Semi Annual Report
MUTUAL SHARES FUND
JUNE 30, 1997
[GRAPHIC of Letter M]
[FRANKLIN TEMPLETON LOGO]
<PAGE>
FRANKLIN MUTUAL ADVISERS SENIOR PORTFOLIO MANAGEMENT TEAM
[PHOTO OF SENIOR MANAGEMENT TEAM APPEARS HERES]
Left to right: Lawrence N. Sondike, Robert Friedman, Peter A. Langerman, Raymond
Garea, Jeff Altman, Michael Price (seated)
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.
[PHOTO OF 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 Shares Fund seeks capital appreciation, with
income as a secondary objective, by investing primarily in common and preferred
stocks, bonds, and convertible securities. The fund may also invest in foreign
securities.
Dear Shareholder:
We are pleased to bring you this semi-annual report of the Mutual Shares 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 .............. 23
NOTES TO FINANCIAL STATEMENTS ..... 26
FUND CATEGORY
[PYRAMID GRAPHIC APPEARS HERE]
<PAGE>
PORTFOLIO BREAKDOWN
Based on Total Net Assets
6/30/97
[PIE CHART APEARS HERE]
Equities 75.0%
Bonds 2.3%
Short-Term Obligations & Other Net Assets 22.7%
TOP 10 INDUSTRIES
Based on Total Net Assets
6/30/97
[BAR CHART APPEARS HERE]
Broadcasting & Publishing 8.7%
Multi-Industry 7.5%
Food & Household Products 7.4%
Insurance 5.2%
Banking 5.1%
Financial Services 5.0%
Energy Sources 4.2%
Beverages & Tobacco 4.1%
Transportation 4.1%
Health & Personal Care 4.0%
The Mutual Shares Fund - Class Z provided a cumulative six-month total return of
13.67%, as discussed in the Performance Summary on page 6. The Lipper Growth and
Income Fund average was 15.52%(1), while the Standard and Poor's(R) 500 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: Lipper Growth and Income Fund average consists of 626 funds. Lipper
calculations do not include sales charges; past and current expense reductions
by the fund's manager increased the fund's total return. If these factors had
been considered, the fund's performance relative to the Lipper average may have
been different. Past performance is not predictive of future results.
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. Among the companies whose stock we purchased
were Reading & Bates Corp., Rowan Companies Inc., and Santa Fe Energy Resources
Inc. We also found good value in selected health care names whose prices had
declined due to short-term disruptions, such as Foundation Health Systems, A 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 Shares Fund and welcome your
comments and suggestions.
Sincerely,
Franklin Mutual Advisers Portfolio Management Team
TOP 10 HOLDINGS
Period ended 6/30/97
COMPANY, % OF TOTAL
INDUSTRY NET ASSETS
- --------------------------------------------------------------------------------
Chase Manhattan Corp., new,
Banking 4.8%
Sunbeam Corp.,
Food & Household Products 4.8%
Investor AB, A & B,
Multi-Industry 4.1%
US West Media Group,
Broadcasting & Publishing 2.8%
Morgan Stanley Dean Witter
Discover & Co.,
Financial Services 1.9%
General Motors Corp.,
Automobiles 1.6%
RJR Nabisco Holdings Corp.,
Beverages & Tobacco 1.6%
Foundation Health
Systems, A,
Health & Personal Care 1.3%
Telephone & Data
Systems Inc.,
Telecommunications 1.0%
Tenet Healthcare Corp.,
Business & Public Services 1.0%
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 usefulin
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 Shares Fund - Class Z provided a cumulative total return of 13.67%
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 $2.54 per share, from $18.58 on
December 31, 1996, to $21.12 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.
* Per share amounts for all periods prior to February 3, 1997, have been
restated to reflect a 5-for-1 share split effective at the close of business on
Friday, January 31, 1997. Past performance is not predictive of future results.
6
<PAGE>
CLASS Z
Periods ended 6/30/97
<TABLE>
<CAPTION>
1-YEAR 5-YEAR 10-YEAR
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Cumulative Total Return(1) 26.93% 148.50% 296.77%
Average Annual Total Return(2) 26.93% 19.97% 14.78%
Value of $10,000 Investment(3) $12,693 $ 24,848 $ 39,677
<S> <C> <C> <C> <C> <C>
6/30/93 6/30/94 6/30/95 6/30/96 6/30/97
- --------------------------------------------------------------------------------
One-Year Total Return(4) 21.06% 9.93% 21.64% 20.93% 26.93%
</TABLE>
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 Shares Fund - Class I provided a cumulative total return of 13.52%
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 $2.51
per share, from $18.56 on December 31, 1996, to $21.07 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.
* Per share amounts for all periods prior to February 3, 1997, have been
restated to reflect a 5-for-1 share split effective at the close of business on
Friday, January 31, 1997.
CLASS I
Periods ended 6/30/97
<TABLE>
<CAPTION>
SINCE
INCEPTION
SIX MONTHS (11/1/96)
- --------------------------------------------------------------------------
<S> <C> <C>
Cumulative Total Return(1) 13.52% 21.36%
Aggregate Total Return(2) 8.44% 15.90%
Value of $10,000 Investment(3) $10,844 $11,590
</TABLE>
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 Shares Fund - Class II provided a cumulative total return of 13.15%
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 $2.44
per share, from $18.56 on December 31, 1996, to $21.00 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.
* Per share amounts for all periods prior to February 3, 1997, have been
restated to reflect a 5-for-1 share split effective at the close of business on
Friday, January 31, 1997.
CLASS II
Periods ended 6/30/97
<TABLE>
<CAPTION>
SINCE
INCEPTION
SIX MONTHS (11/1/96)
- ------------------------------------------------------------------------
<S> <C> <C>
Cumulative Total Return(1) 13.15% 20.90%
Aggregate Total Return(2) 11.01% 18.71%
Value of $10,000 Investment(3) $11,101 $11,871
</TABLE>
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 SHARES FUND
Financial Highlights
PER SHARES 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 1992
------------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of
period................................ $18.58 $17.30 $15.74 $16.19 $14.67 $12.90
---------- ------- --- ------- --- ------- --- ------- --- ------- ---
Income from investment operations:
Net investment income............. .20 .55 .40 .27 .28 .31
Net realized and unrealized
gain............................ 2.34 2.96 4.10 .46 2.78 2.41
---------- ------- --- ------- --- ------- --- ------- --- ------- ---
Total from investment operations...... 2.54 3.51 4.50 0.73 3.06 2.72
---------- ------- --- ------- --- ------- --- ------- --- ------- ---
Distributions:
Dividends from net investment
income.......................... -- (.50) (.39) (.27) (.28) (.32)
Distributions from net realized
gains........................... -- (1.73) (2.55) (0.91) (1.26) (.63)
---------- ------- --- ------- --- ------- --- ------- --- ------- ---
Total distributions................... -- (2.23) (2.94) (1.18) (1.54) (.95)
---------- ------- --- ------- --- ------- --- ------- --- ------- ---
Change in net asset value............. 2.54 1.28 1.56 (0.45) 1.52 1.77
---------- ------- --- ------- --- ------- --- ------- --- ------- ---
Net asset value, end of period........ $21.12 $18.58 $17.30 $15.74 $16.19 $14.67
========== ========== ========== ========== ========== ==========
TOTAL RETURN*......................... 13.67% 20.76% 29.11% 4.53% 21.00% 21.33%
RATIOS /SUPPLEMENTAL DATA
Net assets, end of period (000)....... $7,325,535 $6,543,063 $5,229,574 $3,745,726 $3,527,076 $2,912,972
Ratio of expenses to average net
assets.............................. .75%** .72% .69% .72% .74% .78%
Ratio of expenses, net of fee waiver,
to average net assets............... .71%** .70% .69% .72% .74% .78%
Ratio of net investment income to
average
net assets.......................... 2.17%** 3.02% 2.47% 1.80% 1.90% 2.18%
Portfolio turnover rate............... 27.07% 58.35% 79.32% 66.55% 48.78% 41.06%
Average commission rate paid (per
share).............................. $.0412 $.0410
</TABLE>
*Not annualized for periods of less than one year.
**Annualized.
++Per share amounts for all periods prior to December 31, 1996 have been
restated to reflect a 5-for-1 stock split effective February 3, 1997.
