SEMI ANNUAL REPORT
JUNE 30, 1998
MUTUAL FINANCIAL SERVICES FUND
[LOGO]
FRANKLIN(R) TEMPLETON(R)
PAGE
[PHOTO OF MICHAEL F. PRICE APPEARS HERE]
SPECIAL SHAREHOLDER UPDATE
Dear Shareholder:
As Mutual Series has grown, I have worked closely with a team of individuals who
share my belief in the disciplined, value-oriented investment approach pioneered
by Max Heine more than forty years ago. This process demands intense fundamental
analysis - doing your homework, crunching the numbers, and truly striving to be
an expert in the businesses in which you invest.
Today, we have a senior portfolio group that is among the best in the industry,
and effective November 1, we plan to formalize their management roles. Peter
Langerman will be Chief Executive Officer and Rob Friedman will be Chief
Investment Officer, with overall responsibility for the funds' portfolio
management. Their work will be supported by our senior team, which includes Jeff
Altman, Ray Garea, David Marcus, Larry Sondike and David Winters - each of whom
have made significant contributions to our success. While I will no longer be
actively managing the funds' portfolios, I will continue as Chairman of the
Boards of Directors that oversee the Mutual Series funds and Franklin Mutual
Advisers, Inc.
More than anything, these new titles reflect the tremendous confidence I have in
each of these individuals. Peter Langerman has been with Mutual Series since
1986, and has served as Chief Operating Officer since May 1997. Rob Friedman has
been with our organization since 1988, and has done exceptional work in
implementing our philosophy both domestically and abroad. He has also been
instrumental to the success of Mutual Discovery Fund.
Both personally and professionally, I remain strongly committed to Mutual Series
and will continue to be very much a part of this organization in the years
ahead. My substantial personal investment in the funds should speak for itself.
We hope that you will share the confidence we have in the abilities of Peter,
Rob and our senior management team to lead Mutual Series and continue our
tradition of value investing.
Sincerely,
/s/ Michael F. Price
- ----------------------------
Michael F. Price
PAGE
CONTENTS
<TABLE>
<S> <C>
Shareholder Letter ........................................ 1
Performance Summaries
Class Z ................................................ 4
Class I ................................................ 6
Class II ............................................... 7
Statement of Investments .................................. 11
Financial Statements ...................................... 15
Notes to Financial
Statements ................................................ 18
</TABLE>
[PYRAMID GRAPHIC]
SHAREHOLDER LETTER
- --------------------------------------------------------------------------------
Your Fund's Objective: Mutual Financial Services Fund seeks capital
appreciation, with income as a secondary objective, by investing primarily in
common and preferred stocks, bonds, and convertible securities issued by
companies in the financial services industry. The fund will normally have at
least 65% of its invested assets in the securities of issuers such as banks,
savings and loan organizations, credit card companies, brokerage firms, finance
companies, sub-prime lending institutions, investment advisers, and insurance
companies.
- --------------------------------------------------------------------------------
Dear Shareholder:
We are pleased to bring you this semiannual report of Mutual Financial Services
Fund, which covers the period ended June 30, 1998. During this time, the fund's
Class Z shares produced a six-month 16.54% cumulative total return, as discussed
in the Performance Summary on page 4. This outperformed the Keefe Bruyette &
Woods' "KBW 50" Index, which increased 11.64% over the same period.* We also
outperformed a universe of 20 well-established mutual funds that we monitor,
which specialize in the financial services
*Source: Kefe Bruyette & Woods, Inc. Index is unmanaged and tracks the 50
largest U.S. banks' stocks. Price appreciation includes reinvested dividends.
One cannot invest directly in an index.
You will find a complete listing of the fund's portfolio holdings, including
dollar value and number of shares or principal amount, beginning on page 11 of
this report.
PAGE
sector. Their median total return was 12.63% for the period. A return of 16.16%
or better represented performance in the top quarter of these funds.
Although the financial services sector performed relatively well during the
first half of 1998, compared to broad U.S. market indices, the last two months
of the period were especially difficult for companies in this field. In our
December 31, 1997 annual report, we expressed our concern about acquisition
prices and lofty stock prices of perceived takeover targets within the financial
services industry. Shares of such companies were particularly hard hit in May
and June, with many stocks falling 20% to 25% from their highs. Even though we
had previously avoided this group, we found some stocks of reasonable value, and
built positions in them toward the end of the reporting period.
The challenging environment for small-cap and medium-cap stocks was another
notable occurrence during the reporting period. We found some interesting values
in such equities, as the shares of numerous companies traded down to levels that
we believed to be attractive. For example, we added to our position in Western
Bancorp., the fund's largest holding at the end of the reporting period. Its
shares rose 31.8% from January 23, 1998 (our date of purchase), through June 30,
1998, and we are optimistic about the firm's long-term growth potential. We also
felt that some small-cap and medium-cap banks in New England represented good
value, particularly as we expect further consolidation within this market.
During the six months under review, European financial companies strengthened
considerably. As this occurred and their stock valuations became more stretched,
we took profits and reduced our exposure in Europe from approximately 26% of
total net assets on December 31, 1997, to 18.3% at the end of the reporting
period.
TOTAL RETURN INDEX COMPARISON
[BAR GRAPH APPEARS HERE]
The bar graph compares the 6-moths performance of the Mutual Financial Services
Fund to that of the KBW 50, based on total return from 12/31/97 to 6/30/98
<TABLE>
<S> <C>
Mutual Financial Services Fund(1) 16.54%
KBW 50 Index (2) 11.64%
</TABLE>
1. Represents the change in value of an investment during the period shown.
Total return assumes reinvestment of dividends and capital gains at net asset
value. The historical data shown above pertain only to Class Z shares of the
fund. The fund offers other classes of shares, subject to different fees and
expenses, which affect their performance. Please see the prospectus for more
details. Past performance is not predictive of future results.
2. Index is unmanaged and includes reinvested dividends. One cannot invest
directly in an index.
PORTFOLIO BREAKDOWN
This chart shows in pie format the portfolio breakdown of the fund's securities
on June 30, 1998, based on total net assets
[PIE CHART APPEARS HERE]
<TABLE>
<S> <C>
Equities 87.7%
Bonds 1.6%
Short-Term Investments & Other Net Assets 10.7%
</TABLE>
2
PAGE
Like any true value investor, we continue to be intrigued by events in Japan.
