ANNUAL REPORT
[M GRAPHIC]
MUTUAL BEACON FUND
[M GRAPHIC]
DECEMBER 31, 1999
[FRANKLIN TEMPLETON LOGO]
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Thank you for investing with Franklin Templeton. We encourage our investors to
maintain a long-term perspective and remember that all securities markets move
both up and down, as do mutual fund share prices. We appreciate your past
support and look forward to serving your investment needs in the years ahead.
[PHOTO OF LAWRENCE SONDIKE]
LAWRENCE SONDIKE
Portfolio Managers, Mutual Beacon Fund
[PHOTO OF DAVID J. WINTERS]
DAVID J. WINTERS
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 Beacon Fund seeks capital appreciation, with income as
a secondary objective, by investing primarily in common and preferred stocks,
bonds, and convertible securities. The fund may also invest in foreign
securities.
Dear Shareholder:
We are pleased to bring you the annual report of the Mutual Beacon Fund for the
year ended December 31, 1999. During the year under review, the U.S. economy
entered a ninth consecutive year of expansion, experiencing unusually strong
growth in a low-inflation environment. Global economies generally followed suit
and, in a broad-based rally, stock markets around the world sprang back to life.
In the process, the market became increasingly two-tiered as a select group of
about 40 companies achieved over-the-top success, while the majority of publicly
traded equities languished. The share prices for a majority of companies listed
on the New York Stock Exchange (NYSE) actually declined in 1999, while a
relatively small number of white-hot
CONTENTS
Shareholder Letter ........................................................ 1
Performance Summary ....................................................... 6
Financial Highlights &
Statement of Investments .................................................. 10
Financial Statements ...................................................... 23
Notes to Financial Statements ............................................. 27
Independent Auditors' Report .............................................. 36
Tax Designation ........................................................... 37
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 14 of
this report.
FUND CATEGORY
[PYRAMID GRAPHIC]
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TOP 10 HOLDINGS
12/31/99
<TABLE>
<CAPTION>
COMPANY, % OF TOTAL
INDUSTRY, COUNTRY NET ASSETS
- -----------------------------------------------------------------------------------
<S> <C>
Telephone & Data
Systems Inc., 3.8%
Telecommunications,
United States
Canary Wharf Group PLC, 3.7%
Real Estate, United Kingdom
Investor AB, A & B, 3.5%
Multi-Industry, Sweden
Lagardere SCA, 2.8%
Multi-Industry, France
MediaOne Group Inc., 1.7%
Broadcasting & Publishing,
United States
Aventis SA, 1.6%
Health & Personal Care,
France
BCE Inc., 1.3%
Telecommunications, Canada
United Asset Management
Corp., 1.3%
Financial Services,
United States
Kinnevik AB B, 1.3%
Multi-Industry, Sweden
Railtrack Group PLC, 1.3%
Transportation,
United Kingdom
</TABLE>
technology stocks pushed most of the indexes, especially the Nasdaq Composite(R)
Index, to new highs.(1)
Within this environment, Mutual Beacon Fund - Class Z provided a 16.79% one-year
cumulative total return as shown in the Performance Summary on page 6. The
Lipper(R) Multi-Cap Value Funds Average rose 7.76%(2), the Standard & Poor's(R)
MidCap 400(R) Index appreciated 14.72%, and the S&P 500(R) Composite Index
(which is heavily weighted in technology stocks) climbed 21.04% during the same
period.(3)
We achieved our results by sticking to our longstanding value and special
situation approach. Although market participants were more interested in
positive momentum (buying what's hot) than in valuation, we continued to conduct
fundamental analysis and bought securities only when we saw substantial upside
with relatively little risk. In our opinion, risk still matters.
Several stocks contributed significantly to the fund's strong performance.
Telephone & Data Systems Inc., a wireless and wireline telephone company, almost
tripled during the 12 months under review due to rapid growth in its attractive
1. 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).
2. The Lipper Multi-Cap Value Funds Average is an equally-weighted average
consisting of 518 mutual funds (including Mutual Beacon Fund) within the
Multi-Cap Value investment objective. Returns are adjusted for the reinvestment
of capital gains distributions and income dividends.
3. Sources: Standard & Poor's Micropal.
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 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.
Indexes are unmanaged and include reinvested dividends.
One cannot invest directly in an index.
2
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businesses and the announced merger of one of its affiliates. Canary Wharf Group
PLC, the owner of a large London office development, had a successful public
offering in March 1999 and continued to perform well throughout the year. We
invested in Canary Wharf in the latter half of 1995, after the company had
emerged from bankruptcy, and have made several times our initial investment
since then. Finally, one of our larger positions, Compagnie Financiere Richemont
AG, a Swiss holding company primarily involved in luxury goods, almost doubled
in price as the market came to appreciate its strong brand names.
The year was not without disappointment, however. While some of our investments
in financial stocks, including brokers Lehman Brothers Holdings Inc. and Morgan
Stanley Dean Witter & Co. were profitable, some of our bank and finance company
positions, including Bank One Corp. and First Union Corp., fell in value.
Despite these setbacks, the fund's overall performance was good for a value fund
during a year when our style generally remained out of favor.
Looking forward, we believe domestic and foreign markets should again present us
with profitable investment opportunities in the year 2000. As a number of "new
economy" securities have risen to dizzying heights, the stocks of many solid
companies have languished, creating investment opportunities for Mutual Beacon
Fund. A number of industries feature attractive companies trading at low
multiples and big discounts to their intrinsic value, and we shall concentrate
our efforts on mining these overlooked sectors for what we believe will be
GEOGRAPHIC DISTRIBUTION
Based on Total Net Assets
12/31/99
[BAR GRAPH]
<TABLE>
<S> <C>
United States 49.9%
United Kingdom 7.5%
France 7.0%
Sweden 6.0%
Canada 3.1%
Japan 2.7%
Netherlands 2.5%
Germany 1.1%
Switzerland 1.0%
Other Countries 1.7%
Fixed-Income Securities 6.2%
Government Agencies & Other Net Assets 11.3%
</TABLE>
3
<PAGE>
TOP 10 INDUSTRIES*
12/31/99
<TABLE>
<CAPTION>
% OF TOTAL
INDUSTRY NET ASSETS
- -----------------------------------------------------------------------------------
<S> <C>
Multi-Industry 13.9%
Broadcasting &
Publishing 11.0%
Financial Services 8.7%
Telecommunications 5.9%
Real Estate 4.7%
Insurance 4.5%
Beverages & Tobacco 4.1%
Merchandising 3.9%
Automobiles 3.6%
Health & Personal Care 3.0%
</TABLE>
*Based on equity securities.
tomorrow's gems. Among the areas in which we see compelling value are
financials, where rising interest rates have sent many companies' share prices
sharply lower. Other sectors where we see opportunity include "old media" (i.e.,
newspapers, television broadcasting), auto parts suppliers, and lodging. We also
expect to profit by investing in bankrupt and distressed companies, strategies
we have long successfully employed.
While acknowledging the significant innovations brought about by technology and
the Internet, we are unwilling to pay the unprecedented market valuations these
companies now command. We realize that many once-great technology companies have
vanished over the years, and the technological winners of today may not sustain
their leadership in the years ahead. With the Nasdaq 100(R) trading at over 100
times earnings(4), the optimism built into the current prices does not allow for
error or disappointment. We will not engage in speculative investing, but shall
continue to focus on determining the true present value of a business while
attempting to purchase its securities at a meaningful discount. Of course, past
results do not guarantee future performance. As always, we are mindful of the
risks of each investment, and will continue to focus on the downside as well as
the upside potential while striving to provide shareholders with the best
risk-adjusted returns possible.
4. Source: Nasdaq. The Nasdaq 100 Index represents 100 of the largest
non-financial U.S. and non-U.S. companies listed on the National Market tier of
The Nasdaq Stock Market, and reflects Nasdaq's largest companies across major
industry groups, including computer hardware and software, telecommunications,
retail/wholesale trade and biotechnology. The Nasdaq 100 Index is a modified
capitalization-weighted index, which is designed to limit domination of the
Index by a few large stocks while generally retaining the ranking of companies.
Almost all of the companies now in the Index are over $1 billion in market
value, with $6 billion as the average (as of 12/31/99).
Indexes are unmanaged and include reinvested dividends. One cannot invest
directly in an index.
4
<PAGE>
We appreciate your participation in the Mutual Beacon Fund and welcome your
comments and suggestions, either through regular mail or by e-mail at
[email protected].
Sincerely,
/s/ Lawrence Sondike
Lawrence Sondike
Portfolio Manager
/s/ David J. Winters
David J. Winters
Portfolio Manager
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.
5
<PAGE>
CLASS Z:
No initial sales charge or Rule 12b-1 fees and are available only to certain
investors, as described in the prospectus.
CLASS A (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.
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.