10
<PAGE>
MUTUAL SHARES FUND
Financial Highlights (continued)
PER SHARES 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.......................................... $18.56 $18.90
-------- -------
Income from investment operations:
Net investment income..................................................... .35 .21
Net realized and unrealized gain.......................................... 2.16 1.08
-------- -------
Total from investment operations.............................................. 2.51 1.29
-------- -------
Distributions:
Dividends from net investment income...................................... -- (.47)
Distributions from net realized gains..................................... -- (1.16)
-------- -------
Total distributions........................................................... -- (1.63)
-------- -------
Change in net asset value..................................................... 2.51 (.34)
-------- -------
Net asset value, end of period................................................ $21.07 $18.56
======== =======
TOTAL RETURN*................................................................. 13.52% 6.91%
RATIOS /SUPPLEMENTAL DATA
Net assets, end of period (000)............................................... $477,620 $35,634
Ratio of expenses to average net assets....................................... 1.10%** 1.18%**
Ratio of expenses, net of fee waiver, to average net assets................... 1.06%** 1.09%**
Ratio of net investment income to average net assets.......................... 2.04%** 2.44%**
Portfolio turnover rate....................................................... 27.07% 58.35%
Average commission rate paid (per share)...................................... $.0412 $.0410
</TABLE>
*Total return does not reflect sales commissions. Not annualized for periods of
less than one year.
**Annualized.
+Commencement of sales.
++Per share amounts for the period ended December 31, 1996 have been restated to
reflect a 5-for-1 stock split effective February 3, 1997.
11
<PAGE>
MUTUAL SHARES FUND
Financial Highlights (continued)
PER SHARES 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.......................................... $18.56 $18.90
------------- ------------------
Income from investment operations:
Net investment income..................................................... .31 .20
Net realized and unrealized gain.......................................... 2.13 1.08
------------- ------------------
Total from investment operations.............................................. 2.44 1.28
------------- ------------------
Distributions:
Dividends from net investment income...................................... -- (.46)
Distributions from net realized gains..................................... -- (1.16)
------------- ------------------
Total distributions........................................................... -- (1.62)
------------- ------------------
Change in net asset value..................................................... 2.44 (.34)
------------- ------------------
Net asset value, end of period................................................ $21.00 $18.56
============== =====================
TOTAL RETURN*................................................................. 13.15% 6.82%
RATIOS /SUPPLEMENTAL DATA
Net assets, end of period (000)............................................... $250,669 $16,873
Ratio of expenses to average net assets....................................... 1.75%** 1.80%**
Ratio of expenses, net of fee waiver, to average net assets................... 1.72%** 1.71%**
Ratio of net investment income to average net assets.......................... 1.35%** 1.69%**
Portfolio turnover rate....................................................... 27.07% 58.35%
Average commission rate paid (per share)...................................... $.0412 $.0410
</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.
++Per share amounts for the period ended December 31, 1996 have been restated to
reflect a 5-for-1 stock split effective February 3, 1997.
See Notes to Financial Statements.
12
<PAGE>
MUTUAL SHARES FUND
INVESTMENT PORTFOLIO, JUNE 30, 1997 (UNAUDITED)
<TABLE>
<CAPTION>
INDUSTRY ISSUE COUNTRY SHARES VALUE
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
COMMON STOCKS 74.6%
AEROSPACE & MILITARY TECHNICAL SYSTEMS 2.1%
General Motors Corp., H....................... U.S. 274,900 $ 15,875,475
*Hexcel Corporation............................ U.S. 1,740,895 30,030,439
*+Kreisler Manufacturing Corp. ................. U.S. 54,470 320,011
*Litton Industries Inc. ....................... U.S. 517,500 25,001,719
Lockheed Martin Corp. ........................ U.S. 140,618 14,562,752
*Loral Space & Communications.................. U.S. 953,300 14,299,500
McDonnell Douglas Corp. ...................... U.S. 915,400 62,704,900
Primex Technologies Inc. ..................... U.S. 97,390 2,081,711
--------------
164,876,507
--------------
APPLIANCES & HOUSEHOLD DURABLES 0.3%
Black & Decker Corp. ......................... U.S. 708,375 26,342,695
--------------
AUTOMOBILES 2.0%
General Motors Corp. ......................... U.S. 2,279,000 126,911,813
Volvo AB, B................................... Swe. 1,418,300 37,953,345
--------------
164,865,158
--------------
BANKING 5.0%
Banc One Corp. ............................... U.S. 380,370 18,424,189
Chase Manhattan Corp., new.................... U.S. 3,992,988 387,569,398
--------------
405,993,587
--------------
BEVERAGES & TOBACCO 4.1%
BAT Industries PLC............................ U.K. 4,230,000 37,862,829
Brown-Forman Corp., B......................... U.S. 354,700 17,313,794
*Gallaher Group PLC............................ U.K. 1,350,000 6,317,341
*Gallaher Group PLC, ADR....................... U.K. 599,200 11,047,750
+Genesee Corp., A.............................. U.S. 15,911 632,462
+Genesee Corp., B.............................. U.S. 103,550 4,116,113
Grand Metropolitan PLC........................ U.K. 500,965 4,851,224
Heineken Holding NV, A........................ Neth. 110,493 17,168,661
Philip Morris Cos. Inc. ...................... U.S. 1,872,800 83,105,500
RJR Nabisco Holdings Corp. ................... U.S. 3,829,599 126,376,767
Seagrams Company Ltd. ........................ Can. 432,300 17,400,075
--------------
326,192,516
--------------
BROADCASTING & PUBLISHING 8.7%
Belo (AH) Corp. .............................. U.S. 340,000 14,152,500
BHC Communications Inc., A.................... U.S. 302,817 36,186,632
*Chris Craft Industries Inc. .................. U.S. 210,550 10,159,014
Daily Mail & General Trust PLC................ U.K. 65,000 1,915,935
Daily Mail & General Trust PLC, A............. U.K. 1,284,500 35,294,926
Dow Jones & Co. Inc. ......................... U.S. 1,610,500 64,721,969
Dun & Bradstreet Corp. ....................... U.S. 1,600,400 42,010,500
+Houghton Mifflin Co. ......................... U.S. 751,000 50,129,250
*Outdoor Systems Inc. ......................... U.S. 295,000 11,283,750
Scripps (EW) Co., A........................... U.S. 1,459,500 60,751,688
+Southam Inc. ................................. Can. 3,834,000 65,521,851
</TABLE>
13
<PAGE>
MUTUAL SHARES FUND
INVESTMENT PORTFOLIO, JUNE 30, 1997 (UNAUDITED) (continued)
<TABLE>
<CAPTION>
INDUSTRY ISSUE COUNTRY SHARES VALUE
<S> <C> <C> <C> <C>
BROADCASTING & PUBLISHING (CONTINUED)
United News & Media PLC....................... U.K. 4,633,517 $ 53,743,519
*US West Media Group........................... U.S. 11,226,973 227,346,203
*Viacom Inc., B................................ U.S. 810,300 24,309,000
--------------
697,526,737
--------------
BUILDING MATERIALS & COMPONENTS 0.7%
*American Standard Cos. Inc. .................. U.S. 844,000 37,769,000
Johns-Manville Corp. ......................... U.S. 1,339,535 15,823,257
