ANNUAL
REPORT
DECEMBER 31, 1999
MUTUAL QUALIFIED FUND
[FRANKLIN TEMPLETON LOGO]
<PAGE>
Thank you for investing with Franklin Templeton. We encourage our investors to
maintain a long-term perspective and remember that all securities markets move
both up and down, as do mutual fund share prices. We appreciate your past
support and look forward to serving your investment needs in the years ahead.
[PHOTO] [PHOTO]
RAYMOND GAREA JEFF DIAMOND
Portfolio Manager Assistant Portfolio Manager
Mutual Qualified Fund Mutual Qualified Fund
PETER A. LANGERMAN
Chief Executive Officer
Franklin Mutual Advisers, LLC
ROBERT L. FRIEDMAN
Chief Investment Officer
Franklin Mutual Advisers, LLC
<PAGE>
SHAREHOLDER LETTER
- --------------------------------------------------------------------------------
Your Fund's Goal: Mutual Qualified Fund seeks capital appreciation, with income
as a secondary objective, by investing primarily in common and preferred stocks,
bonds, and convertible securities. The fund may also invest in foreign
securities.
- --------------------------------------------------------------------------------
Dear Shareholder:
We are pleased to bring you this annual report of the Mutual Qualified Fund for
the 12 months ended December 31, 1999. The year under review was made up of two
very different market periods. During the first five months, the global economy
picked up sharply and value-oriented stocks experienced a return to favor. But
the last seven months witnessed not only a resumption of the growth stock mania
of the last few years, but its ascension to new heights as prices of technology
and Internet securities soared. As the year unfolded, the market became
increasingly narrow, with performance of the Standard & Poor's 500(R) Composite
Index (S&P 500(R)) and Nasdaq Composite(R) Index driven almost entirely by
technology and Internet stocks. In fact, 53% of Nasdaq stocks and 60% of those
on the New York Stock Exchange (NYSE) registered a loss or
You will find a complete listing of the fund's portfolio holdings, including
dollar value and number of shares or principal amount, beginning on page 17 of
this report.
CONTENTS
<TABLE>
<CAPTION>
<S> <C>
Shareholder Letter .................................................. 1
Performance Summary ................................................. 8
Financial Highlights &
Statement of Investments ............................................ 13
Financial Statements ................................................ 27
Notes to Financial Statements ....................................... 31
Independent Auditors' Report ........................................ 40
Tax Designation ..................................................... 41
</TABLE>
[PYRAMID GRAPHIC]
<PAGE>
GEOGRAPHIC BREAKDOWN
<TABLE>
<CAPTION>
Based on Total Net Assets
12/31/99
<S> <C>
United States.................. 59.9%
United Kingdom................. 6.3%
France......................... 5.7%
Sweden......................... 3.8%
Netherlands.................... 2.2%
Japan.......................... 1.0%
Other Countries................ 4.4%
Fixed-Income Securities........ 6.2%
Government Agencies
& Other Net Assets............ 10.5%
</TABLE>
no gain at all.(1) Finally, we note some very interesting work by Sanford C.
Bernstein which looks at the performance and characteristics of price momentum
stocks during 1999. Though the astounding contribution of these stocks to S&P
500 returns was at an all-time high by a wide margin, what is truly amazing is
that, at an average 85 times trailing earnings, the price/earnings ratio for
this universe was almost triple its previous zenith in 1998.
To value investors such as ourselves, the foregoing clearly indicates that the
market is fraught with risk. While risk may be an all-but-forgotten word amidst
today's day-trading-driven markets, we remain vigilant to the risk involved in
every stock we own. In our opinion, much of the buying in technology stocks
during 1999 was speculative; many investors may have paid too high a premium for
the rare chance that future earnings growth will justify current share prices
and extraordinarily high growth multiples.
Within this environment, Mutual Qualified Fund - Class Z produced a 13.64%
one-year cumulative total return, while the S&P 500 returned 21.04% during the
same period as shown in the Performance Summary on page 8. In our opinion, more
relevant comparisons can be seen in the S&P MidCap 400(R) Index and the Value
Line Index, because the stocks which comprise these indexes more closely
resemble the type of stocks
(1.) Source: Kirlin Securities/CNBC.
The S&P 500 Composite Index consists of 500 domestic stocks, consisting of four
broad sectors: industrials, utilities, financials and transportation. The S&P
500 serves as a standard for measuring large-cap U.S. stock market performance.
Since some industries are characterized by companies of relatively small stock
capitalization, the Index is not composed of the 500 largest companies on the
New York Stock Exchange.
The Nasdaq Composite Index measures all Nasdaq domestic and non-U.S. based
common stocks listed on The Nasdaq Stock Market. The Index is market-value
weighted and includes over 5,000 companies (as of 12/31/99).
Indexes are unmanaged and include reinvested dividends. One cannot invest
directly in an index.
2
<PAGE>
Mutual Qualified normally buys. These two indexes returned 14.72% and 10.56%,
respectively, for 1999.(2) The fund significantly outperformed the Lipper(R)
Multi-Cap Value Funds Average, which rose only 7.76% for the year.(3)
One of the most important reasons for the fund's positive performance was a
group of stocks representing a combination of strong price appreciation (70% or
better) as well as sizeable positions in the fund. Four names stand out:
Telephone and Data Systems Inc., Canary Wharf Group PLC, Elf Aquitaine SA and
Compagnie Financiere Richemont AG. While their situations were quite different,
each represented an extremely attractive value at the time of our investment.
Two of these situations warrant particular comment. Shares of Telephone and Data
Systems had been languishing for some time as the stock traded at a huge
discount to its underlying asset value. However, due to improved corporate
stewardship, the announced merger of one of its affiliates, and strong growth in
its attractive wireless and wireline telephone businesses, the stock appreciated
dramatically. We acquired Canary Wharf in 1995 as part of a group that purchased
all of the bank group's interest in the formerly bankrupt London real estate
development company. In early 1999, Canary's initial public offering validated
the value of
(2.) Sources: Standard & Poor's Micropal (S&P MidCap 400), Kansas City Board of
Trade (Value Line Index).
The S&P MidCap 400 Index consists of 400 domestic stocks with a median market
capitalization of $676 million. It is a market value-weighted index, where stock
price is multiplied by the number of shares outstanding, with each stock
affecting the Index in proportion to its market value. The Index, calculated by
Standard & Poor's, is a total return index with dividends reinvested.
The Value Line Index is equally weighted and arithmetically averaged based on
the price change of each of the index's 1650 component stocks from the previous
day's close. Indexes are unmanaged and include reinvested dividends. One cannot
invest directly in an index.
(3.) The Lipper Multi-Cap Value Funds Average is an equally-weighted average
consisting of 518 mutual funds (including Mutual Qualified Fund) within the
Multi-Cap Value investment objective. Returns are adjusted for the reinvestment
of capital gains distributions and income dividends.
TOP 10 HOLDINGS
12/31/99
<TABLE>
<CAPTION>
COMPANY, % OF TOTAL
INDUSTRY, COUNTRY NET ASSETS
- --------------------------------------------------------------------------------
<S> <C>
Investor AB, A&B, 3.8%
Multi-Industry, Sweden
Canary Wharf Group PLC, 3.6%
Real Estate, United Kingdom
Telephone and Data
Systems Inc., 3.2%
Telecommunications,
United States
Lagardere SCA, 1.7%
Multi-Industry, France
BCE Inc., 1.7%
Telecommunications, Canada
Aventis SA, 1.5%
Health & Personal Care,
France
MediaOne Group Inc., 1.4%
Broadcasting & Publishing,
United States
Total Fina SA B, 1.3%
Energy Sources, France
Scripps Co. A, 1.2%
Broadcasting & Publishing,
United States
Florida East Coast
Industries Inc., 1.2%
Transportation,
United States
</TABLE>
3
<PAGE>
TOP 10 INDUSTRIES*
12/31/99
<TABLE>
<CAPTION>
% OF TOTAL
INDUSTRY NET ASSETS
- --------------------------------------------------------------------------------
<S> <C>
Multi-Industry 10.1%
Financial Services 9.5%
Health & Personal Care 7.5%
Broadcasting & Publishing 6.4%
Telecommunications 6.3%
Real Estate 5.0%
Banking 4.8%
Insurance 3.9%
Automobiles 3.3%
Merchandising 3.0%
</TABLE>
*Based on equity securities.
our holding at several times our original investment. Elsewhere, issues such as
LucasVarity PLC, Morton International Inc., Telecom Italia SpA, Long Beach
Financial, Promus, and Chancellor Media were acquired by other companies at
substantial premiums to previous trading levels.
Unfortunately, we owned a number of value-oriented stocks that disappointed
investors and significantly hurt our performance. Three of these, Bank One
Corp., PacifiCare and Healthsouth Corp. were especially detrimental. Believing
that Bank One's valuation was no longer justified by its rising risk level, we
greatly reduced our position.
The fund's portfolio composition changed only slightly during the year. A
reduction in our banking positions, from 8.4% to just under 5% by year's end,
was essentially offset by increased investment in other, more attractive
financial issues, namely financial services and insurance stocks. First Union
Corp. was one of our biggest sells in the banking sector because we lost
confidence in the company's management and its general outlook. Elsewhere, we
sold RJ Reynolds (RJR) due to growing concerns about tobacco litigation and
RJR's underlying fundamentals. Other issues, such as Morgan Stanley Dean Witter
& Co., were reduced as they appreciated over the course of the year and became,
in our opinion, expensive stocks. Chase Manhattan Corp. and General Motors Corp.
were also reduced, because they appreciated enough that their position size in
the portfolio became too big relative to their valuations. While we've added
numerous positions throughout the year, three are significant enough to warrant
mention: Aventis SA (pharmaceuticals), Heller Financial Inc., and Pepsi Bottling
Group Inc.
4
<PAGE>
At the end of 1999, the market continued to trade at record highs. Considering
the continued strength of the U.S. economy, signs of possible inflation, and
record margin debt related to securing stock purchases, it appears the Federal
Reserve will continue to increase interest rates. With stock prices at extremely
high levels and the market increasingly narrow, we believe now is a time to be
cautious. We remind you that we are bottom-up, value investors, constantly
searching for stocks offering the opportunity to buy corporate assets for 60
cents on the dollar, and sell them as they approach our assessment of full,
intrinsic value. Our assessment is based upon a company's earnings, cash flow
and assets. We are comfortable that the fund's portfolio continues to meet our
standards for purchasing stocks. And with 50%-60% of Nasdaq and NYSE stocks down
in 1999, we believe several industry sectors offer excellent value and potential
for significant returns in 2000, especially financials, healthcare services and
automobile parts suppliers. The challenge is to find stocks and companies with
catalysts that will cause their value to be realized. By adhering to our value
strategy, we expect to participate in bull markets and outperform in bear
markets. Providing our shareholders with an attractive, long-term compound
return, with less risk and volatility than the overall markets, continues to be
our priority.
5
<PAGE>
As always, we appreciate your participation in Mutual Qualified Fund and welcome
your comments and suggestions, either through regular mail or by e-mail at
[email protected].
Sincerely,
/s/Raymond Garea
- ----------------
Raymond Garea
Portfolio Manager
/s/Jeff Diamond
- ---------------
Jeff Diamond
Assistant Portfolio Manager
6
<PAGE>
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. It is important to remember that the fund may invest in
lower-rated "junk bonds," which entail higher credit risks, as well as in
foreign securities involving risks such as political uncertainty or fluctuations
in foreign exchange rates in areas where the fund invests.
It is also important to note that stocks offer the potential for long-term gains
but can be subject to short-term up and down price movements. Securities of
companies involved in mergers, liquidations and reorganizations, and
distressed/bankruptcy investments, involve higher credit risks. These and other
risks are discussed in the prospectus, which you should review before making an
investment decision.
This discussion reflects our views, opinions and portfolio holdings as of
December 31, 1999, the end of the reporting period. However, market and economic
conditions are changing constantly, which may affect our strategies and the
fund's portfolio composition. Although past performance is not predictive of
future results, these insights may help you understand our investment and
management philosophy.
