SEMI ANNUAL REPORT
JUNE 30, 1997
MUTUAL QUALIFIED FUND
[FRANKLIN TEMPLETON LOGO]
<PAGE>
Franklin Mutual Advisers
Senior Portfolio Management Team
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 back- grounds and great enthusiasm. Our greatest resource in finding
the right people is our reputation as a dynamic and creative investment
organization.
[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 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 Qualified 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 Qualified
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. During the reporting period, the fund's cash level actually dropped
from its December 31, 1996 level of 22.6% and represented 17.8% of the fund's
total net assets on June 30, 1997.
CONTENTS
Shareholder Letter .............. 1
Performance Summaries
Class Z ........................ 6
Class I......................... 8
Class II........................ 9
Statement of Investments......... 13
Financial Statements............. 24
Notes to Financial Statements.... 27
[FUND CATEGORY GRAPHIC APPEARS HERE]
<PAGE>
- -----------------------------------------------------------------------------
PORTFOLIO BREAKDOWN
Based on Total Net Assets 6/30/97
- -----------------------------------------------------------------------------
Equities ........................................... 77.5%
Bonds .............................................. 2.5%
Short-Term Obligations & Other Net Assets .......... 20.0%
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
TOP 10 INDUSTRIES
Based on Total Net Assets 6/30/97
- -----------------------------------------------------------------------------
Multi-Industry...................................... 8.0%
Broadcasting & Publishing........................... 7.5%
Food & Household Products........................... 6.4%
Financial Services.................................. 6.0%
Energy Sources...................................... 5.2%
Insurance........................................... 5.0%
Health & Personal Care.............................. 4.4%
Transportation...................................... 3.8%
Beverages & Tobacco................................. 3.7%
Telecommunications.................................. 3.1%
- -----------------------------------------------------------------------------
The Mutual Qualified Fund - Class Z provided a six-month total return of 13.73%,
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 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: 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, Rowan Companies Inc., and Santa Fe Energy Resources. 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 Qualified 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
- -----------------------------------------------------
Sunbeam Corp.,
Food & Household
Products 3.1%
Chase Manhattan Corp.,
Banking 2.6%
Investor AB, B,
Multi-Industry 2.4%
US West Media Group,
Broadcasting & Publishing 2.3%
General Motors Corp.,
Automobiles 1.6%
Morgan Stanley Dean Witter
Discover & Co.,
Financial Services 1.4%
RJR Nabisco Inc.,
Beverages & Tobacco 1.2%
Foundation Health
Systems, A, Health &
Personal Care 1.0%
Telephone & Data Systems
Inc., Telecommunications 1.0%
Philip Morris Cos. Inc.,
Beverages & Tobacco 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 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. In general, 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 Qualified Fund's Class Z shares provided a cumulative total return of
13.73% 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 $2.23 per share, from $16.24 on
December 31, 1996, to $18.47 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 2-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>
<TABLE>
<CAPTION>
CLASS Z
PERIODS ENDED 6/30/97
1-YEAR 5-YEAR 10-YEAR
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Cumulative Total Return(1) 26.24% 151.69% 301.14%
Average Annual Total Return(2) 26.24% 20.27% 14.90%
Value of $10,000 Investment(3) $12,624 $25,168 $40,114
<CAPTION>
6/30/93 6/30/94 6/30/95 6/30/96 6/30/97
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
One-Year Total Return(4) 21.75% 12.35% 19.88% 21.58% 26.24%
</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 Qualified Fund's Class I shares provided a cumulative total return of
13.49% 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 $2.19
per share, from $16.23 on December 31, 1996, to $18.42 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) 13.49% 20.84%
Aggregate Total Return(2) 8.39% 14.45%
Value of $10,000 Investment(3) $10,839 $11,445
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.
* Per share amounts for all periods prior to February 3, 1997, have been
restated to reflect a 2-for-1 share split effective at the close of business on
Friday, January 31,1997.
Past performance is not predictive of future results.
8
<PAGE>
CLASS II
The Mutual Qualified Fund's Class II shares provided a cumulative total return
of 13.19% 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 $2.14
per share, from $16.23 on December 31, 1996, to $18.37 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) 13.19% 20.43%
Aggregate Total Return(2) 11.06% 18.20%
Value of $10,000 Investment(3) $11,106 $11,820
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 the 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.
* Per share amounts for all periods prior to February 3, 1997, have been
restated to reflect a 2-for-1 share split effective at the close of business on
Friday, January 31,1997.
Past performance is not predictive of future results.
9
<PAGE>
MUTUAL QUALIFIED 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 1992
------------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of
period................................ $16.24 $14.87 $13.34 $13.50 $12.22 $10.59
------------- ----------- ----------- ----------- ----------- -----------
Income from investment operations:
Net investment income............. .18 .47 .33 .22 .19 .25
Net realized and unrealized
gain............................ 2.05 2.62 3.17 .55 2.56 2.14
------------- ----------- ----------- ----------- ----------- -----------
Total from investment operations...... 2.23 3.09 3.50 .77 2.75 2.39
------------- ----------- ----------- ----------- ----------- -----------
Distributions:
Dividends from net investment
income.......................... -- (.43) (.33) (.21) (.19) (.25)
Distributions from net realized
gains........................... -- (1.29) (1.64) (.72) (1.28) (.51)
------------- ----------- ----------- ----------- ----------- -----------
Total distributions................... -- (1.72) (1.97) (.93) (1.47) (.76)
------------- ----------- ----------- ----------- ----------- -----------
Change in net asset value............. 2.23 1.37 1.53 (.16) 1.28 1.63
------------- ----------- ----------- ----------- ----------- -----------
Net asset value, end of period........ $18.47 $16.24 $14.87 $13.34 $13.50 $12.22
============== ============ ============ ============ ============ ============
Total Return*......................... 13.73% 21.19% 26.60% 5.73% 22.71% 22.70%
Ratios /supplemental data
Net assets, end of period (000)....... $4,942,467 $4,287,975 $3,002,132 $1,791,940 $1,511,015 $1,250,785
Ratio of expenses to average net
assets.............................. .78%** .78% .72% .73% .78% .82%
Ratio of expenses, net of fee waiver,
to average net assets............... .74%** .75% .72% .73% .78% .82%
Ratio of net investment income to
average net assets.................. 2.20%** 3.06% 2.71% 1.91% 1.65% 2.10%
Portfolio turnover rate............... 27.62% 65.03% 75.59% 67.65% 56.22% 47.39%
Average commission rate paid (per
share).............................. $0.0413 $0.0357 -- -- -- --
</TABLE>
* Not annualized for periods of less than one year.
** Annualized.
++ Per share amounts for all periods to December 31, 1996 have been restated to
reflect a 2-for-1 stock split effective February 3, 1997.
10
<PAGE>
MUTUAL QUALIFIED 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........................................... $16.23 $16.40
------------- -----------------
Income from investment operations:
Net investment income...................................................... .08 .16
Net realized and unrealized gain........................................... 2.11 .89
------------- -----------------
Total from investment operations............................................... 2.19 1.05
------------- -----------------
Distributions:
Dividends from net investment income....................................... -- (.41)
Distributions from net realized gains...................................... -- (.81)
------------- -----------------
Total distributions............................................................ -- (1.22)
------------- -----------------
Change in net asset value...................................................... 2.19 (.17)
------------- -----------------
Net asset value, end of period................................................. $18.42 $16.23
============== ====================
Total Return*.................................................................. 13.49% 6.47%
Ratios /supplemental data
Net assets, end of period (000)................................................ $220,550 $20,381
Ratio of expenses to average net assets........................................ 1.13%** 1.28%**
Ratio of expenses, net of fee waiver, to average net assets.................... 1.10%** 1.13%**
Ratio of net investment income to average net assets........................... 2.15%** 3.19%**
Portfolio turnover rate........................................................ 27.62% 65.03%
Average commission rate paid (per share)....................................... $0.0413 $0.0357
</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 2-for-1 stock split effective February 3, 1997.
