ANNUAL
REPORT
DECEMBER 31, 1999
MUTUAL DISCOVERY FUND
[Franklin Templeton LOGO]
<PAGE>
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]
PETER A. LANGERMAN
Chief Executive Officer
Franklin Mutual Advisers, LLC
[PHOTO]
ROBERT L. FRIEDMAN
Chief Investment Officer
Franklin Mutual Advisers, LLC
<PAGE>
SHAREHOLDER LETTER
Your Fund's Goal: Mutual Discovery Fund seeks long-term capital appreciation by
investing primarily in common and preferred stocks, bonds, and securities of
companies with market capitalization values of more than $1.5 billion. The fund
may also invest 50% or more of its assets in foreign securities.
Dear Shareholder:
We are pleased to bring you this annual report of the Mutual Discovery Fund for
the year ended December 31, 1999, a period in which the fund's Class Z shares
delivered a 26.8% one-year cumulative total return as shown in the Performance
Summary on page 6. The Standard & Poor's(R) 500 Composite Index (S&P 500(R)) and
the Russell 2000(R) Index - the fund's benchmarks - returned 20.04% (S&P) and
21.26% (Russell), respectively, over the same period.(1)
(1.) Source: Standard & Poor's Micropal.
The S&P 500 Composite Index consists of 500 domestic stocks, consisting of four
broad sectors: industrials, utilities, financials and transportation.
The S&P 500 serves as a standard for measuring large-cap U.S. stock market
performance. Since some industries are characterized by companies of relatively
small stock capitalization, the Index is not composed of the 500 largest
companies on the New York Stock Exchange.
The Russell 2000 Index measures the performance of the 2000 smallest companies
in the Russell 3000 Index, which contains the 3000 largest companies
incorporated in the U.S. and its territories.
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 14 of
this report.
CONTENTS
<TABLE>
<S> <C>
Shareholder Letter 1
Performance Summary 6
Financial Highlights &
Statement of Investments 10
Financial Statements 23
Notes to Financial Statements 27
Independent Auditors'
Report 36
Tax Designation 37
</TABLE>
Fund Category
[PYRAMID GRAPHIC]
<PAGE>
TOP 10 HOLDINGS
12/31/99
<TABLE>
<CAPTION>
COMPANY, % OF TOTAL
INDUSTRY, COUNTRY NET ASSETS
<S> <C>
Lagardere SCA, 4.1%
Multi-Industry, France
Investor AB, A & B, 3.7%
Multi-Industry, Sweden
Aventis SA, 3.2%
Health & Personal Care,
France
Modern Times Group AB, 2.6%
Broadcasting & Publishing,
Sweden
Compagnie Generale 2.5%
D'Industrie et de Participation,
Multi-Industry, France
Corporacion Financiera
Alba SA, 2.4%
Multi-Industry, Spain
Suez Lyonnaise des Eaux SA, 1.9%
Business & Public Services,
France
Canary Wharf Group PLC, 1.8%
Real Estate, United Kingdom
Total Fina SA, 1.8%
Energy Sources, France
Invensys PLC, 1.8%
Machinery & Engineering,
United Kingdom
</TABLE>
During the 12 months under review, the U.S. economy experienced unusually strong
growth in a low-inflation environment. Global economies generally followed suit,
and stock markets around the world sprang back to life in a broad-based rally.
In the process, the market became increasingly two-tiered as a select group of
companies achieved over-the-top success while the majority of publicly traded
equities languished. For example, the tech-heavy Nasdaq Composite(R) Index rose
86% for the year.(2) But the top 32 companies in the index comprised half of its
value, and in fact about half of the more than 5,000 stocks in the Nasdaq were
down in 1999. And although the Dow Jones Industrial Average rose more than 25%,
and the S&P 500 climbed past 20% during the year, about 62% of the stocks listed
on the New York Stock Exchange and 50% of those comprising the S&P 500 fell in
value during 1999.
The fund's impressive performance was achieved not by investing in volatile
emerging markets or high-flying Internet companies, but by sticking to our
longstanding, value strategy during a period when growth investing was clearly
in favor with investors interested in buying hot stocks. Throughout the
reporting period, we conducted in-depth fundamental analysis and bought
securities only when we saw substantial upside with relatively little risk. Many
market participants were interested only in positive momentum, and were
unconcerned about valuations. In our opinion, risk still matters. In addition to
identifying opportunities that traded at a meaningful discount to their
intrinsic value, we linked our equity positions to the dollar
2. Source: Nasdaq. The Nasdaq Composite Index measures all Nasdaq domestic and
non-U.S. based common stocks listed on The Nasdaq Stock Market. The Index is
market-value weighted and includes over 5,000 companies (as of 12/31/99).
Indexes are unmanaged and include reinvested dividends. One cannot invest
directly in an index.
2
<PAGE>
in order to minimize the volatility of unexpected movements of overseas
currencies.
The casino-like atmosphere of 1999 attracted many investors to index funds.
Unfortunately, many people often forget two vital aspects of index investing: 1)
an index is 100% of the risk (price volatility) of its market; and 2) most
indexes are weighted to very large companies. We try to lessen the risk of the
market by diversifying into special situations such as distressed securities and
arbitrage. Believing that the large-cap universe was generally overvalued during
1999, we stayed away from those stocks, opting instead to focus on out-of-favor
mid- to small-cap companies. After all, the best bargains can generally be found
in the most overlooked areas, and rarely in the most popular.
We recalibrated the portfolio during the year, cutting the number of positions
in half. For the most part, no large positions were eliminated, only smaller
ones. We did make some additions to our stake in pharmaceutical, defense, and
media companies whose stocks were selling at 60 cents on the dollar, well below
our perception of their intrinsic values. Continuing to focus on Europe, we
increased our exposure to French stocks. The European economy is an impressive
restructuring story we believe will continue for several years, with France in
particular benefiting from a wave of corporate consolidation.
A number of stocks contributed to the fund's success in 1999. Among them was
Lagardere SCA, a French conglomerate undergoing a restructuring; Compagnie
Financiere Richemont AG, a Swiss conglomerate we purchased at a substantial
discount to the sum of its subsidiaries; AMFM Inc., a radio business that merged
with Capstar, another media company; and Canary
GEOGRAPHIC DISTRIBUTION
Based on Total Net Assets
12/31/99
[BAR CHART]
<TABLE>
<S> <C>
United States 25.9%
France 16.3%
Sweden 9.7%
United Kingdom 8.1%
Canada 3.1%
Spain 3.0%
Italy 2.9%
Japan 2.5%
Switzerland 2.4%
Germany 1.5%
Portugal 1.5%
Singapore 1.2%
Netherlands 1.1%
Other Countries 2.0%
Fixed-Income Securities 4.5%
Government Agencies
& Other Net Assets 14.3%
</TABLE>
3
<PAGE>
TOP 10 INDUSTRIES*
12/31/99
<TABLE>
<CAPTION>
% OF TOTAL
INDUSTRY NET ASSETS
- -----------------------------------------
<S> <C>
Multi-Industry 25.7%
Broadcasting & Publishing 8.4%
Machinery & Engineering 4.4%
Health & Personal Care 4.2%
Business & Public Services 3.6%
Insurance 3.5%
Beverages & Tobacco 3.1%
Energy Sources 2.9%
Financial Services 2.6%
Automobiles 2.4%
</TABLE>
*Based on equity securities.
Wharf Group PLC, a real estate holding in the U.K. that had a successful public
offering in March and continued to perform well throughout the year.
Looking forward, we see good values in mid-size companies around the world. U.S.
financial stocks have fallen considerably, and we expect to find great value in
this sector. In Europe, we intend to take advantage of any opportunities that
arise as European companies react to their rapidly changing business and market
environment. The U.K. continues to offer interesting opportunities on the heels
of a remarkable economic turnaround. We also believe that Aventis SA, a life
science company formed by the merger of France's Rhone Poulenc and Germany's
Hoechst, and whose stock we purchased at a huge discount, may continue to enjoy
significant upside potential. In short, we see no dearth of good companies
trading with above-average earnings prospects at below-average price/earnings
ratios, and shall continue to concentrate on mining overlooked, out-of-favor
sectors for tomorrow's gems as we strive to provide our shareholders the best
risk-adjusted returns possible over the long run.
Thank you for your participation in the Mutual Discovery Fund. We welcome your
comments and suggestions, either through regular mail or by e-mail at
[email protected].
Sincerely,
/s/ Robert Friedman
Robert Friedman,
Chief Investment Officer
4
<PAGE>
In February 2000, David Winters and Jae Chung assumed primary responsibility for
investments in Mutual Discovery Fund.
DAVID WINTERS is co-portfolio manager of Mutual Beacon Fund and Mutual Discovery
Fund. He is also a senior vice president of Franklin Mutual Advisers, Inc. He
follows companies in a wide variety of industries including railroads,
beverages, candy, timber, media and consumer goods, both domestic and foreign.
Prior to joining Heine Securities Corporation (predecessor of Franklin Mutual
Advisers) in 1988, Mr. Winters was a trader for Herzog, Heine, Geduld, Inc. and
a financial analyst for KMS Investment Advisors, Inc. in Seattle, Washington.
David earned his bachelor's degree from Cornell University, Arts and Sciences.
Mr. Winters is a Chartered Financial Analyst (CFA).
JAE CHUNG is co-portfolio manager of Mutual Discovery Fund and Mutual European
Fund. He specializes in the analysis of foreign securities.
Prior to joining Heine Securities (predecessor of Franklin Mutual Advisers) in
September 1996, Mr. Chung was a financial analyst for Oakmont Corporation.
Mr. Chung holds a bachelor of arts degree from Yale University.
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 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.
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
December 31, 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.
5
<PAGE>
CLASS Z: No initial sales charge or Rule 12b-1 fees and are available only to
certain investors, as described in the prospectus.
CLASS A (FORMERLY CLASS I): Subject to the current, 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.
ONE-YEAR PERFORMANCE SUMMARY
AS OF 12/31/99
One-year total return does not include sales charges. Distributions will vary
based on earnings of the fund's portfolio and any profits realized from the sale
of the portfolio's securities. Past distributions are not indicative of future
trends. All total returns include reinvested distributions at net asset value.
