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 Discovery Fund.
The report is not authorized for distribution to prospective investors
in the Fund unless preceded or accompanied by an effective prospectus.
MUTUAL
DISCOVERY
FUND
[LOGO]
ANNUAL
REPORT
December 31, 1996
[LOGO]
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Mutual Discovery Fund -- Class Z
Yearly Performance
Total Return*
-------------
1993................................................................... 35.85%
1994................................................................... 3.62%
1995................................................................... 28.63%
1996................................................................... 24.93%
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Comparison of Changes in Value of $10,000 Investment in
Mutual Discovery Fund
to the S&P 500 and Russell 2000
- --------------------------------------------------------------------------------
[The following table was represented as a line graph in the printed material.]
- -----------------------------------------------------
CLASS Z
AVERAGE ANNUAL TOTAL RETURN*
- -----------------------------------------------------
1 Year 3 Year From Inception
- -----------------------------------------------------
24.93% 18.53% 22.64%
- -----------------------------------------------------
Mutual Discovery
Class Z S&P 500 Russell 2000
--------------- ------- ------------
'92 10000 10000 10000
'93 13585 11006 11890
'94 14077 11150 11674
'95 18107 15334 14995
'96 22621 18855 17467
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Aggregate Total Returns** Since November 1, 1996
Mutual Discovery -- Class I.... .15% Mutual Discovery -- Class II.... 3.85%
* Total Return and Average Annual 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 DISCOVERY 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 Discovery Fund appreciated 24.93% with cash
balances averaging about 15% 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 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.
3
<PAGE>
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 DISCOVERY FUND
SCHEDULE OF INVESTMENTS
DECEMBER 31, 1996
Number Value
of Shares (Note A)
----------- ------------
COMMON STOCK & OTHER EQUITY INTERESTS (77.91%)
Aerospace (0.77%)
*Thomson CSF ................................ 277,537 $ 9,008,578
*Tracor, Inc. ............................... 672,100 14,282,125
------------
23,290,703
------------
Banking (4.42%)
Affiliated Community Bancorp, Inc. ......... 123,500 2,639,812
(A) American National Bank Corp. ............... 331,500 4,019,437
(A)(R)*Atlantic Bancorp, Class A .................. 290,406 3,339,669
(A)(R)*Atlantic Bancorp, Class C .................. 17,387 199,950
(A)*BNH Bancshares, Inc. ....................... 269,750 2,967,250
Banco Pastor SA ............................ 43,184 2,767,501
(A)(R)*Bank of Rhode Island ....................... 228,300 2,283,000
California Commercial Bancshares ........... 9,000 121,500
Capital Bancorp ............................ 4,100 114,800
(A)*Civic BanCorp .............................. 385,866 3,955,126
*Coast Savings Financial .................... 167,400 6,131,025
Commonwealth Bancorp, Inc. ................. 785,000 11,775,000
*Den Danske Bank ............................ 25,000 2,016,471
*Den Norske Bank ASA ........................ 1,675,000 6,434,227
First Defiance Financial Corp. ............. 254,000 3,143,250
HUBCO, Inc. ................................ 382,475 9,370,632
(A) ISB Financial Corp. ........................ 510,000 9,180,000
(A) Little Falls Bancorp ....................... 290,000 3,606,875
Long Island Bancorp, Inc. .................. 299,600 10,486,000
(A)(R)*Monarch Bancorp ............................ 3,400,000 6,800,000
(A) North Central Bancshares, Inc. ............. 332,500 4,509,531
(A)*Rancho Santa Fe National Bank .............. 347,223 2,430,561
Sparebanken Nor ............................ 990,500 30,982,244
Standard Federal Bancorporation ............ 29,800 1,694,875
(A) Tolland Bank ............................... 100,300 1,203,600
Wayne Bancorp .............................. 90,000 1,372,500
------------
133,544,836
------------
Chemicals (2.15%)
BASF AG .................................... 292,000 11,226,389
*Bush Boake Allen Inc. ...................... 147,300 3,921,862
*ChemFirst Inc. ............................. 836,200 19,337,125
Clariant AG ................................ 9,000 3,852,820
DSM NV ..................................... 58,000 5,724,414
Olin Corp. ................................. 407,200 15,320,900
*Rhone-Poulenc SA, Class A .................. 161,600 5,513,412
------------
64,896,922
------------
Communications (1.27%)
A T & T Corp. .............................. 163,500 7,112,250
*Associated Group Inc., Class B ............. 35,600 1,059,100
*C-TEC Corp. ................................ 214,400 5,199,200
*Granite Broadcasting Corp. ................. 270,300 2,871,938
MCI Communications Corp. ................... 48,000 1,569,000
*United States Satelite Broadcasting
Co. Inc., Class A ......................... 2,049,900 20,499,000
------------
38,310,488
------------
Computer & Electronic Equipment (2.07%)
*Amphenol Corp., Class A .................... 1,138,700 25,336,075
Canadian Marconi Co. ....................... 595,200 6,464,605
(A)*Continental Information Systems Inc. ....... 426,553 853,106
(A)(R)*Distribution Systems S.p.A ................. 500 20,669
*Imation Corp. .............................. 66,700 1,875,938
(A)(R)*MWCR, L.L.C ................................ 10,902,934 10,902,934
(A)(R)*MWCR, Elettronica S.r.L .................... 69,056 69,056
*NBS Technologies, Inc. ..................... 296,400 789,938
(A)(R)*Sweda Industrie Elettroniche S.p.A ......... 500 20,669
*Wang Laboratories Inc. ..................... 797,000 16,139,250
------------
62,472,240
------------
Conglomerates (8.51%)
BTR PLC .................................... 2,866,805 13,947,522
Cheung Kong Holdings Ltd. .................. 4,426,000 39,341,586
*Cie Financiere Richemont AG,
Class A ................................... 3,681 5,170,176
Empire Co. Ltd., Class A ................... 764,100 7,392,446
Hanson PLC ................................. 8,950,000 12,572,378
Harcourt General, Inc. ..................... 106,900 4,930,763
Incentive AB, A Shares ..................... 4,900 355,653
Investor AB, A Shares ...................... 149,750 6,697,178
Investor AB, B Shares ...................... 439,000 19,407,832
Kansas City Southern Industries, Inc. ...... 1,005,200 45,234,000
Kinnevik AB, A Shares ...................... 89,500 2,454,086
Kinnevik AB, B Shares ...................... 882,487 24,327,156
Lagardere S.C.A ............................ 691,163 18,981,989
5
<PAGE>
Number Value
of Shares (Note A)
----------- ------------
Lonrho PLC ................................. 1,288,251 $ 2,747,580
RGI NV, Resource Group
International ............................. 1,307,400 13,324,083
Semi-Tech (Global) Co. Ltd. ................ 5,675,709 9,392,860
Tomkins PLC ................................ 4,913,444 22,726,383
Viad Corp. ................................. 509,300 8,403,450
------------
257,407,121