11
<PAGE>
MUTUAL QUALIFIED FUND
Financial Highlights (continued)
Per Share Operating Performance - Class II++ (For a share outstanding throughout
the period)
<TABLE>
<CAPTION>
Six months
ended For the period
June 30, November 1, 1996+
1997 through
(unaudited) December 31, 1996
------------ -----------------
<S> <C> <C>
Net asset value, beginning of period........................................... $16.23 $16.40
------------ -----------------
Income from investment operations:
Net investment income...................................................... .04 .13
Net realized and unrealized gain........................................... 2.10 .91
------------ -----------------
Total from investment operations............................................... 2.14 1.04
------------ -----------------
Distributions:
Dividends from net investment income....................................... -- (.39)
Distributions from net realized gains...................................... -- (.82)
------------ -----------------
Total distributions............................................................ -- (1.21)
------------ -----------------
Change in net asset value...................................................... 2.14 (.17)
------------ -----------------
Net asset value, end of period................................................. $18.37 $16.23
============== ====================
Total Return*.................................................................. 13.19% 6.37%
Ratios /supplemental data
Net assets, end of period (000)................................................ $106,670 $9,963
Ratio of expenses to average net assets........................................ 1.78%** 1.93%**
Ratio of expenses, net of fee waiver, to average net assets.................... 1.75%** 1.78%**
Ratio of net investment income to average net assets........................... 1.50%** 2.59%**
Portfolio turnover rate........................................................ 27.62% 65.03%
Average commission rate paid (per share)....................................... $0.0413 $0.0357
</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 all periods prior to December 31, 1996 have been
restated to reflect a 2-for-1 stock split effective February 3, 1997.
12
<PAGE>
MUTUAL QUALIFIED FUND
Investment Portfolio, June 30,1997 (unaudited)
<TABLE>
<CAPTION>
INDUSTRY ISSUE COUNTRY SHARES VALUE
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stocks 77.0%
Aerospace & Military Tech 1.7%
General Motors Corp., H.................... U.S. 169,300 $ 9,777,075
*Hexcel Corporation........................ U.S. 843,498 14,550,341
*Kreisler Manufacturing Corp. ............. U.S. 17,660 103,753
*Litton Industries Inc. ................... U.S. 249,900 11,831,731
Lockheed Martin Corp. ..................... U.S. 56,822 5,884,628
*Loral Space & Communications.............. U.S. 523,200 7,848,000
McDonnell Douglas Corp. ................... U.S. 597,400 40,921,900
Primex Technologies Inc. .................. U.S. 66,650 1,424,644
--------------
92,342,072
--------------
Appliances & Household Durables 0.3%
Black & Decker Corp........................ U.S. 460,500 17,124,844
--------------
Automobiles 2.1%
General Motors Corp. ...................... U.S. 1,532,500 85,341,094
Volvo AB, B................................ Swe. 873,930 23,386,143
--------------
108,727,237
--------------
Banking 2.6%
Banc One Corp. ............................ U.S. 181,800 1,664,313
Chase Manhattan Corp., new................. U.S. 1,395,572 135,457,708
--------------
137,122,021
--------------
Beverages & Tobacco 3.6%
BAT Industries PLC......................... U.K. 2,775,000 24,839,090
Brown-Forman Corp., B...................... U.S. 221,500 10,811,969
*Gallaher Group PLC........................ U.K. 910,000 4,258,356
*Gallaher Group PLC, ADR................... U.K. 410,800 7,574,125
Genesee Corp., A........................... U.S. 7,000 278,250
Genesee Corp., B........................... U.S. 45,341 1,802,305
Grand Metropolitan PLC..................... U.K. 711,265 6,887,718
Heineken Holding NV, A..................... Neth. 82,752 12,858,200
Philip Morris Cos. Inc..................... U.S. 1,198,100 53,165,688
RJR Nabisco Holdings Corp.................. U.S. 1,922,883 63,455,139
Seagrams Company Ltd....................... Can. 142,700 5,743,675
--------------
191,674,515
--------------
Broadcasting & Publishing 7.5%
Belo (AH) Corp............................. U.S. 235,900 9,819,338
BHC Communications Inc., A................. U.S. 143,041 17,093,400
Chris Craft Industries Inc................. U.S. 195,906 9,452,465
Daily Mail & General Trust PLC............. U.K. 38,500 1,134,823
Daily Mail & General Trust PLC, A.......... U.K. 949,800 26,098,186
Dow Jones & Co. Inc........................ U.S. 1,070,200 43,008,663
Dun & Bradstreet Corp...................... U.S. 957,700 25,139,625
Hollinger International Inc., A............ U.S. 416,900 4,664,069
Houghton Mifflin Co........................ U.S. 482,400 32,200,200
NV Holdingsmij de Telegraaf................ Neth. 1,301,024 28,103,020
</TABLE>
13
<PAGE>
MUTUAL QUALIFIED FUND
Investment Portfolio, June 30,1997 (unaudited) (continued)
<TABLE>
<CAPTION>
INDUSTRY ISSUE COUNTRY SHARES VALUE
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Broadcasting & Publishing (continued)
Pearson PLC................................ U.K. 1,629,500 $ 18,873,208
Scripps (EW) Co., A........................ U.S. 1,062,300 44,218,238
*US West Media Group....................... U.S. 5,945,500 120,396,375
*Viacom Inc., B............................ U.S. 522,700 15,681,000
--------------
395,882,610
--------------
Building Materials & Components 0.8%
*American Standard Cos Inc. ............... U.S. 534,000 23,896,500
Johns-Manville Corp. ...................... U.S. 521,764 6,163,337
Lone Star Industries Inc. ................. U.S. 53,116 2,406,819
Noland Co. ................................ U.S. 17,500 411,250
Puerto Rican Cement Co. Inc. .............. U.S. 246,900 8,039,681
--------------
40,917,587
--------------
Business & Public Services 1.9%
+Esselte AB, A............................. Swe. 1,375,000 31,462,090
+Esselte AB, B............................. Swe. 233,600 5,496,115
Suez Lyonnaise Des Eaux SA................. Fr. 364,807 36,749,523
*Talbert Medical Management Holdings
Corp...................................... U.S. 48,741 2,168,975
*Tenet Healthcare Corp..................... U.S. 859,200 25,400,100
--------------
101,276,803
--------------
Chemicals 2.1%
Chemfirst Inc. ............................ U.S. 898,400 24,369,100
DSM NV..................................... Neth. 116,428 11,584,079
General Chemical Group Inc. ............... U.S. 390,900 10,456,575
Olin Corp. ................................ U.S. 1,284,500 50,175,781
Rohm & Haas Co. ........................... U.S. 136,600 12,302,538
--------------
108,888,073
--------------
Construction & Housing 0.2%
Martin Marietta Materials Inc. ............ U.S. 271,084 8,776,345
--------------
Data Processing & Reproduction 0.2%
*National Processing Inc. ................. U.S. 218,000 2,234,500
*NCR Corp.................................. U.S. 217,100 6,458,725
--------------
8,693,225