<TABLE>
<S> <C> <C>
CLASS Z
One-Year Total Return 26.80%
Net Asset Value (NAV) (12/31/99) $21.10 (12/31/98) $17.27
Change in NAV +$3.83
Distributions (1/1/99-12/31/99) Dividend Income $0.4189
Long-Term Capital Gain $0.3243
--------------------------------
Total $0.7432
CLASS A
One-Year Total Return 26.38%
Net Asset Value (NAV) (12/31/99) $21.00 (12/31/98) $17.19
Change in NAV +$3.81
Distributions (1/1/99-12/31/99) Dividend Income $0.3502
Long-Term Capital Gain $0.3243
--------------------------------
Total $0.6745
CLASS B
One-Year Total Return 25.55%
Net Asset Value (NAV) (12/31/99) $20.90 (1/1/99) $17.19
Change in NAV +$3.71
Distributions (1/1/99-12/31/99) Dividend Income $0.3102
Long-Term Capital Gain $0.3243
--------------------------------
Total $0.6345
CLASS C
One-Year Total Return 25.57%
Net Asset Value (NAV) (12/31/99) $20.95 (12/31/98) $17.15
Change in NAV +$3.80
Distributions (1/1/99-12/31/99) Dividend Income $0.2200
Long-Term Capital Gain $0.3243
--------------------------------
Total $0.5443
</TABLE>
Mutual Discovery Fund paid distributions derived from long-term capital gains of
$0.3243 per share in December 1999. The fund hereby designates such
distributions as capital gain dividends per Internal Revenue Code Section 852
(b)(3).
Past performance does not guarantee future results.
6
<PAGE>
ADDITIONAL PERFORMANCE
AS OF QUARTER ENDED 12/31/99
<TABLE>
<CAPTION>
INCEPTION
CLASS Z 1-YEAR 5-YEAR (12/31/92)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Cumulative Total Return(1) 26.80% 145.75% 245.93%
Average Annual Total Return(2) 26.80% 19.70% 19.40%
Value of $10,000 Investment(3) $ 12,680 $ 24,575 $ 34,593
</TABLE>
<TABLE>
<CAPTION>
INCEPTION
CLASS A 1-YEAR 3-YEAR (1/1/96)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Cumulative Total Return(1) 26.38% 51.12% 58.45%
Average Annual Total Return(2) 19.11% 12.51% 13.51%
Value of $10,000 Investment(3) $ 11,911 $ 14,240 $ 14,933
</TABLE>
<TABLE>
<CAPTION>
INCEPTION
CLASS B 1-YEAR (1/1/99)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Cumulative Total Return(1) 25.55% 25.55%
Average Annual Total Return(2) 21.55% 21.55%
Value of $10,000 Investment(3) $ 12,155 $ 12,155
</TABLE>
<TABLE>
<CAPTION>
INCEPTION
CLASS C 1-YEAR 3-YEAR (11/1/96)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Cumulative Total Return(1) 25.57% 48.27% 55.47%
Average Annual Total Return(2) 23.35% 13.66% 14.60%
Value of $10,000 Investment(3) $ 12,335 $ 14,682 $ 15,390
</TABLE>
For updated performance figures, see the fund's "Prices and Performance" on the
Internet at www.franklintempleton.com, or call Franklin Templeton at
1-800/342-5236.
Past performance does not guarantee future results.
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.
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.
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.
7
<PAGE>
AVERAGE ANNUAL TOTAL RETURN
12/31/99
<TABLE>
<CAPTION>
CLASS Z
- ------------------------------------
<S> <C>
1-Year 26.80%
5-Year 19.70%
Since Inception (12/31/92) 19.40%
</TABLE>
AVERAGE ANNUAL TOTAL RETURN
12/31/99
<TABLE>
<CAPTION>
CLASS A
- ------------------------------------
<S> <C>
1-Year 19.11%
3-Year 12.51%
Since Inception (11/1/96) 13.51%
</TABLE>
TOTAL RETURN INDEX COMPARISON FOR HYPOTHETICAL $10,000 INVESTMENT
Total return represents the change in value of an investment over the periods
shown. It includes the current, applicable, maximum sales charge(s), fund
expenses, account fees and reinvested distributions. The unmanaged indexes
differ from the fund in composition, do not pay management fees or expenses and
include reinvested dividends. One cannot invest directly in an index.
CLASS Z (12/31/92 - 12/31/99)
This graph compares the performance of Mutual Discovery Fund - Class Z, as
tracked by the growth in value of a $10,000 investment, to that of the S&P 500
and Russell 2000 Indexes from 12/31/92 -12/31/99.
<TABLE>
<CAPTION>
MUTUAL DISCOVERY
DATE FUND - CLASS Z S&P 500 RUSSELL 2000
---- -------------- ------- ------------
<S> <C> <C> <C>
12/31/1992 $10,000 $10,000 $10,000
12/31/1993 $13,585 $11,008 $11,888
12/31/1994 $14,077 $11,153 $11,672
12/31/1995 $18,107 $15,345 $14,992
12/31/1996 $22,620 $18,868 $17,464
12/31/1997 $27,810 $25,162 $21,369
12/31/1998 $27,282 $32,354 $20,825
12/31/1999 $34,593 $39,161 $25,252
</TABLE>
CLASS A (11/1/96 - 12/31/99)
This graph compares the performance of Mutual Discovery Fund - Class A, as
tracked by the growth in value of a $10,000 investment, to that of the S&P 500
and Russell 2000 Indexes from 11/1/96 -12/31/99.
<TABLE>
<CAPTION>
MUTUAL DISCOVERY
DATE FUND - CLASS A S&P 500 RUSSELL 2000
---- -------------- ------- ------------
<S> <C> <C> <C>
11/01/1996 $ 9,425 $10,000 $10,000
11/30/1996 $ 9,810 $10,756 $10,412
12/31/1996 $ 9,889 $10,543 $10,685
01/31/1997 $10,350 $11,202 $10,898
02/28/1997 $10,545 $11,289 $10,635
03/31/1997 $10,447 $10,825 $10,133
04/30/1997 $10,465 $11,472 $10,161
05/31/1997 $10,840 $12,170 $11,291
06/30/1997 $11,238 $12,715 $11,775
07/31/1997 $11,721 $13,728 $12,323
08/31/1997 $11,609 $12,959 $12,605
09/30/1997 $12,190 $13,669 $13,528
10/31/1997 $11,832 $13,212 $12,934
11/30/1997 $11,901 $13,824 $12,850
12/31/1997 $12,110 $14,062 $13,075
01/31/1998 $12,110 $14,218 $12,868
02/28/1998 $12,727 $15,243 $13,819
03/31/1998 $13,454 $16,024 $14,389
04/30/1998 $13,699 $16,186 $14,468
05/31/1998 $13,878 $15,907 $13,688
06/30/1998 $13,531 $16,553 $13,717
07/31/1998 $13,209 $16,376 $12,606
08/31/1998 $11,400 $14,008 $10,158
09/30/1998 $10,887 $14,906 $10,953
10/31/1998 $11,183 $16,118 $11,400
11/30/1998 $11,742 $17,094 $11,997
12/31/1998 $11,823 $18,079 $12,740
01/31/1999 $11,906 $18,835 $12,909
02/28/1999 $11,762 $18,249 $11,864
03/31/1999 $12,305 $18,979 $12,049
04/30/1999 $13,123 $19,713 $13,128
</TABLE>
Past performance does not guarantee future results.
8
<PAGE>
<TABLE>
<S> <C> <C> <C>
05/31/1999 $13,130 $19,248 $13,320
06/30/1999 $13,596 $20,316 $13,922
07/31/1999 $13,442 $19,683 $13,540
08/31/1999 $13,268 $19,584 $13,039
09/30/1999 $13,092 $19,048 $13,042
10/31/1999 $13,358 $20,253 $13,096
11/30/1999 $14,057 $20,664 $13,877
12/31/1999 $14,933 $21,881 $15,448
</TABLE>
This graph compares the performance of Mutual Discovery Fund - Class B, as
tracked by the growth in value of a $10,000 investment, to that of the S&P 500
and Russell 2000 Indexes from 1/1/99 -12/31/99.
<TABLE>
<CAPTION>
MUTUAL DISCOVERY
DATE FUND - CLASS B S&P 500 RUSSELL 2000
---- -------------- ------- ------------
<S> <C> <C> <C>
01/01/1999 $10,000 $10,000 $10,000
01/31/1999 $10,070 $10,418 $10,133
02/28/1999 $ 9,942 $10,094 $ 9,312
03/31/1999 $10,396 $10,498 $ 9,457
04/30/1999 $11,076 $10,904 $10,305
05/31/1999 $11,076 $10,647 $10,455
06/30/1999 $11,462 $11,238 $10,928
07/31/1999 $11,320 $10,887 $10,628
08/31/1999 $11,172 $10,833 $10,235
09/30/1999 $11,018 $10,536 $10,237
10/31/1999 $11,231 $11,203 $10,279
11/30/1999 $11,816 $11,430 $10,893
12/31/1999 $12,155 $12,103 $12,126
</TABLE>
<PAGE>
CLASS B (1/1/99 - 12/31/99)
[insert C plot points]
CLASS C (11/1/96 - 12/31/99)
[insert D plot points]
*Source: Standard and Poor's Micropal. The Russell 2000 Index measures the
performance of the 2000 smallest companies in the Russell 3000 Index, which
contains the 3000 largest companies incorporated in the U.S. and its
territories.
AVERAGE ANNUAL TOTAL RETURN
12/31/99
<TABLE>
<CAPTION>
CLASS B
- ------------------------------------
<S> <C>
1-Year 21.55%
Since Inception (1/1/99) 21.55%
</TABLE>
AVERAGE ANNUAL TOTAL RETURN
12/31/99
<TABLE>
<CAPTION>
CLASS C
- ------------------------------------
<S> <C>
1-Year 23.35%
3-Year 13.66%
Since Inception (11/1/96) 14.60%
</TABLE>
9
<PAGE>
This graph compares the performance of Mutual Discovery Fund - Class C, as
tracked by the growth in value of a $10,000 investment, to that of the S&P 500
and Russell 2000 Indexes from 11/1/96-12/31/99.
