<PAGE> 1
ANNUAL REPORT DECEMBER 31, 1997
MUTUAL BEACON FUND
[FRANKLIN TEMPLETON LOGO]
<PAGE> 2
TECHNOLOGY UPDATE:
FRANKLIN TEMPLETON
COMBATS THE YEAR 2000 PROBLEM
By Charles B. Johnson,
President of Franklin Resources, Inc.
As we near the 21st century, Franklin Templeton is taking important steps to
tackle the computer glitch dubbed the Year 2000 Problem, Y2K, or the Millennium
Bug. The problem originated from the software designers' attempt to save memory
by recording years in a two-digit format--"98" instead of "1998", for
example--but didn't take into account that the year 2000 or "00", could also be
interpreted as 1900. Uncorrected, this problem could prevent computers from
accurately processing date-sensitive data after 1999.
Franklin Templeton's Information Services & Technology division established a
Year 2000 Project Team that has already begun making the necessary software
changes to help ensure that our computer systems, which service the funds and
their shareholders, will be Year 2000 Compliant. As changes reach completion, we
will conduct comprehensive tests to verify their effectiveness. We will also
require all of our major software or data-services suppliers to be Year-2000
Compliant.
In addition, with an estimated 80% of businesses facing the Year 2000 Problem,
mutual fund portfolio managers must be aware of the impact it could have on
companies in their portfolios. That's why Franklin Templeton portfolio managers
consistently keep this issue in mind while selecting investments and managing
their portfolios.
<PAGE> 3
SHAREHOLDER LETTER
- -------------------------------------------------------------------------
Your Fund's Objective: The Mutual Beacon Fund seeks 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.
- -------------------------------------------------------------------------
Dear Shareholder:
We are pleased to bring you this annual report of the Mutual Beacon Fund, which
covers the 12 months ended December 31, 1997. The fund's Class Z shares
produced a 23.03% one-year cumulative total return and a 143.69% five-year
cumulative total return, as discussed in the Performance Summary on page 5.
During the same period, the Standard and Poor's(R) 500 Stock Index (S&P 500(R))
had a 31.63%(1) return, while the Lipper Growth & Income Funds' average was
26.99%.(2)
1. Source: Micropal. Index is unmanaged and includes reinvested dividends. One
cannot invest directly in an index.
2. Source: Lipper Growth and Income Fund average consists of 624 funds. Lipper
calculations do not include sales charges; past and current expense reductions
by the fund's manager increased the fund's total return. If these factors had
been considered, the fund's performance relative to the Lipper average may have
been different.
You may find a complete listing of the fund's portfolio holdings, including the
number of shares and dollar value, beginning on page 17 of this report.
CONTENTS
Shareholder Letter ............................. 11
Performance Summary
Class Z ...................................... 15
Class I ...................................... 8
Class II ..................................... 11
Financial Highlights &
Statement of Investments ....................... 14
Financial Statements ........................... 30
Notes to Financial Statements .................. 33
Report of Independent
Auditors ....................................... 42
Tax Designation ................................ 43
[FUND CATEGORY PYRAMID CHART]
<PAGE> 4
PORTFOLIO BREAKDOWN
Based on Total Net Assets
12/31/97
[PIE CHART]
Equities 78.4%
Bonds 3.1%
Short-Term Investments &
Other Net Assets 18.5%
TOP 10 INDUSTRIES
12/31/97
% OF TOTAL
INDUSTRY NET ASSETS
--------------------------------------------
Broadcasting & Publishing 9.8%
Multi-Industry 7.7%
Beverages & Tobacco 5.3%
Telecommunications 4.6%
Energy Sources 4.4%
Financial Services 3.9%
Insurance 3.8%
Health & Personal Care 3.5%
Food & Household
Products 3.5%
Transportation 3.2%
Despite occasional setbacks caused by warnings of "irrational exuberance" in the
domestic equity market and Asia's economic crises, the U.S. and European stock
markets demonstrated tremendous resilience, making 1997 yet another year in the
extraordinary bull market that began at least three years ago. From the
beginning of 1995 through the end of 1997, U.S. stock prices more than doubled,
as measured by the S&P 500. Finding cheap stocks became even tougher during the
past year as investors looking to "buy the dips" were willing to purchase
securities at historically high valuations. As a result, our cash level
increased somewhat by year-end, but it remained well within the fund's
historical range. Over the past ten years, year-end cash levels for the fund
have been as high as 34% and as low as 10%.
At the end of the reporting period, stocks in the S&P 500 were trading at an
average of 24 times earnings, with many of the names that dominate the index
valued too high for our standards. However, we were still able to find
opportunities in the domestic equity market. We purchased additional shares of
U.S. West Media Group, which were up over 50% this year as the company's
restructuring complemented investors' recognition of the value of its core cable
business. In addition, during this period, the merger and acquisition
environment, as well as divestiture activity, continued to be strong.
The fund also benefited from its European holdings, particularly in the small
and mid-capitalization stocks. For example, in the U.K., investors embraced the
privatized railroad firm, Railtrack Group Plc., as they began to understand the
value of relaxation from government regulation, and the company's stock
appreciated 164.87% over the reporting period. Reflecting the relative
attractiveness of the European sector, the fund had 25.6% of its total net
assets invested there at the end of the year.
2
<PAGE> 5
We believe equity markets will present us with substantial opportunities in
1998. Although our direct exposure to Asia was virtually non-existent, the Asian
economic crises of late 1997 may have a greater impact on some companies than
the market has reflected. We are looking to see if these crises have created
opportunities for us. However, we are always mindful of the lower risk, lower
volatility philosophy of the fund and our investments everywhere are intended to
be consistent with this.
In Europe, we anticipate an exciting year as the continent prepares for the
limited introduction of the eurocurrency on January 1, 1999. While it may be
years before the success or failure of the new system is known, we expect
mistakes to occur and hope they force greater flexibility on the system, as well
as offer us investment opportunities in the process.
We appreciate your participation in Mutual Beacon Fund and welcome your comments
and suggestions.
Sincerely,
Franklin Mutual Advisers Senior Portfolio Management Team
TOP 10 HOLDINGS
12/31/97
COMPANY, % OF TOTAL
INDUSTRY NET ASSETS
--------------------------------------------
U.S. West Media Group,
Broadcasting & Publishing 2.6%
Chase Manhattan Corp.,
Banking 2.0%
Investor AB,
Multi-Industry 2.0%
General Motors Corp.,
Automobiles 1.5%
RJR Nabisco Holdings Corp.,
Beverages & Tobacco 1.4%
Morgan Stanley, Dean Witter Discover & Co.,
Financial Services 1.4%
MCI Communications Corp.,
Telecommunications 1.3%
Suez Lyonnaise des Eaux SA,
Business & Public Services 1.3%
Railtrack Group Plc.,
Transportation 1.2%
Philip Morris Cos. Inc.,
Beverages & Tobacco 1.1%
3
<PAGE> 6
Please remember, this discussion reflects our views and opinions as of December
31, 1997, the end of the reporting period. Market and economic conditions are
changing constantly, which may affect our strategies and portfolio holdings.
Although historic performance is no guarantee of future results, these insights
may help you understand our investment and management philosophy.
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 investments are made. The fund generally expects
to hedge against currency risk where feasible and to the extent possible. The
fund's value-oriented strategy may include investments in companies involved in
mergers, reorganizations, restructurings, or liquidations. The risks associated
with this and other fund-specific investments are described in the prospectus.
4
<PAGE> 7
PERFORMANCE SUMMARY
CLASS Z
Mutual Beacon Fund - Class Z produced a 23.03% cumulative total return for the
12-month period ended December 31, 1997. Cumulative total return measures the
change in value of an investment, assuming reinvestment of dividends and capital
gains.
The fund's Class Z share price increased $1.14, from $12.98 on December 31,
1996, to $14.12 on December 31, 1997.* During the reporting period, Class Z
shareholders received per-share distributions of 54.0 cents ($0.5400) in
dividend income, 41.00 cents ($0.4100) in short-term capital gains, and 85.00
cents ($0.8500) in long-term capital gains. Distributions will vary depending on
income earned by the fund and any profits realized from the sale of securities
in the portfolio, as well as the level of the fund's operating expenses.
The graph on page 6 compares the performance of Mutual Beacon Fund - Class Z and
the unmanaged Standard & Poor's 500 Stock Index (S&P 500), as well as the Lipper
Growth & Income Funds' average, for the 10-year period ended December 31, 1997.
*Per-share amounts for all periods prior to February 3, 1997, have been restated
to reflect a 3-for-1 share split effective at the close of business on Friday,
January 31, 1997.
Past performance is not predictive of future results.
5
<PAGE> 8
Keep in mind that an unmanaged market index has inherent performance
differentials in comparison with any fund. An index does not pay management fees
to cover salaries of security analysts or portfolio managers, or pay commissions
or market spreads to buy and sell securities. Unlike an index, mutual funds are
never 100% invested because they need to have cash on hand to redeem shares. In
addition, the performance shown for the fund includes all fund expenses and
account fees. The index's performance would have been lower if the fund's costs
had been applied to it. Please remember that an index is simply a measure of
performance, and one cannot invest in it directly.
CLASS Z
TOTAL RETURN INDEX COMPARISON
$10,000 INVESTMENT (1/1/88 - 12/31/97)
<TABLE>
<CAPTION>
MUTUAL BEACON LIPPER GROWTH & INCOME Lipper Growth &
DATE FUND - CLASS Z* S&P 500** FUNDS AVERAGE S&P 500 $T Income Funds Average***
---- -------------- --------- --------------------- ---------- ------------------------
<S> <C> <C> <C> <C> <C>
1/1/88 $10,000 $10,000 $10,000
12/31/88 $12,892 $11,661 $11,507 16.61% 15.07%
12/31/89 $15,137 $15,356 $14,180 31.69% 23.23%
12/31/90 $13,906 $14,880 $13,543 -3.10% -4.49%
12/31/91 $16,354 $19,414 $17,455 30.47% 28.88%
12/31/92 $20,102 $20,894 $18,958 7.62% 8.61%
12/31/93 $24,712 $23,000 $21,147 10.08% 11.55%
12/31/94 $26,100 $23,303 $20,948 1.32% -0.94%
12/31/95 $32,857 $32,061 $27,405 37.58% 30.82%
12/31/96 $39,818 $39,422 $33,099 22.96% 20.78%
12/31/97 $48,973 $52,573 $42,033 33.36% 26.99%
</TABLE>
The historical performance shown pertains only to the fund's Class Z shares. The
fund offers other share classes subject to different fees and expenses, which
affect their performance. Please see the prospectus for more details.
*Performance figures represent the change in value of an investment over the
periods shown, assuming reinvestment of dividends and capital gains at net asset
value. This was a period of generally rising security prices.
**Index is unmanaged and includes reinvested dividends. One cannot invest
directly in an index.
***Lipper Growth and Income Fund average consists of 624 funds. Lipper
calculations do not include sales charges; past and current expense reductions
by the fund's manager increased the fund's total return. If these factors had
been considered, the fund's performance relative to the Lipper average may have
been different.
Past performance is not predictive of future results.
6
<PAGE> 9
CLASS Z
Periods ended 12/31/97
<TABLE>
<CAPTION>
1-YEAR 5-YEAR 10-YEAR
----------------------------------------------------------------------
<S> <C> <C> <C>
Cumulative Total Return(1) 23.03% 143.69% 389.35%
Average Annual Total Return(2) 23.03% 19.49% 17.22%
Value of $10,000 Investment(3) $12,303 $24,369 $48,935
</TABLE>
<TABLE>
<CAPTION>
12/31/93 12/31/94 12/31/95 12/31/96 12/31/97
----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
One-Year Total
Return(4) 22.93% 5.61% 25.89% 21.19% 23.03%
</TABLE>
1. Cumulative total return represents the change in value of an investment over
the indicated periods.
2. Average annual total return represents the average annual change in value of
an investment over the indicated periods.
3. These figures represent the value of a hypothetical $10,000 investment in the
fund over the indicated periods.
4. One-year total return represents the change in value of an investment over
the periods ended on the specified dates.
All calculations assume reinvestment of dividends and capital gains at net asset
value. 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.
Franklin Mutual Advisers has made a commitment to the fund's Board not to seek
an increase in the rate of investment advisory fees for a three-year period
beginning November 1, 1996.
Investment return and principal value will fluctuate with market conditions,
currency volatility and the economic, social, and political climates of
countries where investments are made. You may have a gain or loss when you sell
your shares.