But, in our opinion, there are two critical factors that make it extremely risky
to invest in Japanese financial institutions right now. First, such corporations
lack disclosure and transparency regarding loan portfolios, making it virtually
impossible to assess their asset quality. Second, given the size of their
balance sheets, the negative consequences of an incorrect assessment would be
large. However, we will continue to monitor the situation closely.
We appreciate your participation in Mutual Financial Services Fund and welcome
your comments and suggestions.
Sincerely,
Franklin Mutual Advisers Senior Portfolio Management Team
TOP 10 HOLDINGS
6/30/98
<TABLE>
<CAPTION>
COMPANY INDUSTRY, COUNTRY % OF TOTAL NET ASSETS
<S> <C>
Western Bancorp. Banking, U.S. 3.4%
First Chicago NBD Corp. Banking, U.S. 3.0%
First Union Corp. Banking, U.S. 2.9%
Sampo Insurance Co. Ltd., A Insurance, Finland 2.9%
United Asset Management Corp. Financial Services, U.S. 2.3%
Banca Nazionale del Lavoro SpA di Risp Banking, Italy 2.2%
Vermont Financial Services Corp. Banking, U.S. 2.1%
Beneficial Corp. Financial Services, U.S. 2.0%
Mercantile Bankshares Corp. Banking, U.S. 2.0%
Firstar Corp. Financial Services, U.S. 2.0%
</TABLE>
- --------------------------------------------------------------------------------
The discussion contained in this report reflects our views, opinions and
portfolio holdings as of June 30, 1998, the end of the reporting period.
However, market and economic conditions are changing constantly, which can be
expected to affect our strategies and the fund's portfolio composition. Although
historic performance is no guarantee of future results, these insights may help
you understand our investment and management philosophy.
Of course, there are special risks involved with investing in a single industry,
including increased sensitivity to economic, political, or regulatory
developments, which can result in greater volatility than a fund that invests in
many different industries. 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'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.
- --------------------------------------------------------------------------------
3
PAGE
PERFORMANCE SUMMARY
CLASS Z
Mutual Financial Services Fund - Class Z produced a 16.54% cumulative total
return for the six-month period ended June 30, 1998. Cumulative total return
measures the change in value of an investment, assuming reinvestment of all
distributions.
The fund's Class Z share price increased $2.03, from $12.27 on December 31,
1997, to $14.30 on June 30, 1998. During the reporting period, Class Z shares
paid no distributions. Distributions will vary depending on income earned by the
fund and any profits realized from the sale of securities in the portfolio, as
well as the level of the fund's operating expenses.
Past performance is not predictive of future results.
4
PAGE
CLASS Z
Periods ended 6/30/98
<TABLE>
<CAPTION>
SINCE
INCEPTION
(8/19/97)
- ------------------------------------------------------------------------
<S> <C>
Aggregate Total Return(1) 44.42%
Value of $10,000 Investment(2) $14,442
</TABLE>
1. Aggregate total return represents the change in value of an investment over
the indicated period. Since these shares have existed for less than one year,
average annual total returns are not provided.
2. This figure represents the value of a hypothetical $10,000 investment in the
fund over the indicated period.
All calculations assume reinvestment of dividends and capital gains at net asset
value. Franklin Mutual Advisers has agreed in advance to waive all or a portion
of its management fee and/or make certain payments to reduce the fund's expenses
for the first 24 months of operation, after which Franklin Mutual Advisers may
terminate this arrangement at any time.
Since markets can go down as well as up, investment return and principal value
will fluctuate with market conditions, currency volatility, and the economic,
social, and political climates of countries where investments are made. You may
have a gain or loss when you sell your shares.
Past performance is not predictive of future results.
5
PAGE
CLASS I
Mutual Financial Services Fund - Class I produced a 16.46% cumulative total
return for the six-month period ended June 30, 1998. Cumulative total return
measures the change in value of an investment, assuming reinvestment of all
distributions, and does not include the sales charge.
The fund's Class I share price, as measured by net asset value, increased $2.02,
from $12.27 on December 31, 1997, to $14.29 on June 30, 1998. During the
reporting period, Class I shares paid no distributions. Distributions will vary
depending on income earned by the fund and any profits realized from the sale of
securities in the portfolio, as well as the level of the fund's operating
expenses.
CLASS I
Periods ended 6/30/98
<TABLE>
<CAPTION>
SINCE
INCEPTION
(8/19/97)
- ------------------------------------------------------------------------
<S> <C>
Cumulative Total Return(1) 44.22%
Aggregate Total Return(2) 37.74%
Value of $10,000 Investment(3) $13,774
</TABLE>
1. Cumulative total return represents the change in value of an investment over
the indicated period and does not include the sales charge.
2. Aggregate total return represents the change in value of an investment over
the indicated period and includes 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. This figure represents the value of a hypothetical $10,000 investment in the
fund over the indicated period and includes the sales charge.
All calculations assume reinvestment of dividends and capital gains at net asset
value. Franklin Mutual Advisers has agreed in advance to waive all or a portion
of its management fee and/or make certain payments to reduce the fund's expenses
for the first 24 months of operation, after which Franklin Mutual Advisers may
terminate this arrangement at any time.
Since markets can go down as well as up, investment return and principal value
will fluctuate with market conditions, currency volatility and the economic,
social, and political climates of countries where investments are made. You may
have a gain or loss when you sell your shares.
Past performance is not predictive of future results.
6
PAGE
Class II
Mutual Financial Services Fund - Class II produced a 16.07% cumulative total
return for the six-month period ended June 30, 1998. Cumulative total return
measures the change in value of an investment, assuming reinvestment of all
distributions, and does not include sales charges.
The fund's Class II share price, as measured by net asset value, increased
$1.97, from $12.26 on December 31, 1997, to $14.23 on June 30, 1998. During the
reporting period, Class II shares paid no distributions. Distributions will vary
depending on income earned by the fund and any profits realized from the sale of
securities in the portfolio, as well as the level of the fund's operating
expenses.