<TABLE>
<CAPTION>
MUTUAL DISCOVERY
DATE FUND - CLASS C S&P 500 RUSSELL 2000
---- -------------- ------- ------------
<S> <C> <C> <C>
11/01/1996 $ 9,900 $10,000 $10,000
11/30/1996 $10,304 $10,756 $10,412
12/31/1996 $10,386 $10,543 $10,685
01/31/1997 $10,870 $11,202 $10,898
02/28/1997 $11,070 $11,289 $10,635
03/31/1997 $10,955 $10,825 $10,133
04/30/1997 $10,967 $11,472 $10,161
05/31/1997 $11,354 $12,170 $11,291
06/30/1997 $11,760 $12,715 $11,775
07/31/1997 $12,267 $13,728 $12,323
08/31/1997 $12,144 $12,959 $12,605
09/30/1997 $12,740 $13,669 $13,528
10/31/1997 $12,359 $13,212 $12,934
11/30/1997 $12,427 $13,824 $12,850
12/31/1997 $12,641 $14,062 $13,075
01/31/1998 $12,635 $14,218 $12,868
02/28/1998 $13,268 $15,243 $13,819
03/31/1998 $14,021 $16,024 $14,389
04/30/1998 $14,271 $16,186 $14,468
05/31/1998 $14,446 $15,907 $13,688
06/30/1998 $14,082 $16,553 $13,717
07/31/1998 $13,737 $16,376 $12,606
08/31/1998 $11,853 $14,008 $10,158
09/30/1998 $11,316 $14,906 $10,953
10/31/1998 $11,618 $16,118 $11,400
11/30/1998 $12,188 $17,094 $11,997
12/31/1998 $12,272 $18,079 $12,740
01/31/1999 $12,344 $18,835 $12,909
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C> <C>
02/28/1999 $12,193 $18,249 $11,864
03/31/1999 $12,744 $18,979 $12,049
04/30/1999 $13,588 $19,713 $13,128
05/31/1999 $13,588 $19,248 $13,320
06/30/1999 $14,065 $20,316 $13,922
07/31/1999 $13,890 $19,683 $13,540
08/31/1999 $13,708 $19,584 $13,039
09/30/1999 $13,519 $19,048 $13,042
10/31/1999 $13,788 $20,253 $13,096
11/30/1999 $14,500 $20,664 $13,877
12/31/1999 $15,390 $21,881 $15,401
</TABLE>
<PAGE>
MUTUAL DISCOVERY FUND
Financial Highlights
<TABLE>
<CAPTION>
CLASS Z
------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------
1999+ 1998 1997 1996 1995
------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
(For a share outstanding throughout the year)
Net asset value, beginning of year.................. $17.27 $18.89 $17.18 $15.16 $12.55
------------------------------------------------------------------
Income from investment operations:
Net investment income.............................. .25 .38 .39 .34 .17
Net realized and unrealized gains (losses)......... 4.32 (.71) 3.49 3.39 3.40
------------------------------------------------------------------
Total from investment operations.................... 4.57 (.33) 3.88 3.73 3.57
------------------------------------------------------------------
Less distributions from:
Net investment income.............................. (.42) (.48) (.81) (.31) (.14)
Net realized gains................................. (.32) (.81) (1.36) (1.40) (.82)
------------------------------------------------------------------
Total distributions................................. (.74) (1.29) (2.17) (1.71) (.96)
------------------------------------------------------------------
Net asset value, end of year........................ $21.10 $17.27 $18.89 $17.18 $15.16
==================================================================
Total Return........................................ 26.80% (1.90)% 22.94% 24.93% 28.63%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's)..................... $2,038,298 $2,514,144 $3,879,550 $2,975,596 $1,370,221
Ratios to average net assets:
Expenses(a)........................................ 1.05% 1.01% .98% .96% 1.01%
Expenses, excluding waiver and payments by
affiliate(a)..................................... 1.11% 1.04% 1.00% .99% 1.01%
Net investment income.............................. 1.33% 1.81% 1.82% 2.24% 2.00%
Portfolio turnover rate............................. 87.67% 83.57% 58.15% 80.18% 73.23%
(a)Excluding dividend expense on securities sold
short, the ratios of expenses and expenses,
excluding waiver and payments by affiliate to
average net assets would have been:
Expenses........................................... 1.03% 1.00% .98% .96% .99%
Expenses, excluding waiver and payments by
affiliate........................................ 1.09% 1.03% 1.00% .99% .99%
</TABLE>
+Based on average weighted shares outstanding.
10
<PAGE>
MUTUAL DISCOVERY FUND
Financial Highlights (continued)
<TABLE>
<CAPTION>
CLASS A
--------------------------------------------
YEAR ENDED DECEMBER 31,
--------------------------------------------
1999++ 1998 1997++ 1996+
--------------------------------------------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
(For a share outstanding throughout the year)
Net asset value, beginning of year.......................... $17.19 $18.83 $17.15 $17.66
--------------------------------------------
Income from investment operations:
Net investment income...................................... .18 .32 .27 .11
Net realized and unrealized gains (losses)................. 4.30 (.74) 3.54 .74
--------------------------------------------
Total from investment operations............................ 4.48 (.42) 3.81 .85
--------------------------------------------
Less distributions from:
Net investment income...................................... (.35) (.41) (.77) (.29)
Net realized gains......................................... (.32) (.81) (1.36) (1.07)
--------------------------------------------
Total distributions......................................... (.67) (1.22) (2.13) (1.36)
--------------------------------------------
Net asset value, end of year................................ $21.00 $17.19 $18.83 $17.15
============================================
Total Return*............................................... 26.38% (2.37)% 22.54% 4.85%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's)............................. $844,462 $859,848 $693,952 $29,903
Ratios to average net assets:
Expenses(a)................................................ 1.40% 1.36% 1.33% 1.38%**
Expenses, excluding waiver and payments by affiliate(a).... 1.46% 1.39% 1.35% 1.51%**
Net investment income...................................... .98% 1.46% 1.39% .74%**
Portfolio turnover rate..................................... 87.67% 83.57% 58.15% 80.18%
(a)Excluding dividend expense on securities sold short, the
ratios of expenses and expenses, excluding waiver and
payments by affiliate to average net assets would have
been:
Expenses................................................... 1.38% 1.35% 1.33% 1.38%**
Expenses, excluding waiver and payments by affiliate....... 1.44% 1.38% 1.35% 1.51%**
</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.
11
<PAGE>
MUTUAL DISCOVERY FUND
Financial Highlights (continued)
<TABLE>
<CAPTION>
CLASS B
------------------
YEAR ENDED
DECEMBER 31, 1999+
------------------
<S> <C>
PER SHARE OPERATING PERFORMANCE
(For a share outstanding throughout the year)
Net asset value, beginning of year.......................... $17.19
------------------
Income from investment operations:
Net investment income...................................... .01
Net realized and unrealized gains.......................... 4.33
------------------
Total from investment operations............................ 4.34
------------------
Less distributions from:
Net investment income...................................... (.31)
Net realized gains......................................... (.32)
------------------
Total distributions......................................... (.63)
------------------
Net asset value, end of year................................ $20.90
==================
Total Return*............................................... 25.55%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's)............................. $8,090
Ratios to average net assets:
Expenses(a)................................................ 2.05%
Expenses, excluding waiver and payments by affiliate(a).... 2.11%
Net investment income...................................... .08%
Portfolio turnover rate..................................... 87.67%
(a)Excluding dividend expense on securities sold short, the ratios of expenses and
expenses, excluding waiver and payments by affiliate to average net assets
would have been:
Expenses................................................... 2.03%
Expenses, excluding waiver and payments by affiliate....... 2.09%
</TABLE>
*Total return does not reflect the contingent deferred sales charge and is not
annualized.
+Effective date of Class B shares was January 1, 1999. Based on average weighted
shares outstanding.
12
<PAGE>
MUTUAL DISCOVERY FUND
Financial Highlights (continued)
<TABLE>
<CAPTION>
CLASS C
----------------------------------------------------
YEAR ENDED DECEMBER 31,
----------------------------------------------------
1999++ 1998 1997++ 1996+
----------------------------------------------------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
(For a share outstanding throughout the year)
Net asset value, beginning of year.......................... $17.15 $18.79 $17.17 $17.66
----------------------------------------------------
Income from investment operations:
Net investment income...................................... .06 .23 .15 .09
Net realized and unrealized gains (losses)................. 4.28 (.75) 3.52 .76
----------------------------------------------------
Total from investment operations............................ 4.34 (.52) 3.67 .85
----------------------------------------------------
Less distributions from:
Net investment income...................................... (.22) (.31) (.69) (.27)
Net realized gains......................................... (.32) (.81) (1.36) (1.07)
----------------------------------------------------
Total distributions......................................... (.54) (1.12) (2.05) (1.34)
----------------------------------------------------
Net asset value, end of year................................ $20.95 $17.15 $18.79 $17.17
====================================================
Total Return*............................................... 25.57% (2.97)% 21.70% 4.90%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's)............................. $541,919 $563,761 $402,625 $18,038
Ratios to average net assets:
Expenses(a)................................................ 2.04% 2.01% 1.98% 2.00%**
Expenses, excluding waiver and payments by affiliate(a).... 2.10% 2.03% 2.00% 2.13%**
Net investment income...................................... .35% .81% .74% .13%**
Portfolio turnover rate..................................... 87.67% 83.57% 58.15% 80.18%
(a)Excluding dividend expense on securities sold short, the
ratios of expenses and expenses, excluding waiver and
payments by affiliate to average net assets would have
been:
Expenses................................................... 2.02% 2.00% 1.98% 2.00%**
Expenses, excluding waiver and payments by affiliate....... 2.08% 2.02% 2.00% 2.13%**
</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.
13
<PAGE>
MUTUAL DISCOVERY FUND
STATEMENT OF INVESTMENTS, DECEMBER 31, 1999
<TABLE>
<CAPTION>
COUNTRY SHARES VALUE
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS 83.6%
AEROSPACE & MILITARY TECHNOLOGY .9%
*Finmeccanica SpA........................................... Italy 17,859,800 $ 22,043,808
Lockheed Martin Corp. ...................................... United States 370,700 8,109,063
--------------
30,152,871
--------------
APPLIANCES & HOUSEHOLD DURABLES .1%
Maytag Corp. ............................................... United States 57,700 2,769,600
--------------
AUTOMOBILES 2.4%
Delphi Automotive Systems Corp. ............................ United States 2,796,007 44,037,110
General Motors Corp. ....................................... United States 236,400 17,183,325
*Lear Corp. ................................................ United States 507,500 16,240,000
*SPX Corp. ................................................. United States 54,700 4,420,444
--------------
81,880,879
--------------
BANKING 1.2%
Bank One Corp. ............................................. United States 317,800 10,189,463
Banque Nationale de Paris................................... France 193,165 17,813,263
Chittenden Corp. ........................................... United States 13,459 398,723
Merita AS................................................... Finland 2,407,500 14,178,873
--------------
42,580,322
--------------
BEVERAGES & TOBACCO 3.1%
Altadis SA, A............................................... Spain 933,188 13,340,652
*Buenos Aires Embotelladora SA, B........................... Argentina 2,122,936 9,554,550
*Buenos Aires Embotelladora SA, B, ADR...................... Argentina 1,943,556 174,945
Coca-Cola West Japan Co. Ltd. .............................. Japan 637,600 26,830,552
Farmer Brothers Co. ........................................ United States 81,202 12,911,118
Fraser and Neave Ltd. ...................................... Singapore 890,500 3,288,247
Gallaher Group PLC.......................................... United Kingdom 3,014,791 12,838,331
Gallaher Group PLC, ADR..................................... United Kingdom 128,400 1,974,150
Mikuni Coca-Cola Bottling Co. .............................. Japan 777,700 13,623,164
Swedish Match AB............................................ Sweden 3,521,494 12,297,281
--------------
106,832,990
--------------
BROADCASTING & PUBLISHING 8.4%
*AMFM Inc. ................................................. United States 247,041 19,330,958
Dun & Bradstreet Corp. ..................................... United States 535,900 15,809,050
*MediaOne Group Inc. ....................................... United States 506,000 38,867,125
*Modern Times Group AB, A................................... Sweden 94,500 4,666,667
*Modern Times Group AB, B................................... Sweden 1,676,387 83,178,755
NV Holdingsmig de Telegraaf................................. Netherlands 1,652,662 36,603,810
Publicis SA................................................. France 28,323 10,692,767
Scripps Co., A.............................................. United States 346,800 15,540,975
Seat Pagine Gialle SpA, di Risp............................. Italy 5,998,300 13,176,574
Torstar Corp., B............................................ Canada 1,207,100 13,148,783
</TABLE>
14
<PAGE>
MUTUAL DISCOVERY FUND
STATEMENT OF INVESTMENTS, DECEMBER 31, 1999 (CONT.)
