UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT INVESTMENT COMPANIES
Investment Company Act file number 811-21306
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FRANKLIN MUTUAL RECOVERY FUND
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(Exact name of registrant as specified in charter)
101 JOHN F. KENNEDY PARKWAY, SHORT HILLS, NJ 07078-2789
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(Address of principal executive offices) (Zip code)
CRAIG S. TYLE, ONE FRANKLIN PARKWAY, SAN MATEO, CA 94403-1906
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(Name and address of agent for service)
Registrant's telephone number, including area code: (210) 912-2100
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Date of fiscal year end: 3/31
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Date of reporting period: 3/31/06
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ITEM 1. REPORTS TO STOCKHOLDERS.
[GRAPHIC OMITTED]
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MARCH 31, 2006
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ANNUAL REPORT AND SHAREHOLDER LETTER VALUE
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WANT TO RECEIVE
THIS DOCUMENT
FASTER VIA EMAIL?
FRANKLIN
MUTUAL RECOVERY FUND Eligible shareholders can
sign up for eDelivery at
franklintempleton.com.
See inside for details.
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[LOGO](R)
FRANKLIN TEMPLETON
INVESTMENTS
Franklin o Templeton o MUTUAL SERIES
Thank You For Your
Continued Participation
At Mutual Series, we are pleased so many investors
share our long-term investment philosophy and have
remained shareholders for many years. Your ongoing
support plays a significant role in contributing to
the funds' success.
SPECIALIZED EXPERTISE Mutual Series is part of Franklin Templeton
Investments, which offers the specialized expertise
of three world-class investment management groups
--Franklin, Templeton and Mutual Series. Mutual
Series is dedicated to a unique style of value
investing, searching aggressively for opportunity
among what we believe are undervalued stocks, as
well as arbitrage situations and distressed
securities. Franklin is a recognized leader in fixed
income investing and also brings expertise in
growth- and value-style U.S. equity investing.
Templeton pioneered international investing and,
with offices in over 25 countries, offers investors
a truly global perspective.
TRUE DIVERSIFICATION Because these management groups work independently
and adhere to different investment approaches,
Franklin, Templeton and Mutual Series funds
typically have distinct portfolios. That's why the
funds can be used to build truly diversified
allocation plans covering every major asset class.
RELIABILITY YOU CAN TRUST Franklin Templeton Investments seeks to consistently
provide investors with exceptional risk-adjusted
returns over the long term, as well as the reliable,
accurate and personal service that has helped the
firm become one of the most trusted names in
financial services.
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MUTUAL FUNDS | RETIREMENT PLANS | 529 COLLEGE SAVINGS PLANS | SEPARATE ACCOUNTS
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[GRAPHIC OMITTED]
Not part of the annual report
Contents
SHAREHOLDER LETTER ..................................................... 1
ANNUAL REPORT
Franklin Mutual Recovery Fund .......................................... 4
Performance Summary .................................................... 10
Your Fund's Expenses ................................................... 15
The Fund's Repurchase Offers ........................................... 17
Financial Highlights and Statement of Investments ...................... 18
Financial Statements ................................................... 28
Notes to Financial Statements .......................................... 33
Report of Independent Registered Public Accounting Firm ................ 46
Tax Designation ........................................................ 47
Board Members and Officers ............................................. 48
Shareholder Information ................................................ 53
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Annual Report
Franklin Mutual Recovery Fund
YOUR FUND'S GOAL AND MAIN INVESTMENTS: Franklin Mutual Recovery Fund's goal is
capital appreciation. The Fund seeks to achieve superior risk-adjusted returns
with a moderate correlation to U.S. equity markets by investing in distressed
companies, risk arbitrage securities and undervalued securities. The Fund may
take long and short positions.
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ASSET ALLOCATION
Based on Total Net Assets as of 3/31/06
[THE FOLLOWING TABLE WAS REPRESENTED BY A PIE CHART IN THE PRINTED MATERIAL.]
Equity ............................................. 64.4%
Fixed Income & Other Debt .......................... 17.5%
Short-Term Investments & Other Net Assets .......... 18.1%
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PERFORMANCE DATA REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE FUTURE
RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU MAY HAVE
A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY DIFFER FROM
FIGURES SHOWN. PLEASE VISIT FRANKLINTEMPLETON.COM OR CALL 1-800/342-5236 FOR
MOST RECENT MONTH-END PERFORMANCE.
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We are pleased to bring you Franklin Mutual Recovery Fund's annual report for
the fiscal year ended March 31, 2006.
PERFORMANCE OVERVIEW
Franklin Mutual Recovery Fund - Class A posted a +12.51% cumulative total return
for the year under review. The Fund outperformed the Standard & Poor's 500
Index's (S&P 500's) +11.72% total return for the same period. 1 The Fund also
outperformed the +1.43% total return of the Bloomberg/EFFAS
1. Source: Standard & Poor's Micropal. The S&P 500 consists of 500 stocks
chosen for market size, liquidity and industry group representation. Each
stock's weight in the index is proportionate to its market value. The S&P
500 is one of the most widely used benchmarks of U.S. equity performance.
The index is unmanaged and includes reinvested dividends. One cannot
invest directly in an index, nor is an index representative of the Fund's
portfolio.
THE DOLLAR VALUE, NUMBER OF SHARES OR PRINCIPAL AMOUNT, AND NAMES OF ALL
PORTFOLIO HOLDINGS ARE LISTED IN THE FUND'S STATEMENT OF INVESTMENTS (SOI). THE
SOI BEGINS ON PAGE 22.
4 | Annual Report
U.S. Government 3-5 Years Total Return Index. 2 The performance of the Fund
relative to the Bloomberg index is used as the basis for calculating the
performance adjustment to the management fee paid to the Fund's adviser. You can
find more of the Fund's performance data in the Performance Summary beginning on
page 10.
ECONOMIC AND MARKET OVERVIEW
During the 12 months ended March 31, 2006, the U.S. economy advanced at a modest
pace. For 2005, gross domestic product (GDP) grew 3.5% amid strong consumption
and business productivity trends. In the fourth quarter of 2005, declines in
vehicle sales and defense spending contributed to slower GDP growth of 1.7%
annualized. Furthermore, slower export growth combined with greater demand for
imported goods and materials fueled a widening trade deficit. Residential
construction and real estate activity waned as long-term mortgage rates rose,
but economic growth picked up again in first quarter 2006. In March, the Federal
Reserve Board (Fed) indicated that the economy was in transition -- from one led
by rapid consumer spending, accommodative monetary policy and fiscal stimuli
toward one led by business investment spending and export trade.
The labor market firmed as employment increased in most states and the
unemployment rate dropped from 5.1% to 4.7%. 3 Labor costs increased during the
reporting period. Hiring rebounded in many industries and personal income rose.
Elevated energy and other commodity prices were a primary economic concern. Oil
prices remained high, largely due to potential long-term supply disruptions and
strong growth in global demand, especially from China and India. Natural gas
prices rose during the second half of 2005 mainly because of expected rising
demand with the onset of winter; however, they retreated somewhat amid
milder-than-expected weather conditions. Although medical and pharmacy costs
climbed substantially, the core Consumer Price Index (CPI) rose 2.1% for the
year under review, which was less than the 2.2% 10-year average. 4
The Fed continued its monetary tightening cycle and raised the federal funds
target rate from 2.75% to 4.75% in eight quarter-point steps. The Fed suggested
more rate increases may be necessary to balance growth with what it saw as
potential inflationary risks of tighter labor and product markets. The effects
of the Fed's credit-tightening campaign cooled the previously hot housing and
real estate markets as the cost of credit grew less attractive to most
2. Source: Bloomberg LP. The Bloomberg/EFFAS U.S. Government 3-5 Years Total
Return Index is designed as a transparent benchmark for the U.S.
government bond market. The index is unmanaged and includes price
appreciation/ depreciation only. One cannot invest directly in an index,
nor is an index representative of the Fund's portfolio. Please see Notes
to Financial Statements for more information about the performance-based
management fee.
3. Source: Bureau of Labor Statistics.
4. Source: Bureau of Labor Statistics. Core CPI excludes food and energy
costs.
Annual Report | 5
TOP 10 HOLDINGS
3/31/06
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COMPANY % OF TOTAL
SECTOR/INDUSTRY, COUNTRY NET ASSETS
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Guidant Corp. 5.5%
HEALTH CARE EQUIPMENT & SUPPLIES, U.S.
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Owens Corning 4.7%
CONSTRUCTION MATERIALS, U.S.
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Burlington Resources Inc. 4.7%
OIL, GAS & CONSUMABLE FUELS, U.S.
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NTL Inc. 4.3%
DIVERSIFIED TELECOMMUNICATION SERVICES, U.K.
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Temple-Inland Inc. 4.2%
CONTAINERS & PACKAGING, U.S.
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Adelphia Communications Corp. & Affiliated Issuers 3.8%
MEDIA, U.S.
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Weyerhaeuser Co. 3.0%
PAPER & FOREST PRODUCTS, U.S.
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KT&G Corp. 2.8%
TOBACCO, SOUTH KOREA
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ACE Aviation Holdings Inc. 2.5%
AIRLINES, CANADA
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Time Warner Inc. 2.4%
MEDIA, U.S.
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consumers who were already dealing with near-record consumer debt burdens and
historically high gas prices.
In this environment, the blue chip stocks of the Dow Jones Industrial Average
posted a one-year total return of +8.27%, while the broader S&P 500 and the
technology-heavy NASDAQ Composite Index returned +11.72% and +18.02%,
respectively. 5 Small company stocks outperformed their large-capitalization
counterparts by a wide margin, and technology stocks saw their biggest
resurgence since 2003. Energy, financial and telecommunications stocks also
performed well.
INVESTMENT STRATEGY
We follow a distinctive investment approach and can seek investments in
distressed companies, risk arbitrage and special situations/undervalued stocks.
The availability of investments at attractive prices in each of these categories
varies with market cycles. Therefore, the percentage of the Fund's assets
invested in each of these areas will fluctuate as we attempt to take advantage
of opportunities afforded by cyclical changes. We employ rigorous, fundamental
analysis to find investment opportunities. In choosing investments, we look at
the market price of an individual company's securities relative to our
evaluation of its asset value based on such factors as book value, cash flow
potential, long-term earnings and earnings multiples. We may invest in
distressed companies if we believe the market overreacted to adverse
developments or failed to appreciate positive changes.
MANAGER'S DISCUSSION
During the fiscal year under review, the biggest contributions to the Fund's
performance came from a mix of special situation and distressed investments. Our
top performer was U.K.-based Anglo American, one of the world's largest
independent coal miners and a significant stakeholder in a number of leading
global producers of diamonds, precious metals, paper, packaging goods, base
metals and other minerals. The company benefited from a strong commodity cycle
and high metals prices driven by sustained world demand, particularly from
China. Anglo American, a complex mix of wholly owned assets and
5. Source: Standard & Poor's Micropal. The Dow Jones Industrial Average is
price weighted based on the average market price of 30 blue chip stocks of
companies that are generally industry leaders. See footnote 1 for a
description of the S&P 500. The NASDAQ Composite Index measures all NASDAQ
domestic and international based common type stocks listed on The NASDAQ
Stock Market. The index is market value weighted and includes more than
3,000 companies.
6 | Annual Report
stakes in other publicly traded companies, has benefited from announced actions
to simplify and focus its corporate structure and return capital to
shareholders.
Owens Corning bank debt, which was one of the Fund's top performers in its
previous fiscal year, was its second-best performer this fiscal year. Our
investment in Owens Corning bank debt is structurally senior to the pending
asbestos tort claims that have driven the building products company into
bankruptcy, and has continued to benefit from the failure of legal efforts to
challenge the banks' structural seniority in the company's bankruptcy
proceedings.
KT&G, formerly known as Korea Tobacco & Ginseng, was the third-best performer
of the past fiscal year. KT&G has an attractive mix of assets whose value the
market has been gradually recognizing. The shares recently appreciated as the
company was challenged by various third-party investors to take actions to
enhance shareholder value.
Conversely, the only significant negative impact on the Fund during the year
came from our investment in the bonds of Adelphia Communications, a bankrupt
cable company. Adelphia's bonds depreciated due to continued conflict among
various creditor classes in the Adelphia bankruptcy. Recent softness in overall
U.S. cable valuations and fears that a plan of reorganization will not be
confirmed within the time limit imposed by the Time Warner asset purchase
agreement also negatively impacted the bonds.
According to our investment strategy, we typically fully hedge the Fund's
foreign currency exposure. Therefore, despite the Fund's significant investments
outside the U.S. (primarily in western Europe), currency movements did not have
a material impact on the Fund's performance during the year under review.
As of March 31, 2006, the Fund was 82% invested, with approximately 21% of total
assets invested in positions we classified as distressed or post-reorganization.
Net risk arbitrage exposure rose to 17% of the portfolio from 10% one year
earlier. Special situation investments were about 44% of total net assets, with
the balance of the portfolio in cash and other assets.
TOP 10 SECTORS/INDUSTRIES
3/31/06
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% OF TOTAL
NET ASSETS
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Tobacco 9.8%
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Diversified Telecommunication Services 7.0%
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Media 6.2%
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Metals & Mining 6.0%
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Health Care Equipment & Supplies 4.5%
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Containers & Packaging 4.2%
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Oil, Gas & Consumable Fuels 4.0%
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Insurance 3.6%
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Industrial Conglomerates 3.2%
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Paper & Forest Products 3.0%
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Annual Report | 7
Thank you for your interest and participation in Franklin Mutual Recovery Fund.
We look forward to serving your future investment needs.
[PHOTO OF MICHAEL J. EMBLER]
/s/ Michael J. Embler
Michael J. Embler
Co-Portfolio Manager
[PHOTO OF SHAWN TUMULTY]
/s/ Shawn Tumulty
Shawn Tumulty
Co-Portfolio Manager
[PHOTO OF CHRISTIAN CORREA]
/s/ Christian Correa
Christian Correa
Assistant Portfolio Manager
Franklin Mutual Recovery Fund
THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS
AS OF MARCH 31, 2006, THE END OF THE REPORTING PERIOD. THE WAY WE IMPLEMENT OUR
MAIN INVESTMENT STRATEGIES AND THE RESULTING PORTFOLIO HOLDINGS MAY CHANGE
DEPENDING ON FACTORS SUCH AS MARKET AND ECONOMIC CONDITIONS. THESE OPINIONS MAY
NOT BE RELIED UPON AS INVESTMENT ADVICE OR AN OFFER FOR A PARTICULAR SECURITY.
THE INFORMATION IS NOT A COMPLETE ANALYSIS OF EVERY ASPECT OF ANY MARKET,
COUNTRY, INDUSTRY, SECURITY OR THE FUND. STATEMENTS OF FACT ARE FROM SOURCES
CONSIDERED RELIABLE, BUT THE INVESTMENT MANAGER MAKES NO REPRESENTATION OR
WARRANTY AS TO THEIR COMPLETENESS OR ACCURACY. ALTHOUGH HISTORICAL PERFORMANCE
IS NO GUARANTEE OF FUTURE RESULTS, THESE INSIGHTS MAY HELP YOU UNDERSTAND OUR
INVESTMENT MANAGEMENT PHILOSOPHY.
8 | Annual Report
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MICHAEL EMBLER is a senior vice president and the chief investment officer of
Franklin Mutual Advisers, LLC (Mutual Series). Mr. Embler has been portfolio
manager of Franklin Mutual Recovery Fund since its inception and currently has
portfolio management responsibilities for another Mutual Series fund. Mr. Embler
specializes in analyzing and trading bankrupt and distressed securities. Before
joining Franklin Templeton Investments in 2001, he was a Managing Director and
portfolio manager at Nomura Holdings America, Inc.
SHAWN TUMULTY joined Franklin Templeton Investments in 2000. He has been an
assistant portfolio manager for another Mutual Series fund since 2003. In May
2005, he assumed the duties of co-portfolio manager for Franklin Mutual Recovery
Fund. Prior to joining Franklin Templeton Investments, Mr. Tumulty was an
analyst and portfolio manager at Hamilton Partners Limited.
CHRISTIAN CORREA assumed responsibility as assistant portfolio manager for
Franklin Mutual Recovery Fund in November 2004. He is also a research analyst
for Mutual Series specializing in global risk arbitrage and event-driven
situations. Mr. Correa joined Mutual Series in 2003 from Lehman Brothers
Holdings Inc., where he covered U.S. risk arbitrage and special situations.
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Annual Report | 9
Performance Summary as of 3/31/06
Your dividend income will vary depending on dividends or interest paid by
securities in the Fund's portfolio, adjusted for operating expenses of each
class. Capital gain distributions are net profits realized from the sale of
portfolio securities. The performance table and graphs do not reflect any taxes
that a shareholder would pay on Fund dividends, capital gain distributions, if
any, or any realized gains on the sale of Fund shares. Total return reflects
reinvestment of the Fund's dividends and capital gain distributions, if any, and
any unrealized gains or losses.