--------------
Electrical & Electronics 1.4%
Philips Electronics NV..................... Neth. 193,000 13,824,342
Philips Electronics NV, N.Y.reg. .......... Neth. 516,900 37,152,188
*Unitrode Corp., wts. ..................... U.S. 4,569 100,518
*Wang Labs Inc., A......................... U.S. 1,065,500 22,708,469
--------------
73,785,517
--------------
</TABLE>
14
<PAGE>
MUTUAL QUALIFIED FUND
Investment Portfolio, June 30,1997 (unaudited) (continued)
<TABLE>
<CAPTION>
INDUSTRY ISSUE COUNTRY SHARES VALUE
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Electronic Components & Instruments 0.9%
*Amphenol Corp., A......................... U.S. 362,773 $ 14,102,800
*Imation Corp. ............................ U.S. 588,700 15,526,963
Raychem Corp. ............................. U.S. 79,000 5,875,625
Spectra Physics AB, A...................... Swe. 748,800 13,455,265
--------------
48,960,653
--------------
Energy Equipment & Services 1.1%
*Rowan Cos. Inc. .......................... U.S. 211,500 5,961,656
Transocean Offshore Inc. .................. U.S. 690,816 50,170,512
--------------
56,132,168
--------------
Energy Sources 5.2%
Amerada Hess Corp. ........................ U.S. 80,000 4,445,000
Ashland Inc. .............................. U.S. 298,800 13,856,850
Enron Global Power & Pipeline.............. U.S. 617,200 20,560,475
Enserch Corp. ............................. U.S. 1,363,000 30,333,425
Imperial Oil Ltd. ......................... Can. 421,400 21,649,425
*Nuevo Energy Co. ......................... U.S. 629,200 25,797,200
Pennzoil Co. .............................. U.S. 392,400 30,116,700
*Reading & Bates Corp. .................... U.S. 470,500 12,585,875
Royal Dutch Petroleum Co. ................. Neth. 384,800 20,923,500
*Santa Fe Energy Resources Inc. ........... U.S. 398,000 5,845,625
Shell Transport & Trading Co. PLC.......... U.K. 2,065,500 14,085,534
Societe Elf Aquitaine SA................... Fr. 406,700 43,876,291
Union Texas Petroleum Holdings Inc......... U.S. 634,200 13,278,563
*Western Atlas Inc......................... U.S. 209,600 15,353,200
--------------
272,707,663
--------------
Financial Services 5.4%
Advanta Corp., A........................... U.S. 163,300 6,001,275
Advanta Corp., B........................... U.S. 593,900 21,194,806
Arthur J Gallagher Co...................... U.S. 325,500 12,287,625
Astoria Financial Corp..................... U.S. 29,600 1,406,000
Bear Stearns Co. Inc....................... U.S. 302,111 10,328,428
Beneficial Corp............................ U.S. 107,900 7,667,644
Central European Equity Fund Inc........... U.S. 228,800 5,491,200
*(R)Cityscape Financial Corp............... U.S. 861,000 16,307,878
Finova Group Inc........................... U.S. 430,700 32,948,559
*+ITLA Capital Corp........................ U.S. 709,000 11,521,250
Lehman Brothers Holdings Inc............... U.S. 314,500 12,737,250
Liberty Financial Companies Inc............ U.S. 130,347 6,501,057
*+Long Beach Financial Corp................ U.S. 1,100,000 9,625,000
Long Island Bancorp Inc.................... U.S. 465,800 16,914,363
Morgan Stanley Dean Witter Discover &
Co........................................ U.S. 1,755,000 75,574,688
New Germany Fund Inc....................... U.S. 694,800 10,943,100
*+Regent Kingpin Chile Value Fund.......... U.K. 80,180 117,063
*(R)St. George Holdings Ltd., A............ U.S. 152,073 15,207
</TABLE>
15
<PAGE>
MUTUAL QUALIFIED FUND
Investment Portfolio, June 30,1997 (unaudited) (continued)
<TABLE>
<CAPTION>
INDUSTRY ISSUE COUNTRY SHARES VALUE
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Financial Services (continued)
(R)*St. George Holdings Ltd., B............ U.S. 1,495 $ 150
United Asset Management Corp............... U.S. 1,022,300 28,943,869
--------------
286,526,412
--------------
Food & Household Products 6.3%
Cadbury Schweppes PLC...................... U.K. 1,724,149 15,375,473
Dial Corp.................................. U.S. 1,134,900 17,732,813
Lindt & Spruengli Chocolate Works Ltd.,
partn. ctf................................ Swtz. 4,445 8,217,391
Lindt & Spruengli Chocolate Works Ltd.,
reg....................................... Swtz. 116 2,541,595
Nabisco Holdings Corp., A.................. U.S. 109,700 4,374,288
Seaboard Corp.............................. U.S. 10,100 2,666,400
STE Bic.................................... Fr. 141,186 23,087,744
+(R)Sunbeam Corp........................... U.S. 4,800,554 163,098,822
Tootsie Roll Industries Inc................ U.S. 176,773 7,866,399
Tupperware Corp............................ U.S. 365,800 13,351,700
*U S Industries Inc........................ U.S. 268,000 9,547,500
+Van Melle NV.............................. Neth. 461,477 36,205,338
Verenigde Bedrijven Nutricia NV............ Neth. 164,539 25,985,577
--------------
330,051,040
--------------
Forest Products & Paper 0.7%
Bowater Inc................................ U.S. 310,600 14,365,254
Greif Brothers Corp., A.................... U.S. 93,400 2,521,800
St. Joe Paper Corp......................... U.S. 152,100 12,738,375
Temple Inland Inc.......................... U.S. 46,500 5,195,620
--------------
34,821,049
--------------
Health & Personal Care 4.5%
Allergan Inc............................... U.S. 676,800 21,530,700
*Apria Healthcare Group Inc................ U.S. 655,200 11,629,800
*Beverly Enterprises....................... U.S. 1,896,000 30,810,000
*Foundation Health Systems, A.............. U.S. 1,802,130 54,627,066
*Horizon/CMS Healthcare Corp............... U.S. 1,111,000 22,289,438
Instrumentarium Group, A................... Fin. 52,000 1,952,723
Instrumentarium Group, B................... Fin. 325,200 12,149,401
*(R)Kendall International Inc., Residual
Ownership Certificates.................... U.S. 444 5,328
*Kindercare Learning Centers Inc........... U.S. 49,302 936,738
Maxicare Health Plans Inc.................. U.S. 544,100 12,174,238
*Mid-Atlantic Medical Services............. U.S. 1,036,400 16,128,975
*Pacificare Health Systems Inc., A......... U.S. 305,142 18,480,162
*Pacificare Health Systems Inc., B......... U.S. 181,790 11,611,836
*Perrigo Co. .............................. U.S. 409,800 5,122,500
*Physicians Heath Services, A.............. U.S. 25,700 693,900
Rhone-Poulenc Rorer Inc. .................. U.S. 70,200 6,379,425
*Vitalink Pharmacy Services Inc. .......... U.S. 507,009 9,696,547
--------------
236,218,777
--------------
</TABLE>
16
<PAGE>
MUTUAL QUALIFIED FUND
Investment Portfolio, June 30,1997 (unaudited) (continued)
<TABLE>
<CAPTION>
INDUSTRY ISSUE COUNTRY SHARES VALUE
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Industrial Components 1.6%
Crown Cork & Seal Co. Inc. ................ U.S. 210,854 $ 11,267,511
Gencorp Inc. .............................. U.S. 1,002,900 23,192,063
+(R)Lancer Industries Inc., B.............. U.S. 4 51,286
Lucas Varity PLC........................... U.K. 2,512,977 8,704,545
Lucas Variety PLC, ADR..................... U.K. 999,174 34,596,400
*Owens-Illinois Inc. ...................... U.S. 159,800 4,953,800
--------------
82,765,605
--------------
Insurance 4.8%
*Alleghany Corp. .......................... U.S. 92,773 20,178,145
Allmerica Property & Casualty Companies