Lone Star Industries Inc. .................... U.S. 63,095 2,858,992
Noland Co. ................................... U.S. 134,475 3,160,163
--------------
59,611,412
--------------
BUSINESS & PUBLIC SERVICES 1.6%
Suez Lyonnaise des Eaux SA.................... Fr. 385,446 38,828,584
*Talbert Medical Management Holdings Corp. .... U.S. 101,139 4,500,686
*Tenet Healthcare Corp. ....................... U.S. 2,844,200 84,081,663
--------------
127,410,933
--------------
CHEMICALS 1.3%
BASF AG....................................... Ger. 274,500 10,129,064
DSM NV........................................ Neth. 2,237 222,572
Olin Corp. ................................... U.S. 1,899,100 74,183,594
Rohm & Haas Co. .............................. U.S. 230,500 20,759,406
--------------
105,294,636
--------------
CONSTRUCTION & HOUSING 0.2%
Martin Marietta Materials Inc. ............... U.S. 470,015 15,216,736
--------------
DATA PROCESSING & REPRODUCTION 0.1%
*NCR Corp. .................................... U.S. 327,100 9,731,225
--------------
ELECTRICAL & ELECTRONICS 0.5%
Philips Electronics NV........................ Neth. 563,300 40,487,188
--------------
ELECTRONIC COMPONENTS & INSTRUMENTS 0.5%
*Imation Corp. ................................ U.S. 1,028,600 27,129,325
Raychem Corp. ................................ U.S. 121,200 9,014,250
--------------
36,143,575
--------------
ENERGY EQUIPMENT & SERVICES 1.0%
*CS Resources Ltd. ............................ Can. 1,014,800 11,720,960
*Rowan Companies Inc. ......................... U.S. 344,800 9,719,050
Transocean Offshore Inc. ..................... U.S. 843,200 61,237,400
--------------
82,677,410
--------------
ENERGY SOURCES 4.2%
Amerada Hess Corp. ........................... U.S. 337,800 18,769,013
Ashland Inc. ................................. U.S. 512,600 23,771,825
Imperial Oil Ltd. ............................ Can. 810,400 41,634,300
Pennzoil Co. ................................. U.S. 600,500 46,088,375
*Reading & Bates Corp. ........................ U.S. 818,600 21,897,550
</TABLE>
14
<PAGE>
MUTUAL SHARES FUND
INVESTMENT PORTFOLIO, JUNE 30, 1997 (UNAUDITED) (continued)
<TABLE>
<CAPTION>
INDUSTRY ISSUE COUNTRY SHARES VALUE
<S> <C> <C> <C> <C>
ENERGY SOURCES (CONTINUED)
Royal Dutch Petroleum Co. .................... Neth. 884,000 $ 48,067,500
Saga Petroleum AS, A.......................... Nor. 948,500 17,988,525
*Santa Fe Energy Resources Inc. ............... U.S. 470,400 6,909,000
Shell Transport & Trading Co. PLC............. U.K. 3,300,000 22,504,122
Societe Elf Aquitane SA....................... Fr. 496,478 53,561,872
Societe Elf Aquitaine SA, Sponsored ADR....... Fr. 222,200 12,096,013
*Western Atlas Inc. ........................... U.S. 317,200 23,234,900
--------------
336,522,995
--------------
FINANCIAL SERVICES 4.4%
Advanta Corp., A.............................. U.S. 252,100 9,264,675
Advanta Corp., B.............................. U.S. 806,000 28,764,125
Astoria Financial Corp. ...................... U.S. 60,500 2,873,750
Bear Stears Co. Inc. ......................... U.S. 413,708 14,143,627
Beneficial Corp. ............................. U.S. 148,800 10,574,100
*Cityscape Financial Corp. .................... U.S. 100,000 1,993,750
*(R)Cityscape Financial Corp...................... U.S. 1,311,000 24,831,159
Finova Group Inc. ............................ U.S. 925,800 70,823,700
Lehman Brothers Holdings Inc. ................ U.S. 833,300 33,748,650
Morgan Stanley Dean Witter Discover & Co. .... U.S. 3,610,900 155,494,381
United Asset Management Corp. ................ U.S. 122,300 3,462,619
--------------
355,974,536
--------------
FOOD & HOUSEHOLD PRODUCTS 7.1%
Cadbury Schweppes PLC......................... U.K. 2,037,169 18,166,897
Dial Corp. ................................... U.S. 1,874,200 29,284,375
Nabisco Holdings Corp., A..................... U.S. 214,000 8,533,250
+Seaboard Corp. ............................... U.S. 76,450 20,182,800
+(R)Sunbeam Corp. ................................ U.S. 11,260,174 382,564,412
Tupperware Corp. ............................. U.S. 535,500 19,545,750
*U S Industries Inc. .......................... U.S. 667,600 23,783,250
+Van Melle NV.................................. Neth. 925,076 72,577,158
--------------
574,637,892
--------------
FOREST PRODUCTS & PAPER 0.8%
Bowater Inc. ................................. U.S. 469,200 21,700,508
Fletcher Challenge Canada Ltd., A............. Can. 65,500 1,102,773
Greif Brothers Corp., A....................... U.S. 205,400 5,545,800
St. Joe Paper Corp. .......................... U.S. 348,075 29,151,281
Temple Inland Inc. ........................... U.S. 160,547 8,669,563
--------------
66,169,925
--------------
HEALTH & PERSONAL CARE 4.0%
Allergan Inc. ................................ U.S. 130,500 4,151,531
*Apria Healthcare Group Inc. .................. U.S. 905,200 16,067,300
*Beverly Enterprises........................... U.S. 3,282,000 53,332,500
*Foundation Health Systems, A.................. U.S. 3,517,090 106,611,791
Horizon/CMS Healthcare Corp. ................. U.S. 1,780,900 35,729,306
*(R)Kendall International Inc., Residual
Ownership Certificates ...................... U.S. 379 4,548
</TABLE>
15
<PAGE>
MUTUAL SHARES FUND
INVESTMENT PORTFOLIO, JUNE 30, 1997 (UNAUDITED) (continued)
<TABLE>
<CAPTION>
INDUSTRY ISSUE COUNTRY SHARES VALUE
<S> <C> <C> <C> <C>
HEALTH & PERSONAL CARE (CONTINUED)
*Kindercare Learning Centers Inc. ............. U.S. 95,891 $ 1,821,929
*Mid-Atlantic Medical Services................. U.S. 1,953,000 30,393,563
*Pacificare Health Systems Inc., A............. U.S. 522,724 31,657,472
*Pacificare Health Systems Inc., B............. U.S. 377,220 24,094,928
*Perrigo Co. .................................. U.S. 955,700 11,946,250
Rhone-Poulenc Rorer Inc. ..................... U.S. 108,100 9,823,588
--------------
325,634,706
--------------
INDUSTRIAL COMPONENTS 0.5%
Crown Cork & Seal Co. Inc. ................... U.S. 291,846 15,595,521
*+(R)Lancer Industries Inc., B..................... U.S. 3 43,591
Lucas Varity PLC.............................. U.K. 5,482,790 18,991,496
*Owens-Illinois Inc. .......................... U.S. 243,400 7,545,400
*Paxall Inc. .................................. U.S. 21 46,305
--------------
42,222,313
--------------
INSURANCE 5.2%
*Alleghany Corp. .............................. U.S. 199,922 43,483,044
Allmerica Property & Casualty Companies
Inc. ........................................ U.S. 1,023,000 33,503,250
American General Corp. ....................... U.S. 449,848 21,480,275
AON Corp. .................................... U.S. 1,044,600 54,058,050
Argonaut Group Inc. .......................... U.S. 320,300 9,448,850
Cincinnati Financial Corp. ................... U.S. 28,200 2,227,800
Enhance Financial Services Group Inc. ........ U.S. 346,600 15,207,075
Financial Security Assurance Holding Ltd. .... U.S. 474,500 18,475,844
+Fund American Enterprises Holdings Inc. ...... U.S. 674,084 70,778,823
Hartford Financial Services Group Inc. ....... U.S. 202,200 16,732,050
Kansas City Life Insurance Co. ............... U.S. 78,300 6,185,700
Old Republic International Corp. ............. U.S. 1,275,480 38,662,988
Provident Companies Inc. ..................... U.S. 636,131 34,033,009
Safeco Corp. ................................. U.S. 267,000 12,465,563
Selective Insurance Group Inc. ............... U.S. 386,854 18,738,241
Torchmark Corp. .............................. U.S. 90,500 6,448,125
Twentieth Century Industries California....... U.S. 261,100 5,483,100
Unitrin Inc................................... U.S. 168,300 10,266,300
--------------
417,678,087
--------------
LEISURE & TOURISM 1.3%
*Circus Circus Enterprises Inc................. U.S. 424,400 10,450,850
Comcast Corp., A.............................. U.S. 105,500 2,208,906
Comcast Corp., Special A...................... U.S. 2,318,619 49,560,481
