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.
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(Exact name of registrant as specified in charter)
101 John F. Kennedy Parkway, Short Hills, NJ 07078-2705
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(Address of principal executive offices) (Zip code)
Craig S. Tyle, One Franklin Parkway, San Mateo, CA 94403-1906
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(Name and address of agent for service)
Registrant's telephone number, including area code: (210) 912-2100
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Date of fiscal year end: 12/31
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Date of reporting period: 12/31/07
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Item 1. Reports to Stockholders.
[GRAPHIC OMITTED]
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DECEMBER 31, 2007
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ANNUAL REPORT AND SHAREHOLDER LETTER VALUE
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WANT TO RECEIVE
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[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.
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MUTUAL FUNDS | RETIREMENT PLANS | 529 COLLEGE SAVINGS PLANS | SEPARATE ACCOUNTS
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[GRAPHIC OMITTED]
Not part of the annual report
Contents
SHAREHOLDER LETTER ........................................................ 1
ANNUAL REPORT
Mutual Beacon Fund ........................................................ 5
Performance Summary ....................................................... 11
Your Fund's Expenses ...................................................... 16
Financial Highlights and Statement of Investments ......................... 18
Financial Statements ...................................................... 31
Notes to Financial Statements ............................................. 35
Report of Independent Registered Public Accounting Firm ................... 50
Tax Designation ........................................................... 51
Board Members and Officers ................................................ 52
Shareholder Information ................................................... 56
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Shareholder Letter
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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.
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AVERAGE ANNUAL TOTAL RETURN
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CLASS Z 12/31/07
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1-Year +3.03%
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5-Year +15.08%
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10-Year +10.05%
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Dear Shareholder:
The past year was a turbulent time for equities both in the U.S. and in many
international markets. Several developments contributed to this volatility,
including (1) credit problems centered around subprime mortgage lending; (2)
declining home values in the U.S.; (3) a nearly complete evaporation of the
corporate leveraged lending that fueled the leveraged buyout boom of the past
several years; (4) a sharp increase in oil, agricultural and certain mining
commodity prices; and (5) a sharp decline in the value of the U.S. dollar
relative to most other currencies. For the year ended December 31, 2007, the
Standard & Poor's (S&P) 500 Index rose 5.49% while the Morgan Stanley Capital
International (MSCI) World Index gained 9.57%. 1 However, indicative of the
impact of the developments noted here, the S&P 500 Financials Index declined
18.63%, the S&P Homebuilders Select Industry Index declined 48.39% and the S&P
GSSI Natural Resources Index appreciated 34.44% during the year. 2 By
comparison, Mutual Beacon Fund - Class Z gained 3.03% over this period.
1. Source: Standard & Poor's Micropal. The S&P 500 Index 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
Index 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.
2. Source: Standard & Poor's Micropal. The S&P 500 Financials Index is market
value weighted and includes all the financial stocks in the S&P 500. The S&P
Homebuilders Select Industry Index is an equal-weighted index that draws its
constituents from the GICS (Global Industry Classification Standards)
Homebuilding sub-industry. The S&P GSSI Natural Resources Index is a modified
cap-weighted index designed to measure equity performance in the natural
resources sector. The index includes companies involved in the following
categories: extractive industries, energy companies, owners and operators of
timber tracts, forestry services, producers of pulp and paper, and owners of
plantations.
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.
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NOT FDIC INSURED | MAY LOSE VALUE | NO BANK GUARANTEE
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Not part of the annual report | 1
The markets in 2007 were particularly challenging for us as value-driven,
bottom-up stock pickers in a year when a thematic approach to investing based on
macroeconomic factors would likely have enhanced performance. Value investors
are always faced with the task of buying and owning companies when they are out
of favor, whether for company-specific reasons or because of a perception of
macroeconomic fundamentals. It is these very headwinds that create opportunities
to buy well-managed companies with strong industry positions at valuations that
can reward investors over the long term.
Despite the challenges, a number of positive factors contributed to Fund
performance this year. Many of our international holdings made strong gains,
particularly among the tobacco, energy and industrial companies we owned. Fund
shareholders also benefited from the fact that our international holdings were
less than fully hedged back into U.S. dollars, reflecting our cautious view
regarding the dollar. Investments in merger arbitrage situations were also
generally profitable, particularly as we took advantage in late summer of
concerns that deals would fall apart because of "buyer's remorse" or
unavailability of financing.
In the U.S., our focus over the past several years on larger capitalization
companies with strong balance sheets and leading industry positions benefited
our shareholders. For example, investments in Microsoft, Altria and Verizon
Communications, all part of the large-cap Dow Jones Industrial Average,
generated solid returns in 2007. 3 As we have discussed in previous reports, the
multi-year outperformance of small- and mid-capitalization stocks going into
2007 resulted in attractive valuations among their mega-cap counterparts. At
period-end, we continued to see real value in a number of these companies.
The Fund's exposure to the financial sector negatively impacted Fund performance
during the year. While we had limited direct exposure to the subprime mortgage
originators, the spreading contagion of the credit crisis hurt valuations of
most financial institutions, including some well-capitalized domestic and
European banks owned by the Fund. We were disappointed by the breakdown in risk
management processes at some of the largest U.S. financial institutions and have
adjusted certain positions accordingly. Nevertheless, we believe the markets
have overly penalized many stocks in the sector and accordingly have added
selectively to certain holdings.
3. Mutual Beacon Fund's holdings are based on total net assets as of 12/31/07:
Microsoft Corp.: 2.2%; Altria Group Inc.: 2.1%; and Verizon Communications Inc.:
0.0% (sold by period-end).
2 | Not part of the annual report
Another difficult area for us in the latter half of the year was what we would
term "event-driven" stocks. These are investments we believe are attractively
valued and where we see an identifiable catalyst to unlock the value. While each
investment is different, a few issues dominated the second half of 2007. One key
driver was the abrupt absence of private equity buyers for companies (or
divisions of companies) that were potential sale targets. Virgin Media, the U.K.
cable company, was one example. Another key element was direct or indirect
exposure to the residential construction or financial industries, where the
catalyst was overwhelmed by the economic headwinds facing the company.
Temple-Inland, which sold its timber assets and split into three companies
including a packaging company, a savings bank and a real estate developer in
2007, exemplified this risk. Finally, we believe many of these event-driven
investments were held in common with some of the hedge funds that faced pressure
to sell in the latter half of 2007. Again, while somewhat painful in the short
term, "technical" pressures often give us a chance to take advantage of
temporary market dislocations to increase ownership in attractively valued
companies.
Fear and volatility can breed opportunity for patient investors. We believe the
extended credit crisis has created a number of such opportunities. We have no
crystal ball telling us precisely when the U.S. housing market will turn
positive or where oil prices will be a year from now. However, we believe that
if we stick to our discipline of buying good businesses at cheap valuations, we
should reach our goal of limiting our downside risk while generating consistent
returns over the long term.
In the enclosed annual report for Mutual Beacon Fund, the portfolio managers
discuss market conditions, investment management decisions and Fund performance
during the period under review. You will also find performance data and
financial information. Please remember that all securities markets fluctuate, as
do mutual fund share prices.
If you would like more frequent updates, FRANKLINTEMPLETON.COM provides daily
prices, monthly performance figures, portfolio holdings and other information.
You can also access your account, buy and sell shares, read timely articles, and
find helpful financial planning tools. We hope you will take advantage of these
online services.
Not part of the annual report | 3
As always, we thank you for your trust and support and extend our best wishes
for a happy, healthy and prosperous 2008.
Sincerely,
/s/ Peter A. Langerman
Peter A. Langerman
Chairman, President and Chief Executive Officer
Franklin Mutual Advisers, LLC
/s/ Michael J. Embler
Michael J. Embler
Senior Vice President and Chief Investment Officer
Franklin Mutual Advisers, LLC
THIS LETTER REFLECTS OUR ANALYSIS AND OPINIONS AS OF DECEMBER 31, 2007. 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.
4 | Not part of the annual report
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 primarily 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.
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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.
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This annual report for Mutual Beacon Fund covers the fiscal year ended December
31, 2007.
PERFORMANCE OVERVIEW
Mutual Beacon Fund - Class Z posted a cumulative total return of +3.03% for the
12 months ended December 31, 2007. The Fund underperformed its benchmark, the
Standard & Poor's 500 Index (S&P 500), which returned +5.49% 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
During the 12 months ended December 31, 2007, the U.S. economy advanced at a
moderate but uneven pace. After slow first quarter growth, gross domestic
product (GDP) advanced solidly in the second quarter, supported by federal
defense spending, accelerating exports and declining imports, and greater
business spending. In the third quarter, growth accelerated despite a struggling
housing market and the abrupt unraveling of the subprime mortgage market. The
housing downturn affected the overall economy by fourth quarter 2007 when GDP
growth decelerated as credit conditions worsened and consumer spending slowed.
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.
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 22.
Annual Report | 5
GEOGRAPHIC BREAKDOWN
Based on Total Net Assets as of 12/31/07
[THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.]
U.S. 59.2%
U.K. 6.4%
Germany 4.9%
France 4.4%
Norway 2.7%
Denmark 2.6%
Switzerland 2.1%
Spain 2.0%
Belgium 2.0%
South Korea 1.8%
Italy 1.8%
Japan 1.5%
Sweden 1.4%
Other 1.0%
Short-Term Investments & Other Net Assets 6.2%
Consumer confidence declined through period-end largely due to rising mortgage
and fuel costs, falling home prices and a weaker job market. Oil prices were
volatile and established a new record high in November, nearing $99 per barrel.
For the 12 months ended December 31, 2007, the core Consumer Price Index (CPI),
which excludes food and energy costs, rose 2.4%, which was higher than its
10-year average rate. 2
Facing the prospect of slower economic growth, the Federal Reserve Board lowered
the federal funds target rate to 4.25% from 5.25% during the period. As
investors fled riskier, poorer-performing assets, U.S. Treasuries rallied and
the 10-year Treasury note yield fell from 4.71% at the beginning of the period
to 4.04% on December 31, 2007.
The global economy remained resilient despite elevated energy prices and
widespread fears of contagion from the deteriorating U.S. housing situation.
Consumer and corporate demand strength, particularly in China and other
developing economies, generally favorable employment and accommodative monetary
policies continued to underpin the current global expansionary period that began
in 2002.
These factors also contributed to the strength of global equity markets during
2007. However, concerns about slower growth and declining asset quality surfaced
in the first quarter. Initially centered on the U.S. subprime mortgage market,
they spread in August to global capital markets. Difficulties in assessing risk
and the value of collateral in the structured finance industry contributed to
declining risk appetite among lenders and investors. The private equity
industry, which relies on the availability of cheap credit, played a pivotal
role in several large and high-profile acquisitions, helped boost merger and
acquisition activity in the first half of 2007, and was an important driver of
equity performance. A second-half tightening of liquidity led to slower deal
activity and weighed on market performance. However, in 2007, global merger and
acquisition activity still reached record levels.
To alleviate the credit crunch and restore investor confidence, the world's
major central banks infused capital into the system. However, credit and equity
markets continued to face headwinds as write-downs and losses from subprime
mortgage financing affected many large financial institutions toward the end of
the year, and equity prices remained volatile. For the year, however, global and
non-U.S. equity markets registered the fifth consecutive year of double-digit
total returns. Broad-based stock performance by European and Asian shares at
least doubled
2. Source: Bureau of Labor Statistics.
6 | Annual Report
that of U.S. stocks, while emerging market equity returns more than tripled
those in developed markets. In addition, U.S. dollar weakness versus the
currencies of many major trading partners enhanced equity returns for U.S.-based
investors holding stocks denominated in these currencies.
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 for our shareholders.
TOP 10 SECTORS/INDUSTRIES
Based on Equity Securities as of 12/31/07
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% OF TOTAL
NET ASSETS
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Tobacco 11.0%
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Media 8.9%
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Insurance 8.3%
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Commercial Banks 7.9%
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Paper & Forest Products 4.7%
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Industrial Conglomerates 4.2%
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Food Products 3.7%
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Health Care Providers & Services 2.9%
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Software 2.9%
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Real Estate 2.4%
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Annual Report | 7
TOP 10 HOLDINGS
12/31/07
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COMPANY % OF TOTAL
SECTOR/INDUSTRY, COUNTRY NET ASSETS
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White Mountains Insurance Group Ltd. 2.6%
INSURANCE, U.S.
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Weyerhaeuser Co. 2.4%
PAPER & FOREST PRODUCTS, U.S.
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U.S. Bancorp 2.3%
COMMERCIAL BANKS, U.S.
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Microsoft Corp. 2.2%
SOFTWARE, U.S.
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News Corp., A 2.2%
MEDIA, U.S.
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Orkla ASA 2.1%
INDUSTRIAL CONGLOMERATES, NORWAY
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Altria Group Inc. 2.1%
TOBACCO, U.S.
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Berkshire Hathaway Inc., A & B 2.1%
INSURANCE, U.S.
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Comcast Corp., A 2.0%
MEDIA, U.S.
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Fortis 2.0%
DIVERSIFIED FINANCIAL SERVICES, BELGIUM
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MANAGER'S DISCUSSION
During the year under review, the largest contributor to Fund performance was
our equity portfolio, most notably some of our long-term holdings. Three
investments that performed well during 2007 were KT&G, Berkshire Hathaway and
Transocean.
Shares of South Korea-based KT&G appreciated 41% in local currency during 2007,
due largely to the company's strong operating performance. Each division of KT&G
reported positive news in 2007. The company's domestic tobacco sales and
operating margins expanded due to increased average selling prices for a pack of
cigarettes. Overseas sales and revenues registered high double-digit increases.
KT&G owns a 100% stake in KGC, South Korea's leading red ginseng maker, which
has a dominant position of more than 60% market share. Over the past five years,
KGC's sales and earnings have grown at 20% and 27% compounded annual growth
rates, respectively. We believe this trend could continue given the country's
aging demographic, growing income levels, and KGC's aggressive distribution and
production expansion plan. According to our analysis, not only is the outlook
for earnings quite good but the company's ability to return cash to shareholders
has been impressive as well. KT&G has announced that between 2006 and 2008 it
will return 2.8 trillion won (the local currency, which equaled approximately
$3.0 billion on December 31, 2007) to shareholders. After 2008, KT&G is expected
to return an average 5% to 7% of market capitalization to shareholders annually
through dividends and share buybacks.
Berkshire Hathaway stock appreciated 29% as the company benefited from a lack of
catastrophe losses in 2007, resulting in large insurance company profits after
higher-than-average losses in 2004 and 2005 resulted in a favorable pricing
environment for U.S. property insurers. Within Berkshire's non-insurance
operations, the company benefited from an improving contribution from its
utility business, Mid-American Energy. Most significantly for its share price
value, Berkshire's cash stockpile of almost $40 billion, along with CEO Warren
Buffett's willingness to wait until a bargain emerged before deploying this
capital, positioned the company as a safe haven for investors who perceived
2007's subprime mortgage crisis as an investment opportunity rather than a
threat. By the end of 2007 Berkshire management had successfully kept its
capital mostly in reserve, for use in executing timely future transactions when
the investment climate is right.
8 | Annual Report
Transocean shares appreciated nearly 67% during 2007, driven by strong company
fundamentals, the company's merger with GlobalSanteFe, and shareholder-friendly
initiatives. Fundamentally, a continued tight supply and demand balance for
offshore rig contractors resulted in higher day rates and favorable financial
performance at Transocean. On the event-driven and shareholder-friendly side,
the company completed a merger with GlobalSantaFe concurrently with a leveraged
recapitalization that enabled a special distribution of $33.03 in late November.
All of these actions were received with widespread shareholder appreciation.
Although many of our investments appreciated during the year, some of the Fund's
holdings underperformed. Three positions that declined significantly in value
were Sovereign Bancorp, financial services conglomerate Citigroup, and
U.K.-based cable company Virgin Media.
In a difficult year for finance and banking stocks in general, the Fund's shares
of Sovereign Bancorp fared poorly and lost 54% in value. While the company took
early steps to restructure its balance sheet in an effort to lower its risk
profile at the beginning of 2007, the bank's asset quality deteriorated in the
second half of the year, consistent with many other U.S. financial companies.
The Fund's Citigroup shares declined 38% during the time we held it in 2007 as
the company's exposure to risky mortgage assets resulted in write-offs during
the second half of the year, ultimately leading to the resignation of CEO
Charles Prince. Although we believed Citigroup had some extremely valuable
global franchises, we were disappointed by the company's apparently weak risk
management systems, and exited the position during the year.
Shares of Virgin Media, the U.K.'s largest cable company, declined 32% in local
currency during 2007. First, the company was forced to pull several British Sky
Broadcasting (BSkyB) channels from its offering due to a pricing dispute, which
resulted in a reduction in subscribers. Second, the contraction of the leveraged
corporate debt market scuttled a plan announced in June to sell the company.
Finally, Virgin Media posted mediocre earnings results in 2007.
Finally, investors should note that we maintained our currency hedging posture
of being generally hedged to the U.S. dollar for most of our non-U.S. holdings.
Since the dollar was weaker compared with most foreign currencies during 2007,
the Fund benefited to the extent it was not fully hedged.
Annual Report | 9
Thank you for your continued participation in Mutual Beacon Fund. We look
forward to serving your future investment needs.
[PHOTO OMITTED] /s/ Michael J. Embler
Michael J. Embler
Co-Portfolio Manager
[PHOTO OMITTED] /s/ Christian Correa
Christian Correa, CFA
Co-Portfolio Manager
Mutual Beacon Fund
THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS
AS OF DECEMBER 31, 2007, 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.
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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 assumed responsibility as co-portfolio manager for Mutual
Beacon Fund effective December 31, 2007. 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.
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10 | Annual Report
Performance Summary as of 12/31/07
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 12/31/07 12/31/06
- ------------------------------------------------------------------------------------
Net Asset Value (NAV) -$0.98 $15.73 $16.71
- ------------------------------------------------------------------------------------
DISTRIBUTIONS (1/1/07-12/31/07)
- ------------------------------------------------------------------------------------
Dividend Income $0.5651
- ------------------------------------------------------------------------------------
Short-Term Capital Gain $0.0017
- ------------------------------------------------------------------------------------
Long-Term Capital Gain $0.9218
- ------------------------------------------------------------------------------------
TOTAL $1.4886
- ------------------------------------------------------------------------------------
CLASS A (SYMBOL: TEBIX) CHANGE 12/31/07 12/31/06
- ------------------------------------------------------------------------------------
Net Asset Value (NAV) -$0.99 $15.62 $16.61
- ------------------------------------------------------------------------------------
DISTRIBUTIONS (1/1/07-12/31/07)
- ------------------------------------------------------------------------------------
Dividend Income $0.5122
- ------------------------------------------------------------------------------------
Short-Term Capital Gain $0.0017
- ------------------------------------------------------------------------------------
Long-Term Capital Gain $0.9218
- ------------------------------------------------------------------------------------
TOTAL $1.4357
- ------------------------------------------------------------------------------------
CLASS B (SYMBOL: TEBBX) CHANGE 12/31/07 12/31/06
- ------------------------------------------------------------------------------------
Net Asset Value (NAV) -$0.98 $15.19 $16.17
- ------------------------------------------------------------------------------------
DISTRIBUTIONS (1/1/07-12/31/07)
- ------------------------------------------------------------------------------------
Dividend Income $0.3851
- ------------------------------------------------------------------------------------
Short-Term Capital Gain $0.0017
- ------------------------------------------------------------------------------------
Long-Term Capital Gain $0.9218
- ------------------------------------------------------------------------------------
TOTAL $1.3086
- ------------------------------------------------------------------------------------
CLASS C (SYMBOL: TEMEX) CHANGE 12/31/07 12/31/06
- ------------------------------------------------------------------------------------
Net Asset Value (NAV) -$0.99 $15.47 $16.46
- ------------------------------------------------------------------------------------
DISTRIBUTIONS (1/1/07-12/31/07)
- ------------------------------------------------------------------------------------
Dividend Income $0.3961
- ------------------------------------------------------------------------------------
Short-Term Capital Gain $0.0017
- ------------------------------------------------------------------------------------
Long-Term Capital Gain $0.9218
- ------------------------------------------------------------------------------------
TOTAL $1.3196
- ------------------------------------------------------------------------------------
Annual Report | 11
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 +3.03% +101.87% +160.46%
- --------------------------------------------------------------------------------------------------
Average Annual Total Return 3 +3.03% +15.08% +10.05%
- --------------------------------------------------------------------------------------------------
Value of $10,000 Investment 4 $10,303 $ 20,187 $ 26,046
- --------------------------------------------------------------------------------------------------
Total Annual Operating Expenses 5 0.85%
- --------------------------------------------------------------------------------------------------
CLASS A 1-YEAR 5-YEAR 10-YEAR
- --------------------------------------------------------------------------------------------------
Cumulative Total Return 2 +2.67% +98.57% +151.67%
- --------------------------------------------------------------------------------------------------
Average Annual Total Return 3 -3.21% +13.35% +9.02%
- --------------------------------------------------------------------------------------------------
Value of $10,000 Investment 4 $ 9,679 $ 18,712 $ 23,719
- --------------------------------------------------------------------------------------------------
Total Annual Operating Expenses 5 1.15%
- --------------------------------------------------------------------------------------------------
CLASS B 1-YEAR 5-YEAR INCEPTION (1/1/99)
- --------------------------------------------------------------------------------------------------
Cumulative Total Return 2 +1.95% +92.07% +133.66%
- --------------------------------------------------------------------------------------------------
Average Annual Total Return 3 -1.80% +13.71% +9.89%
- --------------------------------------------------------------------------------------------------
Value of $10,000 Investment 4 $ 9,820 $ 19,007 $ 23,366
- --------------------------------------------------------------------------------------------------
Total Annual Operating Expenses 5 1.85%
- --------------------------------------------------------------------------------------------------
CLASS C 1-YEAR 5-YEAR 10-YEAR
- --------------------------------------------------------------------------------------------------
Cumulative Total Return 2 +1.99% +92.17% +135.88%
- --------------------------------------------------------------------------------------------------
Average Annual Total Return 3 +1.05% +13.96% +8.96%
- --------------------------------------------------------------------------------------------------
Value of $10,000 Investment 4 $10,105 $ 19,217 $ 23,588
- --------------------------------------------------------------------------------------------------
Total Annual Operating Expenses 5 1.85%
- --------------------------------------------------------------------------------------------------
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 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 (1/1/98-12/31/07)
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE GRAPH IN THE PRINTED MATERIAL.]
DATE Mutual Beacon Fund S&P 500 6
- --------------------------------------------------------------------------------
1/1/1998 $10,000 $10,000
1/31/1998 $ 9,943 $10,111
2/28/1998 $10,482 $10,840
3/31/1998 $10,928 $11,395
4/30/1998 $11,069 $11,510
5/31/1998 $11,105 $11,312
6/30/1998 $11,027 $11,771
7/31/1998 $10,759 $11,646
8/31/1998 $ 9,288 $ 9,962
9/30/1998 $ 9,093 $10,600
10/31/1998 $ 9,634 $11,463
11/30/1998 $10,182 $12,157
12/31/1998 $10,237 $12,858
1/31/1999 $10,416 $13,396
2/28/1999 $10,299 $12,979
3/31/1999 $10,775 $13,498
4/30/1999 $11,625 $14,021
5/31/1999 $11,735 $13,690
6/30/1999 $12,057 $14,450
7/31/1999 $11,802 $13,999
8/31/1999 $11,380 $13,929
9/30/1999 $11,085 $13,548
10/31/1999 $11,396 $14,405
11/30/1999 $11,666 $14,698
12/31/1999 $11,956 $15,563
1/31/2000 $11,662 $14,781
2/29/2000 $11,334 $14,502
3/31/2000 $12,465 $15,920
4/30/2000 $12,318 $15,441
5/31/2000 $12,474 $15,124
6/30/2000 $12,328 $15,497
7/31/2000 $12,642 $15,255
8/31/2000 $13,168 $16,203
9/30/2000 $13,195 $15,347
10/31/2000 $13,417 $15,282
11/30/2000 $13,066 $14,078
12/31/2000 $13,668 $14,146
1/31/2001 $14,557 $14,648
2/28/2001 $14,475 $13,313
3/31/2001 $14,057 $12,469
4/30/2001 $14,639 $13,438
5/31/2001 $15,129 $13,528
6/30/2001 $15,245 $13,199
7/31/2001 $15,339 $13,069
8/31/2001 $15,016 $12,251
9/30/2001 $13,691 $11,262
10/31/2001 $13,680 $11,476
11/30/2001 $14,171 $12,357
12/31/2001 $14,504 $12,465
1/31/2002 $14,449 $12,283
2/28/2002 $14,537 $12,046
3/31/2002 $14,938 $12,499
4/30/2002 $15,071 $11,741
5/31/2002 $15,127 $11,655
6/30/2002 $14,081 $10,825
7/31/2002 $13,160 $ 9,981
8/31/2002 $13,283 $10,046
9/30/2002 $12,564 $ 8,955
10/31/2002 $12,733 $ 9,743
11/30/2002 $12,980 $10,316
12/31/2002 $12,902 $ 9,710
1/31/2003 $12,765 $ 9,456
2/28/2003 $12,480 $ 9,314
3/31/2003 $12,514 $ 9,404
4/30/2003 $13,324 $10,179
5/31/2003 $14,043 $10,715
6/30/2003 $14,288 $10,852
7/31/2003 $14,449 $11,043
8/31/2003 $14,862 $11,259
9/30/2003 $14,839 $11,139
10/31/2003 $15,449 $11,769
11/30/2003 $16,000 $11,873
12/31/2003 $16,700 $12,495
1/31/2004 $16,770 $12,725
2/29/2004 $17,338 $12,902
3/31/2004 $17,315 $12,707
4/30/2004 $16,851 $12,508
5/31/2004 $16,944 $12,679
6/30/2004 $17,229 $12,926
7/31/2004 $17,007 $12,498
8/31/2004 $17,147 $12,549
9/30/2004 $17,451 $12,684
10/31/2004 $17,685 $12,878
11/30/2004 $18,607 $13,399
12/31/2004 $19,126 $13,855
1/31/2005 $18,730 $13,518
2/28/2005 $19,318 $13,802
3/31/2005 $19,198 $13,558
4/30/2005 $19,042 $13,300
5/31/2005 $19,438 $13,724
6/30/2005 $19,684 $13,743
7/31/2005 $20,205 $14,254
8/31/2005 $20,302 $14,124
9/30/2005 $20,556 $14,239
10/31/2005 $19,975 $14,001
11/30/2005 $20,520 $14,531
12/31/2005 $20,896 $14,536
1/31/2006 $21,394 $14,921
2/28/2006 $21,663 $14,961
3/31/2006 $22,431 $15,147
4/30/2006 $22,552 $15,351
5/31/2006 $22,390 $14,909
6/30/2006 $22,303 $14,929
7/31/2006 $22,358 $15,021
8/31/2006 $23,134 $15,379
9/30/2006 $23,328 $15,775
10/31/2006 $24,214 $16,289
11/30/2006 $24,629 $16,599
12/31/2006 $25,279 $16,832
1/31/2007 $25,915 $17,086
2/28/2007 $25,839 $16,752
3/31/2007 $26,323 $16,939
4/30/2007 $27,004 $17,690
5/31/2007 $27,972 $18,307
6/30/2007 $27,709 $18,003
7/31/2007 $26,640 $17,445
8/31/2007 $26,472 $17,706
9/30/2007 $26,839 $18,368
10/31/2007 $27,419 $18,661
11/30/2007 $26,487 $17,880
12/31/2007 $26,046 $17,756
AVERAGE ANNUAL TOTAL RETURN
- ----------------------------------------------
CLASS Z 12/31/07
- ----------------------------------------------
1-Year +3.03%
- ----------------------------------------------
5-Year +15.08%
- ----------------------------------------------
10-Year +10.05%
- ----------------------------------------------
CLASS A (1/1/98-12/31/07)
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE GRAPH IN THE PRINTED MATERIAL.]
DATE Mutual Beacon Fund S&P 500 6
- --------------------------------------------------------------------------------
1/1/1998 $ 9,425 $10,000
1/31/1998 $ 9,371 $10,111
2/28/1998 $ 9,873 $10,840
3/31/1998 $10,288 $11,395
4/30/1998 $10,421 $11,510
5/31/1998 $10,448 $11,312
6/30/1998 $10,375 $11,771
7/31/1998 $10,121 $11,646
8/31/1998 $ 8,732 $ 9,962
9/30/1998 $ 8,542 $10,600
10/31/1998 $ 9,052 $11,463
11/30/1998 $ 9,570 $12,157
12/31/1998 $ 9,615 $12,858
1/31/1999 $ 9,784 $13,396
2/28/1999 $ 9,666 $12,979
3/31/1999 $10,107 $13,498
4/30/1999 $10,901 $14,021
5/31/1999 $11,011 $13,690
6/30/1999 $11,305 $14,450
7/31/1999 $11,066 $13,999
8/31/1999 $10,661 $13,929
9/30/1999 $10,384 $13,548
10/31/1999 $10,668 $14,405
11/30/1999 $10,923 $14,698
12/31/1999 $11,192 $15,563
1/31/2000 $10,916 $14,781
2/29/2000 $10,600 $14,502
3/31/2000 $11,654 $15,920
4/30/2000 $11,516 $15,441
5/31/2000 $11,662 $15,124
6/30/2000 $11,514 $15,497
7/31/2000 $11,809 $15,255
8/31/2000 $12,293 $16,203
9/30/2000 $12,319 $15,347
10/31/2000 $12,527 $15,282
11/30/2000 $12,198 $14,078
12/31/2000 $12,747 $14,146
1/31/2001 $13,578 $14,648
2/28/2001 $13,492 $13,313
3/31/2001 $13,100 $12,469
4/30/2001 $13,635 $13,438
5/31/2001 $14,094 $13,528
6/30/2001 $14,189 $13,199
7/31/2001 $14,277 $13,069
8/31/2001 $13,965 $12,251
9/30/2001 $12,745 $11,262
10/31/2001 $12,726 $11,476
11/30/2001 $13,175 $12,357
12/31/2001 $13,484 $12,465
1/31/2002 $13,432 $12,283
2/28/2002 $13,505 $12,046
3/31/2002 $13,878 $12,499
4/30/2002 $14,002 $11,741
5/31/2002 $14,044 $11,655
6/30/2002 $13,065 $10,825
7/31/2002 $12,206 $ 9,981
8/31/2002 $12,321 $10,046
9/30/2002 $11,651 $ 8,955
10/31/2002 $11,798 $ 9,743
11/30/2002 $12,018 $10,316
12/31/2002 $11,945 $ 9,710
1/31/2003 $11,818 $ 9,456
2/28/2003 $11,553 $ 9,314
3/31/2003 $11,574 $ 9,404
4/30/2003 $12,326 $10,179
5/31/2003 $12,994 $10,715
6/30/2003 $13,218 $10,852
7/31/2003 $13,357 $11,043
8/31/2003 $13,731 $11,259
9/30/2003 $13,709 $11,139
10/31/2003 $14,275 $11,769
11/30/2003 $14,777 $11,873
12/31/2003 $15,407 $12,495
1/31/2004 $15,482 $12,725
2/29/2004 $15,988 $12,902
3/31/2004 $15,966 $12,707
4/30/2004 $15,525 $12,508
5/31/2004 $15,611 $12,679
6/30/2004 $15,882 $12,926
7/31/2004 $15,665 $12,498
8/31/2004 $15,784 $12,549
9/30/2004 $16,066 $12,684
10/31/2004 $16,271 $12,878
11/30/2004 $17,115 $13,399
12/31/2004 $17,585 $13,855
1/31/2005 $17,219 $13,518
2/28/2005 $17,762 $13,802
3/31/2005 $17,640 $13,558
4/30/2005 $17,485 $13,300
5/31/2005 $17,851 $13,724
6/30/2005 $18,084 $13,743
7/31/2005 $18,554 $14,254
8/31/2005 $18,632 $14,124
9/30/2005 $18,856 $14,239
10/31/2005 $18,330 $14,001
11/30/2005 $18,823 $14,531
12/31/2005 $19,149 $14,536
1/31/2006 $19,608 $14,921
2/28/2006 $19,856 $14,961
3/31/2006 $20,538 $15,147
4/30/2006 $20,650 $15,351
5/31/2006 $20,501 $14,909
6/30/2006 $20,415 $14,929
7/31/2006 $20,466 $15,021
8/31/2006 $21,168 $15,379
9/30/2006 $21,346 $15,775
10/31/2006 $22,137 $16,289
11/30/2006 $22,519 $16,599
12/31/2006 $23,102 $16,832
1/31/2007 $23,686 $17,086
2/28/2007 $23,603 $16,752
3/31/2007 $24,048 $16,939
4/30/2007 $24,646 $17,690
5/31/2007 $25,536 $18,307
6/30/2007 $25,289 $18,003
7/31/2007 $24,307 $17,445
8/31/2007 $24,138 $17,706
9/30/2007 $24,461 $18,368
10/31/2007 $24,994 $18,661
11/30/2007 $24,138 $17,880
12/31/2007 $23,719 $17,756
AVERAGE ANNUAL TOTAL RETURN
- ----------------------------------------------
CLASS A 12/31/07
- ----------------------------------------------
1-Year -3.21%
- ----------------------------------------------
5-Year +13.35%
- ----------------------------------------------
10-Year +9.02%
- ----------------------------------------------
Annual Report | 13
Performance Summary (CONTINUED)
AVERAGE ANNUAL TOTAL RETURN
- ----------------------------------------------
CLASS B 12/31/07
- ----------------------------------------------
1-Year -1.80%
- ----------------------------------------------
5-Year +13.71%
- ----------------------------------------------
Since Inception (1/1/99) +9.89%
- ----------------------------------------------
CLASS B (1/1/99-12/31/07)
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE GRAPH IN THE PRINTED MATERIAL.]
DATE Mutual Beacon Fund S&P 500 6
- --------------------------------------------------------------------------------
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 $10,833
9/30/1999 $10,719 $10,536
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 $11,278
3/31/2000 $11,996 $12,382
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 $11,864
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 $11,002
1/31/2001 $13,896 $11,392
2/28/2001 $13,806 $10,354
3/31/2001 $13,390 $ 9,698
4/30/2001 $13,935 $10,451
5/31/2001 $14,401 $10,521
6/30/2001 $14,487 $10,265
7/31/2001 $14,568 $10,164
8/31/2001 $14,244 $ 9,528
9/30/2001 $12,990 $ 8,759
10/31/2001 $12,959 $ 8,926
11/30/2001 $13,415 $ 9,610
12/31/2001 $13,722 $ 9,694
1/31/2002 $13,658 $ 9,553
2/28/2002 $13,722 $ 9,369
3/31/2002 $14,097 $ 9,721
4/30/2002 $14,215 $ 9,132
5/31/2002 $14,258 $ 9,064
6/30/2002 $13,253 $ 8,419
7/31/2002 $12,375 $ 7,763
8/31/2002 $12,483 $ 7,813
9/30/2002 $11,801 $ 6,964
10/31/2002 $11,942 $ 7,577
11/30/2002 $12,169 $ 8,023
12/31/2002 $12,081 $ 7,552
1/31/2003 $11,950 $ 7,354
2/28/2003 $11,677 $ 7,244
3/31/2003 $11,688 $ 7,314
4/30/2003 $12,441 $ 7,917
5/31/2003 $13,107 $ 8,334
6/30/2003 $13,320 $ 8,440
7/31/2003 $13,463 $ 8,589
8/31/2003 $13,825 $ 8,756
9/30/2003 $13,793 $ 8,663
10/31/2003 $14,353 $ 9,153
11/30/2003 $14,848 $ 9,234
12/31/2003 $15,491 $ 9,718
1/31/2004 $15,546 $ 9,897
2/29/2004 $16,052 $10,034
3/31/2004 $16,019 $ 9,883
4/30/2004 $15,568 $ 9,728
5/31/2004 $15,645 $ 9,861
6/30/2004 $15,903 $10,053
7/31/2004 $15,681 $ 9,720
8/31/2004 $15,792 $ 9,759
9/30/2004 $16,069 $ 9,865
10/31/2004 $16,268 $10,016
11/30/2004 $17,099 $10,421
12/31/2004 $17,554 $10,776
1/31/2005 $17,181 $10,513
2/28/2005 $17,712 $10,734
3/31/2005 $17,588 $10,544
4/30/2005 $17,430 $10,344
5/31/2005 $17,769 $10,673
6/30/2005 $17,985 $10,689
7/31/2005 $18,453 $11,086
8/31/2005 $18,510 $10,985
9/30/2005 $18,738 $11,074
10/31/2005 $18,190 $10,889
11/30/2005 $18,681 $11,301
12/31/2005 $18,987 $11,305
1/31/2006 $19,441 $11,604
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 $11,595
6/30/2006 $20,185 $11,611
7/31/2006 $20,211 $11,683
8/31/2006 $20,897 $11,961
9/30/2006 $21,053 $12,269
10/31/2006 $21,829 $12,669
11/30/2006 $22,192 $12,909
12/31/2006 $22,758 $13,091
1/31/2007 $23,334 $13,289
2/28/2007 $23,252 $13,029
3/31/2007 $23,692 $13,174
4/30/2007 $24,281 $13,758
5/31/2007 $25,158 $14,238
6/30/2007 $24,914 $14,001
7/31/2007 $23,947 $13,567
8/31/2007 $23,782 $13,771
9/30/2007 $24,101 $14,286
10/31/2007 $24,626 $14,513
11/30/2007 $23,782 $13,906
12/31/2007 $23,366 $13,810
AVERAGE ANNUAL TOTAL RETURN
- ----------------------------------------------
CLASS C 12/31/07
- ----------------------------------------------
1-Year +1.05%
- ----------------------------------------------
5-Year +13.96%
- ----------------------------------------------
10-Year +8.96%
- ----------------------------------------------
CLASS C (1/1/98-12/31/07)
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE GRAPH IN THE PRINTED MATERIAL.]
DATE Mutual Beacon Fund S&P 500 6
- --------------------------------------------------------------------------------
1/1/1998 $10,000 $10,000
1/31/1998 $ 9,936 $10,111
2/28/1998 $10,470 $10,840
3/31/1998 $10,905 $11,395
4/30/1998 $11,033 $11,510
5/31/1998 $11,061 $11,312
6/30/1998 $10,976 $11,771
7/31/1998 $10,701 $11,646
8/31/1998 $ 9,231 $ 9,962
9/30/1998 $ 9,028 $10,600
10/31/1998 $ 9,557 $11,463
11/30/1998 $10,100 $12,157
12/31/1998 $10,140 $12,858
1/31/1999 $10,311 $13,396
2/28/1999 $10,179 $12,979
3/31/1999 $10,645 $13,498
4/30/1999 $11,477 $14,021
5/31/1999 $11,578 $13,690
6/30/1999 $11,887 $14,450
7/31/1999 $11,626 $13,999
8/31/1999 $11,198 $13,929
9/30/1999 $10,897 $13,548
10/31/1999 $11,190 $14,405
11/30/1999 $11,452 $14,698
12/31/1999 $11,727 $15,563
1/31/2000 $11,428 $14,781
2/29/2000 $11,095 $14,502
3/31/2000 $12,196 $15,920
4/30/2000 $12,042 $15,441
5/31/2000 $12,187 $15,124
6/30/2000 $12,028 $15,497
7/31/2000 $12,328 $15,255
8/31/2000 $12,828 $16,203
9/30/2000 $12,846 $15,347
10/31/2000 $13,055 $15,282
11/30/2000 $12,701 $14,078
12/31/2000 $13,276 $14,146
1/31/2001 $14,125 $14,648
2/28/2001 $14,035 $13,313
3/31/2001 $13,616 $12,469
4/30/2001 $14,165 $13,438
5/31/2001 $14,635 $13,528
6/30/2001 $14,727 $13,199
7/31/2001 $14,809 $13,069
8/31/2001 $14,483 $12,251
9/30/2001 $13,207 $11,262
10/31/2001 $13,176 $11,476
11/30/2001 $13,635 $12,357
12/31/2001 $13,947 $12,465
1/31/2002 $13,882 $12,283
2/28/2002 $13,958 $12,046
3/31/2002 $14,335 $12,499
4/30/2002 $14,454 $11,741
5/31/2002 $14,486 $11,655
6/30/2002 $13,472 $10,825
7/31/2002 $12,579 $ 9,981
8/31/2002 $12,688 $10,046
9/30/2002 $11,991 $ 8,955
10/31/2002 $12,144 $ 9,743
11/30/2002 $12,361 $10,316
12/31/2002 $12,274 $ 9,710
1/31/2003 $12,143 $ 9,456
2/28/2003 $11,858 $ 9,314
3/31/2003 $11,880 $ 9,404
4/30/2003 $12,647 $10,179
5/31/2003 $13,315 $10,715
6/30/2003 $13,539 $10,852
7/31/2003 $13,682 $11,043
8/31/2003 $14,057 $11,259
9/30/2003 $14,024 $11,139
10/31/2003 $14,586 $11,769
11/30/2003 $15,094 $11,873
12/31/2003 $15,741 $12,495
1/31/2004 $15,796 $12,725
2/29/2004 $16,316 $12,902
3/31/2004 $16,282 $12,707
4/30/2004 $15,830 $12,508
5/31/2004 $15,907 $12,679
6/30/2004 $16,165 $12,926
7/31/2004 $15,942 $12,498
8/31/2004 $16,054 $12,549
9/30/2004 $16,331 $12,684
10/31/2004 $16,531 $12,878
11/30/2004 $17,387 $13,399
12/31/2004 $17,849 $13,855
1/31/2005 $17,464 $13,518
2/28/2005 $18,007 $13,802
3/31/2005 $17,871 $13,558
4/30/2005 $17,713 $13,300
5/31/2005 $18,064 $13,724
6/30/2005 $18,281 $13,743
7/31/2005 $18,749 $14,254
8/31/2005 $18,818 $14,124
9/30/2005 $19,046 $14,239
10/31/2005 $18,498 $14,001
11/30/2005 $18,978 $14,531
12/31/2005 $19,298 $14,536
1/31/2006 $19,752 $14,921
2/28/2006 $19,991 $14,961
3/31/2006 $20,672 $15,147
4/30/2006 $20,772 $15,351
5/31/2006 $20,609 $14,909
6/30/2006 $20,509 $14,929
7/31/2006 $20,535 $15,021
8/31/2006 $21,235 $15,379
9/30/2006 $21,403 $15,775
10/31/2006 $22,193 $16,289
11/30/2006 $22,555 $16,599
12/31/2006 $23,127 $16,832
1/31/2007 $23,689 $17,086
2/28/2007 $23,591 $16,752
3/31/2007 $24,026 $16,939
4/30/2007 $24,617 $17,690
5/31/2007 $25,488 $18,307
6/30/2007 $25,238 $18,003
7/31/2007 $24,232 $17,445
8/31/2007 $24,062 $17,706
9/30/2007 $24,374 $18,368
10/31/2007 $24,870 $18,661
11/30/2007 $24,005 $17,880
12/31/2007 $23,588 $17,756
14 | Annual Report
Performance Summary (CONTINUED)
ENDNOTES
VALUE SECURITIES MAY NOT INCREASE IN PRICE AS ANTICIPATED OR MAY DECLINE FURTHER
IN VALUE. THE FUND'S INVESTMENTS IN FOREIGN SECURITIES INVOLVE SPECIAL RISKS.
FOREIGN SECURITIES RISKS INCLUDE CURRENCY FLUCTUATIONS, AND ECONOMIC AND
POLITICAL UNCERTAINTIES. THE FUND MAY ALSO INVEST IN COMPANIES ENGAGED IN
MERGERS, REORGANIZATIONS OR LIQUIDATIONS, WHICH INVOLVE SPECIAL RISKS AS PENDING
DEALS MAY NOT BE COMPLETED ON TIME OR ON FAVORABLE TERMS, 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. Figures are as stated in the Fund's prospectus current as of the date of this
report.
6. 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.
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 7/1/07 VALUE 12/31/07 PERIOD* 7/1/07-12/31/07
- --------------------------------------------------------------------------------------------------------
Actual $1,000 $ 940.00 $3.96
- --------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $ 1,021.12 $4.13
- --------------------------------------------------------------------------------------------------------
CLASS A
- --------------------------------------------------------------------------------------------------------
Actual $1,000 $ 937.90 $5.52
- --------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $ 1,019.51 $5.75
- --------------------------------------------------------------------------------------------------------
CLASS B
- --------------------------------------------------------------------------------------------------------
Actual $1,000 $ 934.60 $8.78
- --------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $ 1,016.13 $9.15
- --------------------------------------------------------------------------------------------------------
CLASS C
- --------------------------------------------------------------------------------------------------------
Actual $1,000 $ 934.60 $8.78
- --------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $ 1,016.13 $9.15
- --------------------------------------------------------------------------------------------------------
* Expenses are calculated using the most recent six-month expense ratio,
annualized for each class (Z: 0.81%; A: 1.13%; B: 1.80%; and C: 1.80%),
multiplied by the average account value over the period, multiplied by 184/365
to reflect the one-half year period.
Annual Report | 17
Mutual Beacon Fund
FINANCIAL HIGHLIGHTS
---------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
CLASS Z 2007 2006 2005 2004 2003
---------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ................... $ 16.71 $ 15.52 $ 15.94 $ 14.40 $ 11.31
---------------------------------------------------------------------------
Income from investment operations a:
Net investment income b ........................... 0.51 0.26 0.31 0.30 0.19
Net realized and unrealized gains (losses) ........ -- 2.91 1.16 1.76 3.13
---------------------------------------------------------------------------
Total from investment operations ..................... 0.51 3.17 1.47 2.06 3.32
---------------------------------------------------------------------------
Less distributions from:
Net investment income ............................. (0.57) (0.28) (0.30) (0.37) (0.23)
Net realized gains ................................ (0.92) (1.70) (1.59) (0.15) --
---------------------------------------------------------------------------
Total distributions .................................. (1.49) (1.98) (1.89) (0.52) (0.23)
---------------------------------------------------------------------------
Redemption fees ...................................... -- d -- d -- d -- d --
---------------------------------------------------------------------------
Net asset value, end of year ......................... $ 15.73 $ 16.71 $ 15.52 $ 15.94 $ 14.40
===========================================================================
Total return ......................................... 3.03% 20.98% 9.25% 14.52% 29.44%
RATIOS TO AVERAGE NET ASSETS
Expenses c ........................................... 0.82% e 0.85% e 0.89% e 0.83% e 0.86%
Expenses - excluding dividend expense on
securities sold short ............................. 0.81% e 0.82% e 0.84% e 0.82% e 0.83%
Net investment income ................................ 2.89% 1.59% 1.91% 1.99% 1.48%
SUPPLEMENTAL DATA
Net assets, end of year (000's) ...................... $3,883,935 $3,925,029 $3,433,665 $3,359,389 $3,112,212
Portfolio turnover rate .............................. 49.84% 40.72% 35.36% 29.17% 49.61%
a The amount shown for a share outstanding throughout the period may not
correlate with the Statement of Operations for the period due to timing of sales
and repurchases 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 Beacon Fund
FINANCIAL HIGHLIGHTS (CONTINUED)
---------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
CLASS A 2007 2006 2005 2004 2003
---------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ................... $ 16.61 $ 15.44 $ 15.87 $ 14.34 $ 11.27
---------------------------------------------------------------------------
Income from investment operations a:
Net investment income b ........................... 0.45 0.21 0.26 0.25 0.14
Net realized and unrealized gains (losses) ........ -- 2.90 1.15 1.75 3.12
---------------------------------------------------------------------------
Total from investment operations ..................... 0.45 3.11 1.41 2.00 3.26
---------------------------------------------------------------------------
Less distributions from:
Net investment income ............................. (0.52) (0.24) (0.25) (0.32) (0.19)
Net realized gains ................................ (0.92) (1.70) (1.59) (0.15) --
---------------------------------------------------------------------------
Total distributions .................................. (1.44) (1.94) (1.84) (0.47) (0.19)
---------------------------------------------------------------------------
Redemption fees ...................................... -- e -- e -- e -- e --
---------------------------------------------------------------------------
Net asset value, end of year ......................... $ 15.62 $ 16.61 $ 15.44 $ 15.87 $ 14.34
===========================================================================
Total return c ....................................... 2.67% 20.65% 8.89% 14.13% 28.99%
RATIOS TO AVERAGE NET ASSETS
Expenses d ........................................... 1.14% f 1.15% f 1.22% f 1.18% f 1.21%
Expenses - excluding dividend expense on securities
sold short ........................................ 1.13% f 1.12% f 1.17% f 1.17% f 1.18%
Net investment income ................................ 2.57% 1.29% 1.58% 1.64% 1.13%
SUPPLEMENTAL DATA
Net assets, end of year (000's) ...................... $2,654,731 $2,176,658 $1,633,022 $1,462,133 $1,301,620
Portfolio turnover rate .............................. 49.84% 40.72% 35.36% 29.17% 49.61%
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 repurchases 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 B 2007 2006 2005 2004 2003
---------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ................... $ 16.17 $ 15.09 $ 15.54 $ 14.06 $ 11.07
---------------------------------------------------------------------------
Income from investment operations a:
Net investment income b ........................... 0.32 0.10 0.14 0.15 0.05
Net realized and unrealized gains (losses) ........ 0.01 2.80 1.14 1.71 3.06
---------------------------------------------------------------------------
Total from investment operations ..................... 0.33 2.90 1.28 1.86 3.11
---------------------------------------------------------------------------
Less distributions from:
Net investment income ............................. (0.39) (0.12) (0.14) (0.23) (0.12)
Net realized gains ................................ (0.92) (1.70) (1.59) (0.15) --
---------------------------------------------------------------------------
Total distributions .................................. (1.31) (1.82) (1.73) (0.38) (0.12)
---------------------------------------------------------------------------
Redemption fees ...................................... -- e -- e -- e -- e --
---------------------------------------------------------------------------
Net asset value, end of year ......................... $ 15.19 $ 16.17 $ 15.09 $ 15.54 $ 14.06
===========================================================================
Total return c ....................................... 1.95% 19.86% 8.17% 13.32% 28.22%
RATIOS TO AVERAGE NET ASSETS
Expenses d ........................................... 1.81% f 1.85% f 1.89% f 1.83% f 1.86%
Expenses - excluding dividend expense on securities
sold short ........................................ 1.80% f 1.82% f 1.84% f 1.82% f 1.83%
Net investment income ................................ 1.90% 0.59% 0.91% 0.99% 0.48%
SUPPLEMENTAL DATA
Net assets, end of year (000's) ...................... $ 171,628 $ 199,461 $ 186,169 $ 186,840 $ 155,572
Portfolio turnover rate .............................. 49.84% 40.72% 35.36% 29.17% 49.61%
a The amount shown for a share outstanding throughout the period may not
correlate with the Statement of Operations for the period due to timing of sales
and repurchases 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
FINANCIAL HIGHLIGHTS (CONTINUED)
---------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
CLASS C 2007 2006 2005 2004 2003
---------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ................... $ 16.46 $ 15.33 $ 15.77 $ 14.26 $ 11.22
---------------------------------------------------------------------------
Income from investment operations a:
Net investment income b ........................... 0.33 0.10 0.15 0.14 0.06
Net realized and unrealized gains (losses) ........ -- 2.85 1.14 1.74 3.09
---------------------------------------------------------------------------
Total from investment operations ..................... 0.33 2.95 1.29 1.88 3.15
---------------------------------------------------------------------------
Less distributions from:
Net investment income ............................. (0.40) (0.12) (0.14) (0.23) (0.11)
Net realized gains ................................ (0.92) (1.70) (1.59) (0.14) --
---------------------------------------------------------------------------
Total distributions .................................. (1.32) (1.82) (1.73) (0.37) (0.11)
---------------------------------------------------------------------------
Redemption fees ...................................... -- e -- e -- e -- e --
---------------------------------------------------------------------------
Net asset value, end of year ......................... $ 15.47 $ 16.46 $ 15.33 $ 15.77 $ 14.26
===========================================================================
Total return c ....................................... 1.99% 19.84% 8.12% 13.39% 28.24%
RATIOS TO AVERAGE NET ASSETS
Expenses d ........................................... 1.81% f 1.85% f 1.89% f 1.83% f 1.86%
Expenses - excluding dividend expense on securities
sold short ........................................ 1.80% f 1.82% f 1.84% f 1.82% f 1.83%
Net investment income ................................ 1.90% 0.59% 0.91% 0.99% 0.48%
SUPPLEMENTAL DATA
Net assets, end of year (000's) ...................... $ 875,060 $ 825,234 $ 697,400 $ 658,813 $ 579,825
Portfolio turnover rate .............................. 49.84% 40.72% 35.36% 29.17% 49.61%
a The amount shown for a share outstanding throughout the period may not
correlate with the Statement of Operations for the period due to timing of sales
and repurchases 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 Beacon Fund
STATEMENT OF INVESTMENTS, DECEMBER 31, 2007
- ------------------------------------------------------------------------------------------------------------------------------------
SHARES/WARRANTS/
COUNTRY CONTRACTS VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS 94.4%
COMMON STOCKS AND OTHER EQUITY INTERESTS 89.3%
AIR FREIGHT & LOGISTICS 1.1%
Deutsche Post AG .............................................. Germany 2,364,674 $ 80,440,173
-----------------
AIRLINES 0.6%
a ACE Aviation Holdings Inc., A ................................. Canada 920,863 26,270,658
a,b ACE Aviation Holdings Inc., A, 144A ........................... Canada 46,508 1,326,794
a Northwest Airlines Corp. ...................................... United States 911,804 13,230,276
a,c Northwest Airlines Corp., Contingent Distribution ............. United States 35,952,000 1,213,380
-----------------
42,041,108
-----------------
AUTO COMPONENTS 0.5%
a,c Collins & Aikman Products Co., Contingent Distribution ........ United States 1,508,338 667,440
a Goodyear Tire & Rubber Co. .................................... United States 1,347,098 38,015,105
-----------------
38,682,545
-----------------
AUTOMOBILES 1.5%
General Motors Corp. .......................................... United States 2,956,699 73,592,238
a,d,e,f International Automotive Components Group Brazil LLC .......... Brazil 2,387,711 16,585,351
a,d,e,f International Automotive Components Group Japan LLC ........... Japan 378,194 3,391,418
a,d,e,f International Automotive Components Group LLC ................. Luxembourg 10,149,082 10,767,161
a,d,e,f International Automotive Components Group NA LLC .............. United States 6,469,826 8,896,011
-----------------
113,232,179
-----------------
BEVERAGES 1.8%
Brown-Forman Corp., A ......................................... United States 308,260 23,070,178
Brown-Forman Corp., B ......................................... United States 362,618 26,873,620
Carlsberg AS, A ............................................... Denmark 74,900 8,546,179
Carlsberg AS, B ............................................... Denmark 671,304 81,063,620
-----------------
139,553,597
-----------------
BUILDING PRODUCTS 0.3%
a,c Armstrong World Industries Inc., Contingent Distribution ...... United States 19,836,575 74,387
a Owens Corning Inc. ............................................ United States 1,090,603 22,051,993
-----------------
22,126,380
-----------------
CHEMICALS 0.1%
a,c Dow Corning Corp., Contingent Distribution .................... United States 12,598,548 6,425,259
-----------------
COMMERCIAL BANKS 7.9%
a Banco Popolare SpA ............................................ Italy 2,450,074 54,204,812
BNP Paribas SA ................................................ France 727,050 78,748,933
Commerce Bancorp Inc. ......................................... United States 1,214,390 46,316,835
Danske Bank AS ................................................ Denmark 1,524,804 59,610,451
a,d,e,g FE Capital Holdings Ltd. ...................................... Japan 14,498 9,523,457
a,d,e,g First Chicago Bancorp ......................................... United States 1,157,143 16,200,002
Intesa Sanpaolo SpA ........................................... Italy 10,097,248 79,718,613
Mitsubishi UFJ Financial Group Inc. ........................... Japan 2,777,112 26,073,948
a,d,e NCB Warrant Holdings Ltd., A .................................. Japan 67,420 4,000,152
Svenska Handelsbanken AB, A ................................... Sweden 1,458,813 46,704,037
U.S. Bancorp .................................................. United States 5,538,540 175,793,260
-----------------
596,894,500
-----------------
22 | Annual Report
Mutual Beacon Fund
STATEMENT OF INVESTMENTS, DECEMBER 31, 2007 (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------------
SHARES/WARRANTS/
COUNTRY CONTRACTS VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
COMMON STOCKS AND OTHER EQUITY INTERESTS (CONTINUED)
COMMERCIAL SERVICES & SUPPLIES 0.0% h
a Comdisco Holding Co. Inc. ..................................... United States 1,202 $ 10,950
a,c Comdisco Holding Co. Inc., Contingent Distribution ............ United States 54,914,113 --
-----------------
10,950
-----------------
COMMUNICATIONS EQUIPMENT 2.0%
Motorola Inc. ................................................. United States 5,723,343 91,802,422
Telefonaktiebolaget LM Ericsson, B ............................ Sweden 19,859,426 46,625,437
Telefonaktiebolaget LM Ericsson, B, ADR ....................... Sweden 667,100 15,576,785
-----------------
154,004,644
-----------------
COMPUTERS & PERIPHERALS 1.6%
a,d,e,g DecisionOne Corp. ............................................. United States 1,142,353 --
a,d,e,g DecisionOne Corp., wts., 6/08/17 .............................. United States 627,237 --
a Dell Inc. ..................................................... United States 4,061,020 99,535,600
a Lexmark International Inc., A ................................. United States 664,600 23,167,956
-----------------
122,703,556
-----------------
CONSUMER FINANCE 1.4%
a,d,e Cerberus CG Investor I LLC .................................... United States 18,089,600 15,231,019
a,d,e Cerberus CG Investor II LLC ................................... United States 18,089,600 15,231,019
a,d,e Cerberus CG Investor III LLC .................................. United States 9,044,800 7,615,509
a,d,e Cerberus FIM Investors Auto Finance LLC ....................... United States 5,706,149 3,061,525
a,d,e Cerberus FIM Investors Commercial Finance LLC ................. United States 475,305 255,016
a,d,e Cerberus FIM Investors Commercial Mortgage LLC ................ United States 890,886 477,988
a,d,e Cerberus FIM Investors Insurance LLC .......................... United States 4,357,377 2,337,867
a,d,e Cerberus FIM Investors Rescap LLC ............................. United States 8,112,533 4,352,625
SLM Corp. ..................................................... United States 2,785,220 56,094,331
-----------------
104,656,899
-----------------
CONTAINERS & PACKAGING 0.6%
Temple-Inland Inc. ............................................ United States 2,158,767 45,010,292
-----------------
DIVERSIFIED FINANCIAL SERVICES 2.1%
Fortis ........................................................ Belgium 5,623,830 148,385,020
a Fortis VVPR Strip ............................................. Belgium 2,249,532 32,828
a Guaranty Financial Group Inc. ................................. United States 719,589 11,513,423
a,c Marconi Corp., Contingent Distribution ........................ United Kingdom 42,651,300 --
-----------------
159,931,271
-----------------
DIVERSIFIED TELECOMMUNICATION SERVICES 0.9%
a,d,e,f AboveNet Inc. ................................................. United States 466,432 23,321,600
a,d,f AboveNet Inc., stock grants, grant price $20.95,
expiration date 9/09/13 .................................... United States 613 25,409
a,d,e,f AboveNet Inc., wts., 9/08/08 .................................. United States 16,857 795,650
a,d,e,f AboveNet Inc., wts., 9/08/10 .................................. United States 19,829 866,131
a,c,e Global Crossing Holdings Ltd., Contingent Distribution ........ United States 60,632,757 --
Telefonica SA ................................................. Spain 1,317,275 42,714,955
-----------------
67,723,745
-----------------
Annual Report | 23
Mutual Beacon Fund
STATEMENT OF INVESTMENTS, DECEMBER 31, 2007 (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------------
SHARES/WARRANTS/
COUNTRY CONTRACTS VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
COMMON STOCKS AND OTHER EQUITY INTERESTS (CONTINUED)
ELECTRIC UTILITIES 0.5%
E.ON AG ....................................................... Germany 182,802 $ 38,844,684
----------------
ELECTRONIC EQUIPMENT & INSTRUMENTS 0.8%
Tyco Electronics Ltd. ......................................... United States 1,705,745 63,334,312
----------------
ENERGY EQUIPMENT & SERVICES 1.7%
a Seadrill Ltd. ................................................. Bermuda 2,283,800 55,681,939
a,i Transocean Inc. ............................................... United States 507,510 72,650,057
----------------
128,331,996
----------------
FOOD & STAPLES RETAILING 2.3%
Carrefour SA .................................................. France 1,069,252 83,154,401
CVS Caremark Corp. ............................................ United States 2,211,114 87,891,782
----------------
171,046,183
----------------
FOOD PRODUCTS 3.7%
Cadbury Schweppes PLC ......................................... United Kingdom 4,497,511 55,494,609
g Farmer Brothers Co. ........................................... United States 1,033,896 23,769,269
Groupe Danone ................................................. France 852,980 76,430,494
a Lighthouse Caledonia ASA ...................................... Norway 615,270 584,193
a,j Marine Harvest ................................................ Norway 72,384,735 46,484,999
Nestle SA ..................................................... Switzerland 175,235 80,411,401
----------------
283,174,965
----------------
HEALTH CARE EQUIPMENT & SUPPLIES 0.7%
Hillenbrand Industries Inc. ................................... United States 889,128 49,551,103
----------------
HEALTH CARE PROVIDERS & SERVICES 2.9%
a Community Health Systems Inc. ................................. United States 1,692,360 62,380,390
a,d,e,f Kindred Healthcare Inc. ....................................... United States 1,639,289 38,901,967
a,d,e,f Kindred Healthcare Inc., stock grants:
grant price $18.15, expiration date 7/17/11 ................... United States 5,731 31,985
grant price $19.87, expiration date 1/01/12 United States 1,720 6,641
grant price $6.94, expiration date 1/01/13 .................... United States 1,710 28,713
grant price $19.87, expiration date 1/01/14 ................... United States 1,276 4,927
grant price $21.33, expiration date 1/10/15 ................... United States 709 1,702
grant price $22.08, expiration date 1/10/16 ................... United States 354 584
Omnicare Inc. ................................................. United States 599,150 13,666,611
a PharMerica Inc. ............................................... United States 600,019 8,328,264
Quest Diagnostics Inc. ........................................ United States 938,540 49,648,766
a Tenet Healthcare Corp. ........................................ United States 9,752,777 49,544,107
----------------
222,544,657
----------------
HOTELS, RESTAURANTS & LEISURE 0.1%
a Trump Entertainment Resorts Inc. .............................. United States 895,133 3,849,072
----------------
HOUSEHOLD DURABLES 0.2%
a,j Hovnanian Enterprises Inc., A ................................. United States 2,255,390 16,171,146
----------------
INDEPENDENT POWER PRODUCERS & ENERGY TRADERS 1.3%
Constellation Energy Group .................................... United States 934,100 95,773,273
----------------
24 | Annual Report
Mutual Beacon Fund
STATEMENT OF INVESTMENTS, DECEMBER 31, 2007 (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------------
SHARES/WARRANTS/
COUNTRY CONTRACTS VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
COMMON STOCKS AND OTHER EQUITY INTERESTS (CONTINUED)
INDUSTRIAL CONGLOMERATES 4.2%
f Orkla ASA ..................................................... Norway 8,348,283 $ 161,681,256
Siemens AG .................................................... Germany 738,980 116,923,427
Tyco International Ltd. ....................................... United States 935,315 37,085,240
----------------
315,689,923
----------------
INSURANCE 8.3%
a Alleghany Corp. ............................................... United States 169,611 68,183,622
Allianz SE .................................................... Germany 244,340 52,802,006
American International Group Inc. ............................. United States 893,860 52,112,038
a Berkshire Hathaway Inc., A .................................... United States 741 104,925,600
a Berkshire Hathaway Inc., B .................................... United States 10,755 50,935,680
Old Republic International Corp. .............................. United States 2,217,426 34,170,535
a,d,e Olympus Re Holdings Ltd. ...................................... United States 106,700 349,464
d,e Symetra Financial ............................................. United States 4,450,920 71,303,738
White Mountains Insurance Group Ltd. .......................... United States 383,121 196,943,350
----------------
631,726,033
----------------
IT SERVICES 0.5%
a Alliance Data Systems Corp. ................................... United States 529,140 39,680,209
----------------
LEISURE EQUIPMENT & PRODUCTS 1.0%
Mattel Inc. ................................................... United States 3,854,432 73,388,385
----------------
MACHINERY 0.0%
a,d,e Motor Coach Industries International Inc., wts., 5/27/09 ...... United States 6 --
----------------
MARINE 0.6%
A.P. Moller - Maersk AS ....................................... Denmark 4,291 45,685,566
----------------
MEDIA 8.9%
a Adelphia Recovery Trust ....................................... United States 48,268,724 3,378,811
a,c Adelphia Recovery Trust Arohova Contingent Value Vehicle,
Contingent Distribution .................................... United States 6,161,087 3,172,960
a,c Century Communications Corp., Contingent Distribution ......... United States 16,986,000 --
a Comcast Corp., A .............................................. United States 8,218,025 148,910,613
a Liberty Media Holding Corp.-Capital, A ........................ United States 347,868 40,523,143
News Corp., A ................................................. United States 7,966,387 163,231,270
a Sun-Times Media Group Inc., A ................................. United States 985,458 2,168,007
a Time Warner Cable Inc., A ..................................... United States 1,830,948 50,534,165
Time Warner Inc. .............................................. United States 6,400,710 105,675,722
a,e TVMAX Holdings Inc. ........................................... United States 133,855 --
a Viacom Inc., B ................................................ United States 1,958,560 86,019,955
Virgin Media Inc. ............................................. United Kingdom 3,991,350 68,411,739
----------------
672,026,385
----------------
Annual Report | 25
Mutual Beacon Fund
STATEMENT OF INVESTMENTS, DECEMBER 31, 2007 (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------------
SHARES/WARRANTS/
COUNTRY CONTRACTS VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
COMMON STOCKS AND OTHER EQUITY INTERESTS (CONTINUED)
METALS & MINING 1.3%
Alcoa Inc. .................................................... United States 1,083,040 $ 39,585,112
a,d,e,g Esmark Inc. ................................................... United States 3,954,729 50,292,289
a,d,e,g PMG LLC ....................................................... United States 29,737 11,723,831
-----------------
101,601,232
-----------------
MULTI-UTILITIES 1.5%
Energy East Corp. ............................................. United States 1,323,585 36,014,748
a,c NorthWestern Corp., Contingent Distribution ................... United States 11,863,900 841,254
RWE AG ........................................................ Germany 566,745 79,771,797
-----------------
116,627,799
-----------------
OIL, GAS & CONSUMABLE FUELS 0.0% h
Royal Dutch Shell PLC, A ...................................... United Kingdom 5,673 238,018
-----------------
PAPER & FOREST PRODUCTS 4.7%
a Domtar Corp. .................................................. United States 7,936,264 61,029,870
International Paper Co. ....................................... United States 1,930,820 62,519,952
MeadWestvaco Corp. ............................................ United States 1,560,233 48,835,293
Weyerhaeuser Co. .............................................. United States 2,468,965 182,061,479
-----------------
354,446,594
-----------------
PHARMACEUTICALS 2.0%
Novartis AG ................................................... Switzerland 1,399,344 76,684,842
Pfizer Inc. ................................................... United States 3,317,670 75,410,639
-----------------
152,095,481
-----------------
REAL ESTATE 2.4%
a Alexander's Inc. .............................................. United States 38,800 13,706,100
a,e Canary Wharf Group PLC ........................................ United Kingdom 10,069,634 100,639,538
a Forestar Real Estate Group .................................... United States 719,589 16,975,103
j The St. Joe Co. ............................................... United States 695,598 24,700,685
Ventas Inc. ................................................... United States 608,900 27,552,725
-----------------
183,574,151
-----------------
SEMICONDUCTORS & SEMICONDUCTOR EQUIPMENT 0.7%
a LSI Corp. ..................................................... United States 10,548,673 56,013,454
-----------------
SOFTWARE 2.9%
a BEA Systems Inc. .............................................. United States 2,756,080 43,490,942
Microsoft Corp. ............................................... United States 4,637,880 165,108,528
a NAVTEQ Corp. .................................................. United States 167,800 12,685,680
-----------------
221,285,150
-----------------
SPECIALTY RETAIL 0.8%
The Home Depot Inc. ........................................... United States 2,253,250 60,702,555
-----------------
THRIFTS & MORTGAGE FINANCE 1.9%
Hudson City Bancorp Inc. ...................................... United States 3,556,680 53,421,333
People's United Financial Inc. ................................ United States 1,692,640 30,128,992
Sovereign Bancorp Inc. ........................................ United States 3,288,580 37,489,812
Washington Mutual Inc. ........................................ United States 1,747,880 23,788,647
-----------------
144,828,784
-----------------
26 | Annual Report
Mutual Beacon Fund
STATEMENT OF INVESTMENTS, DECEMBER 31, 2007 (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------------
SHARES/WARRANTS/
COUNTRY CONTRACTS VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
COMMON STOCKS AND OTHER EQUITY INTERESTS (CONTINUED)
TOBACCO 11.0%
Altadis SA .................................................... Spain 1,469,777 $ 106,623,924
Altria Group Inc. ............................................. United States 2,138,378 161,618,609
British American Tobacco PLC .................................. United Kingdom 3,150,086 122,990,602
Imperial Tobacco Group PLC .................................... United Kingdom 2,532,443 136,463,444
Japan Tobacco Inc. ............................................ Japan 12,406 74,314,738
KT&G Corp. .................................................... South Korea 1,625,350 138,390,465
k Reynolds American Inc. ........................................ United States 1,481,724 97,734,515
-----------------
838,136,297
-----------------
TRANSPORTATION INFRASTRUCTURE 0.0% h
a Groupe Eurotunnel SA, wts., 12/30/11 .......................... France 1,570,655 527,191
-----------------
TOTAL COMMON STOCKS AND OTHER EQUITY INTERESTS
(COST $5,319,784,901) ...................................... 6,774,331,696
-----------------
PREFERRED STOCKS 0.2%
AUTO COMPONENTS 0.1%
d,e Dana Holding Corp., 4.00%, cvt., pfd., B ...................... United States 60,625 6,062,500
-----------------
CONSUMER FINANCE 0.1%
a SLM Corp., cvt., pfd., C ...................................... United States 4,700 4,887,765
-----------------
DIVERSIFIED TELECOMMUNICATION SERVICES 0.0% h
d PTV Inc., 10.00%, pfd., A ..................................... United Kingdom 114,246 137,095
-----------------
TOTAL PREFERRED STOCKS (COST $11,105,238) ..................... 11,087,360
-----------------
OPTIONS PURCHASED 1.4%
CALL OPTIONS 0.0% h
a,d Owens Corning Inc., exercise price $37.50, expiration date
1/02/08, shares ............................................ United States 310,123 15,506
-----------------
PUT OPTIONS 1.4%
a Dow Jones EUROSTOXX 50, exercise price $4,088.73,
expiration date 6/20/08, contracts ......................... United States 40,595 5,395,575
a Index basket consisting of 35% Dow Jones EUROSTOXX 50
(exercise price $4,091.31), 65% S&P 500 Index (exercise
price $1,396.49), expiration date 7/18/08, contracts ....... United States 4,000,000 13,714,172
a S&P 500 Index, exercise price $1,250.00, expiration date
6/21/08, contracts ............................................ United States 1,468 4,022,320
a S&P 500 Index, exercise price $1,250.00, expiration date
12/20/08, contracts ........................................... United States 5,554 27,492,300
a S&P 500 Index, exercise price $1,300.00, expiration date
12/20/08, contracts ........................................... United States 5,186 31,479,020
a S&P 500 Index, exercise price $1,350.00, expiration date
9/20/08, contracts ............................................ United States 3,137 19,637,620
Annual Report | 27
Mutual Beacon Fund
STATEMENT OF INVESTMENTS, DECEMBER 31, 2007 (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------------
SHARES/WARRANTS/
COUNTRY CONTRACTS VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
PUT OPTIONS (CONTINUED)
a S&P 500 Index, exercise price $1,375.00, expiration date
6/21/08, contracts ......................................... United States 456 $ 2,416,800
-----------------
104,157,807
-----------------
TOTAL OPTIONS PURCHASED (COST $112,015,457) ................... 104,173,313
-----------------
---------------------
PRINCIPAL
AMOUNT l
---------------------
CORPORATE BONDS & NOTES 3.3%
b ACE Aviation Holdings Inc., cvt., 144A, 4.25%, 6/01/35 ........ Canada 1,993,000 CAD 2,266,254
d,e Cerberus CG Investor I LLC, 12.00%, 7/31/14 ................... United States 18,089,600 15,231,019
d,e Cerberus CG Investor II LLC, 12.00%, 7/31/14 .................. United States 18,089,600 15,231,019
d,e Cerberus CG Investor III LLC, 12.00%, 7/31/14 ................. United States 9,044,800 7,615,509
d,e Cerberus FIM Investors Auto Finance LLC, 12.00%, 11/22/13 ..... United States 17,106,799 9,178,326
d,e Cerberus FIM Investors Commercial Finance LLC, 12.00%,
11/22/13 ................................................... United States 1,425,915 765,048
d,e Cerberus FIM Investors Commercial Mortgage LLC, 12.00%,
11/22/13 ................................................... United States 2,672,657 1,433,963
d,e Cerberus FIM Investors Insurance LLC, 12.00%, 11/22/13 ........ United States 13,072,130 7,013,602
d,e Cerberus FIM Investors Rescap LLC, 12.00%, 11/22/13 ........... United States 24,337,605 13,057,877
d,e,g DecisionOne Corp.,
12.00%, 4/15/10 ............................................ United States 1,412,099 1,412,099
m FRN, 9.50%, 5/12/09 ........................................ United States 263,440 263,440
Groupe Eurotunnel SA, cvt.,
3.00%, 6/28/09 ............................................. France 21,700 EUR 69,669
3.00%, 6/28/09 ............................................. France 24,211 GBP 105,833
3.00%, 7/28/10 ............................................. France 5,574,500 EUR 16,066,914
3.00%, 7/28/10 ............................................. France 5,182,586 GBP 20,337,642
6.00%, 7/28/10 ............................................. France 11,654,700 EUR 22,876,145
6.00%, 7/28/10 ............................................. France 14,069,455 GBP 37,599,887
sub. bond, T1, 3.00%, 7/28/08 .............................. France 21,700 EUR 77,586
sub. bond, T1, 3.00%, 7/28/08 France 24,211 GBP 117,860
b Indianapolis Downs LLC,
senior secured note, 144A, 11.00%, 11/01/12 ................ United States 6,400,000 6,208,000
senior secured sub. note, 144A, PIK, 15.50%, 11/01/13 ...... United States 21,600,000 22,248,000
d,e,f International Automotive Components Group NA LLC, 9.00%,
4/01/17 .................................................... United States 1,947,800 1,947,800
d,e,m Motor Coach Industries International Inc., FRN, 18.081%,
12/01/08 ................................................... United States 32,534,499 32,209,154
Trump Entertainment Resorts Inc., 8.50%, 5/20/15 .............. United States 17,380,260 13,317,624
e TVMAX Holdings Inc., PIK,
11.50%, 2/28/08 ............................................ United States 364,554 255,188
14.00%, 2/28/08 ............................................ United States 857,882 600,517
-----------------
TOTAL CORPORATE BONDS & NOTES (COST $282,452,181) ............. 247,505,975
-----------------
28 | Annual Report
Mutual Beacon Fund
STATEMENT OF INVESTMENTS, DECEMBER 31, 2007 (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL
COUNTRY AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
CORPORATE BONDS & NOTES IN REORGANIZATION 0.2%
b Calpine Corp., senior secured note, 144A,
8.50%, 7/15/10 ............................................. United States 3,119,000 $ 3,352,925
9.875%, 12/01/11 ........................................... United States 1,098,000 1,152,900
8.75%, 7/15/13 ............................................. United States 1,652,000 1,784,160
n Dana Corp.,
6.50%, 3/01/09 ............................................. United States 2,594,000 1,958,470
5.85%, 1/15/15 ............................................. United States 11,335,000 8,331,225
7.00%, 3/01/29 ............................................. United States 2,425,000 1,830,875
senior note, 7.00%, 3/15/28 ................................ United States 536,000 393,960
e,n Safety Kleen Services, senior sub. note, 9.25%, 6/01/08 ....... United States 50,000 250
-----------------
TOTAL CORPORATE BONDS & NOTES IN REORGANIZATION
(COST $17,933,540) ......................................... 18,804,765
-----------------
TOTAL LONG TERM INVESTMENTS (COST $5,743,291,317) ............. 7,155,903,109
-----------------
SHORT TERM INVESTMENTS 5.8%
U.S. GOVERNMENT AND AGENCY SECURITIES 5.3%
k,o FHLB, 1/02/08 - 12/04/08 ...................................... United States 341,920,000 338,669,802
o U.S. Treasury Bills, 1/17/08 - 5/01/08 ........................ United States 61,000,000 60,767,270
-----------------
TOTAL U.S. GOVERNMENT AND AGENCY SECURITIES
(COST $399,017,374) ........................................ 399,437,072
-----------------
TOTAL INVESTMENTS BEFORE MONEY MARKET FUND
(COST $6,142,308,691) ...................................... 7,555,340,181
-----------------
p INVESTMENTS FROM CASH COLLATERAL RECEIVED FOR LOANED
SECURITIES 0.5%
MONEY MARKET FUND (COST $38,019,919) 0.5%
q Bank of New York Institutional Cash Reserve Fund, 5.06% ....... United States 38,019,919 38,019,919
-----------------
TOTAL INVESTMENTS (COST $6,180,328,610) 100.2% ................ 7,593,360,100
OPTIONS WRITTEN (0.1)% ........................................ (4,616,520)
SECURITIES SOLD SHORT (0.5)% .................................. (35,184,780)
NET UNREALIZED LOSS ON FORWARD EXCHANGE
CONTRACTS (0.2)% ........................................... (12,601,713)
OTHER ASSETS, LESS LIABILITIES 0.6% ........................... 44,396,552
-----------------
NET ASSETS 100.0% ............................................. $ 7,585,353,639
=================
Annual Report | 29
Mutual Beacon Fund
STATEMENT OF INVESTMENTS, DECEMBER 31, 2007 (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------------
SHARES/
COUNTRY CONTRACTS VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
r OPTIONS WRITTEN 0.1%
ENERGY EQUIPMENT & SERVICES 0.1%
a Transocean Inc., Feb. 120.00 Calls, 2/16/08 ................... United States 3,009 $ 4,363,050
a Transocean Inc., Feb. 130.00 Calls, 2/16/08 ................... United States 355 253,470
-----------------
TOTAL OPTIONS WRITTEN (PREMIUMS RECEIVED $2,764,825) .......... 4,616,520
-----------------
s SECURITIES SOLD SHORT (PROCEEDS $36,746,298)
COMMERCIAL BANKS 0.5%
Toronto-Dominion Bank ......................................... Canada 502,999 $ 35,184,780
-----------------
CURRENCY ABBREVIATIONS
CAD - Canadian Dollar
EUR - Euro
GBP - British Pound
SELECTED PORTFOLIO ABBREVIATIONS
ADR - American Depository Receipt
FHLB - Federal Home Loan Bank
FRN - Floating Rate Note
PIK - Payment-In-Kind
a Non-income producing for the twelve months ended December 31, 2007.
