A Portfolio of
Franklin Mutual Beacon Fund
[Logo]
This report and the financial statements contained herein are submitted for the
general information of the shareholders of Mutual Beacon Fund. The report is
not authorized for distribution to prospective investors in the Fund unless
preceded or accompanied by an effective prospectus.
MUTUAL
BEACON
FUND
[Logo]
ANNUAL
REPORT
December 31, 1996
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Mutual Beacon Fund -- Class Z
Yearly Performance
Total Return*
1985** ............................................................. 25.25%
1986 ............................................................. 15.47%
1987 ............................................................. 12.84%
1988 ............................................................. 28.79%
1989 ............................................................. 17.46%
1990 ............................................................. -8.17%
1991 ............................................................. 17.60%
1992 ............................................................. 22.92%
1993 ............................................................. 22.93%
1994 ............................................................. 5.61%
1995 ............................................................. 25.89%
1996 ............................................................. 21.19%
- --------------------------------------------------------------------------------
Comparison of Changes in Value of $10,000 Investment in
Mutual Beacon Fund
To the S&P 500 and The Lipper Growth and Income Funds Average
- --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURN*
- ----------------------------------------
1 Year 5 Year 10 Year
- ----------------------------------------
21.19% 19.48% 16.20%
- ----------------------------------------
[The following table was represented as a line graph in the printed material.]
Lipper
Growth
Mutual & Income
Shares Funds
Class Z S&P 500 Average
------- ------- -------
'86 ....... 10000 10000 10000
'87 ....... 11284 10494 10191
'88 ....... 14533 12231 11819
'89 ....... 17070 16101 14621
'90 ....... 15675 15602 13991
'91 ....... 18434 20344 18070
'92 ....... 22659 21891 19677
'93 ....... 27856 24092 21967
'94 ....... 29420 24408 21760
'95 ....... 37037 33568 28465
'96 ....... 44885 41275 34377
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Aggregate Total Returns** Since November 1, 1996
Mutual Beacon -- Class I.... 1.71% Mutual Beacon -- Class II.... 5.38%
* Total Return and Average Annual Total Return includes changes in share
price and reinvestment of dividends and capital gain distributions.
** As of November 1, 1996, the fund began offering Class I and Class II
shares, which include sales charges and 12b-1 fees. Aggregate total return
for Class I and II measures the change in value of an investment since
inception and includes the maximum initial sales charges. Aggregate Total
Return calculations assume reinvestment of dividends and capital gains at
net asset value. Since the shares have existed for less than one year,
average annual total returns are not provided.
<PAGE>
FRANKLIN MUTUAL SERIES FUND INC.
51 John F. Kennedy Parkway
Short Hills, New Jersey 07078
February 18, 1997
TO THE SHAREHOLDERS OF MUTUAL BEACON FUND:
Nineteen ninety-six was a year in which almost everything went right in
the equity markets. With the exception of a couple of short-lived "corrections,"
the markets, continuing the strong upward 1995 trend, moved inexorably to record
levels. During the year, Mutual Beacon Fund appreciated 21.19% with cash
balances averaging about 22% of total net assets.
As value investors, our primary mission is to buy securities at
significant discounts to asset value. When you consider that since the beginning
of 1995 the Standard & Poor's(R) 500 stock index has appreciated more than 65%,
you might ask -- how can a value investor continue to "find value" in a market
that has seen such a dramatic move over such a short period? Or, put another
way, were markets extremely cheap two years ago or are they extremely expensive
now?
The answer to these types of questions lies in understanding how we
operate our business on a daily basis. We focus on individual stocks, not on
macroeconomic variables or overall market movements. Our experience demonstrates
that "cheap stock" opportunities exist even as many securities may be priced at
expensive levels. Most people like to invest in companies that are performing
well and have stocks that performed well. We tend to focus on the laggards, the
underperformers whose share price performance has been poor, or companies beset
by negative news such as earnings disappointments or adverse legal judgments.
The extension of our value investing approach to mergers and acquisitions as
well as to distressed securities further removes us from the equivalent of
owning a market index.
Although the equity markets are significantly higher than they were two
years ago, valuations of specific companies are not necessarily out of line with
our investment parameters. While some companies simply have not participated in
the upward movement, others are operating much better than they had been
previously and have attractive valuations. Furthermore, the models for
emphasizing returns to shareholders through mechanisms such as restructurings,
spinoffs and stock buybacks are well documented. We direct our attention to
situations where these opportunities have not been fully exploited. The Funds
have also expanded their geographic breadth, focusing more on Europe as
valuations became more compelling there; the performance of the "European
portfolio" within the Funds was a significant contributor to the overall
performance of the Funds this year.
As we look forward, we continue to find a number of new situations that
provide compelling value. Of particular interest to us is that they are familiar
names and very large companies, such as General Motors and Olin Corporation.
Equity valuations in Europe also continue to be attractive
3
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relative to the U.S. market, as many companies are recognizing the need to
compete globally in terms of shareholder returns as well as for customers.
This year will also be our first full year as part of the Franklin
Templeton family and we are happy to say that this partnership is proceeding as
we had hoped. The investment process here continues to operate autonomously. At
the same time, we are integrating our shareholder services with those of the
Franklin Templeton family to respond to shareholder needs. We would like to
thank the senior management of Franklin Templeton for their help in this process
and their commitment to ensuring that the qualities that have made our Funds
special will be perpetuated.
Sincerely,
MICHAEL F. PRICE, President
4
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MUTUAL BEACON FUND
SCHEDULE OF INVESTMENTS
DECEMBER 31, 1996
Number Value
of Shares (Note A)
--------- --------
COMMON STOCK & OTHER EQUITY INTERESTS (75.19%)
Aerospace (1.90%)
* Coltec Industries, Inc................... 419,600 $ 7,918,619
General Motors Corp., Class H............ 167,800 9,438,750
* Hexcel Corp.............................. 980,601 14,341,290
* Litton Industries, Inc................... 249,500 11,882,438
Lockheed Martin Corp..................... 108,394 9,918,051
* Loral Space & Communications............. 625,600 11,495,400
McDonnell Douglas Corp................... 467,500 29,920,000
-------------
94,914,548
-------------
Banking (3.09%)
Astoria Financial Corp................... 44,800 1,652,000
Barclays PLC............................. 430,000 7,381,026
Bay View Capital Corp.................... 34,500 1,461,938
* Cal Fed Bancorp Inc...................... 91,400 2,239,300
Chase Manhattan Corp..................... 1,539,852 137,431,791
Standard Federal Bancorporation.......... 72,800 4,140,500
-------------
154,306,555
-------------
Chemicals (1.88%)
BASF AG ................................. 481,300 18,504,319
Clariant AG.............................. 18,500 7,919,686
DSM NV .................................. 137,000 13,521,460
Eastman Chemical Co., Inc................ 109,000 6,022,250
Laporte PLC.............................. 160,000 1,886,846
Olin Corp................................ 897,500 33,768,438
Rohm & Haas Co........................... 147,800 12,064,175
-------------
93,687,174
-------------
Communications (3.95%)
* 360 Communications Company............... 414,500 9,585,313
AT&T Corp................................ 1,927,200 83,833,200
* Associated Group Inc., Class A........... 27,875 857,156
* Associated Group Inc., Class B........... 81,875 2,435,781
* Jacor Communications Inc.,
Warrants............................... 592,575 1,185,150
Korea Mobile Telecommunications
Corp................................... 5,000 5,065,917
MCI Communications Corp. ................ 1,475,000 48,214,063
* NetCom Systems AB, Class A............... 109,350 1,715,646
Sprint Corp.............................. 131,000 5,223,625
Telephone & Data Systems Inc............. 1,081,900 39,218,875
-------------
197,334,726
-------------
Computer & Electronic Equipment (1.65%)
* Imation Corp............................. 488,500 13,739,063
* Unitrode Corp., Warrants................. 8,148 37,685
* Wang Laboratories, Inc................... 1,506,700 30,510,675
Xerox Corp............................... 715,700 37,663,713
-------------
81,951,136
-------------
Conglomerates (8.79%)
