Semi Annual Report
June 30, 2000
Mutual Shares Fund
[FRANKLIN TEMPLETON LOGO]
FRANKLIN(R) TEMPLETON(R)
INVESTMENTS
<PAGE>
Thank you for investing with Franklin Templeton. We encourage our investors to
maintain a long-term perspective and remember that all securities markets move
both up and down, as do mutual fund share prices. We appreciate your past
support and look forward to serving your investment needs in the years ahead.
[PHOTO OF LAWRENCE SONDIKE]
LAWRENCE SONDIKE
Portfolio Manager
Mutual Shares Fund
PETER A. LANGERMAN
Chief Executive Officer
Franklin Mutual Advisers, LLC
[PHOTO OF SUSAN R. POTTO]
SUSAN R. POTTO
Assistant Portfolio Manager
Mutual Shares Fund
WE'RE ON THE WEB --
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<PAGE>
SHAREHOLDER LETTER
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 in the U.S. and other countries.
Dear Shareholder:
This semiannual report for Mutual Shares Fund covers the six months ended June
30, 2000. For most of this time, the U.S. economy continued to grow at a robust
pace. Concerned about the possibility of future inflation, the U.S. Federal
Reserve Board (the Fed) raised the federal funds target rate three times, and by
June statistics were released indicating the red-hot economy appeared to be
cooling down. U.S. and European equity markets experienced extreme volatility
throughout the reporting period. For example, the Standard & Poor's(R) 500 (S&P
500(R)) Composite Index declined by 7.00% from January through February, rallied
nearly 10% in March, then dropped 9.48% from the end of March through mid-April
before rebounding to end the
The dollar value, number of shares or principal value, and complete legal titles
of all portfolio holdings are listed in the Fund's Statement of Investments
(SOI). The SOI begins on page 13.
<TABLE>
<CAPTION>
CONTENTS
<S> <C>
Shareholder Letter 1
Performance Summary 7
Financial Highlights &
Statement of Investments 9
Financial Statements 23
Notes to Financial
Statements 27
</TABLE>
[PYRAMID GRAPH]
<PAGE>
[INDEX COMPARISON CHART - PLOT POINTS]
<TABLE>
<CAPTION>
NASDAQ MSCI ALL
DATE S&P 500 COMPOSITE COUNTRIES - S&P NASDAQ MSCI AC -
---- INDEX INDEX EUROPE INDEX 500 ------ Europe
----- ----- ------------ --- ------
<S> <C> <C> <C> <C> <C> <C>
12/31/99 100.0 100.0 100.0
1/3/00 99.0 101.5 100.8 -0.95% 1.52% 0.76%
1/4/00 95.2 95.9 98.4 -3.83% -5.55% -2.33%
1/5/00 95.4 95.3 96.3 0.19% -0.62% -2.18%
1/6/00 95.5 91.6 95.9 0.10% -3.88% -0.37%
1/7/00 98.1 95.4 97.5 2.71% 4.17% 1.62%
1/10/00 99.2 99.5 98.6 1.12% 4.30% 1.18%
1/11/00 97.9 96.4 98.3 -1.31% -3.17% -0.35%
1/12/00 97.5 94.6 98.0 -0.44% -1.82% -0.31%
1/13/00 98.7 97.2 98.6 1.22% 2.78% 0.67%
1/14/00 99.7 99.9 99.6 1.07% 2.71% 1.00%
1/18/00 99.0 101.5 98.0 -0.68% 1.64% -1.66%
</TABLE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
1/19/00 99.1 102.0 97.5 0.05% 0.50% -0.47%
1/20/00 98.4 103.0 97.3 -0.71% 0.92% -0.15%
1/21/00 98.1 104.1 96.7 -0.29% 1.10% -0.67%
1/24/00 95.4 100.7 96.5 -2.76% -3.29% -0.18%
1/25/00 96.0 102.4 95.1 0.61% 1.74% -1.42%
1/26/00 95.6 100.0 95.7 -0.42% -2.34% 0.63%
1/27/00 95.2 99.3 95.9 -0.39% -0.75% 0.14%
1/28/00 92.6 95.5 94.9 -2.75% -3.77% -1.01%
1/31/00 94.9 96.8 92.9 2.52% 1.37% -2.14%
2/1/00 95.9 99.6 93.9 1.06% 2.83% 1.07%
2/2/00 95.9 100.1 95.1 -0.01% 0.54% 1.26%
2/3/00 97.0 103.5 97.5 1.12% 3.36% 2.61%
2/4/00 96.9 104.3 97.3 -0.04% 0.79% -0.28%
2/7/00 96.9 106.2 96.3 -0.01% 1.83% -1.04%
2/8/00 98.1 108.8 99.2 1.23% 2.45% 3.10%
2/9/00 96.1 107.2 99.7 -2.08% -1.45% 0.44%
2/10/00 96.4 110.2 98.9 0.36% 2.81% -0.74%
2/11/00 94.4 108.0 98.7 -2.10% -2.01% -0.21%
2/14/00 94.6 108.6 97.4 0.20% 0.53% -1.35%
2/15/00 95.4 108.6 96.0 0.87% 0.05% -1.42%
2/16/00 94.4 108.8 97.2 -1.03% 0.16% 1.23%
2/17/00 94.5 111.8 98.2 0.04% 2.74% 1.07%
2/18/00 91.6 108.4 97.7 -3.04% -3.02% -0.55%
2/22/00 92.0 107.7 98.4 0.45% -0.67% 0.69%
2/23/00 92.6 111.8 99.5 0.63% 3.84% 1.12%
2/24/00 92.1 113.5 98.9 -0.53% 1.48% -0.53%
2/25/00 90.8 112.8 99.1 -1.48% -0.59% 0.16%
2/28/00 91.8 112.5 96.8 1.10% -0.28% -2.33%
2/29/00 93.0 115.4 97.5 1.36% 2.60% 0.78%
3/1/00 93.9 117.6 99.3 0.93% 1.86% 1.86%
3/2/00 94.0 116.8 101.2 0.19% -0.62% 1.89%
3/3/00 95.9 120.8 101.8 1.98% 3.37% 0.56%
3/6/00 94.7 120.5 102.6 -1.27% -0.20% 0.78%
3/7/00 92.3 119.1 101.4 -2.56% -1.16% -1.17%
3/8/00 93.0 120.3 100.2 0.82% 1.02% -1.19%
3/9/00 95.4 124.0 101.7 2.56% 3.06% 1.51%
3/10/00 95.0 124.1 102.1 -0.47% 0.03% 0.38%
3/13/00 94.2 120.6 99.9 -0.82% -2.80% -2.11%
3/14/00 92.5 115.7 99.7 -1.77% -4.09% -0.25%
3/15/00 94.8 112.6 98.0 2.43% -2.63% -1.68%
3/16/00 99.3 115.9 99.9 4.76% 2.94% 1.93%
3/17/00 99.7 117.9 100.2 0.41% 1.71% 0.31%
3/20/00 99.1 113.3 101.3 -0.54% -3.92% 1.14%
3/21/00 101.7 115.8 101.5 2.56% 2.21% 0.13%
3/22/00 102.1 119.5 100.7 0.45% 3.25% -0.70%
3/23/00 104.0 121.4 101.1 1.78% 1.56% 0.39%
3/24/00 104.0 122.0 103.4 0.01% 0.45% 2.23%
3/27/00 103.7 121.9 103.1 -0.24% -0.09% -0.28%
3/28/00 102.6 118.8 103.0 -1.06% -2.51% -0.11%
</TABLE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
3/29/00 102.7 114.1 101.3 0.05% -3.91% -1.63%
3/30/00 101.3 109.5 99.0 -1.37% -4.02% -2.23%
3/31/00 102.0 112.4 99.7 0.72% 2.58% 0.72%
4/3/00 102.5 103.8 98.0 0.49% -7.64% -1.75%
4/4/00 101.7 102.0 98.3 -0.75% -1.77% 0.34%
4/5/00 101.2 102.5 97.3 -0.49% 0.49% -1.10%
4/6/00 102.2 104.9 98.8 0.94% 2.36% 1.55%
4/7/00 103.2 109.3 99.9 1.00% 4.19% 1.17%
4/10/00 102.4 102.9 99.9 -0.78% -5.81% 0.02%
4/11/00 102.1 99.7 98.3 -0.26% -3.16% -1.64%
4/12/00 99.9 92.6 97.8 -2.23% -7.06% -0.53%
4/13/00 98.0 90.4 97.6 -1.82% -2.46% -0.13%
4/14/00 92.3 81.6 95.1 -5.83% -9.67% -2.60%
4/17/00 95.4 87.0 93.5 3.31% 6.56% -1.66%
4/18/00 98.1 93.2 93.4 2.87% 7.19% -0.17%
4/19/00 97.2 91.1 94.6 -0.98% -2.30% 1.28%
4/20/00 97.6 89.5 95.1 0.50% -1.69% 0.55%
4/24/00 97.3 85.6 95.1 -0.33% -4.43% 0.02%
4/25/00 100.6 91.2 94.8 3.33% 6.57% -0.29%
4/26/00 99.4 89.2 95.4 -1.11% -2.19% 0.59%
4/27/00 99.7 92.7 93.4 0.27% 3.97% -2.04%
4/28/00 98.9 94.9 95.3 -0.85% 2.30% 1.94%
5/1/00 99.9 97.3 94.9 1.09% 2.52% -0.33%
5/2/00 98.4 93.0 96.7 -1.50% -4.36% 1.81%
5/3/00 96.3 91.1 93.7 -2.16% -2.06% -3.11%
5/4/00 95.9 91.4 93.4 -0.39% 0.35% -0.25%
5/5/00 97.5 93.8 93.7 1.64% 2.60% 0.32%
5/8/00 96.9 90.2 93.2 -0.59% -3.86% -0.57%
5/9/00 96.1 88.1 92.6 -0.84% -2.30% -0.67%
5/10/00 94.1 83.2 91.6 -2.06% -5.59% -1.02%
5/11/00 95.8 86.0 92.4 1.79% 3.39% 0.89%
5/12/00 96.7 86.7 93.9 0.93% 0.84% 1.57%
5/15/00 98.9 88.7 93.9 2.21% 2.23% -0.03%
5/16/00 99.8 91.4 94.7 0.94% 3.05% 0.90%
5/17/00 98.5 89.6 92.0 -1.24% -1.95% -2.88%
5/18/00 97.8 87.0 92.3 -0.73% -2.91% 0.39%
5/19/00 95.8 83.3 89.5 -2.11% -4.19% -3.10%
5/22/00 95.3 82.7 89.0 -0.44% -0.77% -0.56%
5/23/00 93.5 77.8 89.9 -1.92% -5.93% 1.00%
5/24/00 95.2 80.4 88.9 1.83% 3.35% -1.07%
5/25/00 94.0 78.8 90.8 -1.25% -2.00% 2.09%
5/26/00 93.8 78.8 91.6 -0.25% -0.01% 0.95%
5/30/00 96.8 85.0 94.3 3.22% 7.94% 2.98%
5/31/00 96.7 83.6 94.3 -0.13% -1.69% -0.06%
6/1/00 98.6 88.0 95.8 1.99% 5.34% 1.61%
6/2/00 100.5 93.7 99.5 1.96% 6.44% 3.85%
6/5/00 99.9 93.9 98.7 -0.65% 0.22% -0.85%
6/6/00 99.2 92.3 99.4 -0.67% -1.71% 0.76%
6/7/00 100.1 94.3 98.6 0.93% 2.21% -0.86%
</TABLE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
6/8/00 99.5 94.0 98.3 -0.66% -0.36% -0.21%
6/9/00 99.2 95.2 98.0 -0.32% 1.29% -0.40%
6/12/00 98.4 92.6 98.2 -0.75% -2.76% 0.27%
6/13/00 100.0 94.6 98.6 1.62% 2.21% 0.36%
6/14/00 100.1 93.3 99.4 0.07% -1.39% 0.88%
6/15/00 100.6 94.5 98.2 0.56% 1.27% -1.20%
6/16/00 99.7 94.9 98.6 -0.97% 0.39% 0.34%
6/19/00 101.1 98.0 98.2 1.47% 3.35% -0.36%
6/20/00 100.5 98.6 98.6 -0.68% 0.59% 0.43%
6/21/00 100.7 99.9 96.9 0.22% 1.26% -1.80%
6/22/00 98.8 96.7 95.9 -1.82% -3.13% -1.03%
6/23/00 98.1 94.5 95.4 -0.74% -2.32% -0.45%
6/26/00 99.0 96.1 95.5 0.96% 1.74% 0.02%
6/27/00 98.7 94.8 95.4 -0.32% -1.36% 0.00%
6/28/00 99.0 96.8 96.0 0.29% 2.11% 0.53%
6/29/00 98.2 95.3 94.3 -0.85% -1.60% -1.69%
6/30/00 99.0 97.5 96.0 0.85% 2.29% 1.72%
</TABLE>
six-month period at - 0.42%.(1) The technology-heavy Nasdaq Composite Index was
even more volatile.(2) Whipsawed by investor concerns over such issues as
historically high valuations and the federal district court's anti-monopoly
ruling against technology bellwether Microsoft, the Nasdaq(R) soared 24.07%
through mid-March, then plummeted 37.32% in the succeeding 2-1/2 months before
rebounding in June to end the six-month period at - 2.02%.
