SEMI ANNUAL REPORT
JUNE 30, 2000
MUTUAL EUROPEAN FUND
[TEMPLETON LOGO]
FRANKLIN(R) TEMPLETON(R) INVESTMENTS
<PAGE>
[FRANKLIN TEMPLETON 50 YEAR GRAPHIC]
Thank you for investing with Franklin Templeton. We encourage our investors to
maintain a long-term perspective and remember that all securities markets move
both up and down, as do mutual fund share prices. We appreciate your past
support and look forward to serving your investment needs in the years ahead.
[PHOTO OF ROBERT L. FRIEDMAN]
ROBERT L. FRIEDMAN
Portfolio Manager
Mutual European Fund
PETER A. LANGERMAN
Chief Executive Officer
Franklin Mutual Advisers, LLC
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resource for fund literature, prices and performance, investor information and
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<PAGE>
SHAREHOLDER LETTER
Your Fund's Goal: Mutual European Fund seeks capital appreciation, with income
as a secondary goal, by investing primarily in common and preferred stocks,
bonds and convertible securities. The Fund normally will have at least 65% of
its assets invested in the securities of issuers organized under the laws of, or
whose principal business operations or at least 50% of whose revenue is earned
from, European countries.
Dear Shareholder:
We are pleased to bring you this semiannual report of Mutual European Fund for
the six months ended June 30, 2000. During the reporting period, European
economies generally experienced varying degrees of recovery and growth fostered
by rising trade levels, an increasing supply of jobs, and government and
economic reforms. Many European economies -- most notably France, Germany and
Finland -- continued to perform well even as the European Central Bank (ECB)
raised interest rates four times.
Reflecting these developments, many European equity markets posted strong gains
until March and April, when
The dollar value, number of shares or principal value, and complete legal titles
of all portfolio holdings are listed in the Fund's Statement of Investments
(SOI). The SOI begins on page 13.
CONTENTS
<TABLE>
<CAPTION>
<S> <C>
Shareholder Letter ............. 1
Performance Summary ............ 7
Financial Highlights & Statement
of Investments ................. 9
Financial Statements ........... 18
Notes to Financial Statements .. 22
</TABLE>
FUND CATEGORY
[PYRAMID GRAPH]
<PAGE>
TOP FIVE SECTORS*
6/30/00
<TABLE>
<CAPTION>
% OF TOTAL
NET
SECTOR ASSETS
------ ------
<S> <C>
Media ..................................... 12.1%
Industrial Conglomerates .................. 7.8%
Construction & Engineering ................ 7.5%
Banks ..................................... 6.1%
Multi-Utilities ........................... 5.9%
</TABLE>
* Based on equity
PORTFOLIO BREAKDOWN
BASED ON TOTAL NET ASSETS
6/30/00
[PIE CHART]
<TABLE>
<S> <C>
Equities................................... 75.5%
Government Agencies & Other Net Assets..... 23.7%
Bonds...................................... 0.8%
</TABLE>
the region's stock markets generally began to fall in tandem with the drop of
the U.S. Nasdaq Composite Index (Nasdaq(R)).(1) European telecommunications,
technology and Internet-related stocks, which had supported global markets in
1999 and early 2000, were hardest hit by the Nasdaq's downward spiral, though
their prices recovered somewhat in May and June. Any rise in European share
prices were partially offset, in U.S.-dollar terms, by the euro's falling value,
which hit all-time lows toward the end of April. The euro did eventually recover
somewhat in May and June due to accelerating growth in the region and
speculation about early signs of a possible slowdown in the U.S. economy.
Within this environment, Mutual European Fund - Class Z delivered an 8.96%
six-month cumulative total return as shown in the Performance Summary on page 7,
significantly outperforming the -3.23% return of the Morgan Stanley Capital
International (MSCI(R)) All Countries - Europe Index for the same period.(2)
The Fund's solid performance was achieved through old-fashioned value investing.
We bought securities trading at large discounts to what we believed to be their
intrinsic value, paying special attention to buying shares in good businesses
that were generally ignored by most investors. While many stock prices
1. The Nasdaq Composite Index measures all Nasdaq domestic and non-U.S. based
common stocks listed on the Nasdaq Stock Market(R). The Index is market-value
weighted and includes over 5,000 companies (as of 6/30/00). The Index is
unmanaged and includes reinvested dividends. One cannot invest directly in an
index.
2. Source: Standard & Poor's Micropal. The MSCI All Countries - Europe Index
represents 21 developed and emerging markets in Europe. The 15 European
countries classified as developed are Austria, Belgium, Denmark, Finland,
France, Germany, Ireland, Italy, the Netherlands, Norway, Portugal, Spain,
Sweden, Switzerland and the U.K. The six European countries classified as
emerging markets are the Czech Republic, Greece, Hungary, Poland, Russia and
Turkey. The MSCI Indexes define the local market for each country by
constructing a matrix of all listed securities, sorting the matrix by industry,
and seeking to capture 60% of the market capitalization for each group by
selecting the most investable stocks in each industry. The index applies full
market capitalization weights to each included stock. The change in value
measures price appreciation only and does not include reinvested dividends. One
cannot invest directly in an index.
2
<PAGE>
were based on what we believed to be unrealistic prospects -- especially among
the momentum-driven technology sectors -- others were selling at historically
low valuations. Metaphorically speaking, we were given the rare chance to dance
with the most attractive people at the ball because so many of our peers were
hanging out at the high-tech punch bowl. And because the portfolio was largely
hedged, we were not hindered by the euro's slump and the dramatic rise of the
dollar against European currencies.
The largest contributor to the Fund's returns during the reporting period was
Lagardere, a family-controlled French defense and media holding company that has
been transforming itself into a media powerhouse. Because its primary focus was
the defense industry, and it did not own all of its media assets outright, we
were able to purchase the company's stock at less than 50% of what we believed
its assets to be worth. Lagardere has made tremendous strides since then,
increasing ownership of its non-wholly owned media assets while broadening and
strengthening its media portfolio. Today, it is the world's largest magazine
publisher and controls newspapers, radio stations, book publishers and
television production companies globally. Investors have finally started to
recognize Lagardere as a premier media conglomerate; its stock appreciated more
than 43% from the start of the reporting period to June 30, 2000.
Of course, not all of our stocks proved to be success stories. One investment
that has yet to blossom is Peninsular & Oriental Steam Navigation (P&O), a
U.K.-based company with assets in cruise ships, ferry boats, container fleets,
ports and related logistics. P&O has spun out assets aggressively over the past
two years, and plans to spin out its Princess Cruise Lines
TOP 10 COUNTRIES*
6/30/00
<TABLE>
<CAPTION>
% OF TOTAL
COUNTRY NET ASSETS
------- ----------
<S> <C>
France 24.2%
United Kingdom 16.5%
Sweden 12.6%
Italy 4.1%
United States 3.3%
Spain 3.2%
Finland 2.5%
Irish Republic 2.0%
Netherlands 1.8%
Switzerland 1.6%
</TABLE>
* Based on equity securities.