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, 2007, the aggregate value of
these securities was $38,339,033, representing 0.51% of net assets.
c 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.
d See Note 9 regarding restricted securities.
e Security has been deemed illiquid because it may not be able to be sold within
seven days. At December 31, 2007, the aggregate value of these securities was
$528,472,191, representing 6.97% of net assets.
f See Note 12 regarding other considerations.
g See Note 11 regarding holdings of 5% voting securities.
h Rounds to less than 0.1% of net assets.
i A portion or all of the security is held in connection with written option
contracts open at year end.
j A portion or all of the security is on loan as of December 31, 2007. See Note
1(g).
k Security or a portion of the security has been segregated as collateral for
securities sold short. At December 31, 2007, the value of securities and or cash
pledged amounted to $36,411,260.
l The principal amount is stated in U.S. dollars unless otherwise indicated.
m The coupon rate shown represents the rate at period end.
n See Note 8 regarding defaulted securities.
o The security is traded on a discount basis with no stated coupon rate.
p See Note 1(g) regarding securities on loan.
q The rate shown is the annualized seven-day yield at period end.
r See Note 1(e) regarding written options.
s See Note 1(f) regarding securities sold short.
30 | The accompanying notes are an integral part of these financial statements.
| Annual Report
Mutual Beacon Fund
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
December 31, 2007
Assets:
Investments in securities:
Cost - Unaffiliated issuers ............................................................................. $ 6,069,155,041
Cost - Controlled affiliated issuers (Note 11) .......................................................... 2,081,593
Cost - Non-controlled affiliated issuers (Note 11) ...................................................... 109,091,976
------------------
Total cost of investments ............................................................................... $ 6,180,328,610
------------------
Value - Unaffiliated issuers (includes securities loaned in the amount of $37,544,521) .................. $ 7,480,175,713
Value - Controlled affiliated issuers (Note 11) ......................................................... 11,723,831
Value - Non-controlled affiliated issuers (Note 11) ..................................................... 101,460,556
------------------
Total value of investments .............................................................................. 7,593,360,100
Cash on deposits with brokers for securities sold short .................................................... 36,765,512
Foreign currency, at value (cost $5,045,994) ............................................................... 4,871,825
Receivables:
Investment securities sold .............................................................................. 50,256,511
Capital shares sold ..................................................................................... 9,434,526
Dividends and interest .................................................................................. 19,962,672
Unrealized gain on forward exchange contracts (Note 7) ..................................................... 14,331,734
------------------
Total assets ......................................................................................... 7,728,982,880
------------------
Liabilities:
Payables:
Investment securities purchased ......................................................................... 7,509,668
Capital shares redeemed ................................................................................. 21,952,397
Affiliates .............................................................................................. 7,607,030
Funds advanced by custodian ................................................................................ 147,096
Options written, at value (premiums received $2,764,825) ................................................... 4,616,520
Securities sold short, at value (proceeds $36,746,298) ..................................................... 35,184,780
Payable upon return of securities loaned ................................................................... 38,019,919
Unrealized loss on forward exchange contracts (Note 7) ..................................................... 26,933,447
Accrued expenses and other liabilities ..................................................................... 1,658,384
------------------
Total liabilities .................................................................................... 143,629,241
------------------
Net assets, at value .............................................................................. $ 7,585,353,639
==================
Net assets consist of:
Paid-in capital ............................................................................................ $ 6,015,164,418
Undistributed net investment income ........................................................................ 8,966,151
Net unrealized appreciation (depreciation) ................................................................. 1,400,037,760
Accumulated net realized gain (loss) ....................................................................... 161,185,310
------------------
Net assets, at value ............................................................................... $ 7,585,353,639
==================
Annual Report |
The accompanying notes are an integral part of these financial statements. | 31
Mutual Beacon Fund
FINANCIAL STATEMENTS (CONTINUED)
STATEMENT OF ASSETS AND LIABILITIES (CONTINUED)
December 31, 2007
CLASS Z:
Net assets, at value ....................................................................................... $ 3,883,935,338
------------------
Shares outstanding ......................................................................................... 246,983,110
------------------
Net asset value and maximum offering price per share a ..................................................... $ 15.73
------------------
CLASS A:
Net assets, at value ....................................................................................... $ 2,654,730,649
------------------
Shares outstanding ......................................................................................... 169,933,439
------------------
Net asset value per share a ................................................................................ $ 15.62
------------------
Maximum offering price per share (net asset value per share / 94.25%) ...................................... $ 16.57
------------------
CLASS B:
Net assets, at value ....................................................................................... $ 171,627,803
------------------
Shares outstanding ......................................................................................... 11,297,423
------------------
Net asset value and maximum offering price per share a ..................................................... $ 15.19
------------------
CLASS C:
Net assets, at value ....................................................................................... $ 875,059,849
------------------
Shares outstanding ......................................................................................... 56,566,897
------------------
Net asset value and maximum offering price per share a ..................................................... $ 15.47
==================
a Redemption price is equal to net asset value less contingent deferred sales,
if applicable, and redemption fees retained by the Fund.
32 | The accompanying notes are an integral part of these financial statements.
| Annual Report
Mutual Beacon Fund
FINANCIAL STATEMENTS (CONTINUED)
STATEMENT OF OPERATIONS
for the year ended December 31, 2007
Investment income:
Dividends: (net of foreign taxes of $8,067,603)
Unaffiliated issuers ....................................................................................... $ 195,040,417
Non-controlled affiliated issuers (Note 11) ................................................................ 44,997,448
Interest: (net of foreign taxes of $1,960)
Unaffiliated issuers .................................................................................... 47,970,900
Non-controlled affiliated issuers (Note 11) ............................................................. 177,520
Income from securities loaned ................................................................................. 1,853,963
------------------
Total investment income ........................................................................... 290,040,248
------------------
Expenses:
Management fees (Note 3a) .................................................................................. 45,902,016
Administrative fees (Note 3b) .............................................................................. 5,947,061
Distribution fees: (Note 3c)
Class A ................................................................................................. 8,351,362
Class B ................................................................................................. 1,929,020
Class C ................................................................................................. 8,967,677
Transfer agent fees (Note 3e) .............................................................................. 8,458,166
Custodian fees (Note 4) .................................................................................... 830,957
Reports to shareholders .................................................................................... 447,176
Registration and filing fees ............................................................................... 244,110
Professional fees .......................................................................................... 955,572
Directors' fees and expenses ............................................................................... 112,296
Dividends on securities sold short ......................................................................... 633,546
Other ...................................................................................................... 250,842
------------------
Total expenses .................................................................................... 83,029,801
Expenses reductions (Note 4) ...................................................................... (66,389)
------------------
Net expenses ................................................................................... 82,963,412
------------------
Net investment income ....................................................................... 207,076,836
------------------
Realized and unrealized gains (losses):
Net realized gain (loss) from:
Investments
Unaffiliated issuers ................................................................................. 632,018,814
Controlled affiliated issuers (Note 11) .............................................................. 1,108,236
Non-controlled affiliated issuers (Note 11) .......................................................... 76,860,627
Written options ......................................................................................... 1,454,524
Foreign currency transactions ........................................................................... (133,359,382)
Securities sold short ................................................................................... (18,877,587)
Synthetic equity swaps .................................................................................. 3,231,971
------------------
Net realized gain (loss) ....................................................................... 562,437,203
------------------
Net change in unrealized appreciation (depreciation) on:
Investments ............................................................................................. (589,986,350)
Translation of assets and liabilities denominated in foreign currencies ................................. 2,794,502
------------------
Net change in unrealized appreciation (depreciation) ........................................... (587,191,848)
------------------
Net realized and unrealized gain (loss) ....................................................................... (24,754,645)
------------------
Net increase (decrease) in net assets resulting from operations ............................................... $ 182,322,191
==================
Annual Report |
The accompanying notes are an integral part of these financial statements. | 33
Mutual Beacon Fund
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF CHANGES IN NET ASSETS
-------------------------------------
YEAR ENDED DECEMBER 31,
-------------------------------------
2007 2006
-------------------------------------
Increase (decrease) in net assets:
Operations:
Net investment income ................................................................. $ 207,076,836 $ 86,974,083
Net realized gain (loss) from investments, written options, securities sold short,
synthetic equity swaps, and foreign currency transactions .......................... 562,437,203 593,555,930
Net unrealized appreciation (depreciation) on investments and translation of assets and
liabilities denominated in foreign currencies ...................................... (587,191,848) 538,134,352
-------------------------------------
Net increase (decrease) in net assets resulting from operations ................. 182,322,191 1,218,664,365
=====================================
Distributions to shareholders from:
Net investment income:
Class Z ............................................................................ (130,125,357) (61,295,783)
Class A ............................................................................ (80,817,727) (28,014,668)
Class B ............................................................................ (4,105,340) (1,358,698)
Class C ............................................................................ (20,964,655) (5,635,292)
Net realized gains:
Class Z ............................................................................ (213,170,126) (367,390,486)
Class A ............................................................................ (145,346,463) (199,838,408)
Class B ............................................................................ (9,918,571) (19,518,901)
Class C ............................................................................ (48,866,936) (78,148,401)
-------------------------------------
Total distributions to shareholders ...................................................... (653,315,175) (761,200,637)
-------------------------------------
Capital share transactions: (Note 2)
Class Z ............................................................................ 183,737,378 223,773,762
Class A ............................................................................ 659,455,776 419,501,161
Class B ............................................................................ (18,583,161) (303,929)
Class C ............................................................................ 105,335,071 75,680,025
-------------------------------------
Total capital share transactions ......................................................... 929,945,064 718,651,019
-------------------------------------
Redemption fees .......................................................................... 19,015 11,990
-------------------------------------
Net increase (decrease) in net assets ........................................... 458,971,095 1,176,126,737
Net assets:
Beginning of year ........................................................................ 7,126,382,544 5,950,255,807
-------------------------------------
End of year .............................................................................. $ 7,585,353,639 $ 7,126,382,544
=====================================
Undistributed net investment income included in net assets:
End of year .............................................................................. $ 8,966,151 $ 955,331
=====================================
34 | The accompanying notes are an integral part of these financial statements.
| Annual Report
Mutual Beacon Fund
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Franklin Mutual Series Fund Inc. (Series Fund) is registered under the
Investment Company Act of 1940, as amended, (1940 Act) as an open-end investment
company, consisting of six separate funds. The Mutual Beacon Fund (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.
Annual Report | 35
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.
36 | Annual Report
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.
Annual Report | 37
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 or index 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 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.
38 | Annual Report
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 it is the Fund's policy
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 of
America. 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 per share
distributions, by class, are generally due to differences in class specific
expenses.
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.
Annual Report | 39
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 Funds' 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, 2007, there were 1.55 billion shares authorized ($0.001 par
value). Transactions in the Fund's shares were as follows:
--------------------------------------------------------------
YEAR ENDED DECEMBER 31,
2007 2006
--------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
--------------------------------------------------------------
CLASS Z SHARES:
Shares sold ...................... 14,093,045 $ 246,409,474 8,978,063 $ 149,701,821
Shares issued in reinvestment of
distributions .................. 19,675,347 314,926,373 24,275,024 398,131,632
Shares redeemed .................. (21,723,780) (377,598,469) (19,597,258) (324,059,691)
--------------------------------------------------------------
Net increase (decrease) .......... 12,044,612 $ 183,737,378 13,655,829 $ 223,773,762
==============================================================
CLASS A SHARES:
Shares sold ...................... 53,732,297 $ 934,047,432 30,066,396 $ 499,708,886
Shares issued in reinvestment of
distributions .................. 13,427,605 213,312,929 13,328,007 217,422,834
Shares redeemed .................. (28,289,809) (487,904,585) (18,083,631) (297,630,559)
--------------------------------------------------------------
Net increase (decrease) .......... 38,870,093 $ 659,455,776 25,310,772 $ 419,501,161
==============================================================
CLASS B SHARES:
Shares sold ...................... 337,672 $ 5,656,771 300,376 $ 4,821,000
Shares issued in reinvestment of
distributions .................. 826,541 12,800,173 1,200,866 19,045,401
Shares redeemed .................. (2,198,565) (37,040,105) (1,510,592) (24,170,330)
--------------------------------------------------------------
Net increase (decrease) .......... (1,034,352) $ (18,583,161) (9,350) $ (303,929)
==============================================================
40 | Annual Report
Mutual Beacon Fund
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. CAPITAL STOCK (CONTINUED)
--------------------------------------------------------------
YEAR ENDED DECEMBER 31,
2007 2006
--------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
--------------------------------------------------------------
CLASS C SHARES:
Shares sold ...................... 9,340,352 $ 160,272,572 6,123,512 $ 100,268,679
Shares issued in reinvestment of
distributions .................. 3,919,913 61,710,344 4,646,095 74,988,754
Shares redeemed .................. (6,837,573) (116,647,845) (6,132,053) (99,577,408)
--------------------------------------------------------------
Net increase (decrease) .......... 6,422,692 $ 105,335,071 4,637,554 $ 75,680,025
==============================================================
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
Annual Report | 41
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 charges retained net of commissions paid to
unaffiliated broker/dealers ..................... $ 2,270,398
Contingent deferred sales charges retained ......... $ 222,294
E. TRANSFER AGENT FEES
For the year ended December 31, 2007, the Fund paid transfer agent fees of
$8,458,166, of which $3,945,435 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, 2007, the
custodian fees were reduced as noted in the Statement of Operations.
42 | Annual Report
Mutual Beacon Fund
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. INCOME TAXES
The Fund has reviewed the tax positions taken on federal income tax returns, for
each of the three open tax years and as of December 31, 2007 and has determined
that no provision for income tax is required in the Fund's financial statements.
The tax character of distributions paid during the years ended December 31, 2007
and 2006, was as follows:
--------------------------------
2007 2006
--------------------------------
Distributions paid from:
Ordinary income .......................... $ 236,780,922 $ 140,317,569
Long term capital gain ................... 416,534,253 620,883,068
--------------------------------
$ 653,315,175 $ 761,200,637
================================
At December 31, 2007, 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 .......................................... $6,221,989,022
===============
Unrealized appreciation ...................................... $1,916,699,324
Unrealized depreciation ...................................... (545,328,246)
---------------
Net unrealized appreciation (depreciation) ................... $1,371,371,078
===============
Undistributed ordinary income ................................ $ 36,066,490
Undistributed long term capital gains ........................ 165,853,104
---------------
Distributable earnings ....................................... $ 201,919,594
===============
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, synthetic equity swaps, pass-through
entity income, 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, synthetic equity swaps and
pass-through entity income.
6. INVESTMENT TRANSACTIONS
Purchases and sales of investments (excluding short term securities and
securities sold short) for the year ended December 31, 2007, aggregated
$4,247,405,300 and $3,669,351,370, respectively.
Annual Report | 43
Mutual Beacon Fund
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. INVESTMENT TRANSACTIONS (CONTINUED)
Transactions in options written during the year ended December 31, 2007, were as
follows:
--------------------------
NUMBER OF PREMIUMS
CONTRACTS RECEIVED
--------------------------
Options outstanding at December 31, 2006 .......... 626 $ 70,335
Options written ................................... 46,835 4,663,969
Options expired ................................... (5,126) (627,741)
Options exercised ................................. -- --
Options closed .................................... (38,971) (1,341,738)
--------------------------
Options outstanding at December 31, 2007 .......... 3,364 $ 2,764,825
==========================
7. FORWARD EXCHANGE CONTRACTS
At December 31, 2007, the Fund had the following forward exchange contracts
outstanding:
-----------------------------------------------------------
CONTRACT SETTLEMENT UNREALIZED UNREALIZED
AMOUNT DATE GAIN LOSS
-----------------------------------------------------------
CONTRACTS TO BUY
130,643,385 Swedish Krona ................ $ 20,704,011 1/15/08 $ -- $ (495,045)
54,824,880 Norwegian Krone .............. 9,900,000 2/19/08 174,560 --
CONTRACTS TO SELL
612,500,000 Norwegian Krone .............. 112,494,094 1/09/08 -- (182,905)
90,936,321 British Pound ................ 183,685,064 1/10/08 3,051,732 --
86,365,675 Euro ......................... 119,577,271 1/14/08 -- (6,493,717)
685,296,043 Swedish Krona ................ 107,811,068 1/15/08 1,803,985 --
45,035,593 Euro ......................... 65,768,764 2/13/08 3,609 --
75,736,488 Euro ......................... 105,591,455 2/13/08 -- (5,005,998)
323,200,000 Norwegian Krone .............. 59,651,076 2/19/08 260,200 --
191,010,797 Norwegian Krone .............. 34,889,618 2/19/08 -- (210,316)
24,500,000 Euro ......................... 36,285,235 2/25/08 505,586 --
99,299,261 Swiss Franc .................. 88,801,957 3/07/08 831,709 --
114,644,017 British Pound ................ 231,948,331 3/10/08 4,589,678 --
25,632,407 Euro ......................... 37,962,876 3/13/08 528,992 --
71,061,344 Euro ......................... 98,926,576 3/13/08 -- (4,852,290)
7,016,930,000 Japanese Yen ................. 62,516,938 3/19/08 -- (950,809)
26,595,221 Canadian Dollar .............. 26,762,248 3/26/08 -- (23,019)
54,568,426,950 Korean Won ................... 59,795,000 3/27/08 1,198,031 --
2,807,250,000 Korean Won ................... 3,000,000 3/27/08 -- (14,497)
747,283,632 Danish Krone ................. 142,089,524 4/23/08 -- (4,241,160)
99,440,800 Euro ......................... 141,217,868 4/24/08 -- (3,985,732)
3,800,000 Euro ......................... 5,652,747 5/19/08 104,707 --
22,468,517 Euro ......................... 32,330,192 5/19/08 -- (474,077)
89,676,993 Euro ......................... 132,202,123 5/28/08 1,278,945 --
1,590,000 Euro ......................... 2,317,425 5/28/08 -- (3,882)
-----------------------------
UNREALIZED GAIN (LOSS) ON FORWARD EXCHANGE CONTRACTS ........................... 14,331,734 (26,933,447)
-----------------------------
NET UNREALIZED LOSS ON FORWARD EXCHANGE CONTRACTS ........................... $ (12,601,713)
==============
44 | Annual Report
Mutual Beacon Fund
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
8. CREDIT RISK AND 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, 2007, the aggregate value of these securities was $12,514,780,
representing 0.16% of the Fund's net assets. For information as to specific
securities, see the accompanying Statement of Investments.
9. RESTRICTED SECURITIES
The Fund may invest in securities that are restricted under the Securities Act
of 1933 (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, 2007, 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
CONTRACTS ISSUER DATES COST VALUE
- -----------------------------------------------------------------------------------------------------------
466,432 AboveNet Inc. ......................... 10/02/01 - 12/12/07 $ 23,428,396 $ 23,321,600
613 AboveNet Inc., stock grants, grant
price $20.95, expiration date
9/09/13 ............................. 4/17/06 - 9/08/06 -- 25,409
16,857 AboveNet Inc., wts., 9/08/08 .......... 10/02/01 - 9/07/07 1,927,924 795,650
19,829 AboveNet Inc., wts., 9/08/10 .......... 10/02/01 - 9/07/07 2,071,196 866,131
18,089,600 Cerberus CG Investor I LLC ............ 7/26/07 18,089,600 15,231,019
18,089,600 Cerberus CG Investor I LLC,
12.00%, 7/31/14 ..................... 7/26/07 18,089,600 15,231,019
18,089,600 Cerberus CG Investor II LLC ........... 7/26/07 18,089,600 15,231,019
18,089,600 Cerberus CG Investor II LLC,
12.00%, 7/31/14 ..................... 7/26/07 18,089,600 15,231,019
9,044,800 Cerberus CG Investor III LLC .......... 7/26/07 9,044,800 7,615,509
9,044,800 Cerberus CG Investor III LLC,
12.00%, 7/31/14 ..................... 7/26/07 9,044,800 7,615,509
5,706,149 Cerberus FIM Investors Auto
Finance LLC ......................... 11/20/06 5,706,148 3,061,525
Annual Report | 45
Mutual Beacon Fund
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
9. RESTRICTED SECURITIES (CONTINUED)
- -----------------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT/
SHARES/WARRANTS/ ACQUISITION
CONTRACTS ISSUER DATES COST VALUE
- -----------------------------------------------------------------------------------------------------------
17,106,799 Cerberus FIM Investors Auto
Finance LLC, 12.00%,
11/22/13 ............................ 11/21/06 $ 17,106,799 $ 9,178,326
475,305 Cerberus FIM Investors Commercial
Finance LLC ......................... 11/20/06 475,305 255,016
1,425,915 Cerberus FIM Investors Commercial
Finance LLC, 12.00%,
11/22/13 ............................ 11/20/06 1,425,915 765,048
890,886 Cerberus FIM Investors Commercial
Mortgage LLC ........................ 11/20/06 890,886 477,988
2,672,657 Cerberus FIM Investors Commercial
Mortgage LLC, 12.00%,
11/22/13 ............................ 11/20/06 2,672,657 1,433,963
4,357,377 Cerberus FIM Investors Insurance
LLC ................................. 11/20/06 4,357,377 2,337,867
13,072,130 Cerberus FIM Investors Insurance
LLC, 12.00%, 11/22/13 ............... 11/20/06 13,072,130 7,013,602
8,112,533 Cerberus FIM Investors Rescap
LLC, ................................ 11/20/06 8,112,535 4,352,625
24,337,605 Cerberus FIM Investors Rescap
LLC, 12.00%, 11/22/13 ............... 11/20/06 24,337,604 13,057,877
60,625 Dana Holding Corp., 4.00%,
cvt., pfd., B ....................... 12/27/07 6,062,500 6,062,500
1,142,353 DecisionOne Corp. ..................... 3/12/99 - 7/18/00 793,798 --
1,412,099 DecisionOne Corp., 12.00%,
4/15/10 ............................. 3/12/99 - 10/17/07 2,638,280 1,412,099
263,440 DecisionOne Corp., FRN, 9.50%,
5/12/09 ............................. 7/09/07 263,440 263,440
627,237 DecisionOne Corp., wts.,
6/08/17 ............................. 7/07/07 -- --
3,954,729 Esmark Inc. ........................... 11/08/04 - 11/28/07 73,249,520 50,292,289
14,498 FE Capital Holdings Ltd. .............. 8/29/03 - 3/22/07 516,568 9,523,457
1,157,143 First Chicago Bancorp ................. 11/16/06 16,200,002 16,200,002
2,387,711 International Automotive
Components Group Brazil LLC ......... 4/13/06 - 8/21/06 1,431,796 16,585,351
378,194 International Automotive
Components Group Japan LLC .......... 9/26/06 - 3/27/07 3,286,434 3,391,418
10,149,082 International Automotive
Components Group LLC ................ 1/12/06 - 10/16/06 10,154,061 10,767,161
6,469,826 International Automotive
Components Group NA LLC ............. 3/30/07 - 10/10/07 6,458,850 8,896,011
1,947,800 International Automotive
Components Group NA LLC,
9.00%, 4/01/17 ...................... 3/30/07 1,977,017 1,947,800
1,639,289 Kindred Healthcare Inc. ............... 4/28/99 - 3/29/06 15,010,878 38,901,967
46 | Annual Report
Mutual Beacon Fund
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
9. RESTRICTED SECURITIES (CONTINUED)
- -----------------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT/
SHARES/WARRANTS/ ACQUISITION
CONTRACTS ISSUER DATES COST VALUE
- -----------------------------------------------------------------------------------------------------------
Kindred Healthcare Inc., stock grants:
5,731 grant price $18.15,
expiration date 7/17/11 ............ 7/17/02 - 7/17/05 $ -- $ 31,985
1,720 grant price $19.87,
expiration date 1/01/12 ............ 1/13/03 - 1/01/06 -- 6,641
1,710 grant price $6.94,
expiration date 1/01/13 ............ 1/01/04 - 1/03/07 -- 28,713
1,276 grant price $19.87,
expiration date 1/01/14 ............ 1/04/05 - 1/03/07 -- 4,927
709 grant price $21.33,
expiration date 1/10/15 ............ 1/06/06 - 1/09/07 -- 1,702
354 grant price $22.08,
expiration date 1/10/16 ............ 1/09/07 -- 584
32,534,499 Motor Coach Industries
International Inc., FRN,
18.081%, 12/01/08 ................... 5/27/04 - 11/30/07 32,534,499 32,209,154
6 Motor Coach Industries
International Inc., wts.,
5/27/09 ............................. 3/30/07 -- --
67,420 NCB Warrant Holdings Ltd., A .......... 12/16/05 -- 4,000,152
106,700 Olympus Re Holdings Ltd. .............. 12/19/01 10,670,000 349,464
310,123 Owens Corning Inc., exercise price
$37.50, expiration date 1/02/08,
shares a ............................ 12/20/06 32,455 15,506
29,737 PMG LLC ............................... 3/22/04 2,081,593 11,723,831
114,246 PTV Inc., 10.00%, pfd., A ............. 12/07/01 - 3/06/02 342,738 137,095
4,450,920 Symetra Financial ..................... 7/27/04 51,160,000 71,303,738
-------------
TOTAL RESTRICTED SECURITIES (5.63% of Net Assets) .......................... $427,154,708
=============
a The Fund also invests in unrestricted securities of the issuer, valued at
$22,051,993 as of December 31, 2007.
10. UNFUNDED CAPITAL COMMITMENTS
At December 31, 2007, the Fund had aggregate unfunded capital commitments to
investments of $63,734,438.
Annual Report | 47
Mutual Beacon 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, 2007, were as shown below.
- ------------------------------------------------------------------------------------------------------------------------------------
NUMBER OF NUMBER OF
SHARES/WARRANTS/ SHARES/WARRANTS/
PRINCIPAL AMOUNT PRINCIPAL AMOUNT VALUE AT REALIZED
HELD AT BEGINNING GROSS GROSS HELD AT END END OF INVESTMENT CAPITAL
NAME OF ISSUER OF YEAR ADDITIONS REDUCTIONS OF YEAR YEAR INCOME GAIN (LOSS)
- ------------------------------------------------------------------------------------------------------------------------------------
CONTROLLED AFFILIATES a
PMG, LLC ....................... 31,748 -- 2,011 29,737 $ 11,723,831 $ -- $ 1,108,236
NON-CONTROLLED AFFILIATES
Anchor Resources LLC ........... 69,184 -- 69,184 -- -- -- 256,739
DecisionOne Corp. .............. 1,142,353 -- -- 1,142,353 -- -- --
DecisionOne Corp., 12.00%,
4/15/10 ..................... 1,329,650 82,449 -- 1,412,099 1,412,099 164,044 --
DecisionOne Corp., FRN, 9.50%,
5/12/09 ..................... -- 263,440 -- 263,440 263,440 13,476 --
DecisionOne Corp., wts.,
6/08/17 ..................... -- 627,237 -- 627,237 -- -- --
Esmark Inc. .................... 7,869 3,946,860 -- 3,954,729 50,292,289 188,856 --
Esmark Inc., 8.00%, cvt.,
pfd., A ..................... 28,644 626 29,270 -- -- 1,768,865 362,594
Farmer Brothers Co. ............ 1,033,896 -- -- 1,033,896 23,769,269 460,084 --
FE Capital Holdings Ltd. ....... 13,981 517 -- 14,498 9,523,457 -- --
First Chicago Bancorp .......... 1,157,143 -- -- 1,157,143 16,200,002 -- --
Florida East Coast Industries,
Inc. ........................ 1,967,636 -- 1,967,636 -- -- 42,579,643 76,241,294
--------------------------------------
TOTAL NON-CONTROLLED AFFILIATES ........................................................... $101,460,556 $45,174,968 $76,860,627
--------------------------------------
TOTAL AFFILIATED SECURITIES (1.49% of Net Assets) ......................................... $113,184,387 $45,174,968 $77,968,863
======================================
a Issuer in which the Fund owns 25% or more of the outstanding voting
securities.
12. OTHER CONSIDERATIONS
Officers, directors or employees of the Fund's Investment Manager, may serve
from time to time as members of boards of directors of companies in which the
Fund invests. Such participation may result in the possession by the Investment
Manager of material non-public information which, pursuant to the Fund's
policies and the requirements of applicable securities laws, could prevent the
Fund from trading in the securities of such companies for limited or extended
periods of time.
48 | Annual Report
Mutual Beacon Fund
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
13. REGULATORY AND LITIGATION 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 and governmental
entities. Specifically, the Company entered into settlements with the SEC, among
others, concerning market timing and marketing support.
On June 6, 2007, the SEC posted for public comment the proposed plan of
distribution for the market timing settlement. Once the SEC approves the final
plan of distribution, disbursements of settlement monies will be made promptly
to individuals who were shareholders of the designated funds during the relevant
period, 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.
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.
14. NEW ACCOUNTING PRONOUNCEMENT
In September 2006, Financial Accounting Standards Board (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 Funds constituting the Franklin Mutual Series
Fund Inc.) (the "Fund"), including the statement of investments, as of December
31, 2007, 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, 2007, 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, 2007,
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 14, 2008
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 $523,360,348 as a long
term capital gain dividend for the fiscal year ended December 31, 2007.
Under Section 871(k)(2)(C) of the Code, the Fund designates the maximum amount
allowable but no less than $29,858,442 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, 2007.
Under Section 854(b)(2) of the Code, the Fund designates 65.04% of the ordinary
income dividends as income qualifying for the dividends received deduction for
the fiscal year ended December 31, 2007.
Under Section 854(b)(2) of the Code, the Fund designates the maximum amount
allowable but no less than $208,416,025 as qualified dividends for purposes of
the maximum rate under Section 1(h)(11) of the Code for the fiscal year ended
December 31, 2007. In January 2008, shareholders will receive Form 1099-DIV
which will include their share of qualified dividends distributed during the
calendar year 2007. Shareholders are advised to check with their tax advisors
for information on the treatment of these amounts on their individual income tax
returns.
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 None
c/o Franklin Mutual Advisers, LLC
101 John F. Kennedy Parkway
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; a director to numerous
financial publishing organizations; and FORMERLY, Vice Director, Dalomon Center, Stern School of Business, New York University.
- ------------------------------------------------------------------------------------------------------------------------------------
ANN TORRE BATES (1958) Director Since 1994 7 SLM Corporation (Sallie Mae) and
c/o Franklin Mutual Advisers, LLC Allied Capital Corporation (Financial
101 John F. Kennedy Parkway Services).
Short Hills, NJ 07078-2789
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 14 Franklin Templeton Emerging Markets
c/o Franklin Mutual Advisers, LLC Debt Opportunities Fund PLC and
101 John F. Kennedy Parkway Fiduciary International Ireland
Short Hills, NJ 07078-2789 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
c/o Franklin Mutual Advisers, LLC
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).
- ------------------------------------------------------------------------------------------------------------------------------------
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
- ------------------------------------------------------------------------------------------------------------------------------------
CHARLES RUBENS II (1930) Director Since 1998 14 None
c/o Franklin Mutual Advisers, LLC
101 John F. Kennedy Parkway
Short Hills, NJ 07078-2789
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Private Investor.
- ------------------------------------------------------------------------------------------------------------------------------------
ROBERT E. WADE (1946) Director and Director Since 34 El Oro and Exploration Co., P.l.c.
c/o Franklin Mutual Advisers, LLC Chairman 1991 and (investments) and ARC Wireless
101 John F. Kennedy Parkway of the Board Chairman of the Solutions, Inc. (Wireless Components
Short Hills, NJ 07078-2789 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
- ------------------------------------------------------------------------------------------------------------------------------------
**GREGORY E. JOHNSON (1961) Director Since April 92 None
One Franklin Parkway 2007
San Mateo, CA 94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Director, President and Chief Executive Officer, Franklin Resources, Inc.; President, Templeton Worldwide, Inc.; Director,
Templeton Asset Management Ltd.; and Officer And/or Director or Trustee, as the Case May Be, of Some of the Other Subsidiaries of
Franklin Resources, Inc. and of 33 of the Investment Companies in Franklin Templeton Investments.
- ------------------------------------------------------------------------------------------------------------------------------------
**PETER A. LANGERMAN (1955) Director, Director Since 7 None
c/o Franklin Mutual Advisers, LLC President April 2007 and
101 John F. Kennedy Parkway Andchief President and
Short Hills, NJ 07078-2702 Executive Chief Executive
Officer - Officer -
Investment Investment
Management Management
Since 2005
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Chairman of the Board, Chief Executive Officer and President, Franklin Mutual Advisers, LLC; Officer And/or Director, as the Case
May Be, of Three of the Investment Companies in Franklin Templeton Investments; and Formerly, Director, New Jersey's Division of
Investment.
- ------------------------------------------------------------------------------------------------------------------------------------
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.
- ------------------------------------------------------------------------------------------------------------------------------------
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
- --------------------------------------------------------------------------------------------------------------------------------
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 Compliance
- Aml Since 2006
Compliance
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.
- --------------------------------------------------------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------------------------------------------------------
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; Secretary, Franklin Advisory Services, LLC, Franklin Mutual
Advisers, LLC and Franklin Templeton Distributors, Inc.; and Officer of 41 of the Investment Companies in Franklin Templeton
Investments.
- --------------------------------------------------------------------------------------------------------------------------------
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 18 of the Investment Companies in Franklin Templeton Investments;
and FORMERLY, Vice President, Jpmorgan Chase (2000-2004) and American General Financial Group (1991-2000).
- --------------------------------------------------------------------------------------------------------------------------------
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
- --------------------------------------------------------------------------------------------------------------------------------
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 Some of the Other Subsidiaries of Franklin Resources, Inc.
and 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.
** Gregory E. Johnson is considered to be an interested person of the Fund under
the federal securities laws due to his position as an officer and director of
Franklin Resources, Inc., which is the parent company of the Fund's investment
manager and distributor. Peter A. Langerman is considered to be an interested
person of the Fund under the federal securities laws due to his position as an
officer of Franklin Mutual Advisers, LLC, which is the Fund's investment
manager.
Note 1: Officer information is current as of the date of this report. It is
possible that after this date, information about officers may change.
Note 2: Prior to December 31, 2007, William J. Lippman, Leonard Rubin and Anne
M. Tatlock ceased to be directors of the Fund.
THE FUND'S BOARD 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
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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 FUNDS
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 1
GLOBAL
Mutual Discovery Fund
Templeton Global Long-Short Fund
Templeton Global Opportunities Trust
Templeton Global Smaller Companies Fund 1
Templeton Growth Fund
Templeton World Fund
GROWTH
Franklin Capital Growth Fund
Franklin Flex Cap Growth Fund
Franklin Growth Opportunities Fund 2
Franklin Small Cap Growth Fund II 3
Franklin Small-Mid Cap Growth Fund
VALUE
Franklin All Cap Value Fund
Franklin Balance Sheet Investment Fund 1
Franklin Equity Income Fund
Franklin Large Cap Value Fund
Franklin MicroCap Value Fund 1
Franklin MidCap Value Fund
Franklin Small Cap Value Fund
Mutual Beacon Fund
Mutual Qualified Fund
Mutual Recovery Fund 4
Mutual Shares Fund
BLEND
Franklin Balanced Fund
Franklin Convertible Securities Fund
Franklin Focused Core Equity Fund
Franklin Growth Fund
Franklin Rising Dividends 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(R) Allocation Fund
Franklin Templeton Founding Funds Allocation Fund
Franklin Templeton Perspectives Allocation Fund
Franklin Templeton Conservative Target Fund
Franklin Templeton Growth Target Fund
Franklin Templeton Moderate Target Fund
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 5
Franklin Floating Rate Daily Access Fund
Franklin High Income Fund
Franklin Income Fund
Franklin Limited Maturity U.S. Government Securities Fund 5
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 5
Templeton Global Bond Fund
Templeton Income Fund
Templeton International Bond 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
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 and select
retirement plans can continue adding to their accounts.
2. Effective 11/1/07, Franklin Aggressive Growth Fund changed its name to
Franklin Growth Opportunities Fund. The fund's investment goal and strategy
remained the same.
3. The fund is closed to new investors. Existing shareholders can continue
adding to their accounts
4. 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.
5. An investment in the fund is neither insured nor guaranteed by the U.S.
government or by any other entity or institution.
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. The fund invests primarily in 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.
12/07 Not part of the annual report
[LOGO (R)]
FRANKLIN TEMPLETON
INVESTMENT
One Franklin Parkway
San Mateo, CA 94403-1906
o WANT TO RECEIVE THIS DOCUMENT FASTER VIA EMAIL?
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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 A2007 02/08
[GRAPHIC OMITTED]
- --------------------------------------------------------------------------------
DECEMBER 31, 2007
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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]
Not part of the annual report
Contents
SHAREHOLDER LETTER .................................................. 1
ANNUAL REPORT
Mutual Discovery Fund ............................................... 4
Performance Summary ................................................. 11
Your Fund's Expenses ................................................ 16
Financial Highlights and Statement of Investments ................... 18
Financial Statements ................................................ 33
Notes to Financial Statements ....................................... 37
Report of Independent Registered Public Accounting Firm ............. 53
Tax Designation ..................................................... 54
Board Members and Officers .......................................... 56
Shareholder Information ............................................. 60
- --------------------------------------------------------------------------------
Shareholder Letter
- --------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURN
- --------------------------------------------
CLASS Z 12/31/07
- --------------------------------------------
1-Year +11.32%
- --------------------------------------------
5-Year +20.08%
- --------------------------------------------
10-Year +12.41%
- --------------------------------------------
Dear Shareholder:
The past year was a turbulent time for equities both in the U.S. and in many
international markets. Several developments contributed to this volatility,
including (1) credit problems centered around subprime mortgage lending; (2)
declining home values in the U.S.; (3) a nearly complete evaporation of the
corporate leveraged lending that fueled the leveraged buyout boom of the past
several years; (4) a sharp increase in oil, agricultural and certain mining
commodity prices; and (5) a sharp decline in the value of the U.S. dollar
relative to most other currencies. For the year ended December 31, 2007, the
Standard & Poor's (S&P) 500 Index rose 5.49% while the Morgan Stanley Capital
International (MSCI) World Index gained 9.57%. 1 However, indicative of the
impact of the developments noted here, the S&P 500 Financials Index declined
18.63%, the S&P Homebuilders Select Industry Index declined 48.39% and the S&P
GSSI Natural Resources Index appreciated 34.44% during the year. 2 By
comparison, Mutual Discovery Fund-Class Z gained 11.32% over this period.
1. Source: Standard & Poor's Micropal. The S&P 500 Index 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
Index 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.
2. Source: Standard & Poor's Micropal. The S&P 500 Financials Index is market
value weighted and includes all the financial stocks in the S&P 500. The S&P
Homebuilders Select Industry Index is an equal-weighted index that draws its
constituents from the GICS (Global Industry Classification Standards)
Homebuilding sub-industry. The S&P GSSI Natural Resources Index is a modified
cap-weighted index designed to measure equity performance in the natural
resources sector. The index includes companies involved in the following
categories: extractive industries, energy companies, owners and operators of
timber tracts, forestry services, producers of pulp and paper, and owners of
plantations.
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.
- --------------------------------------------------------------------------------
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Log in at franklintempleton.com and click on eDelivery. Shareholders who are
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NOT FDIC INSURED | MAY LOSE VALUE | NO BANK GUARANTEE
- -----------------------------------------------------
Not part of the annual report | 1
Despite the challenges, a number of positive factors contributed to Fund
performance this year. Many of our international holdings made strong gains,
particularly among the tobacco, energy and industrial companies we owned. Fund
shareholders also benefited from the fact that our international holdings were
less than fully hedged back into U.S. dollars, reflecting our cautious view
regarding the dollar. Investments in merger arbitrage situations were also
generally profitable, particularly as we took advantage in late summer of
concerns that deals would fall apart because of "buyer's remorse" or
unavailability of financing.
In the U.S., our focus over the past several years on larger capitalization
companies with strong balance sheets and leading industry positions benefited
our shareholders. For example, investments in Microsoft and Altria, both part of
the large-cap Dow Jones Industrial Average, generated solid returns in 2007. 3
As we have discussed in previous reports, the multi-year outperformance of
small- and mid-capitalization stocks going into 2007 resulted in attractive
valuations among their mega-cap counterparts. At period-end, we continued to see
real value in a number of these companies.
A difficult area for us in the latter half of the year was what we would term
"event-driven" stocks. These are investments we believe are attractively valued
and where we see an identifiable catalyst to unlock the value. While each
investment is different, a few issues dominated the second half of 2007. One key
driver was the abrupt absence of private equity buyers for companies (or
divisions of companies) that were potential sale targets. Virgin Media, the U.K.
cable company, was one example. We believe many event-driven investments were
held in common with some of the hedge funds that faced pressure to sell in the
latter half of 2007. Again, while somewhat painful in the short term,
"technical" pressures often give us a chance to take advantage of temporary
market dislocations to increase ownership in attractively valued companies.
Value investors are always faced with the task of buying and owning companies
when they are out of favor, whether for company-specific reasons or because of a
perception of macroeconomic fundamentals. It is these very headwinds that can
create opportunities to buy well-managed companies with strong industry
positions at valuations that have the potential to reward investors over the
long term. We believe the extended credit crisis has created a number of such
opportunities. We have no crystal ball telling us precisely when the U.S.
housing market will turn positive or where oil prices will be a year from now.
However, we believe that if we stick to our discipline of buying good
3. Mutual Discovery Fund's holdings are based on total net assets as of
12/31/07: Microsoft Corp.: 0.9% and Altria Group Inc.: 0.5%.
2 | Not part of the annual report
businesses at cheap valuations, we should reach our goal of limiting our
downside risk while generating consistent returns over the long term.
In the enclosed annual report for Mutual Discovery Fund, the portfolio managers
discuss market conditions, investment management decisions and Fund performance
during the period under review. You will also find performance data and
financial information. Please remember that all securities markets fluctuate, as
do mutual fund share prices.
If you would like more frequent updates, FRANKLINTEMPLETON.COM provides daily
prices, monthly performance figures, portfolio holdings and other information.
You can also access your account, buy and sell shares, read timely articles, and
find helpful financial planning tools. We hope you will take advantage of these
online services.
As always, we thank you for your trust and support and extend our best wishes
for a happy, healthy and prosperous 2008.
Sincerely,
/s/ Peter A. Langerman
Peter A. Langerman
Chairman, President and Chief Executive Officer
Franklin Mutual Advisers, LLC
/s/ Michael J. Embler
Michael J. Embler
Senior Vice President and Chief Investment Officer
Franklin Mutual Advisers, LLC
THIS LETTER REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS AS OF
DECEMBER 31, 2007. 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.
Not part of the annual report | 3
Annual Report
Mutual Discovery Fund
YOUR FUND'S GOAL AND MAIN INVESTMENTS: Mutual Discovery Fund seeks capital
appreciation by investing primarily 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, 2007.
PERFORMANCE OVERVIEW
Mutual Discovery Fund - Class Z posted a cumulative total return of +11.32% for
the 12 months ended December 31, 2007. 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 +5.49% and +9.57% 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
In spite of elevated energy prices and widespread fears of contagion from the
deteriorating U.S. housing situation, the global economy remained resilient in
2007. Consumer and corporate demand strength, particularly in China and other
developing economies, generally favorable employment and accommodative monetary
policies continued to underpin the current expansionary period that began in
2002.
These factors also contributed to the strength of global equity markets during
2007. However, concerns about slower growth and declining asset quality surfaced
in the first quarter. These were initially centered on the U.S. subprime
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
mortgage market but spread in August to global capital markets. Difficulties in
assessing risk and the value of collateral in the structured finance industry
contributed to declining risk appetite among lenders and investors. The private
equity industry, which relies on the availability of cheap credit, played a
pivotal role in several large and high-profile acquisitions and helped boost
merger and acquisition activity in the first half of the year. This was an
important driver of equity performance, but as liquidity dried up in the second
half of the year, significantly slower money flows from private equity weighed
on market performance. However, global merger and acquisition activity still
reached record levels. The staggering $4.5 trillion of deals announced in 2007
eclipsed the previous record from 2006 by 24%. 2
To alleviate the credit crunch and restore investor confidence, the world's
major central banks infused capital into the system, and the U.S. Federal
Reserve Board reduced its target interest rate by a full percentage point.
However, credit and equity markets continued to face headwinds as write-downs
and losses from subprime mortgage financing affected many large financial
institutions toward the end of the year, and equity prices remained volatile.
For the year, however, global and non-U.S. equity markets registered the fifth
consecutive year of double-digit total returns, making this an exceptionally
strong period for investors in global equities. Broad-based stock performance by
European and Asian shares at least doubled that of U.S. stocks, while emerging
market equity returns more than tripled those in developed markets. Led by the
BRIC countries, Brazil, Russia, India and China, emerging market economies
continued to grow at accelerated rates, supporting elevated prices for oil and
other commodities. At the same time, investment inflows from developed economies
continued to underpin equity prices in emerging markets. In addition, U.S.
dollar weakness versus the currencies of many major trading partners enhanced
equity returns for U.S.-based investors holding stocks denominated in these
currencies.
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
2. Source: "For Deal Makers, Tale of Two Halves," THE WALL STREET JOURNAL,
1/2/08.
GEOGRAPHIC BREAKDOWN
Based on Total Net Assets as of 12/31/07
[THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.]
U.S. 17.2%
France 13.0%
U.K. 9.5%
Germany 8.3%
South Korea 4.9%
Norway 4.8%
Switzerland 4.1%
Hong Kong 3.9%
Japan 2.7%
Denmark 2.6%
Italy 2.4%
Spain 1.9%
Bermuda 1.6%
Netherlands 1.5%
Belguim 1.4%
Sweden 1.0%
Other 4.5%
Short-Term Investments & Other Net Assets 14.7%
Annual Report | 5
TOP 10 SECTORS/INDUSTRIES
Based on Equity Securities as of 12/31/07
- --------------------------------------------------------------------------------
% OF TOTAL
NET ASSETS
- --------------------------------------------------------------------------------
Tobacco 11.7%
- --------------------------------------------------------------------------------
Commercial Banks 7.7%
- --------------------------------------------------------------------------------
Food Products 6.1%
- --------------------------------------------------------------------------------
Insurance 5.7%
- --------------------------------------------------------------------------------
Media 5.7%
- --------------------------------------------------------------------------------
Diversified Financial Services 5.0%
- --------------------------------------------------------------------------------
Beverages 4.7%
- --------------------------------------------------------------------------------
Industrial Conglomerates 4.2%
- --------------------------------------------------------------------------------
Energy Equipment & Services 4.2%
- --------------------------------------------------------------------------------
Real Estate 2.7%
- --------------------------------------------------------------------------------
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.
MANAGER'S DISCUSSION
Among the Fund's top contributors to performance in 2007 were KT&G, a South
Korea-based cigarette manufacturer; Berkshire Hathaway, the well-known
investment conglomerate; and German securities exchange platform provider
Deutsche Boerse.
6 | Annual Report
Shares of KT&G appreciated 41% in local currency during 2007, due largely to the
company's strong operating performance. Each division of KT&G reported positive
news in 2007. The company's domestic tobacco sales and operating margins
expanded due to increased average selling prices for a pack of cigarettes.
Overseas sales and revenues registered high double-digit increases. KT&G owns a
100% stake in KGC, South Korea's leading red ginseng maker, which has a dominant
position of more than 60% market share. Over the past five years, KGC's sales
and earnings have grown at 20% and 27% compounded annual growth rates,
respectively. We believe this trend could continue given the country's aging
demographic, growing income levels, and KGC's aggressive distribution and
production expansion plan. According to our analysis, not only is the outlook
for earnings quite good but the company's ability to return cash to shareholders
has been impressive as well. KT&G has announced that between 2006 and 2008 it
will return 2.8 trillion won (the local currency, which equaled approximately
$3.0 billion on December 31, 2007) to shareholders. After 2008, KT&G is expected
to return an average 5% to 7% of market capitalization to shareholders annually
through dividends and share buybacks.
Berkshire Hathaway stock appreciated 29% as the company benefited from a lack of
catastrophe losses in 2007, resulting in large insurance company profits after
higher-than-average losses in 2004 and 2005 resulted in a favorable pricing
environment for U.S. property insurers. Within Berkshire's non-insurance
operations, the company benefited from an improving contribution from its
utility business, Mid-American Energy. Most significantly for its share price
value, Berkshire's cash stockpile of almost $40 billion, along with CEO Warren
Buffett's willingness to wait until a bargain emerged before deploying this
capital, positioned the company as a safe haven for investors who perceived
2007's subprime mortgage crisis as an investment opportunity rather than a
threat. By the end of 2007 Berkshire management had successfully kept its
capital mostly in reserve, for use in executing timely future transactions when
the investment climate is right.
The Fund's investment in Deutsche Boerse rose 97% in local currency as cash
equity trading volumes surged 63%, the company resumed its buyback of shares,
and investors appeared to recognize hidden potential embedded in the business.
The exchange industry grew as such quasi-monopolies benefited from higher
volumes in different product classes and generally beneficial pricing trends.
Deutsche Boerse also tapped into the structural potential of its business by
announcing future cost cutting of over 100 million euros per year to enhance
profitability. We believed future exchange consolidation prospects placed the
company in a good position for ongoing shareholder returns. Therefore, we
increased our holdings in Deutsche Boerse throughout 2007 when we found the
price attractive.
TOP 10 HOLDINGS
12/31/07
- --------------------------------------------------------------------------------
COMPANY % OF TOTAL
SECTOR/INDUSTRY, COUNTRY NET ASSETS
- --------------------------------------------------------------------------------
KT&G Corp. 2.4%
TOBACCO, SOUTH KOREA
- --------------------------------------------------------------------------------
Imperial Tobacco Group PLC 2.3%
TOBACCO, U.K.
- --------------------------------------------------------------------------------
British American Tobacco PLC 2.3%
TOBACCO, U.K.
- --------------------------------------------------------------------------------
Orkla ASA 2.3%
INDUSTRIAL CONGLOMERATES, NORWAY
- --------------------------------------------------------------------------------
Carrefour SA 1.9%
FOOD & STAPLES RETAILING, FRANCE
- --------------------------------------------------------------------------------
Pernod Ricard SA 1.7%
BEVERAGES, FRANCE
- --------------------------------------------------------------------------------
Japan Tobacco Inc. 1.7%
TOBACCO, JAPAN
- --------------------------------------------------------------------------------
Carlsberg AS, A & B 1.7%
BEVERAGES, DENMARK
- --------------------------------------------------------------------------------
Berkshire Hathaway Inc., A & B 1.6%
INSURANCE, U.S.
- --------------------------------------------------------------------------------
Altadis SA 1.6%
TOBACCO, SPAIN
- --------------------------------------------------------------------------------
Annual Report | 7
Although the Fund performed well in 2007, some of our positions detracted from
performance. Among them were Belgium-based Fortis, whose operations are focused
in banking, insurance and investment management; Norway's Marine Harvest, one of
the world's leading seafood companies; and Banca Popolare, an Italian financial
services provider.
Fortis declined 30% in local currency as the company raised a significant amount
of capital to fund its acquisition of ABN Amro's Dutch retail banking, asset
management and private banking units. Fortis was part of a consortium with Royal
Bank of Scotland and Banco Santander, which together acquired these businesses
and by year-end had completed the largest bank acquisition in European history.
Fortis' stock price also came under pressure after the company announced weak
third quarter 2007 operating results for its banking and insurance businesses.
Marine Harvest, formerly known as Pan Fish, benefited from increased demand for
salmon. But the company reported disappointing results in third quarter 2007 as
it experienced difficult biological conditions due to a disease outbreak in its
Chilean and Norwegian fisheries. Analysts responded by reducing the company's
earnings estimate, and for 2007 Marine Harvest shares fell 38% in local
currency.
The Fund's shares of Banca Popolare declined 34% in local currency during 2007.
As global economic fears became more evident in the markets, Banca Popolare
suffered as investors became hesitant about the bank's growth prospects for the
next few years. Also, concerns developed over the potential integration of its
$10 billion BPI (Banca Popolare Italiana) acquisition and lost revenue stemming
from the company's Banca Italease subsidiary. At period-end, we believed Banca
Popolare should be able to weather an economic downturn due to its regional
focus and potential future earnings growth from merger integration.
Finally, investors should note that we maintained our currency hedging posture
of being generally hedged to the U.S. dollar for most of our non-U.S. holdings.
Since the dollar was weaker compared with most foreign currencies during 2007,
the Fund benefited to the extent it was not fully hedged.
8 | Annual Report
Thank you for your continued participation in Mutual Discovery Fund.
We look forward to serving your future investment needs.
[PHOTO OMITTED]
/s/ Anne E. Gudefin
Anne E. Gudefin, CFA
Co-Portfolio Manager
[PHOTO OMITTED]
/s/ Charles M. Lahr
Charles M. Lahr, CFA
Co-Portfolio Manager
[PHOTO OMITTED]
/s/ Mandana Hormozi
Mandana Hormozi
Assistant Portfolio Manager
Mutual Discovery Fund
THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS
AS OF DECEMBER 31, 2007, 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 has been portfolio manager for Mutual Discovery Fund since 2007. He
has also been 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 Principal Financial Group.
MANDANA HORMOZI has been assistant portfolio manager for Mutual Discovery Fund
since 2007. 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.
- --------------------------------------------------------------------------------
10 | Annual Report
Performance Summary as of 12/31/07
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 12/31/07 12/31/06
- ------------------------------------------------------------------------------------------
Net Asset Value (NAV) +$2.00 $ 32.45 $ 30.45
- ------------------------------------------------------------------------------------------
DISTRIBUTIONS (1/1/07-12/31/07)
- ------------------------------------------------------------------------------------------
Dividend Income $0.7406
- ------------------------------------------------------------------------------------------
Long-Term Capital Gain $0.7061
- ------------------------------------------------------------------------------------------
TOTAL $1.4467
- ------------------------------------------------------------------------------------------
CLASS A (SYMBOL: TEDIX) CHANGE 12/31/07 12/31/06
- ------------------------------------------------------------------------------------------
Net Asset Value (NAV) +$1.95 $ 32.09 $ 30.14
- ------------------------------------------------------------------------------------------
DISTRIBUTIONS (1/1/07-12/31/07)
- ------------------------------------------------------------------------------------------
Dividend Income $0.6474
- ------------------------------------------------------------------------------------------
Long-Term Capital Gain $0.7061
- ------------------------------------------------------------------------------------------
TOTAL $1.3535
- ------------------------------------------------------------------------------------------
CLASS B (SYMBOL: TEDBX) CHANGE 12/31/07 12/31/06
- ------------------------------------------------------------------------------------------
Net Asset Value (NAV) +$1.91 $ 31.46 $ 29.55
- ------------------------------------------------------------------------------------------
DISTRIBUTIONS (1/1/07-12/31/07)
- ------------------------------------------------------------------------------------------
Dividend Income $0.4066
- ------------------------------------------------------------------------------------------
Long-Term Capital Gain $0.7061
- ------------------------------------------------------------------------------------------
TOTAL $1.1127
- ------------------------------------------------------------------------------------------
CLASS C (SYMBOL: TEDSX) CHANGE 12/31/07 12/31/06
- ------------------------------------------------------------------------------------------
Net Asset Value (NAV) +$1.91 $ 31.84 $ 29.93
- ------------------------------------------------------------------------------------------
DISTRIBUTIONS (1/1/07-12/31/07)
- ------------------------------------------------------------------------------------------
Dividend Income $0.4394
- ------------------------------------------------------------------------------------------
Long-Term Capital Gain $0.7061
- ------------------------------------------------------------------------------------------
TOTAL $1.1455
- ------------------------------------------------------------------------------------------
CLASS R (SYMBOL: TEDRX) CHANGE 12/31/07 12/31/06
- ------------------------------------------------------------------------------------------
Net Asset Value (NAV) +$1.92 $ 31.85 $ 29.93
- ------------------------------------------------------------------------------------------
DISTRIBUTIONS (1/1/07-12/31/07)
- ------------------------------------------------------------------------------------------
Dividend Income $0.5955
- ------------------------------------------------------------------------------------------
Long-Term Capital Gain $0.7061
- ------------------------------------------------------------------------------------------
TOTAL $1.3016
- ------------------------------------------------------------------------------------------
Annual Report | 11
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 +11.32% +149.67% +222.02%
- ---------------------------------------------------------------------------------------------------
Average Annual Total Return 3 +11.32% +20.08% +12.41%
- ---------------------------------------------------------------------------------------------------
Value of $10,000 Investment 4 $11,132 $24,967 $32,202
- ---------------------------------------------------------------------------------------------------
Total Annual Operating Expenses 5 1.05%
- ---------------------------------------------------------------------------------------------------
CLASS A 1 1-YEAR 5-YEAR 10-YEAR
- ---------------------------------------------------------------------------------------------------
Cumulative Total Return 2 +10.96% +145.53% +210.86%
- ---------------------------------------------------------------------------------------------------
Average Annual Total Return 3 +4.58% +18.27% +11.35%
- ---------------------------------------------------------------------------------------------------
Value of $10,000 Investment 4 $10,458 $23,141 $29,297
- ---------------------------------------------------------------------------------------------------
Total Annual Operating Expenses 5 1.36%
- ---------------------------------------------------------------------------------------------------
CLASS B 1 1-YEAR 5-YEAR INCEPTION (1/1/99)
- ---------------------------------------------------------------------------------------------------
Cumulative Total Return 2 +10.22% +137.52% +202.08%
- ---------------------------------------------------------------------------------------------------
Average Annual Total Return 3 +6.22% +18.69% +13.07%
- ---------------------------------------------------------------------------------------------------
Value of $10,000 Investment 4 $10,622 $23,552 $30,208
- ---------------------------------------------------------------------------------------------------
Total Annual Operating Expenses 5 2.05%
- ---------------------------------------------------------------------------------------------------
CLASS C 1 1-YEAR 5-YEAR 10-YEAR
- ---------------------------------------------------------------------------------------------------
Cumulative Total Return 2 +10.24% +137.55% +191.31%
- ---------------------------------------------------------------------------------------------------
Average Annual Total Return 3 +9.24% +18.89% +11.28%
- ---------------------------------------------------------------------------------------------------
Value of $10,000 Investment 4 $10,924 $23,755 $29,131
- ---------------------------------------------------------------------------------------------------
Total Annual Operating Expenses 5 2.05%
- ---------------------------------------------------------------------------------------------------
CLASS R 1-YEAR 5-YEAR INCEPTION (1/2/02)
- ---------------------------------------------------------------------------------------------------
Cumulative Total Return 2 +10.76% +143.50% +120.40%
- ---------------------------------------------------------------------------------------------------
Average Annual Total Return 3 +10.76% +19.48% +14.09%
- ---------------------------------------------------------------------------------------------------
Value of $10,000 Investment 4 $11,076 $24,350 $22,040
- ---------------------------------------------------------------------------------------------------
Total Annual Operating Expenses 5 1.55%
- ---------------------------------------------------------------------------------------------------
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 (1/1/98-12/31/07) 1
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE GRAPH IN THE PRINTED MATERIAL.]
Date Mutual Discovery Fund S&P 500 6 MSCI World Index 6
1/1/1998 $10,000 $10,000 $10,000
1/31/1998 $10,005 $10,111 $10,280
2/28/1998 $10,519 $10,840 $10,977
3/31/1998 $11,122 $11,395 $11,443
4/30/1998 $11,329 $11,510 $11,556
5/31/1998 $11,482 $11,312 $11,413
6/30/1998 $11,196 $11,771 $11,685
7/31/1998 $10,933 $11,646 $11,668
8/31/1998 $ 9,442 $ 9,962 $10,114
9/30/1998 $ 9,020 $10,600 $10,295
10/31/1998 $ 9,269 $11,463 $11,227
11/30/1998 $ 9,735 $12,157 $11,897
12/31/1998 $ 9,810 $12,858 $12,480
1/31/1999 $ 9,878 $13,396 $12,755
2/28/1999 $ 9,765 $12,979 $12,417
3/31/1999 $10,213 $13,498 $12,936
4/30/1999 $10,901 $14,021 $13,448
5/31/1999 $10,906 $13,690 $12,958
6/30/1999 $11,294 $14,450 $13,564
7/31/1999 $11,167 $13,999 $13,525
8/31/1999 $11,034 $13,929 $13,503
9/30/1999 $10,890 $13,548 $13,374
10/31/1999 $11,115 $14,405 $14,071
11/30/1999 $11,699 $14,698 $14,469
12/31/1999 $12,439 $15,563 $15,642
1/31/2000 $12,392 $14,781 $14,748
2/29/2000 $12,787 $14,502 $14,789
3/31/2000 $13,335 $15,920 $15,814
4/30/2000 $13,188 $15,441 $15,147
5/31/2000 $13,265 $15,124 $14,765
6/30/2000 $13,302 $15,497 $15,264
7/31/2000 $13,473 $15,255 $14,836
8/31/2000 $13,871 $16,203 $15,321
9/30/2000 $13,732 $15,347 $14,508
10/31/2000 $13,839 $15,282 $14,267
11/30/2000 $13,606 $14,078 $13,402
12/31/2000 $14,006 $14,146 $13,621
1/31/2001 $14,435 $14,648 $13,886
2/28/2001 $14,435 $13,313 $12,714
3/31/2001 $14,006 $12,469 $11,881
4/30/2001 $14,413 $13,438 $12,762
5/31/2001 $14,849 $13,528 $12,604
6/30/2001 $14,918 $13,199 $12,211
7/31/2001 $14,888 $13,069 $12,050
8/31/2001 $14,738 $12,251 $11,474
9/30/2001 $13,485 $11,262 $10,464
10/31/2001 $13,523 $11,476 $10,666
11/30/2001 $13,868 $12,357 $11,298
12/31/2001 $14,183 $12,465 $11,371
1/31/2002 $14,230 $12,283 $11,028
2/28/2002 $14,370 $12,046 $10,934
3/31/2002 $14,846 $12,499 $11,419
4/30/2002 $15,103 $11,741 $11,036
5/31/2002 $15,220 $11,655 $11,061
6/30/2002 $14,286 $10,825 $10,393
7/31/2002 $13,344 $ 9,981 $ 9,518
8/31/2002 $13,477 $10,046 $ 9,538
9/30/2002 $12,771 $ 8,955 $ 8,491
10/31/2002 $12,818 $ 9,743 $ 9,119
11/30/2002 $13,006 $10,316 $ 9,613
12/31/2002 $12,898 $ 9,710 $ 9,149
1/31/2003 $12,683 $ 9,456 $ 8,872
2/28/2003 $12,340 $ 9,314 $ 8,720
3/31/2003 $12,396 $ 9,404 $ 8,697
4/30/2003 $13,345 $10,179 $ 9,473
5/31/2003 $14,096 $10,715 $10,019
6/30/2003 $14,336 $10,852 $10,196
7/31/2003 $14,512 $11,043 $10,405
8/31/2003 $14,946 $11,259 $10,633
9/30/2003 $15,026 $11,139 $10,700
10/31/2003 $15,669 $11,769 $11,337
11/30/2003 $16,215 $11,873 $11,513
12/31/2003 $16,967 $12,495 $12,238
1/31/2004 $17,179 $12,725 $12,437
2/29/2004 $17,726 $12,902 $12,649
3/31/2004 $17,661 $12,707 $12,570
4/30/2004 $17,359 $12,508 $12,320
5/31/2004 $17,351 $12,679 $12,441
6/30/2004 $17,681 $12,926 $12,701
7/31/2004 $17,501 $12,498 $12,290
8/31/2004 $17,616 $12,549 $12,349
9/30/2004 $18,091 $12,684 $12,587
10/31/2004 $18,461 $12,878 $12,898
11/30/2004 $19,519 $13,399 $13,581
12/31/2004 $20,258 $13,855 $14,103
1/31/2005 $19,807 $13,518 $13,789
2/28/2005 $20,658 $13,802 $14,232
3/31/2005 $20,483 $13,558 $13,962
4/30/2005 $20,324 $13,300 $13,667
5/31/2005 $20,759 $13,724 $13,920
6/30/2005 $21,207 $13,743 $14,047
7/31/2005 $21,930 $14,254 $14,540
8/31/2005 $22,014 $14,124 $14,657
9/30/2005 $22,636 $14,239 $15,042
10/31/2005 $21,930 $14,001 $14,680
11/30/2005 $22,620 $14,531 $15,177
12/31/2005 $23,437 $14,536 $15,517
1/31/2006 $24,240 $14,921 $16,213
2/28/2006 $24,829 $14,961 $16,196
3/31/2006 $25,766 $15,147 $16,559
4/30/2006 $25,989 $15,351 $17,071
5/31/2006 $25,329 $14,909 $16,503
6/30/2006 $25,384 $14,929 $16,505
7/31/2006 $25,620 $15,021 $16,611
8/31/2006 $26,302 $15,379 $17,051
9/30/2006 $26,557 $15,775 $17,259
10/31/2006 $27,402 $16,289 $17,896
11/30/2006 $28,030 $16,599 $18,344
12/31/2006 $28,928 $16,832 $18,722
1/31/2007 $29,745 $17,086 $18,946
2/28/2007 $29,526 $16,752 $18,856
3/31/2007 $30,390 $16,939 $19,209
4/30/2007 $31,635 $17,690 $20,067
5/31/2007 $32,736 $18,307 $20,649
6/30/2007 $32,657 $18,003 $20,497
7/31/2007 $31,992 $17,445 $20,048
8/31/2007 $31,583 $17,706 $20,041
9/30/2007 $32,410 $18,368 $21,001
10/31/2007 $33,085 $18,661 $21,650
11/30/2007 $32,191 $17,880 $20,775
12/31/2007 $32,202 $17,756 $20,513
AVERAGE ANNUAL TOTAL RETURN
- ----------------------------------------------
CLASS Z 1 12/31/07
- ----------------------------------------------
1-Year +11.32%
- ----------------------------------------------
5-Year +20.08%
- ----------------------------------------------
10-Year +12.41%
- ----------------------------------------------
CLASS A (1/1/98-12/31/07) 1
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE GRAPH IN THE PRINTED MATERIAL.]
