SEMI ANNUAL REPORT
June 30, 1999
MUTUAL EUROPEAN FUND
[LOGO]
FRANKLIN(R) TEMPLETON(R)
Thank you for investing with Franklin Templeton. We encourage our investors to
maintain a long-term perspective and remember that all securities markets move
both up and down, as do mutual fund share prices. We appreciate your past
support and look forward to serving your investment needs in the years ahead.
[PHOTO OF PETER A. LANGERMAN]
PETER A. LANGERMAN
Chief Executive Officer
Franklin Mutual Advisers, Inc.
[PHOTO OF ROBERT L. FRIEDMAN]
ROBERT L. FRIEDMAN
Chief Investment Officer
Franklin Mutual Advisers, Inc.
SHAREHOLDER LETTER
Dear Shareholder:
We are pleased to bring you this semiannual report of the Mutual European Fund
for the six months ended June 30, 1999, during which the fund's Class Z shares
appreciated 13.96%. And we are also pleased to report that all of our Mutual
Series funds delivered results for the period under review that compared very
favorably to commonly cited indexes.
Throughout the first few months of 1999, conventional wisdom still largely
favored growth investors versus value investors such as ourselves. Stocks of
companies with the biggest capitalizations and ".com" stocks seemed to go up
largely without regard to fundamental valuations. One only had to listen to
tales from the growing legion of day traders to be convinced that a so-called
"new paradigm" had taken hold. However, beginning in April, internet stocks lost
a bit of their luster, some large-cap growth names sputtered, and media pundits
(who love to perceive new trends) began to declare that value was back in vogue.
We even received a number of calls from reporters asking whether we felt
vindicated about the market's "return to value."
CONTENTS
Shareholder Letter ............................................... 1
Fund Report ...................................................... 5
Performance Summary .............................................. 10
Financial Highlights &
Statement of Investments ......................................... 12
Financial Statements ............................................. 21
Notes to Financial Statements .................................... 25
[FUND CATEGORY PYRAMID GRAPHIC]
Although pure theme or momentum investing may work in the short term, it is not,
in our opinion, sustainable over the long term.
As you know, we have never been slaves to conventional wisdom, nor wavered in
our belief that fundamental research, solid underlying valuations, and good
stock picking always have and always will make a real difference. Although pure
theme or momentum investing may work in the short term, it is not, in our
opinion, sustainable over the long term. Our value investing philosophy embodies
this approach, and we believe that we will make money for our shareholders over
time by sticking to our discipline, whether value investing is "in" or "out." We
need, of course, to be mindful of changes in society and of how business
valuations change, but the biggest mistake we could make would be to try to
follow the latest investment fad. We always try to buy stocks that others have
given up on because of a short-term problem that masks fundamental strengths or
just because the stocks "aren't moving."
One outgrowth of investors' increasing accessibility to information and their
ability to react to such information has been greater market volatility, at
least in the short term. We like market volatility, although not in our
performance, because it creates opportunity for contrarian investors like us to
capitalize on someone else's overreaction, and it often works to our advantage.
2
Our performance this year does not merely reflect value's being back in style.
In fact, markets may be only at the early stages of a rebalancing in favor of
value and the medium- or smaller-cap companies. You may recall that late last
year we appointed specific portfolio managers for each of our funds, to improve
the day-to-day implementation of our investing philosophy. The revised portfolio
management structure is working very well. Driven by an intensive focus on
bottom-up stock picking, our portfolio managers and research team are
responsible for the fund's strong performance record during the period under
review.
In June, Mutual Shares, our oldest fund, celebrated its 50th anniversary, and
our underlying investment discipline for all our funds remains the same as
always - buy stocks at discounts to asset value in order to produce steady,
absolute returns over long periods with minimal risk and volatility. Through
strong as well as rocky markets, we pay attention to the fundamentals because
that is what matters. This gives us the conviction to buy the names that we
believe have value even when conventional wisdom may say otherwise.
Through strong as well as rocky markets, we pay attention to the fundamentals
because that is what matters.
3
On the following pages, you'll find a report from David E. Marcus, Mutual
European Fund's portfolio manager, with specific comments about portfolio
developments this year. We welcome your comments, either through regular mail or
by email at [email protected].
Sincerely,
/s/PETER A. LANGERMAN
- ------------------------
Peter A. Langerman
Chief Executive Officer
Franklin Mutual Advisers, Inc.
/s/ROBERT L. FRIEDMAN
- ---------------------------
Robert L. Friedman
Chief Investment Officer
Franklin Mutual Advisers, Inc.
4
FUND REPORT
- --------------------------------------------------------------------------------
YOUR FUND'S GOAL: MUTUAL EUROPEAN FUND SEEKS CAPITAL APPRECIATION, WITH INCOME
AS A SECONDARY OBJECTIVE, BY INVESTING PRIMARILY IN COMMON AND PREFERRED STOCKS,
BONDS, AND CONVERTIBLE SECURITIES. THE FUND WILL NORMALLY HAVE AT LEAST 65% OF
ITS INVESTED ASSETS IN THE SECURITIES OF ISSUERS ORGANIZED UNDER THE LAWS OF, OR
WHOSE PRINCIPAL BUSINESS OPERATIONS OR AT LEAST 50% OF WHOSE REVENUE IS EARNED
FROM, EUROPEAN COUNTRIES.
- --------------------------------------------------------------------------------
During the six months ended June 30, 1999, Mutual European Fund's Class Z shares
provided a 13.96% cumulative total return, as shown in the Performance Summary
on page 11, and the Morgan Stanley Capital International(R) Europe Index posted
a -2.27% return for the same period. Since the U.S. dollar strengthened
considerably against most European currencies in 1999, our performance was
helped relative to this index by the fund's practice of hedging foreign currency
exposure.
Adhering to our disciplined approach of looking for cheap stocks enabled us to
identify a number of situations that produced substantial returns during the
reporting period. These included stocks of the following companies in which the
fund had a significant investment.
Invensys PLC, a world leader in automation and controls, is the result of the
merger between BTR PLC and Siebe PLC, two United Kingdom engineering firms.
After the announcement of the merger in late 1998, we were surprised to see both
stocks decline in value when the combination created a world leader
You will find a complete listing of the fund's portfolio holdings, including
dollar value and number of shares or principal amount, beginning on page 16 of
this report.
5
that offered restructuring, a clean balance sheet, potential for cost cutting
and share buyback, and significant possibilities for asset sales - all at a
bargain price. The market's misunderstanding proved to be our opportunity, as
the stock appreciated about 20% during the reporting period. We believe it
continues to offer a compelling valuation.
TOP 5 INDUSTRIES*
6/30/99
[This chart lists the top 5 industries, based on equtiy securities, of Mutual
European Fund, based on total net assets as of 6/30/99.]
% OF TOTAL
INDUSTRY NET ASSETS
- -----------------------------------------------------------------
Multi-Industry 18.9%
Banking 7.9%
Machinery & Engineering 7.5%
Broadcasting & Publishing 6.2%
Business & Public Services 6.0%
* Based on equity securities.
Pathe SA is a French media conglomerate whose assets include movie production,
an extensive film library, and a significant stake in BSkyB, a large U.K.
broadcasting group. The stock was trading at a discount of over 50% to its net
asset value when we purchased it in May. Within a month, Vivendi, a large,
French utility/media conglomerate, offered to buy Pathe SA, and the stock
provided a return of nearly 40%.