3
<PAGE>
TOP 10 HOLDINGS
6/30/00
<TABLE>
<CAPTION>
COMPANY, % OF TOTAL
SECTOR, COUNTRY NET ASSETS
--------------- ----------
<S> <C>
Lagardere SCA, 6.1%
Media, France
Suez Lyonnaise Des Eaux SA, 4.0%
Multi-Utilities,
France
Aventis SA, 3.4%
Pharmaceuticals, France
Invik & Co. AB, 2.9%
Diversified
Financials, Sweden
British Telecommunications PLC, 2.9%
Diversified Telecommunication
Services, United Kingdom
Groupe GTM, 2.8%
Construction &
Engineering, France
Investor AB, 2.8%
Diversified Financials, Sweden
Modern Times Group AB, 2.8%
Media, Sweden
Cir Cie Industriali Riunite 2.4%
SpA Torino,
Industrial Conglomerates, Italy
Williams PLC, 2.4%
Commercial Services & Supplies,
United Kingdom
</TABLE>
division as it reorganizes to battle stiff competition. We are pleased with the
management's proactive stance and believe the company is deeply undervalued.
We have added several stocks of what we believe to be undervalued, high-quality
companies to our portfolio, including European port services companies
Associated British Ports and Mersey Docks & Harbour Co., as well as Thomson
Travel Group, which received a takeover bid in the second quarter. We've also
initiated or added to several financial issues, such as Bank of Ireland and
Irish Life & Permanent. In the case of Irish Life & Permanent, we have found
excellent value in the largest provider of insurance, pensions and mortgages in
Ireland. Although this market was expanding rapidly, Irish Life's stock was
trading at a discount to the company's takeover value in the first half of 2000.
Because the company possesses what we calculate to be excess capital, and has
been restructuring to improve profitability, we believe there are many ways to
win with Irish Life.
On the sell side, we cut back our holdings in Aventis (France, pharmaceuticals
and life sciences), Corporacion Financiera Alba (Spain, industrial
conglomerate), Cir Cie Industriali Riunite SpA Torino (Italy, media-based
conglomerate) and Investor (Sweden, multi-industry conglomerate). Although we
remain fans of their management teams, they have reached the valuation targets
we set for them when they were first purchased.
Looking forward, we make no predictions on the European economy. We are
bottom-up stock pickers and maintain a guarded view on general overvaluations in
the equity markets. However, we continue to search for selected bargains and
opportunistically put cash to work. We will also continue to
4
<PAGE>
think of ourselves as owners of the companies whose shares we purchase,
examining our investments and, when appropriate, making suggestions to
management on how to unlock value.
Thank you for your continued participation in Mutual European Fund. We welcome
your comments and suggestions, either through regular mail or by email at
[email protected].
Sincerely,
/s/ Robert L. Friedman
Robert L. Friedman
Portfolio Manager
Mutual European Fund
5
<PAGE>
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 June
30, 2000, 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.
6
<PAGE>
SIX-MONTH PERFORMANCE SUMMARY
AS OF 6/30/00
Six-month 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, as well as the level of operating expenses for
each class. Past distributions are not indicative of future trends. All total
returns include reinvested distributions at net asset value.
<TABLE>
<CAPTION>
CLASS Z
<S> <C> <C>
Six-Month Total Return 8.96%
Net Asset Value (NAV) $17.45 (6/30/00) $16.89 (12/31/99)
Change in NAV +$0.56
Distributions (1/1/00-6/30/00) Dividend Income $0.2809
Short-Term Capital Gain $0.3565
Long-Term Capital Gain $0.3148
---------------------- -------
Total $0.9522
</TABLE>
<TABLE>
<CAPTION>
CLASS A
<S> <C> <C>
Six-Month Total Return 8.75%
Net Asset Value (NAV) $17.28 (6/30/00) $16.75 (12/31/99)
Change in NAV +$0.53
Distributions (1/1/00-6/30/00) Dividend Income $0.2645
Short-Term Capital Gain $0.3565
Long-Term Capital Gain $0.3148
---------------------- -------
Total $0.9358
</TABLE>
<TABLE>
<CAPTION>
CLASS B
<S> <C> <C>
Six-Month Total Return 8.41%
Net Asset Value (NAV) $17.13 (6/30/00) $16.66 (12/31/99)
Change in NAV +$0.47
Distributions (1/1/00-6/30/00) Dividend Income $0.2586
Short-Term Capital Gain $0.3565
Long-Term Capital Gain $0.3148
---------------------- -------
Total $0.9299
</TABLE>
<TABLE>
<CAPTION>
CLASS C
<S> <C> <C>
Six-Month Total Return 8.53%
Net Asset Value (NAV) $17.27 (6/30/00) $16.75 (12/31/99)
Change in NAV +$0.52
Distributions (1/1/00-6/30/00) Dividend Income $0.2358
Short-Term Capital Gain $0.3565
Long-Term Capital Gain $0.3148
---------------------- -------
Total $0.9071
</TABLE>
Past performance does not guarantee future results.
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: 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: 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.
7
<PAGE>
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.
ADDITIONAL PERFORMANCE AS OF 6/30/00
<TABLE>
<CAPTION>
INCEPTION
CLASS Z 1-YEAR 3-YEAR (7/3/96)
------- ------ ------ --------
<S> <C> <C> <C>
Cumulative Total Return(1) 40.37% 82.47% 136.48%
Average Annual Total Return(2) 40.37% 22.20% 24.06%
Value of $10,000 Investment(3) $14,037 $18,247 $23,648
</TABLE>
<TABLE>
<CAPTION>
INCEPTION
CLASS A 1-YEAR 3-YEAR (11/1/96)
------- ------ ------ ---------
<S> <C> <C> <C>
Cumulative Total Return(1) 39.80% 79.62% 113.80%
Average Annual Total Return(2) 31.80% 19.19% 21.54%
Value of $10,000 Investment(3) $13,180 $16,935 $20,421
</TABLE>
<TABLE>
<CAPTION>
INCEPTION
CLASS B 1-YEAR (1/1/99)
------- ------ --------
<S> <C> <C>
Cumulative Total Return(1) 38.86% 57.38%
Average Annual Total Return(2) 34.86% 33.17%
Value of $10,000 Investment(3) $13,486 $15,338
</TABLE>
<TABLE>
<CAPTION>
INCEPTION
CLASS C 1-YEAR 3-YEAR (11/1/96)
------- ------ ------ ---------
<S> <C> <C> <C>
Cumulative Total Return(1) 39.80% 79.62% 109.87%
Average Annual Total Return(2) 36.72% 20.59% 22.11%
Value of $10,000 Investment(3) $13,672 $17,536 $20,776
</TABLE>
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 the countries where the Fund invests. You may
have a gain or loss when you sell your shares.
For updated performance figures, see "Prices and Performance" at
franklintempleton.com, or call Franklin Templeton at 1-800/342-5236.
Past performance does not guarantee future results.