<TABLE>
<CAPTION>
CLASS Z
<S> <C> <C>
One-Year Total Return 16.79%
Net Asset Value (NAV) (12/31/99) $13.84 (12/31/98) $13.12
Change in NAV +$0.72
Distributions
(1/1/99 - 12/31/99) Dividend Income $0.2652
Long-Term Capital Gain $1.1851
----------------------------------
Total $1.4503
</TABLE>
<TABLE>
<CAPTION>
CLASS A
<S> <C> <C>
One-Year Total Return 16.40%
Net Asset Value (NAV) (12/31/99) $13.81 (12/31/98) $13.09
Change in NAV +$0.72
Distributions
(1/1/99 - 12/31/99) Dividend Income $0.2100
Long-Term Capital Gain $1.1851
----------------------------------
Total $1.3951
</TABLE>
<TABLE>
<CAPTION>
CLASS B
<S> <C> <C>
One-Year Total Return 15.33%
Net Asset Value (NAV) (12/31/99) $13.69 (1/1/99) $13.09
Change in NAV +$0.60
Distributions
(1/1/99 - 12/31/99) Dividend Income $0.1927
Long-Term Capital Gain $1.1851
----------------------------------
Total $1.3778
</TABLE>
<TABLE>
<CAPTION>
CLASS C
<S> <C> <C>
One-Year Total Return 15.65%
Net Asset Value (NAV) (12/31/99) $13.75 (12/31/98) $13.04
Change in NAV +$0.71
Distributions
(1/1/99 - 12/31/99)
Dividend Income $0.1170
Long-Term Capital Gain $1.1851
----------------------------------
Total $1.3021
</TABLE>
Mutual Beacon Fund paid distributions derived from long-term capital gains of
$1.1851 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.
6
<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) 16.79% 124.33% 286.81%
Average Annual Total Return(2) 16.79% 17.54% 14.49%
Value of $10,000 Investment(3) $11,679 $22,433 $38,681
</TABLE>
<TABLE>
<CAPTION>
INCEPTION
CLASS A 1-YEAR 3-YEAR (11/1/96)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Cumulative Total Return(1) 16.40% 45.53% 54.69%
Average Annual Total Return(2) 9.69% 11.10% 12.66%
Value of $10,000 Investment(3) $10,969 $13,714 $14,581
</TABLE>
<TABLE>
<CAPTION>
INCEPTION
CLASS B 1-YEAR (1/1/99)
- --------------------------------------------------------------------------------
<S> <C> <C>
Cumulative Total Return(1) 15.33% 15.33%
Average Annual Total Return(2) 11.33% 11.33%
Value of $10,000 Investment(3) $11,133 $11,133
</TABLE>
<TABLE>
<CAPTION>
INCEPTION
CLASS C 1-YEAR 3-YEAR (11/1/96)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Cumulative Total Return(1) 15.65% 42.69% 51.58%
Average Annual Total Return(2) 13.52% 12.21% 13.69%
Value of $10,000 Investment(3) $11,352 $14,128 $15,007
</TABLE>
1. Cumulative total return represents the change in value of an investment over
the periods indicated and does not include sales charges.
2. Average annual total return represents the average annual change in value of
an investment over the periods indicated and includes the current, applicable,
maximum sales charge(s) for that class.
3. These figures represent the value of a hypothetical $10,000 investment in the
fund over the periods indicated and include the current, applicable, maximum
sales charge(s) for that class.
Since markets can go down as well as up, investment return and principal value
will fluctuate with market conditions, currency volatility and the social,
economic, and political climates of countries where the fund invests. You may
have a gain or loss when you sell your shares.
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.
Past performance does not guarantee of future results.
7
<PAGE>
AVERAGE ANNUAL TOTAL RETURN
12/31/99
<TABLE>
<CAPTION>
CLASS Z
- --------------------------------------
<S> <C>
1-Year 16.79%
5-Year 17.54%
10-Year 14.49%
</TABLE>
AVERAGE ANNUAL TOTAL RETURN
12/31/99
<TABLE>
<CAPTION>
CLASS A
- --------------------------------------
<S> <C>
1-Year 9.69%
3-Year 11.10%
Since Inception (11/1/96) 12.66%
</TABLE>
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.
This graph compares the performance of Mutual Beacon 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 BEACON FUND LIPPER GROWTH & INCOME LIPPER MULTI-CAP VALUE
DATE - 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 $ 9,187 $ 9,690 $ 9,555 $ 9,376
12/31/1991 $10,804 $12,643 $12,354 $12,051
12/31/1992 $13,280 $13,606 $13,467 $13,377
12/31/1993 $16,326 $14,977 $15,118 $15,212
12/31/1994 $17,242 $15,175 $14,995 $15,154
12/31/1995 $21,706 $20,878 $19,711 $19,922
12/31/1996 $26,305 $25,671 $23,922 $24,147
12/31/1997 $32,354 $34,235 $30,397 $30,447
12/31/1998 $33,119 $44,020 $35,200 $33,193
12/31/1999 $38,681 $53,282 $40,051 $35,769
</TABLE>
This graph compares the performance of Mutual Beacon 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 BEACON 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 $ 9,895 $10,756 $10,668 $10,664
12/31/1996 $10,038 $10,543 $10,557 $10,620
01/31/1997 $10,381 $11,202 $11,019 $11,028
02/28/1997 $10,598 $11,289 $11,077 $11,120
03/31/1997 $10,451 $10,825 $10,680 $10,759
04/30/1997 $10,512 $11,472 $11,076 $11,060
05/31/1997 $10,938 $12,170 $11,768 $11,780
06/30/1997 $11,255 $12,715 $12,222 $12,208
07/31/1997 $11,873 $13,728 $13,129 $13,099
08/31/1997 $11,747 $12,959 $12,678 $12,779
09/30/1997 $12,322 $13,669 $13,322 $13,428
10/31/1997 $11,920 $13,212 $12,851 $12,909
11/30/1997 $12,093 $13,824 $13,203 $13,187
12/31/1997 $12,301 $14,062 $13,425 $13,403
01/31/1998 $12,231 $14,218 $13,440 $13,335
02/28/1998 $12,885 $15,243 $14,364 $14,262
03/31/1998 $13,426 $16,024 $15,000 $14,873
04/30/1998 $13,601 $16,186 $15,101 $14,934
05/31/1998 $13,636 $15,907 $14,788 $14,603
06/30/1998 $13,541 $16,553 $15,035 $14,638
07/31/1998 $13,209 $16,376 $14,647 $14,130
08/31/1998 $11,397 $14,008 $12,490 $12,023
09/30/1998 $11,148 $14,906 $13,154 $12,579
10/31/1998 $11,815 $16,118 $14,120 $13,562
11/30/1998 $12,490 $17,094 $14,841 $14,178
12/31/1998 $12,550 $18,079 $15,503 $14,626
01/31/1999 $12,771 $18,835 $15,764 $14,669
02/28/1999 $12,617 $18,249 $15,280 $14,223
03/31/1999 $13,193 $18,979 $15,778 $14,595
04/30/1999 $14,228 $19,713 $16,710 $15,704
05/31/1999 $14,372 $19,248 $16,495 $15,643
06/30/1999 $14,757 $20,316 $17,209 $16,189
07/31/1999 $14,444 $19,683 $16,713 $15,712
08/31/1999 $13,916 $19,584 $16,366 $15,231
09/30/1999 $13,554 $19,048 $15,842 $14,631
10/31/1999 $13,925 $20,253 $16,558 $15,152
11/30/1999 $14,258 $20,664 $16,783 $15,253
12/31/1999 $14,581 $21,881 $17,544 $15,727
</TABLE>
Past performance does not guarantee future results.
8
<PAGE>
This graph compares the performance of Mutual Beacon 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 BEACON 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 $10,160 $10,418 $10,168 $10,029
02/28/1999 $10,031 $10,094 $ 9,856 $ 9,724
03/31/1999 $10,481 $10,498 $10,177 $ 9,979
04/30/1999 $11,291 $10,904 $10,779 $10,737
05/31/1999 $11,398 $10,647 $10,640 $10,695
06/30/1999 $11,693 $11,238 $11,100 $11,069
07/31/1999 $11,436 $10,887 $10,781 $10,742
08/31/1999 $11,015 $10,833 $10,556 $10,413
09/30/1999 $10,719 $10,536 $10,219 $10,003
10/31/1999 $11,007 $11,203 $10,680 $10,359
11/30/1999 $11,265 $11,430 $10,826 $10,429
12/31/1999 $11,133 $12,103 $11,316 $10,753
</TABLE>
This graph compares the performance of Mutual Beacon 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 BEACON 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 $10,392 $10,756 $10,668 $10,664
12/31/1996 $10,539 $10,543 $10,557 $10,620
01/31/1997 $10,891 $11,202 $11,019 $11,028
02/28/1997 $11,109 $11,289 $11,077 $11,120
03/31/1997 $10,947 $10,825 $10,680 $10,759
04/30/1997 $11,012 $11,472 $11,076 $11,060
05/31/1997 $11,450 $12,170 $11,768 $11,780
06/30/1997 $11,775 $12,715 $12,222 $12,208
07/31/1997 $12,411 $13,728 $13,129 $13,099
08/31/1997 $12,280 $12,959 $12,678 $12,779
09/30/1997 $12,874 $13,669 $13,322 $13,428
10/31/1997 $12,453 $13,212 $12,851 $12,909
11/30/1997 $12,619 $13,824 $13,203 $13,187
12/31/1997 $12,824 $14,062 $13,425 $13,403
01/31/1998 $12,742 $14,218 $13,440 $13,335
02/28/1998 $13,428 $15,243 $14,364 $14,262
03/31/1998 $13,985 $16,024 $15,000 $14,873
04/30/1998 $14,150 $16,186 $15,101 $14,934
05/31/1998 $14,187 $15,907 $14,788 $14,603
06/30/1998 $14,078 $16,553 $15,035 $14,638
07/31/1998 $13,724 $16,376 $14,647 $14,130
08/31/1998 $11,840 $14,008 $12,490 $12,023
09/30/1998 $11,579 $14,906 $13,154 $12,579
10/31/1998 $12,257 $16,118 $14,120 $13,562
11/30/1998 $12,953 $17,094 $14,841 $14,178
12/31/1998 $13,005 $18,079 $15,503 $14,626
01/31/1999 $13,225 $18,835 $15,764 $14,669
02/28/1999 $13,055 $18,249 $15,280 $14,223
03/31/1999 $13,653 $18,979 $15,778 $14,595
04/30/1999 $14,721 $19,713 $16,710 $15,704
05/31/1999 $14,850 $19,248 $16,495 $15,643
06/30/1999 $15,247 $20,316 $17,209 $16,189
07/31/1999 $14,912 $19,683 $16,713 $15,712
08/31/1999 $14,363 $19,584 $16,366 $15,231
09/30/1999 $13,976 $19,048 $15,842 $14,631
10/31/1999 $14,352 $20,253 $16,558 $15,152
11/30/1999 $14,688 $20,664 $16,783 $15,253
12/31/1999 $15,007 $21,881 $17,544 $15,727
</TABLE>
AVERAGE ANNUAL TOTAL RETURN
12/31/99
<TABLE>
<CAPTION>
CLASS B
- --------------------------------------
<S> <C>
1-Year 11.33%
Since Inception (1/1/99) 11.33%
</TABLE>
AVERAGE ANNUAL TOTAL RETURN
12/31/99
<TABLE>
<CAPTION>
CLASS C
- --------------------------------------
<S> <C>
1-Year 13.52%
3-Year 12.21%
Since Inception (11/1/96) 13.69%
</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.
