SEMI ANNUAL
JUNE 30, 2000
MUTUAL FINANCIAL SERVICES FUND
REPORT
[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 RAYMOND GAREA]
RAYMOND GAREA
Portfolio Manager
Mutual Financial Services 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 Financial Services Fund seeks capital appreciation,
with income as a secondary goal, by investing primarily in common and preferred
stocks, bonds, and convertible securities issued by companies in the financial
services industry. The Fund normally will have at least 65% of its assets
invested in the securities of issuers such as banks, savings and loan
organizations, credit card companies, brokerage firms, finance companies,
sub-prime lending institutions, investment advisors, and insurance companies.
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Dear Shareholder:
This semiannual report for Mutual Financial Services Fund covers the six months
ended June 30, 2000. Although the U.S. economy continued to exhibit
stronger-than-expected growth, several worrisome signs of inflation surfaced
during this time. It is not yet clear how much the series of rate hikes
implemented by the Federal Reserve Board (the Fed) have slowed the U.S. economy,
or whether the Fed is finished raising rates. What is clear is that this series
of interest rate increases, coupled with several other factors discussed below,
resulted in an extraordinary period of volatility for financial services stocks.
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 ... 16
Notes to Financial
Statements ............. 20
</TABLE>
[FUND CATEGORY PYRAMID GRAPHIC]
<PAGE>
In addition to schizophrenic swings on major U.S. indexes, there was an enormous
divergence in stock price performance among financial service companies. Some of
these differences were firmly rooted in the performance characteristics of
companies facing ongoing revenue and earnings growth challenges. For example,
regional bank stocks lagged significantly in 1999. We reduced our exposure to
this group in the latter part of the year and were not tempted to take
meaningful positions in them during the first half of 2000. Our decision proved
to be a wise one: the Keefe Bruyette & Woods (KBW) Regional Bank Index
eventually declined 7.64% during the reporting period, evidence that these banks
were some of the worst performers among the financial services groups.(1)
Within this environment, Mutual Financial Services Fund - Class Z performed
relatively well. After being down 17% at one point in early March, the Fund
experienced a spring rally and, as shown in the Performance Summary on page 7,
went on to post a 1.05% six-month cumulative total return, significantly
outperforming the Nasdaq Bank Index(R), which posted a return of -10.24%.(2)
According to KBW, its Bank Index declined 12.85%,(3) its Finance Company Index
declined 3.10%(4) and its Insurance Company Index rose 3.61% during the same
time.(5)
1. Source: Keefe, Bruyette & Woods, Inc. The KBW Regional Bank Index is an
equal-weighted index consisting of large regional banks. This index was incepted
on 1/3/00. One cannot invest directly in an index.
2. Source: Nasdaq. The Nasdaq Bank Index contains all types of banks and savings
institutions and related holding companies, and establishments performing
functions closely related to banking, such as check cashing agencies, currency
exchanges, safe deposit companies and corporations for banking abroad. One
cannot invest directly in an index.
3. Source: Keefe, Bruyette & Woods, Inc. The KBW Bank Index is an equal-weighted
index consisting of 24 money-center and large regional banks. One cannot invest
directly in an index.
4. Source: Keefe, Bruyette & Woods, Inc. The KBW Financial Index is an
equal-weighted index consisting of 24 large financial service companies in the
banking, brokerage and insurance segments. One cannot invest directly in an
index.
5. Source: Keefe, Bruyette & Woods, Inc. The KBW Insurance Company Index is an
equal-weighted index consisting of 24 large insurance companies in the property
& casualty, life, financial guarantor and insurance brokerage segments. One
cannot invest directly in an index.
2
<PAGE>
We also compare the Fund's performance against a universe of 75 financial
services funds whose median performance for the six-month period was -1.93%.(6)
The broad-based Standard & Poor's 500(R) Composite Index (S&P 500(R)), which is
heavily weighted with non-financial services issues, returned -0.42% during the
same time.(7)
The Fund's strong performance relative to the indexes was aided by our early
intentions to avoid regional banks. We held only a small amount of their stocks
as they plummeted in the first half of 2000, and continue to be cautious on
regional banks because we believe they still face many challenges affecting
their ability to grow revenues and earnings.
Insurance stocks also buoyed the Fund's performance during this difficult time.
We believed -- and continue to believe -- that in the post-HR 10 Financial
Services Modernization Act world (the Act which overrules previous legislation
barring banks and insurance companies from engaging in commercial and investment
banking activities), many life insurance companies will be acquired by larger
financial services players. We positioned the Fund accordingly, and while it is
still early in that game, it's reassuring to know the insurance segment
performed well in the first half of 2000.
Four of the Fund's holdings did quite well during the six-month period: City
National, Household International, Hartford Financial
6. Source: Lipper, Inc. The Lipper Financial Services Funds Average for this
period consisted of 75 funds and does not include sales charges or the effects
of expense limitations. The Fund's performance relative to the Lipper Average
may have differed if these factors had been considered. One cannot invest
directly in an index.
7. 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 Index is
unmanaged and includes reinvested dividends. One cannot invest directly in an
index.