Alexander & Baldwin, Inc................. 154,800 3,870,000
* American Standard Companies Inc.......... 360,100 13,773,825
BTR PLC.................................. 5,974,107 29,065,104
* Berkshire Hathaway Inc., Class A......... 305 10,400,500
Cheung Kong Holdings Ltd................. 2,250,000 19,999,677
Hanson PLC............................... 9,662,500 13,573,252
Harcourt General Inc..................... 100,900 4,654,013
Incentive AB, A Shares................... 340,694 24,728,334
Investor AB, A Shares.................... 1,004,900 44,941,531
Investor AB, B Shares.................... 1,659,700 73,373,982
Kinnevik AB, A Shares.................... 287,550 7,884,609
Kinnevik AB, B Shares.................... 1,870,752 51,570,251
Lagardere S.C.A.......................... 1,102,738 30,285,418
Philips Electronics NV................... 585,000 23,400,000
Philips Electronics NV, ADR.............. 447,700 18,151,752
RGI NV, Resource Group
International.......................... 250,000 2,547,821
Semi-Tech (Global) Ltd................... 7,916,018 13,100,398
Tomkins PLC.............................. 3,244,800 15,008,326
Viad Corp................................ 2,319,600 38,273,400
-------------
438,602,193
-------------
Construction (0.55%)
Hollandsche Beton Groep NV .............. 5,613 1,163,564
Lone Star Industries, Inc................ 123,768 4,563,945
Martin Marietta Materials Inc............ 281,860 6,553,245
(A) Puerto Rican Cement Co., Inc............. 279,800 8,743,750
* Schuller Corp............................ 489,617 5,202,181
* USG Corp................................. 30,300 1,026,413
-------------
27,253,098
-------------
Consumer Products & Services (5.96%)
American Brands, Inc..................... 354,300 17,582,138
B.A.T Industries PLC..................... 3,035,000 25,216,278
* BIC SA................................... 150,208 22,538,442
Corning Inc.............................. 677,700 31,343,625
Dial Corp................................ 2,319,600 34,214,100
5
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Number Value
of Shares (Note A)
--------- --------
Esselte AB, A Shares..................... 636,000 $ 14,454,863
Esselte AB, B Shares..................... 804,500 17,812,635
* KinderCare Learning Centers, Inc......... 181,278 3,398,963
Loewen Group Inc......................... 154,400 6,040,900
Philip Morris Companies Inc.............. 47,000 5,293,375
RJR Nabisco Holdings Corp. .............. 1,764,185 59,982,290
* Ranger Industries, Inc................... 5,059 1,417
Sophus Berendsen A/S, Class B............ 56,000 7,208,015
(R) Sunbeam Corp............................. 1,480,670 32,408,165
Vendome Luxury Group PLC................. 1,228,317 11,173,405
* U.S. Industries, Inc..................... 246,000 8,456,250
-------------
297,124,861
-------------
Entertainment & Media (4.36%)
* BHC Communications, Inc.................. 179,298 18,176,335
* Chris Craft Industries, Inc.............. 228,847 9,582,968
Comcast Corp., Class A................... 70,000 1,233,750
Comcast Corp., Class A, Special
Non-Voting............................. 1,465,766 26,108,957
EMI Group PLC............................ 250,000 5,931,579
* ITT Corp................................. 375,600 16,291,650
Shaw Brothers Ltd........................ 8,800,300 10,467,743
Todd A.O. Corp., Class A................. 116,828 1,197,487
* US West, Inc. - Media Group.............. 6,942,800 128,441,800
-------------
217,432,269
-------------
Financial Services (5.04%)
Bear Stearns Companies, Inc.............. 368,177 10,262,934
Beneficial Corp.......................... 81,600 5,171,400
California Financial Holding Corp........ 44,000 1,270,500
Capital One Financial Corp............... 70,200 2,527,200
Compagnie de Suez SA..................... 152,140 6,472,919
Dean Witter, Discover & Co. ............. 1,073,900 71,145,875
Finova Group Inc......................... 612,600 39,359,550
First USA, Inc. ......................... 193,400 6,696,475
Fund American Enterprises
Holdings, Inc. ........................ 265,111 25,384,378
Lehman Brothers Holdings Inc............. 222,600 6,984,075
Leucadia National Corp................... 382,600 10,234,550
Liberty Financial Companies, Inc......... 181,244 7,045,861
Mercury Finance Company.................. 1,361,900 16,683,275
Salomon Inc. ............................ 482,500 22,737,813
United Asset Management Corp............. 700,600 18,653,475
* Wilshire Financial Services
Group, Inc............................. 65,000 1,056,250
-------------
251,686,530
-------------
Food & Beverages (3.38%)
Brown-Forman Corp., Class A.............. 24,700 1,120,763
Brown-Forman Corp., Class B.............. 249,700 11,423,775
Cadbury Schweppes PLC.................... 1,810,061 15,271,440
Cultor Oy, Series 1...................... 330,700 17,972,826
Farmer Brothers Co....................... 52,036 7,909,472
* FoodBrands America, Inc.................. 143,936 1,979,120
Grand Metropolitan PLC................... 330,000 2,600,473
Heineken Holding NV...................... 84,941 13,283,562
Hormel Foods Corp........................ 136,500 3,685,500
Lindt & Spruengli AG,
Participation Certificates............. 3,977 6,566,433
Lindt & Spruengli AG, Registered......... 68 1,240,867
* Lotte Confectionary Co. Ltd.............. 8,590 996,237
Nabisco Holdings Corp., Class A.......... 279,300 10,857,788
Nestle SA, Registered.................... 2,619 2,811,732
Nutricia Verenigde Bedrijven NV.......... 187,440 28,498,697
Seaboard Corp............................ 5,350 1,423,100
Seagrams Company, Ltd.................... 77,500 3,003,125
* Stroh Brewing Co., Warrants.............. 39,944 389,454
Societe Sucriere de Pithiviers SA........ 11,670 7,224,822
Van Melle NV............................. 235,302 19,352,959
Weetabix PLC, Class A.................... 262,105 11,000,741
-------------
168,612,886
-------------
Healthcare (5.90%)
Allergan, Inc............................ 536,700 19,119,938
* Apria Healthcare Group Inc............... 62,600 1,173,750
* Beverly Enterprises, Inc................. 2,233,700 28,479,675
* FHP International Corp................... 1,365,900 50,709,038
* Foundation Health Corp................... 1,040,800 33,045,400
* Health Systems International, Inc........ 797,400 19,735,650
* Horizon/CMS Healthcare Corp.............. 1,216,200 15,354,525
(R)* Kendall International, Inc.,
Residual Ownership Certificates........ 49 758
* Laboratory Corp. of America,
Warrants............................... 177,387 16,630
Mallinckrodt Group Inc................... 411,600 18,161,850
* Maxicare Health Plans, Inc............... 860,000 19,135,000
* Mid Atlantic Medical Services, Inc....... 1,380,000 18,457,500
* Novartis AG.............................. 1,813 2,075,096
* Novartis AG, Registered.................. 12,286 14,071,302
* Perrigo Co............................... 491,100 4,481,288
* Tenet HealthCare Corp.................... 1,227,000 26,840,625
United HealthCare Corp................... 387,000 17,415,000
6
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Number Value
of Shares (Note A)
--------- --------
* Wellpoint Health Networks Inc.,
Class A................................ 184,200 $ 6,331,875
-------------
294,604,900
-------------
Industrial (4.85%)
(A) Aker A/S, Series A....................... 2,004,500 44,628,253
Briggs & Stratton Corp................... 956,500 42,086,000
Bucher Holding AG, Bearer................ 13,233 9,095,525
Crown Cork & Seal, Inc................... 309,600 16,834,500
Federal Mogul Corp....................... 286,400 6,300,800
Greif Brothers Corp...................... 28,800 813,600
Hayes Wheels International, Inc.......... 144,260 5,554,010
ITT Industries Inc....................... 646,100 15,829,450
(R)* Lancer Industries, Inc., Class B......... 1 5,130
* LucasVarity PLC.......................... 3,360,636 12,809,496
LucasVarity PLC, ADR..................... 1,116,154 42,413,852
Lyonnaise des Eaux SA.................... 119,479 11,127,562
* New Holland NV........................... 227,000 4,738,625
* Owens-Illinois, Inc...................... 178,800 4,067,700
Smith Investment Co...................... 7,254 483,298
(A) Toro Co.................................. 675,600 24,659,400
Vulcan International Corp................ 15,884 488,433
-------------
241,935,634
-------------
Insurance (3.15%)
* 20th Century Industries.................. 172,000 2,902,500
* Alleghany Corp........................... 64,872 13,752,864
Allmerica Property & Casualty
Companies, Inc......................... 438,900 13,331,588
AON Corp................................. 30,100 1,869,963
Argonaut Group, Inc...................... 129,300 3,975,975
Assurances Generales de France........... 349,921 11,304,102
Axa SA................................... 75,000 4,773,385
Enhance Financial Services Group,
Inc. .................................. 205,300 7,493,450
Financial Security Assurance
Holdings Ltd........................... 209,300 6,880,738
General RE Corp.......................... 69,328 10,936,492
Home Beneficial Corp., Class B........... 313,100 11,858,663
ING Groep NV............................. 136,097 4,903,118
Kansas City Life Insurance Co............ 17,750 1,127,125
(A) National Security Group, Inc............. 174,977 2,296,573
Old Republic International Corp.......... 748,465 20,021,439
Provident Companies, Inc................. 240,000 11,610,000
Providian Corp........................... 122,200 6,278,025
Reliable Life Insurance Company,
