SEMI ANNUAL REPORT
JUNE 30, 1999
MUTUAL SHARES FUND
[LOGO]
Franklin(R) Templeton(R)
[COVER ILLUSTRATION OF "M"]
PAGE
[FIFTY YEAR GRAPHIC]
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 PERTA A . ANGERMAN]
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 Shareholder:
We are pleased to bring you this semiannual report of the Mutual Shares Fund for
the six months ended June 30, 1999, during which the fund's Class Z shares
appreciated 16.84%. 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 .......... 8
Financial Highlights &
Statement of Investments .....10
Financial Statements .........24
Notes to Financial
Statements ...................28
FUND CATEGORY
[PYRAMID 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 volatility in the markets, 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
Through strong as well as rocky markets, we pay attention to the fundamentals
because that is what matters.
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 stocks that we believe
have value even when conventional wisdom may say otherwise.
On the following pages, you'll find a report from Lawrence Sondike and David
Marcus, Mutual Shares 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.
3
PAGE
FUND REPORT
[THIS CHART SHOWS IN PIE FORMATTHE U.S. EXPOSURE OF MUTUAL SHARES FUND, BASED
ON TOTAL NET ASSETS AS OF 6/30/99]
U.S. EXPOSURE
Based on Total Net Assets
6/30/99
[PIE CHART]
United States - 79.1%
Other Countries - 20.9%
- --------------------------------------------------------------------------------
YOUR FUND'S GOAL: MUTUAL SHARES FUND SEEKS CAPITAL APPRECIATION, WITH INCOME AS
A SECONDARY OBJECTIVE, BY INVESTING PRIMARILY IN COMMON AND PREFERRED STOCKS,
BONDS, AND CONVERTIBLE SECURITIES. THE FUND MAY ALSO INVEST IN FOREIGN
SECURITIES.
- --------------------------------------------------------------------------------
During the first six months of 1999, which were marked by low inflation, rising
interest rates, and moderate economic growth, Mutual Shares Fund's Class Z
shares produced a cumulative total return of 16.84%, as shown in the Performance
Summary on page 9. This compares favorably with most of the broader market
indexes, including the unmanaged Standard & Poor's(R) 500 Composite Index, which
rose 12.38%, and the unmanaged S&P Mid-Cap 400 Index, up 6.83%. The strong
performance of the fund was due largely to our disciplined value and special
situations approach.
Several of our largest positions, including Lucas Varity PLC, Morton
International Inc., Telecom Italia SpA, di Risp, and MediaOne Group Inc.,
received takeover bids in the first half of the year, at significant premiums to
the prices at which the stocks had been trading. We had identified these
investments previously through detailed, fundamental analysis of companies with
attractive assets whose stocks were trading at large discounts to our assessment
of their true worth. Two more of our
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 14 of
this report.
4
PAGE
big gainers were Canary Wharf Group PLC and Telephone & Data Systems Inc., both
of which are in the special situations category. Canary Wharf owns an extensive
real estate project in London. The fund initially invested in the project more
than three years ago. In March of this year, the company completed its initial
public offering, and its stock has performed very well. Telephone & Data
Systems, a wireless and wireline telephone company, was trading at 50% of its
intrinsic value; the company's announcement to sell or spin off one of its
assets helped narrow this discount.
In the U.S., undervalued asset plays we favored included Bank One Corp.,
Lockheed Martin Corp., and Washington Post Co., B. Bank One owns First USA, an
outstanding credit card and consumer banking business which is not fully
reflected in its share price. Lockheed Martin, the nation's largest defense
company, generates substantial free cash flow, while Washington Post, a
well-respected media company, owns attractive, and we believe underappreciated,
cable assets.
In Europe, we purchased shares in Lagardere SCA and Invensys PLC because we felt
they were undervalued. Lagardere, the French media and aerospace conglomerate,
has taken significant steps to improve values, while Invensys PLC, the product
of the merger between BTR PLC and Siebe PLC, is a world leader in automation and
controls.
[THIS CHART LISTS THE TOP 10 HOLDINGS, INCLUDING INDUSTRY AND COUNTRY, OF MUTUAL
SHARES FUND, BASED ON TOTAL NET ASSETS AS OF 6/30/99]
TOP 10 HOLDINGS
6/30/99
COMPANY, % OF TOTAL
INDUSTRY, COUNTRY NET ASSETS
-------------------------------------------
Investor AB, A&B,
Multi-Industry, Sweden 2.9%
Bank One Corp.,
Banking, U.S. 2.6%
Canary Wharf Group PLC,
Real Estate, United Kingdom 2.5%
Telephone & Data Systems Inc.,
Telecommunications, U.S. 2.2%
First Union Corp.,
Banking, U.S. 1.7%
Lockheed Martin Corp.,
Aerospace & Military
Technology, U.S. 1.6%
MediaOne Group Inc.,
Broadcasting &
Publishing, U.S. 1.6%
Owens-Illinois Inc.,
Industrial Components, U.S. 1.3%
Chase Manhattan Corp.,
Banking, U.S. 1.3%
Philip Morris Cos. Inc.,
Beverages & Tobacco, U.S. 1.3%
5
PAGE
Looking forward, we believe that both domestic and foreign markets should
continue to present us with profitable investment opportunities. We are
experienced at recognizing opportunity where others may see only bad news. We
also expect to profit from the stocks of companies undergoing corporate change,
such as the purchase or sale of assets, spinoffs, and share buybacks. In our
opinion, this favorable merger and acquisition environment may very well lead to
bids for some of our holdings, as well as opportunities to profit by arbitraging
the deals. We expect to profit by investing in bankruptcy and distressed
companies, a strategy we have long successfully employed. Of course, past
results cannot guarantee future performance and, as always, we are mindful of
the risks of each investment, focusing on the downside as well as the upside
potential.
We appreciate your participation in Mutual Shares Fund and will strive to
provide the best risk-adjusted returns possible.
[PHOTO OF LAWRENCE SONDIKE]
/s/LAWRENCE SONDIKE
- -----------------------
Lawrence Sondike
[PHOTO OF DAVID E. MARCUS]
/s/DAVID E. MARCUS
- --------------------------
David E. Marcus
Portfolio Managers
6
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.
7
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.
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.
PRICE AND DISTRIBUTION INFORMATION
CLASS Z CHANGE 6/30/99 12/31/98
- ---------------------------------------------------------------
Net Asset Value +$2.87 $22.42 $19.55
Distributions (1/1/99 - 6/30/99)
-------------------------------
Dividend Income $0.0542
Long-Term Capital Gain $0.3622
-------
TOTAL $0.4164
=======
CLASS A CHANGE 6/30/99 12/31/98
- ---------------------------------------------------------------
Net Asset Value +$2.84 $22.34 $19.50
Distributions (1/1/99 - 6/30/99)
-------------------------------
Dividend Income $0.0357
Long-Term Capital Gain $0.3622
-------
TOTAL $0.3979
=======
CLASS B CHANGE 6/30/99 1/1/99
- ---------------------------------------------------------------
Net Asset Value +$2.75 $22.25 $19.50
Distributions (1/1/99 - 6/30/99)
-------------------------------
Dividend Income $0.0451
Long-Term Capital Gain $0.3622
-------
TOTAL $0.4073
=======
CLASS C CHANGE 6/30/99 12/31/98
- ---------------------------------------------------------------
Net Asset Value +$2.79 $22.20 $19.41
Distributions (1/1/99 - 6/30/99)
-------------------------------
Dividend Income $0.0029
Long-Term Capital Gain $0.3622
-------
TOTAL $0.3651
=======
8 Past performance is not predictive of future results.
PAGE
PERFORMANCE
CLASS Z 6-MONTH 1-YEAR 5-YEAR 10-YEAR
- -------------------------------------------------------------------------
Cumulative Total Return(1) 16.84% 10.03% 143.61% 296.90%
Average Annual Total Return(2) 16.84% 10.03% 19.48% 14.78%
Value of $10,000 Investment(3) $11,684 $11,003 $24,361 $39,690
6/30/95 6/30/96 6/30/97 6/30/98 6/30/99
- -------------------------------------------------------------------------
One-Year
Total Return(4) 21.64% 20.93% 26.93% 18.58% 10.03%
INCEPTION
CLASS A 6-MONTH 1-YEAR (11/1/96)
- -----------------------------------------------------------------
Cumulative Total Return(1) 16.63% 9.63% 57.24%
Average Annual Total Return(2) 9.92% 3.33% 15.94%
Value of $10,000 Investment(3) $10,992 $10,333 $14,820
INCEPTION
CLASS B 6-MONTH (1/1/99)
- -------------------------------------------------------------------
Cumulative Total Return(1) 16.22% 16.22%
Aggregate Total Return(2) 12.22% 12.22%
Value of $10,000 Investment(3) $11,222 $11,222
INCEPTION
CLASS C 6-MONTH 1-YEAR (11/1/96)
- ---------------------------------------------------------------------
Cumulative Total Return(1) 16.28% 8.95% 54.56%
Average Annual Total Return(2) 14.10% 6.87% 17.34%
Value of $10,000 Investment(3) $11,410 $10,687 $15,301
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.