------------
Construction (0.70%)
*Cimpor Cementos de Portugal SA ............. 270,000 5,812,706
Hollandsche Beton Groep NV ................. 40,191 8,331,514
Lone Star Industries, Inc. ................. 61,326 2,261,396
Martin Marietta Materials Inc. ............. 209,100 4,861,575
------------
21,267,191
------------
Consumer Products & Services (3.43%)
B.A.T Industries PLC ....................... 1,235,000 10,260,989
*BIC SA ..................................... 6,414 962,409
CarnaudMetalbox Asia Ltd. .................. 334,000 930,894
Dial Corp. ................................. 612,900 9,040,275
Esselte AB, A Shares ....................... 439,196 9,981,947
RJR Nabisco Holdings Corp. ................. 101,300 3,444,200
Sophus Berendsen A/S, A Shares ............. 73,985 9,548,073
Sophus Berendsen A/S, B Shares ............. 276,553 35,596,396
*U.S. Industries, Inc. ...................... 150,500 5,173,438
Vendome Luxury Group PLC ................... 2,068,169 18,813,132
------------
103,751,753
------------
Entertainment & Media (4.79%)
*BHC Communications, Inc. ................... 58,600 5,940,575
Comcast Corp., Class A ..................... 30,000 528,750
Comcast Corp., Class A, Special
Non-Voting ................................ 358,100 6,378,656
EMI Group PLC .............................. 1,423,655 33,778,089
*Metromedia International
Group Inc. ................................ 900,000 8,887,500
*Pathe SA ................................... 52,767 12,721,070
Shaw Brothers Ltd. ......................... 4,704,700 5,596,127
*U S West, Inc.,- Media Group................ 1,350,400 24,982,400
Yorkshire-Tyne Tees TV Holdings,
PLC ....................................... 1,350,000 28,214,616
*Young Broadcasting Corp., Class A .......... 608,000 17,784,000
------------
144,811,783
------------
Financial Services (2.57%)
Bear Stearns Companies, Inc. ............... 109,245 3,045,204
*Capital Factors Holding, Inc. .............. 500,000 6,250,000
*Cityscape Financial Corp. .................. 523,000 13,728,750
*Compagnie de Suez SA ....................... 459,985 19,570,432
Dean Witter, Discover & Co. ................ 218,300 14,462,375
Eaton Vance Corp. .......................... 172,000 8,191,500
Finova Group Inc. .......................... 62,100 3,989,925
Liberty Financial Companies, Inc. .......... 93,150 3,621,206
*SPS Transaction Services Inc. .............. 320,500 4,887,625
------------
77,747,017
------------
Food & Beverages (2.76%)
Cadbury Schweppes PLC ...................... 809,876 6,832,904
Cultor Oy, Series 1 ........................ 135,600 7,369,565
Farmer Brothers Co. ........................ 65,202 9,910,704
Heineken Holding NV ........................ 56,185 8,786,533
*Lotte Confectionary Co. Ltd. ............... 6,130 710,935
Nutricia Verenigde Bedrijven NV ............ 49,230 7,485,013
Rieber & Son AS, Class B ................... 641,400 18,503,857
*Sizzler International, Inc. ................ 1,206,100 3,467,538
*Stroh Brewing Co., Warrants ................ 21,205 206,749
Societe Sucriere de Pithiviers SA .......... 11,568 7,161,674
Van Melle NV ............................... 157,614 12,963,329
------------
83,398,801
------------
Healthcare (4.39%)
*Apria Healthcare Group Inc. ................ 1,383,900 25,948,125
*Beverly Enterprises, Inc. .................. 798,100 10,175,775
*FHP International Corp. .................... 356,500 13,235,063
*Foundation Health Corp. .................... 409,700 13,007,975
*Health Systems International, Inc. ......... 298,200 7,380,450
*Horizon/CMS Healthcare Corp. ............... 631,200 7,968,900
Instrumentarium Group, Series A ............ 99,300 3,639,561
Instrumentarium Group, Series B ............ 319,000 11,650,435
*Laboratory Corp. of America,
Warrants .................................. 53,685 5,033
*Mid Atlantic Medical Services, Inc. ........ 641,000 8,573,375
*Novartis A G ............................... 533 610,053
*Novartis A G, Registered ................... 5,390 6,173,231
*Tenet HealthCare Corp. ..................... 339,300 7,422,188
*Vencor Inc. ................................ 532,200 16,830,825
------------
132,620,989
------------
Industrial (5.40%)
Aker A/S, Series A ......................... 755,000 16,809,345
Aker A/S, Series B ......................... 2,701,000 54,629,821
Bucher Holding AG, Bearer .................. 11,413 7,844,572
6
<PAGE>
Number Value
of Shares (Note A)
----------- ------------
CGIP-Compagnie Generale Industrie
de Participation .......................... 63,763 $17,597,850
Compagnie Fives-Lille ...................... 58,176 5,497,828
Federal Mogul Corp. ........................ 83,000 1,826,000
*Hexagon AB, Class B ........................ 29,000 690,998
*LucasVarity PLC ............................ 4,400,213 16,771,977
*Lyonnaise des Eaux SA ...................... 113,520 10,572,576
(A)(R)*MB-Motori, L.L.C ........................... 557,863 1,197,230
Marine-Wendel SA ........................... 112,118 10,292,800
Shaw Industries Ltd., Class A .............. 436,800 8,834,552
Shaw Industries Ltd., Class B .............. 2,200 43,372
SIG Swiss Industrial Company
Holding Ltd., Bearer ...................... 3,925 9,940,792
SIG Swiss Industrial Company
Holding Ltd., Registered .................. 690 837,692
------------
163,387,405
------------
Insurance (5.34%)
*20th Century Industries .................... 109,000 1,839,375
*Alleghany Corp. ............................ 43,394 9,199,528
Allmerica Property & Casualty
Companies, Inc. ........................... 421,800 12,812,175
Argonaut Group, Inc. ....................... 43,983 1,352,477
Arthur J Gallagher Co. ..................... 459,500 14,244,500
Assurances Generales de France ............. 190,610 6,157,604
*Axa SA ..................................... 177,200 11,277,917
General RE Corp. ........................... 48,808 7,699,462
Home Beneficial Corp., Class B ............. 407,799 15,445,387
Koelnische Rueckversicherungs AG ........... 16,757 12,525,544
*La France SA ............................... 13,540 2,927,356
National Security Group, Inc. .............. 48,430 635,644
Old Republic International Corp. ........... 441,850 11,819,488
Provident Companies, Inc. .................. 333,100 16,113,713
PXRE Corp. ................................. 193,700 4,794,075
Reliable Life Insurance Company,
Class A ................................... 23,814 1,631,259
Royal & Sun Alliance Insurance
Group PLC ................................. 2,820,245 21,547,766
SAFECO Corp. ............................... 154,000 6,073,375
SCOR SA .................................... 98,615 3,471,020
------------
161,567,665
------------
Investment Companies (4.39%)
Alliance Global Environment
Fund, Inc. ............................... 164,600 2,057,500
Asean Fund Ltd. ........................... 290,800 4,798,200
Austria Fund, Inc. ........................ 349,300 3,143,700
Central European Equity Fund Inc. ......... 364,000 7,189,000
Forvaltnings AB Ratos, B Shares ........... 948,600 31,991,613
G.T. Global Developing Markets
Fund ..................................... 154,400 1,794,900
Growth Fund of Spain, Inc. ................ 138,500 1,765,875