7
<PAGE>
ONE-YEAR PERFORMANCE SUMMARY AS OF 12/31/99
One-year total return does not include sales charges. Distributions will vary
based on earnings of the fund's portfolio and any profits realized from the sale
of the portfolio's securities. Past distributions are not indicative of future
trends. All total returns include reinvested distributions at net asset value.
CLASS Z: No initial sales charge or Rule 12b-1 fees and are available only to
certain investors, as described in the prospectus.
CLASS A (formerly Class I): Subject to the current, maximum 5.75% initial sales
charge.
CLASS B: Subject to no initial sales charge, but subject to a contingent
deferred sales charge (CDSC) declining from 4% to 0% over six years. These
shares have higher annual fees and expenses than Class A shares.
CLASS C (formerly Class II): Subject to 1% initial sales charge and 1% CDSC for
shares redeemed within 18 months of investment. These shares have higher annual
fees and expenses than Class A shares.
For all share classes, the fund's manager has agreed in advance to waive a
portion of its management fees, which increases total return to shareholders. If
the manager had not taken this action, the fund's total returns would have been
lower.
<TABLE>
<S> <C> <C>
CLASS Z
One-Year Total Return 13.64%
Net Asset Value (NAV) (12/31/99) $16.91 (12/31/98) $16.46
Change in NAV +$0.45
Distributions (1/1/99-12/31/99) Dividend Income $0.2913
Long-Term Capital Gain $1.4822
---------------------------------
Total $1.7735
CLASS A
One-Year Total Return 13.27%
Net Asset Value (NAV) (12/31/99) $16.87 (12/31/98) $16.42
Change in NAV +$0.45
Distributions (1/1/99-12/31/99) Dividend Income $0.2279
Long-Term Capital Gain $1.4822
---------------------------------
Total $1.7101
CLASS B
One-Year Total Return 12.55%
Net Asset Value (NAV) (12/31/99) $16.78 (1/1/99) $16.42
Change in NAV +$0.36
Distributions (1/1/99-12/31/99) Dividend Income $0.2016
Long-Term Capital Gain $1.4822
---------------------------------
Total $1.6838
CLASS C
One-Year Total Return 12.54%
Net Asset Value (NAV) (12/31/99) $16.80 (12/31/98) $16.35
Change in NAV +$0.45
Distributions (1/1/99-12/31/99) Dividend Income $0.1031
Long-Term Capital Gain $1.4822
---------------------------------
Total $1.5853
</TABLE>
Mutual Qualified Fund paid distributions derived from long-term capital gains of
$1.4822 per share in December 1999. The fund hereby designates such
distributions as capital gain dividends per Internal Revenue Code Section 852
(b)(3).
Past performance does not guarantee future results.
8
<PAGE>
ADDITIONAL PERFORMANCE
AS OF QUARTER ENDED 12/31/99
<TABLE>
<CAPTION>
CLASS Z 1-YEAR 5-YEAR 10-YEAR
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Cumulative Total Return(1) 13.64% 118.88% 279.31%
Average Annual Total Return(2) 13.64% 16.96% 14.26%
Value of $10,000 Investment(3) $11,364 $21,888 $37,931
</TABLE>
<TABLE>
<CAPTION>
INCEPTION
CLASS A 1-YEAR 3-YEAR (11/1/96)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Cumulative Total Return(1) 13.27% 41.17% 49.94%
Average Annual Total Return(2) 6.77% 9.99% 11.54%
Value of $10,000 Investment(3) $10,677 $13,305 $14,130
</TABLE>
<TABLE>
<CAPTION>
INCEPTION
CLASS B 1-YEAR (1/1/99)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Cumulative Total Return(1) 12.55% 12.55%
Average Annual Total Return(2) 9.03% 9.03%
Value of $10,000 Investment(3) $10,855 $10,855
</TABLE>
<TABLE>
<CAPTION>
INCEPTION
CLASS C 1-YEAR 3-YEAR (11/1/96)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Cumulative Total Return(1) 12.54% 38.41% 46.86%
Average Annual Total Return(2) 11.38% 11.08% 12.56%
Value of $10,000 Investment(3) $11,039 $13,702 $14,541
</TABLE>
For updated performance figures, see the fund's "Prices and Performance" on the
Internet at www.franklintempleton.com, or call Franklin Templeton at
1-800/342-5236.
(1.) Cumulative total return represents the change in value of an investment
over the periods indicated and does not include sales charges.
(2.) Average annual total return represents the average annual change in value
of an investment over the periods indicated and includes the current,
applicable, maximum sales charge(s) for that class.
(3.) These figures represent the value of a hypothetical $10,000 investment in
the fund over the periods indicated and include the current, applicable, maximum
sales charge(s) for that class.
Since markets can go down as well as up, investment return and principal value
will fluctuate with market conditions, currency volatility and the social,
economic, and political climates of countries where the fund invests. You may
have a gain or loss when you sell your shares.
Past performance does not guarantee future results.
9
<PAGE>
TOTAL RETURN INDEX COMPARISON FOR HYPOTHETICAL $10,000 INVESTMENT
Total return represents the change in value of an investment over the periods
shown. It includes the current, applicable, maximum sales charge(s), fund
expenses, account fees and reinvested distributions. The unmanaged indexes
differ from the fund in composition, do not pay management fees or expenses and
include reinvested dividends. One cannot invest directly in an index. As a
result of changes to the Lipper domestic equity fund classifications during the
reporting period, performance for the Lipper Growth & Income Funds Average will
not be provided in the future. The fund has been reclassified by Lipper and is
currently categorized as a Multi-Cap Value Fund. Performance for both averages
has been provided for comparison purposes during this transitional period only.
Future reports will include performance information for the Lipper Multi-Cap
Funds Average, but not for the Lipper Growth & Income Funds Average.
AVERAGE ANNUAL TOTAL RETURN
12/31/99
<TABLE>
<CAPTION>
CLASS Z
- --------------------------------------------------------------------------------
<S> <C>
1-Year 13.64%
5-Year 16.96%
10-Year 14.26%
</TABLE>
CLASS Z (1/1/90 - 12/31/99)
This graph compares the performance of Mutual Qualified Fund - Class Z, as
tracked by the growth in value of a $10,000 investment, to that of the S&P 500,
Lipper Growth & Income Funds Average, and Lipper Multi-Cap Value Funds Average
Indexes from 1/1/90-12/31/99.
<TABLE>
<CAPTION>
MUTUAL QUALIFIED LIPPER GROWTH & INCOME LIPPER MULTI-CAP VALUE
DATE FUND-CLASS Z S&P 500 FUNDS AVERAGE FUNDS AVERAGE
---- ---------------- ------- ---------------------- ----------------------
<S> <C> <C> <C> <C>
01/01/1990 $10,000 $10,000 $10,000 $10,000
12/31/1990 $ 8,988 $ 9,690 $ 9,555 $ 9,376
12/31/1991 $10,887 $12,643 $12,354 $12,051
12/31/1992 $13,358 $13,606 $13,467 $13,377
12/31/1993 $16,391 $14,977 $15,118 $15,212
12/31/1994 $17,330 $15,175 $14,995 $15,154
12/31/1995 $21,940 $20,878 $19,711 $19,922
12/31/1996 $26,588 $25,671 $23,922 $24,147
12/31/1997 $33,212 $34,235 $30,397 $30,447
12/31/1998 $33,379 $44,020 $35,200 $33,193
12/31/1999 $37,931 $53,282 $40,051 $35,769
</TABLE>
Past performance does not guarantee future results.
10
<PAGE>
CLASS A (11/1/96 - 12/31/99)
This graph compares the performance of Mutual Qualified Fund - Class A, as
tracked by the growth in value of a $10,000 investment, to that of the S&P 500,
Lipper Growth & Income Funds Average, and Lipper Multi-Cap Value Funds Average
Indexes from 11/1/96 -12/31/99.
<TABLE>
<CAPTION>
MUTUAL QUALIFIED LIPPER GROWTH & INCOME LIPPER MULTI-CAP VALUE
DATE FUND - CLASS A S&P 500 FUNDS AVERAGE FUNDS AVERAGE
---- ---------------- ------- ---------------------- ----------------------
<S> <C> <C> <C> <C>
11/01/1996 $ 9,425 $10,000 $10,000 $10,000
11/30/1996 $ 9,908 $10,756 $10,668 $10,664
12/31/1996 $10,034 $10,543 $10,557 $10,620
01/31/1997 $10,358 $11,202 $11,019 $11,028
02/28/1997 $10,578 $11,289 $11,077 $11,120
03/31/1997 $10,436 $10,825 $10,680 $10,759
04/30/1997 $10,529 $11,472 $11,076 $11,060
05/31/1997 $11,030 $12,170 $11,768 $11,780
06/30/1997 $11,389 $12,715 $12,222 $12,208
07/31/1997 $11,981 $13,728 $13,129 $13,099
08/31/1997 $11,874 $12,959 $12,678 $12,779
09/30/1997 $12,465 $13,669 $13,322 $13,428
10/31/1997 $12,119 $13,212 $12,851 $12,909
11/30/1997 $12,258 $13,824 $13,203 $13,187
12/31/1997 $12,487 $14,062 $13,425 $13,403
01/31/1998 $12,418 $14,218 $13,440 $13,335
02/28/1998 $13,133 $15,243 $14,364 $14,262
03/31/1998 $13,643 $16,024 $15,000 $14,873
04/30/1998 $13,657 $16,186 $15,101 $14,934
05/31/1998 $13,602 $15,907 $14,788 $14,603
06/30/1998 $13,505 $16,553 $15,035 $14,638
07/31/1998 $13,111 $16,376 $14,647 $14,130
08/31/1998 $11,154 $14,008 $12,490 $12,023
09/30/1998 $11,111 $14,906 $13,154 $12,579
10/31/1998 $11,761 $16,118 $14,120 $13,562
11/30/1998 $12,335 $17,094 $14,841 $14,178
12/31/1998 $12,507 $18,079 $15,503 $14,626
01/31/1999 $12,590 $18,835 $15,764 $14,669
02/28/1999 $12,240 $18,249 $15,280 $14,223
03/31/1999 $12,865 $18,979 $15,778 $14,595
04/30/1999 $13,992 $19,713 $16,710 $15,704
05/31/1999 $14,166 $19,248 $16,495 $15,643
06/30/1999 $14,577 $20,316 $17,209 $16,189
07/31/1999 $14,294 $19,683 $16,713 $15,712
08/31/1999 $13,620 $19,584 $16,366 $15,231
09/30/1999 $13,307 $19,048 $15,842 $14,631
10/31/1999 $13,659 $20,253 $16,558 $15,152
11/30/1999 $14,051 $20,664 $16,783 $15,253
12/31/1999 $14,130 $21,881 $17,544 $15,727
</TABLE>
AVERAGE ANNUAL TOTAL RETURN
12/31/99
<TABLE>
<CAPTION>
CLASS A
- --------------------------------------------------------------------------------
<S> <C>
1-Year 6.77%
3-Year 9.99%
Since Inception (11/1/96) 11.54%
</TABLE>
CLASS B (1/1/99 - 12/31/99)
This graph compares the performance of Mutual Qualified Fund - Class B, as
tracked by the growth in value of a $10,000 investment, to that of the S&P 500,
Lipper Growth & Income Funds Average, and Lipper Multi-Cap Value Funds Average
Indexes from 1/1/99 -12/31/99.
<TABLE>
<CAPTION>
MUTUAL QUALIFIED LIPPER GROWTH & INCOME LIPPER MULTI-CAP VALUE
DATE FUND - CLASS B S&P 500 FUNDS AVERAGE FUNDS AVERAGE
---- ---------------- ------- ---------------------- ----------------------
<S> <C> <C> <C> <C>
01/01/1999 $10,000 $10,000 $10,000 $10,000
01/31/1999 $10,061 $10,418 $10,168 $10,029
02/28/1999 $ 9,787 $10,094 $ 9,856 $ 9,724
03/31/1999 $10,274 $10,498 $10,177 $ 9,979
04/30/1999 $11,163 $10,904 $10,779 $10,737
05/31/1999 $11,297 $10,647 $10,640 $10,695
06/30/1999 $11,617 $11,238 $11,100 $11,069
07/31/1999 $11,385 $10,887 $10,781 $10,742
08/31/1999 $10,851 $10,833 $10,556 $10,413
09/30/1999 $10,588 $10,536 $10,219 $10,003
10/31/1999 $10,864 $11,203 $10,680 $10,359
11/30/1999 $11,171 $11,430 $10,826 $10,429
12/31/1999 $10,855 $12,103 $11,316 $10,753
</TABLE>
AVERAGE ANNUAL TOTAL RETURN
12/31/99
<TABLE>
<CAPTION>
CLASS B
- --------------------------------------------------------------------------------
<S> <C>
1-Year 9.03%
Since Inception (1/1/99) 9.03%
</TABLE>
Past performance does not guarantee future results.