Date Mutual Discovery Fund S&P 500 6 MSCI World Index 6
1/1/1998 $ 9,424 $10,000 $10,000
1/31/1998 $ 9,424 $10,111 $10,280
2/28/1998 $ 9,905 $10,840 $10,977
3/31/1998 $10,470 $11,395 $11,443
4/30/1998 $10,661 $11,510 $11,556
5/31/1998 $10,801 $11,312 $11,413
6/30/1998 $10,531 $11,771 $11,685
7/31/1998 $10,280 $11,646 $11,668
8/31/1998 $ 8,872 $ 9,962 $10,114
9/30/1998 $ 8,472 $10,600 $10,295
10/31/1998 $ 8,703 $11,463 $11,227
11/30/1998 $ 9,138 $12,157 $11,897
12/31/1998 $ 9,201 $12,858 $12,480
1/31/1999 $ 9,266 $13,396 $12,755
2/28/1999 $ 9,153 $12,979 $12,417
3/31/1999 $ 9,576 $13,498 $12,936
4/30/1999 $10,213 $14,021 $13,448
5/31/1999 $10,218 $13,690 $12,958
6/30/1999 $10,581 $14,450 $13,564
7/31/1999 $10,461 $13,999 $13,525
8/31/1999 $10,325 $13,929 $13,503
9/30/1999 $10,189 $13,548 $13,374
10/31/1999 $10,396 $14,405 $14,071
11/30/1999 $10,940 $14,698 $14,469
12/31/1999 $11,629 $15,563 $15,642
1/31/2000 $11,579 $14,781 $14,748
2/29/2000 $11,950 $14,502 $14,789
3/31/2000 $12,459 $15,920 $15,814
4/30/2000 $12,315 $15,441 $15,147
5/31/2000 $12,387 $15,124 $14,765
6/30/2000 $12,417 $15,497 $15,264
7/31/2000 $12,571 $15,255 $14,836
8/31/2000 $12,939 $16,203 $15,321
9/30/2000 $12,803 $15,347 $14,508
10/31/2000 $12,903 $15,282 $14,267
11/30/2000 $12,678 $14,078 $13,402
12/31/2000 $13,055 $14,146 $13,621
1/31/2001 $13,450 $14,648 $13,886
2/28/2001 $13,443 $13,313 $12,714
3/31/2001 $13,034 $12,469 $11,881
4/30/2001 $13,408 $13,438 $12,762
5/31/2001 $13,811 $13,528 $12,604
6/30/2001 $13,871 $13,199 $12,211
7/31/2001 $13,843 $13,069 $12,050
8/31/2001 $13,703 $12,251 $11,474
9/30/2001 $12,529 $11,262 $10,464
10/31/2001 $12,564 $11,476 $10,666
11/30/2001 $12,880 $12,357 $11,298
12/31/2001 $13,168 $12,465 $11,371
1/31/2002 $13,212 $12,283 $11,028
2/28/2002 $13,335 $12,046 $10,934
3/31/2002 $13,772 $12,499 $11,419
4/30/2002 $14,005 $11,741 $11,036
5/31/2002 $14,107 $11,655 $11,061
6/30/2002 $13,238 $10,825 $10,393
7/31/2002 $12,366 $ 9,981 $ 9,518
8/31/2002 $12,483 $10,046 $ 9,538
9/30/2002 $11,824 $ 8,955 $ 8,491
10/31/2002 $11,868 $ 9,743 $ 9,119
11/30/2002 $12,036 $10,316 $ 9,613
12/31/2002 $11,932 $ 9,710 $ 9,149
1/31/2003 $11,731 $ 9,456 $ 8,872
2/28/2003 $11,412 $ 9,314 $ 8,720
3/31/2003 $11,464 $ 9,404 $ 8,697
4/30/2003 $12,333 $10,179 $ 9,473
5/31/2003 $13,024 $10,715 $10,019
6/30/2003 $13,236 $10,852 $10,196
7/31/2003 $13,401 $11,043 $10,405
8/31/2003 $13,797 $11,259 $10,633
9/30/2003 $13,872 $11,139 $10,700
10/31/2003 $14,455 $11,769 $11,337
11/30/2003 $14,955 $11,873 $11,513
12/31/2003 $15,646 $12,495 $12,238
1/31/2004 $15,836 $12,725 $12,437
2/29/2004 $16,328 $12,902 $12,649
3/31/2004 $16,267 $12,707 $12,570
4/30/2004 $15,987 $12,508 $12,320
5/31/2004 $15,980 $12,679 $12,441
6/30/2004 $16,275 $12,926 $12,701
7/31/2004 $16,107 $12,498 $12,290
8/31/2004 $16,206 $12,549 $12,349
9/30/2004 $16,640 $12,684 $12,587
10/31/2004 $16,968 $12,878 $12,898
11/30/2004 $17,935 $13,399 $13,581
12/31/2004 $18,616 $13,855 $14,103
1/31/2005 $18,191 $13,518 $13,789
2/28/2005 $18,972 $13,802 $14,232
3/31/2005 $18,802 $13,558 $13,962
4/30/2005 $18,655 $13,300 $13,667
5/31/2005 $19,041 $13,724 $13,920
6/30/2005 $19,451 $13,743 $14,047
7/31/2005 $20,105 $14,254 $14,540
8/31/2005 $20,175 $14,124 $14,657
9/30/2005 $20,744 $14,239 $15,042
10/31/2005 $20,090 $14,001 $14,680
11/30/2005 $20,712 $14,531 $15,177
12/31/2005 $21,463 $14,536 $15,517
1/31/2006 $22,188 $14,921 $16,213
2/28/2006 $22,716 $14,961 $16,196
3/31/2006 $23,573 $15,147 $16,559
4/30/2006 $23,763 $15,351 $17,071
5/31/2006 $23,161 $14,909 $16,503
6/30/2006 $23,206 $14,929 $16,505
7/31/2006 $23,416 $15,021 $16,611
8/31/2006 $24,029 $15,379 $17,051
9/30/2006 $24,256 $15,775 $17,259
10/31/2006 $25,020 $16,289 $17,896
11/30/2006 $25,592 $16,599 $18,344
12/31/2006 $26,403 $16,832 $18,722
1/31/2007 $27,139 $17,086 $18,946
2/28/2007 $26,937 $16,752 $18,856
3/31/2007 $27,717 $16,939 $19,209
4/30/2007 $28,846 $17,690 $20,067
5/31/2007 $29,836 $18,307 $20,649
6/30/2007 $29,766 $18,003 $20,497
7/31/2007 $29,152 $17,445 $20,048
8/31/2007 $28,766 $17,706 $20,041
9/30/2007 $29,511 $18,368 $21,001
10/31/2007 $30,116 $18,661 $21,650
11/30/2007 $29,292 $17,880 $20,775
12/31/2007 $29,297 $17,756 $20,513
AVERAGE ANNUAL TOTAL RETURN
- ----------------------------------------------
CLASS A 1 12/31/07
- ----------------------------------------------
1-Year +4.58%
- ----------------------------------------------
5-Year +18.27%
- ----------------------------------------------
10-Year +11.35%
- ----------------------------------------------
Annual Report | 13
Performance Summary (CONTINUED)
AVERAGE ANNUAL TOTAL RETURN
- ----------------------------------------------
CLASS B 1 12/31/07
- ----------------------------------------------
1-Year +6.22%
- ----------------------------------------------
5-Year +18.69%
- ----------------------------------------------
Since Inception (1/1/99) +13.07%
- ----------------------------------------------
CLASS B (1/1/99-12/31/07) 1
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE GRAPH IN THE PRINTED MATERIAL.]
Date Mutual Discovery Fund S&P 500 6 MSCI World Index 6
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 $10,833 $10,820
9/30/1999 $11,018 $10,536 $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 $11,278 $11,851
3/31/2000 $13,420 $12,382 $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 $11,864 $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 $11,002 $10,915
1/31/2001 $14,411 $11,392 $11,127
2/28/2001 $14,396 $10,354 $10,188
3/31/2001 $13,961 $ 9,698 $ 9,520
4/30/2001 $14,351 $10,451 $10,227
5/31/2001 $14,771 $10,521 $10,100
6/30/2001 $14,832 $10,265 $ 9,785
7/31/2001 $14,787 $10,164 $ 9,656
8/31/2001 $14,627 $ 9,528 $ 9,194
9/30/2001 $13,373 $ 8,759 $ 8,385
10/31/2001 $13,403 $ 8,926 $ 8,547
11/30/2001 $13,730 $ 9,610 $ 9,054
12/31/2001 $14,028 $ 9,694 $ 9,112
1/31/2002 $14,068 $ 9,553 $ 8,837
2/28/2002 $14,193 $ 9,369 $ 8,761
3/31/2002 $14,656 $ 9,721 $ 9,151
4/30/2002 $14,892 $ 9,132 $ 8,843
5/31/2002 $14,994 $ 9,064 $ 8,864
6/30/2002 $14,061 $ 8,419 $ 8,328
7/31/2002 $13,121 $ 7,763 $ 7,627
8/31/2002 $13,247 $ 7,813 $ 7,643
9/30/2002 $12,536 $ 6,964 $ 6,804
10/31/2002 $12,576 $ 7,577 $ 7,307
11/30/2002 $12,749 $ 8,023 $ 7,703
12/31/2002 $12,633 $ 7,552 $ 7,331
1/31/2003 $12,410 $ 7,354 $ 7,110
2/28/2003 $12,068 $ 7,244 $ 6,988
3/31/2003 $12,115 $ 7,314 $ 6,969
4/30/2003 $13,032 $ 7,917 $ 7,591
5/31/2003 $13,749 $ 8,334 $ 8,029
6/30/2003 $13,971 $ 8,440 $ 8,170
7/31/2003 $14,131 $ 8,589 $ 8,338
8/31/2003 $14,540 $ 8,756 $ 8,520
9/30/2003 $14,612 $ 8,663 $ 8,574
10/31/2003 $15,221 $ 9,153 $ 9,085
11/30/2003 $15,742 $ 9,234 $ 9,225
12/31/2003 $16,452 $ 9,718 $ 9,806
1/31/2004 $16,646 $ 9,897 $ 9,966
2/29/2004 $17,155 $10,034 $10,136
3/31/2004 $17,082 $ 9,883 $10,073
4/30/2004 $16,775 $ 9,728 $ 9,872
5/31/2004 $16,759 $ 9,861 $ 9,969
6/30/2004 $17,058 $10,053 $10,178
7/31/2004 $16,871 $ 9,720 $ 9,848
8/31/2004 $16,969 $ 9,759 $ 9,895
9/30/2004 $17,416 $ 9,865 $10,086
10/31/2004 $17,749 $10,016 $10,335
11/30/2004 $18,757 $10,421 $10,883
12/31/2004 $19,450 $10,776 $11,301
1/31/2005 $18,998 $10,513 $11,049
2/28/2005 $19,803 $10,734 $11,404
3/31/2005 $19,614 $10,544 $11,188
4/30/2005 $19,450 $10,344 $10,951
5/31/2005 $19,844 $10,673 $11,154
6/30/2005 $20,261 $10,689 $11,256
7/31/2005 $20,931 $11,086 $11,651
8/31/2005 $20,997 $10,985 $11,745
9/30/2005 $21,576 $11,074 $12,053
10/31/2005 $20,881 $10,889 $11,763
11/30/2005 $21,518 $11,301 $12,161
12/31/2005 $22,286 $11,305 $12,434
1/31/2006 $23,027 $11,604 $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 $11,595 $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 $11,961 $13,663
9/30/2006 $25,059 $12,269 $13,830
10/31/2006 $25,831 $12,669 $14,341
11/30/2006 $26,409 $12,909 $14,699
12/31/2006 $27,224 $13,091 $15,002
1/31/2007 $27,984 $13,289 $15,182
2/28/2007 $27,776 $13,029 $15,109
3/31/2007 $28,579 $13,174 $15,392
4/30/2007 $29,745 $13,758 $16,080
5/31/2007 $30,766 $14,238 $16,547
6/30/2007 $30,692 $14,001 $16,425
7/31/2007 $30,059 $13,567 $16,064
8/31/2007 $29,663 $13,771 $16,059
9/30/2007 $30,431 $14,286 $16,828
10/31/2007 $31,055 $14,513 $17,348
11/30/2007 $30,204 $13,906 $16,647
12/31/2007 $30,208 $13,810 $16,437
AVERAGE ANNUAL TOTAL RETURN
- ----------------------------------------------
CLASS C 1 12/31/07
- ----------------------------------------------
1-Year +9.24%
- ----------------------------------------------
5-Year +18.89%
- ----------------------------------------------
10-Year +11.28%
- ----------------------------------------------
CLASS C (1/1/98-12/31/07) 1
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE GRAPH IN THE PRINTED MATERIAL.]
Date Mutual Discovery Fund S&P 500 6 MSCI World Index 6
1/1/1998 $10,000 $10,000 $10,000
1/31/1998 $ 9,995 $10,111 $10,280
2/28/1998 $10,495 $10,840 $10,977
3/31/1998 $11,091 $11,395 $11,443
4/30/1998 $11,288 $11,510 $11,556
5/31/1998 $11,426 $11,312 $11,413
6/30/1998 $11,139 $11,771 $11,685
7/31/1998 $10,866 $11,646 $11,668
8/31/1998 $ 9,375 $ 9,962 $10,114
9/30/1998 $ 8,951 $10,600 $10,295
10/31/1998 $ 9,190 $11,463 $11,227
11/30/1998 $ 9,642 $12,157 $11,897
12/31/1998 $ 9,708 $12,858 $12,480
1/31/1999 $ 9,765 $13,396 $12,755
2/28/1999 $ 9,646 $12,979 $12,417
3/31/1999 $10,082 $13,498 $12,936
4/30/1999 $10,749 $14,021 $13,448
5/31/1999 $10,749 $13,690 $12,958
6/30/1999 $11,126 $14,450 $13,564
7/31/1999 $10,988 $13,999 $13,525
8/31/1999 $10,845 $13,929 $13,503
9/30/1999 $10,695 $13,548 $13,374
10/31/1999 $10,908 $14,405 $14,071
11/30/1999 $11,470 $14,698 $14,469
12/31/1999 $12,184 $15,563 $15,642
1/31/2000 $12,131 $14,781 $14,748
2/29/2000 $12,509 $14,502 $14,789
3/31/2000 $13,033 $15,920 $15,814
4/30/2000 $12,882 $15,441 $15,147
5/31/2000 $12,946 $15,124 $14,765
6/30/2000 $12,968 $15,497 $15,264
7/31/2000 $13,123 $15,255 $14,836
8/31/2000 $13,496 $16,203 $15,321
9/30/2000 $13,353 $15,347 $14,508
10/31/2000 $13,447 $15,282 $14,267
11/30/2000 $13,210 $14,078 $13,402
12/31/2000 $13,588 $14,146 $13,621
1/31/2001 $13,994 $14,648 $13,886
2/28/2001 $13,979 $13,313 $12,714
3/31/2001 $13,552 $12,469 $11,881
4/30/2001 $13,936 $13,438 $12,762
5/31/2001 $14,341 $13,528 $12,604
6/30/2001 $14,397 $13,199 $12,211
7/31/2001 $14,360 $13,069 $12,050
8/31/2001 $14,199 $12,251 $11,474
9/30/2001 $12,982 $11,262 $10,464
10/31/2001 $13,011 $11,476 $10,666
11/30/2001 $13,326 $12,357 $11,298
12/31/2001 $13,622 $12,465 $11,371
1/31/2002 $13,660 $12,283 $11,028
2/28/2002 $13,781 $12,046 $10,934
3/31/2002 $14,227 $12,499 $11,419
4/30/2002 $14,453 $11,741 $11,036
5/31/2002 $14,559 $11,655 $11,061
6/30/2002 $13,651 $10,825 $10,393
7/31/2002 $12,738 $ 9,981 $ 9,518
8/31/2002 $12,860 $10,046 $ 9,538
9/30/2002 $12,176 $ 8,955 $ 8,491
10/31/2002 $12,206 $ 9,743 $ 9,119
11/30/2002 $12,381 $10,316 $ 9,613
12/31/2002 $12,264 $ 9,710 $ 9,149
1/31/2003 $12,049 $ 9,456 $ 8,872
2/28/2003 $11,720 $ 9,314 $ 8,720
3/31/2003 $11,758 $ 9,404 $ 8,697
4/30/2003 $12,646 $10,179 $ 9,473
5/31/2003 $13,351 $10,715 $10,019
6/30/2003 $13,562 $10,852 $10,196
7/31/2003 $13,716 $11,043 $10,405
8/31/2003 $14,116 $11,259 $10,633
9/30/2003 $14,186 $11,139 $10,700
10/31/2003 $14,778 $11,769 $11,337
11/30/2003 $15,279 $11,873 $11,513
12/31/2003 $15,979 $12,495 $12,238
1/31/2004 $16,165 $12,725 $12,437
2/29/2004 $16,662 $12,902 $12,649
3/31/2004 $16,584 $12,707 $12,570
4/30/2004 $16,289 $12,508 $12,320
5/31/2004 $16,274 $12,679 $12,441
6/30/2004 $16,567 $12,926 $12,701
7/31/2004 $16,387 $12,498 $12,290
8/31/2004 $16,481 $12,549 $12,349
9/30/2004 $16,910 $12,684 $12,587
10/31/2004 $17,238 $12,878 $12,898
11/30/2004 $18,205 $13,399 $13,581
12/31/2004 $18,881 $13,855 $14,103
1/31/2005 $18,440 $13,518 $13,789
2/28/2005 $19,228 $13,802 $14,232
3/31/2005 $19,047 $13,558 $13,962
4/30/2005 $18,881 $13,300 $13,667
5/31/2005 $19,267 $13,724 $13,920
6/30/2005 $19,668 $13,743 $14,047
7/31/2005 $20,318 $14,254 $14,540
8/31/2005 $20,382 $14,124 $14,657
9/30/2005 $20,945 $14,239 $15,042
10/31/2005 $20,271 $14,001 $14,680
11/30/2005 $20,889 $14,531 $15,177
12/31/2005 $21,631 $14,536 $15,517
1/31/2006 $22,358 $14,921 $16,213
2/28/2006 $22,876 $14,961 $16,196
3/31/2006 $23,720 $15,147 $16,559
4/30/2006 $23,903 $15,351 $17,071
5/31/2006 $23,277 $14,909 $16,503
6/30/2006 $23,311 $14,929 $16,505
7/31/2006 $23,507 $15,021 $16,611
8/31/2006 $24,111 $15,379 $17,051
9/30/2006 $24,324 $15,775 $17,259
10/31/2006 $25,082 $16,289 $17,896
11/30/2006 $25,635 $16,599 $18,344
12/31/2006 $26,425 $16,832 $18,722
1/31/2007 $27,149 $17,086 $18,946
2/28/2007 $26,937 $16,752 $18,856
3/31/2007 $27,706 $16,939 $19,209
4/30/2007 $28,809 $17,690 $20,067
5/31/2007 $29,789 $18,307 $20,649
6/30/2007 $29,696 $18,003 $20,497
7/31/2007 $29,068 $17,445 $20,048
8/31/2007 $28,662 $17,706 $20,041
9/30/2007 $29,395 $18,368 $21,001
10/31/2007 $29,979 $18,661 $21,650
11/30/2007 $29,139 $17,880 $20,775
12/31/2007 $29,131 $17,756 $20,513
14 | Annual Report
Performance Summary (CONTINUED)
CLASS R (1/1/02-12/31/07)
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE GRAPH IN THE PRINTED MATERIAL.]
Date Mutual Discovery Fund S&P 500 6 MSCI World Index 6
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 $10,027 $10,043
4/30/2002 $10,630 $ 9,420 $ 9,705
5/31/2002 $10,708 $ 9,350 $ 9,728
6/30/2002 $10,050 $ 8,684 $ 9,140
7/31/2002 $ 9,382 $ 8,007 $ 8,370
8/31/2002 $ 9,471 $ 8,060 $ 8,388
9/30/2002 $ 8,970 $ 7,184 $ 7,467
10/31/2002 $ 9,004 $ 7,816 $ 8,020
11/30/2002 $ 9,132 $ 8,276 $ 8,454
12/31/2002 $ 9,051 $ 7,790 $ 8,046
1/31/2003 $ 8,893 $ 7,586 $ 7,803
2/28/2003 $ 8,655 $ 7,472 $ 7,669
3/31/2003 $ 8,689 $ 7,545 $ 7,648
4/30/2003 $ 9,351 $ 8,166 $ 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 $ 8,859 $ 9,151
8/31/2003 $10,454 $ 9,032 $ 9,351
9/30/2003 $10,505 $ 8,936 $ 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 $10,172 $10,941
6/30/2004 $12,316 $10,370 $11,170
7/31/2004 $12,189 $10,026 $10,808
8/31/2004 $12,258 $10,067 $10,860
9/30/2004 $12,589 $10,176 $11,069
10/31/2004 $12,838 $10,332 $11,343
11/30/2004 $13,568 $10,750 $11,944
12/31/2004 $14,076 $11,115 $12,403
1/31/2005 $13,753 $10,844 $12,126
2/28/2005 $14,341 $11,073 $12,516
3/31/2005 $14,211 $10,877 $12,279
4/30/2005 $14,100 $10,670 $12,019
5/31/2005 $14,394 $11,010 $12,242
6/30/2005 $14,699 $11,025 $12,353
7/31/2005 $15,190 $11,435 $12,788
8/31/2005 $15,243 $11,331 $12,890
9/30/2005 $15,669 $11,423 $13,228
10/31/2005 $15,178 $11,232 $12,910
11/30/2005 $15,646 $11,657 $13,347
12/31/2005 $16,207 $11,661 $13,646
1/31/2006 $16,751 $11,970 $14,258
2/28/2006 $17,152 $12,003 $14,243
3/31/2006 $17,791 $12,152 $14,563
4/30/2006 $17,935 $12,315 $15,013
5/31/2006 $17,478 $11,961 $14,513
6/30/2006 $17,510 $11,977 $14,515
7/31/2006 $17,664 $12,051 $14,609
8/31/2006 $18,123 $12,338 $14,995
9/30/2006 $18,289 $12,655 $15,179
10/31/2006 $18,870 $13,068 $15,739
11/30/2006 $19,291 $13,316 $16,132
12/31/2006 $19,898 $13,503 $16,465
1/31/2007 $20,450 $13,707 $16,662
2/28/2007 $20,297 $13,439 $16,582
3/31/2007 $20,882 $13,590 $16,893
4/30/2007 $21,726 $14,192 $17,648
5/31/2007 $22,477 $14,687 $18,160
6/30/2007 $22,408 $14,443 $18,026
7/31/2007 $21,949 $13,995 $17,631
8/31/2007 $21,656 $14,205 $17,625
9/30/2007 $22,215 $14,736 $18,469
10/31/2007 $22,667 $14,970 $19,040
11/30/2007 $22,042 $14,344 $18,270
12/31/2007 $22,040 $14,245 $18,040
AVERAGE ANNUAL TOTAL RETURN
- ----------------------------------------------
CLASS R 12/31/07
- ----------------------------------------------
1-Year +10.76%
- ----------------------------------------------
5-Year +19.48%
- ----------------------------------------------
Since Inception (1/1/02) +14.09%
- ----------------------------------------------
ENDNOTES
VALUE SECURITIES MAY NOT INCREASE IN PRICE AS ANTICIPATED OR MAY DECLINE FURTHER
IN VALUE. THE FUND'S INVESTMENTS IN FOREIGN SECURITIES INVOLVE CERTAIN RISKS
INCLUDING CURRENCY FLUCTUATIONS, AND ECONOMIC AND POLITICAL UNCERTAINTIES.
SMALLER-COMPANY STOCKS HAVE 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'S INVESTMENTS IN COMPANIES ENGAGED IN MERGERS,
REORGANIZATIONS OR LIQUIDATIONS ALSO INVOLVE SPECIAL RISKS AS PENDING DEALS MAY
NOT BE COMPLETED ON TIME OR ON FAVORABLE TERMS. THE FUND MAY INVEST IN
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. Figures are as stated in the Fund's prospectus current as of the date of this
report.
6. 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.
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 Fund's 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 7/1/07 VALUE 12/31/07 PERIOD* 7/1/07-12/31/07
- --------------------------------------------------------------------------------------------------------
Actual $ 1,000 $ 986.10 $ 5.06
- --------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $ 1,000 $ 1,020.11 $ 5.14
- --------------------------------------------------------------------------------------------------------
CLASS A
- --------------------------------------------------------------------------------------------------------
Actual $ 1,000 $ 984.30 $ 6.60
- --------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $ 1,000 $ 1,018.55 $ 6.72
- --------------------------------------------------------------------------------------------------------
CLASS B
- --------------------------------------------------------------------------------------------------------
Actual $ 1,000 $ 981.10 $ 10.04
- --------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $ 1,000 $ 1,015.07 $ 10.21
- --------------------------------------------------------------------------------------------------------
CLASS C
- --------------------------------------------------------------------------------------------------------
Actual $ 1,000 $ 981.00 $ 10.04
- --------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $ 1,000 $ 1,015.07 $ 10.21
- --------------------------------------------------------------------------------------------------------
CLASS R
- --------------------------------------------------------------------------------------------------------
Actual $ 1,000 $ 983.60 $ 7.55
- --------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $ 1,000 $ 1,017.59 $ 7.68
- --------------------------------------------------------------------------------------------------------
* Expenses are calculated using the most recent six-month expense ratio
annualized for each class (Z: 1.01%; A: 1.32%; B: 2.01%; C: 2.01%; and R:
1.51%), 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 2007 2006 2005 2004 2003
---------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ................... $ 30.45 $ 26.28 $ 24.26 $ 20.81 $ 16.16
---------------------------------------------------------------------------
Income from investment operations a:
Net investment income b ........................... 0.69 0.67 0.37 0.41 0.28
Net realized and unrealized gains (losses) ........ 2.76 5.36 3.43 3.58 4.80
---------------------------------------------------------------------------
Total from investment operations ..................... 3.45 6.03 3.80 3.99 5.08
---------------------------------------------------------------------------
Less distributions from:
Net investment income ............................. (0.74) (0.63) (0.44) (0.54) (0.43)
Net realized gains ................................ (0.71) (1.23) (1.34) -- --
---------------------------------------------------------------------------
Total distributions .................................. (1.45) (1.86) (1.78) (0.54) (0.43)
---------------------------------------------------------------------------
Redemption fees ...................................... -- d -- d -- d -- d --
---------------------------------------------------------------------------
Net asset value, end of year ......................... $ 32.45 $ 30.45 $ 26.28 $ 24.26 $ 20.81
===========================================================================
Total return ......................................... 11.32% 23.43% 15.70% 19.39% 31.55%
RATIOS TO AVERAGE NET ASSETS
Expenses c ........................................... 1.01% e 1.05% e 1.07% e 1.07% e 1.11%
Expenses - excluding dividend expense on securities
sold short ........................................ 1.01% e 1.02% e 1.04% e 1.06% e 1.08%
Net investment income ................................ 2.09% 2.28% 1.42% 1.87% 1.55%
SUPPLEMENTAL DATA
Net assets, end of year (000's) ...................... $4,720,388 $3,923,802 $3,033,756 $2,578,585 $2,168,161
Portfolio turnover rate .............................. 25.12% 22.27% 25.69% 34.34% 46.34%
a The amount shown for a share outstanding throughout the period may not
correlate with the Statement of Operations for the period due to timing of sales
and repurchases 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 2007 2006 2005 2004 2003
---------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ................... $ 30.14 $ 26.04 $ 24.07 $ 20.67 $ 16.06
---------------------------------------------------------------------------
Income from investment operations a:
Net investment income b ........................... 0.58 0.55 0.27 0.33 0.21
Net realized and unrealized gains (losses) ........ 2.73 5.34 3.41 3.54 4.78
---------------------------------------------------------------------------
Total from investment operations ..................... 3.31 5.89 3.68 3.87 4.99
---------------------------------------------------------------------------
Less distributions from:
Net investment income ............................. (0.65) (0.56) (0.37) (0.47) (0.38)
Net realized gains ................................ (0.71) (1.23) (1.34) -- --
---------------------------------------------------------------------------
Total distributions .................................. (1.36) (1.79) (1.71) (0.47) (0.38)
---------------------------------------------------------------------------
Redemption fees ...................................... -- e -- e -- e -- e --
---------------------------------------------------------------------------
Net asset value, end of year ......................... $ 32.09 $ 30.14 $ 26.04 $ 24.07 $ 20.67
===========================================================================
Total return c ....................................... 10.96% 23.02% 15.29% 18.98% 31.13%
RATIOS TO AVERAGE NET ASSETS
Expenses d ........................................... 1.32% f 1.36% f 1.42% f 1.42% f 1.46%
Expenses - excluding dividend expense on securities
sold short ........................................ 1.32% f 1.33% f 1.39% f 1.41% f 1.43%
Net investment income ................................ 1.78% 1.97% 1.07% 1.52% 1.20%
SUPPLEMENTAL DATA
Net assets, end of year (000's) ...................... $8,913,527 $6,128,353 $3,545,288 $ 2,106,695 $1,439,579
Portfolio turnover rate .............................. 25.12% 22.27% 25.69% 34.34% 46.34%
a The amount shown for a share outstanding throughout the period may not
correlate with the Statement of Operations for the period due to timing of sales
and repurchases 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 2007 2006 2005 2004 2003
---------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ................... $ 29.55 $ 25.57 $ 23.67 $ 20.35 $ 15.85
---------------------------------------------------------------------------
Income from investment operations a:
Net investment income b ........................... 0.36 0.38 0.11 0.18 0.09
Net realized and unrealized gains (losses) ........ 2.67 5.19 3.33 3.49 4.69
---------------------------------------------------------------------------
Total from investment operations ..................... 3.03 5.57 3.44 3.67 4.78
---------------------------------------------------------------------------
Less distributions from:
Net investment income ............................. (0.41) (0.36) (0.20) (0.35) (0.28)
Net realized gains ................................ (0.71) (1.23) (1.34) -- --
---------------------------------------------------------------------------
Total distributions .................................. (1.12) (1.59) (1.54) (0.35) (0.28)
---------------------------------------------------------------------------
Redemption fees ...................................... -- e -- e -- e -- e --
---------------------------------------------------------------------------
Net asset value, end of year ......................... $ 31.46 $ 29.55 $ 25.57 $ 23.67 $ 20.35
===========================================================================
Total return c ....................................... 10.22% 22.16% 14.59% 18.22% 30.22%
RATIOS TO AVERAGE NET ASSETS
Expenses d ........................................... 2.01% f 2.05% f 2.07% f 2.07% f 2.11%
Expenses - excluding dividend expense on securities
sold short ........................................ 2.01% f 2.02% f 2.04% f 2.06% f 2.08%
Net investment income ................................ 1.09% 1.28% 0.42% 0.87% 0.55%
SUPPLEMENTAL DATA
Net assets, end of year (000's) ...................... $ 276,175 $ 274,181 $225,158 $ 186,841 $ 115,801
Portfolio turnover rate .............................. 25.12% 22.27% 25.69% 34.34% 46.34%
a The amount shown for a share outstanding throughout the period may not
correlate with the Statement of Operations for the period due to timing of sales
and repurchases 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 2007 2006 2005 2004 2003
---------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ................... $ 29.93 $ 25.90 $ 23.97 $ 20.59 $ 16.02
---------------------------------------------------------------------------
Income from investment operations a:
Net investment income b ........................... 0.36 0.36 0.11 0.19 0.10
Net realized and unrealized gains (losses) ........ 2.70 5.28 3.38 3.53 4.73
---------------------------------------------------------------------------
Total from investment operations ..................... 3.06 5.64 3.49 3.72 4.83
---------------------------------------------------------------------------
Less distributions from:
Net investment income ............................. (0.44) (0.38) (0.22) (0.34) (0.26)
Net realized gains ................................ (0.71) (1.23) (1.34) -- --
---------------------------------------------------------------------------
Total distributions .................................. (1.15) (1.61) (1.56) (0.34) (0.26)
---------------------------------------------------------------------------
Redemption fees ...................................... -- e -- e -- e -- e --
---------------------------------------------------------------------------
Net asset value, end of year ......................... $ 31.84 $ 29.93 $ 25.90 $ 23.97 $ 20.59
===========================================================================
Total return c ....................................... 10.24% 22.17% 14.56% 18.17% 30.29%
RATIOS TO AVERAGE NET ASSETS
Expenses d ........................................... 2.01% f 2.05% f 2.07% f 2.07% f 2.11%
Expenses - excluding dividend expense on securities
sold short ........................................ 2.01% f 2.02% f 2.04% f 2.06% f 2.08%
Net investment income ................................ 1.09% 1.28% 0.42% 0.87% 0.55%
SUPPLEMENTAL DATA
Net assets, end of year (000's) ...................... $3,075,593 $2,242,348 $1,435,702 $ 968,934 $ 725,489
Portfolio turnover rate .............................. 25.12% 22.27% 25.69% 34.34% 46.34%
a The amount shown for a share outstanding throughout the period may not
correlate with the Statement of Operations for the period due to timing of sales
and repurchases 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 2007 2006 2005 2004 2003
---------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ................... $ 29.93 $ 25.88 $ 23.94 $ 20.57 $ 16.01
---------------------------------------------------------------------------
Income from investment operations a:
Net investment income b ........................... 0.51 0.50 0.22 0.29 0.17
Net realized and unrealized gains (losses) ........ 2.72 5.29 3.40 3.54 4.76
---------------------------------------------------------------------------
Total from investment operations ..................... 3.23 5.79 3.62 3.83 4.93
---------------------------------------------------------------------------
Less distributions from:
Net investment income ............................. (0.60) (0.51) (0.34) (0.46) (0.37)
Net realized gains ................................ (0.71) (1.23) (1.34) -- --
---------------------------------------------------------------------------
Total distributions .................................. (1.31) (1.74) (1.68) (0.46) (0.37)
---------------------------------------------------------------------------
Redemption fees ...................................... -- e -- e -- e -- e --
---------------------------------------------------------------------------
Net asset value, end of year ......................... $ 31.85 $ 29.93 $ 25.88 $ 23.94 $ 20.57
===========================================================================
Total return c ....................................... 10.76% 22.78% 15.13% 18.84% 30.87%
RATIOS TO AVERAGE NET ASSETS
Expenses d ........................................... 1.51% f 1.55% f 1.57% f 1.57% f 1.61%
Expenses - excluding dividend expense on securities
sold short ........................................ 1.51% f 1.52% f 1.54% f 1.56% f 1.58%
Net investment income ................................ 1.59% 1.78% 0.92% 1.37% 1.05%
SUPPLEMENTAL DATA
Net assets, end of year (000's) ...................... $ 275,002 $ 175,790 $ 99,501 $ 46,690 $ 19,546
Portfolio turnover rate .............................. 25.12% 22.27% 25.69% 34.34% 46.34%
a The amount shown for a share outstanding throughout the period may not
correlate with the Statement of Operations for the period due to timing of sales
and repurchases 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 Discovery Fund
STATEMENT OF INVESTMENTS, DECEMBER 31, 2007
- ------------------------------------------------------------------------------------------------------------------------------------
SHARES/WARRANTS/
COUNTRY CONTRACTS VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS 85.9%
COMMON STOCKS AND OTHER EQUITY INTERESTS 83.8%
AIRLINES 0.4%
a ACE Aviation Holdings Inc., A ................................. Canada 1,277,511 $ 36,445,219
a,b ACE Aviation Holdings Inc., A, 144A ........................... Canada 64,416 1,837,679
a Northwest Airlines Corp. ...................................... United States 1,754,015 25,450,758
a,c Northwest Airlines Corp., Contingent Distribution ............. United States 69,160,000 2,334,150
------------------
66,067,806
------------------
AUTO COMPONENTS 0.0% d
a,c Collins & Aikman Products Co., Contingent Distribution ........ United States 1,970,181 871,805
------------------
AUTOMOBILES 0.4%
Hero Honda Motors Ltd. ........................................ India 1,042,903 18,464,187
a,e,f,g,h International Automotive Components Group Brazil LLC .......... Brazil 3,204,016 22,255,512
a,e,f,g,h International Automotive Components Group Japan LLC ........... Japan 650,533 5,833,592
a,e,g,h International Automotive Components Group LLC ................. Luxembourg 13,618,870 14,448,259
a,e,g,h International Automotive Components Group NA LLC .............. United States 11,533,275 15,858,253
------------------
76,859,803
------------------
BEVERAGES 4.7%
Brown-Forman Corp., A ......................................... United States 143,200 10,717,088
Brown-Forman Corp., B ......................................... United States 391,650 29,025,181
Carlsberg AS, A ............................................... Denmark 113,300 12,927,664
Carlsberg AS, B ............................................... Denmark 2,348,253 283,564,361
Fomento Economico Mexicano SAB de CV, ADR ..................... Mexico 3,150,684 120,261,608
Lotte Chilsung Beverage Co. Ltd. .............................. South Korea 55,692 62,412,166
Pernod Ricard SA .............................................. France 1,303,498 300,747,266
------------------
819,655,334
------------------
BUILDING PRODUCTS 0.7%
a Armstrong World Industries Inc. ............................... United States 199,839 8,015,542
a,c Armstrong World Industries Inc., Contingent Distribution ...... United States 22,185,050 83,194
KCC Corp. ..................................................... South Korea 160,170 90,176,369
a Owens Corning Inc. ............................................ United States 750,622 15,177,577
------------------
113,452,682
------------------
CAPITAL MARKETS 1.1%
Legg Mason Inc. ............................................... United States 852,120 62,332,578
Marfin Investment Group Holdings SA ........................... Greece 14,276,740 123,758,474
------------------
186,091,052
------------------
CHEMICALS 2.2%
a,c Dow Corning Corp., Contingent Distribution .................... United States 11,430,153 5,829,378
Linde AG ...................................................... Germany 1,662,431 219,534,948
Sika AG ....................................................... Switzerland 85,406 160,984,130
------------------
386,348,456
------------------
COMMERCIAL BANKS 8.3%
a Banco Popolare SpA ............................................ Italy 7,825,844 173,136,979
Bank of Ireland ............................................... Ireland 1,707,777 25,321,202
BNP Paribas SA ................................................ France 1,957,306 212,001,594
Commerce Bancorp Inc. ......................................... United States 3,717,790 141,796,511
Annual Report | 23
Mutual Discovery Fund
STATEMENT OF INVESTMENTS, DECEMBER 31, 2007 (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------------
SHARES/WARRANTS/
COUNTRY CONTRACTS VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
COMMON STOCKS AND OTHER EQUITY INTERESTS (CONTINUED)
COMMERCIAL BANKS (CONTINUED)
Danske Bank AS ................................................ Denmark 3,875,695 $ 151,515,819
a,e,f,g FE Capital Holdings Ltd. ...................................... Japan 12,017 7,893,554
First Community Bancorp ....................................... United States 518,434 21,380,218
Intesa Sanpaolo SpA ........................................... Italy 13,008,438 102,702,701
a Investors Bancorp Inc. ........................................ United States 1,775 25,098
Mitsubishi UFJ Financial Group Inc. ........................... Japan 5,860,123 55,019,942
a,e,g NCB Warrant Holdings Ltd., A .................................. Japan 55,890 3,316,056
Royal Bank of Scotland Group PLC .............................. United Kingdom 1,101,074 9,713,739
Societe Generale, A ........................................... France 773,452 111,665,965
Sumitomo Mitsui Financial Group Inc. .......................... Japan 12,485 93,708,873
Svenska Handelsbanken AB, A ................................... Sweden 3,204,537 102,593,557
Swedbank AB, A ................................................ Sweden 2,532,015 71,664,127
Unione Di Banche Italiane SCPA ................................ Italy 1,785,203 49,004,488
U.S. Bancorp .................................................. United States 3,199,005 101,536,419
------------------
1,433,996,842
------------------
COMMERCIAL SERVICES & SUPPLIES 0.1%
a Comdisco Holding Co. Inc. ..................................... United States 913 8,318
a,c Comdisco Holding Co. Inc., Contingent Distribution ............ United States 41,726,153 --
Fursys Inc. ................................................... South Korea 547,260 13,622,304
------------------
13,630,622
------------------
COMPUTERS & PERIPHERALS 0.3%
a,e,g DecisionOne Corp. ............................................. United States 359,884 --
a,e,g DecisionOne Corp., wts., 6/08/17 .............................. United States 197,603 --
a Dell Inc. ..................................................... United States 1,871,150 45,861,887
------------------
45,861,887
------------------
CONSTRUCTION MATERIALS 0.6%
Ciments Francais SA ........................................... France 399,572 68,638,511
Hanil Cement Co. Ltd. ......................................... South Korea 331,250 38,396,053
------------------
107,034,564
------------------
CONSUMER FINANCE 0.4%
a,e,g Cerberus CG Investor I LLC .................................... United States 7,903,600 6,654,646
a,e,g Cerberus CG Investor II LLC ................................... United States 7,903,600 6,654,646
a,e,g Cerberus CG Investor III LLC .................................. United States 3,951,800 3,327,323
a,e,g Cerberus FIM Investors Auto Finance LLC ....................... United States 8,723,795 4,680,586
a,e,g Cerberus FIM Investors Commercial Finance LLC ................. United States 726,666 389,879
a,e,g Cerberus FIM Investors Commercial Mortgage LLC ................ United States 1,362,023 730,767
a,e,g Cerberus FIM Investors Insurance LLC .......................... United States 6,661,738 3,574,228
a,e,g Cerberus FIM Investors Rescap LLC ............................. United States 12,402,778 6,654,474
SLM Corp. ..................................................... United States 2,001,760 40,315,446
------------------
72,981,995
------------------
DISTRIBUTORS 0.2%
Compania de Distribucion Integral Logista SA .................. Spain 564,170 41,865,896
------------------
24 | Annual Report
Mutual Discovery Fund
STATEMENT OF INVESTMENTS, DECEMBER 31, 2007 (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------------
SHARES/WARRANTS/
COUNTRY CONTRACTS VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
COMMON STOCKS AND OTHER EQUITY INTERESTS (CONTINUED)
DIVERSIFIED FINANCIAL SERVICES 5.0%
Citigroup Inc. ................................................ United States 561,610 $ 16,533,798
Deutsche Boerse AG ............................................ Germany 1,405,872 278,512,742
Fortis ........................................................ Belgium 9,062,832 239,123,250
a Fortis VVPR Strip ............................................. Belgium 3,397,596 49,583
Guinness Peat Group PLC ....................................... United Kingdom 27,286,699 36,392,544
Jardine Matheson Holdings Ltd. ................................ Hong Kong 4,554,012 126,146,132
Jardine Strategic Holdings Ltd. ............................... Hong Kong 10,060,600 157,951,420
a,c Marconi Corp., Contingent Distribution ........................ United Kingdom 33,909,700 --
------------------
854,709,469
------------------
DIVERSIFIED TELECOMMUNICATION SERVICES 0.9%
a,e,g,h AboveNet Inc. ................................................. United States 352,895 17,644,750
a,e,h AboveNet Inc., stock grants, grant price $20.95, expiration
date 9/09/13 ............................................... United States 464 19,233
a,e,g,h AboveNet Inc., wts., 9/08/08 .................................. United States 12,673 598,165
a,e,g,h AboveNet Inc., wts., 9/08/10 .................................. United States 14,911 651,312
Chunghwa Telecom Co. Ltd., ADR ................................ Taiwan 2,902,333 61,268,244
a,c,g Global Crossing Holdings Ltd., Contingent Distribution ........ United States 45,658,716 --
Koninklijke (Royal) KPN NV .................................... Netherlands 4,511,679 81,906,435
------------------
162,088,139
------------------
ELECTRIC UTILITIES 0.7%
E.ON AG ....................................................... Germany 597,820 127,034,327
------------------
ELECTRONIC EQUIPMENT & INSTRUMENTS 0.2%
Tyco Electronics Ltd. ......................................... United States 781,630 29,021,922
------------------
ENERGY EQUIPMENT & SERVICES 4.2%
Bourbon SA .................................................... France 1,031,595 67,474,633
a BW Offshore Ltd. .............................................. Norway 18,666,535 78,657,402
a Compagnie Generale de Geophysique SA .......................... France 580,532 165,203,873
a,f Dockwise Ltd. ................................................. Norway 12,379,100 51,252,139
Petroleum Geo-Services ASA .................................... Norway 1,796,568 52,149,895
a Seadrill Ltd. ................................................. Bermuda 9,211,447 224,586,756
a Transocean Inc. ............................................... United States 551,774 78,986,448
------------------
718,311,146
------------------
FOOD & STAPLES RETAILING 2.2%
Carrefour SA .................................................. France 4,298,988 334,326,961
CVS Caremark Corp. ............................................ United States 1,232,553 48,993,982
------------------
383,320,943
------------------
FOOD PRODUCTS 6.1%
Cadbury Schweppes PLC ......................................... United Kingdom 10,530,995 129,941,528
Cermaq ASA .................................................... Norway 3,630,328 50,435,139
f CSM NV ........................................................ Netherlands 4,036,926 136,088,747
f Farmer Brothers Co. ........................................... United States 904,637 20,797,605
Groupe Danone ................................................. France 2,686,412 240,713,495
Kraft Foods Inc., A ........................................... United States 415,186 13,547,519
Annual Report | 25
Mutual Discovery Fund
STATEMENT OF INVESTMENTS, DECEMBER 31, 2007 (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------------
SHARES/WARRANTS/
COUNTRY CONTRACTS VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
COMMON STOCKS AND OTHER EQUITY INTERESTS (CONTINUED)
FOOD PRODUCTS (CONTINUED)
a Lighthouse Caledonia ASA ...................................... Norway 1,401,289 $ 1,330,509
Lotte Confectionary Co. Ltd. .................................. South Korea 52,189 94,225,105
a,i Marine Harvest ................................................ Norway 164,857,626 105,870,478
Nestle SA ..................................................... Switzerland 219,229 100,599,259
Nong Shim Co. Ltd. ............................................ South Korea 210,569 43,753,721
Premier Foods PLC ............................................. United Kingdom 22,024,219 89,491,295
Rieber & Son ASA .............................................. Norway 3,605,065 34,660,897
------------------
1,061,455,297
------------------
HEALTH CARE EQUIPMENT & SUPPLIES 0.2%
Covidien Ltd. ................................................. United States 781,630 34,618,393
------------------
HEALTH CARE PROVIDERS & SERVICES 1.3%
a,e,g,h Kindred Healthcare Inc. ....................................... United States 1,135,557 26,947,903
a,e,g,h Kindred Healthcare Inc., stock grants:
grant price $18.15, expiration date 7/17/11 ................ United States 3,928 21,922
grant price $19.87, expiration date 1/01/12 ................ United States 1,175 4,537
grant price $6.94, expiration date 1/01/13 ................. United States 1,174 19,713
grant price $19.87, expiration date 1/01/14 ................ United States 878 3,390
grant price $21.33, expiration date 1/10/15 ................ United States 489 1,174
grant price $22.08, expiration date 1/10/16 ................ United States 246 406
a MDS Inc. ...................................................... Canada 1,294,341 24,994,620
a PharMerica Inc. ............................................... United States 415,641 5,769,097
Quest Diagnostics Inc. ........................................ United States 1,302,600 68,907,540
Rhoen-Klinikum AG ............................................. Germany 3,163,170 98,878,404
------------------
225,548,706
------------------
HOTELS, RESTAURANTS & LEISURE 0.0% d
a,e,f,g Hancock Discovery LLC ......................................... United States 8,758,216 --
a Trump Entertainment Resorts Inc. .............................. United States 839,693 3,610,680
------------------
3,610,680
------------------
HOUSEHOLD DURABLES 0.2%
Hunter Douglas NV ............................................. Netherlands 323,796 23,947,905
Koninklijke Philips Electronics NV ............................ Netherlands 272,485 11,738,657
------------------
35,686,562
------------------
INDEPENDENT POWER PRODUCERS & ENERGY TRADERS 0.7%
Constellation Energy Group .................................... United States 1,098,560 112,635,357
------------------
INDUSTRIAL CONGLOMERATES 4.2%
Keppel Corp. Ltd. ............................................. Singapore 17,381,344 156,757,065
h Orkla ASA ..................................................... Norway 20,568,718 398,354,507
Siemens AG .................................................... Germany 1,005,019 159,016,842
Tyco International Ltd. ....................................... United States 156,030 6,186,590
------------------
720,315,004
------------------
INSURANCE 5.7%
a Alleghany Corp. ............................................... United States 75,045 30,168,090
Allianz SE .................................................... Germany 593,700 128,298,891
American International Group Inc. ............................. United States 500,700 29,190,810
26 | Annual Report
Mutual Discovery Fund
STATEMENT OF INVESTMENTS, DECEMBER 31, 2007 (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------------
SHARES/WARRANTS/
COUNTRY CONTRACTS VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
COMMON STOCKS AND OTHER EQUITY INTERESTS (CONTINUED)
INSURANCE (CONTINUED)
Assicurazioni Generali SpA .................................... Italy 1,206,738 $ 54,592,644
a,e,f,g Augsburg Re AG ................................................ Switzerland 66,860 --
a Berkshire Hathaway Inc., A .................................... United States 853 120,784,800
a Berkshire Hathaway Inc., B .................................... United States 34,470 163,249,920
a Conseco Inc. .................................................. United States 2,684,120 33,712,547
E-L Financial Corp. Ltd. ...................................... Canada 177,619 104,471,251
Hartford Financial Services Group Inc. ........................ United States 511,000 44,554,090
a,e,f,g Imagine Group Holdings Ltd. ................................... Bermuda 4,551,501 52,069,171
Old Republic International Corp. .............................. United States 1,898,187 29,251,062
a,e,g Olympus Re Holdings Ltd. ...................................... United States 47,160 154,458
Prudential Financial Inc. ..................................... United States 421,200 39,188,448
White Mountains Insurance Group Ltd. .......................... United States 172,815 88,835,551
Zurich Financial Services AG .................................. Switzerland 237,664 69,734,628
------------------
988,256,361
------------------
MACHINERY 1.5%
f,j Aker Yards ASA ................................................ Norway 5,752,030 65,622,571
Kone OYJ, B ................................................... Finland 77,263 5,404,288
a,e,g Motor Coach Industries International Inc., wts., 5/27/09 ...... United States 5 --
Schindler Holding AG .......................................... Switzerland 2,263,002 145,781,103
Schindler Holding AG, Registered .............................. Switzerland 659,880 42,509,036
------------------
259,316,998
------------------
MEDIA 5.7%
a Adelphia Recovery Trust ....................................... United States 45,477,593 3,183,431
a,c Adelphia Recovery Trust Arahova Contingent Value Vehicle,
Contingent Distribution .................................... United States 5,538,790 2,852,477
a,c Century Communications Corp., Contingent Distribution ......... United States 15,282,000 --
CJ CGV Co. Ltd. ............................................... South Korea 849,040 11,700,888
Daekyo Co. Ltd. ............................................... South Korea 367,570 34,870,163
Eutelsat Communications ....................................... France 6,644,123 197,315,647
JC Decaux SA .................................................. France 2,791,333 109,578,002
a Liberty Media Holding Corp.-Capital, A ........................ United States 212,775 24,786,160
k News Corp., A ................................................. United States 5,033,010 103,126,375
a Premiere AG ................................................... Germany 3,927,965 73,430,450
a Sun-Times Media Group Inc., A ................................. United States 880,440 1,936,968
Teleperformance ............................................... France 1,465,107 56,937,705
a Time Warner Cable Inc., A ..................................... United States 1,019,692 28,143,499
Time Warner Inc. .............................................. United States 7,333,400 121,074,434
a,g TVMAX Holdings Inc. ........................................... United States 118,432 --
a Viacom Inc., B ................................................ United States 1,719,410 75,516,487
Virgin Media Inc. ............................................. United Kingdom 5,426,163 93,004,434
WPP Group PLC ................................................. United Kingdom 3,258,420 41,888,837
------------------
979,345,957
------------------
METALS & MINING 1.4%
Anglo American PLC ............................................ United Kingdom 2,536,742 155,243,698
a,e,f,g Esmark Inc. ................................................... United States 3,850,425 48,965,854
a Gammon Gold Inc. .............................................. Canada 4,215,239 33,764,329
------------------
237,973,881
------------------
Annual Report | 27
Mutual Discovery Fund
STATEMENT OF INVESTMENTS, DECEMBER 31, 2007 (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------------
SHARES/WARRANTS/
COUNTRY CONTRACTS VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
COMMON STOCKS AND OTHER EQUITY INTERESTS (CONTINUED)
MULTI-UTILITIES 1.8%
Energy East Corp. ............................................. United States 1,290,320 $ 35,109,607
NorthWestern Corp. ............................................ United States 328,196 9,681,782
a,c NorthWestern Corp., Contingent Distribution ................... United States 9,839,500 697,661
RWE AG ........................................................ Germany 1,172,783 165,074,254
Suez SA ....................................................... France 1,593,344 108,286,729
------------------
318,850,033
------------------
MULTILINE RETAIL 0.3%
Jelmoli Holding AG ............................................ Switzerland 19,024 45,579,033
------------------
OIL, GAS & CONSUMABLE FUELS 2.1%
BP PLC ........................................................ United Kingdom 7,976,960 97,476,402
BP PLC, ADR ................................................... United Kingdom 180,900 13,236,453
Eni SpA ....................................................... Italy 847,600 30,985,473
Royal Dutch Shell PLC, A ...................................... United Kingdom 3,324,863 139,498,986
Total SA, B ................................................... France 510,684 42,353,505
Total SA, B, ADR .............................................. France 417,296 34,468,650
------------------
358,019,469
------------------
PAPER & FOREST PRODUCTS 1.4%
a Domtar Corp. .................................................. United States 3,018,373 23,211,288
Mondi Ltd. .................................................... United Kingdom 278,762 2,633,729
Mondi PLC ..................................................... United Kingdom 696,907 5,885,058
Weyerhaeuser Co. .............................................. United States 2,781,353 205,096,970
------------------
236,827,045
------------------
PERSONAL PRODUCTS 0.3%
Amorepacific Corp. ............................................ South Korea 64,004 48,547,449
------------------
PHARMACEUTICALS 1.6%
Novartis AG ................................................... Switzerland 2,508,989 137,494,014
Pfizer Inc. ................................................... United States 2,675,730 60,819,343
Sanofi-Aventis ................................................ France 860,485 79,087,056
------------------
277,400,413
------------------
REAL ESTATE 2.7%
a,g Canary Wharf Group PLC ........................................ United Kingdom 5,400,183 53,971,368
Great Eagle Holdings Ltd. ..................................... Hong Kong 12,726,353 47,572,253
Link REIT ..................................................... Hong Kong 84,222,231 182,309,955
Swire Pacific Ltd., A ......................................... Hong Kong 9,379,950 129,306,450
Swire Pacific Ltd., B ......................................... Hong Kong 13,605,000 36,114,374
Ventas Inc. ................................................... United States 516,500 23,371,625
------------------
472,646,025
------------------
SEMICONDUCTORS & SEMICONDUCTOR EQUIPMENT 0.2%
a LSI Corp. ..................................................... United States 4,963,248 26,354,847
------------------
SOFTWARE 0.9%
Microsoft Corp. ............................................... United States 4,335,680 154,350,208
------------------
28 | Annual Report
Mutual Discovery Fund
STATEMENT OF INVESTMENTS, DECEMBER 31, 2007 (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------------
SHARES/WARRANTS/
COUNTRY CONTRACTS VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
COMMON STOCKS AND OTHER EQUITY INTERESTS (CONTINUED)
THRIFTS & MORTGAGE FINANCE 0.6%
Hudson City Bancorp Inc. ...................................... United States 2,146,520 $ 32,240,730
Hypo Real Estate Holding AG ................................... Germany 1,488,952 78,854,615
------------------
111,095,345
------------------
TOBACCO 11.7%
Altadis SA .................................................... Spain 3,911,525 283,758,789
Altria Group Inc. ............................................. United States 1,213,908 91,747,167
British American Tobacco PLC .................................. United Kingdom 10,342,443 403,805,893
Imperial Tobacco Group PLC .................................... United Kingdom 7,506,026 404,470,370
ITC Ltd. ...................................................... India 18,037,005 96,261,443
Japan Tobacco Inc. ............................................ Japan 49,765 298,103,573
KT&G Corp. .................................................... South Korea 4,837,575 411,895,441
Reynolds American Inc. ........................................ United States 378,400 24,959,264
------------------
2,015,001,940
------------------
TRADING COMPANIES & DISTRIBUTORS 0.6%
f Kloeckner & Co. AG ............................................ Germany 2,796,264 111,403,867
------------------
TRANSPORTATION INFRASTRUCTURE 0.0% d
a Groupe Eurotunnel SA, wts., 12/30/11 .......................... France 200,763 67,386
------------------
TOTAL COMMON STOCKS AND OTHER EQUITY INTERESTS
(COST $10,017,156,596) ..................................... 14,474,110,946
------------------
PREFERRED STOCKS 0.1%
AUTO COMPONENTS 0.1%
e,g Dana Holding Corp., 4.00%, cvt. pfd., B ....................... United States 89,831 8,983,100
------------------
DIVERSIFIED TELECOMMUNICATION SERVICES 0.0% d
e PTV Inc., 10.00%, pfd., A ..................................... United Kingdom 86,280 103,536
------------------
TOTAL PREFERRED STOCKS (COST $9,241,940) ...................... 9,086,636
------------------
OPTIONS PURCHASED 0.5%
CALL OPTIONS 0.0% d
a,e Owens Corning Inc., exercise price $37.50, expiration date
1/02/08, shares ............................................ United States 535,890 26,795
------------------
PUT OPTIONS 0.5%
a Index basket consisting of 80% Dow Jones EUROSTOXX 50
(exercise price $4,018.50), 20% S&P 500 Index (exercise
price $1,362.92), expiration date 5/23/08, contracts ....... United States 4,372,000 9,546,796
a Index basket consisting of 80% Dow Jones EUROSTOXX 50
(exercise price $4,029.17), 20% S&P 500 Index (exercise
price $1,368.36), expiration date 5/29/08, contracts ....... United States 4,372,000 10,501,544
a Index basket consisting of 80% Dow Jones EUROSTOXX 50
(exercise price $4,059.77), 20% S&P 500 Index (exercise
price $1,379.26), expiration date 6/20/08, contracts ....... United States 4,372,000 11,984,195
a Index basket consisting of 80% Dow Jones EUROSTOXX 50
(exercise price $4,089.42), 20% S&P 500 Index (exercise
price $1,380.37), expiration date 6/20/08, contracts ....... United States 4,372,000 13,190,324
Annual Report | 29
Mutual Discovery Fund
STATEMENT OF INVESTMENTS, DECEMBER 31, 2007 (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------------
SHARES/WARRANTS/
COUNTRY CONTRACTS VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
OPTIONS PURCHASED (CONTINUED)
PUT OPTIONS (CONTINUED)
a Index basket consisting of 70% Dow Jones EUROSTOXX 50
(exercise price $4,083.52), 30% S&P 500 Index (exercise
price $1,393.76), expiration date 7/18/08, contracts ....... United States 4,350,300 $ 14,148,421
a Index basket consisting of 70% Dow Jones EUROSTOXX 50
(exercise price $4,083.52), 30% S&P 500 Index (exercise
price $1,393.78), expiration date 7/18/08, contracts ....... United States 4,350,000 15,181,500
a Index basket consisting of 70% Dow Jones EUROSTOXX 50
(exercise price $3,919.03), 30% S&P 500 Index (exercise
price $1,343.00), expiration date 8/15/08, contracts ....... United States 4,358,000 12,925,828
------------------
87,478,608
------------------
TOTAL OPTIONS PURCHASED (COST $88,561,721) .................... 87,505,403
------------------
------------------
PRINCIPAL AMOUNT l
------------------
CORPORATE BONDS & NOTES 1.3%
b ACE Aviation Holdings Inc., cvt., 144A, 4.25%, 6/01/35 ........ Canada 2,761,000 CAD 3,139,552
e,f,g Augsburg Re AG, zero cpn., 1/30/08 ............................ Switzerland 768,890 --
e,g Cerberus CG Investor I LLC, 12.00%, 7/31/14 ................... United States 7,903,600 6,654,646
e,g Cerberus CG Investor II LLC, 12.00%, 7/31/14 .................. United States 7,903,600 6,654,646
e,g Cerberus CG Investor III LLC, 12.00%, 7/31/14 ................. United States 3,951,800 3,327,323
e,g Cerberus FIM Investors Auto Finance LLC, 12.00%, 11/22/13 ..... United States 26,153,583 14,032,206
e,g Cerberus FIM Investors Commercial Finance LLC, 12.00%,
11/22/13 ................................................... United States 2,179,997 1,169,636
e,g Cerberus FIM Investors Commercial Mortgage LLC, 12.00%,
11/22/13 ................................................... United States 4,086,069 2,192,302
e,g Cerberus FIM Investors Insurance LLC, 12.00%, 11/22/13 ........ United States 19,985,213 10,722,685
e,g Cerberus FIM Investors Rescap LLC, 12.00%, 11/22/13 ........... United States 37,208,337 19,963,423
e,g DecisionOne Corp.,
12.00%, 4/15/10 ............................................ United States 444,865 444,865
m FRN, 9.50%, 5/12/09 ........................................... United States 82,993 82,993
Groupe Eurotunnel SA, cvt.,
3.00%, 6/28/09 ............................................. France 9,600 EUR 30,821
3.00%, 6/28/09 ............................................. France 11,935 GBP 52,171
3.00%, 7/28/10 ............................................. France 7,220,400 EUR 20,810,753
3.00%, 7/28/10 ............................................. France 4,866,820 GBP 19,098,505
6.00%, 7/28/10 ............................................. France 16,883,900 EUR 33,140,153
6.00%, 7/28/10 ............................................. France 12,517,564 GBP 33,452,539
sub. bond, T1, 3.00%, 7/28/08 .............................. France 9,600 EUR 34,324
sub. bond, T1, 3.00%, 7/28/08 .............................. France 11,935 GBP 58,100
e,g,h International Automotive Components Group NA LLC, 9.00%,
4/01/17 .................................................... United States 3,472,200 3,472,200
e,g,m Motor Coach Industries International Inc., FRN, 18.081%,
12/01/08 ................................................... United States 29,617,472 29,321,297
Trump Entertainment Resorts Inc., 8.50%, 5/20/15 .............. United States 17,141,134 13,134,394
30 | Annual Report
Mutual Discovery Fund
STATEMENT OF INVESTMENTS, DECEMBER 31, 2007 (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------------
COUNTRY PRINCIPAL AMOUNT l VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
CORPORATE BONDS & NOTES (CONTINUED)
g TVMAX Holdings Inc., PIK,
11.50%, 2/28/08 ............................................ United States 284,850 $ 199,395
14.00%, 2/28/08 ............................................ United States 728,545 509,981
------------------
TOTAL CORPORATE BONDS & NOTES (COST $265,768,491) ............. 221,698,910
------------------
CORPORATE BONDS & NOTES IN REORGANIZATION 0.2%
b Calpine Corp., senior secured note, 144A,
8.50%, 7/15/10 ............................................. United States 6,435,000 6,917,625
9.875%, 12/01/11 ........................................... United States 2,265,000 2,378,250
8.75%, 7/15/13 ............................................. United States 3,395,000 3,666,600
n Dana Corp.,
6.50%, 3/01/09 ............................................. United States 4,782,000 3,610,410
5.85%, 1/15/15 ............................................. United States 15,800,000 11,613,000
7.00%, 3/01/29 ............................................. United States 3,435,000 2,593,425
senior note, 7.00%, 3/15/28 ................................... United States 986,000 724,710
g,n Safety Kleen Services, senior sub. note, 9.25%, 6/01/08 ....... United States 40,000 200
------------------
TOTAL CORPORATE BONDS & NOTES IN REORGANIZATION
(COST $30,175,927) ......................................... 31,504,220
------------------
TOTAL LONG TERM INVESTMENTS
(COST $10,410,904,675) ..................................... 14,823,906,115
------------------
SHORT TERM INVESTMENTS 14.2%
U.S. GOVERNMENT AND AGENCY SECURITIES 14.1%
o FHLB,
k 1/02/08 - 12/09/08 .......................................... United States 1,682,430,000 1,669,231,992
1/03/08 ..................................................... United States 315,510,000 315,510,000
1/08/08 ..................................................... United States 310,000,000 309,798,810
k U.S. Treasury Bills, 4/24/08 - 5/01/08 ........................ United States 149,500,000 147,951,277
------------------
TOTAL U.S. GOVERNMENT AND AGENCY SECURITIES
(COST $2,440,452,436) ...................................... 2,442,492,079
------------------
TOTAL INVESTMENTS BEFORE MONEY MARKET FUND
(COST $12,851,357,111) ..................................... 17,266,398,194
------------------
p INVESTMENTS FROM CASH COLLATERAL RECEIVED FOR
LOANED SECURITIES 0.1%
MONEY MARKET FUND (COST $9,238,186) 0.1%
q Bank of New York Institutional Cash Reserve Fund, 5.06% ....... United States 9,238,186 9,238,186
------------------
TOTAL INVESTMENTS (COST $12,860,595,297) 100.1% ............... 17,275,636,380
SECURITIES SOLD SHORT (0.6)% .................................. (107,716,565)
NET UNREALIZED LOSS ON FORWARD EXCHANGE
CONTRACTS (0.2)% ........................................... (34,130,356)
OTHER ASSETS, LESS LIABILITIES 0.7% ........................... 126,895,980
------------------
NET ASSETS 100.0% ............................................. $ 17,260,685,439
------------------
Annual Report | 31
Mutual Discovery Fund
STATEMENT OF INVESTMENTS, DECEMBER 31, 2007 (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------------
COUNTRY SHARES VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
r SECURITIES SOLD SHORT (PROCEEDS $112,850,226) 0.6%
COMMERCIAL BANKS 0.6%
Toronto-Dominion Bank Canada 1,539,908 $ 107,716,565
------------------
CURRENCY ABBREVIATIONS
CAD - Canadian Dollar
EUR - Euro
GBP - British Pound
SELECTED PORTFOLIO ABBREVIATIONS
ADR - American Depository Receipt
FHLB - Federal Home Loan Bank
FRN - Floating Rate Note
PIK - Payment-In-Kind
REIT - Real Estate Investment Trust
a Non-income producing for the twelve months ended December 31, 2007.
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, 2007, the aggregate value of
these securities was $17,939,706, representing 0.10% of net assets.
c 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.
d Rounds to less than 0.1% of net assets.
e See Note 10 regarding restricted securities.
f See Note 12 regarding holdings of 5% voting securities.
g Security has been deemed illiquid because it may not be able to be sold within
seven days. At December 31, 2007, the aggregate value of these securities was
$411,056,796, representing 2.38% of net assets.
h See Note 13 regarding other considerations.
i A portion or all of the security is on loan as of December 31, 2007. See Note
1(h).
j See Note 1(c) regarding securities purchased on a when-issued or delayed
delivery basis.
k Security or a portion of the security has been segregated as collateral for
securities sold short. At December 31, 2007, the value of securities and or cash
pledged amounted to $87,536,985.
l The principal amount is stated in U.S. dollars unless otherwise indicated.
m The coupon rate shown represents the rate at period end.
n See Note 9 regarding defaulted securities.
o The security is traded on a discount basis with no stated coupon rate.
p See Note 1(h) regarding securities on loan.
q The rate shown is the annualized seven-day yield at period end.
r See Note 1(g) regarding securities sold short.
32 | The accompanying notes are an integral part of these financial statements.
| Annual Report
Mutual Discovery Fund
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
December 31, 2007
Assets:
Investments in securities:
Cost - Unaffiliated issuers .............................................................................. $ 12,315,811,019
Cost - Controlled affiliated issuers (Note 12) ........................................................... 10,913,951
Cost - Non-controlled affiliated issuers (Note 12) ....................................................... 533,870,327
------------------
Total cost of investments ................................................................................ $ 12,860,595,297
==================
Value - Unaffiliated issuers (includes securities loaned in the amount of $8,465,777) .................... $ 16,753,453,768
Value - Controlled affiliated issuer (Note 12) ........................................................... --
Value - Non-controlled affiliated issuers (Note 12) ...................................................... 522,182,612
------------------
Total value of investments ............................................................................... 17,275,636,380
Cash on deposits with brokers for securities sold short .................................................... 111,013,795
Foreign currency, at value (cost $35,640,300) .............................................................. 35,631,450
Receivables:
Capital shares sold ...................................................................................... 39,838,283
Dividends and interest ................................................................................... 25,012,795
Unrealized gain on forward exchange contracts (Note 7) ..................................................... 46,620,880
------------------
Total assets ........................................................................................... 17,533,753,583
------------------
Liabilities:
Payables:
Investment securities purchased .......................................................................... 5,671,497
Capital shares redeemed .................................................................................. 42,004,902
Affiliates ............................................................................................... 23,051,377
Funds advanced by custodian ................................................................................ 59,456
Securities sold short, at value (proceeds $112,850,226) .................................................... 107,716,565
Payable upon return of securities loaned ................................................................... 9,238,186
Unrealized loss on forward exchange contracts (Note 7) ..................................................... 80,751,236
Accrued expenses and other liabilities ..................................................................... 4,574,925
------------------
Total liabilities ...................................................................................... 273,068,144
------------------
Net assets, at value ................................................................................. $ 17,260,685,439
==================
Net assets consist of:
Paid-in capital ............................................................................................ $ 12,799,410,054
Distributions in excess of net investment income ........................................................... (10,579,632)
Net unrealized appreciation (depreciation) ................................................................. 4,386,214,251
Accumulated net realized gain (loss) ....................................................................... 85,640,766
------------------
Net assets, at value ................................................................................. $ 17,260,685,439
==================
Annual Report |
The accompanying notes are an integral part of these financial statements. | 33
Mutual Discovery Fund
FINANCIAL STATEMENTS (CONTINUED)
STATEMENT OF ASSETS AND LIABILITIES (CONTINUED)
December 31, 2007
Class Z:
Net assets, at value ....................................................................................... $ 4,720,388,259
==================
Shares outstanding ......................................................................................... 145,481,590
==================
Net asset value and maximum offering price per share a ..................................................... $ 32.45
==================
Class A:
Net assets, at value ....................................................................................... $ 8,913,527,320
==================
Shares outstanding ......................................................................................... 277,742,385
==================
Net asset value per share a ................................................................................ $ 32.09
==================
Maximum offering price per share (net asset value per share / 94.25%) ...................................... $ 34.05
==================
Class B:
Net assets, at value ....................................................................................... $ 276,174,953
==================
Shares outstanding ......................................................................................... 8,779,388
==================
Net asset value and maximum offering price per share a ..................................................... $ 31.46
==================
Class C:
Net assets, at value ....................................................................................... $ 3,075,593,403
==================
Shares outstanding ......................................................................................... 96,602,233
==================
Net asset value and maximum offering price per share a ..................................................... $ 31.84
==================
Class R:
Net assets, at value ....................................................................................... $ 275,001,504
==================
Shares outstanding ......................................................................................... 8,633,163
==================
Net asset value and maximum offering price per share a ..................................................... $ 31.85
==================
a Redemption price is equal to net asset value less contingent deferred sales
charges, if applicable, and redemption fees retained by the Fund.
