[Cover Art]
Semi-Annual Report
June 30, 2000
MUTUAL QUALIFIED FUND
[FRANKLIN TEMPLETON INVESTMENTS LOGO]
<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.
[Raymond Garea Image] [Jeff Diamond Image]
<TABLE>
<S> <C>
RAYMOND GAREA JEFF DIAMOND
Portfolio Manager Assistant Portfolio Manager
Mutual Qualified Fund Mutual Qualified Fund
PETER A. LANGERMAN
Chief Executive Officer
Franklin Mutual Advisers, LLC
</TABLE>
WE'RE ON THE WEB --
Now you can access online information about your fund, including this
shareholder report. Find our Web site at FRANKLINTEMPLETON.COM, your online
resource for fund literature, prices and performance, investor information and
around-the-clock account services.
<PAGE>
SHAREHOLDER LETTER
Your Fund's Goal: Mutual Qualified Fund seeks capital appreciation, with income
as a secondary objective, by investing primarily in common and preferred stocks,
bonds and convertible securities in the U.S. and other countries.
Dear Shareholder:
We are pleased to bring you this semiannual report for Mutual Qualified Fund,
which covers the six months ended June 30, 2000. During this time, the U.S.
economy forged ahead rapidly, unemployment sank to a 30-year low, and
construction and consumer spending rose substantially. Concerned about the
possibility of future inflation, the Federal Reserve Board (the Fed) raised the
federal funds target rate three times by mid-May. Toward the end of the period,
statistics were released indicating the red-hot economy might be starting to
cool down.
The period under review was one of enormous stock market volatility and radical
shifts in leadership among various sectors of the stock market. During the first
two months of 2000, the Nasdaq Composite Index soared
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 14.
CONTENTS
<TABLE>
<S> <C>
Shareholder Letter 1
Performance Summary 8
Financial Highlights &
Statement of Investments 10
Financial Statements 24
Notes to Financial
Statements 28
</TABLE>
[Fund Catagory Pyramid Graph]
<PAGE>
INDEX COMPARISON (BASED ON DAILY PRICE CHANGE)*
S&P 500 vs. Nasdaq Composite vs. MSCI All Countries - Europe (12/31/99 -
6/30/00)
[PLOTPOINTS]
<TABLE>
<CAPTION>
Date S&P 500 NASDAQ Composite MSCI All Countries - S&P 500 NASDAQ MSCI AC -
Index Index Europe Index Europe
<S> <C> <C> <C> <C> <C> <C>
12/31/99 100.0 100.0 100.0
1/3/00 99.0 101.5 100.8 -0.95% 1.52% 0.76%
1/4/00 95.2 95.9 98.4 -3.83% -5.55% -2.33%
1/5/00 95.4 95.3 96.3 0.19% -0.62% -2.18%
1/6/00 95.5 91.6 95.9 0.10% -3.88% -0.37%
1/7/00 98.1 95.4 97.5 2.71% 4.17% 1.62%
1/10/00 99.2 99.5 98.6 1.12% 4.30% 1.18%
1/11/00 97.9 96.4 98.3 -1.31% -3.17% -0.35%
1/12/00 97.5 94.6 98.0 -0.44% -1.82% -0.31%
1/13/00 98.7 97.2 98.6 1.22% 2.78% 0.67%
1/14/00 99.7 99.9 99.6 1.07% 2.71% 1.00%
1/18/00 99.0 101.5 98.0 -0.68% 1.64% -1.66%
1/19/00 99.1 102.0 97.5 0.05% 0.50% -0.47%
1/20/00 98.4 103.0 97.3 -0.71% 0.92% -0.15%
1/21/00 98.1 104.1 96.7 -0.29% 1.10% -0.67%
1/24/00 95.4 100.7 96.5 -2.76% -3.29% -0.18%
1/25/00 96.0 102.4 95.1 0.61% 1.74% -1.42%
1/26/00 95.6 100.0 95.7 -0.42% -2.34% 0.63%
1/27/00 95.2 99.3 95.9 -0.39% -0.75% 0.14%
1/28/00 92.6 95.5 94.9 -2.75% -3.77% -1.01%
1/31/00 94.9 96.8 92.9 2.52% 1.37% -2.14%
2/1/00 95.9 99.6 93.9 1.06% 2.83% 1.07%
2/2/00 95.9 100.1 95.1 -0.01% 0.54% 1.26%
2/3/00 97.0 103.5 97.5 1.12% 3.36% 2.61%
2/4/00 96.9 104.3 97.3 -0.04% 0.79% -0.28%
2/7/00 96.9 106.2 96.3 -0.01% 1.83% -1.04%
2/8/00 98.1 108.8 99.2 1.23% 2.45% 3.10%
2/9/00 96.1 107.2 99.7 -2.08% -1.45% 0.44%
2/10/00 96.4 110.2 98.9 0.36% 2.81% -0.74%
2/11/00 94.4 108.0 98.7 -2.10% -2.01% -0.21%
2/14/00 94.6 108.6 97.4 0.20% 0.53% -1.35%
2/15/00 95.4 108.6 96.0 0.87% 0.05% -1.42%
2/16/00 94.4 108.8 97.2 -1.03% 0.16% 1.23%
2/17/00 94.5 111.8 98.2 0.04% 2.74% 1.07%
2/18/00 91.6 108.4 97.7 -3.04% -3.02% -0.55%
2/22/00 92.0 107.7 98.4 0.45% -0.67% 0.69%
2/23/00 92.6 111.8 99.5 0.63% 3.84% 1.12%
2/24/00 92.1 113.5 98.9 -0.53% 1.48% -0.53%
2/25/00 90.8 112.8 99.1 -1.48% -0.59% 0.16%
2/28/00 91.8 112.5 96.8 1.10% -0.28% -2.33%
2/29/00 93.0 115.4 97.5 1.36% 2.60% 0.78%
3/1/00 93.9 117.6 99.3 0.93% 1.86% 1.86%
3/2/00 94.0 116.8 101.2 0.19% -0.62% 1.89%
3/3/00 95.9 120.8 101.8 1.98% 3.37% 0.56%
3/6/00 94.7 120.5 102.6 -1.27% -0.20% 0.78%
3/7/00 92.3 119.1 101.4 -2.56% -1.16% -1.17%
3/8/00 93.0 120.3 100.2 0.82% 1.02% -1.19%
3/9/00 95.4 124.0 101.7 2.56% 3.06% 1.51%
3/10/00 95.0 124.1 102.1 -0.47% 0.03% 0.38%
3/13/00 94.2 120.6 99.9 -0.82% -2.80% -2.11%
3/14/00 92.5 115.7 99.7 -1.77% -4.09% -0.25%
3/15/00 94.8 112.6 98.0 2.43% -2.63% -1.68%
3/16/00 99.3 115.9 99.9 4.76% 2.94% 1.93%
3/17/00 99.7 117.9 100.2 0.41% 1.71% 0.31%
3/20/00 99.1 113.3 101.3 -0.54% -3.92% 1.14%
3/21/00 101.7 115.8 101.5 2.56% 2.21% 0.13%
3/22/00 102.1 119.5 100.7 0.45% 3.25% -0.70%
3/23/00 104.0 121.4 101.1 1.78% 1.56% 0.39%
3/24/00 104.0 122.0 103.4 0.01% 0.45% 2.23%
3/27/00 103.7 121.9 103.1 -0.24% -0.09% -0.28%
3/28/00 102.6 118.8 103.0 -1.06% -2.51% -0.11%
3/29/00 102.7 114.1 101.3 0.05% -3.91% -1.63%
3/30/00 101.3 109.5 99.0 -1.37% -4.02% -2.23%
3/31/00 102.0 112.4 99.7 0.72% 2.58% 0.72%
4/3/00 102.5 103.8 98.0 0.49% -7.64% -1.75%
4/4/00 101.7 102.0 98.3 -0.75% -1.77% 0.34%
4/5/00 101.2 102.5 97.3 -0.49% 0.49% -1.10%
4/6/00 102.2 104.9 98.8 0.94% 2.36% 1.55%
4/7/00 103.2 109.3 99.9 1.00% 4.19% 1.17%
4/10/00 102.4 102.9 99.9 -0.78% -5.81% 0.02%
4/11/00 102.1 99.7 98.3 -0.26% -3.16% -1.64%
4/12/00 99.9 92.6 97.8 -2.23% -7.06% -0.53%
4/13/00 98.0 90.4 97.6 -1.82% -2.46% -0.13%
4/14/00 92.3 81.6 95.1 -5.83% -9.67% -2.60%
4/17/00 95.4 87.0 93.5 3.31% 6.56% -1.66%
4/18/00 98.1 93.2 93.4 2.87% 7.19% -0.17%
4/19/00 97.2 91.1 94.6 -0.98% -2.30% 1.28%
4/20/00 97.6 89.5 95.1 0.50% -1.69% 0.55%
4/24/00 97.3 85.6 95.1 -0.33% -4.43% 0.02%
4/25/00 100.6 91.2 94.8 3.33% 6.57% -0.29%
4/26/00 99.4 89.2 95.4 -1.11% -2.19% 0.59%
4/27/00 99.7 92.7 93.4 0.27% 3.97% -2.04%
4/28/00 98.9 94.9 95.3 -0.85% 2.30% 1.94%
5/1/00 99.9 97.3 94.9 1.09% 2.52% -0.33%
5/2/00 98.4 93.0 96.7 -1.50% -4.36% 1.81%
5/3/00 96.3 91.1 93.7 -2.16% -2.06% -3.11%
5/4/00 95.9 91.4 93.4 -0.39% 0.35% -0.25%
5/5/00 97.5 93.8 93.7 1.64% 2.60% 0.32%
5/8/00 96.9 90.2 93.2 -0.59% -3.86% -0.57%
5/9/00 96.1 88.1 92.6 -0.84% -2.30% -0.67%
5/10/00 94.1 83.2 91.6 -2.06% -5.59% -1.02%
5/11/00 95.8 86.0 92.4 1.79% 3.39% 0.89%
5/12/00 96.7 86.7 93.9 0.93% 0.84% 1.57%
5/15/00 98.9 88.7 93.9 2.21% 2.23% -0.03%
5/16/00 99.8 91.4 94.7 0.94% 3.05% 0.90%
5/17/00 98.5 89.6 92.0 -1.24% -1.95% -2.88%
5/18/00 97.8 87.0 92.3 -0.73% -2.91% 0.39%
5/19/00 95.8 83.3 89.5 -2.11% -4.19% -3.10%
5/22/00 95.3 82.7 89.0 -0.44% -0.77% -0.56%
5/23/00 93.5 77.8 89.9 -1.92% -5.93% 1.00%
5/24/00 95.2 80.4 88.9 1.83% 3.35% -1.07%
5/25/00 94.0 78.8 90.8 -1.25% -2.00% 2.09%
5/26/00 93.8 78.8 91.6 -0.25% -0.01% 0.95%
5/30/00 96.8 85.0 94.3 3.22% 7.94% 2.98%
5/31/00 96.7 83.6 94.3 -0.13% -1.69% -0.06%
6/1/00 98.6 88.0 95.8 1.99% 5.34% 1.61%
6/2/00 100.5 93.7 99.5 1.96% 6.44% 3.85%
6/5/00 99.9 93.9 98.7 -0.65% 0.22% -0.85%
6/6/00 99.2 92.3 99.4 -0.67% -1.71% 0.76%
6/7/00 100.1 94.3 98.6 0.93% 2.21% -0.86%
6/8/00 99.5 94.0 98.3 -0.66% -0.36% -0.21%
6/9/00 99.2 95.2 98.0 -0.32% 1.29% -0.40%
6/12/00 98.4 92.6 98.2 -0.75% -2.76% 0.27%
6/13/00 100.0 94.6 98.6 1.62% 2.21% 0.36%
6/14/00 100.1 93.3 99.4 0.07% -1.39% 0.88%
6/15/00 100.6 94.5 98.2 0.56% 1.27% -1.20%
6/16/00 99.7 94.9 98.6 -0.97% 0.39% 0.34%
6/19/00 101.1 98.0 98.2 1.47% 3.35% -0.36%
6/20/00 100.5 98.6 98.6 -0.68% 0.59% 0.43%
6/21/00 100.7 99.9 96.9 0.22% 1.26% -1.80%
6/22/00 98.8 96.7 95.9 -1.82% -3.13% -1.03%
6/23/00 98.1 94.5 95.4 -0.74% -2.32% -0.45%
6/26/00 99.0 96.1 95.5 0.96% 1.74% 0.02%
6/27/00 98.7 94.8 95.4 -0.32% -1.36% 0.00%
6/28/00 99.0 96.8 96.0 0.29% 2.11% 0.53%
6/29/00 98.2 95.3 94.3 -0.85% -1.60% -1.69%
6/30/00 99.0 97.5 96.0 0.85% 2.29% 1.72%
</TABLE>
* Index performance shown represents percentage deviations from a base of 100.