Within this environment, Mutual Shares Fund - Class Z shares provided a 0.80%
six-month cumulative total return as shown in the Performance Summary on page 7.
This compares favorably to the S&P 500 Index which, as noted, declined
1. The S&P 500 Composite Index consists of 500 domestic stocks, consisting of
four broad sectors: industrials, utilities, financials and transportation. The
S&P 500 serves as standard for measuring large-cap U.S. stock market
performance. Since some industries are characterized by companies of relatively
small stock capitalization, the Index is not composed of the 500 largest
companies on the New York Stock Exchange. The Index is unmanaged and includes
reinvested dividends. One cannot invest directly in an index.
2. The Nasdaq Composite Index measures all Nasdaq domestic and non-U.S. based
common stocks listed on the Nasdaq Stock Market(R). The Index is market-value
weighted and includes over 5,000 companies (as of 6/30/00). One cannot invest
directly in an index.
2
<PAGE>
0.42%, and to the Lipper Multi-Cap Value Funds Average, which declined 0.47%
during the same period.(3)
The Fund's performance relative to these indexes was due largely to our
disciplined value and special situations approach. As the Federal Reserve waged
a war against inflation by raising interest rates, prices of some cyclical
stocks fell to levels we have not seen for many years. This situation provided
us with opportunities to purchase high-quality stocks that we believed had been
unduly neglected by the marketplace.
B.F. Goodrich is an example of how we were able to use the market's volatility
to our advantage. As old economy stocks fell out of favor with investors chasing
after the new economy high flyers, Goodrich's stock price declined to the low
$20s due to fears of a cyclical downturn in the commercial aerospace industry.
In early 2000, Goodrich was trading at just seven times earnings and a 50%
discount to its estimated intrinsic value. In addition, management's intention
to restructure the company into a more focused, profitable organization gave us
the catalyst we needed to unlock its hidden value. Subsequently, management
announced its plan to sell Goodrich's sizable chemicals division, aggressively
repurchased stock, and the outlook for the commercial aerospace industry
improved. The stock appreciated over 50% from its lows and, during the first six
months of 2000, was the second-largest contributor to the Fund's performance.
The largest contributor to the Fund's returns during the reporting period was
Lagardere, a family-controlled French
3. Source: Standard & Poor's Micropal. The Index is unmanaged and includes
reinvested dividends. The Lipper Multi-Cap Value Funds Average is an equally
weighted average consisting of 518 mutual funds (including Mutual Shares Fund)
within the Multi-Cap Value investment objective. Returns are adjusted for the
reinvestment of capital gains distributions and income dividends. One cannot
invest directly in an index.
[GEOGRAPHIC DISTRIBUTION BAR GRAPH]
Geographic Distribution
Based on Total Net Assets
6/30/00
<TABLE>
<CAPTION>
<S> <C>
United States 65.6%
United Kingdom 7.2%
France 2.6%
Sweden 2.5%
Netherlands 0.7%
Other Countries 1.9%
Fixed Income Securities 6.2%
Government Agencies &
Other net Assets 13.3%
</TABLE>
3
<PAGE>
TOP 10 SECTORS*
6/30/00
<TABLE>
<CAPTION>
% OF TOTAL
SECTOR NET ASSETS
------ ----------
<S> <C>
Diversified Financials 8.7%
Media 7.5%
Insurance 6.9%
Diversified
Telecommunication Services 6.8%
Commercial Services &
Supplies 4.4%
Auto Components 4.0%
Multiline Retail 4.0%
Banks 3.9%
Real Estate 3.8%
Road & Rail 3.5%
</TABLE>
* Based on equity securities.
defense and media holding company that has been transforming itself into a media
powerhouse. Until recently, the company's primary focus was in the defense
industry, it did not own its media assets outright, and margins were below those
of its peers. This caused Lagardere's stock valuation to become steeply
discounted, and we were able to buy shares at less than 50% of what we believed
the assets to be worth. Lagardere has made tremendous strides since then,
increasing ownership of its non-wholly owned media assets while broadening and
strengthening its media portfolio. Today, it is the world's largest magazine
publisher and controls assets including newspapers, radio stations, book
publishers and a movie production company. Investors finally started to
recognize Lagardere as a premier media conglomerate, causing its stock to
appreciate more than 43% from the start of the reporting period to June 30,
2000.
Of course, not all of our stocks proved to be success stories. The share price
of Finova (financial services) fell sharply when the company missed first
quarter earnings targets due to a special charge needed to bolster loan loss
reserves. Faced with higher financing costs and slowing growth, Finova's board
of directors announced in May their intention to explore strategic alternatives
to maximize the value of the firm. Owens Illinois (a glass packaging
manufacturer) was another disappointment. Its share price declined when its
South American and Eastern European operations were negatively impacted by
economic weakness in those regions. However, we expect economic recovery to
stimulate future demand for Owens Illinois products, and we believe the stock
could prove to be a profitable investment for the Fund.
During the reporting period, we added to our positions in out-of-favor sectors
such as traditional media, purchasing shares of
4
<PAGE>
Washington Post and E.W. Scripps. We also added to our positions in the
retailing sector, buying shares of May Department Stores and Sears.
On the sell side - adhering to our strategy of buying assets at a discount and
selling near full value - we pared our holdings of stocks whose prices had
appreciated significantly since their original purchase date. These included
Investor (Swedish holding company), Kansas City Southern (U.S. railroad and
financial services company) and Aventis (French life sciences and pharmaceutical
company). We also sold positions in companies we believed were subject to
deteriorating business conditions or whose management did not act like owners.
Throughout the period, we continued to seek out undervalued opportunities in the
risk arbitrage and bankruptcy arenas. One notable arbitrage success story during
the period was our investment in U.S. West, a telecommunications company that
was acquired by Qwest Communications. With the deal structured as an equity
swap, our investment in U.S. West enabled us to indirectly accumulate a position
in a high-growth company such as Qwest in a low-risk way. Since having initially
purchased U.S. West in the mid-$50s range in the summer of 1999, the stock price
appreciated more than 50% by its acquisition date in June of 2000. Regarding
bankruptcies, we believe as the Fed continues to raise rates and the economy
slows, there will be an increasing supply of distressed bonds and bank debt from
which to choose.
Looking forward, we will continue to search for undervalued investments that
provide our shareholders with excellent long-term, low-risk returns. With our
disciplined due diligence and our three-pronged approach to value combining
bargain stocks,
TOP 10 HOLDINGS
6/30/00
<TABLE>
<CAPTION>
COMPANY, % OF TOTAL
SECTOR, COUNTRY NET ASSETS
--------------- ----------
<S> <C>
Canary Wharf Group PLC, 2.6%
Real Estate, United Kingdom
Telephone & Data Systems Inc., 2.5%
Diversified Telecommunication
Services, United States
Investor AB, 2.5%
Industrial Conglomerates,
Sweden
AT&T Corp., 2.4%
Diversified Telecommunication
Services, United States
Washington Post Co. B, 1.8%
Media, United States
Federated Department Stores, 1.7%
Multiline Retail, United States
B.F. Goodrich Co., 1.6%
Aerospace & Defense,
United States
Delphi Automotive Systems Corp., 1.6%
Auto Components,
United States
Bear Stearns Cos. Inc., 1.5%
Diversified Financials,
United States
Scripps Co. A, 1.5%
Media, United States
</TABLE>
5
<PAGE>
bankruptcies and special situations, we believe Mutual Shares is well positioned
to capitalize on today's volatile marketplace.
Thank you for your support. We appreciate your participation in Mutual Shares
Fund and welcome your comments and suggestions, either through regular mail or
by email at [email protected].
Sincerely,
/s/ Lawrence Sondike
---------------------------
Lawrence Sondike
Portfolio Manager
/s/ Susan R. Potto
---------------------------
Susan R. Potto
Assistant Portfolio Manager
Mutual Shares Fund
The Fund's value-oriented strategy may include investments in companies involved
in mergers, reorganizations, restructurings or liquidations. 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.
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, 2000, 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.
