SEMI ANNUAL REPORT
June 30, 2000
MUTUAL DISCOVERY FUND
[FRANKLIN 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 DAVID J. WINTERS]
DAVID J. WINTERS
Portfolio Manager
Mutual Discovery Fund
PETER A. LANGERMAN
Chief Executive Officer
Franklin Mutual Advisers, LLC
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resource for fund literature, prices and performance, investor information and
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SHAREHOLDER LETTER
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Your Fund's Goal: Mutual Discovery Fund seeks long-term capital appreciation by
investing primarily in common and preferred stocks and bonds. The Fund may
invest 50% or more of its assets in foreign securities.
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Dear Shareholder:
We are pleased to bring you this semiannual report of Mutual Discovery Fund for
the six months ended June 30, 2000. During this period, global markets were
generally volatile, experiencing dramatic gyrations in individual securities and
a roller coaster ride in the popular averages. The U.S. Nasdaq Composite Index
was whipsawed by wild bouts of gains and losses throughout the reporting period.
After reaching a record high on March 10 with an approximate 24% year-to-date
return, the Nasdaq(R) declined 37.32% from that peak before recovering somewhat
in late May and June. On June 30, it was 2.02% lower than it had been at the
start of the reporting period.(1) The apparent catalysts for this volatility
were interest rate hikes by the Federal Reserve
1. Source: Standard & Poor's Micropal. 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). The Index is unmanaged and includes reinvested dividends. One
cannot invest directly in an index.
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.
CONTENTS
<TABLE>
<S> <C>
Shareholder Letter .......... 1
Performance Summary ......... 7
Financial Highlights &
Statement of Investments .... 9
Financial Statements ........ 23
Notes to Financial Statements 27
</TABLE>
[FUND CATEGORY PYRAMID]
<PAGE>
TOP 10 SECTORS*
6/30/00
<TABLE>
<CAPTION>
% OF TOTAL
SECTOR NET ASSETS
-------------------------------------------
<S> <C>
Media 10.4%
Insurance 5.6%
Industrial Conglomerates 4.6%
Diversified Financials 4.4%
Commercial Services &
Supplies 4.2%
Diversified Telecommunication
Services 4.2%
Food Products 3.8%
Multi-Utilities 3.2%
Road & Rail 3.2%
Construction & Engineering 3.0%
</TABLE>
*Based on equity securities.
Board, earnings disappointments from several major telecommunications companies,
the introduction of legislative proposals adverse to the interests of drug
companies and a shakeout within various Internet-related sectors. Overlaying
these factors were clear signs of accelerating inflation as labor markets
tightened, energy prices soared, and companies began to demonstrate an ability
to raise prices.
Within this environment, Mutual Discovery Fund's Class Z shares produced a 6.94%
six-month cumulative total return as shown in the Performance Summary on page 7.
The Standard & Poor's 500(R) (S&P 500(R)) Composite Index returned -0.42% during
the same period, and the Russell 2000(R) Index finished the period up 3.04%.(2)
The Fund's strong performance relative to its benchmarks was due largely to our
disciplined value approach to investing, which combines undervalued stocks,
bankruptcies and deal arbitrage.
During the six months under review, the Fund was invested primarily in Europe
and the United States. Investors in both regions seemed to be mesmerized by a
narrow segment of securities in the telecom, media and technology sectors,
particularly those involved with the Internet. We sold shares of several
companies we had purchased earlier as undervalued asset plays that rose to fair
value as the market reappraised their
2. Source: Standard & Poor's Micropal. 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 a 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 Russell 2000 Index measures the performance of the 2,000 smallest companies
in the Russell 3000 Index, which contains the 3,000 largest companies
incorporated in the U.S. and its territories.
Indexes are unmanaged and include reinvested dividends. One cannot invest
directly in an index.
2
<PAGE>
businesses. Once again, we found that buying out-of-favor shares of high-quality
companies usually proves to be profitable. On June 30, the Fund's portfolio
contained many special situations that, in our opinion, should provide excellent
long-term returns for our shareholders. Included in this category are:
- Washington Post, a diversified media company trading at a significant
discount to what we believe to be its intrinsic value. Management has a major
personal investment, an excellent long-term record, high integrity and a
commitment to developing "new media" platforms. Believing that Washington
Post had first-class assets available at a very cheap price, we purchased its
stock when its price was substantially below a recent tender offer to
repurchase shares.
- Cheung Kong Holdings, a Hong Kong company with operations in real estate,
cellular telecommunications and other businesses was removed from a major
index during the reporting period, prompting indiscriminant investor selling.
In our opinion, the company is well positioned to capitalize on the growth of
global trade and cellular phone use. Cheung Kong offers compelling value due
to management's ability to create value over time and the large discount to
asset value of the shares.
- Irish Life & Permanent is the largest provider of insurance, pensions and
mortgages in Ireland. Although this market was expanding rapidly, Irish
Life's stock was trading at a discount to what we calculated to be the
company's takeover value in the first half of 2000. Because it has excess
capital and new management has been restructuring the business to improve
profitability, we believe there are many ways to win with Irish Life.
TOP 10 HOLDINGS
6/30/00
<TABLE>
<CAPTION>
COMPANY, % OF TOTAL
SECTOR, COUNTRY NET ASSETS
---------------------------------------------
<S> <C>
Lagardere SCA, 3.5%
Media, France
Investor AB, 2.5%
Industrial Conglomerates,
Sweden
Railtrack Group PLC, 2.3%
Road & Rail, United Kingdom
Suez Lyonnaise des Eaux SA, 2.2%
Multi-Utilities, France
Aventis SA, 2.2%
Pharmaceuticals, France
Williams PLC, 2.1%
Commercial Services &
Supplies, United Kingdom
Canary Wharf Group PLC, 1.6%
Real Estate, United Kingdom
Modern Times Group AB, 1.5%
Media, Sweden
Invik & Co. AB, 1.3%
Diversified Financials, Sweden
Delphi Automotive 1.2%
Systems Corp.,
Auto Components,
United States
</TABLE>
3
<PAGE>
GEOGRAPHIC DISTRIBUTION
Based on Total Net Assets
6/30/00
[BAR GRAPHIC]
<TABLE>
<S> <C>
United States 27.7%
France 13.1%
United Kingdom 11.2%
Sweden 7.0%
Canada 3.6%
Switzerland 2.4%
Japan 1.8%
Irish Republic 1.2%
Spain 1.2%
Netherlands 1.0%
Other Countries 3.5%
Fixed-Income Securities 4.7%
Government Agencies & Other Net Assets 21.6%
</TABLE>
Although we believe the wave of recent speculative activity has diminished
somewhat, many securities remain adored for their promise in spite of price. For
them, momentum is the mantra. Conversely, we continue to find other securities
which investors inexplicably choose to ignore despite low valuations and
favorable prospects. The current market environment has become increasingly
two-tiered as a select group of companies' shares achieve over-the-top success
while the majority of publicly traded equities languish. This environment should
provide Mutual Discovery Fund with ample opportunities in the remainder of 2000.
Deal activity is accelerating as corporate buyers step in to purchase 100% of
attractively priced companies. The discrepancy between depressed public markets
and higher private market valuations has prompted several companies to put
themselves up for sale. For example, Bush Boake Allen, a portfolio holding in
the flavoring and fragrance business, recently hired CS First Boston to explore
a sale or merger.
We expect to continue to think of ourselves as owners of the companies whose
shares Mutual Discovery Fund purchases, examining our investments and, when
appropriate, making suggestions to management on how to unlock value. For
example, one long-time investment of ours, MediaOne, recently merged with AT&T.
We originally purchased the predecessor company, U.S. West, and were
instrumental in prodding for the eventual spin-off of the media assets which
became MediaOne.
4
<PAGE>
Looking forward, we are optimistic about the prospects for Mutual Discovery
Fund. As the Federal Reserve has raised interest rates, the economy has begun to
slow down, more companies are defaulting on their financial obligations, and the
supply of distressed bonds and bank debt has increased. In the near future, this
could be a fertile area for Mutual Discovery Fund to mine for discrepancies
between price and value. Bankruptcy, when correctly analyzed, is an excellent
area to explore for good risk/reward opportunities.
With our strong fundamental analytical work, we are prepared to identify
compelling undervalued situations in distressed bonds and bank debt, as well as
in undervalued equities, and are confident we are well positioned to capitalize
on future possibilities for the benefit of the Fund's shareholders.
Thank you for your loyalty and support. We welcome your comments and
suggestions, either through regular mail or by email at [email protected].
Sincerely,
/s/ David J. Winters
David J. Winters
Portfolio Manager
Mutual Discovery Fund
5
<PAGE>
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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.
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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.