PORTFOLIO BREAKDOWN
Based on Total Net Assets
6/30/00
[PIE CHART GRAPHIC]
<TABLE>
<S> <C>
Equities 85.2%
Bonds 1.5%
Government Agencies & Other Net Assets 13.3%
</TABLE>
3
<PAGE>
TOP 10 HOLDINGS
6/30/00
<TABLE>
<CAPTION>
COMPANY, % OF TOTAL
SECTOR, COUNTRY NET ASSETS
---------------------------------------------
<S> <C>
U.S. Bancorp, 4.0%
Banks, United States
United Asset Management Corp., 4.0%
Diversified Financials,
United States
Sovereign Bancorp Inc., 3.3%
Banks, United States
Household International Inc., 3.2%
Diversified Financials,
United States
State National Bancshares Inc., 3.2%
Banks, United States
Superior Financial Corp., 3.2%
Banks, United States
Commercial Federal Corp., 3.2%
Banks, United States
Metris Cos. Inc., 3.1%
Diversified Financials,
United States
TCF Financial Corp., 2.6%
Banks, United States
First Community Bancorp., 2.5%
Banks, United States
</TABLE>
and ReliaStar, the last of which was acquired at a significant premium by ING
Groep. Most notably, the Fund's stock in City National was obtained in a deal
whereby our large position in Pacific Bank was acquired by City National in
exchange for cash and stock. We liked City National's franchise and management,
its growth prospects in California and its reasonable valuation, so we continued
to hold the stock we received in the deal. In return, we got a sizeable premium
for Pacific Bank and now own stock of what we feel is a better company with
superior future prospects.
Looking forward, we will continue to look for compelling opportunities in the
financial services sector while remaining cognizant of the market's treatment of
these companies during periods of rising interest rates. Although the financial
services sector rallied since its drubbing in early March, its recent downward
trend continues to leave these stocks exhibiting excellent fundamentals and
cheap valuations. We also expect additional acquisitions of life insurance
companies at significant premiums to current trading prices; consequently, we
own a number of what we believe to be the most likely candidates in this sector.
Finally, we note the ongoing disparity in valuations between larger
capitalization financial companies and their small- and medium-cap brethren.
Contrary to the case in other industries, we believe many of these smaller
companies, which are selling at lower premiums (based on price-to-earnings
ratios) than their large-cap counterparts within the financial services sector,
have
4
<PAGE>
superior fundamental prospects. We will continue to invest a significant portion
of the Fund's assets in these situations, which we believe offer much higher
potential returns.
As always, we appreciate your interest in Mutual Financial Services Fund, and
welcome your comments and suggestions, either through regular mail or by email
at [email protected].
Sincerely,
/s/ Raymond Garea
Raymond Garea
Portfolio Manager
Mutual Financial Services 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 1.05%
Net Asset Value (NAV) $12.89 (6/30/00) $13.05 (12/31/99)
Change in NAV -$0.16
Distributions (1/1/00 - 6/30/00) Dividend Income $0.0338
Short-Term Capital Gain $0.2663
---------------------------------
Total $0.3001
</TABLE>
CLASS A
<TABLE>
<S> <C> <C>
Six-Month Total Return 0.89%
Net Asset Value (NAV) $12.90 (6/30/00) $13.07 (12/31/99)
Change in NAV -$0.17
Distributions (1/1/00 - 6/30/00) Dividend Income $0.0227
Short-Term Capital Gain $0.2663
---------------------------------
Total $0.2890
</TABLE>
CLASS B
<TABLE>
<S> <C> <C>
Six-Month Total Return 0.53%
Net Asset Value (NAV) $12.79 (6/30/00) $13.00 (12/31/99)
Change in NAV -$0.21
Distributions (1/1/00 - 6/30/00) Dividend Income $0.0156
Short-Term Capital Gain $0.2663
---------------------------------
Total $0.2819
</TABLE>
CLASS C
<TABLE>
<S> <C> <C>
Six-Month Total Return 0.58%
Net Asset Value (NAV) $12.86 (6/30/00) $13.05 (12/31/99)
Change in NAV -$0.19
Distributions (1/1/00 - 6/30/00) Dividend Income $0.0021
Short-Term Capital Gain $0.2663
---------------------------------
Total $0.2684
</TABLE>
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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.
--------------------------------------------------------------------------------
Past performance does not guarantee future results.
7
<PAGE>
ADDITIONAL PERFORMANCE
AS OF 6/30/00
<TABLE>
<CAPTION>
INCEPTION
CLASS Z 1-YEAR (8/19/97)
--------------------------------------------------------------------------------
<S> <C> <C>
Cumulative Total Return(1) -6.11% 40.51%
Average Annual Total Return(2) -6.11% 12.61%
Value of $10,000 Investment(3) $9,389 $14,051
</TABLE>
<TABLE>
<CAPTION>
INCEPTION
CLASS A 1-YEAR (8/19/97)
--------------------------------------------------------------------------------
<S> <C> <C>
Cumulative Total Return(1) -6.41% 39.37%
Average Annual Total Return(2) -11.79% 9.99%
Value of $10,000 Investment(3) $8,821 $13,135
</TABLE>
<TABLE>
<CAPTION>
INCEPTION
CLASS B 1-YEAR (1/1/99)
--------------------------------------------------------------------------------
<S> <C> <C>
Cumulative Total Return(1) -7.05% 4.24%
Average Annual Total Return(2) -10.61% 0.18%
Value of $10,000 Investment(3) $8,939 $10,026
</TABLE>
<TABLE>
<CAPTION>
INCEPTION
CLASS C 1-YEAR (8/19/97)
--------------------------------------------------------------------------------
<S> <C> <C>
Cumulative Total Return(1) -7.05% 36.85%
Average Annual Total Return(2) -8.90% 11.19%
Value of $10,000 Investment(3) $9,110 $13,550
</TABLE>
1. Cumulative total return represents the change in value of an investment over
the periods indicated and does not include sales charges.
2. Average annual total return represents the average annual change in value of
an investment over the periods indicated and includes the current, applicable,
maximum sales charge(s) for that class.