Inc. ..................................... U.S. 395,800 12,962,450
American General Corp. .................... U.S. 260,703 12,448,578
AON Corp. ................................. U.S. 712,650 36,879,650
Argonaut Group Inc. ....................... U.S. 169,100 4,988,450
*(R)CGA Group Ltd. ........................ U.S. 139,785 698,925
Cincinnati Financial Corp. ................ U.S. 18,600 1,469,400
Enhance Financial Services Group Inc. ..... U.S. 195,000 8,555,625
Financial Security Assurance Holding
Ltd. ..................................... U.S. 230,200 8,963,413
Fund American Enterprises Holdings Inc. ... U.S. 242,976 25,512,480
Hartford Financial Services Group Inc. .... U.S. 134,800 11,154,700
Kansas City Life Insurance Co. ............ U.S. 29,890 2,361,310
Koelnische Rueckversicherungs AG........... Gr. 12,055 10,369,001
Leucadia National Corp. ................... U.S. 354,000 10,951,875
Ohio Casualty Corp. ....................... U.S. 177,100 7,792,400
Old Republic International Corp. .......... U.S. 652,400 19,775,875
Provident Companies Inc. .................. U.S. 283,384 15,161,044
Royal & Sun Alliance Insurance Group PLC... U.K. 2,444,023 18,030,312
Safeco Corp. .............................. U.S. 133,800 6,246,788
Selective Insurance Group Inc. ............ U.S. 183,300 8,878,594
Torchmark Corp. ........................... U.S. 59,500 4,239,375
Twentieth Century Industries California.... U.S. 145,000 3,045,000
Unitrin Inc. .............................. U.S. 48,600 2,964,600
--------------
253,627,990
--------------
Leisure & Tourism 1.3%
*Circus Circus Enterprises Inc. ........... U.S. 275,800 6,791,575
Comcast Corp., A........................... U.S. 58,000 1,214,375
Comcast Corp., Special A................... U.S. 1,615,137 34,523,553
Hilton Hotels Corp. ....................... U.S. 356,500 9,469,531
*ITT Corp. ................................ U.S. 246,800 15,070,225
Readers Digest Association Inc., A......... U.S. 58,800 1,686,825
--------------
68,756,084
--------------
</TABLE>
17
<PAGE>
MUTUAL QUALIFIED FUND
Investment Portfolio, June 30,1997 (unaudited) (continued)
<TABLE>
<CAPTION>
INDUSTRY ISSUE COUNTRY SHARES VALUE
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Machinery & Engineering 0.9%
Federal Mogul Corp. ....................... U.S. 26,600 $ 931,000
Giddings & Lewis Inc. ..................... U.S. 75,000 1,565,625
ITT Industries Inc. ....................... U.S. 1,317,300 33,920,475
New Holland NV............................. U.S. 411,000 11,251,125
--------------
47,668,225
--------------
Merchandising 1.8%
Delchamps Inc. ............................ U.S. 57,700 1,846,400
Dillards Inc., A........................... U.S. 467,000 16,169,875
*Footstar Inc. ............................ U.S. 897,100 23,436,738
*Neiman-Marcus Group Inc. ................. U.S. 316,500 8,308,125
*Provigo Inc. ............................. Can. 3,629,100 20,629,592
*Service Merchandise Co. Inc. ............. U.S. 166,900 500,700
*Waban Inc. ............................... U.S. 697,500 22,450,781
--------------
93,342,211
--------------
Metals & Mining 0.8%
LTV Corp. ................................. U.S. 293,900 4,188,075
*Metallurg Inc. ........................... U.S. 377,819 4,250,464
Reynolds Metals Co. ....................... U.S. 494,700 35,247,375
--------------
43,685,914
--------------
Multi-Industry 8.0%
Alexander & Baldwin Inc. .................. U.S. 143,200 3,741,100
*Berkshire-Hathaway Inc., A................ U.S. 425 20,060,000
Canadian Pacific Ltd., new................. Can. 166,000 4,720,625
Forvaltnings AB Ratos, B................... Swe. 4,975,200 45,343,106
Harcourt General Inc. ..................... U.S. 473,600 22,555,200
Incentive AB, A............................ Swe. 167,300 15,139,293
Investor AB, A............................. Swe. 934,900 48,343,352
Investor AB, B............................. Swe. 2,412,000 127,062,246
Lagardere SCA.............................. Fr. 793,428 23,046,635
McMillan Bloedel Ltd. ..................... Can. 369,000 5,063,579
Morton International Inc. ................. U.S. 854,000 25,780,125
*Ranger Industries Inc. ................... U.S. 24,483 16,832
Sophus Berendsen AS, A..................... Den. 42,405 6,099,004
Sophus Berendsen AS, B..................... Den. 238,375 34,464,374
Viad Corp. ................................ U.S. 1,994,500 38,394,125
--------------
419,829,596
--------------
Real Estate 2.0%
*Alexander's Inc. ......................... U.S. 134,390 9,457,696
*Al-Zar Ltd. LP............................ U.S. 59 20,650
*Cadillac Fairview Corp. .................. Can. 1,149,135 21,843,509
*Cadillac Fairview Corp., wts. ............ Can. 126,360 983,649
*Castle & Cooke Inc. ...................... U.S. 49,666 822,593
*E & J Properties Ltd. .................... U.S. 5,600 10,500
Mark Centers Trust......................... U.S. 110,400 1,062,600
</TABLE>
18
<PAGE>
MUTUAL QUALIFIED FUND
Investment Portfolio, June 30,1997 (unaudited) (continued)
<TABLE>
<CAPTION>
INDUSTRY ISSUE COUNTRY SHARES VALUE
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Real Estate (continued)
Metropolis Realty Trust Inc. .............. U.S. 33,000 $ 1,221,000
*+(R)MSCW Investors II, LLC................ U.K. 23,562,000 39,237,956
*+(R)S.H. Mortgage Acquisition LLC......... U.S. 6,106,769 6,106,769
*+(R)Wellsford Real Properties Inc. ....... U.S. 2,427,184 24,029,122
--------------
104,796,044
--------------
Recreation & Other Consumer Goods 0.6%
Mattel Inc. ............................... U.S. 455,800 15,440,225
Todd A O Corp., A.......................... U.S. 191,774 1,866,800
Xerox Corp. ............................... U.S. 206,200 16,264,025
--------------
33,571,050
--------------
Telecommunications 2.9%
AT&T Corp. ................................ U.S. 725,400 25,434,338
*Ionica PLC, units......................... U.K. 7,850 4,160,500
*Ionica PLC, wts. ......................... U.K. 2,170 477,400
MCI Communications Corp. .................. U.S. 680,300 26,042,734
Sprint..................................... U.S. 256,600 13,503,575
*Tele Communications Inc., Liberty Media
Group A................................... U.S. 428,100 10,167,375
Telephone & Data Systems Inc. ............. U.S. 1,423,800 54,015,425
*360 Degrees Communications Co. ........... U.S. 1,077,534 18,452,770
--------------
152,254,117
--------------
Textiles & Apparel 0.1%
Fab Industries Inc. ....................... U.S. 186,000 5,812,500
--------------
Transportation 3.3%
Burlington Northern Santa Fe Corp. ........ U.S. 349,100 31,375,363
Canadian National Railway Co. ............. Can. 416,900 18,239,375
*Central Transport Rental Group............ U.K. 700,000 81,600
Florida East Coast Industries Inc. ........ U.S. 301,500 33,466,500
*Fritz Cos. ............................... U.S. 392,300 3,800,406
Helikopter Services Group ASA.............. Nor. 637,400 8,174,917
*MS Carriers Inc. ......................... U.S. 186,200 4,678,275
*Railtrack Group PLC....................... U.K. 3,618,000 37,686,872
Ryder Systems Inc. ........................ U.S. 690,000 22,770,000
Tranz Rail Holdings Ltd., ADR.............. N.Z. 395,500 6,674,063