dramatically as the desire for technology and new economy stocks reached a fever
pitch.(1) After peaking on March 10 with an approximate 24% year-to-date return,
the Nasdaq(R) declined an astonishing 37.32% before recovering somewhat in late
May and June. The apparent catalysts for this volatility were the Fed rate
hikes, earnings disappointments from several major telecommunications companies,
the introduction of legislative proposals adverse to drug company interests,
soaring energy prices and fears of inflation as labor markets tightened.
However, when investors began to believe the economy might be about to achieve
Alan Greenspan's desired soft landing, technology stocks rallied and by June 30,
the Nasdaq was posting a loss of only 2.02% for the six-month period.
Within this environment, Mutual Qualified Fund - Class Z produced a 3.65%
six-month cumulative total return, as shown in the Performance Summary on page
8, while the Standard & Poor's 500(R) (S&P 500(R)) Composite Index returned
-0.42%
1. 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.
2
<PAGE>
during the same period. The Fund's return also compares favorably with its peer
group as measured by the Lipper Multi-Cap Value Funds Average, which returned
-0.47% during the period.(2)
Several factors contributed to the Fund's positive performance. First, some of
our larger holdings, such as Lagardere, Pepsi Bottling Group and Mid-Atlantic
Medical Services, appreciated considerably during the period. In addition, the
Fund's other health care holdings, including hospital management companies and
HMOs, appreciated significantly as investors came to realize that pricing power
had returned to the sector and the regulatory environment had become less
hostile. The Fund also benefited when one of its holdings, Hussmann
International (a refrigeration systems manufacturer), was acquired by
Ingersoll-Rand at a premium of almost 117% to its closing price the day prior to
the announcement.
Our investment in Hussmann is an excellent example of our philosophy of seeking
investment in companies whose stocks trade at substantial discounts to what we
believe to be the intrinsic (or private market) value of their underlying
businesses. Although Hussmann's stock had been depressed by a delay in orders
from a few of its U.S. customers, it did not change the company's position as a
U.S. market leader with substantial growth opportunities overseas. Transactions
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 Index is unmanaged and includes reinvested
dividends. One cannot invest directly in an index.
The Lipper Multi-Cap Value Funds Average is an equally-weighted average
consisting of 518 mutual funds (including Mutual Qualified Fund) within the
Multi-Cap Value investment objective. Returns are adjusted for the reinvestment
of capital gains distributions and income dividends.
GEOGRAPHIC DISTRIBUTION
Based on Total Net Assets
6/30/00
<TABLE>
<CAPTION>
[Plotpoints for Geographic Distribution Bar Chart]
<S> <C>
United States 63.8%
United Kingdom 7.5%
France 3.3%
Sweden 2.2%
Netherlands 1.9%
Bermuda 1.1%
Other Countries 3.4%
Fixed-Income Securities 6.8%
Government Agencies
& Other Net Assets 10.0%
</TABLE>
3
<PAGE>
TOP 10 HOLDINGS
6/30/00
<TABLE>
<CAPTION>
COMPANY, % OF TOTAL
SECTOR, COUNTRY NET ASSETS
--------------- ----------
<S> <C>
Canary Wharf Group PLC, 3.1%
Real Estate, United Kingdom
Investor AB, 2.2%
Industrial Conglomerates,
Sweden
Telephone & Data Systems Inc., 2.2%
Diversified Telecommunication
Services, United States
Scripps Co., A, 1.5%
Media, United States
United Asset Management Corp., 1.4%
Diversified Financials,
United States
Florida East Coast Industries Inc., 1.3%
Road & Rail, United States
Pepsi Bottling Group Inc., 1.2%
Beverages, United States
Thermo Electron Corp., 1.2%
Electrical Equipment,
United States
Household International Inc., 1.2%
Diversified Financials,
United States
Republic Services Inc., 1.2%
Commercial Services &
Supplies, United States
</TABLE>
involving acquisitions of similar companies suggested the stock was truly a
bargain. We were gratified by the successful outcome of this investment because
it demonstrates that value does eventually get recognized and value investing
can produce impressive gains.
Of course, the period under review was not all rosy, and there were a few
disappointments. Our position in Telephone & Data Systems, a leading
telecommunications company that had a spectacular run in 1999, declined in
value, along with shares of other wireless communications companies. Although we
had reduced our holdings during the stock's rise, it remained a significant
position in the portfolio. Owens-Illinois was another company whose stock
negatively impacted six-month returns. While the company has a leading and very
profitable position in glass packaging in the U.S., its eastern European and
South American operations have struggled mightily to recover from the effects of
the 1998 financial crisis. As a result, the company has been unable to meet Wall
Street's and our expectations for earnings and cash flow. Nevertheless, we
believe Owens-Illinois will be successful in the long run and will prove to be a
profitable investment for your Fund.
During the period, the most notable increase in our holdings occurred in the
telecommunications area, where we added to or initiated investments in British
Telecommunications PLC, MediaOne Group and U.S. West (which was acquired by
Qwest Communications during the period). The latter two situations represented
complicated arbitrage opportunities we found compelling. On the sell side of the
ledger, we made significant
4
<PAGE>
sales of some of our European holdings such as Lagardere SCA and NV Holdingsmig
de Telegraaf. These companies have significant hidden media- and
technology-related assets, causing investors to drive the stocks to more fully
valued levels during the strong market rally earlier in the year.
By the end of the reporting period, we were finding a great deal of value in
cyclical sectors of the market, which many believe will be hurt if the U.S.
economy were to experience a significant slowdown. Some of the areas where we
have increased our holdings include retailers, particularly department stores,
and paper/forest products companies. Paper companies are witnessing valuations
not seen since the recessionary period of 1990-1991, yet the industry has
consolidated substantially since that time, and growth in paper-making capacity
(the usual suspect for triggering slumps in paper prices) remains constrained.
This sort of situation provides us with an opportunity to make investments at
valuations we consider attractive with limited downside risk and solid return
potential.
In last December's annual report, we wrote: "In our opinion, much of the buying
in technology stocks during 1999 was speculative; many investors may have paid
too high a premium for the rare chance that future earnings growth will justify
current share prices and extraordinarily high growth multiples." While the mania
continued for another two months, fundamentals eventually won out. And even
though some of the speculation has been wrung out of the market, we believe
overall valuations remain high.
Looking forward, we expect to continue our three-pronged investment approach
involving bargain-priced stocks,
TOP 10 SECTORS*
6/30/00
<TABLE>
<CAPTION>
% OF TOTAL
SECTOR NET ASSETS
------ ----------
<S> <C>
Insurance 7.4%
Diversified Financials 6.7%
Diversified
Telecommunication Services 6.2%
Banks 6.2%
Media 5.5%
Health Care Providers &
Services 5.0%
Real Estate 4.2%
Industrial Conglomerates 3.4%
Commercial Services &
Supplies 3.0%
Auto Components 2.9%
</TABLE>
* Based on equity securities.
5
<PAGE>
bankruptcies and special situation investing. As always, we will strive to
provide our shareholders with attractive, long-term returns with less risk and
volatility than overall markets.
We appreciate your participation in Mutual Qualified 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 Qualified Fund
/s/ Jeff Diamond
---------------------------
Jeff Diamond
Assistant Portfolio Manager
Mutual Qualified Fund
6
<PAGE>
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.
7
<PAGE>
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.
SIX-MONTH PERFORMANCE SUMMARY AS OF 6/30/00
Six-month total return does not include sales charges. Distributions will vary
based on earnings of the Fund's portfolio and any profits realized from the sale
of the portfolio's securities, as well as the level of operating expenses for
each class. Past distributions are not indicative of future trends. All total
returns include reinvested distributions at net asset value.
