UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT INVESTMENT COMPANIES
Investment Company Act file number 811-05387
---------
FRANKLIN MUTUAL SERIES FUND INC.
----------------------------------
(Exact name of registrant as specified in charter)
101 JOHN F. KENNEDY PARKWAY, SHORT HILLS, NJ 07078-2705
-------------------------------------------------------
(Address of principal executive offices) (Zip code)
CRAIG S. TYLE, ONE FRANKLIN PARKWAY, SAN MATEO, CA 94403-1906
-------------------------------------------------------------
(Name and address of agent for service)
Registrant's telephone number, including area code: (210) 912-2100
--------------
Date of fiscal year end: 12/31
-------
Date of reporting period: 12/31/06
----------
ITEM 1. REPORTS TO STOCKHOLDERS.
MUTUAL SHARES FUND
[GRAPHIC OMITTED]
- --------------------------------------------------------------------------------
DECEMBER 31, 2006
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
ANNUAL REPORT AND SHAREHOLDER LETTER VALUE
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
WANT TO RECEIVE
THIS DOCUMENT
FASTER VIA EMAIL?
MUTUAL SHARES FUND Eligible shareholders can
sign up for eDelivery at
franklintempleton.com.
See inside for details.
- --------------------------------------------------------------------------------
[LOGO](R)
FRANKLIN TEMPLETON
INVESTMENTS
Franklin o Templeton o MUTUAL SERIES
Thank You For Your
Continued Participation
At Mutual Series, we are pleased so many
investors share our long-term investment
philosophy and have remained shareholders for
many years. Your ongoing support plays a
significant role in contributing to the funds'
success.
SPECIALIZED EXPERTISE Mutual Series is part of Franklin Templeton
Investments, which offers the specialized
expertise of three world-class investment
management groups -- Franklin, Templeton and
Mutual Series. Mutual Series is dedicated to a
unique style of value investing, searching
aggressively for opportunity among what we
believe are undervalued stocks, as well as
arbitrage situations and distressed securities.
Franklin is a recognized leader in fixed income
investing and also brings expertise in growth-
and value-style U.S. equity investing. Templeton
pioneered international investing and, with
offices in over 25 countries, offers investors a
truly global perspective.
TRUE DIVERSIFICATION Because these management groups work
independently and adhere to different
investment approaches, Franklin, Templeton and
Mutual Series funds typically have distinct
portfolios. That's why the funds can be used to
build truly diversified allocation plans
covering every major asset class.
RELIABILITY YOU CAN TRUST Franklin Templeton Investments seeks to
consistently provide investors with exceptional
risk-adjusted returns over the long term, as
well as the reliable, accurate and personal
service that has helped the firm become one of
the most trusted names in financial services.
- --------------------------------------------------------------------------------
MUTUAL FUNDS | RETIREMENT PLANS | 529 COLLEGE SAVINGS PLANS | SEPARATE ACCOUNTS
- --------------------------------------------------------------------------------
[GRAPHIC OMITTED]
Annual Report
Mutual Shares Fund
YOUR FUND'S GOALS AND MAIN INVESTMENTS: Mutual Shares Fund seeks capital
appreciation, with income as a secondary goal, by investing mainly in equity
securities of companies the Fund's managers believe are at prices below their
intrinsic value. The Fund may invest up to 35% of its assets in foreign
securities.
- --------------------------------------------------------------------------------
PERFORMANCE DATA REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE FUTURE
RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU MAY HAVE
A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY DIFFER FROM
FIGURES SHOWN. PLEASE VISIT FRANKLINTEMPLETON.COM OR CALL 1-800/342-5236 FOR
MOST RECENT MONTH-END PERFORMANCE.
- --------------------------------------------------------------------------------
We are pleased to bring you Mutual Shares Fund's annual report for the fiscal
year ended December 31, 2006.
PERFORMANCE OVERVIEW
Mutual Shares Fund -- Class Z posted a cumulative total return of +18.37% for
the 12 months ended December 31, 2006. The Fund outperformed its benchmark, the
Standard & Poor's 500 Index (S&P 500), which returned +15.78% for the same
period. 1 You can find the Fund's long-term performance data in the Performance
Summary beginning on page 12.
ECONOMIC AND MARKET OVERVIEW
During the 12 months ended December 31, 2006, the U.S. economy advanced at a
moderate but slowing pace. Although first quarter 2006 gross domestic product
(GDP) grew an annualized 5.6%, fourth quarter GDP growth was an estimated
annualized 3.5%. The housing market weakened during the year, while corporate
profits and consumer and government spending generally remained robust. Exports
picked up some momentum, but the trade deficit stayed in record territory. Labor
costs rose and hiring generally increased as the unemployment rate fell from
4.9% to 4.5%. 2
1. Source: Standard & Poor's Micropal. The S&P 500 consists of 500 stocks
chosen for market size, liquidity and industry group representation. Each
stock's weight in the index is proportionate to its market value. The S&P
500 is one of the most widely used benchmarks of U.S. equity performance.
The index is unmanaged and includes reinvested dividends. One cannot
invest directly in an index, nor is an index representative of the Fund's
portfolio.
2. Source: Bureau of Labor Statistics.
THE DOLLAR VALUE, NUMBER OF SHARES OR PRINCIPAL AMOUNT, AND NAMES OF ALL
PORTFOLIO HOLDINGS ARE LISTED IN THE FUND'S STATEMENT OF INVESTMENTS (SOI). THE
SOI BEGINS ON PAGE 24.
4 | Annual Report
Although energy and other commodity prices fell in the second half of the year,
they remained historically high and were a primary economic concern for much of
the period. Oil prices reached a record high of $77 per barrel in July before
declining to $61 at year-end. Oil price volatility appeared to raise the anxiety
level among consumers and businesses alike. Consumers curbed spending on large
purchases, such as homes and cars. Home prices fell in many parts of the
country, mortgage rates crept up, and borrowing against home equity flattened.
Overall, the core Consumer Price Index (CPI) rose 2.6% for the 12 months ended
December 31, 2006, which was higher than the 2.2% 10-year average. 3
The Federal Reserve Board (Fed) raised the federal funds target rate
incrementally from 4.25% at the beginning of the year to 5.25% on June 30. Since
June, however, the Fed left the rate unchanged, citing a slowing economy,
widespread cooling in the housing market and the lagging effect of prior
tightening. The Fed stated that even with lower oil prices toward period-end,
inflation risks remained.
Outside the U.S., the economy continued to grow. The economic drivers remained
consistent over the past four years: strong corporate and consumer demand,
reasonably low inflation, an improving labor market, and a relatively moderate
interest rate environment, despite recent interest rate hikes by many of the
world's central banks. However, the global economy also faced headwinds from
elevated energy prices, higher global interest rates and a weaker U.S. housing
market. These factors dampened investor confidence mid-year, when many equity
markets declined before rebounding later in the year.
Despite such challenges, global economic activity was healthy. Strong global
liquidity -- whether petrodollars, corporate cash, private equity, household
savings or central banks' reserves -- continued to search for a home. Record
global merger and acquisition activity in 2006 also reflected the abundance of
cash in the capital markets. Bond yield spreads over U.S. Treasuries narrowed,
and global equity and commodity markets rose in the latter part of the year.
GEOGRAPHIC BREAKDOWN
Based on Total Net Assets as of 12/31/06
[THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.]
U.S. 55.9%
U.K. 7.0%
France 6.1%
Japan 2.5%
Sweden 2.3%
Germany 2.2%
Belgium 1.7%
Norway 1.7%
Spain 1.6%
Netherlands 1.4%
Denmark 1.3%
Switzerland 1.1%
Italy 1.0%
Other 4.7%
Short-Term Investments & Other Net Assets 9.5%
3. Source: Bureau of Labor Statistics. Core CPI excludes food and energy
costs.
Annual Report | 5
TOP 10 SECTORS/INDUSTRIES
Based on Equity Securities as of 12/31/06
- --------------------------------------------------------------------------------
% OF TOTAL
NET ASSETS
- --------------------------------------------------------------------------------
Insurance 10.0%
- --------------------------------------------------------------------------------
Commercial Banks 9.4%
- --------------------------------------------------------------------------------
Tobacco 8.2%
- --------------------------------------------------------------------------------
Media 7.2%
- --------------------------------------------------------------------------------
Diversified Telecommunication Services 4.9%
- --------------------------------------------------------------------------------
Food Products 4.1%
- --------------------------------------------------------------------------------
Paper & Forest Products 3.7%
- --------------------------------------------------------------------------------
Industrial Conglomerates 2.9%
- --------------------------------------------------------------------------------
Oil, Gas & Consumable Fuels 2.9%
- --------------------------------------------------------------------------------
Diversified Financial Services 2.6%
- --------------------------------------------------------------------------------
U.S equity markets performed well for the year in this environment. The blue
chip stocks of the Dow Jones Industrial Average posted a 12-month total return
of +19.05%, and the broader S&P 500 returned +15.78%, while the technology-heavy
NASDAQ Composite Index had a total return of +11.27%. 4 Non-U.S. equity markets
ended 2006 on a stronger note, and all major non-U.S. regions delivered
double-digit total returns for the year. Stock market indexes in the U.S. and
most European countries reached six-year highs in the fourth quarter, and many
emerging market indexes in Asia, Europe and Latin America neared or reached
all-time highs.
INVESTMENT STRATEGY
At Mutual Series, we are committed to our distinctive value approach to
investing, which we believe can generate above-average risk-adjusted returns
over time for our shareholders. Our major investment strategy is investing in
undervalued stocks. When selecting undervalued equities, we are always attracted
to fundamentally strong companies with healthy balance sheets, high-quality
assets, substantial free cash flow and shareholder-oriented management teams and
whose stocks are trading at discounts to our assessment of the companies'
intrinsic or business value. We also look for asset rich companies whose shares
may be trading at depressed levels due to concerns over short-term earnings
disappointments, litigation, management strategy or other perceived negatives.
This strict value approach is not only intended to improve the likelihood of
upside potential, but it is also intended to reduce the risk of substantial
declines. While the vast majority of our undervalued equity investments are made
in publicly traded companies globally, we may invest occasionally in privately
held companies as well.
We complement this more traditional investment strategy with two others. One is
distressed investing, a highly specialized field that has proven quite
profitable during certain periods over the years. Distressed investing is
complex and can take many forms. The most common distressed investment the Fund
undertakes is the purchase of financially troubled or bankrupt companies' debt
at a substantial discount to face value. After the financially distressed
company is reorganized, often in bankruptcy court, the old debt is typically
replaced with new securities issued by the financially stronger company.
4. Source: Standard & Poor's Micropal. The Dow Jones Industrial Average is
price weighted based on the average market price of 30 blue chip stocks of
companies that are generally industry leaders. See footnote 1 for a
description of the S&P 500. The NASDAQ Composite Index measures all NASDAQ
domestic and international based common type stocks listed on The NASDAQ
Stock Market. The index is market value weighted and includes more than
3,000 companies.
6 | Annual Report
The other piece of our investment strategy is participating in arbitrage
situations, another highly specialized field. When companies announce proposed
mergers or takeovers, commonly referred to as "deals," the target company may
trade at a discount to the bid it ultimately accepts. One form of arbitrage
involves purchasing the target company's stock when it is trading below the
value it would receive in a deal. In keeping with our commitment to a relatively
conservative investment approach, we typically focus our arbitrage efforts on
announced deals, and eschew rumored deals or other situations we consider
relatively risky.
In addition, we will generally seek to hedge the Fund's currency exposure when
we deem it advantageous, to focus our efforts on analyzing business fundamentals
and assessing the value of company assets and liabilities.
MANAGER'S DISCUSSION
During the year under review, the largest contributor to Fund performance was
our equity portfolio, most notably our U.S. holdings. Three investments that
performed well during 2006 were Berkshire Hathaway, Reynolds American and Time
Warner.
Berkshire Hathaway is a holding company with substantial operations in insurance
and re-insurance. Our investment in Berkshire was the largest contributor to the
Fund's performance as the company's A and B shares rose 24% and 25% in 2006. In
the first half of the year, following the catastrophic 2005 hurricane season,
Berkshire's shares performed well as investors began to focus on the expected
rise in insurance risk premiums, and the company's property insurance operations
benefited from a strong pricing environment. In the year's second half, the
company's stock appreciated further as the industry's returns generally improved
following the benign Atlantic storm season. Berkshire Hathaway has been a
long-term Fund holding and, even with the consistent growth and shareholder
value created by the company, we continued to believe the company's investments
and operating businesses were collectively valued at a discount to intrinsic
value. Thus, we maintained a sizable investment in Berkshire Hathaway's shares.
TOP 10 HOLDINGS
12/31/06
- --------------------------------------------------------------------------------
COMPANY % OF TOTAL
SECTOR/INDUSTRY, COUNTRY NET ASSETS
- --------------------------------------------------------------------------------
Berkshire Hathaway Inc., A & B 3.4%
INSURANCE, U.S.
- --------------------------------------------------------------------------------
Weyerhaeuser Co. 2.2%
PAPER & FOREST PRODUCTS, U.S.
- --------------------------------------------------------------------------------
White Mountains Insurance Group Ltd. 2.0%
INSURANCE, U.S.
- --------------------------------------------------------------------------------
BellSouth Corp. 1.9%
DIVERSIFIED TELECOMMUNICATION
SERVICES, U.S.
- --------------------------------------------------------------------------------
Tyco International Ltd. 1.8%
INDUSTRIAL CONGLOMERATES, U.S.
- --------------------------------------------------------------------------------
Verizon Communications Inc. 1.8%
DIVERSIFIED TELECOMMUNICATION
SERVICES, U.S.
- --------------------------------------------------------------------------------
Orkla ASA 1.7%
FOOD PRODUCTS, NORWAY
- --------------------------------------------------------------------------------
Altadis SA 1.6%
TOBACCO, SPAIN
- --------------------------------------------------------------------------------
British American Tobacco PLC,
ord. & ADR 1.6%
TOBACCO, U.K.
- --------------------------------------------------------------------------------
Altria Group Inc. 1.6%
TOBACCO, U.S.
- --------------------------------------------------------------------------------
Annual Report | 7
Reynolds American was formed in June 2004 after Brown & Williamson, British
American Tobacco's U.S. subsidiary, merged with R.J. Reynolds Tobacco. Based in
North Carolina, Reynolds American is the second-largest cigarette manufacturer
in the U.S., with approximately 30% market share. The company's shares
appreciated during the Fund's fiscal year after the company experienced profit
growth that exceeded analysts' expectations and raised its quarterly dividend
paid to shareholders. In May 2006, Reynolds diversified its business model and
entered a higher growth category by acquiring Conwood, the second-largest
U.S.-based smokeless tobacco company. Reynolds subsequently announced that
Conwood would be accretive to earnings in the first year and enhance the
company's earnings growth profile thereafter. In addition, Reynolds' management
announced a productivity program that it expects to generate $325 million in
cost savings over five years. These events, combined with a number of favorable
court decisions and an improved outlook for U.S. tobacco litigation, contributed
to the shares' 44% return for the year under review.
Time Warner is a leading global media and entertainment company with businesses
in filmed entertainment, interactive services, television networks, cable
systems and publishing. The Fund initially established a position in Time Warner
in mid-2005 as part of an activist consortium seeking to encourage management to
realize some of the company's intrinsic value that was not being reflected in
the stock price. Time Warner implemented several of the consortium's
suggestions, including instituting a $20 billion share repurchase program,
engaging in more aggressive cost-cutting measures and reviewing the company's
portfolio for potential asset sales where private market valuations were
significantly higher than those in the public market. In 2006, Time Warner's
shares appreciated 26%, in part reflecting the company's financial and portfolio
re-engineering actions. In addition, the company experienced favorable operating
momentum driven by its cable division, which posted strong revenue-generating
unit growth largely due to increased penetration of the company's bundle of
video, data and telephony in its core Time Warner systems and newly acquired
Adelphia systems. The rise in Time Warner's share price also reflected
better-than-expected usage trends and expense reductions at America Online
(AOL), despite management's strategic move to offer AOL Internet service at no
charge.
8 | Annual Report
Although many of our investments appreciated during the year, some of the Fund's
holdings underperformed. Three positions that declined in value included Dell,
Boston Scientific and Massey Energy. We purchased each of these during the
period, and the following paragraph discusses performance since the Fund's
initial purchase through period-end.
Dell's stock fell 16% as the company experienced market share losses and lower
profitability. During the period, management announced a series of new
investments in products and services designed to improve future operational
performance. Our investment in Boston Scientific declined 34% in value after the
company won a bidding war for Guidant and its implantable cardioverter
defibrillator business generated results that fell short of expectations. Massey
Energy's shares fell 31% after the company experienced production shortfalls and
spot prices for coal weakened. Recently, management came under significant
pressure, and shareholders elected two independent members to the company's
board of directors.
Finally, investors should note that we maintained our currency hedging posture
of being substantially hedged to the U.S. dollar versus most of our non-U.S.
holdings. Since the dollar was generally weaker against foreign currencies
during the review period, the portfolio returns were lower than they would have
been had we not hedged the foreign currency exposure.
Annual Report | 9
Thank you for your continued participation in Mutual Shares Fund. We look
forward to serving your future investment needs.
/s/ Peter A. Langerman
Peter A. Langerman
[PHOTO OMITTED] Co-Portfolio Manager
/s/ F. David Segal
F. David Segal, CFA
[PHOTO OMITTED] Co-Portfolio Manager
/s/ Debbie A. Turner
Debbie A. Turner, CFA
[PHOTO OMITTED] Assistant Portfolio Manager
Mutual Shares Fund
THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS
AS OF DECEMBER 31, 2006, THE END OF THE REPORTING PERIOD. THE WAY WE IMPLEMENT
OUR MAIN INVESTMENT STRATEGIES AND THE RESULTING PORTFOLIO HOLDINGS MAY CHANGE
DEPENDING ON FACTORS SUCH AS MARKET AND ECONOMIC CONDITIONS. THESE OPINIONS MAY
NOT BE RELIED UPON AS INVESTMENT ADVICE OR AN OFFER FOR A PARTICULAR SECURITY.
THE INFORMATION IS NOT A COMPLETE ANALYSIS OF EVERY ASPECT OF ANY MARKET,
COUNTRY, INDUSTRY, SECURITY OR THE FUND. STATEMENTS OF FACT ARE FROM SOURCES
CONSIDERED RELIABLE, BUT THE INVESTMENT MANAGER MAKES NO REPRESENTATION OR
WARRANTY AS TO THEIR COMPLETENESS OR ACCURACY. ALTHOUGH HISTORICAL PERFORMANCE
IS NO GUARANTEE OF FUTURE RESULTS, THESE INSIGHTS MAY HELP YOU UNDERSTAND OUR
INVESTMENT MANAGEMENT PHILOSOPHY.
10 | Annual Report
- --------------------------------------------------------------------------------
PETER LANGERMAN has been a portfolio manager for Mutual Shares Fund since 2005.
He joined Franklin Templeton Investments in 1996, serving in various capacities,
including President and Chief Executive Officer of Franklin Mutual Advisers and
member of the management team of the Funds, including Mutual Shares Fund. From
2002 to 2005, he served as director of New Jersey's Division of Investment,
overseeing employee pension funds. Between 1986 and 1996, Mr. Langerman was
employed at Heine Securities Corporation, the Fund's former manager.
F. DAVID SEGAL, effective January 1, 2007, assumes portfolio manager
responsibilities for Mutual Shares Fund. He joined Franklin Templeton
Investments in 2002. Previously, he was an analyst in the Structured Finance
Group of MetLife for the period 1999-2002.
DEBBIE TURNER has been an assistant portfolio manager for Mutual Shares Fund
since 2001. She joined Franklin Templeton Investments in 1996. Between 1993 and
1996, Ms. Turner was employed at Heine Securities Corporation, the Fund's former
manager.
- --------------------------------------------------------------------------------
Annual Report | 11
Performance Summary as of 12/31/06
Your dividend income will vary depending on dividends or interest paid by
securities in the Fund's portfolio, adjusted for operating expenses of each
class. Capital gain distributions are net profits realized from the sale of
portfolio securities. The performance table and graphs do not reflect any taxes
that a shareholder would pay on Fund dividends, capital gain distributions, if
any, or any realized gains on the sale of Fund shares. Total return reflects
reinvestment of the Fund's dividends and capital gain distributions, if any, and
any unrealized gains or losses.
PRICE AND DISTRIBUTION INFORMATION
- --------------------------------------------------------------------------------
CLASS Z (SYMBOL: MUTHX) CHANGE 12/31/06 12/31/05
- --------------------------------------------------------------------------------
Net Asset Value (NAV) +$2.13 $26.08 $23.95
- --------------------------------------------------------------------------------
DISTRIBUTIONS (1/1/06-12/31/06)
- --------------------------------------------------------------------------------
Dividend Income $0.5247
- --------------------------------------------------------------------------------
Short-Term Capital Gain $0.2493
- --------------------------------------------------------------------------------
Long-Term Capital Gain $1.4210
- --------------------------------------------------------------------------------
TOTAL $2.1950
- --------------------------------------------------------------------------------
CLASS A (SYMBOL: TESIX) CHANGE 12/31/06 12/31/05
- --------------------------------------------------------------------------------
Net Asset Value (NAV) +$2.08 $25.90 $23.82
- --------------------------------------------------------------------------------
DISTRIBUTIONS (1/1/06-12/31/06)
- --------------------------------------------------------------------------------
Dividend Income $0.4491
- --------------------------------------------------------------------------------
Short-Term Capital Gain $0.2493
- --------------------------------------------------------------------------------
Long-Term Capital Gain $1.4210
- --------------------------------------------------------------------------------
TOTAL $2.1194
- --------------------------------------------------------------------------------
CLASS B (SYMBOL: FMUBX) CHANGE 12/31/06 12/31/05
- --------------------------------------------------------------------------------
Net Asset Value (NAV) +$2.00 $25.35 $23.35
- --------------------------------------------------------------------------------
DISTRIBUTIONS (1/1/06-12/31/06)
- --------------------------------------------------------------------------------
Dividend Income $0.2699
- --------------------------------------------------------------------------------
Short-Term Capital Gain $0.2493
- --------------------------------------------------------------------------------
Long-Term Capital Gain $1.4210
- --------------------------------------------------------------------------------
TOTAL $1.9402
- --------------------------------------------------------------------------------
CLASS C (SYMBOL: TEMTX) CHANGE 12/31/06 12/31/05
- --------------------------------------------------------------------------------
Net Asset Value (NAV) +$2.15 $25.63 $23.48
- --------------------------------------------------------------------------------
DISTRIBUTIONS (1/1/06-12/31/06)
- --------------------------------------------------------------------------------
Dividend Income $0.1645
- --------------------------------------------------------------------------------
Short-Term Capital Gain $0.2493
- --------------------------------------------------------------------------------
Long-Term Capital Gain $1.4210
- --------------------------------------------------------------------------------
TOTAL $1.8348
- --------------------------------------------------------------------------------
CLASS R (SYMBOL: TESRX) CHANGE 12/31/06 12/31/05
- --------------------------------------------------------------------------------
Net Asset Value (NAV) +$2.05 $25.77 $23.72
- --------------------------------------------------------------------------------
DISTRIBUTIONS (1/1/06-12/31/06)
- --------------------------------------------------------------------------------
Dividend Income $0.4161
- --------------------------------------------------------------------------------
Short-Term Capital Gain $0.2493
- --------------------------------------------------------------------------------
Long-Term Capital Gain $1.4210
- --------------------------------------------------------------------------------
TOTAL $2.0864
- --------------------------------------------------------------------------------
12 | Annual Report
Performance Summary (CONTINUED)
PERFORMANCE
CUMULATIVE TOTAL RETURN EXCLUDES SALES CHARGES. AVERAGE ANNUAL TOTAL RETURN AND
VALUE OF $10,000 INVESTMENT INCLUDE MAXIMUM SALES CHARGES. CLASS Z/R: NO SALES
CHARGES; CLASS A: 5.75% MAXIMUM INITIAL SALES CHARGE; CLASS B: CONTINGENT
DEFERRED SALES CHARGE (CDSC) DECLINING FROM 4% TO 1% OVER SIX YEARS, AND
ELIMINATED THEREAFTER; CLASS C: 1% CDSC IN FIRST YEAR ONLY. THE FUND MAY CHARGE
A 2% FEE ON REDEMPTIONS MADE WITHIN SEVEN DAYS OF PURCHASE.
- ---------------------------------------------------------------------------------------
CLASS Z 1 1-YEAR 5-YEAR 10-YEAR
- ---------------------------------------------------------------------------------------
Cumulative Total Return 2 +18.37% +67.91% +196.68%
- ---------------------------------------------------------------------------------------
Average Annual Total Return 3 +18.37% +10.92% +11.49%
- ---------------------------------------------------------------------------------------
Value of $10,000 Investment 4 $ 11,837 $ 16,791 $ 29,668
- ---------------------------------------------------------------------------------------
CLASS A 1 1-YEAR 5-YEAR 10-YEAR
- ---------------------------------------------------------------------------------------
Cumulative Total Return 2 +17.98% +65.01% +186.43%
- ---------------------------------------------------------------------------------------
Average Annual Total Return 3 +11.21% +9.24% +10.44%
- ---------------------------------------------------------------------------------------
Value of $10,000 Investment 4 $ 11,121 $ 15,554 $ 26,997
- ---------------------------------------------------------------------------------------
CLASS B 1 1-YEAR 5-YEAR INCEPTION (1/1/99)
- ---------------------------------------------------------------------------------------
Cumulative Total Return 2 +17.21% +59.72% +115.63%
- ---------------------------------------------------------------------------------------
Average Annual Total Return 3 +13.21% +9.54% +10.09%
- ---------------------------------------------------------------------------------------
Value of $10,000 Investment 4 $ 11,321 $ 15,772 $ 21,563
- ---------------------------------------------------------------------------------------
CLASS C 1 1-YEAR 5-YEAR 10-YEAR
- ---------------------------------------------------------------------------------------
Cumulative Total Return 2 +17.18% +59.71% +168.46%
- ---------------------------------------------------------------------------------------
Average Annual Total Return 3 +16.18% +9.82% +10.38%
- ---------------------------------------------------------------------------------------
Value of $10,000 Investment 4 $ 11,618 $ 15,971 $ 26,846
- ---------------------------------------------------------------------------------------
CLASS R 1-YEAR 3-YEAR INCEPTION (1/1/02)
- ---------------------------------------------------------------------------------------
Cumulative Total Return 2 +17.73% +46.61% +64.05%
- ---------------------------------------------------------------------------------------
Average Annual Total Return 3 +17.73% +13.60% +10.41%
- ---------------------------------------------------------------------------------------
Value of $10,000 Investment 4 $ 11,773 $ 14,661 $ 16,405
- ---------------------------------------------------------------------------------------
PERFORMANCE DATA REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE FUTURE
RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU MAY HAVE
A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY DIFFER FROM
FIGURES SHOWN.
FOR MOST RECENT MONTH-END PERFORMANCE, SEE "FUNDS AND PERFORMANCE" AT
FRANKLINTEMPLETON.COM OR CALL 1-800/342-5236.
Annual Report | 13
Performance Summary (CONTINUED)
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 any current, applicable, maximum sales charge, Fund expenses,
account fees and reinvested distributions. The unmanaged index includes
reinvestment of any income or distributions. It differs from the Fund in
composition and does not pay management fees or expenses. One cannot invest
directly in an index.
AVERAGE ANNUAL TOTAL RETURN
- ----------------------------------
CLASS Z 1 12/31/06
- ----------------------------------
1-Year +18.37%
- ----------------------------------
5-Year +10.92%
- ----------------------------------
10-Year +11.49%
- ----------------------------------
CLASS Z (1/1/97-12/31/06) 1
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE GRAPH IN THE PRINTED MATERIAL.]
Date Mutual Shares Fund S&P 500 5
--------- ------------------ -------------
1/1/1997 $10,000 $10,000
1/31/1997 $10,314 $10,624
2/28/1997 $10,560 $10,708
3/31/1997 $10,420 $10,269
4/30/1997 $10,533 $10,881
5/31/1997 $11,034 $11,543
6/30/1997 $11,373 $12,060
7/31/1997 $12,003 $13,019
8/31/1997 $11,921 $12,290
9/30/1997 $12,466 $12,963
10/31/1997 $12,248 $12,531
11/30/1997 $12,406 $13,110
12/31/1997 $12,638 $13,335
1/31/1998 $12,549 $13,482
2/28/1998 $13,273 $14,454
3/31/1998 $13,718 $15,194
4/30/1998 $13,671 $15,347
5/31/1998 $13,546 $15,083
6/30/1998 $13,487 $15,695
7/31/1998 $13,124 $15,529
8/31/1998 $11,272 $13,286
9/30/1998 $11,200 $14,137
10/31/1998 $11,936 $15,286
11/30/1998 $12,575 $16,212
12/31/1998 $12,694 $17,146
1/31/1999 $12,896 $17,862
2/28/1999 $12,727 $17,307
3/31/1999 $13,318 $18,000
4/30/1999 $14,351 $18,697
5/31/1999 $14,422 $18,256
6/30/1999 $14,832 $19,268
7/31/1999 $14,422 $18,667
8/31/1999 $13,866 $18,575
9/30/1999 $13,509 $18,066
10/31/1999 $14,038 $19,209
11/30/1999 $14,303 $19,600
12/31/1999 $14,599 $20,753
1/31/2000 $14,120 $19,711
2/29/2000 $13,541 $19,338
3/31/2000 $14,942 $21,228
4/30/2000 $14,785 $20,590
5/31/2000 $14,971 $20,169
6/30/2000 $14,708 $20,666
7/31/2000 $15,118 $20,343
8/31/2000 $15,883 $21,606
9/30/2000 $15,868 $20,466
10/31/2000 $16,246 $20,379
11/30/2000 $15,736 $18,773
12/31/2000 $16,618 $18,865
1/31/2001 $17,601 $19,534
2/28/2001 $17,609 $17,754
3/31/2001 $17,164 $16,630
4/30/2001 $17,861 $17,922
5/31/2001 $18,482 $18,042
6/30/2001 $18,595 $17,603
7/31/2001 $18,587 $17,429
8/31/2001 $18,163 $16,339
9/30/2001 $16,563 $15,020
10/31/2001 $16,494 $15,307
11/30/2001 $17,186 $16,481
12/31/2001 $17,669 $16,625
1/31/2002 $17,505 $16,383
2/28/2002 $17,587 $16,067
3/31/2002 $18,114 $16,671
4/30/2002 $18,223 $15,661
5/31/2002 $18,232 $15,546
6/30/2002 $17,050 $14,439
7/31/2002 $16,026 $13,313
8/31/2002 $16,192 $13,401
9/30/2002 $15,315 $11,946
10/31/2002 $15,555 $12,996
11/30/2002 $15,869 $13,760
12/31/2002 $15,745 $12,952
1/31/2003 $15,614 $12,613
2/28/2003 $15,362 $12,424
3/31/2003 $15,399 $12,543
4/30/2003 $16,306 $13,577
5/31/2003 $17,138 $14,292
6/30/2003 $17,398 $14,474
7/31/2003 $17,501 $14,730
8/31/2003 $17,916 $15,016
9/30/2003 $17,841 $14,857
10/31/2003 $18,500 $15,697
11/30/2003 $19,093 $15,835
12/31/2003 $19,937 $16,665
1/31/2004 $20,099 $16,971
2/29/2004 $20,621 $17,207
3/31/2004 $20,593 $16,947
4/30/2004 $20,251 $16,682
5/31/2004 $20,279 $16,910
6/30/2004 $20,617 $17,239
7/31/2004 $20,302 $16,668
8/31/2004 $20,484 $16,735
9/30/2004 $20,751 $16,916
10/31/2004 $20,999 $17,175
11/30/2004 $22,020 $17,870
12/31/2004 $22,706 $18,477
1/31/2005 $22,263 $18,027
2/28/2005 $22,943 $18,406
3/31/2005 $22,775 $18,081
4/30/2005 $22,558 $17,738
5/31/2005 $23,041 $18,302
6/30/2005 $23,301 $18,328
7/31/2005 $23,904 $19,009
8/31/2005 $24,003 $18,836
9/30/2005 $24,369 $18,988
10/31/2005 $23,884 $18,672
11/30/2005 $24,487 $19,377
12/31/2005 $25,064 $19,384
1/31/2006 $25,692 $19,897
2/28/2006 $25,860 $19,951
3/31/2006 $26,665 $20,199
4/30/2006 $26,854 $20,470
5/31/2006 $26,414 $19,882
6/30/2006 $26,429 $19,908
7/31/2006 $26,514 $20,031
8/31/2006 $27,267 $20,507
9/30/2006 $27,469 $21,035
10/31/2006 $28,456 $21,720
11/30/2006 $28,923 $22,133
12/31/2006 $29,668 $22,443
AVERAGE ANNUAL TOTAL RETURN
- ----------------------------------
CLASS A 1 12/31/06
- ----------------------------------
1-Year +11.21%
- ----------------------------------
5-Year +9.24%
- ----------------------------------
10-Year +10.44%
- ----------------------------------
CLASS A (1/1/97-12/31/06) 1
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE GRAPH IN THE PRINTED MATERIAL.]
Date Mutual Shares Fund S&P 500 5
--------- ------------------ -------------
1/1/1997 $ 9,425 $10,000
1/31/1997 $ 9,719 $10,624
2/28/1997 $ 9,947 $10,708
3/31/1997 $ 9,815 $10,269
4/30/1997 $ 9,917 $10,881
5/31/1997 $10,384 $11,543
6/30/1997 $10,699 $12,060
7/31/1997 $11,291 $13,019
8/31/1997 $11,214 $12,290
9/30/1997 $11,722 $12,963
10/31/1997 $11,512 $12,531
11/30/1997 $11,656 $13,110
12/31/1997 $11,877 $13,335
1/31/1998 $11,782 $13,482
2/28/1998 $12,464 $14,454
3/31/1998 $12,877 $15,194
4/30/1998 $12,827 $15,347
5/31/1998 $12,704 $15,083
6/30/1998 $12,642 $15,695
7/31/1998 $12,299 $15,529
8/31/1998 $10,563 $13,286
9/30/1998 $10,489 $14,137
10/31/1998 $11,176 $15,286
11/30/1998 $11,771 $16,212
12/31/1998 $11,878 $17,146
1/31/1999 $12,067 $17,862
2/28/1999 $11,903 $17,307
3/31/1999 $12,457 $18,000
4/30/1999 $13,414 $18,697
5/31/1999 $13,475 $18,256
6/30/1999 $13,860 $19,268
7/31/1999 $13,470 $18,667
8/31/1999 $12,942 $18,575
9/30/1999 $12,607 $18,066
10/31/1999 $13,097 $19,209
11/30/1999 $13,339 $19,600
12/31/1999 $13,616 $20,753
1/31/2000 $13,162 $19,711
2/29/2000 $12,620 $19,338
3/31/2000 $13,923 $21,228
4/30/2000 $13,770 $20,590
5/31/2000 $13,943 $20,169
6/30/2000 $13,692 $20,666
7/31/2000 $14,068 $20,343
8/31/2000 $14,775 $21,606
9/30/2000 $14,754 $20,466
10/31/2000 $15,108 $20,379
11/30/2000 $14,624 $18,773
12/31/2000 $15,443 $18,865
1/31/2001 $16,351 $19,534
2/28/2001 $16,351 $17,754
3/31/2001 $15,928 $16,630
4/30/2001 $16,578 $17,922
5/31/2001 $17,149 $18,042
6/30/2001 $17,250 $17,603
7/31/2001 $17,242 $17,429
8/31/2001 $16,839 $16,339
9/30/2001 $15,348 $15,020
10/31/2001 $15,284 $15,307
11/30/2001 $15,912 $16,481
12/31/2001 $16,360 $16,625
1/31/2002 $16,208 $16,383
2/28/2002 $16,276 $16,067
3/31/2002 $16,757 $16,671
4/30/2002 $16,850 $15,661
5/31/2002 $16,859 $15,546
6/30/2002 $15,755 $14,439
7/31/2002 $14,812 $13,313
8/31/2002 $14,958 $13,401
9/30/2002 $14,151 $11,946
10/31/2002 $14,357 $12,996
11/30/2002 $14,649 $13,760
12/31/2002 $14,528 $12,952
1/31/2003 $14,407 $12,613
2/28/2003 $14,165 $12,424
3/31/2003 $14,199 $12,543
4/30/2003 $15,030 $13,577
5/31/2003 $15,792 $14,292
6/30/2003 $16,020 $14,474
7/31/2003 $16,116 $14,730
8/31/2003 $16,491 $15,016
9/30/2003 $16,412 $14,857
10/31/2003 $17,023 $15,697
11/30/2003 $17,555 $15,835
12/31/2003 $18,332 $16,665
1/31/2004 $18,472 $16,971
2/29/2004 $18,955 $17,207
3/31/2004 $18,920 $16,947
4/30/2004 $18,604 $16,682
5/31/2004 $18,621 $16,910
6/30/2004 $18,928 $17,239
7/31/2004 $18,628 $16,668
8/31/2004 $18,787 $16,735
9/30/2004 $19,034 $16,916
10/31/2004 $19,254 $17,175
11/30/2004 $20,179 $17,870
12/31/2004 $20,806 $18,477
1/31/2005 $20,389 $18,027
2/28/2005 $21,006 $18,406
3/31/2005 $20,842 $18,081
4/30/2005 $20,643 $17,738
5/31/2005 $21,087 $18,302
6/30/2005 $21,312 $18,328
7/31/2005 $21,858 $19,009
8/31/2005 $21,940 $18,836
9/30/2005 $22,276 $18,988
10/31/2005 $21,821 $18,672
11/30/2005 $22,367 $19,377
12/31/2005 $22,883 $19,384
1/31/2006 $23,450 $19,897
2/28/2006 $23,604 $19,951
3/31/2006 $24,324 $20,199
4/30/2006 $24,488 $20,470
5/31/2006 $24,084 $19,882
6/30/2006 $24,093 $19,908
7/31/2006 $24,161 $20,031
8/31/2006 $24,852 $20,507
9/30/2006 $25,028 $21,035
10/31/2006 $25,914 $21,720
11/30/2006 $26,333 $22,133
12/31/2006 $26,997 $22,443
14 | Annual Report
Performance Summary (CONTINUED)
CLASS B (1/1/99-12/31/06) 1
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE GRAPH IN THE PRINTED MATERIAL.]
Date Mutual Shares Fund S&P 500 5
--------- ------------------ -------------
1/1/1999 $10,000 $10,000
1/31/1999 $10,154 $10,418
2/28/1999 $10,005 $10,094
3/31/1999 $10,467 $10,498
4/30/1999 $11,262 $10,905
5/31/1999 $11,313 $10,647
6/30/1999 $11,627 $11,238
7/31/1999 $11,293 $10,887
8/31/1999 $10,844 $10,834
9/30/1999 $10,556 $10,537
10/31/1999 $10,964 $11,203
11/30/1999 $11,157 $11,431
12/31/1999 $11,382 $12,104
1/31/2000 $11,000 $11,496
2/29/2000 $10,539 $11,279
3/31/2000 $11,618 $12,381
4/30/2000 $11,489 $12,009
5/31/2000 $11,624 $11,763
6/30/2000 $11,411 $12,053
7/31/2000 $11,720 $11,865
8/31/2000 $12,303 $12,601
9/30/2000 $12,279 $11,936
10/31/2000 $12,558 $11,886
11/30/2000 $12,157 $10,949
12/31/2000 $12,827 $11,003
1/31/2001 $13,574 $11,393
2/28/2001 $13,568 $10,355
3/31/2001 $13,213 $ 9,699
4/30/2001 $13,745 $10,453
5/31/2001 $14,204 $10,523
6/30/2001 $14,279 $10,267
7/31/2001 $14,265 $10,166
8/31/2001 $13,921 $ 9,530
9/30/2001 $12,691 $ 8,760
10/31/2001 $12,624 $ 8,927
11/30/2001 $13,144 $ 9,612
12/31/2001 $13,501 $ 9,696
1/31/2002 $13,367 $ 9,555
2/28/2002 $13,416 $ 9,371
3/31/2002 $13,805 $ 9,723
4/30/2002 $13,875 $ 9,134
5/31/2002 $13,875 $ 9,067
6/30/2002 $12,964 $ 8,421
7/31/2002 $12,175 $ 7,765
8/31/2002 $12,290 $ 7,816
9/30/2002 $11,616 $ 6,967
10/31/2002 $11,781 $ 7,580
11/30/2002 $12,017 $ 8,025
12/31/2002 $11,908 $ 7,554
1/31/2003 $11,800 $ 7,357
2/28/2003 $11,605 $ 7,246
3/31/2003 $11,619 $ 7,316
4/30/2003 $12,297 $ 7,919
5/31/2003 $12,910 $ 8,335
6/30/2003 $13,093 $ 8,442
7/31/2003 $13,166 $ 8,591
8/31/2003 $13,464 $ 8,758
9/30/2003 $13,391 $ 8,665
10/31/2003 $13,885 $ 9,155
11/30/2003 $14,313 $ 9,236
12/31/2003 $14,934 $ 9,720
1/31/2004 $15,043 $ 9,898
2/29/2004 $15,428 $10,036
3/31/2004 $15,385 $ 9,884
4/30/2004 $15,115 $ 9,729
5/31/2004 $15,123 $ 9,863
6/30/2004 $15,362 $10,054
7/31/2004 $15,114 $ 9,722
8/31/2004 $15,238 $ 9,761
9/30/2004 $15,428 $ 9,866
10/31/2004 $15,596 $10,017
11/30/2004 $16,340 $10,422
12/31/2004 $16,830 $10,777
1/31/2005 $16,493 $10,514
2/28/2005 $16,979 $10,735
3/31/2005 $16,837 $10,545
4/30/2005 $16,673 $10,345
5/31/2005 $17,017 $10,674
6/30/2005 $17,193 $10,690
7/31/2005 $17,620 $11,087
8/31/2005 $17,680 $10,986
9/30/2005 $17,935 $11,075
10/31/2005 $17,560 $10,890
11/30/2005 $17,987 $11,301
12/31/2005 $18,397 $11,306
1/31/2006 $18,839 $11,605
2/28/2006 $18,957 $11,636
3/31/2006 $19,524 $11,781
4/30/2006 $19,643 $11,939
5/31/2006 $19,311 $11,596
6/30/2006 $19,307 $11,611
7/31/2006 $19,354 $11,683
8/31/2006 $19,890 $11,960
9/30/2006 $20,017 $12,268
10/31/2006 $20,720 $12,668
11/30/2006 $21,040 $12,909
12/31/2006 $21,563 $13,090
AVERAGE ANNUAL TOTAL RETURN
- ----------------------------------
CLASS B 1 12/31/06
- ----------------------------------
1-Year +13.21%
- ----------------------------------
5-Year +9.54%
- ----------------------------------
Since Inception (1/1/99) +10.09%
- ----------------------------------
CLASS C (1/1/97-12/31/06) 1
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE GRAPH IN THE PRINTED MATERIAL.]
Date Mutual Shares Fund S&P 500 5
--------- ------------------ -------------
1/1/1997 $10,000 $10,000
1/31/1997 $10,307 $10,624
2/28/1997 $10,546 $10,708
3/31/1997 $10,396 $10,269
4/30/1997 $10,498 $10,881
5/31/1997 $10,988 $11,543
6/30/1997 $11,317 $12,060
7/31/1997 $11,936 $13,019
8/31/1997 $11,843 $12,290
9/30/1997 $12,377 $12,963
10/31/1997 $12,148 $12,531
11/30/1997 $12,295 $13,110
12/31/1997 $12,514 $13,335
1/31/1998 $12,413 $13,482
2/28/1998 $13,123 $14,454
3/31/1998 $13,548 $15,194
4/30/1998 $13,489 $15,347
5/31/1998 $13,353 $15,083
6/30/1998 $13,282 $15,695
7/31/1998 $12,916 $15,529
8/31/1998 $11,082 $13,286
9/30/1998 $11,004 $14,137
10/31/1998 $11,717 $15,286
11/30/1998 $12,335 $16,212
12/31/1998 $12,446 $17,146
1/31/1999 $12,632 $17,862
2/28/1999 $12,452 $17,307
3/31/1999 $13,023 $18,000
4/30/1999 $14,017 $18,697
5/31/1999 $14,081 $18,256
6/30/1999 $14,471 $19,268
7/31/1999 $14,054 $18,667
8/31/1999 $13,500 $18,575
9/30/1999 $13,142 $18,066
10/31/1999 $13,643 $19,209
11/30/1999 $13,891 $19,600
12/31/1999 $14,172 $20,753
1/31/2000 $13,690 $19,711
2/29/2000 $13,118 $19,338
3/31/2000 $14,466 $21,228
4/30/2000 $14,305 $20,590
5/31/2000 $14,473 $20,169
6/30/2000 $14,207 $20,666
7/31/2000 $14,592 $20,343
8/31/2000 $15,315 $21,606
9/30/2000 $15,285 $20,466
10/31/2000 $15,632 $20,379
11/30/2000 $15,134 $18,773
12/31/2000 $15,969 $18,865
1/31/2001 $16,897 $19,534
2/28/2001 $16,889 $17,754
3/31/2001 $16,449 $16,630
4/30/2001 $17,108 $17,922
5/31/2001 $17,686 $18,042
6/30/2001 $17,783 $17,603
7/31/2001 $17,757 $17,429
8/31/2001 $17,339 $16,339
9/30/2001 $15,797 $15,020
10/31/2001 $15,722 $15,307
11/30/2001 $16,359 $16,481
12/31/2001 $16,809 $16,625
1/31/2002 $16,643 $16,383
2/28/2002 $16,704 $16,067
3/31/2002 $17,193 $16,671
4/30/2002 $17,280 $15,661
5/31/2002 $17,280 $15,546
6/30/2002 $16,141 $14,439
7/31/2002 $15,166 $13,313
8/31/2002 $15,299 $13,401
9/30/2002 $14,466 $11,946
10/31/2002 $14,670 $12,996
11/30/2002 $14,963 $13,760
12/31/2002 $14,829 $12,952
1/31/2003 $14,695 $12,613
2/28/2003 $14,446 $12,424
3/31/2003 $14,473 $12,543
4/30/2003 $15,309 $13,577
5/31/2003 $16,082 $14,292
6/30/2003 $16,307 $14,474
7/31/2003 $16,388 $14,730
8/31/2003 $16,764 $15,016
9/30/2003 $16,674 $14,857
10/31/2003 $17,283 $15,697
11/30/2003 $17,820 $15,835
12/31/2003 $18,590 $16,665
1/31/2004 $18,725 $16,971
2/29/2004 $19,209 $17,207
3/31/2004 $19,164 $16,947
4/30/2004 $18,824 $16,682
5/31/2004 $18,832 $16,910
6/30/2004 $19,135 $17,239
7/31/2004 $18,821 $16,668
8/31/2004 $18,974 $16,735
9/30/2004 $19,216 $16,916
10/31/2004 $19,423 $17,175
11/30/2004 $20,350 $17,870
12/31/2004 $20,965 $18,477
1/31/2005 $20,541 $18,027
2/28/2005 $21,149 $18,406
3/31/2005 $20,974 $18,081
4/30/2005 $20,762 $17,738
5/31/2005 $21,195 $18,302
6/30/2005 $21,412 $18,328
7/31/2005 $21,939 $19,009
8/31/2005 $22,022 $18,836
9/30/2005 $22,336 $18,988
10/31/2005 $21,865 $18,672
11/30/2005 $22,400 $19,377
12/31/2005 $22,909 $19,384
1/31/2006 $23,466 $19,897
2/28/2006 $23,602 $19,951
3/31/2006 $24,315 $20,199
4/30/2006 $24,471 $20,470
5/31/2006 $24,051 $19,882
6/30/2006 $24,040 $19,908
7/31/2006 $24,099 $20,031
8/31/2006 $24,768 $20,507
9/30/2006 $24,926 $21,035
10/31/2006 $25,802 $21,720
11/30/2006 $26,205 $22,133
12/31/2006 $26,846 $22,443
AVERAGE ANNUAL TOTAL RETURN
- ----------------------------------
CLASS C 1 12/31/06
- ----------------------------------
1-Year +16.18%
- ----------------------------------
5-Year +9.82%
- ----------------------------------
10-Year +10.38%
- ----------------------------------
Annual Report | 15
Performance Summary (CONTINUED)
AVERAGE ANNUAL TOTAL RETURN
- ----------------------------------
CLASS R 12/31/06
- ----------------------------------
1-Year +17.73%
- ----------------------------------
3-Year +13.60%
- ----------------------------------
Since Inception (1/1/02) +10.41%
- ----------------------------------
CLASS R (1/1/02-12/31/06)
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE GRAPH IN THE PRINTED MATERIAL.]
Date Mutual Shares Fund S&P 500 5
--------- ------------------ -------------
1/1/2002 $10,000 $10,000
1/31/2002 $ 9,917 $ 9,854
2/28/2002 $ 9,958 $ 9,664
3/31/2002 $10,258 $10,028
4/30/2002 $10,314 $ 9,420
5/31/2002 $10,320 $ 9,351
6/30/2002 $ 9,643 $ 8,685
7/31/2002 $ 9,066 $ 8,008
8/31/2002 $ 9,150 $ 8,061
9/30/2002 $ 8,656 $ 7,185
10/31/2002 $ 8,782 $ 7,817
11/30/2002 $ 8,956 $ 8,277
12/31/2002 $ 8,878 $ 7,791
1/31/2003 $ 8,804 $ 7,587
2/28/2003 $ 8,661 $ 7,473
3/31/2003 $ 8,677 $ 7,545
4/30/2003 $ 9,182 $ 8,167
5/31/2003 $ 9,648 $ 8,596
6/30/2003 $ 9,792 $ 8,706
7/31/2003 $ 9,846 $ 8,860
8/31/2003 $10,075 $ 9,032
9/30/2003 $10,022 $ 8,937
10/31/2003 $10,390 $ 9,442
11/30/2003 $10,716 $ 9,525
12/31/2003 $11,190 $10,024
1/31/2004 $11,276 $10,208
2/29/2004 $11,566 $10,350
3/31/2004 $11,544 $10,194
4/30/2004 $11,351 $10,034
5/31/2004 $11,362 $10,171
6/30/2004 $11,543 $10,369
7/31/2004 $11,360 $10,026
8/31/2004 $11,457 $10,066
9/30/2004 $11,608 $10,175
10/31/2004 $11,737 $10,331
11/30/2004 $12,304 $10,749
12/31/2004 $12,680 $11,114
1/31/2005 $12,430 $10,843
2/28/2005 $12,802 $11,071
3/31/2005 $12,702 $10,876
4/30/2005 $12,580 $10,669
5/31/2005 $12,846 $11,009
6/30/2005 $12,984 $11,024
7/31/2005 $13,312 $11,434
8/31/2005 $13,362 $11,330
9/30/2005 $13,562 $11,422
10/31/2005 $13,284 $11,231
11/30/2005 $13,618 $11,655
12/31/2005 $13,933 $11,660
1/31/2006 $14,274 $11,968
2/28/2006 $14,362 $12,001
3/31/2006 $14,802 $12,150
4/30/2006 $14,897 $12,313
5/31/2006 $14,650 $11,959
6/30/2006 $14,648 $11,975
7/31/2006 $14,689 $12,049
8/31/2006 $15,107 $12,335
9/30/2006 $15,214 $12,653
10/31/2006 $15,750 $13,065
11/30/2006 $16,000 $13,313
12/31/2006 $16,405 $13,500
ENDNOTES
THE FUND'S INVESTMENTS INCLUDE SMALLER-COMPANY STOCKS AND FOREIGN SECURITIES.
SMALLER-COMPANY STOCKS HAVE HISTORICALLY EXHIBITED GREATER PRICE VOLATILITY THAN
LARGER-COMPANY STOCKS, PARTICULARLY OVER THE SHORT TERM. FOREIGN SECURITIES
RISKS INCLUDE EXPOSURE TO CURRENCY VOLATILITY AND POLITICAL, ECONOMIC AND
REGULATORY UNCERTAINTY. THE FUND MAY ALSO INVEST IN COMPANIES ENGAGED, OR
PROPOSED TO BE ENGAGED, IN MERGERS, REORGANIZATIONS OR LIQUIDATIONS, WHICH
INVOLVE SPECIAL RISKS, AS WELL AS LOWER-RATED BONDS, WHICH ENTAIL HIGHER CREDIT
RISK. THE FUND'S PROSPECTUS ALSO INCLUDES A DESCRIPTION OF THE MAIN INVESTMENT
RISKS.
CLASS Z: Shares are available to certain eligible investors as described in
the prospectus.
CLASS A: Prior to 8/3/98, these shares were offered at a lower initial sales
charge; thus actual total returns may differ.
CLASS B: These shares have higher annual fees and expenses than Class A
shares.
CLASS C: Prior to 1/1/04, these shares were offered with an initial sales
charge; thus actual total returns would have differed. These shares
have higher annual fees and expenses than Class A shares.
CLASS R: Shares are available to certain eligible investors as described in
the prospectus. These shares have higher annual fees and expenses
than Class A shares.
1. Past expense reductions by the Fund's manager increased the Fund's total
returns. If the manager had not taken this action, the Fund's total
returns would have been lower.
2. Cumulative total return represents the change in value of an investment
over the periods indicated.
3. Average annual total return represents the average annual change in value
of an investment over the periods indicated.
4. These figures represent the value of a hypothetical $10,000 investment in
the Fund over the periods indicated.
5. Source: Standard & Poor's Micropal. The S&P 500 consists of 500 stocks
chosen for market size, liquidity and industry group representation. Each
stock's weight in the index is proportionate to its market value. The S&P
500 is one of the most widely used benchmarks of U.S. equity performance.
16 | Annual Report
Your Fund's Expenses
As a Fund shareholder, you can incur two types of costs:
o Transaction costs, including sales charges (loads) on Fund purchases and
redemption fees; and
o Ongoing Fund costs, including management fees, distribution and service
(12b-1) fees, and other Fund expenses. All mutual funds have ongoing
costs, sometimes referred to as operating expenses.
The following table shows ongoing costs of investing in the Fund and can help
you understand these costs and compare them with those of other mutual funds.
The table assumes a $1,000 investment held for the six months indicated.
ACTUAL FUND EXPENSES
The first line (Actual) for each share class listed in the table provides actual
account values and expenses. The "Ending Account Value" is derived from the
Fund's actual return, which includes the effect of Fund expenses.
You can estimate the expenses you paid during the period by following these
steps. OF COURSE, YOUR ACCOUNT VALUE AND EXPENSES WILL DIFFER FROM THOSE IN THIS
ILLUSTRATION:
1. Divide your account value by $1,000.
IF AN ACCOUNT HAD AN $8,600 VALUE, THEN $8,600 / $1,000 = 8.6.
2. Multiply the result by the number under the heading "Expenses Paid During
Period."
IF EXPENSES PAID DURING PERIOD WERE $7.50, THEN 8.6 X $7.50 = $64.50.
In this illustration, the estimated expenses paid this period are $64.50.
HYPOTHETICAL EXAMPLE FOR COMPARISON WITH OTHER FUNDS
Information in the second line (Hypothetical) for each class in the table can
help you compare ongoing costs of investing in the Fund with those of other
mutual funds. This information may not be used to estimate the actual ending
account balance or expenses you paid during the period. The hypothetical "Ending
Account Value" is based on the actual expense ratio for each class and an
assumed 5% annual rate of return before expenses, which does not represent the
Fund's actual return. The figure under the heading "Expenses Paid During Period"
shows the hypothetical expenses your account would have incurred under this
scenario. You can compare this figure with the 5% hypothetical examples that
appear in shareholder reports of other funds.
Annual Report | 17
Your Fund's Expenses (CONTINUED)
PLEASE NOTE THAT EXPENSES SHOWN IN THE TABLE ARE MEANT TO HIGHLIGHT ONGOING
COSTS AND DO NOT REFLECT ANY TRANSACTION COSTS, SUCH AS SALES CHARGES OR
REDEMPTION FEES. Therefore, the second line for each class is useful in
comparing ongoing costs only, and will not help you compare total costs of
owning different funds. In addition, if transaction costs were included, your
total costs would have been higher. Please refer to the Fund prospectus for
additional information on operating expenses.
- --------------------------------------------------------------------------------------------------------
BEGINNING ACCOUNT ENDING ACCOUNT EXPENSES PAID DURING
CLASS Z VALUE 7/1/06 VALUE 12/31/06 PERIOD* 7/1/06--12/31/06
- --------------------------------------------------------------------------------------------------------
Actual $1,000 $1,122.50 $4.65
- --------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,020.82 $4.43
- --------------------------------------------------------------------------------------------------------
CLASS A
- --------------------------------------------------------------------------------------------------------
Actual $1,000 $1,120.50 $6.52
- --------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,019.06 $6.21
- --------------------------------------------------------------------------------------------------------
CLASS B
- --------------------------------------------------------------------------------------------------------
Actual $1,000 $1,116.90 $9.98
- --------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,015.78 $9.50
- --------------------------------------------------------------------------------------------------------
CLASS C
- --------------------------------------------------------------------------------------------------------
Actual $1,000 $1,116.70 $9.98
- --------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,015.78 $9.50
- --------------------------------------------------------------------------------------------------------
CLASS R
- --------------------------------------------------------------------------------------------------------
Actual $1,000 $1,119.90 $7.32
- --------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,018.30 $6.97
- --------------------------------------------------------------------------------------------------------
* Expenses are equal to the annualized expense ratio for each class (Z:
0.87%; A: 1.22%; B: 1.87%; C: 1.87%; and R: 1.37%), multiplied by the
average account value over the period, multiplied by 184/365 to reflect
the one-half year period.
18 | Annual Report
Mutual Shares Fund
FINANCIAL HIGHLIGHTS
---------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
CLASS Z 2006 2005 2004 2003 2002
---------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ....................... $ 23.95 $ 23.05 $ 20.99 $ 16.84 $ 19.44
---------------------------------------------------------------------
Income from investment operations a:
Net investment income b ................................. 0.42 0.47 0.35 0.24 0.33
Net realized and unrealized gains (losses) .............. 3.90 1.92 2.52 4.23 (2.42)
---------------------------------------------------------------------
Total from investment operations ......................... 4.32 2.39 2.87 4.47 (2.09)
---------------------------------------------------------------------
Less distributions from:
Net investment income ................................... (0.52) (0.29) (0.39) (0.32) (0.25)
Net realized gains ...................................... (1.67) (1.20) (0.42) -- (0.26)
---------------------------------------------------------------------
Total distributions ...................................... (2.19) (1.49) (0.81) (0.32) (0.51)
---------------------------------------------------------------------
Redemption fees .......................................... -- d -- d -- d -- --
---------------------------------------------------------------------
Net asset value, end of year ............................. $ 26.08 $ 23.95 $ 23.05 $ 20.99 $ 16.84
=====================================================================
Total return ............................................. 18.37% 10.39% 13.89% 26.62% (10.89)%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) .......................... $11,577,506 $8,951,080 $7,240,641 $5,782,145 $4,585,605
Ratios to average net assets:
Expenses c .............................................. 0.84% e 0.81% e 0.81% e 0.84% 0.79%
Net investment income ................................... 1.63% 1.99% 1.62% 1.28% 1.79%
Portfolio turnover rate .................................. 33.40% 21.57% 33.22% 54.65% 51.22%
Ratios to average net assets, excluding
dividend expense on securities sold short:
Expenses ................................................ 0.76% e 0.76% e 0.80% e 0.81% 0.78%
a The amount shown for a share outstanding throughout the period may not
correlate with the Statement of Operations for the period due to the
timing of sales and repurchase of the Fund shares in relation to income
earned and/or fluctuating market value of the investments of the Fund.
b Based on average daily shares outstanding.
c Includes dividend expense on securities sold short which varies from
period to period. See below for expense ratios that reflect only operating
expenses.
d Amount rounds to less than $0.01 per share.
e Benefit of expense reduction rounds to less than 0.01%.
Annual Report |
The accompanying notes are an integral part of these financial statements. | 19
Mutual Shares Fund
FINANCIAL HIGHLIGHTS (CONTINUED)
---------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
CLASS A 2006 2005 2004 2003 2002
---------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of period ..................... $ 23.82 $ 22.94 $ 20.90 $ 16.78 $ 19.37
---------------------------------------------------------------------
Income from investment operations a:
Net investment income b ................................. 0.32 0.39 0.27 0.17 0.26
Net realized and unrealized gains (losses) .............. 3.88 1.91 2.51 4.21 (2.40)
---------------------------------------------------------------------
Total from investment operations ......................... 4.20 2.30 2.78 4.38 (2.14)
---------------------------------------------------------------------
Less distributions from:
Net investment income ................................... (0.45) (0.22) (0.32) (0.26) (0.19)
Net realized gains ...................................... (1.67) (1.20) (0.42) -- (0.26)
---------------------------------------------------------------------
Total distributions ...................................... (2.12) (1.42) (0.74) (0.26) (0.45)
---------------------------------------------------------------------
Redemption fees .......................................... -- e -- e -- e -- --
---------------------------------------------------------------------
Net asset value, end of period ........................... $ 25.90 $ 23.82 $ 22.94 $ 20.90 $ 16.78
=====================================================================
Total return c ........................................... 17.98% 9.98% 13.50% 26.18% (11.20)%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) ........................ $ 6,761,779 $4,211,238 $2,940,029 $2,257,336 $1,543,833
Ratios to average net assets:
Expenses d .............................................. 1.18% f 1.16% f 1.16% f 1.19% 1.14%
Net investment income ................................... 1.29% 1.64% 1.27% 0.93% 1.44%
Portfolio turnover rate .................................. 33.40% 21.57% 33.22% 54.65% 51.22%
Ratios to average net assets, excluding dividend
expense on securities sold short:
Expenses ................................................ 1.10% f 1.11% f 1.15% f 1.16% 1.13%
a The amount shown for a share outstanding throughout the period may not
correlate with the Statement of Operations for the period due to the
timing of sales and repurchase of the Fund shares in relation to income
earned and/or fluctuating market value of the investments of the Fund.
b Based on average daily shares outstanding.
c Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable.
d Includes dividend expense on securities sold short which varies from
period to period. See below for expense ratios that reflect only operating
expenses.
e Amount rounds to less than $0.01 per share.
f Benefit of expense reduction rounds to less than 0.01%.
20 | The accompanying notes are an integral part of these financial statements.
| Annual Report
Mutual Shares Fund
FINANCIAL HIGHLIGHTS (CONTINUED)
---------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
CLASS B 2006 2005 2004 2003 2002
---------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ....................... $ 23.35 $ 22.50 $ 20.54 $ 16.53 $ 19.12
---------------------------------------------------------------------
Income from investment operations a:
Net investment income b ................................. 0.16 0.23 0.13 0.04 0.15
Net realized and unrealized gains (losses) .............. 3.78 1.88 2.44 4.14 (2.36)
---------------------------------------------------------------------
Total from investment operations ......................... 3.94 2.11 2.57 4.18 (2.21)
---------------------------------------------------------------------
Less distributions from:
Net investment income ................................... (0.27) (0.06) (0.19) (0.17) (0.12)
Net realized gains ...................................... (1.67) (1.20) (0.42) -- (0.26)
---------------------------------------------------------------------
Total distributions ...................................... (1.94) (1.26) (0.61) (0.17) (0.38)
---------------------------------------------------------------------
Redemption fees .......................................... -- e -- e -- e -- --
---------------------------------------------------------------------
Net asset value, end of year ............................. $ 25.35 $ 23.35 $ 22.50 $ 20.54 $ 16.53
=====================================================================
Total return c ........................................... 17.21% 9.31% 12.70% 25.41% (11.80)%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) .......................... $ 659,186 $ 612,007 $ 588,401 $ 444,671 $ 235,470
Ratios to average net assets:
Expenses d .............................................. 1.84% f 1.81% f 1.81% f 1.84% 1.79%
Net investment income ................................... 0.63% 0.99% 0.62% 0.28% 0.79%
Portfolio turnover rate .................................. 33.40% 21.57% 33.22% 54.65% 51.22%
Ratio to average net assets, excluding dividend
expense on securities sold short:
Expenses ................................................ 1.76% f 1.76% f 1.80% f 1.81% 1.78%
a The amount shown for a share outstanding throughout the period may not
correlate with the Statement of Operations for the period due to the
timing of sales and repurchase of the Fund shares in relation to income
earned and/or fluctuating market value of the investments of the Fund.
b Based on average daily shares outstanding.
c Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable.
d Includes dividend expense on securities sold short which varies from
period to period. See below for expense ratios that reflect only operating
expenses.
e Amount rounds to less than $0.01 per share.
f Benefit of expense reduction rounds to less than 0.01%.
Annual Report |
The accompanying notes are an integral part of these financial statements. | 21
Mutual Shares Fund
FINANCIAL HIGHLIGHTS (CONTINUED)
---------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
CLASS C 2006 2005 2004 2003 2002
---------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ....................... $ 23.48 $ 22.76 $ 20.75 $ 16.68 $ 19.26
---------------------------------------------------------------------
Income from investment operations a:
Net investment income b ................................. 0.16 0.23 0.13 0.05 0.15
Net realized and unrealized gains (losses) .............. 3.82 1.89 2.49 4.17 (2.39)
---------------------------------------------------------------------
Total from investment operations ......................... 3.98 2.12 2.62 4.22 (2.24)
---------------------------------------------------------------------
Less distributions from:
Net investment income ................................... (0.16) (0.20) (0.19) (0.15) (0.08)
Net realized gains ...................................... (1.67) (1.20) (0.42) -- (0.26)
---------------------------------------------------------------------
Total distributions ...................................... (1.83) (1.40) (0.61) (0.15) (0.34)
---------------------------------------------------------------------
Redemption fees .......................................... -- e -- e -- e -- --
---------------------------------------------------------------------
Net asset value, end of year ............................. $ 25.63 $ 23.48 $ 22.76 $ 20.75 $ 16.68
=====================================================================
Total return c ........................................... 17.18% 9.27% 12.77% 25.37% (11.78)%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) .......................... $ 2,387,517 $1,834,009 $1,551,111 $1,272,590 $ 866,422
Ratios to average net assets:
Expenses d .............................................. 1.84% f 1.81% f 1.81% f 1.84% 1.78%
Net investment income ................................... 0.63% 0.99% 0.62% 0.28% 0.80%
Portfolio turnover rate .................................. 33.40% 21.57% 33.22% 54.65% 51.22%
Ratios to average net assets, excluding dividend
expense on securities sold short:
Expenses ................................................ 1.76% f 1.76% f 1.80% f 1.81% 1.77%
a The amount shown for a share outstanding throughout the period may not
correlate with the Statement of Operations for the period due to the
timing of sales and repurchase of the Fund shares in relation to income
earned and/or fluctuating market value of the investments of the Fund.
b Based on average daily shares outstanding.
c Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable.
d Includes dividend expense on securities sold short which varies from
period to period. See below for expense ratios that reflect only operating
expenses.
e Amount rounds to less than $0.01 per share.
f Benefit of expense reduction rounds to less than 0.01%.
22 | The accompanying notes are an integral part of these financial statements.
| Annual Report
Mutual Shares Fund
FINANCIAL HIGHLIGHTS (CONTINUED)
----------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
CLASS R 2006 2005 2004 2003 2002 g
----------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ....................... $ 23.72 $ 22.85 $ 20.83 $ 16.75 $ 19.36
----------------------------------------------------------------------
Income from investment operations a:
Net investment income b ................................. 0.28 0.35 0.24 0.13 0.24
Net realized and unrealized gains (losses) .............. 3.86 1.91 2.50 4.21 (2.37)
----------------------------------------------------------------------
Total from investment operations ......................... 4.14 2.26 2.74 4.34 (2.13)
----------------------------------------------------------------------
Less distributions from:
Net investment income ................................... (0.42) (0.19) (0.30) (0.26) (0.22)
Net realized gains ...................................... (1.67) (1.20) (0.42) -- (0.26)
----------------------------------------------------------------------
Total distributions ...................................... (2.09) (1.39) (0.72) (0.26) (0.48)
----------------------------------------------------------------------
Redemption fees .......................................... -- e -- e -- e -- --
----------------------------------------------------------------------
Net asset value, end of year ............................. $ 25.77 $ 23.72 $ 22.85 $ 20.83 $ 16.75
======================================================================
Total return c .......................................... 17.73% 9.88% 13.32% 26.02% (11.26)%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) .......................... $ 188,646 $ 109,305 $ 74,763 $ 46,933 $ 13,392
Ratios to average net assets:
Expenses d .............................................. 1.34% f 1.31% f 1.31% f 1.34% 1.29% h
Net investment income ................................... 1.13% 1.49% 1.12% 0.78% 1.29% h
Portfolio turnover rate .................................. 33.40% 21.57% 33.22% 54.65% 51.22%
Ratios to average net assets, excluding dividend
expense on securities sold short:
Expenses ................................................ 1.26% f 1.26% f 1.30% f 1.31% 1.28% h
a The amount shown for a share outstanding throughout the period may not
correlate with the Statement of Operations for the period due to the
timing of sales and repurchase of the Fund shares in relation to income
earned and/or fluctuating market value of the investments of the Fund.
b Based on average daily shares outstanding.
c Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable.
d Includes dividend expense on securities sold short which varies from
period to period. See below for expense ratios that reflect only operating
expenses.
e Amount rounds to less than $0.01 per share.
f Benefit of expense reduction rounds to less than 0.01%.
g For the period January 2, 2002 (effective date) to December 31, 2002.
h Annualized.
Annual Report |
The accompanying notes are an integral part of these financial statements. | 23
Mutual Shares Fund
STATEMENT OF INVESTMENTS, DECEMBER 31, 2006
- --------------------------------------------------------------------------------------------------------------------------------
SHARES/WARRANTS/
COUNTRY CONTRACTS VALUE
- --------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS 93.5%
COMMON STOCKS AND OTHER EQUITY INTERESTS 89.8%
AEROSPACE & DEFENSE 0.1%
a GenCorp Inc. ............................................. United States 1,993,300 $ 27,946,066
-----------------
AIRLINES 0.4%
a ACE Aviation Holdings Inc., A ............................ Canada 2,345,198 76,056,668
a,b ACE Aviation Holdings Inc., A, 144A ...................... Canada 121,088 3,926,982
-----------------
79,983,650
-----------------
AUTOMOBILES 0.5%
General Motors Corp. ..................................... United States 1,472,130 45,223,834
a,c,d,e,g International Automotive Components Group Brazil LLC ..... Brazil 6,069,096 25,004,675
a,c,d,e,g International Automotive Components Group Japan LLC ...... Japan 953,142 8,007,242
a,c,d,e,g International Automotive Components Group LLC ............ Luxembourg 25,796,752 25,796,752
-----------------
104,032,503
-----------------
BEVERAGES 2.1%
Brown-Forman Corp., A .................................... United States 125,460 8,459,768
Brown-Forman Corp., B .................................... United States 606,036 40,143,824
Coca-Cola Enterprises Inc. ............................... United States 7,501,360 153,177,771
Pernod Ricard SA ......................................... France 1,112,591 255,549,568
-----------------
457,330,931
-----------------
BUILDING PRODUCTS 0.2%
a Armstrong World Industries Inc. .......................... United States 534,677 22,664,958
a,f Armstrong World Industries Inc., Contingent Distribution . United States 45,410,075 567,626
a,e,f Owens Corning, Contingent Distribution ................... United States 58,343,354 --
a,d Owens Corning Inc. ....................................... United States 1,021,874 29,026,331
a,d Owens Corning Inc., options to sell (shares), exercise
price $25.00, expiration date, 4/06/07 ................... United States 911,589 --
a,d Owens Corning Inc., options to purchase (shares),
exercise price $37.50, expiration date, 1/02/08 .......... United States 911,589 --
-----------------
52,258,915
-----------------
CAPITAL MARKETS 1.2%
Legg Mason Inc. .......................................... United States 1,524,491 144,902,870
The Bear Stearns Cos. Inc. ............................... United States 656,304 106,833,165
-----------------
251,736,035
-----------------
CHEMICALS 1.2%
a Arkema ................................................... France 1,145,278 58,855,314
a,f,p Dow Corning Corp., Contingent Distribution ............... United States 621,830,547 10,412,547
Koninklijke DSM NV ....................................... Netherlands 1,088,980 53,805,924
Linde AG ................................................. Germany 1,240,940 128,623,829
-----------------
251,697,614
-----------------
COMMERCIAL BANKS 9.4%
BNP Paribas SA ........................................... France 1,182,997 129,067,489
a,b,c Centennial Bank Holdings Inc., 144A ...................... United States 3,845,467 36,378,118
Chinatrust Financial Holding Co. Ltd. .................... Taiwan 138,257,280 115,621,018
Danske Bank AS ........................................... Denmark 3,475,500 154,420,183
a,c,d,e Elephant Capital Holdings Ltd. ........................... Japan 25,721 34,864,956
24 | Annual Report
Mutual Shares Fund
STATEMENT OF INVESTMENTS, DECEMBER 31, 2006 (CONTINUED)
- --------------------------------------------------------------------------------------------------------------------------------
SHARES/WARRANTS/
COUNTRY CONTRACTS VALUE
- --------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
COMMON STOCKS AND OTHER EQUITY INTERESTS (CONTINUED)
COMMERCIAL BANKS (CONTINUED)
Intesa Sanpaulo SpA ...................................... Italy 26,466,053 $ 204,378,593
a Investors Bancorp Inc. ................................... United States 1,796 28,251
Mitsubishi UFJ Financial Group Inc. ...................... Japan 13,221 163,270,215
a,d,e NCB Warrant Holdings Ltd., A ............................. Japan 124,040 14,608,191
Societe Generale, A ...................................... France 1,109,568 188,358,512
Sumitomo Mitsui Financial Group Inc. ..................... Japan 16,131 165,328,013
Svenska Handelsbanken AB, A .............................. Sweden 7,571,740 228,770,169
Swedbank AB, A ........................................... Sweden 4,675,017 169,567,627
U.S. Bancorp ............................................. United States 4,371,380 158,200,242
UnionBanCal Corp. ........................................ United States 1,002,800 61,421,500
Wachovia Corp. ........................................... United States 3,571,595 203,402,335
-----------------
2,027,685,412
-----------------
COMMERCIAL SERVICES & SUPPLIES 0.3%
a Comdisco Holding Co. Inc. ................................ United States 1,098 12,956
a,f Comdisco Holding Co. Inc., Contingent Distribution ....... United States 95,431,240 --
Republic Services Inc. ................................... United States 1,546,255 62,886,191
-----------------
62,899,147
-----------------
COMPUTERS & PERIPHERALS 1.7%
a,c,d,e DecisionOne Corp. ........................................ United States 1,879,100 1,339,798
a Dell Inc. ................................................ United States 6,557,230 164,520,901
International Business Machines Corp. .................... United States 1,966,640 191,059,076
-----------------
356,919,775
-----------------
CONSTRUCTION MATERIALS 0.2%
Rinker Group Ltd. ........................................ Australia 2,739,521 39,034,531
-----------------
CONSUMER FINANCE 0.8%
Capital One Financial Corp. .............................. United States 161,100 12,375,702
a,d,e Cerberus FIM Investors Auto Finance LLC .................. United States 11,573,733 11,725,117
a,d,e Cerberus FIM Investors Commercial Finance LLC ............ United States 1,478,887 1,498,231
a,d,e Cerberus FIM Investors Commercial Mortgage LLC ........... United States 2,530,476 2,563,575
a,d,e Cerberus FIM Investors Insurance LLC ..................... United States 12,055,348 12,213,032
a,d,e Cerberus FIM Investors Rescap LLC ........................ United States 25,569,306 25,903,752
Takefuji Corp. ........................................... Japan 2,775,308 109,813,926
-----------------
176,093,335
-----------------
CONTAINERS & PACKAGING 0.8%
Temple-Inland Inc. ....................................... United States 3,700,000 170,311,000
-----------------
DIVERSIFIED CONSUMER SERVICES 0.4%
H&R Block Inc. ........................................... United States 4,087,770 94,182,221
-----------------
DIVERSIFIED FINANCIAL SERVICES 2.6%
Citigroup Inc. ........................................... United States 4,022,330 224,043,781
Fortis ................................................... Belgium 7,356,673 313,768,087
Leucadia National Corp. .................................. United States 930,086 26,228,425
a,f Marconi Corp., Contingent Distribution ................... United Kingdom 77,739,439 --
-----------------
564,040,293
-----------------
Annual Report | 25
Mutual Shares Fund
STATEMENT OF INVESTMENTS, DECEMBER 31, 2006 (CONTINUED)
- --------------------------------------------------------------------------------------------------------------------------------
SHARES/WARRANTS/
COUNTRY CONTRACTS VALUE
- --------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
COMMON STOCKS AND OTHER EQUITY INTERESTS (CONTINUED)
DIVERSIFIED TELECOMMUNICATION SERVICES 6.8%
a,c,d,e,g AboveNet Inc. ............................................ United States 763,805 $ 23,402,985
a,c,e,f,g AboveNet Inc., Contingent Distribution ................... United States 106,869,000 --
a,c,d,g AboveNet Inc., options to purchase (shares),
exercise price $20.95, expiration date, 9/09/13 ......... United States 1,065 28,808
a,c,d,e,g AboveNet Inc., wts., 9/08/08 ............................. United States 25,659 821,088
a,c,d,e,g AboveNet Inc., wts., 9/08/10 ............................. United States 30,186 869,357
Belgacom ................................................. Belgium 1,433,845 63,160,967
BellSouth Corp. .......................................... United States 8,605,080 405,385,319
Chunghwa Telecom Co. Ltd., ADR ........................... Taiwan 3,914,623 77,235,512
Embarq Corp. ............................................. United States 1,513,102 79,528,641
a,e,f Global Crossing Holdings Ltd., Contingent Distribution ... United States 105,649,309 --
Koninklijke (Royal) KPN NV ............................... Netherlands 3,202,416 45,528,549
NTL Inc. ................................................. United Kingdom 9,128,225 230,396,399
Sprint Nextel Corp. ...................................... United States 8,504,832 160,656,276
Verizon Communications Inc. .............................. United States 10,247,448 381,614,964
-----------------
1,468,628,865
-----------------
ELECTRIC UTILITIES 1.5%
Constellation Energy Group ............................... United States 3,333,700 229,591,919
E.ON AG .................................................. Germany 619,790 84,507,101
-----------------
314,099,020
-----------------
ELECTRICAL EQUIPMENT 0.2%
American Power Conversion Corp. .......................... United States 1,585,016 48,485,639
-----------------
ELECTRONIC EQUIPMENT & INSTRUMENTS 0.0% h
Symbol Technologies Inc. ................................. United States 201,400 3,008,916
-----------------
ENERGY EQUIPMENT & SERVICES 0.5%
a Basic Energy Services Inc. ............................... United States 25,733 634,318
a Seadrill Ltd. ............................................ Bermuda 5,877,230 99,201,113
-----------------
99,835,431
-----------------
FOOD & STAPLES RETAILING 1.2%
Carrefour SA ............................................. France 2,196,318 133,191,519
Kroger Co. ............................................... United States 5,559,670 128,261,587
-----------------
261,453,106
-----------------
FOOD PRODUCTS 4.2%
Cadbury Schweppes PLC .................................... United Kingdom 14,828,526 158,700,546
General Mills Inc. ....................................... United States 1,037,600 59,765,760
Groupe Danone ............................................ France 671,351 101,737,694
Nestle SA ................................................ Switzerland 653,170 232,097,665
g Orkla ASA ................................................ Norway 6,435,750 364,330,578
-----------------
916,632,243
-----------------
HEALTH CARE EQUIPMENT & SUPPLIES 1.4%
q Bausch & Lomb Inc. ....................................... United States 1,720,570 89,572,874
a Boston Scientific Corp. .................................. United States 7,102,981 122,029,213
Hillenbrand Industries Inc. .............................. United States 1,462,406 83,254,774
-----------------
294,856,861
-----------------
26 | Annual Report
Mutual Shares Fund
STATEMENT OF INVESTMENTS, DECEMBER 31, 2006 (CONTINUED)
- --------------------------------------------------------------------------------------------------------------------------------
SHARES/WARRANTS/
COUNTRY CONTRACTS VALUE
- --------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
COMMON STOCKS AND OTHER EQUITY INTERESTS (CONTINUED)
HEALTH CARE PROVIDERS & SERVICES 2.0%
Aetna Inc. ............................................... United States 2,030,800 $ 87,689,944
Caremark Rx Inc. ......................................... United States 2,102,400 120,068,064
a Express Scripts Inc. ..................................... United States 1,520,800 108,889,280
a,c,d,e,g Kindred Healthcare Inc. .................................. United States 2,860,528 68,616,915
a,c,d,e,g Kindred Healthcare Inc., options to purchase (shares):
exercise price $23.75, expiration date, 7/17/11 ......... United States 7,640 1,815
exercise price $26.00, expiration date, 1/01/12 ......... United States 2,292 --
exercise price $9.07, expiration date, 1/01/13 .......... United States 1,714 25,560
exercise price $25.99, expiration date, 1/01/14 ......... United States 1,136 --
exercise price $27.90, expiration date, 1/10/15 ......... United States 473 --
MDS Inc. ................................................. Canada 2,178,151 39,759,083
-----------------
425,050,661
-----------------
HOTELS, RESTAURANTS & LEISURE 0.4%
a Trump Entertainment Resorts Inc. ......................... United States 1,823,378 33,258,415
a Wyndham Worldwide Corp. .................................. United States 1,845,958 59,107,575
-----------------
92,365,990
-----------------
HOUSEHOLD DURABLES 0.3%
Koninklijke Philips Electronics NV ....................... Netherlands 1,751,624 66,060,444
-----------------
INDUSTRIAL CONGLOMERATES 2.9%
Keppel Corp. Ltd. ........................................ Singapore 8,139,467 93,419,818
Siemens AG ............................................... Germany 1,520,719 151,761,331
Tyco International Ltd. .................................. United States 12,614,130 383,469,552
-----------------
628,650,701
-----------------
INSURANCE 10.0%
a Alleghany Corp. .......................................... United States 348,651 126,769,504
American International Group Inc. ........................ United States 2,237,380 160,330,651
a Berkshire Hathaway Inc., A ............................... United States 1,590 174,884,100
a Berkshire Hathaway Inc., B ............................... United States 149,920 549,606,720
a Conseco Inc. ............................................. United States 3,867,000 77,262,660
Hartford Financial Services Group Inc. ................... United States 1,221,700 113,996,827
Montpelier Re Holdings Ltd. .............................. Bermuda 863,889 16,076,974
Nationwide Financial Services Inc., A .................... United States 1,794,150 97,242,930
Old Republic International Corp. ......................... United States 6,101,302 142,038,311
a,d,e Olympus Re Holdings Ltd. ................................. Bermuda 202,380 202,380
Prudential Financial Inc. ................................ United States 948,700 81,455,382
The St. Paul Travelers Cos. Inc. ......................... United States 3,421,316 183,690,456
c White Mountains Insurance Group Ltd. ..................... United States 729,657 422,785,155
Zurich Financial Services AG ............................. Switzerland 44,446 11,963,635
-----------------
2,158,305,685
-----------------
LEISURE EQUIPMENT & PRODUCTS 0.6%
Mattel Inc. .............................................. United States 5,907,650 133,867,349
-----------------
Annual Report | 27
Mutual Shares Fund
STATEMENT OF INVESTMENTS, DECEMBER 31, 2006 (CONTINUED)
- --------------------------------------------------------------------------------------------------------------------------------
SHARES/WARRANTS/
COUNTRY CONTRACTS VALUE
- --------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
COMMON STOCKS AND OTHER EQUITY INTERESTS (CONTINUED)
MACHINERY 0.7%
c Federal Signal Corp. ..................................... United States 3,360,800 $ 53,907,232
Scania AB ................................................ Sweden 1,291,280 90,656,481
-----------------
144,563,713
-----------------
MARINE 0.6%
A P Moller - Maersk A/S .................................. Denmark 13,678 128,809,318
-----------------
MEDIA 7.2%
a Cablevision Systems Corp., A ............................. United States 4,362,500 124,244,000
Clear Channel Communications Inc. ........................ United States 4,933,880 175,350,095
a Comcast Corp., A ......................................... United States 4,724,327 197,854,815
a EchoStar Communications Corp., A ......................... United States 416,430 15,836,833
a Liberty Media Holding Corp.-Capital, A ................... United States 1,271,417 124,573,438
Mediaset SpA ............................................. Italy 1,001,294 11,882,605
News Corp., A ............................................ United States 15,150,522 325,433,213
Sun-Times Media Group Inc., A ............................ United States 1,929,706 9,474,856
Time Warner Inc. ......................................... United States 13,379,318 291,401,546
a,c TVMAX Holdings Inc. ...................................... United States 257,217 257,217
a Viacom Inc., B ........................................... United States 4,258,771 174,737,374
Washington Post Co., B ................................... United States 139,850 104,272,160
-----------------
1,555,318,152
-----------------
METALS & MINING 2.1%
Anglo American PLC ....................................... South Africa 3,077,756 150,140,614
c,d,e,g Esmark Inc. .............................................. United States 16,598 13,666,627
Mittal Steel Co. NV ...................................... Netherlands 3,408,967 143,865,213
Phelps Dodge Corp. ....................................... United States 860,760 103,050,187
United States Steel Corp. ................................ United States 561,365 41,058,236
-----------------
451,780,877
-----------------
MULTI-UTILITIES & UNREGULATED POWER 1.1%
NorthWestern Corp. ....................................... United States 716,460 25,348,355
a,f NorthWestern Corp., Contingent Distribution .............. United States 21,699,220 2,267,115
a NorthWestern Corp., wts., 11/01/07 ....................... United States 39,226 446,784
RWE AG ................................................... Germany 1,046,347 115,277,480
Suez SA .................................................. France 1,656,430 85,779,153
-----------------
229,118,887
-----------------
OIL, GAS & CONSUMABLE FUELS 2.9%
a,c,d,e Anchor Resources LLC ..................................... United States 123,013 --
a,e Apco Oil Corp. ........................................... United States 9,200 --
BP PLC ................................................... United Kingdom 5,707,068 63,426,272
BP PLC, ADR .............................................. United Kingdom 46,400 3,113,440
Massey Energy Co. ........................................ United States 3,588,570 83,362,481
a,c OPTI Canada Inc. ......................................... Canada 4,085,890 69,357,566
Pogo Producing Co. ....................................... United States 1,905,050 92,280,622
Royal Dutch Shell PLC, A ................................. United Kingdom 5,849,264 206,313,686
Total SA, B .............................................. France 1,523,752 109,924,580
-----------------
627,778,647
-----------------
28 | Annual Report
Mutual Shares Fund
STATEMENT OF INVESTMENTS, DECEMBER 31, 2006 (CONTINUED)
- --------------------------------------------------------------------------------------------------------------------------------
SHARES/WARRANTS/
COUNTRY CONTRACTS VALUE
- --------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
COMMON STOCKS AND OTHER EQUITY INTERESTS (CONTINUED)
PAPER & FOREST PRODUCTS 3.7%
International Paper Co. .................................. United States 9,480,806 $ 323,295,485
Weyerhaeuser Co. ......................................... United States 6,765,707 477,997,199
-----------------
801,292,684
-----------------
PHARMACEUTICALS 2.2%
Pfizer Inc. .............................................. United States 10,691,800 276,917,620
Sanofi-Aventis ........................................... France 1,407,137 129,931,503
Valeant Pharmaceuticals International .................... United States 3,520,835 60,699,195
-----------------
467,548,318
-----------------
REAL ESTATE 2.3%
a,c Alexander's Inc. ......................................... United States 326,675 137,089,164
e Canary Wharf Group PLC ................................... United Kingdom 14,262,931 97,202,693
Link REIT ................................................ Hong Kong 17,828,204 36,668,693
Potlatch Corp. ........................................... United States 324,599 14,223,928
a Realogy Corp. ............................................ United States 2,545,247 77,171,889
Reckson Associates Realty Corp. .......................... United States 836,600 38,148,960
The St. Joe Co. .......................................... United States 1,052,935 56,405,728
Ventas Inc. .............................................. United States 1,072,765 45,399,415
-----------------
502,310,470
-----------------
ROAD & RAIL 1.2%
Avis Budget Group Inc. ................................... United States 922,979 20,019,415
c,d,e Florida East Coast Industries Inc. ....................... United States 4,423,071 250,434,280
-----------------
270,453,695
-----------------
SOFTWARE 1.0%
Microsoft Corp. .......................................... United States 7,330,629 218,892,582
-----------------
SPECIALTY RETAIL 0.2%
The Home Depot Inc. ...................................... United States 1,030,613 41,389,418
-----------------
TEXTILES, APPAREL & LUXURY GOODS 0.1%
Christian Dior SA ........................................ France 164,222 17,505,085
-----------------
THRIFTS & MORTGAGE FINANCE 2.4%
Countrywide Financial Corp. .............................. United States 2,690,901 114,228,747
Hudson City Bancorp Inc. ................................. United States 4,121,569 57,207,378
Sovereign Bancorp Inc. ................................... United States 5,261,714 133,594,918
Washington Mutual Inc. ................................... United States 4,666,130 212,262,254
-----------------
517,293,297
-----------------
TOBACCO 8.2%
Altadis SA ............................................... Spain 6,753,888 353,498,362
Altria Group Inc. ........................................ United States 3,963,450 340,143,279
British American Tobacco PLC ............................. United Kingdom 12,181,486 340,896,679
British American Tobacco PLC, ADR ........................ United Kingdom 70,550 3,997,363
Imperial Tobacco Group PLC ............................... United Kingdom 6,933,289 272,913,885
Japan Tobacco Inc. ....................................... Japan 10,831 52,319,276
Annual Report | 29
Mutual Shares Fund
STATEMENT OF INVESTMENTS, DECEMBER 31, 2006 (CONTINUED)
- --------------------------------------------------------------------------------------------------------------------------------
SHARES/WARRANTS/
COUNTRY CONTRACTS VALUE
- --------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
COMMON STOCKS AND OTHER EQUITY INTERESTS (CONTINUED)
TOBACCO (CONTINUED)
KT&G Corp. ............................................... South Korea 1,972,180 $ 119,815,237
Reynolds American Inc. ................................... United States 4,297,230 281,339,648
-----------------
1,764,923,729
-----------------
TOTAL COMMON STOCKS AND OTHER EQUITY INTERESTS
(COST $14,183,063,094) .................................. 19,366,431,211
-----------------
PREFERRED STOCKS 0.3%
DIVERSIFIED TELECOMMUNICATION SERVICES 0.0% h
d PTV Inc., 10.00%, pfd., A ................................ United Kingdom 199,566 748,373
-----------------
METALS & MINING 0.3%
c,d,e,g Esmark Inc., 8.00%, cvt. pfd., A ......................... United States 60,419 58,425,173
-----------------
TOTAL PREFERRED STOCKS (COST $61,017,698) ................ 59,173,546
-----------------
------------------
PRINCIPAL AMOUNT o
------------------
CORPORATE BONDS & NOTES 1.2%
b ACE Aviation Holdings Inc., cvt., 144A, 4.25%, 6/01/35 ... Canada 5,190,000 CAD 4,470,460
d,e Cerberus FIM Investors Auto Finance LLC, 12.00%, 11/22/13 United States 34,533,170 34,533,170
d,e Cerberus FIM Investors Commercial Finance LLC, 12.00%,
11/22/13 ................................................. United States 4,436,661 4,436,661
d,e Cerberus FIM Investors Commercial Mortgage LLC, 12.00%,
11/22/13 ................................................. United States 7,591,429 7,591,429
d,e Cerberus FIM Investors Insurance LLC, 12.00%, 11/22/13 ... United States 36,166,045 36,166,045
d,e Cerberus FIM Investors Rescap LLC, 12.00%, 11/22/13 ...... United States 76,707,917 76,707,917
c,d,e DecisionOne Corp., 12.00%, 4/15/10 ....................... United States 2,187,193 2,187,193
e,i Motor Coach Industries International Inc., FRN, 18.37%,
12/01/08 ................................................. United States 61,636,303 63,177,211
Trump Entertainment Resorts Inc., 8.50%, 5/20/15 ......... United States 36,590,212 36,590,212
c,e TVMAX Holdings Inc., PIK,
11.50%, 1/30/07 ........................................ United States 446,378 446,378
14.00%, 1/30/07 ........................................ United States 1,385,745 1,385,745
-----------------
TOTAL CORPORATE BONDS & NOTES (COST $268,323,146)......... 267,692,421
-----------------
CORPORATE BONDS & NOTES IN REORGANIZATION 1.8%
j Adelphia Communications Corp.,
9.25%, 10/01/02 ........................................ United States 11,465,000 10,490,475
8.125%, 7/15/03 ........................................ United States 1,442,000 1,330,245
7.50%, 1/15/04 ......................................... United States 3,750,000 3,459,375
10.50%, 7/15/04 ........................................ United States 6,320,000 5,909,200
9.875%, 3/01/05 ........................................ United States 2,564,000 2,365,290
10.25%, 11/01/06 ....................................... United States 11,760,000 10,731,000
9.875%, 3/01/07 ........................................ United States 1,090,000 1,005,525
8.375%, 2/01/08 ........................................ United States 9,037,000 8,336,632
7.75%, 1/15/09 ......................................... United States 19,364,000 17,863,290
7.875%, 5/01/09 ........................................ United States 7,952,000 7,216,440
9.375%, 11/15/09 ....................................... United States 9,522,000 9,069,705
30 | Annual Report
Mutual Shares Fund
STATEMENT OF INVESTMENTS, DECEMBER 31, 2006 (CONTINUED)
- --------------------------------------------------------------------------------------------------------------------------------
COUNTRY PRINCIPAL AMOUNT o VALUE
- --------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
CORPORATE BONDS & NOTES IN REORGANIZATION (CONTINUED)
j Adelphia Communications Corp., (continued)
senior note, 10.875%, 10/01/10 ......................... United States 8,130,000 $ 7,499,925
senior note, 10.25%, 6/15/11 ........................... United States 9,783,000 9,342,765
j Century Communications Corp.,
8.875%, 1/15/07 ........................................ United States 559,000 673,595
8.75%, 10/01/07 ........................................ United States 5,509,000 6,459,303
8.375%, 12/15/07 ....................................... United States 875,000 1,054,375
senior note, 9.50%, 3/01/05 ............................ United States 1,578,000 1,917,270
Series B, zero cpn., senior disc. note, 1/15/08 ........ United States 8,769,000 6,116,378
zero cpn., 3/15/03 ..................................... United States 15,848,000 16,917,740
i,j Collins & Aikman Products Co.,
Revolver, FRN, 11.50%, 8/31/09 ......................... United States 1,145,756 653,081
Tranche B1 Term Loan, FRN, 11.50%, 8/31/11 ............. United States 2,711,000 1,545,270
j Dana Corp.,
6.50%, 3/01/09 ......................................... United States 729,000 550,395
5.85%, 1/15/15 ......................................... United States 29,532,000 21,263,040
7.00%, 3/01/29 ......................................... United States 6,376,000 4,718,240
j Eurotunnel PLC,
Participating Loan Note, 1.00%, 4/30/40 ................ United Kingdom 1,482,000 GBP 609,478
i S8 Tier 1 EFL2 Stabilization Note, FRN, 5.971%, 3/15/26 United Kingdom 547,000 GBP 385,638
b,i Senior Tranche G2 Term Loan A, 144A, FRN, 5.747%,
12/15/12 .............................................. United Kingdom 1,627,232 GBP 3,226,523
i Tier 2, FRN, 5.959%, 12/31/18 .......................... United Kingdom 13,617,682 GBP 26,701,519
i Tier 3, FRN, 5.895%, 12/31/25 .......................... United Kingdom 53,591,168 GBP 91,831,472
j Eurotunnel SA,
i S6 Tier 1 FM2 Stabilization Note, FRN, 4.187%, 3/15/26 . France 82,000 EUR 38,968
i S7 Tier 1 FM4 Stabilization Note, FRN, 4.187%, 3/15/26 . France 471,000 EUR 223,828
Senior Tranche H1 Term Loan (KfW Advance), 8.78%,
12/15/12 .............................................. France 1,427,326 EUR 1,907,693
i Tier 2 (PIBOR), FRN, 4.291%, 12/31/18 .................. France 1,393,972 EUR 1,842,412
i Tier 2 (LIBOR), FRN, 4.305%, 12/31/18 .................. France 3,151,383 EUR 4,165,183
i Tier 3 (LIBOR), FRN, 4.300%, 12/31/25 .................. France 77,744,116 EUR 89,797,851
i Tier 3 (PIBOR), FRN, 4.304%, 12/31/25 .................. France 13,502,354 EUR 15,595,809
j Safety Kleen Services, senior sub. note, 9.25%, 6/01/08 .. United States 85,000 85
-----------------
TOTAL CORPORATE BONDS & NOTES IN REORGANIZATION
(COST $282,557,824)...................................... 392,815,013
-----------------
------------------
SHARES/PRINCIPAL
AMOUNT o
------------------
COMPANIES IN LIQUIDATION 0.0% h
e Peregrine Investments Holdings Ltd.,
6.70%, 1/15/98 ......................................... Hong Kong 95,000,000 JPY 5,985
6.70%, 6/30/00 ......................................... Hong Kong 250,000,000 JPY 15,752
zero cpn., 1/22/98 ..................................... Hong Kong 500,000 3,750
e PIV Investment Finance (Cayman) Ltd. ..................... Hong Kong 22,710,000 454,200
-----------------
TOTAL COMPANIES IN LIQUIDATION (COST $--)................. 479,687
-----------------
Annual Report | 31
Mutual Shares Fund
STATEMENT OF INVESTMENTS, DECEMBER 31, 2006 (CONTINUED)
- --------------------------------------------------------------------------------------------------------------------------------
COUNTRY PRINCIPAL AMOUNT o VALUE
- --------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
GOVERNMENT AGENCIES (COST $89,200,000) 0.4%
Federal Home Loan Bank, 2.26% - 5.48%, 1/26/07 - 2/28/08 . United States 89,200,000 $ 88,975,934
-----------------
TOTAL LONG TERM INVESTMENTS (COST $14,884,161,762)........ 20,175,567,811
-----------------
SHORT TERM INVESTMENTS 6.1%
U.S. GOVERNMENT AND AGENCY SECURITIES 6.1%
k U.S. Treasury Bill, 5/03/07 .............................. United States 100,000,000 98,374,300
k,l Federal Home Loan Bank, 1/02/07 - 6/27/07 ................ United States 1,226,215,000 1,220,503,728
-----------------
TOTAL SHORT TERM INVESTMENTS
(COST $1,318,330,313).................................... 1,318,878,028
-----------------
TOTAL INVESTMENTS (COST $16,202,492,075) 99.6%............ 21,494,445,839
OPTIONS WRITTEN 0.0% h ................................... (95,445)
SECURITIES SOLD SHORT (3.0)% ............................. (651,060,873)
NET UNREALIZED LOSS ON FORWARD EXCHANGE
CONTRACTS (0.2)%......................................... (47,126,359)
OTHER ASSETS, LESS LIABILITIES 3.6% ...................... 778,471,121
-----------------
NET ASSETS 100.0%......................................... $ 21,574,634,283
=================
------------------
CONTRACTS
------------------
m OPTIONS WRITTEN 0.0% h
HEALTH CARE EQUIPMENT & SUPPLIES 0.0% h
Bausch & Lomb Inc., Feb. 55.00 Calls, 2/17/07 ............ United States 489 $ 63,570
Bausch & Lomb Inc., Jan. 55.00 Calls, 1/20/07 ............ United States 1,275 31,875
-----------------
TOTAL OPTIONS WRITTEN
(PREMIUMS RECEIVED $200,656) ............................ $ 95,445
-----------------
------------------
SHARES
------------------
n SECURITIES SOLD SHORT 3.0%
DIVERSIFIED TELECOMMUNICATION SERVICES 1.9%
AT&T Inc. ................................................ United States 11,400,659 $ 407,573,559
-----------------
ELECTRIC UTILITIES 0.5%
FPL Group Inc. ........................................... United States 1,899,740 103,383,851
Iberdrola SA, Br. ........................................ Spain 22,062 964,552
-----------------
104,348,403
-----------------
FOOD & STAPLES RETAILING 0.2%
CVS Corp. ................................................ United States 1,407,337 43,500,787
-----------------
FOOD PRODUCTS 0.1%
Kraft Foods Inc., A ...................................... United States 971,045 34,666,306
-----------------
METALS & MINING 0.1%
Freeport-McMoRan Copper & Gold Inc., B ................... United States 576,700 32,139,491
-----------------
REAL ESTATE 0.1%
SL Green Realty Corp. .................................... United States 86,868 11,534,333
-----------------
32 | Annual Report
Mutual Shares Fund
STATEMENT OF INVESTMENTS, DECEMBER 31, 2006 (CONTINUED)
- --------------------------------------------------------------------------------------------------------------------------------
COUNTRY SHARES VALUE
- --------------------------------------------------------------------------------------------------------------------------------
SECURITIES SOLD SHORT (CONTINUED)
TEXTILES, APPAREL & LUXURY GOODS 0.1%
LVMH Moet Hennessy Louis Vuitton ......................... France 163,903 $ 17,297,994
-----------------
TOTAL SECURITIES SOLD SHORT
(PROCEEDS $548,238,606) ................................. $ 651,060,873
-----------------
CURRENCY ABBREVIATIONS
CAD - Canadian Dollar
EUR - Euro
GBP - British Pound
JPY - Japanese Yen
SELECTED PORTFOLIO ABBREVIATIONS
ADR - American Depository Receipt
FRN - Floating Rate Note
LIBOR - London InterBank Offered Rate
PIBOR - Paris InterBank Offered Rate
PIK - Payment-In-Kind
REIT - Real Estate Investment Trust
a Non-income producing during the twelve months ended December 31, 2006.
b Security was purchased pursuant to Rule 144A under the Securities Act of
1933 and may be sold in transactions exempt from registration only to
qualified institutional buyers or in a public offering registered under
the Securities Act of 1933. These securities have been deemed liquid under
guidelines approved by the Fund's Board of Directors. At December 31,
2006, the value of these securities was $48,002,083, representing 0.22% of
net assets.
c See Note 12 regarding Holdings of 5% Voting Securities.
d See Note 11 regarding restricted securities.
e Security has been deemed illiquid because it may not be able to be sold
within seven days. At December 31, 2006 the aggregate value of these
securities was $904,305,630, representing 4.19% of net assets.
f Contingent distributions represent the right to receive additional
distributions, if any, during the reorganization of the underlying
company. Shares represent total underlying principal of debt securities.
g See Note 13 regarding other considerations -- security board member.
h Rounds to less than 0.1% of net assets.
i The coupon rate shown represents the rate at period end.
j See Note 10 regarding defaulted securities.
k The security is traded on a discount basis with no stated coupon rate.
l See Note 1(f) regarding securities segregated with broker for securities
sold short.
m See Note 1(e) regarding written options.
n See Note 1(f) regarding securities sold short.
o The principal amount is stated in U.S. dollars unless otherwise indicated.
p See Note 13 regarding other considerations -- credit committee
participation.
q A portion or all of the security is held in connection with written option
contracts open at year end.
Annual Report |
The accompanying notes are an integral part of these financial statements. | 33
Mutual Shares Fund
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
December 31, 2006
Assets:
Investments in securities:
Cost - Unaffiliated issuers ......................................................................... $15,630,617,938
Cost - Non-controlled affiliated issuers (Note 12) .................................................. 571,874,137
---------------
Total cost of investments ........................................................................... $16,202,492,075
===============
Value - Unaffiliated issuers (includes securities segregated with broker for securities
sold short in the amount of $408,850,896) .......................................................... $20,259,346,040
Value - Non-controlled affiliated issuers (Note 12) ................................................. 1,235,099,799
---------------
Total value of investments .......................................................................... 21,494,445,839
Cash ................................................................................................. 582,366
Cash on deposit with brokers for securities sold short ............................................... 691,537,058
Foreign currency, at value (cost $65,920,520) ........................................................ 67,741,366
Receivables:
Investment securities sold .......................................................................... 97,589,743
Capital shares sold ................................................................................. 50,887,204
Dividends and interest .............................................................................. 23,270,336
Other ............................................................................................... 2,253,877
Unrealized gain on forward exchange contracts (Note 8) ............................................... 35,702,145
Due from broker - synthetic equity swaps (Note 7) .................................................... 23,488
---------------
Total assets .................................................................................... 22,464,033,422
---------------
Liabilities:
Payables:
Investment securities purchased ..................................................................... 93,148,541
Capital shares redeemed ............................................................................. 38,215,171
Affiliates .......................................................................................... 22,251,418
Options written, at value (premiums received $200,656) ............................................... 95,445
Securities sold short, at value (proceeds $548,238,606) .............................................. 651,060,873
Unrealized loss on forward exchange contracts (Note 8) ............................................... 82,828,504
Accrued expenses and other liabilities ............................................................... 1,799,187
---------------
Total liabilities ............................................................................... 889,399,139
---------------
Net assets, at value .......................................................................... $21,574,634,283
===============
Net assets consist of:
Paid-in capital ...................................................................................... $16,384,058,850
Distributions in excess of net investment income ..................................................... (1,937,133)
Net unrealized appreciation (depreciation) ........................................................... 5,144,069,927
Accumulated net realized gain (loss) ................................................................. 48,442,639
---------------
Net assets, at value .......................................................................... $21,574,634,283
===============
34 | The accompanying notes are an integral part of these financial statements.
| Annual Report
Mutual Shares Fund
FINANCIAL STATEMENTS (CONTINUED)
STATEMENT OF ASSETS AND LIABILITIES (CONTINUED)
December 31, 2006
CLASS Z:
Net assets, at value ................................................................................. $11,577,506,085
===============
Shares outstanding ................................................................................... 443,907,132
===============
Net asset value and maximum offering price per share a ............................................... $ 26.08
===============
CLASS A:
Net assets, at value ................................................................................. $ 6,761,779,087
===============
Shares outstanding ................................................................................... 261,047,306
===============
Net asset value per share a .......................................................................... $ 25.90
===============
Maximum offering price ............................................................................... $ 27.48
===============
CLASS B:
Net assets, at value ................................................................................. $ 659,185,984
===============
Shares outstanding ................................................................................... 26,004,031
===============
Net asset value and maximum offering price per share a ............................................... $ 25.35
===============
CLASS C:
Net assets, at value ................................................................................. $ 2,387,516,823
===============
Shares outstanding ................................................................................... 93,162,174
===============
Net asset value and maximum offering price per share a ............................................... $ 25.63
===============
CLASS R:
Net assets, at value ................................................................................. $ 188,646,304
===============
Shares outstanding ................................................................................... 7,319,736
===============
Net asset value and maximum offering price per share a ............................................... $ 25.77
===============
a Redemption price is equal to net asset value less contingent deferred
sales charges, if applicable, and redemption fees retained by the Fund.
Annual Report |
The accompanying notes are an integral part of these financial statements. | 35
Mutual Shares Fund
FINANCIAL STATEMENTS (CONTINUED)
STATEMENT OF OPERATIONS
for the year ended December 31, 2006
Investment income:
Dividends (net of foreign taxes of $17,131,566)
Unaffiliated issuers ................................................................................ $ 326,570,053
Non-controlled affiliated issuers (Note 12) ......................................................... 13,528,939
Interest income (net of foreign taxes of $351)
Unaffiliated issuers ................................................................................ 104,525,434
Non-controlled affiliated issuers (Note 12) ......................................................... 485,400
Income from securities loaned - net .................................................................. 3,065,354
Other income (Note 14) ............................................................................... 826,188
---------------
Total investment income ......................................................................... 449,001,368
---------------
Expenses:
Management fees (Note 3a) ............................................................................ 102,797,842
Administrative fees (Note 3b) ........................................................................ 13,892,244
Distribution fees (Note 3c)
Class A ............................................................................................. 18,110,813
Class B ............................................................................................. 6,266,246
Class C ............................................................................................. 20,632,449
Class R ............................................................................................. 732,161
Transfer agent fees (Note 3e) ........................................................................ 14,346,379
Custodian fees (Note 4) .............................................................................. 2,239,255
Reports to shareholders .............................................................................. 988,446
Registration and filing fees ......................................................................... 514,849
Professional fees .................................................................................... 3,456,404
Directors' fees and expenses ......................................................................... 378,451
Dividends on securities sold short ................................................................... 13,516,262
Other ................................................................................................ 425,925
---------------
Total expenses .................................................................................. 198,297,726
---------------
Expense reductions (Note 4) ..................................................................... (67,655)
---------------
Net expenses .................................................................................. 198,230,071
---------------
Net investment income ....................................................................... 250,771,297
---------------
Realized and unrealized gains (losses):
Net realized gain (loss) from:
Investments
Unaffiliated issuers ............................................................................... 1,334,054,512
Non-controlled affiliated issuers (Note 12) ........................................................ 183,574,667
Written options ..................................................................................... 1,973,666
Foreign currency transactions ....................................................................... (209,050,818)
Securities sold short ............................................................................... (39,512,150)
Synthetic equity swaps .............................................................................. 6,466,038
---------------
Net realized gain (loss) ...................................................................... 1,277,505,915
---------------
Net change in unrealized appreciation (depreciation) on:
Investments ......................................................................................... 1,666,289,985
Translation of assets and liabilities denominated in foreign currencies ............................. (105,851,147)
Change in deferred taxes on unrealized appreciation (depreciation) .................................. 431,279
---------------
Net change in unrealized appreciation (depreciation) .......................................... 1,560,870,117
---------------
Net realized and unrealized gain (loss) ............................................................... 2,838,376,032
---------------
Net increase (decrease) in net assets resulting from operations ....................................... $ 3,089,147,329
===============
36 | The accompanying notes are an integral part of these financial statements.
| Annual Report
Mutual Shares Fund
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF CHANGES IN NET ASSETS
----------------------------------
YEAR ENDED DECEMBER 31,
----------------------------------
2006 2005
----------------------------------
Increase (decrease) in net assets:
Operations:
Net investment income ............................................................. $ 250,771,297 $ 239,239,504
Net realized gain (loss) from investments, written options, securities sold short,
foreign currency transactions, and synthetic equity swaps ........................ 1,277,505,915 754,413,165
Net change in unrealized appreciation (depreciation) on investments, translation of
assets and liabilities denominated in foreign currencies, and deferred taxes ..... 1,560,870,117 390,480,321
----------------------------------
Net increase (decrease) in net assets resulting from operations ............... 3,089,147,329 1,384,132,990
----------------------------------
Distributions to shareholders from:
Net investment income:
Class Z .......................................................................... (213,013,305) (103,197,432)
Class A .......................................................................... (102,518,920) (35,896,189)
Class B .......................................................................... (6,728,719) (1,459,350)
Class C .......................................................................... (14,229,042) (14,954,125)
Class R .......................................................................... (2,664,653) (802,093)
Net realized gains:
Class Z .......................................................................... (688,410,621) (423,357,278)
Class A .......................................................................... (398,575,406) (199,279,526)
Class B .......................................................................... (41,096,225) (30,001,973)
Class C .......................................................................... (145,013,204) (88,516,570)
Class R .......................................................................... (11,224,212) (5,204,999)
----------------------------------
Total distributions to shareholders ................................................ (1,623,474,307) (902,669,535)
----------------------------------
Capital share transactions: (Note 2)
Class Z .......................................................................... 1,805,196,748 1,416,100,652
Class A .......................................................................... 2,143,360,560 1,158,479,828
Class B .......................................................................... (4,818,299) 1,693,456
Class C .......................................................................... 379,010,165 233,434,044
Class R .......................................................................... 68,529,010 31,485,467
----------------------------------
Total capital share transactions ................................................... 4,391,278,184 2,841,193,447
----------------------------------
Redemption fees .................................................................... 44,080 37,371
----------------------------------
Net increase (decrease) in net assets ......................................... 5,856,995,286 3,322,694,273
Net assets:
Beginning of year .................................................................. 15,717,638,997 12,394,944,724
----------------------------------
End of year ........................................................................ $21,574,634,283 $15,717,638,997
----------------------------------
Undistributed net investment income/Distributions in excess of net investment
income included in net assets:
End of year ........................................................................ $ (1,937,133) $ 72,585,668
==================================
Annual Report |
The accompanying notes are an integral part of these financial statements. | 37
Mutual Shares Fund
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Franklin Mutual Series Fund Inc. (the Series Fund) is registered under the
Investment Company Act of 1940, as amended (the 1940 Act) as an open-end
investment company, consisting of six separate funds. The Mutual Shares Fund
(the Fund) included in this report is diversified. The financial statements of
the remaining funds in the Series Fund are presented separately. The Fund offers
five classes of shares: Class Z, Class A, Class B, Class C and Class R. Each
class of shares differs by its initial sales load, contingent deferred sales
charges, distribution fees, voting rights on matters affecting a single class
and its exchange privilege.
The following summarizes the Fund's significant accounting policies.
A. SECURITY VALUATION
Securities listed on a securities exchange or on the NASDAQ National Market
System are valued at the last quoted sale price or the official closing price of
the day, respectively. Over-the-counter securities and listed securities for
which there is no reported sale are valued within the range of the most recent
quoted bid and ask prices. Securities that trade in multiple markets or on
multiple exchanges are valued according to the broadest and most representative
market.
Corporate debt securities and Government securities generally trade in the
over-the-counter market rather than on a securities exchange. The Fund may
utilize independent pricing services, quotations from bond dealers, and
information with respect to bond and note transactions, to assist in determining
a current market value for each security. The Fund's pricing services may use
valuation models or matrix pricing which considers information with respect to
comparable bond and note transactions, quotations from bond dealers, or by
reference to other securities that are considered comparable in such
characteristics as rating, interest rate and maturity date, option adjusted
spread models, prepayment projections, interest rate spreads and yield curves,
to determine current value.
Foreign securities are valued as of the close of trading on the foreign stock
exchange on which the security is primarily traded, or the NYSE, whichever is
earlier. If no sale is reported at that time, the foreign security will be
valued within the range of the most recent quoted bid and ask prices. The value
is then converted into its U.S. dollar equivalent at the foreign exchange rate
in effect at the close of the NYSE on the day that the value of the foreign
security is determined.
38 | Annual Report
Mutual Shares Fund
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
A. SECURITY VALUATION (CONTINUED)
The Fund has procedures to determine the fair value of individual securities and
other assets for which market prices are not readily available or which may not
be reliably priced. Methods for valuing these securities may include:
fundamental analysis, matrix pricing, discounts from market prices of similar
securities, or discounts applied due to the nature and duration of restrictions
on the disposition of the securities. Due to the inherent uncertainty of
valuations of such securities, the fair values may differ significantly from the
values that would have been used had a ready market for such investments
existed. Occasionally, events occur between the time at which trading in a
security is completed and the close of the NYSE that might call into question
the availability (including the reliability) of the value of a portfolio
security held by the Fund. The investment manager monitors price movements
following the close of trading in foreign stock markets through a series of
country specific market proxies (such as baskets of American Depository
Receipts, futures contracts and exchange traded funds). These price movements
are measured against established trigger thresholds for each specific market
proxy to assist in determining if an event has occurred. If such an event
occurs, the securities may be valued using fair value procedures, which may
include the use of independent pricing services. All security valuation
procedures are approved by the Fund's 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, income and expense items denominated in foreign currencies are
translated into U.S. dollars at the exchange rate in effect on the transaction
date. Occasionally, events may impact the availability or reliability of foreign
exchange rates used to convert the U.S. dollar equivalent value. If such an
event occurs, the foreign exchange rate will be valued at fair value using
procedures established and approved by the Fund's Board of Directors.
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 on the
Statement of Operations.
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 denominated assets and liabilities other than investments in securities
held at the end of the reporting period.
Annual Report | 39
Mutual Shares Fund
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
C. FOREIGN CURRENCY CONTRACTS
When the Fund purchases or sells foreign securities it may enter into foreign
exchange contracts to minimize foreign exchange risk from the trade date to the
settlement date of the transactions. A foreign exchange contract is an agreement
between two parties to exchange different currencies at an agreed upon exchange
rate at a future date. Realized and unrealized gains and losses on these
contracts are included in the Statement of Operations.
The Fund may also enter into forward exchange contracts to hedge against
fluctuations in foreign exchange rates or to gain exposure to certain foreign
currencies. These contracts are valued daily by the Fund and the unrealized
gains or losses on the contracts, as measured by the difference between the
contractual forward foreign exchange rates and the forward rates at the
reporting date, are included in the Statement of Assets and Liabilities.
Realized and unrealized gains and losses on these contracts are included in the
Statement of Operations.
The risks of these contracts include movement in the values of the foreign
currencies relative to the U.S. dollar and the possible inability of the
counterparties to fulfill their obligations under the contracts, which may be in
excess of the amount reflected in the Statement of Assets and Liabilities.
D. SYNTHETIC EQUITY SWAPS
The Fund may engage in synthetic equity swaps. Synthetic equity swaps 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 purchase or short sale of the underlying
security taken place. Upon entering into synthetic equity swaps, 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 ("margin account"). Periodically,
payments are made to recognize changes in value of the contract resulting from
interest on the notional value of the contract, market value changes in the
underlying security, and/or dividends paid by the issuer of the underlying
security. The Fund recognizes a realized gain or loss when cash is received
from, or paid to, the broker. Synthetic equity swaps are valued daily by the
Fund and the unrealized gains or losses on the contracts (as measured by the
difference between the contract amount plus or minus cash received or paid and
the market value of the underlying securities) are recorded in the Statement of
Operations. The margin account and any net unrealized gains or losses on open
synthetic equity swaps are included in the Statement of Assets and Liabilities.
The risks of entering into synthetic equity swaps include unfavorable price
movements in the underlying securities or the inability of the counterparties to
fulfill their obligations under the contract.
40 | Annual Report
Mutual Shares Fund
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
E. OPTIONS
The Fund may purchase or write options. Options are contracts entitling the
holder to purchase or sell a specified number of shares or units of a particular
security at a specified price. Options purchased are recorded as investments;
options written (sold) are recorded as liabilities. Upon closing of an option,
other than by exercise, which results in a cash settlement, the difference
between the premium (original option value) 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. When
an option expires, the premium is realized as a gain for options written or as a
loss for options purchased. The risks include the possibility there may be an
illiquid options market or the inability of the counterparties to fulfill their
obligations under the contract. Writing options involves, to varying degrees,
elements of market risk in excess of the amount recognized in the Statement of
Assets and Liabilities.
F. SECURITIES SOLD SHORT
The Fund is engaged in selling securities short, which obligates the Fund to
replace a borrowed security with the same security at current market value. The
Fund incurs 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 realizes a gain if the price of the security declines between those
dates. Gains are limited to the price at which the Fund sold the security short,
while losses are potentially unlimited in size.
The Fund is required to establish a margin account with the broker lending the
security sold short. While the short sale is outstanding, the broker retains the
proceeds of the short sale and the Fund must maintain a deposit with broker
consisting of cash and securities having a value equal to a specified percentage
of the value of the securities sold short. The Fund is obligated to pay the
counterparty any dividends or interest due on securities sold short. Such
dividends and interest are recorded as an expense to the Fund.
G. SECURITIES LENDING
The Fund may loan securities to certain brokers through a securities lending
agent for which it receives initial cash collateral against the loaned
securities in an amount equal to at least 102% of the market value of the loaned
securities. Collateral is maintained over the life of the loan in an amount not
less than 100% of the market value of loaned securities, as determined at the
close of fund business each day; any additional collateral required due to
changes in security values is delivered to the fund on the next business day.
The Fund receives interest income from the investment of cash collateral,
adjusted by lender fees and broker rebates. The Fund bears the risk of loss with
respect to the investment of the collateral and the securities loaned. The
securities lending agent has agreed to indemnify the Fund in the case of default
of any securities borrower. At December 31, 2006, the Fund had no securities on
loan.
Annual Report | 41
Mutual Shares Fund
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
H. INCOME AND DEFERRED TAXES
No provision has been made for U.S. income taxes because the Fund intends to
qualify as a regulated investment company under the Internal Revenue Code and to
distribute to shareholders substantially all of its taxable income and net
realized gains.
Foreign securities held by the Fund may be subject to foreign taxation on
dividend and interest income received. Foreign taxes, if any, are recorded based
on the tax regulations and rates that exist in the foreign markets in which the
Fund invests.
The Fund may be subject to a tax imposed on net realized gains on securities of
certain foreign countries. The Fund records an estimated deferred tax liability
for net unrealized gains on these securities in an amount that would be payable
if the securities were disposed of on the valuation date.
I. 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.
Interest income and estimated expenses are accrued daily. Amortization of
premium and accretion of discount on debt securities are included in interest
income. Dividend income and dividends declared on securities sold short, are
recorded on the ex-dividend date except that certain dividends from foreign
securities are recognized as soon as the Fund is notified of the ex-dividend
date. Distributions to shareholders are recorded on the ex-dividend date and are
determined according to income tax regulations (tax basis). Distributable
earnings determined on a tax basis may differ from earnings recorded in
accordance with accounting principles generally accepted in the United States.
These differences may be permanent or temporary. Permanent differences are
reclassified among capital accounts to reflect their tax character. These
reclassifications have no impact on net assets or the results of operations.
Temporary differences are not reclassified, as they may reverse in subsequent
periods.
Common expenses incurred by the Series Fund are allocated among the funds based
on the ratio of net assets of each fund to the combined net assets of the Series
Fund. Fund specific expenses are charged directly to the fund that incurred the
expense.
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. Differences in class-level
expenses may result in payment of different per share distributions by class.
J. ACCOUNTING ESTIMATES
The preparation of financial statements in accordance with accounting principles
generally accepted in the United States of America 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 expenses during the reporting period. Actual results could differ from those
estimates.
42 | Annual Report
Mutual Shares Fund
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
K. REDEMPTION FEES
A short term trading redemption fee will be imposed, with some exceptions, on
any Fund shares that are redeemed or exchanged within seven calendar days
following their purchase date. The redemption fee is 2% of the amount redeemed.
Such fees are retained by the Fund and accounted for as an addition to paid-in
capital.
L. GUARANTEES AND INDEMNIFICATIONS
Under the Series Fund's organizational documents, its officers and directors are
indemnified by the Fund against certain liabilities arising out of the
performance of their duties to the Fund. Additionally, in the normal course of
business, the Fund enters into contracts with service providers that contain
general indemnification clauses. The Fund's maximum exposure under these
arrangements is unknown as this would involve future claims that may be made
against the Fund that have not yet occurred. Currently, the Fund expects the
risk of loss to be remote.