6
<PAGE>
SIX-MONTH PERFORMANCE SUMMARY
AS OF 6/30/00
Six-month total return does not include sales charges. 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 operating expenses for
each class. Past distributions are not indicative of future trends. All total
returns include reinvested distributions at net asset value.
<TABLE>
<CAPTION>
CLASS Z
<S> <C> <C> <C>
Six-Month Total Return 0.80%
Net Asset Value (NAV) $19.04 (6/30/00) $20.43 (12/31/99)
Change in NAV - $1.39
Distributions (1/1/00 - 6/30/00) Dividend Income $0.3895
Short-Term Capital Gain $0.3722
Long-Term Capital Gain $0.8069
---------
Total $1.5686
</TABLE>
<TABLE>
<CAPTION>
CLASS A
<S> <C> <C> <C>
Six-Month Total Return 0.56%
Net Asset Value (NAV) $18.96 (6/30/00) $20.38 (12/31/99)
Change in NAV - $1.42
Distributions (1/1/00 - 6/30/00) Dividend Income $0.3705
Short-Term Capital Gain $0.3722
Long-Term Capital Gain $0.8069
---------
Total $1.5496
</TABLE>
<TABLE>
<CAPTION>
CLASS B
<S> <C> <C> <C>
Six-Month Total Return 0.25%
Net Asset Value (NAV) $18.80 (6/30/00) $20.26 (12/31/99)
Change in NAV - $1.46
Distributions (1/1/00 - 6/30/00) Dividend Income $0.3462
Short-Term Capital Gain $0.3722
Long-Term Capital Gain $0.8069
---------
Total $1.5253
</TABLE>
<TABLE>
<CAPTION>
CLASS C
<S> <C> <C> <C>
Six-Month Total Return 0.24%
Net Asset Value (NAV) $18.84 (6/30/00) $20.29 (12/31/99)
Change in NAV - $1.45
Distributions (1/1/00 - 6/30/00) Dividend Income $0.3347
Short-Term Capital Gain $0.3722
Long-Term Capital Gain $0.8069
---------
Total $1.5138
</TABLE>
Past performance does not guarantee future results.
CLASS Z: No initial sales charge or Rule 12b-1 fees and are available only to
certain investors, as described in the prospectus.
CLASS A: Subject to the current, 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: 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.
7
<PAGE>
1. Cumulative total return represents the change in value of an investment over
the periods indicated and does not include sales charges.
2. Average annual total return represents the average annual change in value of
an investment over the periods indicated and includes the current, applicable,
maximum sales charge(s) for that class.
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.
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 the countries where the Fund invests. You may
have a gain or loss when you sell your shares.
ADDITIONAL PERFORMANCE
AS OF 6/30/00
<TABLE>
<CAPTION>
CLASS Z 1-YEAR 5-YEAR 10-YEAR
------- ------ ------ -------
<S> <C> <C> <C>
Cumulative Total Return(1) - 0.84% 98.51% 288.62%
Average Annual Total Return(2) - 0.84% 14.70% 14.54%
Value of $10,000 Investment(3) $9,916 $19,851 $38,862
</TABLE>
<TABLE>
<CAPTION>
INCEPTION
CLASS A 1-YEAR 3-YEAR (11/1/96)
------- ------ ------ ---------
<S> <C> <C> <C>
Cumulative Total Return(1) - 1.21% 27.98% 54.94%
Average Annual Total Return(2) - 6.88% 6.44% 11.30%
Value of $10,000 Investment(3) $9,312 $12,060 $14,797
</TABLE>
<TABLE>
<CAPTION>
INCEPTION
CLASS B 1-YEAR (1/1/99)
------- ------ ---------
<S> <C> <C>
Cumulative Total Return(1) - 1.86% 14.11%
Average Annual Total Return(2) - 5.24% 6.75%
Value of $10,000 Investment(3) $9,476 $11,025
</TABLE>
<TABLE>
<CAPTION>
INCEPTION
CLASS C 1-YEAR 3-YEAR (11/1/96)
------- ------ ------ ---------
<S> <C> <C> <C>
Cumulative Total Return(1) - 1.83% 25.54% 51.40%
Average Annual Total Return(2) - 3.63% 7.52% 11.69%
Value of $10,000 Investment(3) $9,637 $12,429 $14,988
</TABLE>
For updated performance figures, see "Prices and Performance" at
franklintempleton.com, or call Franklin Templeton at 1-800/342-5236.
Past performance does not guarantee future results.
8
<PAGE>
MUTUAL SHARES FUND
Financial Highlights
<TABLE>
<CAPTION>
CLASS Z
------------------------------------------------------------------------------
SIX MONTHS
ENDED YEAR ENDED DECEMBER 31,
JUNE 30, 2000 --------------------------------------------------------------
(UNAUDITED) 1999 1998 1997 1996 1995
------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE+
(For a share outstanding throughout the
period)
Net asset value, beginning of period..... $20.43 $19.55 $21.30 $18.57 $17.29 $15.74
------------------------------------------------------------------------------
Income from investment operations:
Net investment income................... .17 .33 .53 .42 .55 .40
Net realized and unrealized gains
(losses).............................. .01 2.55 (.46) 4.43 2.96 4.10
------------------------------------------------------------------------------
Total from investment operations......... .18 2.88 .07 4.85 3.51 4.50
------------------------------------------------------------------------------
Less distributions from:
Net investment income................... (.39) (.42) (.53) (.54) (.50) (.39)
Net realized gains...................... (1.18) (1.58) (1.29) (1.58) (1.73) (2.56)
------------------------------------------------------------------------------
Total distributions...................... (1.57) (2.00) (1.82) (2.12) (2.23) (2.95)
------------------------------------------------------------------------------
Net asset value, end of period........... $19.04 $20.43 $19.55 $21.30 $18.57 $17.29
==============================================================================
Total Return*............................ .80% 14.95% .45% 26.44% 20.76% 29.11%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's)........ $4,981,953 $5,571,867 $6,279,026 $7,918,986 $6,543,063 $5,229,574
Ratios to average net assets:
Expenses(a)............................. .78%** .77% .76% .76% .70% .73%
Expenses, excluding waiver and payments
by affiliate(a)....................... .83%** .81% .80% .79% .72% .73%
Net investment income................... 1.73%** 1.58% 2.15% 1.92% 3.02% 2.47%
Portfolio turnover rate.................. 33.21% 66.24% 69.46% 49.61% 58.35% 79.32%
(a)Excluding dividend expense on
securities sold short, the ratios of
expenses and expenses, excluding waiver
and payments by affiliate to average net
assets would have been:
Expenses................................. 0.75%** .75% .73% .72% .70% .69%
Expenses, excluding waiver and payments
by affiliate............................ 0.80%** .79% .77% .75% .72% .69%
</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 effective year ended December 31, 1999.
9
<PAGE>
MUTUAL SHARES FUND
Financial Highlights (continued)
<TABLE>
<CAPTION>
CLASS A
---------------------------------------------------------------------------
SIX MONTHS
ENDED YEAR ENDED DECEMBER 31,
JUNE 30, 2000 -------------------------------------------------------
(UNAUDITED)+++ 1999+++ 1998 1997+++ 1996+
---------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE++
(For a share outstanding throughout the
period)
Net asset value, beginning of period.......... $20.38 $19.50 $21.26 $18.56 $18.90
---------------------------------------------------------------------------
Income from investment operations:
Net investment income........................ .14 .26 .40 .34 .21
Net realized and unrealized gains (losses)... (.01) 2.54 (.41) 4.43 1.08
---------------------------------------------------------------------------
Total from investment operations.............. .13 2.80 (.01) 4.77 1.29
---------------------------------------------------------------------------
Less distributions from:
Net investment income........................ (.37) (.34) (.46) (.49) (.47)
Net realized gains........................... (1.18) (1.58) (1.29) (1.58) (1.16)
---------------------------------------------------------------------------
Total distributions........................... (1.55) (1.92) (1.75) (2.07) (1.63)
---------------------------------------------------------------------------
Net asset value, end of period................ $18.96 $20.38 $19.50 $21.26 $18.56
===========================================================================
Total Return*................................. .56% 14.57% .06% 26.03% 6.91%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's)............. $1,209,703 $1,365,694 $1,509,647 $1,043,262 $35,634
Ratios to average net assets:
Expenses(a).................................. 1.13%** 1.12% 1.11% 1.11% 1.09%**
Expenses, excluding waiver and payments by
affiliate(a)............................... 1.18%** 1.16% 1.15% 1.14% 1.18%**
Net investment income........................ 1.38%** 1.23% 1.78% 1.58% 2.44%**
Portfolio turnover rate....................... 33.21% 66.24% 69.46% 49.61% 58.35%
(a)Excluding dividend expense on securities
sold short, the ratios of expenses and
expenses, excluding waiver and payments by
affiliate to average net assets would have
been:
Expenses...................................... 1.10%** 1.10% 1.08% 1.07% 1.09%**
Expenses, excluding waiver and payments by
affiliate.................................... 1.15%** 1.14% 1.12% 1.10% 1.18%**
</TABLE>
*Total return does not reflect sales commissions and is not annualized.
**Annualized.
+For the period November 1, 1996 (effective date) to December 31, 1996.
++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.
10
<PAGE>
MUTUAL SHARES FUND
Financial Highlights (continued)
<TABLE>
<CAPTION>
CLASS B
--------------------------------------
SIX MONTHS ENDED
JUNE 30, 2000 YEAR ENDED
(UNAUDITED) DECEMBER 31, 1999+
--------------------------------------
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE++
(For a share outstanding throughout the period)
Net asset value, beginning of period........................ $20.26 $19.50
--------------------------------------
Income from investment operations:
Net investment income...................................... .08 .09
Net realized and unrealized gains (losses)................. (.01) 2.55
--------------------------------------
Total from investment operations............................ .07 2.64
--------------------------------------
Less distributions from:
Net investment income...................................... (.35) (.30)
Net realized gains......................................... (1.18) (1.58)
--------------------------------------
Total distributions......................................... (1.53) (1.88)
--------------------------------------
Net asset value, end of period.............................. $18.80 $20.26
======================================
Total Return*............................................... .25% 13.76%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's)........................... $26,252 $21,634
Ratios to average net assets:
Expenses(a)................................................ 1.78%** 1.77%
Expenses, excluding waiver and payments by affiliate(a).... 1.83%** 1.81%
Net investment income...................................... .76%** .46%
Portfolio turnover rate..................................... 33.21% 66.24%
(a)Excluding dividend expense on securities sold short, the
ratios of expenses and expenses, excluding waiver and
payments by affiliate to average net assets would have been:
Expenses.................................................... 1.75%** 1.75%
Expenses, excluding waiver and payments by affiliate........ 1.80%** 1.79%
</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 effective year ended December 31,
1999.
