SEMI ANNUAL REPORT
MUTUAL DISCOVERY FUND
JUNE 30, 1997
[GRAPHIC M]
[FRANKLIN TEMPLETON LOGO]
<PAGE>
In its continuing efforts to strengthen the investment team, the fund's advisor
recently named as vice presidents the people pictured to the lower right. These
individuals have over 36 combined years of experience with Mutual Series. We
have also added several people to the research and trading side who have
excellent backgrounds and great enthusiasm. Our greatest resource in finding the
right people is our reputation as a dynamic and creative investment
organization.
FRANKLIN MUTUAL ADVISERS
SENIOR PORTFOLIO MANAGEMENT TEAM
[PHOTO OF SENIOR PORTFOLIO MANAGEMENT TEAM APPEARS HERE]
Left to right: Lawrence N. Sondike, Robert Friedman, Peter A. Langerman, Raymond
Garea, Jeff Altman, Michael Price (seated)
[PHOTO OF PORTFOLIO MANAGEMENT TEAM APPEARS HERE]
Left to right top: Susan Potto, David Winters, Greg Gigliotti
Bottom: Leigh Walzer, Tom Price
<PAGE>
SHAREHOLDER LETTER
Your Fund's Objective: The Mutual Discovery Fund seeks long-term capital
appreciation by investing primarily in common and preferred stocks, bonds, and
convertible securities of smaller capitalization companies. The fund also
expects to invest up to approximately 50% of its assets in foreign securities.
Dear Shareholder:
We are pleased to bring you this semi-annual report of the Mutual Discovery
Fund, which covers the six months ended June 30, 1997.
To borrow a phrase from another age, the first half of 1997 was a bit like "the
best of times." This description is apt for obvious reasons: equity markets
continued moving to record levels supported by large capital inflows, relatively
stable interest rates, and high investor confidence. When things are this
favorable, the contrarian asks how long these conditions can last, or even more
starkly, "Are the worst of times ahead?" We are not in the business of making
market calls (fortunately), although unbridled optimism makes our job tougher.
The good news for us is that even in upbeat markets, we have been able to find
and buy stocks that fit our defensive style and conservative valuation
standards.
CONTENTS
SHAREHOLDER LETTER .............................................. 1
PERFORMANCE SUMMARIES
Class Z ........................................................ 6
Class I ........................................................ 8
Class II ....................................................... 9
STATEMENT OF INVESTMENTS ........................................ 13
FINANCIAL STATEMENTS ............................................ 25
NOTES TO FINANCIAL STATEMENTS .................................. 28
[FUND CATEGORY PYRAMID GRAPHIC APPEARS HERE]
<PAGE>
PORTFOLIO BREAKDOWN
Based on Total Net Assets
6/30/97
Equities 78.9%
Bonds 3.7%
Short-Term Obligations & Other Net Assets 17.4%
TOP 10 INDUSTRIES
Based on Total Net Assets
6/30/97
Multi-Industry 14.6%
Broadcasting & Publishing 8.2%
Financial Services 6.8%
Energy Sources 5.5%
Health & Personal Care 3.7%
Insurance 3.6%
Transportation 3.5%
Real Estate 3.4%
Industrial Components 3.3%
Merchandising 3.1%
The Mutual Discovery Fund - Class Z provided a cumulative six-month total return
of 13.91%, as discussed in the Performance Summary on page 6, outperforming the
Russell 2000(R) Index, which had a 10.20%(1) return. The Standard and Poor
500(R) Stock Index (S&P 500(R)) had a 20.61%(2) return over the same period. The
largest capitalization stocks in the S&P 500 performed the best. For example, if
one were to calculate the performance of this index excluding the 25 largest
stocks in the index, the total return for the period dropped to under 17%.
While an index may be up more than 17% in a quarter, as the S&P 500 was from
April through June of this year, we believe that our value approach is the best
way to achieve consistent, long-term appreciation with relatively low risk and
low volatility. When we buy a security, it is because our analysis tells us that
it is worth significantly more than we are paying. Passive investment
management, or indexing, may lead to greater returns in a specific time period,
but unless one has blind faith in stocks generally, this kind of investing can
be scary. Conventional wisdom, which is what indexing reflects, can be "the
blind leading the blind" or a road to achieving mediocre returns with high
volatility. If the markets are less benign than they have been this past
quarter, then many investors may have a rude awakening to the perils of
indexing. The mix of our investments -- cheap stocks, special situations such as
deals and spin-offs, and bankruptcies -- is intended to provide opportunity for
the best risk-adjusted returns in a wide variety of market conditions.
1. Source: Micropal. Index is unmanaged and includes reinvested dividends. One
cannot invest directly in an index.
2. Source: Micropal. Index is unmanaged and includes reinvested dividends. One
cannot invest directly in an index.
2
<PAGE>
Our most recent efforts to find value have included buying shares in several
energy companies, including some in the oil service business and others involved
in oil exploration and production. We also found good value in selected health
care names whose prices had declined due to short-term disruptions, such as
Foundation Health Systems and PacifiCare Health Systems Inc. Strong merger and
acquisition activity also provided us with some good investment opportunities.
Many foreign stocks remained attractive, but the larger capitalization names
were generally less compelling than they had been a year or two ago. However,
opportunities in the smaller capitalization companies still appear to be
plentiful.
We appreciate your participation in the Mutual Discovery Fund and welcome your
comments and suggestions.
Sincerely,
Franklin Mutual Series Portfolio Management Team
TOP 10 HOLDINGS
Period ended 6/30/97
COMPANY, % OF TOTAL
INDUSTRY NET ASSETS
Pacific Forest Products Ltd.,
Forest Products & Paper 1.7%
Southam Inc.,
Broadcasting & Publishing 1.5%
Aker RGI ASA, B,
Multi-Industry 1.5%
Suez Lyonnaise Des Eaux SA,
Business & Public Services 1.4%
Kansas City Southern
Industries Inc.,
Multi-Industry 1.1%
Waban Inc.,
Merchandising 1.1%
Societe Elf Aquitane SA,
Energy Sources 1.0%
Custos AB, B,
Multi-Industry 1.0%
Enserch Corp.,
Energy Sources 1.0%
Sophus Berendsen AB, B,
Multi-Industry 0.9%
For a complete listing of portfolio holdings, see page 13 of this report.
3
<PAGE>
This discussion reflects the strategies the fund employed during the six months
under review, and includes opinions as of the close of the period. Since
economic and market conditions are constantly changing, strategies and
evaluations, conclusions, and decisions regarding portfolio holdings may change
as new circumstances arise. Although past performance of a specific investment
or sector cannot guarantee future performance, such information can be useful in
analyzing securities the fund purchases and sells.
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 investments are made. Notably, the fund generally
expects to hedge against currency risk. The fund's value-oriented strategy may
include investments in companies involved in mergers, reorganizations,
restructurings, or liquidations. The risks associated with this and other
fund-specific investments are described in the prospectus.
4
<PAGE>
INVESTMENT APPROACH
We seek to invest in securities selling at a substantial discount to their
intrinsic value, taking into consideration, among other factors, price/book,
price/earnings, and cash flow. Rather than attempt to project growth rates and
earnings, we try to determine what a company is worth today -- and we want to
buy it at significantly less than that. Applying this value approach, we invest
primarily in three areas: (1) cheap stocks based on asset values, (2) mergers,
recapitalizations, spin-offs and other extraordinary corporate changes, and (3)
bankruptcy and other financially distressed situations. These investments,
particularly in the latter two categories, do not typically move with the same
volatility as the market indices and therefore have tended to reduce excessive
volatility in our overall performance. Generally, we have tended to underperform
the S&P 500(R) slightly in bull markets, while outperforming the benchmark in
sideways and bear markets. Of course, past performance cannot guarantee future
results.
5
<PAGE>
PERFORMANCE SUMMARY
CLASS Z
The Mutual Discovery Fund's Class Z shares provided a cumulative total return of
13.91% for the six-month period ended June 30, 1997. Cumulative total return
measures the change in value of an investment, assuming reinvestment of
dividends and capital gains, if any.
The fund's Class Z share price increased $2.39 per share, from $17.18 on
December 31, 1996, to $19.57 on June 30, 1997. During the reporting period,
Class Z shares did not pay distributions. Of course, distributions will vary
depending on income earned by the fund, as well as any profits realized from the
sale of securities in the portfolio.
Past performance is not predictive of future results.
6
<PAGE>
CLASS Z
Periods ended 6/30/97
SINCE
INCEPTION
1-YEAR 3-YEAR (12/31/92)
------ ------ ----------
Cumulative Total Return(1) 26.11% 83.49% 157.67%
Average Annual Total Return(2) 26.11% 21.05% 23.43%
Value of $10,000 Investment(3) $12,611 $17,737 $25,767
6/30/94 6/30/95 6/30/96 6/30/97
------- ------- ------- -------
One-Year Total Return(4) 21.90% 15.82% 25.63% 26.11%
1. Cumulative total returns represent the change in value of an investment over
the indicated periods.
2. Average annual total returns represent the average annual change in value of
an investment over the indicated periods.
3. These figures represent the value of a hypothetical $10,000 investment in the
fund over the indicated periods.
4. One-year total returns represent the change in value of an investment over
the periods ended on the specified dates.
All total return calculations assume reinvestment of dividends and capital
gains, if any, at net asset value. 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 return
would have been lower. Franklin Mutual Advisers has made a commitment to the
fund's Board not to seek an increase in the rate of investment advisory fees for
a three year period beginning November 1, 1996.
Investment return and principal value will fluctuate with market conditions,
currencies and the economic, social, and political climates of countries where
investments are made. Thus, your shares, when redeemed, may be worth more or
less than their original cost.
Past performance is not predictive of future results.
7
<PAGE>
CLASS I
The Mutual Discovery Fund's Class I shares provided a cumulative total return of
13.70% for the six-month period ended June 30, 1997. Cumulative total return
measures the change in value of an investment, assuming reinvestment of
dividends and capital gains, if any, and does not include the initial sales
charge.
The fund's Class I share price, as measured by net asset value, increased $2.35
per share, from $17.15 on December 31, 1996, to $19.50 on June 30, 1997. During
the reporting period, Class I shares did not pay distributions. Of course,
distributions will vary depending on income earned by the fund, as well as any
profits realized from the sale of securities in the portfolio.
CLASS I
Periods ended 6/30/97
SINCE
INCEPTION
SIX MONTHS (11/1/96)
---------- ---------
Cumulative Total Return(1) 13.70% 19.22%
Aggregate Annual Total Return(2) 8.57% 13.87%
Value of $10,000 Investment(3) $10,857 $11,387
1. Cumulative total returns represent the change in value of an investment over
the indicated periods and do not include the sales charge.
2. Aggregate total returns represent the change in value of an investment over
the indicated periods and include the maximum 4.5% initial sales charge. Since
these shares have existed for less than one year, average annual total returns
are not provided.
3. These figures represent the value of a hypothetical $10,000 investment in the
fund over the indicated periods and include the sales charge.
All total return calculations assume reinvestment of dividends and capital
gains, if any, at net asset value. 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 return
would have been lower. The fee waiver may be discontinued at any time, upon
notice to the fund's Board of Directors.
Investment return and principal value will fluctuate with market conditions,
currencies and the economic, social, and political climates of countries where
investments are made. Thus, your shares, when redeemed, may be worth more or
less than their original cost.