Xtra Corp. ................................ U.S. 202,800 8,910,525
--------------
175,857,896
--------------
Utilities Electrical & Gas 0.4%
Northeast Utilities........................ U.S. 2,272,500 21,730,781
--------------
Total Common Stocks (Cost
$3,046,395,518)........................... 4,054,326,624
--------------
</TABLE>
19
<PAGE>
MUTUAL QUALIFIED FUND
Investment Portfolio, June 30,1997 (unaudited) (continued)
<TABLE>
<CAPTION>
NUMBER OF
ISSUE COUNTRY SHARES VALUE
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Preferred Stocks 0.5%
*(R)CGA Group Ltd., pfd., A, Units......... U.S. 240,000 $ 6,000,000
*(R)CGA Group Ltd., pfd., B................ U.S. 28,571 714,275
Criimi Mae Inc., 10.875%, cvt., pfd., B.... U.S. 26,200 946,475
Crown Cork & Seal Co. Inc., 4.50%, cvt.,
pfd. ..................................... U.S. 83,784 4,231,092
Excel Realty Trust Inc., cvt., pfd., A..... U.S. 258,000 7,030,500
Gentra Inc., pfd., G....................... Can. 74,000 1,192,295
*(R)Interlake Corp., 9.00%, Series A3,
cvt., pfd. ............................... U.S. 1,050 1,192,087
*+(R)Lancer Industries Inc., pfd., C....... U.S. 205,128 2,615,382
*North Atlantic Trading Company Inc. 144A,
pfd....................................... U.S. 15 375,000
*Wundies Industries Inc., 11.25%, pfd. .... U.S. 12,168 35,744
--------------
Total Preferred Stocks (Cost
$18,938,369).............................. 24,332,850
--------------
PRINCIPAL IN
LOCAL CURRENCY**
----------------
Corporate Bonds and Notes 1.1%
American Communication Services Inc.,
14.50%, 11/1/05........................... U.S. 1,950,000 1,150,500
American Telecasting Inc., zero cpn.,
6/15/04................................... U.S. 2,000,000 630,000
Asia Pulp & Paper Co. Ltd., 12.00%,
12/29/49, 144A............................ Indo.(A) 2,850,000 2,929,259
Azteca Holdings, 11.00%, 6/15/02, 144A..... Mex.(A) 500,000 505,625
Cadillac Fairview Corp., 12.00%, 7/31/05... Can. 131,259 97,426
CAI Wireless Systems Inc., 12.25%,
9/15/02................................... U.S. 2,600,000 832,000
(R)CGA Private Trust Company, Ltd., FRN,
6/10/99................................... U.S. 1,071,425 1,071,425
Cityscape Financial Corp., 12.75%, 6/1/04,
144A...................................... U.S. 2,000,000 1,980,000
Consorcio G Grupo Dina SA de CV 8.00%,
cvt., 8/8/04.............................. Mex.(A) 2,330,000 1,881,475
zero cpn., 11/15/02........................ Mex.(A) 4,006,000 3,505,250
*CS Wireless Inc., zero coupon, B,
3/1/06.................................... U.S. 6,025,000 1,415,875
(R)Fairchild Semiconductor Corp., 11.74%,
3/14/08................................... U.S. 2,525,000 2,525,000
Flagstar Companies Inc., 10.75%, 9/15/01... U.S. 950,000 969,000
FRD Acquisition Co., 12.50%, 7/15/04....... U.S. 875,000 934,063
Gaylord Container Corp., 9.75%, 6/15/07.... U.S. 500,000 501,250
Gentra Inc.
7.50%, 12/31/01, Series A.................. Can. 9,900,000 9,391,361
7.50%, new, 12/31/01, Series B............. Can. 629,584 506,056
Globalstar LP, 11.25%, 6/15/04, 144A....... U.S. 1,250,000 1,178,125
Greyhound Lines Inc., 11.5%, 4/15/07,
144A...................................... U.S. 550,000 588,500
Inflo Systems Inc., 10.00%, 1/1/07......... U.S. 2,100,000 1,785,000
Metallurg Inc., 12.00%, 4/14/07............ U.S. 3,247,000 3,344,410
North Atlantic Trading Company Inc.,
11.00%, 6/15/04........................... U.S. 650,000 659,750
Olivetti International NV, 3.75%, cvt.,
12/31/99.................................. Itl. 8,300,000,000 4,835,236
Oxford Automotive Inc., 10.125%, 6/15/07,
144A...................................... U.S. 775,000 775,000
*Peoples Choice TV
Corp., unit, 13.25%, cvt., 6/1/04......... U.S. 1,925 721,875
Phonetel Technologies Inc., 12.00%,
12/15/06.................................. U.S. 425,000 431,375
Sassco, 12.75%, 02/15/05, w/i.............. U.S. 1,000,000 1,050,000
Specialty Foods Corp., 11.25%, 8/15/03,
B......................................... U.S. 2,460,000 2,115,600
Supermercados Norte SA, 10.875%, 02/09/04,
144A...................................... Arg.(A) 1,100,000 1,127,500
Stone Container Corp., 11.50%, 8/15/06,
144A...................................... Can.(A) 810,000 830,250
TFM SA de CV, 10.25%, 6/15/07, 144A........ Mex.(A) 350,000 354,375
TFM SA de CV, 6/15/09, 144A................ Mex.(A) 1,750,000 1,015,000
Transamerican Energy Corporation, 6/15/02,
144A...................................... U.S. 5,000,000 3,637,500
</TABLE>
20
<PAGE>
MUTUAL QUALIFIED 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 (continued)
Transamerican Energy Corporation, 11.50%,
6/15/02, 144A............................. U.S. 1,000,000 $ 972,500
Uniforet Inc., 11.125%, 10/15/06........... Can.(A) 880,000 792,000
Vicap SA, 11.375%, 5/15/07, 144A........... U.S. 1,000,000 1,048,750
--------------
Total Corporate Bonds and Notes (Cost
$52,453,472)......................... 58,088,311
--------------
Bonds and Notes in Reorganization 1.4%
*Adams County Co. Ind. Dev. Auth., 9.00%,
11/1/96................................... U.S. 7,201,000 3,601
*Ames Department Stores Inc., trade
claims.................................... U.S. 4,002,809 30,021
*Boston Chicken Inc., zero cpn., cvt.,
6/1/15.................................... U.S. 3,200,000 700,000
*Caldor Corp., trade claims................ U.S. 7,483,883 823,227
*Dow Corning Corp.
8.15%, 10/15/29............................ U.S. 5,150,000 5,948,250
8.55%, 3/1/01.............................. U.S. 1,000,000 1,167,500
9.30%, 1/27/98............................. U.S. 1,835,000 2,165,300
9.375%, 2/1/08............................. U.S. 735,000 870,975
bank debt #1............................... U.S. 1,801,364 3,434,250
bank debt #2............................... U.S. 2,850,000 2,170,644
swap ...................................... U.S. 7,437,830 7,660,965
*El Paso TX Housing Finance Corp., 8.88%,
10/15/96.................................. U.S. 3,565,000 1,783
*Eurotunnel Finance Ltd., bank claim
tranche A.................................. U.K. 5,000,000 3,934,287
tranche A1................................. U.K. 2,366,047 1,861,742
tranche B.................................. U.K.(B) 141,591 73,813
tranche B.................................. U.K. 745,178 586,349
tranche D.................................. Bel. 55,000,000 706,794
tranche D1................................. Bel. 274,574,182 3,528,496
tranche E.................................. Fr.(B) 550,694 287,082
tranche E.................................. Fr. 62,625,488 4,928,665
tranche E1................................. Fr. 32,166,338 2,531,511
tranche J1................................. U.K. 1,169,819 920,480
*Harrah's Jazz Finance Corp., 14.25%,
11/15/01.................................. U.S. 2,900,000 1,116,500
*Harvard Industries Inc., 11.125%,
8/1/05.................................... U.S. 3,000,000 1,215,000
*Heartland Wireless Comm. Inc.
13.00%, 4/15/03............................ U.S. 615,000 221,400
13.00%, 4/15/03, Ser. D.................... U.S. 1,030,000 370,800
Home Holdings Inc.
8.625%, 12/15/03........................... U.S. 3,215,000 675,150
7.75%, 12/15/98............................ U.S. 745,000 152,725
*Louisiana Agriculture Finance Auth.
