A Portfolio of
Franklin Mutual Series Fund Inc.
[Logo]
This report and the financial statements contained herein are submitted for the
general information of the shareholders of Mutual Shares Fund. The report is
not authorized for distribution to prospective investors in the Fund unless
preceded or accompanied by an effective prospectus.
MUTUAL
SHARES
FUND
[Logo]
ANNUAL
REPORT
December 31, 1996
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Mutual Shares Fund -- Class Z
Yearly Performance
Total Return*
1950 ........................................................... 28.25%
1951 ........................................................... 27.91%
1952 ........................................................... 16.45%
1953 ........................................................... -3.89%
1954 ........................................................... 28.10%
1955 ........................................................... 11.49%
1956 ........................................................... 11.23%
1957 ........................................................... -15.46%
1958 ........................................................... 34.50%
1959 ........................................................... 6.60%
1960 ........................................................... 6.22%
1961 ........................................................... 22.56%
1962 ........................................................... -1.42%
1963 ........................................................... 20.61%
1964 ........................................................... 10.45%
1965 ........................................................... 20.93%
1966 ........................................................... 2.03%
1967 ........................................................... 32.22%
1968 ........................................................... 39.97%
1969 ........................................................... -19.21%
1970 ........................................................... -8.98%
1971 ........................................................... 22.28%
1972 ........................................................... .53%
1973 ........................................................... -8.11%
1974 ........................................................... 8.16%
1975 ........................................................... 34.12%
1976 ........................................................... 55.21%
1977 ........................................................... 15.61%
1978 ........................................................... 18.11%
1979 ........................................................... 42.69%
1980 ........................................................... 19.38%
1981 ........................................................... 8.93%
1982 ........................................................... 12.87%
1983 ........................................................... 36.64%
1984 ........................................................... 14.47%
1985 ........................................................... 26.73%
1986 ........................................................... 16.99%
1987 ........................................................... 6.34%
1988 ........................................................... 30.69%
1989 ........................................................... 14.93%
1990 ........................................................... -9.82%
1991 ........................................................... 20.99%
1992 ........................................................... 21.33%
1993 ........................................................... 21.00%
1994 ........................................................... 4.53%
1995 ........................................................... 29.11%
1996 ........................................................... 20.76%
*****
- --------------------------------------------------------------------------------
Comparison of Changes in Value of $10,000 Investment in
Mutual Shares Fund
to the S&P 500 and The Lipper Growth and Income Funds Average
- --------------------------------------------------------------------------------
- ------------------------------------------
CLASS Z
AVERAGE ANNUAL TOTAL RETURN*
- ------------------------------------------
1 Year 5 Year 10 Year
- ------------------------------------------
20.76% 19.06% 15.35%
- ------------------------------------------
[The following table was represented as a line graph in the printed material.]
Lipper
Growth
Mutual & Income
Shares Funds
Class Z S&P 500 Average
------- ------- -------
'86 ............. 10000 10000 10000
'87 ............. 10634 10494 10191
'88 ............. 13898 12231 11819
'89 ............. 15972 16101 14621
'90 ............. 14404 15602 13991
'91 ............. 17427 20344 18070
'92 ............. 21145 21891 19677
'93 ............. 25585 24092 21967
'94 ............. 26743 24408 21760
'95 ............. 34526 33568 28465
'96 ............. 41692 41275 34377
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Aggregate Total Returns** Since November 1, 1996
Mutual Shares -- Class I..... 2.10% Mutual Shares -- Class II....... 5.76%
* Total Return includes changes in share price and reinvestment of dividends
and capital gain distributions.
** As of November 1, 1996, the fund began offering Class I and Class II
shares, which include sales charges and 12b-1 fees. Aggregate total return
for Class I and II measures the change in value of an investment since
inception and includes the maximum initial sales charges. Aggregate Total
Return calculations assume reinvestment of dividends and capital gains at
net asset value. Since the shares have existed for less than one year,
average annual total returns are not provided.
- --------------------------------------------------------------------------------
<PAGE>
FRANKLIN MUTUAL SERIES FUND INC.
51 John F. Kennedy Parkway
Short Hills, New Jersey 07078
February 18, 1997
TO THE SHAREHOLDERS OF MUTUAL SHARES FUND:
Nineteen ninety-six was a year in which almost everything went right in
the equity markets. With the exception of a couple of short-lived "corrections,"
the markets, continuing the strong upward 1995 trend, moved inexorably to record
levels. During the year, Mutual Shares Fund appreciated 20.76% with cash
balances averaging about 21% of total net assets.
As value investors, our primary mission is to buy securities at
significant discounts to asset value. When you consider that since the beginning
of 1995 the Standard & Poor's(R) 500 stock index has appreciated more than 65%,
you might ask -- how can a value investor continue to "find value" in a market
that has seen such a dramatic move over such a short period? Or, put another
way, were markets extremely cheap two years ago or are they extremely expensive
now?
The answer to these types of questions lies in understanding how we
operate our business on a daily basis. We focus on individual stocks, not on
macroeconomic variables or overall market movements. Our experience demonstrates
that "cheap stock" opportunities exist even as many securities may be priced at
expensive levels. Most people like to invest in companies that are performing
well and have stocks that performed well. We tend to focus on the laggards, the
underperformers whose share price performance has been poor, or companies beset
by negative news such as earnings disappointments or adverse legal judgments.
The extension of our value investing approach to mergers and acquisitions as
well as to distressed securities further removes us from the equivalent of
owning a market index.
Although the equity markets are significantly higher than they were two
years ago, valuations of specific companies are not necessarily out of line with
our investment parameters. While some companies simply have not participated in
the upward movement, others are operating much better than they had been
previously and have attractive valuations. Furthermore, the models for
emphasizing returns to shareholders through mechanisms such as restructurings,
spinoffs and stock buybacks are well documented. We direct our attention to
situations where these opportunities have not been fully exploited. The Funds
have also expanded their geographic breadth, focusing more on Europe as
valuations became more compelling there; the performance of the "European
portfolio" within the Funds was a significant contributor to the overall
performance of the Funds this year.
As we look forward, we continue to find a number of new situations that
provide compelling value. Of particular interest to us is that they are familiar
names and very large companies, such as General Motors and Olin Corporation.
Equity valuations in Europe also continue to be attractive
3
<PAGE>
relative to the U.S. market, as many companies are recognizing the need to
compete globally in terms of shareholder returns as well as for customers.
This year will also be our first full year as part of the Franklin
Templeton family and we are happy to say that this partnership is proceeding as
we had hoped. The investment process here continues to operate autonomously. At
the same time, we are integrating our shareholder services with those of the
Franklin Templeton family to respond to shareholder needs. We would like to
thank the senior management of Franklin Templeton for their help in this process
and their commitment to ensuring that the qualities that have made our Funds
special will be perpetuated.