Past performance is not predictive of future results.
8
<PAGE>
CLASS II
The Mutual Discovery Fund's Class II shares provided a cumulative total return
of 13.28% for the six-month period ended June 30, 1997. Cumulative total return
measures the change in value of an investment, assuming reinvestment of
dividends and capital gains, if any, and does not include sales charges.
The fund's Class II share price, as measured by net asset value, increased $2.28
per share, from $17.17 on December 31, 1996, to $19.45 on June 30, 1997. During
the reporting period, Class II shares did not pay distributions. Of course,
distributions will vary depending on income earned by the fund, as well as any
profits realized from the sale of securities in the portfolio.
CLASS II
Periods ended 6/30/97
SINCE
INCEPTION
SIX MONTHS (11/1/96)
---------- ---------
Cumulative Total Return(1) 13.28% 18.81%
Aggregate Annual Total Return(2) 11.18% 16.65%
Value of $10,000 Investment(3) $11,118 $11,665
1. Cumulative total returns represent the change in value of an investment over
the indicated periods and do not include sales charges.
2. Aggregate total returns represent the change in value of an investment over
the indicated periods and include the 1.0% initial sales charge and 1.0%
contingent deferred sales charge, applicable to shares redeemed within 18 months
of investment. Since these shares have existed for less than one year, average
annual total returns are not provided.
3. These figures represent the value of a hypothetical $10,000 investment in the
fund over the indicated periods and include sales charges.
All total return calculations assume reinvestment of dividends and capital
gains, if any, at net asset value. 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 return
would have been lower. The fee waiver may be discontinued at any time, upon
notice to the fund's Board of Directors.
Investment return and principal value will fluctuate with market conditions,
currencies and the economic, social, and political climates of countries where
investments are made. Thus, your shares, when redeemed, may be worth more or
less than their original cost.
Past performance is not predictive of future results.
9
<PAGE>
MUTUAL DISCOVERY FUND
Financial Highlights
Per Share Operating Performance - Class Z (For a share outstanding throughout
the period)
<TABLE>
<CAPTION>
Six months
ended Year ended December 31,
June 30, 1997 ----------------------------------------
(unaudited) 1996 1995 1994 1993
------------- ----------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period................. $17.18 $15.16 $12.55 $13.05 $10.00
---------- ------- --- ------- --- ----- --- ----- ---
Income from investment operations:
Net investment income............................ .21 .34 .17 .15 .10
Net realized and unrealized gain................. 2.18 3.39 3.40 .32 3.48
---------- ------- --- ------- --- ----- --- ----- ---
Total from investment operations..................... 2.39 3.73 3.57 .47 3.58
---------- ------- --- ------- --- ----- --- ----- ---
Distributions:
Dividends from net investment income............. -- (.31) (.14) (.16) (.09)
Distributions from net realized gains............ -- (1.40) (.82) (.81) (.44)
---------- ------- --- ------- --- ----- --- ----- ---
Total distributions.................................. -- (1.71) (.96) (.97) (.53)
---------- ------- --- ------- --- ----- --- ----- ---
Change in net asset value............................ 2.39 2.02 2.61 (.50) 3.05
---------- ------- --- ------- --- ----- --- ----- ---
Net asset value, end of period....................... $19.57 $17.18 $15.16 $12.55 $13.05
========== ========== ========== ======== ========
Total Return*........................................ 13.91% 24.93% 28.63% 3.62% 35.85%
Ratios/Supplemental Data
Net assets, end of period (000)...................... $3,669,693 $2,975,596 $1,370,221 $725,331 $548,387
Ratio of expenses to average net assets.............. 1.00%** .99% .99% .99% 1.07%
Ratio of expenses, net of fee waiver, to average net
assets............................................. .98% ** .96% .99% .99% 1.07%
Ratio of net investment income to average net
assets............................................. 2.38%** 2.24% 2.00% 1.64% 1.17%
Portfolio turnover rate.............................. 27.02% 80.18% 73.23% 72.70% 90.37%
Average commission rate paid (per share)............. $.0275 $.0257
</TABLE>
*Not annualized for periods of less than one year.
**Annualized.
10
<PAGE>
MUTUAL DISCOVERY FUND
Financial Highlights (continued)
Per Share Operating Performance - Class I (For a share outstanding throughout
the period)
<TABLE>
<CAPTION>
Six months For the period
ended November 1, 1996+
June 30, 1997 through
(unaudited) December 31, 1996
------------- -----------------
<S> <C> <C>
Net asset value, beginning of period........................................... $17.15 $17.66
------------- -----------------
Income from investment operations:
Net investment income...................................................... .27 .11
Net realized and unrealized gain........................................... 2.08 .74
------------- -----------------
Total from investment operations............................................... 2.35 .85
------------- -----------------
Distributions:
Dividends from net investment income....................................... -- (.29)
Distributions from net realized gains...................................... -- (1.07)
------------- -----------------
Total distributions............................................................ -- (1.36)
------------- -----------------
Change in net asset value...................................................... 2.35 (.51)
------------- -----------------
Net asset value, end of period................................................. $19.50 $17.15
============== ====================
Total Return*.................................................................. 13.70% 4.85%
Ratios /Supplemental Data
Net assets, end of period (000)................................................ $380,439 $29,903
Ratio of expenses to average net assets........................................ 1.35%** 1.51%**
Ratio of expenses, net of fee waiver, to average net assets.................... 1.33%** 1.38%**
Ratio of net investment income to average net assets........................... 2.46%** .74%**
Portfolio turnover rate........................................................ 27.02% 80.18%
Average commission rate paid (per share)....................................... $.0275 $.0257
</TABLE>
*Total return does not reflect sales commissions or the contingent deferred
sales charge. Not annualized for periods of less than one year.
**Annualized.
+Commencement of sales.
11
<PAGE>
MUTUAL DISCOVERY FUND
Financial Highlights (continued)
Per Share Operating Performance - Class II (For a share outstanding throughout
the period)
<TABLE>
<CAPTION>
Six months For the period
ended November 1, 1996+
June 30, 1997 through
(unaudited) December 31, 1996
------------- -----------------
<S> <C> <C>
Net asset value, beginning of period........................................... $17.17 $17.66
-------- -------
Income from investment operations:
Net investment income...................................................... .25 .09
Net realized and unrealized gain........................................... 2.03 .76
-------- -------
Total from investment operations............................................... 2.28 .85
-------- -------
Distributions:
Dividends from net investment income....................................... -- (.27)
Distributions from net realized gains...................................... -- (1.07)
-------- -------
Total distributions............................................................ -- (1.34)
-------- -------
Change in net asset value...................................................... 2.28 (0.49)
-------- -------
Net asset value, end of period................................................. $19.45 $17.17
======== =======
Total Return*.................................................................. 13.28% 4.90%
Ratios /Supplemental Data
Net assets, end of period (000)................................................ $194,955 $18,038
Ratio of expenses to average net assets........................................ 2.00%** 2.13%**
Ratio of expenses, net of fee wavier, to average net assets.................... 1.98%** 2.00%**
Ratio of net investment income to average net assets........................... 1.82%** .13%**
Portfolio turnover rate........................................................ 27.02% 80.18%
Average commission rate paid (per share)....................................... $0.0275 $0.0257
</TABLE>
*Total return does not reflect sales commissions or the contingent deferred
sales charge. Not annualized for periods of less than one year.
**Annualized.
+Commencement of sales.
12
<PAGE>
MUTUAL DISCOVERY FUND
Investment Portfolio, June 30,1997 (unaudited)
<TABLE>
<CAPTION>
INDUSTRY ISSUE COUNTRY SHARES VALUE
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stocks 77.5%
Aerospace & Military Technical Systems 0.4%
Primex Technologies Inc. ..................... U.S. 40,720 $ 870,390
*Tracor Inc. ................................. U.S. 672,100 16,886,513
--------------
17,756,903
--------------
Appliances & Household Durables 0.5%
Electrolux AB, B.............................. Swe. 311,000 22,433,973
--------------
Automobiles 1.4%
Bertrand Faure................................ Fr. 12,072 635,779
Fiat SpA...................................... Itl. 11,052,000 39,736,213
General Motors Corp. ......................... U.S. 373,600 20,804,850
--------------
61,176,842
--------------
Banking 1.2%
Affiliated Community Bancorp Inc. ............ U.S. 154,375 3,627,813
*+(R)Atlantic Bancorp, A...................... U.S. 290,406 4,196,367
*+(R)Atlantic Bancorp, C...................... U.S. 17,387 251,242
*+(R)Bank of Rhode Island..................... U.S. 228,300 2,283,000
*+BNH Bancshares Inc. ........................ U.S. 221,750 3,353,969
