SEMI ANNUAL REPORT
MUTUAL DISCOVERY FUND
June 30, 1999
Mutual Discovery Fund
[LOGO]
FRANKLIN(R) TEMPLETON(R)
PAGE
Thank you for investing with Franklin Templeton. We encourage our investors to
maintain a long-term perspective and remember that all securities markets move
both up and down, as do mutual fund share prices. We appreciate your past
support and look forward to serving your investment needs in the years ahead.
[PHOTO OF PETER A. LANGERMAN]
PETER A. LANGERMAN
Chief Executive Officer
Franklin Mutual Advisers, Inc.
[PHOTO OF ROBERT L. FRIEDMAN]
ROBERT L. FRIEDMAN
Chief Investment Officer
Franklin Mutual Advisers, Inc.
PAGE
SHAREHOLDER LETTER
Dear Shareholders:
We are pleased to bring you this semiannual report of the Mutual Discovery Fund
for the six months ended June 30, 1999, during which the fund's Class Z shares
appreciated 15.19%. And we are also pleased to report that all of our Mutual
Series funds delivered results for the period under review that compared very
favorably to commonly cited indexes.
Throughout the first few months of 1999, conventional wisdom still largely
favored growth investors versus value investors such as ourselves. Stocks of
companies with the biggest capitalizations and ".com" stocks seemed to go up
largely without regard to fundamental valuations. One only had to listen to
tales from the growing legion of day traders to be convinced that a so-called
"new paradigm" had taken hold. However, beginning in April, internet stocks lost
a bit of their luster, some large-cap growth names sputtered, and media pundits
(who love to perceive new trends) began to declare that value was back in vogue.
We even received a number of calls from reporters asking whether we felt
vindicated about the market's "return to value."
As you know, we have never been slaves to conventional wisdom, nor wavered in
our belief that fundamental
CONTENTS
Shareholder Letter ............................ 1
Fund Report ................................... 4
Performance Summary ........................... 9
Financial Highlights &
Statement of Investments ...................... 11
Financial Statements .......................... 25
Notes to Financial Statements ................. 29
[FUND CATEGORY GRAPHIC]
PAGE
Although pure theme or momentum investing may work in the short term, it is not,
in our opinion, sustainable over the long term.
research, solid underlying valuations, and good stock picking always have and
always will make a real difference. Although pure theme or momentum investing
may work in the short term, it is not, in our opinion, sustainable over the long
term. Our value investing philosophy embodies this approach, and we believe that
we will make money for our shareholders over time by sticking to our discipline,
whether value investing is "in" or "out." We need, of course, to be mindful of
changes in society and of how business valuations change, but the biggest
mistake we could make would be to try to follow the latest investment fad. We
always try to buy stocks that others have given up on because of a short-term
problem that masks fundamental strengths or just because the stocks "aren't
moving."
One outgrowth of investors' increasing accessibility to information and their
ability to react to such information has been greater market volatility, at
least in the short term. We like market volatility, although not in our
performance, because it creates opportunity for contrarian investors like us to
capitalize on someone else's overreaction, and it often works to our advantage.
Our performance this year does not merely reflect value's being back in style.
In fact, markets may be only at the early stages of a rebalancing in favor of
value and the medium- or smaller-cap companies. You may recall that late last
year we appointed specific portfolio managers for each of our funds, to improve
the day-to-day implementation of our investing philosophy. The revised portfolio
management structure is working very well. Driven by an intensive focus on
bottom-up stock picking, our portfolio managers and research team are
responsible for the fund's strong performance record during the period under
review.
2
PAGE
In June, Mutual Shares, our oldest fund, celebrated its 50th anniversary, and
our underlying investment discipline for all our funds remains the same as
always - buy stocks at discounts to asset value in order to produce steady,
absolute returns over long periods with minimal risk and volatility. Through
strong as well as rocky markets, we pay attention to the fundamentals because
that is what matters. This gives us the conviction to buy the stocks that we
believe have value even when conventional wisdom may say otherwise.
On the following pages, you'll find a report from Mutual Discovery Fund's
portfolio managers, with specific comments about portfolio developments this
year. We welcome your comments, either through regular mail or by email at
[email protected].
Sincerely,
/s/PETER A. LANGERMAN
- ------------------------------
Peter A. Langerman
Chief Executive Officer
Franklin Mutual Advisers, Inc.
/s/ROBERT L. FRIEDMAN
- ------------------------------
Robert L. Friedman
Chief Investment Officer
Franklin Mutual Advisers, Inc.
Through strong as well as rocky markets, we pay attention to the fundamentals
because that is what matters.
3
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[PIE CHART]
[THIS CHART SHOWS IN PIE FORMAT THE U.S. EXPOSURE OF MUTUAL DISCOVERY FUND,
BASED ON TOTAL NET ASSETS AS OF 6/30/99]
U.S. EXPOSURE
Based on Total Net Assets
6/30/99
United States 48.1%
Other Countries 51.9%
FUND REPORT
- --------------------------------------------------------------------------------
YOUR FUND'S GOAL: MUTUAL DISCOVERY FUND SEEKS LONG-TERM CAPITAL APPRECIATION BY
INVESTING PRIMARILY IN COMMON AND PREFERRED STOCKS, BONDS, AND SECURITIES OF
SMALLER CAPITALIZATION COMPANIES. THE FUND MAY INVEST 50% OR MORE OF ITS ASSETS
IN FOREIGN SECURITIES.
- --------------------------------------------------------------------------------
During the six-month period ended June 30, 1999, Mutual Discovery Fund's Class Z
shares produced a 15.19% cumulative total return, as shown in the Performance
Summary on page 10. The Morgan Stanley Capital International(R) (MSCI) Europe
Index posted a - 2.27% return, while the Standard & Poor's(R) 500 Composite
Index and Russell 2000 Index returned 12.38% and 9.28%, respectively, during the
same period. Since the U.S. dollar strengthened considerably against most
European currencies in 1999, the fund's practice of hedging foreign currency
exposure helped its performance relative to the MSCI Europe Index.
Adhering to our disciplined approach of searching the world for cheap stocks
enabled us to identify a number of situations that produced substantial gains
during the reporting period. These included stocks of the following companies,
in which the fund had a sizeable investment.
Invensys PLC, a world leader in automation and controls, is the result of the
merger between BTR PLC and Siebe PLC, two United Kingdom engineering firms.
After the announcement of the merger in late 1998, we were surprised to see both
stocks
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 15 of
this report.
4
PAGE
decline in value when the combination created a world leader that offered
restructuring, a clean balance sheet, potential for cost cutting and share
buyback, and significant potential for asset sales - all at a bargain price. The
market's misunderstanding proved to be our opportunity, as the stock appreciated
about 50% during the reporting period. We believe it continues to offer a
compelling valuation.
Pathe SA is a French media conglomerate whose assets include movie production,
an extensive film library, and a significant stake in BSkyB, a large U.K.
broadcasting group. The stock was trading at a discount of over 50% to its net
asset value when we purchased it in May. Within a month, Vivendi, a large,
French utility/media conglomerate, offered to buy Pathe SA, and the stock
returned nearly 40%.
At the beginning of 1999, we owned stock in Telecom Italia SpA, di Risp, because
we felt it was one of the cheapest telecom companies in the world, with enormous
potential for restructuring. Eventually others figured this out. During the
first half of 1999, the company was the subject of one of the largest hostile
takeover attempts ever undertaken, and its stock appreciated more than 20%
during that time.
In the U.S., one of the undervalued asset plays we favored was Bank One Corp.,
which owns First USA, an outstanding credit card and consumer banking business
which we believe is not fully reflected in the company's share price. Other
examples include Lockheed Martin Corp., the nation's largest defense company,
which generates substantial free cash flow, and Washington Post Co., a
well-respected media firm with attractive, and we believe underappreciated,
cable assets.
TOP 10 HOLDINGS
6/30/99
[THIS CHART LISTS THE TOP 0 HOLDINGS, INCLUDING INDUSTRY AND COUNTRY, OF
MUTUAL DISCOVERY FUND, BASED ON TOTAL NET ASSETS AS OF 6/30/99]
COMPANY, % OF TOTAL
INDUSTRY, COUNTRY NET ASSETS
- -------------------------------------------------------------
Investor AB, A&B,
Multi-Industry, Sweden 2.8%
Compagnie Financiere Richemont AG,
Br., A, Multi-Industry, Switzerland 2.0%
Rhone-Poulenc SA, A,
Health & Personal Care, France 2.0%
Invensys PLC,
Machinery & Engineering,
United Kingdom 1.9%
Compagnie Generale D'Industrie et de
Participation, Multi-Industry, France 1.7%
Canary Wharf Group PLC,
Real Estate, United Kingdom 1.7%
UST Corp., Inc., Banking, U.S. 1.6%
Societe Elf Aquitaine SA, ADR,
Business & Public Services, France 1.4%
Suez Lyonnaise des Eaux SA,
Business & Public Services, France 1.4%
Lagardere SCA,
Multi-Industry, France 1.4%
5
PAGE
In addition, we owned shares of several other companies that became targets of
merger and acquisition proposals during the reporting period and contributed
positively to the fund's performance. Examples included United Kingdom food
company Hillsdown Holdings PLC, Swedish trucking company ASG AB, French banking
firm Societe Generale Paris, and French investment bank Paribas. We also began
investing in smaller to mid-sized companies in the Far East, selectively
purchasing shares in those companies with management teams we believed would
look out for their shareholders' interests.
Although the introduction of the euro on January 1, 1999 was heralded as one of
the most significant events in Europe since the end of World War II, its debut
was followed by weakness in various European economies. Concern over this
malaise led to a 11.28% fall in the euro's value versus the U.S. dollar.
However, our ongoing hedging policy helped protect the fund from this slump.
Looking forward, we intend to take advantage of any opportunities that arise as
European companies react to the rapidly changing environment there.
6
PAGE
We are very proud of our performance for this first half of 1999 and shall
continue searching for the cheapest stocks that have what we believe is the best
potential for substantial future returns. Thank you for your participation in
Mutual Discovery Fund. We look forward to serving your investment needs in the
future.