<TABLE>
<CAPTION>
COUNTRY SHARES VALUE
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS (CONT.)
BROADCASTING & PUBLISHING (CONT.)
True North Communications Inc. ............................. United States 529,900 $ 23,679,905
Washington Post Co., B...................................... United States 26,603 14,787,943
--------------
289,483,312
--------------
BUSINESS & PUBLIC SERVICES 3.6%
Deluxe Corp. ............................................... United States 24,600 674,963
*Republic Services Inc., A.................................. United States 1,221,100 17,553,313
Suez Lyonnaise des Eaux SA.................................. France 413,715 66,266,039
*Suez Lyonnaise des Eaux SA, strip.......................... France 269,320 2,711
Vivendi..................................................... France 444,474 40,115,870
--------------
124,612,896
--------------
CHEMICALS 2.5%
Bayer AG, Br. .............................................. Germany 365,320 17,359,412
*Bush Boake Allen Inc. ..................................... United States 651,700 16,007,381
ChemFirst Inc. ............................................. United States 633,400 13,855,625
CK Witco Corp. ............................................. United States 844,342 11,293,074
Laporte PLC................................................. United Kingdom 852,200 7,506,004
Union Carbide Corp. ........................................ United States 306,100 20,432,174
--------------
86,453,670
--------------
CONSTRUCTION & HOUSING 1.0%
Groupe GTM.................................................. France 255,681 24,839,642
*Grupo Ferrovial SA......................................... Spain 541,691 7,852,965
--------------
32,692,607
--------------
DATA PROCESSING & REPRODUCTION .8%
Compaq Computer Corp. ...................................... United States 387,500 10,486,719
*NCR Corp. ................................................. United States 202,800 7,681,050
*Network Associates Inc. ................................... United States 356,700 9,519,431
--------------
27,687,200
--------------
ELECTRICAL & ELECTRONICS 1.5%
(R)+*Distribution Systems SpA............................... Italy 500 20,669
(R)+*MWCR Elettronica SRL................................... Italy 69,056 69,056
(R)+*MWCR LLC............................................... Italy 13,505,313 17,999,881
Racal Electronics PLC....................................... United Kingdom 3,246,721 29,462,221
(R)+*Sweda Industrie Elettroniche SpA....................... Italy 500 20,669
*Thomson Multimedia......................................... France 81,052 4,365,531
--------------
51,938,027
--------------
ELECTRONIC COMPONENTS & INSTRUMENTS .4%
*General Instrument Corp. .................................. United States 180,750 15,363,750
--------------
</TABLE>
15
<PAGE>
MUTUAL DISCOVERY FUND
STATEMENT OF INVESTMENTS, DECEMBER 31, 1999 (CONT.)
<TABLE>
<CAPTION>
COUNTRY SHARES VALUE
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS (CONT.)
ENERGY EQUIPMENT & SERVICES .8%
*Cooper Cameron Corp. ...................................... United States 259,300 $ 12,689,494
*Weatherford International Inc. ............................ United States 330,500 13,199,343
--------------
25,888,837
--------------
ENERGY SOURCES 3.5%
*Abraxas Petroleum Corp. ................................... United States 165,142 154,821
Atlantic Richfield Co. ..................................... United States 291,150 25,184,475
Burlington Resources Inc. .................................. United States 494,100 16,336,181
*Gulf Canada Resources Ltd. ................................ Canada 2,807,799 9,476,322
*Gulf Canada Resources Ltd., fgn. .......................... Canada 2,071,600 6,805,519
Total Fina SA, B............................................ France 345,596 46,100,342
Total Fina SA, B, ADR....................................... France 208,648 14,448,874
--------------
118,506,534
--------------
FINANCIAL SERVICES 2.6%
Bear Stearns Co. Inc. ...................................... United States 387,225 16,553,869
Greenpoint Financial Corp. ................................. United States 477,696 11,375,136
Household International Inc. ............................... United States 284,900 10,612,525
Investors Group Inc. ....................................... Canada 808,500 11,518,846
Irish Life & Permanent PLC.................................. Irish Republic 910,962 8,759,675
Lehman Brothers Holdings Inc. .............................. United States 80,300 6,800,406
Metris Cos. Inc. ........................................... United States 370,300 13,215,081
*MFN Financial Corp. ....................................... United States 292,338 1,900,197
Morgan Stanley, Dean Witter & Co. .......................... United States 9,500 1,356,125
Power Corp. of Canada....................................... Canada 259,800 4,447,092
Power Financial Corp. ...................................... Canada 176,900 2,936,303
--------------
89,475,255
--------------
FOOD & HOUSEHOLD PRODUCTS 2.4%
Associated British Foods PLC................................ United Kingdom 1,447,112 7,969,091
Earthgrains Company......................................... United States 1,580,400 25,483,950
*Fine Host Corp. ........................................... United States 212,022 2,099,018
Flowers Industries Inc. .................................... United States 163,400 2,604,188
Kikkoman Corp. ............................................. Japan 2,622,300 17,424,688
*Kohler Co. ................................................ United States 30 1,338,000
*Pactiv Corp. .............................................. United States 1,126,300 11,966,938
U.S. Industries Inc. ....................................... United States 1,038,000 14,532,000
--------------
83,417,873
--------------
HEALTH & PERSONAL CARE 4.2%
American Home Products Corp. ............................... United States 26,100 1,029,319
Aventis SA.................................................. France 1,885,200 109,509,755
Banyu Pharmaceutical Co. Ltd. .............................. Japan 359,800 5,580,888
(R)*Cape Ann Investors LLC.................................. United States 1,670,389 29,733
Ono Pharmaceutical Co. Ltd. ................................ Japan 426,200 11,428,174
</TABLE>
16
<PAGE>
MUTUAL DISCOVERY FUND
STATEMENT OF INVESTMENTS, DECEMBER 31, 1999 (CONT.)
<TABLE>
<CAPTION>
COUNTRY SHARES VALUE
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS (CONT.)
HEALTH & PERSONAL CARE (CONT.)
Sankyo Co. Ltd. ............................................ Japan 604,400 $ 12,421,001
Ventas Inc. ................................................ United States 746,200 3,124,712
--------------
143,123,582
--------------
INDUSTRIAL COMPONENTS .7%
Mannesmann AG............................................... Germany 74,300 17,982,201
*Owens-Illinois Inc. ....................................... United States 211,200 5,293,200
--------------
23,275,401
--------------
INSURANCE 3.5%
Allmerica Financial Corp. .................................. United States 302,000 16,798,750
AON Corp. .................................................. United States 355,300 14,212,000
Horace Mann Educators Corp. ................................ United States 531,400 10,428,725
Lincoln National Corp. ..................................... United States 141,000 5,640,000
MBIA Inc. .................................................. United States 337,600 17,829,500
Old Republic International Corp. ........................... United States 960,500 13,086,813
Radian Group Inc. .......................................... United States 181,229 8,653,685
ReliaStar Financial Corp. .................................. United States 156,900 6,148,519
W. R. Berkley Corp. ........................................ United States 363,024 7,578,126
XL Capital Ltd., A.......................................... Bermuda 349,700 18,140,688
--------------
118,516,806
--------------
LEISURE & TOURISM .2%
Hilton Hotels Corp. ........................................ United States 835,380 8,040,533
--------------
MACHINERY & ENGINEERING 4.4%
FKI PLC..................................................... United Kingdom 2,865,148 11,298,158
IMI PLC..................................................... United Kingdom 4,681,915 21,223,995
Invensys PLC................................................ United Kingdom 11,250,367 60,545,473
NACCO Industries Inc., A.................................... United States 290,600 16,146,463
*Sulzer AG.................................................. Switzerland 22,733 14,774,666
United Dominion Industries Ltd. ............................ Canada 1,403,400 27,980,288
--------------
151,969,043
--------------
MERCHANDISING 2.2%
*Borders Group Inc. ........................................ United States 295,900 4,752,894
*Boyds Collection Ltd. ..................................... United States 996,400 6,912,525
*Federated Department Stores Inc. .......................... United States 219,400 11,093,413
*Homeland Holdings Corp. ................................... United States 38,115 96,717
May Department Stores Co. .................................. United States 57,000 1,838,250
*Saks Inc. ................................................. United States 1,045,000 16,262,813
Sears, Roebuck & Co. ....................................... United States 46,800 1,424,475
Sonae SGPS SA............................................... Portugal 658,292 34,727,173
--------------
77,108,260
--------------
</TABLE>
17
<PAGE>
MUTUAL DISCOVERY FUND
STATEMENT OF INVESTMENTS, DECEMBER 31, 1999 (CONT.)
<TABLE>
<CAPTION>
COUNTRY SHARES VALUE
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS (CONT.)