8.80%, 10/01/96............................ U.S. 750,000 375
8.25%, 10/01/96............................ U.S. 1,600,000 800
*Louisiana Housing Finance Auth., 8.61%,
8/01/96................................... U.S. 6,150,000 3,075
*Maxicare Health Plans Inc., bank note..... U.S. 124,847 39,951
</TABLE>
21
<PAGE>
MUTUAL QUALIFIED 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)
Mercury Finance Co., Commercial Paper
2/2/97..................................... U.S. 550,000 $ 506,000
2/3/97..................................... U.S. 610,009 561,208
2/4/97..................................... U.S. 77,596 71,388
2/6/97..................................... U.S. 360,373 331,819
2/7/97..................................... U.S. 232,789 214,166
2/11/97.................................... U.S. 116,394 107,082
2/13/97.................................... U.S. 186,231 171,333
2/18/97.................................... U.S. 77,596 71,388
2/19/97.................................... U.S. 713,886 656,775
2/20/97.................................... U.S. 117,170 107,796
2/21/97.................................... U.S. 170,712 157,055
2/24/97.................................... U.S. 263,828 242,722
3/10/97.................................... U.S. 4,000,000 3,680,000
3/17/97.................................... U.S. 529,356 487,008
4/11/97.................................... U.S. 38,798 35,694
4/18/97.................................... U.S. 108,635 99,944
4/22/97.................................... U.S. 62,077 57,111
4/24/97.................................... U.S. 93,116 85,667
Mercury Finance Co., Bank Claim, MTN
6.29%, 12/16/97............................ U.S. 4,300,000 3,956,000
6.16%, 12/15/98............................ U.S. 500,000 460,000
7.33%, 6/29/99............................. U.S. 1,350,000 1,242,000
7.42%, 6/29/00............................. U.S. 4,003,269 3,683,007
7.50%, 6/29/01............................. U.S. 3,903,269 3,591,007
*Nebraska Investment Finance Auth., 8.34%,
11/1/93................................... U.S. 1,000,000 500
*Southeast Banking Corp.
10.50%, 4/11/2001.......................... U.S. 3,875,000 2,325,000
4.75%, 10/15/97............................ U.S. 2,200,000 1,540,000
zero coupon, 11/10/97...................... U.S. 750,000 450,000
*Stratosphere Corp., 14.25%, 5/15/02....... U.S. 1,100,000 797,500
*Tiphook Finance Corp., bank claim......... U.K. 118,013 190,632
--------------
Total Bonds and Notes in Reorganization
(Cost $68,014,387)..................... 74,011,313
--------------
NUMBER
OF SHARES
- ---------------------------------------------------------------------------------------------------------------------
Companies in Liquidation 0.0%
*Aerospace Creditors Liquidating Trust,
CBI....................................... U.S. 126,677 158,346
*Americana Hotels & Realty Corp............ U.S. 143,000 84,913
*City Investing Co., Liquidating Trust..... U.S. 1,579,485 1,480,769
*MBO Properties Inc. ...................... U.S. 160,917 724,127
*MCorp Financial Trust, claim units........ U.S. 27,617 53,852
*MCorp Trust, claim units.................. U.S. 27,611 276
--------------
Total Companies in Liquidation (Cost
$277,408)............................ 2,502,283
--------------
</TABLE>
22
<PAGE>
MUTUAL QUALIFIED FUND
Investment Portfolio, June 30,1997 (unaudited) (continued)
<TABLE>
<CAPTION>
PRINCIPAL
ISSUE COUNTRY AMOUNT VALUE
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Short Term Obligations 17.5%
Federal Home Loan Bank System, 5.106% to
5.910% with maturities to 6/11/98......... U.S. 45,000,000 $ 44,915,317
Federal Home Loan Bank System, discount
notes, 5.11% to 5.95% with maturities to
5/26/98................................... U.S. 317,895,000 310,045,605
Federal Home Loan Mortgage Corp., 5.715% to
5.950% with maturities to 6/19/98......... U.S. 27,900,000 27,900,192
Federal Home Loan Mortgage Corp., discount
notes, 5.19% to 5.21%, with maturities to
10/31/97.................................. U.S. 14,000,000 13,827,248
Federal National Mortgage Assn., 6.08%,
5/6/98.................................... U.S. 12,500,000 12,527,325
Federal National Mortgage Assn., discount
notes, 5.12% to 5.64%, with maturities to
4/10/98................................... U.S. 523,450,000 513,820,144
--------------
Total Short Term Obligations (Cost
$911,349,743)........................ 923,035,831
--------------
Total Investments 97.5% (Cost
$4,097,428,897)........................... 5,136,297,212
Securities Sold Short (0.9%).............. (49,395,507)
Options Written 0.0%...................... (110,250)
Net Equity in Forward Contracts 0.7%...... 37,857,416
Other Assets, Less Liabilities 2.7%....... 145,037,998
--------------
Total Net Assets 100.0%................... $5,269,686,869
==============
Securities Sold Short
- ------------------------
ISSUER COUNTRY SHARES VALUE
- ------------------------------------------------------------------- ------- ---------------- --------------
Boeing Co.......................................................... U.S. 384,400 $ 20,397,225
*Enserch Exploration Inc. ......................................... U.S. 23,000 251,563
*Healthsouth Corp. ................................................ U.S. 936,900 23,363,944
Pharmacia & Upjohn................................................. U.S. 154,900 5,382,775
--------------
Total (proceeds $46,191,703)................................... $ 49,395,507
==============
Options Written
- ---------------------------------------------------------------------------------------------------
SHARES SUBJECT
Common Stock / Expiration Date / Exercise Price TO CALL VALUE
- ------------------------------------------------------------------- ---------------- --------------
*Advanta Corp. / July / 35......................................... 210,000 $ 76,125
*Advanta Corp. / July / 40......................................... 210,000 34,125
--------------
Total (premiums received $90,646).............................. $ 110,250
==============
</TABLE>
*Non-income producing securities
**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.
23
<PAGE>
MUTUAL QUALIFIED 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 $3,957,513,908)........................ $4,806,731,019
Controlled Affiliates (cost $42,385,488).......................... 45,344,725
Non Controlled Affiliates (cost $97,529,501)...................... 284,221,468 $5,136,297,212
--------------
Cash............................................................... 14,829,460
Receivables:
Investment securities sold........................................ 70,539,902
Capital shares sold............................................... 60,080,773
Dividends and interest............................................ 9,549,232
Deposits with broker for securities sold short..................... 39,225,868
Unrealized gains on forward exchange contracts (Note 9)............ 43,722,673
--------------
Total assets................................................... 5,374,245,120
--------------
Liabilities:
Payables:
Investment securities purchased................................... 38,599,978
Capital shares redeemed........................................... 7,142,982
Securities sold short, at value (proceeds received $46,191,703).... 49,395,507
Outstanding options written, at value (premium received $90,646)... 110,250
Unrealized loss on forward exchange contracts (Note 9)............. 5,865,257
Accrued expenses................................................... 3,444,277
--------------
Total liabilities.............................................. 104,558,251
--------------
Net assets, at value................................................ $5,269,686,869
==============
Net assets consist of:
Undistributed net investment income................................ $ 49,791,111
Net unrealized appreciation........................................ 1,073,502,323
Accumulated net realized gain...................................... 282,116,682
Net capital paid in on shares of capital stock..................... 3,864,276,753
--------------
Net assets, at value................................................ $5,269,686,869
==============
Class Z
Net asset value per share ($4,942,466,660 / 267,649,100 shares outstanding)............... $18.47
======
Class I
Net asset value per share ($220,550,265 / 11,972,206 shares outstanding).................. $18.42
======
Maximum offering price ($18.42 / 95.50%).................................................. $19.29
======
Class II
Net asset value per share ($106,669,944 / 5,807,507 shares outstanding)................... $18.37
======
Maximum offering price ($18.37 / 99.00%).................................................. $18.56
======
</TABLE>
See Notes to Financial Statements.