/s/DAVID E. MARCUS [PHOTO OF DAVID E. MARCUS]
- -------------------
David E. Marcus
/s/ROBERT L. FRIEDMAN [PHOTO OF ROBERT L. FRIEDMAN]
- ----------------------
Robert L. Friedman
Portfolio Managers
7
PAGE
It is important to remember that the fund may invest in lower-rated "junk
bonds," which entail higher credit risks, as well as in foreign securities
involving risks such as political uncertainty or fluctuations in foreign
exchange rates in areas where the fund invests. The fund generally expects to
hedge against currency risk where feasible and to the extent possible. The
fund's value-oriented strategy may include investments in companies involved in
mergers, reorganizations, restructurings or liquidations.
It is also important to note that stocks offer the potential for long-term gains
but can be subject to short-term up and down price movements. Securities of
companies involved in mergers, liquidations and reorganizations, and
distressed/bankruptcy investments, involve higher credit risks. These and other
risks are discussed in the prospectus, which you should review before making an
investment decision.
This discussion reflects our views, opinions and portfolio holdings as of June
30, 1999, the end of the reporting period. However, market and economic
conditions are changing constantly, which may affect our strategies and the
fund's portfolio composition. Although past performance is not predictive of
future results, these insights may help you understand our investment and
management philosophy.
8
PAGE
PERFORMANCE SUMMARY AS OF 6/30/99
Distributions will vary based on earnings of the fund's portfolio and any
profits realized from the sale of the portfolio's securities, as well as the
level of each share class's expenses. Past distributions are not indicative of
future trends. All total returns include reinvested distributions at net asset
value.
PRICE AND DISTRIBUTION INFORMATION
CLASS Z CHANGE 6/30/99 12/31/98
- --------------------------------------------------------------------------------
Net Asset Value +$2.29 $19.56 $17.27
DISTRIBUTIONS (1/1/99 - 6/30/99)
--------------------------------
Dividend Income $0.0714
Long-Term Capital Gain $0.2589
-------
TOTAL $0.3303
=======
CLASS A CHANGE 6/30/99 12/31/98
- --------------------------------------------------------------------------------
Net Asset Value +$2.26 $19.45 $17.19
DISTRIBUTIONS (1/1/99 - 6/30/99)
---------------------------------------------
Dividend Income $0.0554
Long-Term Capital Gain $0.2589
-------
TOTAL $0.3143
=======
CLASS B CHANGE 6/30/99 1/1/99
- --------------------------------------------------------------------------------
Net Asset Value +$2.19 $19.38 $17.19
DISTRIBUTIONS (1/1/99 - 6/30/99)
---------------------------------------------
Dividend Income $0.0610
Long-Term Capital Gain $0.2589
-------
TOTAL $0.3199
=======
CLASS C CHANGE 6/30/99 12/31/98
- --------------------------------------------------------------------------------
Net Asset Value +$2.23 $19.38 $17.15
DISTRIBUTIONS (1/1/99 - 6/30/99)
---------------------------------------------
Dividend Income $0.0247
Long-Term Capital Gain $0.2589
-------
TOTAL $0.2836
=======
Past performance is not predictive of future results.
CLASS Z:
No initial sales charge or Rule 12b-1 fees and are available only to certain
investors, as described in the fund's prospectus.
CLASS A (formerly Class I): Subject to the maximum 5.75% initial sales charge.
CLASS B:
Subject to no initial sales charge, but subject to a contingent deferred sales
charge (CDSC) declining from 4% to 0% over six years. These shares have higher
annual fees and expenses than Class A shares.
CLASS C (formerly Class II):
Subject to 1% initial sales charge and 1% CDSC for shares redeemed within 18
months of investment. These shares have higher annual fees and expenses than
Class A shares.
For all share classes, the fund's Manager has agreed in advance to waive a
portion of its management fees, which increases total return to shareholders. If
the Manager had not taken this action, the fund's total returns would have been
lower. 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 the three-year
period beginning November 1, 1996.
9
PAGE
1. Cumulative total return represents the change in value of an investment over
the periods indicated and does not include sales charges.
2. Average annual total return represents the average annual change in value of
an investment over the periods indicated and includes the current, applicable,
maximum sales charge(s) for that class. Since Class B shares have existed for
less than one year, aggregate total return for that class represents total
return since inception, including the maximum sales charge.
3. These figures represent the value of a hypothetical $10,000 investment in the
fund over the periods indicated and include the current, applicable, maximum
sales charge(s) for that class.
4. One-year total return represents the change in value of an investment over
the one-year periods ended on the specified dates and does not include sales
charges.
Since markets can go down as well as up, investment return and principal value
will fluctuate with market conditions, currency volatility and the social,
economic and political climates of countries where the fund invests. You may
have a gain or loss when you sell your shares.
PERFORMANCE
<TABLE>
<CAPTION>
INCEPTION
CLASS Z 6-MONTH 1-YEAR 5-YEAR (12/31/92)
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cumulative Total Return(1) 15.19% 0.93% 123.80% 214.26%
Average Annual Total Return(2) 15.19% 0.93% 17.47% 19.27%
Value of $10,000 Investment(3) $ 11,519 $ 10,093 $ 22,380 $ 31,426
</TABLE>
<TABLE>
<CAPTION>
6/30/95 6/30/96 6/30/97 6/30/98 6/30/99
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
One-Year Total Return(4) 15.82% 25.63% 26.11% 20.84% 0.93%
</TABLE>
<TABLE>
<CAPTION>
INCEPTION
CLASS A 6-MONTH 1-YEAR (11/1/96)
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cumulative Total Return(1) 14.99% 0.48% 44.25%
Average Annual Total Return(2) 8.37% -5.29% 12.24%
Value of $10,000 Investment(3) $ 10,837 $ 9,471 $ 13,596
</TABLE>
INCEPTION
CLASS B 6-MONTH (1/1/99)
- ----------------------------------------------------------------------------
Cumulative Total Return(1) 14.62% 14.62%
Aggregate Total Return(2) 10.62% 10.62%
Value of $10,000 Investment(3) $11,062 $11,062
<TABLE>
<CAPTION>
INCEPTION
CLASS C 6-MONTH 1-YEAR (11/1/96)
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cumulative Total Return(1) 14.67% -0.12% 42.04%
Average Annual Total Return(2) 12.55% -2.03% 13.67%
Value of $10,000 Investment(3) $11,255 $9,797 $14,062
</TABLE>
Past performance is not predictive of future results.
10
PAGE
MUTUAL DISCOVERY FUND
Financial Highlights
<TABLE>
<CAPTION>
CLASS Z
----------------------------------------------------------------------------
SIX MONTHS
ENDED YEAR ENDED DECEMBER 31,
JUNE 30, 1999 ------------------------------------------------------------
(UNAUDITED)+ 1998 1997 1996 1995 1994
----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
(For a share outstanding throughout the
period)
Net asset value, beginning of period...... $17.27 $18.89 $17.18 $15.16 $12.55 $13.05
----------------------------------------------------------------------------
Income from investment operations:
Net investment income.................... .18 .38 .39 .34 .17 .15
Net realized and unrealized gains
(losses)............................... 2.44 (.71) 3.49 3.39 3.40 .32
----------------------------------------------------------------------------
Total from investment operations.......... 2.62 (.33) 3.88 3.73 3.57 .47
----------------------------------------------------------------------------
Less distributions from:
Net investment income.................... (.07) (.48) (.81) (.31) (.14) (.16)
Net realized gains....................... (.26) (.81) (1.36) (1.40) (.82) (.81)
----------------------------------------------------------------------------
Total distributions....................... (.33) (1.29) (2.17) (1.71) (.96) (.97)
----------------------------------------------------------------------------
Net asset value, end of period............ $19.56 $17.27 $18.89 $17.18 $15.16 $12.55
============================================================================
Total Return*............................. 15.19% (1.90)% 22.94% 24.93% 28.63% 3.62%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's)......... $1,995,688 $2,514,144 $3,879,550 $2,975,596 $1,370,221 $725,331
Ratios to average net assets:
Expenses................................. 1.04%** 1.00% .98% .96% .99% .99%
Expenses, excluding waiver and payments
by affiliate............................ 1.08%** 1.03% 1.00% .99% .99% .99%
Net investment income.................... 2.01%** 1.81% 1.82% 2.24% 2.00% 1.64%
Portfolio turnover rate................... 37.32% 83.57% 58.15% 80.18% 73.23% 72.70%
</TABLE>
* Total return is not annualized.
** Annualized.
+ Based on average weighted shares outstanding.
11
PAGE
MUTUAL DISCOVERY FUND
Financial Highlights (continued)
<TABLE>
<CAPTION>
CLASS A
------------------------------------------------
SIX MONTHS
ENDED YEAR ENDED DECEMBER 31,
JUNE 30, 1999 -------------------------------
(UNAUDITED)++ 1998 1997++ 1996+
------------------------------------------------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
(For a share outstanding throughout the period)
Net asset value, beginning of period........................ $17.19 $18.83 $17.15 $17.66
------------------------------------------------
Income from investment operations:
Net investment income...................................... .16 .32 .27 .11
Net realized and unrealized gains (losses)................. 2.42 (.74) 3.54 .74
------------------------------------------------
Total from investment operations............................ 2.58 (.42) 3.81 .85
------------------------------------------------
Less distributions from:
Net investment income...................................... (.06) (.41) (.77) (.29)
Net realized gains......................................... (.26) (.81) (1.36) (1.07)
------------------------------------------------
Total distributions......................................... (.32) (1.22) (2.13) (1.36)
------------------------------------------------
Net asset value, end of period.............................. $19.45 $17.19 $18.83 $17.15
================================================
Total Return*............................................... 14.99% (2.37)% 22.54% 4.85%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's)........................... $825,393 $859,848 $693,952 $29,903
Ratios to average net assets:
Expenses................................................... 1.38%** 1.35% 1.33% 1.38%**
Expenses, excluding waiver and payments by affiliate....... 1.43%** 1.38% 1.35% 1.51%**
Net investment income...................................... 1.72%** 1.46% 1.39% .74%**
Portfolio turnover rate..................................... 37.32% 83.57% 58.15% 80.18%
</TABLE>
* Total return does not reflect sales commissions and is not annualized.