TOP 5 COUNTRIES
6/30/99
[This chart lists the top 5 countries of Mutual European Fund, based on total
net assets as of 6/30/99.]
% OF TOTAL
COUNTRY NET ASSETS
- -----------------------------------------------------------------
France 25.7%
Sweden 17.4%
United Kingdom 11.2%
Italy 5.8%
Spain 5.6%
6
At the beginning of 1999, we owned stock in Telecom Italia SpA, di Risp, because
we felt it was one of the cheapest telecom companies in the world, with enormous
potential for restructuring. Eventually others figured this out. During the
first half of 1999, the company was the subject of one of the largest hostile
takeover attempts ever undertaken, and its stock appreciated more than 20%
during that time.
In addition, we owned shares of several other companies that became targets of
merger and acquisition proposals during the reporting period and contributed
positively to the fund's performance. Examples included Swedish trucking firms
BTL AB and ASG AB, United Kingdom food companies Hillsdown Holdings
TOP 10 HOLDINGS
6/30/99
[This chart lists the top 10 holdings, including industry and country, of Mutual
European Fund, based on total net assets as of 6/30/99.]
% OF TOTAL
COMPANY, INDUSTRY, COUNTRY NET ASSETS
- -----------------------------------------------------------------
Rhone-Poulenc SA, A,
Health & Personal Care, France 4.7%
Invensys PLC,
Machinery & Engineering, United Kingdom 4.1%
Suez Lyonnaise des Eaux SA,
Business & Public Services, France 3.6%
Pathe SA,
Leisure & Tourism, France 3.3%
Investor AB, A&B,
Multi-Industry, Sweden 3.3%
Corporacion Financiera Alba SA,
Multi-Industry, Spain 2.9%
Modern Times Group AB,
Broadcasting & Publishing, Sweden 2.7%
Compagnie Generale D'Industrie et de Participation,
Multi-Industry, France 2.5%
Groupe GTM,
Construction & Housing, France 2.5%
Brierley Investments Ltd.,
Multi-Industry, New Zealand 2.2%
7
PLC and Terranova Foods PLC, French banking companies Societe Generale Paris and
Paribas, and Swedish real estate conglomerate Asticus.
Although the introduction of the euro on January 1, 1999 was heralded as one of
the most significant events in Europe since the end of World War II, its debut
was followed by weakness in various European economies. Concern over this
malaise led to a 11.28% fall in the euro's value versus the U.S. dollar.
However, our ongoing hedging policy helped protect the fund from this slump.
Looking forward, we intend to take advantage of any opportunities that arise as
European companies react to the rapidly changing environment there.
We are very proud of our performance for this first half of 1999 and shall
continue searching for the cheapest stocks that have what we believe is the best
potential for substantial, future returns. Thank you for your continued support
and participation in Mutual European Fund. We look forward to serving your
investment needs in the future.
[PHOTO OF DAVID E. MARCUS]
/s/DAVID E. MARCUS
- ----------------------
David E. Marcus
Portfolio Manager
8
It is important to remember that the fund may invest in lower-rated "junk
bonds," which entail higher credit risks, as well as in foreign securities
involving risks such as political uncertainty or fluctuations in foreign
exchange rates in areas where the fund invests. The fund generally expects to
hedge against currency risk where feasible and to the extent possible. The
fund's value-oriented strategy may include investments in companies involved in
mergers, reorganizations, restructurings or liquidations.
It is also important to note that stocks offer the potential for long-term gains
but can be subject to short-term up and down price movements. Securities of
companies involved in mergers, liquidations and reorganizations, and
distressed/bankruptcy investments, involve higher credit risks. These and other
risks are discussed in the prospectus, which you should review before making an
investment decision.
This discussion reflects our views, opinions and portfolio holdings as of June
30, 1999, the end of the reporting period. However, market and economic
conditions are changing constantly, which may affect our strategies and the
fund's portfolio composition. Although past performance is not predictive of
future results, these insights may help you understand our investment and
management philosophy.
9
PERFORMANCE SUMMARY AS OF 6/30/99
Distributions will vary based on earnings of the fund's portfolio
and any profits realized from the sale of the portfolio's securities, as well as
the level of each share class's expenses. Past distributions are not indicative
of future trends. All total returns include reinvested distributions at net
asset value.
CLASS Z:
No initial sales charge or Rule 12b-1 fees and are available only to certain
investors, as described in the fund's prospectus.
CLASS A (formerly Class I):
Subject to the maximum 5.75% initial sales charge.
CLASS B:
Subject to no initial sales charge, but subject to a contingent deferred sales
charge (CDSC) declining from 4% to 0% over six years. These shares have higher
annual fees and expenses than Class A shares.
CLASS C (formerly Class II):
Subject to 1% initial sales charge and 1% CDSC for shares redeemed within 18
months of investment. These shares have higher annual fees and expenses than
Class A shares.
For all share classes, the fund's Manager has agreed in advance to waive a
portion of its management fees, which increases total return to shareholders. If
the Manager had not taken this action, the fund's total returns would have been
lower. Franklin Mutual Advisers has made a commitment to the fund's Board not to
seek an increase in the rate of investment advisory fees for the three-year
period beginning November 1, 1996.
PRICE AND DISTRIBUTION INFORMATION
CLASS Z CHANGE 6/30/99 12/31/98
- --------------------------------------------------------------------
Net Asset Value +$1.58 $14.12 $12.54
DISTRIBUTIONS (1/1/99 - 6/30/99)
------------------------------------
Dividend Income $0.1710
CLASS A CHANGE 6/30/99 12/31/98
- --------------------------------------------------------------------
Net Asset Value +$1.54 $14.01 $12.47
DISTRIBUTIONS (1/1/99 - 6/30/99)
------------------------------------
Dividend Income $0.1589
CLASS B CHANGE 6/30/99 1/1/99
- --------------------------------------------------------------------
Net Asset Value +$1.50 $13.97 $12.47
DISTRIBUTIONS (1/1/99 - 6/30/99)
------------------------------------
Dividend Income $0.1638
CLASS C CHANGE 6/30/99 12/31/98
- --------------------------------------------------------------------
Net Asset Value +$1.53 $13.98 $12.45
DISTRIBUTIONS (1/1/99 - 6/30/99)
------------------------------------
Dividend Income $0.1363
10 Past performance is not predictive of future results.
PERFORMANCE
<TABLE>
<CAPTION>
INCEPTION
CLASS Z 6-MONTH 1-YEAR (7/3/96)
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cumulative Total Return(1) 13.96% 0.12% 68.47%
Average Annual Total Return(2) 13.96% 0.12% 19.05%
Value of $10,000 Investment(3) $11,396 $10,012 $16,847
</TABLE>
<TABLE>
<CAPTION>
INCEPTION
CLASS A 6-MONTH 1-YEAR (11/1/96)
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cumulative Total Return(1) 13.62% -0.52% 53.22%
Average Annual Total Return(2) 7.09% -6.23% 14.81%
Value of $10,000 Investment(3) $10,709 $9,377 $14,441
</TABLE>
<TABLE>
<CAPTION>
INCEPTION
CLASS B 6-MONTH (1/1/99)
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
Cumulative Total Return(1) 13.34% 13.34%
Aggregate Total Return(2) 9.34% 9.34%
Value of $10,000 Investment(3) $10,934 $10,934
</TABLE>
<TABLE>
<CAPTION>
INCEPTION
CLASS C 6-MONTH 1-YEAR (11/1/96)
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cumulative Total Return(1) 13.38% -0.97% 51.16%
Average Annual Total Return(2) 11.22% -2.89% 16.36%
Value of $10,000 Investment(3) $11,122 $9,711 $14,965
</TABLE>
1. Cumulative total return represents the change in value of an investment over
the periods indicated and does not include sales charges.