Past performance is not predictive of future results.
7
<PAGE> 10
CLASS I
Mutual Beacon Fund - Class I produced a 22.52% cumulative total return for the
12-month period ended December 31, 1997. Cumulative total return measures the
change in value of an investment, assuming reinvestment of dividends and capital
gains, and does not include the initial sales charge.
The fund's Class I share price, as measured by net asset value, increased $1.11,
from $12.98 on December 31, 1996, to $14.09 on December 31, 1997.* During the
reporting period, Class I shareholders received per-share distributions of 50.62
cents ($0.5062) in dividend income, 41.00 cents ($0.4100) in short-term capital
gains, and 85.00 cents ($0.8500) in long-term capital gains. Distributions will
vary depending on income earned by the fund and any profits realized from the
sale of securities in the portfolio, as well as the level of the fund's
operating expenses.
The graph on page 9 compares the performance of Mutual Beacon Fund - Class I
since inception on November 1, 1996, and the unmanaged Standard & Poor's 500
Stock Index (S&P 500), as well as the Lipper Growth & Income Funds' average.
Keep in mind that an unmanaged market index has inherent performance
differentials in comparison with any fund. An index does not pay management fees
to cover salaries of security analysts or portfolio managers, or pay commissions
or market spreads to buy and sell securities. Unlike an index, mutual funds are
never 100% invested because they need to have cash on hand to redeem shares. In
addition,
*Per-share amounts for all periods prior to February 3, 1997, have been restated
to reflect a 3-for-1 share split effective at the close of business on Friday,
January 31, 1997.
Past performance is not predictive of future results.
8
<PAGE> 11
the performance shown for the fund includes the initial sales charge, all fund
expenses and account fees. The index's performance would have been lower if the
fund's costs had been applied to it. Please remember that an index is simply a
measure of performance, and one cannot invest in it directly.
CLASS I
TOTAL RETURN INDEX COMPARISON
$10,000 INVESTMENT (11/1/96 - 12/31/97)
<TABLE>
<CAPTION>
MUTUAL BEACON LIPPER GROWTH & INCOME Lipper Growth &
DATE FUND - CLASS I* S&P 500** FUNDS AVERAGE S&P 500 $T Income Funds Average***
---- -------------- --------- --------------------- ---------- ------------------------
<S> <C> <C> <C> <C> <C>
11/1/96 $9,550 $10,000 $10,000
11/30/96 $10,007 $10,756 $10,650 7.56% 6.50%
12/31/96 $10,151 $10,543 $10,538 -1.98% -1.05%
1/31/97 $10,498 $11,202 $10,992 6.25% 4.31%
2/28/97 $10,717 $11,289 $11,048 0.78% 0.51%
3/31/97 $10,569 $10,825 $10,654 -4.11% -3.57%
4/30/97 $10,631 $11,472 $11,038 5.97% 3.60%
5/31/97 $11,061 $12,170 $11,728 6.09% 6.26%
6/30/97 $11,382 $12,715 $12,180 4.48% 3.85%
7/31/97 $12,007 $13,728 $13,076 7.96% 7.36%
8/31/97 $11,880 $12,959 $12,640 -5.60% -3.34%
9/30/97 $12,461 $13,669 $13,281 5.48% 5.07%
10/31/97 $12,055 $13,212 $12,814 -3.34% -3.51%
11/30/97 $12,230 $13,824 $13,158 4.63% 2.68%
12/31/97 $12,441 $14,062 $13,378 1.72% 1.67%
</TABLE>
The historical performance shown pertains only to the fund's Class I shares. The
fund offers other share classes subject to different fees and expenses, which
affect their performance. Please see the prospectus for more details.
*Performance figures reflect the change in value of an investment over the
periods shown and include the maximum 4.5% initial sales charge, assuming
reinvestment of dividends and capital gains at net asset value. This was a
period of generally rising security prices.
**Index is unmanaged and includes reinvested dividends. One cannot invest
directly in an index.
***Lipper Growth and Income Fund average consists of 624 funds. Lipper
calculations do not include sales charges; past and current expense reductions
by the fund's manager increased the fund's total return. If these factors had
been considered, the fund's performance relative to the Lipper average may have
been different.
Past performance is not predictive of future results.
9
<PAGE> 12
CLASS I
Periods ended 12/31/97
<TABLE>
<CAPTION>
SINCE
INCEPTION
1-YEAR (11/1/96)
---------
----------------------------------------------------------------------
<S> <C> <C>
Cumulative Total Return(1) 22.52% 30.50%
Average Annual Total Return(2) 17.01% 20.76%
Value of $10,000 Investment(3) $11,701 $12,462
</TABLE>
1. Cumulative total return represents the change in value of an investment over
the indicated periods and does not include the sales charge.
2. Average annual total return represents the average annual change in value of
an investment over the indicated periods and includes the maximum 4.5% initial
sales charge.
3. These figures represent the value of a hypothetical $10,000 investment in the
fund over the indicated periods and include the sales charge.
All calculations assume reinvestment of dividends and capital gains at net asset
value. 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.
Franklin Mutual Advisers has made a commitment to the fund's Board not to seek
an increase in the rate of investment advisory fees for a three-year period
beginning November 1, 1996.
Investment return and principal value will fluctuate with market conditions,
currency volatility and the economic, social, and political climates of
countries where investments are made. You may have a gain or loss when you sell
your shares.
Past performance is not predictive of future results.
10
<PAGE> 13
CLASS II
Mutual Beacon Fund - Class II produced a 21.65% cumulative total return for the
12-month period ended December 31, 1997. Cumulative total return measures the
change in value of an investment, assuming reinvestment of dividends and capital
gains, and does not include sales charges.
The fund's Class II share price, as measured by net asset value, increased
$1.06, from $12.98 on December 31, 1996, to $14.04 on December 31, 1997.* During
the reporting period, Class II shareholders received per-share distributions of
44.71 cents ($0.4471) in dividend income, 41.00 cents ($0.4100) in short-term
capital gains, and 85.00 cents ($0.8500) in long-term capital gains.
Distributions will vary depending on income earned by the fund and any profits
realized from the sale of securities in the portfolio, as well as the level of
the fund's operating expenses.
The graph on page 12 compares the performance of Mutual Beacon Fund - Class II
since inception on November 1, 1996, and the unmanaged Standard & Poor's 500
Stock Index (S&P 500), as well as the Lipper Growth & Income Funds' average.
Keep in mind that an unmanaged market index has inherent performance
differentials in comparison with any fund. An index does not pay management fees
to cover salaries of security analysts or portfolio managers, or pay commissions
or market spreads to buy and sell securities. Unlike an index, mutual funds are
never 100% invested
*Per-share amounts for all periods prior to February 3, 1997, have been restated
to reflect a 3-for-1 share split effective at the close of business on Friday,
January 31, 1997.
Past performance is not predictive of future results.
11
<PAGE> 14
because they need to have cash on hand to redeem shares. In addition, the
performance shown for the fund includes sales charges, all fund expenses and
account fees. The index's performance would have been lower if the fund's costs
had been applied to it. Please remember that an index is simply a measure of
performance, and one cannot invest in it directly.
CLASS II
TOTAL RETURN INDEX COMPARISON
$10,000 INVESTMENT (11/1/96 - 12/31/97)
<TABLE>
<CAPTION>
MUTUAL BEACON LIPPER GROWTH & INCOME Lipper Growth &
DATE FUND - CLASS II* S&P 500** FUNDS AVERAGE S&P 500 $T Income Funds Average***
---- -------------- --------- --------------------- ---------- ------------------------
<S> <C> <C> <C> <C> <C>
11/1/96 $9,900 $10,000 $10,000
11/30/96 $10,371 $10,756 $10,650 7.56% 6.50%
12/31/96 $10,517 $10,543 $10,538 -1.98% -1.05%
1/31/97 $10,868 $11,202 $10,992 6.25% 4.31%
2/28/97 $11,087 $11,289 $11,048 0.78% 0.51%
3/31/97 $10,925 $10,825 $10,654 -4.11% -3.57%
4/30/97 $10,990 $11,472 $11,038 5.97% 3.60%
5/31/97 $11,428 $12,170 $11,728 6.09% 6.26%
6/30/97 $11,752 $12,715 $12,180 4.48% 3.85%
7/31/97 $12,387 $13,728 $13,076 7.96% 7.36%
8/31/97 $12,255 $12,959 $12,640 -5.60% -3.34%
9/30/97 $12,848 $13,669 $13,281 5.48% 5.07%
10/31/97 $12,428 $13,212 $12,814 -3.34% -3.51%
11/30/97 $12,593 $13,824 $13,158 4.63% 2.68%
12/31/97 $12,699 $14,062 $13,378 1.72% 1.67%
</TABLE>
The historical performance shown pertains only to the fund's Class II shares.
The fund offers other share classes subject to different fees and expenses,
which affect their performance. Please see the prospectus for more details.
*Performance figures represent the change in value of an investment over the
periods shown and include all sales charges, assuming reinvestment of dividends
and capital gains at net asset value. This was a period of generally rising
security prices.
**Index is unmanaged and includes reinvested dividends. One cannot invest
directly in an index.
***Lipper Growth and Income Fund average consists of 624 funds. Lipper
calculations do not include sales charges; past and current expense reductions
by the fund's manager increased the fund's total return. If these factors had
been considered, the fund's performance relative to the Lipper average may have
been different.
Past performance is not predictive of future results.
12
<PAGE> 15
CLASS II
Periods ended 12/31/97
<TABLE>
<CAPTION>
SINCE
INCEPTION
1-YEAR (11/1/96)
----------------------------------------------------------------------
<S> <C> <C>
Cumulative Total Return(1) 21.65% 29.50%
Average Annual Total Return(2) 19.45% 23.72%
Value of $10,000 Investment(3) $11,945 $12,820
</TABLE>
1. Cumulative total return represents the change in value of an investment over
the indicated periods and does not include sales charges.
2. Average annual total return represents the average annual change in value of
an investment over the indicated periods and includes the 1.0% initial sales
charge and 1.0% contingent deferred sales charge, applicable to shares redeemed
within 18 months of investment.
3. These figures represent the value of a hypothetical $10,000 investment in the
fund over the indicated periods and include sales charges.
All calculations assume reinvestment of dividends and capital gains at net asset
value. 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.
Franklin Mutual Advisers has made a commitment to the fund's Board not to seek
an increase in the rate of investment advisory fees for a three-year period
beginning November 1, 1996.
Investment return and principal value will fluctuate with market conditions,
currency volatility and the economic, social, and political climates of
countries where investments are made. You may have a gain or loss when you sell
your shares.
Past performance is not predictive of future results.
13
<PAGE> 16
MUTUAL BEACON FUND
Financial Highlights
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------
1997 1996 1995 1994 1993
------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE+ - CLASS Z
(For a share outstanding throughout the year)
Net asset value, beginning of year.............. $12.98 $11.98 $10.34 $10.36 $9.03
------------------------------------------------------------------
Income from investment operations:
Net investment income.......................... .31 .40 .29 .15 .12
Net realized and unrealized gain............... 2.63 2.08 2.36 .43 1.94
------------------------------------------------------------------
Total from investment operations................ 2.94 2.48 2.65 .58 2.06
------------------------------------------------------------------
Less distributions from:
Net investment income.......................... (.54) (.35) (.28) (.15) (.12)
Net realized gains............................. (1.26) (1.13) (.73) (.45) (.61)
------------------------------------------------------------------
Total distributions............................. (1.80) (1.48) (1.01) (.60) (.73)
------------------------------------------------------------------
Net asset value, end of year.................... $14.12 $12.98 $11.98 $10.34 $10.36
==================================================================
Total Return.................................... 23.03% 21.19% 25.89% 5.61% 22.93%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's)................. $5,678,822 $4,920,388 $3,573,297 $2,060,453 $1,062,293
Ratios to average net assets:
Expenses....................................... .74% .73% .72% .75% .73%
Expenses, excluding waiver and payments by
affiliate.................................... .77% .75% .72% .75% .73%
Net investment income.......................... 1.92% 3.21% 2.89% 1.96% 1.53%
Portfolio turnover rate......................... 54.72% 66.87% 73.18% 70.63% 52.88%
Average commission rate paid*................... $.0230 $.0469 -- -- --
</TABLE>
*Relates to purchases and sales of equity securities. Prior to fiscal year 1996
disclosure of average commission rate was not required.