** Annualized.
+ For the period November 1, 1996 (effective date) to December 31, 1996.
++ Based on average weighted shares outstanding.
12
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MUTUAL DISCOVERY FUND
Financial Highlights (continued)
<TABLE>
<CAPTION>
CLASS B
----------------
SIX MONTHS ENDED
JUNE 30, 1999
(UNAUDITED)+
----------------
<S> <C>
PER SHARE OPERATING PERFORMANCE
(For a share outstanding throughout the period)
Net asset value, beginning of period........................ $17.19
----------------
Income from investment operations:
Net investment income...................................... .15
Net realized and unrealized gains.......................... 2.36
----------------
Total from investment operations............................ 2.51
----------------
Less distributions from:
Net investment income...................................... (.06)
Net realized gains......................................... (.26)
----------------
Total distributions......................................... (.32)
----------------
Net asset value, end of period.............................. $19.38
================
Total Return*............................................... 14.62%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's)........................... $3,946
Ratios to average net assets:
Expenses................................................... 2.04%**
Expenses, excluding waiver and payments by affiliate....... 2.09%**
Net investment income...................................... 1.63%**
Portfolio turnover rate..................................... 37.32%
</TABLE>
* Total return does not reflect the contingent deferred sales charge and is not
annualized.
** Annualized.
+ Effective date of Class B shares was January 1, 1999. Based on average
weighted shares outstanding.
13
PAGE
MUTUAL DISCOVERY FUND
Financial Highlights (continued)
<TABLE>
<CAPTION>
CLASS C
------------------------------------------------
SIX MONTHS
ENDED YEAR ENDED DECEMBER 31,
JUNE 30, 1999 -------------------------------
(UNAUDITED)++ 1998 1997++ 1996+
------------------------------------------------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
(For a share outstanding throughout the period)
Net asset value, beginning of period........................ $17.15 $18.79 $17.17 $17.66
------------------------------------------------
Income from investment operations:
Net investment income...................................... .10 .23 .15 .09
Net realized and unrealized gains (losses)................. 2.42 (.75) 3.52 .76
------------------------------------------------
Total from investment operations............................ 2.52 (.52) 3.67 .85
------------------------------------------------
Less distributions from:
Net investment income...................................... (.03) (.31) (.69) (.27)
Net realized gains......................................... (.26) (.81) (1.36) (1.07)
------------------------------------------------
Total distributions......................................... (.29) (1.12) (2.05) (1.34)
------------------------------------------------
Net asset value, end of period.............................. $19.38 $17.15 $18.79 $17.17
================================================
Total Return*............................................... 14.67% (2.97)% 21.70% 4.90%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's)........................... $535,707 $563,761 $402,625 $18,038
Ratios to average net assets:
Expenses................................................... 2.02%** 2.00% 1.98% 2.00%**
Expenses, excluding waiver and payments by affiliate....... 2.07%** 2.02% 2.00% 2.13%**
Net investment income...................................... 1.08%** .81% .74% .13%**
Portfolio turnover rate..................................... 37.32% 83.57% 58.15% 80.18%
</TABLE>
* Total return does not reflect sales commissions or the contingent deferred
sales charge and is not annualized.
** Annualized.
+ For the period November 1, 1996 (effective date) to December 31, 1996.
++ Based on average weighted shares outstanding.
See Notes to Financial Statements.
14
PAGE
MUTUAL DISCOVERY FUND
STATEMENT OF INVESTMENTS, JUNE 30, 1999 (UNAUDITED)
<TABLE>
<CAPTION>
COUNTRY SHARES VALUE
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS 82.6%
AEROSPACE & MILITARY TECHNOLOGY .3%
Lockheed Martin Corp. ...................................... United States 302,800 $ 11,279,300
--------------
AUTOMOBILES 1.7%
*DaimlerChrysler AG......................................... Germany 76,000 6,638,342
Delphi Automotive Systems Corp. ............................ United States 844,107 15,668,736
General Motors Corp. ....................................... United States 189,300 12,493,800
*SPX Corp. ................................................. United States 9,800 818,300
TRW Inc. ................................................... United States 371,900 20,408,013
--------------
56,027,191
--------------
BANKING 7.0%
*Banca Nazionale del Lavoro SpA............................. Italy 8,621,000 27,186,777
Bank One Corp. ............................................. United States 375,500 22,365,719
*BHF-Bank AG................................................ Germany 352,600 11,999,381
Chittenden Corp. ........................................... United States 760,336 23,760,500
Christiania Bank OG Kreditkasse............................. Norway 3,653,400 13,133,213
*Credit Commercial de France CCF............................ France 76,000 8,213,674
First American Corp. Tennessee.............................. United States 254,400 10,573,500
First Union Corp. .......................................... United States 377,500 17,742,500
Hibernia Corp., A........................................... United States 306,300 4,805,081
Merita AS................................................... Finland 4,319,700 24,545,269
Paribas..................................................... France 79,700 8,934,093
Societe Generale Paris...................................... France 48,000 8,459,524
UST Corp., Inc. ............................................ United States 1,809,696 54,743,304
--------------
236,462,535
--------------
BEVERAGES & TOBACCO 4.3%
Allied Domecq PLC........................................... United Kingdom 841,800 8,140,416
Austria Tabak AG............................................ Austria 66,300 3,862,999
*Buenos Aires Embotelladora SA, B........................... Argentina 212,293,526 10,615,738
*Buenos Aires Embotelladora SA, B, ADR...................... Argentina 2,688,056 169,347
Farmer Brothers Co. ........................................ United States 81,202 16,443,405
Gallaher Group PLC.......................................... United Kingdom 2,000,400 12,297,153
Gallaher Group PLC, ADR..................................... United Kingdom 103,800 2,536,612
Greenalls Group PLC......................................... United Kingdom 1,338,690 7,511,958
Kita Kyushu Coca-Cola Bottling Co. Ltd. .................... Japan 700,200 39,799,868
Mikuni Coca-Cola Bottling Co. .............................. Japan 632,000 12,844,679
Philip Morris Cos. Inc. .................................... United States 570,000 22,906,875
Swedish Match AB............................................ Sweden 1,613,400 5,749,944
--------------
142,878,994
--------------
BROADCASTING & PUBLISHING 5.7%
*Capstar Broadcasting Corp., A.............................. United States 368,600 10,090,425
*CEI Citicorp Holdings SA, B................................ Argentina 2,786,300 8,081,078
*Chancellor Media Corp., A.................................. United States 362,600 19,988,325
Dow Jones & Co. Inc. ....................................... United States 299,400 15,886,913
</TABLE>
15
PAGE
MUTUAL DISCOVERY FUND
STATEMENT OF INVESTMENTS, JUNE 30, 1999 (UNAUDITED) (CONT.)
<TABLE>
<CAPTION>
COUNTRY SHARES VALUE
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS (CONT.)
BROADCASTING & PUBLISHING (CONT.)
*MediaOne Group Inc. ....................................... United States 288,500 $ 21,457,188
*Modern Times Group AB, A................................... Sweden 94,500 1,889,555
*Modern Times Group AB, B................................... Sweden 1,510,887 32,787,421
NV Holdingsmig de Telegraaf................................. Netherlands 1,671,800 32,929,133
*Publicis SA................................................ France 66,600 14,079,612
Scripps Co., A.............................................. United States 194,300 9,241,394
Seat Pagine Gialle SpA, di Risp............................. Italy 18,103,900 15,430,415
Washington Post Co., B...................................... United States 21,900 11,776,725
--------------
193,638,184
--------------
BUSINESS & PUBLIC SERVICES 3.4%
Corporate Services Group PLC., A............................ United Kingdom 10,619,982 14,228,720
Hillenbrand Industries Inc. ................................ United States 480,900 20,798,925
*Republic Services Inc., A.................................. United States 168,000 4,158,000
Sophus Berendsen AS, A...................................... Denmark 123,890 3,169,600
Sophus Berendsen AS, B...................................... Denmark 891,700 24,053,087
Suez Lyonnaise des Eaux SA.................................. France 259,715 46,843,512
*Suez Lyonnaise des Eaux SA, fgn. .......................... France 269,320 2,777
--------------
113,254,621
--------------
CHEMICALS 2.5%
Arch Chemicals Inc. ........................................ United States 233,350 5,673,322
Bayer AG, Br. .............................................. Germany 365,320 15,201,260
*Bush Boake Allen Inc. ..................................... United States 711,000 20,796,750
Chemfirst Inc. ............................................. United States 899,200 21,861,800
Crompton & Knowles Corp. ................................... United States 576,500 11,277,781
Olin Corp. ................................................. United States 555,600 7,326,975
Witco Corp. ................................................ United States 80,600 1,612,000
--------------
83,749,888
--------------
CONSTRUCTION & HOUSING 1.4%
Groupe GTM.................................................. France 39,000 4,182,737
*Grupo Ferrovial SA......................................... Spain 1,813,500 43,948,902
--------------
48,131,639
--------------
DATA PROCESSING & REPRODUCTION .2%
*Cadence Design Systems Inc. ............................... United States 297,100 3,788,025
*Tecnost Mael SpA........................................... Italy 1,633,080 4,033,440
--------------
7,821,465
--------------
ELECTRICAL & ELECTRONICS 1.3%
(R)+*Distribution Systems SpA............................... Italy 500 20,669
Honeywell Inc. ............................................. United States 11,300 1,309,387
*Level One Communications Inc. ............................. United States 7,400 362,138
(R)+*MWCR Elettronica SRL................................... Italy 69,056 69,056
</TABLE>
16
PAGE
MUTUAL DISCOVERY FUND
STATEMENT OF INVESTMENTS, JUNE 30, 1999 (UNAUDITED) (CONT.)