Capital Bancorp............................... U.S. 46,900 1,881,863
*+Civic Bancorp............................... U.S. 365,866 5,030,658
*+Life Financial Corp. ....................... U.S. 215,000 2,902,500
*Pacific Bank N.A. ........................... U.S. 116,300 4,186,800
*+Rancho Santa Fe National Bank............... U.S. 347,223 2,951,396
*Regent National Bank......................... U.S. 110,000 1,567,500
SC Bancorp.................................... U.S. 340,400 4,850,700
+Tolland Bank................................. U.S. 100,300 1,980,925
*Western Bancorp.............................. U.S. 409,000 10,429,500
--------------
49,494,233
--------------
Beverages & Tobacco 1.4%
BAT Industries PLC............................ U.K. 1,235,000 11,054,514
*Carnaudmetalbox Asia Ltd., fgn............... Sing. 260,000 527,383
Farmer Brothers Co. .......................... U.S. 68,202 8,661,654
Grand Metropolitan PLC........................ U.K. 2,028,500 19,643,504
Guinness PLC.................................. U.K. 910,000 8,910,723
Heineken Holding NV, A........................ Neth. 56,185 8,730,157
*Stroh Brewery Co., wts. ..................... U.S. 45,235 316,645
--------------
57,844,580
--------------
</TABLE>
13
<PAGE>
MUTUAL DISCOVERY FUND
Investment Portfolio, June 30, 1997 (unaudited) (continued)
<TABLE>
<CAPTION>
INDUSTRY ISSUE COUNTRY SHARES VALUE
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Broadcasting & Publishing 7.8%
+A-Pressen AS, A.............................. Nor. 590,000 $ 14,248,486
Aamulehti Yhtymae OY, II...................... Fin. 420,500 15,385,875
BHC Communications Inc., A.................... U.S. 58,600 7,002,700
Dow Jones & Co. Inc. ......................... U.S. 467,900 18,803,731
Dun & Bradstreet Corp. ....................... U.S. 248,600 6,525,750
Euromoney Publications PLC.................... U.K. 550,450 13,795,854
*Granite Broadcasting Corp. .................. U.S. 270,300 2,770,575
John Fairfax Holdings Ltd. ................... Aus. 10,812,889 25,635,727
Midland Independent Newspapers PLC............ U.K. 1,000,000 2,989,225
Mirror Group PLC.............................. U.K. 4,868,800 15,243,125
NV Holdingsmij de Telegraaf................... Neth. 1,054,330 22,774,258
Pearson PLC................................... U.K. 1,311,000 15,184,275
Shaw Brothers Hong Kong Ltd. ................. H.K. 4,704,700 5,283,246
Southam Inc. ................................. Can. 3,615,800 61,792,882
TCA Cable TV Inc. ............................ U.S. 266,800 10,038,350
United News & Media PLC....................... U.K. 1,212,569 14,064,419
*US West Media Group.......................... U.S. 1,350,400 27,345,600
Yorkshire Tyne Tees Television Holdings PLC... U.K. 1,599,280 30,228,360
*Young Broadcasting Corp., A.................. U.S. 700,500 22,766,250
--------------
331,878,688
--------------
Building Materials & Components 0.1%
Lone Star Industries Inc. .................... U.S. 61,326 2,778,834
--------------
Business & Public Services 1.8%
Esselte AB, A................................. Swe. 439,196 10,049,472
*IFIL Finanziaria Partecipazioni SpA.......... Itl. 1,571,000 5,413,544
Suez Lyonnaise Des Eaux SA.................... Fr. 569,948 57,414,692
*Talbert Medical Management Holdings Corp..... U.S. 16,822 748,579
*Tenet Healthcare Corp. ...................... U.S. 154,300 4,561,494
--------------
78,187,781
--------------
Chemicals 2.5%
Aga AB, B..................................... Swe. 440,300 5,862,698
BASF AG....................................... Ger. 292,000 10,774,815
*Bush Boake Allen Inc. ....................... U.S. 472,700 14,712,788
ChemFirst Inc. ............................... U.S. 836,200 22,681,925
Dow Corning Corp. ............................ U.S. 6,938,674 7,146,835
Inspec Group PLC.............................. U.K. 2,661,000 8,774,134
Laporte PLC................................... U.K. 1,600,000 17,092,708
Olin Corp. ................................... U.S. 460,000 17,968,750
--------------
105,014,653
--------------
</TABLE>
14
<PAGE>
MUTUAL DISCOVERY FUND
Investment Portfolio, June 30, 1997 (unaudited) (continued)
<TABLE>
<CAPTION>
INDUSTRY ISSUE COUNTRY SHARES VALUE
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Construction & Housing 2.3%
+Chicago Bridge & Iron Co. ................... U.S. 765,000 $ 16,925,625
Grupo Acciona SA.............................. Sp. 173,182 19,510,154
Hollandsche Beton Groep NV.................... Neth. 30,726 7,008,014
Lennar Corp. ................................. U.S. 599,100 19,133,756
Martin Marietta Materials Inc. ............... U.S. 224,100 7,255,238
Skanska AB, B................................. Swe. 638,800 28,242,467
--------------
98,075,254
--------------
Data Processing & Reproduction 0.8%
*Intuit Inc. ................................. U.S. 980,000 22,478,750
*National Processing Inc. .................... U.S. 905,200 9,278,300
Tecnost Mael SpA.............................. Itl. 852,500 1,545,075
--------------
33,302,125
--------------
Electrical & Electronics 0.7%
*+(R)Distribution Systems SpA................. Itl. 500 20,669
*+(R)MWCR Elettronica SRL..................... Itl. 69,056 69,056
*+(R)MWCR LLC................................. Itl. 13,916,566 13,916,566
*+(R)Sweda Industrie Elettroniche SpA......... Itl. 500 20,669
*Wang Labs Inc., A............................ U.S. 797,000 16,986,062
--------------
31,013,022
--------------
Electronic Components & Instruments 1.1%
*Amphenol Corp., A............................ U.S. 546,800 21,256,850
*Dynatech Corp. .............................. U.S. 94,700 3,385,525
Harman International Industries Inc. ......... U.S. 128,100 5,396,213
*Imation Corp. ............................... U.S. 280,400 7,395,550
*NBS Technologies Inc. ....................... Can. 352,200 862,040
Spectra Physics AB, A......................... Swe. 560,000 10,062,698
--------------
48,358,876
--------------
Energy Equipment & Services 1.6%
Bouygues Offshore SA, ADR..................... Fr. 710,000 8,875,000
*EVI Inc. .................................... U.S. 361,406 15,179,052
Shaw Industries Ltd., A....................... Can. 436,800 11,086,455
Shaw Industries Ltd., B....................... Can. 2,200 55,759
Transocean Offshore Inc. ..................... U.S. 440,984 32,026,463
--------------
67,222,729
--------------
</TABLE>
15
<PAGE>
MUTUAL DISCOVERY FUND
Investment Portfolio, June 30, 1997 (unaudited) (continued)
<TABLE>
<CAPTION>
INDUSTRY ISSUE COUNTRY SHARES VALUE
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Energy Sources 5.5%
*Aviva Petroleum Inc., depository shares...... U.S. 191,592 $ 550,818
*Cie Generale De Geophysique SA............... Fr. 60,873 5,924,984
*Cie Generale De Geophysique SA, ADR.......... Fr. 542,590 10,444,858
Energy Group PLC.............................. U.K. 895,000 9,553,781
Eni SpA....................................... Itl. 5,858,000 33,123,174
Enserch Corp. ................................ U.S. 1,804,300 40,145,675
Saga Petroleum AS, A.......................... Nor. 858,400 16,279,758
Saga Petroleum AS, B.......................... Nor. 1,295,500 22,625,116
San Juan Basin Royalty Trust.................. U.S. 482,900 3,923,563
Shell Transport & Trading Co. PLC............. U.K. 825,000 5,626,030
Societe Elf Aquitaine SA, Sponsored ADR....... Fr. 205,500 11,186,906
Societe Elf Aquitaine SA...................... Fr. 410,291 44,263,701
*United Meridian Corp. ....................... U.S. 367,000 11,010,000
Yorkshire Water PLC........................... U.K. 2,782,000 18,091,409
--------------
232,749,773
--------------
Financial Services 6.3%
Advanta Corp., A.............................. U.S. 78,900 2,899,575
Advanta Corp., B.............................. U.S. 673,900 24,049,806
Alliance Global Environment Fund Inc. ........ U.S. 164,600 2,623,313
+American National Bancorp Inc. .............. U.S. 131,500 2,531,375
Arthur J Gallagher Co. ....................... U.S. 479,900 18,116,225
Asia Tigers Fund Inc. ........................ U.S. 263,000 2,975,188
Austria Fund Inc. ............................ Aust. 349,300 3,405,675
Axa-UAP SA.................................... Fr. 177,200 11,020,913
Bear Stearns Companies, Inc. ................. U.S. 91,052 3,112,849
*Capital Factors Holding...................... U.S. 500,000 8,750,000
Central European Equity Fund Inc. ............ U.S. 364,000 8,736,000
Cerus-Compagnies Europeennes Reunies SA....... Fr. 206,725 1,044,759
*(R)Cityscape Financial Corp. ................ U.S. 593,000 11,231,791
Cityscape Financial Corp. .................... U.S. 457,600 9,123,400
*Coast Savings Financial...................... U.S. 167,400 7,606,238
Commonwealth Bancorp Inc. .................... U.S. 560,000 9,170,000
+Continental Information Systems Inc. ........ U.S. 452,525 1,018,181
Credit Communal Holding Dexia Belgium......... Bel. 120,000 12,886,913
Eaton Vance Corp. ............................ U.S. 344,000 9,567,500
*Edinburg Dragon Trust PLC.................... U.K. 1,550,000 2,252,119
First Defiance Financial Corp. ............... U.S. 174,000 2,544,750
G.T. Global Developing Markets Fund Inc. ..... U.S. 154,400 2,171,250
Growth Fund Spain Inc. ....................... U.S. 138,500 2,112,125
*JF Indonesia Fund Inc. ...................... Indo. 1,407,000 1,816,117
John Hancock Bank & Thrift Opportunity Fund,
SBI.......................................... U.S. 111,100 3,957,938
Liberty Financial Companies, Inc. ............ U.S. 73,150 3,648,356
+Little Falls Bancorp. ....................... U.S. 170,000 2,656,250
Long Island Bancorp Inc. ..................... U.S. 340,700 12,371,669
Mercury European Privatization Trust PLC...... U.K. 15,452,253 31,136,615
*Mercury European Privitization Trust PLC,
wts. ........................................ U.K. 6,135,000 3,933,413
Morgan Stanley Dean Witter Discover & Co. .... U.S. 401,200 17,276,675
</TABLE>
16
<PAGE>
MUTUAL DISCOVERY FUND
Investment Portfolio, June 30, 1997 (unaudited) (continued)
<TABLE>
<CAPTION>
INDUSTRY ISSUE COUNTRY SHARES VALUE
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Financial Services (cont.)