8
<PAGE>
MUTUAL EUROPEAN FUND
Financial Highlights
<TABLE>
<CAPTION>
CLASS Z
-------------------------------------------------------------
SIX MONTHS
ENDED YEAR ENDED DECEMBER 31,
JUNE 30, 2000 --------------------------------------------
(UNAUDITED)++ 1999++ 1998 1997++ 1996+
-------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
(For a share outstanding throughout the period)
Net asset value, beginning of period.................... $16.89 $12.54 $12.60 $11.39 $10.00
-------------------------------------------------------------
Income from investment operations:
Net investment income.................................. .23 .24 .31 .33 .06
Net realized and unrealized gains...................... 1.28 5.50 .33 2.28 1.40
-------------------------------------------------------------
Total from investment operations........................ 1.51 5.74 .64 2.61 1.46
-------------------------------------------------------------
Less distributions from:
Net investment income.................................. (.28) (.50) (.34) (.84) (.05)
Net realized gains..................................... (.67) (.89) (.36) (.56) (.02)
-------------------------------------------------------------
Total distributions..................................... (.95) (1.39) (.70) (1.40) (.07)
-------------------------------------------------------------
Net asset value, end of period.......................... $17.45 $16.89 $12.54 $12.60 $11.39
=============================================================
Total Return*........................................... 8.96% 46.81% 4.74% 23.16% 14.61%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's)....................... $580,331 $524,109 $483,873 $546,780 $450,495
Ratios to average net assets:
Expenses(a)............................................ 1.03%** 1.05% 1.05% 1.02% 1.09%**
Expenses, excluding waiver and payments by
affiliate(a)......................................... 1.05%** 1.09% 1.05% 1.05% 1.15%**
Net investment income.................................. 2.49%** 1.69% 2.02% 2.53% 1.87%**
Portfolio turnover rate................................. 51.93% 127.05% 97.62% 98.12% 36.75%
(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%** 1.04% 1.05% 1.02% 1.09%**
Expenses, excluding waiver and payments by affiliate... 1.05%** 1.08% 1.05% 1.05% 1.15%**
</TABLE>
*Total return is not annualized.
**Annualized.
+For the period July 3, 1996 (commencement of operations) to December 31, 1996.
++Based on average weighted shares outstanding.
9
<PAGE>
MUTUAL EUROPEAN FUND
Financial Highlights (continued)
<TABLE>
<CAPTION>
CLASS A
---------------------------------------------------------
SIX MONTHS
ENDED YEAR ENDED DECEMBER 31,
JUNE 30, 2000 ----------------------------------------
(UNAUDITED)++ 1999++ 1998 1997++ 1996+
---------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
(For a share outstanding throughout the period)
Net asset value, beginning of period...................... $16.75 $12.47 $12.56 $11.38 $10.84
---------------------------------------------------------
Income from investment operations:
Net investment income.................................... .20 .19 .27 .24 .03
Net realized and unrealized gains........................ 1.27 5.43 .29 2.31 .58
---------------------------------------------------------
Total from investment operations.......................... 1.47 5.62 .56 2.55 .61
---------------------------------------------------------
Less distributions from:
Net investment income.................................... (.27) (.45) (.29) (.81) (.05)
Net realized gains....................................... (.67) (.89) (.36) (.56) (.02)
---------------------------------------------------------
Total distributions....................................... (.94) (1.34) (.65) (1.37) (.07)
---------------------------------------------------------
Net asset value, end of period............................ $17.28 $16.75 $12.47 $12.56 $11.38
=========================================================
Total Return*............................................. 8.75% 46.05% 4.15% 22.61% 5.61%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's)......................... $213,042 $177,217 $170,486 $93,231 $9,200
Ratios to average net assets:
Expenses(a).............................................. 1.38%** 1.40% 1.40% 1.37% 1.32%**
Expenses, excluding waiver and payments by
affiliate(a)........................................... 1.40%** 1.44% 1.40% 1.39% 1.42%**
Net investment income.................................... 2.14%** 1.36% 1.68% 1.84% 1.44%**
Portfolio turnover rate................................... 51.93% 127.05% 97.62% 98.12% 36.75%
(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%** 1.39% 1.40% 1.37% 1.32%**
Expenses, excluding waiver and payments by affiliate..... 1.40%** 1.43% 1.40% 1.39% 1.42%**
</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.
10
<PAGE>
MUTUAL EUROPEAN FUND
Financial Highlights (continued)
<TABLE>
<CAPTION>
CLASS B
--------------------------------------
SIX MONTHS ENDED
JUNE 30, 2000 YEAR ENDED
(UNAUDITED) DECEMBER 31, 1999+
--------------------------------------
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE++
(For a share outstanding throughout the period)
Net asset value, beginning of period........................ $16.66 $12.47
--------------------------------------
Income from investment operations:
Net investment income...................................... .19 .01
Net realized and unrealized gains.......................... 1.21 5.50
--------------------------------------
Total from investment operations............................ 1.40 5.51
--------------------------------------
Less distributions from:
Net investment income...................................... (.26) (.43)
Net realized gains......................................... (.67) (.89)
--------------------------------------
Total distributions......................................... (.93) (1.32)
--------------------------------------
Net asset value, end of period.............................. $17.13 $16.66
======================================
Total Return*............................................... 8.41% 45.17%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's)........................... $3,670 $1,039
Ratios to average net assets:
Expenses(a)................................................ 2.03%** 2.05%
Expenses, excluding waiver and payments by affiliate(a).... 2.05%** 2.09%
Net investment income...................................... 2.15%** .04%
Portfolio turnover rate..................................... 51.93% 127.05%
(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%** 2.04%
Expenses, excluding waiver and payments by affiliate....... 2.05%** 2.08%
</TABLE>
*Total return does not reflect the contingent deferred sales charge and is not
annualized.
**Annualized.
+Effective date of Class B shares was January 1, 1999.
++Based on average weighted shares outstanding effective year ended December 31,
1999.
11
<PAGE>
MUTUAL EUROPEAN FUND
Financial Highlights (continued)
<TABLE>
<CAPTION>
CLASS C
---------------------------------------------------------
SIX MONTHS
ENDED YEAR ENDED DECEMBER 31,
JUNE 30, 2000 ----------------------------------------
(UNAUDITED)++ 1999++ 1998 1997++ 1996+
---------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
(For a share outstanding throughout the period)
Net asset value, beginning of period....................... $16.75 $12.45 $12.52 $11.38 $10.84
---------------------------------------------------------
Income from investment operations:
Net investment income..................................... .14 .10 .21 .13 .02
Net realized and unrealized gains......................... 1.29 5.44 .31 2.33 .58
---------------------------------------------------------
Total from investment operations........................... 1.43 5.54 .52 2.46 .60
---------------------------------------------------------
Less distributions from:
Net investment income..................................... (.24) (.35) (.23) (.76) (.04)
Net realized gains........................................ (.67) (.89) (.36) (.56) (.02)
---------------------------------------------------------
Total distributions........................................ (.91) (1.24) (.59) (1.32) (.06)
---------------------------------------------------------
Net asset value, end of period............................. $17.27 $16.75 $12.45 $12.52 $11.38
=========================================================
Total Return*.............................................. 8.53% 45.40% 3.74% 21.79% 5.52%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's).......................... $120,942 $103,987 $96,555 $49,174 $2,754
Ratios to average net assets:
Expenses(a)............................................... 2.03%** 2.04% 2.05% 2.02% 1.94%**
Expenses, excluding waiver and payments by affiliate(a)... 2.05%** 2.08% 2.05% 2.05% 2.04%**
Net investment income..................................... 1.50%** .71% 1.00% 1.03% .79%**
Portfolio turnover rate.................................... 51.93% 127.05% 97.62% 98.12% 36.75%
(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%** 2.03% 2.05% 2.02% 1.94%**
Expenses, excluding waiver and payments by affiliate...... 2.05%** 2.07% 2.05% 2.05% 2.04%**
</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.