<TABLE>
<CAPTION>
COUNTRY SHARES VALUE
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS (CONT.)
ELECTRICAL & ELECTRONICS (CONT.)
(R)+*MWCR LLC............................................... Italy 13,505,313 $ 14,999,001
Racal Electronics PLC....................................... United Kingdom 4,261,500 25,961,819
(R)+*Sweda Industrie Elettroniche SpA....................... Italy 500 20,669
--------------
42,742,739
--------------
ELECTRONIC COMPONENTS & INSTRUMENTS .7%
*Amphenol Corp., A.......................................... United States 374,600 14,890,350
*NBS Technologies Inc. ..................................... Canada 264,700 226,085
*Quantum Corp. ............................................. United States 262,600 6,335,225
--------------
21,451,660
--------------
ENERGY EQUIPMENT & SERVICES 1.6%
Baker Hughes Inc. .......................................... United States 253,900 8,505,650
*BJ Services Co. ........................................... United States 299,600 8,819,475
*Cooper Cameron Corp. ...................................... United States 525,800 19,487,462
ISIS SA..................................................... France 94,783 6,695,509
*Weatherford International Inc. ............................ United States 296,800 10,870,300
--------------
54,378,396
--------------
ENERGY SOURCES 1.8%
Atlantic Richfield Co. ..................................... United States 97,600 8,155,700
*Santa Fe Snyder Corp. ..................................... United States 840,100 6,405,763
Societe Elf Aquitaine SA.................................... France 241,200 35,395,236
Societe Elf Aquitaine SA, ADR............................... France 158,500 11,659,656
--------------
61,616,355
--------------
FINANCIAL SERVICES 8.6%
Bear Stearns Co. Inc. ...................................... United States 360,005 16,830,234
Cir Cie Industriali Riunite SpA Torino...................... Italy 14,967,900 19,911,922
Cir Cie Industriali Riunite SpA Torino, di Risp............. Italy 2,590,900 2,826,825
CIT Group Inc., A........................................... United States 636,800 18,387,600
Eaton Vance Corp. .......................................... United States 688,000 23,693,000
Greenpoint Financial Corp. ................................. United States 847,396 27,805,181
Household International Inc. ............................... United States 746,800 35,379,650
(R)+Laser Mortgage Management Inc. ......................... United States 991,833 3,409,426
Lehman Brothers Holdings Inc. .............................. United States 400,700 24,943,575
Mercury European Investment Trust PLC....................... United Kingdom 9,552,253 26,198,607
*Mercury European Investment Trust PLC, wts. ............... United Kingdom 6,135,000 8,533,996
Metris Cos. Inc. ........................................... United States 478,000 19,478,500
*MFN Financial Corp. ....................................... United States 292,324 2,904,970
Morgan Stanley, Dean Witter & Co. .......................... United States 82,300 8,435,750
Newcourt Credit Group Inc. ................................. Canada 38,400 502,467
Newcourt Credit Group Inc., fgn. ........................... Canada 963,100 12,460,106
</TABLE>
17
PAGE
MUTUAL DISCOVERY FUND
STATEMENT OF INVESTMENTS, JUNE 30, 1999 (UNAUDITED) (CONT.)
<TABLE>
<CAPTION>
COUNTRY SHARES VALUE
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS (CONT.)
FINANCIAL SERVICES (CONT.)
Pargesa Holdings SA, Br. ................................... Switzerland 13,000 $ 19,734,980
Pioneer Group Inc. ......................................... United States 879,400 15,169,650
Power Financial Corp. ...................................... Canada 73,100 1,398,565
--------------
288,005,004
--------------
FOOD & HOUSEHOLD PRODUCTS 1.7%
Earthgrains Company......................................... United States 422,300 10,900,619
*Fine Host Corp. ........................................... United States 212,022 2,332,242
Hillsdown Holdings PLC...................................... United Kingdom 7,118,800 16,270,389
Interstate Bakeries Corp. .................................. United States 9,400 210,913
Kikkoman Corp. ............................................. Japan 1,212,300 10,266,090
*Kohler Co. ................................................ United States 30 1,338,000
U.S. Industries Inc. ....................................... United States 976,000 16,592,000
--------------
57,910,253
--------------
HEALTH & PERSONAL CARE 2.4%
(R)*Cape Ann Investors LLC.................................. United States 1,670,390 658,802
McKesson HBOC Inc. ......................................... United States 163,600 5,255,650
Rhone-Poulenc SA, A......................................... France 1,465,800 66,979,064
Sankyo Co. Ltd. ............................................ Japan 231,300 5,828,363
Ventas Inc. ................................................ United States 205,800 1,106,175
--------------
79,828,054
--------------
INDUSTRIAL COMPONENTS 1.9%
+DT Industries Inc. ........................................ United States 931,530 8,558,432
*Owens-Illinois Inc. ....................................... United States 1,182,000 38,636,625
*Thermo Electron Corp. ..................................... United States 881,400 17,683,088
--------------
64,878,145
--------------
INSURANCE 2.9%
Allmerica Financial Corp. .................................. United States 232,000 14,108,500
American Bankers Insurance Group Inc. ...................... United States 90,100 4,904,819
Assurances Generales de France AGF.......................... France 320,000 15,410,952
*Companhia de Seguros Mundial Confianca SA.................. Portugal 91,395 3,606,035
Corporacion Mapfre PLC...................................... Spain 618,600 12,599,103
Horace Mann Educators Corp. ................................ United States 473,600 12,876,000
*Old Republic International Corp. .......................... United States 75,400 1,305,363
Provident Companies Inc. ................................... United States 100,000 4,000,000
Radian Group Inc. .......................................... United States 207,120 10,110,045
Sampo Insurance Co. PLC, A.................................. Finland 237,885 6,893,440
Berkeley W R Corp. ......................................... United States 522,300 13,057,500
--------------
98,871,757
--------------
</TABLE>
18
PAGE
MUTUAL DISCOVERY FUND
STATEMENT OF INVESTMENTS, JUNE 30, 1999 (UNAUDITED) (CONT.)
<TABLE>
<CAPTION>
COUNTRY SHARES VALUE
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS (CONT.)
LEISURE & TOURISM 1.6%
Pathe SA.................................................... France 296,316 $ 35,568,921
*Promus Hotel Corp. ........................................ United States 615,800 19,089,800
--------------
54,658,721
--------------
MACHINERY & ENGINEERING 6.0%
Case Corp. ................................................. United States 53,600 2,579,500
FKI PLC..................................................... United Kingdom 13,177,800 40,711,970
IMI PLC..................................................... United Kingdom 7,787,915 31,548,409
Invensys PLC................................................ United Kingdom 13,669,683 64,747,955
Toyoda Automatic Loom Works Ltd. ........................... Japan 435,300 7,390,462
+TT Group PLC............................................... United Kingdom 10,655,280 22,589,691
United Dominion Industries Ltd. ............................ Canada 1,285,600 31,175,800
--------------
200,743,787
--------------
MERCHANDISING 1.1%
*Boyds Collection Ltd. ..................................... United States 503,300 8,713,381
*Federated Department Stores Inc. .......................... United States 184,800 9,782,850
*Homeland Holdings Corp. ................................... United States 38,115 80,041
Rite Aid Corp. ............................................. United States 780,700 19,224,738
--------------
37,801,010
--------------
MULTI-INDUSTRY 15.3%
*Alleghany Corp. ........................................... United States 48,646 8,999,510
*Berkshire-Hathaway Inc., A................................. United States 402 27,697,800
Brierley Investments Ltd. .................................. New Zealand 96,225,800 27,024,706
Compagnie Financiere Richemont AG, Br., A................... Switzerland 35,060 67,431,751
Compagnie Generale D'Industrie et de Participation.......... France 1,173,662 56,764,719
Corporacion Financiera Alba SA.............................. Spain 264,952 42,897,251
Empire Co. Ltd., A.......................................... Canada 280,500 5,174,923
Imasco Ltd. ................................................ Canada 683,200 18,532,996
Investor AB, A.............................................. Sweden 1,569,800 17,263,738
Investor AB, B.............................................. Sweden 6,846,000 76,496,119
+Invik & Co. AB, B.......................................... Sweden 409,816 24,077,052
Kansas City Southern Industries Inc. ....................... United States 441,800 28,192,363
Kinnevik AB, B.............................................. Sweden 1,323,500 24,907,081
Lagardere SCA............................................... France 1,226,835 45,672,624
Power Corp. of Canada....................................... Canada 200,300 3,859,556
Saab AB, B.................................................. Sweden 2,267,197 17,599,977
Trelleborg AB, B............................................ Sweden 2,476,900 21,849,859
--------------
514,442,025
--------------
</TABLE>
19
PAGE
MUTUAL DISCOVERY FUND
STATEMENT OF INVESTMENTS, JUNE 30, 1999 (UNAUDITED) (CONT.)
<TABLE>
<CAPTION>
COUNTRY SHARES VALUE
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS (CONT.)
