or limitation were fully
set forth herein.
(5) This Agreement shall become effective on April 1, 1999 and
shall continue in effect through June 30, 2001. If not sooner terminated, this
Agreement shall continue in effect for successive periods of 12 months each
thereafter, provided that each such continuance shall be specifically approved
annually by the vote of a majority of the Fund's Board of Directors who are not
parties to this Agreement or "interested persons" (as defined in the 1940 Act)
of any such party, cast in person at a meeting called for the purpose of voting
on such approval and either the vote of (a) a majority of the outstanding voting
securities of the Fund, as defined in the 1940 Act, or (b) a majority of the
Fund's Board of Directors as a whole.
(6) Notwithstanding the foregoing, this Agreement may be
terminated by either party at any time, without the payment of any penalty, on
sixty (60) days' written notice to the other party, provided that termination by
the Fund is approved by vote of a majority of the Fund's Board of Directors in
office at the time or by vote of a majority of the outstanding voting securities
of the Fund (as defined by the 1940 Act).
(7) This Agreement will terminate automatically and immediately in
the event of its assignment (as defined in the 1940 Act).
(8) In the event this Agreement is terminated and the Investment
Adviser no longer acts as Investment Adviser to the Fund, the Investment Adviser
reserves the right to withdraw from the Fund the use of the name "Franklin",
"Templeton" or any name misleadingly implying a continuing relationship between
the Fund and the Investment Adviser or any of its affiliates.
(9) Except as may otherwise be provided by the 1940 Act, neither
the Investment Adviser nor its officers, directors, employees or agents shall be
subject to any liability for any error of judgment, mistake of law, or any loss
arising out of any investment or other act or omission in the performance by the
Investment Adviser of its duties under the Agreement or for any loss or damage
resulting from the imposition by any government of exchange control restrictions
which might affect the liquidity of the Fund's assets, or from acts or omissions
of custodians, or securities depositories, or from any war or political act of
any foreign government to which such assets might be exposed, or for failure, on
the part of the custodian or otherwise, timely to collect payments, except for
any liability, loss or damage resulting from willful misfeasance, bad faith or
gross negligence on the Investment Adviser's part or by reason of reckless
disregard of the Investment Adviser's duties under this Agreement. It is hereby
understood and acknowledged by the Fund that the value of the investments made
for the Fund may increase as well as decrease and are not guaranteed by the
Investment Adviser. It is further understood and acknowledged by the Fund that
investment decisions made on behalf of the Fund by the Investment Adviser are
subject to a variety of factors which may affect the values and income generated
by the Fund's portfolio securities, including general economic conditions,
market factors and currency exchange rates, and that investment decisions made
by the Investment Adviser will not always be profitable or prove to have been
correct.
(10) a. The Fund hereby agrees to indemnify the Investment
Adviser and each of the Investment Adviser's directors,
officers, employees, and agents (including any individual who
serves at the Investment Adviser's request as director,
officer, partner, trustee or the like of another corporation)
(each such person being an "Indemnitee") against any
liabilities and expenses, including amounts paid in
satisfaction of judgments, in compromise or as fines and
penalties, and counsel fees (all as provided in accordance
with applicable corporate law) reasonably incurred by such
Indemnitee in connection with the defense or disposition of
any action, suit or other proceeding, whether civil or
criminal, before any court or administrative or investigative
body in which he may be or may have been involved as a party
or otherwise or with which he may be or may have been
threatened, while acting in any capacity set forth above in
this Section 10 or thereafter by reason of his having acted in
any such capacity, except with respect to any matter as to
which he shall have been adjudicated not to have acted in good
faith in the reasonable belief that his action was in the best
interest of the Fund and furthermore, in the case of any
criminal proceeding, so long as he had no reasonable cause to
believe that the conduct was unlawful, provided, however, that
(1) no Indemnitee shall be indemnified hereunder against any
expense of such Indemnitee arising by reason of (i) willful
misfeasance, (ii) bad faith, (iii) gross negligence or (iv)
reckless disregard of the duties involved in the conduct of
his position (the conduct referred to in such clauses (i)
through (iv) being sometimes referred to herein as "disabling
conduct"), (2) as to any matter disposed of by settlement or a
compromise payment by such Indemnitee, pursuant to a consent
decree or otherwise, no indemnification either for said
payment or for any other expenses shall be provided unless
there has been a determination that such settlement or
compromise is in the best interests of the Fund and that such
Indemnitee appears to have acted in good faith in the
reasonable belief that his action was in the best interests of
the Fund and did not involve disabling conduct by such
Indemnitee and (3) with respect to any action, suit or other
proceeding voluntarily prosecuted by any Indemnitee as
plaintiff, indemnification shall be mandatory only if the
prosecution of such action, suit or other proceeding by such
Indemnitee was authorized by a majority of the full Board of
the Fund.
b. The Fund shall make advance payments in connection with
the expenses of defending any action with respect to which
indemnification might be sought hereunder in the Fund receives
a written affirmation of the Indemnitee's good faith belief
that the standard of conduct necessary for indemnification has
been met and a written undertaking to reimburse the Fund
unless it is subsequently determined that he is entitled to
such indemnification and if the directors of the Fund
determine that the facts then known to them would not preclude
indemnification. In addition, at least one of the following
conditions must be met: (A) the Indemnitee shall provide a
security for his undertaking, (B) the Fund shall be insured
against losses arising by reason of any lawful advance, or (C)
a majority of a quorum consisting of directors of the Fund who
are neither "interested persons" of the Fund (as defined in
Section 2(a)(19) of the Act) nor parties to the proceeding
("Disinterested Non-party Directors") or an independent legal
counsel in a written opinion, shall determine, based on a
review of readily available facts (as opposed to a full
trial-type inquiry), that there is reason to believe that the
Indemnitee ultimately will be found entitled to
indemnification.
c. All determinations with respect to indemnification
hereunder shall be made (1) by a final decision on the merits
by a court or other body before whom the proceeding was
brought that such Indemnitees is not liable by reason of
disabling conduct or, (2) in the absence of such a decision,
by (i) a majority vote of a quorum of the Disinterested
Directors of the Fund, or (ii) if such a quorum is not
obtainable or even, if obtainable, if a majority vote of such
quorum so directs, independent legal counsel in a written
opinion. All determinations that advance payments in
connection with the expense of defending any proceeding shall
be authorized shall be made in accordance with the immediately
preceding clause (2) above.
The rights accruing to any Indemnitee under these provisions shall
not exclude any other right to which he may be lawfully entitled.
(11) It is understood that the services of the Investment Adviser
are not deemed to be exclusive, and nothing in this Agreement shall prevent the
Investment Adviser, or any affiliate thereof, from providing similar services to
other investment companies and other clients, including clients which may invest
in the same types of securities as the Fund, or, in providing such services,
from using information furnished by others. The Fund acknowledges that the
Investment Adviser renders services to others, that officers and employees of
the investment adviser invest for their own accounts, and the Fund is not
entitled to, and does not expect, to obtain the benefits of any investment
opportunities developed by the Investment Adviser such officers or employees in
which the Investment Adviser acting in good faith, does not cause the Fund to
invest.
(12) This Agreement shall be construed in accordance with the laws
of the State of Delaware, provided that nothing herein shall be construed as
being inconsistent with applicable Federal and state securities laws and any
rules, regulations and orders thereunder.
(13) If any provision of this Agreement shall be held or made
invalid by a court decision, statute, rule or otherwise, the remainder of this
Agreement shall not be affected thereby and, to this extent, the provisions of
this Agreement shall be deemed to be severable.
(14) Nothing herein shall be construed as constituting the
Investment Adviser an agent of the Fund.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be executed by their duly authorized officers and their respective corporate
seals to be hereunto duly affixed and attested.
MUTUAL BEACON FUND, a series of
FRANKLIN MUTUAL SERIES FUND INC.
By:/s/Deborah R. Gatzek
Deborah R. Gatzek
Vice President &
Secretary
FRANKLIN MUTUAL ADVISERS, LLC
By:/s/Leslie M. Kratter
Leslie M. Kratter
Secretary
INVESTMENT ADVISORY AGREEMENT
AGREEMENT made as of the 1st day of November, 1996, between MUTUAL
DISCOVERY FUND, a series (composed of one or more classes) of FRANKLIN MUTUAL
SERIES FUND INC., a corporation organized under the laws of the State of
Maryland (hereinafter referred to as the "Fund"), and Franklin Mutual Advisers,
Inc. (hereinafter referred to as the "Investment Adviser").
In consideration of the mutual agreements herein made, the Fund and
the Investment Adviser understand and agree as follows:
(1) The Investment Adviser agrees, during the life of this
Agreement, to manage the investment and reinvestment of the Fund's assets
consistent with the provisions of the Fund's Charter, By-laws and the
investment policies adopted and approved by the Fund's Board of Directors and
shareholders pursuant to the Investment Company Act of 1940 (the "1940 Act").
In pursuance of the foregoing, the Investment Adviser shall have sole and
exclusive discretion in all determinations with respect to the purchasing and
selling of securities and other assets for the Fund and in voting and
exercising all other rights appertaining to such securities and other assets on
behalf of the Fund, and shall take all such steps as may be necessary to
implement those determinations.
(2) The Investment Adviser is not required to furnish any
personnel, overhead items or facilities for the Fund, including trading desk
facilities or daily pricing of the Fund's portfolio, but personnel employed by
the Investment Adviser may act as officers and/or directors.
(3) The Investment Adviser shall be responsible for selecting
members of securities exchanges, brokers and dealers (such members, brokers and
dealers being hereinafter referred to as "brokers") for the execution of the
Fund's portfolio transactions consistent with the Fund's brokerage policy and,
when applicable, the negotiation of commissions in connection therewith. All
decisions and placements shall be made in accordance with the following
principles:
(A) Purchase and sale orders will usually be placed with
brokers which are selected by the Investment Adviser as able to
achieve "best execution" of such orders. "Best execution" shall
mean prompt and reliable execution at the most favorable securities
price, taking into account the other provisions hereinafter set
forth. The determination of what may constitute best execution and
price in the execution of a securities transaction by a broker
involves a number of considerations, including, without limitation,
the overall direct net economic result to the Fund (involving both
price paid or received and any commissions and other costs paid),
the efficiency with which the transaction is executed, the ability
to effect the transaction at all where a large block is involved,
availability of the broker to stand ready to execute possibly
difficult transactions in the future, and the financial strength
and stability of the broker. Such considerations are judgmental and
are weighed by the Investment Adviser in determining the overall
reasonableness of brokerage commissions.
(B) In selecting brokers for portfolio transactions, the
Investment Adviser shall take into account its past experience as
to brokers qualified to achieve "best execution", including brokers
who specialize in any foreign securities held by the Fund.
(C) The Investment Adviser is authorized to allocate
brokerage business to brokers who have provided brokerage and
research services, as such services are defined in Section 28(e) of
the Securities Exchange Act of 1934 (the "1934 Act") for the Fund
and/or other accounts, if any, for which the Investment Adviser
exercises investment discretion (as defined in Section 3(a)(35) of
the 1934 Act) and, as to transactions for which fixed minimum
commission rates are not applicable, to cause the Fund to pay a
commission for effecting a securities transaction in excess of the
amount another broker would have charged for effecting that
transaction, if the Investment Adviser determines in good faith
that such amount of commission is reasonable in relation to the
value of the brokerage and research services provided by such
broker, viewed in terms of either that particular transaction or
the Investment Adviser's overall responsibilities with respect to
the Fund and the other accounts, if any, as to which it exercises
investment discretion. In reaching such determination, the
Investment Adviser will not be required to place or attempt to
place a specific dollar value on the research or execution services
of a broker or on the portion of any commission reflecting either
of said services. In demonstrating that such determinations were
made in good faith, the Investment Adviser shall be prepared to
show that all commissions were allocated and paid for purposes
contemplated by the Fund's brokerage policy; that the research
services provide lawful and appropriate assistance to the
Investment Adviser in the performance of its investment
decision-making responsibilities, and that the commissions were
within a reasonable range. Whether commissions were within a
reasonable range shall be based on any available information as to
the level of commissions known to be charged by other brokers on
comparable transactions, but there shall be taken into account the
Fund's policies that (i) obtaining a low commission is deemed
secondary to obtaining a favorable securities price, since it is
recognized that usually it is more beneficial to the Fund to obtain
a favorable price than to pay the lowest commission; and (ii) the
quality, comprehensiveness, and frequency of research studies which
are provided for the Investment Adviser are useful to the
Investment Adviser in performing its advisory services under its
Agreement. Research services provided by brokers to the Investment
Adviser are considered to be in addition to, and not in lieu of,
services required to be performed by the Investment Adviser under
this Agreement. Research furnished by brokers through which the
Fund effects securities transactions may be used by the Investment
Adviser for any of its accounts, and not all such research may be
used by the Investment Adviser for the Fund. When execution of
portfolio transactions is allocated to brokers trading on exchanges
with fixed brokerage commission rates, account may be taken of
various services provided by the broker.
(D) Purchases and sales of portfolio securities within the
United States other than on a securities exchange shall be executed
with primary market makers acting as principal, except where, in
the judgment of the Investment Adviser, better prices and execution
may be obtained on a commission basis or from other sources.
(E) Sales of Fund Shares (which shall be deemed to include
also Shares of other registered investment companies which have
either the same adviser or an investment adviser affiliated with
the Fund's Investment Adviser) by a broker are one factor among
others to be taken into account in deciding to allocate portfolio
transactions (including agency transactions, principal
transactions, purchases in underwritings or tenders in response to
tender offers) for the account of the Fund to that broker; provided
that the broker shall furnish "best execution," as defined in
subparagraph A above, and that such allocation shall be within the
scope of the Fund's policies as stated above; provided further,
that in every allocation made to a broker in which the sale of Fund
Shares is taken into account, there shall be no increase in the
amount of the commissions or other compensation paid to such broker
beyond a reasonable commission or other compensation determined, as
set forth in subparagraph C above, on the basis of best execution
alone or best execution plus research services, without taking
account of or placing any value upon such sale of Fund's Shares.
(4) The Fund agrees to pay to the Investment Adviser as
compensation for such services a fee for its services based upon a percentage
of the Fund's average daily net assets, payable at the end of each calendar
month. This fee shall be calculated daily at the following annual rate: .80%
for Mutual Discovery Fund.
Notwithstanding the foregoing, if the total expenses of the Fund
(including the fee to the Investment Adviser) in any fiscal year of the Fund
exceed any expense limitation imposed by applicable State law, the Investment
Adviser shall reimburse the Fund for such excess in the manner and to the
extent required by applicable State law. The term "total expenses," as used in
this paragraph, does not include interest, taxes, litigation expenses,
distribution expenses, brokerage commissions or other costs of acquiring or
disposing of any of the Fund's portfolio securities or any costs or expenses
incurred or arising other than in the ordinary and necessary course of the
Fund's business. When the accrued amount of such expenses exceeds this limit,
the monthly payment of the Investment Adviser's fee will be reduced by the
amount of such excess, subject to adjustment month by month during the balance
of the Fund's fiscal year if accrued expenses thereafter fall below the limit.
The Investment Adviser may waive all or a portion of its fees
provided for hereunder and such waiver shall be treated as a reduction in the
purchase price of its services. The Investment Adviser shall be contractually
bound hereunder by the terms of any publicly announced waiver of its fee or any
limitation of the Fund's expenses, as if such waiver or limitation were fully
set forth herein.
(5) This Agreement shall become effective on November 1, 1996 and
shall continue in effect through June 30, 1998. If not sooner terminated, this
Agreement shall continue in effect for successive periods of 12 months each
thereafter, provided that each such continuance shall be specifically approved
annually by the vote of a majority of the Fund's Board of Directors who are not
parties to this Agreement or "interested persons" (as defined in the 1940 Act)
of any such party, cast in person at a meeting called for the purpose of voting
on such approval and either the vote of (a) a majority of the outstanding
voting securities of the Fund, as defined in the 1940 Act, or (b) a majority of
the Fund's Board of Directors as a whole.
(6) Notwithstanding the foregoing, this Agreement may be
terminated by either party at any time, without the payment of any penalty, on
sixty (60) days' written notice to the other party, provided that termination
by the Fund is approved by vote of a majority of the Fund's Board of Directors
in office at the time or by vote of a majority of the outstanding voting
securities of the Fund (as defined by the 1940 Act).
(7) This Agreement will terminate automatically and immediately
in the event of its assignment (as defined in the 1940 Act).
(8) In the event this Agreement is terminated and the Investment
Adviser no longer acts as Investment Adviser to the Fund, the Investment
Adviser reserves the right to withdraw from the Fund the use of the name
"Franklin", "Templeton" or any name misleadingly implying a continuing
relationship between the Fund and the Investment Adviser or any of its
affiliates.
(9) Except as may otherwise be provided by the 1940 Act, neither
the Investment Adviser nor its officers, directors, employees or agents shall
be subject to any liability for any error of judgment, mistake of law, or any
loss arising out of any investment or other act or omission in the performance
by the Investment Adviser of its duties under the Agreement or for any loss or
damage resulting from the imposition by any government of exchange control
restrictions which might affect the liquidity of the Fund's assets, or from
acts or omissions of custodians, or securities depositories, or from any war or
political act of any foreign government to which such assets might be exposed,
or for failure, on the part of the custodian or otherwise, timely to collect
payments, except for any liability, loss or damage resulting from willful
misfeasance, bad faith or gross negligence on the Investment Adviser's part or
by reason of reckless disregard of the Investment Adviser's duties under this
Agreement. It is hereby understood and acknowledged by the Fund that the value
of the investments made for the Fund may increase as well as decrease and are
not guaranteed by the Investment Adviser. It is further understood and
acknowledged by the Fund that investment decisions made on behalf of the Fund
by the Investment Adviser are subject to a variety of factors which may affect
the values and income generated by the Fund's portfolio securities, including
general economic conditions, market factors and currency exchange rates, and
that investment decisions made by the Investment Adviser will not always be
profitable or prove to have been correct.
(10) a. The Fund hereby agrees to indemnify the Investment
Adviser and each of the Investment Adviser's directors,
officers, employees, and agents (including any individual who
serves at the Investment Adviser's request as director,
officer, partner, trustee or the like of another corporation)
(each such person being an "Indemnitee") against any
liabilities and expenses, including amounts paid in
satisfaction of judgments, in compromise or as fines and
penalties, and counsel fees (all as provided in accordance
with applicable corporate law) reasonably incurred by such
Indemnitee in connection with the defense or disposition of
any action, suit or other proceeding, whether civil or
criminal, before any court or administrative or investigative
body in which he may be or may have been involved as a party
or otherwise or with which he may be or may have been
threatened, while acting in any capacity set forth above in
this Section 10 or thereafter by reason of his having acted
in any such capacity, except with respect to any matter as to
which he shall have been adjudicated not to have acted in
good faith in the reasonable belief that his action was in
the best interest of the Fund and furthermore, in the case of
any criminal proceeding, so long as he had no reasonable
cause to believe that the conduct was unlawful, provided,
however, that (1) no Indemnitee shall be indemnified
hereunder against any expense of such Indemnitee arising by
reason of (i) willful misfeasance, (ii) bad faith, (iii)
gross negligence or (iv) reckless disregard of the duties
involved in the conduct of his position (the conduct referred
to in such clauses (i) through (iv) being sometimes referred
to herein as "disabling conduct"), (2) as to any matter
disposed of by settlement or a compromise payment by such
Indemnitee, pursuant to a consent decree or otherwise, no
indemnification either for said payment or for any other
expenses shall be provided unless there has been a
determination that such settlement or compromise is in the
best interests of the Fund and that such Indemnitee appears
to have acted in good faith in the reasonable belief that his
action was in the best interests of the Fund and did not
involve disabling conduct by such Indemnitee and (3) with
respect to any action, suit or other proceeding voluntarily
prosecuted by any Indemnitee as plaintiff, indemnification
shall be mandatory only if the prosecution of such action,
suit or other proceeding by such Indemnitee was authorized by
a majority of the full Board of the Fund.
b. The Fund shall make advance payments in connection with
the expenses of defending any action with respect to which
indemnification might be sought hereunder in the Fund
receives a written affirmation of the Indemnitee's good faith
belief that the standard of conduct necessary for
indemnification has been met and a written undertaking to
reimburse the Fund unless it is subsequently determined that
he is entitled to such indemnification and if the directors
of the Fund determine that the facts then known to them would
not preclude indemnification. In addition, at least one of
the following conditions must be met: (A) the Indemnitee
shall provide a security for his undertaking, (B) the Fund
shall be insured against losses arising by reason of any
lawful advance, or (C) a majority of a quorum consisting of
directors of the Fund who are neither "interested persons" of
the Fund (as defined in Section 2(a)(19) of the Act) nor
parties to the proceeding ("Disinterested Non-party
Directors") or an independent legal counsel in a written
opinion, shall determine, based on a review of readily
available facts (as opposed to a full trial-type inquiry),
that there is reason to believe that the Indemnitee
ultimately will be found entitled to indemnification.
c. All determinations with respect to indemnification
hereunder shall be made (1) by a final decision on the merits
by a court or other body before whom the proceeding was
brought that such Indemnitees is not liable by reason of
disabling conduct or, (2) in the absence of such a decision,
by (i) a majority vote of a quorum of the Disinterested
Directors of the Fund, or (ii) if such a quorum is not
obtainable or even, if obtainable, if a majority vote of such
quorum so directs, independent legal counsel in a written
opinion. All determinations that advance payments in
connection with the expense of defending any proceeding shall
be authorized shall be made in accordance with the
immediately preceding clause (2) above.
The rights accruing to any Indemnitee under these provisions shall
not exclude any other right to which he may be lawfully entitled.
(11) It is understood that the services of the Investment Adviser
are not deemed to be exclusive, and nothing in this Agreement shall prevent the
Investment Adviser, or any affiliate thereof, from providing similar services
to other investment companies and other clients, including clients which may
invest in the same types of securities as the Fund, or, in providing such
services, from using information furnished by others. The Fund acknowledges
that the Investment Adviser renders services to others, that officers and
employees of the investment adviser invest for their own accounts, and the Fund
is not entitled to, and does not expect, to obtain the benefits of any
investment opportunities developed by the Investment Adviser such officers or
employees in which the Investment Adviser acting in good faith, does not cause
the Fund to invest.
(12) This Agreement shall be construed in accordance with the laws
of the State of Maryland, provided that nothing herein shall be construed as
being inconsistent with applicable Federal and state securities laws and any
rules, regulations and orders thereunder.
(13) If any provision of this Agreement shall be held or made
invalid by a court decision, statute, rule or otherwise, the remainder of this
Agreement shall not be affected thereby and, to this extent, the provisions of
this Agreement shall be deemed to be severable.