24
<PAGE>
MUTUAL QUALIFIED FUND
Financial Statements (continued)
Statement of Operations
for the six months ended June 30, 1997 (unaudited)
<TABLE>
<S> <C> <C>
Investment income:
(net of $3,054,104 foreign taxes withheld)
Dividends........................................................... $ 39,952,988
Interest............................................................ 29,348,740
------------
Total income.................................................... $ 69,301,728
Expenses:
Management fees (Note 4)............................................ 14,043,145
Administrative fees (Note 4)........................................ 1,819,491
Distribution fees (Note 4)
Class I....................................................... 198,664
Class II...................................................... 260,308
Transfer agent fees (Note 4)........................................ 1,564,987
Custodian fees...................................................... 261,045
Reports to shareholders............................................. 179,784
Audit fees.......................................................... 18,088
Legal fees.......................................................... 45,213
Registration and filing fees........................................ 158,943
Directors' fees and expenses........................................ 19,304
Other............................................................... 59,150
------------
Total expenses.................................................. 18,628,122
Less expenses waived (Note 4)....................................... (713,505)
------------
Total expenses less fees waived................................. 17,914,617
------------
Net investment income........................................... 51,387,111
Realized and unrealized gain:
Net realized gain on:
Investments........................................................ 173,735,223
Foreign currency transactions...................................... 39,620,309
------------
213,355,532
------------
Net unrealized appreciation on:
Investments........................................................ 309,742,875
Foreign currency translation of other assets and liabilities....... 37,790,523
------------
347,533,398
------------
Net realized and unrealized gain..................................... 560,888,930
------------
Net increase in net assets resulting from operations................. $612,276,041
============
</TABLE>
See Notes to Financial Statements.
25
<PAGE>
MUTUAL QUALIFIED 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.......................................... $ 51,387,111 $ 114,962,821
Net realized gain on investment and foreign currency
transactions................................................. 213,355,532 276,332,748
Net unrealized appreciation.................................... 347,533,398 330,171,813
-------------- -----------------
Net increase in net assets resulting from operations......... 612,276,041 721,467,382
Distributions to shareholders:
From net investment income
Class Z........................................................ -- (107,303,548)
Class I........................................................ -- (353,451)
Class II....................................................... -- (182,773)
From net realized gain
Class Z........................................................ -- (311,919,654)
Class I........................................................ -- (711,352)
Class II....................................................... -- (378,697)
Capital share transactions (Note 3)
Class Z........................................................ 65,775,419 983,246,572
Class I........................................................ 184,629,256 21,035,840
Class II....................................................... 89,686,717 10,286,322
-------------- -----------------
Net increase in net assets................................... 952,367,433 1,315,186,641
Net assets:
Beginning of period............................................. 4,317,319,436 3,002,132,795
-------------- -----------------
End of period................................................... $5,269,686,869 $ 4,317,319,436
============== ===============
</TABLE>
See Notes to Financial Statements.
26
<PAGE>
MUTUAL QUALIFIED FUND
Notes to Financial Statements (unaudited)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Mutual Qualified 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. 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.
27
<PAGE>
MUTUAL QUALIFIED 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 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.
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.
28
<PAGE>
MUTUAL QUALIFIED FUND
Notes to Financial Statements (unaudited) (continued)
3. CAPITAL STOCK (cont.)
Effective February 3, 1997, the shares of the Fund were split on a 2-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 1.150 billion Fund shares
authorized ($0.001 par value) of which 750 million, 200 million, and 200 million
were designated as Class Z, Class I, and Class II shares, 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........................................... 19,237,457 $ 366,637,284 34,226,041 $1,085,539,409
Shares issued on reinvestment of distributions........ -- -- 12,345,504 395,968,029
Shares issued on 2-for-1 stock split.................. 131,387,870 -- -- --
Shares Redeemed....................................... (15,000,638) (300,861,865) (15,506,528) (498,260,866)
----------- ------------- ----------- --------------
Net increase.......................................... 135,624,689 $ 65,775,419 31,065,017 $ 983,246,572
============= =============== ============ ================
</TABLE>
<TABLE>
<CAPTION>
Year ended
Six months ended December 31, 1996
June 30, 1997
---------------------------- -----------------------------
Shares Amount Shares Amount
----------- ------------- ----------- --------------
<S> <C> <C> <C> <C>
Class I
Shares sold........................................... 9,974,728 $ 190,167,087 601,500 $ 20,190,535
Shares issued on reinvestment of distributions........ -- -- 29,625 953,331
Shares issued on 2-for-1 stock split.................. 1,682,112 -- -- --
Shares Redeemed....................................... (312,534) (5,537,831) (3,225) (108,026)
----------- ------------- ----------- --------------
Net increase.......................................... 11,344,306 $ 184,629,256 627,900 $ 21,035,840
============= =============== ============ ================
</TABLE>
<TABLE>
<CAPTION>
Six months ended Year ended
June 30, 1997 December 31, 1996
---------------------------- -----------------------------
Shares Amount Shares Amount
----------- ------------- ----------- --------------
<S> <C> <C> <C> <C>
Class II
Shares sold........................................... 4,992,998 $ 92,212,775 300,727 $ 10,097,197
Shares issued reinvestment of distributions........... -- -- 12,961 416,815
Shares issued on 2-for-1 stock split.................. 655,258 -- -- --
Shares Redeemed....................................... (147,770) (2,526,058) (6,667) (227,690)
----------- ------------- ----------- --------------
Net increase.......................................... 5,500,486 $ 89,686,717 307,021 $ 10,286,322
============= =============== ============ ================
</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
shares, and transfer agent, respectively.
29
<PAGE>
MUTUAL QUALIFIED 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 .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 $317,671 and
$11,039, respectively.
5. INVESTMENT TRANSACTIONS
Purchases and sales of securities (excluding short-term securities) for the
period ended June 30, 1997 aggregated $1,546,538,078 and $1,040,785,262,
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................... 275 $ 119,483
Options written............................................ 420 90,646
Options terminated in closing transactions................. (275) (119,483)
--- ---------
Options outstanding June 30, 1997.......................... 420 $ 90,646
===================== ==========
</TABLE>
6. INCOME TAXES
At June 30, 1997, the net unrealized appreciation based on the cost of
investments for income tax purposes of $4,052,030,034 was as follows:
<TABLE>
<S> <C>
Unrealized appreciation................................................. $1,081,474,171
Unrealized depreciation................................................. (46,712,751)
--------------
Net unrealized appreciation............................................. $1,034,761,420
================
</TABLE>
30
<PAGE>
MUTUAL QUALIFIED 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>
139,785 CGA Group, Ltd.,................................................... 6/10/97 $ 698,925
240,000 CGA Group, Ltd., Pfd., A, Units.................................... 6/10/97 6,000,000
28,571 CGA Group, Ltd., Pfd., B........................................... 6/10/97 714,275
1,071,425 CGA Private Trustee Co., Ltd., FRN, 6/10/99........................ 6/10/97 1,071,425
861,000 Cityscape Financial Corp........................................... 1/3/97 16,307,878
2,525,000 Fairchild Semiconductor Corp., 11.74%, 3/14/08..................... 4/2/97 2,525,000
1,050 Interlake Corp., 9%, Series A3, cvt., pfd.......................... 6/17/92 1,192,087
444 Kendall International, Inc., Residual Ownership Certificates....... 7/6/92 5,328
4 Lancer Industries, Inc., B......................................... 8/11/89 51,286
205,128 Lancer Industries, Inc., Pfd., C................................... 8/11/89 2,615,382
23,562,000 MSCW Investors II, LLC............................................. 12/27/95 39,237,956
6,106,769 S.H. Mortgage Acquisition LLC...................................... 8/17/95 6,106,769
152,073 St. George Holdings Ltd., A........................................ 6/10/97 15,207
1,495 St. George Holdings Ltd., B........................................ 6/10/97 150
4,800,554 Sunbeam Corp....................................................... 2/23/90 163,098,822
2,427,184 Wellsford Real Properties, Inc..................................... 6/2/97 24,029,122
------------
Total Restricted Securities (Cost $108,925,758) (5.0% of Net Assets)...................... $263,669,612
==============
</TABLE>
31
<PAGE>
MUTUAL QUALIFIED 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
$329,566,193. For the period ended 6/30/97, dividend income from "affiliated
companies" was $1,939,724 and net realized gains (losses) from disposition of
"affiliated companies" were $6,917,801.