3. These figures represent the value of a hypothetical $10,000 investment in the
Fund over the periods indicated and include the current, applicable, maximum
sales charge(s) for that class.
--------------------------------------------------------------------------------
Since markets can go down as well as up, investment return and principal value
will fluctuate with market conditions, currency volatility and the social,
economic and political climates of the countries where the Fund invests. You may
have a gain or loss when you sell your shares.
--------------------------------------------------------------------------------
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 FINANCIAL SERVICES FUND
Financial Highlights
<TABLE>
<CAPTION>
CLASS Z
-----------------------------------------------------------
SIX MONTHS ENDED YEAR ENDED DECEMBER 31,
JUNE 30, 2000 -------------------------------------
(UNAUDITED) 1999 1998 1997+
-----------------------------------------------------------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE++
(For a share outstanding throughout the period)
Net asset value, beginning of period.................... $13.05 $12.85 $12.27 $10.00
-----------------------------------------------------------
Income from investment operations:
Net investment income.................................. .12 .16 .24 .04
Net realized and unrealized gains...................... .02 .45 .64 2.35
-----------------------------------------------------------
Total from investment operations........................ .14 .61 .88 2.39
-----------------------------------------------------------
Less distributions from:
Net investment income.................................. (.03) (.19) (.19) (.03)
Net realized gains..................................... (.27) (.22) (.11) (.09)
-----------------------------------------------------------
Total distributions..................................... (.30) (.41) (.30) (.12)
-----------------------------------------------------------
Net asset value, end of period.......................... $12.89 $13.05 $12.85 $12.27
===========================================================
Total Return*........................................... 1.05% 4.78% 7.08% 23.92%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's)....................... $64,606 $76,916 $143,132 $136,350
Ratios to average net assets:
Expenses(a)............................................ 1.31%** 1.07% 1.01% 1.00%**
Expenses, excluding waiver and payments by
affiliate(a)......................................... 1.31%** 1.20% 1.10% 1.62%**
Net investment income.................................. 1.97%** 1.17% 1.76% 1.37%**
Portfolio turnover rate................................. 29.04% 81.81% 136.76% 42.26%
(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............................................... 1.30%** 1.05% 1.00% 1.00%**
Expenses, excluding waiver and payments by affiliate... 1.30%** 1.18% 1.09% 1.62%**
</TABLE>
*Total return is not annualized.
**Annualized.
+For the period August 19, 1997 (commencement of operations) to December 31,
1997.
++Based on average weighted shares outstanding effective year ended December 31,
1998.
9
<PAGE>
MUTUAL FINANCIAL SERVICES FUND
Financial Highlights (continued)
<TABLE>
<CAPTION>
CLASS A
-----------------------------------------------------------
SIX MONTHS ENDED YEAR ENDED DECEMBER 31,
JUNE 30, 2000 -------------------------------------
(UNAUDITED) 1999 1998 1997+
-----------------------------------------------------------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE++
(For a share outstanding throughout the period)
Net asset value, beginning of period.................... $13.07 $12.87 $12.27 $10.00
-----------------------------------------------------------
Income from investment operations:
Net investment income.................................. .10 .11 .17 .03
Net realized and unrealized gains...................... .02 .45 .69 2.35
-----------------------------------------------------------
Total from investment operations........................ .12 .56 .86 2.38
-----------------------------------------------------------
Less distributions from:
Net investment income.................................. (.02) (.14) (.15) (.02)
Net realized gains..................................... (.27) (.22) (.11) (.09)
-----------------------------------------------------------
Total distributions..................................... (.29) (.36) (.26) (.11)
-----------------------------------------------------------
Net asset value, end of period.......................... $12.90 $13.07 $12.87 $12.27
===========================================================
Total Return*........................................... .89% 4.35% 6.90% 23.83%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's)....................... $96,758 $107,935 $164,989 $78,249
Ratios to average net assets:
Expenses(a)............................................ 1.66%** 1.42% 1.36% 1.35%**
Expenses, excluding waiver and payments by
affiliate(a)......................................... 1.66%** 1.55% 1.45% 1.97%**
Net investment income.................................. 1.63%** .82% 1.42% 1.02%**
Portfolio turnover rate................................. 29.04% 81.81% 136.76% 42.26%
(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............................................... 1.65%** 1.40% 1.35% 1.35%**
Expenses, excluding waiver and payments by affiliate... 1.65%** 1.53% 1.44% 1.97%**
</TABLE>
*Total return does not reflect sales commissions and is not annualized.
**Annualized.
+For the period August 19, 1997 (commencement of operations) to December 31,
1997.
++Based on average weighted shares outstanding effective year ended December 31,
1999.