PRICE AND DISTRIBUTION INFORMATION
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CLASS A (SYMBOL: FMRAX) CHANGE 3/31/06 3/31/05
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Net Asset Value (NAV) +$0.79 $13.43 $12.64
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DISTRIBUTIONS (4/1/05-3/31/06)
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Dividend Income $0.0136
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Short-Term Capital Gain $0.4432
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Long-Term Capital Gain $0.2599
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TOTAL $0.7167
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CLASS B (SYMBOL: N/A) CHANGE 3/31/06 3/31/05
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Net Asset Value (NAV) +$0.71 $13.29 $12.58
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DISTRIBUTIONS (4/1/05-3/31/06)
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Short-Term Capital Gain $0.4432
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Long-Term Capital Gain $0.2599
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TOTAL $0.7031
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CLASS C (SYMBOL: FCMRX) CHANGE 3/31/06 3/31/05
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Net Asset Value (NAV) +$0.71 $13.29 $12.58
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DISTRIBUTIONS (4/1/05-3/31/06)
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Short-Term Capital Gain $0.4432
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Long-Term Capital Gain $0.2599
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TOTAL $0.7031
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ADVISOR CLASS (SYMBOL: FMRVX) CHANGE 3/31/06 3/31/05
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Net Asset Value (NAV) +$0.83 $13.50 $12.67
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DISTRIBUTIONS (4/1/05-3/31/06)
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Dividend Income $0.0224
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Short-Term Capital Gain $0.4432
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Long-Term Capital Gain $0.2599
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TOTAL $0.7255
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10 | Annual Report
Performance Summary (CONTINUED)
PERFORMANCE
CLASS A: 5.75% MAXIMUM INITIAL SALES CHARGE; CLASS B: CONTINGENT DEFERRED SALES
CHARGE (CDSC) DECLINING FROM 4% TO 1% OVER SIX YEARS, AND ELIMINATED THEREAFTER;
CLASS C: 1% CDSC IN FIRST YEAR ONLY. CUMULATIVE TOTAL RETURN EXCLUDES SALES
CHARGES. AVERAGE ANNUAL TOTAL RETURN AND VALUE OF $10,000 INVESTMENT INCLUDE
MAXIMUM SALES CHARGES.
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CLASS A 1-YEAR INCEPTION (11/3/03)
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Cumulative Total Return 1 +12.51% +36.16%
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Average Annual Total Return 2 +6.04% +10.91%
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Value of $10,000 Investment 3 $10,604 $12,834
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CLASS B 1-YEAR INCEPTION (11/3/03)
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Cumulative Total Return 1 +11.79% +34.27%
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Average Annual Total Return 2 +7.79% +11.96%
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Value of $10,000 Investment 3 $10,779 $13,127
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CLASS C 1-YEAR INCEPTION (11/3/03)
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Cumulative Total Return 1 +11.79% +34.25%
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Average Annual Total Return 2 +10.79% +13.01%
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Value of $10,000 Investment 3 $11,079 $13,425
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ADVISOR CLASS 1-YEAR INCEPTION (6/2/03)
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Cumulative Total Return 1 +12.88% +52.36%
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Average Annual Total Return 2 +12.88% +16.04%
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Value of $10,000 Investment 3 $11,288 $15,236
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PERFORMANCE DATA REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE FUTURE
RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU MAY HAVE
A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY DIFFER FROM
FIGURES SHOWN.
FOR MOST RECENT MONTH-END PERFORMANCE, SEE "FUNDS AND PERFORMANCE" AT
FRANKLINTEMPLETON.COM OR CALL 1-800/342-5236.
Annual Report | 11
Performance Summary (CONTINUED)
TOTAL RETURN INDEX COMPARISON FOR HYPOTHETICAL $10,000 INVESTMENT
Total return represents the change in value of an investment over the periods
shown. It includes any current, applicable, maximum sales charge, Fund expenses,
account fees and reinvested distributions. The unmanaged index includes
reinvestment of any income or distributions. It differs from the Fund in
composition and does not pay management fees or expenses. One cannot invest
directly in an index.
AVERAGE ANNUAL TOTAL RETURN
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CLASS A 3/31/06
- ------------------------------------------
1-Year +6.04%
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Since Inception (11/3/03) +10.91%
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CLASS A (11/3/03-3/31/06)
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE GRAPH IN THE PRINTED MATERIAL.]
DATE Franklin Mutual Recovery Fund S&P 500 4
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11/3/2003 $ 9,423 $10,000
11/30/2003 $ 9,652 $10,088
12/31/2003 $10,010 $10,617
1/31/2004 $10,155 $10,811
2/29/2004 $10,283 $10,962
3/31/2004 $10,189 $10,796
4/30/2004 $10,095 $10,627
5/31/2004 $10,070 $10,773
6/30/2004 $10,266 $10,982
7/31/2004 $10,112 $10,619
8/31/2004 $10,249 $10,661
9/30/2004 $10,325 $10,777
10/31/2004 $10,342 $10,941
11/30/2004 $10,973 $11,384
12/31/2004 $11,323 $11,771
1/31/2005 $11,151 $11,484
2/28/2005 $11,313 $11,726
3/31/2005 $11,404 $11,518
4/30/2005 $11,341 $11,300
5/31/2005 $11,630 $11,659
6/30/2005 $11,790 $11,676
7/31/2005 $11,995 $12,110
8/31/2005 $12,041 $11,999
9/30/2005 $12,032 $12,097
10/31/2005 $11,594 $11,895
11/30/2005 $11,827 $12,344
12/31/2005 $12,085 $12,349
1/31/2006 $12,506 $12,676
2/28/2006 $12,563 $12,710
3/31/2006 $12,834 $12,868
AVERAGE ANNUAL TOTAL RETURN
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CLASS B 3/31/06
- ------------------------------------------
1-Year +7.79%
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Since Inception (11/3/03) +11.96%
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CLASS B (11/3/03-3/31/06)
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE GRAPH IN THE PRINTED MATERIAL.]
DATE Franklin Mutual Recovery Fund S&P 500 4
- --------------------------------------------------------------------------------
11/3/2003 $10,000 $10,000
11/30/2003 $10,243 $10,088
12/31/2003 $10,620 $10,617
1/31/2004 $10,764 $10,811
2/29/2004 $10,891 $10,962
3/31/2004 $10,792 $10,796
4/30/2004 $10,692 $10,627
5/31/2004 $10,656 $10,773
6/30/2004 $10,855 $10,982
7/31/2004 $10,692 $10,619
8/31/2004 $10,828 $10,661
9/30/2004 $10,909 $10,777
10/31/2004 $10,918 $10,941
11/30/2004 $11,569 $11,384
12/31/2004 $11,944 $11,771
1/31/2005 $11,753 $11,484
2/28/2005 $11,916 $11,726
3/31/2005 $12,011 $11,518
4/30/2005 $11,935 $11,300
5/31/2005 $12,231 $11,659
6/30/2005 $12,387 $11,676
7/31/2005 $12,604 $12,110
8/31/2005 $12,643 $11,999
9/30/2005 $12,623 $12,097
10/31/2005 $12,161 $11,895
11/30/2005 $12,397 $12,344
12/31/2005 $12,660 $12,349
1/31/2006 $13,094 $12,676
2/28/2006 $13,145 $12,710
3/31/2006 $13,127 $12,868
12 | Annual Report
Performance Summary (CONTINUED)
AVERAGE ANNUAL TOTAL RETURN
- ------------------------------------------
CLASS C 3/31/06
- ------------------------------------------
1-Year +10.79%
- ------------------------------------------
Since Inception (11/3/03) +13.01%
- ------------------------------------------
CLASS C (11/3/03-3/31/06)
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE GRAPH IN THE PRINTED MATERIAL.]
DATE Franklin Mutual Recovery Fund S&P 500 4
- --------------------------------------------------------------------------------
11/3/2003 $10,000 $10,000
11/30/2003 $10,243 $10,088
12/31/2003 $10,618 $10,617
1/31/2004 $10,772 $10,811
2/29/2004 $10,898 $10,962
3/31/2004 $10,799 $10,796
4/30/2004 $10,690 $10,627
5/31/2004 $10,654 $10,773
6/30/2004 $10,853 $10,982
7/31/2004 $10,690 $10,619
8/31/2004 $10,826 $10,661
9/30/2004 $10,907 $10,777
10/31/2004 $10,916 $10,941
11/30/2004 $11,568 $11,384
12/31/2004 $11,943 $11,771
1/31/2005 $11,751 $11,484
2/28/2005 $11,914 $11,726
3/31/2005 $12,009 $11,518
4/30/2005 $11,933 $11,300
5/31/2005 $12,229 $11,659
6/30/2005 $12,385 $11,676
7/31/2005 $12,601 $12,110
8/31/2005 $12,641 $11,999
9/30/2005 $12,621 $12,097
10/31/2005 $12,159 $11,895
11/30/2005 $12,395 $12,344
12/31/2005 $12,658 $12,349
1/31/2006 $13,102 $12,676
2/28/2006 $13,142 $12,710
3/31/2006 $13,425 $12,868
AVERAGE ANNUAL TOTAL RETURN
- ------------------------------------------
ADVISOR CLASS 3/31/06
- ------------------------------------------
1-Year +12.88%
- ------------------------------------------
Since Inception (6/2/03) +16.04%
- ------------------------------------------
ADVISOR CLASS (6/2/03-3/31/06)
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE GRAPH IN THE PRINTED MATERIAL.]
DATE Franklin Mutual Recovery Fund S&P 500 4
- --------------------------------------------------------------------------------
6/2/2003 $10,000 $10,000
6/30/2003 $10,120 $10,128
7/31/2003 $10,190 $10,306
8/31/2003 $10,340 $10,507
9/30/2003 $10,630 $10,396
10/31/2003 $11,070 $10,984
11/30/2003 $11,370 $11,080
12/31/2003 $11,795 $11,661
1/31/2004 $11,976 $11,875
2/29/2004 $12,127 $12,040
3/31/2004 $12,016 $11,858
4/30/2004 $11,906 $11,672
5/31/2004 $11,886 $11,832
6/30/2004 $12,117 $12,062
7/31/2004 $11,946 $11,663
8/31/2004 $12,107 $11,710
9/30/2004 $12,207 $11,837
10/31/2004 $12,217 $12,017
11/30/2004 $12,961 $12,503
12/31/2004 $13,391 $12,929
1/31/2005 $13,188 $12,614
2/28/2005 $13,380 $12,879
3/31/2005 $13,498 $12,651
4/30/2005 $13,423 $12,411
5/31/2005 $13,775 $12,806
6/30/2005 $13,963 $12,824
7/31/2005 $14,216 $13,301
8/31/2005 $14,271 $13,180
9/30/2005 $14,260 $13,286
10/31/2005 $13,753 $13,065
11/30/2005 $14,029 $13,558
12/31/2005 $14,333 $13,563
1/31/2006 $14,853 $13,922
2/28/2006 $14,909 $13,960
3/31/2006 $15,236 $14,134
Annual Report | 13
Performance Summary (CONTINUED)
ENDNOTES
THE FUND IS NONDIVERSIFIED, WHICH MEANS IT CAN BE MORE SUSCEPTIBLE TO ADVERSE
ECONOMIC, POLITICAL AND REGULATORY CHANGES. THE FUND'S INVESTMENTS MAY INCLUDE
SMALLER-COMPANY STOCKS AND FOREIGN SECURITIES. SMALLER-COMPANY STOCKS HAVE
EXHIBITED GREATER PRICE VOLATILITY THAN LARGER-COMPANY STOCKS, PARTICULARLY OVER
THE SHORT TERM. FOREIGN SECURITIES RISKS INCLUDE CURRENCY FLUCTUATIONS, AND
ECONOMIC AND POLITICAL UNCERTAINTIES. THE FUND MAY ALSO SHORT STOCKS. IT MAY NOT
BE ABLE TO COVER A SHORT POSITION AT ANY PARTICULAR TIME OR AT AN ACCEPTABLE
PRICE. THE FUND IS STRUCTURED AS A CONTINUOUSLY OFFERED, CLOSED-END FUND AND
DOES NOT OFFER DAILY REDEMPTIONS. INSTEAD, THE FUND HAS A FUNDAMENTAL POLICY TO
PROVIDE INVESTORS ACCESS TO THEIR MONEY BY MAKING QUARTERLY TENDER OFFERS FOR
5%-25% OF THE FUND'S OUTSTANDING SHARES. HOWEVER, IN UNUSUAL CIRCUMSTANCES, THE
FUND MAY SUSPEND OR POSTPONE A TENDER OFFER SUBJECT TO APPROVAL BY THE FUND'S
BOARD OF TRUSTEES. THE FUND'S PROSPECTUS ALSO INCLUDES A DESCRIPTION OF THE MAIN
INVESTMENT RISKS.
CLASS B: These shares have higher annual fees and expenses than Class A
shares.
CLASS C: Prior to 1/1/04, these shares were offered with an initial sales
charge; thus actual total returns would have differed. These
shares have higher annual fees and expenses than Class A shares.
ADVISOR CLASS: Shares are available to certain eligible investors as described
in the prospectus.
1. Cumulative total return represents the change in value of an investment
over the periods indicated and does not include a sales charge.
2. Average annual total return represents the average annual change in value
of an investment over the periods indicated and includes any current,
applicable, maximum sales charge.
3. These figures represent the value of a hypothetical $10,000 investment in
the Fund over the periods indicated and include any current, applicable,
maximum sales charge.
4. Source: Standard & Poor's Micropal. The S&P 500 consists of 500 stocks
chosen for market size, liquidity and industry group representation. Each
stock's weight in the index is proportionate to its market value. The S&P
500 is one of the most widely used benchmarks of U.S. equity performance.
14 | Annual Report
Your Fund's Expenses
As a Fund shareholder, you can incur two types of costs:
o Transaction costs, including sales charges (loads) on Fund purchases and
redemption fees; and
o Ongoing Fund costs, including management fees, distribution and service
(12b-1) fees, and other Fund expenses. All mutual funds have ongoing
costs, sometimes referred to as operating expenses.
The following table shows ongoing costs of investing in the Fund and can help
you understand these costs and compare them with those of other mutual funds.
The table assumes a $1,000 investment held for the six months indicated.
ACTUAL FUND EXPENSES
The first line (Actual) for each share class listed in the table below provides
actual account values and expenses. The "Ending Account Value" is derived from
the Fund's actual return, which includes the effect of Fund expenses.
You can estimate the expenses you paid during the period by following these
steps. OF COURSE, YOUR ACCOUNT VALUE AND EXPENSES WILL DIFFER FROM THOSE IN THIS
ILLUSTRATION:
1. Divide your account value by $1,000.
IF AN ACCOUNT HAD AN $8,600 VALUE, THEN $8,600 / $1,000 = 8.6.
2. Multiply the result by the number under the heading "Expenses Paid During
Period."
IF EXPENSES PAID DURING PERIOD WERE $7.50, THEN 8.6 x $7.50 = $64.50.
In this illustration, the estimated expenses paid this period are $64.50.
HYPOTHETICAL EXAMPLE FOR COMPARISON WITH OTHER FUNDS
Information in the second line (Hypothetical) for each class in the table can
help you compare ongoing costs of investing in the Fund with those of other
mutual funds. This information may not be used to estimate the actual ending
account balance or expenses you paid during the period. The hypothetical "Ending
Account Value" is based on the actual expense ratio for each class and an
assumed 5% annual rate of return before expenses, which does not represent the
Fund's actual return. The figure under the heading "Expenses Paid During Period"
shows the hypothetical expenses your account would have incurred under this
scenario. You can compare this figure with the 5% hypothetical examples that
appear in shareholder reports of other funds.
Annual Report | 15
Your Fund's Expenses (CONTINUED)
PLEASE NOTE THAT EXPENSES SHOWN IN THE TABLE ARE MEANT TO HIGHLIGHT ONGOING
COSTS AND DO NOT REFLECT ANY TRANSACTION COSTS, SUCH AS SALES CHARGES OR
REDEMPTION FEES. Therefore, the second line for each class is useful in
comparing ongoing costs only, and will not help you compare total costs of
owning different funds. In addition, if transaction costs were included, your
total costs would have been higher. Please refer to the Fund prospectus for
additional information on operating expenses.
- --------------------------------------------------------------------------------------------------------
BEGINNING ACCOUNT ENDING ACCOUNT EXPENSES PAID DURING
CLASS A VALUE 10/1/05 VALUE 3/31/06 PERIOD* 10/1/05-3/31/06
- --------------------------------------------------------------------------------------------------------
Actual $1,000 $1,066.40 $18.39
- --------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,007.13 $17.86
- --------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------
CLASS B
- --------------------------------------------------------------------------------------------------------
Actual $1,000 $1,063.70 $21.71
- --------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,003.89 $21.08
- --------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------
CLASS C
- --------------------------------------------------------------------------------------------------------
Actual $1,000 $1,063.70 $21.76
- --------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,003.84 $21.13
- --------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------
ADVISOR CLASS
- --------------------------------------------------------------------------------------------------------
Actual $1,000 $1,068.50 $16.66
- --------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,008.83 $16.18
- --------------------------------------------------------------------------------------------------------
* Expenses are equal to the annualized expense ratio for each class (A:
3.57%; B: 4.22%; C: 4.23%; and Advisor: 3.23%), multiplied by the average
account value over the period, multiplied by 182/365 to reflect the
one-half year period.
16 | Annual Report
THE FUND'S REPURCHASE OFFERS
The Fund will make quarterly repurchase offers for a portion of its shares. With
any repurchase offer, shareholders may elect to tender (have the Fund
repurchase) all, a portion or none of their shares. With each repurchase offer,
shareholders will be notified in writing about the offer, how to request that
the Fund repurchase their shares and the deadline for submitting repurchase
requests.