New Age Media Fund Inc. ...................... U.S. 233,500 $ 3,648,438
New Germany Fund Inc. ........................ U.S. 932,600 14,688,450
+North Central Bancshares Inc. ............... U.S. 332,500 5,153,750
*+Regent Kingpin Chile Value Fund............. U.K. 212,505 310,257
*Schroder Asian Growth Fund................... U.S. 107,600 1,378,625
*SPS Transaction Services Inc. ............... U.S. 320,500 5,929,250
*(R)St. George Holdings Ltd., A............... U.S. 152,074 15,207
*(R)St. George Holdings Ltd., B............... U.S. 1,495 150
United Corporations Ltd. ..................... Can. 38,398 1,334,663
--------------
268,205,768
--------------
Food & Household Products 2.1%
Cadbury Schweppes PLC......................... U.K. 1,466,511 13,077,930
Cultor OY..................................... Fin. 135,600 7,181,166
Lotte Confectionary Co. Ltd. ................. Kor. 17,370 2,699,391
Ralcorp Holdings Inc. ........................ U.S. 614,400 9,062,400
*Sardus AB.................................... Swe. 796,600 6,848,155
Sizzler International Inc. ................... U.S. 1,099,900 3,230,956
Sucriere de Pithiviers Le-Vieil SA............ Fr. 11,568 6,968,319
*U S Industries Inc. ......................... U.S. 162,800 5,799,750
Van Melle NV.................................. Neth. 159,129 12,484,521
Williams PLC.................................. U.K. 650,000 3,496,311
*Worms Et Compagnie........................... Fr. 302,888 17,936,091
--------------
88,784,990
--------------
Forest Products & Paper 1.8%
Fletcher Challenge Canada Ltd., A............. Can. 350,000 5,892,682
*Jefferson Smurfit Group PLC.................. U.K. 13,000 208,000
*+Pacific Forest Products Ltd. ............... Can. 3,888,400 71,097,505
--------------
77,198,187
--------------
Health & Personal Care 3.7%
*Apria Healthcare Group Inc. ................. U.S. 1,383,900 24,564,225
*Beverly Enterprises, Inc. ................... U.S. 787,100 12,790,375
*Foundation Health Systems, A................. U.S. 830,810 25,183,928
*Grancare Inc. Delaware....................... U.S. 863,400 9,335,513
*Horizon/CMS Healthcare Corp. ................ U.S. 631,200 12,663,450
Instrumentarium Group, B...................... Fin. 276,000 10,311,299
*Mid-Atlantic Medical Services................ U.S. 616,700 9,597,394
*Pacificare Health Systems Inc., A............ U.S. 19,964 1,209,070
*Pacificare Health Systems Inc., B............ U.S. 62,744 4,007,773
*Regency Health Services Inc. ................ U.S. 260,300 4,002,113
*+Summit Care Corp. .......................... U.S. 679,800 9,177,300
*United Dental Care Inc. Delaware............. U.S. 368,700 5,530,500
*Vencor Inc. ................................. U.S. 507,200 21,429,200
*Vitalink Pharmacy Services Inc. ............. U.S. 343,131 6,562,380
--------------
156,364,520
--------------
17
<PAGE>
MUTUAL DISCOVERY FUND
Investment Portfolio, June 30, 1997 (unaudited) (continued)
INDUSTRY ISSUE COUNTRY SHARES VALUE
- ----------------------------------------------------------------------------------------------------------------------
Industrial Components 3.2%
Charter PLC................................... U.K. 945,362 $ 12,578,798
*DT Industries Inc. .......................... U.S. 285,000 10,188,750
Hexagon AB, B................................. Swe. 29,000 787,279
Kennametal Inc. .............................. U.S. 899,000 38,657,000
Lucas Varity PLC.............................. U.K. 4,675,213 16,194,180
*+(R)MB-Motori LLC............................ U.S. 557,863 499,120
Michelin SA, B................................ Fr. 526,584 31,621,742
Tomkins PLC................................... U.K. 4,968,037 21,510,593
*Veritas DGC Inc. ............................ U.S. 186,100 4,187,250
--------------
136,224,712
--------------
Insurance 3.2%
Alleghany Corp. .............................. U.S. 44,262 9,626,959
Allmerica Property & Casualty Companies
Inc. ........................................ U.S. 406,900 13,325,975
American General Corp. ....................... U.S. 394,342 18,829,813
Argonaut Group Inc. .......................... U.S. 47,383 1,397,799
Assurances Generales de France................ Fr. 93,610 2,991,468
*(R)CGA Group Ltd. ........................... U.S. 139,785 698,925
INA-Istituto Nazionale Delle Assicurazioni
SpA.......................................... Itl. 1,800,000 2,726,374
Koelnische Rueckversicherungs AG.............. Ger. 16,757 14,413,384
National Security Group, Inc. ................ U.S. 48,430 714,343
Old Republic International Corp. ............. U.S. 78,550 2,381,047
Pohjola Insurance Co. Ltd., A................. Fin. 195,000 5,820,615
Provident Companies Inc. ..................... U.S. 333,100 17,820,850
PXRE Corp. ................................... U.S. 333,700 10,261,275
Reliable Life Insurance Companies, A.......... U.S. 23,814 3,000,564
Royal & Sun Alliance Insurance Group PLC...... U.K. 2,597,809 19,164,838
SAFECO Corp. ................................. U.S. 154,000 7,189,875
SCOR SA....................................... Fr. 98,615 3,970,308
Twentieth Century Industries California....... U.S. 109,000 2,289,000
--------------
136,623,412
--------------
Leisure & Tourism 0.3%
Comcast Corp., A.............................. U.S. 30,000 628,125
Comcast Corp., Special A...................... U.S. 358,100 7,654,388
Pathe SA...................................... Fr. 27,290 5,414,627
--------------
13,697,140
--------------
Machinery & Engineering 1.9%
Bucher Holding AG............................. Swtz. 11,413 11,877,960
+Greenfield Industries Inc. .................. U.S. 844,500 22,801,500
Rauma OY...................................... Fin. 810,000 18,562,419
SIG Schweizerische Industrie-Gessellschaft,
Bearer....................................... Swtz. 3,925 11,891,903
SIG Schweizerische Industrie-Gessellschaft,
Registered................................... Swtz. 690 1,025,197
Triplex Lloyd PLC............................. U.K. 1,204,000 3,097,770
TT Group PLC.................................. U.K. 1,680,000 10,351,546
--------------
79,608,295
--------------
</TABLE>
18
<PAGE>
MUTUAL DISCOVERY FUND
Investment Portfolio, June 30, 1997 (unaudited) (continued)
<TABLE>
<CAPTION>
INDUSTRY ISSUE COUNTRY SHARES VALUE
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Merchandising 2.9%
Delchamps Inc. ............................... U.S. 163,179 $ 5,221,728
*Dress Barn Inc............................... U.S. 345,000 6,727,500
East Asiatic Co. Ltd. ........................ Den. 816,790 19,312,946
*Footstar Inc. ............................... U.S. 733,800 19,170,525
*Hemkopskedjan AB............................. Swe. 700,000 7,194,105
*Hills Stores Co. ............................ U.S. 67,393 231,663
*Homeland Holdings Corp. ..................... U.S. 168,809 1,339,921
*Homeland Holdings Corp. w/i ................. U.S. 38,115 211,776
*Isosceles PLC................................ U.K. 643,694 10,719
*Service Merchandise Co. Inc. ................ U.S. 372,300 1,116,900
*Vendome Luxury Group PLC..................... U.K. 2,068,169 15,274,741
*Waban Inc. .................................. U.S. 1,413,800 45,506,687
--------------
121,319,211
--------------
Metals & Mining 0.3%
*Algoma Steel Inc. ........................... Can. 1,431,003 8,600,836
*WHX Corp. ................................... U.S. 439,800 3,353,474
--------------
11,954,310
--------------
Multi-Industry 14.5%
Aker RGI ASA, A............................... Nor. 1,363,093 26,781,285
Aker RGI ASA, B............................... Nor. 3,513,818 61,366,684
+Bulten AB, B................................. Swe. 1,137,200 8,967,643
Cheung Kong Holdings Ltd. .................... H.K. 1,750,000 17,280,214
Cie Financiere Richemont AG, A................ Swtz. 27,086 39,131,434
Cie Generale d'Industrie et de Participation
CGIP......................................... Fr. 96,364 27,384,056
Custos AB, A.................................. Swe. 806,511 17,307,327
Custos AB, B.................................. Swe. 1,955,092 42,081,678
DCC PLC....................................... Irl. 2,250,000 13,820,970
Empire Co. Ltd., A............................ Can. 764,100 9,959,664
Financiere Et Industrielle Gaz Et Eaux SA..... Fr. 4,792 1,981,562
Forvaltnings AB Ratos, B...................... Swe. 3,794,400 34,581,501
+Gendis Inc., A............................... Can. 1,169,200 11,535,790
Harcourt General Inc. ........................ U.S. 143,400 6,829,425
Hogg Robinson PLC............................. U.K. 1,090,000 3,893,570
Investor AB, A................................ Swe. 149,750 7,743,520
Investor AB, B................................ Swe. 439,000 23,126,172
*Invik & Co. AB, A............................ Swe. 38,455 1,705,134
Invik & Co. AB, B............................. Swe. 145,099 6,424,460
Kansas City Southern Industries Inc. ......... U.S. 727,100 46,897,950
Kinnevik AB, A................................ Swe. 89,500 2,435,492
Kinnevik AB, B................................ Swe. 882,487 24,584,829
La France SA.................................. Fr. 13,980 2,738,098
Lagardere SCA................................. Fr. 691,163 20,076,151
Marine Wendel................................. Fr. 129,266 13,197,814
Montaigne Participations et Gestion SA........ Fr. 6,740 3,320,282
Morton International Inc. .................... U.S. 162,300 4,899,431
Oerlikon-Buehrle Holding AG................... Swtz. 169,950 19,898,288
Oresund Investment AB......................... Swe. 158,800 4,311,034
</TABLE>
19
<PAGE>
MUTUAL DISCOVERY FUND
Investment Portfolio, June 30, 1997 (unaudited) (continued)
<TABLE>
<CAPTION>
INDUSTRY ISSUE COUNTRY SHARES VALUE
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Multi-Industry (cont.)
Rieber & Son AS, B............................ Nor. 641,400 $ 19,252,852
Sophus Berendsen AS, A........................ Den. 73,985 10,641,075
Sophus Berendsen, AS B........................ Den. 276,553 39,984,168
STE Eurafrance................................ Fr. 23,715 9,725,382
STE Generale de Belgique, SA.................. Bel. 269,320 25,143,517
Viad Corp. ................................... U.S. 384,300 7,397,775
--------------
616,406,227
--------------
Real Estate 2.6%
Alexander Haagen Properties Inc.1............. U.S. 444,900 7,229,625
Berkshire Realty Company...................... U.S. 470,250 4,996,406
*Castellum AB................................. Swe. 1,128,000 8,457,630
Fastighets AB Tornet, A....................... Swe. 581,994 6,846,546
+First Union Real Estate Equity & Mortgage
Investments, SBI............................. U.S. 41,000 581,688
+Mark Centers Trust........................... U.S. 463,400 4,460,225
*+(R)MSCW Investors II, LLC................... U.S. 10,438,000 17,382,471
Naeckebro AB, A............................... Swe. 420,400 5,380,337
*+(R)Re Acquisition LLC....................... U.S. 22,811,561 22,811,561
Santa Anita Realty Enterprises Inc. .......... U.S. 271,300 8,427,256
STE Des Immeubles De France................... Fr. 47,069 2,723,205
*TrizecHahn Corp., wts. ...................... Can. 1,131,530 4,793,403
*+(R)Value Property Trust..................... U.S. 1,101,955 13,772,716
*+(R)Value Property Trust, wts. .............. U.S. 6,874 9,483
--------------
107,872,552
--------------
Recreation & Other Consumer Goods 1.1%
EMI Group PLC................................. U.K. 1,745,529 31,321,213
*+(R)Hancock LLC.............................. U.S. 5,292,820 5,292,820
*Outboard Marine Corp. ....................... U.S. 83,700 1,485,675
*Scientific Games Holdings Corp. ............. U.S. 470,000 9,693,750
--------------
47,793,458
--------------
Telecommunications 1.2%
*+Cellular Communications International
Inc. ........................................ U.S. 449,000 15,041,500
*CS Wireless Inc. ............................ U.S. 1,304 13
GN Great Nordic Ltd., br...................... Den. 36,700 3,896,670
*Ionica PLC, units............................ U.K. 6,450 3,418,500
*Ionica PLC, wts. ............................ U.K. 1,710 376,200
*Palmer Wireless Inc., A...................... U.S. 877,700 14,811,188
*United States Satelite Broadcasting Co. Inc.,
A............................................ U.S. 1,407,475 11,611,669
--------------
49,155,740
--------------
</TABLE>
20
<PAGE>
MUTUAL DISCOVERY FUND
Investment Portfolio, June 30, 1997 (unaudited) (continued)
<TABLE>
<CAPTION>
INDUSTRY ISSUE COUNTRY SHARES VALUE
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Transportation 3.1%
Canadian National Railway Co. ................ Can. 133,500 $ 5,840,625
Florida East Coast Industries Inc. ........... U.S. 120,100 13,331,100
*Fritz Companies.............................. U.S. 1,296,300 12,557,906
*Landstar System Inc. ........................ U.S. 551,200 15,502,500
*MIF Ltd...................................... Nor. 329,333 5,010,175
*MS Carriers Inc. ............................ U.S. 320,600 8,055,075
Railtrack Group PLC........................... U.K. 1,801,300 18,763,229
Ryder Systems Inc. ........................... U.S. 344,300 11,361,900
*+Smithway Motor Xpress, A.................... U.S. 350,000 3,981,250
*+Transport Corp. of America.................. U.S. 385,000 5,197,500
Tranz Rail Holdings Ltd. ..................... N.Z. 53,100 302,973
Tranz Rail Holdings Ltd., ADR................. N.Z. 1,878,000 31,691,250
--------------
131,595,483
--------------
Utilities Electrical & Gas 0.2%
Southwest Gas Corp. .......................... U.S. 487,100 9,681,113
--------------
Total Common Stocks (Cost $2,747,815,494)..... 3,289,773,384
--------------
Preferred Stocks 1.3%
Asean Fund Ltd., pfd. ........................ Sing. 290,800 4,594,640
*(R)CGA Group Ltd., pfd., A, units............ U.S. 240,000 6,000,000
*(R)CGA Group Ltd., pfd., B................... U.S. 28,572 714,300
+First Union Real Estate Equity & Mortgage
Investment, cvt., pfd., A.................... U.S. 554,000 26,592,000
Gentra Inc., pfd., G.......................... Can. 139,500 2,247,636
Granite Broadcasting Corp., cvt., pfd.A....... U.S. 171,000 8,806,500
*Hills Stores Co., conv., pfd., A............. U.S. 17,136 67,473
*North Atlantic Trading Company Inc., pfd. ... U.S. 10 250,000
*Supermarkets General Holdings Corp.,
exchangeable, pfd. .......................... U.S. 204,080 3,877,520
--------------
Total Preferred Stocks (Cost $40,026,152)..... 53,150,069
--------------
PRINCIPAL IN
ISSUE COUNTRY LOCAL CURRENCY** VALUE
- -------------------------------------------------------------------------------------------------------------------
Corporate Bonds and Notes 1.3%
Aamulehti Yhtymae OY, 6.00%, cvt.,
11/19/98................................... Fin. 8,538,000 $ 7,831,527
Acindar Industries Argentina SA, FRN,
11/12/98................................... Arg.(A) 7,900,000 8,255,500
American Communication Services Inc.,
11/1/05.................................... U.S. 1,800,000 1,062,000
Asia Pulp & Paper Co. Ltd., zero cpn.,
12/29/49, 144A............................. Indo.(A) 2,150,000 2,209,791
Azteca Holdings, 11.00%, 6/15/02, 144A...... Mex.(A) 400,000 404,500
Boston Chicken Inc., conv., 6/1/15.......... U.S. 2,800,000 612,500
CAI Wireless Systems Inc., 12.25%,
9/15/02.................................... U.S. 2,300,000 736,000
(R)CGA Private Trust Company, Ltd., FRN,
6/10/99.................................... U.S. 1,071,425 1,071,425
*CS Wireless Inc., zero coupon, B, 3/1/06... U.S. 4,995,000 1,173,825
Cityscape Financial Corp., 12.75%, 6/1/04,
144A....................................... U.S. 2,500,000 2,475,000
*Consorcio G Grupo Dina SA de CV
8.00%, cvt., 8/8/04........................ Mex.(A) 1,305,000 1,053,788
zero coupon, 11/15/02....................... Mex.(A) 2,395,000 2,095,625
</TABLE>
21
<PAGE>
MUTUAL DISCOVERY FUND
Investment Portfolio, June 30, 1997 (unaudited) (continued)
<TABLE>
<CAPTION>
PRINCIPAL IN
ISSUE COUNTRY LOCAL CURRENCY** VALUE
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Corporate Bonds and Notes (cont.)