34 | The accompanying notes are an integral part of these financial statements.
| Annual Report
Mutual Discovery Fund
FINANCIAL STATEMENTS (CONTINUED)
STATEMENT OF OPERATIONS
for the year ended December 31, 2007
Investment income:
Dividends: (net of foreign taxes of $27,212,366)
Unaffiliated issuers ..................................................................................... $ 333,462,927
Non-controlled affiliated issuers (Note 12) .............................................................. 58,800,043
Interest: (net of foreign taxes of $3,083)
Unaffiliated issuers ....................................................................................... 91,981,258
Non-controlled affiliated issuers (Note 12) ................................................................ 208,898
Income from securities loaned ................................................................................. 1,921,701
------------------
Total investment income ................................................................................ 486,374,827
------------------
Expenses:
Management fees (Note 3a) .................................................................................. 118,295,055
Administrative fees (Note 3b) .............................................................................. 11,909,667
Distribution fees: (Note 3c)
Class A .................................................................................................. 24,639,541
Class B .................................................................................................. 2,860,347
Class C .................................................................................................. 27,858,343
Class R .................................................................................................. 1,188,112
Transfer agent fees (Note 3e) .............................................................................. 19,601,483
Custodian fees (Note 4) .................................................................................... 4,042,361
Reports to shareholders .................................................................................... 1,246,826
Registration and filing fees ............................................................................... 836,634
Professional fees .......................................................................................... 824,088
Directors' fees and expenses ............................................................................... 246,017
Dividends on securities sold short ......................................................................... 702,876
Other ...................................................................................................... 498,976
------------------
Total expenses ......................................................................................... 214,750,326
Expense reductions (Note 4) ............................................................................ (39,881)
------------------
Net expenses ......................................................................................... 214,710,445
------------------
Net investment income .............................................................................. 271,664,382
------------------
Realized and unrealized gains (losses):
Net realized gain (loss) from:
Investments
Unaffiliated Issuers ................................................................................... 847,197,690
Non-controlled affiliated issuers (Note 12) ............................................................ 69,998,317
Written options .......................................................................................... 132,425
Foreign currency transactions ............................................................................ (432,645,702)
Securities sold short .................................................................................... (11,817,133)
Synthetic equity swaps ................................................................................... 4,677,013
------------------
Net realized gain (loss) ............................................................................... 477,542,610
------------------
Net change in unrealized appreciation (depreciation) on:
Investments .............................................................................................. 701,583,732
Translation of assets and liabilities denominated in foreign currencies .................................. 15,433,556
------------------
Net change in unrealized appreciation (depreciation) ................................................... 717,017,288
------------------
Net realized and unrealized gain (loss) ....................................................................... 1,194,559,898
------------------
Net increase (decrease) in net assets resulting from operations ............................................... $ 1,466,224,280
==================
Annual Report |
The accompanying notes are an integral part of these financial statements. | 35
Mutual Discovery Fund
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF CHANGES IN NET ASSETS
-------------------------------------
YEAR ENDED DECEMBER 31,
-------------------------------------
2007 2006
-------------------------------------
Increase (decrease) in net assets:
Operations:
Net investment income .................................................................. $ 271,664,382 $ 203,044,400
Net realized gain (loss) from investments, written options, securities sold short,
synthetic equity swaps, and foreign currency transactions ............................ 477,542,610 417,255,448
Net change in unrealized appreciation (depreciation) on investments, translation of
assets and liabilities denominated in foreign currencies, and deferred taxes ......... 717,017,288 1,559,485,835
-------------------------------------
Net increase (decrease) in net assets resulting from operations .................... 1,466,224,280 2,179,785,683
-------------------------------------
Distributions to shareholders from:
Net investment income:
Class Z .............................................................................. (103,525,166) (79,515,700)
Class A .............................................................................. (172,255,326) (104,704,715)
Class B .............................................................................. (3,477,494) (3,195,315)
Class C .............................................................................. (40,926,857) (26,440,918)
Class R .............................................................................. (4,909,917) (2,764,923)
Net realized gains:
Class Z .............................................................................. (98,813,037) (152,564,620)
Class A .............................................................................. (188,175,584) (226,734,020)
Class B .............................................................................. (6,040,635) (11,010,320)
Class C .............................................................................. (65,710,419) (85,287,764)
Class R .............................................................................. (5,833,119) (6,547,343)
-------------------------------------
Total distributions to shareholders ...................................................... (689,667,554) (698,765,638)
-------------------------------------
Capital share transactions: (Note 2)
Class Z .............................................................................. 546,678,826 386,789,430
Class A .............................................................................. 2,422,442,924 1,915,592,766
Class B .............................................................................. (16,203,793) 13,246,450
Class C .............................................................................. 697,882,683 551,191,840
Class R .............................................................................. 88,798,021 57,174,658
-------------------------------------
Total capital share transactions ......................................................... 3,739,598,661 2,923,995,144
-------------------------------------
Redemption fees .......................................................................... 56,157 54,889
-------------------------------------
Net increase (decrease) in net assets .............................................. 4,516,211,544 4,405,070,078
Net assets:
Beginning of year ........................................................................ 12,744,473,895 8,339,403,817
-------------------------------------
End of year .............................................................................. $ 17,260,685,439 $ 12,744,473,895
=====================================
Distributions in excess of net investment income included in net assets:
End of year .............................................................................. $ (10,579,632) $ (12,725,521)
=====================================
36 | The accompanying notes are an integral part of these financial statements.
| Annual Report
Mutual Discovery Fund
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Franklin Mutual Series Fund Inc. (Series Fund) is registered under the
Investment Company Act of 1940, as amended, (1940 Act) as an open-end investment
company, consisting of six separate funds. The Mutual Discovery Fund
(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.
Annual Report | 37
Mutual Discovery 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.
38 | Annual Report
Mutual Discovery Fund
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
C. SECURITIES PURCHASED ON A WHEN-ISSUED OR DELAYED DELIVERY BASIS
The Fund may purchase securities on a when-issued or delayed delivery basis,
with payment and delivery scheduled for a future date. These transactions are
subject to market fluctuations and are subject to the risk that the value at
delivery may be more or less than the trade date purchase price. Although the
Fund will generally purchase these securities with the intention if holding the
securities, it may sell the securities before the settlement date. Sufficient
assets have been segregated for these securities.
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
Annual Report | 39
Mutual Discovery Fund
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
E. SYNTHETIC EQUITY SWAPS (CONTINUED)
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.
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 or index 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.
40 | Annual Report
Mutual Discovery Fund
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
I. INCOME AND DEFERRED TAXES
No provision has been made for U.S. income taxes because it is the Fund's policy
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 of
America. 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.
Annual Report | 41
Mutual Discovery Fund
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
J. SECURITY TRANSACTIONS, INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS
(CONTINUED)
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 per share
distributions, by class, are generally due to differences in class specific
expenses.
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 Funds' 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.
42 | Annual Report
Mutual Discovery Fund
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. CAPITAL STOCK
At December 31, 2007, there were 870 million shares authorized ($0.001 par
value). Transactions in the Fund's shares were as follows:
--------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
2007 2006
--------------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
--------------------------------------------------------------------
CLASS Z SHARES:
Shares sold ......................... 24,056,002 $ 798,541,198 17,002,780 $ 491,154,476
Shares issued in reinvestment of
distributions ..................... 5,514,378 177,662,386 7,260,169 212,486,746
Shares redeemed ..................... (12,948,159) (429,524,758) (10,860,325) (316,851,792)
--------------------------------------------------------------------
Net increase (decrease) ............. 16,622,221 $ 546,678,826 13,402,624 $ 386,789,430
====================================================================
CLASS A SHARES:
Shares sold ......................... 99,655,862 $ 3,253,322,579 79,025,862 $ 2,243,787,149
Shares issued in reinvestment of
distributions ..................... 10,564,327 336,532,210 10,632,371 308,509,847
Shares redeemed ..................... (35,803,944) (1,167,411,865) (22,474,891) (636,704,230)
--------------------------------------------------------------------
Net increase (decrease) ............. 74,416,245 $ 2,422,442,924 67,183,342 $ 1,915,592,766
====================================================================
CLASS B SHARES:
Shares sold ......................... 764,950 $ 24,471,455 1,015,295 $ 28,025,010
Shares issued in reinvestment of
distributions ..................... 272,720 8,514,149 453,192 12,798,395
Shares redeemed ..................... (1,535,785) (49,189,397) (996,900) (27,576,955)
--------------------------------------------------------------------
Net increase (decrease) ............. (498,115) $ (16,203,793) 471,587 $ 13,246,450
====================================================================
CLASS C SHARES:
Shares sold ......................... 27,970,919 $ 903,746,320 23,002,226 $ 647,945,552
Shares issued in reinvestment of
distributions ..................... 2,910,663 91,972,642 3,385,090 97,115,493
Shares redeemed ..................... (9,203,919) (297,836,279) (6,905,349) (193,869,205)
--------------------------------------------------------------------
Net increase (decrease) ............. 21,677,663 $ 697,882,683 19,481,967 $ 551,191,840
====================================================================
CLASS R SHARES:
Shares sold ......................... 3,907,963 $ 126,322,542 2,480,439 $ 69,654,257
Shares issued in reinvestment of
distributions ..................... 333,189 10,535,932 318,277 9,168,194
Shares redeemed ..................... (1,480,501) (48,060,453) (770,653) (21,647,793)
--------------------------------------------------------------------
Net increase (decrease) ............. 2,760,651 $ 88,798,021 2,028,063 $ 57,174,658
====================================================================
Annual Report | 43
Mutual Discovery Fund
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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 Transfer agent
Services)
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 $13 billion
0.710% Over $13 billion, up to and including $16 billion
0.690%* In excess of $16 billion
* Breakpoint added effective July 1, 2007.
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.
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 plans, 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.
44 | Annual Report
Mutual Discovery Fund
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. TRANSACTIONS WITH AFFILIATES (CONTINUED)
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 charges retained net of commissions paid to
unaffiliated broker/dealers ........................ $9,133,439
Contingent deferred sales charges retained............ $ 482,481
E. TRANSFER AGENT FEES
For the year ended December 31, 2007, the Fund paid transfer agent fees of
$19,601,483, of which $8,836,745 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, 2007, the
custodian fees were reduced as noted in the Statement of Operations.
5. INCOME TAXES
The Fund has reviewed the tax positions taken on federal income tax returns, for
each of the three open tax years and as of December 31, 2007 and has determined
that no provision for income tax is required in the Fund's financial statements.
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, 2007, the Fund deferred realized currency losses of
$1,763,159.
Annual Report | 45
Mutual Discovery Fund
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. INCOME TAXES (CONTINUED)
The tax character of distributions paid during the years ended December 31, 2007
and 2006, was as follows:
---------------------------
2007 2006
---------------------------
Distributions paid from:
Ordinary income ......................... $325,094,760 $250,153,080
Long term capital gain .................. 364,572,794 448,612,558
---------------------------
$689,667,554 $698,765,638
===========================
At December 31, 2007, 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 .................................. $ 12,884,106,281
=================
Unrealized appreciation .............................. $ 5,058,095,855
Unrealized depreciation .............................. (666,565,756)
-----------------
Net unrealized appreciation (depreciation)............ $ 4,391,530,099
=================
Undistributed ordinary income ........................ $ 28,992,280
Undistributed long term capital gains ................ 46,469,216
-----------------
Distributable earnings ............................... $ 75,461,496
=================
Net investment income (loss) differs for financial statement and tax purposes
primarily due to differing treatments of defaulted securities, foreign currency
transactions, passive foreign investment company shares, pass-through entity
income, bond discounts and premiums, synthetic equity swaps, 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, pass-through entity income, bond discounts and premiums, synthetic
equity swaps, 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, 2007, aggregated
$5,112,511,701 and $3,596,900,635, respectively.
Transactions in options written during the year ended December 31, 2007, were as
follows:
--------------------------
NUMBER OF PREMIUMS
CONTRACTS RECEIVED
--------------------------
Options outstanding at
December 31, 2006 .............. 990 $ 112,825
Options written ................... 200 19,600
Options expired ................... (1,190) (132,425)
Options exercised ................. -- --
Options closed .................... -- --
--------------------------
Options outstanding at
December 31, 2007 .............. -- $ --
==========================
46 | Annual Report
Mutual Discovery Fund
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. FORWARD EXCHANGE CONTRACTS
At December 31, 2007, the Fund had the following forward exchange contracts
outstanding:
-----------------------------------------------------------------
CONTRACT SETTLEMENT UNREALIZED UNREALIZED
AMOUNT DATE GAIN LOSS
-----------------------------------------------------------------
CONTRACTS TO BUY
94,290,140 Norwegian Krone .................... $ 17,050,000 2/19/08 $ 276,652 $ --
677,621 Canadian Dollar .................... 664,745 3/26/08 17,718 --
3,214,244 Danish Krone ....................... 629,009 4/23/08 394 --
CONTRACTS TO SELL
1,560,689,259 Norwegian Krone .................... 286,642,158 1/09/08 -- (466,058)
17,400,000 British Pound ...................... 34,484,364 1/10/08 -- (78,345)
298,622,049 British Pound ...................... 601,887,283 1/10/08 8,712,021 --
304,073,640 Euro ............................... 420,971,928 1/14/08 -- (22,894,970)
820,655,565 Swedish Krona ...................... 128,564,110 1/15/08 1,618,531 --
77,259,193 Singapore Dollar ................... 51,794,750 1/24/08 -- (1,903,335)
33,565,253 New Zealand Dollar ................. 25,795,568 2/08/08 187,930 --
146,498,155 Euro ............................... 204,455,047 2/13/08 -- (9,475,162)
61,299,788 Euro ............................... 89,520,556 2/13/08 4,913 --
462,188,667 Norwegian Krone .................... 84,432,260 2/19/08 -- (499,020)
771,200,000 Norwegian Krone .................... 142,335,737 2/19/08 620,874 --
447,886,205 Euro ............................... 664,522,938 2/25/08 10,432,677 --
466,044,975 Swiss Franc ........................ 417,005,576 3/07/08 4,130,635 --
230,982,027 British Pound ...................... 467,320,721 3/10/08 9,243,937 --
158,134,114 Euro ............................... 221,449,959 3/13/08 -- (9,491,056)
123,146,692 Euro ............................... 182,386,408 3/13/08 2,541,456 --
26,174,934,744 Japanese Yen ....................... 232,882,879 3/19/08 -- (3,868,649)
167,884,085 Canadian Dollar .................... 167,910,049 3/26/08 -- (1,173,713)
4,304,450,000 Korean Won ......................... 4,600,000 3/27/08 -- (22,228)
260,701,036,075 Korean Won ......................... 285,673,500 3/27/08 5,726,079 --
1,780,635,684 Danish Krone ....................... 338,572,110 4/23/08 -- (10,106,257)
184,379,206 Euro ............................... 260,160,894 4/24/08 -- (9,069,892)
300,000,000 Euro ............................... 426,309,363 5/19/08 -- (11,693,761)
10,500,000 Euro ............................... 15,619,433 5/19/08 289,323 --
3,600,000 Euro ............................... 5,247,000 5/28/08 -- (8,790)
251,838,733 Euro ............................... 370,487,595 5/28/08 2,817,740 --
----------------------------------
UNREALIZED GAIN (LOSS) ON FORWARD EXCHANGE CONTRACTS ............................. 46,620,880 (80,751,236)
----------------------------------
NET UNREALIZED LOSS ON FORWARD EXCHANGE CONTRACTS ............................. $ (34,130,356)
================
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.
Annual Report | 47
Mutual Discovery Fund
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
9. CREDIT RISK AND 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, 2007, the aggregate value of these securities was $18,541,745,
representing 0.11% of the Fund's net assets. For information as to specific
securities, see the accompanying Statement of Investments.
10. RESTRICTED SECURITIES
The Fund may invest in securities that are restricted under the Securities Act
of 1933 (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, 2007, 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
CONTRACTS ISSUER DATES COST VALUE
- ------------------------------------------------------------------------------------------------------------------------
352,895 AboveNet Inc. .................................... 10/02/01 - 12/12/07 $17,427,178 $ 17,644,750
464 AboveNet Inc., stock grants, grant price
$20.95, expiration date 9/09/13 ............... 4/17/06 - 9/08/06 -- 19,233
12,673 AboveNet Inc., wts., 9/08/08 ..................... 10/02/01 - 9/07/07 1,506,203 598,165
14,911 AboveNet Inc., wts., 9/08/10 ..................... 10/02/01 - 9/07/07 1,843,189 651,312
66,860 Augsburg Re AG ................................... 5/25/06 66,860 --
768,890 Augsburg Re AG, zero cpn., 1/30/08 ............... 5/25/06 768,890 --
7,903,600 Cerberus CG Investor I LLC ....................... 7/26/07 7,903,600 6,654,646
7,903,600 Cerberus CG Investor I LLC, 12.00%,
7/31/14 ....................................... 7/26/07 7,903,600 6,654,646
7,903,600 Cerberus CG Investor II LLC ...................... 7/26/07 7,903,600 6,654,646
7,903,600 Cerberus CG Investor II LLC, 12.00%,
7/31/14 ....................................... 7/26/07 7,903,600 6,654,646
3,951,800 Cerberus CG Investor III LLC ..................... 7/26/07 3,951,800 3,327,323
48| Annual Report
Mutual Discovery Fund
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
10. RESTRICTED SECURITIES (CONTINUED)
- --------------------------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT/
SHARES/WARRANTS/ ACQUISITION
CONTRACTS ISSUER DATES COST VALUE
- --------------------------------------------------------------------------------------------------------------------
3,951,800 Cerberus CG Investor III LLC, 12.00%,
7/31/14 .................................... 7/26/07 $ 3,951,800 $ 3,327,323
8,723,795 Cerberus FIM Investors Auto Finance
LLC ........................................ 11/20/06 8,723,795 4,680,586
26,153,583 Cerberus FIM Investors Auto Finance
LLC, 12.00%, 11/22/13 ...................... 11/21/06 26,153,583 14,032,206
726,666 Cerberus FIM Investors Commercial
Finance LLC ................................ 11/20/06 726,666 389,879
2,179,997 Cerberus FIM Investors Commercial
Finance LLC, 12.00%, 11/22/13 .............. 11/20/06 2,179,997 1,169,636
1,362,023 Cerberus FIM Investors Commercial
Mortgage LLC ............................... 11/20/06 1,362,023 730,767
4,086,069 Cerberus FIM Investors Commercial
Mortgage LLC, 12.00%, 11/22/13 ............. 11/20/06 4,086,069 2,192,302
6,661,738 Cerberus FIM Investors Insurance
LLC ........................................ 11/20/06 6,661,738 3,574,228
19,985,213 Cerberus FIM Investors Insurance LLC,
12.00%, 11/22/13 ........................... 11/20/06 19,985,213 10,722,685
12,402,778 Cerberus FIM Investors Rescap LLC ............. 11/20/06 12,402,779 6,654,474
37,208,337 Cerberus FIM Investors Rescap LLC,
12.00%, 11/22/13 ........................... 11/20/06 37,208,336 19,963,423
89,831 Dana Holding Corp., 4.00%, cvt.,
pfd., B .................................... 12/27/07 8,983,100 8,983,100
359,884 DecisionOne Corp. ............................. 9/28/99 - 7/18/00 273,004 --
444,865 DecisionOne Corp., 12.00%,
4/15/10 .................................... 10/29/99 - 10/17/07 865,275 444,865
82,993 DecisionOne Corp., FRN, 9.50%,
5/12/09 .................................... 7/09/07 82,993 82,993
197,603 DecisionOne Corp., wts., 6/08/17 .............. 7/09/07 -- --
3,850,425 Esmark Inc. ................................... 11/08/04 - 11/28/07 71,317,488 48,965,854
12,017 FE Capital Holdings Ltd. ...................... 8/29/03 - 3/22/07 428,176 7,893,554
8,758,216 Hancock Discovery LLC ......................... 3/06/97 - 7/20/98 10,913,951 --
4,551,501 Imagine Group Holdings Ltd. ................... 8/31/04 46,614,197 52,069,171
3,204,016 International Automotive Components
Group Brazil LLC ........................... 4/13/06 - 8/21/06 1,917,450 22,255,512
650,533 International Automotive Components
Group Japan LLC ............................ 9/26/06 - 3/27/07 5,652,928 5,833,592
13,618,870 International Automotive Components
Group LLC .................................. 1/12/06 - 10/16/06 13,625,552 14,448,259
11,533,275 International Automotive Components
Group NA LLC ............................... 3/30/07 - 10/10/07 11,517,385 15,858,253
3,472,200 International Automotive Components
Group NA LLC, 9.00%, 4/01/17 ............... 3/30/07 3,524,283 3,472,200
1,135,557 Kindred Healthcare Inc. ....................... 5/20/99 - 3/29/06 10,626,030 26,947,903
Annual Report | 49
Mutual Discovery Fund
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
10. RESTRICTED SECURITIES (CONTINUED)
- ---------------------------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT/
SHARES/WARRANTS/ ACQUISITION
CONTRACTS ISSUER DATES COST VALUE
- ---------------------------------------------------------------------------------------------------------------------
Kindred Healthcare Inc., stock grants:
3,928 grant price $18.15, expiration date
7/17/11 ................................. 7/17/02 - 7/17/05 $ -- $ 21,922
1,175 grant price $19.87, expiration date
1/01/12 ................................. 1/01/03 - 1/01/06 -- 4,537
1,174 grant price $6.94, expiration date
1/01/13 ................................. 1/01/04 - 1/03/07 -- 19,713
878 grant price $19.87, expiration date
1/01/14 ................................. 1/01/05 - 1/03/07 -- 3,390
489 grant price $21.33, expiration date
1/10/15 ................................. 1/06/06 - 1/09/07 -- 1,174
246 grant price $22.08, expiration date
1/10/16 ................................. 1/09/07 -- 406
29,617,472 Motor Coach Industries International
Inc., FRN, 18.081%, 12/01/08 ............... 5/27/04 - 11/30/07 29,617,472 29,321,297
5 Motor Coach Industries International
Inc., wts., 5/27/09 ........................ 3/30/07 -- --
55,890 NCB Warrant Holdings Ltd., A .................. 12/16/05 -- 3,316,056
47,160 Olympus Re Holdings Ltd. ...................... 12/19/01 4,716,000 154,458
535,890 a Owens Corning Inc., exercise price
$37.50, expiration date 1/02/08,
shares .................................. 12/20/06 56,082 26,795
86,280 PTV Inc., 10.00%, pfd., A ..................... 12/07/01 - 3/06/02 258,840 103,536
-------------
TOTAL RESTRICTED SECURITIES (2.07% of Net Assets) ............................ $356,525,416
=============
a The Fund also invests in unrestricted securities of the issuer, valued at
$15,177,577 as of December 31, 2007.
11. UNFUNDED CAPITAL COMMITMENTS
At December 31, 2007, the Fund had aggregate unfunded capital commitments to
investments of $17,415,000.
12. 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, 2007, were as shown below.
- ------------------------------------------------------------------------------------------------------------------------------------
NUMBER OF SHARES/ NUMBER OF SHARES/
PRINCIPAL AMOUNT PRINCIPAL AMOUNT REALIZED
HELD AT GROSS GROSS HELD AT VALUE AT INVESTMENT CAPITAL
NAME OF ISSUER BEGINNING OF YEAR ADDITIONS REDUCTIONS END OF YEAR END OF YEAR INCOME GAIN (LOSS)
- ------------------------------------------------------------------------------------------------------------------------------------
CONTROLLED AFFILIATES a
Hancock Discovery LLC .... 8,758,216 -- -- 8,758,216 $ -- $ -- $ --
50| Annual Report
Mutual Discovery Fund
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
12. HOLDINGS OF 5% VOTING SECURITIES OF PORTFOLIO COMPANIES (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------------
NUMBER OF SHARES/ NUMBER OF SHARES/
PRINCIPAL AMOUNT PRINCIPAL AMOUNT REALIZED
HELD AT GROSS GROSS HELD AT VALUE AT INVESTMENT CAPITAL
NAME OF ISSUER BEGINNING OF YEAR ADDITIONS REDUCTIONS END OF YEAR END OF YEAR INCOME GAIN (LOSS)
- ------------------------------------------------------------------------------------------------------------------------------------
NON-CONTROLLED AFFILIATES
Aker Yards ASA ............. -- 6,889,540 1,137,510 5,752,030 $ 65,622,571 $ 1,458,732 $ (3,758,879)
Augsberg Re AG ............. 66,860 -- -- 66,860 -- -- --
Augsberg Re AG, zero cpn.,
1/30/08 ................. 768,890 -- -- 768,890 -- -- --
CSM NV ..................... 4,036,926 -- -- 4,036,926 136,088,747 3,733,486 --
Dockwise Ltd. .............. -- 12,379,100 -- 12,379,100 51,252,139 -- --
Esmark Inc. ................ 7,661 3,884,320 41,556 3,850,425 48,965,854 183,864 --
Esmark Inc., 8.00%, cvt.
pfd., A ................. 27,889 610 28,499 -- -- 1,705,437 353,037
Farmer Brothers Co. ........ 904,637 -- -- 904,637 20,797,605 402,563 --
FE Capital Holdings Ltd. ... 11,589 428 -- 12,017 7,893,554 -- --
Florida East Coast
Industries Inc. ......... 2,247,600 -- 2,247,600 -- -- 48,638,064 73,404,159
Imagine Group Holdings
Ltd. .................... 4,551,501 -- -- 4,551,501 52,069,171 -- --
International Automotive
Components Group Brazil
LLC ..................... 3,204,016 -- -- 3,204,016 22,255,512 -- --
International Automotive
Components Group Japan
LLC ..................... 561,502 89,031 -- 650,533 5,833,592 -- --
International Automotive
Components Group
NA LLC .................. -- 11,533,275 -- 11,533,275 --b -- --
International Automotive
Components Group NA LLC,
9.00%, 4/01/17 ....... -- 3,472,200 -- 3,472,200 --b 208,898 --
Kloeckner & Co. AG ......... 506,310 2,289,954 -- 2,796,264 111,403,867 2,677,897 --
----------------------------------------
TOTAL NON-CONTROLLED AFFILIATES ......................................................... $522,182,612 $59,008,941 $ 69,998,317
----------------------------------------
TOTAL AFFILIATED SECURITIES (3.03% of Net Assets) ....................................... $522,182,612 $59,008,941 $ 69,998,317
========================================
a Issuer in which the Fund owns 25% or more of the outstanding voting
securities.
b As of December 31, 2007, no longer an affiliate.
13. OTHER CONSIDERATIONS
Officers, directors or employees of the Fund's Investment Manager, may serve
from time to time as members of bondholders' steering committees, official
creditors' committees, or boards of directors of companies in which the Fund
invests. Such participation may result in the possession by the Investment
Manager of material non-public information which, pursuant to the Fund's
policies and the requirements of applicable securities laws, could prevent the
Fund from trading in the securities of such companies for limited or extended
periods of time.
Annual Report | 51
Mutual Discovery Fund
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
14. REGULATORY AND LITIGATION 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 and governmental
entities. Specifically, the Company entered into settlements with the SEC, among
others, concerning market timing and marketing support.
On June 6, 2007, the SEC posted for public comment the proposed plan of
distribution for the market timing settlement. Once the SEC approves the final
plan of distribution, disbursements of settlement monies will be made promptly
to individuals who were shareholders of the designated funds during the relevant
period, 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.
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 PRONOUNCEMENT
In September 2006, Financial Accounting Standards Board (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.
52 | 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 Funds constituting the Franklin Mutual Series
Fund Inc.) (the "Fund"), including the statement of investments, as of December
31, 2007, 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, 2007, 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,
2007, 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 14, 2008
Annual Report | 53
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 $411,042,010 as a long
term capital gain dividend for the fiscal year ended December 31, 2007.
Under Section 854(b)(2) of the Code, the Fund designates the maximum amount
allowable but no less than $399,011,943 as qualified dividends for purposes of
the maximum rate under Section 1(h)(11) of the Code for the fiscal year ended
December 31, 2007. In January 2008, shareholders will receive Form 1099-DIV
which will include their share of qualified dividends distributed during the
calendar year 2007. 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)(2)(C) of the Code, the Fund designates the maximum amount
allowable but no less than $32,397,837 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, 2007.
Under Section 854(b)(2) of the Code, the Fund designates 29.59% of the ordinary
income dividends as income qualifying for the dividends received deduction for
the fiscal year ended December 31, 2007.
At December 31, 2007, 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 income 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 20, 2007, 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 table provides a detailed analysis of foreign tax paid, foreign
source income, and foreign qualified dividends as designated by the Fund, to
Class A, Class B, Class C, Class Z and Class R shareholders of record.
RECORD DATE: 12/20/2007
- -------------------------------------------------------------------------------
FOREIGN TAX FOREIGN FOREIGN
PAID SOURCE INCOME QUALIFIED DIVIDENDS
CLASS PER SHARE PER SHARE PER SHARE
- -------------------------------------------------------------------------------
Class A ................... $ 0.0526 $ 0.4131 $ 0.3159
Class B ................... $ 0.0526 $ 0.2616 $ 0.2003
Class C ................... $ 0.0526 $ 0.2843 $ 0.2176
Class Z ................... $ 0.0526 $ 0.4705 $ 0.3601
Class R ................... $ 0.0526 $ 0.3811 $ 0.2916
54 | Annual Report
Mutual Discovery 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 2008, shareholders will receive Form 1099-DIV which will include
their share of taxes paid and foreign source income distributed during the
calendar year 2007. 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 2007 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 | 55
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 None
c/o Franklin Mutual Advisers, LLC
101 John F. Kennedy Parkway
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; a director to numerous
financial publishing organizations; and FORMERLY, Vice Director, Salomon Center, Stern School of Business, New York University.
- ------------------------------------------------------------------------------------------------------------------------------------
ANN TORRE BATES (1958) Director Since 1994 7 SLM Corporation (Sallie Mae)
c/o Franklin Mutual Advisers, LLC and Allied Capital
101 John F. Kennedy Parkway Corporation (financial
Short Hills, NJ 07078-2789 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 14 Franklin Templeton Emerging
c/o Franklin Mutual Advisers, LLC Markets Debt Opportunities
101 John F. Kennedy Parkway Fund PLC and Fiduciary
Short Hills, NJ 07078-2789 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
c/o Franklin Mutual Advisers, LLC
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).
- ------------------------------------------------------------------------------------------------------------------------------------
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
- ------------------------------------------------------------------------------------------------------------------------------------
CHARLES RUBENS II (1930) Director Since 1998 14 None
c/o Franklin Mutual Advisers, LLC
101 John F. Kennedy Parkway
Short Hills, NJ 07078-2789
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Private investor.
- ------------------------------------------------------------------------------------------------------------------------------------
ROBERT E. WADE (1946) Director and Director 34 El Oro and Exploration Co.,
c/o Franklin Mutual Advisers, LLC Chairman since 1991 p.l.c. (investments) and ARC
101 John F. Kennedy Parkway of the Board and Chairman Wireless Solutions, Inc.
Short Hills, NJ 07078-2789 of the Board (wireless components and
since 2005 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
- ------------------------------------------------------------------------------------------------------------------------------------
**GREGORY E. JOHNSON (1961) Director Since April 92 None
One Franklin Parkway 2007
San Mateo, CA 94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Director, President and Chief Executive Officer, Franklin Resources, Inc.; President, Templeton Worldwide, Inc.; Director,
Templeton Asset Management Ltd.; and officer and/or director or trustee, as the case may be, of some of the other subsidiaries of
Franklin Resources, Inc. and of 33 of the investment companies in Franklin Templeton Investments.
- ------------------------------------------------------------------------------------------------------------------------------------
**PETER A. LANGERMAN (1955) Director, Director 7 None
c/o Franklin Mutual Advisers, LLC President and since April
101 John F. Kennedy Parkway Chief Executive 2007 and
Short Hills, NJ 07078-2702 Officer - President and
Investment Chief
Management Executive
Officer -
Investment
Management
since 2005
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Chairman of the Board, Chief Executive Officer and President, Franklin Mutual Advisers, LLC; officer and/or director, as the case
may be, of three of the investment companies in Franklin Templeton Investments; and FORMERLY, Director, New Jersey's Division of
Investment.
- ------------------------------------------------------------------------------------------------------------------------------------
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.
- ------------------------------------------------------------------------------------------------------------------------------------
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
- ------------------------------------------------------------------------------------------------------------------------------------
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 and Vice
- AML Compliance President -
AML
Compliance
since 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 and
Short Hills, NJ 07078-2789 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.
- ------------------------------------------------------------------------------------------------------------------------------------
JIMMY D. GAMBILL (1947) Senior Vice Since 2002 Not Applicable Not Applicable
500 East Broward Blvd. President and
Suite 2100 Chief Executive
Fort Lauderdale, 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.
- ------------------------------------------------------------------------------------------------------------------------------------
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; Secretary, Franklin Advisory Services, LLC, Franklin Mutual
Advisers, LLC and Franklin Templeton Distributors, Inc.; and officer of 41 of the investment companies in Franklin Templeton
Investments.
- ------------------------------------------------------------------------------------------------------------------------------------
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 18 of the investment companies in Franklin Templeton Investments; and
FORMERLY, Vice President, JPMorgan Chase (2000-2004) and American General Financial Group (1991-2000).
- ------------------------------------------------------------------------------------------------------------------------------------
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
- ------------------------------------------------------------------------------------------------------------------------------------
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 some of the other subsidiaries of Franklin Resources, Inc. and
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.
** Gregory E. Johnson is considered to be an interested person of the Fund under
the federal securities laws due to his position as an officer and director of
Franklin Resources, Inc., which is the parent company of the Fund's investment
manager and distributor. Peter A. Langerman is considered to be an interested
person of the Fund under the federal securities laws due to his position as an
officer of Franklin Mutual Advisers, LLC, which is the Fund's investment
manager.
Note 1: Officer information is current as of the date of this report. It is
possible that after this date, information about officers may change.
Note 2: Prior to December 31, 2007, William J. Lippman, Leonard Rubin and Anne
M. Tatlock ceased to be directors of the Fund.
THE FUND'S BOARD 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 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.
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 FUNDS
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 1
GLOBAL
Mutual Discovery Fund
Templeton Global Long-Short Fund
Templeton Global Opportunities Trust
Templeton Global Smaller Companies Fund 1
Templeton Growth Fund
Templeton World Fund
GROWTH
Franklin Capital Growth Fund
Franklin Flex Cap Growth Fund
Franklin Growth Opportunities Fund 2
Franklin Small Cap Growth Fund II 3
Franklin Small-Mid Cap Growth Fund
VALUE
Franklin All Cap Value Fund
Franklin Balance Sheet Investment Fund 1
Franklin Equity Income Fund
Franklin Large Cap Value Fund
Franklin MicroCap Value Fund 1
Franklin MidCap Value Fund
Franklin Small Cap Value Fund
Mutual Beacon Fund
Mutual Qualified Fund
Mutual Recovery Fund 4
Mutual Shares Fund
BLEND
Franklin Balanced Fund
Franklin Convertible Securities Fund
Franklin Focused Core Equity Fund
Franklin Growth Fund
Franklin Rising Dividends 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(R) Allocation Fund
Franklin Templeton Founding Funds Allocation Fund
Franklin Templeton Perspectives Allocation Fund
Franklin Templeton Conservative Target Fund
Franklin Templeton Growth Target Fund
Franklin Templeton Moderate Target Fund
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 5
Franklin Floating Rate Daily Access Fund
Franklin High Income Fund
Franklin Income Fund
Franklin Limited Maturity U.S. Government Securities Fund 5
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 5
Templeton Global Bond Fund
Templeton Income Fund
Templeton International Bond 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
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 and select
retirement plans can continue adding to their accounts.
2. Effective 11/1/07, Franklin Aggressive Growth Fund changed its name to
Franklin Growth Opportunities Fund. The fund's investment goal and strategy
remained the same.
3. The fund is closed to new investors. Existing shareholders can continue
adding to their accounts.
4. 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.
5. An investment in the fund is neither insured nor guaranteed by the U.S.
government or by any other entity or institution.
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. The fund invests primarily in 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.
12/07 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 A2007 02/08
Contents
SHAREHOLDER LETTER ........................................................ 1
ANNUAL REPORT
Mutual Financial Services Fund ............................................ 4
Performance Summary ....................................................... 9
Your Fund's Expenses ...................................................... 14
Financial Highlights and Statement of Investments ......................... 16
Financial Statements ...................................................... 24
Notes to Financial Statements ............................................. 28
Report of Independent Registered Public Accounting Firm ................... 41
Tax Designation ........................................................... 42
Board Members and Officers ................................................ 44
Shareholder Information ................................................... 48
- --------------------------------------------------------------------------------
Shareholder Letter
- --------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURN
- -------------------------------------------------------
CLASS Z 12/31/07
- -------------------------------------------------------
1-Year -8.71%
- -------------------------------------------------------
5-Year +13.44%
- -------------------------------------------------------
10-Year +12.05%
- -------------------------------------------------------
Dear Shareholder:
We are pleased to bring you the annual report for Mutual Financial Services
Fund. Although Mutual Financial Services Fund - Class Z declined 8.71% for the
year ended December 31, 2007, this compared favorably with the Standard and
Poor's 500 (S&P 500) Financials Index, which fell 18.63% during the same period.
1 While our distinctive, disciplined investment style contributed to the Fund's
continued relative outperformance, we were not completely immune from the
financial services sector's significant underperformance relative to the
broader market.
The year under review was a difficult environment for financial
services-specific investing, as a number of factors affected these stocks as
well as the economy in general. These factors included: (1) credit problems
centered around sub-prime mortgage lending; (2) declining home values in the
U.S.; (3) a nearly complete evaporation of the corporate leveraged lending that
fueled the leveraged buyout boom of the past several years; (4) a sharp increase
in oil, mining and agricultural commodity prices; and (5) a sharp decline in the
value of the U.S. dollar relative to most other currencies.
1. Source: Standard & Poor's Micropal. The S&P 500 Financials Index is market
value weighted and includes all the financial stocks in the S&P 500 Index. 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.
- --------------------------------------------------------------------------------
eDELIVERY DETAILS
Log in at franklintempleton.com and click on eDelivery. Shareholders who are
registered at franklintempleton.com can receive these reports via email. Not all
accounts are eligible for eDelivery.
- -----------------------------------------------------
NOT FDIC INSURED | MAY LOSE VALUE | NO BANK GUARANTEE
- -----------------------------------------------------
Not part of the annual report | 1
The positive factors impacting the Fund's 2007 results centered around our
philosophy of investing with capital preservation as a top priority. Successful
investing is at least as much about curtailing losses as it is about
participating in the upside, and while we did not avoid a loss this year, we are
content in knowing that our approach helped minimize losses over the Fund's
fiscal year. The Fund has also served our investors well over the longer term,
as Class Z shares delivered a 24.76% cumulative total return over the past three
years and easily outpaced the S&P 500 Financials Index, which rose just 3.27%
over the same time. 1 Specifically, our enduring strategy of investing in
specialty insurance companies and attractively valued securities exchanges,
especially those in Europe, continued to perform well during 2007.
The past year was one in which many financial stocks with apparently inexpensive
valuations became even cheaper, and those with rich valuations outperformed.
This presented a problem to many value investors. We chose to navigate this
course by investing in stocks that offered solid business models and balance
sheets with less relative risk. The Fund's U.S. exposure continued to wane, as
has been the trend for several years. We divested from many U.S. companies in
2005 and 2006, particularly those that seemed directly exposed to the risks of a
U.S. housing slowdown. We took further steps in 2007 to eliminate exposure to
companies where we saw significant downside potential. Also, we never allocated
a significant amount of capital to U.S. investment banks, where four years of
retained earnings can be (and sometimes are) wiped out within a calendar quarter
or two of write-downs.
Many of our investments in Europe, while outperforming their U.S. peers, still
detracted from the Fund's absolute performance in 2007 in the latter half of the
year. Although many of our investments in European banks had no direct and
little secondary exposure to increasingly risky U.S. assets, the widespread
sell-off within the financial services sector, sparked primarily by the subprime
mortgage lending crisis, negatively impacted funding markets and dragged down
stock prices globally. We had projected that these stocks would have performed
even better than they did amid a U.S.-driven downturn but viewed the valuations
at which many of these companies were trading at year-end as having
substantially less risk than their underlying valuations implied.
Fear and volatility can breed opportunity for patient investors. We are happy to
take advantage of market stresses to buy great companies cheaply, and the
extended credit crisis in particular continues to create such opportunities. We
have no crystal ball telling us precisely when the U.S. housing market will turn
positive, where oil prices will be a year from now, or what actions the
2 | Not part of the annual report
Federal Reserve Board will take. However, we believe that if we stick to our
discipline of buying good businesses at cheap valuations, we should reach our
goal of limiting our downside risk while generating consistent returns over the
long term.
In the enclosed annual report for Mutual Financial Services Fund, the portfolio
manager discusses market conditions, investment management decisions and Fund
performance during the period under review. You will also find performance data
and financial information. Please remember that all securities markets
fluctuate, as do mutual fund share prices.
If you would like more frequent updates, FRANKLINTEMPLETON.COM provides daily
prices, monthly performance figures, portfolio holdings and other information.
You can also access your account, buy and sell shares, read timely articles, and
find helpful financial planning tools. We hope you will take advantage of these
online services.
As always, we thank you for your trust and support and extend our best wishes
for a happy, healthy and prosperous 2008.
Sincerely,
/s/ Peter A. Langerman
Peter A. Langerman
Chairman, President and Chief Executive Officer
Franklin Mutual Advisers, LLC
/s/ Michael J. Embler
Michael J. Embler
Senior Vice President and Chief Investment Officer
Franklin Mutual Advisers, LLC
THIS LETTER REFLECTS OUR ANALYSIS AND OPINIONS AS OF DECEMBER 31, 2007. THE
INFORMATION IS NOT A COMPLETE ANALYSIS OF EVERY ASPECT OF ANY MARKET, COUNTRY,
INDUSTRY, SECURITY OR FUND. STATEMENTS OF FACT ARE FROM SOURCES CONSIDERED
RELIABLE.
Not part of the annual report | 3
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 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, subprime 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.
- --------------------------------------------------------------------------------
This annual report for Mutual Financial Services Fund covers the fiscal year
ended December 31, 2007.
PERFORMANCE OVERVIEW
Mutual Financial Services Fund - Class Z had a cumulative total return of -8.71%
for the 12 months ended December 31, 2007. The Fund - Class Z underperformed its
broad benchmark, the Standard & Poor's 500 (S&P 500) Index, which returned
+5.49% for the same period, but outperformed its narrow benchmark, the S&P 500
Financials Index, which returned -18.63%. 1 You can find the Fund's long-term
performance data in the Performance Summary beginning on page 9.
ECONOMIC AND MARKET OVERVIEW
In spite of elevated energy prices and widespread fears of contagion from the
deteriorating U.S. housing situation, the global economy remained resilient in
2007. Consumer and corporate demand strength, particularly in China and other
developing economies, generally favorable employment and accommodative monetary
policies continued to underpin the current expansionary period that began in
2002.
1. Source: Standard & Poor's Micropal. The S&P 500 Index 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
Index 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 Index. 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
These factors also contributed to the strength of global equity markets during
2007. However, concerns about slower growth and declining asset quality surfaced
in the first quarter. These were initially centered on the U.S. subprime
mortgage market but spread in August to global capital markets. Difficulties in
assessing risk and the value of collateral in the structured finance industry
contributed to declining risk appetite among lenders and investors. The private
equity industry, which relies on the availability of cheap credit, played a
pivotal role in several large and high-profile acquisitions and helped boost
merger and acquisition activity in the first half of the year. This was an
important driver of equity performance, but as liquidity dried up in the second
half of the year, significantly slower money flows from private equity weighed
on market performance. However, global merger and acquisition activity still
reached record levels. The staggering $4.5 trillion of deals announced in 2007
eclipsed the previous record from 2006 by 24%. 2
To alleviate the credit crunch and restore investor confidence, the world's
major central banks infused capital into the system, and the U.S. Federal
Reserve Board reduced its target interest rate by a full percentage point.
However, credit and equity markets continued to face headwinds as write-downs
and losses from subprime mortgage financing affected many large financial
institutions toward the end of the year, and equity prices remained volatile.
For the year, however, global and non-U.S. equity markets registered the fifth
consecutive year of double-digit total returns, making this an exceptionally
strong period for investors in global equities. Broad-based stock performance by
European and Asian shares at least doubled that of U.S. stocks, while emerging
market equity returns more than tripled those in developed markets. Led by the
BRIC countries, Brazil, Russia, India and China, emerging market economies
continued to grow at accelerated rates, supporting elevated prices for oil and
other commodities. At the same time, investment inflows from developed economies
continued to underpin equity prices in emerging markets. In addition, U.S.
dollar weakness versus the currencies of many major trading partners enhanced
equity returns for U.S.-based investors holding stocks denominated in these
currencies.
- --------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
2. Source: "For Deal Makers, Tale of Two Halves," THE WALL STREET JOURNAL,
1/2/08.
Annual Report | 5
GEOGRAPHIC BREAKDOWN
Based on Total Net Assets as of 12/31/07
[THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.]
U.S. 28.2%
Germany 12.8%
Norway 6.9%
Sweden 6.4%
Belgium 5.6%
France 4.9%
Switzerland 4.4%
U.K. 4.2%
Italy 3.9%
Japan 3.3%
Greece 3.1%
Denmark 2.5%
Other 9.7%
Short-Term Investments & Other Net Assets 4.1%
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
fundamental 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 for our shareholders.
MANAGER'S DISCUSSION
Among the Fund's top contributors to performance in 2007 were Deutsche Boerse,
OMX and Hellenic Exchanges.
The Fund's investment in Deutsche Boerse rose nearly 99% in local currency as
cash equity trading volumes surged 63%, the company resumed its buyback of
shares, and investors appeared to recognize hidden potential embedded in the
business. The exchange industry grew as such quasi-monopolies benefited from
higher volumes in different product classes and generally beneficial pricing
trends. Deutsche Boerse also tapped into the structural potential of its
business by announcing future cost cutting of over 100 millioneuros per year to
enhance profitability. We believed future exchange consolidation prospects
placed the company in a good position for ongoing shareholder returns.
Therefore, we increased our holdings in Deutsche Boerse throughout 2007 when we
found the price attractive.
OMX, a company owning securities exchanges in the Nordic and Baltic regions of
Europe, appreciated 115% in local currency as its acquisition by the
NASDAQ-Borse Dubai group closed successfully. The cash-generative nature of
exchanges has made them a Fund staple for many years, and OMX experienced many
of the same positive trends that other exchanges saw in 2007. Seeing the
fundamental attractions of the business, NASDAQ-Borse Dubai acquired OMX to
create a transatlantic business and to leverage off of OMX's undervalued
technology business.
6 | Annual Report
Our investment in Hellenic Exchanges, the Greek stock exchange, appreciated 81%
in local currency during 2007. The positive factors affecting securities trading
were felt in markets both large and small, as the Greek stock exchange possesses
a highly profitable monopoly in Greek securities and in 2007 earned an EBITDA
(earnings before interest, tax, depreciation and amortization) margin in excess
of 70% with potential for further cost containment. In addition to robust growth
in trading volumes, Hellenic Exchanges has maintained a generous capital return
program and has continually reduced its operating costs, cutting them by almost
20% since 2004. We believe many of the attractive qualities found in other
European exchanges are present in Hellenic Exchanges, and it could become a
sought-after acquisition target by another exchange or financial groups as the
pan-European consolidation theme proceeds.
In a difficult year for the financial services sector as a whole, the Fund also
owned several stocks that detracted from performance. Among the leading
detractors were Belgium-based Fortis, whose operations are focused in banking,
insurance and investment management; Banca Popolare, an Italian financial
services provider; and Eurocastle, a Guernsey-based company that operates in the
German real estate industry.
Fortis declined 30% in local currency as the company raised a significant amount
of capital to fund its acquisition of ABN Amro's Dutch retail banking, asset
management and private banking units. Fortis was part of a consortium with Royal
Bank of Scotland and Banco Santander, which together acquired these businesses
and by year-end had completed the largest bank acquisition in European history.
Fortis' stock price also came under pressure after the company announced weak
third quarter 2007 operating results for its banking and insurance businesses.
The Fund's shares of Banca Popolare declined 34% in local currency during 2007.
As global economic fears became more evident in the markets, Banca Popolare
suffered as investors became hesitant about the bank's growth prospects for the
next few years. Also, concerns developed over the potential integration of its
$10 billion BPI (Banca Popolare Italiana) acquisition and lost revenue stemming
from the company's Banca Italease subsidiary. At period-end, we believed Banca
Popolare should be able to weather an economic downturn due to its regional
focus and potential future earnings growth from merger integration.
PORTFOLIO BREAKDOWN
Based on Total Net Assets as of 12/31/07
[THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.]
Commercial Banks 25.4%
Diversified Financial Services 18.1%
Insurance 17.5%
Real Estate 12.3%
Capital Markets 9.4%
Thrifts & Mortgage Finance 6.0%
Commercial Services & Supplies 2.4%
Media 1.5%
Consumer Finance 1.3%
Corporate Bonds 1.1%
Other 5.0%
Annual Report | 7
TOP 10 HOLDINGS
12/31/07
- --------------------------------------------------------------------------------
COMPANY % OF TOTAL
SECTOR/INDUSTRY, COUNTRY NET ASSETS
- --------------------------------------------------------------------------------
Fortis 4.6%
DIVERSIFIED FINANCIAL SERVICES, BELGIUM
- --------------------------------------------------------------------------------
Deutsche Boerse AG 3.7%
DIVERSIFIED FINANCIAL SERVICES, GERMANY
- --------------------------------------------------------------------------------
Acta Holding ASA 3.0%
CAPITAL MARKETS, NORWAY
- --------------------------------------------------------------------------------
Oslo Bors Holding ASA 3.0%
DIVERSIFIED FINANCIAL SERVICES, NORWAY
- --------------------------------------------------------------------------------
BNP Paribas SA 2.9%
COMMERCIAL BANKS, FRANCE
- --------------------------------------------------------------------------------
Danske Bank AS 2.5%
COMMERCIAL BANKS, DENMARK
- --------------------------------------------------------------------------------
White Mountains Insurance Group Ltd. 2.4%
INSURANCE, U.S.
- --------------------------------------------------------------------------------
Banque Cantonale Vaudoise 2.4%
COMMERCIAL BANKS, SWITZERLAND
- --------------------------------------------------------------------------------
D. Carnegie & Co. AB 2.2%
CAPITAL MARKETS, SWEDEN
- --------------------------------------------------------------------------------
Hellenic Exchanges SA Holding 2.1%
DIVERSIFIED FINANCIAL SERVICES, GREECE
- --------------------------------------------------------------------------------
Our investment in Eurocastle shares declined 53% in local currency. Investors
became concerned with the functioning of global funding markets as well as with
global economic weakening and its possible effects on the recovery in German
office properties. In our analysis, Eurocastle stock traded at a meaningful
discount to its liquidation value at period-end, which indicated the presence of
significant value.
Finally, investors should note that we maintained our currency hedging posture
of being generally hedged to the U.S. dollar for most of our non-U.S. holdings.
Since the dollar was weaker compared with most foreign currencies during 2007,
the Fund benefited to the extent it was not fully hedged.
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, 2007, 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. He is also portfolio manager 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 12/31/07
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 12/31/07 12/31/06
- --------------------------------------------------------------------------------------
Net Asset Value (NAV) -$3.91 $18.68 $22.59
- --------------------------------------------------------------------------------------
DISTRIBUTIONS (1/1/07-12/31/07)
- --------------------------------------------------------------------------------------
Dividend Income $0.6144
- --------------------------------------------------------------------------------------
Short-Term Capital Gain $0.1339
- --------------------------------------------------------------------------------------
Long-Term Capital Gain $1.2614
- --------------------------------------------------------------------------------------
TOTAL $2.0097
- --------------------------------------------------------------------------------------
CLASS A (SYMBOL: TFSIX) CHANGE 12/31/07 12/31/06
- --------------------------------------------------------------------------------------
Net Asset Value (NAV) -$3.90 $18.70 $22.60
- --------------------------------------------------------------------------------------
DISTRIBUTIONS (1/1/07-12/31/07)
- --------------------------------------------------------------------------------------
Dividend Income $0.5418
- --------------------------------------------------------------------------------------
Short-Term Capital Gain $0.1339
- --------------------------------------------------------------------------------------
Long-Term Capital Gain $1.2614
- --------------------------------------------------------------------------------------
TOTAL $1.9371
- --------------------------------------------------------------------------------------
CLASS B (SYMBOL: TBFSX) CHANGE 12/31/07 12/31/06
- --------------------------------------------------------------------------------------
Net Asset Value (NAV) -$3.82 $18.26 $22.08
- --------------------------------------------------------------------------------------
DISTRIBUTIONS (1/1/07-12/31/07)
- --------------------------------------------------------------------------------------
Dividend Income $0.3594
- --------------------------------------------------------------------------------------
Short-Term Capital Gain $0.1339
- --------------------------------------------------------------------------------------
Long-Term Capital Gain $1.2614
- --------------------------------------------------------------------------------------
TOTAL $1.7547
- --------------------------------------------------------------------------------------
CLASS C (SYMBOL: TMFSX) CHANGE 12/31/07 12/31/06
- --------------------------------------------------------------------------------------
Net Asset Value (NAV) -$3.87 $18.59 $22.46
- --------------------------------------------------------------------------------------
DISTRIBUTIONS (1/1/07-12/31/07)
- --------------------------------------------------------------------------------------
Dividend Income $0.3757
- --------------------------------------------------------------------------------------
Short-Term Capital Gain $0.1339
- --------------------------------------------------------------------------------------
Long-Term Capital Gain $1.2614
- --------------------------------------------------------------------------------------
TOTAL $1.7710
- --------------------------------------------------------------------------------------
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 -8.71% +87.85% +212.08%
- ------------------------------------------------------------------------------------------------
Average Annual Total Return 3 -8.71% +13.44% +12.05%
- ------------------------------------------------------------------------------------------------
Value of $10,000 Investment 4 $ 9,129 $ 18,785 $ 31,208
- ------------------------------------------------------------------------------------------------
Total Annual Operating Expenses 5 1.08%
- ------------------------------------------------------------------------------------------------
CLASS A 1-YEAR 5-YEAR 10-YEAR
- ------------------------------------------------------------------------------------------------
Cumulative Total Return 2 -8.99% +84.82% +202.17%
- ------------------------------------------------------------------------------------------------
Average Annual Total Return 3 -14.22% +11.74% +11.03%
- ------------------------------------------------------------------------------------------------
Value of $10,000 Investment 4 $ 8,578 $ 17,422 $ 28,478
- ------------------------------------------------------------------------------------------------
Total Annual Operating Expenses 5 1.39%
- ------------------------------------------------------------------------------------------------
CLASS B 1-YEAR 5-YEAR INCEPTION (1/1/99)
- ------------------------------------------------------------------------------------------------
Cumulative Total Return 2 -9.58% +78.77% +168.41%
- ------------------------------------------------------------------------------------------------
Average Annual Total Return 3 -12.89% +12.07% +11.59%
- ------------------------------------------------------------------------------------------------
Value of $10,000 Investment 4 $ 8,711 $ 17,677 $ 26,841
- ------------------------------------------------------------------------------------------------
Total Annual Operating Expenses 5 2.08%
- ------------------------------------------------------------------------------------------------
CLASS C 1-YEAR 5-YEAR 10-YEAR
- ------------------------------------------------------------------------------------------------
Cumulative Total Return 2 -9.60% +78.66% +182.94%
- ------------------------------------------------------------------------------------------------
Average Annual Total Return 3 -10.43% +12.31% +10.96%
- ------------------------------------------------------------------------------------------------
Value of $10,000 Investment 4 $ 8,957 $ 17,866 $ 28,294
- ------------------------------------------------------------------------------------------------
Total Annual Operating Expenses 5 2.08%
- ------------------------------------------------------------------------------------------------
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 (1/1/98-12/31/07)
[THE FOLLOWING TABLE WAS REPRESENTED BY LINE GRAPH IN THE PRINTED MATERIAL.]
Mutual Financial S&P 500 Financials
Date Services Fund S&P 500 6 Index 6
- ------------- ---------------- --------- -------------------
1/1/1998 $10,000 $10,000 $10,000
1/31/1998 $10,098 $10,111 $ 9,715
2/28/1998 $11,091 $10,840 $10,628
3/31/1998 $11,735 $11,395 $11,234
4/30/1998 $12,044 $11,510 $11,420
5/31/1998 $11,783 $11,312 $11,145
6/30/1998 $11,645 $11,771 $11,612
7/31/1998 $11,609 $11,646 $11,614
8/31/1998 $ 9,381 $ 9,962 $ 8,936
9/30/1998 $ 9,578 $10,600 $ 9,115
10/31/1998 $ 9,997 $11,463 $10,221
11/30/1998 $10,441 $12,157 $10,918
12/31/1998 $10,708 $12,858 $11,142
1/31/1999 $10,675 $13,396 $11,379
2/28/1999 $10,458 $12,979 $11,531
3/31/1999 $10,717 $13,498 $11,972
4/30/1999 $11,399 $14,021 $12,784
5/31/1999 $11,541 $13,690 $12,073
6/30/1999 $12,066 $14,450 $12,573
7/31/1999 $11,941 $13,999 $11,792
8/31/1999 $11,380 $13,929 $11,250
9/30/1999 $11,238 $13,548 $10,666
10/31/1999 $12,058 $14,405 $12,446
11/30/1999 $11,807 $14,698 $11,835
12/31/1999 $11,211 $15,563 $11,601
1/31/2000 $10,515 $14,781 $11,234
2/29/2000 $ 9,639 $14,502 $10,017
3/31/2000 $11,014 $15,920 $11,876
4/30/2000 $10,928 $15,441 $11,503
5/31/2000 $11,624 $15,124 $12,274
6/30/2000 $11,329 $15,497 $11,530
7/31/2000 $12,059 $15,255 $12,722
8/31/2000 $12,982 $16,203 $13,943
9/30/2000 $13,852 $15,347 $14,274
10/31/2000 $13,738 $15,282 $14,212
11/30/2000 $13,333 $14,078 $13,374
12/31/2000 $14,832 $14,146 $14,582
1/31/2001 $15,022 $14,648 $14,542
2/28/2001 $15,068 $13,313 $13,587
3/31/2001 $15,168 $12,469 $13,178
4/30/2001 $15,804 $13,438 $13,668
5/31/2001 $16,495 $13,528 $14,219
6/30/2001 $16,917 $13,199 $14,214
7/31/2001 $17,130 $13,069 $13,984
8/31/2001 $17,001 $12,251 $13,132
9/30/2001 $15,658 $11,262 $12,357
10/31/2001 $15,501 $11,476 $12,127
11/30/2001 $16,177 $12,357 $12,993
12/31/2001 $16,658 $12,465 $13,277
1/31/2002 $16,978 $12,283 $13,070
2/28/2002 $17,088 $12,046 $12,880
3/31/2002 $18,070 $12,499 $13,736
4/30/2002 $18,610 $11,741 $13,370
5/31/2002 $18,750 $11,655 $13,347
6/30/2002 $18,044 $10,825 $12,714
7/31/2002 $17,153 $ 9,981 $11,705
8/31/2002 $17,501 $10,046 $11,945
9/30/2002 $16,077 $ 8,955 $10,548
10/31/2002 $16,508 $ 9,743 $11,503
11/30/2002 $16,671 $10,316 $11,975
12/31/2002 $16,613 $ 9,710 $11,334
1/31/2003 $16,425 $ 9,456 $11,145
2/28/2003 $16,081 $ 9,314 $10,796
3/31/2003 $16,227 $ 9,404 $10,754
4/30/2003 $17,344 $10,179 $12,071
5/31/2003 $18,325 $10,715 $12,709
6/30/2003 $18,388 $10,852 $12,741
7/31/2003 $18,952 $11,043 $13,326
8/31/2003 $19,276 $11,259 $13,192
9/30/2003 $19,234 $11,139 $13,280
10/31/2003 $20,384 $11,769 $14,194
11/30/2003 $20,802 $11,873 $14,155
12/31/2003 $21,635 $12,495 $14,851
1/31/2004 $22,315 $12,725 $15,324
2/29/2004 $22,639 $12,902 $15,730
3/31/2004 $22,725 $12,707 $15,575
4/30/2004 $21,873 $12,508 $14,856
5/31/2004 $22,002 $12,679 $15,129
6/30/2004 $22,284 $12,926 $15,204
7/31/2004 $21,988 $12,498 $14,892
8/31/2004 $22,273 $12,549 $15,393
9/30/2004 $22,922 $12,684 $15,261
10/31/2004 $22,966 $12,878 $15,339
11/30/2004 $24,251 $13,399 $15,793
12/31/2004 $25,015 $13,855 $16,468
1/31/2005 $24,648 $13,518 $16,112
2/28/2005 $25,089 $13,802 $16,027
3/31/2005 $24,648 $13,558 $15,418
4/30/2005 $24,318 $13,300 $15,434
5/31/2005 $25,052 $13,724 $15,857
6/30/2005 $25,708 $13,743 $16,085
7/31/2005 $26,813 $14,254 $16,338
8/31/2005 $26,474 $14,124 $16,053
9/30/2005 $26,574 $14,239 $16,201
10/31/2005 $26,210 $14,001 $16,713
11/30/2005 $27,504 $14,531 $17,496
12/31/2005 $28,551 $14,536 $17,535
1/31/2006 $29,768 $14,921 $17,692
2/28/2006 $30,799 $14,961 $18,050
3/31/2006 $31,593 $15,147 $18,103
4/30/2006 $31,950 $15,351 $18,887
5/31/2006 $30,429 $14,909 $18,192
6/30/2006 $30,068 $14,929 $18,080
7/31/2006 $30,244 $15,021 $18,528
8/31/2006 $31,081 $15,379 $18,743
9/30/2006 $31,823 $15,775 $19,524
10/31/2006 $32,498 $16,289 $19,998
11/30/2006 $32,809 $16,599 $20,123
12/31/2006 $34,185 $16,832 $20,900
1/31/2007 $35,320 $17,086 $21,085
2/28/2007 $35,078 $16,752 $20,456
3/31/2007 $35,396 $16,939 $20,305
4/30/2007 $36,379 $17,690 $21,145
5/31/2007 $37,438 $18,307 $21,632
6/30/2007 $36,114 $18,003 $20,735
7/31/2007 $34,027 $17,445 $19,118
8/31/2007 $33,408 $17,706 $19,413
9/30/2007 $33,114 $18,368 $19,852
10/31/2007 $32,991 $18,661 $19,493
11/30/2007 $31,445 $17,880 $17,984
12/31/2007 $31,208 $17,756 $17,006
AVERAGE ANNUAL TOTAL RETURN
- --------------------------------------------------------------------------------
CLASS Z 12/31/07
- --------------------------------------------------------------------------------
1-Year -8.71%
- --------------------------------------------------------------------------------
5-Year +13.44%
- --------------------------------------------------------------------------------
10-Year +12.05%
- --------------------------------------------------------------------------------
CLASS A (1/1/98-12/31/07)
[THE FOLLOWING TABLE WAS REPRESENTED BY LINE GRAPH IN THE PRINTED MATERIAL.]
Mutual Financial S&P 500 Financials
Date Services Fund S&P 500 6 Index 6
- ------------- ---------------- --------- -------------------
1/1/1998 $ 9,424 $10,000 $10,000
1/31/1998 $ 9,517 $10,111 $ 9,715
2/28/1998 $10,453 $10,840 $10,628
3/31/1998 $11,067 $11,395 $11,234
4/30/1998 $11,351 $11,510 $11,420
5/31/1998 $11,105 $11,312 $11,145
6/30/1998 $10,967 $11,771 $11,612
7/31/1998 $10,936 $11,646 $11,614
8/31/1998 $ 8,837 $ 9,962 $ 8,936
9/30/1998 $ 9,015 $10,600 $ 9,115
10/31/1998 $ 9,402 $11,463 $10,221
11/30/1998 $ 9,821 $12,157 $10,918
12/31/1998 $10,066 $12,858 $11,142
1/31/1999 $10,035 $13,396 $11,379
2/28/1999 $ 9,832 $12,979 $11,531
3/31/1999 $10,066 $13,498 $11,972
4/30/1999 $10,708 $14,021 $12,784
5/31/1999 $10,841 $13,690 $12,073
6/30/1999 $11,324 $14,450 $12,573
7/31/1999 $11,206 $13,999 $11,792
8/31/1999 $10,680 $13,929 $11,250
9/30/1999 $10,538 $13,548 $10,666
10/31/1999 $11,300 $14,405 $12,446
11/30/1999 $11,065 $14,698 $11,835
12/31/1999 $10,505 $15,563 $11,601
1/31/2000 $ 9,853 $14,781 $11,234
2/29/2000 $ 9,026 $14,502 $10,017
3/31/2000 $10,312 $15,920 $11,876
4/30/2000 $10,231 $15,441 $11,503
5/31/2000 $10,874 $15,124 $12,274
6/30/2000 $10,598 $15,497 $11,530
7/31/2000 $11,280 $15,255 $12,722
8/31/2000 $12,135 $16,203 $13,943
9/30/2000 $12,940 $15,347 $14,274
10/31/2000 $12,833 $15,282 $14,212
11/30/2000 $12,447 $14,078 $13,374
12/31/2000 $13,855 $14,146 $14,582
1/31/2001 $14,025 $14,648 $14,542
2/28/2001 $14,058 $13,313 $13,587
3/31/2001 $14,152 $12,469 $13,178
4/30/2001 $14,736 $13,438 $13,668
5/31/2001 $15,380 $13,528 $14,219
6/30/2001 $15,762 $13,199 $14,214
7/31/2001 $15,960 $13,069 $13,984
8/31/2001 $15,831 $12,251 $13,132
9/30/2001 $14,579 $11,262 $12,357
10/31/2001 $14,432 $11,476 $12,127
11/30/2001 $15,054 $12,357 $12,993
12/31/2001 $15,497 $12,465 $13,277
1/31/2002 $15,794 $12,283 $13,070
2/28/2002 $15,896 $12,046 $12,880
3/31/2002 $16,799 $12,499 $13,736
4/30/2002 $17,292 $11,741 $13,370
5/31/2002 $17,422 $11,655 $13,347
6/30/2002 $16,761 $10,825 $12,714
7/31/2002 $15,934 $ 9,981 $11,705
8/31/2002 $16,248 $10,046 $11,945
9/30/2002 $14,925 $ 8,955 $10,548
10/31/2002 $15,315 $ 9,743 $11,503
11/30/2002 $15,468 $10,316 $11,975
12/31/2002 $15,408 $ 9,710 $11,334
1/31/2003 $15,225 $ 9,456 $11,145
2/28/2003 $14,906 $ 9,314 $10,796
3/31/2003 $15,032 $ 9,404 $10,754
4/30/2003 $16,065 $10,179 $12,071
5/31/2003 $16,964 $10,715 $12,709
6/30/2003 $17,027 $10,852 $12,741
7/31/2003 $17,540 $11,043 $13,326
8/31/2003 $17,840 $11,259 $13,192
9/30/2003 $17,792 $11,139 $13,280
10/31/2003 $18,846 $11,769 $14,194
11/30/2003 $19,224 $11,873 $14,155
12/31/2003 $19,999 $12,495 $14,851
1/31/2004 $20,617 $12,725 $15,324
2/29/2004 $20,906 $12,902 $15,730
3/31/2004 $20,985 $12,707 $15,575
4/30/2004 $20,188 $12,508 $14,856
5/31/2004 $20,298 $12,679 $15,129
6/30/2004 $20,552 $12,926 $15,204
7/31/2004 $20,278 $12,498 $14,892
8/31/2004 $20,532 $12,549 $15,393
9/30/2004 $21,130 $12,684 $15,261
10/31/2004 $21,160 $12,878 $15,339
11/30/2004 $22,337 $13,399 $15,793
12/31/2004 $23,034 $13,855 $16,468
1/31/2005 $22,696 $13,518 $16,112
2/28/2005 $23,101 $13,802 $16,027
3/31/2005 $22,685 $13,558 $15,418
4/30/2005 $22,370 $13,300 $15,434
5/31/2005 $23,045 $13,724 $15,857
6/30/2005 $23,642 $13,743 $16,085
7/31/2005 $24,658 $14,254 $16,338
8/31/2005 $24,334 $14,124 $16,053
9/30/2005 $24,415 $14,239 $16,201
10/31/2005 $24,080 $14,001 $16,713
11/30/2005 $25,258 $14,531 $17,496
12/31/2005 $26,217 $14,536 $17,535
1/31/2006 $27,321 $14,921 $17,692
2/28/2006 $28,267 $14,961 $18,050
3/31/2006 $28,995 $15,147 $18,103
4/30/2006 $29,310 $15,351 $18,887
5/31/2006 $27,903 $14,909 $18,192
6/30/2006 $27,566 $14,929 $18,080
7/31/2006 $27,714 $15,021 $18,528
8/31/2006 $28,482 $15,379 $18,743
9/30/2006 $29,151 $15,775 $19,524
10/31/2006 $29,758 $16,289 $19,998
11/30/2006 $30,042 $16,599 $20,123
12/31/2006 $31,289 $16,832 $20,900
1/31/2007 $32,328 $17,086 $21,085
2/28/2007 $32,092 $16,752 $20,456
3/31/2007 $32,369 $16,939 $20,305
4/30/2007 $33,255 $17,690 $21,145
5/31/2007 $34,224 $18,307 $21,632
6/30/2007 $33,018 $18,003 $20,735
7/31/2007 $31,080 $17,445 $19,118
8/31/2007 $30,515 $17,706 $19,413
9/30/2007 $30,246 $18,368 $19,852
10/31/2007 $30,119 $18,661 $19,493
11/30/2007 $28,705 $17,880 $17,984
12/31/2007 $28,478 $17,756 $17,006
AVERAGE ANNUAL TOTAL RETURN
- --------------------------------------------------------------------------------
CLASS A 12/31/07
- --------------------------------------------------------------------------------
1-Year -14.22%
- --------------------------------------------------------------------------------
5-Year +11.74%
- --------------------------------------------------------------------------------
10-Year +11.03%
- --------------------------------------------------------------------------------
Annual Report | 11
Performance Summary (CONTINUED)
AVERAGE ANNUAL TOTAL RETURN
- --------------------------------------------------------------------------------
CLASS B 12/31/07
- --------------------------------------------------------------------------------
1-Year -12.89%
- --------------------------------------------------------------------------------
5-Year +12.07%
- --------------------------------------------------------------------------------
Since Inception (1/1/99) +11.59%
- --------------------------------------------------------------------------------
CLASS B (1/1/99-12/31/07)
[THE FOLLOWING TABLE WAS REPRESENTED BY LINE GRAPH IN THE PRINTED MATERIAL.]