2. CAPITAL STOCK
At December 31, 2006, there were 1.9 billlion shares authorized ($0.001 par
value). Transactions in the Fund's shares were as follows:
---------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
2006 2005
---------------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
---------------------------------------------------------------------
CLASS Z SHARES:
Shares sold .................... 58,989,808 $ 1,512,255,054 58,317,629 $ 1,382,140,067
Shares issued in reinvestment of
distributions ................. 32,352,206 830,332,879 19,934,438 478,389,881
Shares redeemed ................ (21,118,207) (537,391,185) (18,728,837) (444,429,296)
---------------------------------------------------------------------
Net increase (decrease) ........ 70,223,807 $ 1,805,196,748 59,523,230 $ 1,416,100,652
=====================================================================
CLASS A SHARES:
Shares sold .................... 96,505,572 $ 2,449,217,770 62,183,806 $ 1,476,618,967
Shares issued in reinvestment of
distributions ................. 18,089,962 461,565,811 9,031,555 215,572,318
Shares redeemed ................ (30,363,019) (767,423,021) (22,579,055) (533,711,457)
---------------------------------------------------------------------
Net increase (decrease) ........ 84,232,515 $ 2,143,360,560 48,636,306 $ 1,158,479,828
=====================================================================
CLASS B SHARES:
Shares sold .................... 857,349 $ 21,132,869 1,344,083 $ 30,694,786
Shares issued in reinvestment of
distributions ................. 1,794,285 44,688,168 1,266,719 29,636,484
Shares redeemed ................ (2,862,654) (70,639,336) (2,541,813) (58,637,814)
---------------------------------------------------------------------
Net increase (decrease) ........ (211,020) $ (4,818,299) 68,989 $ 1,693,456
=====================================================================
Annual Report | 43
Mutual Shares Fund
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. CAPITAL STOCK (CONTINUED)
---------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
2006 2005
---------------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
---------------------------------------------------------------------
CLASS C SHARES:
Shares sold .................... 19,735,859 $ 494,085,976 15,473,104 $ 361,085,892
Shares issued in reinvestment of
distributions ................. 5,691,658 144,004,696 4,035,616 94,971,880
Shares redeemed ................ (10,380,456) (259,080,507) (9,546,635) (222,623,728)
---------------------------------------------------------------------
Net increase (decrease) ........ 15,047,061 $ 379,010,165 9,962,085 $ 233,434,044
=====================================================================
CLASS R SHARES:
Shares sold .................... 3,617,851 $ 91,221,363 2,060,687 $ 48,448,915
Shares issued in reinvestment of
distributions ................. 542,562 13,771,339 251,253 5,971,962
Shares redeemed ................ (1,448,897) (36,463,692) (975,186) (22,935,410)
---------------------------------------------------------------------
Net increase (decrease) ........ 2,711,516 $ 68,529,010 1,336,754 $ 31,485,467
=====================================================================
3. TRANSACTIONS WITH AFFILIATES
Franklin Resources, Inc. is the holding company for various subsidiaries that
together are referred to as Franklin Templeton Investments. Certain officers and
directors of the Series Fund are also officers and/or directors of the following
subsidiaries:
- --------------------------------------------------------------------------------------
SUBSIDIARY AFFILIATION
- --------------------------------------------------------------------------------------
Franklin Mutual Advisers, LLC (Franklin Mutual) Investment manager
Franklin Templeton Services, LLC (FT Services) Administrative manager
Franklin Templeton Distributors, Inc. (Distributors) Principal underwriter
Franklin Templeton Investor Services, LLC (Investor Services) Transfer agent
A. MANAGEMENT FEES
The Fund pays an investment management fee to Franklin Mutual based on the
average daily net assets of the Fund as follows:
- -------------------------------------------------------------------------
ANNUALIZED FEE RATE NET ASSETS
- -------------------------------------------------------------------------
0.600% Up to and including $5 billion
0.570% Over $5 billion, up to and including $10 billion
0.550% Over $10 billion, up to and including $15 billion
0.530% Over $15 billion, up to and including $20 billion
0.510% In excess of $20 billion
44 | Annual Report
Mutual Shares Fund
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. TRANSACTIONS WITH AFFILIATES (CONTINUED)
B. ADMINISTRATIVE FEES
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:
- ---------------------------------------------------------------------------
ANNUALIZED FEE RATE NET ASSETS
- ---------------------------------------------------------------------------
0.150% Up to and including $200 million
0.135% Over $200 million, up to and including $700 million
0.100% Over $700 million, up to and including $1.2 billion
0.075% In excess of $1.2 billion
C. DISTRIBUTION FEES
The Fund's Board of Directors has adopted distribution plans for each share
class, with the exception of Class Z shares, pursuant to Rule 12b-1 under the
1940 Act. Under the Fund's Class A reimbursement distribution plan, the Fund
reimburses Distributors for costs incurred in connection with the servicing,
sale and distribution of the Fund's shares up to the maximum annual plan rate.
Under the Class A reimbursement distribution plan, costs exceeding the maximum
for the current plan year cannot be reimbursed in subsequent periods.
In addition, under the Fund's Class B, C, and R compensation distribution plans,
the Fund pays Distributors for costs incurred in connection with the servicing,
sale and distribution of the Fund's shares up to the maximum annual plan rate
for each class.
The maximum annual plan rates, based on the average daily net assets, for each
class, are as follows:
Class A ............................................................. 0.35%
Class B ............................................................. 1.00%
Class C ............................................................. 1.00%
Class R ............................................................. 0.50%
D. SALES CHARGES/UNDERWRITING AGREEMENTS
Distributors has advised the Fund of the following commission transactions
related to the sales and redemptions of the Fund's shares for the year:
Sales charge retained net of commisions paid to
unaffiliated brokers/dealers .................................. $ 9,082,673
Contingent deferred sales charges retained ..................... $ 925,728
E. TRANSFER AGENT FEES
The Fund paid transfer agent fees of $14,346,379, of which $9,071,491 was
retained by Investor Services.
Annual Report | 45
Mutual Shares Fund
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. EXPENSE OFFSET ARRANGEMENT
The Fund has entered into an arrangement with its custodian whereby credits
realized as a result of uninvested cash balances are used to reduce a portion of
the Fund's custodian expenses. During the year ended December 31, 2006, the
custodian fees were reduced as noted in the Statement of Operations.
5. INCOME TAXES
For tax purposes, realized currency losses, occurring subsequent to October 31,
may be deferred and treated as occurring on the first day of the following
fiscal year. At December 31, 2006, the Fund deferred realized currency losses of
$206,647.
The tax character of distributions paid during the years ended December 31, 2006
and 2005, was as follows:
----------------------------------
2006 2005
----------------------------------
Distributions paid from:
Ordinary income ................... $ 532,733,473 $ 293,157,500
Long term capital gain ............ 1,090,740,834 609,512,035
----------------------------------
$ 1,623,474,307 $ 902,669,535
==================================
At December 31, 2006, the cost of investments, net unrealized appreciation
(depreciation), for income tax purposes were as follows:
Cost of investments .................................. $16,240,089,753
===============
Unrealized appreciation .............................. $ 5,578,647,877
Unrealized depreciation .............................. (324,291,791)
---------------
Net unrealized appreciation (depreciation)............ 5,254,356,086
===============
Undistributed ordinary income ........................ $ 11,485,782
Undistributed long term capital gains ................ 31,087,822
---------------
Distributable earnings ............................... $ 42,573,604
===============
Net investment income differs for financial statement and tax purposes primarily
due to differing treatments of defaulted securities, foreign currency
transactions, passive foreign investment companies bond discounts and premiums,
and certain dividends on securities sold short.
Net realized gains (losses) differ for financial statement and tax purposes
primarily due to differing treatment of wash sales, foreign currency
transactions, bond discounts and premiums, and certain dividends on securities
sold short.
46 | Annual Report
Mutual Shares Fund
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. INVESTMENT TRANSACTIONS
Purchases and sales of investments (excluding short term securities) for the
year ended December 31, 2006, aggregated $9,776,843,088 and $5,646,362,475,
respectively.
Transactions in options written during the year ended December 31, 2006, were as
follows:
-----------------------------
NUMBER OF PREMIUMS
CONTRACTS RECEIVED
-----------------------------
Options outstanding at
December 31, 2005 ............................ 1,000 $ 80,997
Options written ............................... 28,224 4,786,222
Options expired ............................... (7,919) (869,625)
Options exercised ............................. (10,839) (2,164,926)
Options closed ................................ (8,702) (1,632,012)
-----------------------------
Options outstanding at December 31, 2006 ...... 1,764 $ 200,656
=============================
7. SYNTHETIC EQUITY SWAPS
As of December 31, 2006, the Fund had the following synthetic equity swaps
outstanding:
NUMBER OF NOTIONAL UNREALIZED
CONTRACTS VALUE GAIN (LOSS)
- -------------------------------------------------------------------------------
CONTRACTS TO BUY
Scottish Power PLC (7.46 GBP)......... 134,055 $1,963,699 $ 6,038
------------
Net unrealized gain (loss)...................................... $ 6,038
------------
8. FORWARD EXCHANGE CONTRACTS
At December 31, 2006, the Fund had the following forward exchange contracts
outstanding:
CONTRACT SETTLEMENT UNREALIZED UNREALIZED
AMOUNT DATE GAIN LOSS
- ---------------------------------------------------------------------------------------------------------
CONTRACTS TO SELL
43,250,000 British Pound ........ $ 82,056,928 1/08/07 $ (2,647,685)
76,892,139 British Pound ........ 143,293,887 1/16/07 (7,306,967)
175,140,593 Euro ................. 221,673,915 1/18/07 (9,757,604)
773,252,075 Danish Krone ......... 131,228,793 1/23/07 (5,810,579)
158,000,000 Euro ................. 205,973,770 1/24/07 (2,872,376)
70,839,087 Singapore Dollar ..... 45,252,116 1/24/07 (1,005,695)
111,900,000 British Pound ........ 220,251,219 2/08/07 $ 1,060,503
44,257,500 British Pound ........ 84,398,211 2/08/07 (2,293,774)
1,321,326,553 Swedish Krona ........ 193,980,261 2/15/07 528,960
71,425,000 British Pound ........ 140,282,153 2/20/07 370,974
296,985,140 Euro ................. 377,358,201 2/20/07 (15,660,190)
121,411,459 Euro ................. 162,154,110 2/26/07 1,442,458
124,428,362 Euro ................. 163,650,722 2/26/07 (1,054,386)
Annual Report | 47
Mutual Shares Fund
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
8. FORWARD EXCHANGE CONTRACTS (CONTINUED)
CONTRACT SETTLEMENT UNREALIZED UNREALIZED
AMOUNT DATE GAIN LOSS
- ---------------------------------------------------------------------------------------------------------
CONTRACTS TO SELL
1,075,000,000 Norwegian Krone ...... $ 176,948,912 3/07/07 $ 4,044,738
127,298,141 Swiss Franc .......... 107,462,218 3/07/07 2,355,850
300,000,000 Euro ................. 384,075,720 3/13/07 $ (13,272,403)
35,182,469 Australian Dollar .... 27,583,056 3/14/07 (132,809)
1,597,500,000 Swedish Krona ........ 234,934,916 3/15/07 689,823
38,544,972,637 Japanese Yen ......... 336,350,614 3/19/07 9,116,863
122,525,039 Japanese Yen ......... 1,039,343 3/19/07 (434)
1,948,625,000 Korean Won ........... 2,125,000 3/22/07 25,984
55,284,604,750 Korean Won ........... 58,552,500 3/22/07 (998,860)
233,085,532 Canadian Dollar ...... 209,768,532 3/26/07 9,224,999
21,081,510 Canadian Dollar ...... 18,450,000 3/26/07 (311,764)
156,462,660 Euro ................. 207,949,059 4/13/07 465,834
307,539,167 Euro ................. 390,994,219 4/18/07 (16,905,934)
104,467,689 Euro ................. 140,018,558 5/24/07 1,272,645
72,500,000 Euro ................. 93,725,825 5/24/07 (2,563,074)
32,903,543 Euro ................. 44,202,620 6/06/07 481,403
8,036,511 Euro ................. 10,642,913 6/06/07 (35,757)
2,400,298,250 Taiwan Dollar ........ 75,400,000 6/06/07 1,737,212
767,128,646 Norwegian Krone ...... 126,641,051 6/07/07 2,883,899
115,442,140 Norwegian Krone ...... 18,600,000 6/07/07 (198,213)
------------------------------
Unrealized gain (loss) on forward exchange contracts ................ 35,702,145 (82,828,504)
------------------------------
Net unrealized gain (loss) on forward exchange contracts ........................ $ (47,126,359)
=============
9. CONCENTRATION OF RISK
Investing in foreign securities may include certain risks and considerations not
typically associated with investing in U.S. securities, such as fluctuating
currency values and changing local and regional economic, political and social
conditions, which may result in greater market volatility. In addition, certain
foreign securities may not be as liquid as U.S. securities.
10. DEFAULTED SECURITIES
The Fund may purchase the pre-default or defaulted debt of distressed companies.
Distressed companies are financially troubled and are about to be/or are already
involved in financial restructuring or bankruptcy. The Fund does not accrue
income on these securities, if it becomes probable that the income will not be
collected. Risks associated with purchasing these securities include the
possibility that the bankruptcy or other restructuring process takes longer than
expected, or that distributions in restructuring are less than anticipated,
either or both of which may result in unfavorable consequences to the Fund. At
December 31, 2006, the aggregate value of these securities was $392,815,013,
representing 1.82% of the Fund's net assets. For information as to specific
securities, see the accompanying Statement of Investments.
48 | Annual Report
Mutual Shares Fund
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
11. RESTRICTED SECURITIES
The Fund may invest in securities that are restricted under the Securities Act
of 1933 (the 1933 Act) or which are subject to legal, contractual, or other
agreed upon restrictions on resale. Restricted securities are often purchased in
private placement transactions, and cannot be sold without prior registration
unless the sale is pursuant to an exemption under the 1933 Act. Disposal of
these securities may require greater effort and expense, and prompt sale at an
acceptable price may be difficult. The Fund may have registration rights for
restricted securities. The issuer generally incurs all registration costs.
At December 31, 2006, the Fund held investments in restricted securities,
excluding 144A securities deemed to be liquid, valued in accordance with
procedures approved by the Fund's Board of Directors as reflecting fair value,
as follows:
- ---------------------------------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT,
SHARES, WARRANTS ACQUISITION
AND CONTRACTS ISSUER DATES COST VALUE
- ---------------------------------------------------------------------------------------------------------------------------
763,805 AboveNet Inc. ...................................... 10/02/01-11/25/03 $ 38,348,164 $ 23,402,985
25,659 AboveNet Inc., wts., 9/08/08 ....................... 10/02/01-10/02/03 3,196,155 821,088
30,186 AboveNet Inc., wts., 9/08/10 ....................... 10/02/01-10/03/03 3,430,956 869,357
1,065 AboveNet Inc., options to purchase (shares),
exercise price $20.95, expiration date, 9/09/13... 4/17/06-9/08/06 -- 28,808
123,013 Anchor Resources LLC ............................... 6/29/04 -- --
11,573,733 Cerberus FIM Investors Auto Finance, LLC ........... 11/20/06 11,573,733 11,725,117
34,533,170 Cerberus FIM Investors Auto Finance, LLC, 12.00%,
11/22/13 11/21/06 34,533,170 34,533,170
1,478,887 Cerberus FIM Investors Commercial Finance, LLC ..... 11/20/06 1,478,887 1,498,231
4,436,661 Cerberus FIM Investors Commercial Finance, LLC,
12.00%, 11/22/13 ................................... 11/20/06 4,436,661 4,436,661
2,530,476 Cerberus FIM Investors Commercial Mortgage, LLC .... 11/20/06 2,530,476 2,563,575
7,591,429 Cerberus FIM Investors Commercial Mortgage, LLC,
12.00%, 11/22/13 11/20/06 7,591,429 7,591,429
12,055,348 Cerberus FIM Investors Insurance, LLC............... 11/20/06 12,055,348 12,213,032
36,166,045 Cerberus FIM Investors Insurance, LLC, 12.00%,
11/22/13 ......................................... 11/20/06 36,166,045 36,166,045
25,569,306 Cerberus FIM Investors Rescap, LLC.................. 11/20/06 25,569,306 25,903,752
76,707,917 Cerberus FIM Investors Rescap, LLC, 12.00%,
11/22/13............................................ 11/20/06 76,707,917 76,707,917
1,879,100 DecisionOne Corp. .................................. 3/12/99-7/18/00 1,313,384 1,339,798
2,187,193 DecisionOne Corp. 12.00%, 4/15/10 .................. 3/12/99-10/16/06 5,572,051 2,187,193
25,721 Elephant Capital Holdings Ltd. ..................... 8/29/03-7/29/04 -- 34,864,956
16,598 Esmark Inc. ........................................ 7/28/06 17,587,881 13,666,627
60,419 Esmark Inc., 8.00%, cvt. Pfd., A ................... 11/08/04-9/29/06 60,419,000 58,425,173
4,423,071 Florida East Coast Industries Inc. ................. 10/03/75-7/15/05 108,943,491 250,434,280
6,069,096 International Automotive Components Group
Brazil, LLC ...................................... 4/13/06-8/21/06 3,632,064 25,004,675
953,142 International Automotive Components Group
Japan, LLC ....................................... 9/26/06-11/14/06 9,294,996 8,007,242
25,796,752 International Automotive Components Group LLC ...... 1/12/06-10/16/06 25,809,409 25,796,752
2,860,528 Kindred Healthcare Inc. ............................ 4/28/99-3/29/06 34,247,209 68,616,915
Annual Report | 49
Mutual Shares Fund
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
11. RESTRICTED SECURITIES (CONTINUED)
- ---------------------------------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT,
SHARES, WARRANTS ACQUISITION
AND CONTRACTS ISSUER DATES COST VALUE
- ---------------------------------------------------------------------------------------------------------------------------
Kindred Healthcare Inc., options to purchase (shares):
7,640 exercise price $23.75, expiration date, 7/17/11 .. 7/17/02-7/17/05 $ -- $ 1,815
2,292 exercise price $26.00, expiration date, 1/01/12 .. 1/01/03-1/01/06 -- --
1,714 exercise price $9.07, expiration date, 1/01/13 ... 1/01/04-1/01/06 -- 25,560
1,136 exercise price $25.99, expiration date, 1/01/14 .. 1/01/05-1/01/06 -- --
473 exercise price $27.90, expiration date, 1/01/15 .. 1/06/06 -- --
124,040 NCB Warrant Holdings Ltd., A ....................... 12/16/05 -- 14,608,191
202,380 Olympus Re Holdings Ltd. ........................... 12/19/01 20,238,000 202,380
1,021,874 Owens Corning Inc. ................................. 10/20/06-12/20/06 28,825,468 29,026,331
911,589 Owens Corning Inc., options to sell (shares),
exercise price $25.00, expiration date, 4/06/07 .. 12/20/06 31,787 --
911,589 Owens Corning Inc., options to purchase (shares),
exercise price $37.50, expiration date, 1/02/08 .. 12/20/06 81,379 --
199,566 PTV Inc., 10.00%, pfd., A .......................... 12/07/01-3/06/02 598,698 748,373
-------------
TOTAL RESTRICTED SECURITIES (3.58% of Net Assets)................................................... $ 771,417,428
=============
12. HOLDINGS OF 5% VOTING SECURITIES OF PORTFOLIO COMPANIES
The Investment Company Act of 1940 defines "affiliated companies" to include
investments in portfolio companies in which a fund owns 5% or more of the
outstanding voting securities. Investments in "affiliated companies" for the
Fund for the year ended December 31, 2006 were as shown below.
- ------------------------------------------------------------------------------------
NUMBER OF SHARES/
WARRANTS/CONTRACTS/
PRINCIPAL AMOUNT
HELD AT BEGINNING GROSS GROSS
NAME OF ISSUER OF YEAR ADDITIONS REDUCTIONS
- ------------------------------------------------------------------------------------
NON-CONTROLLED AFFILIATES
AboveNet Inc. ................ 763,805 -- --
AboveNet Inc., Contingent
Distribution ............... 106,869,000 -- --
AboveNet Inc., options to
purchase (shares), exercise
price $20.95 expiration date,
9/09/13 .................... -- 1,065 --
AboveNet Inc., wts., 9/08/08 . 25,659 -- --
AboveNet Inc., wts., 9/08/10 . 30,186 -- --
Alexander's Inc. ............. 326,675 -- --
Anchor Resources LLC ......... 123,013 -- --
Centennial Bank Holdings Inc.,
144A ....................... 3,845,467 -- --
City Investing Company
Liquidating Trust .......... 4,373,476 -- 4,373,476
DecisionOne Corp. ............ 1,879,100 -- --
DecisionOne Corp., 12.00%,
4/15/10 .................... 2,039,765 147,428 --
Elephant Capital Holdings Ltd. 25,721 -- --
Esmark Inc. .................. -- 16,598 --
- -----------------------------------------------------------------------------------------------
NUMBER OF SHARES/
WARRANTS/CONTRACTS/
PRINCIPAL AMOUNT VALUE AT INVESTMENT REALIZED
HELD AT END OF END OF INCOME CAPITAL
NAME OF ISSUER YEAR YEAR (LOSS) GAIN (LOSS)
- -----------------------------------------------------------------------------------------------
NON-CONTROLLED AFFILIATES
AboveNet Inc. ................ 763,805 $ 23,402,985 $ -- $ --
AboveNet Inc., Contingent
Distribution ............... 106,869,000 -- -- --
AboveNet Inc., options to
purchase (shares), exercise
price $20.95 expiration date
9/09/13 .................... 1,065 28,808 -- --
AboveNet Inc., wts., 9/08/08 . 25,659 821,088 -- --
AboveNet Inc., wts., 9/08/10 . 30,186 869,357 -- --
Alexander's Inc. ............. 326,675 137,089,164 -- --
Anchor Resources LLC ......... 123,013 -- -- 636,634
Centennial Bank Holdings Inc.,
144A ....................... 3,845,467 36,378,118 -- --
City Investing Company
Liquidating Trust .......... -- -- -- 507,323
DecisionOne Corp. ............ 1,879,100 1,339,798 -- --
DecisionOne Corp., 12.00%,
4/15/10 .................... 2,187,193 2,187,193 250,815 --
Elephant Capital Holdings Ltd. 25,721 34,864,956 -- --
Esmark Inc. .................. 16,598 13,666,627 132,784 --
50 | Annual Report
Mutual Shares Fund
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
12. HOLDINGS OF 5% VOTING SECURITIES OF PORTFOLIO COMPANIES (CONTINUED)
- ---------------------------------------------------------------------------------------------
NUMBER OF
SHARES/
WARRANTS/
CONTRACTS/
PRINCIPAL AMOUNT
HELD AT BEGINNING GROSS GROSS
NAME OF ISSUER OF YEAR ADDITIONS REDUCTIONS
- ---------------------------------------------------------------------------------------------
Esmark Inc., 8.00%, cvt. pfd.,
A ................................. 60,419 -- --
Federal Signal Corp. ................ 3,360,800 -- --
FHC Delaware Inc. ................... 784,457 -- 784,457
Florida East Coast Industries Inc. .. 4,423,071 -- --
International Automotive
Components Group Brazil LLC ...... -- 6,069,096 --
International Automotive
Components Group Japan LLC ........ -- 953,142 --
International Automotive
Components Group LLC .............. -- 25,796,752 --
Kindred Healthcare Inc. ............. 2,380,966 1,483,840 1,004,278
Kindred Healthcare Inc.,
options to purchase (shares):
Exercise price $23.75,
expiration date 7/17/11 ........ 7,640 -- --
Exercise price $26.00,
expiration date 1/01/12 ........ 1,724 568 --
Exercise price $9.07,
expiration date 1/01/13 ........ 1,146 568 --
Exercise price $25.99,
expiration date 1/01/14 ........ 568 568 --
Exercise price $27.90,
expiration date 1/10/15 ........ -- 473 --
Kindred Healthcare Inc., wts.,
Series A, 4/20/06 .............. 211,977 -- 211,977
Kindred Healthcare Inc., wts.,
Series B, 4/20/06 .............. 529,943 -- 529,943
Lancer Industries Inc., B ........... 3 -- 3
MBOP Liquidating Trust .............. 574,712 -- 574,712
OPTI Canada ......................... 9,481,276 5,296,145 a 10,691,531
TVMAX Holdings Inc. ................. 257,217 -- --
TVMAX Holdings Inc., PIK,
11.50%, 1/30/07 ................... 433,314 233,883 220,819
TVMAX Holdings Inc., PIK,
14.00%, 1/30/07 ................... 1,203,379 182,366 --
White Mountains Insurance
Group Inc. ........................ 740,448 -- 10,791
TOTAL NON-CONTROLLED AFFILIATES
(5.72% of Net Assets) ....................................................................
- -----------------------------------------------------------------------------------------------------
NUMBER OF
SHARES/
WARRANTS/
CONTRACTS/
PRINCIPAL
AMOUNT VALUE AT INVESTMENT REALIZED
HELD AT END END OF INCOME CAPITAL
NAME OF ISSUER OF YEAR YEAR (LOSS) GAIN (LOSS)
- -----------------------------------------------------------------------------------------------------
Esmark Inc., 8.00%, cvt. pfd.,
A .............................. 60,419 $ 58,425,173 $ 5,492,332 $ --
Federal Signal Corp. ............. 3,360,800 53,907,232 806,592 --
FHC Delaware Inc. ................ -- -- -- (2,235,702)
Florida East Coast Industries Inc. 4,423,071 250,434,280 1,194,229 --
International Automotive
Components Group Brazil LLC .... 6,069,096 25,004,675 -- --
International Automotive
Components Group Japan LLC ..... 953,142 8,007,242 -- --
International Automotive
Components Group LLC ........... 25,796,752 25,796,752 -- --
Kindred Healthcare Inc. .......... 2,860,528 68,616,915 -- 3,200,236
Kindred Healthcare Inc.,
options to purchase (shares):
Exercise price $23.75,
expiration date 7/17/11 ..... 7,640 1,815 -- --
Exercise price $26.00,
expiration date 1/01/12 ..... 2,292 -- -- --
Exercise price $9.07,
expiration date 1/01/13 ..... 1,714 25,560 -- --
Exercise price $25.99,
expiration date 1/01/14 ..... 1,136 -- -- --
Exercise price $27.90,
expiration date 1/10/15 ..... 473 -- -- --
Kindred Healthcare Inc., wts., ...
Series A, 4/20/06 ....... -- -- -- --
Kindred Healthcare Inc., wts., ...
Series B, 4/20/06 ........... -- -- -- --
Lancer Industries Inc., B ........ -- -- -- 7,116,531
MBOP Liquidating Trust ........... -- -- -- 82,679
OPTI Canada ...................... 4,085,890 69,357,566 -- 171,437,242
TVMAX Holdings Inc. .............. 257,217 257,217 -- --
TVMAX Holdings Inc., PIK,
11.50%, 1/30/07 ................ 446,378 446,378 54,723 --
TVMAX Holdings Inc., PIK,
14.00%, 1/30/07 ................ 1,385,745 1,385,745 179,862 --
White Mountains Insurance
Group Inc. ..................... 729,657 422,785,155 5,903,002 2,829,724
-----------------------------------------------
TOTAL NON-CONTROLLED AFFILIATES
(5.72% of Net Assets) .......................... $1,235,099,799 $14,014,339 $183,574,667
===============================================
a Reflects a 2:1 stock split during the current year. The balance as of
January 1, 2006 was 9,481,276.
Annual Report | 51
Mutual Shares Fund
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
13. OTHER CONSIDERATIONS
Directors or employees of Franklin Mutual, as the Fund's Investment Manager, may
serve as members on the board of directors of certain companies in which the
Fund invests and/or may represent the Fund in certain corporate negotiations. As
a result of this involvement, such individuals may be in possession of certain
material non-public information which, pursuant to the Fund's policies and the
requirements of the federal securities laws, could prevent the Fund from trading
in the securities of such companies for limited or extended periods of time. The
securities have been identified on the accompanying Statement of Investments.
Directors or employees of Franklin Mutual, as the Fund's Investment Manager,
serve as members of various bondholders' steering committees, on credit
committees, and represent the Fund in certain corporate restructuring
negotiations. As a result of this involvement, such individuals may be in
possession of certain material non-public information. If the Fund's Investment
Manager, while in possession of such information, seeks to buy or sell any of
these securities, it will comply with all applicable federal securities laws.
The securities have been identified on the accompanying Statement of
Investments.
14. REGULATORY MATTERS
As part of various investigations by a number of federal, state, and foreign
regulators and governmental entities, including the Securities and Exchange
Commission ("SEC"), relating to certain practices in the mutual fund industry,
including late trading, market timing and marketing support payments to
securities dealers who sell fund shares ("marketing support"), Franklin
Resources, Inc. and certain of its subsidiaries (collectively, the "Company"),
entered into settlements with certain of those regulators. Specifically, the
Company entered into settlements with the SEC, among others, concerning market
timing and marketing support.
On June 23, 2006, the SEC approved the proposed plan of distribution for the
marketing support settlement, and disbursement of the settlement monies to the
designated funds, in accordance with the terms and conditions of that settlement
and plan, was completed in September 2006 and is recorded as other income.
The plan of distribution for the market timing settlement is currently under
review by the SEC staff. After publication of notice of the plan and a 30-day
comment period, the proposed plan of distribution will be submitted to the SEC
for approval. Following the SEC's approval of the plan of distribution, with
modifications as appropriate, distribution of the settlement monies will begin
in accordance with the terms and conditions of the settlement and plan.
In addition, the Company, as well as most of the mutual funds within Franklin
Templeton Investments and certain current or former officers, Company directors,
fund directors, and employees, have been named in private lawsuits (styled as
shareholder class actions, or as derivative actions on behalf of either the
named funds or Franklin Resources, Inc.). The lawsuits
52 | Annual Report
Mutual Shares Fund
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
14. REGULATORY MATTERS (CONTINUED)
relate to the industry practices referenced above, as well as to allegedly
excessive commissions and advisory and distribution fees.
The Company and fund management believe that the claims made in each of the
private lawsuits referenced above are without merit and intend to defend against
them vigorously. The Company cannot predict with certainty the eventual outcome
of these lawsuits, nor whether they will have a material negative impact on the
Company. If it is determined that the Company bears responsibility for any
unlawful or inappropriate conduct that caused losses to the Fund, it is
committed to making the Fund or its shareholders whole, as appropriate.
15. NEW ACCOUNTING PRONOUNCEMENTS
In July 2006, the Financial Accounting Standards Board (FASB) issued FASB
Interpretation No. 48, "Accounting for Uncertainty in Income Taxes--an
Interpretation of FASB Statement No. 109" ("FIN 48"), which clarifies the
accounting for uncertainty in tax positions taken or expected to be taken in a
tax return. FIN 48 provides guidance on the measurement, recognition,
classification and disclosure of tax positions, along with accounting for the
related interest and penalties. FIN 48 is effective for fiscal years beginning
after December 15, 2006, and is to be applied to all open tax years as of the
date of effectiveness. On December 22, 2006, the Securities and Exchange
Commission extended the implementation date to no later than the last net asset
value calculation in the first semi-annual reporting period in 2007. The Fund is
currently evaluating the impact, if any, of applying the various provisions of
FIN 48.
In September 2006, the FASB issued FASB Statement No. 157, "Fair Value
Measurement" ("SFAS 157"), which defines fair value, establishes a framework for
measuring fair value, and expands disclosures about fair value measurements.
SFAS 157 is effective for fiscal years beginning after November 15, 2007, and
interim periods within those fiscal years. The Fund believes the adoption of
SFAS 157 will have no material impact on its financial statements.
Annual Report | 53
Mutual Shares Fund
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
TO THE BOARD OF DIRECTORS OF FRANKLIN MUTUAL SERIES FUND INC.
AND SHAREHOLDERS OF THE MUTUAL SHARES FUND:
We have audited the accompanying statement of assets and liabilities of the
Mutual Shares Fund (one of the portfolio constituting the Franklin Mutual Series
Fund Inc.) (the "Fund"), including the statement of investments, as of December
31, 2006, and the related statement of operations for the year then ended, the
statements of changes in net assets for each of the two years in the period then
ended, and the financial highlights for each of the periods indicated therein.
These financial statements and financial highlights are the responsibility of
the Fund's management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (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. We were
not engaged to perform an audit of the Fund's internal control over financial
reporting. Our audits included consideration of internal control over financial
reporting as a basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the
effectiveness of the Fund's internal control over financial reporting.
Accordingly, we express no such opinion. An audit also includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements and financial highlights, assessing the accounting principles used
and significant estimates made by management, and evaluating the overall
financial statement presentation. Our procedures included confirmation of
securities owned as of December 31, 2006, by correspondence with the custodian
and brokers or by other appropriate auditing procedures where replies from the
brokers were not received. 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 the
Mutual Shares Fund of the Franklin Mutual Series Fund Inc. at December 31, 2006,
the results of its operations for the year then ended, the changes in its net
assets for each of the two years in the period then ended, and the financial
highlights for each of the periods indicated therein, in conformity with U.S.
generally accepted accounting principles.
/s/ Ernst & Young LLP
Boston, Massachusetts
February 20, 2007
54 | Annual Report
Mutual Shares Fund
TAX DESIGNATION (UNAUDITED)
Under Section 852(b)(3)(C) of the Internal Revenue Code (Code), the Fund
designates the maximum amount allowable but no less than $1,003,778,016 as a
long term capital gain dividend for the fiscal year ended December 31, 2006.
Under Section 854(b)(2) of the Code, the Fund designates the maximum amount
allowable but no less than $304,025,825 as qualified dividends for purposes of
the maximum rate under Section 1(h)(11) of the Code for the fiscal year ended
December 31, 2006. In January 2007, shareholders will receive Form 1099-DIV
which will include their share of qualified dividends distributed during the
calendar year 2006. Shareholders are advised to check with their tax advisors
for information on the treatment of these amounts on their individual income tax
returns.
Under Section 871(k)(1)(C) of the Code, the Fund designates the maximum amount
allowable but no less than $98,235,375 as interest-related dividends for
purposes of the tax imposed under Section 871(a)(1)(A) of the Code for the
fiscal year ended December 31, 2006.
Under Section 871(k)(2)(C) of the Code, the Fund designates the maximum amount
allowable but no less than $193,538,768 as a short-term capital gain dividend
for purposes of the tax imposed under Section 871(a)(1)(A) of the Code for the
fiscal year ended December 31, 2006.
Under Section 854(b)(2) of the Code, the Fund designates 31.91% of the ordinary
income dividends as income qualifying for the dividends received deduction for
the fiscal year ended December 31, 2006.
Annual Report | 55
Mutual Shares Fund
BOARD MEMBERS AND OFFICERS
The name, year of birth and address of the officers and board members, as well
as their affiliations, positions held with the Fund, principal occupations
during the past five years and number of portfolios overseen in the Franklin
Templeton Investments fund complex are shown below.
INDEPENDENT BOARD MEMBERS
- ------------------------------------------------------------------------------------------------------------------------------------
NUMBER OF PORTFOLIOS IN
NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN
AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- ------------------------------------------------------------------------------------------------------------------------------------
EDWARD I. ALTMAN, PH.D. (1941) Director Since 1987 7 Director, A.T.D. Inc. (financial
101 John F. Kennedy Parkway technology and investment company).
Short Hills, NJ 07078-2789
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Max L. Heine Professor of Finance and Director of The Credit and Debt Markets Research Program, Salomon Center, Stern School of
Business, New York University; editor and author of numerous financial publications; financial consultant; and serves on the
Investment Advisory Committee of the New York State Common Retirement Fund; and FORMERLY, Vice Director, NYU Salomon Center, Stern
School of Business, New York University.
- ------------------------------------------------------------------------------------------------------------------------------------
ANN TORRE BATES (1958) Director Since 1994 7 Independent Director, SLM
101 John F. Kennedy Parkway Corporation (Sallie Mae) and Allied
Short Hills, NJ 07078-2789 Capital Corporation (financial
services).
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Independent strategic and financial consultant; and FORMERLY, Executive Vice President and Chief Financial Officer, NHP
Incorporated (manager of multifamily housing) (1995-1997); and Vice President and Treasurer, US Airways, Inc. (until 1995).
- ------------------------------------------------------------------------------------------------------------------------------------
BURTON J. GREENWALD (1929) Director Since 2002 13 Director, Franklin Templeton
101 John F. Kennedy Parkway Emerging Markets Debt Opportunities
Short Hills, NJ 07078-2789 Fund PLC and Fiduciary
International Ireland Limited.
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Managing Director, B.J. Greenwald Associates (management consultants to the financial services industry) and FORMERLY, Chairman,
Fiduciary Trust International Funds; Executive Vice President, L.F. Rothschild Fund Management, Inc.; President and Director, Merit
Mutual Funds; President, Underwriting Division and Director, National Securities & Research Corporation; Governor, Investment
Company Institute and Chairman, ICI Public Information Committee.
- ------------------------------------------------------------------------------------------------------------------------------------
BRUCE A. MACPHERSON (1930) Director Since 1974 7 None
101 John F. Kennedy Parkway
Short Hills, NJ 07078-2789
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Retired, former Chairman, A.A. MacPherson, Inc., Canton, MA (representative for electrical manufacturers).
- ------------------------------------------------------------------------------------------------------------------------------------
CHARLES RUBENS II (1930) Director Since 1998 13 None
101 John F. Kennedy Parkway
Short Hills, NJ 07078-2789
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Private investor.
- ------------------------------------------------------------------------------------------------------------------------------------
56 | Annual Report
- ------------------------------------------------------------------------------------------------------------------------------------
NUMBER OF PORTFOLIOS IN
NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN
AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- ------------------------------------------------------------------------------------------------------------------------------------
ROBERT E. WADE (1946) Director and Director since 30 Director, El Oro and Exploration
101 John F. Kennedy Parkway Chairman of 1991 and Co., p.l.c. (investments) and ARC
Short Hills, NJ 07078-2789 the Board Chairman of the Wireless Solutions, Inc. (wireless
Board since components and network products).
2005
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Practicing attorney.
- ------------------------------------------------------------------------------------------------------------------------------------
INTERESTED BOARD MEMBERS AND OFFICERS
- ------------------------------------------------------------------------------------------------------------------------------------
NUMBER OF PORTFOLIOS IN
NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN
AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- ------------------------------------------------------------------------------------------------------------------------------------
**WILLIAM J. LIPPMAN (1925) Director Since 1996 13 None
One Parker Plaza, 9th Floor
Fort Lee, NJ 07024-2920
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
President, Franklin Advisory Services, LLC; Director, Templeton Worldwide, Inc.; and officer and/or director or trustee, as the
case may be, of four of the investment companies in Franklin Templeton Investments.
- ------------------------------------------------------------------------------------------------------------------------------------
PHILIPPE BRUGERE-TRELAT (1949) Vice Since 2005 Not Applicable Not Applicable
101 John F. Kennedy Parkway, President
Short Hills, NJ 07078-2789
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Vice President, Franklin Mutual Advisers, LLC; Portfolio Manager of Eurovest SA (French registered Investment Company, Sicav); and
officer of two of the investment companies in Franklin Templeton Investments.
- ------------------------------------------------------------------------------------------------------------------------------------
JAMES M. DAVIS (1952) Chief Chief Not Applicable Not Applicable
One Franklin Parkway Compliance Compliance
San Mateo, CA 94403-1906 Officer and Officer since
Vice President 2004
- AML and Vice
Compliance President
- AML
Compliance
since
February 2006
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Director, Global Compliance, Franklin Resources, Inc.; officer of some of the other subsidiaries of Franklin Resources, Inc. and of
46 of the investment companies in Franklin Templeton Investments; and FORMERLY, Director of Compliance, Franklin Resources, Inc.
(1994-2001).
- ------------------------------------------------------------------------------------------------------------------------------------
MICHAEL J. EMBLER (1964) Senior Vice Since 2005 Not Applicable Not Applicable
101 John F. Kennedy Parkway President
Short Hills, NJ 07078-2789 and Chief
Investment
Officer
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Senior Vice President and Chief Investment Officer, Franklin Mutual Advisers, LLC; and officer of two of the investment companies
in Franklin Templeton Investments.
- ------------------------------------------------------------------------------------------------------------------------------------
Annual Report | 57
- ------------------------------------------------------------------------------------------------------------------------------------
NUMBER OF PORTFOLIOS IN
NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN
AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- ------------------------------------------------------------------------------------------------------------------------------------
JIMMY D. GAMBILL (1947) Senior Vice Since 2002 Not Applicable Not Applicable
500 East Broward Blvd. President
Suite 2100 and Chief
Fort Lauderdale, Executive
FL 33394-3091 Officer -
Finance and
Administration
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
President, Franklin Templeton Services, LLC; Senior Vice President, Templeton Worldwide, Inc.; and officer of some of the other
subsidiaries of Franklin Resources, Inc. and of 46 of the investment companies in Franklin Templeton Investments.
- ------------------------------------------------------------------------------------------------------------------------------------
DAVID P. GOSS (1947) Vice President Since 2000 Not Applicable Not Applicable
One Franklin Parkway
San Mateo, CA 94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Senior Associate General Counsel, Franklin Templeton Investments; officer and director of one of the subsidiaries of Franklin
Resources, Inc.; and officer of 46 of the investment companies in Franklin Templeton Investments.
- ------------------------------------------------------------------------------------------------------------------------------------
STEVEN J. GRAY (1955) Secretary Since 2005 Not Applicable Not Applicable
One Franklin Parkway
San Mateo, CA 94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Senior Associate General Counsel, Franklin Templeton Investments; and officer of 41 of the investment companies in Franklin
Templeton Investments.
- ------------------------------------------------------------------------------------------------------------------------------------
BARBARA J. GREEN (1947) Vice President Since 2000 Not Applicable Not Applicable
One Franklin Parkway
San Mateo, CA 94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Vice President, Deputy General Counsel and Secretary, Franklin Resources, Inc.; Secretary and Senior Vice President, Templeton
Worldwide, Inc.; Secretary, Franklin Advisers, Inc., Franklin Advisory Services, LLC, Franklin Investment Advisory Services, LLC,
Franklin Mutual Advisers, LLC, Franklin Templeton Institutional, LLC, Franklin Templeton Investor Services, LLC, Franklin Templeton
Services, LLC, Franklin Templeton Distributors, Inc., Templeton Investment Counsel, LLC, and Templeton/Franklin Investment
Services, Inc.; Vice President, Templeton Global Advisors Limited; and officer of some of the other subsidiaries of Franklin
Resources, Inc. and of 46 of the investment companies in Franklin Templeton Investments; and FORMERLY, Deputy Director, Division of
Investment Management, Executive Assistant and Senior Advisor to the Chairman, Counselor to the Chairman, Special Counsel and
Attorney Fellow, U.S. Securities and Exchange Commission (1986-1995); Attorney, Rogers & Wells (until 1986); and Judicial Clerk,
U.S. District Court (District of Massachusetts) (until 1979).
- ------------------------------------------------------------------------------------------------------------------------------------
PETER A. LANGERMAN (1955) President Since 2005 Not Applicable Not Applicable
101 John F. Kennedy Parkway and Chief
Short Hills, NJ 07078-2702 Executive
Officer -
Investment
Management
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Chairman of the Board, Chief Executive Officer and President, Franklin Mutual Advisers, LLC; and officer of two of the investment
companies in Franklin Templeton Investments; and FORMERLY, Director, New Jersey's Division of Investment.
- ------------------------------------------------------------------------------------------------------------------------------------
58 | Annual Report
- ------------------------------------------------------------------------------------------------------------------------------------
NUMBER OF PORTFOLIOS IN
NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN
AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- ------------------------------------------------------------------------------------------------------------------------------------
GREGORY R. SEWARD (1956) Treasurer Since 2005 Not Applicable Not Applicable
500 East Broward Blvd.
Suite 2100
Fort Lauderdale,
FL 33394-3091
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Vice President, Franklin Templeton Services, LLC; officer of 16 of the investment companies in Franklin Templeton Investments; and
FORMERLY, Vice President, JPMorgan Chase (2000-2004) and American General Financial Group (1991-2000).
- ------------------------------------------------------------------------------------------------------------------------------------
CRAIG S. TYLE (1960) Vice Since 2005 Not Applicable Not Applicable
One Franklin Parkway President
San Mateo, CA 94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
General Counsel and Executive Vice President, Franklin Resources, Inc.; officer of some of the other subsidiaries of Franklin
Resources, Inc. and of 46 of the investment companies in Franklin Templeton Investments; and FORMERLY, Partner, Shearman &
Sterling, LLP (2004-2005); and General Counsel, Investment Company Institute (ICI) (1997-2004).
- ------------------------------------------------------------------------------------------------------------------------------------
GALEN G. VETTER (1951) Chief Since 2004 Not Applicable Not Applicable
500 East Broward Blvd. Financial
Suite 2100 Officer and
Fort Lauderdale, FL Chief
33394-3091 Accounting
Officer
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Senior Vice President, Franklin Templeton Services, LLC; officer of 46 of the investment companies in Franklin Templeton
Investments; and FORMERLY, Managing Director, RSM McGladrey, Inc. (1999-2004); and Partner, McGladrey & Pullen, LLP (1979-1987 and
1991-2004).
- ------------------------------------------------------------------------------------------------------------------------------------
* We base the number of portfolios on each separate series of the U.S.
registered investment companies within the Franklin Templeton Investments
fund complex. These portfolios have a common investment manager or
affiliated investment managers.
** William J. Lippman is considered to be an interested person of Mutual
Series under the federal securities laws due to his position as an officer
of some of the subsidiaries of Franklin Resources, Inc., which is the
parent company of Mutual Series' investment manager and distributor.
Note: Subsequent to December 31, 2006, Leonard Rubin and Anne M. Tatlock ceased
to be a director of the Fund.
THE FUND'S BOARD OF DIRECTORS HAS DETERMINED THAT CERTAIN OF THE MEMBERS OF THE
AUDIT COMMITTEE, INCLUDING ANN TORRE BATES, ARE AUDIT COMMITTEE FINANCIAL
EXPERTS, AND "INDEPENDENT," UNDER THOSE PROVISIONS OF THE SARBANES-OXLEY ACT OF
2002, AND THE RULES AND FORM AMENDMENTS ADOPTED BY THE SECURITIES AND EXCHANGE
COMMISSION, RELATING TO AUDIT COMMITTEE FINANCIAL EXPERTS.
THE STATEMENT OF ADDITIONAL INFORMATION (SAI) INCLUDES ADDITIONAL INFORMATION
ABOUT THE BOARD MEMBERS AND IS AVAILABLE, WITHOUT CHARGE, UPON REQUEST.
SHAREHOLDERS MAY CALL 1-800/DIAL BEN (1-800/342-5236) TO REQUEST THE SAI.
Annual Report | 59
Mutual Shares Fund
SHAREHOLDER INFORMATION
PROXY VOTING POLICIES AND PROCEDURES
The Fund has established Proxy Voting Policies and Procedures ("Policies") that
the Fund uses to determine how to vote proxies relating to portfolio securities.
Shareholders may view the Fund's complete Policies online at
franklintempleton.com. Alternatively, shareholders may request copies of the
Policies free of charge by calling the Proxy Group collect at 1-954/527-7678 or
by sending a written request to: Franklin Templeton Companies, LLC, 500 East
Broward Boulevard, Suite 1500, Fort Lauderdale, FL 33394, Attention: Proxy
Group. Copies of the Fund's proxy voting records are also made available online
at franklintempleton.com and posted on the U.S. Securities and Exchange
Commission's website at sec.gov and reflect the most recent 12-month period
ended June 30.
QUARTERLY STATEMENT OF INVESTMENTS
The Fund files a complete statement of investments with the U.S. Securities and
Exchange Commission for the first and third quarters for each fiscal year on
Form N-Q. Shareholders may view the filed Form N-Q by visiting the Commission's
website at sec.gov. The filed form may also be viewed and copied at the
Commission's Public Reference Room in Washington, DC. Information regarding the
operations of the Public Reference Room may be obtained by calling
1-800/SEC-0330.
60 | Annual Report
Literature Request
LITERATURE REQUEST. TO RECEIVE A BROCHURE AND PROSPECTUS, PLEASE CALL US AT
1-800/DIAL BEN(R) (1-800/342-5236) OR VISIT FRANKLINTEMPLETON.COM. INVESTORS
SHOULD CAREFULLY CONSIDER A FUND'S INVESTMENT GOALS, RISKS, CHARGES AND EXPENSES
BEFORE INVESTING. THE PROSPECTUS CONTAINS THIS AND OTHER INFORMATION. PLEASE
CAREFULLY READ THE PROSPECTUS BEFORE INVESTING. To ensure the highest quality of
service, we may monitor, record and access telephone calls to or from our
service departments. These calls can be identified by the presence of a regular
beeping tone.
FRANKLIN TEMPLETON INVESTMENTS
INTERNATIONAL
Mutual European Fund
Templeton BRIC Fund
Templeton China World Fund
Templeton Developing Markets Trust
Templeton Emerging Markets Small Cap Fund
Templeton Foreign Fund
Templeton Foreign Smaller Companies Fund
Templeton International (Ex EM) Fund 1
GLOBAL
Mutual Discovery Fund
Templeton Global Long-Short Fund
Templeton Global Opportunities Trust
Templeton Global Smaller Companies Fund
Templeton Growth Fund
Templeton World Fund
GROWTH
Franklin Aggressive Growth Fund
Franklin Capital Growth Fund
Franklin Flex Cap Growth Fund
Franklin Small-Mid Cap Growth Fund
Franklin Small Cap Growth Fund II 1
VALUE
Franklin Balance Sheet Investment Fund 2
Franklin Equity Income Fund
Franklin Large Cap Value Fund
Franklin MicroCap Value Fund 2
Franklin MidCap Value Fund
Franklin Small Cap Value Fund
Mutual Beacon Fund
Mutual Qualified Fund
Mutual Recovery Fund 3
Mutual Shares Fund
BLEND
Franklin Balanced Fund
Franklin Blue Chip Fund 1
Franklin Convertible Securities Fund
Franklin Growth Fund
Franklin Rising Dividends Fund
Franklin U.S. Long-Short Fund
SECTOR
Franklin Biotechnology Discovery Fund
Franklin DynaTech Fund
Franklin Global Communications Fund
Franklin Global Health Care Fund
Franklin Global Real Estate Fund
Franklin Gold and Precious Metals Fund
Franklin Natural Resources Fund
Franklin Real Estate Securities Fund
Franklin Technology Fund
Franklin Utilities Fund
Mutual Financial Services Fund
ASSET ALLOCATION
Franklin Templeton Corefolio Allocation Fund
Franklin Templeton Founding Funds Allocation Fund
Franklin Templeton Perspectives Allocation Fund
TARGET FUNDS
Franklin Templeton Conservative Target Fund
Franklin Templeton Growth Target Fund
Franklin Templeton Moderate Target Fund
RETIREMENT TARGET FUNDS
Franklin Templeton 2015 Retirement Target Fund
Franklin Templeton 2025 Retirement Target Fund
Franklin Templeton 2035 Retirement Target Fund
Franklin Templeton 2045 Retirement Target Fund
INCOME
Franklin Adjustable U.S. Government
Securities Fund 4
Franklin Floating Rate Daily Access Fund
Franklin High Income Fund 5
Franklin Income Fund
Franklin Limited Maturity
U.S. Government Securities Fund 4
Franklin Low Duration Total Return Fund
Franklin Real Return Fund
Franklin Strategic Income Fund
Franklin Strategic Mortgage Portfolio
Franklin Templeton Hard Currency Fund
Franklin Total Return Fund
Franklin U.S. Government Securities Fund 4
Templeton Global Bond Fund
Templeton Income Fund
TAX-FREE INCOME 6
NATIONAL FUNDS
Double Tax-Free Income Fund
Federal Tax-Free Income Fund
High Yield Tax-Free Income Fund
Insured Tax-Free Income Fund 7
LIMITED-TERM FUNDS
California Limited-Term Tax-Free Income Fund
Federal Limited-Term Tax-Free Income Fund
New York Limited-Term Tax-Free Income Fund
INTERMEDIATE-TERM FUNDS
California Intermediate-Term Tax-Free Income Fund
Federal Intermediate-Term Tax-Free Income Fund
New York Intermediate-Term Tax-Free Income Fund
STATE-SPECIFIC
Alabama
Arizona
California 8
Colorado
Connecticut
Florida 8
Georgia
Kentucky
Louisiana
Maryland
Massachusetts 7
Michigan 7
Minnesota 7
Missouri
New Jersey
New York 8
North Carolina
Ohio 7
Oregon
Pennsylvania
Tennessee
Virginia
INSURANCE FUNDS
Franklin Templeton Variable Insurance Products Trust 9
1. The fund is closed to new investors. Existing shareholders can continue
adding to their accounts.
2. The fund is only open to existing shareholders and select retirement
plans.
3. The fund is a continuously offered, closed-end fund. Shares may be
purchased daily; there is no daily redemption. However, each quarter,
pending board approval, the fund will authorize the repurchase of 5%-25%
of the outstanding number of shares. Investors may tender all or a portion
of their shares during the tender period.
4. An investment in the fund is neither insured nor guaranteed by the U.S.
government or by any other entity or institution.
5. Effective 10/1/06, Franklin's AGE High Income Fund changed its name to
Franklin High Income Fund. The fund's investment goal and strategy
remained the same.
6. For investors subject to the alternative minimum tax, a small portion of
fund dividends may be taxable. Distributions of capital gains are
generally taxable.
7. Portfolio of insured municipal securities.
8. These funds are available in two or more variations, including long-term
portfolios, portfolios of insured securities, a high-yield portfolio (CA)
and limited-term, intermediate-term and money market portfolios (CA and
NY).
9. The funds of the Franklin Templeton Variable Insurance Products Trust are
generally available only through insurance company variable contracts.
01/07 Not part of the annual report
[LOGO](R)
FRANKLIN TEMPLETON One Franklin Parkway
INVESTMENTS San Mateo, CA 94403-1906
o WANT TO RECEIVE THIS DOCUMENT FASTER VIA EMAIL?
Eligible shareholders can sign up for eDelivery at
franklintempleton.com. See inside for details.
ANNUAL REPORT AND SHAREHOLDER LETTER
MUTUAL SHARES FUND
INVESTMENT MANAGER
Franklin Mutual Advisers, LLC
101 John F. Kennedy Parkway
Short Hills, NJ 07078
DISTRIBUTOR
Franklin Templeton Distributors, Inc.
1-800/DIAL BEN(R)
franklintempleton.com
SHAREHOLDER SERVICES
1-800/632-2301 - (Class A, B, C & R)
1-800/448-FUND - (Class Z)
Authorized for distribution only when accompanied or preceded by a prospectus.
Investors should carefully consider a fund's investment goals, risks, charges
and expenses before investing. The prospectus contains this and other
information; please read it carefully before investing.
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
identified by the presence of a regular beeping tone.
474 A2006 02/07
MUTUAL QUALIFIED FUND
[GRAPHIC OMITTED]
- --------------------------------------------------------------------------------
DECEMBER 31, 2006
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
ANNUAL REPORT AND SHAREHOLDER LETTER VALUE
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
WANT TO RECEIVE
THIS DOCUMENT
FASTER VIA EMAIL?
MUTUAL QUALIFIED FUND
Eligible shareholders can
sign up for eDelivery at
franklintempleton.com.
See inside for details.
- --------------------------------------------------------------------------------
[LOGO](R)
FRANKLIN TEMPLETON
INVESTMENTS
Franklin o Templeton o MUTUAL SERIES
Thank You For Your
Continued Participation
At Mutual Series, we are pleased so many investors
share our long-term investment philosophy and have
remained shareholders for many years. Your ongoing
support plays a significant role in contributing
to the funds' success.
SPECIALIZED EXPERTISE Mutual Series is part of Franklin Templeton
Investments, which offers the specialized
expertise of three world-class investment
management groups -- Franklin, Templeton and
Mutual Series. Mutual Series is dedicated to a
unique style of value investing, searching
aggressively for opportunity among what we believe
are undervalued stocks, as well as arbitrage
situations and distressed securities. Franklin is
a recognized leader in fixed income investing and
also brings expertise in growth- and value-style
U.S. equity investing. Templeton pioneered
international investing and, with offices in over
25 countries, offers investors a truly global
perspective.
TRUE DIVERSIFICATION Because these management groups work independently
and adhere to different investment approaches,
Franklin, Templeton and Mutual Series funds
typically have distinct portfolios. That's why the
funds can be used to build truly diversified
allocation plans covering every major asset class.
RELIABILITY YOU CAN TRUST Franklin Templeton Investments seeks to
consistently provide investors with exceptional
risk-adjusted returns over the long term, as well
as the reliable, accurate and personal service
that has helped the firm become one of the most
trusted names in financial services.
- -------------------------------------------------------------------------------
MUTUAL FUNDS | RETIREMENT PLANS | 529 COLLEGE SAVINGS PLANS | SEPARATE ACCOUNTS
- -------------------------------------------------------------------------------
[GRAPHIC OMITTED]
Annual Report
Mutual Qualified Fund
YOUR FUND'S GOALS AND MAIN INVESTMENTS: Mutual Qualified Fund seeks capital
appreciation, with income as a secondary goal, by investing mainly in equity
securities of companies the Fund's managers believe are at prices below their
intrinsic value. The Fund may invest up to, but less than, 50% of its assets in
foreign securities.
- --------------------------------------------------------------------------------
PERFORMANCE DATA REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE FUTURE
RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU MAY HAVE
A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY DIFFER FROM
FIGURES SHOWN. PLEASE VISIT FRANKLINTEMPLETON.COM OR CALL 1-800/342-5236 FOR
MOST RECENT MONTH-END PERFORMANCE.
- --------------------------------------------------------------------------------
We are pleased to bring you Mutual Qualified Fund's annual report for the fiscal
year ended December 31, 2006.
PERFORMANCE OVERVIEW
Mutual Qualified Fund - Class Z posted a +19.29% cumulative total return for the
12 months ended December 31, 2006. The Fund outperformed its benchmark, the
Standard & Poor's 500 Index (S&P 500), which returned +15.78% for the same
period. 1 You can find the Fund's long-term performance data in the Performance
Summary beginning on page 10.
ECONOMIC AND MARKET OVERVIEW
During the 12 months ended December 31, 2006, the U.S. economy advanced at a
moderate but slowing pace. Although first quarter 2006 gross domestic product
(GDP) grew an annualized 5.6%, fourth quarter GDP growth was an estimated
annualized 3.5%. The housing market weakened during the year, while corporate
profits and consumer and government spending generally remained robust. Exports
picked up some momentum, but the trade deficit stayed in record territory. Labor
costs rose and hiring generally increased as the unemployment rate fell from
4.9% to 4.5%. 2
Although energy and other commodity prices fell in the second half of the year,
they remained historically high and were a primary economic concern for much of
the period. Oil prices reached a record high of $77 per barrel in July before
declining to $61 at year-end. Oil price volatility appeared to raise the
1. Source: Standard & Poor's Micropal. The S&P 500 consists of 500 stocks
chosen for market size, liquidity and industry group representation. Each
stock's weight in the index is proportionate to its market value. The S&P
500 is one of the most widely used benchmarks of U.S. equity performance.
The index is unmanaged and includes reinvested dividends. One cannot
invest directly in an index, nor is an index representative of the Fund's
portfolio.
2. Source: Bureau of Labor Statistics.
THE DOLLAR VALUE, NUMBER OF SHARES OR PRINCIPAL AMOUNT, AND NAMES OF ALL
PORTFOLIO HOLDINGS ARE LISTED IN THE FUND'S STATEMENT OF INVESTMENTS (SOI). THE
SOI BEGINS ON PAGE 21.
4 | Annual Report
anxiety level among consumers and businesses alike. Consumers curbed spending on
large purchases, such as homes and cars. Home prices fell in many parts of the
country, mortgage rates crept up, and borrowing against home equity flattened.
Overall, the core Consumer Price Index (CPI) rose 2.6% for the 12 months ended
December 31, 2006, which was higher than the 2.2% 10-year average. 3
The Federal Reserve Board (Fed) raised the federal funds target rate
incrementally from 4.25% at the beginning of the year to 5.25% on June 30. Since
June, however, the Fed left the rate unchanged, citing a slowing economy,
widespread cooling in the housing market and the lagging effect of prior
tightening. The Fed stated that even with lower oil prices toward period-end,
inflation risks remained.
Outside the U.S., the economy continued to grow. The economic drivers remained
consistent over the past four years: strong corporate and consumer demand,
reasonably low inflation, an improving labor market, and a relatively moderate
interest rate environment, despite recent interest rate hikes by many of the
world's central banks. However, the global economy also faced head-winds from
elevated energy prices, higher global interest rates and a weaker U.S. housing
market. These factors dampened investor confidence mid-year, when many equity
markets declined before rebounding later in the year.
Despite such challenges, global economic activity was healthy. Strong global
liquidity -- whether petrodollars, corporate cash, private equity, household
savings or central banks' reserves -- continued to search for a home. Record
global merger and acquisition activity in 2006 also reflected the abundance of
cash in the capital markets. Bond yield spreads over U.S. Treasuries narrowed,
and global equity and commodity markets rose in the latter part of the year.
U.S. equity markets performed well for the year in this environment. The blue
chip stocks of the Dow Jones Industrial Average posted a 12-month total return
of +19.05%, and the broader S&P 500 returned +15.78%, while the technology-heavy
NASDAQ Composite Index had a total return of +11.27%. 4 Non-U.S. equity markets
ended 2006 on a stronger note, and all major non-U.S. regions delivered
double-digit total returns for the year. Stock market indexes in the U.S. and
most European countries reached six-year highs in the fourth quarter, and many
emerging market indexes in Asia, Europe and Latin America neared or reached
all-time highs.
GEOGRAPHIC BREAKDOWN
Based on Total Net Assets as of 12/31/06
[THE FOLLOWING TABLE WAS REPRESENTED AS A BAR CHART IN THE PRINTED MATERIAL.]
U.S. 42.9%
France 11.7%
U.K 8.4%
South Korea 4.8%
Germany 3.5%
Norway 3.3%
Spain 2.3%
Japan 2.3%
Switzerland 2.0%
Bermuda 1.5%
Finland 1.4%
Netherlands 1.4%
Hong Kong 1.3%
Sweden 1.3%
Other 4.6%
Short-Term Investments & Other Net Assets 7.3%
3. Source: Bureau of Labor Statistics. Core CPI excludes food and energy
costs.
4. Source: Standard & Poor's Micropal. The Dow Jones Industrial Average is
price weighted based on the average market price of 30 blue chip stocks of
companies that are generally industry leaders. See footnote 1 for a
description of the S&P 500. The NASDAQ Composite Index measures all NASDAQ
domestic and international based common type stocks listed on The NASDAQ
Stock Market. The index is market value weighted and includes more than
3,000 companies.
Annual Report | 5
TOP 10 SECTORS/INDUSTRIES
Based on Equity Securities as of 12/31/06
- --------------------------------------------------------------------------------
% OF TOTAL
NET ASSETS
- --------------------------------------------------------------------------------
Tobacco 11.4%
- --------------------------------------------------------------------------------
Insurance 11.3%
- --------------------------------------------------------------------------------
Food Products 9.6%
- --------------------------------------------------------------------------------
Commercial Banks 5.5%
- --------------------------------------------------------------------------------
Real Estate 4.4%
- --------------------------------------------------------------------------------
Health Care Providers & Services 4.4%
- --------------------------------------------------------------------------------
Media 3.7%
- --------------------------------------------------------------------------------
Thrifts & Mortgage Finance 3.1%
- --------------------------------------------------------------------------------
Diversified Telecommunication Services 2.8%
- --------------------------------------------------------------------------------
Paper & Forest Products 2.7%
- --------------------------------------------------------------------------------
INVESTMENT STRATEGY
At Mutual Series, we are committed to our distinctive value approach to
investing, which we believe can generate above-average risk-adjusted returns
over time for our shareholders. Our major investment strategy is investing in
undervalued stocks. When selecting undervalued equities, we are always attracted
to fundamentally strong companies with healthy balance sheets, high-quality
assets, substantial free cash flow and shareholder-oriented management teams and
whose stocks are trading at discounts to our assessment of the companies'
intrinsic or business value. We also look for asset rich companies whose shares
may be trading at depressed levels due to concerns over short-term earnings
disappointments, litigation, management strategy or other perceived negatives.
This strict value approach is not only intended to improve the likelihood of
upside potential, but it is also intended to reduce the risk of substantial
declines. While the vast majority of our undervalued equity investments are made
in publicly traded companies globally, we may invest occasionally in privately
held companies as well.
We complement this more traditional investment strategy with two others. One is
distressed investing, a highly specialized field that has proven quite
profitable during certain periods over the years. Distressed investing is
complex and can take many forms. The most common distressed investment the Fund
undertakes is the purchase of financially troubled or bankrupt companies' debt
at a substantial discount to face value. After the financially distressed
company is reorganized, often in bankruptcy court, the old debt is typically
replaced with new securities issued by the financially stronger company.
The other piece of our investment strategy is participating in arbitrage
situations, another highly specialized field. When companies announce proposed
mergers or takeovers, commonly referred to as "deals," the target company may
trade at a discount to the bid it ultimately accepts. One form of arbitrage
involves purchasing the target company's stock when it is trading below the
value it would receive in a deal. In keeping with our commitment to a relatively
conservative investment approach, we typically focus our arbitrage efforts on
announced deals and eschew rumored deals or other situations we consider
relatively risky.
In addition, we will generally seek to hedge the Fund's currency exposure when
we deem it advantageous, to focus our efforts on analyzing business fundamentals
and assessing the value of company assets and liabilities.
6 | Annual Report
MANAGER'S DISCUSSION
During the year under review, the largest contributor to Fund performance was
our equity portfolio. Three of our best performing investments during the fiscal
year were KT&G Corp., a South Korean tobacco products manufacturer; Orkla, a
Norwegian conglomerate; and Groupe Danone, a French food-processing company.
KT&G, the world's ninth largest tobacco company, is South Korea's leading
cigarette manufacturer, with 72% market share. During 2006, KT&G increased its
market share by launching new products with higher average selling prices while
experiencing ongoing strong performance in its ginseng business. Another factor
contributing to KT&G's performance was the election of an activist shareholder
to the company's board of directors. Many investors believed this new director
would focus the company on unlocking shareholder value. The company announced
its growth strategy for its cigarette and ginseng businesses, as well as a large
shareholder return of capital. Through the company's share buy-back program and
higher dividend policy, KT&G will return the equivalent of 30% of its market
capitalization from 2006 to 2008. Although KT&G's stock price gained 25% in
local currency during 2006, the shares traded significantly below our estimate
of fair value.
Orkla's stock price appreciated 29% in local currency during the year under
review. Several Orkla divisions performed well in 2006, including the specialty
materials division, which benefited from higher aluminum and hydroelectricity
prices and from the restructured aluminum business. In addition, the company's
investment portfolio appreciated significantly during the year. Aside from these
positive factors, Orkla experienced three corporate events during the period
that we believe highlighted the company's value. In May, Renewable Energy
Corporation (REC), the leading global supplier of solar-grade silicon and
wafers, completed an initial public offering (IPO). Driven by strong demand for
solar panels, REC's share price appreciated 20% since May's IPO through
period-end. Orkla, which owns a 23.5% stake in REC, benefited from the share
price appreciation. In July, Orkla divested most of its media assets at what we
believed was an attractive price, and many investors considered the asset sale a
positive step toward making Orkla a more focused company. Finally, in November,
Orkla created a joint venture with Alcoa for its soft alloy business that it
believes has the potential to become a global leader in its field and
significant potential for cost savings. Although Orkla has improved its
operations and become more focused, the company's shares traded at a significant
discount to their intrinsic value at period-end in our assessment.
TOP 10 HOLDINGS
12/31/06
- --------------------------------------------------------------------------------
COMPANY % OF TOTAL
SECTOR/INDUSTRY, COUNTRY NET ASSETS
- --------------------------------------------------------------------------------
White Mountains Insurance Group Ltd. 3.5%
INSURANCE, U.S.
- --------------------------------------------------------------------------------
KT&G Corp. 3.3%
TOBACCO, SOUTH KOREA
- --------------------------------------------------------------------------------
Weyerhaeuser Co. 2.7%
PAPER & FOREST PRODUCTS, U.S.
- --------------------------------------------------------------------------------
Orkla ASA 2.3%
FOOD PRODUCTS, NORWAY
- --------------------------------------------------------------------------------
Altadis SA 2.3%
TOBACCO, SPAIN
- --------------------------------------------------------------------------------
Generale de Sante 2.3%
HEALTH CARE PROVIDERS & SERVICES, FRANCE
- --------------------------------------------------------------------------------
Groupe Danone 2.2%
FOOD PRODUCTS, FRANCE
- --------------------------------------------------------------------------------
Berkshire Hathaway Inc., A & B 2.1%
INSURANCE, U.S.
- --------------------------------------------------------------------------------
Pernod Ricard SA 2.0%
BEVERAGES, FRANCE
- --------------------------------------------------------------------------------
British American Tobacco PLC 1.9%
TOBACCO, U.K.
- --------------------------------------------------------------------------------
Annual Report | 7
Groupe Danone produces yogurt, biscuits and bottled water. The company ranks
first in global yogurt sales, which represent 55% of Danone's overall sales,
with an 18% market share that is about four times larger than its closest
competitor. We believe that given its scale, Danone not only has a purchasing
advantage, but also can leverage its relationships with distributors to
cross-sell products and further increase market share. Additionally, consumers
seem to like the company's offerings in the healthy and functional food
categories. Danone was also expanding geographically to new markets in China,
India, Russia and Mexico, as well as introducing dairy products in the U.S. that
recently experienced growth rates above 20%. In November, company management
increased its sales growth target from 5%-7% to 6%-8%. For the year under
review, Danone's share price increased 32% in local currency.
Although the Fund performed well during the fiscal year, it had some
underachieving holdings. Three investments that failed to meet our expectations
were The Mills Corp., a regional retail- and entertainment-oriented real estate
investment trust; NTL, a U.K. cable television company; and Mitsubishi UFJ
Financial Group, a Japanese banking and financial services company. Shares of
The Mills Corp., which we purchased and sold during the period, dropped as the
company faced accounting issues and investigations and was expected to announce
a restatement of historical financial results. The company's shares fell 41% in
value for the time we held them. NTL, the U.K.'s largest cable television
provider, generated lackluster operating results as it continued to restructure
its NTL unit while integrating its early 2006 acquisition of cable TV operator
Telewest, as well as its purchase of mobile telephone company Virgin Mobile.
NTL's share price was also negatively impacted by news late in the year that the
company was interested in pursuing a transaction with ITV, a U.K. media firm. By
period-end, such a transaction appeared unlikely following the acquisition of an
18% position in ITV by competitor British Sky Broadcasting. For the 12-month
period, NTL shares declined 6%. Mitsubishi UFJ's lackluster performance in 2006
(-8% in local currency) was attributable to flat loan balances and net interest
margins, which were contrary to investors' expectations given developments in
Japan's interest rate environment.
Finally, investors should note that we remained substantially hedged to the U.S.
dollar versus European currencies, especially the euro. Since the dollar was
generally weaker over the review period, the portfolio returns were lower than
they would have been had we not hedged the foreign currency exposure.
8 | Annual Report
Thank you for your continued participation in Mutual Qualified Fund. We look
forward to serving your future investment needs.
/s/ Anne E. Gudefin
[PHOTO OMITTED]
Anne E. Gudefin, CFA
Portfolio Manager
/s/ Shawn M. Tumulty
[PHOTO OMITTED]
Shawn M. Tumulty, CFA
Assistant Portfolio Manager
Mutual Qualified Fund
THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS
AS OF DECEMBER 31, 2006, THE END OF THE REPORTING PERIOD. THE WAY WE IMPLEMENT
OUR MAIN INVESTMENT STRATEGIES AND THE RESULTING PORTFOLIO HOLDINGS MAY CHANGE
DEPENDING ON FACTORS SUCH AS MARKET AND ECONOMIC CONDITIONS. THESE OPINIONS MAY
NOT BE RELIED UPON AS INVESTMENT ADVICE OR AN OFFER FOR A PARTICULAR SECURITY.
THE INFORMATION IS NOT A COMPLETE ANALYSIS OF EVERY ASPECT OF ANY MARKET,
COUNTRY, INDUSTRY, SECURITY OR THE FUND. STATEMENTS OF FACT ARE FROM SOURCES
CONSIDERED RELIABLE, BUT THE INVESTMENT MANAGER MAKES NO REPRESENTATION OR
WARRANTY AS TO THEIR COMPLETENESS OR ACCURACY. ALTHOUGH HISTORICAL PERFORMANCE
IS NO GUARANTEE OF FUTURE RESULTS, THESE INSIGHTS MAY HELP YOU UNDERSTAND OUR
INVESTMENT MANAGEMENT PHILOSOPHY.
- --------------------------------------------------------------------------------
ANNE GUDEFIN has been portfolio manager for Mutual Qualified Fund since 2002.
She is also portfolio manager for Mutual Discovery Fund and has been a member of
the management team of the Mutual Series Funds since 2000, when she joined
Franklin Templeton Investments. Previously, she was an analyst at Perry Capital.
SHAWN TUMULTY has been an assistant portfolio manager for Mutual Qualified Fund
since 2003. He joined Franklin Templeton Investments in 2000. Prior to joining
Franklin Templeton Investments, Mr. Tumulty was an analyst and portfolio manager
at Hamilton Partners Limited.
- --------------------------------------------------------------------------------
Annual Report | 9
Performance Summary as of 12/31/06
Your dividend income will vary depending on dividends or interest paid by
securities in the Fund's portfolio, adjusted for operating expenses of each
class. Capital gain distributions are net profits realized from the sale of
portfolio securities. The performance table and graphs do not reflect any taxes
that a shareholder would pay on Fund dividends, capital gain distributions, if
any, or any realized gains on the sale of Fund shares. Total return reflects
reinvestment of the Fund's dividends and capital gain distributions, if any, and
any unrealized gains or losses.
PRICE AND DISTRIBUTION INFORMATION
- ----------------------------------------------------------------------------------------------------------
CLASS Z (SYMBOL: MQIFX) CHANGE 12/31/06 12/31/05
- ----------------------------------------------------------------------------------------------------------
Net Asset Value (NAV) +$2.07 $21.88 $19.81
- ----------------------------------------------------------------------------------------------------------
DISTRIBUTIONS (1/1/06-12/31/06)
- ----------------------------------------------------------------------------------------------------------
Dividend Income $0.4016
- ----------------------------------------------------------------------------------------------------------
Short-Term Capital Gain $0.0438
- ----------------------------------------------------------------------------------------------------------
Long-Term Capital Gain $1.2581
- ----------------------------------------------------------------------------------------------------------
TOTAL $1.7035
- ----------------------------------------------------------------------------------------------------------
CLASS A (SYMBOL: TEQIX) CHANGE 12/31/06 12/31/05
- ----------------------------------------------------------------------------------------------------------
Net Asset Value (NAV) +$2.04 $21.75 $19.71
- ----------------------------------------------------------------------------------------------------------
DISTRIBUTIONS (1/1/06-12/31/06)
- ----------------------------------------------------------------------------------------------------------
Dividend Income $0.3347
- ----------------------------------------------------------------------------------------------------------
Short-Term Capital Gain $0.0438
- ----------------------------------------------------------------------------------------------------------
Long-Term Capital Gain $1.2581
- ----------------------------------------------------------------------------------------------------------
TOTAL $1.6366
- ----------------------------------------------------------------------------------------------------------
CLASS B (SYMBOL: TEBQX) CHANGE 12/31/06 12/31/05
- ----------------------------------------------------------------------------------------------------------
Net Asset Value (NAV) +$1.98 $21.32 $19.34
- ----------------------------------------------------------------------------------------------------------
DISTRIBUTIONS (1/1/06-12/31/06)
- ----------------------------------------------------------------------------------------------------------
Dividend Income $0.1867
- ----------------------------------------------------------------------------------------------------------
Short-Term Capital Gain $0.0438
- ----------------------------------------------------------------------------------------------------------
Long-Term Capital Gain $1.2581
- ----------------------------------------------------------------------------------------------------------
TOTAL $1.4886
- ----------------------------------------------------------------------------------------------------------
CLASS C (SYMBOL: TEMQX) CHANGE 12/31/06 12/31/05
- ----------------------------------------------------------------------------------------------------------
Net Asset Value (NAV) +$2.00 $21.58 $19.58
- ----------------------------------------------------------------------------------------------------------
DISTRIBUTIONS (1/1/06-12/31/06)
- ----------------------------------------------------------------------------------------------------------
Dividend Income $0.1988
- ----------------------------------------------------------------------------------------------------------
Short-Term Capital Gain $0.0438
- ----------------------------------------------------------------------------------------------------------
Long-Term Capital Gain $1.2581
- ----------------------------------------------------------------------------------------------------------
TOTAL $1.5007
- ----------------------------------------------------------------------------------------------------------
10 | Annual Report
Performance Summary (CONTINUED)
PERFORMANCE 1
CUMULATIVE TOTAL RETURN EXCLUDES SALES CHARGES. AVERAGE ANNUAL TOTAL RETURN AND
VALUE OF $10,000 INVESTMENT INCLUDE MAXIMUM SALES CHARGES. CLASS Z: NO SALES
CHARGES; CLASS A: 5.75% MAXIMUM INITIAL SALES CHARGE; CLASS B: CONTINGENT
DEFERRED SALES CHARGE (CDSC) DECLINING FROM 4% TO 1% OVER SIX YEARS, AND
ELIMINATED THEREAFTER; CLASS C: 1% CDSC IN FIRST YEAR ONLY. THE FUND MAY CHARGE
A 2% FEE ON REDEMPTIONS MADE WITHIN SEVEN DAYS OF PURCHASE.
- -----------------------------------------------------------------------------------------------------------
CLASS Z 1-YEAR 5-YEAR 10-YEAR
- -----------------------------------------------------------------------------------------------------------
Cumulative Total Return 2 +19.29% +76.36% +211.06%
- -----------------------------------------------------------------------------------------------------------
Average Annual Total Return 3 +19.29% +12.02% +12.02%
- -----------------------------------------------------------------------------------------------------------
Value of $10,000 Investment 4 $11,929 $17,636 $31,106
- -----------------------------------------------------------------------------------------------------------
CLASS A 1-YEAR 5-YEAR 10-YEAR
- -----------------------------------------------------------------------------------------------------------
Cumulative Total Return 2 +18.94% +73.36% +200.38%
- -----------------------------------------------------------------------------------------------------------
Average Annual Total Return 3 +12.11% +10.32% +10.97%
- -----------------------------------------------------------------------------------------------------------
Value of $10,000 Investment 4 $11,211 $16,342 $28,311
- -----------------------------------------------------------------------------------------------------------
CLASS B 1-YEAR 5-YEAR INCEPTION (1/1/99)
- -----------------------------------------------------------------------------------------------------------
Cumulative Total Return 2 +18.16% +67.78% +128.93%
- -----------------------------------------------------------------------------------------------------------
Average Annual Total Return 3 +14.16% +10.64% +10.92%
- -----------------------------------------------------------------------------------------------------------
Value of $10,000 Investment 4 $11,416 $16,578 $22,893
- -----------------------------------------------------------------------------------------------------------
CLASS C 1-YEAR 5-YEAR 10-YEAR
- -----------------------------------------------------------------------------------------------------------
Cumulative Total Return 2 +18.16% +67.80% +181.51%
- -----------------------------------------------------------------------------------------------------------
Average Annual Total Return 3 +17.16% +10.91% +10.90%
- -----------------------------------------------------------------------------------------------------------
Value of $10,000 Investment 4 $11,716 $16,780 $28,151
- -----------------------------------------------------------------------------------------------------------
PERFORMANCE DATA REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE FUTURE
RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU MAY HAVE
A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY DIFFER FROM
FIGURES SHOWN.
FOR MOST RECENT MONTH-END PERFORMANCE, SEE "FUNDS AND PERFORMANCE" AT
FRANKLINTEMPLETON.COM OR CALL 1-800/342-5236.
Annual Report | 11
Performance Summary (CONTINUED)
TOTAL RETURN INDEX COMPARISON FOR HYPOTHETICAL $10,000 INVESTMENT 1
Total return represents the change in value of an investment over the periods
shown. It includes any current, applicable, maximum sales charge, Fund expenses,
account fees and reinvested distributions. The unmanaged index includes
reinvestment of any income or distributions. It differs from the Fund in
composition and does not pay management fees or expenses. One cannot invest
directly in an index.
AVERAGE ANNUAL TOTAL RETURN
- ------------------------------------
CLASS Z 12/31/06
- ------------------------------------
1-Year +19.29%
- ------------------------------------
5-Year +12.02%
- ------------------------------------
10-Year +12.02%
- ------------------------------------
CLASS Z (1/1/97-12/31/06)
[THE FOLLOWING TABLE WAS REPRESENTED AS A LINE CHART IN THE PRINTED MATERIAL.]
Date Mutual Qualified Fund S&P 500 5
- --------------------------------------------------------------------------------
1/1/1997 $10,000 $10,000
1/31/1997 $10,326 $10,624
2/28/1997 $10,551 $10,708
3/31/1997 $10,416 $10,269
4/30/1997 $10,508 $10,881
5/31/1997 $11,013 $11,543
6/30/1997 $11,377 $12,060
7/31/1997 $11,968 $13,019
8/31/1997 $11,868 $12,290
9/30/1997 $12,463 $12,963
10/31/1997 $12,118 $12,531
11/30/1997 $12,262 $13,110
12/31/1997 $12,492 $13,335
1/31/1998 $12,430 $13,482
2/28/1998 $13,151 $14,454
3/31/1998 $13,666 $15,194
4/30/1998 $13,680 $15,347
5/31/1998 $13,632 $15,083
6/30/1998 $13,543 $15,695
7/31/1998 $13,143 $15,529
8/31/1998 $11,188 $13,286
9/30/1998 $11,146 $14,137
10/31/1998 $11,796 $15,286
11/30/1998 $12,382 $16,212
12/31/1998 $12,554 $17,146
1/31/1999 $12,638 $17,862
2/28/1999 $12,295 $17,307
3/31/1999 $12,920 $18,000
4/30/1999 $14,057 $18,697
5/31/1999 $14,232 $18,256
6/30/1999 $14,653 $19,268
7/31/1999 $14,378 $18,667
8/31/1999 $13,702 $18,575
9/30/1999 $13,388 $18,066
10/31/1999 $13,749 $19,209
11/30/1999 $14,150 $19,600
12/31/1999 $14,266 $20,753
1/31/2000 $13,870 $19,711
2/29/2000 $13,237 $19,338
3/31/2000 $14,680 $21,228
4/30/2000 $14,697 $20,590
5/31/2000 $15,017 $20,169
6/30/2000 $14,779 $20,666
7/31/2000 $15,226 $20,343
8/31/2000 $15,903 $21,606
9/30/2000 $15,948 $20,466
10/31/2000 $16,086 $20,379
11/30/2000 $15,583 $18,773
12/31/2000 $16,299 $18,865
1/31/2001 $17,173 $19,534
2/28/2001 $17,143 $17,754
3/31/2001 $16,770 $16,630
4/30/2001 $17,565 $17,922
5/31/2001 $18,193 $18,042
6/30/2001 $18,478 $17,603
7/31/2001 $18,558 $17,429
8/31/2001 $18,236 $16,339
9/30/2001 $16,542 $15,020
10/31/2001 $16,421 $15,307
11/30/2001 $17,117 $16,481
12/31/2001 $17,638 $16,625
1/31/2002 $17,563 $16,383
2/28/2002 $17,648 $16,067
3/31/2002 $18,258 $16,671
4/30/2002 $18,386 $15,661
5/31/2002 $18,386 $15,546
6/30/2002 $17,135 $14,439
7/31/2002 $15,927 $13,313
8/31/2002 $16,069 $13,401
9/30/2002 $15,024 $11,946
10/31/2002 $15,231 $12,996
11/30/2002 $15,612 $13,760
12/31/2002 $15,398 $12,952
1/31/2003 $15,276 $12,613
2/28/2003 $14,956 $12,424
3/31/2003 $14,989 $12,543
4/30/2003 $16,016 $13,577
5/31/2003 $16,910 $14,292
6/30/2003 $17,189 $14,474
7/31/2003 $17,444 $14,730
8/31/2003 $17,877 $15,016
9/30/2003 $17,789 $14,857
10/31/2003 $18,544 $15,697
11/30/2003 $19,166 $15,835
12/31/2003 $20,093 $16,665
1/31/2004 $20,285 $16,971
2/29/2004 $20,779 $17,207
3/31/2004 $20,779 $16,947
4/30/2004 $20,172 $16,682
5/31/2004 $20,341 $16,910
6/30/2004 $20,725 $17,239
7/31/2004 $20,409 $16,668
8/31/2004 $20,680 $16,735
9/30/2004 $21,175 $16,916
10/31/2004 $21,412 $17,175
11/30/2004 $22,741 $17,870
12/31/2004 $23,437 $18,477
1/31/2005 $22,920 $18,027
2/28/2005 $23,557 $18,406
3/31/2005 $23,364 $18,081
4/30/2005 $23,172 $17,738
5/31/2005 $23,749 $18,302
6/30/2005 $24,236 $18,328
7/31/2005 $25,028 $19,009
8/31/2005 $24,991 $18,836
9/30/2005 $25,393 $18,988
10/31/2005 $24,736 $18,672
11/30/2005 $25,478 $19,377
12/31/2005 $26,076 $19,384
1/31/2006 $26,694 $19,897
2/28/2006 $27,063 $19,951
3/31/2006 $28,076 $20,199
4/30/2006 $28,248 $20,470
5/31/2006 $27,839 $19,882
6/30/2006 $27,804 $19,908
7/31/2006 $27,977 $20,031
8/31/2006 $28,765 $20,507
9/30/2006 $28,885 $21,035
10/31/2006 $29,859 $21,720
11/30/2006 $30,540 $22,133
12/31/2006 $31,106 $22,443
AVERAGE ANNUAL TOTAL RETURN
- ------------------------------------
CLASS A 12/31/06
- ------------------------------------
1-Year +12.11%
- ------------------------------------
5-Year +10.32%
- ------------------------------------
10-Year +10.97%
- ------------------------------------
CLASS A (1/1/97-12/31/06)
[THE FOLLOWING TABLE WAS REPRESENTED AS A LINE CHART IN THE PRINTED MATERIAL.]
Date Mutual Qualified Fund S&P 500 5
- --------------------------------------------------------------------------------
1/1/1997 $9,425 $10,000
1/31/1997 $9,730 $10,624
2/28/1997 $9,936 $10,708
3/31/1997 $9,803 $10,269
4/30/1997 $9,890 $10,881
5/31/1997 $10,360 $11,543
6/30/1997 $10,697 $12,060
7/31/1997 $11,253 $13,019
8/31/1997 $11,153 $12,290
9/30/1997 $11,708 $12,963
10/31/1997 $11,383 $12,531
11/30/1997 $11,513 $13,110
12/31/1997 $11,728 $13,335
1/31/1998 $11,664 $13,482
2/28/1998 $12,336 $14,454
3/31/1998 $12,814 $15,194
4/30/1998 $12,827 $15,347
5/31/1998 $12,776 $15,083
6/30/1998 $12,685 $15,695
7/31/1998 $12,314 $15,529
8/31/1998 $10,475 $13,286
9/30/1998 $10,436 $14,137
10/31/1998 $11,047 $15,286
11/30/1998 $11,585 $16,212
12/31/1998 $11,746 $17,146
1/31/1999 $11,825 $17,862
2/28/1999 $11,496 $17,307
3/31/1999 $12,082 $18,000
4/30/1999 $13,141 $18,697
5/31/1999 $13,306 $18,256
6/30/1999 $13,691 $19,268
7/31/1999 $13,426 $18,667
8/31/1999 $12,792 $18,575
9/30/1999 $12,497 $18,066
10/31/1999 $12,829 $19,209
11/30/1999 $13,197 $19,600
12/31/1999 $13,305 $20,753
1/31/2000 $12,934 $19,711
2/29/2000 $12,335 $19,338
3/31/2000 $13,676 $21,228
4/30/2000 $13,684 $20,590
5/31/2000 $13,983 $20,169
6/30/2000 $13,764 $20,666
7/31/2000 $14,173 $20,343
8/31/2000 $14,788 $21,606
9/30/2000 $14,831 $20,466
10/31/2000 $14,950 $20,379
11/30/2000 $14,481 $18,773
12/31/2000 $15,143 $18,865
1/31/2001 $15,948 $19,534
2/28/2001 $15,920 $17,754
3/31/2001 $15,564 $16,630
4/30/2001 $16,304 $17,922
5/31/2001 $16,880 $18,042
6/30/2001 $17,132 $17,603
7/31/2001 $17,207 $17,429
8/31/2001 $16,897 $16,339
9/30/2001 $15,328 $15,020
10/31/2001 $15,216 $15,307
11/30/2001 $15,854 $16,481
12/31/2001 $16,331 $16,625
1/31/2002 $16,252 $16,383
2/28/2002 $16,331 $16,067
3/31/2002 $16,888 $16,671
4/30/2002 $16,997 $15,661
5/31/2002 $16,997 $15,546
6/30/2002 $15,830 $14,439
7/31/2002 $14,719 $13,313
8/31/2002 $14,840 $13,401
9/30/2002 $13,880 $11,946
10/31/2002 $14,062 $12,996
11/30/2002 $14,405 $13,760
12/31/2002 $14,209 $12,952
1/31/2003 $14,096 $12,613
2/28/2003 $13,800 $12,424
3/31/2003 $13,810 $12,543
4/30/2003 $14,760 $13,577
5/31/2003 $15,577 $14,292
6/30/2003 $15,831 $14,474
7/31/2003 $16,057 $14,730
8/31/2003 $16,448 $15,016
9/30/2003 $16,376 $14,857
10/31/2003 $17,054 $15,697
11/30/2003 $17,630 $15,835
12/31/2003 $18,469 $16,665
1/31/2004 $18,646 $16,971
2/29/2004 $19,092 $17,207
3/31/2004 $19,092 $16,947
4/30/2004 $18,521 $16,682
5/31/2004 $18,677 $16,910
6/30/2004 $19,025 $17,239
7/31/2004 $18,724 $16,668
8/31/2004 $18,963 $16,735
9/30/2004 $19,420 $16,916
10/31/2004 $19,628 $17,175
11/30/2004 $20,843 $17,870
12/31/2004 $21,474 $18,477
1/31/2005 $20,987 $18,027
2/28/2005 $21,573 $18,406
3/31/2005 $21,385 $18,081
4/30/2005 $21,208 $17,738
5/31/2005 $21,728 $18,302
6/30/2005 $22,159 $18,328
7/31/2005 $22,876 $19,009
8/31/2005 $22,842 $18,836
9/30/2005 $23,212 $18,988
10/31/2005 $22,596 $18,672
11/30/2005 $23,268 $19,377
12/31/2005 $23,803 $19,384
1/31/2006 $24,371 $19,897
2/28/2006 $24,697 $19,951
3/31/2006 $25,602 $20,199
4/30/2006 $25,759 $20,470
5/31/2006 $25,385 $19,882
6/30/2006 $25,345 $19,908
7/31/2006 $25,504 $20,031
8/31/2006 $26,202 $20,507
9/30/2006 $26,300 $21,035
10/31/2006 $27,181 $21,720
11/30/2006 $27,794 $22,133
12/31/2006 $28,311 $22,443
12 | Annual Report
Performance Summary (CONTINUED)
CLASS B (1/1/99-12/31/06)
[THE FOLLOWING TABLE WAS REPRESENTED AS A LINE CHART IN THE PRINTED MATERIAL.]
Date Mutual Qualified Fund S&P 500 5
- --------------------------------------------------------------------------------
1/1/1999 $10,000 $10,000
1/31/1999 $10,061 $10,418
2/28/1999 $9,787 $10,094
3/31/1999 $10,274 $10,498
4/30/1999 $11,163 $10,905
5/31/1999 $11,297 $10,647
6/30/1999 $11,617 $11,238
7/31/1999 $11,385 $10,887
8/31/1999 $10,851 $10,834
9/30/1999 $10,588 $10,537
10/31/1999 $10,864 $11,203
11/30/1999 $11,171 $11,431
12/31/1999 $11,255 $12,104
1/31/2000 $10,933 $11,496
2/29/2000 $10,423 $11,279
3/31/2000 $11,550 $12,381
4/30/2000 $11,557 $12,009
5/31/2000 $11,805 $11,763
6/30/2000 $11,605 $12,053
7/31/2000 $11,946 $11,865
8/31/2000 $12,461 $12,601
9/30/2000 $12,491 $11,936
10/31/2000 $12,585 $11,886
11/30/2000 $12,186 $10,949
12/31/2000 $12,731 $11,003
1/31/2001 $13,405 $11,393
2/28/2001 $13,366 $10,355
3/31/2001 $13,064 $9,699
4/30/2001 $13,676 $10,453
5/31/2001 $14,156 $10,523
6/30/2001 $14,358 $10,267
7/31/2001 $14,413 $10,166
8/31/2001 $14,151 $9,530
9/30/2001 $12,830 $8,760
10/31/2001 $12,719 $8,927
11/30/2001 $13,252 $9,612
12/31/2001 $13,644 $9,696
1/31/2002 $13,569 $9,555
2/28/2002 $13,628 $9,371
3/31/2002 $14,089 $9,723
4/30/2002 $14,173 $9,134
5/31/2002 $14,165 $9,067
6/30/2002 $13,184 $8,421
7/31/2002 $12,253 $7,765
8/31/2002 $12,338 $7,816
9/30/2002 $11,536 $6,967
10/31/2002 $11,681 $7,580
11/30/2002 $11,963 $8,025
12/31/2002 $11,792 $7,554
1/31/2003 $11,689 $7,357
2/28/2003 $11,439 $7,246
3/31/2003 $11,448 $7,316
4/30/2003 $12,222 $7,919
5/31/2003 $12,900 $8,335
6/30/2003 $13,099 $8,442
7/31/2003 $13,280 $8,591
8/31/2003 $13,600 $8,758
9/30/2003 $13,523 $8,665
10/31/2003 $14,076 $9,155
11/30/2003 $14,543 $9,236
12/31/2003 $15,237 $9,720
1/31/2004 $15,368 $9,898
2/29/2004 $15,733 $10,036
3/31/2004 $15,715 $9,884
4/30/2004 $15,246 $9,729
5/31/2004 $15,359 $9,863
6/30/2004 $15,634 $10,054
7/31/2004 $15,382 $9,722
8/31/2004 $15,573 $9,761
9/30/2004 $15,938 $9,866
10/31/2004 $16,104 $10,017
11/30/2004 $17,086 $10,422
12/31/2004 $17,594 $10,777
1/31/2005 $17,188 $10,514
2/28/2005 $17,658 $10,735
3/31/2005 $17,502 $10,545
4/30/2005 $17,336 $10,345
5/31/2005 $17,760 $10,674
6/30/2005 $18,100 $10,690
7/31/2005 $18,678 $11,087
8/31/2005 $18,632 $10,986
9/30/2005 $18,921 $11,075
10/31/2005 $18,408 $10,890
11/30/2005 $18,949 $11,301
12/31/2005 $19,375 $11,306
1/31/2006 $19,826 $11,605
2/28/2006 $20,086 $11,636
3/31/2006 $20,817 $11,781
4/30/2006 $20,928 $11,939
5/31/2006 $20,607 $11,596
6/30/2006 $20,562 $11,611
7/31/2006 $20,673 $11,683
8/31/2006 $21,242 $11,960
9/30/2006 $21,313 $12,268
10/31/2006 $22,004 $12,668
11/30/2006 $22,491 $12,909
12/31/2006 $22,893 $13,090
AVERAGE ANNUAL TOTAL RETURN
- -------------------------------------
CLASS B 12/31/06
- -------------------------------------
1-Year +14.16%
- -------------------------------------
5-Year +10.64%
- -------------------------------------
Since Inception (1/1/99) +10.92%
- -------------------------------------
CLASS C (1/1/97-12/31/06)
[THE FOLLOWING TABLE WAS REPRESENTED AS A LINE CHART IN THE PRINTED MATERIAL.]
Date Mutual Qualified Fund S&P 500 5
- --------------------------------------------------------------------------------
1/1/1997 $10,000 $10,000
1/31/1997 $10,317 $10,624
2/28/1997 $10,533 $10,708
3/31/1997 $10,385 $10,269
4/30/1997 $10,471 $10,881
5/31/1997 $10,971 $11,543
6/30/1997 $11,322 $12,060
7/31/1997 $11,901 $13,019
8/31/1997 $11,794 $12,290
9/30/1997 $12,370 $12,963
10/31/1997 $12,020 $12,531
11/30/1997 $12,151 $13,110
12/31/1997 $12,370 $13,335
1/31/1998 $12,295 $13,482
2/28/1998 $12,999 $14,454
3/31/1998 $13,498 $15,194
4/30/1998 $13,498 $15,347
5/31/1998 $13,437 $15,083
6/30/1998 $13,341 $15,695
7/31/1998 $12,934 $15,529
8/31/1998 $10,998 $13,286
9/30/1998 $10,949 $14,137
10/31/1998 $11,581 $15,286
11/30/1998 $12,143 $16,212
12/31/1998 $12,299 $17,146
1/31/1999 $12,374 $17,862
2/28/1999 $12,028 $17,307
3/31/1999 $12,629 $18,000
4/30/1999 $13,728 $18,697
5/31/1999 $13,893 $18,256
6/30/1999 $14,290 $19,268
7/31/1999 $14,003 $18,667
8/31/1999 $13,346 $18,575
9/30/1999 $13,021 $18,066
10/31/1999 $13,361 $19,209
11/30/1999 $13,740 $19,600
12/31/1999 $13,841 $20,753
1/31/2000 $13,446 $19,711
2/29/2000 $12,819 $19,338
3/31/2000 $14,203 $21,228
4/30/2000 $14,212 $20,590
5/31/2000 $14,517 $20,169
6/30/2000 $14,269 $20,666
7/31/2000 $14,688 $20,343
8/31/2000 $15,329 $21,606
9/30/2000 $15,365 $20,466
10/31/2000 $15,472 $20,379
11/30/2000 $14,982 $18,773
12/31/2000 $15,656 $18,865
1/31/2001 $16,482 $19,534
2/28/2001 $16,444 $17,754
3/31/2001 $16,074 $16,630
4/30/2001 $16,814 $17,922
5/31/2001 $17,412 $18,042
6/30/2001 $17,665 $17,603
7/31/2001 $17,723 $17,429
8/31/2001 $17,401 $16,339
9/30/2001 $15,773 $15,020
10/31/2001 $15,647 $15,307
11/30/2001 $16,300 $16,481
12/31/2001 $16,777 $16,625
1/31/2002 $16,694 $16,383
2/28/2002 $16,766 $16,067
3/31/2002 $17,320 $16,671
4/30/2002 $17,423 $15,661
5/31/2002 $17,412 $15,546
6/30/2002 $16,219 $14,439
7/31/2002 $15,062 $13,313
8/31/2002 $15,177 $13,401
9/30/2002 $14,187 $11,946
10/31/2002 $14,364 $12,996
11/30/2002 $14,718 $13,760
12/31/2002 $14,506 $12,952
1/31/2003 $14,381 $12,613
2/28/2003 $14,066 $12,424
3/31/2003 $14,077 $12,543
4/30/2003 $15,030 $13,577
5/31/2003 $15,857 $14,292
6/30/2003 $16,110 $14,474
7/31/2003 $16,331 $14,730
8/31/2003 $16,721 $15,016
9/30/2003 $16,636 $14,857
10/31/2003 $17,321 $15,697
11/30/2003 $17,890 $15,835
12/31/2003 $18,736 $16,665
1/31/2004 $18,895 $16,971
2/29/2004 $19,350 $17,207
3/31/2004 $19,329 $16,947
4/30/2004 $18,747 $16,682
5/31/2004 $18,884 $16,910
6/30/2004 $19,228 $17,239
7/31/2004 $18,921 $16,668
8/31/2004 $19,154 $16,735
9/30/2004 $19,599 $16,916
10/31/2004 $19,800 $17,175
11/30/2004 $21,007 $17,870
12/31/2004 $21,643 $18,477
1/31/2005 $21,139 $18,027
2/28/2005 $21,722 $18,406
3/31/2005 $21,520 $18,081
4/30/2005 $21,318 $17,738
5/31/2005 $21,834 $18,302
6/30/2005 $22,258 $18,328
7/31/2005 $22,973 $19,009
8/31/2005 $22,916 $18,836
9/30/2005 $23,268 $18,988
10/31/2005 $22,644 $18,672
11/30/2005 $23,302 $19,377
12/31/2005 $23,825 $19,384
1/31/2006 $24,385 $19,897
2/28/2006 $24,702 $19,951
3/31/2006 $25,590 $20,199
4/30/2006 $25,737 $20,470
5/31/2006 $25,335 $19,882
6/30/2006 $25,293 $19,908
7/31/2006 $25,429 $20,031
8/31/2006 $26,120 $20,507
9/30/2006 $26,206 $21,035
10/31/2006 $27,057 $21,720
11/30/2006 $27,662 $22,133
12/31/2006 $28,151 $22,443
AVERAGE ANNUAL TOTAL RETURN
- -------------------------------------
CLASS C 12/31/06
- -------------------------------------
1-Year +17.16%
- -------------------------------------
5-Year +10.91%
- -------------------------------------
10-Year +10.90%
- -------------------------------------
Annual Report | 13
Performance Summary (CONTINUED)
ENDNOTES
THE FUND'S INVESTMENTS INCLUDE SMALLER-COMPANY STOCKS AND FOREIGN SECURITIES.
SMALLER-COMPANY STOCKS HAVE HISTORICALLY EXHIBITED GREATER PRICE VOLATILITY THAN
LARGER-COMPANY STOCKS, PARTICULARLY OVER THE SHORT TERM. FOREIGN SECURITIES
RISKS INCLUDE EXPOSURE TO CURRENCY VOLATILITY AND POLITICAL, ECONOMIC AND
REGULATORY UNCERTAINTY. THE FUND MAY ALSO INVEST IN COMPANIES ENGAGED IN
MERGERS, REORGANIZATIONS OR LIQUIDATIONS, WHICH INVOLVE SPECIAL RISKS, AS WELL
AS LOWER-RATED BONDS, WHICH ENTAIL HIGHER CREDIT RISK. THE FUND'S PROSPECTUS
ALSO INCLUDES A DESCRIPTION OF THE MAIN INVESTMENT RISKS.
CLASS Z: Shares are available to certain eligible investors as described in
the prospectus.
CLASS A: Prior to 8/3/98, these shares were offered at a lower initial sales
charge; thus actual total returns may differ.
CLASS B: These shares have higher annual fees and expenses than Class A
shares.
CLASS C: Prior to 1/1/04, these shares were offered with an initial sales
charge; thus actual total returns would have differed. These shares
have higher annual fees and expenses than Class A shares.
1. Past expense reductions by the Fund's manager increased the Fund's total
returns. If the manager had not taken this action, the Fund's total
returns would have been lower.
2. Cumulative total return represents the change in value of an investment
over the periods indicated.
3. Average annual total return represents the average annual change in value
of an investment over the periods indicated.
4. These figures represent the value of a hypothetical $10,000 investment in
the Fund over the periods indicated.
5. Source: Standard & Poor's Micropal. The S&P 500 consists of 500 stocks
chosen for market size, liquidity and industry group representation. Each
stock's weight in the index is proportionate to its market value. The S&P
500 is one of the most widely used benchmarks of U.S. equity performance.
14 | Annual Report
Your Fund's Expenses
As a Fund shareholder, you can incur two types of costs:
o Transaction costs, including sales charges (loads) on Fund purchases and
redemption fees; and
o Ongoing Fund costs, including management fees, distribution and service
(12b-1) fees, and other Fund expenses. All mutual funds have ongoing
costs, sometimes referred to as operating expenses.
The following table shows ongoing costs of investing in the Fund and can help
you understand these costs and compare them with those of other mutual funds.
The table assumes a $1,000 investment held for the six months indicated.
ACTUAL FUND EXPENSES
The first line (Actual) for each share class listed in the table provides actual
account values and expenses. The "Ending Account Value" is derived from the
Fund's actual return, which includes the effect of Fund expenses.
You can estimate the expenses you paid during the period by following these
steps. OF COURSE, YOUR ACCOUNT VALUE AND EXPENSES WILL DIFFER FROM THOSE IN THIS
ILLUSTRATION:
1. Divide your account value by $1,000.
IF AN ACCOUNT HAD AN $8,600 VALUE, THEN $8,600 / $1,000 = 8.6.
2. Multiply the result by the number under the heading "Expenses Paid During
Period."
IF EXPENSES PAID DURING PERIOD WERE $7.50, THEN 8.6 X $7.50 = $64.50.
In this illustration, the estimated expenses paid this period are $64.50.
HYPOTHETICAL EXAMPLE FOR COMPARISON WITH OTHER FUNDS
Information in the second line (Hypothetical) for each class in the table can
help you compare ongoing costs of investing in the Fund with those of other
mutual funds. This information may not be used to estimate the actual ending
account balance or expenses you paid during the period. The hypothetical "Ending
Account Value" is based on the actual expense ratio for each class and an
assumed 5% annual rate of return before expenses, which does not represent the
Fund's actual return. The figure under the heading "Expenses Paid During Period"
shows the hypothetical expenses your account would have incurred under this
scenario. You can compare this figure with the 5% hypothetical examples that
appear in shareholder reports of other funds.
Annual Report | 15
Your Fund's Expenses (CONTINUED)
PLEASE NOTE THAT EXPENSES SHOWN IN THE TABLE ARE MEANT TO HIGHLIGHT ONGOING
COSTS AND DO NOT REFLECT ANY TRANSACTION COSTS, SUCH AS SALES CHARGES OR
REDEMPTION FEES. Therefore, the second line for each class is useful in
comparing ongoing costs only, and will not help you compare total costs of
owning different funds. In addition, if transaction costs were included, your
total costs would have been higher. Please refer to the Fund prospectus for
additional information on operating expenses.
- -----------------------------------------------------------------------------------------------------------
BEGINNING ACCOUNT ENDING ACCOUNT EXPENSES PAID DURING
CLASS Z VALUE 7/1/06 VALUE 12/31/06 PERIOD* 7/1/06-12/31/06
- -----------------------------------------------------------------------------------------------------------
Actual $1,000 $1,118.80 $4.54
- -----------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,020.92 $4.33
- -----------------------------------------------------------------------------------------------------------
CLASS A
- -----------------------------------------------------------------------------------------------------------
Actual $1,000 $1,117.00 $6.30
- -----------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,019.26 $6.01
- -----------------------------------------------------------------------------------------------------------
CLASS B
- -----------------------------------------------------------------------------------------------------------
Actual $1,000 $1,113.40 $9.85
- -----------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,015.88 $9.40
- -----------------------------------------------------------------------------------------------------------
CLASS C
- -----------------------------------------------------------------------------------------------------------
Actual $1,000 $1,113.00 $9.91
- -----------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,015.83 $9.45
- -----------------------------------------------------------------------------------------------------------
* Expenses are equal to the annualized expense ratio for each class (Z:
0.85%; A: 1.18%; B: 1.85%; and C: 1.86%), multiplied by the average
account value over the period, multiplied by 184/365 to reflect the
one-half year period.
16 | Annual Report
Mutual Qualified Fund
FINANCIAL HIGHLIGHTS
------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
CLASS Z 2006 2005 2004 2003 2002
------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ............... $ 19.81 $ 19.49 $ 17.88 $ 13.95 $ 16.49
------------------------------------------------------------------------------
Income from investment operations a:
Net investment income b ......................... 0.38 0.41 0.37 0.20 0.28
Net realized and unrealized gains (losses) ...... 3.39 1.77 2.56 4.04 (2.34)
------------------------------------------------------------------------------
Total from investment operations ................. 3.77 2.18 2.93 4.24 (2.06)
------------------------------------------------------------------------------
Less distributions from:
Net investment income ........................... (0.40) (0.42) (0.39) (0.31) (0.26)
Net realized gains .............................. (1.30) (1.44) (0.93) -- (0.22)
------------------------------------------------------------------------------
Total distributions .............................. (1.70) (1.86) (1.32) (0.31) (0.48)
------------------------------------------------------------------------------
Redemption fees .................................. -- d -- d -- d -- --
------------------------------------------------------------------------------
Net asset value, end of year ..................... $ 21.88 $ 19.81 $ 19.49 $ 17.88 $ 13.95
==============================================================================
Total return ..................................... 19.29% 11.26% 16.64% 30.50% (12.70)%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) .................. $4,200,899 $3,646,593 $3,419,744 $3,102,506 $2,503,544
Ratios to average net assets:
Expenses c ...................................... 0.83% e 0.85% e 0.82% e 0.85% 0.80%
Net investment income ........................... 1.77% 2.04% 2.01% 1.34% 1.81%
Portfolio turnover rate .......................... 23.64% 20.98% 37.61% 49.70% 51.24%
Ratios to average net assets, excluding
dividend expense on securities sold short:
Expenses ........................................ 0.81% e 0.81% e 0.81% e 0.82% 0.79%
a The amount shown for a share outstanding throughout the period may not
correlate with the Statement of Operations for the period due to the
timing of sales and repurchase of the Fund shares in relation to income
earned and/or fluctuating market value of the investments of the Fund.
b Based on average daily shares outstanding.
c Includes dividend expense on securities sold short which varies from
period to period. See below for expense ratios that reflect only operating
expenses.
d Amount rounds to less than $0.01 per share.
e Benefit of expense reduction rounds to less than 0.01%.
Annual Report |
The accompanying notes are an integral part of these financial statements. | 17
Mutual Qualified Fund
FINANCIAL HIGHLIGHTS (CONTINUED)
----------------------------------------------------------------
YEAR ENDED DECEMBER 31,
CLASS A 2006 2005 2004 2003 2002
----------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ........................... $ 19.71 $ 19.41 $ 17.81 $ 13.91 $ 16.44
----------------------------------------------------------------
Income from investment operations a:
Net investment income b ..................................... 0.31 0.34 0.31 0.15 0.23
Net realized and unrealized gains (losses) .................. 3.36 1.75 2.55 4.01 (2.33)
----------------------------------------------------------------
Total from investment operations ............................. 3.67 2.09 2.86 4.16 (2.10)
----------------------------------------------------------------
Less distributions from:
Net investment income ....................................... (0.33) (0.35) (0.33) (0.26) (0.21)
Net realized gains .......................................... (1.30) (1.44) (0.93) -- (0.22)
----------------------------------------------------------------
Total distributions .......................................... (1.63) (1.79) (1.26) (0.26) (0.43)
----------------------------------------------------------------
Redemption fees .............................................. -- e -- e -- e -- --
----------------------------------------------------------------
Net asset value, end of year ................................. $ 21.75 $ 19.71 $ 19.41 $ 17.81 $ 13.91
================================================================
Total return c ............................................... 18.94% 10.85% 16.27% 29.98% (13.00)%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) .............................. $993,364 $794,789 $692,523 $625,088 $449,507
Ratios to average net assets:
Expenses d .................................................. 1.15% f 1.20% f 1.17% f 1.20% 1.15%
Net investment income ....................................... 1.45% 1.69% 1.66% 0.99% 1.46%
Portfolio turnover rate ...................................... 23.64% 20.98% 37.61% 49.70% 51.24%
Ratios to average net assets, excluding dividend
expense on securities sold short:
Expenses .................................................... 1.13%f 1.16%f 1.16%f 1.17% 1.14%
a The amount shown for a share outstanding throughout the period may not
correlate with the Statement of Operations for the period due to the
timing of sales and repurchase of the Fund shares in relation to income
earned and/or fluctuating market value of the investments of the Fund.
b Based on average daily shares outstanding.
c Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable.
d Includes dividend expense on securities sold short which varies from
period to period. See below for expense ratios that reflect only operating
expenses.
e Amount rounds to less than $0.01 per share.
f Benefit of expense reduction rounds to less than 0.01%.
18 | The accompanying notes are an integral part of these financial statements.
| Annual Report
Mutual Qualified Fund
FINANCIAL HIGHLIGHTS (CONTINUED)
-----------------------------------------------------------------
YEAR ENDED DECEMBER 31,
CLASS B 2006 2005 2004 2003 2002
-----------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ......................... $ 19.34 $ 19.08 $ 17.54 $ 13.72 $ 16.25
-----------------------------------------------------------------
Income from investment operations a:
Net investment income b ................................... 0.16 0.20 0.19 0.05 0.13
Net realized and unrealized gains (losses) ................ 3.31 1.72 2.50 3.94 (2.30)
-----------------------------------------------------------------
Total from investment operations ........................... 3.47 1.92 2.69 3.99 (2.17)
-----------------------------------------------------------------
Less distributions from:
Net investment income ..................................... (0.19) (0.22) (0.22) (0.17) (0.14)
Net realized gains ........................................ (1.30) (1.44) (0.93) -- (0.22)
-----------------------------------------------------------------
Total distributions ........................................ (1.49) (1.66) (1.15) (0.17) (0.36)
-----------------------------------------------------------------
Redemption fees ............................................ -- e -- e -- e -- --
-----------------------------------------------------------------
Net asset value, end of year ............................... $ 21.32 $ 19.34 $ 19.08 $ 17.54 $ 13.72
=================================================================
Total return c ............................................. 18.16% 10.12% 15.46% 29.22% (13.58)%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ............................ $74,470 $69,847 $67,714 $53,760 $36,023
Ratios to average net assets:
Expenses d ................................................ 1.82% f 1.85% f 1.82% f 1.85% 1.80%
Net investment income ..................................... 0.78% 1.04% 1.01% 0.34% 0.81%
Portfolio turnover rate .................................... 23.64% 20.98% 37.61% 49.70% 51.24%
Ratios to average net assets, excluding dividend
expense on securities sold short:
Expenses .................................................. 1.80% f 1.81% f 1.81%f 1.82% 1.79%
a The amount shown for a share outstanding throughout the period may not
correlate with the Statement of Operations for the period due to the
timing of sales and repurchase of the Fund shares in relation to income
earned and/or fluctuating market value of the investments of the Fund.
b Based on average daily shares outstanding.
c Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable.
d Includes dividend expense on securities sold short which varies from
period to period. See below for expense ratios that reflect only operating
expenses.
e Amount rounds to less than $0.01 per share.
f Benefit of expense reduction rounds to less than 0.01%.
Annual Report |
The accompanying notes are an integral part of these financial statements. | 19
Mutual Qualified Fund
FINANCIAL HIGHLIGHTS (CONTINUED)
--------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
CLASS C 2006 2005 2004 2003 2002
--------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ..................... $ 19.58 $ 19.30 $ 17.72 $ 13.85 $ 16.36
--------------------------------------------------------------------
Income from investment operations a:
Net investment income b ............................... 0.16 0.20 0.19 0.05 0.13
Net realized and unrealized gains (losses) ............ 3.34 1.74 2.52 3.98 (2.31)
--------------------------------------------------------------------
Total from investment operations ....................... 3.50 1.94 2.71 4.03 (2.18)
--------------------------------------------------------------------
Less distributions from:
Net investment income ................................. (0.20) (0.22) (0.20) (0.16) (0.11)
Net realized gains .................................... (1.30) (1.44) (0.93) -- (0.22)
--------------------------------------------------------------------
Total distributions .................................... (1.50) (1.66) (1.13) (0.16) (0.33)
--------------------------------------------------------------------
Redemption fees ........................................ -- e -- e -- e -- --
--------------------------------------------------------------------
Net asset value, end of year ........................... $ 21.58 $ 19.58 $ 19.30 $ 17.72 $ 13.85
====================================================================
Total return c ......................................... 18.16% 10.08% 15.52% 29.16% (13.53)%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ........................ $420,806 $336,786 $311,071 $285,668 $225,699
Ratios to average net assets:
Expenses d ............................................ 1.83% f 1.85% f 1.82% f 1.85% 1.79%
Net investment income ................................. 0.77% 1.04% 1.01% 0.34% 0.82%
Portfolio turnover rate ................................ 23.64% 20.98% 37.61% 49.70% 51.24%
Ratios to average net assets, excluding dividend
expense on securities sold short:
Expenses .............................................. 1.81% f 1.81% f 1.81% f 1.82% 1.78%
a The amount shown for a share outstanding throughout the period may not
correlate with the Statement of Operations for the period due to the
timing of sales and repurchase of the Fund shares in relation to income
earned and/or fluctuating market value of the investments of the Fund.
b Based on average daily shares outstanding.
c Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable.
d Includes dividend expense on securities sold short which varies from
period to period. See below for expense ratios that reflect only operating
expenses.
e Amount rounds to less than $0.01 per share.
f Benefit of expense reduction rounds to less than 0.01%.