<TABLE>
<CAPTION>
Number of
Shares Shares Dividend Realized
Held at Gross Gross Held at Value Income Capital
Dec. 31, 1996 Additions Reductions June 30, 1997 June 30, 1997 1/1/97-6/30/97 Gains/(losses)
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Controlled Affiliates*
MSCW Investors II, LLC........ 23,562,000 -- -- 23,562,000 $ 39,237,956 -- --
S.H. Mortgage Acquisition
LLC......................... 19,668,774 -- 13,562,005 6,106,769 6,106,769 -- $2,122,153
------------- -------------- --------------
Total Controlled
Affiliates.............. $ 45,344,725 -- $2,122,153
============== ================= ==============
Non Controlled Affiliates
Esselte AB, A................. 1,375,000 -- -- 1,375,000 $ 31,462,090 $ 889,968 --
Esselte AB, B................. 233,600 -- -- 233,600 5,496,115 151,197 --
ITLA Capital Corp. ........... 605,000 104,000 -- 709,000 11,521,250 -- --
Lancer Industries, Inc., B.... 4 -- -- 4 51,286 307,692 --
Lancer Industries, Inc., Pfd.,
C .......................... 205,128 -- -- 205,128 2,615,382 -- $4,794,846
Long Beach Financial Corp..... -- 1,100,000 -- 1,100,000 9,625,000 -- --
Regent Kingpin Chile Value
Fund........................ 80,180 -- -- 80,180 117,063 -- --
Regent Kingpin Chile Value
Fund, wts................... 6,168 -- 6,168 -- -- -- 802
Sunbeam Corp. ................ 4,800,554 -- -- 4,800,554 163,098,822 96,011 --
Van Melle NV.................. 457,082 4,395 -- 461,477 36,205,338 494,856 --
Wellsford Real Properties,
Inc. ....................... -- 2,427,184 -- 2,427,184 24,029,122 -- --
------------- -------------- --------------
Total Non Controlled Affiliates... $ 284,221,468 $1,939,724 $4,795,648
============== ================= ==============
</TABLE>
* Issuers in which the Fund owns 25% or more of the outstanding voting
securities.
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 Statement of Assets and Liabilities. Realized and unrealized
gains and losses are included in the Statement of Operations.
32
<PAGE>
MUTUAL QUALIFIED FUND
Notes to Financial Statements (unaudited) (continued)
9. FINANCIAL INSTRUMENTS (Cont.)
As of June 30, 1997, the Fund had the following forward exchange contracts
outstanding:
<TABLE>
<CAPTION>
Contracts to In Settlement Unrealized
Buy: Exchange for Date Gain/(Loss)
<S> <C> <C> <C> <C> <C> <C>
------------ ---------- -----------
3,221,688 British Pound........................................ U.S. $ 5,245,270 9/18/97 U.S. $ 106,767
3,689,519 British Pound........................................ 5,979,678 10/20/97 143,516
1,523,696 British Pound........................................ 2,476,006 11/17/97 50,528
5,178,429 Swiss Franc.......................................... 3,554,904 9/10/97 21,784
U.S. $17,255,858 322,595
Contracts to
Sell:
142,294,577 Belgium Franc........................................ U.S. $ 4,034,437 11/07/97 77,122
45,000,000 Canadian Dollar...................................... 32,824,823 8/29/97 114,916
58,574,024 Canadian Dollar...................................... 42,929,468 11/28/97 138,057
261,750,645 Danish Krone......................................... 40,555,245 10/24/97 859,027
119,306,730 Dutch Guilder........................................ 62,782,861 9/08/97 1,697,033
89,019,622 Dutch Guilder........................................ 47,416,171 9/17/97 1,808,118
98,306,934 Dutch Guilder........................................ 51,105,935 12/10/97 427,991
86,377,753 Finnish Markka....................................... 17,339,232 9/03/97 621,119
382,534,522 French Franc......................................... 70,583,211 7/17/97 5,410,920
175,052,428 French Franc......................................... 31,153,681 8/29/97 1,245,527
39,643,450 French Franc......................................... 7,000,000 11/14/97 191,150
152,803,600 French Franc......................................... 26,873,655 11/28/97 603,750
20,000,000 French Franc......................................... 3,466,805 11/28/97 28,417
17,123,909 Deutschemark......................................... 10,193,335 9/18/97 315,772
7,885,520,834 Italian Lira......................................... 4,624,885 1/02/98 3,740
56,256,232 Norwegian Krone...................................... 7,934,588 12/09/97 185,305
2,500,000 Norwegian Krone...................................... 353,742 9/10/97 11,114
413,097,277 Swedish Krona........................................ 62,585,755 7/21/97 9,136,775
715,765,388 Swedish Krona........................................ 103,599,193 8/15/97 10,896,317
284,217,048 Swedish Krona........................................ 38,639,974 11/18/97 1,684,122
303,480,827 Swedish Krona........................................ 40,049,201 2/17/98 447,182
482,702,927 Swedish Krona........................................ 69,718,489 10/21/97 7,028,571
650,000 Swiss Franc.......................................... 459,528 9/10/97 10,581
U.S. $776,224,214 42,942,626
Net unrealized gain on offsetting forward exchange contracts ... 457,452
Unrealized gain on forward exchange contracts................. U.S. $43,722,673
</TABLE>
33
<PAGE>
MUTUAL QUALIFIED 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>
4,000,000 Canadian Dollar......................................... U.S. $ 2,926,223 8/29/97 U.S. $ (18,675)
11,900,000 Finnish Markka.......................................... 2,359,155 9/03/97 (55,952)
22,375,820 French Franc............................................ 3,892,462 7/17/97 (80,301)
1,500,000 Deutschemark............................................ 906,344 9/18/97 (41,101)
15,423,965 Swiss Franc............................................. 10,730,078 9/10/97 (76,903)
U.S. $20,814,262 (272,932)
Contracts to Sell:
- ----------------------------------------------------------------------
17,000,000 British Pound........................................... U.S. $27,498,010 7/18/97 (796,654)
28,405,872 British Pound........................................... 46,848,772 8/18/97 (384,557)
32,251,328 British Pound........................................... 51,324,763 9/18/97 (2,252,431)
17,007,308 British Pound........................................... 27,509,320 10/20/97 (716,317)
16,408,632 British Pound........................................... 26,829,755 11/17/97 (378,849)
30,044,676 British Pound........................................... 48,972,822 12/15/97 (804,028)
295,668 Canadian Dollar......................................... 214,252 8/29/97 (665)
7,000,000 Canadian Dollar......................................... 5,089,799 11/28/97 (24,070)
19,216,750 Swedish Krona........................................... 2,500,000 2/17/98 (7,645)
33,920,880 Swiss Franc............................................. 23,201,696 9/10/97 (227,109)
U.S. $259,989,189 (5,592,325)
Unrealized loss on forward exchange............................. (5,865,257)
Net unrealized gain on forward exchange contracts............. U.S. $37,857,416
34
</TABLE>
<PAGE>
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<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
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FRANKLIN STATE-SPECIFIC
FUNDS SEEKING
TAX-FREE INCOME
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North Carolina
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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 Qualified 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.
475 S97 06/97
[LOGO] Printed on recycled paper
<PAGE>