11
<PAGE>
MUTUAL SHARES FUND
Financial Highlights (continued)
<TABLE>
<CAPTION>
CLASS C
-------------------------------------------------------------
SIX MONTHS
ENDED YEAR ENDED DECEMBER 31,
JUNE 30, 2000 -------------------------------------------
(UNAUDITED)+++ 1999+++ 1998 1997+++ 1996+
-------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE++
(For a share outstanding throughout the period)
Net asset value, beginning of period.................... $20.29 $19.41 $21.18 $18.56 $18.90
-------------------------------------------------------------
Income from investment operations:
Net investment income.................................. .07 .12 .28 .20 .20
Net realized and unrealized gains (losses)............. (.01) 2.53 (.43) 4.42 1.08
-------------------------------------------------------------
Total from investment operations........................ .06 2.65 (.15) 4.62 1.28
-------------------------------------------------------------
Less distributions from:
Net investment income.................................. (.33) (.20) (.33) (.42) (.46)
Net realized gains..................................... (1.18) (1.57) (1.29) (1.58) (1.16)
-------------------------------------------------------------
Total distributions..................................... (1.51) (1.77) (1.62) (2.00) (1.62)
-------------------------------------------------------------
Net asset value, end of period.......................... $18.84 $20.29 $19.41 $21.18 $18.56
=============================================================
Total Return*........................................... .24% 13.87% (.59)% 25.17% 6.82%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's)....................... $744,368 $890,712 $993,931 $636,838 $16,873
Ratios to average net assets:
Expenses(a)............................................ 1.77%** 1.76% 1.76% 1.76% 1.71%**
Expenses, excluding waiver and payments by
affiliate(a)......................................... 1.82%** 1.80% 1.80% 1.79% 1.80%**
Net investment income.................................. .73%** .59% 1.12% .92% 1.69%**
Portfolio turnover rate................................. 33.21% 66.24% 69.46% 49.61% 58.35%
(a)Excluding dividend expense on securities sold short,
the ratios of expenses and expenses, excluding waiver
and payments by affiliate to average net assets would
have been:
Expenses................................................ 1.74%** 1.74% 1.73% 1.72% 1.71%**
Expenses, excluding waiver and payments by affiliate.... 1.79%** 1.78% 1.77% 1.75% 1.80%**
</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.
12
<PAGE>
MUTUAL SHARES FUND
STATEMENT OF INVESTMENTS, JUNE 30, 2000 (UNAUDITED)
<TABLE>
<CAPTION>
COUNTRY SHARES VALUE
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS 81.0%
AEROSPACE & DEFENSE 1.9%
B.F. Goodrich Co. .......................................... United States 3,314,634 $ 112,904,721
*Hexcel Corp. .............................................. United States 1,740,895 16,538,503
--------------
129,443,224
--------------
AUTO COMPONENTS 4.0%
Borg Warner Inc. ........................................... United States 658,655 23,135,256
Delphi Automotive Systems Corp. ............................ United States 7,711,408 112,297,378
*Lear Corp. ................................................ United States 3,091,700 61,834,000
TRW Inc. ................................................... United States 1,868,125 81,029,922
--------------
278,296,556
--------------
AUTOMOBILES .7%
General Motors Corp. ....................................... United States 773,493 44,910,937
--------------
BANKS 3.9%
Bank of Ireland............................................. Irish Republic 3,559,826 22,521,041
Banknorth Group Inc. ....................................... United States 2,524,157 38,651,154
Chase Manhattan Corp. ...................................... United States 1,095,564 50,464,416
Greenpoint Financial Corp. ................................. United States 2,646,392 49,619,850
National City Corp. ........................................ United States 1,131,519 19,306,543
Sovereign Bancorp Inc. ..................................... United States 4,396,000 30,909,375
U.S. Bancorp................................................ United States 3,280,946 63,158,211
--------------
274,630,590
--------------
BEVERAGES 1.4%
Brown-Forman Corp., A....................................... United States 9,500 501,125
Brown-Forman Corp., B....................................... United States 634,720 34,116,200
Pepsi Bottling Group Inc. .................................. United States 2,111,670 61,634,367
--------------
96,251,692
--------------
BUILDING PRODUCTS .7%
*American Standard Cos. Inc. ............................... United States 1,131,400 46,387,400
--------------
CHEMICALS 1.5%
+*Cytec Industries Inc. .................................... United States 2,356,100 58,166,218
*Henkel KGAA, pfd. ......................................... Germany 58,100 3,341,513
Union Carbide Corp. ........................................ United States 857,050 42,423,975
--------------
103,931,706
--------------
</TABLE>
13
<PAGE>
MUTUAL SHARES FUND
STATEMENT OF INVESTMENTS, JUNE 30, 2000 (UNAUDITED) (CONT.)
<TABLE>
<CAPTION>
COUNTRY SHARES VALUE
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS (CONT.)
COMMERCIAL SERVICES & SUPPLIES 4.4%
*Cendant Corp. ............................................. United States 580,500 $ 8,127,000
Dun & Bradstreet Corp. ..................................... United States 2,371,800 67,892,775
(R)+*Environmental Credits LLC.............................. United States 120,706 17,079,899
Galileo International Inc. ................................. United States 2,801,855 58,488,723
*Philip Services Corp. ..................................... Canada 459,463 2,886,002
Rentokil Initial PLC........................................ United Kingdom 11,298,901 25,742,686
*Republic Services Inc. .................................... United States 4,712,600 75,401,600
Williams PLC................................................ United Kingdom 9,097,523 52,954,230
--------------
308,572,915
--------------
COMMUNICATIONS EQUIPMENT .3%
*General Motors Corp., H.................................... United States 271,518 23,825,704
--------------
COMPUTERS & PERIPHERALS .5%
Compaq Computer Corp. ...................................... United States 964,900 24,665,256
*NCR Corp. ................................................. United States 275,400 10,723,388
--------------
35,388,644
--------------
CONTAINERS & PACKAGING 1.1%
*Owens-Illinois Inc. ....................................... United States 3,723,762 43,521,468
*Pactiv Corp. .............................................. United States 4,217,095 33,209,623
--------------
76,731,091
--------------
DIVERSIFIED FINANCIALS 6.5%
Bear Stearns Cos. Inc. ..................................... United States 2,580,679 107,420,762
CIT Group Inc., A........................................... United States 4,206,730 68,359,363
Finova Group Inc. .......................................... United States 2,327,500 30,257,500
Household International Inc. ............................... United States 1,621,748 67,403,901
Kansas City Southern Industries Inc. ....................... United States 329,065 29,183,952
Lehman Brothers Holdings Inc. .............................. United States 425,300 40,217,431
+*MFN Financial Corp. ...................................... United States 573,852 3,550,709
St. Joe Co. ................................................ United States 855,535 25,666,050
+United Asset Management Corp. ............................. United States 3,435,900 80,314,162
--------------
452,373,830
--------------
DIVERSIFIED TELECOMMUNICATION SERVICES 6.8%
AT&T Corp. ................................................. United States 1,961,865 62,043,980
AT&T Corp., W/I............................................. United States 3,104,916 102,462,240
British Telecommunications PLC.............................. United Kingdom 2,686,786 34,694,710
Centurytel Inc. ............................................ United States 1,865,300 53,627,375
SBC Communications Inc. .................................... United States 1,015,500 43,920,375
Telephone & Data Systems Inc. .............................. United States 1,756,660 176,105,164
--------------
472,853,844
--------------
ELECTRIC UTILITIES .4%
E.On AG..................................................... Germany 554,847 26,858,416
--------------
</TABLE>
14
<PAGE>
MUTUAL SHARES FUND
STATEMENT OF INVESTMENTS, JUNE 30, 2000 (UNAUDITED) (CONT.)
<TABLE>
<CAPTION>
COUNTRY SHARES VALUE
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS (CONT.)
ELECTRICAL EQUIPMENT 2.0%
National Service Industries Inc. ........................... United States 998,400 $ 19,468,800
Rockwell International Corp. ............................... United States 852,900 26,866,350
*Thermo Electron Corp. ..................................... United States 4,358,925 91,809,858
--------------
138,145,008
--------------
FOOD & DRUG RETAILING .1%
*Brunos Inc. ............................................... United States 98,873 9,392,935
--------------
FOOD PRODUCTS 1.4%
Bestfoods................................................... United States 87,425 6,054,181
Sara Lee Corp. ............................................. United States 1,704,300 32,914,294
*Universal Foods Corp. ..................................... United States 280,890 5,196,465
+Van Melle NV............................................... Netherlands 1,812,527 49,515,950
--------------
93,680,890
--------------
HEALTH CARE PROVIDERS & SERVICES 1.1%
*Foundation Health Systems Inc., A.......................... United States 3,224,020 41,912,260
Tenet Healthcare Corp. ..................................... United States 1,247,385 33,679,395
--------------
75,591,655
--------------
HOTELS RESTAURANTS & LEISURE 2.4%
Carnival Corp. ............................................. United States 1,059,890 20,667,855
+*Fine Host Corp. .......................................... United States 784,457 7,766,124
*Park Place Entertainment Corp. ............................ United States 4,810,200 58,624,313
Starwood Hotels & Resorts Worldwide Inc. ................... United States 2,359,840 76,842,290
--------------
163,900,582
--------------
HOUSEHOLD DURABLES 1.2%
*Bulova Corp. .............................................. United States 37,900 630,088
Maytag Corp. ............................................... United States 1,345,545 49,616,972
(R)+*Sunbeam Corp. ......................................... United States 11,260,174 34,836,163
--------------
85,083,223
--------------
INDUSTRIAL CONGLOMERATES 3.5%
Corporacion Financiera Alba SA.............................. Spain 572,064 15,134,549
Compagnie Generale D'Industrie et de Participation.......... France 390,340 16,687,593
Investor AB, A.............................................. Sweden 6,228,500 84,504,789
Investor AB, B.............................................. Sweden 6,565,395 90,198,392
U.S. Industries Inc. ....................................... United States 2,847,405 34,524,785
--------------
241,050,108
--------------
</TABLE>
15
<PAGE>
MUTUAL SHARES FUND
STATEMENT OF INVESTMENTS, JUNE 30, 2000 (UNAUDITED) (CONT.)
<TABLE>
<CAPTION>
COUNTRY SHARES VALUE
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS (CONT.)