11
<PAGE>
AVERAGE ANNUAL TOTAL RETURN
12/31/99
<TABLE>
<CAPTION>
CLASS C
- --------------------------------------------------------------------------------
<S> <C>
1-Year 11.38%
3-Year 11.08%
Since Inception (11/1/96) 12.56%
</TABLE>
CLASS C (11/1/96 - 12/31/99)
This graph compares the performance of Mutual Qualified Fund - Class C, as
tracked by the growth in value of a $10,000 investment, to that of the S&P 500,
Lipper Growth & Income Funds Average, and Lipper Multi-Cap Value Funds Average
Indexes from 11/1/96-12/31/99.
<TABLE>
<CAPTION>
MUTUAL QUALIFIED LIPPER GROWTH & INCOME LIPPER MULTI-CAP VALUE
DATE FUND - CLASS C S&P 500 FUNDS AVERAGE FUNDS AVERAGE
---- ---------------- ------- ---------------------- ----------------------
<S> <C> <C> <C> <C>
11/01/1996 $ 9,900 $10,000 $10,000 $10,000
11/30/1996 $10,404 $10,756 $10,668 $10,664
12/31/1996 $10,530 $10,543 $10,557 $10,620
01/31/1997 $10,864 $11,202 $11,019 $11,028
02/28/1997 $11,091 $11,289 $11,077 $11,120
03/31/1997 $10,935 $10,825 $10,680 $10,759
04/30/1997 $11,026 $11,472 $11,076 $11,060
05/31/1997 $11,552 $12,170 $11,768 $11,780
06/30/1997 $11,922 $12,715 $12,222 $12,208
07/31/1997 $12,531 $13,728 $13,129 $13,099
08/31/1997 $12,419 $12,959 $12,678 $12,779
09/30/1997 $13,025 $13,669 $13,322 $13,428
10/31/1997 $12,657 $13,212 $12,851 $12,909
11/30/1997 $12,795 $13,824 $13,203 $13,187
12/31/1997 $13,025 $14,062 $13,425 $13,403
01/31/1998 $12,946 $14,218 $13,440 $13,335
02/28/1998 $13,687 $15,243 $14,364 $14,262
03/31/1998 $14,213 $16,024 $15,000 $14,873
04/30/1998 $14,213 $16,186 $15,101 $14,934
05/31/1998 $14,148 $15,907 $14,788 $14,603
06/30/1998 $14,047 $16,553 $15,035 $14,638
07/31/1998 $13,619 $16,376 $14,647 $14,130
08/31/1998 $11,580 $14,008 $12,490 $12,023
09/30/1998 $11,529 $14,906 $13,154 $12,579
10/31/1998 $12,194 $16,118 $14,120 $13,562
11/30/1998 $12,786 $17,094 $14,841 $14,178
12/31/1998 $12,949 $18,079 $15,503 $14,626
01/31/1999 $13,028 $18,835 $15,764 $14,669
02/28/1999 $12,664 $18,249 $15,280 $14,223
03/31/1999 $13,297 $18,979 $15,778 $14,595
04/30/1999 $14,454 $19,713 $16,710 $15,704
05/31/1999 $14,629 $19,248 $16,495 $15,643
06/30/1999 $15,045 $20,316 $17,209 $16,189
07/31/1999 $14,745 $19,683 $16,713 $15,712
08/31/1999 $14,052 $19,584 $16,366 $15,231
09/30/1999 $13,710 $19,048 $15,842 $14,631
10/31/1999 $14,068 $20,253 $16,558 $15,152
11/30/1999 $14,467 $20,664 $16,783 $15,253
12/31/1999 $14,541 $21,881 $17,544 $15,727
</TABLE>
*Source: Standard and Poor's Micropal.
**Source: Lipper Analytical Services, Inc. Lipper Growth & Income Funds Average
consists of 148 funds as of 12/31/99. Lipper Multi-Cap Value Funds average
consists of 518 funds as of 12/31/99. 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 averages may have been different.
Past performance does not guarantee future results.
12
<PAGE>
MUTUAL QUALIFIED FUND
Financial Highlights
<TABLE>
<CAPTION>
CLASS Z
------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------
1999++ 1998 1997 1996 1995
------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE+
(For a share outstanding throughout the year)
Net asset value, beginning of year.................. $16.46 $18.19 $16.24 $14.87 $13.34
------------------------------------------------------------------
Income from investment operations:
Net investment income.............................. .23 .43 .37 .47 .33
Net realized and unrealized gains (losses)......... 1.99 (.38) 3.62 2.62 3.17
------------------------------------------------------------------
Total from investment operations.................... 2.22 .05 3.99 3.09 3.50
------------------------------------------------------------------
Less distributions from:
Net investment income.............................. (.29) (.45) (.64) (.43) (.33)
Net realized gains ................................ (1.48) (1.33) (1.40) (1.29) (1.64)
------------------------------------------------------------------
Total distributions................................. (1.77) (1.78) (2.04) (1.72) (1.97)
------------------------------------------------------------------
Net asset value, end of year........................ $16.91 $16.46 $18.19 $16.24 $14.87
==================================================================
Total Return........................................ 13.64% .45% 24.95% 21.19% 26.60%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's)..................... $3,152,050 $3,942,519 $5,239,947 $4,287,975 $3,002,132
Ratios to average net assets:
Expenses(a)........................................ .80% .77% .79% .75% .76%
Expenses, excluding waiver and payments by
affiliate(a)..................................... .85% .80% .82% .78% .76%
Net investment income.............................. 1.31% 2.05% 1.85% 3.06% 2.71%
Portfolio turnover rate............................. 59.84% 66.84% 52.76% 65.03% 75.59%
(a)Excluding dividend expense on securities sold
short, the ratios of expenses and expenses,
excluding waiver and payments by affiliate to
average net assets would have been:
Expenses........................................... .77% .76% .75% .75% .72%
Expenses, excluding waiver and payments by
affiliate........................................ .82% .79% .78% .78% .72%
</TABLE>
+Per share amounts for all periods prior to December 31, 1996 have been restated
to reflect a 2-for-1 stock split effective February 3, 1997.
++Based on average weighted shares outstanding.
13
<PAGE>
MUTUAL QUALIFIED FUND
Financial Highlights (continued)
<TABLE>
<CAPTION>
CLASS A
----------------------------------------------------
YEAR ENDED DECEMBER 31,
----------------------------------------------------
1999+++ 1998 1997+++ 1996+
----------------------------------------------------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE++
(For a share outstanding throughout the year)
Net asset value, beginning of year.......................... $16.42 $18.14 $16.23 $16.40
----------------------------------------------------
Income from investment operations:
Net investment income...................................... .17 .35 .28 .16
Net realized and unrealized gains (losses)................. 1.99 (.35) 3.63 .89
----------------------------------------------------
Total from investment operations............................ 2.16 0.00 3.91 1.05
----------------------------------------------------
Less distributions from:
Net investment income...................................... (.23) (.39) (.60) (.41)
Net realized gains......................................... (1.48) (1.33) (1.40) (.81)
----------------------------------------------------
Total distributions......................................... (1.71) (1.72) (2.00) (1.22)
----------------------------------------------------
Net asset value, end of year................................ $16.87 $16.42 $18.14 $16.23
====================================================
Total Return*............................................... 13.27% .15% 24.44% 6.47%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's)............................. $471,313 $570,143 $452,590 $20,381
Ratios to average net assets:
Expenses(a)................................................ 1.14% 1.12% 1.14% 1.13%**
Expenses, excluding waiver and payments by affiliate(a).... 1.19% 1.15% 1.17% 1.28%**
Net investment income...................................... .97% 1.66% 1.48% 3.19%**
Portfolio turnover rate..................................... 59.84% 66.84% 52.76% 65.03%
(a)Excluding dividend expense on securities sold short, the
ratios of expenses and expenses, excluding waiver and
payments by affiliate to average net assets would have
been:
Expenses................................................... 1.11% 1.11% 1.10% 1.13%**
Expenses, excluding waiver and payments by affiliate....... 1.16% 1.14% 1.13% 1.28%**
</TABLE>
*Total return does not reflect sales commissions and is not annualized.
**Annualized.
+For the period November 1, 1996 (effective date) to December 31, 1996.
++Per share amounts for the period ended December 31, 1996 have been restated to
reflect a 2-for-1 stock split effective February 3, 1997.
+++Based on average weighted shares outstanding.
14
<PAGE>
MUTUAL QUALIFIED FUND
Financial Highlights (continued)
<TABLE>
<CAPTION>
CLASS B
------------------
YEAR ENDED
DECEMBER 31, 1999+
------------------
<S> <C>
PER SHARE OPERATING PERFORMANCE
(For a share outstanding throughout the year)
Net asset value, beginning of year.......................... $16.42
------------------
Income from investment operations:
Net investment income...................................... .03
Net realized and unrealized gains.......................... 2.01
------------------
Total from investment operations............................ 2.04
------------------
Less distributions from:
Net investment income...................................... (.20)
Net realized gains......................................... (1.48)
------------------
Total distributions......................................... (1.68)
------------------
Net asset value, end of year................................ $16.78
==================
Total Return*............................................... 12.55%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's)............................. $4,168
Ratios to average net assets:
Expenses(a)................................................ 1.81%
Expenses, excluding waiver and payments by affiliate(a).... 1.86%
Net investment income...................................... .20%
Portfolio turnover rate..................................... 59.84%
(a)Excluding dividend expense on securities sold short, the ratios of expenses and
expenses, excluding waiver and payments by affiliate to average net assets
would have been:
Expenses................................................... 1.78%
Expenses, excluding waiver and payments by affiliate....... 1.83%
</TABLE>
*Total return does not reflect the contingent deferred sales charge and is not
annualized.
+Effective date of Class B shares was January 1, 1999. Based on average weighted
shares outstanding.
15
<PAGE>
MUTUAL QUALIFIED FUND
Financial Highlights (continued)
<TABLE>
<CAPTION>
CLASS C
---------------------------------------------------
YEAR ENDED DECEMBER 31,
---------------------------------------------------
1999+++ 1998 1997+++ 1996+
---------------------------------------------------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE++
(For a share outstanding throughout the year)
Net asset value, beginning of year.......................... $16.35 $18.09 $16.23 $16.40
---------------------------------------------------
Income from investment operations:
Net investment income...................................... .05 .24 .16 .13
Net realized and unrealized gains (losses)................. 1.98 (.37) 3.63 .91
---------------------------------------------------
Total from investment operations............................ 2.03 (.13) 3.79 1.04
---------------------------------------------------
Less distributions from:
Net investment income...................................... (.10) (.28) (.53) (.39)
Net realized gains......................................... (1.48) (1.33) (1.40) (.82)
---------------------------------------------------
Total distributions......................................... (1.58) (1.61) (1.93) (1.21)
---------------------------------------------------
Net asset value, end of year................................ $16.80 $16.35 $18.09 $16.23
===================================================
Total Return*............................................... 12.54% (.58)% 23.66% 6.37%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's)............................. $264,902 $322,609 $231,721 $9,963
Ratios to average net assets:
Expenses(a)................................................ 1.80% 1.77% 1.79% 1.78%**
Expenses, excluding waiver and payments by affiliate(a).... 1.84% 1.80% 1.82% 1.93%**
Net investment income...................................... .32% 1.01% .84% 2.59%**
Portfolio turnover rate..................................... 59.84% 66.84% 52.76% 65.03%
(a)Excluding dividend expense on securities sold short, the
ratios of expenses and expenses, excluding waiver and
payments by affiliate to average net assets would have
been:
Expenses................................................... 1.77% 1.76% 1.75% 1.78%**
Expenses, excluding waiver and payments by affiliate....... 1.81% 1.79% 1.78% 1.93%**
</TABLE>
*Total return does not reflect sales commissions or the contingent deferred
sales charge and is not annualized.