12
<PAGE>
MUTUAL EUROPEAN FUND
STATEMENT OF INVESTMENTS, JUNE 30, 2000 (UNAUDITED)
<TABLE>
<CAPTION>
COUNTRY SHARES VALUE
--------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS 75.5%
AEROSPACE & DEFENSE .5%
*Finmeccanica SpA........................................... Italy 3,300,000 $ 4,539,224
------------
AUTO PARTS .1%
Polynorm NV................................................. Netherlands 16,485 991,559
------------
BANKS 6.1%
Anglo Irish Bank Corp. PLC.................................. Irish Republic 1,871,835 4,094,648
Banca Nazionale del Lavoro SpA.............................. Italy 2,967,500 10,439,328
Bank of Ireland............................................. Irish Republic 454,875 2,877,741
BNP Paribas................................................. France 227,800 22,010,500
Dexia....................................................... Belgium 20,100 2,976,736
Espirito Santo Financial Group SA, ADR...................... Portugal 311,100 5,599,800
Svenska Handelsbanken, A.................................... Sweden 284,020 4,144,859
Union Bank of Norway, 144A.................................. Norway 188,401 4,242,918
------------
56,386,530
------------
BEVERAGES .6%
Diageo PLC.................................................. United Kingdom 544,500 4,896,271
*Diageo PLC, ADR............................................ United Kingdom 10,700 380,519
------------
5,276,790
------------
BUILDING PRODUCTS 1.7%
Uponor OYJ.................................................. Finland 829,620 15,705,873
------------
CHEMICALS .4%
Yule Catto & Company PLC.................................... United Kingdom 1,106,767 2,982,341
*Henkel KGAA, pfd. ......................................... Germany 7,400 425,597
------------
3,407,938
------------
COMMERCIAL SERVICES & SUPPLIES 2.9%
Rentokil Initial PLC........................................ United Kingdom 1,838,205 4,188,047
Williams PLC................................................ United Kingdom 3,799,803 22,117,630
------------
26,305,677
------------
CONSTRUCTION & ENGINEERING 7.5%
Acciona SA.................................................. Spain 243,870 9,327,109
Fomento de Construcciones y Contratas SA.................... Spain 551,374 10,464,711
Groupe GTM.................................................. France 273,618 25,703,159
*Sulzer AG.................................................. Switzerland 14,431 9,628,950
Vinci SA.................................................... France 328,646 13,703,559
------------
68,827,488
------------
CONTAINERS & PACKAGING .6%
*Smurfit-Stone Container Corp. ............................. United States 450,900 5,805,338
------------
</TABLE>
13
<PAGE>
MUTUAL EUROPEAN FUND
STATEMENT OF INVESTMENTS, JUNE 30, 2000 (UNAUDITED) (CONT.)
<TABLE>
<CAPTION>
COUNTRY SHARES VALUE
--------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS (CONT.)
DIVERSIFIED FINANCIALS 4.9%
*Brierley Investments Ltd. ................................. New Zealand 44,354,674 $ 6,926,409
Invik & Co. AB, B........................................... Sweden 256,186 26,696,386
Irish Life & Permanent PLC.................................. Irish Republic 1,330,915 11,232,498
------------
44,855,293
------------
DIVERSIFIED TELECOMMUNICATION SERVICES 2.9%
British Telecommunications PLC.............................. United Kingdom 2,059,940 26,600,191
British Telecommunications PLC, ADR......................... United Kingdom 500 66,125
------------
26,666,316
------------
ELECTRIC UTILITIES .3%
E.On AG..................................................... Germany 36,695 1,776,291
------------
ELECTRICAL EQUIPMENT .3%
*Thermo Electron Corp. ..................................... United States 111,335 2,344,993
------------
FOOD PRODUCTS .9%
Associated British Foods PLC................................ United Kingdom 448,300 3,094,673
CSM NV...................................................... Netherlands 241,915 4,776,896
------------
7,871,569
------------
HOTELS RESTAURANTS & LEISURE .7%
*Thistle Hotels PLC......................................... United Kingdom 1,801,740 3,491,268
Thomson Travel Group PLC.................................... United Kingdom 944,400 2,516,227
------------
6,007,495
------------
HOUSEHOLD DURABLES .8%
Forbo Holding AG............................................ Switzerland 11,641 4,868,016
Hunter Douglas NV........................................... Netherlands 93,217 2,533,168
------------
7,401,184
------------
INDUSTRIAL CONGLOMERATES 7.8%
Cir Cie Industriali Riunite SpA Torino, di Risp............. Italy 8,865,800 22,231,637
Compagnie Generale D'Industrie et de Participation.......... France 238,674 10,203,654
Corporacion Financiera Alba SA.............................. Spain 360,271 9,531,344
Investor AB, A.............................................. Sweden 1,156,300 15,688,029
Investor AB, B.............................................. Sweden 707,160 9,715,287
Trelleborg AB, B............................................ Sweden 655,460 4,595,917
------------
71,965,868
------------
INSURANCE 1.1%
XL Capital Ltd., A.......................................... Bermuda 179,605 9,721,121
------------
</TABLE>
14
<PAGE>
MUTUAL EUROPEAN FUND
STATEMENT OF INVESTMENTS, JUNE 30, 2000 (UNAUDITED) (CONT.)
<TABLE>
<CAPTION>
COUNTRY SHARES VALUE
--------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS (CONT.)
MACHINERY 4.3%
Atle AB..................................................... Sweden 632,300 $ 9,696,084
Invensys PLC................................................ United Kingdom 4,680,742 17,537,636
Morgan Crucible Co. PLC..................................... United Kingdom 2,060,046 6,782,930
*Powell Duffryn PLC......................................... United Kingdom 808,011 5,761,285
------------
39,777,935
------------
MARINE 1.9%
*Koninklijke Nedlloyd Groep NV.............................. Netherlands 121,264 2,358,466
Peninsular & Oriental Steam Navigation Co. ................. United Kingdom 1,786,379 15,225,205
------------
17,583,671
------------
MEDIA 12.1%
Kinnevik AB, B.............................................. Sweden 778,400 19,968,077
Lagardere SCA............................................... France 731,872 56,123,001
*Modern Times Group AB, B................................... Sweden 527,085 25,239,505
*Studio Canal............................................... France 206,100 2,212,645
*Trinity Mirror PLC......................................... United Kingdom 516,200 4,610,533
TVA Group Inc., B........................................... Canada 188,800 2,949,801
------------
111,103,562
------------
MULTI-UTILITIES 5.9%
Suez Lyonnaise des Eaux SA.................................. France 205,802 36,199,405
*Suez Lyonnaise des Eaux SA, strip.......................... France 61,009 585
Vivendi..................................................... France 205,920 18,248,250
------------
54,448,240
------------
OFFICE ELECTRONICS .1%
Xerox Corp. ................................................ United States 37,400 776,050
------------
OIL & GAS 1.2%
Fortum Corp. ............................................... Finland 942,865 3,705,520
Total Fina Elf SA, B........................................ France 49,170 7,569,401
------------
11,274,921
------------
PAPER & FOREST PRODUCTS 2.2%
Boise Cascade Corp. ........................................ United States 85,445 2,210,889
International Paper Co. .................................... United States 318,015 9,480,822
Mead Corp. ................................................. United States 202,740 5,119,185
UPM-Kymmene Corp. .......................................... Finland 145,235 3,619,599
------------
20,430,495
------------
</TABLE>
15
<PAGE>
MUTUAL EUROPEAN FUND
STATEMENT OF INVESTMENTS, JUNE 30, 2000 (UNAUDITED) (CONT.)