Sincerely,
MICHAEL F. PRICE, President
4
<PAGE>
MUTUAL SHARES FUND
SCHEDULE OF INVESTMENTS
DECEMBER 31, 1996
Number Value
of Shares (Note A)
----------- -----------
COMMON STOCKS & OTHER EQUITY INTERESTS (74.44%)
Aerospace (2.46%)
General Motors Corp., Class H ............. 234,900 $13,213,125
* Hexcel Corp. .............................. 1,721,098 25,171,041
* Litton Industries, Inc. ................... 1,038,100 49,439,514
Lockheed Martin Corp. ..................... 175,418 16,050,747
* Loral Space & Communications .............. 888,800 16,331,700
McDonnell Douglas Corp. ................... 660,600 42,278,400
------------
162,484,527
------------
Banking (5.85%)
Astoria Financial Corp................... 72,700 2,680,813
Barclays PLC............................. 290,000 4,977,900
Bay View Capital Corp.................... 132,400 5,610,450
* Cal Fed Bancorp Inc...................... 141,000 3,454,500
Chase Manhattan Corp..................... 3,997,188 356,749,029
Den Norske Bank ASA...................... 1,430,500 5,495,022
Standard Federal Bancorporation.......... 122,000 6,938,750
------------
385,906,464
------------
Chemicals (1.43%)
BASF AG.................................. 274,500 10,553,575
DSM NV................................... 109,000 10,757,950
Eastman Chemical Co., Inc................ 173,500 9,585,875
Olin Corp................................ 1,245,000 46,843,125
Rohm & Haas Co........................... 202,200 16,504,575
------------
94,245,100
------------
Communications (4.50%)
* 360 Communications Company............... 686,666 15,879,151
AT&T Corp................................ 2,936,600 127,742,100
* Associated Group Inc., Class A........... 14,525 446,644
* Associated Group Inc., Class B........... 117,625 3,499,344
MCI Communications Corp.................. 2,024,900 66,188,919
Sprint Corp.............................. 590,000 23,526,250
Telephone & Data Systems, Inc............ 1,623,400 58,848,250
------------
296,130,658
------------
Computers and Electronic Equipment (1.07%)
* Imation Corp............................. 750,900 21,119,063
Xerox Corp............................... 943,800 49,667,475
------------
70,786,538
------------
Conglomerates (8.56%)
Alexander & Baldwin, Inc................. 273,000 6,825,000
* American Standard Companies Inc.......... 543,100 20,773,575
BTR PLC.................................. 9,960,282 48,458,562
* Berkshire Hathaway Inc., Class A......... 1,025 34,952,500
Harcourt General, Inc.................... 159,100 7,338,488
Incentive AB, A Shares................... 529,200 38,410,522
Investor AB, A Shares.................... 1,770,400 79,176,521
Investor AB, B Shares.................... 4,543,500 200,864,425
Lagardere S.C.A.......................... 977,000 26,832,170
Philips Electronics NV................... 914,900 36,596,000
Philips Electronics NV, ADR.............. 130,000 5,270,779
Viad Corp................................ 3,583,100 59,121,150
------------
564,619,692
------------
Construction (0.51%)
Lone Star Industries, Inc................ 63,095 2,326,628
Martin Marietta Materials Inc............ 408,515 9,497,974
Noland Co................................ 134,475 3,076,116
* Schuller Corp............................ 1,339,535 14,232,559
* USG Corp................................. 136,300 4,617,163
------------
33,750,440
------------
Consumer Products & Services (8.10%)
American Brands, Inc..................... 474,300 23,537,138
B.A.T Industries PLC..................... 4,230,000 35,144,928
* Bulova Corp.............................. 37,900 236,875
Corning Inc.............................. 1,004,000 46,435,000
Dial Corp................................ 3,583,100 52,850,725
(A) Fab Industries, Inc...................... 331,100 9,105,250
* KinderCare Learning Centers, Inc......... 360,526 6,759,863
* Loewen Group Inc......................... 211,100 8,259,288
Philip Morris Companies, Inc............. 61,900 6,971,488
* Ranger Industries, Inc................... 76,839 21,515
RJR Nabisco Holdings Corp................ 2,450,679 83,323,086
(A)(R)* Sunbeam Corp............................. 11,260,174 246,457,058
* U. S. Industries, Inc.................... 428,900 14,743,438
------------
533,845,652
------------
Entertainment & Media (4.32%)
* BHC Communications, Inc.................. 302,817 30,698,073
* Chris Craft Industries, Inc.............. 204,417 8,559,962
Comcast Corp., Class A................... 105,500 1,859,438
Comcast Corp., Class A, Special
Non-Voting............................. 2,095,119 37,319,307
Todd A. O. Corp., Class A................ 332,723 3,410,411
* U S West, Inc., Media Group.............. 10,986,673 203,253,451
------------
285,100,642
------------
5
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Number Value
of Shares (Note A)
----------- -----------
Financial Services (5.51%)
Bear Stearns Companies, Inc.............. 549,231 15,309,814
Beneficial Corp.......................... 89,000 5,640,375
California Financial Holding Corp........ 56,620 1,634,903
Capital One Financial Corp............... 269,100 9,687,600
Dean Witter, Discover & Co. ............. 1,932,000 127,995,000
Finova Group Inc......................... 1,020,100 65,541,425
First USA, Inc........................... 501,600 17,367,900
(A) Fund American Enterprises Holdings, Inc.. 657,782 62,982,627
Lehman Brothers Holdings Inc............. 1,112,200 34,895,275
Mercury Finance Company.................. 1,813,100 22,210,475
------------
363,265,394
------------
Food & Beverages (3.00%)
Brown-Forman Corp., Class B.............. 354,700 16,227,525
Cadbury Schweppes PLC.................... 1,993,223 16,816,773
* FoodBrands America, Inc.................. 271,379 3,731,461
(A) Genesee Corp., Class A................... 15,911 672,240
(A) Genesee Corp., Class B................... 103,550 4,374,988
Grand Metropolitan PLC................... 490,000 3,861,308
Heineken Holding NV...................... 110,493 17,279,531
Hormel Foods Corp........................ 232,800 6,285,600
Nabisco Holdings Corp., Class A.......... 411,600 16,000,950
(A) Seaboard Corp............................ 76,450 20,335,700
Seagrams Company, Ltd.................... 432,300 16,751,625
(A) Van Melle NV............................. 916,266 75,360,424
------------
197,698,125
------------
Health Care (7.31%)
Apria Healthcare Group Inc............... 82,700 1,550,625
* Beverly Enterprises, Inc................. 3,254,400 41,493,600
Cognizant Corp........................... 1,494,900 49,331,700
(A)* FHP International Corp................... 2,143,300 79,570,013
Foundation Health Corp................... 1,531,300 48,618,775
(A)* Health Systems International Inc......... 1,526,400 37,778,400
* Horizon/CMS Healthcare Corp.............. 1,780,900 22,483,863
Imation Corp............................. 750,900 21,119,063
(R)* Kendall International, Inc., Residual
Ownership Certificates ................. 379 5,859
* Laboratory Corp. of America, Warrants.... 360,015 33,751
* Mid Atlantic Medical Services, Inc....... 2,180,100 29,158,838
Novartis AG.............................. 2,986 3,417,671
Novartis AG, Registered.................. 21,026 24,081,328
* Perrigo Co............................... 955,700 8,720,763
* Tenet HealthCare Corp.................... 3,824,100 83,652,188
United HealthCare Corp................... 699,800 31,491,000
------------
482,507,437
------------
Industrial (1.50%)
Crown Cork & Seal, Inc................... 405,046 22,024,376
Federal Mogul Corp....................... 392,100 8,626,200
Greif Brothers Corp...................... 182,800 5,164,100
ITT Industries Inc....................... 453,200 11,103,400
Lagardere SCA............................ 977,000 26,832,170
(A)(R)* Lancer Industries, Inc., Class B......... 3 43,591
Lucas Varity PLC......................... 3,421,590 13,041,830