(R)Fairchild Semiconductor Corp., 11.74%,
3/14/08.................................... U.S. 1,700,000 $ 1,700,000
Gaylord Container Corp., 9.75%, 6/15/07..... U.S. 500,000 501,250
Gentra Inc.,
7.50%, 12/31/01, Series A................... Can. 4,296,500 4,075,756
7.50%, 12/31/01, Series B................... Can. 428,152 344,146
Globalstar LP, 11.25%, 6/15/04, 144A........ U.S. 1,000,000 942,500
Greyhound Lines Inc., 11.5%, 4/15/07,
144A....................................... U.S. 550,000 588,500
Heilman Acquisition Corp., 9.625%,
1/31/04.................................... U.S. 7,550,000 755
North Atlantic Trading Company Inc., 11.00%,
6/15/04.................................... U.S. 500,000 507,500
Olivetti International NV, 3.75%, cvt.,
12/31/99................................... Itl. 23,000,000,000 13,398,847
Oxford Automotive Inc., 10.125%, 6/15/07,
144A....................................... U.S. 625,000 625,000
*Peoples Choice TV
Corp., unit, 13.25%, cvt., 6/1/04.......... U.S. 1,575 590,625
Sassco, 12.75%, 02/15/05, w/i............... U.S. 800,000 840,000
Supermercados Norte
SA, 10.875%, 02/09/04, 144A................ Arg.(A) 750,000 768,750
TFM SA de CV, 10.25%,....................... Mex.(A) 350,000 354,375
6/15/07, 144A 6/15/09, 144A................. Mex.(A) 1,700,000 986,000
Vicap SA, 11.375%, 5/15/07, 144A............ U.S. 1,000,000 1,048,750
--------------
Total Corporate Bonds & Notes (Cost
$50,048,791)............................... 56,254,235
--------------
Bonds and Notes In Reorganization 2.4%
*Anchor Glass Container Corp., 9.91%,
7/15/99.................................... U.S. 3,077,197 3,138,741
*Buenos Aires Embotelladora SA, bank
claim...................................... U.S. 23,294,118 18,751,765
*Caldor Corp., bank claim................... U.S. 1,995,925 1,906,109
*Confederation Treasury Services Ltd.,
9.50%, 7/30/97............................. Can.(B) 4,000,000 3,730,287
1/1/00...................................... Can. 11,229,833 4,553,898
10/27/04.................................... U.K.(A) 8,000,000 1,180,000
3/11/04..................................... Can.(A) 5,500,000 811,250
*Continental Information Sys. Inc.
Bank Claim................................. U.S. 1,927,860 833,414
Bank Claim Class 7, Escrow Receipts......... U.S. 2,126,507 213
Bank Claim Class 9, Escrow Receipts......... U.S. 13,824,792 34,562
*Dow Corning Corp.,
8.15%, 10/15/29............................ U.S. 500,000 577,500
8.55%, 3/1/00............................... U.S. 2,705,000 3,158,088
9.375%, 2/1/08.............................. U.S. 100,000 118,500
Bank claim.................................. U.S. 1,241,480 1,495,983
Bank debt................................... U.S. 3,250,000 3,916,250
*Eurotunnel Finance Ltd., bank claim
tranche A.................................. U.K. 4,000,000 3,147,430
tranche A1.................................. U.K. 1,700,000 1,337,658
tranche B................................... U.K. 601,871 473,587
tranche B................................... U.K. 8,313,349 6,541,420
tranche B................................... U.K.(C) 1,734,873 904,405
tranche C................................... Fr. 3,000,000 236,102
tranche E................................... Fr. 17,000,000 1,337,911
tranche E................................... Fr.(C) 125,500 65,424
tranche E1.................................. Fr. 7,500,000 590,255
</TABLE>
22
<PAGE>
MUTUAL DISCOVERY FUND
Investment Portfolio, June 30, 1997 (unaudited) (continued)
<TABLE>
<CAPTION>
PRINCIPAL IN
ISSUE COUNTRY LOCAL CURRENCY** VALUE
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Bonds In Reorganization (cont.)
*Foxmeyer Health Corp.,
Trade claim................................ U.S. 1,991,115 $ 1,393,781
Trade claim................................. U.S. 5,105,144 867,875
*Harrah's Jazz Finance Corp., 14.25%,
11/15/01................................... U.S. 2,700,000 1,039,500
*Heartland Wireless Communications Inc.,
13.00%, 4/15/03............................ U.S. 810,000 291,600
13.00%, 4/15/03, Series D................... U.S. 465,000 167,400
*Isosceles PLC., bank claim................. U.K. 993,553 223,367
Mercury Finance Co., 5.79%, 2/2/97.......... U.S. 450,000 414,000
Mercury Finance Co., bank claim
2/03/97..................................... U.S. 140,665 129,412
2/04/97..................................... U.S. 96,469 88,751
2/06/97..................................... U.S. 352,644 324,432
2/07/97..................................... U.S. 289,406 266,254
2/11/97..................................... U.S. 144,703 133,127
2/13/97..................................... U.S. 231,525 213,003
2/18/97..................................... U.S. 96,469 88,751
2/19/97..................................... U.S. 300,079 276,073
2/20/97..................................... U.S. 145,668 134,015
2/21/97..................................... U.S. 71,757 66,016
2/24/97..................................... U.S. 110,898 102,026
3/10/97..................................... U.S. 3,000,000 2,760,000
3/17/97..................................... U.S. 422,551 388,747
4/11/97..................................... U.S. 29,341 26,994
4/18/97..................................... U.S. 82,155 75,583
4/22/97..................................... U.S. 46,946 43,190
4/24/97..................................... U.S. 70,419 64,785
Mercury Finance Co., bank claim, MTN
6.29%, 12/16/97............................. U.S. 3,200,000 2,944,000
6.16%, 12/15/98............................. U.S. 1,500,000 1,380,000
7.33%, 6/29/99.............................. U.S. 1,200,000 1,104,000
7.42%, 6/29/00.............................. U.S. 2,650,026 2,438,024
7.50%, 6/29/01.............................. U.S. 2,750,026 2,530,024
*Merisel Inc., bank debt.................... U.S. 5,439,810 5,494,208
Sizzler International Inc.
Bank claim.................................. U.S. 1,734,500 1,890,605
*Southeast Banking Corp.,
10.50%, 4/11/01............................. U.S. 7,800,000 4,680,000
6.50%, cvt., 3/15/99........................ U.S. 700,000 420,000
zero coupon, 12/16/96....................... U.S. 400,000 240,000
zero coupon, 11/10/97....................... U.S. 5,800,000 3,480,000
*Stratosphere Corp., 14.25%, 5/15/02........ U.S. 1,090,000 790,250
Bank claim.................................. U.S. 6,940,500 7,565,145
--------------
Total Bonds in Reorganization
(Cost $84,452,681)..................... 103,375,690
--------------
</TABLE>
23
<PAGE>
MUTUAL DISCOVERY FUND
Investment Portfolio, June 30, 1997 (unaudited) (continued)
<TABLE>
<CAPTION>
NUMBER
ISSUE COUNTRY OF SHARES VALUE
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Companies In Liquidation 0.1%
City Investing Co. ......................... U.S. 100,000 $ 93,750
MBO Properties Inc. ........................ U.S. 273,144 1,229,148
*Petrie Stores Liquidating Trust, CBI....... U.S. 1,213,700 3,792,813
--------------
Total Companies in Liquidation (Cost
3,721,286)................................. 5,115,711
--------------
PRINCIPAL
AMOUNT
----------------
<CAPTION>
<S> <C> <C> <C> <C>
Short Term Obligations 15.8%
Federal Home Loan Bank, 5.12% to 5.63% with
maturities to 4/10/98...................... U.S. 202,115,000 200,100,324
Federal Home Loan Bank, discount notes,
5.44% to 5.715% with maturities to
6/12/98.................................... U.S. 218,925,000 212,100,296
Federal National Mortgage Association, 5.12%
to 5.65% with maturities to 5/28/98........ U.S. 263,600,000 257,485,847
--------------
Total Short Term Obligations
(Cost $669,331,134).................... 669,686,467
--------------
Total Investments (Cost
$3,595,395,538) 98.4%..................... 4,177,355,556
Securities Sold Short (0.4%)............... (19,636,919)
Net Equity in Forward Contracts 0.8%....... 35,041,987
Other Assets, less liabilities 1.2%........ 52,326,687
--------------
Total Net Assets 100.0%.................... $4,245,087,311
==============
Securities Sold Short
- -----------------
<CAPTION>
ISSUER COUNTRY SHARES VALUE
- ------------------------ ------- ---------------- --------------
<S> <C> <C> <C>
*DST Systems Inc. .................................................. U.S. 191,000 6,362,688
*Healthsouth Corp. ................................................. U.S. 532,300 13,274,231
--------------
Total Securities Sold Short
(Proceeds received $17,370,805)............................... $ 19,636,919
==============
</TABLE>
* Non-income producing.
