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 Qualified Fund. The report is
not authorized for distribution to prospective investors in the Fund unless
preceded or accompanied by an effective prospectus.
MUTUAL
QUALIFIED
FUND
[LOGO]
ANNUAL
REPORT
December 31, 1996
[LOGO]
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Mutual Qualified Fund -- Class Z
Yearly Performance
Total Return*
-------------
1980 ............................................................... 9.20%
1981 ............................................................... 22.35%
1982 ............................................................... 15.36%
1983 ............................................................... 34.54%
1984 ............................................................... 14.71%
1985 ............................................................... 25.16%
1986 ............................................................... 17.51%
1987 ............................................................... 7.72%
1988 ............................................................... 30.15%
1989 ............................................................... 14.44%
1990 ............................................................... -10.12%
1991 ............................................................... 21.13%
1992 ............................................................... 22.70%
1993 ............................................................... 22.71%
1994 ............................................................... 5.73%
1995 ............................................................... 26.60%
1996 ............................................................... 21.19%
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Comparison of Changes in Value of $10,000 Investment in
Mutual Qualified Fund
To the S&P 500 and The Lipper Growth and Income Funds Average
- --------------------------------------------------------------------------------
[The following table was depicted as a line chart in the printed material]
- ----------------------------------------------
CLASS Z
AVERAGE ANNUAL TOTAL RETURN*
- ----------------------------------------------
1 Year 5 Year 10 Year
- ----------------------------------------------
21.19% 19.55% 15.62%
- ----------------------------------------------
Mutual Qualified Lipper Growth &
Class Z S&P 500 Income Funds Average
------- ------- --------------------
'86 10000 10000 10000
'87 10772 10494 10191
'88 14020 12231 11819
'89 16044 16101 14621
'90 14421 15602 13991
'91 17468 20344 18070
'92 21433 21891 19677
'93 26299 24092 21967
'94 27805 24408 21760
'95 35201 33568 28465
'96 42660 41275 34377
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Aggregate Total Returns** Since November 1, 1996
Mutual Qualified -- Class I.... 1.67% Mutual Qualified -- Class II.... 5.31%
* 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 QUALIFIED 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 Qualified Fund appreciated 21.19% with cash
balances averaging about 23% of total net assets.
As value investors, our primary mission is to buy securities at
significant discounts to asset value. When you consider that since the beginning
of 1995 the Standard & Poor's(R) 500 stock index has appreciated more than 65%,
you might ask -- how can a value investor continue to "find value" in a market
that has seen such a dramatic move over such a short period? Or, put another
way, were markets extremely cheap two years ago or are they extremely expensive
now?
The answer to these types of questions lies in understanding how we
operate our business on a daily basis. We focus on individual stocks, not on
macroeconomic variables or overall market movements. Our experience demonstrates
that "cheap stock" opportunities exist even as many securities may be priced at
expensive levels. Most people like to invest in companies that are performing
well and have stocks that performed well. We tend to focus on the laggards, the
underperformers whose share price performance has been poor, or companies beset
by negative news such as earnings disappointments or adverse legal judgments.
The extension of our value investing approach to mergers and acquisitions as
well as to distressed securities further removes us from the equivalent of
owning a market index.
Although the equity markets are significantly higher than they were two
years ago, valuations of specific companies are not necessarily out of line with
our investment parameters. While some companies simply have not participated in
the upward movement, others are operating much better than they had been
previously and have attractive valuations. Furthermore, the models for
emphasizing returns to shareholders through mechanisms such as restructurings,
spinoffs and stock buybacks are well documented. We direct our attention to
situations where these opportunities have not been fully exploited. The Funds
have also expanded their geographic breadth, focusing more on Europe as
valuations became more compelling there; the performance of the "European
portfolio" within the Funds was a significant contributor to the overall
performance of the Funds this year.
As we look forward, we continue to find a number of new situations that
provide compelling value. Of particular interest to us is that they are familiar
names and very large companies, such as General Motors and Olin Corporation.
Equity valuations in Europe also continue to be attractive
3
<PAGE>
relative to the U.S. market, as many companies are recognizing the need to
compete globally in terms of shareholder returns as well as for customers.
This year will also be our first full year as part of the Franklin
Templeton family and we are happy to say that this partnership is proceeding as
we had hoped. The investment process here continues to operate autonomously. At
the same time, we are integrating our shareholder services with those of the
Franklin Templeton family to respond to shareholder needs. We would like to
thank the senior management of Franklin Templeton for their help in this process
and their commitment to ensuring that the qualities that have made our Funds
special will be perpetuated.
Sincerely,
MICHAEL F. PRICE, President
4
<PAGE>
MUTUAL QUALIFIED FUND
SCHEDULE OF INVESTMENTS
DECEMBER 31, 1996
Number Value
of Shares (Note A)
--------- --------
COMMON STOCK & OTHER EQUITY INTERESTS (71.53%)
Aerospace (1.90%)
General Motors Corp., Class H............ 143,300 $ 8,060,625
* Hexcel Corp.............................. 833,907 12,195,890
* Litton Industries, Inc................... 392,500 18,692,812
Lockheed Martin Corp..................... 77,022 7,047,513
* Loral Space & Communications............. 484,200 8,897,175
McDonnell Douglas Corp................... 425,800 27,251,200
--------------
82,145,215
--------------
Banking (3.76%)
Astoria Financial Corp................... 34,500 1,272,188
Barclays PLC............................. 380,000 6,522,767
* Cal Fed Bancorp Inc...................... 72,800 1,783,600
Chase Manhattan Corp..................... 1,397,972 124,769,001
(A)* ITLA Capital Corp........................ 605,000 9,075,000
Long Island Bancorp, Inc................. 420,400 14,714,000
* Primary Bank............................. 23,417 374,672
Standard Federal Bancorporation.......... 63,000 3,583,125
--------------
162,094,353
--------------
Chemicals (1.32%)
DSM NV................................... 121,000 11,942,311
Eastman Chemical Co., Inc................ 78,500 4,337,125