**Annualized.
+For the period November 1, 1996 (effective date) to December 31, 1996.
++Per share amounts for the period ended December 31, 1996 have been restated to
reflect a 2-for-1 stock split effective February 3, 1997.
+++Based on average weighted shares outstanding.
See Notes to Financial Statements.
16
<PAGE>
MUTUAL QUALIFIED FUND
STATEMENT OF INVESTMENTS, DECEMBER 31, 1999
<TABLE>
<CAPTION>
COUNTRY SHARES VALUE
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS 86.9%
AEROSPACE & MILITARY TECHNOLOGY 1.0%
B.F. Goodrich Co. .......................................... United States 657,900 $ 18,092,250
*Hexcel Corp. .............................................. United States 843,498 4,691,958
Lockheed Martin Corp. ...................................... United States 724,244 15,842,838
--------------
38,627,046
--------------
AUTOMOBILES 3.3%
Borg-Warner Automotive Inc. ................................ United States 480,200 19,448,100
Delphi Automotive Systems Corp. ............................ United States 1,769,336 27,867,042
General Motors Corp. ....................................... United States 509,000 36,997,938
*Lear Corp. ................................................ United States 848,400 27,148,800
Meritor Automotive Inc. .................................... United States 737,400 14,287,125
*SPX Corp. ................................................. United States 48,500 3,919,406
--------------
129,668,411
--------------
BANKING 4.8%
Bank One Corp. ............................................. United States 909,214 29,151,674
Chase Manhattan Corp. ...................................... United States 589,844 45,823,506
*Imperial Bancorp........................................... United States 241,028 5,814,801
M & T Bank Corp. ........................................... United States 44,429 18,404,713
National City Corp. ........................................ United States 424,181 10,047,787
Sovereign Bancorp Inc. ..................................... United States 3,000,800 22,365,338
TCF Financial Corp. ........................................ United States 1,078,700 26,832,663
U.S. Bancorp................................................ United States 1,229,686 29,281,898
--------------
187,722,380
--------------
BEVERAGES & TOBACCO 2.4%
Altadis SA, A............................................... Spain 665,257 9,510,369
Brown-Forman Corp., A....................................... United States 18,700 1,008,631
Brown-Forman Corp., B....................................... United States 172,300 9,864,175
Gallaher Group PLC.......................................... United Kingdom 3,921,100 16,697,801
Gallaher Group PLC, ADR..................................... United Kingdom 164,000 2,521,500
Genesee Corp., A............................................ United States 1,000 20,000
Mikuni Coca-Cola Bottling Co. .............................. Japan 321,500 5,631,795
Pepsi Bottling Group Inc. .................................. United States 1,646,500 27,270,156
UST Inc. ................................................... United States 773,850 19,491,347
--------------
92,015,774
--------------
BROADCASTING & PUBLISHING 6.4%
*AMFM Inc. ................................................. United States 199,530 15,613,222
*AT&T Corp. - Liberty Media Group, A........................ United States 341,912 19,403,506
Daily Mail & General Trust PLC, A........................... United Kingdom 43,951 2,955,543
Dow Jones & Co. Inc. ....................................... United States 532,600 36,216,800
*MediaOne Group Inc. ....................................... United States 699,300 53,714,981
Meredith Corp. ............................................. United States 408,700 17,037,681
NV Holdingsmig de Telegraaf................................. Netherlands 1,838,454 40,718,804
</TABLE>
17
<PAGE>
MUTUAL QUALIFIED FUND
STATEMENT OF INVESTMENTS, DECEMBER 31, 1999 (CONT.)
<TABLE>
<CAPTION>
COUNTRY SHARES VALUE
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS (CONT.)
BROADCASTING & PUBLISHING (CONT.)
Scripps Co., A.............................................. United States 1,068,200 $ 47,868,713
Washington Post Co., B...................................... United States 26,550 14,758,481
--------------
248,287,731
--------------
BUILDING MATERIALS & COMPONENTS 1.2%
*American Standard Cos. Inc. ............................... United States 423,500 19,428,062
Hussman International Inc. ................................. United States 1,039,300 15,654,456
Lennox International Inc. .................................. United States 754,400 6,931,050
*Service Experts Inc. ...................................... United States 657,600 3,822,300
--------------
45,835,868
--------------
BUSINESS & PUBLIC SERVICES 2.1%
Laidlaw Inc. ............................................... Canada 6,000 31,500
Laidlaw Inc., fgn. ......................................... Canada 884,800 4,620,126
*Republic Services Inc., A.................................. United States 2,246,200 32,289,125
Suez Lyonnaise des Eaux SA.................................. France 286,606 45,906,589
--------------
82,847,340
--------------
CHEMICALS 2.9%
Bayer AG, Br. .............................................. Germany 373,800 17,762,368
ChemFirst Inc. ............................................. United States 766,700 16,771,562
CK Witco Corp. ............................................. United States 1,412,300 18,889,512
Geon Co. ................................................... United States 495,400 16,100,500
Lyondell Chemical Co. ...................................... United States 420,000 5,355,000
Omnova Solutions Inc. ...................................... United States 1,562,600 12,110,150
Union Carbide Corp. ........................................ United States 379,150 25,308,263
--------------
112,297,355
--------------
DATA PROCESSING & REPRODUCTION 1.2%
Autodesk Inc. .............................................. United States 459,000 15,491,250
*Network Associates Inc. ................................... United States 511,200 13,642,650
*Quantum Corp-DSSG.......................................... United States 883,612 13,364,632
*Quantum Corp-HDDG.......................................... United States 864,306 5,996,123
--------------
48,494,655
--------------
ELECTRONIC COMPONENTS & INSTRUMENTS .8%
*General Instrument Corp. .................................. United States 222,000 18,870,000
Thomas & Betts Corp. ....................................... United States 160,400 5,112,750
*Varian Inc. ............................................... United States 362,600 8,158,500
--------------
32,141,250
--------------
ENERGY EQUIPMENT & SERVICES .7%
*Cooper Cameron Corp. ...................................... United States 138,800 6,792,525
*Weatherford International Inc. ............................ United States 514,605 20,552,037
--------------
27,344,562
--------------
</TABLE>
18
<PAGE>
MUTUAL QUALIFIED FUND
STATEMENT OF INVESTMENTS, DECEMBER 31, 1999 (CONT.)
<TABLE>
<CAPTION>
COUNTRY SHARES VALUE
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS (CONT.)
ENERGY SOURCES 3.4%
*Abraxas Petroleum Corp. ................................... United States 220,289 $ 206,521
Atlantic Richfield Co. ..................................... United States 317,950 27,502,675
Burlington Resources Inc. .................................. United States 471,200 15,579,050
Royal Dutch Petroleum Co., N.Y. shs......................... Netherlands 314,800 19,025,725
Shell Transport & Trading Co. PLC........................... United Kingdom 2,065,500 17,166,045
Total Fina SA, B............................................ France 384,068 51,232,266
--------------
130,712,282
--------------
FINANCIAL SERVICES 9.5%
*Ambase Corp. .............................................. United States 1,981,800 1,862,892
+Bay View Capital Corp. .................................... United States 1,100,000 15,606,250
CIT Group Inc., A........................................... United States 1,577,810 33,331,236
Commercial Federal Corp. ................................... United States 1,919,510 34,191,272
Dime Bancorp Inc. .......................................... United States 454,000 6,866,750
Finova Group Inc. .......................................... United States 1,090,200 38,702,100
Greenpoint Financial Corp. ................................. United States 1,409,600 33,566,100
Heller Financial Inc. ...................................... United States 1,737,200 34,852,575
Household International Inc. ............................... United States 1,014,573 37,792,844
+*ITLA Capital Corp. ....................................... United States 689,000 8,655,563
Lehman Brothers Holdings Inc. .............................. United States 58,800 4,979,625
*MFN Financial Corp. ....................................... United States 337,490 2,193,685
Metris Cos. Inc. ........................................... United States 969,600 34,602,600
Morgan Stanley, Dean Witter & Co. .......................... United States 41,300 5,895,575
PMI Group Inc. ............................................. United States 599,900 29,282,619
Power Corp. of Canada....................................... Canada 331,700 5,677,830
Power Financial Corp. ...................................... Canada 230,300 3,822,671
United Asset Management Corp. .............................. United States 2,011,100 37,331,044
--------------
369,213,231
--------------
FOOD & HOUSEHOLD PRODUCTS 2.3%
Associated British Foods PLC................................ United Kingdom 52,100 286,909
CBRL Group Inc. ............................................ United States 1,262,300 12,248,255
+CKE Restaurants Inc. ...................................... United States 2,592,886 15,233,205
+*Fine Host Corp. .......................................... United States 452,571 4,480,453
Seaboard Corp. ............................................. United States 10,100 1,961,925
(R)*Sunbeam Corp. .......................................... United States 4,800,554 18,092,088
U.S. Industries Inc. ....................................... United States 695,500 9,737,000
+Van Melle NV............................................... Netherlands 476,517 27,344,678
--------------
89,384,513
--------------
FOREST PRODUCTS & PAPER .2%
+*Fibermark Inc. ........................................... United States 754,400 8,864,200
--------------
HEALTH & PERSONAL CARE 7.5%
Aetna Inc. ................................................. United States 170,000 9,488,125
American Home Products Corp. ............................... United States 29,700 1,171,294
Aventis SA.................................................. France 981,474 57,013,037
Banyu Pharmaceutical Co. Ltd. .............................. Japan 615,800 9,551,725
</TABLE>
19
<PAGE>
MUTUAL QUALIFIED FUND
STATEMENT OF INVESTMENTS, DECEMBER 31, 1999 (CONT.)
<TABLE>
<CAPTION>
COUNTRY SHARES VALUE
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS (CONT.)
HEALTH & PERSONAL CARE (CONT.)
*Foundation Health Systems, A............................... United States 914,900 $ 9,091,819
*Health Management Associates Inc., A....................... United States 1,762,000 23,566,750
+*Mid Atlantic Medical Services Inc. ....................... United States 3,612,400 30,028,075
Ono Pharmaceutical Co Ltd. ................................. Japan 527,900 14,155,170
*PacifiCare Health Systems Inc. ............................ United States 711,332 37,700,596
*PSS World Medical Inc. .................................... United States 2,501,100 23,604,131
*Quorum Health Group Inc. .................................. United States 1,769,300 16,476,606
Sankyo Co. Ltd. ............................................ Japan 559,100 11,490,043
*Tenet Healthcare Corp. .................................... United States 1,883,200 44,255,200
Ventas Inc. ................................................ United States 1,025,000 4,292,187
--------------
291,884,758
--------------
INDUSTRIAL COMPONENTS 1.2%
Gencorp Inc. ............................................... United States 1,355,700 13,387,538
(R)+*Lancer Industries Inc., B.............................. United States 4 14,359,074
Mark IV Industries Inc. .................................... United States 768,600 13,594,613
*Owens-Illinois Inc. ....................................... United States 289,300 7,250,581
--------------
48,591,806
--------------
INSURANCE 3.9%
Allmerica Financial Corp. .................................. United States 523,300 29,108,562
AON Corp. .................................................. United States 122,800 4,912,000
Enhance Financial Services Group Inc. ...................... United States 564,600 9,174,750
Jefferson-Pilot Corp. ...................................... United States 7,400 505,050
Lincoln National Corp. ..................................... United States 197,000 7,880,000
MBIA Inc. .................................................. United States 407,100 21,499,969
Old Republic International Corp. ........................... United States 419,900 5,721,138
Radian Group Inc. .......................................... United States 552,300 26,372,325
ReliaStar Financial Corp. .................................. United States 193,100 7,567,106
White Mountain Insurance Group Inc. ........................ United States 141,876 17,096,058
XL Capital Ltd., A.......................................... Bermuda 440,300 22,840,562
--------------
152,677,520
--------------
LEISURE & TOURISM 2.2%
Galileo International Inc. ................................. United States 654,300 19,588,106
Hilton Hotels Corp. ........................................ United States 1,381,302 13,295,032
*Park Place Entertainment Corp. ............................ United States 2,016,600 25,207,500
*Prime Hospitality Corp. ................................... United States 1,858,400 16,377,150
Starwood Hotels & Resorts Worldwide Inc. ................... United States 454,600 10,683,100
--------------
85,150,888
--------------
MACHINERY & ENGINEERING .8%
Invensys PLC................................................ United Kingdom 5,901,473 31,759,628
--------------
MERCHANDISING 3.0%
+*Dress Barn Inc. .......................................... United States 1,288,300 21,417,988
*Federated Department Stores Inc. .......................... United States 140,300 7,093,918
J.C. Penney Co. Inc. ....................................... United States 762,300 15,198,356
</TABLE>
20
<PAGE>
MUTUAL QUALIFIED FUND
STATEMENT OF INVESTMENTS, DECEMBER 31, 1999 (CONT.)