MULTI-INDUSTRY 25.7%
*Alleghany Corp. ........................................... United States 50,046 $ 9,283,533
*Berkshire-Hathaway Inc., A................................. United States 402 22,552,200
*Brierley Investments Ltd. ................................. NewZealand 70,396,052 14,712,741
Cir Cie Industriali Riunite SpA Torino...................... Italy 15,617,900 41,147,734
Cir Cie Industriali Riunite SpA Torino, di Risp............. Italy 2,590,900 5,868,846
Compagnie Financiere Richemont AG, A, Br. .................. Switzerland 19,379 46,241,884
Compagnie Generale D'Industrie et de Participation.......... France 1,290,592 84,454,324
Corporacion Financiera Alba SA.............................. Spain 2,443,601 83,544,438
Imasco Ltd. ................................................ Canada 1,041,500 28,776,489
Investor AB, A.............................................. Sweden 2,034,300 28,941,834
Investor AB, B.............................................. Sweden 6,846,000 96,592,593
+Invik & Co. AB, B.......................................... Sweden 430,477 51,120,725
Kansas City Southern Industries Inc. ....................... United States 424,900 31,708,163
Kinnevik AB, B.............................................. Sweden 1,323,500 41,082,187
Lagardere SCA............................................... France 2,605,875 141,666,415
*Pacific Century Regional Developments Ltd. ................ Singapore 2,643,400 37,932,909
Pargesa Holdings SA, Br. ................................... Switzerland 13,000 21,224,490
*Thermo Electron Corp. ..................................... United States 1,486,700 22,300,500
Trelleborg AB, B............................................ Sweden 1,525,500 13,721,429
TRW Inc. ................................................... United States 400,000 20,775,000
Williams PLC................................................ United Kingdom 8,228,300 37,632,867
--------------
881,281,301
--------------
REAL ESTATE 2.0%
*Canary Wharf Group PLC..................................... United Kingdom 9,881,883 61,245,732
Castellum AB................................................ Sweden 130,300 1,271,593
MBO Properties Inc. ........................................ United States 273,144 136,572
(R)*Security Capital European Realty........................ United States 357,000 5,143,478
--------------
67,797,375
--------------
RECREATION & OTHER CONSUMER GOODS .3%
(R)+*Hancock LLC............................................ United States 8,758,216 8,758,216
--------------
TELECOMMUNICATIONS 2.0%
Portugal Telecom SA......................................... Portugal 1,555,000 17,048,173
Telephone & Data Systems Inc. .............................. United States 352,100 44,364,600
U.S. West Inc. ............................................. United States 109,400 7,876,800
--------------
69,289,573
--------------
TRANSPORTATION 2.3%
Burlington Northern Santa Fe Corp. ......................... United States 351,900 8,533,575
Florida East Coast Industries Inc. ......................... United States 507,700 21,196,475
*MIF Ltd. .................................................. Norway 336,378 3,358,952
Railtrack Group PLC......................................... United Kingdom 2,706,322 44,393,181
--------------
77,482,183
--------------
</TABLE>
18
<PAGE>
MUTUAL DISCOVERY FUND
STATEMENT OF INVESTMENTS, DECEMBER 31, 1999 (CONT.)
<TABLE>
<CAPTION>
COUNTRY SHARES VALUE
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS (CONT.)
UTILITIES ELECTRICAL & GAS .9%
*Citizens Utilities Co., B.................................. United States 1,021,501 $ 14,492,545
*MidAmerican Energy Holding Co. ............................ United States 76,000 2,560,250
Veba AG..................................................... Germany 300,100 14,653,025
--------------
31,705,820
--------------
TOTAL COMMON STOCKS (COST $2,148,073,220)................... 2,868,084,716
--------------
<CAPTION>
PRINCIPAL
AMOUNT**
------------
<S> <C> <C> <C>
CORPORATE BONDS & NOTES 1.4%
Abraxas Petroleum Corp., Series A, 11.50%, 11/01/04......... United States $ 1,939,00 1,774,185
Eurotunnel Finance Ltd., Equity Note, 12/31/03.............. United Kingdom 4,866,050GBP 3,381,549
Eurotunnel PLC:
12/31/25, Tier 3.......................................... United Kingdom 4,850,057GBP 4,428,596
12/31/50, Resettable Advance R5........................... United Kingdom 4,001,837GBP 2,166,581
Stabilization Advance S8, Tier 1.......................... United Kingdom 2,984,965GBP 1,157,767
Stabilization Advance S8, Tier 2.......................... United Kingdom 2,216,007GBP 716,262
Eurotunnel SA:
12/31/18, Tier 2 (Libor).................................. France 3,559,735EUR 2,472,785
12/31/18, Tier 2 (Pibor).................................. France 2,293,539EUR 1,593,217
12/31/25, Tier 3 (Libor).................................. France 5,035,517EUR 2,813,563
12/31/25, Tier 3 (Pibor).................................. France 4,198,311EUR 2,345,780
12/31/50, Resettable Advance R4........................... France 6,173,594EUR 2,051,028
Stabilization Advance S6, Tier 1 (Pibor).................. France 1,198,383EUR 289,552
Stabilization Advance S7, Tier 1 (Pibor).................. France 1,527,379EUR 369,043
Stabilization Advance S6, Tier 2.......................... France 2,396,792EUR 482,592
HIH Capital Ltd., cvt., 144A, 7.50%, 9/25/06................ United Kingdom 8,105,000 5,268,250
MFN Financial Corp.:
Series A, 10.00%, 3/23/01................................. United States 1,210,124 1,167,770
Series B, 10.676%, FRN, 3/23/01........................... United States 2,090,123 2,027,419
RH Cement Finance PLC, 144A, 31.20%, 3/10/00................ Irish Republic 2,450,000 2,719,500
Rite Aid Corp.:
7.125%, 1/15/07........................................... United States 1,315,000 973,100
144A, 6.125%, 12/15/08.................................... United States 315,000 223,650
6.875%, 8/15/13........................................... United States 395,000 264,650
Southwest Royalties Inc., B, 10.50%, 10/15/04............... United States 11,676,000 6,246,660
TFM SA de CV:
senior disc. note, zero cpn. ............................. Mexico 4,260,000 2,737,050
10.25%,6/15/07............................................ Mexico 350,000 332,500
Tribasa Toll Road Trust I, 144A, 10.50%, 12/01/11........... Mexico 4,326,328 1,730,531
--------------
TOTAL CORPORATE BONDS & NOTES (COST $55,606,887)............ 49,733,580
--------------
BONDS & NOTES IN REORGANIZATION 3.1%
*Aerovias Venezolanas SA, Bank Claim........................ Venezuela 3,728,588 857,575
*Aerovias Venezolanas SA, Bank Claim........................ Venezuela 780,000 156,000
*Aiken Cnty S C Indl Rev Ref Beloit, 6.00%, 12/01/11........ United States 280,000 106,400
</TABLE>
19
<PAGE>
MUTUAL DISCOVERY FUND
STATEMENT OF INVESTMENTS, DECEMBER 31, 1999 (CONT.)
<TABLE>
<CAPTION>
PRINCIPAL
COUNTRY AMOUNT** VALUE
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
BONDS & NOTES IN REORGANIZATION (CONT.)
*Altos Hornos de Mexico SA:
cvt., 5.50%, 12/15/01..................................... Mexico $ 135,000 $ 45,900
Series A, 11.375%, 4/30/02................................ Mexico 600,000 237,000
Series B, 11.875%, 4/30/04................................ Mexico 410,000 161,950
Tranche A, Term Loan...................................... United States 772,799 324,576
*Brunos Inc.:
Revolver.................................................. United States 1,862,400 1,098,816
Tranche A, Term Loan...................................... United States 3,438,560 2,028,751
Tranche B, Term Loan...................................... United States 2,143,240 1,264,511
*Buenos Aires Embotelladora SA:
Series B, 12.00%, 8/03/05................................. Argentina 355,000 346,125
144A, 12.00%, 9/01/05..................................... Argentina 6,501,000 6,338,475
*Crown Leasing, Bank Claim.................................. Japan 777,146,017JPY 526,285
*Decision One Corp.:
Revolver.................................................. United States 351,370 157,238
Tranche A, Term Loan...................................... United States 4,554,682 2,038,220
Tranche B, Term Loan...................................... United States 777,500 347,931
*Dow Corning Corp.:
9.375%,02/01/08........................................... United States 100,000 144,000
8.15%,10/15/29............................................ United States 500,000 675,000
Bank Debt................................................. United States 1,241,480 1,707,035
Bank Debt #1.............................................. United States 3,250,000 4,468,750
Bank Debt................................................. United States 2,705,000 3,651,750
Bank Claim................................................ United States 6,938,674 9,540,677
*Foxmeyer Health Corp.:
Reclaimation Trade Claim.................................. United States 4,861,606 1,264,017
Reclaimation Trade Claim.................................. United States 610,315 469,941
*Harnischfeger Industries Inc.:
8.90%, 3/01/22............................................ United States 2,475,000 940,500
8.70%, 6/15/22............................................ United States 1,745,000 663,100
7.25%, 12/15/25........................................... United States 4,620,000 1,755,600
6.875%, 2/15/27........................................... United States 2,400,000 912,000
*Heilman Acquisition Corp., 9.625%, 1/31/04................. United States 7,550,000 755
*Koninklijke Ned Vlieg Fokker NV, Trade Claim............... Netherlands 17,485,098EUR 5,104,881
*Loewen Group Inc., Series 5, 6.10%, 10/01/02............... Canada 2,805,000CAD 931,184
*Loewen Group International Inc.:
Revolver.................................................. United States 1,178,609 624,662
144A, 6.70%, 10/01/99..................................... Canada 6,045,000 2,962,050
Series 3, 7.50%, 4/15/01.................................. Canada 1,660,000 813,400
Series 3, 7.75%, 10/15/01................................. Canada 330,000 161,700
Series 2, 8.25%, 4/15/03.................................. Canada 1,160,000 568,400
Series 6, 7.20%, 6/01/03.................................. Canada 10,955,000 5,477,500
Series 4, 8.25%, 10/15/03................................. Canada 4,970,000 2,435,300
Series 7, 7.60%, 6/01/08.................................. Canada 7,260,000 3,630,000
</TABLE>
20
<PAGE>
MUTUAL DISCOVERY FUND
STATEMENT OF INVESTMENTS, DECEMBER 31, 1999 (CONT.)
<TABLE>
<CAPTION>
PRINCIPAL
COUNTRY AMOUNT** VALUE
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
BONDS & NOTES IN REORGANIZATION (CONT.)
*Mariner Post-Acute Network Inc.:
Revolver.................................................. United States $ 632,000 $ 202,240
Tranche A, Term Loan...................................... United States 926,443 296,462
Tranche B, Term Loan...................................... United States 810,879 259,481
Tranche C, Term Loan...................................... United States 413,688 132,380
*Nippon Credit Bank Ltd., Bank Claim........................ Japan 395,595,008JPY 618,578
*Nippon Total Finance, Bank Claim........................... Japan 401,059,536JPY 233,477
*Paging Network Inc., Revolver A............................ United States 3,793,000 3,224,050
*Port Seattle Wash Rev Ref-Beloit Proj., 6.00%, 12/01/17.... United States 150,000 57,000
*Southeast Banking Corp.:
zero coupon, 12/18/96..................................... United States 400,000 107,000
zero coupon, 11/12/97..................................... United States 5,800,000 1,551,500
10.50%,4/11/01............................................ United States 7,800,000 1,079,208
*United Companies Financial Corp., Revolver................. United States 16,959,600 13,567,680
*Vencor Inc.:
9.875%,5/01/05............................................ United States 11,035,000 2,289,762
Revolver.................................................. United States 1,990,978 1,304,090
Term Loan A............................................... United States 8,170,156 5,351,452
Term Loan B............................................... United States 4,914,299 3,218,865
Tranche A, Term Loan, 03/07/00............................ United States 1,320,134 1,306,932
Tranche B, Term Loan, 03/07/00............................ United States 450,000 445,500
*Ventas Inc.:
Tranche A, Bridge Loan.................................... United States 1,743,461 1,577,832
Tranche B, Revolver....................................... United States 1,631,691 1,476,680
Tranche C, Term Loan A.................................... United States 1,688,761 1,528,328
Tranche D, Term Loan B.................................... United States 1,197,728 1,107,898
--------------
TOTAL BONDS & NOTES IN REORGANIZATION (COST $103,859,290)... 105,874,350
--------------
<CAPTION>
SHARES
------------
<S> <C> <C> <C>
COMPANIES IN LIQUIDATION .1%
*City Investing Company Liquidating Trust................... United States 100,000 128,125
*Petrie Stores Liquidating Trust, CBI....................... United States 1,213,700 2,958,394
--------------
TOTAL COMPANIES IN LIQUIDATION (COST $3,440,137)............ 3,086,519
--------------
</TABLE>
21
<PAGE>
MUTUAL DISCOVERY FUND
STATEMENT OF INVESTMENTS, DECEMBER 31, 1999 (CONT.)