CLASS II
Periods ended 6/30/98
<TABLE>
<CAPTION>
SINCE
INCEPTION
(8/19/97)
- -------------------------------------------------------------------------
<S> <C>
Cumulative Total Return(1) 43.42%
Aggregate Total Return(2) 41.01%
Value of $10,000 Investment(3) $14,101
</TABLE>
1. Cumulative total return represents the change in value of an investment over
the indicated period and does not include sales charges.
2. Aggregate total return represents the change in value of an investment over
the indicated period and includes the 1.0% initial sales charge and 1.0%
contingent deferred sales charge, applicable to shares redeemed within 18 months
of investment. Since these shares have existed for less than one year, average
annual total returns are not provided.
3. This figure represents the value of a hypothetical $10,000 investment in the
fund over the indicated period and includes sales charges.
All calculations assume reinvestment of dividends and capital gains at net asset
value. Franklin Mutual Advisers has agreed in advance to waive all or a portion
of its management fee and/or make certain payments to reduce the fund's expenses
for the first 24 months of operation, after which Franklin Mutual Advisers may
terminate this arrangement at any time.
Since markets can go down as well as up, investment return and principal value
will fluctuate with market conditions, currency volatility and the economic,
social, and political climates of countries where investments are made. You may
have a gain or loss when you sell your shares.
Past performance is not predictive of future results.
7
PAGE
MUTUAL FINANCIAL SERVICES FUND
Financial Highlights
<TABLE>
<CAPTION>
CLASS Z
--------------------------------------
SIX MONTHS ENDED
JUNE 30, 1998 PERIOD ENDED
(UNAUDITED) DECEMBER 31, 1997+
--------------------------------------
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE
(For a share outstanding throughout the period)
Net asset value, beginning of period........................ $12.27 $10.00
--------------------------------------
Income from investment operations:
Net investment income...................................... .12 .04
Net realized and unrealized gains.......................... 1.91 2.35
--------------------------------------
Total from investment operations............................ 2.03 2.39
--------------------------------------
Less distributions from:
Net investment income...................................... -- (.03)
Net realized gains......................................... -- (.09)
--------------------------------------
Total distributions......................................... -- (.12)
--------------------------------------
Net asset value, end of period.............................. $14.30 $12.27
=====================================
Total Return*............................................... 16.54% 23.92%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's)........................... $257,226 $136,350
Ratios to average net assets:
Expenses................................................... 1.00%** 1.00%**
Expenses, excluding waiver and payments by affiliate....... 1.12%** 1.62%**
Net investment income...................................... 1.90%** 1.37%**
Portfolio turnover rate..................................... 61.09% 42.26%
</TABLE>
*Total return is not annualized.
**Annualized.
+For the period August 19, 1997 (commencement of operations) to December 31,
1997.
8
PAGE
MUTUAL FINANCIAL SERVICES FUND
Financial Highlights (continued)
<TABLE>
<CAPTION>
CLASS I
--------------------------------------
SIX MONTHS ENDED
JUNE 30, 1998 PERIOD ENDED
(UNAUDITED)++ DECEMBER 31, 1997+
--------------------------------------
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE
(For a share outstanding throughout the period)
Net asset value, beginning of period........................ $12.27 $10.00
--------------------------------------
Income from investment operations:
Net investment income...................................... .11 .03
Net realized and unrealized gains.......................... 1.91 2.35
--------------------------------------
Total from investment operations............................ 2.02 2.38
--------------------------------------
Less distributions from:
Net investment income...................................... -- (.02)
Net realized gains......................................... -- (.09)
--------------------------------------
Total distributions......................................... -- (.11)
--------------------------------------
Net asset value, end of period.............................. $14.29 $12.27
======================================
Total Return*............................................... 16.46% 23.83%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's)........................... $192,979 $78,249
Ratios to average net assets:
Expenses................................................... 1.35%** 1.35%**
Expenses, excluding waiver and payments by affiliate....... 1.48%** 1.97%**
Net investment income...................................... 1.58%** 1.02%**
Portfolio turnover rate..................................... 61.09% 42.26%
</TABLE>
*Total return does not reflect sales commissions and is not annualized.
**Annualized.
+For the period August 19, 1997 (commencement of operations) to December 31,
1997.
++Based on average weighted shares outstanding.
9
PAGE
MUTUAL FINANCIAL SERVICES FUND
Financial Highlights (continued)
<TABLE>
<CAPTION>
CLASS II
--------------------------------------
SIX MONTHS ENDED
JUNE 30, 1998 PERIOD ENDED
(UNAUDITED)++ DECEMBER 31, 1997+
--------------------------------------
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE
(For a share outstanding throughout the period)
Net asset value, beginning of period........................ $12.26 $10.00
--------------------------------------
Income from investment operations:
Net investment income...................................... .07 .01
Net realized and unrealized gains.......................... 1.90 2.35
--------------------------------------
Total from investment operations............................ 1.97 2.36
--------------------------------------
Less distributions from:
Net investment income...................................... -- (.01)
Net realized gains......................................... -- (.09)
--------------------------------------
Total distributions......................................... -- (.10)
--------------------------------------
Net asset value, end of period.............................. $14.23 $12.26
======================================
Total Return*............................................... 16.07% 23.57%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's)........................... $132,288 $43,207
Ratios to average net assets:
Expenses................................................... 2.00%** 2.00%**
Expenses, excluding waiver and payments by affiliate....... 2.13%** 2.62%**
Net investment income...................................... .94%** .37%**
Portfolio turnover rate..................................... 61.09% 42.26%
</TABLE>
*Total return does not reflect sales commissions or the contingent deferred
sales charge and is not annualized.
**Annualized.
+For the period August 19, 1997 (commencement of operations) to December 31,
1997.
++Based on average weighted shares outstanding.
See Notes to Financial Statements.