9
<PAGE>
MUTUAL BEACON 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.................. $13.12 $14.12 $12.98 $11.98 $10.34
------------------------------------------------------------------
Income from investment operations:
Net investment income.............................. .22 .33 .31 .40 .29
Net realized and unrealized gains (losses)......... 1.95 (.01) 2.63 2.08 2.36
------------------------------------------------------------------
Total from investment operations.................... 2.17 .32 2.94 2.48 2.65
------------------------------------------------------------------
Less distributions from:
Net investment income.............................. (.27) (.45) (.54) (.35) (.28)
Net realized gains................................. (1.18) (.87) (1.26) (1.13) (.73)
------------------------------------------------------------------
Total distributions................................. (1.45) (1.32) (1.80) (1.48) (1.01)
------------------------------------------------------------------
Net asset value, end of year........................ $13.84 $13.12 $14.12 $12.98 $11.98
==================================================================
Total Return........................................ 16.79% 2.37% 23.03% 21.19% 25.89%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's)..................... $3,217,509 $4,030,517 $5,678,822 $4,920,388 $3,573,297
Ratios to average net assets:
Expenses(a)........................................ .79% .78% .79% .73% .75%
Expenses, excluding waiver and payments by
affiliate(a)..................................... .83% .81% .82% .75% .75%
Net investment income.............................. 1.52% 2.28% 1.92% 3.21% 2.89%
Portfolio turnover rate............................. 67.61% 65.27% 54.72% 66.87% 73.18%
(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......................................... .78% .76% .74% .73% .72%
Expenses, excluding waiver and payments by
affiliate........................................ .82% .79% .77% .75% .72%
</TABLE>
+Per share amounts for all periods prior to December 31, 1996 have been restated
to reflect a 3-for-1 stock split effective February 3, 1997.
++Based on average weighted shares outstanding.
10
<PAGE>
MUTUAL BEACON 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.......................... $13.09 $14.09 $12.98 $13.21
----------------------------------------------------
Income from investment operations:
Net investment income...................................... .17 .27 .23 .16
Net realized and unrealized gains.......................... 1.95 -- 2.65 .69
----------------------------------------------------
Total from investment operations............................ 2.12 .27 2.88 .85
----------------------------------------------------
Less distributions from:
Net investment income...................................... (.21) (.40) (.51) (.33)
Net realized gains......................................... (1.19) (.87) (1.26) (.75)
----------------------------------------------------
Total distributions......................................... (1.40) (1.27) (1.77) (1.08)
----------------------------------------------------
Net asset value, end of year................................ $13.81 $13.09 $14.09 $12.98
====================================================
Total Return*............................................... 16.40% 2.02% 22.52% 6.51%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's)............................. $760,769 $947,444 $753,519 $52,070
Ratios to average net assets:
Expenses(a)................................................ 1.14% 1.13% 1.14% 1.03%**
Expenses, excluding waiver and payments by affiliate(a).... 1.18% 1.16% 1.17% 1.13%**
Net investment income...................................... 1.18% 1.89% 1.58% 1.33%**
Portfolio turnover rate..................................... 67.61% 65.27% 54.72% 66.87%
(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................................................. 1.13% 1.11% 1.09% 1.03%**
Expenses, excluding waiver and payments by affiliate..... 1.17% 1.14% 1.12% 1.13%**
</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 3-for-1 stock split effective February 3, 1997.
+++Based on average weighted shares outstanding.
11
<PAGE>
MUTUAL BEACON 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.......................... $13.09
------
Income from investment operations:
Net investment income...................................... .05
Net realized and unrealized gains.......................... 1.93
------
Total from investment operations............................ 1.98
------
Less distributions from:
Net investment income...................................... (.19)
Net realized gains......................................... (1.19)
------
Total distributions......................................... (1.38)
------
Net asset value, end of year................................ $13.69
======
Total Return*............................................... 15.33%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's)............................. $8,956
Ratios to average net assets:
Expenses(a)................................................ 1.79%
Expenses, excluding waiver and payments by affiliate(a).... 1.84%
Net investment income...................................... .37%
Portfolio turnover rate..................................... 67.61%
(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.
12
<PAGE>
MUTUAL BEACON 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.......................... $13.04 $14.04 $12.98 $13.21
----------------------------------------------------
Income from investment operations:
Net investment income...................................... .07 .18 .14 .13
Net realized and unrealized gains.......................... 1.94 .01 2.63 .71
----------------------------------------------------
Total from investment operations............................ 2.01 .19 2.77 .84
----------------------------------------------------
Less distributions from:
Net investment income...................................... (.12) (.32) (.45) (.32)
Net realized gains......................................... (1.18) (.87) (1.26) (.75)
----------------------------------------------------
Total distributions......................................... (1.30) (1.19) (1.71) (1.07)
----------------------------------------------------
Net asset value, end of year................................ $13.75 $13.04 $14.04 $12.98
====================================================
Total Return*............................................... 15.65% 1.40% 21.65% 6.45%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's)............................. $459,807 $500,404 $362,425 $16,263
Ratios to average net assets:
Expenses(a)................................................ 1.78% 1.78% 1.79% 1.75%**
Expenses, excluding waiver and payments by affiliate(a).... 1.83% 1.81% 1.82% 1.85%**
Net investment income...................................... .52% 1.24% .92% .84%**
Portfolio turnover rate..................................... 67.61% 65.27% 54.72% 66.87%
(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% 1.74% 1.75%**
Expenses, excluding waiver and payments by affiliate..... 1.82% 1.79% 1.77% 1.85%**
</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 3-for-1 stock split effective February 3, 1997.
+++Based on average weighted shares outstanding.
See Notes to Financial Statements.
13
<PAGE>
MUTUAL BEACON FUND
STATEMENT OF INVESTMENTS, DECEMBER 31, 1999
<TABLE>
<CAPTION>
COUNTRY SHARES VALUE
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS 85.3%
AEROSPACE & MILITARY TECHNOLOGY 1.2%
B.F. Goodrich Co. .......................................... United States 1,802,616 $ 49,571,940
*Hexcel Corp. .............................................. United States 991,880 5,517,332
--------------
55,089,272
--------------
AUTOMOBILES 3.6%
Borg-Warner Automotive Inc. ................................ United States 425,800 17,244,900
Delphi Automotive Systems Corp. ............................ United States 3,433,311 54,074,648
General Motors Corp. ....................................... United States 664,100 48,271,769
*Lear Corp. ................................................ United States 1,314,000 42,048,000
--------------
161,639,317
--------------
BANKING 2.0%
Bank One Corp. ............................................. United States 1,332,320 42,717,510
Chase Manhattan Corp. ...................................... United States 460,880 35,804,615
National City Corp. ........................................ United States 435,300 10,311,169
--------------
88,833,294
--------------
BEVERAGES & TOBACCO 4.1%
Altadis SA, A............................................... Spain 896,366 12,814,253
Brown-Forman Corp., A....................................... United States 125,200 6,752,975
Brown-Forman Corp., B....................................... United States 228,580 13,086,205
Coca-Cola West Japan Co. Ltd. .............................. Japan 464,000 19,525,371
Farmer Brothers Co. ........................................ United States 93,286 14,832,474
Fraser and Neave Ltd. ...................................... Singapore 1,837,600 6,785,494
Gallaher Group PLC.......................................... United Kingdom 4,520,224 19,249,140
Gallaher Group PLC, ADR..................................... United Kingdom 177,500 2,729,062
Heineken Holding NV, A...................................... Netherlands 449,584 15,818,948
Mikuni Coca-Cola Bottling Co. .............................. Japan 1,019,900 17,865,841
Molson Inc., A.............................................. Canada 754,775 13,963,781
Molson Inc., B.............................................. Canada 22,700 423,888
Pepsi Bottling Group Inc. .................................. United States 731,200 12,110,500
Swedish Match AB............................................ Sweden 2,414,100 8,430,190
UST Inc. ................................................... United States 664,700 16,742,131
--------------
181,130,253
--------------
BROADCASTING & PUBLISHING 11.0%
*AT&T Corp.-Liberty Media Group, A.......................... United States 689,808 39,146,604
*CTV Inc. .................................................. Canada 1,294,480 20,233,244
Daily Mail & General Trust PLC, A........................... United Kingdom 126,979 8,538,869
Dow Jones & Co. Inc. ....................................... United States 586,700 39,895,600
Dun & Bradstreet Corp. ..................................... United States 603,100 17,791,450
McClatchy Co., A............................................ United States 283,500 12,261,375
*MediaOne Group Inc. ....................................... United States 1,006,200 77,288,738
Meredith Corp. ............................................. United States 427,700 17,829,744
*Modern Times Group AB, A................................... Sweden 287,550 14,200,000
*Modern Times Group AB, B................................... Sweden 641,452 31,827,483
</TABLE>
14
<PAGE>
MUTUAL BEACON FUND
STATEMENT OF INVESTMENTS, DECEMBER 31, 1999 (CONT.)