<TABLE>
<CAPTION>
PRINCIPAL
COUNTRY AMOUNT** VALUE
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
GOVERNMENT AGENCIES 9.0%
Fannie Mae, 5.46% to 5.92%, with maturities to 12/07/00..... United States $108,800,000 $ 105,064,811
Federal Home Loan Bank, 1.28% to 5.82%, with maturities to
4/12/01................................................... United States 179,600,000 176,401,791
Federal Home Loan Mortgage Corp., 5.22% to 5.61%, with
maturities to 8/03/00..................................... United States 29,500,000 28,712,540
--------------
TOTAL GOVERNMENT AGENCIES (COST $310,792,487)............... 310,179,142
--------------
TOTAL INVESTMENTS (COST $2,621,772,021) 97.2%............... 3,336,958,307
SECURITIES SOLD SHORT (2.5%)................................ (85,190,060)
NET EQUITY IN FORWARD CONTRACTS .9%......................... 31,371,592
OTHER ASSETS, LESS LIABILITIES 4.4%......................... 149,628,962
--------------
TOTAL NET ASSETS 100.0%..................................... $3,432,768,801
==============
SECURITIES SOLD SHORT
<CAPTION>
ISSUER COUNTRY SHARES VALUE
- -------------------------------------------------------------------------------------------------------------------
*BP Amoco PLC, ADR.......................................... United Kingdom 331,400 $ 19,656,163
*Clear Channel Communications Inc. ......................... United States 232,230 20,726,528
*Dow Chemical Co. .......................................... United States 164,359 21,962,470
*DST Systems Inc. .......................................... United States 98,685 7,530,899
*Motorola Inc. ............................................. United States 104,000 15,314,000
--------------
TOTAL SECURITIES SOLD SHORT (PROCEEDS $69,893,890).......... $ 85,190,060
==============
</TABLE>
<TABLE>
<CAPTION>
CONTRACTS FOR DIFFERENCES VALUE AT UNREALIZED
ISSUER COUNTRY SHARES 12/31/99 GAIN/LOSS
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
*BP Amoco PLC, cfd., 5.18................................. United Kingdom 237,800 $2,396,178 $ (405,948)
*BP Amoco PLC, cfd., 5.47................................. United Kingdom 93,400 941,140 (115,095)
*BP Amoco PLC, cfd., 5.565................................ United Kingdom 60,000 604,587 (64,968)
*BP Amoco PLC, cfd., 5.65................................. United Kingdom 178,800 1,801,668 (169,157)
*BP Amoco PLC, cfd., 5.71................................. United Kingdom 37,400 376,859 (31,732)
*BP Amoco PLC, cfd., 6.23317.............................. United Kingdom 153,400 1,545,726 (446)
*BP Amoco PLC, cfd., 6.24797.............................. United Kingdom 115,900 1,167,860 2,435
---------- ----------
TOTAL CONTRACT FOR DIFFERENCES............................ $8,834,018 $ (784,911)
========== ==========
</TABLE>
CURRENCY ABBREVIATIONS:
CAD -- Canadian Dollar
EUR -- European Unit
GBP -- British Pound
JPY -- Japanese Yen
*Non-income producing.
**Securities denominated in U.S. dollars unless otherwise indicated.
(R)Restricted Securities (See note 6).
+Affiliated Issuers (See note 7).
See Notes to Financial Statements.
22
<PAGE>
MUTUAL DISCOVERY FUND
Financial Statements
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1999
<TABLE>
<S> <C> <C>
Assets:
Investments in securities, at value:
Unaffiliated issuers (cost $2,573,776,551)................ $3,258,969,091
Controlled affiliates (cost $22,594,144).................. 26,868,491
Non controlled affiliates (cost $25,401,326).............. 51,120,725 $3,336,958,307
--------------
Cash....................................................... 27,765,260
Receivables:
Investment securities sold................................ 62,061,235
Capital shares sold....................................... 3,629,967
Dividends and interest.................................... 7,705,387
From affiliates........................................... 238,207
Unrealized gain on forward exchange contracts (Note 8)..... 35,200,233
Deposits with broker for securities sold short............. 84,356,397
--------------
Total assets.......................................... 3,557,914,993
--------------
Liabilities:
Payables:
Investment securities purchased........................... 21,250,357
Capital shares redeemed................................... 7,263,249
To affiliates............................................. 4,218,298
Securities sold short, at value (proceeds $69,893,890)..... 85,190,060
Unrealized loss on forward exchange contracts (Note 8)..... 3,828,641
Due to broker-variation margin............................. 2,765,210
Accrued expenses........................................... 630,377
--------------
Total liabilities..................................... 125,146,192
--------------
Net assets, at value........................................ $3,432,768,801
==============
Net assets consist of:
Undistributed net investment income........................ $ 8,835,164
Net unrealized appreciation................................ 730,476,797
Accumulated net realized gain.............................. 140,227,720
Capital shares............................................. 2,553,229,120
--------------
Net assets, at value........................................ $3,432,768,801
==============
</TABLE>
23
<PAGE>
MUTUAL DISCOVERY FUND
Financial Statements (continued)
STATEMENT OF ASSETS AND LIABILITIES (CONT.)
DECEMBER 31, 1999
<TABLE>
<S> <C> <C>
CLASS Z:
Net asset value and maximum offering price per share
($2,038,297,982 / 96,613,584 shares outstanding).......... $21.10
==============
CLASS A:
Net asset value per share ($844,461,968 / 40,212,933 shares
outstanding).............................................. $21.00
==============
Maximum offering price per share ($21.00 / 94.25%)......... $22.28
==============
CLASS B:
Net asset value and maximum offering price per share
($8,089,924 / 387,151 shares outstanding)*................ $20.90
==============
CLASS C:
Net asset value per share ($541,918,927 / 25,862,187 shares
outstanding)*............................................. $20.95
==============
Maximum offering price per share ($20.95 / 99.00%)......... $21.16
==============
</TABLE>
*Redemption price per share is equal to net asset value less any applicable
sales charge.
See Notes to Financial Statements.
24
<PAGE>
MUTUAL DISCOVERY FUND
Financial Statements (continued)
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1999
<TABLE>
<S> <C> <C>
Investment Income:
(net of foreign taxes of $4,900,036)
Dividends.................................................. $ 53,799,257
Interest................................................... 25,582,523
------------
Total investment income............................... $ 79,381,780
------------
Expenses:
Management fees (Note 3)................................... 26,653,620
Administrative fees (Note 3)............................... 2,583,510
Distribution fees (Note 3)
Class A................................................... 2,801,857
Class B................................................... 37,899
Class C................................................... 5,190,916
Transfer agent fees (Note 3)............................... 5,301,555
Custodian fees............................................. 440,727
Reports to shareholders.................................... 699,445
Registration and filing fees............................... 73,394
Professional fees.......................................... 268,633
Directors' fees and expenses............................... 92,236
Dividends for securities sold short........................ 696,046
Other...................................................... 118,418
------------
Total expenses........................................ 44,958,256
Expenses waived/paid by affiliate (Note 3)............ (1,855,908)
------------
Net expenses....................................... 43,102,348
------------
Net investment income........................... 36,279,432
------------
Realized and unrealized gains:
Net realized gain from:
Investments............................................... 147,004,196
Foreign currency transactions............................. 95,431,346
Short sale transactions................................... (18,963,725)
------------
Net realized gain..................................... 223,471,817
Net unrealized appreciation on:
Investments............................................... 469,631,682
Translation of assets and liabilities denominated in
foreign currencies...................................... 49,598,855
------------
Net unrealized appreciation........................... 519,230,537
------------
Net realized and unrealized gain............................ 742,702,354
------------
Net increase in net assets resulting from operations........ $778,981,786
============
</TABLE>
See Notes to Financial Statements.
25
<PAGE>
MUTUAL DISCOVERY FUND
Financial Statements (continued)
STATEMENTS OF CHANGES IN NET ASSETS
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
------------------------------------
<S> <C> <C>
Increase (decrease) in net assets:
Operations:
Net investment income..................................... $ 36,279,432 $ 83,978,267
Net realized gain from investments and foreign currency
transactions............................................. 223,471,817 164,704,672
Net unrealized appreciation (depreciation) on investments
and translation of assets and liabilities denominated in
foreign currencies....................................... 519,230,537 (434,011,075)
------------------------------------
Net increase (decrease) in net assets resulting from
operations............................................ 778,981,786 (185,328,136)
Distributions to shareholders from:
Net investment income:
Class Z.................................................. (40,349,277) (74,719,859)
Class A.................................................. (14,112,750) (20,468,910)
Class B.................................................. (101,868) --
Class C.................................................. (5,682,447) (9,767,282)
Net realized gains:
Class Z.................................................. (32,419,104) (138,830,937)
Class A.................................................. (13,580,342) (40,521,871)
Class B.................................................. (71,532) --
Class C.................................................. (8,761,056) (25,858,757)
Capital share transactions (Note 2):
Class Z.................................................. (874,179,314) (1,059,140,516)
Class A.................................................. (176,260,101) 279,367,028
Class B.................................................. 7,279,414 --
Class C.................................................. (125,727,380) 236,895,123
------------------------------------
Net decrease in net assets.............................. (504,983,971) (1,038,374,117)
Net assets:
Beginning of year.......................................... 3,937,752,772 4,976,126,889
------------------------------------
End of year................................................ $3,432,768,801 $ 3,937,752,772
====================================
Undistributed net investment income/(Distributions in excess
of net investment income) included in net assets:
End of year................................................ $ 8,835,164 $ (45,045,911)
====================================
</TABLE>
See Notes to Financial Statements.