10
<PAGE>
MUTUAL FINANCIAL SERVICES 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........................ $13.00 $12.87
----------------------------------------
Income from investment operations:
Net investment income...................................... .06 .03
Net realized and unrealized gains.......................... .01 .44
----------------------------------------
Total from investment operations............................ .07 .47
----------------------------------------
Less distributions from:
Net investment income...................................... (.01) (.12)
Net realized gains......................................... (.27) (.22)
----------------------------------------
Total distributions......................................... (.28) (.34)
----------------------------------------
Net asset value, end of period.............................. $12.79 $13.00
========================================
Total Return*............................................... .53% 3.69%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's)........................... $2,625 $1,065
Ratios to average net assets:
Expenses(a)................................................ 2.32%** 2.08%
Expenses, excluding waiver and payments by affiliate(a).... 2.32%** 2.21%
Net investment income...................................... .97%** .19%
Portfolio turnover rate..................................... 29.04% 81.81%
(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................................................... 2.31%** 2.06%
Expenses, excluding waiver and payments by affiliate....... 2.31%** 2.19%
</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 FINANCIAL SERVICES FUND
Financial Highlights (continued)
<TABLE>
<CAPTION>
CLASS C
----------------------------------------------------------
SIX MONTHS ENDED YEAR ENDED DECEMBER 31,
JUNE 30, 2000 ------------------------------------
(UNAUDITED) 1999 1998 1997+
----------------------------------------------------------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE++
(For a share outstanding throughout the period)
Net asset value, beginning of period..................... $13.05 $12.83 $12.26 $10.00
----------------------------------------------------------
Income from investment operations:
Net investment income................................... .06 .02 .08 .01
Net realized and unrealized gains....................... .02 .46 .68 2.35
----------------------------------------------------------
Total from investment operations......................... .08 .48 .76 2.36
----------------------------------------------------------
Less distributions from:
Net investment income................................... --*** (.04) (.08) (.01)
Net realized gains...................................... (.27) (.22) (.11) (.09)
----------------------------------------------------------
Total distributions...................................... (.27) (.26) (.19) (.10)
----------------------------------------------------------
Net asset value, end of period........................... $12.86 $13.05 $12.83 $12.26
==========================================================
Total Return*............................................ .58% 3.75% 6.13% 23.57%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's)........................ $74,400 $88,773 $127,717 $43,207
Ratios to average net assets:
Expenses(a)............................................. 2.30%** 2.06% 2.01% 2.00%**
Expenses, excluding waiver and payments by
affiliate(a).......................................... 2.30%** 2.19% 2.10% 2.62%**
Net investment income................................... .99%** .18% .77% .37%**
Portfolio turnover rate.................................. 29.04% 81.81% 136.76% 42.26%
(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................................................ 2.29%** 2.04% 2.00% 2.00%**
Expenses, excluding waiver and payments by affiliate.... 2.29%** 2.17% 2.09% 2.62%**
</TABLE>
*Total return does not reflect sales commissions or the contingent deferred
sales charge and is not annualized.
**Annualized.
***The Fund paid distributions from net investment income of $0.0021 per share.
+For the period August 19, 1997 (commencement of operations) to December 31,
1997.
++Based on average weighted shares outstanding effective year ended December 31,
1999.
See Notes to Financial Statements.
12
<PAGE>
MUTUAL FINANCIAL SERVICES FUND
STATEMENT OF INVESTMENTS, JUNE 30, 2000 (UNAUDITED)
<TABLE>
<CAPTION>
COUNTRY SHARES VALUE
--------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS 85.4%
BANKS 45.3%
AmSouth Bancorporation...................................... United States 98,000 $ 1,543,500
Anglo Irish Bank Corp. PLC.................................. Irish Republic 1,756,318 3,841,954
Banca Nazionale del Lavoro SpA.............................. Italy 650,000 2,286,626
Bank of Ireland............................................. Irish Republic 118,040 746,773
Banknorth Group Inc. ....................................... United States 89,510 1,370,622
Boston Private Financial Holdings Inc. ..................... United States 386,200 3,886,138
Chase Manhattan Corp. ...................................... United States 54,750 2,521,922
City National Corp. ........................................ United States 152,653 5,304,692
Comerica Inc. .............................................. United States 33,400 1,498,825
Commercial Federal Corp. ................................... United States 482,700 7,512,019
Espirito Santo Financial Group SA, ADR...................... Portugal 58,600 1,054,800
Financial Institutions Inc. ................................ United States 29,268 409,752
+*First Community Bancorp. ................................. United States 439,765 5,991,798
First Essex Bancorp Inc. ................................... United States 119,300 1,901,344
Firstar Corp. .............................................. United States 81,300 1,712,381
Fleet Boston Financial Corp. ............................... United States 120,000 4,080,000
Greenpoint Financial Corp. ................................. United States 193,386 3,625,988
M & T Bank Corp. ........................................... United States 8,000 3,600,000
Mellon Financial Corp. ..................................... United States 53,500 1,949,406
National City Corp. ........................................ United States 51,500 878,719
Pacific Century Financial Corp. ............................ United States 75,000 1,096,875
PNC Financial Services Group................................ United States 20,100 942,188
Prosperity Bancshares Inc. ................................. United States 179,600 2,896,050
Sovereign Bancorp Inc. ..................................... United States 1,122,000 7,889,063
(R)+*State National Bancshares Inc. ........................ United States 507,936 7,619,040
Sterling Bancshares Inc. ................................... United States 74,500 805,531
(R)+*Superior Financial Corp. .............................. United States 737,000 7,531,219
TCF Financial Corp. ........................................ United States 239,200 6,144,450
Texas Regional Bancshares Inc., A........................... United States 58,900 1,494,588
U.S. Bancorp. .............................................. United States 501,130 9,646,753
Union Bank of Norway, 144A.................................. Norway 100,000 2,252,068
Unionbancal Corp. .......................................... United States 30,000 556,875
+Warren Bancorp Inc. ....................................... United States 405,300 2,887,763
Wells Fargo & Co. .......................................... United States 13,469 521,924
*Zions Bancorp., wts., 1/01/03.............................. United States 3,669 68,356
------------
108,070,002
------------
DIVERSIFIED FINANCIALS 22.5%
Bear Stearns Cos. Inc. ..................................... United States 10,500 437,063
*Blackrock Inc. ............................................ United States 40,000 1,160,000
Capital One Financial Corp. ................................ United States 60,000 2,677,500
CIT Group Inc., A........................................... United States 223,130 3,625,863
*CompuCredit Corp. ......................................... United States 62,800 1,884,000
Finova Group Inc. .......................................... United States 129,600 1,684,800
Heller Financial Inc. ...................................... United States 236,736 4,853,088
Household International Inc. ............................... United States 186,070 7,733,534
</TABLE>
13
<PAGE>
MUTUAL FINANCIAL SERVICES FUND
STATEMENT OF INVESTMENTS, JUNE 30, 2000 (UNAUDITED) (CONT.)