Olin Corp................................ 815,500 30,683,187
Rohm & Haas Co........................... 121,000 9,876,625
--------------
56,839,248
--------------
Communications (3.96%)
* 360 Communications Company............... 363,333 8,402,076
AT&T Corp................................ 1,631,300 70,961,550
* Associated Group Inc., Class A........... 19,025 585,019
* Associated Group Inc., Class B........... 62,425 1,857,144
MCI Communications Corp.................. 1,267,300 41,424,869
Sprint Corp.............................. 279,000 11,125,125
Telephone & Data Systems Inc............. 1,003,700 36,384,125
--------------
170,739,908
--------------
Computer & Electronic Equipment (1.55%)
* Imation Corp............................. 434,500 12,220,313
* Unitrode Corp., Warrants................. 4,569 21,132
* Wang Laboratories, Inc................... 1,065,500 21,576,375
Xerox Corp............................... 626,900 32,990,612
--------------
66,808,432
--------------
Conglomerates (7.65%)
Alexander & Baldwin, Inc................. 143,200 3,580,000
* American Standard Companies Inc.......... 326,200 12,477,150
BTR PLC.................................. 5,594,779 27,219,605
* Berkshire Hathaway Inc., Class A......... 425 14,492,500
Harcourt General Inc..................... 75,500 3,482,438
Incentive AB, A Shares................... 431,400 31,311,979
Investor AB, A Shares.................... 934,900 41,810,964
Investor AB, B Shares.................... 2,412,000 106,632,551
Lagardere S.C.A.......................... 793,428 21,790,578
Philips Electronics NV................... 516,900 20,676,000
Philips Electronics NV, ADR.............. 302,000 12,244,425
Viad Corp................................ 2,088,000 34,452,000
--------------
330,170,190
--------------
Construction (0.51%)
Lone Star Industries, Inc................ 53,116 1,958,652
Martin Marietta Materials Inc............ 229,784 5,342,478
Noland Co................................ 17,500 400,312
Puerto Rican Cement Co., Inc............. 246,900 7,715,625
* Schuller Corp............................ 521,764 5,543,742
* USG Corp................................. 30,600 1,036,575
--------------
21,997,384
--------------
Consumer Products & Services (8.45%)
American Brands, Inc..................... 302,000 14,986,750
B.A.T Industries PLC..................... 2,775,000 23,056,069
* BIC SA................................... 148,186 22,235,045
Corning Inc.............................. 526,900 24,369,125
Dial Corp................................ 2,088,000 30,798,000
(A)* Esselte AB, A Shares..................... 1,375,000 31,250,687
(A)* Esselte AB, B Shares..................... 233,600 5,172,196
Fab Industries, Inc...................... 186,000 5,115,000
* KinderCare Learning Centers, Inc......... 185,364 3,475,575
Loewen Group Inc......................... 129,000 5,047,125
Philip Morris Companies Inc.............. 41,100 4,628,887
RJR Nabisco Holdings Corp................ 1,361,683 46,297,222
* Ranger Industries, Inc................... 24,483 6,855
Sophus Berendsen A/S, A Shares........... 42,405 5,472,542
5
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Number Value
of Shares (Note A)
--------- --------
Sophus Berendsen A/S, B Shares........... 238,375 $ 30,682,331
(A)(R) Sunbeam Corp............................. 4,800,554 105,072,126
* U.S. Industries Inc...................... 212,500 7,304,687
--------------
364,970,222
--------------
Entertainment & Media (4.16%)
* BHC Communications, Inc.................. 143,041 14,500,781
* Chris Craft Industries, Inc.............. 190,200 7,964,625
Comcast Corp., Class A................... 58,000 1,022,250
Comcast Corp., Class A
Special Non-Voting..................... 1,470,837 26,199,284
* ITT Corp................................. 338,800 14,695,450
* Pearson PLC.............................. 495,000 6,355,612
Todd A.O. Corp., Class A................. 191,774 1,965,683
* US West, Inc., - Media Group............. 5,766,500 106,680,250
--------------
179,383,935
--------------
Financial Services (4.27%)
Bear Stearns Companies, Inc.............. 390,025 10,871,947
Beneficial Corp.......................... 59,400 3,764,475
California Financial Holding Corp........ 37,400 1,079,925
Capital One Financial Corp............... 78,800 2,836,800
Dean Witter, Discover & Co............... 952,400 63,096,500
Finova Group Inc......................... 484,900 31,154,825
First USA, Inc. ......................... 143,500 4,968,688
Fund American Enterprises
Holdings, Inc.......................... 242,976 23,264,952
Lehman Brothers Holdings Inc............. 439,800 13,798,725
Leucadia National Corp................... 396,400 10,603,700
Liberty Financial Companies, Inc......... 140,347 5,455,990
Mercury Finance Company.................. 1,097,600 13,445,600
--------------
184,342,127
--------------
Food & Beverages (3.85%)
Brown-Forman Corp., Class B.............. 221,500 10,133,625
Cadbury Schweppes PLC.................... 1,686,956 14,232,806
* FoodBrands America, Inc.................. 147,287 2,025,196
Genesee Corp., Class A................... 7,000 295,750
Genesee Corp, Class B.................... 45,341 1,915,657
Grand Metropolitan PLC................... 280,000 2,206,462
Heineken Holding NV...................... 82,752 12,941,234
Hormel Foods Corp........................ 122,300 3,302,100
Lindt & Spruengli AG,
Participation Certificates............. 4,445 7,339,148
Lindt & Spruengli AG, Registered......... 126 2,299,253
Nabisco Holdings Corp., Class A.......... 231,200 8,987,900
Nestle SA, Registered.................... 6,656 7,145,814
Nutricia Verenigde Bedrijven NV.......... 163,330 24,832,971
Seaboard Corp............................ 10,100 2,686,600
Seagrams Company, Ltd.................... 142,700 5,529,625
Tootsie Roll Industries, Inc............. 579,100 22,946,837
(A)* Van Melle NV............................. 457,082 37,593,770
--------------
166,414,748
--------------
Healthcare (5.71%)
Allergan, Inc............................ 137,800 4,909,125
* Apria Healthcare Group Inc............... 167,400 3,138,750
* Beverly Enterprises, Inc................. 1,857,600 23,684,400
* FHP International Corp................... 1,032,900 38,346,413
* Foundation Health Corp................... 885,100 28,101,925
* Health Systems International, Inc........ 651,500 16,124,625
* Horizon/CMS Healthcare Corp.............. 1,106,000 13,963,250
Instrumentarium Group, Series A.......... 92,700 3,397,657
Instrumentarium Group, Series B.......... 325,200 11,876,870
(R)* Kendall International, Inc.,
Residual Ownership Certificates........ 444 6,864
* Laboratory Corp. of America,
Warrants............................... 144,863 13,581
* Maxicare Health Plans, Inc............... 571,800 12,722,550
* Mid Atlantic Medical Services, Inc....... 1,193,900 15,968,412
* Novartis AG.............................. 2,133 2,441,357
* Novartis AG, Registered.................. 13,754 15,752,620
* Perrigo Co............................... 409,800 3,739,425
* Tenet HealthCare Corp.................... 1,470,700 32,171,562
United HealthCare Corp................... 323,000 14,535,000
* Wellpoint Health Networks Inc.,
Class A................................ 159,200 5,472,500
--------------
246,366,886
--------------
Industrial (2.27%)
Crown Cork & Seal, Inc................... 285,354 15,516,124
Federal Mogul Corp....................... 249,100 5,480,200
Greif Brothers Corp...................... 78,800 2,226,100
ITT Industries Inc....................... 900,700 22,067,150