20 | The accompanying notes are an integral part of these financial statements.
| Annual Report
Mutual Qualified Fund
STATEMENT OF INVESTMENTS, DECEMBER 31, 2006
- ------------------------------------------------------------------------------------------------------------------------------------
SHARES/WARRANTS/
COUNTRY CONTRACTS VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS 94.5%
COMMON STOCKS AND OTHER EQUITY INTERESTS 88.4%
AIRLINES 0.7%
a ACE Aviation Holdings Inc., A ............................................. Canada 1,131,669 $ 36,700,941
a,b ACE Aviation Holdings Inc., A, 144A ....................................... Canada 58,455 1,895,743
------------
38,596,684
------------
AUTOMOBILES 0.3%
a,c,d,g International Automotive Components Group Brazil LLC ...................... Brazil 1,982,308 8,167,109
a,c,d,g International Automotive Components Group Japan LLC ....................... Japan 265,676 2,231,915
a,c,d,g International Automotive Components Group LLC ............................. Luxembourg 8,425,843 8,425,843
------------
18,824,867
------------
BEVERAGES 2.6%
Brown-Forman Corp., A ..................................................... United States 79,200 5,340,456
Coca-Cola Enterprises Inc. ................................................ United States 1,570,200 32,063,484
Pernod Ricard SA .......................................................... France 490,916 112,757,852
------------
150,161,792
------------
BUILDING PRODUCTS 0.3%
a Armstrong World Industries Inc. ........................................... United States 185,150 7,848,508
a,e Armstrong World Industries Inc., Contingent Distribution .................. United States 15,729,675 196,621
a,c,e Owens Corning, Contingent Distribution .................................... United States 22,273,842 --
a,d Owens Corning Inc. ........................................................ United States 279,965 7,952,406
a,d Owens Corning Inc., options to sell (shares), exercise price $25.00,
expiration date, 4/06/07 ................................................. United States 249,750 --
a,d Owens Corning Inc., options to purchase (shares), exercise price
$37.50, expiration date, 1/02/08 ......................................... United States 249,750 --
------------
15,997,535
------------
CAPITAL MARKETS 0.7%
Legg Mason Inc. ........................................................... United States 398,890 37,914,495
------------
CHEMICALS 0.7%
a,e,o Dow Corning Corp., Contingent Distribution ................................ United States 20,809,194 8,063,563
Linde AG .................................................................. Germany 302,117 31,314,524
a Sika AG ................................................................... Switzerland 696 1,079,512
------------
40,457,599
------------
COMMERCIAL BANKS 5.5%
BNP Paribas SA ............................................................ France 515,209 56,210,398
a,b Centennial Bank Holdings Inc., 144A ....................................... United States 1,735,639 16,419,145
a,c,d,f Elephant Capital Holdings Ltd. ............................................ Japan 11,087 15,028,126
Mitsubishi UFJ Financial Group Inc. ....................................... Japan 5,648 69,748,897
a,c,d NCB Warrant Holdings Ltd., A .............................................. Japan 53,490 6,299,517
c,f State National Bancshares Inc. ............................................ United States 1,375,000 50,277,563
Sumitomo Mitsui Financial Group Inc. ...................................... Japan 3,404 34,887,890
Svenska Handelsbanken AB, A ............................................... Sweden 452,960 13,685,591
Swedbank AB, A ............................................................ Sweden 974,500 35,346,107
U.S. Bancorp .............................................................. United States 413,010 14,946,832
------------
312,850,066
------------
Annual Report | 21
Mutual Qualified Fund
STATEMENT OF INVESTMENTS, DECEMBER 31, 2006 (CONTINUED)
SHARES/WARRANTS/
COUNTRY CONTRACTS VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
COMMON STOCKS AND OTHER EQUITY INTERESTS (CONTINUED)
COMMERCIAL SERVICES & SUPPLIES 0.9%
a Comdisco Holding Co. Inc. ................................................ United States 515 $ 6,077
a,e Comdisco Holding Co. Inc., Contingent Distribution ....................... United States 44,591,246 --
a,c,d,f First Chicago Bancorp .................................................... United States 659,105 9,227,470
a,f Insun ENT Co. Ltd. ....................................................... South Korea 687,953 8,174,065
Republic Services Inc. ................................................... United States 877,603 35,692,114
------------
53,099,726
------------
COMPUTERS & PERIPHERALS 0.2%
a,c,d,f DecisionOne Corp. ........................................................ United States 1,008,199 718,846
International Business Machines Corp. .................................... United States 118,160 11,479,244
------------
12,198,090
------------
CONSTRUCTION MATERIALS 0.2%
Rinker Group Ltd. ........................................................ Australia 629,100 8,963,838
------------
CONSUMER FINANCE 0.5%
Capital One Financial Corp. .............................................. United States 26,400 2,028,048
a,c,d Cerberus FIM Investors Auto Finance LLC .................................. United States 3,462,696 3,507,988
a,c,d Cerberus FIM Investors Commercial Finance LLC ............................ United States 442,462 448,249
a,c,d Cerberus FIM Investors Commercial Mortgage LLC ........................... United States 757,082 766,985
a,c,d Cerberus FIM Investors Insurance LLC ..................................... United States 3,606,788 3,653,965
a,c,d Cerberus FIM Investors Rescap LLC ........................................ United States 7,649,972 7,750,033
a,f White River Capital Inc. ................................................. United States 549,751 8,878,479
------------
27,033,747
------------
CONTAINERS & PACKAGING 0.8%
Temple-Inland Inc. ....................................................... United States 1,042,200 47,972,466
------------
DIVERSIFIED CONSUMER SERVICES 0.2%
H&R Block Inc. ........................................................... United States 609,820 14,050,253
------------
DIVERSIFIED FINANCIAL SERVICES 0.9%
Deutsche Boerse AG ....................................................... Germany 33,110 6,093,610
Fortis ................................................................... Belgium 795,800 33,941,517
Leucadia National Corp. .................................................. United States 414,420 11,686,644
a,e Marconi Corp., Contingent Distribution ................................... United Kingdom 34,293,500 --
------------
51,721,771
------------
DIVERSIFIED TELECOMMUNICATION SERVICES 3.9%
a,c,d,g AboveNet Inc. ............................................................ United States 365,293 11,192,578
a,c,e,g AboveNet Inc., Contingent Distribution ................................... United States 50,430,000 --
a,d,g AboveNet Inc., options to purchase (shares),
exercise price $20.95, expiration date, 9/09/13 ......................... United States 510 13,795
a,c,d,g AboveNet Inc., wts., 9/08/08 ............................................. United States 11,991 383,712
a,c,d,g AboveNet Inc., wts., 9/08/10 ............................................. United States 14,107 406,282
BellSouth Corp. .......................................................... United States 1,288,930 60,721,492
Chunghwa Telecom Co. Ltd., ADR ........................................... Taiwan 1,167,859 23,041,858
Embarq Corp. ............................................................. United States 5,943 312,364
a,c,e Global Crossing Holdings Ltd., Contingent Distribution ................... United States 49,411,586 --
NTL Inc. ................................................................. United Kingdom 3,655,939 92,275,900
22 | Annual Report
Mutual Qualified Fund
STATEMENT OF INVESTMENTS, DECEMBER 31, 2006 (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------------
SHARES/WARRANTS/
COUNTRY CONTRACTS VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
COMMON STOCKS AND OTHER EQUITY INTERESTS (CONTINUED)
DIVERSIFIED TELECOMMUNICATION SERVICES (CONTINUED)
Sprint Nextel Corp. ...................................................... United States 118,861 $ 2,245,284
Verizon Communications Inc. .............................................. United States 917,648 34,173,212
------------
224,766,477
------------
ELECTRIC UTILITIES 0.7%
Constellation Energy Group ............................................... United States 175,600 12,093,572
E.ON AG .................................................................. Germany 198,820 27,108,701
------------
39,202,273
------------
ELECTRICAL EQUIPMENT 0.2%
American Power Conversion Corp. .......................................... United States 434,071 13,278,232
------------
ELECTRONIC EQUIPMENT & INSTRUMENTS 0.0% h
Symbol Technologies Inc. ................................................. United States 56,300 841,122
------------
ENERGY EQUIPMENT & SERVICES 1.1%
a Basic Energy Services Inc. ............................................... United States 12,326 303,836
a Bergesen Worldwide Offshore Ltd. ......................................... Norway 2,813,120 11,819,832
a Seadrill Ltd. ............................................................ Bermuda 2,862,640 48,318,183
------------
60,441,851
------------
FOOD & STAPLES RETAILING 1.9%
Bourbon SA ............................................................... France 526,876 28,953,775
Carrefour SA ............................................................. France 1,305,508 79,170,044
------------
108,123,819
------------
FOOD PRODUCTS 9.6%
Cadbury Schweppes PLC .................................................... United Kingdom 4,306,301 46,087,677
CSM NV ................................................................... Netherlands 1,909,144 73,513,225
Groupe Danone ............................................................ France 840,711 127,402,802
a Lotte Confectionary Co. Ltd. ............................................. South Korea 30,405 39,559,194
Nestle SA ................................................................ Switzerland 160,750 57,120,963
Nong Shim Co. Ltd. ....................................................... South Korea 81,743 25,050,274
g Orkla ASA ................................................................ Norway 2,316,300 131,126,740
a Pan Fish ASA ............................................................. Norway 48,980,183 44,773,084
------------
544,633,959
------------
HEALTH CARE EQUIPMENT & SUPPLIES 0.3%
a Boston Scientific Corp. .................................................. United States 958,046 16,459,230
------------
HEALTH CARE PROVIDERS & SERVICES 4.4%
Aetna Inc. ............................................................... United States 164,890 7,119,950
Caremark Rx Inc. ......................................................... United States 426,900 24,380,259
f Generale de Sante ........................................................ France 3,146,068 128,741,973
a,c,d,g Kindred Healthcare Inc. .................................................. United States 1,444,624 34,652,918
a,c,d,g Kindred Healthcare Inc., options to purchase (shares):
exercise price $23.75, expiration date, 7/17/11 ......................... United States 3,876 921
exercise price $26.00, expiration date, 1/01/12 ......................... United States 1,164 --
exercise price $9.07, expiration date, 1/01/13 .......................... United States 870 12,974
exercise price $25.99, expiration date, 1/01/14 ......................... United States 576 --
exercise price $27.90, expiration date, 1/10/15 ......................... United States 240 --
Annual Report | 23
Mutual Qualified Fund
STATEMENT OF INVESTMENTS, DECEMBER 31, 2006 (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------------
SHARES/WARRANTS/
COUNTRY CONTRACTS VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
COMMON STOCKS AND OTHER EQUITY INTERESTS (CONTINUED)
HEALTH CARE PROVIDERS & SERVICES (CONTINUED)
Rhoen-Klinikum AG ..................................................... Germany 1,157,046 $ 55,275,104
------------
250,184,099
------------
HOTELS, RESTAURANTS & LEISURE 0.2%
Ladbrokes PLC ......................................................... United Kingdom 5,316 43,594
a Trump Entertainment Resorts Inc. ...................................... United States 693,717 12,653,398
------------
12,696,992
------------
HOUSEHOLD DURABLES 0.5%
Yankee Candle Co. Inc. ................................................ United States 880,880 30,196,566
------------
INDUSTRIAL CONGLOMERATES 1.6%
Keppel Corp. Ltd. ..................................................... Singapore 2,743,244 31,485,275
Siemens AG ............................................................ Germany 460,520 45,957,950
Tyco International Ltd. ............................................... United States 480,580 14,609,632
------------
92,052,857
------------
INSURANCE 11.3%
a Alleghany Corp. ....................................................... United States 143,797 52,284,589
American International Group Inc. ..................................... United States 249,250 17,861,255
a Berkshire Hathaway Inc., A ............................................ United States 468 51,475,320
a Berkshire Hathaway Inc., B ............................................ United States 18,875 69,195,750
a Conseco Inc. .......................................................... United States 1,073,500 21,448,530
Hartford Financial Services Group Inc. ................................ United States 482,200 44,994,082
a,c,d,f Imagine Group Holdings Ltd. ........................................... Bermuda 2,814,856 30,878,970
Montpelier Re Holdings Ltd. ........................................... Bermuda 332,216 6,182,540
Old Republic International Corp. ...................................... United States 2,135,500 49,714,440
a,c,d Olympus Re Holdings Ltd. .............................................. Bermuda 97,300 97,300
Prudential Financial Inc. ............................................. United States 461,000 39,581,460
The St. Paul Travelers Cos. Inc. ...................................... United States 226,690 12,170,986
c,d Symetra Financial ..................................................... United States 394,800 46,669,308
White Mountains Insurance Group Ltd. .................................. United States 346,830 200,963,707
------------
643,518,237
------------
MACHINERY 2.3%
Kone OYJ, B ........................................................... Finland 1,438,600 81,544,084
NACCO Industries Inc., A .............................................. United States 182,854 24,977,856
Scania AB ............................................................. Sweden 349,600 24,544,255
------------
131,066,195
------------
MEDIA 3.7%
CJ CGV Co. Ltd. ....................................................... South Korea 574,910 13,229,112
Clear Channel Communications Inc. ..................................... United States 522,500 18,569,650
a Liberty Media Holding Corp.-Capital, A ................................ United States 307,412 30,120,228
News Corp., A ......................................................... United States 1,126,900 24,205,812
Sun-Times Media Group Inc., A ......................................... United States 767,234 3,767,119
Time Warner Inc. ...................................................... United States 3,504,460 76,327,139
a,c TVMAX Holdings Inc. ................................................... United States 111,391 111,391
a Viacom Inc., B ........................................................ United States 230,350 9,451,260
Washington Post Co., B ................................................ United States 43,591 32,501,449
------------
208,283,160
------------
24 | Annual Report
Mutual Qualified Fund
STATEMENT OF INVESTMENTS, DECEMBER 31, 2006 (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------------
SHARES/WARRANTS/
COUNTRY CONTRACTS VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
COMMON STOCKS AND OTHER EQUITY INTERESTS (CONTINUED)
METALS & MINING 2.2%
Anglo American PLC .................................................... South Africa 1,080,353 $ 52,702,314
c,d,f,g Esmark Inc. ........................................................... United States 6,143 5,058,002
Mittal Steel Co. NV ................................................... Netherlands 130,845 5,521,920
Newmont Mining Corp. .................................................. United States 662,750 29,923,163
Phelps Dodge Corp. .................................................... United States 139,860 16,744,039
United States Steel Corp. ............................................. United States 194,235 14,206,348
------------
124,155,786
------------
MULTI-UTILITIES 0.8%
NorthWestern Corp. .................................................... United States 308,610 10,918,622
a,e NorthWestern Corp., Contingent Distribution ........................... United States 9,346,450 976,619
a NorthWestern Corp., wts., 11/01/07 .................................... United States 16,682 190,008
RWE AG ................................................................ Germany 281,473 31,010,265
------------
43,095,514
------------
MULTILINE RETAIL 1.0%
Jelmoli Holding AG .................................................... Switzerland 24,399 54,762,845
------------
OIL, GAS & CONSUMABLE FUELS 2.6%
a,c,d Anchor Resources LLC .................................................. United States 58,923 --
BP PLC ................................................................ United Kingdom 1,221,600 13,576,417
BP PLC, ADR ........................................................... United Kingdom 193,700 12,997,270
Eni SpA ............................................................... Italy 1,452,100 48,841,198
Royal Dutch Shell PLC, A .............................................. United Kingdom 785,210 27,695,719
Total SA, B ........................................................... France 665,472 48,007,635
------------
151,118,239
------------
PAPER & FOREST PRODUCTS 2.7%
Weyerhaeuser Co. ...................................................... United States 2,142,200 151,346,430
------------
PHARMACEUTICALS 1.8%
Merck & Co. Inc. ...................................................... United States 162,700 7,093,720
Pfizer Inc. ........................................................... United States 1,871,640 48,475,476
Sanofi-Aventis ........................................................ France 321,748 29,709,404
Valeant Pharmaceuticals International ................................. United States 1,025,100 17,672,724
------------
102,951,324
------------
REAL ESTATE 4.5%
a Alexander's Inc. ...................................................... United States 108,590 45,569,793
c Canary Wharf Group PLC ................................................ United Kingdom 8,298,072 56,551,837
Great Eagle Holdings Ltd. ............................................. Hong Kong 33,222 95,662
KKR Financial Corp. ................................................... United States 1,548,500 41,484,315
Link REIT ............................................................. Hong Kong 12,229,532 25,153,457
Reckson Associates Realty Corp. ....................................... United States 168,200 7,669,920
Swire Pacific Ltd., A ................................................. Hong Kong 3,620,800 38,888,290
Swire Pacific Ltd., B ................................................. Hong Kong 5,292,600 10,804,071
Ventas Inc. ........................................................... United States 669,525 28,334,298
------------
254,551,643
------------
ROAD & RAIL 1.5%
c,d Florida East Coast Industries Inc. .................................... United States 1,497,000 84,760,140
------------
Annual Report | 25
Mutual Qualified Fund
STATEMENT OF INVESTMENTS, DECEMBER 31, 2006 (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------------
SHARES/WARRANTS/
COUNTRY CONTRACTS VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
COMMON STOCKS AND OTHER EQUITY INTERESTS (CONTINUED)
SOFTWARE 0.5%
Microsoft Corp. .................................................... United States 951,600 $ 28,414,776
--------------
TEXTILES, APPAREL & LUXURY GOODS 0.1%
Christian Dior SA .................................................. France 67,145 7,157,256
--------------
THRIFTS & MORTGAGE FINANCE 3.1%
a Franklin Bank Corp. ................................................ United States 889,879 18,278,115
Hudson City Bancorp Inc. ........................................... United States 2,308,140 32,036,983
f ITLA Capital Corp. ................................................. United States 445,796 25,816,046
Sovereign Bancorp Inc. ............................................. United States 3,922,296 99,587,096
--------------
175,718,240
--------------
TOBACCO 11.4%
Altadis SA ......................................................... Spain 2,499,700 130,834,248
i Altria Group Inc. .................................................. United States 899,427 77,188,825
British American Tobacco PLC ....................................... United Kingdom 3,939,454 110,244,906
Imperial Tobacco Group PLC ......................................... United Kingdom 1,301,759 51,240,920
KT&G Corp. ......................................................... South Korea 3,097,050 188,154,113
Reynolds American Inc. ............................................. United States 1,372,600 89,864,122
--------------
647,527,134
--------------
TOTAL COMMON STOCKS AND OTHER EQUITY INTERESTS
(COST $3,075,485,542) .............................................. 5,031,147,325
--------------
PREFERRED STOCKS 0.4%
DIVERSIFIED TELECOMMUNICATION SERVICES 0.0% h
d PTV Inc., 10.00%, pfd., A .......................................... United Kingdom 92,938 348,517
--------------
METALS & MINING 0.4%
c,d,f,g Esmark Inc., 8.00%, cvt. pfd., A ................................... United States 22,360 21,622,120
--------------
TOTAL PREFERRED STOCKS (COST $22,638,814) .......................... 21,970,637
--------------
------------------
PRINCIPAL AMOUNT j
------------------
CORPORATE BONDS & NOTES 1.6%
b ACE Aviation Holdings Inc., cvt., 144A, 4.25%, 6/1/35 .............. Canada 2,505,000 CAD 2,157,707
c,d Cerberus FIM Investors Auto Finance LLC, 12.00%, 11/22/13 .......... United States 10,331,832 10,331,832
c,d Cerberus FIM Investors Commercial Finance LLC, 12.00%,
11/22/13 ........................................................... United States 1,327,385 1,327,385
c,d Cerberus FIM Investors Commercial Mortgage LLC, 12.00%,
11/22/13 ........................................................... United States 2,271,248 2,271,248
c,d Cerberus FIM Investors Insurance LLC, 12.00%, 11/22/13 ............. United States 10,820,365 10,820,365
c,d Cerberus FIM Investors Rescap LLC, 12.00%, 11/22/13 ................ United States 22,949,915 22,949,915
c,d,f DecisionOne Corp., 12.00%, 4/15/10 ................................. United States 1,173,501 1,173,501
c,k Motor Coach Industries International Inc., FRN, 18.37%, 12/01/08 ... United States 23,561,731 24,150,774
Trump Entertainment Resorts Inc., 8.50%, 5/20/15 ................... United States 13,553,108 13,553,108
c TVMAX Holdings Inc., PIK,
11.50%, 1/30/07 ................................................... United States 222,932 222,932
14.00%, 1/30/07 ................................................... United States 629,603 629,603
--------------
TOTAL CORPORATE BONDS & NOTES (COST $90,342,034) ................... 89,588,370
--------------
26 | Annual Report
Mutual Qualified Fund
STATEMENT OF INVESTMENTS, DECEMBER 31, 2006 (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------------
COUNTRY PRINCIPAL AMOUNT j VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
CORPORATE BONDS & NOTES IN REORGANIZATION 3.2%
l Adelphia Communications Corp.,
9.25%, 10/01/02 ....................................................... United States 2,551,000 $ 2,334,165
8.125%, 7/15/03 ....................................................... United States 660,000 608,850
7.50%, 1/15/04 ........................................................ United States 1,740,000 1,605,150
10.50%, 7/15/04 ....................................................... United States 2,715,000 2,538,525
9.875%, 3/01/05 ....................................................... United States 1,013,000 934,493
10.25%, 11/01/06 ...................................................... United States 4,368,000 3,985,800
9.875%, 3/01/07 ....................................................... United States 390,000 359,775
8.375%, 2/01/08 ....................................................... United States 3,934,000 3,629,115
7.75%, 1/15/09 ........................................................ United States 8,148,000 7,516,530
7.875%, 5/01/09 ....................................................... United States 3,491,000 3,168,082
9.375%, 11/15/09 ...................................................... United States 3,471,000 3,306,127
senior note, 10.875%, 10/01/10 ........................................ United States 3,183,000 2,936,317
senior note, 10.25%, 6/15/11 .......................................... United States 3,429,000 3,274,695
l Century Communications Corp.,
8.875%, 1/15/07 ....................................................... United States 210,000 253,050
8.75%, 10/01/07 ....................................................... United States 2,062,000 2,417,695
8.375%, 12/15/07 ...................................................... United States 400,000 482,000
senior note, 9.50%, 3/01/05 ........................................... United States 610,000 741,150
Series B, zero cpn., senior disc. note, 1/15/08 ....................... United States 3,450,000 2,406,375
zero cpn., 3/15/03 .................................................... United States 6,765,000 7,221,637
k,l Collins & Aikman Products Co.,
Revolver, FRN, 11.50%, 8/31/09 ........................................ United States 362,713 206,746
Tranche B1 Term Loan, FRN, 11.50%, 8/31/11 ............................ United States 858,200 489,174
l Dana Corp.,
6.50%, 3/01/09 ........................................................ United States 198,000 149,490
5.85%, 1/15/15 ........................................................ United States 9,145,000 6,584,400
7.00%, 3/01/29 ........................................................ United States 1,972,000 1,459,280
l Eurotunnel PLC,
Participating Loan Note, 1.00%, 4/30/40 ............................... United Kingdom 1,020,000 GBP 419,479
k S8 Tier 1 EFL2 Stabilization Note, FRN, 5.971%, 3/15/26 ............... United Kingdom 254,000 GBP 179,072
b,k Senior Tranche G2 Term Loan A, 144A, FRN, 5.747%, 12/15/12 ............ United Kingdom 828,649 GBP 1,643,069
k Tier 2, FRN, 5.959%, 12/31/18 ......................................... United Kingdom 10,332,415 GBP 20,259,777
k Tier 3, FRN, 5.895%, 12/31/25 ......................................... United Kingdom 24,858,208 GBP 42,595,934
l Eurotunnel SA,
k S6 Tier 1 FM2 Stabilization Note, FRN, 4.187%, 3/15/26 ................ France 41,000 EUR 19,484
k S7 Tier 1 FM4 Stabilization Note, FRN, 4.187%, 3/15/26 ................ France 228,000 EUR 108,350
Senior Tranche H1 Term Loan (KfW Advance), 8.78%, 12/15/12 ............ France 482,500 EUR 644,886
k Tier 2 (LIBOR), FRN, 4.305%, 12/31/18 ................................. France 2,479,106 EUR 3,276,635
k Tier 2 (PIBOR), FRN, 4.291%, 12/31/18 ................................. France 1,096,535 EUR 1,449,290
k Tier 3 (LIBOR), FRN, 4.300%, 12/31/25 ................................. France 37,541,397 EUR 43,361,954
k Tier 3 (PIBOR), FRN, 4.304%, 12/31/25 ................................. France 6,693,302 EUR 7,731,056
l Safety Kleen Services, senior sub. note, 9.25%, 6/01/08 ................. United States 40,000 40
------------
TOTAL CORPORATE BONDS & NOTES IN REORGANIZATION
(COST $124,534,202) ..................................................... 180,297,647
------------
GOVERNMENT AGENCIES (COST $50,000,000) 0.9%
i Federal Home Loan Bank, 2.26% - 5.48%, 1/26/07 - 2/28/08 ................ United States 50,000,000 49,819,400
------------
Annual Report | 27
Mutual Qualified Fund
STATEMENT OF INVESTMENTS, DECEMBER 31, 2006 (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------------
COUNTRY PRINCIPAL AMOUNT j VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL LONG TERM INVESTMENTS (COST $3,363,000,592) .............. $ 5,372,823,379
---------------
SHORT TERM INVESTMENTS 4.6%
U.S. GOVERNMENT AND AGENCY SECURITIES 4.6%
i,m Federal Home Loan Bank, 1/02/07 - 6/04/07 ...................... United States 241,804,000 240,651,174
m U.S. Treasury Bill, 5/03/07 .................................... United States 25,000,000 24,593,575
---------------
TOTAL SHORT TERM INVESTMENTS (COST $265,127,213) ............... 265,244,749
---------------
TOTAL INVESTMENTS (COST $3,628,127,805) 99.1% .................. 5,638,068,128
SECURITIES SOLD SHORT (1.8)% ................................... (104,109,141)
NET UNREALIZED LOSS ON FORWARD
EXCHANGE CONTRACTS (0.3)% ..................................... (17,746,222)
OTHER ASSETS, LESS LIABILITIES 3.0% ............................ 173,326,405
---------------
NET ASSETS 100.0% .............................................. $ 5,689,539,170
===============
-----------
SHARES
-----------
n SECURITIES SOLD SHORT 1.8%
DIVERSIFIED TELECOMMUNICATION SERVICES 1.1%
AT&T Inc. ...................................................... United States 1,707,418 $ 61,040,194
---------------
ELECTRIC UTILITIES 0.1%
FPL Group Inc. ................................................. United States 100,500 5,469,210
---------------
FOOD & STAPLES RETAILING 0.2%
CVS Corp. ...................................................... United States 380,000 11,745,800
---------------
FOOD PRODUCTS 0.2%
Kraft Foods Inc., A ............................................ United States 314,799 11,238,324
---------------
METALS & MINING 0.1%
Freeport-McMoRan Copper & Gold Inc., B ......................... United States 93,706 5,222,235
---------------
REAL ESTATE 0.0% h
SL Green Realty Corp. .......................................... United States 17,471 2,319,799
---------------
TEXTILES, APPAREL & LUXURY GOODS 0.1%
LVMH Moet Hennessy Louis Vuitton ............................... France 67,024 7,073,579
---------------
TOTAL SECURITIES SOLD SHORT (PROCEEDS $93,444,781) ............. $ 104,109,141
---------------
28 | Annual Report
Mutual Qualified Fund
STATEMENT OF INVESTMENTS, DECEMBER 31, 2006 (CONTINUED)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
CURRENCY ABBREVIATIONS
CAD - Canadian Dollar
EUR - Euro
GBP - British Pound
SELECTED PORTFOLIO ABBREVIATIONS
ADR - American Depository Receipt
FRN - Floating Rate Note
LIBOR - London InterBank Offered Rate
PIBOR - Paris InterBank Offered Rate
PIK - Payment-In-Kind
REIT - Real Estate Investment Trust
a Non-income producing for the twelve months ended December 31, 2006.
b Security was purchased pursuant to Rule 144A under the Securities Act of
1933 and may be sold in transactions exempt from registration only to
qualified institutional buyers or in a public offering registered under
the Securities Act of 1933. These securities have been deemed liquid under
guidelines approved by the Fund's Board of Directors. At December 31,
2006, the aggregate value of these securities was $22,115,664,
representing 0.39% of net assets.
c Security has been deemed illiquid because it may not be able to be sold
within seven days. At December 31, 2006, the aggregate value of these
securities was $482,779,617, representing 8.49% of net assets.
d See Note 10 regarding restricted securities.
e Contingent distributions represent the right to receive additional
distributions, if any, during the reorganization of the underlying
company. Shares represent total underlying principal of debt securities.
f See Note 11 regarding holdings of 5% voting securities.
g See Note 12 regarding other considerations -- security board member.
h Rounds to less than 0.1% of net assets.
i See Note 1(f) regarding securities segregated with broker for securities
sold short.
j The principal amount is stated in U.S. dollars unless otherwise indicated.
k The coupon rate shown represents the rate at period end.
l See Note 9 regarding defaulted securities.
m The security is traded on a discount basis with no stated coupon rate.
n See Note 1(f) regarding securities sold short.
o See Note 12 regarding other considerations -- credit committee
participation.
Annual Report |
The accompanying notes are an integral part of these financial statements. | 29
Mutual Qualified Fund
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
December 31, 2006
Assets:
Investments in securities:
Cost - Unaffiliated issuers ............................................................................. $ 3,439,407,659
Cost - Non-controlled affiliated issuers (Note 11) ...................................................... 188,720,146
---------------
Total cost of investments ............................................................................... $ 3,628,127,805
===============
Value - Unaffiliated issuers (includes securities segregated with broker for securities
sold short in the amount of $96,897,717) .............................................................. $ 5,332,472,967
Value - Non-controlled affiliated issuers (Note 11) ..................................................... 305,595,161
---------------
Total value of investments .............................................................................. 5,638,068,128
Cash ..................................................................................................... 373,107
Cash on deposit with brokers for securities sold short ................................................... 115,809,396
Cash on deposit with brokers for synthetic equity swaps .................................................. 722,486
Foreign currency, at value (cost $39,043,330) ............................................................ 38,989,361
Receivables:
Investment securities sold .............................................................................. 16,231,788
Capital shares sold ..................................................................................... 6,581,741
Dividends and interest .................................................................................. 6,648,101
Other ................................................................................................... 980,607
Unrealized gain on forward exchange contracts (Note 7) ................................................... 11,740,796
---------------
Total assets ...................................................................................... 5,836,145,511
---------------
Liabilities:
Payables:
Investment securities purchased ......................................................................... 1,936,982
Capital shares redeemed ................................................................................. 4,385,330
Affiliates .............................................................................................. 5,122,441
Foreign tax ............................................................................................. 834,858
Securities sold short, at value (proceeds $93,444,781) ................................................... 104,109,141
Unrealized loss on forward exchange contracts (Note 7) ................................................... 29,487,018
Accrued expenses and other liabilities ................................................................... 730,571
---------------
Total liabilities ................................................................................. 146,606,341
---------------
Net assets, at value ........................................................................... $ 5,689,539,170
===============
Net assets consist of:
Paid-in capital .......................................................................................... $ 3,693,874,476
Distributions in excess of net investment income ......................................................... (4,982,471)
Net unrealized appreciation (depreciation) ............................................................... 1,981,478,298
Accumulated net realized gain (loss) ..................................................................... 19,168,867
---------------
Net assets, at value ........................................................................... $ 5,689,539,170
===============
30 | The accompanying notes are an integral part of these financial statements.
| Annual Report
Mutual Qualified Fund
FINANCIAL STATEMENTS (CONTINUED)
STATEMENT OF ASSETS AND LIABILITIES (CONTINUED)
December 31, 2006
CLASS Z:
Net assets, at value ............................................................... $4,200,899,130
==============
Shares outstanding ................................................................. 192,025,501
==============
Net asset value and maximum offering price per share a ............................. $ 21.88
==============
CLASS A:
Net assets, at value ............................................................... $ 993,363,801
==============
Shares outstanding ................................................................. 45,662,488
==============
Net asset value per share a ........................................................ $ 21.75
==============
Maximum offering price per share (net asset value per share / 94.25%) .............. $ 23.08
==============
CLASS B:
Net assets, at value $ 74,470,064
==============
Shares outstanding ................................................................. 3,493,501
==============
Net asset value and maximum offering price per share a ............................. $ 21.32
==============
CLASS C:
Net assets, at value ............................................................... $ 420,806,175
==============
Shares outstanding ................................................................. 19,503,283
==============
Net asset value and maximum offering price per share a ............................. $ 21.58
==============
a Redemption price is equal to net asset value less contingent deferred
sales charges, if applicable, and redemption fees retained by the Fund.
Annual Report |
The accompanying notes are an integral part of these financial statements. | 31
Mutual Qualified Fund
FINANCIAL STATEMENTS (CONTINUED)
STATEMENT OF OPERATIONS
for the year ended December 31, 2006
Investment income:
Dividends: (net of foreign taxes of $6,056,314)
Unaffiliated issuers ................................................................................. $ 105,784,607
Non-controlled affiliated issuers (Note 11) .......................................................... 3,961,350
Interest:
Unaffiliated issuers ................................................................................. 25,364,711
Non-controlled affiliated issuers (Note 11) .......................................................... 134,571
Income from securities loaned - net ................................................................... 349,633
Other income (Note 13) ................................................................................ 332,979
-------------
Total investment income ........................................................................ 135,927,851
-------------
Expenses:
Management fees (Note 3a) ............................................................................. 31,230,253
Administrative fees (Note 3b) ......................................................................... 3,987,608
Distribution fees (Note 3c)
Class A .............................................................................................. 2,860,607
Class B .............................................................................................. 716,288
Class C .............................................................................................. 3,724,613
Transfer agent fees (Note 3e) ......................................................................... 4,137,683
Custodian fees (Note 4) ............................................................................... 1,038,670
Reports to shareholders ............................................................................... 224,277
Registration and filing fees .......................................................................... 216,649
Professional fees ..................................................................................... 1,209,468
Directors' fees and expenses .......................................................................... 107,806
Dividends on securities sold short .................................................................... 1,303,101
Other ................................................................................................. 113,333
-------------
Total expenses ................................................................................. 50,870,356
Expense reductions (Note 4) .................................................................... (15,469)
-------------
Net expenses ................................................................................ 50,854,887
-------------
Net investment income .................................................................... 85,072,964
-------------
Realized and unrealized gains (losses):
Net realized gain (loss) from:
Investments (Net of foreign taxes $834,858)
Unaffiliated issuers ............................................................................... 391,127,586
Non-controlled affiliated issuers (Note 11) ........................................................ (30,885)
Written options ...................................................................................... 112,952
Foreign currency transactions ........................................................................ (79,488,293)
Securities sold short ................................................................................ (1,467,627)
Synthetic equity swaps ............................................................................... 772,585
-------------
Net realized gain (loss) .................................................................... 311,026,318
-------------
Net change in unrealized appreciation (depreciation) on:
Investments .......................................................................................... 572,137,646
Translation of assets and liabilities denominated in foreign currencies .............................. (49,602,922)
Change in deferred taxes on unrealized appreciation (depreciation) .................................... 145,034
-------------
Net change in unrealized appreciation (depreciation) .......................................... 522,679,758
-------------
Net realized and unrealized gain (loss) ................................................................ 833,706,076
-------------
Net increase (decrease) in net assets resulting from operations ........................................ $ 918,779,040
=============
32 | The accompanying notes are an integral part of these financial statements.
| Annual Report
Mutual Qualified Fund
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF CHANGES IN NET ASSETS
----------------------------------
YEAR ENDED DECEMBER 31,
----------------------------------
2006 2005
----------------------------------
Increase (decrease) in net assets:
Operations:
Net investment income .................................................................... $ 85,072,964 $ 87,351,351
Net realized gain (loss) from investments, written options, securities sold short,
foreign currency transactions, and synthetic equity swaps ............................... 311,026,318 305,613,335
Net change in unrealized appreciation (depreciation) on investments, translation of assets
and liabilities denominated in foreign currencies, and deferred taxes ................... 522,679,758 98,195,575
----------------------------------
Net increase (decrease) in net assets resulting from operations ....................... 918,779,040 491,160,261
----------------------------------
Distributions to shareholders from:
Net investment income:
Class Z ................................................................................. (72,701,378) (71,711,158)
Class A ................................................................................. (14,297,690) (13,135,480)
Class B ................................................................................. (624,281) (738,983)
Class C ................................................................................. (3,637,539) (3,553,228)
Net realized gains:
Class Z ................................................................................. (235,676,842) (247,747,070)
Class A ................................................................................. (55,482,433) (54,231,833)
Class B ................................................................................. (4,356,865) (4,898,744)
Class C ................................................................................. (23,788,670) (23,121,799)
----------------------------------
Total distributions to shareholders ...................................................... (410,565,698) (419,138,295)
----------------------------------
Capital share transactions: (Note 2)
Class Z ................................................................................. 172,221,468 170,136,182
Class A ................................................................................. 114,571,705 91,917,900
Class B ................................................................................. (2,408,287) 1,140,288
Class C ................................................................................. 48,918,181 21,731,076
----------------------------------
Total capital share transactions ......................................................... 333,303,067 284,925,446
----------------------------------
Redemption fees .......................................................................... 7,653 16,510
----------------------------------
Net increase (decrease) in net assets ................................................. 841,524,062 356,963,922
Net assets:
Beginning of year .......................................................................... 4,848,015,108 4,491,051,186
----------------------------------
End of year ................................................................................ $ 5,689,539,170 $ 4,848,015,108
==================================
Undistributed net investment income/Distributions in excess of net investment income
included in net assets:
End of year ................................................................................ $ (4,982,471) $ 372,372
==================================
Annual Report |
The accompanying notes are an integral part of these financial statements. | 33
Mutual Qualified Fund
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Franklin Mutual Series Fund Inc. (the Series Fund) is registered under the
Investment Company Act of 1940, as amended (the 1940 Act) as an open-end
investment company, consisting of six separate funds. The Mutual Qualified Fund
(the Fund) included in this report is diversified. The financial statements of
the remaining funds in the Series Fund are presented separately. The Fund offers
four classes of shares: Class Z, Class A, Class B and Class C. Each class of
shares differs by its initial sales load, contingent deferred sales charges,
distribution fees, voting rights on matters affecting a single class and its
exchange privilege.
The following summarizes the Fund's significant accounting policies.
A. SECURITY VALUATION
Securities listed on a securities exchange or on the NASDAQ National Market
System are valued at the last quoted sale price or the official closing price of
the day, respectively. Over-the-counter securities and listed securities for
which there is no reported sale are valued within the range of the most recent
quoted bid and ask prices. Securities that trade in multiple markets or on
multiple exchanges are valued according to the broadest and most representative
market.
Corporate debt securities and Government securities generally trade in the
over-the-counter market rather than on a securities exchange. The Fund may
utilize independent pricing services, quotations from bond dealers, and
information with respect to bond and note transactions, to assist in determining
a current market value for each security. The Fund's pricing services may use
valuation models or matrix pricing which considers information with respect to
comparable bond and note transactions, quotations from bond dealers, or by
reference to other securities that are considered comparable in such
characteristics as rating, interest rate and maturity date, option adjusted
spread models, prepayment projections, interest rate spreads and yield curves,
to determine current value.
Foreign securities are valued as of the close of trading on the foreign stock
exchange on which the security is primarily traded, or the NYSE, whichever is
earlier. If no sale is reported at that time, the foreign security will be
valued within the range of the most recent quoted bid and ask prices. The value
is then converted into its U.S. dollar equivalent at the foreign exchange rate
in effect at the close of the NYSE on the day that the value of the foreign
security is determined.
34 | Annual Report
Mutual Qualified Fund
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
A. SECURITY VALUATION (CONTINUED)
The Fund has procedures to determine the fair value of individual securities and
other assets for which market prices are not readily available or which may not
be reliably priced. Methods for valuing these securities may include:
fundamental analysis, matrix pricing, discounts from market prices of similar
securities, or discounts applied due to the nature and duration of restrictions
on the disposition of the securities. Due to the inherent uncertainty of
valuations of such securities, the fair values may differ significantly from the
values that would have been used had a ready market for such investments
existed. Occasionally, events occur between the time at which trading in a
security is completed and the close of the NYSE that might call into question
the availability (including the reliability) of the value of a portfolio
security held by the Fund. The investment manager monitors price movements
following the close of trading in foreign stock markets through a series of
country specific market proxies (such as baskets of American Depository
Receipts, futures contracts and exchange traded funds). These price movements
are measured against established trigger thresholds for each specific market
proxy to assist in determining if an event has occurred. If such an event
occurs, the securities may be valued using fair value procedures, which may
include the use of independent pricing services. All security valuation
procedures are approved by the Fund's 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, income and expense items denominated in foreign currencies are
translated into U.S. dollars at the exchange rate in effect on the transaction
date. Occasionally, events may impact the availability or reliability of foreign
exchange rates used to convert the U.S. dollar equivalent value. If such an
event occurs, the foreign exchange rate will be valued at fair value using
procedures established and approved by the Fund's Board of Directors.
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 on the
Statement of Operations.
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 denominated assets and liabilities other than investments in securities
held at the end of the reporting period.
Annual Report | 35
Mutual Qualified Fund
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
C. FOREIGN CURRENCY CONTRACTS
When the Fund purchases or sells foreign securities it may enter into foreign
exchange contracts to minimize foreign exchange risk from the trade date to the
settlement date of the transactions. A foreign exchange contract is an agreement
between two parties to exchange different currencies at an agreed upon exchange
rate at a future date. Realized and unrealized gains and losses on these
contracts are included in the Statement of Operations.
The Fund may also enter into forward exchange contracts to hedge against
fluctuations in foreign exchange rates or to gain exposure to certain foreign
currencies. These contracts are valued daily by the Fund and the unrealized
gains or losses on the contracts, as measured by the difference between the
contractual forward foreign exchange rates and the forward rates at the
reporting date, are included in the Statement of Assets and Liabilities.
Realized and unrealized gains and losses on these contracts are included in the
Statement of Operations.
The risks of these contracts include movement in the values of the foreign
currencies relative to the U.S. dollar and the possible inability of the
counterparties to fulfill their obligations under the contracts, which may be in
excess of the amount reflected in the Statement of Assets and Liabilities.
D. SYNTHETIC EQUITY SWAPS
The Fund may engage in synthetic equity swaps. Synthetic equity swaps 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 purchase or short sale of the underlying
security taken place. Upon entering into synthetic equity swaps, 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 ("margin account"). Periodically,
payments are made to recognize changes in value of the contract resulting from
interest on the notional value of the contract, market value changes in the
underlying security, and/or dividends paid by the issuer of the underlying
security. The Fund recognizes a realized gain or loss when cash is received
from, or paid to, the broker. Synthetic equity swaps are valued daily by the
Fund and the unrealized gains or losses on the contracts (as measured by the
difference between the contract amount plus or minus cash received or paid and
the market value of the underlying securities) are recorded in the Statement of
Operations. The margin account and any net unrealized gains or losses on open
synthetic equity swaps are included in the Statement of Assets and Liabilities.
The risks of entering into synthetic equity swaps include unfavorable price
movements in the underlying securities or the inability of the counterparties to
fulfill their obligations under the contract.
36 | Annual Report
Mutual Qualified Fund
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
E. OPTIONS
The Fund may purchase or write options. Options are contracts entitling the
holder to purchase or sell a specified number of shares or units of a particular
security at a specified price. Options purchased are recorded as investments;
options written (sold) are recorded as liabilities. Upon closing of an option,
other than by exercise, which results in a cash settlement, the difference
between the premium (original option value) 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. When
an option expires, the premium is realized as a gain for options written or as a
loss for options purchased. The risks include the possibility there may be an
illiquid options market or the inability of the counterparties to fulfill their
obligations under the contract. Writing options involves, to varying degrees,
elements of market risk in excess of the amount recognized in the Statement of
Assets and Liabilities.
F. SECURITIES SOLD SHORT
The Fund is engaged in selling securities short, which obligates the Fund to
replace a borrowed security with the same security at current market value. The
Fund incurs 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 realizes a gain if the price of the security declines between those
dates. Gains are limited to the price at which the Fund sold the security short,
while losses are potentially unlimited in size.
The Fund is required to establish a margin account with the broker lending the
security sold short. While the short sale is outstanding, the broker retains the
proceeds of the short sale and the Fund must maintain a deposit with broker
consisting of cash and securities having a value equal to a specified percentage
of the value of the securities sold short. The Fund is obligated to pay the
counterparty any dividends or interest due on securities sold short. Such
dividends and interest are recorded as an expense to the Fund.
G. SECURITIES LENDING
The Fund may loan securities to certain brokers through a securities lending
agent for which it receives initial cash collateral against the loaned
securities in an amount equal to at least 102% of the market value of the loaned
securities. Collateral is maintained over the life of the loan in an amount not
less than 100% of the market value of loaned securities, as determined at the
close of fund business each day; any additional collateral required due to
changes in security values is delivered to the fund on the next business day.
The Fund receives interest income from the investment of cash collateral,
adjusted by lender fees and broker rebates. The Fund bears the risk of loss with
respect to the investment of the collateral and the securities loaned. The
securities lending agent has agreed to indemnify the Fund in the case of default
of any securities borrower. At December 31, 2006, the Fund had no securities on
loan.
Annual Report | 37
Mutual Qualified Fund
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
H. INCOME AND DEFERRED TAXES
No provision has been made for U.S. income taxes because the Fund intends to
qualify as a regulated investment company under the Internal Revenue Code and to
distribute to shareholders substantially all of its taxable income and net
realized gains.
Foreign securities held by the Fund may be subject to foreign taxation on
dividend and interest income received. Foreign taxes, if any, are recorded based
on the tax regulations and rates that exist in the foreign markets in which the
Fund invests.
The Fund may be subject to a tax imposed on net realized gains on securities of
certain foreign countries. The Fund records an estimated deferred tax liability
for net unrealized gains on these securities in an amount that would be payable
if the securities were disposed of on the valuation date.
I. 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.
Interest income and estimated expenses are accrued daily. Amortization of
premium and accretion of discount on debt securities are included in interest
income. Dividend income and dividends declared on securities sold short, are
recorded on the ex-dividend date except that certain dividends from foreign
securities are recognized as soon as the Fund is notified of the ex-dividend
date. Distributions to shareholders are recorded on the ex-dividend date and are
determined according to income tax regulations (tax basis). Distributable
earnings determined on a tax basis may differ from earnings recorded in
accordance with accounting principles generally accepted in the United States.
These differences may be permanent or temporary. Permanent differences are
reclassified among capital accounts to reflect their tax character. These
reclassifications have no impact on net assets or the results of operations.
Temporary differences are not reclassified, as they may reverse in subsequent
periods.
Common expenses incurred by the Series Fund are allocated among the funds based
on the ratio of net assets of each fund to the combined net assets of the Series
Fund. Fund specific expenses are charged directly to the fund that incurred the
expense.
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. Differences in class-level
expenses may result in payment of different per share distributions by class.
38 | Annual Report
Mutual Qualified Fund
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
J. ACCOUNTING ESTIMATES
The preparation of financial statements in accordance with accounting principles
generally accepted in the United States of America 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 expenses during the reporting period. Actual results could differ from those
estimates.
K. REDEMPTION FEES
A short term trading redemption fee will be imposed, with some exceptions, on
any Fund shares that are redeemed or exchanged within seven calendar days
following their purchase date. The redemption fee is 2% of the amount redeemed.
Such fees are retained by the Fund and accounted for as an addition to paid-in
capital.
L. GUARANTEES AND INDEMNIFICATIONS
Under the Series Fund's organizational documents, its officers and directors are
indemnified by the Fund against certain liabilities arising out of the
performance of their duties to the Fund. Additionally, in the normal course of
business, the Fund enters into contracts with service providers that contain
general indemnification clauses. The Fund's maximum exposure under these
arrangements is unknown as this would involve future claims that may be made
against the Fund that have not yet occurred. Currently, the Fund expects the
risk of loss to be remote.
2. CAPITAL STOCK
At December 31, 2006, there were 1.00 billion shares authorized ($0.001 par
value). Transactions in the Fund's shares were as follows:
---------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
2006 2005
---------------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
---------------------------------------------------------------------
CLASS Z SHARES:
Shares sold ................................... 8,512,548 $ 181,803,162 8,224,844 $ 164,565,279
Shares issued in reinvestment of
distributions ................................ 13,636,748 293,498,827 15,292,237 304,242,087
Shares redeemed ............................... (14,219,750) (303,080,521) (14,850,176) (298,671,184)
---------------------------------------------------------------------
Net increase (decrease) ....................... 7,929,546 $ 172,221,468 8,666,905 $ 170,136,182
=====================================================================
CLASS A SHARES:
Shares sold ................................... 10,807,154 $ 229,222,653 9,309,485 $ 185,621,526
Shares issued in reinvestment of
distributions ................................ 3,087,615 66,093,819 3,259,149 64,510,221
Shares redeemed ............................... (8,554,219) (180,744,767) (7,920,762) (158,213,847)
---------------------------------------------------------------------
Net increase (decrease) ....................... 5,340,550 $ 114,571,705 4,647,872 $ 91,917,900
=====================================================================
Annual Report | 39
Mutual Qualified Fund
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. CAPITAL STOCK (CONTINUED)
---------------------------------------------------------------
YEAR ENDED DECEMBER 31,
2006 2005
---------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
---------------------------------------------------------------
CLASS B SHARES:
Shares sold ................................... 159,945 $ 3,278,231 270,527 $ 5,213,646
Shares issued in reinvestment of
distributions ................................ 219,353 4,592,968 271,363 5,272,612
Shares redeemed ............................... (496,487) (10,279,486) (479,421) (9,345,970)
---------------------------------------------------------------
Net increase (decrease) ....................... (117,189) $ (2,408,287) 62,469 $ 1,140,288
===============================================================
CLASS C SHARES:
Shares sold ................................... 3,442,336 $ 72,454,321 2,410,025 $ 47,732,679
Shares issued in reinvestment of
distributions ................................ 1,177,478 24,986,482 1,253,716 24,647,883
Shares redeemed ............................... (2,320,964) (48,522,622) (2,578,585) (50,649,486)
---------------------------------------------------------------
Net increase (decrease) ....................... 2,298,850 $ 48,918,181 1,085,156 $ 21,731,076
===============================================================
3. TRANSACTIONS WITH AFFILIATES
Franklin Resources, Inc. is the holding company for various subsidiaries that
together are referred to as Franklin Templeton Investments. Certain officers and
directors of the Series Fund are also officers and/or directors of the following
subsidiaries:
- ------------------------------------------------------------------------------------------------------------
SUBSIDIARY AFFILIATION
- ------------------------------------------------------------------------------------------------------------
Franklin Mutual Advisers, LLC (Franklin Mutual) Investment manager
Franklin Templeton Investment Management Limited (FTIML) Investment manager
Franklin Templeton Services, LLC (FT Services) Administrative manager
Franklin Templeton Distributors, Inc. (Distributors) Principal underwriter
Franklin Templeton Investor Services, LLC (Investor Services) Transfer agent
A. MANAGEMENT FEES
The Fund pays an investment management fee to Franklin Mutual based on the
average daily net assets of the Fund as follows:
- --------------------------------------------------------------------------------
ANNUALIZED FEE RATE NET ASSETS
- --------------------------------------------------------------------------------
0.600% Up to and including $5 billion
0.570% Over $5 billion, up to and including $7 billion
0.550% Over $7 billion, up to and including $10 billion
0.540% In excess of $10 billion
Under a subadvisory agreement, FTIML, an affiliate of Franklin Mutual, provides
subadvisory services to the Fund and receives from Franklin Mutual fees based on
the average daily net assets of the Fund.
40 | Annual Report
Mutual Qualified Fund
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. TRANSACTIONS WITH AFFILIATES (CONTINUED)
B. ADMINISTRATIVE FEES
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:
- --------------------------------------------------------------------------------
ANNUALIZED FEE RATE NET ASSETS
- --------------------------------------------------------------------------------
0.150% Up to and including $200 million
0.135% Over $200 million, up to and including $700 million
0.100% Over $700 million, up to and including $1.2 billion
0.075% In excess of $1.2 billion
C. DISTRIBUTION FEES
The Fund's Board of Directors has adopted distribution plans for each share
class, with the exception of Class Z shares, pursuant to Rule 12b-1 under the
1940 Act. Under the Fund's Class A reimbursement distribution plan, the Fund
reimburses Distributors for costs incurred in connection with the servicing,
sale and distribution of the Fund's shares up to the maximum annual plan rate.
Under the Class A reimbursement distribution plan, costs exceeding the maximum
for the current plan year cannot be reimbursed in subsequent periods.
In addition, under the Fund's Class B and C compensation distribution plans, the
Fund pays Distributors for costs incurred in connection with the servicing, sale
and distribution of the Fund's shares up to the maximum annual plan rate for
each class.
The maximum annual plan rates, based on the average daily net assets, for each
class, are as follows:
Class A ..................................................... 0.35%
Class B ..................................................... 1.00%
Class C ..................................................... 1.00%
D. SALES CHARGES/UNDERWRITING AGREEMENTS
Distributors has advised the Fund of the following commission transactions
related to the sales and redemptions of the Fund's shares for the year:
Sales charge retained net of commisions paid to
unaffillated broker/dealers ............................... $509,560
Contingent deferred sales charges retained .................. $105,090
E. TRANSFER AGENT FEES
The Fund paid transfer agent fees of $4,137,683, of which $3,122,994 was
retained by Investor Services.
Annual Report | 41
Mutual Qualified Fund
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. EXPENSE OFFSET ARRANGEMENT
The Fund has entered into an arrangement with its custodian whereby credits
realized as a result of uninvested cash balances are used to reduce a portion of
the Fund's custodian expenses. During the year ended December 31, 2006, the
custodian fees were reduced as noted in the Statement of Operations.
5. INCOME TAXES
The tax character of distributions paid during the years ended December 31, 2006
and 2005, was as follows:
---------------------------------
2006 2005
---------------------------------
Distributions paid from:
Ordinary income .................... $101,907,924 $140,988,207
Long term capital gain ............. 308,657,775 278,150,088
---------------------------------
$410,565,699 $419,138,295
=================================
At December 31, 2006, the cost of investments, net unrealized appreciation
(depreciation), undistributed ordinary income and undistributed long term
capital gains for income tax purposes were as follows:
Cost of investments .................................... $ 3,644,758,155
===============
Unrealized appreciation ................................ $ 2,069,387,671
Unrealized depreciation ................................ (76,077,698)
---------------
Net unrealized appreciation (depreciation) ............. $ 1,993,309,973
===============
Undistributed ordinary income .......................... $ 1,836,593
Undistributed long term capital gains .................. 11,551,277
---------------
Distributable earnings ................................. $ 13,387,870
===============
Net investment income differs for financial statement and tax purposes primarily
due to differing treatments of defaulted securities, foreign currency
transactions, passive foreign investment company shares, bond discounts and
premiums, foreign taxes paid on net realized gains and certain dividends on
securities sold short.
Net realized gains (losses) differ for financial statement and tax purposes
primarily due to differing treatments of wash sales, foreign currency
transactions, passive foreign investment company shares, bond discounts and
premiums, foreign taxes paid on net realized gains and certain dividends on
securities sold short.
42 | Annual Report
Mutual Qualified Fund
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. INVESTMENT TRANSACTIONS
Purchases and sales of investments (excluding short term securities and
securities sold short) for the year ended December 31, 2006, aggregated
$1,170,147,760 and $1,350,514,532, respectively.
Transactions in options written during the year ended December 31, 2006, were as
follows:
NUMBER OF PREMIUMS
CONTRACTS RECEIVED
--------------------------
Options outstanding at December 31, 2005 ........ 200 $ 16,799
Options written ................................. 3,079 550,883
Options expired ................................. (200) (16,799)
Options exercised ............................... (2,529) (433,610)
Options closed .................................. (550) (117,273)
--------------------------
Options outstanding at December 31, 2006 ........ -- $ --
==========================
7. FORWARD EXCHANGE CONTRACTS
At December 31, 2006, the Fund had the following forward exchange contracts
outstanding:
CONTRACT SETTLEMENT UNREALIZED UNREALIZED
AMOUNT DATE GAIN LOSS
- --------------------------------------------------------------------------------------------------------------------
CONTRACTS TO BUY
320,900,000 Taiwan Dollar ............... $ 10,000,000 6/06/07 $ (151,895)
CONTRACTS TO SELL
21,150,000 British Pound ............... 40,127,261 1/08/07 (1,294,764)
23,857,848 British Pound ............... 44,531,473 1/16/07 (2,196,480)
44,102,665 Euro ........................ 55,709,989 1/18/07 (2,567,460)
69,107,552 Euro ........................ 90,784,863 1/24/07 (562,263)
23,834,250 Singapore Dollar ............ 15,231,762 1/24/07 (331,960)
35,600,000 British Pound ............... 70,072,596 2/08/07 $ 338,999
19,736,353 British Pound ............... 37,545,797 2/08/07 (1,113,947)
193,774,723 Swedish Krona ............... 28,447,122 2/15/07 77,169
19,925,000 British Pound ............... 39,134,154 2/20/07 103,979
90,281,614 Euro ........................ 114,612,349 2/20/07 (4,862,768)
23,200,521 Euro ........................ 30,986,036 2/26/07 275,639
80,362,538 Euro ........................ 103,526,236 2/26/07 (2,849,194)
550,000,000 Norwegian Krone ............. 90,532,001 3/07/07 2,069,401
78,675,118 Swiss Franc ................. 66,573,677 3/07/07 1,613,923
160,000,000 Euro ........................ 204,848,940 3/13/07 (7,070,058)
8,343,048 Australian Dollar ........... 6,540,950 3/14/07 (31,494)
238,603,600 Swedish Krona ............... 35,089,425 3/15/07 102,756
8,355,311,411 Japanese Yen ................ 73,019,213 3/19/07 2,085,451
3,966,025,000 Korean Won .................. 4,325,000 3/22/07 52,885
124,031,431,250 Korean Won .................. 131,350,000 3/22/07 (2,253,930)
Annual Report | 43
Mutual Qualified Fund
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. FORWARD EXCHANGE CONTRACTS (CONTINUED)
CONTRACT SETTLEMENT UNREALIZED UNREALIZED
AMOUNT DATE GAIN LOSS
- -------------------------------------------------------------------------------------------------------------------
CONTRACTS TO SELL
40,525,461 Canadian Dollar ................ $36,484,942 3/26/07 $ 1,617,402
74,372,385 Euro ........................... 98,845,790 4/13/07 221,478
68,355,756 Euro ........................... 86,525,809 4/18/07 $ (4,136,865)
53,675,000 Euro ........................... 71,940,894 5/24/07 653,906
50,000,000 Euro ........................... 67,170,000 6/06/07 731,536
522,851,000 Taiwan Dollar .................. 16,450,000 6/06/07 404,218
370,260,473 Norwegian Krone ................ 61,124,385 6/07/07 1,392,054
37,239,400 Norwegian Krone ................ 6,000,000 6/07/07 (63,940)
---------------------------
Unrealized gain (loss) on forward exchange contracts ................... 11,740,796 (29,487,018)
---------------------------
Net unrealized gain (loss) on forward exchange contracts ...................... $(17,746,222)
============
8. CONCENTRATION OF RISK
Investing in foreign securities may include certain risks and considerations not
typically associated with investing in U.S. securities, such as fluctuating
currency values and changing local and regional economic, political and social
conditions, which may result in greater market volatility. In addition, certain
foreign securities may not be as liquid as U.S. securities.
9. DEFAULTED SECURITIES
The Fund may purchase the pre-default or defaulted debt of distressed companies.
Distressed companies are financially troubled and are about to be/or are already
involved in financial restructuring or bankruptcy. The Fund does not accrue
income on these securities, if it becomes probable that the income will not be
collected. Risks associated with purchasing these securities include the
possibility that the bankruptcy or other restructuring process takes longer than
expected, or that distributions in restructuring are less than anticipated,
either or both of which may result in unfavorable consequences to the Fund. At
December 31, 2006, the aggregate value of these securities was $180,297,647,
representing 3.17% of the Fund's net assets. For information as to specific
securities, see the accompanying Statement of Investments.
44 | Annual Report
Mutual Qualified Fund
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
10. RESTRICTED SECURITIES
The Fund may invest in securities that are restricted under the Securities Act
of 1933 (the 1933 Act) or which are subject to legal, contractual, or other
agreed upon restrictions on resale. Restricted securities are often purchased in
private placement transactions, and cannot be sold without prior registration
unless the sale is pursuant to an exemption under the 1933 Act. Disposal of
these securities may require greater effort and expense, and prompt sale at an
acceptable price may be difficult. The Fund may have registration rights for
restricted securities. The issuer generally incurs all registration costs.
At December 31, 2006, the Fund held investments in restricted securities,
excluding 144A securities deemed to be liquid, valued in accordance with
procedures approved by the Fund's Board of Directors as reflecting fair value,
as follows:
- ---------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT,
SHARES, WARRANTS ACQUISITION
AND CONTRACTS ISSUER DATES COST VALUE
- ---------------------------------------------------------------------------------------------------------------------------------
365,293 AboveNet Inc. ...................................... 10/02/01 - 11/25/03 $16,953,496 $11,192,578
510 AboveNet Inc., options to purchase
(shares), exercise price $20.95,
expiration date, 9/09/13 ........................... 4/17/06 - 9/08/06 -- 13,795
11,991 AboveNet Inc., wts., 9/08/08 ....................... 10/02/01 - 10/02/03 1,490,986 383,712
14,107 AboveNet Inc., wts., 9/08/10 ....................... 10/02/01 - 10/02/03 1,600,719 406,282
58,923 Anchor Resources LLC ............................... 6/29/04 -- --
3,462,696 Cerberus FIM Investors Auto Finance
LLC .............................................. 11/20/06 3,462,696 3,507,988
10,331,832 Cerberus FIM Investors Auto Finance
LLC, 12.00%, 11/22/13 ............................ 11/21/06 10,331,832 10,331,832
442,462 Cerberus FIM Investors Commercial
Finance LLC ...................................... 11/20/06 442,462 448,249
1,327,385 Cerberus FIM Investors Commercial
Finance LLC, 12.00%, 11/22/13 .................... 11/20/06 1,327,385 1,327,385
757,082 Cerberus FIM Investors Commercial
Mortgage LLC ..................................... 11/20/06 757,082 766,985
2,271,248 Cerberus FIM Investors Commercial
Mortgage LLC, 12.00%, 11/22/13 ................... 11/20/06 2,271,248 2,271,248
3,606,788 Cerberus FIM Investors Insurance LLC ............... 11/20/06 3,606,788 3,653,965
10,820,365 Cerberus FIM Investors Insurance LLC,
12.00%, 11/22/13 ................................. 11/20/06 10,820,365 10,820,365
7,649,972 Cerberus FIM Investors Rescap LLC .................. 11/20/06 7,649,972 7,750,033
22,949,915 Cerberus FIM Investors Rescap
LLC, 12.00%, 11/22/13 ............................ 11/20/06 22,949,915 22,949,915
1,008,199 DecisionOne Corp. .................................. 3/12/99 - 7/18/00 700,978 718,846
1,173,501 DecisionOne Corp. 12.00%, 4/15/10 .................. 3/12/99 - 10/16/06 2,981,329 1,173,501
11,087 Elephant Capital Holdings Ltd. ..................... 8/29/03 - 7/29/04 -- 15,028,126
6,143 Esmark Inc. ........................................ 7/28/06 6,509,253 5,058,002
22,360 Esmark Inc., 8.00%, cvt. pfd., A ................... 11/08/04 - 9/29/06 22,360,000 21,622,120
Annual Report | 45
Mutual Qualified Fund
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
10. RESTRICTED SECURITIES (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT,
SHARES, WARRANTS ACQUISITION
AND CONTRACTS ISSUER DATES COST VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
659,105 First Chicago Bancorp .............................. 11/16/06 $ 9,227,470 $ 9,227,470
1,497,000 Florida East Coast Industries Inc. ................. 11/16/87 - 7/15/04 31,051,609 84,760,140
2,814,856 Imagine Group Holdings Ltd. ........................ 8/31/04 28,828,348 30,878,970
1,982,308 International Automotive Components
Group Brazil LLC ................................. 4/13/06 - 8/21/06 1,994,018 8,167,109
265,676 International Automotive Components
Group Japan LLC .................................. 9/26/06 - 11/14/06 2,223,218 2,231,915
8,425,843 International Automotive Components
Group LLC ........................................ 1/12/06 - 10/16/06 8,034,000 8,425,843
1,444,624 Kindred Healthcare Inc. ............................ 4/28/99 - 3/29/06 17,191,448 34,652,918
Kindred Healthcare Inc., options to purchase (shares):
3,876 exercise price $23.75,
expiration date, 7/17/11 ........................ 7/17/02 - 7/17/05 -- 921
1,164 exercise price $26.00,
expiration date, 1/01/12 ........................ 1/01/03 - 1/01/06 -- --
870 exercise price $9.07,
expiration date, 1/01/13 ........................ 1/01/04 - 1/01/06 -- 12,974
576 exercise price $25.99,
expiration date, 1/01/14 ........................ 1/01/05 - 1/01/06 -- --
240 exercise price $27.90,
expiration date, 1/10/15 ........................ 1/06/06 -- --
53,490 NCB Warrant Holdings Ltd., A ....................... 12/16/05 -- 6,299,517
97,300 Olympus Re Holdings Ltd. ........................... 12/19/01 9,730,000 97,300
279,965 Owens Corning Inc. ................................. 10/20/06 - 12/20/06 7,897,375 7,952,406
249,750 Owens Corning Inc., options to sell
(shares), exercise price $25.00,
expiration date, 4/06/07 ......................... 12/20/06 8,709 --
249,750 Owens Corning Inc., options to purchase
(shares), exercise price $37.50,
expiration date, 1/02/08 ......................... 12/20/06 22,394 --
92,938 PTV Inc., 10.00%, pfd, A ........................... 12/07/01 - 3/06/02 278,814 348,517
394,800 Symetra Financial .................................. 7/27/04 39,480,000 46,669,308
============
TOTAL RESTRICTED SECURITIES (6.31% OF NET ASSETS) .......................................... $359,150,235
============
46 | Annual Report
Mutual Qualified Fund
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
11. HOLDINGS OF 5% VOTING SECURITIES OF PORTFOLIO COMPANIES
The 1940 Act defines "affiliated companies" to include investments in portfolio
companies in which a fund owns 5% or more of the outstanding voting securities.
Investments in "affiliated companies" for the Fund for the year ended December
31, 2006 were as shown below.
- ------------------------------------------------------------------------------------------------------------------------------------
NUMBER OF SHARES/ NUMBER OF SHARES/
PRINCIPAL PRINCIPAL
AMOUNT HELD AMOUNT HELD VALUE INVESTMENT REALIZED
AT BEGINNING GROSS GROSS AT END AT END INCOME CAPITAL
NAME OF ISSUER OF YEAR ADDITIONS REDUCTIONS OF YEAR OF YEAR (LOSS) GAIN (LOSS)
- ------------------------------------------------------------------------------------------------------------------------------------
NON-CONTROLLED AFFILIATES
DecisionOne Corp. ................. 1,008,199 -- -- 1,008,199 $ 718,846 $ -- $ --
DecisionOne Corp., 12.00%, 4/15/10 1,094,401 79,100 -- 1,173,501 1,173,501 134,571 --
Elephant Capital Holdings Ltd. .... 11,087 -- -- 11,087 15,028,126 -- --
Esmark Inc. ....................... -- 6,143 -- 6,143 5,058,002 49,143 --
Esmark Inc., 8.00%, cvt. pfd., A .. 22,360 -- -- 22,360 21,622,120 2,032,615 --
First Chicago Bancorp ............. -- 659,105 -- 659,105 9,227,470 -- --
Generale de Sante ................. 2,010,450 1,135,618 -- 3,146,068 128,741,973 1,199,614 (16)
Imagine Group Holdings Ltd. ....... 2,814,856 -- -- 2,814,856 30,878,970 -- --
Insun ENT Co. Ltd. ................ 687,953 -- -- 687,953 8,174,065 -- --
ITLA Capital Corp. ................ 445,796 -- -- 445,796 25,816,046 267,478 --
Lancer Industries Inc., B ......... 4 -- 4 -- -- -- 8,372,094
MBOP Liquidating Trust ............ 412,418 -- 412,418 -- -- -- 59,331
Saxon Capital Inc. ................ 2,663,585 -- 2,663,585 -- -- -- (8,462,294)
State National Bancshares Inc. .... 1,375,000 -- -- 1,375,000 50,277,563 412,500 --
White River Capital Inc. .......... 549,751 -- -- 549,751 8,878,479 -- --
-------------------------------------
TOTAL NON-CONTROLLED AFFILIATES
(5.37% OF NET ASSETS) .................................................................. $305,595,161 $4,095,921 $ (30,885)
=====================================
12. OTHER CONSIDERATIONS
Directors or employees of Franklin Mutual, as the Fund's Investment Manager, may
serve as members on the board of directors of certain companies in which the
Fund invests and/or may represent the Fund in certain corporate negotiations. As
a result of this involvement, such individuals may be in possession of certain
material non-public information which, pursuant to the Fund's policies and the
requirements of the federal securities laws, could prevent the Fund from trading
in the securities of such companies for limited or extended periods of time. The
securities have been identified on the accompanying Statement of Investments.
Directors or employees of Franklin Mutual, as the Fund's Investment Manager,
serve as members of various bondholders' steering committees, on credit
committees, and represent the Fund in certain corporate restructuring
negotiations. As a result of this involvement, such individuals may be in
possession of certain material non-public information. If the Fund's Investment
Manager, while in possession of such information, seeks to buy or sell any of
these securities, it will comply with all applicable federal securities laws.
The securities have been identified on the accompanying Statement of
Investments.
Annual Report | 47
Mutual Qualified Fund
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
13. REGULATORY MATTERS
As part of various investigations by a number of federal, state, and foreign
regulators and governmental entities, including the Securities and Exchange
Commission ("SEC"), relating to certain practices in the mutual fund industry,
including late trading, market timing and marketing support payments to
securities dealers who sell fund shares ("marketing support"), Franklin
Resources, Inc. and certain of its subsidiaries (collectively, the "Company"),
entered into settlements with certain of those regulators. Specifically, the
Company entered into settlements with the SEC, among others, concerning market
timing and marketing support.
On June 23, 2006, the SEC approved the proposed plan of distribution for the
marketing support settlement, and disbursement of the settlement monies to the
designated funds, in accordance with the terms and conditions of that settlement
and plan, was completed in September 2006 and is recorded as other income.
The plan of distribution for the market timing settlement is currently under
review by the SEC staff. After publication of notice of the plan and a 30-day
comment period, the proposed plan of distribution will be submitted to the SEC
for approval. Following the SEC's approval of the plan of distribution, with
modifications as appropriate, distribution of the settlement monies will begin
in accordance with the terms and conditions of the settlement and plan.
In addition, the Company, as well as most of the mutual funds within Franklin
Templeton Investments and certain current or former officers, Company directors,
fund directors, and employees, have been named in private lawsuits (styled as
shareholder class actions, or as derivative actions on behalf of either the
named funds or Franklin Resources, Inc.). The lawsuits relate to the industry
practices referenced above, as well as to allegedly excessive commissions and
advisory and distribution fees.
The Company and fund management believe that the claims made in each of the
private lawsuits referenced above are without merit and intend to defend against
them vigorously. The Company cannot predict with certainty the eventual outcome
of these lawsuits, nor whether they will have a material negative impact on the
Company. If it is determined that the Company bears responsibility for any
unlawful or inappropriate conduct that caused losses to the Fund, it is
committed to making the Fund or its shareholders whole, as appropriate.
48 | Annual Report
Mutual Qualified Fund
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
14. NEW ACCOUNTING PRONOUNCEMENTS
In July 2006, the Financial Accounting Standards Board (FASB) issued FASB
Interpretation No. 48, "Accounting for Uncertainty in Income Taxes -- an
Interpretation of FASB Statement No. 109" ("FIN 48"), which clarifies the
accounting for uncertainty in tax positions taken or expected to be taken in a
tax return. FIN 48 provides guidance on the measurement, recognition,
classification and disclosure of tax positions, along with accounting for the
related interest and penalties. FIN 48 is effective for fiscal years beginning
after December 15, 2006, and is to be applied to all open tax years as of the
date of effectiveness. On December 22, 2006, the Securities and Exchange
Commission extended the implementation date to no later than the last net asset
value calculation in the first semi-annual reporting period in 2007. The Fund is
currently evaluating the impact, if any, of applying the various provisions of
FIN 48.
In September 2006, FASB issued FASB Statement No. 157, "Fair Value Measurement"
("SFAS 157"), which defines fair value, establishes a framework for measuring
fair value, and expands disclosures about fair value measurements. SFAS 157 is
effective for fiscal years beginning after November 15, 2007, and interim
periods within those fiscal years. The Fund believes the adoption of SFAS 157
will have no material impact on its financial statements.
Annual Report | 49
Mutual Qualified Fund
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
TO THE BOARD OF DIRECTORS OF FRANKLIN MUTUAL SERIES FUND INC.
AND SHAREHOLDERS OF MUTUAL QUALIFIED FUND:
We have audited the accompanying statement of assets and liabilities of the
Mutual Qualified Fund (one of the portfolio constituting the Franklin Mutual
Series Fund Inc.) (the "Fund"), including the statement of investments, as of
December 31, 2006, and the related statement of operations for the year then
ended, the statements of changes in net assets for each of the two years in the
period then ended, and the financial highlights for each of the five years in
the period then ended. 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 the standards of the Public Company
Accounting Oversight Board (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. We were
not engaged to perform an audit of the Fund's internal control over financial
reporting. Our audits included consideration of internal control over financial
reporting as a basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the
effectiveness of the Fund's internal control over financial reporting.
Accordingly, we express no such opinion. An audit also includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements and financial highlights, assessing the accounting principles used
and significant estimates made by management, and evaluating the overall
financial statement presentation. Our procedures included confirmation of
securities owned as of December 31, 2006, by correspondence with the custodian
and brokers or by other appropriate auditing procedures where replies from the
brokers were not received. 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 the
Mutual Qualified Fund of the Franklin Mutual Series Fund Inc. at December 31,
2006, the results of its operations for the year then ended, the changes in its
net assets for each of the two years in the period then ended, and the financial
highlights for each of the five years in the period then ended, in conformity
with U.S. generally accepted accounting principles.
/s/ Ernst & Young LLP
Boston, Massachusetts
February 20, 2007
50 | Annual Report
Mutual Qualified Fund
TAX DESIGNATION (UNAUDITED)
Under Section 852(b)(3)(C) of the Internal Revenue Code (Code), the Fund
designates the maximum amount allowable but no less than $273,493,325 as a long
term capital gain dividend for the fiscal year ended December 31, 2006.
Under Section 854(b)(2) of the Code, the Fund designates the maximum amount
allowable but no less than $89,120,329 as qualified dividends for purposes of
the maximum rate under Section 1(h)(11) of the Code for the fiscal year ended
December 31, 2006. In January 2007, shareholders will receive Form 1099-DIV
which will include their share of qualified dividends distributed during the
calendar year 2006. Shareholders are advised to check with their tax advisors
for information on the treatment of these amounts on their individual income tax
returns.
Under Section 871(k)(1)(C) of the Code, the Fund designates the maximum amount
allowable but no less than $22,957,298 as interest related dividends for
purposes of the tax imposed under Section 871(a)(1)(A) of the Code for the
fiscal year ended December 31, 2006.
Under Section 854(b)(2) of the Code, the Fund designates 32.73% of the ordinary
income dividends as income qualifying for the dividends received deduction for
the fiscal year ended December 31, 2006.
Annual Report | 51
Mutual Qualified Fund
BOARD MEMBERS AND OFFICERS
The name, year of birth and address of the officers and board members, as well
as their affiliations, positions held with the Fund, principal occupations
during the past five years and number of portfolios overseen in the Franklin
Templeton Investments fund complex are shown below.
INDEPENDENT BOARD MEMBERS
- ------------------------------------------------------------------------------------------------------------------------------------
NUMBER OF PORTFOLIOS IN
NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN
AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- ------------------------------------------------------------------------------------------------------------------------------------
EDWARD I. ALTMAN, PH.D. (1941) Director Since 1987 7 Director, A.T.D. Inc. (financial
101 John F. Kennedy Parkway technology and investment company).
Short Hills, NJ 07078-2789
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Max L. Heine Professor of Finance and Director of The Credit and Debt Markets Research Program, Salomon Center, Stern School of
Business, New York University; editor and author of numerous financial publications; financial consultant; and serves on the
Investment Advisory Committee of the New York State Common Retirement Fund; and FORMERLY, Vice Director, NYU Salomon Center, Stern
School of Business, New York University.
- ------------------------------------------------------------------------------------------------------------------------------------
ANN TORRE BATES (1958) Director Since 1994 7 Independent Director, SLM
101 John F. Kennedy Parkway Corporation (Sallie Mae) and Allied
Short Hills, NJ 07078-2789 Capital Corporation (financial
services).
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Independent strategic and financial consultant; and FORMERLY, Executive Vice President and Chief Financial Officer, NHP Incorporated
(manager of multifamily housing) (1995-1997); and Vice President and Treasurer, US Airways, Inc. (until 1995).
- ------------------------------------------------------------------------------------------------------------------------------------
BURTON J. GREENWALD (1929) Director Since 2002 13 Director, Franklin Templeton Emerging
101 John F. Kennedy Parkway Markets Debt Opportunities Fund PLC
Short Hills, NJ 07078-2789 and Fiduciary International Ireland
Limited.
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Managing Director, B.J. Greenwald Associates (management consultants to the financial services industry) and FORMERLY, Chairman,
Fiduciary Trust International Funds; Executive Vice President, L.F. Rothschild Fund Management, Inc.; President and Director, Merit
Mutual Funds; President, Underwriting Division and Director, National Securities & Research Corporation; Governor, Investment
Company Institute and Chairman, ICI Public Information Committee.
- ------------------------------------------------------------------------------------------------------------------------------------
BRUCE A. MACPHERSON (1930) Director Since 1974 7 None
101 John F. Kennedy Parkway
Short Hills, NJ 07078-2789
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Retired, former Chairman, A.A. MacPherson, Inc., Canton, MA (representative for electrical manufacturers).
- ------------------------------------------------------------------------------------------------------------------------------------
CHARLES RUBENS II (1930) Director Since 1998 13 None
101 John F. Kennedy Parkway
Short Hills, NJ 07078-2789
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Private investor.
- ------------------------------------------------------------------------------------------------------------------------------------
52 | Annual Report
- ------------------------------------------------------------------------------------------------------------------------------------
NUMBER OF PORTFOLIOS IN
NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN
AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- ------------------------------------------------------------------------------------------------------------------------------------
ROBERT E. WADE (1946) Director and Director since 30 Director, El Oro and
101 John F. Kennedy Parkway Chairman of 1991 and Exploration Co., p.l.c.
Short Hills, NJ 07078-2789 the Board Chairman of the (investments) and ARC
Board since 2005 Wireless Solutions, Inc.
(wireless components and
network products).
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Practicing attorney.
- ------------------------------------------------------------------------------------------------------------------------------------
INTERESTED BOARD MEMBERS AND OFFICERS
- ------------------------------------------------------------------------------------------------------------------------------------
NUMBER OF PORTFOLIOS IN
NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN
AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- ------------------------------------------------------------------------------------------------------------------------------------
**WILLIAM J. LIPPMAN (1925) Director Since 1996 13 None
One Parker Plaza, 9th Floor
Fort Lee, NJ 07024-2920
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
President, Franklin Advisory Services, LLC; Director, Templeton Worldwide, Inc.; and officer and/or director or trustee, as the case
may be, of four of the investment companies in Franklin Templeton Investments.
- ------------------------------------------------------------------------------------------------------------------------------------
PHILIPPE BRUGERE-TRELAT (1949) Vice President Since 2005 Not Applicable Not Applicable
101 John F. Kennedy Parkway,
Short Hills, NJ 07078-2789
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Vice President, Franklin Mutual Advisers, LLC; Portfolio Manager of Eurovest SA (French registered Investment Company, Sicav); and
officer of two of the investment companies in Franklin Templeton Investments.
- ------------------------------------------------------------------------------------------------------------------------------------
JAMES M. DAVIS (1952) Chief Chief Compliance Not Applicable Not Applicable
One Franklin Parkway Compliance Officer since 2004
San Mateo, CA 94403-1906 Officer and and Vice President
Vice President - AML
- AML Compliance since
Compliance February 2006
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Director, Global Compliance, Franklin Resources, Inc.; officer of some of the other subsidiaries of Franklin Resources, Inc. and of
46 of the investment companies in Franklin Templeton Investments; and FORMERLY, Director of Compliance, Franklin Resources, Inc.
(1994-2001).
- ------------------------------------------------------------------------------------------------------------------------------------
MICHAEL J. EMBLER (1964) Senior Vice Since 2005 Not Applicable Not Applicable
101 John F. Kennedy Parkway President
Short Hills, NJ 07078-2789 and Chief
Investment
Officer
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Senior Vice President and Chief Investment Officer, Franklin Mutual Advisers, LLC; and officer of two of the investment companies in
Franklin Templeton Investments.
- ------------------------------------------------------------------------------------------------------------------------------------
Annual Report | 53
- ------------------------------------------------------------------------------------------------------------------------------------
NUMBER OF PORTFOLIOS IN
NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN
AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- ------------------------------------------------------------------------------------------------------------------------------------
JIMMY D. GAMBILL (1947) Senior Vice Since 2002 Not Applicable Not Applicable
500 East Broward Blvd. President
Suite 2100 and Chief
Fort Lauderdale, FL 33394-3091 Executive
Officer -
Finance and
Administration
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
President, Franklin Templeton Services, LLC; Senior Vice President, Templeton Worldwide, Inc.; and officer of some of the other
subsidiaries of Franklin Resources, Inc. and of 46 of the investment companies in Franklin Templeton Investments.
- ------------------------------------------------------------------------------------------------------------------------------------
DAVID P. GOSS (1947) Vice President Since 2000 Not Applicable Not Applicable
One Franklin Parkway
San Mateo, CA 94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Senior Associate General Counsel, Franklin Templeton Investments; officer and director of one of the subsidiaries of Franklin
Resources, Inc.; and officer of 46 of the investment companies in Franklin Templeton Investments.
- ------------------------------------------------------------------------------------------------------------------------------------
STEVEN J. GRAY (1955) Secretary Since 2005 Not Applicable Not Applicable
One Franklin Parkway
San Mateo, CA 94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Senior Associate General Counsel, Franklin Templeton Investments; and officer of 41 of the investment companies in Franklin
Templeton Investments.
- ------------------------------------------------------------------------------------------------------------------------------------
BARBARA J. GREEN (1947) Vice President Since 2000 Not Applicable Not Applicable
One Franklin Parkway
San Mateo, CA 94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Vice President, Deputy General Counsel and Secretary, Franklin Resources, Inc.; Secretary and Senior Vice President, Templeton
Worldwide, Inc.; Secretary, Franklin Advisers, Inc., Franklin Advisory Services, LLC, Franklin Investment Advisory Services, LLC,
Franklin Mutual Advisers, LLC, Franklin Templeton Institutional, LLC, Franklin Templeton Investor Services, LLC, Franklin Templeton
Services, LLC, Franklin Templeton Distributors, Inc., Templeton Investment Counsel, LLC, and Templeton/Franklin Investment Services,
Inc.; Vice President, Templeton Global Advisors Limited; and officer of some of the other subsidiaries of Franklin Resources, Inc.
and of 46 of the investment companies in Franklin Templeton Investments; and FORMERLY, Deputy Director, Division of Investment
Management, Executive Assistant and Senior Advisor to the Chairman, Counselor to the Chairman, Special Counsel and Attorney Fellow,
U.S. Securities and Exchange Commission (1986-1995); Attorney, Rogers & Wells (until 1986); and Judicial Clerk, U.S. District Court
(District of Massachusetts) (until 1979).
- ------------------------------------------------------------------------------------------------------------------------------------
PETER A. LANGERMAN (1955) President Since 2005 Not Applicable Not Applicable
101 John F. Kennedy Parkway and Chief
Short Hills, NJ 07078-2702 Executive
Officer -
Investment
Management
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Chairman of the Board, Chief Executive Officer and President, Franklin Mutual Advisers, LLC; and officer of two of the investment
companies in Franklin Templeton Investments; and FORMERLY, Director, New Jersey's Division of Investment.
- ------------------------------------------------------------------------------------------------------------------------------------
54 | Annual Report
- ------------------------------------------------------------------------------------------------------------------------------------
NUMBER OF PORTFOLIOS IN
NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN
AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- ------------------------------------------------------------------------------------------------------------------------------------
GREGORY R. SEWARD (1956) Treasurer Since 2005 Not Applicable Not Applicable
500 East Broward Blvd.
Suite 2100
Fort Lauderdale, FL 33394-3091
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Vice President, Franklin Templeton Services, LLC; officer of 16 of the investment companies in Franklin Templeton Investments; and
FORMERLY, Vice President, JPMorgan Chase (2000-2004) and American General Financial Group (1991-2000).
- ------------------------------------------------------------------------------------------------------------------------------------
CRAIG S. TYLE (1960) Vice President Since 2005 Not Applicable Not Applicable
One Franklin Parkway
San Mateo, CA 94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
General Counsel and Executive Vice President, Franklin Resources, Inc.; officer of some of the other subsidiaries of Franklin
Resources, Inc. and of 46 of the investment companies in Franklin Templeton Investments; and FORMERLY, Partner, Shearman & Sterling,
LLP (2004-2005); and General Counsel, Investment Company Institute (ICI) (1997-2004).
- ------------------------------------------------------------------------------------------------------------------------------------
GALEN G. VETTER (1951) Chief Financial Since 2004 Not Applicable Not Applicable
500 East Broward Blvd. Officer and
Suite 2100 Chief
Fort Lauderdale, FL 33394-3091 Accounting
Officer
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Senior Vice President, Franklin Templeton Services, LLC; officer of 46 of the investment companies in Franklin Templeton
Investments; and FORMERLY, Managing Director, RSM McGladrey, Inc. (1999-2004); and Partner, McGladrey & Pullen, LLP (1979-1987 and
1991-2004).
- ------------------------------------------------------------------------------------------------------------------------------------
* We base the number of portfolios on each separate series of the U.S.
registered investment companies within the Franklin Templeton Investments
fund complex. These portfolios have a common investment manager or
affiliated investment managers.
** William J. Lippman is considered to be an interested person of Mutual
Series under the federal securities laws due to his position as an officer
of some of the subsidiaries of Franklin Resources, Inc., which is the
parent company of Mutual Series' investment manager and distributor.
Note: Subsequent to December 31, 2006, Leonard Rubin and Anne M. Tatlock ceased
to be a director of the Fund.
THE FUND'S BOARD OF DIRECTORS HAS DETERMINED THAT CERTAIN OF THE MEMBERS OF THE
AUDIT COMMITTEE, INCLUDING ANN TORRE BATES, ARE AUDIT COMMITTEE FINANCIAL
EXPERTS, AND "INDEPENDENT," UNDER THOSE PROVISIONS OF THE SARBANES-OXLEY ACT OF
2002, AND THE RULES AND FORM AMENDMENTS ADOPTED BY THE SECURITIES AND EXCHANGE
COMMISSION, RELATING TO AUDIT COMMITTEE FINANCIAL EXPERTS.
THE STATEMENT OF ADDITIONAL INFORMATION (SAI) INCLUDES ADDITIONAL INFORMATION
ABOUT THE BOARD MEMBERS AND IS AVAILABLE, WITHOUT CHARGE, UPON REQUEST.
SHAREHOLDERS MAY CALL 1-800/DIAL BEN (1-800/342-5236) TO REQUEST THE SAI.
Annual Report | 55
Mutual Qualified Fund
SHAREHOLDER INFORMATION
PROXY VOTING POLICIES AND PROCEDURES
The Fund has established Proxy Voting Policies and Procedures ("Policies") that
the Fund uses to determine how to vote proxies relating to portfolio securities.
Shareholders may view the Fund's complete Policies online at
franklintempleton.com. Alternatively, shareholders may request copies of the
Policies free of charge by calling the Proxy Group collect at 1-954/527-7678 or
by sending a written request to: Franklin Templeton Companies, LLC, 500 East
Broward Boulevard, Suite 1500, Fort Lauderdale, FL 33394, Attention: Proxy
Group. Copies of the Fund's proxy voting records are also made available online
at franklintempleton.com and posted on the U.S. Securities and Exchange
Commission's website at sec.gov and reflect the most recent 12-month period
ended June 30.
QUARTERLY STATEMENT OF INVESTMENTS
The Fund files a complete statement of investments with the U.S. Securities and
Exchange Commission for the first and third quarters for each fiscal year on
Form N-Q. Shareholders may view the filed Form N-Q by visiting the Commission's
website at sec.gov. The filed form may also be viewed and copied at the
Commission's Public Reference Room in Washington, DC. Information regarding the
operations of the Public Reference Room may be obtained by calling
1-800/SEC-0330.
56 | Annual Report
Literature Request
LITERATURE REQUEST. TO RECEIVE A BROCHURE AND PROSPECTUS, PLEASE CALL US AT
1-800/DIAL BEN(R) (1-800/342-5236) OR VISIT FRANKLINTEMPLETON.COM. INVESTORS
SHOULD CAREFULLY CONSIDER A FUND'S INVESTMENT GOALS, RISKS, CHARGES AND EXPENSES
BEFORE INVESTING. THE PROSPECTUS CONTAINS THIS AND OTHER INFORMATION. PLEASE
CAREFULLY READ THE PROSPECTUS BEFORE INVESTING. To ensure the highest quality of
service, we may monitor, record and access telephone calls to or from our
service departments. These calls can be identified by the presence of a regular
beeping tone.
FRANKLIN TEMPLETON INVESTMENTS
INTERNATIONAL
Mutual European Fund
Templeton BRIC Fund
Templeton China World Fund
Templeton Developing Markets Trust
Templeton Emerging Markets Small Cap Fund
Templeton Foreign Fund
Templeton Foreign Smaller Companies Fund
Templeton International (Ex EM) Fund 1
GLOBAL
Mutual Discovery Fund
Templeton Global Long-Short Fund
Templeton Global Opportunities Trust
Templeton Global Smaller Companies Fund
Templeton Growth Fund
Templeton World Fund
GROWTH
Franklin Aggressive Growth Fund
Franklin Capital Growth Fund
Franklin Flex Cap Growth Fund
Franklin Small-Mid Cap Growth Fund
Franklin Small Cap Growth Fund II 1
VALUE
Franklin Balance Sheet Investment Fund 2
Franklin Equity Income Fund
Franklin Large Cap Value Fund
Franklin MicroCap Value Fund 2
Franklin MidCap Value Fund
Franklin Small Cap Value Fund
Mutual Beacon Fund
Mutual Qualified Fund
Mutual Recovery Fund 3
Mutual Shares Fund
BLEND
Franklin Balanced Fund
Franklin Blue Chip Fund 1
Franklin Convertible Securities Fund
Franklin Growth Fund
Franklin Rising Dividends Fund
Franklin U.S. Long-Short Fund
SECTOR
Franklin Biotechnology Discovery Fund
Franklin DynaTech Fund
Franklin Global Communications Fund
Franklin Global Health Care Fund
Franklin Global Real Estate Fund
Franklin Gold and Precious Metals Fund
Franklin Natural Resources Fund
Franklin Real Estate Securities Fund
Franklin Technology Fund
Franklin Utilities Fund
Mutual Financial Services Fund
ASSET ALLOCATION
Franklin Templeton Corefolio Allocation Fund
Franklin Templeton Founding Funds Allocation Fund
Franklin Templeton Perspectives Allocation Fund
TARGET FUNDS
Franklin Templeton Conservative Target Fund
Franklin Templeton Growth Target Fund
Franklin Templeton Moderate Target Fund
RETIREMENT TARGET FUNDS
Franklin Templeton 2015 Retirement Target Fund
Franklin Templeton 2025 Retirement Target Fund
Franklin Templeton 2035 Retirement Target Fund
Franklin Templeton 2045 Retirement Target Fund
INCOME
Franklin Adjustable U.S. Government Securities Fund 4
Franklin Floating Rate Daily Access Fund
Franklin High Income Fund 5
Franklin Income Fund
Franklin Limited Maturity U.S. Government Securities Fund 4
Franklin Low Duration Total Return Fund
Franklin Real Return Fund
Franklin Strategic Income Fund
Franklin Strategic Mortgage Portfolio
Franklin Templeton Hard Currency Fund
Franklin Total Return Fund
Franklin U.S. Government Securities Fund 4
Templeton Global Bond Fund
Templeton Income Fund
TAX-FREE INCOME 6
NATIONAL FUNDS
Double Tax-Free Income Fund
Federal Tax-Free Income Fund
High Yield Tax-Free Income Fund
Insured Tax-Free Income Fund 7
LIMITED-TERM FUNDS
California Limited-Term Tax-Free Income Fund
Federal Limited-Term Tax-Free Income Fund
New York Limited-Term Tax-Free Income Fund
INTERMEDIATE-TERM FUNDS
California Intermediate-Term Tax-Free Income Fund
Federal Intermediate-Term Tax-Free Income Fund
New York Intermediate-Term Tax-Free Income Fund
STATE-SPECIFIC
Alabama Michigan 7
Arizona Minnesota 7
California 8 Missouri
Colorado New Jersey
Connecticut New York 8
Florida 8 North Carolina
Georgia Ohio 7
Kentucky Oregon
Louisiana Pennsylvania
Maryland Tennessee
Massachusetts 7 Virginia
INSURANCE FUNDS
Franklin Templeton Variable Insurance Products Trust 9
1. The fund is closed to new investors. Existing shareholders can continue
adding to their accounts.
2. The fund is only open to existing shareholders and select retirement
plans.
3. The fund is a continuously offered, closed-end fund. Shares may be
purchased daily; there is no daily redemption. However, each quarter,
pending board approval, the fund will authorize the repurchase of 5%-25%
of the outstanding number of shares. Investors may tender all or a portion
of their shares during the tender period.
4. An investment in the fund is neither insured nor guaranteed by the U.S.
government or by any other entity or institution.
5. Effective 10/1/06, Franklin's AGE High Income Fund changed its name to
Franklin High Income Fund. The fund's investment goal and strategy
remained the same.
6. For investors subject to the alternative minimum tax, a small portion of
fund dividends may be taxable. Distributions of capital gains are
generally taxable.
7. Portfolio of insured municipal securities.
8. These funds are available in two or more variations, including long-term
portfolios, portfolios of insured securities, a high-yield portfolio (CA)
and limited-term, intermediate-term and money market portfolios (CA and
NY).
9. The funds of the Franklin Templeton Variable Insurance Products Trust are
generally available only through insurance company variable contracts.
01/07 Not part of the annual report
[LOGO](R)
FRANKLIN TEMPLETON One Franklin Parkway
INVESTMENTS San Mateo, CA 94403-1906
o WANT TO RECEIVE THIS DOCUMENT FASTER VIA EMAIL?
Eligible shareholders can sign up for eDelivery at
franklintempleton.com. See inside for details.
ANNUAL REPORT AND SHAREHOLDER LETTER
MUTUAL QUALIFIED FUND
INVESTMENT MANAGER
Franklin Mutual Advisers, LLC
101 John F. Kennedy Parkway
Short Hills, NJ 07078
DISTRIBUTOR
Franklin Templeton Distributors, Inc.
1-800/DIAL BEN(R)
franklintempleton.com
SHAREHOLDER SERVICES
1-800/632-2301 - (Class A, B & C)
1-800/448-FUND - (Class Z)
Authorized for distribution only when accompanied or preceded by a prospectus.
Investors should carefully consider a fund's investment goals, risks, charges
and expenses before investing. The prospectus contains this and other
information; please read it carefully before investing.
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
identified by the presence of a regular beeping tone.
475 A2006 02/07
MUTUAL EUROPEAN FUND
[GRAPHIC OMITTED]
- --------------------------------------------------------------------------------
DECEMBER 31, 2006
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
ANNUAL REPORT AND SHAREHOLDER LETTER INTERNATIONAL
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
WANT TO RECEIVE
THIS DOCUMENT
FASTER VIA EMAIL?
MUTUAL EUROPEAN FUND
Eligible shareholders can
sign up for eDelivery at
franklintempleton.com.
See inside for details.
- --------------------------------------------------------------------------------
[LOGO](R)
FRANKLIN TEMPLETON
INVESTMENTS
Franklin o Templeton o MUTUAL SERIES
Thank You For Your
Continued Participation
At Mutual Series, we are pleased so many investors
share our long-term investment philosophy and have
remained shareholders for many years. Your ongoing
support plays a significant role in contributing to
the funds' success.
SPECIALIZED EXPERTISE Mutual Series is part of Franklin Templeton
Investments, which offers the specialized expertise
of three world-class investment management groups --
Franklin, Templeton and Mutual Series. Mutual
Series is dedicated to a unique style of value
investing, searching aggressively for opportunity
among what we believe are undervalued stocks, as
well as arbitrage situations and distressed
securities. Franklin is a recognized leader in
fixed income investing and also brings expertise in
growth- and value-style U.S. equity investing.
Templeton pioneered international investing and,
with offices in over 25 countries, offers investors
a truly global perspective.
TRUE DIVERSIFICATION Because these management groups work independently
and adhere to different investment approaches,
Franklin, Templeton and Mutual Series funds
typically have distinct portfolios. That's why the
funds can be used to build truly diversified
allocation plans covering every major asset class.
RELIABILITY YOU CAN TRUST Franklin Templeton Investments seeks to consistently
provide investors with exceptional risk-adjusted
returns over the long term, as well as the reliable,
accurate and personal service that has helped the
firm become one of the most trusted names in
financial services.
- --------------------------------------------------------------------------------
MUTUAL FUNDS | RETIREMENT PLANS | 529 COLLEGE SAVINGS PLANS | SEPARATE ACCOUNTS
- --------------------------------------------------------------------------------
[GRAPHIC OMITTED]
Annual Report
Mutual European Fund
YOUR FUND'S GOALS AND MAIN INVESTMENTS: Mutual European Fund seeks capital
appreciation, with income as a secondary goal, by investing at least 80% of its
net assets in securities of European companies that the manager believes are
available at market prices less than their intrinsic value. The Fund defines
European companies as issuers organized under the laws of, or whose principal
business operations are located in, or who earn at least 50% of their revenue
from, European countries, as defined in the prospectus.
- --------------------------------------------------------------------------------
PERFORMANCE DATA REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE FUTURE
RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU MAY HAVE
A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY DIFFER FROM
FIGURES SHOWN. PLEASE VISIT FRANKLINTEMPLETON.COM OR CALL 1-800/342-5236 FOR
MOST RECENT MONTH-END PERFORMANCE.
- --------------------------------------------------------------------------------
This annual report for Mutual European Fund covers the fiscal year ended
December 31, 2006.
PERFORMANCE OVERVIEW
Mutual European Fund - Class Z posted a +27.30% cumulative total return for the
12 months ended December 31, 2006. The Fund underperformed its benchmark, the
Morgan Stanley Capital International (MSCI) All Country (AC) Europe Index, which
returned +34.43% (in U.S. dollars) for the same period. 1 You can find the
Fund's long-term performance data in the Performance Summary beginning on page
9.
ECONOMIC AND MARKET OVERVIEW
The global economy grew in 2006, although gross domestic product growth slowed
in the U.S. while it accelerated in Europe. The economic drivers remained
consistent over the past four years: strong corporate and consumer demand,
reasonably low inflation, an improving labor market, and a relatively moderate
interest rate environment, despite recent interest rate hikes by many of the
world's central banks. However, the economy also faced headwinds from elevated
energy prices, higher global interest rates and a weaker U.S. housing market.
These factors dampened investor confidence mid-year, when many equity markets
declined before rebounding later in the year.
1. Source: Standard & Poor's Micropal. The MSCI AC Europe Index is a free
float-adjusted, market capitalization-weighted index designed to measure
equity market performance in the European region. The index is unmanaged
and includes reinvested dividends. One cannot invest directly in an index,
nor is an index representative of the Fund's portfolio.
THE DOLLAR VALUE, NUMBER OF SHARES OR PRINCIPAL AMOUNT, AND NAMES OF ALL
PORTFOLIO HOLDINGS ARE LISTED IN THE FUND'S STATEMENT OF INVESTMENTS (SOI). THE
SOI BEGINS ON PAGE 20.
4 | Annual Report
Despite such challenges, global economic activity was healthy. Strong global
liquidity -- whether petrodollars, corporate cash, private equity, household
savings or central banks' reserves -- continued to search for a home. Largely as
a result, bond yield spreads over U.S. Treasuries narrowed, and equity and
commodity markets rose in the latter part of the year. The shift from risk
aversion to risk tolerance was concurrent with the U.S. Federal Reserve Board's
decisions since June to hold the federal funds target rate at 5.25%, as well as
with lower oil prices in the second half of the year.
Narrowing corporate credit spreads globally reflected greater risk tolerance,
while abundant cash supplies in the capital markets contributed to record global
merger and acquisition activity in 2006. The total value of deals announced as a
result of hostile takeovers, private equity buyouts and broad corporate
consolidation was $3.8 trillion. 2 This figure surpassed the $3.4 trillion mark
set in 2000. 2 Announced deals from private equity alone reached a record $700
billion, more than double the record set in 2005 and 20 times greater than a
decade ago. 3
With this economic backdrop, European equities had a positive year,
outperforming the U.S. market by a significant margin for the second year in a
row. Despite a sharp correction at the end of May and beginning of June,
European equities rose 20% over the 12-month period (in local currency). 1 The
historical correlation between European markets and the U.S. dollar did not hold
true in 2006. Europe's markets rose significantly while the dollar lost 10.55%
against the euro, 12.28% against the British pound and also fell against the
Swiss franc and Nordic currencies. 4
Despite strong returns in 2006, European equities ended the year priced at about
14 times consensus 2007 earnings estimates. In addition, the euro zone's
dividend yield was 3.00%, only slightly below the 3.95% yield of the 10-year
German bond. However, European equity markets faced potential challenges from a
possible U.S. economic slowdown, rising global short-term interest rates
(albeit, from historically low levels), and a continued rise in the euro's value
versus the U.S. dollar.
GEOGRAPHIC BREAKDOWN
Based on Total Net Assets as of 12/31/06
[THE FOLLOWING TABLE WAS REPRESENTED BY A BAR GRAPH IN THE PRINTED MATERIAL.]
Germany 16.5%
France 16.3%
U.K 11.7%
Netherlands 9.3%
Switzerland 6.9%
Norway 6.4%
Sweden 5.8%
Belgium 4.6%
Spain 3.1%
U.S. 2.9%
Denmark 2.8%
South Africa 2.5%
Italy 2.3%
Finland 1.9%
Other 1.1%
Short-Term Investments & Other Net Assets 5.9%
2. Source: "Can M&A's "Best of Times" Get Better?," THE WALL STREET JOURNAL,
1/2/07.
3. Source: "TPG tops buy-out league with $101bn," THE WALL STREET JOURNAL,
12/27/06.
4. Source: Exshare (via Compustat via Factset).
Annual Report | 5
TOP 10 SECTORS/INDUSTRIES
Based on Equity Securities as of 12/31/06
- -------------------------------------------------------------------------------
% OF TOTAL
NET ASSETS
- -------------------------------------------------------------------------------
Food Products 11.4%
- -------------------------------------------------------------------------------
Commercial Banks 10.2%
- -------------------------------------------------------------------------------
Tobacco 7.9%
- -------------------------------------------------------------------------------
Chemicals 6.8%
- -------------------------------------------------------------------------------
Machinery 6.3%
- -------------------------------------------------------------------------------
Oil, Gas & Consumable Fuels 4.7%
- -------------------------------------------------------------------------------
Diversified Financial Services 4.4%
- -------------------------------------------------------------------------------
Metals & Mining 4.2%
- -------------------------------------------------------------------------------
Multi-Utilities 4.1%
- -------------------------------------------------------------------------------
Diversified Telecommunication Services 3.9%
- -------------------------------------------------------------------------------
INVESTMENT STRATEGY
We follow a distinctive value investment approach, which combines investments in
what we believe are undervalued common stocks with distressed debt investing and
risk arbitrage. Our style aims to provide our shareholders with superior
risk-adjusted results over time. We employ rigorous, fundamental analysis to
find compelling situations. In our opinion, successful investing is as much
about assessing risk and containing losses as it is about achieving profits. In
choosing investments, we look at the market price of an individual company's
securities relative to our evaluation of its intrinsic value based on factors
including book value, cash flow generation, long-term earnings potential and
earnings multiples. We may invest in bankrupt or distressed companies if we
believe the market overreacted to adverse developments or failed to appreciate
positive changes.
In addition, we will generally seek to hedge the Fund's currency exposure to
focus our efforts on analyzing business fundamentals and assessing the value of
company assets and liabilities.
MANAGER'S DISCUSSION
Although we increased our European merger arbitrage activity during the year
under review, our equity portfolio was the largest contributor to Fund
performance. Three of the Fund's best performing stock investments were
Euronext, a European securities exchange; Schindler Holding, a Swiss elevator
manufacturer; and Anglo American, a global mining and natural resources group.
Our investment in Euronext appreciated 119% in local currency during the year
under review amid a favorable environment for global exchanges. Fundamentally,
trading volumes in stocks and derivatives were strong and the company kept costs
under control. Euronext announced a plan to return approximately $1.2 billion to
shareholders in the form of dividends and buy-backs. The company's return of
excess capital to shareholders contributed to our overall investment return. In
addition, shareholders of Euronext and the New York Stock Exchange voted for the
formation of the first transatlantic securities exchange, having agreed to
create a new company at a price as of December 2006 that a vast majority of
shareholders recognized as attractive.
Schindler Holding gained 49% in local currency during the Fund's fiscal year. As
in 2005, the company benefited from favorable market conditions in emerging
markets and Europe as various facilities were upgraded. Despite the year's
strong performance, we continued to see meaningful upside potential in the
stock, which in our assessment traded at an attractive valuation at period-end.
6 | Annual Report
U.K.-headquartered Anglo American has substantial interests in platinum, gold,
diamonds, base and ferrous metals, and paper and packaging. The stock
appreciated 33% in local currency during the year, following strong performance
in 2005. Anglo and its mining sector peers benefited from high metals prices
driven by sustained global demand, particularly from China. In addition, the
company's management began to implement its previously outlined restructuring
plan, including a substantial share buyback program. In October, Anglo announced
the nomination of a new chief executive officer to succeed the current
officeholder on March 1, 2007.
Although many of our investments performed well in 2006, some of the Fund's
holdings posted negative results. Three positions that declined in value during
the year were NTL, the U.K.'s largest cable television provider; Aker Drilling,
a Norwegian offshore driller; and Highland Gold Mining, a U.K.-based gold mining
company operating mainly in Russia.
NTL generated lackluster operating results as it continued to restructure its
NTL unit while integrating its early 2006 acquisition of cable TV operator
Telewest, as well as its purchase of mobile telephone company Virgin Mobile.
NTL's share price was also negatively impacted by news late in the year that the
company was interested in pursuing a transaction with ITV, a U.K. media firm. By
period-end, such a transaction appeared unlikely following the acquisition of an
18% position in ITV by competitor British Sky Broadcasting. For the 12-month
period, NTL shares declined 6%.
Aker Drilling provides contract drilling services, mainly for the ultra-deep
offshore industry. The stock, which we purchased during the period, lost 4% in
local currency from the time we bought it through year-end. The decline was
largely due to concerns regarding the industry's rising labor costs.
Highland Gold Mining's stock fell 37% in local currency from the beginning of
the period until we sold it. The company experienced a difficult year as its
Russian Darasun mine was severely impacted by a fatal fire in September, which
led to reduced output and higher costs. The mine produced close to 12,000 ounces
of gold in the first six months of the year, equal to about 13% of Highland
Gold's total gold output. As we no longer viewed the stock's risk/reward profile
as attractive, we sold our relatively small position by period-end.
Finally, investors should note that we remained substantially hedged to the U.S.
dollar versus European currencies, especially the euro. Since the dollar was
generally weaker over the review period, the portfolio returns were lower than
they would have been had we not hedged the foreign currency exposure.
TOP 10 HOLDINGS
12/31/06
- -------------------------------------------------------------------------------
COMPANY % OF TOTAL
SECTOR/INDUSTRY, COUNTRY NET ASSETS
- -------------------------------------------------------------------------------
Orkla ASA 3.2%
FOOD PRODUCTS, NORWAY
- -------------------------------------------------------------------------------
Imperial Tobacco Group PLC 2.8%
TOBACCO, U.K.
- -------------------------------------------------------------------------------
British American Tobacco PLC 2.7%
TOBACCO, U.K.
- -------------------------------------------------------------------------------
Nestle SA 2.5%
FOOD PRODUCTS, SWITZERLAND
- -------------------------------------------------------------------------------
Anglo American PLC 2.5%
METALS & MINING, SOUTH AFRICA
- -------------------------------------------------------------------------------
Siemens AG 2.4%
INDUSTRIAL CONGLOMERATES, GERMANY
- -------------------------------------------------------------------------------
Altadis SA 2.4%
TOBACCO, SPAIN
- -------------------------------------------------------------------------------
Fortis 2.3%
DIVERSIFIED FINANCIAL SERVICES, BELGIUM
- -------------------------------------------------------------------------------
Schindler Holding AG, ord. & Registered 2.3%
MACHINERY, SWITZERLAND
- -------------------------------------------------------------------------------
Linde AG 2.3%
CHEMICALS, GERMANY
- -------------------------------------------------------------------------------
Annual Report | 7
Thank you for your continued participation in Mutual European Fund. We
look forward to serving your future investment needs.
[PHOTO] /s/ Philippe Brugere-Trelat
Philippe Brugere-Trelat
Portfolio Manager
/s/ Katrina Dudley
Katrina Dudley, CFA
Assistant Portfolio Manager
Mutual European Fund
THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS
AS OF DECEMBER 31, 2006, THE END OF THE REPORTING PERIOD. THE WAY WE IMPLEMENT
OUR MAIN INVESTMENT STRATEGIES AND THE RESULTING PORTFOLIO HOLDINGS MAY CHANGE
DEPENDING ON FACTORS SUCH AS MARKET AND ECONOMIC CONDITIONS. THESE OPINIONS MAY
NOT BE RELIED UPON AS INVESTMENT ADVICE OR AN OFFER FOR A PARTICULAR SECURITY.
THE INFORMATION IS NOT A COMPLETE ANALYSIS OF EVERY ASPECT OF ANY MARKET,
COUNTRY, INDUSTRY, SECURITY OR THE FUND. STATEMENTS OF FACT ARE FROM SOURCES
CONSIDERED RELIABLE, BUT THE INVESTMENT MANAGER MAKES NO REPRESENTATION OR
WARRANTY AS TO THEIR COMPLETENESS OR ACCURACY. ALTHOUGH HISTORICAL PERFORMANCE
IS NO GUARANTEE OF FUTURE RESULTS, THESE INSIGHTS MAY HELP YOU UNDERSTAND OUR
INVESTMENT MANAGEMENT PHILOSOPHY.
- --------------------------------------------------------------------------------
PHILIPPE BRUGERE-TRELAT has been lead portfolio manager for Mutual European Fund
since 2005. He has been a member of the management team of the Mutual Series
Funds since 2004, when he rejoined Franklin Templeton Investments. Previously,
he was president and portfolio manager of Eurovest. Between 1984 and 1994, Mr.
Brugere-Trelat was employed at Heine Securities Corporation, the Fund's former
manager.
KATRINA DUDLEY, effective January 1, 2007, assumes assistant portfolio manager
responsibilities for Mutual European Fund. She follows industrial companies
(foreign and domestic) including transportation, manufacturers, machinery,
electrical equipment and general industrial, as well as domestic health care
companies. Prior to joining Franklin Templeton Investments in 2002, Ms. Dudley
was an investment analyst at Federated Investors, Inc., responsible for the
technology and health care sectors. From 1995 to 2001, Ms. Dudley was a senior
manager in the corporate finance division of Ernst & Young LLP, where she
specialized in valuation and litigation consulting.
CHARLES LAHR was an assistant portfolio for Mutual European Fund through
December 2006. He has been a portfolio manager for Mutual Financial Services
Fund since 2004 and, effective January 1, 2007, assumes portfolio manager
responsibilities for Mutual Discovery Fund. He joined Franklin Templeton
Investments in 2003. Previously, he was a senior analyst for the State of
Wisconsin Investment Board and also worked for U.S. Bancorp and the Principal
Financial Group.
- --------------------------------------------------------------------------------
8 | Annual Report
Performance Summary as of 12/31/06
Your dividend income will vary depending on dividends or interest paid by
securities in the Fund's portfolio, adjusted for operating expenses of each
class. Capital gain distributions are net profits realized from the sale of
portfolio securities. The performance table and graphs do not reflect any taxes
that a shareholder would pay on Fund dividends, capital gain distributions, if
any, or any realized gains on the sale of Fund shares. Total return reflects
reinvestment of the Fund's dividends and capital gain distributions, if any, and
any unrealized gains or losses.
PRICE AND DISTRIBUTION INFORMATION
- -----------------------------------------------------------------------------
CLASS Z (SYMBOL: MEURX) CHANGE 12/31/06 12/31/05
- -----------------------------------------------------------------------------
Net Asset Value (NAV) +$3.29 $24.59 $21.30
- -----------------------------------------------------------------------------
DISTRIBUTIONS (1/1/06-12/31/06)
- -----------------------------------------------------------------------------
Dividend Income $0.6581
- -----------------------------------------------------------------------------
Short-Term Capital Gain $0.1560
- -----------------------------------------------------------------------------
Long-Term Capital Gain $1.5988
- -----------------------------------------------------------------------------
TOTAL $2.4129
- -----------------------------------------------------------------------------
CLASS A (SYMBOL: TEMIX) CHANGE 12/31/06 12/31/05
- -----------------------------------------------------------------------------
Net Asset Value (NAV) +$3.20 $24.19 $20.99
- -----------------------------------------------------------------------------
DISTRIBUTIONS (1/1/06-12/31/06)
- -----------------------------------------------------------------------------
Dividend Income $0.5936
- -----------------------------------------------------------------------------
Short-Term Capital Gain $0.1560
- -----------------------------------------------------------------------------
Long-Term Capital Gain $1.5988
- -----------------------------------------------------------------------------
TOTAL $2.3484
- -----------------------------------------------------------------------------
CLASS B (SYMBOL: TEUBX) CHANGE 12/31/06 12/31/05
- -----------------------------------------------------------------------------
Net Asset Value (NAV) +$3.07 $23.65 $20.58
- -----------------------------------------------------------------------------
DISTRIBUTIONS (1/1/06-12/31/06)
- -----------------------------------------------------------------------------
Dividend Income $0.4261
- -----------------------------------------------------------------------------
Short-Term Capital Gain $0.1560
- -----------------------------------------------------------------------------
Long-Term Capital Gain $1.5988
- -----------------------------------------------------------------------------
TOTAL $2.1809
- -----------------------------------------------------------------------------
CLASS C (SYMBOL: TEURX) CHANGE 12/31/06 12/31/05
- -----------------------------------------------------------------------------
Net Asset Value (NAV) +$3.19 $24.17 $20.98
- -----------------------------------------------------------------------------
DISTRIBUTIONS (1/1/06-12/31/06)
- -----------------------------------------------------------------------------
Dividend Income $0.4279
- -----------------------------------------------------------------------------
Short-Term Capital Gain $0.1560
- -----------------------------------------------------------------------------
Long-Term Capital Gain $1.5988
- -----------------------------------------------------------------------------
TOTAL $2.1827
- -----------------------------------------------------------------------------
Annual Report | 9
Performance Summary (CONTINUED)
PERFORMANCE 1
CUMULATIVE TOTAL RETURN EXCLUDES SALES CHARGES. AVERAGE ANNUAL TOTAL RETURN AND
VALUE OF $10,000 INVESTMENT INCLUDE MAXIMUM SALES CHARGES. CLASS Z: NO SALES
CHARGES; CLASS A: 5.75% MAXIMUM INITIAL SALES CHARGE; CLASS B: CONTINGENT
DEFERRED SALES CHARGE (CDSC) DECLINING FROM 4% TO 1% OVER SIX YEARS, AND
ELIMINATED THEREAFTER; CLASS C: 1% CDSC IN FIRST YEAR ONLY. THE FUND MAY CHARGE
A 2% FEE ON REDEMPTIONS MADE WITHIN SEVEN DAYS OF PURCHASE.
- ----------------------------------------------------------------------------------------
CLASS Z 1-YEAR 5-YEAR 10-YEAR
- ----------------------------------------------------------------------------------------
Cumulative Total Return 2 +27.30% +123.97% +362.49%
- ----------------------------------------------------------------------------------------
Average Annual Total Return 3 +27.30% +17.50% +16.55%
- ----------------------------------------------------------------------------------------
Value of $10,000 Investment 4 $12,730 $22,397 $46,249
- ----------------------------------------------------------------------------------------
CLASS A 1-YEAR 5-YEAR 10-YEAR
- ----------------------------------------------------------------------------------------
Cumulative Total Return 2 +26.96% +120.17% +344.71%
- ----------------------------------------------------------------------------------------
Average Annual Total Return 3 +19.66% +15.72% +15.41%
- ----------------------------------------------------------------------------------------
Value of $10,000 Investment 4 $11,966 $20,752 $41,929
- ----------------------------------------------------------------------------------------
CLASS B 1-YEAR 5-YEAR INCEPTION (1/1/99)
- ----------------------------------------------------------------------------------------
Cumulative Total Return 2 +26.01% +113.03% +230.58%
- ----------------------------------------------------------------------------------------
Average Annual Total Return 3 +22.01% +16.11% +16.13%
- ----------------------------------------------------------------------------------------
Value of $10,000 Investment 4 $12,201 $21,103 $33,058
- ----------------------------------------------------------------------------------------
CLASS C 1-YEAR 5-YEAR 10-YEAR
- ----------------------------------------------------------------------------------------
Cumulative Total Return 2 +26.10% +113.04% +318.82%
- ----------------------------------------------------------------------------------------
Average Annual Total Return 3 +25.10% +16.33% +15.40%
- ----------------------------------------------------------------------------------------
Value of $10,000 Investment 4 $12,510 $21,304 $41,882
- ----------------------------------------------------------------------------------------
PERFORMANCE DATA REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE FUTURE
RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU MAY HAVE
A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY DIFFER FROM
FIGURES SHOWN.
FOR MOST RECENT MONTH-END PERFORMANCE, SEE "FUNDS AND PERFORMANCE" AT
FRANKLINTEMPLETON.COM OR CALL 1-800/342-5236.
10 | Annual Report
Performance Summary (CONTINUED)
TOTAL RETURN INDEX COMPARISON FOR HYPOTHETICAL $10,000 INVESTMENT 1
Total return represents the change in value of an investment over the periods
shown. It includes any current, applicable, maximum sales charge, Fund expenses,
account fees and reinvested distributions. The unmanaged index includes
reinvestment of any income or distributions. It differs from the Fund in
composition and does not pay management fees or expenses. One cannot invest
directly in an index.
CLASS Z (1/1/97-12/31/06)
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE GRAPH IN THE PRINTED MATERIAL.]
Date Mutual European Fund MSCI AC Europe Index 5
--------- -------------------- ----------------------
1/1/1997 $10,000 $10,000
1/31/1997 $10,457 $10,066
2/28/1997 $10,676 $10,204
3/31/1997 $10,817 $10,526
4/30/1997 $10,799 $10,468
5/31/1997 $10,939 $10,922
6/30/1997 $11,308 $11,468
7/31/1997 $11,801 $11,997
8/31/1997 $11,589 $11,323
9/30/1997 $12,358 $12,436
10/31/1997 $11,890 $11,825
11/30/1997 $12,013 $12,001
12/31/1997 $12,316 $12,478
1/31/1998 $12,521 $12,926
2/28/1998 $13,205 $13,937
3/31/1998 $14,153 $14,933
4/30/1998 $14,515 $15,256
5/31/1998 $15,023 $15,494
6/30/1998 $14,681 $15,645
7/31/1998 $14,564 $15,982
8/31/1998 $12,906 $13,901
9/30/1998 $11,721 $13,344
10/31/1998 $12,063 $14,416
11/30/1998 $12,846 $15,202
12/31/1998 $12,899 $15,869
1/31/1999 $12,930 $15,790
2/28/1999 $13,095 $15,407
3/31/1999 $13,393 $15,587
4/30/1999 $14,175 $16,072
5/31/1999 $14,205 $15,331
6/30/1999 $14,700 $15,592
7/31/1999 $14,720 $15,763
8/31/1999 $14,856 $15,929
9/30/1999 $14,856 $15,816
10/31/1999 $15,335 $16,388
11/30/1999 $16,626 $16,847
12/31/1999 $18,937 $18,622
1/31/2000 $19,363 $17,319
2/29/2000 $21,841 $18,211
3/31/2000 $21,168 $18,649
4/30/2000 $20,585 $17,835
5/31/2000 $20,619 $17,680
6/30/2000 $20,634 $18,020
7/31/2000 $20,764 $17,736
8/31/2000 $21,284 $17,513
9/30/2000 $20,764 $16,695
10/31/2000 $21,001 $16,560
11/30/2000 $20,918 $15,856
12/31/2000 $21,676 $16,970
1/31/2001 $22,277 $16,996
2/28/2001 $22,151 $15,479
3/31/2001 $21,285 $14,330
4/30/2001 $21,928 $15,377
5/31/2001 $22,305 $14,651
6/30/2001 $22,166 $14,102
7/31/2001 $22,040 $14,119
8/31/2001 $21,830 $13,758
9/30/2001 $19,336 $12,375
10/31/2001 $19,966 $12,786
11/30/2001 $20,387 $13,312
12/31/2001 $20,649 $13,663
1/31/2002 $21,093 $12,973
2/28/2002 $21,408 $12,954
3/31/2002 $22,253 $13,669
4/30/2002 $22,711 $13,588
5/31/2002 $22,840 $13,560
6/30/2002 $21,968 $13,083
7/31/2002 $20,264 $11,634
8/31/2002 $20,293 $11,639
9/30/2002 $19,007 $10,121
10/31/2002 $19,065 $11,099
11/30/2002 $19,253 $11,648
12/31/2002 $19,057 $11,224
1/31/2003 $18,528 $10,697
2/28/2003 $17,955 $10,361
3/31/2003 $18,219 $10,204
4/30/2003 $19,674 $11,604
5/31/2003 $20,923 $12,378
6/30/2003 $21,202 $12,507
7/31/2003 $21,690 $12,756
8/31/2003 $22,148 $12,756
9/30/2003 $22,503 $13,021
10/31/2003 $23,449 $13,879
11/30/2003 $24,307 $14,465
12/31/2003 $25,316 $15,661
1/31/2004 $25,602 $15,850
2/29/2004 $26,447 $16,329
3/31/2004 $26,342 $15,858
4/30/2004 $26,130 $15,713
5/31/2004 $26,206 $15,977
6/30/2004 $26,795 $16,200
7/31/2004 $26,490 $15,758
8/31/2004 $26,566 $15,784
9/30/2004 $27,357 $16,427
10/31/2004 $28,057 $17,028
11/30/2004 $29,547 $18,265
12/31/2004 $30,779 $19,044
1/31/2005 $30,264 $18,706
2/28/2005 $31,808 $19,675
3/31/2005 $31,138 $19,157
4/30/2005 $30,732 $18,692
5/31/2005 $31,231 $18,792
6/30/2005 $31,964 $19,076
7/31/2005 $33,155 $19,798
8/31/2005 $33,703 $20,133
9/30/2005 $34,455 $20,668
10/31/2005 $33,923 $19,991
11/30/2005 $34,894 $20,365
12/31/2005 $36,330 $21,084
1/31/2006 $37,541 $22,510
2/28/2006 $38,564 $22,561
3/31/2006 $40,457 $23,404
4/30/2006 $40,952 $24,660
5/31/2006 $39,519 $23,943
6/30/2006 $39,655 $24,033
7/31/2006 $40,055 $24,437
8/31/2006 $41,496 $25,206
9/30/2006 $42,225 $25,358
10/31/2006 $43,597 $26,457
11/30/2006 $44,361 $27,457
12/31/2006 $46,249 $28,342
AVERAGE ANNUAL TOTAL RETURN
- ------------------------------------------
CLASS Z 12/31/06
- ------------------------------------------
1-Year +27.30%
- ------------------------------------------
5-Year +17.50%
- ------------------------------------------
10-Year +16.55%
- ------------------------------------------
CLASS A (1/1/97-12/31/06)
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE GRAPH IN THE PRINTED MATERIAL.]
Date Mutual European Fund MSCI AC Europe Index 5
--------- -------------------- ----------------------
1/1/1997 $9,428 $10,000
1/31/1997 $9,859 $10,066
2/28/1997 $10,058 $10,204
3/31/1997 $10,191 $10,526
4/30/1997 $10,174 $10,468
5/31/1997 $10,298 $10,922
6/30/1997 $10,646 $11,468
7/31/1997 $11,104 $11,997
8/31/1997 $10,904 $11,323
9/30/1997 $11,620 $12,436
10/31/1997 $11,179 $11,825
11/30/1997 $11,287 $12,001
12/31/1997 $11,569 $12,478
1/31/1998 $11,762 $12,926
2/28/1998 $12,388 $13,937
3/31/1998 $13,262 $14,933
4/30/1998 $13,594 $15,256
5/31/1998 $14,072 $15,494
6/30/1998 $13,750 $15,645
7/31/1998 $13,614 $15,982
8/31/1998 $12,064 $13,901
9/30/1998 $10,948 $13,344
10/31/1998 $11,260 $14,416
11/30/1998 $11,988 $15,202
12/31/1998 $12,039 $15,869
1/31/1999 $12,068 $15,790
2/28/1999 $12,213 $15,407
3/31/1999 $12,483 $15,587
4/30/1999 $13,217 $16,072
5/31/1999 $13,227 $15,331
6/30/1999 $13,679 $15,592
7/31/1999 $13,698 $15,763
8/31/1999 $13,825 $15,929
9/30/1999 $13,816 $15,816
10/31/1999 $14,255 $16,388
11/30/1999 $15,446 $16,847
12/31/1999 $17,584 $18,622
1/31/2000 $17,972 $17,319
2/29/2000 $20,271 $18,211
3/31/2000 $19,641 $18,649
4/30/2000 $19,096 $17,835
5/31/2000 $19,127 $17,680
6/30/2000 $19,123 $18,020
7/31/2000 $19,245 $17,736
8/31/2000 $19,710 $17,513
9/30/2000 $19,234 $16,695
10/31/2000 $19,444 $16,560
11/30/2000 $19,367 $15,856
12/31/2000 $20,058 $16,970
1/31/2001 $20,606 $16,996
2/28/2001 $20,476 $15,479
3/31/2001 $19,679 $14,330
4/30/2001 $20,267 $15,377
5/31/2001 $20,606 $14,651
6/30/2001 $20,471 $14,102
7/31/2001 $20,340 $14,119
8/31/2001 $20,157 $13,758
9/30/2001 $17,839 $12,375
10/31/2001 $18,428 $12,786
11/30/2001 $18,808 $13,312
12/31/2001 $19,044 $13,663
1/31/2002 $19,444 $12,973
2/28/2002 $19,724 $12,954
3/31/2002 $20,498 $13,669
4/30/2002 $20,912 $13,588
5/31/2002 $21,032 $13,560
6/30/2002 $20,214 $13,083
7/31/2002 $18,653 $11,634
8/31/2002 $18,667 $11,639
9/30/2002 $17,482 $10,121
10/31/2002 $17,523 $11,099
11/30/2002 $17,684 $11,648
12/31/2002 $17,511 $11,224
1/31/2003 $17,020 $10,697
2/28/2003 $16,488 $10,361
3/31/2003 $16,720 $10,204
4/30/2003 $18,057 $11,604
5/31/2003 $19,190 $12,378
6/30/2003 $19,444 $12,507
7/31/2003 $19,883 $12,756
8/31/2003 $20,309 $12,756
9/30/2003 $20,625 $13,021
10/31/2003 $21,476 $13,879
11/30/2003 $22,259 $14,465
12/31/2003 $23,174 $15,661
1/31/2004 $23,426 $15,850
2/29/2004 $24,195 $16,329
3/31/2004 $24,097 $15,858
4/30/2004 $23,901 $15,713
5/31/2004 $23,957 $15,977
6/30/2004 $24,496 $16,200
7/31/2004 $24,200 $15,758
8/31/2004 $24,270 $15,784
9/30/2004 $24,975 $16,427
10/31/2004 $25,608 $17,028
11/30/2004 $26,975 $18,265
12/31/2004 $28,094 $19,044
1/31/2005 $27,604 $18,706
2/28/2005 $29,002 $19,675
3/31/2005 $28,382 $19,157
4/30/2005 $28,007 $18,692
5/31/2005 $28,454 $18,792
6/30/2005 $29,109 $19,076
7/31/2005 $30,180 $19,798
8/31/2005 $30,672 $20,133
9/30/2005 $31,353 $20,668
10/31/2005 $30,860 $19,991
11/30/2005 $31,743 $20,365
12/31/2005 $33,026 $21,084
1/31/2006 $34,128 $22,510
2/28/2006 $35,040 $22,561
3/31/2006 $36,755 $23,404
4/30/2006 $37,196 $24,660
5/31/2006 $35,890 $23,943
6/30/2006 $36,006 $24,033
7/31/2006 $36,375 $24,437
8/31/2006 $37,672 $25,206
9/30/2006 $38,329 $25,358
10/31/2006 $39,546 $26,457
11/30/2006 $40,235 $27,457
12/31/2006 $41,929 $28,342
AVERAGE ANNUAL TOTAL RETURN
- ------------------------------------------
CLASS A 12/31/06
- ------------------------------------------
1-Year +19.66%
- ------------------------------------------
5-Year +15.72%
- ------------------------------------------
10-Year +15.41%
- ------------------------------------------
Annual Report | 11
Performance Summary (CONTINUED)
AVERAGE ANNUAL TOTAL RETURN
- ---------------------------------------------
CLASS B 12/31/06
- ---------------------------------------------
1-Year +22.01%
- ---------------------------------------------
5-Year +16.11%
- ---------------------------------------------
Since Inception (1/1/99) +16.13%
- ---------------------------------------------
CLASS B (1/1/99-12/31/06)
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE GRAPH IN THE PRINTED MATERIAL.]