CLASS Z
<TABLE>
<S> <C> <C>
Six-Month Total Return 6.94%
Net Asset Value (NAV) $21.07 (6/30/00) $21.10 (12/31/99)
Change in NAV -$0.03
Dividend Income $0.3248
Distributions (1/1/00 - 6/30/00) Short-Term Capital Gain $0.3603
Long-Term Capital Gain $0.8078
---------------------------------
Total $1.4929
</TABLE>
CLASS A
<TABLE>
<S> <C> <C>
Six-Month Total Return 6.78%
Net Asset Value (NAV) $20.95 (6/30/00) $21.00 (12/31/99)
Change in NAV -$0.05
Dividend Income $0.3049
Distributions (1/1/00 - 6/30/00) Short-Term Capital Gain $0.3603
Long-Term Capital Gain $0.8078
---------------------------------
Total $1.4730
</TABLE>
CLASS B
<TABLE>
<S> <C> <C>
Six-Month Total Return 6.43%
Net Asset Value (NAV) $20.79 (6/30/00) $20.90 (12/31/99)
Change in NAV -$0.11
Dividend Income $0.2844
Distributions (1/1/00 - 6/30/00) Short-Term Capital Gain $0.3603
Long-Term Capital Gain $0.8078
---------------------------------
Total $1.4525
</TABLE>
Class C
<TABLE>
<S> <C> <C>
Six-Month Total Return 6.49%
Net Asset Value (NAV) $20.87 (6/30/00) $20.95 (12/31/99)
Change in NAV -$0.08
Dividend Income $0.2692
Distributions (1/1/00 - 6/30/00) Short-Term Capital Gain $0.3603
Long-Term Capital Gain $0.8078
---------------------------------
Total $1.4373
</TABLE>
Past performance does not guarantee future results.
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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.
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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.
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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>
INCEPTION
CLASS Z 1-YEAR 5-YEAR (12/31/92)
-----------------------------------------------------------------------------
<S> <C> <C> <C>
Cumulative Total Return(1) 17.78% 127.46% 269.94%
Average Annual Total Return(2) 17.78% 17.86% 19.07%
Value of $10,000 Investment(3) $11,778 $22,746 $36,994
</TABLE>
<TABLE>
<CAPTION>
INCEPTION
CLASS A 1-YEAR 3-YEAR (11/1/96)
-----------------------------------------------------------------------------
<S> <C> <C> <C>
Cumulative Total Return(1) 17.36% 42.00% 69.20%
Average Annual Total Return(2) 10.59% 10.20% 14.01%
Value of $10,000 Investment(3) $11,059 $13,384 $16,161
</TABLE>
<TABLE>
<CAPTION>
INCEPTION
CLASS B 1-YEAR (1/1/99)
-----------------------------------------------------------------------------
<S> <C> <C>
Cumulative Total Return(1) 16.53% 33.56%
Average Annual Total Return(2) 12.53% 18.94%
Value of $10,000 Investment(3) $11,253 $12,956
</TABLE>
<TABLE>
<CAPTION>
INCEPTION
CLASS C 1-YEAR 3-YEAR (11/1/96)
-----------------------------------------------------------------------------
<S> <C> <C> <C>
Cumulative Total Return(1) 16.56% 39.39% 65.48%
Average Annual Total Return(2) 14.38% 11.33% 14.44%
Value of $10,000 Investment(3) $11,438 $13,797 $16,381
</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 DISCOVERY 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........ $21.10 $17.27 $18.89 $17.18 $15.16 $12.55
------------------------------------------------------------------------------
Income from investment operations:
Net investment income...................... .18 .25 .38 .39 .34 .17
Net realized and unrealized gains
(losses)................................. 1.29 4.32 (.71) 3.49 3.39 3.40
------------------------------------------------------------------------------
Total from investment operations............ 1.47 4.57 (.33) 3.88 3.73 3.57
------------------------------------------------------------------------------
Less distributions from:
Net investment income...................... (.33) (.42) (.48) (.81) (.31) (.14)
Net realized gains......................... (1.17) (.32) (.81) (1.36) (1.40) (.82)
------------------------------------------------------------------------------
Total distributions......................... (1.50) (.74) (1.29) (2.17) (1.71) (.96)
------------------------------------------------------------------------------
Net asset value, end of period.............. $21.07 $21.10 $17.27 $18.89 $17.18 $15.16
==============================================================================
Total Return*............................... 6.94% 26.80% (1.90)% 22.94% 24.93% 28.63%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's)........... $2,015,420 $2,038,298 $2,514,144 $3,879,550 $2,975,596 $1,370,221
Ratios to average net assets:
Expenses(a)................................ 1.03%** 1.05% 1.01% .98% .96% 1.01%
Expenses, excluding waiver and payments by
affiliate(a)............................. 1.08%** 1.11% 1.04% 1.00% .99% 1.01%
Net investment income...................... 1.64%** 1.33% 1.81% 1.82% 2.24% 2.00%
Portfolio turnover rate..................... 40.04% 87.67% 83.57% 58.15% 80.18% 73.23%
(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................................... 1.01%** 1.03% 1.00% .98% .96% .99%
Expenses, excluding waiver and payments by
affiliate................................. 1.06%** 1.09% 1.03% 1.00% .99% .99%
</TABLE>
*Total return is not annualized.
**Annualized.
+Based on average weighted shares outstanding effective year ended December 31,
1999.
9
<PAGE>
MUTUAL DISCOVERY 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.................. $21.00 $17.19 $18.83 $17.15 $17.66
------------------------------------------------------------
Income from investment operations:
Net investment income................................ .14 .18 .32 .27 .11
Net realized and unrealized gains (losses)........... 1.28 4.30 (.74) 3.54 .74
------------------------------------------------------------
Total from investment operations...................... 1.42 4.48 (.42) 3.81 .85
------------------------------------------------------------
Less distributions from:
Net investment income................................ (.30) (.35) (.41) (.77) (.29)
Net realized gains................................... (1.17) (.32) (.81) (1.36) (1.07)
------------------------------------------------------------
Total distributions................................... (1.47) (.67) (1.22) (2.13) (1.36)
------------------------------------------------------------
Net asset value, end of period........................ $20.95 $21.00 $17.19 $18.83 $17.15
============================================================
Total Return*......................................... 6.78% 26.38% (2.37)% 22.54% 4.85%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's)..................... $861,745 $844,462 $859,848 $693,952 $29,903
Ratios to average net assets:
Expenses(a).......................................... 1.38%** 1.40% 1.36% 1.33% 1.38%**
Expenses, excluding waiver and payments by
affiliate(a)....................................... 1.43%** 1.46% 1.39% 1.35% 1.51%**
Net investment income................................ 1.29%** .98% 1.46% 1.39% .74%**
Portfolio turnover rate............................... 40.04% 87.67% 83.57% 58.15% 80.18%
(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............................................. 1.36%** 1.38% 1.35% 1.33% 1.38%**
Expenses, excluding waiver and payments by
affiliate............................................ 1.41%** 1.44% 1.38% 1.35% 1.51%**
</TABLE>
*Total return does not reflect sales commissions and is not annualized.
**Annualized.
+For the period November 1, 1996 (effective date) to December 31, 1996.
++Based on average weighted shares outstanding.
10
<PAGE>
MUTUAL DISCOVERY 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........................ $20.90 $17.19
--------------------------------------
Income from investment operations:
Net investment income...................................... .08 .01
Net realized and unrealized gains.......................... 1.26 4.33
--------------------------------------
Total from investment operations............................ 1.34 4.34
--------------------------------------
Less distributions from:
Net investment income...................................... (.28) (.31)
Net realized gains......................................... (1.17) (.32)
--------------------------------------
Total distributions......................................... (1.45) (.63)
--------------------------------------
Net asset value, end of period.............................. $20.79 $20.90
======================================
Total Return*............................................... 6.43% 25.55%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's)........................... $14,303 $8,090
Ratios to average net assets:
Expenses(a)................................................ 2.03%** 2.05%
Expenses, excluding waiver and payments by affiliate(a).... 2.08%** 2.11%
Net investment income...................................... .78%** .08%
Portfolio turnover rate..................................... 40.04% 87.67%
(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................................................... 2.01%** 2.03%
Expenses, excluding waiver and payments by affiliate....... 2.06%** 2.09%
</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 DISCOVERY 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................... $20.95 $17.15 $18.79 $17.17 $17.66
------------------------------------------------------------
Income from investment operations:
Net investment income................................. .07 .06 .23 .15 .09
Net realized and unrealized gains (losses)............ 1.29 4.28 (.75) 3.52 .76
------------------------------------------------------------
Total from investment operations....................... 1.36 4.34 (.52) 3.67 .85
------------------------------------------------------------
Less distributions from:
Net investment income................................. (.27) (.22) (.31) (.69) (.27)
Net realized gains.................................... (1.17) (.32) (.81) (1.36) (1.07)
------------------------------------------------------------
Total distributions.................................... (1.44) (.54) (1.12) (2.05) (1.34)
------------------------------------------------------------
Net asset value, end of period......................... $20.87 $20.95 $17.15 $18.79 $17.17
============================================================
Total Return*.......................................... 6.49% 25.57% (2.97)% 21.70% 4.90%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's)...................... $545,532 $541,919 $563,761 $402,625 $18,038
Ratios to average net assets:
Expenses(a)........................................... 2.03%** 2.04% 2.01% 1.98% 2.00%**
Expenses, excluding waiver and payments by
affiliate(a)........................................ 2.08%** 2.10% 2.03% 2.00% 2.13%**
Net investment income................................. .64%** .35% .81% .74% .13%**
Portfolio turnover rate................................ 40.04% 87.67% 83.57% 58.15% 80.18%
(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.............................................. 2.01%** 2.02% 2.00% 1.98% 2.00%**
Expenses, excluding waiver and payments by
affiliate............................................ 2.06%** 2.08% 2.02% 2.00% 2.13%**
</TABLE>
*Total return does not reflect sales commissions or the contingent deferred
sales charge and is not annualized.