2. Average annual total return represents the average annual change in value of
an investment over the periods indicated and includes the current, applicable,
maximum sales charge(s) for that class. Since Class B shares have existed for
less than one year, aggregate total return for that class represents total
return since inception, including the maximum sales charge.
3. These figures represent the value of a hypothetical $10,000 investment in the
fund over the periods indicated and include the current, applicable, maximum
sales charge(s) for that class.
BEGIN CALLOUT
Since markets can go down as well as up, investment return and principal value
will fluctuate with market conditions, currency volatility and the social,
economic and political climates of countries where the fund invests. You may
have a gain or loss when you sell your shares.
END CALLOUT
Past performance is not predictive of future results. 11
MUTUAL EUROPEAN FUND
Financial Highlights
<TABLE>
<CAPTION>
CLASS Z
-------------------------------------------------
SIX MONTHS
ENDED YEAR ENDED DECEMBER 31,
JUNE 30, 1999 --------------------------------
(UNAUDITED)++ 1998 1997++ 1996+
-------------------------------------------------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
(For a share outstanding throughout the period)
Net asset value, beginning of period........................ $12.54 $12.60 $11.39 $10.00
-------------------------------------------------
Income from investment operations:
Net investment income...................................... .22 .31 .33 .06
Net realized and unrealized gains.......................... 1.53 .33 2.28 1.40
-------------------------------------------------
Total from investment operations............................ 1.75 .64 2.61 1.46
-------------------------------------------------
Less distributions from:
Net investment income...................................... (.17) (.34) (.84) (.05)
Net realized gains......................................... -- (.36) (.56) (.02)
-------------------------------------------------
Total distributions......................................... (.17) (.70) (1.40) (.07)
-------------------------------------------------
Net asset value, end of period.............................. $14.12 $12.54 $12.60 $11.39
=================================================
Total Return*............................................... 13.96% 4.74% 23.16% 14.61%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's)........................... $465,294 $483,873 $546,780 $450,495
Ratios to average net assets:
Expenses................................................... 1.06%** 1.05% 1.02% 1.09%**
Expenses, excluding waiver and payments by affiliate....... 1.08%** 1.05% 1.05% 1.15%**
Net investment income...................................... 3.35%** 2.02% 2.53% 1.87%**
Portfolio turnover rate..................................... 66.41% 97.62% 98.12% 36.75%
</TABLE>
* Total return is not annualized.
** Annualized.
+ For the period July 3, 1996 (commencement of operations) to December 31,
1996.
+ Based on average weighted shares outstanding.
12
MUTUAL EUROPEAN FUND
Financial Highlights (continued)
<TABLE>
<CAPTION>
CLASS A
---------------------------------------------
SIX MONTHS
ENDED YEAR ENDED DECEMBER 31,
JUNE 30, 1999 ----------------------------
(UNAUDITED)++ 1998 1997++ 1996+
---------------------------------------------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
(For a share outstanding throughout the period)
Net asset value, beginning of period........................ $12.47 $12.56 $11.38 $10.84
---------------------------------------------
Income from investment operations:
Net investment income...................................... .19 .27 .24 .03
Net realized and unrealized gains.......................... 1.51 .29 2.31 .58
---------------------------------------------
Total from investment operations............................ 1.70 .56 2.55 .61
---------------------------------------------
Less distributions from:
Net investment income...................................... (.16) (.29) (.81) (.05)
Net realized gains......................................... -- (.36) (.56) (.02)
---------------------------------------------
Total distributions......................................... (.16) (.65) (1.37) (.07)
---------------------------------------------
Net asset value, end of period.............................. $14.01 $12.47 $12.56 $11.38
=============================================
Total Return*............................................... 13.62% 4.15% 22.61% 5.61%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's)........................... $151,221 $170,486 $93,231 $9,200
Ratios to average net assets:
Expenses................................................... 1.40%** 1.40% 1.37% 1.32%**
Expenses, excluding waiver and payments by affiliate....... 1.43%** 1.40% 1.39% 1.42%**
Net investment income...................................... 2.98%** 1.68% 1.84% 1.44%**
Portfolio turnover rate..................................... 66.41% 97.62% 98.12% 36.75%
</TABLE>
* Total return does not reflect sales commissions and is not annualized.
* Annualized.
+ For the period November 1, 1996 (effective date) to December 31, 1996.
++ Based on average weighted shares outstanding.
13
MUTUAL EUROPEAN FUND
Financial Highlights (continued)
<TABLE>
<CAPTION>
CLASS B
----------------
SIX MONTHS ENDED
JUNE 30, 1999
(UNAUDITED)+
----------------
<S> <C>
PER SHARE OPERATING PERFORMANCE
(For a share outstanding throughout the period)
Net asset value, beginning of period........................ $12.47
----------------
Income from investment operations:
Net investment income...................................... .21
Net realized and unrealized gain........................... 1.45
----------------
Total from investment operations............................ 1.66
----------------
Less distributions from:
Net investment income...................................... (.16)
----------------
Total distributions......................................... (.16)
----------------
Net asset value, end of period.............................. $13.97
================
Total Return*............................................... 13.34%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's)........................... $372
Ratios to average net assets:
Expenses................................................... 2.06%**
Expenses, excluding waiver and payments by affiliate....... 2.09%**
Net investment income...................................... 3.19%**
Portfolio turnover rate..................................... 66.41%
</TABLE>
* Total return does not reflect the contingent deferred sales charge and is not
annualized.
** Annualized.
+ Effective date of Class B shares was January 1, 1999. Based on average
weighted shares outstanding.
14
MUTUAL EUROPEAN FUND
Financial Highlights (continued)
<TABLE>
<CAPTION>
CLASS C
---------------------------------------------
SIX MONTHS
ENDED YEAR ENDED DECEMBER 31,
JUNE 30, 1999 ----------------------------
(UNAUDITED)++ 1998 1997++ 1996+
---------------------------------------------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
(For a share outstanding throughout the period)
Net asset value, beginning of period........................ $12.45 $12.52 $11.38 $10.84
---------------------------------------------
Income from investment operations:
Net investment income...................................... .15 .21 .13 .02
Net realized and unrealized gains.......................... 1.52 .31 2.33 .58
---------------------------------------------
Total from investment operations............................ 1.67 .52 2.46 .60
---------------------------------------------
Less distributions from:
Net investment income...................................... (.14) (.23) (.76) (.04)
Net realized gains......................................... -- (.36) (.56) (.02)
---------------------------------------------
Total distributions......................................... (.14) (.59) (1.32) (.06)
---------------------------------------------
Net asset value, end of period.............................. $13.98 $12.45 $12.52 $11.38
=============================================
Total Return*............................................... 13.38% 3.74% 21.79% 5.52%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's)........................... $87,667 $96,555 $49,174 $2,754
Ratios to average net assets:
Expenses................................................... 2.04%** 2.05% 2.02% 1.94%**
Expenses, excluding waiver and payments by affiliate....... 2.07%** 2.05% 2.05% 2.04%**
Net investment income...................................... 2.35%** 1.00% 1.03% .79%**
Portfolio turnover rate..................................... 66.41% 97.62% 98.12% 36.75%
</TABLE>
* Total return does not reflect sales commissions or the contingent deferred
sales charge and is not annualized.