Past performance is not predictive of future results. 9
PAGE
MUTUAL SHARES 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.............................. $19.55 $21.30 $18.57 $17.29 $15.74 $16.19
-----------------------------------------------------------------------------------
Income from investment operations:
Net investment income................ .19 .53 .42 .55 .40 .27
Net realized and unrealized gains
(losses)........................... 3.09 (.46) 4.43 2.96 4.10 .46
-----------------------------------------------------------------------------------
Total from investment operations...... 3.28 .07 4.85 3.51 4.50 .73
-----------------------------------------------------------------------------------
Less distributions from:
Net investment income................ (.05) (.53) (.54) (.50) (.39) (.27)
Net realized gains................... (.36) (1.29) (1.58) (1.73) (2.56) (.91)
-----------------------------------------------------------------------------------
Total distributions................... (.41) (1.82) (2.12) (2.23) (2.95) (1.18)
-----------------------------------------------------------------------------------
Net asset value, end of period........ $22.42 $19.55 $21.30 $18.57 $17.29 $15.74
===================================================================================
Total Return*......................... 16.84% .45% 26.44% 20.76% 29.11% 4.53%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's)..... $6,106,958 $6,279,026 $7,918,986 $6,543,063 $5,229,574 $3,745,726
Ratios to average net assets:
Expenses............................. .75%** .73% .72% .70% .69% .72%
Expenses, excluding waiver and
payments by affiliate.............. .79%** .77% .75% .72% .69% .72%
Net investment income................ 1.81%** 2.15% 1.92% 3.02% 2.47% 1.80%
Portfolio turnover rate............... 31.30% 69.46% 49.61% 58.35% 79.32% 66.55%
</TABLE>
* Total return is not annualized.
** Annualized.
+ Per share amounts for all periods prior to December 31, 1996 have been
restated to reflect a 5-for-1 stock split effective February 3, 1997.
++ Based on average weighted shares outstanding.
10
PAGE
MUTUAL SHARES 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........................ $19.50 $21.26 $18.56 $18.90
-----------------------------------------------------------
Income from investment operations:
Net investment income...................................... .15 .40 .34 .21
Net realized and unrealized gains (losses)................. 3.09 (.41) 4.43 1.08
-----------------------------------------------------------
Total from investment operations............................ 3.24 (.01) 4.77 1.29
-----------------------------------------------------------
Less distributions from:
Net investment income...................................... (.04) (.46) (.49) (.47)
Net realized gains......................................... (.36) (1.29) (1.58) (1.16)
-----------------------------------------------------------
Total distributions......................................... (.40) (1.75) (2.07) (1.63)
-----------------------------------------------------------
Net asset value, end of period.............................. $22.34 $19.50 $21.26 $18.56
===========================================================
Total Return*............................................... 16.63% .06% 26.03% 6.91%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's)........................... $1,516,251 $1,509,647 $1,043,262 $35,634
Ratios to average net assets:
Expenses................................................... 1.09%** 1.08% 1.07% 1.09%**
Expenses, excluding waiver and payments by affiliate....... 1.14%** 1.12% 1.10% 1.18%**
Net investment income...................................... 1.46%** 1.78% 1.58% 2.44%**
Portfolio turnover rate..................................... 31.30% 69.46% 49.61% 58.35%
</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.
++ Per share amounts for the period ended December 31, 1996 have been restated
to reflect a 5-for-1 stock split effective February 3, 1997.
+++ Based on average weighted shares outstanding.
11
PAGE
MUTUAL SHARES 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........................ $19.50
----------------
Income from investment operations:
Net investment income...................................... .09
Net realized and unrealized gains.......................... 3.06
----------------
Total from investment operations............................ 3.15
----------------
Less distributions from:
Net investment income...................................... (.04)
Net realized gains......................................... (.36)
----------------
Total distributions......................................... (.40)
----------------
Net asset value, end of period.............................. $22.25
================
Total Return*............................................... 16.22%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's)........................... $10,945
Ratios to average net assets:
Expenses................................................... 1.75%**
Expenses, excluding waiver and payments by affiliate....... 1.79%**
Net investment income...................................... .90%**
Portfolio turnover rate..................................... 31.30%
</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.
12
PAGE
MUTUAL SHARES 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....................... $19.41 $21.18 $18.56 $18.90
---------------------------------------------------------
Income from investment operations:
Net investment income..................................... .08 .28 .20 .20
Net realized and unrealized gains (losses)................ 3.07 (.43) 4.42 1.08
---------------------------------------------------------
Total from investment operations........................... 3.15 (.15) 4.62 1.28
---------------------------------------------------------
Less distributions from:
Net investment income..................................... -- (.33) (.42) (.46)
Net realized gains........................................ (.36) (1.29) (1.58) (1.16)
---------------------------------------------------------
Total distributions........................................ (.36) (1.62) (2.00) (1.62)
---------------------------------------------------------
Net asset value, end of period............................. $22.20 $19.41 $21.18 $18.56
=========================================================
Total Return*.............................................. 16.28% (.59)% 25.17% 6.82%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's).......................... $1,007,407 $993,931 $636,838 $16,873
Ratios to average net assets:
Expenses.................................................. 1.73%** 1.73% 1.72% 1.71%**
Expenses, excluding waiver and payments by affiliate...... 1.78%** 1.77% 1.75% 1.80%**
Net investment income..................................... .82%** 1.12% .92% 1.69%**
Portfolio turnover rate.................................... 31.30% 69.46% 49.61% 58.35%
</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.
++ Per share amounts for the period ended December 31, 1996 have been restated
to reflect a 5-for-1 stock split effective February 3, 1997.
+++ Based on average weighted shares outstanding.
See Notes to Financial Statements.
13
PAGE
MUTUAL SHARES FUND
STATEMENT OF INVESTMENTS, JUNE 30, 1999 (UNAUDITED)
<TABLE>
<CAPTION>
COUNTRY SHARES VALUE
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS 79.3%
AEROSPACE & MILITARY TECHNOLOGY 3.0%
*Coltec Industries Inc. .................................... United States 2,176,213 $ 47,196,619
*Hexcel Corp. .............................................. United States 1,740,895 17,626,562
Lockheed Martin Corp. ...................................... United States 3,680,936 137,114,866
Northrop Grumman Corp. ..................................... United States 836,800 55,490,300
--------------
257,428,347
--------------
APPLIANCES & HOUSEHOLD DURABLES .6%
Premark International Inc. ................................. United States 1,438,400 53,940,000
--------------
AUTOMOBILES 4.3%
Borg-Warner Automotive Inc. ................................ United States 789,300 43,411,500
Delphi Automotive Systems Corp. ............................ United States 4,415,708 81,966,580
General Motors Corp. ....................................... United States 1,501,575 99,103,950
*Lear Corp. ................................................ United States 1,667,300 82,948,175
TRW Inc. ................................................... United States 1,220,500 66,974,938
--------------
374,405,143
--------------
BANKING 6.7%
Bank One Corp. ............................................. United States 3,813,703 227,153,685
Banknorth Group Inc. ....................................... United States 140,100 4,623,300
Chase Manhattan Corp. ...................................... United States 1,336,676 115,789,559
First American Corp. Tennessee.............................. United States 552,100 22,946,656
First Union Corp. .......................................... United States 3,202,103 150,498,841
Peoples Heritage Financial Group Inc. ...................... United States 704,400 13,251,525
U.S. Bancorp................................................ United States 1,290,400 43,873,600
Western Bancorp............................................. United States 73,300 3,188,550
--------------
581,325,716
--------------
BEVERAGES & TOBACCO 3.0%
Allied Domecq PLC........................................... United Kingdom 2,067,483 19,993,077
Brown-Forman Corp., B....................................... United States 246,120 16,043,948
Gallaher Group PLC.......................................... United Kingdom 5,065,391 31,138,717
Gallaher Group PLC, ADR..................................... United Kingdom 160,000 3,910,000
+Genesee Corp., A........................................... United States 15,211 403,092
+Genesee Corp., B........................................... United States 62,050 1,644,325
Nabisco Group Holdings Corp. ............................... United States 1,306,922 25,566,662
Philip Morris Cos. Inc. .................................... United States 2,866,250 115,187,422
UST Inc. ................................................... United States 1,464,400 42,833,700
--------------
256,720,943
--------------
BROADCASTING & PUBLISHING 6.3%
*AT&T Corp. - Liberty Media Group, A........................ United States 1,131,712 41,590,416
Central Newspapers Inc., A.................................. United States 1,301,100 48,953,888
Dow Jones & Co. Inc. ....................................... United States 1,147,300 60,878,606
Media General Inc., A....................................... United States 916,100 46,721,100
*MediaOne Group Inc. ....................................... United States 1,838,473 136,736,429
</TABLE>
14
PAGE
MUTUAL SHARES FUND
STATEMENT OF INVESTMENTS, JUNE 30, 1999 (UNAUDITED) (CONT.)