(A)(R)* Lancer Industries, Inc., Class B......... 4 51,286
* LucasVarity PLC.......................... 1,912,977 7,291,558
* LucasVarity PLC, ADR..................... 999,174 37,968,612
* New Holland NV........................... 192,000 4,008,000
* Owens-Illinois, Inc...................... 159,800 3,635,450
--------------
98,244,480
--------------
6
<PAGE>
Number Value
of Shares (Note A)
--------- --------
Insurance (3.84%)
* 20th Century Industries.................. 145,000 $ 2,446,875
* Alleghany Corp........................... 90,954 19,282,248
Allmerica Property & Casualty
Companies, Inc......................... 389,900 11,843,213
AON Corp................................. 25,600 1,590,400
Argonaut Group, Inc...................... 158,300 4,867,725
Enhance Financial Services
Group, Inc............................. 207,200 7,562,800
Financial Security Assurance
Holdings Ltd........................... 230,200 7,567,825
General RE Corp.......................... 57,562 9,080,406
Home Beneficial Corp., Class B........... 269,600 10,211,100
Kansas City Life Insurance Co............ 29,890 1,898,015
Koelinische Rueckversicherungs AG........ 12,055 9,010,887
Old Republic International Corp.......... 790,000 21,132,500
Provident Companies, Inc................. 196,100 9,486,337
Providian Corp........................... 49,700 2,553,337
Royal & Sun Alliance
Insurance Group PLC.................... 2,908,775 22,224,169
SAFECO Corp.............................. 133,800 5,276,737
Selective Insurance Group, Inc........... 183,300 6,965,400
The Paul Revere Corp..................... 113,800 4,239,050
Torchmark Corp........................... 113,600 5,736,800
Unitrin, Inc............................. 48,600 2,709,450
--------------
165,685,274
--------------
Investment Companies (1.36%)
Central European Equity Fund Inc......... 228,800 4,518,800
Forvaltnings AB Ratos, B Shares.......... 1,243,800 41,947,257
New Germany Fund, Inc.................... 694,800 9,292,950
(A)* Regent Kingpin Chile Value Fund.......... 80,180 3,063,678
(A)* Regent Kingpin Chile
Value Fund, Warrants................... 6,168 62
--------------
58,822,747
--------------
Metals (0.39%)
Cyprus Amax Minerals Co.................. 80,400 1,879,350
Inco Ltd................................. 71,591 2,286,960
Inco Ltd., Class VBN Shares.............. 62,750 1,523,448
* Kreisler Manufacturing Corp.............. 17,660 78,366
LTV Corp................................. 293,900 3,490,063
Pitt Des Moines, Inc..................... 46,600 1,939,725
Reynolds Metals Co....................... 98,000 5,524,750
--------------
16,722,662
--------------
Natural Resources (3.63%)
Amerada Hess Corp........................ 80,000 4,630,000
Ashland Inc.............................. 191,600 8,406,450
Bowater Inc.............................. 8,200 308,525
* Crown Central Petroleum
Corp., Class A......................... 71,900 889,763
* Crown Central Petroleum
Corp., Class B......................... 228,600 2,743,200
Imperial Oil Ltd......................... 421,400 19,805,800
* Northeast Utilities...................... 751,900 9,962,675
Royal Dutch Petroleum Co................. 96,200 16,426,150
* Santa Fe Energy Resources Inc............ 242,500 3,364,687
Shell Transport & Trading Co............. 688,500 11,900,786
Societe Elf Aquitane SA.................. 289,100 26,334,027
Temple Inland Inc........................ 46,500 2,516,812
Transocean Offshore Inc.................. 562,016 35,196,252
Union Texas Petroleum
Holdings, Inc.......................... 634,200 14,190,225
--------------
156,675,352
--------------
Printing & Publishing (3.37%)
Cognizant Corp........................... 888,700 29,327,100
Daily Mail & General
Trust PLC, Class A..................... 949,800 21,428,831
Daily Mail & General
Trust PLC, Ordinary.................... 38,500 943,143
De Telegraaf Holding NV.................. 1,072,024 22,601,607
Dun & Bradstreet Corp.................... 957,700 22,745,375
Houghton Mifflin Co...................... 248,900 14,093,963
Knight-Ridder, Inc....................... 270,600 10,350,450
Scripps (E.W.) Co., Class A.............. 701,200 24,542,000
--------------
146,032,469
--------------
Real Estate (2.18%)
* Al-Zar Ltd............................... 59 20,650
* Alexander's Inc.......................... 134,390 10,633,609
* Cadillac Fairview Corp................... 1,147,930 16,763,608
* Cadillac Fairview Corp., Warrants........ 126,360 461,319
* Castle & Cooke, Inc...................... 49,666 788,448
* E & J Properties Ltd., Units............. 5,600 14,000
(A)(R)* MSCW Investors II, L.L.C................. 23,562,000 40,363,861
St. Joe Paper Co......................... 85,800 5,577,000
(A)(R)* S.H. Mortgage Acquisition L.L.C.......... 19,668,774 19,668,774
--------------
94,291,269
--------------
7
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Number Value
of Shares (Note A)
--------- --------
Retail (1.35%)
American Stores Co. ..................... 134,400 $ 5,493,600
Delchamps, Inc........................... 62,700 1,214,813
Dillard Department
Stores Inc., Class A................... 228,200 7,045,675
* Eckerd Corp.............................. 141,317 4,522,144
* Payless ShoeSource, Inc.................. 258,100 9,678,750
Sears PLC................................ 4,093,000 6,731,216
* Service Merchandise Co., Inc............. 166,900 709,325
* Vons Companies Inc....................... 381,700 22,854,287
--------------
58,249,810
--------------
Transportation (6.05%)
Burlington Northern Santa Fe Corp........ 52,000 4,491,500
Caliber Systems Inc...................... 216,800 4,173,400
Canadian National Railway Co............. 416,900 15,842,200
Canadian Pacific, Ltd.................... 166,000 4,399,000
* Central Transport Rental
Group PLC.............................. 700,000 113,921
* Central Transport Rental
Group PLC, ADR......................... 559,399 209,775
Conrail Inc.............................. 511,915 50,999,532
Florida East Coast Industries, Inc....... 268,800 23,486,400
* Fritz Companies, Inc..................... 212,000 2,703,000
General Motors Corp...................... 1,170,900 65,277,675
Helikopter Services Group ASA............ 637,400 8,294,795
* M.S. Carriers Inc........................ 170,500 2,728,000
Railtrack Group PLC, Partly-Paid......... 4,183,000 27,767,713
Ryder Systems, Inc....................... 855,000 24,046,875
Volvo AB, B Shares....................... 873,930 19,285,830
XTRA Corp................................ 168,300 7,300,012
--------------
261,119,628
--------------
TOTAL COMMON STOCK &
OTHER EQUITY INTERESTS 3,088,116,339
--------------
PREFERRED STOCK (0.73%)
Chevy Chase Preferred
Capital Corp., 10.375% Pfd. A.......... 27,000 1,397,250
Criimi Mae Inc., 10.875%
Series B Conv. Pfd..................... 26,200 759,800
Crown Cork & Seal, Inc., 4.50%
Conv. Pfd.............................. 83,784 4,356,768
* Gentra Inc., Pfd. G...................... 74,000 975,284
Inco Ltd., 5.50%
Series E Conv. Pfd..................... 9,841 509,272
Number
of Shares
or Principal Value
Amount (Note A)
--------- --------
(R)* Interlake Corp., 9.00%
Series A3 Conv. Pfd.................... 1,050 $ 927,171
(A)(R) Lancer Industries, Inc.,
Series C Pfd........................... 205,128 13,589,730
RJR Nabisco Holdings Corp.,
Class C Pfd............................ 1,319,000 8,903,250
* Wundies Industries Inc., 11.25%
Cum. Pfd............................... 12,168 25,857
--------------
31,444,382
--------------
CORPORATE BONDS AND NOTES (1.18%)
Cadillac Fairview Corp.