JF Asia Select Ltd. ....................... 760,000 1,130,002
JF Indonesia Fund Inc. .................... 1,407,000 1,637,210
John Hancock Bank & Thrift
Opportunity Fund ......................... 639,900 19,676,925
Mercury European Privatisation
Trust PLC................................. 15,369,216 28,303,538
*Mercury European Privatisation
Trust PLC, Warrants ...................... 6,135,000 3,152,945
New Age Media Fund, Inc. .................. 233,500 2,918,750
New Germany Fund Inc. ..................... 932,600 12,473,525
(A)*Regent Kingpin Chile Value Fund ........... 212,505 8,119,816
(A)*Regent Kingpin Chile Value Fund,
Warrants ................................. 16,347 163
Societe Eurafrance SA ..................... 3,015 1,303,689
United Corporations Ltd. .................... 35,919 1,153,982
------------
132,611,333
------------
Metals (0.38%)
*Algoma Steel Inc. ........................... 1,526,003 7,799,658
*WHX Corp. ................................... 410,800 3,645,850
------------
11,445,508
------------
Natural Resources (8.41%)
*AO Tatneft .................................. 200,000 9,600,000
*Aviva Petroleum Inc., Depository
Shares ..................................... 201,788 781,930
*Aviva Petroleum, Inc. ....................... 385,000 230,839
*Bouygues Offshore SA, ADR ................... 220,000 2,832,500
*Energy Ventures, Inc. ....................... 180,703 9,193,265
ENSERCH Corp. ............................... 1,794,700 41,278,100
(A)*Pacific Forest Products Ltd. ................ 3,689,400 48,489,796
Penn Virginia Corp. ......................... 168,450 7,875,038
Saga Petroleum A/S, A Shares ................ 888,400 14,904,170
Saga Petroleum A/S, B Shares................. 1,295,500 20,312,010
Southwest Gas Corp. ......................... 400,800 7,715,400
Shell Transport & Trading Co. ............... 275,000 4,753,400
Societe Elf Aquitane SA ..................... 378,000 34,431,900
Societe Elf Aquitaine SA, ADR ............... 135,000 6,108,750
7
<PAGE>
Number Value
of Shares (Note A)
----------- ------------
Timberwest Forest Ltd. ...................... 1,353,800 $ 18,287,248
Transocean Offshore Inc. .................... 437,984 27,428,748
------------
254,223,094
------------
Printing & Publishing (6.31%)
(A)*A Pressen AS, A Shares ..................... 537,200 13,055,190
Aamulehti Yhtymae Oy-II .................... 420,500 12,797,826
Cognizant Corp. ............................ 248,600 8,203,800
De Telegraaf Holding NV .................... 760,800 16,040,035
Dun & Bradstreet Corp. ..................... 248,600 5,904,250
Euromoney Publications PLC ................. 550,450 13,248,745
John Fairfax Holdings Ltd. ................. 10,812,889 24,494,662
Midland Independent
Newspapers PLC ............................ 750,000 1,683,112
Mirror Group PLC ........................... 4,868,800 17,932,504
Pearson PLC ................................ 1,571,000 20,171,044
Southam Inc. ............................... 3,105,300 43,193,724
United News & Media PLC .................... 1,188,318 14,188,811
------------
190,913,703
------------
Real Estate (2.49%)
Alexander Haagen Properties, Inc. .......... 556,700 8,211,325
Crown American Realty Trust ................ 368,100 2,760,750
*Fastighets AB Tornet, A Shares ............. 618,394 9,430,262
Heba Fastighets AB, B Shares ............... 66,200 742,582
*Lodet Fastighets AB ........................ 216,000 221,706
(A)(R)*MSCW Investors II, L.L.C ................... 10,438,000 17,881,248
*Nackebro Fastighets AB, A Shares ........... 478,200 8,203,905
San Juan Basin Royalty Trust ............... 482,900 3,983,925
Santa Anita Realty Enterprises Inc. ........ 271,300 7,121,625
*TrizecHahn Corp., Class A
Warrants .................................. 1,131,530 4,833,303
(A)(R)*Value Property Trust ....................... 1,101,955 12,038,858
(A)(R)*Value Property Trust, Warrants ............. 6,874 1,473
------------
75,430,962
------------
Retail (2.92%)
Coles Myer Ltd. ............................ 8,975,667 36,955,691
Delchamps, Inc. ............................ 219,179 4,246,593
*Hills Stores Co. ........................... 67,393 404,358
*Homeland Holding Corp. ..................... 106,196 902,666
*Payless Shoesource, Inc. ................... 17,100 641,250
Sears Canada Inc. .......................... 896,700 6,743,828
*Service Merchandise Co., Inc. .............. 372,300 1,582,275
*Waban Inc. ................................. 1,413,800 36,758,800
------------
88,235,461
------------
Number
of Shares
or Principal Value
Amount (Note A)
----------- ------------
Transportation (4.44%)
Burlington Northern Santa Fe Corp. ......... 5,000 $ 431,875
Caliber Systems Inc. ....................... 1,048,400 20,181,700
Canadian National Railway Co. .............. 133,500 5,073,000
*Continental Airlines, Inc., Class B ........ 236,600 6,683,950
Florida East Coast Industries Inc. ......... 120,100 10,493,738
*Fritz Companies, Inc. ...................... 1,296,300 16,527,825
General Motors Corp. ....................... 178,800 9,968,100
*Landstar System Inc. ....................... 441,200 10,257,900
*M.S. Carriers, Inc. ........................ 320,600 5,129,600
(A) MIF Ltd. ................................... 322,875 5,214,193
Railtrack Group PLC, Partly Paid ........... 2,023,000 13,429,138
Ryder Systems, Inc. ........................ 510,500 14,357,813
(A)*Smithway Motor Xpress Corp. ................ 350,000 2,843,750
(A)*Transport Corp. of America, Inc. ........... 385,000 4,138,750
Volvo AB, B Shares ......................... 432,970 9,554,753
------------
134,286,085
------------
TOTAL COMMON STOCK &
OTHER EQUITY INTERESTS .................... 2,355,621,060
-------------
PREFERRED STOCK (1.20%)
*Gentra Inc., Pfd. G ........................ 139,500 1,838,542
*Granite Broadcasting Corp.,
Series A Conv. Pfd. ....................... 135,000 7,627,500
(A)*First Union Real Estate Equity
& Mortgage Investments,
Series A Conv. Pfd. ....................... 554,000 22,298,500
*Hills Stores Co., Pfd. ..................... 17,136 103,887
*Supermarkets General Holdings
Corp., $3.52 Pfd. ......................... 180,200 4,505,000
------------
36,373,429
------------
CORPORATE BONDS AND NOTES (1.36%)
Aamulehti Yhtymae Oy, Conv.,
6.00%, 11/19/98.........................FIM 8,538,000 6,496,304
Acindar Industria Argentina de Aceros
SA, Floating Rate, 11/12/98................ $ 7,400,000 7,252,000
American Restaurant Group,
13.00%, 9/15/98............................ 6,560,000 4,246,944
Consorcio G Grupo Dina SA
8.00%, 8/08/04 ............................ 3,165,000 1,993,950
*Consorcio G Grupo Dina SA,
0/12.00%, 11/15/02 ........................ 2,400,000 1,992,000
*Gentra Inc., Series A,
7.50%, 12/31/01..........................CAD 4,296,500 3,921,452
8
<PAGE>
Principal Value
Amount (Note A)
----------- ------------
*Gentra Inc., Series B,
7.50%, 12/31/01..........................CAD 428,152 $ 328,254
Homeland Stores Inc.,
10.00%, 8/01/03 ........................... $ 822,000 756,240
Olivetti International NV,
3.75%, 12/31/99, conv..................ITL 23,000,000,000 14,185,356
------------
41,172,500
------------
BONDS AND NOTES IN REORGANIZATION (2.24%)
*Anchor Glass, Container Corp. ..............