<TABLE>
<CAPTION>
COUNTRY SHARES VALUE
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS (CONT.)
BROADCASTING & PUBLISHING (CONT.)
Meredith Corp. ............................................. United States 706,100 $ 24,448,713
Scripps Co., A.............................................. United States 1,990,900 94,692,181
Washington Post Co., B...................................... United States 173,339 93,213,047
--------------
547,234,380
--------------
BUILDING MATERIALS & COMPONENTS .8%
*American Standard Cos. Inc. ............................... United States 1,070,300 51,374,400
Armstrong World Industries Inc. ............................ United States 261,330 15,108,141
--------------
66,482,541
--------------
BUSINESS & PUBLIC SERVICES 1.5%
Hillenbrand Industries Inc. ................................ United States 215,400 9,316,050
*Republic Services Inc., A.................................. United States 437,700 10,833,075
Suez Lyonnaise des Eaux SA.................................. France 612,308 110,438,970
--------------
130,588,095
--------------
CHEMICALS 1.3%
Arch Chemicals Inc. ........................................ United States 943,100 22,929,119
Crompton & Knowles Corp. ................................... United States 1,452,200 28,408,662
*Cytec Industries Inc. ..................................... United States 799,000 25,468,125
Olin Corp. ................................................. United States 1,839,000 24,251,813
*W.R. Grace & Co. .......................................... United States 370,700 6,811,613
Witco Corp. ................................................ United States 211,100 4,222,000
--------------
112,091,332
--------------
DATA PROCESSING & REPRODUCTION .1%
*Cadence Design Systems Inc. ............................... United States 769,400 9,809,850
--------------
ELECTRICAL & ELECTRONICS .1%
Honeywell Inc. ............................................. United States 29,200 3,383,550
*Level One Communications Inc. ............................. United States 71,800 3,513,713
--------------
6,897,263
--------------
ELECTRONIC COMPONENTS & INSTRUMENTS .2%
*Quantum Corp. ............................................. United States 765,300 18,462,863
--------------
ENERGY EQUIPMENT & SERVICES 1.2%
Baker Hughes Inc. .......................................... United States 545,500 18,274,250
*Cooper Cameron Corp. ...................................... United States 1,376,300 51,009,119
*Weatherford International Inc. ............................ United States 969,185 35,496,401
--------------
104,779,770
--------------
ENERGY SOURCES 2.3%
Atlantic Richfield Co. ..................................... United States 209,500 17,506,344
(R)+*Environmental Credits LLC.............................. United States 305,881 60,380,909
Royal Dutch Petroleum Co., N.Y. shs. ....................... Netherlands 664,000 40,006,000
</TABLE>
15
PAGE
MUTUAL SHARES FUND
STATEMENT OF INVESTMENTS, JUNE 30, 1999 (UNAUDITED) (CONT.)
<TABLE>
<CAPTION>
COUNTRY SHARES VALUE
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS (CONT.)
ENERGY SOURCES (CONT.)
Shell Transport & Trading Co. PLC........................... United Kingdom 2,740,000 $ 20,525,598
Societe Elf Aquitaine SA, ADR............................... France 119,900 8,820,144
Societe Elf Aquitaine SA, Br. .............................. France 330,393 48,483,989
--------------
195,722,984
--------------
FINANCIAL SERVICES 8.1%
Bear Stearns Co. Inc. ...................................... United States 2,018,290 94,355,057
CIT Group Inc., A........................................... United States 1,938,700 55,979,963
(R)+FBR Asset Investment Corp. ............................. United States 750,000 9,375,000
Finova Group Inc. .......................................... United States 442,300 23,276,038
Great Trust Services........................................ United States 399,036 199,518
Greenpoint Financial Corp. ................................. United States 2,675,492 87,789,581
Household International Inc. ............................... United States 2,162,548 102,450,712
(R)Laser Mortgage Management Inc. .......................... United States 288,400 991,375
Lehman Brothers Holdings Inc. .............................. United States 1,496,800 93,175,800
+*MFN Financial Corp. ...................................... United States 573,806 5,702,197
Morgan Stanley, Dean Witter & Co. .......................... United States 552,400 56,621,000
Newcourt Credit Group Inc. ................................. Canada 35,700 467,137
Newcourt Credit Group Inc., fgn. ........................... Canada 1,847,100 23,896,856
PMI Group Inc. ............................................. United States 1,015,600 63,792,375
Power Financial Corp. ...................................... Canada 189,000 3,615,989
+United Asset Management Corp. ............................. United States 3,435,900 78,166,725
--------------
699,855,323
--------------
FOOD & HOUSEHOLD PRODUCTS 2.8%
*Fine Host Corp. ........................................... United States 784,457 8,629,027
+Seaboard Corp. ............................................ United States 78,050 26,537,000
(R)+*Sunbeam Corp. ......................................... United States 11,260,174 80,439,868
U.S. Industries Inc. ....................................... United States 3,905,300 66,390,100
+Van Melle NV............................................... Netherlands 889,481 57,100,332
--------------
239,096,327
--------------
FOREST PRODUCTS & PAPER 1.1%
Rayonier Inc. .............................................. United States 1,307,750 65,142,297
St. Joe Co. ................................................ United States 995,325 26,873,775
--------------
92,016,072
--------------
HEALTH & PERSONAL CARE 3.9%
*Beverly Enterprises Inc. .................................. United States 2,982,000 24,042,375
*Foundation Health Systems, A............................... United States 2,577,650 38,664,750
*Healthsouth Corp. ......................................... United States 3,163,300 47,251,794
McKesson HBOC Inc. ......................................... United States 827,400 26,580,225
*Pacificare Health Systems Inc. ............................ United States 786,794 56,599,993
</TABLE>
16
PAGE
MUTUAL SHARES FUND
STATEMENT OF INVESTMENTS, JUNE 30, 1999 (UNAUDITED) (CONT.)
<TABLE>
<CAPTION>
COUNTRY SHARES VALUE
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS (CONT.)
HEALTH & PERSONAL CARE (CONT.)