Class A .............................. 16,684 1,142,854
SAFECO Corp.............................. 150,420 5,932,189
SCOR SA.................................. 107,549 3,785,476
Selective Insurance Group, Inc........... 120,550 4,580,900
The Paul Revere Corp..................... 146,400 5,453,400
Unitrin, Inc............................. 15,400 858,550
-------------
157,069,369
-------------
Investment Companies (1.18%)
Austria Fund, Inc........................ 233,700 2,103,300
Forvaltnings AB Ratos, B Shares.......... 1,538,100 51,872,549
JF Indonesia Fund, Inc................... 1,407,300 1,637,559
New Age Media Fund, Inc.................. 265,100 3,313,750
-------------
58,927,158
-------------
Metals (0.52%)
* Algoma Steel, Inc........................ 1,602,153 8,188,873
Central Steel & Wire Co.................. 959 565,810
Cyprus Amax Minerals Co.................. 83,500 1,951,813
Inco Ltd................................. 88,567 2,829,255
Inco Ltd., Class VBN Shares.............. 76,850 1,865,768
LTV Corp................................. 336,900 4,000,688
Reynolds Metals Co. ..................... 116,400 6,562,050
-------------
25,964,257
-------------
Natural Resources (4.28%)
Apco Argentina Inc....................... 81,179 2,070,065
Ashland Inc.............................. 227,700 9,990,338
Bouygues Offshore SA, ADR................ 817,300 10,522,738
Bowater Inc. ............................ 9,400 353,675
Clyde Petroleum PLC ..................... 1,500,000 3,006,475
* Crown Central Petroleum Corp.,
Class A................................ 43,300 535,838
* Crown Central Petroleum Corp.,
Class B................................ 98,400 1,180,800
* Energy Ventures, Inc..................... 342,300 17,414,513
Fina, Inc................................ 42,600 2,055,450
(A)* GulfMark International, Inc.............. 319,037 18,504,146
Imperial Oil Ltd......................... 606,100 28,486,700
Royal Dutch Petroleum Co................. 31,200 5,327,400
Saga Petroleum A/S, A Shares............. 1,626,990 27,295,066
Saga Petroleum A/S, B Shares............. 1,482,105 23,237,770
* Santa Fe Energy Resources, Inc........... 272,000 3,774,000
Shell Transport & Trading Co............. 686,500 11,866,216
Societe Elf Aquitane SA.................. 391,400 35,652,501
Temple Inland Inc........................ 55,900 3,025,588
Union Texas Petroleum
Holdings, Inc.......................... 407,000 9,106,625
-------------
213,405,904
-------------
7
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Number Value
of Shares (Note A)
--------- --------
Printing & Publishing (4.30%)
Cognizant Corp........................... 1,031,700 $34,046,100
Daily Mail & General Trust PLC,
Class A................................ 371,200 8,374,797
Daily Mail & General Trust PLC,
Ordinary............................... 19,000 465,447
De Telegraaf Holding NV.................. 1,642,800 34,635,343
Dun & Bradstreet Corp.................... 1,111,700 26,402,875
Houghton Mifflin Co...................... 210,100 11,896,913
Knight-Ridder, Inc....................... 316,700 12,113,775
Midland Independent
Newspapers PLC......................... 250,000 561,037
Mirror Group PLC......................... 11,456,200 42,194,864
Pearson PLC.............................. 1,706,000 21,904,392
Scripps (E.W.) Co., Class A.............. 634,600 22,211,000
-------------
214,806,543
-------------
Real Estate (2.71%)
* Al-Zar Ltd............................... 12 4,200
Alico, Inc............................... 33,900 635,625
* Cadillac Fairview Corp................... 1,101,504 16,085,634
* Cadillac Fairview Corp., Warrants........ 112,599 411,080
* Castle & Cooke, Inc...................... 43,333 687,911
* E & J Properties Ltd., Units............. 15,000 37,500
Gould Investors L.P...................... 14,600 467,200
(A)(R)* MB Metropolis, L.L.C..................... 6,416,576 7,924,471
(A)(R)* MSCW Investors III, L.L.C................ 28,372,000 48,603,830
One Liberty Properties, Inc.............. 2,920 37,960
(A)* Resurgence Properties Inc................ 591,900 4,461,446
(A)(R)* Resurgence Properties Inc................ 900,000 6,783,750
St. Joe Paper Co......................... 100,000 6,500,000
(A)(R)* Value Property Trust..................... 3,880,280 42,392,059
(A)(R)* Value Property Trust, Warrants........... 24,204 5,187
-------------
135,037,853
-------------
Retail (1.53%)
American Stores Co....................... 222,500 9,094,688
Delchamps Inc............................ 66,700 1,292,313
Dillard Department Stores Inc.,
Class A................................ 256,900 7,931,788
Eckerd Corp.............................. 182,153 5,828,896
* Hills Stores Co.......................... 227,260 1,363,560
Homeland Holding Corp.................... 188,219 1,599,862
* Office Depot, Inc. ...................... 67,400 1,196,350
* Payless ShoeSource, Inc.................. 308,600 11,572,500
Sears PLC................................ 5,959,500 9,800,802
* Service Merchandise Co., Inc............. 52,600 223,550
* Vons Companies Inc....................... 437,200 26,177,350
-------------
76,081,659
-------------
Transportation (6.22%)
Burlington Northern Santa Fe Corp........ 59,000 5,096,125
Caliber Systems Inc...................... 256,400 4,935,700
Canadian National Railway Co............. 491,900 18,692,200
Canadian Pacific, Ltd.................... 210,000 5,565,000
* Central Transport Rental Group
PLC.................................... 1,030,000 167,626
* Central Transport Rental Group PLC,
ADR.................................... 825,114 309,418
Conrail Inc.............................. 584,709 58,251,634
Florida East Coast Industries, Inc. ..... 302,000 26,387,250
General Motors Corp. .................... 1,371,900 76,483,425
Helikopter Services Group ASA............ 621,400 8,086,579
(A)* Old Dominion Freight Line, Inc........... 419,000 4,451,875
Railtrack Group PLC, Partly-Paid......... 4,972,000 33,005,276
Ryder Systems, Inc....................... 1,007,000 28,321,875
Volvo AB, B Shares....................... 1,142,900 25,221,442
XTRA Corp................................ 349,000 15,137,875
-------------
310,113,300
-------------
TOTAL COMMON STOCK &
OTHER EQUITY INTERESTS 3,750,852,553
-------------
PREFERRED STOCK (0.99%)
Chevy Chase Preferred Capital
Corp., 10.375% Pfd..................... 31,000 1,604,250
Criimi Mae Inc., 10.875%
Series B Conv. Pfd..................... 22,200 643,800
Crown Cork & Seal, Inc., 4.50%
Conv. Pfd.............................. 88,766 4,615,832
* FHP International Corp.,
Series A Conv. Pfd..................... 195,000 5,947,500
* Gentra Inc., Pfd. G...................... 79,000 1,041,181
* Hills Stores Co., Pfd.................... 48,309 292,873
Inco Ltd., 5.50%
Series E Conv. Pfd..................... 12,973 671,353
(R)* Interlake Corp., 9.00%
Series A3 Conv. Pfd.................... 400 353,208
(R) Lancer Industries, Inc.,
Series C Pfd........................... 20,513 1,358,986
RJR Nabisco Holdings Corp.,
Class C Pfd............................ 1,655,000 11,171,250
Ransomes PLC,(pound)8.25 Conv. Pfd....... 14,345,000 21,871,124
-------------
49,571,357
-------------
8
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Principal Value
Amount (Note A)
--------- --------
CORPORATE BONDS AND NOTES (1.43%)
American Restaurant Group,
13.00%,9/15/98......................... $11,000,000 $7,121,400
Cadillac Fairview Corp., 12.00%,
7/31/05.............................CAD 132,492 91,904
Comcast Cellular Corp., 0%, 3/05/00,
Series A............................... $ 13,393,000 9,609,478
* Consorcio G Grupo Dina SA,
0/12.00%, 11/15/02..................... 4,975,000 4,129,250
Consorcio G Grupo Dina SA,
8.00%, 8/08/04......................... 4,885,000 3,077,550
Continental Airlines, Inc.,
Lease Claim............................ 2,802,676 2,550,435
FRD Acquisition Co., Series B,
12.50%, 7/15/04........................ 1,500,000 1,530,000
Flagstar Companies Inc.,
10.75%, 9/15/01........................ 2,750,000 2,530,000
Flagstar Companies Inc.,
10.875%, 12/01/02...................... 475,000 437,000
* Gentra Inc., Series A, 7.50%,
12/31/01............................CAD 4,734,850 4,321,538
* Gentra Inc., Series B, 7.50%,
12/31/01............................CAD 1,248,888 957,491
Georges Quick to Fix Foods, Inc.,
Series B, 11.50%, 12/01/06............. $ 1,900,000 1,966,500
Home Holdings Inc.,
8.625%, 12/15/03....................... 2,100,000 420,000
Homeland Stores, Inc., 10.00%,
8/01/03................................ 1,289,000 1,185,880
* Inflo Systems, Inc., 0/10.00%,
1/01/07................................ 2,400,000 1,692,000
International Knife & Saw Inc.,
11.375%, 11/15/06...................... 1,900,000 1,966,500
Olivetti International NV, 3.75%,
12/31/99...........................ITL 12,900,000,000 7,956,135
Phonetel Technologies Inc.,
12.00%, 12/15/06....................... $ 1,575,000 1,630,125
Specialty Foods Corp., Series B,
11.25%, 8/15/03........................ 2,225,000 1,757,750
Stone Container Financial Corp.,
11.50%, 8/15/06........................ 1,150,000 1,184,500
TransAmerican Refining Corp.,
16.50%, 2/15/02........................ 4,000,000 4,040,000
* TransAmerican Refining Corp.,
0/18.00%, 2/15/02...................... 4,260,000 3,514,500
Uniforet Inc., 11.125%, 10/15/06......... 1,665,000 1,556,775
Wilshire Financial Services Group,
Inc., 13.00%, 1/01/04.................. $ 6,000,000 6,030,000
-------------
71,256,711
-------------
BONDS AND NOTES IN REORGANIZATION (1.91%)
* Adams County CO Industrial Dev.
