<
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 European Fund. The report is
not authorized for distribution to prospective investors in the Fund unless
preceded or accompanied by an effective prospectus.
MUTUAL
EUROPEAN
FUND
[Logo]
ANNUAL
REPORT
December 31, 1996
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Mutual European Fund -- Class Z
Yearly Performance
Total Return*
1996.................................................................... 14.61%
- --------------------------------------------------------------------------------
Comparison of Changes in Value of $10,000 Investment in Mutual European Fund
MSCI AC Europe Index
[The following table was represented as a line graph in the printed material.]
Mutual European MSCI AC Europe
Class Z Index
--------------- --------------
Jul-96 10000 10000
Aug-96 10430 10193
Sep-96 10640 10401
Oct-96 10840 10638
Nov-96 11260 11173
Dec-96 11461 11395
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Aggregate Total Returns** Since November 1, 1996
Mutual European -- Class I.......86% Mutual European -- Class II.......4.46%
* 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 EUROPEAN FUND:
Mutual European began on July 3rd, 1996, at a crossroads for European
financial markets. On one hand restructurings and mergers continued to reap
value for shareholders. On the other hand, the onerous requirements of the
Maastricht criteria continued to suppress a sustained recovery for local
businesses. The only escapees from economic stagnation were the rebels of
Western Europe: Norway, which declined entry into the European Union (EU), and
Sweden and the UK both of whom have lowered their currencies relative values in
order to regain a competitive edge.
This "good news/bad news" situation summarizes the markets as well as the
economies. The bad news is companies can face problems that we do not dream of
in the United States. Examples include France's inflexible job market and
Britain's Labour Party threat of windfall taxes. The good news is simply this:
Europe is the stellar restructuring locale of the world. Stagnant markets have
forced intelligent managements to overhaul their firms. As certain industries
compete on a global scale, all competitors must face the same challenges: a
merger in the U.S. affects a competitor in Germany. The company in Germany must
respond efficiently or dwindle away.
There will be fits and starts, but the signs are encouraging. Several
markets are contemplating share-buybacks; and cross border acquisitions are
accelerating (although cross border mergers remain elusive). We watch these
changes with great interest.
Mutual European's research team consists of a dozen analysts who use their
expertise to analyze businesses on both sides of the Atlantic. The analyst who
covers Merck (of New Jersey) understands Novartis (of Basel, Switzerland). The
analysts who learned their trade investing in U.S. restructurings are applying
their knowledge to Sweden and France.
We feel no obligation to chase any particular market. We don't invest your
money in any locale unless we find assets trading at a substantial discount to
their true worth. We appreciate your joining our fund in its opening days.
Sincerely,
MICHAEL F. PRICE, President
3
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4
<PAGE>
MUTUAL EUROPEAN FUND
SCHEDULE OF INVESTMENTS
DECEMBER 31, 1996
Number Value
of Shares (Note A)
--------- --------
COMMON STOCK & OTHER EQUITY INTERESTS (56.93%)
Banking (1.45%)
Banco Pastor SA.......................... 2,061 $ 132,082
Chase Manhattan Corp..................... 10,000 892,500
Den Danske Bank.......................... 29,500 2,379,436
Den Norske Bank ASA...................... 332,500 1,277,242
* Sparbanken Sverige AB, A Shares.......... 65,000 2,033,161
------------
6,714,421
------------
Chemicals (2.87%)
BASF AG ................................. 100,000 3,844,654
Clariant AG.............................. 9,700 4,152,484
Laporte PLC.............................. 90,000 1,061,351
Rhone-Poulenc SA, Class A................ 123,000 4,196,471
------------
13,254,960
------------
Communications (1.18%)
A T & T Corp............................. 47,000 2,044,500
* Cellular Communications
International Inc...................... 62,000 1,798,000
* Telecel Comunicacaoes
Pessoais SA............................ 25,000 1,596,259
------------
5,438,759
------------
Computer & Electronic Equipment (1.23%)