+Per share amounts for all periods prior to December 31, 1997 have been restated
to reflect a 3-for-1 stock split effective February 3, 1997.
14
<PAGE> 17
MUTUAL BEACON FUND
Financial Highlights (continued)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1997+++ 1996+
--------------------------
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE++ - CLASS I
(For a share outstanding throughout the year)
Net asset value, beginning of year................................................ $12.98 $13.21
--------------------------
Income from investment operations:
Net investment income............................................................ .23 .16
Net realized and unrealized gain................................................. 2.65 .69
--------------------------
Total from investment operations.................................................. 2.88 .85
--------------------------
Less distributions from:
Net investment income............................................................ (.51) (.33)
Net realized gains............................................................... (1.26) (.75)
--------------------------
Total distributions............................................................... (1.77) (1.08)
--------------------------
Net asset value, end of year...................................................... $14.09 $12.98
==========================
Total Return*..................................................................... 22.52% 6.51%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's)................................................... $753,519 $52,070
Ratios to average net assets:
Expenses......................................................................... 1.09% 1.03%**
Expenses, excluding waiver and payments by affiliate............................. 1.12% 1.13%**
Net investment income............................................................ 1.58% 1.33%**
Portfolio turnover rate........................................................... 54.72% 66.87%
Average commission rate paid***................................................... $.0230 $.0469
</TABLE>
*Total return does not reflect sales commissions and is not annualized.
**Annualized.
***Relates to purchases and sales of equity securities.
+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 3-for-1 stock split effective February 3, 1997.
+++Based on average weighted shares outstanding.
15
<PAGE> 18
MUTUAL BEACON FUND
Financial Highlights (continued)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1997+++ 1996+
--------------------------
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE++ - CLASS II
(For a share outstanding throughout the year)
Net asset value, beginning of year................................................ $12.98 $13.21
--------------------------
Income from investment operations:
Net investment income............................................................ .14 .13
Net realized and unrealized gain................................................. 2.63 .71
--------------------------
Total from investment operations.................................................. 2.77 .84
--------------------------
Less distributions from:
Net investment income............................................................ (.45) (.32)
Net realized gains............................................................... (1.26) (.75)
--------------------------
Total distributions............................................................... (1.71) (1.07)
--------------------------
Net asset value, end of year...................................................... $14.04 $12.98
==========================
Total Return*..................................................................... 21.65% 6.45%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's)................................................... $362,425 $16,263
Ratios to average net assets:
Expenses......................................................................... 1.74% 1.75%**
Expenses, excluding waiver and payments by affiliate............................. 1.77% 1.85%**
Net investment income............................................................ .92% .84%**
Portfolio turnover rate........................................................... 54.72% 66.87%
Average commission rate paid***................................................... $.0230 $.0469
</TABLE>
*Total return does not reflect sales commissions or the contingent deferred
sales charge and is not annualized.
**Annualized.
***Relates to purchases and sales of equity securities.
+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 3-for-1 stock split effective February 3, 1997.
+++Based on average weighted shares outstanding.
See Notes to Financial Statements.
16
<PAGE> 19
MUTUAL BEACON FUND
STATEMENT OF INVESTMENTS, DECEMBER 31, 1997
<TABLE>
<CAPTION>
COUNTRY SHARES VALUE
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS 77.9%
AEROSPACE & MILITARY TECHNOLOGY 1.1%
Boeing Co. ...................................................... United States 263,060 $ 12,873,499
*Coltec Industries Inc. ......................................... United States 419,600 9,729,475
*General Motors Corp., H......................................... United States 197,800 7,306,238
*Hexcel Corp. ................................................... United States 991,880 24,735,008
*Litton Industries Inc. ......................................... United States 1,100 63,250
Lockheed Martin Corp. ........................................... United States 2,494 245,659
Northrop Grumman Corp. .......................................... United States 84,800 9,752,000
Primex Technologies Inc. ........................................ United States 47,740 1,611,225
Raytheon Co., A.................................................. United States 172,374 8,500,193
-----------
74,816,547
-----------
APPLIANCES & HOUSEHOLD DURABLES 0.7%
Black & Decker Corp. ............................................ United States 490,000 19,140,625
+Toro Co. ....................................................... United States 648,700 27,650,838
-----------
46,791,463
-----------
AUTOMOBILES 2.5%
General Motors Corp. ............................................ United States 1,733,300 105,081,313
*Hayes Lemmerz Intl. Inc. ....................................... United States 288,520 8,078,560
Regie Nationale des Usines Renault SA............................ France 990,000 27,848,633
Volvo AB, B...................................................... Sweden 1,058,900 28,406,617
-----------
169,415,123
-----------
BANKING 3.1%
Barnett Banks Inc. .............................................. United States 64,300 4,621,563
Chase Manhattan Corp. ........................................... United States 1,228,740 134,547,030
Corestates Financial Corp. ...................................... United States 16,000 1,281,000
First Union Corp. ............................................... United States 260,430 13,347,038
Fleet Financial Group Inc. ...................................... United States 271,800 20,368,013
Mellon Bank Corp. ............................................... United States 114,000 6,911,250
PNC Bank Corp. .................................................. United States 197,800 11,286,963
Wells Fargo & Co. ............................................... United States 43,700 14,833,419
-----------
207,196,276
-----------
BEVERAGES & TOBACCO 5.3%
B.A.T. Industries Plc. .......................................... United Kingdom 3,904,066 35,553,879
Brown-Forman Corp., A............................................ United States 51,700 2,727,175
Brown-Forman Corp., B............................................ United States 249,700 13,795,925
Diageo Plc. ..................................................... United Kingdom 3,330,000 30,544,689
Farmer Brothers Co. ............................................. United States 82,686 15,462,282
Gallaher Group Plc. ............................................. United Kingdom 2,095,000 11,113,602
Gallaher Group Plc., ADR......................................... United Kingdom 623,500 13,327,313
Heineken Holding NV, A........................................... Netherlands 104,791 16,124,475
Molson Co. Ltd., A............................................... Canada 1,951,375 34,888,654
Philip Morris Cos. Inc........................................... United States 1,636,800 74,167,500
RJR Nabisco Holdings Corp........................................ United States 2,583,385 96,876,938
</TABLE>
17
<PAGE> 20
MUTUAL BEACON FUND
STATEMENT OF INVESTMENTS, DECEMBER 31, 1997 (continued)
<TABLE>
<CAPTION>
COUNTRY SHARES VALUE
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS (CONT.)
BEVERAGES & TOBACCO (CONT.)
*Stroh Brewery Co., wts. ........................................ United States 66,892 $ 66,892
UST Inc. ........................................................ United States 503,600 18,601,725
-----------
363,251,049
-----------
BROADCASTING & PUBLISHING 9.8%
BHC Communications Inc., A....................................... United States 164,098 21,373,765
*Chris Craft Industries Inc. .................................... United States 235,712 12,330,684
Comcast Corp., A................................................. United States 70,000 2,231,250
Comcast Corp., Special A......................................... United States 940,166 29,673,989
Daily Mail & General Trust Plc. ................................. United Kingdom 19,000 655,302
Daily Mail & General Trust Plc., A............................... United Kingdom 371,200 12,269,084
Dow Jones & Co. Inc. ............................................ United States 1,044,700 56,087,331
Dun & Bradstreet Corp. .......................................... United States 1,086,700 33,619,781
Havas SA......................................................... France 334,250 24,047,562
Hollinger International Inc., A.................................. United States 482,000 6,748,000
Houghton Mifflin Co. ............................................ United States 958,000 36,763,250
Midland Independent Newspapers Plc. ............................. United Kingdom 375,000 1,299,517
Mirror Group Plc. ............................................... United Kingdom 13,246,200 42,748,625
*Modern Times Group AB, A........................................ Sweden 287,550 1,684,036
*Modern Times Group AB, B ....................................... Sweden 1,919,052 11,480,619
NV Holdingsmij de Telegraaf...................................... Netherlands 2,007,800 37,826,035
Pearson Plc. .................................................... United Kingdom 2,338,248 30,337,931
*Peoples Choice TV Corp., unit................................... United States 2,300 828,000
Readers Digest Association Inc., A............................... United States 286,300 6,763,838
Scripps Co., A................................................... United States 1,052,000 50,956,250
*SFX Broadcasting Inc., A........................................ United States 156,400 12,551,100
Shaw Brothers Hong Kong Ltd. .................................... Hong Kong 10,588,300 7,856,849
Southam Inc. .................................................... Canada 431,400 8,226,199
Time Warner Inc. ................................................ United States 682,600 42,321,200
*US West Media Group............................................. United States 6,161,800 177,921,975
-----------
668,602,172
-----------
BUILDING MATERIALS & COMPONENTS 0.8%
*American Standard Cos. Inc. .................................... United States 742,100 28,431,706
Johns-Manville Corp. ............................................ United States 573,617 5,772,021
Lone Star Industries Inc. ....................................... United States 123,768 6,575,175
+Puerto Rican Cement Co. Inc. ................................... United States 279,800 14,042,463
-----------
54,821,365
-----------
BUSINESS & PUBLIC SERVICES 1.8%
Esselte AB, A.................................................... Sweden 636,000 12,015,265
Esselte AB, B.................................................... Sweden 804,500 16,313,115
Moore Corp. Ltd. ................................................ Canada 349,700 5,261,222
Moore Corp. Ltd., fgn. .......................................... Canada 90,000 1,361,250
Suez Lyonnaise des Eaux SA....................................... France 820,000 90,740,218
-----------
125,691,070
-----------
</TABLE>
18
<PAGE> 21
MUTUAL BEACON FUND
STATEMENT OF INVESTMENTS, DECEMBER 31, 1997 (continued)
<TABLE>
<CAPTION>
COUNTRY SHARES VALUE
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS (CONT.)
CHEMICALS 2.1%
Allied Colloids Group Plc. ...................................... United Kingdom 3,894,270 $ 10,712,952
Laporte Plc. .................................................... United Kingdom 2,604,500 28,595,261
Morton International Inc. ....................................... United States 962,000 33,068,750
Olin Corp. ...................................................... United States 1,367,000 64,078,125
Rohm & Haas Co. ................................................. United States 36,300 3,475,725
-----------
139,930,813
-----------
CONSTRUCTION & HOUSING 0.5%
Grupo Acciona SA................................................. Spain 147,291 24,034,488
Hollandsche Beton Groep NV....................................... Netherlands 50,380 936,713
Martin Marietta Materials Inc. .................................. United States 305,060 11,153,756
-----------
36,124,957
-----------
DATA PROCESSING & REPRODUCTION 0.3%
First Data Corp.................................................. United States 131,000 3,831,750
*NCR Corp. ...................................................... United States 564,000 15,686,250
-----------
19,518,000
-----------
ELECTRICAL & ELECTRONICS 1.2%
Philips Electronics NV........................................... Netherlands 191,700 11,496,422
Philips Electronics NV ADR....................................... Netherlands 585,000 35,392,500
*Wang Laboratories Inc., A....................................... United States 1,506,700 33,335,738
80,224,660
ELECTRONIC COMPONENTS & INSTRUMENTS 1.1%
*Amphenol Corp., A............................................... United States 756,566 42,131,270
Fisher Scientific International Inc. ............................ United States 186,400 8,900,600
+Spectra Physics AB, A........................................... Sweden 1,130,000 21,419,035
-----------
72,450,905
-----------
ENERGY EQUIPMENT & SERVICES 1.9%
Bouygues Offshore SA, ADR........................................ France 1,257,700 27,354,975
*EVI Inc. ....................................................... United States 95,946 4,965,206
*+Gulfmark Offshore Inc.......................................... United States 642,074 21,188,442
*Reading & Bates Corp. .......................................... United States 644,900 27,005,188
*Rowan Companies Inc. ........................................... United States 569,500 17,369,750
*Trico Marine Services Inc. ..................................... United States 907,700 26,663,688
*United Meridian Corp. .......................................... United States 185,000 5,203,125
-----------
129,750,374
-----------
ENERGY SOURCES 4.4%
Apco Argentina Inc. ............................................. United States 74,679 2,576,426
Fina Inc., A..................................................... United States 214,900 13,753,600
Imperial Oil Ltd. ............................................... Canada 606,100 38,752,519
Kerr McGee Corp.................................................. United States 379,400 24,020,763
Noble Affiliates Inc. ........................................... United States 237,800 8,382,450
Pennzoil Co. .................................................... United States 863,600 57,699,275
Royal Dutch Petroleum Co. ....................................... Netherlands 124,800 6,762,600
Saga Petroleum AS, A............................................. Norway 1,350,490 23,255,896
</TABLE>
19
<PAGE> 22
MUTUAL BEACON FUND
STATEMENT OF INVESTMENTS, DECEMBER 31, 1997 (continued)
<TABLE>
<CAPTION>
COUNTRY SHARES VALUE
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS (CONT.)