9.875%, 12/15/08 .......................... 1,852,000 101,860
*Anchor Glass, Container Corp. ..............
9.91%, 7/15/99 ............................ 4,171,729 4,359,457
*Anchor Glass, Container Corp. ..............
10.25%, 6/30/02 ........................... 3,987,000 3,189,600
*CIS Corp., Bank Claim ...................... 1,927,860 592,239
*CIS Corp., Bank Claim, Class 7
Escrow Receipts ........................... 2,126,507 49,760
*CIS Corp., Bank Claim, Class 9
Escrow Receipts..............13,824,792 ... 107,833
*Confederation Treasury Services
Ltd., Swap...............................CAD 11,229,833 4,632,803
*Confederation Treasury Services
Ltd., 9.50%, 6/10/97.....................CAD 385,000 165,857
*Confederation Treasury Services
Ltd., 9.50%, 7/30/97.....................GBP 4,500,000 4,548,258
*Confederation Treasury Services,
Ltd., 10/27/04...........................GBP 8,000,000 1,250,000
*Confederation Treasury Services
Ltd., 3/11/04............................GBP 5,500,000 859,375
*Dow Corning Corp., Bank Claim............... 1,241,480 1,359,421
*Dow Corning Corp., Bank Debt................ 3,250,000 3,558,750
*Dow Corning Corp., Swap .................... 6,938,674 6,591,741
*Dow Corning Corp.,
8.15%, 10/15/29 ........................... 500,000 535,000
*Dow Corning Corp.,
9.375%, 2/01/08 ........................... 100,000 109,500
*Dow Corning Corp., Medium Term
Note, 8.55%, 3/1/00 ....................... 2,705,000 2,934,925
*Eurotunnel Finance Limited,
Bank Debt, Tranche A.....................GBP 4,000,000 2,672,423
*Eurotunnel Finance Limited,
Bank Debt, Tranche A1....................GBP 1,600,000 1,068,969
Principal
Amount
or Number Value
of Shares (Note A)
----------- ------------
*Eurotunnel Finance Limited,
Bank Debt, Tranche B......................GBP 1,237,536 $ 826,805
*Eurotunnel Finance Limited,
Bank Debt, Tranche B1.....................GBP 566,871 378,730
*Eurotunnel Finance Limited,
Bank Debt, Tranche C......................FRF 2,800,000 210,608
*Eurotunnel Finance Limited,
Bank Debt, Tranche E......................FRF 16,000,000 1,203,472
*Eurotunnel Finance Limited,
Bank Debt, Tranche E......................ECU 125,500 61,445
*Eurotunnel Finance Limited,
Bank Debt, Tranche E1.....................FRF 7,000,000 526,519
*Foxmeyer Health Corp.,
Reclamation Trade Claim..................... $ 1,991,115 1,294,225
*Foxmeyer Health Corp.,
Trade Claim ................................ 3,541,533 424,984
*Heilman Acquisition Corp.,
9.625%, 1/31/04............................. $ 7,550,000 755
*Isosceles PLC., Facility B
Term Loan, 2001...........................GBP 993,553 229,776
*Merisel Inc., Bank Debt ..................... 4,771,641 4,413,768
*Merisel Inc., 12.50%, 12/31/04 .............. 4,225,000 2,556,125
*Sizzler International, Inc.,
Bank Debt #1 ............................... 1,734,500 1,647,775
*Sizzler International, Inc.,
Bank Debt #2 ............................... 6,940,500 6,593,475
*SouthEast Banking Corp.,
0%, 12/16/96 ............................... 400,000 232,000
*SouthEast Banking Corp.,
0%, 11/10/97 ............................... 5,800,000 3,364,000
*SouthEast Banking Corp.,
6.50%, 3/15/99 ............................. 700,000 406,000
*SouthEast Banking Corp.,
10.50%, 4/11/01 ............................ 7,800,000 4,524,000
------------
67,582,233
------------
COMPANIES IN LIQUIDATION (0.13%)
*City Investing Co.,
Liquidating Trust .......................... 100,000 93,750
*MBO Properties Inc. ......................... 241,144 542,574
*Petrie Stores Liquidating Trust,
Certificate of Beneficial Interest ......... 1,213,700 3,337,675
------------
3,973,999
------------
9
<PAGE>
Principal Value
Amount (Note A)
----------- ------------
U.S. GOVERNMENT AGENCY DISCOUNT NOTES (15.14%)
Federal Home Loan Bank System,
5.350%, 1/06/97............................ $ 1,000,000 $ 999,257
5.260%, 1/21/97 ........................... 2,300,000 2,293,279
5.270%, 2/13/97 ........................... 1,000,000 993,705
5.240%, 2/14/97 ........................... 1,000,000 993,596
5.240%, 2/20/97 ........................... 1,500,000 1,489,083
5.460%, 2/27/97 ........................... 2,500,000 2,478,387
5.400%, 3/03/97 ........................... 7,400,000 7,332,290
5.500%, 3/04/97 ........................... 8,900,000 8,819,375
5.180%, 3/05/97 ........................... 8,500,000 8,419,972
5.490%, 3/12/97............................ 22,300,000 22,066,720
5.220%, 4/02/97............................ 14,000,000 13,813,856
5.600%, 4/07/97............................ 12,500,000 12,323,000
5.220%, 4/08/97............................ 10,000,000 9,858,270
5.280%, 4/10/97 ........................... 4,000,000 3,941,152
5.330%, 4/14/97 ........................... 6,500,000 6,402,181
5.270%, 4/18/97 ........................... 5,000,000 4,921,830
5.370%, 4/29/97 ........................... 5,000,000 4,913,795
5.300%, 4/30/97 ........................... 5,000,000 4,913,065
5.540%, 5/06/97............................ 19,500,000 19,145,880
5.320%, 5/23/97 ........................... 4,400,000 4,309,232
5.580%, 5/27/97............................ 17,200,000 16,835,171
5.330%, 6/23/97............................ 10,000,000 9,749,150
5.350%, 6/24/97 ........................... 4,500,000 4,385,596
5.220%, 7/23/97............................ 30,000,000 29,111,880
5.120%, 8/04/97 ........................... 5,000,000 4,843,230
5.170%, 8/08/97............................ 18,000,000 17,433,882
5.150%, 9/05/97............................ 18,000,000 17,351,622
5.280%, 9/10/97 ........................... 1,100,000 1,059,575
5.220%, 9/12/97............................ 11,500,000 11,074,017
Federal Home Loan Mortgage Corp.,
5.220%, 2/03/97 ........................... 2,000,000 1,990,430
Federal National Mortgage Association,
5.500%, 1/14/97............................ 12,000,000 11,976,167
5.230%, 1/17/97 ........................... 1,500,000 1,496,513
5.280%, 2/07/97 ........................... 2,000,000 1,989,147
5.220%, 2/19/97 ........................... 2,300,000 2,283,658
5.480%, 3/14/97 ........................... 5,500,000 5,442,140
5.490%, 3/24/97............................ 14,000,000 13,828,444
5.260%, 4/03/97............................ 10,000,000 9,864,560
5.330%, 4/11/97 ........................... 5,300,000 5,222,562
Number of
Shares, Contracts,
or Principal Value
Amount (Note A)
----------------- -----------
5.280%, 4/28/97............................ $ 5,000,000 $ 4,914,525
5.420%, 5/09/97 ........................... 8,500,000 8,339,520
5.240%, 5/16/97............................ 10,500,000 10,294,074
5.460%, 6/02/97 ........................... 8,000,000 7,823,680
5.230%, 6/06/97............................ 15,000,000 14,660,700
5.250%, 6/16/97 ........................... 5,500,000 5,366,091
5.490%, 6/17/97............................ 18,700,000 18,247,180
5.250%, 6/30/97 ........................... 3,200,000 3,116,480
5.860%, 7/03/97 ........................... 9,000,000 9,020,232
5.340%, 7/07/97............................ 18,500,000 17,998,373
5.260%, 7/08/97............................ 10,000,000 9,727,400
5.420%, 7/11/97............................ 17,500,000 17,015,338