REAL ESTATE 2.7%
(R)*Canary Wharf Group PLC.................................. United Kingdom 9,907,183 $ 56,077,510
Castellum AB................................................ Sweden 1,122,100 10,558,457
MBO Properties Inc. ........................................ United States 273,144 136,572
(R)*Security Capital European Realty........................ United States 304,500 5,276,132
*Security Capital US Realty, A.............................. United States 783,275 14,882,225
*Wellsford Real Properties Inc. ............................ United States 252,436 2,713,687
--------------
89,644,583
--------------
RECREATION & OTHER CONSUMER GOODS .3%
(R)+*Hancock LLC............................................ United States 8,405,522 8,405,522
--------------
TELECOMMUNICATIONS 2.4%
BCE Inc. ................................................... Canada 352,200 17,267,065
*Superior Telecom Inc. ..................................... United States 157,600 3,940,000
*Telecom Italia SpA, di Risp................................ Italy 3,162,900 17,205,628
Telephone & Data Systems Inc. .............................. United States 454,500 33,206,906
Telesp Participacoes SA..................................... Brazil 115,079,100 1,496,521
*Vodafone Airtouch PLC, ADR................................. United Kingdom 38,950 7,673,150
--------------
80,789,270
--------------
TRANSPORTATION 2.4%
ASG AB, B................................................... Sweden 485,400 15,129,499
Florida East Coast Industries Inc. ......................... United States 526,200 23,284,350
(R)*Golden Ocean Group Ltd., wts., 8/31/01.................. United States 2,110 0
*MIF Ltd. .................................................. Norway 336,378 5,811,039
Railtrack Group PLC......................................... United Kingdom 1,752,822 35,834,465
--------------
80,059,353
--------------
UTILITIES ELECTRICAL & GAS 1.4%
*Citizens Utilities Co., B.................................. United States 2,829,601 31,479,311
Veba AG..................................................... Germany 269,300 15,885,284
--------------
47,364,595
--------------
TOTAL COMMON STOCKS (COST $2,306,714,519)................... 2,776,835,046
--------------
PREFERRED STOCKS .4%
Tele Centro Sul Participacoes SA, ADR, pfd. ................ Brazil 132,500 7,353,750
Tele Norte Leste Participacoes SA, ADR, pfd. ............... Brazil 413,200 7,670,025
--------------
TOTAL PREFERRED STOCKS (COST $11,086,871)................... 15,023,775
--------------
</TABLE>
20
PAGE
MUTUAL DISCOVERY FUND
STATEMENT OF INVESTMENTS, JUNE 30, 1999 (UNAUDITED) (CONT.)
<TABLE>
<CAPTION>
PRINCIPAL
COUNTRY AMOUNT** VALUE
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CORPORATE BONDS & NOTES 1.6%
Abraxas Petroleum Corp., Series D, 11.50%, 11/01/04......... United States $ 2,770,000 $ 1,745,100
Eurotunnel Finance Ltd., Equity Note, 12/31/03.............. United Kingdom 6,741,050 5,206,510
Eurotunnel PLC:
12/31/25, tier 3.......................................... United Kingdom 3,762,057GBP 3,854,445
12/31/50, Resettable Advance R5........................... United Kingdom 4,821,594GBP 3,230,001
Stabilization Advance S8 tier 1........................... United Kingdom 826,565GBP 312,688
Stabilization Advance S8 tier 2........................... United Kingdom 640,087GBP 201,786
Eurotunnel SA:
12/31/18, tier 2 (Libor).................................. France 3,559,735EUR 2,698,159
12/31/18, tier 2 (Pibor).................................. France 2,293,539EUR 1,750,252
12/31/25, tier 3 (Libor).................................. France 4,733,668EUR 3,124,211
12/31/25, tier 3 (Pibor).................................. France 4,198,311EUR 2,770,877
12/31/50, Resettable Advance R4........................... France 8,132,603EUR 3,480,489
Stabilization Advance S6 tier 1 (Pibor)................... France 505,382EUR 125,082
Stabilization Advance S7 tier 1 (Libor)................... France 165,748EUR 41,022
Stabilization Advance S6 tier 2........................... France 585,863EUR 120,834
(R)*Golden Ocean Group Ltd., 10.00%, 8/31/01................ United States 5,150,000 566,500
*Great Trust Services, Series A, zero coupon, 1/15/02....... United States 185,168 92,584
HIH Capital Ltd.:
cvt., 7.50%, 9/25/06...................................... United Kingdom 5,445,000 3,729,825
144A, 7.50, 9/25/06....................................... United Kingdom 2,660,000 1,822,100
Hvide Marine Inc., 8.375%, 2/15/08.......................... United States 1,145,000 555,325
MFN Financial Corp.:
Series A, 10.00%, 4/23/01................................. United States 1,210,235 1,143,672
Series B, FRN, 9.495%, 4/23/01............................ United States 2,090,235 1,975,272
R.H. Cement Finance PLC, 144A, FRN, 14.40%, 3/10/00......... Irish Republic 3,500,000 3,500,000
Southwest Royalties Inc., B, 10.50%, 10/15/04............... United States 11,586,000 5,619,210
TFM SA de CV:
144A, 10.25%, 6/15/07..................................... Mexico 350,000 310,625
144A, zero coupon to 6/15/02, 11.75%, 6/15/09............. Mexico 4,650,000 2,813,250
Tribasa Toll Road Trust I, 144A 10.50%, 12/01/11............ Mexico 4,415,695 2,296,161
--------------
TOTAL CORPORATE BONDS & NOTES (COST $59,401,280)............ 53,085,980
--------------
BONDS & NOTES IN REORGANIZATION 2.6%
*Aiken Cnty S C Indl. Rev. Ref. Belott, 6.00%, 12/01/11..... United States 280,000 170,800
*Altos Hornos de Mexico SA:
cvt, 5.50%, 12/15/01...................................... Mexico 135,000 54,000
Series A, 11.375%, 04/30/02............................... Mexico 600,000 270,000
Series B, 11.875%, 4/15/04................................ Mexico 410,000 184,500
*Aerovias Venezolanas SA, Bank Claim:
lease..................................................... Venezuela 3,795,157 2,277,094
term loan................................................. Venezuela 800,000 440,000
*Buenos Aires Embotelladore SA:
Series A, zero cpn., 8/03/05.............................. Argentina 2,783,000 1,586,310
Series B, 12.00%, 8/03/05................................. Argentina 355,000 301,750
144A, 12.00%, 9/01/05..................................... Argentina 6,501,000 5,265,810
</TABLE>
21
PAGE
MUTUAL DISCOVERY FUND
STATEMENT OF INVESTMENTS, JUNE 30, 1999 (UNAUDITED) (CONT.)
<TABLE>
<CAPTION>
PRINCIPAL
COUNTRY AMOUNT** VALUE
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
BONDS & NOTES IN REORGANIZATION (CONT.)
*Brunos Inc.
revolver.................................................. United States $ 1,862,400 $ 1,070,880
tranche A, term loan...................................... United States 3,263,000 1,762,020
tranche B, term loan...................................... United States 1,650,000 891,000
*Crown Leasing, Bank Claim.................................. Japan 777,146,017JPY 1,019,266
*Dow Corning Corp.:
bank debt................................................. United States 1,241,480 1,592,198
bank debt #1.............................................. United States 3,250,000 4,168,125
8.55%, 3/01/01............................................ United States 2,705,000 3,469,162
9.375%, 2/01/08........................................... United States 100,000 128,250
8.15%, 10/15/29........................................... United States 500,000 641,250
swap...................................................... United States 6,938,674 8,898,850
*Foxmeyer Health Corp.:
reclamation trade claim................................... United States 5,105,144 1,327,337
trade claim............................................... United States 610,315 457,736
*Heilman Acquisition Corp., 9.625, 1/31/04.................. United States 7,550,000 755
*Harnischfeger Industries Inc.:
8.90%, 3/01/22............................................ United States 1,950,000 1,189,500
8.70%, 6/15/22............................................ United States 975,000 594,750
6.875%, 2/15/27........................................... United States 2,400,000 1,464,000
*Koninklijke Ned Vlieg Fokker NV:
6.25%, 11/04/98........................................... Netherlands 1,917,345EUR 583,290
trade claim............................................... Netherlands 17,485,098EUR 14,425,160
*Loewen Group Inc., Series 5, 6.10%, 10/02/02............... Canada 2,250,000CAD 930,133
*Loewen Group International Inc.:
bank claim, revolver...................................... Canada 1,207,516 754,697
144A, 6.70%, 10/01/99..................................... Canada 2,420,000 1,464,100
Series 3, 7.50%, 4/15/01.................................. Canada 240,000 151,200
Series 2, 8.25%, 4/15/03.................................. Canada 890,000 556,250
Sereis 6, 7.20%, 6/01/03.................................. Canada 10,020,000 6,412,800
Series 4, 8.25%, 10/15/03................................. Canada 6,310,000 3,943,750
Series 7, 7.60%, 6/01/08.................................. Canada 6,870,000 4,362,450
*Nippon Credit Bank Ltd., Bank Claim........................ Japan 395,595,008JPY 522,219
*Nippon Total Finance, Bank Claim........................... Japan 401,059,536JPY 197,107
*Port Seattle Wash Rev Ref-Beloit Proj., 6.00%, 12/01/17.... United States 150,000 91,500
*Southeast Banking Corp.:
zero coupon, 12/18/96..................................... United States 400,000 100,000
zero coupon, 11/2/97...................................... United States 5,800,000 1,450,000
10.50, 4/11/01............................................ United States 7,800,000 1,950,000
*Vencor Inc.
revolver.................................................. United States 520,850 442,723
term loan A............................................... United States 2,881,512 2,377,247
term loan B............................................... United States 382,193 321,998
9.875%, 5/01/05........................................... United States 11,035,000 3,365,675
</TABLE>
22
PAGE
MUTUAL DISCOVERY FUND
STATEMENT OF INVESTMENTS, JUNE 30, 1999 (UNAUDITED) (CONT.)
<TABLE>
<CAPTION>
PRINCIPAL
COUNTRY AMOUNT** VALUE
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
BONDS & NOTES IN REORGANIZATION (CONT.)