Hilton Hotels Corp............................ U.S. 526,400 13,982,500
*ITT Corp...................................... U.S. 386,600 23,606,763
Readers Digest Association Inc., A............ U.S. 98,900 2,837,194
--------------
102,646,694
--------------
</TABLE>
16
<PAGE>
MUTUAL SHARES FUND
INVESTMENT PORTFOLIO, JUNE 30, 1997 (UNAUDITED) (continued)
<TABLE>
<CAPTION>
INDUSTRY ISSUE COUNTRY SHARES VALUE
<S> <C> <C> <C> <C>
MACHINERY & ENGINEERING 0.8%
Federal Mogul Corp............................ U.S. 48,700 $ 1,704,500
ITT Industries Inc............................ U.S. 1,678,200 43,213,650
New Holland NV................................ U.S. 650,900 17,818,388
--------------
62,736,538
--------------
MERCHANDISING 0.6%
American Stores Co............................ U.S. 316,300 15,617,313
Delchamps Inc................................. U.S. 123,600 3,955,200
Dillards Inc., A.............................. U.S. 764,900 26,484,663
*Service Merchandise Co. Inc................... U.S. 913,600 2,740,800
--------------
48,797,976
--------------
METALS & MINING 0.9%
Commercial Metals Co.......................... U.S. 374,812 12,087,687
LTV Corp...................................... U.S. 421,700 6,009,225
*Metallurg Inc................................. U.S. 589,439 6,631,189
Reynolds Metals Co............................ U.S. 696,500 49,625,625
--------------
74,353,726
--------------
MULTI-INDUSTRY 7.2%
Alexander & Baldwin Inc....................... U.S. 273,000 7,132,125
*Berkshire-Hathaway Inc., A.................... U.S. 1,025 48,380,000
Canadian Pacific Ltd., new.................... Can. 299,000 8,502,813
Harcourt General Inc.......................... U.S. 633,100 30,151,388
Incentive AB, A............................... Swe. 112,894 10,215,991
Investor AB, A................................ Swe. 1,770,400 91,546,765
Investor AB, B................................ Swe. 4,543,500 239,347,979
Lagardere S.C.A............................... Fr. 977,000 28,378,835
McMillan Bloedel Ltd.......................... Can. 531,200 7,289,359
Morton International Inc...................... U.S. 1,411,700 42,615,694
*Ranger Industries Inc......................... U.S. 76,839 52,827
Viad Corp..................................... U.S. 3,430,400 66,035,200
--------------
579,648,976
--------------
REAL ESTATE 1.9%
*+Alexander's Inc............................... U.S. 386,000 27,164,750
*Al-Zar Ltd. LP................................. U.S. 284 99,400
*Cadillac Fairview Corp......................... Can. 2,650,997 50,391,883
*Cadillac Fairview Corp., wts................... Can. 291,749 2,271,119
*Castle & Cooke Inc............................. U.S. 112,933 1,870,453
*+(R)MSCW Investors I, LLC......................... U.K. 40,500,000 67,444,920
--------------
149,242,525
--------------
</TABLE>
17
<PAGE>
MUTUAL SHARES FUND
INVESTMENT PORTFOLIO, JUNE 30, 1997 (UNAUDITED) (continued)
<TABLE>
<CAPTION>
INDUSTRY ISSUE COUNTRY SHARES VALUE
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
RECREATION & OTHER CONSUMER GOODS 0.6%
*Bulova Corp................................... U.S. 37,900 $ 454,800
Mattel Inc.................................... U.S. 670,900 22,726,738
Todd A O Corp., A............................. U.S. 332,723 3,238,850
Xerox Corp.................................... U.S. 292,200 23,047,283
--------------
49,467,671
--------------
TELECOMMUNICATIONS 3.3%
AT&T Corp..................................... U.S. 1,560,600 54,718,538
*CS Wireless Inc. ............................. U.S. 1,512 15
*Ionica PLC.................................... U.K. 11,850 6,280,500
*Ionica PLC, wts. ............................. U.K. 3,265 718,300
MCI Communications Corp. ..................... U.S. 1,124,100 43,031,953
Sprint........................................ U.S. 574,000 30,206,750
Tele-Communications Inc., Liberty Media Group,
*A............................................. U.S. 621,500 14,760,625
Telephone & Data Systems Inc. ................ U.S. 2,224,600 84,395,763
*360 Degrees Communications Co. ............... U.S. 1,766,166 30,245,593
--------------
264,358,037
--------------
TEXTILES & APPAREL 0.1%
+Fab Industries Inc. .......................... U.S. 331,100 10,346,875
--------------
TRANSPORTATION 3.6%
Burlington Northern Santa Fe Corp. ........... U.S. 509,700 45,809,288
Canadian National Railway Co. ................ Can. 745,400 32,611,250
*Central Transport Rental Group................ U.K. 1,356,000 158,071
+Florida East Coast Industries Inc. ........... U.S. 498,200 55,300,200
Helikopter Services Group ASA................. Nor. 947,800 12,155,924
*Railtrack Group PLC........................... U.K. 6,798,000 70,811,321
Ryder Systems Inc. ........................... U.S. 1,292,900 42,665,700
Xtra Corp. ................................... U.S. 658,400 28,928,450
--------------
288,440,204
--------------
TOTAL COMMON STOCKS (COST $4,186,944,180)... 6,011,249,991
--------------
PREFERRED STOCKS 0.3%
Criimi Mae Inc., 10.875%, conv., pfd., B...... U.S. 51,100 1,845,988
Crown Cork & Seal Co. Inc., 4.50%, conv.,
pfd. ........................................ U.S. 120,119 6,066,010
Excel Realty Trust Inc., conv., pfd., A....... U.S. 392,000 10,682,000
Gentra Inc., pfd., G.......................... Can. 157,500 2,537,655
Interlake Corp., Series A3, 9.00%, conv.,
(R) pfd. ........................................ U.S. 2,450 2,781,537
+(R)Lancer Industries Inc., pfd., C............... U.S. 174,359 2,223,077
*North Atlantic Trading Company Inc. .......... U.S. 25 625,000
*Wundies Industries Inc., 11.25%, pfd. ........ U.S. 30,892 90,745
--------------
TOTAL PREFERRED STOCKS (COST $19,683,456)... 26,852,012
--------------
</TABLE>
18
<PAGE>
MUTUAL SHARES 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 1.0%
American Communication Services Inc., zero
coupon, 11/1/05.............................. U.S. 4,050,000 $ 2,389,500
*American Telecasting Inc., 14.50%, 6/15/04.... U.S. 6,500,000 2,047,500
Asia Pulp & Paper Co. Ltd., 12.00%, 12/29/49,
144A......................................... Indo.(A) 4,050,000 4,162,631
Azteca Holdings, 11.00%, 6/15/02, 144A........ Mex.(A) 600,000 606,750
Boston Chicken Inc., conv., 6/1/15............ U.S. 5,400,000 1,181,250
Cadillac Fairview Corp., 12.00%, 7/31/05...... Can. 302,084 224,220
CAI Wireless Systems Inc., 12.25%, 9/15/02.... U.S. 3,860,000 1,235,200
Cityscape Financial Corp., 12.75%, 6/1/04,
144A......................................... U.S. 3,000,000 2,970,000
CML Group Inc., 5.50%, 1/15/03................ U.S. 2,000,000 1,420,000
Coach USA Inc., 9.375%, 7/1/07, 144A.......... U.S. 1,000,000 995,000
Consorcio G Grupo Dina SA de CV:
8.00%, conv., 8/8/04......................... Mex.(A) 3,470,000 2,802,025
zero coupon, 11/15/02........................ Mex.(A) 5,065,000 4,431,875
CS Wireless Inc., zero coupon, B, 3/1/06...... U.S. 8,700,000 2,044,500
(R)Fairchild Semiconductor Corp., 11.74%,
3/14/08...................................... U.S. 3,300,000 3,300,000
Falcon Building Products Inc., 10.50%,
6/15/07, 144A................................ U.S. 3,500,000 2,082,500
Flagstar Companies Inc., 10.75%, 9/15/01...... U.S. 1,820,000 1,856,400
FRD Acquisition Co., 12.50%, 7/15/04.......... U.S. 1,875,000 2,001,563
Gaylord Container Corp., 9.75%, 6/15/07....... U.S. 850,000 852,125
Gentra Inc.:
7.50%, 12/31/01.............................. Can. 2,820,000 2,675,115
7.50%, 12/31/01, new......................... Can. 429,024 344,847
Globalstar LP, 11.25%, 6/15/04, 144A.......... U.S. 1,500,000 1,413,750
Greyhound Lines Inc., 11.50%, 4/15/07, 144A... U.S. 1,025,000 1,096,750
Inflo Systems Inc., 10.00%, 1/1/07............ U.S. 3,500,000 2,975,000
Metallurg Inc., 12.00%, 4/14/07............... U.S. 4,977,000 5,126,310
North Atlantic Trading Company Inc., 11.00%,