New Holland NV........................... 311,200 6,496,300
Owens-Illinois Inc....................... 243,400 5,537,350
* PXL Holdings Corp........................ 21 15,372
------------
98,884,689
------------
Insurance (4.71%)
* 20th Century Industries.................. 261,100 4,406,063
* Alleghany Corp........................... 196,002 41,552,424
Allmerica Property & Casualty
Companies, Inc. ....................... 994,000 30,192,750
AON Corp................................. 36,400 2,261,350
Argonaut Group, Inc...................... 274,600 8,443,950
Enhance Financial Services Group, Inc.... 365,600 13,344,400
Financial Security Assurance Holdings Ltd. 474,500 15,599,188
General RE Corp.......................... 109,876 17,332,939
Home Beneficial Corp., Class B........... 465,200 17,619,450
ITT Hartford Group, Inc.................. 503,000 21,817,625
Kansas City Life Insurance Co............ 78,300 4,972,050
Old Republic International Corp.......... 1,554,480 41,582,340
Provident Companies, Inc................. 440,700 21,318,863
Providian Corp........................... 328,984 16,901,553
SAFECO Corp.............................. 267,000 10,529,813
Selective Insurance Group, Inc........... 386,854 14,700,452
The Paul Revere Corp..................... 254,800 9,491,300
Torchmark Inc............................ 180,400 9,110,200
Unitrin, Inc............................. 168,300 9,382,725
------------
310,559,435
------------
Metals (0.61%)
* Bayou Steel Corp......................... 195,600 513,450
Commercial Metals Co..................... 374,812 11,291,212
Cyprus Amax Minerals Co.................. 204,200 4,773,175
Inco Ltd................................. 133,463 4,263,449
Inco Ltd., Class VBN Shares.............. 110,500 2,682,724
(A)* Kreisler Manufacturing Corp.............. 54,470 241,711
LTV Corp................................. 421,700 5,007,688
Pitt Des Moines, Inc..................... 75,500 3,142,688
Reynolds Metals Co....................... 142,600 8,039,075
------------
39,955,172
------------
6
<PAGE>
Number Value
of Shares (Note A)
----------- -----------
Natural Resources (2.32%)
Amerada Hess Corp........................ 337,800 19,550,175
Ashland Inc.............................. 289,700 12,710,588
Bowater Inc. ............................ 12,400 466,550
* Crown Central Petroleum Corp., Class A... 90,100 1,114,988
* Crown Central Petroleum Corp., Class B... 700 8,400
Imperial Oil Ltd......................... 810,400 38,088,800
Royal Dutch Petroleum Co................. 221,000 37,735,750
Saga Petroleum A/S, A Shares............. 1,042,000 17,481,029
Shell Transport & Trading Co............. 1,100,000 19,013,602
Societe Elf Aquitane SA.................. 28,700 2,614,274
Temple Inland Inc........................ 83,500 4,519,438
------------
153,303,594
------------
Printing & Publishing (2.94%)
Daily Mail & General Trust PLC, Class A.. 1,284,500 28,980,137
Daily Mail & General Trust PLC, Ordinary. 65,000 1,592,318
Dun & Bradstreet Corp.................... 1,600,400 38,009,500
Houghton Mifflin Co...................... 375,100 21,240,038
Knight-Ridder, Inc....................... 447,800 17,128,350
Scripps (E.W.) Co., Class A.............. 773,400 27,069,000
United News & Media PLC.................. 5,033,517 60,101,438
------------
194,120,781
------------
Real Estate (2.38%)
* Al-Zar Ltd............................... 284 99,400
(A)* Alexander's Inc.......................... 386,000 30,542,250
* Cadillac Fairview Corp................... 2,648,216 38,672,790
* Cadillac Fairview Corp., Warrants........ 291,749 1,065,127
* Castle & Cooke, Inc...................... 112,933 1,792,811
(A)(R)* MSCW Investors I, L.L.C.................. 40,500,000 69,380,204
St. Joe Paper Co......................... 237,275 15,422,875
------------
156,975,457
------------
Retail (1.49%)
American Stores Co....................... 536,000 21,909,000
Delchamps Inc............................ 131,100 2,540,063
Dillard Department Stores Inc., Class A.. 379,100 11,704,713
Eckerd Corp.............................. 219,040 7,009,280
* Payless ShoeSource, Inc.................. 461,300 17,298,750
* Service Merchandise Co., Inc............. 913,600 3,882,800
* Vons Companies Inc....................... 569,100 34,074,864
------------
98,419,470
------------
Transportation (6.59%)
Burlington Northern Santa Fe Corp........ 79,800 6,892,725
Caliber Systems Inc...................... 376,800 7,253,400
Canadian National Railway Co............. 745,400 28,325,200
Canadian Pacific, Ltd.................... 299,000 7,923,500
Central Transport Rental Group, PLC...... 1,356,000 220,680
Central Transport Rental Group, ADR...... 1,085,514 407,068
Conrail Inc.............................. 768,999 76,611,525
Florida East Coast Industries, Inc....... 442,500 38,663,437
General Motors Corp...................... 1,777,800 99,112,350
Helikopter Services Group ASA............ 947,800 12,334,180
Railtrack Group PLC, Partly-Paid......... 7,758,000 51,499,383
Ryder Systems, Inc....................... 1,569,900 44,153,438
Volvo AB, B Shares....................... 1,489,300 32,865,775
XTRA Corp................................ 658,400 28,558,100
------------
434,820,761
------------
TOTAL COMMON STOCK &
OTHER EQUITY INTERESTS.................. 4,909,428,795
------------
PREFERRED STOCK (0.67%)
Chevy Chase Preferred Capital Corp.,
10.375% Pfd. A ......................... 42,000 2,173,500
Criimi Mae Inc., 10.875% Series B,
Conv., Pfd. ............................ 51,100 1,481,900
Crown Cork & Seal Inc.,
4.50% Conv. Pfd. ....................... 120,119 6,246,188
* Gentra Inc., Pfd. G...................... 157,500 2,075,773
Inco Ltd., 5.50% Series E,
Conv. Pfd .............................. 16,822 870,539
(R)* Interlake Corp., 9.00% Series A3
Conv. Pfd. ............................. 2,450 2,163,399
(A)(R) Lancer Industries, Inc., Series C Pfd.... 174,359 11,551,284
RJR Nabisco Holdings Corp., Class C Pfd.. 2,609,100 17,611,425
* Wundies Industries Inc., 11.25% Cum. Pfd. 30,892 65,646
------------
44,239,654
------------
7
<PAGE>
Number
of Shares
or Principal Value
Amount (Note A)
----------- -----------
CORPORATE BONDS AND NOTES: (0.76%)
Cadillac Fairview Corp., 12.00%,
7/31/05 .............................CAD 302,084 $ 209,543
Comcast Cellular Corp., 0%,
3/05/00, Series A ...................... 8,955,000 6,425,213
Consorcio G Grupo Dina SA,
0/12.00%, 11/15/02 ..................... 5,900,000 4,897,000
Consorcio G Grupo Dina SA,
8.00%, 8/08/04 ......................... 6,850,000 4,315,500
FRD Acquisition Co., Series B,
12.50%, 7/15/04 ........................ 2,250,000 2,295,000
Flagstar Companies Inc.,
10.75%, 9/15/01. ....................... 4,045,000 3,721,400
Flagstar Companies Inc.,
10.875%, 12/01/02 ...................... 625,000 575,000
* Gentra Inc., Series A, 7.50%,
12/31/01.............................CAD 2,820,000 2,573,838
* Gentra Inc., Series B, 7.50%,
12/31/01 ............................CAD 429,024 328,922
Georges Quick to Fix Foods Inc.,
Series B, 11.50%, 12/01/06, 144A ....... 2,500,000 2,587,500
Inflo Systems Inc., 10.00%,
1/01/07 ................................ 3,500,000 2,467,500
International Knife & Saw Inc.,
11.375%, 11/15/06 ...................... 2,450,000 2,535,750
Olivetti International NV, 3.75%,
12/31/99 ............................ITL 13,300,000,000 8,202,836
Phonetel Technologies Inc., 12.00%,
12/15/06 ............................... 2,075,000 2,147,625
Specialty Foods Corp., Series B,
11.25%, 8/15/03, Series B .............. 2,875,000 2,271,250
Stone Container Financial Corp.,
11.50%, 8/15/06, ....................... 2,540,000 2,616,200
Uniforet Inc., 11.125%,
10/15/06, .............................. 2,255,000 2,108,425
------------
50,278,502
------------
BONDS AND NOTES IN REORGANIZATIONS (1.01%)
* Adams County C0, Industrial Dev.