<TABLE>
<CAPTION>
COUNTRY SHARES VALUE
--------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS (CONT.)
DIVERSIFIED FINANCIALS (CONT.)
Investors Group Inc. ....................................... Canada 171,900 $ 2,360,913
*John Hancock Financial Services Inc. ...................... United States 136,800 3,240,450
Kansas City Southern Industries Inc. ....................... United States 16,600 1,472,211
Lehman Brothers Holdings Inc. .............................. United States 11,900 1,125,294
Metris Cos. Inc. ........................................... United States 295,300 7,419,413
*MFN Financial Corp. ....................................... United States 54,677 338,314
Providian Financial Corp. .................................. United States 45,000 4,050,000
United Asset Management Corp. .............................. United States 412,600 9,644,525
------------
53,706,968
------------
INSURANCE 17.6%
Aetna Inc. ................................................. United States 20,000 1,283,750
Allmerica Financial Corp. .................................. United States 73,800 3,865,275
Ambac Financial Group Inc. ................................. United States 50,000 2,740,625
American General Corp. ..................................... United States 20,000 1,220,000
Financial Security Assurance Holdings Ltd. ................. United States 2,000 151,750
Hartford Financial Services Group Inc. ..................... United States 39,200 2,192,750
*Industrial Alliance Life Insurance Co. .................... Canada 211,180 3,491,874
IPC Holdings Ltd. .......................................... Bermuda 36,200 506,800
Irish Life & Permanent PLC.................................. Irish Republic 371,800 3,137,873
Jefferson-Pilot Corp. ...................................... United States 68,100 3,843,394
MBIA Inc. .................................................. United States 51,900 2,500,931
*MetLife Inc. .............................................. United States 32,600 686,637
Mutual Risk Management Ltd. ................................ Bermuda 32,000 554,000
PMI Group Inc. ............................................. United States 57,350 2,724,125
Radian Group Inc. .......................................... United States 81,291 4,206,809
ReliaStar Financial Corp. .................................. United States 66,000 3,460,875
Renaissance Holdings Ltd. .................................. Bermuda 49,600 2,160,700
XL Capital Ltd., A.......................................... Bermuda 58,700 3,177,135
------------
41,905,303
------------
TOTAL COMMON STOCKS (COST $195,146,961)..................... 203,682,273
------------
<CAPTION>
PRINCIPAL
AMOUNT**
--------
<S> <C> <C> <C>
CORPORATE BONDS 1.5%
Matrix Bancorp Inc., 11.50%, 9/30/04........................ United States $ 2,200,000 2,002,000
MFN Financial Corp.:
Series A, 10.00%, 3/23/01................................. United States 137,407 131,567
Series B, FRN, 11.26%, 3/23/01............................ United States 167,407 161,966
(R)Source Capital Corp., 7.50%, 3/01/08..................... United States 1,400,000 1,182,104
------------
TOTAL CORPORATE BONDS (COST $3,856,187)..................... 3,477,637
------------
</TABLE>
14
<PAGE>
MUTUAL FINANCIAL SERVICES FUND
STATEMENT OF INVESTMENTS, JUNE 30, 2000 (UNAUDITED) (CONT.)
<TABLE>
<CAPTION>
PRINCIPAL
COUNTRY AMOUNT** VALUE
--------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
GOVERNMENT AGENCIES 13.3%
Fannie Mae, 5.84% to 6.54%, with maturities to 6/07/01...... United States $15,000,000 $ 14,330,630
Federal Home Loan Bank, 5.90% to 6.67%, with maturities to
5/25/01................................................... United States 11,568,000 11,211,593
Federal Home Loan Mortgage Corp., 5.58% to 6.57%, with
maturities to 3/01/01..................................... United States 6,425,000 6,254,663
------------
TOTAL GOVERNMENT AGENCIES (COST $31,817,302)................ 31,796,886
------------
TOTAL INVESTMENTS (COST $230,820,450) 100.2%................ 238,956,796
SECURITIES SOLD SHORT (.2%)................................. (482,738)
NET EQUITY IN FORWARD CONTRACTS............................. (5,154)
OTHER ASSETS, LESS LIABILITIES.............................. (79,825)
------------
TOTAL NET ASSETS 100.0%..................................... $238,389,079
============
<CAPTION>
SECURITIES SOLD SHORT (PROCEEDS $779,863)
ISSUER COUNTRY SHARES VALUE
--------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
*Fremont General Corp. ..................................... United States 122,600 $ 482,738
============
</TABLE>
*Non-income producing.
**Securities denominated in U.S. dollars.
(R)Restricted securities (see note 6).
+Affiliated issuers (see note 7).
See Notes to Financial Statements.