<TABLE>
<CAPTION>
COUNTRY SHARES VALUE
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS (CONT.)
BROADCASTING & PUBLISHING (CONT.)
NV Holdingsmig de Telegraaf................................. Netherlands 2,208,400 $ 48,912,514
*R. H. Donnelley Corp. ..................................... United States 1,059,172 19,991,872
Scripps Co., A.............................................. United States 1,189,400 53,299,988
True North Communications Inc. ............................. United States 717,900 32,081,156
Washington Post Co., B...................................... United States 100,622 55,933,254
--------------
489,231,891
--------------
BUILDING MATERIALS & COMPONENTS .8%
*American Standard Cos. Inc. ............................... United States 537,000 24,634,875
Armstrong World Industries Inc. ............................ United States 289,400 9,658,725
--------------
34,293,600
--------------
BUSINESS & PUBLIC SERVICES 1.1%
Suez Lyonnaise des Eaux SA.................................. France 312,252 50,014,390
--------------
CHEMICALS 1.7%
Bayer AG, Br. .............................................. Germany 545,750 25,933,152
Nippon Sanso Corp. ......................................... Japan 2,142,400 6,289,769
Union Carbide Corp. ........................................ United States 425,750 28,418,813
*W.R. Grace & Co. .......................................... United States 1,219,700 16,923,338
--------------
77,565,072
--------------
ELECTRONIC COMPONENTS & INSTRUMENTS .5%
*General Instrument Corp. .................................. United States 249,900 21,241,500
--------------
ENERGY SOURCES 2.5%
*Abraxas Petroleum Corp. ................................... United States 247,833 232,343
Atlantic Richfield Co. .................................... United States 402,100 34,781,650
Burlington Resources Inc. .................................. United States 668,800 22,112,200
Royal Dutch Petroleum Co., N.Y. shs. ....................... Netherlands 124,800 7,542,600
Shell Transport & Trading Co. PLC........................... United Kingdom 1,394,500 11,589,470
Total Fina SA, B............................................ France 277,156 36,970,875
--------------
113,229,138
--------------
FINANCIAL SERVICES 8.7%
Bear Stearns Co. Inc. ...................................... United States 1,245,772 53,256,753
CIT Group Inc., A........................................... United States 1,857,470 39,239,054
Commercial Federal Corp. ................................... United States 2,161,342 38,498,904
Dime Bancorp Inc. .......................................... United States 611,500 9,248,937
Greenpoint Financial Corp. ................................. United States 1,068,808 25,450,990
Heller Financial Inc. ...................................... United States 2,202,400 44,185,650
Household International Inc. ............................... United States 932,781 34,746,092
Lehman Brothers Holdings Inc. .............................. United States 247,700 20,977,094
Liberty Financial Cos. Inc. ................................ United States 1,728,311 39,643,134
*MFN Financial Corp. ....................................... United States 380,744 2,474,836
Morgan Stanley, Dean Witter & Co. .......................... United States 63,600 9,078,900
Power Corp. of Canada. ..................................... Canada 375,900 6,434,418
</TABLE>
15
<PAGE>
MUTUAL BEACON FUND
STATEMENT OF INVESTMENTS, DECEMBER 31, 1999 (CONT.)
<TABLE>
<CAPTION>
COUNTRY SHARES VALUE
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS (CONT.)
FINANCIAL SERVICES (CONT.)
Power Financial Corp. ...................................... Canada 259,700 $ 4,310,672
+United Asset Management Corp. ............................. United States 3,105,000 57,636,563
--------------
385,181,997
--------------
FOOD & HOUSEHOLD PRODUCTS 2.8%
Associated British Foods PLC................................ United Kingdom 1,941,933 10,694,017
CSM NV...................................................... Netherlands 652,514 13,926,605
+*Fine Host Corp. .......................................... United States 507,977 5,028,972
Kikkoman Corp. ............................................. Japan 2,544,700 16,909,050
Seaboard Corp. ............................................. United States 4,790 930,458
(R)*Sunbeam Corp. .......................................... United States 1,480,670 5,580,275
U.S. Industries Inc. ....................................... United States 1,825,000 25,550,000
+Van Melle NV............................................... Netherlands 403,144 23,134,207
Weetabix Ltd., A............................................ United Kingdom 433,025 22,744,012
--------------
124,497,596
--------------
FOREST PRODUCTS & PAPER .6%
Rayonier Inc. .............................................. United States 296,700 14,334,319
St. Joe Co. ................................................ United States 465,298 11,312,558
--------------
25,646,877
--------------
HEALTH & PERSONAL CARE 3.0%
American Home Products Corp. ............................... United States 33,900 1,336,931
Aventis SA.................................................. France 1,201,061 69,768,670
Aventis SA, ADR............................................. France 7,550 429,406
Banyu Pharmaceutical Co. Ltd. .............................. Japan 575,300 8,923,526
Ono Pharmaceutical Co. Ltd. ................................ Japan 659,200 17,675,862
Sankyo Co. Ltd. ............................................ Japan 776,600 15,959,877
Santen Pharmaceutical Co. Ltd. ............................. Japan 862,900 14,271,185
Ventas Inc. ................................................ United States 863,600 3,616,325
--------------
131,981,782
--------------
INDUSTRIAL COMPONENTS .9%
Gencorp Inc. ............................................... United States 1,147,800 11,334,525
(R)*Lancer Industries Inc., B............................... United States 1 1,436,306
Omnova Solutions Inc. ...................................... United States 1,375,100 10,657,025
*Owens-Illinois Inc. ....................................... United States 713,616 17,885,001
--------------
41,312,857
--------------
INSURANCE 4.5%
Allmerica Financial Corp. .................................. United States 592,600 32,963,375
AON Corp. .................................................. United States 368,400 14,736,000
Horace Mann Educators Corp. ................................ United States 690,700 13,554,988
Lincoln National Corp. ..................................... United States 209,900 8,396,000
MBIA Inc. .................................................. United States 760,600 40,169,188
Old Republic International Corp. ........................... United States 1,729,900 23,569,888
</TABLE>
16
<PAGE>
MUTUAL BEACON FUND
STATEMENT OF INVESTMENTS, DECEMBER 31, 1999 (CONT.)
<TABLE>
<CAPTION>
COUNTRY SHARES VALUE
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS (CONT.)
INSURANCE (CONT.)
ReliaStar Financial Corp. .................................. United States 218,400 $ 8,558,550
White Mountain Insurance Group Inc. ........................ United States 165,711 19,968,176
XL Capital Ltd., A.......................................... Bermuda 705,600 36,603,000
--------------
198,519,165
--------------
LEISURE & TOURISM 2.1%
Hilton Hotels Corp. ........................................ United States 1,784,068 17,171,654
*Park Place Entertainment Corp. ............................ United States 2,678,400 33,480,000
Starwood Hotels & Resorts Worldwide Inc. ................... United States 1,732,900 40,723,150
--------------
91,374,804
--------------
MACHINERY & ENGINEERING .8%
Invensys PLC................................................ United Kingdom 6,002,908 32,305,515
Toyoda Automatic Loom Works Ltd. ........................... Japan 230,000 4,805,500
--------------
37,111,015
--------------
MERCHANDISING 3.9%
*Federated Department Stores Inc. .......................... United States 722,600 36,536,462
*Homeland Holdings Corp. ................................... United States 59,798 151,737
J.C. Penney Co. Inc. ....................................... United States 881,300 17,570,919
May Department Stores Co. .................................. United States 347,600 11,210,100
*Neiman-Marcus Group Inc., A................................ United States 904,800 25,277,850
*Neiman-Marcus Group Inc., B................................ United States 318,900 8,590,369
*Payless Shoesource Inc. ................................... United States 818,200 38,455,400
*Saks Inc. ................................................. United States 1,449,200 22,553,175
Sears, Roebuck & Co. ....................................... United States 438,300 13,340,756
--------------
173,686,768
--------------
METALS & MINING
Central Steel & Wire Co. ................................... United States 959 680,410
--------------
MISC MATERIALS & COMMODITIES .3%
Agrium Inc. ................................................ Canada 783,400 6,068,248
Agrium Inc., fgn. .......................................... Canada 953,300 7,507,238
--------------
13,575,486
--------------
MULTI-INDUSTRY 13.9%
*Alleghany Corp. ........................................... United States 124,864 23,162,272
*Berkshire-Hathaway Inc., A................................. United States 628 35,230,800
Compagnie Financiere Richemont AG, Br., A................... Switzerland 18,155 43,321,193
Compagnie Generale D'Industrie et de Participation.......... France 520,417 34,055,275
Imasco Ltd. ................................................ Canada 1,539,600 42,538,917
Investor AB, A.............................................. Sweden 4,091,600 58,210,888
Investor AB, B.............................................. Sweden 7,046,800 99,425,750
Kansas City Southern Industries Inc. ....................... United States 539,500 40,260,188
Kinnevik AB, B.............................................. Sweden 1,816,552 56,386,799
</TABLE>
17
<PAGE>
MUTUAL BEACON FUND
STATEMENT OF INVESTMENTS, DECEMBER 31, 1999 (CONT.)