Auth., 9.00%, 11/01/96................. 1,775,000 88,750
* Ames Department Stores, Inc.,
Trade Claims........................... 2,581,653 19,362
* Anchor Glass Container Corp.,
9.875%, 12/15/08....................... 1,113,000 61,215
* Anchor Glass Container Corp.,
10.25%, 6/30/02........................ 696,000 556,800
* Barings BV, 0%, 1/22/01.................. 12,010,000 2,642,200
* Barings BV, 0%, 3/12/01.................. 8,249,000 8,001,530
* Caldor Corp., Trade Claims............... 6,306,634 1,702,791
* Dow Corning Corp., Bank Debt #1.......... 2,070,704 2,257,067
* Dow Corning Corp., Bank Debt#2........... 2,850,000 3,120,750
* Dow Corning Corp., Swap.................. 7,677,843 7,293,951
* Dow Corning Corp.,
8.15%,10/15/29......................... 7,050,000 7,543,500
* Dow Corning Corp.,
9.30%, 1/27/98......................... 1,835,000 2,000,150
* Dow Corning Corp.,
9.375%, 2/01/08........................ 790,000 865,050
* Dow Corning Corp.,
9.50%, 8/10/95......................... 350,000 385,000
* Dow Corning Corp., Medium Term
Note, 8.55%, 3/01/00................... 1,100,000 1,193,500
* El Paso TX Housing Finance
Corp., 8.88%, 10/15/96................. 27,574,000 1,447,635
* Eli Jacobs, Bank Claim................... 25,305,909 126,530
* Eurotunnel Finance Limited,
Bank Debt, Tranche A................GBP 9,250,000 6,179,977
* Eurotunnel Finance Limited,
Bank Debt, Tranche A1...............GBP 3,700,000 2,471,991
* Eurotunnel Finance Limited,
Bank Debt, Tranche B................ECU 2,502,857 1,225,412
* Eurotunnel Finance Limited,
Bank Debt, Tranche B-U.............GBP 42,644 28,490
* Eurotunnel Finance Limited,
Bank Debt, Tranche B1...............ECU 132,602 64,922
* Eurotunnel Finance Limited,
Bank Debt, Tranche C................FRF 6,600,000 496,432
* Eurotunnel Finance Limited,
Bank Debt, Tranche E................ECU 315,010 154,231
9
<PAGE>
Principal Value
Amount (Note A)
--------- --------
* Eurotunnel Finance Limited,
Bank Debt, Tranche E1...............FRF 14,381,620 $1,081,742
* Eurotunnel Finance Limited,
Bank Debt, Tranche E1-U.............FRF 865,580 65,106
* Eurotunnel Finance Limited,
Bank Debt, Tranche B1...............GBP 3,183,734 2,127,071
* Eurotunnel Finance Limited,
Bank Debt, Tranche E................FRF 67,655,427 5,088,840
* Eurotunnel Finance Limited,
Bank Debt, Tranche T................GBP 7,067,186 4,721,827
* Foxmeyer Health Corp., Reclamation
Trade Claim............................ $1,991,115 1,294,225
* Foxmeyer Health Corp.,
Trade Claim............................ 3,541,533 424,984
* Heilman Acquisition Corp.,
9.625%, 1/31/04, Residual Claim........ 15,000,000 1,500
* Isosceles PLC, Facility B Term Loan,
2001................................GBP 394,647 91,269
* Louisiana Agriculture Finance
Authority, 8.25%, 10/01/96............. 950,000 49,875
* Louisiana Housing Finance Authority,
8.61%, 8/01/96......................... 987,000 49,350
* Maxicare Health Plans, Inc.,
Bank Note.............................. 68,320 21,862
* Maxwell Communication Corp.
PLC, 5.00% 6/16/95..................CHF 618,975 40,463
* Maxwell Communication Corp.
PLC, 6.00% 6/15/93..................DEM 206,000 11,716
* Maxwell Communication Corp.
PLC, 8.375% 9/01/93.................ECU 520,000 57,121
* Memphis TN Health Facilities,
8.68%, 9/15/96......................... 8,800,000 462,000
* Metallurg, Inc., Bank Claim.............. 6,995,482 4,407,154
* Metallurg, Inc., Bank Claim #2........... 2,389,204 1,200,575
* Metallurg, Inc., Trade Claim............. 665,812 186,427
* MobileMedia Corp., Bank Debt #1.......... 2,025,034 1,660,528
* MobileMedia Corp., Bank Debt #2.......... 3,131,000 2,504,800
* Nebraska Investment Finance Auth.,
8.34%, 11/01/93........................ 4,660,000 233,000
* Olympia & York Maiden Lane
Finance, 10.375%, 12/31/95............. 7,125,000 2,208,750
* SouthEast Banking Corp., 0%,
12/16/96............................... 5,270,000 3,056,600
* SouthEast Banking Corp., 0%,
11/06/97............................... 6,880,000 3,990,400
Number
of Shares
or Principal Value
Amount (Note A)
------------ --------
* SouthEast Banking Corp.,
6.50%, 3/15/99......................... $ 1,636,000 $ 948,880
* SouthEast Banking Corp.,
10.50%, 4/11/01........................ 15,840,000 9,187,200
* Southeast Texas Housing Finance
Authority, 8.60%, 9/01/96.............. 1,500,000 82,500
* Tiphook Finance Corp.,
Lease Claim.........................GBP 185,118 301,268
-------------
95,484,269
-------------
COMPANIES IN LIQUIDATION (0.04%)
* Aerospace Creditors Liquidating..........
Trust, Certificates of..................
Beneficial Interest..................... 43,902 159,145
* Americana Hotels & Realty Corp........... 71,300 80,213
* City Investing Co., Liquidating
Trust.................................. 250,187 234,553
* MBO Properties Inc....................... 159,135 358,054
(A)* MEI Diversified Inc., Certificates of
Beneficial Interest.................... 13,957,852 1,284,122
* MCorp Financial Trust, Claim Units....... 13,334 90,871
* MCorp Trust, Claim Units................. 13,327 31,372
-------------
2,238,330
-------------
UNITED STATES GOVERNMENT AND
GOVERNMENT AGENCY OBLIGATIONS (20.16%)
U.S. Government Agency Obligations (2.07%)
Federal Home Loan Bank System,
5.010%, 2/28/97....................... $ 12,500,000 12,493,263
5.490%, 3/14/97....................... 14,000,000 13,852,720
5.106%, 2/23/98....................... 12,500,000 12,410,000
5.637%, 3/13/98....................... 25,000,000 24,958,750
Federal National Mortgage Association,
5.570%, 6/13/97........................ 6,000,000 5,857,104
5.860%, 7/03/97........................ 29,000,000 29,065,192
Tennessee Valley Authority,
6.000%, 1/15/97........................ 4,500,000 4,500,837
-------------
103,137,866
-------------
U.S. Government Agency Discount Notes (18.09%)
Federal Home Loan Bank System,...........
5.290%, 1/07/97........................ 3,400,000 3,397,002
5.200%, 1/09/97........................ 500,000 499,422
5.470%, 1/10/97........................ 7,000,000 6,990,428
5.240%, 1/15/97........................ 4,250,000 4,241,339
10
<PAGE>
Principal Value
Amount (Note A)
--------- --------
5.210%, 1/21/97........................ $ 1,200,000 $ 1,196,527
5.230%, 1/21/97........................ 10,000,000 9,970,944
5.200%, 1/23/97........................ 13,000,000 12,958,689
5.270%, 1/29/97........................ 19,000,000 18,922,121
5.260%, 2/04/97........................ 1,000,000 995,032
5.250%, 2/10/97........................ 5,500,000 5,467,917
5.270%, 2/13/97........................ 14,000,000 13,911,874
5.240%, 2/14/97........................ 15,000,000 14,903,933
5.230%, 2/21/97........................ 12,000,000 11,911,090
5.320%, 2/26/97........................ 7,500,000 7,437,933
5.210%, 3/03/97........................ 22,000,000 21,798,700
5.180%, 3/05/97........................ 15,000,000 14,858,775
5.490%, 3/12/97........................ 3,000,000 2,968,617
5.220%, 4/02/97........................ 9,000,000 8,880,336
5.640%, 4/04/97........................ 9,000,000 8,877,708
5.280%, 4/10/97........................ 4,500,000 4,433,796
5.480%, 4/21/97........................ 9,000,000 8,855,352
5.510%, 4/22/97........................ 1,900,000 1,869,186
5.500%, 4/24/97........................ 18,000,000 17,702,802
5.510%, 4/28/97........................ 20,000,000 19,658,100
5.370%, 4/29/97........................ 9,000,000 8,844,831
5.290%, 4/30/97........................ 10,000,000 9,826,130
5.245%, 5/12/97........................ 4,070,000 3,992,544
5.320%, 5/23/97........................ 15,000,000 14,690,565
5.580%, 5/27/97........................ 11,800,000 11,549,710
5.320%, 6/03/97........................ 4,000,000 3,911,260
5.150%, 6/09/97........................ 10,000,000 9,772,100
5.230%, 6/12/97........................ 7,000,000 6,835,570
5.260%, 6/23/97........................ 6,475,000 6,312,575
5.310%, 6/23/97........................ 3,000,000 2,924,745
5.320%, 6/23/97........................ 5,500,000 5,362,033
5.330%, 6/23/97........................ 7,000,000 6,824,405
5.140%, 7/30/97........................ 8,000,000 7,755,000
5.120%, 8/04/97........................ 10,000,000 9,686,460
5.110%, 8/12/97........................ 16,200,000 15,687,205
5.280%, 9/10/97........................ 16,700,000 16,086,275
5.190%, 9/26/97........................ 3,840,000 3,691,634
Federal Home Loan Mortgage Corp.,........
5.420%, 1/27/97........................ 2,000,000 1,992,171
Federal National Mortgage Association,...