6/15/04...................................... U.S. 900,000 913,500
Olivetti International NV, 3.75%, conv.,
12/31/99..................................... Itl. 13,300,000,000 7,748,029
Oxford Automotive Inc., 10.125%, 6/15/07,
144A......................................... U.S. 1,200,000 1,200,000
*Peoples Choice TV Corp., unit, 13.25%, cvt.,
6/01/04...................................... U.S. 3,050 1,143,750
Phonetel Technologies Inc., 12.00%,
12/15/06..................................... U.S. 675,000 685,125
Sassco, 12.75%, 02/15/05, w/i................. U.S. 1,600,000 1,680,000
Specialty Foods Corp., 11.25%, 8/15/03, B..... U.S. 3,890,000 3,345,400
Stone Container Corp., 11.50%, 8/15/06,
144A......................................... U.S. 1,690,000 1,732,250
Stratosphere Corp., 14.25%, 5/15/02........... U.S. 1,625,000 1,178,125
Supermercados Norte SA, 10.875%, 2/9/04,
144A......................................... Arg.(A) 2,000,000 2,050,000
TFM SA de CV:
10.25%, 6/15/07, 144A........................ Mex.(A) 400,000 405,000
zero coupon, 6/15/09, 144A................... Mex.(A) 2,250,000 1,305,000
Uniforet Inc., 11.125%, 10/15/06.............. Can.(A) 1,570,000 1,413,000
*US Cellular Corp., conv., zero coupon,
6/15/15...................................... U.S. 5,000,000 1,737,500
Vicap SA, 11.375%, 5/15/07, 144A.............. U.S. 1,000,000 1,048,750
Wavetek Corporation, 10.125%, 6/15/07, 144A... U.S. 1,500,000 1,530,000
--------------
TOTAL CORPORATE BONDS AND NOTES
(COST $74,865,812)......................... 79,350,240
--------------
</TABLE>
19
<PAGE>
MUTUAL SHARES FUND
INVESTMENT PORTFOLIO, JUNE 30, 1997 (UNAUDITED) (continued)
<TABLE>
<CAPTION>
PRINCIPAL IN
ISSUE COUNTRY LOCAL CURRENCY** VALUE
<S> <C> <C> <C> <C>
BONDS AND NOTES IN REORGANIZATION 1.3%
*Adams County Co. Industrial Dev. Auth., 9.00%
11/01/96................................... U.S. 16,729,000 $ 8,365
*Ames Department Stores Inc., bank claim....... U.S. 6,067,000 45,503
*Ames Department Stores Inc., trade claim...... U.S. 4,511,487 33,836
*Dow Corning Corp.:
8.15%, 10/15/29............................ U.S. 5,280,000 6,098,400
9.375%, 2/1/08............................. U.S. 1,300,000 1,540,500
9.50%, 8/10/95............................. U.S. 1,250,000 1,481,250
bank debt.................................. Jpn. 600,000,000 5,339,848
bank debt #1............................... U.S. 7,500,000 9,037,500
bank debt #2............................... U.S. 1,391,595 1,676,872
bank debt #3............................... U.S. 2,738,952 3,300,437
swap....................................... U.S. 1,000,000 1,030,000
*El Paso TX Housing Finance Corp., 8.88%,
10/15/96................................... U.S. 9,355,000 4,678
*Eurotunnel Finance Ltd., bank claim:
tranche A.................................. U.K. 11,012,599 8,665,345
tranche A1................................. U.K. 4,000,000 3,147,430
tranche B.................................. U.K. 167,000 87,059
tranche B.................................. U.K.(B) 875,000 688,500
tranche D.................................. Bel. 490,000,000 6,296,888
tranche D1................................. Bel. 128,000,000 1,644,901
tranche E.................................. Fr. 106,000,000 8,302,917
tranche E.................................. U.K. 860,500 448,586
tranche E1.................................. Fr. 35,735,020 2,812,369
tranche J.................................. U.K.(B) 2,924,547 2,301,201
*Harrah's Jazz Finance Corp., 14.25%,
11/15/01..................................... U.S. 4,700,000 1,809,500
*Heartland Wireless Comm. Inc.:
13.00%, 4/15/03............................... U.S. 1,570,000 565,200
13.00%, 4/15/03, Series D..................... U.S. 910,000 327,600
*Louisiana Agriculture Finance Authority:
8.80%, 10/01/96............................... U.S. 775,000 388
8.25%, 10/01/96............................... U.S. 3,450,000 1,725
*Louisiana Housing Finance AG, 8.61%, 8/1/96... U.S. 11,530,000 5,765
*Memphis TN Health Facilities, 8.68%,
9/15/96.................................... U.S. 7,110,000 3,555
Mercury Finance Co., 5.79%, 2/2/97............ U.S. 850,000 782,000
Mercury Finance Co., Commercial Paper:
2/03/97.................................... U.S. 640,967 589,690
2/04/97.................................... U.S. 148,626 136,736
2/06/97.................................... U.S. 611,528 562,606
2/07/97.................................... U.S. 445,879 410,209
2/11/97.................................... U.S. 222,939 205,104
2/13/97.................................... U.S. 356,704 328,168
2/18/97.................................... U.S. 148,626 136,736
2/19/97.................................... U.S. 1,954,798 1,798,414
2/20/97.................................... U.S. 224,426 206,472
2/21/97.................................... U.S. 326,978 300,820
2/24/97.................................... U.S. 505,330 464,904
3/10/97.................................... U.S. 6,000,000 5,520,000
</TABLE>
20
<PAGE>
MUTUAL SHARES FUND
INVESTMENT PORTFOLIO, JUNE 30, 1997 (UNAUDITED) (continued)
<TABLE>
<CAPTION>
PRINCIPAL IN
ISSUE COUNTRY LOCAL CURRENCY** VALUE
<S> <C> <C> <C> <C>
BONDS AND NOTES IN REORGANIZATION (CONTINUED)
3/17/97..................................... U.S. 847,489 $ 779,690
4/11/97..................................... U.S. 74,313 68,368
4/18/97..................................... U.S. 208,077 191,431
4/22/97..................................... U.S. 118,902 109,390
4/24/97..................................... U.S. 178,351 164,083
Mercury Finance Co., bank claim, MTN:
6.290%, 12/16/97............................ U.S. 6,500,000 5,980,000
6.160%, 12/15/98............................ U.S. 500,000 460,000
7.330%, 6/29/99............................. U.S. 1,950,000 1,794,000
7.420%, 6/29/00............................. U.S. 6,806,320 6,261,814
7.500%, 6/29/01............................. U.S. 6,291,320 5,788,014
*Mobilemedia Communications Corp., 8.47%,
1/1/99...................................... U.S. 1,000,000 782,500
*Southeast Banking Corp.:
10.50%, 4/11/01............................. U.S. 5,300,000 3,180,000
4.75%, 10/15/97............................. U.S. 3,317,000 2,321,900
6.50%, conv., 3/15/99....................... U.S. 500,000 300,000
zero coupon, 12/16/96....................... U.S. 230,000 138,000
zero coupon, 11/10/97....................... U.S. 1,250,000 750,000
*Southeast Texas Housing Finance Corp., 8.60%,
9/1/96...................................... U.S. 200,000 100
*Tiphook Finance Corp., bank claim............. U.K. 235,146 379,842
--------------
TOTAL BONDS AND NOTES IN REORGANIZATION
(COST $99,550,243)....................... 107,597,109
--------------
NUMBER OF SHARES
COMPANIES IN LIQUIDATION 0.1%
*+Aerospace Creditors Liquidating Trust, CBI.... U.S. 279,703 349,629
*Americana Hotels & Realty Corp................ U.S. 325,300 193,163
*Apco Oil Corp. ............................... U.S. 9,200 2,300
*+City Investing Co., Liquidating Trust......... U.S. 4,314,037 4,044,418
*+MBO Properties Inc............................ U.S. 574,712 2,586,204
*MCorp Financial Trust, claim units............ U.S. 64,189 125,168
*MCorp Trust, claim units...................... U.S. 64,172 642
*Roeser & Pendelton............................ U.S. 2,800 5,376
--------------
TOTAL COMPANIES IN LIQUIDATION
(COST $2,424,622)........................ 7,306,900
--------------
PRINCIPAL
AMOUNT
SHORT-TERM OBLIGATIONS 21.5%
Federal Home Loan Bank System, 5.106% to 5.91%
with maturities to 6/11/98.................. U.S. 96,000,000 95,830,992
Federal Home Loan Bank System, discount notes,
5.11% to 5.175% with maturities to 5/29/98.. U.S. 726,890,000 707,691,683
Federal Home Loan Mortgage Corp., 5.715% to
5.95% with maturities to 6/19/98............ U.S. 47,000,000 47,007,488
Federal Home Loan Mortgage Corp., discount
notes, 5.19% to 5.21% with maturities to