15
<PAGE>
MUTUAL FINANCIAL SERVICES 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 $205,777,422).................. $214,926,976
Non controlled affiliates (cost $25,043,028).............. 24,029,820 $238,956,796
------------
Receivables:
Investment securities sold................................ 692,036
Capital shares sold....................................... 325,914
Dividends and interest.................................... 576,792
Unrealized gain on forward exchange contracts (Note 8)..... 235,120
Deposits with broker for securities sold short............. 628,811
------------
Total assets.......................................... 241,415,469
------------
Liabilities:
Payables:
Investment securities purchased........................... 1,035,576
Capital shares redeemed................................... 691,540
To affiliates............................................. 458,466
Funds advanced by custodian................................ 38,426
Securities sold short, at value (proceeds $779,863)........ 482,738
Unrealized loss on forward exchange contracts (Note 8)..... 240,274
Accrued expenses........................................... 79,370
------------
Total liabilities..................................... 3,026,390
------------
Net assets, at value........................................ $238,389,079
============
Net assets consist of:
Undistributed net investment income........................ $ 1,523,572
Net unrealized appreciation................................ 8,428,317
Accumulated net realized loss.............................. (3,039,660)
Capital shares............................................. 231,476,850
------------
Net assets, at value........................................ $238,389,079
============
</TABLE>
16
<PAGE>
MUTUAL FINANCIAL SERVICES 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
($64,606,544 / 5,013,005 shares outstanding).............. $12.89
===========
CLASS A:
Net asset value per share ($96,757,631 / 7,502,386 shares
outstanding).............................................. $12.90
===========
Maximum offering price per share ($12.90 / 94.25%)......... $13.69
===========
CLASS B:
Net asset value and maximum offering price per share
($2,625,053 / 205,210 shares outstanding)*................ $12.79
===========
CLASS C:
Net asset value per share ($74,399,851 / 5,786,264 shares
outstanding)*............................................. $12.86
===========
Maximum offering price per share ($12.86 / 99.00%)......... $12.99
===========
</TABLE>
*Redemption price per share is equal to net asset value less any applicable
sales charge.
See Notes to Financial Statements.
17
<PAGE>
MUTUAL FINANCIAL SERVICES 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 $35,637)
Dividends.................................................. $ 2,840,726
Interest................................................... 1,075,107
-----------
Total investment income............................... $ 3,915,833
Expenses:
Management fees (Note 3)................................... 951,258
Administrative fees (Note 3)............................... 92,142
Distribution fees (Note 3)
Class A................................................... 167,834
Class B................................................... 9,812
Class C................................................... 373,267
Transfer agent fees (Note 3)............................... 387,300
Custodian fees............................................. 4,500
Reports to shareholders.................................... 49,500
Registration and filing fees............................... 17,500
Professional fees.......................................... 39,400
Directors' fees and expenses............................... 4,100
Dividends for securities sold short........................ 15,477
Other...................................................... 4,500
-----------
Total expenses.................................... 2,116,590
-----------
Net investment income........................... 1,799,243
-----------
Realized and unrealized gains (losses):
Net realized gain (loss) from:
Investments............................................... (3,628,493)
Foreign currency transactions............................. 406,474
Short sale transactions................................... 547,638
-----------
Net realized loss..................................... (2,674,381)
Net unrealized depreciation on:
Investments................................................ (116,596)
Translation of assets and liabilities denominated in
foreign currencies....................................... (153,968)
-----------
Net unrealized depreciation........................... (270,564)
-----------
Net realized and unrealized loss............................ (2,944,945)
-----------
Net decrease in net assets resulting from operations........ $(1,145,702)
===========
</TABLE>
See Notes to Financial Statements.
18
<PAGE>
MUTUAL FINANCIAL SERVICES 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..................................... $ 1,799,243 $ 2,451,265
Net realized gain (loss) from investments, foreign
currency transactions, and short sale transactions....... (2,674,381) 10,541,579
Net unrealized appreciation (depreciation) on investments
and translation of assets and liabilities denominated in
foreign currencies....................................... (270,564) 2,510,923
-------------------------------------
Net increase (decrease) in net assets resulting from
operations............................................ (1,145,702) 15,503,767
Distributions to shareholders from:
Net investment income:
Class Z.................................................. (165,185) (1,205,105)
Class A.................................................. (167,519) (1,195,910)
Class B.................................................. (3,123) (6,371)
Class C.................................................. (11,946) (307,658)
Net realized gains:
Class Z.................................................. (1,304,049) (1,295,892)
Class A.................................................. (1,964,991) (1,804,345)
Class B.................................................. (52,644) (16,201)
Class C.................................................. (1,515,976) (1,500,239)
Capital share transactions (Note 2):
Class Z.................................................. (10,558,572) (68,514,713)
Class A.................................................. (8,797,053) (60,151,254)
Class B.................................................. 1,491,017 1,104,650
Class C.................................................. (12,104,729) (41,758,899)
-------------------------------------
Net decrease in net assets.............................. (36,300,472) (161,148,170)
Net assets:
Beginning of period........................................ 274,689,551 435,837,721
-------------------------------------
End of period.............................................. $238,389,079 $ 274,689,551
=====================================
Undistributed net investment income included in net assets:
End of period.............................................. $ 1,523,572 $ 72,102
=====================================
</TABLE>
See Notes to Financial Statements.
19
<PAGE>
MUTUAL FINANCIAL SERVICES FUND
Notes to Financial Statements (unaudited)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Mutual Financial Services Fund (the Fund) is a separate, diversified series of
Franklin Mutual Series Fund, Inc. (the Series Fund), which is an open-end
investment company registered under the Investment Company Act of 1940. The Fund
seeks long-term capital appreciation by investing approximately 65% of its
assets in securities issued by companies in the financial services industry. 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.
20
<PAGE>
MUTUAL FINANCIAL SERVICES 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. SECURITIES SOLD SHORT:
The Fund is engaged in selling securities short, which obligates the Fund to
replace a security borrowed. The Fund would incur a loss if the price of the
security increases between the date of the short sale and the date on which the
Fund replaces the borrowed security. The Fund would realize a gain if the price
of the security declines between those dates.