5.500%, 1/08/97........................ 22,000,000 21,976,472
5.500%, 1/14/97........................ 20,000,000 19,960,278
5.230%, 1/17/97........................ 4,000,000 3,990,702
5.230%, 1/21/97........................ 10,200,000 10,170,363
5.240%, 1/21/97........................ 6,000,000 5,982,533
5.225%, 2/10/97........................ 20,000,000 19,883,889
5.240%, 2/18/97........................ 11,000,000 10,923,147
5.250%, 2/19/97........................ 4,500,000 4,467,844
5.290%, 2/27/97........................ 14,500,000 14,378,550
5.500%, 3/06/97........................ 3,100,000 3,070,792
5.300%, 3/10/97........................ 1,000,000 989,838
5.500%, 3/10/97........................ 11,700,000 11,581,105
5.220%, 3/13/97........................ 18,000,000 17,813,268
5.370%, 3/17/97........................ 8,700,000 8,602,229
5.410%, 3/17/97........................ 2,200,000 2,175,276
5.490%, 3/17/97........................ 2,000,000 1,977,524
5.170%, 3/19/97........................ 10,000,000 9,887,490
5.240%, 3/27/97........................ 30,000,000 29,618,910
5.230%, 4/03/97........................ 8,000,000 7,891,648
5.260%, 4/03/97........................ 7,000,000 6,905,192
5.330%, 4/11/97........................ 10,700,000 10,543,662
5.205%, 4/16/97........................ 6,520,000 6,419,025
5.220%, 4/17/97........................ 14,840,000 14,610,158
5.190%, 4/21/97........................ 5,000,000 4,919,640
5.420%, 5/09/97........................ 20,000,000 19,622,400
5.230%, 5/12/97........................ 16,000,000 15,695,504
5.500%, 5/13/97........................ 2,000,000 1,961,645
5.240%, 5/16/97........................ 6,000,000 5,882,328
5.230%, 5/19/97........................ 17,000,000 16,651,364
5.250%, 5/20/97........................ 16,000,000 15,676,896
5.180%, 5/21/97........................ 16,000,000 15,674,576
5.210%, 5/21/97........................ 15,000,000 14,694,915
5.460%, 6/02/97........................ 28,500,000 27,871,860
5.140%, 6/04/97........................ 5,500,000 5,375,068
5.150%, 6/05/97........................ 7,000,000 6,842,675
5.230%, 6/06/97........................ 10,000,000 9,773,800
5.240%, 6/10/97........................ 6,300,000 6,153,840
5.490%, 6/17/97........................ 5,000,000 4,878,925
5.240%, 6/30/97........................ 10,000,000 9,739,000
5.250%, 6/30/97........................ 8,600,000 8,375,540
5.420%, 7/11/97........................ 22,900,000 22,265,785
5.130%, 7/18/97........................ 6,000,000 5,826,750
5.170%, 7/24/97........................ 20,000,000 19,405,000
5.290%, 8/08/97........................ 20,000,000 19,361,260
5.120%, 8/18/97........................ 6,100,000 5,896,284
5.130%, 8/22/97........................ 10,000,000 9,660,210
5.130%, 9/18/97........................ 12,600,000 12,117,244
5.120%, 9/19/97........................ 6,000,000 5,777,278
-------------
902,372,518
-------------
11
<PAGE>
Number of
Shares, Contracts
or Principal Value
Amount (Note A)
----------------- --------
OPTIONS (0.47%)
(R)* Cityscape Financial Corp.,
January/20/Call........................ 9,870 $ 23,317,875
--------------
TOTAL INVESTMENTS IN
SECURITIES (100.19%)................... $4,998,231,479
==============
SECURITIES SOLD SHORT (0.45%)
* Arch Communications Group, Inc.,
10.875%, 3/15/08....................... $1,600,000 $ 924,000
* J.C. Penney Co., Inc. ................... 118,100 5,757,375
* Safeway, Inc............................. 332,000 14,193,000
* Staples, Inc............................. 76,400 1,379,975
--------------
22,254,350
--------------
WHEN ISSUED SECURITIES SOLD SHORT (0.12%)
* Covance, Inc............................. 44,600 936,600
* NCR Corp................................. 119,700 3,994,988
* Quest Diagnostics, Inc................... 70,900 1,072,363
--------------
6,003,951
--------------
TOTAL SECURITIES SOLD
SHORT AND WHEN ISSUED
SECURITIES SOLD SHORT (0.57%).......... $ 28,258,301
==============
OPTIONS WRITTEN (0.01%)
* Boeing Co.
May/100/Put............................ 300 $ 91,875
==============
* Non-income producing securities.
(A) Affiliated issuers.
(R) Restricted Securities.
The percentage shown for each investment category is the total value of
that category expressed as a percentage of total net assets of the Fund.
Currency Type Abbreviations:
Principal amount is stated in United States dollars unless otherwise noted.
ECU -- European currency unit
AUD -- Australian dollar
BEF -- Belgian Franc
GBP -- British pound
CAD -- Canadian dollar
DKK -- Danish krone
NLG -- Dutch guilder
FIM -- Finnish markka
FRF -- French franc
DEM -- German mark
HKD -- Hong Kong dollars
ITL -- Italian lira
NOK -- Norwegian krone
SEK -- Swedish krona
CHF -- Swiss franc
Distribution of investments by country:
As a percentage of total investments in securities
United States................................. 73.4%
United Kingdom................................ 7.2
Sweden........................................ 6.3
Netherlands................................... 3.2
France........................................ 3.0
Norway........................................ 2.1
Canada........................................ 1.7
Other (individually less than 1%)............. 3.1
-------
Total......................................... 100.0%
=======
See notes to financial statements.
12
<PAGE>
MUTUAL BEACON FUND
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1996
<TABLE>
<S> <C> <C>
ASSETS
Investments in Securities, at Value
Unaffiliated Issuers (Cost $4,073,366,131) ..................... $4,783,492,617
Controlled Affiliated Issuers (Cost $83,303,663) ............... 98,925,547
Non Controlled Affiliated Issuers (Cost $96,347,705) ........... 115,813,315 $4,998,231,479
--------------
Cash ................................................................................... 6,934,107
Receivables:
Investment Securities Sold ....................................................... 43,249,075
Capital Stock Subscribed ......................................................... 20,968,713
Dividends ........................................................................ 4,938,438
Interest ......................................................................... 3,170,906
Other ............................................................................ 686,808
Fee Reimbursed ................................................................... 822,952
Deposits with Brokers for Securities Sold Short ........................................ 3,737,296
---------------
TOTAL ASSETS ............................................................... 5,082,739,774
---------------
LIABILITIES
Payables:
Investment Securities Purchased .................................................. 49,963,660
Net Payable for Foreign Currency Exchange Contracts .............................. 6,105,374
Investment Advisory Fee .......................................................... 2,425,603
Capital Stock Repurchased ........................................................ 5,707,329
Accrued Expenses and Other Liabilities ........................................... 1,466,577
Securities Sold Short and When Issued Securities Sold Short,
at Value (Proceeds Receivable $29,129,884) ....................................... 28,258,301
Outstanding Options Written, at Value (Premium Received $130,346) ...................... 91,875
---------------
TOTAL LIABILITIES .......................................................... 94,018,719
---------------
NET ASSETS APPLICABLE TO OUTSTANDING CAPITAL STOCK ..................................... $ 4,988,721,055
===============
COMPOSITION OF NET ASSETS
Paid In Capital ........................................................................ $ 4,174,075,017
Distributions in Excess of Net Investment Income ....................................... (1,622,610)
Accumulated Net Realized Gain on Investments and Foreign Currency Transactions ......... 76,197,617
Net Unrealized Appreciation of Investments, Securities Sold Short and Options Written .. 746,124,034
Net Unrealized Depreciation of Foreign Currency Exchange Contracts and Dividends ....... (6,053,003)
---------------
TOTAL NET ASSETS ........................................................... $ 4,988,721,055
===============
Class Z
Net Asset Value per Share (Offering and Redemption Price per Share)
($4,920,388,290 / 126,316,355 shares outstanding) .......................... $ 38.95
===============
Class I
Net Asset Value per Share ($52,069,657 / 1,337,413 shares outstanding) ........... $ 38.93
===============
Maximum Offering Price ($38.93 / 95.5%) .......................................... $ 40.76
===============
Class II
Net Asset Value per Share ($16,263,108 / 417,780 shares outstanding) ............. $ 38.93
===============
Maximum Offering Price ($38.93 / 99.0%) .......................................... $ 39.32
===============
</TABLE>
See notes to financial statements.
13
<PAGE>
MUTUAL BEACON FUND
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996
<TABLE>
<S> <C> <C>
INVESTMENT INCOME:
Income:
Dividends -- Unaffiliated Issuers
(Net of Foreign Withholding - $3,620,467) ............................... $ 110,077,439
Dividends-- Non Controlled Affiliated Issuers ............................. 389,452
Interest .................................................................. 60,910,279
------------
TOTAL INCOME .................................................................... $171,377,170
Expenses:
Investment Advisory Fees .................................................. 26,083,112
Shareholder Servicing Costs ............................................... 2,622,770
Administrative ............................................................ 2,162,860
Distribution Fees
Class I ............................................................. 9,518
Class II ............................................................ 10,651
Custodian Fees ............................................................ 545,920
Registration and Filing Fees .............................................. 499,010
Shareholder Reports ....................................................... 302,736
Legal Fees ................................................................ 154,112
Insurance ................................................................. 87,012
Auditing Fees ............................................................. 97,659
Directors' Fees and Expenses .............................................. 60,628
Miscellaneous ............................................................. 63,443
------------
TOTAL EXPENSES .................................................................. 32,699,431
------------
Less Expenses Reimbursed .................................................. (822,952)
TOTAL EXPENSES LESS REIMBURSEMENT ............................................... 31,876,479
------------
NET INVESTMENT INCOME ....................................... 139,500,691
------------
REALIZED AND UNREALIZED GAIN/(LOSS) ON INVESTMENTS
Net Realized Gain on Investments and Foreign Currency Transactions
in Unaffiliated Issuers ................................................ 366,103,808
Net Realized Loss on Investments in Controlled and Non Controlled
Affiliates Issuers ..................................................... (16,797,338)
Net Realized Loss on Securities Sold Short ................................ (10,106,617)
Net Realized Gain on Options Written ...................................... 672,809
Change in Unrealized Appreciation of Investments,
Securities Sold Short, Options Written and Foreign Currency Transactions 352,415,288
-------------
NET GAIN ON INVESTMENTS ..................................... 692,287,950
-------------
NET INCREASE IN NET ASSETS FROM OPERATIONS ...................................... $ 831,788,641
=============
</TABLE>
See notes to financial statements.