(14) Nothing herein shall be construed as constituting the
Investment Adviser an agent of the Fund.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement
to be executed by their duly authorized officers and their respective corporate
seals to be hereunto duly affixed and attested.
MUTUAL DISCOVERY FUND, a series of
FRANKLIN MUTUAL SERIES FUND INC.
By:/s/ Deborah R. Gatzek
Deborah R. Gatzek
Title: Vice President &
Secretary
FRANKLIN MUTUAL ADVISERS, INC.
By:/s/ Leslie M. Kratter
Leslie M. Kratter
Title: Secretary
INVESTMENT ADVISORY AGREEMENT
AGREEMENT made as of the 1st day of April, 1999, between MUTUAL EUROPEAN
FUND, a series (composed of one or more classes) of FRANKLIN MUTUAL SERIES FUND
INC., a corporation organized under the laws of the State of Maryland
(hereinafter referred to as the "Fund"), and Franklin Mutual Advisers, LLC
(hereinafter referred to as the "Investment Adviser").
In consideration of the mutual agreements herein made, the Fund and the
Investment Adviser understand and agree as follows:
(1) The Investment Adviser agrees, during the life of this Agreement, to
manage the investment and reinvestment of the Fund's assets consistent with the
provisions of the Fund's Charter, By-laws and the investment policies adopted
and approved by the Fund's Board of Directors and shareholders pursuant to the
Investment Company Act of 1940 (the "1940 Act"). In pursuance of the foregoing,
the Investment Adviser shall have sole and exclusive discretion in all
determinations with respect to the purchasing and selling of securities and
other assets for the Fund and in voting and exercising all other rights
appertaining to such securities and other assets on behalf of the Fund, and
shall take all such steps as may be necessary to implement those determinations.
(2) The Investment Adviser is not required to furnish any personnel,
overhead items or facilities for the Fund, including trading desk facilities or
daily pricing of the Fund's portfolio, but personnel employed by the Investment
Adviser may act as officers and/or directors.
(3) The Investment Adviser shall be responsible for selecting members of
securities exchanges, brokers and dealers (such members, brokers and dealers
being hereinafter referred to as "brokers") for the execution of the Fund's
portfolio transactions consistent with the Fund's brokerage policy and, when
applicable, the negotiation of commissions in connection therewith. All
decisions and placements shall be made in accordance with the following
principles:
(A) Purchase and sale orders will usually be placed with brokers
which are selected by the Investment Adviser as able to achieve "best
execution" of such orders. "Best execution" shall mean prompt and
reliable execution at the most favorable securities price, taking into
account the other provisions hereinafter set forth. The determination
of what may constitute best execution and price in the execution of a
securities transaction by a broker involves a number of
considerations, including, without limitation, the overall direct net
economic result to the Fund (involving both price paid or received and
any commissions and other costs paid), the efficiency with which the
transaction is executed, the ability to effect the transaction at all
where a large block is involved, availability of the broker to stand
ready to execute possibly difficult transactions in the future, and
the financial strength and stability of the broker. Such
considerations are judgmental and are weighed by the Investment
Adviser in determining the overall reasonableness of brokerage
commissions.
(B) In selecting brokers for portfolio transactions, the
Investment Adviser shall take into account its past experience as to
brokers qualified to achieve "best execution", including brokers who
specialize in any foreign securities held by the Fund.
(C) The Investment Adviser is authorized to allocate brokerage
business to brokers who have provided brokerage and research services,
as such services are defined in Section 28(e) of the Securities
Exchange Act of 1934 (the "1934 Act") for the Fund and/or other
accounts, if any, for which the Investment Adviser exercises
investment discretion (as defined in Section 3(a)(35) of the 1934 Act)
and, as to transactions for which fixed minimum commission rates are
not applicable, to cause the Fund to pay a commission for effecting a
securities transaction in excess of the amount another broker would
have charged for effecting that transaction, if the Investment Adviser
determines in good faith that such amount of commission is reasonable
in relation to the value of the brokerage and research services
provided by such broker, viewed in terms of either that particular
transaction or the Investment Adviser's overall responsibilities with
respect to the Fund and the other accounts, if any, as to which it
exercises investment discretion. In reaching such determination, the
Investment Adviser will not be required to place or attempt to place a
specific dollar value on the research or execution services of a
broker or on the portion of any commission reflecting either of said
services. In demonstrating that such determinations were made in good
faith, the Investment Adviser shall be prepared to show that all
commissions were allocated and paid for purposes contemplated by the
Fund's brokerage policy; that the research services provide lawful and
appropriate assistance to the Investment Adviser in the performance of
its investment decision-making responsibilities, and that the
commissions were within a reasonable range. Whether commissions were
within a reasonable range shall be based on any available information
as to the level of commissions known to be charged by other brokers on
comparable transactions, but there shall be taken into account the
Fund's policies that (i) obtaining a low commission is deemed
secondary to obtaining a favorable securities price, since it is
recognized that usually it is more beneficial to the Fund to obtain a
favorable price than to pay the lowest commission; and (ii) the
quality, comprehensiveness, and frequency of research studies which
are provided for the Investment Adviser are useful to the Investment
Adviser in performing its advisory services under its Agreement.
Research services provided by brokers to the Investment Adviser are
considered to be in addition to, and not in lieu of, services required
to be performed by the Investment Adviser under this Agreement.
Research furnished by brokers through which the Fund effects
securities transactions may be used by the Investment Adviser for any
of its accounts, and not all such research may be used by the
Investment Adviser for the Fund. When execution of portfolio
transactions is allocated to brokers trading on exchanges with fixed
brokerage commission rates, account may be taken of various services
provided by the broker.
(D) Purchases and sales of portfolio securities within the United
States other than on a securities exchange shall be executed with
primary market makers acting as principal, except where, in the
judgment of the Investment Adviser, better prices and execution may be
obtained on a commission basis or from other sources.
(E) Sales of Fund Shares (which shall be deemed to include also
Shares of other registered investment companies which have either the
same adviser or an investment adviser affiliated with the Fund's
Investment Adviser) by a broker are one factor among others to be
taken into account in deciding to allocate portfolio transactions
(including agency transactions, principal transactions, purchases in
underwritings or tenders in response to tender offers) for the account
of the Fund to that broker; provided that the broker shall furnish
"best execution," as defined in subparagraph A above, and that such
allocation shall be within the scope of the Fund's policies as stated
above; provided further, that in every allocation made to a broker in
which the sale of Fund Shares is taken into account, there shall be no
increase in the amount of the commissions or other compensation paid
to such broker beyond a reasonable commission or other compensation
determined, as set forth in subparagraph C above, on the basis of best
execution alone or best execution plus research services, without
taking account of or placing any value upon such sale of Fund's
Shares.
(4) The Fund agrees to pay to the Investment Adviser as compensation for
such services a fee for its services based upon a percentage of the Fund's
average daily net assets, payable at the end of each calendar month. This fee
shall be calculated daily at the following annual rate: .80% for Mutual European
Fund.
Notwithstanding the foregoing, if the total expenses of the Fund (including
the fee to the Investment Adviser) in any fiscal year of the Fund exceed any
expense limitation imposed by applicable State law, the Investment Adviser shall
reimburse the Fund for such excess in the manner and to the extent required by
applicable State law. The term "total expenses," as used in this paragraph, does
not include interest, taxes, litigation expenses, distribution expenses,
brokerage commissions or other costs of acquiring or disposing of any of the
Fund's portfolio securities or any costs or expenses incurred or arising other
than in the ordinary and necessary course of the Fund's business. When the
accrued amount of such expenses exceeds this limit, the monthly payment of the
Investment Adviser's fee will be reduced by the amount of such excess, subject
to adjustment month by month during the balance of the Fund's fiscal year if
accrued expenses thereafter fall below the limit.
The Investment Adviser may waive all or a portion of its fees provided for
hereunder and such waiver shall be treated as a reduction in the purchase price
of its services. The Investment Adviser shall be contractually bound hereunder
by the terms of any publicly announced waiver of its fee or any limitation of
the Fund's expenses, as if such waiver or limitation were fully set forth
herein.
(5) This Agreement shall become effective on April 1, 1999 and shall
continue in effect through June 30, 2001. If not sooner terminated, this
Agreement shall continue in effect for successive periods of 12 months each
thereafter, provided that each such continuance shall be specifically approved
annually by the vote of a majority of the Fund's Board of Directors who are not
parties to this Agreement or "interested persons" (as defined in the 1940 Act)
of any such party, cast in person at a meeting called for the purpose of voting
on such approval and either the vote of (a) a majority of the outstanding voting
securities of the Fund, as defined in the 1940 Act, or (b) a majority of the
Fund's Board of Directors as a whole.
(6) Notwithstanding the foregoing, this Agreement may be terminated by
either party at any time, without the payment of any penalty, on sixty (60)
days' written notice to the other party, provided that termination by the Fund
is approved by vote of a majority of the Fund's Board of Directors in office at
the time or by vote of a majority of the outstanding voting securities of the
Fund (as defined by the 1940 Act).
(7) This Agreement will terminate automatically and immediately in the
event of its assignment (as defined in the 1940 Act).
(8) In the event this Agreement is terminated and the Investment Adviser no
longer acts as Investment Adviser to the Fund, the Investment Adviser reserves
the right to withdraw from the Fund the use of the name "Franklin", "Templeton"
or any name misleadingly implying a continuing relationship between the Fund and
the Investment Adviser or any of its affiliates.
(9) Except as may otherwise be provided by the 1940 Act, neither the
Investment Adviser nor its officers, directors, employees or agents shall be
subject to any liability for any error of judgment, mistake of law, or any loss
arising out of any investment or other act or omission in the performance by the
Investment Adviser of its duties under the Agreement or for any loss or damage
resulting from the imposition by any government of exchange control restrictions
which might affect the liquidity of the Fund's assets, or from acts or omissions
of custodians, or securities depositories, or from any war or political act of
any foreign government to which such assets might be exposed, or for failure, on
the part of the custodian or otherwise, timely to collect payments, except for
any liability, loss or damage resulting from willful misfeasance, bad faith or
gross negligence on the Investment Adviser's part or by reason of reckless
disregard of the Investment Adviser's duties under this Agreement. It is hereby
understood and acknowledged by the Fund that the value of the investments made
for the Fund may increase as well as decrease and are not guaranteed by the
Investment Adviser. It is further understood and acknowledged by the Fund that
investment decisions made on behalf of the Fund by the Investment Adviser are
subject to a variety of factors which may affect the values and income generated
by the Fund's portfolio securities, including general economic conditions,
market factors and currency exchange rates, and that investment decisions made
by the Investment Adviser will not always be profitable or prove to have been
correct.
(10) a. The Fund hereby agrees to indemnify the Investment Adviser and
each of the Investment Adviser's directors, officers, employees, and agents
(including any individual who serves at the Investment Adviser's request as
director, officer, partner, trustee or the like of another corporation)
(each such person being an "Indemnitee") against any liabilities and
expenses, including amounts paid in satisfaction of judgments, in
compromise or as fines and penalties, and counsel fees (all as provided in
accordance with applicable corporate law) reasonably incurred by such
Indemnitee in connection with the defense or disposition of any action,
suit or other proceeding, whether civil or criminal, before any court or
administrative or investigative body in which he may be or may have been
involved as a party or otherwise or with which he may be or may have been
threatened, while acting in any capacity set forth above in this Section 10
or thereafter by reason of his having acted in any such capacity, except
with respect to any matter as to which he shall have been adjudicated not
to have acted in good faith in the reasonable belief that his action was in
the best interest of the Fund and furthermore, in the case of any criminal
proceeding, so long as he had no reasonable cause to believe that the
conduct was unlawful, provided, however, that (1) no Indemnitee shall be
indemnified hereunder against any expense of such Indemnitee arising by
reason of (i) willful misfeasance, (ii) bad faith, (iii) gross negligence
or (iv) reckless disregard of the duties involved in the conduct of his
position (the conduct referred to in such clauses (i) through (iv) being
sometimes referred to herein as "disabling conduct"), (2) as to any matter
disposed of by settlement or a compromise payment by such Indemnitee,
pursuant to a consent decree or otherwise, no indemnification either for
said payment or for any other expenses shall be provided unless there has
been a determination that such settlement or compromise is in the best
interests of the Fund and that such Indemnitee appears to have acted in
good faith in the reasonable belief that his action was in the best
interests of the Fund and did not involve disabling conduct by such
Indemnitee and (3) with respect to any action, suit or other proceeding
voluntarily prosecuted by any Indemnitee as plaintiff, indemnification
shall be mandatory only if the prosecution of such action, suit or other
proceeding by such Indemnitee was authorized by a majority of the full
Board of the Fund.
b. The Fund shall make advance payments in connection with the
expenses of defending any action with respect to which indemnification
might be sought hereunder in the Fund receives a written affirmation of the
Indemnitee's good faith belief that the standard of conduct necessary for
indemnification has been met and a written undertaking to reimburse the
Fund unless it is subsequently determined that he is entitled to such
indemnification and if the directors of the Fund determine that the facts
then known to them would not preclude indemnification. In addition, at
least one of the following conditions must be met: (A) the Indemnitee shall
provide a security for his undertaking, (B) the Fund shall be insured
against losses arising by reason of any lawful advance, or (C) a majority
of a quorum consisting of directors of the Fund who are neither "interested
persons" of the Fund (as defined in Section 2(a)(19) of the Act) nor
parties to the proceeding ("Disinterested Non-party Directors") or an
independent legal counsel in a written opinion, shall determine, based on a
review of readily available facts (as opposed to a full trial-type
inquiry), that there is reason to believe that the Indemnitee ultimately
will be found entitled to indemnification.
c. All determinations with respect to indemnification hereunder shall
be made (1) by a final decision on the merits by a court or other body
before whom the proceeding was brought that such Indemnitees is not liable
by reason of disabling conduct or, (2) in the absence of such a decision,
by (i) a majority vote of a quorum of the Disinterested Directors of the
Fund, or (ii) if such a quorum is not obtainable or even, if obtainable, if
a majority vote of such quorum so directs, independent legal counsel in a
written opinion. All determinations that advance payments in connection
with the expense of defending any proceeding shall be authorized shall be
made in accordance with the immediately preceding clause (2) above.
The rights accruing to any Indemnitee under these provisions shall not
exclude any other right to which he may be lawfully entitled.
(11) It is understood that the services of the Investment Adviser are not
deemed to be exclusive, and nothing in this Agreement shall prevent the
Investment Adviser, or any affiliate thereof, from providing similar services to
other investment companies and other clients, including clients which may invest
in the same types of securities as the Fund, or, in providing such services,
from using information furnished by others. The Fund acknowledges that the
Investment Adviser renders services to others, that officers and employees of
the investment adviser invest for their own accounts, and the Fund is not
entitled to, and does not expect, to obtain the benefits of any investment
opportunities developed by the Investment Adviser such officers or employees in
which the Investment Adviser acting in good faith, does not cause the Fund to
invest.
(12) This Agreement shall be construed in accordance with the laws of the
State of Delaware, provided that nothing herein shall be construed as being
inconsistent with applicable Federal and state securities laws and any rules,
regulations and orders thereunder.
(13) If any provision of this Agreement shall be held or made invalid by a
court decision, statute, rule or otherwise, the remainder of this Agreement
shall not be affected thereby and, to this extent, the provisions of this
Agreement shall be deemed to be severable.
(14) Nothing herein shall be construed as constituting the Investment
Adviser an agent of the Fund.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their duly authorized officers and their respective corporate seals
to be hereunto duly affixed and attested.
MUTUAL EUROPEAN FUND, a series of
FRANKLIN MUTUAL SERIES FUND INC.
By:/s/Deborah R. Gatzek
Deborah R. Gatzek
Vice President &
Secretary
FRANKLIN MUTUAL ADVISERS, LLC
By:/s/Leslie M. Kratter
Leslie M. Kratter
Secretary
INVESTMENT ADVISORY AGREEMENT
AGREEMENT made as of the 1st day of April, 1999, between MUTUAL
FINANCIAL SERVICES FUND, a series (composed of one or more classes) of FRANKLIN
MUTUAL SERIES FUND INC., a corporation organized under the laws of the State of
Maryland (hereinafter referred to as the "Fund"), and Franklin Mutual Advisers,
LLC (hereinafter referred to as the "Investment Adviser").
In consideration of the mutual agreements herein made, the Fund and
the Investment Adviser understand and agree as follows:
(1) The Investment Adviser agrees, during the life of this
Agreement, to manage the investment and reinvestment of the Fund's assets
consistent with the provisions of the Fund's Charter, By-Laws and the
investment policies adopted and approved by the Fund's Board of Directors and
shareholders pursuant to the Investment Company Act of 1940 (the "1940 Act").
In pursuance of the foregoing, the Investment Adviser shall have sole and
exclusive discretion in all determinations with respect to the purchasing and
selling of securities and other assets for the Fund and in voting and
exercising all other rights appertaining to such securities and other assets on
behalf of the Fund, and shall take all such steps as may be necessary to
implement those determinations.
(2) The Investment Adviser is not required to furnish any
personnel, overhead items or facilities for the Fund, including trading desk
facilities or daily pricing of the Fund's portfolio, but personnel employed by
the Investment Adviser may act as officers and/or directors.
(3) The Investment Adviser shall be responsible for selecting
members of securities exchanges, brokers and dealers (such members, brokers and
dealers being hereinafter referred to as "brokers") for the execution of the
Fund's portfolio transactions consistent with the Fund's brokerage policy and,
when applicable, the negotiation of commissions in connection therewith. All
decisions and placements shall be made in accordance with the following
principles:
(A) Purchase and sale orders will usually be placed with
brokers which are selected by the Investment Adviser as able to
achieve "best execution" of such orders. "Best execution" shall
mean prompt and reliable execution at the most favorable securities
price, taking into account the other provisions hereinafter set
forth. The determination of what may constitute best execution and
price in the execution of a securities transaction by a broker
involves a number of considerations, including, without limitation,
the overall direct net economic result to the Fund (involving both
price paid or received and any commissions and other costs paid),
the efficiency with which the transaction is executed, the ability
to effect the transaction at all where a large block is involved,
availability of the broker to stand ready to execute possibly
difficult transactions in the future, and the financial strength
and stability of the broker. Such considerations are judgmental and
are weighed by the Investment Adviser in determining the overall
reasonableness of brokerage commissions.
(B) In selecting brokers for portfolio transactions, the
Investment Adviser shall take into account its past experience as
to brokers qualified to achieve "best execution", including brokers
who specialize in any foreign securities held by the Fund.
(C) The Investment Adviser is authorized to allocate
brokerage business to brokers who have provided brokerage and
research services, as such services are defined in Section 28(e) of
the Securities Exchange Act of 1934 (the "1934 Act") for the Fund
and/or other accounts, if any, for which the Investment Adviser
exercises investment discretion (as defined in Section 3(a)(35) of
the 1934 Act) and, as to transactions for which fixed minimum
commission rates are not applicable, to cause the Fund to pay a
commission for effecting a securities transaction in excess of the
amount another broker would have charged for effecting that
transaction, if the Investment Adviser determines in good faith
that such amount of commission is reasonable in relation to the
value of the brokerage and research services provided by such
broker, viewed in terms of either that particular transaction or
the Investment Adviser's overall responsibilities with respect to
the Fund and the other accounts, if any, as to which it exercises
investment discretion. In reaching such determination, the
Investment Adviser will not be required to place or attempt to
place a specific dollar value on the research or execution services
of a broker or on the portion of any commission reflecting either
of said services. In demonstrating that such determinations were
made in good faith, the Investment Adviser shall be prepared to
show that all commissions were allocated and paid for purposes
contemplated by the Fund's brokerage policy; that the research
services provide lawful and appropriate assistance to the
Investment Adviser in the performance of its investment
decision-making responsibilities, and that the commissions were
within a reasonable range. Whether commissions were within a
reasonable range shall be based on any available information as to
the level of commissions known to be charged by other brokers on
comparable transactions, but there shall be taken into account the
Fund's policies that (i) obtaining a low commission is deemed
secondary to obtaining a favorable securities price, since it is
recognized that usually it is more beneficial to the Fund to obtain
a favorable price than to pay the lowest commission; and (ii) the
quality, comprehensiveness, and frequency of research studies which
are provided for the Investment Adviser are useful to the
Investment Adviser in performing its advisory services under its
Agreement. Research services provided by brokers to the Investment
Adviser are considered to be in addition to, and not in lieu of,
services required to be performed by the Investment Adviser under
this Agreement. Research furnished by brokers through which the
Fund effects securities transactions may be used by the Investment
Adviser for any of its accounts, and not all such research may be
used by the Investment Adviser for the Fund. When execution of
portfolio transactions is allocated to brokers trading on exchanges
with fixed brokerage commission rates, account may be taken of
various services provided by the broker.
(D) Purchases and sales of portfolio securities within the
United States other than on a securities exchange shall be executed
with primary market makers acting as principal, except where, in
the judgment of the Investment Adviser, better prices and execution
may be obtained on a commission basis or from other sources.
(E) Sales of Fund Shares (which shall be deemed to include
also Shares of other registered investment companies which have
either the same adviser or an investment adviser affiliated with
the Fund's Investment Adviser) by a broker are one factor among
others to be taken into account in deciding to allocate portfolio
transactions (including agency transactions, principal
transactions, purchases in underwritings or tenders in response to
tender offers) for the account of the Fund to that broker; provided
that the broker shall furnish "best execution," as defined in
subparagraph A above, and that such allocation shall be within the
scope of the Fund's policies as stated above; provided further,
that in every allocation made to a broker in which the sale of Fund
Shares is taken into account, there shall be no increase in the
amount of the commissions or other compensation paid to such broker
beyond a reasonable commission or other compensation determined, as
set forth in subparagraph C above, on the basis of best execution
alone or best execution plus research services, without taking
account of or placing any value upon such sale of Fund's Shares.
(4) The Fund agrees to pay to the Investment Adviser as
compensation for such services a fee for its services based upon a percentage
of the Fund's average daily net assets, payable at the end of each calendar
month. This fee shall be calculated daily at the following annual rate: .80%
for Mutual Financial Services Fund.
Notwithstanding the foregoing, if the total expenses of the Fund
(including the fee to the Investment Adviser) in any fiscal year of the Fund
exceed any expense limitation imposed by applicable State law, the Investment
Adviser shall reimburse the Fund for such excess in the manner and to the
extent required by applicable State law. The term "total expenses," as used in
this paragraph, does not include interest, taxes, litigation expenses,
distribution expenses, brokerage commissions or other costs of acquiring or
disposing of any of the Fund's portfolio securities or any costs or expenses
incurred or arising other than in the ordinary and necessary course of the
Fund's business. When the accrued amount of such expenses exceeds this limit,
the monthly payment of the Investment Adviser's fee will be reduced by the
amount of such excess, subject to adjustment month by month during the balance
of the Fund's fiscal year if accrued expenses thereafter fall below the limit.