Auth., 9.00%, 11/01/96 ................. 16,729,000 836,450
* Ames Department Stores, Inc.,
Trade Claims ........................... 10,578,487 79,339
* Dow Corning Corp.,
Bank Debt............................JPY 600,000,000 4,921,855
* Dow Corning Corp., Bank Debt #1.......... 7,500,000 8,212,500
Principal Value
Amount (Note A)
----------- -----------
* Dow Corning Corp., Bank Debt #2.......... $ 1,391,595 $ 1,523,796
* Dow Corning Corp., Bank Debt #3.......... 2,738,952 2,999,152
* Dow Corning Corp., 9.50%, 8/10/95........ 1,250,000 1,375,000
* Dow Corning Corp., 9.375%, 2/01/08....... 1,300,000 1,423,500
* Dow Corning Corp., 8.15%, 10/15/29....... 5,280,000 5,649,600
* El Paso TX Housing Finance Corp.,
8.88%, 10/15/96 ........................ 9,355,000 491,138
* Eurotunnel Finance Limited, Bank
Debt, Tranche D......................BEF 490,000,000 6,023,166
* Eurotunnel Finance Limited,
Bank Debt, Tranche D1................BEF 73,000,000 897,329
* Eurotunnel Finance Limited,
Bank Debt, Tranche E.................ECU 600,000 293,763
* Eurotunnel Finance Limited,
Bank Debt, Tranche E.................FRF 75,500,000 5,678,881
* Eurotunnel Finance Limited,
Bank Debt, Tranche E1................FRF 23,835,020 1,792,798
* Eurotunnel Finance Limited,
Bank Debt, Tranche J.................GBP 2,924,547 1,953,906
* Louisiana Agriculture Finance
Authority, 8.25%, 10/01/96 ............. 3,450,000 181,125
* Louisiana Agriculture Finance
Authority, 8.80%, 10/01/96 ............. 775,000 40,687
* Louisiana Housing Finance
Authority, 8.61%, 8/01/96 .............. 11,530,000 576,500
* Memphis TN Health Facilities,
8.68%, 9/15/96 ......................... 7,110,000 373,275
* Metallurg Inc., Bank Claim............... 8,635,849 5,440,585
* Metallurg Inc., Bank Claim #2............ 5,780,806 2,904,855
* Metallurg Inc., Trade Claim.............. 1,610,968 451,071
* Mobilemedia Corp., Bank Claim............ 2,680,212 2,197,774
* Mobilemedia Corp., Bank Debt............. 4,144,000 3,315,200
* Southeast Banking Corp., 0%, 12/16/96.... 230,000 133,400
* Southeast Banking Corp., 4.75%, 10/15/97. 3,317,000 2,156,050
* Southeast Banking Corp., 0%, 11/06/97.... 1,250,000 725,000
* Southeast Banking Corp., 6.50%, 3/15/99.. 500,000 290,000
* Southeast Banking Corp., 10.50%, 4/11/01. 5,300,000 3,074,000
8
<PAGE>
Number
of Shares
or Principal Value
Amount (Note A)
----------- -----------
* Southeast Texas Housing Finance
Corp., 8.60%, 9/01/96 .................. $ 200,000 $ 11,000
* Tiphook Finance Corp.,
Lease Claim .........................GBP 235,146 382,685
------------
66,405,380
------------
COMPANIES IN LIQUIDATION (0.10%)
(A)* Aerospace Creditors Liquidating
Trust, Certificates of
Beneficial Interest..................... 279,703 1,013,923
* Americana Hotels & Realty Corp........... 325,300 365,963
(A)* City Investing Co., Liquidating Trust.... 4,314,037 4,044,410
* MBO Properties Inc....................... 167,437 376,733
* MCorp Financial Trust, Claim Units....... 64,189 437,446
* MCorp Trust, Claim Units................. 64,172 151,061
* Roeser & Pendelton....................... 2,800 3,629
------------
6,393,165
------------
UNITED STATES GOVERNMENT AND
GOVERNMENT AGENCY OBLIGATIONS (22.38%)
U.S. Government Agency Obligations (2.32%)
Federal Home Loan Bank System,
5.010%, 2/28/97......................... 25,000,000 24,986,525
5.106%, 2/23/98......................... 25,000,000 24,820,000
5.637%, 3/13/98......................... 50,000,000 49,917,500
Federal Home Loan Mortgage Corp,
5.170%, 3/24/97......................... 14,000,000 13,990,256
Federal National Mortgage Association,
5.860%, 7/03/97......................... 31,000,000 31,069,688
Tennessee Valley Authority, 6.000%,
1/15/97 ................................ 8,500,000 8,501,581
------------
153,285,550
------------
U.S. Government Agency Discount Notes (20.06%)
Federal Home Loan Bank System,
5.350%, 1/06/97......................... 3,500,000 3,497,399
5.280%, 1/08/97......................... 5,000,000 4,994,866
5.240%, 1/13/97......................... 9,000,000 8,984,280
5.240%, 1/15/97......................... 3,000,000 2,993,887
5.230%, 1/21/97......................... 20,000,000 19,941,889
5.450%, 1/24/97......................... 12,000,000 11,958,217
5.210%, 1/28/97......................... 13,000,000 12,949,202
5.260%, 1/31/97......................... 24,000,000 23,894,800
Principal Value
Amount (Note A)
----------- -----------
5.330%, 2/05/97......................... $ 7,250,000 $ 7,212,431
5.250%, 2/10/97......................... 12,000,000 11,930,000
5.210%, 2/13/97......................... 2,300,000 2,285,687
5.270%, 2/13/97......................... 8,500,000 8,446,495
5.240%, 2/14/97......................... 11,000,000 10,929,551
5.240%, 2/20/97......................... 16,500,000 16,379,917
5.230%, 2/21/97......................... 3,000,000 2,977,772
5.320%, 2/26/97......................... 4,500,000 4,462,760
5.400%, 3/03/97......................... 10,500,000 10,403,925
5.500%, 3/03/97......................... 21,735,000 21,536,125
5.410%, 3/04/97......................... 12,750,000 12,634,498
5.420%, 3/04/97......................... 10,000,000 9,909,410
5.500%, 3/04/97......................... 8,765,000 8,685,598
5.180%, 3/05/97......................... 20,000,000 19,811,700
5.490%, 3/12/97......................... 10,000,000 9,895,390
5.220%, 3/26/97......................... 15,000,000 14,815,905
5.640%, 4/04/97......................... 24,500,000 24,167,094
5.600%, 4/07/97......................... 18,000,000 17,745,120
5.520%, 4/09/97......................... 10,000,000 9,856,810
5.280%, 4/10/97......................... 2,000,000 1,970,576
5.210%, 4/14/97......................... 14,000,000 13,768,931
5.510%, 4/24/97......................... 11,500,000 11,310,124
5.290%, 4/30/97......................... 8,000,000 7,860,904
5.540%, 5/06/97......................... 10,300,000 10,112,952
5.430%, 5/09/97......................... 25,000,000 24,535,100
5.180%, 5/12/97......................... 14,500,000 14,224,051
5.320%, 5/23/97......................... 15,000,000 14,690,565
5.580%, 5/27/97......................... 36,500,000 35,725,799
5.140%, 5/29/97......................... 19,000,000 18,591,481
5.320%, 6/03/97......................... 8,000,000 7,822,520
5.150%, 6/09/97......................... 25,000,000 24,430,250
5.540%, 6/12/97......................... 2,000,000 1,953,020
5.245%, 6/20/97......................... 13,955,000 13,608,372
5.260%, 6/23/97......................... 10,000,000 9,749,150
5.310%, 6/23/97......................... 2,500,000 2,437,287
5.320%, 6/23/97......................... 7,500,000 7,311,863
5.330%, 6/09/97......................... 6,000,000 5,849,490
5.140%, 7/30/97......................... 15,000,000 14,540,625
5.120%, 8/04/97......................... 34,000,000 32,933,964
5.170%, 8/08/97......................... 21,000,000 20,339,529
5.110%, 8/12/97......................... 22,300,000 21,594,116
5.150%, 9/05/97......................... 10,000,000 9,639,790
5.190%, 9/26/97......................... 9,000,000 8,652,267
Federal Home Loan Mortgage Corp.,........
5.190%, 1/03/97......................... 2,300,000 2,299,337
9
<PAGE>
Principal Value
Amount (Note A)
----------- -----------
5.420%, 2/07/97......................... $20,000,000 $19,888,589
5.200%, 8/15/97......................... 7,000,000 6,771,492
Federal National Mortgage Association,
5.500%, 1/14/97......................... 11,000,000 10,978,153
5.190%, 1/16/97......................... 3,000,000 2,993,513
5.230%, 1/17/97......................... 15,000,000 14,965,133
5.230%, 1/21/97......................... 7,400,000 7,378,499
5.240%, 1/21/97......................... 6,000,000 5,982,533
5.270%, 1/28/97......................... 7,000,000 6,972,333
5.220%, 2/03/97......................... 9,000,000 8,956,935
5.220%, 2/04/97......................... 14,500,000 14,428,515
5.225%, 2/10/97......................... 13,000,000 12,924,528
5.225%, 2/18/97......................... 5,500,000 5,461,683
5.250%, 2/19/97......................... 12,000,000 11,914,250
5.290%, 2/27/97......................... 8,500,000 8,428,805
5.300%, 3/10/97......................... 18,000,000 17,817,084
5.370%, 3/17/97......................... 16,300,000 16,117,310
5.170%, 3/19/97......................... 25,000,000 24,718,725
5.260%, 4/03/97......................... 9,700,000 9,568,623
5.330%, 4/11/97......................... 9,300,000 9,164,118
5.220%, 4/17/97......................... 10,000,000 9,845,120
5.190%, 4/21/97......................... 15,000,000 14,758,920
5.280%, 4/28/97......................... 1,500,000 1,474,358
5.160%, 4/29/97......................... 2,700,000 2,653,449
5.150%, 5/02/97......................... 4,200,000 4,124,475
5.150%, 5/05/97......................... 9,000,000 8,837,874
5.420%, 5/09/97......................... 25,500,000 25,018,560
5.500%, 5/13/97......................... 4,500,000 4,413,704
5.500%, 5/15/97......................... 10,500,000 10,295,595
5.240%, 5/16/97......................... 14,500,000 14,215,626
5.230%, 5/19/97......................... 13,000,000 12,733,396
5.465%, 6/02/97......................... 31,500,000 30,805,740
5.150%, 6/05/97......................... 35,000,000 34,213,375
5.240%, 6/10/97......................... 31,000,000 30,280,800
5.570%, 6/13/97......................... 5,000,000 4,880,920
5.490%, 6/17/97......................... 7,300,000 7,123,231
5.240%, 6/30/97......................... 14,000,000 13,634,600
5.250%, 6/30/97......................... 7,000,000 6,817,300
5.260%, 7/08/97......................... 13,900,000 13,521,086
5.420%, 7/11/97......................... 28,800,000 28,002,384
5.120%, 7/18/97......................... 20,000,000 19,422,500
5.150%, 7/22/97......................... 34,800,000 33,774,861
5.160%, 7/24/97......................... 8,300,000 8,053,075
5.265%, 8/08/97......................... 15,000,000 14,520,945
Number of
Shares, Contracts
or Principal Value
Amount (Note A)
----------- -----------
5.120%, 8/18/97......................... $13,100,000 $ 12,662,512
5.130%, 8/22/97......................... 10,000,000 9,660,210
5.300%, 9/08/97......................... 68,000,000 65,492,500
5.130%, 9/18/97......................... 12,400,000 11,924,906
5.120%, 9/19/97......................... 5,000,000 4,814,400
-------------
1,322,660,034
-------------
OPTIONS (0.47%)
(R)* Cityscape Financial Corp.,
Jan/20/Call ............................ 1,311,000 30,972,375
-------------
TOTAL INVESTMENTS IN
SECURITIES (99.83%) .................... $6,583,663,455
=============
SECURITIES SOLD SHORT (0.40%)
* Arch Communications Group,
0%, 3/15/08... ......................... $ 2,100,000 $ 1,212,750
* J.C. Penney Co. Inc...................... 144,900 7,063,875
* Safeway Inc.............................. 411,600 17,595,900
-------------
25,872,525
-------------
WHEN ISSUED SECURITIES SOLD (0.13%)
* Covance Inc.............................. 59,000 1,239,000
* NCR Corp................................. 176,700 5,897,363
* Quest Diagnostics Inc.................... 93,300 1,411,163
-------------
8,547,526
-------------
TOTAL SECURITIES SOLD SHORT
AND WHEN ISSUED
SECURITIES SOLD
(0.53%) ................................ $34,420,051
=============
OPTIONS WRITTEN
* Boeing Co., May/100/Put.................. 425 $130,156
=============
* Non-income producing securities
(A) Affiliated issuers
(R) Restricted securities
The percentage shown for each investment category is the total value
of that category expressed as a percentage of total net assets of the
Fund.