10/31/97.................................... U.S. 17,000,000 16,817,234
</TABLE>
21
<PAGE>
MUTUAL SHARES FUND
INVESTMENT PORTFOLIO, JUNE 30, 1997 (UNAUDITED) (continued)
<TABLE>
<CAPTION>
PRINCIPAL
ISSUE COUNTRY AMOUNT VALUE
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
SHORT-TERM OBLIGATIONS (CONTINUED)
Federal Home Loan Mortgage Association,
discount notes, 5.12% to 5.86% with
maturities to 4/6/97......................... U.S. 787,290,000 $ 773,758,219
Federal National Mortgage Association, 6.08%,
5/6/98....................................... U.S. 25,000,000 25,054,650
Federal National Mortgage Association,
discount notes 5.43% to 5.60% with maturities
to 5/28/98................................... U.S. 61,600,000 58,914,452
--------------
TOTAL SHORT-TERM OBLIGATIONS
(COST $1,724,299,360).................... 1,725,074,718
--------------
TOTAL INVESTMENTS 98.8%
(COST $6,107,767,673).................... 7,957,430,970
SECURITIES SOLD SHORT (1.0%)............. (76,842,087)
OPTIONS WRITTEN 0.0%..................... (177,313)
NET EQUITY IN FORWARD CONTRACTS 0.5%..... 38,329,025
OTHER ASSETS, LESS LIABILITIES 1.7%...... 135,083,445
--------------
TOTAL NET ASSETS 100.0%.................. $8,053,824,040
==============
SECURITIES SOLD SHORT
- ---------------------
ISSUER COUNTRY SHARES VALUE
------ ------- ------ --------------
U.S. 590,500 $ 31,333,406
*Boeing Co............................................................
U.S. 1,501,900 37,453,631
*Healthsouth Corp.....................................................
U.S. 231,800 8,055,050
*Pharmacia & Upjohn...................................................
--------------
$ 76,842,087
TOTAL (PROCEEDS $71,862,797)......................................
==============
OPTIONS WRITTEN
- ---------------
SHARES SUBJECT
COMMON STOCK / EXPIRATION DATE / EXERCISE PRICE TO CALL VALUE
----------------------------------------------- -------------- --------------
330,000 $ 119,625
*Advanta Corp., July/35/Call..........................................
355,000 57,688
*Advanta Corp., July/40/Call..........................................
--------------
$ 177,313
TOTAL (PREMIUMS RECEIVED $146,492)................................
==============
</TABLE>
*Non-income producing.
**Securities traded in currency of countries indicated.
(A)Traded in U.S. dollars.
(B)Traded in European currency units.
(R)Restricted Securities.
+Affiliated Issuers (See Note 8)
See Notes to Financial Statements.
22
<PAGE>
MUTUAL SHARES 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 $5,778,944,171).......................... $7,121,104,426
Controlled Affiliates (Cost $62,358,380)............................ 67,444,920
Non Controlled Affiliates (Cost $266,465,122)....................... 768,881,624 $7,957,430,970
--------------
Cash................................................................. 13,964,482
Receivables:
Investment securities sold.......................................... 83,221,651
Capital shares sold................................................. 23,250,039
Dividends and interest.............................................. 14,174,146
From affiliates..................................................... 135,841
Deposits with brokers for securities sold short...................... 46,827,883
Unrealized gains on forward exchange contracts (Note 9).............. 48,154,103
--------------
Total assets..................................................... 8,187,159,115
--------------
Liabilities:
Payables:
Investment securities purchased..................................... 38,866,353
Capital shares redeemed............................................. 2,291,473
Securities sold short, at value (Proceeds received $71,862,797)...... 76,842,087
Outstanding options written, at value (Premium received $146,492).... 177,313
Unrealized loss on forward exchange contracts (Note 9)............... 9,825,078
Accrued expenses..................................................... 5,332,771
--------------
Total liabilities................................................ 133,335,075
--------------
Net assets, at value.................................................. $8,053,824,040
==============
Net assets consist of:
Undistributed net investment income.................................. $ 73,406,139
Net unrealized appreciation.......................................... 1,882,982,211
Accumulated net realized gain........................................ 425,830,111
Net capital paid in on shares of capital stock....................... 5,671,605,579
--------------
Net assets, at value.................................................. $8,053,824,040
==============
CLASS Z
Net asset value per share ($7,325,535,396 / 346,908,614 shares
outstanding)........................................................ $ 21.12
==============
CLASS I
Net asset value per share ($477,619,526 / 22,666,132 shares
outstanding)........................................................ $ 21.07
==============
Maximum offering price ($21.07 / 95.50%)............................. $ 22.06
==============
CLASS II
Net asset value per share ($250,669,118 / 11,939,047 shares
outstanding)........................................................ $ 21.00
==============
Maximum offering price ($21.00 / 99.00%)............................. $ 21.21
==============
</TABLE>
See Notes to Financial Statements.
23
<PAGE>
MUTUAL SHARES FUND
Financial Statements (continued)
STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1997 (UNAUDITED)
<TABLE>
<S> <C> <C>
Investment Income:
(net of $1,328,755 foreign taxes withheld)
Dividends........................................................... $ 58,705,788
Interest............................................................ 44,733,310
------------
Total Income.................................................... $103,439,098
Expenses:
Management fees (Note 4)............................................ 21,433,711
Administrative fees (Note 4)........................................ 2,777,138
Distribution fees (Note 4)
Class I....................................................... 408,644
Class II...................................................... 553,418
Transfer agent fees (Note 4)........................................ 1,512,155
Custodian fees...................................................... 267,568
Reports to shareholders............................................. 166,035
Audit fees.......................................................... 23,051
Legal fees.......................................................... 72,591
Registration and filing fees........................................ 294,577
Directors' fees and expenses........................................ 38,028
Other............................................................... 90,348
------------
Total expenses.................................................. 27,637,264
Less expenses waived (Note 4)....................................... (1,217,941)
============
Total expenses less fees waived................................. 26,419,323
------------
Net investment income........................................... 77,019,775
Realized and unrealized gain:
Net realized gain on:
Investments........................................................ 289,685,773
Foreign currency transactions...................................... 43,844,416
------------
333,530,189
------------
Net unrealized appreciation on:
Investments........................................................ 477,800,209
Foreign currency translation of other assets and liabilities....... 42,946,466
------------
520,746,675
------------
Net realized and unrealized gain..................................... 854,276,864
------------
Net increase in net assets resulting from operations................. $931,296,639
============
</TABLE>
See Notes to Financial Statements.