The Investment Adviser may waive all or a portion of its fees
provided for hereunder and such waiver shall be treated as a reduction in the
purchase price of its services. The Investment Adviser shall be contractually
bound hereunder by the terms of any publicly announced waiver of its fee or any
limitation of the Fund's expenses, as if such waiver or limitation were fully
set forth herein.
(5) This Agreement shall become effective on April 1, 1999 and
shall continue in effect through June 20, 2001. If not sooner terminated, this
Agreement shall continue in effect for successive periods of 12 months each
thereafter, provided that each such continuance shall be specifically approved
annually by the vote of a majority of the Fund's Board of Directors who are not
parties to this Agreement or "interested persons" (as defined in the 1940 Act)
of any such party, cast in person at a meeting called for the purpose of voting
on such approval and either the vote of (a) a majority of the outstanding
voting securities of the Fund, as defined in the 1940 Act, or (b) a majority of
the Fund's Board of Directors as a whole.
(6) Notwithstanding the foregoing, this Agreement may be
terminated by either party at any time, without the payment of any penalty, on
sixty (60) days' written notice to the other party, provided that termination
by the Fund is approved by vote of a majority of the Fund's Board of Directors
in office at the time or by vote of a majority of the outstanding voting
securities of the Fund (as defined by the 1940 Act).
(7) This Agreement will terminate automatically and immediately
in the event of its assignment (as defined in the 1940 Act).
(8) In the event this Agreement is terminated and the Investment
Adviser no longer acts as Investment Adviser to the Fund, the Investment
Adviser reserves the right to withdraw from the Fund the use of the name
"Franklin", "Templeton" or any name misleadingly implying a continuing
relationship between the Fund and the Investment Adviser or any of its
affiliates.
(9) Except as may otherwise be provided by the 1940 Act, neither
the Investment Adviser nor its officers, directors, employees or agents shall
be subject to any liability for any error of judgment, mistake of law, or any
loss arising out of any investment or other act or omission in the performance
by the Investment Adviser of its duties under the Agreement or for any loss or
damage resulting from the imposition by any government of exchange control
restrictions which might affect the liquidity of the Fund's assets, or from
acts or omissions of custodians, or securities depositories, or from any war or
political act of any foreign government to which such assets might be exposed,
or for failure, on the part of the custodian or otherwise, timely to collect
payments, except for any liability, loss or damage resulting from willful
misfeasance, bad faith or gross negligence on the Investment Adviser's part or
by reason of reckless disregard of the Investment Adviser's duties under this
Agreement. It is hereby understood and acknowledged by the Fund that the value
of the investments made for the Fund may increase as well as decrease and are
not guaranteed by the Investment Adviser. It is further understood and
acknowledged by the Fund that investment decisions made on behalf of the Fund
by the Investment Adviser are subject to a variety of factors which may affect
the values and income generated by the Fund's portfolio securities, including
general economic conditions, market factors and currency exchange rates, and
that investment decisions made by the Investment Adviser will not always be
profitable or prove to have been correct.
(10) a. The Fund hereby agrees to indemnify the Investment
Adviser and each of the Investment Adviser's directors,
officers, employees, and agents (including any individual who
serves at the Investment Adviser's request as director,
officer, partner, trustee or the like of another corporation)
(each such person being an "Indemnitee") against any
liabilities and expenses, including amounts paid in
satisfaction of judgments, in compromise or as fines and
penalties, and counsel fees (all as provided in accordance
with applicable corporate law) reasonably incurred by such
Indemnitee in connection with the defense or disposition of
any action, suit or other proceeding, whether civil or
criminal, before any court or administrative or investigative
body in which he may be or may have been involved as a party
or otherwise or with which he may be or may have been
threatened, while acting in any capacity set forth above in
this Section 10 or thereafter by reason of his having acted
in any such capacity, except with respect to any matter as to
which he shall have been adjudicated not to have acted in
good faith in the reasonable belief that his action was in
the best interest of the Fund and furthermore, in the case of
any criminal proceeding, so long as he had no reasonable
cause to believe that the conduct was unlawful, provided,
however, that (1) no Indemnitee shall be indemnified
hereunder against any expense of such Indemnitee arising by
reason of (i) willful misfeasance, (ii) bad faith, (iii)
gross negligence or (iv) reckless disregard of the duties
involved in the conduct of his position (the conduct referred
to in such clauses (i) through (iv) being sometimes referred
to herein as "disabling conduct"), (2) as to any matter
disposed of by settlement or a compromise payment by such
Indemnitee, pursuant to a consent decree or otherwise, no
indemnification either for said payment or for any other
expenses shall be provided unless there has been a
determination that such settlement or compromise is in the
best interests of the Fund and that such Indemnitee appears
to have acted in good faith in the reasonable belief that his
action was in the best interests of the Fund and did not
involve disabling conduct by such Indemnitee and (3) with
respect to any action, suit or other proceeding voluntarily
prosecuted by any Indemnitee as plaintiff, indemnification
shall be mandatory only if the prosecution of such action,
suit or other proceeding by such Indemnitee was authorized by
a majority of the full Board of the Fund.
b. The Fund shall make advance payments in connection with
the expenses of defending any action with respect to which
indemnification might be sought hereunder in the Fund
receives a written affirmation of the Indemnitee's good faith
belief that the standard of conduct necessary for
indemnification has been met and a written undertaking to
reimburse the Fund unless it is subsequently determined that
he is entitled to such indemnification and if the directors
of the Fund determine that the facts then known to them would
not preclude indemnification. In addition, at least one of
the following conditions must be met: (A) the Indemnitee
shall provide a security for his undertaking, (B) the Fund
shall be insured against losses arising by reason of any
lawful advance, or (C) a majority of a quorum consisting of
directors of the Fund who are neither "interested persons" of
the Fund (as defined in Section 2(a)(19) of the Act) nor
parties to the proceeding ("Disinterested Non-party
Directors") or an independent legal counsel in a written
opinion, shall determine, based on a review of readily
available facts (as opposed to a full trial-type inquiry),
that there is reason to believe that the Indemnitee
ultimately will be found entitled to indemnification.
c. All determinations with respect to indemnification
hereunder shall be made (1) by a final decision on the merits
by a court or other body before whom the proceeding was
brought that such Indemnitees is not liable by reason of
disabling conduct or, (2) in the absence of such a decision,
by (i) a majority vote of a quorum of the Disinterested
Directors of the Fund, or (ii) if such a quorum is not
obtainable or even, if obtainable, if a majority vote of such
quorum so directs, independent legal counsel in a written
opinion. All determinations that advance payments in
connection with the expense of defending any proceeding shall
be authorized shall be made in accordance with the
immediately preceding clause (2) above.
The rights accruing to any Indemnitee under these provisions shall
not exclude any other right to which he may be lawfully entitled.
(11) It is understood that the services of the Investment Adviser
are not deemed to be exclusive, and nothing in this Agreement shall prevent the
Investment Adviser, or any affiliate thereof, from providing similar services
to other investment companies and other clients, including clients which may
invest in the same types of securities as the Fund, or, in providing such
services, from using information furnished by others. The Fund acknowledges
that the Investment Adviser renders services to others, that officers and
employees of the investment adviser invest for their own accounts, and the Fund
is not entitled to, and does not expect, to obtain the benefits of any
investment opportunities developed by the Investment Adviser such officers or
employees in which the Investment Adviser acting in good faith, does not cause
the Fund to invest.
(12) This Agreement shall be construed in accordance with the laws
of the State of Delaware, provided that nothing herein shall be construed as
being inconsistent with applicable Federal and state securities laws and any
rules, regulations and orders thereunder.
(13) If any provision of this Agreement shall be held or made
invalid by a court decision, statute, rule or otherwise, the remainder of this
Agreement shall not be affected thereby and, to this extent, the provisions of
this Agreement shall be deemed to be severable.
(14) Nothing herein shall be construed as constituting the
Investment Adviser an agent of the Fund.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement
to be executed by their duly authorized officers and their respective corporate
seals to be hereunto duly affixed and attested.
MUTUAL FINANCIAL SERVICES FUND, a series of
FRANKLIN MUTUAL SERIES FUND INC.
By:/s/Deborah R. Gatzek
Deborah R. Gatzek
Vice President &
Secretary
FRANKLIN MUTUAL ADVISERS, LLC
By:/s/Leslie M. Kratter
Leslie M. Kratter
Secretary
FRANKLIN MUTUAL SERIES FUND INC.
51 John F. Kennedy Park Way
Short Hills, New Jersey
Franklin/Templeton Distributors, Inc.
777 Mariners Island Blvd.
San Mateo, CA 94404
Re: Amendment of Distribution Agreement - Mutual Financial Services Fund
Gentlemen:
We (the "Fund") are a corporation or business trust operating as an open-end
management investment company or "mutual fund," which is registered under the
Investment Company Act of 1940, as amended (the "1940 Act") and whose shares are
registered under the Securities Act of 1933, as amended (the "1933 Act"). You
have informed us that your company is registered as a broker-dealer under the
provisions of the Securities Exchange Act of 1934, as amended (the "1934 Act")
and that your company is a member of the National Association of Securities
Dealers, Inc.
This agreement is an amendment (the "Amendment") of the Distribution Agreement
(the "Agreement") currently in effect between you and us. As used herein all
capitalized terms herein have the meanings set forth in the Agreement. We have
been authorized to execute and deliver the Amendment to you by a resolution of
our Board passed at a meeting at which a majority of Board members, including a
majority who are not otherwise interested persons of the Fund and who are not
interested persons of our investment adviser, its related organizations or of
you or your related organizations, were present and voted in favor of such
resolution approving the Amendment.
To the extent that any provision of the Amendment conflicts with any provision
of the Agreement, the Amendment provision supersedes the Agreement provision.
The Agreement and the Amendment together constitute the entire agreement between
the parties hereto and supersede all prior oral or written agreements between
the parties hereto.
Section 4. entitled "Compensation" is amended by adding the following sentences
at the end of Subsection 4.B:
The compensation provided in the Class B Distribution Plan
applicable to Class B Shares (the "Class B Plan") is divided into a
distribution fee and a service fee, each of which fees is in
compensation for different services to be rendered to the Fund.
Subject to the termination provisions in the Class B Plan, the
distribution fee with respect to the sale of a Class B Share shall
be earned when such Class B Share is sold and shall be payable from
time to time as provided in the Class B Plan. The distribution fee
payable to you as provided in the Class B Plan shall be payable
without offset, defense or counterclaim (it being understood by the
parties hereto that nothing in this sentence shall be deemed a
waiver by the Fund of any claim the Fund may have against you).
You may direct the Fund to cause our custodian to pay such
distribution fee to Lightning Finance Company Limited ("LFL") or
other persons providing funds to you to cover expenses referred to
in Section 2(a) of the Class B Plan and to cause our custodian to
pay the service fee to you for payment to dealers or others or
directly to others to cover expenses referred to in Section 2(b) of
the Class B Plan.
We understand that you intend to assign your right to receive
certain distribution fees with respect to Class B Shares to LFL in
exchange for funds that you will use to cover expenses referred to
in Section 2(a) of the Class B Plan. In recognition that we will
benefit from your arrangement with LFL, we agree that, in addition
to the provisions of Section 7 (iii) of the Class B Plan, we will
not pay to any person or entity, other than LFL, any such assigned
distribution fees related to Class B Shares sold by you prior to
the termination of either the Agreement or the Class B Plan. We
agree that the preceding sentence shall survive termination of the
Agreement.
Section 4. entitled "Compensation" is amended by adding the following Subsection
4.C. after Subsection 4.B.:
C. With respect to the sales commission on the redemption of
Shares of each series and class of the Fund as provided in
Subsection 4.A. above, we will cause our shareholder services agent
(the "Transfer Agent") to withhold from redemption proceeds payable
to holders of the Shares all contingent deferred sales charges
properly payable by such holders in accordance with the terms of
our then current prospectuses and statements of additional
information (each such sales charge, a "CDSC"). Upon receipt of an
order for redemption, the Transfer Agent shall direct our custodian
to transfer such redemption proceeds to a general trust account.
We shall then cause the Transfer Agent to pay over to you or your
assigns from the general trust account such CDSCs properly payable
by such holders as promptly as possible after the settlement date
for each such redemption of Shares. CDSCs shall be payable without
offset, defense or counterclaim (it being understood that nothing
in this sentence shall be deemed a waiver by us of any claim we may
have against you.) You may direct that the CDSCs payable to you be
paid to any other person.
Section 11. entitled "Conduct of Business" is amended by replacing the reference
in the second paragraph to "Rules of Fair Practice" with a reference to the
"Conduct Rules".
Section 16. entitled "Miscellaneous" is amended in the first paragraph by
changing the first letter of each of the words in each of the terms in
quotations marks, except "Parent," to the lower case and giving to the term
"assignment" the meaning as set forth only in the 1940 Act and the Rules and
Regulations thereunder (and not as set forth in the 1933 Act and the Rules and
Regulations thereunder.)
If the foregoing meets with your approval, please acknowledge your acceptance by
signing each of the enclosed copies, whereupon this will become a binding
agreement as of the date set forth below.
Very truly yours,
FRANKLIN MUTUAL SERIES FUND INC.
By /s/Deborah R. Gatzek
Deborah R. Gatzek
Vice President & Secretary
Accepted:
Franklin/Templeton Distributors, Inc.
By /s/Harmon E. Burns
Harmon E. Burns
Executive Vice President
Dated: March 26, 1999
FRANKLIN MUTUAL SERIES FUND INC.
51 John F. Kennedy Park Way
Short Hills, New Jersey
Franklin/Templeton Distributors, Inc.
777 Mariners Island Blvd.
San Mateo, CA 94404
Re: Amendment of Distribution Agreement - Mutual Shares Fund
Gentlemen:
We (the "Fund") are a corporation or business trust operating as an open-end
management investment company or "mutual fund," which is registered under the
Investment Company Act of 1940, as amended (the "1940 Act") and whose shares
are registered under the Securities Act of 1933, as amended (the "1933
Act"). You have informed us that your company is registered as a
broker-dealer under the provisions of the Securities Exchange Act of 1934, as
amended (the "1934 Act") and that your company is a member of the National
Association of Securities Dealers, Inc.
This agreement is an amendment (the "Amendment") of the Distribution
Agreement (the "Agreement") currently in effect between you and us. As used
herein all capitalized terms herein have the meanings set forth in the
Agreement. We have been authorized to execute and deliver the Amendment to
you by a resolution of our Board passed at a meeting at which a majority of
Board members, including a majority who are not otherwise interested persons
of the Fund and who are not interested persons of our investment adviser, its
related organizations or of you or your related organizations, were present
and voted in favor of such resolution approving the Amendment.
To the extent that any provision of the Amendment conflicts with any
provision of the Agreement, the Amendment provision supersedes the Agreement
provision. The Agreement and the Amendment together constitute the entire
agreement between the parties hereto and supersede all prior oral or written
agreements between the parties hereto.
Section 4. entitled "Compensation" is amended by adding the following
sentences at the end of Subsection 4.B:
The compensation provided in the Class B Distribution Plan
applicable to Class B Shares (the "Class B Plan") is divided into
a distribution fee and a service fee, each of which fees is in
compensation for different services to be rendered to the Fund.
Subject to the termination provisions in the Class B Plan, the
distribution fee with respect to the sale of a Class B Share
shall be earned when such Class B Share is sold and shall be
payable from time to time as provided in the Class B Plan. The
distribution fee payable to you as provided in the Class B Plan
shall be payable without offset, defense or counterclaim (it
being understood by the parties hereto that nothing in this
sentence shall be deemed a waiver by the Fund of any claim the
Fund may have against you). You may direct the Fund to cause our
custodian to pay such distribution fee to Lightning Finance
Company Limited ("LFL") or other persons providing funds to you
to cover expenses referred to in Section 2(a) of the Class B Plan
and to cause our custodian to pay the service fee to you for
payment to dealers or others or directly to others to cover
expenses referred to in Section 2(b) of the Class B Plan.
We understand that you intend to assign your right to receive
certain distribution fees with respect to Class B Shares to LFL
in exchange for funds that you will use to cover expenses
referred to in Section 2(a) of the Class B Plan. In recognition
that we will benefit from your arrangement with LFL, we agree
that, in addition to the provisions of Section 7 (iii) of the
Class B Plan, we will not pay to any person or entity, other than
LFL, any such assigned distribution fees related to Class B
Shares sold by you prior to the termination of either the
Agreement or the Class B Plan. We agree that the preceding
sentence shall survive termination of the Agreement.
Section 4. entitled "Compensation" is amended by adding the following
Subsection 4.C. after Subsection 4.B.:
C. With respect to the sales commission on the redemption of
Shares of each series and class of the Fund as provided in
Subsection 4.A. above, we will cause our shareholder services
agent (the "Transfer Agent") to withhold from redemption proceeds
payable to holders of the Shares all contingent deferred sales
charges properly payable by such holders in accordance with the
terms of our then current prospectuses and statements of
additional information (each such sales charge, a "CDSC"). Upon
receipt of an order for redemption, the Transfer Agent shall
direct our custodian to transfer such redemption proceeds to a
general trust account. We shall then cause the Transfer Agent to
pay over to you or your assigns from the general trust account
such CDSCs properly payable by such holders as promptly as
possible after the settlement date for each such redemption of
Shares. CDSCs shall be payable without offset, defense or
counterclaim (it being understood that nothing in this sentence
shall be deemed a waiver by us of any claim we may have against
you.) You may direct that the CDSCs payable to you be paid to
any other person.
Section 11. entitled "Conduct of Business" is amended by replacing the
reference in the second paragraph to "Rules of Fair Practice" with a
reference to the "Conduct Rules".
Section 16. entitled "Miscellaneous" is amended in the first paragraph by
changing the first letter of each of the words in each of the terms in
quotations marks, except "Parent," to the lower case and giving to the term
"assignment" the meaning as set forth only in the 1940 Act and the Rules and
Regulations thereunder (and not as set forth in the 1933 Act and the Rules
and Regulations thereunder.)
If the foregoing meets with your approval, please acknowledge your acceptance
by signing each of the enclosed copies, whereupon this will become a binding
agreement as of the date set forth below.
Very truly yours,
FRANKLIN MUTUAL SERIES FUND INC.
By /s/Deborah R. Gatzek
Deborah R. Gatzek
Vice President & Secretary
Accepted:
Franklin/Templeton Distributors, Inc.
By /s/Harmon E. Burns
Harmon E. Burns
Executive Vice President
Dated: March 26, 1999
FRANKLIN MUTUAL SERIES FUND INC.
51 John F. Kennedy Park Way
Short Hills, New Jersey
Franklin/Templeton Distributors, Inc.
777 Mariners Island Blvd.
San Mateo, CA 94404
Re: Amendment of Distribution Agreement - Mutual Beacon Fund
Gentlemen:
We (the "Fund") are a corporation or business trust operating as an open-end
management investment company or "mutual fund," which is registered under the
Investment Company Act of 1940, as amended (the "1940 Act") and whose shares
are registered under the Securities Act of 1933, as amended (the "1933
Act"). You have informed us that your company is registered as a
broker-dealer under the provisions of the Securities Exchange Act of 1934, as
amended (the "1934 Act") and that your company is a member of the National
Association of Securities Dealers, Inc.
This agreement is an amendment (the "Amendment") of the Distribution
Agreement (the "Agreement") currently in effect between you and us. As used
herein all capitalized terms herein have the meanings set forth in the
Agreement. We have been authorized to execute and deliver the Amendment to
you by a resolution of our Board passed at a meeting at which a majority of
Board members, including a majority who are not otherwise interested persons
of the Fund and who are not interested persons of our investment adviser, its
related organizations or of you or your related organizations, were present
and voted in favor of such resolution approving the Amendment.
To the extent that any provision of the Amendment conflicts with any
provision of the Agreement, the Amendment provision supersedes the Agreement
provision. The Agreement and the Amendment together constitute the entire
agreement between the parties hereto and supersede all prior oral or written
agreements between the parties hereto.
Section 4. entitled "Compensation" is amended by adding the following
sentences at the end of Subsection 4.B:
The compensation provided in the Class B Distribution Plan
applicable to Class B Shares (the "Class B Plan") is divided into
a distribution fee and a service fee, each of which fees is in
compensation for different services to be rendered to the Fund.
Subject to the termination provisions in the Class B Plan, the
distribution fee with respect to the sale of a Class B Share
shall be earned when such Class B Share is sold and shall be
payable from time to time as provided in the Class B Plan. The
distribution fee payable to you as provided in the Class B Plan
shall be payable without offset, defense or counterclaim (it
being understood by the parties hereto that nothing in this
sentence shall be deemed a waiver by the Fund of any claim the
Fund may have against you). You may direct the Fund to cause our
custodian to pay such distribution fee to Lightning Finance
Company Limited ("LFL") or other persons providing funds to you
to cover expenses referred to in Section 2(a) of the Class B Plan
and to cause our custodian to pay the service fee to you for
payment to dealers or others or directly to others to cover
expenses referred to in Section 2(b) of the Class B Plan.
We understand that you intend to assign your right to receive
certain distribution fees with respect to Class B Shares to LFL
in exchange for funds that you will use to cover expenses
referred to in Section 2(a) of the Class B Plan. In recognition
that we will benefit from your arrangement with LFL, we agree
that, in addition to the provisions of Section 7 (iii) of the
Class B Plan, we will not pay to any person or entity, other than
LFL, any such assigned distribution fees related to Class B
Shares sold by you prior to the termination of either the
Agreement or the Class B Plan. We agree that the preceding
sentence shall survive termination of the Agreement.
Section 4. entitled "Compensation" is amended by adding the following
Subsection 4.C. after Subsection 4.B.:
C. With respect to the sales commission on the redemption of
Shares of each series and class of the Fund as provided in
Subsection 4.A. above, we will cause our shareholder services
agent (the "Transfer Agent") to withhold from redemption proceeds
payable to holders of the Shares all contingent deferred sales
charges properly payable by such holders in accordance with the
terms of our then current prospectuses and statements of
additional information (each such sales charge, a "CDSC"). Upon
receipt of an order for redemption, the Transfer Agent shall
direct our custodian to transfer such redemption proceeds to a
general trust account. We shall then cause the Transfer Agent to
pay over to you or your assigns from the general trust account
such CDSCs properly payable by such holders as promptly as
possible after the settlement date for each such redemption of
Shares. CDSCs shall be payable without offset, defense or
counterclaim (it being understood that nothing in this sentence
shall be deemed a waiver by us of any claim we may have against
you.) You may direct that the CDSCs payable to you be paid to
any other person.