5.265%, 8/08/97 ........................... 2,500,000 2,420,158
5.120%, 9/19/97 ........................... 6,000,000 5,777,280
5.235%, 9/24/97............................ 17,400,000 16,726,951
------------
457,813,651
------------
OPTIONS (0.46%)
(R)*Cityscape Financial Corp.,
January/20/Call ............................ 5,930 14,009,625
------------
TOTAL INVESTMENTS IN
SECURITIES (98.44%) .......................... $2,976,546,497
==============
SECURITIES SOLD SHORT (0.42%)
*DST Systems Inc. ............................ 402,000 $12,612,750
------------
WHEN ISSUED SECURITIES SOLD SHORT (0.01%)
*NCR Corp. ................................... 10,000 333,750
------------
TOTAL SECURITIES SOLD
SHORT AND WHEN ISSUED
SECURITIES SOLD SHORT (0.43%) ............... $ 12,946,500
==============
*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
AUD -- Australian dollar
GBP -- British pound
CAD -- Canadian dollar
DKK -- Danish krone
NLG -- Dutch guilder
FIM -- Finnish markka
FRF -- French franc
DEM -- German mark
HKD -- Hong Kong dollar
ITL -- Italian lira
NOK -- Norwegian krone
PTE -- Portuguese escudo
SGD -- Singapore dollar
ESP -- Spanish peseta
SEK -- Swedish krona
CHF -- Swiss franc
Distribution of investments by country:
As a percentage of total investments in securities
United States........................ 51.9%
United Kingdom....................... 11.5
France............................... 6.3
Canada............................... 5.9
Norway............................... 5.5
Sweden............................... 5.2
Australia............................ 2.1
Netherlands.......................... 2.0
Hong Kong............................ 1.9
Denmark.............................. 1.6
Germany.............................. 1.5
Finland.............................. 1.4
Switzerland.......................... 1.2
Other (individually less than 1%).... 2.0
-----
Total................................ 100.0%
=====
See notes to financial statements.
11
<PAGE>
MUTUAL DISCOVERY FUND
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1996
ASSETS
<TABLE>
<CAPTION>
<S> <C> <C>
Investments in Securities, at Value
Unaffiliated Issuers (Cost $2,449,511,357) ................................. $2,784,906,097
Controlled Affiliated Issuers (Cost $35,665,548) ........................... 38,211,785
Non Controlled Affiliated Issuers (Cost $128,392,703) ...................... 153,428,615
-------------- $2,976,546,497
Cash ............................................................................ 3,331,571
Receivables:
Investment Securities Sold ................................................. 40,566,366
Capital Stock Subscribed ................................................... 13,485,926
Dividends .................................................................. 5,519,437
Interest ................................................................... 1,324,212
Fee Reimbursed ............................................................. 641,276
Other Assets .................................................................... 3,382
Deposits with Brokers for Securities Sold Short ................................. 20,711,263
--------------
TOTAL ASSETS ........................................................... 3,062,129,930
--------------
LIABILITIES
Payables:
Investment Securities Purchased ............................................ 13,607,767
Capital Stock Repurchased .................................................. 2,386,342
Investment Advisory Fee .................................................... 1,943,661
Accrued Expenses and Other Liabilities ..................................... 994,589
Net Payable for Foreign Currency Exchange Contracts ........................ 6,714,327
Securities Sold Short and When Issued Securities Sold Short,
at Value (Proceeds Receivable $12,584,373) .................................... 12,946,500
--------------
TOTAL LIABILITIES ...................................................... 38,593,186
--------------
NET ASSETS APPLICABLE TO OUTSTANDING CAPITAL STOCK .............................. $3,023,536,744
==============
COMPOSITION OF NET ASSETS
Paid In Capital ................................................................. $2,616,046,060
Distributions in Excess of Net Investment Income ................................ (4,135,091)
Accumulated Net Realized Gain on Investments and Foreign Currency
Transactions .................................................................. 55,664,483
Net Unrealized Appreciation of Investments, Securities Sold Short
and Options Written ........................................................... 362,614,762
Net Unrealized Depreciation of Foreign Currency Exchange Contracts
and Dividends ................................................................. (6,653,470)
--------------
TOTAL NET ASSETS ....................................................... $3,023,536,744
==============
Class Z
Net Asset Value per Share (Offering and Redemption Price per Share)
($2,975,595,800 / 173,179,167 shares outstanding) ............................. $ 17.18
==============
Class I
Net Asset Value per Share ($29,903,210 / 1,743,246 shares outstanding) ..... $ 17.15
==============
Maximum Offering Price ($17.15 / 95.50%) ................................... $ 17.96
==============
Class II
Net Asset Value per Share ($18,037,734 / 1,050,641 shares outstanding) ..... $ 17.17
==============
Maximum Offering Price ($17.17 / 99.00%) ................................... $ 17.34
==============
</TABLE>
12
<PAGE>
MUTUAL DISCOVERY FUND
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
<S> <C> <C>
INVESTMENT INCOME:
Income:
Dividends -- Unaffiliated Issuers
(Net of Foreign Withholding -- $3,103,943)................................ $48,046,466
Dividends-- Non Controlled Affiliated Issuers
(Net of Foreign Withholding -- $6,189).................................... 795,896
Interest.................................................................... 22,462,789
-----------
TOTAL INCOME..................................................................... $ 71,305,151
Expenses:
Investment Advisory Fees.................................................... 17,795,530
Shareholder Servicing Costs................................................. 1,831,159
Administrative.............................................................. 1,232,465
Distribution Fees
Class I................................................................... 6,634
Class II.................................................................. 12,377
Custodian Fees.............................................................. 409,774
Registration and Filing Fees................................................ 258,297
Shareholder Reports......................................................... 185,407
Legal Fees.................................................................. 129,130
Auditing Fees............................................................... 70,475
Insurance................................................................... 38,413
Directors' Fees and Expenses................................................ 31,253
Miscellaneous............................................................... 29,581