Each quarter the Board of Trustees will set the amount of the repurchase offer,
as a percentage of outstanding shares. This amount is known as the repurchase
offer amount and will generally be between 5% and 25% of the Fund's outstanding
shares. If repurchase requests exceed the repurchase offer amount, the Fund will
prorate requests. The Fund may, however, first accept any requests to repurchase
all of a shareholder's shares if the shareholder owns less than 100 shares. The
Board will also determine the date by which the Fund must receive shareholders'
repurchase requests, which is known as the repurchase request deadline. The
Board will base these decisions on investment management considerations, market
conditions, liquidity of the Fund's assets, shareholder servicing and
administrative considerations and other factors it deems appropriate. Each
repurchase request deadline will occur within the period that begins 21 days
before, and ends 21 days after, the end of the quarterly interval. The
repurchase price of the shares will be the net asset value as of the close of
the NYSE on the date the Board sets as the repurchase pricing date. The maximum
number of days between the repurchase request deadline and the repurchase
pricing date is 14 days.
SUMMARY OF REPURCHASE OFFERS - 4/1/05 THROUGH 3/31/06
- -----------------------------------------------------------------------
REPURCHASE REPURCHASE % OF SHARES NUMBER OF
REQUEST DEADLINE OFFER AMOUNT TENDERED* SHARES TENDERED*
- -----------------------------------------------------------------------
7/1/05 10% 2.378% 411,413.554
- -----------------------------------------------------------------------
10/3/05 10% 1.759% 345,451.871
- -----------------------------------------------------------------------
1/5/06 10% 3.429% 847,989.585
- -----------------------------------------------------------------------
4/21/06 10% 4.105% 759,402.147
- -----------------------------------------------------------------------
* In connection with the repurchase offers, due to the limited number of
shares tendered, the Fund did not have to consider whether to repurchase
an additional amount of shares, not in excess of 2% of the shares
outstanding, and did not need to repurchase any shares on a pro rata basis
as described in the Prospectus and Repurchase Offer/Request Form.
Annual Report | 17
Franklin Mutual Recovery Fund
FINANCIAL HIGHLIGHTS
--------------------------------------
YEAR ENDED MARCH 31,
CLASS A 2006 2005 2004 d
--------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ............................................. $ 12.64 $ 11.91 $ 11.10
--------------------------------------
Income from investment operations:
Net investment income (loss) a .............................................. (0.02) 0.02 (0.04)
Net realized and unrealized gains (losses) .................................. 1.52 1.43 0.90
--------------------------------------
Total from investment operations ............................................... 1.50 1.45 0.86
--------------------------------------
Less distributions from:
Net investment income ....................................................... (0.01) (0.04) (0.01)
Net realized gains .......................................................... (0.70) (0.68) (0.04)
--------------------------------------
Total distributions ............................................................ (0.71) (0.72) (0.05)
--------------------------------------
Net asset value, end of year ................................................... $ 13.43 $ 12.64 $ 11.91
======================================
Total return b ................................................................. 12.51% 12.48% 7.77%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ................................................ $ 104,694 $ 57,709 $ 24,225
Ratios to average net assets:
Expenses before waiver and payments by affiliate and expense reduction c .... 3.53% 3.15% 3.45% e
Expenses net of waiver and payments by affiliate c .......................... 3.53% 3.05% 3.45% e
Expenses net of waiver and payments by affiliate and expense reduction c .... 3.52% 3.05% 3.45% e
Net investment income (loss) ................................................ (0.19)% 0.17% (0.89)% e
Portfolio turnover rate ........................................................ 69.20% 87.68% 129.60%
Ratio to average net assets, excluding dividend expense on securities sold short:
Expenses before waiver and payments by affiliate and expense reduction ...... 3.34% 3.11% 3.36% e
Expenses net of waiver and payments by affiliate ............................ 3.34% 3.02% 3.36% e
Expenses net of waiver and payments by affiliate and expense reduction ...... 3.33% 3.02% 3.36% e
a Based on average daily shares outstanding.
b Total return does not reflect sales commissions or the contingent deferred
sales charges, and is not annualized for periods less than one year.
c Includes dividend expense on securities sold short which varies from year
to year. See below for expense rates that reflect only operating expenses.
d For the period November 3, 2003 (effective date) to March 31, 2004.
e Annualized.
18 | See notes to financial statements. | Annual Report
Franklin Mutual Recovery Fund
FINANCIAL HIGHLIGHTS (CONTINUED)
---------------------------------------
YEAR ENDED MARCH 31,
CLASS B 2006 2005 2004 d
---------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ............................................. $ 12.58 $ 11.89 $ 11.10
---------------------------------------
Income from investment operations:
Net investment income (loss) a .............................................. (0.11) (0.06) (0.07)
Net realized and unrealized gains (losses) .................................. 1.52 1.43 0.91
---------------------------------------
Total from investment operations ............................................... 1.41 1.37 0.84
---------------------------------------
Less distributions from:
Net investment income ....................................................... -- -- (0.01)
Net realized gains .......................................................... (0.70) (0.68) (0.04)
---------------------------------------
Total distributions ............................................................ (0.70) (0.68) (0.05)
---------------------------------------
Net asset value, end of year ................................................... $ 13.29 $ 12.58 $ 11.89
=======================================
Total return b ................................................................. 11.79% 11.77% 7.55%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ................................................ $ 4,243 $ 3,246 $ 1,892
Ratios to average net assets:
Expenses before waiver and payments by affiliate and expense reduction c .... 4.18% 3.79% 4.10% e
Expenses net of waiver and payments by affiliate c .......................... 4.18% 3.69% 4.10% e
Expenses net of waiver and payments by affiliate and expense reduction c .... 4.17% 3.69% 4.10% e
Net investment income (loss) ................................................ (0.84)% (0.47)% (1.47)% e
Portfolio turnover rate ........................................................ 69.20% 87.68% 129.60%
Ratio to average net assets, excluding dividend expense on securities sold short:
Expenses before waiver and payments by affiliate and expense reduction ...... 3.99% 3.75% 4.00% e
Expenses net of waiver and payments by affiliate ............................ 3.99% 3.65% 4.00% e
Expenses net of waiver and payments by affiliate and expense reduction ...... 3.98% 3.65% 4.00% e
a Based on average daily shares outstanding.
b Total return does not reflect the contingent deferred sales charges, and
is not annualized for periods less than one year.
c Includes dividend expense on securities sold short which varies from year
to year. See below for expense rates that reflect only operating expenses.
d For the period November 3, 2003 (effective date) to March 31, 2004.
e Annualized.
Annual Report | See notes to financial statements. | 19
Franklin Mutual Recovery Fund
FINANCIAL HIGHLIGHTS (CONTINUED)
---------------------------------------
YEAR ENDED MARCH 31,
CLASS C 2006 2005 2004 d
---------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ............................................. $ 12.58 $ 11.89 $ 11.10
---------------------------------------
Income from investment operations:
Net investment income (loss) a .............................................. (0.11) (0.06) (0.07)
Net realized and unrealized gains (losses) .................................. 1.52 1.43 0.91
---------------------------------------
Total from investment operations ............................................... 1.41 1.37 0.84
---------------------------------------
Less distributions from:
Net investment income ....................................................... -- -- (0.01)
Net realized gains (losses) ................................................. (0.70) (0.68) (0.04)
---------------------------------------
Total distributions ............................................................ (0.70) (0.68) (0.05)
---------------------------------------
Net asset value, end of year ................................................... $ 13.29 $ 12.58 $ 11.89
=======================================
Total return b ................................................................. 11.79% 11.77% 7.54%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ................................................ $ 55,030 $ 29,991 $ 16,887
Ratios to average net assets:
Expenses before waiver and payments by affiliate and expense reduction c .... 4.18% 3.78% 4.10% e
Expenses net of waiver and payments by affiliate c .......................... 4.18% 3.68% 4.10% e
Expenses net of waiver and payments by affiliate and expense reduction c .... 4.17% 3.68% 4.10% e
Net investment income (loss) ................................................ (0.84)% (0.46)% (1.52)% e
Portfolio turnover rate ........................................................ 69.20% 87.68% 129.60%
Ratio to average net assets, excluding dividend expense on securities sold short:
Expenses before waiver and payments by affiliate and expense reduction ...... 3.99% 3.74% 4.02% e
Expenses net of waiver and payments by affiliate ............................ 3.99% 3.64% 4.02% e
Expenses net of waiver and payments by affiliate and expense reduction ...... 3.98% 3.64% 4.02% e
a Based on average daily shares outstanding.
b Total return does not reflect the contingent deferred sales charges, and
is not annualized for periods less than one year.
c Includes dividend expense on securities sold short which varies from year
to year. See below for expense rates that reflect only operating expenses.
d For the period November 3, 2003 (effective date) to March 31, 2004.
e Annualized.
20 | See notes to financial statements. | Annual Report
Franklin Mutual Recovery Fund
FINANCIAL HIGHLIGHTS (CONTINUED)
---------------------------------------
YEAR ENDED MARCH 31,
ADVISOR CLASS 2006 2005 2004 d
---------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ............................................. $ 12.67 $ 11.92 $ 10.00
---------------------------------------
Income from investment operations:
Net investment income (loss) a .............................................. 0.02 0.06 (0.09)
Net realized and unrealized gains (losses) .................................. 1.53 1.44 2.06
---------------------------------------
Total from investment operations ............................................... 1.55 1.50 1.97
---------------------------------------
Less distributions from:
Net investment income ....................................................... (0.02) (0.07) (0.01)
Net realized gains .......................................................... (0.70) (0.68) (0.04)
---------------------------------------
Total distributions ............................................................ (0.72) (0.75) (0.05)
---------------------------------------
Net asset value, end of year ................................................... $ 13.50 $ 12.67 $ 11.92
=======================================
Total return b ................................................................. 12.88% 12.88% 19.76%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ................................................ $ 80,420 $ 71,586 $ 45,854
Ratios to average net assets:
Expenses before waiver and payments by affiliate and expense reduction c .... 3.18% 2.80% 3.10% e
Expenses net of waiver and payments by affiliate c .......................... 3.18% 2.70% 3.10% e
Expenses net of waiver and payments by affiliate and expense reduction c .... 3.17% 2.70% 3.10% e
Net investment income (loss) ................................................ 0.16% 0.52% (1.01)% e
Portfolio turnover rate ........................................................ 69.20% 87.68% 129.60%
Ratio to average net assets, excluding dividend expense on securities sold short:
Expenses before waiver and payments by affiliate and expense reduction ...... 2.99% 2.76% 3.01% e
Expenses net of waiver and payments by affiliate ............................ 2.99% 2.66% 3.01% e
Expenses net of waiver and payments by affiliate and expense reduction ...... 2.98% 2.66% 3.10% e
a Based on average daily shares outstanding.
b Total return is not annualized for periods less than one year.
c Includes dividend expense on securities sold short which varies from year
to year. See below for expense rates that reflect only operating expenses.
d For the period June 2, 2003 (commencement of operations) to March 31,
2004.
e Annualized.
Annual Report | See notes to financial statements. | 21
Franklin Mutual Recovery Fund
STATEMENT OF INVESTMENTS, MARCH 31, 2006
- --------------------------------------------------------------------------------------------------------------------------------
SHARES/WARRANTS/
COUNTRY CONTRACTS VALUE
- --------------------------------------------------------------------------------------------------------------------------------
COMMON STOCKS AND OTHER EQUITY INTERESTS 73.5%
AIRLINES 2.4%
a ACE Aviation Holdings Inc. ............................................. Canada 190,035 $ 5,539,534
a,b ACE Aviation Holdings Inc., A, 144A .................................... Canada 10,020 292,084
a,c Air Canada Inc., Contingent Distribution ............................... Canada 4,442,455 --
-----------
5,831,618
-----------
AUTOMOBILES 0.2%
a,d International Automotive Components Group LLC .......................... Luxembourg 510,000 510,000
-----------
COMMERCIAL BANKS 1.1%
a,d Elephant Capital Holdings Ltd. ......................................... Japan 286 693,216
a,d NCB Warrant Holdings Ltd., A ........................................... Japan 13,135 2,121,348
-----------
2,814,564
-----------
COMPUTERS & PERIPHERALS 1.4%
a Maxtor Corp. ........................................................... United States 356,260 3,405,846
-----------
CONSTRUCTION MATERIALS 0.9%
Lafarge North America Inc. ............................................. United States 25,300 2,125,200
-----------
CONTAINERS & PACKAGING 4.2%
e Temple-Inland Inc. ..................................................... United States 229,800 10,237,590
-----------
DIVERSIFIED FINANCIAL SERVICES 0.2%
Aeroplan Income Fund ................................................... Canada 36,007 397,765
-----------
DIVERSIFIED TELECOMMUNICATION SERVICES 7.6%
a,d,f AboveNet Inc. .......................................................... United States 39,586 948,615
a,c,f AboveNet Inc., Contingent Distribution ................................. United States 2,387,000 --
BellSouth Corp. ........................................................ United States 74,090 2,567,219
a NTL Inc. ............................................................... United Kingdom 357,783 10,415,054
Verizon Communications Inc. ............................................ United States 135,737 4,623,202
-----------
18,554,090
-----------
ELECTRIC UTILITIES 1.1%
Endesa SA .............................................................. Spain 85,910 2,772,919
a,b Entegra/Union Power, 144A .............................................. United States 16,994 --
-----------
2,772,919
-----------
FOOD & STAPLES RETAILING 1.4%
Albertson's Inc. ....................................................... United States 130,590 3,352,245
-----------
HEALTH CARE EQUIPMENT & SUPPLIES 5.5%
Guidant Corp. .......................................................... United States 172,080 13,432,565
-----------
HEALTH CARE PROVIDERS & SERVICES 2.2%
a Emdeon Corp. ........................................................... United States 270,555 2,921,994
a,d,f Kindred Healthcare Inc. ................................................ United States 103,800 2,480,041
22 | Annual Report
Franklin Mutual Recovery Fund
STATEMENT OF INVESTMENTS, MARCH 31, 2006 (CONTINUED)
- --------------------------------------------------------------------------------------------------------------------------------
SHARES/WARRANTS/
COUNTRY CONTRACTS VALUE
- --------------------------------------------------------------------------------------------------------------------------------
COMMON STOCKS AND OTHER EQUITY INTERESTS (CONTINUED)
HEALTH CARE PROVIDERS & SERVICES (CONTINUED)
a,d,f Kindred Healthcare Inc., Jan. 9.07 Calls, 1/01/13 ...................... United States 50 $ 741
a,d,f Kindred Healthcare Inc., Jan. 25.99 Calls, 1/01/14 ..................... United States 50 --
a,d,f Kindred Healthcare Inc., Jan. 26.00 Calls, 1/01/12 ..................... United States 50 --
a,d,f Kindred Healthcare Inc., Jan. 27.90 Calls, 1/10/15 ..................... United States 21 --
a,d,f Kindred Healthcare Inc., Jul. 23.75 Calls, 7/17/11 ..................... United States 166 24
-----------
5,402,800
-----------
HOTELS, RESTAURANTS & LEISURE 1.2%
a,c Trump Atlantic, Contingent Distribution ................................ United States 5,150,000 195,597
a Trump Entertainment Resorts Inc. ....................................... United States 152,691 2,827,837
-----------
3,023,434
-----------
INDEPENDENT POWER PRODUCERS & ENERGY TRADERS 1.4%
Constellation Energy Group ............................................. United States 60,630 3,317,067
-----------
INDUSTRIAL CONGLOMERATES 3.2%
Orkla ASA .............................................................. Norway 107,300 5,319,336
Tyco International Ltd. ................................................ United States 89,750 2,412,480
-----------
7,731,816
-----------
INSURANCE 3.6%
a,d Imagine Group Holdings Ltd. ............................................ Bermuda 287,034 2,939,667
a,d Symetra Financial ...................................................... United States 51,200 5,888,000
-----------
8,827,667
-----------
MEDIA 7.2%
a Hollinger Inc. ......................................................... Canada 93,000 200,295
d Hollinger International Inc., A ........................................ United States 112,700 897,205
Knight Ridder Inc. ..................................................... United States 41,840 2,644,706
News Corp., A .......................................................... United States 337,210 5,601,058
Time Warner Inc. ....................................................... United States 353,053 5,927,760
The Walt Disney Co. .................................................... United States 88,350 2,464,082
-----------
17,735,106
-----------
METALS & MINING 4.3%
Anglo American PLC ..................................................... South Africa 132,458 5,101,254
Arcelor ................................................................ Luxembourg 66,900 2,636,753
Lonmin PLC ............................................................. United Kingdom 57,740 2,669,840
-----------
10,407,847
-----------
MULTI-UTILITIES 0.0% g
NorthWestern Corp. ..................................................... United States 43 1,339
a,c NorthWestern Corp. Contingent Distribution ............................. United States 1,020 15
a NorthWestern Corp., wts., 11/01/07 ..................................... United States 366 2,068
-----------
3,422
-----------
Annual Report | 23
Franklin Mutual Recovery Fund
STATEMENT OF INVESTMENTS, MARCH 31, 2006 (CONTINUED)
- --------------------------------------------------------------------------------------------------------------------------------
SHARES/WARRANTS/
COUNTRY CONTRACTS VALUE
- --------------------------------------------------------------------------------------------------------------------------------
COMMON STOCKS AND OTHER EQUITY INTERESTS (CONTINUED)
OIL, GAS & CONSUMABLE FUELS 6.4%
Burlington Resources Inc. ............................................. United States 125,870 $ 11,568,712
Pogo Producing Co. .................................................... United States 79,090 3,974,272
------------
15,542,984
------------
PAPER & FOREST PRODUCTS 3.0%
e Weyerhaeuser Co. ...................................................... United States 101,510 7,352,369
------------
PHARMACEUTICALS 0.1%
Merck KGaA ............................................................ Germany 2,500 237,534
Schering AG ........................................................... Germany 800 83,145
------------
320,679
------------
REAL ESTATE 1.6%
Shurgard Storage Centers Inc., A ...................................... United States 58,000 3,864,540
------------
THRIFTS & MORTGAGE FINANCE 1.5%
Sovereign Bancorp Inc. ................................................ United States 170,300 3,731,273
------------
TOBACCO 9.8%
Altadis SA ............................................................ Spain 105,359 4,723,160
e Altria Group Inc. ..................................................... United States 63,420 4,493,941
Imperial Tobacco Group PLC ............................................ United Kingdom 97,512 2,890,206
KT&G Corp. ............................................................ South Korea 122,320 6,898,715
e Reynolds American Inc. ................................................ United States 47,200 4,979,600
------------
23,985,622
------------
WIRELESS TELECOMMUNICATION SERVICES 2.0%
Sprint Nextel Corp. ................................................... United States 188,700 4,876,008
------------
TOTAL COMMON STOCKS AND OTHER EQUITY INTERESTS
(COST $159,290,508) ................................................ 179,557,036
------------
PREFERRED STOCKS 2.2%
METALS & MINING 2.2%
d,f Esmark Inc., 10.00%, cvt. pfd., A ..................................... United States 4,962 5,346,059
------------
TOTAL PREFERRED STOCKS (COST $4,962,000) .............................. 5,346,059
------------
----------------
PRINCIPAL
AMOUNT i
----------------
CORPORATE BONDS & NOTES 7.2%
b ACE Aviation Holdings Inc., cvt., 144A, 4.25%, 6/01/35 ................ Canada 430,000 CAD 362,246
h Collins & Aikman Products Co.,
Revolver, FRN, 11.00%, 8/31/09 ..................................... United States 16,163 15,516