Section 11. entitled "Conduct of Business" is amended by replacing the
reference in the second paragraph to "Rules of Fair Practice" with a
reference to the "Conduct Rules".
Section 16. entitled "Miscellaneous" is amended in the first paragraph by
changing the first letter of each of the words in each of the terms in
quotations marks, except "Parent," to the lower case and giving to the term
"assignment" the meaning as set forth only in the 1940 Act and the Rules and
Regulations thereunder (and not as set forth in the 1933 Act and the Rules
and Regulations thereunder.)
If the foregoing meets with your approval, please acknowledge your acceptance
by signing each of the enclosed copies, whereupon this will become a binding
agreement as of the date set forth below.
Very truly yours,
FRANKLIN MUTUAL SERIES FUND INC.
By /s/Deborah R. Gatzek
Deborah R. Gatzek
Vice President & Secretary
Accepted:
Franklin/Templeton Distributors, Inc.
By /s/Harmon E. Burns
Harmon E. Burns
Executive Vice President
Dated: March 26, 1999
FRANKLIN MUTUAL SERIES FUND INC.
51 John F. Kennedy Park Way
Short Hills, New Jersey
Franklin/Templeton Distributors, Inc.
777 Mariners Island Blvd.
San Mateo, CA 94404
Re: Amendment of Distribution Agreement - Mutual Qualified Fund
Gentlemen:
We (the "Fund") are a corporation or business trust operating as an open-end
management investment company or "mutual fund," which is registered under the
Investment Company Act of 1940, as amended (the "1940 Act") and whose shares
are registered under the Securities Act of 1933, as amended (the "1933
Act"). You have informed us that your company is registered as a
broker-dealer under the provisions of the Securities Exchange Act of 1934, as
amended (the "1934 Act") and that your company is a member of the National
Association of Securities Dealers, Inc.
This agreement is an amendment (the "Amendment") of the Distribution
Agreement (the "Agreement") currently in effect between you and us. As used
herein all capitalized terms herein have the meanings set forth in the
Agreement. We have been authorized to execute and deliver the Amendment to
you by a resolution of our Board passed at a meeting at which a majority of
Board members, including a majority who are not otherwise interested persons
of the Fund and who are not interested persons of our investment adviser, its
related organizations or of you or your related organizations, were present
and voted in favor of such resolution approving the Amendment.
To the extent that any provision of the Amendment conflicts with any
provision of the Agreement, the Amendment provision supersedes the Agreement
provision. The Agreement and the Amendment together constitute the entire
agreement between the parties hereto and supersede all prior oral or written
agreements between the parties hereto.
Section 4. entitled "Compensation" is amended by adding the following
sentences at the end of Subsection 4.B:
The compensation provided in the Class B Distribution Plan
applicable to Class B Shares (the "Class B Plan") is divided into
a distribution fee and a service fee, each of which fees is in
compensation for different services to be rendered to the Fund.
Subject to the termination provisions in the Class B Plan, the
distribution fee with respect to the sale of a Class B Share
shall be earned when such Class B Share is sold and shall be
payable from time to time as provided in the Class B Plan. The
distribution fee payable to you as provided in the Class B Plan
shall be payable without offset, defense or counterclaim (it
being understood by the parties hereto that nothing in this
sentence shall be deemed a waiver by the Fund of any claim the
Fund may have against you). You may direct the Fund to cause our
custodian to pay such distribution fee to Lightning Finance
Company Limited ("LFL") or other persons providing funds to you
to cover expenses referred to in Section 2(a) of the Class B Plan
and to cause our custodian to pay the service fee to you for
payment to dealers or others or directly to others to cover
expenses referred to in Section 2(b) of the Class B Plan.
We understand that you intend to assign your right to receive
certain distribution fees with respect to Class B Shares to LFL
in exchange for funds that you will use to cover expenses
referred to in Section 2(a) of the Class B Plan. In recognition
that we will benefit from your arrangement with LFL, we agree
that, in addition to the provisions of Section 7 (iii) of the
Class B Plan, we will not pay to any person or entity, other than
LFL, any such assigned distribution fees related to Class B
Shares sold by you prior to the termination of either the
Agreement or the Class B Plan. We agree that the preceding
sentence shall survive termination of the Agreement.
Section 4. entitled "Compensation" is amended by adding the following
Subsection 4.C. after Subsection 4.B.:
C. With respect to the sales commission on the redemption of
Shares of each series and class of the Fund as provided in
Subsection 4.A. above, we will cause our shareholder services
agent (the "Transfer Agent") to withhold from redemption proceeds
payable to holders of the Shares all contingent deferred sales
charges properly payable by such holders in accordance with the
terms of our then current prospectuses and statements of
additional information (each such sales charge, a "CDSC"). Upon
receipt of an order for redemption, the Transfer Agent shall
direct our custodian to transfer such redemption proceeds to a
general trust account. We shall then cause the Transfer Agent to
pay over to you or your assigns from the general trust account
such CDSCs properly payable by such holders as promptly as
possible after the settlement date for each such redemption of
Shares. CDSCs shall be payable without offset, defense or
counterclaim (it being understood that nothing in this sentence
shall be deemed a waiver by us of any claim we may have against
you.) You may direct that the CDSCs payable to you be paid to
any other person.
Section 11. entitled "Conduct of Business" is amended by replacing the
reference in the second paragraph to "Rules of Fair Practice" with a
reference to the "Conduct Rules".
Section 16. entitled "Miscellaneous" is amended in the first paragraph by
changing the first letter of each of the words in each of the terms in
quotations marks, except "Parent," to the lower case and giving to the term
"assignment" the meaning as set forth only in the 1940 Act and the Rules and
Regulations thereunder (and not as set forth in the 1933 Act and the Rules
and Regulations thereunder.)
If the foregoing meets with your approval, please acknowledge your acceptance
by signing each of the enclosed copies, whereupon this will become a binding
agreement as of the date set forth below.
Very truly yours,
FRANKLIN MUTUAL SERIES FUND INC.
By /s/Deborah R. Gatzek
Deborah R. Gatzek
Vice President & Secretary
Accepted:
Franklin/Templeton Distributors, Inc.
By /s/Harmon E. Burns
Harmon E. Burns
Executive Vice President
Dated: March 26, 1999
FRANKLIN MUTUAL SERIES FUND INC.
51 John F. Kennedy Park Way
Short Hills, New Jersey
Franklin/Templeton Distributors, Inc.
777 Mariners Island Blvd.
San Mateo, CA 94404
Re: Amendment of Distribution Agreement - Mutual Discovery Fund
Gentlemen:
We (the "Fund") are a corporation or business trust operating as an open-end
management investment company or "mutual fund," which is registered under the
Investment Company Act of 1940, as amended (the "1940 Act") and whose shares
are registered under the Securities Act of 1933, as amended (the "1933
Act"). You have informed us that your company is registered as a
broker-dealer under the provisions of the Securities Exchange Act of 1934, as
amended (the "1934 Act") and that your company is a member of the National
Association of Securities Dealers, Inc.
This agreement is an amendment (the "Amendment") of the Distribution
Agreement (the "Agreement") currently in effect between you and us. As used
herein all capitalized terms herein have the meanings set forth in the
Agreement. We have been authorized to execute and deliver the Amendment to
you by a resolution of our Board passed at a meeting at which a majority of
Board members, including a majority who are not otherwise interested persons
of the Fund and who are not interested persons of our investment adviser, its
related organizations or of you or your related organizations, were present
and voted in favor of such resolution approving the Amendment.
To the extent that any provision of the Amendment conflicts with any
provision of the Agreement, the Amendment provision supersedes the Agreement
provision. The Agreement and the Amendment together constitute the entire
agreement between the parties hereto and supersede all prior oral or written
agreements between the parties hereto.
Section 4. entitled "Compensation" is amended by adding the following
sentences at the end of Subsection 4.B:
The compensation provided in the Class B Distribution Plan
applicable to Class B Shares (the "Class B Plan") is divided into
a distribution fee and a service fee, each of which fees is in
compensation for different services to be rendered to the Fund.
Subject to the termination provisions in the Class B Plan, the
distribution fee with respect to the sale of a Class B Share
shall be earned when such Class B Share is sold and shall be
payable from time to time as provided in the Class B Plan. The
distribution fee payable to you as provided in the Class B Plan
shall be payable without offset, defense or counterclaim (it
being understood by the parties hereto that nothing in this
sentence shall be deemed a waiver by the Fund of any claim the
Fund may have against you). You may direct the Fund to cause our
custodian to pay such distribution fee to Lightning Finance
Company Limited ("LFL") or other persons providing funds to you
to cover expenses referred to in Section 2(a) of the Class B Plan
and to cause our custodian to pay the service fee to you for
payment to dealers or others or directly to others to cover
expenses referred to in Section 2(b) of the Class B Plan.
We understand that you intend to assign your right to receive
certain distribution fees with respect to Class B Shares to LFL
in exchange for funds that you will use to cover expenses
referred to in Section 2(a) of the Class B Plan. In recognition
that we will benefit from your arrangement with LFL, we agree
that, in addition to the provisions of Section 7 (iii) of the
Class B Plan, we will not pay to any person or entity, other than
LFL, any such assigned distribution fees related to Class B
Shares sold by you prior to the termination of either the
Agreement or the Class B Plan. We agree that the preceding
sentence shall survive termination of the Agreement.
Section 4. entitled "Compensation" is amended by adding the following
Subsection 4.C. after Subsection 4.B.:
C. With respect to the sales commission on the redemption of
Shares of each series and class of the Fund as provided in
Subsection 4.A. above, we will cause our shareholder services
agent (the "Transfer Agent") to withhold from redemption proceeds
payable to holders of the Shares all contingent deferred sales
charges properly payable by such holders in accordance with the
terms of our then current prospectuses and statements of
additional information (each such sales charge, a "CDSC"). Upon
receipt of an order for redemption, the Transfer Agent shall
direct our custodian to transfer such redemption proceeds to a
general trust account. We shall then cause the Transfer Agent to
pay over to you or your assigns from the general trust account
such CDSCs properly payable by such holders as promptly as
possible after the settlement date for each such redemption of
Shares. CDSCs shall be payable without offset, defense or
counterclaim (it being understood that nothing in this sentence
shall be deemed a waiver by us of any claim we may have against
you.) You may direct that the CDSCs payable to you be paid to
any other person.
Section 11. entitled "Conduct of Business" is amended by replacing the
reference in the second paragraph to "Rules of Fair Practice" with a
reference to the "Conduct Rules".
Section 16. entitled "Miscellaneous" is amended in the first paragraph by
changing the first letter of each of the words in each of the terms in
quotations marks, except "Parent," to the lower case and giving to the term
"assignment" the meaning as set forth only in the 1940 Act and the Rules and
Regulations thereunder (and not as set forth in the 1933 Act and the Rules
and Regulations thereunder.)
If the foregoing meets with your approval, please acknowledge your acceptance
by signing each of the enclosed copies, whereupon this will become a binding
agreement as of the date set forth below.
Very truly yours,
FRANKLIN MUTUAL SERIES FUND INC.
By /s/Deborah R. Gatzek
Deborah R. Gatzek
Vice President & Secretary
Accepted:
Franklin/Templeton Distributors, Inc.
By /s/Harmon E. Burns
Harmon E. Burns
Executive Vice President
Dated: March 26, 1999
FRANKLIN MUTUAL SERIES FUND INC.
51 John F. Kennedy Park Way
Short Hills, New Jersey
Franklin/Templeton Distributors, Inc.
777 Mariners Island Blvd.
San Mateo, CA 94404
Re: Amendment of Distribution Agreement - Mutual European
Fund
Gentlemen:
We (the "Fund") are a corporation or business trust operating as an
open-end management investment company or "mutual fund," which is
registered under the Investment Company Act of 1940, as amended (the
"1940 Act") and whose shares are registered under the Securities Act of
1933, as amended (the "1933 Act"). You have informed us that your
company is registered as a broker-dealer under the provisions of the
Securities Exchange Act of 1934, as amended (the "1934 Act") and that
your company is a member of the National Association of Securities
Dealers, Inc.
This agreement is an amendment (the "Amendment") of the Distribution
Agreement (the "Agreement") currently in effect between you and us. As
used herein all capitalized terms herein have the meanings set forth in
the Agreement. We have been authorized to execute and deliver the
Amendment to you by a resolution of our Board passed at a meeting at
which a majority of Board members, including a majority who are not
otherwise interested persons of the Fund and who are not interested
persons of our investment adviser, its related organizations or of you
or your related organizations, were present and voted in favor of such
resolution approving the Amendment.
To the extent that any provision of the Amendment conflicts with any
provision of the Agreement, the Amendment provision supersedes the
Agreement provision. The Agreement and the Amendment together
constitute the entire agreement between the parties hereto and supersede
all prior oral or written agreements between the parties hereto.
Section 4. entitled "Compensation" is amended by adding the following
sentences at the end of Subsection 4.B:
The compensation provided in the Class B Distribution Plan
applicable to Class B Shares (the "Class B Plan") is divided
into a distribution fee and a service fee, each of which
fees is in compensation for different services to be
rendered to the Fund. Subject to the termination provisions
in the Class B Plan, the distribution fee with respect to
the sale of a Class B Share shall be earned when such Class
B Share is sold and shall be payable from time to time as
provided in the Class B Plan. The distribution fee payable
to you as provided in the Class B Plan shall be payable
without offset, defense or counterclaim (it being understood
by the parties hereto that nothing in this sentence shall be
deemed a waiver by the Fund of any claim the Fund may have
against you). You may direct the Fund to cause our
custodian to pay such distribution fee to Lightning Finance
Company Limited ("LFL") or other persons providing funds to
you to cover expenses referred to in Section 2(a) of the
Class B Plan and to cause our custodian to pay the service
fee to you for payment to dealers or others or directly to
others to cover expenses referred to in Section 2(b) of the
Class B Plan.
We understand that you intend to assign your right to
receive certain distribution fees with respect to Class B
Shares to LFL in exchange for funds that you will use to
cover expenses referred to in Section 2(a) of the Class B
Plan. In recognition that we will benefit from your
arrangement with LFL, we agree that, in addition to the
provisions of Section 7 (iii) of the Class B Plan, we will
not pay to any person or entity, other than LFL, any such
assigned distribution fees related to Class B Shares sold by
you prior to the termination of either the Agreement or the
Class B Plan. We agree that the preceding sentence shall
survive termination of the Agreement.
Section 4. entitled "Compensation" is amended by adding the following
Subsection 4.C. after Subsection 4.B.:
C. With respect to the sales commission on the redemption
of Shares of each series and class of the Fund as provided
in Subsection 4.A. above, we will cause our shareholder
services agent (the "Transfer Agent") to withhold from
redemption proceeds payable to holders of the Shares all
contingent deferred sales charges properly payable by such
holders in accordance with the terms of our then current
prospectuses and statements of additional information (each
such sales charge, a "CDSC"). Upon receipt of an order for
redemption, the Transfer Agent shall direct our custodian to
transfer such redemption proceeds to a general trust
account. We shall then cause the Transfer Agent to pay over
to you or your assigns from the general trust account such
CDSCs properly payable by such holders as promptly as
possible after the settlement date for each such redemption
of Shares. CDSCs shall be payable without offset, defense
or counterclaim (it being understood that nothing in this
sentence shall be deemed a waiver by us of any claim we may
have against you.) You may direct that the CDSCs payable to
you be paid to any other person.
Section 11. entitled "Conduct of Business" is amended by replacing the
reference in the second paragraph to "Rules of Fair Practice" with a
reference to the "Conduct Rules".
Section 16. entitled "Miscellaneous" is amended in the first paragraph
by changing the first letter of each of the words in each of the terms
in quotations marks, except "Parent," to the lower case and giving to
the term "assignment" the meaning as set forth only in the 1940 Act and
the Rules and Regulations thereunder (and not as set forth in the 1933
Act and the Rules and Regulations thereunder.)
If the foregoing meets with your approval, please acknowledge your
acceptance by signing each of the enclosed copies, whereupon this will
become a binding agreement as of the date set forth below.
Very truly yours,
FRANKLIN MUTUAL SERIES FUND INC.
By /s/Deborah R. Gatzek
Deborah R. Gatzek
Vice President & Secretary
Accepted:
Franklin/Templeton Distributors, Inc.
By /s/Harmon E. Burns
Harmon E. Burns
Executive Vice President
Dated: March 26, 1999
MASTER CUSTODY AGREEMENT
EXHIBIT A
<TABLE>
<CAPTION>
The following is a list of the Investment Companies and their respective Series for which the Custodian shall serve under the
Master Custody Agreement dated as of February 16, 1996.
- -------------------------------------------- ---------------------------- ---------------------------------------------------------
INVESTMENT COMPANY ORGANIZATION SERIES ---(IF APPLICABLE)
- -------------------------------------------- ---------------------------- ---------------------------------------------------------
<S> <C> <C>
Adjustable Rate Securities Portfolios Delaware Business Trust U.S. Government Adjustable Rate Mortgage Portfolio
Franklin Asset Allocation Fund Delaware Business Trust
Franklin California Tax-Free Income Maryland Corporation
Fund, Inc.
Franklin California Tax-Free Trust Massachusetts Business Franklin California Insured Tax-Free Income Fund
Trust Franklin California Tax-Exempt Money Fund
Franklin California Intermediate-Term Tax-Free
Income Fund
Franklin Custodian Funds, Inc. Maryland Corporation Growth Series
Utilities Series
Dynatech Series
Income Series
U.S. Government Securities Series
Franklin Equity Fund California Corporation
Franklin Federal Money Fund California Corporation
Franklin Federal Tax- Free Income Fund California Corporation
- -------------------------------------------- ---------------------------- ---------------------------------------------------------
- -------------------------------------------- ---------------------------- ---------------------------------------------------------
INVESTMENT COMPANY ORGANIZATION SERIES ---(IF APPLICABLE)
- -------------------------------------------- ---------------------------- ---------------------------------------------------------
<S> <C> <C>
Franklin Gold & Precious Metals Fund Delaware Business Trust
Franklin High Income Trust Delaware Business Trust AGE High Income Fund
Franklin Investors Securities Trust Massachusetts Business Franklin Global Government Income Fund
Trust Franklin Short-Intermediate U.S. Govt Securities Fund
Franklin Convertible Securities Fund
Franklin Adjustable U.S. Government Securities Fund
Franklin Equity Income Fund
Franklin Bond Fund
Franklin Managed Trust Delaware Business Trust Franklin Rising Dividends Fund
Franklin Money Fund California Corporation
Franklin Municipal Securities Trust Delaware Business Trust Franklin California High Yield Municipal Fund
Franklin Tennessee Municipal Bond Fund
Franklin Mutual Series Fund Inc. Maryland Corporation Mutual Shares Fund
Mutual Beacon Fund
Mutual Qualified Fund
Mutual Discovery Fund
Mutual European Fund
Mutual Financial Services Fund
- -------------------------------------------- ---------------------------- ---------------------------------------------------------
- -------------------------------------------- ---------------------------- ---------------------------------------------------------
INVESTMENT COMPANY ORGANIZATION SERIES ---(IF APPLICABLE)
- -------------------------------------------- ---------------------------- ---------------------------------------------------------
<S> <C> <C>
Franklin New York Tax-Free Income Fund Delaware Business Trust
Franklin New York Tax-Free Trust Massachusetts Business Franklin New York Tax-Exempt Money Fund
Trust Franklin New York Intermediate-Term Tax-Free
Income Fund
Franklin New York Insured Tax-Free Income Fund
Franklin Real Estate Securities Trust Delaware Business Trust Franklin Real Estate Securities Fund
Franklin Strategic Mortgage Portfolio Delaware Business Trust
Franklin Strategic Series Delaware Business Trust Franklin California Growth Fund
Franklin Strategic Income Fund
Franklin MidCap Growth Fund
Franklin Global Utilities Fund
Franklin Small Cap Growth Fund
Franklin Global Health Care Fund
Franklin Natural Resources Fund
Franklin Blue Chip Fund
Franklin Biotechnology Discovery Fund
Franklin U.S. Long-Short Fund
Franklin Large Cap Growth Fund
Franklin Aggressive Growth Fund
Franklin Small Cap Growth Fund II
Franklin Technology Fund
Franklin Tax-Exempt Money Fund California Corporation
- -------------------------------------------- ---------------------------- ---------------------------------------------------------
- -------------------------------------------- ---------------------------- ---------------------------------------------------------
INVESTMENT COMPANY ORGANIZATION SERIES---(IF APPLICABLE)
- -------------------------------------------- ---------------------------- ---------------------------------------------------------
<S> <C> <C>
Franklin Tax-Free Trust Massachusetts Business Franklin Massachusetts Insured Tax-Free Income Fund
Trust Franklin Michigan Insured Tax-Free Income Fund
Franklin Minnesota Insured Tax-Free Income Fund
Franklin Insured Tax-Free Income Fund
Franklin Ohio Insured Tax-Free Income Fund
Franklin Puerto Rico Tax-Free Income Fund
Franklin Arizona Tax-Free Income Fund
Franklin Colorado Tax-Free Income Fund
Franklin Georgia Tax-Free Income Fund
Franklin Pennsylvania Tax-Free Income Fund
Franklin High Yield Tax-Free Income Fund
Franklin Missouri Tax-Free Income Fund
Franklin Oregon Tax-Free Income Fund
Franklin Texas Tax-Free Income Fund
Franklin Virginia Tax-Free Income Fund
Franklin Alabama Tax-Free Income Fund
Franklin Florida Tax-Free Income Fund
Franklin Connecticut Tax-Free Income Fund
Franklin Louisiana Tax-Free Income Fund
Franklin Maryland Tax-Free Income Fund
Franklin North Carolina Tax-Free Income Fund
Franklin New Jersey Tax-Free Income Fund
Franklin Kentucky Tax-Free Income Fund
Franklin Federal Intermediate-Term Tax-Free Income
Fund
Franklin Arizona Insured Tax-Free Income Fund
Franklin Florida Insured Tax-Free Income fund
- -------------------------------------------- ---------------------------- ---------------------------------------------------------
- -------------------------------------------- ---------------------------- ---------------------------------------------------------
INVESTMENT COMPANY ORGANIZATION SERIES ---(IF APPLICABLE)
- -------------------------------------------- ---------------------------- ---------------------------------------------------------
<S> <C> <C>
Franklin Templeton Fund Allocator Series Delaware Business Trust Franklin Templeton Conservative Target Fund
Franklin Templeton Moderate Target Fund
Franklin Templeton Growth Target Fund
Franklin Templeton Global Trust Delaware Business Trust Franklin Templeton Global Currency Fund
Franklin Templeton Hard Currency Fund
Franklin Templeton International Trust Delaware Business Trust Templeton Pacific Growth Fund
Templeton Foreign Smaller Companies Fund
Franklin Templeton Money Fund Trust Delaware Business Trust Franklin Templeton Money Fund
Franklin Value Investors Trust Massachusetts Business Franklin Balance Sheet Investment Fund
Trust Franklin MicroCap Value Fund
Franklin Value Fund
Franklin Templeton Variable Insurance Massachusetts Business Franklin Money Market Fund
Products Trust Trust Franklin Growth and Income Fund
Franklin Natural Resources Securities Fund
Franklin Real Estate Fund
Franklin Global Communications Securities Fund
Franklin High Income Fund
Templeton Global Income Securities Fund
Franklin Income Securities Fund
Franklin U.S. Government Fund
Franklin Zero Coupon Fund - 2000
Franklin Zero Coupon Fund - 2005
Franklin Zero Coupon Fund - 2010
Franklin Rising Dividends Securities Fund
- -------------------------------------------- ---------------------------- ---------------------------------------------------------
- -------------------------------------------- ---------------------------- ---------------------------------------------------------
INVESTMENT COMPANY ORGANIZATION SERIES ---(IF APPLICABLE)
- -------------------------------------------- ---------------------------- ---------------------------------------------------------
<S> <C> <C>
Franklin Templeton Variable Insurance Massachusetts Business Templeton Pacific Growth Fund
Products Trust (cont.) Trust Templeton International Equity Fund
Templeton Developing Markets Equity Fund
Templeton Global Growth Fund
Templeton Global Asset Allocation Fund
Franklin Small Cap Fund
Franklin Large Cap Growth Securities Fund
Templeton International Smaller Companies Fund
Mutual Discovery Securities Fund
Mutual Shares Securities Fund
Franklin Global Health Care Securities Fund
Franklin Value Securities Fund
Franklin Aggressive Growth Securities Fund
Franklin S&P 500 Index Fund
Franklin Strategic Income Securities Fund
Franklin Technology Securities Fund
- -------------------------------------------- ---------------------------- ---------------------------------------------------------
<S> <C> <C>
Institutional Fiduciary Trust Massachusetts Business Money Market Portfolio
Trust Franklin U.S. Government Securities Money Market
Portfolio
Franklin Cash Reserves Fund
The Money Market Portfolios Delaware Business Trust The Money Market Portfolio
The U.S. Government Securities Money Market Portfolio
Templeton Variable Products Series Fund Franklin Growth Investments Fund
Mutual Shares Investments Fund
Mutual Discovery Investments Fund
Franklin Small Cap Investments Fund
- -------------------------------------------- ---------------------------- ---------------------------------------------------------
- -------------------------------------------- ---------------------------- ---------------------------------------------------------
INVESTMENT COMPANY ORGANIZATION SERIES---(IF APPLICABLE)
- -------------------------------------------- ---------------------------- ---------------------------------------------------------
<S> <C> <C>
Franklin Floating Rate Master Trust Delaware Business Trust Franklin Floating Rate Master Series
CLOSED END FUNDS:
Franklin Multi-Income Trust Massachusetts Business
Trust
Franklin Universal Trust Massachusetts Business
Trust
Franklin Floating Rate Trust Delaware Business Trust
- -------------------------------------------- ---------------------------- ---------------------------------------------------------
REVISED: 3/21/00
</TABLE>
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. 28 to Registration Statement Number 33-18516 on
Form N1-A of our reports dated January XX, 2000, 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 2000 Annual Report to Shareholders.