-----------
TOTAL EXPENSES................................................................... 22,030,495
------------
Less Expenses Reimbursed.................................................... (641,276)
TOTAL EXPENSES LESS REIMBURSEMENT................................................ 21,389,219
------------
NET INVESTMENT INCOME................................................... 49,915,932
------------
REALIZED AND UNREALIZED GAIN/(LOSS) ON INVESTMENTS
Net Realized Gain on Investments and Foreign Currency Transactions
in Unaffiliated Issuers................................................... 192,500,004
Net Realized Gain on Investments in Controlled and Non Controlled
Affiliated Issuers............................................................. 42,396,655
Net Realized Loss on Securities Sold Short.................................. (618,571)
Net Realized Gain on Options Written........................................ 15,795
Change in Unrealized Appreciation of Investments, Securities Sold Short,
Options Written and Foreign Currency Transactions.............................. 199,749,620
------------
NET GAIN ON INVESTMENTS................................................. 434,043,503
------------
NET INCREASE IN NET ASSETS FROM OPERATIONS....................................... $483,959,435
============
</TABLE>
See notes to financial statements.
13
<PAGE>
MUTUAL DISCOVERY 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 ............................................ $ 49,915,932 $ 19,871,738
Net Realized Gain on Investments and Foreign Currency Transactions 234,293,883 84,890,711
Change in Unrealized Appreciation of Investments ................. 199,749,620 129,809,314
--------------- ---------------
NET INCREASE IN NET ASSETS
FROM OPERATIONS ......................................... 483,959,435 234,571,763
--------------- ---------------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net Investment Income
Class Z ........................................................ (49,056,367) (11,920,757)
Class I ........................................................ (316,033) --
Class II ....................................................... (193,382) --
Net Realized Gain on Investments
Class Z ........................................................ (214,035,299) (66,854,127)
Class I ........................................................ (1,188,595) --
Class II ....................................................... (756,559) --
--------------- ---------------
TOTAL DISTRIBUTIONS TO SHAREHOLDERS .......................... (265,546,235) (78,774,884)
--------------- ---------------
CAPITAL STOCK TRANSACTIONS:
Class Z ........................................................ 1,385,295,943 489,092,918
Class I ........................................................ 30,918,577 --
Class II ....................................................... 18,687,584 --
--------------- ---------------
NET INCREASE IN NET ASSETS ............................................ 1,653,315,304 644,889,797
NET ASSETS:
Beginning of Year ................................................ 1,370,221,440 725,331,643
--------------- ---------------
End of Year -- Including Distributions in Excess of Net Investment
Income of $4,135,091 and $4,232,205, respectively .............. $ 3,023,536,744 $ 1,370,221,440
=============== ===============
</TABLE>
See notes to financial statements.
14
<PAGE>
MUTUAL DISCOVERY FUND
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
NOTE A -- SIGNIFICANT ACCOUNTING POLICIES
Mutual Discovery 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 Discovery Fund, Mutual Shares
Fund, Mutual Qualified Fund, Mutual Beacon 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 Discovery 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 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
15
<PAGE>
MUTUAL DISCOVERY FUND
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
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 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 Adviser, 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
$17,795,530 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 eight-tenths of one percent. Prior to November 1, 1996,
administrative personnel and services were
16
<PAGE>
MUTUAL DISCOVERY FUND
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
provided at approximate cost by Heine. On November 1, 1996 Franklin Templeton
Services, Inc. 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 $380,772 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 $364,585. 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 $41,905 from the sale of the
Fund's shares and FTIS received fees of $423,734.
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 $384,267. 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 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 year ended December 31, 1996 aggregated
$2,454,818,007 and $1,505,285,469, respectively.
For Federal income tax purposes, the identified cost of investments at
December 31, 1996 was $2,614,669,962. Net unrealized appreciation for all
securities at December 31, 1996, based on cost, amounted to $361,876,535,
consisting of aggregate gross unrealized appreciation of $408,534,943 and
aggregate gross unrealized depreciation of $46,658,408. Transactions in options
written during the year ended December 31, 1996 were as follows:
Principal
Amount or
Number of
Contracts Premium
--------- --------
Options written .................................... 270,330 $ 74,879
Options expired .................................... (270,000) (15,795)
Options terminated in closing transactions ......... (330) (59,084)
Options exercised .................................. -- --
-------- --------
Options outstanding at December 31, 1996 ........... -0- -0-
======== ========
17
<PAGE>
MUTUAL DISCOVERY FUND
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
NOTE E -- RESTRICTED SECURITIES
A summary of the restricted securities held at December 31, 1996 follows:
Acquisition
Name of Issuer Date Value
- ------------- ---------- -----
Common Stock & Other Equity Interests
Atlantic Bancorp, Class A ........................ 6/08/95 $ 3,339,669
Atlantic Bancorp, Class C ........................ 6/08/95 199,950
Bank of Rhode Island ............................. 3/21/96 2,283,000
Cityscape Financial Corp., January/20/Call ....... 11/25/96 14,009,625
Distribution Systems S.p.A ....................... 9/27/96 20,669
MB-Motori, L.L.C ................................. 12/07/94 1,197,230
MSCW Investors II, L.L.C ......................... 12/27/95 17,881,248
MWCR, L.L.C ...................................... 2/21/95 10,902,934
MWCR, Elettronica S.r.L .......................... 9/27/96 69,056
Monarch Bancorp .................................. 3/29/95 6,800,000
Sweda Industrie Elettroniche S.p.A ............... 9/27/96 20,669
Value Property Trust ............................. 12/31/93 12,038,858
Value Property Trust, Warrants ................... 3/13/96 1,473
-----------
Total restricted securities: (Cost $59,462,347)
(2.27% of Net Assets) ............................. $68,764,381