Mutual Financial S&P 500 Financials
Date Services Fund S&P 500 6 Index 6
- ------------- ---------------- --------- -------------------
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 $10,833 $10,097
9/30/1999 $10,419 $10,536 $ 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 $11,278 $ 8,991
3/31/2000 $10,161 $12,382 $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 $11,864 $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 $11,002 $13,088
1/31/2001 $13,751 $11,392 $13,052
2/28/2001 $13,776 $10,354 $12,194
3/31/2001 $13,851 $ 9,698 $11,827
4/30/2001 $14,421 $10,451 $12,267
5/31/2001 $15,041 $10,521 $12,762
6/30/2001 $15,414 $10,265 $12,757
7/31/2001 $15,593 $10,164 $12,550
8/31/2001 $15,457 $ 9,528 $11,786
9/30/2001 $14,228 $ 8,759 $11,090
10/31/2001 $14,074 $ 8,926 $10,884
11/30/2001 $14,672 $ 9,610 $11,661
12/31/2001 $15,099 $ 9,694 $11,916
1/31/2002 $15,384 $ 9,553 $11,730
2/28/2002 $15,466 $ 9,369 $11,560
3/31/2002 $16,346 $ 9,721 $12,328
4/30/2002 $16,814 $ 9,132 $11,999
5/31/2002 $16,924 $ 9,064 $11,979
6/30/2002 $16,277 $ 8,419 $11,410
7/31/2002 $15,461 $ 7,763 $10,506
8/31/2002 $15,761 $ 7,813 $10,720
9/30/2002 $14,467 $ 6,964 $ 9,467
10/31/2002 $14,833 $ 7,577 $10,323
11/30/2002 $14,974 $ 8,023 $10,748
12/31/2002 $14,917 $ 7,552 $10,172
1/31/2003 $14,727 $ 7,354 $10,002
2/28/2003 $14,414 $ 7,244 $ 9,689
3/31/2003 $14,528 $ 7,314 $ 9,652
4/30/2003 $15,524 $ 7,917 $10,834
5/31/2003 $16,377 $ 8,334 $11,407
6/30/2003 $16,423 $ 8,440 $11,435
7/31/2003 $16,916 $ 8,589 $11,960
8/31/2003 $17,192 $ 8,756 $11,839
9/30/2003 $17,135 $ 8,663 $11,918
10/31/2003 $18,151 $ 9,153 $12,739
11/30/2003 $18,502 $ 9,234 $12,704
12/31/2003 $19,225 $ 9,718 $13,328
1/31/2004 $19,819 $ 9,897 $13,753
2/29/2004 $20,082 $10,034 $14,117
3/31/2004 $20,150 $ 9,883 $13,978
4/30/2004 $19,381 $ 9,728 $13,333
5/31/2004 $19,478 $ 9,861 $13,578
6/30/2004 $19,707 $10,053 $13,645
7/31/2004 $19,430 $ 9,720 $13,366
8/31/2004 $19,667 $ 9,759 $13,815
9/30/2004 $20,222 $ 9,865 $13,697
10/31/2004 $20,242 $10,016 $13,767
11/30/2004 $21,362 $10,421 $14,174
12/31/2004 $22,015 $10,776 $14,780
1/31/2005 $21,675 $10,513 $14,460
2/28/2005 $22,048 $10,734 $14,384
3/31/2005 $21,631 $10,544 $13,837
4/30/2005 $21,324 $10,344 $13,852
5/31/2005 $21,960 $10,673 $14,232
6/30/2005 $22,516 $10,689 $14,436
7/31/2005 $23,472 $11,086 $14,663
8/31/2005 $23,146 $10,985 $14,407
9/30/2005 $23,213 $11,074 $14,540
10/31/2005 $22,876 $10,889 $15,000
11/30/2005 $23,989 $11,301 $15,703
12/31/2005 $24,884 $11,305 $15,737
1/31/2006 $25,918 $11,604 $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 $11,595 $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 $11,961 $16,821
9/30/2006 $27,518 $12,269 $17,523
10/31/2006 $28,082 $12,669 $17,948
11/30/2006 $28,334 $12,909 $18,060
12/31/2006 $29,491 $13,091 $18,757
1/31/2007 $30,470 $13,289 $18,923
2/28/2007 $30,248 $13,029 $18,359
3/31/2007 $30,508 $13,174 $18,224
4/30/2007 $31,344 $13,758 $18,977
5/31/2007 $32,256 $14,238 $19,414
6/30/2007 $31,117 $14,001 $18,609
7/31/2007 $29,291 $13,567 $17,158
8/31/2007 $28,758 $13,771 $17,423
9/30/2007 $28,504 $14,286 $17,817
10/31/2007 $28,385 $14,513 $17,494
11/30/2007 $27,053 $13,906 $16,141
12/31/2007 $26,841 $13,810 $15,263
AVERAGE ANNUAL TOTAL RETURN
- --------------------------------------------------------------------------------
CLASS C 12/31/07
- --------------------------------------------------------------------------------
1-Year -10.43%
- --------------------------------------------------------------------------------
5-Year +12.31%
- --------------------------------------------------------------------------------
10-Year +10.96%
- --------------------------------------------------------------------------------
CLASS C (1/1/98-12/31/07)
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE GRAPH IN THE PRINTED MATERIAL.]
Mutual Financial S&P 500 Financials
Date Services Fund S&P 500 6 Index 6
- ------------- ---------------- --------- -------------------
1/1/1998 $10,000 $10,000 $10,000
1/31/1998 $10,098 $10,111 $ 9,715
2/28/1998 $11,076 $10,840 $10,628
3/31/1998 $11,711 $11,395 $11,234
4/30/1998 $12,013 $11,510 $11,420
5/31/1998 $11,744 $11,312 $11,145
6/30/1998 $11,597 $11,771 $11,612
7/31/1998 $11,549 $11,646 $11,614
8/31/1998 $ 9,330 $ 9,962 $ 8,936
9/30/1998 $ 9,519 $10,600 $ 9,115
10/31/1998 $ 9,922 $11,463 $10,221
11/30/1998 $10,357 $12,157 $10,918
12/31/1998 $10,612 $12,858 $11,142
1/31/1999 $10,571 $13,396 $11,379
2/28/1999 $10,356 $12,979 $11,531
3/31/1999 $10,596 $13,498 $11,972
4/30/1999 $11,257 $14,021 $12,784
5/31/1999 $11,397 $13,690 $12,073
6/30/1999 $11,905 $14,450 $12,573
7/31/1999 $11,764 $13,999 $11,792
8/31/1999 $11,209 $13,929 $11,250
9/30/1999 $11,052 $13,548 $10,666
10/31/1999 $11,856 $14,405 $12,446
11/30/1999 $11,599 $14,698 $11,835
12/31/1999 $11,002 $15,563 $11,601
1/31/2000 $10,311 $14,781 $11,234
2/29/2000 $ 9,442 $14,502 $10,017
3/31/2000 $10,783 $15,920 $11,876
4/30/2000 $10,690 $15,441 $11,503
5/31/2000 $11,364 $15,124 $12,274
6/30/2000 $11,066 $15,497 $11,530
7/31/2000 $11,772 $15,255 $12,722
8/31/2000 $12,658 $16,203 $13,943
9/30/2000 $13,493 $15,347 $14,274
10/31/2000 $13,372 $15,282 $14,212
11/30/2000 $12,968 $14,078 $13,374
12/31/2000 $14,421 $14,146 $14,582
1/31/2001 $14,589 $14,648 $14,542
2/28/2001 $14,625 $13,313 $13,587
3/31/2001 $14,704 $12,469 $13,178
4/30/2001 $15,305 $13,438 $13,668
5/31/2001 $15,968 $13,528 $14,219
6/30/2001 $16,356 $13,199 $14,214
7/31/2001 $16,554 $13,069 $13,984
8/31/2001 $16,410 $12,251 $13,132
9/30/2001 $15,105 $11,262 $12,357
10/31/2001 $14,943 $11,476 $12,127
11/30/2001 $15,582 $12,357 $12,993
12/31/2001 $16,030 $12,465 $13,277
1/31/2002 $16,328 $12,283 $13,070
2/28/2002 $16,415 $12,046 $12,880
3/31/2002 $17,350 $12,499 $13,736
4/30/2002 $17,851 $11,741 $13,370
5/31/2002 $17,967 $11,655 $13,347
6/30/2002 $17,285 $10,825 $12,714
7/31/2002 $16,418 $ 9,981 $11,705
8/31/2002 $16,733 $10,046 $11,945
9/30/2002 $15,363 $ 8,955 $10,548
10/31/2002 $15,748 $ 9,743 $11,503
11/30/2002 $15,895 $10,316 $11,975
12/31/2002 $15,836 $ 9,710 $11,334
1/31/2003 $15,637 $ 9,456 $11,145
2/28/2003 $15,299 $ 9,314 $10,796
3/31/2003 $15,429 $ 9,404 $10,754
4/30/2003 $16,473 $10,179 $12,071
5/31/2003 $17,388 $10,715 $12,709
6/30/2003 $17,435 $10,852 $12,741
7/31/2003 $17,953 $11,043 $13,326
8/31/2003 $18,252 $11,259 $13,192
9/30/2003 $18,192 $11,139 $13,280
10/31/2003 $19,267 $11,769 $14,194
11/30/2003 $19,646 $11,873 $14,155
12/31/2003 $20,409 $12,495 $14,851
1/31/2004 $21,041 $12,725 $15,324
2/29/2004 $21,317 $12,902 $15,730
3/31/2004 $21,388 $12,707 $15,575
4/30/2004 $20,562 $12,508 $14,856
5/31/2004 $20,664 $12,679 $15,129
6/30/2004 $20,912 $12,926 $15,204
7/31/2004 $20,622 $12,498 $14,892
8/31/2004 $20,871 $12,549 $15,393
9/30/2004 $21,462 $12,684 $15,261
10/31/2004 $21,483 $12,878 $15,339
11/30/2004 $22,666 $13,399 $15,793
12/31/2004 $23,360 $13,855 $16,468
1/31/2005 $23,004 $13,518 $16,112
2/28/2005 $23,405 $13,802 $16,027
3/31/2005 $22,959 $13,558 $15,418
4/30/2005 $22,638 $13,300 $15,434
5/31/2005 $23,314 $13,724 $15,857
6/30/2005 $23,896 $13,743 $16,085
7/31/2005 $24,907 $14,254 $16,338
8/31/2005 $24,566 $14,124 $16,053
9/30/2005 $24,636 $14,239 $16,201
10/31/2005 $24,284 $14,001 $16,713
11/30/2005 $25,459 $14,531 $17,496
12/31/2005 $26,409 $14,536 $17,535
1/31/2006 $27,502 $14,921 $17,692
2/28/2006 $28,447 $14,961 $18,050
3/31/2006 $29,147 $15,147 $18,103
4/30/2006 $29,454 $15,351 $18,887
5/31/2006 $28,018 $14,909 $18,192
6/30/2006 $27,672 $14,929 $18,080
7/31/2006 $27,810 $15,021 $18,528
8/31/2006 $28,549 $15,379 $18,743
9/30/2006 $29,213 $15,775 $19,524
10/31/2006 $29,802 $16,289 $19,998
11/30/2006 $30,078 $16,599 $20,123
12/31/2006 $31,300 $16,832 $20,900
1/31/2007 $32,317 $17,086 $21,085
2/28/2007 $32,066 $16,752 $20,456
3/31/2007 $32,331 $16,939 $20,305
4/30/2007 $33,195 $17,690 $21,145
5/31/2007 $34,143 $18,307 $21,632
6/30/2007 $32,910 $18,003 $20,735
7/31/2007 $30,961 $17,445 $19,118
8/31/2007 $30,378 $17,706 $19,413
9/30/2007 $30,093 $18,368 $19,852
10/31/2007 $29,951 $18,661 $19,493
11/30/2007 $28,528 $17,880 $17,984
12/31/2007 $28,294 $17,756 $17,006
12 | Annual Report
Performance Summary (CONTINUED)
ENDNOTES
VALUE SECURITIES MAY NOT INCREASE IN PRICE AS ANTICIPATED OR MAY DECLINE FURTHER
IN VALUE. INVESTING IN A SINGLE-SECTOR FUND INVOLVES SPECIAL RISKS, INCLUDING
GREATER SENSITIVITY TO ECONOMIC, POLITICAL OR REGULATORY DEVELOPMENTS IMPACTING
THE SECTOR. IN ADDITION, THE FUND INVESTS IN FOREIGN SECURITIES WHOSE RISKS
INCLUDE CURRENCY FLUCTUATIONS, AND ECONOMIC AND POLITICAL UNCERTAINTIES. THE
FUND'S INVESTMENTS IN SMALLER-COMPANY STOCKS CARRY AN INCREASED RISK OF PRICE
FLUCTUATION, PARTICULARLY OVER THE SHORT TERM. THE FUND MAY ALSO INVEST IN
COMPANIES ENGAGED IN MERGERS, REORGANIZATIONS OR LIQUIDATIONS, WHICH INVOLVE
SPECIAL RISKS AS PENDING DEALS MAY NOT BE COMPLETED ON TIME OR ON FAVORABLE
TERMS, 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. Figures are as stated in the Fund's prospectus current as of the date of this
report.
6. 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 7/1/07 VALUE 12/31/07 PERIOD* 7/1/07-12/31/07
- --------------------------------------------------------------------------------------------------------
Actual $1,000 $ 864.20 $ 5.26
- --------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,019.56 $ 5.70
- --------------------------------------------------------------------------------------------------------
CLASS A
- --------------------------------------------------------------------------------------------------------
Actual $1,000 $ 862.50 $ 6.62
- --------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,018.10 $ 7.17
- --------------------------------------------------------------------------------------------------------
CLASS B
- --------------------------------------------------------------------------------------------------------
Actual $1,000 $ 859.70 $ 9.94
- --------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,014.52 $ 10.76
- --------------------------------------------------------------------------------------------------------
CLASS C
- --------------------------------------------------------------------------------------------------------
Actual $1,000 $ 859.70 $ 9.94
- --------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,014.52 $ 10.76
- --------------------------------------------------------------------------------------------------------
* Expenses are calculated using the most recent six-month expense ratio,
annualized for each class (Z: 1.12%; A: 1.41%; B: 2.12%; and C: 2.12%),
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 2007 2006 2005 2004 2003
-------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ............................... $ 22.59 $ 21.59 $ 20.45 $ 20.06 $ 15.92
-------------------------------------------------------------
Income from investment operations a:
Net investment income b ....................................... 0.51 0.40 0.44 0.34 0.23
Net realized and unrealized gains (losses) .................... (2.41) 3.76 2.40 2.70 4.58
-------------------------------------------------------------
Total from investment operations ................................. (1.90) 4.16 2.84 3.04 4.81
-------------------------------------------------------------
Less distributions from:
Net investment income ......................................... (0.61) (0.57) (0.49) (0.32) (0.24)
Net realized gains ............................................ (1.40) (2.59) (1.21) (2.33) (0.43)
-------------------------------------------------------------
Total distributions .............................................. (2.01) (3.16) (1.70) (2.65) (0.67)
-------------------------------------------------------------
Redemption fees .................................................. -- d -- d -- d -- d --
-------------------------------------------------------------
Net asset value, end of year ..................................... $ 18.68 $ 22.59 $ 21.59 $ 20.45 $ 20.06
=============================================================
Total return ..................................................... (8.71)% 19.73% 14.14% 15.62% 30.23%
RATIOS TO AVERAGE NET ASSETS
Expenses c ....................................................... 1.11% e 1.08% e 1.12% e 1.10% e 1.13%
Expenses - excluding dividend expense on securities sold short ... 1.11% e 1.08% e 1.11% e 1.09% e 1.11%
Net investment income ............................................ 2.25% 1.71% 2.10% 1.65% 1.28%
SUPPLEMENTAL DATA
Net assets, end of year (000's) .................................. $164,890 $213,874 $174,864 $166,175 $151,918
Portfolio turnover rate .......................................... 49.87% 62.65% 31.71% 38.40% 25.78%
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 repurchases 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 expenses 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 2007 2006 2005 2004 2003
-------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ................................ $ 22.60 $ 21.61 $ 20.47 $ 20.08 $ 15.95
-------------------------------------------------------------
Income from investment operations a:
Net investment income b ........................................ 0.44 0.33 0.37 0.27 0.16
Net realized and unrealized gains (losses) ..................... (2.40) 3.76 2.41 2.70 4.58
-------------------------------------------------------------
Total from investment operations .................................. (1.96) 4.09 2.78 2.97 4.74
-------------------------------------------------------------
Less distributions from:
Net investment income .......................................... (0.54) (0.51) (0.43) (0.25) (0.18)
Net realized gains ............................................. (1.40) (2.59) (1.21) (2.33) (0.43)
-------------------------------------------------------------
Total distributions ............................................... (1.94) (3.10) (1.64) (2.58) (0.61)
-------------------------------------------------------------
Redemption fees ................................................... -- e -- e -- e -- e --
-------------------------------------------------------------
Net asset value, end of year ...................................... $ 18.70 $ 22.60 $ 21.61 $ 20.47 $ 20.08
=============================================================
Total return c .................................................... (8.99)% 19.35% 13.82% 15.17% 29.79%
RATIOS TO AVERAGE NET ASSETS
Expenses d ........................................................ 1.40% f 1.39% f 1.42% f 1.44% f 1.48%
Expenses - excluding dividend expense on securities sold short .... 1.40% f 1.39% f 1.41% f 1.43% f 1.46%
Net investment income ............................................. 1.96% 1.40% 1.80% 1.31% 0.93%
SUPPLEMENTAL DATA
Net assets, end of year (000's) ................................... $441,180 $557,768 $359,058 $296,778 $264,411
Portfolio turnover rate ........................................... 49.87% 62.65% 31.71% 38.40% 25.78%
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 repurchases 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 commission or contingent deferred sales
charges, if applicable.
d Includes dividend expenses 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 2007 2006 2005 2004 2003
-------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ................................ $ 22.08 $ 21.17 $ 20.09 $ 19.76 $ 15.73
-------------------------------------------------------------
Income from investment operations a:
Net investment income b ........................................ 0.27 0.16 0.23 0.14 0.05
Net realized and unrealized gains (losses) ..................... (2.33) 3.68 2.34 2.64 4.49
-------------------------------------------------------------
Total from investment operations .................................. (2.06) 3.84 2.57 2.78 4.54
-------------------------------------------------------------
Less distributions from:
Net investment income .......................................... (0.36) (0.34) (0.28) (0.12) (0.08)
Net realized gains ............................................. (1.40) (2.59) (1.21) (2.33) (0.43)
-------------------------------------------------------------
Total distributions ............................................... (1.76) (2.93) (1.49) (2.45) (0.51)
-------------------------------------------------------------
Redemption fees ................................................... -- e -- e -- e -- e --
-------------------------------------------------------------
Net asset value, end of year ...................................... $ 18.26 $ 22.08 $ 21.17 $ 20.09 $ 19.76
=============================================================
Total return c .................................................... (9.58)% 18.51% 13.03% 14.51% 28.88%
RATIOS TO AVERAGE NET ASSETS
Expenses d ........................................................ 2.11% f 2.08% f 2.12% f 2.10% f 2.12%
Expenses - excluding dividend expense on securities sold short .... 2.11% f 2.08% f 2.11% f 2.09% f 2.10%
Net investment income ............................................. 1.25% 0.71% 1.10% 0.65% 0.29%
SUPPLEMENTAL DATA
Net assets, end of year (000's) ................................... $ 30,756 $ 46,085 $ 42,526 $ 42,614 $ 34,219
Portfolio turnover rate ........................................... 49.87% 62.65% 31.71% 38.40% 25.78%
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 repurchases 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 commission or contingent deferred sales
charges, if applicable.
d Includes dividend expenses 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 2007 2006 2005 2004 2003
-------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ................................ $ 22.46 $ 21.51 $ 20.39 $ 20.02 $ 15.92
-------------------------------------------------------------
Income from investment operations a:
Net investment income b ........................................ 0.28 0.16 0.23 0.13 0.05
Net realized and unrealized gains (losses) ..................... (2.37) 3.73 2.38 2.68 4.55
-------------------------------------------------------------
Total from investment operations .................................. (2.09) 3.89 2.61 2.81 4.60
-------------------------------------------------------------
Less distributions from:
Net investment income .......................................... (0.38) (0.35) (0.28) (0.11) (0.07)
Net realized gains ............................................. (1.40) (2.59) (1.21) (2.33) (0.43)
-------------------------------------------------------------
Total distributions ............................................... (1.78) (2.94) (1.49) (2.44) (0.50)
-------------------------------------------------------------
Redemption fees ................................................... -- e -- e -- e -- e --
-------------------------------------------------------------
Net asset value, end of year ...................................... $ 18.59 $ 22.46 $ 21.51 $ 20.39 $ 20.02
=============================================================
Total return c .................................................... (9.60)% 18.52% 13.06% 14.46% 28.87%
RATIOS TO AVERAGE NET ASSETS
Expenses d ........................................................ 2.11% f 2.08% f 2.12% f 2.10% f 2.13%
Expenses - excluding dividend expense on securities sold short .... 2.11% f 2.08% f 2.11% f 2.09% f 2.11%
Net investment income ............................................. 1.25% 0.71% 1.10% 0.65% 0.28%
SUPPLEMENTAL DATA
Net assets, end of year (000's) ................................... $183,684 $225,305 $169,000 $155,698 $141,233
Portfolio turnover rate ........................................... 49.87% 62.65% 31.71% 38.40% 25.78%
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 repurchases 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 commission or contingent deferred sales
charges, if applicable.
d Includes dividend expenses 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, 2007
- ------------------------------------------------------------------------------------------------------------------------------------
COUNTRY SHARES VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS 96.6%
COMMON STOCKS AND OTHER EQUITY INTERESTS 95.5%
CAPITAL MARKETS 9.4%
Acta Holding ASA .......................................... Norway 5,917,580 $ 24,717,833
D. Carnegie & Co. AB ...................................... Sweden 931,850 18,087,319
a Gottex Fund Management Holdings Ltd. ...................... Switzerland 55,916 3,424,436
Legg Mason Inc. ........................................... United States 71,542 5,233,297
Marfin Investment Group Holdings SA ....................... Greece 994,503 8,620,888
Tullett Prebon PLC ........................................ United Kingdom 1,814,894 16,921,642
----------------
77,005,415
----------------
COMMERCIAL BANKS 26.1%
Aareal Bank AG ............................................ Germany 297,429 13,334,108
Abington Bancorp Inc. ..................................... United States 576,850 5,422,390
a Alliance Bank & Trust Co. ................................. United States 226,100 2,159,255
a,b,c,d Atlantic Banc Holdings Inc. ............................... United States 350,000 3,500,000
a Banco Popolare SpA ........................................ Italy 458,584 10,145,596
Banque Cantonale Vaudoise ................................. Switzerland 44,100 19,497,088
BNP Paribas SA ............................................ France 220,650 23,899,253
a Centennial Bank Holdings Inc. ............................. United States 1,333,807 7,709,405
Commerce Bancorp Inc. ..................................... United States 207,100 7,898,794
Danske Bank AS ............................................ Denmark 517,029 20,212,652
a,b,c Elephant Capital Holdings Ltd. ............................ Japan 2,167 1,427,272
a,b,c First Chicago Bancorp ..................................... United States 496,868 6,956,152
First Community Bancorp ................................... United States 365,031 15,053,878
Intesa Sanpaolo SpA ....................................... Italy 1,926,362 15,208,788
Intesa Sanpaolo SpA, di Risp .............................. Italy 147,000 1,072,086
Mitsubishi UFJ Financial Group Inc. ....................... Japan 612,602 5,751,641
a,b,c NCB Warrant Holdings Ltd., A .............................. Japan 10,590 628,324
Royal Bank of Scotland Group PLC .......................... United Kingdom 78,483 692,382
Societe Generale, A ....................................... France 113,975 16,454,969
Southern National Bancorp of Virginia Inc. ................ United States 290,840 2,617,560
Sumitomo Mitsui Financial Group Inc. ...................... Japan 741 5,561,736
Svenska Handelsbanken AB, A ............................... Sweden 278,531 8,917,196
Swedbank AB, A ............................................ Sweden 219,136 6,202,250
U.S. Bancorp .............................................. United States 450,101 14,286,206
----------------
214,608,981
----------------
COMMERCIAL SERVICES & SUPPLIES 2.4%
a Comdisco Holding Co. Inc. ................................. United States 103 938
a,e Comdisco Holding Co. Inc., Contingent Distribution ........ United States 4,645,036 --
Intrum Justitia AB ........................................ Sweden 846,790 15,061,146
a Protection One Inc. ....................................... United States 370,533 4,405,637
----------------
19,467,721
----------------
CONSUMER FINANCE 1.3%
a,b,c Cerberus CG Investor I LLC ................................ United States 1,000,000 841,976
a,b,c Cerberus CG Investor II LLC ............................... United States 1,000,000 841,977
a,b,c Cerberus CG Investor III LLC .............................. United States 500,000 420,988
a,b,c Cerberus FIM Investors Auto Finance LLC ................... United States 1,255,339 673,528
a,b,c Cerberus FIM Investors Commercial Finance LLC ............. United States 104,566 56,103
a,b,c Cerberus FIM Investors Commercial Mortgage LLC ............ United States 195,993 105,156
a,b,c Cerberus FIM Investors Insurance LLC ...................... United States 958,613 514,325
20 | Annual Report
Mutual Financial Services Fund
STATEMENT OF INVESTMENTS, DECEMBER 31, 2007 (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------------
COUNTRY SHARES VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
COMMON STOCKS AND OTHER EQUITY INTERESTS (CONTINUED)
CONSUMER FINANCE (CONTINUED)
a,b,c Cerberus FIM Investors Rescap LLC ......................... United States 1,784,739 $ 957,568
SLM Corp. ................................................. United States 173,470 3,493,686
a White River Capital Inc. .................................. United States 172,799 3,012,319
----------------
10,917,626
----------------
DIVERSIFIED BANKS 0.6%
a,b,c The Bankshares Inc. ....................................... United States 456,903 4,569,030
----------------
DIVERSIFIED FINANCIAL SERVICES 18.1%
Banca Italease ............................................ Italy 144,761 2,023,842
Bolsas Y Mercados Espanoles ............................... Spain 165,309 11,241,955
Citigroup Inc. ............................................ United States 188,240 5,541,785
Deutsche Boerse AG ........................................ Germany 153,979 30,504,280
Fortis .................................................... Belgium 1,429,904 37,728,084
a Fortis VVPR Strip ......................................... Belgium 439,970 6,421
Guinness Peat Group PLC ................................... United Kingdom 5,439,414 7,254,601
Hellenic Exchanges SA Holding ............................. Greece 490,500 17,179,468
KBC Ancora ................................................ Belgium 69,280 7,835,542
Osaka Securities Exchange Co. Ltd. ........................ Japan 1,023 4,797,821
Oslo Bors Holding ASA ..................................... Norway 911,000 24,306,744
----------------
148,420,543
----------------
INSURANCE 17.5%
Allianz SE ................................................ Germany 32,892 7,107,979
f AmTrust Financial Services Inc., 144A ..................... United States 950,031 13,081,927
a Argo Group International Holdings Ltd. .................... United States 153,230 6,455,580
Assicurazioni Generali SpA ................................ Italy 87,487 3,957,899
a,b,c Augsburg Re AG ............................................ Switzerland 10,745 --
a Berkshire Hathaway Inc., A ................................ United States 73 10,336,800
a Berkshire Hathaway Inc., B ................................ United States 254 1,202,944
a Cninsure Inc., ADR ........................................ China 250,000 3,937,500
a Conseco Inc. .............................................. United States 149,880 1,882,493
g,h Hartford Financial Services Group Inc. .................... United States 113,740 9,916,991
a,b,c Imagine Group Holdings Ltd. ............................... Bermuda 551,589 6,310,178
a Lancashire Holdings Ltd. .................................. United Kingdom 1,216,268 8,778,531
a,b,c Olympus Re Holdings Ltd. .................................. United States 7,480 24,499
a Protector Forsikring ASA .................................. Norway 4,360,410 7,935,312
Prudential Financial Inc. ................................. United States 46,220 4,300,309
Resolution PLC ............................................ United Kingdom 28,086 397,056
b,c Symetra Financial ......................................... United States 1,020,510 16,348,570
h The Travelers Cos. Inc. ................................... United States 81,913 4,406,919
a Tower Australia Group Ltd. ................................ Australia 3,567,505 8,751,874
White Mountains Insurance Group Ltd. ...................... United States 38,048 19,558,574
Zurich Financial Services AG .............................. Switzerland 29,526 8,663,427
----------------
143,355,362
----------------
MEDIA 1.5%
f Maiden Holdings Ltd., 144A ................................ United States 1,500,000 12,000,000
----------------
MULTILINE RETAIL 0.3%
Jelmoli Holding AG ........................................ Switzerland 1,039 2,489,309
----------------
Annual Report | 21
Mutual Financial Services Fund
STATEMENT OF INVESTMENTS, DECEMBER 31, 2007 (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------------
COUNTRY SHARES VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
COMMON STOCKS AND OTHER EQUITY INTERESTS (CONTINUED)
REAL ESTATE 12.3%
a Conwert Immobilien Invest AG .............................. Austria 652,828 $ 11,470,562
DIC Asset AG .............................................. Germany 270,530 8,369,716
a Dolphin Capital Investors Ltd. ............................ Virgin Islands (British) 5,486,000 14,988,061
Eurocastle Investment Ltd. ................................ Guernsey Islands 633,467 15,484,538
a Francono Rhein-Main AG .................................... Germany 1,377,430 3,819,290
d Franconofurt AG ........................................... Germany 499,260 6,112,913
a Franconowest Ag ........................................... Germany 99,852 189,435
Gagfah SA ................................................. Luxembourg 374,530 6,449,530
JER Investors Trust Inc. .................................. United States 84,280 907,696
Link REIT ................................................. Hong Kong 2,799,102 6,059,020
Northern European Properties Ltd. ......................... Sweden 4,488,264 4,634,088
Patrizia Immobilien AG .................................... Germany 424,265 3,176,245
Redwood Trust Inc. ........................................ United States 83,300 2,852,192
b,c,f Star Asia Finance Ltd., 144A .............................. Japan 968,500 8,958,625
Vivacon AG ................................................ Germany 297,966 5,631,135
a Zueblin Immobilien Holding AG ............................. Switzerland 251,355 2,218,099
----------------
101,321,145
----------------
THRIFTS & MORTGAGE FINANCE 6.0%
BankUnited Financial Corp., A ............................. United States 302,070 2,084,283
Hudson City Bancorp Inc. .................................. United States 1,136,486 17,070,020
Hypo Real Estate Holding AG ............................... Germany 266,826 14,131,054
Interhyp AG ............................................... Germany 176,782 12,907,080
Sovereign Bancorp Inc. .................................... United States 168,960 1,926,144
Westfield Financial Inc. .................................. United States 160,000 1,552,000
----------------
49,670,581
----------------
TOTAL COMMON STOCKS AND OTHER EQUITY INTERESTS
(COST $723,117,174) ..................................... 783,825,713
----------------
----------------
PRINCIPAL AMOUNT
----------------
CORPORATE BONDS & NOTES 1.1%
b,c Augsburg Re AG, zero cpn., 1/30/08 ........................ Switzerland $ 123,572 --
b,c Cerberus CG Investor I LLC, 12.00%, 7/31/14 ............... United States 1,000,000 841,976
b,c Cerberus CG Investor II LLC, 12.00%, 7/31/14 .............. United States 1,000,000 841,977
b,c Cerberus CG Investor III LLC, 12.00%, 7/31/14 ............. United States 500,000 420,988
b,c Cerberus FIM Investors Auto Finance LLC, 12.00%,
11/22/13 ................................................ United States 3,763,457 2,019,211
b,c Cerberus FIM Investors Commercial Finance LLC, 12.00%,
11/22/13 ................................................ United States 313,698 168,309
b,c Cerberus FIM Investors Commercial Mortgage LLC, 12.00%,
11/22/13 ................................................ United States 587,978 315,468
b,c Cerberus FIM Investors Insurance LLC, 12.00%, 11/22/13 .... United States 2,875,838 1,542,976
b,c Cerberus FIM Investors Rescap LLC, 12.00%, 11/22/13 ....... United States 5,354,217 2,872,703
----------------
TOTAL CORPORATE BONDS & NOTES (COST $15,518,761 ) ......... 9,023,608
----------------
TOTAL LONG TERM INVESTMENTS (COST $738,635,935) ........... 792,849,321
----------------
22 | Annual Report
Mutual Financial Services Fund
STATEMENT OF INVESTMENTS, DECEMBER 31, 2007 (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------------
COUNTRY PRINCIPAL AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
SHORT TERM INVESTMENTS 1.8%
U.S. GOVERNMENT AND AGENCY SECURITIES 1.8%
g,i FHLB, 1/02/08 - 2/15/08 ................................... United States $ 11,100,000 $ 11,081,523
i U.S. Treasury Bills, 4/24/08 - 5/01/08 .................... United States 3,500,000 3,464,031
----------------
TOTAL U.S. GOVERNMENT AND AGENCY SECURITIES
(COST $14,531,678) ...................................... 14,545,554
----------------
TOTAL INVESTMENTS (COST $753,167,613) 98.4% ............... 807,394,875
OPTIONS WRITTEN 0.0% j .................................... (3,040)
SECURITIES SOLD SHORT (0.7)% .............................. (6,000,381)
NET UNREALIZED LOSS ON FORWARD EXCHANGE
CONTRACTS (0.6)% ........................................ (4,940,918)
OTHER ASSETS, LESS LIABILITIES 2.9% ....................... 24,058,542
----------------
NET ASSETS 100.0% ......................................... $ 820,509,078
================
----------------
CONTRACTS
----------------
k OPTIONS WRITTEN 0.0% j
INSURANCE 0.0% j
Hartford Financial Services Group Inc., Jan. 110 Calls,
1/19/08 ................................................. United States 109 $ 1,090
The Travelers Cos. Inc., Jan. 60 Calls, 1/19/08 ........... United States 195 1,950
----------------
TOTAL OPTIONS WRITTEN (PREMIUMS RECEIVED $34,696) ......... 3,040
----------------
----------------
SHARES
----------------
l SECURITIES SOLD SHORT (PROCEEDS $6,284,806)
COMMERCIAL BANKS 0.7%
Toronto-Dominion Bank ..................................... Canada 85,781 $ 6,000,381
----------------
SELECTED PORTFOLIO ABBREVIATIONS
ADR - American Depository Receipt
FHLB - Federal Home Loan Bank
REIT - Real Estate Investment Trust
a Non-income producing for the twelve months ended December 31, 2007.
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, 2007, the aggregate value of these securities was
$62,157,879, representing 7.58% of net assets.
d See Note 10 regarding holdings of 5% voting 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 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, 2007, the aggregate value of
these securities was $34,040,552, representing 4.15% of net assets.
g Security or a portion of the security has been segregated as collateral for
securities sold short. At December 31, 2007, the value of securities and or cash
pledged amounted to $5,068,713.
h A portion or all of the security is held in connection with written option
contracts open at year end.
i The security is traded on a discount basis with no stated coupon rate.
j Rounds to less than 0.1% of net assets.
k See Note 1(e) regarding written options.
l See Note 1(f) regarding securities sold short.
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, 2007
Assets:
Investments in securities:
Cost - Unaffiliated issuers .......................................... $ 741,831,380
Cost - Non-controlled affiliated issuers (Note 10) ................... 11,336,233
----------------
Total cost of investments ............................................ $ 753,167,613
================
Value - Unaffiliated issuers ......................................... $ 797,781,962
Value - Non-controlled affiliated issuers (Note 10) .................. 9,612,913
----------------
Total value of investments ........................................... 807,394,875
Cash .................................................................... 4,752
Cash on deposits with brokers for securities sold short .. .. .. . . .... 6,612,954
Foreign currency, at value (cost $18,230,883) ........................... 18,177,187
Receivables:
Investment securities sold ........................................... 160,077
Capital shares sold .................................................. 3,782,098
Dividends and interest ............................................... 2,547,403
Unrealized gain on forward exchange contracts (Note 7) .................. 2,685,473
----------------
Total assets ...................................................... 841,364,819
----------------
Liabilities:
Payables:
Capital shares redeemed .............................................. 5,595,125
Affiliates ........................................................... 1,272,196
Options written, at value (premiums received $34,696) ................... 3,040
Securities sold short, at value (proceeds $6,284,806) ................... 6,000,381
Unrealized loss on forward exchange contracts (Note 7) .................. 7,626,391
Accrued expenses and other liabilities .................................. 358,608
----------------
Total liabilities ................................................. 20,855,741
----------------
Net assets, at value ........................................... $ 820,509,078
----------------
Net assets consist of:
Paid-in capital ......................................................... $ 769,798,870
Distributions in excess of net investment income ........................ (1,283,860)
Net unrealized appreciation (depreciation) .............................. 49,563,830
Accumulated net realized gain (loss) .................................... 2,430,238
----------------
Net assets, at value ........................................... $ 820,509,078
================
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, 2007
CLASS Z:
Net assets, at value .................................................... $ 164,889,604
================
Shares outstanding ...................................................... 8,828,487
================
Net asset value and maximum offering price per share a .................. $ 18.68
================
CLASS A:
Net assets, at value .................................................... $ 441,179,785
================
Shares outstanding ...................................................... 23,591,081
================
Net asset value per share a ............................................. $ 18.70
================
Maximum offering price per share (net asset value per share / 94.25%) ... $ 19.84
================
CLASS B:
Net assets, at value .................................................... $ 30,755,716
================
Shares outstanding ...................................................... 1,683,930
================
Net asset value and maximum offering price per share a .................. $ 18.26
================
CLASS C:
Net assets, at value .................................................... $ 183,683,973
================
Shares outstanding ...................................................... 9,878,211
================
Net asset value and maximum offering price per share a .................. $ 18.59
================
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, 2007
Investment income:
Dividends: (net of foreign taxes of $2,624,229)
Unaffiliated issuers ................................................................... $ 29,465,350
Non-controlled affiliated issuers (Note 10) ............................................ 203,232
Interest (net of foreign taxes of $643) ................................................... 5,172,117
Income from securities loaned ............................................................. 16,615
---------------
Total investment income .......................................................... 34,857,314
---------------
Expenses:
Management fees (Note 3a) ................................................................. 8,271,940
Administrative fees (Note 3b) ............................................................. 788,527
Distribution fees: (Note 3c)
Class A ................................................................................ 1,627,069
Class B ................................................................................ 414,854
Class C ................................................................................ 2,237,573
Transfer agent fees (Note 3e) ............................................................. 1,799,866
Custodian fees (Note 4) ................................................................... 238,164
Reports to shareholders ................................................................... 147,772
Registration and filing fees .............................................................. 97,442
Professional fees ......................................................................... 110,751
Directors' fees and expenses .............................................................. 16,691
Other ..................................................................................... 36,102
---------------
Total expenses ................................................................... 15,786,751
Expense reductions (Note 4) ...................................................... (6,730)
---------------
Net expenses ............................................................... 15,780,021
---------------
Net investment income ................................................... 19,077,293
---------------
Realized and unrealized gains (losses):
Net realized gain (loss) from:
Investments
Unaffiliated issuers ................................................................ 88,263,016
Non-controlled affiliated issuers (Note 10) ......................................... (3,902,202)
Foreign currency transactions .......................................................... (36,086,384)
Synthetic equity swaps ................................................................. (28,404)
---------------
Net realized gain (loss) ......................................................... 48,246,026
---------------
Net change in unrealized appreciation (depreciation) on:
Investments ............................................................................ (158,101,555)
Translation of assets and liabilities denominated in foreign currencies ................ (440,297)
---------------
Net change in unrealized appreciation (depreciation) ............................. (158,541,852)
---------------
Net realized and unrealized gain (loss) ...................................................... (110,295,826)
---------------
Net increase (decrease) in net assets resulting from operations .............................. $ (91,218,533)
---------------
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,
---------------------------------
2007 2006
---------------------------------
Increase (decrease) in net assets:
Operations:
Net investment income .................................................................. $ 19,077,293 $ 11,544,118
Net realized gain (loss) from investments, foreign currency transactions,
and synthetic equity swaps .......................................................... 48,246,026 122,729,435
Net change in unrealized appreciation (depreciation) on investments and
translation of assets and liabilities denominated in foreign currencies ............. (158,541,852) 21,491,331
---------------------------------
Net increase (decrease) in net assets resulting from operations .................. (91,218,533) 155,764,884
---------------------------------
Distributions to shareholders from:
Net investment income:
Class Z ............................................................................. (5,237,527) (4,850,586)
Class A ............................................................................. (12,467,378) (11,024,582)
Class B ............................................................................. (613,237) (643,796)
Class C ............................................................................. (3,628,332) (3,167,122)
Net realized gains:
Class Z ............................................................................. (12,010,868) (21,917,044)
Class A ............................................................................. (32,373,433) (56,478,510)
Class B ............................................................................. (2,369,277) (4,890,247)
Class C ............................................................................. (13,398,613) (23,212,292)
---------------------------------
Total distributions to shareholders ....................................................... (82,098,665) (126,184,179)
---------------------------------
Capital share transactions: (Note 2)
Class Z ............................................................................. (14,311,619) 30,704,932
Class A ............................................................................. (23,031,413) 186,536,002
Class B ............................................................................. (8,804,710) 1,574,660
Class C ............................................................................. (3,068,654) 49,182,992
---------------------------------
Total capital share transactions .......................................................... (49,216,396) 267,998,586
---------------------------------
Redemption fees ........................................................................... 10,203 4,102
---------------------------------
Net increase (decrease) in net assets ............................................ (222,523,391) 297,583,393
Net assets:
Beginning of year ......................................................................... 1,043,032,469 745,449,076
---------------------------------
End of year ............................................................................... $ 820,509,078 $1,043,032,469
=================================
Distributions in excess of net investment income included in net assets:
End of year ............................................................................... $ (1,283,860) $ (6,961,272)
=================================
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. (Series Fund) is registered under the
Investment Company Act of 1940, as amended, (1940 Act) as an open-end investment
company, consisting of six separate funds. The Mutual Financial Services Fund
(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.
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
28 | Annual Report
Mutual Financial Services Fund
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
A. SECURITY VALUATION (CONTINUED)
(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. 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.
Annual Report | 29
Mutual Financial Services Fund
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
C. FOREIGN CURRENCY CONTRACTS (CONTINUED)
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.
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 or index 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
30 | Annual Report
Mutual Financial Services Fund
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
E. OPTIONS (CONTINUED)
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, 2007, the fund had no securities on
loan.
H. INCOME TAXES
No provision has been made for U.S. income taxes because it is the Fund's policy
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.
Annual Report | 31
Mutual Financial Services Fund
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 of
America. 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 per share
distributions, by class, are generally due to differences in class specific
expenses.
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.
32 | Annual Report
Mutual Financial Services Fund
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
1. GUARANTEES AND INDEMNIFICATIONS
Under the Series Funds' 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, 2007, there were 500 million shares authorized ($0.001 par
value). Transactions in the Fund's shares were as follows:
------------------------------------------------------------
YEAR ENDED DECEMBER 31,
2007 2006
------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
------------------------------------------------------------
CLASS Z SHARES
Shares sold ....................... 1,142,965 $ 25,747,515 1,247,626 $ 28,944,258
Shares issued in reinvestment of
distributions ................... 798,044 15,799,592 1,108,120 24,688,386
Shares redeemed ................... (2,578,954) (55,858,726) (987,955) (22,927,712)
------------------------------------------------------------
Net increase (decrease) ........... (637,945) $ (14,311,619) 1,367,791 $ 30,704,932
============================================================
CLASS A SHARES:
Shares sold ....................... 8,273,263 $ 185,555,532 10,652,294 $ 248,569,023
Shares issued in reinvestment of
distributions ................... 2,082,149 41,350,983 2,801,174 62,452,788
Shares redeemed ................... (11,440,654) (249,937,928) (5,391,463) (124,485,809)
------------------------------------------------------------
Net increase (decrease) ........... (1,085,242) $ (23,031,413) 8,062,005 $ 186,536,002
============================================================
CLASS B SHARES:
Shares sold ....................... 91,173 $ 1,940,538 158,560 $ 3,562,328
Shares issued in reinvestment of
distributions ................... 141,355 2,759,025 232,836 5,067,757
Shares redeemed ................... (636,193) (13,504,273) (312,782) (7,055,425)
------------------------------------------------------------
Net increase (decrease) ........... (403,665) $ (8,804,710) 78,614 $ 1,574,660
============================================================
CLASS C SHARES:
Shares sold ....................... 2,125,234 $ 47,085,730 2,318,404 $ 53,362,559
Shares issued in reinvestment of
distributions ................... 769,413 15,205,291 1,051,613 23,298,391
Shares redeemed ................... (3,045,901) (65,359,675) (1,197,941) (27,477,958)
------------------------------------------------------------
Net increase (decrease) ........... (151,254) $ (3,068,654) 2,172,076 $ 49,182,992
============================================================
Annual Report | 33
Mutual Financial Services Fund
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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 Transfer agent
Services)
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
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 plans, 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.
34 | Annual Report
Mutual Financial Services Fund
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. TRANSACTIONS WITH AFFILIATES (CONTINUED)
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 charges retained net of commissions paid to
unaffiliated broker/dealers .................... $ 397,538
Contingent deferred sales charges retained ........ $ 77,496
E. TRANSFER AGENT FEES
For the year ended December 31, 2007, the Fund paid transfer agent fees of
$1,799,866, of which $963,561 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, 2007, the
custodian fees were reduced as noted in the Statement of Operations.
5. INCOME TAXES
The Fund has reviewed the tax positions taken on federal income tax returns, for
each of the three open tax years and as of December 31, 2007 and has determined
that no provision for income tax is required in the Fund's financial statements.
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, 2007, the Fund deferred realized currency losses of
$42,256.
The tax character of distributions paid during the years ended December 31, 2007
and 2006, was as follows:
----------------------------
2007 2006
----------------------------
Distributions paid from:
Ordinary income .............. $ 25,584,387 $ 55,615,319
Long term capital gain ....... 56,514,278 70,568,860
----------------------------
$ 82,098,665 $ 126,184,179
============================
Annual Report | 35
Mutual Financial Services Fund
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. INCOME TAXES (CONTINUED)
At December 31, 2007, the cost of investments, net unrealized appreciation
(depreciation), and undistributed long term capital gains for income tax
purposes were as follows:
Cost of investments ......................................... $ 756,564,985
=============
Unrealized appreciation ..................................... $ 143,601,080
Unrealized depreciation ..................................... (92,771,190)
-------------
Net unrealized appreciation (depreciation) .................. $ 50,829,890
-------------
Distributable earnings - undistributed long term capital
gains .................................................... $ 67,379
=============
Net investment income differs for financial statement and tax purposes primarily
due to differing treatments of foreign currency transactions, passive foreign
investment company shares, pass-through entity income, bond discounts and
premiums, and synthetic equity swaps.
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, pass-through entity
income, bond discounts and premiums, and synthetic equity swaps.
6. INVESTMENT TRANSACTIONS
Purchases and sales of investments (excluding short term securities and
securities sold short) for the year ended December 31, 2007, aggregated
$481,490,663 and $594,875,259, respectively.
Transactions in options written during the year ended December 31, 2007, were as
follows:
---------------------
NUMBER OF PREMIUMS
CONTRACTS RECEIVED
---------------------
Options outstanding at December 31, 2006 ........... -- $ --
Options written .................................... 304 34,696
Options expired .................................... -- --
Options exercised .................................. -- --
Options closed ..................................... -- --
---------------------
Options outstanding at December 31, 2007 ........... 304 $ 34,696
=====================
36 | Annual Report
MUTUAL FINANCIAL SERVICES FUND
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. FORWARD EXCHANGE CONTRACTS
At December 31, 2007, the Fund had the following forward exchange contracts
outstanding:
-------------------------------------------------------
CONTRACT SETTLEMENT UNREALIZED UNREALIZED
AMOUNT DATE GAIN LOSS
-------------------------------------------------------
CONTRACTS TO BUY
22,780,227 Swedish Krona ...... $ 3,590,863 1/15/08 $ -- $ (67,035)
22,123,100 Norwegian Krone .... 4,000,000 2/19/08 65,316 --
CONTRACTS TO SELL
941,552 British Pound ...... 1,906,495 1/10/08 36,230 --
36,527,120 Euro ............... 50,569,767 1/14/08 -- (2,750,144)
3,896,423 Australian Dollar .. 3,511,944 1/15/08 101,008 --
242,098,827 Swedish Krona ...... 37,925,346 1/15/08 475,560 --
5,659,477 New Zeland Dollar .. 4,349,421 2/08/08 31,687 --
23,692,454 Euro ............... 32,908,819 2/13/08 -- (1,689,103)
15,402,830 Euro ............... 22,493,876 2/13/08 1,234 --
93,675,796 Norwegian Krone .... 17,110,587 2/19/08 -- (103,175)
160,000,000 Norwegian Krone .... 29,530,236 2/19/08 128,812 --
19,000,000 Euro ............... 28,208,058 2/25/08 460,575 --
24,909,869 Swiss Franc ........ 22,288,579 3/07/08 220,622 --
11,137,874 British Pound ...... 22,534,860 3/10/08 446,554 --
20,000,000 Euro ............... 27,789,000 3/13/08 -- (1,419,247)
750,615,637 Japanese Yen ....... 6,680,961 3/19/08 -- (108,283)
75,275,931 Danish Krone ....... 14,312,990 4/23/08 -- (427,301)
26,498,616 Euro ............... 37,631,214 4/24/08 -- (1,062,103)
25,621,603 Euro ............... 38,123,920 5/28/08 717,875 --
---------------------------
UNREALIZED GAIN (LOSS) ON FORWARD EXCHANGE CONTRACTS ..... 2,685,473 (7,626,391)
---------------------------
NET UNREALIZED LOSS ON FORWARD EXCHANGE CONTRACTS .. $ (4,940,918)
=============
8. RESTRICTED SECURITIES
The Fund may invest in securities that are restricted under the Securities Act
of 1933 (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, 2007, 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 ACQUISITION
AMOUNT/SHARES ISSUER DATES COST VALUE
- -------------------------------------------------------------------------------------------------------------
350,000 Atlantic Banc Holdings Inc. ............ 2/01/07 $ 3,500,000 $ 3,500,000
10,745 Augsburg Re AG ......................... 5/25/06 10,745 --
123,572 Augsburg Re AG, zero cpn.,
1/30/08 .............................. 5/25/06 123,572 --
1,000,000 Cerberus CG Investor I LLC ............. 7/26/07 1,000,000 841,976
1,000,000 Cerberus CG Investor I LLC, 12.00%,
7/31/14 .............................. 7/26/07 1,000,000 841,976
1,000,000 Cerberus CG Investor II LLC ............ 7/26/07 1,000,000 841,977
1,000,000 Cerberus CG Investor II LLC, 12.00%,
7/31/14 .............................. 7/26/07 1,000,000 841,977
500,000 Cerberus CG Investor III LLC ........... 7/26/07 500,000 420,988
500,000 Cerberus CG Investor III LLC, 12.00%,
7/31/14 .............................. 7/26/07 500,000 420,988
1,255,339 Cerebrus FIM Investors Auto
Finance LLC .......................... 11/20/06 1,255,339 673,528
3,763,457 Cerebrus FIM Investors Auto
Finance LLC, 12.00%, 11/22/13 ........ 11/20/06 3,763,457 2,019,211
104,566 Cerebrus FIM Investors Commercial
Finance LLC .......................... 11/20/06 104,566 56,103
313,698 Cerebrus FIM Investors Commercial
Finance LLC, 12.00%, 11/22/13 ........ 11/20/06 313,698 168,309
195,993 Cerebrus FIM Investors Commercial
Mortgage LLC ......................... 11/20/06 195,993 105,156
587,978 Cerebrus FIM Investors Commercial
Mortgage LLC, 12.00%, 11/22/13 ....... 11/20/06 587,978 315,468
958,613 Cerebrus FIM Investors Insurance
LLC .................................. 11/20/06 958,613 514,325
2,875,838 Cerebrus FIM Investors Insurance
LLC, 12.00%, 11/22/13 ................ 11/20/06 2,875,838 1,542,976
1,784,739 Cerebrus FIM Investors Rescap LLC ...... 11/20/06 1,784,739 957,568
5,354,217 Cerebrus FIM Investors Rescap LLC,
12.00%, 11/22/13 ..................... 11/20/06 5,354,217 2,872,703
2,167 Elephant Capital Holdings Ltd. ......... 8/29/03 - 3/22/07 77,220 1,427,272
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 6,310,178
10,590 NCB Warrant Holdings Ltd., A ........... 12/16/05 -- 628,324
7,480 Olympus Re Holdings Ltd. ............... 12/19/01 748,000 24,499
968,500 Star Asia Finance Ltd., 144A ........... 2/22/07 - 5/18/07 9,836,925 8,958,625
1,020,510 Symetra Financial ...................... 7/27/04 11,730,000 16,348,570
456,903 The Bankshares Inc. .................... 3/22/07 4,569,030 4,569,030
--------------
TOTAL RESTRICTED SECURITIES (7.58% of Net Assets) .......................... $ 62,157,879
==============
38 | Annual Report
Mutual Financial Services Fund
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
9. UNFUNDED CAPITAL COMMITMENTS
At December 31, 2007, the Fund had aggregate unfunded capital commitments to
investments of $989,000.
10. 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, 2007, 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
Atlantic Banc
Holdings ................ -- 350,000 -- 350,000 $ 3,500,000 $ -- $ --
Coast Financial
Holdings Inc. ........... -- 527,780 527,780 -- -- -- (3,902,202)
Franconofurt AG ......... 309,280 189,980 -- 499,260 6,112,913 203,232 --
Intergrated Alarm
Systems a ............... 1,277,700 -- 1,277,700 -- -- -- --
-------------------------------------------
TOTAL NON-CONTROLLED AFFILIATES (1.17% of Net Assets) .............................. $ 9,612,913 $ 203,232 $ (3,902,202)
===========================================
a Integrated Alarm Systems merged with Protection One Inc. and is not an
affiliate at December 31, 2007.
11. REGULATORY AND LITIGATION 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 and governmental
entities. Specifically, the Company entered into settlements with the SEC, among
others, concerning market timing and marketing support.
On June 6, 2007, the SEC posted for public comment the proposed plan of
distribution for the market timing settlement. Once the SEC approves the final
plan of distribution, disbursements of settlement monies will be made promptly
to individuals who were shareholders of the designated funds during the relevant
period, 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.
Annual Report | 39
Mutual Financial Services Fund
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
11. REGULATORY AND LITIGATION 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.
12. NEW ACCOUNTING PRONOUNCEMENT
In September 2006, Financial Accounting Standards Board (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 Funds constituting the Franklin
Mutual Series Fund Inc.) (the "Fund"), including the statement of investments,
as of December 31, 2007, 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, 2007, by correspondence with the custodian
and brokers. 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, 2007, 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 14, 2008
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 $40,819,007 as a long
term capital gain dividend for the fiscal year ended December 31, 2007.
Under Section 854(b)(2) of the Code, the Fund designates the maximum amount
allowable but no less than $24,713,557 as qualified dividends for purposes of
the maximum rate under Section 1(h)(11) of the Code for the fiscal year ended
December 31, 2007. In January 2008, shareholders will receive Form 1099-DIV
which will include their share of qualified dividends distributed during the
calendar year 2007. 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)(2)(C) of the Code, the Fund designates the maximum amount
allowable but no less than $4,222,687 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, 2007.
Under Section 854(b)(2) of the Code, the Fund designates 22.15% of the ordinary
income dividends as income qualifying for the dividends received deduction for
the fiscal year ended December 31, 2007.
At December 31, 2007, 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 income 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 20, 2007, 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 table provides a detailed analysis of foreign tax paid, foreign
source income, and foreign qualified dividends as designated by the Fund, to
Class A, Class B, Class C and Class Z shareholders of record.
RECORD DATE: 12/20/2007
- ----------------------------------------------------------------------------------------------
FOREIGN TAX FOREIGN SOURCE FOREIGN QUALIFIED
CLASS PAID PER SHARE INCOME PER SHARE DIVIDENDS PER SHARE
- ----------------------------------------------------------------------------------------------
Class A ......................... $ 0.0635 $ 0.4162 $ 0.3262
Class B ......................... $ 0.0635 $ 0.3081 $ 0.2415
Class C ......................... $ 0.0635 $ 0.3188 $ 0.2499
Class Z ......................... $ 0.0635 $ 0.4591 $ 0.3600
42 | 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 2008, shareholders will receive Form 1099-DIV which will include
their share of taxes paid and foreign source income distributed during the
calendar year 2007. 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 2007 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 | 43
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 None
C/o Franklin Mutual Advisers, LLC
101 John F. Kennedy Parkway
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; a director to numerous
financial publishing organizations; and FORMERLY, Vice Director, Salomon Center, Stern School of Business, New York University.
- ----------------------------------------------------------------------------------------------------------------------------------
ANN TORRE BATES (1958) Director Since 1994 7 SLM Corporation (Sallie Mae)
c/o Franklin Mutual Advisers, LLC and Allied Capital
101 John F. Kennedy Parkway Corporation (financial
Short Hills, NJ 07078-2789 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 14 Franklin Templeton Emerging
c/o Franklin Mutual Advisers, LLC Markets Debt Opportunities
101 John F. Kennedy Parkway Fund PLC and Fiduciary
Short Hills, NJ 07078-2789 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
Mutualfunds; President, Underwriting Division and Director, National Securities & Research Corporation; Governor, Investment
Company Instituteand Chairman, ICI Public Information Committee.
- ----------------------------------------------------------------------------------------------------------------------------------
BRUCE A. MACPHERSON (1930) Director Since 1974 7 None
C/o Franklin Mutual Advisers, LLC
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).
- ----------------------------------------------------------------------------------------------------------------------------------
44 | 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
- ----------------------------------------------------------------------------------------------------------------------------------
CHARLES RUBENS II (1930) Director Since 1998 14 None
c/o Franklin Mutual Advisers, LLC
101 John F. Kennedy Parkway
Short Hills, NJ 07078-2789
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Private investor.
- ----------------------------------------------------------------------------------------------------------------------------------
ROBERT E. WADE (1946) Director and Director Since 34 EL Oro and Exploration CO.,
c/o Franklin Mutual Advisers, LLC Chairman 1991 and p.l.c. (investments) and ARC
101 John F. Kennedy Parkway of the Board Chairman of the Wireless Solutions, Inc.
Short Hills, NJ 07078-2789 Board since 2005 (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
- ----------------------------------------------------------------------------------------------------------------------------------
**GREGORY E. JOHNSON (1961) Director Since April 2007 92 None
One Franklin Parkway
San Mateo, CA 94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Director, President and Chief Executive Officer, Franklin Resources, Inc.; President, Templeton Worldwide, Inc.; Director,
Templeton Asset Management Ltd.; and officer and/or Director or trustee, as the Case may be, of Some of the Other Subsidiaries of
Franklin Resources, Inc. and of 33 of the investment companies in Franklin Templeton Investments.
- ----------------------------------------------------------------------------------------------------------------------------------
**PETER A. LANGERMAN (1955) Director, Director Since 7 None
c/o Franklin Mutual Advisers, LLC President April 2007 and
101 John F. Kennedy Parkway and chief President and
Short Hills, NJ 07078-2702 Executive Chief Executive
Officer - Officer -
Investment Investment
Management Management
since 2005
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Chairman of the Board, Chief Executive Officer and President, Franklin Mutual Advisers, LLC; officer and/or director, as the Case
may be, of three of the investment companies in Franklin Templeton Investments; and FORMERLY, Director, New Jersey's Division of
Investment.
- ----------------------------------------------------------------------------------------------------------------------------------
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.
- ----------------------------------------------------------------------------------------------------------------------------------
Annual Report | 45
- ----------------------------------------------------------------------------------------------------------------------------------
NUMBER OF PORTFOLIOS IN
NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN
AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- ----------------------------------------------------------------------------------------------------------------------------------
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 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.
- ----------------------------------------------------------------------------------------------------------------------------------
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.
- ----------------------------------------------------------------------------------------------------------------------------------
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; Secretary, Franklin Advisory Services, LLC, Franklin Mutual
Advisers, LLC and Franklin Templeton Distributors, Inc.; and officer of 41 of the investment companies in Franklin Templeton
Investments.
- ----------------------------------------------------------------------------------------------------------------------------------
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 18 of the investment companies in Franklin Templeton Investments; and
FORMERLY, Vice President, JPMorgan Chase (2000-2004) and American General Financial Group (1991-2000).
- ----------------------------------------------------------------------------------------------------------------------------------
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
- ----------------------------------------------------------------------------------------------------------------------------------
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 some of the other subsidiaries of Franklin Resources, INC. and
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.
** Gregory E. Johnson is considered to be an interested person of the Fund under
the federal securities laws due to his position as an officer and director of
Franklin Resources, Inc., which is the parent company of the Fund's investment
manager and distributor. Peter A. Langerman is considered to be an interested
person of the Fund under the federal securities laws due to his position as an
officer of Franklin Mutual Advisers, LLC, which is the Fund's investment
manager.
Note 1: Officer information is current as of the date of this report. It is
possible that after this date, information about officers may change.
Note 2: Prior to December 31, 2007, William J. Lippman, Leonard Rubin and Anne
M. Tatlock ceased to be directors of the Fund.
THE FUND'S BOARD 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 | 47
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.
48 | Annual Report
[GRAPHIC OMITTED]
DECEMBER 31, 2007
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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]
Not part of the annual report
Contents
SHAREHOLDER LETTER ........................................................ 1
ANNUAL REPORT
Mutual European Fund ...................................................... 4
Performance Summary ....................................................... 9
Your Fund's Expenses ...................................................... 14
Financial Highlights and Statement of Investments ......................... 16
Financial Statements ...................................................... 26
Notes to Financial Statements ............................................. 30
Report of Independent Registered Public Accounting Firm ................... 43
Tax Designation ........................................................... 44
Board Members and Officers ................................................ 46
Shareholder Information ................................................... 50
- --------------------------------------------------------------------------------
Shareholder Letter
- --------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURN
- --------------------------------------------------------------------------------
CLASS Z 12/31/07
- --------------------------------------------------------------------------------
1-Year +17.15%
- --------------------------------------------------------------------------------
5-Year +23.24%
- --------------------------------------------------------------------------------
10-Year +15.97%
- --------------------------------------------------------------------------------
Dear Shareholder:
We are pleased to bring you the annual report for Mutual European Fund. The year
2007 was a tale of two halves for the region's stock markets. European equities
generally enjoyed a strong first half of the year, driven by solid economic
data, ample liquidity and sustained merger and acquisition activity across a
number of sectors. In the second half of the year, however, the emergence of a
credit market crisis, centered on U.S. subprime mortgage lending, brought a
quick end to the pervasive feeling of optimism, if not complacency, that
characterized prior months. A sudden drop of confidence and liquidity led to
significant turmoil in global financial markets, which was stabilized following
massive interventions by the major central banks, including the European Central
Bank (ECB). Although not the root of the crisis, European equities suffered from
volatility brought about by uncertainty, particularly in the region's financial
sector. A surge in the value of the main European currencies relative to the
U.S. dollar, particularly the euro, as well as a rise in global energy and input
costs, provided an added dimension to the newfound pessimism affecting European
equity investors. Against this backdrop, Mutual European Fund - Class Z posted a
gain of +17.15% for the 12 months ended December 31, 2007. This compared
favorably with the Morgan Stanley
- --------------------------------------------------------------------------------
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Not part of the annual report | 1
Capital International (MSCI) All Country (AC) Europe Index, which returned
+15.17% in U.S. dollar terms for the same period. 1
Despite the challenging environment, a number of positive factors contributed to
Fund performance this year. Various tobacco, industrial and utility companies we
owned made strong gains. One notable exception to the gloom surrounding
financial equities was the Fund's investments in several European securities
exchanges that performed quite well this year. Fund shareholders also benefited
somewhat from the fact that we were less than fully hedged back into U.S.
dollars, reflecting our cautious view regarding the dollar.
The Fund's overall exposure to the European financial sector negatively impacted
Fund performance during the year, although having been underweighted in the
sector throughout the period relative to the benchmark index proved helpful. The
spreading contagion of the credit crisis hurt valuations of most financial
institutions around the world, including some well-capitalized European banks
with no direct and little secondary exposure to risky U.S. assets. We believe
the markets have overly penalized many stocks in the sector and, accordingly,
have added selectively to certain holdings. We believe that over our longer-term
horizon Fund shareholders should benefit from these positions.
As we move into 2008, most companies in the European region face the combined
effect on their operating margins of a strong euro, persistently high energy and
commodity prices, and a less dynamic world economy dominated by an expected
slowdown in U.S. economic growth. This is hardly a recipe for a strong bull
market, at least in the very near term. Fear and volatility can breed
opportunity for patient investors. We are happy to take advantage of market
stresses to buy great companies at bargain prices. We believe the extended
credit crisis has created a number of such opportunities. We have no crystal
ball telling us precisely when the U.S. housing market will turn positive, where
oil prices or the euro will be a year from now, or whether the ECB will become
more accommodating. However, we believe that if we stick to our discipline of
buying good businesses at cheap valuations, we should reach our goal of limiting
our downside risk while generating consistent returns over the long term.
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.
2 | Not part of the annual report
In the enclosed annual report for Mutual European Fund, the portfolio managers
discuss market conditions, investment management decisions and Fund performance
during the period under review. You will also find performance data and
financial information. Please remember that all securities markets fluctuate, as
do mutual fund share prices.
If you would like more frequent updates, FRANKLINTEMPLETON.COM provides daily
prices, monthly performance figures, portfolio holdings and other information.
You can also access your account, buy and sell shares, read timely articles, and
find helpful financial planning tools. We hope you will take advantage of these
online services.
As always, we thank you for your trust and support and extend our best wishes
for a happy, healthy and prosperous 2008.
Sincerely,
/s/ Peter A. Langerman
Peter A. Langerman
Chairman, President and Chief Executive Officer
Franklin Mutual Advisers, LLC
/s/ Michael J. Embler
Michael J. Embler
Senior Vice President and Chief Investment Officer
Franklin Mutual Advisers, LLC
THIS LETTER REFLECTS OUR ANALYSIS AND OPINIONS AS OF DECEMBER 31, 2007. THE
INFORMATION IS NOT A COMPLETE ANALYSIS OF EVERY ASPECT OF ANY MARKET, COUNTRY,
INDUSTRY, SECURITY OR FUND. STATEMENTS OF FACT ARE FROM SOURCES CONSIDERED
RELIABLE.
Not part of the annual report | 3
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.
- --------------------------------------------------------------------------------
We are pleased to bring you Mutual European Fund's annual report for the fiscal
year ended December 31, 2007.
PERFORMANCE OVERVIEW
Mutual European Fund - Class Z posted a cumulative total return of +17.15% for
the 12 months ended December 31, 2007. The Fund outperformed its benchmark, the
Morgan Stanley Capital International (MSCI) All Country (AC) Europe Index, which
returned +15.17% (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
In spite of elevated energy prices and widespread fears of contagion from the
deteriorating U.S. housing situation, the global economy remained resilient in
2007. Consumer and corporate demand strength, particularly in China and other
developing economies, generally favorable employment and accommodative monetary
policies continued to underpin the current expansionary period that began in
2002.
These factors also contributed to the strength of global equity markets during
2007. However, concerns about slower growth and declining asset quality surfaced
in the first quarter. These were initially centered on the U.S. subprime
mortgage market but spread in August to global capital markets. Difficulties in
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
assessing risk and the value of collateral in the structured finance industry
contributed to declining risk appetite among lenders and investors. The private
equity industry, which relies on the availability of cheap credit, played a
pivotal role in several large and high-profile acquisitions and helped boost
merger and acquisition activity in the first half of the year. This was an
important driver of equity performance, but as liquidity dried up in the second
half of the year, significantly slower money flows from private equity weighed
on market performance. However, global merger and acquisition activity still
reached record levels. The staggering $4.5 trillion of deals announced in 2007
eclipsed the previous record from 2006 by 24%. 2
To alleviate the credit crunch and restore investor confidence, the world's
major central banks infused capital into the system, and the U.S. Federal
Reserve Board reduced its target interest rate by a full percentage point.
However, credit and equity markets continued to face headwinds as write-downs
and losses from subprime mortgage financing affected many large financial
institutions toward the end of the year, and equity prices remained volatile.
For the year, however, global and non-U.S. equity markets registered the fifth
consecutive year of double-digit total returns, making this an exceptionally
strong period for investors in global equities. Broad-based stock performance by
European and Asian shares at least doubled that of U.S. stocks, while emerging
market equity returns more than tripled those in developed markets. Led by the
BRIC countries, Brazil, Russia, India and China, emerging market economies
continued to grow at accelerated rates, supporting elevated prices for oil and
other commodities. At the same time, investment inflows from developed economies
continued to underpin equity prices in emerging markets. In addition, U.S.
dollar weakness versus the currencies of many major trading partners enhanced
equity returns for U.S.-based investors holding stocks denominated in these
currencies.
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
GEOGRAPHIC BREAKDOWN
Based on Total Net Assets as of 12/31/07
[THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.]
Germany 20.7%
France 17.3%
U.K. 13.1%
Netherlands 8.2%
Switzerland 8.0%
Italy 3.8%
Norway 3.6%
U.S. 3.6%
Spain 3.5%
Denmark 3.5%
Sweden 3.3%
Belgium 1.8%
Finland 1.4%
Other 1.0%
Short-Term Investments & Other Net Assets 7.2%
2. Source: "For Deal Makers, Tale of Two Halves," THE WALL STREET JOURNAL,
1/2/08.
Annual Report | 5
TOP 10 SECTORS/INDUSTRIES
Based on Equity Securities as of 12/31/07
- --------------------------------------------------------------------------------
% OF TOTAL
NET ASSETS
- --------------------------------------------------------------------------------
Food Products 7.2%
- --------------------------------------------------------------------------------
Commercial Banks 7.0%
- --------------------------------------------------------------------------------
Tobacco 6.3%
- --------------------------------------------------------------------------------
Diversified Financial Services 5.0%
- --------------------------------------------------------------------------------
Industrial Conglomerates 4.9%
- --------------------------------------------------------------------------------
Insurance 4.9%
- --------------------------------------------------------------------------------
Oil, Gas & Consumable Fuels 4.3%
- --------------------------------------------------------------------------------
Machinery 4.1%
- --------------------------------------------------------------------------------
Air Freight & Logistics 4.1%
- --------------------------------------------------------------------------------
Media 3.6%
- --------------------------------------------------------------------------------
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
Among the Fund's top contributors to performance in 2007 were Norwegian
industrial conglomerate Orkla, German securities exchange platform provider
Deutsche Boerse, and German electronics and industrial engineering firm Siemens.
Orkla is one of Norway's largest conglomerates with operations in several
industries including consumer goods, and metals and minerals. In 2007, Orkla was
again among the top performing stocks, advancing 52% in local currency terms.
Orkla shares performed well after the company reported strong operational
performance, and its management pursued two transactions that we believed could
create value. Orkla increased its stake in the solar energy solution company
Renewable Energy Corp. (REC) from 27.5% to 40.0% in February 2007, at a discount
of over 25% to REC's market price at the time. As REC's stock appreciated more
than 142% in local currency during the reporting period, Orkla's ownership in
REC benefited its own share price. Orkla also merged its aluminum profile
business, Sapa, with Alcoa's aluminum extrusion business.
The Fund's investment in Deutsche Boerse rose 97% in local currency as cash
equity trading volumes surged 63%, the company resumed its buyback of shares,
and investors appeared to recognize hidden potential embedded in the business.
The exchange industry grew as such quasi-monopolies benefited from higher
volumes in different product classes and generally beneficial pricing trends.
Deutsche Boerse also tapped into the structural potential of its business by
announcing future cost cutting of over 100 million euros per year to enhance
profitability. We believed future exchange consolidation prospects placed the
company in a good position for ongoing shareholder returns. Therefore, we
increased our holdings in Deutsche Boerse throughout 2007 when we found the
price attractive.