<TABLE>
<CAPTION>
CLASS Z
<S> <C> <C>
Six-Month Total Return 3.65%
Net Asset Value (NAV) $16.18 (6/30/00) $16.91 (12/31/99)
Change in NAV -$0.73
Distributions (1/1/00-6/30/00) Dividend Income $0.3298
Short-Term Capital Gain $0.2185
Long-Term Capital Gain $0.8031
------------------------ -------
Total $1.3514
</TABLE>
<TABLE>
<CAPTION>
CLASS A
<S> <C> <C>
Six-Month Total Return 3.45%
Net Asset Value (NAV) $16.12 (6/30/00) $16.87 (12/31/99)
Change in NAV -$0.75
Distributions (1/1/00-6/30/00) Dividend Income $0.3139
Short-Term Capital Gain $0.2185
Long-Term Capital Gain $0.8031
------------------------ -------
Total $1.3355
</TABLE>
<TABLE>
<CAPTION>
CLASS B
<S> <C> <C>
Six-Month Total Return 3.11%
Net Asset Value (NAV) $15.99 (6/30/00) $16.78 (12/31/99)
Change in NAV -$0.79
Distributions (1/1/00-6/30/00) Dividend Income $0.2945
Short-Term Capital Gain $0.2185
Long-Term Capital Gain $0.8031
------------------------ -------
Total $1.3161
</TABLE>
<TABLE>
<CAPTION>
CLASS C
<S> <C> <C>
Six-Month Total Return 3.16%
Net Asset Value (NAV) $16.03 (6/30/00) $16.80 (12/31/99)
Change in NAV -$0.77
Distributions (1/1/00-6/30/00) Dividend Income $0.2832
Short-Term Capital Gain $0.2185
Long-Term Capital Gain $0.8031
------------------------ -------
Total $1.3048
</TABLE>
Past performance does not guarantee future results.
8
<PAGE>
ADDITIONAL PERFORMANCE
AS OF 6/30/00
<TABLE>
<CAPTION>
INCEPTION
CLASS Z 1-YEAR 5-YEAR 10-YEAR (7/3/96)
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cumulative Total Return(1) 0.86% 99.37% 299.08% 2,105.81%
Average Annual Total Return(2) 0.86% 14.80% 14.84% 16.95%
Value of $10,000 Investment(3) $10,086 $19,937 $39,908 $220,581
</TABLE>
<TABLE>
<CAPTION>
INCEPTION
CLASS A 1-YEAR 3-YEAR (11/1/96)
-------------------------------------------------------------------------------
<S> <C> <C> <C>
Cumulative Total Return(1) 0.53% 28.67% 55.10%
Average Annual Total Return(2) - 5.23% 6.65% 11.33%
Value of $10,000 Investment(3) $9,477 $12,129 $14,812
</TABLE>
<TABLE>
<CAPTION>
INCEPTION
CLASS B 1-YEAR (1/1/99)
-------------------------------------------------------------------------------
<S> <C> <C>
Cumulative Total Return(1) - 0.10% 16.05%
Average Annual Total Return(2) - 3.56% 7.99%
Value of $10,000 Investment(3) $9,644 $11,216
</TABLE>
<TABLE>
<CAPTION>
INCEPTION
CLASS C 1-YEAR 3-YEAR (11/1/96)
-------------------------------------------------------------------------------
<S> <C> <C> <C>
Cumulative Total Return(1) - 0.14% 26.03% 51.41%
Average Annual Total Return(2) - 2.02% 7.65% 11.70%
Value of $10,000 Investment(3) $9,798 $12,990 $14,991
</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.
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.
9
<PAGE>
MUTUAL QUALIFIED 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........ $16.91 $16.46 $18.19 $16.24 $14.87 $13.34
------------------------------------------------------------------------------
Income from investment operations:
Net investment income...................... .12 .23 .43 .37 .47 .33
Net realized and unrealized gains
(losses)................................. .50 1.99 (.38) 3.62 2.62 3.17
------------------------------------------------------------------------------
Total from investment operations............ .62 2.22 .05 3.99 3.09 3.50
------------------------------------------------------------------------------
Less distributions from:
Net investment income...................... (.33) (.29) (.45) (.64) (.43) (.33)
Net realized gains......................... (1.02) (1.48) (1.33) (1.40) (1.29) (1.64)
------------------------------------------------------------------------------
Total distributions......................... (1.35) (1.77) (1.78) (2.04) (1.72) (1.97)
------------------------------------------------------------------------------
Net asset value, end of period.............. $16.18 $16.91 $16.46 $18.19 $16.24 $14.87
==============================================================================
Total Return*............................... 3.65% 13.64% .45% 24.95% 21.19% 26.60%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's)........... $2,778,257 $3,152,050 $3,942,519 $5,239,947 $4,287,975 $3,002,132
Ratios to average net assets:
Expenses(a)................................ .81%** .80% .77% .79% .75% .76%
Expenses, excluding waiver and payments by
affiliate(a)............................. .86%** .85% .80% .82% .78% .76%
Net investment income...................... 1.46%** 1.31% 2.05% 1.85% 3.06% 2.71%
Portfolio turnover rate..................... 28.23% 59.84% 66.84% 52.76% 65.03% 75.59%
(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................................. .79%** .77% .76% .75% .75% .72%
Expenses, excluding waiver and payments by
affiliate................................ .84%** .82% .79% .78% .78% .72%
</TABLE>
*Total return is not annualized.
**Annualized.
+Per share amounts for all periods prior to December 31, 1996 have been restated
to reflect a 2-for-1 stock split effective February 3, 1997. Based on average
weighted shares outstanding effective year ended December 31, 1999.
10
<PAGE>
MUTUAL QUALIFIED 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.................... $16.87 $16.42 $18.14 $16.23 $16.40
-------------------------------------------------------------
Income from investment operations:
Net investment income.................................. .09 .17 .35 .28 .16
Net realized and unrealized gains (losses)............. .49 1.99 (.35) 3.63 .89
-------------------------------------------------------------
Total from investment operations........................ .58 2.16 0.00 3.91 1.05
-------------------------------------------------------------
Less distributions from:
Net investment income.................................. (.31) (.23) (.39) (.60) (.41)
Net realized gains..................................... (1.02) (1.48) (1.33) (1.40) (.81)
-------------------------------------------------------------
Total distributions..................................... (1.33) (1.71) (1.72) (2.00) (1.22)
-------------------------------------------------------------
Net asset value, end of period.......................... $16.12 $16.87 $16.42 $18.14 $16.23
=============================================================
Total Return*........................................... 3.45% 13.27% .15% 24.44% 6.47%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's)....................... $418,913 $471,313 $570,143 $452,590 $20,381
Ratios to average net assets:
Expenses(a)............................................ 1.16%** 1.14% 1.12% 1.14% 1.13%**
Expenses, excluding waiver and payments by
affiliate(a)......................................... 1.21%** 1.19% 1.15% 1.17% 1.28%**
Net investment income.................................. 1.11%** .97% 1.66% 1.48% 3.19%**
Portfolio turnover rate................................. 28.23% 59.84% 66.84% 52.76% 65.03%
(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............................................. 1.14%** 1.11% 1.11% 1.10% 1.13%**
Expenses, excluding waiver and payments by
affiliate............................................ 1.19%** 1.16% 1.14% 1.13% 1.28%**
</TABLE>
*Total return does not reflect sales commissions and is not annualized.
**Annualized.
+For the period November 1, 1996 (effective date) to December 31, 1996.
++Per share amounts for the period ended December 31, 1996 have been restated to
reflect a 2-for-1 stock split effective February 3, 1997.
+++Based on average weighted shares outstanding.
11
<PAGE>
MUTUAL QUALIFIED 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........................ $16.78 $16.42
--------------------------------------
Income from investment operations:
Net investment income...................................... .04 .03
Net realized and unrealized gains.......................... .49 2.01
--------------------------------------
Total from investment operations............................ .53 2.04
--------------------------------------
Less distributions from:
Net investment income...................................... (.30) (.20)
Net realized gains......................................... (1.02) (1.48)
--------------------------------------
Total distributions......................................... (1.32) (1.68)
--------------------------------------
Net asset value, end of period.............................. $15.99 $16.78
======================================
Total Return*............................................... 3.11% 12.55%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's)........................... $5,324 $4,168
Ratios to average net assets:
Expenses(a)................................................ 1.81%** 1.81%
Expenses, excluding waiver and payments by affiliate(a).... 1.86%** 1.86%
Net investment income...................................... .49%** .20%
Portfolio turnover rate..................................... 28.23% 59.84%
(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................................................... 1.79%** 1.78%
Expenses, excluding waiver and payments by affiliate....... 1.84%** 1.83%
</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.
12
<PAGE>
MUTUAL QUALIFIED 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.................... $16.80 $16.35 $18.09 $16.23 $16.40
------------------------------------------------------------
Income from investment operations:
Net investment income.................................. .04 .05 .24 .16 .13
Net realized and unrealized gains (losses)............. .49 1.98 (.37) 3.63 .91
------------------------------------------------------------
Total from investment operations........................ .53 2.03 (.13) 3.79 1.04
------------------------------------------------------------
Less distributions from:
Net investment income.................................. (.28) (.10) (.28) (.53) (.39)
Net realized gains..................................... (1.02) (1.48) (1.33) (1.40) (.82)
------------------------------------------------------------
Total distributions..................................... (1.30) (1.58) (1.61) (1.93) (1.21)
------------------------------------------------------------
Net asset value, end of period.......................... $16.03 $16.80 $16.35 $18.09 $16.23
============================================================
Total Return*........................................... 3.16% 12.54% (.58)% 23.66% 6.37%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's)....................... $217,361 $264,902 $322,609 $231,721 $9,963
Ratios to average net assets:
Expenses(a)............................................ 1.80%** 1.80% 1.77% 1.79% 1.78%**
Expenses, excluding waiver and payments by
affiliate(a)......................................... 1.85%** 1.84% 1.80% 1.82% 1.93%**
Net investment income.................................. .46%** .32% 1.01% .84% 2.59%**
Portfolio turnover rate................................. 28.23% 59.84% 66.84% 52.76% 65.03%
(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............................................... 1.78%** 1.77% 1.76% 1.75% 1.78%**
Expenses, excluding waiver and payments by affiliate... 1.83%** 1.81% 1.79% 1.78% 1.93%**
</TABLE>
*Total return does not reflect sales commissions or the contingent deferred
sales charge and is not annualized.