**Annualized.
+For the period November 1, 1996 (effective date) to December 31, 1996.
++Based on average weighted shares outstanding.
See Notes to Financial Statements.
12
<PAGE>
MUTUAL DISCOVERY FUND
STATEMENT OF INVESTMENTS, JUNE 30, 2000 (UNAUDITED)
<TABLE>
<CAPTION>
COUNTRY SHARES VALUE
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS 74.1%
AEROSPACE & DEFENSE
B.F. Goodrich Co. .......................................... United States 44,900 $ 1,529,406
--------------
AUTO COMPONENTS 2.3%
Delphi Automotive Systems Corp. ............................ United States 2,846,007 41,444,977
*Lear Corp. ................................................ United States 706,500 14,130,000
TRW Inc. ................................................... United States 519,300 22,524,638
--------------
78,099,615
--------------
AUTOMOBILES .2%
General Motors Corp. ....................................... United States 134,100 7,786,181
--------------
BANKS 2.3%
Bank of Ireland............................................. Irish Republic 1,704,626 10,784,222
BNP Paribas................................................. France 298,765 28,867,290
Chase Manhattan Corp. ...................................... United States 295,500 13,611,469
Dexia....................................................... Belgium 108,580 16,080,298
Greenpoint Financial Corp. ................................. United States 450,796 8,452,425
--------------
77,795,704
--------------
BEVERAGES 1.9%
Brown-Forman Corp., A....................................... United States 20,300 1,070,825
Brown-Forman Corp., B....................................... United States 215,900 11,604,625
*Buenos Aires Embotelladora SA, B, ADR...................... Argentina 1,938,756 193,914
Coca-Cola West Japan Co. Ltd. .............................. Japan 637,600 20,187,704
Diageo PLC.................................................. United Kingdom 1,635,870 14,710,126
*Diageo PLC, ADR............................................ United Kingdom 39,490 1,404,363
Fraser and Neave Ltd. ...................................... Singapore 777,400 2,765,188
Mikuni Coca-Cola Bottling Co. .............................. Japan 817,700 11,893,959
--------------
63,830,704
--------------
CHEMICALS 1.6%
Bayer AG, Br. .............................................. Germany 365,320 14,042,149
ChemFirst Inc. ............................................. United States 485,200 11,705,450
Crompton Corp. ............................................. United States 844,342 10,343,190
*Henkel KGAA................................................ Germany 27,400 1,575,860
Union Carbide Corp. ........................................ United States 352,700 17,458,650
--------------
55,125,299
--------------
COMMERCIAL SERVICES & SUPPLIES 4.2%
Dun & Bradstreet Corp. ..................................... United States 796,700 22,805,538
+*MDC Corp. Inc., A......................................... Canada 1,619,585 14,646,986
Rentokil Initial PLC........................................ United Kingdom 5,287,100 12,045,787
*Republic Services Inc. .................................... United States 1,413,100 22,609,600
Williams PLC................................................ United Kingdom 12,335,768 71,803,180
--------------
143,911,091
--------------
</TABLE>
13
<PAGE>
MUTUAL DISCOVERY FUND
STATEMENT OF INVESTMENTS, JUNE 30, 2000 (UNAUDITED) (CONT.)
<TABLE>
<CAPTION>
COUNTRY SHARES VALUE
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS (CONT.)
COMMUNICATIONS EQUIPMENT .1%
*General Motors Corp., H.................................... United States 47,073 $ 4,130,656
--------------
COMPUTERS & PERIPHERALS .3%
Compaq Computer Corp. ...................................... United States 387,500 9,905,469
--------------
CONSTRUCTION & ENGINEERING 3.0%
Acciona SA.................................................. Spain 207,700 7,943,743
Fomento de Construcciones y Contratas SA.................... Spain 683,505 12,972,469
Groupe GTM.................................................. France 255,681 24,018,191
*Sulzer AG.................................................. Switzerland 53,552 35,732,071
Vinci SA.................................................... France 548,692 22,878,822
--------------
103,545,296
--------------
CONSTRUCTION MATERIALS .1%
Southdown Inc. ............................................. United States 50,500 2,916,375
--------------
CONTAINERS & PACKAGING .7%
*Pactiv Corp. .............................................. United States 1,615,240 12,720,015
*Smurfit-Stone Container Corp. ............................. United States 1,016,900 13,092,588
--------------
25,812,603
--------------
DIVERSIFIED FINANCIALS 4.4%
Bear Stearns Cos. Inc. ..................................... United States 387,225 16,118,241
*Brierley Investments Ltd. ................................. New Zealand 65,746,152 10,266,895
CIT Group Inc., A........................................... United States 183,700 2,985,125
Investors Group Inc. ....................................... Canada 808,500 11,104,120
+Invik & Co. AB, B.......................................... Sweden 430,477 44,858,737
Kansas City Southern Industries Inc. ....................... United States 131,200 11,635,800
Lehman Brothers Holdings Inc. .............................. United States 35,800 3,385,338
*MFN Financial Corp. ....................................... United States 292,338 1,808,841
Pargesa Holdings SA, Br. ................................... Switzerland 13,000 29,739,868
Power Corp. of Canada....................................... Canada 259,800 5,330,310
Power Financial Corp. ...................................... Canada 176,900 3,516,032
Rembrandt Controlling Investments Ltd. ..................... South Africa 1,374,300 9,445,779
--------------
150,195,086
--------------
DIVERSIFIED TELECOMMUNICATION SERVICES 4.2%
AT&T Corp. ................................................. United States 23,500 743,188
AT&T Corp., W/I............................................. United States 798,950 26,365,350
British Telecommunications PLC.............................. United Kingdom 3,068,838 39,628,182
British Telecommunications PLC, ADR......................... United Kingdom 1,700 224,825
Centurytel Inc. ............................................ United States 172,600 4,962,250
*Citizens Communications Co., B............................. United States 444,701 7,671,092
SBC Communications Inc. .................................... United States 420,300 18,177,975
Sprint Corp Fon Group....................................... United States 15,000 765,000
</TABLE>
14
<PAGE>
MUTUAL DISCOVERY FUND
STATEMENT OF INVESTMENTS, JUNE 30, 2000 (UNAUDITED) (CONT.)
<TABLE>
<CAPTION>
COUNTRY SHARES VALUE
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS (CONT.)
DIVERSIFIED TELECOMMUNICATION SERVICES (CONT.)