INSURANCE 6.9%
*Alleghany Corp. ........................................... United States 290,200 $ 48,753,600
Allmerica Financial Corp. .................................. United States 1,012,000 53,003,500
Ambac Financial Group Inc. ................................. United States 450,300 24,682,069
*Berkshire-Hathaway Inc., A................................. United States 1,025 55,145,000
*Berkshire Hathaway Inc., B................................. United States 1,700 2,992,000
Financial Security Assurance Holdings Ltd. ................. United States 68,400 5,189,850
Hartford Financial Services Group Inc. ..................... United States 634,500 35,492,344
MBIA Inc. .................................................. United States 1,651,850 79,598,522
*MetLife Inc. .............................................. United States 984,710 20,740,454
Old Republic International Corp. ........................... United States 2,831,910 46,726,515
PMI Group Inc. ............................................. United States 825,050 39,189,875
+White Mountain Insurance Group Inc. ....................... United States 421,384 67,421,440
--------------
478,935,169
--------------
IT CONSULTING & SERVICES .4%
+*DecisionOne Corp. ........................................ United States 430,529 1,937,381
*Unisys Corp. .............................................. United States 1,726,480 25,141,865
--------------
27,079,246
--------------
LEISURE EQUIPMENT & PRODUCTS .4%
Hasbro Inc. ................................................ United States 2,032,225 30,610,389
--------------
MACHINERY .8%
Invensys PLC................................................ United Kingdom 11,643,763 43,626,434
(R)+*Lancer Industries Inc., B.............................. United States 3 12,204,615
*PXL Holdings Corp. ........................................ United States 21 0
--------------
55,831,049
--------------
MARINE .6%
Peninsular & Oriental Steam Navigation Co. ................. United Kingdom 4,600,819 39,212,515
--------------
MEDIA 7.4%
*AT&T Corp.-Liberty Media Group, A.......................... United States 2,263,424 54,888,032
Central Newspapers Inc., A.................................. United States 342,340 21,653,005
Dow Jones & Co. Inc. ....................................... United States 232,410 17,024,033
*Fox Entertainment Group Inc., A............................ United States 783,715 23,805,343
Knight-Ridder Inc. ......................................... United States 786,830 41,849,521
Lagardere SCA............................................... France 918,876 70,463,249
Media General Inc., A....................................... United States 345,200 16,763,775
Meredith Corp. ............................................. United States 1,232,500 41,596,875
Scripps Co., A.............................................. United States 2,163,900 106,572,075
Washington Post Co., B...................................... United States 264,638 126,496,964
--------------
521,112,872
--------------
</TABLE>
16
<PAGE>
MUTUAL SHARES FUND
STATEMENT OF INVESTMENTS, JUNE 30, 2000 (UNAUDITED) (CONT.)
<TABLE>
<CAPTION>
COUNTRY SHARES VALUE
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS (CONT.)
MULTILINE RETAIL 4.0%
*Federated Department Stores Inc. .......................... United States 3,418,620 $ 115,378,425
May Department Stores Co. .................................. United States 2,898,030 69,552,720
*Saks Inc. ................................................. United States 3,760,510 39,485,355
Sears, Roebuck & Co. ....................................... United States 1,604,700 52,353,338
--------------
276,769,838
--------------
MULTI-UTILITIES .7%
Suez Lyonnaise des Eaux SA.................................. France 279,701 49,197,820
--------------
OFFICE ELECTRONICS .4%
Xerox Corp. ................................................ United States 1,521,295 31,566,871
--------------
OIL & GAS 1.1%
*Abraxas Petroleum Corp. ................................... United States 428,954 643,431
*Abraxas Petroleum Corp., rts., 11/01/04.................... United States 428,954 214,477
Apco Oil Corp. ............................................. United States 9,200 0
Burlington Resources Inc. .................................. United States 1,913,960 73,208,970
Conoco Inc., A.............................................. United States 132,200 2,908,400
--------------
76,975,278
--------------
PAPER & FOREST PRODUCTS 2.9%
Abitibi-Consolidated Inc. .................................. Canada 1,603,782 14,882,906
Boise Cascade Corp. ........................................ United States 1,954,895 50,582,908
International Paper Co. .................................... United States 1,944,670 57,975,474
Mead Corp. ................................................. United States 2,141,520 54,073,380
Rayonier Inc. .............................................. United States 760,375 27,278,453
--------------
204,793,121
--------------
PHARMACEUTICALS 1.1%
Aventis SA.................................................. France 643,882 47,184,520
Bristol-Myers Squibb Co. ................................... United States 501,500 29,212,375
--------------
76,396,895
--------------
REAL ESTATE 3.5%
+*Alexander's Inc. ......................................... United States 383,200 28,069,400
*Al-Zar Ltd. LP............................................. United States 284 1,420
*Canary Wharf Group PLC..................................... United Kingdom 32,631,255 182,033,962
Cheung Kong Holdings Ltd. .................................. Hong Kong 2,175,720 24,072,948
+*MBO Properties Inc. ...................................... United States 574,712 287,356
(R)*Security Capital European Realty........................ United States 685,950 10,114,333
*Ventas Inc. ............................................... United States 1,523,500 4,856,156
--------------
249,435,575
--------------
</TABLE>
17
<PAGE>
MUTUAL SHARES FUND
STATEMENT OF INVESTMENTS, JUNE 30, 2000 (UNAUDITED) (CONT.)
<TABLE>
<CAPTION>
COUNTRY SHARES VALUE
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS (CONT.)
ROAD & RAIL 2.9%
Burlington Northern Santa Fe Corp. ......................... United States 1,846,700 $ 42,358,681
+Florida East Coast Industries Inc. ........................ United States 1,913,700 76,548,000
Railtrack Group PLC......................................... United Kingdom 5,278,264 82,062,115
--------------
200,968,796
--------------
SPECIALTY RETAIL .7%
*Payless Shoesource Inc. ................................... United States 542,074 27,781,292
Sherwin-Williams Co. ....................................... United States 1,027,340 21,766,766
--------------
49,548,058
--------------
TOBACCO 1.4%
Compagnie Financiere Richemont AG, Br., A................... Switzerland 8,412 22,735,834
Gallaher Group PLC.......................................... United Kingdom 6,866,611 37,551,860
Gallaher Group PLC, ADR..................................... United Kingdom 160,000 3,430,000
UST Inc. ................................................... United States 2,338,700 34,349,656
--------------
98,067,350
--------------
TOTAL COMMON STOCKS (COST $4,781,795,706)................... 5,643,801,792
--------------
<CAPTION>
PRINCIPAL
AMOUNT**
--------------
<S> <C> <C> <C>
CORPORATE BONDS & NOTES 3.0%
Abraxas Petroleum Corp., Series A, 11.50%, 11/01/04......... United States $ 5,036,500 4,255,843
+DecisionOne Corp., Term Loan............................... United States 16,265,985 13,826,087
Eurotunnel Finance Ltd.:
Equity Note, 12/31/03..................................... United Kingdom 7,369,442GBP 4,239,351
Participating Loan Note, 4/30/40.......................... United Kingdom 1,482,000GBP 897,407
Eurotunnel PLC:
12/31/18, Tier 2.......................................... United Kingdom 14,936,189GBP 15,601,633
12/31/25, Tier 3.......................................... United Kingdom 8,162,126GBP 7,166,588
12/31/50, Resettable Advance R5........................... United Kingdom 3,751,660GBP 2,101,389
Stabilization Advance S8, Tier 1.......................... United Kingdom 4,533,094GBP 1,784,223
Stabilization Advance S8, Tier 2.......................... United Kingdom 2,943,700GBP 1,024,950
Eurotunnel SA:
12/31/12, Tier 1 (Libor).................................. France 4,687,699EUR 3,459,921
12/31/12, Tier 1 (Pibor).................................. France 812,702EUR 599,843
12/31/18, Tier 2 (Libor).................................. France 22,166,207EUR 14,448,277
12/31/18, Tier 2 (Pibor).................................. France 4,576,207EUR 2,982,842
12/31/25, Tier 3 (Libor).................................. France 38,213,226EUR 20,878,742
12/31/25, Tier 3 (Pibor).................................. France 10,575,783EUR 5,778,341
12/31/50, Resettable Advance R4........................... France 21,724,301EUR 7,600,715
Stabilization Advance S6, Tier 1 (Pibor).................. France 1,849,047EUR 460,826
Stabilization Advance S6, Tier 2.......................... France 6,150,408EUR 1,297,007
Stabilization Advance S7, Tier 1 (Pibor).................. France 4,122,676EUR 1,027,468
</TABLE>
18
<PAGE>
MUTUAL SHARES FUND
STATEMENT OF INVESTMENTS, JUNE 30, 2000 (UNAUDITED) (CONT.)
<TABLE>
<CAPTION>
PRINCIPAL
COUNTRY AMOUNT** VALUE
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CORPORATE BONDS & NOTES (CONT.)
Finova Capital Corp.:
6.11%, 2/18/03............................................ United States $ 5,363,000 $ 4,624,558
6.15%, 3/31/03............................................ United States 955,000 809,078
7.25%, 11/08/04........................................... United States 3,235,000 2,834,669
Golden Books Publishing Inc., 10.75%, 2/20/49............... United States 2,331,600 1,072,536
HIH Capital Ltd., cvt., 144A, 7.50%, 9/25/06................ United Kingdom 7,930,000 4,559,750
La Quinta Inns Inc.:
7.25%, 3/15/04............................................ United States 1,521,000 1,140,750
7.33%, 4/01/08............................................ United States 3,410,000 2,284,700
Laidlaw Inc.:
7.70%, 8/15/02............................................ Canada 1,260,000 371,700
7.05%, 5/15/03............................................ Canada 385,000 114,538
6.65%, 10/01/04........................................... Canada 3,775,000 906,000
7.875%, 4/15/05........................................... Canada 3,800,000 1,121,000
7.65%, 5/15/06............................................ Canada 3,400,000 816,000
8.75%, 4/15/25............................................ Canada 5,690,000 1,678,550
6.72%, 10/01/27........................................... Canada 9,120,000 2,257,200
Levi Straus & Co.:
6.80%, 11/01/03........................................... United States 385,000 315,700
7.00%, 11/01/06........................................... United States 1,480,000 1,124,800
Meditrust Corp.:
7.00%, 8/15/07............................................ United States 2,910,000 1,949,700
7.82%, 9/10/26............................................ United States 11,490,000 8,847,300
+MFN Financial Corp.:
Series A, 10.00%, 3/23/01................................. United States 1,708,216 1,635,617
Series B, FRN, 11.26%, 3/23/01............................ United States 2,028,213 1,962,296
Philip Services Corp.:
PIK, 10.00%, 5/01/05...................................... Canada 2,103,765 1,683,012
Senior Term Debt, 9.00%, 5/01/05.......................... Canada 4,013,048 3,611,743
Rite Aid Corp.:
7.125%, 1/15/07........................................... United States 2,455,000 1,215,225
144A, 6.125%, 12/15/08.................................... United States 780,000 378,300
6.875%, 8/15/13........................................... United States 975,000 468,000
7.70%, 2/15/27............................................ United States 1,135,000 510,750
Service Corp. International:
6.30%, 3/15/03............................................ United States 500,000 312,500
7.375%, 4/15/04........................................... United States 6,110,000 3,757,650
6.00%, 12/15/05........................................... United States 1,420,000 773,900
7.70%, 4/15/09............................................ United States 710,000 372,750
SFC New Holdings Inc., PIK, 13.25%, 8/15/03................. United States 23,265,000 18,612,000
Southwest Royalties Inc., B, 10.50%, 10/15/04............... United States 15,693,000 10,121,985
TFM SA de CV:
senior disc. note, zero cpn. ............................. Mexico 2,785,000 1,928,613
10.25%, 6/15/07........................................... Mexico 400,000 350,000
U.S. Cellular Corp., cvt., 6/15/15.......................... United States 5,000,000 2,892,710
</TABLE>
19
<PAGE>
MUTUAL SHARES FUND
STATEMENT OF INVESTMENTS, JUNE 30, 2000 (UNAUDITED) (CONT.)