ENERGY SOURCES (CONT.)
Saga Petroleum AS, B............................................. Norway 1,482,105 $ 22,507,900
*Santa Fe Energy Resources Inc................................... United States 699,600 7,870,500
Shell Transport & Trading Co. Plc. .............................. United Kingdom 2,059,500 14,933,472
Societe Elf Aquitaine SA......................................... France 552,459 64,255,429
Societe Elf Aquitaine SA, ADR.................................... France 25,000 1,465,625
Tidewater Inc. .................................................. United States 64,900 3,577,613
Union Texas Petroleum Holdings Inc. ............................. United States 410,100 8,535,206
-----------
298,349,274
-----------
FINANCIAL SERVICES 3.9%
Advanta Corp., A................................................. United States 156,300 4,102,875
Advanta Corp., B................................................. United States 557,600 14,149,100
Astoria Financial Corp. ......................................... United States 29,697 1,655,608
Austria Fund Inc. ............................................... Austria 233,700 2,351,606
Bear Stearns Co. Inc. ........................................... United States 112,630 5,349,918
Beneficial Corp. ................................................ United States 205,200 17,057,250
Cenfed Financial Corp. .......................................... United States 15,000 675,000
*Cityscape Financial Corp. ...................................... United States 987,000 493,500
Finova Group Inc. ............................................... United States 718,300 35,690,531
*Golden State Bancorp Inc. ...................................... United States 790,800 29,556,150
(R)Laser Mortgage Management Inc. ............................... United States 275,000 3,987,500
Liberty Financial Companies Inc. ................................ United States 249,666 9,424,892
Morgan Stanley, Dean Witter Discover & Co. ...................... United States 1,554,000 91,880,250
Power Financial Corp. ........................................... Canada 195,800 6,850,705
Providian Financial Corp. ....................................... United States 78,600 3,551,738
United Asset Management Corp. ................................... United States 1,511,300 36,932,394
-----------
263,709,017
-----------
FOOD & HOUSEHOLD PRODUCTS 3.5%
BIC SA........................................................... France 104,549 7,631,200
Cadbury Schweppes Plc. .......................................... United Kingdom 1,934,058 19,217,335
Lindt & Spruengli Chocolate Works Ltd., partn. ctf. ............. Switzerland 4,522 7,889,098
Lindt & Spruengli Chocolate Works Ltd., reg. .................... Switzerland 7 135,053
Lotte Confectionary Co. Ltd. .................................... South Korea 32,980 1,809,522
Nabisco Holdings Corp., A........................................ United States 1,380,900 66,887,344
Seaboard Corp. .................................................. United States 5,350 2,354,000
Sucriere de Pithiviers Le-Vieil SA............................... France 11,670 6,534,502
(R)Sunbeam Corp. ................................................ United States 1,480,670 56,135,901
U.S. Industries Inc. ............................................ United States 450,000 13,556,250
Van Melle NV..................................................... Netherlands 277,764 19,863,280
Verenigde Bedrijven Nutricia NV.................................. Netherlands 699,163 21,206,088
Weetabix Plc., A................................................. United Kingdom 309,305 15,493,697
-----------
238,713,270
-----------
</TABLE>
20
<PAGE> 23
MUTUAL BEACON FUND
STATEMENT OF INVESTMENTS, DECEMBER 31, 1997 (continued)
<TABLE>
<CAPTION>
COUNTRY SHARES VALUE
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS (CONT.)
FOREST PRODUCTS & PAPER 0.7%
Bowater Inc. .................................................... United States 358,000 $ 15,908,625
Champion International Corp. .................................... United States 231,700 10,498,906
Greif Brothers Corp., A.......................................... United States 44,400 1,487,400
St. Joe Paper Corp. ............................................. United States 169,700 15,357,850
Temple Inland Inc. .............................................. United States 109,493 5,727,853
-----------
48,980,634
-----------
HEALTH & PERSONAL CARE 3.5%
*Apria Healthcare Group Inc. .................................... United States 692,500 9,305,469
*Beverly Enterprises Inc. ....................................... United States 2,298,500 29,880,500
*Foundation Health Systems, A.................................... United States 2,323,840 51,995,920
*Kindercare Learning Centers Inc. ............................... United States 48,215 916,085
*Maxicare Health Plans Inc. ..................................... United States 795,553 8,651,639
*Mid-Atlantic Medical Services Inc. ............................. United States 1,202,100 15,326,775
*Oxford Health Plans Inc. ....................................... United States 1,387,400 21,591,413
*Pacificare Health Systems Inc., A............................... United States 391,290 19,662,323
*Pacificare Health Systems Inc., B............................... United States 356,398 18,666,345
*Paragon Health Networks Inc. ................................... United States 539,223 10,548,550
*Perrigo Co. .................................................... United States 249,400 3,335,725
*PharMerica Inc. ................................................ United States 1,046,047 10,852,741
United States Surgical Corp. .................................... United States 259,300 7,600,731
*Vencor Inc. .................................................... United States 763,100 18,648,256
*Vitalink Pharmacy Services Inc. ................................ United States 560,200 13,514,825
-----------
240,497,297
-----------
INDUSTRIAL COMPONENTS 1.9%
Charter Plc...................................................... United Kingdom 310,000 3,805,758
Gencorp Inc. .................................................... United States 666,700 16,667,500
*ITT Industries Inc. ............................................ United States 1,274,800 39,996,850
(R)Lancer Industries Inc., B..................................... United States 1 512,820
Lucas Varity Plc. ............................................... United Kingdom 4,765,636 16,866,945
Lucas Varity Plc., ADR........................................... United Kingdom 1,329,944 46,381,797
*Owens-Illinois Inc. ............................................ United States 178,600 6,775,638
Smith Investment Co. ............................................ United States 7,254 816,075
Vulcan International Corp. ...................................... United States 15,884 623,447
-----------
132,446,830
-----------
INSURANCE 3.8%
*Alleghany Corp. ................................................ United States 66,169 18,841,623
Allmerica Financial Corp. ....................................... United States 183,820 9,179,511
American General Corp. .......................................... United States 152,867 8,264,372
AON Corp. ....................................................... United States 799,950 46,897,069
Argonaut Group Inc. ............................................. United States 155,600 5,270,950
Assurances Generales de France................................... France 1,210,787 64,155,523
Financial Security Assurance Holding Ltd. ....................... United States 209,300 10,098,725
Fund American Enterprises Holdings Inc. ......................... United States 265,111 32,078,431
Kansas City Life Insurance Co. .................................. United States 17,750 1,757,250
</TABLE>
21
<PAGE> 24
MUTUAL BEACON FUND
STATEMENT OF INVESTMENTS, DECEMBER 31, 1997 (continued)
<TABLE>
<CAPTION>
COUNTRY SHARES VALUE
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS (CONT.)
INSURANCE (CONT.)
Leucadia National Corp. ......................................... United States 292,900 $ 10,105,050
+National Security Group Inc. ................................... United States 174,977 3,083,970
Provident Companies Inc. ........................................ United States 107,076 4,135,811
Reliable Life Insurance Co., A................................... United States 17,584 1,995,784
SAFECO Corp. .................................................... United States 150,420 7,332,975
Sampo Insurance Co. Ltd., A...................................... Finland 304,900 10,071,570
SCOR SA.......................................................... France 52,655 2,517,921
Selective Insurance Group Inc. .................................. United States 178,100 4,808,700
Twentieth Century Industries California.......................... United States 93,100 2,420,600
Unitrin Inc. .................................................... United States 45,600 2,946,900
Western National Corp. .......................................... United States 303,500 8,991,188
-----------
254,953,923
-----------
LEISURE & TOURISM 1.8%
*Circus Circus Enterprises Inc. ................................. United States 710,400 14,563,200
Hilton Hotels Corp. ............................................. United States 761,500 22,654,625
ITT Corp. ....................................................... United States 615,600 51,017,850
*MGM Grand Inc. ................................................. United States 709,100 25,571,919
*+Servico Inc. .................................................. United States 693,000 11,694,375
-----------
125,501,969
-----------
MACHINERY & ENGINEERING 1.2%
Briggs & Stratton Corp. ......................................... United States 1,151,200 55,905,150
Bucher Holding AG, br. .......................................... Switzerland 13,233 11,497,903
New Holland NV................................................... Netherlands 481,000 12,716,438
-----------
80,119,491
-----------
MERCHANDISING 1.5%
American Stores Co. ............................................. United States 688,300 14,153,169
Dillards Inc., A................................................. United States 77,500 2,731,875
FKI Plc. ........................................................ United Kingdom 11,499,900 36,262,988
*Footstar Inc. .................................................. United States 311,100 8,360,813
*Hills Stores Co. ............................................... United States 227,260 724,391
*Homeland Holdings Corp. ........................................ United States 59,798 272,081
*Homeland Holdings Corp., when issue............................. United States 210,453 1,367,949
*Provigo Inc. ................................................... Canada 825,000 5,022,567
Vendome Luxury Group Plc. ....................................... United Kingdom 2,061,836 16,118,676
*Woolworth Corp. ................................................ United States 982,900 20,026,588
-----------
105,041,097
-----------
METALS & MINING 0.8%
*Algoma Steel Inc. .............................................. Canada 1,302,153 4,510,449
Aluminum Co. of America.......................................... United States 38,200 2,688,325
Central Steel & Wire Co. ........................................ United States 959 738,430
LTV Corp. ....................................................... United States 722,900 7,048,275
+(R)Metallurg Inc. .............................................. United States 404,958 5,466,933
Reynolds Metals Co. ............................................. United States 525,700 31,542,000
-----------
51,994,412
-----------
</TABLE>
22
<PAGE> 25
MUTUAL BEACON FUND
STATEMENT OF INVESTMENTS, DECEMBER 31, 1997 (continued)
<TABLE>
<CAPTION>
COUNTRY SHARES VALUE
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS (CONT.)
MULTI-INDUSTRY 7.7%
Aker RGI ASA, A.................................................. Norway 2,218,979 $ 40,016,843
Aker RGI ASA, B.................................................. Norway 618,835 10,069,180
*Berkshire-Hathaway Inc., A...................................... United States 305 14,030,000
Canadian Pacific Ltd. ........................................... Canada 210,000 5,722,500
Cie Financiere Richemont AG, A................................... Switzerland 20,157 21,927,021
Custos AB, A..................................................... Sweden 1,000,000 21,536,795
Forvaltnings AB Ratos, B......................................... Sweden 6,152,400 55,015,857
Gendis Inc., A................................................... Canada 722,500 10,743,588
Harcourt General Inc. ........................................... United States 393,800 21,560,550
Investor AB, A................................................... Sweden 1,016,900 49,564,894
Investor AB, B................................................... Sweden 1,729,700 84,307,598
Kinnevik AB, A................................................... Sweden 287,550 4,889,136
Kinnevik AB, B................................................... Sweden 1,854,552 30,714,945
Lagardere S.C.A. ................................................ France 1,185,598 39,201,462
McMillan Bloedel Ltd. ........................................... Canada 552,400 5,740,275
Power Corp. of Canada............................................ Canada 216,900 7,771,093
Sophus Berendsen AS, B........................................... Denmark 201,450 33,222,683
Ste Eurafrance................................................... France 43,953 17,892,307
Tomkins Plc. .................................................... United Kingdom 1,967,643 9,177,681
Viad Corp. ...................................................... United States 2,042,000 39,436,125
-----------
522,540,533
-----------
REAL ESTATE 2.5%
Alexander & Baldwin Inc. ........................................ United States 154,800 4,227,975
*Alexander's Inc. ............................................... United States 48,000 4,359,000
*Al-Zar Ltd. LP.................................................. United States 12 4,116
*Cadillac Fairview Corp. ........................................ Canada 1,102,672 25,656,096
*Cadillac Fairview Corp., wts. .................................. Canada 112,599 1,378,876
*Castle & Cooke Inc. ............................................ United States 45,033 759,932
*E & J Properties Ltd., units.................................... United States 15,000 50,625
*Gould Investors LP.............................................. United States 14,600 730,000
*Insignia Financial Group Inc.................................... United States 224,800 5,170,400
*+(R)MB Metropolis LLC .......................................... United States 5,375,561 6,638,817
*MBO Properties Inc. ............................................ United States 205,135 1,743,658
+(R)MSCW Investors III, LLC...................................... United Kingdom 28,372,000 47,104,938
*Nichols J C Co. ................................................ United States 165,245 11,567,150
+Resurgence Properties Inc. ..................................... United States 591,900 932,242
+(R)Resurgence Properties Inc., Restricted....................... United States 900,000 1,417,500
*+(R)Value Property Trust........................................ United States 3,880,280 58,058,690
*+(R)Value Property Trust, wts. ................................. United States 24,222 139,277
*Wellsford Real Properties Inc. ................................. United States 80,850 1,263,281
-----------
171,202,573
-----------
RECREATION & OTHER CONSUMER GOODS 0.6%
EMI Group Plc. .................................................. United Kingdom 4,553,076 39,202,307
Todd A O Corp., A................................................ United States 116,828 978,435
-----------
40,180,742
-----------
</TABLE>
23
<PAGE> 26
MUTUAL BEACON FUND
STATEMENT OF INVESTMENTS, DECEMBER 31, 1997 (continued)
<TABLE>
<CAPTION>
COUNTRY SHARES VALUE
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS (CONT.)