Date Mutual European Fund MSCI AC Europe Index 5
--------- -------------------- ----------------------
1/1/1999 $10,000 $10,000
1/31/1999 $10,016 $9,950
2/28/1999 $10,136 $9,709
3/31/1999 $10,361 $9,822
4/30/1999 $10,954 $10,128
5/31/1999 $10,962 $9,661
6/30/1999 $11,334 $9,826
7/31/1999 $11,342 $9,933
8/31/1999 $11,439 $10,038
9/30/1999 $11,431 $9,967
10/31/1999 $11,788 $10,327
11/30/1999 $12,770 $10,616
12/31/1999 $14,517 $11,735
1/31/2000 $14,831 $10,914
2/29/2000 $16,713 $11,476
3/31/2000 $16,190 $11,752
4/30/2000 $15,729 $11,239
5/31/2000 $15,746 $11,141
6/30/2000 $15,738 $11,356
7/31/2000 $15,820 $11,177
8/31/2000 $16,206 $11,036
9/30/2000 $15,802 $10,520
10/31/2000 $15,967 $10,436
11/30/2000 $15,894 $9,992
12/31/2000 $16,450 $10,694
1/31/2001 $16,894 $10,710
2/28/2001 $16,775 $9,754
3/31/2001 $16,114 $9,030
4/30/2001 $16,580 $9,690
5/31/2001 $16,861 $9,232
6/30/2001 $16,744 $8,886
7/31/2001 $16,624 $8,897
8/31/2001 $16,462 $8,670
9/30/2001 $14,572 $7,798
10/31/2001 $15,028 $8,057
11/30/2001 $15,332 $8,389
12/31/2001 $15,518 $8,610
1/31/2002 $15,838 $8,175
2/28/2002 $16,058 $8,163
3/31/2002 $16,675 $8,613
4/30/2002 $17,006 $8,563
5/31/2002 $17,094 $8,545
6/30/2002 $16,425 $8,244
7/31/2002 $15,136 $7,331
8/31/2002 $15,147 $7,334
9/30/2002 $14,169 $6,378
10/31/2002 $14,203 $6,994
11/30/2002 $14,325 $7,340
12/31/2002 $14,182 $7,073
1/31/2003 $13,778 $6,741
2/28/2003 $13,329 $6,529
3/31/2003 $13,520 $6,430
4/30/2003 $14,586 $7,312
5/31/2003 $15,494 $7,800
6/30/2003 $15,696 $7,881
7/31/2003 $16,034 $8,038
8/31/2003 $16,373 $8,038
9/30/2003 $16,621 $8,205
10/31/2003 $17,298 $8,746
11/30/2003 $17,919 $9,115
12/31/2003 $18,642 $9,869
1/31/2004 $18,836 $9,988
2/29/2004 $19,442 $10,290
3/31/2004 $19,351 $9,993
4/30/2004 $19,191 $9,902
5/31/2004 $19,225 $10,068
6/30/2004 $19,633 $10,209
7/31/2004 $19,391 $9,930
8/31/2004 $19,437 $9,946
9/30/2004 $19,990 $10,352
10/31/2004 $20,485 $10,730
11/30/2004 $21,568 $11,510
12/31/2004 $22,448 $12,001
1/31/2005 $22,060 $11,788
2/28/2005 $23,163 $12,399
3/31/2005 $22,647 $12,072
4/30/2005 $22,342 $11,779
5/31/2005 $22,682 $11,842
6/30/2005 $23,191 $12,021
7/31/2005 $24,039 $12,476
8/31/2005 $24,416 $12,687
9/30/2005 $24,946 $13,024
10/31/2005 $24,533 $12,598
11/30/2005 $25,216 $12,834
12/31/2005 $26,234 $13,286
1/31/2006 $27,089 $14,185
2/28/2006 $27,802 $14,217
3/31/2006 $29,141 $14,748
4/30/2006 $29,472 $15,540
5/31/2006 $28,414 $15,088
6/30/2006 $28,491 $15,145
7/31/2006 $28,764 $15,399
8/31/2006 $29,776 $15,884
9/30/2006 $30,269 $15,980
10/31/2006 $31,229 $16,672
11/30/2006 $31,735 $17,302
12/31/2006 $33,058 $17,860
AVERAGE ANNUAL TOTAL RETURN
- ---------------------------------------------
CLASS C 12/31/06
- ---------------------------------------------
1-Year +25.10%
- ---------------------------------------------
5-Year +16.33%
- ---------------------------------------------
10-Year +15.40%
- ---------------------------------------------
CLASS C (1/1/97-12/31/06)
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE GRAPH IN THE PRINTED MATERIAL.]
Date Mutual European Fund MSCI AC Europe Index 5
--------- -------------------- ----------------------
1/1/1997 $10,000 $10,000
1/31/1997 $10,448 $10,066
2/28/1997 $10,659 $10,204
3/31/1997 $10,782 $10,526
4/30/1997 $10,764 $10,468
5/31/1997 $10,888 $10,922
6/30/1997 $11,248 $11,468
7/31/1997 $11,722 $11,997
8/31/1997 $11,502 $11,323
9/30/1997 $12,252 $12,436
10/31/1997 $11,784 $11,825
11/30/1997 $11,899 $12,001
12/31/1997 $12,189 $12,478
1/31/1998 $12,383 $12,926
2/28/1998 $13,055 $13,937
3/31/1998 $13,979 $14,933
4/30/1998 $14,319 $15,256
5/31/1998 $14,815 $15,494
6/30/1998 $14,465 $15,645
7/31/1998 $14,330 $15,982
8/31/1998 $12,683 $13,901
9/30/1998 $11,504 $13,344
10/31/1998 $11,834 $14,416
11/30/1998 $12,593 $15,202
12/31/1998 $12,635 $15,869
1/31/1999 $12,655 $15,790
2/28/1999 $12,807 $15,407
3/31/1999 $13,091 $15,587
4/30/1999 $13,842 $16,072
5/31/1999 $13,852 $15,331
6/30/1999 $14,325 $15,592
7/31/1999 $14,335 $15,763
8/31/1999 $14,458 $15,929
9/30/1999 $14,448 $15,816
10/31/1999 $14,899 $16,388
11/30/1999 $16,139 $16,847
12/31/1999 $18,370 $18,622
1/31/2000 $18,765 $17,319
2/29/2000 $21,167 $18,211
3/31/2000 $20,498 $18,649
4/30/2000 $19,917 $17,835
5/31/2000 $19,938 $17,680
6/30/2000 $19,925 $18,020
7/31/2000 $20,040 $17,736
8/31/2000 $20,525 $17,513
9/30/2000 $20,006 $16,695
10/31/2000 $20,225 $16,560
11/30/2000 $20,121 $15,856
12/31/2000 $20,836 $16,970
1/31/2001 $21,392 $16,996
2/28/2001 $21,256 $15,479
3/31/2001 $20,402 $14,330
4/30/2001 $20,999 $15,377
5/31/2001 $21,351 $14,651
6/30/2001 $21,199 $14,102
7/31/2001 $21,050 $14,119
8/31/2001 $20,846 $13,758
9/30/2001 $18,441 $12,375
10/31/2001 $19,039 $12,786
11/30/2001 $19,419 $13,312
12/31/2001 $19,659 $13,663
1/31/2002 $20,058 $12,973
2/28/2002 $20,347 $12,954
3/31/2002 $21,118 $13,669
4/30/2002 $21,544 $13,588
5/31/2002 $21,654 $13,560
6/30/2002 $20,801 $13,083
7/31/2002 $19,178 $11,634
8/31/2002 $19,192 $11,639
9/30/2002 $17,958 $10,121
10/31/2002 $17,986 $11,099
11/30/2002 $18,152 $11,648
12/31/2002 $17,960 $11,224
1/31/2003 $17,442 $10,697
2/28/2003 $16,897 $10,361
3/31/2003 $17,121 $10,204
4/30/2003 $18,477 $11,604
5/31/2003 $19,637 $12,378
6/30/2003 $19,874 $12,507
7/31/2003 $20,310 $12,756
8/31/2003 $20,732 $12,756
9/30/2003 $21,055 $13,021
10/31/2003 $21,912 $13,879
11/30/2003 $22,699 $14,465
12/31/2003 $23,616 $15,661
1/31/2004 $23,858 $15,850
2/29/2004 $24,627 $16,329
3/31/2004 $24,513 $15,858
4/30/2004 $24,313 $15,713
5/31/2004 $24,356 $15,977
6/30/2004 $24,877 $16,200
7/31/2004 $24,576 $15,758
8/31/2004 $24,633 $15,784
9/30/2004 $25,336 $16,427
10/31/2004 $25,967 $17,028
11/30/2004 $27,329 $18,265
12/31/2004 $28,442 $19,044
1/31/2005 $27,946 $18,706
2/28/2005 $29,331 $19,675
3/31/2005 $28,690 $19,157
4/30/2005 $28,296 $18,692
5/31/2005 $28,733 $18,792
6/30/2005 $29,381 $19,076
7/31/2005 $30,450 $19,798
8/31/2005 $30,919 $20,133
9/30/2005 $31,593 $20,668
10/31/2005 $31,080 $19,991
11/30/2005 $31,944 $20,365
12/31/2005 $33,213 $21,084
1/31/2006 $34,305 $22,510
2/28/2006 $35,208 $22,561
3/31/2006 $36,917 $23,404
4/30/2006 $37,329 $24,660
5/31/2006 $35,999 $23,943
6/30/2006 $36,079 $24,033
7/31/2006 $36,434 $24,437
8/31/2006 $37,706 $25,206
9/30/2006 $38,334 $25,358
10/31/2006 $39,542 $26,457
11/30/2006 $40,203 $27,457
12/31/2006 $41,882 $28,342
12 | Annual Report
Performance Summary (CONTINUED)
ENDNOTES
BECAUSE THE FUND INVESTS IN ISSUERS LOCATED IN EUROPE, IT MAY EXPERIENCE GREATER
VOLATILITY THAN A GEOGRAPHICALLY DIVERSIFIED FUND. FOREIGN SECURITIES RISKS
INCLUDE EXPOSURE TO CURRENCY FLUCTUATIONS AND ECONOMIC AND POLITICAL
UNCERTAINTIES. IN ADDITION, THE FUND'S INVESTMENTS IN SMALLER-COMPANY STOCKS
CARRY AN INCREASED RISK OF PRICE FLUCTUATION, ESPECIALLY OVER THE SHORT TERM.
THE FUND MAY ALSO INVEST IN COMPANIES ENGAGED IN MERGERS, REORGANIZATIONS OR
LIQUIDATIONS, WHICH INVOLVE SPECIAL RISKS, AS WELL AS LOWER-RATED BONDS, WHICH
ENTAIL HIGHER CREDIT RISK. THE FUND'S PROSPECTUS ALSO INCLUDES A DESCRIPTION OF
THE MAIN INVESTMENT RISKS.
CLASS Z: Shares are available to certain eligible investors as described in
the prospectus.
CLASS A: Prior to 8/3/98, these shares were offered at a lower initial sales
charge; thus actual total returns may differ.
CLASS B: These shares have higher annual fees and expenses than Class A
shares.
CLASS C: Prior to 1/1/04, these shares were offered with an initial sales
charge; thus actual total returns would have differed. These shares
have higher annual fees and expenses than Class A shares.
1. Past expense reductions by the Fund's manager increased the Fund's total
returns. If the manager had not taken this action, the Fund's total
returns would have been lower.
2. Cumulative total return represents the change in value of an investment
over the periods indicated.
3. Average annual total return represents the average annual change in value
of an investment over the periods indicated.
4. These figures represent the value of a hypothetical $10,000 investment in
the Fund over the periods indicated.
5. Source: Standard & Poor's Micropal. The MSCI AC Europe Index is a free
float-adjusted, market capitalization-weighted index designed to measure
equity market performance in the European region.
Annual Report | 13
Your Fund's Expenses
As a Fund shareholder, you can incur two types of costs:
o Transaction costs, including sales charges (loads) on Fund purchases and
redemption fees; and
o Ongoing Fund costs, including management fees, distribution and service
(12b-1) fees, and other Fund expenses. All mutual funds have ongoing
costs, sometimes referred to as operating expenses.
The following table shows ongoing costs of investing in the Fund and can help
you understand these costs and compare them with those of other mutual funds.
The table assumes a $1,000 investment held for the six months indicated.
ACTUAL FUND EXPENSES
The first line (Actual) for each share class listed in the table provides actual
account values and expenses. The "Ending Account Value" is derived from the
Fund's actual return, which includes the effect of Fund expenses.
You can estimate the expenses you paid during the period by following these
steps. OF COURSE, YOUR ACCOUNT VALUE AND EXPENSES WILL DIFFER FROM THOSE IN THIS
ILLUSTRATION:
1. Divide your account value by $1,000.
IF AN ACCOUNT HAD AN $8,600 VALUE, THEN $8,600 / $1,000 = 8.6.
2. Multiply the result by the number under the heading "Expenses Paid During
Period."
IF EXPENSES PAID DURING PERIOD WERE $7.50, THEN 8.6 X $7.50 = $64.50.
In this illustration, the estimated expenses paid this period are $64.50.
HYPOTHETICAL EXAMPLE FOR COMPARISON WITH OTHER FUNDS
Information in the second line (Hypothetical) for each class in the table can
help you compare ongoing costs of investing in the Fund with those of other
mutual funds. This information may not be used to estimate the actual ending
account balance or expenses you paid during the period. The hypothetical "Ending
Account Value" is based on the actual expense ratio for each class and an
assumed 5% annual rate of return before expenses, which does not represent the
Fund's actual return. The figure under the heading "Expenses Paid During Period"
shows the hypothetical expenses your account would have incurred under this
scenario. You can compare this figure with the 5% hypothetical examples that
appear in shareholder reports of other funds.
14 | Annual Report
Your Fund's Expenses (CONTINUED)
PLEASE NOTE THAT EXPENSES SHOWN IN THE TABLE ARE MEANT TO HIGHLIGHT ONGOING
COSTS AND DO NOT REFLECT ANY TRANSACTION COSTS, SUCH AS SALES CHARGES OR
REDEMPTION FEES. Therefore, the second line for each class is useful in
comparing ongoing costs only, and will not help you compare total costs of
owning different funds. In addition, if transaction costs were included, your
total costs would have been higher. Please refer to the Fund prospectus for
additional information on operating expenses.
- --------------------------------------------------------------------------------------------------------
EXPENSES PAID
BEGINNING ACCOUNT ENDING ACCOUNT DURING PERIOD*
CLASS Z VALUE 7/1/06 VALUE 12/31/06 7/1/06-12/31/06
- --------------------------------------------------------------------------------------------------------
Actual $1,000 $1,166.30 $ 5.84
- --------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,019.81 $ 5.45
- --------------------------------------------------------------------------------------------------------
CLASS A
- --------------------------------------------------------------------------------------------------------
Actual $1,000 $1,164.50 $ 7.42
- --------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,018.35 $ 6.92
- --------------------------------------------------------------------------------------------------------
CLASS B
- --------------------------------------------------------------------------------------------------------
Actual $1,000 $1,160.30 $11.27
- --------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,014.77 $10.51
- --------------------------------------------------------------------------------------------------------
CLASS C
- --------------------------------------------------------------------------------------------------------
Actual $1,000 $1,160.80 $11.27
- --------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,014.77 $10.51
- --------------------------------------------------------------------------------------------------------
* Expenses are equal to the annualized expense ratio for each class (Z:
1.07%; A: 1.36%; B: 2.07%; and C: 2.07%), multiplied by the average
account value over the period, multiplied by 184/365 to reflect the
one-half year period.
Annual Report | 15
Mutual European Fund
FINANCIAL HIGHLIGHTS
----------------------------------------------------------------
YEAR ENDED DECEMBER 31,
CLASS Z 2006 2005 2004 2003 2002
----------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ............. $ 21.30 $ 19.75 $ 16.79 $ 12.97 $ 14.43
----------------------------------------------------------------
Income from investment operations a:
Net investment income b ....................... 0.62 0.42 0.37 0.32 0.27
Net realized and unrealized gains (losses) .... 5.08 3.11 3.21 3.93 (1.38)
----------------------------------------------------------------
Total from investment operations ............... 5.70 3.53 3.58 4.25 (1.11)
----------------------------------------------------------------
Less distributions from:
Net investment income ......................... (0.66) (0.55) (0.60) (0.43) (0.25)
----------------------------------------------------------------
Net realized gains ............................ (1.75) (1.43) (0.02) -- (0.10)
----------------------------------------------------------------
Total distributions ............................ (2.41) (1.98) (0.62) (0.43) (0.35)
----------------------------------------------------------------
Redemption fees ................................ -- d -- d -- d -- d --
----------------------------------------------------------------
Net asset value, end of year ................... $ 24.59 $ 21.30 $ 19.75 $ 16.79 $ 12.97
================================================================
Total return ................................... 27.30% 18.03% 21.58% 32.84% (7.71)%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ................ $1,034,000 $788,228 $650,547 $498,667 $376,828
Ratios to average net assets:
Expenses c .................................... 1.05% e 1.05% e 1.07% e 1.08% 1.05%
Net investment income ......................... 2.64% 1.99% 2.10% 2.19% 1.88%
Portfolio turnover rate ........................ 37.65% 29.84% 33.11% 52.33% 29.86%
Ratios to average net assets, excluding dividend
expense on securities sold short:
Expenses ...................................... 1.04% e 1.04% e 1.07% e 1.08% 1.04%
a The amount shown for a share outstanding throughout the period may not
correlate with the Statement of Operations for the period due to the
timing of sales and repurchase of the Fund shares in relation to income
earned and/or fluctuating market value of the investments of the Fund.
b Based on average daily shares outstanding.
c Includes dividend expense on securities sold short which varies from
period to period. See below for expense ratios that reflect only operating
expenses.
d Amount rounds to less than $0.01 per share.
e Benefit of expense reduction rounds to less than 0.01%.
16 | The accompanying notes are an integral part of these financial statements.
| Annual Report
Mutual European Fund
FINANCIAL HIGHLIGHTS (CONTINUED)
--------------------------------------------------------------
YEAR ENDED DECEMBER 31,
CLASS A 2006 2005 2004 2003 2002
--------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ............. $ 20.99 $ 19.50 $ 16.59 $ 12.83 $ 14.27
--------------------------------------------------------------
Income from investment operations a:
Net investment income b ....................... 0.56 0.34 0.31 0.26 0.22
Net realized and unrealized gains (losses) .... 4.98 3.07 3.16 3.88 (1.35)
--------------------------------------------------------------
Total from investment operations ............... 5.54 3.41 3.47 4.14 (1.13)
--------------------------------------------------------------
Less distributions from:
Net investment income ......................... (0.59) (0.49) (0.54) (0.38) (0.21)
--------------------------------------------------------------
Net realized gains ............................ (1.75) (1.43) (0.02) -- (0.10)
--------------------------------------------------------------
Total distributions ............................ (2.34) (1.92) (0.56) (0.38) (0.31)
--------------------------------------------------------------
Redemption fees ................................ -- e -- e -- e -- e --
--------------------------------------------------------------
Net asset value, end of year ................... $ 24.19 $ 20.99 $ 19.50 $ 16.59 $ 12.83
--------------------------------------------------------------
Total return c ................................. 26.96% 17.56% 21.23% 32.34% (8.05)%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ................ $964,717 $707,995 $545,120 $417,630 $302,735
Ratios to average net assets:
Expenses d .................................... 1.34% f 1.38% f 1.42% f 1.43% 1.40%
Net investment income ......................... 2.35% 1.66% 1.75% 1.84% 1.53%
Portfolio turnover rate ........................ 37.65% 29.84% 33.11% 52.33% 29.86%
Ratios to average net assets, excluding dividend
expense on securities sold short:
Expenses ...................................... 1.33% f 1.37% f 1.42% f 1.43% 1.39%
a The amount shown for a share outstanding throughout the period may not
correlate with the Statement of Operations for the period due to the
timing of sales and repurchase of the Fund shares in relation to income
earned and/or fluctuating market value of the investments of the Fund.
b Based on average daily shares outstanding.
c Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable.
d Includes dividend expense on securities sold short which varies from
period to period. See below for expense ratios that reflect only operating
expenses.
e Amount rounds to less than $0.01 per share.
f Benefit of expense reduction rounds to less than 0.01%.
Annual Report |
The accompanying notes are an integral part of these financial statements. | 17
Mutual European Fund
FINANCIAL HIGHLIGHTS (CONTINUED)
----------------------------------------------------
YEAR ENDED DECEMBER 31,
CLASS B 2006 2005 2004 2003 2002
----------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ............. $20.58 $19.14 $16.31 $12.64 $14.09
----------------------------------------------------
Income from investment operations a:
Net investment income b ....................... 0.38 0.21 0.19 0.16 0.10
Net realized and unrealized gains (losses) .... 4.87 3.01 3.10 3.81 (1.31)
----------------------------------------------------
Total from investment operations ............... 5.25 3.22 3.29 3.97 (1.21)
----------------------------------------------------
Less distributions from:
Net investment income ......................... (0.43) (0.35) (0.44) (0.30) (0.14)
Net realized gains ............................ (1.75) (1.43) (0.02) -- (0.10)
----------------------------------------------------
Total distributions ............................ (2.18) (1.78) (0.46) (0.30) (0.24)
----------------------------------------------------
Redemption fees ................................ -- e -- e -- e -- e --
----------------------------------------------------
Net asset value, end of year ................... $23.65 $20.58 $19.14 $16.31 $12.64
====================================================
Total return c ................................. 26.01% 16.87% 20.41% 31.45% (8.61)%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ................ $63,219 $55,303 $50,216 $38,526 $24,855
Ratios to average net assets:
Expenses d .................................... 2.05% f 2.05% f 2.07% f 2.08% 2.05%
Net investment income ......................... 1.64% 0.99% 1.10% 1.19% 0.87%
Portfolio turnover rate ........................ 37.65% 29.84% 33.11% 52.33% 29.86%
Ratios to average net assets, excluding dividend
expense on securities sold short:
Expenses ...................................... 2.04% f 2.04% f 2.07% f 2.08% 2.04%
a The amount shown for a share outstanding throughout the period may not
correlate with the Statement of Operations for the period due to the
timing of sales and repurchase of the Fund shares in relation to income
earned and/or fluctuating market value of the investments of the Fund.
b Based on average daily shares outstanding.
c Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable.
d Includes dividend expense on securities sold short which varies from
period to period. See below for expense ratios that reflect only operating
expenses.
e Amount rounds to less than $0.01 per share.
f Benefit of expense reduction rounds to less than 0.01%.
18 | The accompanying notes are an integral part of these financial statements.
| Annual Report
Mutual European Fund
FINANCIAL HIGHLIGHTS (CONTINUED)
----------------------------------------------------
YEAR ENDED DECEMBER 31,
CLASS C 2006 2005 2004 2003 2002
----------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ............. $20.98 $19.50 $16.60 $12.85 $14.29
----------------------------------------------------
Income from investment operations a:
Net investment income b ....................... 0.38 0.21 0.20 0.17 0.13
Net realized and unrealized gains (losses) .... 4.99 3.05 3.15 3.87 (1.35)
----------------------------------------------------
Total from investment operations ............... 5.37 3.26 3.35 4.04 (1.22)
----------------------------------------------------
Less distributions from:
Net investment income ......................... (0.43) (0.35) (0.43) (0.29) (0.12)
Net realized gains ............................ (1.75) (1.43) (0.02) -- (0.10)
----------------------------------------------------
Total distributions ............................ (2.18) (1.78) (0.45) (0.29) (0.22)
----------------------------------------------------
Redemption fees ................................ -- e -- e -- e -- e --
----------------------------------------------------
Net asset value, end of year ................... $24.17 $20.98 $19.50 $16.60 $12.85
====================================================
Total return c ................................. 26.10% 16.78% 20.43% 31.49% (8.65)%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ................ $303,259 $242,894 $205,197 $166,758 $123,374
Ratios to average net assets:
Expenses d .................................... 2.05% f 2.05% f 2.07% f 2.08% 2.02%
Net investment income ......................... 1.64% 0.99% 1.10% 1.19% 0.91%
Portfolio turnover rate ........................ 37.65% 29.84% 33.11% 52.33% 29.86%
Ratios to average net assets, excluding dividend
expense on securities sold short:
Expenses ...................................... 2.04% f 2.04% f 2.07% f 2.08% 2.01%
a The amount shown for a share outstanding throughout the period may not
correlate with the Statement of Operations for the period due to the
timing of sales and repurchase of the Fund shares in relation to income
earned and/or fluctuating market value of the investments of the Fund.
b Based on average daily shares outstanding.
c Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable.
d Includes dividend expense on securities sold short which varies from
period to period. See below for expense ratios that reflect only operating
expenses.
e Amount rounds to less than $0.01 per share.
f Benefit of expense reduction rounds to less than 0.01%.
Annual Report |
The accompanying notes are an integral part of these financial statements. | 19
Mutual European Fund
STATEMENT OF INVESTMENTS, DECEMBER 31, 2006
- ---------------------------------------------------------------------------------------------------------
SHARES/WARRANTS/
COUNTRY CONTRACTS VALUE
- ---------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS 94.4%
COMMON STOCKS AND OTHER EQUITY INTERESTS 91.0%
AIR FREIGHT & LOGISTICS 0.1%
a Geodis SA .................................... France 12,309 $ 2,526,641
-------------
AUTOMOBILES 0.6%
Renault SA ................................... France 117,178 14,075,954
-------------
BEVERAGES 2.2%
Carlsberg AS, A .............................. Denmark 28,600 2,632,585
Carlsberg AS, B .............................. Denmark 193,506 19,216,325
Pernod Ricard SA ............................. France 133,800 30,732,347
-------------
52,581,257
-------------
CAPITAL MARKETS 0.5%
D. Carnegie & Co. AB ......................... Sweden 517,156 11,133,890
-------------
CHEMICALS 6.8%
a Arkema ....................................... France 72,152 3,707,858
K+S AG ....................................... Germany 434,094 47,131,368
Koninklijke DSM NV ........................... Netherlands 610,876 30,183,059
Linde AG ..................................... Germany 514,528 53,330,992
a Sika AG ...................................... Switzerland 16,481 25,562,423
-------------
159,915,700
-------------
COMMERCIAL BANKS 10.2%
a Aareal Bank AG .............................. Germany 544,817 25,344,102
BNP Paribas SA ............................... France 459,760 50,160,794
Danske Bank AS ............................... Denmark 464,556 20,640,720
Intesa Sanpaulo SpA .......................... Italy 2,925,735 22,593,380
KBC Groep NV ................................. Belgium 252,669 30,985,466
Natixis ...................................... France 92,700 2,604,004
a Postal Savings Bank .......................... Greece 13,110 309,083
Societe Generale, A .......................... France 191,290 32,473,089
Svenska Handelsbanken AB, A .................. Sweden 1,272,140 38,436,038
Swedbank AB, A ............................... Sweden 481,880 17,478,278
-------------
241,024,954
-------------
COMMERCIAL SERVICES & SUPPLIES 0.8%
Techem AG .................................... Germany 259,982 19,029,842
-------------
DISTRIBUTORS 0.9%
Compania de Distribucion Integral Logista SA . Spain 322,008 20,785,759
-------------
DIVERSIFIED FINANCIAL SERVICES 4.4%
Deutsche Boerse AG ........................... Germany 170,417 31,363,777
Euronext NV .................................. Netherlands 164,380 19,420,588
Fortis ....................................... Belgium 1,273,570 54,318,796
a,b Marconi Corp., Contingent Distribution ....... United Kingdom 28,582,000 --
-------------
105,103,161
-------------
DIVERSIFIED TELECOMMUNICATION SERVICES 3.9%
a,c,d,e AboveNet Inc. ................................ United States 83,713 2,564,966
a,b,d,e AboveNet Inc., Contingent Distribution ....... United States 11,722,000 --
20 | Annual Report
Mutual European Fund
STATEMENT OF INVESTMENTS, DECEMBER 31, 2006 (CONTINUED)
- --------------------------------------------------------------------------------------------------------------------------------
SHARES/WARRANTS/
COUNTRY CONTRACTS VALUE
- --------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
COMMON STOCKS AND OTHER EQUITY INTERESTS (CONTINUED)
DIVERSIFIED TELECOMMUNICATION SERVICES (CONTINUED)
a,c,d AboveNet Inc., options to purchase (shares), exercise price $20.95,
expiration date, 9/09/13 .......................................... United States 117 $ 3,165
a,c,d,e AboveNet Inc., wts., 9/08/08 ........................................ United States 2,816 90,112
a,c,d,e AboveNet Inc., wts., 9/08/10 ........................................ United States 3,313 95,414
Belgacom ............................................................ Belgium 518,490 22,839,519
Koninklijke (Royal) KPN NV .......................................... Netherlands 1,939,171 27,569,074
NTL Inc. ............................................................ United Kingdom 1,632,505 41,204,426
-------------
94,366,676
-------------
ELECTRIC UTILITIES 1.8%
E.ON AG ............................................................. Germany 321,220 43,797,691
-------------
ELECTRONIC EQUIPMENT & INSTRUMENTS 0.9%
OMX AB .............................................................. Sweden 1,094,740 20,133,296
-------------
ENERGY EQUIPMENT & SERVICES 1.8%
a Aker Drilling ASA ................................................... Norway 1,209,492 7,448,280
a,f Compagnie Generale de Geophysique SA ................................ France 12,184 2,640,909
Fugro NV ............................................................ Netherlands 378,195 18,072,353
a Petroleum Geo-Services ASA .......................................... Norway 338,313 7,948,370
a Seadrill Ltd. ....................................................... Bermuda 403,920 6,817,721
-------------
42,927,633
-------------
FOOD & STAPLES RETAILING 2.9%
Bourbon SA .......................................................... France 339,698 18,667,654
Carrefour SA ........................................................ France 704,130 42,700,622
RHM PLC ............................................................. United Kingdom 1,117,244 8,292,348
-------------
69,660,624
-------------
FOOD PRODUCTS 11.4%
Cadbury Schweppes PLC ............................................... United Kingdom 2,622,412 28,066,054
CSM NV .............................................................. Netherlands 816,226 31,429,481
Groupe Danone ....................................................... France 323,470 49,019,204
Leroy Seafood Group ASA ............................................. Norway 348,693 6,151,169
Nestle SA ........................................................... Switzerland 166,037 58,999,648
d Orkla ASA ........................................................... Norway 1,322,640 74,875,220
a Pan Fish ASA ........................................................ Norway 7,424,923 6,787,168
Rieber & Son ASA .................................................... Norway 1,548,350 13,905,254
-------------
269,233,198
-------------
HEALTH CARE PROVIDERS & SERVICES 1.1%
Rhoen-Klinikum AG ................................................... Germany 519,452 24,815,576
-------------
HOTELS, RESTAURANTS & LEISURE 0.0% g
Ladbrokes PLC ....................................................... United Kingdom 17,202 141,067
-------------
HOUSEHOLD DURABLES 2.9%
Hunter Douglas NV ................................................... Netherlands 369,725 29,722,578
Koninklijke Philips Electronics NV .................................. Netherlands 1,019,375 38,444,532
-------------
68,167,110
-------------
Annual Report | 21
Mutual European Fund
STATEMENT OF INVESTMENTS, DECEMBER 31, 2006 (CONTINUED)
- -------------------------------------------------------------------------------------------------------------------
SHARES/WARRANTS/
COUNTRY CONTRACTS VALUE
- -------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
COMMON STOCKS AND OTHER EQUITY INTERESTS (CONTINUED)
INDUSTRIAL CONGLOMERATES 2.4%
Siemens AG .......................................... Germany 571,075 $ 56,990,872
-------------
INSURANCE 1.7%
a,c,e Augsburg Re AG ...................................... Switzerland 17,909 --
a,c,e Olympus Re Holdings Ltd. ............................ Bermuda 16,080 16,080
White Mountains Insurance Group Ltd. ................ United States 57,372 33,243,058
Zurich Financial Services AG ........................ Switzerland 22,246 5,988,009
-------------
39,247,147
-------------
MACHINERY 5.7%
AB SKF, B ........................................... Sweden 2,060,828 38,050,961
Kone OYJ, B ......................................... Finland 579,380 32,840,964
Scania AB ........................................... Sweden 156,080 10,957,858
Schindler Holding AG ................................ Switzerland 502,363 31,599,954
Schindler Holding AG, Registered .................... Switzerland 352,315 21,973,608
-------------
135,423,345
-------------
MARINE 1.0%
A P Moller - Maersk AS .............................. Denmark 2,516 23,693,833
-------------
MEDIA 2.2%
JC Decaux SA ........................................ France 619,833 17,738,804
Mediaset SpA ........................................ Italy 1,635,178 19,405,064
Sun-Times Media Group Inc., A ....................... United States 215,694 1,059,058
h Time Warner Inc. .................................... United States 613,830 13,369,217
-------------
51,572,143
-------------
METALS & MINING 4.2%
a African Platinum PLC ................................ United Kingdom 3,791,605 2,580,288
Anglo American PLC .................................. South Africa 1,204,829 58,774,563
c,e,i,j Globe Specialty Metals Inc., 144A ................... United States 2,050,000 10,258,200
a,c,e,i,j Globe Specialty Metals Inc., wts., 144A, 10/03/09 ... United States 4,100,000 2,214,000
Mittal Steel Co. NV ................................. Netherlands 592,066 24,986,367
-------------
98,813,418
-------------
MULTI-UTILITIES 4.1%
RWE AG .............................................. Germany 456,804 50,326,721
Suez SA ............................................. France 880,789 45,612,151
-------------
95,938,872
-------------
MULTILINE RETAIL 0.8%
Jelmoli Holding AG .................................. Switzerland 8,844 19,850,101
-------------
OIL, GAS & CONSUMABLE FUELS 4.7%
BP PLC .............................................. United Kingdom 747,800 8,310,776
Eni SpA ............................................. Italy 361,200 12,148,916
a,c,e,j Euro Wagon LP ....................................... Jersey Islands 15,240,837 20,118,666
Ganger Rolf ......................................... Norway 470,416 18,030,249
Norsk Hydro ASA ..................................... Norway 441,000 13,684,890
22 | Annual Report
Mutual European Fund
STATEMENT OF INVESTMENTS, DECEMBER 31, 2006 (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------
SHARES/WARRANTS/
COUNTRY CONTRACTS VALUE
- ------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
COMMON STOCKS AND OTHER EQUITY INTERESTS (CONTINUED)
OIL, GAS & CONSUMABLE FUELS (CONTINUED)
Royal Dutch Shell PLC, A ................................... United Kingdom 466,164 $ 16,442,413
Total SA, B ................................................ France 306,368 22,101,611
---------------
110,837,521
---------------
PAPER & FOREST PRODUCTS 0.5%
a Ahlstrom OYJ, A ............................................ Finland 393,345 11,760,674
---------------
PHARMACEUTICALS 1.3%
Sanofi-Aventis ............................................. France 342,206 31,598,444
---------------
REAL ESTATE 0.1%
e Canary Wharf Group PLC ..................................... United Kingdom 192,100 1,309,172
---------------
TEXTILES, APPAREL & LUXURY GOODS 0.2%
Christian Dior SA .......................................... France 38,450 4,098,541
---------------
THRIFTS & MORTGAGE FINANCE 0.8%
Hypo Real Estate Holding AG ................................ Germany 314,154 19,768,700
---------------
TOBACCO 7.9%
Altadis SA ................................................. Spain 1,086,551 56,870,057
British American Tobacco PLC ............................... United Kingdom 2,259,606 63,234,665
Imperial Tobacco Group PLC ................................. United Kingdom 1,706,404 67,168,893
---------------
187,273,615
---------------
TRADING COMPANIES & DISTRIBUTORS 0.2%
a Kloeckner & Co. AG ......................................... Germany 126,597 5,511,432
---------------
TOTAL COMMON STOCKS AND OTHER EQUITY INTERESTS
(COST $1,377,244,037) ..................................... 2,153,107,859
---------------
PREFERRED STOCKS 0.6%
DIVERSIFIED TELECOMMUNICATION SERVICES 0.0% g
c PTV Inc., 10.00%, pfd., A .................................. United Kingdom 46,841 175,654
---------------
MACHINERY 0.6%
Jungheinrich AG, pfd. ...................................... Germany 452,549 13,769,777
---------------
TOTAL PREFERRED STOCKS (COST $9,849,000) ................... 13,945,431
---------------
-------------
PRINCIPAL
AMOUNT n
-------------
CORPORATE BONDS & NOTES (COST $205,953) 0.0% g
c,e Augsburg Re AG, zero cpn., 2/17/07 ......................... Switzerland 205,953 2,060
--------------
CORPORATE BONDS & NOTES IN REORGANIZATION 2.5%
k Eurotunnel PLC,
Participating Loan Note, 1.00%, 4/30/40 ................... United Kingdom 210,000 GBP 86,363
l S8 Tier 1 EFL2 Stabilization Note, FRN, 5.971%, 3/15/26 .. United Kingdom 148,000 GBP 104,341
i,l Senior Tranche G2 Term Loan A, 144A, FRN, 5.747%, 12/15/12 United Kingdom 380,300 GBP 754,070
l Tier 2, FRN, 5.959%, 12/31/18 ............................ United Kingdom 7,595,283 GBP 14,892,813
l Tier 3, FRN, 5.895%, 12/31/25 ............................ United Kingdom 14,544,322 GBP 24,922,512
k Eurotunnel SA,
l S6 Tier 1 FM2 Stabilization Note, FRN, 4.187%, 3/15/26 ... France 35,000 EUR 16,633
Annual Report | 23
Mutual European Fund
STATEMENT OF INVESTMENTS, DECEMBER 31, 2006 (CONTINUED)
- -------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL
COUNTRY AMOUNT n VALUE
- -------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
CORPORATE BONDS & NOTES IN REORGANIZATION (CONTINUED)
k Eurotunnel SA, (continued)
l S7 Tier 1 FM4 Stabilization Note, FRN, 4.187%, 3/15/26 .......... France 52,000 EUR $ 24,711
Senior Tranche H1 Term Loan (KfW Advance), 8.78%,
12/15/12 ........................................................ France 163,300 EUR 218,259
l Tier 2 (LIBOR), FRN, 4.305%, 12/31/18 ........................... France 988,713 EUR 1,306,782
l Tier 2 (PIBOR), FRN, 4.291%, 12/31/18 ........................... France 437,395 EUR 578,104
l Tier 3 (LIBOR), FRN, 4.300%, 12/31/25 ........................... France 8,732,014 EUR 10,085,858
l Tier 3 (PIBOR), FRN, 4.304%, 12/31/25 ........................... France 5,798,977 EUR 6,698,072
----------------
TOTAL CORPORATE BONDS & NOTES IN REORGANIZATION
(COST $36,662,447) ............................................... 59,688,518
----------------
GOVERNMENT AGENCIES 0.3%
Federal Home Loan Bank, 5.22%, 11/14/07 ............................ United States 5,000,000 4,996,650
Government of Norway, 6.75%, 1/15/07 ............................... Norway 13,450,000 NOK 2,159,103
----------------
TOTAL GOVERNMENT AGENCIES (COST $6,913,369) ........................ 7,155,753
----------------
TOTAL LONG TERM INVESTMENTS (COST $1,430,874,806) .................. 2,233,899,621
----------------
SHORT TERM INVESTMENTS 4.9%
GOVERNMENT AGENCIES (COST $113,724,849) 4.8%
h,m Federal Home Loan Bank, 1/02/07 - 8/17/07 .......................... United States 114,299,000 113,778,079
----------------
o INVESTMENTS FROM CASH COLLATERAL RECEIVED FOR LOANED SECURITIES 0.1%
p REPURCHASE AGREEMENTS 0.1%
Deutsche Bank Securities Inc., 5.34%, 1/02/07 (Maturity Value
$500,297) Collateralized by U.S. Government Agency Securities,
4.50% - 7.00%, 11/01/13 - 12/01/36 ............................... United States 500,000 500,000
Citigroup Global Markets Inc., 5.34%, 1/02/07 (Maturity Value
$181,107) Collateralized by U.S. Government Agency Securities,
3.758% - 7.00%, 12/01/13 - 12/01/36 .............................. United States 181,000 181,000
Barclays Capital Inc., 5.33%, 1/02/07 (Maturity Value $600,355)
Collateralized by U.S. Government Agency Securities, 3.308% -
7.063%, 5/01/17 - 6/01/39 ........................................ United States 600,000 600,000
Morgan Stanley & Co. Inc., 5.35%, 1/02/07 (Maturity Value
$600,357) Collateralized by U.S. Government Agency Securities,
4.875% - 6.125%, 8/27/07 - 8/17/26 ............................... United States 600,000 600,000
Lehman Brothers, 5.34%, 1/02/07 (Maturity Value $600,356)
Collateralized by U.S. Government Agency Securities, 3.90% -
9.50%, 9/01/07- 1/01/37 .......................................... United States 600,000 600,000
----------------
TOTAL INVESTMENT FROM CASH COLLATERAL RECEIVED FOR LOANED
SECURITIES (COST $2,481,000) ..................................... 2,481,000
----------------
TOTAL SHORT TERM INVESTMENTS (COST $116,205,849) ................... 116,259,079
----------------
TOTAL INVESTMENTS (COST $1,547,080,655) 99.3% ...................... 2,350,158,700
SECURITIES SOLD SHORT (0.4)% ....................................... (9,635,199)
NET UNREALIZED LOSS ON FORWARD EXCHANGE
CONTRACTS (0.8)% ................................................. (19,416,730)
OTHER ASSETS, LESS LIABILITIES 1.9% ................................ 44,087,623
----------------
NET ASSETS 100.0% .................................................. $ 2,365,194,394
================
24 | Annual Report
Mutual European Fund
STATEMENT OF INVESTMENTS, DECEMBER 31, 2006 (CONTINUED)
- ----------------------------------------------------------------------------------------------
COUNTRY SHARES VALUE
- ----------------------------------------------------------------------------------------------
SECURITIES SOLD SHORT 0.4%
ELECTRIC UTILITIES 0.2%
Iberdrola SA, Br. ...................................... Spain 125,593 $5,490,933
----------
TEXTILES, APPAREL & LUXURY GOODS 0.2%
LVMH Moet Hennessy Louis Vuitton ....................... France 39,268 4,144,266
----------
TOTAL SECURITIES SOLD SHORT (PROCEEDS $9,705,478) ...... 9,635,199
----------
SELECTED CURRENCY ABBREVIATIONS
EUR - Euro
GBP - British Pound
NOK - Norwegian Krone
SELECTED PORTFOLIO ABBREVIATIONS
FRN - Floating Rate Note
LIBOR - London InterBank Offered Rate
PIBOR - Paris InterBank Offered Rate
a Non-income producing during the twelve months ended as of December 31,
2006.
b Contingent distributions represent the right to receive additional
distributions, if any, during the reorganization of the underlying
company. Shares represent total underlying principal of debt securities.
c See Note 11 regarding restricted securities.
d See Note 13 regarding other considerations - security board member.
e Security has been deemed illiquid because it may not be able to be sold
within seven days. At December 31, 2006, the aggregate value of these
securities was $36,668,670, representing 1.55% of net assets.
f A portion or all of the security is on loan as of December 31, 2006. See
Note 1(h).
g Rounds to less than 0.1% of net assets.
h See Note 1(g) regarding securities segregated with broker for securities
sold short.
i Security was purchased pursuant to Rule 144A under the Securities Act of
1933 and may be sold in transactions exempt from registration only to
qualified institutional buyers or in a public offering registered under
the Securities Act of 1933. These securities have been deemed liquid under
guidelines approved by the Fund's Board of Directors. At December 31,
2006, the value of these securities was $13,226,270, representing 0.56% of
net assets.
j See Note 12 regarding holdings of 5% voting securities.
k See Note 10 regarding defaulted securities.
l The coupon rate shown represents the rate at period end.
m The security is traded on a discount basis with no stated coupon rate.
n The principal amount stated in U.S. dollars unless otherwise indicated.
o See Note 1(h) regarding securites on loan.
p See Note 1(c) regarding repurchase agreements.
Annual Report |
The accompanying notes are an integral part of these financial statements. | 25
Mutual European Fund
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
December 31, 2006
Assets:
Investments in securities:
Cost - Unaffiliated issuers ............................................ $1,514,173,963
Cost - Non-controlled affiliated issuers (Note 12) ..................... 30,425,692
Cost - Repurchase agreements ........................................... 2,481,000
==============
Total cost of investments .............................................. $1,547,080,655
==============
Value - Unaffiliated issuers (includes securities segregated with broker
for securities sold short in the amount of $7,861,734 and securities
loaned in the amount of $2,376,688) .................................. $2,315,086,834
Value - Non-controlled affiliated issuers (Note 12) .................... 32,590,866
Value - Repurchase agreements .......................................... 2,481,000
==============
Total value of investments ............................................. 2,350,158,700
Cash .................................................................... 137,658
Cash on deposit with brokers for securities sold short .................. 20,955,807
Foreign currency, at value (cost $19,634,818) ........................... 19,654,983
Receivables:
Investment securities sold ............................................. 1,282,238
Capital shares sold .................................................... 7,044,889
Dividends and interest ................................................. 1,921,510
Other .................................................................. 557,393
Unrealized gain on forward exchange contracts (Note 8) .................. 7,623,234
Due from broker - synthetic equity swaps (Note 7) ....................... 2,933,266
==============
Total assets ................................................... 2,412,269,678
==============
Liabilities:
Payables:
Investment securities purchased ........................................ 178,673
Capital shares redeemed ................................................ 4,181,422
Affiliates ............................................................. 3,184,460
Securities sold short, at value (proceeds $9,705,478) ................... 9,635,199
Payable upon return of securities loaned ................................ 2,481,000
Unrealized loss on forward exchange contracts (Note 8) .................. 27,039,964
Accrued expenses and other liabilities .................................. 374,566
==============
Total liabilities .............................................. 47,075,284
==============
Net assets, at value ......................................... $2,365,194,394
==============
Net assets consist of:
Paid-in capital ......................................................... $1,576,970,342
Undistributed net investment income ..................................... 379,335
Net unrealized appreciation (depreciation) .............................. 782,526,417
Accumulated net realized gain (loss) .................................... 5,318,300
==============
Net assets, at value ......................................... $2,365,194,394
==============
26 | The accompanying notes are an integral part of these financial statements.
| Annual Report
Mutual European Fund
FINANCIAL STATEMENTS (CONTINUED)
STATEMENT OF ASSETS AND LIABILITIES (CONTINUED)
December 31, 2006
CLASS Z:
Net assets, at value ................................................ $ 1,033,999,530
===============
Shares outstanding .................................................. 42,056,290
===============
Net asset value and maximum offering price per share a .............. $ 24.59
===============
CLASS A:
Net assets, at value ................................................ $ 964,717,125
===============
Shares outstanding .................................................. 39,881,157
===============
Net asset value per share a ......................................... $ 24.19
===============
Maximum offering price per share (net asset value per share / 94.25%) $ 25.67
===============
CLASS B:
Net assets, at value ................................................ $ 63,219,046
===============
Shares outstanding .................................................. 2,672,946
===============
Net asset value and maximum offering price per share a .............. $ 23.65
===============
CLASS C:
Net assets, at value ................................................ $ 303,258,693
===============
Shares outstanding .................................................. 12,549,286
===============
Net asset value and maximum offering price per share a .............. $ 24.17
===============
a Redemption price is equal to net asset value less contingent deferred
sales charges, if applicable, and redemption fees retained by the Fund.
Annual Report |
The accompanying notes are an integral part of these financial statements. | 27
Mutual European Fund
FINANCIAL STATEMENTS (CONTINUED)
STATEMENT OF OPERATIONS
for the year ended December 31, 2006
Investment income:
Dividends: (net of foreign taxes of $5,435,014)
Unaffiliated issuers .................................................. $ 68,529,047
Non-controlled affiliated issuers (Note 12) ........................... 143,500
Interest ............................................................... 6,890,701
Income from securities loaned - net .................................... 296,865
Other income (Note 14) ................................................. 30,170
==============
Total investment income ......................................... 75,890,283
==============
Expenses:
Management fees (Note 3a) .............................................. 16,124,976
Administrative fees (Note 3b) .......................................... 1,572,779
Distribution fees (Note 3c)
Class A ............................................................... 2,381,657
Class B ............................................................... 586,260
Class C ............................................................... 2,698,364
Transfer agent fees (Note 3e) ......................................... 2,473,590
Custodian fees (Note 4) ................................................ 514,823
Reports to shareholders ................................................ 161,898
Registration and filing fees ........................................... 170,531
Professional fees ...................................................... 356,656
Directors' fees and expenses ........................................... 41,901
Dividends on securities sold short ..................................... 76,817
Other .................................................................. 53,674
==============
Total expenses .................................................. 27,213,926
Expense reductions (Note 4) ..................................... (3,352)
Net expenses .................................................. 27,210,574
==============
Net investment income ........................................ 48,679,709
==============
Realized and unrealized gains (losses):
Net realized gain (loss) from:
Investments ........................................................... 235,783,115
Foreign currency transactions ......................................... (72,486,166)
Securities sold short ................................................. (1,297,181)
Synthetic equity swaps ................................................ 3,060,037
==============
Net realized gain (loss) ..................................... 165,059,805
==============
Net change in unrealized appreciation (depreciation) on:
Investments ........................................................... 326,737,136
Translation of assets and liabilities denominated in foreign currencies (51,542,237)
==============
Net change in unrealized appreciation (depreciation) ......... 275,194,899
==============
Net realized and unrealized gain (loss) ................................. 440,254,704
==============
Net increase (decrease) in net assets resulting from operations ......... $ 488,934,413
==============
28 | The accompanying notes are an integral part of these financial statements.
| Annual Report
Mutual European Fund
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF CHANGES IN NET ASSETS
-----------------------------------
YEAR ENDED DECEMBER 31,
-----------------------------------
2006 2005
-----------------------------------
Increase (decrease) in net assets:
Operations:
Net investment income ................................................................. $ 48,679,709 $ 26,936,404
Net realized gain (loss) from investments, written options, securities sold short,
foreign currency transactions, and synthetic equity swaps ........................... 165,059,805 129,895,073
Net change in unrealized appreciation (depreciation) on investments and translation of
assets and liabilities denominated in foreign currencies ............................ 275,194,899 109,301,395
-----------------------------------
Net increase (decrease) in net assets resulting from operations ................... 488,934,413 266,132,872
-----------------------------------
Distributions to shareholders from:
Net investment income:
Class Z ............................................................................... (25,490,896) (18,812,712)
Class A ............................................................................... (21,883,241) (15,200,452)
Class B ............................................................................... (1,076,058) (869,707)
Class C ............................................................................... (5,010,522) (3,747,958)
Net realized gains:
Class Z ............................................................................... (67,718,539) (48,659,125)
Class A ............................................................................... (64,399,240) (45,158,712)
Class B ............................................................................... (4,442,824) (3,565,400)
Class C ............................................................................... (20,535,458) (15,354,401)
-----------------------------------
Total distributions to shareholders ....................................................... (210,556,778) (151,368,467)
-----------------------------------
Capital share transactions: (Note 2)
Class Z ............................................................................... 120,412,634 84,943,484
Class A ............................................................................... 148,931,566 120,359,620
Class B ............................................................................... (183,563) 1,351,079
Class C ............................................................................... 23,232,387 21,918,475
-----------------------------------
Total capital share transactions .......................................................... 292,393,024 228,572,658
-----------------------------------
Redemption fees ........................................................................... 4,943 1,678
-----------------------------------
Net increase (decrease) in net assets ............................................... 570,775,602 343,338,741
Net assets:
Beginning of year ....................................................................... 1,794,418,792 1,451,080,051
-----------------------------------
End of year ............................................................................. $ 2,365,194,394 $ 1,794,418,792
===================================
Undistributed net investment income included in net assets:
End of year ............................................................................. $ 379,335 $ 249,169
===================================
Annual Report |
The accompanying notes are an integral part of these financial statements. | 29
Mutual European Fund
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Franklin Mutual Series Fund Inc. (the Series Fund) is registered under the
Investment Company Act of 1940, as amended (the 1940 Act) as an open-end
investment company, consisting of six separate funds. The Mutual European Fund
(the Fund) included in this report is diversified. The financial statements of
the remaining funds in the Series Fund are presented separately. The Fund offers
four classes of shares: Class Z, Class A, Class B and Class C. Each class of
shares differs by its initial sales load, contingent deferred sales charges,
distribution fees, voting rights on matters affecting a single class and its
exchange privilege.
The following summarizes the Fund's significant accounting policies.
A. SECURITY VALUATION
Securities listed on a securities exchange or on the NASDAQ National Market
System are valued at the last quoted sale price or the official closing price of
the day, respectively. Over-the-counter securities and listed securities for
which there is no reported sale are valued within the range of the most recent
quoted bid and ask prices. Securities that trade in multiple markets or on
multiple exchanges are valued according to the broadest and most representative
market.
Corporate debt securities and Government securities generally trade in the
over-the-counter market rather than on a securities exchange. The Fund may
utilize independent pricing services, quotations from bond dealers, and
information with respect to bond and note transactions, to assist in determining
a current market value for each security. The Fund's pricing services may use
valuation models or matrix pricing which considers information with respect to
comparable bond and note transactions, quotations from bond dealers, or by
reference to other securities that are considered comparable in such
characteristics as rating, interest rate and maturity date, option adjusted
spread models, prepayment projections, interest rate spreads and yield curves,
to determine current value.
Foreign securities are valued as of the close of trading on the foreign stock
exchange on which the security is primarily traded, or the NYSE, whichever is
earlier. If no sale is reported at that time, the foreign security will be
valued within the range of the most recent quoted bid and ask prices. The value
is then converted into its U.S. dollar equivalent at the foreign exchange rate
in effect at the close of the NYSE on the day that the value of the foreign
security is determined.
30 | Annual Report
Mutual European Fund
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
A. SECURITY VALUATION (CONTINUED)
The Fund has procedures to determine the fair value of individual securities and
other assets for which market prices are not readily available or which may not
be reliably priced. Methods for valuing these securities may include:
fundamental analysis, matrix pricing, discounts from market prices of similar
securities, or discounts applied due to the nature and duration of restrictions
on the disposition of the securities. Due to the inherent uncertainty of
valuations of such securities, the fair values may differ significantly from the
values that would have been used had a ready market for such investments
existed. Occasionally, events occur between the time at which trading in a
security is completed and the close of the NYSE that might call into question
the availability (including the reliability) of the value of a portfolio
security held by the Fund. The investment manager monitors price movements
following the close of trading in foreign stock market through a series of
county specific market proxies (such as baskets of American Depository Receipts,
futures contracts and exchange traded funds). These price movements are measured
against established triggers thresholds for each specific market proxy to assist
in determining if an event has occurred. If such an event occurs, the securities
may be valued using fair value procedures, which may include the use of
independent pricing services. All security valuation procedures are approved by
the Fund's 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, income and expense items denominated in foreign currencies are
translated into U.S. dollars at the exchange rate in effect on the transaction
date. Occasionally, events may impact the availability or reliability of foreign
exchange rates used to convert the U.S. dollar equivalent value. If such an
event occurs, the foreign exchange rate will be valued at fair value using
procedures established and approved by the Fund's Board of Directors.
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 on the
Statement of Operations.
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 denominated assets and liabilities other than investments in securities
held at the end of the reporting period.
Annual Report | 31
Mutual European Fund
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
C. REPURCHASE AGREEMENTS
The Fund may enter into repurchase agreements, which are accounted for as a loan
by the fund to the seller, collateralized by securities which are delivered to
the fund's custodian. The market value, including accrued interest, of the
initial collateralization is required to be at least 102% of the dollar amount
invested by the fund, with the value of the underlying securities marked to
market daily to maintain coverage of at least 100%. All repurchase agreements
held by the Fund at year end, had been entered into on December 31, 2006.
Repurchase agreements are valued at cost.
D. FOREIGN CURRENCY CONTRACTS
When the Fund purchases or sells foreign securities it may enter into foreign
exchange contracts to minimize foreign exchange risk from the trade date to the
settlement date of the transactions. A foreign exchange contract is an agreement
between two parties to exchange different currencies at an agreed upon exchange
rate at a future date. Realized and unrealized gains and losses on these
contracts are included in the Statement of Operations.
The Fund may also enter into forward exchange contracts to hedge against
fluctuations in foreign exchange rates or to gain exposure to certain foreign
currencies. These contracts are valued daily by the Fund and the unrealized
gains or losses on the contracts, as measured by the difference between the
contractual forward foreign exchange rates and the forward rates at the
reporting date, are included in the Statement of Assets and Liabilities.
Realized and unrealized gains and losses on these contracts are included in the
Statement of Operations.
The risks of these contracts include movement in the values of the foreign
currencies relative to the U.S. dollar and the possible inability of the
counterparties to fulfill their obligations under the contracts, which may be in
excess of the amount reflected in the Statement of Assets and Liabilities.
E. SYNTHETIC EQUITY SWAPS
The Fund may engage in synthetic equity swaps. Synthetic equity swaps 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 purchase or short sale of the underlying
security taken place. Upon entering into synthetic equity swaps, 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 ("margin account"). Periodically,
payments are made to recognize changes in value of the contract resulting from
interest on the notional value of the contract, market value changes in the
underlying security, and/or dividends paid by the issuer of the underlying
security. The Fund recognizes a realized gain or loss when cash is received
from, or paid to, the broker. Synthetic equity swaps are valued daily by the
Fund and the unrealized gains or losses on the contracts (as measured by the
difference between the contract amount plus or minus cash received or paid and
the market value of the underlying securities) are recorded in the Statement of
Operations. The margin account and any net unrealized gains or losses on open
synthetic equity swaps are included in the Statement of Assets and Liabilities.
The risks of entering into synthetic equity swaps include unfavorable price
movements in the underlying securities or the inability of the counterparties to
fulfill their obligations under the contract.
32 | Annual Report
Mutual European Fund
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
F. OPTIONS
The Fund may purchase or write options. Options are contracts entitling the
holder to purchase or sell a specified number of shares or units of a particular
security at a specified price. Options purchased are recorded as investments;
options written (sold) are recorded as liabilities. Upon closing of an option,
other than by exercise, which results in a cash settlement, the difference
between the premium (original option value) 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. When
an option expires, the premium is realized as a gain for options written or as a
loss for options purchased. The risks include the possibility there may be an
illiquid options market or the inability of the counterparties to fulfill their
obligations under the contract. Writing options involves, to varying degrees,
elements of market risk in excess of the amount recognized in the Statement of
Assets and Liabilities.
G. SECURITIES SOLD SHORT
The Fund is engaged in selling securities short, which obligates the Fund to
replace a borrowed security with the same security at current market value. The
Fund incurs 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 realizes a gain if the price of the security declines between those
dates. Gains are limited to the price at which the Fund sold the security short,
while losses are potentially unlimited in size.
The Fund is required to establish a margin account with the broker lending the
security sold short. While the short sale is outstanding, the broker retains the
proceeds of the short sale and the Fund must maintain a deposit with broker
consisting of cash and securities having a value equal to a specified percentage
of the value of the securities sold short. The Fund is obligated to pay the
counterparty any dividends or interest due on securities sold short. Such
dividends and interest are recorded as an expense to the Fund.
H. SECURITIES LENDING
The Fund may loan securities to certain brokers through a securities lending
agent for which it receives initial cash collateral against the loaned
securities in an amount equal to at least 102% of the market value of the loaned
securities. Collateral is maintained over the life of the loan in an amount not
less than 100% of the market value of loaned securities, as determined at the
close of fund business each day; any additional collateral required due to
changes in security values is delivered to the fund on the next business day.
The collateral is invested in short-term instruments as noted in the Statement
of Investments. The Fund receives interest income from the investment of cash
collateral, adjusted by lender fees and broker rebates. The Fund bears the risk
of loss with respect to the investment of the collateral and the securities
loaned. The securities lending agent has agreed to indemnify the Fund in the
case of default of any securities borrower.
Annual Report | 33
Mutual European Fund
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
I. INCOME TAXES
No provision has been made for U.S. income taxes because the Fund intends to
qualify as a regulated investment company under the Internal Revenue Code and to
distribute to shareholders substantially all of its taxable income and net
realized gains.
Foreign securities held by the Fund may be subject to foreign taxation on
dividend and interest income received. Foreign taxes, if any, are recorded based
on the tax regulations and rates that exist in the foreign markets in which the
Fund invests.
J. 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.
Interest income and estimated expenses are accrued daily. Amortization of
premium and accretion of discount on debt securities are included in interest
income. Dividend income and dividends declared on securities sold short are
recorded on the ex dividend date except that certain dividends from foreign
securities are recognized as soon as the fund is notified of the ex-divedend
date. Distributions to shareholders are recorded on the ex-dividend date and are
determined according to income tax regulations (tax basis). Distributable
earnings determined on a tax basis may differ from earnings recorded in
accordance with accounting principles generally accepted in the United States.
These differences may be permanent or temporary. Permanent differences are
reclassified among capital accounts to reflect their tax character. These
reclassifications have no impact on net assets or the results of operations.
Temporary differences are not reclassified, as they may reverse in subsequent
periods.
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. Differences in class-level
expenses may result in payment of different per share distributions by class.
Common expenses incurred by the Series Fund are allocated among the funds based
on the ratio of net assets of each fund to the combined net assets of the Series
Fund. Fund specific expenses are charged directly to the fund that incurred the
expense.
K. ACCOUNTING ESTIMATES
The preparation of financial statements in accordance with accounting principles
generally accepted in the United States of America 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 expenses during the reporting period. Actual results could differ from those
estimates.
34 | Annual Report
Mutual European Fund
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
L. REDEMPTION FEES
A short term trading redemption fee will be imposed, with some exceptions, on
any Fund shares that are redeemed or exchanged within seven calendar days
following their purchase date. The redemption fee is 2% of the amount redeemed.
Such fees are retained by the Fund and accounted for as an addition to paid-in
capital.
M. GUARANTEES AND INDEMNIFICATIONS Under the Series Fund's organizational
documents, its officers and directors are indemnified by the Fund against
certain liabilities arising out of the performance of their duties to the Fund.
Additionally, in the normal course of business, the Fund enters into contracts
with service providers that contain general indemnification clauses. The Fund's
maximum exposure under these arrangements is unknown as this would involve
future claims that may be made against the Fund that have not yet occurred.
Currently, the Fund expects the risk of loss to be remote.
2. CAPITAL STOCK
At December 31, 2006, there were 500 million shares authorized ($0.001 par
value). Transactions in the Fund's shares were as follows:
-----------------------------------------------------------
YEAR ENDED DECEMBER 31,
2006 2005
-----------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
-----------------------------------------------------------
CLASS Z SHARES:
Shares sold .................... 5,431,574 $ 128,493,327 5,377,432 $ 112,505,328
Shares issued in reinvestment of
distributions ................. 3,685,023 87,880,555 2,984,092 63,192,364
Shares redeemed ................ (4,074,596) (95,961,248) (4,294,224) (90,754,208)
-----------------------------------------------------------
Net increase (decrease) ........ 5,042,001 $ 120,412,634 4,067,300 $ 84,943,484
===========================================================
CLASS A SHARES:
Shares sold .................... 13,363,218 $ 312,765,819 9,974,175 $ 205,918,108
Shares issued in reinvestment of
distributions ................. 2,734,585 64,182,231 2,152,673 44,944,939
Shares redeemed ................ (9,943,698) (228,016,484) (6,359,520) (130,503,427)
-----------------------------------------------------------
Net increase (decrease) ........ 6,154,105 $ 148,931,566 5,767,328 $ 120,359,620
===========================================================
CLASS B SHARES:
Shares sold .................... 187,205 $ 4,290,688 177,278 $ 3,527,919
Shares issued in reinvestment of
distributions ................. 218,877 5,014,535 196,622 4,024,563
Shares redeemed ................ (420,926) (9,488,786) (309,160) (6,201,403)
-----------------------------------------------------------
Net increase (decrease) ........ (14,844) $ (183,563) 64,740 $ 1,351,079
===========================================================
Annual Report | 35
Mutual European Fund
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. CAPITAL STOCK (CONTINUED)
---------------------------------------------------------
YEAR ENDED DECEMBER 31,
2006 2005
---------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
---------------------------------------------------------
CLASS C SHARES:
Shares sold .................... 1,898,556 $ 44,159,577 1,782,398 $ 36,506,909
Shares issued in reinvestment of
distributions ................. 973,872 22,793,189 823,947 17,201,713
Shares redeemed ................ (1,898,057) (43,720,379) (1,554,721) (31,790,147)
---------------------------------------------------------
Net increase (decrease) ........ 974,371 $ 23,232,387 1,051,624 $ 21,918,475
=========================================================
3. TRANSACTIONS WITH AFFILIATES
Franklin Resources, Inc. is the holding company for various subsidiaries that
together are referred to as Franklin Templeton Investments. Certain officers and
directors of the Series Fund are also officers and/or directors of the
following subsidiaries:
- ----------------------------------------------------------------------------------------
SUBSIDIARY AFFILIATION
- ----------------------------------------------------------------------------------------
Franklin Mutual Advisers, LLC (Franklin Mutual) Investment manager
Franklin Templeton Services, LLC (FT Services) Administrative manager
Franklin Templeton Distributors, Inc. (Distributors) Principal underwriter
Franklin Templeton Investor Services, LLC (Investor Services) Transfer agent
A. MANAGEMENT FEES
The Fund pays an investment management fee to Franklin Mutual based on the
average daily net assets of the Fund as follows:
- --------------------------------------------------------------------------------
ANNUALIZED FEE RATE NET ASSETS
- --------------------------------------------------------------------------------
0.800% Up to and including $1 billion
0.770% Over $1 billion, up to and including $2 billion
0.750% Over $2 billion, up to and including $5 billion
0.730% In excess of $5 billion
B. ADMINISTRATIVE FEES
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:
- --------------------------------------------------------------------------------
ANNUALIZED FEE RATE NET ASSETS
- --------------------------------------------------------------------------------
0.150% Up to and including $200 million
0.135% Over $200 million, up to and including $700 million
0.100% Over $700 million, up to and including $1.2 billion
0.075% In excess of $1.2 billion
36 | Annual Report
Mutual European Fund
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. TRANSACTIONS WITH AFFILIATES (CONTINUED)
C. DISTRIBUTION FEES
The Fund's Board of Directors has adopted distribution plans for each share
class with the exception of Class Z shares, pursuant to Rule 12b-1 under the
1940 Act. Under the Fund's Class A reimbursement distribution plan, the Fund
reimburses Distributors for costs incurred in connection with the servicing,
sale and distribution of the Fund's shares up to the maximum annual plan rate.
Under the Class A reimbursement distribution plan, costs exceeding the maximum
for the current plan year cannot be reimbursed in subsequent periods.
In addition, under the Fund's Class B and C compensation distribution plans, the
Fund pays Distributors for costs incurred in connection with the servicing, sale
and distribution of the Fund's shares up to the maximum annual plan rate for
each class.
The maximum annual plan rates, based on the average daily net assets, for each
class, are as follows:
Class A ....................... 0.35%
Class B ....................... 1.00%
Class C ....................... 1.00%
D. SALES CHARGES/UNDERWRITING AGREEMENTS
Distributors has advised the Fund of the following commission transactions
related to the sales and redemptions of the Fund's shares for the year:
Sales charge retained net of commisions paid to
unaffillated broker dealers .................. $295,700
Contingent deferred sales charges retained .... $ 92,212
E. TRANSFER AGENT FEES
The Fund paid transfer agent fees of $2,473,590, of which $1,414,788 was
retained by Investor Services.
4. EXPENSE OFFSET ARRANGEMENT
The Fund has entered into an arrangement with its custodian whereby credits
realized as a result of uninvested cash balances are used to reduce a portion of
the Fund's custodian expenses. During the year ended December 31, 2006, the
custodian fees were reduced as noted in the Statement of Operations.
Annual Report | 37
Mutual European Fund
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. INCOME TAXES
For tax purposes, realized capital losses, occurring subsequent to October 31,
may be deferred and treated as occurring on the first day of the following
fiscal year. At December 31, 2006, the Fund deferred realized capital losses of
$12,056,898.
The tax character of distributions paid during the years ended December 31, 2006
and 2005, was as follows:
------------------------------
2006 2005
------------------------------
Distributions paid from:
Ordinary income ...................... $ 67,088,310 $ 68,796,936
Long term capital gain ............... 143,468,468 82,571,531
------------------------------
$210,556,778 $151,368,467
==============================
At December 31, 2006, the cost of investments, net unrealized appreciation
(depreciation), undistributed ordinary income and undistributed long term
capital gains for income tax purposes were as follows:
Cost of investments ....................................... $ 1,549,319,896
================
Unrealized appreciation ................................... $ 809,895,057
Unrealized depreciation ................................... (9,056,253)
----------------
Net unrealized appreciation (depreciation) ................ $ 800,838,804
================
Distributable earnings - Undistributed ordinary income .... $ 2,586,839
================
Net investment income differs for financial statement and tax purposes primarily
due to differing treatments of defaulted securities, foreign currency
transactions, passive foreign investment company shares, bond discounts and
premiums and certain dividends on securities sold short.
Net realized gains (losses) differ for financial statement and tax purposes
primarily due to differing treatments of wash sales, foreign currency
transactions, passive foreign investment company shares, and certain dividends
on securities sold short.
6. INVESTMENT TRANSACTIONS
Purchases and sales of investments (excluding short term securities and
securities sold short) for the year ended December 31, 2006, aggregated
$775,568,105 and $733,872,437, respectively.
38 | Annual Report
Mutual European Fund
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. SYNTHETIC EQUITY SWAPS
As of December 31, 2006, the Fund had the following synthetic equity swaps
outstanding:
NUMBER OF NOTIONAL UNREALIZED
CONTRACTS VALUE GAIN (LOSS)
- ----------------------------------------------------------------------------------------------------------------
CONTRACTS TO BUY
Scottish Power PLC (7.48-7.58 GBP) ............................. 763,020 $ 11,177,065 $ (95,344)
-------------
Total contracts to buy ....................................................................... $ (95,344)
-------------
CONTRACTS TO SELL
Fred Olsen Energy ASA (228.03 - 282.66 NOK) .................... 169,512 $ 7,937,890 $ (1,184,052)
-------------
Total contracts to sell ...................................................................... (1,184,052)
-------------
Net unrealized gain (loss) ................................................................... $ (1,279,396)
=============
8. FORWARD EXCHANGE CONTRACTS
At December 31, 2006, the Fund had the following forward exchange contracts
outstanding:
CONTRACT SETTLEMENT UNREALIZED UNREALIZED
AMOUNT DATE GAIN LOSS
- -----------------------------------------------------------------------------------------------
CONTRACTS TO BUY
1,953,598 British Pound . $ 3,832,178 1/08/07 $ (6,079)
36,461,206 Danish Krone .. 6,438,324 1/23/07 $ 23,502
39,168,556 Danish Krone .. 6,947,472 1/23/07 (5,836)
79,314,666 Swedish Krona . 11,655,062 2/15/07 (42,849)
831,773 Norwegian Krone 132,824 3/07/07 959
18,621,000 Norwegian Krone 3,000,000 3/07/07 (4,978)
CONTRACTS TO SELL
20,300,000 British Pound . 38,514,581 1/08/07 (1,242,728)
11,145,765 British Pound . 20,762,957 1/16/07 (1,067,125)
56,495,923 Euro .......... 71,539,430 1/18/07 (3,114,521)
283,030,950 Danish Krone .. 48,132,616 1/23/07 (2,027,461)
62,073,417 Euro .......... 79,866,246 1/24/07 (2,183,082)
24,950,000 British Pound . 49,106,840 2/08/07 234,557
19,371,963 British Pound . 36,876,609 2/08/07 (1,069,366)
408,908,295 Swedish Krona . 60,029,732 2/15/07 162,743
4,950,000 British Pound . 9,709,051 2/20/07 12,709
94,296,578 Euro .......... 119,844,851 2/20/07 (4,943,511)
52,363,523 Euro .......... 69,935,412 2/26/07 622,117
72,532,597 Euro .......... 95,311,465 2/26/07 (699,517)
450,000,000 Norwegian Krone 74,071,638 3/07/07 1,693,146
117,413,690 Swiss Franc ... 99,354,269 3/07/07 2,409,205
90,000,000 Euro .......... 115,217,100 3/13/07 (3,987,337)
Annual Report | 39
Mutual European Fund
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
8. FORWARD EXCHANGE CONTRACTS (CONTINUED)
CONTRACT SETTLEMENT UNREALIZED UNREALIZED
AMOUNT DATE GAIN LOSS
- --------------------------------------------------------------------------------------------------------------
CONTRACTS TO SELL
472,500,000 Swedish Krona ............ $ 69,487,792 3/15/07 $ 204,032
102,477,981 Euro ..................... 136,199,953 4/13/07 305,153
73,507,657 Euro ..................... 93,195,324 4/18/07 $ (4,300,502)
33,711,402 Euro ..................... 45,161,308 5/24/07 388,427
71,900,000 Euro ..................... 93,146,953 5/24/07 (2,345,072)
30,791,866 Euro ..................... 41,333,243 6/06/07 417,958
305,543,656 Norwegian Krone .......... 50,440,606 6/07/07 1,148,726
------------------------------
Unrealized gain (loss) on forward exchange contracts .............. 7,623,234 $ (27,039,964)
------------------------------
Net unrealized gain (loss) on forward exchange contracts ................... $ (19,416,730)
==============
9. CONCENTRATION OF RISK
Investing in foreign securities may include certain risks and considerations not
typically associated with investing in U.S. securities, such as fluctuating
currency values and changing local and regional economic, political and social
conditions, which may result in greater market volatility. In addition, certain
foreign securities may not be as liquid as U.S. securities.
10. DEFAULTED SECURITIES
The Fund may purchase the pre-default or defaulted debt of distressed companies.
Distressed companies are financially troubled and are about to be/or are already
involved in financial restructuring or bankruptcy. The Fund does not accrue
income on these securities, if it becomes probable that the income will not be
collected. Risks associated with purchasing these securities include the
possibility that the bankruptcy or other restructuring process takes longer than
expected, or that distributions in restructuring are less than anticipated,
either or both of which may result in unfavorable consequences to the Fund. At
December 31, 2006, the aggregate value of these securities was $59,688,518,
representing 2.52% of the Fund's net assets. For information as to specific
securities, see the accompanying Statement of Investments.
11. RESTRICTED SECURITIES
The Fund may invest in securities that are restricted under the Securities Act
of 1933 (the 1933 Act) or which are subject to legal, contractual, or other
agreed upon restrictions on resale. Restricted securities are often purchased in
private placement transactions, and cannot be sold without prior registration
unless the sale is pursuant to an exemption under the 1933 Act. Disposal of
these securities may require greater effort and expense, and prompt sale at an
acceptable price may be difficult. The Fund may have registration rights for
restricted securities. The issuer generally incurs all registration costs.
40 | Annual Report
Mutual European Fund
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
11. RESTRICTED SECURITIES (CONTINUED)
At December 31, 2006, the Fund held investments in restricted securities,
excluding 144A securities deemed to be liquid, valued in accordance with
procedures approved by the Fund's Board of Directors as reflecting fair value,
as follows:
- --------------------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT,
SHARES, WARRANTS ACQUISITION
AND CONTRACTS ISSUER DATES COST VALUE
- --------------------------------------------------------------------------------------------------------------
83,713 AboveNet Inc. ....................... 10/02/01 - 11/25/03 $ 4,201,443 $ 2,564,966
117 AboveNet Inc., options to purchase
(shares), exercise price $20.95,
expiration date, 9/09/13 .......... 4/17/06 - 9/08/06 -- 3,165
2,816 AboveNet Inc., wts., 9/08/08 ........ 10/02/01 - 10/02/03 348,479 90,112
3,313 AboveNet Inc., wts., 9/08/10 ........ 10/02/01 - 10/02/03 373,672 95,414
17,909 Augsburg Re AG ...................... 5/25/06 17,909 --
205,953 Augsburg Re AG, zero cpn.,
2/17/07 ........................... 5/25/06 205,953 2,060
15,240,837 Euro Wagon LP ....................... 12/08/05 - 10/30/06 18,125,692 20,118,666
2,050,000 Globe Specialty Metals Inc.,
144A .............................. 9/27/05 11,275,000 10,258,200
4,100,000 Globe Specialty Metals Inc., wts.,
144A, 10/03/09 .................... 9/27/05 1,025,000 2,214,000
16,080 Olympus Re Holdings Ltd. ............ 2/19/01 - 12/19/01 1,608,000 16,080
46,841 PTV Inc., 10.00%, pfd, A ............ 12/07/01 - 3/16/02 140,523 175,654
-------------
TOTAL RESTRICTED SECURITIES (1.50% of Net Assets) ....................... $ 35,538,317
=============
12. HOLDINGS OF 5% VOTING SECURITIES OF PORTFOLIO COMPANIES
The Investment Company Act of 1940 defines "affiliated companies" to include
investments in portfolio companies in which a fund owns 5% or more of the
outstanding voting securities. Investments in "affiliated companies" for the
Fund for the year ended December 31, 2006 were as shown below.
- ------------------------------------------------------------------------------------------------------------------------------------
NUMBER OF NUMBER OF
SHARES/WARRANTS SHARES/WARRANTS VALUE REALIZED
HELD AT BEGINNING GROSS GROSS HELD AT END AT END INVESTMENT CAPITAL
NAME OF ISSUER OF YEAR ADDITIONS REDUCTIONS OF YEAR OF YEAR INCOME GAIN (LOSS)
- ------------------------------------------------------------------------------------------------------------------------------------
NON-CONTROLLED AFFILIATES
Euro Wagon LP .............. 14,000,000 1,240,837 -- 15,240,837 $ 20,118,666 -- --
Globe Specialty Metals Inc.,
144A ..................... 2,050,000 -- -- 2,050,000 10,258,200 $ 143,500 --
Globe Specialty Metals Inc.,
wts., 10/03/09, 144A .... 4,100,000 -- -- 4,100,000 2,214,000 -- --
----------------------------------------
TOTAL NON-CONTROLLED AFFILIATED SECURITIES (1.38% OF NET ASSETS) .................... $ 32,590,866 $ 143,500 $ --
========================================
Annual Report | 41
Mutual European Fund
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
13. OTHER CONSIDERATIONS
Directors or employees of Franklin Mutual, as the Fund's Investment Manager, may
serve as members on the board of directors of certain companies in which the
Fund invests and/or may represent the Fund in certain corporate negotiations. As
a result of this involvement, such individuals may be in possession of certain
material non-public information which, pursuant to the Fund's policies and the
requirements of the federal securities laws, could prevent the Fund from trading
in the securities of such companies for limited or extended periods of time. The
securities have been identified on the accompanying Statement of Investments.
14. REGULATORY MATTERS
As part of various investigations by a number of federal, state, and foreign
regulators and governmental entities, including the Securities and Exchange
Commission ("SEC"), relating to certain practices in the mutual fund industry,
including late trading, market timing and marketing support payments to
securities dealers who sell fund shares ("marketing support"), Franklin
Resources, Inc. and certain of its subsidiaries (collectively, the "Company"),
entered into settlements with certain of those regulators. Specifically, the
Company entered into settlements with the SEC, among others, concerning market
timing and marketing support.
On June 23, 2006, the SEC approved the proposed plan of distribution for the
marketing support settlement, and disbursement of the settlement monies to the
designated funds, in accordance with the terms and conditions of that settlement
and plan, was completed in September 2006 and is recorded as other income.
The plan of distribution for the market timing settlement is currently under
review by the SEC staff. After publication of notice of the plan and a 30-day
comment period, the proposed plan of distribution will be submitted to the SEC
for approval. Following the SEC's approval of the plan of distribution, with
modifications as appropriate, distribution of the settlement monies will begin
in accordance with the terms and conditions of the settlement and plan.
In addition, the Company, as well as most of the mutual funds within Franklin
Templeton Investments and certain current or former officers, Company directors,
fund directors, and employees, have been named in private lawsuits (styled as
shareholder class actions, or as derivative actions on behalf of either the
named funds or Franklin Resources, Inc.). The lawsuits relate to the industry
practices referenced above, as well as to allegedly excessive commissions and
advisory and distribution fees.
42 | Annual Report
Mutual European Fund
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
14. REGULATORY MATTERS (CONTINUED)
The Company and fund management believe that the claims made in each of the
private lawsuits referenced above are without merit and intend to defend against
them vigorously. The Company cannot predict with certainty the eventual outcome
of these lawsuits, nor whether they will have a material negative impact on the
Company. If it is determined that the Company bears responsibility for any
unlawful or inappropriate conduct that caused losses to the Fund, it is
committed to making the Fund or its shareholders whole, as appropriate.
15. NEW ACCOUNTING PRONOUNCEMENTS
In July 2006, the Financial Accounting Standards Board (FASB) issued FASB
Interpretation No. 48, "Accounting for Uncertainty in Income Taxes -- an
Interpretation of FASB Statement No. 109" ("FIN 48"), which clarifies the
accounting for uncertainty in tax positions taken or expected to be taken in a
tax return. FIN 48 provides guidance on the measurement, recognition,
classification and disclosure of tax positions, along with accounting for the
related interest and penalties. FIN 48 is effective for fiscal years beginning
after December 15, 2006, and is to be applied to all open tax years as of the
date of effectiveness. On December 22, 2006, the Securities and Exchange
Commission extended the implementation date to no later than the last net asset
value calculation in the first new semi-annual reporting period in 2007. The
Fund is currently evaluating the impact, if any, of applying the various
provisions of FIN 48.
In September 2006, FASB issued FASB Statement No. 157, "Fair Value Measurement"
("SFAS 157"), which defines fair value, establishes a framework for measuring
fair value, and expands disclosures about fair value measurements. SFAS 157 is
effective for fiscal years beginning after November 15, 2007, and interim
periods within those fiscal years. The Fund believes the adoption of SFAS 157
will have no material impact on its financial statements.
Annual Report | 43
Mutual European Fund
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
TO THE BOARD OF DIRECTORS OF FRANKLIN MUTUAL SERIES FUND INC.
AND SHAREHOLDERS OF THE MUTUAL EUROPEAN FUND:
We have audited the accompanying statement of assets and liabilities of the
Mutual European Fund (one of the portfolio constituting the Franklin Mutual
Series Fund Inc.) (the "Fund"), including the statement of investments, as of
December 31, 2006, and the related statement of operations for the year then
ended, the statements of changes in net assets for each of the two years in the
period then ended, and the financial highlights for each of the five years in
the period then ended. 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 the standards of the Public Company
Accounting Oversight Board (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. We were
not engaged to perform an audit of the Fund's internal control over financial
reporting. Our audits included consideration of internal control over financial
reporting as a basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the
effectiveness of the Fund's internal control over financial reporting.
Accordingly, we express no such opinion. An audit also includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements and financial highlights, assessing the accounting principles used
and significant estimates made by management, and evaluating the overall
financial statement presentation. Our procedures included confirmation of
securities owned as of December 31, 2006, by correspondence with the custodian
and brokers or by other appropriate auditing procedures where replies from the
brokers were not received. 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 the
Mutual European Fund of the Franklin Mutual Series Fund Inc. at December 31,
2006, the results of its operations for the year then ended, the changes in its
net assets for each of the two years in the period then ended, and the financial
highlights for each of the five years in the period then ended, in conformity
with U.S. generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
Boston, Massachusetts
February 20, 2007
44 | Annual Report
Mutual European Fund
TAX DESIGNATION (UNAUDITED)
Under Section 852(b)(3)(C) of the Internal Revenue Code (Code), the Fund
designates the maximum amount allowable but no less than $127,381,868 as a long
term capital gain dividend for the fiscal year ended December 31, 2006.
Under Section 854(b)(2) of the Code, the Fund designates the maximum amount
allowable but no less than $68,679,787 as qualified dividends for purposes of
the maximum rate under Section 1(h)(11) of the Code for the fiscal year ended
December 31, 2006. In January 2007, shareholders will receive Form 1099-DIV
which will include their share of qualified dividends distributed during the
calendar year 2006. Shareholders are advised to check with their tax advisors
for information on the treatment of these amounts on their individual income tax
returns.
Under Section 871(k)(1)(C) of the Code, the Fund designates the maximum amount
allowable but no less than $4,535,326 as interest related dividends for purposes
of the tax imposed under Section 871(a)(1)(A) of the Code for the fiscal year
ended December 31, 2006.
Under Section 854(b)(2) of the Code, the Fund designates 0.54% of the ordinary
income dividends as income qualifying for the dividends received deduction for
the fiscal year ended December 31, 2006.
At December 31, 2006, more than 50% of the Fund's total assets were invested in
securities of foreign issuers. In most instances, foreign taxes were withheld
from dividends paid to the Fund on these investments. As shown in the table
below, the Funds designates to shareholders the foreign source income and
foreign taxes paid, pursuant to Section 853 of the Code. This designation will
allow shareholders of record on December 21, 2006, to treat their proportionate
share of foreign taxes paid by the Funds as having been paid directly by them.
The shareholder shall consider these amounts as foreign taxes paid in the tax
year in which they receive the Fund distribution.
The following tables provide a detailed analysis, by country, of foreign tax
paid, foreign source income, and foreign qualified dividends as designated by
the Fund, to Class Z, Class A, Class B, and Class C shareholders of record.
Annual Report | 45
Mutual European Fund
TAX DESIGNATION (UNAUDITED) (CONTINUED)
RECORD DATE: 12/21/2006
- --------------------------------------------------------------------------------------------------------
CLASS Z
FOREIGN TAX FOREIGN SOURCE FOREIGN QUALIFIED
COUNTRY PAID PER SHARE INCOME PER SHARE DIVIDENDS PER SHARE
- --------------------------------------------------------------------------------------------------------
Belgium ...................... $0.0023 $0.0117 $0.0117
Canada ....................... 0.0000 0.0002 0.0000
Denmark ...................... 0.0002 0.0085 0.0009
Finland ...................... 0.0011 0.0057 0.0057
France ....................... 0.0129 0.0704 0.0635
Germany ...................... 0.0099 0.0541 0.0468
Ireland ...................... 0.0000 0.0072 0.0072
Italy ........................ 0.0055 0.0197 0.0197
Luxembourg ................... 0.0014 0.0071 0.0071
Netherlands .................. 0.0096 0.0601 0.0454
Norway ....................... 0.0051 0.0263 0.0206
South Africa ................. 0.0000 0.0229 0.0229
Spain ........................ 0.0054 0.0268 0.0268
Sweden ....................... 0.0043 0.0217 0.0216
Switzerland .................. 0.0027 0.0230 0.0156
United Kingdom ............... 0.0000 0.2582 0.2464
-----------------------------------------------------------
TOTAL ........................ $0.0604 $0.6236 $0.5619
===========================================================
- --------------------------------------------------------------------------------------------------------
CLASS A
FOREIGN TAX FOREIGN SOURCE FOREIGN QUALIFIED
COUNTRY PAID PER SHARE INCOME PER SHARE DIVIDENDS PER SHARE
- --------------------------------------------------------------------------------------------------------
Belgium ...................... $0.0023 $0.0106 $0.0106
Canada ....................... 0.0000 0.0002 0.0000
Denmark ...................... 0.0002 0.0077 0.0008
Finland ...................... 0.0011 0.0052 0.0052
France ....................... 0.0129 0.0638 0.0575
Germany ...................... 0.0099 0.0491 0.0424
Ireland ...................... 0.0000 0.0065 0.0065
Italy ........................ 0.0055 0.0178 0.0178
Luxembourg ................... 0.0014 0.0065 0.0065
Netherlands .................. 0.0096 0.0545 0.0412
Norway ....................... 0.0051 0.0239 0.0187
South Africa ................. 0.0000 0.0207 0.0207
Spain ........................ 0.0054 0.0243 0.0243
Sweden ....................... 0.0043 0.0196 0.0195
Switzerland .................. 0.0027 0.0209 0.0142
United Kingdom ............... 0.0000 0.2345 0.2238
-----------------------------------------------------------
TOTAL ........................ $0.0604 $0.5658 $0.5097
===========================================================
46 | Annual Report
Mutual European Fund
TAX DESIGNATION (UNAUDITED) (CONTINUED)
- --------------------------------------------------------------------------------------------------------
CLASS B
FOREIGN TAX FOREIGN SOURCE FOREIGN QUALIFIED
COUNTRY PAID PER SHARE INCOME PER SHARE DIVIDENDS PER SHARE
- --------------------------------------------------------------------------------------------------------
Belgium ...................... $0.0023 $0.0078 $0.0078
Canada ....................... 0.0000 0.0001 0.0000
Denmark ...................... 0.0002 0.0057 0.0006
Finland ...................... 0.0011 0.0038 0.0038
France ....................... 0.0129 0.0468 0.0422
Germany ...................... 0.0099 0.0360 0.0311
Ireland ...................... 0.0000 0.0048 0.0048
Italy ........................ 0.0055 0.0131 0.0131
Luxembourg ................... 0.0014 0.0048 0.0048
Netherlands .................. 0.0096 0.0400 0.0302
Norway ....................... 0.0051 0.0175 0.0137
South Africa ................. 0.0000 0.0152 0.0152
Spain ........................ 0.0054 0.0178 0.0178
Sweden ....................... 0.0043 0.0144 0.0144
Switzerland .................. 0.0027 0.0153 0.0104
United Kingdom ............... 0.0000 0.1719 0.1640
---------------------------------------------------------------
TOTAL ........................ $0.0604 $0.4150 $0.3739
===============================================================
- --------------------------------------------------------------------------------------------------------
CLASS C
FOREIGN TAX FOREIGN SOURCE FOREIGN QUALIFIED
COUNTRY PAID PER SHARE INCOME PER SHARE DIVIDENDS PER SHARE
- --------------------------------------------------------------------------------------------------------
Belgium $0.0023 $0.0078 $0.0078
Canada 0.0000 0.0001 0.0000
Denmark 0.0002 0.0057 0.0006
Finland 0.0011 0.0038 0.0038
France 0.0129 0.0470 0.0424
Germany 0.0099 0.0362 0.0313
Ireland 0.0000 0.0048 0.0048
Italy 0.0055 0.0131 0.0131
Luxembourg 0.0014 0.0048 0.0048
Netherlands 0.0096 0.0402 0.0304
Norway 0.0051 0.0176 0.0138
South Africa 0.0000 0.0153 0.0153
Spain 0.0054 0.0179 0.0179
Sweden 0.0043 0.0145 0.0145
Switzerland 0.0027 0.0154 0.0104
United Kingdom 0.0000 0.1728 0.1649
---------------------------------------------------------------
TOTAL $0.0604 $0.4170 $0.3758
===============================================================
Annual Report | 47
Mutual European Fund
TAX DESIGNATION (UNAUDITED) (CONTINUED)
Foreign Tax Paid per Share (Column 1) is the amount per share available to you,
as a tax credit (assuming you held your shares in the Fund for a minimum of 16
days during the 31-day period beginning 15 days before the ex-dividend date of
the Fund's distribution to which the foreign taxes relate), or, as a tax
deduction.
Foreign Source Income per Share (Column 2) is the amount per share of income
dividends paid to you that is attributable to foreign securities held by the
Fund, plus any foreign taxes withheld on these dividends. The amounts reported
include foreign source qualified dividends that have not been adjusted for the
rate differential applicable to such dividend income. 1
Foreign Qualified Dividends per Share (Column 3) is the amount per share of
foreign source qualified dividends the Fund paid to you, plus any foreign taxes
withheld on these dividends. These amounts represent the portion of the Foreign
Source Income reported to you in column 2 that were derived from qualified
foreign securities held by the Fund. 1
In January 2007, shareholders will receive Form 1099-DIV which will include
their share of taxes paid and foreign source income distributed during the
calendar year 2006. The Foreign Source Income reported on Form 1099-DIV has not
been adjusted for the rate differential on foreign source qualified dividend
income. Shareholders are advised to check with their tax advisors for
information on the treatment of these amounts on their 2006 individual income
tax returns.
1 Qualified dividends are taxed at a maximum rate of 15% (5% for those in
the 10% and 15% income tax bracket). In determining the amount of foreign
tax credit that may be applied against the U.S. tax liability of
individuals receiving foreign source qualified dividends, adjustments may
be required to the foreign tax credit limitation calculation to reflect
the rate differential applicable to such dividend income. The rules
however permit certain individuals to elect not to apply the rate
differential adjustments for capital gains and/or dividends for any
taxable year. Please consult your tax advisor and the instructions to Form
1116 for more information.
48 | Annual Report
Mutual European Fund
BOARD MEMBERS AND OFFICERS
The name, year of birth and address of the officers and board members, as well
as their affiliations, positions held with the Fund, principal occupations
during the past five years and number of portfolios overseen in the Franklin
Templeton Investments fund complex are shown below.
INDEPENDENT BOARD MEMBERS
- ----------------------------------------------------------------------------------------------------------------------------------
NUMBER OF PORTFOLIOS IN
NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN
AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- ----------------------------------------------------------------------------------------------------------------------------------
EDWARD I. ALTMAN, PH.D. (1941) Director Since 1987 7 Director, A.T.D. Inc. (financial
101 John F. Kennedy Parkway technology and investment company).
Short Hills, NJ 07078-2789
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Max L. Heine Professor of Finance and Director of The Credit and Debt Markets Research Program, Salomon Center, Stern School of
Business, New York University; editor and author of numerous financial publications; financial consultant; and serves on the
Investment Advisory Committee of the New York State Common Retirement Fund; and FORMERLY, Vice Director, NYU Salomon Center,
Stern School of Business, New York University.
- ----------------------------------------------------------------------------------------------------------------------------------
ANN TORRE BATES (1958) Director Since 1994 7 Independent Director, SLM
101 John F. Kennedy Parkway Corporation (Sallie Mae) and Allied
Short Hills, NJ 07078-2789 Capital Corporation (financial
services).
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Independent strategic and financial consultant; and FORMERLY, Executive Vice President and Chief Financial Officer, NHP
Incorporated (manager of multifamily housing) (1995-1997); and Vice President and Treasurer, US Airways, Inc. (until 1995).
- ----------------------------------------------------------------------------------------------------------------------------------
BURTON J. GREENWALD (1929) Director Since 2002 13 Director, Franklin Templeton Emerging
101 John F. Kennedy Parkway Markets Debt Opportunities Fund PLC
Short Hills, NJ 07078-2789 and Fiduciary International Ireland
Limited.
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Managing Director, B.J. Greenwald Associates (management consultants to the financial services industry) and FORMERLY, Chairman,
Fiduciary Trust International Funds; Executive Vice President, L.F. Rothschild Fund Management, Inc.; President and Director,
Merit Mutual Funds; President, Underwriting Division and Director, National Securities & Research Corporation; Governor,
Investment Company Institute and Chairman, ICI Public Information Committee.
- ----------------------------------------------------------------------------------------------------------------------------------
BRUCE A. MACPHERSON (1930) Director Since 1974 7 None
101 John F. Kennedy Parkway
Short Hills, NJ 07078-2789
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Retired, former Chairman, A.A. MacPherson, Inc., Canton, MA (representative for electrical manufacturers).
- ----------------------------------------------------------------------------------------------------------------------------------
CHARLES RUBENS II (1930) Director Since 1998 13 None
101 John F. Kennedy Parkway
Short Hills, NJ 07078-2789
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Private investor.
- ----------------------------------------------------------------------------------------------------------------------------------
Annual Report | 49
- ----------------------------------------------------------------------------------------------------------------------------------
NUMBER OF PORTFOLIOS IN
NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN
AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- ----------------------------------------------------------------------------------------------------------------------------------
ROBERT E. WADE (1946) Director and Director since 30 Director, El Oro and
101 John F. Kennedy Parkway Chairman of 1991 and Exploration Co., p.l.c.
Short Hills, NJ 07078-2789 the Board Chairman of the (investments) and ARC
Board since 2005 Wireless Solutions, Inc.
(wireless components and
network products).
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Practicing attorney.
- ----------------------------------------------------------------------------------------------------------------------------------
INTERESTED BOARD MEMBERS AND OFFICERS
- ----------------------------------------------------------------------------------------------------------------------------------
NUMBER OF PORTFOLIOS IN
NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN
AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- ----------------------------------------------------------------------------------------------------------------------------------
**WILLIAM J. LIPPMAN (1925) Director Since 1996 13 None
One Parker Plaza, 9th Floor
Fort Lee, NJ 07024-2920
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
President, Franklin Advisory Services, LLC; Director, Templeton Worldwide, Inc.; and officer and/or director or trustee, as the
case may be, of four of the investment companies in Franklin Templeton Investments.
- ----------------------------------------------------------------------------------------------------------------------------------
PHILIPPE BRUGERE-TRELAT (1949) Vice President Since 2005 Not Applicable Not Applicable
101 John F. Kennedy Parkway,
Short Hills, NJ 07078-2789
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Vice President, Franklin Mutual Advisers, LLC; Portfolio Manager of Eurovest SA (French registered Investment Company, Sicav);
and officer of two of the investment companies in Franklin Templeton Investments.
- ----------------------------------------------------------------------------------------------------------------------------------
JAMES M. DAVIS (1952) Chief Chief Compliance Not Applicable Not Applicable
One Franklin Parkway Compliance Officer since 2004
San Mateo, CA 94403-1906 Officer and and Vice President
Vice President - AML
- AML Compliance since
Compliance February 2006
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Director, Global Compliance, Franklin Resources, Inc.; officer of some of the other subsidiaries of Franklin Resources, Inc. and
of 46 of the investment companies in Franklin Templeton Investments; and FORMERLY, Director of Compliance, Franklin Resources,
Inc. (1994-2001).
- ----------------------------------------------------------------------------------------------------------------------------------
MICHAEL J. EMBLER (1964) Senior Vice Since 2005 Not Applicable Not Applicable
101 John F. Kennedy Parkway President
Short Hills, NJ 07078-2789 and Chief
Investment
Officer
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Senior Vice President and Chief Investment Officer, Franklin Mutual Advisers, LLC; and officer of two of the investment companies
in Franklin Templeton Investments.
- ----------------------------------------------------------------------------------------------------------------------------------
50 | Annual Report
- ----------------------------------------------------------------------------------------------------------------------------------
NUMBER OF PORTFOLIOS IN
NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN
AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- ----------------------------------------------------------------------------------------------------------------------------------
JIMMY D. GAMBILL (1947) Senior Vice Since 2002 Not Applicable Not Applicable
500 East Broward Blvd. President
Suite 2100 and Chief
Fort Lauderdale, FL 33394-3091 Executive
Officer -
Finance and
Administration
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
President, Franklin Templeton Services, LLC; Senior Vice President, Templeton Worldwide, Inc.; and officer of some of the other
subsidiaries of Franklin Resources, Inc. and of 46 of the investment companies in Franklin Templeton Investments.
- ----------------------------------------------------------------------------------------------------------------------------------
DAVID P. GOSS (1947) Vice President Since 2000 Not Applicable Not Applicable
One Franklin Parkway
San Mateo, CA 94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Senior Associate General Counsel, Franklin Templeton Investments; officer and director of one of the subsidiaries of Franklin
Resources, Inc.; and officer of 46 of the investment companies in Franklin Templeton Investments.
- ----------------------------------------------------------------------------------------------------------------------------------
STEVEN J. GRAY (1955) Secretary Since 2005 Not Applicable Not Applicable
One Franklin Parkway
San Mateo, CA 94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Senior Associate General Counsel, Franklin Templeton Investments; and officer of 41 of the investment companies in Franklin
Templeton Investments.
- ----------------------------------------------------------------------------------------------------------------------------------
BARBARA J. GREEN (1947) Vice President Since 2000 Not Applicable Not Applicable
One Franklin Parkway
San Mateo, CA 94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Vice President, Deputy General Counsel and Secretary, Franklin Resources, Inc.; Secretary and Senior Vice President, Templeton
Worldwide, Inc.; Secretary, Franklin Advisers, Inc., Franklin Advisory Services, LLC, Franklin Investment Advisory Services, LLC,
Franklin Mutual Advisers, LLC, Franklin Templeton Institutional, LLC,, Franklin Templeton Investor Services, LLC, Franklin
Templeton Services, LLC, Franklin Templeton Distributors, Inc., Templeton Investment Counsel, LLC, and Templeton/Franklin
Investment Services, Inc.; Vice President, Templeton Global Advisors Limited; and officer of some of the other subsidiaries of
Franklin Resources, Inc. and of 46 of the investment companies in Franklin Templeton Investments; and FORMERLY, Deputy Director,
Division of Investment Management, Executive Assistant and Senior Advisor to the Chairman, Counselor to the Chairman, Special
Counsel and Attorney Fellow, U.S. Securities and Exchange Commission (1986-1995); Attorney, Rogers & Wells (until 1986); and
Judicial Clerk, U.S. District Court (District of Massachusetts) (until 1979).
- ----------------------------------------------------------------------------------------------------------------------------------
PETER A. LANGERMAN (1955) President Since 2005 Not Applicable Not Applicable
101 John F. Kennedy Parkway and Chief
Short Hills, NJ 07078-2702 Executive
Officer -
Investment
Management
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Chairman of the Board, Chief Executive Officer and President, Franklin Mutual Advisers, LLC; and officer of two of the investment
companies in Franklin Templeton Investments; and FORMERLY, Director, New Jersey's Division of Investment.
- ----------------------------------------------------------------------------------------------------------------------------------
Annual Report | 51
- ----------------------------------------------------------------------------------------------------------------------------------
NUMBER OF PORTFOLIOS IN
NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN
AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- ----------------------------------------------------------------------------------------------------------------------------------
GREGORY R. SEWARD (1956) Treasurer Since 2005 Not Applicable Not Applicable
500 East Broward Blvd.
Suite 2100
Fort Lauderdale, FL 33394-3091
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Vice President, Franklin Templeton Services, LLC; officer of 16 of the investment companies in Franklin Templeton Investments;
and FORMERLY, Vice President, JPMorgan Chase (2000-2004) and American General Financial Group (1991-2000).
- ----------------------------------------------------------------------------------------------------------------------------------
CRAIG S. TYLE (1960) Vice President Since 2005 Not Applicable Not Applicable
One Franklin Parkway
San Mateo, CA 94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
General Counsel and Executive Vice President, Franklin Resources, Inc.; officer of some of the other subsidiaries of Franklin
Resources, Inc. and of 46 of the investment companies in Franklin Templeton Investments; and FORMERLY, Partner, Shearman &
Sterling, LLP (2004-2005); and General Counsel, Investment Company Institute (ICI) (1997-2004).
- ----------------------------------------------------------------------------------------------------------------------------------
GALEN G. VETTER (1951) Chief Financial Since 2004 Not Applicable Not Applicable
500 East Broward Blvd. Officer and
Suite 2100 Chief
Fort Lauderdale, FL 33394-3091 Accounting
Officer
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Senior Vice President, Franklin Templeton Services, LLC; officer of 46 of the investment companies in Franklin Templeton
Investments; and FORMERLY, Managing Director, RSM McGladrey, Inc. (1999-2004); and Partner, McGladrey & Pullen, LLP (1979-1987
and 1991-2004).
- ----------------------------------------------------------------------------------------------------------------------------------
* We base the number of portfolios on each separate series of the U.S.
registered investment companies within the Franklin Templeton Investments
fund complex. These portfolios have a common investment manager or
affiliated investment managers.
** William J. Lippman is considered to be an interested person of Mutual
Series under the federal securities laws due to his position as an officer
of some of the subsidiaries of Franklin Resources, Inc., which is the
parent company of Mutual Series' investment manager and distributor.
Note: Subsequent to December 31, 2006, Leonard Rubin and Anne M. Tatlock ceased
to be a director of the Fund.
THE FUND'S BOARD OF DIRECTORS HAS DETERMINED THAT CERTAIN OF THE MEMBERS OF THE
AUDIT COMMITTEE, INCLUDING ANN TORRE BATES, ARE AUDIT COMMITTEE FINANCIAL
EXPERTS, AND "INDEPENDENT," UNDER THOSE PROVISIONS OF THE SARBANES-OXLEY ACT OF
2002, AND THE RULES AND FORM AMENDMENTS ADOPTED BY THE SECURITIES AND EXCHANGE
COMMISSION, RELATING TO AUDIT COMMITTEE FINANCIAL EXPERTS.
THE STATEMENT OF ADDITIONAL INFORMATION (SAI) INCLUDES ADDITIONAL INFORMATION
ABOUT THE BOARD MEMBERS AND IS AVAILABLE, WITHOUT CHARGE, UPON REQUEST.
SHAREHOLDERS MAY CALL 1-800/DIAL BEN (1-800/342-5236) TO REQUEST THE SAI.
52 | Annual Report
Mutual European Fund
SHAREHOLDER INFORMATION
PROXY VOTING POLICIES AND PROCEDURES
The Fund has established Proxy Voting Policies and Procedures ("Policies") that
the Fund uses to determine how to vote proxies relating to portfolio securities.
Shareholders may view the Fund's complete Policies online at
franklintempleton.com. Alternatively, shareholders may request copies of the
Policies free of charge by calling the Proxy Group collect at 1-954/527-7678 or
by sending a written request to: Franklin Templeton Companies, LLC, 500 East
Broward Boulevard, Suite 1500, Fort Lauderdale, FL 33394, Attention: Proxy
Group. Copies of the Fund's proxy voting records are also made available online
at franklintempleton.com and posted on the U.S. Securities and Exchange
Commission's website at sec.gov and reflect the most recent 12-month period
ended June 30.
QUARTERLY STATEMENT OF INVESTMENTS
The Fund files a complete statement of investments with the U.S. Securities and
Exchange Commission for the first and third quarters for each fiscal year on
Form N-Q. Shareholders may view the filed Form N-Q by visiting the Commission's
website at sec.gov. The filed form may also be viewed and copied at the
Commission's Public Reference Room in Washington, DC. Information regarding the
operations of the Public Reference Room may be obtained by calling
1-800/SEC-0330.
Annual Report | 53
This page intentionally left blank.
This page intentionally left blank.
This page intentionally left blank.
Literature Request
Literature Request. To receive a brochure and prospectus, please call us at
1-800/DIAL BEN(R) (1-800/342-5236) or visit franklintempleton.com. Investors
should carefully consider a fund's investment goals, risks, charges and expenses
before investing. The prospectus contains this and other information. Please
carefully read the prospectus before investing. To ensure the highest quality of
service, we may monitor, record and access telephone calls to or from our
service departments. These calls can be identified by the presence of a regular
beeping tone.
Franklin Templeton Investments
INTERNATIONAL
Mutual European Fund
Templeton BRIC Fund
Templeton China World Fund
Templeton Developing Markets Trust
Templeton Emerging Markets Small Cap Fund
Templeton Foreign Fund
Templeton Foreign Smaller Companies Fund
Templeton International (Ex EM) Fund 1
GLOBAL
Mutual Discovery Fund
Templeton Global Long-Short Fund
Templeton Global Opportunities Trust
Templeton Global Smaller Companies Fund
Templeton Growth Fund
Templeton World Fund
GROWTH
Franklin Aggressive Growth Fund
Franklin Capital Growth Fund
Franklin Flex Cap Growth Fund
Franklin Small-Mid Cap Growth Fund
Franklin Small Cap Growth Fund II 1
VALUE
Franklin Balance Sheet Investment Fund 2
Franklin Equity Income Fund
Franklin Large Cap Value Fund
Franklin MicroCap Value Fund 2
Franklin MidCap Value Fund
Franklin Small Cap Value Fund
Mutual Beacon Fund
Mutual Qualified Fund
Mutual Recovery Fund 3
Mutual Shares Fund
BLEND
Franklin Balanced Fund
Franklin Blue Chip Fund 1
Franklin Convertible Securities Fund
Franklin Growth Fund
Franklin Rising Dividends Fund
Franklin U.S. Long-Short Fund
SECTOR
Franklin Biotechnology Discovery Fund
Franklin DynaTech Fund
Franklin Global Communications Fund
Franklin Global Health Care Fund
Franklin Global Real Estate Fund
Franklin Gold and Precious Metals Fund
Franklin Natural Resources Fund
Franklin Real Estate Securities Fund
Franklin Technology Fund
Franklin Utilities Fund
Mutual Financial Services Fund
ASSET ALLOCATION
Franklin Templeton Corefolio Allocation Fund
Franklin Templeton Founding Funds Allocation Fund
Franklin Templeton Perspectives Allocation Fund
TARGET FUNDS
Franklin Templeton Conservative Target Fund
Franklin Templeton Growth Target Fund
Franklin Templeton Moderate Target Fund
RETIREMENT TARGET FUNDS
Franklin Templeton 2015 Retirement Target Fund
Franklin Templeton 2025 Retirement Target Fund
Franklin Templeton 2035 Retirement Target Fund
Franklin Templeton 2045 Retirement Target Fund
INCOME
Franklin Adjustable U.S. Government Securities Fund 4
Franklin Floating Rate Daily Access Fund
Franklin High Income Fund 5
Franklin Income Fund
Franklin Limited Maturity
U.S. Government Securities Fund 4
Franklin Low Duration Total Return Fund
Franklin Real Return Fund
Franklin Strategic Income Fund
Franklin Strategic Mortgage Portfolio
Franklin Templeton Hard Currency Fund
Franklin Total Return Fund
Franklin U.S. Government Securities Fund 4
Templeton Global Bond Fund
Templeton Income Fund
TAX-FREE INCOME 6
NATIONAL FUNDS
Double Tax-Free Income Fund
Federal Tax-Free Income Fund
High Yield Tax-Free Income Fund
Insured Tax-Free Income Fund 7
LIMITED-TERM FUNDS
California Limited-Term Tax-Free Income Fund
Federal Limited-Term Tax-Free Income Fund
New York Limited-Term Tax-Free Income Fund
INTERMEDIATE-TERM FUNDS
California Intermediate-Term Tax-Free Income Fund
Federal Intermediate-Term Tax-Free Income Fund
New York Intermediate-Term Tax-Free Income Fund
STATE-SPECIFIC
Alabama Michigan 7
Arizona Minnesota 7
California 8 Missouri
Colorado New Jersey
Connecticut New York 8
Florida 8 North Carolina
Georgia Ohio 7
Kentucky Oregon
Louisiana Pennsylvania
Maryland Tennessee
Massachusetts 7 Virginia
INSURANCE FUNDS
Franklin Templeton Variable Insurance Products Trust 9
1. The fund is closed to new investors. Existing shareholders can continue
adding to their accounts.
2. The fund is only open to existing shareholders and select retirement
plans.
3. The fund is a continuously offered, closed-end fund. Shares may be
purchased daily; there is no daily redemption. However, each quarter,
pending board approval, the fund will authorize the repurchase of 5%-25%
of the outstanding number of shares. Investors may tender all or a portion
of their shares during the tender period.
4. An investment in the fund is neither insured nor guaranteed by the U.S.
government or by any other entity or institution.
5. Effective 10/1/06, Franklin's AGE High Income Fund changed its name to
Franklin High Income Fund. The fund's investment goal and strategy
remained the same.
6. For investors subject to the alternative minimum tax, a small portion of
fund dividends may be taxable. Distributions of capital gains are
generally taxable.
7. Portfolio of insured municipal securities.
8. These funds are available in two or more variations, including long-term
portfolios, portfolios of insured securities, a high-yield portfolio (CA)
and limited-term, intermediate-term and money market portfolios (CA and
NY).
9. The funds of the Franklin Templeton Variable Insurance Products Trust are
generally available only through insurance company variable contracts.
01/07 Not part of the annual report
[LOGO](R)
FRANKLIN TEMPLETON One Franklin Parkway
INVESTMENTS San Mateo, CA 94403-1906
o WANT TO RECEIVE THIS DOCUMENT FASTER VIA EMAIL?
Eligible shareholders can sign up for eDelivery at
franklintempleton.com. See inside for details.
ANNUAL REPORT AND SHAREHOLDER LETTER
MUTUAL EUROPEAN FUND
INVESTMENT MANAGER
Franklin Mutual Advisers, LLC
101 John F. Kennedy Parkway
Short Hills, NJ 07078
DISTRIBUTOR
Franklin Templeton Distributors, Inc.
1-800/DIAL BEN(R)
franklintempleton.com
SHAREHOLDER SERVICES
1-800/632-2301 - (Class A, B & C)
1-800/448-FUND - (Class Z)
Authorized for distribution only when accompanied or preceded by a prospectus.
Investors should carefully consider a fund's investment goals, risks, charges
and expenses before investing. The prospectus contains this and other
information; please read it carefully before investing.
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
identified by the presence of a regular beeping tone.
478 A2006 02/07
MUTUAL FINANCIAL SERVICES FUND
[GRAPHIC OMITTED]
- --------------------------------------------------------------------------------
DECEMBER 31, 2006
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
ANNUAL REPORT AND SHAREHOLDER LETTER SECTOR
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
WANT TO RECEIVE
THIS DOCUMENT
FASTER VIA EMAIL?
MUTUAL FINANCIAL SERVICES FUND
Eligible shareholders can
sign up for eDelivery at
franklintempleton.com.
See inside for details.
- --------------------------------------------------------------------------------
[LOGO](R)
FRANKLIN TEMPLETON
INVESTMENTS
Franklin o Templeton o MUTUAL SERIES
Thank You For Your
Continued Participation
At Mutual Series, we are pleased so many investors
share our long-term investment philosophy and have
remained shareholders for many years. Your ongoing
support plays a significant role in contributing
to the funds' success.
SPECIALIZED EXPERTISE Mutual Series is part of Franklin Templeton
Investments, which offers the specialized
expertise of three world-class investment
management groups -- Franklin, Templeton and
Mutual Series. Mutual Series is dedicated to a
unique style of value investing, searching
aggressively for opportunity among what we
believe are undervalued stocks, as well as
arbitrage situations and distressed securities.
Franklin is a recognized leader in fixed income
investing and also brings expertise in growth- and
value-style U.S. equity investing. Templeton
pioneered international investing and, with
offices in over 25 countries, offers investors a
truly global perspective.
TRUE DIVERSIFICATION Because these management groups work independently
and adhere to different investment approaches,
Franklin, Templeton and Mutual Series funds
typically have distinct portfolios. That's why the
funds can be used to build truly diversified
allocation plans covering every major asset class.
RELIABILITY YOU CAN TRUST Franklin Templeton Investments seeks to
consistently provide investors with exceptional
risk-adjusted returns over the long term, as well
as the reliable, accurate and personal service
that has helped the firm become one of the most
trusted names in financial services.
- --------------------------------------------------------------------------------
MUTUAL FUNDS | RETIREMENT PLANS | 529 COLLEGE SAVINGS PLANS | SEPARATE ACCOUNTS
- --------------------------------------------------------------------------------
[GRAPHIC OMITTED]
Annual Report
Mutual Financial Services Fund
YOUR FUND'S GOALS AND MAIN INVESTMENTS: Mutual Financial Services Fund seeks
capital appreciation, with income as a secondary goal, by investing at least 80%
of its net assets in securities of financial services companies that the manager
believes are available at market prices less than their intrinsic value. The
Fund concentrates its investments in securities of issuers such as banks,
savings and loan organizations, credit card companies, brokerage firms, finance
companies, sub-prime lending institutions, investment advisors, investment
companies and insurance companies.
- --------------------------------------------------------------------------------
PERFORMANCE DATA REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE FUTURE
RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU MAY HAVE
A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY DIFFER FROM
FIGURES SHOWN. PLEASE VISIT FRANKLINTEMPLETON.COM OR CALL 1-800/342-5236 FOR
MOST RECENT MONTH-END PERFORMANCE.
- --------------------------------------------------------------------------------
We are pleased to bring you Mutual Financial Services Fund's annual report for
the fiscal year ended December 31, 2006.
PERFORMANCE OVERVIEW
Mutual Financial Services Fund - Class Z posted a +19.73% cumulative total
return for the 12 months ended December 31, 2006. The Fund - Class Z
outperformed its benchmarks, the Standard & Poor's 500 Index (S&P 500) and the
S&P 500 Financials Index, which returned +15.78% and +19.19% for the same
period. 1 You can find the Fund's long-term performance data in the Performance
Summary beginning on page 9.
ECONOMIC AND MARKET OVERVIEW
The global economy grew in 2006, although gross domestic product growth slowed
in the U.S. while it accelerated in Europe. The economic drivers remained
consistent over the past four years: strong corporate and consumer demand,
reasonably low inflation, an improving labor market, and a relatively moderate
interest rate environment, despite recent interest rate hikes by many of the
world's central banks. However, the economy also faced headwinds from elevated
energy prices, higher global interest rates and a weaker U.S.
1. Source: Standard & Poor's Micropal. The S&P 500 consists of 500 stocks
chosen for market size, liquidity and industry group representation. Each
stock's weight in the index is proportionate to its market value. The S&P
500 is one of the most widely used benchmarks of U.S. equity performance.
The S&P 500 Financials Index is market value weighted and includes all the
financial stocks in the S&P 500. The indexes are unmanaged and include
reinvested dividends. One cannot invest directly in an index, nor is an
index representative of the Fund's portfolio.
THE DOLLAR VALUE, NUMBER OF SHARES OR PRINCIPAL AMOUNT, AND NAMES OF ALL
PORTFOLIO HOLDINGS ARE LISTED IN THE FUND'S STATEMENT OF INVESTMENTS (SOI). THE
SOI BEGINS ON PAGE 20.
4 | Annual Report
housing market. These factors dampened investor confidence mid-year, when many
equity markets declined before rebounding later in the year.
Despite such challenges, global economic activity was healthy. Strong global
liquidity -- whether petrodollars, corporate cash, private equity, household
savings or central banks' reserves -- continued to search for a home. Largely as
a result, bond yield spreads over U.S. Treasuries narrowed, and equity and
commodity markets rose in the latter part of the year. The shift from risk
aversion to risk tolerance was concurrent with the U.S. Federal Reserve Board's
decisions since June to hold the federal funds target rate at 5.25%, as well as
with lower oil prices in the second half of the year.
Narrowing corporate credit spreads globally reflected greater risk tolerance,
while abundant cash supplies in the capital markets contributed to record global
merger and acquisition activity in 2006. The total value of deals announced as a
result of hostile takeovers, private equity buyouts and broad corporate
consolidation was $3.8 trillion. 2 This figure surpassed the $3.4 trillion mark
set in 2000. 2 Announced deals from private equity alone reached a record $700
billion, more than double the record set in 2005 and 20 times greater than a
decade ago. 3
With this economic backdrop, the non-U.S. equity markets -- including emerging
markets that remained a major magnet for global fund flows -- led global equity
markets to end 2006 on a strong note, and all major regions delivered
double-digit total returns for the year. Stock market indexes in the U.S. and
most European countries reached six-year highs in the fourth quarter, and many
emerging market indexes in Asia, Europe and Latin America neared or reached
all-time highs.
Global financial stocks rose in the first four months of the period. In May and
June they experienced a correction as investors worried about inflation and the
potential response by global central banks. European financial stocks led on the
way up as well as down in the first half of the year. The second quarter decline
proved to be a buying opportunity for some investors as U.S. and European
financial stocks surged from July to the end of the year. Inflation fears
receded and capital market activities like mergers and acquisitions and buyouts
accelerated, driving many financial services shares to new highs.
INVESTMENT STRATEGY
We strive to provide investors with superior risk-adjusted returns over time
through our distinctive, value investment style, which includes investments in
undervalued common stocks, distressed debt and risk arbitrage. Rigorous fun-
GEOGRAPHIC BREAKDOWN
Based on Total Net Assets as of 12/31/06
[THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.]
U.S. 41.4%
Germany 12.5%
Sweden 7.7%
Belgium 5.1%
Japan 5.1%
France 4.3%
Spain 2.9%
Guernsey Islands 2.7%
Italy 2.6%
Norway 2.4%
Greece 2.4%
Taiwan 1.6%
Switzerland 1.6%
Denmark 1.4%
Bermuda 1.1%
Other 4.5%
Other Net Assets 0.7%
2. Source: "Can M&A's 'Best of Times' Get Better?," THE WALL STREET JOURNAL,
1/2/07.
3. Source: "TPG tops buy-out league with $101bn," THE WALL STREET JOURNAL,
12/27/06.
Annual Report | 5
- --------------------------------------------------------------------------------
WHAT IS RETURN ON EQUITY?
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Return on equity is an amount, expressed as a percentage, earned on a company's
common stock investment for a given period. It is calculated by dividing common
stock equity (net worth) at the beginning of the accounting period into net
income for the period after preferred stock dividends but before common stock
dividends. Return on equity tells common shareholders how effectually their
money is being employed. Comparing percentages for current and prior periods
also reveals trends, and comparison with industry composites reveals how well a
company is holding its own against its competitors.
- --------------------------------------------------------------------------------
damental analysis drives our investment process. We attempt to determine each
investment's intrinsic value as well as the price at which we would be willing
to commit shareholder funds. While valuation remains our key consideration, we
utilize numerous fundamental factors such as return on equity, financial
leverage and long-term earnings power. We also consider factors such as
management quality and competitive position. As always, our approach to
successful investing is as much about assessing risk and containing losses as it
is about achieving profits.
In addition, we will generally seek to hedge the Fund's currency exposure when
we deem it advantageous, to focus our efforts on analyzing business fundamentals
and assessing the value of company assets and liabilities.
MANAGER'S DISCUSSION
The Fund benefited from the performance of its European holdings over the year.
Top contributors to Fund performance in 2006 included Euronext, Eurocastle
Investment and Fortis. Our investment in Euronext, a European securities
exchange, appreciated 119% in local currency during the year under review amid a
favorable environment for global exchanges. Fundamentally, trading volumes in
stocks and derivatives were strong and costs were kept under control. Euronext
announced a plan to return approximately $1.2 billlion to shareholders in the
form of dividends and buybacks. The company's return of excess capital to
shareholders contributed to our overall investment return. In addition,
shareholders of Euronext and the New York Stock Exchange voted for the formation
of the first transatlantic securities exchange, having agreed to create a new
company at a price as of December 2006 that a vast majority of shareholders
recognized as attractive.
Eurocastle, a company that invests in German real estate, rose 81% in local
currency as it purchased German office and retail properties and then created
value by increasing occupancy rates and streamlining operations. German real
estate is an asset class that has long been neglected by investors and has had
poor performance over the past decade. This trend has been changing recently as
investors enter the German property market and the country's economy recovers.
In 2006, Eurocastle increased its property portfolio substantially while
expanding profitability.
Our investment in Fortis, the Fund's largest holding, also helped performance,
as the stock gained 25% in local currency during the year. The company's
operational transformation continued as the environment for financial services
in Europe's Benelux region grew rapidly. For example, loan growth was 18% and
book value grew at a double-digit rate in 2006 with what we felt was an
6 | Annual Report
attractive dividend offered to shareholders. Fortis management has stated it
intends to pursue further operational growth, and we continued to hold a sizable
position.
Some positions declined in value during the period, but in every case, the
position was small relative to the overall portfolio. Declines are to be
expected due to the inherent nature of the markets, and we used price weakness
to re-evaluate our investments and add to selected positions at prices we
considered attractive. Positions that detracted from Fund performance included
Vivacon, Centennial Bank Holdings and OMX.
Vivacon was the biggest detractor from overall Fund performance, declining 31%
in local currency since we initiated a position early in the period through
period-end. At year-end the company's stock had yet to recover completely from
the broad market sell-off in May and June. We continued to purchase shares on
price weakness throughout the summer as we believed the company had significant
opportunities in the German real estate market, and since June 30, the stock
price appreciated 46% in local currency through period-end.