** Annualized.
+ For the period November 1, 1996 (effective date) to December 31, 1996.
++ Based on average weighted shares outstanding.
See Notes to Financial Statements.
15
MUTUAL EUROPEAN FUND
STATEMENT OF INVESTMENTS, JUNE 30, 1999 (UNAUDITED)
<TABLE>
<CAPTION>
COUNTRY SHARES VALUE
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS 84.9%
AUTOMOBILES 1.0%
*Daimlerchrysler AG......................................... Germany 80,000 $ 6,987,728
------------
BANKING 7.9%
*Banca Nazionale Del Lavoro SpA............................. Italy 4,840,800 15,265,718
*BHF Bank AG................................................ Germany 76,936 2,618,220
*BHW Holding AG............................................. Germany 514,647 7,881,312
Christiania Bank OG Kreditkasse............................. Norway 639,970 2,300,559
Merita AS................................................... Finland 1,561,600 8,873,276
Societe Generale Paris...................................... France 70,500 12,424,925
Union Bank of Norway, 144A.................................. Norway 350,340 6,541,757
------------
55,905,767
------------
BEVERAGES & TOBACCO 1.0%
Allied Domecq PLC........................................... United Kingdom 375,300 3,629,245
Gallaher Group PLC.......................................... United Kingdom 402,700 2,475,537
Gallaher Group PLC, ADR..................................... United Kingdom 20,100 491,194
------------
6,595,976
------------
BROADCASTING & PUBLISHING 6.2%
*Modern Times Group AB...................................... Sweden 873,900 18,964,308
NV Holdingsmig de Telegraaf................................. Netherlands 382,500 7,534,031
*Publicis SA................................................ France 49,500 10,464,577
Seat Pagine Gialle SpA, di Risp............................. Italy 5,913,500 5,040,227
*Telefonica Publicidad E Informacion SA..................... Spain 100,000 1,546,870
------------
43,550,013
------------
BUSINESS & PUBLIC SERVICES 6.0%
*Carlisle Holdings Ltd...................................... United States 50,500 732,250
*Carlisle Holdings Ltd., fgn. .............................. United Kingdom 55,806 719,106
Corporate Services Group PLC, A............................. United Kingdom 2,135,200 2,860,755
Sophus Berendsen AS, A...................................... Denmark 137,000 3,505,006
Sophus Berendsen AS, B...................................... Denmark 282,400 7,617,575
Suez Lyonnaise des Eaux SA.................................. France 141,387 25,501,275
*Suez Lyonnaise des Eaux SA, fgn. .......................... France 61,009 629
+*Uniholding Corp........................................... United States 581,585 1,417,613
------------
42,354,209
------------
CONSTRUCTION & HOUSING 5.9%
Groupe GTM.................................................. France 165,613 17,761,939
*Grupo Ferrovial SA......................................... Spain 607,285 14,717,126
NCC AB...................................................... Sweden 876,200 9,326,758
------------
41,805,823
------------
DATA PROCESSING & REPRODUCTION .1%
*Tecnost Mael SpA........................................... Italy 307,800 760,216
------------
</TABLE>
16
MUTUAL EUROPEAN FUND
STATEMENT OF INVESTMENTS, JUNE 30, 1999 (UNAUDITED) (CONT.)
<TABLE>
<CAPTION>
COUNTRY SHARES VALUE
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS (CONT.)
ELECTRICAL & ELECTRONICS 1.7%
*Perlos OYJ................................................. Finland 356,000 $ 5,213,159
Racal Electronics PLC....................................... United Kingdom 1,133,600 6,906,094
------------
12,119,253
------------
ENERGY SOURCES 2.8%
Atlantic Richfield Co. ..................................... United States 18,600 1,554,263
Societe Elf Aquitaine SA, Br. .............................. France 49,300 7,234,598
Societe Industrielle de Transports Automobiles.............. France 48,778 11,036,293
------------
19,825,154
------------
FINANCIAL SERVICES 3.5%
Cir Cie Industriali Riunite SpA Torino...................... Italy 8,054,600 10,715,102
Cir Cie Industriali Riunite SpA Torino, di Risp............. Italy 4,060,000 4,429,700
Espirito Santo Financial Group SA, ADR...................... Portugal 572,000 9,366,500
------------
24,511,302
------------
FOOD & HOUSEHOLD PRODUCTS 1.5%
Van Melle NV................................................ Netherlands 110,266 7,078,538
Wolverhampton & Dudley Breweries PLC........................ United Kingdom 365,900 3,486,437
------------
10,564,975
------------
HEALTH & PERSONAL CARE 5.2%
*Industriforvaltnings Skandigen AB Skandigen................ Sweden 1,250,000 3,646,201
Rhone-Poulenc SA, A......................................... France 724,950 33,126,260
------------
36,772,461
------------
INSURANCE 1.1%
*Companhia de Seguros Mundial Confianca SA.................. Portugal 121,700 4,801,735
Corporacion Mapfre PLC...................................... Spain 128,269 2,612,471
------------
7,414,206
------------
LEISURE & TOURISM 3.3%
Pathe SA.................................................... France 195,321 23,445,771
------------
MACHINERY & ENGINEERING 7.5%
*Buderus AG................................................. Germany 4,878 1,946,773
FKI PLC..................................................... United Kingdom 3,402,600 10,512,115
IMI PLC..................................................... United Kingdom 1,693,600 6,860,679
Invensys PLC................................................ United Kingdom 6,078,542 28,791,682
*Neopost SA................................................. France 185,244 4,298,226
------------
52,409,475
------------
</TABLE>
17
MUTUAL EUROPEAN FUND
STATEMENT OF INVESTMENTS, JUNE 30, 1999 (UNAUDITED) (CONT.)
<TABLE>
<CAPTION>
COUNTRY SHARES VALUE
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS (CONT.)
MULTI-INDUSTRY 18.9%
Brierley Investments Ltd. .................................. New Zealand 54,972,939 $ 15,438,973
Cie Nationale A Portefeuille................................ Belgium 22,188 1,761,860
Compagnie Financiere Richemont AG, Br., A................... Switzerland 6,600 12,693,941
Compagnie Generale D'Industrie et de Participation.......... France 369,923 17,891,501
Corporacion Financiera Alba SA.............................. Spain 125,700 20,351,552
Investor AB, A.............................................. Sweden 486,000 5,344,742
Investor AB, B.............................................. Sweden 1,573,600 17,583,157
Invik & Co. AB, B........................................... Sweden 250,061 14,691,304
Kinnevik AB, B.............................................. Sweden 536,700 10,100,212
Lagardere SCA............................................... France 408,386 15,203,398
Saab AB, B.................................................. Sweden 283,400 2,200,000
------------
133,260,640
------------
REAL ESTATE 3.8%
Anders Dios AB.............................................. Sweden 744,700 4,335,762
Castellum AB................................................ Sweden 714,400 6,722,183
Fastighets AB Tornet........................................ Sweden 402,900 5,473,412
Lundbergforetagen AB, B..................................... Sweden 634,200 7,981,581
(R)*Security Capital European Realty........................ United States 108,750 1,884,333
------------
26,397,271
------------
TELECOMMUNICATIONS 1.4%
*Societe Europeenne de Communication SA, ADR................ Sweden 186,606 2,507,518
*Societe Europeenne de Communication SA, A, ADR............. Sweden 114,372 1,472,540
*Telecom Italia SpA, di Risp................................ Italy 856,500 4,659,212
*Vodafone AirTouch PLC, ADR................................. United Kingdom 7,400 1,457,800
------------
10,097,070
------------
TRANSPORTATION 4.7%
ASG AB, B................................................... Sweden 393,000 12,249,471
De Sammensluttede Vognmaend AF, B........................... Denmark 88,450 7,993,952
Koninklijke Nedlloyd Groep NV............................... Netherlands 286,995 7,103,104
Railtrack Group PLC......................................... United Kingdom 286,100 5,848,991
------------
33,195,518
------------
UTILITIES ELECTRICAL & GAS 1.4%
Veba AG..................................................... Germany 167,600 9,886,274
------------
TOTAL COMMON STOCKS (COST $530,157,466)..................... 597,859,102
------------
</TABLE>
18
MUTUAL EUROPEAN FUND
STATEMENT OF INVESTMENTS, JUNE 30, 1999 (UNAUDITED) (CONT.)