Tranche B1 Term Loan, FRN, 11.00%, 8/31/11 ......................... United States 37,800 35,910
b Dana Credit Corp., 144A, 8.375%, 8/15/07 .............................. United States 3,000 2,865
24 | Annual Report
Franklin Mutual Recovery Fund
STATEMENT OF INVESTMENTS, MARCH 31, 2006 (CONTINUED)
- --------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL
COUNTRY AMOUNT i VALUE
- --------------------------------------------------------------------------------------------------------------------------------
CORPORATE BONDS & NOTES (CONTINUED)
Entegra/Union Power,
Term Loan A, 4.00%, 6/01/12 ........................................ United States 865,750 $ 935,010
Term Loan B, 9.00%, 6/01/20 ........................................ United States 833,685 900,380
h Eurotunnel PLC,
b Senior Tranche G2 Term Loan A, 144A, FRN, 5.747%, 12/15/12 ......... United Kingdom 65,100 GBP 109,363
S8 Tier 1 Stabilization Advance, FRN, 5.840%, 3/15/26 .............. United Kingdom 36,916 GBP 15,384
Tier 2, FRN, 5.863%, 12/31/18 ...................................... United Kingdom 9,600 GBP 15,335
Tier 3, FRN, 5.895%, 12/31/25 ...................................... United Kingdom 3,615,500 GBP 3,735,275
Eurotunnel SA,
Senior Tranche H1 Term Loan (KfW Advance), 8.78%, 12/15/12 ......... France 18,500 EUR 21,686
h S6 Tier 1 Stabilization Advance (PIBOR), FRN, 3.925%, 3/15/26 ...... France 251 EUR 73
h S7 Tier 1 Stabilization Advance (PIBOR), FRN, 3.926%, 3/15/26 ...... France 23,203 EUR 6,747
h Tier 3 (LIBOR), FRN, 3.903%, 12/31/25 .............................. France 41,370 EUR 29,824
h Tier 3 (LIBOR), FRN, 3.926%, 12/31/25 .............................. France 7,850,800 EUR 5,659,657
h Motor Coach Industries International Inc., FRN, 17.810%, 12/01/08 ..... United States 3,011,768 2,936,474
Trump Entertainment Resorts Inc., 8.50%, 5/20/15 ...................... United States 2,801,691 2,738,653
------------
TOTAL CORPORATE BONDS & NOTES (COST $16,470,286) ...................... 17,520,398
------------
CORPORATE BONDS & NOTES IN REORGANIZATION 10.3%
j Adelphia Communications Corp.,
9.25%, 10/01/02 .................................................... United States 1,987,000 1,162,395
8.125%, 7/15/03 .................................................... United States 950,000 570,000
9.875%, 3/01/05 .................................................... United States 22,000 13,090
10.25%, 11/01/06 ................................................... United States 5,105,000 2,986,425
9.875%, 3/01/07 .................................................... United States 13,000 7,735
8.375%, 2/01/08 .................................................... United States 31,000 18,445
7.75%, 1/15/09 ..................................................... United States 90,000 53,550
7.875%, 5/01/09 .................................................... United States 12,000 7,020
9.375%, 11/15/09 ................................................... United States 2,322,000 1,428,030
10.875%, 10/01/10 .................................................. United States 71,000 42,245
10.25%, 6/15/11 .................................................... United States 958,000 608,330
j Armstrong World Industries Inc.,
6.35%, 8/15/03 ..................................................... United States 276,000 194,580
6.50%, 8/15/05 ..................................................... United States 25,000 17,626
9.75%, 4/15/08 ..................................................... United States 59,000 42,185
7.45%, 5/15/29 ..................................................... United States 1,286,000 900,200
Revolver, 10/29/03 ................................................. United States 42,075 28,927
Trade Claim ........................................................ United States 4,131,400 2,799,023
b,j Calpine Corp., senior secured note, 144A, 8.75%, 7/15/13 .............. United States 58,000 53,505
j Century Communications Corp.,
8.875%, 1/15/07 .................................................... United States 5,000 4,900
8.75%, 10/01/07 .................................................... United States 29,000 27,695
8.375%, 12/15/07 ................................................... United States 1,699,000 1,656,525
Series B, zero cpn., 1/15/08 ....................................... United States 1,060,000 609,500
zero cpn., 3/15/03 ................................................. United States 33,000 28,710
Annual Report | 25
Franklin Mutual Recovery Fund
STATEMENT OF INVESTMENTS, MARCH 31, 2006 (CONTINUED)
- --------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL
COUNTRY AMOUNT i VALUE
- --------------------------------------------------------------------------------------------------------------------------------
CORPORATE BONDS & NOTES IN REORGANIZATION (CONTINUED)
j Dana Corp.,
5.85%, 1/15/15 ..................................................... United States 397,000 $ 301,720
7.00%, 3/01/29 ..................................................... United States 88,000 66,880
j Owens Corning,
k Revolver, 6/26/02 .................................................. United States 7,579,715 11,521,164
Revolver, 6/26/02 .................................................. United States 52,000 80,080
------------
TOTAL CORPORATE BONDS & NOTES IN REORGANIZATION
(COST $24,470,983) ................................................. 25,230,485
------------
GOVERNMENT AGENCIES (COST $8,295,080) 3.4%
e,l Federal Home Loan Bank, 4/13/06 ....................................... United States 8,300,000 8,295,449
------------
TOTAL INVESTMENTS (COST $213,488,857) 96.6% ........................... 235,949,427
SECURITIES SOLD SHORT (11.3)% ......................................... (27,647,811)
NET UNREALIZED GAIN ON FORWARD EXCHANGE CONTRACTS 0.0% g ............... 18,859
OTHER ASSETS, LESS LIABILITIES 14.7% .................................. 36,066,521
------------
NET ASSETS 100.0% ..................................................... $244,386,996
============
------------
SHARES
------------
m SECURITIES SOLD SHORT 11.3%
COMPUTERS & PERIPHERALS 1.4%
Seagate Technology .................................................... United States 131,740 $ 3,468,714
------------
DIVERSIFIED TELECOMMUNICATION SERVICES 0.6%
AT&T Inc. ............................................................. United States 49,000 1,324,960
------------
ELECTRIC UTILITIES 1.4%
FPL Group Inc. ........................................................ United States 87,379 3,507,393
------------
FOOD & STAPLES RETAILING 0.3%
SUPERVALU Inc. ........................................................ United States 23,720 731,050
------------
FOOD PRODUCTS 0.5%
Kraft Foods Inc., A ................................................... United States 41,223 1,249,469
------------
HEALTH CARE EQUIPMENT & SUPPLIES 1.0%
Boston Scientific Corp. ............................................... United States 103,040 2,375,072
------------
HEALTH CARE PROVIDERS & SERVICES 0.7%
WebMD Health Corp., A ................................................. United States 43,182 1,798,098
------------
MEDIA 1.0%
Pixar ................................................................. United States 38,413 2,463,810
------------
METALS & MINING 0.5%
United States Steel Corp. ............................................. United States 20,250 1,228,770
------------
OIL, GAS & CONSUMABLE FUELS 2.4%
ConocoPhillips ........................................................ United States 90,810 5,734,652
------------
26 | Annual Report
Franklin Mutual Recovery Fund
STATEMENT OF INVESTMENTS, MARCH 31, 2006 (CONTINUED)
- --------------------------------------------------------------------------------------------------------------------------------
COUNTRY SHARES VALUE
- --------------------------------------------------------------------------------------------------------------------------------
m SECURITIES SOLD SHORT (CONTINUED)
REAL ESTATE 1.5%
Public Storage Inc. ................................................... United States 46,360 $ 3,765,823
------------
TOTAL SECURITIES SOLD SHORT (PROCEEDS $25,086,914) .................... $ 27,647,811
------------
CURRENCY ABBREVIATIONS
CAD - Canadian Dollar
EUR - Euro
GBP - British Pound
SELECTED PORTFOLIO ABBREVIATIONS
FRN - Floating Rate Note
LIBOR - London InterBank Offered Rate
PIBOR - Paris InterBank Offered Rate
a Non-income producing.
b Security was purchased pursuant to Rule 144A under the Securities Act of
1933 and may be sold in transactions exempt from registration only to
qualified institutional buyers or in a public offering registered under
the Securities Act of 1933. These securities have been deemed liquid under
guidelines approved by the Fund's Board of Trustees. At March 31, 2006,
the aggregate value of these securities was $820,063, representing 0.34%
of net assets.
c Contingent Distributions represent the right to receive additional
distributions, if any, during the reorganization of the underlying
company. Shares represent total underlying principal of debt securities.
d See Note 11 regarding restricted securities.
e See Note 1(f) regarding securities segregated with broker for securities
sold short.
f See Note 13 regarding other considerations.
g Rounds to less than 0.1% of net assets.
h The coupon rate shown represents the rate at period end.
i The principal amount is stated in U.S. dollars unless otherwise indicated.
j See Note 10 regarding defaulted securities.
k See Note 12 regarding unfunded loan commitments.
l The security is traded on a discount basis with no stated coupon rate.
m See Note 1(f) regarding securities sold short.
Annual Report | See notes to financial statements. | 27
Franklin Mutual Recovery Fund
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
March 31, 2006
Assets:
Investments in securities:
Cost .................................................................. $ 213,488,857
-------------
Value ................................................................. $ 235,949,427
Cash ..................................................................... 3,152
Foreign currency, at value (cost $5,368,151) ............................. 5,334,674
Receivables:
Investment securities sold ............................................ 2,175,244
Capital shares sold ................................................... 880,004
Dividends and interest ................................................ 643,053
Unrealized gain on forward exchange contracts (Note 9) ................... 422,928
Unrealized gain on unfunded loan commitments (Note 12) ................... 94,752
Cash on deposit with brokers for securities sold short ................... 34,005,757
Due from broker - synthetic equity swaps ................................. 101,540
-------------
Total assets ....................................................... 279,610,531
-------------
Liabilities:
Payables:
Investment securities purchased ....................................... 6,374,215
Capital shares redeemed ............................................... 5,175
Affiliates ............................................................ 670,368
Securities sold short, at value (proceeds $25,086,914) ................... 27,647,811
Unrealized loss on forward exchange contracts (Note 9) ................... 404,069
Accrued expenses and other liabilities ................................... 121,897
-------------
Total liabilities .................................................. 35,223,535
-------------
Net assets, at value ............................................ $ 244,386,996
=============
Net assets consist of:
Paid-in capital .......................................................... $ 218,167,384
Distributions in excess of net investment income ......................... (68,131)
Net unrealized appreciation (depreciation) ............................... 19,841,501
Accumulated net realized gain (loss) ..................................... 6,446,242
-------------
Net assets, at value ............................................ $ 244,386,996
=============
28 | See notes to financial statements. | Annual Report
Franklin Mutual Recovery Fund
FINANCIAL STATEMENTS (CONTINUED)
STATEMENT OF ASSETS AND LIABILITIES (CONTINUED)
March 31, 2006
CLASS A:
Net assets, at value ..................................................... $ 104,694,340
=============
Shares outstanding ....................................................... 7,797,574
=============
Net asset value per share a .............................................. $ 13.43
=============
Maximum offering price per share (net asset value per share / 94.25%) .... $ 14.25
=============
CLASS B:
Net assets, at value ..................................................... $ 4,242,612
=============
Shares outstanding ....................................................... 319,205
=============
Net asset value and maximum offering price per share a ................... $ 13.29
=============
CLASS C:
Net assets, at value ..................................................... $ 55,030,420
=============
Shares outstanding ....................................................... 4,140,104
=============
Net asset value and maximum offering price per share a ................... $ 13.29
=============
ADVISOR CLASS:
Net assets, at value ..................................................... $ 80,419,624
=============
Shares outstanding ....................................................... 5,957,935
=============
Net asset value and maximum offering price per share a ................... $ 13.50
=============
a Redemption price is equal to net asset value less contingent deferred
sales charges, if applicable, and redemption fees retained by the Fund.
Annual Report | See notes to financial statements. | 29
Franklin Mutual Recovery Fund
FINANCIAL STATEMENTS (CONTINUED)
STATEMENT OF OPERATIONS
for the year ended March 31, 2006
Investment income:
Dividends ................................................................ $ 3,418,685
Interest ................................................................. 3,216,554
-------------
Total investment income ............................................ 6,635,239
-------------
Expenses:
Management fees (Note 4a) ................................................ 4,422,854
Administrative fees (Note 4b) ............................................ 397,880
Distribution fees (Note 4c)
Class A ............................................................... 271,594
Class B ............................................................... 37,276
Class C ............................................................... 428,161
Transfer agent fees (Note 4e) ............................................ 350,432
Custodian fees (Note 5) .................................................. 13,633
Reports to shareholders .................................................. 33,023
Registration and filing fees ............................................. 75,249
Professional fees ........................................................ 444,174
Trustees' fees and expenses .............................................. 97,197
Dividends on securities sold short ....................................... 385,674
Other .................................................................... 107,520
-------------
Total expenses ..................................................... 7,064,667
Expense reductions (Note 5) ........................................ (7,806)
-------------
Net expenses ....................................................... 7,056,861
-------------
Net investment income (loss) .................................... (421,622)
-------------
Realized and unrealized gains (losses):
Net realized gain (loss) from:
Investments ........................................................... 14,841,219
Written options ....................................................... 19,089
Securities sold short ................................................. (2,487,003)
Foreign currency transactions ......................................... 520,300
-------------
Net realized gain (loss) ........................................... 12,893,605
-------------
Net change in unrealized appreciation (depreciation) on:
Investments ........................................................... 11,488,044
Translation of assets and liabilities denominated in
foreign currencies ................................................. (132,225)
-------------
Net change in unrealized appreciation (depreciation) ............... 11,355,819
-------------
Net realized and unrealized gain (loss) ..................................... 24,249,424
-------------
Net increase (decrease) in net assets resulting from operations ............. $ 23,827,802
=============
30 | See notes to financial statements. | Annual Report
Franklin Mutual Recovery Fund
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF CHANGES IN NET ASSETS
-------------------------------
YEAR ENDED MARCH 31,
-------------------------------
2006 2005
-------------------------------
Increase (decrease) in net assets:
Operations:
Net investment income (loss) .......................................... $ (421,622) $ 235,364
Net realized gain (loss) from investments, written options, securities
sold short and foreign currency transactions ....................... 12,893,605 7,387,248
Net change in unrealized appreciation (depreciation) on investments
and translation of assets and liabilities denominated in foreign
currencies ....................................................... 11,355,819 6,837,986
-------------------------------
Net increase (decrease) in net assets resulting from
operations ................................................... 23,827,802 14,460,598
-------------------------------
Distributions to shareholders from:
Net investment income:
Class A ............................................................ (69,292) (144,732)
Advisor Class ...................................................... (124,522) (328,363)
Net realized gains:
Class A ............................................................ (4,142,673) (2,133,292)
Class B ............................................................ (204,421) (147,707)
Class C ............................................................ (2,274,806) (1,245,771)
Advisor Class ...................................................... (4,081,176) (3,097,129)
-------------------------------
Total distributions to shareholders ...................................... (10,896,890) (7,096,994)
-------------------------------
Capital share transactions: (Note 3)
Class A ............................................................ 41,571,942 31,098,428
Class B ............................................................ 782,215 1,198,797
Class C ............................................................ 22,393,491 11,780,830
Advisor Class ...................................................... 4,177,413 22,231,584
-------------------------------
Total capital share transactions ......................................... 68,925,061 66,309,639
-------------------------------
Net increase (decrease) in net assets ........................... 81,855,973 73,673,243
Net assets:
Beginning of year ........................................................ 162,531,023 88,857,780
-------------------------------
End of year .............................................................. $ 244,386,996 $ 162,531,023
===============================
Distributions in excess of net investment income included in net assets:
End of year ........................................................... $ (68,131) $ (139,173)
===============================
Annual Report | See notes to financial statements. | 31
Franklin Mutual Recovery Fund
FINANCIAL STATEMENTS (CONTINUED)
STATEMENT OF CASH FLOWS
for the year ended March 31, 2006
Cash flows from operating activities:
Net increase in net assets resulting from operations ..................... $ 23,827,802
Adjustments to reconcile net increase in net assets from operations to
net cash used in operating activities:
Net change in unrealized appreciation on investments and translation
of assets and liabilities denominated in foreign currencies ........ (11,362,409)
Net realized gain on investments, written options and securities
sold short ......................................................... (12,373,305)
Amortization of bond discounts and premiums ........................... (842,948)
Decrease in receivables from investment securities sold ............... 8,143,209
Increase in dividends and interest receivable ......................... (287,754)
Increase in cash on deposit at brokers for securities sold short ...... (14,715,130)
Decrease in due from broker - synthetic equity swaps .................. 974,470
Increase in payables for investment securities purchased .............. 1,279,735
Increase in payable to affiliates ..................................... 389,606
Increase in accrued expenses and other liabilities .................... 9,015
Purchase of investment securities ..................................... (2,100,853,949)
Proceeds from sale of investment securities ........................... 2,052,642,143
----------------
Net cash used in operating activities .............................. (53,169,515)
----------------
Cash flows from financing activities:
Distributions to shareholders ............................................ (10,896,890)
Decrease in receivable for capital shares sold ........................... 144,282
Increase in payable for capital shares redeemed .......................... 5,175
Proceeds from capital shares sold ........................................ 91,531,809
Proceeds from capital shares sold in reinvestment of distributions ....... 9,005,626
Payment on capital shares redeemed ....................................... (31,612,374)
----------------
Net cash provided by financing activities .......................... 58,177,628
----------------
Net increase in cash ........................................................ 5,008,113
Cash beginning of year ...................................................... 329,713
----------------
Cash end of year ............................................................ $ 5,337,826
----------------
32 | See notes to financial statements. | Annual Report
Franklin Mutual Recovery Fund
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Franklin Mutual Recovery Fund (the Fund) is registered under the Investment
Company Act of 1940 as a non-diversified, closed-end, continuously offered
investment company. The Fund offers four classes of shares: Class A, Class B,
Class C and Advisor Class. Effective March 1, 2005, Class B shares are only
offered to existing Class B shareholders in the form of reinvested distributions
and certain exchanges from other Franklin Templeton Class B shares. Each class
of shares differs by its initial sales load, contingent deferred sales charges,
distribution fees, voting rights on matters affecting a single class and its
exchange privilege.