* ADB-Gruppen Mandator A.B................. 4,500 73,902
* Circon Corp.............................. 124,400 1,897,100
* Intentia International AB................ 100,000 1,495,634
* Tecnost Mael SPA......................... 822,500 2,213,588
------------
5,680,224
------------
Conglomerates (8.43%)
Atle AB.................................. 420,000 4,742,040
Bergman & Beving AB...................... 12,100 393,880
BTR PLC.................................. 500,000 2,432,590
* Cie Financiere Richemont
AG, Class A............................ 2,400 3,370,938
* Corporacion Financiera
Reunida SA............................. 555,458 1,822,647
Hanson PLC............................... 2,960,000 4,158,016
Investor AB, B Shares.................... 67,300 2,975,278
Kinnevik AB, B Shares.................... 224,000 6,174,916
Lagardere S.C.A.......................... 110,000 3,021,022
* RGI NV, Resource Group
International.......................... 195,100 1,988,319
Rue Imperiale De Lyon AB................. 100 98,075
Tomkins PLC.............................. 1,691,194 7,822,359
------------
39,000,080
------------
Construction (2.64%)
* Cimpor Cementos de Portugal SA........... 245,000 5,274,492
Hollandsche Beton Groep NV............... 33,561 6,957,128
------------
12,231,620
------------
Consumer Products & Services (3.29%)
B.A.T Industries PLC..................... 625,000 5,192,808
Esselte AB, A Shares .................. 162,000 3,681,899
Esselte AB, B Shares .................. 29,400 650,953
Sophus Berendsen A/S, Class B............ 25,000 3,217,864
Vendome Luxury Group PLC................. 270,000 2,456,059
------------
15,199,583
------------
Entertainment & Media (4.08%)
Comcast Corp., Class A................... 43,434 773,668
EMI Group PLC............................ 300,000 7,117,895
* Endemol Entertainment Holdings........... 60,000 1,998,262
* Pathe SA................................. 21,225 5,116,924
* P4 Radio Hele Norge ASA.................. 10,000 90,938
* Tv 4 AB, Class A......................... 183,000 3,756,681
------------
18,854,368
------------
Financial Services (1.33%)
* C.E. Heath PLC........................... 150,000 218,418
Compagnie de Suez SA..................... 85,000 3,616,393
Mercury Finance Co....................... 189,100 2,316,475
------------
6,151,286
------------
Food & Beverages (2.66%)
Cadbury Schweppes PLC.................... 438,849 3,702,558
Heineken Holding NV...................... 34,250 5,356,212
Orkla ASA, Class B....................... 51,005 3,230,796
------------
12,289,566
------------
Industrial (6.84%)
Aker A/S, Series A....................... 100,000 2,226,403
Aker A/S, Series B....................... 85,500 1,729,304
CGIP, Compagnie Generale
Industrie de Participation............. 6,500 1,793,925
Compagnie Fives-Lille ................ 29,798 2,816,012
Finnveden Invest AB, Class B............. 486,400 8,772,510
* Hexagon AB, Class B...................... 204,457 5,162,160
* LucasVarity PLC.......................... 18,536 70,652
* Lyonnaise des Eaux SA.................... 57,824 5,385,383
Marine-Wendel SA......................... 21,850 2,005,902
5
<PAGE>
Number Value
of Shares (Note A)
--------- --------
SIG Swiss Industrial Company
Holding Ltd., Registered............... 1,370 $ 1,663,242
------------
31,625,493
------------
Insurance (4.34%)
Assurances Generales de France........... 132,305 4,274,077
* Axa SA................................... 67,000 4,264,224
Koelnische Rueckversicherungs AG......... 906 677,218
* La France SA ......................... 13,525 2,924,113
Royal & Sun Alliance Insurance
Group PLC.............................. 361,800 2,764,292
SCOR SA.................................. 108,500 3,818,949
Sedgwick Group, PLC...................... 600,000 1,351,629
------------
20,074,502
------------
Investment Companies (0.74%)
* Financiere Et Industrielle Gaz
Et Eaux SA............................. 7,746 3,164,132
* Mercury European Privatisation
Trust PLC, Warrants.................... 540,000 277,521
------------
3,441,653
------------
Natural Resources (2.21%)
* Bouygues Offshore SA, ADR................ 62,700 807,263
* Clyde Petroleum PLC...................... 1,250,000 2,505,396
Saga Petroleum A/S, B Shares............. 233,200 3,656,319
Societe Elf Aquitane SA.................. 35,600 3,242,793
------------
10,211,771
------------
Printing & Publishing (5.90%)
* A Pressen AS, A Shares................... 166,400 4,043,901