<TABLE>
<CAPTION>
PRINCIPAL
COUNTRY AMOUNT** VALUE
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CORPORATE BONDS AND NOTES 1.3%
Eurotunnel Finance Ltd.:
Equity Note 12/31/03...................................... United Kingdom 1,334,692GBP $ 1,030,861
Participating Loan Note 4/30/40........................... United Kingdom 780,000GBP 528,672
Eurotunnel PLC:
12/31/12, tier 1.......................................... United Kingdom 888,013GBP 1,147,774
12/31/18, tier 2.......................................... United Kingdom 1,412,152GBP 1,647,162
12/31/25, tier 3.......................................... United Kingdom 604,750GBP 619,601
12/31/50, Resettable Advance R5........................... United Kingdom 895,083GBP 599,619
Stabilization Advance S8 Tier 1........................... United Kingdom 153,447GBP 58,049
Stabilization Advance S8 Tier 2........................... United Kingdom 119,147GBP 37,557
Eurotunnel SA:
12/31/12, tier 1 (Libor).................................. France 33,539EUR 8,301
12/31/18, tier 2 (Libor).................................. France 1,860,784EUR 1,410,412
12/31/18, tier 2 (Pibor).................................. France 302,908EUR 231,156
12/31/25, tier 3 (Libor).................................. France 1,710,312EUR 1,128,802
12/31/25, tier 3 (Pibor).................................. France 345,448EUR 227,995
12/31/50, Resettable Advance R4........................... France 1,835,071EUR 785,350
Stabilization Advance S7 tier 1 (Libor)................... France 110,596EUR 27,372
Stabilization Advance S6 tier 2........................... France 127,931EUR 26,386
------------
TOTAL CORPORATE BONDS AND NOTES (COST 9,984,544)............ 9,515,069
------------
BONDS & NOTES IN REORGANIZATION (COST $2,830,155) .4%
*Koninklijke Ned Vlieg Fokker NV, trade claim............... Netherlands 3,122,440EUR 2,576,005
------------
SHORT TERM INVESTMENTS 3.9%
Fannie Mae, 5.165% to 5.20%, with maturities to 6/09/00..... United States 11,500,000 11,166,800
Federal Home Loan Bank, 4.68% to 4.91%, with maturities to
5/02/00................................................... United States 10,697,000 10,415,465
Federal Home Loan Mortgage Corp., 5.00% to 5.10%, with
maturities to 3/08/00..................................... United States 6,000,000 5,822,103
------------
TOTAL SHORT TERM INVESTMENTS (COST $27,416,674)............. 27,404,368
------------
TOTAL INVESTMENTS (COST $570,388,839) 90.5%................. 637,354,544
SECURITIES SOLD SHORT (.3%)................................. (2,113,097)
NET EQUITY IN FORWARD CONTRACTS 3.4%........................ 24,361,632
OTHER ASSETS, LESS LIABILITIES 6.4%......................... 44,951,375
------------
TOTAL NET ASSETS 100.0%..................................... $704,554,454
============
</TABLE>
19
MUTUAL EUROPEAN FUND
STATEMENT OF INVESTMENTS, JUNE 30, 1999 (UNAUDITED) (CONT.)
<TABLE>
<CAPTION>
SECURITIES SOLD SHORT
ISSUER COUNTRY SHARES VALUE
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
*BP Amoco PLC, ADR.......................................... United Kingdom 7,100 $ 770,350
*Credit Lyonnais, Inv. Cert................................. France 36,340 1,342,747
------------
TOTAL SECURITIES SOLD SHORT (PROCEEDS $1,926,392)........... $ 2,113,097
============
</TABLE>
<TABLE>
<CAPTION>
VALUE AT UNREALIZED
CONTRACTS FOR DIFFERENCES COUNTRY SHARES 6/30/99 LOSS
ISSUER
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
*BP Amoco PLC, cfd 10.3574.................................. United Kingdom 24,000 $ 430,503 $ (38,685)
*BP Amoco PLC, cfd 10.9450.................................. United Kingdom 8,700 156,058 (5,965)
*BP Amoco PLC, cfd 11.2992.................................. United Kingdom 16,600 297,765 (2,114)
*Vodafone Group PLC, cfd 11.2893............................ United Kingdom 44,000 866,913 (82,581)
*Vodafone Group PLC, cfd 12.2720............................ United Kingdom 30,000 590,145 (9,836)
---------- ---------
TOTAL CONTRACTS FOR DIFFERENCES............................. $2,341,384 $(139,181)
========== =========
</TABLE>
CURRENCY ABBREVIATIONS:
EUR -- European Unit
GBP -- British Pound
* Non-income producing.
** Securities denominated in U.S. dollars unless otherwise indicated.
(R)Restricted securities (see note 6).
+ The Investment Company Act of 1940 defines "affiliated persons" to include
any persons, such as the Fund, that owns 5% or more of the outstanding voting
securities of another person. Investments in "affiliated persons", at June
30, 1999 were $1,417,613.
See Notes to Financial Statements.
20
MUTUAL EUROPEAN FUND
Financial Statements
STATEMENT OF ASSETS AND LIABILITIES
JUNE 30, 1999 (UNAUDITED)
<TABLE>
<S> <C> <C>
Assets:
Investments in securities, at value:
Unaffiliated issuers (cost $565,736,167).................. $635,936,931
Non controlled affiliates (cost $4,652,672)............... 1,417,613 $637,354,544
------------
Receivables:
Investment securities sold................................ 48,063,125
Capital shares sold....................................... 4,316,771
Dividends and interest.................................... 2,314,703
From affiliates........................................... 22,906
Unrealized gain on forward exchange contracts (Note 7)..... 25,896,679
Deposits with broker for securities sold short............. 6,718,178
------------
Total assets.......................................... 724,686,906
------------
Liabilities:
Payables:
Investment securities purchased........................... 5,327,557
Capital shares redeemed................................... 1,287,611
To affiliates............................................. 801,422
Funds advanced by custodian................................ 8,507,421
Securities sold short, at value (proceeds $1,926,392)...... 2,113,097
Unrealized loss on forward exchange contracts (Note 7)..... 1,535,047
Due to broker-variation margin............................. 130,496
Accrued expense............................................ 429,801
------------
Total liabilities..................................... 20,132,452
------------
Net assets, at value........................................ $704,554,454
============
Net assets consist of:
Undistributed net investment income........................ $ 80,639
Net unrealized appreciation................................ 90,691,962
Accumulated net realized gain.............................. 38,376,877
Capital shares............................................. 575,404,976
------------
Net assets, at value........................................ $704,554,454
============
</TABLE>
21
MUTUAL EUROPEAN FUND
Financial Statements (continued)
STATEMENT OF ASSETS AND LIABILITIES (CONT.)