The Fund is required to establish a margin account with the broker lending the
security sold short. While the short sale is outstanding, the broker retains the
proceeds of the short sale. The Fund must also maintain a deposit for the broker
consisting of cash and securities having a value equal to a specified percentage
of the value of the securities sold short.
f. 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 shares, 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.
21
<PAGE>
MUTUAL FINANCIAL SERVICES FUND
Notes to Financial Statements (unaudited) (continued)
2. CAPITAL STOCK (CONT.)
At June 30, 2000, there were 500 million shares authorized ($0.001 par value) of
which 200 million, 100 million, 100 million, and 100 million were designated as
Class Z, Class A, Class B, and Class C shares, respectively. Transactions in the
Fund's shares were as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
JUNE 30, 2000 DECEMBER 31, 1999
-------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
--------------------------------------------------------
<S> <C> <C> <C> <C>
CLASS Z:
Shares sold................................................ 1,107,672 $ 13,789,209 1,500,207 $ 20,309,447
Shares issued on reinvestment of distributions............. 106,867 1,389,267 180,539 2,351,572
Shares redeemed............................................ (2,096,170) (25,737,048) (6,923,737) (91,175,732)
-------------------------------------------------------------
Net decrease............................................... (881,631) $(10,558,572) (5,242,991) $(68,514,713)
=============================================================
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
JUNE 30, 2000 DECEMBER 31, 1999
-------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
--------------------------------------------------------
<S> <C> <C> <C> <C>
CLASS A:
Shares sold................................................ 2,361,436 $ 30,013,370 2,330,975 $ 31,882,857
Shares issued on reinvestment of distributions............. 153,903 2,002,269 214,398 2,794,234
Shares redeemed............................................ (3,270,520) (40,812,692) (7,111,825) (94,828,345)
-------------------------------------------------------------
Net decrease............................................... (755,181) $ (8,797,053) (4,566,452) $(60,151,254)
=============================================================
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
JUNE 30, 2000 DECEMBER 31, 1999+
-------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
--------------------------------------------------------
<S> <C> <C> <C> <C>
CLASS B:
Shares sold................................................ 130,788 $ 1,587,009 81,880 $ 1,105,837
Shares issued on reinvestment of distributions............. 3,956 51,034 1,614 20,760
Shares redeemed............................................ (11,413) (147,026) (1,615) (21,947)
-------------------------------------------------------------
Net increase............................................... 123,331 $ 1,491,017 81,879 $ 1,104,650
=============================================================
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
JUNE 30, 2000 DECEMBER 31, 1999
-------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
--------------------------------------------------------
<S> <C> <C> <C> <C>
CLASS C:
Shares sold................................................ 983,697 $ 11,982,164 889,788 $ 11,927,663
Shares issued on reinvestment of distributions............. 109,669 1,422,407 130,019 1,687,741
Shares redeemed............................................ (2,108,225) (25,509,300) (4,170,705) (55,374,303)
-------------------------------------------------------------
Net decrease............................................... (1,014,859) $(12,104,729) (3,150,898) $(41,758,899)
=============================================================
</TABLE>
+Effective date of Class B shares was January 1, 1999.
22
<PAGE>
MUTUAL FINANCIAL SERVICES FUND
Notes to Financial Statements (unaudited) (continued)
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.
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 those shares and received contingent deferred sales
charges for the period of $40,836 and $45,376, respectively.
4. INCOME TAXES
No provision has been made for income taxes because the Fund's policy is to
qualify as a regulated investment company under the Internal Revenue Code and to
distribute all of its taxable income.
At June 30, 2000, the net unrealized appreciation based on the cost of
investments for income tax purposes of $230,844,581 was as follows:
<TABLE>
<S> <C>
Unrealized appreciation..................................... $ 26,153,778
Unrealized depreciation..................................... (18,041,563)
------------
Net unrealized appreciation................................. $ 8,112,215
============
</TABLE>
Net investment income and net realized capital gains differ for financial
statement and tax purposes primarily due to differing treatments of wash sales
and foreign currency transactions.
23
<PAGE>
MUTUAL FINANCIAL SERVICES 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 $62,517,134 and $94,631,932, respectively.
6. RESTRICTED SECURITIES
The Fund may purchase securities through a private offering that generally
cannot be sold to the public without prior registration under the Securities Act
of 1933. The costs of registering such securities are paid by the issuer.
Restricted securities held at June 30, 2000 are as follows:
<TABLE>
<CAPTION>
NUMBER OF SHARES OR ACQUISITION
PRINCIPAL AMOUNT ISSUER DATE VALUE
----------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C>
1,400,000 Source Capital Corp., 7.50%, 3/01/08........................ 2/06/98 $ 1,182,104
507,936 State National Bancshares Inc. ............................. 6/08/98 7,619,040
737,000 Superior Financial Corp. ................................... 3/27/98 7,531,219
-----------
TOTAL RESTRICTED SECURITIES (COST $16,001,326) (6.85% OF NET ASSETS).............. $16,332,363
===========
</TABLE>
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 $24,029,820. For the six months ended June 30, 2000, dividend income
from "affiliated persons" was $273,217 and net realized losses from disposition
of "affiliated persons" were $1,936,969.