26
<PAGE>
MUTUAL DISCOVERY FUND
Notes to Financial Statements
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Mutual Discovery 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 by investing in small capitalization companies.
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. SECURITIES 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 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.
27
<PAGE>
MUTUAL DISCOVERY FUND
Notes to Financial Statements (continued)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONT.)
c. SECURITIES TRANSACTIONS, INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS
(CONT.)
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.
d. 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.
e. 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.
f. 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 to 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 Fund 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.
g. 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.
28
<PAGE>
MUTUAL DISCOVERY FUND
Notes to Financial Statements (continued)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONT.)
g. SECURITIES SOLD SHORT (CONT.)
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.
h. 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 shares 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.
At December 31, 1999, there were 600 million shares authorized ($0.001 par
value) of which 300 million, 100 million, 100 million, and 100 million were
designated as Class Z, Class A, Class B, and Class C, respectively. Transactions
in the Fund's shares were as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------
1999 1998
---------------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
--------------------------------------------------------------
<S> <C> <C> <C> <C>
CLASS Z SHARES:
Shares sold......................................... 9,449,194 $ 177,669,171 25,432,957 $ 499,887,354
Shares issued on reinvestment of distributions...... 3,465,002 68,633,024 11,109,339 203,205,264
Shares redeemed..................................... (61,919,974) (1,120,481,509) (96,260,843) (1,762,233,134)
---------------------------------------------------------------------
Net decrease........................................ (49,005,778) $ (874,179,314) (59,718,547) $(1,059,140,516)
=====================================================================
</TABLE>
29
<PAGE>
MUTUAL DISCOVERY FUND
Notes to Financial Statements (continued)
2. CAPITAL STOCK (CONT.)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------
1999 1998
---------------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
---------------------------------------------------------------------
<S> <C> <C> <C> <C>
CLASS A SHARES:
Shares sold......................................... 39,162,598 $ 734,172,539 34,825,153 $ 677,130,211
Shares issued on reinvestment of distributions...... 1,296,636 25,547,006 3,160,927 56,769,299
Shares redeemed..................................... (50,263,265) (935,979,646) (24,829,893) (454,532,482)
---------------------------------------------------------------------
Net increase (decrease)............................. (9,804,031) $ (176,260,101) 13,156,187 $ 279,367,028
=====================================================================
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1999+
------------------------------
------------------------------
SHARES AMOUNT
-----------------------
<S> <C> <C> <C> <C>
CLASS B SHARES:
Shares sold......................................... 412,998 $ 7,760,525
Shares issued on reinvestment of distributions...... 8,140 160,581
Shares redeemed..................................... (33,987) (641,692)
------------------------------
Net increase........................................ 387,151 $ 7,279,414
==============================
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------
1999 1998
---------------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
--------------------------------------------------------------
<S> <C> <C> <C> <C>
CLASS C SHARES:
Shares sold......................................... 3,695,408 $ 68,911,957 16,896,047 $ 334,831,778
Shares issued on reinvestment of distributions...... 675,339 13,232,587 1,822,933 32,679,296
Shares redeemed..................................... (11,372,965) (207,871,924) (7,286,338) (130,615,951)
---------------------------------------------------------------------
Net increase (decrease)............................. (7,002,218) $ (125,727,380) 11,432,642 $ 236,895,123
=====================================================================
</TABLE>
+Effective date of Class B shares was January 1, 1999.
3. TRANSACTIONS WITH AFFILIATES AND RELATED PARTIES
Certain officers of the 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 .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
30
<PAGE>
MUTUAL DISCOVERY FUND
Notes to Financial Statements (continued)
3. TRANSACTIONS WITH AFFILIATES AND RELATED PARTIES (CONT.)
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 aggregated average daily net assets as follows:
<TABLE>
<CAPTION>
ANNUALIZED
FEE RATE AVERAGE DAILY NET ASSETS
- -----------------------------------------------------------------
<S> <C>
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
</TABLE>
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 from sales of Fund shares and received contingent deferred sales
charges for the period of $215,102 and $614,861 respectively.
4. 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.
At December 31, 1999, the unrealized appreciation based on the cost of
investments for income tax purposes of $2,632,408,898 was as follows:
<TABLE>
<S> <C>
Unrealized appreciation..................................... $ 832,794,445
Unrealized depreciation..................................... (128,245,036)
-------------
Net unrealized appreciation................................. $ 704,549,409
=============
</TABLE>
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, wash sales and foreign currency transactions.
31
<PAGE>
MUTUAL DISCOVERY FUND
Notes to Financial Statements (continued)
5. INVESTMENT TRANSACTIONS
Purchases and sales of securities (excluding short-term securities) for the year
ended December 31, 1999 aggregated $2,681,147,413 and $3,762,137,280,
respectively.
Transactions in options written during the year ended December 31, 1999 were as
follows:
<TABLE>
<CAPTION>
NUMBER
OF CONTRACTS PREMIUM
-------------------------
<S> <C> <C>
Options Outstanding at December 31, 1998.................... 189 $ 46,106
Options written............................................. 711 295,508
Options expired............................................. (392) (128,593)
Options terminated in closing transactions.................. (508) (213,021)
Options exercised........................................... 0 0
-------------------------
Options outstanding December 31, 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 December 31, 1999 are as follows:
<TABLE>
<CAPTION>
NUMBER OF SHARES OR ACQUISITION
PRINCIPAL AMOUNT ISSUER DATE VALUE
- ------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C>
1,670,390 Cape Ann Investors, LLC..................................... 9/09/97 $ 29,733
500 Distribution Systems SpA.................................... 9/27/96 20,669
8,758,216 Hancock LLC................................................. 3/06/97 8,758,216
69,056 MWCR Elettronica SRL........................................ 9/27/96 69,056
13,505,313 MWCR LLC.................................................... 9/27/96 17,999,881
357,000 Security Capital European Realty............................ 4/08/98 5,143,478
500 Sweda Industrie Elettroniche SpA............................ 9/27/96 20,669
-----------
TOTAL RESTRICTED SECURITIES (COST $31,404,533) (.93% OF NET ASSETS)............... $32,041,702
===========
</TABLE>
32
<PAGE>
MUTUAL DISCOVERY FUND
Notes to Financial Statements (continued)
7. INVESTMENT IN AFFILIATES
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 December
31, 1999, were $78,018,949. For the year ended December 31, 1999, dividend
income from "affiliated persons" was $1,408,264 and net realized losses from
disposition of "affiliated persons" were $79,803,649.
<TABLE>
<CAPTION>
NUMBER OF NUMBER OF REALIZED
SHARES HELD GROSS GROSS SHARES HELD VALUE DIVIDEND INCOME CAPITAL
NAME OF ISSUER DEC. 31, 1998 ADDITIONS REDUCTIONS DEC. 31, 1999 DEC. 31, 1999 1/1/99-12/31/99 GAIN/(LOSS)
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
CONTROLLED AFFILIATES*
Cape Ann Investors
LLC................... 1,670,389 -- -- 1,670,389 $ 29,733 -- --
Distribution Systems
SpA................... 500 -- -- 500 20,669 -- --
Hancock LLC............ 8,426,332 352,694 (20,810) 8,758,216 8,758,216 -- --
MB-Motori LLC.......... 557,863 -- (557,863) -- ** -- $ 212,610
MSCW Investors II,
LLC................... 10,438,000 -- (10,438,000) -- ** -- 2,094,877
MWCR Elettronica SRL... 69,056 -- -- 69,056 69,056 -- --
MWCR LLC............... 13,505,313 -- -- 13,505,313 17,999,881 -- --
Sweda Industrie
Elettroniche SpA...... 500 -- -- 500 20,669 -- --
----------------------------------------------
TOTAL CONTROLLED
AFFILIATES $26,898,224 -- $ 2,307,487
==============================================
NON CONTROLLED
AFFILIATES
Alma Media OYJ, Series
2..................... 746,700 -- (746,700) -- ** $ 160,424 $ 8,090,607
Corporate Services
Group PLC, A.......... 17,697,482 -- (17,697,482) -- ** -- (9,327,430)
DT Industries Inc. .... 1,343,530 -- (1,343,530) -- ** 41,455 (26,868,700)
First Union Real Estate
Equity & Mtg.
Investments, SBI...... 2,600,732 -- (2,600,732) -- ** -- (8,513,922)
Invik & Co. AB, B...... 250,724 179,753 -- 430,477 $51,120,725 -- --
Laser Mortgage
Management Inc. ...... 1,141,933 -- (1,141,933) -- ** -- (8,777,145)
LNR Property Corp. .... 954,100 638,100 (1,592,200) -- ** 9,213 (2,416,314)
LNR Property Corp.,
B..................... 638,100 -- (638,100) -- ** 7,179 --
North Central
Bancshares Inc. ...... 178,000 -- (178,000) -- ** -- 1,037,386
Tecnost Mael SpA....... 3,821,000 1,676,780 (5,497,780) -- ** -- 6,070,505
TT Group PLC........... 10,726,480 2,950,000 (13,676,480) -- ** 1,189,993 (19,240,611)
Veritas DGC Inc. ...... 2,108,700 -- (2,108,700) -- ** -- (22,165,512)
----------------------------------------------
TOTAL NON CONTROLLED
AFFILIATES $51,120,725 $1,408,264 $(82,111,136)
==============================================
</TABLE>
*Issuer in which the Fund owns 25% or more of the outstanding voting securities.
**As of December 31, 1999, no longer an affiliate.
8. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
The Fund has been a party to financial instruments with off-balance-sheet risk,
primarily forward exchange contracts in order to minimize the impact on the Fund
from adverse changes in the relationship between the functional
33
<PAGE>
MUTUAL DISCOVERY FUND
Notes to Financial Statements (continued)
8. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK (CONT.)
currency and the foreign currencies and interest rates. These instruments
involve market risk in excess of the amount recognized on the Statement of
Assets and Liabilities. Some of these risks have been minimized by offsetting
contracts. Risks arise from the possible inability of counterparties to meet the
terms of their contracts, future movement in currency values and interest rates
and contract positions that are not exact offsets. The contract amount indicates
the extent of the Fund's involvement in such contracts.
A forward exchange contract is an agreement between two parties to exchange
different currencies at a specific rate at an agreed future date. At December
31, 1999, the Fund has outstanding forward exchange contracts for the sale of
currencies as set out below. The contracts are reported in the financial
statements at the Fund's net equity, as measured by the difference between the
forward exchange rates at the reporting date and the forward exchange rates at
the day of entry into the contract.