Aamulehti Yhtymae Oy-II.................. 25,000 760,870
* AC Nielsen Corp.......................... 6,666 100,823
Cognizant Corp........................... 20,000 660,000
De Telegraaf Holding NV.................. 205,760 4,338,062
Dun & Bradstreet Corp.................... 20,000 475,000
Midland Independent
Newspaper PLC.......................... 1,580,200 3,546,206
Mirror Group PLC......................... 700,000 2,578,203
Pearson PLC.............................. 431,000 5,533,876
Scripps (E.W.) Co., Class A.............. 37,500 1,312,500
United News & Media PLC.................. 328,869 3,926,777
------------
27,276,218
------------
Real Estate (5.31%)
* Diligentia AB............................ 50,000 788,141
* Fastighets AB Tornet, Class A............ 227,506 3,469,376
* German City Estates NV................... 57,400 887,680
* Lodet Fastighets AB...................... 255,000 261,736
Norrporten Fastighets AB................. 1,300 23,637
Number
of Shares
or Principal Value
Amount (Note A)
--------- --------
Santa Anita Realty Enterprises Inc....... 266,400 $ 6,993,000
* Scandic Hotels AB........................ 428,000 7,154,410
* Wallenstam Byggnads AB, Class B.......... 600,000 4,970,784
------------
24,548,764
------------
Transportation (2.15%)
Florida East Coast Industries Inc. ..... 14,000 1,223,250
Helikopter Services Group ASA............ 397,200 5,168,956
* KTM-Motorradholding AG................... 22,000 1,228,937
Railtrack Group PLC, Partly Paid......... 350,000 2,322,737
------------
9,943,880
------------
Utilities (0.28%)
* Thames Water Group PLC................... 125,000 1,316,939
------------
TOTAL COMMON STOCK &
OTHER EQUITY INTERESTS 263,254,087
------------
CORPORATE BONDS AND NOTES (2.26%)
Aamulehti Yhtymae Oy,
6.00%, 11/19/98, conv.........FIM 3,750,000 2,853,261
Olivetti International NV,
3.75%, 12/31/99, conv.........ITL 4,000,000,000 2,467,018
Uniholding Corp., Promissory
Note, 1/01/97.................... $ 6,200,000 5,146,000
------------
10,466,279
------------
BONDS AND NOTES IN REORGANIZATION (1.91%)
* Anchor Glass Container Corp.,
7.43%, 7/15/98......................... 478,265 478,265
* Anchor Glass Container Corp.,
9.91%, 7/15/98......................... 121,259 126,716
* Eurotunnel Finance Limited,
Bank Debt, Tranche B............... FRF 25,000,000 1,880,424
* Fokker NV, 6.25%, 11/04/98........... DEM 250,000 29,249
* Fokker NV,
Floating Rate, 8/26/96............. DEM 4,000,000 467,988
* Fokker NV,
7.50%, 6/29/96..................... DEM 2,500,000 292,493
* Northampton Business Parks,
Bank Claim..........................GBP 9,124,783 5,549,214
------------
8,824,349
------------
6
<PAGE>
Principal Value
Amount (Note A)
--------- --------
U.S GOVERNMENT AGENCY
DISCOUNT NOTES (37.67%)
Federal Home Loan Bank System,
5.220%, 1/09/97........................ $ 1,500,000 $ 1,498,260
5.460%, 2/27/97........................ 8,000,000 7,930,840
5.500%, 4/22/97........................ 5,000,000 4,918,910
5.200%, 5/08/97........................ 5,000,000 4,907,750
5.320%, 5/23/97........................ 1,400,000 1,371,119
5.350%, 6/24/97........................ 1,200,000 1,169,492
5.220%, 7/23/97........................ 30,000,000 29,111,880
5.280%, 9/10/97........................ 1,500,000 1,444,875
Federal Home Loan Mortgage Corp.,
5.460%, 1/14/97........................ 15,000,000 14,970,425
Federal National Mortgage Association,
5.510%, 1/13/97........................ 1,000,000 998,163
5.320%, 1/17/97........................ 1,800,000 1,795,744
5.220%, 2/03/97........................ 2,600,000 2,587,559
5.360%, 2/10/97........................ 15,000,000 14,910,667
5.240%, 2/18/97........................ 2,000,000 1,986,027
5.500%, 3/06/97........................ 6,900,000 6,834,988
5.300%, 3/10/97........................ 1,200,000 1,187,806
5.480%, 3/14/97........................ 2,000,000 1,978,960
5.490%, 3/17/97........................ 2,000,000 1,977,584
5.320%, 3/24/97........................ 15,000,000 14,816,190
5.240%, 4/10/97........................ 10,000,000 9,853,980
5.240%, 4/11/97........................ 5,000,000 4,926,945
5.179%, 5/01/97........................ 1,700,000 1,670,364
5.500%, 5/13/97........................ 2,400,000 2,353,975
5.230%, 5/16/97........................ 3,500,000 3,431,358
5.230%, 5/19/97........................ 5,000,000 4,897,460