Rhone-Poulenc SA, A......................................... France 1,668,984 $ 76,263,464
Sankyo Co. Ltd. ............................................ Japan 220,100 5,546,142
*Tenet Healthcare Corp. .................................... United States 3,458,700 64,202,119
Ventas Inc. ................................................ United States 538,300 2,893,363
--------------
342,044,225
--------------
INDUSTRIAL COMPONENTS 2.0%
(R)+*Lancer Industries Inc., B.............................. United States 3 9,737,540
*Owens-Illinois Inc. ....................................... United States 3,565,800 116,557,088
*Paxall Group Inc. ......................................... United States 21 16,800
*Thermo Electron Corp. ..................................... United States 2,247,500 45,090,469
--------------
171,401,897
--------------
INSURANCE 1.8%
Allmerica Financial Corp. .................................. United States 841,100 51,149,394
American Bankers Insurance Group Inc. ...................... United States 196,100 10,675,194
*Old Republic International Corp. .......................... United States 194,500 3,367,281
Provident Companies Inc. ................................... United States 214,200 8,568,000
Sampo Insurance Co. Plc., A................................. Finland 156,192 4,526,137
Torchmark Corp. ............................................ United States 552,500 18,854,062
+White Mountain Insurance Group Inc. ....................... United States 421,384 59,415,144
--------------
156,555,212
--------------
LEISURE & TOURISM 3.0%
*Park Place Entertainment Corp. ............................ United States 5,222,900 50,596,844
Pathe SA.................................................... France 495,000 59,418,377
*Promus Hotel Corp. ........................................ United States 2,779,580 86,166,980
Starwood Hotels & Resorts Worldwide Inc. ................... United States 2,084,000 63,692,250
--------------
259,874,451
--------------
MACHINERY & ENGINEERING 1.2%
Case Corp. ................................................. United States 137,800 6,631,625
Invensys Plc. .............................................. United Kingdom 20,819,528 98,613,981
--------------
105,245,606
--------------
MERCHANDISING 3.9%
*Barney's Inc. ............................................. United States 302,447 2,722,023
*Barney's Inc., wts., 5/15/00............................... United States 73,019 178,897
*Federated Department Stores Inc. .......................... United States 1,494,875 79,134,945
J.C. Penney Co. Inc. ....................................... United States 1,694,000 82,264,875
*Payless Shoesource Inc. ................................... United States 890,800 47,657,800
Rite Aid Corp. ............................................. United States 2,957,100 72,818,588
*Toys R Us Inc. ............................................ United States 2,327,315 48,146,329
--------------
332,923,457
--------------
</TABLE>
17
PAGE
MUTUAL SHARES FUND
STATEMENT OF INVESTMENTS, JUNE 30, 1999 (UNAUDITED) (CONT.)
<TABLE>
<CAPTION>
COUNTRY SHARES VALUE
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS (CONT.)
METALS & MINING .4%
Allegheny Teledyne Inc. .................................... United States 1,687,860 $ 38,187,833
--------------
MULTI-INDUSTRY 7.9%
*Alleghany Corp. ........................................... United States 265,240 49,069,400
*Berkshire-Hathaway Inc., A................................. United States 1,025 70,622,500
Compagnie Financiere Richemont AG, Br., A................... Switzerland 38,041 73,165,181
Compagnie Generale D'Industrie et de Participation.......... France 953,885 46,135,100
Corporacion Financiera Alba SA.............................. Spain 327,325 52,995,798
Investor AB, A.............................................. Sweden 6,726,600 73,975,194
Investor AB, B.............................................. Sweden 15,802,250 176,571,836
Kansas City Southern Industries Inc. ....................... United States 455,300 29,053,831
Lagardere SCA............................................... France 1,586,524 59,063,129
Ogden Corp. ................................................ United States 1,527,900 41,157,806
Power Corp. of Canada....................................... Canada 518,200 9,985,132
--------------
681,794,907
--------------
REAL ESTATE 3.4%
+*Alexander's Inc. ......................................... United States 383,200 28,308,900
*Al-Zar Ltd. LP............................................. United States 284 63,210
*Cadillac Fairview Corp. ................................... Canada 1,714,497 32,509,253
*Cadillac Fairview Corp., wts., 7/31/00..................... Canada 291,749 1,863,924
(R)+*Canary Wharf Group Plc. ............................... United Kingdom 38,440,402 217,583,751
*Excel Legacy Corp. ........................................ United States 302,357 1,436,196
+MBO Properties Inc. ....................................... United States 574,712 287,356
(R)*Security Capital European Realty........................ United States 585,075 10,137,712
--------------
292,190,302
--------------
RECREATION & OTHER CONSUMER GOODS
*Bulova Corp. .............................................. United States 37,900 814,850
--------------
TELECOMMUNICATIONS 4.5%
BCE Inc. ................................................... Canada 818,750 40,140,289
*General Motors Corp., H.................................... United States 463,000 26,043,750
Paging Network Inc. ........................................ United States 8,350,000 7,515,000
*Telecom Italia SpA, di Risp................................ Italy 8,473,900 46,096,548
Telephone & Data Systems Inc. .............................. United States 2,583,300 188,742,356
*United States Cellular Corp. .............................. United States 1,092,400 58,443,400
*Vodafone AirTouch Plc., ADR................................ United Kingdom 90,900 17,907,300
--------------
384,888,643
--------------
TEXTILES & APPAREL .5%
Liz Claiborne Inc. ......................................... United States 1,266,900 46,241,850
--------------
</TABLE>
18
PAGE
MUTUAL SHARES FUND
STATEMENT OF INVESTMENTS, JUNE 30, 1999 (UNAUDITED) (CONT.)
<TABLE>
<CAPTION>
COUNTRY SHARES VALUE
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS (CONT.)
TRANSPORTATION 2.3%
Burlington Northern Santa Fe Corp. ......................... United States 950,700 $ 29,471,700
+Florida East Coast Industries Inc. ........................ United States 1,991,300 88,115,025
(R)*Golden Ocean Group Ltd., wts., 8/31/01.................. United States 4,030 0
Railtrack Group Plc. ....................................... United Kingdom 4,142,343 84,685,522
--------------
202,272,247
--------------
UTILITIES ELECTRICAL & GAS 1.1%
*MidAmerican Energy Holding Co. ............................ United States 1,597,500 55,313,438
Veba AG..................................................... Germany 657,947 38,810,527
--------------
94,123,965
--------------
TOTAL COMMON STOCKS (COST $5,016,245,948)................... 6,855,416,394
--------------
PREFERRED STOCKS .6%
Embratel Participacoes SA, ADR, pfd. ....................... Brazil 653,000 9,060,375
Tele Centro Sul Participacoes SA, ADR, pfd. ................ Brazil 300,500 16,677,750
Tele Norte Leste Participacoes SA, ADR, pfd. ............... Brazil 1,329,880 24,685,898
*Wundies Industries Inc., 11.25%, pfd. ..................... United States 30,892 187,283
--------------
TOTAL PREFERRED STOCKS (COST $42,443,325)................... 50,611,306
--------------
<CAPTION>
PRINCIPAL
AMOUNT**
--------
<S> <C> <C> <C>
CORPORATE BONDS AND NOTES 2.5%
Abraxas Petroleum Corp., Series D, 11.50%, 11/01/04......... United States $ 7,195,000 4,532,850
Eurotunnel Finance Ltd.:
Equity Note, 12/31/03..................................... United Kingdom 12,469,442GBP 9,630,885
Participating Loan Note, 4/30/40.......................... United Kingdom 5,520,000GBP 3,741,370
Eurotunnel Plc.:
12/31/12, tier 1.......................................... United Kingdom 4,187,269GBP 5,412,125
12/31/18, tier 2.......................................... United Kingdom 14,936,189GBP 17,421,865
12/31/25, tier 3.......................................... United Kingdom 2,521,214GBP 2,583,130
12/31/50, Resettable Advance R5........................... United Kingdom 4,505,326GBP 3,018,132
Stabilization Advance, S8, tier 1......................... United Kingdom 725,194GBP 274,340
Stabilization Advance, S8, tier 2......................... United Kingdom 562,210GBP 177,236
Eurotunnel SA:
12/31/12, tier 1 (Libor).................................. France 15,576,370EUR 13,011,096
12/31/12, tier 1 (Pibor).................................. France 766,479EUR 640,248
12/31/18, tier 2 (Libor).................................. France 24,148,044EUR 18,303,406
12/31/18, tier 2 (Pibor).................................. France 4,576,207EUR 3,492,207
12/31/25, tier 3 (Libor).................................. France 25,171,351EUR 16,613,040
12/31/25, tier 3 (Pibor).................................. France 6,485,728EUR 4,280,567
12/31/50, Resettable Advance R4........................... France 28,617,872EUR 12,247,516
Stabilization Advance, S6, tier 1 (Pibor)................. France 518,010EUR 128,207
Stabilization Advance, S7, tier 1 (Libor)................. France 1,666,683EUR 412,503
Stabilization Advance, S6, tier 2......................... France 1,921,223EUR 396,251
Golden Books Publishing, 7.65%, 9/15/02..................... United States 3,310,000 1,307,450
</TABLE>
19
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MUTUAL SHARES FUND
STATEMENT OF INVESTMENTS, JUNE 30, 1999 (UNAUDITED) (CONT.)