10
<PAGE>
Currency Type Abbreviations:
Principal amount is stated in United States dollars unless
otherwise noted
ECU - European Currency Unit
BEF - Belgium franc
GBP - British pound
CAD - Canadian dollar
NLG - Dutch guilder
FRF - French franc
DEM - German Deutsche mark
JPY - Japanese yen
NOK - Norwegian krone
ITL - Italian Lira
SEK - Swedish krona
CHF - Swiss franc
Distribution of investments by country:
As a percentage of total investments in securities
United States......................................................... 84.8%
United Kingdom........................................................ 5.4%
Sweden................................................................ 5.4%
Netherlands........................................................... 1.7%
Other (individually less than 1%)..................................... 2.7%
------
Total................................................................. 100.0%
======
See notes to financial statements
11
<PAGE>
MUTUAL SHARES FUND
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1996
<TABLE>
<S> <C> <C>
ASSETS
Investments in Securities, at Value
Unaffiliated Issuers (Cost $4,915,314,976) ..................................... $5,930,209,382
Controlled Affiliated Issuers (Cost $62,358,380) ............................... 69,380,204
Non Controlled Affiliated Issuers (Cost $239,973,677) .......................... 584,073,869 $ 6,583,663,455
---------------
Cash ................................................................................ 9,226,503
Receivables:
Investment Securities Sold ..................................................... 55,209,282
Capital Stock Subscribed ....................................................... 10,291,698
Dividends ...................................................................... 5,968,298
Interest ....................................................................... 4,301,983
Other .......................................................................... 914,342
Fee Reimbursed ................................................................. 967,446
Deposits with Brokers for Securities Sold Short ..................................... 4,337,110
---------------
TOTAL ASSETS ............................................................... 6,674,880,117
---------------
LIABILITIES
Payables:
Investment Securities Purchased ................................................ 33,271,660
Net Payable for Foreign Currency Exchange Contracts ............................ 4,698,284
Investment Advisory Fee ........................................................ 3,212,553
Capital Stock Repurchased ...................................................... 2,718,108
Accrued Expenses and Other Liabilities ......................................... 1,859,381
Securities Sold Short and When Issued Securities Sold Short, at Value
(Proceeds Receivable $35,202,106) .............................................. 34,420,051
Outstanding Options Written, at Value (Premium Received $184,656) ................... 130,156
---------------
TOTAL LIABILITIES .......................................................... 80,310,193
---------------
NET ASSETS APPLICABLE TO OUTSTANDING CAPITAL STOCK .................................. $ 6,594,569,924
===============
COMPOSITION OF NET ASSETS
Paid in Capital ..................................................................... $ 5,143,648,102
Distributed in Excess of Net Investment Income ...................................... (3,613,636)
Accumulated Net Realized Gain on Investments and Foreign Currency Transactions ...... 92,299,922
Net Unrealized Appreciation of Investments, Securities Sold Short and Options Written 1,366,852,977
Net Unrealized Depreciation of Foreign Currency Exchange Contracts and Dividends .... (4,617,441)
---------------
TOTAL NET ASSETS ........................................................... $ 6,594,569,924
===============
Class Z
Net asset value per share (Offering and Redemption Price Per Share)
($6,543,063,383 / 70,472,770 shares outstanding) ........................... $ 92.85
===============
Class I
Net asset value per share ($34,633,813 / 373,178 shares outstanding) ........... $ 92.81
===============
Maximum Offering Price ($92.81 / 95.50%) ....................................... $ 97.18
===============
Class II
Net asset value per share ($16,872,728 / 181,853 shares outstanding) ........... $ 92.78
===============
Maximum offering price ($92.78 / 99.0%) ........................................ $ 93.72
===============
</TABLE>
See notes to financial statements.
12
<PAGE>
MUTUAL SHARES FUND
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996
<TABLE>
<S> <C> <C>
INVESTMENT INCOME:
Income:
Dividends -- Unaffiliated Issuers
(Net of Foreign Withholding-- $2,709,315) ............................ $134,441,203
Dividends-- Non Controlled Affiliated Issuers
(Net of Foreign Withholding-- $48,674) ............................... 14,013,469
Interest ............................................................... 72,882,658
------------
TOTAL INCOME ................................................................ $221,337,330
Expenses:
Investment Advisory Fees ............................................... 35,687,092
Shareholder Servicing Costs ............................................ 2,980,646
Administrative ......................................................... 2,513,342
Distribution Fees
Class I .............................................................. 7,973
Class II ............................................................. 10,314
Custodian Fees ......................................................... 390,735
Registration and Filing Fees ........................................... 224,858
Shareholder Reports .................................................... 194,615
Legal Fees ............................................................. 185,275
Auditing Fees .......................................................... 140,217
Insurance .............................................................. 126,131
Directors' Fees and Expenses ........................................... 78,861
Miscellaneous .......................................................... 75,463
------------
TOTAL EXPENSES .............................................................. 42,615,522
---------------
Less Expenses Reimbursed ............................................... (967,446)
TOTAL EXPENSES LESS REIMBURSEMENT ...................................... 41,648,076
---------------
NET INVESTMENT INCOME ....................................... 179,689,254
---------------
REALIZED AND UNREALIZED GAIN/(LOSS) ON INVESTMENTS
Net Realized Gain on Investments and Foreign Currency Transactions
in Unaffiliated Issuers .............................................. 478,015,197
Net Realized Gain on Investments
in Non Controlled Affiliated Issuers ................................. 125,811
Net Realized Loss on Securities Sold Short ............................. (11,715,019)
Net Realized Gain on Options Written ................................... 367,153
Change in Unrealized Appreciation of Investments, Securities Sold Short,
Options Written and Foreign Currency Transactions .................... 478,415,187
---------------
NET GAIN ON INVESTMENTS ..................................... 945,208,329
---------------
NET INCREASE IN NET ASSETS FROM OPERATIONS .................................. $ 1,124,897,583
===============
</TABLE>
See notes to financial statements.