JUNE 30, 1999 (UNAUDITED)
<TABLE>
<S> <C>
CLASS Z:
Net asset value and maximum offering price per share
($465,293,640 / 32,961,452 shares outstanding)........... $14.12
===========
CLASS A:
Net asset value per share ($151,221,426 / 10,791,339 shares
outstanding).............................................. $14.01
===========
Maximum offering price per share ($14.01 / 94.25%)......... $14.86
===========
CLASS B:
Net asset value and maximum offering price per share
($372,022 / 26,631 shares outstanding)*................... $13.97
===========
CLASS C:
Net asset value per share ($87,667,366 / 6,271,884 shares
outstanding)*............................................. $13.98
===========
Maximum offering price per share ($13.98 / 99.00%)......... $14.12
===========
</TABLE>
*Redemption price per share is equal to net asset value less any applicable
sales charge.
See Notes to Financial Statements.
22
MUTUAL EUROPEAN FUND
Financial Statements (continued)
STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1999 (UNAUDITED)
<TABLE>
<S> <C> <C>
Investment Income: (net of foreign taxes of $1,428,707)
Dividends.................................................. $13,222,903
Interest................................................... 1,740,483
-----------
Total investment income............................... $14,963,386
-----------
Expenses:
Management fees (Note 3)................................... 2,722,091
Administrative fees (Note 3)............................... 257,683
Distribution fees (Note 3)
Class A................................................... 264,126
Class B................................................... 822
Class C................................................... 431,041
Transfer agent fees (Note 3)............................... 480,150
Custodian fees............................................. 69,570
Reports to shareholders.................................... 49,539
Registration and filing fees............................... 65,974
Professional fees.......................................... 21,480
Directors' fees and expenses............................... 8,243
Other...................................................... 7,528
-----------
Total expenses........................................ 4,378,247
Expenses waived/paid by affiliate (Note 3)............ (94,037)
-----------
Net expenses...................................... 4,284,210
-----------
Net investment income........................... 10,679,176
-----------
Realized and unrealized gains:
Net realized gain from:
Investments............................................... 22,021,935
Foreign currency transactions............................. 11,776,270
-----------
Net realized gain..................................... 33,798,205
Net unrealized appreciation on:
Investments............................................... 14,546,818
Translation of assets and liabilities denominated in
foreign currencies...................................... 29,200,482
-----------
Net unrealized appreciation........................... 43,747,300
-----------
Net realized and unrealized gain............................ 77,545,505
-----------
Net increase in net assets resulting from operations........ $88,224,681
===========
</TABLE>
See Notes to Financial Statements.
23
MUTUAL EUROPEAN FUND
Financial Statements (continued)
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
JUNE 30, 1999 YEAR ENDED
(UNAUDITED) DECEMBER 31, 1998
-------------------------------------
<S> <C> <C>
Increase (decrease) in net assets:
Operations:
Net investment income..................................... $ 10,679,176 $ 15,829,262
Net realized gain from investments and foreign currency
transactions............................................. 33,798,205 6,283,000
Net unrealized appreciation (depreciation) on investments
and translation of assets and liabilities denominated in
foreign currencies....................................... 43,747,300 (21,552,207)
-------------------------------------
Net increase in net assets resulting from operations.... 88,224,681 560,055
Distributions to shareholders from:
Net investment income:
Class Z.................................................. (5,606,382) (13,601,975)
Class A.................................................. (1,706,165) (3,913,014)
Class B.................................................. (4,279) --
Class C.................................................. (850,333) (1,783,371)
Net realized gains:
Class Z.................................................. -- (17,368,914)
Class A.................................................. -- (5,010,752)
Class C.................................................. -- (2,814,880)
Capital share transactions (Note 2):
Class Z.................................................. (70,256,585) (43,585,595)
Class A.................................................. (37,590,267) 91,968,786
Class B.................................................. 354,000 --
Class C.................................................. (18,924,443) 57,278,350
-------------------------------------
Net increase (decrease) in net assets................... (46,359,773) 61,728,690
Net assets:
Beginning of period........................................ 750,914,227 689,185,537
-------------------------------------
End of period.............................................. $704,554,454 $750,914,227
=====================================
Undistributed net investment income/(Distributions in excess
of net investment income) included in net assets:
End of period.............................................. $ 80,639 $ (2,431,378)
=====================================
</TABLE>
See Notes to Financial Statements.
24
MUTUAL EUROPEAN FUND
Notes to Financial Statements (unaudited)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Mutual European Fund (the Fund) is a separate, diversified series of Franklin
Mutual Series Fund, Inc. (the Series Fund), which is an open-end investment
company registered under the Investment Company Act of 1940. The Fund seeks
long-term capital appreciation and income through a flexible policy of investing
at least 65% of its invested assets in stocks and corporate debt securities of
European countries. The following summarizes the Fund's significant accounting
policies.
a. SECURITY VALUATION:
Securities listed or traded on a recognized national exchange or NASDAQ are
valued at the latest reported sales price. Over-the-counter securities and
listed securities for which no sale is reported are valued within the range of
the latest quoted bid and asked prices. Restricted securities and securities for
which market quotations are not readily available are valued at fair value as
determined by management in accordance with procedures established by the Board
of Directors.
b. FOREIGN CURRENCY TRANSLATION:
Portfolio securities and other assets and liabilities denominated in foreign
currencies are translated into U.S. dollars based on the exchange rate of such
currencies against U.S. dollars on the date of valuation. Purchases and sales of
securities and income items denominated in foreign currencies are translated
into U.S. dollars at the exchange rate in effect on the transaction date.
The Fund does not separately report the effect of changes in foreign exchange
rates from changes in market prices on securities held. Such changes are
included in net realized and unrealized gain or loss from investments.
Realized foreign exchange gains or losses arise from sales of foreign
currencies, currency gains or losses realized between the trade and settlement
dates on securities transactions, and the difference between the recorded
amounts of dividends, interest, and foreign withholding taxes, and the U.S.
dollar equivalent of the amounts actually received or paid. Net unrealized
foreign exchange gains and losses arise from changes in foreign exchange rates
on foreign currency denominated assets and liabilities other than investments in
securities held at the end of the reporting period.
c. INCOME TAXES:
No provision has been made for income taxes because the Fund's policy is to
qualify as a regulated investment company under the Internal Revenue Code and to
distribute all of its taxable income.
d. SECURITY TRANSACTIONS, INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS:
Security transactions are accounted for on trade date. Realized gains and losses
on security transactions are determined on a specific identification basis.
Certain income from foreign securities is recorded as soon as
25
MUTUAL EUROPEAN FUND
Notes to Financial Statements (unaudited) (continued)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONT.)
d. SECURITY TRANSACTIONS, INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS (CONT.)
information is available to the Fund. Interest income and estimated expenses are
accrued daily. Dividend income and distributions to shareholders are recorded on
the ex-dividend date.
Realized and unrealized gains and losses and net investment income, other than
class specific expenses, are allocated daily to each class of shares based upon
the relative proportion of net assets of each class.