TELECOMMUNICATIONS 4.6%
*360 Degrees Communications Company.............................. United States 1,393,400 $ 28,129,281
*Ionica Group Plc., wts. ........................................ United Kingdom 2,560 275,200
Koninklijke Ptt Nederland NV..................................... Netherlands 1,128,000 47,063,744
*Loral Space & Communications Ltd. .............................. United States 677,100 14,515,331
MCI Communications Corp. ........................................ United States 2,132,300 91,289,094
SK Telecom Co. Ltd. ............................................. South Korea 11,310 3,284,037
Sprint Corp. .................................................... United States 144,200 8,453,725
*Telecommunications Inc.- TCI Ventures Group, A.................. United States 1,141,300 32,313,056
Telephone & Data Systems Inc. ................................... United States 1,491,900 69,253,137
*Telewest Communications Plc..................................... United Kingdom 13,926,000 16,010,051
-------------
310,586,656
-------------
TRANSPORTATION 3.2%
Burlington Northern Santa Fe Corp. .............................. United States 380,300 35,344,131
Canadian National Railway Co. ................................... Canada 491,900 23,242,275
Florida East Coast Industries Inc. .............................. United States 338,000 32,490,250
*(R)Golden Ocean Group Ltd., wts. ............................... United States 2,125 10,625
Helikopter Services Group ASA.................................... Norway 621,400 7,583,186
*+Old Dominion Freight Line Inc. ................................ United States 419,000 6,389,750
Railtrack Group Plc. ............................................ United Kingdom 5,274,334 84,111,456
Tranz Rail Holdings Ltd. ........................................ New Zealand 50,000 188,711
Tranz Rail Holdings Ltd., ADR.................................... New Zealand 110,000 1,265,000
Xtra Corp. ...................................................... United States 405,500 23,772,438
-------------
214,397,822
-------------
UTILITIES ELECTRICAL & GAS 0.1%
Nova Corp. ...................................................... Canada 457,900 4,357,748
Thames Water Group Plc. ......................................... United Kingdom 100,000 1,496,190
-------------
5,853,938
-------------
TOTAL COMMON STOCKS (COST $4,151,886,082).................. 5,293,654,252
-------------
PREFERRED STOCKS 0.5%
Criimi Mae Inc., 10.875%, conv., pfd., B......................... United States 22,200 758,963
*Hills Stores Co., conv., pfd., A................................ United States 37,113 111,339
*(R)Interlake Corp., 9.00%, Series A3, conv., pfd. .............. United States 400 449,640
*Isosceles Plc., pfd., A......................................... United Kingdom 512,915 8,424
*North Atlantic Trading Company Inc., 12.00%, pfd. .............. United States 21,169 571,563
Pacificare Health Systems Inc., 4.00%, conv., pfd., A............ United States 97,500 2,218,125
Ransomes Plc., L8.25, conv., pfd. ............................... United Kingdom 14,345,000 23,324,054
*(R)Viasystems Inc., pfd., B..................................... United States 102,000 2,167,500
-------------
TOTAL PREFERRED STOCKS (COST $24,198,548).................. 29,609,608
-------------
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT**
----------
<S> <C> <C> <C>
CORPORATE BONDS AND NOTES 1.2%
American Communications Services Inc., 0/11.00%, 11/01/05........ United States $ 2,250,000 1,811,250
Asia Pulp & Paper Co. Ltd., 144A, 12.00%, 12/29/29............... Indonesia 2,275,000 2,013,375
</TABLE>
24
<PAGE> 27
MUTUAL BEACON FUND
STATEMENT OF INVESTMENTS, DECEMBER 31, 1997 (continued)
<TABLE>
<CAPTION>
PRINCIPAL
COUNTRY AMOUNT** VALUE
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CORPORATE BONDS AND NOTES (CONT.)
Azteca Holdings, 144A, 11.00%, 6/15/02........................... Mexico $ 500,000 $ 517,500
Bally Total Fitness Holding Corp., 144A, 9.875%, 10/15/07........ United States 500,000 506,250
Boston Chicken, Inc., conv., zero coupon, 6/01/15................ United States 5,350,000 809,188
Cadillac Fairview Corp., 12.00%, 7/31/05......................... Canada 132,492CAD 94,567
Cityscape Financial Corp., 12.75%, 6/01/04....................... United States 6,335,000 2,787,400
Club Regina Resorts Inc., 13.00%, 12/01/00....................... United States 3,750,000 3,834,375
Consorcio G Grupo Dina SA de CV,
0/12.00%, 11/15/02............................................. Mexico 4,059,000 3,673,395
8.00%, conv., 8/08/04.......................................... Mexico 2,565,000 2,193,075
County Seat Stores Inc., 144A, 12.75%, 11/01/04.................. United States 750,000 772,500
CS Wireless Inc., 0/12.25%, B, 3/01/06........................... United States 6,725,000 1,782,125
Delco Remy International, 11.50%, 7/31/04........................ United States 4,600,000 4,669,000
(R)Fairchild Semiconductor Corp., 11.74%, 3/14/08................ United States 2,475,000 2,536,875
Flagstar Companies Inc., 10.75%, 9/15/01......................... United States 1,000,000 1,117,500
FRD Acquisition Co., 12.50%, 7/15/04............................. United States 1,250,000 1,306,250
Global Ocean Carriers Ltd., 144A, 10.25%, 7/15/07................ United States 2,300,000 2,208,000
Globalstar LP,
10.75%, 11/01/04............................................... United States 600,000 588,000
11.25%, 6/15/04................................................ United States 1,050,000 1,057,875
(R)Golden Ocean Group Ltd., 10.00%, 8/31/01...................... United States 1,725,000 1,414,500
Heilman Acquisition Corp 9.625%, 1/31/04......................... United States 15,000,000 1,500
Home Holdings Inc 8.625%, 12/15/03............................... United States 3,600,000 1,242,000
Hurricane Hydrocarbons Ltd., 11.75%, 11/01/04.................... Canada 2,000,000 1,900,000
Ionica Plc., 0/15.00%, 5/01/07................................... United Kingdom 13,475,000 5,457,375
Jitney Jungle Stores of America Inc., 10.375%, 9/15/07........... United States 1,600,000 1,668,000
Local Financial, 11.00%, 9/05/04................................. United States 1,400,000 1,484,000
Localiza Rent-A-Car SA, 10.25%, 10/01/05......................... Brazil 1,000,000 850,000
Nebco Evans Holding Company, 144A, 0/7.00%, 7/15/07.............. United States 1,000,000 655,000
North Atlantic Trading Company Inc.,11.00%, 6/15/04.............. United States 750,000 781,875
Olivetti International NV, 3.75%, conv., 12/31/99................ Italy 13,300,000,000ITL 8,345,392
Packaging Resources Inc., 13.00%, 6/30/03........................ United States 3,663,675 3,407,218
Price Communications Wireless, 144A, 11.75%, 7/15/07............. United States 990,000 1,079,100
Production Resource Group Plc., 11.50%, 12/15/07................. United States 1,250,000 1,256,250
RBX Corp., 12.00%, 1/15/03....................................... United States 1,300,000 1,332,500
Resource America Inc., 144A, 12.00%, 8/01/04..................... United States 1,800,000 1,840,500
Rutherford Moran Corp., 144A, 10.75%, 10/01/04................... United States 1,000,000 1,015,000
Sassco Fashions Ltd., 12.75%, 02/15/05........................... United States 955,313 998,302
Specialty Foods Corp., 11.25%, 8/15/03, B........................ United States 1,990,000 1,870,600
Stratosphere Corp., 14.25%, 5/15/02.............................. United States 1,410,000 796,650
Supermercados Norte SA, 144A, 10.875%, 2/09/04................... Argentina 1,150,000 1,095,375
TFM SA de CV,
144A, 10.25%, 6/15/07.......................................... Mexico 400,000 412,000
0/6.00%, 6/15/09............................................... Mexico 1,900,000 1,211,250
Transamerican Energy Corporation,
144A, 11.50%, 6/15/02.......................................... United States 1,000,000 985,000
144A, 0/6.00%, 6/15/02......................................... United States 5,000,000 4,025,000
</TABLE>
25
<PAGE> 28
MUTUAL BEACON FUND
STATEMENT OF INVESTMENTS, DECEMBER 31, 1997 (continued)
<TABLE>
<CAPTION>
PRINCIPAL
COUNTRY AMOUNT** VALUE
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CORPORATE BONDS AND NOTES (CONT.)
Uniforet Inc., 11.125%, 10/15/06................................. Canada $ 1,050,000 $ 1,002,750
Vicap SA, 144A, 11.375%, 5/15/07................................. United States 1,000,000 1,075,000
Wilsons The Leather Experts, 11.25%, 8/15/04..................... United States 1,300,000 1,280,500
------------
TOTAL CORPORATE BONDS AND NOTES (COST $84,966,933)......... 82,761,137
------------
BONDS AND NOTES IN REORGANIZATION 1.9%
Adams County Co. Ind. Dev. Auth., 9.00%, 11/01/96................ United States 1,775,000 888
Ames Department Stores Inc.,
bank claim..................................................... United States 1,000,000 7,500
trade claim.................................................... United States 838,042 6,285
trade debt..................................................... United States 743,611 5,577
Barings BV ,
zero coupon, 1/22/01........................................... Netherlands 12,010,000 5,884,900
zero coupon, 3/12/01........................................... Netherlands 8,249,000 8,661,450
Caldor Corp.,
bank claim..................................................... United States 491,014 304,429
bank claim 1................................................... United States 3,602,714 3,458,605
trade claim.................................................... United States 5,740,313 229,613
Dictaphone Corporation, bank claim............................... United States 1,201,566 1,189,550
Dow Corning Corp.,
9.30%, 1/27/98................................................. United States 1,835,000 2,257,050
8.55%, 3/01/01................................................. United States 1,100,000 1,320,000
9.375%, 2/01/08................................................ United States 790,000 1,007,250
8.15%, 10/15/29................................................ United States 7,050,000 8,460,000
9.50%, 8/10/49................................................. United States 350,000 434,000
bank claim..................................................... United States 2,070,704 2,557,319
bank debt #1................................................... United States 2,850,000 3,519,750
swap........................................................... United States 7,677,843 8,138,514
El Paso TX Housing Finance Corp., 8.88%, 10/15/96................ United States 27,574,000 13,787
Eli Jacobs, bank claim........................................... United States 25,305,909 126,530
Eurotunnel Finance Ltd.,
tranche A...................................................... United Kingdom 9,250,000GBP 8,051,669
tranche A1..................................................... United Kingdom 3,700,000GBP 3,220,667
tranche B...................................................... United Kingdom 2,502,857XEU 1,429,937
tranche B...................................................... United Kingdom 7,067,486GBP 6,151,898
tranche B1..................................................... United Kingdom 3,183,734GBP 2,771,283
tranche B1..................................................... United Kingdom 132,602XEU 75,758
tranche B-U.................................................... United Kingdom 42,644GBP 37,119
tranche C...................................................... France 6,600,000FRF 570,242
tranche E...................................................... France 315,010XEU 179,972
tranche E...................................................... France 67,655,472FRF 5,845,451
tranche E1-U................................................... France 865,580FRF 74,786
tranche E1..................................................... France 14,381,620FRF 1,242,576
Foxmeyer Health Corp.,
reclamation trade claim........................................ United States 5,488,844 1,042,880
trade claim.................................................... United States 1,402,185 1,093,704
Harrah's Jazz Finance Corp 14.25%, 11/15/01...................... United States 4,238,000 1,334,970
</TABLE>
26
<PAGE> 29
MUTUAL BEACON FUND
STATEMENT OF INVESTMENTS, DECEMBER 31, 1997 (continued)
<TABLE>
<CAPTION>
PRINCIPAL
COUNTRY AMOUNT** VALUE
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
BONDS AND NOTES IN REORGANIZATION (CONT.)