10
PAGE
MUTUAL FINANCIAL SERVICES FUND
STATEMENT OF INVESTMENTS, JUNE 30, 1998 (UNAUDITED)
<TABLE>
<CAPTION>
COUNTRY SHARES VALUE
--------------------------------------
<S> <C> <C> <C>
COMMON STOCKS 87.7%
BANKING 41.5%
Affiliated Community Bancorp Inc. .......................... United States 209,900 $ 7,635,113
*Annapolis National Bancorp Inc. ........................... United States 32,163 325,650
Australia & New Zealand Banking Group Ltd. ................. Australia 555,000 3,828,629
Australia & New Zealand Banking Group Ltd., ADR............. Australia 51,100 1,746,981
Banc One Corp. ............................................. United States 50,000 2,790,625
*Banca Nazionale del Lavoro SpA di Risp..................... Italy 480,000 12,688,926
Banco Latinoamericano de Exportaciones SA, E................ Panama 167,500 5,150,625
Banque Cantonale Vaudoise................................... Switzerland 13,700 5,599,947
BG Bank AS.................................................. Denmark 164,500 10,188,379
*Boston Private Financial Holdings Inc. .................... United States 228,500 2,227,875
Chase Manhattan Corp. ...................................... United States 100,000 7,550,000
Cullen/Frost Bankers Inc. .................................. United States 149,300 8,099,525
First Chicago NBD Corp. .................................... United States 194,800 17,264,150
First Union Corp. .......................................... United States 137,780 17,045,668
Fleet Financial Group Inc. ................................. United States 51,400 4,291,900
Fokus Bank AS............................................... Norway 1,000,000 7,753,958
*Fokus Bank AS, rts......................................... Norway 1,000,000 14,335
GBC Bancorp................................................. United States 75,000 1,987,500
*Golden State Bancorp Inc., wts............................. United States 790,000 4,196,875
Jeffbanks Inc. ............................................. United States 111,700 5,487,263
*Kookmin Bank............................................... Korea (South) 2,375,337 8,823,173
Long Island Commercial Bank................................. United States 87,000 1,381,125
M & T Bank Corp. ........................................... United States 12,000 6,648,000
Mercantile Bancorporation Inc. ............................. United States 120,000 6,045,000
Mercantile Bankshares Corp. ................................ United States 330,100 11,491,606
Merita Ltd., A.............................................. Finland 475,500 3,137,384
PNC Bank Corp. ............................................. United States 156,500 8,421,656
+Professional Bancorp, Inc. ................................ United States 155,616 2,908,074
*Regency Bancorp............................................ United States 100,000 1,254,375
*Regency Bancorp, wts....................................... United States 10,000 25,438
Royal Bank of Canada........................................ Canada 92,200 5,548,740
+*State National Bancshares Inc. ........................... United States 285,714 3,999,996
Unibanco Uniao de Bancos Brasileiros SA, GDR................ Brazil 194,100 5,725,950
Unionbancorp Inc. .......................................... United States 207,800 3,844,300
*United Security Bancorporation............................. United States 102,850 2,211,275
UST Corp., Inc. ............................................ United States 287,300 7,613,450
Vermont Financial Services Corp. ........................... United States 448,400 12,302,975
Warren Bancorp Inc. ........................................ United States 361,000 4,783,250
Western Bancorp............................................. United States 473,621 19,980,886
------------
242,020,577
------------
BUSINESS & PUBLIC SERVICES .9%
Suez Lyonnaise des Eaux SA.................................. France 32,916 5,417,039
------------
</TABLE>
11
PAGE
MUTUAL FINANCIAL SERVICES FUND
STATEMENT OF INVESTMENTS, JUNE 30, 1998 (UNAUDITED) (CONT.)
<TABLE>
<CAPTION>
COUNTRY SHARES VALUE
--------------------------------------
<S> <C> <C> <C>
COMMON STOCKS (CONT.)
DATA PROCESSING & REPRODUCTION .2%
*National Processing Inc. .................................. United States 96,600 $ 1,032,413
------------
FINANCIAL SERVICES 31.4%
Advanta Corp., B............................................ United States 212,231 4,218,091
Associated Banc Corp. ...................................... United States 25,000 940,625
*Baker Fentress & Co. ...................................... United States 82,600 1,512,613
Banque Cantonale de Geneve.................................. Switzerland 23,020 7,277,222
Beneficial Corp. ........................................... United States 76,200 11,672,888
Broadway Financial Corp. ................................... United States 42,465 459,153
Citizens Bancorp Indiana.................................... United States 15,000 219,375
*Coast Federal Litigation Contingent Pymt Rts Trust, rts.... United States 322,400 4,876,300
Commercial Federal Corp. ................................... United States 232,400 7,349,650
Commonwealth Bancorp Inc. .................................. United States 90,400 2,073,550
Cowlitz Bancorporation...................................... United States 129,000 1,556,063
*First Alliance Corporation................................. United States 249,900 1,749,300
First Colorado Bancorp...................................... United States 9,000 249,750
First Essex Bancorp Inc. ................................... United States 24,800 554,900
First Virginia Banks Inc. .................................. United States 214,100 10,945,863
Firstar Corp. .............................................. United States 300,000 11,400,000
*Firstcity Financial Corp. ................................. United States 193,000 5,597,000
(R)+*Gateway American Bank of Florida....................... United States 225,000 900,000
Greater Delaware Valley Savings Bank........................ United States 8,000 225,000
Greenpoint Financial Corp. ................................. United States 290,600 10,933,825
*Heller Financial Inc. ..................................... United States 184,000 5,520,000
*Hubco Inc. ................................................ United States 92,611 3,316,631
*IBS Financial Corp. ....................................... United States 49,250 935,750
Klamath First Bancorp Inc. ................................. United States 134,800 2,569,625
Laser Mortgage Management Inc. ............................. United States 212,300 2,308,763
Laurentian Bank of Canada................................... Canada 173,100 3,719,670
London Forfaiting Co. ...................................... United Kingdom 1,000,000 4,546,668
*Long Beach Financial Corp. ................................ United States 516,000 5,676,000
MECH Financial Inc. ........................................ United States 45,800 1,328,200
National City Corp. ........................................ United States 155,000 11,005,000
*PBOC Holdings Inc. ........................................ United States 123,200 1,701,700
Peoples Bancorp Inc. ....................................... United States 1,109,899 11,098,993
Peoples Heritage Financial Group Inc. ...................... United States 225,700 5,332,163
Pioneer Group Inc. ......................................... United States 77,000 2,026,063
*Pointe Financial Corp. .................................... United States 80,000 1,210,000
Reliance Bancorp Inc. ...................................... United States 164,100 6,287,081
(R)*SFC Acquisition Corp. .................................. United States 550,000 5,500,000
*Sierrawest Bancorp......................................... United Kingdom 13,800 436,425
Timberland Bancorp Inc. .................................... United States 151,800 2,504,700
United Asset Management Corp. .............................. United States 522,600 13,620,263
</TABLE>
12
PAGE
MUTUAL FINANCIAL SERVICES FUND
STATEMENT OF INVESTMENTS, JUNE 30, 1998 (UNAUDITED) (CONT.)