<TABLE>
<CAPTION>
COUNTRY SHARES VALUE
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS (CONT.)
MULTI-INDUSTRY (CONT.)
Lagardere SCA............................................... France 2,252,029 $ 122,429,846
TRW Inc. ................................................... United States 605,600 31,453,350
Williams PLC................................................ United Kingdom 6,680,350 30,553,179
--------------
617,028,457
--------------
REAL ESTATE 4.7%
*Alexander's Inc. .......................................... United States 46,300 3,657,700
*Al-Zar Ltd. LP............................................. United States 12 60
*Cadillac Fairview Corp. ................................... Canada 651,272 14,999,210
*Cadillac Fairview Corp., wts., 7/31/00..................... Canada 112,599 1,160,333
*Canary Wharf Group PLC..................................... United Kingdom 26,860,563 166,475,846
*HomeFed Corp. ............................................. United States 653,705 571,992
(R)+*MB Metropolis LLC...................................... United States 8,589 0
MBO Properties Inc. ........................................ United States 205,135 102,568
(R)*Security Capital European Realty........................ United States 488,750 7,041,666
+*Wellsford Real Properties Inc. ........................... United States 1,583,221 13,457,379
--------------
207,466,754
--------------
RECREATION & OTHER CONSUMER GOODS .3%
*Gtech Holdings Corp. ...................................... United States 690,700 15,195,400
--------------
TELECOMMUNICATIONS 5.9%
BCE Inc. ................................................... Canada 650,350 58,989,835
Portugal Telecom SA......................................... Portugal 1,702,575 18,666,105
Telephone & Data Systems Inc. .............................. United States 1,351,700 170,314,200
U.S. West Inc. ............................................. United States 228,500 16,452,000
--------------
264,422,140
--------------
TEXTILES & APPAREL .4%
*Nautica Enterprises Inc. .................................. United States 1,491,300 16,870,331
--------------
TRANSPORTATION 2.7%
Burlington Northern Santa Fe Corp. ......................... United States 463,800 11,247,150
Florida East Coast Industries Inc. ......................... United States 1,269,400 52,997,450
Railtrack Group PLC......................................... United Kingdom 3,414,345 56,007,243
--------------
120,251,843
--------------
UTILITIES ELECTRICAL & GAS 1.3%
*Citizens Utilities Co., B.................................. United States 2,466,782 34,997,470
Veba AG..................................................... Germany 439,500 21,459,529
--------------
56,456,999
--------------
TOTAL COMMON STOCKS (COST $2,847,434,809)................... 3,793,528,408
--------------
</TABLE>
18
<PAGE>
MUTUAL BEACON FUND
STATEMENT OF INVESTMENTS, DECEMBER 31, 1999 (CONT.)
<TABLE>
<CAPTION>
PRINCIPAL
COUNTRY AMOUNT** VALUE
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
BONDS & NOTES 2.1%
Abraxas Petroleum Corp., Series A, 11.50%, 11/01/04......... United States $ 2,909,900 $ 2,662,559
Dictaphone Corporation:
Revolver.................................................. United States 4,831,566 4,541,672
Tranche B, Term Loan...................................... United States 3,108,875 2,953,431
Eurotunnel Finance Ltd:
Equity Note 12/31/03...................................... United Kingdom 5,007,387GBP 3,479,769
Participating Loan Note, 4/30/40.......................... United Kingdom 858,000GBP 582,381
Eurotunnel PLC:
12/31/18, Tier 2.......................................... United Kingdom 13,192,620GBP 14,817,898
12/31/25, Tier 3.......................................... United Kingdom 10,314,941GBP 9,418,591
12/31/50, Resettable Advance R5........................... United Kingdom 4,158,272GBP 2,251,275
Stabilization Advance S8, Tier 1.......................... United Kingdom 3,025,319GBP 1,173,419
Stabilization Advance S8, Tier 2.......................... United Kingdom 2,274,844GBP 735,279
Eurotunnel SA:
12/31/12, Tier 1 (Libor).................................. France 1,213,605EUR 959,106
12/31/12, Tier 1 (Pibor).................................. France 122,451EUR 96,772
12/31/18, Tier 2 (Libor).................................. France 8,543,897EUR 5,935,054
12/31/18, Tier 2 (Pibor).................................. France 1,733,689EUR 1,204,314
12/31/25, Tier 3 (Libor).................................. France 11,155,220EUR 6,232,908
12/31/25, Tier 3 (Pibor).................................. France 2,995,199EUR 1,673,548
12/31/50, Resettable Advance R4........................... France 6,453,441EUR 2,144,000
Stabilization Advance S6, Tier 1 (Pibor).................. France 903,652EUR 218,339
Stabilization Advance S7, Tier 1 (Pibor).................. France 1,875,101EUR 453,060
Stabilization Advance S6, Tier 2.......................... France 2,452,449EUR 493,798
MFN Financial Corp.:
Series A, 10.00%, 3/23/01................................. United States 1,575,122 1,519,993
Series B, FRN, 10.676%, 3/23/01........................... United States 2,700,119 2,619,115
RH Cement Finance PLC, 144A, 31.20%, 3/10/00................ Irish Republic 3,450,000 3,829,500
Rite Aid Corp.:
7.125%, 1/15/07........................................... United States 1,820,000 1,346,800
144A, 6.125%, 12/15/08.................................... United States 440,000 312,400
6.875%, 8/15/13........................................... United States 550,000 368,500
SFC New Holdings Inc., PIK, 13.25%, 8/15/03................. United States 8,154,000 5,870,880
Southwest Royalties Inc., B, 10.50%, 10/15/04............... United States 17,406,000 9,312,210
TFM SA de CV:
senior disc. note, zero cpn............................... Mexico 5,000,000 3,212,500
10.25%, 6/15/07........................................... Mexico 400,000 380,000
Tribasa Toll Road Trust I:
10.50%, 12/01/11.......................................... Mexico 216,316 86,527
144A, 10.50%, 12/01/11.................................... Mexico 2,073,032 829,213
--------------
TOTAL BONDS & NOTES (COST $98,580,899)...................... 91,714,811
--------------
BONDS & NOTES IN REORGANIZATION 4.1%
*Acme Metals Inc., Term Loan................................ United States 2,872,000 2,441,200
*Aiken Cnty S C Indl Rev Ref Beloit, 6.00%, 12/01/2011...... United States 420,000 159,600
</TABLE>
19
<PAGE>
MUTUAL BEACON FUND
STATEMENT OF INVESTMENTS, DECEMBER 31, 1999 (CONT.)
<TABLE>
<CAPTION>
PRINCIPAL
COUNTRY AMOUNT** VALUE
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
BONDS & NOTES IN REORGANIZATION (CONT.)
*Altos Hornos de Mexico SA:
cvt., 5.50%, 12/15/01..................................... Mexico $ 200,000 $ 68,000
Series A, 11.375%, 4/30/02................................ Mexico 900,000 355,500
Series B, 11.875%, 4/30/04................................ Mexico 620,000 244,900
Tranche A Term Loan....................................... United States 1,158,150 486,423
*Barings BV, zero coupon, 1/22/01........................... Netherlands 25,350,000 15,970,500
*Breed Technologies Inc.:
Bank Debt................................................. United States 28,773 16,832
Term Loan B............................................... United States 196,829 115,145
*Brunos Inc.:
Revolver.................................................. United States 2,531,800 1,493,762
Tranche A, Term Loan...................................... United States 4,664,320 2,751,949
Tranche B, Term Loan...................................... United States 4,313,780 2,545,130
*Crown Leasing, Bank Claim.................................. Japan 1,048,052,471JPY 709,744
*Decision One Corp.:
Revolver.................................................. United States 3,640,471 1,629,111
Tranche A, Term Loan...................................... United States 11,922,943 5,335,517
Tranche B, Term Loan...................................... United States 5,602,564 2,507,147
*Dow Corning Corp.:
9.30%, 1/27/98............................................ United States 1,835,000 2,660,750
8.55%, 3/01/01............................................ United States 1,100,000 1,485,000
9.375%, 2/01/08........................................... United States 790,000 1,137,600
8.15%, 10/15/29........................................... United States 7,050,000 9,517,500
9.50%, 8/10/49............................................ United States 350,000 507,500
Bank Debt #1.............................................. United States 2,850,000 3,918,750
Bank Debt................................................. United States 2,070,704 2,847,218
Bank Claim................................................ United States 7,677,843 10,557,035
*Eli Jacobs, Bank Claim..................................... United States 25,305,910 253,059
*Foxmeyer Health Corp.:
Reclaimation Trade Claim.................................. United States 5,136,413 1,335,467
Reclaimation Trade Claim.................................. United States 610,315 469,942
*Harnischfeger Industries Inc.:
8.90%, 3/01/22............................................ United States 3,690,000 1,402,200
8.70%, 6/15/22............................................ United States 2,580,000 980,400
7.25%, 12/15/25........................................... United States 6,755,000 2,566,900
6.875%, 2/15/27........................................... United States 3,580,000 1,360,400
*Heilman Acquisition Corp., 9.625%, 1/31/04................. United States 15,000,000 1,500
*Integrated Health Services Inc.:
Revolver.................................................. United States 4,730,000 2,175,800
Tranche B, Term Loan...................................... United States 5,978,658 2,750,183
Tranche C, Term Loan...................................... United States 4,122,532 1,896,365
*Koninklijke Ned Vlieg Fokker NV, Trade Claim............... Netherlands 6,467,467EUR 1,888,216
*Loewen Group Inc., Series 5, 6.10%, 10/01/02............... Canada 3,415,000 1,133,688
*Loewen Group International Inc.:
Revolver.................................................. United States 1,608,590 852,553
144A, 6.70%, 10/01/99..................................... Canada 9,005,000 4,412,450
Series 3, 7.50%, 4/15/01.................................. Canada 2,955,000 1,447,950
</TABLE>
20
<PAGE>
MUTUAL BEACON FUND
STATEMENT OF INVESTMENTS, DECEMBER 31, 1999 (CONT.)