Centennial Bank's shares fell 24% in value during 2006. The company faced
several challenges that pressured the share price including a weak local economy
in northern Colorado, an outsized level of problem loans and a high level of
senior management turnover. Centennial Bank has since taken steps toward
improving performance including a restructured leadership team, new revenue
producers and an enhanced risk-management structure.
Investing in securities exchanges was generally successful for the Fund in 2006
as well as in prior years, but our holding in OMX, which operates the Nordic
exchange businesses, was disappointing as the stock declined 8% in local
currency. OMX enjoyed many of the same positive fundamental dynamics as other
global exchanges, but it suffered from a lack of interest by many investors in
2006 as the company avoided many of the discussions related to global exchange
consolidation. We viewed this neglect by other investors as an opportunity to
acquire additional shares as we believed OMX was an attractively priced business
with strong operating prospects and hidden value in its technology division.
Finally, investors should note that we maintained our currency hedging position
of being substantially hedged to the U.S. dollar versus most of our non-U.S.
holdings. Since the dollar was generally weaker against foreign currencies
during the review period, the portfolio returns were lower than they would have
been had we not hedged the foreign currency exposure.
TOP 10 HOLDINGS
12/31/06
- --------------------------------------------------------------------------------
COMPANY % OF TOTAL
SECTOR/INDUSTRY, COUNTRY NET ASSETS
- --------------------------------------------------------------------------------
Fortis 3.0%
DIVERSIFIED FINANCIAL SERVICES,
BELGIUM
- --------------------------------------------------------------------------------
Svenska Handelsbanken AB, A 2.7%
COMMERCIAL BANKS, SWEDEN
- --------------------------------------------------------------------------------
Eurocastle Investment Ltd. 2.7%
REAL ESTATE, GUERNSEY ISLANDS
- --------------------------------------------------------------------------------
Acta Holding ASA 2.4%
CAPITAL MARKETS, NORWAY
- --------------------------------------------------------------------------------
Patrizia Immobilien AG 2.3%
REAL ESTATE, GERMANY
- --------------------------------------------------------------------------------
White Mountains Insurance Group Ltd. 2.1%
INSURANCE, U.S.
- --------------------------------------------------------------------------------
BNP Paribas SA 2.1%
COMMERCIAL BANKS, FRANCE
- --------------------------------------------------------------------------------
Societe Generale, A 2.0%
COMMERCIAL BANKS, FRANCE
- --------------------------------------------------------------------------------
Swedbank AB, A 1.9%
COMMERCIAL BANKS, SWEDEN
- --------------------------------------------------------------------------------
First Community Bancorp 1.9%
COMMERCIAL BANKS, U.S.
- --------------------------------------------------------------------------------
Annual Report | 7
PORTFOLIO BREAKDOWN
Based on Total Net Assets as of 12/31/06
[THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.]
Commercial Banks 33.6%
Insurance 15.8%
Real Estate 11.9%
Diversified Financial Services 11.4%
Thrifts & Mortgage Finance 8.8%
Capital Markets 7.2%
Government Agencies 5.1%
Consumer Finance 2.9%
Diversified Consumer Services 1.5%
Commercial Services & Supplies 1.1%
Other Net Assets 0.7%
Thank you for your continued participation in Mutual Financial Services Fund. We
look forward to serving your future investment needs.
[PHOTO OMITTED] /s/ Charles M. Lahr
Charles M. Lahr, CFA
Portfolio Manager
Mutual Financial Services Fund
THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS
AS OF DECEMBER 31, 2006, THE END OF THE REPORTING PERIOD. THE WAY WE IMPLEMENT
OUR MAIN INVESTMENT STRATEGIES AND THE RESULTING PORTFOLIO HOLDINGS MAY CHANGE
DEPENDING ON FACTORS SUCH AS MARKET AND ECONOMIC CONDITIONS. THESE OPINIONS MAY
NOT BE RELIED UPON AS INVESTMENT ADVICE OR AN OFFER FOR A PARTICULAR SECURITY.
THE INFORMATION IS NOT A COMPLETE ANALYSIS OF EVERY ASPECT OF ANY MARKET,
COUNTRY, INDUSTRY, SECURITY OR THE FUND. STATEMENTS OF FACT ARE FROM SOURCES
CONSIDERED RELIABLE, BUT THE INVESTMENT MANAGER MAKES NO REPRESENTATION OR
WARRANTY AS TO THEIR COMPLETENESS OR ACCURACY. ALTHOUGH HISTORICAL PERFORMANCE
IS NO GUARANTEE OF FUTURE RESULTS, THESE INSIGHTS MAY HELP YOU UNDERSTAND OUR
INVESTMENT MANAGEMENT PHILOSOPHY.
- --------------------------------------------------------------------------------
CHARLES LAHR has been a portfolio manager for Mutual Financial Services Fund
since 2004. Effective January 1, 2007, he assumes portfolio manager
responsibilities for Mutual Discovery Fund. He joined Franklin Templeton
Investments in 2003. Previously, he was a senior analyst for the State of
Wisconsin Investment Board and also worked for U.S. Bancorp and the Principal
Financial Group.
- --------------------------------------------------------------------------------
8 | Annual Report
Performance Summary as of 12/31/06
Your dividend income will vary depending on dividends or interest paid by
securities in the Fund's portfolio, adjusted for operating expenses of each
class. Capital gain distributions are net profits realized from the sale of
portfolio securities. The performance table and graphs do not reflect any taxes
that a shareholder would pay on Fund dividends, capital gain distributions, if
any, or any realized gains on the sale of Fund shares. Total return reflects
reinvestment of the Fund's dividends and capital gain distributions, if any, and
any unrealized gains or losses.
PRICE AND DISTRIBUTION INFORMATION
- --------------------------------------------------------------------------------
CLASS Z (SYMBOL: TEFAX) CHANGE 12/31/06 12/31/05
- --------------------------------------------------------------------------------
Net Asset Value (NAV) +$1.00 $22.59 $21.59
- --------------------------------------------------------------------------------
DISTRIBUTIONS (1/1/06-12/31/06)
- --------------------------------------------------------------------------------
Dividend Income $0.5725
- --------------------------------------------------------------------------------
Short-Term Capital Gain $0.8765
- --------------------------------------------------------------------------------
Long-Term Capital Gain $1.7098
- --------------------------------------------------------------------------------
TOTAL $3.1588
- --------------------------------------------------------------------------------
CLASS A (SYMBOL: TFSIX) CHANGE 12/31/06 12/31/05
- --------------------------------------------------------------------------------
Net Asset Value (NAV) +$0.99 $22.60 $21.61
- --------------------------------------------------------------------------------
DISTRIBUTIONS (1/1/06-12/31/06)
- --------------------------------------------------------------------------------
Dividend Income $0.5060
- --------------------------------------------------------------------------------
Short-Term Capital Gain $0.8765
- --------------------------------------------------------------------------------
Long-Term Capital Gain $1.7098
- --------------------------------------------------------------------------------
TOTAL $3.0923
- --------------------------------------------------------------------------------
CLASS B (SYMBOL: TBFSX) CHANGE 12/31/06 12/31/05
- --------------------------------------------------------------------------------
Net Asset Value (NAV) +$0.91 $22.08 $21.17
- --------------------------------------------------------------------------------
DISTRIBUTIONS (1/1/06-12/31/06)
- --------------------------------------------------------------------------------
Dividend Income $0.3405
- --------------------------------------------------------------------------------
Short-Term Capital Gain $0.8765
Long-Term Capital Gain $1.7098
TOTAL $2.9268
- --------------------------------------------------------------------------------
CLASS C (SYMBOL: TMFSX) CHANGE 12/31/06 12/31/05
- --------------------------------------------------------------------------------
Net Asset Value (NAV) +$0.95 $22.46 $21.51
- --------------------------------------------------------------------------------
DISTRIBUTIONS (1/1/06-12/31/06)
- --------------------------------------------------------------------------------
Dividend Income $0.3543
- --------------------------------------------------------------------------------
Short-Term Capital Gain $0.8765
- --------------------------------------------------------------------------------
Long-Term Capital Gain $1.7098
- --------------------------------------------------------------------------------
TOTAL $2.9406
- --------------------------------------------------------------------------------
Annual Report | 9
Performance Summary (CONTINUED)
PERFORMANCE 1
CUMULATIVE TOTAL RETURN EXCLUDES SALES CHARGES. AVERAGE ANNUAL TOTAL RETURN AND
VALUE OF $10,000 INVESTMENT INCLUDE MAXIMUM SALES CHARGES. CLASS Z: NO SALES
CHARGES; CLASS A: 5.75% MAXIMUM INITIAL SALES CHARGE; CLASS B: CONTINGENT
DEFERRED SALES CHARGE (CDSC) DECLINING FROM 4% TO 1% OVER SIX YEARS, AND
ELIMINATED THEREAFTER; CLASS C: 1% CDSC IN FIRST YEAR ONLY. THE FUND MAY CHARGE
A 2% FEE ON REDEMPTIONS MADE WITHIN SEVEN DAYS OF PURCHASE.
- --------------------------------------------------------------------------------
CLASS Z 1-YEAR 5-YEAR INCEPTION (8/19/97)
- --------------------------------------------------------------------------------
Cumulative Total Return 2 +19.73% +105.22% +323.97%
- --------------------------------------------------------------------------------
Average Annual Total Return 3 +19.73% +15.46% +16.67%
- --------------------------------------------------------------------------------
Value of $10,000 Investment 4 $ 11,973 $ 20,522 $ 42,397
- --------------------------------------------------------------------------------
CLASS A 1-YEAR 5-YEAR INCEPTION (8/19/97)
- --------------------------------------------------------------------------------
Cumulative Total Return 2 +19.35% +101.91% +311.46%
- --------------------------------------------------------------------------------
Average Annual Total Return 3 +12.48% +13.73% +15.57%
- --------------------------------------------------------------------------------
Value of $10,000 Investment 4 $ 11,248 $ 19,026 $ 38,780
- --------------------------------------------------------------------------------
CLASS B 1-YEAR 5-YEAR INCEPTION (1/1/99)
- --------------------------------------------------------------------------------
Cumulative Total Return 2 +18.51% +95.31% +194.91%
- --------------------------------------------------------------------------------
Average Annual Total Return 3 +14.51% +14.09% +14.49%
- --------------------------------------------------------------------------------
Value of $10,000 Investment 4 $ 11,451 $ 19,331 $ 29,491
- --------------------------------------------------------------------------------
CLASS C 1-YEAR 5-YEAR INCEPTION (8/19/97)
- --------------------------------------------------------------------------------
Cumulative Total Return 2 +18.52% +95.26% +287.08%
- --------------------------------------------------------------------------------
Average Annual Total Return 3 +17.52% +14.32% +15.55%
- --------------------------------------------------------------------------------
Value of $10,000 Investment 4 $ 11,752 $ 19,526 $ 38,708
- --------------------------------------------------------------------------------
PERFORMANCE DATA REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE FUTURE
RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU MAY HAVE
A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY DIFFER FROM
FIGURES SHOWN.
FOR MOST RECENT MONTH-END PERFORMANCE, SEE "FUNDS AND PERFORMANCE" AT
FRANKLINTEMPLETON.COM OR CALL 1-800/342-5236.
10 | Annual Report
Performance Summary (CONTINUED)
TOTAL RETURN INDEX COMPARISON FOR HYPOTHETICAL $10,000 INVESTMENT 1
Total return represents the change in value of an investment over the periods
shown. It includes any current, applicable, maximum sales charge, Fund expenses,
account fees and reinvested distributions. The unmanaged indexes include
reinvestment of any income or distributions. They differ from the Fund in
composition and do not pay management fees or expenses. One cannot invest
directly in an index.
CLASS Z (8/19/97-12/31/06)
[THE FOLLOWING TABLE WAS REPRESENTED AS A LINE CHART IN THE PRINTED MATERIAL.]
Mutual Financial S&P 500
Date Service Fund S&P 500 5 Financials Index 5
--------- --------------- --------- ------------------
8/19/1997 $10,000 $10,000 $10,000
8/31/1997 $10,080 $ 9,783 $ 9,711
9/30/1997 $11,270 $10,319 $10,495
10/31/1997 $11,590 $ 9,975 $10,277
11/30/1997 $11,770 $10,436 $10,683
12/31/1997 $12,402 $10,615 $11,219
1/31/1998 $12,523 $10,732 $10,899
2/28/1998 $13,756 $11,506 $11,924
3/31/1998 $14,553 $12,095 $12,604
4/30/1998 $14,937 $12,216 $12,812
5/31/1998 $14,614 $12,007 $12,504
6/30/1998 $14,442 $12,494 $13,028
7/31/1998 $14,398 $12,361 $13,030
8/31/1998 $11,634 $10,576 $10,025
9/30/1998 $11,879 $11,253 $10,227
10/31/1998 $12,399 $12,168 $11,467
11/30/1998 $12,950 $12,905 $12,249
12/31/1998 $13,281 $13,648 $12,501
1/31/1999 $13,239 $14,219 $12,766
2/28/1999 $12,971 $13,777 $12,937
3/31/1999 $13,291 $14,328 $13,432
4/30/1999 $14,138 $14,883 $14,342
5/31/1999 $14,313 $14,532 $13,546
6/30/1999 $14,965 $15,338 $14,106
7/31/1999 $14,809 $14,860 $13,230
8/31/1999 $14,114 $14,786 $12,622
9/30/1999 $13,937 $14,381 $11,966
10/31/1999 $14,954 $15,291 $13,963
11/30/1999 $14,643 $15,602 $13,278
12/31/1999 $13,904 $16,520 $13,016
1/31/2000 $13,041 $15,690 $12,604
2/29/2000 $11,955 $15,393 $11,239
3/31/2000 $13,659 $16,898 $13,325
4/30/2000 $13,553 $16,390 $12,905
5/31/2000 $14,416 $16,055 $13,771
6/30/2000 $14,051 $16,451 $12,936
7/31/2000 $14,956 $16,194 $14,273
8/31/2000 $16,100 $17,199 $15,643
9/30/2000 $17,179 $16,291 $16,015
10/31/2000 $17,038 $16,222 $15,945
11/30/2000 $16,536 $14,944 $15,005
12/31/2000 $18,394 $15,017 $16,360
1/31/2001 $18,631 $15,550 $16,315
2/28/2001 $18,687 $14,133 $15,244
3/31/2001 $18,811 $13,238 $14,784
4/30/2001 $19,600 $14,266 $15,335
5/31/2001 $20,457 $14,362 $15,953
6/30/2001 $20,981 $14,012 $15,947
7/31/2001 $21,245 $13,874 $15,689
8/31/2001 $21,085 $13,007 $14,733
9/30/2001 $19,419 $11,956 $13,863
10/31/2001 $19,224 $12,184 $13,606
11/30/2001 $20,062 $13,119 $14,577
12/31/2001 $20,660 $13,234 $14,896
1/31/2002 $21,057 $13,041 $14,663
2/28/2002 $21,193 $12,789 $14,450
3/31/2002 $22,410 $13,270 $15,411
4/30/2002 $23,081 $12,466 $15,000
5/31/2002 $23,254 $12,375 $14,975
6/30/2002 $22,378 $11,493 $14,264
7/31/2002 $21,273 $10,598 $13,133
8/31/2002 $21,705 $10,667 $13,401
9/30/2002 $19,940 $ 9,509 $11,834
10/31/2002 $20,473 $10,345 $12,905
11/30/2002 $20,676 $10,953 $13,435
12/31/2002 $20,604 $10,310 $12,715
1/31/2003 $20,371 $10,041 $12,503
2/28/2003 $19,944 $ 9,890 $12,113
3/31/2003 $20,125 $ 9,985 $12,065
4/30/2003 $21,510 $10,808 $13,543
5/31/2003 $22,727 $11,376 $14,259
6/30/2003 $22,805 $11,522 $14,295
7/31/2003 $23,505 $11,725 $14,951
8/31/2003 $23,907 $11,953 $14,800
9/30/2003 $23,855 $11,827 $14,899
10/31/2003 $25,281 $12,495 $15,925
11/30/2003 $25,800 $12,605 $15,881
12/31/2003 $26,832 $13,266 $16,661
1/31/2004 $27,675 $13,509 $17,192
2/29/2004 $28,077 $13,697 $17,647
3/31/2004 $28,184 $13,490 $17,473
4/30/2004 $27,127 $13,279 $16,667
5/31/2004 $27,287 $13,461 $16,974
6/30/2004 $27,638 $13,722 $17,058
7/31/2004 $27,270 $13,268 $16,708
8/31/2004 $27,624 $13,322 $17,270
9/30/2004 $28,428 $13,466 $17,122
10/31/2004 $28,482 $13,671 $17,209
11/30/2004 $30,077 $14,225 $17,718
12/31/2004 $31,025 $14,708 $18,476
1/31/2005 $30,569 $14,350 $18,077
2/28/2005 $31,116 $14,652 $17,981
3/31/2005 $30,569 $14,393 $17,298
4/30/2005 $30,160 $14,120 $17,316
5/31/2005 $31,070 $14,569 $17,791
6/30/2005 $31,883 $14,589 $18,046
7/31/2005 $33,254 $15,132 $18,330
8/31/2005 $32,834 $14,994 $18,010
9/30/2005 $32,958 $15,115 $18,176
10/31/2005 $32,506 $14,863 $18,750
11/30/2005 $34,111 $15,425 $19,629
12/31/2005 $35,410 $15,430 $19,672
1/31/2006 $36,919 $15,839 $19,849
2/28/2006 $38,198 $15,882 $20,251
3/31/2006 $39,182 $16,079 $20,310
4/30/2006 $39,625 $16,295 $21,190
5/31/2006 $37,739 $15,826 $20,410
6/30/2006 $37,291 $15,848 $20,284
7/31/2006 $37,509 $15,945 $20,787
8/31/2006 $38,547 $16,324 $21,028
9/30/2006 $39,468 $16,744 $21,905
10/31/2006 $40,305 $17,290 $22,436
11/30/2006 $40,690 $17,618 $22,576
12/31/2006 $42,397 $17,865 $23,448
AVERAGE ANNUAL TOTAL RETURN
- ---------------------------------------------------
CLASS Z 12/31/06
- ---------------------------------------------------
1-Year +19.73%
- ---------------------------------------------------
5-Year +15.46%
- ---------------------------------------------------
Since Inception (8/19/97) +16.67%
- ---------------------------------------------------
CLASS A (8/19/97-12/31/06)
[THE FOLLOWING TABLE WAS REPRESENTED AS A LINE CHART IN THE PRINTED MATERIAL.]
Mutual Financial S&P 500
Date Service Fund S&P 500 5 Financials Index 5
--------- --------------- --------- ------------------
8/19/1997 $ 9,425 $10,000 $10,000
8/31/1997 $ 9,500 $ 9,783 $ 9,711
9/30/1997 $10,622 $10,319 $10,495
10/31/1997 $10,924 $ 9,975 $10,277
11/30/1997 $11,093 $10,436 $10,683
12/31/1997 $11,681 $10,615 $11,219
1/31/1998 $11,795 $10,732 $10,899
2/28/1998 $12,955 $11,506 $11,924
3/31/1998 $13,716 $12,095 $12,604
4/30/1998 $14,068 $12,216 $12,812
5/31/1998 $13,764 $12,007 $12,504
6/30/1998 $13,593 $12,494 $13,028
7/31/1998 $13,554 $12,361 $13,030
8/31/1998 $10,953 $10,576 $10,025
9/30/1998 $11,173 $11,253 $10,227
10/31/1998 $11,653 $12,168 $11,467
11/30/1998 $12,172 $12,905 $12,249
12/31/1998 $12,476 $13,648 $12,501
1/31/1999 $12,437 $14,219 $12,766
2/28/1999 $12,185 $13,777 $12,937
3/31/1999 $12,476 $14,328 $13,432
4/30/1999 $13,271 $14,883 $14,342
5/31/1999 $13,436 $14,532 $13,546
6/30/1999 $14,035 $15,338 $14,106
7/31/1999 $13,889 $14,860 $13,230
8/31/1999 $13,236 $14,786 $12,622
9/30/1999 $13,061 $14,381 $11,966
10/31/1999 $14,005 $15,291 $13,963
11/30/1999 $13,713 $15,602 $13,278
12/31/1999 $13,019 $16,520 $13,016
1/31/2000 $12,212 $15,690 $12,604
2/29/2000 $11,186 $15,393 $11,239
3/31/2000 $12,780 $16,898 $13,325
4/30/2000 $12,681 $16,390 $12,905
5/31/2000 $13,478 $16,055 $13,771
6/30/2000 $13,135 $16,451 $12,936
7/31/2000 $13,981 $16,194 $14,273
8/31/2000 $15,040 $17,199 $15,643
9/30/2000 $16,037 $16,291 $16,015
10/31/2000 $15,905 $16,222 $15,945
11/30/2000 $15,426 $14,944 $15,005
12/31/2000 $17,172 $15,017 $16,360
1/31/2001 $17,382 $15,550 $16,315
2/28/2001 $17,424 $14,133 $15,244
3/31/2001 $17,540 $13,238 $14,784
4/30/2001 $18,264 $14,266 $15,335
5/31/2001 $19,062 $14,362 $15,953
6/30/2001 $19,535 $14,012 $15,947
7/31/2001 $19,781 $13,874 $15,689
8/31/2001 $19,621 $13,007 $14,733
9/30/2001 $18,069 $11,956 $13,863
10/31/2001 $17,888 $12,184 $13,606
11/30/2001 $18,658 $13,119 $14,577
12/31/2001 $19,206 $13,234 $14,896
1/31/2002 $19,575 $13,041 $14,663
2/28/2002 $19,702 $12,789 $14,450
3/31/2002 $20,820 $13,270 $15,411
4/30/2002 $21,431 $12,466 $15,000
5/31/2002 $21,593 $12,375 $14,975
6/30/2002 $20,774 $11,493 $14,264
7/31/2002 $19,748 $10,598 $13,133
8/31/2002 $20,137 $10,667 $13,401
9/30/2002 $18,499 $ 9,509 $11,834
10/31/2002 $18,982 $10,345 $12,905
11/30/2002 $19,171 $10,953 $13,435
12/31/2002 $19,097 $10,310 $12,715
1/31/2003 $18,870 $10,041 $12,503
2/28/2003 $18,475 $ 9,890 $12,113
3/31/2003 $18,630 $ 9,985 $12,065
4/30/2003 $19,911 $10,808 $13,543
5/31/2003 $21,025 $11,376 $14,259
6/30/2003 $21,104 $11,522 $14,295
7/31/2003 $21,739 $11,725 $14,951
8/31/2003 $22,111 $11,953 $14,800
9/30/2003 $22,051 $11,827 $14,899
10/31/2003 $23,358 $12,495 $15,925
11/30/2003 $23,826 $12,605 $15,881
12/31/2003 $24,787 $13,266 $16,661
1/31/2004 $25,552 $13,509 $17,192
2/29/2004 $25,910 $13,697 $17,647
3/31/2004 $26,009 $13,490 $17,473
4/30/2004 $25,022 $13,279 $16,667
5/31/2004 $25,157 $13,461 $16,974
6/30/2004 $25,472 $13,722 $17,058
7/31/2004 $25,133 $13,268 $16,708
8/31/2004 $25,447 $13,322 $17,270
9/30/2004 $26,188 $13,466 $17,122
10/31/2004 $26,226 $13,671 $17,209
11/30/2004 $27,684 $14,225 $17,718
12/31/2004 $28,548 $14,708 $18,476
1/31/2005 $28,130 $14,350 $18,077
2/28/2005 $28,632 $14,652 $17,981
3/31/2005 $28,116 $14,393 $17,298
4/30/2005 $27,725 $14,120 $17,316
5/31/2005 $28,562 $14,569 $17,791
6/30/2005 $29,301 $14,589 $18,046
7/31/2005 $30,561 $15,132 $18,330
8/31/2005 $30,160 $14,994 $18,010
9/30/2005 $30,260 $15,115 $18,176
10/31/2005 $29,845 $14,863 $18,750
11/30/2005 $31,305 $15,425 $19,629
12/31/2005 $32,493 $15,430 $19,672
1/31/2006 $33,861 $15,839 $19,849
2/28/2006 $35,034 $15,882 $20,251
3/31/2006 $35,936 $16,079 $20,310
4/30/2006 $36,327 $16,295 $21,190
5/31/2006 $34,583 $15,826 $20,410
6/30/2006 $34,165 $15,848 $20,284
7/31/2006 $34,349 $15,945 $20,787
8/31/2006 $35,301 $16,324 $21,028
9/30/2006 $36,130 $16,744 $21,905
10/31/2006 $36,882 $17,290 $22,436
11/30/2006 $37,235 $17,618 $22,576
12/31/2006 $38,780 $17,865 $23,448
AVERAGE ANNUAL TOTAL RETURN
- ---------------------------------------------------
CLASS A 12/31/06
- ---------------------------------------------------
1-Year +12.48%
- ---------------------------------------------------
5-Year +13.73%
- ---------------------------------------------------
Since Inception (8/19/97) +15.57%
- ---------------------------------------------------
Annual Report | 11
Performance Summary (CONTINUED)
AVERAGE ANNUAL TOTAL RETURN
- ---------------------------------------------------
CLASS B 12/31/06
- ---------------------------------------------------
1-Year +14.51%
- ---------------------------------------------------
5-Year +14.09%
- ---------------------------------------------------
Since Inception (1/1/99) +14.49%
- ---------------------------------------------------
CLASS B (1/1/99-12/31/06)
[THE FOLLOWING TABLE WAS REPRESENTED AS A LINE CHART IN THE PRINTED MATERIAL.]
Mutual Financial S&P 500
Date Service Fund S&P 500 5 Financials Index 5
--------- --------------- --------- ------------------
1/1/1999 $10,000 $10,000 $10,000
1/31/1999 $ 9,961 $10,418 $10,212
2/28/1999 $ 9,759 $10,094 $10,349
3/31/1999 $ 9,984 $10,498 $10,745
4/30/1999 $10,614 $10,905 $11,473
5/31/1999 $10,738 $10,647 $10,836
6/30/1999 $11,215 $11,238 $11,285
7/31/1999 $11,090 $10,887 $10,583
8/31/1999 $10,559 $10,834 $10,097
9/30/1999 $10,419 $10,537 $ 9,573
10/31/1999 $11,168 $11,203 $11,170
11/30/1999 $10,926 $11,431 $10,622
12/31/1999 $10,369 $12,104 $10,412
1/31/2000 $ 9,722 $11,496 $10,082
2/29/2000 $ 8,901 $11,279 $ 8,991
3/31/2000 $10,161 $12,381 $10,659
4/30/2000 $10,073 $12,009 $10,324
5/31/2000 $10,711 $11,763 $11,016
6/30/2000 $10,424 $12,053 $10,348
7/31/2000 $11,092 $11,865 $11,417
8/31/2000 $11,924 $12,601 $12,514
9/30/2000 $12,714 $11,936 $12,811
10/31/2000 $12,600 $11,886 $12,755
11/30/2000 $12,217 $10,949 $12,003
12/31/2000 $13,583 $11,003 $13,088
1/31/2001 $13,751 $11,393 $13,052
2/28/2001 $13,776 $10,355 $12,194
3/31/2001 $13,851 $ 9,699 $11,827
4/30/2001 $14,421 $10,453 $12,267
5/31/2001 $15,041 $10,523 $12,762
6/30/2001 $15,414 $10,267 $12,757
7/31/2001 $15,593 $10,166 $12,550
8/31/2001 $15,457 $ 9,530 $11,786
9/30/2001 $14,228 $ 8,760 $11,090
10/31/2001 $14,074 $ 8,927 $10,884
11/30/2001 $14,672 $ 9,612 $11,661
12/31/2001 $15,099 $ 9,696 $11,916
1/31/2002 $15,384 $ 9,555 $11,730
2/28/2002 $15,466 $ 9,371 $11,560
3/31/2002 $16,346 $ 9,723 $12,328
4/30/2002 $16,814 $ 9,134 $11,999
5/31/2002 $16,924 $ 9,067 $11,979
6/30/2002 $16,277 $ 8,421 $11,410
7/31/2002 $15,461 $ 7,765 $10,506
8/31/2002 $15,761 $ 7,816 $10,720
9/30/2002 $14,467 $ 6,967 $ 9,467
10/31/2002 $14,833 $ 7,580 $10,323
11/30/2002 $14,974 $ 8,025 $10,748
12/31/2002 $14,917 $ 7,554 $10,172
1/31/2003 $14,727 $ 7,357 $10,002
2/28/2003 $14,414 $ 7,246 $ 9,689
3/31/2003 $14,528 $ 7,316 $ 9,652
4/30/2003 $15,524 $ 7,919 $10,834
5/31/2003 $16,377 $ 8,335 $11,407
6/30/2003 $16,423 $ 8,442 $11,435
7/31/2003 $16,916 $ 8,591 $11,960
8/31/2003 $17,192 $ 8,758 $11,839
9/30/2003 $17,135 $ 8,665 $11,918
10/31/2003 $18,151 $ 9,155 $12,739
11/30/2003 $18,502 $ 9,236 $12,704
12/31/2003 $19,225 $ 9,720 $13,328
1/31/2004 $19,819 $ 9,898 $13,753
2/29/2004 $20,082 $10,036 $14,117
3/31/2004 $20,150 $ 9,884 $13,978
4/30/2004 $19,381 $ 9,729 $13,333
5/31/2004 $19,478 $ 9,863 $13,578
6/30/2004 $19,707 $10,054 $13,645
7/31/2004 $19,430 $ 9,722 $13,366
8/31/2004 $19,667 $ 9,761 $13,815
9/30/2004 $20,222 $ 9,866 $13,697
10/31/2004 $20,242 $10,017 $13,767
11/30/2004 $21,362 $10,422 $14,174
12/31/2004 $22,015 $10,777 $14,780
1/31/2005 $21,675 $10,514 $14,460
2/28/2005 $22,048 $10,735 $14,384
3/31/2005 $21,631 $10,545 $13,837
4/30/2005 $21,324 $10,345 $13,852
5/31/2005 $21,960 $10,674 $14,232
6/30/2005 $22,516 $10,690 $14,436
7/31/2005 $23,472 $11,087 $14,663
8/31/2005 $23,146 $10,986 $14,407
9/30/2005 $23,213 $11,075 $14,540
10/31/2005 $22,876 $10,890 $15,000
11/30/2005 $23,989 $11,301 $15,703
12/31/2005 $24,884 $11,306 $15,737
1/31/2006 $25,918 $11,605 $15,878
2/28/2006 $26,800 $11,636 $16,200
3/31/2006 $27,458 $11,781 $16,247
4/30/2006 $27,752 $11,939 $16,951
5/31/2006 $26,400 $11,596 $16,327
6/30/2006 $26,067 $11,611 $16,226
7/31/2006 $26,199 $11,683 $16,629
8/31/2006 $26,907 $11,960 $16,821
9/30/2006 $27,518 $12,268 $17,523
10/31/2006 $28,082 $12,668 $17,948
11/30/2006 $28,334 $12,909 $18,060
12/31/2006 $29,491 $13,090 $18,757
AVERAGE ANNUAL TOTAL RETURN
- ---------------------------------------------------
CLASS C 12/31/06
- ---------------------------------------------------
1-Year +17.52%
- ---------------------------------------------------
5-Year +14.32%
- ---------------------------------------------------
Since Inception (8/19/97) +15.55%
- ---------------------------------------------------
CLASS C (8/19/97-12/31/06)
[THE FOLLOWING TABLE WAS REPRESENTED AS A LINE CHART IN THE PRINTED MATERIAL.]
Mutual Financial S&P 500
Date Service Fund S&P 500 5 Financials Index 5
--------- --------------- --------- ------------------
8/19/1997 $10,000 $10,000 $10,000
8/31/1997 $10,080 $ 9,783 $ 9,711
9/30/1997 $11,270 $10,319 $10,495
10/31/1997 $11,570 $ 9,975 $10,277
11/30/1997 $11,750 $10,436 $10,683
12/31/1997 $12,367 $10,615 $11,219
1/31/1998 $12,488 $10,732 $10,899
2/28/1998 $13,697 $11,506 $11,924
3/31/1998 $14,484 $12,095 $12,604
4/30/1998 $14,856 $12,216 $12,812
5/31/1998 $14,524 $12,007 $12,504
6/30/1998 $14,342 $12,494 $13,028
7/31/1998 $14,283 $12,361 $13,030
8/31/1998 $11,538 $10,576 $10,025
9/30/1998 $11,772 $11,253 $10,227
10/31/1998 $12,270 $12,168 $11,467
11/30/1998 $12,809 $12,905 $12,249
12/31/1998 $13,124 $13,648 $12,501
1/31/1999 $13,073 $14,219 $12,766
2/28/1999 $12,807 $13,777 $12,937
3/31/1999 $13,104 $14,328 $13,432
4/30/1999 $13,921 $14,883 $14,342
5/31/1999 $14,095 $14,532 $13,546
6/30/1999 $14,723 $15,338 $14,106
7/31/1999 $14,549 $14,860 $13,230
8/31/1999 $13,863 $14,786 $12,622
9/30/1999 $13,668 $14,381 $11,966
10/31/1999 $14,662 $15,291 $13,963
11/30/1999 $14,344 $15,602 $13,278
12/31/1999 $13,606 $16,520 $13,016
1/31/2000 $12,751 $15,690 $12,604
2/29/2000 $11,677 $15,393 $11,239
3/31/2000 $13,335 $16,898 $13,325
4/30/2000 $13,220 $16,390 $12,905
5/31/2000 $14,054 $16,055 $13,771
6/30/2000 $13,685 $16,451 $12,936
7/31/2000 $14,558 $16,194 $14,273
8/31/2000 $15,654 $17,199 $15,643
9/30/2000 $16,686 $16,291 $16,015
10/31/2000 $16,537 $16,222 $15,945
11/30/2000 $16,037 $14,944 $15,005
12/31/2000 $17,835 $15,017 $16,360
1/31/2001 $18,043 $15,550 $16,315
2/28/2001 $18,086 $14,133 $15,244
3/31/2001 $18,185 $13,238 $14,784
4/30/2001 $18,928 $14,266 $15,335
5/31/2001 $19,747 $14,362 $15,953
6/30/2001 $20,227 $14,012 $15,947
7/31/2001 $20,472 $13,874 $15,689
8/31/2001 $20,294 $13,007 $14,733
9/30/2001 $18,681 $11,956 $13,863
10/31/2001 $18,480 $12,184 $13,606
11/30/2001 $19,270 $13,119 $14,577
12/31/2001 $19,824 $13,234 $14,896
1/31/2002 $20,193 $13,041 $14,663
2/28/2002 $20,300 $12,789 $14,450
3/31/2002 $21,457 $13,270 $15,411
4/30/2002 $22,077 $12,466 $15,000
5/31/2002 $22,220 $12,375 $14,975
6/30/2002 $21,376 $11,493 $14,264
7/31/2002 $20,304 $10,598 $13,133
8/31/2002 $20,694 $10,667 $13,401
9/30/2002 $19,000 $9,509 $11,834
10/31/2002 $19,475 $10,345 $12,905
11/30/2002 $19,658 $10,953 $13,435
12/31/2002 $19,585 $10,310 $12,715
1/31/2003 $19,339 $10,041 $12,503
2/28/2003 $18,921 $9,890 $12,113
3/31/2003 $19,080 $9,985 $12,065
4/30/2003 $20,372 $10,808 $13,543
5/31/2003 $21,504 $11,376 $14,259
6/30/2003 $21,562 $11,522 $14,295
7/31/2003 $22,202 $11,725 $14,951
8/31/2003 $22,572 $11,953 $14,800
9/30/2003 $22,498 $11,827 $14,899
10/31/2003 $23,828 $12,495 $15,925
11/30/2003 $24,296 $12,605 $15,881
12/31/2003 $25,240 $13,266 $16,661
1/31/2004 $26,022 $13,509 $17,192
2/29/2004 $26,362 $13,697 $17,647
3/31/2004 $26,451 $13,490 $17,473
4/30/2004 $25,429 $13,279 $16,667
5/31/2004 $25,555 $13,461 $16,974
6/30/2004 $25,862 $13,722 $17,058
7/31/2004 $25,503 $13,268 $16,708
8/31/2004 $25,811 $13,322 $17,270
9/30/2004 $26,542 $13,466 $17,122
10/31/2004 $26,568 $13,671 $17,209
11/30/2004 $28,031 $14,225 $17,718
12/31/2004 $28,889 $14,708 $18,476
1/31/2005 $28,450 $14,350 $18,077
2/28/2005 $28,945 $14,652 $17,981
3/31/2005 $28,393 $14,393 $17,298
4/30/2005 $27,996 $14,120 $17,316
5/31/2005 $28,832 $14,569 $17,791
6/30/2005 $29,552 $14,589 $18,046
7/31/2005 $30,802 $15,132 $18,330
8/31/2005 $30,380 $14,994 $18,010
9/30/2005 $30,468 $15,115 $18,176
10/31/2005 $30,032 $14,863 $18,750
11/30/2005 $31,485 $15,425 $19,629
12/31/2005 $32,660 $15,430 $19,672
1/31/2006 $34,012 $15,839 $19,849
2/28/2006 $35,181 $15,882 $20,251
3/31/2006 $36,046 $16,079 $20,310
4/30/2006 $36,426 $16,295 $21,190
5/31/2006 $34,649 $15,826 $20,410
6/30/2006 $34,222 $15,848 $20,284
7/31/2006 $34,393 $15,945 $20,787
8/31/2006 $35,307 $16,324 $21,028
9/30/2006 $36,128 $16,744 $21,905
10/31/2006 $36,856 $17,290 $22,436
11/30/2006 $37,197 $17,618 $22,576
12/31/2006 $38,708 $17,865 $23,448
12 | Annual Report
Performance Summary (CONTINUED)
ENDNOTES
INVESTING IN A SINGLE-SECTOR FUND INVOLVES SPECIAL RISKS, INCLUDING GREATER
SENSITIVITY TO ECONOMIC, POLITICAL OR REGULATORY DEVELOPMENTS AFFECTING THE
SECTOR. FOREIGN SECURITIES RISKS INCLUDE EXPOSURE TO CURRENCY VOLATILITY AND
POLITICAL, ECONOMIC AND REGULATORY UNCERTAINTY. SMALLER-COMPANY STOCKS HAVE
HISTORICALLY EXHIBITED GREATER PRICE VOLATILITY THAN LARGER-COMPANY STOCKS,
PARTICULARLY OVER THE SHORT TERM. THE FUND MAY ALSO INVEST IN COMPANIES ENGAGED
IN MERGERS, REORGANIZATIONS OR LIQUIDATIONS, WHICH INVOLVE SPECIAL RISKS, AS
WELL AS LOWER-RATED BONDS, WHICH ENTAIL HIGHER CREDIT RISK. THE FUND'S
PROSPECTUS ALSO INCLUDES A DESCRIPTION OF THE MAIN INVESTMENT RISKS.
CLASS Z: Shares are available to certain eligible investors as described in the
prospectus.
CLASS A: Prior to 8/3/98, these shares were offered at a lower initial
sales charge; thus actual total returns may differ.
CLASS B: These shares have higher annual fees and expenses than Class A
shares.
CLASS C: Prior to 1/1/04, these shares were offered with an initial
sales charge; thus actual total returns would have differed. These
shares have higher annual fees and expenses than Class A shares.
1. Past expense reductions by the Fund's manager increased the Fund's total
returns. If the manager had not taken this action, the Fund's total
returns would have been lower.
2. Cumulative total return represents the change in value of an investment
over the periods indicated.
3. Average annual total return represents the average annual change in value
of an investment over the periods indicated.
4. These figures represent the value of a hypothetical $10,000 investment in
the Fund over the periods indicated.
5. Source: Standard & Poor's Micropal. The S&P 500 consists of 500 stocks
chosen for market size, liquidity and industry group representation. Each
stock's weight in the index is proportionate to its market value. The S&P
500 is one of the most widely used benchmarks of U.S. equity performance.
The S&P 500 Financials Index is market value weighted and includes all the
financial stocks in the S&P 500.
Annual Report | 13
Your Fund's Expenses
As a Fund shareholder, you can incur two types of costs:
o Transaction costs, including sales charges (loads) on Fund purchases and
redemption fees; and
o Ongoing Fund costs, including management fees, distribution and service
(12b-1) fees, and other Fund expenses. All mutual funds have ongoing
costs, sometimes referred to as operating expenses.
The following table shows ongoing costs of investing in the Fund and can help
you understand these costs and compare them with those of other mutual funds.
The table assumes a $1,000 investment held for the six months indicated.
ACTUAL FUND EXPENSES
The first line (Actual) for each share class listed in the table provides actual
account values and expenses. The "Ending Account Value" is derived from the
Fund's actual return, which includes the effect of Fund expenses.
You can estimate the expenses you paid during the period by following these
steps. OF COURSE, YOUR ACCOUNT VALUE AND EXPENSES WILL DIFFER FROM THOSE IN THIS
ILLUSTRATION:
1. Divide your account value by $1,000.
IF AN ACCOUNT HAD AN $8,600 VALUE, THEN $8,600 / $1,000 = 8.6.
2. Multiply the result by the number under the heading "Expenses Paid During
Period."
IF EXPENSES PAID DURING PERIOD WERE $7.50, THEN 8.6 X $7.50 = $64.50.
In this illustration, the estimated expenses paid this period are $64.50.
HYPOTHETICAL EXAMPLE FOR COMPARISON WITH OTHER FUNDS
Information in the second line (Hypothetical) for each class in the table can
help you compare ongoing costs of investing in the Fund with those of other
mutual funds. This information may not be used to estimate the actual ending
account balance or expenses you paid during the period. The hypothetical "Ending
Account Value" is based on the actual expense ratio for each class and an
assumed 5% annual rate of return before expenses, which does not represent the
Fund's actual return. The figure under the heading "Expenses Paid During Period"
shows the hypothetical expenses your account would have incurred under this
scenario. You can compare this figure with the 5% hypothetical examples that
appear in shareholder reports of other funds.
14 | Annual Report
Your Fund's Expenses (CONTINUED)
PLEASE NOTE THAT EXPENSES SHOWN IN THE TABLE ARE MEANT TO HIGHLIGHT ONGOING
COSTS AND DO NOT REFLECT ANY TRANSACTION COSTS, SUCH AS SALES CHARGES OR
REDEMPTION FEES. Therefore, the second line for each class is useful in
comparing ongoing costs only, and will not help you compare total costs of
owning different funds. In addition, if transaction costs were included, your
total costs would have been higher. Please refer to the Fund prospectus for
additional information on operating expenses.
- -------------------------------------------------------------------------------------------------------
BEGINNING ACCOUNT ENDING ACCOUNT EXPENSES PAID DURING
CLASS Z VALUE 7/1/06 VALUE 12/31/06 PERIOD* 7/1/06-12/31/06
- -------------------------------------------------------------------------------------------------------
Actual $1,000 $1,136.90 $ 6.03
- -------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,019.56 $ 5.70
- -------------------------------------------------------------------------------------------------------
CLASS A
- -------------------------------------------------------------------------------------------------------
Actual $1,000 $1,135.10 $ 7.75
- -------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,017.95 $ 7.32
- -------------------------------------------------------------------------------------------------------
CLASS B
- -------------------------------------------------------------------------------------------------------
Actual $1,000 $1,131.30 $11.39
- -------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,014.52 $10.76
- -------------------------------------------------------------------------------------------------------
CLASS C
- -------------------------------------------------------------------------------------------------------
Actual $1,000 $1,131.10 $11.44
- -------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,014.47 $10.82
- -------------------------------------------------------------------------------------------------------
* Expenses are equal to the annualized expense ratio for each class (Z: 1.12%;
A: 1.44%; B: 2.12%; and C: 2.13%), multiplied by the average account value over
the period, multiplied by 184/365 to reflect the one-half year period.
Annual Report | 15
Mutual Financial Services Fund
FINANCIAL HIGHLIGHTS
---------------------------------------------------------------
YEAR ENDED DECEMBER 31,
CLASS Z 2006 2005 2004 2003 2002
---------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ........................ $ 21.59 $ 20.45 $ 20.06 $ 15.92 $ 16.64
---------------------------------------------------------------
Income from investment operations a:
Net investment income b ................................ 0.40 0.44 0.34 0.23 0.25
Net realized and unrealized gains (losses) ............. 3.76 2.40 2.70 4.58 (0.26)
---------------------------------------------------------------
Total from investment operations .......................... 4.16 2.84 3.04 4.81 (0.01)
---------------------------------------------------------------
Less distributions from:
Net investment income .................................. (0.57) (0.49) (0.32) (0.24) (0.28)
Net realized gains ..................................... (2.59) (1.21) (2.33) (0.43) (0.43)
---------------------------------------------------------------
Total distributions ....................................... (3.16) (1.70) (2.65) (0.67) (0.71)
---------------------------------------------------------------
Redemption fees ........................................... -- d -- d -- d -- --
---------------------------------------------------------------
Net asset value, end of year .............................. $ 22.59 $ 21.59 $ 20.45 $ 20.06 $ 15.92
===============================================================
Total return .............................................. 19.73% 14.14% 15.62% 30.23% (0.27)%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ........................... $ 213,874 $ 174,864 $ 166,175 $ 151,918 $ 104,658
Ratios to average net assets:
Expenses c ............................................. 1.08% e 1.12% e 1.10% e 1.13% 1.09%
Net investment income .................................. 1.71% 2.10% 1.65% 1.28% 1.47%
Portfolio turnover rate ................................... 62.65% 31.71% 38.40% 25.78% 40.17%
Ratios to average net assets, excluding dividend
expense on securities sold short:
Expenses ............................................... 1.08% e 1.11% e 1.09% e 1.11% 1.09%
a The amount shown for a share outstanding throughout the period may not
correlate with the Statement of Operations for the period due to the
timing of sales and repurchase of the Fund shares in relation to income
earned and/or fluctuating market value of the investments of the Fund.
b Based on average daily shares outstanding.
c Includes dividend expense on securities sold short which varies from
period to period. See below for expense ratios that reflect only operating
expenses.
d Amount rounds to less than $0.01 per share.
e Benefit of expense reduction rounds to less than 0.01%.
16 | The accompanying notes are an integral part of these financial statements.
| Annual Report
Mutual Financial Services Fund
FINANCIAL HIGHLIGHTS (CONTINUED)
---------------------------------------------------------------
YEAR ENDED DECEMBER 31,
CLASS A 2006 2005 2004 2003 2002
---------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ........................ $ 21.61 $ 20.47 $ 20.08 $ 15.95 $ 16.66
---------------------------------------------------------------
Income from investment operations a:
Net investment income b ................................ 0.33 0.37 0.27 0.16 0.19
Net realized and unrealized gains (losses) ............. 3.76 2.41 2.70 4.58 (0.25)
---------------------------------------------------------------
Total from investment operations .......................... 4.09 2.78 2.97 4.74 (0.06)
---------------------------------------------------------------
Less distributions from:
Net investment income .................................. (0.51) (0.43) (0.25) (0.18) (0.22)
Net realized gains ..................................... (2.59) (1.21) (2.33) (0.43) (0.43)
---------------------------------------------------------------
Total distributions ....................................... (3.10) (1.64) (2.58) (0.61) (0.65)
---------------------------------------------------------------
Redemption fees ........................................... -- e -- e -- e -- --
---------------------------------------------------------------
Net asset value, end of year .............................. $ 22.60 $ 21.61 $ 20.47 $ 20.08 $ 15.95
===============================================================
Total return c ............................................ 19.35% 13.82% 15.17% 29.79% (0.57)%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ........................... $ 557,768 $ 359,058 $ 296,778 $ 264,411 $ 180,299
Ratios to average net assets:
Expenses d ............................................. 1.39% f 1.42% f 1.44% f 1.48% 1.44%
Net investment income .................................. 1.40% 1.80% 1.31% 0.93% 1.12%
Portfolio turnover rate ................................... 62.65% 31.71% 38.40% 25.78% 40.17%
Ratios to average net assets, excluding dividend
expense on securities sold short:
Expenses ............................................... 1.39% f 1.41% f 1.43% f 1.46% 1.44%
a The amount shown for a share outstanding throughout the period may not
correlate with the Statement of Operations for the period due to the
timing of sales and repurchase of the Fund shares in relation to income
earned and/or fluctuating market value of the investments of the Fund.
b Based on average daily shares outstanding.
c Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable.
d Includes dividend expense on securities sold short which varies from
period to period. See below for expense ratios that reflect only operating
expenses.
e Amount rounds to less than $0.01 per share.
f Benefit of expense reduction rounds to less than 0.01%.
Annual Report |
The accompanying notes are an integral part of these financial statements. | 17
Mutual Financial Services Fund
FINANCIAL HIGHLIGHTS (CONTINUED)
---------------------------------------------------------------
YEAR ENDED DECEMBER 31,
CLASS B 2006 2005 2004 2003 2002
---------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ........................ $ 21.17 $ 20.09 $ 19.76 $ 15.73 $ 16.47
---------------------------------------------------------------
Income from investment operations a:
Net investment income b ................................ 0.16 0.23 0.14 0.05 0.09
Net realized and unrealized gains (losses) ............. 3.68 2.34 2.64 4.49 (0.26)
---------------------------------------------------------------
Total from investment operations .......................... 3.84 2.57 2.78 4.54 (0.17)
---------------------------------------------------------------
Less distributions from:
Net investment income .................................. (0.34) (0.28) (0.12) (0.08) (0.14)
Net realized gains ..................................... (2.59) (1.21) (2.33) (0.43) (0.43)
---------------------------------------------------------------
Total distributions ....................................... (2.93) (1.49) (2.45) (0.51) (0.57)
---------------------------------------------------------------
Redemption fees ........................................... -- e -- e -- e -- --
---------------------------------------------------------------
Net asset value, end of year .............................. $ 22.08 $ 21.17 $ 20.09 $ 19.76 $ 15.73
===============================================================
Total return c ............................................ 18.51% 13.03% 14.51% 28.88% (1.21)%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ........................... $ 46,085 $ 42,526 $ 42,614 $ 34,219 $ 20,776
Ratios to average net assets:
Expenses d ............................................. 2.08% f 2.12% f 2.10% f 2.12% 2.09%
Net investment income .................................. 0.71% 1.10% 0.65% 0.29% 0.47%
Portfolio turnover rate ................................... 62.65% 31.71% 38.40% 25.78% 40.17%
Ratios to average net assets, excluding dividend
expense on securities sold short:
Expenses ............................................... 2.08% f 2.11% f 2.09% f 2.10% 2.09%
a The amount shown for a share outstanding throughout the period may not
correlate with the Statement of Operations for the period due to the
timing of sales and repurchase of the Fund shares in relation to income
earned and/or fluctuating market value of the investments of the Fund.
b Based on average daily shares outstanding.
c Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable.
d Includes dividend expense on securities sold short which varies from
period to period. See below for expense ratios that reflect only operating
expenses.
e Amount rounds to less than $0.01 per share.
f Benefit of expense reduction rounds to less than 0.01%.
18 | The accompanying notes are an integral part of these financial statements.
| Annual Report
Mutual Financial Services Fund
FINANCIAL HIGHLIGHTS (CONTINUED)
---------------------------------------------------------------
YEAR ENDED DECEMBER 31,
CLASS C 2006 2005 2004 2003 2002
---------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ........................ $ 21.51 $ 20.39 $ 20.02 $ 15.92 $ 16.63
---------------------------------------------------------------
Income from investment operations a:
Net investment income b ................................ 0.16 0.23 0.13 0.05 0.08
Net realized and unrealized gains (losses) ............. 3.73 2.38 2.68 4.55 (0.25)
---------------------------------------------------------------
Total from investment operations .......................... 3.89 2.61 2.81 4.60 (0.17)
---------------------------------------------------------------
Less distributions from:
Net investment income .................................. (0.35) (0.28) (0.11) (0.07) (0.11)
Net realized gains ..................................... (2.59) (1.21) (2.33) (0.43) (0.43)
---------------------------------------------------------------
Total distributions ....................................... (2.94) (1.49) (2.44) (0.50) (0.54)
---------------------------------------------------------------
Redemption fees ........................................... -- e -- e -- e -- --
---------------------------------------------------------------
Net asset value, end of year .............................. $ 22.46 $ 21.51 $ 20.39 $ 20.02 $ 15.92
===============================================================
Total return c ............................................ 18.52% 13.06% 14.46% 28.87% (1.20)%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ........................... $ 225,305 $ 169,000 $ 155,698 $ 141,233 $ 105,451
Ratios to average net assets:
Expenses d ............................................. 2.08% f 2.12% f 2.10% f 2.13% 2.07%
Net investment income .................................. 0.71% 1.10% 0.65% 0.28% 0.49%
Portfolio turnover rate ................................... 62.65% 31.71% 38.40% 25.78% 40.17%
Ratios to average net assets, excluding dividend
expense on securities sold short:
Expenses ............................................... 2.08% f 2.11% f 2.09% f 2.11% 2.07%
a The amount shown for a share outstanding throughout the period may not
correlate with the Statement of Operations for the period due to the
timing of sales and repurchase of the Fund shares in relation to income
earned and/or fluctuating market value of the investments of the Fund.
b Based on average daily shares outstanding.
c Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable.
d Includes dividend expense on securities sold short which varies from
period to period. See below for expense ratios that reflect only operating
expenses.
e Amount rounds to less than $0.01 per share.
f Benefit of expense reduction rounds to less than 0.01%.
Annual Report |
The accompanying notes are an integral part of these financial statements. | 19
Mutual Financial Services Fund
STATEMENT OF INVESTMENTS, DECEMBER 31, 2006
- -----------------------------------------------------------------------------------------------------------------------------------
COUNTRY SHARES VALUE
- -----------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS 94.7%
COMMON STOCKS AND OTHER EQUITY INTERESTS 93.0%
CAPITAL MARKETS 7.2%
Acta Holding ASA ........................................................... Norway 4,766,120 $ 25,223,228
a Banca Generali ............................................................. Italy 387,225 4,912,212
D. Carnegie & Co. AB ....................................................... Sweden 603,730 12,997,748
a FIM Group Oyj .............................................................. Finland 1,203,707 9,692,615
HCI Capital AG ............................................................. Germany 258,197 4,880,728
Ichiyoshi Securities Co. Ltd. .............................................. Japan 560,100 8,079,067
Legg Mason Inc. ............................................................ United States 71,542 6,800,067
Patriot Capital Funding Inc. ............................................... United States 124,800 1,808,352
Toyo Securities Co. Ltd. ................................................... Japan 194,000 777,402
--------------
75,171,419
--------------
COMMERCIAL BANKS 33.6%
a Aareal Bank AG ............................................................. Germany 337,475 15,698,851
a Aspis Bank SA .............................................................. Greece 2,200,000 13,300,823
Banque Cantonale Vaudoise .................................................. Switzerland 27,537 13,265,126
Basler Kantonalbank ........................................................ Switzerland 4,227 383,311
BNP Paribas SA ............................................................. France 198,550 21,662,227
a,f Centennial Bank Holdings Inc., 144A ........................................ United States 946,861 8,957,305
Chinatrust Financial Holding Co. Ltd. ...................................... Taiwan 20,216,000 16,906,122
City National Corp. ........................................................ United States 90,253 6,426,014
Danske Bank AS ............................................................. Denmark 331,464 14,727,300
a,b,c Elephant Capital Holdings Ltd. ............................................. Japan 2,090 2,833,010
First Community Bancorp .................................................... United States 373,250 19,509,777
Intesa Sanpaulo SpA ........................................................ Italy 2,264,959 17,490,675
Intesa Sanpaulo SpA, di Risp ............................................... Italy 147,000 1,073,082
KBC Groep NV ............................................................... Belgium 104,050 12,759,926
Laurentian Bank of Canada .................................................. Canada 372,700 9,675,327
MB Financial Inc. .......................................................... United States 88,900 3,343,529
Mitsubishi UFJ Financial Group Inc. ........................................ Japan 1,158 14,300,500
Natixis .................................................................... France 68,700 1,929,829
a,b,c NCB Warrant Holdings Ltd., A ............................................... Japan 10,590 1,247,184
Placer Sierra Bancshares ................................................... United States 104,380 2,481,113
a Postal Savings Bank ........................................................ Greece 165,200 3,894,770
Prosperity Bancshares Inc. ................................................. United States 152,837 5,274,405
Societe Generale, A ........................................................ France 124,028 21,054,797
a Southern National Bancorp of Virginia Inc. ................................. United States 264,400 4,389,040
c State National Bancshares Inc. ............................................. United States 507,936 18,572,934
Sumitomo Mitsui Financial Group Inc. ....................................... Japan 1,489 15,260,890
Svenska Handelsbanken AB, A ................................................ Sweden 929,120 28,072,139
Swedbank AB, A ............................................................. Sweden 550,855 19,980,072
a Texas Capital Bancshares Inc. .............................................. United States 282,000 5,606,160
U.S. Bancorp ............................................................... United States 353,610 12,797,146
UnionBanCal Corp. .......................................................... United States 48,900 2,995,125
Wachovia Corp. ............................................................. United States 260,196 14,818,162
--------------
350,686,671
--------------
20 | Annual Report
Mutual Financial Services Fund
STATEMENT OF INVESTMENTS, DECEMBER 31, 2006 (CONTINUED)
- -----------------------------------------------------------------------------------------------------------------------------------
COUNTRY SHARES VALUE
- -----------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
COMMON STOCKS AND OTHER EQUITY INTERESTS (CONTINUED)
COMMERCIAL SERVICES & SUPPLIES 1.1%
a Comdisco Holding Co. Inc. .................................................. United States 53 $ 625
a,d Comdisco Holding Co. Inc., Contingent Distribution ......................... United States 4,645,036 --
a,b,c First Chicago Bancorp ...................................................... United States 496,868 6,956,152
a,e Integrated Alarm Services Group Inc. ....................................... United States 1,277,700 4,152,525
--------------
11,109,302
--------------
CONSUMER FINANCE 1.7%
Aiful Corp. ................................................................ Japan 180,710 5,085,719
a,b,c Cerberus FIM Investors Auto Finance LLC .................................... United States 935,171 947,403
a,b,c Cerberus FIM Investors Commercial Finance LLC .............................. United States 119,496 121,059
a,b,c Cerberus FIM Investors Commercial Mortgage LLC ............................. United States 204,465 207,139
a,b,c Cerberus FIM Investors Insurance LLC ....................................... United States 974,086 986,827
a,b,c Cerberus FIM Investors Rescap LLC .......................................... United States 2,066,031 2,093,055
Takefuji Corp. ............................................................. Japan 136,746 5,410,792
a White River Capital Inc. ................................................... United States 172,799 2,790,704
--------------
17,642,698
--------------
DIVERSIFIED CONSUMER SERVICES 1.5%
Banca Italease ............................................................. Italy 59,679 3,479,680
H&R Block Inc. ............................................................. United States 543,820 12,529,613
--------------
16,009,293
--------------
DIVERSIFIED FINANCIAL SERVICES 11.4%
Almancora Comm VA .......................................................... Belgium 68,343 9,743,347
a Bolsas Y Mercados Espanoles ................................................ Spain 301,883 12,485,025
Capital One Financial Corp. ................................................ United States 18,990 1,458,812
Citigroup Inc. ............................................................. United States 189,170 10,536,769
Deutsche Boerse AG ......................................................... Germany 105,476 19,411,947
Euronext NV ................................................................ Netherlands 26,187 3,093,849
Fortis ..................................................................... Belgium 723,460 30,856,157
Guinness Peat Group PLC .................................................... New Zealand 3,286,949 5,649,798
a Hellenic Exchanges SA Holding .............................................. Greece 408,490 7,516,827
Jer Investors Trust Inc. ................................................... United States 159,380 3,294,385
Leucadia National Corp. .................................................... United States 52,800 1,488,960
OMX AB ..................................................................... Sweden 746,610 13,730,859
--------------
119,266,735
--------------
INSURANCE 15.8%
American International Group Inc. .......................................... United States 72,400 5,188,184
a,f AmTrust Financial Services Inc., 144A ...................................... United States 1,291,200 11,039,760
a,b,c Augsburg Re AG ............................................................. Switzerland 10,745 --
a Berkshire Hathaway Inc., A ................................................. United States 113 12,428,870
a Berkshire Hathaway Inc., B ................................................. United States 334 1,224,444
a Conseco Inc. ............................................................... United States 233,200 4,659,336
FBD Holdings PLC ........................................................... United States 153,330 8,359,254
Grupo Catalana Occidente SA ................................................ Spain 493,316 17,875,488
Hartford Financial Services Group Inc. ..................................... United States 155,050 14,467,716
a,b,c Imagine Group Holdings Ltd. ................................................ Bermuda 551,589 6,050,931
Montpelier Re Holdings Ltd. ................................................ Bermuda 302,275 5,625,338
Nationwide Financial Services Inc., A ...................................... United States 104,390 5,657,938
Annual Report | 21
Mutual Financial Services Fund
STATEMENT OF INVESTMENTS, DECEMBER 31, 2006 (CONTINUED)
- -----------------------------------------------------------------------------------------------------------------------------------
COUNTRY SHARES VALUE
- -----------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
COMMON STOCKS AND OTHER EQUITY INTERESTS (CONTINUED)
INSURANCE (CONTINUED)
Old Republic International Corp. ........................................... United States 320,775 $ 7,467,642
a,b,c Olympus Re Holdings Ltd. ................................................... United States 7,480 7,480
Prudential Financial Inc. .................................................. United States 71,050 6,100,353
SNS Reaal Groep NV ......................................................... Netherlands 210,810 4,572,136
b,c Symetra Financial .......................................................... United States 117,300 13,866,033
The St. Paul Travelers Cos. Inc. ........................................... United States 289,473 15,541,805
White Mountains Insurance Group Ltd. ....................................... United States 38,048 22,046,153
Zurich Financial Services AG ............................................... Switzerland 9,808 2,640,043
--------------
164,818,904
--------------
REAL ESTATE 11.9%
a CA IMMO International AG ................................................... Austria 214,000 4,463,353
f CBRE Realty Finance Inc., 144A ............................................. United States 525,000 8,247,750
a DIC Asset AG ............................................................... Germany 292,813 11,901,190
Eurocastle Investment Ltd. ................................................. Guernsey Islands 550,707 28,060,685
a Francono Rhein-Main AG ..................................................... Germany 1,102,500 4,671,690
Franconofurt AG ............................................................ Germany 309,280 4,695,048
a Gagfah SA .................................................................. Luxembourg 144,842 4,577,296
iStar Financial Inc. ....................................................... United States 92,772 4,436,357
KKR Financial Corp. ........................................................ United States 155,500 4,165,845
Link REIT .................................................................. Hong Kong 2,740,341 5,636,278
a Northern European Properties Ltd. .......................................... Sweden 4,500,000 5,940,225
a Patrizia Immobilien AG ..................................................... Germany 790,930 23,595,916
a Vivacon AG ................................................................. Germany 390,928 13,133,332
--------------
123,524,965
--------------
THRIFTS & MORTGAGE FINANCE 8.8%
Countrywide Financial Corp. ................................................ United States 224,285 9,520,898
a Franklin Bank Corp. ........................................................ United States 310,100 6,369,454
Hudson City Bancorp Inc. ................................................... United States 1,303,320 18,090,081
Hypo Real Estate Holding AG ................................................ Germany 258,966 16,295,897
a Interhyp AG ................................................................ Germany 180,990 15,859,233
Sovereign Bancorp Inc. ..................................................... United States 481,325 12,220,842
Washington Mutual Inc. ..................................................... United States 288,310 13,115,222
a Westfield Financial Inc. ................................................... United States 60,000 632,661
--------------
92,104,288
--------------
TOTAL COMMON STOCKS AND OTHER EQUITY INTERESTS
(COST $757,587,360) ...................................................... 970,334,275
--------------
----------
PRINCIPAL
AMOUNT
----------
CORPORATE BONDS & NOTES 1.2%
b,c Augsburg Re AG, zero cpn., 2/17/07 ......................................... Switzerland $ 123,572 1,236
b,c Cerberus FIM Investors Auto Finance LLC, 12.00%, 11/22/13 .................. United States 2,790,322 2,790,322
b,c Cerberus FIM Investors Commercial Finance LLC, 12.00%, 11/22/13 ............ United States 358,487 358,487
b,c Cerberus FIM Investors Commercial Mortgage LLC, 12.00%, 11/22/13 ........... United States 613,397 613,397
b,c Cerberus FIM Investors Insurance LLC, 12.00%, 11/22/13 ..................... United States 2,922,260 2,922,260
b,c Cerberus FIM Investors Rescap LLC, 12.00%, 11/22/13 ........................ United States 6,198,092 6,198,092
--------------
TOTAL CORPORATE BONDS & NOTES (COST $13,006,129) ........................... 12,883,794
--------------
22 | Annual Report
Mutual Financial Services Fund
STATEMENT OF INVESTMENTS, DECEMBER 31, 2006 (CONTINUED)
- -----------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL
COUNTRY AMOUNT VALUE
- -----------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
GOVERNMENT AGENCIES (COST $5,000,000) 0.5%
Federal Home Loan Bank, 5.22%, 11/14/07 .................................... United States $ 5,000,000 $ 4,996,650
--------------
TOTAL LONG TERM INVESTMENTS (COST $775,593,489) ............................ 988,214,719
--------------
SHORT TERM INVESTMENTS (COST $47,285,512) 4.6%
U.S. GOVERNMENT AND AGENCY SECURITIES 4.6%
g Federal Home Loan Bank, 1/02/07 - 4/04/07 .................................. United States 47,420,000 47,309,180
--------------
TOTAL INVESTMENTS (COST $822,879,001) 99.3% ................................ 1,035,523,899
NET UNREALIZED LOSS ON FORWARD EXCHANGE CONTRACTS (0.5)% ................... (4,629,123)
OTHER ASSETS, LESS LIABILITIES 1.2% ........................................ 12,137,693
--------------
TOTAL NET ASSETS 100.0% .................................................... $1,043,032,469
==============
SELECTED PORTFOLIO ABBREVIATION
REIT - Real Estate Investment Trust
a Non-income producing for the twelve months ended December 31, 2006.
b See Note 8 regarding restricted securities.
c Security has been deemed illiquid because it may not be able to be sold
within seven days. At December 31, 2006, the aggregate value of these
securities was $66,773,001, representing 6.40% of net assets.
d Contingent distributions represent the right to receive additional
distributions, if any, during the reorganization of the underlying
company. Shares represent total underlying principal of debt securities.
e See Note 9 regarding holdings of 5% voting securities.
f Security was purchased pursuant to Rule 144A under the Securities Act of
1933 and may be sold in transactions exempt from registration only to
qualified institutional buyers or in a public offering registered under
the Securities Act of 1933. These securities have been deemed liquid under
guidelines approved by the Fund's Board of Directors. At December 31,
2006, the value of these securities was $28,244,815, representing 2.71% of
net assets.
g The security is traded on a discount basis with no stated coupon rate.
Annual Report |
The accompanying notes are an integral part of these financial statements. | 23
Mutual Financial Services Fund
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
December 31, 2006
Assets:
Investments in securities:
Cost - Unaffiliated issuers ............................ $ 813,611,518
Cost - Non-controlled affiliated issuers (Note 9) ...... 9,267,483
---------------
Total cost of investments .............................. $ 822,879,001
===============
Value - Unaffiliated issuers ........................... 1,031,371,374
Value - Non-controlled affiliated issuers (Note 9) ..... 4,152,525
---------------
Total value of investments ............................. 1,035,523,899
Cash ..................................................... 108,239
Cash on deposit with brokers for securities sold short ... 1,080,686
Cash on deposit with brokers for synthetic equity swaps .. 12,223
Foreign currency, at value (cost $7,121,344) ............. 7,190,717
Receivables:
Investment securities sold ............................. 6,259,926
Capital shares sold .................................... 3,008,740
Dividends and interest ................................. 1,082,808
Unrealized gain on forward exchange contracts (Note 7) ... 3,442,266
---------------
Total assets ......................................... 1,057,709,504
Liabilities:
Payables:
Investment securities purchased ........................ 1,264,900
Capital shares redeemed ................................ 3,485,114
Affiliates ............................................. 1,663,447
Unrealized loss on forward exchange contracts (Note 7) ... 8,071,389
Accrued expenses and other liabilities ................... 192,185
---------------
Total liabilities .................................... 14,677,035
---------------
Net assets, at value ............................... $ 1,043,032,469
===============
Net assets consist of:
Paid-in capital .......................................... $ 817,138,316
Distributions in excess of net investment income ......... (6,961,272)
Net unrealized appreciation (depreciation) ............... 208,105,682
Accumulated net realized gain (loss) ..................... 24,749,743
---------------
Net assets, at value ............................... $ 1,043,032,469
===============
24 | The accompanying notes are an integral part of these financial statements.
| Annual Report
Mutual Financial Services Fund
FINANCIAL STATEMENTS (CONTINUED)
STATEMENT OF ASSETS AND LIABILITIES (CONTINUED)
December 31, 2006
CLASS Z:
Net assets, at value ..................................... $ 213,874,343
===============
Shares outstanding ....................................... 9,466,432
===============
Net asset value and maximum offering price per share a ... $ 22.59
===============
CLASS A:
Net assets, at value ..................................... $ 557,768,159
===============
Shares outstanding ....................................... 24,676,323
===============
Net asset value per share a .............................. $ 22.60
===============
Maximum offering price per share (net asset value per
share / 94.25%) .......................................... $ 23.98
===============
CLASS B:
Net assets, at value ..................................... $ 46,084,649
===============
Shares outstanding ....................................... 2,087,595
===============
Net asset value and maximum offering price per share a ... $ 22.08
===============
CLASS C:
Net assets, at value ..................................... $ 225,305,318
===============
Shares outstanding ....................................... 10,029,465
===============
Net asset value and maximum offering price per share a ... $ 22.46
===============
a Redemption price is equal to net asset value less contingent deferred
sales charges, if applicable, and redemption fees retained by the Fund.
Annual Report |
The accompanying notes are an integral part of these financial statements. | 25
Mutual Financial Services Fund
FINANCIAL STATEMENTS (CONTINUED)
STATEMENT OF OPERATIONS
for the year ended December 31, 2006
Investment income:
Dividends (net of foreign taxes of $1,778,051) ............. $ 22,596,782
Interest ................................................... 2,457,159
Income from securities loaned - net ........................ 109,254
Other income (Note 10) ..................................... 23,179
---------------
Total investment income ................................ 25,186,374
---------------
Expenses:
Management fees (Note 3a) .................................. 7,216,966
Administrative fees (Note 3b) .............................. 689,645
Distribution fees (Note 3c)
Class A .................................................. 1,464,326
Class B .................................................. 438,789
Class C .................................................. 1,968,945
Transfer agent fees (Note 3e) .............................. 1,245,502
Custodian fees (Note 4) .................................... 213,899
Reports to shareholders .................................... 137,891
Registration and filing fees ............................... 94,135
Professional fees .......................................... 132,925
Directors' fees and expenses ............................... 18,953
Other ...................................................... 24,437
---------------
Total expenses ......................................... 13,646,413
Expense reductions (Note 4) ............................ (4,157)
---------------
Net expenses ......................................... 13,642,256
---------------
Net investment income .............................. 11,544,118
---------------
Realized and unrealized gains (losses):
Net realized gain (loss) from:
Investments .............................................. 136,567,091
Foreign currency transactions ............................ (15,079,842)
Securities sold short .................................... (141,900)
Synthetic equity swaps ................................... 1,384,086
---------------
Net realized gain (loss) ............................... 122,729,435
---------------
Net change in unrealized appreciation (depreciation) on:
Investments .............................................. 32,300,734
Translation of assets and liabilities denominated in
foreign currencies ... (10,809,403)
---------------
Net change in unrealized appreciation (depreciation) ... 21,491,331
---------------
Net realized and unrealized gain (loss) ....................... 144,220,766
---------------
Net increase (decrease) in net assets resulting from
operations ............................................. $ 155,764,884
---------------
26 | The accompanying notes are an integral part of these financial statements.
| Annual Report
Mutual Financial Services Fund
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF CHANGES IN NET ASSETS
------------------------------
YEAR ENDED DECEMBER 31,
------------------------------
2006 2005
------------------------------
Increase (decrease) in net assets:
Operations:
Net investment income ..................................................................... $ 11,544,118 $ 11,188,993
Net realized gain (loss) from investments, securities sold short,
foreign currency transactions, and synthetic equity swaps ............................... 122,729,435 37,764,445
Net change in unrealized appreciation (depreciation) on investments and translation of
assets and liabilities denominated in foreign currencies ................................ 21,491,331 39,169,016
------------------------------
Net increase (decrease) in net assets resulting from operations ....................... 155,764,884 88,122,454
------------------------------
Distributions to shareholders from:
Net investment income:
Class Z ................................................................................. (4,850,586) (3,763,970)
Class A ................................................................................. (11,024,582) (6,706,421)
Class B ................................................................................. (643,796) (539,612)
Class C ................................................................................. (3,167,122) (2,132,095)
Net realized gains:
Class Z ................................................................................. (21,917,044 (9,354,463)
Class A ................................................................................. (56,478,510) (18,415,891)
Class B ................................................................................. (4,890,247) (2,339,402)
Class C ................................................................................. (23,212,292) (8,968,562)
------------------------------
Total distributions to shareholders ......................................................... (126,184,179) (52,220,416)
------------------------------
Capital share transactions: (Note 2)
Class Z ................................................................................. 30,704,932 (191,699)
Class A ................................................................................. 186,536,002 45,360,278
Class B ................................................................................. 1,574,660 (2,103,037)
Class C ................................................................................. 49,182,992 5,215,334
------------------------------
Total capital share transactions ............................................................ 267,998,586 48,280,876
------------------------------
Redemption fees ............................................................................. 4,102 1,695
------------------------------
Net increase (decrease) in net assets ................................................. 297,583,393 84,184,609
Net assets:
Beginning of year ........................................................................... 745,449,076 661,264,467
------------------------------
End of year ................................................................................. $1,043,032,469 $745,449,076
==============================
Distributions in excess of net investment income included in net assets:
End of year ................................................................................. $ (6,961,272) $ (603,681)
==============================
Annual Report |
The accompanying notes are an integral part of these financial statements. | 27
Mutual Financial Services Fund
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Franklin Mutual Series Fund Inc. (the Series Fund) is registered under the
Investment Company Act of 1940, as amended (the 1940 Act) as an open-end
investment company, consisting of six separate funds. The Mutual Financial
Services Fund (the Fund) included in this report is diversified. The financial
statements of the remaining funds in the Series Fund are presented separately.
The Fund offers four classes of shares: Class Z, Class A, Class B and Class C.
Each class of shares differs by its initial sales load, contingent deferred
sales charges, distribution fees, voting rights on matters affecting a single
class and its exchange privilege.
The following summarizes the Fund's significant accounting policies.
A. SECURITY VALUATION
Securities listed on a securities exchange or on the NASDAQ National Market
System are valued at the last quoted sale price or the official closing price of
the day, respectively. Over-the-counter securities and listed securities for
which there is no reported sale are valued within the range of the most recent
quoted bid and ask prices. Securities that trade in multiple markets or on
multiple exchanges are valued according to the broadest and most representative
market.
Corporate debt securities and Government securities generally trade in the
over-the-counter market rather than on a securities exchange. The Fund may
utilize independent pricing services, quotations from bond dealers, and
information with respect to bond and note transactions, to assist in determining
a current market value for each security. The Fund's pricing services may use
valuation models or matrix pricing which considers information with respect to
comparable bond and note transactions, quotations from bond dealers, or by
reference to other securities that are considered comparable in such
characteristics as rating, interest rate and maturity date, option adjusted
spread models, prepayment projections, interest rate spreads and yield curves,
to determine current value.
Foreign securities are valued as of the close of trading on the foreign stock
exchange on which the security is primarily traded, or the NYSE, whichever is
earlier. If no sale is reported at that time, the foreign security will be
valued within the range of the most recent quoted bid and ask prices. The value
is then converted into its U.S. dollar equivalent at the foreign exchange rate
in effect at the close of the NYSE on the day that the value of the foreign
security is determined.
28 | Annual Report
Mutual Financial Services Fund
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
A. SECURITY VALUATION (CONTINUED)
The Fund has procedures to determine the fair value of individual securities and
other assets for which market prices are not readily available or which may not
be reliably priced. Methods for valuing these securities may include:
fundamental analysis, matrix pricing, discounts from market prices of similar
securities, or discounts applied due to the nature and duration of restrictions
on the disposition of the securities. Due to the inherent uncertainty of
valuations of such securities, the fair values may differ significantly from the
values that would have been used had a ready market for such investments
existed. Occasionally, events occur between the time at which trading in a
security is completed and the close of the NYSE that might call into question
the availability (including the reliability) of the value of a portfolio
security held by the Fund. The investment manager monitors price movements
following the close of trading in foreign stock markets through a series of
country specific market proxies (such as baskets of American Depository
Receipts, futures contracts and exchange traded funds). These price movements
are measured against established trigger thresholds for each specific market
proxy to assist in determining if an event has occurred. If such an event
occurs, the securities may be valued using fair value procedures, which may
include the use of independent pricing services. All security valuation
procedures are approved by the Fund's 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, income and expense items denominated in foreign currencies are
translated into U.S. dollars at the exchange rate in effect on the transaction
date. Occasionally, events may impact the availability or reliability of foreign
exchange rates used to convert the U.S. dollar equivalent value. If such an
event occurs, the foreign exchange rate will be valued at fair value using
procedures established and approved by the Fund's Board of Directors.
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 on the
Statement of Operations.
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 denominated assets and liabilities other than investments in securities
held at the end of the reporting period.
Annual Report | 29
Mutual Financial Services Fund
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
C. FOREIGN CURRENCY CONTRACTS
When the Fund purchases or sells foreign securities it may enter into foreign
exchange contracts to minimize foreign exchange risk from the trade date to the
settlement date of the transactions. A foreign exchange contract is an agreement
between two parties to exchange different currencies at an agreed upon exchange
rate at a future date. Realized and unrealized gains and losses on these
contracts are included in the Statement of Operations.
The Fund may also enter into forward exchange contracts to hedge against
fluctuations in foreign exchange rates or to gain exposure to certain foreign
currencies. These contracts are valued daily by the Fund and the unrealized
gains or losses on the contracts, as measured by the difference between the
contractual forward foreign exchange rates and the forward rates at the
reporting date, are included in the Statement of Assets and Liabilities.
Realized and unrealized gains and losses on these contracts are included in the
Statement of Operations.
The risks of these contracts include movement in the values of the foreign
currencies relative to the U.S. dollar and the possible inability of the
counterparties to fulfill their obligations under the contracts, which may be in
excess of the amount reflected in the Statement of Assets and Liabilities.
D. SYNTHETIC EQUITY SWAPS
The Fund may engage in synthetic equity swaps. Synthetic equity swaps 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 purchase or short sale of the underlying
security taken place. Upon entering into synthetic equity swaps, 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 ("margin account"). Periodically,
payments are made to recognize changes in value of the contract resulting from
interest on the notional value of the contract, market value changes in the
underlying security, and/or dividends paid by the issuer of the underlying
security. The Fund recognizes a realized gain or loss when cash is received
from, or paid to, the broker. Synthetic equity swaps are valued daily by the
Fund and the unrealized gains or losses on the contracts (as measured by the
difference between the contract amount plus or minus cash received or paid and
the market value of the underlying securities) are recorded in the Statement of
Operations. The margin account and any net unrealized gains or losses on open
synthetic equity swaps are included in the Statement of Assets and Liabilities.
The risks of entering into synthetic equity swaps include unfavorable price
movements in the underlying securities or the inability of the counterparties to
fulfill their obligations under the contract.
30 | Annual Report
Mutual Financial Services Fund
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
E. OPTIONS
The Fund may purchase or write options. Options are contracts entitling the
holder to purchase or sell a specified number of shares or units of a particular
security at a specified price. Options purchased are recorded as investments;
options written (sold) are recorded as liabilities. Upon closing of an option,
other than by exercise, which results in a cash settlement, the difference
between the premium (original option value) 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. When
an option expires, the premium is realized as a gain for options written or as a
loss for options purchased. The risks include the possibility there may be an
illiquid options market or the inability of the counterparties to fulfill their
obligations under the contract. Writing options involves, to varying degrees,
elements of market risk in excess of the amount recognized in the Statement of
Assets and Liabilities.
F. SECURITIES SOLD SHORT
The Fund is engaged in selling securities short, which obligates the Fund to
replace a borrowed security with the same security at current market value. The
Fund incurs 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 realizes a gain if the price of the security declines between those
dates. Gains are limited to the price at which the Fund sold the security short,
while losses are potentially unlimited in size.
The Fund is required to establish a margin account with the broker lending the
security sold short. While the short sale is outstanding, the broker retains the
proceeds of the short sale and the Fund must maintain a deposit with broker
consisting of cash and securities having a value equal to a specified percentage
of the value of the securities sold short. The Fund is obligated to pay the
counterparty any dividends or interest due on securities sold short. Such
dividends and interest are recorded as an expense to the Fund.
G. SECURITIES LENDING
The Fund may loan securities to certain brokers through a securities lending
agent for which it receives initial cash collateral against the loaned
securities in an amount equal to at least 102% of the market value of the loaned
securities. Collateral is maintained over the life of the loan in an amount not
less than 100% of the market value of loaned securities, as determined at the
close of fund business each day; any additional collateral required due to
changes in security values is delivered to the fund on the next business day.
The Fund receives interest income from the investment of cash collateral,
adjusted by lender fees and broker rebates. The Fund bears the risk of loss with
respect to the investment of the collateral and the securities loaned. The
securities lending agent has agreed to indemnify the Fund in the case of default
of any securities borrower. At December 31, 2006, the Fund had no securities on
loan.
Annual Report | 31
Mutual Financial Services Fund
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
H. INCOME TAXES
No provision has been made for U.S. income taxes because the Fund intends to
qualify as a regulated investment company under the Internal Revenue Code and to
distribute to shareholders substantially all of its taxable income and net
realized gains.
Foreign securities held by the Fund may be subject to foreign taxation on
dividend and interest income received. Foreign taxes, if any, are recorded based
on the tax regulations and rates that exist in the foreign markets in which the
Fund invests.
I. 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.
Interest income and estimated expenses are accrued daily. Amortization of
premium and accretion of discount on debt securities are included in interest
income. Dividend income and dividends declared on securities sold short, are
recorded on the ex-dividend date except that certain dividends from foreign
securities are recognized as soon as the Fund is notified of the ex-dividend
date. Distributions to shareholders are recorded on the ex-dividend date and are
determined according to income tax regulations (tax basis). Distributable
earnings determined on a tax basis may differ from earnings recorded in
accordance with accounting principles generally accepted in the United States.
These differences may be permanent or temporary. Permanent differences are
reclassified among capital accounts to reflect their tax character. These
reclassifications have no impact on net assets or the results of operations.
Temporary differences are not reclassified, as they may reverse in subsequent
periods.
Common expenses incurred by the Series Fund are allocated among the funds based
on the ratio of net assets of each fund to the combined net assets of the Series
Fund. Fund specific expenses are charged directly to the fund that incurred the
expense.
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. Differences in class-level
expenses may result in payment of different per share distributions by class.
J. ACCOUNTING ESTIMATES
The preparation of financial statements in accordance with accounting principles
generally accepted in the United States of America 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 expenses during the reporting period. Actual results could differ from those
estimates.
32 | Annual Report
Mutual Financial Services Fund
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
K. REDEMPTION FEES
A short term trading redemption fee will be imposed, with some exceptions, on
any Fund shares that are redeemed or exchanged within seven calendar days
following their purchase date. The redemption fee is 2% of the amount redeemed.
Such fees are retained by the Fund and accounted for as an addition to paid-in
capital.
L. GUARANTEES AND INDEMNIFICATIONS
Under the Series Fund's organizational documents, its officers and directors are
indemnified by the Fund against certain liabilities arising out of the
performance of their duties to the Fund. Additionally, in the normal course of
business, the Fund enters into contracts with service providers that contain
general indemnification clauses. The Fund's maximum exposure under these
arrangements is unknown as this would involve future claims that may be made
against the Fund that have not yet occurred. Currently, the Fund expects the
risk of loss to be remote.
2. CAPITAL STOCK
At December 31, 2006, there were 500 million shares authorized ($0.001 par
value). Transactions in the Fund's shares were as follows:
-----------------------------------------------------------------
YEAR ENDED DECEMBER 31,
2006 2005
-----------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
-----------------------------------------------------------------
CLASS Z SHARES
Shares sold .................... 1,247,626 $ 28,944,258 679,875 $ 14,183,552
Shares issued in reinvestment of
distributions ............... 1,108,120 24,688,386 565,701 12,022,854
Shares redeemed ................ (987,955) (22,927,712) (1,274,008) (26,398,105)
-----------------------------------------------------------------
Net increase (decrease) ........ 1,367,791 $ 30,704,932 (28,432) $ (191,699)
=================================================================
CLASS A SHARES
Shares sold .................... 10,652,294 $ 248,569,023 4,276,295 $ 89,422,089
Shares issued in reinvestment of
distributions ............... 2,801,174 62,452,788 1,083,314 23,054,690
Shares redeemed ................ (5,391,463) (124,485,809) (3,242,457) (67,116,501)
-----------------------------------------------------------------
Net increase (decrease) ........ 8,062,005 $ 186,536,002 2,117,152 $ 45,360,278
=================================================================
CLASS B SHARES
Shares sold .................... 158,560 $ 3,562,328 169,286 $ 3,512,309
Shares issued in reinvestment of
distributions ............... 232,836 5,067,757 127,227 2,644,855
Shares redeemed ................ (312,782) (7,055,425) (408,883) (8,260,201)
-----------------------------------------------------------------
Net increase (decrease) ........ 78,614 $ 1,574,660 (112,370) $ (2,103,037)
=================================================================
Annual Report | 33
Mutual Financial Services Fund
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. CAPITAL STOCK (CONTINUED)
------------------------------------------------------
YEAR ENDED DECEMBER 31,
2006 2005
------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
------------------------------------------------------
CLASS C SHARES
Shares sold ........................................ 2,318,404 $ 53,362,559 1,128,446 $ 23,514,526
Shares issued in reinvestment of distributions ..... 1,051,613 23,298,391 471,580 9,963,541
Shares redeemed .................................... (1,197,941) (27,477,958) (1,377,451) (28,262,733)
------------------------------------------------------
Net increase (decrease) ............................ 2,172,076 $ 49,182,992 222,575 $ 5,215,334
======================================================
3. TRANSACTIONS WITH AFFILIATES
Franklin Resources, Inc. is the holding company for various subsidiaries that
together are referred to as Franklin Templeton Investments. Certain officers and
directors of the Series Fund are also officers and/or directors of the following
subsidiaries:
- ------------------------------------------------------------------------------------------------
SUBSIDIARY AFFILIATION
- ------------------------------------------------------------------------------------------------
Franklin Mutual Advisers, LLC (Franklin Mutual) Investment manager
Franklin Templeton Services, LLC (FT Services) Administrative manager
Franklin Templeton Distributors, Inc. (Distributors) Principal underwriter
Franklin Templeton Investor Services, LLC (Investor Services) Transfer agent
A. MANAGEMENT FEES
The Fund pays an investment management fee to Franklin Mutual based on the
average daily net assets of the Fund as follows:
- --------------------------------------------------------------------------------
ANNUALIZED FEE RATE NET ASSETS
- --------------------------------------------------------------------------------
0.800% Up to and including $1 billion
0.770% Over $1 billion, up to and including $2 billion
0.750% Over $2 billion, up to and including $5 billion
0.730% In excess of $5 billion
B. ADMINISTRATIVE FEES
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:
- --------------------------------------------------------------------------------
ANNUALIZED FEE RATE NET ASSETS
- --------------------------------------------------------------------------------
0.150% Up to and including $200 million
0.135% Over $200 million, up to and including $700 million
0.100% Over $700 million, up to and including $1.2 billion
0.075% In excess of $1.2 billion
34 | Annual Report
Mutual Financial Services Fund
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. TRANSACTIONS WITH AFFILIATES (CONTINUED)
C. DISTRIBUTION FEES
The Fund's Board of Directors has adopted distribution plans for each share
class, with the exception of Class Z shares, pursuant to Rule 12b-1 under the
1940 Act. Under the Fund's Class A reimbursement distribution plan, the Fund
reimburses Distributors for costs incurred in connection with the servicing,
sale and distribution of the Fund's shares up to the maximum annual plan rate.
Under the Class A reimbursement distribution plan, costs exceeding the maximum
for the current plan year cannot be reimbursed in subsequent periods.
In addition, under the Fund's Class B and C compensation distribution plans, the
Fund pays Distributors for costs incurred in connection with the servicing, sale
and distribution of the Fund's shares up to the maximum annual plan rate for
each class.
The maximum annual plan rates, based on the average daily net assets, for each
class, are as follows:
Class A ............................................ 0.35%
Class B ............................................ 1.00%
Class C ............................................ 1.00%
D. SALES CHARGES/UNDERWRITING AGREEMENTS
Distributors has advised the Fund of the following commission transactions
related to the sales and redemptions of the Fund's shares for the year:
Sales charge retained net of commisions paid to
unaffiliated broker/dealers ..................... $ 392,978
Contingent deferred sales charges retained ......... $ 55,117
E. TRANSFER AGENT FEES
The Fund paid transfer agent fees of $1,245,502, of which $565,543 was retained
by Investor Services.
4. EXPENSE OFFSET ARRANGEMENT
The Fund has entered into an arrangement with their custodian whereby credits
realized as a result of uninvested cash balances are used to reduce a portion of
the Fund's custodian expenses. During the year ended December 31, 2006, the
custodian fees were reduced as noted in the Statements of Operations.
Annual Report | 35
Mutual Financial Services Fund
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. INCOME TAXES
The tax character of distributions paid during the years ended December 31, 2006
and 2005, was as follows:
------------------------------
2006 2005
------------------------------
Distributions paid from:
Ordinary income ............................ $ 55,615,319 $ 26,996,949
Long term capital gain ..................... 70,568,860 25,223,467
------------------------------
$ 126,184,179 $ 52,220,416
==============================
At December 31, 2006, the cost of investments, net unrealized appreciation
(depreciation), undistributed ordinary income and undistributed long term
capital gains for income tax purposes were as follows:
Cost of investments ........................................... $ 833,425,519
=============
Unrealized appreciation ....................................... $ 229,463,107
Unrealized depreciation ....................................... (27,364,727)
-------------
Net unrealized appreciation (depreciation) .................... $ 202,098,380
=============
Undistributed ordinary income ................................. $ 3,500,538
Undistributed long term capital gains ......................... 20,538,669
-------------
Distributable earnings ........................................ $ 24,039,207
=============
Net investment income differs for financial statement and tax purposes primarily
due to differing treatments of foreign currency transactions, passive foreign
investment company shares, and certain dividends on securities sold short.
Net realized gains (losses) differ for financial statement and tax purposes
primarily due to differing treatments of wash sales, foreign currency
transactions, and passive foreign investment company shares.
6. INVESTMENT TRANSACTIONS
Purchases and sales of investments (excluding short term securities and
securities sold short) for the year ended December 31, 2006, aggregated
$653,712,874 and $533,333,621, respectively.
36 | Annual Report
Mutual Financial Services Fund
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. FORWARD EXCHANGE CONTRACTS
At December 31, 2006, the Fund had the following forward exchange contracts
outstanding:
CONTRACT SETTLEMENT UNREALIZED UNREALIZED
AMOUNT DATE GAIN LOSS
- -------------------------------------------------------------------------------------------------------
CONTRACTS TO BUY
471,812,000 Japanese Yen ............. $ 4,000,000 3/19/07 $ 3,914 --
1,324,979,452 Japanese Yen ............. 11,382,178 3/19/07 $ (133,552)
4,727,628 Canadian Dollar .......... 4,111,312 3/26/07 (43,728)
CONTRACTS TO SELL
44,887,453 Euro ..................... 56,681,241 1/18/07 (2,633,229)
69,951,912 Danish Krone ............. 11,871,914 1/23/07 (525,293)
205,191,493 Swedish Krona ............ 30,122,584 2/15/07 81,138
26,575,912 Euro ..................... 34,032,324 2/20/07 (1,137,187)
10,350,341 Euro ..................... 13,823,656 2/26/07 122,970
30,889,678 Euro ..................... 40,066,619 2/26/07 (821,869)
5,534,868 New Zealand Dollar ....... 3,780,315 3/07/07 (102,285)
75,000,000 Norwegian Krone .......... 12,345,273 3/07/07 282,191
14,806,758 Swiss Franc .............. 12,526,012 3/07/07 300,503
1,379,312 Swiss Franc .............. 1,135,077 3/07/07 (3,780)
40,000,000 Euro ..................... 51,208,750 3/13/07 (1,771,000)
225,000,000 Swedish Krona ............ 33,089,425 3/15/07 97,158
5,890,749,490 Japanese Yen ............. 51,474,149 3/19/07 1,463,683
14,205,468 Canadian Dollar .......... 12,788,379 3/26/07 566,193
43,068,366 Euro ..................... 57,240,617 4/13/07 128,182
15,582,523 Euro ..................... 19,787,372 4/18/07 (880,283)
2,213,942 Euro ..................... 2,959,012 6/06/07 17,193
7,539,758 Euro ..................... 10,014,729 6/06/07 (3,198)
264,607,625 Taiwan Dollar ............ 8,312,500 6/06/07 191,953
49,787,683 Norwegian Krone .......... 8,219,195 6/07/07 187,188
9,309,850 Norwegian Krone .......... 1,500,000 6/07/07 (15,985)
--------------------------
Unrealized gain (loss) on forward exchange contracts ............... 3,442,266 (8,071,389)
--------------------------
Net unrealized gain (loss) on forward exchange contracts ...................... $ (4,629,123)
============
8. RESTRICTED SECURITIES
The Fund may invest in securities that are restricted under the Securities Act
of 1933 (the 1933 Act) or which are subject to legal, contractual, or other
agreed upon restrictions on resale. Restricted securities are often purchased in
private placement transactions, and cannot be sold without prior registration
unless the sale is pursuant to an exemption under the 1933 Act. Disposal of
these securities may require greater effort and expense, and prompt sale at an
acceptable price may be difficult. The Fund may have registration rights for
restricted securities. The issuer generally incurs all registration costs.
Annual Report | 37
Mutual Financial Services Fund
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
8. RESTRICTED SECURITIES (CONTINUED)
At December 31, 2006, the Fund held investments in restricted securities,
excluding 144A securities deemed to be liquid, valued in accordance with
procedures approved by the Fund's Board of Directors as reflecting fair value,
as follows:
- ---------------------------------------------------------------------------------------------------------
PRINCIPAL
AMOUNT/ ACQUISITION
SHARES ISSUER DATES COST VALUE
- ---------------------------------------------------------------------------------------------------------
10,745 Augsburg Re AG ........................... 5/25/06 $ 10,745 $ --
123,572 Augsburg Re AG, zero cpn., 2/17/07 ....... 5/25/06 123,572 1,236
935,171 Cerberus FIM Investors Auto Finance LLC .. 11/20/06 935,171 947,403
2,790,322 Cerberus FIM Investors Auto Finance
LLC, 12.00%, 11/22/13 .................... 11/21/06 2,790,322 2,790,322
119,496 Cerberus FIM Investors Comercial Finance
LLC ...................................... 11/20/06 119,496 121,059
358,487 Cerberus FIM Investors Comercial Finance
LLC, 12.00%, 11/22/13 .................... 11/20/06 358,487 358,487
204,465 Cerberus FIM Investors Comercial Mortgage
LLC ...................................... 11/20/06 204,466 207,139
613,397 Cerberus FIM Investors Comercial Mortgage
LLC, 12.00%, 11/22/13 .................... 11/20/06 613,397 613,397
974,086 Cerberus FIM Investors Insurance
LLC ...................................... 11/20/06 974,087 986,827
2,922,260 Cerberus FIM Investors Insurance
LLC, 12.00%, 11/22/13 .................... 11/20/06 2,922,260 2,922,260
2,066,031 Cerberus FIM Investors Rescap LLC ........ 11/20/06 2,066,031 2,093,055
6,198,092 Cerberus FIM Investors Rescap
LLC, 12.00%, 11/22/13 .................... 11/20/06 6,198,092 6,198,092
2,090 Elephant Capital Holdings Ltd. ........... 8/20/03 - 7/29/04 -- 2,833,010
496,868 First Chicago Bancorp .................... 11/16/06 6,956,152 6,956,152
551,589 Imagine Group Holdings Ltd. .............. 8/31/04 5,649,099 6,050,931
10,590 NCB Warrant Holdings Ltd., A ............. 12/16/05 -- 1,247,184
7,480 Olympus Re Holdings Ltd. ................. 12/19/01 748,000 7,480
117,300 Symetra Financial ........................ 7/27/04 11,730,000 13,866,033
------------
TOTAL RESTRICTED SECURITIES (4.62% of Net Assets) ........................ $ 48,200,067
============
9. HOLDINGS OF 5% VOTING SECURITIES OF PORTFOLIO COMPANIES
The Investment Company Act of 1940 defines "affiliated companies" to include
investments in portfolio companies in which a fund owns 5% or more of the
outstanding voting securities. Investments in "affiliated companies" for the
Fund for the year ended December 31, 2006 were as shown below.
- -----------------------------------------------------------------------------------------------------------------------------------
NUMBER OF SHARES NUMBER OF SHARES VALUE AT
HELD AT BEGINNING GROSS GROSS HELD AT END OF END OF INVESTMENT REALIZED CAPITAL
NAME OF ISSUER OF YEAR ADDITIONS REDUCTIONS YEAR YEAR INCOME GAIN (LOSS)
- -----------------------------------------------------------------------------------------------------------------------------------
NON-CONTROLLED AFFILIATES
Integrated Alarm Systems .. 1,277,700 -- -- 1,277,700 $ 4,152,525 $-- $--
==========================================
TOTAL NON-CONTROLLED AFFILIATES (0.40% of Net Assets)
38 | Annual Report
Mutual Financial Services Fund
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
10. REGULATORY MATTERS
As part of various investigations by a number of federal, state, and foreign
regulators and governmental entities, including the Securities and Exchange
Commission ("SEC"), relating to certain practices in the mutual fund industry,
including late trading, market timing and marketing support payments to
securities dealers who sell fund shares ("marketing support"), Franklin
Resources, Inc. and certain of its subsidiaries (collectively, the "Company"),
entered into settlements with certain of those regulators. Specifically, the
Company entered into settlements with the SEC, among others, concerning market
timing and marketing support.
On June 23, 2006, the SEC approved the proposed plan of distribution for the
marketing support settlement, and disbursement of the settlement monies to the
designated funds, in accordance with the terms and conditions of that settlement
and plan, was completed in September 2006 and is recorded as other income.
The plan of distribution for the market timing settlement is currently under
review by the SEC staff. After publication of notice of the plan and a 30-day
comment period, the proposed plan of distribution will be submitted to the SEC
for approval. Following the SEC's approval of the plan of distribution, with
modifications as appropriate, distribution of the settlement monies will begin
in accordance with the terms and conditions of the settlement and plan.
In addition, the Company, as well as most of the mutual funds within Franklin
Templeton Investments and certain current or former officers, Company directors,
fund directors, and employees, have been named in private lawsuits (styled as
shareholder class actions, or as derivative actions on behalf of either the
named funds or Franklin Resources, Inc.). The lawsuits relate to the industry
practices referenced above, as well as to allegedly excessive commissions and
advisory and distribution fees.
The Company and fund management believe that the claims made in each of the
private lawsuits referenced above are without merit and intend to defend against
them vigorously. The Company cannot predict with certainty the eventual outcome
of these lawsuits, nor whether they will have a material negative impact on the
Company. If it is determined that the Company bears responsibility for any
unlawful or inappropriate conduct that caused losses to the Fund, it is
committed to making the Fund or its shareholders whole, as appropriate.
Annual Report | 39
Mutual Financial Services Fund
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
11. NEW ACCOUNTING PRONOUNCEMENTS
In July 2006, the Financial Accounting Standards Board (FASB) issued FASB
Interpretation No. 48, "Accounting for Uncertainty in Income Taxes -- an
Interpretation of FASB Statement No. 109" ("FIN 48"), which clarifies the
accounting for uncertainty in tax positions taken or expected to be taken in a
tax return. FIN 48 provides guidance on the measurement, recognition,
classification and disclosure of tax positions, along with accounting for the
related interest and penalties. FIN 48 is effective for fiscal years beginning
after December 15, 2006, and is to be applied to all open tax years as of the
date of effectiveness. On December 22, 2006, the Securities and Exchange
Commission extended the implementation date to no later than the last net asset
value calculation in the first semi-annual reporting period in 2007. The Fund is
currently evaluating the impact, if any, of applying the various provisions of
FIN 48.
In September 2006, FASB issued FASB Statement No. 157, "Fair Value Measurement"
("SFAS 157"), which defines fair value, establishes a framework for measuring
fair value, and expands disclosures about fair value measurements. SFAS 157 is
effective for fiscal years beginning after November 15, 2007, and interim
periods within those fiscal years. The Fund believes the adoption of SFAS 157
will have no material impact on its financial statements.
40 | Annual Report
Mutual Financial Services Fund
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
TO THE BOARD OF DIRECTORS OF FRANKLIN MUTUAL SERIES FUND INC.
AND SHAREHOLDERS OF THE MUTUAL FINANCIAL SERVICES FUND:
We have audited the accompanying statement of assets and liabilities of the
Mutual Financial Services Fund (one of the portfolio constituting the Franklin
Mutual Series Fund Inc.) (the "Fund"), including the statement of investments,
as of December 31, 2006, and the related statement of operations for the year
then ended, the statements of changes in net assets for each of the two years in
the period then ended, and the financial highlights for each of the five years
in the period then ended. 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 the standards of the Public Company
Accounting Oversight Board (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. We were
not engaged to perform an audit of the Fund's internal control over financial
reporting. Our audits included consideration of internal control over financial
reporting as a basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the
effectiveness of the Fund's internal control over financial reporting.
Accordingly, we express no such opinion. An audit also includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements and financial highlights, assessing the accounting principles used
and significant estimates made by management, and evaluating the overall
financial statement presentation. Our procedures included confirmation of
securities owned as of December 31, 2006, by correspondence with the custodian
and brokers or by other appropriate auditing procedures where replies from the
brokers were not received. 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 the
Mutual Financial Services Fund of the Franklin Mutual Series Fund Inc. at
December 31, 2006, the results of its operations for the year then ended, the
changes in its net assets for each of the two years in the period then ended,
and the financial highlights for each of the five years in the period then
ended, in conformity with U.S. generally accepted accounting principles.
/s/ Ernst & Young LLP
Boston, Massachusetts
February 20, 2007
Annual Report | 41
Mutual Financial Services Fund
TAX DESIGNATION (UNAUDITED)
Under Section 852(b)(3)(C) of the Internal Revenue Code (Code), the Fund
designates the maximum amount allowable but no less than $83,520,582 as a long
term capital gain dividend for the fiscal year ended December 31, 2006.
Under Section 854(b)(2) of the Code, the Fund designates the maximum amount
allowable but no less than $18,656,426 as qualified dividends for purposes of
the maximum rate under Section 1(h)(11) of the Code for the fiscal year ended
December 31, 2006. In January 2007, shareholders will receive Form 1099-DIV
which will include their share of qualified dividends distributed during the
calendar year 2006. Shareholders are advised to check with their tax advisors
for information on the treatment of these amounts on their individual income tax
returns.
Under Section 871(k)(1)(C) of the Code, the Fund designates the maximum amount
allowable but no less than $2,276,465 as interest related dividends for purposes
of the tax imposed under Section 871(a)(1)(A) of the Code for the fiscal year
ended December 31, 2006.
Under Section 871(k)(2)(C) of the Code, the Fund designates the maximum amount
allowable but no less than $26,675,649 as a short term capital gain dividend for
purposes of the tax imposed under Section 871(a)(1)(A) of the Code for the
fiscal year ended December 31, 2006.
Under Section 854(b)(2) of the Code, the Fund designates 11.08% of the ordinary
income dividends as income qualifying for the dividends received deduction for
the fiscal year ended December 31, 2006.
At December 31, 2006, more than 50% of the Mutual Financial Services Fund's
total assets were invested in securities of foreign issuers. In most instances,
foreign taxes were withheld from dividends paid to the Fund on these
investments. As shown in the table below, the Fund designates to shareholders
the foreign source income and foreign taxes paid, pursuant to Section 853 of the
Code. This designation will allow shareholders of record on December 21, 2006,
to treat their proportionate share of foreign taxes paid by the Fund as having
been paid directly by them. The shareholder shall consider these amounts as
foreign taxes paid in the tax year in which they receive the Fund distribution.
The following tables provide a detailed analysis, by country, of foreign tax
paid, foreign source income, and foreign qualified dividends as designated by
the Fund, to Class Z, Class A, Class B, and Class C shareholders of record.
42 | Annual Report
Mutual Financial Services Fund
TAX DESIGNATION (UNAUDITED) (CONTINUED)
RECORD DATE: 12/21/2006
- ------------------------------------------------------------------------------------------------------------
CLASS Z
FOREIGN TAX FOREIGN SOURCE FOREIGN QUALIFIED
COUNTRY PAID PER SHARE INCOME PER SHARE DIVIDENDS PER SHARE
- ------------------------------------------------------------------------------------------------------------
Belgium .......................................... $0.0007 $0.0037 $0.0037
Bermuda .......................................... 0.0000 0.0054 0.0054
Canada ........................................... 0.0017 0.0095 0.0093
Denmark .......................................... 0.0002 0.0120 0.0010
France ........................................... 0.0055 0.0314 0.0309
Germany .......................................... 0.0051 0.0300 0.0281
Greece ........................................... 0.0000 0.0076 0.0076
Guernsey Islands ................................. 0.0000 0.0197 0.0000
Hong Kong ........................................ 0.0000 0.0039 0.0000
Ireland .......................................... 0.0000 0.0192 0.0192
Italy ............................................ 0.0059 0.0181 0.0181
Japan ............................................ 0.0011 0.0130 0.0119
Netherlands ...................................... 0.0033 0.0501 0.0301
New Zealand ...................................... 0.0000 0.0011 0.0000
Norway ........................................... 0.0059 0.0330 0.0329
Spain ............................................ 0.0008 0.0044 0.0044
Sweden ........................................... 0.0059 0.0337 0.0336
Switzerland ...................................... 0.0010 0.0053 0.0053
Taiwan ........................................... 0.0056 0.0069 0.0000
Turkey ........................................... 0.0000 0.0015 0.0015
United Kingdom ................................... 0.0000 0.0006 0.0000
-------------------------------------------------------
TOTAL ............................................ $0.0427 $0.3101 $0.2430
=======================================================
- ------------------------------------------------------------------------------------------------------------
CLASS A
FOREIGN TAX FOREIGN SOURCE FOREIGN QUALIFIED
COUNTRY PAID PER SHARE INCOME PER SHARE DIVIDENDS PER SHARE
- ------------------------------------------------------------------------------------------------------------
Belgium .......................................... $0.0007 $0.0035 $0.0035
Bermuda .......................................... 0.0000 0.0051 0.0051
Canada ........................................... 0.0017 0.0089 0.0087
Denmark .......................................... 0.0002 0.0113 0.0009
France ........................................... 0.0055 0.0296 0.0292
Germany .......................................... 0.0051 0.0283 0.0265
Greece ........................................... 0.0000 0.0071 0.0071
Guernsey Islands ................................. 0.0000 0.0186 0.0000
Hong Kong ........................................ 0.0000 0.0036 0.0000
Ireland .......................................... 0.0000 0.0181 0.0181
Italy ............................................ 0.0059 0.0171 0.0171
Japan ............................................ 0.0011 0.0122 0.0112
Netherlands ...................................... 0.0033 0.0473 0.0284
New Zealand ...................................... 0.0000 0.0010 0.0000
Norway ........................................... 0.0059 0.0311 0.0310
Spain ............................................ 0.0008 0.0042 0.0042
Sweden ........................................... 0.0059 0.0318 0.0317
Switzerland ...................................... 0.0010 0.0050 0.0050
Taiwan ........................................... 0.0056 0.0065 0.0000
Turkey ........................................... 0.0000 0.0014 0.0014
United Kingdom ................................... 0.0000 0.0005 0.0000
-------------------------------------------------------
TOTAL ............................................ $0.0427 $0.2922 $0.2291
=======================================================
Annual Report | 43
Mutual Financial Services Fund
TAX DESIGNATION (UNAUDITED) (CONTINUED)
- ------------------------------------------------------------------------------------------------------------
CLASS B
FOREIGN TAX FOREIGN SOURCE FOREIGN QUALIFIED
COUNTRY PAID PER SHARE INCOME PER SHARE DIVIDENDS PER SHARE
- ------------------------------------------------------------------------------------------------------------
Belgium .......................................... $0.0007 $0.0030 $0.0030
Bermuda .......................................... 0.0000 0.0043 0.0043
Canada ........................................... 0.0017 0.0076 0.0074
Denmark .......................................... 0.0002 0.0096 0.0008
France ........................................... 0.0055 0.0251 0.0247
Germany .......................................... 0.0051 0.0240 0.0225
Greece ........................................... 0.0000 0.0060 0.0060
Guernsey Islands ................................. 0.0000 0.0157 0.0000
Hong Kong ........................................ 0.0000 0.0031 0.0000
Ireland .......................................... 0.0000 0.0154 0.0154
Italy ............................................ 0.0059 0.0145 0.0145
Japan ............................................ 0.0011 0.0104 0.0096
Netherlands ...................................... 0.0033 0.0401 0.0241
New Zealand ...................................... 0.0000 0.0009 0.0000
Norway ........................................... 0.0059 0.0264 0.0263
Spain ............................................ 0.0008 0.0035 0.0035
Sweden ........................................... 0.0059 0.0269 0.0269
Switzerland ...................................... 0.0010 0.0042 0.0042
Taiwan ........................................... 0.0056 0.0055 0.0000
Turkey ........................................... 0.0000 0.0012 0.0012
United Kingdom ................................... 0.0000 0.0005 0.0000
-------------------------------------------------------
TOTAL ............................................ $0.0427 $0.2479 $0.1944
=======================================================
- ------------------------------------------------------------------------------------------------------------
CLASS C
FOREIGN TAX FOREIGN SOURCE FOREIGN QUALIFIED
COUNTRY PAID PER SHARE INCOME PER SHARE DIVIDENDS PER SHARE
- ------------------------------------------------------------------------------------------------------------
Belgium .......................................... $0.0007 $0.0030 $0.0030
Bermuda .......................................... 0.0000 0.0044 0.0044
Canada ........................................... 0.0017 0.0077 0.0075
Denmark .......................................... 0.0002 0.0097 0.0008
France ........................................... 0.0055 0.0255 0.0251
Germany .......................................... 0.0051 0.0244 0.0229
Greece ........................................... 0.0000 0.0061 0.0061
Guernsey Islands ................................. 0.0000 0.0160 0.0000
Hong Kong ........................................ 0.0000 0.0031 0.0000
Ireland .......................................... 0.0000 0.0156 0.0156
Italy ............................................ 0.0059 0.0147 0.0147
Japan ............................................ 0.0011 0.0105 0.0096
Netherlands ...................................... 0.0033 0.0407 0.0244
New Zealand ...................................... 0.0000 0.0009 0.0000
Norway ........................................... 0.0059 0.0268 0.0267
Spain ............................................ 0.0008 0.0036 0.0036
Sweden ........................................... 0.0059 0.0274 0.0274
Switzerland ...................................... 0.0010 0.0043 0.0043
Taiwan ........................................... 0.0056 0.0056 0.0000
Turkey ........................................... 0.0000 0.0013 0.0013
United Kingdom ................................... 0.0000 0.0005 0.0000
-------------------------------------------------------
TOTAL ............................................ $0.0427 $0.2518 $0.1974
=======================================================
44 | Annual Report
Mutual Financial Services Fund
TAX DESIGNATION (UNAUDITED) (CONTINUED)
Foreign Tax Paid per Share (Column 1) is the amount per share available to you,
as a tax credit (assuming you held your shares in the Fund for a minimum of 16
days during the 31-day period beginning 15 days before the ex-dividend date of
the Fund's distribution to which the foreign taxes relate), or, as a tax
deduction.
Foreign Source Income per Share (Column 2) is the amount per share of income
dividends paid to you that is attributable to foreign securities held by the
Fund, plus any foreign taxes withheld on these dividends. The amounts reported
include foreign source qualified dividends that have not been adjusted for the
rate differential applicable to such dividend income. 1
Foreign Qualified Dividends per Share (Column 3) is the amount per share of
foreign source qualified dividends the Fund paid to you, plus any foreign taxes
withheld on these dividends. These amounts represent the portion of the Foreign
Source Income reported to you in column 2 that were derived from qualified
foreign securities held by the Fund. 1
In January 2007, shareholders will receive Form 1099-DIV which will include
their share of taxes paid and foreign source income distributed during the
calendar year 2006. The Foreign Source Income reported on Form 1099-DIV has not
been adjusted for the rate differential on foreign source qualified dividend
income. Shareholders are advised to check with their tax advisors for
information on the treatment of these amounts on their 2006 individual income
tax returns.
1. Qualified dividends are taxed at a maximum rate of 15% (5% for those in
the 10% and 15% income tax brackets). In determining the amount of foreign
tax credit that may be applied against the U.S. tax liability of
individuals receiving foreign source qualified dividends, adjustments may
be required to the foreign tax credit limitation calculation to reflect
the rate differential applicable to such dividend income. The rules
however permit certain individuals to elect not to apply the rate
differential adjustments for capital gains and/or dividends for any
taxable year. Please consult your tax advisor and the instructions to Form
1116 for more information.
Annual Report | 45
Mutual Financial Services Fund
BOARD MEMBERS AND OFFICERS
The name, year of birth and address of the officers and board members, as well
as their affiliations, positions held with the Fund, principal occupations
during the past five years and number of portfolios overseen in the Franklin
Templeton Investments fund complex are shown below.
INDEPENDENT BOARD MEMBERS
- -----------------------------------------------------------------------------------------------------------------------------------
NUMBER OF PORTFOLIOS IN
NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN
AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- -----------------------------------------------------------------------------------------------------------------------------------
EDWARD I. ALTMAN, PH.D. (1941) Director Since 1987 7 Director, A.T.D. Inc. (financial
101 John F. Kennedy Parkway technology and investment company).
Short Hills, NJ 07078-2789
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Max L. Heine Professor of Finance and Director of The Credit and Debt Markets Research Program, Salomon Center, Stern School of
Business, New York University; editor and author of numerous financial publications; financial consultant; and serves on the
Investment Advisory Committee of the New York State Common Retirement Fund; and FORMERLY, Vice Director, NYU Salomon Center, Stern
School of Business, New York University.
- -----------------------------------------------------------------------------------------------------------------------------------
ANN TORRE BATES (1958) Director Since 1994 7 Independent Director, SLM
101 John F. Kennedy Parkway Corporation (Sallie Mae) and Allied
Short Hills, NJ 07078-2789 Capital Corporation (financial
services).
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Independent strategic and financial consultant; and FORMERLY, Executive Vice President and Chief Financial Officer, NHP
Incorporated (manager of multifamily housing) (1995-1997); and Vice President and Treasurer, US Airways, Inc. (until 1995).
- -----------------------------------------------------------------------------------------------------------------------------------
BURTON J. GREENWALD (1929) Director Since 2002 13 Director, Franklin Templeton Emerging
101 John F. Kennedy Parkway Markets Debt Opportunities Fund PLC
Short Hills, NJ 07078-2789 and Fiduciary International Ireland
Limited.
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Managing Director, B.J. Greenwald Associates (management consultants to the financial services industry) and FORMERLY, Chairman,
Fiduciary Trust International Funds; Executive Vice President, L.F. Rothschild Fund Management, Inc.; President and Director, Merit
Mutual Funds; President, Underwriting Division and Director, National Securities & Research Corporation; Governor, Investment
Company Institute and Chairman, ICI Public Information Committee.
- -----------------------------------------------------------------------------------------------------------------------------------
BRUCE A. MACPHERSON (1930) Director Since 1974 7 None
101 John F. Kennedy Parkway
Short Hills, NJ 07078-2789
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Retired, former Chairman, A.A. MacPherson, Inc., Canton, MA (representative for electrical manufacturers).
- -----------------------------------------------------------------------------------------------------------------------------------
CHARLES RUBENS II (1930) Director Since 1998 13 None
101 John F. Kennedy Parkway
Short Hills, NJ 07078-2789
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Private investor.
- -----------------------------------------------------------------------------------------------------------------------------------
46 | Annual Report
- -----------------------------------------------------------------------------------------------------------------------------------
NUMBER OF PORTFOLIOS IN
NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN
AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- -----------------------------------------------------------------------------------------------------------------------------------
ROBERT E. WADE (1946) Director and Director since 30 Director, El Oro and Exploration Co.,
101 John F. Kennedy Parkway Chairman of 1991 and p.l.c. (investments) and ARC Wireless
Short Hills, NJ 07078-2789 the Board Chairman of the Solutions, Inc. (wireless components
Board since 2005 and network products).
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Practicing attorney.
- -----------------------------------------------------------------------------------------------------------------------------------
INTERESTED BOARD MEMBERS AND OFFICERS
- -----------------------------------------------------------------------------------------------------------------------------------
NUMBER OF PORTFOLIOS IN
NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN
AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- -----------------------------------------------------------------------------------------------------------------------------------
**WILLIAM J. LIPPMAN (1925) Director Since 1996 13 None
One Parker Plaza, 9th Floor
Fort Lee, NJ 07024-2920
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
President, Franklin Advisory Services, LLC; Director, Templeton Worldwide, Inc.; and officer and/or director or trustee, as the
case may be, of four of the investment companies in Franklin Templeton Investments.
- -----------------------------------------------------------------------------------------------------------------------------------
PHILIPPE BRUGERE-TRELAT (1949) Vice President Since 2005 Not Applicable Not Applicable
101 John F. Kennedy Parkway
Short Hills, NJ 07078-2789
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Vice President, Franklin Mutual Advisers, LLC; Portfolio Manager of Eurovest SA (French registered Investment Company, Sicav); and
officer of two of the investment companies in Franklin Templeton Investments.
- -----------------------------------------------------------------------------------------------------------------------------------
JAMES M. DAVIS (1952) Chief Chief Compliance Not Applicable Not Applicable
One Franklin Parkway Compliance Officer since 2004
San Mateo, CA 94403-1906 Officer and and Vice President
Vice President - AML
- AML Compliance since
Compliance February 2006
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Director, Global Compliance, Franklin Resources, Inc.; officer of some of the other subsidiaries of Franklin Resources, Inc. and of
46 of the investment companies in Franklin Templeton Investments; and FORMERLY, Director of Compliance, Franklin Resources, Inc.
(1994-2001).
- -----------------------------------------------------------------------------------------------------------------------------------
MICHAEL J. EMBLER (1964) Senior Vice Since 2005 Not Applicable Not Applicable
101 John F. Kennedy Parkway President
Short Hills, NJ 07078-2789 and Chief
Investment
Officer
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Senior Vice President and Chief Investment Officer, Franklin Mutual Advisers, LLC; and officer of two of the investment companies
in Franklin Templeton Investments.
- -----------------------------------------------------------------------------------------------------------------------------------
Annual Report | 47
- -----------------------------------------------------------------------------------------------------------------------------------
NUMBER OF PORTFOLIOS IN
NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN
AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- -----------------------------------------------------------------------------------------------------------------------------------
JIMMY D. GAMBILL (1947) Senior Vice Since 2002 Not Applicable Not Applicable
500 East Broward Blvd. President
Suite 2100 and Chief
Fort Lauderdale, FL 33394-3091 Executive
Officer -
Finance and
Administration
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
President, Franklin Templeton Services, LLC; Senior Vice President, Templeton Worldwide, Inc.; and officer of some of the other
subsidiaries of Franklin Resources, Inc. and of 46 of the investment companies in Franklin Templeton Investments.
- -----------------------------------------------------------------------------------------------------------------------------------
DAVID P. GOSS (1947) Vice President Since 2000 Not Applicable Not Applicable
One Franklin Parkway
San Mateo, CA 94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Senior Associate General Counsel, Franklin Templeton Investments; officer and director of one of the subsidiaries of Franklin
Resources, Inc.; and officer of 46 of the investment companies in Franklin Templeton Investments.
- -----------------------------------------------------------------------------------------------------------------------------------
STEVEN J. GRAY (1955) Secretary Since 2005 Not Applicable Not Applicable
One Franklin Parkway
San Mateo, CA 94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Senior Associate General Counsel, Franklin Templeton Investments; and officer of 41 of the investment companies in Franklin
Templeton Investments.
- -----------------------------------------------------------------------------------------------------------------------------------
BARBARA J. GREEN (1947) Vice President Since 2000 Not Applicable Not Applicable
One Franklin Parkway
San Mateo, CA 94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Vice President, Deputy General Counsel and Secretary, Franklin Resources, Inc.; Secretary and Senior Vice President, Templeton
Worldwide, Inc.; Secretary, Franklin Advisers, Inc., Franklin Advisory Services, LLC, Franklin Investment Advisory Services, LLC,
Franklin Mutual Advisers, LLC, Franklin Templeton Institutional, LLC, Franklin Templeton Investor Services, LLC, Franklin Templeton
Services, LLC, Franklin Templeton Distributors, Inc., Templeton Investment Counsel, LLC, and Templeton/Franklin Investment
Services, Inc.; Vice President, Templeton Global Advisors Limited; and officer of some of the other subsidiaries of Franklin
Resources, Inc. and of 46 of the investment companies in Franklin Templeton Investments; and FORMERLY, Deputy Director, Division of
Investment Management, Executive Assistant and Senior Advisor to the Chairman, Counselor to the Chairman, Special Counsel and
Attorney Fellow, U.S. Securities and Exchange Commission (1986-1995); Attorney, Rogers & Wells (until 1986); and Judicial Clerk,
U.S. District Court (District of Massachusetts) (until 1979).
- -----------------------------------------------------------------------------------------------------------------------------------
PETER A. LANGERMAN (1955) President Since 2005 Not Applicable Not Applicable
101 John F. Kennedy Parkway and Chief
Short Hills, NJ 07078-2702 Executive
Officer -
Investment
Management
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Chairman of the Board, Chief Executive Officer and President, Franklin Mutual Advisers, LLC; and officer of two of the investment
companies in Franklin Templeton Investments; and FORMERLY, Director, New Jersey's Division of Investment.
- -----------------------------------------------------------------------------------------------------------------------------------
48 | Annual Report
- -----------------------------------------------------------------------------------------------------------------------------------
NUMBER OF PORTFOLIOS IN
NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN
AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- -----------------------------------------------------------------------------------------------------------------------------------
GREGORY R. SEWARD (1956) Treasurer Since 2005 Not Applicable Not Applicable
500 East Broward Blvd.
Suite 2100
Fort Lauderdale, FL 33394-3091
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Vice President, Franklin Templeton Services, LLC; officer of 16 of the investment companies in Franklin Templeton Investments; and
FORMERLY, Vice President, JPMorgan Chase (2000-2004) and American General Financial Group (1991-2000).
- -----------------------------------------------------------------------------------------------------------------------------------
CRAIG S. TYLE (1960) Vice President Since 2005 Not Applicable Not Applicable
One Franklin Parkway
San Mateo, CA 94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
General Counsel and Executive Vice President, Franklin Resources, Inc.; officer of some of the other subsidiaries of Franklin
Resources, Inc. and of 46 of the investment companies in Franklin Templeton Investments; and FORMERLY, Partner, Shearman &
Sterling, LLP (2004-2005); and General Counsel, Investment Company Institute (ICI) (1997-2004).