13
<PAGE>
MUTUAL SHARES FUND
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Year Ended December 31,
1996 1995
---------------------------------
<S> <C> <C>
INCREASE/(DECREASE) IN NET ASSETS FROM OPERATIONS:
Net Investment Income ............................................ $ 179,689,254 $ 113,283,268
Net Realized Gain on Investments and Foreign Currency Transactions 466,793,142 711,760,828
Change in Unrealized Appreciation of Investments ................. 478,415,187 311,202,838
--------------- ---------------
NET INCREASE IN NET ASSETS
FROM OPERATIONS ........................................... 1,124,897,583 1,136,246,934
--------------- ---------------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net Investment Income
Class Z ........................................................ (161,313,930) (102,773,385)
Class I ........................................................ (548,439) --
Class II ....................................................... (259,046) --
Net Realized Gain on Investments
Class Z ........................................................ (560,755,894) (674,837,860)
Class I ........................................................ (1,352,354) --
Class II ....................................................... (652,745) --
--------------- ---------------
TOTAL DISTRIBUTIONS TO SHAREHOLDERS .......................... (724,882,408) (777,611,245)
--------------- ---------------
CAPITAL STOCK TRANSACTIONS:
Class Z ........................................................ 911,577,294 1,125,212,286
Class I ........................................................ 35,916,388 --
Class II ....................................................... 17,487,150 --
--------------- ---------------
NET INCREASE IN NET ASSETS ............................................ 1,364,996,007 1,483,847,975
NET ASSETS:
Beginning of Year ................................................ 5,229,573,917 3,745,725,942
--------------- ---------------
End of Year -- Including Distributions in Excess of Net Investment
Income of $3,613,636 and $12,074,214, respectively ............. $ 6,594,569,924 $ 5,229,573,917
=============== ===============
</TABLE>
See notes to financial statements
14
<PAGE>
MUTUAL SHARES FUND
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
NOTE A -- SIGNIFICANT ACCOUNTING POLICIES
Mutual Shares Fund is a portfolio of Franklin Mutual Series Fund Inc. (the
"Series Fund"), which is registered under the Investment Company Act of 1940 as
a diversified open-end management investment company. The Series Fund currently
consists of five portfolios: Mutual Shares Fund, Mutual Qualified Fund, Mutual
Beacon, Mutual Discovery Fund and Mutual European Fund. Each of these portfolios
is considered to be a separate entity for financial reporting and Federal income
tax purposes. The financial statements and notes include operations with respect
to Mutual Shares Fund (the "Fund") only.
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. The
policies are in conformity with generally accepted accounting principles.
Security Valuation: Investments in securities and securities sold short
that are listed on an exchange or the NASDAQ national market or other securities
traded in the over-the-counter market are valued at the last reported sales
price on the day of valuation; however, if there are no sales on that day, such
securities are valued at the mean between the closing bid and asked prices.
Securities for which market quotations are not readily available are valued at
"fair value" as determined in good faith by management under the direction of
the Board of Directors. Fair value reflects what management believes is the bid
price for the securities and is based on estimates and assumptions deemed
relevant under the circumstances. Actual results could differ from these
estimates. Temporary investments are valued at the prevailing market value.
Restricted Securities: The Fund invests in securities which are restricted
as to public sale in accordance with the Securities Act of 1933. Such assets are
valued at fair value as determined in good faith by management under the
direction of the Board of Directors. It is the Fund's policy that no more than
15%, as determined at the time of investment, of the value of the Fund's assets
be invested in restricted securities.
Foreign Securities: The value of foreign securities is converted into U.S.
dollars at the rate of exchange prevailing on the day of valuation. Purchases
and sales of foreign securities, as well as income and expenses relating to such
securities, are converted at the prevailing rate of exchange on the respective
date of such transactions.
Foreign Exchange Contracts: The Fund may engage in currency transactions
in order to hedge the value of portfolio holdings denominated in foreign
currencies against fluctuations in relative value. Foreign Exchange contracts
are valued at the forward rate, and are marked-to-market daily. The change in
market value is recorded by the Fund as an unrealized gain or loss. 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 use of currency transactions can result in
the Fund incurring losses as a result of a number of factors including the
imposition of exchange controls, suspension of settlements, or the inability to
deliver or receive a specified currency. The Fund does not isolate that portion
of the results of operations resulting from changes in foreign exchange rates on
investments from the fluctuations arising from changes in market prices of
securities held. Such fluctuations are included with the net realized and
unrealized gain or loss from investments.
Options Written: When the Fund writes an option, the premium received is
recorded as a liability with subsequent daily adjustment to current market
value. When the Fund enters into a closing transaction or the option expires or
is exercised, the Fund realizes a gain or loss, and the liability is eliminated.
All securities covering outstanding options are held in a segregated account by
the custodian bank.
Securities Sold Short: The Fund is engaged in selling securities short,
which obligates the Fund to replace a security borrowed by purchasing the same
security at the current market value. The Fund would incur 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 would realize a gain if
the price of the security declines between those dates.
15
<PAGE>
MUTUAL SHARES FUND
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
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 also maintain a cash deposit
with the broker having a value equal to a specified percentage of the value of
the securities sold short.
Securities Transactions and Investment Income: Securities transactions are
recorded on a trade-date basis. Securities gains or losses are determined on the
identified cost basis. Dividend income is recorded on the ex-dividend date or,
for certain foreign dividends, as soon as the Fund becomes aware of the
dividends. Interest income, including original issue discount, where applicable,
is recorded on the accrual basis, except for bonds trading "flat", in which case
interest is recorded when received.
Dividends and Distributions to Shareholders: Income dividends and capital
gain distributions are determined in accordance with income tax regulations
which may differ from generally accepted accounting principles. These
differences are primarily due to differing treatments of income and gains on
various investment securities held by the Fund, timing differences and differing
characterization of distributions made by the Fund. Differences in the
recognition or classification of income between the financial statements and tax
earnings and profits which result in temporary over-distribution for financial
statement purposes are classified as distributions in excess of net investment
income or accumulated net realized gains.
Federal Income Taxes: The Fund qualifies, and intends to continue to meet
the requirements for qualification, as a regulated investment company, as
defined in applicable sections of the Internal Revenue Code ("Code"). By
complying with Code provisions, the Fund is relieved from Federal income tax
provided that substantially all of its taxable income is distributed to
shareholders. Therefore, no Federal income tax provision has been provided.
NOTE B -- MERGER OF HEINE SECURITIES AND FRANKLIN RESOURCES
On October 31, 1996, pursuant to an agreement between Franklin Resources,
Inc. ("FRI") and Heine Securities Corporation ("Heine"), the investment adviser,
the assets of Heine were acquired by Franklin Mutual Advisers, Inc. ("FMA"), a
subsidiary of FRI. FMA became the investment adviser to the Series Fund and the
Series Fund name changed from Mutual Series Fund Inc. to Franklin Mutual Series
Fund Inc.
NOTE C -- INVESTMENT ADVISORY FEES AND OTHER TRANSACTIONS WITH AFFILIATES
Certain officers of the Fund are also directors or officers of FMA,
Franklin Templeton Distributors, Inc. ("FTD") and Franklin Templeton Investor
Services, Inc. ("FTIS"), the Fund's investment adviser, principal underwriter
for Class I and II, and transfer agent, respectively.
For the period ended December 31, 1996, the Advisers received fees of
$35,687,092 for investment management and advisory services under the investment
advisory agreements. The fee was paid monthly based on average daily net assets
at the annual rate of six-tenths of one percent. Prior to November 1, 1996,
administrative personnel and services were provided at approximate cost by
Heine. On November 1, 1996 Franklin Templeton Services, Inc. ("FTSI") became the
Fund's administrative manager. The Fund pays FTSI monthly its allocated share of
an administrative fee of 0.15% per annum on the first $200 million of the Series
Fund's aggregate average daily net assets, 0.135% of the next $500 million,
0.10% of the next $500 million and 0.075% per annum of such average net assets
in excess of $1.2 billion. The Fund paid FTSI fees of $840,707 through December
31, 1996. In connection with the merger, FRI and FMA agreed through October 31,
1999, to limit the expense ratio of the Fund to be no higher than expected for
the Fund's 1996 fiscal year, except that increases in expenses will be permitted
if the Fund's Board of Directors determines that such expenses would have been
higher had the merger not taken place. This expense limitation does not include
items such as litigation expenses, interest, taxes, insurance, brokerage
commissions and expenses of an extraordinary nature. The Franklin Group and FMA
have also voluntarily reimbursed the Fund for additional 1996 expenses of
$341,119. The total of all reimbursements is set forth in the statement of
operations. For the period ended December 31, 1996, FTD received net commissions
of $99,326 from the sale of the Fund's shares and FTIS received fees of
$591,146.
16
<PAGE>
MUTUAL SHARES FUND
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
Clearwater Securities, Inc. ("Clearwater") is a registered securities
dealer which is owned by Michael F. Price, President of FMA. Through October 31,
1996, the Fund executed certain security transactions with Clearwater, and paid
brokerage commissions totaling $755,142. Effective November 1, 1996, security
transactions were no longer executed with Clearwater.