<TABLE>
<CAPTION>
PRINCIPAL
COUNTRY AMOUNT** VALUE
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CORPORATE BONDS AND NOTES (CONT.)
(R)*Golden Ocean Group Ltd., 10.00%, 8/31/01................ United States $ 10,275,000 $ 1,130,250
Hechinger Co., 6.95%, 10/15/03.............................. United States 26,198,000 2,750,790
HIH Capital Ltd., cvt., 7.50%, 9/25/06...................... United Kingdom 7,930,000 5,432,050
Hvide Marine Inc., 8.375%, 2/15/08.......................... United States 2,840,000 1,377,400
Kelley Oil & Gas Corp.:
144A, 14.00%, 4/15/03..................................... United States 3,550,000 3,656,500
10.375%, 10/15/06......................................... United States 1,875,000 1,078,125
Series D, 10.375%, 10/15/06............................... United States 2,320,000 1,334,000
+MFN Financial Corp.:
Series A, 10.00%, 4/23/01................................. United States 2,377,400 2,246,643
Series B, FRN, 9.495%, 4/23/01............................ United States 4,027,400 3,805,893
R.H. Cement Finance Plc., 144A, FRN, 14.40%, 3/10/00........ Irish Republic 7,500,000 7,500,000
(R)Roil Limited, 144A, 12.779%, 12/05/02.................... Cayman Islands 6,984,000 2,444,400
Security Capital US Realty, cvt., 144A, 2.00%, 5/22/03...... United States 39,682,000 30,530,339
Southwest Royalties Inc., B, 10.50%, 10/15/04............... United States 28,388,000 13,768,180
Specialty Foods Corp.:
13.25%, 8/15/03........................................... United States 12,300,000 9,594,000
11.00%, 8/15/09........................................... United States 1,160,138 116
TFM SA de CV:
144A, 10.25%, 6/15/07..................................... Mexico 400,000 355,000
144A, zero coupon to 6/15/02, 11.75%, 6/15/09............. Mexico 7,650,000 4,628,250
Tribasa Toll Road Trust I, 144A, 10.50%, 12/01/11........... Mexico 3,127,784 1,626,447
US Cellular Corp., cvt., 6/15/15............................ United States 5,000,000 2,556,250
--------------
TOTAL CORPORATE BONDS AND NOTES (COST $248,480,924)......... 213,439,057
--------------
GOVERNMENT BONDS (COST $25,000,000) .3%
Federal Home Loan Mortgage Corp., 5.635%, 10/01/01.......... United States 25,000,000 24,814,350
--------------
BONDS & NOTES IN REORGANIZATION 2.5%
*Acme Metals Inc., term loan................................ United States 4,554,143 3,438,378
*Aiken Cnty S C Indl Rev Ref Belott, 6.00%, 12/01/11........ United States 775,000 472,750
*Altos Hornos de Mexico SA:
cvt., 5.50%, 12/15/01..................................... Mexico 350,000 140,000
Series A, 11.375%, 4/30/02................................ Mexico 1,540,000 693,000
Series B, 11.875%, 4/15/04................................ Mexico 1,070,000 481,500
*APS Inc., bank claim....................................... United States 3,485,741 1,498,869
*Breed Technologies Inc., term loan B....................... United States 347,154 223,914
*Brunos Inc.:
revolver.................................................. United States 4,001,907 2,301,096
tranche A, term loan...................................... United States 6,979,366 3,768,857
tranche B, term loan...................................... United States 5,706,000 3,081,240
*Crown Leasing, bank claim.................................. Japan 1,655,539,489JPY 2,171,323
*Decision One Corp.:
revolver.................................................. United States 5,053,168 2,210,761
tranche A, term loan...................................... United States 8,929,647 3,906,720
tranche B, term loan...................................... United States 2,605,753 1,140,017
</TABLE>
20
PAGE
MUTUAL SHARES FUND
STATEMENT OF INVESTMENTS, JUNE 30, 1999 (UNAUDITED) (CONT.)
<TABLE>
<CAPTION>
PRINCIPAL
COUNTRY AMOUNT** VALUE
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
BONDS & NOTES IN REORGANIZATION (CONT.)
*Dictaphone Corporation:
revolver.................................................. United States $ 7,349,262 $ 6,393,858
tranche B Term Loan....................................... United States 4,933,932 4,341,860
tranche C Term Loan....................................... United States 4,411,500 3,882,120
*Dow Corning Corp.:
bank debt................................................. United States 600,000,000JPY 5,353,602
bank debt #1.............................................. United States 7,500,000 9,618,750
bank debt #2.............................................. United States 2,738,952 3,512,706
bank debt #3.............................................. United States 1,391,595 1,784,721
swap...................................................... United States 1,000,000 1,282,500
8.55%, 3/01/01............................................ United States 500,000 641,250
9.375%, 2/01/08........................................... United States 2,170,000 2,783,025
8.15%, 10/15/29........................................... United States 5,280,000 6,771,600
9.50%, 8/10/99............................................ United States 1,250,000 1,603,125
*Harnischfeger Industries Inc.:
8.90%, 3/01/22............................................ United States 5,025,000 3,065,250
8.70%, 6/15/22............................................ United States 2,510,000 1,531,100
6.875%, 2/15/27........................................... United States 6,173,000 3,765,530
*Integrated Health Services Inc., bank claim................ United States 4,388,861 4,059,696
*Koninklijke Ned Vlieg Fokker NV, trade claim............... Netherlands 10,115,592EUR 8,345,337
*Loewen Group Inc., Series 5, 6.10%, 10/02/02............... Canada 4,415,000CAD 1,825,128
*Loewen Group International Inc.:
144A, 6.70%, 10/01/99..................................... Canada 6,175,000 3,735,875
Series 3, 7.50%, 4/15/01.................................. Canada 1,580,000 995,400
Series 3, 7.75%, 10/15/01................................. Canada 3,100,000 1,953,000
Series 2, 8.25%, 4/15/03.................................. Canada 3,240,000 2,025,000
Series 6, 7.20%, 6/01/03.................................. Canada 26,725,000 17,104,000
Series 4, 8.25%, 10/15/03................................. Canada 9,315,000 5,821,875
Series 7, 7.60%, 6/01/08.................................. Canada 20,845,000 13,236,575
bank claim, revolver...................................... Canada 2,622,500 1,639,063
*Nippon Credit Bank Ltd., bank claim........................ Japan 842,728,577JPY 1,112,473
*Nippon Total Finance, bank claim........................... Japan 854,369,557JPY 419,893
*Peregrine Investments Holdings Ltd.:
zero coupon, 1/15/98...................................... Hong Kong 500,000 55,625
zero coupon, 1/22/98...................................... Hong Kong 95,000,000JPY 87,316
zero coupon, 6/30/00...................................... Hong Kong 250,000,000JPY 229,779
*Philip Services Corporation:
revolver, Canadian Operating.............................. Canada 173,744 74,710
revolver, Canadian Operating.............................. Canada 8,515,156CAD 2,501,891
revolver, tranche 1....................................... United States 6,005,962 2,582,564
revolver, tranche 2....................................... United States 5,569,251 2,394,778
revolver, tranche 3....................................... United States 2,795,057 1,201,875
*PIV Investment Finance (Cayman) Ltd., cvt., 4.50%,
12/01/00.................................................. Hong Kong 20,350,000 5,596,250
*Port Seattle Wash Rev Ref-Beloit Proj., 6.00%, 12/01/17.... United States 385,000 234,850
*Pratama Datakom Asia BV:
144A, 12.75%, 7/15/05..................................... Indonesia 12,810,000 3,010,350
Reg. S, 12.75%, 7/15/05................................... Indonesia 2,690,000 632,150
</TABLE>
21
PAGE
MUTUAL SHARES FUND
STATEMENT OF INVESTMENTS, JUNE 30, 1999 (UNAUDITED) (CONT.)
<TABLE>
<CAPTION>
PRINCIPAL
COUNTRY AMOUNT** VALUE
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
BONDS & NOTES IN REORGANIZATION (CONT.)