<TABLE>
<CAPTION>
COUNTRY SHARES VALUE
--------------------------------------
<S> <C> <C> <C>
COMMON STOCKS (CONT.)
FINANCIAL SERVICES (CONT.)
Webster Financial Corp. .................................... United States 197,600 $ 6,570,200
*Wilshire Financial Services Group Inc. .................... United States 30,000 712,500
------------
182,637,563
------------
HEALTH & PERSONAL CARE 1.3%
*Vencor Inc. ............................................... United States 1,052,000 7,627,000
------------
INSURANCE 10.8%
*Allianz AG, wts. .......................................... France 17,996 104,624
Argonaut Group Inc. ........................................ United States 31,250 988,281
Assurances Generales de France AGF.......................... France 60,000 3,394,983
Citizens Corp. ............................................. United States 139,300 4,361,831
*Companhia de Seguros Mundial Confianca SA.................. Portugal 141,650 3,765,166
Guardian Royal Exchange Plc. ............................... United Kingdom 1,773,714 10,446,844
Pohjola Insurance Co. Ltd. ................................. Finland 51,800 2,568,072
Royal & Sun Alliance Insurance Group Plc. .................. United Kingdom 825,000 8,534,388
Sampo Insurance Co. Ltd., A................................. Finland 359,000 17,012,823
St. Paul Co. Inc. .......................................... United States 180,850 7,607,003
Topdanmark AS............................................... Denmark 12,000 1,990,426
Union Assurances Federales SA............................... France 15,194 2,394,952
------------
63,169,393
------------
U.S. REGIONAL BANKS 1.6%
Westamerica Bancorp......................................... United States 282,800 9,084,946
------------
TOTAL COMMON STOCKS (COST $486,568,544)..................... 510,988,931
------------
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT**
-----------
<S> <C> <C> <C>
BONDS 1.0%
Local Financial, 11.00%, 9/05/04............................ United States $ 750,000 821,250
Matrix Capital Corp., 11.50%, 9/30/04....................... United States 3,200,000 3,497,600
(R)Source Capital Corporation, 7.50%, 3/01/08............... United States 1,400,000 1,436,568
------------
5,755,418
TOTAL BONDS (COST $5,320,000)............................... ------------
BONDS & NOTES IN REORGANIZATION .6%
Mercury Finance Co., Bank Claim, MTN, 7.42%, 6/29/00........ United States 151,528 146,982
Mercury Finance Co., Commercial Paper:
2/11/97................................................... United States 1,015,351 984,891
2/18/97................................................... United States 2,467,612 2,393,584
------------
TOTAL BONDS & NOTES IN REORGANIZATION (COST $3,182,268)..... 3,525,457
------------
</TABLE>
13
PAGE
MUTUAL FINANCIAL SERVICES FUND
STATEMENT OF INVESTMENTS, JUNE 30, 1998 (UNAUDITED) (CONT.)
<TABLE>
<CAPTION>
PRINCIPAL
COUNTRY AMOUNT** VALUE
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
SHORT TERM INVESTMENTS 5.6%
Fannie Mae, 5.23% to 5.46%, with maturities to 3/29/99...... United States $22,510,000 $ 21,966,401
Federal Home Loan Bank, 5.28%, with maturities to 2/23/99... United States 4,685,000 4,517,901
Federal Home Loan Mortgage Corp., 5.30% to 5.41%, with
maturities to 12/03/98.................................... United States 6,000,000 5,900,575
------------
TOTAL SHORT TERM INVESTMENTS (COST $32,394,742)............. 32,384,877
------------
TOTAL INVESTMENTS (COST $527,465,554) 94.9%................. 552,654,683
NET EQUITY IN FORWARD CONTRACTS .2%......................... 1,197,174
OTHER ASSETS, LESS LIABILITIES 4.9%......................... 28,640,799
------------
TOTAL NET ASSETS 100.0%..................................... $582,492,656
============
</TABLE>
*Non-income producing.
**Securities traded in U.S. dollars.
(R)Restricted securities (see note 6).
+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 non-controlled "affiliated
companies" at June 30, 1998 were $7,808,070.
See Notes to Financial Statements.
14
PAGE
MUTUAL FINANCIAL SERVICES FUND
Financial Statements
STATEMENT OF ASSETS AND LIABILITIES
JUNE 30, 1998 (UNAUDITED)
<TABLE>
<S> <C> <C>
Assets:
Investments in securities, at value:
Unaffiliated issuers (cost $519,899,634).................. $544,846,613
Non controlled affiliates (cost $7,565,920)............... 7,808,070 $552,654,683
------------
Cash....................................................... 24,475,145
Receivables:
Investment securities sold................................ 11,671,035
Capital shares sold....................................... 2,817,650
Dividends and interest.................................... 1,521,404
From affiliates........................................... 283,119
Unrealized gain on forward exchange contracts (Note 7)..... 1,879,606
------------
Total assets.......................................... 595,302,642
------------
Liabilities:
Payables:
Investment securities purchased........................... 10,485,224
Capital shares redeemed................................... 457,007
To affiliates............................................. 849,935
Unrealized loss on forward exchange contracts (Note 7)..... 682,432
Accrued liabilities........................................ 335,388
------------
Total liabilities..................................... 12,809,986
------------
Net assets, at value........................................ $582,492,656
============
Net assets consist of:
Undistributed net investment income........................ $ 3,783,025
Net unrealized appreciation................................ 26,386,303
Accumulated net realized gain.............................. 38,960,394
Capital shares............................................. 513,362,934
------------
Net assets, at value........................................ $582,492,656
============
</TABLE>
<TABLE>
<S> <C> <C>
CLASS Z:
Net asset value and maximum offering price per share
($257,226,032 / 17,992,300 shares outstanding)............ $14.30
===============
CLASS I:
Net asset value per share ($192,978,525 / 13,501,027 shares
outstanding).............................................. $14.29
==============
Maximum offering price per share ($14.29 / 95.50%)......... $14.96
==============
CLASS II:
Net asset value per share ($132,288,099 / 9,299,690 shares
outstanding)*............................................. $14.23
==============
Maximum offering price per share ($14.23 / 99.00%)......... $14.37
==============
</TABLE>
*Redemption price per share is equal to net asset value less any applicable
sales charge.