<TABLE>
<CAPTION>
COUNTRY SHARES VALUE
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS (CONT.)
MERCHANDISING (CONT.)
May Department Stores Co. .................................. United States 305,400 $ 9,849,150
*Payless Shoesource Inc. ................................... United States 526,400 24,740,800
*Saks Inc. ................................................. United States 1,314,100 20,450,681
Sears, Roebuck & Co. ....................................... United States 562,300 17,115,006
--------------
115,865,899
--------------
METALS & MINING .7%
Allegheny Technologies Inc. ................................ United States 110,530 2,480,017
*Ucar International Inc. ................................... United States 1,406,100 25,046,156
--------------
27,526,173
--------------
MULTI-INDUSTRY 10.1%
*Alleghany Corp. ........................................... United States 108,324 20,094,102
*Berkshire-Hathaway Inc., A................................. United States 425 23,842,500
Compagnie Financiere Richemont AG, Br., A................... Switzerland 13,212 31,526,279
Crane Co. .................................................. United States 809,700 16,092,787
Harsco Corp. ............................................... United States 267,400 8,489,950
Investor AB, A.............................................. Sweden 3,551,600 50,528,348
Investor AB, B.............................................. Sweden 7,029,400 99,180,247
Kansas City Southern Industries Inc. ....................... United States 245,000 18,283,125
Lagardere SCA............................................... France 1,222,796 66,476,376
*Thermo Electron Corp. ..................................... United States 1,230,000 18,450,000
TRW Inc. ................................................... United States 501,900 26,067,431
Williams PLC................................................ United Kingdom 3,235,800 14,799,221
--------------
393,830,366
--------------
REAL ESTATE 5.0%
*Alexander's Inc. .......................................... United States 132,890 10,498,310
*Al-Zar Ltd. LP............................................. United States 59 295
*Cadillac Fairview Corp. ................................... Canada 666,735 15,355,333
*Cadillac Fairview Corp., wts., 7/31/00..................... Canada 126,360 1,302,140
*Canary Wharf Group PLC..................................... United Kingdom 22,306,672 138,251,834
+MBO Properties Inc. ....................................... United States 412,418 206,209
(R)+*S.H. Mortgage Acquisition LLC.......................... United States 387,991 872,050
(R)*Security Capital European Realty........................ United States 425,000 6,123,188
+*Wellsford Real Properties Inc. ........................... United States 2,404,348 20,436,958
--------------
193,046,317
--------------
RECREATION & OTHER CONSUMER GOODS .3%
*Gtech Holdings Corp. ...................................... United States 557,200 12,258,400
--------------
TELECOMMUNICATIONS 6.3%
BCE Inc. ................................................... Canada 715,250 64,876,573
*General Motors Corp., H.................................... United States 100,400 9,638,400
Portugal Telecom SA......................................... Portugal 1,046,000 11,467,774
Telecom Italia SpA.......................................... Italy 3,815,800 23,256,673
</TABLE>
21
<PAGE>
MUTUAL QUALIFIED FUND
STATEMENT OF INVESTMENTS, DECEMBER 31, 1999 (CONT.)
<TABLE>
<CAPTION>
COUNTRY SHARES VALUE
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS (CONT.)
TELECOMMUNICATIONS (CONT.)
Telephone & Data Systems Inc. .............................. United States 1,001,300 $ 126,163,800
U.S. West Inc. ............................................. United States 163,200 11,750,400
--------------
247,153,620
--------------
TRANSPORTATION 2.6%
Burlington Northern Santa Fe Corp. ......................... United States 407,000 9,869,750
Florida East Coast Industries Inc. ......................... United States 1,126,100 47,014,675
Railtrack Group PLC......................................... United Kingdom 2,603,138 42,700,601
--------------
99,585,026
--------------
UTILITIES ELECTRICAL & GAS 1.1%
*Citizens Utilities Co., B.................................. United States 1,802,179 25,568,415
Veba AG..................................................... Germany 349,900 17,084,617
--------------
42,653,032
--------------
TOTAL COMMON STOCKS (COST $2,579,996,652)................... 3,385,440,031
--------------
<CAPTION>
PRINCIPAL
AMOUNT**
------------
<S> <C> <C> <C>
CORPORATE BONDS AND NOTES 2.5%
Abraxas Petroleum Corp., Series A, 11.50%, 11/01/04......... United States $ 2,586,500 2,366,647
Dictaphone Corp.:
Revolver.................................................. United States 4,223,585 3,970,170
Tranche B, Term Loan...................................... United States 2,747,500 2,610,125
Eurotunnel Finance Ltd.:
Equity Note 12/31/03...................................... United Kingdom 5,745,253GBP 3,992,532
Participating Loan Note, 4/30/40.......................... United Kingdom 1,020,000GBP 692,341
Eurotunnel PLC:
12/31/18, Tier 2.......................................... United Kingdom 9,298,020GBP 10,443,499
12/31/25, Tier 3.......................................... United Kingdom 6,602,435GBP 6,028,695
12/31/50, Resettable Advance R5........................... United Kingdom 2,616,160GBP 1,416,380
Stabilization Advance S8, Tier 1.......................... United Kingdom 3,003,200GBP 1,164,840
Stabilization Advance S8, Tier 2.......................... United Kingdom 1,923,311GBP 621,656
Eurotunnel SA:
12/31/12, Tier 1 (Libor).................................. France 2,337,047EUR 1,846,956
12/31/12, Tier 1 (Pibor).................................. France 1,350,451EUR 1,067,255
12/31/18, Tier 2 (Libor).................................. France 12,837,186EUR 8,917,405
12/31/18, Tier 2 (Pibor).................................. France 3,830,475EUR 2,660,855
12/31/25, Tier 3 (Libor).................................. France 20,784,309EUR 11,613,099
12/31/25, Tier 3 (Pibor).................................. France 8,280,576EUR 4,626,719
12/31/50, Resettable Advance R4........................... France 13,236,295EUR 4,397,440
Stabilization Advance S6, Tier 1 (Pibor).................. France 1,379,124EUR 333,222
Stabilization Advance S6, Tier 2.......................... France 3,605,411EUR 725,946
Stabilization Advance S7, Tier 1 (Pibor).................. France 2,368,261EUR 572,217
MFN Financial Corp.:
Series A, 10.00%, 3/23/01................................. United States 1,402,111 1,353,037
Series B, FRN, 10.676%, 3/23/01........................... United States 2,377,108 2,305,795
</TABLE>
22
<PAGE>
MUTUAL QUALIFIED FUND
STATEMENT OF INVESTMENTS, DECEMBER 31, 1999 (CONT.)
<TABLE>
<CAPTION>
PRINCIPAL
COUNTRY AMOUNT** VALUE
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CORPORATE BONDS AND NOTES (CONT.)
RH Cement Finance PLC, 144A, 31.20%, 3/10/00 Irish Republic $ 3,050,000 $ 3,385,500
Rite Aid Corp.:
7.125%, 1/15/07........................................... United States 1,625,000 1,202,500
144A, 6.125%, 12/15/08.................................... United States 390,000 276,900
6.875%, 8/15/13........................................... United States 490,000 328,300
SFC New Holdings Inc., PIK, 13.25%, 8/15/03................. United States 7,112,000 5,120,640
Southwest Royalties Inc., B, 10.50%, 10/15/04............... United States 15,367,000 8,221,345
TFM SA de CV:
senior disc. note, zero cpn. ............................. Mexico 4,450,000 2,859,125
10.25%, 6/15/07........................................... Mexico 350,000 332,500
Tribasa Toll Road Trust I:
10.50%, 12/01/11.......................................... Mexico 171,250 68,500
144A, 10.50%, 12/01/11.................................... Mexico 1,847,703 739,081
--------------
TOTAL CORPORATE BONDS AND NOTES (COST $106,393,595)......... 96,261,222
--------------
BONDS & NOTES IN REORGANIZATION 3.7%
*Acme Metals Inc., Term Loan................................ United States 2,531,000 2,151,350
*Aiken Cnty S C Indl Rev Ref Beloit, 6.00%, 12/01/11........ United States 375,000 142,500
*Altos Hornos de Mexico SA:
cvt., 5.50%, 12/15/01..................................... Mexico 180,000 61,200
Series A, 11.375%, 4/30/02................................ Mexico 800,000 316,000
Series B, 11.875%, 4/30/04................................ Mexico 550,000 217,250
Tranche A, Term Loan...................................... United States 1,031,334 433,160
*Breed Technologies Inc.:
Bank Debt................................................. United States 25,239 14,765
Term Loan B............................................... United States 172,657 101,004
*Brunos Inc.:
Revolver.................................................. United States 2,243,400 1,323,606
Tranche A, Term Loan...................................... United States 4,150,540 2,448,819
Tranche B, Term Loan...................................... United States 3,776,260 2,227,993
*Crown Leasing, Bank Claim.................................. Japan 929,473,897JPY 629,443
*Decision One Corp.:
Revolver.................................................. United States 3,219,430 1,440,695
Tranche A, Term Loan...................................... United States 10,542,101 4,717,590
Tranche B, Term Loan...................................... United States 4,910,160 2,197,297
*Dow Corning Corp.:
9.30%, 1/27/98............................................ United States 1,835,000 2,660,750
8.55%, 3/01/01............................................ United States 1,000,000 1,350,000
9.38%, 2/01/08............................................ United States 735,000 1,058,400
8.15%, 10/15/29........................................... United States 5,150,000 6,952,500
Bank Debt................................................. United States 1,801,364 2,476,875
Bank Debt #1.............................................. United States 2,850,000 3,918,750
Bank Claim................................................ United States 7,437,830 10,227,017
*Harnischfeger Industries Inc.:
8.90%, 3/01/22............................................ United States 3,280,000 1,246,400
8.70%, 6/15/22............................................ United States 2,265,000 860,700
7.25%, 12/15/25........................................... United States 5,885,000 2,236,300
6.875%, 2/15/27........................................... United States 3,185,000 1,210,300
</TABLE>
23
<PAGE>
MUTUAL QUALIFIED FUND
STATEMENT OF INVESTMENTS, DECEMBER 31, 1999 (CONT.)
<TABLE>
<CAPTION>
PRINCIPAL
COUNTRY AMOUNT** VALUE
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
BONDS & NOTES IN REORGANIZATION (CONT.)