14
<PAGE>
MUTUAL BEACON FUND
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------
1996 1995
--------------- ---------------
<S> <C> <C>
INCREASE/(DECREASE) IN NET ASSETS FROM OPERATIONS:
Net Investment Income ............................................ $ 139,500,691 $ 85,517,780
Net Realized Gain on Investments and Foreign Currency Transactions 339,872,662 274,784,273
Change in Unrealized Appreciation of Investments ................. 352,415,288 297,322,201
--------------- ---------------
NET INCREASE IN NET ASSETS
FROM OPERATIONS .............................................. 831,788,641 657,624,254
--------------- ---------------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net Investment Income
Class Z ........................................................ (123,408,070) (77,357,961)
Class I ........................................................ (733,476) --
Class II ....................................................... (258,962) --
Net Realized Gain on Investments
Class Z ........................................................ (390,075,901) (200,919,879)
Class I ........................................................ (1,661,478) --
Class II ....................................................... (601,432) --
--------------- ---------------
TOTAL DISTRIBUTIONS TO SHAREHOLDERS ............................ (516,739,319) (278,277,840)
--------------- ---------------
CAPITAL STOCK TRANSACTIONS:
Class Z ....................................................... 1,029,861,383 1,133,497,944
Class I ....................................................... 53,716,426 --
Class II ...................................................... 16,796,782 --
--------------- ---------------
NET INCREASE IN NET ASSETS ......................................... 1,415,423,913 1,512,844,358
NET ASSETS:
Beginning of Year ................................................ 3,573,297,142 2,060,452,784
--------------- ---------------
End of Year -- Including Distributions in Excess of Net Investment
Income of $1,622,610, and $7,873,167, respectively ............ $ 4,988,721,055 $ 3,573,297,142
=============== ===============
</TABLE>
See notes to financial statements.
15
<PAGE>
MUTUAL BEACON FUND
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
NOTE A -- SIGNIFICANT ACCOUNTING POLICIES
Mutual Beacon Fund is a portfolio of Franklin Mutual Series Fund Inc. (the
"Series Fund"), which is registered under the Investment Company Act of 1940 as
a diversified, open-end management investment company. The Series Fund currently
consists of five portfolios: Mutual Beacon Fund, Mutual Shares Fund, Mutual
Qualified Fund, Mutual Discovery Fund and Mutual European Fund. Each of these
portfolios is considered to be a separate entity for financial reporting and
Federal income tax purposes. The financial statements and notes include
operations with respect to Mutual Beacon Fund (the "Fund") only.
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
may affect the reported amounts of assets and liabilities. Actual results could
differ from those estimates.
Security Valuation: Investments in securities and securities sold short
that are listed on an exchange or the NASDAQ national market or other securities
traded in the over-the-counter market are valued at the last reported sales
price on the day of valuation; however, if there are no sales on that day, such
securities are valued at the mean between the closing bid and asked prices.
Securities for which market quotations are not readily available are valued at
"fair value" as determined in good faith by management under the direction of
the Board of Directors. Fair value reflects what management believes is the bid
price for the securities and is based on estimates and assumptions deemed
relevant under the circumstances. Actual results could differ from these
estimates. Temporary investments are valued at the prevailing market value.
Restricted Securities: The Fund invests in securities which are restricted
as to public sale in accordance with the Securities Act of 1933. Such assets are
valued at fair value as determined in good faith by management under the
direction of the Board of Directors. It is the Fund's policy that no more than
15%, as determined at the time of investment, of the value of the Fund's assets
be invested in restricted securities.
Foreign Securities: The value of foreign securities is converted into U.S.
dollars at the rate of exchange prevailing on the day of valuation. Purchases
and sales of foreign securities, as well as income and expenses relating to such
securities, are converted at the prevailing rate of exchange on the respective
date of such transactions.
Foreign Exchange Contracts: The Fund may engage in currency transactions
in order to hedge the value of portfolio holdings denominated in foreign
currencies against fluctuations in relative value. Foreign Exchange contracts
are valued at the forward rate, and are marked-to-market daily. The change in
market value is recorded by the Fund as an unrealized gain or loss. 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. The use of currency transactions can result in
the Fund incurring losses as a result of a number of factors including the
imposition of exchange controls, suspension of settlements, or the inability to
deliver or receive a specified currency. The Fund does not isolate that portion
of the results of operations resulting from changes in foreign exchange rates on
investments from the fluctuations arising from changes in market prices of
securities held. Such fluctuations are included with the net realized and
unrealized gain or loss from investments.
Options Written: When the Fund writes an option, the premium received is
recorded as a liability with subsequent daily adjustment to current market
value. When the Fund enters into a closing transaction or the option expires or
is exercised, the Fund realizes a gain or loss, and the liability is eliminated.
All securities covering outstanding options are held in a segregated account by
the custodian bank.
16
<PAGE>
MUTUAL BEACON FUND
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
Securities Sold Short: The Fund is engaged in selling securities short,
which obligates the Fund to replace a security borrowed by purchasing the same
security at the current market value. The Fund would incur a loss if the price
of the security increases between the date of the short sale and the date on
which the Fund replaces the borrowed security. The Fund would realize a gain if
the price of the security declines between those dates.
The Fund is required to establish a margin account with the broker lending
the security sold short. While the short sale is outstanding, the broker retains
the proceeds of the short sale and the Fund must also maintain a cash deposit
with the broker having a value equal to a specified percentage of the value of
the securities sold short.
Securities Transactions and Investment Income: Securities transactions are
recorded on a trade-date basis. Securities gains or losses are determined on the
identified cost basis. Dividend income is recorded on the ex-dividend date or,
for certain foreign dividends, as soon as the Fund becomes aware of the
dividends. Interest income, including original issue discount, where applicable,
is recorded on the accrual basis, except for bonds trading "flat", in which case
interest is recorded when received.
Dividends and Distributions to Shareholders: Income dividends and capital
gain distributions are determined in accordance with income tax regulations
which may differ from generally accepted accounting principles. These
differences are primarily due to differing treatments of income and gains on
various investment securities held by the Fund, timing differences and differing
characterization of distributions made by the Fund. Differences in the
recognition or classification of income between the financial statements and tax
earnings and profits which result in temporary over-distribution for financial
statement purposes are classified as distributions in excess of net investment
income or accumulated net realized gains.
Federal Income Taxes: The Fund qualifies, and intends to continue to meet
the requirements for qualification, as a regulated investment company, as
defined in applicable sections of the Internal Revenue Code ("Code"). By
complying with Code provisions, the Fund is relieved from Federal income tax
provided that substantially all of its taxable income is distributed to
shareholders. Therefore, no Federal income tax provision has been provided.
NOTE B -- MERGER OF HEINE SECURITIES CORPORATION AND FRANKLIN RESOURCES
On October 31, 1996, pursuant to an agreement between Franklin Resources,
Inc. ("FRI") and Heine Securities Corporation ("Heine"), the investment adviser,
the assets of Heine were acquired by Franklin Mutual Advisers, Inc. ("FMA"), a
subsidiary of FRI. FMA became the investment adviser to the Series Fund and the
Series Fund name changed from Mutual Series Fund Inc. to Franklin Mutual Series
Fund Inc.
NOTE C -- INVESTMENT ADVISORY FEES AND OTHER TRANSACTIONS WITH AFFILIATES
Certain officers of the Fund are also directors or officers of FMA,
Franklin Templeton Distributors, Inc. ("FTD") and Franklin Templeton Investor
Services, Inc. ("FTIS"), the Fund's investment adviser, principal underwriter
for Class I and II, and transfer agent, respectively.
For the year ended December 31, 1996, the Advisers received fees of
$26,083,112 for investment management and advisory services under the investment
advisory agreements. The fee was paid monthly based on average daily net assets
at the annual rate of six-tenths of one percent. Prior to November 1, 1996,
administrative personnel and services were provided at approximate cost by the
Heine. On November 1, 1996 Franklin Templeton Services, Inc.
17
<PAGE>
MUTUAL BEACON FUND
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
("FTSI") became the Fund's administrative manager. The Fund pays FTSI monthly
its allocated share of an administrative fee of 0.15% per annum on the first
$200 million of the Series Fund's aggregate average daily net assets, 0.135% of
the next $500 million, 0.10% of the next $500 million and 0.075% per annum of
such average net assets in excess of $1.2 billion. The Fund paid FTSI fees of
$634,856 through December 31, 1996. In connection with the merger, FRI and FMA
agreed, through October 31, 1999, 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 Fund's Board of Directors determines that
such expenses would have been higher had the merger not taken place. This
expense limitation does not include items such as litigation expenses, interest,
taxes, insurance, brokerage commissions and expenses of an extraordinary nature.
The Franklin Group and FMA have also voluntarily reimbursed the Fund for
additional 1996 expenses of $345,413. The total of all reimbursements is set
forth in the statement of operations. For the period ended December 31, 1996,
FTD paid net commissions of $68,177 from the sale of the Fund's shares and FTIS
received fees of $493,378.