See Notes to Financial Statements.
15
PAGE
MUTUAL FINANCIAL SERVICES FUND
Financial Statements (continued)
STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1998 (UNAUDITED)
<TABLE>
<S> <C> <C>
Investment Income:
(net of foreign taxes of $299,958)
Dividends.................................................. $ 4,536,458
Interest................................................... 2,086,969
-----------
Total investment income............................... $ 6,623,427
-----------
Expenses:
Management fees (Note 3)................................... 1,808,764
Administrative fees (Note 3)............................... 174,000
Distribution fees (Note 3)
Class I.................................................. 248,763
Class II................................................. 430,807
Transfer agent fees (Note 3)............................... 307,000
Custodian fees............................................. 54,814
Reports to shareholders.................................... 66,853
Registration and filing fees............................... 116,700
Professional fees.......................................... 22,300
Directors' fees and expenses............................... 2,100
-----------
Total expenses........................................ 3,232,101
Expenses waived/paid by affiliate (Note 3)............ (283,120)
-----------
Net expenses...................................... 2,948,981
-----------
Net investment income........................... 3,674,446
-----------
Realized and unrealized gains:
Net realized gain from:
Investments............................................... 35,073,810
Foreign currency transactions............................. 383,227
-----------
Net realized gain...................................... 35,457,037
Net unrealized appreciation (depreciation) on:
Investments............................................... 9,658,708
Translation of assets and liabilities denominated in
foreign currencies...................................... (135,621)
-----------
Net unrealized appreciation............................ 9,523,087
-----------
Net realized and unrealized gain............................ 44,980,124
-----------
Net increase in net assets resulting from operations........ $48,654,570
===========
</TABLE>
See Notes to Financial Statements.
16
PAGE
MUTUAL FINANCIAL SERVICES FUND
Financial Statements (continued)
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
JUNE 30, 1998 PERIOD ENDED
(UNAUDITED) DECEMBER 31, 1997+
-------------------------------------
<S> <C> <C>
Increase (decrease) in net assets:
Operations:
Net investment income..................................... $ 3,674,446 $ 586,662
Net realized gain from investments and foreign currency
transactions............................................. 35,457,037 5,249,927
Net unrealized appreciation on investments and translation
of assets and liabilities denominated in foreign
currencies............................................... 9,523,087 16,863,216
-------------------------------------
Net increase in net assets resulting from operations.... 48,654,570 22,699,805
Distributions to shareholders from:
Net investment income:
Class Z.................................................. -- (312,463)
Class I.................................................. -- (127,466)
Class II................................................. -- (17,029)
Net realized gains:
Class Z.................................................. -- (937,387)
Class I.................................................. -- (541,128)
Class II................................................. -- (289,180)
Capital share transactions (Note 2):
Class Z.................................................. 93,624,273 124,473,660
Class I.................................................. 100,761,071 72,594,863
Class II................................................. 81,647,246 40,261,821
-------------------------------------
Net increase in net assets.............................. 324,687,160 257,805,496
Net assets:
Beginning of period........................................ 257,805,496 --
-------------------------------------
End of period.............................................. $582,492,656 $257,805,496
=====================================
Undistributed net investment income included in net assets:
End of period.............................................. $ 3,783,025 $ 108,579
=====================================
</TABLE>
+For the period August 19, 1997 (commencement of operations) to December 31,
1997.
See Notes to Financial Statements.
17
PAGE
MUTUAL FINANCIAL SERVICES FUND
Notes to Financial Statements (unaudited)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Mutual Financial Services Fund (the Fund) is a separate, diversified series of
Franklin Mutual Series Fund Inc. (the Series Fund), which is an open-end
investment company registered under the Investment Company Act of 1940. The Fund
seeks long-term capital appreciation by investing approximately 65% of its
assets in securities issued by companies in financial services industries. The
following summarizes the Fund's significant accounting policies.
a. SECURITY VALUATION:
Securities listed or traded on a recognized national exchange or NASDAQ are
valued at the latest reported sales price. Over-the-counter securities and
listed securities for which no sale is reported are valued within the range of
the latest quoted bid and asked prices. Restricted securities and securities for
which market quotations are not readily available are valued at fair value as
determined by management in accordance with procedures established by the Board
of Directors.
b. FOREIGN CURRENCY TRANSLATION:
Portfolio securities and other assets and liabilities denominated in foreign
currencies are translated into U.S. dollars based on the exchange rate of such
currencies against U.S. dollars on the date of valuation. Purchases and sales of
securities and income items denominated in foreign currencies are translated
into U.S. dollars at the exchange rate in effect on the transaction date.
The Fund does not separately report the effect of changes in foreign exchange
rates from changes in market prices on securities held. Such changes are
included in net realized and unrealized gain or loss from investments.
Realized foreign exchange gains or losses arise from sales of foreign
currencies, currency gains or losses realized between the trade and settlement
dates on securities transactions and the difference between the recorded amounts
of dividends, interest, and foreign withholding taxes and the U.S. dollar
equivalent of the amounts actually received or paid. Net unrealized foreign
exchange gains and losses arise from changes in foreign exchange rates on
foreign currency denominated assets and liabilities other than investments in
securities held at the end of the reporting period.
c. INCOME TAXES:
No provision has been made for income taxes because the Fund's policy is to
qualify as a regulated investment company under the Internal Revenue Code and to
distribute all of its taxable income.
d. SECURITIES TRANSACTIONS, INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS:
Security transactions are accounted for on trade date. Realized gains and losses
on security transactions are determined on a specific identification basis.