*Integrated Health Services Inc.:
Revolver.................................................. United States $ 4,121,000 $ 1,895,660
Tranche B, Term Loan...................................... United States 5,213,611 2,398,261
Tranche C, Term Loan...................................... United States 3,595,408 1,653,888
*Koninklijke Ned Vlieg Fokker NV, Trade Claim............... Netherlands 5,699,306EUR 1,663,947
*Loewen Group., Series 5, 6.10%, 10/01/02................... Canada 3,030,000CAD 1,005,879
*Loewen Group International Inc.:
Revolver.................................................. United States 1,429,112 757,429
144A, 6.70%, 10/01/99..................................... Canada 7,920,000 3,880,800
Series 3, 7.50%, 4/15/01.................................. Canada 2,595,000 1,271,550
Series 3, 7.75%, 10/15/01................................. Canada 2,100,000 1,029,000
Series 2, 8.25%, 4/15/03.................................. Canada 1,925,000 943,250
Series 6, 7.20%, 6/01/03.................................. Canada 14,865,000 7,432,500
Series 4, 8.25%, 10/15/03................................. Canada 3,150,000 1,543,500
Series 7, 7.60%, 6/1/08................................... Canada 11,225,000 5,612,500
*Mariner Post-acute Network Inc.:
Revolver.................................................. United States 765,000 244,800
Tranche A, Term Loan...................................... United States 1,121,434 358,859
Tranche B, Term Loan...................................... United States 977,160 312,691
Tranche C, Term Loan...................................... United States 497,128 159,081
*Nippon Credit Bank Ltd., Bank Claim........................ Japan 473,135,325JPY 739,825
*Nippon Total Finance, Bank Claim........................... Japan 479,670,951JPY 279,240
*Paging Network Inc., Revolver A............................ United States 5,099,000 4,334,150
*Philip Services Corp.:
Revolver Canadian Operating, CAD Tranche.................. Canada 439,400 175,760
Revolver Tranche 1........................................ United States 3,349,789 1,339,916
Revolver Tranche 2........................................ United States 3,384,242 1,353,697
Revolver Tranche 3........................................ United States 1,555,775 622,310
*Port Seattle Wash Rev Ref-Beloit Proj., 6.00%, 12/01/17.... United States 200,000 76,000
*Pratama Datakom Asia BV:
144A, 12.75%, 7/15/05..................................... Indonesia 6,855,000 1,233,900
Reg S, 12.75%, 7/15/05.................................... Indonesia 1,520,000 273,600
*Southeast Banking Corp.:
zero coupon, 12/18/96..................................... United States 2,000,000 535,000
4.75%, 10/15/97........................................... United States 2,200,000 539,000
zero coupon, 11/12/97..................................... United States 750,000 200,625
10.50%, 4/11/01........................................... United States 3,875,000 536,145
*United Companies Financial Corp., Revolver................. United States 24,682,800 19,746,240
*Vencor Inc.
9.875%, 5/01/05........................................... United States 14,540,000 3,017,050
Revolver.................................................. United States 2,680,825 1,755,941
Term Loan A............................................... United States 10,977,974 7,190,573
Term Loan B............................................... United States 6,613,161 4,331,620
Tranche A, Term Loan 3/07/00.............................. United States 1,760,179 1,742,577
Tranche B, Term Loan 3/07/00.............................. United States 600,000 594,000
</TABLE>
24
<PAGE>
MUTUAL QUALIFIED FUND
STATEMENT OF INVESTMENTS, DECEMBER 31, 1999 (CONT.)
<TABLE>
<CAPTION>
PRINCIPAL
COUNTRY AMOUNT** VALUE
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
BONDS & NOTES IN REORGANIZATION (CONT.)
*Ventas Inc.:
Tranche A, Bridge Loan.................................... United States $ 2,324,695 $ 2,103,849
Tranche B, Revolver....................................... United States 2,175,284 1,968,632
Tranche C, Term Loan A.................................... United States 2,251,105 2,037,250
Tranche D, Term Loan B.................................... United States 1,597,005 1,477,230
--------------
TOTAL BONDS & NOTES IN REORGANIZATION (COST $137,829,094)... 142,988,389
--------------
COMPANIES IN LIQUIDATION (COST $97,408) .1%
*City Investing Company Liquidating Trust................... United States 1,579,485 2,023,715
--------------
GOVERNMENT AGENCIES 5.9%
Fannie Mae, 5.20% to 5.92%, with maturities to 12/07/00..... United States 115,100,000 110,987,470
Federal Home Loan Bank, 4.775% to 5.820%, with maturities to
4/12/01................................................... United States 96,050,000 94,336,490
Federal Home Loan Mortgage Corp., 5.220% to 5.635%, with
maturities to 10/01/01.................................... United States 25,500,000 24,898,355
--------------
TOTAL GOVERNMENT AGENCIES (COST $231,242,416)............... 230,222,315
--------------
TOTAL INVESTMENTS (COST $3,055,559,165) 99.1%............... 3,856,935,672
SECURITIES SOLD SHORT (3.7%)................................ (142,293,609)
NET EQUITY IN FORWARDS CONTRACTS .4%........................ 13,864,406
OTHER ASSETS, LESS LIABILITIES 4.2%......................... 163,926,444
--------------
TOTAL NET ASSETS 100.0%..................................... $3,892,432,913
==============
<CAPTION>
SECURITIES SOLD SHORT
ISSUER COUNTRY SHARES VALUE
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
*BP Amoco PLC, ADR.......................................... United Kingdom 367,700 $ 21,809,206
*Clear Channel Communications Inc. ......................... United States 187,542 16,738,124
*Dow Chemical Co. .......................................... United States 203,733 27,223,822
*Motorola Inc. ............................................. United States 127,700 18,803,825
*Nortel Networks Corp. ..................................... Canada 572,200 57,718,632
--------------
TOTAL SECURITIES SOLD SHORT (PROCEEDS $93,627,152).......... $ 142,293,609
==============
</TABLE>
25
<PAGE>
MUTUAL QUALIFIED FUND
STATEMENT OF INVESTMENTS, DECEMBER 31, 1999 (CONT.)
<TABLE>
CONTRACTS FOR DIFFERENCES VALUE AT UNREALIZED
ISSUER COUNTRY SHARES 12/31/99 LOSS
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
*BP Amoco PLC, cfd 5.18..................................
United Kingdom 285,600 $ 466,539 $ (39,284)
*BP Amoco PLC, cfd 5.47..................................
United Kingdom 112,200 1,130,577 (138,262)
*BP Amoco PLC, cfd 5.565.................................
United Kingdom 74,800 753,718 (80,993)
*BP Amoco PLC, cfd 5.65..................................
United Kingdom 216,000 2,176,511 (204,351)
*BP Amoco PLC, cfd 5.71..................................
United Kingdom 46,300 1,864,142 (538)
*BP Amoco PLC, cfd 6.23317...............................
United Kingdom 185,000 2,877,832 (487,547)
----------- ---------
TOTAL CONTRACTS FOR DIFFERENCES.......................... $ 9,269,319 $(950,975)
=========== =========
</TABLE>
CURRENCY ABBREVIATIONS:
<TABLE>
<S> <C> <C>
CAD -- Canadian Dollar
GBP -- British Pound
EUR -- European Unit
JPY -- Japanese Yen
</TABLE>
*Non-income producing.
**Securities denominated in U.S. dollars unless otherwise indicated.
(R)Restricted securities (see note 6).
+Affiliated issuers (see note 7).
See Notes to Financial Statements.
26
<PAGE>
MUTUAL QUALIFIED FUND
Financial Statements
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1999
<TABLE>
<S> <C> <C>
Assets:
Investments in securities, at value:
Unaffiliated issuers (cost $2,897,697,710)................ $3,689,430,969
Controlled affiliates (cost $408,673)..................... 872,050
Non controlled affiliates (cost $157,452,782)............. 166,632,653 $3,856,935,672
--------------
Cash....................................................... 18,722,545
Receivables:
Investment securities sold................................ 29,344,269
Capital shares sold....................................... 3,070,432
Dividends and interest.................................... 9,613,524
From affiliates........................................... 197,432
Unrealized gain on forward exchange contracts (Note 8)..... 16,946,276
Deposits with broker for securities sold short............. 155,146,350
--------------
Total assets.......................................... 4,089,976,500
--------------
Liabilities:
Payables:
Investment securities purchased........................... 35,975,276
Capital shares redeemed................................... 11,634,921
To affiliates............................................. 3,218,164
Securities sold short, at value (proceeds $93,627,152)..... 142,293,609
Unrealized loss on forward exchange contracts (Note 8)..... 3,081,870
Due to broker-variation margin............................. 805,717
Accrued expenses........................................... 534,030
--------------
Total liabilities..................................... 197,543,587
--------------
Net assets, at value........................................ $3,892,432,913
==============
Net assets consist of:
Undistributed net investment income........................ $ 7,744,479
Net unrealized appreciation................................ 765,623,481
Accumulated net realized gain.............................. 175,129,259
Capital shares............................................. 2,943,935,694
--------------
Net assets, at value........................................ $3,892,432,913
==============
</TABLE>
27
<PAGE>
MUTUAL QUALIFIED FUND
Financial Statements (continued)
STATEMENT OF ASSETS AND LIABILITIES (CONT.)
DECEMBER 31, 1999
<TABLE>
<S> <C> <C>
CLASS Z:
Net asset value and maximum offering price per share
($3,152,049,994 / 186,363,951 shares outstanding)........................... $16.91
==============
CLASS A:
Net asset value per share ($471,312,703 / 27,935,511 shares outstanding)..... $16.87
==============
Maximum offering price per share ($16.87 / 94.25%)........................... $17.90
==============
CLASS B:
Net asset value and maximum offering price per share
($4,167,953 / 248,384 shares outstanding)*.................................. $16.78
==============
CLASS C:
Net asset value per share ($264,902,263 / 15,763,690 shares outstanding)*.... $16.80
==============
Maximum offering price per share ($16.80 / 99.00%)........................... $16.97
==============
</TABLE>
*Redemption price per share is equal to net asset value less any applicable
sales charge.
See Notes to Financial Statements.
28
<PAGE>
MUTUAL QUALIFIED FUND
Financial Statements (continued)
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1999
<TABLE>
<S> <C> <C>
Investment Income:
(net of foreign taxes of $2,488,244)
Dividends.................................................. $ 51,397,043
Interest................................................... 37,431,847
------------
Total investment income............................... $ 88,828,890
------------
Expenses:
Management fees (Note 3)................................... 25,229,854
Administrative fees (Note 3)............................... 3,271,078
Distribution fees (Note 3)
Class A................................................... 1,730,002
Class B................................................... 19,523
Class C................................................... 2,901,938
Transfer agent fees (Note 3)............................... 4,612,948
Custodian fees............................................. 236,921
Reports to shareholders.................................... 690,776
Registration and filing fees............................... 80,538
Professional fees.......................................... 263,446
Directors' fees and expenses............................... 116,830
Dividends for securities sold short........................ 1,384,893
Other...................................................... 102,666
------------
Total expenses........................................ 40,641,413
Expenses waived/paid by affiliate (Note 3)............ (2,065,996)
------------
Net expenses......................................... 38,575,417
------------
Net investment income........................... 50,253,473
------------
Realized and unrealized gains:
Net realized gain from:
Investments............................................... 328,548,909
Foreign currency transactions............................. 51,506,958
Short sale transactions................................... 27,499,496
------------
Net realized gain..................................... 407,555,363
Net unrealized appreciation on:
Investments............................................... 60,076,955
Translation of assets and liabilities denominated in
foreign currencies....................................... 15,401,618
------------
Net unrealized appreciation........................... 75,478,573
------------
Net realized and unrealized gain............................ 483,033,936
------------
Net increase in net assets resulting from operations........ $533,287,409
============
</TABLE>
See Notes to Financial Statements.
29
<PAGE>
MUTUAL QUALIFIED FUND
Financial Statements (continued)
STATEMENTS OF CHANGES IN NET ASSETS
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
------------------------------------
<S> <C> <C>
Increase (decrease) in net assets:
Operations:
Net investment income..................................... $ 50,253,473 $ 113,258,587
Net realized gain from investments and foreign currency
transactions............................................ 407,555,363 440,721,475
Net unrealized appreciation (depreciation) on investments
and translation of assets and liabilities denominated in
foreign currencies...................................... 75,478,573 (569,601,471)
------------------------------------
Net increase (decrease) in net assets resulting from
operations............................................ 533,287,409 (15,621,409)
Distributions to shareholders from:
Net investment income:
Class Z.................................................. (51,709,981) (104,418,623)
Class A.................................................. (6,163,680) (12,591,220)
Class B.................................................. (40,474) --
Class C.................................................. (1,567,724) (5,201,123)
Net realized gains:
Class Z.................................................. (265,942,816) (311,180,836)
Class A.................................................. (40,759,342) (43,430,197)
Class B.................................................. (269,835) --
Class C.................................................. (23,061,319) (24,765,851)
Capital share transactions (Note 2):
Class Z.................................................. (908,520,451) 130,852,525
Class A.................................................. (114,984,297) (887,186,415)
Class B.................................................. 4,349,989 184,555,922
Class C.................................................. (67,455,539) --
------------------------------------
Net decrease in net assets.............................. (942,838,060) (1,088,987,227)
Net assets:
Beginning of year.......................................... 4,835,270,973 5,924,258,200
------------------------------------
End of year................................................ $3,892,432,913 $ 4,835,270,973
====================================
Undistributed net investment income/(Distributions in excess
of net investment income) included in net assets:
End of year................................................ $ 7,744,479 $ (6,722,046)
====================================
</TABLE>
See Notes to Financial Statements.