** Securities traded in currency of countries indicated.
(A) Traded in U.S. Dollars (B) Traded in Great British Pounds (C) Traded in
European Currency Units (R) Restricted Securities.
+ Affiliated Issuers (see Note 8)
See Notes to Financial Statements.
24
<PAGE>
MUTUAL DISCOVERY FUND
Financial Statements
Statement of Assets and Liabilities
June 30, 1997 (unaudited)
<TABLE>
<S> <C> <C>
Assets:
Investments in securities, at value
Unaffiliated Issuers (cost $3,357,903,022)......................... $3,860,863,918
Controlled (cost $59,000,251)...................................... 60,323,189
Non Controlled (cost $195,863,070)................................. 256,168,449 $4,177,355,556
--------------
Cash............................................................... 43,207,220
Receivables:
Investment securities sold........................................ 26,881,290
Capital shares sold............................................... 20,612,922
Dividends and interest............................................ 8,350,427
Deposits with broker for securities sold short..................... 18,750,271
Unamortized organization costs..................................... 2,728
Unrealized gain on forward exchange contracts (Note 9)............. 46,728,443
--------------
Total assets................................................... 4,341,888,857
--------------
Liabilities:
Payables:
Investment securities purchased................................... 58,320,844
Capital shares redeemed........................................... 2,739,052
Securities Sold Short at value (Proceeds received $17,370,805)..... 19,636,919
Unrealized loss on forward exchange contracts (Note 9)............. 11,686,456
Accrued expenses................................................... 4,418,275
--------------
Total liabilities.............................................. 96,801,546
--------------
Net assets, at value................................................ $4,245,087,311
==============
Net assets consist of:
Undistributed net investment income................................ $ 38,603,108
Net unrealized appreciation........................................ 597,365,085
Accumulated net realized gain...................................... 240,549,717
Net capital paid in on shares of capital stock..................... 3,368,569,401
--------------
Net assets, at value................................................ $4,245,087,311
==============
Class Z
Net asset value per share ($3,669,693,059 / 187,551,079 shares
outstanding)...................................................... $19.57
======
Class I
Net asset value per share ($380,439,201 / 19,512,083 shares
outstanding)...................................................... $19.50
======
Maximum offering price ($19.50 / 95.50%)........................... $20.42
======
Class II
Net asset value per share ($194,955,051 / 10,025,305 shares
outstanding)...................................................... $19.45
======
Maximum offering price ($19.45 / 99.00%)........................... $19.65
======
</TABLE>
See Notes to Financial Statements.
25
<PAGE>
MUTUAL DISCOVERY FUND
Financial Statements (unaudited)
Statement of Operations
for the six months ended June 30, 1997 (unaudited)
<TABLE>
<S> <C> <C>
Investment income:(net of $4,217,230 foreign taxes withheld)
Dividends........................................................... $ 41,638,323
Interest............................................................ 19,596,219
------------
Total income.................................................... $ 61,234,542
Expenses:
Management fees (Note 4)............................................ 14,427,089
Administrative fees (Note 4)........................................ 1,403,009
Distribution fees (Note 4)
Class I....................................................... 315,146
Class II...................................................... 472,903
Transfer agent fees (Note 4)........................................ 1,182,324
Custodian fees...................................................... 412,235
Reports to shareholders............................................. 171,994
Audit fees.......................................................... 16,085
Legal fees.......................................................... 51,866
Registration and filing fees........................................ 361,532
Directors' fees and expenses........................................ 15,196
Amortization of organization costs.................................. 655
Other............................................................... 46,563
------------
Total expenses.................................................. 18,876,597
Less expenses waived (Note 4)....................................... (380,254)
------------
Total expenses less fees waived................................. 18,496,343
------------
Net investment income......................................... 42,738,199
Realized and unrealized gain:
Net realized gain on:
Investments........................................................ 134,374,819
Foreign currency transactions...................................... 50,510,415
------------
184,885,234
------------
Net unrealized appreciation on:
Investments........................................................ 206,423,568
Foreign currency translation of other assets and liabilities....... 34,980,225
------------
241,403,793
------------
Net realized and unrealized gain..................................... 426,289,027
------------
Net increase in net assets resulting from operations................. $469,027,226
============
</TABLE>
See Notes to Financial Statements.
26
<PAGE>
MUTUAL DISCOVERY FUND
Financial Statements (continued)
Statements of Changes in Net Assets
<TABLE>
<CAPTION>
Six months
ended
June 30, 1997 Year ended
(unaudited) December 31, 1996
-------------- -----------------
<S> <C> <C>
Increase (decrease) in net assets:
Operations:
Net investment income.......................................... $ 42,738,199 $ 49,915,932
Net realized gain on investment and foreign currency
transactions................................................. 184,885,234 234,293,883
Net unrealized appreciation.................................... 241,403,793 199,749,620
-------------- -----------------
Net increase in net assets resulting from operations......... 469,027,226 483,959,435
Distributions to shareholders:
From net investment income
Class Z........................................................ -- (49,056,367)
Class I........................................................ -- (316,033)
Class II....................................................... -- (193,382)
From net realized gain
Class Z........................................................ -- (214,035,299)
Class I........................................................ -- (1,188,595)
Class II....................................................... -- (756,559)
Capital share transactions (Note 3)
Class Z........................................................ 261,058,601 1,385,295,943
Class I........................................................ 326,536,324 30,918,577
Class II....................................................... 164,928,416 18,687,584
-------------- -----------------
Net increase in net assets................................... 1,221,550,567 1,653,315,304
Net assets:
Beginning of period............................................. 3,023,536,744 1,370,221,440
-------------- -----------------
End of period................................................... $4,245,087,311 $ 3,023,536,744
============== ===============
</TABLE>
See Notes to Financial Statements.
27
<PAGE>
MUTUAL DISCOVERY FUND
Notes to Financial Statements (unaudited)
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 approximately 50% of its assets in
foreign investments. 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, 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 denominated assets and liabilities other than investments in securities
held at the end of the reporting period.
c. Income Taxes:
No provision has been made for income taxes because the Fund's policy is to
qualify as a regulated investment company under the Internal Revenue Code and
distribute substantially all of its taxable income.
d. Securities Transactions, Investment Income, Expenses and Distributions:
Securities 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.
28
<PAGE>
MUTUAL DISCOVERY FUND
Notes to Financial Statements (unaudited) (continued)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (cont.)
Common expenses incurred by the Series Fund are allocated among the Funds
based on the ratio of net assets of each Fund to the combined net assets.
Other expenses are charged to each Fund on a specific identification basis.
e. 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.
f. Options:
Options purchased are recorded as investments; options written (sold) are
accounted for 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 cash
settlement, the difference between the premium and the settlement proceeds is
realized as a gain or loss. When securities are acquired or delivered upon
exercise of an option, the acquisition cost or sale proceeds are adjusted by the
amount of the premium. When an option is closed, the difference between the
premium and the cost to close the position is realized as a gain or loss.
g. Securities Sold Short:
The Fund is engaged in selling securities short, which obligates the Fund to
replace a security borrowed by purchasing the same security at the current
market value. The Fund would incur a loss if the price of the security increases
between the date of the short sale and the date on which the Fund replaces the
borrowed security. The Fund would realize a gain if the price of the security
declines between those dates.
The Fund is required to establish a margin account with the broker lending the
security sold short. While the short sale is outstanding, the broker retains the
proceeds of the short sale and the Fund must also maintain a deposit with the
Broker consisting of cash and securities having a value equal to a specified
percentage of the value of the securities sold short.
2. MERGER OF HEINE SECURITIES AND FRANKLIN RESOURCES
On October 31, 1996, pursuant to an agreement between Franklin Resources, Inc.
(FRI) and Heine Securities Corporation (Heine), the investment adviser, the
assets of Heine were acquired by Franklin Mutual Advisers, Inc. (FMA), a
subsidiary of FRI. FMA became the investment adviser to the Series Fund and the
Series Fund name changed from Mutual Series Fund Inc. to Franklin Mutual Series
Fund Inc.
29
<PAGE>
MUTUAL DISCOVERY FUND
Notes to Financial Statements (unaudited) (continued)
3. CAPITAL STOCK
Effective November 1, 1996, the Fund offered three classes of shares: Class Z,
Class I and Class II. Outstanding shares before that date were designated as
Class Z shares. The shares have the same rights except for their initial sales
load, distribution fees, voting rights on matters affecting a single class and
the exchange privilege of each class.
At June 30, 1997, there were 400 million shares authorized ($0.001 par value) of
which 200 million, 100 million, and 100 million were designated as Class Z,
Class I, and Class II, respectively. Transactions in the Fund's shares were as
follows
<TABLE>
<CAPTION>
Year ended
Six months ended December 31, 1996
June 30, 1997
--------------------------- ------------------------------
Shares Amount Shares Amount
----------- ------------ ------------ --------------
<S> <C> <C> <C> <C>
Class Z
Shares sold.......................................... 32,148,484 $587,264,002 92,579,326 $1,546,731,608
Shares issued on reinvestment of distributions....... -- -- 14,300,641 243,309,490
Shares redeemed...................................... (17,776,572) (326,205,401) (24,057,746) (404,745,155)
----------- ------------ ------------ --------------
Net increase (decrease).............................. 14,371,912 $261,058,601 82,822,221 $1,385,295,943
============= ============== ============== ================
</TABLE>
<TABLE>
<CAPTION>
For the period
November 1, 1996
Six months ended through
June 30, 1997 December 31, 1996
-------------------------- ------------------------
Shares Amount Shares Amount
---------- ------------ --------- -----------
<S> <C> <C> <C> <C>
Class I
Shares sold................................................ 19,040,909 $349,942,569 1,741,544 $30,983,582
Shares issued on reinvestment of distributions............. -- -- 78,256 1,329,570
Shares redeemed............................................ (1,272,072) (23,406,245) (76,554) (1,394,575)
---------- ------------ --------- -----------
Net increase (decrease).................................... 17,768,837 $326,536,324 1,743,246 $30,918,577
============ ============== ========== =============
</TABLE>
<TABLE>
<CAPTION>
For the period
November 1, 1996
Six months ended through
June 30, 1997 December 31, 1996
------------------------- -----------------------
Shares Amount Shares Amount
--------- ------------ -------- -----------
<S> <C> <C> <C> <C>
Class II
Shares sold.................................................. 9,199,550 $169,065,699 1,024,931 $18,275,196
Shares issued on reinvestment of distributions............... -- -- 49,793 845,981
Shares redeemed.............................................. (224,886) (4,137,283) (24,083) (433,593)
--------- ------------ -------- -----------
Net increase (decrease)...................................... 8,974,644 $164,928,416 1,050,641 $18,687,584
========== ============== ========= =============
</TABLE>
4. TRANSACTIONS WITH AFFILIATED AND RELATED PARTIES
Certain officers of the Fund are also officers or directors of FMA, Franklin
Templeton Services, Inc. (FTSI) , Franklin Templeton Distributors, Inc. (FTD)
and Franklin Templeton Investor Services, Inc. (FTIS), the Fund's investment
manager, administrative manager, principal underwriter for Class I and II, and
transfer agent, respectively.