- -----------------------------------------------------------------------------------------------------------------------------------
GALEN G. VETTER (1951) Chief Financial Since 2004 Not Applicable Not Applicable
500 East Broward Blvd. Officer and
Suite 2100 Chief
Fort Lauderdale, FL 33394-3091 Accounting
Officer
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Senior Vice President, Franklin Templeton Services, LLC; officer of 46 of the investment companies in Franklin Templeton
Investments; and FORMERLY, Managing Director, RSM McGladrey, Inc. (1999-2004); and Partner, McGladrey & Pullen, LLP (1979-1987 and
1991-2004).
- -----------------------------------------------------------------------------------------------------------------------------------
* We base the number of portfolios on each separate series of the U.S.
registered investment companies within the Franklin Templeton Investments
fund complex. These portfolios have a common investment manager or
affiliated investment managers.
** William J. Lippman is considered to be an interested person of Mutual
Series under the federal securities laws due to his position as an officer
of some of the subsidiaries of Franklin Resources, Inc., which is the
parent company of Mutual Series' investment manager and distributor.
Note: Subsequent to December 31, 2006, Leonard Rubin and Anne M. Tatlock ceased
to be a director of the Fund.
THE FUND'S BOARD OF DIRECTORS HAS DETERMINED THAT CERTAIN OF THE MEMBERS OF THE
AUDIT COMMITTEE, INCLUDING ANN TORRE BATES, ARE AUDIT COMMITTEE FINANCIAL
EXPERTS, AND "INDEPENDENT," UNDER THOSE PROVISIONS OF THE SARBANES-OXLEY ACT OF
2002, AND THE RULES AND FORM AMENDMENTS ADOPTED BY THE SECURITIES AND EXCHANGE
COMMISSION, RELATING TO AUDIT COMMITTEE FINANCIAL EXPERTS.
THE STATEMENT OF ADDITIONAL INFORMATION (SAI) INCLUDES ADDITIONAL INFORMATION
ABOUT THE BOARD MEMBERS AND IS AVAILABLE, WITHOUT CHARGE, UPON REQUEST.
SHAREHOLDERS MAY CALL 1-800/DIAL BEN (1-800/342-5236) TO REQUEST THE SAI.
Annual Report | 49
Mutual Financial Services Fund
SHAREHOLDER INFORMATION
PROXY VOTING POLICIES AND PROCEDURES
The Fund has established Proxy Voting Policies and Procedures ("Policies") that
the Fund uses to determine how to vote proxies relating to portfolio securities.
Shareholders may view the Fund's complete Policies online at
franklintempleton.com. Alternatively, shareholders may request copies of the
Policies free of charge by calling the Proxy Group collect at 1-954/527-7678 or
by sending a written request to: Franklin Templeton Companies, LLC, 500 East
Broward Boulevard, Suite 1500, Fort Lauderdale, FL 33394, Attention: Proxy
Group. Copies of the Fund's proxy voting records are also made available online
at franklintempleton.com and posted on the U.S. Securities and Exchange
Commission's website at sec.gov and reflect the most recent 12-month period
ended June 30.
QUARTERLY STATEMENT OF INVESTMENTS
The Fund files a complete statement of investments with the U.S. Securities and
Exchange Commission for the first and third quarters for each fiscal year on
Form N-Q. Shareholders may view the filed Form N-Q by visiting the Commission's
website at sec.gov. The filed form may also be viewed and copied at the
Commission's Public Reference Room in Washington, DC. Information regarding the
operations of the Public Reference Room may be obtained by calling
1-800/SEC-0330.
50 | Annual Report
This page intentionally left blank.
This page intentionally left blank.
Literature Request
LITERATURE REQUEST. TO RECEIVE A BROCHURE AND PROSPECTUS, PLEASE CALL US AT
1-800/DIAL BEN(R) (1-800/342-5236) OR VISIT FRANKLINTEMPLETON.COM. INVESTORS
SHOULD CAREFULLY CONSIDER A FUND'S INVESTMENT GOALS, RISKS, CHARGES AND EXPENSES
BEFORE INVESTING. THE PROSPECTUS CONTAINS THIS AND OTHER INFORMATION. PLEASE
CAREFULLY READ THE PROSPECTUS BEFORE INVESTING. TO ENSURE THE HIGHEST QUALITY OF
SERVICE, WE MAY MONITOR, RECORD AND ACCESS TELEPHONE CALLS TO OR FROM OUR
SERVICE DEPARTMENTS. THESE CALLS CAN BE IDENTIFIED BY THE PRESENCE OF A REGULAR
BEEPING TONE.
FRANKLIN TEMPLETON INVESTMENTS
INTERNATIONAL
Mutual European Fund
Templeton BRIC Fund
Templeton China World Fund
Templeton Developing Markets Trust
Templeton Emerging Markets Small Cap Fund
Templeton Foreign Fund
Templeton Foreign Smaller Companies Fund
Templeton International (Ex EM) Fund 1
GLOBAL
Mutual Discovery Fund
Templeton Global Long-Short Fund
Templeton Global Opportunities Trust
Templeton Global Smaller Companies Fund
Templeton Growth Fund
Templeton World Fund
GROWTH
Franklin Aggressive Growth Fund
Franklin Capital Growth Fund
Franklin Flex Cap Growth Fund
Franklin Small-Mid Cap Growth Fund
Franklin Small Cap Growth Fund II 1
VALUE
Franklin Balance Sheet Investment Fund 2
Franklin Equity Income Fund
Franklin Large Cap Value Fund
Franklin MicroCap Value Fund 2
Franklin MidCap Value Fund
Franklin Small Cap Value Fund
Mutual Beacon Fund
Mutual Qualified Fund
Mutual Recovery Fund 3
Mutual Shares Fund
BLEND
Franklin Balanced Fund
Franklin Blue Chip Fund 1
Franklin Convertible Securities Fund
Franklin Growth Fund
Franklin Rising Dividends Fund
Franklin U.S. Long-Short Fund
SECTOR
Franklin Biotechnology Discovery Fund
Franklin DynaTech Fund
Franklin Global Communications Fund
Franklin Global Health Care Fund
Franklin Global Real Estate Fund
Franklin Gold and Precious Metals Fund
Franklin Natural Resources Fund
Franklin Real Estate Securities Fund
Franklin Technology Fund
Franklin Utilities Fund
Mutual Financial Services Fund
ASSET ALLOCATION
Franklin Templeton Corefolio Allocation Fund
Franklin Templeton Founding Funds Allocation Fund
Franklin Templeton Perspectives Allocation Fund
TARGET FUNDS
Franklin Templeton Conservative Target Fund
Franklin Templeton Growth Target Fund
Franklin Templeton Moderate Target Fund
RETIREMENT TARGET FUNDS
Franklin Templeton 2015 Retirement Target Fund
Franklin Templeton 2025 Retirement Target Fund
Franklin Templeton 2035 Retirement Target Fund
Franklin Templeton 2045 Retirement Target Fund
INCOME
Franklin Adjustable U.S. Government Securities Fund 4
Franklin Floating Rate Daily Access Fund
Franklin High Income Fund 5
Franklin Income Fund
Franklin Limited Maturity
U.S. Government Securities Fund 4
Franklin Low Duration Total Return Fund
Franklin Real Return Fund
Franklin Strategic Income Fund
Franklin Strategic Mortgage Portfolio
Franklin Templeton Hard Currency Fund
Franklin Total Return Fund
Franklin U.S. Government Securities Fund 4
Templeton Global Bond Fund
Templeton Income Fund
TAX-FREE INCOMEB 6
NATIONAL FUNDS
Double Tax-Free Income Fund
Federal Tax-Free Income Fund
High Yield Tax-Free Income Fund
Insured Tax-Free Income Fund 7
LIMITED-TERM FUNDS
California Limited-Term Tax-Free Income Fund
Federal Limited-Term Tax-Free Income Fund
New York Limited-Term Tax-Free Income Fund
INTERMEDIATE-TERM FUNDS
California Intermediate-Term Tax-Free Income Fund
Federal Intermediate-Term Tax-Free Income Fund
New York Intermediate-Term Tax-Free Income Fund
STATE-SPECIFIC
Alabama Michigan 7
Arizona Minnesota 7
California 8 Missouri
Colorado New Jersey
Connecticut New York 8
Florida 8 North Carolina
Georgia Ohio 7
Kentucky Oregon
Louisiana Pennsylvania
Maryland Tennessee
Massachusetts 7 Virginia
INSURANCE FUNDS
Franklin Templeton Variable Insurance Products Trust 9
1. The fund is closed to new investors. Existing shareholders can continue
adding to their accounts.
2. The fund is only open to existing shareholders and select retirement
plans.
3. The fund is a continuously offered, closed-end fund. Shares may be
purchased daily; there is no daily redemption. However, each quarter,
pending board approval, the fund will authorize the repurchase of 5%-25%
of the outstanding number of shares. Investors may tender all or a portion
of their shares during the tender period.
4. An investment in the fund is neither insured nor guaranteed by the U.S.
government or by any other entity or institution.
5. Effective 10/1/06, Franklin's AGE High Income Fund changed its name to
Franklin High Income Fund. The fund's investment goal and strategy
remained the same.
6. For investors subject to the alternative minimum tax, a small portion of
fund dividends may be taxable. Distributions of capital gains are
generally taxable.
7. Portfolio of insured municipal securities.
8. These funds are available in two or more variations, including long-term
portfolios, portfolios of insured securities, a high-yield portfolio (CA)
and limited-term, intermediate-term and money market portfolios (CA and
NY).
9. The funds of the Franklin Templeton Variable Insurance Products Trust are
generally available only through insurance company variable contracts.
01/07 Not part of the annual report
[LOGO](R)
FRANKLIN TEMPLETON One Franklin Parkway
INVESTMENTS San Mateo, CA 94403-1906
o WANT TO RECEIVE THIS DOCUMENT FASTER VIA EMAIL?
Eligible shareholders can sign up for eDelivery at
franklintempleton.com. See inside for details.
ANNUAL REPORT AND SHAREHOLDER LETTER
MUTUAL FINANCIAL SERVICES FUND
INVESTMENT MANAGER
Franklin Mutual Advisers, LLC
101 John F. Kennedy Parkway
Short Hills, NJ 07078
DISTRIBUTOR
Franklin Templeton Distributors, Inc.
1-800/DIAL BEN(R)
franklintempleton.com
SHAREHOLDER SERVICES
1-800/632-2301 - (Class A, B & C)
1-800/448-FUND - (Class Z)
Authorized for distribution only when accompanied or preceded by a prospectus.
Investors should carefully consider a fund's investment goals, risks, charges
and expenses before investing. The prospectus contains this and other
information; please read it carefully before investing. 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 identified by the presence
of a regular beeping tone.
479 A2006 02/07
MUTUAL BEACON FUND
[GRAPHIC OMITTED]
- --------------------------------------------------------------------------------
DECEMBER 31, 2006
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
ANNUAL REPORT AND SHAREHOLDER LETTER VALUE
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
WANT TO RECEIVE
THIS DOCUMENT
FASTER VIA EMAIL?
MUTUAL BEACON FUND
Eligible shareholders can
sign up for eDelivery at
franklintempleton.com.
See inside for details.
- --------------------------------------------------------------------------------
[LOGO](R)
FRANKLIN TEMPLETON
INVESTMENTS
Franklin o Templeton o MUTUAL SERIES
Thank You For Your
Continued Participation
At Mutual Series, we are pleased so many
investors share our long-term investment
philosophy and have remained shareholders for
many years. Your ongoing support plays a
significant role in contributing to the funds'
success.
SPECIALIZED EXPERTISE Mutual Series is part of Franklin Templeton
Investments, which offers the specialized
expertise of three world-class investment
management groups -- Franklin, Templeton and
Mutual Series. Mutual Series is dedicated to a
unique style of value investing, searching
aggressively for opportunity among what we
believe are undervalued stocks, as well as
arbitrage situations and distressed
securities. Franklin is a recognized leader in
fixed income investing and also brings
expertise in growth- and value-style U.S.
equity investing. Templeton pioneered
international investing and, with offices in
over 25 countries, offers investors a truly
global perspective.
TRUE DIVERSIFICATION Because these management groups work
independently and adhere to different
investment approaches, Franklin, Templeton and
Mutual Series funds typically have distinct
portfolios. That's why the funds can be used
to build truly diversified allocation plans
covering every major asset class.
RELIABILITY YOU CAN TRUST Franklin Templeton Investments seeks to
consistently provide investors with
exceptional risk-adjusted returns over the
long term, as well as the reliable, accurate
and personal service that has helped the firm
become one of the most trusted names in
financial services.
- --------------------------------------------------------------------------------
MUTUAL FUNDS | RETIREMENT PLANS | 529 COLLEGE SAVINGS PLANS | SEPARATE ACCOUNTS
- --------------------------------------------------------------------------------
[GRAPHIC OMITTED]
Annual Report
Mutual Beacon Fund
YOUR FUND'S GOALS AND MAIN INVESTMENTS: Mutual Beacon Fund seeks capital
appreciation, with income as a secondary goal, by investing mainly in equity
securities of companies the Fund's managers believe are at prices below their
intrinsic value. The Fund may invest up to 35% of its assets in foreign
securities.
- --------------------------------------------------------------------------------
PERFORMANCE DATA REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE FUTURE
RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU MAY HAVE
A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY DIFFER FROM
FIGURES SHOWN. PLEASE VISIT FRANKLINTEMPLETON.COM OR CALL 1-800/342-5236 FOR
MOST RECENT MONTH-END PERFORMANCE.
- --------------------------------------------------------------------------------
We are pleased to bring you Mutual Beacon Fund's annual report for the fiscal
year ended December 31, 2006.
PERFORMANCE OVERVIEW
Mutual Beacon Fund -- Class Z posted a +20.98% cumulative total return for the
12 months ended December 31, 2006. The Fund outperformed its benchmark, the
Standard & Poor's 500 Index (S&P 500), which returned +15.78% for the same
period. 1 You can find the Fund's long-term performance data in the Performance
Summary beginning on page 10.
ECONOMIC AND MARKET OVERVIEW
During the 12 months ended December 31, 2006, the U.S. economy advanced at a
moderate but slowing pace. Although first quarter 2006 gross domestic product
(GDP) grew an annualized 5.6%, fourth quarter GDP growth was an estimated
annualized 3.5%. The housing market weakened during the year, while corporate
profits and consumer and government spending generally remained robust. Exports
picked up some momentum, but the trade deficit stayed in record territory. Labor
costs rose and hiring generally increased as the unemployment rate fell from
4.9% to 4.5%. 2
1. Source: Standard & Poor's Micropal. The S&P 500 consists of 500 stocks
chosen for market size, liquidity and industry group representation. Each
stock's weight in the index is proportionate to its market value. The S&P
500 is one of the most widely used benchmarks of U.S. equity performance.
The index is unmanaged and includes reinvested dividends. One cannot
invest directly in an index, nor is an index representative of the Fund's
portfolio.
2. Source: Bureau of Labor Statistics.
THE DOLLAR VALUE, NUMBER OF SHARES OR PRINCIPAL AMOUNT, AND NAMES OF ALL
PORTFOLIO HOLDINGS ARE LISTED IN THE FUND'S STATEMENT OF INVESTMENTS (SOI). THE
SOI BEGINS ON PAGE 21.
4 | Annual Report
Although energy and other commodity prices fell in the second half of the year,
they remained historically high and were a primary economic concern for much of
the period. Oil prices reached a record high of $77 per barrel in July before
declining to $61 at year-end. Oil price volatility appeared to raise the anxiety
level among consumers and businesses alike. Consumers curbed spending on large
purchases, such as homes and cars. Home prices fell in many parts of the
country, mortgage rates crept up, and borrowing against home equity flattened.
Overall, the core Consumer Price Index (CPI) rose 2.6% for the 12 months ended
December 31, 2006, which was higher than the 2.2% 10-year average. 3
The Federal Reserve Board (Fed) raised the federal funds target rate
incrementally from 4.25% at the beginning of the year to 5.25% on June 30. Since
June, however, the Fed left the rate unchanged, citing a slowing economy,
widespread cooling in the housing market and the lagging effect of prior
tightening. The Fed stated that even with lower oil prices toward period-end,
inflation risks remained.
Outside the U.S., the economy continued to grow. The economic drivers remained
consistent over the past four years: strong corporate and consumer demand,
reasonably low inflation, an improving labor market, and a relatively moderate
interest rate environment, despite recent interest rate hikes by many of the
world's central banks. However, the global economy also faced headwinds from
elevated energy prices, higher global interest rates and a weaker U.S. housing
market. These factors dampened investor confidence mid-year, when many equity
markets declined before rebounding later in the year.
Despite such challenges, global economic activity was healthy. Strong global
liquidity -- whether petrodollars, corporate cash, private equity, household
savings or central banks' reserves -- continued to search for a home. Record
global merger and acquisition activity in 2006 also reflected the abundance of
cash in the capital markets. Bond yield spreads over U.S. Treasuries narrowed,
and global equity and commodity markets rose in the latter part of the year.
GEOGRAPHIC BREAKDOWN
Based on Total Net Assets as of 12/31/06
[THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.]
U.S. 56.0%
U.K. 7.0%
France 5.4%
Norway 2.8%
Japan 2.5%
Denmark 2.5%
Germany 2.4%
Sweden 2.1%
Spain 2.0%
Belgium 1.8%
South Korea 1.4%
Italy 1.1%
Switzerland 1.0%
Taiwan 1.0%
Other 1.9%
Short-Term Investments & Other Net Assets 9.1%
3. Source: Bureau of Labor Statistics. Core CPI excludes food and energy
costs.
Annual Report | 5
TOP 10 SECTORS/INDUSTRIES
Based on Equity Securities as of 12/31/06
- -------------------------------------------------
% OF TOTAL
NET ASSETS
- -------------------------------------------------
Insurance 10.7%
- -------------------------------------------------
Tobacco 9.7%
- -------------------------------------------------
Commercial Banks 8.9%
- -------------------------------------------------
Media 7.1%
- -------------------------------------------------
Food Products 5.2%
- -------------------------------------------------
Diversified Telecommunication Services 4.9%
- -------------------------------------------------
Paper & Forest Products 3.6%
- -------------------------------------------------
Diversified Financial Services 3.1%
- -------------------------------------------------
Pharmaceuticals 2.7%
- -------------------------------------------------
Real Estate 2.7%
- -------------------------------------------------
U.S. equity markets performed well for the year in this environment. The blue
chip stocks of the Dow Jones Industrial Average posted a 12-month total return
of +19.05%, and the broader S&P 500 returned +15.78%, while the technology-heavy
NASDAQ Composite Index had a total return of +11.27%. 4 Non-U.S. equity markets
ended 2006 on a stronger note, and all major non-U.S. regions delivered
double-digit total returns for the year. Stock market indexes in the U.S. and
most European countries reached six-year highs in the fourth quarter, and many
emerging market indexes in Asia, Europe and Latin America neared or reached
all-time highs.
INVESTMENT STRATEGY
At Mutual Series, we are committed to our distinctive value approach to
investing, which we believe can generate above-average risk-adjusted returns
over time for our shareholders. Our major investment strategy is investing in
undervalued stocks. When selecting undervalued equities, we are always attracted
to fundamentally strong companies with healthy balance sheets, high-quality
assets, substantial free cash flow and shareholder-oriented management teams and
whose stocks are trading at discounts to our assessment of the companies'
intrinsic or business value. We also look for asset rich companies whose shares
may be trading at depressed levels due to concerns over short-term earnings
disappointments, litigation, management strategy or other perceived negatives.
This strict value approach is not only intended to improve the likelihood of
upside potential, but it is also intended to reduce the risk of substantial
declines. While the vast majority of our undervalued equity investments are made
in publicly traded companies globally, we may invest occasionally in privately
held companies as well.
We complement this more traditional investment strategy with two others. One is
distressed investing, a highly specialized field that has proven quite
profitable during certain periods over the years. Distressed investing is
complex and can take many forms. The most common distressed investment the Fund
undertakes is the purchase of financially troubled or bankrupt companies' debt
at a substantial discount to face value. After the financially distressed
company is reorganized, often in bankruptcy court, the old debt is typically
replaced with new securities issued by the financially stronger company.
4. Source: Standard & Poor's Micropal. The Dow Jones Industrial Average is
price weighted based on the average market price of 30 blue chip stocks of
companies that are generally industry leaders. See footnote 1 for a
description of the S&P 500. The NASDAQ Composite Index measures all NASDAQ
domestic and international based common type stocks listed on The NASDAQ
Stock Market. The index is market value weighted and includes more than
3,000 companies.
6 | Annual Report
The other piece of our investment strategy is participating in arbitrage
situations, another highly specialized field. When companies announce proposed
mergers or takeovers, commonly referred to as "deals," the target company may
trade at a discount to the bid it ultimately accepts. One form of arbitrage
involves purchasing the target company's stock when it is trading below the
value it would receive in a deal. In keeping with our commitment to a relatively
conservative investment approach, we typically focus our arbitrage efforts on
announced deals, and eschew rumored deals or other situations we consider
relatively risky.
In addition, we will generally seek to hedge the Fund's currency exposure when
we deem it advantageous, to focus our efforts on analyzing business fundamentals
and assessing the value of company assets and liabilities.
MANAGER'S DISCUSSION
The Fund's performance was driven primarily by U.S. investments from a wide
range of sectors. The three positions that had the largest positive impact on
Fund performance during the fiscal year were investments in common stocks of
Agco, News Corp. and Berkshire Hathaway.
Agco, whose stock price increased 87% during the period, is a global
manufacturer and distributor of agricultural equipment. The company made
progress in integrating and restructuring its operations, and its stock
benefited from a strong commodity pricing environment, particularly for corn,
which is used in ethanol production.
News Corp. is a global media and telecommunications company, part of a sector
that enjoyed generally strong performance in 2006 following a dismal 2005. The
company experienced strong earnings and cash flow growth, while benefiting from
the announcement of its repurchase of Liberty Media's large ownership stake in
News Corp. The company's stock appreciated 39% during the year. Other media and
telecommunications investments that had a significant positive impact on Fund
performance included Comcast, Verizon and Time Warner.
TOP 10 HOLDINGS
12/31/06
- ------------------------------------------------
COMPANY % OF TOTAL
SECTOR/INDUSTRY, COUNTRY NET ASSETS
- ------------------------------------------------
Berkshire Hathaway Inc., A & B 3.1%
INSURANCE, U.S.
- ------------------------------------------------
White Mountains Insurance Group Ltd. 3.1%
INSURANCE, U.S.
- ------------------------------------------------
Weyerhaeuser Co. 2.7%
PAPER & FOREST PRODUCTS, U.S.
- ------------------------------------------------
Altria Group Inc. 2.3%
TOBACCO, U.S.
- ------------------------------------------------
Verizon Communications Inc. 2.0%
DIVERSIFIED TELECOMMUNICATION
SERVICES, U.S.
- ------------------------------------------------
Altadis SA 2.0%
TOBACCO, SPAIN
- ------------------------------------------------
Tyco International Ltd. 1.9%
INDUSTRIAL CONGLOMERATES, U.S.
- ------------------------------------------------
Orkla ASA 1.9%
FOOD PRODUCTS, NORWAY
- ------------------------------------------------
Fortis 1.8%
DIVERSIFIED FINANCIAL SERVICES,
BELGIUM
- ------------------------------------------------
News Corp. 1.8%
MEDIA, U.S.
- ------------------------------------------------
Annual Report | 7
Berkshire Hathaway is a holding company with substantial operations in insurance
and re-insurance. The company's Class A and B shares rose 24% and 25% in 2006.
In the first half of the year, following the catastrophic 2005 hurricane season,
Berkshire's shares performed well as investors began to focus on the expected
rise in insurance risk premiums, and the company's property insurance operations
benefited from a strong pricing environment. In the year's second half, the
company's stock appreciated further as the industry's returns generally improved
following the benign Atlantic storm season. Berkshire Hathaway has been a
long-term Fund holding and, even with the consistent growth and shareholder
value created by the company, we continued to believe the company's investments
and operating businesses were collectively valued at a discount to intrinsic
value. Thus, we maintained a sizable investment in Berkshire Hathaway's shares.
Unfortunately, not every security in the portfolio appreciated during the Fund's
fiscal year. Three positions that detracted from performance included NTL, a
U.K. cable television company; Boston Scientific, a U.S. medical devices
company; and The Mills Corp., a U.S. regional retail- and entertainment-oriented
real estate investment trust. NTL generated lackluster operating results as it
continued to restructure its NTL unit while integrating its early 2006
acquisition of cable TV operator Telewest, as well as its purchase of mobile
telephone company Virgin Mobile. NTL's share price was also negatively impacted
by news late in the year that the company was interested in pursuing a
transaction with ITV, a U.K. media firm. By period-end, such a transaction
appeared unlikely following the acquisition of an 18% position in ITV by
competitor British Sky Broadcasting. For the 12-month period, NTL shares
declined 6%. At period-end, we continued to view NTL as competitively
well-positioned and attractively valued.
Our investment in Boston Scientific, which we initiated during the Fund's fiscal
year, declined 34% in value for the time we held it during the period. The
shares fell after the company won a bidding war for Guidant and its implantable
cardioverter defibrillator business generated results that fell short of
expectations.
Shares of The Mills Corp., which we purchased and sold during the period,
dropped as the company faced accounting issues and investigations and was
expected to announce a restatement of historical financial results. The
company's shares fell 41% in value for the time we held them.
Finally, investors should note that we remained substantially hedged to the U.S.
dollar versus European currencies, especially the euro. Since the dollar was
generally weaker over the review period, the portfolio returns were lower than
they would have been had we not hedged the foreign currency exposure.
8 | Annual Report
Thank you for your continued participation in Mutual Beacon Fund. We look
forward to serving your future investment needs.
/s/ Michael J. Embler
Michael J. Embler
[PHOTO OMITTED] Portfolio Manager
/s/ Christian Correa
Christian Correa
[PHOTO OMITTED] Assistant Portfolio Manager
Mutual Beacon Fund
THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS
AS OF DECEMBER 31, 2006, THE END OF THE REPORTING PERIOD. THE WAY WE IMPLEMENT
OUR MAIN INVESTMENT STRATEGIES AND THE RESULTING PORTFOLIO HOLDINGS MAY CHANGE
DEPENDING ON FACTORS SUCH AS MARKET AND ECONOMIC CONDITIONS. THESE OPINIONS MAY
NOT BE RELIED UPON AS INVESTMENT ADVICE OR AN OFFER FOR A PARTICULAR SECURITY.
THE INFORMATION IS NOT A COMPLETE ANALYSIS OF EVERY ASPECT OF ANY MARKET,
COUNTRY, INDUSTRY, SECURITY OR THE FUND. STATEMENTS OF FACT ARE FROM SOURCES
CONSIDERED RELIABLE, BUT THE INVESTMENT MANAGER MAKES NO REPRESENTATION OR
WARRANTY AS TO THEIR COMPLETENESS OR ACCURACY. ALTHOUGH HISTORICAL PERFORMANCE
IS NO GUARANTEE OF FUTURE RESULTS, THESE INSIGHTS MAY HELP YOU UNDERSTAND OUR
INVESTMENT MANAGEMENT PHILOSOPHY.
- --------------------------------------------------------------------------------
MICHAEL EMBLER, Chief Investment Officer for Franklin Mutual Advisers, LLC, has
been portfolio manager for Mutual Beacon Fund since 2005. He also manages
another fund for Franklin Mutual Advisers, and has been a member of the
management team of the Mutual Series Funds since 2001. Before joining Franklin
Templeton Investments in 2001, he was Managing Director and portfolio manager at
Nomura Holding America, Inc.
CHRISTIAN CORREA, effective January 1, 2007, assumes assistant portfolio manager
responsibilities for Mutual Beacon Fund. He has been an analyst for Franklin
Mutual Advisers since 2003, when he joined Franklin Templeton Investments.
Previously, he covered U.S. risk arbitrage and special situations at Lehman
Brothers Holdings Inc.
CHARLES LAHR was an assistant portfolio manager for Mutual Beacon Fund through
December 2006. Effective January 1, 2007, he assumes portfolio manager
responsibilities for Mutual Discovery Fund. He has been a portfolio manager for
Mutual Financial Services Fund since 2004. He joined Franklin Templeton
Investments in 2003. Previously, he was a senior analyst for the State of
Wisconsin Investment Board and also worked for U.S. Bancorp and the Principal
Financial Group.
- --------------------------------------------------------------------------------
Annual Report | 9
Performance Summary as of 12/31/06
Your dividend income will vary depending on dividends or interest paid by
securities in the Fund's portfolio, adjusted for operating expenses of each
class. Capital gain distributions are net profits realized from the sale of
portfolio securities. The performance table and graphs do not reflect any taxes
that a shareholder would pay on Fund dividends, capital gain distributions, if
any, or any realized gains on the sale of Fund shares. Total return reflects
reinvestment of the Fund's dividends and capital gain distributions, if any, and
any unrealized gains or losses.
PRICE AND DISTRIBUTION INFORMATION
- --------------------------------------------------------------------------------
CLASS Z (SYMBOL: BEGRX) CHANGE 12/31/06 12/31/05
- --------------------------------------------------------------------------------
Net Asset Value (NAV) +$1.19 $16.71 $15.52
- --------------------------------------------------------------------------------
DISTRIBUTIONS (1/1/06-12/31/06)
- --------------------------------------------------------------------------------
Dividend Income $0.2836
- --------------------------------------------------------------------------------
Short-Term Capital Gain $0.1124
- --------------------------------------------------------------------------------
Long-Term Capital Gain $1.5885
- --------------------------------------------------------------------------------
TOTAL $1.9845
- --------------------------------------------------------------------------------
CLASS A (SYMBOL: TEBIX) CHANGE 12/31/06 12/31/05
- --------------------------------------------------------------------------------
Net Asset Value (NAV) +$1.17 $16.61 $15.44
- --------------------------------------------------------------------------------
DISTRIBUTIONS (1/1/06-12/31/06)
- --------------------------------------------------------------------------------
Dividend Income $0.2371
- --------------------------------------------------------------------------------
Short-Term Capital Gain $0.1124
- --------------------------------------------------------------------------------
Long-Term Capital Gain $1.5885
- --------------------------------------------------------------------------------
TOTAL $1.9380
- --------------------------------------------------------------------------------
CLASS B (SYMBOL: TEBBX) CHANGE 12/31/06 12/31/05
- --------------------------------------------------------------------------------
Net Asset Value (NAV) +$1.08 $16.17 $15.09
- --------------------------------------------------------------------------------
DISTRIBUTIONS (1/1/06-12/31/06)
- --------------------------------------------------------------------------------
Dividend Income $0.1183
- --------------------------------------------------------------------------------
Short-Term Capital Gain $0.1124
- --------------------------------------------------------------------------------
Long-Term Capital Gain $1.5885
- --------------------------------------------------------------------------------
TOTAL $1.8192
- --------------------------------------------------------------------------------
CLASS C (SYMBOL: TEMEX) CHANGE 12/31/06 12/31/05
- --------------------------------------------------------------------------------
Net Asset Value (NAV) +$1.13 $16.46 $15.33
- --------------------------------------------------------------------------------
DISTRIBUTIONS (1/1/06-12/31/06)
- --------------------------------------------------------------------------------
Dividend Income $0.1228
- --------------------------------------------------------------------------------
Short-Term Capital Gain $0.1124
- --------------------------------------------------------------------------------
Long-Term Capital Gain $1.5885
- --------------------------------------------------------------------------------
TOTAL $1.8237
- --------------------------------------------------------------------------------
10 | Annual Report
Performance Summary (CONTINUED)
PERFORMANCE 1
CUMULATIVE TOTAL RETURN EXCLUDES SALES CHARGES. AVERAGE ANNUAL TOTAL RETURN AND
VALUE OF $10,000 INVESTMENT INCLUDE MAXIMUM SALES CHARGES. CLASS Z: NO SALES
CHARGES; CLASS A: 5.75% MAXIMUM INITIAL SALES CHARGE; CLASS B: CONTINGENT
DEFERRED SALES CHARGE (CDSC) DECLINING FROM 4% TO 1% OVER SIX YEARS, AND
ELIMINATED THEREAFTER; CLASS C: 1% CDSC IN FIRST YEAR ONLY. THE FUND MAY CHARGE
A 2% FEE ON REDEMPTIONS MADE WITHIN SEVEN DAYS OF PURCHASE.
- --------------------------------------------------------------------------------
CLASS Z 1-YEAR 5-YEAR 10-YEAR
- --------------------------------------------------------------------------------
Cumulative Total Return 2 +20.98% +74.29% +210.92%
- --------------------------------------------------------------------------------
Average Annual Total Return 3 +20.98% +11.75% +12.01%
- --------------------------------------------------------------------------------
Value of $10,000 Investment 4 $12,098 $17,429 $ 31,092
- --------------------------------------------------------------------------------
CLASS A 1-YEAR 5-YEAR 10-YEAR
- --------------------------------------------------------------------------------
Cumulative Total Return 2 +20.65% +71.33% +200.41%
- --------------------------------------------------------------------------------
Average Annual Total Return 3 +13.72% +10.06% +10.97%
- --------------------------------------------------------------------------------
Value of $10,000 Investment 4 $11,372 $16,152 $ 28,310
- --------------------------------------------------------------------------------
CLASS B 1-YEAR 5-YEAR INCEPTION (1/1/99)
- --------------------------------------------------------------------------------
Cumulative Total Return 2 +19.86% +65.85% +127.58%
- --------------------------------------------------------------------------------
Average Annual Total Return 3 +15.86% +10.38% +10.83%
- --------------------------------------------------------------------------------
Value of $10,000 Investment 4 $11,586 $16,385 $ 22,758
- --------------------------------------------------------------------------------
CLASS C 1-YEAR 5-YEAR 10-YEAR
- --------------------------------------------------------------------------------
Cumulative Total Return 2 +19.84% +65.82% +181.42%
- --------------------------------------------------------------------------------
Average Annual Total Return 3 +18.84% +10.64% +10.90%
- --------------------------------------------------------------------------------
Value of $10,000 Investment 4 $11,884 $16,582 $ 28,142
- --------------------------------------------------------------------------------
PERFORMANCE DATA REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE FUTURE
RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU MAY HAVE
A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY DIFFER FROM
FIGURES SHOWN.
FOR MOST RECENT MONTH-END PERFORMANCE, SEE "FUNDS AND PERFORMANCE" AT
FRANKLINTEMPLETON.COM OR CALL 1-800/342-5236.
Annual Report | 11
Performance Summary (CONTINUED)
TOTAL RETURN INDEX COMPARISON FOR HYPOTHETICAL $10,000 INVESTMENT 1
Total return represents the change in value of an investment over the periods
shown. It includes any current, applicable, maximum sales charge, Fund expenses,
account fees and reinvested distributions. The unmanaged index includes
reinvestment of any income or distributions. It differs from the Fund in
composition and does not pay management fees or expenses. One cannot invest
directly in an index.
AVERAGE ANNUAL TOTAL RETURN
- -----------------------------------
CLASS Z 12/31/06
- -----------------------------------
1-Year +20.98%
- -----------------------------------
5-Year +11.75%
- -----------------------------------
10-Year +12.01%
- -----------------------------------
CLASS Z (1/1/97-12/31/06)
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE GRAPH IN THE PRINTED MATERIAL.]
Date Mutual Beacon Fund - Class Z S&P 500 Index 5
- --------- ---------------------------- ---------------
1/1/1997 $10,000 $10,000
1/31/1997 $10,344 $10,624
2/28/1997 $10,567 $10,708
3/31/1997 $10,421 $10,269
4/30/1997 $10,483 $10,881
5/31/1997 $10,914 $11,543
6/30/1997 $11,230 $12,060
7/31/1997 $11,853 $13,019
8/31/1997 $11,727 $12,290
9/30/1997 $12,307 $12,963
10/31/1997 $11,915 $12,531
11/30/1997 $12,088 $13,110
12/31/1997 $12,299 $13,335
1/31/1998 $12,230 $13,482
2/28/1998 $12,892 $14,454
3/31/1998 $13,440 $15,194
4/30/1998 $13,615 $15,347
5/31/1998 $13,658 $15,083
6/30/1998 $13,562 $15,695
7/31/1998 $13,232 $15,529
8/31/1998 $11,423 $13,286
9/30/1998 $11,184 $14,137
10/31/1998 $11,849 $15,286
11/30/1998 $12,523 $16,212
12/31/1998 $12,590 $17,146
1/31/1999 $12,811 $17,862
2/28/1999 $12,667 $17,307
3/31/1999 $13,252 $18,000
4/30/1999 $14,298 $18,697
5/31/1999 $14,433 $18,256
6/30/1999 $14,829 $19,268
7/31/1999 $14,515 $18,667
8/31/1999 $13,996 $18,575
9/30/1999 $13,634 $18,066
10/31/1999 $14,016 $19,209
11/30/1999 $14,349 $19,600
12/31/1999 $14,705 $20,753
1/31/2000 $14,343 $19,711
2/29/2000 $13,940 $19,338
3/31/2000 $15,331 $21,228
4/30/2000 $15,151 $20,590
5/31/2000 $15,342 $20,169
6/30/2000 $15,163 $20,666
7/31/2000 $15,549 $20,343
8/31/2000 $16,195 $21,606
9/30/2000 $16,229 $20,466
10/31/2000 $16,502 $20,379
11/30/2000 $16,071 $18,773
12/31/2000 $16,811 $18,865
1/31/2001 $17,904 $19,534
2/28/2001 $17,804 $17,754
3/31/2001 $17,289 $16,630
4/30/2001 $18,005 $17,922
5/31/2001 $18,608 $18,042
6/30/2001 $18,751 $17,603
7/31/2001 $18,866 $17,429
8/31/2001 $18,469 $16,339
9/30/2001 $16,839 $15,020
10/31/2001 $16,826 $15,307
11/30/2001 $17,429 $16,481
12/31/2001 $17,839 $16,625
1/31/2002 $17,771 $16,383
2/28/2002 $17,880 $16,067
3/31/2002 $18,372 $16,671
4/30/2002 $18,536 $15,661
5/31/2002 $18,605 $15,546
6/30/2002 $17,319 $14,439
7/31/2002 $16,186 $13,313
8/31/2002 $16,338 $13,401
9/30/2002 $15,453 $11,946
10/31/2002 $15,661 $12,996
11/30/2002 $15,965 $13,760
12/31/2002 $15,869 $12,952
1/31/2003 $15,700 $12,613
2/28/2003 $15,350 $12,424
3/31/2003 $15,392 $12,543
4/30/2003 $16,388 $13,577
5/31/2003 $17,272 $14,292
6/30/2003 $17,573 $14,474
7/31/2003 $17,771 $14,730
8/31/2003 $18,280 $15,016
9/30/2003 $18,252 $14,857
10/31/2003 $19,001 $15,697
11/30/2003 $19,679 $15,835
12/31/2003 $20,540 $16,665
1/31/2004 $20,626 $16,971
2/29/2004 $21,325 $17,207
3/31/2004 $21,297 $16,947
4/30/2004 $20,726 $16,682
5/31/2004 $20,840 $16,910
6/30/2004 $21,191 $17,239
7/31/2004 $20,918 $16,668
8/31/2004 $21,090 $16,735
9/30/2004 $21,464 $16,916
10/31/2004 $21,751 $17,175
11/30/2004 $22,886 $17,870
12/31/2004 $23,523 $18,477
1/31/2005 $23,036 $18,027
2/28/2005 $23,760 $18,406
3/31/2005 $23,612 $18,081
4/30/2005 $23,420 $17,738
5/31/2005 $23,907 $18,302
6/30/2005 $24,210 $18,328
7/31/2005 $24,851 $19,009
8/31/2005 $24,970 $18,836
9/30/2005 $25,283 $18,988
10/31/2005 $24,568 $18,672
11/30/2005 $25,238 $19,377
12/31/2005 $25,700 $19,384
1/31/2006 $26,313 $19,897
2/28/2006 $26,644 $19,951
3/31/2006 $27,588 $20,199
4/30/2006 $27,737 $20,470
5/31/2006 $27,539 $19,882
6/30/2006 $27,431 $19,908
7/31/2006 $27,499 $20,031
8/31/2006 $28,453 $20,507
9/30/2006 $28,691 $21,035
10/31/2006 $29,781 $21,720
11/30/2006 $30,292 $22,133
12/31/2006 $31,092 $22,443
AVERAGE ANNUAL TOTAL RETURN
- -----------------------------------
CLASS A 12/31/06
- -----------------------------------
1-Year +13.72%
- -----------------------------------
5-Year +10.06%
- -----------------------------------
10-Year +10.97%
- -----------------------------------
CLASS A (1/1/97-12/31/06)
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE GRAPH IN THE PRINTED MATERIAL.]
Date Mutual Beacon Fund - Class A S&P 500 Index 5
- --------- ---------------------------- ---------------
1/1/1997 $9,424 $10,000
1/31/1997 $9,746 $10,624
2/28/1997 $9,949 $10,708
3/31/1997 $9,811 $10,269
4/30/1997 $9,869 $10,881
5/31/1997 $10,269 $11,543
6/30/1997 $10,566 $12,060
7/31/1997 $11,147 $13,019
8/31/1997 $11,029 $12,290
9/30/1997 $11,568 $12,963
10/31/1997 $11,191 $12,531
11/30/1997 $11,354 $13,110
12/31/1997 $11,549 $13,335
1/31/1998 $11,484 $13,482
2/28/1998 $12,099 $14,454
3/31/1998 $12,607 $15,194
4/30/1998 $12,771 $15,347
5/31/1998 $12,803 $15,083
6/30/1998 $12,713 $15,695
7/31/1998 $12,402 $15,529
8/31/1998 $10,701 $13,286
9/30/1998 $10,467 $14,137
10/31/1998 $11,093 $15,286
11/30/1998 $11,727 $16,212
12/31/1998 $11,783 $17,146
1/31/1999 $11,990 $17,862
2/28/1999 $11,846 $17,307
3/31/1999 $12,386 $18,000
4/30/1999 $13,358 $18,697
5/31/1999 $13,493 $18,256
6/30/1999 $13,854 $19,268
7/31/1999 $13,560 $18,667
8/31/1999 $13,064 $18,575
9/30/1999 $12,725 $18,066
10/31/1999 $13,073 $19,209
11/30/1999 $13,386 $19,600
12/31/1999 $13,714 $20,753
1/31/2000 $13,377 $19,711
2/29/2000 $12,990 $19,338
3/31/2000 $14,281 $21,228
4/30/2000 $14,112 $20,590
5/31/2000 $14,290 $20,169
6/30/2000 $14,110 $20,666
7/31/2000 $14,470 $20,343
8/31/2000 $15,064 $21,606
9/30/2000 $15,096 $20,466
10/31/2000 $15,350 $20,379
11/30/2000 $14,947 $18,773
12/31/2000 $15,620 $18,865
1/31/2001 $16,639 $19,534
2/28/2001 $16,533 $17,754
3/31/2001 $16,053 $16,630
4/30/2001 $16,709 $17,922
5/31/2001 $17,271 $18,042
6/30/2001 $17,388 $17,603
7/31/2001 $17,496 $17,429
8/31/2001 $17,113 $16,339
9/30/2001 $15,618 $15,020
10/31/2001 $15,594 $15,307
11/30/2001 $16,144 $16,481
12/31/2001 $16,523 $16,625
1/31/2002 $16,460 $16,383
2/28/2002 $16,549 $16,067
3/31/2002 $17,006 $16,671
4/30/2002 $17,158 $15,661
5/31/2002 $17,209 $15,546
6/30/2002 $16,011 $14,439
7/31/2002 $14,958 $13,313
8/31/2002 $15,099 $13,401
9/30/2002 $14,277 $11,946
10/31/2002 $14,457 $12,996
11/30/2002 $14,727 $13,760
12/31/2002 $14,638 $12,952
1/31/2003 $14,482 $12,613
2/28/2003 $14,157 $12,424
3/31/2003 $14,183 $12,543
4/30/2003 $15,105 $13,577
5/31/2003 $15,923 $14,292
6/30/2003 $16,198 $14,474
7/31/2003 $16,368 $14,730
8/31/2003 $16,826 $15,016
9/30/2003 $16,800 $14,857
10/31/2003 $17,493 $15,697
11/30/2003 $18,108 $15,835
12/31/2003 $18,880 $16,665
1/31/2004 $18,973 $16,971
2/29/2004 $19,592 $17,207
3/31/2004 $19,565 $16,947
4/30/2004 $19,025 $16,682
5/31/2004 $19,131 $16,910
6/30/2004 $19,462 $17,239
7/31/2004 $19,197 $16,668
8/31/2004 $19,343 $16,735
9/30/2004 $19,687 $16,916
10/31/2004 $19,939 $17,175
11/30/2004 $20,973 $17,870
12/31/2004 $21,549 $18,477
1/31/2005 $21,101 $18,027
2/28/2005 $21,766 $18,406
3/31/2005 $21,617 $18,081
4/30/2005 $21,427 $17,738
5/31/2005 $21,875 $18,302
6/30/2005 $22,161 $18,328
7/31/2005 $22,737 $19,009
8/31/2005 $22,833 $18,836
9/30/2005 $23,107 $18,988
10/31/2005 $22,462 $18,672
11/30/2005 $23,066 $19,377
12/31/2005 $23,465 $19,384
1/31/2006 $24,028 $19,897
2/28/2006 $24,332 $19,951
3/31/2006 $25,168 $20,199
4/30/2006 $25,304 $20,470
5/31/2006 $25,122 $19,882
6/30/2006 $25,017 $19,908
7/31/2006 $25,080 $20,031
8/31/2006 $25,939 $20,507
9/30/2006 $26,158 $21,035
10/31/2006 $27,127 $21,720
11/30/2006 $27,596 $22,133
12/31/2006 $28,310 $22,443
12 | Annual Report
Performance Summary (CONTINUED)
CLASS B (1/1/99-12/31/06)
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE GRAPH IN THE PRINTED MATERIAL.]
Date Mutual Beacon Fund - Class B S&P 500 Index 5
- --------- ---------------------------- ---------------
1/1/1999 $10,000 $10,000
1/31/1999 $10,160 $10,418
2/28/1999 $10,031 $10,094
3/31/1999 $10,481 $10,498
4/30/1999 $11,291 $10,905
5/31/1999 $11,398 $10,647
6/30/1999 $11,693 $11,238
7/31/1999 $11,436 $10,887
8/31/1999 $11,015 $10,834
9/30/1999 $10,719 $10,537
10/31/1999 $11,007 $11,203
11/30/1999 $11,265 $11,431
12/31/1999 $11,533 $12,104
1/31/2000 $11,247 $11,496
2/29/2000 $10,918 $11,279
3/31/2000 $11,996 $12,381
4/30/2000 $11,845 $12,009
5/31/2000 $11,988 $11,763
6/30/2000 $11,840 $12,053
7/31/2000 $12,127 $11,865
8/31/2000 $12,622 $12,601
9/30/2000 $12,631 $11,936
10/31/2000 $12,846 $11,886
11/30/2000 $12,496 $10,949
12/31/2000 $13,054 $11,003
1/31/2001 $13,896 $11,393
2/28/2001 $13,806 $10,355
3/31/2001 $13,390 $9,699
4/30/2001 $13,935 $10,453
5/31/2001 $14,401 $10,523
6/30/2001 $14,487 $10,267
7/31/2001 $14,568 $10,166
8/31/2001 $14,244 $9,530
9/30/2001 $12,990 $8,760
10/31/2001 $12,959 $8,927
11/30/2001 $13,415 $9,612
12/31/2001 $13,722 $9,696
1/31/2002 $13,658 $9,555
2/28/2002 $13,722 $9,371
3/31/2002 $14,097 $9,723
4/30/2002 $14,215 $9,134
5/31/2002 $14,258 $9,067
6/30/2002 $13,253 $8,421
7/31/2002 $12,375 $7,765
8/31/2002 $12,483 $7,816
9/30/2002 $11,801 $6,967
10/31/2002 $11,942 $7,580
11/30/2002 $12,169 $8,025
12/31/2002 $12,081 $7,554
1/31/2003 $11,950 $7,357
2/28/2003 $11,677 $7,246
3/31/2003 $11,688 $7,316
4/30/2003 $12,441 $7,919
5/31/2003 $13,107 $8,335
6/30/2003 $13,320 $8,442
7/31/2003 $13,463 $8,591
8/31/2003 $13,825 $8,758
9/30/2003 $13,793 $8,665
10/31/2003 $14,353 $9,155
11/30/2003 $14,848 $9,236
12/31/2003 $15,491 $9,720
1/31/2004 $15,546 $9,898
2/29/2004 $16,052 $10,036
3/31/2004 $16,019 $9,884
4/30/2004 $15,568 $9,729
5/31/2004 $15,645 $9,863
6/30/2004 $15,903 $10,054
7/31/2004 $15,681 $9,722
8/31/2004 $15,792 $9,761
9/30/2004 $16,069 $9,866
10/31/2004 $16,268 $10,017
11/30/2004 $17,099 $10,422
12/31/2004 $17,554 $10,777
1/31/2005 $17,181 $10,514
2/28/2005 $17,712 $10,735
3/31/2005 $17,588 $10,545
4/30/2005 $17,430 $10,345
5/31/2005 $17,769 $10,674
6/30/2005 $17,985 $10,690
7/31/2005 $18,453 $11,087
8/31/2005 $18,510 $10,986
9/30/2005 $18,738 $11,075
10/31/2005 $18,190 $10,890
11/30/2005 $18,681 $11,301
12/31/2005 $18,987 $11,306
1/31/2006 $19,441 $11,605
2/28/2006 $19,667 $11,636
3/31/2006 $20,334 $11,781
4/30/2006 $20,435 $11,939
5/31/2006 $20,272 $11,596
6/30/2006 $20,185 $11,611
7/31/2006 $20,211 $11,683
8/31/2006 $20,897 $11,960
9/30/2006 $21,053 $12,268
10/31/2006 $21,829 $12,668
11/30/2006 $22,192 $12,909
12/31/2006 $22,758 $13,090
AVERAGE ANNUAL TOTAL RETURN
- -----------------------------------
CLASS B 12/31/06
- -----------------------------------
1-Year +15.86%
- -----------------------------------
5-Year +10.38%
- -----------------------------------
Since Inception (1/1/99) +10.83%
- -----------------------------------
CLASS C (1/1/97-12/31/06)
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE GRAPH IN THE PRINTED MATERIAL.]
Date Mutual Beacon Fund - Class C S&P 500 Index 5
- --------- ---------------------------- ---------------
1/1/1997 $10,000 $10,000
1/31/1997 $10,334 $10,624
2/28/1997 $10,542 $10,708
3/31/1997 $10,388 $10,269
4/30/1997 $10,450 $10,881
5/31/1997 $10,866 $11,543
6/30/1997 $11,174 $12,060
7/31/1997 $11,778 $13,019
8/31/1997 $11,652 $12,290
9/30/1997 $12,216 $12,963
10/31/1997 $11,817 $12,531
11/30/1997 $11,973 $13,110
12/31/1997 $12,168 $13,335
1/31/1998 $12,090 $13,482
2/28/1998 $12,740 $14,454
3/31/1998 $13,269 $15,194
4/30/1998 $13,425 $15,347
5/31/1998 $13,460 $15,083
6/30/1998 $13,356 $15,695
7/31/1998 $13,021 $15,529
8/31/1998 $11,232 $13,286
9/30/1998 $10,986 $14,137
10/31/1998 $11,629 $15,286
11/30/1998 $12,290 $16,212
12/31/1998 $12,339 $17,146
1/31/1999 $12,547 $17,862
2/28/1999 $12,386 $17,307
3/31/1999 $12,954 $18,000
4/30/1999 $13,966 $18,697
5/31/1999 $14,089 $18,256
6/30/1999 $14,465 $19,268
7/31/1999 $14,147 $18,667
8/31/1999 $13,627 $18,575
9/30/1999 $13,260 $18,066
10/31/1999 $13,617 $19,209
11/30/1999 $13,935 $19,600
12/31/1999 $14,269 $20,753
1/31/2000 $13,906 $19,711
2/29/2000 $13,501 $19,338
3/31/2000 $14,840 $21,228
4/30/2000 $14,653 $20,590
5/31/2000 $14,830 $20,169
6/30/2000 $14,636 $20,666
7/31/2000 $15,001 $20,343
8/31/2000 $15,610 $21,606
9/30/2000 $15,632 $20,466
10/31/2000 $15,886 $20,379
11/30/2000 $15,455 $18,773
12/31/2000 $16,154 $18,865
1/31/2001 $17,188 $19,534
2/28/2001 $17,079 $17,754
3/31/2001 $16,568 $16,630
4/30/2001 $17,237 $17,922
5/31/2001 $17,809 $18,042
6/30/2001 $17,921 $17,603
7/31/2001 $18,020 $17,429
8/31/2001 $17,623 $16,339
9/30/2001 $16,071 $15,020
10/31/2001 $16,033 $15,307
11/30/2001 $16,592 $16,481
12/31/2001 $16,971 $16,625
1/31/2002 $16,893 $16,383
2/28/2002 $16,985 $16,067
3/31/2002 $17,444 $16,671
4/30/2002 $17,588 $15,661
5/31/2002 $17,627 $15,546
6/30/2002 $16,394 $14,439
7/31/2002 $15,307 $13,313
8/31/2002 $15,440 $13,401
9/30/2002 $14,591 $11,946
10/31/2002 $14,777 $12,996
11/30/2002 $15,042 $13,760
12/31/2002 $14,936 $12,952
1/31/2003 $14,776 $12,613
2/28/2003 $14,430 $12,424
3/31/2003 $14,456 $12,543
4/30/2003 $15,389 $13,577
5/31/2003 $16,202 $14,292
6/30/2003 $16,475 $14,474
7/31/2003 $16,649 $14,730
8/31/2003 $17,105 $15,016
9/30/2003 $17,065 $14,857
10/31/2003 $17,749 $15,697
11/30/2003 $18,366 $15,835
12/31/2003 $19,154 $16,665
1/31/2004 $19,222 $16,971
2/29/2004 $19,853 $17,207
3/31/2004 $19,813 $16,947
4/30/2004 $19,262 $16,682
5/31/2004 $19,356 $16,910
6/30/2004 $19,670 $17,239
7/31/2004 $19,399 $16,668
8/31/2004 $19,535 $16,735
9/30/2004 $19,873 $16,916
10/31/2004 $20,116 $17,175
11/30/2004 $21,157 $17,870
12/31/2004 $21,719 $18,477
1/31/2005 $21,251 $18,027
2/28/2005 $21,912 $18,406
3/31/2005 $21,747 $18,081
4/30/2005 $21,554 $17,738
5/31/2005 $21,981 $18,302
6/30/2005 $22,245 $18,328
7/31/2005 $22,815 $19,009
8/31/2005 $22,898 $18,836
9/30/2005 $23,176 $18,988
10/31/2005 $22,509 $18,672
11/30/2005 $23,093 $19,377
12/31/2005 $23,483 $19,384
1/31/2006 $24,035 $19,897
2/28/2006 $24,326 $19,951
3/31/2006 $25,154 $20,199
4/30/2006 $25,277 $20,470
5/31/2006 $25,077 $19,882
6/30/2006 $24,957 $19,908
7/31/2006 $24,988 $20,031
8/31/2006 $25,839 $20,507
9/30/2006 $26,044 $21,035
10/31/2006 $27,005 $21,720
11/30/2006 $27,446 $22,133
12/31/2006 $28,142 $22,443
AVERAGE ANNUAL TOTAL RETURN
- -----------------------------------
CLASS C 12/31/06
- -----------------------------------
1-Year +18.84%
- -----------------------------------
5-Year +10.64%
- -----------------------------------
10-Year +10.90%
- -----------------------------------
Annual Report | 13
Performance Summary (CONTINUED)
ENDNOTES
THE FUND'S INVESTMENTS INCLUDE SMALLER-COMPANY STOCKS AND FOREIGN SECURITIES.
SMALLER-COMPANY STOCKS HAVE HISTORICALLY EXHIBITED GREATER PRICE VOLATILITY THAN
LARGER-COMPANY STOCKS, PARTICULARLY OVER THE SHORT TERM. FOREIGN SECURITIES
RISKS INCLUDE EXPOSURE TO CURRENCY VOLATILITY AND POLITICAL, ECONOMIC AND
REGULATORY UNCERTAINTY. THE FUND MAY ALSO INVEST IN COMPANIES ENGAGED IN
MERGERS, REORGANIZATIONS OR LIQUIDATIONS, WHICH INVOLVE SPECIAL RISKS, AS WELL
AS LOWER-RATED BONDS, WHICH ENTAIL HIGHER CREDIT RISK. THE FUND'S PROSPECTUS
ALSO INCLUDES A DESCRIPTION OF THE MAIN INVESTMENT RISKS.
CLASS Z: Shares are available to certain eligible investors as described in
the prospectus.
CLASS A: Prior to 8/3/98, these shares were offered at a lower initial sales
charge; thus actual total returns may differ.
CLASS B: These shares have higher annual fees and expenses than Class A
shares.
CLASS C: Prior to 1/1/04, these shares were offered with an initial sales
charge; thus actual total returns would have differed. These shares
have higher annual fees and expenses than Class A shares.
1. Past expense reductions by the Fund's manager increased the Fund's total
returns. If the manager had not taken this action, the Fund's total
returns would have been lower.
2. Cumulative total return represents the change in value of an investment
over the periods indicated.
3. Average annual total return represents the average annual change in value
of an investment over the periods indicated.
4. These figures represent the value of a hypothetical $10,000 investment in
the Fund over the periods indicated.
5. Sources: Standard & Poor's Micropal. The S&P 500 consists of 500 stocks
chosen for market size, liquidity and industry group representation. Each
stock's weight in the index is proportionate to its market value. The S&P
500 is one of the most widely used benchmarks of U.S. equity performance.
14 | Annual Report
Your Fund's Expenses
As a Fund shareholder, you can incur two types of costs:
o Transaction costs, including sales charges (loads) on Fund purchases and
redemption fees; and
o Ongoing Fund costs, including management fees, distribution and service
(12b-1) fees, and other Fund expenses. All mutual funds have ongoing
costs, sometimes referred to as operating expenses.
The following table shows ongoing costs of investing in the Fund and can help
you understand these costs and compare them with those of other mutual funds.
The table assumes a $1,000 investment held for the six months indicated.
ACTUAL FUND EXPENSES
The first line (Actual) for each share class listed in the table provides actual
account values and expenses. The "Ending Account Value" is derived from the
Fund's actual return, which includes the effect of Fund expenses.
You can estimate the expenses you paid during the period by following these
steps. OF COURSE, YOUR ACCOUNT VALUE AND EXPENSES WILL DIFFER FROM THOSE IN THIS
ILLUSTRATION:
1. Divide your account value by $1,000.
IF AN ACCOUNT HAD AN $8,600 VALUE, THEN $8,600 / $1,000 = 8.6.
2. Multiply the result by the number under the heading "Expenses Paid During
Period."
IF EXPENSES PAID DURING PERIOD WERE $7.50, THEN 8.6 X $7.50 = $64.50.
In this illustration, the estimated expenses paid this period are $64.50.
HYPOTHETICAL EXAMPLE FOR COMPARISON WITH OTHER FUNDS
Information in the second line (Hypothetical) for each class in the table can
help you compare ongoing costs of investing in the Fund with those of other
mutual funds. This information may not be used to estimate the actual ending
account balance or expenses you paid during the period. The hypothetical "Ending
Account Value" is based on the actual expense ratio for each class and an
assumed 5% annual rate of return before expenses, which does not represent the
Fund's actual return. The figure under the heading "Expenses Paid During Period"
shows the hypothetical expenses your account would have incurred under this
scenario. You can compare this figure with the 5% hypothetical examples that
appear in shareholder reports of other funds.
Annual Report | 15
Your Fund's Expenses (CONTINUED)
PLEASE NOTE THAT EXPENSES SHOWN IN THE TABLE ARE MEANT TO HIGHLIGHT ONGOING
COSTS AND DO NOT REFLECT ANY TRANSACTION COSTS, SUCH AS SALES CHARGES OR
REDEMPTION FEES. Therefore, the second line for each class is useful in
comparing ongoing costs only, and will not help you compare total costs of
owning different funds. In addition, if transaction costs were included, your
total costs would have been higher. Please refer to the Fund prospectus for
additional information on operating expenses.
- ---------------------------------------------------------------------------------------------------------
BEGINNING ACCOUNT ENDING ACCOUNT EXPENSES PAID DURING
CLASS Z VALUE 7/1/06 VALUE 12/31/06 PERIOD* 7/1/06--12/31/06
- ---------------------------------------------------------------------------------------------------------
Actual $1,000 $1,133.40 $4.68
- ---------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,020.82 $4.43
- ---------------------------------------------------------------------------------------------------------
CLASS A
- ---------------------------------------------------------------------------------------------------------
Actual $1,000 $1,131.60 $6.29
- ---------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,019.31 $5.96
- ---------------------------------------------------------------------------------------------------------
CLASS B
- ---------------------------------------------------------------------------------------------------------
Actual $1,000 $1,127.50 $9.92
- ---------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,015.83 $9.40
- ---------------------------------------------------------------------------------------------------------
CLASS C
- ---------------------------------------------------------------------------------------------------------
Actual $1,000 $1,127.60 $9.97
- ---------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,015.83 $9.45
- ---------------------------------------------------------------------------------------------------------
* Expenses are equal to the annualized expense ratio for each class (Z:
0.87%; A: 1.17%; B: 1.85%; and C: 1.86%), multiplied by the average
account value over the period, multiplied by 184/365 to reflect the
one-half year period.
16 | Annual Report
Mutual Beacon Fund
FINANCIAL HIGHLIGHTS
--------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
CLASS Z 2006 2005 2004 2003 2002
--------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ......................... $ 15.52 $ 15.94 $ 14.40 $ 11.31 $ 13.05
--------------------------------------------------------------------
Income from investment operations a:
Net investment income b ................................... 0.26 0.31 0.30 0.19 0.23
Net realized and unrealized gains (losses) ................ 2.91 1.16 1.76 3.13 (1.66)
--------------------------------------------------------------------
Total from investment operations ........................... 3.17 1.47 2.06 3.32 (1.43)
--------------------------------------------------------------------
Less distributions from:
Net investment income ..................................... (0.28) (0.30) (0.37) (0.23) (0.20)
Net realized gains ........................................ (1.70) (1.59) (0.15) -- (0.11)
--------------------------------------------------------------------
Total distributions ........................................ (1.98) (1.89) (0.52) (0.23) (0.31)
--------------------------------------------------------------------
Redemption fees ............................................ -- d -- d -- d -- --
--------------------------------------------------------------------
Net asset value, end of year ............................... $ 16.71 $ 15.52 $ 15.94 $ 14.40 $ 11.31
====================================================================
Total return ............................................... 20.98% 9.25% 14.52% 29.44% (11.05)%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ............................ $3,925,029 $3,433,665 $3,359,389 $3,112,212 $2,572,002
Ratios to average net assets:
Expenses c ................................................ 0.85% e 0.89% e 0.83% e 0.86% 0.80%
Net investment income ..................................... 1.59% 1.91% 1.99% 1.48% 1.88%
Portfolio turnover rate .................................... 40.72% 35.36% 29.17% 49.61% 52.27%
Ratios to average net assets, excluding dividend
expense on securities sold short:
Expenses .................................................. 0.82% e 0.84% e 0.82% e 0.83% 0.79%
a The amount shown for a share outstanding throughout the period may not
correlate with the Statement of Operations for the period due to the
timing of sales and repurchase of the Fund shares in relation to income
earned and/or fluctuating market value of the investments of the Fund.
b Based on average daily shares outstanding.
c Includes dividend expense on securities sold short which varies from
period to period. See below for expense ratios that reflect only operating
expenses.
d Amount rounds to less than $0.01 per share.
e Benefit of expense reduction rounds to less than 0.01%.
Annual Report |
The accompanying notes are an integral part of these financial statements. | 17
Mutual Beacon Fund
FINANCIAL HIGHLIGHTS (CONTINUED)
--------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
CLASS A 2006 2005 2004 2003 2002
--------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ......................... $ 15.44 $ 15.87 $ 14.34 $ 11.27 $ 13.01
--------------------------------------------------------------------
Income from investment operations a:
Net investment income b ................................... 0.21 0.26 0.25 0.14 0.19
Net realized and unrealized gains (losses) ................ 2.90 1.15 1.75 3.12 (1.66)
--------------------------------------------------------------------
Total from investment operations ........................... 3.11 1.41 2.00 3.26 (1.47)
--------------------------------------------------------------------
Less distributions from:
Net investment income ..................................... (0.24) (0.25) (0.32) (0.19) (0.16)
Net realized gains ........................................ (1.70) (1.59) (0.15) -- (0.11)
--------------------------------------------------------------------
Total distributions ........................................ (1.94) (1.84) (0.47) (0.19) (0.27)
--------------------------------------------------------------------
Redemption fees ............................................ -- e -- e -- e -- --
--------------------------------------------------------------------
Net asset value, end of year ............................... $ 16.61 $ 15.44 $ 15.87 $ 14.34 $ 11.27
====================================================================
Total return c ............................................. 20.65% 8.89% 14.13% 28.99% (11.41)%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ............................ $2,176,658 $1,633,022 $1,462,133 $1,301,620 $ 918,983
Ratios to average net assets:
Expenses d ................................................ 1.15% f 1.22% f 1.18% f 1.21% 1.15%
Net investment income ..................................... 1.29% 1.58% 1.64% 1.13% 1.53%
Portfolio turnover rate .................................... 40.72% 35.36% 29.17% 49.61% 52.27%
Ratios to average net assets, excluding dividend
expense on securities sold short:
Expenses .................................................. 1.12% f 1.17% f 1.17% f 1.18% 1.14%
a The amount shown for a share outstanding throughout the period may not
correlate with the Statement of Operations for the period due to the
timing of sales and repurchase of the Fund shares in relation to income
earned and/or fluctuating market value of the investments of the Fund.
b Based on average daily shares outstanding.
c Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable.
d Includes dividend expense on securities sold short which varies from
period to period. See below for expense ratios that reflect only operating
expenses.
e Amount rounds to less than $0.01 per share.
f Benefit of expense reduction rounds to less than 0.01%.
18 | The accompanying notes are an integral part of these financial statements.
| Annual Report
Mutual Beacon Fund
FINANCIAL HIGHLIGHTS (CONTINUED)
--------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
CLASS B 2006 2005 2004 2003 2002
--------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ......................... $ 15.09 $ 15.54 $ 14.06 $ 11.07 $ 12.80
--------------------------------------------------------------------
Income from investment operations a:
Net investment income b ................................... 0.10 0.14 0.15 0.05 0.11
Net realized and unrealized gains (losses) ................ 2.80 1.14 1.71 3.06 (1.63)
--------------------------------------------------------------------
Total from investment operations ........................... 2.90 1.28 1.86 3.11 (1.52)
--------------------------------------------------------------------
Less distributions from:
Net investment income ..................................... (0.12) (0.14) (0.23) (0.12) (0.10)
Net realized gains ........................................ (1.70) (1.59) (0.15) -- (0.11)
--------------------------------------------------------------------
Total distributions ........................................ (1.82) (1.73) (0.38) (0.12) (0.21)
--------------------------------------------------------------------
Redemption fees ............................................ -- e -- e -- e -- --
--------------------------------------------------------------------
Net asset value, end of year ............................... $ 16.17 $ 15.09 $ 15.54 $ 14.06 $ 11.07
====================================================================
Total return c ............................................. 19.86% 8.17% 13.32% 28.22% (11.96)%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ............................ $ 199,461 $ 186,169 $ 186,840 $ 155,572 $ 100,405
Ratios to average net assets:
Expenses d ................................................ 1.85% f 1.89% f 1.83% f 1.86% 1.80%
Net investment income ..................................... 0.59% 0.91% 0.99% 0.48% 0.88%
Portfolio turnover rate .................................... 40.72% 35.36% 29.17% 49.61% 52.27%
Ratios to average net assets, excluding dividend
expense on securities sold short:
Expenses .................................................. 1.82% f 1.84% f 1.82% f 1.83% 1.79%
a The amount shown for a share outstanding throughout the period may not
correlate with the Statement of Operations for the period due to the
timing of sales and repurchase of the Fund shares in relation to income
earned and/or fluctuating market value of the investments of the Fund.
b Based on average daily shares outstanding.
c Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable.
d Includes dividend expense on securities sold short which varies from
period to period. See below for expense ratios that reflect only operating
expenses.
e Amount rounds to less than $0.01 per share.
f Benefit of expense reduction rounds to less than 0.01%.
Annual Report |
The accompanying notes are an integral part of these financial statements. | 19
Mutual Beacon Fund
FINANCIAL HIGHLIGHTS (CONTINUED)
--------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
CLASS C 2006 2005 2004 2003 2002
--------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ......................... $ 15.33 $ 15.77 $ 14.26 $ 11.22 $ 12.94
--------------------------------------------------------------------
Income from investment operations a:
Net investment income b ................................... 0.10 0.15 0.14 0.06 0.11
Net realized and unrealized gains (losses) ................ 2.85 1.14 1.74 3.09 (1.64)
--------------------------------------------------------------------
Total from investment operations ........................... 2.95 1.29 1.88 3.15 (1.53)
--------------------------------------------------------------------
Less distributions from:
Net investment income ..................................... (0.12) (0.14) (0.23) (0.11) (0.08)
Net realized gains ........................................ (1.70) (1.59) (0.14) -- (0.11)
--------------------------------------------------------------------
Total distributions ........................................ (1.82) (1.73) (0.37) (0.11) (0.19)
--------------------------------------------------------------------
Redemption fees ............................................ -- e -- e -- e -- --
--------------------------------------------------------------------
Net asset value, end of year ............................... $ 16.46 $ 15.33 $ 15.77 $ 14.26 $ 11.22
====================================================================
Total return c ............................................. 19.84% 8.12% 13.39% 28.24% (11.99)%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ............................ $ 825,234 $ 697,400 $ 658,813 $ 579,825 $ 443,683
Ratios to average net assets:
Expenses d ................................................ 1.85% f 1.89% f 1.83% f 1.86% 1.79%
Net investment income ..................................... 0.59% 0.91% 0.99% 0.48% 0.89%
Portfolio turnover rate .................................... 40.72% 35.36% 29.17% 49.61% 52.27%
Ratios to average net assets, excluding dividend
expense on securities sold short:
Expenses .................................................. 1.82% f 1.84% f 1.82% f 1.83% 1.78%
a The amount shown for a share outstanding throughout the period may not
correlate with the Statement of Operations for the period due to the
timing of sales and repurchase of the Fund shares in relation to income
earned and/or fluctuating market value of the investments of the Fund.
b Based on average daily shares outstanding.
c Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable.
d Includes dividend expense on securities sold short which varies from
period to period. See below for expense ratios that reflect only operating
expenses.
e Amount rounds to less than $0.01 per share.
f Benefit of expense reduction rounds to less than 0.01%.
20 | The accompanying notes are an integral part of these financial statements.
| Annual Report
Mutual Beacon Fund
STATEMENT OF INVESTMENTS, DECEMBER 31, 2006
- -----------------------------------------------------------------------------------------------------------------------------------
SHARES/WARRANTS/
COUNTRY CONTRACTS VALUE
- -----------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS 94.4%
COMMON STOCKS AND OTHER EQUITY INTERESTS 89.5%
AIRLINES 0.4%
a ACE Aviation Holdings Inc., A .................................. Canada 902,761 $ 29,277,270
a,b ACE Aviation Holdings Inc., A, 144A ............................ Canada 46,508 1,508,292
----------------
30,785,562
----------------
AUTOMOBILES 0.3%
a,c,d,g International Automotive Components Group Brazil LLC ........... Brazil 2,387,711 9,837,369
a,c,d,g International Automotive Components Group Japan LLC ............ Japan 326,435 2,742,345
a,c,d,g International Automotive Components Group LLC .................. Luxembourg 10,149,082 10,149,082
----------------
22,728,796
----------------
BEVERAGES 1.7%
Brown-Forman Corp., A .......................................... United States 308,260 20,785,972
Brown-Forman Corp., B .......................................... United States 362,618 24,019,816
Carlsberg AS, A ................................................ Denmark 74,900 6,894,427
Carlsberg AS, B ................................................ Denmark 671,304 66,664,580
----------------
118,364,795
----------------
BUILDING PRODUCTS 0.3%
a Armstrong World Industries Inc. ................................ United States 233,478 9,897,133
a,e Armstrong World Industries Inc., Contingent Distribution ....... United States 19,836,575 247,957
a,d,e Owens Corning, Contingent Distribution ......................... United States 27,188,600 --
a,c Owens Corning Inc. ............................................. United States 347,643 9,874,799
a,c Owens Corning Inc., options to sell (shares), exercise price
$25.00, expiration date, 4/06/07 ............................. United States 310,123 --
a,c Owens Corning Inc., options to purchase (shares), exercise
price $37.50, expiration date, 1/02/08 ....................... United States 310,123 --
----------------
20,019,889
----------------
CAPITAL MARKETS 0.5%
Legg Mason Inc. ................................................ United States 396,900 37,725,345
----------------
CHEMICALS 1.1%
a,e,q Dow Corning Corp., Contingent Distribution ..................... United States 23,723,548 9,192,875
Koninklijke DSM NV ............................................. Netherlands 683,349 33,763,911
Linde AG ....................................................... Germany 314,170 32,563,822
----------------
75,520,608
----------------
COMMERCIAL BANKS 8.9%
BNP Paribas SA ................................................. France 681,580 74,361,828
Chinatrust Financial Holding Co. Ltd. .......................... Taiwan 41,682,080 34,857,655
Danske Bank AS ................................................. Denmark 1,454,680 64,632,989
a,c,d,f FE Capital Holdings Ltd. ....................................... Japan 13,981 18,902,721
Intesa Sanpaulo SpA ............................................ Italy 10,279,630 79,382,306
MB Financial Inc. .............................................. United States 369,950 13,913,820
Mitsubishi UFJ Financial Group Inc. ............................ Japan 5,528 68,266,980
a,c,d NCB Warrant Holdings Ltd., A ................................... Japan 67,420 7,940,053
Societe Generale, A ............................................ France 51,116 8,677,371
Sumitomo Mitsui Financial Group Inc. ........................... Japan 3,005 30,798,505
Svenska Handelsbanken AB, A .................................... Sweden 2,577,705 77,881,967
Swedbank AB, A ................................................. Sweden 1,956,390 70,960,257
U.S. Bancorp ................................................... United States 1,002,720 36,288,437
Annual Report | 21
Mutual Beacon Fund
STATEMENT OF INVESTMENTS, DECEMBER 31, 2006 (CONTINUED)
- -----------------------------------------------------------------------------------------------------------------------------------
SHARES/WARRANTS/
COUNTRY CONTRACTS VALUE
- -----------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
COMMON STOCKS AND OTHER EQUITY INTERESTS (CONTINUED)
COMMERCIAL BANKS (CONTINUED)
Wachovia Corp. ................................................. United States 831,320 $ 47,343,674
----------------
634,208,563
----------------
COMMERCIAL SERVICES & SUPPLIES 0.2%
a Comdisco Holding Co. Inc. ...................................... United States 630 7,434
a,e Comdisco Holding Co. Inc., Contingent Distribution ............. United States 54,914,113 --
a,c,d,f First Chicago Bancorp .......................................... United States 1,157,143 16,200,002
----------------
16,207,436
----------------
COMPUTERS & PERIPHERALS 1.6%
a,c,d,f DecisionOne Corp. .............................................. United States 1,142,353 814,498
a Dell Inc. ...................................................... United States 2,222,540 55,763,528
International Business Machines Corp. .......................... United States 593,820 57,689,613
----------------
114,267,639
----------------
CONSUMER FINANCE 0.8%
a,c,d Cerberus FIM Investors Auto Finance LLC ........................ United States 4,250,824 4,306,425
a,c,d Cerberus FIM Investors Commercial Finance LLC .................. United States 543,168 550,273
a,c,d Cerberus FIM Investors Commercial Mortgage LLC ................. United States 929,398 941,555
a,c,d Cerberus FIM Investors Insurance LLC ........................... United States 4,427,713 4,485,627
a,c,d Cerberus FIM Investors Rescap LLC .............................. United States 9,391,146 9,513,982
Takefuji Corp. ................................................. Japan 870,465 34,442,728
----------------
54,240,590
----------------
CONTAINERS & PACKAGING 1.1%
Temple-Inland Inc. ............................................. United States 1,672,900 77,003,587
----------------
DIVERSIFIED FINANCIAL SERVICES 3.1%
Capital One Financial Corp. .................................... United States 89,640 6,886,145
Citigroup Inc. ................................................. United States 1,340,150 74,646,355
Fortis ......................................................... Belgium 3,044,469 129,849,079
Leucadia National Corp. ........................................ United States 338,311 9,540,370
a,e Marconi Corp., Contingent Distribution ......................... United Kingdom 42,651,300 --
----------------
220,921,949
----------------
DIVERSIFIED TELECOMMUNICATION SERVICES 6.6%
a,c,d,g AboveNet Inc. .................................................. United States 439,477 13,465,575
a,d,e,g AboveNet Inc., Contingent Distribution ......................... United States 61,502,000 --
a,c,g AboveNet Inc., options to purchase (shares), exercise
price $20.95, expiration date, 9/09/13 ....................... United States 613 16,582
a,c,d,g AboveNet Inc., wts., 9/08/08 ................................... United States 14,770 472,640
a,c,d,g AboveNet Inc., wts., 9/08/10 ................................... United States 17,376 500,429
BellSouth Corp. ................................................ United States 2,522,330 118,826,966
Chunghwa Telecom Co. Ltd., ADR ................................. Taiwan 1,703,573 33,611,495
a,d,e Global Crossing Holdings Ltd., Contingent Distribution ......... United States 60,632,757 --
NTL Inc. ....................................................... United Kingdom 3,991,350 100,741,674
Sprint Nextel Corp. ............................................ United States 3,170,490 59,890,556
Verizon Communications Inc. .................................... United States 3,809,062 141,849,469
----------------
469,375,386
----------------
22 | Annual Report
Mutual Beacon Fund
STATEMENT OF INVESTMENTS, DECEMBER 31, 2006 (CONTINUED)
- -----------------------------------------------------------------------------------------------------------------------------------
SHARES/WARRANTS/
COUNTRY CONTRACTS VALUE
- -----------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
COMMON STOCKS AND OTHER EQUITY INTERESTS (CONTINUED)
ELECTRIC UTILITIES 1.7%
Constellation Energy Group ..................................... United States 934,100 $ 64,331,467
E.ON AG ........................................................ Germany 441,388 60,182,352
----------------
124,513,819
----------------
ELECTRICAL EQUIPMENT 0.2%
American Power Conversion Corp. ................................ United States 534,600 16,353,414
----------------
ELECTRONIC EQUIPMENT & INSTRUMENTS 0.1%
Symbol Technologies Inc. ....................................... United States 276,200 4,126,428
----------------
ENERGY EQUIPMENT & SERVICES 0.5%
a Basic Energy Services Inc. ..................................... United States 14,473 356,758
a Seadrill Ltd. .................................................. Bermuda 2,283,800 38,548,006
----------------
38,904,764
----------------
FOOD & STAPLES RETAILING 0.9%
Carrefour SA ................................................... France 1,036,811 62,875,427
----------------
FOOD PRODUCTS 5.7%
Cadbury Schweppes PLC .......................................... United Kingdom 4,497,511 48,134,080
f Farmer Brothers Co ............................................. United States 1,033,896 22,073,680
Groupe Danone .................................................. France 466,490 70,692,703
Nestle SA ...................................................... Switzerland 198,235 70,440,897
g Orkla ASA ...................................................... Norway 2,332,900 132,066,473
a Pan Fish ASA ................................................... Norway 72,384,735 66,167,328
----------------
409,575,161
----------------
HEALTH CARE EQUIPMENT & SUPPLIES 2.1%
h Bausch & Lomb Inc. ............................................. United States 637,690 33,198,141
a Boston Scientific Corp. ........................................ United States 2,901,870 49,854,127
The Cooper Cos. Inc. ........................................... United States 357,930 15,927,885
Hillenbrand Industries Inc. .................................... United States 889,128 50,618,057
----------------
149,598,210
----------------
HEALTH CARE PROVIDERS & SERVICES 1.7%
Aetna Inc. ..................................................... United States 451,300 19,487,134
Caremark Rx Inc. ............................................... United States 561,600 32,072,976
a Express Scripts Inc. ........................................... United States 405,000 28,998,000
a,c,d,g Kindred Healthcare Inc. ........................................ United States 1,639,289 39,322,445
a,c,d,g Kindred Healthcare Inc., options to purchase (shares):
exercise price $23.75, expiration date, 7/17/11 .............. United States 4,380 1,040
exercise price $26.00, expiration date, 1/01/12 .............. United States 1,314 --
exercise price $9.07, expiration date, 1/01/13 ............... United States 982 14,644
exercise price $25.99, expiration date, 1/01/14 .............. United States 650 --
exercise price $27.90, expiration date, 1/10/15 .............. United States 271 --
----------------
119,896,239
----------------
HOTELS RESTAURANTS & LEISURE 0.2%
a Trump Entertainment Resorts Inc. ............................... United States 895,133 16,327,226
----------------
Annual Report | 23
Mutual Beacon Fund
STATEMENT OF INVESTMENTS, DECEMBER 31, 2006 (CONTINUED)
- -----------------------------------------------------------------------------------------------------------------------------------
SHARES/WARRANTS/
COUNTRY CONTRACTS VALUE
- -----------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
COMMON STOCKS AND OTHER EQUITY INTERESTS (CONTINUED)
INDUSTRIAL CONGLOMERATES 2.5%
Siemens AG ..................................................... Germany 365,000 $ 36,425,458
Tyco International Ltd. ........................................ United States 4,540,860 138,042,144
----------------
174,467,602
----------------
INSURANCE 10.7%
a Alleghany Corp. ................................................ United States 166,286 60,461,590
a Berkshire Hathaway Inc., A ..................................... United States 741 81,502,590
a Berkshire Hathaway Inc., B ..................................... United States 38,925 142,699,050
Hartford Financial Services Group Inc. ......................... United States 538,210 50,220,375
Montpelier Re Holdings Ltd. .................................... Bermuda 388,350 7,227,194
Old Republic International Corp. ............................... United States 2,217,426 51,621,677
a,c,d Olympus Re Holdings Ltd. ....................................... Bermuda 106,700 106,700
Prudential Financial Inc. ...................................... United States 541,900 46,527,534
The St. Paul Travelers Cos. Inc. ............................... United States 686,210 36,842,615
c,d Symetra Financial .............................................. United States 511,600 60,476,236
White Mountains Insurance Group Ltd. ........................... United States 383,221 222,049,744
----------------
759,735,305
----------------
LEISURE EQUIPMENT & PRODUCTS 1.0%
Mattel Inc. .................................................... United States 3,010,472 68,217,296
----------------
MACHINERY 1.2%
a AGCO Corp. ..................................................... United States 2,695,850 83,409,599
----------------
MARINE 0.5%
A P Moller - Maersk A/S ........................................ Denmark 3,885 36,586,065
----------------
MEDIA 7.1%
a Cablevision Systems Corp., A ................................... United States 857,200 24,413,056
Clear Channel Communications Inc. .............................. United States 2,044,720 72,669,349
a Comcast Corp., A ............................................... United States 1,180,490 49,438,921
a Liberty Media Holding Corp.-Capital, A ......................... United States 347,868 34,084,107
News Corp., A .................................................. United States 5,881,090 126,325,813
Sun-Times Media Group Inc., A .................................. United States 985,458 4,838,599
Time Warner Inc. ............................................... United States 3,438,900 74,899,242
a,d TVMAX Holdings Inc. ............................................ United States 133,855 133,855
a Viacom Inc., B ................................................. United States 1,775,450 72,846,713
Washington Post Co., B ......................................... United States 65,625 48,930,000
----------------
508,579,655
----------------
METALS & MINING 0.9%
c,d,f,g Esmark Inc. .................................................... United States 7,869 6,479,256
Mittal Steel Co. NV ............................................ Netherlands 160,379 6,768,314
Phelps Dodge Corp. ............................................. United States 287,600 34,431,472
a,c,d,f PMG LLC ........................................................ United States 31,748 19,334,692
----------------
67,013,734
----------------
MULTI-UTILITIES & UNREGULATED POWER 1.7%
NorthWestern Corp. ............................................. United States 391,751 13,860,150
a,e NorthWestern Corp., Contingent Distribution .................... United States 11,863,900 1,239,714
a NorthWestern Corp., wts., 11/01/07 ............................. United States 21,154 240,944
24 | Annual Report
Mutual Beacon Fund
STATEMENT OF INVESTMENTS, DECEMBER 31, 2006 (CONTINUED)
- -----------------------------------------------------------------------------------------------------------------------------------
SHARES/WARRANTS/
COUNTRY CONTRACTS VALUE
- -----------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
COMMON STOCKS AND OTHER EQUITY INTERESTS (CONTINUED)
MULTI-UTILITIES & UNREGULATED POWER (CONTINUED)
RWE AG ......................................................... Germany 380,190 $ 41,886,052
Suez SA ........................................................ France 1,228,805 63,634,354
----------------
120,861,214
----------------
OIL, GAS & CONSUMABLE FUELS 0.2%
a,c,d,f Anchor Resources LLC ........................................... United States 69,184 --
Royal Dutch Shell PLC, A ....................................... United Kingdom 400,000 14,108,694
----------------
14,108,694
----------------
PAPER & FOREST PRODUCTS 3.6%
International Paper Co ......................................... United States 1,930,820 65,840,962
Weyerhaeuser Co ................................................ United States 2,709,391 191,418,474
----------------
257,259,436
----------------
PHARMACEUTICALS 2.7%
Pfizer Inc. .................................................... United States 3,928,130 101,738,567
Sanofi-Aventis ................................................. France 781,390 72,151,594
Valeant Pharmaceuticals International .......................... United States 997,800 17,202,072
----------------
191,092,233
----------------
REAL ESTATE 2.7%
a Alexander's Inc. ............................................... United States 38,800 16,282,420
d Canary Wharf Group PLC ......................................... United Kingdom 10,069,634 68,625,133
iStar Financial Inc. ............................................ United States 787,288 37,648,112
Reckson Associates Realty Corp. ................................ United States 162,800 7,423,680
The St. Joe Co ................................................. United States 695,598 37,263,185
Ventas Inc. .................................................... United States 608,900 25,768,648
----------------
193,011,178
----------------
ROAD & RAIL 1.6%
c,d,f Florida East Coast Industries Inc. ............................. United States 1,967,636 111,407,550
----------------
SOFTWARE 1.0%
Microsoft Corp. ................................................ United States 2,372,280 70,836,281
----------------
SPECIALTY RETAIL 0.1%
The Home Depot Inc. ............................................ United States 249,608 10,024,257
----------------
TEXTILES, APPAREL & LUXURY GOODS 0.1%
Christian Dior SA .............................................. France 72,087 7,684,044
----------------
THRIFTS & MORTGAGE FINANCE 2.5%
Hudson City Bancorp Inc. ....................................... United States 3,854,980 53,507,122
Sovereign Bancorp Inc. ......................................... United States 2,146,830 54,508,014
Washington Mutual Inc. ......................................... United States 1,524,900 69,367,701
----------------
177,382,837
----------------
TOBACCO 9.7%
Altadis SA ..................................................... Spain 2,658,610 139,151,594
i Altria Group Inc. .............................................. United States 1,902,149 163,242,427
British American Tobacco PLC ................................... United Kingdom 3,659,976 102,423,765
British American Tobacco PLC, ADR .............................. United Kingdom 40,400 2,289,064
Imperial Tobacco Group PLC ..................................... United Kingdom 2,532,443 99,684,127
Annual Report | 25
Mutual Beacon Fund
STATEMENT OF INVESTMENTS, DECEMBER 31, 2006 (CONTINUED)
- -----------------------------------------------------------------------------------------------------------------------------------
SHARES/WARRANTS/
COUNTRY CONTRACTS VALUE
- -----------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
COMMON STOCKS AND OTHER EQUITY INTERESTS (CONTINUED)
TOBACCO (CONTINUED)
Japan Tobacco Inc. ............................................. Japan 3,780 $ 18,259,335
KT&G Corp. ..................................................... South Korea 1,625,350 98,744,382
i Reynolds American Inc. ......................................... United States 1,054,904 69,064,565
----------------
692,859,259
----------------
TOTAL COMMON STOCKS AND OTHER EQUITY INTERESTS
(COST $4,399,610,785) 6,378,077,072
----------------
PREFERRED STOCKS 0.4%
DIVERSIFIED TELECOMMUNICATION SERVICES 0.0% j
c PTV Inc., 10.00%, pfd., A ...................................... United Kingdom 114,246 428,423
----------------
METALS & MINING 0.4%
c,d,f,g Esmark Inc., 8.00%, cvt. pfd., A ............................... United States 28,644 27,698,748
----------------
TOTAL PREFERRED STOCKS (COST $28,986,738) ...................... 28,127,171
----------------
------------------
PRINCIPAL AMOUNT k
------------------
CORPORATE BONDS & NOTES 1.6%
b ACE Aviation Holdings Inc., cvt., 144A, 4.25%, 6/01/35 ......... Canada 1,993,000 CAD 1,716,691
c,d Cerberus FIM Investors Auto Finance LLC, 12.00%, 11/22/13 ...... United States 12,683,413 12,683,413
c,d Cerberus FIM Investors Commercial Finance LLC,
12.00%, 11/22/13 ............................................. United States 1,629,506 1,629,506
c,d Cerberus FIM Investors Commercial Mortgage LLC,
12.00%, 11/22/13 ............................................. United States 2,788,196 2,788,196
c,d Cerberus FIM Investors Insurance LLC, 12.00%, 11/22/13 ......... United States 13,283,138 13,283,138
c,d Cerberus FIM Investors Rescap LLC, 12.00%, 11/22/13 ............ United States 28,173,439 28,173,439
c,d,f DecisionOne Corp., 12.00%, 4/15/10 ............................. United States 1,329,650 1,329,650
d,m Motor Coach Industries International Inc., FRN, 18.37%,
12/01/08 ..................................................... United States 30,503,962 31,266,561
Trump Entertainment Resorts Inc., 8.50%, 5/20/15 ............... United States 17,380,260 17,380,260
d TVMAX Holdings Inc., PIK,
11.50%, 1/30/07 .............................................. United States 257,109 257,109
14.00%, 1/30/07 .............................................. United States 744,982 744,982
----------------
TOTAL CORPORATE BONDS & NOTES (COST $111,991,507) 111,252,945
----------------
CORPORATE BONDS & NOTES IN REORGANIZATION 2.3%
l Adelphia Communications Corp.,
9.25%, 10/01/02 .............................................. United States 3,244,000 2,968,260
8.125%, 7/15/03 .............................................. United States 825,000 761,063
7.50%, 1/15/04 ............................................... United States 2,160,000 1,992,600
10.50%, 7/15/04 .............................................. United States 3,375,000 3,155,625
9.875%, 3/01/05 .............................................. United States 1,304,000 1,202,940
10.25%, 11/01/06 ............................................. United States 5,565,000 5,078,062
9.875%, 3/01/07 .............................................. United States 493,000 454,793
8.375%, 2/01/08 .............................................. United States 4,959,000 4,574,677
7.75%, 1/15/09 ............................................... United States 10,231,000 9,438,097
7.875%, 5/01/09 .............................................. United States 4,398,000 3,991,185
9.375%, 11/15/09 ............................................. United States 4,390,000 4,181,475
senior note, 10.875%, 10/01/10 ............................... United States 4,080,000 3,763,800
26 | Annual Report
Mutual Beacon Fund
STATEMENT OF INVESTMENTS, DECEMBER 31, 2006 (CONTINUED)
- -----------------------------------------------------------------------------------------------------------------------------------
COUNTRY PRINCIPAL AMOUNT k VALUE
- -----------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
CORPORATE BONDS & NOTES IN REORGANIZATION (CONTINUED)
l Adelphia Communications Corp., (continued)
senior note, 10.25%, 6/15/11 ................................. United States 4,305,000 $ 4,111,275
l Century Communications Corp.,
8.875%, 1/15/07 .............................................. United States 266,000 320,530
8.75%, 10/01/07 .............................................. United States 2,620,000 3,071,950
8.375%, 12/15/07 ............................................. United States 500,000 602,500
senior note, 9.50%, 3/01/05 .................................... United States 773,000 939,195
Series B, zero cpn., senior disc. note, 1/15/08 .............. United States 4,386,000 3,059,235
zero cpn., 3/15/03 ........................................... United States 8,441,000 9,010,767
l,m Collins & Aikman Products Co.,
Revolver, FRN, 11.50%, 8/31/09 ............................... United States 448,837 255,837
Tranche B1 Term Loan, FRN, 11.50%, 8/31/11 ................... United States 1,061,996 605,338
l Dana Corp.,
6.50%, 3/01/09 ............................................... United States 246,000 185,730
5.85%, 1/15/15 ............................................... United States 11,335,000 8,161,200
7.00%, 3/01/29 ............................................... United States 2,425,000 1,794,500
l Eurotunnel PLC,
Participating Loan Note, 1.00%, 4/30/40 ...................... United Kingdom 858,000 GBP 352,855
m S8 Tier 1 EFL2 Stabilization Note, FRN, 5.971%, 3/15/26 ...... United Kingdom 290,000 GBP 204,452
m Tier 2, FRN, 5.959%, 12/31/18 ................................ United Kingdom 7,592,095 GBP 14,886,563
m Tier 3, FRN, 5.895%, 12/31/25 ................................ United Kingdom 28,404,485 GBP 48,672,679
l Eurotunnel SA,
m S6 Tier 1 FM2 Stabilization Note, FRN, 4.187%, 3/15/26 ....... France 6,000 EUR 2,851
m S7 Tier 1 FM4 Stabilization Note, FRN, 4.187%, 3/15/26 ....... France 123,000 EUR 58,452
Senior Tranche H1 Term Loan (KfW Advance), 8.78%,
12/15/12 .................................................... France 605,300 EUR 809,014
m Tier 2 (LIBOR), FRN, 4.305%, 12/31/18 ........................ France 1,880,987 EUR 2,486,100
m Tier 2 (PIBOR), FRN, 4.291%, 12/31/18 ........................ France 832,034 EUR 1,099,700
m Tier 3 (LIBOR), FRN, 4.300%, 12/31/25 ........................ France 20,347,101 EUR 23,501,791
m Tier 3 (PIBOR), FRN, 4.304%, 12/31/25 ........................ France 1,048,320 EUR 1,210,855
l Safety Kleen Services, senior sub. note, 9.25%, 6/01/08 ........ United States 50,000 50
----------------
TOTAL CORPORATE BONDS & NOTES IN REORGANIZATION
(COST $119,452,686) 166,965,996
----------------
GOVERNMENT AGENCIES (COST $42,000,000) 0.6%
i Federal Home Loan Bank, 2.26% - 5.48%, 1/26/07 - 2/28/08 ....... United States 42,000,000 41,840,971
----------------
TOTAL LONG TERM INVESTMENTS (COST $4,702,041,716) 6,726,264,155
----------------
SHORT TERM INVESTMENTS (COST 330,441,771) 4.6%
U.S. GOVERNMENT AND AGENCY SECURITIES 4.6%
i,n Federal Home Loan Bank, 1/02/07 - 9/28/07 ...................... United States 332,441,000 330,580,354
----------------
TOTAL INVESTMENTS (COST $5,032,483,487) 99.0% .................. 7,056,844,509
OPTIONS WRITTEN 0.0% j ......................................... (33,920)
SECURITIES SOLD SHORT (3.5)% ................................... (251,532,278)
NET UNREALIZED LOSS ON FORWARD EXCHANGE
CONTRACTS (0.2)% ............................................. (15,747,943)
OTHER ASSETS, LESS LIABILITIES 4.7% ............................ 336,852,176
----------------
NET ASSETS 100.0% .............................................. $ 7,126,382,544
================
Annual Report | 27
Mutual Beacon Fund
STATEMENT OF INVESTMENTS, DECEMBER 31, 2006 (CONTINUED)
- -----------------------------------------------------------------------------------------------------------------------------------
COUNTRY CONTRACTS VALUE
- -----------------------------------------------------------------------------------------------------------------------------------
o OPTIONS WRITTEN 0.0% j
HEALTH CARE EQUIPMENT & SUPPLIES 0.0% j
Bausch & Lomb Inc., Feb. 55 Calls, 2/17/07 ..................... United States 174 $ 22,620
Bausch & Lomb Inc., Jan. 55 Calls, 1/20/07 ..................... United States 452 11,300
----------------
TOTAL OPTIONS WRITTEN (PREMIUMS RECEIVED $70,335) 33,920
----------------
-------------------
SHARES
-------------------
p SECURITIES SOLD SHORT 3.5%
DIVERSIFIED TELECOMMUNICATION SERVICES 1.7%
AT&T Inc. ...................................................... United States 3,341,193 $ 119,447,650
----------------
ELECTRIC UTILITIES 0.4%
FPL Group Inc. ................................................. United States 534,675 29,097,013
Iberdrola SA, Br ............................................... Spain 7,340 320,905
----------------
29,417,918
----------------
FOOD & STAPLES RETAILING 0.3%
CVS Corp. ...................................................... United States 704,003 21,760,732
----------------
FOOD PRODUCTS 0.5%
Kraft Foods Inc., A ............................................ United States 901,987 32,200,936
----------------
HEALTH CARE PROVIDERS & SERVICES 0.4%
a Medco Health Solutions Inc. .................................... United States 526,370 28,129,213
----------------
METALS & MINING 0.1%
Freeport-McMoRan Copper & Gold Inc., B ......................... United States 192,700 10,739,171
----------------
REAL ESTATE 0.0% j
SL Green Realty Corp. .......................................... United States 16,910 2,245,310
----------------
TEXTILES, APPAREL & LUXURY GOODS 0.1%
LVMH Moet Hennessy Louis Vuitton ............................... France 71,930 7,591,348
----------------
TOTAL SECURITIES SOLD SHORT (PROCEEDS $229,860,495) ............ $ 251,532,278
================
28 | Annual Report
Mutual Beacon Fund
STATEMENT OF INVESTMENTS, DECEMBER 31, 2006 (CONTINUED)
SELECTED CURRENCY ABBREVIATIONS
CAD - Canadian Dollar
EUR - Euro
GBP - British Pound
SELECTED PORTFOLIO ABBREVIATIONS
ADR - American Depository Receipt
FRN - Floating Rate Note
LIBOR - London InterBank Offered Rate
PIBOR - Paris InterBank Offered Rate
PIK - Payment In Kind
a Non-income producing during the twelve months ended December 31, 2006.
b Security was purchased pursuant to Rule 144A under the Securities Act of
1933 and may be sold in transactions exempt from registration only to
qualified institutional buyers or in a public offering registered under
the Securities Act of 1933. These securities have been deemed liquid under
guidelines approved by the Fund's Board of Directors. At December 31,
2006, the aggregate value of these securities was $3,224,983, representing
0.05% of net assets.
c See Note 11 regarding restricted securities.
d Security has been deemed illiquid because it may not be able to be sold
within seven days. At December 31, 2006, the aggregate value of these
securities was $526,578,869, representing 7.39% of net assets.
e Contingent distributions represent the right to receive additional
distributions, if any, during the reorganization of the underlying
company. Shares represent total underlying principal of debt securities.
f See Note 12 regarding holdings of 5% voting securities.
g See Note 13 regarding other considerations -- security board member.
h A portion or all of the security is held in connection with written option
contracts open at year end.
i See Note 1(f) regarding securities segregated with broker for securities
sold short.
j Rounds to less than 0.1% of net assets.
k The principal amount is stated in U.S. dollars unless otherwise indicated.
l See Note 10 regarding defaulted securities.
m The coupon rate shown represents the rate at period end.
n The security is traded on a discount basis with no stated coupon rate.
o See Note 1(e) regarding written options.
p See Note 1(f) regarding securities sold short.
q See Note 13 regarding other considerations -- credit committee
participation.
Annual Report |
The accompanying notes are an integral part of these financial statements. | 29
Mutual Beacon Fund
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
December 31, 2006
Assets:
Investments in securities:
Cost - Unaffiliated issuers ...................................................... $ 4,910,741,437
Cost - Controlled affiliated issuers (Note 12) ................................... 2,222,378
Cost - Non-controlled affiliated issuers (Note 12) ............................... 119,519,672
-----------------
Total cost of investments ........................................................ $ 5,032,483,487
-----------------
Value - Unaffiliated issuers (includes securities segregated
with broker for securities sold short in the amount of $150,739,326) ............ $ 6,832,603,712
Value - Controlled affiliated issuers (Note 12) .................................. 19,334,692
Value - Non-controlled affiliated issuers (Note 12) .............................. 204,906,105
-----------------
Total value of investments ....................................................... 7,056,844,509
Cash .............................................................................. 371,326
Cash on deposit with brokers for securities sold short ............................ 263,364,331
Foreign currency, at value (cost $50,654,705) ..................................... 50,828,885
Receivables:
Investment securities sold ....................................................... 42,626,055
Capital shares sold .............................................................. 11,171,306
Dividends and interest ........................................................... 7,983,787
Other ............................................................................ 1,227,951
Unrealized gain on forward exchange contracts (Note 8) ............................ 11,291,795
Due from broker - synthetic equity swaps (Note 7) ................................. 2,009
-----------------
Total assets .................................................................. 7,445,711,954
-----------------
Liabilities:
Payables:
Investment securities purchased ................................................. 23,146,533
Capital shares redeemed ......................................................... 9,274,553
Affiliates ...................................................................... 7,449,165
Options written, at value (premiums received $70,335) ............................ 33,920
Securities sold short, at value (proceeds $229,860,495) .......................... 251,532,278
Unrealized loss on forward exchange contracts (Note 8) ........................... 27,039,738
Accrued expenses and other liabilities ........................................... 853,223
-----------------
Total liabilities ............................................................ 319,329,410
-----------------
Net assets, at value ....................................................... $ 7,126,382,544
=================
Net assets consist of:
Paid-in capital ................................................................... $ 5,083,765,118
Undistributed net investment income ............................................... 955,331
Net unrealized appreciation (depreciation) ........................................ 1,987,229,608
Accumulated net realized gain (loss) .............................................. 54,432,487
-----------------
Net assets, at value ........................................................ $ 7,126,382,544
=================
30 | The accompanying notes are an integral part of these financial statements.
| Annual Report
Mutual Beacon Fund
FINANCIAL STATEMENTS (CONTINUED)
STATEMENT OF ASSETS AND LIABILITIES (CONTINUED)
December 31, 2006
CLASS Z:
Net assets, at value .............................................................. $ 3,925,029,438
=================
Shares outstanding ................................................................ 234,938,498
=================
Net asset value and maximum offering price per share a ............................ $ 16.71
=================
CLASS A:
Net assets, at value .............................................................. $ 2,176,658,349
=================
Shares outstanding ................................................................ 131,063,346
=================
Net asset value per share a ....................................................... $ 16.61
=================
Maximum offering price per share (net asset value per share / 94.25%) ............. $ 17.62
=================
CLASS B:
Net assets, at value .............................................................. $ 199,460,632
=================
Shares outstanding ................................................................ 12,331,775
=================
Net asset value and maximum offering price per share a ............................ $ 16.17
=================
CLASS C:
Net assets, at value .............................................................. $ 825,234,125
=================
Shares outstanding ................................................................ 50,144,205
=================
Net asset value and maximum offering price per share a ............................ $ 16.46
=================
a Redemption price is equal to net asset value less contingent deferred
sales charges, if applicable, and redemption fees retained by the Fund.
Annual Report |
The accompanying notes are an integral part of these financial statements. | 31
Mutual Beacon Fund
FINANCIAL STATEMENTS (CONTINUED)
STATEMENT OF OPERATIONS
for the year ended December 31, 2006
Investment income:
Dividends (net of foreign taxes of $6,433,913)
Unaffiliated issuers ............................................................. $ 125,314,182
Non-controlled affiliated issuers (Note 12) ...................................... 3,995,513
Interest Income (net of foreign taxes of $157)
Unaffiliated issuers ............................................................. 25,268,001
Non-controlled affiliated issuers (Note 12) ...................................... 152,477
Income from securities loaned - net ............................................... 1,286,473
Other income (Note 14) ............................................................ 508,191
-----------------
Total investment income ...................................................... 156,524,837
-----------------
Expenses:
Management fees (Note 3a) ......................................................... 37,944,785
Administrative fees (Note 3b) ..................................................... 4,887,851
Distribution fees (Note 3c)
Class A .......................................................................... 5,548,687
Class B .......................................................................... 1,893,357
Class C .......................................................................... 7,430,657
Transfer agent fees (Note 3e) ..................................................... 5,793,649
Custodian fees (Note 4) ........................................................... 816,441
Reports to shareholders ........................................................... 451,238
Registration and filing fees ...................................................... 304,424
Professional fees ................................................................. 1,804,235
Directors' fees and expenses ...................................................... 139,045
Dividends on securities sold short ................................................ 2,384,017
Other ............................................................................. 170,387
-----------------
Total expenses ............................................................... 69,568,773
Expense reductions (Note 4) .................................................. (18,019)
-----------------
Net expenses ............................................................... 69,550,754
-----------------
Net investment income ..................................................... 86,974,083
-----------------
Realized and unrealized gains (losses):
Net realized gain (loss) from:
Investments
Unaffiliated issuers ............................................................ 660,608,982
Non-controlled affiliated issuers (Note 12) ..................................... (1,447,734)
Controlled affiliated issuers (Note 12) ......................................... 2,346,866
Written options .................................................................. 1,010,376
Foreign currency transactions .................................................... (66,577,168)
Securities sold short ............................................................ (5,234,030)
Synthetic equity swaps ........................................................... 2,848,638
-----------------
Net realized gain (loss) .................................................... 593,555,930
-----------------
Net change in unrealized appreciation (depreciation) on:
Investments ...................................................................... 587,754,824
Translation of assets and liabilities denominated in foreign currencies .......... (49,620,472)
-----------------
Net change in unrealized appreciation (depreciation) ......................... 538,134,352
-----------------
Net realized and unrealized gain (loss) ........................................... 1,131,690,282
-----------------
Net increase (decrease) in net assets resulting from operations ................... $ 1,218,664,365
=================
32 | The accompanying notes are an integral part of these financial statements.
| Annual Report
Mutual Beacon Fund
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF CHANGES IN NET ASSETS
--------------------------------------
YEAR ENDED DECEMBER 31,
--------------------------------------
2006 2005
--------------------------------------
Increase (decrease) in net assets:
Operations:
Net investment income ............................................................ $ 86,974,083 $ 96,021,200
Net realized gain (loss) from investments, written options, securities
sold short, foreign currency transactions, and synthetic equity swaps ........... 593,555,930 625,478,594
Net change in unrealized appreciation (depreciation) on investments and
translation of assets and liabilities denominated in foreign currencies ......... 538,134,352 (221,336,916)
--------------------------------------
Net increase (decrease) in net assets resulting from operations .............. 1,218,664,365 500,162,878
======================================
Distributions to shareholders from:
Net investment income:
Class Z ......................................................................... (61,295,783) (60,342,727)
Class A ......................................................................... (28,014,668) (23,520,169)
Class B ......................................................................... (1,358,698) (1,530,106)
Class C ......................................................................... (5,635,292) (5,682,282)
Net realized gains:
Class Z ......................................................................... (367,390,486) (321,411,244)
Class A ......................................................................... (199,838,408) (152,696,307)
Class B ......................................................................... (19,518,901) (18,000,266)
Class C ......................................................................... (78,148,401) (66,098,869)
--------------------------------------
Total distributions to shareholders ............................................... (761,200,637) (649,281,970)
--------------------------------------
Capital share transactions: (Note 2)
Class Z ......................................................................... 223,773,762 155,432,764
Class A ......................................................................... 419,501,161 215,432,427
Class B ......................................................................... (303,929) 4,237,354
Class C ......................................................................... 75,680,025 57,084,985
--------------------------------------
Total capital share transactions .................................................. 718,651,019 432,187,530
--------------------------------------
Redemption fees ................................................................... 11,990 11,659
--------------------------------------
Net increase (decrease) in net assets ........................................ 1,176,126,737 283,080,097
Net assets
Beginning of year ................................................................. 5,950,255,807 5,667,175,710
--------------------------------------
End of year ....................................................................... $ 7,126,382,544 $ 5,950,255,807
======================================
Undistributed net investment income included in net assets:
End of year ....................................................................... $ 955,331 $ 4,564,461
======================================
Annual Report |
The accompanying notes are an integral part of these financial statements. | 33
Mutual Beacon Fund
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Franklin Mutual Series Fund Inc. (the Series Fund) is registered under the
Investment Company Act of 1940, as amended (the 1940 Act) as an open-end
investment company, consisting of six separate funds. The Mutual Beacon Fund
(the Fund) included in this report is diversified. The financial statements of
the remaining funds in the Series Fund are presented separately. The Fund offers
four classes of shares: Class Z, Class A, Class B and Class C. Each class of
shares differs by its initial sales load, contingent deferred sales charges,
distribution fees, voting rights on matters affecting a single class and its
exchange privilege.
The following summarizes the Fund's significant accounting policies.
A. SECURITY VALUATION
Securities listed on a securities exchange or on the NASDAQ National Market
System are valued at the last quoted sale price or the official closing price of
the day, respectively. Over-the- counter securities and listed securities for
which there is no reported sale are valued within the range of the most recent
quoted bid and ask prices. Securities that trade in multiple markets or on
multiple exchanges are valued according to the broadest and most representative
market.
Corporate debt securities and Government securities generally trade in the
over-the-counter market rather than on a securities exchange. The Fund may
utilize independent pricing services, quotations from bond dealers, and
information with respect to bond and note transactions, to assist in determining
a current market value for each security. The Fund's pricing services may use
valuation models or matrix pricing which considers information with respect to
comparable bond and note transactions, quotations from bond dealers, or by
reference to other securities that are considered comparable in such
characteristics as rating, interest rate and maturity date, option adjusted
spread models, prepayment projections, interest rate spreads and yield curves,
to determine current value.
Foreign securities are valued as of the close of trading on the foreign stock
exchange on which the security is primarily traded, or the NYSE, whichever is
earlier. If no sale is reported at that time, the foreign security will be
valued within the range of the most recent quoted bid and ask prices. The value
is then converted into its U.S. dollar equivalent at the foreign exchange rate
in effect at the close of the NYSE on the day that the value of the foreign
security is determined.
34 | Annual Report
Mutual Beacon Fund
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
A. SECURITY VALUATION (CONTINUED)
The Fund has procedures to determine the fair value of individual securities and
other assets for which market prices are not readily available or which may not
be reliably priced. Methods for valuing these securities may include:
fundamental analysis, matrix pricing, discounts from market prices of similar
securities, or discounts applied due to the nature and duration of restrictions
on the disposition of the securities. Due to the inherent uncertainty of
valuations of such securities, the fair values may differ significantly from the
values that would have been used had a ready market for such investments
existed. Occasionally, events occur between the time at which trading in a
security is completed and the close of the NYSE that might call into question
the availability (including the reliability) of the value of a portfolio
security held by the Fund. The investment manager monitors price movements
following the close of trading in foreign stock markets through a series of
country specific market proxies (such as baskets of American Depository
Receipts, futures contracts and exchange traded funds). These price movements
are measured against established trigger thresholds for each specific market
proxy to assist in determining if an event has occurred. If such an event
occurs, the securities may be valued using fair value procedures, which may
include the use of independent pricing services. All security valuation
procedures are approved by the Fund's 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, income and expense items denominated in foreign currencies are
translated into U.S. dollars at the exchange rate in effect on the transaction
date. Occasionally, events may impact the availability or reliability of foreign
exchange rates used to convert the U.S. dollar equivalent value. If such an
event occurs, the foreign exchange rate will be valued at fair value using
procedures established and approved by the Fund's Board of Directors.
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 on the
Statement of Operations.
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 denominated assets and liabilities other than investments in securities
held at the end of the reporting period.
Annual Report | 35
Mutual Beacon Fund
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
C. FOREIGN CURRENCY CONTRACTS
When the Fund purchases or sells foreign securities it may enter into foreign
exchange contracts to minimize foreign exchange risk from the trade date to the
settlement date of the transactions. A foreign exchange contract is an agreement
between two parties to exchange different currencies at an agreed upon exchange
rate at a future date. Realized and unrealized gains and losses on these
contracts are included in the Statement of Operations.
The Fund may also enter into forward exchange contracts to hedge against
fluctuations in foreign exchange rates or to gain exposure to certain foreign
currencies. These contracts are valued daily by the Fund and the unrealized
gains or losses on the contracts, as measured by the difference between the
contractual forward foreign exchange rates and the forward rates at the
reporting date, are included in the Statement of Assets and Liabilities.
Realized and unrealized gains and losses on these contracts are included in the
Statement of Operations.
The risks of these contracts include movement in the values of the foreign
currencies relative to the U.S. dollar and the possible inability of the
counterparties to fulfill their obligations under the contracts, which may be in
excess of the amount reflected in the Statement of Assets and Liabilities.
D. SYNTHETIC EQUITY SWAPS
The Fund may engage in synthetic equity swaps. Synthetic equity swaps 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 purchase or short sale of the underlying
security taken place. Upon entering into synthetic equity swaps, 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 ("margin account"). Periodically,
payments are made to recognize changes in value of the contract resulting from
interest on the notional value of the contract, market value changes in the
underlying security, and/or dividends paid by the issuer of the underlying
security. The Fund recognizes a realized gain or loss when cash is received
from, or paid to, the broker. Synthetic equity swaps are valued daily by the
Fund and the unrealized gains or losses on the contracts (as measured by the
difference between the contract amount plus or minus cash received or paid and
the market value of the underlying securities) are recorded in the Statement of
Operations. The margin account and any net unrealized gains or losses on open
synthetic equity swaps are included in the Statement of Assets and Liabilities.
The risks of entering into synthetic equity swaps include unfavorable price
movements in the underlying securities or the inability of the counterparties to
fulfill their obligations under the contract.
36 | Annual Report
Mutual Beacon Fund
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
E. OPTIONS
The Fund may purchase or write options. Options are contracts entitling the
holder to purchase or sell a specified number of shares or units of a particular
security at a specified price. Options purchased are recorded as investments;
options written (sold) are recorded as liabilities. Upon closing of an option,
other than by exercise, which results in a cash settlement, the difference
between the premium (original option value) 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. When
an option expires, the premium is realized as a gain for options written or as a
loss for options purchased. The risks include the possibility there may be an
illiquid options market or the inability of the counterparties to fulfill their
obligations under the contract. Writing options involves, to varying degrees,
elements of market risk in excess of the amount recognized in the Statement of
Assets and Liabilities.
F. SECURITIES SOLD SHORT
The Fund is engaged in selling securities short, which obligates the Fund to
replace a borrowed security with the same security at current market value. The
Fund incurs 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 realizes a gain if the price of the security declines between those
dates. Gains are limited to the price at which the Fund sold the security short,
while losses are potentially unlimited in size.
The Fund is required to establish a margin account with the broker lending the
security sold short. While the short sale is outstanding, the broker retains the
proceeds of the short sale and the Fund must maintain a deposit with broker
consisting of cash and securities having a value equal to a specified percentage
of the value of the securities sold short. The Fund is obligated to pay the
counterparty any dividends or interest due on securities sold short. Such
dividends and interest are recorded as an expense to the Fund.
G. SECURITIES LENDING
The Fund may loan securities to certain brokers through a securities lending
agent for which it receives initial cash collateral against the loaned
securities in an amount equal to at least 102% of the market value of the loaned
securities. Collateral is maintained over the life of the loan in an amount not
less than 100% of the market value of loaned securities, as determined at the
close of fund business each day; any additional collateral required due to
changes in security values is delivered to the fund on the next business day.
The Fund receives interest income from the investment of cash collateral,
adjusted by lender fees and broker rebates. The Fund bears the risk of loss with
respect to the investment of the collateral and the securities loaned. The
securities lending agent has agreed to indemnify the Fund in the case of default
of any securities borrower. At December 31, 2006, the Fund had no securities on
loan.
Annual Report | 37
Mutual Beacon Fund
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
H. INCOME TAXES
No provision has been made for U.S. income taxes because the Fund intends to
qualify as a regulated investment company under the Internal Revenue Code and to
distribute to shareholders substantially all of its taxable income and net
realized gains.
Foreign securities held by the Funds may be subject to foreign taxation on
dividend and interest income received. Foreign taxes, if any, are recorded based
on the tax regulations and rates that exist in the foreign markets in which the
Funds invests.
I. 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.
Interest income and estimated expenses are accrued daily. Amortization of
premium and accretion of discount on debt securities are included in interest
income. Dividend income and dividends declared on securities sold short, are
recorded on the ex-dividend date except that certain dividends from foreign
securities are recognized as soon as the Fund is notified of the ex-dividend
date. Distributions to shareholders are recorded on the ex-dividend date and are
determined according to income tax regulations (tax basis). Distributable
earnings determined on a tax basis may differ from earnings recorded in
accordance with accounting principles generally accepted in the United States.
These differences may be permanent or temporary. Permanent differences are
reclassified among capital accounts to reflect their tax character. These
reclassifications have no impact on net assets or the results of operations.
Temporary differences are not reclassified, as they may reverse in subsequent
periods.
Common expenses incurred by the Series Fund are allocated among the funds based
on the ratio of net assets of each fund to the combined net assets of the Series
Fund. Fund specific expenses are charged directly to the fund that incurred the
expense.
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. Differences in class-level
expenses may result in payment of different per share distributions by class.
J. ACCOUNTING ESTIMATES
The preparation of financial statements in accordance with accounting principles
generally accepted in the United States of America 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 expenses during the reporting period. Actual results could differ from those
estimates.
38 | Annual Report
Mutual Beacon Fund
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
K. REDEMPTION FEES
A short term trading redemption fee will be imposed, with some exceptions, on
any Fund shares that are redeemed or exchanged within seven calendar days
following their purchase date. The redemption fee is 2% of the amount redeemed.
Such fees are retained by the Fund and accounted for as an addition to paid-in
capital.
L. GUARANTEES AND INDEMNIFICATIONS
Under the Series Fund's organizational documents, its officers and directors are
indemnified by the Fund against certain liabilities arising out of the
performance of their duties to the Fund. Additionally, in the normal course of
business, the Fund enters into contracts with service providers that contain
general indemnification clauses. The Fund's maximum exposure under these
arrangements is unknown as this would involve future claims that may be made
against the Fund that have not yet occurred. Currently, the Fund expects the
risk of loss to be remote.
2. CAPITAL STOCK
At December 31, 2006, there were 1.55 billion shares authorized ($0.001 par
value). Transactions in the Fund's shares were as follows:
----------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
2006 2005
----------------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
----------------------------------------------------------------------
CLASS Z SHARES:
Shares sold ................................ 8,978,063 $ 149,701,821 9,627,199 $ 157,823,087
Shares issued in reinvestment of
distributions ............................. 24,275,024 398,131,632 22,556,761 353,149,844
Shares redeemed ............................ (19,597,258) (324,059,691) (21,717,045) (355,540,167)
----------------------------------------------------------------------
Net increase (decrease) .................... 13,655,829 $ 223,773,762 10,466,915 $ 155,432,764
======================================================================
CLASS A SHARES:
Shares sold ................................ 30,066,396 $ 499,708,886 20,638,795 $ 336,110,441
Shares issued in reinvestment of
distributions ............................. 13,328,007 217,422,834 10,784,005 167,935,388
Shares redeemed ............................ (18,083,631) (297,630,559) (17,798,261) (288,613,402)
----------------------------------------------------------------------
Net increase (decrease) .................... 25,310,772 $ 419,501,161 13,624,539 $ 215,432,427
======================================================================
CLASS B SHARES:
Shares sold ................................ 300,376 $ 4,821,000 441,856 $ 6,909,193
Shares issued in reinvestment of
distributions ............................. 1,200,866 19,045,401 1,187,718 18,082,957
Shares redeemed ............................ (1,510,592) (24,170,330) (1,309,590) (20,754,796)
----------------------------------------------------------------------
Net increase (decrease) .................... (9,350) $ (303,929) 319,984 $ 4,237,354
======================================================================
Annual Report | 39
Mutual Beacon Fund
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. CAPITAL STOCK (CONTINUED)
----------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
2006 2005
----------------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
----------------------------------------------------------------------
CLASS C SHARES:
Shares sold ................................ 6,123,512 $ 100,268,679 5,683,466 $ 91,278,462
Shares issued in reinvestment of
distributions ............................. 4,646,095 74,988,754 4,219,758 65,245,399
Shares redeemed ............................ (6,132,053) (99,577,408) (6,181,561) (99,438,876)
----------------------------------------------------------------------
Net increase (decrease) .................... 4,637,554 $ 75,680,025 3,721,663 $ 57,084,985
======================================================================
3. TRANSACTIONS WITH AFFILIATES
Franklin Resources, Inc. is the holding company for various subsidiaries that
together are referred to as Franklin Templeton Investments. Certain officers and
directors of the Series Fund are also officers and/or directors of the following
subsidiaries:
- -----------------------------------------------------------------------------------------
SUBSIDIARY AFFILIATION
- -----------------------------------------------------------------------------------------
Franklin Mutual Advisers, LLC (Franklin Mutual) Investment manager
Franklin Templeton Services, LLC (FT Services) Administrative manager
Franklin Templeton Distributors, Inc. (Distributors) Principal underwriter
Franklin Templeton Investor Services, LLC (Investor Services) Transfer agent
A. MANAGEMENT FEES
The Fund pays an investment management fee to Franklin Mutual based on the
average daily net assets of the Fund as follows:
- ----------------------------------------------------------------------
ANNUALIZED FEE RATE NET ASSETS
- ----------------------------------------------------------------------
0.600% Up to and including $5 billion
0.570% Over $5 billion, up to and including $7 billion
0.550% Over $7 billion, up to and including $10 billion
0.540% In excess of $10 billion
B. ADMINISTRATIVE FEES
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:
- -------------------------------------------------------------------------
ANNUALIZED FEE RATE NET ASSETS
- -------------------------------------------------------------------------
0.150% Up to and including $200 million
0.135% Over $200 million, up to and including $700 million
0.100% Over $700 million, up to and including $1.2 billion
0.075% In excess of $1.2 billion
40 | Annual Report
Mutual Beacon Fund
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. TRANSACTIONS WITH AFFILIATES (CONTINUED)
C. DISTRIBUTION FEES
The Fund's Board of Directors has adopted distribution plans for each share
class with the exception of Class Z shares, pursuant to Rule 12b-1 under the
1940 Act. Under the Fund's Class A reimbursement distribution plan, the Fund
reimburses Distributors for costs incurred in connection with the servicing,
sale and distribution of the Fund's shares up to the maximum annual plan rate.
Under the Class A reimbursement distribution plan, costs exceeding the maximum
for the current plan year cannot be reimbursed in subsequent periods.
In addition, under the Fund's Class B and C compensation distribution plans, the
Fund pays Distributors for costs incurred in connection with the servicing, sale
and distribution of the Fund's shares up to the maximum annual plan rate for
each class.