Under the distribution plans for Class I and II shares, the Fund
reimburses FTD quarterly for FTD's costs and expenses in connection with any
activity that is primarily intended to result in a sale of Fund shares, subject
to a maximum of 0.35% and 1.00% per annum of the average daily net assets of
Class I and II shares, respectively. Class II shares redeemed within 18 months
are subject to a contingent deferred sales charge. There were no contingent
deferred sales charges paid to FTD for the period ended December 31, 1996.
NOTE D -- INVESTMENT TRANSACTIONS
Purchases and proceeds from the sale of investment securities (excluding
short-term investments) for the year ended December 31, 1996 aggregated
$3,077,044,487 and $2,853,815,553, respectively.
For Federal income tax purposes, the identified cost of investments at
December 31, 1996 was $5,220,152,733. Net unrealized appreciation for all
securities at December 31, 1996, based on Federal income tax cost, amounted to
$1,363,510,722, consisting of aggregate gross unrealized appreciation of
$1,427,909,658 and aggregate gross unrealized depreciation of $64,398,936.
Transactions in options written during the year ended December 31, 1996
were as follows:
Principal
Amount or
Number of
Contracts Premium
-------- -----------
Options outstanding at December 31, 1995 .. 110 $ 13,832
Options written ........................... 141,850 1,001,843
Options expired ........................... (138,770) (329,825)
Options terminated in closing transactions (1,190) (199,833)
Options exercised ......................... (1,575) (301,361)
-------- -----------
Options outstanding at December 31, 1996 .. 425 $ 184,656
======== ===========
NOTE E -- RESTRICTED SECURITIES
A summary of the restricted securities held at December 31, 1996 follows:
<TABLE>
<CAPTION>
Acquisition
Name of Issuer Date Value
- ------------- --------- -------------
<S> <C> <C>
Common Stock & Other Equity Interests
Kendall International, Inc., Residual Ownership Certificates ...... 7/06/92 $ 5,859
Lancer Industries, Inc., Class B .................................. 8/11/89 43,591
MSCW Investors I, L.L.C ........................................... 12/27/95 69,380,204
Sunbeam Corp. ..................................................... 2/23/90 246,457,058
Preferred Stock
Interlake Corp., 9.00%, Series A3 Conv. Pfd. ...................... 6/17/92 2,163,399
Lancer Industries, Inc., Series C Pfd. ............................ 8/11/89 11,551,284
------------
Option
Cityscape Financial Corp., January/20/Call ........................ 11/25/96 30,972,375
------------
Total restricted securities: (Cost $115,302,424) (5.47% of Net Assets) $360,573,770
============
</TABLE>
17
<PAGE>
MUTUAL SHARES FUND
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
NOTE F -- INVESTMENT IN AFFILIATES*
<TABLE>
<CAPTION>
Balance of Shares Gross Sales Balance of Shares Value Dividend Income
Held Dec. 31, Gross Purchases and Held Dec. 31, Dec. 31, Jan. 1-Dec. 31,
Name of Issuer: 1995 and Additions Reductions 1996 1996 1996
- ---------------------------------- ----------------- --------------- ----------- ----------------- -------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Controlled Affiliates**
MSCW Investors I, L.L.C .......... 40,500,000 -- -- 40,500,000 $ 69,380,204 --
------------ -----------
Total Controlled Affiliates .... $ 69,380,204 --
============ ===========
Non Controlled Affiliates
Aerospace Creditors
Liquidating Trust, Certificates
of Beneficial Interest ........ 279,703 -- -- 279,703 $ 1,013,923 --
Alexander's Inc. ................. 386,000 -- -- 386,000 30,542,250 --
Americana Hotels & Realty Corp. .. 325,300 -- -- 325,300 *** --
City Investing Co.,
Liquidating Trust ............. 4,314,037 -- -- 4,314,037 4,044,410 --
FHP International Corp. .......... 2,121,100 22,200 -- 2,143,300 79,570,013 --
Fab Industries, Inc. ............. 218,500 112,600 -- 331,100 9,105,250 $ 212,065
Fund American Enterprise
Holdings, Inc. ................ 657,782 -- -- 657,782 62,982,627 526,226
Genessee Corp., Class A .......... 15,911 -- -- 15,911 672,240 28,640
Genessee Corp., Class B .......... 103,550 -- -- 103,550 4,374,988 186,390
Health Systems International Inc. 916,000 610,400 -- 1,526,400 37,778,400 --
Hexcel Corp. ..................... 1,721,098 -- -- 1,721,098 *** --
Kreisler Manufacturing Corp. ..... 54,470 -- -- 54,470 241,711 --
Lancer Industries, Inc., Class B . 3 -- -- 3 43,591 --
Lancer Industries, Inc.,
Series C Pfd. ................. 174,359 -- -- 174,359 11,551,284 11,464,120
Management Assistance, Inc.,
Liquidating Trust ............. 1,358,500 -- 1,358,500 *** *** ***
Seaboard Corp. ................... 76,450 -- -- 76,450 20,335,700 76,450
Sunbeam Corp. .................... 11,260,174 -- -- 11,260,174 246,457,058 450,407
Van Melle NV ..................... 905,612 10,654 -- 916,266 75,360,424 1,069,171
------------ -----------
Total Non Controlled Affiliates $584,073,869 $14,013,469
============ ===========
</TABLE>
* Affiliated issuers, as defined in the Investment Company Act of 1940, are
issuers in which the Fund held 5% or more of the outstanding voting
securities.
** Issuer in which the Fund owns 25% or more of the outstanding voting
securities.
*** As of December 31, 1996 no longer an affiliate.
18
<PAGE>
MUTUAL SHARES FUND
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
NOTE G -- FOREIGN CURRENCY EXCHANGE CONTRACTS
At December 31, 1996, the Fund had various contracts which obligate the
Fund to deliver currencies at specified future dates. Open contracts were as
follows:
<TABLE>
<CAPTION>
Net Unrealized
Contracts to Deliver In Exchange for Settlement Date Value Appreciation/(Depreciation)
-------------------- --------------- --------------- -------------- ---------------------------
<S> <C> <C> <C> <C> <C> <C>
Sales
BEF 205,495,000 $ 6,613,936 2/07/97 $ 6,478,518 $ 135,418
CAD 118,105,808 88,736,963 5/30/97 87,010,256 1,726,707
CHF 44,538,697 34,045,135 3/10/97 33,501,873 543,262
DEM 15,384,349 10,332,414 3/18/97 10,048,169 284,245
FRF 202,494,241 39,270,078 2/28/97 39,181,981 88,097
GBP 43,686,119 67,855,631 2/18/97 74,760,537 (6,904,906)
GBP 35,000,000 58,049,250 3/18/97 59,851,225 (1,801,975)
GBP 60,559,948 93,863,924 5/16/97 103,383,584 (9,519,660)
GBP 35,000,000 57,876,000 6/18/97 59,690,435 (1,814,435)
GBP 35,387,367 58,382,079 8/18/97 60,240,163 (1,858,084)
ITL 11,952,322,917 7,795,410 1/02/97 7,884,118 (88,708)
ITL 11,952,322,917 7,752,942 7/02/97 7,833,936 (80,994)
JPY 534,000,000 4,976,701 3/19/97 4,660,294 316,407
NLG 128,338,477 78,226,549 3/06/97 74,638,393 3,588,156
NLG 125,991,363 75,180,187 3/17/97 73,328,171 1,852,016
NOK 130,000,000 20,328,699 3/10/97 20,446,344 (117,645)
NOK 74,696,402 11,527,223 6/09/97 11,798,413 (271,190)
SEK 601,585,799 90,551,177 1/21/97 88,278,273 2,272,904
SEK 310,636,543 46,817,866 2/18/97 45,640,687 1,177,179
SEK 479,708,647 72,486,721 5/15/97 70,760,470 1,726,251
SEK 542,166,407 82,140,203 7/21/97 80,219,030 1,921,173
SEK 338,923,356 51,223,964 8/15/97 50,201,564 1,022,400
-------------- -------------- -----------
$1,064,033,052 $1,069,836,434 (5,803,382)
============== ============== -----------
Purchases
$ 4,990,002 CHF 6,498,480 3/10/97 $ 4,888,137 (101,865)
3,808,001 FRF 20,000,000 2/28/97 3,869,935 61,934
20,495,161 GBP 12,895,849 5/16/97 22,014,865 1,519,704
7,804,324 ITL 11,952,322,917 1/02/97 7,884,118 79,794
3,785,624 NLG 6,340,920 3/17/97 3,690,476 (95,148)
13,005,496 SEK 86,179,293 1/21/97 12,646,175 (359,321)
----------- ----------- -----------
$53,888,608 $54,993,706 1,105,098
=========== =========== -----------
$(4,698,284)
===========
</TABLE>
Currency type abbreviations are explained on page 11.