/S/ERNST & YOUNG LLP
ERNST & YOUNG LLP
Boston, Massachusetts
April 27, 2000
POWER OF ATTORNEY
The undersigned Officers and Directors of FRANKLIN MUTUAL SERIES
FUND INC. (the "Registrant") hereby appoint Harmon Burns, Deborah R.
Gatzek, Mark H. Plafker, Murray L. Simpson, Barbara J. Green, David P.
Goss, Karen Skidmore, Bradley Takahashi and Leiann Nuzum (with full power
to each of them to act alone) his/her attorney-in-fact and agent, in all
capacities, to execute, and to file any of the documents referred to below
relating to Post-Effective Amendments to the Registrant's registration
statement on Form N-1A under the Investment Company Act of 1940, as
amended, and under the Securities Act of 1933, as amended, covering the
sale of shares by the Registrant under prospectuses becoming effective
after this date, including any amendment or amendments increasing or
decreasing the amount of securities for which registration is being sought,
with all exhibits and any and all documents required to be filed with
respect thereto with any regulatory authority. Each of the undersigned
grants to each of said attorneys, full authority to do every act necessary
to be done in order to effectuate the same as fully, to all intents and
purposes as he/she could do if personally present, thereby ratifying all
that said attorneys-in-fact and agents, may lawfully do or cause to be done
by virtue hereto.
This Power of Attorney may be executed in one or more counterparts, each of
which shall be deemed to be an original and all of which shall be deemed to
be a single document.
The undersigned Officers and Directors hereby execute this Power of
Attorney as of this 25th day of February 2000.
/s/Edward I. Altman, Ph.D. /s/Ann Torre Grant
Edward I. Altman, Ph.D., Director Ann Torre Grant, Director
/s/Andrew H. Hines, Jr. /s/William J. Lippman
Andrew H. Hines, Jr. Director William J. Lippman, Director
/s/Bruce A. MacPherson /s/Fred R. Millsaps
Bruce A. MacPherson, Director Fred R. Millsaps, Director
/s/Charles Rubens II /s/Leonard Rubin
Charles Rubens II, Director Leonard Rubin, Director
/s/Vaughn R. Sturtevant /s/Robert E. Wade
Vaughn R. Sturtevant, Director Robert E. Wade, Director
/s/Michael F. Price /s/Peter A. Langerman
Michael F. Price, Chairman of the Board Peter A. Langerman, President
and Director
/s/James R. Baio, Treasurer
James R. Baio, Treasurer
CERTIFICATE OF SECRETARY
I, David P. Goss, certify that I am Assistant Secretary of FRANKLIN MUTUAL
SERIES FUND INC. (the "Fund").
As Assistant Secretary of the Fund, I further certify that the following
resolution was adopted by a majority of the Directors of the Fund present at a
meeting held at at Lyford Cay, Bahamas, on February 25, 2000.
RESOLVED, that a Power of Attorney, substantially in
the form of the Power of Attorney presented to this
Board, appointing Harmon Burns, Deborah R. Gatzek,
Mark H. Plafker, Murray L. Simpson, Barbara J. Green,
David P. Gross, Karen L. Skidmore, Bradley Takahashi
and Leiann Nuzum as attorneys-in-fact for the purpose
of filing documents with the Securities and Exchange
Commission, be executed by each Director and
designated officer.
I declare under penalty of perjury that the matters set forth in this
certificate are true and correct of my own knowledge.
Dated: February 25, 2000 /s/David P. Goss
Assistant Secretary
THE FRANKLIN TEMPLETON GROUP
CODE OF ETHICS
AND
POLICY STATEMENT ON INSIDER TRADING
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C> <C>
THE FRANKLIN TEMPLETON GROUP CODE OF ETHICS.......................................1
PART 1 - STATEMENT OF PRINCIPLES..................................................1
PART 2 - PURPOSES, AND CONSEQUENCES OF NON-COMPLIANCE.............................2
PART 3 - COMPLIANCE REQUIREMENTS FOR ALL ACCESS PERSONS...........................3
PART 4 - ADDITIONAL COMPLIANCE REQUIREMENTS APPLICABLE TO PORTFOLIO PERSONS......10
PART 5 - REPORTING REQUIREMENTS FOR ALL ACCESS PERSONS...........................13
PART 6 - PRE-CLEARANCE REQUIREMENTS..............................................17
PART 7 - PENALTIES FOR VIOLATIONS OF THE CODE....................................22
PART 8 - A REMINDER ABOUT THE FRANKLIN TEMPLETON GROUP INSIDER TRADING POLICY....23
APPENDIX A: COMPLIANCE PROCEDURES, DEFINITIONS, AND OTHER ITEMS..................24
I. RESPONSIBILITIES OF EACH DESIGNATED COMPLIANCE OFFICER.....................25
II. COMPILATION OF DEFINITIONS OF IMPORTANT TERMS..............................31
III. SECURITIES EXEMPT FROM THE PROHIBITED, REPORTING,
AND PRE-CLEARANCE PROVISIONS .............................................32
IV. LEGAL REQUIREMENT..........................................................33
APPENDIX B: FORMS AND SCHEDULES..................................................34
ACKNOWLEDGMENT FORM..............................................................35
SCHEDULE A: LEGAL AND COMPLIANCE OFFICERS AND PRECLEARANCE DESK
TELEPHONE & FAX NUMBERS.............................................36
SCHEDULE B: SECURITIES TRANSACTION REPORT........................................37
SCHEDULE C: INITIAL, ANNUAL & UPDATED DISCLOSURE OF ACCESS PERSONS
SECURITIES HOLDINGS ................................................39
SCHEDULE D: NOTIFICATION OF SECURITIES ACCOUNT OPENING..........................40
SCHEDULE E: NOTIFICATION OF DIRECT OR INDIRECT BENEFICIAL INTEREST..............41
SCHEDULE F: INITIAL, ANNUAL & UPDATED DISCLOSURE OF SECURITIES ACCOUNTS.........42
SCHEDULE G: INITIAL AND ANNUAL CERTIFICATION OF DISCRETIONARY AUTHORITY.........43
SCHEDULE H: CHECKLIST FOR INVESTMENTS IN PARTNERSHIPS AND SECURITIES
ISSUED IN PRIVATE
PLACEMENTS.......................................................................45
APPENDIX C: INVESTMENT ADVISOR AND BROKER-DEALER AND OTHER SUBSIDIARIES OF FRANKLIN
RESOURCES, INC. - FEBRUARY 2000.................................................47
THE FRANKLIN TEMPLETON GROUP POLICY STATEMENT ON INSIDER TRADING..................1
A. LEGAL REQUIREMENT...........................................................1
B. WHO IS AN INSIDER?..........................................................2
C. WHAT IS MATERIAL INFORMATION?...............................................2
D. WHAT IS NON-PUBLIC INFORMATION?.............................................2
E. BASIS FOR LIABILITY.........................................................3
F. PENALTIES FOR INSIDER TRADING...............................................3
G. INSIDER TRADING PROCEDURES..................................................4
</TABLE>
THE FRANKLIN TEMPLETON GROUP CODE OF ETHICS
Franklin Resources, Inc. and all of its subsidiaries, and the funds in the
Franklin Templeton Group of Funds (the "Funds") (collectively, the "Franklin
Templeton Group") will follow this Code of Ethics (the "Code") and Policy
Statement on Insider Trading (the "Insider Trading Policy"). Additionally, the
subsidiaries listed in Appendix C of this Code, together with Franklin
Resources, Inc., the Funds, the Fund's investment advisers and principal
underwriter, have adopted the Code and Insider Trading Policy.
PART 1 - STATEMENT OF PRINCIPLES
The Franklin Templeton Group's policy is that the interests of shareholders
and clients are paramount and come before the interests of any director, officer
or employee of the Franklin Templeton Group.1
Personal investing activities of ALL directors, officers and employees of
the Franklin Templeton Group should be conducted in a manner to avoid actual OR
potential conflicts of interest with the Franklin Templeton Group, Fund
shareholders, and other clients of any Franklin Templeton adviser.
Directors, officers and employees of the Franklin Templeton Group shall use
their positions with the Franklin Templeton Group, and any investment
opportunities they learn of because of their positions with the Franklin
Templeton Group, in a manner consistent with their fiduciary duties for the
benefit of Fund shareholders, and clients.
PART 2 - PURPOSES, AND CONSEQUENCES OF NON-COMPLIANCE
It is important that you read and understand this document, because its
overall purpose is to help all of us comply with the law and to preserve and
protect the outstanding reputation of the Franklin Templeton Group. This
document was adopted to comply with Securities and Exchange Commission rules
under the Investment Company Act of 1940 ("1940 Act"), the Investment Advisers
Act of 1940 ("Advisers Act"), the Insider Trading and Securities Fraud
Enforcement Act of 1988 ("ITSFEA"), industry practice and the recommendations
contained in the ICI's REPORT OF THE ADVISORY GROUP ON PERSONAL INVESTING. Any
violation of the Code or Insider Trading Policy, including engaging in a
prohibited transaction or failing to file required reports, may result in
disciplinary action, and, when appropriate, termination of employment and/or
referral to appropriate governmental agencies.
PART 3 - COMPLIANCE REQUIREMENTS FOR ALL ACCESS PERSONS
3.1 WHO IS COVERED BY THE CODE AND HOW DOES IT WORK?
The principles contained in the Code must be observed by ALL directors,
officers and employees2 of the Franklin Templeton Group. However, there are
different categories of restrictions on personal investing activities. The
category in which you have been placed generally depends on your job function,
although unique circumstances may result in you being placed in a different
category.
The Code covers the following categories of employees who are described below:
(1) ACCESS PERSONS: Access Persons are those employees who have "ACCESS TO
INFORMATION" concerning recommendations made to a Fund or client with
regard to the purchase or sale of a security. Examples of "ACCESS TO
INFORMATION" would include having access to trading systems, portfolio
accounting systems, research data bases or settlement information. Access
Persons would typically include employees, including Management Trainees,
in the following departments:
o fund accounting;
o investment operations;
o information services & technology;
o product management;
o legal and legal compliance
o and anyone else designated by the Director of Compliance
In addition, you are an Access Person if you are any of the following:
o an officer or and directors of funds;
o an officer or director of an investment advisor or broker-dealer
subsidiary in the Franklin Templeton Group;
o a person that controls those entities; and
o any Franklin Resources' Proprietary Account ("Proprietary Account")3
(2) PORTFOLIO PERSONS: Portfolio Persons are a subset of Access Persons and are
those employees of the Franklin Templeton Group, who, in connection with
his or her regular functions or duties, makes or participates in the
decision to purchase or sell a security by a Fund in the Franklin Templeton
Group, or any other client or if his or her functions relate to the making
of any recommendations about those purchases or sales. Portfolio Persons
include:
o portfolio managers;
o research analysts;
o traders;
o employees serving in equivalent capacities (such as Management Trainees);
o employees supervising the activities of Portfolio Persons; and
o anyone else designated by the Director of Compliance
(3) NON-ACCESS PERSONS: If you are an employee in the Franklin Templeton Group
AND you do not fit into any of the above categories, you are a Non-Access
Person. Because you do not normally receive confidential information about
Fund portfolios, you are subject only to the prohibited transaction
provisions described in 3.4 of this Code and the Franklin Resources, Inc.'s
Standards of Business Conduct contained in the Employee Handbook.
Please contact the Legal Compliance Department if you are unsure as to what
category you fall in or whether you should be considered to be an Access Person
or Portfolio Person.
The Code works by prohibiting some transactions and requiring pre-clearance
and reporting of most others. NON-ACCESS PERSONS do not have to pre-clear their
security transactions, and, in most cases, do not have to report their
transactions. "INDEPENDENT DIRECTORS" need not report any securities transaction
unless you knew, or should have known that, during the 15-day period before or
after the transaction, the security was purchased or sold or considered for
purchase or sale by a Fund or Franklin Resources for a Fund. (See Section 5.2.B
below.) HOWEVER, PERSONAL INVESTING ACTIVITIES OF ALL EMPLOYEES AND INDEPENDENT
DIRECTORS ARE TO BE CONDUCTED IN COMPLIANCE WITH THE PROHIBITED TRANSACTIONS
PROVISIONS CONTAINED IN 3.4 BELOW. If you have any questions regarding your
personal securities activity, contact the Legal Compliance Department.
3.2 WHAT ACCOUNTS AND TRANSACTIONS ARE COVERED?
The Code covers all of your personal securities accounts and transactions,
as well as transactions by any of Franklin Resource's Proprietary Accounts. It
also covers all securities and accounts in which you have "beneficial
ownership." 4 A transaction by or for the account of your spouse, or any other
family member living in your home is considered to be the same as a transaction
by you. Also, a transaction for any account in which you have any economic
interest (other than the account of an unrelated client for which advisory fees
are received) and have or share investment control is generally considered the
same as a transaction by you. For example, if you invest in a corporation that
invests in securities and you have or share control over its investments, that
corporation's securities transactions are considered yours.
However, you are not deemed to have a pecuniary interest in any securities
held by a partnership, corporation, trust or similar entity unless you control,
or share control of such entity, or have, or share control over its investments.
For example, securities transactions of a trust or foundation in which you do
not have an economic interest (i.e., you are not the trustor or beneficiary) but
of which you are a trustee are not considered yours unless you have voting or
investment control of its assets. Accordingly, each time the words "you" or
"your" are used in this document, they apply not only to your personal
transactions and accounts, but also to all transactions and accounts in which
you have any direct or indirect beneficial interest. If it is not clear whether
a particular account or transaction is covered, ask a Preclearance Officer for
guidance.
3.3 WHAT SECURITIES ARE EXEMPT FROM THE CODE OF ETHICS?
You do not need to pre-clear OR report transactions of the following
securities:
(1) securities that are direct obligations of the U. S. Government (i.e.,
issued or guaranteed by the U.S. Government, such as Treasury bills, notes
and bonds, including U.S. Savings Bonds and derivatives thereof);
(2) high quality short-term instruments, including but not limited to bankers'
acceptances, bank certificates of deposit, commercial paper and repurchase
agreements;
(3) shares of registered open-end investment companies ("mutual funds"); and
(4) commodity futures, currencies, currency forwards and derivatives thereof.
Such transactions are also exempt from: (i) the prohibited transaction
provisions contained in Part 3.4 such as front-running; (ii) the additional
compliance requirements applicable to portfolio persons contained in Part 4; and
(iii) the applicable reporting requirements contained in Part 5.
3.4 PROHIBITED TRANSACTIONS FOR ALL ACCESS PERSONS
A. "INTENT" IS IMPORTANT
Certain transactions described below have been determined by the courts and
the SEC to be prohibited by law. The Code reiterates that these types of
transactions are a violation of the Statement of Principals and are prohibited.
Preclearance, which is a cornerstone of our compliance efforts, cannot detect
transactions which are dependent upon INTENT, or which by their nature, occur
before any order has been placed for a fund or client. A Preclearance Officer,
who is there to assist you with compliance with the Code, CANNOT guarantee any
transaction or transactions comply with the Code or the law. The fact that your
transaction receives preclearance, shows evidence of good faith, but depending
upon all the facts, may not provide a full and complete defense to any
accusation of violation of the Code or of the law. For example, if you executed
a transaction for which you received approval, or if the transaction was exempt
from preclearance (e.g., a transaction for 100 shares or less), would not
preclude a subsequent finding that front-running or scalping occurred because
such activity are dependent upon your intent. Intent cannot be detected during
preclearance, but only after a review of all the facts.
In the final analysis, compliance remains the responsibility of EACH
individual effecting personal securities transactions.
B. FRONT-RUNNING: TRADING AHEAD OF A FUND OR CLIENT
You cannot front-run any trade of a Fund or client. The term "front-run"
means knowingly trading before a contemplated transaction by a Fund or client of
any Franklin Templeton adviser, whether or not your trade and the Fund's or
client's trade take place in the same market. Thus, you may not:
(1) purchase a security if you intend, or know of Franklin Templeton Group's
intention, to purchase that security or a related security on behalf of a
Fund or client, or
(2) sell a security if you intend, or know of Franklin Templeton Group's
intention, to sell that security or a related security on behalf of a Fund
or client.
C. SCALPING.
You cannot purchase a security (or its economic equivalent) with the
intention of recommending that the security be purchased for a Fund, or client,
or sell short a security (or its economic equivalent) with the intention of
recommending that the security be sold for a Fund or client. Scalping is
prohibited whether or not you realize a profit from such transaction.
D. TRADING PARALLEL TO A FUND OR CLIENT
You cannot buy a security if you know that the same or a related security
is being bought contemporaneously by a Fund or client, or sell a security if you
know that the same or a related security is being sold contemporaneously by a
Fund or client.
E. TRADING AGAINST A FUND OR CLIENT
You cannot:
(1) buy a security if you know that a Fund or client is selling the same or a
related security, or has sold the security, until seven (7) calendar days
after the Fund's or client's order has either been executed or withdrawn,
or
(2) sell a security if you know that a Fund or client is buying the same or a
related security, or has bought the security until seven (7) calendar days
after the Fund's or client's order has either been executed or withdrawn.
Refer to Section I.A., "Pre-Clearance Standards," of Appendix A of the Code
for more details regarding the preclearance of personal securities transactions.
F. USING PROPRIETARY INFORMATION FOR PERSONAL TRANSACTIONS
You cannot buy or sell a security based on Proprietary Information 5
without disclosing the information and receiving written authorization. If you
wish to purchase or sell a security about which you obtained such information,
you must report all of the information you obtained regarding the security to
the Appropriate Analyst(s)6, or to the Director of Compliance for dissemination
to the Appropriate Analyst(s).
You will be permitted to purchase or sell such security if the Appropriate
Analyst(s) confirms to the Preclearance Desk that there is no intention to
engage in a transaction regarding the security within seven (7) calendar days on
behalf of an Associated Client7 and you subsequently preclear such security in
accordance with Part 6 below.
G. CERTAIN TRANSACTIONS IN SECURITIES OF FRANKLIN RESOURCES, INC., AND
AFFILIATED CLOSED-END FUNDS, AND REAL ESTATE INVESTMENT TRUSTS
If you are an employee of Franklin Resources, Inc. or any of its
affiliates, including the Franklin Templeton Group, you cannot effect a short
sale of the securities, including "short sales against the box" of Franklin
Resources, Inc., or any of the Franklin or Templeton closed-end funds, Franklin
real estate investment trusts or any other security issued by Franklin
Resources, Inc. or its affiliates. This prohibition would also apply to
effecting economically equivalent transactions, including, but not limited to
sales of any option to buy (i.e., a call option) or purchases of any option to
sell (i.e., a put option) and "swap" transactions or other derivatives. Officers
and directors of the Franklin Templeton Group who may be covered by Section 16
of the Securities Exchange Act of 1934, are reminded that their obligations
under that section are in addition to their obligations under this Code.
PART 4 - ADDITIONAL COMPLIANCE REQUIREMENTS APPLICABLE TO PORTFOLIO PERSONS8
4.1 REQUIREMENT TO DISCLOSE INTEREST AND METHOD OF DISCLOSURE
As a Portfolio Person, you must promptly disclose your direct or indirect
beneficial interest in a security whenever you learn that the security is under
consideration for purchase or sale by an Associated Client in the Franklin
Templeton Group and you;
(1) Have or share investment control of the Associated Client;
(2) Make any recommendation or participate in the determination of which
recommendation shall be made on behalf of the Associated Client; or
(3) Have functions or duties that relate to the determination of which
recommendation shall be made to the Associated Client.