5.150%, 6/05/97........................ 1,300,000 1,270,783
5.180%, 6/06/97........................ 2,400,000 2,345,712
5.490%, 6/17/97........................ 2,200,000 2,146,727
5.230%, 6/25/97........................ 15,000,000 14,619,375
5.240%, 6/30/97........................ 2,000,000 1,947,800
5.250%, 6/30/97........................ 2,305,000 2,244,840
5.420%, 7/11/97........................ 3,300,000 3,208,606
5.305%, 9/18/97........................ 3,000,000 2,885,058
------------
174,200,222
------------
OPTIONS (0.45%)
Contracts
---------
(R)* Cityscape Financial Corp.,
January/20/Call........................ 880 2,079,000
------------
TOTAL INVESTMENTS IN
SECURITIES (99.22%).................... $458,823,937
------------
* Non-income producing securities.
(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.
Currency Type Abbreviations:
Principal amount is stated in United States dollars unless otherwise noted.
ATS -- Austrian schilling
GBP -- British pound
DKK -- Danish krone
NLG -- Dutch guilder
FIM -- Finnish markka
FRF -- French franc
DEM -- German Deutsche mark
ITL -- Italian lira
NOK -- Norwegian krone
PTE -- Portuguese escudo
ESP -- Spanish peseta
SEK -- Swedish krona
CHF -- Swiss franc
Distribution of investments by country:
As a percentage of total investments in securities.
United States................................. 44.1%
United Kingdom................................ 14.8
Sweden........................................ 12.3
France........................................ 11.0
Norway........................................ 5.1
Netherlands................................... 4.4
Switzerland................................... 2.0
Portugal...................................... 1.5
Denmark....................................... 1.2
Italy......................................... 1.1
Germany....................................... 1.0
Other (individually less than 1%)............. 1.5
-----
Total......................................... 100.0%
=====
See notes to financial statements.
7
<PAGE>
MUTUAL EUROPEAN FUND
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1996
ASSETS
Investments in Securities, at Value (cost $430,292,422) ...... $ 458,823,937
Cash ......................................................... 530,404
Receivables:
Investment Securities Sold ............................... 6,800,225
Capital Stock Subscribed ................................. 1,888,609
Dividends ................................................ 236,292
Interest ................................................. 118,184
Fee Reimbursed ........................................... 73,152
-------------
TOTAL ASSETS ........................................ 468,470,803
-------------
LIABILITIES
Payables:
Investment Securities Purchased .......................... 5,023,495
Capital Stock Repurchased ................................ 449,841
Investment Advisory Fees ................................. 293,344
Accrued Expenses and Other Liabilities ................... 149,932
Net Payable for Foreign Currency Exchange Contracts ...... 105,235
-------------
TOTAL LIABILITIES .................................... 6,021,847
-------------
NET ASSETS APPLICABLE TO OUTSTANDING CAPITAL STOCK ........... $ 462,448,956
=============
COMPOSITION OF NET ASSETS
Paid In Capital .............................................. $ 430,067,727
Undistributed Net Investment Income .......................... 580,686
Accumulated Net Realized Gain on Investments and Foreign
Currency Transactions .................................... 3,364,491
Net Unrealized Appreciation of Investments ................... 28,531,515
Net Unrealized Depreciation of Foreign Currency Exchange
Contracts and Dividends .................................. (95,463)
-------------
TOTAL NET ASSETS ................................. $ 462,448,956
=============
Class Z
Net Asset Value per Share (Offering and Redemption
Price per Share)
($450,495,190 / 39,546,933 shares outstanding) ....... $ 11.39
=============
Class I
Net Asset Value per Share
($9,199,892 / 808,273 shares outstanding) ............ $ 11.38
=============
Maximum Offering Price
($11.38 / 95.5%) ..................................... $ 11.92
=============
Class II
Net Asset Value per Share
($2,753,874 / 242,005 shares outstanding) ............ $ 11.38
=============
Maximum Offering Price
($11.38 / 99.0%) ..................................... $ 11.49
=============
See notes to financial statements.