The following summarizes the Fund's significant accounting policies.
A. SECURITY VALUATION
Securities listed on a securities exchange or on the NASDAQ National Market
System are valued at the last quoted sale price or the official closing price of
the day, respectively. Over-the-counter securities and listed securities for
which there is no reported sale are valued within the range of the most recent
quoted bid and ask prices. Securities that trade in multiple markets or on
multiple exchanges are valued according to the broadest and most representative
market.
Corporate debt and Government securities generally trade in the over-the-counter
market rather than on a securities exchange. The Fund may utilize independent
pricing services, quotations from bond dealers, and information with respect to
bond and note transactions, to assist in determining a current market value for
each security. The Fund's pricing services may use valuation models or matrix
pricing which considers information with respect to comparable bond and note
transactions, quotations from bond dealers, or by reference to other securities
that are considered comparable in such characteristics as rating, interest rate
and maturity date, option adjusted spread models, prepayment projections,
interest rate spreads and yield curves, to determine current value.
Foreign securities are valued as of the close of trading on the foreign stock
exchange on which the security is primarily traded, or the NYSE, whichever is
earlier. If no sale is reported at that time, the foreign security will be
valued within the range of the most recent quoted bid and ask prices. The value
is then converted into its U.S. dollar equivalent at the foreign exchange rate
in effect at the close of the NYSE on the day that the value of the foreign
security is determined.
The Fund has procedures to determine the fair value of individual securities and
other assets for which market prices are not readily available or which may not
be reliably priced. Methods for valuing these securities may include:
fundamental analysis, matrix pricing, discounts from market prices of similar
securities, and discounts applied due to the nature and duration of restrictions
on the disposition of the securities. Due to the inherent uncertainty of
valuations of such securities, the fair values may differ significantly from the
values that would have been used had a ready market for such investments
existed. Occasionally, events occur between the time at which trading in a
security is completed and the close of the NYSE that might call into
Annual Report | 33
Franklin Mutual Recovery Fund
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
A. SECURITY VALUATION (CONTINUED)
question the availability (including the reliability) of the value of a
portfolio security held by the Fund. If such an event occurs, the securities may
be valued using fair value procedures, which may include the use of independent
pricing services. All security valuation procedures are approved by the Fund's
Board of Trustees.
B. FOREIGN CURRENCY TRANSLATION
Portfolio securities and other assets and liabilities denominated in foreign
currencies are translated into U.S. dollars based on the exchange rate of such
currencies against U.S. dollars on the date of valuation. Purchases and sales of
securities, income and expense items denominated in foreign currencies are
translated into U.S. dollars at the exchange rate in effect on the transaction
date. Occasionally, events may impact the availability or reliability of foreign
exchange rates used to convert the U.S. dollar equivalent value. If such an
event occurs, the foreign exchange rate will be valued at fair value using
procedures established and approved by the Fund's Board of Trustees.
The Fund does not separately report the effect of changes in foreign exchange
rates from changes in market prices on securities held. Such changes are
included in net realized and unrealized gain or loss from investments on the
Statement of Operations.
Realized foreign exchange gains or losses arise from sales of foreign
currencies, currency gains or losses realized between the trade and settlement
dates on securities transactions and the difference between the recorded amounts
of dividends, interest, and foreign withholding taxes and the U.S. dollar
equivalent of the amounts actually received or paid. Net unrealized foreign
exchange gains and losses arise from changes in foreign exchange rates on
foreign denominated assets and liabilities other than investments in securities
held at the end of the reporting period.
C. FOREIGN CURRENCY CONTRACTS
The Fund may enter into forward exchange contracts to hedge against fluctuations
in foreign exchange rates. A forward exchange contract is an agreement between
two parties to exchange different currencies at an agreed upon exchange rate at
a future date. These contracts are valued daily by the Fund and the unrealized
gains or losses on the contracts, as measured by the difference between the
contractual forward foreign exchange rates and the forward rates at the
reporting date, are included in the Statement of Assets and Liabilities.
Realized and unrealized gains and losses on these contracts are included in the
Statement of Operations.
When the Fund purchases or sells foreign securities it may enter into foreign
exchange contracts to minimize foreign exchange risk from the trade date to the
settlement date of the transactions. Realized and unrealized gains and losses on
these contracts are included in the Statement of Operations.
34 | Annual Report
Franklin Mutual Recovery Fund
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
C. FOREIGN CURRENCY CONTRACTS (CONTINUED)
The risks of these contracts include movement in the values of the foreign
currencies relative to the U.S. dollar and the possible inability of the
counterparties to fulfill their obligations under the contracts, which may be in
excess of the amount reflected in the Statement of Assets and Liabilities.
D. SYNTHETIC EQUITY SWAPS
The Fund may engage in synthetic equity swaps. Synthetic equity swaps are
contracts entered into between a broker and the Fund under which the parties
agree to make payments to each other so as to replicate the economic
consequences that would apply had a purchase or sale of the underlying security
taken place. Upon entering into synthetic equity swaps, the Fund is required to
pledge to the broker an amount of cash and/or other assets equal to a certain
percentage of the contract amount ("initial margin"). Subsequent payments known
as "variation margin" are made or received by the Fund periodically, depending
on fluctuations in the value of the underlying security. When the contract is
closed, the Fund records a realized gain or loss equal to the difference between
the value of the contract at the time it was opened and the value at the time it
was closed. The risks of entering into synthetic equity swaps include
unfavorable price movements in the underlying securities or the inability of the
counterparties to fulfill their obligations under the contract. The initial
margin and any net unrealized gains or losses on open synthetic equity swaps are
included in "Due from broker-synthetic equity swaps," in the Statement of Assets
and Liabilities.
E. OPTIONS
The Fund may purchase or write options. Options are contracts entitling the
holder to purchase or sell a specified number of shares or units of a particular
security at a specified price. Options purchased are recorded as investments;
options written (sold) are recorded as liabilities. Upon closing of an option,
other than by exercise, which results in a cash settlement, the difference
between the premium (original option value) and the settlement proceeds is
realized as a gain or loss. When securities are acquired or delivered upon
exercise of an option, the acquisition cost or sale proceeds are adjusted by the
amount of the premium. When an option is closed, the difference between the
premium and the cost to close the position is realized as a gain or loss. When
an option expires, the premium is realized as a gain for options written or as a
loss for options purchased. The risks include the possibility there may be an
illiquid options market or the inability of the counterparties to fulfill their
obligations under the contract. Writing options involves, to varying degrees,
elements of market risk in excess of the amount recognized in the Statement of
Assets and Liabilities.
Annual Report | 35
Franklin Mutual Recovery Fund
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
F. SECURITIES SOLD SHORT
The Fund is engaged in selling securities short, which obligates the Fund to
replace a security borrowed with the same security at current market value. The
Fund incurs a loss if the price of the security increases between the date of
the short sale and the date on which the Fund replaces the borrowed security.
The Fund realizes a gain if the price of the security declines between those
dates. Gains are limited to the price at which the Fund sold the security short,
while losses are potentially unlimited in size.
The Fund is required to establish a margin account with the broker lending the
security sold short. While the short sale is outstanding, the broker retains the
proceeds of the short sale and the Fund must maintain a deposit with the broker
consisting of cash and securities having a value equal to a specified percentage
of the value of the securities sold short. The Fund is obligated to pay the
counterparty any dividends or interest due on securities sold short. Such
dividends and interest are recorded as an expense to the Fund.
G. INCOME TAXES
No provision has been made for U.S. income taxes because the Fund's policy is to
continue to qualify as a regulated investment company under the Internal Revenue
Code and to distribute to shareholders substantially all of its taxable income
and net realized gains.
Foreign securities held by the Fund may be subject to foreign taxation. Foreign
taxes, if any, are recorded based on the tax regulations and rates that exist in
the foreign markets in which the Fund invests.
H. SECURITY TRANSACTIONS, INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS
Security transactions are accounted for on trade date. Realized gains and losses
on security transactions are determined on a specific identification basis.
Interest income and estimated expenses are accrued daily. Amortization of
premium and accretion of discount on debt securities are included in interest
income. Dividend income and dividends declared on securities sold short are
recorded on the ex-dividend date except that certain dividends from foreign
securities are recognized as soon as the Fund is notified of the ex-dividend
date. Distributions to shareholders are recorded on the ex-dividend date and are
determined according to income tax regulations (tax basis). Distributable
earnings determined on a tax basis may differ from earnings recorded in
accordance with accounting principles generally accepted in the United States.
These differences may be permanent or temporary. Permanent differences are
reclassified among capital accounts to reflect their tax character. These
reclassifications have no impact on net assets or the results of operations.
Temporary differences are not reclassified, as they may reverse in subsequent
periods.
36 | Annual Report
Franklin Mutual Recovery Fund
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
H. SECURITY TRANSACTIONS, INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS
(CONTINUED)
Realized and unrealized gains and losses and net investment income, other than
class-specific expenses, are allocated daily to each class of shares based upon
the relative proportion of net assets of each class. Differences in class level
expenses may result in payment of different per share distributions by class.
I. ACCOUNTING ESTIMATES
The preparation of financial statements in accordance with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the amounts of income
and expenses during the reporting period. Actual results could differ from those
estimates.
J. REDEMPTION FEES
A short term trading redemption fee will be imposed, with some exceptions, on
any Fund shares that are redeemed or exchanged within seven calendar days
following their purchase date. The redemption fee is 2% of the amount redeemed.
Such fees are retained by the Fund and accounted for as an addition to paid-in
capital.
K. GUARANTEES AND INDEMNIFICATIONS
Under the Fund's organizational documents, its officers and trustees are
indemnified by the Fund against certain liabilities arising out of the
performance of their duties to the Fund. Additionally, in the normal course of
business, the Fund enters into contracts with service providers that contain
general indemnification clauses. The Fund's maximum exposure under these
arrangements is unknown as this would involve future claims that may be made
against the Fund that have not yet occurred. However, based on experience, the
Fund expects the risk of loss to be remote.
Annual Report | 37
Franklin Mutual Recovery Fund
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. TENDER SHARES
On a quarterly basis, the Fund may make tender offers, the amount of which is
determined by the Board of Trustees, for the repurchase of at least 5% but not
more than 25% of the shares outstanding. The repurchase price is the net asset
value on the repurchase pricing date.
3. SHARES OF BENEFICIAL INTEREST
At March 31, 2006, there were an unlimited number of shares authorized ($0.01
par value). Transactions in the Fund's shares were as follows:
-------------------------------------------------------
YEAR ENDED MARCH 31,
2006 2005
-------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
-------------------------------------------------------
CLASS A SHARES:
Shares sold ............................................ 3,548,080 $ 45,627,243 2,502,867 $ 30,735,123
Shares issued in reinvestment of distributions ......... 273,474 3,471,536 157,695 1,924,919
Shares redeemed ........................................ (590,990) (7,526,837) (127,691) (1,561,614)
-------------------------------------------------------
Net increase (decrease) ................................ 3,230,564 $ 41,571,942 2,532,871 $ 31,098,428
=======================================================
CLASS B SHARES:
Shares sold ............................................ 74,543 $ 951,920 101,473 $ 1,229,065
Shares issued in reinvestment of distributions ......... 13,864 174,829 10,688 129,863
Shares redeemed ........................................ (27,179) (344,534) (13,304) (160,131)
-------------------------------------------------------
Net increase (decrease) ................................ 61,228 $ 782,215 98,857 $ 1,198,797
=======================================================
CLASS C SHARES:
Shares sold ............................................ 1,874,928 $ 23,892,951 1,122,393 $ 13,696,605
Shares issued in reinvestment of distributions ......... 143,033 1,803,849 83,200 1,010,876
Shares redeemed ........................................ (261,428) (3,303,309) (241,871) (2,926,651)
-------------------------------------------------------
Net increase (decrease) ................................ 1,756,533 $ 22,393,491 963,722 $ 11,780,830
=======================================================
ADVISOR CLASS SHARES:
Shares sold ............................................ 1,629,455 $ 21,059,695 1,759,152 $ 21,666,533
Shares issued in reinvestment of distributions ......... 279,075 3,555,412 203,960 2,491,671
Shares redeemed ........................................ (1,602,795) (20,437,694) (157,799) (1,926,620)
-------------------------------------------------------
Net increase (decrease) ................................ 305,735 $ 4,177,413 1,805,313 $ 22,231,584
=======================================================
4. TRANSACTIONS WITH AFFILIATES
Franklin Resources, Inc. is the holding company for various subsidiaries that
together are referred to as Franklin Templeton Investments. Certain officers and
trustees of the Fund are also officers and/or directors of the following
subsidiaries:
38 | Annual Report
Franklin Mutual Recovery Fund
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. TRANSACTIONS WITH AFFILIATES (CONTINUED)
- --------------------------------------------------------------------------------------
SUBSIDIARY AFFILIATION
- --------------------------------------------------------------------------------------
Franklin Mutual Advisers, LLC (Franklin Mutual) Investment manager
Franklin Templeton Services, LLC (FT Services) Administrative manager
Franklin Templeton Distributors, Inc. (Distributors) Principal underwriter
Franklin Templeton Investor Services, LLC (Investor Services) Transfer agent
A. MANAGEMENT FEES
The Fund pays Franklin Mutual an investment management fee comprised of a "base
fee" and a "performance adjustment." The base fee is calculated at the beginning
of each month using an annual rate of 1.50% of the prior month's average daily
net assets. The performance adjustment is calculated at the beginning of each
month based on how much the Fund's total return exceeded or lagged its
benchmark, the Bloomberg/EFFAS U.S. Government 3-5 Years Total Return Index (the
"Fund performance differential"), over the preceding twelve-month period (the
performance period). A performance adjustment is applicable if the Fund
performance differential exceeds 2.00%, either upwards (an increase to the base
fee) or downwards (a decrease to the base fee). The performance adjustment rate
is equal to 0.01% for each additional 0.05% that the Fund performance
differential exceeds 2.00%. The performance adjustment amount is determined by
multiplying the performance adjustment rate by the average daily net assets of
the performance period. The performance adjustment rate may not exceed 1.00%
annualized, either upwards or downwards. At the end of each month, an annualized
investment management fee ratio is calculated (total investment management fees
divided by fiscal year to date average daily net assets). In accordance with the
Investment Management Agreement, the investment management fee ratio may not
exceed 2.50% or fall below 0.50% for the fiscal year. For the period, the total
annualized management fee rate, including the performance adjustment, was 2.22%
of average daily net assets.
B. ADMINISTRATIVE FEES
The Fund pays an administrative fee to FT Services of 0.20% per year of the
average daily net assets of the Fund.
C. DISTRIBUTION FEES
The Fund's Board of Trustees has adopted distribution plans for each share
class, with the exception of Advisor Class shares, pursuant to Rule 12b-1 under
the 1940 Act. Under the Fund's Class A reimbursement distribution plan, the Fund
reimburses Distributors up to 0.35% per year of Class A's average daily net
assets for costs incurred in connection with the sale and distribution of the
Fund's shares. Under the Class A reimbursement distribution plan, costs
exceeding the maximum for the current plan year cannot be reimbursed in
subsequent periods.