Telephone & Data Systems Inc. .............................. United States 301,550 $ 30,230,388
Telus Corp., A.............................................. Canada 561,200 14,941,851
--------------
143,710,101
--------------
ELECTRIC UTILITIES .5%
E.On AG..................................................... Germany 336,800 16,303,439
--------------
ELECTRICAL EQUIPMENT 1.1%
(R)+*MWCR LLC............................................... Italy 11,141,868 2,520,848
*Thermo Electron Corp. ..................................... United States 1,736,100 36,566,606
--------------
39,087,454
--------------
FOOD & DRUG RETAILING .1%
*Brunos Inc. ............................................... United States 40,575 3,854,625
*Homeland Holdings Corp. ................................... United States 29,706 77,978
--------------
3,932,603
--------------
FOOD PRODUCTS 3.8%
Associated British Foods PLC................................ United Kingdom 1,729,012 11,935,593
Bestfoods................................................... United States 42,900 2,970,825
*Bush Boake Allen Inc. ..................................... United States 573,500 25,090,625
Earthgrains Company......................................... United States 1,725,000 33,529,688
Farmer Brothers Co. ........................................ United States 81,202 14,210,350
Flowers Industries Inc. .................................... United States 996,240 19,862,535
Kikkoman Corp. ............................................. Japan 923,800 7,133,355
Koninklijke Numico NV....................................... Netherlands 243,700 11,609,879
Nabisco Holdings Corp., A................................... United States 178,200 9,355,500
--------------
135,698,350
--------------
HEALTH CARE PROVIDERS & SERVICES
(R)+*Cape Ann Investors LLC................................. United States 1,670,390 13,029
--------------
HOTELS RESTAURANTS & LEISURE .5%
*Fine Host Corp. ........................................... United States 212,022 2,099,018
*Thistle Hotels PLC......................................... United Kingdom 2,983,135 5,780,482
Thomson Travel Group PLC.................................... United Kingdom 3,596,720 9,582,977
--------------
17,462,477
--------------
HOUSEHOLD DURABLES .9%
Maytag Corp. ............................................... United States 724,800 26,727,000
Sanyo Electric Co. Ltd. .................................... Japan 380,000 3,426,303
--------------
30,153,303
--------------
INDUSTRIAL CONGLOMERATES 4.6%
Compagnie Generale D'Industrie et de Participation.......... France 744,006 31,807,319
Corporacion Financiera Alba SA.............................. Spain 824,723 21,818,905
</TABLE>
15
<PAGE>
MUTUAL DISCOVERY FUND
STATEMENT OF INVESTMENTS, JUNE 30, 2000 (UNAUDITED) (CONT.)
<TABLE>
<CAPTION>
COUNTRY SHARES VALUE
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS (CONT.)
INDUSTRIAL CONGLOMERATES (CONT.)
Investor AB, A.............................................. Sweden 2,034,300 $ 27,600,239
Investor AB, B.............................................. Sweden 4,252,993 58,429,558
Trelleborg AB, B............................................ Sweden 2,450,050 17,179,122
U.S. Industries Inc. ....................................... United States 257,200 3,118,550
--------------
159,953,693
--------------
INSURANCE 5.6%
*Alleghany Corp. ........................................... United States 57,778 9,706,704
Allmerica Financial Corp. .................................. United States 260,400 13,638,450
Ambac Financial Group Inc. ................................. United States 243,400 13,341,363
*Berkshire-Hathaway Inc., A................................. United States 402 21,627,600
*Berkshire-Hathaway Inc., B................................. United States 800 1,408,000
Hartford Financial Services Group Inc. ..................... United States 213,800 11,959,438
*Industrial Alliance Life Insurance Co. .................... Canada 440,690 7,286,836
Irish Life & Permanent PLC.................................. Irish Republic 3,679,340 31,052,455
Jefferson-Pilot Corp. ...................................... United States 219,600 12,393,675
MBIA Inc. .................................................. United States 362,700 17,477,606
*MetLife Inc. .............................................. United States 464,200 9,777,212
Old Republic International Corp. ........................... United States 772,100 12,739,650
W. R. Berkley Corp. ........................................ United States 44,624 836,700
XL Capital Ltd., A.......................................... Bermuda 533,800 28,891,921
--------------
192,137,610
--------------
IT CONSULTING & SERVICES .2%
*DecisionOne Corp. ......................................... United States 76,661 344,975
*Unisys Corp. .............................................. United States 342,750 4,991,297
--------------
5,336,272
--------------
LEISURE EQUIPMENT & PRODUCTS .3%
(R)+*Hancock LLC............................................ United States 8,758,216 8,758,216
--------------
MACHINERY 1.7%
Eaton Corp. ................................................ United States 102,600 6,874,200
Invensys PLC................................................ United Kingdom 5,761,308 21,586,262
NACCO Industries Inc., A.................................... United States 345,300 12,128,663
United Dominion Industries Ltd. ............................ Canada 1,031,200 17,530,400
--------------
58,119,525
--------------
MARINE .5%
Peninsular & Oriental Steam Navigation Co. ................. United Kingdom 1,823,645 15,542,821
--------------
MEDIA 10.4%
*Fox Entertainment Group Inc., A............................ United States 264,100 8,022,038
Kinnevik AB, B.............................................. Sweden 1,486,050 38,121,223
Knight-Ridder Inc. ......................................... United States 104,200 5,542,138
Lagardere SCA............................................... France 1,561,485 119,741,191
</TABLE>
16
<PAGE>
MUTUAL DISCOVERY FUND
STATEMENT OF INVESTMENTS, JUNE 30, 2000 (UNAUDITED) (CONT.)
<TABLE>
<CAPTION>
COUNTRY SHARES VALUE
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS (CONT.)
MEDIA (CONT.)
*Modern Times Group AB, A................................... Sweden 94,500 $ 4,309,657
*Modern Times Group AB, B................................... Sweden 1,012,201 48,469,322
NV Holdingsmig de Telegraaf................................. Netherlands 1,026,235 23,608,796
Scripps Co., A.............................................. United States 346,800 17,079,900
Torstar Corp., B............................................ Canada 1,207,100 13,849,430
*Trinity Mirror PLC......................................... United Kingdom 1,941,140 17,337,642
True North Communications Inc. ............................. United States 583,700 25,682,800
TVA Group Inc., B........................................... Canada 706,435 11,037,302
Washington Post Co., B...................................... United States 52,903 25,287,632
--------------
358,089,071
--------------
MULTILINE RETAIL 1.1%
*Federated Department Stores Inc. .......................... United States 420,900 14,205,375
May Department Stores Co. .................................. United States 403,800 9,691,200
*Saks Inc. ................................................. United States 1,151,600 12,091,800
Sears, Roebuck & Co. ....................................... United States 69,900 2,280,488
--------------
38,268,863
--------------
MULTI-UTILITIES 3.2%
Suez Lyonnaise des Eaux SA.................................. France 438,215 77,079,533
*Suez Lyonnaise des Eaux SA, strip.......................... France 269,320 2,582
Vivendi..................................................... France 364,774 32,325,597
--------------
109,407,712
--------------
MUTUAL FUNDS & UNIT TRUSTS
*Value Catalyst Fund........................................ Cayman Islands 7,000 700,000
--------------
OFFICE ELECTRONICS .4%
Xerox Corp. ................................................ United States 708,900 14,709,673
--------------
OIL & GAS 2.0%
*Abraxas Petroleum Corp. ................................... United States 165,142 247,713
*Abraxas Petroleum Corp., rts., 11/01/04.................... United States 165,142 82,571
Burlington Resources Inc. .................................. United States 398,100 15,227,325
*Gulf Canada Resources Ltd. ................................ Canada 2,354,599 11,331,508
*Gulf Canada Resources Ltd., fgn. .......................... Canada 464,600 2,163,555
Total Fina SA, B............................................ France 149,571 23,025,481
Total Fina SA, B, ADR....................................... France 208,648 16,026,775
--------------
68,104,928
--------------
PAPER & FOREST PRODUCTS 1.9%
Abitibi-Consolidated Inc. .................................. Canada 158,304 1,469,042
Boise Cascade Corp. ........................................ United States 388,000 10,039,500
Georgia-Pacific Timber Co. ................................. United States 498,600 10,782,225
International Paper Co. .................................... United States 452,690 13,495,821
</TABLE>
17
<PAGE>
MUTUAL DISCOVERY FUND
STATEMENT OF INVESTMENTS, JUNE 30, 2000 (UNAUDITED) (CONT.)
<TABLE>
<CAPTION>
COUNTRY SHARES VALUE
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS (CONT.)
PAPER & FOREST PRODUCTS (CONT.)