===========
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, December 31, Jan. 1-Dec. 31,
Name of Issuer: 1995 and Additions Reductions 1996 1996 1996
- ------------------------ ---------------- -------------- ----------- ----------------- ----------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Controlled Affiliates**
Distribution Systems S.p.A....... 0 500 -- 500 $ 20,669 --
MB-Motori, L.L.C................. 9,144,410 1,819,516 10,406,063 557,863 1,197,230 --
MSCW Investors II, L.L.C......... 10,438,000 -- -- 10,438,000 17,881,248 --
MWCR, L.L.C...................... 4,167,000 6,735,934 -- 10,902,934 10,902,934 --
MWCR, Elettronica S.r.L.......... 0 69,056 -- 69,056 69,056 --
Regent Kingpin Chile Value Fund.. 0 212,505 -- 212,505 8,119,816 --
Regent Kingpin Chile Value Fund,
Warrants....................... 0 16,347 -- 16,347 163 --
Sweda Industrie
Elettroniche S.p.A............. 0 500 -- 500 20,669 --
----------- ----------
Total Controlled Affiliates... $38,211,785 $ 0
=========== ==========
Non Controlled Affiliates
A Pressen AS, A Shares........... 0 537,200 -- 537,200 $13,055,190 $ 35,073
AHI Healthcare Systems, Inc...... 0 828,800 828,800 -- *** --
American National Bank Corp...... 291,000 40,500 -- 331,500 4,019,437 9,945
Atlantic Bancorp, Class A........ 290,406 -- -- 290,406 3,339,669 --
Atlantic Bancorp, Class C........ 17,387 -- -- 17,387 199,950 --
</TABLE>
18
<PAGE>
MUTUAL DISCOVERY FUND
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
<TABLE>
<CAPTION>
Balance of Shares Gross Sales Balance of Shares Value Dividend Income
Held Dec. 31, Gross Purchases and Held Dec. 31, December 31, Jan. 1-Dec. 31,
Name of Issuer: 1995 and Additions Reductions 1996 1996 1996
- ------------------------ ---------------- -------------- ----------- ----------------- ----------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Aviva Petroleum Inc. ............ 860,000 -- 475,000 385,000 *** --
Aviva Petroleum Inc.,
Depositary Shares ............. 255,188 -- 53,400 201,788 *** --
BNH Bancshares, Inc. ............ 1,123,000 -- 853,250 269,750 $ 2,967,250 --
Bank of Rhode Island ............ 0 228,300 -- 228,300 2,283,000 --
Bell Bancorp .................... 499,300 -- 499,300 -- *** $112,343
Cambrex Corp. ................... 388,400 -- 388,400 -- *** 42,788
Civic BanCorp ................... 385,866 -- -- 385,866 3,955,126 --
Continental Information
Systems Inc. .................. 419,828 6,725 -- 426,553 853,106 --
Elcor Corp. ..................... 669,200 -- 669,200 -- *** 115,814
First Union Real Estate Equity &
Mortgage Investments,
Series A Conv. Pfd. ............. 0 555,000 1,000 554,000 22,298,500 --
Goodmark Foods, Inc. ............ 580,200 27,000 607,200 -- *** 47,496
Hamilton Financial Services Corp. 459,300 -- 459,300 -- *** --
ISB Financial Corp. ............. 290,000 220,000 -- 510,000 9,180,000 153,900
Lafayette American
Bank & Trust Co. .............. 573,513 -- 573,513 -- *** 86,027
Lafayette American
Bank & Trust Co., Warrants .... 33,422 -- 33,422 -- *** --
Little Falls Bancorp ............ 0 290,000 -- 290,000 3,606,875 14,500
MIF Ltd. ........................ 315,000 7,875 -- 322,875 5,214,193 94,500
MDT Corp. ....................... 274,700 127,200 401,900 -- *** --
Mols-Linien A/S ................. 170,635 -- 170,635 -- *** --
Monarch Bancorp ................. 800,000 2,600,000 -- 3,400,000 6,800,000 --
North Central Bancshares, Inc. .. 0 332,500 -- 332,500 4,509,531 63,594
Pacific Forest Products Ltd. .... 1,202,000 2,487,400 -- 3,689,400 48,489,796 --
Rancho Santa Fe National Bank ... 347,223 -- -- 347,223 2,430,561 --
Smithway Motor Xpress Corp. ..... 0 360,000 10,000 350,000 2,843,750 --
Tolland Bank .................... 0 100,300 -- 100,300 1,203,600 3,009
TransTechnology Corp. ........... 193,300 -- 193,300 -- *** 16,907
Transport Corp. of America, Inc. 0 385,000 -- 385,000 4,138,750 --
Value Property Trust ............ 1,101,955 -- -- 1,101,955 12,038,858 --
Value Property Trust,
Warrants ...................... 0 6,874 -- 6,874 1,473 --
Yorkshire-Tyne Tees TV
Holdings, PLC ................. 3,300,000 -- 1,950,000 1,350,000 *** --
------------ --------
Total Non Controlled Affiliates $153,428,615 $795,896
============ ========
</TABLE>
* Affiliated issuers, as defined in the Investment Company Act of 1940, are
issuers in which the Fund held 5% or more of the out standing voting
securities.
** Issuers in which the Fund owns 25% or more of the outstanding voting
securities.
*** As of December 31, 1996 no longer an affiliate.
19
<PAGE>
MUTUAL DISCOVERY 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
Sales Contracts to Deliver In Exchange for Settlement Date Value Appreciation/(Depreciation)
----- --------------------- ---------------- --------------- -------------- ---------------------------
<S> <C> <C> <C> <C> <C>
AUD 79,043,941 $ 61,962,545 5/06/97 $ 62,756,542 $ (793,997)
CAD 229,705,979 172,777,642 5/30/97 169,227,716 3,549,926
CHF 43,200,593 33,009,122 3/10/97 32,495,355 513,767
DEM 354,563,532 23,656,549 3/18/97 23,158,160 498,389
DKK 252,842,538 43,659,909 4/24/97 43,186,449 473,460
ESP 31,008,999 2,439,517 2/18/97 2,392,829 46,688
FIM 212,910,550 48,061,072 3/03/97 46,469,264 1,591,808
FRF 838,989,380 163,489,637 2/28/97 162,341,733 1,147,904
GBP 55,199,059 87,703,697 2/18/97 94,462,758 (6,759,061)
GBP 38,000,000 63,024,900 3/18/97 64,981,330 (1,956,430)
GBP 37,116,670 57,542,710 5/16/97 63,362,907 (5,820,197)
GBP 38,000,000 62,836,800 6/18/97 64,806,758 (1,969,958)
GBP 38,280,419 63,155,035 8/18/97 65,165,025 (2,009,990)
HKD 332,168,829 42,958,606 1/10/97 42,947,203 11,403
ITL 18,439,895,834 12,056,241 1/02/97 12,163,520 (107,279)
ITL 18,439,895,833 11,961,143 7/02/97 12,086,100 (124,957)
NLG 50,778,289 30,951,048 3/06/97 29,531,361 1,419,687
NLG 34,201,325 20,331,495 3/17/97 19,888,038 443,457
NLG 22,258,579 13,026,515 6/10/97 13,030,109 (3,594)
NOK 500,000,000 78,187,306 3/10/97 78,639,783 (452,477)
NOK 632,387,687 97,590,692 6/09/97 99,886,620 (2,295,928)
PTE 1,489,900,000 9,556,767 1/17/97 9,605,661 (48,894)
SEK 158,663,519 23,904,627 1/21/97 23,282,700 621,927
SEK 224,102,022 33,775,738 2/18/97 32,926,488 849,250
SEK 439,005,089 66,162,041 5/15/97 64,756,402 1,405,639
SEK 230,512,129 34,838,983 8/15/97 34,143,617 695,366
SGD 1,229,307 879,962 2/18/97 880,839 (877)
-------------- -------------- -----------
$1,359,500,299 $1,368,575,267 (9,074,968)
============== ============== -----------
Purchases
$ 8,653,335 AUD 10,866,626 5/06/97 $ 8,627,504 (25,831)
6,923,304 CAD 9,377,200 5/30/97 6,908,319 (14,985)
5,643,580 FIM 25,896,184 3/03/97 5,652,030 8,450
32,903,322 GBP 20,707,214 5/16/97 35,349,863 2,446,541
12,040,415 ITL 18,439,895,834 1/02/97 12,163,520 123,105
5,578,299 NLG 9,688,170 3/06/97 5,634,394 56,095
4,218,087 PTE 661,424,238 1/17/97 4,264,324 46,237
19,281,712 SEK 130,318,476 1/21/97 19,123,274 (158,438)
5,125,468 SEK 33,945,459 2/18/97 4,987,482 (137,986)
2,335,595 SEK 15,952,116 5/15/97 2,353,048 17,453
------------ ------------ -----------
$102,703,117 $105,063,758 2,360,641
============ ============ -----------
$(6,714,327)
===========
</TABLE>
Currency type abbreviations are explained on page 11.