Harvard Industries,
11.125%, 8/01/05............................................... United States $ 18,030,000 $ 5,949,900
12.00%, 7/15/04................................................ United States 1,225,000 404,250
Heartland Wireless Comm. Inc.,
13.00%, 4/15/03................................................ United States 1,190,000 392,700
13.00%, 4/15/03, Series D...................................... United States 710,000 234,300
Isosceles Plc., Facility B Term Loan, 2003....................... United Kingdom 394,647GBP 6,482
Louisiana Agriculture Finance Auth., 8.25%, 10/01/96............. United States 950,000 475
Louisiana Housing Finance, 8.61%, 8/01/96........................ United States 987,000 494
Maxwell Communication Corp. Plc.,
6.00%, 6/15/93................................................. United Kingdom 206,000DEM 12,023
8.375%, 9/01/93................................................ United Kingdom 520,000XEU 59,989
5.00%, 6/16/95................................................. United Kingdom 618,975CHF 44,465
Memphis TN Health Facilities, 8.68%, 9/15/96..................... United States 8,800,000 4,400
Mercury Finance Co., Commercial Paper,
2/03/97........................................................ United States 422,398 350,591
2/04/97........................................................ United States 76,380 63,395
2/06/97........................................................ United States 672,706 558,346
2/07/97........................................................ United States 229,033 190,097
2/11/97........................................................ United States 114,522 95,053
2/13/97........................................................ United States 196,587 163,167
2/18/97........................................................ United States 76,400 63,412
2/19/97........................................................ United States 702,767 583,297
2/20/97........................................................ United States 147,933 122,785
2/21/97........................................................ United States 824,909 684,674
2/24/97........................................................ United States 587,610 487,716
2/27/97........................................................ United States 64,422 53,470
3/11/97........................................................ United States 42,253 35,070
3/14/97........................................................ United States 75,496 62,661
3/17/97........................................................ United States 645,232 535,543
4/11/97........................................................ United States 38,206 31,711
4/18/97........................................................ United States 137,087 113,783
4/22/97........................................................ United States 78,337 65,020
4/24/97........................................................ United States 117,505 97,529
Mercury Finance Co., Bank Claim, MTN,
5.79%, 2/02/97................................................. United States 556,693 462,055
5.66%, 3/10/97................................................. United States 3,799,051 3,153,212
6.29%, 12/16/97................................................ United States 4,221,168 3,503,569
6.16%, 12/15/98................................................ United States 422,117 350,357
7.33%, 6/29/99................................................. United States 1,266,350 1,051,089
7.42%, 6/29/00................................................. United States 3,845,809 3,192,022
7.50%, 6/29/01................................................. United States 3,845,809 3,192,022
Nebraska Investment Finance Auth., 8.34%, 11/01/93............... United States 4,660,000 2,334
</TABLE>
27
<PAGE> 30
MUTUAL BEACON FUND
STATEMENT OF INVESTMENTS, DECEMBER 31, 1997 (continued)
<TABLE>
<CAPTION>
PRINCIPAL
COUNTRY AMOUNT** VALUE
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
BONDS AND NOTES IN REORGANIZATION (CONT.)
Southeast Banking Corp.,
zero coupon, 12/16/96..........................................
United States $ 5,270,000 $ 3,478,200
zero coupon, 11/10/97..........................................
United States 6,880,000 4,540,800
6.50%, 3/15/99.................................................
United States 1,636,000 899,800
10.50%, 4/11/01................................................
United States 15,840,000 8,870,400
Southeast Texas Housing Finance Corp., 8.60%, 9/01/96............
United States 1,500,000 750
Tiphook Finance Corp., lease claim...............................
United Kingdom 26,378GBP 43,322
------------
TOTAL BONDS AND NOTES IN REORGANIZATION (COST
$103,664,875).................................................. 124,912,639
------------
SHARES
------
COMPANIES IN LIQUIDATION
*Americana Hotels & Realty Corp. ................................
United States 71,300 57,040
*City Investing Co., Liquidating Trust...........................
United States 250,187 218,914
*(R)Kendall International Inc....................................
United States 49 588
*Mcorp Financial Trust, claim units..............................
United States 13,334 16,301
*Mcorp Trust Units...............................................
United States 13,327 133
*+MEI Diversified Inc............................................
United States 13,957,852 1,284,122
*Ranger Industries...............................................
United States 5,059 4,269
------------
TOTAL COMPANIES IN LIQUIDATION (COST $1,219,965)........... 1,581,367
------------
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT**
---------
<S> <C> <C> <C>
SHORT TERM INVESTMENTS 16.3%
Federal Home Loan Bank, 5.325% to 5.69% with maturities to
12/17/98.......................................................
United States $648,624,000 636,710,989
Federal Home Loan Mortgage Corp., 5.405% to 5.415% with
maturities to 11/16/98.........................................
United States 42,400,000 40,771,096
Federal National Mortgage Association., 5.32% to 5.62% with
maturities to 12/04/98.........................................
United States 444,201,000 432,472,244
--------------
TOTAL SHORT TERM INVESTMENTS (COST $1,109,826,963)....... 1,109,954,329
--------------
TOTAL INVESTMENTS (COST $5,475,763,366) 97.8%........... 6,642,473,332
SECURITIES SOLD SHORT (0.5%)............................ (32,064,675)
NET EQUITY IN FORWARD CONTRACTS 0.2%.................... 15,296,757
OTHER ASSETS, LESS LIABILITIES 2.5%..................... 169,060,537
--------------
TOTAL NET ASSETS 100.0%................................. $6,794,765,951
--------------
</TABLE>
28
<PAGE> 31
MUTUAL BEACON FUND
STATEMENT OF INVESTMENTS, DECEMBER 31, 1997 (continued)
<TABLE>
<CAPTION>
SECURITIES SOLD SHORT
-----------------
ISSUER COUNTRY SHARES VALUE
----- ------ ----- ----
<S> <C> <C> <C>
*Nationsbank Corp. ............................................
United States 76,400 $ 4,646,075
*Worldcom Inc. ................................................
United States 906,400 27,418,600
--------------
TOTAL (PROCEEDS $33,599,102)........................... $ 32,064,675
==============
</TABLE>
*Non-income producing.
**Securities traded in U.S. dollars unless otherwise indicated.
(R)Restricted securities (See note 7).
+Affiliated issuers (See note 8).
CURRENCY ABBREVIATIONS:
<TABLE>
<S> <C> <C>
CAD -- Canadian Dollar
CHF -- Swiss Franc
DEM -- German Mark
FRF -- French Franc
GBP -- British Pound
ITL -- Italian Lira
XEU -- European Currency Unit
</TABLE>
See Notes to Financial Statements.
29
<PAGE> 32
MUTUAL BEACON FUND
Financial Statements
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1997
<TABLE>
<S> <C> <C>
Assets:
Investments in securities, at value:
Unaffiliated issuers (cost $5,329,341,289)........................ $6,415,961,940
Controlled affiliates (cost $75,490,809).......................... 111,941,722
Non controlled affiliates (cost $70,931,268)...................... 114,569,670 $6,642,473,332
-------------
Cash............................................................... 26,433,374
Receivables:
Investment securities sold........................................ 48,541,139
Capital shares sold............................................... 14,802,621
Dividends and interest............................................ 15,790,138
From affiliates................................................... 397,953
Unrealized gain on forward exchange contracts (Note 9)............. 27,263,693
Deposits with broker for securities sold short..................... 89,713,557
-------------
Total Assets................................................... 6,865,415,807
-------------
Liabilities:
Payables:
Investment securities purchased................................... 6,296,657
Capital shares redeemed........................................... 10,002,747
To affiliates..................................................... 5,784,757
Distributions to shareholders...................................... 835,959
Securities sold short, at value (proceeds $33,599,102)............. 32,064,675
Unrealized loss on forward exchange contracts (Note 9)............. 11,966,936
Other liabilities.................................................. 3,698,125
-------------
Total liabilities.............................................. 70,649,856
-------------
Net assets, at value................................................ $6,794,765,951
=============
Net assets consist of:
Accumulated distributions in excess of net investment income....... $ (13,240,115)
Net unrealized appreciation........................................ 1,183,541,150
Accumulated net realized gain...................................... 81,862,137
Capital shares..................................................... 5,542,602,779
-------------
Net assets, at value................................................ $6,794,765,951
=============
CLASS Z
Net asset value per share ($5,678,822,419 / 402,248,317 shares outstanding)............. $14.12
======
CLASS I
Net asset value per share ($753,518,847 / 53,486,802 shares outstanding)................ $14.09
======
Maximum offering price per share ($14.09 / 95.50%)...................................... $14.75
======
CLASS II
Net asset value per share ($362,424,685 / 25,807,641 shares outstanding)*............... $14.04
======
Maximum offering price per share ($14.04 / 99.00%)...................................... $14.18
======
</TABLE>
*Redemption price per share is equal to net asset value less any applicable
sales charge.
See Notes to Financial Statements.
30
<PAGE> 33
MUTUAL BEACON FUND
Financial Statements (continued)
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<S> <C> <C>
Investment Income:
(net of foreign taxes of $6,417,686)
Dividends......................................................... $ 92,860,300
Interest.......................................................... 67,989,645
------------
Total investment income....................................... $ 160,849,945
--------------
Expenses:
Management fees (Note 4).......................................... 36,299,616
Administrative fees (Note 4)...................................... 4,682,986
Distribution fees (Note 4)
Class I..................................................... 1,435,312
Class II.................................................... 1,871,688
Transfer agent fees (Note 4)...................................... 3,248,760
Custodian fees.................................................... 829,618
Reports to shareholders........................................... 710,691
Registration and filing fees...................................... 466,599
Professional fees................................................. 195,083
Directors' fees and expenses...................................... 59,668
Other............................................................. 150,867
------------
Total expenses................................................ 49,950,888
Expenses waived/paid by affiliate (Note 4).................... (1,822,295)
--------------
Net expenses............................................. 48,128,593
--------------
Net investment income.................................. 112,721,352
--------------
Realized and unrealized gains:
Net realized gain from:
Investments...................................................... 518,513,076
Foreign currency transactions.................................... 140,581,481
------------
Net realized gain............................................. 659,094,557
Net unrealized appreciation on:
Investments...................................................... 422,120,359
Translation of assets and liabilities denominated in foreign
currencies..................................................... 21,349,760
------------
Net unrealized appreciation................................... 443,470,119
--------------
Net realized and unrealized gain................................... 1,102,564,676
--------------
Net increase in net assets resulting from operations............... $1,215,286,028
==============
</TABLE>
See Notes to Financial Statements.
31
<PAGE> 34
MUTUAL BEACON FUND
Financial Statements (continued)
STATEMENTS OF CHANGES IN NET ASSETS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
-----------------------------------
<S> <C> <C>
Increase (decrease) in net assets:
Operations:
Net investment income........................................... $ 112,721,352 $ 139,500,691
Net realized gain from investments and foreign currency
transactions.................................................. 659,094,557 339,872,662
Net unrealized appreciation on investments and translation of
assets and liabilities denominated in foreign currencies...... 443,470,119 352,415,288
-------------- -------------
Net increase in net assets resulting from operations.......... 1,215,286,028 831,788,641
Distributions to shareholders from:
Net investment income:
Class Z......................................................... (198,852,305) (123,408,070)
Class I......................................................... (22,305,892) (733,476)
Class II........................................................ (9,409,819) (258,962)
Net realized gains:
Class Z......................................................... (463,412,045) (390,075,901)
Class I......................................................... (56,734,666) (1,661,478)
Class II........................................................ (27,054,167) (601,432)
Capital share transactions (Note 3):
Class Z......................................................... 306,526,781 1,029,861,383
Class I......................................................... 709,709,228 53,716,426
Class II........................................................ 352,291,753 16,796,782
-------------- -------------
Net increase in net assets.................................... 1,806,044,896 1,415,423,913
Net assets:
Beginning of year................................................ 4,988,721,055 3,573,297,142
-------------- -------------
End of year...................................................... $6,794,765,951 $4,988,721,055
=============== =============
Distributions in excess of net investment income included in net
assets:
End of year...................................................... $ (13,240,115) $ (1,622,610)
============== =============
</TABLE>
See Notes to Financial Statements.