**Annualized.
+For the period November 1, 1996 (effective date) to December 31, 1996.
++Per share amounts for the period ended December 31, 1996 have been restated to
reflect a 2-for-1 stock split effective February 3, 1997.
+++Based on average weighted shares outstanding.
See Notes to Financial Statements.
13
<PAGE>
MUTUAL QUALIFIED FUND
STATEMENT OF INVESTMENTS, JUNE 30, 2000 (UNAUDITED)
<TABLE>
<CAPTION>
COUNTRY SHARES VALUE
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS 83.7%
AEROSPACE & DEFENSE 1.2%
B.F. Goodrich Co. .......................................... United States 791,100 $ 26,946,845
Gencorp Inc. ............................................... United States 917,400 7,339,200
*Hexcel Corp. .............................................. United States 843,498 8,013,231
--------------
42,299,276
--------------
AUTO COMPONENTS 2.9%
Borg Warner Inc. ........................................... United States 480,905 16,891,788
Delphi Automotive Systems Corp. ............................ United States 1,960,836 28,554,674
*Lear Corp. ................................................ United States 1,037,800 20,756,000
TRW Inc. ................................................... United States 727,500 31,555,313
--------------
97,757,775
--------------
AUTOMOBILES .5%
General Motors Corp. ....................................... United States 294,133 17,078,097
--------------
BANKS 6.2%
Bank of Ireland............................................. Irish Republic 1,732,475 10,960,407
Chase Manhattan Corp. ...................................... United States 818,316 37,693,681
Commercial Federal Corp. ................................... United States 1,919,510 29,872,374
Greenpoint Financial Corp. ................................. United States 1,359,600 25,492,500
+*ITLA Capital Corp. ....................................... United States 689,000 9,990,500
M & T Bank Corp. ........................................... United States 46,129 20,758,050
National City Corp. ........................................ United States 227,381 3,879,688
Sovereign Bancorp Inc. ..................................... United States 3,041,800 21,387,656
TCF Financial Corp. ........................................ United States 1,078,700 27,709,106
U.S. Bancorp................................................ United States 1,254,386 24,146,930
--------------
211,890,892
--------------
BEVERAGES 2.0%
Brown-Forman Corp., A....................................... United States 23,100 1,218,525
Brown-Forman Corp., B....................................... United States 365,000 19,618,750
Mikuni Coca-Cola Bottling Co. .............................. Japan 453,500 6,596,441
Pepsi Bottling Group Inc. .................................. United States 1,437,900 41,968,706
--------------
69,402,422
--------------
BUILDING PRODUCTS .5%
*American Standard Cos. Inc. ............................... United States 403,500 16,543,500
--------------
CHEMICALS 2.3%
ChemFirst Inc. ............................................. United States 587,800 14,180,675
Crompton Corp. ............................................. United States 1,206,800 14,783,300
Geon Co. ................................................... United States 583,400 10,792,900
H.B. Fuller Co. ............................................ United States 131,900 6,009,693
*Henkel KGAA, pfd. ......................................... Germany 27,300 1,570,109
</TABLE>
14
<PAGE>
MUTUAL QUALIFIED FUND
STATEMENT OF INVESTMENTS, JUNE 30, 2000 (UNAUDITED) (CONT.)
<TABLE>
<CAPTION>
COUNTRY SHARES VALUE
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS (CONT.)
CHEMICALS (CONT.)
Omnova Solutions Inc. ...................................... United States 1,562,600 $ 9,766,250
Union Carbide Corp. ........................................ United States 427,350 21,153,826
--------------
78,256,753
--------------
COMMERCIAL SERVICES & SUPPLIES 3.0%
*Cendant Corp. ............................................. United States 282,900 3,960,600
Galileo International Inc. ................................. United States 1,274,500 26,605,187
*Philip Services Corp. ..................................... Canada 197,757 1,242,161
Rentokil Initial PLC........................................ United Kingdom 128,800 293,449
*Republic Services Inc. .................................... United States 2,550,100 40,801,601
Williams PLC................................................ United Kingdom 4,979,600 28,984,910
--------------
101,887,908
--------------
COMMUNICATIONS EQUIPMENT .4%
*General Motors Corp., H.................................... United States 143,597 12,600,636
--------------
COMPUTERS & PERIPHERALS 1.4%
Compaq Computer Corp. ...................................... United States 525,000 13,420,312
*Electronics for Imaging Inc. .............................. United States 57,865 1,464,707
*NCR Corp. ................................................. United States 104,200 4,057,287
*Quantum Corp-DSSG.......................................... United States 2,061,912 19,974,772
*Storage Technology Corp. .................................. United States 796,400 8,710,625
--------------
47,627,703
--------------
CONSTRUCTION MATERIALS .3%
Southdown Inc. ............................................. United States 159,900 9,234,225
--------------
CONTAINERS & PACKAGING .9%
*Owens-Illinois Inc. ....................................... United States 1,392,500 16,274,843
*Smurfit-Stone Container Corp. ............................. United States 1,025,750 13,206,531
--------------
29,481,374
--------------
DIVERSIFIED FINANCIALS 6.7%
*Ambase Corp. .............................................. United States 1,981,800 1,644,894
CIT Group Inc., A........................................... United States 1,970,910 32,027,288
*CompuCredit Corp. ......................................... United States 213,600 6,408,000
Finova Group Inc. .......................................... United States 1,230,000 15,990,000
Heller Financial Inc. ...................................... United States 1,836,300 37,644,150
Household International Inc. ............................... United States 989,573 41,129,127
Kansas City Southern Industries Inc. ....................... United States 94,300 8,363,231
Metris Cos. Inc. ........................................... United States 1,410,350 35,435,043
*MFN Financial Corp. ....................................... United States 337,490 2,088,219
United Asset Management Corp. .............................. United States 2,011,100 47,009,462
--------------
227,739,414
--------------
</TABLE>
15
<PAGE>
MUTUAL QUALIFIED FUND
STATEMENT OF INVESTMENTS, JUNE 30, 2000 (UNAUDITED) (CONT.)
<TABLE>
<CAPTION>
COUNTRY SHARES VALUE
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS (CONT.)
DIVERSIFIED TELECOMMUNICATION SERVICES 6.2%
AT&T Corp. ................................................. United States 473,900 $ 14,987,087
AT&T Corp., W/I............................................. United States 1,085,280 35,814,240
British Telecommunications PLC.............................. United Kingdom 1,692,000 21,848,949
Centurytel Inc. ............................................ United States 460,000 13,225,000
*Citizens Communications Co., B............................. United States 1,104,679 19,055,712
SBC Communications Inc. .................................... United States 316,200 13,675,650
Telecom Italia SpA.......................................... Italy 2,950,600 19,608,632
Telephone & Data Systems Inc. .............................. United States 737,560 73,940,392
--------------
212,155,662
--------------
ELECTRIC UTILITIES .6%
E.On AG..................................................... Germany 424,900 20,568,085
--------------
ELECTRICAL EQUIPMENT 1.8%
Hubbell Inc., B............................................. United States 348,300 8,881,650
Rockwell International Corp. ............................... United States 319,200 10,054,800
*Thermo Electron Corp. ..................................... United States 1,969,900 41,491,019
--------------
60,427,469
--------------
FOOD & DRUG RETAILING .1%
*Brunos Inc. ............................................... United States 55,433 5,266,135
--------------
FOOD PRODUCTS .9%
Bestfoods................................................... United States 42,900 2,970,825
+Van Melle NV............................................... Netherlands 971,015 26,526,904
--------------
29,497,729
--------------
HEALTH CARE EQUIPMENT & SUPPLIES .2%
*Steris Corp. .............................................. United States 909,300 8,070,037
--------------
HEALTH CARE PROVIDERS & SERVICES 5.0%
*Foundation Health Systems, A............................... United States 1,855,225 24,117,925
*Health Management Associates Inc., A....................... United States 537,000 7,014,562
+*Mid Atlantic Medical Services Inc. ....................... United States 2,822,500 38,103,751
*PacifiCare Health Systems Inc. ............................ United States 466,232 28,061,338
*PSS World Medical Inc. .................................... United States 3,098,800 20,820,062
*Quorum Health Group Inc. .................................. United States 1,769,300 18,245,906
Tenet Healthcare Corp. ..................................... United States 1,330,305 35,918,235
--------------
172,281,779
--------------
HOTELS RESTAURANTS & LEISURE 2.3%
CBRL Group Inc. ............................................ United States 1,014,000 14,893,125
+*Fine Host Corp. .......................................... United States 452,571 4,480,453
*Park Place Entertainment Corp. ............................ United States 1,966,600 23,967,937
</TABLE>
16
<PAGE>
MUTUAL QUALIFIED FUND
STATEMENT OF INVESTMENTS, JUNE 30, 2000 (UNAUDITED) (CONT.)
<TABLE>
<CAPTION>
COUNTRY SHARES VALUE
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS (CONT.)
HOTELS RESTAURANTS & LEISURE (CONT.)