*Ritvik Holdings:
bank claim................................................ United States $ 2,630,476 $ 2,235,905
bank claim term loan B.................................... United States 1,058,476 899,705
*Southeast Banking Corp.:
zero coupon, 12/18/96..................................... United States 2,230,000 557,500
4.75%, 10/15/97........................................... United States 3,317,000 1,658,500
zero coupon, 11/12/97..................................... United States 1,250,000 312,500
10.50%, 4/11/01........................................... United States 5,300,000 1,325,000
*United Companies Financial Corp, revolver.................. United States 35,516,600 19,889,296
*Vencor Inc.:
revolver.................................................. United States 1,365,156 1,160,383
term loan A............................................... United States 7,521,121 6,204,925
term loan B............................................... United States 997,065 840,028
9.875%, 5/01/05........................................... United States 28,300,000 8,631,500
*Ventas Inc.:
tranche A, bridge loan.................................... United States 1,365,975 1,270,357
tranche B, revolver....................................... United States 3,286,739 3,056,667
tranche C, term loan A.................................... United States 1,293,341 1,215,741
tranche D, term loan B.................................... United States 453,077 371,523
--------------
TOTAL BONDS & NOTES IN REORGANIZATION (COST $196,077,274)... 212,364,405
--------------
<CAPTION>
SHARES
-----
<S> <C> <C> <C>
COMPANIES IN LIQUIDATION .1%
*Apco Oil Corp. ............................................ United States 9,200 0
+*City Investing Company Liquidating Trust.................. United States 4,314,037 5,662,174
*Kendall International Inc., Residual Ownership
Certificate............................................... United States 379 3,953
*MCorp. Financial Trust, claim units........................ United States 64,189 78,471
*MCorp. Trust Units......................................... United States 64,172 642
*Roeser & Pendelton......................................... United States 2,800 1,549
--------------
TOTAL COMPANIES IN LIQUIDATION (COST $595,808).............. 5,746,789
--------------
</TABLE>
22
PAGE
MUTUAL SHARES FUND
STATEMENT OF INVESTMENTS, JUNE 30, 1999 (UNAUDITED) (CONT.)
<TABLE>
<CAPTION>
PRINCIPAL
COUNTRY AMOUNT** VALUE
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
SHORT TERM INVESTMENTS 12.6%
Fannie Mae, 4.27% to 5.88%, with maturities to 6/19/00...... United States $ 562,675,000 $ 550,100,439
Federal Home Loan Banks, 4.32% to 5.635% with maturities to
5/18/00................................................... United States 497,509,000 486,507,839
Federal Home Loan Mortgage Corp., 4.78% to 5.28%, with
maturities to 6/22/00..................................... United States 60,000,000 57,292,765
--------------
TOTAL SHORT TERM INVESTMENTS (COST $1,095,419,617).......... 1,093,901,043
--------------
TOTAL INVESTMENTS (COST $6,624,262,896) 97.9%............... 8,456,293,344
SECURITIES SOLD SHORT (.7%)................................. (57,810,893)
NET EQUITY IN FORWARD CONTRACTS .7%......................... 60,169,846
OTHER ASSETS, LESS LIABILITIES 2.1%......................... 182,909,802
--------------
TOTAL NET ASSETS 100.0%..................................... $8,641,562,099
==============
<CAPTION>
SECURITIES SOLD SHORT
ISSUER COUNTRY SHARES VALUE
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
*Allied Signal Inc. ........................................ United States 54,850 $ 3,455,550
*BP Amoco Plc., ADR......................................... United Kingdom 81,000 8,788,500
*DST Systems Inc. .......................................... United States 81,500 5,124,313
*Intel Corp. ............................................... United States 62,000 3,689,000
*Nortel Networks Corp. ..................................... Canada 327,500 28,196,105
*Unumprovident Corp. ....................................... United States 156,300 8,557,425
--------------
TOTAL SECURITIES SOLD SHORT (PROCEEDS $55,251,626).......... $ 57,810,893
==============
</TABLE>
<TABLE>
<CAPTION>
CONTRACTS FOR DIFFERENCES VALUE AT UNREALIZED
SECURITY COUNTRY SHARES 6/30/99 LOSS
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
*BP Amoco Plc., cfd. 10.3574............................... United Kingdom 256,400 $ 4,599,212 $ (413,282)
*BP Amoco Plc., cfd. 10.9450............................... United Kingdom 102,000 1,829,640 (69,938)
*BP Amoco Plc., cfd. 11.2992............................... United Kingdom 194,000 3,479,903 (24,708)
*Vodafone Group Plc., cfd. 11.2893......................... United Kingdom 545,000 10,720,973 (1,022,874)
*Vodafone Group Plc., cfd. 12.2720......................... United Kingdom 363,000 7,140,758 (119,013)
----------- -----------
TOTAL CONTRACT FOR DIFFERENCES............................. $27,770,486 $(1,649,815)
=========== ===========
</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.
23
PAGE
MUTUAL SHARES 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 $6,340,141,004)................ $7,721,381,469
Controlled affiliates (cost $35,002,774).................. 60,380,909
Non controlled affiliates (cost $249,119,118)............. 674,530,966 $8,456,293,344
--------------
Cash....................................................... 39,916,260
Receivables:
Investment securities sold................................ 93,280,003
Capital shares sold....................................... 4,026,689
Dividends and interest.................................... 21,013,346
From affiliates........................................... 326,338
Unrealized gain on forward exchange contracts (Note 8)..... 63,633,899
Deposits with broker for securities sold short............. 131,185,287
--------------
Total assets.......................................... 8,809,675,166
--------------
Liabilities:
Payables:
Investment securities purchased........................... 88,086,605
Capital shares redeemed................................... 8,657,590
To affiliates............................................. 7,356,924
Securities sold short, at value (proceeds $55,251,626)..... 57,810,893
Unrealized loss on forward exchange contracts (Note 8)..... 3,464,053
Due to broker-variation margin............................. 1,436,420
Accrued expenses........................................... 1,300,582
--------------
Total liabilities..................................... 168,113,067
--------------
Net assets, at value........................................ $8,641,562,099
==============
Net assets consist of:
Undistributed net investment income........................ $ 56,519,920
Net unrealized appreciation................................ 1,887,991,212
Accumulated net realized gain.............................. 803,718,996
Capital shares............................................. 5,893,331,971
--------------
Net assets, at value........................................ $8,641,562,099
==============
</TABLE>
24
PAGE
MUTUAL SHARES 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
($6,106,958,262 / 272,422,977 shares outstanding)........ $22.42
==============
CLASS A:
Net asset value per share ($1,516,251,409 / 67,876,410
shares outstanding)....................................... $22.34
==============
Maximum offering price per share ($22.34 / 94.25%)......... $23.70
==============
CLASS B:
Net asset value and maximum offering price per share
($10,945,437 / 491,984 shares outstanding)*............... $22.25
==============
CLASS C:
Net asset value per share ($1,007,406,991 / 45,381,751
shares outstanding)*...................................... $22.20
==============
Maximum offering price per share ($22.20 / 99.00%)......... $22.42
==============
</TABLE>
*Redemption price per share is equal to net asset value less any applicable
sales charge.
See Notes to Financial Statements.
25
PAGE
MUTUAL SHARES 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 $2,817,650)
Dividends.................................................. $ 60,438,222
Interest................................................... 46,729,068
------------
Total investment income............................... $ 107,167,290
--------------
Expenses:
Management fees (Note 3)................................... 25,125,683
Administrative fees (Note 3)............................... 3,255,727
Distribution fees (Note 3)
Class A................................................... 2,551,076
Class B................................................... 20,738
Class C................................................... 4,763,141
Transfer agent fees (Note 3)............................... 3,420,045
Custodian fees............................................. 237,091
Reports to shareholders.................................... 285,941
Registration and filing fees............................... 138,884
Professional fees.......................................... 219,515
Directors' fees and expenses............................... 104,102
Other...................................................... 177,872
------------
Total expenses........................................ 40,299,815
Expenses waived/paid by affiliate (Note 3)............ (1,756,489)
--------------
Net expenses...................................... 38,543,326
--------------
Net investment income........................... 68,623,964
--------------
Realized and unrealized gains:
Net realized gain from:
Investments............................................... 767,522,936
Foreign currency transactions............................. 40,606,602
------------
Net realized gain..................................... 808,129,538
Net unrealized appreciation on:
Investments............................................... 357,979,687
Translation of assets and liabilities denominated in
foreign currencies...................................... 62,511,774
------------
Net unrealized appreciation........................... 420,491,461
--------------
Net realized and unrealized gain............................ 1,228,620,999
--------------
Net increase in net assets resulting from operations........ $1,297,244,963
==============
</TABLE>
See Notes to Financial Statements.