Our investment in Siemens rose 47% in local currency during the year under
review. Following an investigation into bribery allegations and the resignations
of key executives, Dr. Gerhard Cromme was appointed chairman of the company's
Supervisory Board and Peter Loescher became chief executive officer
6 | Annual Report
(CEO). The new CEO set out a strategy to streamline Siemens' organizational
structure and realign its divisions. Siemens also announced a substantial share
buyback plan, the first in the company's 160-year history. At period-end,
Siemens was still trading at a discount to its peers, which we believed was
unwarranted. In our view, the "low-hanging fruit" opportunities to cut costs at
Siemens are potentially significant -- from outsourcing manufacturing to
low-cost countries, to global procurement and the elimination of unnecessary
layers of middle management.
Although the Fund performed well in 2007, some of our positions detracted from
performance. Among them were Belgium-based Fortis, whose operations are focused
in banking, insurance and investment management; U.K.-based cable company Virgin
Media; and Banca Popolare, an Italian financial services provider.
Fortis declined 30% in local currency as the company raised a significant amount
of capital to fund its acquisition of ABN Amro's Dutch retail banking, asset
management and private banking units. Fortis was part of a consortium with Royal
Bank of Scotland and Banco Santander, which together acquired these businesses
and by year-end had completed the largest bank acquisition in European history.
Fortis' stock price also came under pressure after the company announced weak
third quarter 2007 operating results for its banking and insurance businesses.
Shares of Virgin Media, the U.K.'s largest cable company, declined 32% in local
currency during 2007. First, the company was forced to pull several British Sky
Broadcasting (BSkyB) channels from its offering due to a pricing dispute, which
resulted in a reduction in subscribers. Second, the contraction of the leveraged
corporate debt market scuttled a plan announced in June to sell the company.
Finally, Virgin Media posted mediocre earnings results in 2007.
The Fund's shares of Banca Popolare declined 34% in local currency during 2007.
As global economic fears became more evident in the markets, Banca Popolare
suffered as investors became hesitant about the bank's growth prospects for the
next few years. Also, concerns developed over the potential integration of its
$10 billion BPI (Banca Popolare Italiana) acquisition and lost revenue stemming
from the company's Banca Italease subsidiary. At period-end, we believed Banca
Popolare should be able to weather an economic downturn due to its regional
focus and potential future earnings growth from merger integration.
Finally, investors should note that we maintained our currency hedging posture
of being generally hedged to the U.S. dollar for most of our non-U.S. holdings.
Since the dollar was weaker compared with most foreign currencies during 2007,
the Fund benefited to the extent it was not fully hedged.
TOP 10 HOLDINGS
12/31/07
- --------------------------------------------------------------------------------
COMPANY % OF TOTAL
SECTOR/INDUSTRY, COUNTRY NET ASSETS
- --------------------------------------------------------------------------------
Siemens AG 2.5%
INDUSTRIAL CONGLOMERATES, GERMANY
- --------------------------------------------------------------------------------
British American Tobacco PLC 2.4%
TOBACCO, U.K.
- --------------------------------------------------------------------------------
Imperial Tobacco Group PLC 2.4%
TOBACCO, U.K.
- --------------------------------------------------------------------------------
Carrefour SA 2.3%
FOOD & STAPLES RETAILING, FRANCE
- --------------------------------------------------------------------------------
RWE AG 2.3%
MULTI-UTILITIES, GERMANY
- --------------------------------------------------------------------------------
Koninklijke Philips Electronics NV 2.2%
HOUSEHOLD DURABLES, NETHERLANDS
- --------------------------------------------------------------------------------
DaimlerChrysler AG 2.1%
AUTOMOBILES, GERMANY
- --------------------------------------------------------------------------------
Nestle SA 2.1%
FOOD PRODUCTS, SWITZERLAND
- --------------------------------------------------------------------------------
Deutsche Boerse AG 2.0%
DIVERSIFIED FINANCIAL SERVICES, GERMANY
- --------------------------------------------------------------------------------
Deutsche Post AG 2.0%
AIR FREIGHT & LOGISTICS, GERMANY
- --------------------------------------------------------------------------------
Annual Report | 7
Thank you for your continued participation in Mutual European Fund. We look
forward to serving your future investment needs.
[PHOTO OMITTED] /s/ Philippe Brugere-Trelat
Philippe Brugere-Trelat
Portfolio Manager
[PHOTO OMITTED] /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, 2007, 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 has been assistant portfolio manager for Mutual European Fund
since 2007. 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.
- --------------------------------------------------------------------------------
8 | Annual Report
Performance Summary as of 12/31/07
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 12/31/07 12/31/06
- ---------------------------------------------------------------------------------------
Net Asset Value (NAV) +$1.73 $26.32 $24.59
- ---------------------------------------------------------------------------------------
DISTRIBUTIONS (1/1/07-12/31/07)
- ---------------------------------------------------------------------------------------
Dividend Income $0.6772
- ---------------------------------------------------------------------------------------
Long-Term Capital Gain $1.7898
- ---------------------------------------------------------------------------------------
TOTAL $2.4670
- ---------------------------------------------------------------------------------------
CLASS A (SYMBOL: TEMIX) CHANGE 12/31/07 12/31/06
- ---------------------------------------------------------------------------------------
Net Asset Value (NAV) +$1.67 $25.86 $24.19
- ---------------------------------------------------------------------------------------
DISTRIBUTIONS (1/1/07-12/31/07)
- ---------------------------------------------------------------------------------------
Dividend Income $0.6012
- ---------------------------------------------------------------------------------------
Long-Term Capital Gain $1.7898
- ---------------------------------------------------------------------------------------
TOTAL $2.3910
- ---------------------------------------------------------------------------------------
CLASS B (SYMBOL: TEUBX) CHANGE 12/31/07 12/31/06
- ---------------------------------------------------------------------------------------
Net Asset Value (NAV) +$1.59 $25.24 $23.65
- ---------------------------------------------------------------------------------------
DISTRIBUTIONS (1/1/07-12/31/07)
- ---------------------------------------------------------------------------------------
Dividend Income $0.3998
- ---------------------------------------------------------------------------------------
Long-Term Capital Gain $1.7898
- ---------------------------------------------------------------------------------------
TOTAL $2.1896
- ---------------------------------------------------------------------------------------
CLASS C (SYMBOL: TEURX) CHANGE 12/31/07 12/31/06
- ---------------------------------------------------------------------------------------
Net Asset Value (NAV) +$1.65 $25.82 $24.17
- ---------------------------------------------------------------------------------------
DISTRIBUTIONS (1/1/07-12/31/07)
- ---------------------------------------------------------------------------------------
Dividend Income $0.4172
- ---------------------------------------------------------------------------------------
Long-Term Capital Gain $1.7898
- ---------------------------------------------------------------------------------------
TOTAL $2.2070
- ---------------------------------------------------------------------------------------
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 +17.15% +184.30% +339.91%
- ------------------------------------------------------------------------------------------------------
Average Annual Total Return 3 +17.15% +23.24% +15.97%
- ------------------------------------------------------------------------------------------------------
Value of $10,000 Investment 4 $11,715 $28,430 $43,991
- ------------------------------------------------------------------------------------------------------
Total Annual Operating Expenses 5 1.05%
- ------------------------------------------------------------------------------------------------------
CLASS A 1-YEAR 5-YEAR 10-YEAR
- ------------------------------------------------------------------------------------------------------
Cumulative Total Return 2 +16.86% +179.82% +323.55%
- ------------------------------------------------------------------------------------------------------
Average Annual Total Return 3 +10.13% +21.41% +14.84%
- ------------------------------------------------------------------------------------------------------
Value of $10,000 Investment 4 $11,013 $26,378 $39,910
- ------------------------------------------------------------------------------------------------------
Total Annual Operating Expenses 5 1.34%
- ------------------------------------------------------------------------------------------------------
CLASS B 1-YEAR 5-YEAR INCEPTION (1/1/99)
- ------------------------------------------------------------------------------------------------------
Cumulative Total Return 2 +16.05% +170.52% +286.33%
- ------------------------------------------------------------------------------------------------------
Average Annual Total Return 3 +12.05% +21.84% +16.20%
- ------------------------------------------------------------------------------------------------------
Value of $10,000 Investment 4 $11,205 $26,852 $38,633
- ------------------------------------------------------------------------------------------------------
Total Annual Operating Expenses 5 2.05%
- ------------------------------------------------------------------------------------------------------
CLASS C 1-YEAR 5-YEAR 10-YEAR
- ------------------------------------------------------------------------------------------------------
Cumulative Total Return 2 +16.03% +170.57% +298.68%
- ------------------------------------------------------------------------------------------------------
Average Annual Total Return 3 +15.03% +22.03% +14.83%
- ------------------------------------------------------------------------------------------------------
Value of $10,000 Investment 4 $11,503 $27,057 $39,868
- ------------------------------------------------------------------------------------------------------
Total Annual Operating Expenses 5 2.05%
- ------------------------------------------------------------------------------------------------------
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 (1/1/98-12/31/07)
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE GRAPH IN THE PRINTED MATERIAL.]
DATE MUTUAL EUROPEAN FUND MSCI AC EUROPE INDEX 6
- --------------------------------------------------------------------------------
1/1/1998 $10,000 $10,000
1/31/1998 $10,167 $10,359
2/28/1998 $10,722 $11,170
3/31/1998 $11,492 $11,968
4/30/1998 $11,786 $12,227
5/31/1998 $12,198 $12,417
6/30/1998 $11,921 $12,539
7/31/1998 $11,825 $12,809
8/31/1998 $10,479 $11,140
9/30/1998 $ 9,517 $10,695
10/31/1998 $ 9,794 $11,553
11/30/1998 $10,430 $12,183
12/31/1998 $10,474 $12,718
1/31/1999 $10,499 $12,655
2/28/1999 $10,632 $12,348
3/31/1999 $10,874 $12,492
4/30/1999 $11,509 $12,881
5/31/1999 $11,534 $12,286
6/30/1999 $11,935 $12,496
7/31/1999 $11,952 $12,633
8/31/1999 $12,062 $12,766
9/30/1999 $12,062 $12,676
10/31/1999 $12,451 $13,134
11/30/1999 $13,499 $13,502
12/31/1999 $15,376 $14,924
1/31/2000 $15,722 $13,880
2/29/2000 $17,734 $14,595
3/31/2000 $17,188 $14,946
4/30/2000 $16,715 $14,293
5/31/2000 $16,742 $14,170
6/30/2000 $16,754 $14,442
7/31/2000 $16,860 $14,214
8/31/2000 $17,282 $14,035
9/30/2000 $16,860 $13,380
10/31/2000 $17,052 $13,272
11/30/2000 $16,984 $12,708
12/31/2000 $17,600 $13,601
1/31/2001 $18,088 $13,622
2/28/2001 $17,986 $12,405
3/31/2001 $17,283 $11,484
4/30/2001 $17,804 $12,324
5/31/2001 $18,111 $11,742
6/30/2001 $17,998 $11,302
7/31/2001 $17,896 $11,315
8/31/2001 $17,725 $11,027
9/30/2001 $15,700 $ 9,918
10/31/2001 $16,212 $10,247
11/30/2001 $16,553 $10,669
12/31/2001 $16,766 $10,950
1/31/2002 $17,127 $10,397
2/28/2002 $17,383 $10,382
3/31/2002 $18,069 $10,955
4/30/2002 $18,441 $10,890
5/31/2002 $18,545 $10,868
6/30/2002 $17,837 $10,485
7/31/2002 $16,453 $ 9,324
8/31/2002 $16,477 $ 9,328
9/30/2002 $15,433 $ 8,111
10/31/2002 $15,480 $ 8,895
11/30/2002 $15,632 $ 9,335
12/31/2002 $15,474 $ 8,996
1/31/2003 $15,044 $ 8,573
2/28/2003 $14,579 $ 8,303
3/31/2003 $14,794 $ 8,177
4/30/2003 $15,975 $ 9,300
5/31/2003 $16,989 $ 9,920
6/30/2003 $17,215 $10,023
7/31/2003 $17,611 $10,223
8/31/2003 $17,983 $10,223
9/30/2003 $18,271 $10,436
10/31/2003 $19,040 $11,123
11/30/2003 $19,736 $11,593
12/31/2003 $20,555 $12,551
1/31/2004 $20,788 $12,703
2/29/2004 $21,474 $13,087
3/31/2004 $21,388 $12,709
4/30/2004 $21,217 $12,593
5/31/2004 $21,278 $12,804
6/30/2004 $21,756 $12,983
7/31/2004 $21,509 $12,629
8/31/2004 $21,571 $12,650
9/30/2004 $22,213 $13,165
10/31/2004 $22,781 $13,646
11/30/2004 $23,991 $14,638
12/31/2004 $24,991 $15,263
1/31/2005 $24,574 $14,992
2/28/2005 $25,827 $15,768
3/31/2005 $25,282 $15,353
4/30/2005 $24,953 $14,980
5/31/2005 $25,358 $15,060
6/30/2005 $25,954 $15,288
7/31/2005 $26,921 $15,867
8/31/2005 $27,366 $16,135
9/30/2005 $27,976 $16,564
10/31/2005 $27,544 $16,022
11/30/2005 $28,333 $16,322
12/31/2005 $29,498 $16,897
1/31/2006 $30,481 $18,040
2/28/2006 $31,312 $18,081
3/31/2006 $32,850 $18,757
4/30/2006 $33,251 $19,764
5/31/2006 $32,088 $19,189
6/30/2006 $32,199 $19,261
7/31/2006 $32,523 $19,585
8/31/2006 $33,693 $20,201
9/30/2006 $34,285 $20,323
10/31/2006 $35,399 $21,203
11/30/2006 $36,019 $22,005
12/31/2006 $37,552 $22,715
1/31/2007 $38,759 $22,819
2/28/2007 $38,285 $22,723
3/31/2007 $40,133 $23,574
4/30/2007 $42,164 $25,069
5/31/2007 $43,661 $25,511
6/30/2007 $43,837 $25,593
7/31/2007 $42,843 $25,125
8/31/2007 $42,552 $24,813
9/30/2007 $43,990 $26,114
10/31/2007 $45,243 $27,398
11/30/2007 $44,112 $26,556
12/31/2007 $43,991 $26,159
AVERAGE ANNUAL TOTAL RETURN
- ------------------------------------------------
CLASS Z 12/31/07
- ------------------------------------------------
1-Year +17.15%
- ------------------------------------------------
5-Year +23.24%
- ------------------------------------------------
10-Year +15.97%
- ------------------------------------------------
CLASS A (1/1/98-12/31/07)
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE GRAPH IN THE PRINTED MATERIAL.]
DATE MUTUAL EUROPEAN FUND MSCI AC EUROPE INDEX 6
- --------------------------------------------------------------------------------
1/1/1998 $ 9,423 $10,000
1/31/1998 $ 9,580 $10,359
2/28/1998 $10,090 $11,170
3/31/1998 $10,802 $11,968
4/30/1998 $11,072 $12,227
5/31/1998 $11,462 $12,417
6/30/1998 $11,199 $12,539
7/31/1998 $11,089 $12,809
8/31/1998 $ 9,826 $11,140
9/30/1998 $ 8,917 $10,695
10/31/1998 $ 9,171 $11,553
11/30/1998 $ 9,764 $12,183
12/31/1998 $ 9,806 $12,718
1/31/1999 $ 9,830 $12,655
2/28/1999 $ 9,948 $12,348
3/31/1999 $10,168 $12,492
4/30/1999 $10,765 $12,881
5/31/1999 $10,773 $12,286
6/30/1999 $11,141 $12,496
7/31/1999 $11,157 $12,633
8/31/1999 $11,261 $12,766
9/30/1999 $11,253 $12,676
10/31/1999 $11,611 $13,134
11/30/1999 $12,581 $13,502
12/31/1999 $14,322 $14,924
1/31/2000 $14,638 $13,880
2/29/2000 $16,511 $14,595
3/31/2000 $15,998 $14,946
4/30/2000 $15,553 $14,293
5/31/2000 $15,579 $14,170
6/30/2000 $15,576 $14,442
7/31/2000 $15,675 $14,214
8/31/2000 $16,053 $14,035
9/30/2000 $15,666 $13,380
10/31/2000 $15,837 $13,272
11/30/2000 $15,774 $12,708
12/31/2000 $16,337 $13,601
1/31/2001 $16,784 $13,622
2/28/2001 $16,677 $12,405
3/31/2001 $16,028 $11,484
4/30/2001 $16,507 $12,324
5/31/2001 $16,784 $11,742
6/30/2001 $16,674 $11,302
7/31/2001 $16,567 $11,315
8/31/2001 $16,418 $11,027
9/30/2001 $14,530 $ 9,918
10/31/2001 $15,010 $10,247
11/30/2001 $15,319 $10,669
12/31/2001 $15,511 $10,950
1/31/2002 $15,837 $10,397
2/28/2002 $16,065 $10,382
3/31/2002 $16,696 $10,955
4/30/2002 $17,033 $10,890
5/31/2002 $17,131 $10,868
6/30/2002 $16,464 $10,485
7/31/2002 $15,193 $ 9,324
8/31/2002 $15,204 $ 9,328
9/30/2002 $14,239 $ 8,111
10/31/2002 $14,272 $ 8,895
11/30/2002 $14,404 $ 9,335
12/31/2002 $14,263 $ 8,996
1/31/2003 $13,863 $ 8,573
2/28/2003 $13,429 $ 8,303
3/31/2003 $13,618 $ 8,177
4/30/2003 $14,708 $ 9,300
5/31/2003 $15,630 $ 9,920
6/30/2003 $15,837 $10,023
7/31/2003 $16,195 $10,223
8/31/2003 $16,542 $10,223
9/30/2003 $16,799 $10,436
10/31/2003 $17,492 $11,123
11/30/2003 $18,130 $11,593
12/31/2003 $18,875 $12,551
1/31/2004 $19,080 $12,703
2/29/2004 $19,706 $13,087
3/31/2004 $19,627 $12,709
4/30/2004 $19,467 $12,593
5/31/2004 $19,513 $12,804
6/30/2004 $19,951 $12,983
7/31/2004 $19,711 $12,629
8/31/2004 $19,768 $12,650
9/30/2004 $20,342 $13,165
10/31/2004 $20,858 $13,646
11/30/2004 $21,971 $14,638
12/31/2004 $22,882 $15,263
1/31/2005 $22,483 $14,992
2/28/2005 $23,622 $15,768
3/31/2005 $23,117 $15,353
4/30/2005 $22,812 $14,980
5/31/2005 $23,176 $15,060
6/30/2005 $23,709 $15,288
7/31/2005 $24,581 $15,867
8/31/2005 $24,982 $16,135
9/30/2005 $25,536 $16,564
10/31/2005 $25,136 $16,022
11/30/2005 $25,855 $16,322
12/31/2005 $26,900 $16,897
1/31/2006 $27,797 $18,040
2/28/2006 $28,540 $18,081
3/31/2006 $29,937 $18,757
4/30/2006 $30,296 $19,764
5/31/2006 $29,232 $19,189
6/30/2006 $29,327 $19,261
7/31/2006 $29,627 $19,585
8/31/2006 $30,684 $20,201
9/30/2006 $31,218 $20,323
10/31/2006 $32,210 $21,203
11/30/2006 $32,771 $22,005
12/31/2006 $34,151 $22,715
1/31/2007 $35,252 $22,819
2/28/2007 $34,800 $22,723
3/31/2007 $36,480 $23,574
4/30/2007 $38,316 $25,069
5/31/2007 $39,671 $25,511
6/30/2007 $39,825 $25,593
7/31/2007 $38,921 $25,125
8/31/2007 $38,638 $24,813
9/30/2007 $39,938 $26,114
10/31/2007 $41,069 $27,398
11/30/2007 $40,023 $26,556
12/31/2007 $39,910 $26,159
AVERAGE ANNUAL TOTAL RETURN
- ------------------------------------------------
CLASS A 12/31/07
- ------------------------------------------------
1-Year +10.13%
- ------------------------------------------------
5-Year +21.41%
- ------------------------------------------------
10-Year +14.84%
- ------------------------------------------------
Annual Report | 11
Performance Summary (CONTINUED)
AVERAGE ANNUAL TOTAL RETURN
- -------------------------------------------
CLASS B 12/31/07
- -------------------------------------------
1-Year +12.05%
- -------------------------------------------
5-Year +21.84%
- -------------------------------------------
Since Inception (1/1/99) +16.20%
- -------------------------------------------
CLASS B (1/1/99-12/31/07)
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE GRAPH IN THE PRINTED MATERIAL.]
DATE MUTUAL EUROPEAN FUND MSCI AC EUROPE INDEX 6
- ----------------------------------------------------------
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
1/31/2007 $ 34,122 $ 17,942
2/28/2007 $ 33,686 $ 17,867
3/31/2007 $ 35,313 $ 18,536
4/30/2007 $ 37,089 $ 19,711
5/31/2007 $ 38,402 $ 20,059
6/30/2007 $ 38,552 $ 20,123
7/31/2007 $ 37,677 $ 19,756
8/31/2007 $ 37,402 $ 19,510
9/30/2007 $ 38,658 $ 20,533
10/31/2007 $ 39,752 $ 21,543
11/30/2007 $ 38,739 $ 20,881
12/31/2007 $ 38,633 $ 20,569
AVERAGE ANNUAL TOTAL RETURN
- -------------------------------------------
CLASS C 12/31/07
- -------------------------------------------
1-Year +15.03%
- -------------------------------------------
5-Year +22.03%
- -------------------------------------------
10-Year +14.83%
- -------------------------------------------
CLASS C (1/1/98-12/31/07)
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE GRAPH IN THE PRINTED MATERIAL.]
DATE MUTUAL EUROPEAN FUND MSCI AC EUROPE INDEX 6
- ----------------------------------------------------------
1/1/1998 $ 10,000 $ 10,000
1/31/1998 $ 10,160 $ 10,359
2/28/1998 $ 10,710 $ 11,170
3/31/1998 $ 11,468 $ 11,968
4/30/1998 $ 11,748 $ 12,227
5/31/1998 $ 12,155 $ 12,417
6/30/1998 $ 11,868 $ 12,539
7/31/1998 $ 11,757 $ 12,809
8/31/1998 $ 10,405 $ 11,140
9/30/1998 $ 9,438 $ 10,695
10/31/1998 $ 9,709 $ 11,553
11/30/1998 $ 10,331 $ 12,183
12/31/1998 $ 10,366 $ 12,718
1/31/1999 $ 10,382 $ 12,655
2/28/1999 $ 10,507 $ 12,348
3/31/1999 $ 10,740 $ 12,492
4/30/1999 $ 11,356 $ 12,881
5/31/1999 $ 11,365 $ 12,286
6/30/1999 $ 11,753 $ 12,496
7/31/1999 $ 11,761 $ 12,633
8/31/1999 $ 11,862 $ 12,766
9/30/1999 $ 11,853 $ 12,676
10/31/1999 $ 12,223 $ 13,134
11/30/1999 $ 13,241 $ 13,502
12/31/1999 $ 15,071 $ 14,924
1/31/2000 $ 15,395 $ 13,880
2/29/2000 $ 17,366 $ 14,595
3/31/2000 $ 16,817 $ 14,946
4/30/2000 $ 16,340 $ 14,293
5/31/2000 $ 16,358 $ 14,170
6/30/2000 $ 16,347 $ 14,442
7/31/2000 $ 16,442 $ 14,214
8/31/2000 $ 16,839 $ 14,035
9/30/2000 $ 16,413 $ 13,380
10/31/2000 $ 16,593 $ 13,272
11/30/2000 $ 16,508 $ 12,708
12/31/2000 $ 17,094 $ 13,601
1/31/2001 $ 17,550 $ 13,622
2/28/2001 $ 17,439 $ 12,405
3/31/2001 $ 16,739 $ 11,484
4/30/2001 $ 17,228 $ 12,324
5/31/2001 $ 17,517 $ 11,742
6/30/2001 $ 17,393 $ 11,302
7/31/2001 $ 17,270 $ 11,315
8/31/2001 $ 17,103 $ 11,027
9/30/2001 $ 15,129 $ 9,918
10/31/2001 $ 15,620 $ 10,247
11/30/2001 $ 15,932 $ 10,669
12/31/2001 $ 16,129 $ 10,950
1/31/2002 $ 16,456 $ 10,397
2/28/2002 $ 16,693 $ 10,382
3/31/2002 $ 17,325 $ 10,955
4/30/2002 $ 17,675 $ 10,890
5/31/2002 $ 17,766 $ 10,868
6/30/2002 $ 17,066 $ 10,485
7/31/2002 $ 15,734 $ 9,324
8/31/2002 $ 15,746 $ 9,328
9/30/2002 $ 14,733 $ 8,111
10/31/2002 $ 14,756 $ 8,895
11/30/2002 $ 14,893 $ 9,335
12/31/2002 $ 14,735 $ 8,996
1/31/2003 $ 14,310 $ 8,573
2/28/2003 $ 13,863 $ 8,303
3/31/2003 $ 14,047 $ 8,177
4/30/2003 $ 15,159 $ 9,300
5/31/2003 $ 16,111 $ 9,920
6/30/2003 $ 16,305 $ 10,023
7/31/2003 $ 16,663 $ 10,223
8/31/2003 $ 17,009 $ 10,223
9/30/2003 $ 17,274 $ 10,436
10/31/2003 $ 17,977 $ 11,123
11/30/2003 $ 18,623 $ 11,593
12/31/2003 $ 19,375 $ 12,551
1/31/2004 $ 19,574 $ 12,703
2/29/2004 $ 20,204 $ 13,087
3/31/2004 $ 20,111 $ 12,709
4/30/2004 $ 19,947 $ 12,593
5/31/2004 $ 19,982 $ 12,804
6/30/2004 $ 20,410 $ 12,983
7/31/2004 $ 20,163 $ 12,629
8/31/2004 $ 20,210 $ 12,650
9/30/2004 $ 20,786 $ 13,165
10/31/2004 $ 21,304 $ 13,646
11/30/2004 $ 22,421 $ 14,638
12/31/2004 $ 23,334 $ 15,263
1/31/2005 $ 22,928 $ 14,992
2/28/2005 $ 24,064 $ 15,768
3/31/2005 $ 23,538 $ 15,353
4/30/2005 $ 23,215 $ 14,980
5/31/2005 $ 23,574 $ 15,060
6/30/2005 $ 24,105 $ 15,288
7/31/2005 $ 24,982 $ 15,867
8/31/2005 $ 25,367 $ 16,135
9/30/2005 $ 25,919 $ 16,564
10/31/2005 $ 25,499 $ 16,022
11/30/2005 $ 26,208 $ 16,322
12/31/2005 $ 27,249 $ 16,897
1/31/2006 $ 28,145 $ 18,040
2/28/2006 $ 28,885 $ 18,081
3/31/2006 $ 30,288 $ 18,757
4/30/2006 $ 30,626 $ 19,764
5/31/2006 $ 29,535 $ 19,189
6/30/2006 $ 29,601 $ 19,261
7/31/2006 $ 29,891 $ 19,585
8/31/2006 $ 30,935 $ 20,201
9/30/2006 $ 31,451 $ 20,323
10/31/2006 $ 32,442 $ 21,203
11/30/2006 $ 32,983 $ 22,005
12/31/2006 $ 34,361 $ 22,715
1/31/2007 $ 35,442 $ 22,819
2/28/2007 $ 34,972 $ 22,723
3/31/2007 $ 36,636 $ 23,574
4/30/2007 $ 38,455 $ 25,069
5/31/2007 $ 39,792 $ 25,511
6/30/2007 $ 39,927 $ 25,593
7/31/2007 $ 38,988 $ 25,125
8/31/2007 $ 38,689 $ 24,813
9/30/2007 $ 39,969 $ 26,114
10/31/2007 $ 41,065 $ 27,398
11/30/2007 $ 40,012 $ 26,556
12/31/2007 $ 39,868 $ 26,159
12 | Annual Report
Performance Summary (CONTINUED)
ENDNOTES
VALUE SECURITIES MAY NOT INCREASE IN PRICE AS ANTICIPATED OR MAY DECLINE FURTHER
IN VALUE. 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 CERTAIN RISKS AS PENDING DEALS MAY NOT BE
COMPLETED ON TIME OR ON FAVORABLE TERMS, 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. Figures are as stated in the Fund's prospectus current as of the date of this
report.
6. 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.
- --------------------------------------------------------------------------------------------------------
BEGINNING ACCOUNT ENDING ACCOUNT EXPENSES PAID DURING
CLASS Z VALUE 7/1/07 VALUE 12/31/07 PERIOD* 7/1/07-12/31/07
- --------------------------------------------------------------------------------------------------------
Actual $1,000 $1,003.50 $ 5.10
- --------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,020.11 $ 5.14
- --------------------------------------------------------------------------------------------------------
CLASS A
- --------------------------------------------------------------------------------------------------------
Actual $1,000 $1,002.10 $ 6.66
- --------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,018.55 $ 6.72
- --------------------------------------------------------------------------------------------------------
CLASS B
- --------------------------------------------------------------------------------------------------------
Actual $1,000 $ 998.60 $10.13
- --------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,015.07 $10.21
- --------------------------------------------------------------------------------------------------------
CLASS C
- --------------------------------------------------------------------------------------------------------
Actual $1,000 $ 998.50 $10.13
- --------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,015.07 $10.21
- --------------------------------------------------------------------------------------------------------
* Expenses are calculated using the most recent six-month expense ratio,
annualized for each class (Z: 1.01%; A: 1.32%; B: 2.01%; and C: 2.01%),
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,
2007 2006 2005 2004 2003
--------------------------------------------------------------
CLASS Z
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year .............................. $ 24.59 $ 21.30 $ 19.75 $ 16.79 $ 12.97
--------------------------------------------------------------
Income from investment operations a:
Net investment income b ...................................... 0.46 0.62 0.42 0.37 0.32
Net realized and unrealized gains (losses) ................... 3.74 5.08 3.11 3.21 3.93
--------------------------------------------------------------
Total from investment operations ................................ 4.20 5.70 3.53 3.58 4.25
--------------------------------------------------------------
Less distributions from:
Net investment income ........................................ (0.68) (0.66) (0.55) (0.60) (0.43)
Net realized gains ........................................... (1.79) (1.75) (1.43) (0.02) --
--------------------------------------------------------------
Total distributions ............................................. (2.47) (2.41) (1.98) (0.62) (0.43)
--------------------------------------------------------------
Redemption fees ................................................. -- d -- d -- d -- d -- d
--------------------------------------------------------------
Net asset value, end of year .................................... $ 26.32 $ 24.59 $ 21.30 $ 19.75 $ 16.79
==============================================================
Total return .................................................... 17.15% 27.30% 18.03% 21.58% 32.84%
RATIOS TO AVERAGE NET ASSETS
Expenses c ...................................................... 1.04% e 1.05% e 1.05% e 1.07% e 1.08%
Expenses - excluding dividend expense on securities sold short .. 1.04% e 1.04% e 1.04% e 1.07% e 1.08%
Net investment income ........................................... 1.65% 2.64% 1.99% 2.10% 2.19%
SUPPLEMENTAL DATA
Net assets, end of year (000's) ................................. $1,250,521 $1,034,000 $788,228 $650,547 $498,667
Portfolio turnover rate ......................................... 39.60% 37.65% 29.84% 33.11% 52.33%
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 repurchases 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.
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,
2007 2006 2005 2004 2003
--------------------------------------------------------------
CLASS A
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year .............................. $ 24.19 $ 20.99 $ 19.50 $ 16.59 $ 12.83
--------------------------------------------------------------
Income from investment operations a:
Net investment income b ...................................... 0.36 0.56 0.34 0.31 0.26
Net realized and unrealized gains (losses) ................... 3.70 4.98 3.07 3.16 3.88
--------------------------------------------------------------
Total from investment operations ................................ 4.06 5.54 3.41 3.47 4.14
--------------------------------------------------------------
Less distributions from:
Net investment income ........................................ (0.60) (0.59) (0.49) (0.54) (0.38)
Net realized gains ........................................... (1.79) (1.75) (1.43) (0.02) --
--------------------------------------------------------------
Total distributions ............................................. (2.39) (2.34) (1.92) (0.56) (0.38)
--------------------------------------------------------------
Redemption fees ................................................. -- e -- e -- e -- e -- e
--------------------------------------------------------------
Net asset value, end of year .................................... $ 25.86 $ 24.19 $ 20.99 $ 19.50 $ 16.59
==============================================================
Total return c .................................................. 16.86% 26.96% 17.56% 21.23% 32.34%
RATIOS TO AVERAGE NET ASSETS
Expenses d ...................................................... 1.34% f 1.34% f 1.38% f 1.42% f 1.43%
Expenses - excluding dividend expense on securities sold short .. 1.34% f 1.33% f 1.37% f 1.42% f 1.43%
Net investment income ........................................... 1.35% 2.35% 1.66% 1.75% 1.84%
SUPPLEMENTAL DATA
Net assets, end of year (000's) ................................. $1,333,176 $ 964,717 $707,995 $545,120 $417,630
Portfolio turnover rate ......................................... 39.60% 37.65% 29.84% 33.11% 52.33%
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 repurchases 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.
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)
CLASS B
--------------------------------------------------------------
YEAR ENDED DECEMBER 31,
2007 2006 2005 2004 2003
--------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year .............................. $ 23.65 $ 20.58 $ 19.14 $ 16.31 $ 12.64
--------------------------------------------------------------
Income from investment operations a:
Net investment income b ...................................... 0.18 0.38 0.21 0.19 0.16
Net realized and unrealized gains (losses) ................... 3.60 4.87 3.01 3.10 3.81
--------------------------------------------------------------
Total from investment operations ................................ 3.78 5.25 3.22 3.29 3.97
--------------------------------------------------------------
Less distributions from:
Net investment income ........................................ (0.40) (0.43) (0.35) (0.44) (0.30)
Net realized gains ........................................... (1.79) (1.75) (1.43) (0.02) --
--------------------------------------------------------------
Total distributions ............................................. (2.19) (2.18) (1.78) (0.46) (0.30)
--------------------------------------------------------------
Redemption fees ................................................. -- e -- e -- e -- e -- e
--------------------------------------------------------------
Net asset value, end of year .................................... $ 25.24 $ 23.65 $ 20.58 $ 19.14 $ 16.31
==============================================================
Total return c .................................................. 16.05% 26.01% 16.87% 20.41% 31.45%
RATIOS TO AVERAGE NET ASSETS
Expenses d ...................................................... 2.04% f 2.05% f 2.05% f 2.07% f 2.08%
Expenses - excluding dividend expense on securities sold short .. 2.04% f 2.04% f 2.04% f 2.07% f 2.08%
Net investment income ........................................... 0.65% 1.64% 0.99% 1.10% 1.19%
SUPPLEMENTAL DATA
Net assets, end of year (000's) ................................. $ 65,317 $ 63,219 $ 55,303 $ 50,216 $ 38,526
Portfolio turnover rate ......................................... 39.60% 37.65% 29.84% 33.11% 52.33%
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 repurchases 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.
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)
CLASS C
--------------------------------------------------------------
YEAR ENDED DECEMBER 31,
2007 2006 2005 2004 2003
--------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year .............................. $ 24.17 $ 20.98 $ 19.50 $ 16.60 $ 12.85
--------------------------------------------------------------
Income from investment operations a:
Net investment income b ...................................... 0.17 0.38 0.21 0.20 0.17
Net realized and unrealized gains (losses) ................... 3.69 4.99 3.05 3.15 3.87
--------------------------------------------------------------
Total from investment operations ................................ 3.86 5.37 3.26 3.35 4.04
--------------------------------------------------------------
Less distributions from:
Net investment income ........................................ (0.42) (0.43) (0.35) (0.43) (0.29)
Net realized gains ........................................... (1.79) (1.75) (1.43) (0.02) --
--------------------------------------------------------------
Total distributions ............................................. (2.21) (2.18) (1.78) (0.45) (0.29)
--------------------------------------------------------------
Redemption fees ................................................. -- e -- e -- e -- e -- e
--------------------------------------------------------------
Net asset value, end of year .................................... $ 25.82 $ 24.17 $ 20.98 $ 19.50 $ 16.60
==============================================================
Total return c .................................................. 16.03% 26.10% 16.78% 20.43% 31.49%
RATIOS TO AVERAGE NET ASSETS
Expenses d ...................................................... 2.04% f 2.05% f 2.05% f 2.07% f 2.08%
Expenses - excluding dividend expense on securities sold short .. 2.04% f 2.04% f 2.04% f 2.07% f 2.08%
Net investment income ........................................... 0.65% 1.64% 0.99% 1.10% 1.19%
SUPPLEMENTAL DATA
Net assets, end of year (000's) ................................. $ 384,861 $ 303,259 $242,894 $205,197 $166,758
Portfolio turnover rate ......................................... 39.60% 37.65% 29.84% 33.11% 52.33%
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 repurchases 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.
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, 2007
- ----------------------------------------------------------------------------------------------------------------------------------
SHARES/WARRANTS/
COUNTRY CONTRACTS VALUE
- ----------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS 93.2%
COMMON STOCKS AND OTHER EQUITY INTERESTS 90.1%
AIR FREIGHT & LOGISTICS 4.1%
Deutsche Post AG .................................................. Germany 1,807,249 $ 61,477,998
Geodis SA ......................................................... France 53,673 8,558,083
TNT NV ............................................................ Netherlands 1,303,263 53,729,150
-------------
123,765,231
-------------
AUTO COMPONENTS 1.1%
a Goodyear Tire & Rubber Co. ........................................ United States 1,150,310 32,461,748
-------------
AUTOMOBILES 2.1%
Daimler AG ........................................................ Germany 670,054 64,743,003
-------------
BEVERAGES 2.6%
Carlsberg AS, A ................................................... Denmark 28,600 3,263,294
Carlsberg AS, B ................................................... Denmark 220,105 26,578,879
Pernod Ricard SA .................................................. France 214,477 49,484,826
-------------
79,326,999
-------------
CAPITAL MARKETS 0.6%
D. Carnegie & Co. AB .............................................. Sweden 855,858 16,612,305
a Gottex Fund Management Holdings Ltd. .............................. Switzerland 9,392 575,189
-------------
17,187,494
-------------
CHEMICALS 3.5%
Koninklijke DSM NV ................................................ Netherlands 676,544 31,919,877
Lanxess ........................................................... Germany 245,850 11,821,840
Linde AG .......................................................... Germany 351,735 46,448,920
Sika AG ........................................................... Switzerland 8,141 15,345,196
-------------
105,535,833
-------------
COMMERCIAL BANKS 7.0%
Aareal Bank AG .................................................... Germany 527,029 23,627,359
a Banco Popolare SpA ................................................ Italy 944,485 20,895,546
BNP Paribas SA .................................................... France 560,850 60,747,320
Danske Bank AS .................................................... Denmark 799,196 31,243,644
Intesa Sanpaolo SpA ............................................... Italy 3,211,557 25,355,510
Royal Bank of Scotland Group PLC .................................. United Kingdom 142,089 1,253,517
a Royal Bank of Scotland Group PLC, ADR ............................. United Kingdom 1,095 9,800
Societe Generale, A ............................................... France 239,500 34,577,451
Swedbank AB, A .................................................... Sweden 383,398 10,851,390
Unione Di Banche Italiane SCPA .................................... Italy 153,175 4,204,711
-------------
212,766,248
-------------
COMMUNICATIONS EQUIPMENT 0.8%
Telefonaktiebolaget LM Ericsson, B ................................ Sweden 9,764,968 22,925,934
Telefonaktiebolaget LM Ericsson, B, ADR ........................... Sweden 67,100 1,566,785
-------------
24,492,719
-------------
DISTRIBUTORS 0.8%
Compania de Distribucion Integral Logista SA ...................... Spain 322,008 23,895,552
-------------
20 | Annual Report
Mutual European Fund
STATEMENT OF INVESTMENTS, DECEMBER 31, 2007 (CONTINUED)
- ----------------------------------------------------------------------------------------------------------------------------------
SHARES/WARRANTS/
COUNTRY CONTRACTS VALUE
- ----------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
COMMON STOCKS AND OTHER EQUITY INTERESTS (CONTINUED)
DIVERSIFIED FINANCIAL SERVICES 5.0%
Deutsche Boerse AG ................................................ Germany 312,614 $ 61,930,945
a Fortis VVPR Strip ................................................. Belgium 442,602 6,459
Fortis ............................................................ Belgium 2,117,902 55,880,944
Guinness Peat Group PLC ........................................... United Kingdom 9,258,918 12,348,712
Investor AB, B .................................................... Sweden 589,321 13,398,424
a,b Marconi Corp., Contingent Distribution ............................ United Kingdom 28,582,000 --
Oslo Bors Holding ASA ............................................. Norway 340,000 9,071,672
-------------
152,637,156
-------------
DIVERSIFIED TELECOMMUNICATION SERVICES 3.3%
a,c,d,e AboveNet Inc. ..................................................... United States 88,848 4,442,400
a,d,e AboveNet Inc., stock grants, grant price $20.95, expiration date
9/09/13 ......................................................... United States 117 4,850
a,c,d,e AboveNet Inc., wts., 9/08/08 ...................................... United States 3,214 151,701
a,c,d,e AboveNet Inc., wts., 9/08/10 ...................................... United States 3,781 165,154
Koninklijke (Royal) KPN NV ........................................ Netherlands 2,465,171 44,753,487
Telecom Italia SpA ................................................ Italy 4,158,868 12,897,143
Telefonica SA ..................................................... Spain 1,202,001 38,976,993
-------------
101,391,728
-------------
ELECTRIC UTILITIES 2.0%
E.ON AG ........................................................... Germany 280,020 59,503,115
-------------
ENERGY EQUIPMENT & SERVICES 1.9%
a Aker Drilling ASA ................................................. Norway 935,217 7,313,777
Bourbon SA ........................................................ France 373,667 24,440,835
a Compagnie Generale de Geophysique SA .............................. France 47,394 13,487,064
Petroleum Geo-Services ASA ........................................ Norway 233,063 6,765,239
a Seadrill Ltd. ..................................................... Bermuda 266,180 6,489,806
-------------
58,496,721
-------------
FOOD & STAPLES RETAILING 2.3%
Carrefour SA ...................................................... France 906,000 70,458,496
-------------
FOOD PRODUCTS 7.2%
Cadbury Schweppes PLC ............................................. United Kingdom 2,622,412 32,357,837
CSM NV ............................................................ Netherlands 816,226 27,515,782
Groupe Danone ..................................................... France 646,940 57,968,468
Leroy Seafood Group ASA ........................................... Norway 348,693 7,057,913
a Lighthouse Caledonia ASA .......................................... Norway 63,111 59,923
a,f Marine Harvest .................................................... Norway 7,424,923 4,768,237
Nestle SA ......................................................... Switzerland 137,037 62,883,198
Premier Foods PLC ................................................. United Kingdom 2,866,042 11,645,626
Rieber & Son ASA .................................................. Norway 1,548,350 14,886,611
-------------
219,143,595
-------------
HEALTH CARE PROVIDERS & SERVICES 0.9%
Rhoen-Klinikum AG ................................................. Germany 859,576 26,869,723
-------------
Annual Report | 21
Mutual European Fund
STATEMENT OF INVESTMENTS, DECEMBER 31, 2007 (CONTINUED)
- ----------------------------------------------------------------------------------------------------------------------------------
SHARES/WARRANTS/
COUNTRY CONTRACTS VALUE
- ----------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
COMMON STOCKS AND OTHER EQUITY INTERESTS (CONTINUED)
HOTELS, RESTAURANTS & LEISURE 0.4%
Accor SA .......................................................... France 149,249 $ 11,914,017
-------------
HOUSEHOLD DURABLES 3.0%
Hunter Douglas NV ................................................. Netherlands 358,046 26,481,031
Koninklijke Philips Electronics NV ................................ Netherlands 1,526,224 65,749,746
-------------
92,230,777
-------------
INDUSTRIAL CONGLOMERATES 4.9%
C.I.R. SpA ........................................................ Italy 6,718,106 24,926,842
e Orkla ASA ......................................................... Norway 2,445,205 47,356,303
Siemens AG ........................................................ Germany 485,275 76,781,531
-------------
149,064,676
-------------
INSURANCE 4.9%
Allianz SE ........................................................ Germany 155,530 33,610,117
Assicurazioni Generali SpA ........................................ Italy 313,073 14,163,375
a,c,d Augsburg Re AG .................................................... Switzerland 17,909 --
a Lancashire Holdings Ltd. .......................................... United Kingdom 1,639,810 11,835,486
a,c,d Olympus Re Holdings Ltd. .......................................... United States 16,080 52,665
Resolution PLC .................................................... United Kingdom 1,175,848 16,623,140
White Mountains Insurance Group Ltd. .............................. United States 57,372 29,492,077
Zurich Financial Services AG ...................................... Switzerland 143,320 42,052,506
-------------
147,829,366
-------------
MACHINERY 4.1%
AB SKF, B ......................................................... Sweden 2,060,828 34,901,197
Kone OYJ, B ....................................................... Finland 579,380 40,525,686
Schindler Holding AG .............................................. Switzerland 406,243 26,169,907
Schindler Holding AG, Registered .................................. Switzerland 352,315 22,695,901
-------------
124,292,691
-------------
MARINE 1.5%
A.P. Moller - Maersk AS ........................................... Denmark 4,214 44,865,760
-------------
MEDIA 3.6%
Eutelsat Communications ........................................... France 1,138,898 33,822,733
JC Decaux SA ...................................................... France 557,979 21,904,310
a Premiere AG ....................................................... Germany 702,674 13,135,980
Virgin Media Inc. ................................................. United Kingdom 1,632,505 27,981,136
WPP Group PLC ..................................................... United Kingdom 990,271 12,730,495
-------------
109,574,654
-------------
METALS & MINING 2.9%
g Anglo American PLC ................................................ United Kingdom 550,500 33,689,534
a,c,d,h,i Globe Specialty Metals Inc., 144A ................................. United States 2,830,952 32,561,610
Rio Tinto PLC, ADR ................................................ United Kingdom 48,090 20,192,991
-------------
86,444,135
-------------
22 | Annual Report
Mutual European Fund
STATEMENT OF INVESTMENTS, DECEMBER 31, 2007 (CONTINUED)
- ----------------------------------------------------------------------------------------------------------------------------------
SHARES/WARRANTS/
COUNTRY CONTRACTS VALUE
- ----------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
COMMON STOCKS AND OTHER EQUITY INTERESTS (CONTINUED)
MULTI-UTILITIES 3.4%
RWE AG ............................................................ Germany 489,204 $ 68,857,568
Suez SA ........................................................... France 482,571 32,796,455
-------------
101,654,023
-------------
MULTILINE RETAIL 0.7%
Jelmoli Holding AG ................................................ Switzerland 8,844 21,189,075
-------------
OIL, GAS & CONSUMABLE FUELS 4.3%
BP PLC ............................................................ United Kingdom 2,260,780 27,626,151
Eni SpA ........................................................... Italy 361,200 13,204,286
a,c,d,i Euro Wagon LP ..................................................... Jersey Islands 16,127,149 20,266,754
Ganger Rolf ....................................................... Norway 321,090 12,998,399
Royal Dutch Shell PLC, A .......................................... United Kingdom 629,550 26,413,596
Total SA, B ....................................................... France 364,598 30,237,883
-------------
130,747,069
-------------
PAPER & FOREST PRODUCTS 0.2%
Ahlstrom OYJ, A ................................................... Finland 31,651 756,128
Mondi Ltd. ........................................................ South Africa 98,470 930,340
Mondi PLC ......................................................... United Kingdom 345,275 2,915,688
-------------
4,602,156
-------------
PHARMACEUTICALS 2.7%
Bristol-Myers Squibb Co. .......................................... United States 406,850 10,789,662
Novartis AG ....................................................... Switzerland 948,307 51,967,759
Sanofi-Aventis .................................................... France 203,171 18,673,418
-------------
81,430,839
-------------
REAL ESTATE 0.1%
a,c Canary Wharf Group PLC ............................................ United Kingdom 192,100 1,919,916
Patrizia Immobilien AG ............................................ Germany 248,769 1,862,401
-------------
3,782,317
-------------
THRIFTS & MORTGAGE FINANCE 1.1%
Hypo Real Estate Holding AG ....................................... Germany 628,843 33,303,406
-------------
TOBACCO 6.3%
Altadis SA ........................................................ Spain 601,830 43,659,328
British American Tobacco PLC ...................................... United Kingdom 1,897,291 74,077,013
Imperial Tobacco Group PLC ........................................ United Kingdom 1,349,474 72,717,873
-------------
190,454,214
-------------
TRADING COMPANIES & DISTRIBUTORS 0.8%
Kloeckner & Co. AG ................................................ Germany 328,293 13,079,276
Wolseley PLC ...................................................... United Kingdom 789,203 11,635,354
-------------
24,714,630
-------------
TRANSPORTATION INFRASTRUCTURE 0.0% j
a Groupe Eurotunnel SA, wts., 12/30/11 .............................. France 444,134 149,074
-------------
Annual Report | 23
Mutual European Fund
STATEMENT OF INVESTMENTS, DECEMBER 31, 2007 (CONTINUED)
- ---------------------------------------------------------------------------------------------------------------------------------
SHARES/WARRANTS/
COUNTRY CONTRACTS VALUE
- ---------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
TOTAL COMMON STOCKS AND OTHER EQUITY INTERESTS
(COST $1,858,122,232) .......................................... $2,730,918,240
---------------
PREFERRED STOCKS 1.0%
AUTOMOBILES 1.0%
Porsche Automobile Holding SE, pfd. ............................... Germany 14,588 29,402,234
---------------
DIVERSIFIED TELECOMMUNICATION SERVICES 0.0% j
d PTV Inc., 10.00%, pfd., A ......................................... United Kingdom 46,841 56,209
---------------
TOTAL PREFERRED STOCKS (COST $36,792,744) ......................... 29,458,443
---------------
OPTIONS PURCHASED 0.3%
PUT OPTIONS 0.3%
a Dow Jones EUROSTOXX 50, exercise price $3,900.00, expiration
date 3/21/08, contracts ......................................... United States 103,530 5,567,843
a Dow Jones EUROSTOXX 50, exercise price $4,000.00, expiration
date 3/20/08, contracts ......................................... United States 67,416 3,031,140
a Volkswagen AG, exercise price $160.00, expiration date 3/20/08,
contracts ....................................................... Germany 558 787,445
---------------
TOTAL OPTIONS PURCHASED (COST $9,505,474) ......................... 9,386,428
---------------
-------------------
PRINCIPAL AMOUNT K
-------------------
CORPORATE BONDS & NOTES 1.8%
c,d Augsburg Re AG, zero cpn., 1/30/08 ................................ Switzerland 205,953 --
Groupe Eurotunnel SA, cvt.,
3.00%, 6/28/09 ................................................. France 8,000 EUR 25,685
3.00%, 6/28/09 ................................................. France 9,616 GBP 42,035
3.00%, 7/28/10 ................................................. France 3,439,700 EUR 9,913,959
3.00%, 7/28/10 ................................................. France 2,751,256 GBP 10,796,552
6.00%, 7/28/10 ................................................. France 7,624,700 EUR 14,965,957
6.00%, 7/28/10 ................................................. France 7,302,720 GBP 19,516,138
sub. bond T1, 3.00%, 7/28/08 ................................... France 8,000 EUR 28,603
sub. bond T1, 3.00%, 7/28/08 ................................... France 9,616 GBP 46,812
---------------
TOTAL CORPORATE BONDS & NOTES (COST $53,136,501) .................. 55,335,741
---------------
TOTAL LONG TERM INVESTMENTS (COST $1,957,556,951) ................. 2,825,098,852
---------------
SHORT TERM INVESTMENTS 4.6%
FOREIGN GOVERNMENT AND AGENCY SECURITIES (COST $41,903,555) 1.4%
l Germany Treasury Bills, 1/16/08 - 3/19/08 ......................... Germany 30,000,000 EUR 43,583,048
---------------
U.S. GOVERNMENT AND AGENCY SECURITIES 3.2%
l,m FHLB, 1/02/08 - 10/31/08 .......................................... United States 90,126,000 89,673,144
l U.S. Treasury Bills, 4/24/08 - 5/01/08 ............................ United States 8,750,000 8,658,879
---------------
TOTAL U.S. GOVERNMENT AND AGENCY SECURITIES
(COST $98,243,554) ............................................. 98,332,023
---------------
TOTAL INVESTMENTS BEFORE MONEY MARKET FUND
(COST $2,097,704,060) .......................................... 2,967,013,923
---------------
24 | Annual Report
Mutual European Fund
STATEMENT OF INVESTMENTS, DECEMBER 31, 2007 (CONTINUED)
- ---------------------------------------------------------------------------------------------------------------------------------
COUNTRY SHARES VALUE
- ---------------------------------------------------------------------------------------------------------------------------------
SHORT TERM INVESTMENTS (CONTINUED)
n INVESTMENTS FROM CASH COLLATERAL RECEIVED FOR
LOANED SECURITIES 0.0% j
MONEY MARKET FUND (COST $416,459) 0.0% j
o Bank of New York Institutional Cash Reserve Fund, 5.06% ........... United States 416,459 $ 416,459
---------------
TOTAL INVESTMENTS (COST $2,098,120,519) 97.8% ..................... 2,967,430,382
OPTIONS WRITTEN 0.0% j ............................................ (463,158)
SECURITIES SOLD SHORT (0.3)% ...................................... (9,483,416)
NET UNREALIZED LOSS ON FORWARD EXCHANGE CONTRACTS (0.4)% .......... (11,128,736)
OTHER ASSETS, LESS LIABILITIES 2.9% ............................... 87,519,284
---------------
NET ASSETS 100.0% ................................................. $3,033,874,356
===============
p OPTIONS WRITTEN (PREMIUMS RECEIVED $1,311,609) 0.0% j
METALS & MINING 0.0% j
Anglo American PLC, Mar. 34.00 Calls, 3/20/08 ..................... United Kingdom 180,000 463,158
---------------
q SECURITIES SOLD SHORT (PROCEEDS $10,439,921) 0.3%
METALS & MINING 0.3%
BHP Billiton Ltd., ADR ............................................ Australia 135,400 $ 9,483,416
---------------
CURRENCY ABBREVIATIONS
EUR - Euro
GBP - British Pound
SELECTED PORTFOLIO ABBREVIATIONS
ADR - American Depository Receipt
FHLB- Federal Home Loan Bank
a Non-income producing for the twelve months ended December 31, 2007.
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 Security has been deemed illiquid because it may not be able to be sold within
seven days. At December 31, 2007, the aggregate value of these securities was
$59,560,200, representing 1.96% of net assets.
d See Note 10 regarding restricted securities.
e See Note 12 regarding other considerations.
f A portion or all of the security is on loan as of December 31, 2007. See Note
1(g).
g A portion or all of the security is held in connection with written option
contracts open at year end.
h 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, 2007, the value of this security
was $32,561,610, representing 1.07% of net assets.
i See Note 11 regarding holdings of 5% voting securities.
j Rounds to less than 0.1% of net assets.
k The principal amount is stated in U.S. dollars unless otherwise indicated.
l The security is traded on a discount basis with no stated coupon rate.
m Security or a portion of the security has been segregated as collateral for
securities sold short. At December 31, 2007, the value of securities and or cash
pledged amounted to $4,931,855.
n See Note 1(g) regarding securities on loan.
o The rate shown is the annualized seven-day yield at period end.
p See Note 1(e) regarding written options.
q See Note 1(f) regarding securities sold short.
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, 2007
Assets:
Investments in securities:
Cost - Unaffiliated issuers ........................................................... $ 2,079,606,740
Cost - Controlled affiliated issuers (Note 11) ........................................ 6,213,779
Cost - Non-controlled affiliated issuers (Note 11) .................................... 12,300,000
----------------
Total cost of investments ............................................................. $ 2,098,120,519
================
Value - Unaffiliated issuers (includes securities loaned in the amount of $381,286) ... $ 2,914,602,018
Value - Controlled affiliated issuers (Note 11) ....................................... 20,266,754
Value - Non-controlled affiliated issuers (Note 11) ................................... 32,561,610
----------------
Total value of investments ............................................................ 2,967,430,382
Cash ..................................................................................... 48,636
Cash on deposits with brokers for securities sold short .................................. 11,132,324
Foreign currency, at value (cost $50,621,169) ............................................ 50,701,105
Receivables:
Investment securities sold ............................................................ 26,797,710
Capital shares sold ................................................................... 9,516,730
Dividends and interest ................................................................ 2,848,993
Unrealized gain on forward exchange contracts (Note 8) ................................... 14,793,441
Due from broker - synthetic equity swaps (Note 7) ........................................ 1,367,905
----------------
Total assets ....................................................................... 3,084,637,226
----------------
Liabilities:
Payables:
Investment securities purchased ....................................................... 4,072,520
Capital shares redeemed ............................................................... 5,945,548
Affiliates ............................................................................ 3,786,352
Options written, at value (premiums received $1,311,609) ................................. 463,158
Securities sold short, at value (proceeds $10,439,921) ................................... 9,483,416
Payable upon return of securities loaned ................................................. 416,459
Unrealized loss on forward exchange contracts (Note 8) ................................... 25,922,177
Accrued expenses and other liabilities ................................................... 673,240
----------------
Total liabilities .................................................................. 50,762,870
----------------
Net assets, at value ............................................................ $ 3,033,874,356
================
Net assets consist of:
Paid-in capital ....................................................................... $ 2,097,426,036
Undistributed net investment income ................................................... 1,270,818
Net unrealized appreciation (depreciation) ............................................ 859,173,222
Accumulated net realized gain (loss) .................................................. 76,004,280
----------------
Net assets, at value ............................................................ $ 3,033,874,356
================
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, 2007
CLASS Z:
Net assets, at value .................................................... $ 1,250,520,575
=================
Shares outstanding ...................................................... 47,517,394
=================
Net asset value and maximum offering price per share a ................. $ 26.32
=================
CLASS A:
Net assets, at value .................................................... $ 1,333,175,770
=================
Shares outstanding ...................................................... 51,562,303
=================
Net asset value per share a ............................................ $ 25.86
=================
Maximum offering price per share (net asset value per share / 94.25%) ... $ 27.44
=================
CLASS B:
Net assets, at value .................................................... $ 65,317,335
=================
Shares outstanding ...................................................... 2,588,193
=================
Net asset value and maximum offering price per share a ................. $ 25.24
=================
CLASS C:
Net assets, at value .................................................... $ 384,860,676
=================
Shares outstanding ...................................................... 14,907,676
=================
Net asset value and maximum offering price per share a ................. $ 25.82
=================
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, 2007
Investment income:
Dividends: (net of foreign taxes of $8,113,846)
Unaffiliated issuers ................................................... $ 64,775,053
Interest - Unaffiliated issuers ........................................... 10,426,939
Income from securities loaned ............................................. 60,892
--------------
Total investment income ............................................. 75,262,884
--------------
Expenses:
Management fees (Note 3a) ................................................. 21,701,340
Administrative fees (Note 3b) ............................................. 2,129,808
Distribution fees: (Note 3c)
Class A ................................................................ 3,570,221
Class B ................................................................ 668,051
Class C ................................................................ 3,564,351
Transfer agent fees (Note 3e) ............................................. 3,708,753
Custodian fees (Note 4) ................................................... 691,405
Reports to shareholders ................................................... 202,132
Registration and filing fees .............................................. 179,919
Professional fees ......................................................... 300,596
Directors' fees and expenses .............................................. 45,114
Dividends on securities sold short ........................................ 133,119
Other ..................................................................... 70,384
--------------
Total expenses ...................................................... 36,965,193
--------------
Expense reductions (Note 4) ......................................... (6,038)
--------------
Net expenses ..................................................... 36,959,155
--------------
Net investment income ......................................... 38,303,729
--------------
Realized and unrealized gains (losses):
Net realized gain (loss) from:
Investments - Unaffiliated issuers ..................................... 388,411,326
Written options ........................................................ 2,175,993
Foreign currency transactions .......................................... (97,696,806)
Securities sold short .................................................. (1,658,657)
Synthetic equity swaps ................................................. 1,130,288
--------------
Net realized gain (loss) ...................................... 292,362,144
--------------
Net change in unrealized appreciation (depreciation) on:
Investments ............................................................ 68,268,634
Translation of assets and liabilities denominated in foreign
currencies .......................................................... 8,378,171
--------------
Net change in unrealized appreciation (depreciation) .......... 76,646,805
--------------
Net realized and unrealized gain (loss) ...................................... 369,008,949
--------------
Net increase (decrease) in net assets resulting from operations .............. $ 407,312,678
==============
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,
-----------------------------------
2007 2006
-----------------------------------
Increase (decrease) in net assets:
Operations:
Net investment income .......................................................... $ 38,303,729 $ 48,679,709
Net realized gain (loss) from investments, written options, securities
sold short, synthetic equity swaps, and foreign currency transactions ....... 292,362,144 165,059,805
Net change in unrealized appreciation (depreciation) on investments and
translation of assets and liabilities denominated in foreign currencies ..... 76,646,805 275,194,899
-----------------------------------
Net increase (decrease) in net assets resulting from operations .......... 407,312,678 488,934,413
-----------------------------------
Distributions to shareholders from:
Net investment income:
Class Z ..................................................................... (29,457,929) (25,490,896)
Class A ..................................................................... (28,346,985) (21,883,241)
Class B ..................................................................... (963,571) (1,076,058)
Class C ..................................................................... (5,742,756) (5,010,522)
Net realized gains:
Class Z ..................................................................... (77,736,999) (67,718,539)
Class A ..................................................................... (84,839,816) (64,399,240)
Class B ..................................................................... (4,299,240) (4,442,824)
Class C ..................................................................... (24,673,303) (20,535,458)
-----------------------------------
Total distributions to shareholders ............................................... (256,060,599) (210,556,778)
-----------------------------------
Capital share transactions: (Note 2)
Class Z ..................................................................... 143,919,250 120,412,634
Class A ..................................................................... 313,315,961 148,931,566
Class B ..................................................................... (2,507,612) (183,563)
Class C ..................................................................... 62,682,338 23,232,387
-----------------------------------
Total capital share transactions .................................................. 517,409,937 292,393,024
-----------------------------------
Redemption fees ................................................................... 17,946 4,943
-----------------------------------
Net increase (decrease) in net assets .................................... 668,679,962 570,775,602
Net assets:
Beginning of year ................................................................. 2,365,194,394 1,794,418,792
-----------------------------------
End of year ....................................................................... $ 3,033,874,356 $ 2,365,194,394
===================================
Undistributed net investment income included in net assets:
End of year ....................................................................... $ 1,270,818 $ 379,335
===================================
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. (Series Fund) is registered under the
Investment Company Act of 1940, as amended, (1940 Act) as an open-end investment
company, consisting of six separate funds. The Mutual European Fund (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 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 | 31
Mutual European 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.
32 | Annual Report
Mutual European 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 or index 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 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)
H. INCOME TAXES
No provision has been made for U.S. income taxes because it is the Fund's policy
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 of
America. 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 per share
distributions, by class, are generally due to differences in class specific
expenses.
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.
34 | Annual Report
Mutual European 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 Funds' 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, 2007, there were 500 million shares authorized ($0.001 par
value). Transactions in the Fund's shares were as follows:
-----------------------------------------------------------
YEAR ENDED DECEMBER 31,
2007 2006
-----------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
-----------------------------------------------------------
CLASS Z SHARES:
Shares sold ....................................... 8,588,857 $ 236,306,017 5,431,574 $ 128,493,327
Shares issued in reinvestment of
distributions ................................... 3,857,533 100,877,481 3,685,023 87,880,555
Shares redeemed ................................... (6,985,286) (193,264,248) (4,074,596) (95,961,248)
-----------------------------------------------------------
Net increase (decrease) ........................... 5,461,104 $ 143,919,250 5,042,001 $ 120,412,634
===========================================================
CLASS A SHARES:
Shares sold ....................................... 20,148,175 $ 546,548,967 13,363,218 $ 312,765,819
Shares issued in reinvestment of
distributions ................................... 3,168,417 81,378,544 2,734,585 64,182,231
Shares redeemed ................................... (11,635,446) (314,611,550) (9,943,698) (228,016,484)
-----------------------------------------------------------
Net increase (decrease) ........................... 11,681,146 $ 313,315,961 6,154,105 $ 148,931,566
===========================================================
CLASS B SHARES:
Shares sold ....................................... 235,198 $ 6,197,833 187,205 $ 4,290,688
Shares issued in reinvestment of
distributions ................................... 188,922 4,735,011 218,877 5,014,535
Shares redeemed ................................... (508,873) (13,440,456) (420,926) (9,488,786)
-----------------------------------------------------------
Net increase (decrease) ........................... (84,753) $ (2,507,612) (14,844) $ (183,563)
===========================================================
Annual Report | 35
Mutual European Fund
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. CAPITAL STOCK (CONTINUED)
-----------------------------------------------------------
YEAR ENDED DECEMBER 31,
2007 2006
-----------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
-----------------------------------------------------------
CLASS C SHARES:
Shares sold ....................................... 3,438,611 $ 92,797,536 1,898,556 $ 44,159,577
Shares issued in reinvestment of
distributions ................................... 1,035,139 26,543,890 973,872 22,793,189
Shares redeemed ................................... (2,115,360) (56,659,088) (1,898,057) (43,720,379)
-----------------------------------------------------------
Net increase (decrease) ........................... 2,358,390 $ 62,682,338 974,371 $ 23,232,387
===========================================================
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 charges retained net of commissions paid to
unaffiliated broker/dealers ............................. $ 761,460
Contingent deferred sales charges retained ................ $ 84,339
E. TRANSFER AGENT FEES
For the year ended December 31, 2007, the Fund paid transfer agent fees of
$3,708,753, of which $2,251,327 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, 2007, the
custodian fees were reduced as noted in the Statement of Operations.
5. INCOME TAXES
The Fund has reviewed the tax positions taken on federal income tax returns, for
each of the three open tax years and as of December 31, 2007 and has determined
that no provision for income tax is required in the Fund's financial statements.
Annual Report | 37
Mutual European Fund
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. INCOME TAXES (CONTINUED)
The tax character of distributions paid during the years ended December 31, 2007
and 2006, was as follows:
--------------------------------
2007 2006
--------------------------------
Distributions paid from:
Ordinary income ........................ $ 64,511,241 $ 67,088,310
Long term capital gain ................. 191,549,358 143,468,468
--------------------------------
$ 256,060,599 $ 210,556,778
================================
At December 31, 2007, 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 ....................................... $ 2,099,069,037
=================
Unrealized appreciation ................................... $ 932,709,303
Unrealized depreciation ................................... (64,347,958)
-----------------
Net unrealized appreciation (depreciation) ................ $ 868,361,345
-----------------
Distributable earnings - Undistributed long term capital
gains ................................................... $ 66,559,277
=================
Net investment income (loss) differs for financial statement and tax purposes
primarily due to differing treatments of defaulted securities, foreign currency
transactions, passive foreign investment company shares, synthetic equity swaps,
pass-through entity income and bond discounts and premiums.
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, synthetic equity swaps
and pass-through entity income.
6. INVESTMENT TRANSACTIONS
Purchases and sales of investments (excluding short term securities and
securities sold short) for the year ended December 31, 2007, aggregated
$1,182,211,584 and $1,047,696,736, respectively.
Transactions in options written during the year ended December 31, 2007, were as
follows:
---------------------------
NUMBER OF PREMIUMS
CONTRACTS RECEIVED
---------------------------
Options outstanding at December 31, 2006 ..... -- $ --
Options written .............................. 657,111 3,606,768
Options expired .............................. (423,811) (2,112,203)
Options exercised ............................ -- --
Options closed ............................... (53,300) (182,956)
---------------------------
Options outstanding at December 31, 2007 ..... 180,000 $ 1,311,609
===========================
38 | Annual Report
Mutual European Fund
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. SYNTHETIC EQUITY SWAPS
As of December 31, 2007, the Fund had the following synthetic equity swaps
outstanding:
- ------------------------------------------------------------------------------------------------------------------
NUMBER OF NOTIONAL UNREALIZED UNREALIZED
CONTRACTS TO SELL CONTRACTS VALUE GAIN LOSS
- ------------------------------------------------------------------------------------------------------------------
Fred Olson Energy ASA (229.84 - 282.66 NOK) ............ 106,858 $5,849,711 $-- $(977,256)
---------------------------
NET UNREALIZED LOSS ON SYNTHETIC EQUITY SWAPS ................................... $(977,256)
=============
8. FORWARD EXCHANGE CONTRACTS
At December 31, 2007, the Fund had the following forward exchange contracts
outstanding:
-------------------------------------------------------
CONTRACT SETTLEMENT UNREALIZED UNREALIZED
AMOUNT DATE GAIN LOSS
-------------------------------------------------------
CONTRACTS TO BUY
42,441,773 Swedish Krona ...................... $ 6,706,523 1/15/08 $ -- $ (141,289)
3,322,720 Norwegian Krone .................... 600,000 2/19/08 10,579 --
CONTRACTS TO SELL
791,715 British Pound ...................... 1,569,367 1/10/08 -- (3,266)
84,692,310 British Pound ...................... 172,503,180 1/10/08 4,273,546 --
98,645,162 Euro ............................... 136,642,866 1/14/08 -- (7,352,918)
1,794,361 Swedish Krona ...................... 277,318 1/15/08 -- (248)
453,689,942 Swedish Krona ...................... 71,017,289 1/15/08 836,893 --
9,801,021 New Zealand Dollar ................. 7,532,281 2/08/08 54,875 --
49,789,363 Euro ............................... 70,368,317 2/13/08 -- (2,338,734)
106,119,123 Norwegian Krone .................... 19,382,829 2/19/08 -- (117,504)
211,200,000 Norwegian Krone .................... 38,979,911 2/19/08 170,032 --
178,102,638 Euro ............................... 264,249,208 2/25/08 4,149,211 --
148,632,837 Swiss Franc ........................ 132,993,263 3/07/08 1,317,616 --
54,164,409 British Pound ...................... 109,585,188 3/10/08 2,167,919 --
122,734,858 Euro ............................... 174,697,394 3/13/08 -- (4,546,110)
49,446,120 Euro ............................... 73,232,176 3/13/08 1,020,451 --
205,727,150 Danish Krone ....................... 39,130,083 4/23/08 -- (1,154,747)
188,875,253 Euro ............................... 269,064,590 4/24/08 -- (6,731,330)
99,027,504 Euro ............................... 141,047,232 5/19/08 -- (3,533,956)
12,800,000 Euro ............................... 19,040,832 5/19/08 352,699 --
850,000 Euro ............................... 1,238,875 5/28/08 -- (2,075)
29,862,568 Euro ............................... 44,037,227 5/28/08 439,620 --
---------------------------
UNREALIZED GAIN (LOSS) ON FORWARD EXCHANGE CONTRACTS ............................ 14,793,441 (25,922,177)
---------------------------
NET UNREALIZED LOSS ON FORWARD EXCHANGE CONTRACTS ............................ $(11,128,736)
=============
Annual Report | 39
Mutual European 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. RESTRICTED SECURITIES
The Fund may invest in securities that are restricted under the Securities Act
of 1933 (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, 2007, 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
CONTRACTS ISSUER DATES COST VALUE
- -----------------------------------------------------------------------------------------------------------
88,848 AboveNet Inc. ....................... 10/02/01 - 12/12/07 $ 4,458,292 $ 4,442,400
117 AboveNet Inc., stock grants, grant
price $20.95, expiration date
9/09/13 .......................... 4/17/06 - 9/08/06 -- 4,850
3,214 AboveNet Inc., wts., 9/08/08 ........ 10/02/01 - 9/07/07 365,831 151,701
3,781 AboveNet Inc., wts., 9/08/10 ........ 10/02/01 - 9/07/07 392,580 165,154
17,909 Augsburg Re AG ...................... 5/25/06 17,909 --
205,953 Augsburg Re AG, zero cpn., 1/30/08 .. 5/25/06 205,953 --
16,127,149 Euro Wagon LP ....................... 12/08/05 - 3/02/07 6,213,779 20,266,754
2,830,952 Globe Specialty Metals Inc., 144A ... 9/27/05 - 1/22/07 12,300,000 32,561,610
16,080 Olympus Re Holdings Ltd. ............ 12/19/01 1,608,000 52,665
46,841 PTV Inc., 10.00%, pfd., A ........... 12/07/01 - 3/06/02 140,523 56,209
-------------
TOTAL RESTRICTED SECURITIES (1.90% of Net Assets) ...................... $ 57,701,343
=============
40 | Annual Report
Mutual European 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, 2007, were as shown below.