Annual Report | 39
Franklin Mutual Recovery Fund
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. TRANSACTIONS WITH AFFILIATES (CONTINUED)
C. DISTRIBUTION FEES (CONTINUED)
Under the Fund's compensation distribution plans, the Fund pays Distributors for
costs incurred in connection with the sale and distribution of the Fund's shares
up to a certain percentage per year of its average daily net assets of each
class as follows:
Class B .................................................. 1.00%
Class C .................................................. 1.00%
D. SALES CHARGES/UNDERWRITING AGENTS
Distributors has advised the Fund of the following commission transactions
related to the sales and redemptions of the Fund's shares for the year:
Net sales charges received a ............................. $ 69,304
Contingent deferred sales charges retained ............... $ 9,184
a Net of commissions paid to unaffiliated broker/dealers.
E. TRANSFER AGENT FEES
The Fund paid transfer agent fees of $350,432, of which $299,662 was retained by
Investor Services.
5. EXPENSE OFFSET ARRANGEMENT
The Fund has entered into an arrangement with its custodian whereby credits
realized as a result of uninvested cash balances are used to reduce a portion of
the Fund's custodian expenses. During the year ended March 31, 2006, the
custodian fees were reduced as noted in the Statement of Operations.
6. INCOME TAXES
Net investment income (loss) differs for financial statement and tax purposes
primarily due to differing treatments of defaulted securities, REIT/ROC
adjustments, net operating loss, bond discounts and premiums, certain dividends
on securities sold short, and organizational costs.
Net realized gains (losses) differ for financial statement and tax purposes
primarily due to differing treatments of wash sales, certain dividends on
securities sold short, defaulted securities, REIT/ROC adjustments, net operating
loss, and bond discounts and premiums.
40 | Annual Report
Franklin Mutual Recovery Fund
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. INCOME TAXES (CONTINUED)
At March 31, 2006, the cost of investments, net unrealized appreciation
(depreciation), undistributed ordinary income and undistributed long term
capital gains for income tax purposes were as follows:
Cost of investments ......................... $ 213,831,153
=============
Unrealized appreciation ..................... $ 29,198,179
Unrealized depreciation ..................... (7,079,905)
-------------
Net unrealized appreciation (depreciation) .. $ 22,118,274
=============
Undistributed ordinary income ............... $ 3,524,332
Undistributed long-term capital gains ....... 3,266,936
-------------
Distributable earnings ...................... $ 6,791,268
=============
The tax character of distributions paid during the years ended March 31, 2006
and 2005, was as follows:
--------------------------
2006 2005
--------------------------
Distributions paid from:
Ordinary income .......................... $ 6,818,946 $ 6,966,412
Long term capital gain ................... 4,077,944 130,582
--------------------------
$ 10,896,890 $ 7,096,994
==========================
7. INVESTMENT TRANSACTIONS
Purchases and sales of investments (excluding short term securities and
securities sold short) for the year ended March 31, 2006 aggregated $244,474,102
and $129,988,273, respectively.
Transactions in options written during the year ended March 31, 2006, were as
follows:
---------------------------
NUMBER OF PREMIUMS
CONTRACTS RECEIVED
---------------------------
Options outstanding at March 31, 2005 ....... 314 $ 18,639
Options written ............................. 1,291 115,851
Options expired ............................. (320) (19,089)
Options exercised ........................... (1,285) (115,401)
Options closed .............................. -- --
===========================
Options outstanding at March 31, 2006 ....... -- $ --
===========================
Annual Report | 41
Franklin Mutual Recovery Fund
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
8. SYNTHETIC EQUITY SWAPS
As of March 31, 2006, the Fund had the following synthetic equity swaps
outstanding:
- -----------------------------------------------------------------------------------------------
NUMBER OF NOTIONAL UNREALIZED
CONTRACTS TO BUY CONTRACTS VALUE GAIN (LOSS)
- -----------------------------------------------------------------------------------------------
BOC Group PLC (15.45 GBP) ............................ 19,512 $ 524,118 $ (229)
-----------
Net unrealized gain (loss) ........................... $ (229)
===========
9. FORWARD EXCHANGE CONTRACTS
At March 31, 2006, the Fund had the following forward exchange contracts
outstanding:
- -----------------------------------------------------------------------------------------------
CONTRACT SETTLEMENT UNREALIZED
CONTRACTS TO BUY AMOUNT a DATE GAIN (LOSS)
- -----------------------------------------------------------------------------------------------
1,850,000 Euro ................................ 2,219,168 8/23/06 $ 41,887
-----------
- -----------------------------------------------------------------------------------------------
CONTRACT SETTLEMENT UNREALIZED
CONTRACTS TO SELL AMOUNT a DATE GAIN (LOSS)
- -----------------------------------------------------------------------------------------------
6,400,000 Canadian Dollar ..................... 5,550,737 4/17/06 $ 67,544
2,980,471 Canadian Dollar ..................... 2,586,111 4/24/06 32,104
4,500,000 Euro ................................ 5,543,847 5/23/06 73,761
7,430,270 British Pound ....................... 13,071,925 8/15/06 143,996
3,793,000 Euro ................................ 4,699,109 8/23/06 63,336
217,375,000 Korean Won .......................... 225,000 9/25/06 300
-----------
381,041
-----------
Unrealized gain on forward exchange contracts ................................ $ 422,928
===========
- -----------------------------------------------------------------------------------------------
CONTRACT SETTLEMENT UNREALIZED
CONTRACTS TO BUY AMOUNT a DATE GAIN (LOSS)
- -----------------------------------------------------------------------------------------------
1,391,844 Canadian Dollar ..................... 1,200,000 4/17/06 $ (7,539)
4,167,555 Euro ................................ 5,232,032 5/23/06 (166,058)
-----------
$ (173,597)
-----------
- -----------------------------------------------------------------------------------------------
CONTRACT SETTLEMENT UNREALIZED
CONTRACTS TO SELL AMOUNT a DATE GAIN (LOSS)
- -----------------------------------------------------------------------------------------------
11,901,798 Norwegian Krone ..................... 1,799,839 5/08/06 $ (19,832)
7,000,000 Norwegian Krone ..................... 1,043,997 6/06/06 (28,384)
300,000 Euro ................................ 357,862 7/17/06 (8,013)
9,146,041 Euro ................................ 11,029,715 8/23/06 (148,501)
6,500,000 Norwegian Krone ..................... 982,764 9/06/06 (18,830)
1,336,625,000 Korean Won .......................... 1,375,224 9/25/06 (6,912)
-----------
(230,472)
-----------
Unrealized loss on forward exchange contracts ................................... (404,069)
-----------
Net unrealized gain (loss) on forward exchange contracts ..................... $ 18,859
===========
a In U.S. Dollar unless otherwise indicated.
42 | Annual Report
Franklin Mutual Recovery Fund
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
10. CREDIT RISK AND DEFAULTED SECURITIES
The Fund may purchase the pre-default or defaulted debt of distressed companies.
Distressed companies are financially troubled and are about to be or are already
involved in financial restructuring or bankruptcy. The Fund does not accrue
income on these securities if it becomes probable that the income will not be
collected. The risks of purchasing these securities are that the issuer is
unable to meet its obligation and any subsequent bankruptcy proceeding may
result in unfavorable consequences to the Fund. At March 31, 2006, the aggregate
value of these securities was $25,230,485, representing 10.32% of the Fund's net
assets. For information as to specific securities, see the accompanying
Statement of Investments.
11. RESTRICTED SECURITIES
At March 31, 2006, investments in securities included issues that are restricted
under the Securities Act of 1933 (the 1933 Act), or the foreign equivalent.
Restricted securities are often purchased in private placement transactions, and
cannot be sold without prior registration, unless the sale is pursuant to an
exemption under the 1933 Act, or the foreign equivalent.
At March 31, 2006, the Fund held investments in restricted securities, valued in
accordance with procedures approved by the Fund's Board of Trustees as
reflecting fair value, as follows:
- ------------------------------------------------------------------------------------------------------
PRINCIPAL
AMOUNT, SHARES ACQUISITION
AND CONTRACTS ISSUER DATE COST VALUE
- ------------------------------------------------------------------------------------------------------
39,586 AboveNet Inc. ............................. 9/03/03 $ 1,511,610 $ 948,615
286 Elephant Capital Holdings Ltd. ............ 10/22/03 -- 693,216
4,962 Esmark Inc., 10.00%, cvt. pfd., A ......... 11/08/04 4,962,000 5,346,059
112,700 Hollinger International Inc., A ........... 4/08/04 1,956,884 897,205
287,034 Imagine Group Holdings Ltd. ............... 8/31/04 2,939,659 2,939,667
510,000 International Automotive Components
Group LLC .............................. 1/12/06 510,000 510,000
103,800 Kindred Healthcare Inc. ................... 3/10/04 2,615,236 2,480,041
50 Kindred Healthcare Inc., Jan. 9.07 Calls,
1/01/13 ................................ 1/01/05 -- 741
50 Kindred Healthcare Inc., Jan. 25.99 Calls,
1/01/14 ................................ 1/01/05 -- --
50 Kindred Healthcare Inc., Jan. 26.00 Calls,
1/01/12 ................................ 1/01/05 -- --
21 Kindred Healthcare Inc., Jan. 27.90 Calls,
1/10/15 ................................ 1/06/05 -- --
166 Kindred Healthcare Inc., Jul. 23.75 Calls,
7/17/11 ................................ 1/17/04 -- 24
13,135 NCB Warrant Holdings Ltd., A .............. 12/16/05 1,993,832 2,121,348
51,200 Symetra Financial ......................... 7/27/04 5,120,000 5,888,000
------------
TOTAL RESTRICTED SECURITIES (8.93% of Net Assets) $ 21,824,916
============
Annual Report | 43
Franklin Mutual Recovery Fund
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
12. UNFUNDED LOAN COMMITMENTS
The Fund may enter into certain credit agreements, all or a portion of which may
be unfunded. The Fund is obligated to fund these loan commitments at the
borrowers' discretion. Funded portions of credit agreements are presented on the
Statement of Investments.
At March 31, 2006, unfunded commitments were as follows:
- --------------------------------------------------------------------------------
UNFUNDED
BORROWER COMMITMENT
- --------------------------------------------------------------------------------
Entegra/Union Power LOC Facility, FRN, 6/01/12 .................... $ 270,913
Entegra/Union Power Working Capital Facility, FRN, 6/01/12 ........ 40,592
Owens Corning, Revolver, 6/26/02 .................................. 204,463
----------
$ 515,968
==========
Unfunded loan commitments and funded portions of credit agreements are marked to
market daily and any unrealized gain or loss is included in the Statement of
Assets and Liabilities and Statement of Operations.
13. OTHER CONSIDERATIONS
Directors or employees of Franklin Mutual, the Fund's Investment Manager, may
serve as members on the board of directors of certain companies in which the
Fund invests and/or may represent the Fund in certain corporate negotiations. At
March 31, 2006, such individuals serve in one or more of these capacities for
AboveNet Inc., Esmark Inc., and Kindred Healthcare Inc. As a result of this
involvement, such individuals may be in possession of certain material
non-public information which, pursuant to the Fund's policies and the
requirements of the federal securities laws, could prevent the Fund from trading
in the securities of such companies for limited or extended periods of time.
14. SUBSEQUENT EVENTS
Effective April 17, 2006, the Fund participates in a $30 million senior
unsecured revolving credit facility to fund shareholder redemptions or meet
unfunded loan commitments. The facility agreement ends on April 16, 2007. The
Fund may borrow, at its election, at the Federal Funds Rate plus 0.70%, the
London InterBank Rate (LIBOR) plus 0.70%, or, an "Alternative Base Rate" which
is the greater of (i) the prime rate and (ii) 1/2 of 1% plus the Federal Funds
Rate. Annual commitment fees of 0.20% per annum are charged on the unused
portion of the facility.
44 | Annual Report
Franklin Mutual Recovery Fund
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
15. REGULATORY MATTERS
As part of various investigations by a number of federal, state, and foreign
regulators and governmental entities, relating to certain practices in the
mutual fund industry, including late trading, market timing and marketing
support payments to securities dealers who sell fund shares, Franklin Resources,
Inc. and certain of its subsidiaries (collectively, the "Company") entered into
settlements with certain of those regulators.
Specifically, the Company entered into settlements with the Securities and
Exchange Commission ("SEC") concerning market timing (the "August 2, 2004 SEC
Order") and marketing support payments to securities dealers who sell fund
shares (the "December 13, 2004 SEC Order") and with the California Attorney
General's Office ("CAGO") concerning marketing support payments to securities
dealers who sell fund shares (the "CAGO Settlement"). Under the terms of the
settlements with the SEC and the CAGO, the Company retained an Independent
Distribution Consultant ("IDC") to develop a plan for distribution of the
respective settlement monies. The CAGO approved the distribution plan under the
CAGO Settlement and, in accordance with the terms and conditions of that
settlement, the monies were disbursed to the relevant funds in March 2005. The
SEC has not yet approved the distribution plan pertaining to the December 13,
2004 SEC Order. When approved, disbursements of settlement monies will be made
promptly to the relevant funds, in accordance with the terms and conditions of
that order. The IDC has also prepared and submitted to the SEC for its approval
a plan of distribution under the August 2, 2004 SEC Order that resolved the
SEC's market timing investigation.
In addition, the Company, as well as most of the mutual funds within Franklin
Templeton Investments and certain current or former officers, directors and/or
employees, have been named in private lawsuits (styled as shareholder class
actions or as derivative actions on behalf of either the named funds or Franklin
Resources, Inc.) relating to the industry practices described above. The
lawsuits were filed in different courts throughout the country. Many of those
suits are now pending in a multidistrict litigation in the United States
District Court for the District of Maryland.
The Company and fund management strongly believe that the claims made in each of
the private lawsuits referenced above are without merit and intends to defend
against them vigorously. The Company cannot predict with certainty the eventual
outcome of these lawsuits, nor whether they will have a negative material impact
on the Company. If it is determined that the Company bears responsibility for
any unlawful or inappropriate conduct that caused losses to the Fund, it is
committed to making the Fund or its shareholders whole, as appropriate.
Annual Report | 45
Franklin Mutual Recovery Fund
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
TO THE BOARD OF TRUSTEES AND SHAREHOLDERS OF THE FRANKLIN MUTUAL RECOVERY FUND
We have audited the accompanying statement of assets and liabilities of the
Franklin Mutual Recovery Fund (the "Fund"), including the statement of
investments, as of March 31, 2006, and the related statement of operations and
cash flows for the year then ended, the statements of changes in net assets for
each of the two years in the period then ended, and the financial highlights for
each of the periods indicated therein. These financial statements and financial
highlights are the responsibility of the Fund's management. Our responsibility
is to express an opinion on these financial statements and financial highlights
based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements and financial highlights are free of material misstatement. We were
not engaged to perform an audit of the Fund's internal control over financial
reporting. Our audit includes consideration of internal control over financial
reporting as a basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the
effectiveness of the Fund's internal control over financial reporting.
Accordingly, we express no such opinion. An audit also includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements and financial highlights, assessing the accounting principles used
and significant estimates made by management, as well as evaluating the overall
financial statement presentation. Our procedures included confirmation of
securities owned as of March 31, 2006, by correspondence with the custodian and
brokers, or by other appropriate auditing procedures where replies from the
brokers were not received. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
Franklin Mutual Recovery Fund at March 31, 2006, the results of its operations
and cash flows for the year then ended, the changes in its net assets for each
of the two years in the period then ended, and the financial highlights for each
of the periods indicated therein, in conformity with U.S. generally accepted
accounting principles.
/S/ ERNST & YOUNG LLP
Boston, Massachusetts
May 10, 2006
46 | Annual Report
Franklin Mutual Recovery Fund
TAX DESIGNATION (UNAUDITED)
Under Section 852(b)(3)(C) of the Internal Revenue Code (Code), the Fund
designates the maximum amount allowable but no less than $5,965,244 as a long
term capital gain dividend for the fiscal year ended March 31, 2006.
Under Section 871(k)(2)(C) of the Code, the Fund designates the maximum amount
allowable but no less than $6,450,683 as a short term capital gain dividend for
purposes of the tax imposed under Section 871(a)(1)(A) of the Code for the
fiscal year ended March 31, 2006.
Under Section 854(b)(2) of the Code, the Fund designates the maximum amount
allowable but no less than $2,807,363 as qualified dividends for purposes of the
maximum rate under Section 1(h)(11) of the Code for the fiscal year ended March
31, 2006. In January 2007, shareholders will receive Form 1099-DIV which will
include their share of qualified dividends distributed during the calendar year
2006. Shareholders are advised to check with their tax advisors for information
on the treatment of these amounts on their individual income tax returns.
Under Section 854(b)(2) of the Code, the Fund designates 29.14% of the ordinary
income dividends as income qualifying for the dividends received deduction for
the fiscal year ended March 31, 2006.
Under Section 871(k)(1)(C) of the Code, the Fund designates the maximum amount
allowable but no less than $2,047,278 as interest related dividends for purposes
of the tax imposed under Section 871(a)(1)(A) of the Code for the fiscal year
ended March 31, 2006.
Annual Report | 47
Franklin Mutual Recovery Fund
BOARD MEMBERS AND OFFICERS
The name, year of birth and address of the officers and board members, as well
as their affiliations, positions held with the Trust, principal occupations
during the past five years and number of portfolios overseen in the Franklin
Templeton Investments fund complex are shown below. Each board member will serve
until that person's successor is elected and qualified.