30
<PAGE>
MUTUAL DISCOVERY FUND
Notes to Financial Statements (unaudited) (continued)
4. TRANSACTIONS WITH AFFILIATED AND RELATED PARTIES (cont.) The Fund pays an
investment management fee to FMA of .80% per year of the average daily net
assets of the Fund. In connection with the merger, FRI and FMA agreed, through
October 31, 1999, to limit the expense ratio of the Fund to be no higher than
expected for the Fund's 1996 fiscal year, except that increases in expenses will
be permitted if the Fund's Board of Directors determines that such expenses
would have been higher had the merger not taken place. This expense limitation
does not include items such as litigation expenses, interest, taxes, insurance,
brokerage commissions, and expenses of an extraordinary nature. The expense
reduction is set forth in the Statement of Operations.
The Fund pays it's allocated share of an administrative fee to FTSI based on the
Series Fund's aggregated average daily net assets as follows: .15% per annum of
the first $200 million, .135% of the next $500 million, .10% of the next $500
million, and .075% in excess of $1.2 billion.
The Fund reimburses FTD up to .35% and 1.00% per year of the average daily net
assets of Class I and Class II, respectively, for costs incurred in marketing
the Fund's shares. FTD received net commissions from sales of Fund shares and
received contingent deferred sales charges for the period of $335,056 and
$14,017 respectively.
5. INVESTMENT TRANSACTIONS
Purchases and sales of securities (excluding short-term securities) for the
period ended June 30, 1997 aggregated $1,516,102,042 and $815,216,906,
respectively.
6. INCOME TAXES
At June 30, 1997, the net unrealized appreciation based on the cost of
investments for income tax purposes of $3,596,467,215 was as follows:
Unrealized appreciation....................... $622,678,668
Unrealized depreciation....................... (61,427,246)
------------
Net unrealized appreciation................... $561,251,422
==============
31
<PAGE>
MUTUAL DISCOVERY FUND
Notes to Financial Statements (unaudited) (continued)
7. 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, 1997 are as follows:
<TABLE>
<CAPTION>
Number of Shares or Acquisition
Principal Amount Issuer Date Value
- ------------------------------------------------------------------------------------ ---------------------------
<S> <C> <C> <C>
290,406 Atlantic Bancorp, Class A............................................ 6/08/95 $4,196,367
17,387 Atlantic Bancorp, Class C............................................ 6/08/95 251,242
228,300 Bank of Rhode Island................................................. 3/21/96 2,283,000
139,785 CGA Group Ltd........................................................ 6/10/97 698,925
240,000 CGA Group Ltd., pfd., A.............................................. 6/10/97 6,000,000
28,572 CGA Group Ltd., pfd., B.............................................. 6/10/97 714,300
1,071,425 CGA Private Trust Company , Ltd., FRN, 6/10/99....................... 6/10/97 1,071,425
593,000 Cityscape Financial Corp............................................. 11/25/96 11,231,791
500 Distribution Systems SpA............................................. 9/27/96 20,669
1,700,000 Fairchild Semiconductor Corp., 11.74%, 3/14/08....................... 4/2/97 1,700,000
5,292,820 Hancock LLC.......................................................... 3/6/97 5,292,820
557,863 MB-Motori, LLC....................................................... 12/07/94 499,120
10,438,000 MSCW Investors II, LLC............................................... 12/27/95 17,382,471
13,916,566 MWCR, LLC............................................................ 2/21/95 13,916,566
69,056 MWCR, Elettronicha SRL............................................... 9/27/96 69,056
22,811,561 Re Acquisition LLC................................................... 4/1/97 22,811,561
152,074 St. George Holdings Ltd., A.......................................... 6/10/97 15,207
1,495 St. George Holdings Ltd., B.......................................... 6/10/97 150
500 Sweda Industrie Elettroniche SpA..................................... 9/27/96 20,669
1,101,955 Value Property Trust................................................. 12/31/93 13,772,716
6,874 Value Property Trust, Warrants....................................... 3/13/96 9,483
------------
Total Restricted Securities (cost $95,411,422) (2.4% of Net Assets).................. $101,957,538
==============
</TABLE>
8. INVESTMENT IN AFFILIATES
The Investment Company Act of 1940 defines "affiliated companies" as investments
in portfolio companies in which the Fund owns 5% or more of the outstanding
voting securities. Investments in "affiliated companies" at June 30, 1997, were
$316,491,638. For the period ended 6/30/97, dividend income from "affiliated
companies" was $1,320,992 and net realized gains (losses) from disposition of
"affiliated companies" were $4,287,239.
32
<PAGE>
MUTUAL DISCOVERY FUND
Notes to Financial Statements (unaudited) (continued)
8. INVESTMENT IN AFFILIATES (cont.)
<TABLE>
<CAPTION>
Number of
Shares Shares Value Dividend Realized
Held Dec. Gross Gross Held June June 30, Income Capital
NAME OF ISSUER: 31, 1996 Additions Reductions 30, 1997 1997 1/1/97-6/30/97 Gains/(Losses)
--------------------------- ---------- ---------- --------- ---------- ----------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Controlled Affiliates*
Distribution Systems SpA... 500 -- -- 500 $ 20,669 -- --
Hancock LLC................ -- 5,370,332 77,512 5,292,820 5,292,820 -- --
MB-Motori, LLC............. 557,863 -- -- 557,863 499,120 -- --
MSCW Investors II, LLC..... 10,438,000 -- -- 10,438,000 17,382,471 -- --
MWCR, LLC.................. 10,902,934 3,414,258 400,626 13,916,566 13,916,566 -- $ (1,544)
MWCR Elettronicha SRL...... 69,056 -- -- 69,056 69,056 -- --
Re Acquisition LLC......... -- 31,059,503 8,247,942 22,811,561 22,811,561 -- 735,180
Regent Kingpin Chile Value
Fund....................... 212,505 -- -- 212,505 310,257 -- --
Regent Kingpin Chile Value
Fund Warrants.............. 16,347 -- 16,347 -- -- -- 2,125
Sweda Industrie
Elettroniche SpA........... 500 -- -- 500 20,669 -- --
------------ ---------- ----------
Total Controlled
Affiliates................. $60,323,189 $ -- $ 735,761
============ ========== ==========
Non Controlled Affiliates
A Pressen AS, A............ 537,200 52,800 -- 590,000 $14,248,486 $ 99,913 --
American National Bank
Corp....................... 331,500 -- 200,000 131,500 ** -- --
Atlantic Bancorp, A........ 290,406 -- -- 290,406 4,196,367 -- --
Atlantic Bancorp, C........ 17,387 -- -- 17,387 251,242 -- --
BNH Bancshares Inc......... 269,750 -- 48,000 221,750 3,353,969 -- $ 469,896
Bank of Rhode Island....... 228,300 -- -- 228,300 2,283,000 -- --
+ Bulten AB, B............... -- 1,137,200 -- 1,137,200 8,967,643 -- --
Cellular Communications
International Inc.......... -- 449,000 -- 449,000 15,041,500 -- --
Chicago Bridge and Iron
Co......................... -- 765,000 -- 765,000 16,925,625 45,900 --
Civic Bancorp.............. 385,866 -- 20,000 365,866 5,030,658 -- 124,992
Continental Information
Systems Inc................ 426,553 25,972 -- 452,525 1,018,181 -- --
First Union Real Estate &
Mortgage Investment cvt.,
pfd., A.................... 554,000 -- -- 554,000 26,592,000 882,245 --
First Union Real Estate &
Mortgage Investment, SBI... -- 41,000 -- 41,000 581,688 4,510 --
Gendis, Inc., A............ -- 1,169,200 -- 1,169,200 11,535,790 50,651 --
Greenfield Industries
Inc........................ -- 844,500 -- 844,500 22,801,500 80,400 --
ISB Financial Corp......... 510,000 -- 510,000 -- ** -- 2,691,270
Life Financial Corp........ -- 215,000 -- 215,000 2,902,500 -- --
Little Falls Bancorp....... 290,000 -- 120,000 170,000 2,656,250 13,100 265,320
</TABLE>
33
<PAGE>
MUTUAL DISCOVERY FUND
Notes to Financial Statements (unaudited) (continued)
8. INVESTMENT IN AFFILIATES (cont.)
<TABLE>
<CAPTION>
Number of
Shares Shares Value Dividend Realized
Held Dec. Gross Gross Held June June 30, Income Capital
NAME OF ISSUER: 31, 1996 Additions Reductions 30, 1997 1997 1/1/97-6/30/97 Gains/(Losses)
- ---------------------------- ---------- ---------- --------- ---------- ------------ -------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Mark Centers Trust.......... -- 463,400 -- 463,400 $ 4,460,225 $ 92,680 --
MIF Ltd..................... 322,875 6,458 -- 329,333 ** -- --
Monarch Bancorp............. 3,400,000 -- 3,400,000 -- ** -- --
North Central Bancshares,
Inc....................... 332,500 -- -- 332,500 5,153,750 41,563 --
Pacific Forest Products
Ltd....................... 3,689,400 199,000 -- 3,888,400 71,097,505 -- --
Rancho Santa Fe National
Bank...................... 347,223 -- -- 347,223 2,951,396 -- --
Smithway Motor Xpress, A.... 350,000 -- -- 350,000 3,981,250 -- --
Summit Care Corp............ -- 679,800 -- 679,800 9,177,300 -- --
Tolland Bank................ 100,300 -- -- 100,300 1,980,925 10,030 --
Transport Corp. of
America................... 385,000 -- -- 385,000 5,197,500 -- --
Value Property Trust........ 1,101,955 -- -- 1,101,955 13,772,716 -- --
Value Property Trust,
wts....................... 6,874 -- -- 6,874 9,483 -- --
Yorkshire-Tyne Tees TV
Holdings, PLC............. 1,350,000 249,280 -- 1,599,280 ** -- --
------------ ---------- ----------
Total Non Controlled
Affiliates............ $256,168,449 $1,320,992 $3,551,478
============ ========== ==========
</TABLE>
*Issuers in which the Fund owns 25% or more of the outstanding voting
securities.
**As of December 31, 1996 no longer an affiliate.
+Name changed from Errce AB
9. FINANCIAL INSTRUMENTS
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 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.
The Fund may enter into forward exchange contracts to hedge against foreign
exchange risk. 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.