<TABLE>
<CAPTION>
COUNTRY SHARES VALUE
--------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS (CONT.)
PHARMACEUTICALS 3.6%
Aventis SA.................................................. France 414,005 $ 30,338,831
Bristol-Myers Squibb Co. ................................... United States 49,975 2,911,044
------------
33,249,875
------------
REAL ESTATE .4%
*Canary Wharf Group PLC..................................... United Kingdom 399,000 2,225,828
(R)*Security Capital European Realty........................ United States 127,500 1,879,988
------------
4,105,816
------------
ROAD & RAIL 2.0%
Railtrack Group PLC......................................... United Kingdom 1,179,500 18,337,898
------------
TRADING COMPANIES & DISTRIBUTORS .6%
Internatio-Muller NV........................................ Netherlands 341,673 5,895,205
------------
TRANSPORTATION INFRASTRUCTURE 1.1%
*Associated British Ports Holdings PLC...................... United Kingdom 1,284,350 6,367,601
*Forth Ports PLC............................................ United Kingdom 174,905 1,575,434
*Mersey Docks & Harbour Co. ................................ United Kingdom 349,810 2,536,582
------------
10,479,617
------------
TOTAL COMMON STOCKS (COST $573,545,430)..................... 693,319,832
------------
<CAPTION>
PRINCIPAL
AMOUNT**
-----------
<S> <C> <C> <C>
CORPORATE BONDS & NOTES .8%
Eurotunnel Finance Ltd.:
Equity Note, 12/31/03..................................... United Kingdom 772,192GBP 444,212
Participating Loan Note, 4/30/40.......................... United Kingdom 210,000GBP 127,163
Eurotunnel PLC:
12/31/18, Tier 2.......................................... United Kingdom 1,412,152GBP 1,475,067
12/31/25, Tier 3.......................................... United Kingdom 1,656,083GBP 1,454,090
12/31/50, Resettable Advance R5........................... United Kingdom 742,924GBP 416,128
Stabilization Advance S8, Tier 1.......................... United Kingdom 569,673GBP 224,223
Stabilization Advance S8, Tier 2.......................... United Kingdom 441,294GBP 153,652
Eurotunnel SA:
12/31/18, Tier 2 (Libor).................................. France 1,738,825EUR 1,133,393
12/31/18, Tier 2 (Pibor).................................. France 302,908EUR 197,440
12/31/25, Tier 3 (Libor).................................. France 1,931,363EUR 1,055,248
12/31/25, Tier 3 (Pibor).................................. France 345,448EUR 188,744
12/31/50, Resettable Advance R4........................... France 1,389,401EUR 486,112
Stabilization Advance S7, Tier 1 (Pibor).................. France 382,922EUR 95,433
Stabilization Advance S6, Tier 1 (Pibor).................. France 173,435EUR 43,224
Stabilization Advance S6, Tier 2.......................... France 523,071EUR 110,306
------------
TOTAL CORPORATE BONDS & NOTES (COST $9,361,776)............. 7,604,435
------------
</TABLE>
16
<PAGE>
MUTUAL EUROPEAN FUND
STATEMENT OF INVESTMENTS, JUNE 30, 2000 (UNAUDITED) (CONT.)
<TABLE>
<CAPTION>
PRINCIPAL
COUNTRY AMOUNT** VALUE
--------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
GOVERNMENT AGENCIES 19.7%
Fannie Mae, 5.59% to 6.68%, with maturities to 6/07/01...... United States $74,101,000 $ 71,300,506
Federal Home Loan Bank, 5.635% to 6.680%, with maturities to
5/11/01................................................... United States 71,407,000 68,807,511
Federal Home Loan Mortgage Corp., 5.61% to 6.68%, with
maturities to 4/26/01..................................... United States 41,405,000 40,709,866
------------
TOTAL GOVERNMENT AGENCIES (COST $180,892,343)............... 180,817,883
------------
TOTAL INVESTMENTS (COST $763,799,549) 96.0%................. 881,742,150
NET EQUITY IN FORWARD CONTRACTS .5%......................... 4,454,198
OTHER ASSETS, LESS LIABILITIES 3.5%......................... 31,787,606
------------
TOTAL NET ASSETS 100.0%..................................... $917,983,954
============
</TABLE>
<TABLE>
<CAPTION>
CONTRACTS FOR DIFFERENCES VALUE AT UNREALIZED
ISSUER COUNTRY SHARES 6/30/00 GAIN
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
*Stmicroelectronics NV, cfd. 70.05..........................
France 35,000 $2,214,254 $135,875
========== ========
</TABLE>
CURRENCY ABBREVIATIONS:
GBP -- British Pound
EUR -- European Unit
*Non-income producing.
**Securities denominated in U.S. dollars unless otherwise indicated.
(R)Restricted securities (see note 6).
See Notes to Financial Statements.
17
<PAGE>
MUTUAL EUROPEAN FUND
Financial Statements
STATEMENT OF ASSETS AND LIABILITIES
JUNE 30, 2000 (UNAUDITED)
<TABLE>
<S> <C>
Assets:
Investments in securities, at value:
Unaffiliated issuers (cost $763,799,549).................. $881,742,150
Cash....................................................... 28,031,219
Receivables:
Investment securities sold................................ 8,347,800
Capital shares sold....................................... 4,757,395
Dividends and interest.................................... 4,053,887
From affiliates........................................... 12,320
Unrealized gain on forward exchange contracts (Note 7)..... 7,731,217
------------
Total assets.......................................... 934,675,988
------------
Liabilities:
Payables:
Investment securities purchased........................... 9,169,626
Capital shares redeemed................................... 3,021,003
To affiliates............................................. 1,047,878
Unrealized loss on forward exchange contracts (Note 7)..... 3,277,019
Due to broker-variation margin............................. 83,244
Accrued expenses........................................... 93,264
------------
Total liabilities..................................... 16,692,034
------------
Net assets, at value........................................ $917,983,954
============
Net assets consist of:
Distributions in excess of net investment income........... $ (292,153)
Net unrealized appreciation................................ 122,532,673
Accumulated net realized gain.............................. 166,277,330
Capital shares............................................. 629,466,104
------------
Net assets, at value........................................ $917,983,954
============
</TABLE>
18
<PAGE>
MUTUAL EUROPEAN FUND
Financial Statements (continued)
STATEMENT OF ASSETS AND LIABILITIES (CONT.)