19
<PAGE>
MUTUAL SHARES FUND
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
NOTE H -- CAPITAL STOCK
Effective November 1, 1996, the Fund offered three classes of shares:
Class Z, Class I and Class II. All Fund shares outstanding before that date were
designated Class Z shares. All classes of shares have the same attributes,
except for their initial sales load, distribution fees, voting rights affecting
a single class and the exchange privilege of each class. At December 31, 1996,
there were 300 million shares authorized ($0.001 par value). Transactions in
capital stock were as follows:
<TABLE>
<CAPTION>
Class Z
-------------------------------------------------------------------
Year Ended December 31,
-------------------------------------------------------------------
1996 1995
------------------------------ ---------------------------------
Shares Amount Shares Amount
------ ------ ------ ------
<S> <C> <C> <C> <C>
Shares sold .............................. 8,816,934 $ 806,551,841 7,891,894 $ 708,857,120
Shares issued in reinvestment of dividends 7,201,944 662,499,126 8,345,334 718,907,620
Shares redeemed .......................... (6,037,372) (557,473,673) (3,348,189) (302,552,454)
---------- ------------- ----------- ---------------
Net Increase ........................... 9,981,506 $ 911,577,294 12,889,039 $ 1,125,212,286
========== ============= =========== ===============
</TABLE>
Class I
----------------------------
For the period
November 1, 1996
to December 31, 1996
----------------------------
Shares Amount
------ ------
Shares sold .................................. 381,958 $ 36,900,354
Shares issued in reinvestment of dividends ... 17,819 1,639,210
Shares redeemed .............................. (26,599) (2,623,176)
-------- ------------
Net Increase ............................... 373,178 $ 35,916,388
======== ============
Class II
----------------------------
For the period
November 1, 1996
to December 31, 1996
----------------------------
Shares Amount
------ ------
Shares sold .................................. 174,376 $ 16,809,900
Shares issued in reinvestment of dividends ... 8,879 816,609
Shares redeemed .............................. (1,402) (139,359)
-------- ------------
Net Increase ............................... 181,853 $ 17,487,150
======== ============
Effective January 31, 1997, there was a 5-for-1 stock split and authorized
shares were increased to 1.5 billion.
20
<PAGE>
MUTUAL SHARES FUND
FINANCIAL HIGHLIGHTS
(Selected data for a share of capital stock outstanding throughout each year)
<TABLE>
<CAPTION>
Class Z
-------------------------------------------------------------------------------------------------
Year Ended December 31,
--------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992 1991 1990 1989 1988 1987
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Year ............ $86.45 $78.69 $80.97 $73.36 $64.49 $56.39 $67.16 $67.77 $57.83 $60.43
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Income from Investment
Operations:
Net Investment Income ........ 2.77 1.99 1.34 1.41 1.55 2.04 3.32 4.03 2.64 2.23
Net Gains or Losses on
Securities (realized and
unrealized) ................ 14.80 20.51 2.28 13.89 12.07 9.69 (9.86) 6.00 14.98 1.78
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total from Investment
Operations ................. 17.57 22.50 3.62 15.30 13.62 11.73 (6.54) 10.03 17.62 4.01
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Less Distributions:
Dividends (from net investment
income) .................... 2.48 1.93 1.34 1.38 1.59 2.00 3.34 4.09 2.63 2.52
Distributions
(from capital gains) ...... 8.69 12.81 4.56 6.31 3.16 1.63 .89 6.55 5.05 4.09
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total Distributions ........ 11.17 14.74 5.90 7.69 4.75 3.63 4.23 10.64 7.68 6.61
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Net Asset Value,
End of Year .................. $92.85 $86.45 $78.69 $80.97 $73.36 $64.49 $56.39 $67.16 $67.77 $57.83
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
Total Return* .................. 20.76% 29.11% 4.53% 21.00% 21.33% 20.99% (9.82)% 14.93% 30.69% 6.34%
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
Ratios/Supplemental Data:
Net Assets, End of Year
(millions) ................... $6,543 $5,230 $3,746 $3,527 $2,913 $2,640 $2,521 $3,403 $2,551 $1,685
Ratio of Expenses to
Average Net Assets ........... .70%++ .69% .72% .74% .78% .82% .85% .65%+ .67%+ .69%
Ratio of Net Investment Income
to Average Net Assets ........ 3.02%++ 2.47% 1.80% 1.90% 2.18% 3.08% 4.88% 5.75%+ 4.16%+ 3.32%
Portfolio Turnover Rate ........ 58.35% 79.32% 66.55% 48.78% 41.06% 47.89% 43.41% 71.54% 89.67% 77.72%
Average Commission Per Share ... $.041 -- -- -- -- -- -- -- -- --
</TABLE>
+ After reduction of expenses by the Investment Adviser. Had the Investment
Adviser not undertaken such action, the ratios of operating expenses and
net investment income would have been .67% and 5.55% in 1989 and .74% and
4.09% in 1988.
++ After reduction of expenses by the Investment Adviser as described in Note
C. Had the Investment Adviser not undertaken such action, the ratios of
operating expenses and net investment income would have been .72% and
3.00%, respectively.
21
<PAGE>
MUTUAL SHARES FUND
FINANCIAL HIGHLIGHTS
(Selected data for a share of capital stock outstanding throughout each period)
Class I Class II
------------------ -------------------
For the period For the period
November 1, 1996+ November 1, 1996+
to December 31, 1996 to December 31, 1996
------------------ -------------------
Net Asset Value,
Beginning of Period .................. $94.49 $94.49
------- -------
Income from Investment Operations:
Net Investment Income ................ 1.03 0.97
Net Gains or Losses on Securities
(realized and unrealized) .......... 5.43 5.41
------- -------
Total from Investment Operations ..... 6.46 6.38
------- -------
Less Distributions:
Dividends (from net investment
income) ............................ 2.35 2.30
Distributions (from capital gains) ... 5.79 5.79
------- -------
Total Distributions ................ 8.14 8.09
------- -------
Net Asset Value,
End of Period ........................ $92.81 $92.78
======= =======
Total Return ........................... 6.91%a 6.82%b
======= =======
Ratios/Supplemental Data:
Net Assets, End of Year
(millions) ........................... $35 $17
Ratio of Expenses to
Average Net Assets ................... 1.09%** 1.71%**
Ratio of Net Investment Income
to Average Net Assets ................ 2.44%** 1.69%**
Portfolio Turnover Rate ................ 58.35% 58.35%
Average Commission Per Share ........... $0.041 $0.041
a Total return does not reflect sales commissions. Not annualized for
periods of less than one year.
b Total return does not reflect sales commissions, or the deferred
contingent sales charges. Not annualized for periods of less than one
year.
** Annualized. After reduction of expenses by the Investment Adviser as
described in Note C. Had the Investment Adviser not undertaken such
action, the ratios of operating expenses and net investment income would
have been 1.18% and 2.35%, respectively for Class I and 1.80% and 1.60%,
respectively for Class II.
+ Commencement of offering of sale.
22
<PAGE>
FRANKLIN MUTUAL SERIES FUND INC.
51 John F. Kennedy Parkway
Short Hills, New Jersey 07078
1-800-448-3863 201-912-2100
BOARD OF DIRECTORS
Michael F. Price (Chairman)
Edward I. Altman, Ph.D.
Ann Torre Grant
Andrew H. Hines, Jr.
Peter A. Langerman
William J. Lippman
Bruce A. MacPherson
Fred R. Millsaps
Leonard Rubin
Barry F. Schwartz
Vaughn R. Sturtevant, M.D.
Robert E. Wade
OFFICERS
Michael F. Price, President
Peter A. Langerman, Exec. Vice President
Jeffrey A. Altman, Vice President
Robert L. Friedman, Vice President
Raymond Garea, Vice President
Lawrence N. Sondike, Vice President
James R. Baio, Treasurer
Stuart C. Pistol, Assistant Treasurer
Liz Cohernour, Gen. Counsel & Secretary
Larry L. Greene, Assistant Secretary
Lily Simo, Assistant Secretary
Karen L. Skidmore, Assistant Secretary
INDEPENDENT AUDITORS
Ernst & Young LLP
200 Clarendon Street
Boston, Ma. 02116
COUNSEL
Skadden, Arps, Slate, Meagher & Flom
919 Third Avenue
New York, N.Y. 10022
CUSTODIAN
State Street Bank and Trust Company
225 Franklin Street
Boston, Ma. 02110
TRANSFER AGENT
Franklin Templeton Investor Services, Inc.
PRINCIPAL UNDERWRITER
Franklin Templeton Distributors, Inc.