Mead Corp. ................................................. United States 788,200 $ 19,902,050
*Tembec Inc. ............................................... Canada 837,500 8,167,561
--------------
63,856,199
--------------
PHARMACEUTICALS 2.9%
Aventis SA.................................................. France 1,011,721 74,140,246
Banyu Pharmaceutical Co. Ltd. .............................. Japan 85,200 2,089,637
Bristol-Myers Squibb Co. ................................... United States 104,300 6,075,475
Ono Pharmaceutical Co. Ltd. ................................ Japan 399,900 17,197,155
--------------
99,502,513
--------------
REAL ESTATE 2.4%
*Canary Wharf Group PLC..................................... United Kingdom 9,881,883 55,126,238
Cheung Kong Holdings Ltd. .................................. Hong Kong 1,651,700 18,275,002
*MBO Properties Inc. ....................................... United States 273,144 136,572
(R)*Security Capital European Realty........................ United States 357,000 5,263,965
*Ventas Inc. ............................................... United States 746,200 2,378,513
--------------
81,180,290
--------------
ROAD & RAIL 3.2%
Burlington Northern Santa Fe Corp. ......................... United States 430,300 9,870,006
Florida East Coast Industries Inc. ......................... United States 507,700 20,308,000
Railtrack Group PLC......................................... United Kingdom 5,078,592 78,957,779
--------------
109,135,785
--------------
SOFTWARE .1%
*Network Associates Inc. ................................... United States 228,945 4,664,754
--------------
TOBACCO 1.4%
*British American Tobacco PLC............................... United Kingdom 472,500 3,165,164
Compagnie Financiere Richemont AG, A, Br. .................. Switzerland 5,974 16,146,442
Gallaher Group PLC.......................................... United Kingdom 4,296,191 23,494,845
Gallaher Group PLC, ADR..................................... United Kingdom 128,400 2,752,575
Philip Morris Cos. Inc. .................................... United States 143,500 3,811,719
--------------
49,370,745
--------------
TOTAL COMMON STOCKS (COST $2,122,352,767)................... 2,547,782,911
--------------
<CAPTION>
PRINCIPAL
AMOUNT**
------------
<S> <C> <C> <C>
CORPORATE BONDS & NOTES 2.1%
Abraxas Petroleum Corp., Series A, 11.50%, 11/01/04......... United States $ 1,939,000 1,638,455
DecisionOne Corp., Term Loan................................ United States 2,896,350 2,461,897
Eurotunnel Finance Ltd., Equity Note, 12/31/03.............. United Kingdom 3,928,550GBP 2,259,940
</TABLE>
18
<PAGE>
MUTUAL DISCOVERY FUND
STATEMENT OF INVESTMENTS, JUNE 30, 2000 (UNAUDITED) (CONT.)
<TABLE>
<CAPTION>
PRINCIPAL
COUNTRY AMOUNT** VALUE
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CORPORATE BONDS & NOTES (CONT.)
Eurotunnel PLC:
12/31/25, Tier 3.......................................... United Kingdom 4,850,057 GBP $ 4,258,494
12/31/50, Resettable Advance R5........................... United Kingdom 4,001,837 GBP 2,241,518
Stabilization Advance S8, Tier 1.......................... United Kingdom 2,984,965 GBP 1,174,881
Stabilization Advance S8, Tier 2.......................... United Kingdom 2,310,056 GBP 804,325
Eurotunnel SA:
12/31/18, Tier 2 (Libor).................................. France 3,559,735 EUR 2,320,290
12/31/18, Tier 2 (Pibor).................................. France 2,293,539 EUR 1,494,964
12/31/25, Tier 3 (Libor).................................. France 5,035,517 EUR 2,751,279
12/31/25, Tier 3 (Pibor).................................. France 4,198,311 EUR 2,293,851
12/31/50, Resettable Advance R4........................... France 6,173,594 EUR 2,159,965
Stabilization Advance S6, Tier 1 (Pibor).................. France 1,198,383 EUR 298,665
Stabilization Advance S6, Tier 2.......................... France 2,505,762 EUR 528,419
Stabilization Advance S7, Tier 1 (Pibor).................. France 1,527,379 EUR 380,659
Finova Capital Corp.:
6.11%, 2/18/03............................................ United States 2,573,000 2,218,718
6.15%, 3/31/03............................................ United States 450,000 381,241
7.25%, 11/08/04........................................... United States 1,550,000 1,358,188
HIH Capital Ltd., cvt., 144A, 7.50%, 9/25/06................ United Kingdom 8,105,000 4,660,375
La Quinta Inns Inc.:
7.25%, 3/15/04............................................ United States 730,000 547,500
7.33%, 4/01/08............................................ United States 1,630,000 1,092,100
Laidlaw Inc.:
7.70%, 8/15/02............................................ Canada 605,000 178,475
7.05%, 5/15/03............................................ Canada 180,000 53,550
6.65%, 10/01/04........................................... Canada 1,835,000 440,400
7.875%, 4/15/05........................................... Canada 1,820,000 536,900
7.65%, 5/15/06............................................ Canada 1,650,000 396,000
8.75%, 4/15/25............................................ Canada 2,743,000 809,185
6.72%, 10/01/27........................................... Canada 4,385,000 1,085,288
Levi Straus & Co.:
6.80%, 11/01/03........................................... United States 180,000 147,600
7.00%, 11/01/06........................................... United States 705,000 535,800
Meditrust Corp.:
7.00%, 8/15/07............................................ United States 1,460,000 978,200
7.82%, 9/10/26............................................ United States 5,495,000 4,231,150
MFN Financial Corp.:
Series A, 10.00%, 3/23/01................................. United States 870,124 833,144
Series B, FRN, 11.26%, 3/23/01............................ United States 1,050,123 1,015,994
Rite Aid Corp.:
7.125%, 1/15/07........................................... United States 995,000 492,525
144A, 6.125%, 12/15/08.................................... United States 315,000 152,775
6.875%, 8/15/13........................................... United States 395,000 189,600
7.70%, 2/15/27............................................ United States 540,000 243,000
</TABLE>
19
<PAGE>
MUTUAL DISCOVERY FUND
STATEMENT OF INVESTMENTS, JUNE 30, 2000 (UNAUDITED) (CONT.)
<TABLE>
<CAPTION>
PRINCIPAL
COUNTRY AMOUNT** VALUE
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CORPORATE BONDS & NOTES (CONT.)
Service Corp. International:
7.375%, 4/15/04........................................... United States $ 2,910,000 $ 1,789,650
6.00%, 12/15/05........................................... United States 670,000 365,150
7.70%, 4/15/09............................................ United States 340,000 178,500
SFC New Holdings Inc., PIK, 13.25%, 8/15/03................. United States 11,125,000 8,900,000
Southwest Royalties Inc., B, 10.50%, 10/15/04............... United States 6,796,000 4,383,420
TFM SA de CV:
senior disc. note, zero cpn. ............................. Mexico 1,435,000 993,738
10.25%, 6/15/07........................................... Mexico 350,000 306,250
Ventas Inc.:
Tranche A, Term Loan, 12/31/02............................ United States 950,979 857,466
Tranche B, Term Loan, 12/31/05............................ United States 3,603,959 3,153,464
Tranche C, Term Loan, 12/31/07............................ United States 1,077,862 943,129
Vlasic Foods International Inc., 10.25%, 7/01/09............ United States 4,023,000 1,428,165
--------------
TOTAL CORPORATE BONDS & NOTES (COST $90,338,225)............ 72,944,242
--------------
BONDS & NOTES IN REORGANIZATION 2.6%
*Aerovias Venezolanas SA, Bank Claim........................ Venezuela 3,728,588 559,288
*Aerovias Venezolanas SA, Bank Claim........................ Venezuela 760,000 114,000
*Aiken Cnty S C Indl Rev Ref Beloit, 6.00%, 12/01/11........ United States 280,000 107,100
*Altos Hornos de Mexico SA:
cvt., 5.50%, 12/15/01..................................... Mexico 135,000 47,925
Series A, 11.375%, 4/30/02................................ Mexico 2,970,000 1,054,350
Series B, 11.875%, 4/30/04................................ Mexico 3,615,000 1,247,175
Tranche A, Term Loan...................................... United States 772,799 316,848
*Crown Leasing, Bank Claim.................................. Japan 691,979,366 JPY 457,810
*Dow Corning Corp.:
9.375%, 2/01/08........................................... United States 100,000 142,500
8.15%, 10/15/29........................................... United States 500,000 668,750
Bank Debt................................................. United States 1,241,480 1,688,413
Bank Debt #1.............................................. United States 3,250,000 4,420,000
Bank Debt................................................. United States 2,705,000 3,617,938
Bank Claim................................................ United States 6,938,674 9,436,597
*Genesis Health Ventures Inc.:
Revolver.................................................. United States 6,271,394 3,925,892
Term Loan A............................................... United States 343,990 211,898
Term Loan B............................................... United States 676,210 422,631
Term Loan C............................................... United States 677,371 423,357
*Harnischfeger Industries Inc.:
8.90%, 3/01/22............................................ United States 2,475,000 946,688
8.70%, 6/15/22............................................ United States 1,745,000 667,463
7.25%, 12/15/25........................................... United States 4,500,000 1,721,250
6.875%, 2/15/27........................................... United States 2,400,000 918,000
*Heilman Acquisition Corp., 9.625%, 1/31/04................. United States 7,550,000 755
*Loewen Group Inc., Series 5, 6.10%, 10/01/02............... Canada 3,530,000 CAD 1,310,319
</TABLE>
20
<PAGE>
MUTUAL DISCOVERY FUND
STATEMENT OF INVESTMENTS, JUNE 30, 2000 (UNAUDITED) (CONT.)
<TABLE>
<CAPTION>
PRINCIPAL
COUNTRY AMOUNT** VALUE
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
BONDS & NOTES IN REORGANIZATION (CONT.)