8
<PAGE>
MUTUAL EUROPEAN FUND
STATEMENT OF OPERATIONS
For Period July 3, 1996 (Commencement of Operations) to December 31, 1996
<TABLE>
<S> <C> <C>
INVESTMENT INCOME:
Income:
Dividends
(Net of Foreign Withholding - $76,402) ......... $ 796,851
Interest ......................................... 2,724,820
-------------
TOTAL INCOME ......................................... $ 3,521,671
Expenses:
Investment Advisory Fees ......................... 949,616
Shareholder Servicing Costs ...................... 188,383
Administrative ................................... 76,315
Distribution Fees
Class I ........................................ 3,373
Class II ....................................... 1,008
Registration and Filing Fees ..................... 129,800
Shareholder Reports .............................. 16,239
Legal Fees ....................................... 5,634
Auditing Fees .................................... 14,317
Insurance ........................................ 70
Directors' Fees and Expenses ..................... 1,920
Miscellaneous .................................... 2,359
-------------
TOTAL EXPENSES ....................................... 1,389,034
-------------
Less Expenses Reimbursed ......................... (73,152)
-------------
TOTAL EXPENSES LESS REIMBURSEMENT .................... 1,315,882
-------------
NET INVESTMENT INCOME .................. 2,205,789
-------------
REALIZED AND UNREALIZED GAIN/(LOSS) ON INVESTMENTS
Net Realized Gain on Investments and Foreign
Currency Transactions .......................... 4,653,655
Net Realized Loss on Securities Sold Short ....... (139,150)
Change in Unrealized Appreciation of Investments
and Foreign Currency Transactions .............. 28,436,052
-------------
NET GAIN ON INVESTMENTS ................ 32,950,557
-------------
NET INCREASE IN NET ASSETS FROM OPERATIONS ........... $ 35,156,346
=============
</TABLE>
See notes to financial statements.
9
<PAGE>
MUTUAL EUROPEAN FUND
STATEMENT OF CHANGES IN NET ASSETS
For Period July 3, 1996 (Commencement of Operations) to December 31, 1996
INCREASE/(DECREASE) IN NET ASSETS FROM OPERATIONS:
Net Investment Income ..................................... $ 2,205,789
Net Realized Gain on Investments and Foreign Currency
Transactions .......................................... 4,514,505
Change in Unrealized Appreciation of Investments .......... 28,436,052
-------------
NET INCREASE IN NET ASSETS
FROM OPERATIONS ..................................... 35,156,346
-------------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net Investment Income
Class Z ............................................... (1,947,610)
Class I ............................................... (25,784)
Class II .............................................. (7,669)
Net Realized Gain on Investments
Class Z ............................................... (779,044)
Class I ............................................... (10,995)
Class II .............................................. (4,015)
-------------
TOTAL DISTRIBUTIONS TO SHAREHOLDERS ................... (2,775,117)
-------------
CAPITAL STOCK TRANSACTIONS:
Class Z ............................................... 418,343,037
Class I ............................................... 9,032,503
Class II .............................................. 2,692,187
-------------
NET INCREASE IN NET ASSETS .................................... 462,448,956
NET ASSETS:
Beginning of Period ....................................... 0
-------------
End of Period -- Including Undistributed Net Investment
Income of $580,686....................................... $ 462,448,956
--------------
See notes to financial statements.
10
<PAGE>
MUTUAL EUROPEAN FUND
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
NOTE A -- SIGNIFICANT ACCOUNTING POLICIES
Mutual European 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 European Fund, Mutual Qualified
Fund, Mutual Shares Fund, Mutual Beacon Fund and Mutual Discovery 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 European 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
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
may affect the reported amounts of assets and liabilities. Actual results could
differ from those estimates.
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
11
<PAGE>
MUTUAL EUROPEAN FUND
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
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.
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 CORPORATION 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
$949,616 for investment management and advisory services under the investment
advisory agreements. The fee was paid monthly based on average daily
12
<PAGE>
MUTUAL EUROPEAN FUND
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
net assets at the annual rate of eight-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 $57,060 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 $25,403. The total of all reimbursements is set forth in the
statement of operations. For the period ended December 31, 1996, FTD paid net
commissions of $1,291 from the sale of the Fund's shares and FTIS received fees
of $67,209.