*Prime Hospitality Corp. ................................... United States 2,108,400 $ 19,898,025
Starwood Hotels & Resorts Worldwide Inc. ................... United States 458,000 14,913,625
--------------
78,153,165
--------------
HOUSEHOLD DURABLES .5%
Maytag Corp. ............................................... United States 108,350 3,995,406
(R)*Sunbeam Corp. .......................................... United States 4,800,554 14,851,714
--------------
18,847,120
--------------
INDUSTRIAL CONGLOMERATES 3.4%
Crane Co. .................................................. United States 827,200 20,111,300
Harsco Corp. ............................................... United States 467,100 11,911,050
Investor AB, A.............................................. Sweden 3,267,400 44,330,248
Investor AB, B.............................................. Sweden 2,346,240 32,233,715
Mark IV Industries Inc. .................................... United States 346,500 7,233,187
--------------
115,819,500
--------------
INSURANCE 7.4%
*Alleghany Corp. ........................................... United States 118,140 19,847,520
Allmerica Financial Corp. .................................. United States 451,300 23,636,837
Ambac Financial Group Inc. ................................. United States 235,400 12,902,862
*Berkshire-Hathaway Inc., A................................. United States 425 22,865,000
Financial Security Assurance Holdings Ltd. ................. United States 33,300 2,526,637
Jefferson-Pilot Corp. ...................................... United States 304,100 17,162,643
MBIA Inc. .................................................. United States 532,000 25,635,750
*MetLife Inc. .............................................. United States 478,415 10,076,616
Old Republic International Corp. ........................... United States 672,100 11,089,650
PMI Group Inc. ............................................. United States 551,300 26,186,750
Radian Group Inc. .......................................... United States 429,300 22,216,275
White Mountain Insurance Group Inc. ........................ United States 141,876 22,700,160
XL Capital Ltd., A.......................................... Bermuda 663,200 35,895,700
--------------
252,742,400
--------------
IT CONSULTING & SERVICES .4%
*DecisionOne Corp. ......................................... United States 231,935 1,043,708
*Unisys Corp. .............................................. United States 1,059,825 15,433,702
--------------
16,477,410
--------------
MACHINERY 1.0%
Invensys PLC................................................ United Kingdom 5,392,473 20,204,325
(R)+*Lancer Industries Inc., B.............................. United States 4 14,359,074
--------------
34,563,399
--------------
MARINE .4%
Peninsular & Oriental Steam Navigation Co. ................. United Kingdom 1,557,633 13,275,616
--------------
</TABLE>
17
<PAGE>
MUTUAL QUALIFIED FUND
STATEMENT OF INVESTMENTS, JUNE 30, 2000 (UNAUDITED) (CONT.)
<TABLE>
<CAPTION>
COUNTRY SHARES VALUE
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS (CONT.)
MEDIA 5.5%
*AT&T Corp.-Liberty Media Group, A.......................... United States 683,824 $ 16,582,732
Dow Jones & Co. Inc. ....................................... United States 186,600 13,668,450
*Fox Entertainment Group Inc., A............................ United States 318,000 9,659,250
Knight-Ridder Inc. ......................................... United States 130,070 6,918,098
Lagardere SCA............................................... France 314,316 24,103,064
Meredith Corp. ............................................. United States 602,600 20,337,750
NV Holdingsmig de Telegraaf................................. Netherlands 849,151 19,534,933
Scripps Co., A.............................................. United States 1,068,700 52,633,475
Washington Post Co., B...................................... United States 48,450 23,159,100
--------------
186,596,852
--------------
METALS & MINING .5%
*Ucar International Inc. ................................... United States 1,346,100 17,583,431
--------------
MULTILINE RETAIL 2.2%
*Federated Department Stores Inc. .......................... United States 713,200 24,070,500
May Department Stores Co. .................................. United States 663,600 15,926,400
*Saks Inc. ................................................. United States 1,589,600 16,690,800
Sears, Roebuck & Co. ....................................... United States 544,200 17,754,525
--------------
74,442,225
--------------
MULTI-UTILITIES .7%
Suez Lyonnaise des Eaux SA.................................. France 131,180 23,073,818
--------------
OFFICE ELECTRONICS .4%
Xerox Corp. ................................................ United States 741,100 15,377,825
--------------
OIL & GAS 2.2%
*Abraxas Petroleum Corp. ................................... United States 220,289 330,434
*Abraxas Petroleum Corp., rts., 11/01/04.................... United States 220,289 110,145
Burlington Resources Inc. .................................. United States 507,500 19,411,875
Conoco Inc., A.............................................. United States 190,100 4,182,200
Royal Dutch Petroleum Co. .................................. Netherlands 314,800 19,379,875
Total Fina Elf SA, B........................................ France 218,468 33,631,725
--------------
77,046,254
--------------
PAPER & FOREST PRODUCTS 1.8%
Abitibi-Consolidated Inc. .................................. Canada 1,154,300 10,711,767
+*Fibermark Inc. ........................................... United States 708,000 8,761,500
International Paper Co. .................................... United States 747,600 22,287,825
Mead Corp. ................................................. United States 831,000 20,982,750
--------------
62,743,842
--------------
PHARMACEUTICALS 2.3%
Aventis SA.................................................. France 445,679 32,659,944
Banyu Pharmaceutical Co. Ltd. .............................. Japan 153,900 3,774,590
Bristol-Myers Squibb Co. ................................... United States 250,000 14,562,500
</TABLE>
18
<PAGE>
MUTUAL QUALIFIED FUND
STATEMENT OF INVESTMENTS, JUNE 30, 2000 (UNAUDITED) (CONT.)
<TABLE>
<CAPTION>
COUNTRY SHARES VALUE
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS (CONT.)
PHARMACEUTICALS (CONT.)
Mylan Laboratories Inc. .................................... United States 270,000 $ 4,927,500
Ono Pharmaceutical Co. Ltd. ................................ Japan 495,400 21,304,003
--------------
77,228,537
--------------
REAL ESTATE 4.2%
*Alexander's Inc. .......................................... United States 132,890 9,734,193
*Al-Zar Ltd. LP............................................. United States 59 295
*Canary Wharf Group PLC..................................... United Kingdom 19,055,872 106,303,478
+*MBO Properties Inc. ...................................... United States 412,418 206,209
(R)*Security Capital European Realty........................ United States 425,000 6,266,625
*Ventas Inc. ............................................... United States 1,025,000 3,267,188
+*Wellsford Real Properties Inc. ........................... United States 1,202,174 18,182,882
--------------
143,960,870
--------------
ROAD & RAIL 2.5%
Florida East Coast Industries Inc. ......................... United States 1,102,100 44,084,000
Railtrack Group PLC......................................... United Kingdom 2,603,138 40,471,452
--------------
84,555,452
--------------
SOFTWARE .8%
Autodesk Inc. .............................................. United States 224,100 7,773,469
*Network Associates Inc. ................................... United States 900,755 18,352,883
--------------
26,126,352
--------------
SPECIALTY RETAIL .5%
*Dress Barn Inc. ........................................... United States 357,100 7,900,838
*Payless Shoesource Inc. ................................... United States 174,015 8,918,269
--------------
16,819,107
--------------
TOBACCO 1.6%
Compagnie Financiere Richemont AG, Br., A................... Switzerland 6,736 18,205,965
Gallaher Group PLC.......................................... United Kingdom 4,214,500 23,048,098
Gallaher Group PLC, ADR..................................... United Kingdom 164,000 3,515,750
UST Inc. ................................................... United States 773,850 11,365,922
--------------
56,135,735
--------------
TOTAL COMMON STOCKS (COST $2,381,032,334)................... 2,861,635,781
--------------
<CAPTION>
PRINCIPAL
AMOUNT**
--------
<S> <C> <C> <C>
CORPORATE BONDS & NOTES 3.3%
Abraxas Petroleum Corp., Series A, 11.50%, 11/01/04......... United States $ 2,586,500 2,185,593
DecisionOne Corp., Term Loan................................ United States 8,762,790 7,448,372
Eurotunnel Finance Ltd.:
Equity Note, 12/31/03..................................... United Kingdom 4,645,253GBP 2,672,232
Participating Loan Note, 4/30/40.......................... United Kingdom 1,020,000GBP 617,648
</TABLE>
19
<PAGE>
MUTUAL QUALIFIED 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:
12/31/18, Tier 2.......................................... United Kingdom 9,298,020GBP $ 9,712,269
12/31/25, Tier 3.......................................... United Kingdom 6,602,435GBP 5,797,133
12/31/50, Resettable Advance R5........................... United Kingdom 2,616,160GBP 1,465,370
Stabilization Advance S8, Tier 1.......................... United Kingdom 3,003,200GBP 1,182,058
Stabilization Advance S8, Tier 2.......................... United Kingdom 1,984,794GBP 691,074
Eurotunnel SA:
12/31/12, Tier 1 (Libor).................................. France 1,498,577EUR 1,106,078
12/31/12, Tier 1 (Pibor).................................. France 1,350,451EUR 996,748
12/31/18, Tier 2 (Libor).................................. France 12,837,186EUR 8,367,477
12/31/18, Tier 2 (Pibor).................................. France 3,830,475EUR 2,496,763
12/31/25, Tier 3 (Libor).................................. France 21,927,676EUR 11,980,729
12/31/25, Tier 3 (Pibor).................................. France 8,280,576EUR 4,524,298
12/31/50, Resettable Advance R4........................... France 13,236,295EUR 4,631,003
Stabilization Advance S6, Tier 1 (Pibor).................. France 1,379,124EUR 343,710
Stabilization Advance S6, Tier 2.......................... France 3,839,045EUR 809,584
Stabilization Advance S7, Tier 1 (Pibor).................. France 2,368,261EUR 590,227
Finova Capital Corp.:
6.11%, 2/18/03............................................ United States 2,580,000 2,224,755
6.15%, 3/31/03............................................ United States 460,000 389,713
7.25%, 11/08/04........................................... United States 1,555,000 1,362,569
La Quinta Inns Inc.:
7.25%, 3/15/04............................................ United States 732,000 549,000
7.33%, 4/01/08............................................ United States 1,670,000 1,118,900
Laidlaw Inc.:
7.70%, 8/15/02............................................ Canada 615,000 181,425
7.05%, 5/15/03............................................ Canada 185,000 55,038
6.65%, 10/01/04........................................... Canada 1,845,000 442,800
7.875%, 4/15/05........................................... Canada 1,845,000 544,275
7.65%, 5/15/06............................................ Canada 1,665,000 399,600
8.75%, 4/15/25............................................ Canada 2,765,000 815,675
6.72%, 10/01/27........................................... Canada 4,395,000 1,087,763
Levi Straus & Co.:
6.80%, 11/01/03........................................... United States 185,000 151,700
7.00%, 11/01/06........................................... United States 725,000 551,000
Meditrust Corp.:
7.00%, 8/15/07............................................ United States 1,425,000 954,750
7.82%, 9/10/26............................................ United States 5,540,000 4,265,800
MFN Financial Corp.:
Series A, 10.00%, 3/23/01................................. United States 997,111 954,734
Series B, FRN, 11.26%, 3/23/01............................ United States 1,197,108 1,158,202
Philip Services Corp.:
PIK, 10.00%, 5/01/05...................................... Canada 905,476 724,381
Senior Term Debt, 9.00%, 5/01/05.......................... Canada 1,727,246 1,554,521
</TABLE>
20
<PAGE>
MUTUAL QUALIFIED FUND
STATEMENT OF INVESTMENTS, JUNE 30, 2000 (UNAUDITED) (CONT.)