*Loewen Group International Inc.:
144A, 6.70%, 10/01/99..................................... Canada 8,095,000 CAD $ 2,833,250
Revolver.................................................. United States 1,178,609 636,449
Series 3, 7.50%, 4/15/01.................................. Canada 2,090,000 1,149,500
Series 3, 7.75%, 10/15/01................................. Canada 730,000 335,800
Series 2, 8.25%, 4/15/03.................................. Canada 2,140,000 1,177,000
Series 6, 7.20%, 6/01/03.................................. Canada 11,595,000 4,058,250
Series 4, 8.25%, 10/15/03................................. Canada 4,970,000 2,286,200
Series 7, 7.60%, 6/01/08.................................. Canada 7,610,000 2,511,300
*Multicare Companies Inc.:
Revolver.................................................. United States 346,736 190,705
Term Loan A............................................... United States 411,869 226,528
Term Loan B............................................... United States 637,530 350,641
Term Loan C............................................... United States 211,426 116,284
*Nippon Credit Bank Ltd., Bank Claim........................ Japan 357,918,640 JPY 541,250
*Nippon Total Finance, Bank Claim........................... Japan 386,283,531 JPY 219,054
*Optel Inc.:
13.00%, 2/15/02........................................... United States 5,575,000 3,902,500
11.50%, 7/01/08........................................... United States 215,000 150,500
*Paging Network Inc.:
Revolver A................................................ United States 8,473,258 6,808,865
10.125%, 8/01/07.......................................... United States 829,000 352,325
10.00%, 10/15/08.......................................... United States 1,090,000 463,250
*Port Seattle Wash Rev Ref-Beloit Proj., 6.00%, 12/01/17.... United States 150,000 57,375
*Safety Kleen Corp.:
9.25%, 5/15/09............................................ United States 20,000 500
Term Loan A............................................... United States 1,118,531 413,856
Term Loan B............................................... United States 564,912 209,017
Term Loan C............................................... United States 564,912 209,017
*Safety Kleen Services, 9.25%, 6/01/08...................... United States 40,000 1,900
*United Companies Financial Corp., Revolver................. United States 16,959,600 11,702,124
*Vencor Inc.:
9.875%, 5/01/05........................................... United States 11,035,000 993,150
Revolver.................................................. United States 2,169,132 1,605,158
Term Loan A............................................... United States 8,854,740 6,552,508
Term Loan B............................................... United States 4,914,299 3,636,581
Tranche A, DIP Revolver, Term Loan 9/30/00................ United States 1,134,785 1,123,437
Tranche B, DIP Revolver, Term Loan 9/30/00................ United States 450,000 445,500
--------------
TOTAL BONDS & NOTES IN REORGANIZATION (COST $85,898,659).... 89,686,721
--------------
<CAPTION>
SHARES
------------
<S> <C> <C> <C>
COMPANIES IN LIQUIDATION .1%
*City Investing Company Liquidating Trust................... United States 100,000 128,125
*Petrie Stores Liquidating Trust, CBI....................... United States 1,213,700 1,479,197
--------------
TOTAL COMPANIES IN LIQUIDATION (COST $1,224,095)............ 1,607,322
--------------
</TABLE>
21
<PAGE>
MUTUAL DISCOVERY FUND
STATEMENT OF INVESTMENTS, JUNE 30, 2000 (UNAUDITED) (CONT.)
<TABLE>
<CAPTION>
PRINCIPAL
COUNTRY AMOUNT** VALUE
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
GOVERNMENT AGENCIES 18.6%
Fannie Mae, 5.46% to 6.68%, with maturities to 6/07/01...... United States $321,300,000 $ 309,528,838
Federal Home Loan Bank, 5.35% to 6.64%, with maturities to
5/10/01................................................... United States 245,500,000 239,638,870
Federal Home Loan Mortgage Corp., 5.48% to 6.68%, with
maturities to 4/26/01..................................... United States 90,900,000 88,772,532
--------------
TOTAL GOVERNMENT AGENCIES (COST $638,517,944)............... 637,940,240
--------------
TOTAL INVESTMENTS (COST $2,938,331,690) 97.5%............... 3,349,961,436
SECURITIES SOLD SHORT (.5%)................................. (17,148,824)
NET EQUITY IN FORWARDS CONTRACTS .4%........................ 14,951,556
OTHER ASSETS, LESS LIABILITIES 2.6%......................... 89,236,186
--------------
TOTAL NET ASSETS 100.0%..................................... $3,437,000,354
==============
<CAPTION>
SECURITIES SOLD SHORT (PROCEEDS $21,843,575)
ISSUER COUNTRY SHARES VALUE
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
*Dow Chemical Co. .......................................... United States 568,077 $ 17,148,824
==============
</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 DISCOVERY 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 $2,886,019,076)................ $3,279,163,620
Controlled affiliates (cost $10,459,603).................. 11,292,093
Non controlled affiliates (cost $41,853,011).............. 59,505,723 $3,349,961,436
--------------
Cash....................................................... 52,410,147
Receivables:
Investment securities sold................................ 63,818,182
Capital shares sold....................................... 3,128,983
Dividends and interest.................................... 10,932,935
From affiliates........................................... 140,564
Unrealized gain on forward exchange contracts (Note 8)..... 21,009,304
Deposits with broker for securities sold short............. 16,710,994
--------------
Total assets.......................................... 3,518,112,545
--------------
Liabilities:
Payables:
Investment securities purchased........................... 46,880,712
Capital shares redeemed................................... 6,279,849
To affiliates............................................. 4,221,467
Securities sold short, at value (proceeds $21,843,575)..... 17,148,824
Unrealized loss on forward exchange contracts (Note 8)..... 6,057,748
Accrued expenses........................................... 523,591
--------------
Total liabilities..................................... 81,112,191
--------------
Net assets, at value........................................ $3,437,000,354
==============
Net assets consist of:
Distributions in excess of net investment income........... $ (15,020,184)
Net unrealized appreciation................................ 431,276,053
Accumulated net realized gain.............................. 465,151,782
Capital shares............................................. 2,555,592,703
--------------
Net assets, at value........................................ $3,437,000,354
==============
</TABLE>
23
<PAGE>
MUTUAL DISCOVERY 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
($2,015,419,918/95,635,798 shares outstanding).......... $21.07
==============
CLASS A:
Net asset value per share ($861,745,738/41,131,510 shares
outstanding).............................................. $20.95
==============
Maximum offering price per share ($20.95/94.25%)......... $22.23
==============
CLASS B:
Net asset value and maximum offering price per share
($14,302,987/688,088 shares outstanding)*............... $20.79
==============
CLASS C:
Net asset value per share ($545,531,711/26,144,651 shares
outstanding)*............................................. $20.87
==============
Maximum offering price per share ($20.87/99.00%)......... $21.08
==============
</TABLE>
*Redemption price per share is equal to net asset value less any applicable
sales charge.
See Notes to Financial Statements.
24
<PAGE>
MUTUAL DISCOVERY 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 $3,835,540)
Dividends.................................................. $ 26,773,339
Interest................................................... 19,088,902
-------------
Total investment income............................... $ 45,862,241
-------------
Expenses:
Management fees (Note 3)................................... 13,755,612
Administrative fees (Note 3)............................... 1,339,479
Distribution fees (Note 3)
Class A................................................... 1,508,635
Class B................................................... 58,159
Class C................................................... 2,712,183
Transfer agent fees (Note 3)............................... 2,424,404
Custodian fees............................................. 217,505
Reports to shareholders.................................... 223,007
Registration and filing fees............................... 42,894
Professional fees.......................................... 93,814
Directors' fees and expenses............................... 52,206
Dividends for securities sold short........................ 405,428
Other...................................................... 12,372
-------------
Total expenses........................................ 22,845,698
Expenses waived/paid by affiliate (Note 3)............ (861,593)
-------------
Net expenses....................................... 21,984,105
-------------
Net investment income........................... 23,878,136
-------------
Realized and unrealized gains (losses):
Net realized gain from:
Investments............................................... 384,388,700
Foreign currency transactions............................. 119,953,604
-------------
Net realized gain..................................... 504,342,304
Net unrealized depreciation on:
Investments............................................... (282,780,708)
Translation of assets and liabilities denominated in
foreign currencies....................................... (16,420,036)
-------------
Net unrealized depreciation........................... (299,200,744)
-------------
Net realized and unrealized gain............................ 205,141,560
-------------
Net increase in net assets resulting from operations........ $ 229,019,696
=============
</TABLE>
See Notes to Financial Statements.