Common expenses incurred by the Series Fund are allocated among the funds
comprising the Series Fund based on the ratio of net assets of each fund to the
combined net assets. Other expenses are charged to each fund on a specific
identification basis.
e. FORWARD EXCHANGE CONTRACTS:
The Fund may enter into forward exchange contracts to hedge against foreign
exchange risks. These contracts are valued daily and the Fund's equity therein
is included in the Statement of Assets and Liabilities. Realized and unrealized
gains and losses are included in the Statement of Operations.
f. OPTION CONTRACTS:
Options purchased are recorded as investments; options written (sold) are
recorded as liabilities. When an option expires, the premium (original option
value) is realized as a gain if the option was written or as a loss if the
option was purchased. When the exercise of an option results in a cash
settlement, the difference between the premium and the settlement proceeds is
realized as a gain or loss. When securities are acquired or delivered upon
exercise of an option, the acquisition cost or sale proceeds are adjusted by the
amount of the premium. When an option is closed, the difference between the
premium and the cost to close the position is realized as a gain or loss.
g. CONTRACTS FOR DIFFERENCES:
Short contracts for differences are contracts entered into between a broker and
the Fund under which the parties agree to make payments to each other so as to
replicate the economic consequences that would apply had a short sale of the
underlying security taken place. Upon entering into short contracts for
differences, the Fund is required to pledge the broker an amount of cash and/or
other assets equal to a certain percentage of the contract amount ("initial
margin"). Subsequent payments known as "variation margin", are made or received
by the Funds periodically, depending on fluctuations in the value of the
underlying security. When the contract is closed, the Fund records a realized
gain or loss equal to the difference between the value of the contract at the
time it was opened and the value at the time it was closed. Should market
conditions move unexpectedly, the Fund may not achieve the anticipated benefits
of the contracts for difference and may realize a loss.
26
MUTUAL EUROPEAN FUND
Notes to Financial Statements (unaudited) (continued)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONT.)
h. SECURITIES SOLD SHORT:
The Fund is engaged in selling securities short, which obligates the Fund to
replace a security borrowed. 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 maintain a deposit for the broker
consisting of cash and securities having a value equal to a specified percentage
of the value of the securities sold short.
i. ACCOUNTING ESTIMATES:
The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of the
financial statements and the amounts of income and expense during the reporting
period. Actual results could differ from those estimates.
2. CAPITAL STOCK
The Fund offers four classes of shares: Class Z, Class A, Class B, and Class C
shares. Effective January 1, 1999, Class I and Class II were renamed Class A,
and Class C, respectively, and a fourth class of shares, Class B was
established. The shares differ by their initial sales load, distribution fees,
voting rights on matters affecting a single class and the exchange privilege of
each class.
27
MUTUAL EUROPEAN FUND
Notes to Financial Statements (unaudited) (continued)
2. CAPITAL STOCK (CONT.)
At June 30, 1999, there were 500 million Fund shares authorized ($0.001 par
value) of which 200 million, 100 million, 100 million and 100 million were
designated as Class Z, Class A, Class B and Class C shares, respectively.
Transactions in the Fund's shares were as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
JUNE 30, 1999 DECEMBER 31, 1998
----------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
----------------------------------------------------------------
<S> <C> <C> <C> <C>
CLASS Z SHARES:
Shares sold............................................ 8,525,888 $ 114,325,425 23,594,141 $ 332,563,913
Shares issued on reinvestment of distributions......... 281,574 3,989,792 1,732,106 23,749,949
Shares redeemed........................................ (14,424,060) (188,571,802) (30,159,934) (399,899,457)
-----------------------------------------------------------------
Net decrease........................................... (5,616,598) $ (70,256,585) (4,833,687) $ (43,585,595)
=================================================================
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
JUNE 30, 1999 DECEMBER 31, 1998
----------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
----------------------------------------------------------------
<S> <C> <C> <C> <C>
CLASS A SHARES:
Shares sold............................................ 18,607,779 $ 245,186,846 30,432,242 $ 417,377,402
Shares issued on reinvestment of distributions......... 106,144 1,493,645 579,768 7,868,775
Shares redeemed........................................ (21,591,350) (284,270,758) (24,763,667) (333,277,391)
-----------------------------------------------------------------
Net increase (decrease)................................ (2,877,427) $ (37,590,267) 6,248,343 $ 91,968,786
=================================================================
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, 1999+
----------------------------
SHARES AMOUNT
----------------------------
<S> <C> <C>
CLASS B SHARES:
Shares sold............................................ 26,469 $ 351,695
Shares issued on reinvestment of distributions......... 275 3,855
Shares redeemed........................................ (113) (1,550)
----------------------------
Net increase........................................... 26,631 $ 354,000
============================
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
JUNE 30, 1999 DECEMBER 31, 1998
----------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
-----------------------------------------------------------------
<S> <C> <C> <C> <C>
CLASS C SHARES:
Shares sold............................................ 1,702,849 $ 22,845,572 6,416,186 $ 90,539,295
Shares issued on reinvestment of distributions......... 56,416 792,273 314,472 4,301,048
Shares redeemed........................................ (3,241,342) (42,562,288) (2,903,661) (37,561,993)
-----------------------------------------------------------------
Net increase (decrease)................................ (1,482,077) $ (18,924,443) 3,826,997 $ 57,278,350
=================================================================
</TABLE>
+ Effective date of Class B shares was January 1, 1999.
28
MUTUAL EUROPEAN FUND
Notes to Financial Statements (unaudited) (continued)
3. TRANSACTIONS WITH AFFILIATES AND RELATED PARTIES
Certain officers of the Series Fund are also officers and/or directors of
Franklin Mutual Advisers, Inc. (Franklin Mutual) and Franklin Templeton
Services, Inc. (FT Services), the Fund's investment manager and administrative
manager, respectively. Franklin/Templeton Investor Services, Inc. (Investor
Services) and Franklin/Templeton Distributors, Inc. (Distributors) are the
Fund's transfer agent and principal underwriter, respectively.
The Fund pays an investment management fee to Franklin Mutual of 0.80% per year
of the average daily net assets of the Fund. Franklin Mutual agreed, through
June 30, 2000, 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 Series Fund's Board of Directors determines that such
expenses would have been higher had the merger between Franklin Mutual and the
Fund's former investment adviser 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 expense
reduction is set forth in the Statement of Operations.
The Fund pays its allocated share of an administrative fee to FT Services based
on the Series Fund's aggregate average daily net assets as follows:
ANNUALIZED
FEE RATE AVERAGE DAILY NET ASSETS
- -----------------------------------------------------------------
0.15% First $200 million
0.135% Over $200 million, up to and including $700 million
0.10% Over $700 million, up to and including $1.2 billion
0.075% Over $1.2 billion
The Fund reimburses Distributors for costs incurred in marketing the Fund's
shares up to .35%, 1.00% and 1.00% per year of the average daily net assets of
Class A, Class B and Class C shares, respectively. Distributors received net
commissions on sales of those Fund shares and received contingent deferred sales
charges for the period of $34,924 and $115,760, respectively.
4. INCOME TAXES
At June 30, 1999, the net unrealized appreciation based on the cost of
investments for income tax purposes of $570,428,318 was as follows:
Unrealized appreciation..................................... $ 87,055,020
Unrealized depreciation..................................... (20,128,794)
------------
Net unrealized appreciation................................. $ 66,926,226
============
Net investment income and net realized capital gains differ for financial
statement and tax purposes primarily due to differing treatments of passive
foreign investment companies and foreign currency transactions.