Clearwater Securities, Inc. ("Clearwater") is a registered securities
dealer which is owned by Michael F. Price, President of FMA. Through October 31,
1996, the Fund executed certain security transactions with Clearwater, and paid
brokerage commissions totaling $607,402. Effective November 1, 1996, security
transactions were no longer executed with Clearwater.
Under the distribution plans for Class I and Class II shares, the Fund
reimburses FTD quarterly for FTD's costs and expenses in connection with any
activity that is primarily intended to result in a sale of Fund shares, subject
to a maximum of 0.35% and 1.00% per annum of the average daily net assets of
Class I and Class II shares, respectively. Class II shares redeemed within 18
months are subject to a contingent deferred sales charge. There were no
contingent deferred sales charge paid to FTD for the period ended December 31,
1996.
NOTE D -- INVESTMENT TRANSACTIONS
Purchases and proceeds from the sale of investment securities (excluding
short-term investments) for the year ended December 31, 1996 aggregated
$2,885,276,808 and $2,404,374,991, respectively.
For Federal income tax purposes, the identified cost of investments at
December 31, 1996 was $4,254,882,866. Net unrealized appreciation for all
securities at December 31, 1996, based on Federal income tax cost, amounted to
$743,348,613, consisting of aggregate gross unrealized appreciation of
$808,122,885 and aggregate gross unrealized depreciation of $64,774,272.
18
<PAGE>
MUTUAL BEACON FUND
NOTES TO FINANCIAL STATEMENTS
December 31, 1996
Transactions in options written during the year ended December 31, 1996
were as follows:
<TABLE>
<CAPTION>
Principal
Amount or
Number of
Contracts Premium
---------- -------------
<S> <C> <C>
Options outstanding at December 31, 1995 ............................. 75 $ 9,431
Options written ...................................................... 62,510 1,252,373
Options expired ...................................................... (59,783) (640,960)
Options terminated in closing transactions ........................... (1,220) (228,331)
Options exercised .................................................... (1,282) (262,167)
-------- -------------
Options outstanding at December 31, 1996 ............................. 300 $ 130,346
======== =============
</TABLE>
NOTE E -- RESTRICTED SECURITIES
A summary of the restricted securities held at December 31, 1996 follows:
<TABLE>
<CAPTION>
Acquisition
Name of Issuer Date Value
- ------------- ----------- -------------
<S> <C> <C>
Common Stock & Other Equity Interests
Kendall International, Inc., Residual Ownership Certificates ..... 7/06/92 $ 758
Lancer Industries, Inc., Class B ................................. 8/11/89 5,130
MB Metropolis, L.L.C ............................................. 12/07/94 7,924,471
MSCW Investors III, L.L.C ........................................ 12/27/95 48,603,830
Resurgence Properties Inc. ....................................... 4/05/95 6,783,750
Sunbeam Corp. .................................................... 2/23/90 32,408,165
Value Property Trust ............................................. 12/23/93 42,392,059
Value Property Trust, Warrants ................................... 3/13/96 5,187
Preferred Stock
Interlake Corp., 9.00%, Series A3 Conv. Pfd. ..................... 6/17/92 353,208
Lancer Industries, Inc., Series C Pfd. ........................... 8/11/89 1,358,986
Option
Cityscape Financial Corp., January/20/Call ....................... 11/25/96 23,317,875
-------------
Total restricted securities: (Cost $116,250,270) (3.27% of Net Assets) $ 163,153,419
=============
</TABLE>
19
<PAGE>
MUTUAL BEACON FUND
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
NOTE F -- INVESTMENT IN AFFILIATES*
<TABLE>
<CAPTION>
Dividend
Income
Balance of Shares Gross Sales Balance of Shares Value Jan. 1-
Held Dec. 31, Gross Purchases and Held Dec. 31, Dec. 31, Dec. 31,
Name of Issuer: 1995 and Additions Reductions 1996 1996 1996
- ---------------------------------- ---------------- ---------------- ----------- ---------------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C>
Controlled Affiliates**
MB Metropolis, L.L.C.............. 6,651,920 -- 235,344 6,416,576 $ 7,924,471 --
MSCW Investors III, L.L.C......... 28,372,000 -- -- 28,372,000 48,603,830 --
Value Property Trust.............. 3,880,280 -- -- 3,880,280 42,392,059 --
Value Property Trust, Warrants.... -- $ 24,204 -- 24,204 5,187 --
----------- --------
Total Controlled Affiliates $98,925,547 --
=========== ========
Non Controlled Affiliates
Aker AS, Series A................. -- 2,004,500 -- 2,004,500 $ 44,628,253 --
Caldor Corp....................... 903,300 -- 903,300 -- *** --
GulfMark International, Inc....... 273,037 46,000 -- 319,037 18,504,146 --
Hexcel Corp....................... 980,601 -- -- 980,601 *** --
MEI Diversified Inc., Certificates
of Beneficial Interest........ -- 13,957,852 -- 13,957,852 1,284,122 --
Management Assistance, Inc.,
Liquidating Trust............. 431,100 -- 431,100 -- *** --
National Security Group, Inc...... 174,977 -- -- 174,977 2,296,573 $ 27,996
New Dimensions in Medicine, Inc... 862,595 -- 862,595 -- *** --
Old Dominion Freight Line, Inc.... 200,000 219,000 -- 419,000 4,451,875 --
Puerto Rican Cement Co., Inc...... 85,000 194,800 -- 279,800 8,743,750 53,680
Resurgence Properties Inc......... 591,900 -- -- 591,900 4,461,446 --
Resurgence Properties Inc.
(Restricted).................. 900,000 -- -- 900,000 6,783,750 --
Toro Co........................... -- 675,600 -- 675,600 24,659,400 307,776
------------ --------
Total Non Controlled Affiliates $115,813,315 $389,452
============ ========
</TABLE>
* Affiliated issuers, as defined in the Investment Company Act of 1940, are
issuers in which the Fund held 5% or more of the outstanding voting
securities.
** Issuers in which the Fund owns 25% or more of the outstanding voting
securities.
*** As of December 31, 1996 no longer an affiliate.
20
<PAGE>
MUTUAL BEACON FUND
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
NOTE G -- FOREIGN CURRENCY EXCHANGE CONTRACTS
At December 31, 1996, the Fund had various contracts which obligate the
Fund to deliver currencies at speci fied future dates. Open contracts were as
follows:
<TABLE>
<CAPTION>
Net Unrealized
Contracts to Deliver In Exchange For Settlement Date Value Appreciation/(Depreciation)
----------------------- --------------- --------------- -------------- -------------------------
<S> <C> <C> <C> <C> <C>
Sales
AUD 16,205,262 $ 12,703,305 5/06/97 $ 12,866,087 $ (162,782)
CAD 80,617,280 60,579,513 5/30/97 59,391,916 1,187,597
CHF 55,745,368 42,559,955 3/10/97 41,931,498 628,457
DEM 27,123,092 18,030,562 3/18/97 17,715,238 315,324
DKK 39,435,591 6,897,834 4/24/97 6,735,746 162,088
FIM 90,619,372 20,455,840 3/03/97 19,778,332 677,508
FRF 697,385,464 135,827,776 2/28/97 134,941,833 885,943
GBP 70,137,345 112,032,585 2/18/97 120,026,809 (7,994,224)
GBP 30,000,000 49,756,500 3/18/97 51,301,050 (1,544,550)
GBP 50,513,538 78,410,540 5/16/97 86,233,074 (7,822,534)
GBP 30,500,000 50,434,800 6/18/97 52,015,951 (1,581,151)
GBP 41,873,506 69,066,715 8/18/97 71,281,563 (2,214,848)
HKD 285,577,764 36,933,094 1/10/97 36,923,291 9,803
ITL 11,559,656,251 7,570,755 1/02/97 7,625,103 (54,348)
ITL 11,559,656,250 7,498,236 7/02/97 7,576,570 (78,334)
NLG 82,655,585 50,381,315 3/06/97 48,070,385 2,310,930
NLG 89,523,199 53,459,676 3/17/97 52,103,353 1,356,323
NLG 80,198,253 46,967,140 6/10/97 46,947,829 19,311
NOK 384,784,928 60,170,068 3/10/97 60,518,807 (348,739)
NOK 263,303,441 40,633,247 6/09/97 41,589,189 (955,942)
SEK 339,127,827 51,045,793 1/21/97 49,764,505 1,281,288
SEK 405,591,412 61,129,075 2/18/97 59,592,058 1,537,017
SEK 604,432,793 91,235,146 5/15/97 89,158,177 2,076,969
SEK 281,694,485 42,677,749 7/21/97 41,679,561 998,188
SEK 468,231,328 70,767,223 8/15/97 69,354,749 1,412,474
-------------- -------------- -----------
$1,277,224,442 $1,285,122,674 $(7,898,232)
============== ============== -----------
Purchases
$12,912,674 AUD 16,205,262 5/06/97 $ 12,866,087 (46,587)
3,971,177 FIM 18,068,556 3/03/97 3,943,593 (27,584)
30,227,884 GBP 18,837,952 5/16/97 32,158,795 1,930,911
7,547,931 ITL 11,559,656,251 1/02/97 7,625,103 77,172
5,221,215 SEK 34,604,420 1/21/97 5,077,943 (143,272)
296,691 SEK 2,026,403 5/15/97 298,909 2,218
----------- ------------ -----------
$60,177,572 $ 61,970,430 1,792,858
=========== ============ -----------
$(6,105,374)
===========
</TABLE>
Currency type abbreviations are explained on page 12.