- ------------------------------------------------------------------------------------------------------------------------------------
NUMBER OF SHARES/ NUMBER OF SHARES/ VALUE AT REALIZED
WARRANTS HELD AT GROSS GROSS WARRANTS HELD AT END OF INVESTMENT CAPITAL
NAME OF ISSUER BEGINNING OF YEAR ADDITIONS REDUCTIONS END OF YEAR YEAR INCOME GAIN (LOSS)
- ------------------------------------------------------------------------------------------------------------------------------------
CONTROLLED AFFILIATESa
Euro Wagon LP .................. 15,240,837 886,312 -- 16,127,149 $20,266,754 $-- $--
NON-CONTROLLED AFFILIATES
Globe Speciality Metals Inc.,
144A ........................ 2,050,000 780,952 -- 2,830,952 32,561,610 -- --
Globe Speciality Metals Inc.,
wts., 10/03/09, 144A ........ 4,100,000 -- 4,100,000 -- -- -- --
------------------------------------
TOTAL NON-CONTROLLED AFFILIATES ........................................................... $32,561,610 $-- $--
------------------------------------
TOTAL AFFILIATED SECURITIES (1.74% of Net Assets) ......................................... $52,828,364 $-- $--
------------------------------------
a Issuer in which the Fund owns 25% or more of the outstanding voting
securities.
12. OTHER CONSIDERATIONS
Officers, directors or employees of the Fund's Investment Manager, may serve
from time to time as members of boards of directors of companies in which the
Fund invests. Such participation may result in the possession by the Investment
Manager of material non-public information which, pursuant to the Fund's
policies and the requirements of applicable securities laws, could prevent the
Fund from trading in the securities of such companies for limited or extended
periods of time.
13. REGULATORY AND LITIGATION 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 and governmental
entities. Specifically, the Company entered into settlements with the SEC, among
others, concerning market timing and marketing support.
On June 6, 2007, the SEC posted for public comment the proposed plan of
distribution for the market timing settlement. Once the SEC approves the final
plan of distribution, disbursements of settlement monies will be made promptly
to individuals who were shareholders of the designated funds during the relevant
period, in accordance with the terms and conditions of the settlement and plan.
Annual Report | 41
Mutual European Fund
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
13. REGULATORY AND LITIGATION MATTERS (CONTINUED)
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.
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.
14. NEW ACCOUNTING PRONOUNCEMENT
In September 2006, Financial Accounting Standards Board (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.
42 | Annual Report
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 Funds constituting the Franklin Mutual Series
Fund Inc.) (the "Fund"), including the statement of investments, as of December
31, 2007, 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, 2007, 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,
2007, 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 14, 2008
Annual Report | 43
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 $258,575,280 as a long
term capital gain dividend for the fiscal year ended December 31, 2007.
Under Section 854(b)(2) of the Code, the Fund designates the maximum amount
allowable but no less than $64,785,986 as qualified dividends for purposes of
the maximum rate under Section 1(h)(11) of the Code for the fiscal year ended
December 31, 2007. In January 2008, shareholders will receive Form 1099-DIV
which will include their share of qualified dividends distributed during the
calendar year 2007. Shareholders are advised to check with their tax advisors
for information on the treatment of these amounts on their individual income tax
returns.
At December 31, 2007, more than 50% of the Fund's total assets were invested in
securities of foreign issuers. In most instances, foreign taxes were withheld
from income 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 20, 2007, 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 table provides a detailed analysis 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.
RECORD DATE:12/20/2007
- --------------------------------------------------------------------------------
FOREIGN TAX FOREIGN SOURCE FOREIGN QUALIFIED
CLASS PAID PER SHARE INCOME PER SHARE DIVIDENDS PER SHARE
- --------------------------------------------------------------------------------
Class Z ........... $0.0758 $0.5257 $0.3850
Class A ........... $0.0758 $0.4565 $0.3345
Class B ........... $0.0758 $0.2704 $0.1983
Class C ........... $0.0758 $0.2883 $0.2114
44 | Annual Report
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 2008, shareholders will receive Form 1099-DIV which will include
their share of taxes paid and foreign source income distributed during the
calendar year 2007. 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 2007 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 | 45
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 None
c/o Franklin Mutual Advisers, LLC
101 John F. Kennedy Parkway
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; a director to numerous
financial publishing organizations; and FORMERLY, Vice Director, Salomon Center, Stern School of Business, New York University.
- ------------------------------------------------------------------------------------------------------------------------------------
ANN TORRE BATES (1958) Director Since 1994 7 SLM Corporation (Sallie Mae) and
c/o Franklin Mutual Advisers, LLC Allied Capital Corporation
101 John F. Kennedy Parkway (financial services).
Short Hills, NJ 07078-2789
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 14 Franklin Templeton Emerging
c/o Franklin Mutual Advisers, LLC Markets Debt Opportunities Fund
101 John F. Kennedy Parkway PLC and Fiduciary International
Short Hills, NJ 07078-2789 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
c/o Franklin Mutual Advisers, LLC
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).
- ------------------------------------------------------------------------------------------------------------------------------------
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
- ------------------------------------------------------------------------------------------------------------------------------------
CHARLES RUBENS II (1930) Director Since 1998 14 None
c/o Franklin Mutual Advisers, LLC
101 John F. Kennedy Parkway
Short Hills, NJ 07078-2789
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Private investor.
- ------------------------------------------------------------------------------------------------------------------------------------
ROBERT E. WADE (1946) Director and Director since 34 El Oro and Exploration Co., p.l.c.
c/o Franklin Mutual Advisers, LLC Chairman 1991 and (investments) and ARC Wireless
101 John F. Kennedy Parkway of the Board Chairman of the Solutions, Inc. (wireless
Short Hills, NJ 07078-2789 Board since 2005 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
- ------------------------------------------------------------------------------------------------------------------------------------
**GREGORY E. JOHNSON (1961) Director Since April 2007 92 None
One Franklin Parkway
San Mateo, CA 94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Director, President and Chief Executive Officer, Franklin Resources, Inc.; President, Templeton Worldwide, Inc.; Director,
Templeton Asset Management Ltd.; and officer and/or director or trustee, as the case may be, of some of the other subsidiaries of
Franklin Resources, Inc. and of 33 of the investment companies in Franklin Templeton Investments.
- ------------------------------------------------------------------------------------------------------------------------------------
**PETER A. LANGERMAN (1955) Director, Director since 7 None
c/o Franklin Mutual Advisers, LLC President April 2007 and
101 John F. Kennedy Parkway and Chief President and
Short Hills, NJ 07078-2702 Executive Chief Executive
Officer - Officer -
Investment Investment
Management Management
since 2005
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Chairman of the Board, Chief Executive Officer and President, Franklin Mutual Advisers, LLC; officer and/or director, as the case
may be, of three of the investment companies in Franklin Templeton Investments; and FORMERLY, Director, New Jersey's Division of
Investment.
- ------------------------------------------------------------------------------------------------------------------------------------
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.
- ------------------------------------------------------------------------------------------------------------------------------------
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
- ------------------------------------------------------------------------------------------------------------------------------------
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 Compliance
- AML since 2006
Compliance
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.
- ------------------------------------------------------------------------------------------------------------------------------------
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.
- ------------------------------------------------------------------------------------------------------------------------------------
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; Secretary, Franklin Advisory Services, LLC, Franklin Mutual
Advisers, LLC and Franklin Templeton Distributors, Inc.; and officer of 41 of the investment companies in Franklin Templeton
Investments.
- ------------------------------------------------------------------------------------------------------------------------------------
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 18 of the investment companies in Franklin Templeton Investments; and
FORMERLY, Vice President, JPMorgan Chase (2000-2004) and American General Financial Group (1991-2000).
- ------------------------------------------------------------------------------------------------------------------------------------
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
- ------------------------------------------------------------------------------------------------------------------------------------
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 some of the other subsidiaries of Franklin Resources, Inc. and
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.
** Gregory E. Johnson is considered to be an interested person of the Fund under
the federal securities laws due to his position as an officer and director of
Franklin Resources, Inc., which is the parent company of the Fund's investment
manager and distributor. Peter A. Langerman is considered to be an interested
person of the Fund under the federal securities laws due to his position as an
officer of Franklin Mutual Advisers, LLC, which is the Fund's investment
manager.
Note 1: Officer information is current as of the date of this report. It is
possible that after this date, information about officers may change.
Note 2: Prior to December 31, 2007, William J. Lippman, Leonard Rubin and Anne
M. Tatlock ceased to be directors of the Fund.
THE FUND'S BOARD 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 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.
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 FUNDS
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 1
GLOBAL
Mutual Discovery Fund
Templeton Global Long-Short Fund
Templeton Global Opportunities Trust
Templeton Global Smaller Companies Fund 1
Templeton Growth Fund
Templeton World Fund
GROWTH
Franklin Capital Growth Fund
Franklin Flex Cap Growth Fund
Franklin Growth Opportunities Fund 2
Franklin Small Cap Growth Fund II 3
Franklin Small-Mid Cap Growth Fund
VALUE
Franklin All Cap Value Fund
Franklin Balance Sheet Investment Fund 1
Franklin Equity Income Fund
Franklin Large Cap Value Fund
Franklin MicroCap Value Fund 1
Franklin MidCap Value Fund
Franklin Small Cap Value Fund
Mutual Beacon Fund
Mutual Qualified Fund
Mutual Recovery Fund 4
Mutual Shares Fund
BLEND
Franklin Balanced Fund
Franklin Convertible Securities Fund
Franklin Focused Core Equity Fund
Franklin Growth Fund
Franklin Rising Dividends 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(R) Allocation Fund
Franklin Templeton Founding Funds Allocation Fund
Franklin Templeton Perspectives Allocation Fund
Franklin Templeton Conservative Target Fund
Franklin Templeton Growth Target Fund
Franklin Templeton Moderate Target Fund
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 5
Franklin Floating Rate Daily Access Fund
Franklin High Income Fund
Franklin Income Fund
Franklin Limited Maturity
U.S. Government Securities Fund 5
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 5
Templeton Global Bond Fund
Templeton Income Fund
Templeton International Bond 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
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 and select
retirement plans can continue adding to their accounts.
2. Effective 11/1/07, Franklin Aggressive Growth Fund changed its name to
Franklin Growth Opportunities Fund. The fund's investment goal and strategy
remained the same.
3. The fund is closed to new investors. Existing shareholders can continue
adding to their accounts.
4. 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.
5. An investment in the fund is neither insured nor guaranteed by the U.S.
government or by any other entity or institution.
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. The fund invests primarily in 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.
12/07 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 A2007 02/08
[GRAPHIC OMITTED]
- --------------------------------------------------------------------------------
DECEMBER 31, 2007
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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]
Not part of the annual report
Contents
SHAREHOLDER LETTER ........................................................ 1
ANNUAL REPORT
Mutual Qualified Fund ..................................................... 5
Performance Summary ....................................................... 11
Your Fund's Expenses ...................................................... 16
Financial Highlights and Statement of Investments ......................... 18
Financial Statements ...................................................... 31
Notes to Financial Statements ............................................. 35
Report of Independent Registered Public Accounting Firm ................... 50
Tax Designation ........................................................... 51
Board Members and Officers ................................................ 52
Shareholder Information ................................................... 56
- --------------------------------------------------------------------------------
Shareholder Letter
- --------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURN
- ----------------------------------------------------------
CLASS Z 12/31/07
- ----------------------------------------------------------
1-Year +9.12%
5-Year +17.13%
10-Year +10.51%
Dear Shareholder:
The past year was a turbulent time for equities both in the U.S. and in many
international markets. Several developments contributed to this volatility,
including (1) credit problems centered around subprime mortgage lending; (2)
declining home values in the U.S.; (3) a nearly complete evaporation of the
corporate leveraged lending that fueled the leveraged buyout boom of the past
several years; (4) a sharp increase in oil, agricultural and certain mining
commodity prices; and (5) a sharp decline in the value of the U.S. dollar
relative to most other currencies. For the year ended December 31, 2007, the
Standard & Poor's (S&P) 500 Index rose 5.49% while the Morgan Stanley Capital
International (MSCI) World Index gained 9.57%. 1 However, indicative of the
impact of the developments noted here, the S&P 500 Financials Index declined
18.63%, the S&P Homebuilders Select Industry Index declined 48.39% and the S&P
GSSI Natural Resources Index appreciated 34.44% during the year. 2 By
comparison, Mutual Qualified Fund - Class Z gained 9.12% over this period.
1. Source: Standard & Poor's Micropal. The S&P 500 Index 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
Index 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.
2. Source: Standard & Poor's Micropal. The S&P 500 Financials Index is market
value weighted and includes all the financial stocks in the S&P 500. The S&P
Homebuilders Select Industry Index is an equal-weighted index that draws its
constituents from the GICS (Global Industry Classification Standards)
Homebuilding sub-industry. The S&P GSSI Natural Resources Index is a modified
cap-weighted index designed to measure equity performance in the natural
resources sector. The index includes companies involved in the following
categories: extractive industries, energy companies, owners and operators of
timber tracts, forestry services, producers of pulp and paper, and owners of
plantations.
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.
eDELIVERY DETAILS
Log in at franklintempleton.com and click on eDelivery. Shareholders who are
registered at franklintempleton.com can receive these reports via email. Not all
accounts are eligible for eDelivery.
- -----------------------------------------------------
NOT FDIC INSURED | MAY LOSE VALUE | NO BANK GUARANTEE
- -----------------------------------------------------
Not part of the annual report | 1
The markets in 2007 were particularly challenging for us as value-driven,
bottom-up stock pickers in a year when a thematic approach to investing based on
macroeconomic factors would likely have enhanced performance. Value investors
are always faced with the task of buying and owning companies when they are out
of favor, whether for company-specific reasons or because of a perception of
macroeconomic fundamentals. It is these very headwinds that create opportunities
to buy well-managed companies with strong industry positions at valuations that
can reward investors over the long term.
Despite the challenges, a number of positive factors contributed to Fund
performance this year. Many of our international holdings made strong gains,
particularly among the tobacco, energy and industrial companies we owned. Fund
shareholders also benefited from the fact that our international holdings were
less than fully hedged back into U.S. dollars, reflecting our cautious view
regarding the dollar. Investments in merger arbitrage situations were also
generally profitable, particularly as we took advantage in late summer of
concerns that deals would fall apart because of "buyer's remorse" or
unavailability of financing.
In the U.S., our focus over the past several years on larger capitalization
companies with strong balance sheets and leading industry positions benefited
our shareholders. For example, investments in Microsoft and Altria, both part of
the large-cap Dow Jones Industrial Average, generated solid returns in 2007. 3
As we have discussed in previous reports, the multi-year outperformance of
small- and mid-capitalization stocks going into 2007 resulted in attractive
valuations among their mega-cap counterparts. At period-end, we continued to see
real value in a number of these companies.
The Fund's exposure to the financial sector negatively impacted Fund performance
during the year. While we had limited direct exposure to the subprime mortgage
originators, the spreading contagion of the credit crisis hurt valuations of
most financial institutions, including some well-capitalized domestic and
European banks owned by the Fund. We were disappointed by the breakdown in risk
management processes at some of the largest U.S. financial institutions and have
adjusted certain positions accordingly. Nevertheless, we believe the markets
have overly penalized many stocks in the sector and accordingly have added
selectively to certain holdings.
3. Mutual Qualified Fund's holdings are based on total net assets as of
12/31/07: Microsoft Corp.: 1.1%; and Altria Group Inc.: 1.4%.
2 | Not part of the annual report
Another difficult area for us in the latter half of the year was what we would
term "event-driven" stocks. These are investments we believe are attractively
valued and where we see an identifiable catalyst to unlock the value. While each
investment is different, a key driver for the second half of 2007 was the abrupt
absence of private equity buyers for companies (or divisions of companies) that
were potential sale targets. Virgin Media, the U.K. cable company, was one
example. We also believe many of these event-driven investments were held in
common with some of the hedge funds that faced pressure to sell in the latter
half of 2007. Again, while somewhat painful in the short term, "technical"
pressures often give us a chance to take advantage of temporary market
dislocations to increase ownership in attractively valued companies.
Fear and volatility can breed opportunity for patient investors. We believe the
extended credit crisis has created a number of such opportunities. We have no
crystal ball telling us precisely when the U.S. housing market will turn
positive or where oil prices will be a year from now. However, we believe that
if we stick to our discipline of buying good businesses at cheap valuations, we
should reach our goal of limiting our downside risk while generating consistent
returns over the long term.
In the enclosed annual report for Mutual Qualified Fund, the portfolio managers
discuss market conditions, investment management decisions and Fund performance
during the period under review. You will also find performance data and
financial information. Please remember that all securities markets fluctuate, as
do mutual fund share prices.
If you would like more frequent updates, FRANKLINTEMPLETON.COM provides daily
prices, monthly performance figures, portfolio holdings and other information.
You can also access your account, buy and sell shares, read timely articles, and
find helpful financial planning tools. We hope you will take advantage of these
online services.
Not part of the annual report | 3
As always, we thank you for your trust and support and extend our best wishes
for a happy, healthy and prosperous 2008.
Sincerely,
/s/ Peter A. Langerman
Peter A. Langerman
Chairman, President and Chief Executive Officer
Franklin Mutual Advisers, LLC
/s/ Michael J. Embler
Michael J. Embler
Senior Vice President and Chief Investment Officer
Franklin Mutual Advisers, LLC
THIS LETTER REFLECTS OUR ANALYSIS AND OPINIONS AS OF DECEMBER 31, 2007. 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.
4 | Not part of the annual report
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 primarily in equity
securities of companies the Fund's managers believe are at prices below their
intrinsic value. The Fund may invest up to 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, 2007.
PERFORMANCE OVERVIEW
Mutual Qualified Fund - Class Z posted a cumulative total return of +9.12% for
the 12 months ended December 31, 2007. The Fund outperformed its benchmark, the
Standard & Poor's 500 Index (S&P 500), which returned +5.49% 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
During the 12 months ended December 31, 2007, the U.S. economy advanced at a
moderate but uneven pace. After slow first quarter growth, gross domestic
product (GDP) advanced solidly in the second quarter, supported by federal
defense spending, accelerating exports and declining imports, and greater
business spending. In the third quarter, growth accelerated despite a struggling
housing market and the abrupt unraveling of the subprime mortgage market. The
housing downturn affected the overall economy by fourth quarter 2007 when GDP
growth decelerated as credit conditions worsened and consumer spending slowed.
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.
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 22.
Annual Report | 5
GEOGRAPHIC BREAKDOWN
Based on Total Net Assets as of 12/31/07
[THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.]
U.S. 35.8%
France 10.5%
U.K. 8.4%
South Korea 5.6%
Germany 5.4%
Norway 3.6%
Switzerland 2.3%
Japan 2.1%
Spain 2.0%
Bermuda 1.8%
Finland 1.6%
Hong Kong 1.4%
Italy 1.1%
Netherlands 1.0%
Other 2.8%
Short-Term Investments & Other Net Assets 14.6%
Consumer confidence declined through period-end largely due to rising mortgage
and fuel costs, falling home prices and a weaker job market. Oil prices were
volatile and established a new record high in November, nearing $99 per barrel.
For the 12 months ended December 31, 2007, the core Consumer Price Index (CPI),
which excludes food and energy costs, rose 2.4%, which was higher than its
10-year average rate. 2
Facing the prospect of slower economic growth, the Federal Reserve Board lowered
the federal funds target rate to 4.25% from 5.25% during the period. As
investors fled riskier, poorer-performing assets, U.S. Treasuries rallied and
the 10-year Treasury note yield fell from 4.71% at the beginning of the period
to 4.04% on December 31, 2007.
The global economy remained resilient despite elevated energy prices and
widespread fears of contagion from the deteriorating U.S. housing situation.
Consumer and corporate demand strength, particularly in China and other
developing economies, generally favorable employment and accommodative monetary
policies continued to underpin the current global expansionary period that began
in 2002.
These factors also contributed to the strength of global equity markets during
2007. However, concerns about slower growth and declining asset quality surfaced
in the first quarter. Initially centered on the U.S. subprime mortgage market,
they spread in August to global capital markets. Difficulties in assessing risk
and the value of collateral in the structured finance industry contributed to
declining risk appetite among lenders and investors. The private equity
industry, which relies on the availability of cheap credit, played a pivotal
role in several large and high-profile acquisitions, helped boost merger and
acquisition activity in the first half of 2007, and was an important driver of
equity performance. A second-half tightening of liquidity led to slower deal
activity and weighed on market performance. However, in 2007, global merger and
acquisition activity still reached record levels.
To alleviate the credit crunch and restore investor confidence, the world's
major central banks infused capital into the system. However, credit and equity
markets continued to face headwinds as write-downs and losses from subprime
mortgage financing affected many large financial institutions toward the end of
the year, and equity prices remained volatile. For the year, however, global and
non-U.S. equity markets registered the fifth consecutive year of double-digit
total returns. Broad-based stock performance by European and Asian shares at
least doubled that of U.S. stocks, while emerging market equity
2. Source: Bureau of Labor Statistics.
6 | Annual Report
returns more than tripled those in developed markets. In addition, U.S. dollar
weakness versus the currencies of many major trading partners enhanced equity
returns for U.S.-based investors holding stocks denominated in these currencies.
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 for our shareholders.
TOP 10 SECTORS/INDUSTRIES
Based on Equity Securities as of 12/31/07
- --------------------------------------------------------------------------------
% OF TOTAL
NET ASSETS
- --------------------------------------------------------------------------------
Tobacco 14.2%
- --------------------------------------------------------------------------------
Insurance 10.4%
- --------------------------------------------------------------------------------
Food Products 7.3%
- --------------------------------------------------------------------------------
Industrial Conglomerates 4.9%
- --------------------------------------------------------------------------------
Media 4.1%
- --------------------------------------------------------------------------------
Commercial Banks 4.0%
- --------------------------------------------------------------------------------
Real Estate 3.9%
- --------------------------------------------------------------------------------
Food & Staples Retailing 3.0%
- --------------------------------------------------------------------------------
Energy Equipment & Services 2.7%
- --------------------------------------------------------------------------------
Oil, Gas & Consumable Fuels 2.7%
- --------------------------------------------------------------------------------
Annual Report | 7
TOP 10 HOLDINGS
12/31/07
- --------------------------------------------------------------------------------
COMPANY % OF TOTAL
SECTOR/INDUSTRY, COUNTRY NET ASSETS
- --------------------------------------------------------------------------------
KT&G Corp. 4.2%
TOBACCO, SOUTH KOREA
- --------------------------------------------------------------------------------
Orkla ASA 3.0%
INDUSTRIAL CONGLOMERATES, NORWAY
- --------------------------------------------------------------------------------
White Mountains Insurance Group Ltd. 2.8%
INSURANCE, U.S.
- --------------------------------------------------------------------------------
Berkshire Hathaway Inc., A & B 2.5%
INSURANCE, U.S.
- --------------------------------------------------------------------------------
British American Tobacco PLC 2.4%
TOBACCO, U.K.
- --------------------------------------------------------------------------------
Groupe Danone 2.4%
FOOD PRODUCTS, FRANCE
- --------------------------------------------------------------------------------
Weyerhaeuser Co. 2.3%
PAPER & FOREST PRODUCTS, U.S.
- --------------------------------------------------------------------------------
Groupe Eurotunnel SA 2.0%
TRANSPORTATION INFRASTRUCTURE, FRANCE
- --------------------------------------------------------------------------------
Altadis SA 2.0%
TOBACCO, SPAIN
- --------------------------------------------------------------------------------
Carrefour SA 1.8%
FOOD & STAPLES RETAILING, FRANCE
- --------------------------------------------------------------------------------
MANAGER'S DISCUSSION
In a challenging year for investors, Mutual Qualified Fund enjoyed success
within its equity portfolio, most notably with some of our long-term holdings.
Three investments that performed well during 2007 were KT&G, a South Korea-based
cigarette manufacturer; Berkshire Hathaway, the well-known investment
conglomerate; and Transocean, a deepwater offshore oil-drilling contractor.
Shares of KT&G appreciated 41% in local currency during 2007, due largely to the
company's strong operating performance. Each division of KT&G reported positive
news in 2007. The company's domestic tobacco sales and operating margins
expanded due to increased average selling prices for a pack of cigarettes.
Overseas sales and revenues registered high double-digit increases. KT&G owns a
100% stake in KGC, South Korea's leading red ginseng maker, which has a dominant
position of more than 60% market share. Over the past five years, KGC's sales
and earnings have grown at 20% and 27% compounded annual growth rates,
respectively. We believe this trend could continue given the country's aging
demographic, growing income levels, and KGC's aggressive distribution and
production expansion plan. According to our analysis, not only is the outlook
for earnings quite good but the company's ability to return cash to shareholders
has been impressive as well. KT&G has announced that between 2006 and 2008 it
will return 2.8 trillion won (the local currency, which equaled approximately
$3.0 billion on December 31, 2007) to shareholders. After 2008, KT&G is expected
to return an average 5% to 7% of market capitalization to shareholders annually
through dividends and share buybacks.
Berkshire Hathaway stock appreciated 29% as the company benefited from a lack of
catastrophe losses in 2007, resulting in large insurance company profits after
higher-than-average losses in 2004 and 2005 resulted in a favorable pricing
environment for U.S. property insurers. Within Berkshire's non-insurance
operations, the company benefited from an improving contribution from its
utility business, Mid-American Energy. Most significantly for its share price
value, Berkshire's cash stockpile of almost $40 billion, along with CEO Warren
Buffett's willingness to wait until a bargain emerged before deploying this
capital, positioned the company as a safe haven for investors who perceived
2007's subprime mortgage crisis as an investment opportunity rather than a
threat. By the end of 2007 Berkshire management had successfully kept its
capital mostly in reserve, for use in executing timely future transactions when
the investment climate is right.
8 | Annual Report
Transocean shares appreciated nearly 67% during 2007, driven by strong company
fundamentals, the company's merger with GlobalSanteFe, and shareholder-friendly
initiatives. Fundamentally, a continued tight supply and demand balance for
offshore rig contractors resulted in higher day rates and favorable financial
performance at Transocean. On the event-driven and shareholder-friendly side,
the company completed a merger with GlobalSantaFe concurrently with a leveraged
recapitalization that enabled a special distribution of $33.03 in late November.
All of these actions were received with widespread shareholder appreciation.
Although the Fund performed well in 2007, some of our positions detracted from
performance. Among them were Sovereign Bancorp, U.K.-based cable company Virgin
Media, and property and casualty insurance and reinsurance provider White
Mountains Insurance Group.
In a difficult year for finance and banking stocks in general, the Fund's shares
of Sovereign Bancorp fared poorly and lost 54% in value. While the company took
early steps to restructure its balance sheet in an effort to lower its risk
profile at the beginning of 2007, the bank's asset quality deteriorated in the
second half of the year, consistent with many other U.S. financial companies.
Shares of Virgin Media, the U.K.'s largest cable company, declined 32% in local
currency during 2007. First, the company was forced to pull several British Sky
Broadcasting (BSkyB) channels from its offering due to a pricing dispute, which
resulted in a reduction in subscribers. Second, the contraction of the leveraged
corporate debt market scuttled a plan announced in June to sell the company.
Finally, Virgin Media posted mediocre earnings results in 2007.
Long-time Fund holding White Mountains continued to be, in our view, a
collection of underappreciated assets. During the year under review, the company
recapitalized and refocused on its reinsurance operations, which could benefit
from minimal catastrophe losses in 2007. Furthermore, online automobile insurer
Esurance, a White Mountains subsidiary, was one of the fastest growing insurance
companies in the U.S. during 2007. That being said, the stock trended 10% lower
for the year along with many of its industry peers including Progressive,
Safeco, Old Republic, and W.R. Berkley (none of which were owned by the Fund).
Finally, investors should note that we maintained our currency hedging posture
of being generally hedged to the U.S. dollar for most of our non-U.S. holdings.
Since the dollar was weaker compared with most foreign currencies during 2007,
the Fund benefited to the extent it was not fully hedged.
Annual Report | 9
Thank you for your continued participation in Mutual Qualified Fund. We look
forward to serving your future investment needs.
[PHOTO OMITTED] /s/ Anne E. Gudefin
Anne E. Gudefin, CFA
Portfolio Manager
[PHOTO OMITTED] /s/ Shawn M. Tumulty
Shawn M. Tumulty, CFA
Assistant Portfolio Manager
Mutual Qualified Fund
THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS
AS OF DECEMBER 31, 2007, 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.
- --------------------------------------------------------------------------------
10 | Annual Report
Performance Summary as of 12/31/07
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 12/31/07 12/31/06
- ----------------------------------------------------------------------------------------------------------------
Net Asset Value (NAV) -$0.04 $21.84 $21.88
- ----------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS (1/1/07-12/31/07)
- ----------------------------------------------------------------------------------------------------------------
Dividend Income $0.7132
- ----------------------------------------------------------------------------------------------------------------
Long-Term Capital Gain $1.3114
- ----------------------------------------------------------------------------------------------------------------
TOTAL $2.0246
- ----------------------------------------------------------------------------------------------------------------
CLASS A (SYMBOL: TEQIX) CHANGE 12/31/07 12/31/06
- ----------------------------------------------------------------------------------------------------------------
Net Asset Value (NAV) -$0.05 $21.70 $21.75
- ----------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS (1/1/07-12/31/07)
- ----------------------------------------------------------------------------------------------------------------
Dividend Income $0.6370
- ----------------------------------------------------------------------------------------------------------------
Long-Term Capital Gain $1.3114
- ----------------------------------------------------------------------------------------------------------------
TOTAL $1.9484
- ----------------------------------------------------------------------------------------------------------------
CLASS B (SYMBOL: TEBQX) CHANGE 12/31/07 12/31/06
- ----------------------------------------------------------------------------------------------------------------
Net Asset Value (NAV) -$0.08 $21.24 $21.32
- ----------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS (1/1/07-12/31/07)
- ----------------------------------------------------------------------------------------------------------------
Dividend Income $0.4720
- ----------------------------------------------------------------------------------------------------------------
Long-Term Capital Gain $1.3114
- ----------------------------------------------------------------------------------------------------------------
TOTAL $1.7834
- ----------------------------------------------------------------------------------------------------------------
CLASS C (SYMBOL: TEMQX) CHANGE 12/31/07 12/31/06
- ----------------------------------------------------------------------------------------------------------------
Net Asset Value (NAV) -$0.08 $21.50 $21.58
- ----------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS (1/1/07-12/31/07)
- ----------------------------------------------------------------------------------------------------------------
Dividend Income $0.4888
- ----------------------------------------------------------------------------------------------------------------
Long-Term Capital Gain $1.3114
- ----------------------------------------------------------------------------------------------------------------
TOTAL $1.8002
- ----------------------------------------------------------------------------------------------------------------
Annual Report | 11
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 +9.12% +120.44% +171.73%
- ------------------------------------------------------------------------------------------------------------
Average Annual Total Return 3 +9.12% +17.13% +10.51%
- ------------------------------------------------------------------------------------------------------------
Value of $10,000 Investment 4 $10,912 $22,044 $27,173
- ------------------------------------------------------------------------------------------------------------
Total Annual Operating Expenses 5 0.83%
- ------------------------------------------------------------------------------------------------------------
CLASS A 1-YEAR 5-YEAR 10-YEAR
- ------------------------------------------------------------------------------------------------------------
Cumulative Total Return 2 +8.73% +116.64% +162.46%
- ------------------------------------------------------------------------------------------------------------
Average Annual Total Return 3 +2.46% +15.34% +9.48%
- ------------------------------------------------------------------------------------------------------------
Value of $10,000 Investment 4 $10,246 $20,416 $24,732
- ------------------------------------------------------------------------------------------------------------
Total Annual Operating Expenses 5 1.15%
- ------------------------------------------------------------------------------------------------------------
CLASS B 1-YEAR 5-YEAR INCEPTION (1/1/99)
- ------------------------------------------------------------------------------------------------------------
Cumulative Total Return 2 +8.04% +109.74% +148.90%
- ------------------------------------------------------------------------------------------------------------
Average Annual Total Return 3 +4.05% +15.75% +10.66%
- ------------------------------------------------------------------------------------------------------------
Value of $10,000 Investment 4 $10,405 $20,774 $24,890
- ------------------------------------------------------------------------------------------------------------
Total Annual Operating Expenses 5 1.82%
- ------------------------------------------------------------------------------------------------------------
CLASS C 1-YEAR 5-YEAR 10-YEAR
- ------------------------------------------------------------------------------------------------------------
Cumulative Total Return 2 +8.02% +109.63% +145.83%
- ------------------------------------------------------------------------------------------------------------
Average Annual Total Return 3 +7.02% +15.95% +9.41%
- ------------------------------------------------------------------------------------------------------------
Value of $10,000 Investment 4 $10,702 $20,963 $24,583
- ------------------------------------------------------------------------------------------------------------
Total Annual Operating Expenses 5 1.83%
- ------------------------------------------------------------------------------------------------------------
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 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 (1/1/98-12/31/07)
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE GRAPH IN THE PRINTED MATERIAL.]
DATE MUTUAL QUALIFIED FUND S&P 500 6
- ----------------------------------------------------------------
1/1/1998 $ 10,000 $ 10,000
1/31/1998 $ 9,950 $ 10,111
2/28/1998 $ 10,528 $ 10,840
3/31/1998 $ 10,941 $ 11,395
4/30/1998 $ 10,952 $ 11,510
5/31/1998 $ 10,913 $ 11,312
6/30/1998 $ 10,842 $ 11,771
7/31/1998 $ 10,522 $ 11,646
8/31/1998 $ 8,956 $ 9,962
9/30/1998 $ 8,923 $ 10,600
10/31/1998 $ 9,443 $ 11,463
11/30/1998 $ 9,913 $ 12,157
12/31/1998 $ 10,050 $ 12,858
1/31/1999 $ 10,117 $ 13,396
2/28/1999 $ 9,843 $ 12,979
3/31/1999 $ 10,343 $ 13,498
4/30/1999 $ 11,253 $ 14,021
5/31/1999 $ 11,393 $ 13,690
6/30/1999 $ 11,731 $ 14,450
7/31/1999 $ 11,510 $ 13,999
8/31/1999 $ 10,969 $ 13,929
9/30/1999 $ 10,717 $ 13,548
10/31/1999 $ 11,007 $ 14,405
11/30/1999 $ 11,328 $ 14,698
12/31/1999 $ 11,421 $ 15,563
1/31/2000 $ 11,103 $ 14,781
2/29/2000 $ 10,597 $ 14,502
3/31/2000 $ 11,752 $ 15,920
4/30/2000 $ 11,765 $ 15,441
5/31/2000 $ 12,022 $ 15,124
6/30/2000 $ 11,831 $ 15,497
7/31/2000 $ 12,189 $ 15,255
8/31/2000 $ 12,731 $ 16,203
9/30/2000 $ 12,767 $ 15,347
10/31/2000 $ 12,877 $ 15,282
11/30/2000 $ 12,475 $ 14,078
12/31/2000 $ 13,048 $ 14,146
1/31/2001 $ 13,748 $ 14,648
2/28/2001 $ 13,724 $ 13,313
3/31/2001 $ 13,426 $ 12,469
4/30/2001 $ 14,062 $ 13,438
5/31/2001 $ 14,565 $ 13,528
6/30/2001 $ 14,792 $ 13,199
7/31/2001 $ 14,857 $ 13,069
8/31/2001 $ 14,598 $ 12,251
9/30/2001 $ 13,243 $ 11,262
10/31/2001 $ 13,146 $ 11,476
11/30/2001 $ 13,703 $ 12,357
12/31/2001 $ 14,120 $ 12,465
1/31/2002 $ 14,060 $ 12,283
2/28/2002 $ 14,128 $ 12,046
3/31/2002 $ 14,616 $ 12,499
4/30/2002 $ 14,719 $ 11,741
5/31/2002 $ 14,719 $ 11,655
6/30/2002 $ 13,717 $ 10,825
7/31/2002 $ 12,750 $ 9,981
8/31/2002 $ 12,864 $ 10,046
9/30/2002 $ 12,028 $ 8,955
10/31/2002 $ 12,193 $ 9,743
11/30/2002 $ 12,498 $ 10,316
12/31/2002 $ 12,327 $ 9,710
1/31/2003 $ 12,229 $ 9,456
2/28/2003 $ 11,973 $ 9,314
3/31/2003 $ 12,000 $ 9,404
4/30/2003 $ 12,822 $ 10,179
5/31/2003 $ 13,537 $ 10,715
6/30/2003 $ 13,760 $ 10,852
7/31/2003 $ 13,965 $ 11,043
8/31/2003 $ 14,312 $ 11,259
9/30/2003 $ 14,241 $ 11,139
10/31/2003 $ 14,845 $ 11,769
11/30/2003 $ 15,343 $ 11,873
12/31/2003 $ 16,086 $ 12,495
1/31/2004 $ 16,239 $ 12,725
2/29/2004 $ 16,635 $ 12,902
3/31/2004 $ 16,635 $ 12,707
4/30/2004 $ 16,149 $ 12,508
5/31/2004 $ 16,284 $ 12,679
6/30/2004 $ 16,591 $ 12,926
7/31/2004 $ 16,338 $ 12,498
8/31/2004 $ 16,555 $ 12,549
9/30/2004 $ 16,952 $ 12,684
10/31/2004 $ 17,141 $ 12,878
11/30/2004 $ 18,205 $ 13,399
12/31/2004 $ 18,762 $ 13,855
1/31/2005 $ 18,348 $ 13,518
2/28/2005 $ 18,858 $ 13,802
3/31/2005 $ 18,704 $ 13,558
4/30/2005 $ 18,550 $ 13,300
5/31/2005 $ 19,012 $ 13,724
6/30/2005 $ 19,402 $ 13,743
7/31/2005 $ 20,036 $ 14,254
8/31/2005 $ 20,007 $ 14,124
9/30/2005 $ 20,328 $ 14,239
10/31/2005 $ 19,802 $ 14,001
11/30/2005 $ 20,397 $ 14,531
12/31/2005 $ 20,875 $ 14,536
1/31/2006 $ 21,370 $ 14,921
2/28/2006 $ 21,665 $ 14,961
3/31/2006 $ 22,476 $ 15,147
4/30/2006 $ 22,613 $ 15,351
5/31/2006 $ 22,287 $ 14,909
6/30/2006 $ 22,258 $ 14,929
7/31/2006 $ 22,397 $ 15,021
8/31/2006 $ 23,027 $ 15,379
9/30/2006 $ 23,124 $ 15,775
10/31/2006 $ 23,904 $ 16,289
11/30/2006 $ 24,449 $ 16,599
12/31/2006 $ 24,902 $ 16,832
1/31/2007 $ 25,562 $ 17,086
2/28/2007 $ 25,562 $ 16,752
3/31/2007 $ 26,211 $ 16,939
4/30/2007 $ 27,007 $ 17,690
5/31/2007 $ 27,975 $ 18,307
6/30/2007 $ 27,929 $ 18,003
7/31/2007 $ 27,255 $ 17,445
8/31/2007 $ 27,026 $ 17,706
9/30/2007 $ 27,358 $ 18,368
10/31/2007 $ 27,792 $ 18,661
11/30/2007 $ 27,392 $ 17,880
12/31/2007 $ 27,173 $ 17,756
AVERAGE ANNUAL TOTAL RETURN
- -------------------------------
CLASS Z 12/31/07
- -------------------------------
1-Year +9.12%
- -------------------------------
5-Year +17.13%
- -------------------------------
10-Year +10.51%
- -------------------------------
CLASS A (1/1/98-12/31/07)
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE GRAPH IN THE PRINTED MATERIAL.]
DATE MUTUAL QUALIFIED FUND S&P 500 6
- ----------------------------------------------------------------
1/1/1998 $ 9,423 $ 10,000
1/31/1998 $ 9,371 $ 10,111
2/28/1998 $ 9,912 $ 10,840
3/31/1998 $ 10,296 $ 11,395
4/30/1998 $ 10,306 $ 11,510
5/31/1998 $ 10,265 $ 11,312
6/30/1998 $ 10,192 $ 11,771
7/31/1998 $ 9,894 $ 11,646
8/31/1998 $ 8,417 $ 9,962
9/30/1998 $ 8,385 $ 10,600
10/31/1998 $ 8,876 $ 11,463
11/30/1998 $ 9,308 $ 12,157
12/31/1998 $ 9,438 $ 12,858
1/31/1999 $ 9,501 $ 13,396
2/28/1999 $ 9,237 $ 12,979
3/31/1999 $ 9,708 $ 13,498
4/30/1999 $ 10,558 $ 14,021
5/31/1999 $ 10,691 $ 13,690
6/30/1999 $ 11,000 $ 14,450
7/31/1999 $ 10,787 $ 13,999
8/31/1999 $ 10,278 $ 13,929
9/30/1999 $ 10,041 $ 13,548
10/31/1999 $ 10,308 $ 14,405
11/30/1999 $ 10,604 $ 14,698
12/31/1999 $ 10,690 $ 15,563
1/31/2000 $ 10,392 $ 14,781
2/29/2000 $ 9,911 $ 14,502
3/31/2000 $ 10,988 $ 15,920
4/30/2000 $ 10,994 $ 15,441
5/31/2000 $ 11,235 $ 15,124
6/30/2000 $ 11,059 $ 15,497
7/31/2000 $ 11,388 $ 15,255
8/31/2000 $ 11,882 $ 16,203
9/30/2000 $ 11,916 $ 15,347
10/31/2000 $ 12,012 $ 15,282
11/30/2000 $ 11,635 $ 14,078
12/31/2000 $ 12,167 $ 14,146
1/31/2001 $ 12,814 $ 14,648
2/28/2001 $ 12,791 $ 13,313
3/31/2001 $ 12,505 $ 12,469
4/30/2001 $ 13,100 $ 13,438
5/31/2001 $ 13,563 $ 13,528
6/30/2001 $ 13,765 $ 13,199
7/31/2001 $ 13,825 $ 13,069
8/31/2001 $ 13,576 $ 12,251
9/30/2001 $ 12,316 $ 11,262
10/31/2001 $ 12,225 $ 11,476
11/30/2001 $ 12,738 $ 12,357
12/31/2001 $ 13,122 $ 12,465
1/31/2002 $ 13,058 $ 12,283
2/28/2002 $ 13,122 $ 12,046
3/31/2002 $ 13,569 $ 12,499
4/30/2002 $ 13,656 $ 11,741
5/31/2002 $ 13,656 $ 11,655
6/30/2002 $ 12,719 $ 10,825
7/31/2002 $ 11,826 $ 9,981
8/31/2002 $ 11,923 $ 10,046
9/30/2002 $ 11,152 $ 8,955
10/31/2002 $ 11,298 $ 9,743
11/30/2002 $ 11,574 $ 10,316
12/31/2002 $ 11,416 $ 9,710
1/31/2003 $ 11,326 $ 9,456
2/28/2003 $ 11,088 $ 9,314
3/31/2003 $ 11,096 $ 9,404
4/30/2003 $ 11,859 $ 10,179
5/31/2003 $ 12,516 $ 10,715
6/30/2003 $ 12,720 $ 10,852
7/31/2003 $ 12,902 $ 11,043
8/31/2003 $ 13,215 $ 11,259
9/30/2003 $ 13,158 $ 11,139
10/31/2003 $ 13,703 $ 11,769
11/30/2003 $ 14,165 $ 11,873
12/31/2003 $ 14,839 $ 12,495
1/31/2004 $ 14,981 $ 12,725
2/29/2004 $ 15,340 $ 12,902
3/31/2004 $ 15,340 $ 12,707
4/30/2004 $ 14,881 $ 12,508
5/31/2004 $ 15,006 $ 12,679
6/30/2004 $ 15,286 $ 12,926
7/31/2004 $ 15,044 $ 12,498
8/31/2004 $ 15,236 $ 12,549
9/30/2004 $ 15,603 $ 12,684
10/31/2004 $ 15,770 $ 12,878
11/30/2004 $ 16,747 $ 13,399
12/31/2004 $ 17,254 $ 13,855
1/31/2005 $ 16,863 $ 13,518
2/28/2005 $ 17,334 $ 13,802
3/31/2005 $ 17,183 $ 13,558
4/30/2005 $ 17,040 $ 13,300
5/31/2005 $ 17,458 $ 13,724
6/30/2005 $ 17,804 $ 13,743
7/31/2005 $ 18,380 $ 14,254
8/31/2005 $ 18,353 $ 14,124
9/30/2005 $ 18,650 $ 14,239
10/31/2005 $ 18,155 $ 14,001
11/30/2005 $ 18,695 $ 14,531
12/31/2005 $ 19,125 $ 14,536
1/31/2006 $ 19,581 $ 14,921
2/28/2006 $ 19,843 $ 14,961
3/31/2006 $ 20,571 $ 15,147
4/30/2006 $ 20,697 $ 15,351
5/31/2006 $ 20,396 $ 14,909
6/30/2006 $ 20,364 $ 14,929
7/31/2006 $ 20,492 $ 15,021
8/31/2006 $ 21,053 $ 15,379
9/30/2006 $ 21,131 $ 15,775
10/31/2006 $ 21,840 $ 16,289
11/30/2006 $ 22,331 $ 16,599
12/31/2006 $ 22,748 $ 16,832
1/31/2007 $ 23,343 $ 17,086
2/28/2007 $ 23,343 $ 16,752
3/31/2007 $ 23,929 $ 16,939
4/30/2007 $ 24,640 $ 17,690
5/31/2007 $ 25,518 $ 18,307
6/30/2007 $ 25,470 $ 18,003
7/31/2007 $ 24,841 $ 17,445
8/31/2007 $ 24,631 $ 17,706
9/30/2007 $ 24,924 $ 18,368
10/31/2007 $ 25,323 $ 18,661
11/30/2007 $ 24,945 $ 17,880
12/31/2007 $ 24,732 $ 17,756
AVERAGE ANNUAL TOTAL RETURN
- -------------------------------
CLASS A 12/31/07
- -------------------------------
1-Year +2.46%
- -------------------------------
5-Year +15.34%
- -------------------------------
10-Year +9.48%
- -------------------------------
Annual Report | 13
Performance Summary (CONTINUED)
AVERAGE ANNUAL TOTAL RETURN
- -------------------------------------
CLASS B 12/31/07
- -------------------------------------
1-Year +4.05%
- -------------------------------------
5-Year +15.75%
- -------------------------------------
Since Inception (1/1/99) +10.66%
- -------------------------------------
CLASS B (1/1/99-12/31/07)
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE GRAPH IN THE PRINTED MATERIAL.]
DATE MUTUAL QUALIFIED FUND S&P 500 6
- ----------------------------------------------------------------
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 $ 10,833
9/30/1999 $ 10,588 $ 10,536
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 $ 11,278
3/31/2000 $ 11,550 $ 12,382
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 $ 11,864
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 $ 11,002
1/31/2001 $ 13,405 $ 11,392
2/28/2001 $ 13,366 $ 10,354
3/31/2001 $ 13,064 $ 9,698
4/30/2001 $ 13,676 $ 10,451
5/31/2001 $ 14,156 $ 10,521
6/30/2001 $ 14,358 $ 10,265
7/31/2001 $ 14,413 $ 10,164
8/31/2001 $ 14,151 $ 9,528
9/30/2001 $ 12,830 $ 8,759
10/31/2001 $ 12,719 $ 8,926
11/30/2001 $ 13,252 $ 9,610
12/31/2001 $ 13,644 $ 9,694
1/31/2002 $ 13,569 $ 9,553
2/28/2002 $ 13,628 $ 9,369
3/31/2002 $ 14,089 $ 9,721
4/30/2002 $ 14,173 $ 9,132
5/31/2002 $ 14,165 $ 9,064
6/30/2002 $ 13,184 $ 8,419
7/31/2002 $ 12,253 $ 7,763
8/31/2002 $ 12,338 $ 7,813
9/30/2002 $ 11,536 $ 6,964
10/31/2002 $ 11,681 $ 7,577
11/30/2002 $ 11,963 $ 8,023
12/31/2002 $ 11,792 $ 7,552
1/31/2003 $ 11,689 $ 7,354
2/28/2003 $ 11,439 $ 7,244
3/31/2003 $ 11,448 $ 7,314
4/30/2003 $ 12,222 $ 7,917
5/31/2003 $ 12,900 $ 8,334
6/30/2003 $ 13,099 $ 8,440
7/31/2003 $ 13,280 $ 8,589
8/31/2003 $ 13,600 $ 8,756
9/30/2003 $ 13,523 $ 8,663
10/31/2003 $ 14,076 $ 9,153
11/30/2003 $ 14,543 $ 9,234
12/31/2003 $ 15,237 $ 9,718
1/31/2004 $ 15,368 $ 9,897
2/29/2004 $ 15,733 $ 10,034
3/31/2004 $ 15,715 $ 9,883
4/30/2004 $ 15,246 $ 9,728
5/31/2004 $ 15,359 $ 9,861
6/30/2004 $ 15,634 $ 10,053
7/31/2004 $ 15,382 $ 9,720
8/31/2004 $ 15,573 $ 9,759
9/30/2004 $ 15,938 $ 9,865
10/31/2004 $ 16,104 $ 10,016
11/30/2004 $ 17,086 $ 10,421
12/31/2004 $ 17,594 $ 10,776
1/31/2005 $ 17,188 $ 10,513
2/28/2005 $ 17,658 $ 10,734
3/31/2005 $ 17,502 $ 10,544
4/30/2005 $ 17,336 $ 10,344
5/31/2005 $ 17,760 $ 10,673
6/30/2005 $ 18,100 $ 10,689
7/31/2005 $ 18,678 $ 11,086
8/31/2005 $ 18,632 $ 10,985
9/30/2005 $ 18,921 $ 11,074
10/31/2005 $ 18,408 $ 10,889
11/30/2005 $ 18,949 $ 11,301
12/31/2005 $ 19,375 $ 11,305
1/31/2006 $ 19,826 $ 11,604
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 $ 11,595
6/30/2006 $ 20,562 $ 11,611
7/31/2006 $ 20,673 $ 11,683
8/31/2006 $ 21,242 $ 11,961
9/30/2006 $ 21,313 $ 12,269
10/31/2006 $ 22,004 $ 12,669
11/30/2006 $ 22,491 $ 12,909
12/31/2006 $ 22,893 $ 13,091
1/31/2007 $ 23,493 $ 13,289
2/28/2007 $ 23,493 $ 13,029
3/31/2007 $ 24,082 $ 13,174
4/30/2007 $ 24,798 $ 13,758
5/31/2007 $ 25,681 $ 14,238
6/30/2007 $ 25,632 $ 14,001
7/31/2007 $ 24,999 $ 13,567
8/31/2007 $ 24,789 $ 13,771
9/30/2007 $ 25,084 $ 14,286
10/31/2007 $ 25,485 $ 14,513
11/30/2007 $ 25,105 $ 13,906
12/31/2007 $ 24,890 $ 13,810
AVERAGE ANNUAL TOTAL RETURN
- -------------------------------------
CLASS C 12/31/07
- -------------------------------------
1-Year +7.02%
- -------------------------------------
5-Year +15.95%
- -------------------------------------
10-Year +9.41%
- -------------------------------------
CLASS C (1/1/98-12/31/07)
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE GRAPH IN THE PRINTED MATERIAL.]
DATE MUTUAL QUALIFIED FUND S&P 500 6
- ----------------------------------------------------------------
1/1/1998 $ 10,000 $ 10,000
1/31/1998 $ 9,939 $ 10,111
2/28/1998 $ 10,509 $ 10,840
3/31/1998 $ 10,912 $ 11,395
4/30/1998 $ 10,912 $ 11,510
5/31/1998 $ 10,862 $ 11,312
6/30/1998 $ 10,785 $ 11,771
7/31/1998 $ 10,456 $ 11,646
8/31/1998 $ 8,891 $ 9,962
9/30/1998 $ 8,852 $ 10,600
10/31/1998 $ 9,362 $ 11,463
11/30/1998 $ 9,816 $ 12,157
12/31/1998 $ 9,942 $ 12,858
1/31/1999 $ 10,003 $ 13,396
2/28/1999 $ 9,723 $ 12,979
3/31/1999 $ 10,210 $ 13,498
4/30/1999 $ 11,098 $ 14,021
5/31/1999 $ 11,231 $ 13,690
6/30/1999 $ 11,552 $ 14,450
7/31/1999 $ 11,321 $ 13,999
8/31/1999 $ 10,789 $ 13,929
9/30/1999 $ 10,526 $ 13,548
10/31/1999 $ 10,801 $ 14,405
11/30/1999 $ 11,108 $ 14,698
12/31/1999 $ 11,189 $ 15,563
1/31/2000 $ 10,870 $ 14,781
2/29/2000 $ 10,363 $ 14,502
3/31/2000 $ 11,482 $ 15,920
4/30/2000 $ 11,489 $ 15,441
5/31/2000 $ 11,735 $ 15,124
6/30/2000 $ 11,536 $ 15,497
7/31/2000 $ 11,874 $ 15,255
8/31/2000 $ 12,392 $ 16,203
9/30/2000 $ 12,421 $ 15,347
10/31/2000 $ 12,508 $ 15,282
11/30/2000 $ 12,112 $ 14,078
12/31/2000 $ 12,657 $ 14,146
1/31/2001 $ 13,324 $ 14,648
2/28/2001 $ 13,294 $ 13,313
3/31/2001 $ 12,994 $ 12,469
4/30/2001 $ 13,593 $ 13,438
5/31/2001 $ 14,077 $ 13,528
6/30/2001 $ 14,280 $ 13,199
7/31/2001 $ 14,328 $ 13,069
8/31/2001 $ 14,068 $ 12,251
9/30/2001 $ 12,751 $ 11,262
10/31/2001 $ 12,649 $ 11,476
11/30/2001 $ 13,177 $ 12,357
12/31/2001 $ 13,562 $ 12,465
1/31/2002 $ 13,496 $ 12,283
2/28/2002 $ 13,554 $ 12,046
3/31/2002 $ 14,002 $ 12,499
4/30/2002 $ 14,085 $ 11,741
5/31/2002 $ 14,076 $ 11,655
6/30/2002 $ 13,112 $ 10,825
7/31/2002 $ 12,177 $ 9,981
8/31/2002 $ 12,269 $ 10,046
9/30/2002 $ 11,469 $ 8,955
10/31/2002 $ 11,612 $ 9,743
11/30/2002 $ 11,898 $ 10,316
12/31/2002 $ 11,727 $ 9,710
1/31/2003 $ 11,625 $ 9,456
2/28/2003 $ 11,371 $ 9,314
3/31/2003 $ 11,380 $ 9,404
4/30/2003 $ 12,150 $ 10,179
5/31/2003 $ 12,819 $ 10,715
6/30/2003 $ 13,023 $ 10,852
7/31/2003 $ 13,202 $ 11,043
8/31/2003 $ 13,517 $ 11,259
9/30/2003 $ 13,449 $ 11,139
10/31/2003 $ 14,003 $ 11,769
11/30/2003 $ 14,463 $ 11,873
12/31/2003 $ 15,147 $ 12,495
1/31/2004 $ 15,275 $ 12,725
2/29/2004 $ 15,643 $ 12,902
3/31/2004 $ 15,626 $ 12,707
4/30/2004 $ 15,155 $ 12,508
5/31/2004 $ 15,266 $ 12,679
6/30/2004 $ 15,545 $ 12,926
7/31/2004 $ 15,296 $ 12,498
8/31/2004 $ 15,485 $ 12,549
9/30/2004 $ 15,844 $ 12,684
10/31/2004 $ 16,007 $ 12,878
11/30/2004 $ 16,983 $ 13,399
12/31/2004 $ 17,497 $ 13,855
1/31/2005 $ 17,089 $ 13,518
2/28/2005 $ 17,560 $ 13,802
3/31/2005 $ 17,397 $ 13,558
4/30/2005 $ 17,234 $ 13,300
5/31/2005 $ 17,651 $ 13,724
6/30/2005 $ 17,994 $ 13,743
7/31/2005 $ 18,572 $ 14,254
8/31/2005 $ 18,526 $ 14,124
9/30/2005 $ 18,810 $ 14,239
10/31/2005 $ 18,306 $ 14,001
11/30/2005 $ 18,838 $ 14,531
12/31/2005 $ 19,261 $ 14,536
1/31/2006 $ 19,713 $ 14,921
2/28/2006 $ 19,969 $ 14,961
3/31/2006 $ 20,688 $ 15,147
4/30/2006 $ 20,806 $ 15,351
5/31/2006 $ 20,481 $ 14,909
6/30/2006 $ 20,447 $ 14,929
7/31/2006 $ 20,557 $ 15,021
8/31/2006 $ 21,115 $ 15,379
9/30/2006 $ 21,185 $ 15,775
10/31/2006 $ 21,873 $ 16,289
11/30/2006 $ 22,362 $ 16,599
12/31/2006 $ 22,758 $ 16,832
1/31/2007 $ 23,338 $ 17,086
2/28/2007 $ 23,327 $ 16,752
3/31/2007 $ 23,897 $ 16,939
4/30/2007 $ 24,593 $ 17,690
5/31/2007 $ 25,468 $ 18,307
6/30/2007 $ 25,397 $ 18,003
7/31/2007 $ 24,762 $ 17,445
8/31/2007 $ 24,530 $ 17,706
9/30/2007 $ 24,815 $ 18,368
10/31/2007 $ 25,196 $ 18,661
11/30/2007 $ 24,805 $ 17,880
12/31/2007 $ 24,583 $ 17,756
14 | Annual Report
Performance Summary (CONTINUED)
ENDNOTES
VALUE SECURITIES MAY NOT INCREASE IN PRICE AS ANTICIPATED OR MAY DECLINE FURTHER
IN VALUE. THE FUND'S INVESTMENTS IN SMALLER-COMPANY STOCKS AND FOREIGN
SECURITIES INVOLVE SPECIAL RISKS. SMALLER-COMPANY STOCKS HAVE EXHIBITED GREATER
PRICE VOLATILITY THAN LARGER-COMPANY STOCKS, PARTICULARLY OVER THE SHORT TERM.
FOREIGN SECURITIES RISKS INCLUDE CURRENCY FLUCTUATIONS, AND ECONOMIC AND
POLITICAL UNCERTAINTIES. THE FUND MAY ALSO INVEST IN COMPANIES ENGAGED IN
MERGERS, REORGANIZATIONS OR LIQUIDATIONS, WHICH INVOLVE SPECIAL RISKS AS PENDING
DEALS MAY NOT BE COMPLETED ON TIME OR ON FAVORABLE TERMS, 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. Figures are as stated in the Fund's prospectus current as of the date of this
report.
6. 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.
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 7/1/07 VALUE 12/31/07 PERIOD* 7/1/07-12/31/07
- --------------------------------------------------------------------------------------------------------
Actual $1,000 $ 972.90 $3.93
- --------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,021.22 $4.02
- --------------------------------------------------------------------------------------------------------
CLASS A
- --------------------------------------------------------------------------------------------------------
Actual $1,000 $ 971.00 $5.66
- --------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,019.46 $5.80
- --------------------------------------------------------------------------------------------------------
CLASS B
- --------------------------------------------------------------------------------------------------------
Actual $1,000 $ 968.20 $8.88
- --------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,016.18 $9.10
- --------------------------------------------------------------------------------------------------------
CLASS C
- --------------------------------------------------------------------------------------------------------
Actual $1,000 $ 967.90 $8.88
- --------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,016.18 $9.10
- --------------------------------------------------------------------------------------------------------
*Expenses are calculated using the most recent six-month expense ratio,
annualized for each class (Z: 0.79%; A: 1.14%; B: 1.79%; and C: 1.79%),
multiplied by 184/365 to reflect the one-half year period.