30
<PAGE>
MUTUAL QUALIFIED FUND
Notes to Financial Statements
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Mutual Qualified Fund (the Fund) is a separate, diversified series of Franklin
Mutual Series Fund, Inc. (the Series Fund), which is an open-end investment
company registered under the Investment Company Act of 1940. The Fund seeks
long-term capital appreciation 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. SECURITY TRANSACTIONS, INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS:
Security transactions are accounted for on trade date. Realized gains and losses
on security transactions are determined on a specific identification basis.
Certain income from foreign securities is recorded as soon as information is
available to the Fund. Interest income and estimated expenses are accrued daily.
Dividend income and distributions to shareholders are recorded on the
ex-dividend date.
Realized and unrealized gains and losses and net investment income, other than
class specific expenses, are allocated daily to each class of shares based upon
the relative proportion of net assets of each class.
31
<PAGE>
MUTUAL QUALIFIED FUND
Notes to Financial Statements (continued)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONT.)
c. SECURITY TRANSACTIONS, INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS (CONT.)
Common expenses incurred by the Series Fund are allocated among the funds
comprising the Series Fund based on the ratio of net assets of each fund to the
combined net assets. Other expenses are charged to each fund on a specific
identification basis.
d. FORWARD EXCHANGE CONTRACTS:
The Fund may enter into forward exchange contracts to hedge against foreign
exchange risks. These contracts are valued daily and the Fund's equity therein
is included in the Statement of Assets and Liabilities. Realized and unrealized
gains and losses are included in the Statement of Operations.
e. OPTION CONTRACTS:
Options purchased are recorded as investments; options written (sold) are
recorded as liabilities. When an option expires, the premium (original option
value) is realized as a gain if the option was written or as a loss if the
option was purchased. When the exercise of an option results in a cash
settlement, the difference between the premium and the settlement proceeds is
realized as a gain or loss. When securities are acquired or delivered upon
exercise of an option, the acquisition cost or sale proceeds are adjusted by the
amount of the premium. When an option is closed, the difference between the
premium and the cost to close the position is realized as a gain or loss.
f. CONTRACTS FOR DIFFERENCES:
Short contracts for differences are contracts entered into between a broker and
the Fund under which the parties agree to make payments to each other so as to
replicate the economic consequences that would apply had a short sale of the
underlying security taken place. Upon entering into short contracts for
differences, the Fund is required to pledge to the broker an amount of cash
and/or other assets equal to a certain percentage of the contract amount
("initial margin"). Subsequent payments known as "variation margin", are made or
received by the Fund periodically, depending on fluctuations in the value of the
underlying security. When the contract is closed, the Fund records a realized
gain or loss equal to the difference between the value of the contract at the
time it was opened and the value at the time it was closed. Should market
conditions move unexpectedly, the Fund may not achieve the anticipated benefits
of the contracts for difference and may realize a loss.
g. SECURITIES SOLD SHORT:
The Fund is engaged in selling securities short, which obligates the Fund to
replace a security borrowed. The Fund would incur a loss if the price of the
security increases between the date of the short sale and the date on which the
Fund replaces the borrowed security. The Fund would realize a gain if the price
of the security declines between those dates.
32
<PAGE>
MUTUAL QUALIFIED FUND
Notes to Financial Statements (continued)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONT.)
g. SECURITIES SOLD SHORT (CONT.)
The Fund is required to establish a margin account with the broker lending the
security sold short. While the short sale is outstanding, the broker retains the
proceeds of the short sale. The Fund must maintain a deposit for the broker
consisting of cash and securities having a value equal to a specified percentage
of the value of the securities sold short.
h. SECURITIES ISSUED ON A WHEN-ISSUED OR DELAYED BASIS:
The Fund may trade securities on a when-issued or delayed basis, with payment
and delivery scheduled for a future date. These transactions are subject to
market fluctuations and are subject to the risk that the value at delivery may
be more or less than the trade date price.
i. ACCOUNTING ESTIMATES:
The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of the
financial statements and the amounts of income and expense during the reporting
period. Actual results could differ from those estimates.
2. CAPITAL STOCK
The Fund offers four classes of shares: Class Z, Class A, Class B, and Class C
shares. Effective January 1, 1999, Class I and Class II shares were renamed
Class A and Class C, respectively, and a fourth class of shares, Class B was
established. The shares differ by their initial sales load, distribution fees,
voting rights on matters affecting a single class and the exchange privilege of
each class.
At December 31, 1999, there were 1.00 billion shares authorized ($0.001 par
value) of which 500 million, 200 million, 100 million and 200 million were
designated as Class Z, Class A, Class B, and Class C shares, respectively.
Transactions in the Fund's shares were as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------
1999 1998
---------------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
--------------------------------------------------------------
<S> <C> <C> <C> <C>
CLASS Z SHARES:
Shares sold......................................... 13,618,003 $ 239,936,301 24,990,204 $ 453,463,894
Shares issued on reinvestment of distributions...... 17,865,351 305,401,650 24,296,181 400,283,129
Shares redeemed..................................... (84,651,807) (1,453,858,402) (97,884,948) (1,740,933,438)
---------------------------------------------------------------------
Net decrease........................................ (53,168,453) $ (908,520,451) (48,598,563) $ (887,186,415)
=====================================================================
</TABLE>
33
<PAGE>
MUTUAL QUALIFIED FUND
Notes to Financial Statements (continued)
2. CAPITAL STOCK (CONT.)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------
1999 1998
---------------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
--------------------------------------------------------------
<S> <C> <C> <C> <C>
CLASS A SHARES:
Shares sold......................................... 6,908,914 $ 121,937,830 18,574,657 $ 343,918,754
Shares issued on reinvestment of distributions...... 2,591,171 44,224,677 3,214,074 52,672,488
Shares redeemed..................................... (16,285,897) (281,146,804) (12,017,429) (212,035,320)
---------------------------------------------------------------------
Net increase (decrease)............................. (6,785,812) $ (114,984,297) 9,771,302 $ 184,555,922
=====================================================================
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1999+
------------------------------
SHARES Amount
-----------------------
<S> <C> <C> <C> <C>
CLASS B SHARES:
Shares sold......................................... 239,303 $ 4,205,444
Shares issued on reinvestment of distributions...... 18,029 300,557
Shares redeemed..................................... (8,948) (156,012)
------------------------------
Net increase........................................ 248,384 $ 4,349,989
==============================
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------
1999 1998
---------------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
--------------------------------------------------------------
<S> <C> <C> <C> <C>
CLASS C SHARES:
Shares sold......................................... 1,917,699 $ 33,307,575 9,583,122 $ 177,957,854
Shares issued on reinvestment of distributions...... 1,326,890 22,561,396 1,662,767 27,085,606
Shares redeemed..................................... (7,206,720) (123,324,510) (4,328,390) (74,190,935)
---------------------------------------------------------------------
Net increase (decrease)............................. (3,962,131) $ (67,455,539) 6,917,499 $ 130,852,525
=====================================================================
</TABLE>
+Effective date of Class B shares was January 1, 1999.
3. TRANSACTIONS WITH AFFILIATES AND RELATED PARTIES
Certain officers of the Series Fund are also officers and/or directors of
Franklin Mutual Advisers, Inc. (Franklin Mutual) and Franklin Templeton
Services, Inc. (FT Services), the Fund's investment manager and administrative
manager, respectively. Franklin/Templeton Investor Services, Inc. (Investor
Services) and Franklin/Templeton Distributors, Inc. (Distributors) are the
Fund's transfer agent and principal underwriter, respectively.
The Fund pays an investment management fee to Franklin Mutual of 0.60% per year
of the average daily net assets of the Fund. Franklin Mutual agreed, through
June 30, 2000, to limit the expense ratio of the Fund to be no higher than
expected for the Fund's 1996 fiscal year, except that increases in expenses will
be permitted if the Series Fund's Board of Directors determines that such
expenses would have been higher had the merger between Franklin Mutual and the
Fund's former investment adviser not taken place. This expense limitation does
not include items such as
34
<PAGE>
MUTUAL QUALIFIED FUND
Notes to Financial Statements (continued)
3. TRANSACTIONS WITH AFFILIATES AND RELATED PARTIES (CONT.)
litigation expenses, interest, taxes, insurance, brokerage commissions, and
expenses of an extraordinary nature. The expense reduction is set forth in the
Statement of Operations.
The Fund pays its allocated share of an administrative fee to FT Services based
on the Series Fund's aggregate average daily net assets as follows:
<TABLE>
<CAPTION>
ANNUALIZED
FEE RATE AVERAGE DAILY NET ASSETS
- -----------------------------------------------------------------
<S> <C>
0.15% First $200 million
0.135% Over $200 million, up to and including $700 million
0.10% Over $700 million, up to and including $1.2 billion
0.075% Over $1.2 billion
</TABLE>
The Fund reimburses Distributors for costs incurred in marketing the Fund's
shares up to 0.35%, 1.00%, and 1.00% per year of the average daily net asset of
Class A, Class B, and Class C shares, respectively. Distributors received net
commissions from sales of those Fund shares, and received contingent deferred
sales charges for the period of $66,781 and $307,032, respectively.
4. INCOME TAXES
No provision has been made for income taxes because the Fund's policy is to
qualify as a regulated investment company under the Internal Revenue Code and to
distribute all of its taxable income.
At December 31, 1999, the net unrealized appreciation based on the cost of
investments for income tax purposes of $3,062,230,658 was as follows:
<TABLE>
<S> <C>
Unrealized appreciation..................................... $1,020,866,904
Unrealized depreciation..................................... (226,161,890)
--------------
Net unrealized appreciation................................. $ 794,705,014
==============
</TABLE>
Net investment income and net realized capital gains differ for financial
statement and tax purposes primarily due to differing treatments of passive
foreign investment companies, wash sales and foreign currency transactions.
35
<PAGE>
MUTUAL QUALIFIED FUND
Notes to Financial Statements (continued)
5. INVESTMENT TRANSACTIONS
Purchases and sales of securities (excluding short-term securities) for the year
ended December 31, 1999, aggregated $2,351,771,809 and $3,325,072,722
respectively.
Transactions in options written during the year ended December 31, 1999 were as
follows:
<TABLE>
<CAPTION>
NUMBER
CONTRA
------
<S> <C> <C>
Options outstanding at December 31, 1998.................... 210 $ 49,246
Options written............................................. 871 362,043
Options expired............................................. (471) (155,096)
Options terminated in closing transactions.................. (610) (256,193)
Options exercised........................................... 0 0
=========================
Options outstanding at December 31, 1999.................... 0 $ 0
-------------------------
</TABLE>
6. RESTRICTED SECURITIES
The Fund may purchase securities through a private offering that generally
cannot be sold to the public without prior registration under the Securities Act
of 1933. The costs of registering such securities are paid by the issuer.
Restricted securities held at December 31, 1999 are as follows:
<TABLE>
<CAPTION>
NUMBER OF SHARES OR ACQUISITION
PRINCIPAL AMOUNT ISSUER DATE VALUE
- ------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C>
4 Lancer Industries Inc., B................................... 8/11/89 $14,359,074
425,000 Security Capital European Realty............................ 4/08/98 6,123,188
387,991 S.H. Mortgage Acquisition LLC............................... 8/17/95 872,050
4,800,554 Sunbeam Corp. .............................................. 2/23/90 18,092,088
===========
TOTAL RESTRICTED SECURITIES (COST $21,472,718) (1.01% OF NET ASSETS).............. $39,446,400
===========
</TABLE>
7. INVESTMENT IN AFFILIATES
The Investment Company Act of 1940 defines "affiliated persons" to include any
persons, such as the Fund, that owns 5% or more of the outstanding voting
securities of another person. Investments in "affiliated persons", at December
31, 1999 were $167,504,703. For the year ended December 31, 1999, dividend
income from "affiliated persons" was $1,819,196 and net realized losses from the
disposition of "affiliated persons" were $25,108,165.