<TABLE>
<CAPTION>
PRINCIPAL
COUNTRY AMOUNT** VALUE
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CORPORATE BONDS & NOTES (CONT.)
Rite Aid Corp.:
7.125%, 1/15/07........................................... United States $ 1,235,000 $ 611,325
144A, 6.125%, 12/15/08.................................... United States 390,000 189,150
6.875%, 8/15/13........................................... United States 490,000 235,200
7.70%, 2/15/27............................................ United States 570,000 256,500
Service Corp. International:
7.375%, 4/15/04........................................... United States 2,955,000 1,817,325
6.00%, 12/15/05........................................... United States 690,000 376,050
7.70%, 4/15/09............................................ United States 345,000 181,125
SFC New Holdings Inc., PIK, 13.25%, 8/15/03................. United States 11,248,000 8,998,400
Southwest Royalties Inc., B, 10.50%, 10/15/04............... United States 7,517,000 4,848,465
TFM SA de CV:
senior disc. note, zero cpn. ............................. Mexico 1,380,000 955,650
10.25%, 6/15/07........................................... Mexico 350,000 306,250
Ventas Inc.:
Tranche A, Term Loan, 12/3102............................. United States 1,268,015 1,143,327
Tranche B, Term Loan, 12/31/05............................ United States 4,804,381 4,203,834
Tranche C, Term Loan, 12/31/07............................ United States 1,437,105 1,257,467
Vlasic Foods International Inc., 10.25%, 7/01/09............ United States 4,093,000 1,453,015
--------------
TOTAL CORPORATE BONDS & NOTES (COST $134,029,026)........... 113,938,050
--------------
BONDS & NOTES IN REORGANIZATION 3.5%
*Aiken Cnty S C Indl Rev Ref Beloit, 6.00%, 12/01/11........ United States 375,000 143,438
*Altos Hornos de Mexico SA:
cvt, 5.50%, 12/15/01...................................... Mexico 180,000 63,900
Series A, 11.375%, 4/30/02................................ Mexico 3,353,000 1,190,315
Series B, 11.875%, 4/30/04................................ Mexico 4,005,000 1,381,725
Tranche A, Term Loan...................................... United States 1,031,334 422,847
*Crown Leasing, Bank Claim.................................. Japan 827,613,787JPY 547,544
*Dow Corning Corp.:
9.30%, 1/27/98............................................ United States 1,835,000 2,614,875
8.55%, 3/01/01............................................ United States 1,000,000 1,337,500
9.375%, 2/01/08........................................... United States 735,000 1,047,375
8.15%, 10/15/29........................................... United States 5,150,000 6,888,125
Bank Debt................................................. United States 1,801,364 2,449,855
Bank Debt #1.............................................. United States 2,850,000 3,876,000
Bank Claim................................................ United States 7,437,830 10,115,449
*Genesis Health Ventures Inc.:
Revolver.................................................. United States 6,091,631 3,813,361
Term Loan A............................................... United States 334,125 205,821
Term Loan B............................................... United States 656,793 410,495
Term Loan C............................................... United States 657,982 411,239
*Harnischfeger Industries Inc.:
8.90%, 3/01/22............................................ United States 3,280,000 1,254,600
8.70%, 6/15/22............................................ United States 2,265,000 866,363
7.25%, 12/15/25........................................... United States 5,425,000 2,075,063
6.875%, 2/15/27........................................... United States 3,185,000 1,218,263
</TABLE>
21
<PAGE>
MUTUAL QUALIFIED FUND
STATEMENT OF INVESTMENTS, JUNE 30, 2000 (UNAUDITED) (CONT.)
<TABLE>
<CAPTION>
PRINCIPAL
COUNTRY AMOUNT** VALUE
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
BONDS & NOTES IN REORGANIZATION (CONT.)
*Integrated Health Services Inc.:
Revolver.................................................. United States $ 1,689,000 $ 540,480
Tranche B, Term Loan...................................... United States 4,976,846 1,592,591
Tranche C, Term Loan...................................... United States 4,521,418 1,446,854
*Loewen Group, Series 5, 6.10%, 10/01/02.................... Canada 3,765,000CAD 1,397,550
*Loewen Group International Inc.:
144A, 6.70%, 10/01/99..................................... Canada 9,180,000 3,213,000
Revolver.................................................. United States 1,429,112 771,720
Series 3, 7.50%, 4/15/01.................................. Canada 3,070,000 1,688,500
Series 3, 7.75%, 10/15/01................................. Canada 2,300,000 1,058,000
Series 2, 8.25%, 4/15/03.................................. Canada 2,290,000 1,259,500
Series 6, 7.20%, 6/01/03.................................. Canada 15,560,000 5,446,000
Series 4, 8.25%, 10/15/03................................. Canada 3,150,000 1,449,000
Series 7, 7.60%, 6/01/08.................................. Canada 11,605,000 3,829,650
*Multicare Companies Inc.:
Revolver.................................................. United States 336,793 185,236
Term Loan A............................................... United States 400,057 220,032
Term Loan B............................................... United States 619,253 340,589
Term Loan C............................................... United States 205,376 112,957
*Nippon Credit Bank Ltd., Bank Claim........................ Japan 428,074,037JPY 647,340
*Nippon Total Finance, Bank Claim........................... Japan 461,998,711JPY 261,991
*Optel Inc.:
13.00%, 2/15/02........................................... United States 6,185,000 4,329,500
11.50%, 7/01/08........................................... United States 240,000 168,000
*Paging Network Inc.:
Revolver A................................................ United States 10,738,487 8,629,137
10.125%, 8/01/07.......................................... United States 830,000 352,750
10.00%,10/15/08........................................... United States 1,110,000 471,750
*Port Seattle Wash Rev Ref-Beloit Proj., 6.00%, 12/01/17.... United States 200,000 76,500
*Pratama Datakom Asia BV:
144A, 12.75%, 7/15/05..................................... Indonesia 6,855,000 1,096,800
Reg S, 12.75%, 7/15/05.................................... Indonesia 1,520,000 243,200
*Safety Kleen Corp.:
9.25%, 5/15/09............................................ United States 25,000 625
Term Loan A............................................... United States 1,086,471 401,994
Term Loan B............................................... United States 548,720 203,027
Term Loan C............................................... United States 548,720 203,026
*Safety Kleen Services, 9.25%, 6/01/08...................... United States 40,000 1,900
*United Companies Financial Corp., Revolver................. United States 24,682,800 17,031,132
*Vencor Inc.:
9.875%, 5/01/05........................................... United States 14,540,000 1,308,600
Revolver.................................................. United States 2,920,236 2,160,975
Term Loan A............................................... United States 11,898,206 8,804,673
Term Loan B............................................... United States 6,613,161 4,893,739
Tranche A, DIP Revolver, Term Loan 9/30/00................ United States 1,513,046 1,497,916
Tranche B, DIP Revolver, Term Loan 9/30/00................ United States 600,000 594,000
--------------
TOTAL BONDS & NOTES IN REORGANIZATION (COST $117,014,585)... 120,264,387
--------------
</TABLE>
22
<PAGE>
MUTUAL QUALIFIED FUND
STATEMENT OF INVESTMENTS, JUNE 30, 2000 (UNAUDITED) (CONT.)
<TABLE>
COUNTRY SHARES VALUE
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMPANIES IN LIQUIDATION (COST $97,408) .1%
*City Investing Company Liquidating Trust................... United States 1,579,485 $ 2,023,715
--------------
PRINCIPAL
AMOUNT**
--------
GOVERNMENT AGENCIES 8.0%
Fannie Mae, 5.005% to 6.680%, with maturities to 6/04/01.... United States $129,000,000 123,790,046
Federal Home Loan Bank, 5.35% to 6.50%, with maturities to
4/12/01................................................... United States 139,819,000 136,978,319
Federal Home Loan Mortgage Corp., 5.635%, 10/01/01.......... United States 12,500,000 12,311,063
--------------
TOTAL GOVERNMENT AGENCIES (COST $273,598,386)............... 273,079,428
--------------
TOTAL INVESTMENTS (COST $2,905,771,739) 98.6%............... 3,370,941,361
OPTIONS WRITTEN............................................. (157,500)
SECURITIES SOLD SHORT (.6%)................................. (20,796,139)
NET EQUITY IN FORWARDS CONTRACTS .2%........................ 9,255,464
OTHER ASSETS, LESS LIABILITIES 1.8%......................... 60,611,782
--------------
TOTAL NET ASSETS 100.0%..................................... $3,419,854,968
==============
OPTIONS WRITTEN (PREMIUMS RECEIVED $244,101)
ISSUER COUNTRY CONTRACTS VALUE
-----------------------------------------------------------------------------------------------------------------
*Pacificare Health Systems, Inc., January/80/Call........... United States 300 $ 157,500
==============
SECURITIES SOLD SHORT (PROCEEDS $26,516,920)
ISSUER COUNTRY SHARES VALUE
-----------------------------------------------------------------------------------------------------------------
*Dow Chemical Co. .......................................... United States 688,899 $ 20,796,139
==============
</TABLE>
CURRENCY ABBREVIATIONS:
CAD -- Canadian Dollar
GBP -- British Pound
EUR -- European Unit
JPY -- Japanese Yen
*Non-income producing.
**Securities denominated in U.S. dollars unless otherwise indicated.
(R)Restricted securities (see note 6).
+Affiliated issuers (see note 7).
See Notes to Financial Statements.