*Ventas Inc.:
tranche A, Bridge loan.................................... United States $ 525,000 $ 488,715
tranche B, revolver....................................... United States 1,269,326 1,180,473
tranche C, term loan A.................................... United States 498,900 468,966
tranche D, term loan B.................................... United States 174,731 143,279
--------------
TOTAL BONDS & NOTES IN REORGANIZATION (COST $79,370,972).... 85,909,075
--------------
<CAPTION>
SHARES
-----
<S> <C> <C> <C>
COMPANIES IN LIQUIDATION .1%
*City Investing Company Liquidating Trust................... United States 100,000 131,250
*Petrie Stores Liquidating Trust, CBI....................... United States 1,213,700 2,882,538
--------------
TOTAL COMPANIES IN LIQUIDATION (COST $3,440,137)............ 3,013,788
--------------
<CAPTION>
PRINCIPAL
AMOUNT**
--------
<S> <C> <C> <C>
SHORT TERM INVESTMENTS 7.1%
Fannie Mae, 4.64% to 5.26%, with maturities to 6/19/00...... United States $ 52,500,000 51,357,285
Federal Home Loan Banks, 4.52% to 5.210% with maturities to
6/02/00................................................... United States 174,000,000 169,428,086
Federal Home Loan Mortgage Corp., 4.75% to 5.28%, with
maturities to 6/22/00..................................... United States 19,500,000 18,665,298
--------------
TOTAL SHORT TERM INVESTMENTS (COST $239,906,103)............ 239,450,669
--------------
TOTAL INVESTMENTS (COST $2,699,919,882) 94.4%............... 3,173,318,333
SECURITIES SOLD SHORT (.8%)................................. (28,108,892)
NET EQUITY IN FORWARD CONTRACTS 2.1%........................ 70,251,720
OTHER ASSETS, LESS LIABILITIES 4.3%......................... 145,273,512
--------------
TOTAL NET ASSETS 100.0%..................................... $3,360,734,673
==============
<CAPTION>
SECURITIES SOLD SHORT
ISSUER COUNTRY SHARES VALUE
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
*Allied Signal Inc. ........................................ United States 21,200 $ 1,335,600
*DST Systems Inc. .......................................... United States 98,685 6,204,819
*Intel Corp. ............................................... United States 6,400 380,800
*BP Amoco Plc., ADR......................................... United Kingdom 37,500 4,068,750
*Nortel Networks Corp. ..................................... Canada 140,800 12,122,173
*Unum Corp. ................................................ United Kingdom 73,000 3,996,750
--------------
TOTAL SECURITIES SOLD SHORT (PROCEEDS $23,388,467).......... $ 28,108,892
==============
</TABLE>
23
PAGE
MUTUAL DISCOVERY FUND
STATEMENT OF INVESTMENTS, JUNE 30, 1999 (UNAUDITED) (CONT.)
<TABLE>
<CAPTION>
CONTRACTS FOR DIFFERENCES VALUE AT UNREALIZED
SECURITY COUNTRY SHARES 6/30/99 GAIN/LOSS
-----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
*BP Amoco PLC, cfd. 10.3574................................ United Kingdom 118,900 $ 2,132,786 $(191,651)
*BP Amoco PLC, cfd. 10.9450................................ United Kingdom 46,700 837,688 (32,020)
*BP Amoco PLC, cfd. 11.2992................................ United Kingdom 89,400 1,603,625 (11,386)
*Vodafone Group PLC, cfd. 11.2893.......................... United Kingdom 235,000 4,622,805 (441,056)
*Vodafone Group PLC, cfd. 12.2720.......................... United Kingdom 156,000 3,068,756 (51,146)
----------- ---------
TOTAL CONTRACT FOR DIFFERENCES............................. $12,265,660 $(727,259)
=========== =========
</TABLE>
CURRENCY ABBREVIATIONS:
CAD -- Canadian Dollar
EUR -- European Unit
GBP -- British Pound
JPY -- Japanese Yen
* Non-income producing.
** Securities denominated in U.S. dollars unless otherwise indicated.
(R)Restricted Securities (See note 6).
+ Affiliated Issuers (See note 7).
See Notes to Financial Statements.
24
PAGE
MUTUAL DISCOVERY FUND
Financial Statements
STATEMENT OF ASSETS AND LIABILITIES
JUNE 30, 1999 (UNAUDITED)
<TABLE>
<S> <C> <C>
Assets:
Investments in securities, at value:
Unaffiliated issuers (cost $2,577,358,580)................ $3,091,168,815
Controlled affiliates (cost $22,241,449).................. 23,514,917
Non controlled affiliates (cost $100,319,853)............. 58,634,601 $3,173,318,333
--------------
Cash....................................................... 52,879,843
Receivables:
Investment securities sold................................ 64,117,437
Capital shares sold....................................... 6,662,564
Dividends and interest.................................... 11,449,398
From affiliates........................................... 171,796
Unrealized gain on forward exchange contracts (Note 8)..... 74,006,510
Deposits with broker for securities sold short............. 49,678,613
--------------
Total assets.......................................... 3,432,284,494
--------------
Liabilities:
Payables:
Investment securities purchased........................... 26,844,318
Capital shares redeemed................................... 7,327,173
To affiliates............................................. 4,167,663
Securities sold short, at value (proceeds $23,388,467)..... 28,108,892
Unrealized loss on forward exchange contracts (Note 8)..... 3,754,790
Due to broker-variation margin............................. 634,588
Accrued expenses........................................... 712,397
--------------
Total liabilities..................................... 71,549,821
--------------
Net assets, at value........................................ $3,360,734,673
==============
Net assets consist of:
Distributions in excess of net investment income........... $ (24,817,246)
Net unrealized appreciation................................ 538,202,487
Accumulated net realized gain.............................. 115,242,455
Capital shares............................................. 2,732,106,977
--------------
Net assets, at value........................................ $3,360,734,673
==============
</TABLE>
25
PAGE
MUTUAL DISCOVERY FUND
Financial Statements (continued)
STATEMENT OF ASSETS AND LIABILITIES (CONT.)
JUNE 30, 1999 (UNAUDITED)
<TABLE>
<S> <C> <C>
CLASS Z:
Net asset value and maximum offering price per share
($1,995,687,642 / 102,037,203 shares outstanding)......... $19.56
==============
CLASS A:
Net asset value per share ($825,393,429 / 42,427,936 shares
outstanding).............................................. $19.45
==============
Maximum offering price per share ($19.45 / 94.25%)......... $20.64
==============
CLASS B:
Net asset value and maximum offering price per share
($3,946,430 / 203,596 shares outstanding)*................ $19.38
==============
CLASS C:
Net asset value per share ($535,707,172 / 27,641,646 shares
outstanding)*............................................. $19.38
==============
Maximum offering price per share ($19.38 / 99.00%)......... $19.58
==============
</TABLE>
*Redemption price per share is equal to net asset value less any applicable
sales charge.
See Notes to Financial Statements.
26
PAGE
MUTUAL DISCOVERY FUND
Financial Statements (continued)
STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1999 (UNAUDITED)
<TABLE>
<S> <C> <C>
Investment Income:
(net of foreign taxes of $3,812,951)
Dividends.................................................. $ 39,294,307
Interest................................................... 12,700,016
------------
Total investment income............................... $ 51,994,323
------------
Expenses:
Management fees (Note 3)................................... 13,567,495
Administrative fees (Note 3)............................... 1,285,035
Distribution fees (Note 3)
Class A................................................... 1,395,195
Class B................................................... 8,695
Class C................................................... 2,592,685
Transfer agent fees (Note 3)............................... 2,646,023
Custodian fees............................................. 218,055
Reports to shareholders.................................... 227,280
Registration and filing fees............................... 95,405
Professional fees.......................................... 139,940
Directors' fees and expenses............................... 41,166
Other...................................................... 145,997
------------
Total expenses........................................ 22,362,971
Expenses waived/paid by affiliate (Note 3)............ (831,019)
------------
Net expenses....................................... 21,531,952
------------
Net investment income........................... 30,462,371
------------
Realized and unrealized gains:
Net realized gain from:
Investments............................................... 64,852,916
Foreign currency transactions............................. 45,234,275
------------
Net realized gain..................................... 110,087,191
Net unrealized appreciation on:
Investments............................................... 238,477,244
Translation of assets and liabilities denominated in
foreign currencies...................................... 88,478,983
------------
Net unrealized appreciation........................... 326,956,227
------------
Net realized and unrealized gain............................ 437,043,418
------------
Net increase in net assets resulting from operations........ $467,505,789
============
</TABLE>
See Notes to Financial Statements.
27
PAGE
MUTUAL DISCOVERY FUND
Financial Statements (continued)
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
JUNE 30, 1999 YEAR ENDED
(UNAUDITED) DECEMBER 31, 1998
----------------------------------------
<S> <C> <C>
Increase (decrease) in net assets:
Operations:
Net investment income..................................... $ 30,462,371 $ 83,978,267
Net realized gain from investments and foreign currency
transactions............................................. 110,087,191 164,704,672
Net unrealized appreciation (depreciation) on investments
and translation of assets and liabilities denominated in
foreign currencies....................................... 326,956,227 (434,011,075)
----------------------------------------
Net increase (decrease) in net assets resulting from
operations............................................ 467,505,789 (185,328,136)
Distributions to shareholders from:
Net investment income:
Class Z.................................................. (7,220,169) (74,719,859)
Class A.................................................. (2,327,993) (20,468,910)
Class B.................................................. (11,243) --
Class C.................................................. (674,301) (9,767,282)
Net realized gains:
Class Z.................................................. (26,183,701) (138,830,937)
Class A.................................................. (10,965,654) (40,521,871)
Class B.................................................. (47,719) --
Class C.................................................. (7,083,584) (25,858,757)
Capital share transactions (Note 2):
Class Z.................................................. (769,475,034) (1,059,140,516)
Class A.................................................. (132,605,990) 279,367,028
Class B.................................................. 3,712,455 --
Class C.................................................. (91,640,955) 236,895,123
----------------------------------------
Net decrease in net assets.............................. (577,018,099) (1,038,374,117)
Net assets:
Beginning of period........................................ 3,937,752,772 4,976,126,889
----------------------------------------
End of period.............................................. $3,360,734,673 $ 3,937,752,772
========================================
Distributions in excess of net investment income included in
net assets:
End of period.............................................. $ (24,817,246) $ (45,045,911)
========================================
</TABLE>
See Notes to Financial Statements.
28
PAGE
MUTUAL DISCOVERY FUND
Notes to Financial Statements (unaudited)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Mutual Discovery Fund (the Fund) is a separate, diversified series of Franklin
Mutual Series Fund, Inc. (the Series Fund), which is an open-end investment
company registered under the Investment Company Act of 1940. The Fund seeks
long-term capital appreciation by investing in small capitalization companies.