36
<PAGE>
MUTUAL QUALIFIED FUND
Notes to Financial Statements (continued)
7. INVESTMENT IN AFFILIATES (CONT.)
<TABLE>
<CAPTION>
NUMBER OF NUMBER OF
SHARES HELD GROSS GROSS SHARES HELD VALUE DIVIDEND INCOME
NAME OF ISSUER DEC. 31, 1998 ADDITIONS REDUCTIONS DEC. 31,1999 DEC. 31,1999 1/1/99-12/31/99
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
CONTROLLED AFFILIATES*
MSCW Investors II LLC...... 23,562,000 -- (23,562,000) -- ** --
S.H. Mortgage Acquisition
LLC....................... 4,999,441 -- (4,611,450) 387,991 $ 872,050 --
-------------------------------
TOTAL CONTROLLED AFFILIATES $ 872,050 $ --
===============================
NON CONTROLLED AFFILIATES
Bay View Capital Corp...... -- 1,100,000 -- 1,100,000 $ 15,606,250 --
CKE Restaurants Inc........ -- 2,678,486 (85,600) 2,592,886 15,233,205 $ 103,715
Chemfirst Inc.............. 974,000 -- (207,300) 766,700 ** 389,600
Dress Barn Inc............. 1,486,600 109,200 (307,500) 1,288,300 21,417,988 --
Fibermark Inc.............. 731,800 22,600 -- 754,400 8,864,200 --
Fine Host Corp. ........... -- 452,571 -- 452,571 4,480,453 --
ITLA Capital Corp. ........ 709,000 -- (20,000) 689,000 8,655,563 --
Lancer Industries Inc.,
B......................... 4 -- -- 4 14,359,074 --
Long Beach Financial
Corp...................... 1,553,500 133,800 (1,687,300) -- ** --
Maxicare Health Plans
Inc....................... 1,768,779 -- (1,768,779) -- ** --
MBO Properties Inc......... 412,418 -- -- 412,418 206,209 --
Mid-Atlantic Medical
Services Inc.............. 4,246,400 25,000 (659,000) 3,612,400 30,028,075 --
Van Melle NV............... 468,576 7,941 -- 476,517 27,344,678 427,047
Vencor Inc................. 6,264,400 -- (6,264,400) -- ** --
Wellsford Real Properties
Inc....................... 2,404,348 -- -- 2,404,348 20,436,958 --
Western Bancorp............ 1,093,773 300,100 (1,393,873) -- ** 898,834
-------------------------------
TOTAL NON CONTROLLED
AFFILIATES $166,632,653 $1,819,196
===============================
<CAPTION>
REALIZED
CAPITAL
NAME OF ISSUER GAIN/(LOSS)
<S> <C>
CONTROLLED AFFILIATES*
MSCW Investors II LLC...... $ 4,740,098
S.H. Mortgage Acquisition
LLC....................... (245,814)
TOTAL CONTROLLED AFFILIATES $ 4,494,284
NON CONTROLLED AFFILIATES
Bay View Capital Corp...... --
CKE Restaurants Inc........ --
Chemfirst Inc.............. $ (291,600)
Dress Barn Inc............. (2,334,117)
Fibermark Inc.............. --
Fine Host Corp. ........... --
ITLA Capital Corp. ........ 23,490
Lancer Industries Inc.,
B......................... --
Long Beach Financial
Corp...................... (3,954,121)
Maxicare Health Plans
Inc....................... (6,087,108)
MBO Properties Inc......... --
Mid-Atlantic Medical
Services Inc.............. (7,716,606)
Van Melle NV............... --
Vencor Inc................. (13,076,432)
Wellsford Real Properties
Inc....................... --
Western Bancorp............ 3,834,045
TOTAL NON CONTROLLED
AFFILIATES $(29,602,449)
</TABLE>
*Issuer in which the Fund owns 25% or more of the outstanding voting securities.
**As of December 31, 1999, no longer an affiliate.
8. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
The Fund has been a party to financial instruments with off-balance-sheet risk,
primarily forward exchange contracts, in order to minimize the impact on the
Fund from adverse changes in the relationship between the functional currency
and foreign currencies and interest rates. These instruments involve market risk
in excess of the amount recognized on the Statement of Assets and Liabilities.
Some of these risks have been minimized by offsetting contracts. Risks arise
from the possible inability of counterparties to meet the terms of their
contracts, future movement in currency values and interest rates and contract
positions that are not exact offsets. The contract amount indicates the extent
of the Fund's involvement in such contracts.
37
<PAGE>
MUTUAL QUALIFIED FUND
Notes to Financial Statements (continued)
8. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK (CONT.)
A forward exchange contract is an agreement between two parties to exchange
different currencies at a specific rate at an agreed future date. At December
31, 1999, the Fund had outstanding forward exchange contracts for the sale of
currencies as set out below. The contracts are reported in the financial
statements at the Fund's net equity, as measured by the difference between the
forward exchange rates at the reporting date and the forward exchange rates at
the day of entry into the contract.
As of December 31, 1999, the Fund had the following forward exchange contracts
outstanding:
<TABLE>
<CAPTION>
IN SETTLEMENT UNREALIZED
NGE FOR DATE Gain/(Loss
CONTRACTS TO BUY: -------------------------------------------------
- ------------------
<C> <S> <C> <C> <C>
5,161,032 Swiss Francs........................................ U.S.$ 3,257,418 3/10/00 U.S.$ 10,030
620,950,000 Japanese Yen........................................ 6,149,999 3/24/00 10,281
2,277,760 British Pounds...................................... 3,676,760 5/22/00 3,662
---------- ---------
U.S.$ 13,084,177 23,973
---------- ---------
<CAPTION>
CONTRACTS TO SELL:
- ------------
87,978,222 European Unit....................................... U.S.$ 92,523,414 1/19/00 3,817,718
235,792,469 Swedish Krona....................................... 29,218,398 1/19/00 1,457,929
27,600,000 British Pounds...................................... 44,895,540 1/20/00 286,596
297,010,402 Swedish Krona....................................... 35,918,411 2/17/00 881,080
40,250,000 European Unit....................................... 43,031,139 2/29/00 2,325,233
54,371,148 Swiss Francs........................................ 35,145,049 3/10/00 722,690
46,433,000 European Unit....................................... 49,871,940 3/10/00 2,879,416
355,486,602 Swedish Krona....................................... 42,659,390 3/17/00 640,951
11,750,000 British Pounds...................................... 19,315,150 3/24/00 325,067
1,632,770,775 Japanese Yen........................................ 16,290,902 3/24/00 92,618
36,079,229 European Unit....................................... 38,728,829 4/12/00 2,129,103
25,769,426 British Pounds...................................... 41,854,057 4/17/00 209,596
37,752,934 British Pounds...................................... 61,133,325 5/22/00 131,836
56,613,245 European Unit....................................... 58,448,798 5/30/00 824,282
179,000,000 Swedish Krona....................................... 21,294,314 6/15/00 17,096
18,080,047 European Unit....................................... 18,610,112 6/19/00 181,092
---------- ---------
U.S.$648,938,768 16,922,303
---------- ---------
Unrealized gain on forward exchange contracts 16,946,276
---------
<CAPTION>
CONTRACTS TO BUY:
- ------------
<C> <S> <C> <C> <C>
<C> <S> <C> <C> <C>
1,535,873 British Pounds...................................... U.S.$ 2,483,314 3/24/00 (1,072)
21,409,127 British Pounds...................................... 34,805,148 5/22/00 (212,112)
---------- ---------
U.S.$ 37,288,462 (213,184)
---------- ---------
</TABLE>
38
<PAGE>
MUTUAL QUALIFIED FUND
Notes to Financial Statements (continued)
8. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK (CONT.)
<TABLE>
<CAPTION>
IN SETTLEMENT UNREALIZED
NGE FOR DATE Gain/(Loss
CONTRACTS TO SELL: -------------------------------------------------
- ------------------
<C> <S> <C> <C> <C>
37,812,871 British Pounds...................................... U.S.$ 60,954,347 1/18/00 U.S.$ (160,721)
35,682,421 British Pounds...................................... 56,116,058 1/20/00 (1,556,230)
50,708,083 Canadian Dollars.................................... 34,604,465 1/31/00 (492,127)
19,751,798 British Pounds...................................... 31,762,866 2/17/00 (161,605)
646,699 European Unit....................................... 654,459 3/10/00 (32)
2,967,959,663 Japanese Yen........................................ 29,048,760 3/24/00 (395,576)
5,324,993 British Pounds...................................... 8,576,730 5/22/00 (27,437)
29,260,073 European Unit....................................... 29,749,878 6/19/00 (74,958)
---------- ---------
U.S.$251,467,563 (2,868,686)
---------- ---------
Unrealized loss on forward exchange contracts.................... (3,081,870)
---------
Net unrealized gain on forward exchange contracts.............. U.S.$13,864,406
---------
</TABLE>
9. CREDIT FACILITY
Certain Franklin Templeton Funds, including Mutual Qualified Fund, are
participants in a $750 million senior unsecured credit agreement for temporary
borrowing purposes. The termination date of the agreement is March 1, 2000.
Interest is calculated on the Fund's borrowings at market rates. At December 31,
1999, the Fund had not utilized this credit facility.
39
<PAGE>
REPORT OF ERNST & YOUNG LLP,
INDEPENDENT AUDITORS
To the Board of Directors of Franklin Mutual Series Fund Inc. and
Shareholders of Mutual Qualified Fund
We have audited the accompanying statement of assets and liabilities of Mutual
Qualified Fund, a portfolio of Franklin Mutual Series Fund Inc. ("Fund"),
including the statement of investments, as of December 31, 1999, the related
statement of operations for the year then ended, and the statements of changes
in net assets and the financial highlights for 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 auditing standards generally accepted
in the United States. 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, 1999, 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
Qualified Fund, a portfolio of Franklin Mutual Series Fund Inc., at December 31,
1999, the results of its operations for the year then ended, and the changes in
net assets and its financial highlights for the periods indicated therein, in
conformity with accounting principles generally accepted in the United States.
[ERNST & YOUNG LLP SIGNATURE]
Boston, Massachusetts
January 28, 2000
40
<PAGE>
FRANKLIN MUTUAL SERIES FUND, INC.
MUTUAL QUALIFIED FUND
Tax Designation
Under Section 852(b)(3)(C) of the Internal Revenue Code, the Fund hereby
designates $377,789,016 as a capital gain dividend for the fiscal year ended
December 31, 1999.
Under Section 854(b)(2) of the Internal Revenue Code, the Fund hereby designates
53.00% of the ordinary income dividends as income qualifying for the dividends
received deduction for the fiscal year ended December 31, 1999.
41
<PAGE>
ANNUAL REPORT
CHAIRMAN OF THE BOARD
Michael F. Price
OFFICERS
Peter A. Langerman
Robert L. Friedman
Jeffrey Altman
Raymond Garea
David E. Marcus
Lawrence Sondike
David J. Winters
AUDITORS
Ernst & Young LLP
200 Clarendon Street
Boston, MA 02116
INVESTMENT MANAGER
Franklin Mutual Advisers, LLC
51 John F. Kennedy Parkway
Short Hills, NJ 07078
DISTRIBUTOR
Franklin/Templeton Distributors, Inc.
1-800/DIAL BEN(R)
www.franklintempleton.com
SHAREHOLDER SERVICES
1-800/632-2301 - (Class A, B, & C)
1-800/448-FUND - (Class Z)
This report must be preceded or accompanied by the current Mutual Qualified Fund
prospectus, which contains more complete information including risk factors,
charges and expenses.
To ensure the highest quality of service, telephone calls to or from our service
departments may be monitored, recorded and accessed. These calls can be
determined by the presence of a regular beeping tone.
475 A99 02/00
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