21
<PAGE>
MUTUAL BEACON FUND
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
NOTE H -- CAPITAL STOCK
Effective November 1, 1996, the Fund offered three classes of shares:
Class Z, Class I and Class II. All Fund shares outstanding before that date were
designated class Z shares. All classes of shares have the same rights, except
for their initial sales load, distribution fees, voting rights affecting a
single class and the exchange privilege of each class. At December 31, 1996,
there were 300 million shares authorized ($0.001 par value). Transactions in
capital stock were as follows:
<TABLE>
<CAPTION>
Class Z
----------------------------------------------------------------
Year Ended Year Ended
to December 31, 1996 to December 31, 1995
------------------------------ -----------------------------
Shares Amount Shares Amount
----------- --------------- ----------- ---------------
<S> <C> <C> <C> <C>
Shares sold .............................. 34,429,925 $1,324,427,054 39,265,763 $1,353,842,644
Shares issued in reinvestment of dividends 11,888,106 459,661,027 7,089,659 251,570,646
Shares redeemed .......................... (19,412,747) (754,226,698) (13,339,166) (471,915,346)
----------- --------------- ----------- ---------------
Net Increase ........................... 26,905,284 $1,029,861,383 33,016,256 $1,133,497,944
=========== =============== =========== ===============
</TABLE>
Class I
-----------------------------
For the period
November 1, 1996
to December 31, 1996
-----------------------------
Shares Amount
------ ------
Shares sold .................................... 1,327,664 $53,458,385
Shares issued in reinvestment of dividends ..... 57,339 2,210,404
Shares redeemed ................................ (47,590) (1,952,363)
---------- ------------
Net Increase ................................. 1,337,413 $53,716,426
========== ============
Class II
-----------------------------
For the period
November 1, 1996
to December 31, 1996
-----------------------------
Shares Amount
------ ------
Shares sold .................................... 414,977 $16,724,893
Shares issued in reinvestment of dividends ..... 20,626 795,137
Shares redeemed ................................ (17,823) (723,248)
-------- ------------
Net Increase ................................. 417,780 $16,796,782
======== ============
Effective January 31, 1997, there was a 3-for-1 stock split and authorized
shares were increased to 1.35 billion shares.
22
<PAGE>
MUTUAL BEACON FUND
FINANCIAL HIGHLIGHTS
(Selected data for a share of capital stock outstanding throughout each period)
<TABLE>
<CAPTION>
Class Z
-------------------------------------------------------------------------------------------------
Sept. 1,
Year Ended December 31, 1987 to
--------------------------------------------------------------------------------------- Dec. 31,
1996 1995 1994 1993 1992 1991 1990 1989 1988 1987
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period .......... $35.94 $31.03 $31.09 $27.10 $23.36 $20.80 $24.09 $22.85 $19.49 $24.78
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Income from Investment
Operations:
Net Investment Income ........ 1.20 .87 .46 .37 .45 .75 1.08 1.12 .77 .22
Net Gains or Losses on
Securities (realized and
unrealized) ................ 6.28 7.09 1.28 5.81 4.85 2.88 (3.03) 2.84 4.80 (3.96)
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total from Investment
Operations ................. 7.48 7.96 1.74 6.18 5.30 3.63 (1.95) 3.96 5.57 (3.74)
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Less Distributions:
Dividends (from net investment
income) .................... 1.06 .84 .44 .37 .46 .74 1.08 1.17 .80 .51
Distributions
(from capital gains) ....... 3.41 2.21 1.36 1.82 1.10 .33 .26 1.55 1.41 1.04
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total Distributions ........ 4.47 3.05 1.80 2.19 1.56 1.07 1.34 2.72 2.21 1.55
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Net Asset Value,
End of Period ................ $38.95 $35.94 $31.03 $31.09 $27.10 $23.36 $20.80 $24.09 $22.85 $19.49
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
Total Return* ................... 21.19% 25.89% 5.61% 22.93% 22.92% 17.60% (8.17)% 17.46% 28.79% (15.12)%
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
Ratios/Supplemental Data:
Net Assets, End of Period
(millions) ................... $4,920 $3,573 $2,060 $1,062 $534 $398 $388 $409 $214 $131
Ratio of Expenses to
Average Net Assets ........... .73%++ .72% .75% .73% .81% .85% .85% .67%+ .59%+ .87%**
Ratio of Net Investment Income
to Average Net Assets ........ 3.21%++ 2.89% 1.96% 1.53% 1.90% 3.07% 4.59% 4.98%+ 3.64%+ 2.86%**
Portfolio Turnover Rate ......... 66.87% 73.18% 70.63% 52.88% 57.52% 56.63% 57.74% 67.18% 86.79% 28.07%
Average Commission Per Share .... $.047 -- -- -- -- -- -- -- -- --
</TABLE>
* Not annualized for periods of less than one year.
** Annualized.
+ After reduction of expenses by the Investment Adviser. Had the Investment
Adviser not undertaken such action, the ratios of operating expenses and
net investment income would have been .68% and 4.97% in 1989 and .66% and
3.57% in 1988.
++ After reduction of expenses by the Investment Adviser, as described in
Note C. Had the Investment Adviser not undertaken such action, the ratios
of operating expenses and net investment income would have been 0.75% and
3.19%, respectively.
23
<PAGE>
MUTUAL BEACON FUND
FINANCIAL HIGHLIGHTS
(Selected data for a share of capital stock outstanding throughout each period)
Class I Class II
-------------------- --------------------
For the period For the period
November 1, 1996+ November 1, 1996+
to December 31, 1996 to December 31, 1996
-------------------- --------------------
Net Asset Value,
Beginning of Period ............... $39.64 $39.64
------- -------
Income from Investment Operations:
Net Investment Income ............. .48 .38
Net Gains or Losses on Securities
(realized and unrealized) ....... 2.07 2.14
------- -------
Total from Investment Operations .. 2.55 2.52
------- -------
Less Distributions:
Dividends (from net investment
income) ......................... 1.00 .97
Distributions (from capital gains) 2.26 2.26
------- -------
Total Distributions ............. 3.26 3.23
------- -------
Net Asset Value,
End of Period ..................... $38.93 $38.93
======= =======
Total Return ......................... 6.51%a 6.45%b
======= =======
Ratios/Supplemental Data:
Net Assets, End of Period
(millions) ........................ $52 $16
Ratio of Expenses to
Average Net Assets ................ 1.03%** 1.75%**
Ratio of Net Investment Income
to Average Net Assets ............. 1.33%** .84%**
Portfolio Turnover Rate .............. 66.87% 66.87%
Average Commission Per Share ......... $.047 $.047
a Total return does not reflect sales commissions. Not annualized for
periods of less than one year.
b Total return does not reflect sales commissions, or the deferred
contingent sales charges. Not annualized for periods of less than one
year.
** Annualized. After reduction of expenses by the Investment Adviser as
described in Note C. Had the Investment Adviser not undertaken such
action, the ratios of operating expenses and net investment income would
have been 1.13% and 1.23% respectively for Class Iand 1.85% and 0.74%
respectively for Class II.
+ Commencement of offering of sale.
24
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF
FRANKLIN MUTUAL SERIES FUND INC.
We have audited the accompanying statement of assets and liabilities of
Mutual Beacon Fund, a portfolio of Franklin Mutual Series Fund Inc. ("Fund")
(formerly Mutual Series Fund Inc.), including the schedule of investments, as of
December 31, 1996, the related statement of operations for the year then ended,
the statement of changes in net assets for each of the two years in the period
then ended, and the financial highlights for each of the periods indicated
therein. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements and financial highlights. Our procedures included confirmation of
securities owned as of December 31, 1996, by correspondence with the custodian
and brokers, or other appropriate auditing procedures when replies from brokers
were not received. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position of
Mutual Beacon Fund, a portfolio of Franklin Mutual Series Fund Inc., at December
31, 1996, the results of its operations for the year then ended, the changes in
its net assets for each of the two years in the period then ended, and the
financial highlights for each of the indicated periods in conformity with
generally accepted accounting principles.
/s/ Ernst & Young LLP
Boston, Massachusetts
February 7, 1997
25
<PAGE>
FRANKLIN MUTUAL SERIES FUND INC.
51 John F. Kennedy Parkway
Short Hills, New Jersey 07078
1-800-448-3863 201-912-2100
BOARD OF DIRECTORS
Michael F. Price (Chairman)
Edward I. Altman, Ph.D.
Ann Torre Grant
Andrew H. Hines, Jr.
Peter A. Langerman
William J. Lippman
Bruce A. MacPherson
Fred R. Millsaps
Leonard Rubin
Barry F. Schwartz
Vaughn R. Sturtevant, M.D.
Robert E. Wade
OFFICERS
Michael F. Price, President
Peter A. Langerman, Exec. Vice President
Jeffrey A. Altman, Vice President
Robert L. Friedman, Vice President
Raymond Garea, Vice President
Lawrence N. Sondike, Vice President
James R. Baio, Treasurer
Stuart C. Pistol, Assistant Treasurer
Liz Cohernour, Gen. Counsel & Secretary
Larry L. Greene, Assistant Secretary
Lily Simo, Assistant Secretary
Karen L. Skidmore, Assistant Secretary
INDEPENDENT AUDITORS
Ernst & Young LLP
200 Clarendon Street
Boston, Ma. 02116
COUNSEL
Skadden, Arps, Slate, Meagher & Flom
919 Third Avenue
New York, N.Y. 10022
CUSTODIAN
State Street Bank and Trust Company
225 Franklin Street
Boston, Ma. 02110
TRANSFER AGENT
Franklin Templeton Investor Services, Inc.
PRINCIPAL UNDERWRITER
Franklin Templeton Distributors, Inc.