JUNE 30, 2000 (UNAUDITED)
<TABLE>
<S> <C>
CLASS Z:
Net asset value and maximum offering price per share
($580,330,745 / 33,256,065 shares outstanding)............ $17.45
===========
CLASS A:
Net asset value per share ($213,041,792 / 12,325,516 shares
outstanding).............................................. $17.28
===========
Maximum offering price per share ($17.28 / 94.25%)......... $18.33
===========
CLASS B:
Net asset value and maximum offering price per share
($3,669,710 / 214,204 shares outstanding)*................ $17.13
===========
CLASS C:
Net asset value per share ($120,941,707 / 7,004,525 shares
outstanding)*............................................. $17.27
===========
Maximum offering price per share ($17.27 / 99.00%)......... $17.44
===========
</TABLE>
*Redemption price per share is equal to net asset value less any applicable
sales charge.
See Notes to Financial Statements.
19
<PAGE>
MUTUAL EUROPEAN FUND
Financial Statements (continued)
STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 2000 (UNAUDITED)
<TABLE>
<S> <C> <C>
Investment Income: (net of foreign taxes of $1,802,265)
Dividends.................................................. $ 11,761,968
Interest................................................... 4,259,607
------------
Total investment income............................... $ 16,021,575
-------------
Expenses:
Management fees (Note 3)................................... 3,635,686
Administrative fees (Note 3)............................... 353,762
Distribution fees (Note 3)
Class A................................................... 365,851
Class B................................................... 12,011
Class C................................................... 580,870
Transfer agent fees (Note 3)............................... 479,795
Custodian fees............................................. 85,077
Reports to shareholders.................................... 66,065
Registration and filing fees............................... 72,578
Professional fees.......................................... 45,829
Directors' fees and expenses............................... 13,554
Dividends for securities sold short........................ 19,621
Other...................................................... 11,220
------------
Total expenses........................................ 5,741,919
Expenses waived/paid by affiliate (Note 3)............ (113,952)
-------------
Net expenses...................................... 5,627,967
-------------
Net investment income........................... 10,393,608
-------------
Realized and unrealized gains (losses):
Net realized gain from:
Investments............................................... 125,292,338
Foreign currency transactions............................. 54,618,250
------------
Net realized gain..................................... 179,910,588
Net unrealized depreciation on:
Investments............................................... (102,517,535)
Translation of assets and liabilities denominated in
foreign currencies...................................... (11,397,620)
------------
Net unrealized depreciation........................... (113,915,155)
-------------
Net realized and unrealized gain............................ 65,995,433
-------------
Net increase in net assets resulting from operations........ $ 76,389,041
=============
</TABLE>
See Notes to Financial Statements.
20
<PAGE>
MUTUAL EUROPEAN FUND
Financial Statements (continued)
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
JUNE 30, 2000 YEAR ENDED
(UNAUDITED) DECEMBER 31, 1999
-------------------------------------
<S> <C> <C>
Increase (decrease) in net assets:
Operations:
Net investment income..................................... $ 10,393,608 $ 10,276,849
Net realized gain from investments and foreign currency
transactions............................................. 179,910,588 72,554,496
Net unrealized appreciation (depreciation) on investments
and translation of assets and liabilities denominated in
foreign currencies....................................... (113,915,155) 189,503,166
-------------------------------------
Net increase in net assets resulting from operations.... 76,389,041 272,334,511
Distributions to shareholders from:
Net investment income:
Class Z.................................................. (8,951,977) (15,264,276)
Class A.................................................. (2,997,437) (4,704,527)
Class B.................................................. (52,082) (18,795)
Class C.................................................. (1,524,946) (2,067,649)
Net realized gains:
Class Z.................................................. (21,391,253) (26,024,392)
Class A.................................................. (7,609,438) (9,133,142)
Class B.................................................. (135,201) (48,119)
Class C.................................................. (4,341,976) (5,032,448)
Capital share transactions (Note 2):
Class Z.................................................. 40,834,977 (95,520,868)
Class A.................................................. 25,418,254 (40,489,485)
Class B.................................................. 2,787,268 900,471
Class C.................................................. 13,206,774 (19,493,558)
-------------------------------------
Net increase in net assets.............................. 111,632,004 55,437,723
Net assets:
Beginning of period........................................ 806,351,950 750,914,227
-------------------------------------
End of period.............................................. $ 917,983,954 $806,351,950
=====================================
Undistributed net investment income/(Distributions in excess
of net investment income) included in net assets:
End of period.............................................. $ (292,153) $ 2,840,681
=====================================
</TABLE>
See Notes to Financial Statements.
21
<PAGE>
MUTUAL EUROPEAN FUND
Notes to Financial Statements (unaudited)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Mutual European Fund (the Fund) is a separate, diversified series of Franklin
Mutual Series Fund, Inc. (the Series Fund), which is an open-end investment
company registered under the Investment Company Act of 1940. The Fund seeks
long-term capital appreciation and income through a flexible policy of investing
at least 65% of its invested assets in stocks and corporate debt securities of
European countries. The following summarizes the Fund's significant accounting
policies.
a. SECURITY VALUATION:
Securities listed or traded on a recognized national exchange or NASDAQ are
valued at the latest reported sales price. Over-the-counter securities and
listed securities for which no sale is reported are valued within the range of
the latest quoted bid and asked prices. Restricted securities and securities for
which market quotations are not readily available are valued at fair value as
determined by management in accordance with procedures established by the Board
of Directors.
b. FOREIGN CURRENCY TRANSLATION:
Portfolio securities and other assets and liabilities denominated in foreign
currencies are translated into U.S. dollars based on the exchange rate of such
currencies against U.S. dollars on the date of valuation. Purchases and sales of
securities and income items denominated in foreign currencies are translated
into U.S. dollars at the exchange rate in effect on the transaction date.
The Fund does not separately report the effect of changes in foreign exchange
rates from changes in market prices on securities held. Such changes are
included in net realized and unrealized gain or loss from investments.
Realized foreign exchange gains or losses arise from sales of foreign
currencies, currency gains or losses realized between the trade and settlement
dates on securities transactions, and the difference between the recorded
amounts of dividends, interest, and foreign withholding taxes, and the U.S.
dollar equivalent of the amounts actually received or paid. Net unrealized
foreign exchange gains and losses arise from changes in foreign exchange rates
on foreign currency denominated assets and liabilities other than investments in
securities held at the end of the reporting period.
c. SECURITY TRANSACTIONS, INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS:
Security transactions are accounted for on trade date. Realized gains and losses
on security transactions are determined on a specific identification basis.
Certain income from foreign securities is recorded as soon as 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.