INDEPENDENT BOARD MEMBERS
- ----------------------------------------------------------------------------------------------------------------------------------
NUMBER OF PORTFOLIOS IN
NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN
AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- ----------------------------------------------------------------------------------------------------------------------------------
EDWARD I. ALTMAN, PH.D. (1941) Trustee Since 2003 7 Director, A.T.D. Inc. (financial
101 John F. Kennedy Parkway technology and investment company).
Short Hills, NJ 07078-2789
- ----------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Max L. Heine Professor of Finance and Director of The Credit and Debt Markets Research Program, Salomon Center; editor and author
of numerous financial publications; financial consultant; and serves on the Investment Advisory Committee of the New York Common
Retirement Fund; and FORMERLY, Vice Director, NYU Salomon Center, Stern School of Business, New York University.
---------------------------------------------------------------------------------------------------------------------------------
ANN TORRE BATES (1958) Trustee Since 2003 7 Independent Director, SLM,
101 John F. Kennedy Parkway Corporation (Sallie Mae); and Allied
Short Hills, NJ 07078-2789 Capital Corporation (financial
services).
- ----------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
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, US Airways, Inc. (until 1995).
- ----------------------------------------------------------------------------------------------------------------------------------
BURTON J. GREENWALD (1929) Trustee Since 2003 13 Director, Fiduciary Emerging Markets
101 John F. Kennedy Parkway Bond Fund PLC and Fiduciary
Short Hills, NJ 07078-2789 International Ireland Limited.
- ----------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Managing Director, B.J. Greenwald Associates (management consultants to the financial services industry).
- ----------------------------------------------------------------------------------------------------------------------------------
BRUCE A. MACPHERSON (1930) Trustee Since 2003 7 None
101 John F. Kennedy Parkway
Short Hills, NJ 07078-2789
- ----------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Retired, former Chairman, A.A. MacPherson, Inc., Canton, MA (representative for electrical manufacturers).
- ----------------------------------------------------------------------------------------------------------------------------------
CHARLES RUBENS II (1930) Trustee Since 2003 13 None
101 John F. Kennedy Parkway
Short Hills, NJ 07078-2789
- ----------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Private investor.
- ----------------------------------------------------------------------------------------------------------------------------------
48 | Annual Report
- ----------------------------------------------------------------------------------------------------------------------------------
NUMBER OF PORTFOLIOS IN
NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN
AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- ----------------------------------------------------------------------------------------------------------------------------------
LEONARD RUBIN (1925) Trustee Since 2003 13 None
101 John F. Kennedy Parkway
Short Hills, NJ 07078-2789
- ----------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Partner in LDR Equities, LLC (manages personal investments); and FORMERLY, President, F.N.C. Textiles, Inc.; and Chairman of the
Board, Carolace Embroidery Co., Inc. (until 1996).
- ----------------------------------------------------------------------------------------------------------------------------------
ROBERT E. WADE (1946) Trustee and Trustee since 2003 25 Director, El Oro and Exploration
101 John F. Kennedy Parkway Chairman of the and Chairman of Co., p.l.c. (investments) and ARC
Short Hills, NJ 07078-2789 Board the Board since Wireless Solution, Inc. (wireless
2005 components and network products).
- ----------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Practicing attorney.
- ----------------------------------------------------------------------------------------------------------------------------------
INTERESTED BOARD MEMBERS AND OFFICERS
- ----------------------------------------------------------------------------------------------------------------------------------
NUMBER OF PORTFOLIOS IN
NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN
AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- ----------------------------------------------------------------------------------------------------------------------------------
**WILLIAM J. LIPPMAN (1925) Trustee Since 2003 14 None
One Parker Plaza, 9th Floor
Fort Lee, NJ 07024-2920
- ----------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
President, Franklin Advisory Services, LLC; Director, Templeton Worldwide, Inc.; and officer and/or director or trustee, as the
case may be, of five of the investment companies in Franklin Templeton Investments.
- ----------------------------------------------------------------------------------------------------------------------------------
**ANNE M. TATLOCK (1939) Trustee Since 2003 7 Director, Fortune Brands, Inc.
600 Fifth Avenue, 7th Floor (consumer products) and Merck & Co.
New York, NY 10020 - 2302 Inc. (pharmaceuticals)
- ----------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Chairman and Chief Executive Officer, Fiduciary Trust Company International; Vice Chairman, Member - Office of the Chairman and
Director, Franklin Resources, Inc.; and officer and/or director, as the case may be, of some of the other subsidiaries of Franklin
Resources, Inc.
- ----------------------------------------------------------------------------------------------------------------------------------
PHILIPPE BRUGERE-TRELAT (1949) Vice President Since 2005 Not Applicable Not Applicable
101 John F. Kennedy Parkway,
Short Hills NJ 07078-2789
- ----------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Vice President, Franklin Mutual Advisers, LLC; Portfolio Manager of Eurovest SA (French registered Investment Company, Sicav); and
officer of two of the investment companies in Franklin Templeton Investments.
- ----------------------------------------------------------------------------------------------------------------------------------
Annual Report | 49
- ----------------------------------------------------------------------------------------------------------------------------------
NUMBER OF PORTFOLIOS IN
NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN
AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- ----------------------------------------------------------------------------------------------------------------------------------
JAMES M. DAVIS (1952) Chief Chief Compliance Not Applicable Not Applicable
One Franklin Parkway Compliance Officer since 2004
San Mateo, CA 94403-1906 Officer and and Vice President
Vice President - AML Compliance
- AML since February 2006
Compliance
- ----------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Director, Global Compliance, Franklin Resources, Inc.; officer of 47 of the investment companies in Franklin Templeton
Investments; and FORMERLY, Director of Compliance, Franklin Resources, Inc. (1994-2001).
- ----------------------------------------------------------------------------------------------------------------------------------
MICHAEL J. EMBLER (1964) Senior Vice Since 2005 Not Applicable Not Applicable
101 John F. Kennedy Parkway President and
Short Hills, NJ 07078-2789 Chief
Investment
Officer
- ----------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Senior Vice President and Chief Investment Officer, Franklin Mutual Advisers, LLC; and officer of two of the investment companies
in Franklin Templeton Investments.
- ----------------------------------------------------------------------------------------------------------------------------------
JIMMY D. GAMBILL (1947) Senior Vice Since 2003 Not Applicable Not Applicable
500 East Broward Blvd. President and
Suite 2100 Chief Executive
Fort Lauderdale, FL 33394-3091 Officer -
Finance and
Administration
- ----------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
President, Franklin Templeton Services, LLC; Senior Vice President, Templeton Worldwide, Inc.; and officer of 47 of the investment
companies in Franklin Templeton Investments.
- ----------------------------------------------------------------------------------------------------------------------------------
DAVID P. GOSS (1947) Vice President Since 2003 Not Applicable Not Applicable
One Franklin Parkway
San Mateo, CA 94403-1906
- ----------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Senior Associate General Counsel, Franklin Templeton Investments; officer and director of one of the subsidiaries of Franklin
Resources, Inc.; and officer of 47 of the investment companies in Franklin Templeton Investments.
- ----------------------------------------------------------------------------------------------------------------------------------
STEVEN J. GRAY (1955) Secretary Since October Not Applicable Not Applicable
One Franklin Parkway 2005
San Mateo, CA 94403-1906
- ----------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Senior Associate General Counsel, Franklin Templeton Investments; and officer of 33 of the investment companies in Franklin
Templeton Investments.
- ----------------------------------------------------------------------------------------------------------------------------------
50 | Annual Report
- ----------------------------------------------------------------------------------------------------------------------------------
NUMBER OF PORTFOLIOS IN
NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN
AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- ----------------------------------------------------------------------------------------------------------------------------------
BARBARA J. GREEN (1947) Vice President Since 2003 Not Applicable Not Applicable
One Franklin Parkway
San Mateo, CA 94403-1906
- ----------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Vice President, Deputy General Counsel and Secretary, Franklin Resources, Inc.; Secretary and Senior Vice President, Templeton
Worldwide, Inc.; Secretary, Franklin Advisers, Inc., Franklin Advisory Services, LLC, Franklin Investment Advisory Services, LLC,
Franklin Mutual Advisers, LLC, Franklin Templeton Alternative Strategies, Inc., Franklin Templeton Investor Services, LLC,
Franklin Templeton Services, LLC, Franklin Templeton Distributors, Inc., Templeton Investment Counsel, LLC, and Templeton/Franklin
Investment Services, Inc.; and officer of some of the other subsidiaries of Franklin Resources, Inc. and of 47 of the investment
companies in Franklin Templeton Investments; 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 (until 1986); and Judicial Clerk, U.S. District Court (District of Massachusetts)
(until 1979).
- ----------------------------------------------------------------------------------------------------------------------------------
PETER A. LANGERMAN (1955) President, and Since 2005 Not Applicable Not Applicable
101 John F. Kennedy Parkway Chief Executive
Short Hills, NJ 07078-2702 Officer -
Investment
Management
- ----------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Chairman of the Board, Chief Executive Officer and President, Franklin Mutual Advisers, LLC; officer of two of the investment
companies in Franklin Templeton Investments; and FORMERLY, Director, New Jersey's Division of Investment.
- ----------------------------------------------------------------------------------------------------------------------------------
GREGORY R. SEWARD (1956) Treasurer Since December Not Applicable Not Applicable
500 East Broward Blvd. 2005
Suite 2100
Fort Lauderdale, FL 33394-3091
- ----------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Vice President, Franklin Templeton Services, LLC; officer of 16 of the investment companies in Franklin Templeton Investments; and
FORMERLY, Vice President, JPMorgan Chase (2000-2004) and American General Financial Group (1991-2000).
- ----------------------------------------------------------------------------------------------------------------------------------
CRAIG S. TYLE (1960) Vice President Since October Not Applicable Not Applicable
One Franklin Parkway 2005
San Mateo, CA 94403-1906
- ----------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
General Counsel and Executive Vice President, Franklin Resources, Inc.; officer of 47 of the investment companies in Franklin
Templeton Investments; and FORMERLY, Partner, Shearman & Sterling, LLP (2004-2005); and General Counsel, Investment Company
Institute (ICI) (1997-2004).
- ----------------------------------------------------------------------------------------------------------------------------------
Annual Report | 51
- ----------------------------------------------------------------------------------------------------------------------------------
NUMBER OF PORTFOLIOS IN
NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN
AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- ----------------------------------------------------------------------------------------------------------------------------------
GALEN G. VETTER (1951) Chief Financial Since 2004 Not Applicable Not Applicable
500 East Broward Blvd. Officer and
Suite 2100 Chief
Fort Lauderdale, FL 33394-3091 Accounting
Officer
- ----------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Senior Vice President, Franklin Templeton Services, LLC; officer of 47 of the investment companies in Franklin Templeton
Investments; and FORMERLY, Managing Director, RSM McGladrey, Inc. (1999-2004); and Partner, McGladrey & Pullen, LLP (1979-1987 and
1991-2004).
- ----------------------------------------------------------------------------------------------------------------------------------
* We base the number of portfolios on each separate series of the U.S.
registered investment companies within the Franklin Templeton Investments
fund complex. These portfolios have a common investment adviser or
affiliated investment advisers.
** William J. Lippman is considered to be an interested person of the Trust
under the federal securities laws due to his position as an officer of
some of the subsidiaries of Franklin Resources, Inc. (Resources), which is
the parent company of the Trust's adviser and distributor. Anne M. Tatlock
is considered to be an interested person of the Trust under the federal
securities laws due to her position as an officer and director of
Resources.
THE FUND'S BOARD OF TRUSTEES HAS DETERMINED THAT CERTAIN OF THE MEMBERS OF THE
AUDIT COMMITTEE, INCLUDING ANN TORRE BATES, ARE AUDIT COMMITTEE FINANCIAL
EXPERTS, AND "INDEPENDENT," UNDER THOSE PROVISIONS OF THE SARBANES-OXLEY ACT OF
2002, AND THE RULES AND FORM AMENDMENTS ADOPTED BY THE SECURITIES AND EXCHANGE
COMMISSION, RELATING TO AUDIT COMMITTEE FINANCIAL EXPERTS.
THE STATEMENT OF ADDITIONAL INFORMATION (SAI) INCLUDES ADDITIONAL INFORMATION
ABOUT THE BOARD MEMBERS AND IS AVAILABLE, WITHOUT CHARGE, UPON REQUEST.
SHAREHOLDERS MAY CALL 1-800/DIAL BEN (1-800/342-5236) TO REQUEST THE SAI.
52 | Annual Report
Franklin Mutual Recovery Fund
SHAREHOLDER INFORMATION
PROXY VOTING POLICIES AND PROCEDURES
The Fund has established Proxy Voting Policies and Procedures ("Policies") that
the Fund uses to determine how to vote proxies relating to portfolio securities.
Shareholders may view the Fund's complete Policies online at
franklintempleton.com. Alternatively, shareholders may request copies of the
Policies free of charge by calling the Proxy Group collect at 1-954/847-2268 or
by sending a written request to: Franklin Templeton Companies, LLC, 500 East
Broward Boulevard, Suite 1500, Fort Lauderdale, FL 33394, Attention: Proxy
Group. Copies of the Fund's proxy voting records are also made available online
at franklintempleton.com and posted on the U.S. Securities and Exchange
Commission's website at sec.gov and reflect the most recent 12-month period
ended June 30.
QUARTERLY STATEMENT OF INVESTMENTS
The Fund files a complete statement of investments with the U.S. Securities and
Exchange Commission for the first and third quarters for each fiscal year on
Form N-Q. Shareholders may view the filed Form N-Q by visiting the Commission's
website at sec.gov. The filed form may also be viewed and copied at the
Commission's Public Reference Room in Washington, DC. Information regarding the
operations of the Public Reference Room may be obtained by calling
1-800/SEC-0330.
Annual Report | 53
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Literature Request
LITERATURE REQUEST. TO RECEIVE A BROCHURE AND PROSPECTUS, PLEASE CALL US AT
1-800/DIAL BEN(R) (1-800/342-5236) OR VISIT FRANKLINTEMPLETON.COM. INVESTORS
SHOULD CAREFULLY CONSIDER A FUND'S INVESTMENT GOALS, RISKS, CHARGES AND EXPENSES
BEFORE INVESTING. THE PROSPECTUS CONTAINS THIS AND OTHER INFORMATION. PLEASE
CAREFULLY READ THE PROSPECTUS BEFORE INVESTING. To ensure the highest quality of
service, we may monitor, record and access telephone calls to or from our
service departments. These calls can be identified by the presence of a regular
beeping tone.
FRANKLIN TEMPLETON INVESTMENTS
INTERNATIONAL
Mutual European Fund
Templeton China World Fund
Templeton Developing Markets Trust
Templeton Foreign Fund
Templeton Foreign Smaller Companies Fund
Templeton International (Ex EM) Fund
GLOBAL
Mutual Discovery Fund
Templeton Global Long-Short Fund
Templeton Global Opportunities Trust
Templeton Global Smaller Companies Fund
Templeton Growth Fund
Templeton World Fund
GROWTH
Franklin Aggressive Growth Fund
Franklin Capital Growth Fund
Franklin Flex Cap Growth Fund
Franklin Small-Mid Cap Growth Fund
Franklin Small Cap Growth Fund II 1
VALUE
Franklin Balance Sheet Investment Fund 2
Franklin Equity Income Fund
Franklin Large Cap Value Fund
Franklin MicroCap Value Fund 2
Franklin MidCap Value Fund
Franklin Small Cap Value Fund
Mutual Beacon Fund
Mutual Qualified Fund
Mutual Recovery Fund 3
Mutual Shares Fund
BLEND
Franklin Blue Chip Fund
Franklin Convertible Securities Fund
Franklin Growth Fund
Franklin Rising Dividends Fund
Franklin U.S. Long-Short Fund
SECTOR
Franklin Biotechnology Discovery Fund
Franklin DynaTech Fund
Franklin Global Communications Fund
Franklin Global Health Care Fund
Franklin Gold and Precious Metals Fund
Franklin Natural Resources Fund
Franklin Real Estate Securities Fund
Franklin Technology Fund
Franklin Utilities Fund
Mutual Financial Services Fund
ASSET ALLOCATION
Franklin Templeton Corefolio
Allocation Fund
Franklin Templeton Founding Funds Allocation Fund
Franklin Templeton Perspectives Allocation Fund
TARGET FUNDS
Franklin Templeton Conservative Target Fund
Franklin Templeton Growth Target Fund
Franklin Templeton Moderate Target Fund
INCOME
Franklin Adjustable U.S. Government
Securities Fund 4
Franklin's AGE High Income Fund
Franklin Floating Rate Daily Access Fund
Franklin Income Fund
Franklin Limited Maturity
U.S. Government Securities Fund 4
Franklin Low Duration Total Return Fund
Franklin Real Return Fund
Franklin Strategic Income Fund
Franklin Strategic Mortgage Portfolio
Franklin Templeton Hard Currency Fund
Franklin Total Return Fund
Franklin U.S. Government Securities Fund 4
Templeton Global Bond Fund
Templeton Income Fund
TAX-FREE INCOME 5
NATIONAL FUNDS
Double Tax-Free Income Fund
Federal Tax-Free Income
Fund High Yield Tax-Free Income Fund
Insured Tax-Free Income Fund 6
LIMITED-TERM FUNDS
California Limited-Term Tax-Free Income Fund
Federal Limited-Term Tax-Free Income Fund
New York Limited-Term Tax-Free Income Fund
INTERMEDIATE-TERM FUNDS
California Intermediate-Term
Tax-Free Income Fund
Federal Intermediate-Term
Tax-Free Income Fund
New York Intermediate-Term
Tax-Free Income Fund
STATE-SPECIFIC
Alabama
Arizona
California 7
Colorado
Connecticut
Florida 7
Georgia
Kentucky
Louisiana
Maryland
Massachusetts 6
Michigan 6
Minnesota 6
Missouri
New Jersey
New York 7
North Carolina
Ohio 7
Oregon
Pennsylvania
Tennessee
Virginia
INSURANCE FUNDS
Franklin Templeton Variable Insurance Products Trust 8
1. The fund is closed to new investors. Existing shareholders can continue
adding to their accounts.