<TABLE>
<CAPTION>
PRINCIPAL
COUNTRY AMOUNT** VALUE
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
BONDS & NOTES IN REORGANIZATION (CONT.)
Series 3, 7.75%, 10/15/01................................. Canada $ 2,400,000 $ 1,176,000
Series 2, 8.25%, 4/15/03.................................. Canada 2,235,000 1,095,150
Series 6, 7.20%, 6/01/03.................................. Canada 16,805,000 8,402,500
Series 4, 8.25%, 10/15/03................................. Canada 3,475,000 1,702,750
Series 7, 7.60%, 6/01/08.................................. Canada 12,630,000 6,315,000
*Mariner Post-Acute Network Inc.:
Revolver.................................................. United States 862,000 275,840
Tranche A Term Loan....................................... United States 1,263,310 404,259
Tranche B, Term Loan...................................... United States 1,099,853 351,953
Tranche C, Term Loan...................................... United States 558,917 178,853
*Nippon Credit Bank Ltd., Bank Claim........................ Japan 533,496,043JPY 834,208
*Nippon Total Finance, Bank Claim........................... Japan 540,865,458JPY 314,865
*Paging Network Inc., Revolver A............................ United States 6,099,000 5,184,150
*Philip Services Corp.:
Revolver Canadian Operating, CAD Tranche.................. Canada 498,000 199,200
Revolver Tranche 1........................................ United States 3,791,139 1,516,456
Revolver Tranche 2........................................ United States 3,830,626 1,532,250
Revolver Tranche 3........................................ United States 1,761,086 704,434
*Port Seattle Wash Rev Ref-Beloit Proj., 6.00%, 12/01/17.... United States 225,000 85,500
*Pratama Datakom, 12.75%, 7/15/05........................... Indonesia 7,795,000 1,403,100
*Pratama Datakom Asia BV, 12.75%, 07/15/05, Reg S........... Indonesia 1,730,000 311,400
*Southeast Banking Corp.:
zero coupon, 12/18/96..................................... United States 5,270,000 1,409,725
zero coupon, 11/12/97..................................... United States 6,880,000 1,840,400
10.50%, 4/11/01........................................... United States 15,840,000 2,191,622
*United Companies Financial Corp., Revolver................. United States 27,939,000 22,351,200
*Vencor Inc.:
9.875%, 5/01/05........................................... United States 16,360,000 3,394,700
Revolver.................................................. United States 2,999,620 1,964,751
Term Loan A............................................... United States 12,295,352 8,053,456
Term Loan B............................................... United States 7,403,547 4,849,323
Tranche A, Term Loan 3/07/00.............................. United States 1,980,201 1,960,399
Tranche B, Term Loan 3/07/00.............................. United States 675,000 668,250
*Ventas Inc.:
Tranche A, Bridge Loan.................................... United States 2,613,480 2,365,199
Tranche B, Revolver....................................... United States 2,443,693 2,211,542
Tranche C, Term Loan A.................................... United States 2,531,102 2,290,647
Tranche D, Term Loan B.................................... United States 1,796,319 1,661,595
--------------
TOTAL BONDS & NOTES IN REORGANIZATION (COST $168,265,691)... 183,589,563
--------------
COMPANY IN LIQUIDATION (COST $91,757)
*City Investing Company Liquidating Trust................... United States 389,587 499,158
--------------
</TABLE>
21
<PAGE>
MUTUAL BEACON FUND
STATEMENT OF INVESTMENTS, DECEMBER 31, 1999 (CONT.)
<TABLE>
<CAPTION>
PRINCIPAL
COUNTRY AMOUNT** VALUE
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
GOVERNMENT AGENCIES 7.1%
Fannie Mae, 5.17% to 5.92%, with maturities to 12/07/00..... United States $ 167,700,000 $ 162,599,390
Federal Home Loan Bank, 1.28% to 5.82%, with maturities to
4/12/01................................................... United States 120,095,000 118,379,056
Federal Home Loan Mortgage Corp., 5.22% to 6.35%, with
maturities to 10/01/01.................................... United States 35,500,000 34,633,962
--------------
TOTAL GOVERNMENT AGENCIES (COST $316,599,872)............... 315,612,408
--------------
TOTAL INVESTMENTS (COST $3,430,973,028) 98.6%............... 4,384,944,348
SECURITIES SOLD SHORT (2.8%)................................ (122,552,623)
NET EQUITY IN FORWARD CONTRACTS .4%......................... 17,717,259
OTHER ASSETS, LESS LIABILITIES 3.8%......................... 166,932,514
--------------
TOTAL NET ASSETS 100.0%..................................... $4,447,041,498
==============
</TABLE>
<TABLE>
<CAPTION>
<CAPTION>
SECURITIES SOLD SHORT
ISSUER COUNTRY SHARES VALUE
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
*BP Amoco PLC, ADR.......................................... United Kingdom 461,000 $ 27,343,062
*Dow Chemical Co. .......................................... United States 228,517 30,535,584
*DST Systems Inc. .......................................... United States 54,700 4,174,294
*Motorola Inc. ............................................. United States 143,700 21,159,825
*Nortel Networks Corp. ..................................... Canada 390,000 39,339,858
--------------
TOTAL SECURITIES SOLD SHORT (PROCEEDS $102,511,399)......... $ 122,552,623
==============
</TABLE>
<TABLE>
CONTRACTS FOR DIFFERENCES VALUE AT UNREALIZED
ISSUER COUNTRY SHARES 12/31/99 GAIN/LOSS
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
*BP Amoco PLC, cfd. 5.18................................. United Kingdom 325,800 $ 3,282,905 $ (556,172)
*BP Amoco PLC, cfd. 5.47................................. United Kingdom 127,000 1,279,708 (156,500)
*BP Amoco PLC, cfd. 5.565................................ United Kingdom 84,500 851,459 (91,496)
*BP Amoco PLC, cfd. 5.65................................. United Kingdom 244,000 2,458,652 (230,841)
*BP Amoco PLC, cfd. 5.71................................. United Kingdom 52,200 525,990 (44,289)
*BP Amoco PLC, cfd. 6.23317.............................. United Kingdom 208,600 2,101,946 (607)
*BP Amoco PLC, cfd. 6.24797.............................. United Kingdom 156,000 1,571,925 3,277
----------- -----------
TOTAL CONTRACTS FOR DIFFERENCES.......................... $12,072,585 $(1,076,628)
=========== ===========
</TABLE>
CURRENCY ABBREVIATIONS:
EUR -- European Unit
GBP -- British Pound
JPY -- Japanese Yen
*Non-income producing.
**Securities traded in U.S. dollars unless otherwise indicated.
(R)Restricted Securities (See note 6).
+Affiliated Issuers (See note 7).
See Notes to Financial Statements.
22
<PAGE>
MUTUAL BEACON FUND
Financial Statements
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1999
<TABLE>
<S> <C> <C>
Assets:
Investments in securities, at value:
Unaffiliated issuers (cost $3,312,790,819)................ $4,285,687,227
Non controlled affiliates (cost $118,182,209)............. 99,257,121 $4,384,944,348
--------------
Cash....................................................... 31,819,954
Receivables:
Investment securities sold................................ 67,228,132
Capital shares sold....................................... 3,260,707
Dividends and interest.................................... 12,139,052
From affiliates........................................... 249,290
Unrealized gain on forward exchange contracts (Note 8)..... 24,376,145
Deposits with broker for securities sold short............. 92,469,455
--------------
Total assets.......................................... 4,616,487,083
--------------
Liabilities:
Payables:
Investment securities purchased........................... 24,345,645
Capital shares redeemed................................... 9,452,875
To affiliates............................................. 4,014,071
Securities sold short, at value (proceeds $102,511,399).... 122,552,623
Unrealized loss on forward exchange contracts (Note 8)..... 6,658,886
Due to broker-variation margin............................. 1,778,638
Accrued expenses........................................... 642,847
--------------
Total liabilities..................................... 169,445,585
--------------
Net assets, at value........................................ $4,447,041,498
==============
Net assets consist of:
Undistributed net investment income........................ $ 10,116,437
Net unrealized appreciation................................ 950,570,727
Accumulated net realized gain.............................. 160,835,377
Capital shares............................................. 3,325,518,957
--------------
Net assets, at value........................................ $4,447,041,498
==============
</TABLE>
23
<PAGE>
MUTUAL BEACON 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
($3,217,508,580 / 232,513,294 shares outstanding)........ $13.84
==============
CLASS A:
Net asset value per share ($760,769,174 / 55,099,886 shares
outstanding)............................................. $13.81
==============
Maximum offering price per share ($13.81 / 94.25%)......... $14.65
==============
CLASS B:
Net asset value and maximum offering price per share
($8,956,253 / 654,046 shares outstanding)*................ $13.69
==============
CLASS C:
Net asset value per share ($459,807,491 / 33,447,879 shares
outstanding)*............................................. $13.75
==============
Maximum offering price per share ($13.75 / 99.00%)......... $13.89
==============
</TABLE>
*Redemption price per share is equal to net asset value less any applicable
sales charge.