32
<PAGE> 35
MUTUAL BEACON FUND
Notes to Financial Statements
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Mutual Beacon Fund (the Fund) is a separate, diversified series of Franklin
Mutual Series Fund, Inc. (the Series Fund), which is an open-end investment
company registered under the Investment Company Act of 1940. The Fund seeks
long-term capital appreciation and income through a flexible policy of investing
in stocks and corporate debt securities. The following summarizes the Fund's
significant accounting policies.
a. SECURITY VALUATION:
Securities listed or traded on a recognized national exchange or NASDAQ are
valued at the latest reported sales price. Over-the-counter securities and
listed securities for which no sale is reported are valued within the range of
the latest quoted bid and asked prices. Restricted securities and securities for
which market quotations are not readily available are valued at fair value as
determined by management in accordance with procedures established by the Board
of Directors.
b. FOREIGN CURRENCY TRANSLATION:
Portfolio securities and other assets and liabilities denominated in foreign
currencies are translated into U.S. dollars based on the exchange rate of such
currencies against U.S. dollars on the date of valuation. Purchases and sales of
securities and income items denominated in foreign currencies are translated
into U.S. dollars at the exchange rate in effect on the transaction date.
The Fund does not separately report the effect of changes in foreign exchange
rates from changes in market prices on securities held. Such changes are
included in net realized and unrealized gain or loss from investments.
Realized foreign exchange gains or losses arise from sales of foreign
currencies, currency gains or losses realized between the trade and settlement
dates on securities transactions and the difference between the recorded amounts
of dividends, interest, and foreign withholding taxes, and the U.S. dollar
equivalent of the amounts actually received or paid. Net unrealized foreign
exchange gains and losses arise from changes in foreign exchange rates on
foreign currency denominated assets and liabilities other than investments in
securities held at the end of the reporting period.
c. 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.
d. 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
33
<PAGE> 36
MUTUAL BEACON FUND
Notes to Financial Statements (continued)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
d. SECURITY TRANSACTIONS, INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS:
(CONTINUED)
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.
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.
e. 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.
f. 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.
g. 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. The Fund must maintain a deposit with the broker
consisting of cash and securities having a value equal to a specified percentage
of the value of the securities sold short.
34
<PAGE> 37
MUTUAL BEACON FUND
Notes to Financial Statements (continued)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 purchase price. Although the Fund will
generally purchase these securities with the intention of acquiring such
securities, it may sell such securities before the settlement date.
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. MERGER OF HEINE SECURITIES 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. (Franklin
Mutual), a subsidiary of FRI (the Merger). Franklin Mutual 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.
3. CAPITAL STOCK
The Fund offers three classes of shares: Class Z, Class I and Class II. 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.
Effective February 3, 1997, the shares of the Fund were split on a 3-for-1
basis. All previously reported per share data for the Fund have been restated to
give effect to the split. At December 31, 1997, there were 1.35 billion Fund
shares authorized ($0.001 par value) of which 750 million, 300 million, and 300
million were designated as Class Z, Class I, and Class II shares, respectively.
Transactions in the Fund's shares were as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------
1997 1996
-------------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
-------------------------------------------------------------------
<S> <C> <C> <C> <C>
CLASS Z SHARES:
Shares sold.......................................... 40,718,198 $ 643,612,541 34,429,925 $1,324,427,054
Shares issued on reinvestment of distributions....... 44,736,434 624,735,916 11,888,106 459,661,027
Shares issued on 3-for-1 stock split................. 251,723,338 -- -- --
Shares redeemed...................................... (61,246,008) (961,821,676) (19,412,747) (754,226,698)
-------------------------------------------------------------------
Net increase......................................... 275,931,962 $ 306,526,781 26,905,284 $1,029,861,383
===================================================================
</TABLE>
35
<PAGE> 38
MUTUAL BEACON FUND
Notes to Financial Statements (continued)
3. CAPITAL STOCK (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------------
1997 1996*
------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
------------------------------------------------------------
<S> <C> <C> <C> <C>
CLASS I SHARES:
Shares sold............................................... 46,602,413 $703,348,818 1,327,664 $53,458,385
Shares issued on reinvestment of distributions............ 5,286,745 73,347,433 57,339 2,210,404
Shares issued on 3-for-1 stock split...................... 4,753,265 -- -- --
Shares redeemed........................................... (4,493,034) (66,987,023) (47,590) (1,952,363)
------------------------------------------------------------
Net increase.............................................. 52,149,389 $709,709,228 1,337,413 $53,716,426
============================================================
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------------
1997 1996*
------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
------------------------------------------------------------
<S> <C> <C> <C> <C>
CLASS II SHARES:
Shares sold............................................... 22,074,280 $332,928,600 414,977 $16,724,893
Shares issued on reinvestment of distributions............ 2,401,998 33,244,103 20,626 795,137
Shares issued on 3-for-1 stock split...................... 1,840,112 -- -- --
Shares redeemed........................................... (926,529) (13,880,950) (17,823) (723,248)
------------------------------------------------------------
Net increase.............................................. 25,389,861 $352,291,753 417,780 $16,796,782
============================================================
</TABLE>
*Effective date of Class I and II shares was November 1, 1996.
4. TRANSACTIONS WITH AFFILIATES AND RELATED PARTIES
Certain officers of the Series Fund are also officers and/or directors of
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. In connection with the Merger, FRI
and Franklin Mutual 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 expense reduction is set forth in the
Statement of Operations.
36
<PAGE> 39
MUTUAL BEACON FUND
Notes to Financial Statements (continued)
4. TRANSACTIONS WITH AFFILIATES AND RELATED PARTIES (CONTINUED)
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 up to 0.35% and 1.00% per year of the average
daily net assets of Class I and Class II shares, respectively, for costs
incurred in marketing the Fund's Class I and Class II shares. Distributors
received net commissions from sales of those shares and received contingent
deferred sales charges for the year of $925,800 and $86,472, respectively.
5. INCOME TAXES
At December 31, 1997, the net unrealized appreciation based on the cost of
investments for income tax purposes of $5,510,028,967 was as follows:
<TABLE>
<S> <C>
Unrealized appreciation..................................... $1,314,257,739
Unrealized depreciation..................................... (181,813,374)
--------------
Net unrealized appreciation................................. $1,132,444,365
==============
</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 and foreign currency transactions.
37
<PAGE> 40
MUTUAL BEACON FUND
Notes to Financial Statements (continued)
6. INVESTMENT TRANSACTIONS
Purchases and sales of securities (excluding short-term securities) for the year
ended December 31, 1997 aggregated $3,507,488,097 and $2,709,533,858,
respectively.
Transactions in options written during the year ended December 31, 1997 were as
follows:
<TABLE>
<CAPTION>
NUMBER
OF CONTRACTS PREMIUM
------------------------------
<S> <C> <C>
Options outstanding at December 31, 1996............................................... 300 $ 130,346
Options written........................................................................ 1285 279,754
Options expired........................................................................ (608) (121,923)
Options terminated in closing transactions............................................. (300) (130,346)
Options exercised...................................................................... (677) (157,831)
------------------------------
Options outstanding at December 31, 1997............................................... -- --
==============================
</TABLE>
7. RESTRICTED SECURITIES
The Fund may purchase securities through private offerings 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 December 31, 1997 are as follows:
<TABLE>
<CAPTION>
NUMBER OF
SHARES OR ACQUISITION
PRINCIPAL AMOUNT ISSUER DATE VALUE
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
2,475,000 Fairchild Semiconductor Corp., 11.74%, 3/14/08........................... 4/2/97 $ 2,536,875
1,725,000 Golden Ocean Group Ltd., 10.25% 8/31/01.................................. 8/26/97 1,414,500
2,125 Golden Ocean Group Ltd., wts. ........................................... 8/26/97 10,625
400 Interlake Corp, 9.00%, Series A3, conv., pfd. ........................... 6/17/92 449,640
49 Kendall International Inc................................................ 7/6/92 588
1 Lancer Industries Inc., B................................................ 8/11/89 512,820
275,000 Laser Mortgage Management Inc. .......................................... 11/26/97 3,987,500
5,375,561 MB Metropolis LLC........................................................ 12/7/94 6,638,817
404,958 Metallurg Inc............................................................ 4/14/97 5,466,933
28,372,000 MSCW Investors III, LLC.................................................. 12/27/95 47,104,938
900,000 Resurgence Properties Inc., Restricted................................... 4/6/95 1,417,500
1,480,670 Sunbeam Corp. ........................................................... 2/23/90 56,135,901
24,222 Value Property Trust, wts................................................ 3/13/96 139,277
3,880,280 Value Property Trust..................................................... 12/23/93 58,058,690
102,000 Viasystems Inc., pfd. B.................................................. 12/12/97 2,167,500
------------
TOTAL RESTRICTED SECURITIES (COST $93,256,132) (2.74% OF NET ASSETS)........................ $186,042,104
============
</TABLE>
38
<PAGE> 41
MUTUAL BEACON FUND
Notes to Financial Statements (continued)
8. INVESTMENT IN AFFILIATES
The Investment Company Act of 1940 defines "affiliated companies" as investments
in portfolio companies in which the Fund owns 5% or more of the outstanding
voting securities. Investments in "affiliated companies" at December 31, 1997
were $226,511,392. For the year ended December 31, 1997, dividend income from
"affiliated companies" was $2,534,312 and net realized gains from disposition of
"affiliated companies" were $586,662.
<TABLE>
<CAPTION>
NUMBER OF NUMBER OF REALIZED
SHARES HELD GROSS GROSS SHARES HELD VALUE DIVIDEND INCOME CAPITAL
NAME OF ISSUER DEC. 31, 1996 ADDITIONS REDUCTIONS DEC. 31, 1997 DEC. 31, 1997 1/1/97-12/31/97 GAINS
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
CONTROLLED AFFILIATES*
MB Metropolis, LLC................ 6,416,576 -- 1,041,015 5,375,561 $ 6,638,817 -- $118,150
MSCW Investors III, LLC........... 28,372,000 -- -- 28,372,000 47,104,938 -- --
Value Property Trust.............. 3,880,280 -- -- 3,880,280 58,058,690 -- --
Value Property Trust, wts......... 24,204 18 -- 24,222 139,277 -- --
----------------------------------------
TOTAL CONTROLLED AFFILIATES.... $111,941,722 -- $118,150
========================================
NON CONTROLLED AFFILIATES
Aker AS, Series A................. 2,004,500 214,479 -- 2,218,979 ** -- --
Gulfmark International, Inc....... 319,037 2,000 321,037 ** ** -- --
Gulfmark Offshore, Inc.***........ -- 642,074 -- 642,074 $ 21,188,442 -- --
MEI Diversified Inc., Certificates
of Beneficial Interest........... 13,957,852 -- -- 13,957,852 1,284,122 -- --
Metallurg Inc..................... -- 404,958 -- 404,958 5,466,933 $ 1,579,336 --
National Security Group, Inc...... 174,977 -- -- 174,977 3,083,970 122,484 --
Old Dominion Freight Line, Inc.... 419,000 -- -- 419,000 6,389,750 -- --
Puerto Rican Cement Co., Inc...... 279,800 -- -- 279,800 14,042,463 212,648 --
Resurgence Properties Inc......... 591,900 -- -- 591,900 932,242 -- --
Resurgence Properties Inc.,
Restricted....................... 900,000 -- -- 900,000 1,417,500 -- --
Servico, Inc...................... -- 693,000 -- 693,000 11,694,375 -- --
Spectra Physics AB, A............. -- 1,130,000 -- 1,130,000 21,419,035 288,740 --
Toro Co........................... 675,600 28,400 55,300 648,700 27,650,838 331,104 $468,512
----------------------------------------
TOTAL NON CONTROLLED
AFFILIATES................... $114,569,670 $ 2,534,312 $468,512
========================================
</TABLE>
*Issuer in which the Fund owns 25% or more of the outstanding voting securities.