The maximum annual plan rates, based on the average daily net assets, for each
class, are as follows:
Class A ................................................. 0.35%
Class B ................................................. 1.00%
Class C ................................................. 1.00%
D. SALES CHARGES/UNDERWRITING AGREEMENTS
Distributors has advised the Fund of the following commission transactions
related to the sales and redemptions of the Fund's shares for the year:
Sales charge retained net of commisions paid to
unaffiliated broker/dealers ....................... $1,373,485
Contingent deferred sales charges retained ......... $ 233,094
E. TRANSFER AGENT FEES
The Fund paid transfer agent fees of $5,793,649, of which, $3,686,647 was
retained by Investor Services:
4. EXPENSE OFFSET ARRANGEMENT
The Fund has entered into an arrangement with its custodian whereby credits
realized as a result of uninvested cash balances are used to reduce a portion of
the Fund's custodian expenses. During the year ended December 31, 2006, the
custodian fees were reduced as noted in the Statement of Operations.
Annual Report | 41
Mutual Beacon Fund
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. INCOME TAXES
The tax character of distributions paid during the years ended December 31, 2006
and 2005, was as follows:
-------------------------------
2006 2005
-------------------------------
Distributions paid from:
Ordinary income ................... $ 140,317,569 $ 127,255,911
Long term capital gain ............ 620,883,068 522,026,059
-------------------------------
$ 761,200,637 $ 649,281,970
===============================
At December 31, 2006, the cost of investments, net unrealized appreciation
(depreciation), undistributed ordinary income, and undistributed long term
capital gains for income tax purposes were as follows:
Cost of investments ................................ $ 5,051,431,285
===============
Unrealized appreciation ............................ $ 2,090,926,941
Unrealized depreciation ............................ (85,513,717)
---------------
Net unrealized appreciation (depreciation) ......... $ 2,005,413,224
===============
Undistributed ordinary income ...................... $ 7,180,348
Undistributed long term capital gains .............. 55,430,223
---------------
Distributable earnings ............................. $ 62,610,571
===============
Net investment income differs for financial statement and tax purposes primarily
due to differing treatments of defaulted securities, foreign currency
transactions, bond discounts and premiums, and certain dividends on securities
sold short.
Net realized gains (losses) differ for financial statement and tax purposes
primarily due to differing treatments of wash sales, foreign currency
transactions, bond discounts and premiums, and certain dividends on securities
sold short.
6. INVESTMENT TRANSACTIONS
Purchases and sales of investments (excluding short term securities and
securities sold short) for the year ended December 31, 2006, aggregated
$2,575,378,544 and $2,510,412,371, respectively.
Transactions in options written during the year ended December 31, 2006, were as
follows:
------------------------
NUMBER OF PREMIUMS
CONTRACTS RECEIVED
------------------------
Options outstanding at December 31, 2005 .. 300 $ 25,199
Options written ........................... 15,517 2,322,812
Options expired ........................... (7,396) (813,264)
Options exercised ......................... (5,554) (1,202,895)
Options closed ............................ (2,241) (261,517)
------------------------
Options outstanding at December 31, 2006 .. 626 $ 70,335
========================
42 | Annual Report
Mutual Beacon Fund
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. SYNTHETIC EQUITY SWAPS
As of December 31, 2006, the Fund had the following synthetic equity swaps
outstanding:
NUMBER OF NOTIONAL UNREALIZED
CONTRACTS VALUE GAIN
- -----------------------------------------------------------------------------------------------------
CONTRACTS TO BUY
Scottish Power PLC (7.46 GBP) .............................. 44,593 $ 653,219 $ 2,009
------------
Net unrealized gain (loss) ........................................................... $ 2,009
------------
8. FORWARD EXCHANGE CONTRACTS
At December 31, 2006, the Fund had the following forward exchange contracts
outstanding:
CONTRACT SETTLEMENT UNREALIZED UNREALIZED
AMOUNT DATE GAIN LOSS
- -----------------------------------------------------------------------------------------------------
CONTRACTS TO BUY
267,047,250 Japanese Yen ........... $ 2,300,000 3/19/07 $ (32,859)
CONTRACTS TO SELL
27,200,000 British Pound .......... 51,605,744 1/08/07 (1,665,134)
18,501,307 British Pound .......... 34,580,175 1/16/07 (1,656,464)
35,480,687 Euro ................... 44,862,912 1/18/07 (2,021,418)
649,600,440 Danish Krone ........... 110,519,271 1/23/07 (4,636,372)
69,012,820 Euro ................... 90,660,416 1/24/07 (561,492)
33,700,000 British Pound .......... 66,333,117 2/08/07 $ 321,257
27,857,500 British Pound .......... 53,123,381 2/08/07 (1,444,138)
383,592,910 Swedish Krona .......... 56,313,604 2/15/07 152,962
11,850,000 British Pound .......... 23,264,568 2/20/07 52,113
66,954,362 Euro ................... 84,975,069 2/20/07 (3,629,685)
46,115,000 Euro ................... 59,407,188 2/26/07 (1,634,973)
612,500,000 Norwegian Krone ........ 100,819,729 3/07/07 2,304,560 (15,747,943)
34,135,469 Swiss Franc ............ 28,884,943 3/07/07 700,280
133,200,000 Euro ................... 170,521,720 3/13/07 (5,900,847)
481,968,460 Swedish Krona .......... 70,878,850 3/15/07 207,470
12,402,259,836 Japanese Yen ........... 107,850,608 3/19/07 2,559,626
69,829,243 Japanese Yen ........... 592,340 3/19/07 (248)
1,547,437,500 Korean Won ............. 1,687,500 3/22/07 20,634
45,655,488,125 Korean Won ............. 48,350,000 3/22/07 (829,088)
32,344,869 Canadian Dollar ........ 29,121,087 3/26/07 1,292,014
71,813,957 Euro ................... 95,445,413 4/13/07 213,801
49,261,686 Euro ................... 62,376,722 4/18/07 (2,960,807)
43,414,903 Euro ................... 58,188,997 5/24/07 528,677
4,350,000 Euro ................... 5,775,060 5/24/07 (2,273)
40,000,000 Euro ................... 53,736,000 6/06/07 585,229
938,455,750 Taiwan Dollar .......... 29,525,000 6/06/07 724,718
433,169,648 Norwegian Krone ........ 71,509,617 6/07/07 1,628,454
37,239,400 Norwegian Krone ........ 6,000,000 6/07/07 (63,940)
-------------------------
Unrealized gain (loss) on forward exchange contracts ........ 11,291,795 (27,039,738)
-------------------------
Net unrealized gain (loss) on forward exchange contracts ............. $(15,747,943)
============
Annual Report | 43
Mutual Beacon Fund
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
9. CONCENTRATION OF RISK
Investing in foreign securities may include certain risks and considerations not
typically associated with investing in U.S. securities, such as fluctuating
currency values and changing local and regional economic, political and social
conditions, which may result in greater market volatility. In addition, certain
foreign securities may not be as liquid as U.S. securities.
10. DEFAULTED SECURITIES
The Fund may purchase the pre-default or defaulted debt of distressed companies.
Distressed companies are financially troubled and are about to be/or are already
involved in financial restructuring or bankruptcy. The Fund does not accrue
income on these securities, if it becomes probable that the income will not be
collected. Risks associated with purchasing these securities include the
possibility that the bankruptcy or other restructuring process takes longer than
expected, or that distributions in restructuring are less than anticipated,
either or both of which may result in unfavorable consequences to the Fund. At
December 31, 2006, the aggregate value of these securities was $166,965,996,
representing 2.34% of the Fund's net assets. For information as to specific
securities, see the accompanying Statement of Investments.
11. RESTRICTED SECURITIES
The Fund may invest in securities that are restricted under the Securities Act
of 1933 (the 1933 Act) or which are subject to legal, contractual, or other
agreed upon restrictions on resale. Restricted securities are often purchased in
private placement transactions, and cannot be sold without prior registration
unless the sale is pursuant to an exemption under the 1933 Act. Disposal of
these securities may require greater effort and expense, and prompt sale at an
acceptable price may be difficult. The Fund may have registration rights for
restricted securities. The issuer generally incurs all registration costs.
At December 31, 2006, the Fund held investments in restricted securities,
excluding 144A securities deemed to be liquid, valued in accordance with
procedures approved by the Fund's Board of Directors as reflecting fair value,
as follows:
- --------------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT,
SHARES, WARRANTS ACQUISITION
AND CONTRACTS ISSUER DATES COST VALUE
- --------------------------------------------------------------------------------------------------------
439,477 AboveNet Inc. .................. 10/02/01 - 11/25/03 $ 20,497,153 $ 13,465,575
613 AboveNet Inc., options to
purchase (shares), exercise
price $20.95, expiration date,
9/09/13 ...................... 4/17/06 - 9/08/06 -- 16,582
14,770 AboveNet Inc., wts., 9/08/08 ... 10/02/01 - 10/02/03 1,836,931 472,640
17,376 AboveNet Inc., wts., 9/08/10 ... 10/02/01 - 10/02/03 1,972,095 500,429
69,184 Anchor Resources LLC ........... 6/29/04 -- --
4,250,824 Cerberus FIM Investors Auto
Finance LLC .................. 11/20/06 4,250,824 4,306,425
44 | Annual Report
Mutual Beacon Fund
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
11. RESTRICTED SECURITIES (CONTINUED)
- --------------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT,
SHARES, WARRANTS ACQUISITION
AND CONTRACTS ISSUER DATES COST VALUE
- --------------------------------------------------------------------------------------------------------
12,683,413 Cerberus FIM Investors Auto
Finance LLC, 12.00%,
11/22/13 ..................... 11/21/06 $ 12,683,413 $ 12,683,413
543,168 Cerberus FIM Investors
Commercial Finance LLC ....... 11/20/06 543,169 550,273
1,629,506 Cerberus FIM Investors
Commercial Finance LLC,
12.00%, 11/22/13 ............. 11/20/06 1,629,506 1,629,506
929,398 Cerberus FIM Investors
Commercial Mortgage LLC ...... 11/20/06 929,399 941,555
2,788,196 Cerberus FIM Investors
Commercial Mortgage LLC,
12.00%, 11/22/13 ............. 11/20/06 2,788,196 2,788,196
4,427,713 Cerberus FIM Investors
Insurance LLC ................ 11/20/06 4,427,713 4,485,627
13,283,138 Cerberus FIM Investors
Insurance LLC, 12.00%,
11/22/13 ..................... 11/20/06 13,283,138 13,283,138
9,391,146 Cerberus FIM Investors Rescap
LLC .......................... 11/20/06 9,391,146 9,513,982
28,173,439 Cerberus FIM Investors Rescap
LLC, 12.00%, 11/22/13 ........ 11/20/06 28,173,439 28,173,439
1,142,353 DecisionOne Corp ............... 3/12/99 - 7/18/00 793,798 814,498
1,329,650 DecisionOne Corp. 12.00%,
4/15/10 ...................... 3/12/99 - 10/16/06 3,377,252 1,329,650
7,869 Esmark Inc. .................... 7/28/06 8,338,296 6,479,256
28,644 Esmark Inc., 8.00%, cvt.
Pfd., A ...................... 11/08/04 - 9/29/06 28,644,000 27,698,748
13,981 FE Capital holdings Limited .... 8/29/03 - 7/29/04 -- 18,902,721
1,157,143 First Chicago Bancorp .......... 11/16/06 16,200,002 16,200,002
1,967,636 Florida East Coast Industries
Inc. ......................... 1/17/86 - 7/15/04 46,735,956 111,407,550
2,387,711 International Automotive
Components Group Brazil,
LLC .......................... 4/13/06 - 8/21/06 1,428,931 9,837,369
326,435 International Automotive
Components Group Japan,
LLC .......................... 9/26/06 - 11/14/06 2,840,936 2,742,345
10,149,082 International Automotive
Components Group LLC ......... 1/12/06 - 10/16/06 10,154,061 10,149,082
Annual Report | 45
Mutual Beacon Fund
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
11. RESTRICTED SECURITIES (CONTINUED)
- --------------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT,
SHARES, WARRANTS ACQUISITION
AND CONTRACTS ISSUER DATES COST VALUE
- --------------------------------------------------------------------------------------------------------
1,639,289 Kindred Healthcare Inc. ........ 4/28/99 - 3/29/06 $ 19,585,289 $ 39,322,445
Kindred Healthcare Inc.,
options to purchase (shares):
4,380 exercise price $23.75,
expiration date, 7/17/11 ..... 7/17/02 - 7/17/05 -- 1,040
1,314 exercise price $26.00,
expiration date, 1/01/12 ..... 1/13/03 - 1/01/06 -- --
982 exercise price $9.07,
expiration date, 1/01/13 ..... 1/01/04 - 1/01/06 -- 14,644
650 exercise price $25.99,
expiration date, 1/01/14 ..... 1/04/05 - 1/01/06 -- --
271 exercise price $27.90,
expiration date, 1/10/15 ..... 1/06/06 -- --
67,420 NCB Warrant Holdings Ltd., A ... 12/16/05 -- 7,940,053
106,700 Olympus Re Holdings Ltd. ....... 12/19/01 10,670,000 106,700
347,643 Owens Corning Inc. ............. 10/20/06 - 12/20/06 9,806,465 9,874,799
310,123 Owens Corning Inc., options to
sell (shares), exercise price
$25.00, expiration date,
4/06/07 ....................... 12/20/06 27,808 --
310,123 Owens Corning Inc., options to
purchase (shares), exercise
price $37.50, expiration date,
1/02/08 ....................... 12/20/06 10,814 --
31,748 PMG LLC ........................ 3/22/04 2,222,378 19,334,692
114,246 PTV Inc., 10.00%, pfd, A ....... 1/25/02 - 3/06/02 342,738 428,423
511,600 Symetra Financial .............. 7/27/04 51,160,000 60,476,236
------------
TOTAL RESTRICTED SECURITIES (6.12% OF NET ASSETS) .................... $435,871,033
============
46 | Annual Report
Mutual Beacon Fund
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
12. HOLDINGS OF 5% VOTING SECURITIES OF PORTFOLIO COMPANIES
The Investment Company Act of 1940 defines "affiliated companies" to include
investments in portfolio companies in which a fund owns 5% or more of the
outstanding voting securities. Investments in "affiliated companies" for the
Fund for the year ended December 31, 2006 were as shown below.
- -----------------------------------------------------------------------------------------------------------------------------------
NUMBER OF NUMBER OF
SHARES/PRINCIPAL SHARES/
AMOUNT HELD PRINCIPAL REALIZED
AT BEGINNING GROSS GROSS AMOUNT HELD VALUE AT INVESTMENT CAPITAL
NAME OF ISSUER OF YEAR ADDITIONS REDUCTIONS AT END OF YEAR END OF YEAR INCOME GAINS (LOSS)
- -----------------------------------------------------------------------------------------------------------------------------------
CONTROLLED AFFILIATES a
PMG LLC ...................... 48,890 -- 17,142 31,748 $ 19,334,692 $ -- $ 2,346,866
NON-CONTROLLED AFFILIATES
Anchor Resources LLC ......... 69,184 -- -- 69,184 -- 358,037 --
DecisionOne Corp. ............ 1,142,353 -- -- 1,142,353 814,498 -- --
DecisionOne Corp., 12.00%,
4/15/10 ..................... 1,240,025 89,625 -- 1,329,650 1,329,650 152,477 --
Esmark Inc. .................. -- 7,869 -- 7,869 6,479,256 62,952 --
Esmark Inc., 8.00%, cvt.
pdf., A ..................... 28,644 -- -- 28,644 27,698,748 2,603,856 --
Farmer Brothers Co. .......... 1,033,896 -- -- 1,033,896 22,073,680 439,406 --
FE Capital Holdings Ltd. ..... 13,981 -- -- 13,981 18,902,721 -- --
FHC Deleware Inc. ............ 507,977 -- 507,977 -- -- -- (1,447,734)
First Chicago Bancorp......... -- 1,157,143 -- 1,157,143 16,200,002 -- --
Florida East Coast Industries,
Inc. ........................ 1,967,636 -- -- 1,967,636 111,407,550 531,262 --
---------------------------------------
TOTAL NON-CONTROLLED AFFILIATES ..................................................... $204,906,105 $4,147,990 $ (1,447,734)
---------------------------------------
TOTAL AFFILIATED SECURITIES (3.15% OF NET ASSETS)..................................... $224,240,797 $4,147,990 $ 899,132
=======================================
a Issuer in which the Fund owns 25% or more of the outstanding voting
securities.
13. OTHER CONSIDERATIONS
Directors or employees of Franklin Mutual, as the Fund's Investment Manager, may
serve as members on the board of directors of certain companies in which the
Fund invests and/or may represent the Fund in certain corporate negotiations. As
a result of this involvement, such individuals may be in possession of certain
material non-public information which, pursuant to the Fund's policies and the
requirements of the federal securities laws, could prevent the Fund from trading
in the securities of such companies for limited or extended periods of time. The
securities have been identified on the accompanying Statement of Investments.
Directors or employees of Franklin Mutual, as the Fund's Investment Manager,
serve as members of various bondholders' steering committees, on credit
committees, and represent the funds in certain corporate restructuring
negotiations. As a result of this involvement, such individuals may be in
possession of certain material non-public information. If the Fund's Investment
Manager, while in possession of such information, seeks to buy or sell any of
these securities, it will comply with all applicable federal securities laws.
The securities have been identified on the accompanying Statement of
Investments.
Annual Report | 47
Mutual Beacon Fund
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
14. REGULATORY MATTERS
As part of various investigations by a number of federal, state, and foreign
regulators and governmental entities, including the Securities and Exchange
Commission ("SEC"), relating to certain practices in the mutual fund industry,
including late trading, market timing and marketing support payments to
securities dealers who sell fund shares ("marketing support"), Franklin
Resources, Inc. and certain of its subsidiaries (collectively, the "Company"),
entered into settlements with certain of those regulators. Specifically, the
Company entered into settlements with the SEC, among others, concerning market
timing and marketing support.
On June 23, 2006, the SEC approved the proposed plan of distribution for the
marketing support settlement, and disbursement of the settlement monies to the
designated funds, in accordance with the terms and conditions of that settlement
and plan, was completed in September 2006 and is recorded as other income.
The plan of distribution for the market timing settlement is currently under
review by the SEC staff. After publication of notice of the plan and a 30-day
comment period, the proposed plan of distribution will be submitted to the SEC
for approval. Following the SEC's approval of the plan of distribution, with
modifications as appropriate, distribution of the settlement monies will begin
in accordance with the terms and conditions of the settlement and plan.
In addition, the Company, as well as most of the mutual funds within Franklin
Templeton Investments and certain current or former officers, Company directors,
fund directors, and employees, have been named in private lawsuits (styled as
shareholder class actions, or as derivative actions on behalf of either the
named funds or Franklin Resources, Inc.). The lawsuits relate to the industry
practices referenced above, as well as to allegedly excessive commissions and
advisory and distribution fees.
The Company and fund management believe that the claims made in each of the
private lawsuits referenced above are without merit and intend to defend against
them vigorously. The Company cannot predict with certainty the eventual outcome
of these lawsuits, nor whether they will have a material negative impact on the
Company. If it is determined that the Company bears responsibility for any
unlawful or inappropriate conduct that caused losses to the Fund, it is
committed to making the Fund or its shareholders whole, as appropriate.
48 | Annual Report
Mutual Beacon Fund
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
15. NEW ACCOUNTING PRONOUNCEMENTS
In July 2006, the Financial Accounting Standards Board (FASB) issued FASB
Interpretation No. 48, "Accounting for Uncertainty in Income Taxes -- an
Interpretation of FASB Statement No. 109" ("FIN 48"), which clarifies the
accounting for uncertainty in tax positions taken or expected to be taken in a
tax return. FIN 48 provides guidance on the measurement, recognition,
classification and disclosure of tax positions, along with accounting for the
related interest and penalties. FIN 48 is effective for fiscal years beginning
after December 15, 2006, and is to be applied to all open tax years as of the
date of effectiveness. On December 22, 2006, the Securities and Exchange
Commission extended the implementation date to no later than the last net asset
value calculation in the first semi-annual reporting period in 2007. The Fund is
currently evaluating the impact, if any, of applying the various provisions of
FIN 48.
In September 2006, the FASB issued FASB Statement No. 157, "Fair Value
Measurement" ("SFAS 157"), which defines fair value, establishes a framework for
measuring fair value, and expands disclosures about fair value measurements.
SFAS 157 is effective for fiscal years beginning after November 15, 2007, and
interim periods within those fiscal years. The Fund believes the adoption of
SFAS 157 will have no material impact on its financial statements.
Annual Report | 49
Mutual Beacon Fund
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
TO THE BOARD OF DIRECTORS OF FRANKLIN MUTUAL SERIES FUND INC.
AND SHAREHOLDERS OF THE MUTUAL BEACON FUND:
We have audited the accompanying statement of assets and liabilities of the
Mutual Beacon Fund (one of the portfolio constituting the Franklin Mutual Series
Fund Inc.) (the "Fund"), including the statement of investments, as of December
31, 2006, and the related statement of operations for the year then ended, the
statements of changes in net assets for each of the two years in the period then
ended, and the financial highlights for each of the five years in the period
then ended. 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 the standards of the Public Company
Accounting Oversight Board (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. We were
not engaged to perform an audit of the Fund's internal control over financial
reporting. Our audits included consideration of internal control over financial
reporting as a basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the
effectiveness of the Fund's internal control over financial reporting.
Accordingly, we express no such opinion. An audit also includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements and financial highlights, assessing the accounting principles used
and significant estimates made by management, and evaluating the overall
financial statement presentation. Our procedures included confirmation of
securities owned as of December 31, 2006, by correspondence with the custodian
and brokers or by other appropriate auditing procedures where replies from the
brokers were not received. 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 the
Mutual Beacon Fund of the Franklin Mutual Series Fund Inc. at December 31, 2006,
the results of its operations for the year then ended, the changes in its net
assets for each of the two years in the period then ended, and the financial
highlights for each of the five years in the period then ended, in conformity
with U.S. generally accepted accounting principles.
/s/ Ernst & Young LLP
Boston, Massachusetts
February 20, 2007
50 | Annual Report
Mutual Beacon Fund
TAX DESIGNATION (UNAUDITED)
Under Section 852(b)(3)(C) of the Internal Revenue Code (Code), the Fund
designates the maximum amount allowable but no less than $534,166,658 as a long
term capital gain dividend for the fiscal year ended December 31, 2006.
Under Section 854(b)(2) of the Code, the Fund designates the maximum amount
allowable but no less than $104,725,245 as qualified dividends for purposes of
the maximum rate under Section 1(h)(11) of the Code for the fiscal year ended
December 31, 2006. In January 2007, shareholders will receive Form 1099-DIV
which will include their share of qualified dividends distributed during the
calendar year 2006. Shareholders are advised to check with their tax advisors
for information on the treatment of these amounts on their individual income tax
returns.
Under Section 871(k)(1)(C) of the Code, the Fund designates the maximum amount
allowable but no less than $23,643,156 as interest related dividends for
purposes of the tax imposed under Section 871(a)(1)(A) of the Code for the
fiscal year ended December 31, 2006.
Under Section 871(k)(2)(C) of the Code, the Fund designates the maximum amount
allowable but no less than $35,699,203 as a short term capital gain dividend for
purposes of the tax imposed under Section 871(a)(1)(A) of the Code for the
fiscal year ended December 31, 2006.
Under Section 854(b)(2) of the Code, the Fund designates 45.52% of the ordinary
income dividends as income qualifying for the dividends received deduction for
the fiscal year ended December 31, 2006.
Annual Report | 51
Mutual Beacon Fund
BOARD MEMBERS AND OFFICERS
The name, year of birth and address of the officers and board members, as well
as their affiliations, positions held with the Fund, principal occupations
during the past five years and number of portfolios overseen in the Franklin
Templeton Investments fund complex are shown below.
INDEPENDENT BOARD MEMBERS
- ------------------------------------------------------------------------------------------------------------------------------------
NUMBER OF PORTFOLIOS IN
NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN
AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- ------------------------------------------------------------------------------------------------------------------------------------
EDWARD I. ALTMAN, PH.D. (1941) Director Since 1987 7 Director, A.T.D. Inc. (financial
101 John F. Kennedy Parkway technology and investment company).
Short Hills, NJ 07078-2789
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Max L. Heine Professor of Finance and Director of The Credit and Debt Markets Research Program, Salomon Center, Stern School of
Business, New York University; editor and author of numerous financial publications; financial consultant; and serves on the
Investment Advisory Committee of the New York State Common Retirement Fund; and FORMERLY, Vice Director, NYU Salomon Center, Stern
School of Business, New York University.
- ------------------------------------------------------------------------------------------------------------------------------------
ANN TORRE BATES (1958) Director Since 1994 7 Independent Director, SLM
101 John F. Kennedy Parkway Corporation (Sallie Mae) and Allied
Short Hills, NJ 07078-2789 Capital Corporation (financial
services).
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Independent strategic and financial consultant; and FORMERLY, Executive Vice President and Chief Financial Officer, NHP Incorporated
(manager of multifamily housing) (1995-1997); and Vice President and Treasurer, US Airways, Inc. (until 1995).
- ------------------------------------------------------------------------------------------------------------------------------------
BURTON J. GREENWALD (1929) Director Since 2002 13 Director, Franklin Templeton Emerging
101 John F. Kennedy Parkway Markets Debt Opportunities Fund PLC
Short Hills, NJ 07078-2789 and Fiduciary International Ireland
Limited.
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Managing Director, B.J. Greenwald Associates (management consultants to the financial services industry) and FORMERLY, Chairman,
Fiduciary Trust International Funds; Executive Vice President, L.F. Rothschild Fund Management, Inc.; President and Director, Merit
Mutual Funds; President, Underwriting Division and Director, National Securities & Research Corporation; Governor, Investment
Company Institute and Chairman, ICI Public Information Committee.
- ------------------------------------------------------------------------------------------------------------------------------------
BRUCE A. MACPHERSON (1930) Director Since 1974 7 None
101 John F. Kennedy Parkway
Short Hills, NJ 07078-2789
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Retired, former Chairman, A.A. MacPherson, Inc., Canton, MA (representative for electrical manufacturers).
- ------------------------------------------------------------------------------------------------------------------------------------
CHARLES RUBENS II (1930) Director Since 1998 13 None
101 John F. Kennedy Parkway
Short Hills, NJ 07078-2789
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Private investor.
- ------------------------------------------------------------------------------------------------------------------------------------
52 | Annual Report
- ------------------------------------------------------------------------------------------------------------------------------------
NUMBER OF PORTFOLIOS IN
NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN
AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- ------------------------------------------------------------------------------------------------------------------------------------
ROBERT E. WADE (1946) Director and Director since 30 Director, El Oro and Exploration Co.,
101 John F. Kennedy Parkway Chairman of 1991 and p.l.c. (investments) and ARC Wireless
Short Hills, NJ 07078-2789 the Board Chairman of the Solutions, Inc. (wireless components
Board since and network products).
2005
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Practicing attorney.
- ------------------------------------------------------------------------------------------------------------------------------------
INTERESTED BOARD MEMBERS AND OFFICERS
- ------------------------------------------------------------------------------------------------------------------------------------
NUMBER OF PORTFOLIOS IN
NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN
AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- ------------------------------------------------------------------------------------------------------------------------------------
**WILLIAM J. LIPPMAN (1925) Director Since 1996 13 None
One Parker Plaza, 9th Floor
Fort Lee, NJ 07024-2920
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
President, Franklin Advisory Services, LLC; Director, Templeton Worldwide, Inc.; and officer and/or director or trustee, as the case
may be, of four of the investment companies in Franklin Templeton Investments.
- ------------------------------------------------------------------------------------------------------------------------------------
PHILIPPE BRUGERE-TRELAT (1949) Vice Since 2005 Not Applicable Not Applicable
101 John F. Kennedy Parkway, President
Short Hills, NJ 07078-2789
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Vice President, Franklin Mutual Advisers, LLC; Portfolio Manager of Eurovest SA (French registered Investment Company, Sicav); and
officer of two of the investment companies in Franklin Templeton Investments.
- ------------------------------------------------------------------------------------------------------------------------------------
JAMES M. DAVIS (1952) Chief Chief Compliance Not Applicable Not Applicable
One Franklin Parkway Compliance Officer since
San Mateo, CA 94403-1906 Officer and 2004 and Vice
Vice President President - AML
- AML Compliance since
Compliance February 2006
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Director, Global Compliance, Franklin Resources, Inc.; officer of some of the other subsidiaries of Franklin Resources, Inc. and of
46 of the investment companies in Franklin Templeton Investments; and FORMERLY, Director of Compliance, Franklin Resources, Inc.
(1994-2001).
- ------------------------------------------------------------------------------------------------------------------------------------
MICHAEL J. EMBLER (1964) Senior Vice Since 2005 Not Applicable Not Applicable
101 John F. Kennedy Parkway President
Short Hills, NJ 07078-2789 and Chief
Investment
Officer
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Senior Vice President and Chief Investment Officer, Franklin Mutual Advisers, LLC; and officer of two of the investment companies in
Franklin Templeton Investments.
- ------------------------------------------------------------------------------------------------------------------------------------
Annual Report | 53
- ------------------------------------------------------------------------------------------------------------------------------------
NUMBER OF PORTFOLIOS IN
NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN
AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- ------------------------------------------------------------------------------------------------------------------------------------
JIMMY D. GAMBILL (1947) Senior Vice Since 2002 Not Applicable Not Applicable
500 East Broward Blvd. President
Suite 2100 and Chief
Fort Lauderdale, FL Executive
33394-3091 Officer -
Finance and
Administration
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
President, Franklin Templeton Services, LLC; Senior Vice President, Templeton Worldwide, Inc.; and officer of some of the other
subsidiaries of Franklin Resources, Inc. and of 46 of the investment companies in Franklin Templeton Investments.
- ------------------------------------------------------------------------------------------------------------------------------------
DAVID P. GOSS (1947) Vice President Since 2000 Not Applicable Not Applicable
One Franklin Parkway
San Mateo, CA 94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Senior Associate General Counsel, Franklin Templeton Investments; officer and director of one of the subsidiaries of Franklin
Resources, Inc.; and officer of 46 of the investment companies in Franklin Templeton Investments.
- ------------------------------------------------------------------------------------------------------------------------------------
STEVEN J. GRAY (1955) Secretary Since 2005 Not Applicable Not Applicable
One Franklin Parkway
San Mateo, CA 94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Senior Associate General Counsel, Franklin Templeton Investments; and officer of 41 of the investment companies in Franklin
Templeton Investments.
- ------------------------------------------------------------------------------------------------------------------------------------
BARBARA J. GREEN (1947) Vice President Since 2000 Not Applicable Not Applicable
One Franklin Parkway
San Mateo, CA 94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Vice President, Deputy General Counsel and Secretary, Franklin Resources, Inc.; Secretary and Senior Vice President, Templeton
Worldwide, Inc.; Secretary, Franklin Advisers, Inc., Franklin Advisory Services, LLC, Franklin Investment Advisory Services, LLC,
Franklin Mutual Advisers, LLC, Franklin Templeton Institutional, LLC, Franklin Templeton Investor Services, LLC, Franklin Templeton
Services, LLC, Franklin Templeton Distributors, Inc., Templeton Investment Counsel, LLC, and Templeton/Franklin Investment Services,
Inc.; Vice President, Templeton Global Advisors Limited; and officer of some of the other subsidiaries of Franklin Resources, Inc.
and of 46 of the investment companies in Franklin Templeton Investments; and FORMERLY, Deputy Director, Division of Investment
Management, Executive Assistant and Senior Advisor to the Chairman, Counselor to the Chairman, Special Counsel and Attorney Fellow,
U.S. Securities and Exchange Commission (1986-1995); Attorney, Rogers & Wells (until 1986); and Judicial Clerk, U.S. District Court
(District of Massachusetts) (until 1979).
- ------------------------------------------------------------------------------------------------------------------------------------
PETER A. LANGERMAN (1955) President Since 2005 Not Applicable Not Applicable
101 John F. Kennedy Parkway and Chief
Short Hills, NJ 07078-2702 Executive
Officer -
Investment
Management
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Chairman of the Board, Chief Executive Officer and President, Franklin Mutual Advisers, LLC; and officer of two of the investment
companies in Franklin Templeton Investments; and FORMERLY, Director, New Jersey's Division of Investment.
- ------------------------------------------------------------------------------------------------------------------------------------
54 | Annual Report
- ------------------------------------------------------------------------------------------------------------------------------------
NUMBER OF PORTFOLIOS IN
NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN
AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- ------------------------------------------------------------------------------------------------------------------------------------
GREGORY R. SEWARD (1956) Treasurer Since 2005 Not Applicable Not Applicable
500 East Broward Blvd.
Suite 2100
Fort Lauderdale, FL 33394-3091
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Vice President, Franklin Templeton Services, LLC; officer of 16 of the investment companies in Franklin Templeton Investments; and
FORMERLY, Vice President, JPMorgan Chase (2000-2004) and American General Financial Group (1991-2000).
- ------------------------------------------------------------------------------------------------------------------------------------
CRAIG S. TYLE (1960) Vice President Since 2005 Not Applicable Not Applicable
One Franklin Parkway
San Mateo, CA 94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
General Counsel and Executive Vice President, Franklin Resources, Inc.; officer of some of the other subsidiaries of Franklin
Resources, Inc. and of 46 of the investment companies in Franklin Templeton Investments; and FORMERLY, Partner, Shearman & Sterling,
LLP (2004-2005); and General Counsel, Investment Company Institute (ICI) (1997-2004).
- ------------------------------------------------------------------------------------------------------------------------------------
GALEN G. VETTER (1951) Chief Since 2004 Not Applicable Not Applicable
500 East Broward Blvd. Financial
Suite 2100 Officer and
Fort Lauderdale, FL 33394-3091 Chief
Accounting
Officer
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Senior Vice President, Franklin Templeton Services, LLC; officer of 46 of the investment companies in Franklin Templeton
Investments; and FORMERLY, Managing Director, RSM McGladrey, Inc. (1999-2004); and Partner, McGladrey & Pullen, LLP (1979-1987 and
1991-2004).
- ------------------------------------------------------------------------------------------------------------------------------------
* We base the number of portfolios on each separate series of the U.S.
registered investment companies within the Franklin Templeton Investments
fund complex. These portfolios have a common investment manager or
affiliated investment managers.
** William J. Lippman is considered to be an interested person of Mutual
Series under the federal securities laws due to his position as an officer
of some of the subsidiaries of Franklin Resources, Inc., which is the
parent company of Mutual Series' investment manager and distributor.
Note: Subsequent to December 31, 2006, Leonard Rubin and Anne M. Tatlock ceased
to be a director of the Fund.
THE FUND'S BOARD OF DIRECTORS HAS DETERMINED THAT CERTAIN OF THE MEMBERS OF THE
AUDIT COMMITTEE, INCLUDING ANN TORRE BATES, ARE AUDIT COMMITTEE FINANCIAL
EXPERTS, AND "INDEPENDENT," UNDER THOSE PROVISIONS OF THE SARBANES-OXLEY ACT OF
2002, AND THE RULES AND FORM AMENDMENTS ADOPTED BY THE SECURITIES AND EXCHANGE
COMMISSION, RELATING TO AUDIT COMMITTEE FINANCIAL EXPERTS.
THE STATEMENT OF ADDITIONAL INFORMATION (SAI) INCLUDES ADDITIONAL INFORMATION
ABOUT THE BOARD MEMBERS AND IS AVAILABLE, WITHOUT CHARGE, UPON REQUEST.
SHAREHOLDERS MAY CALL 1-800/DIAL BEN (1-800/342-5236) TO REQUEST THE SAI.
Annual Report | 55
Mutual Beacon Fund
SHAREHOLDER INFORMATION
PROXY VOTING POLICIES AND PROCEDURES
The Fund has established Proxy Voting Policies and Procedures ("Policies") that
the Fund uses to determine how to vote proxies relating to portfolio securities.
Shareholders may view the Fund's complete Policies online at
franklintempleton.com. Alternatively, shareholders may request copies of the
Policies free of charge by calling the Proxy Group collect at 1-954/527-7678 or
by sending a written request to: Franklin Templeton Companies, LLC, 500 East
Broward Boulevard, Suite 1500, Fort Lauderdale, FL 33394, Attention: Proxy
Group. Copies of the Fund's proxy voting records are also made available online
at franklintempleton.com and posted on the U.S. Securities and Exchange
Commission's website at sec.gov and reflect the most recent 12-month period
ended June 30.
QUARTERLY STATEMENT OF INVESTMENTS
The Fund files a complete statement of investments with the U.S. Securities and
Exchange Commission for the first and third quarters for each fiscal year on
Form N-Q. Shareholders may view the filed Form N-Q by visiting the Commission's
website at sec.gov. The filed form may also be viewed and copied at the
Commission's Public Reference Room in Washington, DC. Information regarding the
operations of the Public Reference Room may be obtained by calling
1-800/SEC-0330.
56 | Annual Report
Literature Request
LITERATURE REQUEST. TO RECEIVE A BROCHURE AND PROSPECTUS, PLEASE CALL US AT
1-800/DIAL BEN(R) (1-800/342-5236) OR VISIT FRANKLINTEMPLETON.COM. INVESTORS
SHOULD CAREFULLY CONSIDER A FUND'S INVESTMENT GOALS, RISKS, CHARGES AND EXPENSES
BEFORE INVESTING. THE PROSPECTUS CONTAINS THIS AND OTHER INFORMATION. PLEASE
CAREFULLY READ THE PROSPECTUS BEFORE INVESTING. To ensure the highest quality of
service, we may monitor, record and access telephone calls to or from our
service departments. These calls can be identified by the presence of a regular
beeping tone.
FRANKLIN TEMPLETON INVESTMENTS
INTERNATIONAL
Mutual European Fund
Templeton BRIC Fund
Templeton China World Fund
Templeton Developing Markets Trust
Templeton Emerging Markets Small Cap Fund
Templeton Foreign Fund
Templeton Foreign Smaller Companies Fund
Templeton International (Ex EM) Fund 1
GLOBAL
Mutual Discovery Fund
Templeton Global Long-Short Fund
Templeton Global Opportunities Trust
Templeton Global Smaller Companies Fund
Templeton Growth Fund
Templeton World Fund
GROWTH
Franklin Aggressive Growth Fund
Franklin Capital Growth Fund
Franklin Flex Cap Growth Fund
Franklin Small-Mid Cap Growth Fund
Franklin Small Cap Growth Fund II 1
VALUE
Franklin Balance Sheet Investment Fund 2
Franklin Equity Income Fund
Franklin Large Cap Value Fund
Franklin MicroCap Value Fund 2
Franklin MidCap Value Fund
Franklin Small Cap Value Fund
Mutual Beacon Fund
Mutual Qualified Fund
Mutual Recovery Fund 3
Mutual Shares Fund
BLEND
Franklin Balanced Fund
Franklin Blue Chip Fund 1
Franklin Convertible Securities Fund
Franklin Growth Fund
Franklin Rising Dividends Fund
Franklin U.S. Long-Short Fund
SECTOR
Franklin Biotechnology Discovery Fund
Franklin DynaTech Fund
Franklin Global Communications Fund
Franklin Global Health Care Fund
Franklin Global Real Estate
Fund Franklin Gold and Precious Metals Fund
Franklin Natural Resources Fund
Franklin Real Estate Securities Fund
Franklin Technology Fund
Franklin Utilities Fund
Mutual Financial Services Fund
ASSET ALLOCATION
Franklin Templeton Corefolio Allocation Fund
Franklin Templeton Founding Funds Allocation Fund
Franklin Templeton Perspectives Allocation Fund
TARGET FUNDS
Franklin Templeton Conservative Target Fund
Franklin Templeton Growth Target Fund
Franklin Templeton Moderate Target Fund
RETIREMENT TARGET FUNDS
Franklin Templeton 2015 Retirement Target Fund
Franklin Templeton 2025 Retirement Target Fund
Franklin Templeton 2035 Retirement Target Fund
Franklin Templeton 2045 Retirement Target Fund
INCOME
Franklin Adjustable U.S. Government
Securities Fund 4
Franklin Floating Rate Daily Access Fund
Franklin High Income Fund 5
Franklin Income Fund
Franklin Limited Maturity
U.S. Government Securities Fund 4
Franklin Low Duration Total Return Fund
Franklin Real Return Fund
Franklin Strategic Income Fund
Franklin Strategic Mortgage Portfolio
Franklin Templeton Hard Currency Fund
Franklin Total Return Fund
Franklin U.S. Government Securities Fund 4
Templeton Global Bond Fund
Templeton Income Fund
TAX-FREE INCOME 6
NATIONAL FUNDS
Double Tax-Free Income Fund
Federal Tax-Free Income Fund
High Yield Tax-Free Income Fund
Insured Tax-Free Income Fund 7
LIMITED-TERM FUNDS
California Limited-Term Tax-Free Income Fund
Federal Limited-Term Tax-Free Income Fund
New York Limited-Term Tax-Free Income Fund
INTERMEDIATE-TERM FUNDS
California Intermediate-Term Tax-Free Income Fund
Federal Intermediate-Term Tax-Free Income Fund
New York Intermediate-Term Tax-Free Income Fund
STATE-SPECIFIC
Alabama
Arizona
California 8
Colorado
Connecticut
Florida 8
Georgia
Kentucky
Louisiana
Maryland
Massachusetts 7
Michigan 7
Minnesota 7
Missouri
New Jersey
New York 8
North Carolina
Ohio 7
Oregon
Pennsylvania
Tennessee
Virginia
INSURANCE FUNDS
Franklin Templeton Variable Insurance Products
Trust 9
1. The fund is closed to new investors. Existing shareholders can continue
adding to their accounts.
2. The fund is only open to existing shareholders and select retirement
plans.
3. The fund is a continuously offered, closed-end fund. Shares may be
purchased daily; there is no daily redemption. However, each quarter,
pending board approval, the fund will authorize the repurchase of 5%-25%
of the outstanding number of shares. Investors may tender all or a portion
of their shares during the tender period.
4. An investment in the fund is neither insured nor guaranteed by the U.S.
government or by any other entity or institution.
5. Effective 10/1/06, Franklin's AGE High Income Fund changed its name to
Franklin High Income Fund. The fund's investment goal and strategy
remained the same.
6. For investors subject to the alternative minimum tax, a small portion of
fund dividends may be taxable. Distributions of capital gains are
generally taxable.
7. Portfolio of insured municipal securities.
8. These funds are available in two or more variations, including long-term
portfolios, portfolios of insured securities, a high-yield portfolio (CA)
and limited-term, intermediate-term and money market portfolios (CA and
NY).
9. The funds of the Franklin Templeton Variable Insurance Products Trust are
generally available only through insurance company variable contracts.
01/07 Not part of the annual report
[LOGO](R)
FRANKLIN TEMPLETON One Franklin Parkway
INVESTMENTS San Mateo, CA 94403-1906
o WANT TO RECEIVE THIS DOCUMENT FASTER VIA EMAIL?
Eligible shareholders can sign up for eDelivery at
franklintempleton.com. See inside for details.
ANNUAL REPORT AND SHAREHOLDER LETTER
MUTUAL BEACON FUND
INVESTMENT MANAGER
Franklin Mutual Advisers, LLC
101 John F. Kennedy Parkway
Short Hills, NJ 07078
DISTRIBUTOR
Franklin Templeton Distributors, Inc.
1-800/DIAL BEN(R)
franklintempleton.com
SHAREHOLDER SERVICES
1-800/632-2301 - (Class A, B & C)
1-800/448-FUND - (Class Z)
Authorized for distribution only when accompanied or preceded by a prospectus.
Investors should carefully consider a fund's investment goals, risks, charges
and expenses before investing. The prospectus contains this and other
information; please read it carefully before investing.
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
identified by the presence of a regular beeping tone.
476 A2006 02/07
MUTUAL DISCOVERY FUND
[GRAPHIC OMITTED]
- --------------------------------------------------------------------------------
DECEMBER 31, 2006
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
ANNUAL REPORT AND SHAREHOLDER LETTER | GLOBAL
- --------------------------------------------------------------------------------
WANT TO RECEIVE THIS
DOCUMENT FASTER VIA EMAIL?
MUTUAL DISCOVERY FUND
Eligible shareholders can
sign up for eDelivery at
franklintempleton.com.
See inside for details.
- --------------------------------------------------------------------------------
[LOGO](R)
FRANKLIN TEMPLETON
INVESTMENTS
Franklin o Templeton o MUTUAL SERIES
Thank You For Your
Continued Participation
At Mutual Series, we are pleased so many investors
share our long-term investment philosophy and have
remained shareholders for many years. Your ongoing
support plays a significant role in contributing
to the funds' success.
SPECIALIZED EXPERTISE Mutual Series is part of Franklin Templeton
Investments, which offers the specialized
expertise of three world-class investment
management groups -- Franklin, Templeton and
Mutual Series. Mutual Series is dedicated to a
unique style of value investing, searching
aggressively for opportunity among what we believe
are undervalued stocks, as well as arbitrage
situations and distressed securities. Franklin is
a recognized leader in fixed income investing and
also brings expertise in growth- and value-style
U.S. equity investing. Templeton pioneered
international investing and, with offices in over
25 countries, offers investors a truly global
perspective.
TRUE DIVERSIFICATION Because these management groups work independently
and adhere to different investment approaches,
Franklin, Templeton and Mutual Series funds
typically have distinct portfolios. That's why the
funds can be used to build truly diversified
allocation plans covering every major asset class.
RELIABILITY YOU CAN TRUST Franklin Templeton Investments seeks to
consistently provide investors with exceptional
risk-adjusted returns over the long term, as well
as the reliable, accurate and personal service
that has helped the firm become one of the most
trusted names in financial services.
- ------------------------------------------------------- ------------------------
MUTUAL FUNDS | RETIREMENT PLANS | 529 COLLEGE SAVINGS PLANS | SEPARATE ACCOUNTS
- ------------------------------------------------------- ------------------------
[GRAPHIC OMITTED]
Annual Report
Mutual Discovery Fund
YOUR FUND'S GOAL AND MAIN INVESTMENTS: Mutual Discovery Fund seeks capital
appreciation by investing mainly in equity securities of companies of any nation
the Fund's managers believe are at prices below their intrinsic value. The Fund
may invest up to 100% of its assets in foreign securities.
- --------------------------------------------------------------------------------
PERFORMANCE DATA REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE FUTURE
RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU MAY HAVE
A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY DIFFER FROM
FIGURES SHOWN. PLEASE VISIT FRANKLINTEMPLETON.COM OR CALL 1-800/342-5236 FOR
MOST RECENT MONTH-END PERFORMANCE.
- --------------------------------------------------------------------------------
We are pleased to bring you Mutual Discovery Fund's annual report for the fiscal
year ended December 31, 2006.
PERFORMANCE OVERVIEW
Mutual Discovery Fund - Class Z posted a +23.43% cumulative total return for the
12 months ended December 31, 2006. The Fund outperformed its benchmarks, the
Standard & Poor's 500 Index (S&P 500) and the Morgan Stanley Capital
International (MSCI) World Index, which returned +15.78% and +20.65% for the
same period. 1 You can find the Fund's long-term performance data in the
Performance Summary beginning on page 11.
ECONOMIC AND MARKET OVERVIEW
The global economy grew in 2006, although gross domestic product growth slowed
in the U.S. while it accelerated in Europe. The economic drivers remained
consistent over the past four years: strong corporate and consumer demand,
reasonably low inflation, an improving labor market, and a relatively moderate
interest rate environment, despite recent interest rate hikes by many of the
world's central banks. However, the economy also faced headwinds from elevated
energy prices, higher global interest rates and a weaker U.S. housing market.
These factors dampened investor confidence mid-year, when many equity markets
declined before rebounding later in the year.
1. Source: Standard & Poor's Micropal. The S&P 500 consists of 500 stocks
chosen for market size, liquidity and industry group representation. Each
stock's weight in the index is proportionate to its market value. The S&P
500 is one of the most widely used benchmarks of U.S. equity performance.
The MSCI World Index is a free float-adjusted, market
capitalization-weighted index designed to measure equity market
performance in global developed markets. The indexes are unmanaged and
include reinvested dividends. One cannot invest directly in an index, nor
is an index representative of the Fund's portfolio.
THE DOLLAR VALUE, NUMBER OF SHARES OR PRINCIPAL AMOUNT, AND NAMES OF ALL
PORTFOLIO HOLDINGS ARE LISTED IN THE FUND'S STATEMENT OF INVESTMENTS (SOI). THE
SOI BEGINS ON PAGE 23.
4 | Annual Report
Despite such challenges, global economic activity was healthy. Strong global
liquidity -- whether petrodollars, corporate cash, private equity, household
savings or central banks' reserves -- continued to search for a home. Largely as
a result, bond yield spreads over U.S. Treasuries narrowed, and equity and
commodity markets rose in the latter part of the year. The shift from risk
aversion to risk tolerance was concurrent with the U.S. Federal Reserve Board's
decisions since June to hold the federal funds target rate at 5.25%, as well as
with lower oil prices in the second half of the year.
Narrowing corporate credit spreads globally reflected greater risk tolerance,
while abundant cash supplies in the capital markets contributed to record global
merger and acquisition activity in 2006. The total value of deals announced as a
result of hostile takeovers, private equity buyouts and broad corporate
consolidation was $3.8 trillion. 2 This figure surpassed the $3.4 trillion mark
set in 2000. 2 Announced deals from private equity alone reached a record $700
billion, more than double the record set in 2005 and 20 times greater than a
decade ago. 3
With this economic backdrop, the non-U.S. equity markets -- including emerging
markets that remained a major magnet for global fund flows -- led global equity
markets to end 2006 on a strong note, and all major regions delivered
double-digit total returns for the year. Stock market indexes in the U.S. and
most European countries reached six-year highs in the fourth quarter, and many
emerging market indexes in Asia, Europe and Latin America neared or reached
all-time highs.
INVESTMENT STRATEGY
At Mutual Series, we are committed to our distinctive value approach to
investing, which we believe can generate above-average risk-adjusted returns
over time for our shareholders. Our major investment strategy is investing in
undervalued stocks. When selecting undervalued equities, we are always attracted
to fundamentally strong companies with healthy balance sheets, high-quality
assets, substantial free cash flow and shareholder-oriented management teams and
whose stocks are trading at discounts to our assessment of the companies'
intrinsic or business value. We also look for asset rich companies whose shares
may be trading at depressed levels due to concerns over short-term earnings
disappointments, litigation, management strategy or other perceived negatives.
This strict value approach is not only intended
2. Source: "Can M&A's 'Best of Times' Get Better?," THE WALL STREET JOURNAL,
1/2/07.
3. Source: "TPG tops buy-out league with $101bn," THE WALL STREET JOURNAL,
12/27/06.
GEOGRAPHIC BREAKDOWN
Based on Total Net Assets as of 12/31/06
[THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.]
U.S. 25.3%
France 9.6%
U.K. 8.3%
Germany 6.4%
South Korea 5.8%
Norway 4.6%
Japan 4.3%
Hong Kong 3.7%
Netherlands 3.4%
Switzerland 3.1%
Sweden 2.1%
Denmark 2.0%
Canada 1.8%
Spain 1.5%
Bermuda 1.5%
Belgium 1.4%
South Africa 1.3%
Italy 1.1%
Mexico 1.1%
Taiwan 1.0%
Other 2.3%
Short-Term Investments & Other Net Assets 8.4%
Annual Report | 5
TOP 10 SECTORS/INDUSTRIES
Based on Equity Securities as of 12/31/06
- --------------------------------------------------------------------------------
% OF TOTAL
NET ASSETS
- --------------------------------------------------------------------------------
Tobacco 10.4%
- --------------------------------------------------------------------------------
Food Products 8.9%
- --------------------------------------------------------------------------------
Commercial Banks 8.1%
- --------------------------------------------------------------------------------
Insurance 6.3%
- --------------------------------------------------------------------------------
Beverages 4.7%
- --------------------------------------------------------------------------------
Diversified Financial Services 4.4%
- --------------------------------------------------------------------------------
Media 4.3%
- --------------------------------------------------------------------------------
Real Estate 4.2%
- --------------------------------------------------------------------------------
Metals & Mining 3.2%
- --------------------------------------------------------------------------------
Diversified Telecommunication Services 2.9%
- --------------------------------------------------------------------------------
to improve the likelihood of upside potential, but it is also intended to reduce
the risk of substantial declines. While the vast majority of our undervalued
equity investments are made in publicly traded companies globally, we may invest
occasionally in privately held companies as well.
We complement this more traditional investment strategy with two others. One is
distressed investing, a highly specialized field that has proven quite
profitable during certain periods over the years. Distressed investing is
complex and can take many forms. The most common distressed investment the Fund
undertakes is the purchase of financially troubled or bankrupt companies' debt
at a substantial discount to face value. After the financially distressed
company is reorganized, often in bankruptcy court, the old debt is typically
replaced with new securities issued by the financially stronger company.
The other piece of our investment strategy is participating in arbitrage
situations, another highly specialized field. When companies announce proposed
mergers or takeovers, commonly referred to as "deals," the target company may
trade at a discount to the bid it ultimately accepts. One form of arbitrage
involves purchasing the target company's stock when it is trading below the
value it would receive in a deal. In keeping with our commitment to a relatively
conservative investment approach, we typically focus our arbitrage efforts on
announced deals, and eschew rumored deals or other situations we consider
relatively risky.
In addition, we will generally seek to hedge the Fund's currency exposure when
we deem it advantageous, to focus our efforts on analyzing business fundamentals
and assessing the value of company assets and liabilities.
MANAGER'S DISCUSSION
During the year under review, the largest contributor to Fund performance was
our equity portfolio. Three investments that performed well were Orkla, a
Norwegian conglomerate; Groupe Danone, a French food company; and Carlsberg, a
Danish brewer.
Orkla's stock price appreciated 29% in local currency during the year under
review. Several Orkla divisions performed well in 2006, including the specialty
materials division, which benefited from higher aluminum and hydroelectricity
prices and from the restructured aluminum business. In addition, the company's
investment portfolio appreciated significantly during the year. Aside from these
positive factors, Orkla experienced three corporate events during the period
that we believe highlighted the company's value. In May, Renewable Energy
Corporation (REC), the leading global supplier of solar-grade silicon and
6 | Annual Report
wafers, completed an initial public offering (IPO). Driven by strong demand for
solar panels, REC's share price appreciated 20% since May's IPO through
period-end. Orkla, which owns a 23.5% stake in REC, benefited from the share
price appreciation. In July, Orkla divested most of its media assets at what we
believed was an attractive price, and many investors considered the asset sale a
positive step toward making Orkla a more focused company. Finally, in November,
Orkla created a joint venture with Alcoa for its soft alloy business that it
believes has the potential to become a global leader in its field and
significant potential for cost savings. Although Orkla has improved its
operations and become more focused, the company's shares traded at a significant
discount to their intrinsic value at period-end in our assessment.
Groupe Danone produces yogurt, biscuits and bottled water. The company ranks
first in global yogurt sales, which represent 55% of Danone's overall sales,
with an 18% market share that is about four times larger than its closest
competitor. We believe that given its scale, Danone not only has a purchasing
advantage, but also can leverage its relationships with distributors to
cross-sell products and further increase market share. Additionally, consumers
seem to like the company's offerings in the healthy and functional food
categories. Danone was also expanding geographically to new markets in China,
India, Russia and Mexico, as well as introducing dairy products in the U.S. that
recently experienced growth rates above 20%. In November, company management
increased its sales growth target from 5%-7% to 6%-8%. For the year under
review, Danone's share price increased 32% in local currency.
Denmark-based Carlsberg, the world's fifth-largest brewer, appreciated 68% in
local currency during the year. This performance was driven by the initial
execution of a turnaround program to lower distribution costs and increase
pricing power, particularly in western Europe. Early results seemed to exceed
investors' expectations. Another positive factor for Carlsberg was a real estate
boom in Copenhagen, where the company owns significant property assets.
Investors seemed to recognize the value of the brewer's extensive real estate
portfolio, which represents approximately 20% of its market capitalization.
Carlsberg owns a 50% stake in Baltic Beverage Holding (BBH), which is Russia's
leading beer company with a 36% market share and a dominant player in many of
the former Soviet republics. BBH experienced strong volume growth and benefited
from successful integration of subsidiaries and the resulting economies of
scale. Carlsberg's turnaround program for its western European operations and
BBH's growth prospects should continue to produce results, in our assessment,
and we found the stock attractively valued at period-end.
TOP 10 HOLDINGS
12/31/06
- -------------------------------------------------------------------------------
COMPANY % OF TOTAL
SECTOR/INDUSTRY, COUNTRY NET ASSETS
- -------------------------------------------------------------------------------
British American Tobacco PLC 2.3%
TOBACCO, U.K.
- -------------------------------------------------------------------------------
Orkla ASA 2.3%
FOOD PRODUCTS, NORWAY
- -------------------------------------------------------------------------------
KT&G Corp. 2.2%
TOBACCO, SOUTH KOREA
- -------------------------------------------------------------------------------
Imperial Tobacco Group PLC 2.0%
TOBACCO, U.K.
- -------------------------------------------------------------------------------
Berkshire Hathaway Inc., A & B 1.7%
INSURANCE, U.S.
- -------------------------------------------------------------------------------
Weyerhaeuser Co. 1.7%
PAPER & FOREST PRODUCTS, U.S.
- -------------------------------------------------------------------------------
Carlsberg AS, A & B 1.5%
BEVERAGES, DENMARK
- -------------------------------------------------------------------------------
Schindler Holding AG, ord. & Registered 1.4%
MACHINERY, SWITZERLAND
- -------------------------------------------------------------------------------
Linde AG 1.4%
CHEMICALS, GERMANY
- -------------------------------------------------------------------------------
Altadis SA 1.3%
TOBACCO, SPAIN
- -------------------------------------------------------------------------------
Annual Report | 7
Although many of our investments appreciated during the year, some Fund holdings
did not perform well. Positions that detracted from performance included Boston
Scientific, a U.S. medical devices company; Takefuji, a Japanese consumer
lender; and Mitsubishi UFJ Financial Group, a Japanese financial holding
company.
Our investment in Boston Scientific, which we initiated during the Fund's fiscal
year, declined 34% in value for the time we held it during the period. The
shares fell after the company won a bidding war for Guidant and its implantable
cardioverter defibrillator business generated results that fell short of
expectations. Takefuji experienced a share price decline during the year as new
legislation in Japan was proposed that will lower the maximum interest rate that
borrowers can be charged. Consistent with our strategy, we purchased Takefuji
shares in the latter part of 2006 as we believed they traded at less than book
value. In addition, the company had significant excess capital that gives it
many strategic options to respond to the potential maximum rate law and that
makes it attractive to an acquiring company. Takefuji's shares declined 17% in
local currency for the time we held them during the period. Mitsubishi UFJ's
lackluster performance in 2006 (-8% in local currency) was attributable to flat
loan balances and net interest margins, which were contrary to investors'
expectations given developments in Japan's interest rate environment.
Finally, investors should note that we maintained our currency hedging position
of being substantially hedged to the U.S. dollar versus most of our non-U.S.
holdings. Since the dollar was generally weaker against foreign currencies
during the review period, the portfolio returns were lower than they would have
been had we not hedged the foreign currency exposure.
8 | Annual Report
Thank you for your continued participation in Mutual Discovery Fund. We look
forward to serving your future investment needs.
/s/ Anne E. Gudefin
[PHOTO OMITTED]
Anne E. Gudefin, CFA
Co-Portfolio Manager
/s/ Charles M. Lahr
[PHOTO OMITTED]
Charles M. Lahr, CFA
Co-Portfolio Manager
/s/ Mandana Hormozi
[PHOTO OMITTED]
Mandana Hormozi
Assistant Portfolio Manager
Mutual Discovery Fund
THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS
AS OF DECEMBER 31, 2006, THE END OF THE REPORTING PERIOD. THE WAY WE IMPLEMENT
OUR MAIN INVESTMENT STRATEGIES AND THE RESULTING PORTFOLIO HOLDINGS MAY CHANGE
DEPENDING ON FACTORS SUCH AS MARKET AND ECONOMIC CONDITIONS. THESE OPINIONS MAY
NOT BE RELIED UPON AS INVESTMENT ADVICE OR AN OFFER FOR A PARTICULAR SECURITY.
THE INFORMATION IS NOT A COMPLETE ANALYSIS OF EVERY ASPECT OF ANY MARKET,
COUNTRY, INDUSTRY, SECURITY OR THE FUND. STATEMENTS OF FACT ARE FROM SOURCES
CONSIDERED RELIABLE, BUT THE INVESTMENT MANAGER MAKES NO REPRESENTATION OR
WARRANTY AS TO THEIR COMPLETENESS OR ACCURACY. ALTHOUGH HISTORICAL PERFORMANCE
IS NO GUARANTEE OF FUTURE RESULTS, THESE INSIGHTS MAY HELP YOU UNDERSTAND OUR
INVESTMENT MANAGEMENT PHILOSOPHY.
Annual Report | 9
- --------------------------------------------------------------------------------
ANNE GUDEFIN has been portfolio manager for Mutual Discovery Fund since 2005.
She is also portfolio manager for Mutual Qualified Fund, and has been a member
of the management team of the Funds since 2000, when she joined Franklin
Templeton Investments. Previously, she was an analyst at Perry Capital.
CHARLES LAHR, effective January 1, 2007, assumes portfolio manager
responsibilities for Mutual Discovery Fund. He has been a portfolio manager for
Mutual Financial Services Fund since 2004. He joined Franklin Templeton
Investments in 2003. Previously, he was a senior analyst for the State of
Wisconsin Investment Board and also worked for U.S. Bancorp and the Principal
Financial Group.
MANDANA HORMOZI, effective January 1, 2007, assumes assistant portfolio manager
responsibilities for Mutual Discovery Fund. She joined Franklin Templeton
Investments in 2003. Previously, she was a senior vice president in the equity
research department at Lazard Freres. Also, she was an economic research analyst
at Mitsubishi Bank.
F. DAVID SEGAL was an assistant portfolio manager for Mutual Discovery Fund from
2004 through December 2006. He has been a portfolio manager for Mutual Shares
Fund since 2005. He joined Franklin Templeton Investments in 2002. Previously,
he was an analyst in the Structured Finance Group of MetLife for the period
1999-2002.
- --------------------------------------------------------------------------------
10 | Annual Report
Performance Summary as of 12/31/06
Your dividend income will vary depending on dividends or interest paid by
securities in the Fund's portfolio, adjusted for operating expenses of each
class. Capital gain distributions are net profits realized from the sale of
portfolio securities. The performance table and graphs do not reflect any taxes
that a shareholder would pay on Fund dividends, capital gain distributions, if
any, or any realized gains on the sale of Fund shares. Total return reflects
reinvestment of the Fund's dividends and capital gain distributions, if any, and
any unrealized gains or losses.
PRICE AND DISTRIBUTION INFORMATION
- --------------------------------------------------------------------------------
CLASS Z (SYMBOL: MDISX) CHANGE 12/31/06 12/31/05
- --------------------------------------------------------------------------------
Net Asset Value (NAV) +$4.17 $30.45 $26.28
- --------------------------------------------------------------------------------
DISTRIBUTIONS (1/1/06-12/31/06)
- --------------------------------------------------------------------------------
Dividend Income $0.6343
- --------------------------------------------------------------------------------
Short-Term Capital Gain $0.0916
- --------------------------------------------------------------------------------
Long-Term Capital Gain $1.1339
- --------------------------------------------------------------------------------
TOTAL $1.8598
- --------------------------------------------------------------------------------
CLASS A (SYMBOL: TEDIX) CHANGE 12/31/06 12/31/05
- --------------------------------------------------------------------------------
Net Asset Value (NAV) +$4.10 $30.14 $26.04
- --------------------------------------------------------------------------------
DISTRIBUTIONS (1/1/06-12/31/06)
- --------------------------------------------------------------------------------
Dividend Income $0.5568
- --------------------------------------------------------------------------------
Short-Term Capital Gain $0.0916
- --------------------------------------------------------------------------------
Long-Term Capital Gain $1.1339
- --------------------------------------------------------------------------------
TOTAL $1.7823
- --------------------------------------------------------------------------------
CLASS B (SYMBOL: TEDBX) CHANGE 12/31/06 12/31/05
- --------------------------------------------------------------------------------
Net Asset Value (NAV) +$3.98 $29.55 $25.57
- --------------------------------------------------------------------------------
DISTRIBUTIONS (1/1/06-12/31/06)
- --------------------------------------------------------------------------------
Dividend Income $0.3557
- --------------------------------------------------------------------------------
Short-Term Capital Gain $0.0916
- --------------------------------------------------------------------------------
Long-Term Capital Gain $1.1339
- --------------------------------------------------------------------------------
TOTAL $1.5812
- --------------------------------------------------------------------------------
CLASS C (SYMBOL: TEDSX) CHANGE 12/31/06 12/31/05
- --------------------------------------------------------------------------------
Net Asset Value (NAV) +$4.03 $29.93 $25.90
- --------------------------------------------------------------------------------
DISTRIBUTIONS (1/1/06-12/31/06)
- --------------------------------------------------------------------------------
Dividend Income $0.3782
- --------------------------------------------------------------------------------
Short-Term Capital Gain $0.0916
- --------------------------------------------------------------------------------
Long-Term Capital Gain $1.1339
- --------------------------------------------------------------------------------
TOTAL $1.6037
- --------------------------------------------------------------------------------
Annual Report | 11
Performance Summary (CONTINUED)
PRICE AND DISTRIBUTION INFORMATION (CONTINUED)
- --------------------------------------------------------------------------------
CLASS R (SYMBOL: TEDRX) CHANGE 12/31/06 12/31/05
- --------------------------------------------------------------------------------
Net Asset Value (NAV) +$4.05 $29.93 $25.88
- --------------------------------------------------------------------------------
DISTRIBUTIONS (1/1/06-12/31/06)
- --------------------------------------------------------------------------------
Dividend Income $0.5102
- --------------------------------------------------------------------------------
Short-Term Capital Gain $0.0916
- --------------------------------------------------------------------------------
Long-Term Capital Gain $1.1339
- --------------------------------------------------------------------------------
TOTAL $1.7357
- --------------------------------------------------------------------------------
PERFORMANCE
CUMULATIVE TOTAL RETURN EXCLUDES SALES CHARGES. AVERAGE ANNUAL TOTAL RETURN AND
VALUE OF $10,000 INVESTMENT INCLUDE MAXIMUM SALES CHARGES. CLASS Z/R: NO SALES
CHARGES; CLASS A: 5.75% MAXIMUM INITIAL SALES CHARGE; CLASS B: CONTINGENT
DEFERRED SALES CHARGE (CDSC) DECLINING FROM 4% TO 1% OVER SIX YEARS, AND
ELIMINATED THEREAFTER; CLASS C: 1% CDSC IN FIRST YEAR ONLY. THE FUND MAY CHARGE
A 2% FEE ON REDEMPTIONS MADE WITHIN SEVEN DAYS OF PURCHASE.
- --------------------------------------------------------------------------------
CLASS Z 1 1-YEAR 5-YEAR 10-YEAR
- --------------------------------------------------------------------------------
Cumulative Total Return 2 +23.43% +103.96% +255.64%
- --------------------------------------------------------------------------------
Average Annual Total Return 3 +23.43% +15.32% +13.53%
- --------------------------------------------------------------------------------
Value of $10,000 Investment 4 $12,343 $20,396 $ 35,564
- --------------------------------------------------------------------------------
CLASS A 1 1-YEAR 5-YEAR 10-YEAR
- --------------------------------------------------------------------------------
Cumulative Total Return 2 +23.02% +100.51% +243.11%
- --------------------------------------------------------------------------------
Average Annual Total Return 3 +15.94% +13.58% +12.45%
- --------------------------------------------------------------------------------
Value of $10,000 Investment 4 $11,594 $18,901 $ 32,333
- --------------------------------------------------------------------------------
CLASS B 1 1-YEAR 5-YEAR INCEPTION (1/1/99)
- --------------------------------------------------------------------------------
Cumulative Total Return 2 +22.16% +94.07% +172.24%
- --------------------------------------------------------------------------------
Average Annual Total Return 3 +18.16% +13.94% +13.35%
- --------------------------------------------------------------------------------
Value of $10,000 Investment 4 $11,816 $19,207 $ 27,224
- --------------------------------------------------------------------------------
CLASS C 1 1-YEAR 5-YEAR 10-YEAR
- --------------------------------------------------------------------------------
Cumulative Total Return 2 +22.17% +93.99% +221.59%
- --------------------------------------------------------------------------------
Average Annual Total Return 3 +21.17% +14.17% +12.39%
- --------------------------------------------------------------------------------
Value of $10,000 Investment 4 $12,117 $19,399 $ 32,159
- --------------------------------------------------------------------------------
CLASS R 1-YEAR 3-YEAR INCEPTION (1/1/02)
- --------------------------------------------------------------------------------
Cumulative Total Return 2 +22.78% +67.99% +98.99%
- --------------------------------------------------------------------------------
Average Annual Total Return 3 +22.78% +18.88% +14.77%
- --------------------------------------------------------------------------------
Value of $10,000 Investment 4 $12,278 $16,799 $ 19,899
- --------------------------------------------------------------------------------
PERFORMANCE DATA REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE FUTURE
RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU MAY HAVE
A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY DIFFER FROM
FIGURES SHOWN.
FOR MOST RECENT MONTH-END PERFORMANCE, SEE "FUNDS AND PERFORMANCE" AT
FRANKLINTEMPLETON.COM OR CALL 1-800/342-5236.
12 | Annual Report
Performance Summary (CONTINUED)
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 any current, applicable, maximum sales charge, Fund expenses,
account fees and reinvested distributions. The unmanaged indexes include
reinvestment of any income or distributions. They differ from the Fund in
composition and do not pay management fees or expenses. One cannot invest
directly in an index.
CLASS Z (1/1/97-12/31/06) 1
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE GRAPH IN THE PRINTED MATERIAL.]
Mutual MSCI
Discovery Fund S&P 500 5 World Index 5
-------------- --------- -------------
1/1/1997 $10,000 $10,000 $10,000
1/31/1997 $10,477 $10,624 $10,122
2/28/1997 $10,681 $10,708 $10,240
3/31/1997 $10,582 $10,269 $10,040
4/30/1997 $10,600 $10,881 $10,370
5/31/1997 $10,984 $11,543 $11,011
6/30/1997 $11,391 $12,060 $11,562
7/31/1997 $11,886 $13,019 $12,097
8/31/1997 $11,773 $12,290 $11,289
9/30/1997 $12,366 $12,963 $11,904
10/31/1997 $12,010 $12,531 $11,280
11/30/1997 $12,082 $13,110 $11,481
12/31/1997 $12,294 $13,335 $11,623
1/31/1998 $12,301 $13,482 $11,948
2/28/1998 $12,932 $14,454 $12,759
3/31/1998 $13,674 $15,194 $13,299
4/30/1998 $13,928 $15,347 $13,431
5/31/1998 $14,117 $15,083 $13,265
6/30/1998 $13,765 $15,695 $13,582
7/31/1998 $13,442 $15,529 $13,562
8/31/1998 $11,609 $13,286 $11,755
9/30/1998 $11,089 $14,137 $11,965
10/31/1998 $11,396 $15,286 $13,049
11/30/1998 $11,969 $16,212 $13,827
12/31/1998 $12,061 $17,146 $14,505
1/31/1999 $12,145 $17,862 $14,824
2/28/1999 $12,005 $17,307 $14,432
3/31/1999 $12,557 $18,000 $15,035
4/30/1999 $13,402 $18,697 $15,630
5/31/1999 $13,409 $18,256 $15,061
6/30/1999 $13,886 $19,268 $15,765
7/31/1999 $13,730 $18,667 $15,720
8/31/1999 $13,566 $18,575 $15,694
9/30/1999 $13,389 $18,066 $15,544
10/31/1999 $13,666 $19,209 $16,355
11/30/1999 $14,383 $19,600 $16,817
12/31/1999 $15,293 $20,753 $18,180
1/31/2000 $15,235 $19,711 $17,141
2/29/2000 $15,721 $19,338 $17,189
3/31/2000 $16,395 $21,228 $18,380
4/30/2000 $16,214 $20,590 $17,605
5/31/2000 $16,308 $20,169 $17,161
6/30/2000 $16,355 $20,666 $17,741
7/31/2000 $16,564 $20,343 $17,244
8/31/2000 $17,053 $21,606 $17,807
9/30/2000 $16,882 $20,466 $16,862
10/31/2000 $17,014 $20,379 $16,582
11/30/2000 $16,727 $18,773 $15,577
12/31/2000 $17,219 $18,865 $15,832
1/31/2001 $17,747 $19,534 $16,139
2/28/2001 $17,747 $17,754 $14,777
3/31/2001 $17,219 $16,630 $13,809
4/30/2001 $17,719 $17,922 $14,833
5/31/2001 $18,256 $18,042 $14,649
6/30/2001 $18,341 $17,603 $14,192
7/31/2001 $18,304 $17,429 $14,005
8/31/2001 $18,120 $16,339 $13,336
9/30/2001 $16,580 $15,020 $12,162
10/31/2001 $16,626 $15,307 $12,397
11/30/2001 $17,050 $16,481 $13,132
12/31/2001 $17,437 $16,625 $13,216
1/31/2002 $17,495 $16,383 $12,817
2/28/2002 $17,667 $16,067 $12,708
3/31/2002 $18,252 $16,671 $13,273
4/30/2002 $18,568 $15,661 $12,827
5/31/2002 $18,712 $15,546 $12,856
6/30/2002 $17,564 $14,439 $12,079
7/31/2002 $16,406 $13,313 $11,062
8/31/2002 $16,570 $13,401 $11,085
9/30/2002 $15,701 $11,946 $ 9,869
10/31/2002 $15,759 $12,996 $10,599
11/30/2002 $15,991 $13,760 $11,173
12/31/2002 $15,858 $12,952 $10,633
1/31/2003 $15,593 $12,613 $10,312
2/28/2003 $15,171 $12,424 $10,136
3/31/2003 $15,240 $12,543 $10,108
4/30/2003 $16,407 $13,577 $11,010
5/31/2003 $17,330 $14,292 $11,645
6/30/2003 $17,625 $14,474 $11,851
7/31/2003 $17,842 $14,730 $12,094
8/31/2003 $18,375 $15,016 $12,358
9/30/2003 $18,474 $14,857 $12,436
10/31/2003 $19,264 $15,697 $13,177
11/30/2003 $19,935 $15,835 $13,381
12/31/2003 $20,860 $16,665 $14,223
1/31/2004 $21,121 $16,971 $14,455
2/29/2004 $21,793 $17,207 $14,702
3/31/2004 $21,713 $16,947 $14,610
4/30/2004 $21,342 $16,682 $14,319
5/31/2004 $21,332 $16,910 $14,459
6/30/2004 $21,738 $17,239 $14,763
7/31/2004 $21,516 $16,668 $14,284
8/31/2004 $21,657 $16,735 $14,353
9/30/2004 $22,242 $16,916 $14,629
10/31/2004 $22,696 $17,175 $14,991
11/30/2004 $23,998 $17,870 $15,785
12/31/2004 $24,906 $18,477 $16,392
1/31/2005 $24,351 $18,027 $16,026
2/28/2005 $25,398 $18,406 $16,541
3/31/2005 $25,183 $18,081 $16,228
4/30/2005 $24,988 $17,738 $15,885
5/31/2005 $25,522 $18,302 $16,179
6/30/2005 $26,073 $18,328 $16,326
7/31/2005 $26,962 $19,009 $16,900
8/31/2005 $27,065 $18,836 $17,035
9/30/2005 $27,830 $18,988 $17,483
10/31/2005 $26,962 $18,672 $17,062
11/30/2005 $27,809 $19,377 $17,640
12/31/2005 $28,815 $19,384 $18,035
1/31/2006 $29,802 $19,897 $18,844
2/28/2006 $30,526 $19,951 $18,824
3/31/2006 $31,678 $20,199 $19,246
4/30/2006 $31,952 $20,470 $19,841
5/31/2006 $31,140 $19,882 $19,181
6/30/2006 $31,208 $19,908 $19,183
7/31/2006 $31,499 $20,031 $19,307
8/31/2006 $32,337 $20,507 $19,818
9/30/2006 $32,650 $21,035 $20,060
10/31/2006 $33,690 $21,720 $20,800
11/30/2006 $34,461 $22,133 $21,320
12/31/2006 $35,564 $22,443 $21,760
AVERAGE ANNUAL TOTAL RETURN
- -----------------------------------
CLASS Z 1 12/31/06
- -----------------------------------
1-Year +23.43%
- -----------------------------------
5-Year +15.32%
- -----------------------------------
10-Year +13.53%
- -----------------------------------
CLASS A (1/1/97-12/31/06) 1
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE GRAPH IN THE PRINTED MATERIAL.]
Mutual MSCI
Discovery Fund S&P 500 5 World Index 5
-------------- --------- -------------
1/1/1997 $ 9,423 $10,000 $10,000
1/31/1997 $ 9,863 $10,624 $10,122
2/28/1997 $10,049 $10,708 $10,240
3/31/1997 $ 9,956 $10,269 $10,040
4/30/1997 $ 9,973 $10,881 $10,370
5/31/1997 $10,329 $11,543 $11,011
6/30/1997 $10,708 $12,060 $11,562
7/31/1997 $11,169 $13,019 $12,097
8/31/1997 $11,063 $12,290 $11,289
9/30/1997 $11,616 $12,963 $11,904
10/31/1997 $11,275 $12,531 $11,280
11/30/1997 $11,342 $13,110 $11,481
12/31/1997 $11,541 $13,335 $11,623
1/31/1998 $11,541 $13,482 $11,948
2/28/1998 $12,129 $14,454 $12,759
3/31/1998 $12,822 $15,194 $13,299
4/30/1998 $13,055 $15,347 $13,431
5/31/1998 $13,227 $15,083 $13,265
6/30/1998 $12,896 $15,695 $13,582
7/31/1998 $12,589 $15,529 $13,562
8/31/1998 $10,864 $13,286 $11,755
9/30/1998 $10,375 $14,137 $11,965
10/31/1998 $10,657 $15,286 $13,049
11/30/1998 $11,190 $16,212 $13,827
12/31/1998 $11,268 $17,146 $14,505
1/31/1999 $11,346 $17,862 $14,824
2/28/1999 $11,209 $17,307 $14,432
3/31/1999 $11,727 $18,000 $15,035
4/30/1999 $12,507 $18,697 $15,630
5/31/1999 $12,513 $18,256 $15,061
6/30/1999 $12,957 $19,268 $15,765
7/31/1999 $12,810 $18,667 $15,720
8/31/1999 $12,644 $18,575 $15,694
9/30/1999 $12,477 $18,066 $15,544
10/31/1999 $12,730 $19,209 $16,355
11/30/1999 $13,397 $19,600 $16,817
12/31/1999 $14,240 $20,753 $18,180
1/31/2000 $14,179 $19,711 $17,141
2/29/2000 $14,634 $19,338 $17,189
3/31/2000 $15,257 $21,228 $18,380
4/30/2000 $15,081 $20,590 $17,605
5/31/2000 $15,169 $20,169 $17,161
6/30/2000 $15,206 $20,666 $17,741
7/31/2000 $15,395 $20,343 $17,244
8/31/2000 $15,845 $21,606 $17,807
9/30/2000 $15,678 $20,466 $16,862
10/31/2000 $15,801 $20,379 $16,582
11/30/2000 $15,526 $18,773 $15,577
12/31/2000 $15,987 $18,865 $15,832
1/31/2001 $16,471 $19,534 $16,139
2/28/2001 $16,462 $17,754 $14,777
3/31/2001 $15,961 $16,630 $13,809
4/30/2001 $16,420 $17,922 $14,833
5/31/2001 $16,912 $18,042 $14,649
6/30/2001 $16,987 $17,603 $14,192
7/31/2001 $16,952 $17,429 $14,005
8/31/2001 $16,780 $16,339 $13,336
9/30/2001 $15,343 $15,020 $12,162
10/31/2001 $15,386 $15,307 $12,397
11/30/2001 $15,773 $16,481 $13,132
12/31/2001 $16,125 $16,625 $13,216
1/31/2002 $16,179 $16,383 $12,817
2/28/2002 $16,330 $16,067 $12,708
3/31/2002 $16,866 $16,671 $13,273
4/30/2002 $17,151 $15,661 $12,827
5/31/2002 $17,276 $15,546 $12,856
6/30/2002 $16,212 $14,439 $12,079
7/31/2002 $15,143 $13,313 $11,062
8/31/2002 $15,287 $13,401 $11,085
9/30/2002 $14,479 $11,946 $ 9,869
10/31/2002 $14,533 $12,996 $10,599
11/30/2002 $14,740 $13,760 $11,173
12/31/2002 $14,612 $12,952 $10,633
1/31/2003 $14,366 $12,613 $10,312
2/28/2003 $13,975 $12,424 $10,136
3/31/2003 $14,039 $12,543 $10,108
4/30/2003 $15,103 $13,577 $11,010
5/31/2003 $15,949 $14,292 $11,645
6/30/2003 $16,209 $14,474 $11,851
7/31/2003 $16,411 $14,730 $12,094
8/31/2003 $16,896 $15,016 $12,358
9/30/2003 $16,987 $14,857 $12,436
10/31/2003 $17,701 $15,697 $13,177
11/30/2003 $18,314 $15,835 $13,381
12/31/2003 $19,160 $16,665 $14,223
1/31/2004 $19,392 $16,971 $14,455
2/29/2004 $19,995 $17,207 $14,702
3/31/2004 $19,921 $16,947 $14,610
4/30/2004 $19,578 $16,682 $14,319
5/31/2004 $19,569 $16,910 $14,459
6/30/2004 $19,930 $17,239 $14,763
7/31/2004 $19,724 $16,668 $14,284
8/31/2004 $19,846 $16,735 $14,353
9/30/2004 $20,377 $16,916 $14,629
10/31/2004 $20,778 $17,175 $14,991
11/30/2004 $21,963 $17,870 $15,785
12/31/2004 $22,797 $18,477 $16,392
1/31/2005 $22,276 $18,027 $16,026
2/28/2005 $23,232 $18,406 $16,541
3/31/2005 $23,024 $18,081 $16,228
4/30/2005 $22,844 $17,738 $15,885
5/31/2005 $23,318 $18,302 $16,179
6/30/2005 $23,820 $18,328 $16,326
7/31/2005 $24,621 $19,009 $16,900
8/31/2005 $24,707 $18,836 $17,035
9/30/2005 $25,402 $18,988 $17,483
10/31/2005 $24,602 $18,672 $17,062
11/30/2005 $25,364 $19,377 $17,640
12/31/2005 $26,283 $19,384 $18,035
1/31/2006 $27,172 $19,897 $18,844
2/28/2006 $27,818 $19,951 $18,824
3/31/2006 $28,867 $20,199 $19,246
4/30/2006 $29,100 $20,470 $19,841
5/31/2006 $28,363 $19,882 $19,181
6/30/2006 $28,418 $19,908 $19,183
7/31/2006 $28,675 $20,031 $19,307
8/31/2006 $29,426 $20,507 $19,818
9/30/2006 $29,704 $21,035 $20,060
10/31/2006 $30,640 $21,720 $20,800
11/30/2006 $31,339 $22,133 $21,320
12/31/2006 $32,333 $22,443 $21,760
AVERAGE ANNUAL TOTAL RETURN
- ------------------------------------------
CLASS A 1 12/31/06
- ------------------------------------------
1-Year +15.94%
- ------------------------------------------
5-Year +13.58%
- ------------------------------------------
10-Year +12.45%
- ------------------------------------------
Annual Report | 13
Performance Summary (CONTINUED)
AVERAGE ANNUAL TOTAL RETURN
- ------------------------------------------
CLASS B 1 12/31/06
- ------------------------------------------
1-Year +18.16%
- ------------------------------------------
5-Year +13.94%
- ------------------------------------------
Since Inception (1/1/99) +13.35%
- ------------------------------------------
CLASS B (1/1/99-12/31/06) 1
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE GRAPH IN THE PRINTED MATERIAL.]
Mutual MSCI
Discovery Fund S&P 500 5 World Index 5
-------------- --------- -------------
1/1/1999 $10,000 $10,000 $10,000
1/31/1999 $10,070 $10,418 $10,220
2/28/1999 $ 9,942 $10,094 $ 9,950
3/31/1999 $10,396 $10,498 $10,366
4/30/1999 $11,076 $10,905 $10,776
5/31/1999 $11,076 $10,647 $10,383
6/30/1999 $11,462 $11,238 $10,869
7/31/1999 $11,320 $10,887 $10,838
8/31/1999 $11,172 $10,834 $10,820
9/30/1999 $11,018 $10,537 $10,717
10/31/1999 $11,231 $11,203 $11,275
11/30/1999 $11,816 $11,431 $11,594
12/31/1999 $12,555 $12,104 $12,534
1/31/2000 $12,495 $11,496 $11,818
2/29/2000 $12,885 $11,279 $11,851
3/31/2000 $13,420 $12,381 $12,672
4/30/2000 $13,264 $12,009 $12,137
5/31/2000 $13,330 $11,763 $11,831
6/30/2000 $13,356 $12,053 $12,231
7/31/2000 $13,517 $11,865 $11,889
8/31/2000 $13,903 $12,601 $12,277
9/30/2000 $13,755 $11,936 $11,626
10/31/2000 $13,851 $11,886 $11,432
11/30/2000 $13,607 $10,949 $10,740
12/31/2000 $13,998 $11,003 $10,915
1/31/2001 $14,411 $11,393 $11,127
2/28/2001 $14,396 $10,355 $10,188
3/31/2001 $13,961 $ 9,699 $ 9,520
4/30/2001 $14,351 $10,453 $10,227
5/31/2001 $14,771 $10,523 $10,100
6/30/2001 $14,832 $10,267 $ 9,785
7/31/2001 $14,787 $10,166 $ 9,656
8/31/2001 $14,627 $ 9,530 $ 9,194
9/30/2001 $13,373 $ 8,760 $ 8,385
10/31/2001 $13,403 $ 8,927 $ 8,547
11/30/2001 $13,730 $ 9,612 $ 9,054
12/31/2001 $14,028 $ 9,696 $ 9,112
1/31/2002 $14,068 $ 9,555 $ 8,837
2/28/2002 $14,193 $ 9,371 $ 8,761
3/31/2002 $14,656 $ 9,723 $ 9,151
4/30/2002 $14,892 $ 9,134 $ 8,843
5/31/2002 $14,994 $ 9,067 $ 8,864
6/30/2002 $14,061 $ 8,421 $ 8,328
7/31/2002 $13,121 $ 7,765 $ 7,627
8/31/2002 $13,247 $ 7,816 $ 7,643
9/30/2002 $12,536 $ 6,967 $ 6,804
10/31/2002 $12,576 $ 7,580 $ 7,307
11/30/2002 $12,749 $ 8,025 $ 7,703
12/31/2002 $12,633 $ 7,554 $ 7,331
1/31/2003 $12,410 $ 7,357 $ 7,110
2/28/2003 $12,068 $ 7,246 $ 6,988
3/31/2003 $12,115 $ 7,316 $ 6,969
4/30/2003 $13,032 $ 7,919 $ 7,591
5/31/2003 $13,749 $ 8,335 $ 8,029
6/30/2003 $13,971 $ 8,442 $ 8,170
7/31/2003 $14,131 $ 8,591 $ 8,338
8/31/2003 $14,540 $ 8,758 $ 8,520
9/30/2003 $14,612 $ 8,665 $ 8,574
10/31/2003 $15,221 $ 9,155 $ 9,085
11/30/2003 $15,742 $ 9,236 $ 9,225
12/31/2003 $16,452 $ 9,720 $ 9,806
1/31/2004 $16,646 $ 9,898 $ 9,966
2/29/2004 $17,155 $10,036 $10,136
3/31/2004 $17,082 $ 9,884 $10,073
4/30/2004 $16,775 $ 9,729 $ 9,872
5/31/2004 $16,759 $ 9,863 $ 9,969
6/30/2004 $17,058 $10,054 $10,178
7/31/2004 $16,871 $ 9,722 $ 9,848
8/31/2004 $16,969 $ 9,761 $ 9,895
9/30/2004 $17,416 $ 9,866 $10,086
10/31/2004 $17,749 $10,017 $10,335
11/30/2004 $18,757 $10,422 $10,883
12/31/2004 $19,450 $10,777 $11,301
1/31/2005 $18,998 $10,514 $11,049
2/28/2005 $19,803 $10,735 $11,404
3/31/2005 $19,614 $10,545 $11,188
4/30/2005 $19,450 $10,345 $10,951
5/31/2005 $19,844 $10,674 $11,154
6/30/2005 $20,261 $10,690 $11,256
7/31/2005 $20,931 $11,087 $11,651
8/31/2005 $20,997 $10,986 $11,745
9/30/2005 $21,576 $11,075 $12,053
10/31/2005 $20,881 $10,890 $11,763
11/30/2005 $21,518 $11,301 $12,161
12/31/2005 $22,286 $11,306 $12,434
1/31/2006 $23,027 $11,605 $12,992
2/28/2006 $23,559 $11,636 $12,978
3/31/2006 $24,439 $11,781 $13,269
4/30/2006 $24,622 $11,939 $13,679
5/31/2006 $23,977 $11,596 $13,224
6/30/2006 $24,011 $11,611 $13,225
7/31/2006 $24,215 $11,683 $13,311
8/31/2006 $24,837 $11,960 $13,663
9/30/2006 $25,059 $12,268 $13,830
10/31/2006 $25,831 $12,668 $14,341
11/30/2006 $26,409 $12,909 $14,699
12/31/2006 $27,224 $13,090 $15,002
AVERAGE ANNUAL TOTAL RETURN
- ------------------------------------------
CLASS C 1 12/31/06
- ------------------------------------------
1-Year +21.17%
- ------------------------------------------
5-Year +14.17%
- ------------------------------------------
10-Year +12.39%
- ------------------------------------------
CLASS C (1/1/97-12/31/06) 1
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE GRAPH IN THE PRINTED MATERIAL.]
Mutual MSCI
Discovery Fund S&P 500 5 World Index 5
-------------- --------- -------------
1/1/1997 $10,000 $10,000 $10,000
1/31/1997 $10,466 $10,624 $10,122
2/28/1997 $10,658 $10,708 $10,240
3/31/1997 $10,547 $10,269 $10,040
4/30/1997 $10,559 $10,881 $10,370
5/31/1997 $10,932 $11,543 $11,011
6/30/1997 $11,322 $12,060 $11,562
7/31/1997 $11,810 $13,019 $12,097
8/31/1997 $11,691 $12,290 $11,289
9/30/1997 $12,266 $12,963 $11,904
10/31/1997 $11,899 $12,531 $11,280
11/30/1997 $11,964 $13,110 $11,481
12/31/1997 $12,170 $13,335 $11,623
1/31/1998 $12,163 $13,482 $11,948
2/28/1998 $12,772 $14,454 $12,759
3/31/1998 $13,498 $15,194 $13,299
4/30/1998 $13,737 $15,347 $13,431
5/31/1998 $13,906 $15,083 $13,265
6/30/1998 $13,556 $15,695 $13,582
7/31/1998 $13,224 $15,529 $13,562
8/31/1998 $11,410 $13,286 $11,755
9/30/1998 $10,893 $14,137 $11,965
10/31/1998 $11,184 $15,286 $13,049
11/30/1998 $11,734 $16,212 $13,827
12/31/1998 $11,815 $17,146 $14,505
1/31/1999 $11,884 $17,862 $14,824
2/28/1999 $11,739 $17,307 $14,432
3/31/1999 $12,269 $18,000 $15,035
4/30/1999 $13,082 $18,697 $15,630
5/31/1999 $13,082 $18,256 $15,061
6/30/1999 $13,540 $19,268 $15,765
7/31/1999 $13,372 $18,667 $15,720
8/31/1999 $13,198 $18,575 $15,694
9/30/1999 $13,016 $18,066 $15,544
10/31/1999 $13,275 $19,209 $16,355
11/30/1999 $13,959 $19,600 $16,817
12/31/1999 $14,827 $20,753 $18,180
1/31/2000 $14,764 $19,711 $17,141
2/29/2000 $15,224 $19,338 $17,189
3/31/2000 $15,861 $21,228 $18,380
4/30/2000 $15,677 $20,590 $17,605
5/31/2000 $15,754 $20,169 $17,161
6/30/2000 $15,782 $20,666 $17,741
7/31/2000 $15,971 $20,343 $17,244
8/31/2000 $16,425 $21,606 $17,807
9/30/2000 $16,251 $20,466 $16,862
10/31/2000 $16,364 $20,379 $16,582
11/30/2000 $16,077 $18,773 $15,577
12/31/2000 $16,537 $18,865 $15,832
1/31/2001 $17,030 $19,534 $16,139
2/28/2001 $17,013 $17,754 $14,777
3/31/2001 $16,493 $16,630 $13,809
4/30/2001 $16,960 $17,922 $14,833
5/31/2001 $17,453 $18,042 $14,649
6/30/2001 $17,521 $17,603 $14,192
7/31/2001 $17,476 $17,429 $14,005
8/31/2001 $17,280 $16,339 $13,336
9/30/2001 $15,798 $15,020 $12,162
10/31/2001 $15,834 $15,307 $12,397
11/30/2001 $16,218 $16,481 $13,132
12/31/2001 $16,578 $16,625 $13,216
1/31/2002 $16,624 $16,383 $12,817
2/28/2002 $16,771 $16,067 $12,708
3/31/2002 $17,314 $16,671 $13,273
4/30/2002 $17,590 $15,661 $12,827
5/31/2002 $17,718 $15,546 $12,856
6/30/2002 $16,612 $14,439 $12,079
7/31/2002 $15,503 $13,313 $11,062
8/31/2002 $15,651 $13,401 $11,085
9/30/2002 $14,818 $11,946 $ 9,869
10/31/2002 $14,855 $12,996 $10,599
11/30/2002 $15,068 $13,760 $11,173
12/31/2002 $14,924 $12,952 $10,633
1/31/2003 $14,664 $12,613 $10,312
2/28/2003 $14,263 $12,424 $10,136
3/31/2003 $14,310 $12,543 $10,108
4/30/2003 $15,390 $13,577 $11,010
5/31/2003 $16,247 $14,292 $11,645
6/30/2003 $16,505 $14,474 $11,851
7/31/2003 $16,692 $14,730 $12,094
8/31/2003 $17,179 $15,016 $12,358
9/30/2003 $17,264 $14,857 $12,436
10/31/2003 $17,985 $15,697 $13,177
11/30/2003 $18,594 $15,835 $13,381
12/31/2003 $19,446 $16,665 $14,223
1/31/2004 $19,673 $16,971 $14,455
2/29/2004 $20,277 $17,207 $14,702
3/31/2004 $20,182 $16,947 $14,610
4/30/2004 $19,824 $16,682 $14,319
5/31/2004 $19,805 $16,910 $14,459
6/30/2004 $20,162 $17,239 $14,763
7/31/2004 $19,943 $16,668 $14,284
8/31/2004 $20,057 $16,735 $14,353
9/30/2004 $20,579 $16,916 $14,629
10/31/2004 $20,978 $17,175 $14,991
11/30/2004 $22,155 $17,870 $15,785
12/31/2004 $22,978 $18,477 $16,392
1/31/2005 $22,442 $18,027 $16,026
2/28/2005 $23,400 $18,406 $16,541
3/31/2005 $23,180 $18,081 $16,228
4/30/2005 $22,978 $17,738 $15,885
5/31/2005 $23,448 $18,302 $16,179
6/30/2005 $23,936 $18,328 $16,326
7/31/2005 $24,727 $19,009 $16,900
8/31/2005 $24,804 $18,836 $17,035
9/30/2005 $25,489 $18,988 $17,483
10/31/2005 $24,669 $18,672 $17,062
11/30/2005 $25,422 $19,377 $17,640
12/31/2005 $26,324 $19,384 $18,035
1/31/2006 $27,209 $19,897 $18,844
2/28/2006 $27,839 $19,951 $18,824
3/31/2006 $28,866 $20,199 $19,246
4/30/2006 $29,090 $20,470 $19,841
5/31/2006 $28,328 $19,882 $19,181
6/30/2006 $28,369 $19,908 $19,183
7/31/2006 $28,608 $20,031 $19,307
8/31/2006 $29,343 $20,507 $19,818
9/30/2006 $29,602 $21,035 $20,060
10/31/2006 $30,524 $21,720 $20,800
11/30/2006 $31,197 $22,133 $21,320
12/31/2006 $32,159 $22,443 $21,760
14 | Annual Report
Performance Summary (CONTINUED)
CLASS R (1/1/02-12/31/06)
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE GRAPH IN THE PRINTED MATERIAL.]
Mutual MSCI
Discovery Fund S&P 500 5 World Index 5
-------------- --------- -------------
1/1/2002 $10,000 $10,000 $10,000
1/31/2002 $10,033 $ 9,854 $ 9,698
2/28/2002 $10,127 $ 9,664 $ 9,616
3/31/2002 $10,459 $10,028 $10,043
4/30/2002 $10,630 $ 9,420 $ 9,705
5/31/2002 $10,708 $ 9,351 $ 9,728
6/30/2002 $10,050 $ 8,685 $ 9,140
7/31/2002 $ 9,382 $ 8,008 $ 8,370
8/31/2002 $ 9,471 $ 8,061 $ 8,388
9/30/2002 $ 8,970 $ 7,185 $ 7,467
10/31/2002 $ 9,004 $ 7,817 $ 8,020
11/30/2002 $ 9,132 $ 8,277 $ 8,454
12/31/2002 $ 9,051 $ 7,791 $ 8,046
1/31/2003 $ 8,893 $ 7,587 $ 7,803
2/28/2003 $ 8,655 $ 7,473 $ 7,669
3/31/2003 $ 8,689 $ 7,545 $ 7,648
4/30/2003 $ 9,351 $ 8,167 $ 8,331
5/31/2003 $ 9,871 $ 8,596 $ 8,811
6/30/2003 $10,033 $ 8,706 $ 8,967
7/31/2003 $10,153 $ 8,860 $ 9,151
8/31/2003 $10,454 $ 9,032 $ 9,351
9/30/2003 $10,505 $ 8,937 $ 9,410
10/31/2003 $10,949 $ 9,442 $ 9,970
11/30/2003 $11,324 $ 9,525 $10,125
12/31/2003 $11,845 $10,024 $10,762
1/31/2004 $11,989 $10,208 $10,937
2/29/2004 $12,364 $10,350 $11,124
3/31/2004 $12,312 $10,194 $11,055
4/30/2004 $12,099 $10,034 $10,835
5/31/2004 $12,093 $10,171 $10,941
6/30/2004 $12,316 $10,369 $11,170
7/31/2004 $12,189 $10,026 $10,808
8/31/2004 $12,258 $10,066 $10,860
9/30/2004 $12,589 $10,175 $11,069
10/31/2004 $12,838 $10,331 $11,343
11/30/2004 $13,568 $10,749 $11,944
12/31/2004 $14,076 $11,114 $12,403
1/31/2005 $13,753 $10,843 $12,126
2/28/2005 $14,341 $11,071 $12,516
3/31/2005 $14,211 $10,876 $12,279
4/30/2005 $14,100 $10,669 $12,019
5/31/2005 $14,394 $11,009 $12,242
6/30/2005 $14,699 $11,024 $12,353
7/31/2005 $15,190 $11,434 $12,788
8/31/2005 $15,243 $11,330 $12,890
9/30/2005 $15,669 $11,422 $13,228
10/31/2005 $15,178 $11,231 $12,910
11/30/2005 $15,646 $11,655 $13,347
12/31/2005 $16,207 $11,660 $13,646
1/31/2006 $16,751 $11,968 $14,258
2/28/2006 $17,152 $12,001 $14,243
3/31/2006 $17,791 $12,150 $14,563
4/30/2006 $17,935 $12,313 $15,013
5/31/2006 $17,478 $11,959 $14,513
6/30/2006 $17,510 $11,975 $14,515
7/31/2006 $17,664 $12,049 $14,609
8/31/2006 $18,123 $12,335 $14,995
9/30/2006 $18,289 $12,653 $15,179
10/31/2006 $18,870 $13,065 $15,739
11/30/2006 $19,291 $13,313 $16,132
12/31/2006 $19,899 $13,500 $16,465
AVERAGE ANNUAL TOTAL RETURN
- ------------------------------------------
CLASS R 12/31/06
- ------------------------------------------
1-Year +22.78%
- ------------------------------------------
3-Year +18.88%
- ------------------------------------------
Since Inception (1/1/02) +14.77%
- ------------------------------------------
ENDNOTES
THE FUND'S INVESTMENTS INCLUDE SMALLER-COMPANY STOCKS AND FOREIGN SECURITIES.
SMALLER-COMPANY STOCKS HAVE HISTORICALLY EXHIBITED GREATER PRICE VOLATILITY THAN
LARGER-COMPANY STOCKS, PARTICULARLY OVER THE SHORT TERM. FOREIGN SECURITIES
RISKS INCLUDE EXPOSURE TO CURRENCY VOLATILITY AND POLITICAL, ECONOMIC AND
REGULATORY UNCERTAINTY. THE FUND MAY ALSO INVEST IN COMPANIES ENGAGED IN
MERGERS, REORGANIZATIONS OR LIQUIDATIONS, WHICH INVOLVE SPECIAL RISKS, AS WELL
AS LOWER-RATED BONDS, WHICH ENTAIL HIGHER CREDIT RISK. THE FUND'S PROSPECTUS
ALSO INCLUDES A DESCRIPTION OF THE MAIN INVESTMENT RISKS.
CLASS Z: Shares are available to certain eligible investors as described in
the prospectus.
CLASS A: Prior to 8/3/98, these shares were offered at a lower initial sales
charge; thus actual total returns may differ.
CLASS B: These shares have higher annual fees and expenses than Class A
shares.
CLASS C: Prior to 1/1/04, these shares were offered with an initial sales
charge; thus actual total returns would have differed. These shares
have higher annual fees and expenses than Class A shares.
CLASS R: Shares are available to certain eligible investors as described in
the prospectus. These shares have higher annual fees and expenses
than Class A shares.
1. Past expense reductions by the Fund's manager increased the Fund's total
returns. If the manager had not taken this action, the Fund's total
returns would have been lower.
2. Cumulative total return represents the change in value of an investment
over the periods indicated.
3. Average annual total return represents the average annual change in value
of an investment over the periods indicated.
4. These figures represent the value of a hypothetical $10,000 investment in
the Fund over the periods indicated.
5. Source: Standard & Poor's Micropal. The S&P 500 consists of 500 stocks
chosen for market size, liquidity and industry group representation. Each
stock's weight in the index is proportionate to its market value. The S&P
500 is one of the most widely used benchmarks of U.S. equity performance.
The MSCI World Index is a free float-adjusted, market
capitalization-weighted index designed to measure equity securities in
global developed markets.
Annual Report | 15
Your Fund's Expenses
As a Fund shareholder, you can incur two types of costs:
o Transaction costs, including sales charges (loads) on Fund purchases and
redemption fees; and
o Ongoing Fund costs, including management fees, distribution and service
(12b-1) fees, and other Fund expenses. All mutual funds have ongoing
costs, sometimes referred to as operating expenses.
The following table shows ongoing costs of investing in the Fund and can help
you understand these costs and compare them with those of other mutual funds.
The table assumes a $1,000 investment held for the six months indicated.
ACTUAL FUND EXPENSES
The first line (Actual) for each share class listed in the table provides actual
account values and expenses. The "Ending Account Value" is derived from the
Fund's actual return, which includes the effect of Fund expenses.
You can estimate the expenses you paid during the period by following these
steps. OF COURSE, YOUR ACCOUNT VALUE AND EXPENSES WILL DIFFER FROM THOSE IN THIS
ILLUSTRATION:
1. Divide your account value by $1,000.
IF AN ACCOUNT HAD AN $8,600 VALUE, THEN $8,600 / $1,000 = 8.6.
2. Multiply the result by the number under the heading "Expenses Paid During
Period."
IF EXPENSES PAID DURING PERIOD WERE $7.50, THEN 8.6 X $7.50 = $64.50.
In this illustration, the estimated expenses paid this period are $64.50.
HYPOTHETICAL EXAMPLE FOR COMPARISON WITH OTHER FUNDS
Information in the second line (Hypothetical) for each class in the table can
help you compare ongoing costs of investing in the Fund with those of other
mutual funds. This information may not be used to estimate the actual ending
account balance or expenses you paid during the period. The hypothetical "Ending
Account Value" is based on the actual expense ratio for each class and an
assumed 5% annual rate of return before expenses, which does not represent the
Fund's actual return. The figure under the heading "Expenses Paid During Period"
shows the hypothetical expenses your account would have incurred under this
scenario. You can compare this figure with the 5% hypothetical examples that
appear in shareholder reports of other funds.
16 | Annual Report
Your Fund's Expenses (CONTINUED)
PLEASE NOTE THAT EXPENSES SHOWN IN THE TABLE ARE MEANT TO HIGHLIGHT ONGOING
COSTS AND DO NOT REFLECT ANY TRANSACTION COSTS, SUCH AS SALES CHARGES OR
REDEMPTION FEES. Therefore, the second line for each class is useful in
comparing ongoing costs only, and will not help you compare total costs of
owning different funds. In addition, if transaction costs were included, your
total costs would have been higher. Please refer to the Fund prospectus for
additional information on operating expenses.
- ---------------------------------------------------------------------------------------------------
BEGINNING ACCOUNT ENDING ACCOUNT EXPENSES PAID DURING
CLASS Z VALUE 7/1/06 VALUE 12/31/06 PERIOD* 7/1/06-12/31/06
- ---------------------------------------------------------------------------------------------------
Actual $1,000 $1,139.60 $ 5.72
- ---------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,019.86 $ 5.40
- ---------------------------------------------------------------------------------------------------
CLASS A
- ---------------------------------------------------------------------------------------------------
Actual $1,000 $1,137.80 $ 7.27
- ---------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,018.40 $ 6.87
- ---------------------------------------------------------------------------------------------------
CLASS B
- ---------------------------------------------------------------------------------------------------
Actual $1,000 $1,133.80 $11.03
- ---------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,014.87 $10.41
- ---------------------------------------------------------------------------------------------------
CLASS C
- ---------------------------------------------------------------------------------------------------
Actual $1,000 $1,133.60 $11.08
- ---------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,014.82 $10.46
- ---------------------------------------------------------------------------------------------------
CLASS R
- ---------------------------------------------------------------------------------------------------
Actual $1,000 $1,136.40 $ 8.40
- ---------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,017.34 $ 7.93
- ---------------------------------------------------------------------------------------------------
* Expenses are equal to the annualized expense ratio for each class (Z:
1.06%; A: 1.35%; B: 2.05%; C: 2.06%; and R: 1.56%), multiplied by the
average account value over the period, multiplied by 184/365 to reflect
the one-half year period.
Annual Report | 17
Mutual Discovery Fund
FINANCIAL HIGHLIGHTS
------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
CLASS Z 2006 2005 2004 2003 2002
------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ................... $ 26.28 $ 24.26 $ 20.81 $ 16.16 $ 18.19
------------------------------------------------------------------------
Income from investment operations a:
Net investment income b ............................. 0.67 0.37 0.41 0.28 0.33
Net realized and unrealized gains (losses) .......... 5.36 3.43 3.58 4.80 (1.96)
------------------------------------------------------------------------
Total from investment operations ..................... 6.03 3.80 3.99 5.08 (1.63)
------------------------------------------------------------------------
Less distributions from:
Net investment income ............................... (0.63) (0.44) (0.54) (0.43) (0.32)
Net realized gains .................................. (1.23) (1.34) -- -- (0.08)
------------------------------------------------------------------------
Total distributions .................................. (1.86) (1.78) (0.54) (0.43) (0.40)
------------------------------------------------------------------------
Redemption fees ...................................... -- d -- d -- d -- --
------------------------------------------------------------------------
Net asset value, end of year ......................... $ 30.45 $ 26.28 $ 24.26 $ 20.81 $ 16.16
========================================================================
Total return ......................................... 23.43% 15.70% 19.39% 31.55% (9.06)%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ...................... $3,923,802 $3,033,756 $2,578,585 $2,168,161 $1,673,786
Ratios to average net assets:
Expenses c .......................................... 1.05% e 1.07% e 1.07% e 1.11% 1.04%
Net investment income ............................... 2.28% 1.42% 1.87% 1.55% 1.88%
Portfolio turnover rate .............................. 22.27% 25.69% 34.34% 46.34% 40.95%
Ratios to average net assets, excluding
dividend expense on securities sold short:
Expenses ............................................ 1.02% e 1.04% e 1.06% e 1.08% 1.03%
a The amount shown for a share outstanding throughout the period may not
correlate with the Statement of Operations for the period due to the
timing of sales and repurchase of the Fund shares in relation to income
earned and/or fluctuating market value of the investments of the Fund.
b Based on average daily shares outstanding.
c Includes dividend expense on securities sold short which varies from
period to period. See below for expense ratios that reflect only operating
expenses.
d Amount rounds to less than $0.01 per share.
e Benefit of expense reduction rounds to less than 0.01%.
18 | The accompanying notes are an integral part of these financial statements.
| Annual Report
Mutual Discovery Fund
FINANCIAL HIGHLIGHTS (CONTINUED)
------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
CLASS A 2006 2005 2004 2003 2002
------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ................... $ 26.04 $ 24.07 $ 20.67 $ 16.06 $ 18.08
------------------------------------------------------------------------
Income from investment operations a:
Net investment income b ............................. 0.55 0.27 0.33 0.21 0.27
Net realized and unrealized gains (losses) .......... 5.34 3.41 3.54 4.78 (1.95)
------------------------------------------------------------------------
Total from investment operations ..................... 5.89 3.68 3.87 4.99 (1.68)
------------------------------------------------------------------------
Less distributions from:
Net investment income ............................... (0.56) (0.37) (0.47) (0.38) (0.26)
Net realized gains .................................. (1.23) (1.34) -- -- (0.08)
------------------------------------------------------------------------
Total distributions .................................. (1.79) (1.71) (0.47) (0.38) (0.34)
------------------------------------------------------------------------
Redemption fees ...................................... -- e -- e -- e -- --
------------------------------------------------------------------------
Net asset value, end of year ......................... $ 30.14 $ 26.04 $ 24.07 $ 20.67 $ 16.06
========================================================================
Total return c ....................................... 23.02% 15.29% 18.98% 31.13% (9.39)%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ...................... $6,128,353 $3,545,288 $2,106,695 $1,439,579 $ 925,278
Ratios to average net assets:
Expenses d .......................................... 1.36% f 1.42% f 1.42% f 1.46% 1.39%
Net investment income ............................... 1.97% 1.07% 1.52% 1.20% 1.53%
Portfolio turnover rate .............................. 22.27% 25.69% 34.34% 46.34% 40.95%
Ratios to average net assets, excluding dividend
expense on securities sold short:
Expenses ............................................ 1.33% f 1.39% f 1.41% f 1.43% 1.38%
a The amount shown for a share outstanding throughout the period may not
correlate with the Statement of Operations for the period due to the
timing of sales and repurchase of the Fund shares in relation to income
earned and/or fluctuating market value of the investments of the Fund.
b Based on average daily shares outstanding.
c Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable.
d Includes dividend expense on securities sold short which varies from
period to period. See below for expense ratios that reflect only operating
expenses.
e Amount rounds to less than $0.01 per share.
f Benefit of expense reduction rounds to less than 0.01%.
Annual Report |
The accompanying notes are an integral part of these financial statements. | 19
Mutual Discovery Fund
FINANCIAL HIGHLIGHTS (CONTINUED)
------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
CLASS B 2006 2005 2004 2003 2002
------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ................... $ 25.57 $ 23.67 $ 20.35 $ 15.85 $ 17.87
------------------------------------------------------------------------
Income from investment operations a:
Net investment income b ............................. 0.38 0.11 0.18 0.09 0.16
Net realized and unrealized gains (losses) .......... 5.19 3.33 3.49 4.69 (1.92)
------------------------------------------------------------------------
Total from investment operations ..................... 5.57 3.44 3.67 4.78 (1.76)
------------------------------------------------------------------------
Less distributions from:
Net investment income ............................... (0.36) (0.20) (0.35) (0.28) (0.18)
Net realized gains .................................. (1.23) (1.34) -- -- (0.08)
------------------------------------------------------------------------
Total distributions .................................. (1.59) (1.54) (0.35) (0.28) (0.26)
------------------------------------------------------------------------
Redemption fees ...................................... -- e -- e -- e -- --
------------------------------------------------------------------------
Net asset value, end of year ......................... $ 29.55 $ 25.57 $ 23.67 $ 20.35 $ 15.85
========================================================================
Total return c ....................................... 22.16% 14.59% 18.22% 30.22% (9.94)%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ...................... $ 274,181 $ 225,158 $ 186,841 $ 115,801 $ 64,747
Ratios to average net assets:
Expenses d .......................................... 2.05% f 2.07% f 2.07% f 2.11% 2.04%
Net investment income ............................... 1.28% 0.42% 0.87% 0.55% 0.88%
Portfolio turnover rate .............................. 22.27% 25.69% 34.34% 46.34% 40.95%
Ratios to average net assets, excluding dividend
expense on securities sold short:
Expenses ............................................ 2.02% f 2.04% f 2.06% f 2.08% 2.03%
a The amount shown for a share outstanding throughout the period may not
correlate with the Statement of Operations for the period due to the
timing of sales and repurchase of the Fund shares in relation to income
earned and/or fluctuating market value of the investments of the Fund.
b Based on average daily shares outstanding.
c Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable.
d Includes dividend expense on securities sold short which varies from
period to period. See below for expense ratios that reflect only operating
expenses.
e Amount rounds to less than $0.01 per share.
f Benefit of expense reduction rounds to less than 0.01%.
20 | The accompanying notes are an integral part of these financial statements.
| Annual Report
Mutual Discovery Fund
FINANCIAL HIGHLIGHTS (CONTINUED)
------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
CLASS C 2006 2005 2004 2003 2002
------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ................... $ 25.90 $ 23.97 $ 20.59 $ 16.02 $ 18.03
------------------------------------------------------------------------
Income from investment operations a:
Net investment income b ............................. 0.36 0.11 0.19 0.10 0.16
Net realized and unrealized gains (losses) .......... 5.28 3.38 3.53 4.73 (1.94)
------------------------------------------------------------------------
Total from investment operations ..................... 5.64 3.49 3.72 4.83 (1.78)
------------------------------------------------------------------------
Less distributions from:
Net investment income ............................... (0.38) (0.22) (0.34) (0.26) (0.15)
Net realized gains .................................. (1.23) (1.34) -- -- (0.08)
------------------------------------------------------------------------
Total distributions .................................. (1.61) (1.56) (0.34) (0.26) (0.23)
------------------------------------------------------------------------
Redemption fees ...................................... -- e -- e -- e -- --
------------------------------------------------------------------------
Net asset value, end of year ......................... $ 29.93 $ 25.90 $ 23.97 $ 20.59 $ 16.02
========================================================================
Total return c ....................................... 22.17% 14.56% 18.17% 30.29% (9.98)%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ...................... $2,242,348 $1,435,702 $ 968,934 $ 725,489 $ 525,375
Ratios to average net assets:
Expenses d .......................................... 2.05% f 2.07% f 2.07% f 2.11% 2.03%
Net investment income ............................... 1.28% 0.42% 0.87% 0.55% 0.89%
Portfolio turnover rate .............................. 22.27% 25.69% 34.34% 46.34% 40.95%
Ratios to average net assets, excluding dividend
expense on securities sold short:
Expenses ............................................ 2.02% f 2.04% f 2.06% f 2.08% 2.02%
a The amount shown for a share outstanding throughout the period may not
correlate with the Statement of Operations for the period due to the
timing of sales and repurchase of the Fund shares in relation to income
earned and/or fluctuating market value of the investments of the Fund.
b Based on average daily shares outstanding.
c Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable.
d Includes dividend expense on securities sold short which varies from
period to period. See below for expense ratios that reflect only operating
expenses.
e Amount rounds to less than $0.01 per share.
f Benefit of expense reduction rounds to less than 0.01%.
Annual Report |
The accompanying notes are an integral part of these financial statements. | 21
Mutual Discovery Fund
FINANCIAL HIGHLIGHTS (CONTINUED)
-------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
CLASS R 2006 2005 2004 2003 2002 g
-------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ................... $ 25.88 $ 23.94 $ 20.57 $ 16.01 $ 18.08
-------------------------------------------------------------------------
Income from investment operations a:
Net investment income b ............................. 0.50 0.22 0.29 0.17 0.25
Net realized and unrealized gains (losses) .......... 5.29 3.40 3.54 4.76 (1.95)
-------------------------------------------------------------------------
Total from investment operations ..................... 5.79 3.62 3.83 4.93 (1.70)
-------------------------------------------------------------------------
Less distributions from:
Net investment income ............................... (0.51) (0.34) (0.46) (0.37) (0.29)
Net realized gains .................................. (1.23) (1.34) -- -- (0.08)
-------------------------------------------------------------------------
Total distributions .................................. (1.74) (1.68) (0.46) (0.37) (0.37)
-------------------------------------------------------------------------
Redemption fees ...................................... -- e -- e -- e -- --
-------------------------------------------------------------------------
Net asset value, end of year ......................... $ 29.93 $ 25.88 $ 23.94 $ 20.57 $ 16.01
=========================================================================
Total return c ....................................... 22.78% 15.13% 18.84% 30.87% (9.49)%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ...................... $ 175,790 $ 99,501 $ 46,690 $ 19,546 $ 3,932
Ratios to average net assets:
Expenses d .......................................... 1.55% f 1.57% f 1.57% f 1.61% 1.54% h
Net investment income ............................... 1.78% 0.92% 1.37% 1.05% 1.38% h
Portfolio turnover rate .............................. 22.27% 25.69% 34.34% 46.34% 40.95%
Ratios to average net assets, excluding dividend
expense on securities sold short:
Expenses ............................................ 1.52% f 1.54% f 1.56% f 1.58% 1.54% h
a The amount shown for a share outstanding throughout the period may not
correlate with the Statement of Operations for the period due to the
timing of sales and repurchase of the Fund shares in relation to income
earned and/or fluctuating market value of the investments of the Fund.
b Based on average daily shares outstanding.
c Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable, and is not annualized for periods less than
one year.
d Includes dividend expense on securities sold short which varies from
period to period. See below for expense ratios that reflect only operating
expenses.
e Amount rounds to less than $0.01 per share.
f Benefit of expense reduction rounds to less than 0.01%.
g For the period January 2, 2002 (effective date) to December 31, 2002.
h Annualized.