25
<PAGE>
MUTUAL DISCOVERY 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..................................... $ 23,878,136 $ 36,279,432
Net realized gain from investments and foreign currency
transactions............................................. 504,342,304 223,471,817
Net unrealized appreciation (depreciation) on investments
and translation of assets and liabilities denominated in
foreign currencies....................................... (299,200,744) 519,230,537
----------------------------------------
Net increase in net assets resulting from operations.... 229,019,696 778,981,786
Distributions to shareholders from:
Net investment income:
Class Z.................................................. (29,210,657) (40,349,277)
Class A.................................................. (11,745,576) (14,112,750)
Class B.................................................. (181,040) (101,868)
Class C.................................................. (6,596,211) (5,682,447)
Net realized gains:
Class Z.................................................. (105,047,794) (32,419,104)
Class A.................................................. (45,000,351) (13,580,342)
Class B.................................................. (743,491) (71,532)
Class C.................................................. (28,626,606) (8,761,056)
Capital share transactions (Note 2):
Class Z.................................................. (25,632,869) (874,179,314)
Class A.................................................. 17,022,447 (176,260,101)
Class B.................................................. 6,468,984 7,279,414
Class C.................................................. 4,505,021 (125,727,380)
----------------------------------------
Net increase (decrease) in net assets................... 4,231,553 (504,983,971)
Net assets:
Beginning of period........................................ 3,432,768,801 3,937,752,772
----------------------------------------
End of period.............................................. $3,437,000,354 $3,432,768,801
========================================
Undistributed net investment income/(Distributions in excess
of net investment income) included in net assets:
End of period.............................................. $ (15,020,184) $ 8,835,164
========================================
</TABLE>
See Notes to Financial Statements.
26
<PAGE>
MUTUAL DISCOVERY FUND
Notes to Financial Statements (unaudited)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Mutual Discovery Fund (the Fund) is a separate, diversified series of Franklin
Mutual Series Fund, Inc. (the Series Fund), which is an open-end investment
company registered under the Investment Company Act of 1940. The Fund seeks
long-term capital appreciation by investing primarily in common and preferred
stocks and bonds. The Fund may also invest 50% or more of its assets in foreign
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. SECURITIES TRANSACTIONS, INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS:
Security transactions are accounted for on trade date. Realized gains and losses
on security transactions are determined on a specific identification basis.
Certain income from foreign securities is recorded as soon as 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 DISCOVERY FUND
Notes to Financial Statements (unaudited) (continued)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONT.)
c. SECURITIES 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. OPTION CONTRACTS:
Options purchased are recorded as investments; options written (sold) are
recorded as liabilities. When an option expires, the premium (original option
value) is realized as a gain if the option was written or as a loss if the
option was purchased. When the exercise of an option results in a cash
settlement, the difference between the premium and the settlement proceeds is
realized as a gain or loss. When securities are acquired or delivered upon
exercise of an option, the acquisition cost or sale proceeds are adjusted by the
amount of the premium. When an option is closed, the difference between the
premium and the cost to close the position is realized as a gain or loss.
f. 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.
g. 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.
28
<PAGE>
MUTUAL DISCOVERY FUND
Notes to Financial Statements (unaudited) (continued)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONT.)
g. SECURITIES SOLD SHORT (CONT.)
The Fund is required to establish a margin account with the broker lending the
security sold short. While the short sale is outstanding, the broker retains the
proceeds of the short sale and the Fund must maintain a deposit for the broker
consisting of cash and securities having a value equal to a specified percentage
of the value of the securities sold short.
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 600 million shares authorized ($0.001 par value) of
which 300 million, 100 million, 100 million, and 100 million were designated as
Class Z, Class A, Class B, and Class C, respectively. Transactions in the Fund's
shares were as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
JUNE 30, 2000 DECEMBER 31, 1999
-------------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
-------------------------------------------------------------------
<S> <C> <C> <C> <C>
CLASS Z SHARES:
Shares sold........................................... 3,770,001 $ 82,712,266 9,449,194 $ 177,669,171
Shares issued on reinvestment of distributions........ 5,996,218 126,220,217 3,465,002 68,633,024
Shares redeemed....................................... (10,744,005) (234,565,352) (61,919,974) (1,120,481,509)
-------------------------------------------------------------------
Net decrease.......................................... (977,786) $ (25,632,869) (49,005,778) $ (874,179,314)
===================================================================
</TABLE>
29
<PAGE>
MUTUAL DISCOVERY FUND
Notes to Financial Statements (unaudited) (continued)
2. CAPITAL STOCK (CONT.)
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
JUNE 30, 2000 DECEMBER 31, 1999
-------------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
-------------------------------------------------------------------
<S> <C> <C> <C> <C>
CLASS A SHARES:
Shares sold........................................... 14,299,832 $ 312,860,345 39,162,598 $ 734,172,539
Shares issued on reinvestment of distributions........ 2,569,058 53,770,198 1,296,636 25,547,006
Shares redeemed....................................... (15,950,313) (349,608,096) (50,263,265) (935,979,646)
-------------------------------------------------------------------
Net increase (decrease)............................... 918,577 $ 17,022,447 (9,804,031) $ (176,260,101)
===================================================================
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
JUNE 30, 2000 DECEMBER 31, 1999+
-------------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
-------------------------------------------------------------------
<S> <C> <C> <C> <C>
CLASS B SHARES:
Shares sold........................................... 304,311 $ 6,589,813 412,998 $ 7,760,525
Shares issued on reinvestment of distributions........ 38,524 799,760 8,140 160,581
Shares redeemed....................................... (41,898) (920,589) (33,987) (641,692)
-------------------------------------------------------------------
Net increase.......................................... 300,937 $ 6,468,984 387,151 $ 7,279,414
===================================================================
</TABLE>
<TABLE>
<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........................................... 2,715,393 $ 59,202,798 3,695,408 $ 68,911,957
Shares issued on reinvestment of distributions........ 1,546,602 32,231,022 675,339 13,232,587
Shares redeemed....................................... (3,979,531) (86,928,799) (11,372,965) (207,871,924)
-------------------------------------------------------------------
Net increase (decrease)............................... 282,464 $ 4,505,021 (7,002,218) $ (125,727,380)
===================================================================
</TABLE>
+Effective date of Class B shares was January 1, 1999.
3. TRANSACTIONS WITH AFFILIATES AND RELATED PARTIES
Certain officers of the Fund are also officers and/or directors of Franklin
Mutual Advisers, Inc. (Franklin Mutual) and Franklin Templeton Services, Inc.
(FT Services), the Fund's investment manager and administrative manager,
respectively. Franklin/Templeton Investor Services, Inc. (Investor Services) and
Franklin/Templeton Distributors, Inc. (Distributors), are the Fund's transfer
agent and principal underwriter, respectively.
The Fund pays an investment management fee to Franklin Mutual of .80% per year
of the average daily net assets of the Fund. Franklin Mutual agreed, through
June 30, 2000, to limit the expense ratio of the Fund to be no higher than
expected for the Fund's 1996 fiscal year, except that increases in expenses will
be permitted if the 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
30
<PAGE>
MUTUAL DISCOVERY FUND
Notes to Financial Statements (unaudited) (continued)
3. TRANSACTIONS WITH AFFILIATES AND RELATED PARTIES (CONT.)
litigation expenses, interest, taxes, insurance, brokerage commissions, and
expenses of an extraordinary nature. The expense reduction is set forth in the
Statement of Operations.
The Fund pays its allocated share of an administrative fee to FT Services based
on the Series Fund's aggregated average daily net assets as follows:
<TABLE>
<CAPTION>
ANNUALIZED
FEE RATE AVERAGE DAILY NET ASSETS
-----------------------------------------------------------------
<S> <C>
0.15% First $200 million
0.135% Over $200 million up to and including $700 million
0.10% Over $700 million up to and including $1.2 billion
0.075% Over $1.2 billion
</TABLE>
The Fund reimburses Distributors for costs incurred in marketing the Fund's
shares up to .35%, 1.00% and 1.00% per year of the average daily net assets of
Class A, Class B, and Class C shares, respectively. Distributors received net
commissions from sales of Fund shares and received contingent deferred sales
charges for the period of $124,599 and $50,101, 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 unrealized appreciation based on the cost of investments
for income tax purposes of $2,978,980,147 was as follows:
<TABLE>
<S> <C>
Unrealized appreciation..................................... $ 548,947,026
Unrealized depreciation..................................... (177,965,737)
-------------
Net unrealized appreciation................................. $ 370,981,289
=============
</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 DISCOVERY FUND
Notes to Financial Statements (unaudited) (continued)
5. INVESTMENT TRANSACTIONS
Purchases and sales of securities (excluding short-term securities) for the six
months ended June 30, 2000 aggregated $1,196,635,842 and $1,553,151,533,
respectively.