22
<PAGE>
MUTUAL EUROPEAN FUND
Notes to Financial Statements (unaudited) (continued)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONT.)
c. SECURITY 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. CONTRACTS FOR DIFFERENCES:
Short contracts for differences are contracts entered into between a broker and
the Fund under which the parties agree to make payments to each other so as to
replicate the economic consequences that would apply had a short sale of the
underlying security taken place. Upon entering into short contracts for
differences, the Fund is required to pledge the broker an amount of cash and/or
other assets equal to a certain percentage of the contract amount ("initial
margin"). Subsequent payments known as "variation margin", are made or received
by the Funds periodically, depending on fluctuations in the value of the
underlying security. When the contract is closed, the Fund records a realized
gain or loss equal to the difference between the value of the contract at the
time it was opened and the value at the time it was closed. Should market
conditions move unexpectedly, the Fund may not achieve the anticipated benefits
of the contracts for difference and may realize a loss.
f. SECURITIES SOLD SHORT:
The Fund may engage in selling securities short, which obligates the Fund to
replace a security borrowed. The Fund would incur a loss if the price of the
security increases between the date of the short sale and the date on which the
Fund replaces the borrowed security. The Fund would realize a gain if the price
of the security declines between those dates.
The Fund is required to establish a margin account with the broker lending the
security sold short. While the short sale is outstanding, the broker retains the
proceeds of the short sale and the Fund must maintain a deposit for the broker
consisting of cash and securities having a value equal to a specified percentage
of the value of the securities sold short.
g. 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.
23
<PAGE>
MUTUAL EUROPEAN FUND
Notes to Financial Statements (unaudited) (continued)
2. CAPITAL STOCK
The Fund offers four classes of shares: Class Z, Class A, Class B, and Class C
shares. Effective January 1, 1999, Class I and Class II were renamed Class A,
and Class C, respectively, and a fourth class of shares, Class B was
established. The shares differ by their initial sales load, distribution fees,
voting rights on matters affecting a single class and the exchange privilege of
each class.
At June 30, 2000, there were 500 million Fund shares authorized ($0.001 par
value) of which 200 million, 100 million, 100 million and 100 million were
designated as Class Z, Class A, Class B and Class C shares, respectively.
Transactions in the Fund's shares were as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
JUNE 30, 2000 DECEMBER 31, 1999
-----------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
-----------------------------------------------------------
<S> <C> <C> <C> <C>
CLASS Z SHARES:
Shares sold............................................ 8,093,514 $ 149,284,722 13,762,604 $ 192,128,143
Shares issued on reinvestment of distributions......... 1,339,027 23,338,448 1,923,918 30,020,664
Shares redeemed........................................ (7,209,132) (131,788,193) (23,231,916) (317,669,675)
-----------------------------------------------------------------
Net increase (decrease)................................ 2,223,409 $ 40,834,977 (7,545,394) $ (95,520,868)
=================================================================
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
JUNE 30, 2000 DECEMBER 31, 1999
-----------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
-----------------------------------------------------------
<S> <C> <C> <C> <C>
CLASS A SHARES:
Shares sold............................................ 30,797,043 $ 560,116,655 38,967,288 $ 544,035,285
Shares issued on reinvestment of distributions......... 563,750 9,736,041 800,603 12,410,393
Shares redeemed........................................ (29,616,138) (544,434,442) (42,855,796) (596,935,163)
-----------------------------------------------------------------
Net increase (decrease)................................ 1,744,655 $ 25,418,254 (3,087,905) $ (40,489,485)
=================================================================
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
JUNE 30, 2000 DECEMBER 31, 1999+
-----------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
-----------------------------------------------------------
<S> <C> <C> <C> <C>
CLASS B SHARES:
Shares sold............................................ 145,234 $ 2,675,078 60,497 $ 868,716
Shares issued on reinvestment of distributions......... 9,451 161,811 4,208 65,370
Shares redeemed........................................ (2,836) (49,621) (2,350) (33,615)
-----------------------------------------------------------------
Net increase........................................... 151,849 $ 2,787,268 62,355 $ 900,471
=================================================================
</TABLE>
24
<PAGE>
MUTUAL EUROPEAN FUND
Notes to Financial Statements (unaudited) (continued)
2. CAPITAL STOCK (CONT.)
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
JUNE 30, 2000 DECEMBER 31, 1999
-----------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
-----------------------------------------------------------------
<S> <C> <C> <C> <C>
CLASS C SHARES:
Shares sold............................................ 5,036,841 $ 91,759,974 4,411,407 $ 62,421,973
Shares issued on reinvestment of distributions......... 318,014 5,485,668 429,896 6,663,372
Shares redeemed........................................ (4,559,468) (84,038,868) (6,386,126) (88,578,903)
-----------------------------------------------------------------
Net increase (decrease)................................ 795,387 $ 13,206,774 (1,544,823) $ (19,493,558)
=================================================================
</TABLE>
+Effective date of Class B shares was January 1, 1999.
3. TRANSACTIONS WITH AFFILIATES AND RELATED PARTIES
Certain officers of the Series Fund are also officers and/or directors of
Franklin Mutual Advisors, Inc. (Franklin Mutual) and Franklin Templeton
Services, Inc. (FT Services), the Fund's investment manager and administrative
manager, respectively. Franklin/Templeton Investor Services, Inc. (Investor
Services) and Franklin/Templeton Distributors, Inc. (Distributors) are the
Fund's transfer agent and principal underwriter, respectively.
The Fund pays an investment management fee to Franklin Mutual of 0.80% per year
of the average daily net assets of the Fund. Franklin Mutual agreed, through
June 30, 2000, to limit the expense ratio of the Fund to be no higher than
expected for the Fund's 1996 fiscal year, except that increases in expenses will
be permitted if the Series Fund's Board of Directors determines that such
expenses would have been higher had the merger between Franklin Mutual and the
Fund's former investment advisor not taken place. This expense limitation does
not include items such as litigation expenses, interest, taxes, insurance,
brokerage commissions, and expenses of an extraordinary nature. The expense
reduction is set forth in the Statement of Operations.
The Fund pays its allocated share of an administrative fee to FT Services based
on the Series Fund's aggregate average daily net assets as follows:
<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 0.35%, 1.00% and 1.00% per year of the average daily net assets of
Class A, Class B, and Class C shares, respectively. Distributors received net
commissions on sales of those Fund shares and received contingent deferred sales
charges for the period of $71,059 and $6,082, respectively.
25
<PAGE>
MUTUAL EUROPEAN FUND
Notes to Financial Statements (unaudited) (continued)
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 June 30, 2000, the net unrealized appreciation based on the cost of
investments for income tax purposes of $770,802,982 was as follows:
<TABLE>
<S> <C>
Unrealized appreciation..................................... $136,674,055
Unrealized depreciation..................................... (25,734,887)
------------
Net unrealized appreciation................................. $110,939,168
============
</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.
5. INVESTMENT TRANSACTIONS
Purchases and sales of securities (excluding short-term securities) for the six
months ended June 30, 2000, aggregated $388,596,620 and $445,418,587,
respectively.
6. RESTRICTED SECURITIES
The Fund may purchase securities through a private offering that generally
cannot be sold to the public without prior registration under the Securities Act
of 1933. The costs of registering such securities are paid by the issuer.