12.00%, 7/31/05................CAD 131,259 91,049
Comcast Cellular Corp.,
0%, 3/05/00, Series A.................. $ 12,900,000 9,255,750
* Consorcio G Grupo Dina SA,
0/12.00%, 11/15/02..................... 4,250,000 3,527,500
Consorcio G Grupo Dina SA,
8.00%, 8/08/04......................... 4,120,000 2,595,600
FRD Acquisition Co., Series B
12.50%, 7/15/04........................ 1,250,000 1,275,000
Flagstar Companies Inc.,
10.75%, 9/15/01........................ 2,475,000 2,277,000
Flagstar Companies Inc.,
10.875%, 12/01/02...................... 400,000 368,000
* Gentra Inc., Series A,
7.50%, 12/31/01................CAD 9,900,000 9,035,815
* Gentra Inc., Series B,
7.50%, 12/31/01................CAD 629,584 482,686
Georges Quick to Fix Foods Inc.,
Series B, 11.50% 12/01/06.............. 1,600,000 1,656,000
Home Holdings Inc.,
8.625%, 12/15/03....................... 5,215,000 1,043,000
* Inflo Systems Inc.,
0/10.00%, 1/01/07...................... 2,100,000 1,480,500
International Knife & Saw Inc.,
11.375%, 11/15/06...................... 1,650,000 1,707,750
Olivetti International NV,
3.75%, 12/31/99................ITL 8,300,000,000 5,119,063
Phonetel Technologies Inc.,
12.00%, 12/15/06....................... 1,350,000 1,397,250
Specialty Foods Corp., Series B,
11.25%, 8/15/03........................ 1,900,000 1,501,000
Stone Container Financial Corp.,
11.50%, 8/15/06........................ 1,310,000 1,349,300
8
<PAGE>
Principal Value
Amount (Note A)
--------- --------
TransAmerican Refining Corp.,
16.50%, 2/15/02........................ 4,500,000 $ 4,545,000
* TransAmerican Refining Corp.,
0/18.00%, 2/15/02...................... 1,000,000 825,000
Uniforet Inc., 11.125%, 10/15/06......... 1,430,000 1,337,050
--------------
50,869,313
--------------
BONDS AND NOTES IN REORGANIZATION (1.16%) * Adams County CO, Industrial Dev.
Auth., 9.00%, 11/01/96................. 7,201,000 360,050
* Ames Department Stores, Inc.,
Trade Claims........................... 4,002,809 30,021
* Caldor Corp., Trade Claims............... 7,546,308 2,037,503
* Dow Corning Corp., Bank Debt #1.......... 1,801,364 1,963,487
* Dow Corning Corp., Bank Debt #2.......... 2,850,000 3,120,750
* Dow Corning Corp., Swap.................. 7,437,830 7,065,939
* Dow Corning Corp.,
9.30%, 1/27/98......................... 1,835,000 2,000,150
* Dow Corning Corp.,
8.15%, 10/15/29........................ 5,150,000 5,510,500
* Dow Corning Corp., Medium
Term Note, 8.55%, 3/01/01.............. 1,000,000 1,085,000
* Dow Corning Corp.,
9.375%, 2/01/08........................ 735,000 804,825
* El Paso TX Housing Finance Corp.,
8.88%, 10/15/96........................ 3,565,000 187,163
* Eurotunnel Finance Limited,
Bank Debt, Tranche D...........BEF 55,000,000 676,070
* Eurotunnel Finance Limited,
Bank Debt, Tranche D1..........BEF 274,574,182 3,375,114
* Eurotunnel Finance Limited,
Bank Debt, Tranche E...........ECU 383,355 187,693
* Eurotunnel Finance Limited,
Bank Debt, Tranche E...........FRF 42,532,233 3,199,146
* Eurotunnel Finance Limited,
Bank Debt, Tranche E1..........FRF 23,835,021 1,792,798
* Eurotunnel Finance Limited,
Bank Debt, Tranche J1..........GBP 1,169,819 781,563
* Louisiana Agriculture Finance
Authority, 8.25%, 10/01/96............. 1,600,000 84,000
* Louisiana Agriculture Finance
Authority, 8.80%, 10/01/96............. 750,000 39,375
* Louisiana Housing Finance
Authority, 8.61%, 8/01/96.............. 6,150,000 307,500
Number
of Shares
or Principal Value
Amount (Note A)
--------- --------
* Maxicare Health Plans, Inc.,
Bank Note.............................. $ 124,847 $ 39,951
* Metallurg Inc., Bank Claim............... 6,675,644 4,205,656
* Metallurg Inc., Bank Claim #2............ 2,304,362 1,157,942
* Metallurg Inc., Trade Claim.............. 642,169 179,807
* MobileMedia Corp., Bank Debt #1.......... 1,762,446 1,445,206
* MobileMedia Corp., Bank Debt #2.......... 2,725,000 2,180,000
* Nebraska Investment Finance
Authority, 8.34%, 11/01/93............. 1,000,000 50,000
* Olympia & York Maiden Lane
Finance, 10.375%, 12/31/95............. 6,269,000 1,943,390
* SouthEast Banking Corp.,
0%, 11/06/97........................... 750,000 435,000
* SouthEast Banking Corp.,
4.75%, 10/15/97........................ 2,200,000 1,430,000
* SouthEast Banking Corp.,
10.50%, 4/11/01........................ 3,875,000 2,247,500
* Tiphook Finance Corp.,
Lease Claim.....................GBP 118,013 192,059
--------------
50,115,158
--------------
COMPANIES IN LIQUIDATION (0.06%)
* Aerospace Creditors
Liquidating Trust, Certificates of
Beneficial Interest.................... 126,677 459,204
* Americana Hotels & Realty Corp........... 143,000 160,875
* City Investing Co.,
Liquidating Trust...................... 1,579,485 1,480,767
* MBO Properties Inc....................... 120,917 272,063
* MCorp Financial Trust, Claim Units....... 27,617 188,207
* MCorp Trust, Claim Units................. 27,611 64,997
--------------
2,626,113
--------------
UNITED STATES GOVERNMENT AND
GOVERNMENT AGENCY OBLIGATIONS (24.76%)
U.S. Government Agency Obligations (2.29%)
Federal Home Loan Bank System,
5.010%, 2/28/97....................... $ 12,500,000 12,493,263
5.106%, 2/23/98....................... 12,500,000 12,410,000
5.637%, 3/13/98....................... 25,000,000 24,958,750
Federal Home Loan Mortgage Corp.,
5.170%, 3/24/97........................ 6,000,000 5,995,824
Federal National Mortgage Association,
5.570%, 6/13/97........................ 5,000,000 4,880,920
5.860%, 7/03/97........................ 31,000,000 31,069,688
9
<PAGE>
Principal Value
Amount (Note A)
--------- --------
Tennessee Valley Authority,
6.00%, 1/15/97......................... $ 7,000,000 $ 7,001,299
--------------
98,809,744
--------------
U.S. Government Agency Discount Notes (22.47%)
Federal Home Loan Bank System,
5.350%, 1/06/97....................... 2,500,000 2,498,142
5.240%, 1/13/97....................... 2,000,000 1,996,507
5.240%, 1/15/97....................... 3,500,000 3,492,868
5.410%, 1/24/97....................... 12,000,000 11,958,523
5.260%, 1/31/97....................... 12,000,000 11,947,400
5.260%, 2/04/97....................... 1,000,000 995,032
5.330%, 2/05/97....................... 4,250,000 4,227,977
5.230%, 2/13/97....................... 4,000,000 3,975,012
5.270%, 2/13/97....................... 7,000,000 6,955,937
5.240%, 2/14/97....................... 6,500,000 6,458,371
5.460%, 2/18/97....................... 17,300,000 17,174,056
5.230%, 2/21/97....................... 15,000,000 14,888,862
5.320%, 2/26/97....................... 6,000,000 5,950,346
5.210%, 3/03/97....................... 23,000,000 22,789,550
5.200%, 3/04/97....................... 6,000,000 5,945,646
5.410%, 3/04/97....................... 3,750,000 3,716,029
5.500%, 3/04/97....................... 4,125,000 4,087,632