In such instances, you must initially disclose that beneficial interest
orally to the primary portfolio manager (or other Appropriate Analyst) of the
Associated Client(s) considering the security, the Director of Research and
Trading or the Director of Compliance. Following that oral disclosure, you must
send a written acknowledgment of that interest on Schedule E (or on a form
containing substantially similar information) to the primary portfolio manager
(or other Appropriate Analyst), with a copy to the Legal Compliance Department.
4.2 SHORT SALES OF SECURITIES
You cannot sell short ANY security held by your Associated Clients,
including "short sales against the box". Additionally, Portfolio Persons
associated with the Templeton Group of Funds and clients cannot sell short any
security on the Templeton "Bargain List". This prohibition would also apply to
effecting economically equivalent transactions, including, but not limited to,
sales of uncovered call options, purchases of put options while not owning the
underlying security and short sales of bonds that are convertible into equity
positions.
4.3 SHORT SWING TRADING
Portfolio Persons cannot profit from the purchase and sale or sale and
purchase within sixty calendar days of any security, including derivatives.
Portfolio Persons are responsible for transactions that may occur in margin and
option accounts and all such transactions must comply with this restriction.9
This restriction does NOT apply to:
(1) trading within a shorter period if you do not realize a profit and if
you do not violate any other provisions of this Code; AND
(2) profiting on the purchase and sale or sale and purchase within sixty
calendar days of the following securities:
o securities that are direct obligations of the U.S. Government,
such as Treasury bills, notes and bonds, and U.S. Savings Bonds
and derivatives thereof;
o high quality short-term instruments ("money market instruments")
including but not limited to (i) bankers' acceptances, (ii) U.S.
bank certificates of deposit; (iii) commercial paper; and (iv)
repurchase agreements;
o shares of registered open-end investment companies; and
o commodity futures, currencies, currency forwards and derivatives
thereof.
Calculation of profits during the 60 calendar day holding period generally
will be based on "last-in, first-out" ("LIFO"). Portfolio Persons may elect to
calculate their 60 calendar day profits on either a LIFO or FIFO ("first-in,
first-out") basis when there has not been any activity in such security by their
Associated Clients during the previous 60 calendar days.
4.4 SERVICE AS A DIRECTOR
As a Portfolio Person, you cannot serve as a director, trustee, or in a
similar capacity for any company (excluding not-for-profit companies, charitable
groups, and eleemosynary organizations) unless you receive approval from the
Chief Executive Officer of the principal investment adviser to the Fund(s) of
which you are a Portfolio Person and he/she determines that your service is
consistent with the interests of the Fund(s) and its shareholders.
4.5 SECURITIES SOLD IN A PUBLIC OFFERING
Portfolio Persons cannot buy securities in any initial public offering, or
a secondary offering by an issuer, INCLUDING initial public offerings of
securities made by closed-end funds and real estate investment trusts advised by
the Franklin Templeton Group. Purchases of open-end mutual funds are excluded
from this prohibition.
4.6 INTERESTS IN PARTNERSHIPS AND SECURITIES ISSUED IN PRIVATE PLACEMENTS
Portfolio Persons cannot acquire limited partnership interests or other
securities in private placements unless they:
(1) complete the Private Placement Checklist (Schedule H);
(2) provide supporting documentation (e.g., a copy of the offering
memorandum); and
(3) obtain approval of the appropriate Chief Investment Officer; and
(4) submit all documents to the Legal Compliance Department Approval will
only be granted after the Director of Compliance consults with an
executive officer of Franklin Resources, Inc.
PART 5 - REPORTING REQUIREMENTS FOR ALL ACCESS PERSONS
5.1 REPORTING OF BENEFICIAL OWNERSHIP AND SECURITIES TRANSACTIONS
Compliance with the following personal securities transaction reporting
procedures is essential to enable us to meet our responsibilities to Funds and
other clients and to comply with regulatory requirements. You are expected to
comply with both the letter and spirit of these requirements, including
completing and filing all reports required under the Code in a timely manner.
5.2 INITIAL HOLDINGS AND BROKERAGE ACCOUNT REPORTS
A. ALL ACCESS PERSONS (EXCEPT INDEPENDENT DIRECTORS) Every employee (new or
transfer) of the Franklin Templeton Group who becomes an Access Person, must
file:
(1) An Acknowledgement Form;
(2) Schedule C: Initial, Annual & Updated Disclosure of Securities Holdings;
and
(3) Schedule F: Initial, Annual & Updated Disclosure of Securities Accounts
The Acknowledgement Form, Schedule C and Schedule F MUST be completed and
returned to the Legal Compliance Department within 10 CALENDAR DAYS of the date
the employee becomes an access person.
5.3 QUARTERLY TRANSACTION REPORTS
A. ALL ACCESS PERSONS (EXCEPT INDEPENDENT DIRECTORS)
You MUST report ALL securities transactions by; (i) providing the Legal
Compliance Department with copies of ALL broker's confirmations and statements
within 10 calendar days after the end of the calendar quarter (which may be sent
under separate cover by the broker) showing ALL transactions and holdings in
securities AND (ii) certifying by January 30th of each year that you have
disclosed all such brokerage accounts on Schedule F to the Legal Compliance
Department. The brokerage statements and confirmations must include all
transactions in securities in which you have, or by reason of the transaction
acquire any direct or indirect beneficial ownership, including transactions in a
discretionary account and transactions for any account in which you have any
economic interest AND have or share investment control. Also, if you acquire
securities by any other method which is not being reported to the Legal
Compliance Department by a duplicate confirmation statement at or near the time
of the acquisition, you must report that acquisition to the Legal Compliance
Department on Schedule B within 10 calendar days after you are notified of the
acquisition. Such acquisitions include, among other things, securities acquired
by gift, inheritance, vesting,10 stock splits, merger or reorganization of the
issuer of the security.
You must file these documents with the Legal Compliance Department not
later than 10 calendar days after the end of each quarter, but you need not show
or report transactions for any account over which you had no direct or indirect
influence or control.11 Failure to timely report transactions is a violation of
Rule 17j-1 as well as the Code, and may be reported to the Fund's Board of
Directors and may also result, among other things, in denial of future personal
security transaction requests.
B. INDEPENDENT DIRECTORS
If you are a director of the Franklin Templeton Group but you are not an
"interested person" of the Fund, you are not required to file transaction
reports unless you knew or should have known that, during the 15-day period
before or after a transaction, the security was purchased or sold, or considered
for purchase or sale, by a Fund or by Franklin Resources on behalf of a Fund.
5.4 ANNUAL REPORTS - ALL ACCESS PERSONS
A. SECURITIES ACCOUNTS REPORTS (EXCEPT INDEPENDENT DIRECTORS)
As an access person, you must file a report of all personal securities
accounts on Schedule F, with the Legal Compliance Department, annually by
January 30th. You must report the name and description of each securities
account in which you have a direct or indirect beneficial interest, including
securities accounts of a spouse and minor children. You must also report any
account in which you have any economic interest AND have or share investment
control (e.g., trusts, foundations, etc.) other than an account for a Fund in,
or a client of, the Franklin Templeton Group.
B. SECURITIES HOLDINGS REPORTS (EXCEPT INDEPENDENT DIRECTORS)
You must file a report of personal securities holdings on Schedule C, with
the Legal Compliance Department, by January 30th of each year. This report
should include ALL of your securities holdings, including any security acquired
by a transaction, gift, inheritance, vesting, merger or reorganization of the
issuer of the security, in which you have any direct or indirect beneficial
ownership, including securities holdings in a discretionary account and for any
account in which you have any economic interest AND have or share investment
control. Your securities holding information must be current as of a date no
more than 30 days before the report is submitted. You may attach copies of
year-end brokerage statements to the Schedule C in lieu of listing each security
position on the schedule.
C. CERTIFICATION OF COMPLIANCE WITH THE CODE OF ETHICS (INCLUDING INDEPENDENT
DIRECTORS)
All access persons, including independent directors, will be asked to
certify that they will comply with the FRANKLIN TEMPLETON GROUP'S CODE OF ETHICS
AND POLICY STATEMENT ON INSIDER TRADING by filing the Acknowledgment Form with
the Legal Compliance Department within 10 business days of receipt of the Code.
Thereafter, you will be asked to certify that you have complied with the Code
during the preceding year by filing a similar Acknowledgment Form by January 30
of each year.
5.5 BROKERAGE ACCOUNTS AND CONFIRMATIONS OF SECURITIES TRANSACTIONS (EXCEPT
INDEPENDENT DIRECTORS)
If you are an access person , in the Franklin Templeton Group, before or at
a time contemporaneous with opening a brokerage account with a registered
broker-dealer, or a bank, or placing an initial order for the purchase or sale
of securities with that broker-dealer or bank, you must:
(1) notify the Legal Compliance Department, in writing, by completing Schedule
D or by providing substantially similar information; and
(2) notify the institution with which the account is opened, in writing, of
your association with the Franklin Templeton Group.
The Compliance Department will request the institution in writing to send
to it duplicate copies of confirmations and statements for all transactions
effected in the account simultaneously with their mailing to you.
If you have an existing account on the effective date of this Code or upon
becoming an access person, you must comply within 10 days with conditions (1)
and (2) above.
PART 6 - PRE-CLEARANCE REQUIREMENTS
6.1 PRIOR APPROVAL OF SECURITIES TRANSACTIONS
A. LENGTH OF APPROVAL
Unless you are covered by Paragraph D below, you cannot buy or sell any
security, without first contacting a Preclearance Officer by fax, phone, or
e-mail and obtaining his or her approval. A clearance is good until the close of
the business day following the day clearance is granted but may be extended in
special circumstances, shortened or rescinded, as explained in Appendix A.
B. SECURITIES NOT REQUIRING PRECLEARANCE
The securities enumerated below do not require preclearance under the Code.
However, all other provisions of the Code apply, including, but not limited to:
(i) the prohibited transaction provisions contained in Part 3.4 such as
front-running; (ii) the additional compliance requirements applicable to
portfolio persons contained in Part 4, (iii) the applicable reporting
requirements contained in Part 5; and (iv) insider trading prohibitions.
You need NOT pre-clear transactions in the following securities:
(1) MUTUAL FUNDS. Transactions in shares of any registered open-end mutual
fund;
(2) FRANKLIN RESOURCES, INC., AND ITS AFFILIATES. Purchases and sales of
securities of Franklin Resources, Inc., closed-end funds of the Franklin
Templeton Group, or real estate investment trusts advised by Franklin
Properties Inc., as these securities cannot be purchased on behalf of our
advisory clients.12
(3) SMALL QUANTITIES. Transactions that do not result in purchases or sales of
more than 100 shares of any one security, regardless of where it is traded,
in any 30 day period. HOWEVER, YOU MAY NOT EXECUTE ANY TRANSACTION,
REGARDLESS OF QUANTITY, IF YOU LEARN THAT THE FUNDS ARE ACTIVE IN THE
SECURITY. IT WILL BE PRESUMED THAT YOU HAVE KNOWLEDGE OF FUND ACTIVITY IN
THE SECURITY IF, AMONG OTHER THINGS, YOU ARE DENIED APPROVAL TO GO FORWARD
WITH A TRANSACTION REQUEST. Transactions made pursuant to dividend
reinvestment plans ("DRIPs") do not require preclearance regardless of
quantity or Fund activity.
(4) GOVERNMENT OBLIGATIONS. Transactions in securities issued or guaranteed by
the governments of the United States, Canada, the United Kingdom, France,
Germany, Switzerland, Italy and Japan, or their agencies or
instrumentalities, or derivatives thereof;
(5) PAYROLL DEDUCTION PLANS. Securities purchased by an employee's spouse
pursuant to a payroll deduction program, provided the Compliance Department
has been previously notified in writing by the access person that the
spouse will be participating in the payroll deduction program.
(6) EMPLOYER STOCK OPTION PROGRAMS. Transactions involving the exercise and/or
purchase by an access person or an access person's spouse of securities
pursuant to a program sponsored by a corporation employing the access
person or spouse.
(7) PRO RATA DISTRIBUTIONS. Purchases effected by the exercise of rights issued
pro rata to all holders of a class of securities or the sale of rights so
received.
(8) TENDER OFFERS. Transactions in securities pursuant to a bona fide tender
offer made for any and all such securities to all similarly situated
shareholders in conjunction with mergers, acquisitions, reorganizations
and/or similar corporate actions. However, tenders pursuant to offers for
less than all outstanding securities of a class of securities of an issuer
must be precleared.
(9) NOT ELIGIBLE FOR FUNDS AND CLIENTS. Transactions in any securities that are
prohibited investments for all Funds and clients advised by the entity
employing the access person.
(10) NO INVESTMENT CONTROL. Transactions effected for an account or entity over
which you do not have or share investment control (i.e., an account where
someone else exercises complete investment control).
(11) NO BENEFICIAL OWNERSHIP. Transactions in which you do not acquire or
dispose of direct or indirect beneficial ownership (i.e., an account where
in you have no financial interest).
Although an access person's securities transaction may be exempt from
pre-clearing, such transactions must comply with the prohibited transaction
provisions of Section 3.4 above. Additionally, you may not trade any securities
as to which you have "inside information" (see attached THE FRANKLIN TEMPLETON
GROUP POLICY STATEMENT ON INSIDER Trading). If you have any questions, contact a
Preclearance Officer before engaging in the transaction. If you have any doubt
whether you have or might acquire direct or indirect beneficial ownership or
have or share investment control over an account or entity in a particular
transaction, or whether a transaction involves a security covered by the Code,
you should consult with a Preclearance Officer before engaging in the
transaction.
C. DISCRETIONARY ACCOUNTS
You need not pre-clear transactions in any discretionary account for which
a registered broker-dealer, a registered investment adviser, or other investment
manager acting in a similar fiduciary capacity, which is not affiliated with the
Franklin Templeton Group, exercises sole investment discretion, if the following
conditions are met:13
(1) The terms of each account relationship ("Agreement") must be in writing and
filed with a Preclearance Officer prior to any transactions.
(2) Any amendment to each Agreement must be filed with aPreclearance Officer
prior to its effective date.
(3) The Portfolio Person certifies to the Compliance Department at the time
such account relationship commences, and annually thereafter, as contained
in Schedule G of the Code that such Portfolio Person does not have direct
or indirect influence or control over the account, other than the right to
terminate the account.
(4) Additionally, any discretionary account that you open or maintain with a
registered broker-dealer, a registered investment adviser, or other
investment manager acting in a similar fiduciary capacity must provide
duplicate copies of confirmations and statements for all transactions
effected in the account simultaneously with their delivery to you., If your
discretionary account acquires securities which are not reported to a
Preclearance Officer by a duplicate confirmation, such transaction must be
reported to a Preclearance Officer on Schedule B within 10 days after you
are notified of the acquisition.14
However, if you make ANY request that the discretionary account manager
enter into or refrain from a specific transaction or class of transactions, you
must first consult with aPreclearance Officer and obtain approval prior to
making such request.
D. DIRECTORS WHO ARE NOT ADVISORY PERSONS OR ADVISORY REPRESENTATIVES
You need not pre-clear any securities if:
(1) You are a director of a Fund in the Franklin Templeton Group and a
director of the fund's advisor;
(2) You are not an "advisory person"15 of a Fund in the Franklin Templeton
Group; and
(3) You are not an employee of any Fund,
or
(1) You are a director of a Fund in the Franklin Templeton Group;
(2) You are not an "advisory representative"16 of Franklin Resources or
any subsidiary; and
(3) You are not an employee of any Fund,
unless you know or should know that, during the 15-day period before the
transaction, the security was purchased or sold, or considered for purchase or
sale, by a Fund or by Franklin Resources on behalf of a Fund or other client.
Directors qualifying under this paragraph are required to comply with all
applicable provisions of the Code including reporting their initial holdings and
brokerage accounts in accordance with 5.2, personal securities transactions and
accounts in accordance with 5.3 and 5.5, and annual reports in accordance with
5.4 of the Code.
PART 7 - PENALTIES FOR VIOLATIONS OF THE CODE
The Code is designed to assure compliance with applicable law and to
maintain shareholder confidence in the Franklin Templeton Group.
In adopting this Code, it is the intention of the Boards of
Directors/Trustees, to attempt to achieve 100% compliance with all requirements
of the Code - but it is recognized that this may not be possible. Incidental
failures to comply with the Code are not necessarily a violation of the law or
the Franklin Templeton Group's Statement of Principles. Such isolated or
inadvertent violations of the Code not resulting in a violation of law or the
Statement of Principles will be referred to the Director of Compliance and/or
management personnel, and disciplinary action commensurate with the violation,
if warranted, will be imposed.
However, if you violate any of the enumerated prohibited transactions
contained in Parts 3 and 4 of the Code, you will be expected to give up ANY
profits realized from these transactions to Franklin Resources for the benefit
of the affected Funds or other clients. If Franklin Resources cannot determine
which Fund(s) or client(s) were affected, the proceeds will be donated to a
charity chosen by Franklin Resources. Failure to disgorge profits when requested
may result in additional disciplinary action, including termination of
employment.
Further, a pattern of violations that individually do not violate the law
or Statement of Principles, but which taken together demonstrate a lack of
respect for the Code of Ethics, may result in disciplinary action including
termination of employment. A violation of the Code resulting in a violation of
the law will be severely sanctioned, with disciplinary action including, but not
limited to, referral of the matter to the board of directors of the affected
Fund, termination of employment or referral of the matter to the appropriate
regulatory agency for civil and/or criminal investigation.
PART 8 - A REMINDER ABOUT THE FRANKLIN TEMPLETON GROUP INSIDER TRADING POLICY
The Code of Ethics is primarily concerned with transactions in securities
held or to be acquired by any of the Funds or Franklin Resources' clients,
regardless of whether those transactions are based on inside information or
actually harm a Fund or a client.
The Insider Trading Policy (attached to this document) deals with the
problem of insider trading in securities that could result in harm to a Fund, a
client, or members of the public, and applies to all directors, officers and
employees of any entity in the Franklin Templeton Group. Although the
requirements of the Code and the Insider Trading Policy are similar, you must
comply with both.
APPENDIX A: COMPLIANCE PROCEDURES, DEFINITIONS, AND OTHER ITEMS
This appendix sets forth the additional responsibilities and obligations of
Compliance Officers, and the Legal/Administration and Legal/Compliance
Departments, under the Franklin Templeton Group Code of Ethics and Policy
Statement on Insider Trading.
I. RESPONSIBILITIES OF EACH DESIGNATED COMPLIANCE OFFICER
A. PRE-CLEARANCE STANDARDS
1. GENERAL PRINCIPLES
The Director of Compliance, or a Preclearance Officer, shall only permit an
access person to go forward with a proposed security17 transaction if he or she
determines that, considering all of the facts and circumstances, the transaction
does not violate the provisions of Rule 17j-1, or of this Code and there is no
likelihood of harm to a client.
2. ASSOCIATED CLIENTS
Unless there are special circumstances that make it appropriate to
disapprove a personal securities transaction request, a Preclearance Officer
shall consider only those securities transactions of the "Associated Clients" of
the access person, including open and executed orders and recommendations, in
determining whether to approve such a request. "Associated Clients" are those
Funds or clients whose trading information would be available to the access
person during the course of his or her regular functions or duties. Currently,
there are three groups of Associated Clients: (i) the Franklin Mutual Series
Funds and clients advised by Franklin Mutual Advisers, LLC ("Mutual Clients");
(ii) the Franklin Group of Funds and the clients advised by the various Franklin
investment advisers ("Franklin Clients"); and (iii) the Templeton Group of Funds
and the clients advised by the various Templeton investment advisers ("Templeton
Clients"). Thus, persons who have access to the trading information of Mutual
Clients generally will be precleared solely against the securities transactions
of the Mutual Clients, including open and executed orders and recommendations.
Similarly, persons who have access to the trading information of Franklin
Clients or Templeton Clients generally will be precleared solely against the
securities transactions of Franklin Clients or Templeton Clients, as
appropriate.
Certain officers of Franklin Resources, as well as legal, compliance, fund
accounting, investment operations and other personnel who generally have access
to trading information of the funds and clients of the Franklin Templeton Group
during the course of their regular functions and duties, will have their
personal securities transactions precleared against executed transactions, open
orders and recommendations of the entire Franklin Templeton Group.
3. SPECIFIC STANDARDS
(a) SECURITIES TRANSACTIONS BY FUNDS OR CLIENTS
No clearance shall be given for any transaction in any security on any day
during which an Associated Client of the access person has executed a buy or
sell order in that security, until seven (7) calendar days after the order has
been executed. Notwithstanding a transaction in the previous seven days,
clearance may be granted to sell if the security has been disposed of by all
Associated Clients.
(b) SECURITIES UNDER CONSIDERATION
OPEN ORDERS
No clearance shall be given for any transaction in any security on any day
which an Associated Client of the access person has a pending buy or sell order
for such security, until seven (7) calendar days after the order has been
executed.
RECOMMENDATIONS
No clearance shall be given for any transaction in any security on any day
on which a recommendation for such security was made by a Portfolio Person,
until seven (7) calendar days after the recommendation was made and no orders
have subsequently been executed or are pending.
(c) PRIVATE PLACEMENTS
In considering requests by Portfolio Personnel for approval of limited
partnerships and other private placement securities transactions, the Director
of Compliance shall consult with an executive officer of Franklin Resources,
Inc. In deciding whether to approve the transaction, the Director of Compliance
and the executive officer shall take into account, among other factors, whether
the investment opportunity should be reserved for a Fund or other client, and
whether the investment opportunity is being offered to the Portfolio Person by
virtue of his or her position with the Franklin Templeton Group. If the
Portfolio Person receives clearance for the transaction, an investment in the
same issuer may only be made for a Fund or client if an executive officer of
Franklin Resources, Inc., who has been informed of the Portfolio Person's
pre-existing investment and who has no interest in the issuer, approves the
transaction.
(d) DURATION OF CLEARANCE
If a Preclearance Officer approves a proposed securities transaction, the
order for the transaction must be placed and effected by the close of the next
business day following the day approval was granted. The Director of Compliance
may, in his or her discretion, extend the clearance period up to seven calendar
days, beginning on the date of the approval, for a securities transaction of any
access person who demonstrates that special circumstances make the extended
clearance period necessary and appropriate.18 The Director of Compliance may, in
his or her discretion, after consultation with a member of senior management for
Franklin Resources, Inc., renew the approval for a particular transaction for up
to an additional seven calendar days upon a similar showing of special
circumstances by the access person. The Director of Compliance may shorten or
rescind any approval or renewal of approval under this paragraph if he or she
determines it is appropriate to do so.