23
<PAGE>
MUTUAL QUALIFIED 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 $2,820,683,429)................ $3,250,330,088
Non controlled affiliates (cost $85,088,310).............. 120,611,273 $3,370,941,361
--------------
Cash....................................................... 7,588,755
Receivables:
Investment securities sold................................ 72,237,276
Capital shares sold....................................... 1,097,940
Dividends and interest.................................... 8,724,908
From affiliates........................................... 173,179
Unrealized gain on forward exchange contracts (Note 8)..... 13,118,360
Deposits with broker for securities sold short............. 19,879,453
--------------
Total assets.......................................... 3,493,761,232
--------------
Liabilities:
Payables:
Investment securities purchased........................... 41,317,315
Capital shares redeemed................................... 4,362,848
To affiliates............................................. 2,866,858
Options written, at value (premiums received $244,101)..... 157,500
Securities sold short, at value (proceeds $26,516,920)..... 20,796,139
Unrealized loss on forward exchange contracts (Note 8)..... 3,862,896
Accrued expenses........................................... 542,708
--------------
Total liabilities..................................... 73,906,264
--------------
Net assets, at value........................................ $3,419,854,968
==============
Net assets consist of:
Distributions in excess of net investment income........... $ (32,311,447)
Net unrealized appreciation................................ 480,232,468
Accumulated net realized gain.............................. 346,746,907
Capital shares............................................. 2,625,187,040
--------------
Net assets, at value........................................ $3,419,854,968
==============
</TABLE>
24
<PAGE>
MUTUAL QUALIFIED 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
($2,778,257,076 / 171,753,337 shares outstanding)........ $16.18
==============
CLASS A:
Net asset value per share ($418,913,051 / 25,991,039 shares
outstanding).............................................. $16.12
==============
Maximum offering price per share ($16.12 / 94.25%)......... $17.10
==============
CLASS B:
Net asset value and maximum offering price per share
($5,323,534 / 332,870 shares outstanding)*................ $15.99
==============
CLASS C:
Net asset value per share ($217,361,307 / 13,563,752 shares
outstanding)*............................................. $16.03
==============
Maximum offering price per share ($16.03 / 99.00%)......... $16.19
==============
</TABLE>
*Redemption price per share is equal to net asset value less any applicable
sales charge.
See Notes to Financial Statements.
25
<PAGE>
MUTUAL QUALIFIED 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 $1,290,856)
Dividends.................................................. $ 24,423,666
Interest................................................... 15,741,926
-------------
Total investment income............................... $ 40,165,592
-------------
Expenses:
Management fees (Note 3)................................... 10,634,492
Administrative fees (Note 3)............................... 1,385,577
Distribution fees (Note 3)
Class A................................................... 758,099
Class B................................................... 23,266
Class C................................................... 1,147,849
Transfer agent fees (Note 3)............................... 2,051,419
Custodian fees............................................. 106,804
Reports to shareholders.................................... 212,517
Registration and filing fees............................... 48,918
Professional fees.......................................... 285,739
Directors' fees and expenses............................... 54,689
Dividends for securities sold short........................ 409,150
Other...................................................... 77,603
-------------
Total expenses........................................ 17,196,122
Expenses waived/paid by affiliate (Note 3)............ (924,882)
-------------
Net expenses...................................... 16,271,240
-------------
Net investment income........................... 23,894,352
-------------
Realized and unrealized gains (losses):
Net realized gain (loss) from:
Investments............................................... 362,943,174
Foreign currency transactions............................. 51,653,879
Short sale transactions................................... (41,798,879)
-------------
Net realized gain..................................... 372,798,174
Net unrealized depreciation on:
Investments............................................... (280,782,071)
Translation of assets and liabilities denominated in
foreign currencies...................................... (4,608,942)
-------------
Net unrealized depreciation........................... (285,391,013)
-------------
Net realized and unrealized gain............................ 87,407,161
-------------
Net increase in net assets resulting from operations........ $ 111,301,513
=============
</TABLE>
See Notes to Financial Statements.
26
<PAGE>
MUTUAL QUALIFIED 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..................................... $ 23,894,352 $ 50,253,473
Net realized gain from investments and foreign currency
transactions............................................ 372,798,174 407,555,363
Net unrealized appreciation (depreciation) on investments
and translation of assets and liabilities denominated in
foreign currencies....................................... (285,391,013) 75,478,573
----------------------------------------
Net increase in net assets resulting from operations.... 111,301,513 533,287,409
Distributions to shareholders from:
Net investment income:
Class Z.................................................. (52,619,920) (51,709,981)
Class A.................................................. (7,651,674) (6,163,680)
Class B.................................................. (90,434) (40,474)
Class C.................................................. (3,588,250) (1,567,724)
Net realized gains:
Class Z.................................................. (163,026,891) (265,942,816)
Class A.................................................. (24,886,257) (40,759,342)
Class B.................................................. (313,788) (269,835)
Class C.................................................. (12,953,590) (23,061,319)
Capital share transactions (Note 2):
Class Z.................................................. (250,340,047) (908,520,451)
Class A.................................................. (32,967,549) (114,984,297)
Class B.................................................. 1,410,119 4,349,989
Class C.................................................. (36,851,177) (67,455,539)
----------------------------------------
Net decrease in net assets.............................. (472,577,945) (942,838,060)
Net assets:
Beginning of period........................................ 3,892,432,913 4,835,270,973
----------------------------------------
End of period.............................................. $3,419,854,968 $3,892,432,913
========================================
Undistributed net investment income/(Distributions in excess
of net investment income) included in net assets:
End of period.............................................. $ (32,311,447) $ 7,744,479
========================================
</TABLE>
See Notes to Financial Statements.
27
<PAGE>
MUTUAL QUALIFIED FUND
Notes to Financial Statements (unaudited)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Mutual Qualified 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 with income as a secondary objective, by
investing primarily in common and preferred stocks, bonds and convertible
securities. The Fund may also invest in foreign securities. The following
summarizes the Fund's significant accounting policies.
a. SECURITY VALUATION:
Securities listed or traded on a recognized national exchange or NASDAQ are
valued at the latest reported sales price. Over-the-counter securities and
listed securities for which no sale is reported are valued within the range of
the latest quoted bid and asked prices. Restricted securities and securities for
which market quotations are not readily available are valued at fair value as
determined by management in accordance with procedures established by the Board
of Directors.
b. FOREIGN CURRENCY TRANSLATION:
Portfolio securities and other assets and liabilities denominated in foreign
currencies are translated into U.S. dollars based on the exchange rate of such
currencies against U.S. dollars on the date of valuation. Purchases and sales of
securities and income items denominated in foreign currencies are translated
into U.S. dollars at the exchange rate in effect on the transaction date.
The Fund does not separately report the effect of changes in foreign exchange
rates from changes in market prices on securities held. Such changes are
included in net realized and unrealized gain or loss from investments.
Realized foreign exchange gains or losses arise from sales of foreign
currencies, currency gains or losses realized between the trade and settlement
dates on securities transactions, and the difference between the recorded
amounts of dividends, interest, and foreign withholding taxes, and the U.S.
dollar equivalent of the amounts actually received or paid. Net unrealized
foreign exchange gains and losses arise from changes in foreign exchange rates
on foreign currency denominated assets and liabilities other than investments in
securities held at the end of the reporting period.
c. SECURITY TRANSACTIONS, INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS:
Security transactions are accounted for on trade date. Realized gains and losses
on security transactions are determined on a specific identification basis.
Certain income from foreign securities is recorded as soon as information is
available to the Fund. Interest income and estimated expenses are accrued daily.
Dividend income and distributions to shareholders are recorded on the
ex-dividend date.
Realized and unrealized gains and losses and net investment income, other than
class specific expenses, are allocated daily to each class of shares based upon
the relative proportion of net assets of each class.
28
<PAGE>
MUTUAL QUALIFIED FUND
Notes to Financial Statements (unaudited) (continued)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONT.)
c. SECURITY TRANSACTIONS, INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS (CONT.)
Common expenses incurred by the Series Fund are allocated among the funds
comprising the Series Fund based on the ratio of net assets of each fund to the
combined net assets. Other expenses are charged to each fund on a specific
identification basis.
d. FORWARD EXCHANGE CONTRACTS:
The Fund may enter into forward exchange contracts to hedge against foreign
exchange risks. These contracts are valued daily and the Fund's equity therein
is included in the Statement of Assets and Liabilities. Realized and unrealized
gains and losses are included in the Statement of Operations.
e. 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.
29
<PAGE>
MUTUAL QUALIFIED 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. 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. SECURITIES ISSUED ON A WHEN-ISSUED OR DELAYED BASIS:
The Fund may trade securities on a when-issued or delayed basis, with payment
and delivery scheduled for a future date. These transactions are subject to
market fluctuations and are subject to the risk that the value at delivery may
be more or less than the trade date price.
i. ACCOUNTING ESTIMATES:
The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of the
financial statements and the amounts of income and expense during the reporting
period. Actual results could differ from those estimates.
2. CAPITAL STOCK
The Fund offers four classes of shares: Class Z, Class A, Class B, and Class C
shares. Effective January 1, 1999, Class I and Class II shares were renamed
Class A and Class C, respectively, and a fourth class of shares, Class B was
established. The shares differ by their initial sales load, distribution fees,
voting rights on matters affecting a single class and the exchange privilege of
each class.
At June 30, 2000, there were 1.00 billion shares authorized ($0.001 par value)
of which 500 million, 200 million, 100 million and 200 million were designated
as Class Z, Class A, Class B, and Class C shares, respectively. Transactions in
the Fund's shares were as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
JUNE 30, 2000 DECEMBER 31, 1999
---------------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
--------------------------------------------------------------
<S> <C> <C> <C> <C>
CLASS Z SHARES:
Shares sold......................................... 4,958,639 $ 83,455,350 13,618,003 $ 239,936,301
Shares issued on reinvestment of distributions...... 12,754,229 206,873,523 17,865,351 305,401,650
Shares redeemed..................................... (32,323,482) (540,668,920) (84,651,807) (1,453,858,402)
---------------------------------------------------------------------
Net decrease........................................ (14,610,614) $ (250,340,047) (53,168,453) $ (908,520,451)
=====================================================================
</TABLE>
30
<PAGE>
MUTUAL QUALIFIED 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......................................... 2,612,946 $ 44,121,614 6,908,914 $ 121,937,830
Shares issued on reinvestment of distributions...... 1,916,485 30,989,308 2,591,171 44,224,677
Shares redeemed..................................... (6,473,903) (108,078,471) (16,285,897) (281,146,804)
---------------------------------------------------------------------
Net decrease........................................ (1,944,472) $ (32,967,549) (6,785,812) $ (114,984,297)
=====================================================================
</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......................................... 103,267 $ 1,726,070 239,303 $ 4,205,444
Shares issued on reinvestment of distributions...... 24,412 391,573 18,029 300,557
Shares redeemed..................................... (43,193) (707,524) (8,948) (156,012)
---------------------------------------------------------------------
Net increase........................................ 84,486 $ 1,410,119 248,384 $ 4,349,989
=====================================================================
</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......................................... 730,879 $ 12,241,476 1,917,699 $ 33,307,575
Shares issued on reinvestment of distributions...... 953,571 15,333,423 1,326,890 22,561,396
Shares redeemed..................................... (3,884,388) (64,426,076) (7,206,720) (123,324,510)
---------------------------------------------------------------------
Net decrease........................................ (2,199,938) $ (36,851,177) (3,962,131) $ (67,455,539)
=====================================================================
</TABLE>
+Effective date of Class B shares was January 1, 1999.