26
PAGE
MUTUAL SHARES 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..................................... $ 68,623,964 $ 196,374,397
Net realized gain from investments and foreign currency
transactions............................................. 808,129,538 583,182,217
Net unrealized appreciation (depreciation) on investments
and translation of assets and liabilities denominated in
foreign currencies....................................... 420,491,461 (827,301,518)
----------------------------------------
Net increase (decrease) in net assets resulting from
operations............................................ 1,297,244,963 (47,744,904)
Distributions to shareholders from:
Net investment income:
Class Z.................................................. (14,574,021) (164,855,136)
Class A.................................................. (2,395,360) (33,970,722)
Class B.................................................. (19,815) --
Class C.................................................. (123,195) (16,236,799)
Net realized gains:
Class Z.................................................. (97,539,004) (405,815,356)
Class A.................................................. (24,209,276) (95,152,617)
Class B.................................................. (159,134) --
Class C.................................................. (16,203,501) (62,745,269)
Capital share transactions (Note 2):
Class Z.................................................. (986,640,232) (1,084,039,468)
Class A.................................................. (191,656,387) 628,757,143
Class B.................................................. 10,466,714 --
Class C.................................................. (115,233,220) 465,320,320
----------------------------------------
Net decrease in net assets.............................. (141,041,468) (816,482,808)
Net assets:
Beginning of period........................................ 8,782,603,567 9,599,086,375
----------------------------------------
End of period.............................................. $8,641,562,099 $ 8,782,603,567
========================================
Undistributed net investment income included in net assets:
End of period.............................................. $ 56,519,920 $ 5,008,347
========================================
</TABLE>
See Notes to Financial Statements.
27
PAGE
MUTUAL SHARES FUND
Notes to Financial Statements (unaudited)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Mutual Shares Fund (the Fund) is a separate, diversified series of Franklin
Mutual Series Fund, Inc. (the Series Fund), which is an open-end investment
company registered under the Investment Company Act of 1940. The Fund seeks
long-term capital appreciation and income through a flexible policy of investing
in stocks and corporate debt securities. The following summarizes the Fund's
significant accounting policies.
a. 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. SECURITY 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
28
PAGE
MUTUAL SHARES 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.
29
PAGE
MUTUAL SHARES 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. 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. SECURITIES ISSUED ON A WHEN-ISSUED OR DELAYED BASIS:
The Fund may trade securities on a when-issued or delayed basis, with payment
and delivery scheduled for a future date. These transactions are subject to
market fluctuations and are subject to the risk that the value at delivery may
be more or less than the trade date purchase price. Although the Fund will
generally purchase these securities with the intention of acquiring such
securities, it may sell such securities before the settlement date.
j. 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.
30
PAGE
MUTUAL SHARES FUND
Notes to Financial Statements (unaudited) (continued)
2. CAPITAL STOCK (CONT.)
At June 30, 1999, there were 1.7 billion shares authorized ($0.001 par value) of
which 1 billion, 250 million, 200 million and 250 million were designated as
Class Z, Class A, Class B and Class C shares, 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......................................... 6,108,780 $ 127,180,878 19,502,032 $ 413,844,106
Shares issued on reinvestment of distributions...... 4,479,895 99,273,771 25,912,149 507,736,078
Shares redeemed..................................... (59,420,039) (1,213,094,881) (95,950,368) (2,005,619,652)
---------------------------------------------------------------------
Net decrease........................................ (48,831,364) $ (986,640,232) (50,536,187) $(1,084,039,468)
=====================================================================
<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......................................... 8,205,284 $ 171,663,150 46,308,752 $ 1,006,489,888
Shares issued on reinvestment of distributions...... 1,152,995 25,448,822 6,240,384 121,708,309
Shares redeemed..................................... (18,911,232) (388,768,359) (24,191,574) (499,441,054)
---------------------------------------------------------------------
Net increase (decrease)............................. (9,552,953) $ (191,656,387) 28,357,562 $ 628,757,143
=====================================================================
<CAPTION>
SIX MONTHS ENDED
JUNE 30, 1999+
------------------------------
SHARES AMOUNT
------------------------------
<S> <C> <C>
CLASS B SHARES:
Shares sold......................................... 487,229 $ 10,359,178
Shares issued on reinvestment of distributions...... 7,703 169,458
Shares redeemed..................................... (2,948) (61,922)
------------------------------
Net increase........................................ 491,984 $ 10,466,714
==============================
<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......................................... 3,835,669 $ 80,070,683 28,245,508 $ 612,709,669
Shares issued on reinvestment of distributions...... 700,489 15,383,457 3,814,215 74,005,389
Shares redeemed..................................... (10,364,039) (210,687,360) (10,921,730) (221,394,738)
---------------------------------------------------------------------
Net increase (decrease)............................. (5,827,881) $ (115,233,220) 21,137,993 $ 465,320,320
=====================================================================
</TABLE>
+ Effective date of Class B shares was January 1, 1999.
31
PAGE
MUTUAL SHARES FUND
Notes to Financial Statements (unaudited) (continued)
3. TRANSACTIONS WITH AFFILIATES AND RELATED PARTIES
Certain officers of the Series 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 0.60% 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 Series 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 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 aggregate 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 0.35%, 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 those Fund shares, and received contingent deferred
sales charges for the period of $233,842 and $868,160, respectively.
4. INCOME TAXES
At June 30, 1999, the net unrealized appreciation based on the cost of
investments for income tax purposes of $6,629,908,338 was as follows:
Unrealized appreciation..................................... $1,990,512,158
Unrealized depreciation..................................... (164,127,152)
--------------
Net unrealized appreciation................................. $1,826,385,006
==============
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.
32
PAGE
MUTUAL SHARES 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 $2,316,637,908 and $3,590,223,786
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 31, 1998.................... 377 $ 89,525
Options written............................................. 601 243,101
Options expired............................................. (844) (279,628)
Options terminated in closing transactions.................. (134) (52,998)
Options exercised........................................... 0 0
-------------------------
Options outstanding at 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>
38,440,402 Canary Wharf Group Plc. .................................... 5/06/99 $217,583,751
305,881 Environmental Credits LLC................................... 3/09/98 60,380,909
750,000 FBR Asset Investment Corp. ................................. 12/12/97 9,375,000
10,275,000 Golden Ocean Group Ltd., 10.00%, 8/31/01.................... 8/26/97 1,130,250
4,030 Golden Ocean Group Ltd., wts., 8/31/01...................... 8/26/97 0
3 Lancer Industries Inc., B................................... 8/11/89 9,737,540
288,400 Laser Mortgage Management Inc. ............................. 11/26/97 991,375
6,984,000 Roil Limited, 144A, 12.779%, 12/05/02....................... 5/08/98 2,444,400
585,075 Security Capital European Realty............................ 4/08/98 10,137,712
11,260,174 Sunbeam Corp. .............................................. 2/23/90 80,439,868
------------
TOTAL RESTRICTED SECURITIES (COST $108,318,893) (4.54% OF NET ASSETS)............. $392,220,805
============
</TABLE>
33
PAGE
MUTUAL SHARES 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 $734,911,874. For the six months ended June 30, 1999, dividend income
from "affiliated persons" was $4,252,000 and net realized gains from disposition
of "affiliated persons" were $28,840,154.