5.180%, 3/05/97....................... 12,000,000 11,887,020
5.490%, 3/12/97....................... 15,500,000 15,337,854
5.390%, 3/24/97....................... 17,000,000 16,793,994
5.220%, 3/26/97....................... 15,000,000 14,815,905
5.600%, 4/07/97....................... 13,000,000 12,815,920
5.280%, 4/10/97....................... 2,500,000 2,463,220
5.330%, 4/14/97....................... 2,500,000 2,462,377
5.280%, 4/15/97....................... 10,000,000 9,848,040
5.510%, 4/22/97....................... 7,900,000 7,771,878
5.500%, 4/24/97....................... 5,000,000 4,917,445
5.290%, 4/30/97....................... 11,000,000 10,808,743
5.300%, 4/30/97....................... 4,055,000 3,984,496
5.300%, 5/06/97....................... 2,500,000 2,454,600
5.540%, 5/06/97....................... 2,300,000 2,258,232
5.320%, 5/23/97....................... 10,200,000 9,989,584
5.580%, 5/27/97....................... 24,500,000 23,980,330
5.150%, 6/09/97....................... 15,000,000 14,658,150
5.310%, 6/23/97....................... 3,000,000 2,924,745
5.320%, 6/23/97....................... 13,000,000 12,673,895
5.330%, 6/23/97....................... 4,530,000 4,416,365
5.220%, 7/23/97....................... 13,000,000 12,615,148
5.140%, 7/30/97....................... 20,000,000 19,387,500
5.120%, 8/04/97....................... 20,000,000 19,372,920
5.110%, 8/12/97....................... 9,500,000 9,199,287
5.150%, 9/05/97....................... 26,000,000 25,063,454
5.280%, 9/10/97....................... 10,200,000 9,825,150
5.190%, 9/26/97....................... 7,000,000 6,729,541
Federal Home Loan Mortgage Corp.,
5.190%, 1/03/97....................... 7,300,000 7,297,895
5.420%, 1/27/97....................... 9,000,000 8,964,770
5.200%, 8/15/97....................... 4,000,000 3,869,424
Federal National Mortgage Association,
5.500%, 1/14/97....................... 9,300,000 9,281,529
5.190%, 1/16/97....................... 8,000,000 7,982,700
5.240%, 1/21/97....................... 14,000,000 13,959,244
5.290%, 1/28/97....................... 40,000,000 39,841,300
5.220%, 2/04/97....................... 12,400,000 12,338,868
5.280%, 2/07/97....................... 7,000,000 6,962,013
5.225%, 2/18/97....................... 12,000,000 11,916,400
5.240%, 2/18/97....................... 9,000,000 8,937,120
5.250%, 2/19/97....................... 12,500,000 12,410,677
5.220%, 2/21/97....................... 10,000,000 9,926,050
5.300%, 3/10/97....................... 800,000 791,870
5.490%, 3/14/97....................... 12,500,000 12,368,500
5.370%, 3/17/97....................... 10,000,000 9,887,920
5.170%, 3/19/97....................... 15,000,000 14,831,235
5.230%, 4/03/97....................... 13,900,000 13,711,738
5.260%, 4/03/97....................... 3,300,000 3,255,305
5.290%, 4/10/97....................... 10,000,000 9,853,980
5.240%, 4/11/97....................... 18,500,000 18,229,697
5.330%, 4/11/97....................... 6,500,000 6,405,029
5.230%, 4/16/97....................... 9,000,000 8,860,617
5.190%, 4/21/97....................... 15,000,000 14,758,920
5.180%, 5/01/97....................... 1,700,000 1,670,364
5.150%, 5/02/97....................... 4,100,000 4,026,274
5.150%, 5/05/97....................... 15,000,000 14,729,790
5.420%, 5/09/97....................... 18,400,000 18,052,608
5.500%, 5/13/97....................... 12,500,000 12,260,288
5.550%, 5/15/97....................... 9,500,000 9,315,064
5.230%, 5/19/97....................... 15,000,000 14,692,380
5.210%, 5/21/97....................... 10,000,000 9,796,610
5.460%, 6/02/97....................... 30,500,000 29,827,780
10
<PAGE>
Number
of Shares,
Contracts or
Principal Value
Amount (Note A)
--------- --------
5.140%, 6/04/97....................... $ 6,200,000 $ 6,059,167
5.150%, 6/05/97....................... 6,700,000 6,549,418
5.240%, 6/10/97....................... 12,700,000 12,405,360
5.490%, 6/17/97....................... 16,800,000 16,393,188
5.240%, 6/30/97....................... 3,000,000 2,921,700
5.250%, 6/30/97....................... 1,200,000 1,168,680
5.420%, 7/11/97....................... 15,500,000 15,070,728
5.130%, 7/18/97....................... 6,100,000 5,923,863
5.150%, 7/22/97....................... 15,200,000 14,752,238
5.160%, 7/24/97....................... 1,400,000 1,358,350
5.170%, 7/24/97....................... 10,000,000 9,702,500
5.265%, 8/08/97....................... 19,500,000 18,877,229
5.120%, 8/18/97....................... 10,800,000 10,439,323
5.130%, 8/22/97....................... 5,000,000 4,830,105
5.310%, 9/08/97....................... 15,700,000 15,121,063
5.305%, 9/18/97....................... 22,000,000 21,157,093
5.120%, 9/19/97....................... 8,000,000 7,703,040
--------------
969,960,687
--------------
OPTIONS (0.47%)
(R)* Cityscape Financial Corp.,
January/20/Call........................ 8,610 20,341,125
TOTAL INVESTMENTS IN
SECURITIES (99.88%) $4,312,282,861
==============
SECURITIES SOLD SHORT (0.41%)
* Arch Communications Group, Inc.,
10.875%, 3/15/08....................... $ 1,300,000 $ 750,750
* J.C. Penney Co., Inc..................... 93,400 4,553,250
* Safeway, Inc............................. 294,800 12,602,700
--------------
17,906,700
--------------
WHEN ISSUED SECURITIES SOLD SHORT (0.12%)
* Covance, Inc............................. 38,900 816,900
* NCR Corp................................. 100,600 3,357,525
* Quest Diagnostics, Inc................... 61,200 925,650
--------------
5,100,075
--------------
TOTAL SECURITIES SOLD SHORT
AND WHEN ISSUED
SECURITIES SOLD SHORT
(0.53%)................................ $ 23,006,775
==============
Value
Contracts (Note A)
--------- --------
OPTIONS WRITTEN (0.01%)
* Boeing Co.,
May/100/Put........................... 275 $ 84,219
==============
* 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.
Currency Type Abbreviations:
Principal amount is stated in United States dollars unless otherwise
noted.
ECU -- European currency units
AUD -- Australian dollar
BEF -- Belgian franc
GBP -- British pound
CAD -- Canadian dollar
DKK -- Danish krone
NLG -- Dutch guilder
FIM -- Finnish markka
FRF -- French franc
DEM -- German mark
ITL -- Italian lira
NOK -- Norwegian krone
SEK -- Swedish krona
CHF -- Swiss franc
Distribution of investments by country:
As a percentage of total investments in securities
United States............................ 78.4%
Sweden................................... 6.4%
United Kingdom........................... 5.1%
Netherlands.............................. 3.7%
Canada................................... 1.9%
France................................... 1.7%
Other (individually less than 1%)........ 2.8%
-------
Total.................................... 100.0%
=======
See notes to financial statements.