B. WAIVERS BY THE DIRECTOR OF COMPLIANCE
The Director of Compliance may, in his or her discretion, after
consultation with an executive officer of Franklin Resources, Inc., waive
compliance by any access person with the provisions of the Code, if he or she
finds that such a waiver:
(1) is necessary to alleviate undue hardship or in view of unforeseen
circumstances or is otherwise appropriate under all the relevant facts
and circumstances;
(2) will not be inconsistent with the purposes and objectives of the Code;
(3) will not adversely affect the interests of advisory clients of the
Franklin Templeton Group, the interests of the Franklin Templeton
Group or its affiliates; and
(4) will not result in a transaction or conduct that would violate
provisions of applicable laws or regulations.
Any waiver shall be in writing, shall contain a statement of the basis for
it, and a copy shall be promptly sent by the Director of Compliance to the
General Counsel of Franklin Resources, Inc.
C. CONTINUING RESPONSIBILITIES OF THE LEGAL COMPLIANCE DEPARTMENT
A Preclearance Officer shall make a record of all requests for
pre-clearance regarding the purchase or sale of a security, including the date
of the request, the name of the access person, the details of the proposed
transaction, and whether the request was approved or denied. APreclearance
Officer shall keep a record of any waivers given, including the reasons for each
exception and a description of any potentially conflicting Fund or client
transactions.
A Preclearance Officer shall also collect the signed initial
acknowledgments of receipt and the annual acknowledgments from each access
person of receipt of a copy of the Code and Insider Trading Policy, as well as
reports, as applicable, on Schedules B, C, D, E and F of the Code. In addition,
a Preclearance Officer shall request copies of all confirmations, and other
information with respect to an account opened and maintained with the
broker-dealer by any access person of the Franklin Templeton Group. A
Preclearance Officer shall preserve those acknowledgments and reports, the
records of consultations and waivers, and the confirmations, and other
information for the period required by applicable regulation.
A Preclearance Officer shall review brokerage transaction confirmations,
account statements, Schedules B, C, D, E, F and Private Placement Checklists of
Access Persons for compliance with the Code. The reviews shall include, but are
not limited to;
(1) Comparison of brokerage confirmations, Schedule Bs, and/or brokerage
statements to preclearance request worksheets or, if a private
placement, the Private Placement Checklist;
(2) Comparison of brokerage statements and/or Schedule Fs to current
securities holding information;
(3) Comparison of Schedule C to current securities account information;
(4) Conducting periodic "back-testing" of access person transactions,
Schedule Es and/or Schedule Gs in comparison to fund and client
transactions;
A Preclearance Officer shall evidence review by initialing and dating the
appropriate document. Any apparent violations of the Code detected by a
Preclearance Officer during his or her review shall be promptly brought to the
attention of the Director of Compliance.
D. PERIODIC RESPONSIBILITIES OF THE LEGAL COMPLIANCE DEPARTMENT
The Legal Compliance Department shall consult with the General Counsel and
the Human Resources Department, as the case may be, to assure that:
(1) Adequate reviews and audits are conducted to monitor compliance with
the reporting, pre-clearance, prohibited transaction and other
requirements of the Code.
(2) Adequate reviews and audits are conducted to monitor compliance with
the reporting, pre-clearance, prohibited transaction and other
requirements of the Code.
(3) All access persons and new employees of the Franklin Templeton Group
are adequately informed and receive appropriate education and training
as to their duties and obligations under the Code.
(4) There are adequate educational, informational and monitoring efforts
to ensure that reasonable steps are taken to prevent and detect
unlawful insider trading by access persons and to control access to
inside information.
(5) Written compliance reports are submitted to the Board of Directors of
Franklin Resources, Inc., and the Board of each relevant Fund at least
annually. Such reports will describe any issues arising under the Code
or procedures since the last report, including, but not limited to,
information about material violations of the Code or procedures and
sanctions imposed in response to the material violations.
(6) The Legal Compliance Department will certify at least annually to the
Fund's board of directors that the Franklin Templeton Group has
adopted procedures reasonably necessary to prevent Access Persons from
violating the Code, and
(7) Appropriate records are kept for the periods required by law.
E. APPROVAL BY FUND'S BOARD OF DIRECTORS
(1) Basis for Approval
The Board of Directors/Trustees must base its approval of the Code on
a determination that the Code contains provisions reasonably necessary to
prevent access persons from engaging in any conduct prohibited by rule
17j-1.
(2) New Funds
At the time a new fund is organized, the Legal Compliance Department will
provide the Fund's board of directors, a certification that the investment
adviser and principal underwriter have adopted procedures reasonably necessary
to prevent Access Persons from violating the Code. Such certification will state
that the Code contains provisions reasonably necessary to prevent Access Persons
from violating the Code.
(3) Material Changes to the Code of Ethics
The Legal Compliance Department will provide the Fund's board of directors
a written description of all material changes to the Code no later than six
months after adoption of the material change by the Franklin Templeton Group.
II. COMPILATION OF DEFINITIONS OF IMPORTANT TERMS
For purposes of the Code of Ethics and Insider Trading Policy, the terms
below have the following meanings:
1934 ACT - The Securities Exchange Act of 1934, as amended.
1940 ACT - The Investment Company Act of 1940, as amended.
ACCESS PERSON - Each director, trustee, general partner or officer, and any
other person that directly or indirectly controls (within the meaning of
Section 2(a)(9) of the 1940 Act) the Franklin Templeton Group or a person,
including an Advisory Representative, who has access to information
concerning recommendations made to a Fund or client with regard to the
purchase or sale of a security.
ADVISORY REPRESENTATIVE - Any officer or director of Franklin Resources; any
employee who makes any recommendation, who participates in the
determination of which recommendation shall be made, or whose functions or
duties relate to the determination of which recommendation shall be made;
any employee who, in connection with his or her duties, obtains any
information concerning which securities are being recommended prior to the
effective dissemination of such recommendations or of the information
concerning such recommendations; and any of the following persons who
obtain information concerning securities recommendations being made by
Franklin Resources prior to the effective dissemination of such
recommendations or of the information concerning such recommendations: (i)
any person in a control relationship to Franklin Resources, (ii) any
affiliated person of such controlling person, and (iii) any affiliated
person of such affiliated person.
AFFILIATED PERSON - same meaning as Section 2(a)(3) of the Investment Company
Act of 1940. An "affiliated person" of an investment company includes
directors, officers, employees, and the investment adviser. In addition, it
includes any person owning 5% of the company's voting securities, any
person in which the investment company owns 5% or more of the voting
securities, and any person directly or indirectly controlling, controlled
by, or under common control with the company.
APPROPRIATE ANALYST - With respect to any access person, any securities analyst
or portfolio manager making investment recommendations or investing funds
on behalf of an Associated Client and who may be reasonably expected to
recommend or consider the purchase or sale of a security.
ASSOCIATED CLIENT - A Fund or client whose trading information would be
available to the access person during the course of his or her regular
functions or duties.
BENEFICIAL OWNERSHIP - Has the same meaning as in Rule 16a-1(a)(2) under the
1934 Act. Generally, a person has a beneficial ownership in a security if
he or she, directly or indirectly, through any contract, arrangement,
understanding, relationship or otherwise, has or shares a direct or
indirect pecuniary interest in the security. There is a presumption of a
pecuniary interest in a security held or acquired by a member of a person's
immediate family sharing the same household.
FUNDS - Investment companies in the Franklin Templeton Group of Funds.
HELD OR TO BE ACQUIRED - A security is "held or to be acquired" if within the
most recent 15 days it (i) is or has been held by a Fund, or (ii) is being
or has been considered by a Fund or its investment adviser for purchase by
the Fund.
PORTFOLIO PERSON - Any employee of the Franklin Templeton Group, who, in
connection with his or her regular functions or duties, makes or
participates in the decision to purchase or sell a security by a Fund in
the Franklin Templeton Group, or any other client or if his or her
functions relate to the making of any recommendations about those purchases
or sales. Portfolio Persons include portfolio managers, research analysts,
traders, persons serving in equivalent capacities (such as Management
Trainees), persons supervising the activities of Portfolio Persons, and
anyone else designated by the Director of Compliance
PROPRIETARY ACCOUNTS - Any corporate account or other account including, but not
limited to, a limited partnership, a corporate hedge fund, a limited
liability company or any other pooled investment vehicle in which Franklin
Resources or its affiliates, owns 5 percent or more of the outstanding
capital or is entitled to 25% or more of the profits or losses in the
account (excluding any asset based investment management fees based on
average periodic net assets in accounts). SECURITY - Any stock, note, bond,
evidence of indebtedness, participation or interest in any profit-sharing
plan or limited or general partnership, investment contract, certificate of
deposit for a security, fractional undivided interest in oil or gas or
other mineral rights, any put, call, straddle, option, or privilege on any
security (including a certificate of deposit), guarantee of, or warrant or
right to subscribe for or purchase any of the foregoing, and in general any
interest or instrument commonly known as a security, except commodity
futures, currency and currency forwards. For the purpose of this Code,
"security" does not include: (1) Direct obligations of the Government of
the United States; (2) Bankers' acceptances, bank certificates of deposit,
commercial paper and high quality short-term debt instruments, including
repurchase agreements; and (3) Shares issued by open-end funds.
SEE Section III of Appendix A for a summary of different requirements for
different types of securities.
III. SECURITIES EXEMPT FROM THE PROHIBITED , REPORTING, AND PRE-CLEARANCE
PROVISIONS
A. PROHIBITED TRANSACTIONS
Securities that are EXEMPT from the prohibited transaction provisions of
Section 3.4 include:
(1) securities that are direct obligations of the U.S. Government, such as
Treasury bills, notes and bonds, and U.S. Savings Bonds and
derivatives thereof;
(2) high quality short-term instruments ("money market instruments")
including but not limited to (i) bankers' acceptances, (ii) U.S. bank
certificates of deposit; (iii) commercial paper; and (iv) repurchase
agreements;
(3) shares of registered open-end investment companies;
(4) commodity futures, currencies, currency forwards and derivatives
thereof;
(5) securities that are prohibited investments for all Funds and clients
advised by the entity employing the access person; and
(6) transactions in securities issued or guaranteed by the governments or
their agencies or instrumentalities of Canada, the United Kingdom,
France, Germany, Switzerland, Italy and Japan and derivatives thereof.
B. REPORTING AND PRECLEARANCE
Securities that are EXEMPT from both the reporting requirements of Section
5 and preclearance requirements of Section 6 of the Code include:
(1) securities that are direct obligations of the U.S. Government, such as
Treasury bills, notes and bonds, and U.S. Savings Bonds and
derivatives thereof;
(2) high quality short-term instruments ("money market instruments")
including but not limited to (i) bankers' acceptances, (ii) U.S. bank
certificates of deposit; (iii) commercial paper; and (iv) repurchase
agreements;
(3) shares of registered open-end investment companies; and
(4) commodity futures, currencies, currency forwards and derivatives
thereof.
IV. LEGAL REQUIREMENT
Rule 17j-1 under the Investment Company Act of 1940 ("1940 Act") makes it
unlawful for any affiliated person of the Franklin Templeton Group in connection
with the purchase or sale of a security, including any option to purchase or
sell, and any security convertible into or exchangeable for, any security that
is "held or to be acquired" by a Fund in the Franklin Templeton Group:
A. To employ any device, scheme or artifice to defraud a Fund;
B. To make to a Fund any untrue statement of a material fact or omit to state
to a Fund a material fact necessary in order to make the statements made,
in light of the circumstances under which they are made, not misleading;
C. To engage in any act, practice, or course of business which operates or
would operate as a fraud or deceit upon a Fund; or
D. To engage in any manipulative practice with respect to a Fund.
A security is "held or to be acquired" if within the most recent 15 days it
(i) is or has been held by a Fund, or (ii) is being or has been considered by a
Fund or its investment adviser for purchase by the Fund. .
APPENDIX B: FORMS AND SCHEDULES
ACKNOWLEDGMENT FORM
CODE OF ETHICS AND POLICY STATEMENT ON INSIDER TRADING
To: DIRECTOR OF COMPLIANCE, LEGAL COMPLIANCE DEPARTMENT
I hereby acknowledge receipt of a copy of the Franklin Templeton Group's CODE OF
ETHICS AND POLICY STATEMENT ON INSIDER TRADING, AMENDED AND RESTATED, FEBRUARY
2000, which I have read and understand. I will comply fully with all provisions
of the Code and the Insider Trading Policy to the extent they apply to me during
the period of my employment. Additionally, I authorize any broker-dealer, bank
or investment adviser with whom I have securities accounts and accounts in which
I have beneficial ownership, to provide brokerage confirmations and statements
as required for compliance with the Code. I further understand and acknowledge
that any violation of the Code or Insider Trading Policy, including engaging in
a prohibited transaction or failure to file reports as required (see Schedules
B, C, D, E, F and G), may subject me to disciplinary action, including
termination of employment.
___________________________________________________________________________
SIGNATURE:
___________________________________________________________________________
PRINT NAME:
___________________________________________________________________________
TITLE:
___________________________________________________________________________
DEPARTMENT:
___________________________________________________________________________
LOCATION:
___________________________________________________________________________
DATE ACKNOWLEDGMENT WAS SIGNED:
___________________________________________________________________________
RETURN TO: LEGAL COMPLIANCE DEPARTMENT, 2000 ALAMEDA DE LAS PULGAS - FLOOR 2.
SCHEDULE A: LEGAL AND COMPLIANCE OFFICERS AND PRECLEARANCE DESK TELEPHONE & FAX
NUMBERS 19
LEGAL OFFICER
MURRAY SIMPSON
EXECUTIVE VICE PRESIDENT & GENERAL COUNSEL
FRANKLIN RESOURCES, INC.
901 MARINERS ISLAND BLVD.
7TH FLOOR
SAN MATEO, CA 94404
(650) 525 -7331
COMPLIANCE OFFICERS
___________________________________________________________________________
Director of Compliance PRECLEARANCE OFFICERS
James M. Davis Stephanie Harwood
Franklin Resources, Inc. Wally Enrico
2000 Alameda de las Pulgas, Suite Legal Compliance Department
200F 2000 Alameda de las Pulgas,
San Mateo, CA 94403 Suite 200E
(650) 312-2832 San Mateo, CA 94403
(650) 312-3693 (telephone)
(650) 312-5646 (facsimile)
Preclear, Legal (internal
e-mail address)
[email protected] (external e-mail
address)
___________________________________________________________________________
SCHEDULE B: SECURITIES TRANSACTION REPORT
This report of personal securities transactions NOT reported by duplicate
confirmations and brokerage statements pursuant to Section 5.3 of the Code is
required pursuant to Rule 204-2(a) of the Investment Advisers Act of 1940 or
Rule 17j-1(c) of the Investment Company Act of 1940. The report must be
completed and submitted to the Compliance Department no later than 10 calendar
days after the end of the calendar quarter.. Refer to Section 5.3 of the Code of
Ethics for further instructions.
<TABLE>
<CAPTION>
________________________________________________________________________________________________________________________
Trade Buy, sell Security Description, including Type of Quantity or Price Broker-Dealer Date Preclearance
Date or Other interest rate and maturity Security Principal or Bank obtained from
(if appropriate) (Stock, Amount Compliance Dept.
Bond, Option,
etc.)
________________________________________________________________________________________________________________________
<S> <C> <C> <C> <C> <C> <C> <C>
________________________________________________________________________________________________________________________
________________________________________________________________________________________________________________________
________________________________________________________________________________________________________________________
________________________________________________________________________________________________________________________
________________________________________________________________________________________________________________________
________________________________________________________________________________________________________________________
________________________________________________________________________________________________________________________
________________________________________________________________________________________________________________________
THE REPORT OR RECORDING OF ANY TRANSACTION ABOVE SHALL NOT BE CONSTRUED AS AN
ADMISSION THAT I HAVE ANY DIRECT OR INDIRECT OWNERSHIP IN THE SECURITIES.
______________________________ _________________________ ___________________ ___________________
(PRINT NAME) (SIGNATURE) (DATE) (QUARTER ENDING)
</TABLE>
RETURN TO: LEGAL COMPLIANCE DEPARTMENT, 2000 ALAMEDA DE LAS PULGAS, SUITE 200E,
SAN MATEO, CA 94403
SCHEDULE C: INITIAL, ANNUAL & UPDATED DISCLOSURE OF ACCESS PERSONS SECURITIES
HOLDINGS This report shall set forth the security name or description and
security class of each security holding in which you have a direct or indirect
beneficial interest, including holdings by a spouse, minor children, trusts,
foundations, and any account for which trading authority has been delegated to
you, other than authority to trade for a Fund in or a client of the Franklin
Templeton Group.. In lieu of listing each security position below, you may
instead attach copies of brokerage statements, sign below and return Schedule C
and brokerage statements to the Legal Compliance Department within 10 days if an
initial report or by January 30th of each year if an annual report. Refer to
Sections 5.2.A and 5.4.A of the Code for additional filing instructions.
<TABLE>
<CAPTION>
_______________________________________________________________________________________
Security Description Type of Security Quantity or
including interest rate (Stocks, Bond Principal Name of Broker- Account
and maturity (if appropriate) Option, etc.) Amount Dealer or Bank Number
_______________________________________________________________________________________
<S> <C> <C> <C> <C>
_______________________________________________________________________________________
_______________________________________________________________________________________
_______________________________________________________________________________________
_______________________________________________________________________________________
_______________________________________________________________________________________
_______________________________________________________________________________________
[ ] I DID NOT HAVE ANY PERSONAL SECURITIES HOLDINGS FOR YEAR ENDED _____________
[ ] I HAVE ATTACHED STATEMENTS CONTAINING ALL MY PERSONAL SECURITIES HOLDINGS FOR THE
YEAR ENDED ______
TO THE BEST OF MY KNOWLEDGE I HAVE DISCLOSED ALL OF MY SECURITIES ACCOUNTS
AND/OR INVESTMENTS IN WHICH I HAVE A DIRECT OR INDIRECT BENEFICIAL INTEREST,
INCLUDING SECURITY ACCOUNTS OF A SPOUSE, MINOR CHILDREN, TRUSTS, FOUNDATIONS,
AND ANY ACCOUNT FOR WHICH TRADING AUTHORITY HAS BEEN DELEGATED AN UNAFFILIATED
PARTY.
_______________________ ___________________ __________________ _______________ ____________
PRINT NAME SIGNATURE DATE YEAR ENDED
</TABLE>
* Securities that are EXEMPT from being reported on Schedule C include: (i)
securities that are direct obligations of the U.S. Government, such as Treasury
bills, notes and bonds, and U.S. Savings Bonds and derivatives thereof; (ii)
high quality short-term instruments ("money market instruments") including but
not limited to bankers' acceptances, U.S. bank certificates of deposit;
commercial paper; and repurchase agreements; (iii) shares of registered open-end
investment companies; and (iv) commodity futures, currencies, currency forwards
and derivatives thereof.
SCHEDULE D: NOTIFICATION OF SECURITIES ACCOUNT OPENING
DATE: __________________________________
TO: Preclearance Desk
Legal Compliance Department
2000 Alameda de las Pulgas, Suite 200E
San Mateo, CA 94403
(650) 312-3693
FAX: (650) 312-5646
FROM: NAME: ____________________________
DEPARTMENT:_______________________
LOCATION:_________________________
EXTENSION:________________________
ARE YOU A REG. REPRESENTATIVE? YES[ ] NO[ ]
ARE YOU AN ACCESS PERSON? YES[ ] NO[ ]
This is to advise you that I will be opening or have opened a securities account
with the following firm:
PLEASE FILL OUT COMPLETELY TO EXPEDITE PROCESSING
NAME ON ACCOUNT: ____________________________________________________________
(If other than employee, please state relationship i.e.,
spouse, son, daughter, trust, etc.)
ACCT # OR SSN #:_____________________________________________________________
NAME OF FIRM:________________________________________________________________
ATTN:________________________________________________________________________
ADDRESS OF FIRM:_____________________________________________________________
CITY/STATE/ZIP:______________________________________________________________
* All Franklin registered representatives and Access Persons, PRIOR TO OPENING A
BROKERAGE ACCOUNT OR PLACING AN INITIAL ORDER, are required to notify the Legal
Compliance Department and the executing broker-dealer in writing. This includes
accounts in which the registered representative or access person has or will
have a financial interest (e.g., a spouse's account) or discretionary authority
(e.g., a trust account for a minor child).
Upon receipt of the NOTIFICATION OF SECURITIES ACCOUNT OPENING form, the Legal
Compliance Department will contact the broker-dealer identified above and
request that it receive duplicate confirmations and statements of your brokerage
account.
SCHEDULE E: NOTIFICATION OF DIRECT OR INDIRECT BENEFICIAL INTEREST If you have
any beneficial ownership in a security and you recommend to the Appropriate
Analyst that the security be considered for purchase or sale by an Associated
Client, or if you carry out a purchase or sale of that security for an
Associated Client, you must disclose your beneficial ownership to the Legal
Compliance Department and the Appropriate Analyst in writing on Schedule E (or
an equivalent form containing similar information) before the purchase or sale,
or before or simultaneously with the recommendation.
<TABLE>
<CAPTION>
____________________________________________________________________________________________________________________________________
Method of Primary
Ownership Acquisition Date and Method Learned Portfolio Manager
Type (Direct Year (Purch/Gift/ that Security Under or Appropriate Name of Person Date of Verbal
Security Description or Indirect) Acquired Other) Consideration by Funds Analyst Notified Notification
____________________________________________________________________________________________________________________________________
<S> <C> <C> <C> <C> <C> <C> <C>
____________________________________________________________________________________________________________________________________
____________________________________________________________________________________________________________________________________
____________________________________________________________________________________________________________________________________
____________________________________________________________________________________________________________________________________
</TABLE>
________________________ ___________________________ __________________
(PRINT NAME) (SIGNATURE) (DATE)
RETURN TO: LEGAL COMPLIANCE DEPARTMENT, 2000 ALAMEDA DE LAS PULGAS, SUITE 200E,
SAN MATEO, CA 94403
SCHEDULE F: INITIAL, ANNUAL & UPDATED DISCLOSURE OF SECURITIES ACCOUNTS
This report shall set forth the name and description of each securities
account in which you have a direct or indirect beneficial interest, including
securities accounts of a spouse, minor children, trusts, foundations, and any
account for which trading authority has been delegated to you, other than
authority to trade for a Fund in, or a client of, the Franklin Templeton Group.
In lieu of listing each securities account below, you may instead attach copies
of the brokerage statements, sign below and return Schedule F and brokerage
statements to the Compliance Department.