24
<PAGE>
MUTUAL SHARES 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.......................................... $ 77,019,775 $ 179,689,254
Net realized gain on investment and foreign currency
transactions................................................. 333,530,189 466,793,142
Net unrealized appreciation.................................... 520,746,675 478,415,187
------------- --------------
Net increase in net assets resulting from operations......... 931,296,639 1,124,897,583
Distributions to shareholders:
From net investment income
Class Z....................................................... -- (161,313,930)
Class I....................................................... -- (548,439)
Class II...................................................... -- (259,046)
From net realized gain
Class Z....................................................... -- (560,755,894)
Class I....................................................... -- (1,352,354)
Class II...................................................... -- (652,745)
Capital share transactions (Note 3)
Class Z....................................................... (103,499,302) 911,577,294
Class I....................................................... 412,328,321 35,916,388
Class II...................................................... 219,128,458 17,487,150
------------- --------------
Net increase in net assets.................................. 1,459,254,116 1,364,996,007
Net assets:
Beginning of period............................................. 6,594,569,924 5,229,573,917
------------- --------------
End of period................................................... $8,053,824,040 $ 6,594,569,924
============= ==============
</TABLE>
See Notes to Financial Statements.
25
<PAGE>
MUTUAL SHARES FUND
Notes to Financial Statements (unaudited)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Mutual Shares Fund (the Fund) is a separate diversified series of Franklin
Mutual Series Fund Inc. (the Series Fund), which is an open-end investment
company registered under the Investment Company Act of 1940. The Fund seeks
long-term capital appreciation and income through a flexible policy of investing
in stocks and corporate debt securities. The following summarizes the Fund's
significant accounting policies.
a. SECURITIES VALUATIONS:
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 TRANSLATIONS:
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.
26
<PAGE>
MUTUAL SHARES FUND
Notes to Financial Statements (unaudited) (continued)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONT.)
d. SECURITIES TRANSACTIONS, INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS:
(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 a cash
settlement, the difference between the premium and the settlement proceeds is
realized as a gain or loss. When securities are acquired or delivered upon
exercise of an option, the acquisition cost or sale proceeds are adjusted by the
amount of the premium. When an option is closed, the difference between the
premium and the cost to close the position is realized as a gain or loss.
g. 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.
27
<PAGE>
MUTUAL SHARES 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.
Effective February 3, 1997, the shares of the Fund were split on a 5-for-1
basis. All previously reported per share data for the Fund have been restated to
give effect to the split. At June 30, 1997, there were 1.5 billion Fund shares
authorized ($0.001 par value) of which 1 billion, 250 million, 250 million were
designated as Class Z, Class I, and Class II shares, respectively. Transactions
in the Fund's shares were as follows:
<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEAR ENDED
JUNE 30, 1997 DECEMBER 31, 1996
---------------------------- --------------------------
SHARES AMOUNT SHARES AMOUNT
----------- ------------- ---------- ------------
<S> <C> <C> <C> <C>
CLASS Z
Shares sold............................................. 13,121,177 $ 302,109,524 8,816,934 $806,551,841
Shares issued on reinvestment of distributions.......... -- -- 7,201,944 662,499,126
Shares issued on 5-for-1 stock split.................... 279,727,890 -- -- --
Shares redeemed......................................... (16,413,223) (405,608,826) (6,037,372) (557,473,673)
----------- ------------- --------- ------------
Net increase (decrease)................................. 276,435,844 $(103,499,302) 9,981,506 $911,577,294
=========== ============= ========= ============
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS FOR THE PERIOD
ENDED NOVEMBER 1, 1996 TO
JUNE 30, 1997 DECEMBER 31, 1996
---------------------------- --------------------------
SHARES AMOUNT SHARES AMOUNT
----------- ------------- ---------- ------------
<S> <C> <C> <C> <C>
CLASS I
Shares sold.............................................. 20,139,050 $432,940,589 381,958 $36,900,354
Shares issued on reinvestment of distributions........... -- -- 17,819 1,639,210
Shares issued on 5-for-1 stock split..................... 3,159,210 -- -- --
Shares redeemed.......................................... (1,005,306) (20,612,268) (26,599) (2,623,176)
---------- ------------ ------- -----------
Net increase............................................. 22,292,954 $412,328,321 373,178 $35,916,388
========== ============ ======= ===========
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS FOR THE PERIOD
ENDED NOVEMBER 1, 1996 TO
JUNE 30, 1997 DECEMBER 31, 1996
---------------------------- --------------------------
SHARES AMOUNT SHARES AMOUNT
----------- ------------- ---------- ------------
<S> <C> <C> <C> <C>
CLASS II
Shares sold.............................................. 10,190,266 $221,785,966 174,376 $16,809,900
Shares issued on reinvestment of distributions........... -- -- 8,879 816,609
Shares issued on 5-for-1 stock split..................... 1,696,268 -- -- --
Shares redeemed.......................................... (129,340) (2,657,508) (1,402) (139,359)
---------- ------------ ------- -----------
Net increase............................................. 11,757,194 $219,128,458 181,853 $17,487,150
========== ============ ======= ===========
</TABLE>
28
<PAGE>
MUTUAL SHARES FUND
Notes to Financial Statements (unaudited) (continued)
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
shares, and transfer agent, respectively.
The Fund pays an investment management fee to FMA of .60% 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 its allocated share of an administrative fee to FTSI based on the
Series Fund's aggregate 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 $615,274 and
$25,144, respectively.
5. INVESTMENT TRANSACTIONS
Purchases and sales of securities (excluding short-term securities) for the
period ended June 30, 1997 aggregated $1,918,796,146 and $1,545,160,889,
respectively.
Transactions in options written during the six months ended June 30, 1997 were
as follows:
<TABLE>
<CAPTION>
NUMBER OF
CONTRACTS PREMIUM
--------- ---------
<S> <C> <C>
Options Outstanding at December 31, 1996................................ 425 184,656
Options written......................................................... 1,725 596,014
Options expired......................................................... (100) (19,699)
Options terminated in closing transactions.............................. (425) (184,656)
Options exercised....................................................... (940) (429,823)
---- --------
Options outstanding June 30, 1997....................................... 685 $ 146,492
==== ========
</TABLE>
29
<PAGE>
MUTUAL SHARES FUND
Notes to Financial Statements (unaudited) (continued)
6. INCOME TAXES
At June 30, 1997, the net unrealized appreciation based on the cost of
investments for income tax purposes of $6,037,282,731 was as follows:
<TABLE>
<S> <C>
Unrealized appreciation......................................................... $1,908,331,899
Unrealized depreciation......................................................... (65,203,060)
--------------
Net unrealized appreciation..................................................... $1,843,128,839
==============
</TABLE>
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
- -----------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C>
1,311,000 Cityscape Financial Corp............................................. 11/25/96 $ 24,831,159
3,300,000 Fairchild Semiconductor Corp., 11.74%, 3/14/08....................... 4/02/97 3,300,000
2,450 Interlake Corp., 9.00%, conv., pfd................................... 6/17/92 2,781,537
379 Kendall International Inc., Residual Ownership Certificates.......... 7/06/92 4,548
3 Lancer Industries Inc., B............................................ 8/11/89 43,591
174,359 Lancer Industries Inc., pfd., C...................................... 8/11/89 2,223,077
40,500,000 MSCW Investors I, LLC................................................ 12/27/95 67,444,920
11,260,174 Sunbeam Corp......................................................... 2/23/90 382,564,412
------------
TOTAL RESTRICTED SECURITIES (COST $123,302,920) (6.00% OF NET ASSETS)................ $483,193,244
============
</TABLE>
30
<PAGE>
MUTUAL SHARES FUND
Notes to Financial Statements (unaudited) (continued)
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
$836,326,544. For the period ended 6/30/97, dividend income from "affiliated
companies" was $1,797,345 and net realized gains (losses) from disposition of
"affiliated companies" were $36,890,505.
<TABLE>
<CAPTION>
NUMBER OF NUMBER OF REALIZED
SHARES HELD GROSS GROSS SHARES HELD VALUE JUNE DIVIDEND INCOME CAPITAL GAINS
NAME OF ISSUER DEC. 31, 1996 ADDITIONS REDUCTIONS JUNE 30, 1997 30, 1997 1/1/97-6/30/97 (LOSSES)
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
CONTROLLED AFFILIATES*
MSCW Investors I,
LLC................. 40,500,000 40,500,000 $ 67,444,920 -- --
------------ ---------- -----------
TOTAL CONTROLLED AFFILIATES........................................... $ 67,444,920 -- --
============ ========== ===========
NON CONTROLLED
AFFILIATES
Aerospace Creditors
Liquidating Trust,
CBI............... 279,703 279,703 $ 349,629 -- $ 950,990
Alexander's Inc....... 386,000 386,000 27,164,750 -- --
City Investing Co.