Transactions in options written during the six months ended June 30, 2000 were
as follows:
<TABLE>
<CAPTION>
NUMBER
OF CONTRACTS PREMIUM
---------------------------
<S> <C> <C>
Options outstanding at December 31, 1999.................... 0 $ 0
Options written............................................. 94 18,518
Options terminated in closing transactions.................. (94) (18,518)
---------------------------
Options outstanding June 30, 2000........................... 0 $ 0
===========================
</TABLE>
6. RESTRICTED SECURITIES
The Fund may purchase securities through a private offering that generally
cannot be sold to the public without prior registration under the Securities Act
of 1933. The costs of registering such securities are paid by the issuer.
Restricted securities held at June 30, 2000 are as follows:
<TABLE>
<CAPTION>
NUMBER OF SHARES OR ACQUISITION
PRINCIPAL AMOUNT ISSUER DATE VALUE
-----------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C>
1,670,390 Cape Ann Investors LLC...................................... 9/09/97 $ 13,029
8,758,216 Hancock LLC................................................. 3/06/97 8,758,216
11,141,868 MWCR LLC.................................................... 9/27/96 2,520,848
357,000 Security Capital European Realty............................ 4/08/98 5,263,965
-----------
TOTAL RESTRICTED SECURITIES (COST $17,599,603) (.48% OF NET ASSETS)................ $16,556,058
===========
</TABLE>
32
<PAGE>
MUTUAL DISCOVERY FUND
Notes to Financial Statements (unaudited) (continued)
7. INVESTMENT IN AFFILIATES
The Investment Company Act of 1940 defines "affiliated persons" to include any
persons, such as the Fund, that owns 5% or more of the outstanding voting
securities of another person. Investments in "affiliated persons" at June 30,
2000, were $70,797,816. For the six months ended June 30, 2000, dividend income
from "affiliated persons" was $140,971 and net realized gains from disposition
of "affiliated persons" were $11,022,603.
<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*
Cape Ann Investors, LLC.......... 1,670,390 -- -- 1,670,390 $ 13,029 --
Distribution Systems SpA......... 500 -- (500) -- ** --
Hancock LLC...................... 8,758,216 -- -- 8,758,216 8,758,216 --
MWCR Elettronica SRL............. 69,056 -- (69,056) -- ** --
MWCR LLC......................... 13,505,313 -- (2,363,445) 11,141,868 2,520,848 --
Sweda Industrie Elettroniche
SpA............................. 500 -- (500) -- ** --
-------------------------------
TOTAL CONTROLLED AFFILIATES...... $11,292,093 --
===============================
NON CONTROLLED AFFILIATES
Invik & Co. AB, B................ 430,477 -- -- 430,477 $44,858,737 $140,971
MDC Corp. Inc., A................ -- 1,619,585 -- 1,619,585 14,646,986 --
-------------------------------
TOTAL NON CONTROLLED
AFFILIATES...................... $59,505,723 $140,971
===============================
<CAPTION>
REALIZED
CAPITAL
NAME OF ISSUER GAIN
--------------------------------- -----------
<S> <C>
CONTROLLED AFFILIATES*
Cape Ann Investors, LLC.......... --
Distribution Systems SpA......... --
Hancock LLC...................... --
MWCR Elettronica SRL............. --
MWCR LLC......................... $11,022,603
Sweda Industrie Elettroniche
SpA............................. --
-----------
TOTAL CONTROLLED AFFILIATES...... $11,022,603
===========
NON CONTROLLED AFFILIATES
Invik & Co. AB, B................ --
MDC Corp. Inc., A................ --
-----------
TOTAL NON CONTROLLED
AFFILIATES...................... --
===========
</TABLE>
*Issuer in which the Fund owns 25% or more of the outstanding voting securities.
**As of June 30, 2000, no longer an affiliate.
8. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
The Fund has been a party to financial instruments with off-balance-sheet risk,
primarily forward exchange contracts in order to minimize the impact on the Fund
from adverse changes in the relationship between the functional currency and the
foreign currencies and interest rates. These instruments involve market risk in
excess of the amount recognized on the Statement of Assets and Liabilities. Some
of these risks have been minimized by offsetting contracts. Risks arise from the
possible inability of counterparties to meet the terms of their contracts,
future movement in currency values and interest rates and contract positions
that are not exact offsets. The contract amount indicates the extent of the
Fund's involvement in such contracts.
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.
33
<PAGE>
MUTUAL DISCOVERY 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
EXCHANGE FOR DATE UNREALIZED
CONTRACTS TO BUY: GAIN/(LOSS)
------------------ -----------------------------------------------
<C> <S> <C> <C> <C> <C> <C>
11,846,515 Canadian Dollars...................................... U.S. $ 7,913,716 7/31/00 U.S. $ 88,102
74,045,238 Swedish Krona......................................... 8,410,102 8/21/00 66,390
-------------- -----------
U.S. $ 16,323,818 154,492
============== -----------
<CAPTION>
CONTRACTS TO SELL:
------------------
<C> <S> <C> <C> <C> <C> <C>
85,000,000 European Unit......................................... U.S. $ 82,155,900 7/12/00 612,680
32,624,430 Hong Kong Dollars..................................... 4,186,604 7/19/00 86
170,029,919 Canadian Dollars...................................... 117,193,804 7/31/00 2,345,816
17,750,000 European Unit......................................... 17,216,080 8/15/00 151,223
414,061,175 Swedish Krona......................................... 48,166,251 8/21/00 765,684
69,950,000 European Unit......................................... 70,720,235 8/24/00 3,434,956
61,387,241 European Unit......................................... 59,593,482 9/12/00 478,161
19,922,702 Singapore Dollars..................................... 11,680,074 9/14/00 57,329
315,848,349 Swedish Krona......................................... 36,870,605 9/15/00 648,792
580,654,562 Swedish Krona......................................... 67,579,367 9/18/00 975,138
49,894,610 British Pounds........................................ 78,529,756 9/25/00 2,872,024
5,929,474,604 Japanese Yen.......................................... 57,806,602 9/27/00 844,055
88,848,537 British Pounds........................................ 140,778,984 10/17/00 5,986,550
598,558,317 Swedish Krona......................................... 69,303,011 10/20/00 502,185
45,000,000 European Unit......................................... 43,788,300 10/30/00 331,126
45,000,000 European Unit......................................... 43,807,125 11/21/00 293,970
2,020,107 British Pounds........................................ 3,093,673 11/22/00 26,412
51,494,015 European Unit......................................... 50,089,930 12/20/00 212,632
4,500,000 British Pounds........................................ 6,847,650 12/20/00 10,579
-------------- -----------
U.S. $1,009,407,433 20,549,398
============== -----------
Net unrealized gain on offsetting forward exchange contracts..... 305,414
-----------
Unrealized gain on forward exchange contracts.................. 21,009,304
-----------
</TABLE>
34
<PAGE>
MUTUAL DISCOVERY FUND
Notes to Financial Statements (unaudited) (continued)
8. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK (CONT.)
<TABLE>
<CAPTION>
IN SETTLEMENT
EXCHANGE FOR DATE UNREALIZED
CONTRACTS TO BUY: GAIN/(LOSS)
------------------ -----------------------------------------------
<C> <S> <C> <C> <C> <C> <C>
99,012,091 Swedish Krona......................................... U.S. $ 11,523,096 8/21/00 U.S. $ (188,468)
============== ===========
<CAPTION>
CONTRACTS TO SELL:
------------
<C> <S> <C> <C> <C> <C> <C>
102,547,068 Hong Kong Dollars..................................... U.S. $ 13,157,316 7/19/00 (2,001)
17,364,284 Canadian Dollars...................................... 11,673,521 7/31/00 (57,310)
108,066,764 European Unit......................................... 100,298,417 8/15/00 (3,597,015)
17,650,484 British Pounds........................................ 26,213,950 8/22/00 (533,287)
35,137,888 European Unit......................................... 33,648,041 9/12/00 (189,406)
124,466,169 Swiss Franc........................................... 76,385,387 9/13/00 (705,645)
1,200,000 Singapore Dollars..................................... 696,783 9/14/00 (3,287)
138,600,000 Swedish Krona......................................... 15,738,082 10/20/00 (193,188)
17,587,108 British Pounds........................................ 26,166,979 11/22/00 (536,686)
50,274,852 British Pounds........................................ 76,333,600 12/20/00 (51,455)
-------------- -----------
U.S. $ 380,312,076 (5,869,280)
============== -----------
Unrealized loss on forward exchange contracts.................... (6,057,748)
-----------
Net unrealized gain on forward exchange contracts.............. U.S. $14,951,556
===========
</TABLE>
35
<PAGE>
[FRANKLIN LOGO]
FRANKLIN(R)TEMPLETON(R) INVESTMENTS
MUTUAL DISCOVERY FUND
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