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 $4,037. Effective November 1, 1996, security
transactions were no longer executed with Clearwater.
Under the distribution plans for Class I and Class 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 Class II shares, respectively. Class II shares redeemed within 18
months are subject to a contingent deferred sales charge. There were no
contingent deferred sales charge 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 period ended December 31, 1996 aggregated
$305,035,611 and $53,054,797, respectively.
For Federal income tax purposes, the identified cost of investments at
December 31, 1996 was $430,352,371. Net unrealized appreciation for all
securities at December 31, 1996, based on Federal income tax cost, amounted to
$28,471,566 consisting of aggregate gross unrealized appreciation of $31,444,474
and aggregate gross unrealized depreciation of $2,972,908.
NOTE E -- RESTRICTED SECURITIES
A summary of the restricted securities held at December 31, 1996 follows:
Acquisition
Name of Issuer Date Value
- -------------- ---------- ----------
Option
Cityscape Financial Corp., January/20/Call 11/25/96 $2,079,000
----------
Total restricted securities: (Cost $1,760,000)
(0.45% of Net Assets) $2,079,000
==========
13
<PAGE>
MUTUAL EUROPEAN FUND
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
NOTE F -- 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>
Sales
ATS 13,000,000 $ 1,193,044 2/11/97 $ 1,203,103 $ (10,059)
CHF 11,038,884 8,427,880 3/10/97 8,303,415 124,465
DEM 7,509,263 4,983,475 3/18/97 4,904,617 78,858
DKK 28,421,515 4,929,969 4/24/97 4,854,501 75,468
ESP 219,197,466 1,674,450 2/18/97 1,686,453 (12,003)
FIM 29,600,419 6,681,810 3/03/97 6,460,505 221,305
FRF 253,395,085 49,335,517 2/28/97 49,031,130 304,387
GBP 8,687,454 14,495,599 2/18/97 14,866,934 (371,335)
GBP 9,000,000 14,926,950 3/18/97 15,390,315 (463,365)
GBP 2,380,240 3,778,707 5/16/97 4,063,374 (284,667)
GBP 9,000,000 14,882,400 6/18/97 15,348,969 (466,569)
GBP 8,246,568 13,605,188 8/18/97 14,038,191 (433,003)
ITL 6,099,425,918 4,006,562 1/02/97 4,023,368 (16,806)
ITL 6,099,425,918 3,956,427 7/02/97 3,997,760 (41,333)
NLG 27,233,423 16,269,384 3/17/97 15,850,111 419,273
NLG 4,197,815 2,459,536 6/10/97 2,457,389 2,147
NOK 150,511,892 23,227,144 6/09/97 23,773,588 (546,444)
PTE 975,400,000 6,246,177 1/17/97 6,288,584 (42,407)
SEK 35,286,738 5,368,408 1/21/97 5,178,066 190,342
SEK 31,178,095 4,716,675 2/18/97 4,580,882 135,793
SEK 185,798,461 27,993,227 5/15/97 27,406,608 586,619
SEK 55,552,421 8,416,395 7/21/97 8,219,545 196,850
SEK 50,303,818 7,602,784 8/15/97 7,451,037 151,747
------------ ------------ ---------
$249,177,708 $249,378,445 (200,737)
============ ============ ---------
Purchases
$ 3,107,592 FIM 14,034,621 3/03/97 $ 3,063,157 (44,435)
1,472,245 GBP 909,374 5/16/97 1,552,417 80,172
3,982,648 ITL 6,099,425,918 1/02/97 4,023,368 40,720
2,874,719 SEK 19,719,998 1/21/97 2,893,764 19,045
----------- ----------- ---------
$11,437,204 $11,532,706 95,502
=========== =========== =========
$(105,235)
=========
</TABLE>
Currency type abbreviations are explained on page 7.