34
<PAGE>
MUTUAL DISCOVERY FUND
Notes to Financial Statements (unaudited) (continued)
9. FINANCIAL INSTRUMENTS (cont.)
As of June 30, 1997, the Fund had the following forward foreign exchange
contracts outstanding:
<TABLE>
<CAPTION>
In Settlement Unrealized
Contracts to Buy: Exchange for Date Gain/(Loss)
----------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
11,642,737 British Pound..................................... U.S. $ 18,941,082 09/18/97 U.S. $ 400,298
1,348,094 British Pound..................................... 2,197,393 12/15/97 36,076
1,067,625 Canadian Dollar................................... 776,116 08/29/97 73
18,000,000 Finnish Markka.................................... 3,483,174 09/03/97 664
95,553,981 Hong Kong Dollar.................................. 12,330,282 07/10/97 1,969
16,238,528 Swedish Krona..................................... 2,100,036 08/15/97 3,109
-------------- -----------
U.S. $ 39,828,083 442,189
==============
-----------
Contracts to Sell:
34,323,359 Australian Dollar................................. U.S. $ 26,921,527 11/07/97 957,646
1,270,986,095 Belgium Franc..................................... 35,951,582 11/07/97 604,542
148,000,000 Canadian Dollar................................... 107,960,868 08/29/97 381,619
134,827,080 Canadian Dollar................................... 98,857,013 11/28/97 358,727
524,279,306 Danish Krone...................................... 81,275,194 10/24/97 1,764,766
41,090,118 Dutch Guilder..................................... 21,609,318 09/08/97 570,908
38,503,778 Dutch Guilder..................................... 20,480,736 09/17/97 753,823
18,393,642 Dutch Guilder..................................... 9,555,996 12/10/97 73,938
352,509,147 Finnish Markka.................................... 70,357,112 09/03/97 2,130,195
748,186,624 French Franc...................................... 138,650,382 07/17/97 11,182,055
604,375,773 French Franc...................................... 106,904,431 08/29/97 3,645,286
40,785,539 French Franc...................................... 7,199,086 11/14/97 194,079
290,717,625 French Franc...................................... 51,099,891 11/28/97 1,119,888
43,756,532 Deutschemark...................................... 26,021,000 09/18/97 780,972
332,168,829 Hong Kong Dollar.................................. 42,914,206 07/10/97 44,308
6,717,150 Irish Punt........................................ 10,183,200 11/14/97 20,437
37,750,000 New Zealand Dollar................................ 25,966,338 09/17/97 380,882
500,000,000 Norwegian Krone................................... 72,716,696 09/10/97 4,191,160
612,321,836 Norwegian Krone................................... 86,364,152 12/09/97 2,016,957
403,561,273 Portugal Escudo................................... 2,330,030 07/17/97 37,256
1,229,307 Singapore Dollar.................................. 869,383 08/29/97 7,286
4,230,603,949 Spanish Peseta.................................... 29,455,473 08/18/97 730,600
81,066,726 Swedish Krona..................................... 10,639,935 07/21/97 151,040
530,354,378 Swedish Krona..................................... 76,975,777 08/15/97 8,286,544
153,593,408 Swedish Krona..................................... 20,559,507 10/21/97 611,922
415,850,401 Swedish Krona..................................... 54,892,538 02/17/98 627,116
738,840,209 Swedish Krona..................................... 98,290,684 11/18/97 2,221,608
63,177,170 Swiss Franc....................................... 44,351,732 09/10/97 715,907
-------------- -----------
U.S. $ 1,379,353,787 44,561,467
==============
-----------
Net unrealized gain on offsetting forward exchange
contracts................................................. 1,724,787
-----------
Unrealized gain on forward exchange contracts............. U.S. $ 46,728,443
-----------
</TABLE>
35
<PAGE>
MUTUAL DISCOVERY FUND
Notes to Financial Statements (unaudited) (continued)
9. FINANCIAL INSTRUMENTS (cont.)
<TABLE>
<CAPTION>
In Settlement Unrealized
Contracts to Buy: Exchange for Date Gain/(Loss)
-------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
46,514,855 Danish Krone....................................... U.S. $ 7,127,130 10/24/97 U.S. $ (72,845 )
19,500,000 Finnish Markka..................................... 3,933,514 09/03/97 (159,357 )
86,475,524 French Franc....................................... 15,001,242 07/17/97 (268,434 )
31,464,819 French Franc....................................... 5,589,870 08/29/97 (214,025 )
3,000,000 Deutschemark....................................... 1,812,689 09/18/97 (82,202 )
52,826,266 Hong Kong Dollar................................... 6,821,627 07/10/97 (3,839 )
4,145,476 Norwegian Krone.................................... 595,358 09/10/97 (27,216 )
389,733,581 Portugal Escudo.................................... 2,235,436 07/17/97 (21,222 )
420,000 Singapore Dollar................................... 295,317 08/29/97 (777 )
1,316,810,710 Spanish Peseta..................................... 9,138,462 08/18/97 (197,606 )
4,564,031 Swiss Franc........................................ 3,160,687 09/10/97 (8,357 )
--------------- ------------
U.S. $ 55,711,332 (1,055,880 )
--------------- ------------
Contracts to Sell:
43,993,751 British Pound...................................... U.S. $ 71,359,715 07/18/97 (1,863,132 )
38,280,419 British Pound...................................... 63,155,035 08/18/97 (497,706 )
47,634,800 British Pound...................................... 75,806,021 09/18/97 (3,326,812 )
48,283,180 British Pound...................................... 78,098,464 10/20/97 (2,033,180 )
21,696,121 British Pound...................................... 35,475,328 11/17/97 (500,929 )
67,167,404 British Pound...................................... 109,482,868 12/15/97 (1,797,472 )
157,628,214,743 Italian Lira....................................... 92,439,403 01/02/98 (64,687 )
221,021,200 Japanese Yen....................................... 1,911,522 09/19/97 (40,028 )
120,216,566 Swedish Krona...................................... 15,527,212 11/18/97 (104,171 )
111,169,107 Swedish Krona...................................... 14,414,978 02/17/98 (91,774 )
53,865,415 Swiss Franc........................................ 36,893,606 09/10/97 (310,685 )
--------------- ------------
U.S. $ 594,564,152 (10,630,576 )
--------------- ------------
---------------
Unrealized loss on forward exchange contracts................. (11,686,456 )
------------
Net unrealized gain on forward exchange contracts........... U.S. $35,041,987
============
</TABLE>
36
<PAGE>
LITERATURE REQUEST
For a free brochure and prospectus, which contain more complete information,
including charges and expenses, call Franklin Fund Information, toll free, at
1-800/DIAL BEN (1-800/342-5236). Please read the prospectus carefully before you
invest or send money. 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.
FRANKLIN TEMPLETON GROUP
GLOBAL GROWTH
Franklin Global Health Care Fund
Franklin Templeton Japan Fund
Templeton Developing
Markets Trust
Templeton Foreign Fund
Templeton Foreign Smaller
Companies Fund
Templeton Global
Infrastructure Fund
Templeton Global
Opportunities Trust
Templeton Global
Real Estate Fund
Templeton Global
Smaller Companies Fund
Templeton Greater European Fund
Templeton Growth Fund
Templeton Latin America Fund
Templeton Pacific Growth Fund
Templeton World Fund
GLOBAL GROWTH AND INCOME
Franklin Global Utilities Fund
Franklin Templeton German
Government Bond Fund
Franklin Templeton Global
Currency Fund
Mutual European Fund
Templeton Global Bond Fund
Templeton Growth and
Income Fund
GLOBAL INCOME
Franklin Global Government
Income Fund
Franklin Templeton Hard
Currency Fund
Franklin Templeton High Income
Currency Fund
Templeton Americas Government
Securities Fund
GROWTH
Franklin Blue Chip Fund
Franklin California Growth Fund
Franklin DynaTech Fund
Franklin Equity Fund
Franklin Gold Fund
Franklin Growth Fund
Franklin MidCap Growth Fund
Franklin Small Cap
Growth Fund
Mutual Discovery Fund
GROWTH AND INCOME
Franklin Asset Allocation Fund
Franklin Balance Sheet
Investment Fund
Franklin Convertible
Securities Fund
Franklin Equity Income Fund
Franklin Income Fund
Franklin MicroCap Value Fund
Franklin Natural Resources Fund
Franklin Real Estate
Securities Fund
Franklin Rising Dividends
Fund Franklin Strategic Income Fund Franklin Utilities Fund Franklin Value Fund
Mutual Beacon Fund Mutual Qualified Fund Mutual Shares Fund Templeton American
Trust, Inc.
Fund Allocator Series
Franklin Templeton Conservative
Target Fund
Franklin Templeton Moderate
Target Fund
Franklin Templeton Growth
Target Fund
INCOME
Franklin Adjustable Rate
Securities Fund
Franklin Adjustable U.S.
Government Securities Fund
Franklin's AGE High Income Fund
Franklin Investment Grade
Income Fund
Franklin Short-Intermediate
U.S. Government Securities Fund
Franklin U.S. Government
Securities Fund
Franklin Money Fund
Franklin Federal Money Fund
For Corporations
Franklin Corporate Qualified
Dividend Fund
FRANKLIN FUNDS SEEKING
TAX-FREE INCOME
Federal Intermediate-Term
Tax-Free Income Fund
Federal Tax-Free Income Fund
High Yield Tax-Free Income Fund
Insured Tax-Free Income Fund
Puerto Rico Tax-Free
Income Fund
Tax-Exempt Money Fund
FRANKLIN STATE-SPECIFIC
FUNDS SEEKING
TAX-FREE INCOME
Alabama
Arizona*
Arkansas**
California*
Colorado
Connecticut
Florida*
Georgia
Hawaii**
Indiana
Kentucky
Louisiana
Maryland
Massachusetts***
Michigan*
Minnesota***
Missouri
New Jersey
New York*
North Carolina
Ohio***
Oregon
Pennsylvania
Tennessee**
Texas
Virginia
Washington**
VARIABLE ANNUITIES+
Franklin Valuemark(R)
Franklin Templeton
Valuemark Income Plus
(an immediate annuity)
* Two or more fund options available: long-term portfolio, intermediate-term
portfolio, a portfolio of insured municipal securities, and/or a high yield
portfolio (CA) and a money market portfolio (CA and NY).
** The fund may invest up to 100% of its assets in bonds that pay interest
subject to the federal alternative minimum tax.
*** Portfolio of insured municipal securities.
+ Franklin Valuemark and Franklin Templeton Valuemark Income Plus are issued by
Allianz Life Insurance Company of North America or by its wholly owned
subsidiary, Preferred Life Insurance Company of New York, and distributed by
NALAC Financial Plans, LLC.
<PAGE>
BOARD OF DIRECTORS
Michael F. Price (Chairman)
Edward I. Altman, Ph.D.
Ann Torre Grant
Andrew H. Hines, Jr.
Peter A. Langerman
William Lippman
Bruce A. MacPherson
Fred R. Millsaps
Leonard Rubin
Barry F. Schwartz
Vaugn R. Sturtevant, M.D.
Robert E. Wade
OFFICERS
Michael F. Price, President
Peter A. Langerman, Exec. Vice President
Jeffrey A. Altman, Senior Vice President
Robert L. Friedman, Senior Vice President
Raymond Garea, Senior Vice President
Lawrence N. Sondike, Senior Vice President
Greg Gigliotti, Vice President
Susan Potto, Vice President
Tom Price, Vice President
Leigh Walzer, Vice President
David Winters, Vice President
James Baio, Treasurer
Stuart C. Pistol, Assistant Treasurer
Liz Cohernour, Gen. Counsel & Secretary
Lily Simo, Assistant Secretary
INVESTMENT MANAGER
Franklin Mutual Advisers, Inc.
51 John F. Kennedy Parkway
Short Hills, NJ 07078
SHAREHOLDER SERVICES
1-800-632-2301-(Class I & II)
1-800-448-FUND-(Class Z)
FUND INFORMATION
1-800-342-5236
This report must be preceded or accompanied by the current prospectus of the
Mutual Discovery Fund, 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.
[RECYCLING LOGO] Printed on recycled paper
477 S97 06/97
<PAGE>