**As of December 31, 1997, no longer an affiliate.
***Spin off from Gulfmark International effective May 1, 1997.
9. 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
39
<PAGE> 42
MUTUAL BEACON FUND
Notes to Financial Statements (continued)
9. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK (CONTINUED)
movement in currency values and interest rates and contract positions that are
not exact offsets. The contract amount indicates the extent of the Fund's
involvement in such contracts.
A forward exchange contract is an agreement between two parties to exchange
different currencies at a specific rate at an agreed future date. The contracts
are reported in the financial statements at the Fund's net equity, as measured
by the difference between the forward exchange rates at the reporting date and
the forward exchange rates at the day of entry into the contract.
As of December 31, 1997, 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>
5,000,000 British Pounds..................................... U.S. $ 8,028,000 2/18/98 U.S. $ 164,348
11,139,842..... British Pounds..................................... 17,879,816 3/18/98 346,633
193,554,996.... Hong Kong Dollars.................................. 24,709,640 1/14/98 253,388
-------- -------------
U.S. $ 50,617,456 764,369
======== -------------
<CAPTION>
CONTRACTS TO SELL:
- -------------------------------------------------------------------
<C> <S> <C> <C> <C> <C> <C>
38,843,571 British Pounds..................................... U.S. $ 64,529,057 1/20/98 798,137
4,200,000 British Pounds..................................... 7,035,000 1/30/98 147,495
43,886,851 British Pounds..................................... 74,212,664 2/17/98 2,302,138
26,508,337 British Pounds..................................... 43,685,739 3/18/98 314,131
42,550,000 British Pounds..................................... 70,002,550 4/15/98 481,707
45,000,000 British Pounds..................................... 75,865,500 5/18/98 2,454,282
59,483,012 Canadian Dollars................................... 41,877,648 1/30/98 206,829
89,806,025 Canadian Dollars................................... 65,010,683 2/27/98 2,051,796
217,256,141 Danish Krone....................................... 32,133,967 1/26/98 382,359
171,554,274 Dutch Guilders..................................... 86,915,542 3/17/98 1,913,369
118,205,613 Dutch Guilders..................................... 59,348,407 6/10/98 498,794
57,840,088 Finnish Markka..................................... 10,817,082 3/3/98 161,842
454,613,700 French Francs...................................... 75,843,362 1/20/98 216,842
217,449,693 French Francs...................................... 37,541,218 2/17/98 1,309,687
45,992,784 French Francs...................................... 7,749,065 2/27/98 81,454
521,548,621 French Francs...................................... 89,898,466 4/17/98 2,715,278
46,330,830 French Francs...................................... 7,800,000 6/11/98 31,988
14,084,623,025 Italian Lira....................................... 8,009,908 7/2/98 39,928
885,492,800 Japanese Yen....................................... 7,143,952 6/19/98 187,376
2,240,492 New Zealand Dollars................................ 1,393,586 2/17/98 97,690
320,427,129 Norwegian Krone.................................... 44,624,005 3/9/98 1,004,422
19,824,885 Norwegian Krone.................................... 2,850,000 3/10/98 151,108
187,901,734 Swedish Krona...................................... 23,993,566 1/12/98 319,773
346,588,895 Swedish Krona...................................... 44,829,937 1/21/98 1,151,630
733,560,281 Swedish Krona...................................... 96,718,600 2/17/98 4,204,468
</TABLE>
40
<PAGE> 43
MUTUAL BEACON FUND
Notes to Financial Statements (continued)
<TABLE>
<CAPTION>
9. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK (CONTINUED)
IN SETTLEMENT UNREALIZED
CONTRACTS TO SELL: EXCHANGE FOR DATE GAIN/(LOSS)
- ------------------------------------------------------------------- -------------- ---------- -------------
<C> <S> <C> <C> <C> <C> <C>
207,061,190 Swedish Krona...................................... U.S. $ 27,600,431 3/18/98 U.S. $ 1,467,530
275,596,266 Swedish Krona...................................... 36,248,358 4/21/98 1,439,935
57,969,394 Swiss Francs....................................... 40,762,700 6/10/98 367,336
-------------- -------------
U.S. $1,184,440,993 26,499,324
============== -------------
Unrealized gain on forward exchange contracts.............. 27,263,693
CONTRACTS TO BUY: -------------
- -------------------------------------------------------------------
40,000,000 British Pounds..................................... U.S. $ 67,512,300 2/18/98 (1,973,519)
45,281,912 British Pounds..................................... 71,722,020 3/18/98 (2,365,969)
17,666,030 French Francs...................................... 3,044,555 1/20/98 (105,751)
6,000,000 Hong Kong Dollars.................................. 773,894 1/14/98 (67)
31,930,000 Norwegian Krone.................................... 4,416,168 3/9/98 (69,553)
136,294,295 Spanish Peseta..................................... 918,425 2/18/98 (22,681)
5,641,461 Swedish Krona...................................... 4,217,407 1/12/98 (218,543)
4,374,767 Swedish Krona...................................... 578,367 1/20/98 (27,044)
-------------- -------------
U.S. $ 153,183,136 (4,783,127)
============== -------------
<CAPTION>
CONTRACTS TO SELL:
- -------------------------------------------------------------------
<C> <S> <C> <C> <C> <C> <C>
45,000,000 British Pounds..................................... U.S. $ 70,907,850 2/18/97 (2,823,278)
46,539,773 British Pounds..................................... 75,079,380 1/20/98 (1,278,753)
14,651,305 British Pounds..................................... 24,360,101 3/18/98 (388,373)
54,054,549 British Pounds..................................... 87,568,369 6/18/98 (487,413)
66,388,379 Dutch Guilders..................................... 32,705,246 3/9/98 (172,625)
236,311,059 French Francs...................................... 38,589,704 1/20/98 (721,436)
386,806,604 French Francs...................................... 64,292,676 2/27/98 (193,147)
259,598,121 Hong Kong Dollars.................................. 33,416,763 1/12/98 (63,929)
390,666,596 Norwegian Krone.................................... 52,978,925 3/10/98 (205,084)
3,105,605,614 Spanish Peseta..................................... 19,954,417 2/18/97 (456,028)
11,813,762 Swedish Krona...................................... 1,481,591 1/12/98 (6,828)
2,524,705 Swedish Krona...................................... 315,790 1/21/98 (2,382)
400,198,341 Swedish Krona...................................... 50,218,132 2/17/98 (253,524)
475,000,000 Swedish Krona...................................... 59,963,391 3/10/98 (59,481)
----------- -------------
U.S. $ 611,832,335 (7,112,281)
============== -------------
Net unrealized loss on offsetting forward exchange
contracts................................................ (71,528)
-------------
Unrealized loss on forward exchange contracts.............. (11,966,936)
-------------
Net unrealized gain on forward exchange contracts........ U.S. $ 15,296,757
=============
</TABLE>
41
<PAGE> 44
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"), including
the schedule of investments, as of December 31, 1997, 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, 1997, 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,
1997, 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.
[ERNST & YOUNG LLP SIGNATURE]
Boston, Massachusetts
January 30, 1998
42
<PAGE> 45
MUTUAL BEACON FUND
Tax Designation
Under Section 854(b)(2) of the Internal Revenue Code, the Fund hereby designates
10.57% of the ordinary income dividends as income qualifying for the dividends
received deduction for the fiscal year ended December 31, 1997.
43
<PAGE> 46
This page intentionally left blank
<PAGE> 47
LITERATURE REQUEST
For a free brochure and prospectus, which contain more complete information,
including charges and expenses, call Franklin Fund Information, toll free, at
1-800/DIAL BEN (1-800/342-5236). Please read the prospectus carefully before you
invest or send money. 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.
FRANKLIN TEMPLETON GROUP Mutual Shares Fund
Templeton American Trust, Inc.
GLOBAL GROWTH
Fund Allocator Series
Franklin Global Health Care Fund Franklin Templeton Conservative
Franklin Templeton Japan Fund Target Fund
Templeton Developing Franklin Templeton Moderate
Markets Trust Target Fund
Templeton Foreign Fund Franklin Templeton Growth
Templeton Foreign Smaller Target Fund
Companies Fund
Templeton Global INCOME
Infrastructure Fund Franklin Adjustable Rate
Templeton Global Securities Fund
Opportunities Trust Franklin Adjustable U.S.
Templeton Global Government Securities Fund
Real Estate Fund Franklin's AGE High Income Fund
Templeton Global Franklin Investment Grade
Smaller Companies Fund Income Fund
Templeton Greater European Fund Franklin Short-Intermediate
Templeton Growth Fund U.S. Government Securities Fund
Templeton Latin America Fund Franklin U.S. Government
Templeton Pacific Growth Fund Securities Fund
Templeton World Fund Franklin Money Fund
Franklin Federal Money Fund
GLOBAL GROWTH AND INCOME
Franklin Global Utilities Fund For Corporations
Franklin Templeton German Franklin Corporate Qualified
Government Bond Fund Dividend Fund
Franklin Templeton Global
Currency Fund FRANKLIN FUNDS SEEKING
Mutual European Fund TAX-FREE INCOME
Templeton Global Bond Fund Federal Intermediate-Term
Templeton Growth and Tax-Free Income Fund
Income Fund Federal Tax-Free Income Fund
High Yield Tax-Free Income Fund
GLOBAL INCOME Insured Tax-Free Income Fund
Franklin Global Government Puerto Rico Tax-Free
Income Fund Income Fund
Franklin Templeton Hard Tax-Exempt Money Fund
Currency Fund
Franklin Templeton High Income FRANKLIN STATE-SPECIFIC
Currency Fund FUNDS SEEKING
Templeton Americas Government TAX-FREE INCOME
Securities Fund
Alabama
GROWTH Arizona**
Arkansas***
Franklin Biotechnology California**
Discovery Fund Colorado
Franklin Blue Chip Fund Connecticut
Franklin California Growth Fund Florida**
Franklin DynaTech Fund Georgia
Franklin Equity Fund Hawaii***
Franklin Gold Fund Indiana
Franklin Growth Fund Kentucky
Franklin MidCap Growth Fund Louisiana
Franklin Small Cap Maryland
Growth Fund Massachusetts+
Mutual Discovery Fund Michigan**
Minnesota+
GROWTH AND INCOME Missouri
Franklin Asset Allocation Fund New Jersey
Franklin Balance Sheet New York**
Investment Fund* North Carolina
Franklin Convertible Ohio+
Securities Fund Oregon
Franklin Equity Income Fund Pennsylvania
Franklin Income Fund Tennessee***
Franklin MicroCap Value Fund* Texas
Franklin Natural Resources Fund Virginia
Franklin Real Estate Washington***
Securities Fund
Franklin Rising Dividends Fund VARIABLE ANNUITIES++
Franklin Strategic Income Fund Franklin Valuemark(R)
Franklin Utilities Fund Franklin Templeton
Franklin Value Fund Valuemark Income Plus
Mutual Beacon Fund (an immediate annuity)
Mutual Financial Services Fund
Mutual Qualified Fund
*These funds are now closed to new accounts, with the exception of retirement
accounts.
**Two or more fund options available: long-term portfolio, intermediate-term
portfolio, a portfolio of insured municipal securities, and/or a high yield
portfolio (CA) and a money market portfolio (CA and NY).
***The fund may invest up to 100% of its assets in bonds that pay interest
subject to the federal alternative minimum tax.
+Portfolio of insured municipal securities.
++Franklin Valuemark and Franklin Templeton Valuemark Income Plus are issued by
Allianz Life Insurance Company of North America or by its wholly owned
subsidiary, Preferred Life Insurance Company of New York, and distributed by
NALAC Financial Plans, LLC.
10/97.1
<PAGE> 48
BOARD OF DIRECTORS INVESTMENT MANAGER
Michael F. Price (Chairman) Franklin Mutual Advisers, Inc.
Peter A. Langerman 51 John F. Kennedy Parkway
Edward I. Altman Short Hills, NJ 07078
Ann Torre Grant
Andrew H. Hines, Jr. SHAREHOLDER SERVICES
William J. Lippman 1-800-632-2301 - (Class I & II)
Bruce A. MacPherson 1-800-448-FUND - (Class Z)
Fred R. Millsaps
Leonard Rubin FUND INFORMATION
Barry F. Schwartz 1-800-342-5236
Vaughn R. Sturtevant, M.D.
Robert E. Wade
476 A97 12/97
This report must be preceded or
accompanied by the current
prospectus of the Mutual Beacon
Fund, 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.
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