<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 6/30/99
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
CONTROLLED AFFILIATES*
Environmental Credits LLC... 316,331 -- (10,450) 305,881 $ 60,380,909 --
MSCW Investors I LLC........ 40,500,000 -- (40,500,000) -- ** --
-------------------------------
TOTAL CONTROLLED
AFFILIATES................. $ 60,380,909 --
===============================
NON CONTROLLED AFFILIATES
Alexander's Inc. ........... 383,200 -- -- 383,200 $ 28,308,900 --
Canary Wharf Group
Plc.****................... -- 38,440,402 -- 38,440,402 217,583,751 --
City Investing Company
Liquidating Trust.......... 4,314,037 -- -- 4,314,037 5,662,174 --
FBR Asset Investment
Corp. ..................... 750,000 -- -- 750,000 9,375,000 $ 243,750
Florida East Coast
Industries Inc. ........... 2,027,900 -- (36,600) 1,991,300 88,115,025 100,630
Genesee Corp., A............ 15,911 -- (700) 15,211 403,092 17,257
Genesee Corp., B............ 96,750 -- (34,700) 62,050 1,644,325 92,015
Kreisler Manufacturing
Corp. ..................... 144,480 -- (144,480) -- ** --
Lancer Industries Inc., B... 3 -- -- 3 9,737,540 --
MBO Properties Inc. ........ 574,712 -- -- 574,712 287,356 --
MFN Financial Corp. ........ -- 573,806 -- 573,806 5,702,197 --
MFN Financial Corp., Series
A, 10.00%, 4/23/01......... -- 13,112,400 (10,735,000) 2,377,400 2,246,643 --
MFN Financial Corp., Series
B, FRN, 9.495%, 4/23/01.... -- 13,112,400 (9,085,000) 4,027,400 3,805,893 --
Seaboard Corp. ............. 78,050 -- -- 78,050 26,537,000 39,025
Sunbeam Corp. .............. 11,260,174 -- -- 11,260,174 80,439,868 --
Telephone & Data Systems
Inc. ...................... 2,913,400 -- (330,100) 2,583,300 ** 328,831
United Asset Management
Corp. ..................... 3,435,900 -- -- 3,435,900 78,166,725 687,180
Van Melle NV................ 939,307 14,824 (64,650) 889,481 57,100,332 941,261
Ventas Inc. ................ 3,469,300 569,900 (3,500,900) 538,300 ** 1,364,064
White Mountain Insurance
Group Inc.***.............. 674,084 -- (252,700) 421,384 59,415,144 438,187
-------------------------------
TOTAL NON CONTROLLED
AFFILIATES................. $674,530,965 $4,252,200
===============================
<CAPTION>
REALIZED
CAPITAL
NAME OF ISSUER GAIN/(LOSS)
- -----------------------------------------
<S> <C>
CONTROLLED AFFILIATES*
Environmental Credits LLC... $ 424,472
MSCW Investors I LLC........ 8,147,589
-----------
TOTAL CONTROLLED
AFFILIATES................. $ 8,572,061
===========
NON CONTROLLED AFFILIATES
Alexander's Inc. ........... --
Canary Wharf Group
Plc.****................... --
City Investing Company
Liquidating Trust.......... --
FBR Asset Investment
Corp. ..................... --
Florida East Coast
Industries Inc. ........... $ 339,824
Genesee Corp., A............ (11,988)
Genesee Corp., B............ (510,115)
Kreisler Manufacturing
Corp. ..................... 76,712
Lancer Industries Inc., B...
MBO Properties Inc. ........ 718,390
MFN Financial Corp. ........ --
MFN Financial Corp., Series
A, 10.00%, 4/23/01......... 36,038
MFN Financial Corp., Series
B, FRN, 9.495%, 4/23/01.... 183,341
Seaboard Corp. ............. --
Sunbeam Corp. .............. --
Telephone & Data Systems
Inc. ...................... 2,337,993
United Asset Management
Corp. ..................... --
Van Melle NV................ (619,078)
Ventas Inc. ................ (2,798,771)
White Mountain Insurance
Group Inc.***.............. 20,515,747
-----------
TOTAL NON CONTROLLED
AFFILIATES................. $20,268,093
===========
</TABLE>
* Issuer in which the Fund owns 25% or more of the outstanding voting
securities.
** As of June 30, 1999, no longer an affiliate.
*** Name changed from Fund American Enterprises Holding Inc. effective June 1,
1999.
**** MSCW Investors I LLC shares were exchanged for shares of Canary Wharf Group
PLC effective May 6, 1999.
34
PAGE
MUTUAL SHARES FUND
Notes to Financial Statements (unaudited) (continued)
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 foreign currencies and interest rates. These instruments involve market risk
in excess of the amount recognized on the Statement of Assets and Liabilities.
Some of these risks have been minimized by offsetting contracts. Risks arise
from the possible inability of counterparties to meet the terms of their
contracts, future movement in currency values and interest rates and contract
positions that are not exact offsets. The contract amount indicates the extent
of the Fund's involvement in such contracts.
A forward exchange contract is an agreement between two parties to exchange
different currencies at a specific rate at an agreed future date. 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: -----------------------------------------------
- ------------------
<C> <S> <C> <C> <C> <C> <C>
18,056,759 Canadian Dollars...................................... U.S. $ 11,873,896 7/13/99 U.S. $ 466,471
24,868,378 Canadian Dollars...................................... 16,603,499 10/29/99 417,762
-------------- -----------
U.S. $ 28,477,395 884,233
============== -----------
</TABLE>
35
PAGE
MUTUAL SHARES FUND
Notes to Financial Statements (unaudited) (continued)
8. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK (CONT.)
<TABLE>
<CAPTION>
IN SETTLEMENT UNREALIZED
CONTRACTS TO SELL: EXCHANGE FOR DATE GAIN/(LOSS)
- ------------------ ------------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
71,476,711 European Unit......................................... U.S. $ 82,542,452 7/19/99 U.S. $ 8,727,226
55,384,646 British Pounds........................................ 91,716,973 7/20/99 4,405,393
215,005,338 Swedish Krona......................................... 27,992,771 7/21/99 2,601,244
31,839,909 British Pounds........................................ 51,846,160 8/17/99 1,641,321
217,102,854 Swedish Krona......................................... 27,656,414 8/17/99 2,044,968
86,385,082 European Unit......................................... 95,479,103 8/31/99 5,972,570
79,760,552 European Unit......................................... 87,764,605 9/10/99 5,055,987
96,228,200 Swiss Franc........................................... 65,843,907 9/10/99 3,416,679
548,852,673 Swedish Krona......................................... 67,929,123 9/15/99 3,059,834
314,949,046 Swedish Krona......................................... 38,648,879 9/20/99 1,412,467
1,217,827,839 Japanese Yen.......................................... 10,471,501 9/24/99 278,795
114,516,485 European Unit......................................... 124,880,110 10/12/99 5,828,087
406,651,023 Swedish Krona......................................... 49,670,334 10/19/99 1,496,505
95,141,237 European Unit......................................... 104,034,486 10/27/99 5,007,382
32,054,868 British Pounds........................................ 52,228,588 11/16/99 1,622,927
235,302,854 Swedish Krona......................................... 29,973,627 11/17/99 2,042,442
46,335,748 European Unit......................................... 49,681,189 11/29/99 1,326,347
7,131,990 British Pounds........................................ 11,475,059 12/15/99 210,430
44,660,143 European Unit......................................... 47,254,987 12/17/99 581,939
32,384,362 British Pounds........................................ 52,524,087 12/20/99 1,370,486
33,352,596 British Pounds........................................ 53,763,902 1/18/00 1,058,793
98,934,223 British Pounds........................................ 160,182,690 5/22/00 3,587,844
-------------- -----------
U.S. $1,383,560,947 62,749,666
============== -----------
Unrealized gain on forward exchange contracts.................... 63,633,899
-----------
<CAPTION>
CONTRACTS TO BUY:
- ------------------
<S> <C> <C> <C> <C> <C>
3,496,808 Canadian Dollars...................................... U.S. $ 2,398,346 7/13/99 (8,555)
21,831,464 Canadian Dollars...................................... 14,978,217 10/29/99 (35,583)
-------------- -----------
U.S. $ 17,376,563 (44,138)
============== -----------
<CAPTION>
CONTRACTS TO SELL:
- ------------------
<S> <C> <C> <C> <C> <C>
25,087,042 Canadian Dollars...................................... U.S. $ 16,647,009 7/13/99 (498,002)
91,185,800 Swedish Krona......................................... 10,750,000 9/15/99 (27,315)
30,200,000 Japanese Yen.......................................... 249,876 9/24/99 (2,885)
130,179,457 Canadian Dollars...................................... 86,210,138 10/29/99 (2,891,713)
-------------- -----------
U.S. $ 113,857,023 (3,419,915)
============== -----------
Unrealized loss on forward exchange contracts.................... (3,464,053)
-----------
Net unrealized gain on forward exchange contracts.............. U.S. $60,169,846
===========
</TABLE>
36
PAGE
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 Shares 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.
474 S99 08/99 [Recycled Logo] Printed on recycled paper