Liquidating Trust... 4,314,037 4,314,037 4,044,418 -- --
FHP International
Corp................ 2,143,300 2,143,300 ** ** -- $ 31,863,870
Fab Industries Inc.... 331,100 331,100 10,346,875 $ 115,885 --
Florida East Coast
Industries, Inc..... 442,500 55,700 498,200 55,300,200 93,620 --
Fund American
Enterprises
Holdings, Inc....... 657,782 16,302 674,084 70,778,823 266,373 --
Genessee Corp., A..... 15,911 15,911 632,462 7,700 --
Genessee Corp., B..... 103,550 103,550 4,116,113 113,905 --
Health Systems
International Inc... 1,526,400 1,526,400 ** ** -- --
Houghton Mifflin
Co.................. 375,100 375,900 751,000 50,129,250 270,264 --
Kreisler Manufacturing
Corp................ 54,470 54,470 320,011 -- --
Lancer Industries,
Inc., B............. 3 3 43,591 -- --
Lancer Industries,
Inc., pfd., C....... 174,359 174,359 2,223,077 261,539 4,075,645
MBO Properties, Inc... 167,437 407,275 574,712 2,586,204 -- --
Seaboard Corp......... 76,450 76,450 20,182,800 38,225 --
Southam Inc........... -- 3,834,000 3,834,000 65,521,851 121,206 --
Sunbeam Corp.......... 11,260,174 11,260,174 382,564,412 225,203 --
Van Melle NV.......... 916,266 8,810 925,076 72,577,158 283,425 --
------------ ---------- -----------
TOTAL NON CONTROLLED AFFILIATES....................................... $ 768,881,624 $ 1,797,345 $ 36,890,505
============ ========== ===========
</TABLE>
*Issuer in which the Fund owns 25% or more of the outstanding voting
securities.
**As of June 30, 1997, no longer an affiliate.
31
<PAGE>
MUTUAL SHARES FUND
Notes to Financial Statements (unaudited) (continued)
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 risks. These contracts are valued daily and the Fund's equity therein
is included in the Statements of Assets and Liabilities. Realized and unrealized
gains and losses are included in the Statement of Operations.
As of June 30, 1997, the Fund had the following forward foreign exchange
contracts outstanding:
<TABLE>
<CAPTION>
CONTRACTS TO IN SETTLEMENT UNREALIZED
BUY: EXCHANGE FOR DATE GAIN/(LOSS)
- --------------- ------------ ---------- -----------
<C> <S> <C> <C> <C>
21,222,580 Great British pound.................................. U.S. $ 34,364,440 9/18/97 U.S. $ 891,358
2,539,032 Great British pound.................................. 4,107,288 10/20/97 106,535
3,232,535 Swiss franc.......................................... 2,223,507 9/10/97 9,172
-------
U.S. $ 40,695,235 1,007,065
=======
CONTRACTS TO SELL:
263,570,000 Belgium franc........................................ U.S. $ 7,470,153 11/07/97 140,081
108,000,000 Canadian dollar...................................... 78,786,009 8/29/97 282,233
108,809,789 Canadian dollar...................................... 79,771,342 11/28/97 280,058
18,584,349 Deutschemark......................................... 11,039,688 9/18/97 319,701
136,292,377 Dutch guilder........................................ 71,693,283 9/08/97 1,910,692
125,487,433 Dutch guilder........................................ 66,845,574 9/17/97 2,553,710
11,625,660 Dutch guilder........................................ 6,044,445 12/10/97 51,332
587,624,937 French franc......................................... 106,091,226 7/17/97 5,977,742
95,991,241 French franc......................................... 17,059,677 8/29/97 659,328
19,255,390 French franc......................................... 3,400,000 11/14/97 92,844
114,953,150 French franc......................................... 20,142,932 11/28/97 380,255
12,652,322,917 Italian lira......................................... 7,420,630 1/02/98 6,001
81,711,284 Norwegian krone...................................... 11,867,803 9/10/97 669,183
117,435,522 Norwegian krone...................................... 16,563,543 12/09/97 386,827
542,166,407 Swedish krona........................................ 82,140,203 7/21/97 11,991,492
594,640,526 Swedish krona........................................ 86,723,964 8/15/97 9,708,663
515,406,506 Swedish krona........................................ 74,441,982 10/21/97 7,504,763
509,335,543 Swedish krona........................................ 69,018,916 11/18/97 2,791,612
479,708,647 Swedish krona........................................ 63,305,310 2/17/98 706,856
------------ ------------
U.S. $879,826,679 46,413,373
============ -----------
Net unrealized gain on offsetting forward exchange contracts...... 733,665
-----------
Unrealized gain on forward exchange contracts................... U.S. $48,154,103
</TABLE>
32
<PAGE>
MUTUAL SHARES FUND
Notes to Financial Statements (unaudited) (continued)
9. FINANCIAL INSTRUMENTS (CONT.)
<TABLE>
<CAPTION>
IN SETTLEMENT UNREALIZED
CONTRACTS TO BUY: EXCHANGE FOR DATE GAIN/(LOSS)
- ----------------- ------------ ----------
<C> <S> <C> <C> <C>
6,000,000 Canadian dollar...................................... U.S. $ 4,389,334 08/29/97 U.S. $ (28,013)
2,000,000 Deutschemark......................................... 1,186,573 09/18/97 (32,915)
17,819,028 Dutch guilder........................................ 9,255,849 09/08/97 (132,390)
7,102,994 Dutch guilder........................................ 3,699,476 09/17/97 (60,349)
48,940,250 French franc......................................... 8,464,347 07/17/97 (126,412)
20,761,959 Swiss franc.......................................... 14,444,326 09/10/97 (104,253)
------------
U.S. $ 41,439,905 (484,332)
============
CONTRACTS TO SELL:
- ------------------
24,000,000 Great British pound.................................. U.S. $ 38,878,140 07/18/97 (1,067,268)
35,387,367 Great British pound.................................. 58,382,079 08/18/97 (460,092)
54,369,602 Great British pound.................................. 86,523,785 09/18/97 (3,797,170)
21,686,119 Great British pound.................................. 35,077,298 10/20/97 (913,380)
47,664,099 Great British pound.................................. 77,935,568 11/17/97 (1,100,488)
54,834,651 Great British pound.................................. 89,380,481 12/15/97 (1,467,434)
2,296,800 Canadian dollar...................................... 1,664,348 08/29/97 (5,166)
19,552,692 Canadian dollar...................................... 14,207,246 11/28/97 (77,026)
534,000,000 Japanese yen......................................... 4,435,216 09/19/97 (279,841)
30,746,800 Swedish krona........................................ 4,000,000 02/17/98 (12,232)
23,994,494 Swiss franc.......................................... 16,412,103 09/10/97 (160,649)
------------ ------------
U.S. $426,896,263 (9,340,746)
============ -----------
Unrealized loss on forward exchange contracts..................... (9,825,078)
-----------
Net unrealized gain on forward exchange contracts............... U.S. $38,329,025
===========
</TABLE>
33
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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
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Templeton Developing
Markets Trust
Templeton Foreign Fund
Templeton Foreign Smaller
Companies Fund
Templeton Global
Infrastructure Fund
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Opportunities Trust
Templeton Global
Real Estate Fund
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Smaller Companies Fund
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GLOBAL GROWTH AND INCOME
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Government Bond Fund
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Currency Fund
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Templeton Global Bond Fund
Templeton Growth and
Income Fund
GLOBAL INCOME
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Income Fund
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Currency Fund
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Currency Fund
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Securities Fund
GROWTH
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Fund Allocator Series
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Target Fund
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INCOME
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For Corporations
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FRANKLIN FUNDS SEEKING
TAX-FREE INCOME
Federal Intermediate-Term
Tax-Free Income Fund
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FRANKLIN STATE-SPECIFIC
FUNDS SEEKING
TAX-FREE INCOME
Alabama
Arizona*
Arkansas**
California*
Colorado
Connecticut
Florida*
Georgia
Hawaii**
Indiana
Kentucky
Louisiana
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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.
02/97.1
<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 Shares 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.
474 S97 06/97
[LOGO] Printed on recycled paper
<PAGE>