14
<PAGE>
MUTUAL EUROPEAN FUND
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
NOTE G -- 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 rights, 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 400 million shares authorized ($0.001 par value). Transactions in
capital stock were as follows:
Class Z
-----------------------------
For the period
July 3, 1996
(commencement of operations)
to December 31, 1996
-----------------------------
Shares Amount
------ ------
Shares sold .................................... 42,171,939 $ 446,968,711
Shares issued in reinvestment of dividends ..... 229,503 2,586,502
Shares redeemed ................................ (2,854,509) (31,212,176)
----------- -------------
Net Increase ................................. 39,546,933 $ 418,343,037
=========== =============
Class I
-----------------------------
For the period
November 1, 1996
to December 31, 1996
-----------------------------
Shares Amount
------ ------
Shares sold .................................... 813,014 $ 9,085,283
Shares issued in reinvestment of dividends ..... 2,838 31,814
Shares redeemed ................................ (7,579) (84,594)
----------- -------------
Net Increase ................................. 808,273 $ 9,032,503
=========== =============
Class II
-----------------------------
For the period
November 1, 1996
to December 31, 1996
-----------------------------
Shares Amount
------ ------
Shares sold .................................... 242,959 $ 2,703,061
Shares issued in reinvestment of dividends ..... 860 9,680
Shares redeemed ................................ (1,814) (20,554)
----------- -------------
Net Increase ................................. 242,005 $ 2,692,187
=========== =============
Michael Price, President of the Fund's investment adviser, is the record
owner of 14,024,208 Class Z shares as of December 31, 1996.
15
<PAGE>
MUTUAL EUROPEAN FUND
FINANCIAL HIGHLIGHTS
(Selected data for a share of capital stock outstanding throughout each period)
<TABLE>
<CAPTION>
Class Z Class I Class II
-------------------- -------------------- --------------------
For the period For the period For the period
July 3, 1996 (a) November 1, 1996 (b) November 1, 1996 (b)
to December 31, 1996 to December 31, 1996 to December 31, 1996
-------------------- -------------------- --------------------
Net Asset Value,
<S> <C> <C> <C>
Beginning of Period .................. $ 10.00 $ 10.84 $ 10.84
--------- --------- ---------
Income from Investment Operations:
Net Investment Income ................ .06 .03 .02
Net Gains or Losses on Securities
(realized and unrealized) .......... 1.40 .58 .58
--------- --------- ---------
Total from Investment Operations ..... 1.46 .61 .60
--------- --------- ---------
Less Distributions:
Dividends (from net investment income) .05 .05 .04
Distributions (from capital gains) ... .02 .02 .02
--------- --------- ---------
Total Distributions ................ .07 .07 .06
--------- --------- ---------
Net Asset Value,
End of Year .......................... $ 11.39 $ 11.38 $ 11.38
========= ========= =========
Total Return ............................ 14.61%+ 5.61%++ 5.52%+++
========= ========= =========
Ratios/Supplemental Data:
Net Assets, End of Year (millions) ...... $ 450 $ 9 $ 3
Ratio of Expenses to Average Net Assets . 1.15%* 1.42%* 2.04%*
Ratio of Expenses, net of reimbursement,
to Average Net Assets ................ 1.09%* 1.32%* 1.94%*
Ratio of Net Investment Income
to Average Net Assets ................ 1.87%* 1.44%* .79%*
Portfolio Turnover Rate ................. 36.75% 36.75% 36.75%
Average Commission Per Share ............ $ .023 $ .023 $ .023
</TABLE>
+ Not annualized for periods of less than one year.
++ Total return does not reflect sales commissions. Not annualized for periods
of less than one year.
+++ Total return does not reflect sales commissions or the contingent deferred
sales charge. Not annualized for periods of less than one year.
* Annualized.
(a) Commencement of operations.
(b) Commencement of offering of sales.
16
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF
FRANKLIN MUTUAL SERIES FUND INC.
We have audited the accompanying statement of assets and liabilities of
Mutual European Fund, a portfolio of Franklin Mutual Series Fund Inc. ("Fund")
(formerly Mutual Series Fund Inc.), including the schedule of investments, as of
December 31, 1996, the related statement of operations and the statement of
change in net assets for the period from July 3, 1996 (commencement of
operations) to December 31, 1996, 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 audit in accordance with generally accepted auditing
standards. 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. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements and financial highlights. Our procedures included confirmation of
securities owned as of December 31, 1996, by correspondence with the custodian
and brokers, or other appropriate auditing procedures when replies from brokers
were not received. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audit provides 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
Mutual European Fund, a portfolio of Franklin Mutual Series Fund Inc., at
December 31, 1996, the results of its operations, the changes in its net assets
and the financial highlights for each of the indicated periods, in conformity
with generally accepted accounting principles.
Ernst & Young LLP
Boston, Massachusetts
February 7, 1997
17
<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.