29
MUTUAL EUROPEAN FUND
Notes to Financial Statements (unaudited) (continued)
5. INVESTMENT TRANSACTIONS
Purchases and sales of securities (excluding short-term securities) for the six
months ended June 30, 1999, aggregated $409,634,809 and $502,408,903,
respectively.
Transactions in options written during the six months ended June 30, 1999 were
as follows:
<TABLE>
<CAPTION>
NUMBER OF
CONTRACTS PREMIUM
------------------------
<S> <C> <C>
Options outstanding at December 31, 1998.................... 0 0
Options written............................................. 50 $ 20,124
Options expired............................................. (50) (20,124)
========================
Options outstanding at June 30, 1999........................ 0 $ 0
========================
</TABLE>
6. RESTRICTED SECURITIES
The Fund may purchase securities through a private offering that generally
cannot be sold to the public without prior registration under the Securities Act
of 1933. The costs of registering such securities are paid by the issuer.
Restricted securities held at June 30, 1999 are as follows:
<TABLE>
<CAPTION>
NUMBER OF ACQUISITION
SHARES ISSUER DATE VALUE
---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
108,750 Security Capital European Realty............................ 4/08/98 $1,884,333
==========
TOTAL RESTRICTED SECURITIES (COST $2,175,000) (0.27% OF NET ASSETS)
</TABLE>
7. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
The Fund has been a party to financial instruments with off-balance-sheet risk,
primarily forward exchange contracts, in order to minimize the impact on the
Fund from adverse changes in the relationship between the functional currency
and foreign currencies and interest rates. These instruments involve market risk
in excess of the amount recognized on the Statement of Assets and Liabilities.
Some of these risks have been minimized by offsetting contracts. Risks arise
from the possible inability of counterparties to meet the terms of their
contracts, future movement in currency values and interest rates and contract
positions that are not exact offsets. The contract amount indicates the extent
of the Fund's involvement in such contracts.
A forward exchange contract is an agreement between two parties to exchange
different currencies at a specific rate at an agreed future date. The contracts
are reported in the financial statements at the Fund's net equity, as measured
by the difference between the forward exchange rates at the reporting date and
the forward exchange rates at the day of entry into the contract.
30
MUTUAL EUROPEAN FUND
Notes to Financial Statements (unaudited) (continued)
7. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK (CONT.)
As of June 30, 1999, the Fund had the following forward exchange contracts
outstanding:
<TABLE>
<CAPTION>
IN SETTLEMENT UNREALIZED
EXCHANGE FOR DATE GAIN/(LOSS)
CONTRACTS TO BUY: ------------------------------------------------
- ------------------
<S> <C> <C> <C> <C> <C> <C>
38,154,560 Norwegian Krone....................................... U.S. $ 4,800,000 09/10/99 U.S. $ 36,241
------------ -----------
U.S. $ 4,800,000 36,241
============ -----------
CONTRACTS TO SELL:
- ------------------
21,341,247 European Unit......................................... U.S. $ 24,541,406 07/19/99 2,500,901
18,680,730 British Pounds........................................ 30,935,289 07/20/99 1,485,897
36,910,681 Swedish Krona......................................... 4,805,319 07/21/99 458,289
9,952,198 British Pounds........................................ 16,193,173 08/17/99 500,650
196,109,996 Swedish Krona......................................... 24,982,165 08/17/99 1,847,229
45,149,915 European Unit......................................... 49,747,186 08/31/99 2,965,818
82,649,309 European Unit......................................... 89,918,030 09/10/99 4,213,882
115,217,531 Norwegian Krone....................................... 14,755,347 09/10/99 151,069
18,486,097 Swiss Franc........................................... 12,808,654 09/10/99 815,956
82,041,868 Swedish Krona......................................... 10,007,395 09/15/99 310,808
38,206,651 Swedish Krona......................................... 4,608,853 09/20/99 91,682
46,978,041 European Unit......................................... 50,610,054 10/12/99 1,771,401
273,327,203 Swedish Krona......................................... 33,242,855 10/19/99 863,205
121,117,997 Danish Krone.......................................... 17,527,352 10/27/99 552,199
39,335,934 European Unit......................................... 42,919,527 10/27/99 1,976,990
9,475,270 British Pounds........................................ 15,444,691 11/16/99 485,892
29,422,493 New Zealand Dollar.................................... 16,518,523 11/17/99 876,064
219,981,907 Swedish Krona......................................... 27,962,095 11/17/99 1,849,554
37,860,577 European Unit......................................... 40,093,642 11/29/99 583,280
583,280 British Pounds........................................ 11,505,529 12/15/99 210,695
39,254,030 European Unit......................................... 41,537,138 12/17/99 513,866
90,320 British Pounds........................................ 143,776 12/20/99 1,108
25,955,000 British Pounds........................................ 41,839,460 01/18/00 823,961
361,440 British Pounds........................................ 582,135 05/22/00 10,042
------------ -----------
U.S. $623,229,594 25,860,438
============ -----------
Unrealized gain on forward exchange contracts.................... 25,896,679
-----------
</TABLE>
31
MUTUAL EUROPEAN FUND
Notes to Financial Statements (unaudited) (continued)
7. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK (CONT.)
<TABLE>
<CAPTION>
IN SETTLEMENT UNREALIZED
CONTRACTS TO BUY: EXCHANGE FOR DATE GAIN/(LOSS
- ------------------ ------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
13,841,070 British Pounds........................................ U.S. $ 22,691,842 07/20/99 U.S. $ (871,974)
7,587,389 British Pounds........................................ 12,283,983 08/17/99 (320,266)
68,876,391 Norwegian Krone....................................... 8,766,391 09/10/99 (36,807)
1,714,681 Swiss Franc........................................... 1,168,995 09/10/99 (56,610)
4,066,209 British Pounds........................................ 6,589,291 11/16/99 (169,886)
------------ -----------
U.S. $ 51,500,502 (1,455,543)
============ -----------
CONTRACTS TO SELL:
- ------------------
62,175,890 Norwegian Krone....................................... U.S. $ 7,838,614 09/10/99 (42,426)
69,775,326 Swedish Krona......................................... 8,223,723 09/15/99 (23,073)
31,649,535 Swedish Krona......................................... 3,742,894 11/17/99 (14,005)
------------ -----------
U.S. $ 19,805,231 (79,504)
============ -----------
Unrealized loss on forward exchange contracts..................... (1,535,047)
-----------
Net unrealized gain on forward exchange contracts............... U.S. $24,361,632
===========
</TABLE>
32
SEMIANNUAL REPORT
CHAIRMAN OF THE BOARD
Michael F. Price
OFFICERS
Peter A. Langerman
Robert L. Friedman
Jeffrey Altman
Raymond Garea
David E. Marcus
Larry Sondike
David Winters
INVESTMENT MANAGER
Franklin Mutual Advisers, Inc.
51 John F. Kennedy Parkway
Short Hills, NJ 07078
DISTRIBUTOR
Franklin/Templeton Distributors, Inc.
1-800-DIAL-BEN(R)
www.franklin-templeton.com
SHAREHOLDER SERVICES
1-800-632-2301 - (Class A, B, & C)
1-800-448-FUND - (Class Z)
FUND INFORMATION
1-800-342-5236
This report must be preceded or accompanied by the current Mutual European Fund
prospectus, which contains more complete information including risk factors,
charges and expenses.
To ensure the highest quality of service, telephone calls to or from our service
departments may be monitored, recorded and accessed. These calls can be
determined by the presence of a regular beeping tone.
478 S99 08/99 [RECYCLE LOGO] Printed on recycled paper