22 | The accompanying notes are an integral part of these financial statements.
| Annual Report
Mutual Discovery Fund
STATEMENT OF INVESTMENTS, DECEMBER 31, 2006
- ----------------------------------------------------------------------------------------------------------------------------
SHARES/WARRANTS/
COUNTRY CONTRACTS VALUE
- ----------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS 93.1%
COMMON STOCKS AND OTHER EQUITY INTERESTS 90.0%
AIRLINES 0.3%
a ACE Aviation Holdings Inc., A ........................... Canada 1,246,832 $ 40,435,770
a,b ACE Aviation Holdings Inc., A, 144A ..................... Canada 64,416 2,089,063
---------------
42,524,833
---------------
AUTOMOBILES 0.6%
Hero Honda Motors Ltd. .................................. India 1,042,903 18,022,375
a,c,d,e,g International Automotive Components Group Brazil LLC .... Brazil 3,204,016 13,200,546
a,c,d,e,g International Automotive Components Group Japan LLC ..... Japan 561,502 4,717,117
a,d,e,g International Automotive Components Group LLC ........... Luxembourg 13,618,870 13,618,870
Renault SA .............................................. France 184,310 22,140,155
---------------
71,699,063
---------------
BEVERAGES 4.7%
Brown-Forman Corp., A ................................... United States 143,200 9,655,976
Brown-Forman Corp., B ................................... United States 391,650 25,942,896
Carlsberg AS, A ......................................... Denmark 113,300 10,429,087
Carlsberg AS, B ......................................... Denmark 1,876,968 186,394,365
Fomento Economico Mexicano SA de CV, ADR ................ Mexico 1,050,228 121,574,393
Lotte Chilsung Beverage Co. Ltd. ........................ South Korea 55,692 83,837,420
Pernod Ricard SA ........................................ France 705,052 161,942,469
---------------
599,776,606
---------------
BUILDING PRODUCTS 0.5%
a Armstrong World Industries Inc. ......................... United States 261,272 11,075,320
a,f Armstrong World Industries Inc., Contingent Distribution United States 22,185,050 277,313
KCC Corp. ............................................... South Korea 126,721 39,447,021
a,e,f Owens Corning, Contingent Distribution .................. United States 29,308,034 --
a,d Owens Corning Inc. ...................................... United States 600,722 17,063,509
a,d Owens Corning Inc., options to sell (shares), exercise
price $25.00, expiration date, 4/06/07 ................. United States 535,890 --
a,d Owens Corning Inc., options to purchase (shares),
exercise price $37.50, expiration date, 1/02/08 ........ United States 535,890 --
---------------
67,863,163
---------------
CAPITAL MARKETS 0.6%
Legg Mason Inc. ......................................... United States 852,120 80,994,006
---------------
CHEMICALS 2.9%
a Arkema .................................................. France 72,224 3,711,558
a Arkema, ADR ............................................. France 10,432 536,096
a,f,s Dow Corning Corp., Contingent Distribution .............. United States 14,735,153 5,709,872
K+S AG .................................................. Germany 905,371 98,299,848
Linde AG ................................................ Germany 1,662,431 172,311,507
a Sika AG ................................................. Switzerland 53,892 83,587,772
---------------
364,156,653
---------------
COMMERCIAL BANKS 8.1%
Bank of Ireland ......................................... United States 1,707,777 39,451,141
BNP Paribas SA .......................................... France 594,632 64,875,616
Annual Report | 23
Mutual Discovery Fund
STATEMENT OF INVESTMENTS, DECEMBER 31, 2006 (CONTINUED)
- ----------------------------------------------------------------------------------------------------------------------------
SHARES/WARRANTS/
COUNTRY CONTRACTS VALUE
- ----------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
COMMON STOCKS AND OTHER EQUITY INTERESTS (CONTINUED)
COMMERCIAL BANKS (CONTINUED)
Chinatrust Financial Holding Co. Ltd. ................... Taiwan 88,975,040 $ 74,407,545
Danske Bank AS .......................................... Denmark 1,352,880 60,109,906
a,c,d,e FE Capital Holdings Ltd. ................................ Japan 11,589 15,668,208
First Community Bancorp ................................. United States 518,434 27,098,545
Intesa Sanpaulo SpA ..................................... Italy 13,008,438 100,454,958
a Investors Bancorp Inc. .................................. United States 1,775 27,921
Mitsubishi UFJ Financial Group Inc. ..................... Japan 11,055 136,521,611
Natixis ................................................. France 843,500 23,694,474
a,d,e NCB Warrant Holdings Ltd., A ............................ Japan 55,890 6,582,165
Societe Generale, A ..................................... France 773,452 131,299,991
Sumitomo Mitsui Financial Group Inc. .................... Japan 12,485 127,959,844
Svenska Handelsbanken AB, A ............................. Sweden 3,204,537 96,820,872
Swedbank AB, A .......................................... Sweden 3,112,200 112,882,663
Wachovia Corp. .......................................... United States 322,590 18,371,500
---------------
1,036,226,960
----------------
COMMERCIAL SERVICES & SUPPLIES 0.3%
a Comdisco Holding Co. Inc. ............................... United States 478 5,640
a,f Comdisco Holding Co. Inc., Contingent Distribution ...... United States 41,726,153 --
Fursys Inc. ............................................. South Korea 547,260 16,653,181
Republic Services Inc. .................................. United States 372,729 15,158,888
---------------
31,817,709
---------------
COMPUTERS & PERIPHERALS 0.4%
a,d,e DecisionOne Corp. ....................................... United States 359,884 256,597
a Dell Inc. ............................................... United States 1,126,340 28,259,871
International Business Machines Corp. ................... United States 202,860 19,707,849
---------------
48,224,317
---------------
CONSTRUCTION MATERIALS 1.1%
Ciments Francais SA ..................................... France 399,572 76,744,701
a Hanil Cement Co. Ltd. ................................... South Korea 331,250 29,385,081
Rinker Group Ltd. ....................................... Australia 2,069,142 29,482,522
---------------
135,612,304
---------------
CONSUMER FINANCE 1.1%
Aiful Corp. ............................................. Japan 1,649,780 46,429,731
a,d,e Cerberus FIM Investors Auto Finance LLC ................. United States 6,498,835 6,583,840
a,d,e Cerberus FIM Investors Commercial Finance LLC ........... United States 830,418 841,280
a,d,e Cerberus FIM Investors Commercial Mortgage LLC .......... United States 1,420,903 1,439,488
a,d,e Cerberus FIM Investors Insurance LLC .................... United States 6,769,270 6,857,812
a,d,e Cerberus FIM Investors Rescap LLC ....................... United States 14,357,573 14,545,370
Takefuji Corp. .......................................... Japan 1,622,179 64,186,694
---------------
140,884,215
---------------
CONTAINERS & PACKAGING 0.5%
Temple-Inland Inc. ...................................... United States 1,371,420 63,126,463
---------------
DISTRIBUTORS 0.3%
Compania de Distribucion Integral Logista SA ............ Spain 564,170 36,417,423
---------------
24 | Annual Report
Mutual Discovery Fund
STATEMENT OF INVESTMENTS, DECEMBER 31, 2006 (CONTINUED)
- ----------------------------------------------------------------------------------------------------------------------------
SHARES/WARRANTS/
COUNTRY CONTRACTS VALUE
- ----------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
COMMON STOCKS AND OTHER EQUITY INTERESTS (CONTINUED)
DIVERSIFIED CONSUMER SERVICES 0.3%
H&R Block Inc. .......................................... United States 1,850,260 $ 42,629,990
----------------
DIVERSIFIED FINANCIAL SERVICES 4.4%
Citigroup Inc. .......................................... United States 419,620 23,372,834
Deutsche Boerse AG ...................................... Germany 346,021 63,682,176
Euronext NV ............................................. Netherlands 752,610 88,916,709
Fortis .................................................. Belgium 2,986,983 127,397,255
Guinness Peat Group PLC ................................. New Zealand 24,499,842 42,111,748
Jardine Matheson Holdings Ltd. .......................... Hong Kong 4,554,012 97,455,857
Jardine Strategic Holdings Ltd. ......................... Hong Kong 8,061,800 107,221,940
Leucadia National Corp. ................................. United States 410,740 11,582,868
a,g Marconi Corp., Contingent Distribution .................. United Kingdom 33,909,700 --
b Spinrite Income Fund, 144A .............................. Canada 274,300 266,002
----------------
562,007,389
----------------
DIVERSIFIED TELECOMMUNICATION SERVICES 3.5%
a,d,e,g AboveNet Inc. ........................................... United States 332,512 10,188,168
a,e,f,g AboveNet Inc., Contingent Distribution .................. United States 46,367,000 --
a,d,g AboveNet Inc., options to purchase (shares), exercise
price $20.95, expiration date, 9/09/13 ................. United States 464 12,551
a,d,e,g AboveNet Inc., wts., 9/08/08 ............................ United States 11,105 355,360
a,d,e,g AboveNet Inc., wts., 9/08/10 ............................ United States 13,066 376,301
Belgacom ................................................ Belgium 1,082,150 47,668,779
BellSouth Corp. ......................................... United States 1,628,420 76,714,866
Chunghwa Telecom Co. Ltd., ADR .......................... Taiwan 2,902,333 57,263,030
Embarq Corp. ............................................ United States 8,039 422,530
a,e,f Global Crossing Holdings Ltd., Contingent Distribution .. United States 45,658,716 --
Koninklijke (Royal) KPN NV .............................. Netherlands 4,511,679 64,142,260
NTL Inc. ................................................ United Kingdom 5,425,163 136,931,114
Sprint Nextel Corp. ..................................... United States 160,782 3,037,172
Verizon Communications Inc. ............................. United States 1,385,973 51,613,634
----------------
448,725,765
----------------
ELECTRIC UTILITIES 1.2%
Constellation Energy Group .............................. United States 1,098,560 75,657,827
E.ON AG ................................................. Germany 597,820 81,511,536
----------------
157,169,363
----------------
ELECTRICAL EQUIPMENT 0.2%
American Power Conversion Corp. ......................... United States 936,000 28,632,240
----------------
ELECTRONIC EQUIPMENT & INSTRUMENTS 0.0% h
Symbol Technologies Inc. ................................ United States 118,800 1,774,872
----------------
ENERGY EQUIPMENT & SERVICES 2.0%
a Basic Energy Services Inc. .............................. United States 11,144 274,700
a Bergesen Worldwide Offshore Ltd. ........................ Norway 5,771,664 24,250,689
Bourbon SA .............................................. France 691,937 38,024,484
a,b,i Compagnie Generale de Geophysique SA, 144A .............. France 77,677 16,836,660
Annual Report | 25
Mutual Discovery Fund
STATEMENT OF INVESTMENTS, DECEMBER 31, 2006 (CONTINUED)
- ----------------------------------------------------------------------------------------------------------------------------
SHARES/WARRANTS/
COUNTRY CONTRACTS VALUE
- ----------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
COMMON STOCKS AND OTHER EQUITY INTERESTS (CONTINUED)
ENERGY EQUIPMENT & SERVICES (CONTINUED)
a Petroleum Geo-Services ASA .............................. Norway 1,796,568 $ 42,208,803
a Seadrill Ltd. ........................................... Bermuda 7,893,470 133,233,004
---------------
254,828,340
---------------
FOOD & STAPLES RETAILING 1.8%
Carrefour SA ............................................ France 2,719,088 164,893,909
RHM PLC ................................................. United Kingdom 9,333,685 69,275,971
---------------
234,169,880
---------------
FOOD PRODUCTS 9.0%
Cadbury Schweppes PLC ................................... United Kingdom 10,525,595 112,648,936
Cermaq ASA .............................................. Norway 3,630,328 52,979,641
c CSM NV .................................................. Netherlands 4,036,926 155,445,294
c Farmer Brothers Co. ..................................... United States 904,637 19,314,000
General Mills Inc. ...................................... United States 478,600 27,567,360
Groupe Danone ........................................... France 822,960 124,712,784
a Lotte Confectionary Co. Ltd. ............................ South Korea 52,189 67,901,817
Nestle SA ............................................... Switzerland 219,229 77,900,912
Nong Shim Co. Ltd. ...................................... South Korea 153,896 47,161,677
g Orkla ASA ............................................... Norway 5,104,342 288,958,998
a Pan Fish ASA ............................................ Norway 154,407,626 141,144,953
Rieber & Son ASA ........................................ Norway 3,605,065 32,375,977
---------------
1,148,112,349
---------------
HEALTH CARE EQUIPMENT & SUPPLIES 0.6%
t Bausch & Lomb Inc. ...................................... United States 991,370 51,610,722
a Boston Scientific Corp. ................................. United States 1,577,917 27,108,614
---------------
78,719,336
---------------
HEALTH CARE PROVIDERS & SERVICES 1.5%
Aetna Inc. .............................................. United States 320,335 13,832,065
Caremark Rx Inc. ........................................ United States 950,600 54,288,766
a,d,e,g Kindred Healthcare Inc. ................................. United States 1,135,557 27,239,174
a,d,e,g Kindred Healthcare Inc., options to purchase (shares):
exercise price $23.75, expiration date, 7/17/11 ........ United States 3,002 713
exercise price $26.00, expiration date, 1/01/12 ........ United States 898 --
exercise price $9.07, expiration date, 1/01/13 ......... United States 672 10,021
exercise price $25.99, expiration date, 1/01/14 ........ United States 446 --
exercise price $27.90, expiration date, 1/10/15 ........ United States 186 --
MDS Inc. ................................................ Canada 1,294,341 23,626,375
Rhoen-Klinikum AG ....................................... Germany 1,581,585 75,556,439
---------------
194,553,553
---------------
HOTELS, RESTAURANTS & LEISURE 0.2%
a,c,d,e Hancock Discovery LLC ................................... United States 8,758,216 --
Ladbrokes PLC ........................................... United Kingdom 1,252,587 10,271,952
a Trump Entertainment Resorts Inc. ........................ United States 839,693 15,316,001
---------------
25,587,953
---------------
26 | Annual Report
Mutual Discovery Fund
STATEMENT OF INVESTMENTS, DECEMBER 31, 2006 (CONTINUED)
- ----------------------------------------------------------------------------------------------------------------------------
SHARES/WARRANTS/
COUNTRY CONTRACTS VALUE
- ----------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
COMMON STOCKS AND OTHER EQUITY INTERESTS (CONTINUED)
HOUSEHOLD DURABLES 0.3%
Hunter Douglas NV ....................................... Netherlands 323,874 $ 26,036,568
Koninklijke Philips Electronics NV ...................... Netherlands 272,485 10,276,452
---------------
36,313,020
---------------
INDUSTRIAL CONGLOMERATES 2.1%
Keppel Corp. Ltd. ....................................... Singapore 7,739,672 88,831,215
Siemens AG .............................................. Germany 876,269 87,447,944
Tyco International Ltd. ................................. United States 3,126,520 95,046,208
---------------
271,325,367
---------------
INSURANCE 6.3%
a Alleghany Corp. ......................................... United States 75,045 27,286,362
American International Group Inc. ....................... United States 500,700 35,880,162
a,c,d,e Augsburg Re AG .......................................... Switzerland 66,860 --
a Berkshire Hathaway Inc., A .............................. United States 853 93,821,470
a Berkshire Hathaway Inc., B .............................. United States 34,470 126,367,020
a Conseco Inc. ............................................ United States 2,279,675 45,547,907
E-L Financial Corp. Ltd. ................................ Canada 177,619 96,011,053
Hartford Financial Services Group Inc. .................. United States 511,000 47,681,410
a,c,d,e Imagine Group Holdings Ltd. ............................. Bermuda 4,551,501 49,929,966
Montpelier Re Holdings Ltd. ............................. Bermuda 348,227 6,480,505
Old Republic International Corp. ........................ United States 1,898,187 44,189,793
a,d,e Olympus Re Holdings Ltd. ................................ Bermuda 47,160 47,160
Prudential Financial Inc. ............................... United States 421,200 36,164,232
The St. Paul Travelers Cos. Inc. ........................ United States 1,037,460 55,701,227
White Mountains Insurance Group Ltd. .................... United States 172,815 100,134,195
Zurich Financial Services AG ............................ Switzerland 121,104 32,597,852
---------------
797,840,314
---------------
MACHINERY 2.2%
a Hanjin Heavy Industries Co. Ltd. ........................ South Korea 1,496,470 48,755,958
Kone OYJ, B ............................................. Finland 77,263 4,379,494
Scania AB ............................................... Sweden 761,160 53,438,516
Schindler Holding AG .................................... Switzerland 2,158,820 135,795,456
Schindler Holding AG, Registered ........................ Switzerland 659,880 41,156,194
---------------
283,525,618
---------------
MEDIA 4.3%
CJ CGV Co. Ltd. ......................................... South Korea 849,040 19,537,049
Clear Channel Communications Inc. ....................... United States 1,529,370 54,353,810
a Comcast Corp., A ........................................ United States 443,600 18,577,968
Daekyo Co. Ltd. ......................................... South Korea 367,570 36,757,000
JC Decaux SA ............................................ France 2,791,333 79,884,273
a Liberty Media Holding Corp.-Capital, A .................. United States 212,775 20,847,695
Mediaset SpA ............................................ Italy 1,407,167 16,699,201
j News Corp., A ........................................... United States 3,489,300 74,950,164
Sun-Times Media Group Inc., A ........................... United States 880,440 4,322,960
Annual Report | 27
Mutual Discovery Fund
STATEMENT OF INVESTMENTS, DECEMBER 31, 2006 (CONTINUED)
- ----------------------------------------------------------------------------------------------------------------------------
SHARES/WARRANTS/
COUNTRY CONTRACTS VALUE
- ----------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
COMMON STOCKS AND OTHER EQUITY INTERESTS (CONTINUED)
MEDIA (CONTINUED)
Time Warner Inc. ........................................ United States 7,333,400 $ 159,721,452
a,e TVMAX Holdings Inc. ..................................... United States 118,432 118,432
a Viacom Inc., B .......................................... United States 858,450 35,222,204
Washington Post Co., B .................................. United States 34,052 25,389,171
---------------
546,381,379
---------------
METALS & MINING 3.1%
Anglo American PLC ...................................... South Africa 3,338,986 162,884,064
c,d,e,g Esmark Inc. ............................................. United States 7,661 6,307,990
a Gammon Lake Resources Inc. .............................. Canada 4,215,239 68,695,463
Mittal Steel Co. NV ..................................... Netherlands 2,064,826 87,139,780
Phelps Dodge Corp. ...................................... United States 310,930 37,224,540
United States Steel Corp. ............................... United States 395,450 28,923,213
---------------
391,175,050
---------------
MULTI-UTILITIES & UNREGULATED POWER 2.2%
NorthWestern Corp. ...................................... United States 324,938 11,496,307
a,f NorthWestern Corp., Contingent Distribution ............. United States 9,839,500 1,028,196
a NorthWestern Corp., wts., 11/01/07 ...................... United States 17,778 202,491
RWE AG .................................................. Germany 1,172,783 129,207,107
Suez SA ................................................. France 2,598,449 134,562,134
---------------
276,496,235
---------------
MULTILINE RETAIL 0.1%
Jelmoli Holding AG ...................................... Switzerland 8,345 18,730,110
---------------
OIL, GAS & CONSUMABLE FUELS 1.5%
a,d,e Anchor Resources LLC .................................... United States 53,272 --
BP PLC .................................................. United Kingdom 2,095,000 23,283,066
BP PLC, ADR ............................................. United Kingdom 180,900 12,138,390
Eni SpA ................................................. Italy 847,600 28,508,918
Royal Dutch Shell PLC, A ................................ United Kingdom 1,707,540 60,227,897
Total SA, B ............................................. France 510,684 36,841,116
Total SA, B, ADR ........................................ France 417,296 30,011,928
---------------
191,011,315
---------------
PAPER & FOREST PRODUCTS 1.7%
Weyerhaeuser Co. ........................................ United States 3,052,200 215,637,930
---------------
PERSONAL PRODUCTS 0.5%
a Amorepacific Corp. ...................................... South Korea 99,940 62,328,172
---------------
PHARMACEUTICALS 1.3%
Merck & Co. Inc. ........................................ United States 468,600 20,430,960
Pfizer Inc. ............................................. United States 2,675,730 69,301,407
Sanofi-Aventis .......................................... France 832,963 76,913,715
---------------
166,646,082
---------------
28 | Annual Report
Mutual Discovery Fund
STATEMENT OF INVESTMENTS, DECEMBER 31, 2006 (CONTINUED)
- ----------------------------------------------------------------------------------------------------------------------------
SHARES/WARRANTS/
COUNTRY CONTRACTS VALUE
- ----------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
COMMON STOCKS AND OTHER EQUITY INTERESTS (CONTINUED)
REAL ESTATE 4.3%
e Canary Wharf Group PLC .................................. United Kingdom 5,400,183 $ 36,802,557
Great Eagle Holdings Ltd. ............................... Hong Kong 12,451,899 35,855,143
iStar Financial Inc. .................................... United States 675,840 32,318,669
Link REIT ............................................... Hong Kong 62,385,902 128,314,074
c Potlatch Corp. .......................................... United States 3,582,320 156,977,262
Reckson Associates Realty Corp. ......................... United States 351,000 16,005,600
Swire Pacific Ltd., A ................................... Hong Kong 7,563,600 81,234,940
Swire Pacific Ltd., B ................................... Hong Kong 13,605,000 27,772,623
a,c,d,e Torre Mayor Investments LP .............................. Mexico 170 15,300,000
Ventas Inc. ............................................. United States 516,500 21,858,280
---------------
552,439,148
---------------
ROAD & RAIL 1.0%
c,d,e Florida East Coast Industries Inc. ...................... United States 2,247,600 127,259,112
---------------
SEMICONDUCTORS & SEMICONDUCTOR EQUIPMENT 0.1%
a Agere Systems Inc. ...................................... United States 471,800 9,044,406
---------------
SOFTWARE 0.7%
Microsoft Corp. ......................................... United States 2,794,540 83,444,964
---------------
TEXTILES, APPAREL & LUXURY GOODS 0.1%
Christian Dior SA ....................................... France 75,476 8,045,291
---------------
THRIFTS & MORTGAGE FINANCE 1.5%
Countrywide Financial Corp. ............................. United States 92,500 3,926,625
Hudson City Bancorp Inc. ................................ United States 2,326,520 32,292,098
Hypo Real Estate Holding AG ............................. Germany 1,352,952 85,136,913
Sovereign Bancorp Inc. .................................. United States 966,840 24,548,068
Washington Mutual Inc. .................................. United States 965,450 43,918,320
---------------
189,822,024
---------------
TOBACCO 10.4%
Altadis SA .............................................. Spain 3,181,151 166,501,379
j Altria Group Inc. ....................................... United States 1,213,908 104,177,585
British American Tobacco PLC ............................ United Kingdom 10,342,443 289,431,394
Imperial Tobacco Group PLC .............................. United Kingdom 6,448,546 253,833,028
ITC Ltd. ................................................ India 18,037,005 71,939,500
Japan Tobacco Inc. ...................................... Japan 31,226 150,837,569
KT&G Corp. .............................................. South Korea 4,689,999 284,930,047
---------------
1,321,650,502
---------------
TRADING COMPANIES & DISTRIBUTORS 0.2%
a Kloeckner & Co. AG ...................................... Germany 506,310 22,042,331
---------------
TOTAL COMMON STOCKS AND OTHER EQUITY INTERESTS
(COST $7,783,280,525) .................................. 11,467,393,115
---------------
Annual Report | 29
Mutual Discovery Fund
STATEMENT OF INVESTMENTS, DECEMBER 31, 2006 (CONTINUED)
- ----------------------------------------------------------------------------------------------------------------------------
SHARES/WARRANTS/
COUNTRY CONTRACTS VALUE
- ----------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
PREFERRED STOCKS 0.2%
DIVERSIFIED TELECOMMUNICATION SERVICES 0.0% h
d PTV Inc., 10.00%, pfd., A ............................... United Kingdom 86,280 $ 323,550
---------------
METALS & MINING 0.2%
c,d,e,g Esmark Inc., 8.00%, cvt. pfd., A ........................ United States 27,889 26,968,663
---------------
TOTAL PREFERRED STOCKS (COST $28,147,840) ............... 27,292,213
---------------
------------------
PRINCIPAL AMOUNT k
------------------
CORPORATE BONDS & NOTES 1.1%
b ACE Aviation Holdings Inc., cvt., 144A, 4.25%, 6/1/35 ... Canada 2,761,000 CAD 2,378,216
c,d,e Augsburg Re AG, zero cpn., 2/17/07 ...................... Switzerland 768,890 7,689
d,e Cerberus FIM Investors Auto Finance LLC, 12.00%, 11/22/13 United States 19,390,926 19,390,926
d,e Cerberus FIM Investors Commercial Finance LLC, 12.00%,
11/22/13 ............................................... United States 2,491,256 2,491,256
d,e Cerberus FIM Investors Commercial Mortgage LLC, 12.00%,
11/22/13 ............................................... United States 4,262,708 4,262,708
d,e Cerberus FIM Investors Insurance LLC, 12.00%, 11/22/13 .. United States 20,307,811 20,307,811
d,e Cerberus FIM Investors Rescap LLC, 12.00%, 11/22/13 ..... United States 43,072,719 43,072,719
d,e DecisionOne Corp., 12.00%, 4/15/10 ...................... United States 418,890 418,890
e,l Motor Coach Industries International Inc., FRN, 18.37%,
12/01/08 ............................................... United States 27,768,992 28,463,217
Trump Entertainment Resorts Inc., 8.50%, 5/20/15 ........ United States 17,141,134 17,141,134
e TVMAX Holdings Inc., PIK,
11.50%, 1/30/07 ........................................ United States 200,896 200,896
14.00%, 1/30/07 ........................................ United States 632,666 632,666
---------------
TOTAL CORPORATE BONDS & NOTES (COST $132,443,044) ....... 138,768,128
---------------
CORPORATE BONDS & NOTES IN REORGANIZATION 1.3%
m Adelphia Communications Corp.,
9.25%, 10/01/02 ........................................ United States 4,491,000 4,109,265
8.125%, 7/15/03 ........................................ United States 650,000 599,625
7.50%, 1/15/04 ......................................... United States 1,655,000 1,526,738
10.50%, 7/15/04 ........................................ United States 2,605,000 2,435,675
9.875%, 3/01/05 ........................................ United States 1,168,000 1,077,480
10.25%, 11/01/06 ....................................... United States 5,186,000 4,732,225
9.875%, 3/01/07 ........................................ United States 528,000 487,080
8.375%, 2/01/08 ........................................ United States 4,053,000 3,738,892
7.75%, 1/15/09 ......................................... United States 8,875,000 8,187,187
7.875%, 5/01/09 ........................................ United States 4,280,000 3,884,100
9.375%, 11/15/09 ....................................... United States 4,509,000 4,294,822
senior note, 10.875%, 10/01/10 ......................... United States 3,769,000 3,476,903
senior note, 10.25%, 6/15/11 ........................... United States 4,712,000 4,499,960
m Century Communications Corp.,
8.875%, 1/15/07 ........................................ United States 262,000 315,710
8.75%, 10/01/07 ........................................ United States 2,620,000 3,071,950
8.375%, 12/15/07 ....................................... United States 392,000 472,360
senior note, 9.50%, 3/01/05 ............................ United States 735,000 893,025
Series B, zero cpn., senior disc. note, 1/15/08 ........ United States 4,045,000 2,821,388
zero cpn., 3/15/03 ..................................... United States 7,228,000 7,715,890
30 | Annual Report
Mutual Discovery Fund
STATEMENT OF INVESTMENTS, DECEMBER 31, 2006 (CONTINUED)
- ----------------------------------------------------------------------------------------------------------------------------
COUNTRY PRINCIPAL AMOUNT k VALUE
- ----------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
CORPORATE BONDS & NOTES IN REORGANIZATION (CONTINUED)
l,m Collins & Aikman Products Co.,
Revolver, FRN, 11.50%, 8/31/09 ........................ United States 586,240 $ 334,157
Tranche B1 Term Loan, FRN, 11.50%, 8/31/11 ............ United States 1,387,200 790,704
m Dana Corp.,
6.50%, 3/01/09 ........................................ United States 430,000 324,650
5.85%, 1/15/15 ........................................ United States 15,800,000 11,376,000
7.00%, 3/01/29 ........................................ United States 3,435,000 2,541,900
l,m Eurotunnel PLC,
S8 Tier 1 EFL2 Stabilization Note, FRN, 5.971%, 3/15/26 United Kingdom 249,000 GBP 175,546
b Senior Tranche G2 Term Loan A, 144A, FRN, 5.747%,
12/15/12 .............................................. United Kingdom 657,069 GBP 1,302,856
Tier 2, FRN, 5.959%, 12/31/18 ......................... United Kingdom 6,155,799 GBP 12,070,277
Tier 3, FRN, 5.895%, 12/31/25 ......................... United Kingdom 24,432,938 GBP 41,867,210
Eurotunnel SA,
l S6 Tier 1 FM2 Stabilization Note, FRN, 4.187%, 3/15/26 France 36,000 EUR 17,108
l S7 Tier 1 FM4 Stabilization Note, FRN, 4.187%, 3/15/26 France 165,000 EUR 78,411
Senior Tranche H1 Term Loan (KfW Advance), 8.78%,
12/15/12 .............................................. France 706,000 EUR 943,605
l Tier 2 (LIBOR), FRN, 4.305%, 12/31/18 ................. France 1,420,047 EUR 1,876,876
l Tier 2 (PIBOR), FRN, 4.291%, 12/31/18 ................. France 628,134 EUR 830,204
l Tier 3 (LIBOR), FRN, 4.300%, 12/31/25 ................. France 27,236,561 EUR 31,459,418
l Tier 3 (PIBOR), FRN, 4.304%, 12/31/25 ................. France 5,943,809 EUR 6,865,359
m Safety Kleen Services, senior sub. note, 9.25%, 6/01/08 . United States 40,000 40
---------------
TOTAL CORPORATE BONDS & NOTES IN REORGANIZATION
(COST $131,557,197) .................................... 171,194,596
---------------
GOVERNMENT AGENCIES (COST $65,000,000) 0.5%
Federal Home Loan Bank, 2.26% - 5.48%, 1/26/07 - 2/28/08 United States 65,000,000 64,947,694
---------------
TOTAL LONG TERM INVESTMENTS (COST $8,140,428,606) ....... 11,869,595,746
---------------
SHORT TERM INVESTMENTS 7.1%
U.S. GOVERNMENT AND AGENCY SECURITIES 7.0%
Government of Norway, 6.75%, 1/15/07 .................... Norway 51,550,000 NOK 8,275,223
n U.S. Treasury Bill, 5/03/07 ............................. United States 100,000,000 98,374,300
n Federal Home Loan Bank, 1/02/07 - 6/04/07 ............... United States 783,686,000 780,111,441
---------------
TOTAL U.S. GOVERNMENT AND AGENCY SECURITIES
(COST $885,420,683)..................................... 886,760,964
---------------
o INVESTMENTS FROM CASH COLLATERAL RECEIVED FOR LOANED SECURITIES 0.1%
p REPURCHASE AGREEMENTS 0.1%
Bank of America LLC, 5.30%, 1/02/07 (Maturity Value
$3,001,110) Collateralized by U.S. Government Agency
Securities, 5.00%, 5/01/35 - 7/01/35 .................. United States 3,000,000 3,000,000
Barclays Capital Inc., 5.30%, 1/02/07 (Maturity Value
$3,489,291) Collateralized by U.S. Government Agency
Securities, 3.308% - 7.063%, 5/01/17 - 6/01/39 ........ United States 3,488,000 3,488,000
Deutsche Bank Securities Inc., 5.30%, 1/02/07
(Maturity Value $3,001,780)
Collateralized by U.S. Government Agency Securities,
4.50% - 7.00%, 11/01/13 - 12/01/36 ................... United States 3,000,000 3,000,000
Annual Report | 31
Mutual Discovery Fund
STATEMENT OF INVESTMENTS, DECEMBER 31, 2006 (CONTINUED)
- ----------------------------------------------------------------------------------------------------------------------------
COUNTRY PRINCIPAL AMOUNT k VALUE
- ----------------------------------------------------------------------------------------------------------------------------
SHORT TERM INVESTMENTS (CONTINUED)
o INVESTMENTS FROM CASH COLLATERAL RECEIVED FOR LOANED SECURITIES (CONTINUED)
p REPURCHASE AGREEMENTS (CONTINUED)
Citigroup Global Markets Inc., 5.30%, 1/02/07 (Maturity
Value $3,333,977) Collateralized by U.S. Government
Agency Securities, 3.758% - 7.00%, 12/01/13 - 12/01/36 United States 3,332,000 $ 3,332,000
Morgan Stanley & Co. Inc., 5.30%, 1/02/07 (Maturity
Value $3,001,783) Collateralized by U.S. Government
Agency Securities, 4.875% - 6.125%, 8/27/07 - 8/17/26 . United States 3,000,000 3,000,000
---------------
TOTAL INVESTMENT FROM CASH COLLATERAL RECEIVED
FOR LOANED SECURITIES (COST $15,820,000)................ 15,820,000
---------------
TOTAL SHORT TERM INVESTMENTS (COST $901,240,683)......... 902,580,964
---------------
TOTAL INVESTMENTS (COST $9,041,669,289) 100.2%........... 12,772,176,710
OPTIONS WRITTEN 0.0% h .................................. (54,465)
SECURITIES SOLD SHORT (1.5)% ........................... (197,292,593)
NET UNREALIZED LOSS ON FORWARD
EXCHANGE CONTRACTS (0.4)% ............................. (50,458,337)
OTHER ASSETS, LESS LIABILITIES 1.7% .................... 220,102,580
---------------
NET ASSETS 100.0%........................................ $12,744,473,895
===============
-----------
CONTRACTS
-----------
q OPTIONS WRITTEN 0.0% h
HEALTH CARE EQUIPMENT & SUPPLIES 0.0%
Bausch & Lomb Inc., Feb. 55.00 Calls, 2/17/07 ........... United States 283 $ 36,790
Bausch & Lomb Inc., Jan. 55.00 Calls, 1/20/07 ........... United States 707 17,675
---------------
TOTAL OPTIONS WRITTEN (PREMIUMS RECEIVED $112,825)....... 54,465
---------------
-----------
SHARES
-----------
r SECURITIES SOLD SHORT 1.5%
DIVERSIFIED TELECOMMUNICATION SERVICES 0.6%
AT&T Inc. ............................................... United States 2,157,707 77,138,025
---------------
ELECTRIC UTILITIES 0.3%
FPL Group Inc. .......................................... United States 628,713 34,214,561
Iberdrola SA, Br. ....................................... Spain 273,185 11,943,663
---------------
46,158,224
---------------
FOOD & STAPLES RETAILING 0.2%
CVS Corp. ............................................... United States 827,676 25,583,465
---------------
FOOD PRODUCTS 0.1%
Kraft Foods Inc., A ..................................... United States 424,867 15,167,752
---------------
METALS & MINING 0.1%
Freeport-McMoRan Copper & Gold Inc., B .................. United States 208,350 11,611,346
---------------
32 | Annual Report
Mutual Discovery Fund
STATEMENT OF INVESTMENTS, DECEMBER 31, 2006 (CONTINUED)
- ----------------------------------------------------------------------------------------------------------------------------
COUNTRY SHARES VALUE
- ----------------------------------------------------------------------------------------------------------------------------
r SECURITIES SOLD SHORT (CONTINUED)
REAL ESTATE 0.1%
LSI Logic Corp. ......................................... United States 982,500 $ 8,842,500
SL Green Realty Corp. ................................... United States 36,458 4,840,893
---------------
13,683,393
---------------
TEXTILES, APPAREL & LUXURY GOODS 0.1%
LVMH Moet Hennessy Louis Vuitton ........................ France 75,332 7,950,388
---------------
TOTAL SECURITIES SOLD SHORT (PROCEEDS $185,525,211)...... $ 197,292,593
===============
CURRENCY ABBREVIATIONS
CAD - Canadian Dollar
EUR - Euro
GBP - British Pound
NOK - Norwegian Krone
SELECTED PORTFOLIO ABBREVIATIONS
ADR - American Depository Receipt
FRN - Floating Rate Note
LIBOR - London InterBank Offered Rate
PIBOR - Paris InterBank Offered Rate
PIK - Payment-In-Kind
REIT - Real Estate Investment Trust
a Non-income producing during the twelve months ended December 31, 2006.
b Security was purchased pursuant to Rule 144A under the Securities Act of
1933 and may be sold in transactions exempt from registration only to
qualified institutional buyers or in a public offering registered under
the Securities Act of 1933. These securities have been deemed liquid under
guidelines approved by the Fund's Board of Directors. At December 31,
2006, the aggregate value of these securities was $22,872,797,
representing 0.18% of net assets.
c See Note 12 regarding holdings of 5% voting securities.
d See Note 11 regarding restricted securities.
e Security has been deemed illiquid because it may not be able to be sold
within seven days. At December 31, 2006, the aggregate value of these
securities was $467,337,631, representing 3.67% of net assets.
f Contingent distributions represent the right to receive additional
distributions, if any, during the reorganization of the underlying
company. Shares represent total underlying principal of debt securities.
g See Note 13 regarding other considerations - security board member.
h Rounds to less than 0.1% of net assets.
i A portion of the security is on loan as of December 31, 2006. See Note
1(i).
j See Note 1(g) regarding securities segregated with broker for securities
sold short.
k The principal amount is stated in U.S. dollars unless otherwise indicated.
l The coupon rate shown represents the rate at period end.
m See Note 10 regarding defaulted securities.
n The security is traded on a discount basis with no stated coupon rate.
o See Note 1(h) regarding securities on loan.
p See Note 1(c) regarding repurchase agreements.
q See Note 1(f) regarding written options.
r See Note 1(g) regarding securities sold short.
s See Note 13 regarding other considerations - credit committee
participation.
t A portion or all of the security is held in connection with written option
contracts open at year end.
Annual Report |
The accompanying notes are an integral part of these financial statements. | 33
Mutual Discovery Fund
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
December 31, 2006
Assets:
Investments in securities:
Cost - Unaffiliated issuers .............................................................................. $ 8,568,341,966
Cost - Non-controlled affiliated issuers (Note 12) ....................................................... 446,589,588
Cost - Controlled affiliates (Note 12) ................................................................... 10,917,735
Cost - Repurchase agreements ............................................................................. 15,820,000
---------------
Total cost of investments ................................................................................ $ 9,041,669,289
===============
Value - Unaffiliated issuers (includes securities segregated with broker for
securities sold short in the amount of $178,172,777 and securities loaned in the amount of $15,152,930) . $12,165,260,863
Value - Non-controlled affiliated issuers (Note 12) ...................................................... 591,095,847
Value - Controlled affiliates (Note 12) .................................................................. --
Value - Repurchase agreements ............................................................................ 15,820,000
---------------
Total value of investments ............................................................................... 12,772,176,710
Cash ...................................................................................................... 2,897,843
Cash on deposit with brokers for securities sold short .................................................... 223,770,071
Foreign currency, at value (cost $46,502,083) ............................................................. 47,560,466
Receivables:
Investment securities sold ............................................................................... 38,014,928
Capital shares sold ...................................................................................... 45,696,832
Dividends and interest ................................................................................... 11,093,318
Other .................................................................................................... 1,095,686
Unrealized gain on forward exchange contracts (Note 8) .................................................... 40,208,269
Due from broker - synthetic equity swaps (Note 7) ......................................................... 4,354,550
---------------
Total assets ......................................................................................... 13,186,868,673
---------------
Liabilities:
Payables:
Investment securities purchased .......................................................................... 10,064,029
Capital shares redeemed .................................................................................. 108,391,685
Affiliates ............................................................................................... 17,333,158
Foreign tax .............................................................................................. 1,096,820
Options written, at value (premiums received $112,825) .................................................... 54,465
Securities sold short, at value (proceeds $185,525,211) ................................................... 197,292,593
Payable upon return of securities loaned .................................................................. 15,820,000
Unrealized loss on forward exchange contracts (Note 8) .................................................... 90,666,606
Accrued expenses and other liabilities .................................................................... 1,675,422
---------------
Total liabilities .................................................................................... 442,394,778
---------------
Net assets, at value ............................................................................... $12,744,473,895
===============
Net assets consist of:
Paid-in capital ........................................................................................... $ 9,063,478,571
Distribution in excess of net investment income ........................................................... (12,725,521)
Net unrealized appreciation (depreciation) ................................................................ 3,669,196,963
Accumulated net realized gain (loss) ...................................................................... 24,523,882
---------------
Net assets, at value ............................................................................... $12,744,473,895
===============
34 | The accompanying notes are an integral part of these financial statements.
| Annual Report
Mutual Discovery Fund
FINANCIAL STATEMENTS (CONTINUED)
STATEMENT OF ASSETS AND LIABILITIES (CONTINUED)
December 31, 2006
CLASS Z:
Net assets, at value ...................................................................................... $ 3,923,802,163
===============
Shares outstanding ........................................................................................ 128,859,369
===============
Net asset value and maximum offering price per share a .................................................... $ 30.45
===============
CLASS A:
Net assets, at value ...................................................................................... $ 6,128,353,217
===============
Shares outstanding ........................................................................................ 203,326,140
===============
Net asset value per share a ............................................................................... $ 30.14
===============
Maximum offering price per share (net asset value per share / 94.25%) ..................................... $ 31.98
===============
CLASS B:
Net assets, at value ...................................................................................... $ 274,181,092
===============
Shares outstanding ........................................................................................ 9,277,503
===============
Net asset value and maximum offering price per share a .................................................... $ 29.55
===============
CLASS C:
Net assets, at value ...................................................................................... $ 2,242,347,820
===============
Shares outstanding ........................................................................................ 74,924,570
===============
Net asset value and maximum offering price per share a .................................................... $ 29.93
===============
CLASS R:
Net assets, at value ...................................................................................... $ 175,789,603
===============
Shares outstanding ........................................................................................ 5,872,512
===============
Net asset value and maximum offering price per share a .................................................... $ 29.93
===============
a Redemption price is equal to net asset value less contingent deferred
sales charges, if applicable, and redemption fees retained by the Fund.
Annual Report |
The accompanying notes are an integral part of these financial statements. | 35
Mutual Discovery Fund
FINANCIAL STATEMENTS (CONTINUED)
STATEMENT OF OPERATIONS
for the year ended December 31, 2006
Investment income:
Dividends: (net of foreign taxes of $16,277,247)
Unaffiliated issuers ..................................................................................... $ 241,649,952
Non-controlled affiliated issuers (Note 12) .............................................................. 53,063,201
Interest (net of foreign taxes of $209) ................................................................... 53,544,952
Income from securities loaned - net ....................................................................... 946,049
Other income (Note 14) .................................................................................... 292,776
---------------
Total investment income .............................................................................. 349,496,930
---------------
Expenses:
Management fees (Note 3a) ................................................................................. 81,136,444
Administrative fees (Note 3b) ............................................................................. 8,018,493
Distribution fees (Note 3c)
Class A .................................................................................................. 14,846,910
Class B .................................................................................................. 2,500,589
Class C .................................................................................................. 18,305,452
Class R .................................................................................................. 688,600
Transfer agent fees (Note 3e) ............................................................................. 11,663,027
Custodian fees (Note 4) ................................................................................... 2,976,634
Reports to shareholders ................................................................................... 923,522
Registration and filing fees .............................................................................. 600,580
Professional fees ......................................................................................... 1,679,305
Directors' fees and expenses .............................................................................. 213,069
Dividends on securities sold short ........................................................................ 2,689,442
Other ..................................................................................................... 240,591
---------------
Total expenses ....................................................................................... 146,482,658
Expense reductions (Note 4) .......................................................................... (30,128)
---------------
Net expenses ....................................................................................... 146,452,530
---------------
Net investment income ............................................................................ 203,044,400
---------------
Realized and unrealized gains (losses):
Net realized gain (loss) from:
Investments (Net of foreign taxes $1,096,820)
Unaffiliated issuers .................................................................................... 623,716,938
Non-controlled affiliated issuers (Note 12) ............................................................. 1,115,271
Written options .......................................................................................... 735,698
Foreign currency transactions ............................................................................ (199,330,244)
Securities sold short .................................................................................... (16,629,288)
Synthetic equity swaps ................................................................................... 7,647,073
---------------
Net realized gain (loss) ........................................................................... 417,255,448
---------------
Net change in unrealized appreciation (depreciation) on:
Investments .............................................................................................. 1,671,267,926
Translation of assets and liabilities denominated in foreign currencies .................................. (111,994,669)
Change in deferred taxes on unrealized appreciation (depreciation) ........................................ 212,578
---------------
Net change in unrealized appreciation (depreciation) ............................................... 1,559,485,835
---------------
Net realized and unrealized gain (loss) .................................................................... 1,976,741,283
---------------
Net increase (decrease) in net assets resulting from operations ............................................ $ 2,179,785,683
===============
36 | The accompanying notes are an integral part of these financial statements.
| Annual Report
Mutual Discovery Fund
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF CHANGES IN NET ASSETS
---------------------------------
YEAR ENDED DECEMBER 31,
---------------------------------
2006 2005
---------------------------------
Increase (decrease) in net assets:
Operations:
Net investment income .................................................................. $ 203,044,400 $ 74,139,679
Net realized gain (loss) from investments, written options, securities sold short,
synthetic equity swaps, and foreign currency transactions ............................. 417,255,448 545,293,106
Net change in unrealized appreciation (depreciation) on investments, translation
of assets and liabilities denominated in foreign currencies, and deferred taxes ....... 1,559,485,835 410,329,170
---------------------------------
Net increase (decrease) in net assets resulting from operations ..................... 2,179,785,683 1,029,761,955
---------------------------------
Distributions to shareholders from:
Net investment income:
Class Z ............................................................................... (79,515,700) (48,037,194)
Class A ............................................................................... (104,704,715) (42,518,253)
Class B ............................................................................... (3,195,315) (1,634,133)
Class C ............................................................................... (26,440,918) (10,283,880)
Class R ............................................................................... (2,764,923) (1,080,128)
Net realized gains:
Class Z ............................................................................... (152,564,620) (146,590,402)
Class A ............................................................................... (226,734,020) (171,167,526)
Class B ............................................................................... (11,010,320) (11,212,671)
Class C ............................................................................... (85,287,764) (70,203,636)
Class R ............................................................................... (6,547,343) (4,839,461)
---------------------------------
Total distributions to shareholders ..................................................... (698,765,638) (507,567,284)
---------------------------------
Capital share transactions: (Note 2)
Class Z ............................................................................... 386,789,430 236,977,632
Class A ............................................................................... 1,915,592,766 1,242,352,449
Class B ............................................................................... 13,246,450 22,746,797
Class C ............................................................................... 551,191,840 379,781,109
Class R ............................................................................... 57,174,658 47,560,961
---------------------------------
Total capital share transactions ........................................................ 2,923,995,144 1,929,418,948
---------------------------------
Redemption fees ......................................................................... 54,889 45,185
---------------------------------
Net increase (decrease) in net assets ............................................... 4,405,070,078 2,451,658,804
Net assets:
Beginning of year ....................................................................... 8,339,403,817 5,887,745,013
---------------------------------
End of year ............................................................................. $12,744,473,895 $ 8,339,403,817
=================================
Distributions in excess of net investment income included in net assets:
End of year ............................................................................. $ (12,725,521) $ (1,761,200)
=================================
Annual Report |
The accompanying notes are an integral part of these financial statements. | 37
Mutual Discovery Fund
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Franklin Mutual Series Fund Inc. (the Series Fund) is registered under the
Investment Company Act of 1940, as amended (the 1940 Act) as an open-end
investment company, consisting of six separate funds. The Mutual Discovery Fund
(the Fund) included in this report is diversified. The financial statements of
the remaining funds in the Series Fund are presented separately. The Fund offers
five classes of shares: Class Z, Class A, Class B, Class C and Class R. Each
class of shares differs by its initial sales load, contingent deferred sales
charges, distribution fees, voting rights on matters affecting a single class
and its exchange privilege.
The following summarizes the Fund's significant accounting policies.
A. SECURITY VALUATION
Securities listed on a securities exchange or on the NASDAQ National Market
System are valued at the last quoted sale price or the official closing price of
the day, respectively. Over-the- counter securities and listed securities for
which there is no reported sale are valued within the range of the most recent
quoted bid and ask prices. Securities that trade in multiple markets or on
multiple exchanges are valued according to the broadest and most representative
market.
Corporate debt securities and Government securities generally trade in the
over-the-counter market rather than on a securities exchange. The Fund may
utilize independent pricing services, quotations from bond dealers, and
information with respect to bond and note transactions, to assist in determining
a current market value for each security. The Fund's pricing services may use
valuation models or matrix pricing which considers information with respect to
comparable bond and note transactions, quotations from bond dealers, or by
reference to other securities that are considered comparable in such
characteristics as rating, interest rate and maturity date, option adjusted
spread models, prepayment projections, interest rate spreads and yield curves,
to determine current value.
Foreign securities are valued as of the close of trading on the foreign stock
exchange on which the security is primarily traded, or the NYSE, whichever is
earlier. If no sale is reported at that time, the foreign security will be
valued within the range of the most recent quoted bid and ask prices. The value
is then converted into its U.S. dollar equivalent at the foreign exchange rate
in effect at the close of the NYSE on the day that the value of the foreign
security is determined.
The Fund has procedures to determine the fair value of individual securities and
other assets for which market prices are not readily available or which may not
be reliably priced. Methods for valuing these securities may include:
fundamental analysis, matrix pricing, discounts from market prices of similar
securities, or discounts applied due to the nature and duration of restrictions
on the disposition of the securities. Due to the inherent uncertainty of
valuations of such securities, the fair values may differ significantly from the
values that would have been used had a ready market for such investments
existed. Occasionally, events occur between the time at which trading in a
security is completed and the close of the NYSE that might call into question
the
38 | Annual Report
Mutual Discovery Fund
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
A. SECURITY VALUATION (CONTINUED)
availability (including the reliability) of the value of a portfolio security
held by the Fund. The investment manager monitors price movements following the
close of trading in foreign stock markets through a series of country specific
market proxies (such as baskets of American Depository Receipts, futures
contracts and exchange traded funds). These price movements are measured against
established trigger thresholds for each specific market proxy to assist in
determining if an event has occurred. If such an event occurs, the securities
may be valued using fair value procedures, which may include the use of
independent pricing services. All security valuation procedures are approved by
the Fund's 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, income and expense items denominated in foreign currencies are
translated into U.S. dollars at the exchange rate in effect on the transaction
date. Occasionally, events may impact the availability or reliability of foreign
exchange rates used to convert the U.S. dollar equivalent value. If such an
event occurs, the foreign exchange rate will be valued at fair value using
procedures established and approved by the Fund's Board of Directors.
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 on the
Statement of Operations.
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 denominated assets and liabilities other than investments in securities
held at the end of the reporting period.
C. REPURCHASE AGREEMENTS
The Fund may enter into repurchase agreements, which are accounted for as a loan
by the Fund to the seller, collateralized by securities which are delivered to
the Fund's custodian. The market value, including accrued interest, of the
initial collateralization is required to be at least 102% of the dollar amount
invested by the Fund, with the value of the underlying securities marked to
market daily to maintain coverage of at least 100%. All repurchase agreements
held by the Fund at year end, had been entered into on December 29, 2006.
Repurchase agreements are valued at cost.
Annual Report | 39
Mutual Discovery Fund
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
D. FOREIGN CURRENCY CONTRACTS
When the Fund purchases or sells foreign securities it may enter into foreign
exchange contracts to minimize foreign exchange risk from the trade date to the
settlement date of the transactions. A foreign exchange contract is an agreement
between two parties to exchange different currencies at an agreed upon exchange
rate at a future date. Realized and unrealized gains and losses on these
contracts are included in the Statement of Operations.
The Fund may also enter into forward exchange contracts to hedge against
fluctuations in foreign exchange rates or to gain exposure to certain foreign
currencies. These contracts are valued daily by the Fund and the unrealized
gains or losses on the contracts, as measured by the difference between the
contractual forward foreign exchange rates and the forward rates at the
reporting date, are included in the Statement of Assets and Liabilities.
Realized and unrealized gains and losses on these contracts are included in the
Statement of Operations.
The risks of these contracts include movement in the values of the foreign
currencies relative to the U.S. dollar and the possible inability of the
counterparties to fulfill their obligations under the contracts, which may be in
excess of the amount reflected in the Statement of Assets and Liabilities.
E. SYNTHETIC EQUITY SWAPS
The Fund may engage in synthetic equity swaps. Synthetic equity swaps 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 purchase or short sale of the underlying
security taken place. Upon entering into synthetic equity swaps, 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 ("margin account"). Periodically,
payments are made to recognize changes in value of the contract resulting from
interest on the notional value of the contract, market value changes in the
underlying security, and/or dividends paid by the issuer of the underlying
security. The Fund recognizes a realized gain or loss when cash is received
from, or paid to, the broker. Synthetic equity swaps are valued daily by the
Fund and the unrealized gains or losses on the contracts (as measured by the
difference between the contract amount plus or minus cash received or paid and
the market value of the underlying securities) are recorded in the Statement of
Operations. The margin account and any net unrealized gains or losses on open
synthetic equity swaps are included in the Statement of Assets and Liabilities.
The risks of entering into synthetic equity swaps include unfavorable price
movements in the underlying securities or the inability of the counterparties to
fulfill their obligations under the contract.
40 | Annual Report
Mutual Discovery Fund
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
F. OPTIONS
The Fund may purchase or write options. Options are contracts entitling the
holder to purchase or sell a specified number of shares or units of a particular
security at a specified price. Options purchased are recorded as investments;
options written (sold) are recorded as liabilities. Upon closing of an option,
other than by exercise, which results in a cash settlement, the difference
between the premium (original option value) 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. When
an option expires, the premium is realized as a gain for options written or as a
loss for options purchased. The risks include the possibility there may be an
illiquid options market or the inability of the counterparties to fulfill their
obligations under the contract. Writing options involves, to varying degrees,
elements of market risk in excess of the amount recognized in the Statement of
Assets and Liabilities.
G. SECURITIES SOLD SHORT
The Fund is engaged in selling securities short, which obligates the Fund to
replace a borrowed security with the same security at current market value. The
Fund incurs 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 realizes a gain if the price of the security declines between those
dates. Gains are limited to the price at which the Fund sold the security short,
while losses are potentially unlimited in size.
The Fund is required to establish a margin account with the broker lending the
security sold short. While the short sale is outstanding, the broker retains the
proceeds of the short sale and the Fund must maintain a deposit with broker
consisting of cash and securities having a value equal to a specified percentage
of the value of the securities sold short. The Fund is obligated to pay the
counterparty any dividends or interest due on securities sold short. Such
dividends and interest are recorded as an expense to the Fund.
H. SECURITIES LENDING
The Fund may loan securities to certain brokers through a securities lending
agent for which it receives initial cash collateral against the loaned
securities in an amount equal to at least 102% of the market value of the loaned
securities. Collateral is maintained over the life of the loan in an amount not
less than 100% of the market value of loaned securities, as determined at the
close of fund business each day; any additional collateral required due to
changes in security values is delivered to the fund on the next business day.
The collateral is invested in short-term instruments as noted in the Statement
of Investments. The Fund receives interest income from the investment of cash
collateral, adjusted by lender fees and broker rebates. The Fund bears the risk
of loss with respect to the investment of the collateral and the securities
loaned. The securities lending agent has agreed to indemnify the Fund in the
case of default of any securities borrower.
Annual Report | 41
Mutual Discovery Fund
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
I. INCOME AND DEFERRED TAXES
No provision has been made for U.S. income taxes because the Fund intends to
qualify as a regulated investment company under the Internal Revenue Code and to
distribute to shareholders substantially all of its taxable income and net
realized gains.
Foreign securities held by the Fund may be subject to foreign taxation on
dividend and interest income received. Foreign taxes, if any, are recorded based
on the tax regulations and rates that exist in the foreign markets in which the
Fund invests.
The Fund may be subject to a tax imposed on net realized gains on securities of
certain foreign countries. The Fund records an estimated deferred tax liability
for net unrealized gains on these securities in an amount that would be payable
if the securities were disposed of on the valuation date.
J. 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.
Interest income and estimated expenses are accrued daily. Amortization of
premium and accretion of discount on debt securities are included in interest
income. Dividend income and dividends declared on securities sold short, are
recorded on the ex-dividend date except that certain dividends from foreign
securities are recognized as soon as the Fund is notified of the ex-dividend
date. Distributions to shareholders are recorded on the ex-dividend date and are
determined according to income tax regulations (tax basis). Distributable
earnings determined on a tax basis may differ from earnings recorded in
accordance with accounting principles generally accepted in the United States.
These differences may be permanent or temporary. Permanent differences are
reclassified among capital accounts to reflect their tax character. These
reclassifications have no impact on net assets or the results of operations.
Temporary differences are not reclassified, as they may reverse in subsequent
periods.
Common expenses incurred by the Series Fund are allocated among the funds based
on the ratio of net assets of each fund to the combined net assets of the Series
Fund. Fund specific expenses are charged directly to the fund that incurred the
expense.
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. Differences in class-level
expenses may result in payment of different per share distributions by class.
42 | Annual Report
Mutual Discovery Fund
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
K. ACCOUNTING ESTIMATES
The preparation of financial statements in accordance with accounting principles
generally accepted in the United States of America 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 expenses during the reporting period. Actual results could differ from those
estimates.
L. REDEMPTION FEES
A short term trading redemption fee will be imposed, with some exceptions, on
any Fund shares that are redeemed or exchanged within seven calendar days
following their purchase date. The redemption fee is 2% of the amount redeemed.
Such fees are retained by the Fund and accounted for as an addition to paid-in
capital.
M. GUARANTEES AND INDEMNIFICATIONS
Under the Series Fund's organizational documents, its officers and directors are
indemnified by the Fund against certain liabilities arising out of the
performance of their duties to the Fund. Additionally, in the normal course of
business, the Fund enters into contracts with service providers that contain
general indemnification clauses. The Fund's maximum exposure under these
arrangements is unknown as this would involve future claims that may be made
against the Fund that have not yet occurred. Currently, the Fund expects the
risk of loss to be remote.
2. CAPITAL STOCK
At December 31, 2006, there were 870 million shares authorized ($0.001 par
value). Transactions in the Fund's shares were as follows:
----------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
2006 2005
----------------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
----------------------------------------------------------------------
CLASS Z SHARES:
Shares sold ...................... 17,002,780 $ 491,154,476 11,753,534 $ 299,204,550
Shares issued in reinvestment of
distributions ................... 7,260,169 212,486,746 6,789,554 177,729,592
Shares redeemed .................. (10,860,325) (316,851,792) (9,384,324) (239,956,510)
----------------------------------------------------------------------
Net increase (decrease) .......... 13,402,624 $ 386,789,430 9,158,764 $ 236,977,632
======================================================================
CLASS A SHARES:
Shares sold ...................... 79,025,862 $ 2,243,787,149 56,645,618 $ 1,439,893,472
Shares issued in reinvestment of
distributions ................... 10,632,371 308,509,847 7,726,972 200,597,742
Shares redeemed .................. (22,474,891) (636,704,230) (15,740,243) (398,138,765)
----------------------------------------------------------------------
Net increase (decrease) .......... 67,183,342 $ 1,915,592,766 48,632,347 $ 1,242,352,449
======================================================================
Annual Report | 43
Mutual Discovery Fund
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. CAPITAL STOCK (CONTINUED)
----------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
2006 2005
----------------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
----------------------------------------------------------------------
CLASS B SHARES:
Shares sold ...................... 1,015,295 $ 28,025,010 1,235,020 $ 30,441,216
Shares issued in reinvestment of
distributions ................... 453,192 12,798,395 458,269 11,673,181
Shares redeemed .................. (996,900) (27,576,955) (781,874) (19,367,600)
----------------------------------------------------------------------
Net increase (decrease) .......... 471,587 $ 13,246,450 911,415 $ 22,746,797
======================================================================
CLASS C SHARES:
Shares sold ...................... 23,002,226 $ 647,945,552 17,305,812 $ 435,052,733
Shares issued in reinvestment of
distributions ................... 3,385,090 97,115,493 2,753,526 71,071,498
Shares redeemed .................. (6,905,349) (193,869,205) (5,039,587) (126,343,122)
----------------------------------------------------------------------
Net increase (decrease) .......... 19,481,967 $ 551,191,840 15,019,751 $ 379,781,109
======================================================================
CLASS R SHARES:
Shares sold ...................... 2,480,439 $ 69,654,257 2,257,530 $ 56,609,057
Shares issued in reinvestment of
distributions ................... 318,277 9,168,194 224,837 5,801,526
Shares redeemed .................. (770,653) (21,647,793) (587,868) (14,849,622)
----------------------------------------------------------------------
Net increase (decrease) .......... 2,028,063 $ 57,174,658 1,894,499 $ 47,560,961
======================================================================
3. TRANSACTIONS WITH AFFILIATES
Franklin Resources, Inc. is the holding company for various subsidiaries that
together are referred to as Franklin Templeton Investments. Certain officers and
directors of the Series Fund are also officers and/or directors of the following
subsidiaries:
- ------------------------------------------------------------------------------------------
SUBSIDIARY AFFILIATION
- ------------------------------------------------------------------------------------------
Franklin Mutual Advisers, LLC (Franklin Mutual) Investment manager
Franklin Templeton Investment Management Limited (FTIML) Investment manager
Franklin Templeton Services, LLC (FT Services) Administrative manager
Franklin Templeton Distributors, Inc. (Distributors) Principal underwriter
Franklin Templeton Investor Services, LLC (Investor Services) Transfer agent
44 | Annual Report
Mutual Discovery Fund
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. TRANSACTIONS WITH AFFILIATES (CONTINUED)
A. MANAGEMENT FEES
The Fund pays an investment management fee to Franklin Mutual based on the
average daily net assets of the Fund as follows:
- --------------------------------------------------------------------------------
ANNUALIZED FEE RATE NET ASSETS
- --------------------------------------------------------------------------------
0.800% Up to and including $4 billion
0.770% Over $4 billion, up to and including $7 billion
0.750% Over $7 billion, up to and including $10 billion
0.730% Over $10 billion, up to and including $15 billion
0.710% In excess of $15 billion
Under a subadvisory agreement, FTIML, an affiliate of Advisers, provides
subadvisory services to the Fund and receives from Franklin Mutual fees based on
the average daily net assets of the Fund.
B. ADMINISTRATIVE FEES
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:
- --------------------------------------------------------------------------------
ANNUALIZED FEE RATE NET ASSETS
- --------------------------------------------------------------------------------
0.150% Up to and including $200 million
0.135% Over $200 million, up to and including $700 million
0.100% Over $700 million, up to and including $1.2 billion
0.075% In excess of $1.2 billion
C. DISTRIBUTION FEES
The Fund's Board of Directors has adopted distribution plans for each share
class, with the exception of Class Z shares, pursuant to Rule 12b-1 under the
1940 Act. Under the Fund's Class A reimbursement distribution plan, the Fund
reimburses Distributors for costs incurred in connection with the servicing,
sale and distribution of the Fund's shares up to the maximum annual plan rate.
Under the Class A reimbursement distribution plan, costs exceeding the maximum
for the current plan year cannot be reimbursed in subsequent periods.
In addition, under the Fund's Class B, C, and R compensation distribution plans,
the Fund pays Distributors for costs incurred in connection with the servicing,
sale and distribution of the Fund's shares up to the maximum annual plan rate
for each class.
The maximum annual plan rates, based on the average daily net assets, for each
class, are as follows:
Class A ........................................... 0.35%
Class B ........................................... 1.00%
Class C ........................................... 1.00%
Class R ........................................... 0.50%
Annual Report | 45
Mutual Discovery Fund
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. TRANSACTIONS WITH AFFILIATES (CONTINUED)
D. SALES CHARGES/UNDERWRITING AGREEMENTS
Distributors has advised the Fund of the following commission transactions
related to the sales and redemptions of the Fund's shares for the year:
Sales charge retained net of commisions paid to
unaffiliated brokers/dealers ......................... $6,478,038
Contingent deferred sales charges retained .............. $ 360,821
E. TRANSFER AGENT FEES
The Fund paid transfer agent fees of $11,663,027, of which $6,806,199 was
retained by Investor Services.
4. EXPENSE OFFSET ARRANGEMENT
The Fund has entered into an arrangement with its custodian whereby credits
realized as a result of uninvested cash balances are used to reduce a portion of
the Fund's custodian expenses. During the year ended December 31, 2006, the
custodian fees were reduced as noted in the Statement of Operations.
5. INCOME TAXES
For tax purposes, realized capital losses, occurring subsequent to October 31,
may be deferred and treated as occurring on the first day of the following
fiscal year. At December 31, 2006, the Fund deferred realized capital losses of
$7,118,516.
The tax character of distributions paid during the years ended December 31, 2006
and 2005, was as follows:
------------------------------
2006 2005
------------------------------
Distributions paid from:
Ordinary income ......................... $ 250,153,080 $ 141,987,989
Long term capital gain .................. 448,612,558 365,579,295
------------------------------
$ 698,765,638 $ 507,567,284
==============================
46 | Annual Report
Mutual Discovery Fund
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. INCOME TAXES (CONTINUED)
At December 31, 2006, the cost of investments, net unrealized appreciation
(depreciation), for income tax purposes were as follows:
Cost of investments ...................................... $ 9,067,669,148
===============
Unrealized appreciation .................................. $ 3,832,666,538
Unrealized depreciation .................................. (128,158,976)
---------------
Net unrealized appreciation (depreciation) ............... $ 3,704,507,562
===============
Distributable earnings - undistributed ordinary income ... $ 2,766,307
===============
Net investment income differs for financial statement and tax purposes primarily
due to differing treatments of defaulted securities, foreign currency
transactions, passive foreign investment company shares, bond discounts and
premiums, certain dividends on securities sold short, and foreign taxes paid on
net realized gains.
Net realized gains (losses) differ for financial statement and tax purposes
primarily due to differing treatments of wash sales, foreign currency
transactions, bond discounts and premiums, foreign taxes paid on net realized
gains and certain dividends on securities sold short.
6. INVESTMENT TRANSACTIONS
Purchases and sales of investments (excluding short term securities) for the
year ended December 31, 2006, aggregated $4,381,879,622 and $2,180,251,477,
respectively.
Transactions in options written during the year ended December 31, 2006, were as
follows:
------------------------
NUMBER OF PREMIUMS
CONTRACTS RECEIVED
------------------------
Options outstanding at
December 31, 2005 .................... 400 $ 33,599
Options written ....................... 12,705 2,113,076
Options expired ....................... (4,480) (492,362)
Options exercised ..................... (6,110) (1,252,399)
Options closed ........................ (1,525) (289,089)
------------------------
Options outstanding at
December 31, 2006 .................... 990 $ 112,825
========================
Annual Report | 47
Mutual Discovery Fund
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. SYNTHETIC EQUITY SWAPS
As of December 31, 2006, the Fund had the following synthetic equity swaps
outstanding:
NUMBER OF NOTIONAL UNREALIZED
CONTRACTS VALUE GAIN (LOSS)
- ---------------------------------------------------------------------------------------------------
CONTRACTS TO BUY
Scottish Power PLC (7.48 - 7.58 GBP)...................... 1,659,690 $ 24,311,896 $ (207,388)
-----------
Net unrealized gain (loss)........................................................... $ (207,388)
===========
8. FORWARD EXCHANGE CONTRACTS
At December 31, 2006, the Fund had the following forward exchange contracts
outstanding:
CONTRACT SETTLEMENT UNREALIZED UNREALIZED
AMOUNT DATE GAIN LOSS
- -----------------------------------------------------------------------------------------------------
CONTRACTS TO BUY
51,757,225 Japanese Yen ............ $ 451,405 3/19/07 $ (12,004)
CONTRACTS TO SELL
66,300,000 British Pound ........... 125,789,001 1/08/07 (4,058,763)
49,141,672 British Pound ........... 91,627,092 1/16/07 (4,621,729)
174,798,074 Euro .................... 221,414,101 1/18/07 (9,564,812)
1,188,452,881 Danish Krone ............ 202,307,550 1/23/07 (8,383,909)
149,021,592 Euro .................... 193,330,900 1/24/07 (3,647,488)
67,346,603 Singapore Dollar ........ 43,029,175 1/24/07 (948,050)
74,150,000 British Pound ........... 145,961,952 2/08/07 $ 716,272
58,722,720 British Pound ........... 111,551,435 2/08/07 (3,475,152)
654,484,025 Swedish Krona ........... 96,084,768 2/15/07 263,802
39,150,000 British Pound ........... 76,862,486 2/20/07 173,237
298,008,205 Euro .................... 379,153,521 2/20/07 (15,218,751)
62,674,156 Euro .................... 83,706,036 2/26/07 744,615
152,522,909 Euro .................... 199,909,863 2/26/07 (1,983,837)
41,565,253 New Zealand Dollar ...... 28,389,067 3/07/07 (768,131)
1,605,695,323 Norwegian Krone ......... 264,303,002 3/07/07 6,041,213
304,542,522 Swiss Franc ............. 257,503,488 3/07/07 6,051,597
18,699,703 Swiss Franc ............. 15,388,549 3/07/07 (51,251)
340,000,000 Euro .................... 435,283,140 3/13/07 (15,044,732)
26,499,159 Australian Dollar ....... 20,775,340 3/14/07 (100,031)
885,554,040 Swedish Krona ........... 130,230,872 3/15/07 381,315
42,812,063,458 Japanese Yen ............ 373,865,570 3/19/07 10,405,664
10,488,187,500 Korean Won .............. 11,437,500 3/22/07 139,855
328,197,252,875 Korean Won .............. 347,625,000 3/22/07 (5,934,344)
207,984,085 Canadian Dollar ......... 187,180,746 3/26/07 8,234,147
98,130,422 Euro .................... 130,421,784 4/13/07 292,230
208,856,557 Euro .................... 264,380,100 4/18/07 (12,633,791)
48 | Annual Report
Mutual Discovery Fund
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
8. FORWARD EXCHANGE CONTRACTS (CONTINUED)
CONTRACT SETTLEMENT UNREALIZED UNREALIZED
AMOUNT DATE GAIN LOSS
- -----------------------------------------------------------------------------------------------------
CONTRACTS TO SELL (CONTINUED)
56,050,000 Euro .................... $ 75,103,653 5/24/07 $ 662,373
111,250,000 Euro .................... 143,820,663 5/24/07 $ (3,932,992)
59,465,954 Euro .................... 79,790,857 6/06/07 774,324
54,607,623 Euro .................... 72,481,349 6/06/07 (72,642)
1,602,099,750 Taiwan Dollar ........... 50,325,000 6/06/07 1,158,137
1,109,024,048 Norwegian Krone ......... 183,082,971 6/07/07 4,169,488
124,751,990 Norwegian Krone ......... 20,100,000 6/07/07 (214,197)
---------------------------
Unrealized gain (loss) on forward exchange contracts ................ 40,208,269 (90,666,606)
---------------------------
Net unrealized gain (loss) on forward exchange contracts........... $ (50,458,337)
=============
9. CONCENTRATION OF RISK
Investing in foreign securities may include certain risks and considerations not
typically associated with investing in U.S. securities, such as fluctuating
currency values and changing local and regional economic, political and social
conditions, which may result in greater market volatility. In addition, certain
foreign securities may not be as liquid as U.S. securities.
10. DEFAULTED SECURITIES
The Fund may purchase the pre-default or defaulted debt of distressed companies.
Distressed companies are financially troubled and are about to be/or are already
involved in financial restructuring or bankruptcy. The Fund does not accrue
income on these securities, if it becomes probable that the income will not be
collected. Risks associated with purchasing these securities include the
possibility that the bankruptcy or other restructuring process takes longer than
expected, or that distributions in restructuring are less than anticipated,
either or both of which may result in unfavorable consequences to the Fund. At
December 31, 2006, the aggregate value of these securities was $171,194,596,
representing 1.34% of the Fund's net assets. For information as to specific
securities, see the accompanying Statement of Investments.
11. RESTRICTED SECURITIES
The Fund may invest in securities that are restricted under the Securities Act
of 1933 (the 1933 Act) or which are subject to legal, contractual, or other
agreed upon restrictions on resale. Restricted securities are often purchased in
private placement transactions, and cannot be sold without prior registration
unless the sale is pursuant to an exemption under the 1933 Act.
Annual Report | 49
Mutual Discovery Fund
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
11. RESTRICTED SECURITIES (CONTINUED)
Disposal of these securities may require greater effort and expense, and prompt
sale at an acceptable price may be difficult. The Fund may have registration
rights for restricted securities. The issuer generally incurs all registration
costs.
At December 31, 2006, the Fund held investments in restricted securities,
excluding 144A securities deemed to be liquid, valued in accordance with
procedures approved by the Fund's Board of Directors as reflecting fair value,
as follows:
- ----------------------------------------------------------------------------------------------------------
PRINCIPAL
AMOUNT/
SHARES/ ACQUISITION
WARRANTS ISSUER DATES COST VALUE
- ----------------------------------------------------------------------------------------------------------
332,512 AboveNet Inc. .......................... 10/02/01 - 11/25/03 $15,655,782 $ 10,188,168
464 AboveNet Inc., options to purchase
(shares), exercise price $20.95,
expiration date, 9/09/13 .............. 4/14/06 - 9/08/06 -- 12,551
11,105 AboveNet Inc., wts., 9/08/08 ........... 10/02/01 - 3/15/02 1,437,838 355,360
13,066 AboveNet Inc., wts., 9/08/10 ........... 10/02/01 - 10/02/03 1,768,651 376,301
53,272 Anchor Resources LLC ................... 6/29/04 -- --
66,860 Augsburg Re AG ......................... 5/25/06 66,860 --
768,890 Augsburg Re AG, zero cpn, 2/17/07 ...... 5/25/06 768,890 7,689
6,498,835 Cerberus FIM Investors Auto Finance,
LLC ................................... 11/20/06 6,498,836 6,583,840
19,390,926 Cerberus FIM Investors Auto Finance,
LLC, 12.00%, 11/22/13 ................. 11/21/06 19,390,926 19,390,926
830,418 Cerberus FIM Investors Commercial
Finance, LLC .......................... 11/20/06 830,419 841,280
2,491,256 Cerberus FIM Investors Commercial
Finance, LLC, 12.00%, 11/22/13......... 11/20/06 2,385,675 2,491,256
1,420,903 Cerberus FIM Investors Commercial
Mortgage, LLC.......................... 11/20/06 1,420,903 1,439,488
4,262,708 Cerberus FIM Investors Commercial
Mortgage, LLC, 12.00%, 11/22/13........ 11/20/06 4,262,708 4,262,708
6,769,270 Cerberus FIM Investors Insurance,
LLC ................................... 11/20/06 6,769,270 6,857,812
20,307,811 Cerberus FIM Investors Insurance,
LLC, 12.00%, 11/22/13 ................. 11/20/06 20,307,811 20,307,811
14,357,573 Cerberus FIM Investors Rescap, LLC ..... 11/20/06 14,357,573 14,545,370
43,072,719 Cerberus FIM Investors Rescap, LLC,
12.00%, 11/22/13 ...................... 11/20/06 43,072,719 43,072,719
359,884 DecisionOne Corp. ...................... 9/28/99 - 7/18/00 273,004 256,597
418,890 DecisionOne Corp., 12.00%, 4/15/10 ..... 10/29/99 - 10/16/06 1,121,048 418,890
7,661 Esmark Inc. ............................ 7/28/06 8,117,891 6,307,990
27,889 Esmark Inc., 8.00%, cvt. pfd. A ........ 11/08/04 - 9/29/06 27,889,000 26,968,663
11,589 FE Capital Holdings Ltd. ............... 8/29/03 - 7/29/04 -- 15,668,208
2,247,600 Florida East Coast Industries Inc. ..... 12/29/95 - 7/15/04 67,070,841 127,259,112
8,758,216 Hancock Discovery, LLC ................. 7/20/98 10,917,735 --
4,551,501 Imagine Group Holdings Ltd. ............ 8/31/04 46,614,197 49,929,966
50 | Annual Report
Mutual Discovery Fund
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
11. RESTRICTED SECURITIES (CONTINUED)
- ----------------------------------------------------------------------------------------------------------
PRINCIPAL
AMOUNT/
SHARES/ ACQUISITION
WARRANTS ISSUER DATES COST VALUE
- ----------------------------------------------------------------------------------------------------------
3,204,016 International Automotive Components
Group Brazil, LLC ..................... 4/13/06 - 8/21/06 $ 1,917,450 $ 13,200,546
561,502 International Automotive Components
Group Japan, LLC ...................... 9/26/06 - 11/14/06 4,886,623 4,717,117
13,618,870 International Automotive Components
Group LLC ............................. 1/12/06 - 10/16/06 13,625,552 13,618,870
1,135,557 Kindred Healthcare Inc. ................ 12/12/01 - 3/29/06 13,864,204 27,239,174
Kindred Healthcare Inc., options to
purchase (shares)
3,002 exercise price $23.75, expiration date,
7/17/11 .............................. 7/17/02 - 7/15/05 -- 713
898 exercise price $26.00, expiration date,
1/01/12............................... 1/01/03 - 1/01/06 -- --
672 exercise price $9.07, expiration date,
1/01/13............................... 1/01/04 - 1/01/06 -- 10,021
446 exercise price $25.99, expiration date,
1/01/14............................... 1/01/05 - 1/01/06 -- --
186 exercise price $27.90, expiration date,
1/10/15............................... 1/06/06 -- --
55,890 NCB Warrant Holdings Ltd., A ........... 12/16/05 -- 6,582,165
47,160 Olympus Re Holdings Ltd. ............... 12/19/01 4,716,000 47,160
600,722 Owens Corning Inc. ..................... 10/20/06 - 12/20/06 16,945,428 17,063,509
535,890 Owens Corning Inc., options to sell
(shares), exercise price $25.00,
expiration date, 4/06/07 .............. 10/20/06 18,686 --
535,890 Owens Corning Inc., options to purchase
(shares), exercise price $37.50,
expiration date, 1/02/08 .............. 10/20/06 40,052 --
86,280 PTV Inc., 10.00%, pfd, A ............... 12/07/01 - 3/06/02 258,840 323,550
170 Torre Mayor Investments LP ............. 10/28/02 12,536,488 15,300,000
------------
TOTAL RESTRICTED SECURITIES (3.58% of Net Assets) ......................... $455,645,530
============
Annual Report | 51
Mutual Discovery Fund
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
12. HOLDINGS OF 5% VOTING SECURITIES OF PORTFOLIO COMPANIES
The Investment Company Act of 1940 defines "affiliated companies" to include
investments in portfolio companies in which a fund owns 5% or more of the
outstanding voting securities. Investments in "affiliated companies" for the
Fund for the year ended December 31, 2006 were as shown below.
NUMBER OF NUMBER OF
SHARES HELD SHARES INVESTMENT REALIZED
AT BEGINNING GROSS GROSS HELD AT VALUE AT INCOME CAPITAL
NAME OF ISSUER OF YEAR ADDITIONS REDUCTIONS END OF YEAR END OF YEAR (LOSS) GAIN (LOSS)
- -----------------------------------------------------------------------------------------------------------------------------------
CONTROLLED AFFILIATES a
Hancock Discovery LLC ............ 8,758,216 -- -- 8,758,216 $ -- $ -- $ --
-----------------------------------------
NON-CONTROLLED AFFILIATES
Augsberg Re AG ................... -- 66,860 -- 66,860 $ -- $ -- $ --
Augsberg Re AG, zero cpn,
2/17/07 ......................... -- 768,890 -- 768,890 7,689 -- --
CSM NV ........................... 3,219,606 817,320 -- 4,036,926 155,445,294 3,441,407 --
Esmark Inc. ...................... -- 7,661 -- 7,661 6,307,990 61,288
Esmark Inc., 8.00%, cvt. pfd., A . 27,889 -- -- 27,889 26,968,663 2,535,223
Farmer Brothers Co. .............. 904,637 -- -- 904,637 19,314,000 384,471 --
FE Capital Holdings Ltd. ......... 11,589 -- -- 11,589 15,668,208 -- --
Florida East Coast
Industries Inc. ................. 2,247,600 -- -- 2,247,600 127,259,112 606,852 --
Gammon Lake Resources Inc. ....... 4,402,100 -- 186,861 4,215,239 -- b -- 1,115,271
Imagine Group Holdings Ltd. ...... 4,551,501 -- -- 4,551,501 49,929,966 -- --
International Automotive
Components Group Brazil LLC ..... -- 3,204,016 -- 3,204,016 13,200,546 -- --
International Automotive
Components Group Japan LLC ...... -- 561,502 -- 561,502 4,717,117 -- --
Potlatch Corp. ................... 2,580,250 1,002,070 -- 3,582,320 156,977,262 46,033,960 --
Torre Mayor Investments LP ....... 170 -- -- 170 15,300,000 -- --
-----------------------------------------
TOTAL NON-CONTROLLED AFFILIATES ........................................................ $591,095,847 $53,063,201 $ 1,115,271
-----------------------------------------
TOTAL AFFILIATED SECURITIES (4.64% of Net Assets) ...................................... $591,095,847 $53,063,201 $ 1,115,271
=========================================
a Issuer in which the Fund owns 25% or more of the outstanding voting
securities.
b As of December 31,2006, no longer an affiliate.
13. OTHER CONSIDERATIONS
Directors or employees of Franklin Mutual, as the Fund's Investment Manager, may
serve as members on the board of directors of certain companies in which the
Fund invests and/or may represent the Fund in certain corporate negotiations. As
a result of this involvement, such individuals may be in possession of certain
material non-public information which, pursuant to the Fund's policies and the
requirements of the federal securities laws, could prevent the Fund from trading
in the securities of such companies for limited or extended periods of time. The
securities have been identified on the accompanying Statement of Investments.
52 | Annual Report
Mutual Discovery Fund
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
13. OTHER CONSIDERATIONS (CONTINUED)
Directors or employees of Franklin Mutual, as the Fund's Investment Manager,
serve as members of various bondholders' steering committees, on credit
committees, and represent the funds in certain corporate restructuring
negotiations. As a result of this involvement, such individuals may be in
possession of certain material non-public information. If the Fund's Investment
Manager, while in possession of such information, seeks to buy or sell any of
these securities, it will comply with all applicable federal securities laws.
The securities have been identified on the accompanying Statement of
Investments.
14. REGULATORY MATTERS
As part of various investigations by a number of federal, state, and foreign
regulators and governmental entities, including the Securities and Exchange
Commission ("SEC"), relating to certain practices in the mutual fund industry,
including late trading, market timing and marketing support payments to
securities dealers who sell fund shares ("marketing support"), Franklin
Resources, Inc. and certain of its subsidiaries (collectively, the "Company"),
entered into settlements with certain of those regulators. Specifically, the
Company entered into settlements with the SEC, among others, concerning market
timing and marketing support.
On June 23, 2006, the SEC approved the proposed plan of distribution for the
marketing support settlement, and disbursement of the settlement monies to the
designated funds, in accordance with the terms and conditions of that settlement
and plan, was completed in September 2006 and is recorded as other income.
The plan of distribution for the market timing settlement is currently under
review by the SEC staff. After publication of notice of the plan and a 30-day
comment period, the proposed plan of distribution will be submitted to the SEC
for approval. Following the SEC's approval of the plan of distribution, with
modifications as appropriate, distribution of the settlement monies will begin
in accordance with the terms and conditions of the settlement and plan.
In addition, the Company, as well as most of the mutual funds within Franklin
Templeton Investments and certain current or former officers, Company directors,
fund directors, and employees, have been named in private lawsuits (styled as
shareholder class actions, or as derivative actions on behalf of either the
named funds or Franklin Resources, Inc.). The lawsuits relate to the industry
practices referenced above, as well as to allegedly excessive commissions and
advisory and distribution fees.
The Company and fund management believe that the claims made in each of the
private lawsuits referenced above are without merit and intend to defend against
them vigorously. The Company cannot predict with certainty the eventual outcome
of these lawsuits, nor whether they will have a material negative impact on the
Company. If it is determined that the Company bears responsibility for any
unlawful or inappropriate conduct that caused losses to the Fund, it is
committed to making the Fund or its shareholders whole, as appropriate.
Annual Report | 53
Mutual Discovery Fund
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
15. NEW ACCOUNTING PRONOUNCEMENTS
In July 2006, the Financial Accounting Standards Board (FASB) issued FASB
Interpretation No. 48, "Accounting for Uncertainty in Income Taxes -- an
Interpretation of FASB Statement No. 109" ("FIN 48"), which clarifies the
accounting for uncertainty in tax positions taken or expected to be taken in a
tax return. FIN 48 provides guidance on the measurement, recognition,
classification and disclosure of tax positions, along with accounting for the
related interest and penalties. FIN 48 is effective for fiscal years beginning
after December 15, 2006, and is to be applied to all open tax years as of the
date of effectiveness. On December 22, 2006, the Securities and Exchange
Commission extended the implementation date to no later than the last net asset
value calculation in the first semi-annual reporting period in 2007. The Fund is
currently evaluating the impact, if any, of applying the various provisions of
FIN 48.
In September 2006, the FASB issued FASB Statement No. 157, "Fair Value
Measurement" ("SFAS 157"), which defines fair value, establishes a framework for
measuring fair value, and expands disclosures about fair value measurements.
SFAS 157 is effective for fiscal years beginning after November 15, 2007, and
interim periods within those fiscal years. The Fund believes the adoption of
SFAS 157 will have no material impact on its financial statements.
54 | Annual Report
Mutual Discovery Fund
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
TO THE BOARD OF DIRECTORS OF FRANKLIN MUTUAL SERIES FUND INC.
AND SHAREHOLDERS OF THE MUTUAL DISCOVERY FUND:
We have audited the accompanying statement of assets and liabilities of the
Mutual Discovery Fund (one of the portfolio constituting the Franklin Mutual
Series Fund Inc.) (the "Fund"), including the statement of investments, as of
December 31, 2006, and the related statement of operations for the year then
ended, the statements of changes in net assets for each of the two years in the
period then ended, and the financial highlights for each of the periods
indicated therein. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (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. We were
not engaged to perform an audit of the Fund's internal control over financial
reporting. Our audits included consideration of internal control over financial
reporting as a basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the
effectiveness of the Fund's internal control over financial reporting.
Accordingly, we express no such opinion. An audit also includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements and financial highlights, assessing the accounting principles used
and significant estimates made by management, and evaluating the overall
financial statement presentation. Our procedures included confirmation of
securities owned as of December 31, 2006, by correspondence with the custodian
and brokers or by other appropriate auditing procedures where replies from the
brokers were not received. 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 the
Mutual Discovery Fund of the Franklin Mutual Series Fund Inc. at December 31,
2006, the results of its operations for the year then ended, the changes in its
net assets for each of the two years in the period then ended, and the financial
highlights for each of the periods indicated therein, in conformity with U.S.
generally accepted accounting principles.
/s/ Ernst & Young LLP
Boston, Massachusetts
February 20, 2007
Annual Report | 55
Mutual Discovery Fund
TAX DESIGNATION (UNAUDITED)
Under Section 852(b)(3)(C) of the Internal Revenue Code (Code), the Fund
designates the maximum amount allowable but no less than $338,905,173 as a long
term capital gain dividend for the fiscal year ended December 31, 2006.
Under Section 854(b)(2) of the Code, the Fund designates the maximum amount
allowable but no less than $222,982,133 as qualified dividends for purposes of
the maximum rate under Section 1(h)(11) of the Code for the fiscal year ended
December 31, 2006. In January 2007, shareholders will receive Form 1099-DIV
which will include their share of qualified dividends distributed during the
calendar year 2006. Shareholders are advised to check with their tax advisors
for information on the treatment of these amounts on their individual income tax
returns.
Under Section 871(k)(1)(C) of the Code, the Fund designates the maximum amount
allowable but no less than $48,214,064 as interest related dividends for
purposes of the tax imposed under Section 871(a)(1)(A) of the Code for the
fiscal year ended December 31, 2006.
Under Section 871(k)(2)(C) of the Code, the Fund designates the maximum amount
allowable but no less than $463,712 as a short term capital gain dividend for
purposes of the tax imposed under Section 871(a)(1)(A) of the Code for the
fiscal year ended December 31, 2006.
Under Section 854(b)(2) of the Code, the Fund designates 16.51% of the ordinary
income dividends as income qualifying for the dividends received deduction for
the fiscal year ended December 31, 2006.
At December 31, 2006, more than 50% of the Mutual Discovery Fund's total assets
were invested in securities of foreign issuers. In most instances, foreign taxes
were withheld from dividends paid to the Fund on these investments. As shown in
the table below, the Fund designates to shareholders the foreign source income
and foreign taxes paid, pursuant to Section 853 of the Code. This designation
will allow shareholders of record on December 21, 2006, to treat their
proportionate share of foreign taxes paid by the Fund as having been paid
directly by them. The shareholder shall consider these amounts as foreign taxes
paid in the tax year in which they receive the Fund distribution.
The following tables provide a detailed analysis, by country, of foreign tax
paid, foreign source income, and foreign qualified dividends as designated by
the Fund, to Class Z, Class A, Class B, Class C, and Class R shareholders of
record.
56 | Annual Report
Mutual Discovery Fund
TAX DESIGNATION (UNAUDITED) (CONTINUED)
RECORD DATE: 12/21/2006
- --------------------------------------------------------------------------------
CLASS Z
FOREIGN TAX FOREIGN SOURCE FOREIGN QUALIFIED
COUNTRY PAID PER SHARE INCOME PER SHARE DIVIDENDS PER SHARE
- --------------------------------------------------------------------------------
Australia ................ $ 0.0000 $ 0.0002 $ 0.0002
Belgium .................. 0.0009 0.0042 0.0042
Bermuda .................. 0.0000 0.0005 0.0005
Canada ................... 0.0001 0.0015 0.0005
Denmark .................. 0.0001 0.0056 0.0006
France ................... 0.0080 0.0409 0.0387
Germany .................. 0.0040 0.0216 0.0189
Hong Kong ................ 0.0000 0.0321 0.0000
India .................... 0.0027 0.0034 0.0034
Ireland .................. 0.0003 0.0070 0.0070
Italy .................... 0.0021 0.0097 0.0097
Japan .................... 0.0006 0.0064 0.0064
Luxembourg ............... 0.0018 0.0085 0.0085
Mexico ................... 0.0000 0.0014 0.0014
Netherlands .............. 0.0045 0.0313 0.0238
New Zealand .............. 0.0000 0.0006 0.0000
Norway ................... 0.0029 0.0140 0.0134
Singapore ................ 0.0000 0.0034 0.0000
South Africa ............. 0.0000 0.0112 0.0112
South Korea .............. 0.0038 0.0163 0.0163
Spain .................... 0.0040 0.0191 0.0191
Sweden ................... 0.0018 0.0087 0.0087
Switzerland .............. 0.0013 0.0095 0.0075
Taiwan ................... 0.0037 0.0076 0.0055
United Kingdom ........... 0.0000 0.1198 0.1087
----------------------------------------------------
Total .................... $ 0.0426 $ 0.3845 $ 0.3142
====================================================
- --------------------------------------------------------------------------------
CLASS A
FOREIGN TAX FOREIGN SOURCE FOREIGN QUALIFIED
COUNTRY PAID PER SHARE INCOME PER SHARE DIVIDENDS PER SHARE
- --------------------------------------------------------------------------------
Australia ................ $ 0.0000 $ 0.0001 $ 0.0001
Belgium .................. 0.0009 0.0037 0.0037
Bermuda .................. 0.0000 0.0005 0.0005
Canada ................... 0.0001 0.0013 0.0004
Denmark .................. 0.0001 0.0050 0.0005
France ................... 0.0080 0.0360 0.0341
Germany .................. 0.0040 0.0190 0.0166
Hong Kong ................ 0.0000 0.0283 0.0000
India .................... 0.0027 0.0030 0.0030
Ireland .................. 0.0003 0.0062 0.0062
Italy .................... 0.0021 0.0085 0.0085
Japan .................... 0.0006 0.0056 0.0056
Luxembourg ............... 0.0018 0.0075 0.0075
Mexico ................... 0.0000 0.0013 0.0013
Netherlands .............. 0.0045 0.0276 0.0209
New Zealand .............. 0.0000 0.0006 0.0000
Norway ................... 0.0029 0.0123 0.0118
Singapore ................ 0.0000 0.0030 0.0000
South Africa ............. 0.0000 0.0099 0.0099
South Korea .............. 0.0038 0.0144 0.0144
Spain .................... 0.0040 0.0168 0.0168
Sweden ................... 0.0018 0.0076 0.0076
Switzerland .............. 0.0013 0.0084 0.0066
Taiwan ................... 0.0037 0.0067 0.0048
United Kingdom ........... 0.0000 0.1054 0.0956
----------------------------------------------------
Total .................... $ 0.0426 $ 0.3387 $ 0.2764
====================================================
Annual Report | 57
Mutual Discovery Fund
TAX DESIGNATION (UNAUDITED) (CONTINUED)
- --------------------------------------------------------------------------------
CLASS B
FOREIGN TAX FOREIGN SOURCE FOREIGN QUALIFIED
COUNTRY PAID PER SHARE INCOME PER SHARE DIVIDENDS PER SHARE
- --------------------------------------------------------------------------------
Australia ................ $ 0.0000 $ 0.0001 $ 0.0001
Belgium .................. 0.0009 0.0024 0.0024
Bermuda .................. 0.0000 0.0003 0.0003
Canada ................... 0.0001 0.0008 0.0003
Denmark .................. 0.0001 0.0032 0.0003
France ................... 0.0080 0.0230 0.0218
Germany .................. 0.0040 0.0121 0.0106
Hong Kong ................ 0.0000 0.0181 0.0000
India .................... 0.0027 0.0019 0.0019
Ireland .................. 0.0003 0.0040 0.0040
Italy .................... 0.0021 0.0055 0.0055
Japan .................... 0.0006 0.0036 0.0036
Luxembourg ............... 0.0018 0.0048 0.0048
Mexico ................... 0.0000 0.0008 0.0008
Netherlands .............. 0.0045 0.0176 0.0134
New Zealand .............. 0.0000 0.0004 0.0000
Norway ................... 0.0029 0.0079 0.0076
Singapore ................ 0.0000 0.0019 0.0000
South Africa ............. 0.0000 0.0063 0.0063
South Korea .............. 0.0038 0.0092 0.0092
Spain .................... 0.0040 0.0107 0.0107
Sweden ................... 0.0018 0.0049 0.0049
Switzerland .............. 0.0013 0.0054 0.0042
Taiwan ................... 0.0037 0.0043 0.0031
United Kingdom ........... 0.0000 0.0674 0.0611
----------------------------------------------------
Total .................... $ 0.0426 $ 0.2166 $ 0.1769
====================================================
- --------------------------------------------------------------------------------
CLASS C
FOREIGN TAX FOREIGN SOURCE FOREIGN QUALIFIED
COUNTRY PAID PER SHARE INCOME PER SHARE DIVIDENDS PER SHARE
- --------------------------------------------------------------------------------
Australia ................ $ 0.0000 $ 0.0001 $ 0.0001
Belgium .................. 0.0009 0.0025 0.0025
Bermuda .................. 0.0000 0.0003 0.0003
Canada ................... 0.0001 0.0009 0.0003
Denmark .................. 0.0001 0.0034 0.0004
France ................... 0.0080 0.0246 0.0233
Germany .................. 0.0040 0.0130 0.0114
Hong Kong ................ 0.0000 0.0193 0.0000
India .................... 0.0027 0.0020 0.0020
Ireland .................. 0.0003 0.0042 0.0042
Italy .................... 0.0021 0.0058 0.0058
Japan .................... 0.0006 0.0038 0.0038
Luxembourg ............... 0.0018 0.0051 0.0051
Mexico ................... 0.0000 0.0009 0.0009
Netherlands .............. 0.0045 0.0188 0.0143
New Zealand .............. 0.0000 0.0004 0.0000
Norway ................... 0.0029 0.0084 0.0081
Singapore ................ 0.0000 0.0020 0.0000
South Africa ............. 0.0000 0.0067 0.0067
South Korea .............. 0.0038 0.0098 0.0098
Spain .................... 0.0040 0.0115 0.0115
Sweden ................... 0.0018 0.0052 0.0052
Switzerland .............. 0.0013 0.0057 0.0045
Taiwan ................... 0.0037 0.0046 0.0033
United Kingdom ........... 0.0000 0.0720 0.0653
----------------------------------------------------
Total .................... $ 0.0426 $ 0.2310 $ 0.1888
====================================================
58 | Annual Report
Mutual Discovery Fund
TAX DESIGNATION (UNAUDITED) (CONTINUED)
- --------------------------------------------------------------------------------
CLASS R
FOREIGN TAX FOREIGN SOURCE FOREIGN QUALIFIED
COUNTRY PAID PER SHARE INCOME PER SHARE DIVIDENDS PER SHARE
- --------------------------------------------------------------------------------
Australia ................ $ 0.0000 $ 0.0001 $ 0.0001
Belgium .................. 0.0009 0.0034 0.0034
Bermuda .................. 0.0000 0.0004 0.0004
Canada ................... 0.0001 0.0012 0.0004
Denmark .................. 0.0001 0.0046 0.0005
France ................... 0.0080 0.0330 0.0312
Germany .................. 0.0040 0.0174 0.0152
Hong Kong ................ 0.0000 0.0259 0.0000
India .................... 0.0027 0.0027 0.0027
Ireland .................. 0.0003 0.0057 0.0057
Italy .................... 0.0021 0.0078 0.0078
Japan .................... 0.0006 0.0052 0.0052
Luxembourg ............... 0.0018 0.0069 0.0069
Mexico ................... 0.0000 0.0012 0.0012
Netherlands .............. 0.0045 0.0253 0.0192
New Zealand .............. 0.0000 0.0005 0.0000
Norway ................... 0.0029 0.0113 0.0108
Singapore ................ 0.0000 0.0027 0.0000
South Africa ............. 0.0000 0.0091 0.0091
South Korea .............. 0.0038 0.0132 0.0132
Spain .................... 0.0040 0.0154 0.0154
Sweden ................... 0.0018 0.0070 0.0070
Switzerland .............. 0.0013 0.0077 0.0060
Taiwan ................... 0.0037 0.0061 0.0044
United Kingdom ........... 0.0000 0.0967 0.0877
----------------------------------------------------
Total .................... $ 0.0426 $ 0.3105 $ 0.2535
====================================================
Foreign Tax Paid per Share (Column 1) is the amount per share available to you,
as a tax credit (assuming you held your shares in the Fund for a minimum of 16
days during the 31-day period beginning 15 days before the ex-dividend date of
the Fund's distribution to which the foreign taxes relate), or, as a tax
deduction.
Foreign Source Income per Share (Column 2) is the amount per share of income
dividends paid to you that is attributable to foreign securities held by the
Fund, plus any foreign taxes withheld on these dividends. The amounts reported
include foreign source qualified dividends that have not been adjusted for the
rate differential applicable to such dividend income. 1
Foreign Qualified Dividends per Share (Column 3) is the amount per share of
foreign source qualified dividends the Fund paid to you, plus any foreign taxes
withheld on these dividends. These amounts represent the portion of the Foreign
Source Income reported to you in column 2 that were derived from qualified
foreign securities held by the Fund. 1
In January 2007, shareholders will receive Form 1099-DIV which will include
their share of taxes paid and foreign source income distributed during the
calendar year 2006. The Foreign Source Income reported on Form 1099-DIV has not
been adjusted for the rate differential on foreign source qualified dividend
income. Shareholders are advised to check with their tax advisors for
information on the treatment of these amounts on their 2006 individual income
tax returns.
1 Qualified dividends are taxed at a maximum rate of 15% (5% for those in
the 10% and 15% income tax bracket). In determining the amount of foreign
tax credit that may be applied against the U.S. tax liability of
individuals receiving foreign source qualified dividends, adjustments may
be required to the foreign tax credit limitation calculation to reflect
the rate differential applicable to such dividend income. The rules
however permit certain individuals to elect not to apply the rate
differential adjustments for capital gains and/or dividends for any
taxable year. Please consult your tax advisor and the instructions to Form
1116 for more information.
Annual Report | 59
Mutual Discovery Fund
BOARD MEMBERS AND OFFICERS
The name, year of birth and address of the officers and board members, as well
as their affiliations, positions held with the Fund, principal occupations
during the past five years and number of portfolios overseen in the Franklin
Templeton Investments fund complex are shown below.
INDEPENDENT BOARD MEMBERS
- ------------------------------------------------------------------------------------------------------------------------------------
NUMBER OF PORTFOLIOS IN
NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN
AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- ------------------------------------------------------------------------------------------------------------------------------------
EDWARD I. ALTMAN, PH.D. (1941) Director Since 1987 7 Director, A.T.D. Inc. (financial
101 John F. Kennedy Parkway technology and investment company).
Short Hills, NJ 07078-2789
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Max L. Heine Professor of Finance and Director of The Credit and Debt Markets Research Program, Salomon Center, Stern School of
Business, New York University; editor and author of numerous financial publications; financial consultant; and serves on the
Investment Advisory Committee of the New York State Common Retirement Fund; and FORMERLY, Vice Director, NYU Salomon Center,
Stern School of Business, New York University.
- ------------------------------------------------------------------------------------------------------------------------------------
ANN TORRE BATES (1958) Director Since 1994 7 Independent Director, SLM
101 John F. Kennedy Parkway Corporation (Sallie Mae) and Allied
Short Hills, NJ 07078-2789 Capital Corporation (financial
services).
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Independent strategic and financial consultant; and FORMERLY, Executive Vice President and Chief Financial Officer, NHP
Incorporated (manager of multifamily housing) (1995-1997); and Vice President and Treasurer, US Airways, Inc. (until 1995).
- ------------------------------------------------------------------------------------------------------------------------------------
BURTON J. GREENWALD (1929) Director Since 2002 13 Director, Franklin Templeton Emerging
101 John F. Kennedy Parkway Markets Debt Opportunities Fund PLC
Short Hills, NJ 07078-2789 and Fiduciary International Ireland
Limited.
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Managing Director, B.J. Greenwald Associates (management consultants to the financial services industry) and FORMERLY, Chairman,
Fiduciary Trust International Funds; Executive Vice President, L.F. Rothschild Fund Management, Inc.; President and Director,
Merit Mutual Funds; President, Underwriting Division and Director, National Securities & Research Corporation; Governor,
Investment Company Institute and Chairman, ICI Public Information Committee.
- ------------------------------------------------------------------------------------------------------------------------------------
BRUCE A. MACPHERSON (1930) Director Since 1974 7 None
101 John F. Kennedy Parkway
Short Hills, NJ 07078-2789
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Retired, former Chairman, A.A. MacPherson, Inc., Canton, MA (representative for electrical manufacturers).
- ------------------------------------------------------------------------------------------------------------------------------------
CHARLES RUBENS II (1930) Director Since 1998 13 None
101 John F. Kennedy Parkway
Short Hills, NJ 07078-2789
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Private investor.
- ------------------------------------------------------------------------------------------------------------------------------------
60 | Annual Report
- ------------------------------------------------------------------------------------------------------------------------------------
NUMBER OF PORTFOLIOS IN
NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN
AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- ------------------------------------------------------------------------------------------------------------------------------------
ROBERT E. WADE (1946) Director and Director since 30 Director, El Oro and Exploration Co.,
101 John F. Kennedy Parkway Chairman of 1991 and p.l.c. (investments) and ARC Wireless
Short Hills, NJ 07078-2789 the Board Chairman of the Solutions, Inc. (wireless components
Board since 2005 and network products).
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Practicing attorney.
- ------------------------------------------------------------------------------------------------------------------------------------
INTERESTED BOARD MEMBERS AND OFFICERS
- ------------------------------------------------------------------------------------------------------------------------------------
NUMBER OF PORTFOLIOS IN
NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN
AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- ------------------------------------------------------------------------------------------------------------------------------------
**WILLIAM J. LIPPMAN (1925) Director Since 1996 13 None
One Parker Plaza, 9th Floor
Fort Lee, NJ 07024-2920
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
President, Franklin Advisory Services, LLC; Director, Templeton Worldwide, Inc.; and officer and/or director or trustee, as the
case may be, of four of the investment companies in Franklin Templeton Investments.
- ------------------------------------------------------------------------------------------------------------------------------------
PHILIPPE BRUGERE-TRELAT (1949) Vice Since 2005 Not Applicable Not Applicable
101 John F. Kennedy Parkway, President
Short Hills, NJ 07078-2789
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Vice President, Franklin Mutual Advisers, LLC; Portfolio Manager of Eurovest SA (French registered Investment Company, Sicav);
and officer of two of the investment companies in Franklin Templeton Investments.
- ------------------------------------------------------------------------------------------------------------------------------------
JAMES M. DAVIS (1952) Chief Chief Compliance Not Applicable Not Applicable
One Franklin Parkway Compliance Officer since
San Mateo, CA 94403-1906 Officer and 2004 and Vice
Vice President
President - AML Compliance
- AML since February
Compliance 2006
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Director, Global Compliance, Franklin Resources, Inc.; officer of some of the other subsidiaries of Franklin Resources, Inc. and
of 46 of the investment companies in Franklin Templeton Investments; and FORMERLY, Director of Compliance, Franklin Resources,
Inc. (1994-2001).
- ------------------------------------------------------------------------------------------------------------------------------------
MICHAEL J. EMBLER (1964) Senior Vice Since 2005 Not Applicable Not Applicable
101 John F. Kennedy Parkway President
Short Hills, NJ 07078-2789 and Chief
Investment
Officer
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Senior Vice President and Chief Investment Officer, Franklin Mutual Advisers, LLC; and officer of two of the investment
companies in Franklin Templeton Investments.
- ------------------------------------------------------------------------------------------------------------------------------------
Annual Report | 61
- ------------------------------------------------------------------------------------------------------------------------------------
NUMBER OF PORTFOLIOS IN
NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN
AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- ------------------------------------------------------------------------------------------------------------------------------------
JIMMY D. GAMBILL (1947) Senior Vice Since 2002 Not Applicable Not Applicable
500 East Broward Blvd. President
Suite 2100 and Chief
Fort Lauderdale, FL 33394-3091 Executive
Officer -
Finance and
Administration
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
President, Franklin Templeton Services, LLC; Senior Vice President, Templeton Worldwide, Inc.; and officer of some of the other
subsidiaries of Franklin Resources, Inc. and of 46 of the investment companies in Franklin Templeton Investments.
- ------------------------------------------------------------------------------------------------------------------------------------
DAVID P. GOSS (1947) Vice Since 2000 Not Applicable Not Applicable
One Franklin Parkway President
San Mateo, CA 94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Senior Associate General Counsel, Franklin Templeton Investments; officer and director of one of the subsidiaries of Franklin
Resources, Inc.; and officer of 46 of the investment companies in Franklin Templeton Investments.
- ------------------------------------------------------------------------------------------------------------------------------------
STEVEN J. GRAY (1955) Secretary Since 2005 Not Applicable Not Applicable
One Franklin Parkway
San Mateo, CA 94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Senior Associate General Counsel, Franklin Templeton Investments; and officer of 41 of the investment companies in Franklin
Templeton Investments.
- ------------------------------------------------------------------------------------------------------------------------------------
BARBARA J. GREEN (1947) Vice Since 2000 Not Applicable Not Applicable
One Franklin Parkway President
San Mateo, CA 94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Vice President, Deputy General Counsel and Secretary, Franklin Resources, Inc.; Secretary and Senior Vice President, Templeton
Worldwide, Inc.; Secretary, Franklin Advisers, Inc., Franklin Advisory Services, LLC, Franklin Investment Advisory Services,
LLC, Franklin Mutual Advisers, LLC, Franklin Templeton Institutional, LLC, Franklin Templeton Investor Services, LLC, Franklin
Templeton Services, LLC, Franklin Templeton Distributors, Inc., Templeton Investment Counsel, LLC, and Templeton/Franklin
Investment Services, Inc.; Vice President, Templeton Global Advisors Limited; and officer of some of the other subsidiaries of
Franklin Resources, Inc. and of 46 of the investment companies in Franklin Templeton Investments; and FORMERLY, Deputy Director,
Division of Investment Management, Executive Assistant and Senior Advisor to the Chairman, Counselor to the Chairman, Special
Counsel and Attorney Fellow, U.S. Securities and Exchange Commission (1986-1995); Attorney, Rogers & Wells (until 1986); and
Judicial Clerk, U.S. District Court (District of Massachusetts) (until 1979).
- ------------------------------------------------------------------------------------------------------------------------------------
PETER A. LANGERMAN (1955) President Since 2005 Not Applicable Not Applicable
101 John F. Kennedy Parkway and Chief
Short Hills, NJ 07078-2702 Executive
Officer -
Investment
Management
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Chairman of the Board, Chief Executive Officer and President, Franklin Mutual Advisers, LLC; and officer of two of the
investment companies in Franklin Templeton Investments; and FORMERLY, Director, New Jersey's Division of Investment.
- ------------------------------------------------------------------------------------------------------------------------------------
62 | Annual Report
- ------------------------------------------------------------------------------------------------------------------------------------
NUMBER OF PORTFOLIOS IN
NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN
AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- ------------------------------------------------------------------------------------------------------------------------------------
GREGORY R. SEWARD (1956) Treasurer Since 2005 Not Applicable Not Applicable
500 East Broward Blvd.
Suite 2100
Fort Lauderdale, FL 33394-3091
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Vice President, Franklin Templeton Services, LLC; officer of 16 of the investment companies in Franklin Templeton Investments;
and FORMERLY, Vice President, JPMorgan Chase (2000-2004) and American General Financial Group (1991-2000).
- ------------------------------------------------------------------------------------------------------------------------------------
CRAIG S. TYLE (1960) Vice Since 2005 Not Applicable Not Applicable
One Franklin Parkway President
San Mateo, CA 94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
General Counsel and Executive Vice President, Franklin Resources, Inc.; officer of some of the other subsidiaries of Franklin
Resources, Inc. and of 46 of the investment companies in Franklin Templeton Investments; and FORMERLY, Partner, Shearman &
Sterling, LLP (2004-2005); and General Counsel, Investment Company Institute (ICI) (1997-2004).
- ------------------------------------------------------------------------------------------------------------------------------------
GALEN G. VETTER (1951) Chief Since 2004 Not Applicable Not Applicable
500 East Broward Blvd. Financial
Suite 2100 Officer and
Fort Lauderdale, FL 33394-3091 Chief
Accounting
Officer
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Senior Vice President, Franklin Templeton Services, LLC; officer of 46 of the investment companies in Franklin Templeton
Investments; and FORMERLY, Managing Director, RSM McGladrey, Inc. (1999-2004); and Partner, McGladrey & Pullen, LLP
(1979-1987 and 1991-2004).
- ------------------------------------------------------------------------------------------------------------------------------------
* We base the number of portfolios on each separate series of the U.S.
registered investment companies within the Franklin Templeton Investments
fund complex. These portfolios have a common investment manager or
affiliated investment managers.
** William J. Lippman is considered to be an interested person of Mutual
Series under the federal securities laws due to his position as an officer
of some of the subsidiaries of Franklin Resources, Inc., which is the
parent company of Mutual Series' investment manager and distributor.
Note: Subsequent to December 31, 2006, Leonard Rubin and Anne M. Tatlock ceased
to be a director of the Fund.
THE FUND'S BOARD OF DIRECTORS HAS DETERMINED THAT CERTAIN OF THE MEMBERS OF THE
AUDIT COMMITTEE, INCLUDING ANN TORRE BATES, ARE AUDIT COMMITTEE FINANCIAL
EXPERTS, AND "INDEPENDENT," UNDER THOSE PROVISIONS OF THE SARBANES-OXLEY ACT OF
2002, AND THE RULES AND FORM AMENDMENTS ADOPTED BY THE SECURITIES AND EXCHANGE
COMMISSION, RELATING TO AUDIT COMMITTEE FINANCIAL EXPERTS.
THE STATEMENT OF ADDITIONAL INFORMATION (SAI) INCLUDES ADDITIONAL INFORMATION
ABOUT THE BOARD MEMBERS AND IS AVAILABLE, WITHOUT CHARGE, UPON REQUEST.
SHAREHOLDERS MAY CALL 1-800/DIAL BEN (1-800/342-5236) TO REQUEST THE SAI.
Annual Report | 63
Mutual Discovery Fund
SHAREHOLDER INFORMATION
PROXY VOTING POLICIES AND PROCEDURES
The Fund has established Proxy Voting Policies and Procedures ("Policies") that
the Fund uses to determine how to vote proxies relating to portfolio securities.
Shareholders may view the Fund's complete Policies online at
franklintempleton.com. Alternatively, shareholders may request copies of the
Policies free of charge by calling the Proxy Group collect at 1-954/527-7678 or
by sending a written request to: Franklin Templeton Companies, LLC, 500 East
Broward Boulevard, Suite 1500, Fort Lauderdale, FL 33394, Attention: Proxy
Group. Copies of the Fund's proxy voting records are also made available online
at franklintempleton.com and posted on the U.S. Securities and Exchange
Commission's website at sec.gov and reflect the most recent 12-month period
ended June 30.
QUARTERLY STATEMENT OF INVESTMENTS
The Fund files a complete statement of investments with the U.S. Securities and
Exchange Commission for the first and third quarters for each fiscal year on
Form N-Q. Shareholders may view the filed Form N-Q by visiting the Commission's
website at sec.gov. The filed form may also be viewed and copied at the
Commission's Public Reference Room in Washington, DC. Information regarding the
operations of the Public Reference Room may be obtained by calling
1-800/SEC-0330.
64 | Annual Report
Literature Request
LITERATURE REQUEST. TO RECEIVE A BROCHURE AND PROSPECTUS, PLEASE CALL US AT
1-800/DIAL BEN(R) (1-800/342-5236) OR VISIT FRANKLINTEMPLETON.COM. INVESTORS
SHOULD CAREFULLY CONSIDER A FUND'S INVESTMENT GOALS, RISKS, CHARGES AND EXPENSES
BEFORE INVESTING. THE PROSPECTUS CONTAINS THIS AND OTHER INFORMATION. PLEASE
CAREFULLY READ THE PROSPECTUS BEFORE INVESTING. To ensure the highest quality of
service, we may monitor, record AND access telephone calls to or from our
service departments. These calls can be identified by the presence of a regular
beeping tone.
FRANKLIN TEMPLETON INVESTMENTS
INTERNATIONAL
Mutual European Fund
Templeton BRIC Fund
Templeton China World Fund
Templeton Developing Markets Trust
Templeton Emerging Markets Small Cap Fund
Templeton Foreign Fund
Templeton Foreign Smaller Companies Fund
Templeton International (Ex EM) Fund 1
GLOBAL
Mutual Discovery Fund
Templeton Global Long-Short Fund
Templeton Global Opportunities Trust
Templeton Global Smaller Companies Fund
Templeton Growth Fund
Templeton World Fund
GROWTH
Franklin Aggressive Growth Fund
Franklin Capital Growth Fund
Franklin Flex Cap Growth Fund
Franklin Small-Mid Cap Growth Fund
Franklin Small Cap Growth Fund II 1
VALUE
Franklin Balance Sheet Investment Fund 2
Franklin Equity Income Fund
Franklin Large Cap Value Fund
Franklin MicroCap Value Fund 2
Franklin MidCap Value Fund
Franklin Small Cap Value Fund
Mutual Beacon Fund
Mutual Qualified Fund
Mutual Recovery Fund 3
Mutual Shares Fund
BLEND
Franklin Balanced Fund
Franklin Blue Chip Fund 1
Franklin Convertible Securities Fund
Franklin Growth Fund
Franklin Rising Dividends Fund
Franklin U.S. Long-Short Fund
SECTOR
Franklin Biotechnology Discovery Fund
Franklin DynaTech Fund
Franklin Global Communications Fund
Franklin Global Health Care Fund
Franklin Global Real Estate Fund
Franklin Gold AND Precious Metals Fund
Franklin Natural Resources Fund
Franklin Real Estate Securities Fund
Franklin Technology Fund
Franklin Utilities Fund
Mutual Financial Services Fund
ASSET ALLOCATION
Franklin Templeton Corefolio Allocation Fund
Franklin Templeton Founding Funds Allocation Fund
Franklin Templeton Perspectives Allocation Fund
TARGET FUNDS
Franklin Templeton Conservative Target Fund
Franklin Templeton Growth Target Fund
Franklin Templeton Moderate Target Fund
RETIREMENT TARGET FUNDS
Franklin Templeton 2015 Retirement Target Fund
Franklin Templeton 2025 Retirement Target Fund
Franklin Templeton 2035 Retirement Target Fund
Franklin Templeton 2045 Retirement Target Fund
INCOME
Franklin Adjustable U.S. Government Securities Fund 4
Franklin Floating Rate Daily Access Fund
Franklin High Income Fund 5
Franklin Income Fund
Franklin Limited Maturity U.S. Government Securities Fund 4
Franklin Low Duration Total Return Fund
Franklin Real Return Fund
Franklin Strategic Income Fund
Franklin Strategic Mortgage Portfolio
Franklin Templeton Hard Currency Fund
Franklin Total Return Fund
Franklin U.S. Government Securities Fund 4
Templeton Global Bond Fund
Templeton Income Fund
TAX-FREE INCOME 6
NATIONAL FUNDS
Double Tax-Free Income Fund
Federal Tax-Free Income Fund
High Yield Tax-Free Income Fund
Insured Tax-Free Income Fund 7
LIMITED-TERM FUNDS
California Limited-Term Tax-Free Income Fund
Federal Limited-Term Tax-Free Income Fund
New York Limited-Term Tax-Free Income Fund
INTERMEDIATE-TERM FUNDS
California Intermediate-Term Tax-Free Income Fund
Federal Intermediate-Term Tax-Free Income Fund
New York Intermediate-Term Tax-Free Income Fund
STATE-SPECIFIC
Alabama
Arizona
California 8
Colorado
Connecticut
Florida 8
Georgia
Kentucky
Louisiana
Maryland
Massachusetts 7
Michigan 7
Minnesota 7
Missouri
New Jersey
New York 8
North Carolina
Ohio 7
Oregon
Pennsylvania
Tennessee
Virginia
INSURANCE FUNDS
Franklin Templeton Variable Insurance Products Trust 9
1. The fund is closed to new investors. Existing shareholders can continue
adding to their accounts.
2. The fund is only open to existing shareholders AND select retirement
plans.
3. The fund is a continuously offered, closed-end fund. Shares may be
purchased daily; there is no daily redemption. However, each quarter,
pending board approval, the fund will authorize the repurchase of 5%-25%
of the outstanding number of shares. Investors may tender all or a portion
of their shares during the tender period.
4. An investment in the fund is neither insured nor guaranteed by the U.S.
government or by any other entity or institution.
5. Effective 10/1/06, Franklin's AGE High Income Fund changed its name to
Franklin High Income Fund. The fund's investment goal AND strategy
remained the same.
6. For investors subject to the alternative minimum tax, a small portion of
fund dividends may be taxable. Distributions of capital gains are
generally taxable.
7. Portfolio of insured municipal securities.
8. These funds are available in two or more variations, including long-term
portfolios, portfolios of insured securities, a high-yield portfolio (CA)
AND limited-term, intermediate-term AND money market portfolios (CA AND
NY).
9. The funds of the Franklin Templeton Variable Insurance Products Trust are
generally available only through insurance company variable contracts.
01/07 Not part of the annual report
[LOGO](R)
FRANKLIN TEMPLETON One Franklin Parkway
INVESTMENTS San Mateo, CA 94403-1906
o WANT TO RECEIVE THIS DOCUMENT FASTER VIA EMAIL?
Eligible shareholders can sign up for eDelivery at franklintempleton.com.
See inside for details.
ANNUAL REPORT AND SHAREHOLDER LETTER
MUTUAL DISCOVERY FUND
INVESTMENT MANAGER
Franklin Mutual Advisers, LLC
101 John F. Kennedy Parkway
Short Hills, NJ 07078
DISTRIBUTOR
Franklin Templeton Distributors, Inc.
1-800/DIAL BEN(R)
franklintempleton.com
SHAREHOLDER SERVICES
1-800/632-2301 - (Class A, B, C & R)
1-800/448-FUND - (Class Z)
Authorized for distribution only when accompanied or preceded by a prospectus.
Investors should carefully consider a fund's investment goals, risks, charges
and expenses before investing. The prospectus contains this and other
information; please read it carefully before investing.
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
identified by the presence of a regular beeping tone.
477 A2006 02/07
ITEM 2. CODE OF ETHICS.
(a) The Registrant has adopted a code of ethics that applies to its principal
executive officers and principal financial and accounting officer.
(c) N/A
(d) N/A
(f) Pursuant to Item 12(a)(1), the Registrant is attaching as an exhibit a copy
of its code of ethics that applies to its principal executive officers and
principal financial and accounting officer.
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.
(a)(1) The registrant has an audit committee financial expert serving on its
audit committee.
(2) The audit committee financial expert is Ann Torre Bates, and she is
"independent" as defined under the relevant Securities and Exchange Commission
Rules and Releases.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
(a) Audit Fees
The aggregate fees paid to the principal accountant for professional services
rendered by the principal accountant for the audit of the registrant's annual
financial statements or for services that are normally provided by the principal
accountant in connection with statutory and regulatory filings or engagements
were $468,869 for the fiscal year ended December 31, 2006 and $355,000 for the
fiscal year ended December 31, 2005.
(b) Audit-Related Fees
There were no fees paid to the principal accountant for assurance and related
services rendered by the principal accountant to the registrant that are
reasonably related to the performance of the audit of the registrant's financial
statements and are not reported under paragraph (a) of Item 4.
There were no fees paid to the principal accountant for assurance and related
services rendered by the principal accountant to the registrant's investment
adviser and any entity controlling, controlled by or under common control with
the investment adviser that provides ongoing services to the registrant that are
reasonably related to the performance of the audit of their financial
statements.
(c) Tax Fees
There were no fees paid to the principal accountant for professional services
rendered by the principal accountant to the registrant for tax compliance, tax
advice and tax planning.
The aggregate fees paid to the principal accountant for professional services
rendered by the principal accountant to the registrant's investment adviser and
any entity controlling, controlled by or under common control with the
investment adviser that provides ongoing services to the registrant for tax
compliance, tax advice and tax planning were $33,924 for the fiscal year ended
December 31, 2006 and $25,000 for the fiscal year ended December 31, 2005. The
services for which these fees were paid included tax compliance and advice.
(d) All Other Fees
There were no fees paid to the principal accountant for products and services
rendered by the principal accountant to the registrant, other than the services
reported in paragraphs (a)-(c) of Item 4.
The aggregate fees paid to the principal accountant for products and services
rendered by the principal accountant to the registrant's investment adviser and
any entity controlling, controlled by or under common control with the
investment adviser that provides ongoing services to the registrant not reported
in paragraphs (a)-(c) of Item 4 were $0 for the fiscal year ended December 31,
2006 and $199,802 for the fiscal year ended December 31, 2005. The services for
which these fees were paid included financial due diligence.
(e) (1) The registrant's audit committee is directly responsible for approving
the services to be provided by the auditors, including:
(i) pre-approval of all audit and audit related services;
(ii) pre-approval of all non-audit related services to be
provided to the Fund by the auditors;
(iii) pre-approval of all non-audit related services to be
provided to the registrant by the auditors to the registrant's investment
adviser or to any entity that controls, is controlled by or is under common
control with the registrant's investment adviser and that provides ongoing
services to the registrant where the non-audit services relate directly to the
operations or financial reporting of the registrant; and
(iv) establishment by the audit committee, if deemed necessary or
appropriate, as an alternative to committee pre-approval of services to be
provided by the auditors, as required by paragraphs (ii) and (iii) above, of
policies and procedures to permit such services to be pre-approved by other
means, such as through establishment of guidelines or by action of a designated
member or members of the committee; provided the policies and procedures are
detailed as to the particular service and the committee is informed of each
service and such policies and procedures do not include delegation of audit
committee responsibilities, as contemplated under the Securities Exchange Act of
1934, to management; subject, in the case of (ii) through (iv), to any waivers,
exceptions or exemptions that may be available under applicable law or rules.
(e) (2) None of the services provided to the registrant described in paragraphs
(b)-(d) of Item 4 were approved by the audit committee pursuant to paragraph
(c)(7)(i)(C) of Rule 2-01 of regulation S-X.
(f) No disclosures are required by this Item 4(f).
(g) The aggregate non-audit fees paid to the principal accountant for services
rendered by the principal accountant to the registrant and the registrant's
investment adviser and any entity controlling, controlled by or under common
control with the investment adviser that provides ongoing services to the
registrant were $33,924 for the fiscal year ended December 31, 2006 and $224,802
for the fiscal year ended December 31, 2005.
(h) The registrant's audit committee of the board has considered whether the
provision of non-audit services that were rendered to the registrant's
investment adviser (not including any sub-adviser whose role is primarily
portfolio management and is subcontracted with or overseen by another investment
adviser), and any entity controlling, controlled by, or under common control
with the investment adviser that provides ongoing services to the registrant
that were not pre-approved pursuant to paragraph (c)(7)(ii) of Rule 2-01 of
Regulation S-X is compatible with maintaining the principal accountant's
independence.
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS. N/A
ITEM 6. SCHEDULE OF INVESTMENTS. N/A
ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR
CLOSED-END MANAGEMENT INVESTMENT COMPANIES. N/A
ITEM 8. PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES. N/A
ITEM 9. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT
COMPANY AND AFFILIATED PURCHASERS. N/A
ITEM 10. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There have been no changes to the procedures by which shareholders may recommend
nominees to the Registrant's Board of Directors that would require disclosure
herein.
ITEM 11. CONTROLS AND PROCEDURES.
(a) EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES. The Registrant maintains
disclosure controls and procedures that are designed to ensure that information
required to be disclosed in the Registrant's filings under the Securities
Exchange Act of 1934 and the Investment Company Act of 1940 is recorded,
processed, summarized and reported within the periods specified in the rules and
forms of the Securities and Exchange Commission. Such information is accumulated
and communicated to the Registrant's management, including its principal
executive officer and principal financial officer, as appropriate, to allow
timely decisions regarding required disclosure. The Registrant's management,
including the principal executive officer and the principal financial officer,
recognizes that any set of controls and procedures, no matter how well designed
and operated, can provide only reasonable assurance of achieving the desired
control objectives.
Within 90 days prior to the filing date of this Shareholder Report on Form
N-CSR, the Registrant had carried out an evaluation, under the supervision and
with the participation of the Registrant's management, including the
Registrant's principal executive officer and the Registrant's principal
financial officer, of the effectiveness of the design and operation of the
Registrant's disclosure controls and procedures. Based on such evaluation, the
Registrant's principal executive officer and principal financial officer
concluded that the Registrant's disclosure controls and procedures are
effective.
(b) CHANGES IN INTERNAL CONTROLS. There have been no significant changes
in the Registrant's internal controls or in other factors that could
significantly affect the internal controls subsequent to the date of their
evaluation in connection with the preparation of this Shareholder Report on Form
N-CSR.
ITEM 12. EXHIBITS.
(a)(1) Code of Ethics
(a) (2) Certifications pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
of Jimmy D. Gambill, Chief Executive Officer - Finance and Administration, and
Galen G. Vetter, Chief Financial Officer
(b) Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 of
Jimmy D. Gambill, Chief Executive Officer - Finance and Administration, and
Galen G. Vetter, Chief Financial Officer
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
FRANKLIN MUTUAL SERIES FUND INC.
By /s/JIMMY D. GAMBILL
-------------------
Jimmy D. Gambill
Chief Executive Officer - Finance and Administration
Date February 27, 2007
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
By /s/JIMMY D. GAMBILL
-------------------
Jimmy D. Gambill
Chief Executive Officer - Finance and Administration
Date February 27, 2007
By /s/GALEN G. VETTER
------------------
Galen G. Vetter
Chief Financial Officer
Date February 27, 2007