Certain income from foreign securities is recorded as soon as
18
PAGE
MUTUAL FINANCIAL SERVICES FUND
Notes to Financial Statements (unaudited) (continued)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONT.)
d. SECURITIES TRANSACTIONS, INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS
(CONT.)
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.
Common expenses incurred by the Series Fund are allocated among the funds
comprising the Series Fund based on the ratio of net assets of each fund to the
combined net assets. Other expenses are charged to each fund on a specific
identification basis.
e. FORWARD EXCHANGE CONTRACTS:
The Fund may enter into forward exchange contracts to hedge against foreign
exchange risks. These contracts are valued daily and the Fund's equity therein
is included in the Statement of Assets and Liabilities. Realized and unrealized
gains and losses are included in the Statement of Operations.
f. 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. The Fund must also maintain a deposit for the broker
consisting of cash and securities having a value equal to a specified percentage
of the value of the securities sold short.
g. ACCOUNTING ESTIMATES:
The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of the
financial statements and the amounts of income and expense during the reporting
period. Actual results could differ from those estimates.
2. CAPITAL STOCK
The Fund offers three classes of shares: Class Z, Class I and Class II shares.
The shares differ by their initial sales load, distribution fees, voting rights
on matters affecting a single class and the exchange privilege of each class.
19
PAGE
MUTUAL FINANCIAL SERVICES FUND
Notes to Financial Statements (unaudited) (continued)
2. CAPITAL STOCK (CONT.)
At June 30, 1998, there were 400 million shares authorized ($0.001 par value) of
which 200 million, 100 million, and 100 million were designated as Class Z,
Class I, and Class II shares, respectively. Transactions in the Fund's shares
were as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED PERIOD ENDED
JUNE 30, 1998 DECEMBER 31, 1997*
--------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
--------------------------------------------------------------
<S> <C> <C> <C> <C>
CLASS Z:
Shares sold.............................................. 11,940,405 $165,010,507 12,843,692 $144,526,424
Shares issued on reinvestment of distributions........... -- -- 99,632 1,204,770
Shares redeemed.......................................... (5,062,770) (71,386,234) (1,828,659) (21,257,534)
--------------------------------------------------------------
Net increase............................................. 6,877,635 $ 93,624,273 11,114,665 $124,473,660
==============================================================
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED PERIOD ENDED
JUNE 30, 1998 DECEMBER 31, 1997*
--------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
--------------------------------------------------------------
<S> <C> <C> <C> <C>
CLASS I:
Shares sold.............................................. 11,284,974 $158,056,042 7,251,035 $ 82,848,856
Shares issued on reinvestment of distributions........... -- -- 49,165 593,254
Shares redeemed.......................................... (4,160,295) (57,294,971) (923,852) (10,847,247)
--------------------------------------------------------------
Net increase............................................. 7,124,679 $100,761,071 6,376,348 $ 72,594,863
==============================================================
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED PERIOD ENDED
JUNE 30, 1998 DECEMBER 31, 1997*
--------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
--------------------------------------------------------------
<S> <C> <C> <C> <C>
CLASS II:
Shares sold.............................................. 6,203,291 $ 87,593,149 3,598,172 $ 41,112,595
Shares issued on reinvestment of distributions........... -- -- 23,523 283,691
Shares redeemed.......................................... (427,852) (5,945,903) (97,444) (1,134,465)
--------------------------------------------------------------
Net increase............................................. 5,775,439 $ 81,647,246 3,524,251 $ 40,261,821
==============================================================
</TABLE>
*Commencement of sales was August 19, 1997.
3. TRANSACTIONS WITH AFFILIATES AND RELATED PARTIES
Certain officers of the Fund are also officers and/or directors of Franklin
Mutual Advisers, Inc. (Franklin Mutual) and Franklin Templeton Services, Inc.
(FT Services), the Fund's investment manager and administrative manager,
respectively. Franklin/Templeton Investor Services, Inc. (Investor Services) and
Franklin/Templeton Distributors, Inc. (Distributors) are the Fund's transfer
agent and principal underwriter, respectively.
The Fund pays an investment management fee to Franklin Mutual of .80% per year
of the average daily net assets of the Fund. Franklin Mutual agreed in advance
to reduce fees to the extent necessary to limit total expenses to an
20
PAGE
MUTUAL FINANCIAL SERVICES FUND
Notes to Financial Statements (unaudited) (continued)
3. TRANSACTIONS WITH AFFILIATES AND RELATED PARTIES (CONT.)
annual rate of 1.00%, 1.35% and 2.00% of the average daily net assets of Class
Z, Class I and Class II shares, respectively, through August 19, 1999.
The Fund pays its allocated share of an administrative fee to FT Services based
on the Series Fund's aggregated average daily net assets as follows:
<TABLE>
<CAPTION>
ANNUALIZED
FEE RATE AVERAGE DAILY NET ASSETS
- -----------------------------------------------------------------
<S> <C>
0.15% First $200 million
0.135% Over $200 million up to and including $700 million
0.10% Over $700 million up to and including $1.2 billion
0.075% Over $1.2 billion
</TABLE>
The Fund reimburses Distributors up to .35% and 1.00% per year of the average
daily net assets of Class I and Class II shares, respectively, for costs
incurred in marketing the Fund's Class I and Class II shares. Distributors
received net commissions from sales of those shares and received contingent
deferred sales charges for the period of $247,854 and $27,580, respectively.
4. INCOME TAXES
The cost of securities for income tax purposes is the same as that shown on the
Statement of Investments.
At June 30, 1998, the net unrealized appreciation based on the cost of
investments for income tax purposes was
as follows:
<TABLE>
<S> <C>
Unrealized appreciation..................................... $ 44,735,504
Unrealized depreciation..................................... (19,546,375)
------------
Net unrealized appreciation................................. $ 25,189,129
============
</TABLE>
Net investment income and net realized capital gains differ for financial
statement and tax purposes primarily due to differing treatments of foreign
currency transactions.
5. INVESTMENT TRANSACTIONS
Purchases and sales of securities (excluding short-term securities) for the
period ended June 30, 1998 aggregated $495,956,035 and $236,797,875
respectively.
21
PAGE
MUTUAL FINANCIAL SERVICES FUND
Notes to Financial Statements (unaudited) (continued)
6. RESTRICTED SECURITIES
The Fund may purchase securities through a private offering that generally
cannot be sold to the public without prior registration under the Securities Act
of 1933. The costs of registering such securities are paid by the issuer.