3. TRANSACTIONS WITH AFFILIATES AND RELATED PARTIES
Certain officers of the Series Fund are also officers and/or directors of
Franklin Mutual Advisers, Inc. (Franklin Mutual) and Franklin Templeton
Services, Inc. (FT Services), the Fund's investment manager and administrative
manager, respectively. Franklin/Templeton Investor Services, Inc. (Investor
Services) and Franklin/Templeton Distributors, Inc. (Distributors) are the
Fund's transfer agent and principal underwriter, respectively.
The Fund pays an investment management fee to Franklin Mutual of 0.60% per year
of the average daily net assets of the Fund. Franklin Mutual agreed, through
June 30, 2000, to limit the expense ratio of the Fund to be no higher than
expected for the Fund's 1996 fiscal year, except that increases in expenses will
be permitted if the Series Fund's Board of Directors determines that such
expenses would have been higher had the merger between Franklin Mutual and the
Fund's former investment adviser not taken place. This expense limitation does
not include items such as
31
<PAGE>
MUTUAL QUALIFIED 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 aggregate 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 0.35%, 1.00%, and 1.00% per year of the average daily net asset of
Class A, Class B, and C shares, respectively. Distributors received net
commissions from sales of those Fund shares and received contingent deferred
sales charges for the period of $63,221 and $33,656, 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 $2,945,229,316 was as follows:
<TABLE>
<S> <C>
Unrealized appreciation..................................... $ 728,275,697
Unrealized depreciation..................................... (302,563,652)
-------------
Net unrealized appreciation................................. $ 425,712,045
=============
</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.
32
<PAGE>
MUTUAL QUALIFIED 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 $952,299,295 and $1,499,445,539,
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............................................. 450 309,276
Options expired............................................. (150) (65,175)
------------------------
Options outstanding at June 30, 2000........................ 300 $244,101
========================
</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>
4 Lancer Industries Inc., B................................... 8/11/89 $14,359,074
425,000 Security Capital European Realty............................ 4/08/98 6,266,625
4,800,554 Sunbeam Corp. .............................................. 2/23/90 14,851,714
-----------
TOTAL RESTRICTED SECURITIES (COST $21,064,045) (1.04% OF NET ASSETS).............. $35,477,413
===========
</TABLE>
33
<PAGE>
MUTUAL QUALIFIED 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 $120,611,273. For the six months ended June 30, 2000, dividend income
from "affiliated persons" was $110,000 and net realized losses from the
disposition of "affiliated persons" were $3,244,731.
<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*
S.H. Mortgage Acquisition LLC.... 387,991 -- (387,991) -- ** --
NON CONTROLLED AFFILIATES
Bay View Capital Corp............ 1,100,000 -- (1,100,000) -- ** $110,000
CKE Restaurants Inc.............. 2,592,886 -- (2,592,886) -- ** --
Dress Barn Inc................... 1,288,300 -- (931,200) 357,100 ** --
Fibermark Inc.................... 754,400 -- (46,400) 708,000 $ 8,761,500 --
Fine Host Corp................... 452,571 -- -- 452,571 4,480,453 --
ITLA Capital Corp................ 689,000 -- -- 689,000 9,990,500 --
Lancer Industries Inc., B........ 4 -- -- 4 14,359,074 --
MBO Properties Inc............... 412,418 -- -- 412,418 206,209 --
Mid-Atlantic Medical Services
Inc............................. 3,612,400 -- (789,900) 2,822,500 38,103,751 --
Van Melle NV..................... 476,517 494,498 -- 971,015 26,526,904 --
Wellsford Real Properties Inc.... 2,404,348 -- (1,202,174) 1,202,174 18,182,882 --
-------------------------------
TOTAL NON CONTROLLED AFFILIATES $120,611,273 $110,000
===============================
<CAPTION>
REALIZED
CAPITAL
NAME OF ISSUER GAIN/(LOSS)
---------------------------------
<S> <C>
CONTROLLED AFFILIATES*
S.H. Mortgage Acquisition LLC.... $ 735,509
NON CONTROLLED AFFILIATES
Bay View Capital Corp............ $(1,003,913)
CKE Restaurants Inc.............. (741,654)
Dress Barn Inc................... (2,999,883)
Fibermark Inc.................... (327,817)
Fine Host Corp................... --
ITLA Capital Corp................ --
Lancer Industries Inc., B........ --
MBO Properties Inc............... --
Mid-Atlantic Medical Services
Inc............................. 1,093,027
Van Melle NV..................... --
Wellsford Real Properties Inc.... --
-----------
TOTAL NON CONTROLLED AFFILIATES $(3,980,240)
===========
</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 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
34
<PAGE>
MUTUAL QUALIFIED FUND
Notes to Financial Statements (unaudited) (continued)
8. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK (CONT.)
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>
4,150,000 European Unit........................................ U.S. $ 3,900,390 7/07/00 U.S. $ 79,489
7,025,955 Canadian Dollars..................................... 4,679,733 7/31/00 66,001
850,000 Swedish Krona........................................ 96,626 8/21/00 680
------------ -----------
U.S. $ 8,676,749 146,170
============ ===========
<CAPTION>
CONTRACTS TO SELL:
------------------
<C> <S> <C> <C> <C> <C> <C>
8,250,000 European Unit........................................ U.S. $ 8,682,300 7/07/00 770,493
14,000,000 European Unit........................................ 13,531,560 7/12/00 100,912
88,127,603 Canadian Dollars..................................... 60,996,049 7/31/00 1,469,597
4,000,000 European Unit........................................ 3,879,680 8/15/00 34,078
141,424,248 Swedish Krona........................................ 16,451,375 8/21/00 261,522
39,150,000 European Unit........................................ 39,581,730 8/24/00 1,923,136
12,734,088 European Unit........................................ 12,362,253 9/12/00 99,449
15,203,975 Swedish Krona........................................ 1,774,838 9/15/00 31,231
255,886,602 Swedish Krona........................................ 29,703,338 9/18/00 351,756
48,343,125 British Pounds....................................... 75,943,170 9/25/00 2,638,034
3,195,831,250 Japanese Yen......................................... 31,172,249 9/27/00 470,931
49,734,720 British Pounds....................................... 78,862,912 10/17/00 3,410,192
233,594,129 Swedish Krona........................................ 27,045,031 10/20/00 194,734
22,500,000 European Unit........................................ 21,894,150 10/30/00 165,563
22,500,000 European Unit........................................ 21,903,563 11/21/00 146,985
5,801,472 British Pounds....................................... 8,838,945 11/22/00 30,188
31,562,800 European Unit........................................ 30,706,823 12/20/00 134,975
3,100,000 British Pounds....................................... 4,717,270 12/20/00 7,288
------------ -----------
U.S. $488,047,236 12,241,064
============ -----------
Net unrealized gain on offsetting forward contracts............. 731,126
-----------
Unrealized gain on forward exchange contracts................. 13,118,360
-----------
</TABLE>
35
<PAGE>
MUTUAL QUALIFIED FUND
Notes to Financial Statements (unaudited) (continued)
8. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK (CONT.)
<TABLE>
<CAPTION>
IN SETTLEMENT UNREALIZED
CONTRACTS TO BUY: EXCHANGE FOR DATE GAIN/(LOSS)
------------------ ------------------------------------------------
<C> <S> <C> <C> <C> <C> <C>
65,980,693 Canadian Dollars..................................... U.S. $ 45,098,846 7/31/00 U.S. $ (531,691)
31,003,160 Swedish Krona........................................ 3,610,374 8/21/00 (61,218)
128,017,120 Japanese Yen......................................... 1,233,306 9/27/00 (3,486)
------------ -----------
U.S. $ 49,942,526 (596,395)
============ ===========
<CAPTION>
CONTRACTS TO SELL:
------------------
<C> <S> <C> <C> <C> <C> <C>
16,713,245 European Unit........................................ U.S. $ 15,565,880 7/07/00 (462,239)
2,930,000 Canadian Dollars..................................... 1,972,870 7/31/00 (6,221)
8,000,000 European Unit........................................ 7,653,920 8/15/00 (37,283)
11,872,247 British Pounds....................................... 17,614,731 8/22/00 (376,266)
16,700,000 European Unit........................................ 15,579,935 9/12/00 (502,004)
26,795,422 Swiss Francs......................................... 16,444,458 9/13/00 (151,913)
17,346,000 Swedish Krona........................................ 1,978,548 10/20/00 (15,275)
30,000,000 European Unit........................................ 27,700,500 10/30/00 (1,270,949)
13,579,748 British Pounds....................................... 20,210,214 11/22/00 (408,811)
34,727,653 British Pounds....................................... 52,727,891 12/20/00 (35,540)
------------ -----------
U.S. $177,448,947 (3,266,501)
============ ===========
Unrealized loss on forward exchange contracts................... (3,862,896)
-----------
Net unrealized gain on forward exchange contracts............. U.S. $ 9,255,464
===========
</TABLE>
36
<PAGE>
[FRANKLIN TEMPLETON INVESTMENTS LOGO]
Mutual Qualified Fund
777 Mariners Island Blvd., P.O. Box 7777
San Mateo, CA 94403-7777
SEMIANNUAL REPORT
CHAIRMAN OF THE BOARD
Michael F. Price
OFFICERS
Peter A. Langerman
Robert L. Friedman
Jeffrey Altman
Raymond Garea
Lawrence Sondike
David J. Winters
INVESTMENT MANAGER
Franklin Mutual Advisers, LLC
51 John F. Kennedy Parkway
Short Hills, NJ 07078
DISTRIBUTOR
Franklin/Templeton Distributors, Inc.
1-800/DIAL BEN(R)
franklintempleton.com
SHAREHOLDER SERVICES
1-800/632-2301 - (Class A, B, & C)
1-800/448-FUND - (Class Z)
This report must be preceded or accompanied by the current Mutual Qualified 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.
475 S00 08/00 [RECYCLE LOGO] Printed on recycled paper