20
<PAGE>
MUTUAL DISCOVERY 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 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:
<TABLE>
<CAPTION>
Class Z
------------------------------------------------------------
Year Ended December 31,
1996 1995
----------------------------- ----------------------------
Shares Amount Shares Amount
------ ----- ------ ------
<S> <C> <C> <C> <C>
Shares sold ................................ 92,579,326 $ 1,546,731,608 37,915,220 $ 564,612,584
Shares issued in reinvestment of dividends.. 14,300,641 243,309,490 4,881,866 72,917,495
Shares redeemed ............................ (24,057,746) (404,745,155) (10,251,832) (148,437,161)
----------- --------------- ----------- -------------
Net Increase ............................. 82,822,221 $ 1,385,295,943 32,545,254 $ 489,092,918
=========== =============== =========== =============
</TABLE>
Class I
------------------------------
For the period
November 1, 1996
to December 31, 1996
-------------------------------
Shares Amount
------ ------
Shares sold ................................ 1,741,544 $ 30,983,582
Shares issued in reinvestment of dividends.. 78,256 1,329,570
Shares redeemed ............................ (76,554) (1,394,575)
---------- ------------
Net Increase ............................. 1,743,246 $ 30,918,577
========== ============
Class II
--------------------------------
For the period
November 1, 1996
to December 31, 1996
--------------------------------
Shares Amount
------ ------
Shares sold ................................ 1,024,931 $ 18,275,196
Shares issued in reinvestment of dividends.. 49,793 845,981
Shares redeemed ............................ (24,083) (433,593)
---------- ------------
Net Increase ............................. 1,050,641 $ 18,687,584
========== ============
21
<PAGE>
MUTUAL DISCOVERY 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
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Year.................. $15.16 $12.55 $13.05 $10.00
------ ------ ------ ------
Income from Investment Operations:
Net Investment Income............................ .34 .17 .15 .10
Net Gain on Securities (realized and unrealized). 3.39 3.40 .32 3.48
------ ------ ------ ------
Total from Investment Operations............... 3.73 3.57 .47 3.58
------ ------ ------ ------
Less Distributions:
Dividends (from net investment income)........... .31 .14 .16 .09
Distributions (from capital gains)............... 1.40 .82 .81 .44
------ ------ ------ ------
Total Distributions............................ 1.71 .96 .97 .53
------ ------ ------ ------
Net Asset Value, End of Year........................ $17.18 $15.16 $12.55 $13.05
====== ====== ====== ======
Total Return........................................ 24.93% 28.63% 3.62% 35.85%
Ratios/Supplemental Data:
Net Assets, End of Year (millions).................. $2,976 $1,370 $725 $548
Ratio of Expenses to Average Net Assets............. .96%+ .99% .99% 1.07%
Ratio of Net Investment Income to
Average Net Assets................................ 2.24%+ 2.00% 1.64% 1.17%
Portfolio Turnover Rate............................. 80.18% 73.23% 72.70% 90.37%
Average Commission Per Share........................ $ .026 -- -- --
</TABLE>
+ 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 .99% and 2.21%
in 1996.
22
<PAGE>
MUTUAL DISCOVERY FUND
FINANCIAL HIGHLIGHTS
(Selected data for a share of capital stock outstanding throughout each period)
<TABLE>
<CAPTION>
Class I Class II
------------------- -------------------
For the period For the period
November 1, 1996 November 1, 1996
to December 31, 1996+ to December 31, 1996
--------------------- ---------------------
<S> <C> <C>
Net Asset Value, Beginning of Period................... $17.66 $17.66
------ ------
Income from Investment Operations:
Net Investment Income.................................. .11 .09
Net Gain on Securities (realized and unrealized)....... .74 .76
------ ------
Total from Investment Operations..................... .85 .85
------ ------
Less Distributions:
Dividends (from net investment income)................. .29 .27
Distributions (from capital gains)..................... 1.07 1.07
------ ------
Total Distributions.................................. 1.36 1.34
------ ------
Net Asset Value, End of Period......................... $17.15 $17.17
====== ======
Total Return........................................... 4.85%a 4.90%b
Ratios/Supplemental Data:
Net Assets, End of Period (millions)................... $ 30 $ 18
Ratio of Expenses to Average Net Assets................ 1.38%** 2.00%**
Ratio of Net Investment Income to
Average Net Assets................................... 0.74%** 0.13%**
Portfolio Turnover Rate................................ 80.18% 80.18%
Average Commission Per Share........................... $ .026 $ .026
</TABLE>
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 charge. Not annualized for periods of less than one year.
** Annualized. 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 1.51% and .61%
respectively for Class I and 2.13% and 0% respectively for Class II.
+ Commencement of offering of sales.
23
<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 Discovery 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 for the year then
ended, the statement of changes in net assets for each of the two years in the
period then ended, and the financial highlights for each of the periods
indicated therein. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with 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 audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position of
Mutual Discovery Fund, a portfolio of Franklin Mutual Series Fund Inc., at
December 31, 1996, the results of its operations for the year then ended, the
changes in its net assets for each of the two years in the period then ended,
and the financial highlights for each of the indicated periods in conformity
with generally accepted accounting principles.
/s/ Ernest & Young LLP
Boston, Massachusetts
February 7, 1997
24
<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.