Restricted securities held at June 30, 1998 are as follows:
<TABLE>
<CAPTION>
NUMBER OF SHARES OR ACQUISITION
PRINCIPAL AMOUNT ISSUER DATE VALUE
- ---------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C>
225,000 Gateway American Bank of Florida............................ 5/04/98 $ 900,000
550,000 SFC Acquisition Corp........................................ 3/27/98 5,500,000
$1,400,000 Source Capital Corporation, 7.50%, 3/01/08.................. 2/11/98 1,436,568
----------
TOTAL RESTRICTED SECURITIES (COST $7,565,920) (1.34% OF NET ASSETS)............... $7,836,568
==========
</TABLE>
7. 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.
A forward exchange contract is an agreement between two parties to exchange
different currencies at a specific rate at an agreed future date. The contracts
are reported in the financial statements at the Fund's net equity, as measured
by the difference between the forward exchange rates at the reporting date and
the forward exchange rates at the day of entry into the contract.
As of June 30, 1998, the Fund had the following forward exchange contracts
outstanding:
<TABLE>
<CAPTION>
IN SETTLEMENT UNREALIZED
EXCHANGE FOR DATE GAIN/(LOSS)
CONTRACTS TO BUY: ---------------------------------------------
- ------------------------------------------------------------------------
<C> <S> <C> <C> <C> <C> <C>
1,001,114 Danish krone........................................... U.S. $ 6,872,045 10/27/98 U.S. $ 3,507
4,563,878 Norwegian krone........................................ 593,405 9/10/98 2,302
13,500,000 Swedish krona.......................................... 1,676,123 11/16/98 26,489
----------- ----------
U.S. $ 9,141,573 32,298
=========== ----------
</TABLE>
22
PAGE
MUTUAL FINANCIAL SERVICES FUND
Notes to Financial Statements (unaudited) (continued)
7. FINANCIAL INSTRUMENTS (CONT.)
<TABLE>
<CAPTION>
IN SETTLEMENT UNREALIZED
EXCHANGE FOR DATE GAIN/(LOSS)
CONTRACTS TO SELL: ---------------------------------------------
- ------------------------------------------------------------------------
<C> <S> <C> <C> <C> <C> <C>
5,673,978 Australian dollars..................................... U.S. $ 3,737,166 10/6/98 U.S. $ 219,172
2,344,983 British pounds......................................... 3,899,707 10/15/98 10,955
12,481,831 Canadian dollars....................................... 8,757,613 7/31/98 263,680
300,000 Canadian dollars....................................... 206,897 11/30/98 2,354
85,197,034 Danish krone........................................... 12,520,791 10/27/98 65,877
64,582,531 Finnish marka.......................................... 11,862,952 9/3/98 48,372
48,532,605 French francs.......................................... 8,086,055 7/17/98 50,169
24,234,244 French francs.......................................... 4,041,841 8/28/98 18,997
4,000,000 French francs.......................................... 677,966 11/18/98 10,882
26,157,100 French francs.......................................... 4,433,407 12/11/98 65,428
920,046,201 Japanese yen........................................... 6,853,768 12/21/98 49,384
103,500,324 Norwegian krone........................................ 13,873,499 9/10/98 363,964
22,127,675 Swedish krona.......................................... 2,897,810 11/16/98 107,081
24,183,247 Swiss francs........................................... 16,672,960 12/10/98 462,116
----------- ----------
U.S. $98,522,432 1,738,431
===========
Net unrealized gain on offsetting forward exchange contracts...... 108,877
----------
Unrealized gain on forward exchange contracts................... 1,879,606
----------
</TABLE>
<TABLE>
<CAPTION>
CONTRACTS TO BUY:
- ------------------------------------------------------------------------
<C> <S> <C> <C> <C> <C> <C>
37,303,693 Norwegian krone........................................ U.S. $ 5,011,002 9/10/98 (141,881)
4,019,236 Swedish krona.......................................... 510,172 11/16/98 (3,268)
1,645,851 Swiss francs........................................... 1,122,298 12/10/98 (19,029)
----------- ----------
U.S. $ 6,643,472 (164,178)
=========== ----------
CONTRACTS TO SELL:
- ------------------------------------------------------------------------
5,581,556 British pounds......................................... U.S. $ 9,071,323 7/20/98 (231,063)
3,061,304 British pounds......................................... 4,973,395 8/17/98 (120,611)
3,212,374 British pounds......................................... 5,265,081 11/18/98 (51,565)
43,260,668 Finnish marka.......................................... 7,875,875 9/3/98 (38,133)
15,354,235 French francs.......................................... 2,525,000 8/28/98 (23,777)
29,362,974,515 Italian lira........................................... 16,635,304 4/2/99 (33,714)
686,200,000 Portuguese escudo...................................... 3,707,185 9/17/98 (19,391)
----------- ----------
U.S. $50,053,163 (518,254)
=========== ----------
Unrealized loss on forward exchange contracts................... (682,432)
----------
Net unrealized gain on forward exchange contracts............. U.S. $1,197,174
==========
</TABLE>
23
PAGE
This page intentionally left blank
PAGE
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For a free brochure and prospectus, which contain more complete information,
including charges and expenses, call Franklin Templeton Fund Information at
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GLOBAL GROWTH AND INCOME
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GROWTH AND INCOME
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Franklin Balance Sheet Investment Fund*
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*These funds are now closed to new accounts, with the exception of retirement
plan accounts.
**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. The Franklin Valuemark Funds are managed by Franklin
Advisers, Inc. and its Templeton and Franklin affiliates.
07/98
PAGE
BOARD OF DIRECTORS
Michael F. Price (Chairman)
Peter A. Langerman
Edward I. Altman
Ann Torre Grant
Andrew H. Hines, Jr.
William J. Lippman
Bruce A. MacPherson
Fred R. Millsaps
Leonard Rubin
Vaughn R. Sturtevant, M.D.
Robert E. Wade
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 prospectus of the Mutual
Financial Services 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.
479 ZS98 08/98 [RECYCLE LOGO] Printed on recycled paper