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
29
PAGE
MUTUAL DISCOVERY FUND
Notes to Financial Statements (unaudited) (continued)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONT.)
d. SECURITY 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. OPTION CONTRACTS:
Options purchased are recorded as investments; options written (sold) are
recorded 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. CONTRACTS FOR DIFFERENCES:
Short contracts for differences are contracts entered into between a broker and
the Fund under which the parties agree to make payments to each other so as to
replicate the economic consequences that would apply had a short sale of the
underlying security taken place. Upon entering into short contracts for
differences, the Fund is required to pledge to the broker an amount of cash
and/or other assets equal to a certain percentage of the contract amount
("initial margin"). Subsequent payments known as "variation margin", are made or
received by the Fund periodically, depending on fluctuations in the value of the
underlying security. When the contract is closed, the Fund records a realized
gain or loss equal to the difference between the value of the contract at the
time it was opened and the value at the time it was closed. Should market
conditions move unexpectedly, the Fund may not achieve the anticipated benefits
of the contracts for difference and may realize a loss.
30
PAGE
MUTUAL DISCOVERY FUND
Notes to Financial Statements (unaudited) (continued)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONT.)
h. SECURITIES SOLD SHORT:
The Fund is engaged in selling securities short, which obligates the Fund to
replace a security borrowed. The Fund would incur a loss if the price of the
security increases between the date of the short sale and the date on which the
Fund replaces the borrowed security. The Fund would realize a gain if the price
of the security declines between those dates.
The Fund is required to establish a margin account with the broker lending the
security sold short. While the short sale is outstanding, the broker retains the
proceeds of the short sale and the Fund must maintain a deposit for the broker
consisting of cash and securities having a value equal to a specified percentage
of the value of the securities sold short.
i. 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 four classes of shares: Class Z, Class A, Class B, and Class C
shares. Effective January 1, 1999, Class I and Class II shares were renamed
Class A and Class C, respectively, and a fourth class of shares, Class B was
established. The shares differ by their initial sales load, distribution fees,
voting rights on matters affecting a single class, and the exchange privilege of
each class.
At June 30, 1999, there were 600 million shares authorized ($0.001 par value) of
which 300 million, 100 million, 100 million, and 100 million were designated as
Class Z, Class A, Class B and Class C, respectively. Transactions in the Fund's
shares were as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
JUNE 30, 1999 DECEMBER 31, 1998
-------------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
-------------------------------------------------------------------
<S> <C> <C> <C> <C>
CLASS Z SHARES:
Shares sold........................................... 5,580,567 $ 101,857,381 25,432,957 $ 499,887,354
Shares issued on reinvestment of distributions........ 1,635,952 31,722,946 11,109,339 203,205,264
Shares redeemed....................................... (50,798,678) (903,055,361) (96,260,843) (1,762,233,134)
-------------------------------------------------------------------
Net decrease.......................................... (43,582,159) $(769,475,034) (59,718,547) $(1,059,140,516)
===================================================================
</TABLE>
31
PAGE
MUTUAL DISCOVERY FUND
Notes to Financial Statements (unaudited) (continued)
2. CAPITAL STOCK (CONT.)
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
JUNE 30, 1999 DECEMBER 31, 1998
-----------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
-----------------------------------------------------------------
<S> <C> <C> <C> <C>
CLASS A SHARES:
Shares sold............................................ 20,397,860 $ 372,235,779 34,825,153 $ 677,130,211
Shares issued on reinvestment of distributions......... 634,736 12,249,176 3,160,927 56,769,299
Shares redeemed........................................ (28,621,624) (517,090,945) (24,829,893) (454,532,482)
-----------------------------------------------------------------
Net increase (decrease)................................ (7,589,028) $(132,605,990) 13,156,187 $ 279,367,028
=================================================================
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, 1999+
----------------------------
SHARES AMOUNT
----------------------------
<S> <C> <C> <C> <C>
CLASS B SHARES:
Shares sold............................................ 206,362 $ 3,760,620
Shares issued on reinvestment of distributions......... 2,878 55,338
Shares redeemed........................................ (5,644) (103,503)
----------------------------
Net increase........................................... 203,596 $ 3,712,455
============================
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
JUNE 30, 1999 DECEMBER 31, 1998
---------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
---------------------------------------------------------------
<S> <C> <C> <C> <C>
CLASS C SHARES:
Shares sold.............................................. 2,058,593 $ 37,181,553 16,896,047 $ 334,831,778
Shares issued on reinvestment of distributions........... 371,274 7,136,090 1,822,933 32,679,296
Shares redeemed.......................................... (7,652,626) (135,958,598) (7,286,338) (130,615,951)
---------------------------------------------------------------
Net increase (decrease).................................. (5,222,759) $ (91,640,955) 11,432,642 $ 236,895,123
===============================================================
</TABLE>
+Effective date of Class B shares was January 1, 1999.
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, through
June 30, 2000, to limit the expense ratio of the Fund to be no higher than
expected for the Fund's 1996 fiscal year, except that increases in expenses will
be permitted if the Fund's Board of Directors determines that such expenses
would have been higher had the merger between Franklin Mutual and the Fund's
former investment adviser not taken place. This expense limitation does not
include items such as litigation
32
PAGE
MUTUAL DISCOVERY FUND
Notes to Financial Statements (unaudited) (continued)
3. TRANSACTIONS WITH AFFILIATES AND RELATED PARTIES (CONT.)
expenses, interest, taxes, insurance, brokerage commissions, and expenses of an
extraordinary nature. The expense reduction is set forth in the Statement of
Operations.
The Fund pays its allocated share of an administrative fee to FT Services based
on the Series Fund's aggregated average daily net assets as follows:
ANNUALIZED
FEE RATE AVERAGE DAILY NET ASSETS
- -----------------------------------------------------------------
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
The Fund reimburses Distributors for costs incurred in marketing the Fund's
shares up to .35%, 1.00% and 1.00% per year of the average daily net assets of
Class A, Class B and Class C shares, respectively. Distributors received net
commissions from sales of Fund shares and received contingent deferred sales
charges for the period of $106,584 and $494,181 respectively.
4. INCOME TAXES
At June 30, 1999, the unrealized appreciation based on the cost of investments
for income tax purposes of $2,720,400,252 was as follows:
Unrealized appreciation..................................... $ 610,293,564
Unrealized depreciation..................................... (157,375,483)
-------------
Net unrealized appreciation................................. $ 452,918,081
=============
Net investment income and net realized capital gains differ for financial
statement and tax purposes primarily due to differing treatments of passive
foreign investment companies and foreign currency transactions.
33
PAGE
MUTUAL DISCOVERY FUND
Notes to Financial Statements (unaudited) (continued)
5. INVESTMENT TRANSACTIONS
Purchases and sales of securities (excluding short-term securities) for the six
months ended June 30, 1999 aggregated $1,163,813,506 and $2,048,089,097,
respectively.
Transactions in options written during the six months ended June 30, 1999 were
as follows:
<TABLE>
<CAPTION>
NUMBER
OF CONTRACTS PREMIUM
----------------------------
<S> <C> <C>
Options Outstanding at December 30, 1998.................... 189 $ 46,106
Options written............................................. 275 110,971
Options expired............................................. (392) (128,593)
Options terminated in closing transactions.................. (72) (28,484)
Options exercised........................................... 0 0
----------------------------
Options outstanding June 30, 1999........................... 0 $ 0
============================
</TABLE>
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, 1999 are as follows:
<TABLE>
<CAPTION>
NUMBER OF SHARES OR ACQUISITION
PRINCIPAL AMOUNT ISSUER DATE VALUE
- -----------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C>
9,907,183 Canary Wharf Group PLC...................................... 5/06/99 $56,077,510
1,670,390 Cape Ann Investors, LLC..................................... 9/09/97 658,802
500 Distribution Systems SpA.................................... 9/27/96 20,669
5,150,000 Golden Ocean Group Ltd., 10.00%, 8/31/01.................... 8/26/97 566,500
2,110 Golden Ocean Group Ltd., wts., 8/31/01...................... 8/26/97 0
8,405,522 Hancock LLC................................................. 3/06/97 8,405,522
991,833 Laser Mortgage Management Inc. ............................. 11/26/97 3,409,426
69,056 MWCR Elettronica SRL........................................ 9/27/95 69,056
13,505,313 MWCR LLC.................................................... 2/21/95 14,999,001
304,500 Security Capital European Realty............................ 4/08/98 5,276,132
500 Sweda Industrie Elettroniche SpA............................ 9/27/96 20,669
-----------
TOTAL RESTRICTED SECURITIES (COST $44,292,063) (2.66% OF NET ASSETS)............... $89,503,287
===========
</TABLE>
34
PAGE
MUTUAL DISCOVERY FUND
Notes to Financial Statements (unaudited) (continued)
7. INVESTMENT IN AFFILIATES
The Investment Company Act of 1940 defines "affiliated persons" to include any
persons, such as the Fund, that owns 5% or more of the outstanding voting
securities of another person. Investments in "affiliated persons" at June 30,
1999, were $82,149,518. For the six months ended June 30, 1999, dividend income
from "affiliated persons" was $1,401,085 and net realized losses from the
disposition of "affiliated persons" were $30,399,221.