Restricted securities held at June 30, 2000 are as follows:
<TABLE>
<CAPTION>
NUMBER OF ACQUISITION
SHARES ISSUER DATE VALUE
-------------------------------------------------------------------------------------------------
<C> <S> <C> <C>
127,500 Security Capital European Realty............................ 4/08/98 $1,879,988
==========
TOTAL RESTRICTED SECURITIES (COST $2,550,000) (0.20% OF NET ASSETS)
</TABLE>
7. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
The Fund has been a party to financial instruments with off-balance-sheet risk,
primarily forward exchange contracts, in order to minimize the impact on the
Fund from adverse changes in the relationship between the functional currency
and foreign currencies and interest rates. These instruments involve market risk
in excess of the amount recognized on the Statement of Assets and Liabilities.
Some of these risks have been minimized by offsetting contracts. Risks arise
from the possible inability of counterparties to meet the terms of their
contracts, future movement in currency values and interest rates and contract
positions that are not exact offsets. The contract amount indicates the extent
of the Fund's involvement in such contracts.
26
<PAGE>
MUTUAL EUROPEAN FUND
Notes to Financial Statements (unaudited) (continued)
7. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK (CONT.)
A forward exchange contract is an agreement between two parties to exchange
different currencies at a specific rate at an agreed future date. The contracts
are reported in the financial statements at the Fund's net equity, as measured
by the difference between the forward exchange rates at the reporting date and
the forward exchange rates at the day of entry into the contract.
As of June 30, 2000, the Fund had the following forward exchange contracts
outstanding:
<TABLE>
<CAPTION>
IN SETTLEMENT UNREALIZED
CONTRACTS TO BUY: EXCHANGE FOR DATE GAIN/(LOSS)
------------------ ------------------------------------------------
<C> <S> <C> <C> <C> <C> <C>
7,225,000 European Unit......................................... U.S $ 6,810,992 7/07/00 U.S. $ 117,834
101,648,579 Swedish Krona......................................... 11,541,766 8/21/00 94,679
36,017,859 Swedish Krona......................................... 4,102,589 9/15/00 27,976
------------ -----------
U.S $ 22,455,347 240,489
============ ===========
<CAPTION>
CONTRACTS TO SELL:
------------
<C> <S> <C> <C> <C> <C> <C>
7,854,707 European Unit......................................... U.S $ 8,202,793 7/07/00 670,075
34,000,000 European Unit......................................... 32,862,360 7/12/00 245,072
1,069,485 Canadian Dollars...................................... 729,487 7/31/00 7,095
10,125,000 European Unit......................................... 9,820,440 8/15/00 86,261
151,088,426 Swedish Krona......................................... 17,575,574 8/21/00 279,393
24,700,000 European Unit......................................... 24,972,338 8/24/00 1,213,275
21,084,052 European Unit......................................... 20,468,397 9/12/00 164,659
10,836,670 Singapore Dollars..................................... 6,353,210 9/14/00 31,183
225,045,038 Swedish Krona......................................... 26,270,667 9/15/00 462,271
315,016,660 Swedish Krona......................................... 36,675,604 9/18/00 541,484
13,039,462 British Pounds........................................ 20,533,841 9/25/00 761,442
38,749,516 British Pounds........................................ 60,972,999 10/17/00 2,185,970
332,840,662 Swedish Krona......................................... 38,537,879 10/20/00 279,765
28,000,000 European Unit......................................... 27,245,940 10/30/00 205,921
27,000,000 European Unit......................................... 26,284,275 11/21/00 176,382
4,329,882 British Pounds........................................ 6,596,742 11/22/00 22,396
38,677,987 European Unit......................................... 37,619,142 12/20/00 155,498
1,100,000 British Pounds........................................ 1,673,870 12/20/00 2,586
------------ -----------
U.S $403,395,558 7,490,728
============ -----------
Unrealized gain on forward exchange contracts.................... 7,731,217
-----------
</TABLE>
27
<PAGE>
MUTUAL EUROPEAN FUND
Notes to Financial Statements (unaudited) (continued)
7. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK (CONT.)
<TABLE>
<CAPTION>
IN SETTLEMENT UNREALIZED
CONTRACTS TO BUY: EXCHANGE FOR DATE GAIN/(LOSS)
------------------ ------------------------------------------------
<C> <S> <C> <C> <C> <C> <C>
295,000 Canadian Dollars...................................... U.S $ 199,570 7/31/00 U.S. $ (310)
38,377,867 Swedish Krona......................................... 4,466,237 8/21/00 (72,846)
------------ -----------
U.S $ 4,665,807 (73,156)
============ -----------
<CAPTION>
CONTRACTS TO SELL:
------------
<C> <S> <C> <C> <C> <C> <C>
19,909,165 European Unit......................................... U.S $ 18,542,400 7/07/00 (550,626)
3,417,390 Canadian Dollars...................................... 2,292,668 7/31/00 (16,155)
50,901,898 European Unit......................................... 47,586,095 8/15/00 (1,351,011)
11,736,611 British Pounds........................................ 17,470,631 8/22/00 (314,825)
17,985,870 European Unit......................................... 17,223,269 9/12/00 (96,950)
22,489,568 Swiss Franc........................................... 13,801,622 9/13/00 (127,818)
33,077,476 Norwegian Krone....................................... 3,815,296 9/13/00 (54,037)
400,000 Singapore Dollars..................................... 232,261 9/14/00 (1,096)
77,119 British Pounds........................................ 116,767 10/17/00 (232)
61,400,000 Swedish Krona......................................... 6,964,514 10/20/00 (93,062)
7,000,000 European Unit......................................... 6,463,450 10/30/00 (296,555)
10,494,969 British Pounds........................................ 15,647,002 11/22/00 (288,201)
13,010,900 British Pounds........................................ 19,754,804 12/20/00 (13,295)
------------ -----------
U.S $169,910,779 (3,203,863)
============ -----------
Unrealized loss on forward exchange contracts.................... (3,277,019)
-----------
Net unrealized gain on forward exchange contracts.............. U.S. $ 4,454,198
===========
</TABLE>
28
<PAGE>
[TEMPLETON LOGO]
FRANKLIN(R) TEMPLETON(R)
INVESTMENTS
MUTUAL EUROPEAN FUND
777 Mariners Island Blvd., P.O. Box 7777
San Mateo, CA 94403-7777
SEMIANNUAL REPORT
CHAIRMAN OF THE BOARD
Michael F. Price
OFFICERS
Peter A. Langerman
Robert L. Friedman
Jeffrey Altman
Raymond Garea
Lawrence Sondike
David J. Winters
INVESTMENT MANAGER
Franklin Mutual Advisers, LLC
51 John F. Kennedy Parkway
Short Hills, NJ 07078
DISTRIBUTOR
Franklin/Templeton Distributors, Inc.
1-800/DIAL BEN(R) franklintempleton.com
SHAREHOLDER SERVICES
1-800/632-2301 - (Class A, B, & C)
1-800/448-FUND - (Class Z)
This report must be preceded or accompanied by the current Mutual European Fund
prospectus, which contains more complete information including risk factors,
charges and expenses.
To ensure the highest quality of service, telephone calls to or from our service
departments may be monitored, recorded and accessed. These calls can be
determined by the presence of a regular beeping tone.
478 S00 08/00 [RECYCLE LOGO] Printed on recycled paper