2. The fund is only open to existing shareholders and select retirement
plans.
3. The fund is a continuously offered, closed-end fund. Shares may be
purchased daily; there is no daily redemption. However, each quarter,
pending board approval, the fund will authorize the repurchase of 5%-25%
of the outstanding number of shares. Investors may tender all or a portion
of their shares during the tender period.
4. An investment in the fund is neither insured nor guaranteed by the U.S.
government or by any other entity or institution.
5. For investors subject to the alternative minimum tax, a small portion of
fund dividends may be taxable. Distributions of capital gains are
generally taxable.
6. Portfolio of insured municipal securities.
7. These funds are available in two or more variations, including long-term
portfolios, portfolios of insured securities, a high-yield portfolio (CA)
and limited-term, intermediate-term and money market portfolios (CA and
NY).
8. The funds of the Franklin Templeton Variable Insurance Products Trust are
generally available only through insurance company variable contracts.
09/05 Not part of the annual report
[LOGO](R)
FRANKLIN TEMPLETON One Franklin Parkway
INVESTMENTS San Mateo, CA 94403-1906
o WANT TO RECEIVE THIS DOCUMENT FASTER VIA EMAIL?
Eligible shareholders can sign up for eDelivery at
franklintempleton.com. See inside for details.
ANNUAL REPORT AND SHAREHOLDER LETTER
FRANKLIN MUTUAL RECOVERY FUND
INVESTMENT MANAGER
Franklin Mutual Advisers, LLC
51 John F. Kennedy Parkway
Short Hills, NJ 07078
DISTRIBUTOR
Franklin Templeton Distributors, Inc.
1-800/DIAL BEN(R)
franklintempleton.com
SHAREHOLDER SERVICES
1-800/632-2301
Authorized for distribution only when accompanied or preceded by a prospectus.
Investors should carefully consider a fund's investment goals, risks, charges
and expenses before investing. The prospectus contains this and other
information; please read it carefully before investing.
To ensure the highest quality of service, telephone calls to or from our service
departments may be monitored, recorded and accessed. These calls can be
identified by the presence of a regular beeping tone.
471 A2006 05/06
ITEM 2. CODE OF ETHICS.
(a) The Registrant has adopted a code of ethics that applies to its principal
executive officers and principal financial and accounting officer.
(c) N/A
(d) N/A
(f) Pursuant to Item 12(a)(1), the Registrant is attaching as an exhibit a copy
of its code of ethics that applies to its principal executive officers and
principal financial and accounting officer.
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.
(a)(1) The Registrant has an audit committee financial expert serving on its
audit committee.
(2) The audit committee financial expertis Ann Torre Bates and she is
"independent" as defined under the relevant Securities and Exchange Commission
Rules and Releases.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
(a) Audit Fees
The aggregate fees paid to the principal accountant for professional services
rendered by the principal accountant for the audit of the registrant's annual
financial statements or for services that are normally provided by the principal
accountant in connection with statutory and regulatory filings or engagements
were $64,000 for the fiscal year ended March 31, 2006 and $50,000 for the fiscal
year ended March 31, 2005.
(b) Audit-Related Fees
There were no fees paid to the principal accountant for assurance and related
services rendered by the principal accountant to the registrant that are
reasonably related to the performance of the audit of the registrant's financial
statements and are not reported under paragraph (a) of Item 4.
There were no fees paid to the principal accountant for assurance and related
services rendered by the principal accountant to the registrant's investment
adviser and any entity controlling, controlled by or under common control with
the investment adviser that provides ongoing services to the registrant that are
reasonably related to the performance of the audit of their financial
statements.
(c) Tax Fees
There were no fees paid to the principal accountant for professional services
rendered by the principal accountant to the registrant for tax compliance, tax
advice and tax planning.
The aggregate fees paid to the principal accountant for professional services
rendered by the principal accountant to the registrant's investment adviser and
any entity controlling, controlled by or under common control with the
investment adviser that provides ongoing services to the registrant for tax
compliance, tax advice and tax planning were $29,167 for the fiscal year ended
March 31, 2006 and $50,000 for the fiscal year ended March 31, 2005. The
services for which these fees were paid included tax compliance and advise.
(d) All Other Fees
There were no fees paid to the principal accountant for products and services
rendered by the principal accountant to the registrant, other than the services
reported in paragraphs (a)-(c) of Item 4.
The aggregate fees paid to the principal accountant for products and services
rendered by the principal accountant to the registrant's investment adviser and
any entity controlling, controlled by or under common control with the
investment adviser that provides ongoing services to the registrant not reported
in paragraphs (a)-(c) of Item 4 were $199,802 for the fiscal year ended March
31, 2006 and $0 for the fiscal year ended March 31, 2005. The services for which
these fees were paid included financial due diligence.
(e) (1) The registrant's audit committee is directly responsible for approving
the services to be provided by the auditors, including:
(i) pre-approval of all audit and audit related services;
(ii) pre-approval of all non-audit related services to be
provided to the Fund by the auditors;
(iii) pre-approval of all non-audit related services to be
provided to the registrant by the auditors to the registrant's investment
adviser or to any entity that controls, is controlled by or is under common
control with the registrant's investment adviser and that provides ongoing
services to the registrant where the non-audit services relate directly to the
operations or financial reporting of the registrant; and
(iv) establishment by the audit committee, if deemed necessary or
appropriate, as an alternative to committee pre-approval of services to be
provided by the auditors, as required by paragraphs (ii) and (iii) above, of
policies and procedures to permit such services to be pre-approved by other
means, such as through establishment of guidelines or by action of a designated
member or members of the committee; provided the policies and procedures are
detailed as to the particular service and the committee is informed of each
service and such policies and procedures do not include delegation of audit
committee responsibilities, as contemplated under the Securities Exchange Act of
1934, to management; subject, in the case of (ii) through (iv), to any waivers,
exceptions or exemptions that may be available under applicable law or rules.
(e) (2) None of the services provided to the registrant described in paragraphs
(b)-(d) of Item 4 were approved by the audit committee pursuant to paragraph
(c)(7)(i)(C) of Rule 2-01 of regulation S-X.
(f) No disclosures are required by this Item 4(f).
(g) The aggregate non-audit fees paid to the principal accountant for services
rendered by the principal accountant to the registrant and the registrant's
investment adviser and any entity controlling, controlled by or under common
control with the investment adviser that provides ongoing services to the
registrant were $228,969 for the fiscal year ended March 31, 2006 and $50,000
for the fiscal year ended March 31, 2005.
(h) The registrant's audit committee of the board of trustees has considered
whether the provision of non-audit services that were rendered to the
registrant's investment adviser (not including any sub-adviser whose role is
primarily portfolio management and is subcontracted with or overseen by another
investment adviser), and any entity controlling, controlled by, or under common
control with the investment adviser that provides ongoing services to the
registrant that were not pre-approved pursuant to paragraph (c)(7)(ii) of Rule
2-01 of Regulation S-X is compatible with maintaining the principal accountant's
independence.
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS
Members of the Audit Committee are: Edward I. Altman, Ann Torre Bates and
Robert E. Wade.
ITEM 6. SCHEDULE OF INVESTMENTS. N/A
ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END
MANAGEMENT INVESTMENT COMPANIES.
The board of trustees of the Fund has delegated the authority to vote proxies
related to the portfolio securities held by the Fund to the Fund's manager
Franklin Mutual Advisers, LLP in accordance with the Proxy Voting Policies and
Procedures (Policies) adopted by the manager.
The manager has delegated its administrative duties with respect to the voting
of proxies to the Proxy Group within Franklin Templeton Companies, LLC (Proxy
Group), an affiliate and wholly owned subsidiary of Franklin Resources, Inc. All
proxies received by the Proxy Group will be voted based upon the manager's
instructions and/or policies.
To assist it in analyzing proxies, the manager subscribes to Institutional
Shareholder Services (ISS), an unaffiliated third party corporate governance
research service that provides in-depth analyses of shareholder meeting agendas,
vote recommendations, recordkeeping and vote disclosure services. In addition,
the manager subscribes to Glass, Lewis & Co., LLC (Glass Lewis), an unaffiliated
third party analytical research firm, to receive analyses and vote
recommendations on the shareholder meetings of publicly held U.S. companies.
Although ISS' and/or Glass Lewis' analyses are thoroughly reviewed and
considered in making a final voting decision, the manager does not consider
recommendations from ISS, Glass Lewis or any other third party to be
determinative of the manager's ultimate decision. The manager votes proxies
solely in the interests of the Fund and its shareholders. As a matter of policy,
the officers, directors/trustees and employees of the Fund, the manager and the
Proxy Group will not be influenced by outside sources whose interests conflict
with the interests of the Fund and its shareholders. All conflicts are resolved
in the interests of the manager's clients. In situations where the manager
perceives a material conflict of interest, the manager may: disclose the
conflict to the Fund's board of directors; defer to the voting recommendation of
the Fund's board of directors, ISS, Glass Lewis or those of another independent
third party provider of proxy services; or take such other action in good faith
(in consultation with counsel) which would protect the interests of the Fund and
its shareholders.
The recommendation of management on any issue is a factor which the manager
considers in determining how proxies should be voted, but is not determinative
of the manager's ultimate decision. As a matter of practice, the votes with
respect to most issues are cast in accordance with the position of the company's
management. Each issue, however, is considered on its own merits, and the
manager will not support the position of the company's management in any
situation where it deems that the ratification of management's position would
adversely affect the investment merits of owning that company's shares.
MANAGER'S PROXY VOTING POLICIES AND PRINCIPLES The manager has adopted general
proxy voting guidelines, which are summarized below. These guidelines are not an
exhaustive list of all the issues that may arise and the manager cannot
anticipate all future situations. In all cases, each proxy will be considered
based on the relevant facts and circumstances.
BOARD OF DIRECTORS. The manager supports an independent board of directors, and
prefers that key committees such as audit, nominating, and compensation
committees be comprised of independent directors. The manager will generally
vote against management efforts to classify a board and will generally support
proposals to declassify the board of directors. The manager may withhold votes
from directors who have attended less than 75% of meetings without a valid
reason. While generally in favor of separating Chairman and CEO positions, the
manager will review this issue as well as proposals to restore or provide for
cumulative voting on a case-by-case basis, taking into consideration factors
such as the company's corporate governance guidelines or provisions and
performance.
RATIFICATION OF AUDITORS OF PORTFOLIO COMPANIES. In light of several high
profile accounting scandals, the manager will closely scrutinize the role and
performance of auditors. On a case-by-case basis, the manager will examine
proposals relating to non-audit relationships and non-audit fees. The manager
will also consider, on a case-by-case basis, proposals to rotate auditors, and
will vote against the ratification of auditors when there is clear and
compelling evidence of accounting irregularities or negligence.
MANAGEMENT AND DIRECTOR COMPENSATION. A company's equity-based compensation plan
should be in alignment with its shareholders' long-term interests. The manager
evaluates plans on a case-by-case basis by considering several factors to
determine whether the plan is fair and reasonable, including the ISS
quantitative model utilized to assess such plans and/or the Glass Lewis
evaluation of the plans. The manager will generally oppose plans that have the
potential to be excessively dilutive, and will almost always oppose plans that
are structured to allow the repricing of underwater options, or plans that have
an automatic share replenishment "evergreen" feature. The manager will generally
support employee stock option plans in which the purchase price is at least 85%
of fair market value, and when potential dilution is 10% or less.
Severance compensation arrangements will be reviewed on a case-by-case basis,
although the manager will generally oppose "golden parachutes" that are
considered to be excessive. The manager will normally support proposals that
require a percentage of directors' compensation to be in the form of common
stock, as it aligns their interests with those of shareholders. The manager will
review on a case-by-case basis any shareholder proposals to adopt policies on
expensing stock option plans.
ANTI-TAKEOVER MECHANISMS AND RELATED ISSUES. The manager generally opposes
anti-takeover measures since they tend to reduce shareholder rights. On
occasion, the manager may vote with management when the research analyst has
concluded that the proposal is not onerous and would not harm the Fund or its
shareholders' interests. The manager generally supports proposals that require
shareholder rights' plans ("poison pills") to be subject to a shareholder vote
and will closely evaluate such plans on a case-by-case basis to determine
whether or not they warrant support. The manager will generally vote against any
proposal to issue stock that has unequal or subordinate voting rights. The
manager generally opposes any supermajority voting requirements as well as the
payment of "greenmail." The manager generally supports "fair price" provisions
and confidential voting.
CHANGES TO CAPITAL STRUCTURE. The manager will review, on a case-by-case basis,
proposals by companies to increase authorized shares and the purpose for the
increase and proposals seeking preemptive rights. The manager will generally not
vote in favor of dual-class capital structures to increase the number of
authorized shares where that class of stock would have superior voting rights.
The manager will generally vote in favor of the issuance of preferred stock in
cases where the company specifies the voting, dividend, conversion and other
rights of such stock and the terms of the preferred stock issuance are deemed
reasonable.
MERGERS AND CORPORATE RESTRUCTURING. Mergers and acquisitions will be subject to
careful review by the research analyst to determine whether each will be
beneficial to shareholders. The manager will analyze various economic and
strategic factors in making the final decision on a merger or acquisition.
Corporate restructuring and reincorporation proposals are also subject to a
thorough examination on a case-by-case basis.
SOCIAL AND CORPORATE POLICY ISSUES. The manager will generally give management
discretion with regard to social, environmental and ethical issues, although the
manager may vote in favor of those that are believed to have significant
economic benefits or implications for the Fund and its shareholders.
GLOBAL CORPORATE GOVERNANCE. Many of the tenets discussed above are applied to
proxy voting decisions for international companies. However, the manager must be
more flexible in these instances and must be mindful of the varied market
practices of each region.
The manager will attempt to process every proxy it receives for all domestic and
foreign proxies. However, there may be situations in which the manager cannot
process proxies, for example, where a meeting notice was received too late, or
sell orders preclude the ability to vote. The manager may abstain from voting
under certain circumstances or vote against items such as "Other Business" when
the manager is not given adequate information from the company.
Shareholders may view the complete Policies online at franklintempleton.com.
Alternatively, shareholders may request copies of the Policies free of charge by
calling the Proxy Group collect at 1-954/847-2268 or by sending a written
request to: Franklin Templeton Companies, LLC, 500 East Broward Boulevard, Suite
1500, Fort Lauderdale, FL 33394, Attention: Proxy Group. Copies of the Fund's
proxy voting records are available online at franklintempleton.com and posted
on the SEC website at www.sec.gov and reflect the twelve-month period beginning
July 1, 2004, and ending June 30, 2005.
ITEM 8. PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANY. N/A
ITEM 9. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT
COMPANY AND AFFILIATED PURCHASERS. N/A
ITEM 10. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There have been no changes to the procedures by which shareholders may recommend
nominees to the Registrant's Board of Directors that would require disclosure
herein.
ITEM 11. CONTROLS AND PROCEDURES.
(A) EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES. The Registrant maintains
disclosure controls and procedures that are designed to ensure that information
required to be disclosed in the Registrant's filings under the Securities
Exchange Act of 1934 and the Investment Company Act of 1940 is recorded,
processed, summarized and reported within the periods specified in the rules and
forms of the Securities and Exchange Commission. Such information is accumulated
and communicated to the Registrant's management, including its principal
executive officer and principal financial officer, as appropriate, to allow
timely decisions regarding required disclosure. The Registrant's management,
including the principal executive officer and the principal financial officer,
recognizes that any set of controls and procedures, no matter how well designed
and operated, can provide only reasonable assurance of achieving the desired
control objectives.
Within 90 days prior to the filing date of this Shareholder Report on Form
N-CSR, the Registrant had carried out an evaluation, under the supervision and
with the participation of the Registrant's management, including the
Registrant's principal executive officer and the Registrant's principal
financial officer, of the effectiveness of the design and operation of the
Registrant's disclosure controls and procedures. Based on such evaluation, the
Registrant's principal executive officer and principal financial officer
concluded that the Registrant's disclosure controls and procedures are
effective.
(B) CHANGES IN INTERNAL CONTROLS. There have been no significant changes
in the Registrant's internal controls or in other factors that could
significantly affect the internal controls subsequent to the date of their
evaluation in connection with the preparation of this Shareholder Report on Form
N-CSR.
ITEM 12. EXHIBITS.
(A)(1) Code of Ethics
(A) (2) Certifications pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
of Jimmy D. Gambill, Chief Executive Officer - Finance and Administration, and
Galen G. Vetter, Chief Financial Officer
(B) Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
of Jimmy D. Gambill, Chief Executive Officer - Finance and Administration, and
Galen G. Vetter, Chief Financial Officer
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
FRANKLIN MUTUAL RECOVERY FUND
By /s/JIMMY D. GAMBILL
-----------------------------
Jimmy D. Gambill
Chief Executive Officer - Finance and Administration
Date: May 22, 2006
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on
the dates indicated.
By /s/JIMMY D. GAMBILL
-----------------------------
Jimmy D. Gambill
Chief Executive Officer - Finance and Administration
Date: May 22, 2006
By /s/GALEN G. VETTER
-----------------------------
Galen G. Vetter
Chief Financial Officer
Date: May 22, 2006