<TABLE>
<CAPTION>
NUMBER OF NUMBER OF DIVIDEND INCOME
SHARES HELD GROSS GROSS SHARES HELD VALUE 1/1/99-
NAME OF ISSUER DEC. 31, 1998 ADDITIONS REDUCTIONS JUNE 30, 1999 JUNE 30, 1999 6/30/95
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
CONTROLLED AFFILIATES*
Distribution Systems SpA........ 500 -- -- 500 $ 20,669 --
Hancock LLC..................... 8,426,332 -- (20,810) 8,405,522 8,405,522 --
MB-Motori LLC................... 557,863 -- (557,863) -- ** --
MSCW Investors II, LLC.......... 10,438,000 -- (10,438,000) -- ** --
MWCR Elettronica SRL............ 69,056 -- -- 69,056 69,056 --
MWCR LLC........................ 13,505,313 -- -- 13,505,313 14,999,001 --
Sweda Industrie Elettroniche
SpA............................ 500 -- -- 500 20,669 --
-------------------------------
TOTAL CONTROLLED AFFILIATES..... $23,514,917 --
===============================
NON-CONTROLLED AFFILIATES
Alma Media OYJ, Series 2........ 746,700 -- (746,700) -- ** $ 160,424
Corporate Services Group PLC,
A.............................. 17,697,482 -- (7,077,500) 10,619,982 ** --
DT Industries Inc. ............. 1,343,530 -- (412,000) 931,530 $ 8,558,432 41,455
First Union Real Estate Equity &
Mtg. Investments, SBI.......... 2,600,732 -- (2,600,732) -- ** --
Invik & Co., AB, B.............. 250,724 159,092 -- 409,816 24,077,052 --
Laser Mortgage Management
Inc. .......................... 1,141,933 -- (150,100) 991,833 3,409,426 --
LNR Property Corp. ............. 954,100 638,100 (1,592,200) -- ** --
LNR Property Corp., B........... 638,100 -- (638,100) -- ** 9,213
North Central Bancshares
Inc. .......................... 178,000 -- (178,000) -- ** --
Tecnost Mael SpA................ 3,821,000 1,676,780 (3,864,700) 1,633,080 ** --
TT Group PLC.................... 10,726,480 2,950,000 (3,021,200) 10,655,280 22,589,691 1,189,993
Veritas DGC Inc. ............... 2,108,700 -- (2,108,700) -- ** --
-------------------------------
TOTAL NON-CONTROLLED
AFFILIATES..................... $58,634,601 $1,401,085
===============================
<CAPTION>
REALIZED
CAPITAL
NAME OF ISSUER GAIN/(LOSSES)
- -------------------------------- -------------
<S> <C>
CONTROLLED AFFILIATES*
Distribution Systems SpA........ --
Hancock LLC..................... --
MB-Motori LLC................... $ 191,306
MSCW Investors II, LLC.......... 1,753,010
MWCR Elettronica SRL............ --
MWCR LLC........................ --
Sweda Industrie Elettroniche
SpA............................ --
------------
TOTAL CONTROLLED AFFILIATES..... $ 1,944,316
============
NON-CONTROLLED AFFILIATES
Alma Media OYJ, Series 2........ $ 8,090,607
Corporate Services Group PLC,
A.............................. (8,090,426)
DT Industries Inc. ............. (8,159,784)
First Union Real Estate Equity &
Mtg. Investments, SBI.......... (4,307,366)
Invik & Co., AB, B.............. --
Laser Mortgage Management
Inc. .......................... (1,506,315)
LNR Property Corp. ............. (552,311)
LNR Property Corp., B........... --
North Central Bancshares
Inc. .......................... 131,363
Tecnost Mael SpA................ 1,348,809
TT Group PLC.................... (6,774,160)
Veritas DGC Inc. ............... (12,523,954)
------------
TOTAL NON-CONTROLLED
AFFILIATES..................... $(32,343,537)
============
</TABLE>
* Issuer in which the Fund owns 25% of more of the outstanding voting
securities.
** As of June 30, 1999, no longer an affiliate.
8. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
The Fund has been a party to financial instruments with off-balance sheet risk,
primarily forward exchange contracts in order to minimize the impact on the Fund
from adverse changes in the relationship between the functional currency and 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.
35
PAGE
MUTUAL DISCOVERY FUND
Notes to Financial Statements (unaudited) (continued)
8. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK (CONT.)
A forward exchange contract is an agreement between two parties to exchange
different currencies at a specific rate at an agreed future date. At June 30,
1999, the Fund has outstanding forward exchange contracts for the sale of
currencies as set out below. 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, 1999, the Fund had the following forward exchange contracts
outstanding:
<TABLE>
<CAPTION>
IN SETTLEMENT UNREALIZED
EXCHANGE FOR DATE GAIN/(LOSS)
CONTRACTS TO BUY: -----------------------------------------------
- ------------------
<S> <C> <C> <C> <C> <C> <C>
86,289,000 Swedish Krona......................................... U.S. $ 10,000,000 7/21/99 U.S. $ 162,395
4,000,000 Canadian Dollars...................................... 2,665,060 8/31/99 70,534
79,886,110 Norwegian Krona....................................... 10,050,000 9/10/99 75,881
-------------- -----------
U.S. $ 22,715,060 308,810
============== -----------
CONTRACTS TO SELL:
- ------------------
25,226,582 European Unit......................................... U.S. $ 29,028,635 7/19/99 2,976,712
33,636,882 British Pounds........................................ 55,702,676 7/20/99 2,675,537
257,843,880 Swedish Krona......................................... 33,533,824 7/21/99 3,167,132
28,324,216 British Pounds........................................ 46,131,966 8/17/99 1,470,635
450,317,946 Swedish Krona......................................... 57,365,343 8/17/99 4,241,703
111,312,586 European Unit......................................... 123,791,700 8/31/99 8,456,929
102,956,819 European Unit......................................... 112,381,404 9/10/99 5,619,152
238,592,730 Norwegian Krona....................................... 30,566,684 9/10/99 324,111
115,540,956 Swiss Franc........................................... 79,590,794 9/10/99 4,634,581
155,553,928 Swedish Krona......................................... 19,248,900 9/15/99 863,871
316,325,412 Swedish Krona......................................... 38,868,768 9/20/99 1,469,629
7,255,098,865 Japanese Yen.......................................... 62,061,906 9/24/99 1,339,789
109,329,329 European Unit......................................... 118,807,599 10/12/99 5,148,174
518,790,349 Swedish Krona......................................... 63,318,420 10/19/99 1,860,030
192,802,312 Danish Krona.......................................... 27,906,882 10/27/99 884,897
141,773,402 European Unit......................................... 159,735,527 10/27/99 12,171,651
17,934,483 Canadian Dollars...................................... 12,313,022 10/29/99 37,693
28,410,030 British Pounds........................................ 46,300,182 11/16/99 1,448,701
45,307,206 New Zealand Dollar.................................... 25,436,598 11/17/99 1,349,036
465,003,373 Swedish Krona......................................... 59,384,441 11/17/99 4,187,086
51,775,936 European Unit......................................... 55,012,667 11/29/99 980,579
50,347,182 British Pounds........................................ 81,018,396 12/15/99 1,497,482
87,704,169 European Unit......................................... 92,801,636 12/17/99 1,144,498
52,486,902 British Pounds........................................ 85,186,242 12/20/99 2,279,125
85,250,000 British Pounds........................................ 137,423,000 1/16/00 2,706,324
21,772,702 British Pounds........................................ 35,224,863 5/22/00 762,643
-------------- -----------
U.S. $1,688,142,075 73,697,700
============== -----------
Unrealized gain on forward exchange contracts.................... 74,006,510
-----------
</TABLE>
36
PAGE
MUTUAL DISCOVERY FUND
Notes to Financial Statements (unaudited) (continued)
8. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK (CONT.)
<TABLE>
<CAPTION>
IN SETTLEMENT UNREALIZED
EXCHANGE FOR DATE GAIN/(LOSS)
CONTRACTS TO BUY: -----------------------------------------------
- ------------------
<S> <C> <C> <C> <C> <C> <C>
33,120,500 British Pounds........................................ U.S. $ 54,016,089 7/20/99 U.S. $(1,803,003)
39,707,547 Swedish Krona......................................... 4,692,454 7/21/99 (29,591)
25,130,371 British Pounds........................................ 40,691,071 8/17/99 (1,065,762)
113,461,469 Norwegian Krona....................................... 14,465,658 9/10/99 (88,279)
14,000,000 Danish Krona.......................................... 2,018,163 10/27/99 (56,010)
2,000,000 Canadian Dollars...................................... 1,369,582 10/29/99 (674)
5,875,098 British Pounds........................................ 9,520,596 11/16/99 (245,462)
-------------- -----------
U.S. $ 126,773,613 (3,288,781)
============== -----------
CONTRACTS TO SELL:
- ------------
319,213 Canadian Dollars...................................... U.S. $ 211,820 7/13/99 (6,337)
12,736,424 Canadian Dollars...................................... 8,476,539 8/31/99 (233,882)
121,806,171 Norwegian Krona....................................... 15,356,300 9/10/99 (83,114)
1,146,451,073 Japanese Yen.......................................... 9,482,287 9/24/99 (113,025)
15,898,374 Canadian Dollars...................................... 10,858,227 10/29/99 (23,479)
13,948,291 Swedish Krona......................................... 1,649,534 11/17/99 (6,172)
-------------- -----------
U.S. $ 46,034,707 (466,009)
============== -----------
Unrealized loss on forward exchange contracts.................... (3,754,790)
-----------
Net unrealized gain on forward exchange contracts.............. U.S. $70,251,720
===========
</TABLE>
37
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SEMIANNUAL REPORT
CHAIRMAN OF THE BOARD
Michael F. Price
OFFICERS
Peter A. Langerman
Robert L. Friedman
Jeffrey Altman
Raymond Garea
David E. Marcus
Larry Sondike
David Winters
INVESTMENT MANAGER
Franklin Mutual Advisers, Inc.
51 John F. Kennedy Parkway
Short Hills, NJ 07078
DISTRIBUTOR
Franklin/Templeton Distributors, Inc.
1-800-DIAL-BEN(R)
www.franklin-templeton.com
SHAREHOLDER SERVICES
1-800-632-2301 - (Class A, B, & C)
1-800-448-FUND - (Class Z)
FUND INFORMATION
1-800-342-5236
This report must be preceded or accompanied by the current Mutual Discovery Fund
prospectus, which contains more complete information including risk factors,
charges and expenses.
To ensure the highest quality of service, telephone calls to or from our service
departments may be monitored, recorded and accessed. These calls can be
determined by the presence of a regular beeping tone.
477 S99 08/99 [RECYCLE SYMBOL] Printed on recycled paper