<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>
NON CONTROLLED AFFILIATES
Broadway Financial Corp. ........... 56,662 -- (56,662) -- * --
First Community Bancorp............. -- 439,765 -- 439,765 $ 5,991,798 --
Pacific Bank NA**................... 531,462 -- (531,462) -- * $ 42,517
Professional Bancorp................ 171,216 -- (171,216) -- * --
Rancho Sante Fe National Bank***.... 347,223 -- (347,223) -- * 62,500
State National Bancshares Inc. ..... 507,936 -- -- 507,936 7,619,040 --
Superior Financial Corp. ........... 737,000 -- -- 737,000 7,531,219 --
Warren Bancorp Inc. ................ 405,300 -- -- 405,300 2,887,763 168,200
-------------------------------
TOTAL NON CONTROLLED AFFILIATES..... $24,029,820 $273,217
-------------------------------
<CAPTION>
REALIZED
CAPITAL
NAME OF ISSUER LOSS
------------------------------------
<S> <C>
NON CONTROLLED AFFILIATES
Broadway Financial Corp. ........... $ (146,334)
First Community Bancorp............. --
Pacific Bank NA**................... --
Professional Bancorp................ (1,790,635)
Rancho Sante Fe National Bank***....
State National Bancshares Inc. ..... --
Superior Financial Corp. ........... --
Warren Bancorp Inc. ................ --
-----------
TOTAL NON CONTROLLED AFFILIATES..... $(1,936,969)
-----------
</TABLE>
*As of June 30, 2000, no longer an affiliate.
**Pacific Bank NA merged into City National Corp. effective March 1,2000.
***Rancho Sante Fe National Bank merged into First Community Bancorp effective
June 5, 2000.
24
<PAGE>
MUTUAL FINANCIAL SERVICES FUND
Notes to Financial Statements (unaudited) (continued)
8. FINANCIAL INSTRUMENTS
The Fund has been a party to financial instruments with off-balance sheet risk,
primarily forward exchange contracts in order to minimize the impact on the Fund
from adverse changes in the relationship between the functional currency and
foreign currencies and interest rates. These instruments involve market risk in
excess of the amount recognized on the Statement of Assets and Liabilities. Some
of these risks have been minimized by offsetting contracts. Risks arise from the
possible inability of counterparties to meet the terms of their contracts,
future movement in currency values and interest rates and contract positions
that are not exact offsets. The contract amount indicates the extent of the
Fund's involvement in such contracts.
A forward exchange contract is an agreement between two parties to exchange
different currencies at a specific rate at an agreed future date. The contracts
are reported in the financial statements at the Fund's net equity, as measured
by the difference between the forward exchange rates at the reporting date and
the forward exchange rates at the day of entry into the contract.
As of June 30, 2000, the Fund had the following forward exchange contracts
outstanding:
<TABLE>
<CAPTION>
IN SETTLEMENT UNREALIZED
CONTRACTS TO BUY: EXCHANGE FOR DATE GAIN/(LOSS)
------------------ ------------------------------------------------
<C> <S> <C> <C> <C> <C> <C>
500,000 Canadian Dollars........................ U.S. $ 337,610 7/31/00 U.S. $ 119
=========== ---------
<CAPTION>
CONTRACTS TO SELL:
------------------
10,182,500 Canadian Dollars........................ U.S. $ 7,052,078 7/31/00 174,232
200,500 European Unit........................... 193,362 9/12/00 283
4,468,398 European Unit........................... 4,345,517 12/20/00 17,410
----------- ---------
U.S. $11,590,957 191,925
=========== ---------
Net unrealized gain on offsetting forward exchange
contracts................................................. 43,076
---------
Unrealized gain on forward exchange contracts.... 235,120
---------
<CAPTION>
CONTRACTS TO BUY:
------------------
<C> <S> <C> <C> <C> <C> <C>
1,945,310 Canadian Dollars........................ U.S. $ 1,344,375 7/31/00 (30,400)
=========== ---------
<CAPTION>
CONTRACTS TO SELL:
------------------
<C> <S> <C> <C> <C> <C> <C>
273,000 Canadian Dollars........................ U.S. $ 183,883 7/31/00 (517)
250,000 European Unit........................... 229,665 8/15/00 (10,685)
550,000 European Unit........................... 521,125 8/24/00 (7,923)
2,700,000 European Unit........................... 2,444,715 9/12/00 (155,359)
17,827,222 Norwegian Krone......................... 2,050,001 9/13/00 (35,390)
----------- ---------
U.S. $ 5,429,389 (209,874)
=========== ---------
Unrealized loss on forward exchange contracts...... (240,274)
---------
Net unrealized loss on forward exchange
contracts................................................. U.S. $ (5,154)
=========
</TABLE>
25
<PAGE>
SEMIANNUAL REPORT
CHAIRMAN OF THE BOARD
Michael F. Price
OFFICERS
Peter A. Langerman
Robert L. Friedman
Jeffrey Altman
Raymond Garea
Lawrence Sondike
David J. Winters
INVESTMENT MANAGER
Franklin Mutual Advisers, LLC
51 John F. Kennedy Parkway
Short Hills, NJ 07078
DISTRIBUTOR
Franklin/Templeton Distributors, Inc.
1-800/DIAL BEN(R)
franklintempleton.com
SHAREHOLDER SERVICES
1-800/632-2301 - (Class A, B, & C)
1-800/448-FUND - (Class Z)
This report must be preceded or accompanied by the current Mutual Financial
Services Fund prospectus, which contains more complete information including
risk factors, charges and expenses.
To ensure the highest quality of service, telephone calls to or from our service
departments may be monitored, recorded and accessed. These calls can be
determined by the presence of a regular beeping tone.
479 S00 08/00 [RECYCLE LOGO]Printed on recycled paper