As of December 31, 1999, the Fund had the following forward exchange contracts
outstanding:
<TABLE>
<CAPTION>
IN SETTLEMENT UNREALIZED
EXCHANGE FOR DATE GAIN/(LOSS
CONTRACTS TO BUY: ---------------------------------------------------
- ------------------
<C> <S> <C> <C> <C>
3,300,000 New Zealand Dollars.............................. U.S.$ 1,719,300 1/18/00 U.S.$ 5,562
26,800,000 Norwegian Krone.................................. 3,334,784 3/10/00 11,347
1,734,918,679 Japanese Yen..................................... 17,197,150 3/24/00 14,516
------------ ---------
U.S.$ 22,251,234 31,425
------------ ---------
<CAPTION>
CONTRACTS TO SELL:
- ------------
98,296,628 European Unit.................................... U.S.$ 103,791,536 1/19/00 4,682,112
518,790,349 Swedish Krona.................................... 64,286,289 1/19/00 3,207,734
68,506,677 British Pounds................................... 111,593,735 1/20/00 868,715
672,039,800 Swedish Krona.................................... 81,597,802 2/17/00 2,319,499
90,450,000 European Unit.................................... 96,088,450 2/29/00 4,613,935
110,824,618 Swiss Francs..................................... 71,629,499 3/10/00 1,466,464
89,060,782 European Unit.................................... 95,237,054 3/10/00 5,103,077
65,353,267 Norwegian Krone.................................. 8,414,764 3/10/00 255,041
15,572,040 Singapore Dollars................................ 9,400,000 3/14/00 2,912
542,254,562 Swedish Krona.................................... 64,982,376 3/17/00 888,004
25,985,995 British Pounds................................... 42,691,254 3/24/00 693,278
720,998,131 Japanese Yen..................................... 7,218,278 3/24/00 65,448
169,804,820 European Unit.................................... 181,127,447 4/12/00 8,872,938
10,412,525 British Pounds................................... 16,911,763 4/17/00 84,691
106,359,629 European Unit.................................... 109,624,328 5/30/00 1,364,817
375,000,000 Swedish Krona.................................... 44,610,992 6/15/00 35,816
38,646,993 European Unit.................................... 39,765,690 6/19/00 372,752
------------ ---------
U.S.$1,148,971,257 34,897,233
------------ ---------
Net unrealized gain on offsetting forward exchange
contracts................................................... 271,575
---------
Unrealized gain on forward exchange contracts............... 35,200,233
---------
</TABLE>
34
<PAGE>
MUTUAL DISCOVERY FUND
Notes to Financial Statements (continued)
8. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK (CONT.)
<TABLE>
<CAPTION>
IN SETTLEMENT UNREALIZED
CONTRACTS TO BUY: EXCHANGE FOR DATE GAIN/(LOSS)
- ------------------ ----------------------------------------------
<C> <S> <C> <C> <C>
16,217,765 Norwegian Krone.................................. U.S.$ 2,077,780 3/10/00 U.S.$ (52,900)
8,951,555 British Pounds................................... 14,473,627 3/24/00 (6,327)
790,838,054 Japanese Yen..................................... 7,870,594 3/24/00 (24,900)
3,237,499 British Pounds................................... 5,237,626 4/17/00 (5,693)
------------ ---------
U.S.$ 29,659,627 (89,820)
------------ ---------
<CAPTION>
CONTRACTS TO SELL:
- ------------
85,250,000 British Pounds................................... U.S.$ 137,423,000 1/18/00 (362,349)
29,315,884 New Zealand Dollars.............................. 15,254,813 1/18/00 (68,177)
4,408,502 British Pounds................................... 6,933,200 1/20/00 (192,112)
91,578,962 Canadian Dollars................................. 62,316,480 1/31/00 (1,068,079)
5,702,207 British Pounds................................... 9,151,735 2/17/00 (64,637)
45,557,510 Singapore Dollars................................ 27,374,968 3/14/00 (117,122)
10,291,468,024 Japanese Yen..................................... 100,709,566 3/24/00 (1,389,344)
35,072,065 Swedish Krona.................................... 4,150,000 6/15/00 (18,916)
86,477,412 European Unit.................................... 87,956,831 6/19/00 (189,724)
------------ ---------
U.S.$ 451,270,593 (3,470,460)
------------ ---------
<CAPTION>
CONTRACTS TO BUY:
- ------------
<C> <S> <C> <C> <C>
<C> <S> <C> <C> <C>
12,583,989 European Unit.................................... SEK 109,000,000 1/19/00 (144,813)
------------ ---------
Net unrealized loss on offsetting forward exchange (123,548)
contracts...................................................
---------
Unrealized loss on forward exchange contracts............... (3,828,641)
---------
Net unrealized gain on forward exchange contracts......... U.S.$31,371,592
---------
</TABLE>
9. CREDIT FACILITY
Certain Franklin Templeton Funds, including Mutual Discovery Fund, are
participants in a $750 million senior unsecured credit agreement for temporary
borrowing purposes. The termination date of the agreement is March 1, 2000.
Interest is calculated on the Fund's borrowings at market rates. At December 31,
1999, the Fund had not utilized this credit facility.
35
<PAGE>
REPORT OF ERNST & YOUNG LLP,
INDEPENDENT AUDITORS
To the Board of Directors of Franklin Mutual Series Fund Inc. and
Shareholders of Mutual Discovery Fund
We have audited the accompanying statement of assets and liabilities of Mutual
Discovery Fund, a portfolio of Franklin Mutual Series Fund Inc. ("Fund"),
including the statement of investments, as of December 31, 1999, the related
statement of operations for the year then ended, and the statements of changes
in net assets and the financial highlights for 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 auditing standards generally accepted
in the United States. 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, 1999, by correspondence with
the custodian and brokers, or other appropriate auditing procedures when replies
from brokers were not received. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of Mutual
Discovery Fund, a portfolio of Franklin Mutual Series Fund Inc., at December 31,
1999, the results of its operations for the year then ended, and the changes in
net assets and its financial highlights for the periods indicated therein, in
conformity with accounting principles generally accepted in the United States.
[ERNST & YOUNG LLP SIGNATURE]
Boston, Massachusetts
January 28, 2000
36
<PAGE>
FRANKLIN MUTUAL SERIES FUND, INC.
MUTUAL DISCOVERY FUND
Tax Designation
Under Section 852(b)(3)(C) of the Internal Revenue Code, the Fund hereby
designates $180,278,551 as a capital gain dividend for the fiscal year ended
December 31, 1999.
Under Section 854(b)(2) of the Internal Revenue Code, the Fund hereby designates
19.14% of the ordinary income dividends as income qualifying for the dividends
received deduction for the fiscal year ended December 31, 1999.
At December 31, 1999, more than 50% of the Mutual Discovery Fund's total assets
were invested in securities of foreign issuers. In most instances, foreign taxes
were withheld from dividends paid to the fund on these investments. The Fund
intends to make an election under Section 853 of the Internal Revenue Code. This
election will allow shareholders to treat their proportionate share of foreign
taxes paid by the Fund as having been paid directly by them.
The following table provides a breakdown by country of foreign source income and
foreign taxes paid, as designated by the Fund, to Class Z, Class A, Class B and
Class C shareholders in December 1999.
<TABLE>
<CAPTION>
CLASS Z CLASS A CLASS B
---------------------------------------------------------------------------------------------------------
FOREIGN TAX FOREIGN SOURCE FOREIGN TAX FOREIGN SOURCE FOREIGN TAX FOREIGN SOURCE
COUNTRY PAID PER SHARE INCOME PER SHARE PAID PER SHARE INCOME PER SHARE PAID PER SHARE INCOME PER SHARE
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Argentina............ $ 0.0000 $0.0001 $ 0.0000 $0.0001 $ 0.0000 $0.0001
Austria.............. 0.0001 0.0006 0.0001 0.0006 0.0001 0.0006
Bermuda.............. 0.0000 0.0005 0.0000 0.0004 0.0000 0.0004
Brazil............... (0.0001) 0.0042 (0.0001) 0.0038 (0.0001) 0.0036
Canada............... 0.0012 0.0076 0.0012 0.0069 0.0012 0.0066
Denmark.............. 0.0002 0.0012 0.0002 0.0011 0.0002 0.0011
Finland.............. 0.0006 0.0033 0.0006 0.0030 0.0006 0.0029
France............... 0.0063 0.0476 0.0063 0.0433 0.0063 0.0412
Germany.............. 0.0002 0.0017 0.0002 0.0015 0.0002 0.0015
Italy................ 0.0027 0.0447 0.0027 0.0406 0.0027 0.0387
Japan................ 0.0005 0.0027 0.0005 0.0024 0.0005 0.0023
Netherlands.......... 0.0011 0.0050 0.0011 0.0045 0.0011 0.0043
Norway............... 0.0011 0.0054 0.0011 0.0049 0.0011 0.0047
Panama............... 0.0000 0.0002 0.0000 0.0002 0.0000 0.0002
Portugal............. 0.0000 0.0001 0.0000 0.0001 0.0000 0.0001
Spain................ 0.0003 0.0014 0.0003 0.0013 0.0003 0.0012
Sweden............... 0.0058 0.0441 0.0058 0.0401 0.0058 0.0382
Switzerland.......... 0.0006 0.0068 0.0006 0.0062 0.0006 0.0059
United Kingdom....... 0.0086 0.0651 0.0086 0.0592 0.0086 0.0564
---------------------------------------------------------------------------------------------------------
TOTAL................ $ 0.0292 $0.2423 $ 0.0292 $0.2202 $ 0.0292 $0.2100
---------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------
<CAPTION>
CLASS C
---------------------------------
FOREIGN TAX FOREIGN SOURCE
COUNTRY PAID PER SHARE INCOME PER SHARE
- --------------------- ---------------------------------
<S> <C> <C>
Argentina............ $ 0.0000 $0.0001
Austria.............. 0.0001 0.0005
Bermuda.............. 0.0000 0.0004
Brazil............... (0.0001) 0.0031
Canada............... 0.0012 0.0056
Denmark.............. 0.0002 0.0009
Finland.............. 0.0006 0.0024
France............... 0.0063 0.0352
Germany.............. 0.0002 0.0013
Italy................ 0.0027 0.0330
Japan................ 0.0005 0.0020
Netherlands.......... 0.0011 0.0037
Norway............... 0.0011 0.0040
Panama............... 0.0000 0.0002
Portugal............. 0.0000 0.0001
Spain................ 0.0003 0.0010
Sweden............... 0.0058 0.0326
Switzerland.......... 0.0006 0.0050
United Kingdom....... 0.0086 0.0481
---------------------------------
TOTAL................ $ 0.0292 $0.1792
---------------------------------
---------------------------------
</TABLE>
In January 2000, shareholders will receive Form 1099-DIV which will include
their share of taxes withheld and foreign source income distributed during the
calendar year 1999. Shareholders are advised to check with their tax advisors
for information on the treatment of these amounts on their individual income tax
returns.
37