<TABLE>
<CAPTION>
PRINCIPAL
COUNTRY AMOUNT** VALUE
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CORPORATE BONDS & NOTES (CONT.)
Ventas Inc.:
Tranche A, Term Loan, 12/31/02............................ United States $ 2,465,261 $ 2,222,845
Tranche B, Term Loan, 12/31/05............................ United States 9,338,293 8,171,006
Tranche C, Term Loan, 12/31/07............................ United States 2,794,926 2,445,560
Vlasic Foods International Inc., 10.25%, 7/01/09............ United States 8,376,000 2,973,480
--------------
TOTAL CORPORATE BONDS & NOTES (COST $203,075,827)........... 212,659,924
--------------
BONDS & NOTES IN REORGANIZATION 3.2%
*Aiken Cnty S C Indl Rev Ref Beloit, 6.00%, 12/01/11........ United States 775,000 296,438
*Altos Hornos de Mexico SA:
cvt., 5.50%, 12/15/01..................................... Mexico 350,000 124,250
Series A, 11.375%, 4/30/02................................ Mexico 6,676,000 2,369,980
Series B, 11.875%, 4/30/04................................ Mexico 8,020,000 2,766,900
Tranche A, Term Loan...................................... United States 2,005,524 822,265
*Crown Leasing, Bank Claim.................................. Japan 1,474,110,581JPY 975,263
*Dow Corning Corp.:
8.55%, 3/01/01............................................ United States 500,000 668,750
9.375%, 2/01/08........................................... United States 2,170,000 3,092,250
8.15%, 10/15/29........................................... United States 5,280,000 7,062,000
9.50%, 8/10/49............................................ United States 1,250,000 1,781,250
Bank Debt................................................. United States 600,000,000JPY 7,655,593
Bank Debt #1.............................................. United States 7,500,000 10,200,000
Bank Debt................................................. United States 2,738,952 3,724,975
Bank Claim................................................ United States 1,000,000 1,360,000
Bank Claim #2............................................. United States 1,391,595 1,892,569
*Genesis Health Ventures Inc.:
Revolver.................................................. United States 12,526,143 7,841,365
Term Loan A............................................... United States 687,067 423,233
Term Loan B............................................... United States 1,350,633 844,146
Term Loan C............................................... United States 1,352,987 845,617
*Harnischfeger Industries Inc.:
8.90%, 3/01/22............................................ United States 6,385,000 2,442,263
8.70%, 6/15/22............................................ United States 4,455,000 1,704,038
7.25%, 12/15/25........................................... United States 10,855,000 4,152,038
6.875%, 2/15/27........................................... United States 6,173,000 2,361,173
</TABLE>
20
<PAGE>
MUTUAL SHARES FUND
STATEMENT OF INVESTMENTS, JUNE 30, 2000 (UNAUDITED) (CONT.)
<TABLE>
<CAPTION>
PRINCIPAL
COUNTRY AMOUNT** VALUE
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
BONDS & NOTES IN REORGANIZATION (CONT.)
*Integrated Health Services Inc.:
Revolver.................................................. United States $ 3,045,665 $ 974,613
Tranche B, Term Loan...................................... United States 9,046,561 2,894,899
Tranche C, Term Loan...................................... United States 8,055,722 2,577,831
*Loewen Group Inc., Series 5, 6.10%, 10/01/02............... Canada 7,380,000CAD 2,739,421
*Loewen Group International Inc.:
144A, 6.70%, 10/01/99..................................... Canada 20,345,000 7,120,750
Revolver.................................................. United States 2,559,720 1,382,249
Series 3, 7.50%, 4/15/01.................................. Canada 5,035,000 2,769,250
Series 3, 7.75%, 10/15/01................................. Canada 4,280,000 1,968,800
Series 2, 8.25%, 4/15/03.................................. Canada 4,580,000 2,519,000
Series 6, 7.20%, 6/01/03.................................. Canada 31,445,000 11,005,750
Series 4, 8.25%, 10/15/03................................. Canada 5,945,000 2,734,700
Series 7, 7.60%, 6/01/08.................................. Canada 21,575,000 7,119,750
*Multicare Companies Inc.:
Revolver.................................................. United States 692,552 380,903
Term Loan A............................................... United States 822,644 452,454
Term Loan B............................................... United States 1,273,373 700,355
Term Loan C............................................... United States 422,303 232,267
*Nippon Credit Bank Ltd., Bank Claim........................ Japan 762,467,322JPY 1,153,015
*Nippon Total Finance, Bank Claim........................... Japan 822,892,514JPY 466,647
*Optel Inc.:
13.00%, 2/15/02........................................... United States 12,390,000 8,673,000
11.50%, 7/01/08........................................... United States 475,000 332,500
*Paging Network Inc.:
Revolver A................................................ United States 21,451,060 17,237,450
10.125%, 8/01/07.......................................... United States 1,705,000 724,625
10.00%, 10/15/08.......................................... United States 2,280,000 969,000
*Peregrine Investments Holdings Ltd.:
6.70%, 1/15/98............................................ Hong Kong 500,000 57,500
zero cpn., 1/22/98........................................ Hong Kong 95,000,000JPY 103,256
2.60%, 6/30/00............................................ Hong Kong 250,000,000JPY 271,726
*PIV Investment Finance (Cayman) Ltd., cvt., 4.50%,
12/01/00.................................................. Hong Kong 22,710,000 5,109,750
*Port Seattle Wash Rev Ref-Beloit Proj., 6.00%, 12/01/17.... United States 385,000 147,263
*Pratama Datakom Asia BV:
144A, 12.75%, 7/15/05..................................... Indonesia 12,810,000 2,049,600
Reg S, 12.75%, 7/15/05.................................... Indonesia 2,690,000 430,400
*Safety Kleen Corp.:
9.25%, 5/15/09............................................ United States 45,000 1,125
Term Loan A............................................... United States 2,234,093 826,614
Term Loan B............................................... United States 1,128,325 417,480
Term Loan C............................................... United States 1,128,325 417,480
*Safety Kleen Services, 9.25%, 6/01/08...................... United States 85,000 4,038
*United Companies Financial Corp., Revolver................. United States 44,340,600 30,595,014
</TABLE>
21
<PAGE>
MUTUAL SHARES FUND
STATEMENT OF INVESTMENTS, JUNE 30, 2000 (UNAUDITED) (CONT.)
<TABLE>
<CAPTION>
PRINCIPAL
COUNTRY AMOUNT** VALUE
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
BONDS & NOTES IN REORGANIZATION (CONT.)
*Vencor Inc.:
9.875%, 5/01/05........................................... United States $ 28,300,000 $ 2,547,000
Revolver.................................................. United States 5,705,036 4,221,727
Term Loan A............................................... United States 23,237,352 17,195,642
Term Loan B............................................... United States 12,923,167 9,563,144
Tranche A, DIP Revolver, Term Loan 9/30/00................ United States 2,963,049 2,933,419
Tranche B, DIP Revolver, Term Loan 9/30/00................ United States 1,175,000 1,163,250
--------------
TOTAL BONDS & NOTES IN REORGANIZATION (COST $264,115,203)... 220,591,013
--------------
<CAPTION>
SHARES
--------------
COMPANIES IN LIQUIDATION .1%
+*City Investing Company Liquidating Trust.................. United States 4,314,037 5,527,360
*Roeser & Pendelton......................................... United States 2,800 6,439
--------------
TOTAL COMPANIES IN LIQUIDATION (COST $589,345).............. 5,533,799
--------------
<CAPTION>
PRINCIPAL
AMOUNT**
--------------
<S> <C> <C> <C>
<S> <C> <C> <C>
GOVERNMENT AGENCIES 10.6%
Fannie Mae, 5.005% to 6.680%, with maturities to 6/01/01.... $ 385,000,000 373,422,790
Federal Home Loan Bank, 5.35% to 6.68%, with maturities to
5/18/01................................................... 276,370,000 269,642,625
Federal Home Loan Mortgage Corp., 6.14% to 6.71%, with
maturities to 10/01/01.................................... 92,200,000 89,827,056
--------------
TOTAL GOVERNMENT AGENCIES (COST $734,476,084)............... 732,892,471
--------------
TOTAL INVESTMENTS (COST $5,984,052,165) 97.9%............... 6,815,478,999
SECURITIES SOLD SHORT (.6%)................................. (41,688,002)
NET EQUITY IN FORWARD CONTRACTS .2%......................... 12,791,719
OTHER ASSETS, LESS LIABILITIES 2.5%......................... 175,693,104
--------------
TOTAL NET ASSETS 100.0%..................................... $6,962,275,820
==============
<CAPTION>
SECURITIES SOLD SHORT (PROCEEDS $53,145,706)
ISSUER COUNTRY SHARES VALUE
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
*Dow Chemical Co. .......................................... United States 1,380,969 $ 41,688,002
==============
</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.
22
<PAGE>
MUTUAL SHARES FUND
Financial Statements
STATEMENT OF ASSETS AND LIABILITIES
JUNE 30, 2000 (UNAUDITED)
<TABLE>
<S> <C> <C>
Assets:
Investments in securities, at value:
Unaffiliated issuers (cost $5,670,736,337)................ $6,354,830,222
Controlled affiliates (cost $13,645,179).................. 17,079,899
Non controlled affiliates (cost $299,670,649)............. 443,568,878 $6,815,478,999
--------------
Cash....................................................... 21,194,659
Receivables:
Investment securities sold................................ 185,327,120
Capital shares sold....................................... 10,380,576
Dividends and interest.................................... 18,478,601
From affiliates........................................... 283,699
Unrealized gain on forward exchange contracts (Note 8)..... 19,305,710
Deposits with broker for securities sold short............. 48,286,829
--------------
Total assets.......................................... 7,118,736,193
--------------
Liabilities:
Payables:
Investment securities purchased........................... 90,463,360
Capital shares redeemed................................... 10,750,841
To affiliates............................................. 6,431,004
Securities sold short, at value (proceeds $53,145,706)..... 41,688,002
Unrealized loss on forward exchange contracts (Note 8)..... 6,513,991
Accrued expenses........................................... 613,175
--------------
Total liabilities..................................... 156,460,373
--------------
Net assets, at value........................................ $6,962,275,820
==============
Net assets consist of:
Distributions in excess of net investment income........... $ (60,531,879)
Net unrealized appreciation................................ 855,676,257
Accumulated net realized gain.............................. 719,591,899
Capital shares............................................. 5,447,539,543
--------------
Net assets, at value........................................ $6,962,275,820
==============
</TABLE>
23
<PAGE>
MUTUAL SHARES FUND
Financial Statements (continued)
STATEMENT OF ASSETS AND LIABILITIES (CONT.)