11
<PAGE>
MUTUAL QUALIFIED FUND
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1996
ASSETS
<TABLE>
<CAPTION>
<S> <C> <C>
Investments in Securities, at Value
Unaffiliated Issuers (Cost $3,444,424,758)....................... $4,047,381,691
Controlled Affiliated Issuers (Cost $55,928,418)................. 60,032,635
Non Controlled Affiliated Issuers (Cost $86,537,926) (Note F).... 204,868,535 $4,312,282,861
--------------
Cash ................................................................................ 8,193,365
Receivables:
Investment Securities Sold ..................................................... 34,242,428
Capital Stock Subscribed ....................................................... 9,613,043
Dividends ...................................................................... 4,166,840
Interest ....................................................................... 4,249,945
Other .......................................................................... 677,877
Fee Reimbursed ................................................................. 1,076,327
Deposits with Brokers for Securities Sold Short ..................................... 2,832,906
---------------
TOTAL ASSETS ............................................................... 4,377,335,592
---------------
LIABILITIES
Payables:
Investment Securities Purchased ................................................ 30,054,189
Capital Stock Repurchased ...................................................... 3,190,687
Investment Advisory Fee ........................................................ 2,114,973
Accrued Expenses and Other Liabilities ......................................... 1,529,841
Net Payable for Foreign Currency Exchange Contracts ............................ 35,472
Securities Sold Short and When Issued Securities Sold Short, at Value
(Proceeds Receivable $23,529,104) .............................................. 23,006,775
Outstanding Options Written, at Value (Premium Received $119,483) ................... 84,219
---------------
TOTAL LIABILITIES .......................................................... 60,016,156
---------------
NET ASSETS APPLICABLE TO OUTSTANDING CAPITAL STOCK .................................. $ 4,317,319,436
===============
COMPOSITION OF NET ASSETS
Paid In Capital ..................................................................... $ 3,524,185,361
Distributions in Excess of Net Investment Income .................................... (1,596,000)
Accumulated Net Realized Gain on Investments and Foreign Currency Transactions ...... 68,761,150
Net Unrealized Appreciation of Investments, Securities Sold Short and Options Written 725,949,352
Net Unrealized Appreciation of Foreign Currency Exchange Contracts and Dividends .... 19,573
---------------
TOTAL NET ASSETS ........................................................... $ 4,317,319,436
===============
Class Z
Net Asset Value per Share
($4,286,975,274 / 132,024,411 shares outstanding) .......................... $ 32.47
===============
Class I
Net Asset Value per Share ($20,380,994 / 627,900 shares outstanding) ........... $ 32.46
===============
Maximum Offering Price ($32.46 / 95.5%) ........................................ $ 33.99
===============
Class II
Net Asset Value per Share ($9,963,168 / 307,021 shares outstanding) ............ $ 32.45
===============
Maximum Offering Price ($32.45 / 99.0%) ........................................ $ 32.78
===============
</TABLE>
See notes to financial statements.
12
<PAGE>
MUTUAL QUALIFIED FUND
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
<S> <C> <C>
INVESTMENT INCOME:
Income:
Dividends -- Unaffiliated Issuers
(Net of Foreign Withholding -- $2,272,601).............................. $ 89,458,094
Dividends -- Non Controlled Affiliated Issuers
(Net of Foreign Withholding -- $166,111) ............................... 1,529,026
Interest ................................................................. 52,055,555
-------------
TOTAL INCOME .................................................................. $ 143,042,675
Expenses:
Investment Advisory Fees ................................................. 22,515,334
Shareholder Servicing Costs .............................................. 3,340,061
Administrative ........................................................... 1,886,543
Distribution Fees
Class I .............................................................. 4,747
Class II ............................................................. 7,956
Custodian Fees ........................................................... 405,524
Registration and Filing Fees ............................................. 408,983
Shareholder Reports ...................................................... 259,270
Legal Fees ............................................................... 82,688
Insurance ................................................................ 71,681
Auditing Fees ............................................................ 72,811
Directors' Fees and Expenses ............................................. 53,558
Miscellaneous ............................................................ 47,025
-------------
TOTAL EXPENSES ................................................................ 29,156,181
-------------
Less Expenses Reimbursed ................................................. (1,076,327)
-------------
TOTAL EXPENSES LESS REIMBURSEMENT ............................................. 28,079,854
NET INVESTMENT INCOME ............................................ 114,962,821
-------------
REALIZED AND UNREALIZED GAIN/(LOSS) ON INVESTMENTS
Net Realized Gain on Investments and Foreign Currency Transactions
in Unaffiliated Issuers ................................................ 281,660,608
Net Realized Gain on Investments in Controlled and Non Controlled
Affiliated Issuers ..................................................... 1,924,991
Net Realized Loss on Securities Sold Short ............................... (7,621,193)
Net Realized Gain on Options Written ..................................... 368,342
Change in Unrealized Appreciation of Investments,
Securities Sold Short, Options Written and Foreign Currency Transactions 330,171,813
-------------
NET GAIN ON INVESTMENTS .......................................... 606,504,561
-------------
NET INCREASE IN NET ASSETS FROM OPERATIONS .................................... $ 721,467,382
=============
</TABLE>
See notes to financial statements.
13
<PAGE>
MUTUAL QUALIFIED 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 ............................................ $ 114,962,821 $ 66,133,081
Net Realized Gain on Investments and Foreign Currency Transactions 276,332,748 327,189,162
Change in Unrealized Appreciation of Investments ................. 330,171,813 156,169,968
--------------- ---------------
NET INCREASE IN NET ASSETS
FROM OPERATIONS ........................................... 721,467,382 549,492,211
--------------- ---------------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net Investment Income
Class Z ...................................................... (107,303,548) (58,854,226)
Class I ...................................................... (353,451) --
Class II ..................................................... (182,773) --
Net Realized Gain on Investments
Class Z ...................................................... (311,919,654) (289,682,676)
Class I ...................................................... (711,352) --
Class II ..................................................... (378,697) --
--------------- ---------------
TOTAL DISTRIBUTIONS TO SHAREHOLDERS .......................... (420,849,475) (348,536,902)
--------------- ---------------
CAPITAL STOCK TRANSACTIONS:
Class Z ...................................................... 983,246,572 1,009,236,508
Class I ...................................................... 21,035,840 --
Class II ..................................................... 10,286,322 --
--------------- ---------------
NET INCREASE IN NET ASSETS ............................................ 1,315,186,641 1,210,191,817
NET ASSETS:
Beginning of Year ................................................ 3,002,132,795 1,791,940,978
--------------- ---------------
End of Year -- Including Distributions in Excess of Net Investment
Income of $1,596,000 and $5,929,311, respectively .............. $ 4,317,319,436 $ 3,002,132,795
=============== ===============
</TABLE>
See notes to financial statements.
14
<PAGE>
MUTUAL QUALIFIED FUND
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
NOTE A -- SIGNIFICANT ACCOUNTING POLICIES
Mutual Qualified 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 Qualified Fund, Mutual Shares
Fund, Mutual Beacon Fund, Mutual Discovery Fund and Mutual European Fund. Each
of these portfolios is considered to be a separate entity for financial
reporting and Federal income tax purposes. The financial statements and notes
include operations with respect to Mutual Qualified 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 segregated account by
the custodian bank.
15
<PAGE>
MUTUAL QUALIFIED FUND
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
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 year ended December 31, 1996, the Advisers received fees of
$22,515,334 for investment management and advisory services under the investment
advisory agreements. The fee was paid monthly based on average daily net assets
at the annual rate of six-tenths of one percent. Prior to November 1, 1996,
administrative personnel and services were provided at approximate cost by
Heine. On November 1, 1996 Franklin Templeton Services, Inc. ("FTSI") became the
Fund's administrative manager. The Fund pays FTSI monthly its allocated share of
an administrative fee of 0.15% per annum on the first $200 million of the Series
Fund's aggregate average daily net
16
<PAGE>
MUTUAL QUALIFIED FUND
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
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 $553,904 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 $611,100. 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 $68,177 from the
sale of the Fund's shares and FTIS received fees of $667,105.