See Notes to Financial Statements.
24
<PAGE>
MUTUAL BEACON 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 $3,656,399)
Dividends.................................................. $ 67,414,997
Interest................................................... 42,852,145
------------
Total investment income............................... $110,267,142
------------
Expenses:
Management fees (Note 3)................................... 28,621,462
Administrative fees (Note 3)............................... 3,708,049
Distribution fees (Note 3)
Class A................................................... 3,002,532
Class B................................................... 39,923
Class C................................................... 4,710,838
Transfer agent fees (Note 3)............................... 5,015,145
Custodian fees............................................. 384,557
Reports to shareholders.................................... 736,191
Registration and filing fees............................... 128,849
Professional fees.......................................... 439,411
Directors' fees and expenses............................... 132,692
Dividends for securities sold short........................ 668,164
Other...................................................... 120,743
------------
Total expenses........................................ 47,708,556
Expenses waived/paid by affiliate (Note 3)............ (2,029,623)
------------
Net expenses...................................... 45,678,933
------------
Net investment income........................... 64,588,209
------------
Realized and unrealized gains:
Net realized gain from:
Investments............................................... 421,069,820
Foreign currency transactions............................. 55,659,417
------------
Net realized gain..................................... 476,729,237
Net unrealized appreciation on:
Investments............................................... 171,233,448
Translation of assets and liabilities denominated in
foreign currencies...................................... 23,767,532
------------
Net unrealized appreciation........................... 195,000,980
------------
Net realized and unrealized gain............................ 671,730,217
------------
Net increase in net assets resulting from operations........ $736,318,426
============
</TABLE>
See Notes to Financial Statements.
25
<PAGE>
MUTUAL BEACON 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..................................... $ 64,588,209 $ 141,765,837
Net realized gain from investments and foreign currency
transactions............................................. 476,729,237 391,064,810
Net unrealized appreciation (depreciation) on investments
and translation of assets and liabilities denominated in
foreign currencies....................................... 195,000,980 (427,971,403)
-------------------------------------
Net increase in net assets resulting from operations.... 736,318,426 104,859,244
Distributions to shareholders from:
Net investment income:
Class Z.................................................. (58,214,981) (137,278,406)
Class A.................................................. (11,231,337) (27,206,575)
Class B.................................................. (98,872) --
Class C.................................................. (3,686,185) (11,323,821)
Net realized gains:
Class Z.................................................. (261,175,450) (268,697,611)
Class A.................................................. (64,460,771) (59,012,359)
Class B.................................................. (592,992) --
Class C.................................................. (37,603,206) (31,235,735)
Capital share transactions (Note 2):
Class Z.................................................. (1,029,066,183) (1,347,918,137)
Class A.................................................. (243,947,992) 276,437,276
Class B.................................................. 9,305,143 --
Class C.................................................. (66,869,223) 184,975,294
-------------------------------------
Net decrease in net assets.............................. (1,031,323,623) (1,316,400,830)
Net assets:
Beginning of year.......................................... 5,478,365,121 6,794,765,951
-------------------------------------
End of year................................................ $ 4,447,041,498 $ 5,478,365,121
=====================================
Undistributed net investment income/(Distributions in excess
of net investment income) included in net assets:
End of year................................................ $ 10,116,437 $ (26,929,334)
=====================================
</TABLE>
See Notes to Financial Statements.
26
<PAGE>
MUTUAL BEACON FUND
Notes to Financial Statements
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Mutual Beacon Fund (the Fund) is a separate, diversified series of Franklin
Mutual Series Fund, Inc. (the Series Fund), which is an open-end investment
company registered under the Investment Company Act of 1940. The Fund seeks
long-term capital appreciation and income through a flexible policy of investing
in stocks and corporate debt securities. The following summarizes the Fund's
significant accounting policies.
a. SECURITY VALUATION:
Securities listed or traded on a recognized national exchange or NASDAQ are
valued at the latest reported sales price. Over-the-counter securities and
listed securities for which no sale is reported are valued within the range of
the latest quoted bid and asked prices. Restricted securities and securities for
which market quotations are not readily available are valued at fair value as
determined by management in accordance with procedures established by the Board
of Directors.
b. FOREIGN CURRENCY TRANSLATION:
Portfolio securities and other assets and liabilities denominated in foreign
currencies are translated into U.S. dollars based on the exchange rate of such
currencies against U.S. dollars on the date of valuation. Purchases and sales of
securities and income items denominated in foreign currencies are translated
into U.S. dollars at the exchange rate in effect on the transaction date.
The Fund does not separately report the effect of changes in foreign exchange
rates from changes in market prices on securities held. Such changes are
included in net realized and unrealized gain or loss from investments.
Realized foreign exchange gains or losses arise from sales of foreign
currencies, currency gains or losses realized between the trade and settlement
dates on securities transactions, and the difference between the recorded
amounts of dividends, interest, and foreign withholding taxes and the U.S.
dollar equivalent of the amounts actually received or paid. Net unrealized
foreign exchange gains and losses arise from changes in foreign exchange rates
on foreign currency denominated assets and liabilities other than investments in
securities held at the end of the reporting period.
c. 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.
27
<PAGE>
MUTUAL BEACON 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.
28
<PAGE>
MUTUAL BEACON 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.
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 1.55 billion Fund shares authorized ($0.001 par
value) of which 750 million, 300 million, 200 million, and 300 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....................................... 14,294,251 $ 203,778,297 29,538,240 $ 423,539,531
Shares issued on reinvestment of distributions.... 21,701,674 298,880,423 28,882,302 383,214,544
Shares redeemed................................... (110,584,648) (1,531,724,903) (153,566,842) (2,154,672,212)
-----------------------------------------------------------------------
Net decrease...................................... (74,588,723) $(1,029,066,183) (95,146,300) $(1,347,918,137)
=======================================================================
</TABLE>
29
<PAGE>
MUTUAL BEACON 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....................................... 17,264,722 $ 244,961,039 33,023,123 $ 478,615,148
Shares issued on reinvestment of distributions.... 5,191,215 71,522,375 6,172,882 81,129,419
Shares redeemed................................... (39,718,858) (560,431,406) (20,320,000) (283,307,291)
-----------------------------------------------------------------------
Net increase (decrease)........................... (17,262,921) $ (243,947,992) 18,876,005 $ 276,437,276
=======================================================================
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1999+
-------------------------------
SHARES AMOUNT
-----------------------
<S> <C> <C> <C> <C>
CLASS B SHARES:
Shares sold....................................... 635,040 $ 9,062,055
Shares issued on reinvestment of distributions.... 47,918 644,821
Shares redeemed................................... (28,912) (401,733)
-------------------------------
Net increase...................................... 654,046 $ 9,305,143
===============================
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------
1999 1998
-----------------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
---------------------------------------------------------------
<S> <C> <C> <C> <C>
CLASS C SHARES:
Shares sold....................................... 5,279,318 $ 74,740,313 17,229,777 $ 250,063,188
Shares issued on reinvestment of distributions.... 2,778,323 37,970,523 2,985,265 39,075,561
Shares redeemed................................... (12,975,678) (179,580,059) (7,656,767) (104,163,455)
-----------------------------------------------------------------------
Net increase (decrease)........................... (4,918,037) $ (66,869,223) 12,558,275 $ 184,975,294
=======================================================================
</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 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 litigation
30
<PAGE>
MUTUAL BEACON FUND
Notes to Financial Statements (continued)
3. TRANSACTIONS WITH AFFILIATES AND RELATED PARTIES (CONT.)
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 shares and received contingent deferred sales
charges for the period of $211,455 and $449,626, 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 $3,438,591,217 was as follows:
<TABLE>
<S> <C>
Unrealized appreciation..................................... $1,132,441,714
Unrealized depreciation..................................... (186,088,583)
--------------
Net unrealized appreciation................................. $ 946,353,131
==============
</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.
5. INVESTMENT TRANSACTIONS
Purchases and sales of securities (excluding short-term securities) for the year
ended December 31, 1999 aggregated $2,960,347,738 and $4,260,227,138,
respectively.
31
<PAGE>
MUTUAL BEACON FUND
Notes to Financial Statements (continued)
5. INVESTMENT TRANSACTIONS (CONT.)
Transactions in options written during the year ended December 31, 1999 were as
follows:
<TABLE>
<CAPTION>
NUMBER
OF CONTRACTS PREMIUM
------------ ---------
<S> <C> <C>
Options outstanding at December 31, 1998.................... 236 $ 55,609
Options written............................................. 376 151,867
Options expired............................................. (530) (175,022)
Options terminated in closing transactions.................. (82) (32,454)
--------------------------------
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>
1 Lancer Industries Inc., B................................... 8/11/89 $ 1,436,306
8,589 MB Metropolis LLC........................................... 12/07/94 0
488,750 Security Capital European Realty............................ 4/08/98 7,041,666
1,480,670 Sunbeam Corp. .............................................. 3/13/90 5,580,275
-----------
2/23/90
TOTAL RESTRICTED SECURITIES (COST $13,639,422) (.32% OF NET ASSETS)............... $14,058,247
===========
</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
32
<PAGE>
MUTUAL BEACON FUND
Notes to Financial Statements (continued)
7. INVESTMENT IN AFFILIATES (CONT.)
December 31, 1999 were $114,089,595. For the year ended December 31, 1999,
dividend income from "affiliated persons" was $3,939,958 and net realized gains
from disposition of "affiliated persons" were $19,135,508.