JUNE 30, 2000 (UNAUDITED)
<TABLE>
<S> <C> <C>
CLASS Z:
Net asset value and maximum offering price per share
($4,981,952,666 / 261,725,136 shares outstanding)......... $19.04
==============
CLASS A:
Net asset value per share ($1,209,703,261 / 63,792,789
shares outstanding)....................................... $18.96
==============
Maximum offering price per share ($18.96 / 94.25%)......... $20.12
==============
CLASS B:
Net asset value and maximum offering price per share
($26,252,202 / 1,396,397 shares outstanding)*............. $18.80
==============
CLASS C:
Net asset value per share ($744,367,691 / 39,511,294 shares
outstanding)*............................................. $18.84
==============
Maximum offering price per share ($18.84 / 99.00%)......... $19.03
==============
</TABLE>
*Redemption price per share is equal to net asset value less any applicable
sales charge.
See Notes to Financial Statements.
24
<PAGE>
MUTUAL SHARES FUND
Financial Statements (continued)
STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 2000 (UNAUDITED)
<TABLE>
<S> <C> <C>
Investment Income:
(net of foreign taxes of $2,234,936)
Dividends.................................................. $ 51,359,644
Interest................................................... 39,380,739
-------------
Total investment income............................... $ 90,740,383
-------------
Expenses:
Management fees (Note 3)................................... 21,730,634
Administrative fees (Note 3)............................... 2,828,761
Distribution fees (Note 3)
Class A................................................... 2,214,853
Class B................................................... 119,123
Class C................................................... 3,939,462
Transfer agent fees (Note 3)............................... 3,249,194
Custodian fees............................................. 192,501
Reports to shareholders.................................... 296,604
Registration and filing fees............................... 104,619
Professional fees.......................................... 339,220
Directors' fees and expenses............................... 111,299
Dividends for securities sold short........................ 999,899
Other...................................................... 82,936
-------------
Total expenses........................................ 36,209,105
Expenses waived/paid by affiliate (Note 3)............ (1,770,798)
-------------
Net expenses...................................... 34,438,307
-------------
Net investment income........................... 56,302,076
-------------
Realized and unrealized gains (losses):
Net realized gain from:
Investments............................................... 670,124,990
Foreign currency transactions............................. 98,482,049
-------------
Net realized gain..................................... 768,607,039
Net unrealized depreciation on:
Investments............................................... (782,048,334)
Translation of assets and liabilities denominated in
foreign currencies...................................... (12,758,152)
-------------
Net unrealized depreciation........................... (794,806,486)
-------------
Net realized and unrealized loss............................ (26,199,447)
-------------
Net increase in net assets resulting from operations........ $ 30,102,629
=============
</TABLE>
See Notes to Financial Statements.
25
<PAGE>
MUTUAL SHARES FUND
Financial Statements (continued)
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, 2000 YEAR ENDED
(UNAUDITED) DECEMBER 31, 1999
----------------------------------------
<S> <C> <C>
Increase (decrease) in net assets:
Operations:
Net investment income..................................... $ 56,302,076 $ 115,569,270
Net realized gain from investments and foreign currency
transactions............................................ 768,607,039 831,688,269
Net unrealized appreciation (depreciation) on investments
and translation of assets and liabilities denominated in
foreign currencies....................................... (794,806,486) 182,982,992
----------------------------------------
Net increase in net assets resulting from operations.... 30,102,629 1,130,240,531
Distributions to shareholders from:
Net investment income:
Class Z.................................................. (95,619,662) (108,309,743)
Class A.................................................. (22,026,778) (21,630,827)
Class B.................................................. (447,188) (270,895)
Class C.................................................. (12,360,832) (8,195,525)
Net realized gains:
Class Z.................................................. (289,499,605) (409,414,842)
Class A.................................................. (70,094,718) (100,779,589)
Class B.................................................. (1,523,234) (1,324,825)
Class C.................................................. (43,547,040) (66,770,051)
Capital share transactions (Note 2):
Class Z.................................................. (231,307,109) (1,004,479,968)
Class A.................................................. (68,208,438) (215,301,758)
Class B.................................................. 6,495,211 22,523,646
Class C.................................................. (89,595,430) (148,981,707)
----------------------------------------
Net decrease in net assets.............................. (887,632,194) (932,695,553)
Net assets:
Beginning of period........................................ 7,849,908,014 8,782,603,567
----------------------------------------
End of period.............................................. $6,962,275,820 $ 7,849,908,014
========================================
Undistributed net investment income/(Distributions in excess
of net investment income) included in net assets:
End of period.............................................. $ (60,531,879) $ 13,620,505
========================================
</TABLE>
See Notes to Financial Statements.
26
<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. 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 information is
available to the Fund. Interest income and estimated expenses are accrued daily.
Dividend income and distributions to shareholders are recorded on the
ex-dividend date.
Realized and unrealized gains and losses and net investment income, other than
class specific expenses, are allocated daily to each class of shares based upon
the relative proportion of net assets of each class.
27
<PAGE>
MUTUAL SHARES FUND
Notes to Financial Statements (unaudited) (continued)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONT.)
c. SECURITY TRANSACTIONS, INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS (CONT.)
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.
d. 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.
e. 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.
f. 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.
28
<PAGE>
MUTUAL SHARES FUND
Notes to Financial Statements (unaudited) (continued)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONT.)
g. 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 price.
h. ACCOUNTING ESTIMATES:
The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of the
financial statements and the amounts of income and expense during the reporting
period. Actual results could differ from those estimates.
2. CAPITAL STOCK
The Fund offers four classes of shares: Class Z, Class A, Class B and Class C
shares. Effective January 1, 1999, Class I and Class II shares were renamed
Class A and Class C, respectively, and a fourth class of shares, Class B was
established. The shares differ by their initial sales load, distribution fees,
voting rights on matters affecting a single class and the exchange privilege of
each class.
At June 30, 2000, 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, 2000 DECEMBER 31, 1999
-------------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
------------------------------------------------------------
<S> <C> <C> <C> <C>
CLASS Z SHARES:
Shares sold........................................... 4,797,196 $ 97,008,555 10,144,534 $ 212,511,082
Shares issued on reinvestment of distributions........ 17,385,427 334,143,990 22,397,081 454,213,355
Shares redeemed....................................... (33,132,499) (662,459,654) (81,120,944) (1,671,204,405)
-------------------------------------------------------------------
Net decrease.......................................... (10,949,876) $(231,307,109) (48,579,329) $(1,004,479,968)
===================================================================
</TABLE>
<TABLE>
SIX MONTHS ENDED YEAR ENDED
JUNE 30, 2000 DECEMBER 31, 1999
-------------------------------------------------------------------
<CAPTION>
SHARES AMOUNT SHARES AMOUNT
-------------------------------------------------------------------
<S> <C> <C> <C> <C>
CLASS A SHARES:
Shares sold........................................... 7,101,911 $ 142,369,558 14,951,408 $ 313,756,603
Shares issued on reinvestment of distributions........ 4,629,700 88,685,921 5,708,854 115,472,688
Shares redeemed....................................... (14,951,013) (299,263,917) (31,077,434) (644,531,049)
-------------------------------------------------------------------
Net decrease.......................................... (3,219,402) $ (68,208,438) (10,417,172) $ (215,301,758)
===================================================================
</TABLE>
29
<PAGE>
MUTUAL SHARES FUND
Notes to Financial Statements (unaudited) (continued)
2. CAPITAL STOCK (CONT.)
<TABLE>
SIX MONTHS ENDED YEAR ENDED
JUNE 30, 2000 DECEMBER 31, 1999+
-------------------------------------------------------------------
<CAPTION>
SHARES AMOUNT SHARES AMOUNT
-------------------------------------------------------------------
<S> <C> <C> <C> <C>
CLASS B SHARES:
Shares sold........................................... 350,516 $ 7,013,156 1,030,482 $ 21,813,792
Shares issued on reinvestment of distributions........ 98,332 1,866,312 76,501 1,521,346
Shares redeemed....................................... (120,273) (2,384,257) (39,161) (811,492)
-------------------------------------------------------------------
Net increase.......................................... 328,575 $ 6,495,211 1,067,822 $ 22,523,646
===================================================================
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
JUNE 30, 2000 DECEMBER 31, 1999
-------------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
------------------------------------------------------------
<S> <C> <C> <C> <C>
CLASS C SHARES:
Shares sold........................................... 2,390,218 $ 47,760,072 6,636,188 $ 138,846,953
Shares issued on reinvestment of distributions........ 2,768,828 52,663,167 3,498,453 70,419,412
Shares redeemed....................................... (9,555,559) (190,018,669) (17,436,466) (358,248,072)
-------------------------------------------------------------------
Net decrease.......................................... (4,396,513) $ (89,595,430) (7,301,825) $ (148,981,707)
===================================================================
</TABLE>
+Effective date of Class B shares was January 1, 1999.
3. TRANSACTIONS WITH AFFILIATES AND RELATED PARTIES
Certain officers of the Series Fund are also officers and/or directors of
Franklin Mutual Advisors, 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.
30
<PAGE>
MUTUAL SHARES FUND
Notes to Financial Statements (unaudited) (continued)
3. TRANSACTIONS WITH AFFILIATES AND RELATED PARTIES (CONT.)
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:
<TABLE>
<CAPTION>
ANNUALIZE
FEE RATE AVERAGE DAILY NET ASSETS
-----------------------------------------------------------------
<S> <C>
0.15% First $200 million
0.135% Over $200 million, up to and including $700 million
0.10% Over $700 million, up to and including $1.2 billion
0.075% Over $1.2 billion
</TABLE>
The Fund reimburses Distributors 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 asset 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 $175,300 and $132,285, respectively.
4. 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.
At June 30, 2000, the net unrealized appreciation based on the cost of
investments for income tax purposes of $6,071,433,442 was as follows:
<TABLE>
<S> <C>
Unrealized appreciation..................................... $1,312,159,670
Unrealized depreciation..................................... (568,112,113)
--------------
Net unrealized appreciation................................. $ 744,045,557
==============
</TABLE>
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, wash sales and foreign currency transactions.