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 $439,926. 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 year ended December 31, 1996 aggregated
$2,316,707,060 and $1,964,780,306, respectively.
For Federal income tax purposes, the identified cost of investments at
December 31, 1996 was $3,588,276,788. Net unrealized appreciation for all
securities at December 31, 1996, based on Federal income tax cost, amounted to
$724,006,073 consisting of aggregate gross unrealized appreciation of
$771,252,719 and aggregate gross unrealized depreciation of $47,246,646.
Transactions in options written during the year ended December 31, 1996
were as follows:
Principal
Amount or
Number of
Contracts Premium
------- ---------
Options outstanding at December 31, 1995 ........... 65 $ 8,173
Options written .................................... 81,300 842,610
Options expired .................................... (79,041) (344,208)
Options terminated in closing transactions ......... (890) (154,269)
Options exercised .................................. (1,159) (232,823)
------- ---------
Options outstanding at December 31, 1996 ........... 275 $ 119,483
======= =========
17
<PAGE>
MUTUAL QUALIFIED FUND
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
NOTE E -- RESTRICTED SECURITIES
A summary of the restricted securities held at December 31, 1996 follows:
<TABLE>
<CAPTION>
Acquisition
Name of Issuer Date Value
- ------------- ------- --------
<S> <C> <C>
Common Stock & Other Equity Interests
Kendall International, Inc., Residual Ownership Certificates ...... 7/06/92 $ 6,864
Lancer Industries, Inc., Class B .................................. 8/11/89 51,286
MSCW Investors II, L.L.C .......................................... 12/27/95 40,363,861
S.H. Mortgage Acquisition L.L.C ................................... 8/17/95 19,668,774
Sunbeam Corp. ..................................................... 2/23/90 105,072,126
Preferred Stock
Interlake Corp., 9.00%, Series A3 Conv. Pfd. ...................... 6/17/92 927,171
Lancer Industries, Inc., Series C Pfd. ............................ 8/11/89 13,589,730
Options
Cityscape Financial Corp., January/20/Call ........................ 11/25/96 20,341,126
------------
Total restricted securities: (Cost $106,433,729) (4.63% of Net Assets) $200,020,938
============
</TABLE>
NOTE F -- INVESTMENT IN AFFILIATES*
<TABLE>
<CAPTION>
Balance Gross Balance Dividend
of Shares Purchases Gross Sales of Shares Value Income
Held Dec. 31, and and Held Dec. 31, Dec. 31, Jan. 1-
Name of Issuer: 1995 Additions Reductions 1996 1996 Dec. 31, 1996
- --------------------------------- ------------- --------- ----------- ------------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Controlled Affiliates**
MSCW Investors II, L.L.C......... 23,562,000 -- -- 23,562,000 $ 40,363,861 --
S.H. Mortgage Acquisition L.L.C.. 28,134,981 -- 8,466,207 19,668,774 19,668,774 --
------------ ----------
Total Controlled Affiliates $ 60,032,635 --
============ ==========
Non Controlled Affiliates
Esselte AB, A Shares............. -- 1,375,000 -- 1,375,000 $ 31,250,687 $ 686,990
Esselte AB, B Shares............. -- 233,600 -- 233,600 5,172,196 116,713
ITLA Capital Corp.+.............. 375,000 230,000 -- 605,000 9,075,000 --
Lancer Industries, Inc., Class B. 4 -- -- 4 51,286 --
Lancer Industries, Inc.,
Series C Pfd.................. 205,128 -- -- 205,128 13,589,730 --
Management Assistance, Inc.,
Liquidating Trust............. 575,717 -- 575,717 -- *** --
Regent Kingpin Chile Value Fund.. -- 80,180 -- 80,180 3,063,678 --
Regent Kingpin Chile Value Fund,
Warrants...................... -- 6,168 -- 6,168 62 --
Sunbeam Corp..................... 4,800,554 -- -- 4,800,554 105,072,126 192,022
Van Melle NV..................... 451,768 5,314 -- 457,082 37,593,770 533,301
------------ ----------
Total Non Controlled Affiliates $204,868,535 $1,529,026
============ ==========
</TABLE>
* Affiliated issuers, as defined in the Investment Company Act of 1940, are
issuers in which the Fund held 5% or more of the outstanding voting
securities.
** Issuers in which the Fund owns 25% or more of the outstanding voting
securities.
*** As of December 31, 1996 no longer an affiliate.
+ Name changed from Imperial Thrift & Loan Association.
18
<PAGE>
MUTUAL QUALIFIED FUND
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
NOTE G -- FOREIGN CURRENCY EXCHANGE CONTRACTS
At December 31, 1996, the Fund had various contracts which obligate the
Fund to deliver currencies at specified future dates. Open contracts were as
follows:
<TABLE>
<CAPTION>
Net Unrealized
Contracts to Deliver In Exchange For Settlement Date Value Appreciation/(Depreciation)
-------------------- --------------- --------------- ----------- ---------------------------
<S> <C> <C> <C> <C> <C>
Sales
AUD 26,713,263 $20,940,527 5/06/97 $21,208,862 $ (268,335)
BEF 120,294,576 3,871,728 2/07/97 3,792,456 79,272
CAD 69,965,897 52,607,024 5/30/97 51,544,888 1,062,136
CHF 47,186,572 36,069,156 3/10/97 35,493,597 575,559
DEM 16,748,909 11,217,302 3/18/97 10,939,420 277,882
DKK 191,301,700 32,913,849 4/24/97 32,675,044 238,805
FIM 68,477,753 15,457,732 3/03/97 14,945,764 511,968
FRF 383,874,098 74,812,611 2/28/97 74,278,397 534,214
GBP 33,586,885 52,200,192 2/18/97 57,477,606 (5,277,414)
GBP 22,000,000 36,488,100 3/18/97 37,620,770 (1,132,670)
GBP 41,254,522 63,917,211 5/16/97 70,426,750 (6,509,539)
GBP 22,000,000 36,379,200 6/18/97 37,519,702 (1,140,502)
GBP 28,405,872 46,848,772 8/18/97 48,355,515 (1,506,743)
ITL 7,455,520,834 4,856,051 1/02/97 4,917,889 (61,838)
ITL 7,455,520,834 4,836,066 7/02/97 4,886,588 (50,522)
NLG 101,127,210 61,640,381 3/06/97 58,813,012 2,827,369
NLG 82,806,053 49,430,641 3/17/97 48,193,909 1,236,732
NLG 56,320,667 32,998,780 6/10/97 32,969,958 28,822
NOK 48,346,330 7,460,853 6/09/97 7,636,378 (175,525)
SEK 482,702,927 72,656,832 1/21/97 70,833,090 1,823,742
SEK 183,144,708 27,602,820 2/18/97 26,908,780 694,040
SEK 303,480,827 45,876,517 5/15/97 44,765,599 1,110,918
SEK 413,097,277 62,585,755 7/21/97 61,121,940 1,463,815
SEK 315,428,128 47,672,958 8/15/97 46,721,434 951,524
------------ ------------ ----------
$901,341,058 $904,047,348 (2,706,290)
============ ============ ----------
Purchases
$ 21,053,627 AUD 26,713,263 5/06/97 $21,208,862 155,235
2,006,957 DEM 3,000,000 3/18/97 1,959,427 (47,530)
121,776 FRF 633,015 2/28/97 122,487 711
39,902,486 GBP 24,845,890 5/16/97 42,415,115 2,512,629
4,868,116 ITL 7,455,520,834 1/02/97 4,917,889 49,773
----------- ------------ ----------
$67,952,962 $ 70,623,780 2,670,818
=========== ============ ----------
$ (35,472)
==========
</TABLE>
Currency type abbreviations are explained on page 11.