<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*
MB Metropolis LLC............ 3,043,906 -- (3,043,906) -- ** --
MB Metropolis LLC
(Restricted)................ -- 8,589 -- 8,589 -- --
MSCW Investors III, LLC...... 28,372,000 -- (28,372,000) -- ** --
-------------------------------
TOTAL CONTROLLED AFFILIATES -- --
===============================
NON CONTROLLED AFFILIATES
ASG AB, B.................... 1,466,689 -- (1,466,689) -- ** $ 771,435
Farmer Bros. Co.............. 93,286 -- -- 93,286 $ 14,832,474 265,865
Fine Host Corp............... -- 507,977 -- 507,977 5,028,972 --
Gulfmark Offshore Inc........ 642,074 -- (642,074) -- ** --
Nautica Enterprises Inc...... 1,503,300 420,100 (432,100) 1,491,300 ** --
R H Donnelly Corp............ 1,914,772 -- (855,600) 1,059,172 ** --
Resurgence Properties Inc.... 591,900 -- (591,900) -- ** --
Resurgence Properties Inc.,
Restricted.................. 900,000 -- (900,000) -- ** --
Spectra Physics AB, A........ 1,130,000 -- (1,130,000) -- ** --
United Asset Management
Corp........................ 3,105,000 -- -- 3,105,000 57,636,563 2,484,000
Van Melle NV................. 282,037 121,107 -- 403,144 23,134,207 418,658
Wellsford Real Properties
Inc......................... 1,583,221 -- -- 1,583,221 13,457,379 --
-------------------------------
TOTAL NON CONTROLLED
AFFILIATES $114,089,595 $3,939,958
===============================
<CAPTION>
REALIZED
CAPITAL
NAME OF ISSUER GAIN/(LOSS)
- ----------------------------- -----------
<S> <C>
CONTROLLED AFFILIATES*
MB Metropolis LLC............ $ (364,783)
MB Metropolis LLC
(Restricted)................ --
MSCW Investors III, LLC...... 5,707,741
-----------
TOTAL CONTROLLED AFFILIATES $ 5,342,958
===========
NON CONTROLLED AFFILIATES
ASG AB, B.................... $ 5,394,428
Farmer Bros. Co.............. --
Fine Host Corp............... --
Gulfmark Offshore Inc........ 4,088,826
Nautica Enterprises Inc...... 586,824
R H Donnelly Corp............ 626,167
Resurgence Properties Inc.... 41,433
Resurgence Properties Inc.,
Restricted.................. 63,000
Spectra Physics AB, A........ 2,991,872
United Asset Management
Corp........................ --
Van Melle NV................. --
Wellsford Real Properties
Inc......................... --
-----------
TOTAL NON CONTROLLED
AFFILIATES $13,792,550
===========
</TABLE>
*Issuer in which the Fund owns 25% or more of the outstanding voting securities.
**As of December 31, 1999, no longer an affiliate.
8. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
The Fund has been a party to financial instruments with off-balance-sheet risk,
primarily forward exchange contracts, in order to minimize the impact on the
Fund from adverse changes in the relationship between the functional currency
and foreign currencies and interest rates. These instruments involve market risk
in excess of the amount recognized on the Statement of Assets and Liabilities.
Some of these risks have been minimized by offsetting contracts. Risks arise
from the possible inability of counterparties to meet the terms of their
contracts, future movement in currency values and interest rates and contract
positions that are not exact offsets. The contract amount indicates the extent
of the Fund's involvement in such contracts.
A forward exchange contract is an agreement between two parties to exchange
different currencies at a specific rate at an agreed future date. The contracts
are reported in the financial statements at the Fund's net equity, as measured
by
33
<PAGE>
MUTUAL BEACON FUND
Notes to Financial Statements (continued)
8. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK (CONT.)
the difference between the forward exchange rates at the reporting date and the
forward exchange rates at the day of entry into the contract.
As of December 31, 1999, the Fund had the following forward exchange contracts
outstanding:
<TABLE>
<CAPTION>
IN SETTLEMENT UNREALIZED
CONTRACTS TO BUY: EXCHANGE FOR DATE GAIN/(LOSS)
- ------------------ -------------------------------------------------
<C> <S> <C> <C> <C>
16,000,000 Canadian Dollars................................... U.S.$ 11,018,904 1/31/00 U.S.$ 55,178
3,535,536 Swiss Franc........................................ 2,231,572 3/10/00 6,775
2,867,549,018 Japanese Yen....................................... 28,304,641 3/24/00 143,547
---------- ---------
U.S.$ 41,555,117 205,500
========== =========
CONTRACTS TO SELL:
- ------------------
93,214,892 European Unit...................................... U.S.$ 97,997,769 1/19/00 4,012,100
570,670,068 Swedish Krona...................................... 70,715,002 1/19/00 3,528,512
37,639,087 British Pounds..................................... 61,232,949 1/20/00 398,168
434,272,478 Swedish Krona...................................... 52,628,448 2/17/00 1,398,765
50,950,000 European Unit...................................... 54,284,952 2/29/00 2,757,849
60,839,175 European Unit...................................... 65,166,474 3/10/00 3,594,179
71,720,808 Swiss Franc........................................ 46,359,722 3/10/00 953,299
494,056,496 Swedish Krona...................................... 59,236,344 3/17/00 838,973
23,000,000 British Pounds..................................... 37,826,475 3/24/00 654,397
1,870,275,544 Japanese Yen....................................... 18,672,034 3/24/00 117,529
80,220,286 European Unit...................................... 85,978,685 4/12/00 4,601,102
25,569,247 British Pounds..................................... 41,528,931 4/17/00 207,968
14,130,011 British Pounds..................................... 22,880,727 5/22/00 49,343
59,066,115 European Unit...................................... 60,941,038 5/30/00 819,836
260,000,000 Swedish Krona...................................... 30,930,288 6/15/00 24,833
20,695,486 European Unit...................................... 21,308,731 6/19/00 213,792
---------- ---------
U.S.$827,688,569 24,170,645
========== ---------
Unrealized gain on forward exchange contracts................... 24,376,145
---------
CONTRACTS TO BUY:
- ------------
145,167 British Pounds..................................... U.S.$ 234,674 3/24/00 (58)
1,013,553,027 Japanese Yen....................................... 10,088,504 3/24/00 (33,314)
14,752,469 British Pounds..................................... 24,010,288 5/22/00 (173,133)
---------- ---------
U.S.$ 34,333,466 (206,505)
========== =========
</TABLE>
34
<PAGE>
MUTUAL BEACON FUND
Notes to Financial Statements (continued)
8. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK (CONT.)
<TABLE>
<CAPTION>
IN SETTLEMENT UNREALIZED
CONTRACTS TO SELL: EXCHANGE FOR DATE GAIN/(LOSS)
- ------------------ -------------------------------------------------
<C> <S> <C> <C> <C>
59,521,237 British Pounds..................................... U.S.$ 95,948,234 1/18/00 U.S.$ (252,991)
53,911,810 British Pounds..................................... 84,729,527 1/20/00 (2,406,304)
176,520,069 Canadian Dollars................................... 120,256,322 1/31/00 (1,918,537)
28,279,522 British Pounds..................................... 45,461,243 2/17/00 (246,432)
10,037,900 Singapore Dollars.................................. 6,024,947 3/14/00 (32,514)
1,227,903 Swedish Krona...................................... 145,116 3/17/00 (21)
13,906,126,759 Japanese Yen....................................... 136,512,840 3/24/00 (1,446,135)
202,957 British Pounds..................................... 327,542 4/17/00 (445)
325,457 British Pounds..................................... 524,214 5/22/00 (1,662)
27,466,075 Swedish Krona...................................... 3,250,000 6/15/00 (14,814)
32,000,000 European Unit...................................... 32,537,600 6/19/00 (80,048)
---------- ---------
U.S.$525,717,585 (6,399,903)
========== =========
CONTRACTS TO BUY:
- ------------
4,560,253 European Unit...................................... SEK 39,500,000 1/19/00 (52,478)
========== =========
Unrealized loss on forward exchange contracts................... (6,658,886)
---------
Net unrealized gain on forward exchange contracts............. U.S.$17,717,259
---------
</TABLE>
9. CREDIT FACILITY
Certain Franklin Templeton Funds, including Mutual Beacon 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.
35
<PAGE>
REPORT OF ERNST & YOUNG LLP,
INDEPENDENT AUDITORS
To the Board of Franklin Mutual Series Fund Inc. and
Shareholders of Mutual Beacon Fund
We have audited the accompanying statement of assets and liabilities of Mutual
Beacon Fund, a portfolio of Franklin Mutual Series Fund Inc. ("Fund"), including
the 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
Beacon 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
36
<PAGE>
FRANKLIN MUTUAL SERIES FUND, INC.
MUTUAL BEACON FUND
Tax Designation
Under Section 852(b)(3)(C) of the Internal Revenue Code, the Fund hereby
designates $440,226,546 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
57.19% of the ordinary income dividends as income qualifying for the dividends
received deduction for the fiscal year ended December 31, 1999.
37
<PAGE>
ANNUAL REPORT
CHAIRMAN OF THE BOARD
Michael F. Price
OFFICERS
Peter A. Langerman
Robert L. Friedman
Jeffery 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 Beacon 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.
476 A99 02/00
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