31
<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, 2000, aggregated $2,206,516,583 and $2,785,738,112,
respectively.
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, 2000 are as follows:
<TABLE>
<CAPTION>
NUMBER OF SHARES OR ACQUISITION
PRINCIPAL AMOUNT ISSUER DATE VALUE
----------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C>
120,706 Environmental Credits LLC................................... 3/09/98 $17,079,899
3 Lancer Industries Inc., B................................... 8/11/89 12,204,615
685,950 Security Capital European Realty............................ 4/08/98 10,114,333
11,260,174 Sunbeam Corp. .............................................. 2/23/90 34,836,163
-----------
TOTAL RESTRICTED SECURITIES (COST $56,757,390) (1.07% OF NET ASSETS).............. $74,235,010
===========
</TABLE>
32
<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,
2000 were $460,648,777. For the six months ended June 30, 2000, dividend income
from "affiliated persons" was $2,850,525 and net realized gains from disposition
of "affiliated persons" were $48,605,433.
<TABLE>
<CAPTION>
NUMBER OF NUMBER OF DIVIDEND INCOME
SHARES HELD GROSS GROSS SHARES HELD VALUE 1/01/00-
NAME OF ISSUER DEC. 31, 1999 ADDITIONS REDUCTIONS JUNE 30, 2000 JUNE 30, 2000 6/30/00
-----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
CONTROLLED AFFILIATES*
Environmental Credits LLC... 305,831 -- (185,125) 120,706 $ 17,079,899 --
-------------------------------
NON CONTROLLED AFFILIATES
Alexander's Inc. ........... 383,200 -- -- 383,200 $ 28,069,400 --
Canary Wharf Group PLC...... 38,342,402 -- (5,711,147) 32,631,255 ** --
City Investing Company,
Liquidating Trust.......... 4,314,037 -- -- 4,314,037 5,527,360 --
Cytec Industries Inc. ...... 2,194,100 162,000 -- 2,356,100 58,166,218 --
DecisionOne Corp. .......... -- 430,529 -- 430,529 1,937,381 --
DecisionOne Corp., Term
Loan....................... -- 16,265,985 -- 16,265,985 13,826,087 --
Fine Host Corp. ............ 784,457 -- -- 784,457 7,766,124 --
Florida East Coast
Industries Inc. ........... 1,921,500 -- (7,800) 1,913,700 76,548,000 $ 95,878
Lancer Industries Inc., B... 3 -- -- 3 12,204,615 --
MBO Properties Inc. ........ 574,712 -- -- 574,712 287,356 --
MFN Financial Corp. ........ 573,852 -- -- 573,852 3,550,709 --
MFN Financial Corp., Series
A, 10.00%, 3/23/01......... 2,378,216 -- (670,000) 1,708,216 1,635,617 --
MFN Financial Corp., Series
B, FRN, 11.26%, 3/23/01.... 4,028,213 -- (2,000,000) 2,028,213 1,962,296 --
Seaboard Corp. ............. 78,050 -- (78,050) -- ** 19,512
Sunbeam Corp. .............. 11,260,174 -- -- 11,260,174 34,836,163 --
United Asset Management
Corp. ..................... 3,435,900 -- -- 3,435,900 80,314,162 1,374,360
Van Melle NV................ 889,481 923,046 -- 1,812,527 49,515,950 1,023,667
White Mountain Insurance
Group Inc. ................ 421,384 -- -- 421,384 67,421,440 337,108
-------------------------------
TOTAL NON CONTROLLED
AFFILIATES $443,568,878 $2,850,525
===============================
<CAPTION>
REALIZED
CAPITAL
NAME OF ISSUER GAIN
----------------------------
<S> <C>
CONTROLLED AFFILIATES*
Environmental Credits LLC... $ 4,942,460
-----------
NON CONTROLLED AFFILIATES
Alexander's Inc. ........... --
Canary Wharf Group PLC...... $32,199,406
City Investing Company,
Liquidating Trust.......... --
Cytec Industries Inc. ...... --
DecisionOne Corp. .......... --
DecisionOne Corp., Term
Loan....................... --
Fine Host Corp. ............ --
Florida East Coast
Industries Inc. ........... 167,747
Lancer Industries Inc., B... --
MBO Properties Inc. ........ --
MFN Financial Corp. ........ --
MFN Financial Corp., Series
A, 10.00%, 3/23/01......... 23,658
MFN Financial Corp., Series
B, FRN, 11.26%, 3/23/01.... 32,373
Seaboard Corp. ............. 11,239,789
Sunbeam Corp. .............. --
United Asset Management
Corp. ..................... --
Van Melle NV................ --
White Mountain Insurance
Group Inc. ................ --
-----------
TOTAL NON CONTROLLED
AFFILIATES $43,662,973
===========
</TABLE>
*Issuer in which the Fund owns 25% or more of the outstanding voting securities.
**As of June 30, 2000, no longer an affiliate.
33
<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. 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.
34
<PAGE>
MUTUAL SHARES FUND
Notes to Financial Statements (unaudited) (continued)
8. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK (CONT.)
As of June 30, 2000, the Fund had the following forward exchange contracts
outstanding:
<TABLE>
<CAPTION>
IN SETTLEMENT UNREALIZED
CONTRACTS TO BUY: EXCHANGE FOR DATE GAIN/(LOSS)
------------------ ---------------------------------------------
<C> <S> <C> <C> <C> <C> <C>
21,916,580 European Unit.......................................... U.S. $ 20,637,820 7/07/00 U.S. $ 380,332
10,503,031 Canadian Dollars....................................... 6,986,049 7/31/00 108,302
20,900,000 Swedish Krona.......................................... 2,375,864 8/21/00 16,710
------------ -----------
U.S. $ 29,999,733 505,344
============ ===========
<CAPTION>
CONTRACTS TO SELL:
------------------
<C> <S> <C> <C> <C> <C> <C>
24,750,000 European Unit.......................................... U.S. $ 26,011,913 7/07/00 U.S. $ 2,276,491
33,000,000 European Unit.......................................... 31,895,820 7/12/00 237,864
51,863,856 Hong Kong Dollars...................................... 6,655,554 7/19/00 143
94,093,309 Canadian Dollars....................................... 65,073,149 7/31/00 1,517,116
8,750,000 European Unit.......................................... 8,486,800 8/15/00 74,546
203,642,536 Swedish Krona.......................................... 23,689,005 8/21/00 376,577
107,300,000 European Unit.......................................... 108,483,260 8/24/00 5,270,817
4,893,045 European Unit.......................................... 4,718,852 9/12/00 6,898
396,216,460 Swedish Krona.......................................... 46,252,388 9/15/00 813,879
435,839,311 Swedish Krona.......................................... 50,595,543 9/18/00 602,409
83,462,085 British Pounds......................................... 131,342,415 9/25/00 4,784,615
901,561,200 Japanese Yen........................................... 8,796,876 9/27/00 135,868
30,368,889 British Pounds......................................... 47,671,851 10/17/00 1,599,101
399,650,960 Swedish Krona.......................................... 46,269,931 10/20/00 332,358
32,000,000 European Unit.......................................... 31,138,460 10/30/00 235,581
33,000,000 European Unit.......................................... 32,125,225 11/21/00 215,578
12,872,035 British Pounds......................................... 19,609,499 11/22/00 65,041
56,697,319 European Unit.......................................... 55,162,142 12/20/00 244,905
4,500,000 British Pounds......................................... 6,847,650 12/20/00 10,579
------------ -----------
U.S. $750,826,333 18,800,366
============ -----------
Unrealized gain on forward exchange contracts..................... 19,305,710
===========
</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 BUY: EXCHANGE FOR DATE GAIN/(LOSS)
------------------ ---------------------------------------------
<C> <S> <C> <C> <C> <C> <C>
62,641,518 Canadian Dollars....................................... U.S. $ 42,755,519 7/31/00 U.S. $ (443,835)
65,595,847 Swedish Krona.......................................... 7,636,397 8/21/00 (127,168)
------------ -----------
U.S. $ 50,391,916 (571,003)
============ ===========
<CAPTION>
CONTRACTS TO SELL:
------------------
<C> <S> <C> <C> <C> <C> <C>
28,007,320 European Unit.......................................... U.S. $ 26,084,618 7/07/00 U.S. $ (774,596)
126,125,631 Hong Kong Dollars...................................... 16,182,519 7/19/00 (2,508)
5,415,000 Canadian Dollars....................................... 3,645,997 7/31/00 (11,606)
20,000,000 European Unit.......................................... 19,134,800 8/15/00 (93,208)
61,137,135 British Pounds......................................... 90,775,912 8/22/00 (1,870,242)
14,603,875 European Unit.......................................... 13,984,671 9/12/00 (78,720)
33,760,894 Swiss Francs........................................... 20,719,196 9/13/00 (191,403)
275,267 British Pounds......................................... 416,781 10/17/00 (827)
39,800,000 Swedish Krona.......................................... 4,545,235 10/20/00 (29,545)
20,300,000 European Unit.......................................... 19,094,525 10/30/00 (509,489)
76,366,310 British Pounds......................................... 113,641,911 11/22/00 (2,310,090)
49,955,711 British Pounds......................................... 75,849,030 12/20/00 (51,138)
------------ -----------
U.S. $404,075,195 (5,923,372)
============ ===========
Net unrealized loss on offsetting forward exchange contracts...... (19,616)
-----------
Unrealized loss on forward exchange contracts................... (6,513,991)
-----------
Net unrealized gain on forward exchange contracts............. U.S. $12,791,719
===========
</TABLE>
36
<PAGE>
[FRANKLIN(R) TEMPLETON INVESTMENTS LOGO]
MUTUAL SHARES FUND
777 Mariners Island Blvd., P.O. Box 7777
San Mateo, CA 94403-7777
SEMIANNUAL REPORT
CHAIRMAN OF THE BOARD
Michael F. Price
OFFICERS
Peter A. Langerman
Robert L. Friedman
Jeffrey Altman
Raymond Garea
Lawrence Sondike
David J. Winters
INVESTMENT MANAGER
Franklin Mutual Advisers, LLC
51 John F. Kennedy Parkway
Short Hills, NJ 07078
DISTRIBUTOR
Franklin/Templeton Distributors, Inc.
1-800/DIAL BEN(R)
franklintempleton.com
SHAREHOLDER SERVICES
1-800/632-2301 - (Class A, B, & C)
1-800/448-FUND - (Class Z)
This report must be preceded or accompanied by the current Mutual Shares(R) 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 S00 08/00 [RECYCLE LOGO] Printed on recycled paper