19
<PAGE>
MUTUAL QUALIFIED FUND
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
NOTE H -- CAPITAL STOCK
Effective November 1, 1996, the Fund offered three classes of shares:
Class Z, Class I and Class II. All Fund shares outstanding before that date were
designated class Z shares. All classes of shares have the same attributes,
except for their initial sales load, distribution fees, voting rights affecting
a single class and the exchange privilege of each class. At December 31, 1996,
there were 300 million shares authorized ($0.001 par value). Transactions in
capital stock were as follows:
<TABLE>
<CAPTION>
Class Z
-------------------------------------------------------------
Year Ended December 31,
1996 1995
----------------------------- -----------------------------
Shares Amount Shares Amount
<S> <C> <C> <C> <C>
Shares sold ................................ 34,226,041 $ 1,085,539,409 29,376,535 $ 885,069,058
Shares issued in reinvestment of dividends . 12,345,504 395,968,029 11,321,587 334,553,126
Shares redeemed ............................ (15,506,528) (498,260,866) (6,936,714) (210,385,676)
----------- --------------- ----------- ---------------
Net Increase ............................. 31,065,017 $ 983,246,572 33,761,408 $ 1,009,236,508
=========== =============== =========== ===============
</TABLE>
Class I
-------------------------
For the period
November 1, 1996
to December 31, 1996
-------------------------
Shares Amount
Shares sold ................................ 601,500 $ 20,190,535
Shares issued in reinvestment of dividends . 29,625 953,331
Shares redeemed ............................ (3,225) (108,026)
-------- ------------
Net Increase ............................. 627,900 $ 21,035,840
======== ============
Class II
-------------------------
For the period
November 1, 1996
to December 31, 1996
-------------------------
Shares Amount
Shares sold ................................ 300,727 $ 10,097,197
Shares issued in reinvestment of dividends . 12,961 416,815
Shares redeemed ............................ (6,667) (227,690)
-------- ------------
Net Increase ............................. 307,021 $ 10,286,322
======== ============
Effective January 31, 1997, there was a 2-for-1 stock split and authorized
shares were increased to 900 million shares.
20
<PAGE>
MUTUAL QUALIFIED FUND
FINANCIAL HIGHLIGHTS
(Selected data for a share of capital stock outstanding throughout each period)
<TABLE>
<CAPTION>
Class Z
--------------------------------------------------------------------------------------
Year Ended December 31,
--------------------------------------------------------------------------------------
1996 1995 1994 1993 1992 1991 1990 1989 1988 1987
------ ------ ------ ------ ------ ------ ------- ------ ------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Year ............ $29.74 $26.67 $27.00 $24.43 $21.18 $18.37 $ 22.21 $22.71 $19.37 $ 20.06
------ ------ ------ ------ ------ ------ ------- ------ ------ -------
Income from Investment
Operations:
Net Investment Income ........ .94 .66 .43 .38 .49 .67 1.22 1.34 .84 .77
Net Gains or Losses on
Securities (realized and
unrealized) ................ 5.24 6.33 1.10 5.12 4.27 3.18 (3.45) 1.91 4.95 .86
------ ------ ------ ------ ------ ------ ------- ------ ------ -------
Total from Investment
Operations ................. 6.18 6.99 1.53 5.50 4.76 3.85 (2.23) 3.25 5.79 1.63
------ ------ ------ ------ ------ ------ ------- ------ ------ -------
Less Distributions:
Dividends (from net investment
income) .................... .87 .65 .43 .37 .49 .67 1.23 1.36 .83 .88
Distributions
(from capital gains) ...... 2.58 3.27 1.43 2.56 1.02 .37 .38 2.39 1.62 1.44
------ ------ ------ ------ ------ ------ ------- ------ ------ -------
Total Distributions ........ 3.45 3.92 1.86 2.93 1.51 1.04 1.61 3.75 2.45 2.32
------ ------ ------ ------ ------ ------ ------- ------ ------ -------
Net Asset Value,
End of Year .................. $32.47 $29.74 $26.67 $27.00 $24.43 $21.18 $ 18.37 $22.21 $22.71 $ 19.37
====== ====== ====== ====== ====== ====== ======= ====== ====== =======
Total Return ................... 21.19% 26.60% 5.73% 22.71% 22.70% 21.13% (10.12)% 14.44% 30.15% 7.72%
====== ====== ====== ====== ====== ====== ======= ====== ====== =======
Ratios/Supplemental Data:
Net Assets, End of Year
(millions) ................... $4,287 $3,002 $1,792 $1,511 $1,251 $1,110 $ 1,075 $1,470 $1,094 $686
Ratio of Expenses to
Average Net Assets ........... .75%++ .72% .73% .78% .82% .87% .89% .70%+ .62%+ .71%
Ratio of Net Investment Income
to Average Net Assets ........ 3.06%++ 2.71% 1.91% 1.65% 2.10% 3.09% 5.40% 5.61%+ 3.96%+ 3.43%
Portfolio Turnover Rate ........ 65.03% 75.59% 67.65% 56.22% 47.39% 51.99% 46.12% 73.41% 85.05% 73.50%
Average Commission Per Share ... $ .036 -- -- -- -- -- -- -- -- --
</TABLE>
+ After reduction of expenses by the Investment Adviser. Had the Investment
Adviser not undertaken such action, the ratios of operating expenses and
net investment income would have been .71% and 5.60% in 1989 and .69% and
3.89% in 1988.
++ After reduction of expenses by the Investment Adviser, as described in
Note C. Had the Investment Adviser not undertaken such action the ratios
of operating expenses and net investment income would have been .78% and
3.03%.
21
<PAGE>
MUTUAL QUALIFIED FUND
FINANCIAL HIGHLIGHTS
(Selected data for a share of capital stock outstanding throughout each period)
Class I Class II
-------------------- -------------------
For the period For the period
November 1, 1996+ November 1, 1996+
to December 31, 1996 to December 31, 1996
-------------------- -------------------
Net Asset Value,
Beginning of Period ................. $ 32.80 $ 32.80
------- -------
Income from Investment Operations:
Net Investment Income ............... 0.32 0.26
Net Gains or Losses on Securities
(realized and unrealized) ......... 1.78 1.81
------- -------
Total from Investment Operations .... 2.10 2.07
------- -------
Less Distributions:
Dividends (from net investment
income) ........................... 0.81 0.79
Distributions (from capital gains) .. 1.63 1.63
------- -------
Total Distributions ............... 2.44 2.42
------- -------
Net Asset Value,
End of Period ....................... $ 32.46 $ 32.45
======= =======
Total Return .......................... 6.47%a 6.37%b
======= =======
Ratios/Supplemental Data:
Net Assets, End of Period
(millions) .......................... $ 20 $ 10
Ratio of Expenses to
Average Net Assets .................. 1.13%** 1.78%**
Ratio of Net Investment Income
to Average Net Assets ............... 3.19%** 2.59%**
Portfolio Turnover Rate ............... 65.03% 65.03%
Average Commission Per Share .......... $ .036 $ .036
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 as
described in Note C. Had the Investment Adviser not undertaken such
action, the ratios of operating expenses and net investment income would
have been 1.28% and 3.04% respectively for Class I and 1.93% and 2.44%
respectively for Class II.
+ Commencement of offering of sales.
22
<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 Qualified 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 Qualified 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/ Ernst & Young LLP
Boston, Massachusetts
February 7, 1997
23
<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.