<TABLE>
<CAPTION>
____________________________________________________________________________________________________________________________
NAME(S) ON ACCOUNT NAME OF BROKERAGE FIRM, ADDRESS OF BROKERAGE FIRM, BANK OR ACCOUNT NAME OF ACCOUNT
(REGISTRATION SHOWN ON BANK OR INVESTMENT INVEST. ADVISER NUMBER EXECUTIVE/REPRESENTATIVE
STATEMENT) ADVISER (STREET, CITY , STATE AND ZIP CODE)
____________________________________________________________________________________________________________________________
<S> <C> <C> <C> <C>
____________________________________________________________________________________________________________________________
____________________________________________________________________________________________________________________________
____________________________________________________________________________________________________________________________
____________________________________________________________________________________________________________________________
</TABLE>
TO THE BEST OF MY KNOWLEDGE I HAVE DISCLOSED ALL OF MY SECURITIES ACCOUNTS IN
WHICH I HAVE A DIRECT OR INDIRECT BENEFICIAL INTEREST, INCLUDING SECURITY
ACCOUNTS OF A SPOUSE, MINOR CHILDREN, TRUSTS, FOUNDATIONS, AND ANY ACCOUNT FOR
WHICH TRADING AUTHORITY HAS BEEN DELEGATED TO ME.
______________________ ____________________ ___________________ ___________
PRINT NAME SIGNATURE DATE YEAR ENDED
RETURN TO: LEGAL COMPLIANCE DEPARTMENT, 2000 ALAMEDA DE LAS PULGAS, SUITE 200E,
SAN MATEO, CA 94403
SCHEDULE G: INITIAL AND ANNUAL CERTIFICATION OF DISCRETIONARY AUTHORITY
This report shall set forth the account name or description in which you have a
direct or indirect beneficial interest, including holdings by a spouse, minor
children, trusts, foundations, and as to which trading authority has been
delegated by you to an unaffiliated registered broker-dealer, registered
investment adviser, or other investment manager acting in a similar fiduciary
capacity, who exercises sole investment discretion.
<TABLE>
<CAPTION>
___________________________________________________________________________________________________________________
TYPE OF OWNERSHIP
NAME/DESCRIPTION OF BROKERAGE FIRM, DIRECT OWNERSHIP ACCOUNT NUMBER
NAME(S) AS SHOWN ON ACCOUNT OR BANK, INVESTMENT ADVISER OR INVESTMENT (DO) (IF APPLICABLE)
INVESTMENT INDIRECT
OWNERSHIP (IO)
___________________________________________________________________________________________________________________
<S> <C> <C> <C>
___________________________________________________________________________________________________________________
___________________________________________________________________________________________________________________
___________________________________________________________________________________________________________________
</TABLE>
TO THE BEST OF MY KNOWLEDGE I HAVE DISCLOSED ALL OF MY SECURITIES ACCOUNTS
AND/OR INVESTMENTS IN WHICH I HAVE A DIRECT OR INDIRECT BENEFICIAL INTEREST,
INCLUDING SECURITY ACCOUNTS OF A SPOUSE, MINOR CHILDREN, TRUSTS, FOUNDATIONS,
AND ANY ACCOUNT FOR WHICH TRADING AUTHORITY HAS BEEN DELEGATED AN UNAFFILIATED
PARTY. FURTHER, I CERTIFY THAT I DO NOT HAVE ANY DIRECT OR INDIRECT INFLUENCE OR
CONTROL OVER THE ACCOUNTS LISTED ABOVE.
____________________ ___________________ _________________ __________________
PRINT NAME SIGNATURE DATE YEAR ENDED
RETURN TO: LEGAL COMPLIANCE DEPARTMENT, 2000 ALAMEDA DE LAS PULGAS, SUITE 200E,
SAN MATEO, CA 94403
SCHEDULE H: CHECKLIST FOR INVESTMENTS IN PARTNERSHIPS AND SECURITIES ISSUED IN
PRIVATE PLACEMENTS
GENERAL INSTRUCTIONS: In considering requests by Access Persons for approval of
limited partnerships and other private placement securities transactions, the
Director of Compliance shall consult with an executive officer of Franklin
Resources, Inc. In deciding whether to approve the transaction, the Director of
Compliance and the executive officer shall take into account, among other
factors, whether the investment opportunity should be reserved for a Fund or
other client, and whether the investment opportunity is being offered to the
access person by virtue of his or her position with the Franklin Templeton
Group. IF THE ACCESS PERSON RECEIVES CLEARANCE FOR THE TRANSACTION, AN
INVESTMENT IN THE SAME ISSUER MAY ONLY BE MADE FOR A FUND OR CLIENT IF AN
EXECUTIVE OFFICER OF FRANKLIN RESOURCES, INC., WHO HAS BEEN INFORMED OF THE
ACCESS PERSON'S PRE-EXISTING INVESTMENT AND WHO HAS NO INTEREST IN THE ISSUER,
APPROVES THE TRANSACTION.
IN ORDER TO PROCESS YOUR REQUEST, PLEASE PROVIDE THE FOLLOWING INFORMATION:
______________________________
1) Name/Description of proposed investment: [______________________________]
__________________________________
2) Proposed Investment Amount: [__________________________________]
3) Please attach pages of the offering memorandum (or other documents)
summarizing the investment opportunity, including:
a) Name of the partnership/hedge fund/issuer;
b) Name of the general partner, location & telephone number;
c) Summary of the offering; including the total amount the offering/issuer;
d) Percentage your investment will represent of the total offering;
e) Plan of distribution; and
f) Investment objective and strategy,
PLEASE RESPOND TO THE FOLLOWING QUESTIONS:
4) Was this investment opportunity presented to you in your capacity as a
portfolio manager, trader or research analyst? If no, please explain the
relationship, if any, you have to the issuer or principals of the issuer.
5) Is this investment opportunity suitable for any fund/client that you
advise? If yes, why isn't the investment being made on behalf of the
fund/client? If no, why isn't the investment opportunity suitable for the
fund/clients?
6) Do any of the fund/clients that you advise presently hold securities of the
issuer of this proposed investment (e.g., common stock, preferred stock,
corporate debt, loan participations, partnership interests, etc)? If yes,
please provide the names of the funds/clients and security description.
7) Do you presently have or will you have any managerial role with the
company/issuer as a result of your investment? If yes, please explain in
detail your responsibilities, including any compensation you will receive.
8) Will you have any investment control or input to the investment decision
making process?
9) If applicable, will you receive reports of portfolio holdings? If yes, when
and how frequently will these be provided?
Reminder: Personal securities transactions that do not generate brokerage
confirmations must be reported to the Legal Compliance Department on Schedule B
within 10 calendar days after you are notified.
______________________________
Name of Access Person
_______________________________ ________________
Access Person Signature Date
Approved by: _______________________________________ ________________
Chief Investment Officer Signature Date
________________________________________________________________________________
Legal Compliance Use Only
________________________________________________________________________________
Date Received: ________________________________________
Date Entered in Lotus Notes: ______________________________________
Date Forwarded FRI Executive Officer: _________________________________
Precleared: [ ] [ ] (attach E-Mail) Date: __________________________
Date Entered in APII: __________________________
________________________________________________________________________________
APPENDIX C: INVESTMENT ADVISOR AND BROKER-DEALER AND OTHER SUBSIDIARIES OF
FRANKLIN RESOURCES, INC. - FEBRUARY 2000
<TABLE>
<CAPTION>
__________________________________________________________________________________________
<S> <C> <C> <C>
Franklin Advisers, Inc. IA Templeton Management Limited IA
(Canada)
__________________________________________________________________________________________
Franklin Advisory Services, LLC. IA Templeton Franklin Investment IA/BD
Services, Inc.
__________________________________________________________________________________________
Franklin Investment Advisory IA Templeton Investment Counsel, Inc. IA
Services, Inc.
__________________________________________________________________________________________
Franklin Management, Inc. IA Templeton Asset Management, Ltd. IA/FIA
__________________________________________________________________________________________
Franklin Mutual Advisers, LLC IA Templeton Investment Management Co. FIA
Ltd. (Japan)
__________________________________________________________________________________________
Franklin Properties, Inc. REA Closed Joint-Stock Company FIA
Templeton (Russia)
__________________________________________________________________________________________
Franklin Templeton Distributors, IA/BD Templeton Unit Trust Management FBD
Inc. Ltd. (UK)
__________________________________________________________________________________________
Franklin Asset Management IA Orion Fund Management Ltd. FIA
(Proprietary) Ltd.
__________________________________________________________________________________________
Templeton (Switzerland), Inc. FBD Templeton Global Advisors Ltd. IA
(Bahamas)
__________________________________________________________________________________________
Templeton Franklin Investment FBD Templeton Asset Management (India) FIA/FBD
Services (Asia) Ltd. Pvt. Ltd.
__________________________________________________________________________________________
`Templeton Investment Management IA/FIA Templeton Italia SIM S.p.A. (Italy) FBD
Limited (UK)
__________________________________________________________________________________________
Templeton Global Strategic Services FBD Templeton Global Strategic Services FBD
S.A. (Luxembourg) (Deutschland) GmbH (Germany)
__________________________________________________________________________________________
Templeton Investment Management FIA Templeton Funds Annuity Company INS
(Australia) Ltd.
__________________________________________________________________________________________
Franklin Templeton Investment TA
Services, Inc.
__________________________________________________________________________________________
Franklin Templeton Services, Inc. BM
__________________________________________________________________________________________
</TABLE>
Codes:
IA: US registered investment adviser
BD: US registered broker-dealer
FIA: Foreign equivalent investment adviser
FBD: Foreign equivalent broker-dealer
TA: US registered transfer agent
BM: Business manager to the funds
REA: Real estate adviser
INS: Insurance company
THE FRANKLIN TEMPLETON GROUP POLICY STATEMENT ON INSIDER TRADING
A. LEGAL REQUIREMENT
Pursuant to the Insider Trading and Securities Fraud Enforcement Act of
1988, it is the policy of the Franklin Templeton Group to forbid any officer,
director, employee, consultant acting in a similar capacity, or other person
associated with the Franklin Templeton Group from trading, either personally or
on behalf of clients, including all client assets managed by the entities in the
Franklin Templeton Group, on material non-public information or communicating
material non-public information to others in violation of the law. This conduct
is frequently referred to as "insider trading." The Franklin Templeton Group's
Policy Statement on Insider Trading applies to every officer, director, employee
or other person associated with the Franklin Templeton Group and extends to
activities within and outside their duties with the Franklin Templeton Group.
Every officer, director and employee must read and retain this policy statement.
Any questions regarding the Franklin Templeton Group's Policy Statement on
Insider Trading or the Compliance Procedures should be referred to the Legal
Department.
The term "insider trading" is not defined in the federal securities laws,
but generally is used to refer to the use of material non-public information to
trade in securities (whether or not one is an "insider") or to communications of
material non-public information to others.
While the law concerning insider trading is not static, it is generally
understood that the law prohibits:
(1) trading by an insider, while in possession of material non-public
information; or
(2) trading by a non-insider, while in possession of material non-public
information, where the information either was disclosed to the
non-insider in violation of an insider's duty to keep it confidential
or was misappropriated; or
(3) communicating material non-public information to others.
The elements of insider trading and the penalties for such unlawful conduct
are discussed below. If, after reviewing this policy statement, you have any
questions, you should consult the Legal Department.
POLICY STATEMENT ON INSIDER TRADING
B. WHO IS AN INSIDER?
The concept of "insider" is broad. It includes officers, directors and
employees of a company. In addition, a person can be a "temporary insider" if he
or she enters into a special confidential relationship in the conduct of a
company's affairs and as a result is given access to information solely for the
company's purposes. A temporary insider can include, among others, a company's
outside attorneys, accountants, consultants, bank lending officers, and the
employees of such organizations. In addition, an investment adviser may become a
temporary insider of a company it advises or for which it performs other
services. According to the U.S. Supreme Court, the company must expect the
outsider to keep the disclosed non-public information confidential and the
relationship must at least imply such a duty before the outsider will be
considered an insider.
C. WHAT IS MATERIAL INFORMATION?
Trading on inside information is not a basis for liability unless the
information is material. "Material information" generally is defined as
information for which there is a substantial likelihood that a reasonable
investor would consider it important in making his or her investment decisions,
or information that is reasonably certain to have a substantial effect on the
price of the company's securities. Information that officers, directors and
employees should consider material includes, but is not limited to: dividend
changes, earnings estimates, changes in previously released earnings estimates,
significant merger or acquisition proposals or agreements, major litigation,
liquidation problems, and extraordinary management developments.
Material information does not have to relate to a company's business. For
example, in CARPENTER V. U.S., 108 U.S. 316 (1987), the Supreme Court considered
as material certain information about the contents of a forthcoming newspaper
column that was expected to affect the market price of a security. In that case,
a WALL STREET JOURNAL reporter was found criminally liable for disclosing to
others the dates that reports on various companies would appear in the WALL
STREET JOURNAL and whether those reports would be favorable or not.
D. WHAT IS NON-PUBLIC INFORMATION?
Information is non-public until it has been effectively communicated to the
marketplace. One must be able to point to some fact to show that the information
is generally public. For example, information found in a report filed with the
Securities and Exchange Commission ("SEC"), or appearing in Dow Jones, Reuters
Economic Services, THE WALL STREET JOURNAL or other publications of general
circulation would be considered public.
E. BASIS FOR LIABILITY
1. FIDUCIARY DUTY THEORY
In 1980, the Supreme Court found that there is no general duty to disclose
before trading on material non-public information, but that such a duty arises
only where there is a fiduciary relationship. That is, there must be a
relationship between the parties to the transaction such that one party has a
right to expect that the other party will not disclose any material non-public
information or refrain from trading. CHIARELLA V. U.S., 445 U.S. 22 (1980).
In DIRKS V. SEC, 463 U.S. 646 (1983), the Supreme Court stated alternate
theories under which non-insiders can acquire the fiduciary duties of insiders.
They can enter into a confidential relationship with the company through which
they gain information (E.G., attorneys, accountants), or they can acquire a
fiduciary duty to the company's shareholders as "tippees" if they are aware or
should have been aware that they have been given confidential information by an
insider who has violated his fiduciary duty to the company's shareholders.
However, in the "tippee" situation, a breach of duty occurs only if the
insider personally benefits, directly or indirectly, from the disclosure. The
benefit does not have to be pecuniary but can be a gift, a reputational benefit
that will translate into future earnings, or even evidence of a relationship
that suggests a quid pro quo.
2. MISAPPROPRIATION THEORY
Another basis for insider trading liability is the "misappropriation"
theory, under which liability is established when trading occurs on material
non-public information that was stolen or misappropriated from any other person.
In U.S. V. CARPENTER, SUPRA, the Court found, in 1987, a columnist defrauded THE
WALL STREET JOURNAL when he stole information from the WALL STREET JOURNAL and
used it for trading in the securities markets. It should be noted that the
misappropriation theory can be used to reach a variety of individuals not
previously thought to be encompassed under the fiduciary duty theory.
F. PENALTIES FOR INSIDER TRADING
Penalties for trading on or communicating material non-public information
are severe, both for individuals involved in such unlawful conduct and their
employers. A person can be subject to some or all of the penalties below even if
he or she does not personally benefit from the violation. Penalties include:
o civil injunctions;
o treble damages;
o disgorgement of profits;
o jail sentences;
o fines for the person who committed the violation of up to three times
the profit gained or loss avoided, whether or not the person actually
benefited; and
o fines for the employer or other controlling person of up to the greater
of $1,000,000 or three times the amount of the profit gained or loss
avoided.
In addition, any violation of this policy statement can result in serious
sanctions by the Franklin Templeton Group, including dismissal of any person
involved.
G. INSIDER TRADING PROCEDURES
Each access person, Compliance Officer, the Risk Management Department, and
the Legal Department, as the case may be, shall comply with the following
procedures.
1. IDENTIFYING INSIDE INFORMATION
Before trading for yourself or others, including investment companies or
private accounts managed by the Franklin Templeton Group, in the securities of a
company about which you may have potential inside information, ask yourself the
following questions:
o Is the information material?
o Is this information that an investor would consider important in
making his or her investment decisions?
o Is this information that would substantially affect the market price
of the securities if generally disclosed?
o Is the information non-public?
o To whom has this information been provided?
o Has the information been effectively communicated to the marketplace
(e.g., published in REUTERS, THE WALL STREET JOURNAL or other
publications of general circulation)?
If, after consideration of these questions, you believe that the information may
be material and non-public, or if you have questions as to whether the
information is material and non-public, you should take the following steps:
(i) Report the matter immediately to the designated Compliance Officer, or if
he or she is not available, to the Legal Department.
(ii) Do not purchase or sell the securities on behalf of yourself or others,
including investment companies or private accounts managed by the Franklin
Templeton Group.
(iii) Do not communicate the information inside or outside the Franklin
Templeton Group, other than to the Compliance Officer or the Legal
Department.
(iv) The Compliance Officer shall immediately contact the Legal Department for
advice concerning any possible material, non-public information.
(v) After the Legal Department has reviewed the issue and consulted with the
Compliance Officer, you will be instructed either to continue the
prohibitions against trading and communication noted in (ii) and (iii), or
you will be allowed to trade and communicate the information.
(vi) In the event the information in your possession is determined by the Legal
Department or the Compliance Officer to be material and non-public, it may
not be communicated to anyone, including persons within the Franklin
Templeton Group, except as provided in (i) above. In addition, care should
be taken so that the information is secure. For example, files containing
the information should be sealed and access to computer files containing
material non-public information should be restricted to the extent
practicable.
2. RESTRICTING ACCESS TO OTHER SENSITIVE INFORMATION
All Franklin Templeton Group personnel also are reminded of the need to be
careful to protect from disclosure other types of sensitive information that
they may obtain or have access to as a result of their employment or association
with the Franklin Templeton Group.
(I) GENERAL ACCESS CONTROL PROCEDURES
The Franklin Templeton Group has established a process by which access to
company files that may contain sensitive or non-public information such as the
Bargain List and the Source of Funds List is carefully limited. Since most of
the Franklin Templeton Group files which contain sensitive information are
stored in computers, personal identification numbers, passwords and/or code
access numbers are distributed to Franklin Templeton Group computer access
persons only. This activity is monitored on an ongoing basis. In addition,
access to certain areas likely to contain sensitive information is normally
restricted by access codes.
________
1 "Director" includes trustee.
2 The term "employee or employees" includes management trainees, as well as
regular employees of the Franklin Templeton Group.
3 SEE Appendix A. II., for definition of "Proprietary Accounts."
4 Generally, a person has "beneficial ownership" in a security if he or she,
directly or indirectly, through any contract, arrangement, understanding,
relationship or otherwise, has or shares a direct or indirect pecuniary
interest in the security. There is a presumption of a pecuniary interest in
a security held or acquired by a member of a person's immediate family
sharing the same household.
5 Proprietary Information: Information that is obtained or developed during
the ordinary course of employment with the Franklin Templeton Group,
whether by you or someone else, and is not available to persons outside the
Franklin Templeton Group. Examples of such Proprietary Information include,
among other things, internal research reports, research materials supplied
to the Franklin Templeton Group by vendors and broker-dealers not generally
available to the public, minutes of departmental/research meetings and
conference calls, and communications with company officers (including
confidentiality agreements). Examples of non-Proprietary Information
include mass media publications (e.g., The Wall Street Journal, Forbes, and
Fortune), certain specialized publications available to the public (e.g.,
Morningstar, Value Line, Standard and Poors), and research reports
available to the general public.
6 The Director of Compliance is designated on Schedule A. The "Appropriate
Analyst" means any securities analyst or portfolio manager, other than you,
making recommendations or investing funds on behalf of any associated
client, who may be reasonably expected to recommend or consider the
purchase or sale of the security in question.
7 Associated Client: A Fund or client whose trading information would be
available to the access person during the course of his or her regular
functions or duties.
8 You are a "Portfolio Person" if you are an employee of the Franklin
Templeton Group, and, in connection with your regular functions or duties,
make or participate in the decision to purchase or sell a security by a
Fund in the Franklin Templeton Group, or any other client or if your
functions relate to the making of any recommendations about those purchases
or sales. Portfolio Persons include portfolio managers, research analysts,
traders, persons serving in equivalent capacities (such as Management
Trainees), persons supervising the activities of Portfolio Persons, and
anyone else so designated by the Compliance Officer.
9 This restriction applies equally to transactions occurring in margin and
option accounts which may not be due to direct actions by the Portfolio
Person. For example, a stock held less than 60 days that is sold to meet a
margin call or the underlying stock of a covered call option held less than
60 days that is called away, would be a violation of this restriction if
these transactions resulted in a profit for the Portfolio Person.
10 You are not required to separately report the vesting of shares or options
of Franklin Resources, Inc., received pursuant to a deferred compensation
plan as such information is already maintained.
11 See Sections 3.2 and 4.6 of the Code. Also, confirmations and statements of
transactions in open-end mutual funds, including mutual funds sponsored by
the Franklin Templeton Group are not required. See Section 3.3 above for a
list of other securities that need not be reported. If you have any
beneficial ownership in a discretionary account, transactions in that
account are treated as yours and must be reported by the manager of that
account (see Section 6.1.C below).
12 Officers, directors and certain other key management personnel who perform
significant policy-making functions of Franklin Resources, Inc., the
closed-end funds, and/or real estate investment trusts may have ownership
reporting requirements in addition to these reporting requirements. Contact
the Legal Compliance Department for additional information. SEE also the
"Insider Trading Policy" attached.
13 Please note that these conditions apply to any discretionary account in
existence prior to the effective date of this Code or prior to your
becoming an access person. Also, the conditions apply to transactions in
any discretionary account, including pre-existing accounts, in which you
have any direct or indirect beneficial ownership, even if it is not in your
name.
14 Any pre-existing agreement must be promptly amended to comply with this
condition. The required reports may be made in the form of an account
statement if they are filed by the applicable deadline.
15 An "advisory person" of a registered investment company or an investment
adviser is any employee, who in connection with his or her regular
functions or duties, makes, participates in, or obtains information
regarding the purchase or sale of a security by an advisory client , or
whose functions relate to the making of any recommendations with respect to
such purchases or sales. Advisory person also includes any natural person
in a control relationship to such company or investment adviser who obtains
information concerning recommendations made to such company with regard to
the purchase or sale of a security.
16 Generally, an "advisory representative" is any person who makes any
recommendation, who participates in the determination of which
recommendation shall be made, or whose functions or duties relate to the
determination of which recommendation shall be made, or who, in connection
with his duties, obtains any information concerning which securities are
being recommended prior to the effective dissemination of such
recommendations or of the information concerning such recommendations. See
Section II of Appendix A for the legal definition of "Advisory
Representative."
17 Security includes any option to purchase or sell, and any security that is
exchangeable for or convertible into, any security that is held or to be
acquired by a fund.
18 Special circumstances include but are not limited to, for example,
differences in time zones, delays due to travel, and the unusual size of
proposed trades or limit orders. Limit orders must expire within the
applicable clearance period.
19 As of February 2000