Annual Report | 17
Mutual Qualified Fund
FINANCIAL HIGHLIGHTS
--------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
CLASS Z 2007 2006 2005 2004 2003
--------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ........................ $ 21.88 $ 19.81 $ 19.49 $ 17.88 $ 13.95
--------------------------------------------------------------------
Income from investment operations a:
Net investment income b ................................ 0.61 0.38 0.41 0.37 0.20
Net realized and unrealized gains (losses) ............. 1.37 3.39 1.77 2.56 4.04
--------------------------------------------------------------------
Total from investment operations .......................... 1.98 3.77 2.18 2.93 4.24
--------------------------------------------------------------------
Less distributions from:
Net investment income .................................. (0.71) (0.40) (0.42) (0.39) (0.31)
Net realized gains ..................................... (1.31) (1.30) (1.44) (0.93) --
--------------------------------------------------------------------
Total distributions ....................................... (2.02) (1.70) (1.86) (1.32) (0.31)
--------------------------------------------------------------------
Redemption fees ........................................... -- d -- d -- d -- d --
--------------------------------------------------------------------
Net asset value, end of year .............................. $ 21.84 $ 21.88 $ 19.81 $ 19.49 $ 17.88
====================================================================
Total return .............................................. 9.12% 19.29% 11.26% 16.64% 30.50%
RATIOS TO AVERAGE NET ASSETS
Expenses c ................................................ 0.80% e 0.83% e 0.85% e 0.82% e 0.85%
Expenses - excluding dividends expense on securities
sold short ............................................. 0.79% e 0.81% e 0.81% e 0.81% e 0.82%
Net investment income ..................................... 2.58% 1.77% 2.04% 2.01% 1.34%
SUPPLEMENTAL DATA
Net assets, end of year (000's) ........................... $4,421,592 $4,200,899 $3,646,593 $3,419,744 $ 3,102,506
Portfolio turnover rate ................................... 26.25% 23.64% 20.98% 37.61% 49.70%
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 repurchases 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 Qualified Fund
FINANCIAL HIGHLIGHTS (CONTINUED)
--------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
CLASS A 2007 2006 2005 2004 2003
--------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ........................ $ 21.75 $ 19.71 $ 19.41 $ 17.81 $ 13.91
--------------------------------------------------------------------
Income from investment operations a:
Net investment income b ................................ 0.52 0.31 0.34 0.31 0.15
Net realized and unrealized gains (losses) ............. 1.38 3.36 1.75 2.55 4.01
--------------------------------------------------------------------
Total from investment operations .......................... 1.90 3.67 2.09 2.86 4.16
--------------------------------------------------------------------
Less distributions from:
Net investment income .................................. (0.64) (0.33) (0.35) (0.33) (0.26)
Net realized gains ..................................... (1.31) (1.30) (1.44) (0.93) --
--------------------------------------------------------------------
Total distributions ....................................... (1.95) (1.63) (1.79) (1.26) (0.26)
--------------------------------------------------------------------
Redemption fees ........................................... -- e -- e -- e -- e --
--------------------------------------------------------------------
Net asset value, end of year .............................. $ 21.70 $ 21.75 $ 19.71 $ 19.41 $ 17.81
====================================================================
Total return c ............................................ 8.73% 18.94% 10.85% 16.27% 29.98%
RATIOS TO AVERAGE NET ASSETS
Expenses d ................................................ 1.14% f 1.15% f 1.20% f 1.17% f 1.20%
Expenses - excluding dividend expense on securities
sold short ............................................. 1.13% f 1.13% f 1.16% f 1.16% f 1.17%
Net investment income ..................................... 2.24% 1.45% 1.69% 1.66% 0.99%
SUPPLEMENTAL DATA
Net assets, end of year (000's) ........................... $1,290,899 $ 993,364 $ 794,789 $ 692,523 $ 625,088
Portfolio turnover rate ................................... 26.25% 23.64% 20.98% 37.61% 49.70%
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 repurchases 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 B 2007 2006 2005 2004 2003
--------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ........................ $ 21.32 $ 19.34 $ 19.08 $ 17.54 $ 13.72
--------------------------------------------------------------------
Income from investment operations a:
Net investment income b ................................ 0.36 0.16 0.20 0.19 0.05
Net realized and unrealized gains (losses) ............. 1.34 3.31 1.72 2.50 3.94
--------------------------------------------------------------------
Total from investment operations .......................... 1.70 3.47 1.92 2.69 3.99
--------------------------------------------------------------------
Less distributions from:
Net investment income .................................. (0.47) (0.19) (0.22) (0.22) (0.17)
Net realized gains ..................................... (1.31) (1.30) (1.44) (0.93) --
--------------------------------------------------------------------
Total distributions ....................................... (1.78) (1.49) (1.66) (1.15) (0.17)
--------------------------------------------------------------------
Redemption fees ........................................... -- e -- e -- e -- e --
--------------------------------------------------------------------
Net asset value, end of year .............................. $ 21.24 $ 21.32 $ 19.34 $ 19.08 $ 17.54
====================================================================
Total return c ............................................ 8.04% 18.16% 10.12% 15.46% 29.22%
RATIOS TO AVERAGE NET ASSETS
Expenses d ................................................ 1.80% f 1.82% f 1.85% f 1.82% f 1.85%
Expenses - excluding dividend expense on securities
sold short ............................................. 1.79% f 1.80% f 1.81% f 1.81% f 1.82%
Net investment income ..................................... 1.58% 0.78% 1.04% 1.01% 0.34%
SUPPLEMENTAL DATA
Net assets, end of year (000's) ........................... $ 70,266 $ 74,470 $ 69,847 $ 67,714 $ 53,760
Portfolio turnover rate ................................... 26.25% 23.64% 20.98% 37.61% 49.70%
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 repurchases 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
FINANCIAL HIGHLIGHTS (CONTINUED)
--------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
CLASS C 2007 2006 2005 2004 2003
--------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ........................ $ 21.58 $ 19.58 $ 19.30 $ 17.72 $ 13.85
--------------------------------------------------------------------
Income from investment operations a:
Net investment income b ................................ 0.36 0.16 0.20 0.19 0.05
Net realized and unrealized gains (losses) ............. 1.36 3.34 1.74 2.52 3.98
--------------------------------------------------------------------
Total from investment operations .......................... 1.72 3.50 1.94 2.71 4.03
--------------------------------------------------------------------
Less distributions from:
Net investment income .................................. (0.49) (0.20) (0.22) (0.20) (0.16)
Net realized gains ..................................... (1.31) (1.30) (1.44) (0.93) --
--------------------------------------------------------------------
Total distributions ....................................... (1.80) (1.50) (1.66) (1.13) (0.16)
--------------------------------------------------------------------
Redemption fees ........................................... -- e -- e -- e -- e --
--------------------------------------------------------------------
Net asset value, end of year .............................. $ 21.50 $ 21.58 $ 19.58 $ 19.30 $ 17.72
====================================================================
Total return c ............................................ 8.02% 18.16% 10.08% 15.52% 29.16%
RATIOS TO AVERAGE NET ASSETS
Expenses d ................................................ 1.80% f 1.83% f 1.85% f 1.82% f 1.85%
Expenses - excluding dividend expense on securities
sold short ............................................. 1.79% f 1.81% f 1.81% f 1.81% f 1.82%
Net investment income ..................................... 1.58% 0.77% 1.04% 1.01% 0.34%
SUPPLEMENTAL DATA
Net assets, end of year (000's) ........................... $ 504,802 $ 420,806 $ 336,786 $ 311,071 $ 285,668
Portfolio turnover rate ................................... 26.25% 23.64% 20.98% 37.61% 49.70%
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 repurchases 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 Qualified Fund
STATEMENT OF INVESTMENTS, DECEMBER 31, 2007
- ------------------------------------------------------------------------------------------------------------------------------------
SHARES/WARRANTS/
COUNTRY CONTRACTS VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS 86.0%
COMMON STOCKS AND OTHER EQUITY INTERESTS 81.2%
AIRLINES 0.7%
a ACE Aviation Holdings Inc., A .................................. Canada 1,159,491 $ 33,078,309
a,b ACE Aviation Holdings Inc., A, 144A ............................ Canada 58,455 1,667,622
a Northwest Airlines Corp. ....................................... United States 716,012 10,389,334
a,c Northwest Airlines Corp., Contingent Distribution .............. United States 28,232,000 952,830
------------------
46,088,095
------------------
AUTO COMPONENTS 0.0% d
a,c Collins & Aikman Products Co., Contingent Distribution ......... United States 1,218,896 539,362
------------------
AUTOMOBILES 0.5%
a,e,f,g International Automotive Components Group Brazil LLC ........... Brazil 1,982,308 13,769,369
a,e,f,g International Automotive Components Group Japan LLC ............ Japan 307,801 2,760,176
a,e,f,g International Automotive Components Group LLC .................. Luxembourg 8,425,843 8,938,977
a,e,f,g International Automotive Components Group NA LLC ............... United States 5,182,488 7,125,921
------------------
32,594,443
------------------
BEVERAGES 2.3%
Brown-Forman Corp., A .......................................... United States 79,200 5,927,328
Coca-Cola Enterprises Inc. ..................................... United States 1,570,200 40,872,306
Pernod Ricard SA ............................................... France 421,043 97,144,400
------------------
143,944,034
------------------
BUILDING PRODUCTS 0.2%
a Armstrong World Industries Inc. ................................ United States 141,617 5,680,258
a,c Armstrong World Industries Inc., Contingent Distribution ....... United States 15,729,675 58,986
a Owens Corning Inc. ............................................. United States 345,065 6,977,214
------------------
12,716,458
------------------
CAPITAL MARKETS 0.5%
Legg Mason Inc. ................................................ United States 398,890 29,178,803
------------------
CHEMICALS 0.9%
a,c Dow Corning Corp., Contingent Distribution ..................... United States 12,089,194 6,165,489
Linde AG ....................................................... Germany 302,117 39,896,537
Sika AG ........................................................ Switzerland 6,147 11,586,650
------------------
57,648,676
------------------
COMMERCIAL BANKS 4.6%
BNP Paribas SA ................................................. France 515,209 55,803,809
a Centennial Bank Holdings Inc. .................................. United States 1,735,639 10,031,993
Commerce Bancorp Inc. .......................................... United States 1,386,020 52,862,803
a,e,f,h Elephant Capital Holdings Ltd. ................................. Japan 11,496 7,571,181
a,e,f,h First Chicago Bancorp .......................................... United States 659,105 9,227,470
Mitsubishi UFJ Financial Group Inc. ............................ Japan 3,848,000 36,128,377
a,e,f NCB Warrant Holdings Ltd., A ................................... Japan 53,490 3,173,660
Sumitomo Mitsui Financial Group Inc. ........................... Japan 1,704 12,789,741
Svenska Handelsbanken AB, A .................................... Sweden 452,960 14,501,557
Swedbank AB, A ................................................. Sweden 877,050 24,823,322
U.S. Bancorp ................................................... United States 1,915,178 60,787,750
------------------
287,701,663
------------------
22 | Annual Report
Mutual Qualified Fund
STATEMENT OF INVESTMENTS, DECEMBER 31, 2007 (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------------
SHARES/WARRANTS/
COUNTRY CONTRACTS VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
COMMON STOCKS AND OTHER EQUITY INTERESTS (CONTINUED)
COMMERCIAL SERVICES & SUPPLIES 0.1%
a Comdisco Holding Co. Inc. ...................................... United States 978 $ 8,910
a,c Comdisco Holding Co. Inc., Contingent Distribution ............. United States 44,591,246 --
a Insun ENT Co. Ltd. ............................................. South Korea 1,448,946 8,622,006
------------------
8,630,916
------------------
COMPUTERS & PERIPHERALS 0.3%
a,e,f,h DecisionOne Corp. .............................................. United States 1,008,199 --
a,e,f,h DecisionOne Corp., wts., 6/08/17 ............................... United States 553,576 --
a Dell Inc. ...................................................... United States 706,270 17,310,678
------------------
17,310,678
------------------
CONSUMER FINANCE 0.8%
a,e,f Cerberus CG Investor I LLC ..................................... United States 6,600,000 5,557,045
a,e,f Cerberus CG Investor II LLC .................................... United States 6,600,000 5,557,045
a,e,f Cerberus CG Investor III LLC ................................... United States 3,300,000 2,778,523
a,e,f Cerberus FIM Investors Auto Finance LLC ........................ United States 4,648,194 2,493,900
a,e,f Cerberus FIM Investors Commercial Finance LLC .................. United States 387,180 207,734
a,e,f Cerberus FIM Investors Commercial Mortgage LLC ................. United States 725,710 389,366
a,e,f Cerberus FIM Investors Insurance LLC ........................... United States 3,549,493 1,904,413
a,e,f Cerberus FIM Investors Rescap LLC .............................. United States 6,608,423 3,545,623
SLM Corp. ...................................................... United States 798,970 16,091,256
a,h White River Capital Inc. ....................................... United States 549,751 9,583,534
------------------
48,108,439
------------------
DIVERSIFIED FINANCIAL SERVICES 0.9%
Deutsche Boerse AG ............................................. Germany 66,220 13,118,629
Fortis ......................................................... Belgium 1,736,332 45,813,202
a Fortis VVPR Strip .............................................. Belgium 530,532 7,742
a,c Marconi Corp., Contingent Distribution ......................... United Kingdom 34,293,500 --
------------------
58,939,573
------------------
DIVERSIFIED TELECOMMUNICATION SERVICES 0.7%
a,e,f,g AboveNet Inc. .................................................. United States 387,649 19,382,450
a,e,g AboveNet Inc., stock grants, grant price $20.95, expiration
date 9/09/13 ................................................ United States 510 21,140
a,e,f,g AboveNet Inc., wts., 9/08/08 ................................... United States 13,684 645,885
a,e,f,g AboveNet Inc., wts., 9/08/10 ................................... United States 16,099 703,204
Chunghwa Telecom Co. Ltd., ADR ................................. Taiwan 1,167,858 24,653,486
Embarq Corp. ................................................... United States 5,943 294,357
a,c,f Global Crossing Holdings Ltd., Contingent Distribution ......... United States 49,411,586 --
------------------
45,700,522
------------------
ELECTRIC UTILITIES 0.7%
E.ON AG ........................................................ Germany 198,820 42,248,444
------------------
ELECTRONIC EQUIPMENT & INSTRUMENTS 0.1%
Tyco Electronics Ltd. .......................................... United States 120,145 4,460,984
------------------
Annual Report | 23
Mutual Qualified Fund
STATEMENT OF INVESTMENTS, DECEMBER 31, 2007 (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------------
SHARES/WARRANTS/
COUNTRY CONTRACTS VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
COMMON STOCKS AND OTHER EQUITY INTERESTS (CONTINUED)
ENERGY EQUIPMENT & SERVICES 2.7%
Bourbon SA ..................................................... France 579,563 $ 37,908,094
a BW Offshore Ltd. ............................................... Norway 2,813,120 11,853,979
a Seadrill Ltd. .................................................. Bermuda 3,251,262 79,269,890
a Transocean Inc. ................................................ United States 294,405 42,144,076
------------------
171,176,039
------------------
FOOD & STAPLES RETAILING 3.0%
Carrefour SA ................................................... France 1,494,958 116,261,028
CVS Caremark Corp. ............................................. United States 1,849,966 73,536,149
------------------
189,797,177
------------------
FOOD PRODUCTS 7.3%
Cadbury Schweppes PLC .......................................... United Kingdom 4,306,301 53,135,277
CSM NV ......................................................... Netherlands 1,909,144 64,359,123
Groupe Danone .................................................. France 1,681,422 150,662,283
Kraft Foods Inc., A ............................................ United States 472,085 15,404,134
a Lighthouse Caledonia ASA ....................................... Norway 416,332 395,302
Lotte Confectionary Co. Ltd. ................................... South Korea 30,405 54,894,984
a,i Marine Harvest ................................................. Norway 48,980,183 31,454,750
Nestle SA ...................................................... Switzerland 160,750 73,764,560
Nong Shim Co. Ltd. ............................................. South Korea 81,743 16,985,218
------------------
461,055,631
------------------
HEALTH CARE EQUIPMENT & SUPPLIES 0.1%
Covidien Ltd. .................................................. United States 120,145 5,321,222
------------------
HEALTH CARE PROVIDERS & SERVICES 2.3%
a,e,f,g Kindred Healthcare Inc. ........................................ United States 1,444,624 34,282,372
a,e,f,g Kindred Healthcare Inc., stock grants:
grant price $18.15, expiration date 7/17/11 ............... United States 5,072 28,307
grant price $19.87, expiration date 1/01/12 ............... United States 1,523 5,880
grant price $6.94, expiration date 1/01/13 ................ United States 1,514 25,422
grant price $19.87, expiration date 1/01/14 ............... United States 1,129 4,359
grant price $21.33, expiration date 1/10/15 ............... United States 627 1,505
grant price $22.08, expiration date 1/10/16 ............... United States 313 517
a PharMerica Inc. ................................................ United States 528,767 7,339,286
Quest Diagnostics Inc. ......................................... United States 568,700 30,084,230
Rhoen-Klinikum AG .............................................. Germany 2,314,092 72,336,841
------------------
144,108,719
------------------
HOTELS, RESTAURANTS & LEISURE 0.1%
a Trump Entertainment Resorts Inc. ............................... United States 693,717 2,982,983
------------------
INDEPENDENT POWER PRODUCERS & ENERGY TRADERS 0.3%
Constellation Energy Group ..................................... United States 175,600 18,004,268
------------------
INDUSTRIAL CONGLOMERATES 4.9%
Keppel Corp. Ltd. .............................................. Singapore 5,486,488 49,480,970
g Orkla ASA ...................................................... Norway 9,599,083 185,905,508
24 | Annual Report
Mutual Qualified Fund
STATEMENT OF INVESTMENTS, DECEMBER 31, 2007 (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------------
SHARES/WARRANTS/
COUNTRY CONTRACTS VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
COMMON STOCKS AND OTHER EQUITY INTERESTS (CONTINUED)
INDUSTRIAL CONGLOMERATES (CONTINUED)
Siemens AG ..................................................... Germany 460,520 $ 72,864,728
Tyco International Ltd. ........................................ United States 23,845 945,454
------------------
309,196,660
------------------
INSURANCE 10.4%
a Alleghany Corp. ................................................ United States 143,797 57,806,394
Allianz SE ..................................................... Germany 59,630 12,886,075
American International Group Inc. .............................. United States 249,250 14,531,275
Assicurazioni Generali SpA ..................................... Italy 327,778 14,828,627
a Berkshire Hathaway Inc., A ..................................... United States 468 66,268,800
a Berkshire Hathaway Inc., B ..................................... United States 18,875 89,392,000
a Conseco Inc. ................................................... United States 1,264,210 15,878,478
Hartford Financial Services Group Inc. ......................... United States 482,200 42,043,018
a,e,f,h Imagine Group Holdings Ltd. .................................... Bermuda 2,814,856 32,201,953
Old Republic International Corp. ............................... United States 2,135,500 32,908,055
a,e,f Olympus Re Holdings Ltd. ....................................... United States 97,300 318,677
Prudential Financial Inc. ...................................... United States 461,000 42,891,440
e,f Symetra Financial .............................................. United States 3,434,760 55,024,855
White Mountains Insurance Group Ltd. ........................... United States 346,730 178,236,556
------------------
655,216,203
------------------
MACHINERY 1.9%
Kone OYJ, B .................................................... Finland 1,438,600 100,625,241
a,e,f Motor Coach Industries International Inc., wts., 5/27/09 ....... United States 5 --
NACCO Industries Inc., A ....................................... United States 172,254 17,172,001
------------------
117,797,242
------------------
MEDIA 4.1%
a Adelphia Recovery Trust ........................................ United States 38,254,708 2,677,830
a,c Adelphia Recovery Trust Arahova Contingent Value Vehicle,
Contingent Distribution ........................................ United States 4,899,492 2,523,238
a,c Century Communications Corp., Contingent Distribution .......... United States 13,497,000 --
CJ CGV Co. Ltd. ................................................ South Korea 574,910 7,923,016
a Comcast Corp., A ............................................... United States 829,640 15,033,077
a Liberty Media Holding Corp.-Capital, A ......................... United States 307,412 35,810,424
News Corp., A .................................................. United States 1,767,710 36,220,378
a Sun-Times Media Group Inc., A .................................. United States 767,234 1,687,915
a Time Warner Cable Inc., A ...................................... United States 862,694 23,810,354
Time Warner Inc. ............................................... United States 3,504,460 57,858,635
a,f TVMAX Holdings Inc. ............................................ United States 111,391 --
a Viacom Inc., B ................................................. United States 230,350 10,116,972
Virgin Media Inc. .............................................. United Kingdom 3,655,939 62,662,794
------------------
256,324,633
------------------
METALS & MINING 1.1%
Anglo American PLC ............................................. United Kingdom 447,467 27,384,114
a,e,f,h Esmark Inc. .................................................... United States 3,087,162 39,259,439
------------------
66,643,553
------------------
Annual Report | 25
Mutual Qualified Fund
STATEMENT OF INVESTMENTS, DECEMBER 31, 2007 (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------------
SHARES/WARRANTS/
COUNTRY CONTRACTS VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
COMMON STOCKS AND OTHER EQUITY INTERESTS (CONTINUED)
MULTI-UTILITIES 0.9%
Energy East Corp. .............................................. United States 256,070 $ 6,967,665
NorthWestern Corp. ............................................. United States 311,667 9,194,176
a,c NorthWestern Corp., Contingent Distribution .................... United States 9,346,450 662,741
RWE AG ......................................................... Germany 281,473 39,618,536
------------------
56,443,118
------------------
MULTILINE RETAIL 0.9%
Jelmoli Holding AG ............................................. Switzerland 24,399 58,456,835
------------------
OIL, GAS & CONSUMABLE FUELS 2.7%
BP PLC ......................................................... United Kingdom 1,221,600 14,927,638
BP PLC, ADR .................................................... United Kingdom 193,700 14,173,029
Eni SpA ........................................................ Italy 1,452,100 53,084,008
Royal Dutch Shell PLC, A ....................................... United Kingdom 798,053 33,483,360
Total SA, B .................................................... France 665,472 55,190,826
------------------
170,858,861
------------------
PAPER & FOREST PRODUCTS 2.6%
a Domtar Corp. ................................................... United States 2,118,456 16,290,927
Mondi Ltd. ..................................................... United Kingdom 49,172 464,574
Mondi PLC ...................................................... United Kingdom 122,930 1,038,087
Weyerhaeuser Co. ............................................... United States 1,952,105 143,948,223
------------------
161,741,811
------------------
PHARMACEUTICALS 1.2%
Pfizer Inc. .................................................... United States 1,871,640 42,542,377
Sanofi-Aventis ................................................. France 242,013 22,243,381
a Valeant Pharmaceuticals International .......................... United States 1,025,100 12,270,447
------------------
77,056,205
------------------
REAL ESTATE 3.9%
a Alexander's Inc. ............................................... United States 108,590 38,359,418
a,f Canary Wharf Group PLC ......................................... United Kingdom 8,298,072 82,933,911
Link REIT ...................................................... Hong Kong 12,491,769 27,040,056
Swire Pacific Ltd., A .......................................... Hong Kong 3,620,800 49,914,210
Swire Pacific Ltd., B .......................................... Hong Kong 5,292,600 14,049,168
Ventas Inc. .................................................... United States 669,525 30,296,006
------------------
242,592,769
------------------
SEMICONDUCTORS & SEMICONDUCTOR EQUIPMENT 0.2%
a LSI Corp. ...................................................... United States 1,879,630 9,980,835
------------------
SOFTWARE 1.1%
Microsoft Corp. ................................................ United States 1,998,000 71,128,800
------------------
THRIFTS & MORTGAGE FINANCE 1.3%
Hudson City Bancorp Inc. ....................................... United States 2,129,440 31,984,189
h Imperial Capital Bancorp Inc. .................................. United States 445,796 8,158,067
Sovereign Bancorp Inc. ......................................... United States 3,815,396 43,495,514
------------------
83,637,770
------------------
26 | Annual Report
Mutual Qualified Fund
STATEMENT OF INVESTMENTS, DECEMBER 31, 2007 (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------------
SHARES/WARRANTS/
COUNTRY CONTRACTS VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
COMMON STOCKS AND OTHER EQUITY INTERESTS (CONTINUED)
TOBACCO 14.2%
Altadis SA ..................................................... Spain 1,706,907 $ 123,826,350
Altria Group Inc. .............................................. United States 1,137,077 85,940,280
British American Tobacco PLC ................................... United Kingdom 3,939,454 153,810,347
Imperial Tobacco Group PLC ..................................... United Kingdom 1,509,119 81,320,518
Japan Tobacco Inc. ............................................. Japan 12,142 72,733,318
KT&G Corp. ..................................................... South Korea 3,097,050 263,698,397
Reynolds American Inc. ......................................... United States 1,710,600 112,831,176
------------------
894,160,386
------------------
TRADING COMPANIES & DISTRIBUTORS 0.7%
Kloeckner & Co. AG ............................................. Germany 1,113,198 44,350,090
------------------
TRANSPORTATION INFRASTRUCTURE 0.0% d
a Groupe Eurotunnel SA, wts., 12/30/11 ........................... France 1,861,027 624,655
------------------
TOTAL COMMON STOCKS AND OTHER EQUITY INTERESTS
(COST $3,137,001,619) ....................................... 5,104,467,555
------------------
PREFERRED STOCKS 0.1%
AUTO COMPONENTS 0.1%
e,f Dana Holding Corp., 4.00%, cvt. pfd., B ........................ United States 48,807 4,880,700
------------------
DIVERSIFIED TELECOMMUNICATION SERVICES 0.0% d
e PTV Inc., 10.00%, pfd., A ...................................... United Kingdom 92,938 111,526
------------------
TOTAL PREFERRED STOCKS (COST $5,159,514) ....................... 4,992,226
------------------
OPTIONS PURCHASED 1.0%
CALL OPTIONS 0.0% d
a,e Owens Corning Inc., exercise price $37.50, expiration date
1/02/08, shares ............................................. United States 249,750 12,487
------------------
PUT OPTIONS 1.0%
a Index basket consisting of 55% Dow Jones EUROSTOXX 50 (exercise
price $4,026.33), 45% S&P 500 Index (exercise price
$1,367.59), expiration date 5/29/08, contracts .............. United States 10,000,000 23,455,882
a Index basket consisting of 55% Dow Jones EUROSTOXX 50 (exercise
price $4,091.24), 45% S&P 500 Index (exercise price
$1,381.87), expiration date 6/20/08, contracts .............. United States 10,000,000 29,035,575
a Index basket consisting of 50% Dow Jones EUROSTOXX 50 (exercise
price $4,083.52), 50% S&P 500 Index (exercise price
$1,393.78), expiration date 7/18/08, contracts .............. United States 3,500,000 11,456,806
------------------
63,948,263
------------------
TOTAL OPTIONS PURCHASED (COST $55,351,137) ..................... 63,960,750
------------------
------------------
PRINCIPAL AMOUNT j
------------------
CORPORATE BONDS & NOTES 3.5%
b ACE Aviation Holdings Inc., cvt., 144A, 4.25%, 6/01/35 ......... Canada 2,505,000 CAD 2,848,453
e,f Cerberus CG Investor I LLC, 12.00%, 7/31/14 .................... United States 6,600,000 5,557,045
e,f Cerberus CG Investor II LLC, 12.00%, 7/31/14 ................... United States 6,600,000 5,557,045
e,f Cerberus CG Investor III LLC, 12.00%, 7/31/14 .................. United States 3,300,000 2,778,523
e,f Cerberus FIM Investors Auto Finance LLC, 12.00%, 11/22/13 ...... United States 13,935,097 7,476,610
Annual Report | 27
Mutual Qualified Fund
STATEMENT OF INVESTMENTS, DECEMBER 31, 2007 (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------------
COUNTRY PRINCIPAL AMOUNT j VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
CORPORATE BONDS & NOTES (CONTINUED)
e,f Cerberus FIM Investors Commercial Finance LLC, 12.00%,
11/22/13 .................................................... United States 1,161,542 $ 623,203
e,f Cerberus FIM Investors Commercial Mortgage LLC, 12.00%,
11/22/13 .................................................... United States 2,177,131 1,168,098
e,f Cerberus FIM Investors Insurance LLC, 12.00%, 11/22/13 ......... United States 10,648,479 5,713,238
e,f Cerberus FIM Investors Rescap LLC, 12.00%, 11/22/13 ............ United States 19,825,266 10,636,868
e,f,h DecisionOne Corp.,
12.00%, 4/15/10 ........................................... United States 1,246,268 1,246,268
k FRN, 9.50%, 5/12/09 ....................................... United States 232,502 232,502
Groupe Eurotunnel SA, cvt.,
3.00%, 6/28/09 ............................................ France 31,400 EUR 100,812
3.00%, 6/28/09 ............................................ France 24,416 GBP 106,728
3.00%, 7/28/10 ............................................ France 9,114,500 EUR 26,269,959
3.00%, 7/28/10 ............................................ France 5,276,020 GBP 20,704,298
6.00%, 7/28/10 ............................................ France 22,114,700 EUR 43,407,301
6.00%, 7/28/10 ............................................ France 13,086,625 GBP 34,973,324
sub. bond, T1, 3.00%, 7/28/08 ............................. France 31,400 EUR 112,268
sub. bond, T1, 3.00%, 7/28/08 ............................. France 24,416 GBP 118,856
b Indianapolis Downs LLC,
senior secured note, 144A, 11.00%, 11/01/12 ............... United States 2,950,000 2,861,500
senior secured sub. note, 144A, PIK, 15.50%, 11/01/13 ..... United States 10,050,000 10,351,500
e,f,g International Automotive Components Group NA LLC, 9.00%,
4/01/17 ..................................................... United States 1,560,200 1,560,200
e,f,k Motor Coach Industries International Inc., FRN, 18.081%,
12/01/08 .................................................... United States 25,130,149 24,878,847
Trump Entertainment Resorts Inc., 8.50%, 5/20/15 ............... United States 13,553,108 10,385,069
f TVMAX Holdings Inc., PIK,
11.50%, 2/28/08 ........................................... United States 316,094 221,266
14.00%, 2/28/08 ........................................... United States 725,016 507,512
------------------
TOTAL CORPORATE BONDS & NOTES (COST $241,975,073) .............. 220,397,293
------------------
CORPORATE BONDS & NOTES IN REORGANIZATION 0.2%
b Calpine Corp., senior secured note, 144A,
8.50%, 7/15/10 ............................................ United States 2,528,000 2,717,600
9.875%, 12/01/11 .......................................... United States 890,000 934,500
8.75%, 7/15/13 ............................................ United States 1,324,000 1,429,920
l Dana Corp.,
6.50%, 3/01/09 ............................................ United States 2,058,000 1,553,790
5.85%, 1/15/15 ............................................ United States 9,145,000 6,721,575
7.00%, 3/01/29 ............................................ United States 1,972,000 1,488,860
senior note, 7.00%, 3/15/28 ............................... United States 423,000 310,905
f,l Safety Kleen Services, senior sub. note, 9.25%, 6/01/08 ........ United States 40,000 200
------------------
TOTAL CORPORATE BONDS & NOTES IN REORGANIZATION
(COST $14,447,659) .......................................... 15,157,350
------------------
TOTAL LONG TERM INVESTMENTS (COST $3,453,935,002) .............. 5,408,975,174
------------------
28 | Annual Report
Mutual Qualified Fund
STATEMENT OF INVESTMENTS, DECEMBER 31, 2007 (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT j
COUNTRY /SHARES VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
SHORT TERM INVESTMENTS 14.0%
U.S. GOVERNMENT AND AGENCY SECURITIES 13.9%
m FHLB,
n 1/02/08 - 12/04/08 ........................................ United States 615,686,000 $ 610,317,358
1/03/08 ................................................... United States 85,000,000 85,000,000
1/04/08 ................................................... United States 115,000,000 115,000,000
m U.S. Teasury Bills, 4/24/08 - 5/01/08 .......................... United States 66,500,000 65,814,185
------------------
TOTAL U.S. GOVERNMENT AND AGENCY SECURITIES
(COST $875,294,851) ......................................... 876,131,543
------------------
TOTAL INVESTMENTS BEFORE MONEY MARKET FUND
(COST $4,329,229,853) ....................................... 6,285,106,717
------------------
o INVESTMENTS FROM CASH COLLATERAL RECEIVED FOR LOANED SECURITIES
(COST $2,745,027) 0.1%
MONEY MARKET FUND 0.1%
p Bank of New York Institutional Cash Reserve Fund, 5.06% ........ United States 2,745,027 2,745,027
------------------
TOTAL INVESTMENTS (COST $4,331,974,880) 100.0% ................. 6,287,851,744
SECURITIES SOLD SHORT (0.6)% ................................... (40,157,456)
NET UNREALIZED LOSS ON FORWARD EXCHANGE CONTRACTS
(0.2)% ...................................................... (13,103,504)
OTHER ASSETS, LESS LIABILITIES 0.8% ............................ 52,968,389
------------------
NET ASSETS 100.0% .............................................. $ 6,287,559,173
------------------
q SECURITIES SOLD SHORT (PROCEEDS $42,068,109) 0.6%
COMMERCIAL BANKS 0.6%
Toronto-Dominion Bank .......................................... Canada 574,088 $ 40,157,456
------------------
CURRENCY ABBREVIATIONS
CAD - Canadian Dollar
EUR - Euro
GBP - British Pound
SELECTED PORTFOLIO ABBREVIATIONS
ADR - American Depository Receipt
FHLB - Federal Home Loan Bank
FRN - Floating Rate Note
PIK - Payment-In-Kind
REIT - Real Estate Investment Trust
Annual Report | 29
Mutual Qualified Fund
STATEMENT OF INVESTMENTS, DECEMBER 31, 2007 (CONTINUED)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
a Non-income producing for the twelve months ended December 31, 2007.
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, 2007, the aggregate value of
these securities was $22,811,095, representing 0.36% of net assets.
c 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.
d Rounds to less than 0.1% of net assets.
e See Note 9 regarding restricted securities.
f Security has been deemed illiquid because it may not be able to be sold within
seven days. At December 31, 2007, the aggregate value of these securities was
$412,857,264, representing 6.57% of the net assets.
g See Note 12 regarding other considerations.
h See Note 11 regarding holdings of 5% voting securities.
i A portion or all of the security is on loan as of December 31, 2007. See Note
1(g).
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 8 regarding defaulted securities.
m The security is traded on a discount basis with no stated coupon rate.
n Security or a portion of the security has been segregated as collateral for
securities sold short. At December 31, 2007, the value of securities and or cash
pledged amounted to $39,732,500.
o See Note 1(g) regarding securities on loan.
p The rate shown is the annualized seven-day yield at period end.
q See Note 1(f) regarding securities sold short.
30 | The accompanying notes are an integral part of these financial statements.
| Annual Report
Mutual Qualified Fund
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
December 31, 2007
Assets:
Investments in securities:
Cost - Unaffiliated issuers .............................................................. $4,204,874,296
Cost - Non-controlled affiliated issuers (Note 11) ....................................... 127,100,584
---------------
Total cost of investments ................................................................ $4,331,974,880
===============
Value - Unaffiliated issuers (include securities loaned in the amount of $2,518,287) ..... $6,180,371,330
Value - Non-controlled affiliated issuers (Note 11) ...................................... 107,480,414
---------------
Total value of investments ............................................................... 6,287,851,744
Cash on deposits with brokers for securities sold short .................................... 41,350,677
Foreign currency, at value (cost $4,354,005) ............................................... 4,328,517
Receivables:
Capital shares sold ...................................................................... 7,896,566
Dividends and interest ................................................................... 14,997,227
Unrealized gain on forward exchange contracts (Note 7) ..................................... 17,411,485
---------------
Total assets ........................................................................... 6,373,836,216
---------------
Liabilities:
Payables:
Capital shares redeemed .................................................................. 6,232,880
Affiliates ............................................................................... 5,530,416
Funds advanced by custodian ................................................................ 83,223
Payable upon return of securities loaned ................................................... 2,745,027
Securities sold short, at value (proceeds $42,068,109) ..................................... 40,157,456
Unrealized loss on forward exchange contracts (Note 7) ..................................... 30,514,989
Accrued expenses and other liabilities ..................................................... 1,013,052
---------------
Total liabilities ...................................................................... 86,277,043
---------------
Net assets, at value ................................................................. $6,287,559,173
===============
Net assets consist of:
Paid-in capital ............................................................................ $4,316,180,314
Undistributed net investment income ........................................................ 2,003,039
Net unrealized appreciation (depreciation) ................................................. 1,944,796,963
Accumulated net realized gain (loss) ....................................................... 24,578,857
---------------
Net assets, at value ................................................................. $6,287,559,173
===============
Annual Report |
The accompanying notes are an integral part of these financial statements. | 31
Mutual Qualified Fund
FINANCIAL STATEMENTS (CONTINUED)
STATEMENT OF ASSETS AND LIABILITIES (CONTINUED)
December 31, 2007
CLASS Z:
Net assets, at value ....................................................................... $ 4,421,592,475
==================
Shares outstanding ......................................................................... 202,488,695
==================
Net asset value and maximum offering price per share a ..................................... $ 21.84
==================
CLASS A:
Net assets, at value ....................................................................... $ 1,290,898,576
==================
Shares outstanding ......................................................................... 59,486,954
==================
Net asset value per share a ................................................................ $ 21.70
==================
Maximum offering price per share (net asset value per share / 94.25%) ...................... $ 23.02
==================
CLASS B:
Net assets, at value ....................................................................... $ 70,266,233
==================
Shares outstanding ......................................................................... 3,308,704
==================
Net asset value and maximum offering price per share a ..................................... $ 21.24
==================
CLASS C:
Net assets, at value ....................................................................... $ 504,801,889
==================
Shares outstanding ......................................................................... 23,478,595
==================
Net asset value and maximum offering price per share a ..................................... $ 21.50
==================
a Redemption price is equal to net asset value less contingent deferred sales
charges, if applicable, and redemption fees retained by the Fund.
32 | The accompanying notes are an integral part of these financial statements.
| Annual Report
Mutual Qualified Fund
FINANCIAL STATEMENTS (CONTINUED)
STATEMENT OF OPERATIONS
for the year ended December 31, 2007
Investment income:
Dividends: (net of foreign taxes of $7,649,988)
Unaffiliated issuers .................................................................................... $ 158,990,061
Non-controlled affiliated issuers (Note 11) ............................................................. 1,813,545
Interest income: (net of foreign taxes of $1,095)
Unaffiliated issuers .................................................................................... 49,341,863
Non-controlled affiliated issuers (Note 11) ............................................................. 156,673
Income from securities loaned ............................................................................. 1,109,267
--------------
Total investment income ............................................................................... 211,411,409
--------------
Expenses:
Management fees (Note 3a) ................................................................................. 37,130,347
Administrative fees (Note 3b) ............................................................................. 4,754,642
Distribution fees: (Note 3c)
Class A ................................................................................................. 4,141,657
Class B ................................................................................................. 749,535
Class C ................................................................................................. 4,874,080
Transfer agent fees (Note 3e) ............................................................................. 5,244,945
Custodian fees (Note 4) ................................................................................... 1,063,419
Reports to shareholders ................................................................................... 385,649
Registration and filing fees .............................................................................. 204,582
Professional fees ......................................................................................... 739,533
Directors' fees and expenses .............................................................................. 91,546
Dividends on securities sold short ........................................................................ 414,650
Other ..................................................................................................... 150,478
--------------
Total expenses ........................................................................................ 59,945,063
Expense reductions (Note 4) ........................................................................... (33,429)
--------------
Net expenses ........................................................................................ 59,911,634
--------------
Net investment income ............................................................................. 151,499,775
--------------
Realized and unrealized gains (losses):
Net realized gain (loss) from:
Investments
Unaffiliated issuers .................................................................................. 408,348,791
Non-controlled affiliated issuers (Note 11) ........................................................... 114,748,024
Foreign currency transactions ........................................................................... (128,584,213)
Securities sold short ................................................................................... (1,846,753)
Synthetic equity swaps .................................................................................. (340)
--------------
Net realized gain (loss) ............................................................................ 392,665,509
--------------
Net change in unrealized appreciation (depreciation) on:
Investments ............................................................................................. (41,488,445)
Translation of assets and liabilities denominated in foreign currencies ................................. 4,807,110
--------------
Net change in unrealized appreciation (depreciation) ................................................ (36,681,335)
--------------
Net realized and unrealized gain (loss) ...................................................................... 355,984,174
--------------
Net increase (decrease) in net assets resulting from operations .............................................. $ 507,483,949
==============
Annual Report |
The accompanying notes are an integral part of these financial statements. | 33
Mutual Qualified Fund
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF CHANGES IN NET ASSETS
------------------------------------
YEAR ENDED DECEMBER 31,
------------------------------------
2007 2006
------------------------------------
Increase (decrease) in net assets:
Operations:
Net investment income ............................................................... $ 151,499,775 $ 85,072,964
Net realized gain (loss) from investments, written options, securities sold
short, synthetic equity swaps, and foreign currency transactions .................. 392,665,509 311,026,318
Net change in unrealized appreciation (depreciation) on investments, translation
of assets and liabilities denominated in foreign currencies, and deferred taxes ... (36,681,335) 522,679,758
------------------------------------
Net increase (decrease) in net assets resulting from operations ............... 507,483,949 918,779,040
------------------------------------
Distributions to shareholders from:
Net investment income:
Class Z .......................................................................... (133,801,897) (72,701,378)
Class A .......................................................................... (34,706,443) (14,297,690)
Class B .......................................................................... (1,467,618) (624,281)
Class C .......................................................................... (10,641,199) (3,637,539)
Net realized gains:
Class Z .......................................................................... (245,908,236) (235,676,842)
Class A .......................................................................... (71,535,285) (55,482,433)
Class B .......................................................................... (4,072,725) (4,356,865)
Class C .......................................................................... (28,564,865) (23,788,670)
------------------------------------
Total distributions to shareholders .................................................... (530,698,268) (410,565,698)
------------------------------------
Capital share transactions: (Note 2)
Class Z .......................................................................... 219,666,981 172,221,468
Class A .......................................................................... 316,804,502 114,571,705
Class B .......................................................................... (4,572,363) (2,408,287)
Class C .......................................................................... 89,317,402 48,918,181
------------------------------------
Total capital share transactions ....................................................... 621,216,522 333,303,067
------------------------------------
Redemption fees ........................................................................ 17,800 7,653
------------------------------------
Net increase (decrease) in net assets ......................................... 598,020,003 841,524,062
Net assets:
Beginning of year ...................................................................... 5,689,539,170 4,848,015,108
------------------------------------
End of year ............................................................................ $ 6,287,559,173 $ 5,689,539,170
====================================
Undistributed net investment income (distributions in excess of net investment income)
included in net assets:
End of year ............................................................................ $ 2,003,039 $ (4,982,471)
====================================
34 | The accompanying notes are an integral part of these financial statements.
| Annual Report
Mutual Qualified Fund
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Franklin Mutual Series Fund Inc. (Series Fund) is registered under the
Investment Company Act of 1940, as amended, (1940 Act) as an open-end investment
company, consisting of six separate funds. The Mutual Qualified Fund (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.
Annual Report | 35
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.
36 | Annual Report
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.
Annual Report | 37
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 or index 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 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.
38 | Annual Report
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 it is the Fund's policy
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 of
America. 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 per share
distributions, by class, are generally due to differences in class specific
expenses.
Annual Report | 39
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 Funds' 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, 2007, there were 1.00 billion shares authorized ($0.001 par
value). Transactions in the Fund's shares were as follows:
------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
2007 2006
------------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
------------------------------------------------------------------
CLASS Z SHARES:
Shares sold ........................ 11,498,413 $ 269,849,858 8,512,548 $ 181,803,162
Shares issued in reinvestment of
distributions .................... 16,420,954 360,016,285 13,636,748 293,498,827
Shares redeemed .................... (17,456,173) (410,199,162) (14,219,750) (303,080,521)
------------------------------------------------------------------
Net increase (decrease) ............ 10,463,194 $ 219,666,981 7,929,546 $ 172,221,468
==================================================================
CLASS A SHARES:
Shares sold ........................ 19,622,769 $ 459,150,297 10,807,154 $ 229,222,653
Shares issued in reinvestment of
distributions .................... 4,576,592 99,690,375 3,087,615 66,093,819
Shares redeemed .................... (10,374,895) (242,036,170) (8,554,219) (180,744,767)
------------------------------------------------------------------
Net increase (decrease) ............ 13,824,466 $ 316,804,502 5,340,550 $ 114,571,705
==================================================================
40 | Annual Report
Mutual Qualified Fund
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. CAPITAL STOCK (CONTINUED)
-----------------------------------------------------------
YEAR ENDED DECEMBER 31,
2007 2006
-----------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
-----------------------------------------------------------
CLASS B SHARES:
Shares sold ........................... 180,171 $ 4,119,296 159,945 $ 3,278,231
Shares issued in reinvestment of
distributions ....................... 237,389 5,061,976 219,353 4,592,968
Shares redeemed ....................... (602,357) (13,753,635) (496,487) (10,279,486)
-----------------------------------------------------------
Net increase (decrease) ............... (184,797) $ (4,572,363) (117,189) $ (2,408,287)
===========================================================
CLASS C SHARES:
Shares sold ........................... 5,112,901 $ 118,074,250 3,442,336 $ 72,454,321
Shares issued in reinvestment of
distributions ....................... 1,634,857 35,274,002 1,177,478 24,986,482
Shares redeemed ....................... (2,772,446) (64,030,850) (2,320,964) (48,522,622)
-----------------------------------------------------------
Net increase (decrease) ............... 3,975,312 $ 89,317,402 2,298,850 $ 48,918,181
===========================================================
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.
Annual Report | 41
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 plans, 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 charges retained net of commissions paid to
unaffiliated broker/dealers ...................................... $943,383
Contingent deferred sales charges retained ......................... $ 92,314
E. TRANSFER AGENT FEES
For the year ended December 31, 2007, the Fund paid transfer agent fees of
$5,244,945, of which $3,189,017 was retained by Investor Services.
42 | Annual Report
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, 2007, the
custodian fees were reduced as noted in the Statement of Operations.
5. INCOME TAXES
The Fund has reviewed the tax positions taken on federal income tax returns, for
each of the three open tax years as of December 31, 2007 and has determined that
no provision for income tax is required in the Fund's financial statements.
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, 2007, the Fund deferred realized currency losses of
$544,932.
The tax character of distributions paid during the years ended December 31, 2007
and 2006, was as follows:
---------------------------
2007 2006
---------------------------
Distributions paid from:
Ordinary income .............................. $ 180,623,450 $101,907,924
Long term capital gain ....................... 350,074,818 308,657,775
---------------------------
$ 530,698,268 $410,565,699
===========================
At December 31, 2007, 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 .......................................... $4,342,497,729
===============
Unrealized appreciation ...................................... $2,182,271,962
Unrealized depreciation ...................................... (236,917,947)
---------------
Net unrealized appreciation (depreciation) ................... $1,945,354,015
===============
Undistributed ordinary income ................................ $ 12,782,493
Undistributed long term capital gains ........................ 10,528,870
---------------
Distributable earnings ....................................... $ 23,311,363
===============
Net investment income (loss) differs for financial statement and tax purposes
primarily due to differing treatments of defaulted securities, foreign currency
transactions, passive foreign investment company shares, pass-through equity
income, 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, pass-through entity income, bond discounts and premiums, and
ceratin dividends on securities sold short.
Annual Report | 43
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, 2007, aggregated
$1,466,258,247 and $1,785,097,903, respectively.
7. FORWARD EXCHANGE CONTRACTS
At December 31, 2007, the Fund had the following forward exchange contracts
outstanding:
-----------------------------------------------------------
CONTRACT SETTLEMENT UNREALIZED UNREALIZED
AMOUNT DATE GAIN LOSS
-----------------------------------------------------------
CONTRACTS TO BUY
20,461,740 Norwegian Krone ............ $ 3,700,000 2/19/08 $ 60,027 $ --
CONTRACTS TO SELL
115,915,333 Great Britian Pound ........ 233,888,193 1/10/08 3,637,256 --
6,800,000 Great Britian Pound ........ 13,476,648 1/10/08 -- (30,617)
127,336,407 Euro ....................... 176,274,955 1/14/08 -- (9,602,439)
245,866,547 Swedish Krona .............. 38,517,306 1/15/08 484,698 --
37,509,430 Singapore Dollar ........... 25,252,084 1/24/08 -- (818,399)
51,324,491 Euro ....................... 74,952,902 2/13/08 4,113 --
76,452,418 Euro ....................... 106,192,409 2/13/08 -- (5,450,511)
672,000,000 Norwegian Krone ............ 124,026,991 2/19/08 541,011 --
395,245,359 Norwegian Krone ............ 72,194,593 2/19/08 -- (435,259)
77,100,000 Euro ....................... 114,301,877 2/25/08 1,705,510 --
113,792,932 Swiss Franc ................ 101,819,391 3/07/08 1,008,841 --
105,461,353 Great Britian Pound ........ 213,368,664 3/10/08 4,220,800 --
52,155,944 Euro ....................... 77,200,481 3/13/08 1,031,295 --
78,631,558 Euro ....................... 109,854,901 3/13/08 -- (4,979,598)
8,914,308,914 Japanese Yen ............... 79,327,623 3/19/08 -- (1,301,970)
1,936,100 Canadian Dollar ............ 2,096,231 3/26/08 146,296 --
31,811,871 Canadian Dollar ............ 31,824,601 3/26/08 -- (214,594)
141,685,647,420 South Korean Won ........... 155,242,000 3/27/08 3,096,338 --
5,520,925,000 South Korean Won ........... 5,900,000 3/27/08 -- (28,510)
86,067,033 Euro ....................... 121,512,280 4/24/08 -- (4,162,926)
8,200,000 Euro ....................... 12,198,033 5/19/08 225,948 --
97,508,240 Euro ....................... 138,872,880 5/19/08 -- (3,490,166)
89,532,375 Euro ....................... 131,961,395 5/28/08 1,249,352 --
-------------------------------
UNREALIZED GAIN (LOSS) ON FORWARD EXCHANGE CONTRACTS ............. 17,411,485 (30,514,989)
-------------------------------
NET UNREALIZED LOSS ON FORWARD EXCHANGE CONTRACTS ...... $ (13,103,504)
================
44 | Annual Report
Mutual Qualified Fund
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
8. CREDIT RISK AND 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, 2007, the aggregate value of these securities was $10,075,330,
representing 0.16% of the Fund's net assets. For information as to specific
securities, see the accompanying Statement of Investments.
9. RESTRICTED SECURITIES
The Fund may invest in securities that are restricted under the Securities Act
of 1933 (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, 2007, 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
CONTRACTS ISSUER DATES COST VALUE
- ----------------------------------------------------------------------------------------------------------------------
387,649 AboveNet Inc. ................................. 10/02/01 - 12/12/07 $19,435,249 $ 19,382,450
510 AboveNet Inc., stock grants, grant price
$20.95, expiration date 9/09/13 ............. 4/17/06 - 9/08/06 -- 21,140
13,684 AboveNet Inc., wts., 9/08/08 .................. 10/02/01 - 9/07/07 1,564,801 645,885
16,099 AboveNet Inc., wts., 9/08/10 .................. 10/02/01 - 9/07/07 1,681,196 703,204
6,600,000 Cerberus CG Investor I LLC .................... 7/26/07 6,600,000 5,557,045
Annual Report | 45
Mutual Qualified Fund
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
9. RESTRICTED SECURITIES (CONTINUED)
- ---------------------------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT/
SHARES/WARRANTS/ ACQUISITION
CONTRACTS ISSUER DATES COST VALUE
- ----------------------------------------------------------------------------------------------------------------------
6,600,000 Cerberus CG Investor I LLC, 12.00%,
7/31/14 ..................................... 7/26/07 $ 6,600,000 $ 5,557,045
6,600,000 Cerberus CG Investor II LLC ................... 7/26/07 6,600,000 5,557,045
6,600,000 Cerberus CG Investor II LLC, 12.00%,
7/31/14 ..................................... 7/26/07 6,600,000 5,557,045
3,300,000 Cerberus CG Investor III LLC .................. 7/26/07 3,300,000 2,778,523
3,300,000 Cerberus CG Investor III LLC, 12.00%,
7/31/14 ..................................... 7/26/07 3,300,000 2,778,523
4,648,194 Cerberus FIM Investors Auto Finance
LLC ......................................... 11/20/06 4,648,194 2,493,900
387,180 Cerberus FIM Investors Commercial
Finance LLC ................................. 11/20/06 387,181 207,734
1,161,542 Cerberus FIM Investors Commercial
Finance LLC, 12.00%, 11/22/13 ............... 11/20/06 1,161,542 623,203
725,710 Cerberus FIM Investors Commercial
Mortgage LLC ................................ 11/20/06 725,710 389,366
2,177,131 Cerberus FIM Investors Commercial
Mortgage LLC, 12.00%, 11/22/13 .............. 11/20/06 2,177,131 1,168,098
13,935,097 Cerberus FIM Investors I Auto Finance
LLC, 12.00%, 11/22/13 ....................... 11/20/06 13,935,097 7,476,610
3,549,493 Cerberus FIM Investors Insurance
LLC ......................................... 11/20/06 3,549,493 1,904,413
10,648,479 Cerberus FIM Investors Insurance,
12.00%, 11/22/13 ............................ 11/21/06 10,648,479 5,713,238
6,608,423 Cerberus FIM Investors Rescap LLC ............. 11/20/06 6,608,422 3,545,623
19,825,266 Cerberus FIM Investors Rescap LLC,
12.00%, 11/22/13 ............................ 11/20/06 19,825,267 10,636,868
48,807 Dana Holding Corp., 4.00%, cvt., pfd.,
B ........................................... 12/27/07 4,880,700 4,880,700
1,008,199 DecisionOne Corp. ............................. 3/12/99 - 7/18/00 700,978 --
1,246,268 DecisionOne Corp., 12.00%, 4/15/10 ............ 3/12/99 - 10/17/07 2,328,805 1,246,268
232,502 DecisionOne Corp., FRN, 10.00%,
5/12/09 ..................................... 7/09/07 232,502 232,502
553,576 DecisionOne Corp., wts., 6/08/17 .............. 7/09/07 -- --
11,496 Elephant Capital Holdings Ltd. ................ 8/29/03 - 3/22/07 409,627 7,571,181
3,087,162 Esmark Inc. ................................... 7/28/06 57,180,518 39,259,439
659,105 First Chicago Bancorp ......................... 11/16/06 9,227,470 9,227,470
2,814,856 Imagine Group Holdings Ltd. ................... 8/31/04 28,828,348 32,201,953
1,982,308 International Automotive Components
Group Brazil LLC ............................ 4/13/06 - 8/21/06 1,186,317 13,769,369
307,801 International Automotive Components
Group Japan LLC ............................. 9/26/06 - 3/27/07 2,674,756 2,760,176
8,425,843 International Automotive Components
Group LLC ................................... 1/12/06 -10/16/06 8,429,977 8,938,977
46 | Annual Report
Mutual Qualified Fund
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
9. RESTRICTED SECURITIES (CONTINUED)
- ----------------------------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT/
SHARES/WARRANTS/ ACQUISITION
CONTRACTS ISSUER DATES COST VALUE
- ----------------------------------------------------------------------------------------------------------------------
5,182,488 International Automotive Components
Group NA LLC ................................ 3/03/07 - 10/10/07 $ 5,176,082 $ 7,125,921
1,560,200 International Automotive Components
Group NA LLC, 9.00%, 4/01/17 ................ 3/30/07 1,583,603 1,560,200
1,444,624 Kindred Healthcare Inc. ....................... 4/28/99 - 3/29/06 13,176,151 34,282,372
Kindred Healthcare Inc., stock grants:
5,072 grant price $18.15, expiration date
7/17/11 ................................... 7/17/02 - 7/17/05 -- 28,307
1,523 grant price $19.87, expiration date
1/01/12 ................................... 1/01/03 - 1/01/06 -- 5,880
1,514 grant price $6.94, expiration date
1/01/13 ................................... 1/01/04 - 1/03/07 -- 25,422
1,129 grant price $19.87, expiration date
1/01/14 ................................... 1/01/05 - 1/03/07 -- 4,359
627 grant price $21.33, expiration date
1/10/15 ................................... 1/06/06 - 1/09/07 -- 1,505
313 grant price $22.08, expiration date
1/10/16 ................................... 1/09/07 -- 517
25,130,149 Motor Coach Industries International
Inc., FRN, 18.081%, 12/01/08 ................ 5/27/04 - 8/31/07 25,130,149 24,878,847
5 Motor Coach Industries International
Inc., wts., 5/27/09 ......................... 3/30/07 -- --
53,490 NCB Warrant Holdings Ltd., A .................. 12/16/05 -- 3,173,660
97,300 Olympus Re Holdings Ltd. ...................... 12/19/01 9,730,000 318,677
249,750 a Owens Corning Inc., exercise price
$37.50, expiration date 1/02/08,
shares ...................................... 12/20/06 26,137 12,487
92,938 PTV Inc., 10.00%, pfd., A ..................... 12/07/01 - 3/06/02 278,814 111,526
3,434,760 Symetra Financial ............................. 7/27/04 - 10/26/07 39,480,000 55,024,855
------------
TOTAL RESTRICTED SECURITIES (5.24% of Net Assets) .................................. $329,339,528
============
a The Fund also invests in unrestricted securities of the issuer, valued at
$6,977,214 as of December 31, 2007.
10. UNFUNDED CAPITAL COMMITMENTS
At December 31, 2007, the Fund had aggregate unfunded capital commitments to
investments of $6,590,000.
Annual Report | 47
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, 2007, were as shown below.
- -----------------------------------------------------------------------------------------------------------------------------------
NUMBER OF NUMBER OF
SHARES/WARRANTS/ SHARES/WARRANTS/
PRINCIPAL AMOUNT PRINCIPAL AMOUNT VALUE AT REALIZED
HELD AT BEGINNING GROSS GROSS HELD AT END END OF INVESTMENT CAPITAL
NAME OF ISSUER OF YEAR ADDITIONS REDUCTIONS OF YEAR YEAR INCOME GAIN (LOSS)
- -----------------------------------------------------------------------------------------------------------------------------------
NON-CONTROLLED AFFILIATES
DecisionOne Corp. ................. 1,008,199 -- -- 1,008,199 $ -- $ -- $ --
DecisionOne Corp., 12.00%,
4/15/10 ......................... 1,173,501 72,767 -- 1,246,268 1,246,268 144,779 --
DecisionOne Corp., FRN, 9.50%,
5/12/09 ......................... -- 232,502 -- 232,502 232,502 11,894 --
DecisionOne Corp., wts., 6/08/17 .. -- 553,576 -- 553,576 -- -- --
Elephant Capital Holdings Ltd. .... 11,087 409 -- 11,496 7,571,181 -- --
Esmark Inc. ....................... 6,143 3,081,019 -- 3,087,162 39,259,439 147,430 --
Esmark Inc., 8.00%, cvt. pfd., A .. 22,360 -- 22,360 -- -- 1,380,806 283,048
First Chicago Bancorp ............. 659,105 -- -- 659,105 9,227,470 -- --
Generale de Sante ................. 3,146,068 -- 3,146,068 -- -- -- 81,509,152
Imagine Group Holdings Ltd. ....... 2,814,856 -- -- 2,814,856 32,201,953 -- --
Imperial Capital Bancorp Inc. ..... 445,796 -- -- 445,796 8,158,067 285,309 --
Insun ENT Co. Ltd. ................ 687,953 1,003,342 242,349 1,448,946 -- a -- 2,018,324
State National Bancshares Inc. .... 1,375,000 -- 1,375,000 -- -- -- 30,937,500
White River Capital Inc. .......... 549,751 -- -- 549,751 9,583,534 -- --
---------------------------------------
TOTAL AFFILIATED SECURITIES (1.71% of Net Assets) ...................................... $107,480,414 $1,970,218 $114,748,024
=======================================
a As of December 31, 2007, no longer an affiliate.
12. OTHER CONSIDERATIONS
Officers, directors or employees of the Fund's Investment Manager, may serve
from time to time as members of bondholders' steering committees, official
creditors' committees, or boards of directors of companies in which the Fund
invests. Such participation may result in the possession by the Investment
Manager of material non-public information which, pursuant to the Fund's
policies and the requirements of applicable securities laws, could prevent the
Fund from trading in the securities of such companies for limited or extended
periods of time.
13. REGULATORY AND LITIGATION 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 and governmental
entities. Specifically, the Company entered into settlements with the SEC, among
others, concerning market timing and marketing support.
48 | Annual Report
Mutual Qualified Fund
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
13. REGULATORY AND LITIGATION MATTERS (CONTINUED)
On June 6, 2007, the SEC posted for public comment the proposed plan of
distribution for the market timing settlement. Once the SEC approves the final
plan of distribution, disbursements of settlement monies will be made promptly
to individuals who were shareholders of the designated funds during the relevant
period, 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.
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.
14. NEW ACCOUNTING PRONOUNCEMENT
In September 2006, Financial Accounting Standards Board (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 THE MUTUAL QUALIFIED FUND:
We have audited the accompanying statement of assets and liabilities of the
Mutual Qualified Fund (one of the Funds constituting the Franklin Mutual Series
Fund Inc.) (the "Fund"), including the statement of investments, as of December
31, 2007, 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, 2007, by correspondence with the custodian
and brokers. 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,
2007, 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 14, 2008
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 $346,372,730 as a long
term capital gain dividend for the fiscal year ended December 31, 2007.
Under Section 854(b)(2) of the Code, the Fund designates the maximum amount
allowable but no less than $129,341,669 as qualified dividends for purposes of
the maximum rate under Section 1(h)(11) of the Code for the fiscal year ended
December 31, 2007. In January 2008, shareholders will receive Form 1099-DIV
which will include their share of qualified dividends distributed during the
calendar year 2007. 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)(2)(C) of the Code, the Fund designates the maximum amount
allowable but no less than $11,333,642 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, 2007.
Under Section 854(b)(2) of the Code, the Fund designates 41.95% of the ordinary
income dividends as income qualifying for the dividends received deduction for
the fiscal year ended December 31, 2007.
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 None
c/o Franklin Mutual Advisers, LLC
101 John F. Kennedy Parkway
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; a director to numerous
financial publishing organizations; and FORMERLY, Vice Director, Salomon Center, Stern School of Business, New York University.
- ----------------------------------------------------------------------------------------------------------------------------------
ANN TORRE BATES (1958) Director Since 1994 7 SLM Corporation (Sallie Mae) and
c/o Franklin Mutual Advisers, LLC Allied Capital Corporation
101 John F. Kennedy Parkway (financial services).
Short Hills, NJ 07078-2789
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 14 Franklin Templeton Emerging Markets
c/o Franklin Mutual Advisers, LLC Debt Opportunities Fund PLC and
101 John F. Kennedy Parkway Fiduciary International Ireland Limited.
Short Hills, NJ 07078-2789
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
c/o Franklin Mutual Advisers, LLC
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).
- ----------------------------------------------------------------------------------------------------------------------------------
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
- ----------------------------------------------------------------------------------------------------------------------------------
CHARLES RUBENS II (1930) Director Since 1998 14 None
c/o Franklin Mutual Advisers, LLC
101 John F. Kennedy Parkway
Short Hills, NJ 07078-2789
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Private investor.
- ----------------------------------------------------------------------------------------------------------------------------------
ROBERT E. WADE (1946) Director and Director since 34 El Oro and Exploration Co., p.l.c.
c/o Franklin Mutual Advisers, LLC Chairman 1991 and (investments) and ARC Wireless
101 John F. Kennedy Parkway of the Board Chairman of the Solutions, Inc. (wireless components
Short Hills, NJ 07078-2789 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
- ----------------------------------------------------------------------------------------------------------------------------------
**GREGORY E. JOHNSON (1961) Director Since April 2007 92 None
One Franklin Parkway
San Mateo, CA 94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Director, President and Chief Executive Officer, Franklin Resources, Inc.; President, Templeton Worldwide, Inc.; Director,
Templeton Asset Management Ltd.; and officer and/or director or trustee, as the case may be, of some of the other subsidiaries of
Franklin Resources, Inc. and of 33 of the investment companies in Franklin Templeton Investments.
- ----------------------------------------------------------------------------------------------------------------------------------
**PETER A. LANGERMAN (1955) Director, Director since 7 None
c/o Franklin Mutual Advisers, LLC President April 2007 and
101 John F. Kennedy Parkway and Chief President and
Short Hills, NJ 07078-2702 Executive Chief Executive
Officer - Officer -
Investment Investment
Management Management
since 2005
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Chairman of the Board, Chief Executive Officer and President, Franklin Mutual Advisers, LLC; officer and/or director, as the case
may be, of three of the investment companies in Franklin Templeton Investments; and FORMERLY, Director, New Jersey's Division of
Investment.
- ----------------------------------------------------------------------------------------------------------------------------------
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.
- ----------------------------------------------------------------------------------------------------------------------------------
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
- ----------------------------------------------------------------------------------------------------------------------------------
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 Compliance
- AML since 2006
Compliance
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.
- ----------------------------------------------------------------------------------------------------------------------------------
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.
- ----------------------------------------------------------------------------------------------------------------------------------
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; Secretary, Franklin Advisory Services, LLC, Franklin Mutual
Advisers, LLC and Franklin Templeton Distributors, Inc.; and officer of 41 of the investment companies in Franklin Templeton
Investments.
- ----------------------------------------------------------------------------------------------------------------------------------
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 18 of the investment companies in Franklin Templeton Investments; and
FORMERLY, Vice President, JPMorgan Chase (2000-2004) and American General Financial Group (1991-2000).
- ----------------------------------------------------------------------------------------------------------------------------------
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
- ----------------------------------------------------------------------------------------------------------------------------------
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 some of the other subsidiaries of Franklin Resources, Inc. and
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.
** Gregory E. Johnson is considered to be an interested person of the Fund under
the federal securities laws due to his position as an officer and director of
Franklin Resources, Inc., which is the parent company of the Fund's investment
manager and distributor. Peter A. Langerman is considered to be an interested
person of the Fund under the federal securities laws due to his position as an
officer of Franklin Mutual Advisers, LLC, which is the Fund's investment
manager.
Note 1: Officer information is current as of the date of this report. It is
possible that after this date, information about officers may change.
Note 2: Prior to December 31, 2007, William J. Lippman, Leonard Rubin and Anne
M. Tatlock ceased to be directors of the Fund.
THE FUND'S BOARD 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 FUNDS
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 1
GLOBAL
Mutual Discovery Fund
Templeton Global Long-Short Fund
Templeton Global Opportunities Trust
Templeton Global Smaller Companies Fund 1
Templeton Growth Fund
Templeton World Fund
GROWTH
Franklin Capital Growth Fund
Franklin Flex Cap Growth Fund
Franklin Growth Opportunities Fund 2
Franklin Small Cap Growth Fund II 3
Franklin Small-Mid Cap Growth Fund
VALUE
Franklin All Cap Value Fund
Franklin Balance Sheet Investment Fund 1
Franklin Equity Income Fund
Franklin Large Cap Value Fund
Franklin MicroCap Value Fund 1
Franklin MidCap Value Fund
Franklin Small Cap Value Fund
Mutual Beacon Fund
Mutual Qualified
Fund Mutual Recovery Fund 4
Mutual Shares Fund
BLEND
Franklin Balanced Fund
Franklin Convertible Securities Fund
Franklin Focused Core Equity Fund
Franklin Growth Fund
Franklin Rising Dividends 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(R) Allocation Fund
Franklin Templeton Founding Funds Allocation Fund
Franklin Templeton Perspectives Allocation Fund
Franklin Templeton Conservative Target Fund
Franklin Templeton Growth Target Fund
Franklin Templeton Moderate Target Fund
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 5
Franklin Floating Rate Daily Access Fund
Franklin High Income Fund
Franklin Income Fund
Franklin Limited Maturity
U.S. Government Securities Fund 5
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 5
Templeton Global Bond Fund
Templeton Income Fund
Templeton International Bond 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
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 and select
retirement plans can continue adding to their accounts.
2. Effective 11/1/07, Franklin Aggressive Growth Fund changed its name to
Franklin Growth Opportunities Fund. The fund's investment goal and strategy
remained the same.
3. The fund is closed to new investors. Existing shareholders can continue
adding to their accounts.
4. 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.
5. An investment in the fund is neither insured nor guaranteed by the U.S.
government or by any other entity or institution.
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. The fund invests primarily in 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.
12/07 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 A2007 02/08
[GRAPHIC OMITTED]
- --------------------------------------------------------------------------------
DECEMBER 31, 2007
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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]
Not part of the annual report
Contents
SHAREHOLDER LETTER ........................................................ 1
ANNUAL REPORT
Mutual Shares Fund ........................................................ 5
Performance Summary ....................................................... 12
Your Fund's Expenses ...................................................... 17
Financial Highlights and Statement of Investments ......................... 19
Financial Statements ...................................................... 35
Notes to Financial Statements ............................................. 39
Report of Independent Registered Public Accounting Firm ................... 55
Tax Designation ........................................................... 56
Board Members and Officers ................................................ 57
Shareholder Information ................................................... 61
- --------------------------------------------------------------------------------
Shareholder Letter
- --------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURN
- ---------------------------------
CLASS Z 12/31/07
- ---------------------------------
1-Year +3.30%
- ---------------------------------
5-Year +14.25%
- ---------------------------------
10-Year +9.26%
- ---------------------------------
Dear Shareholder:
The past year was a turbulent time for equities both in the U.S. and in many
international markets. Several developments contributed to this volatility,
including (1) credit problems centered around subprime mortgage lending; (2)
declining home values in the U.S.; (3) a nearly complete evaporation of the
corporate leveraged lending that fueled the leveraged buyout boom of the past
several years; (4) a sharp increase in oil, agricultural and certain mining
commodity prices; and (5) a sharp decline in the value of the U.S. dollar
relative to most other currencies. For the year ended December 31, 2007, the
Standard & Poor's (S&P) 500 Index rose 5.49% while the Morgan Stanley Capital
International (MSCI) World Index gained 9.57%. 1 However, indicative of the
impact of the developments noted here, the S&P 500 Financials Index declined
18.63%, the S&P Homebuilders Select Industry Index declined 48.39% and the S&P
GSSI Natural Resources Index appreciated 34.44% during the year. 2 By
comparison, Mutual Shares Fund - Class Z gained 3.30% over this period.
1. Source: Standard & Poor's Micropal. The S&P 500 Index 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
Index 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.
2. Source: Standard & Poor's Micropal. The S&P 500 Financials Index is market
value weighted and includes all the financial stocks in the S&P 500. The S&P
Homebuilders Select Industry Index is an equal-weighted index that draws its
constituents from the GICS (Global Industry Classification Standards)
Homebuilding sub-industry. The S&P GSSI Natural Resources Index is a modified
cap-weighted index designed to measure equity performance in the natural
resources sector. The index includes companies involved in the following
categories: extractive industries, energy companies, owners and operators of
timber tracts, forestry services, producers of pulp and paper, and owners of
plantations.
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.
- --------------------------------------------------------------------------------
eDELIVERY DETAILS
LOG IN AT FRANKLINTEMPLETON.COM AND CLICK ON EDELIVERY. SHAREHOLDERS WHO ARE
REGISTERED AT FRANKLINTEMPLETON.COM CAN RECEIVE THESE REPORTS VIA EMAIL. NOT ALL
ACCOUNTS ARE ELIGIBLE FOR EDELIVERY.
- -----------------------------------------------------
NOT FDIC INSURED | MAY LOSE VALUE | NO BANK GUARANTEE
- -----------------------------------------------------
Not part of the annual report | 1
The markets in 2007 were particularly challenging for us as value-driven,
bottom-up stock pickers in a year when a thematic approach to investing based on
macroeconomic factors would likely have enhanced performance. Value investors
are always faced with the task of buying and owning companies when they are out
of favor, whether for company-specific reasons or because of a perception of
macroeconomic fundamentals. It is these very headwinds that create opportunities
to buy well-managed companies with strong industry positions at valuations that
can reward investors over the long term.
Despite the challenges, a number of positive factors contributed to Fund
performance this year. Many of our international holdings made strong gains,
particularly among the tobacco, energy and industrial companies we owned. Fund
shareholders also benefited from the fact that our international holdings were
less than fully hedged back into U.S. dollars, reflecting our cautious view
regarding the dollar. Investments in merger arbitrage situations were also
generally profitable, particularly as we took advantage in late summer of
concerns that deals would fall apart because of "buyer's remorse" or
unavailability of financing.
In the U.S., our focus over the past several years on larger capitalization
companies with strong balance sheets and leading industry positions benefited
our shareholders. For example, investments in Microsoft, Altria and Verizon
Communications, all part of the large-cap Dow Jones Industrial Average,
generated solid returns in 2007. 3 As we have discussed in previous reports, the
multi-year outperformance of small- and mid-capitalization stocks going into
2007 resulted in attractive valuations among their mega-cap counterparts. At
period-end, we continued to see real value in a number of these companies.
The Fund's exposure to the financial sector negatively impacted Fund performance
during the year. While we had limited direct exposure to the subprime mortgage
originators, the spreading contagion of the credit crisis hurt valuations of
most financial institutions, including some well-capitalized domestic and
European banks owned by the Fund. We were disappointed by the breakdown in risk
management processes at some of the largest U.S. financial institutions and have
adjusted certain positions accordingly. Nevertheless, we believe the markets
have overly penalized many stocks in the sector and accordingly have added
selectively to certain holdings.
3. Mutual Shares Fund's holdings are based on total net assets as of 12/31/07:
Microsoft Corp.: 1.5%; Altria Group Inc.: 1.5%; and Verizon Communications Inc.:
0.9%.
2 | Not part of the annual report
Another difficult area for us in the latter half of the year was what we would
term "event-driven" stocks. These are investments we believe are attractively
valued and where we see an identifiable catalyst to unlock the value. While each
investment is different, a few issues dominated the second half of 2007. One key
driver was the abrupt absence of private equity buyers for companies (or
divisions of companies) that were potential sale targets. Virgin Media, the U.K.
cable company, was one example. Another key element was direct or indirect
exposure to the residential construction or financial industries, where the
catalyst was overwhelmed by the economic headwinds facing the company.
Temple-Inland, which sold its timber assets and split into three companies
including a packaging company, a savings bank and a real estate developer in
2007, exemplified this risk. Finally, we believe many event-driven investments
were held in common with some of the hedge funds that faced pressure to sell in
the latter half of 2007. Again, while somewhat painful in the short term,
"technical" pressures often give us a chance to take advantage of temporary
market dislocations to increase ownership in attractively valued companies.
Fear and volatility can breed opportunity for patient investors. We believe the
extended credit crisis has created a number of such opportunities. We have no
crystal ball telling us precisely when the U.S. housing market will turn
positive or where oil prices will be a year from now. However, we believe that
if we stick to our discipline of buying good businesses at cheap valuations, we
should reach our goal of limiting our downside risk while generating consistent
returns over the long term.
In the enclosed annual report for Mutual Shares Fund, the portfolio managers
discuss market conditions, investment management decisions and Fund performance
during the period under review. You will also find performance data and
financial information. Please remember that all securities markets fluctuate, as
do mutual fund share prices.
If you would like more frequent updates, FRANKLINTEMPLETON.COM provides daily
prices, monthly performance figures, portfolio holdings and other information.
You can also access your account, buy and sell shares, read timely articles, and
find helpful financial planning tools. We hope you will take advantage of these
online services.
Not part of the annual report | 3
As always, we thank you for your trust and support and extend our best wishes
for a happy, healthy and prosperous 2008.
Sincerely,
/s/ Peter A. Langerman
Peter A. Langerman
Chairman, President and Chief Executive Officer
Franklin Mutual Advisers, LLC
/s/ Michael J. Embler
Michael J. Embler
Senior Vice President and Chief Investment Officer
Franklin Mutual Advisers, LLC
THIS LETTER REFLECTS OUR ANALYSIS AND OPINIONS AS OF DECEMBER 31, 2007. 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.
4 | Not part of the annual report
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 PRIMARILY 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.
- --------------------------------------------------------------------------------
This annual report for Mutual Shares Fund covers the fiscal year ended December
31, 2007.
PERFORMANCE OVERVIEW
Mutual Shares Fund - Class Z posted a cumulative total return of +3.30% for the
12 months ended December 31, 2007. The Fund underperformed its benchmark, the
Standard & Poor's 500 Index (S&P 500), which returned +5.49% 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, 2007, the U.S. economy advanced at a
moderate but uneven pace. After slow first quarter growth, gross domestic
product (GDP) advanced solidly in the second quarter, supported by federal
defense spending, accelerating exports and declining imports, and greater
business spending. In the third quarter, growth accelerated despite a struggling
housing market and the abrupt unraveling of the subprime mortgage market. The
housing downturn affected the overall economy by fourth quarter 2007 when GDP
growth decelerated as credit conditions worsened and consumer spending slowed.
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.
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.
Annual Report | 5
GEOGRAPHIC BREAKDOWN
Based on Total Net Assets as of 12/31/07
[THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.]
U.S. 57.8%
U.K. 7.8%
Germany 5.2%
France 5.1%
Netherlands 2.3%
Switzerland 2.1%
Norway 1.8%
Spain 1.8%
Denmark 1.4%
Belgium 1.4%
Japan 1.3%
Italy 1.0%
Other 3.2%
Short-Term Investments & Other Net Assets 7.8%
Consumer confidence declined through period-end largely due to rising mortgage
and fuel costs, falling home prices and a weaker job market. Oil prices were
volatile and established a new record high in November, nearing $99 per barrel.
For the 12 months ended December 31, 2007, the core Consumer Price Index (CPI),
which excludes food and energy costs, rose 2.4%, which was higher than its
10-year average rate. 2
Facing the prospect of slower economic growth, the Federal Reserve Board lowered
the federal funds target rate to 4.25% from 5.25% during the period. As
investors fled riskier, poorer-performing assets, U.S. Treasuries rallied and
the 10-year Treasury note yield fell from 4.71% at the beginning of the period
to 4.04% on December 31, 2007.
The global economy remained resilient despite elevated energy prices and
widespread fears of contagion from the deteriorating U.S. housing situation.
Consumer and corporate demand strength, particularly in China and other
developing economies, generally favorable employment and accommodative monetary
policies continued to underpin the current global expansionary period that began
in 2002.
These factors also contributed to the strength of global equity markets during
2007. However, concerns about slower growth and declining asset quality surfaced
in the first quarter. Initially centered on the U.S. subprime mortgage market,
they spread in August to global capital markets. Difficulties in assessing risk
and the value of collateral in the structured finance industry contributed to
declining risk appetite among lenders and investors. The private equity
industry, which relies on the availability of cheap credit, played a pivotal
role in several large and high-profile acquisitions, helped boost merger and
acquisition activity in the first half of 2007, and was an important driver of
equity performance. A second-half tightening of liquidity led to slower deal
activity and weighed on market performance. However, in 2007, global merger and
acquisition activity still reached record levels.
To alleviate the credit crunch and restore investor confidence, the world's
major central banks infused capital into the system. However, credit and equity
markets continued to face headwinds as write-downs and losses from subprime
mortgage financing affected many large financial institutions toward the end of
the year, and equity prices remained volatile. For the year, however, global and
non-U.S. equity markets registered the fifth consecutive year of double-digit
total returns. Broad-based stock performance by European and Asian shares at
least doubled that of U.S. stocks, while emerging market equity
2. Source: Bureau of Labor Statistics.
6 | Annual Report
returns more than tripled those in developed markets. In addition, U.S. dollar
weakness versus the currencies of many major trading partners enhanced equity
returns for U.S. -based investors holding stocks denominated in these
currencies.
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 for our shareholders.
TOP 10 SECTORS/INDUSTRIES
Based on Equity Securities as of 12/31/07
- --------------------------------------------------------------------------------
% OF TOTAL
NET ASSETS
- --------------------------------------------------------------------------------
Tobacco 8.8%
- --------------------------------------------------------------------------------
Insurance 8.3%
- --------------------------------------------------------------------------------
Media 7.5%
- --------------------------------------------------------------------------------
Commercial Banks 5.6%
- --------------------------------------------------------------------------------
Industrial Conglomerates 4.1%
- --------------------------------------------------------------------------------
Paper & Forest Products 3.9%
- --------------------------------------------------------------------------------
Food Products 3.7%
- --------------------------------------------------------------------------------
Food & Staples Retailing 3.6%
- --------------------------------------------------------------------------------
Pharmaceuticals 2.7%
- --------------------------------------------------------------------------------
Health Care Providers & Services 2.3%
- --------------------------------------------------------------------------------
Annual Report | 7
TOP 10 HOLDINGS
12/31/07
- --------------------------------------------------------------------------------
COMPANY % OF TOTAL
SECTOR/INDUSTRY, COUNTRY NET ASSETS
- --------------------------------------------------------------------------------
Berkshire Hathaway Inc., A & B 3.2%
INSURANCE, U.S.
- --------------------------------------------------------------------------------
British American Tobacco PLC, ord. & ADR 1.9%
TOBACCO, U.K.
- --------------------------------------------------------------------------------
Orkla ASA 1.9%
INDUSTRIAL CONGLOMERATES, NORWAY
- --------------------------------------------------------------------------------
Weyerhaeuser Co. 1.8%
PAPER & FOREST PRODUCTS, U.S.
- --------------------------------------------------------------------------------
U.S. Bancorp 1.8%
COMMERCIAL BANKS, U.S.
- --------------------------------------------------------------------------------
News Corp., A 1.7%
MEDIA, U.S.
- --------------------------------------------------------------------------------
Altria Group Inc. 1.5%
TOBACCO, U.S.
- --------------------------------------------------------------------------------
Microsoft Corp. 1.5%
SOFTWARE, U.S.
- --------------------------------------------------------------------------------
White Mountains Insurance Group Ltd. 1.5%
INSURANCE, U.S.
- --------------------------------------------------------------------------------
Imperial Tobacco Group PLC 1.5%
TOBACCO, U.K.
- --------------------------------------------------------------------------------
MANAGER'S DISCUSSION
During the year under review, the largest contributor to Fund performance was
our equity portfolio, most notably some of our long-term holdings. Three
investments that performed well during 2007 were Orkla, Berkshire Hathaway and
British American Tobacco (BAT).
Orkla is one of Norway's largest conglomerates with operations in several
industries including consumer goods, and metals and minerals. In 2007, Orkla was
again among the top performing stocks, advancing 52% in local currency terms.
Orkla shares performed well after the company reported strong operational
performance, and its management pursued two transactions that we believed could
create value. Orkla increased its stake in the solar energy solution company
Renewable Energy Corp. (REC) from 27.5% to 40.0% in February 2007, at a discount
of over 25% to REC's market price at the time. As REC's stock appreciated more
than 142% in local currency during the reporting period, Orkla's ownership in
REC benefited its own share price. Orkla also merged its aluminum profile
business, Sapa, with Alcoa's aluminum extrusion business.
Berkshire Hathaway stock appreciated 29% as the company benefited from a lack of
catastrophe losses in 2007, resulting in large insurance company profits after
higher-than-average losses in 2004 and 2005 resulted in a favorable pricing
environment for U.S. property insurers. Within Berkshire's non-insurance
operations, the company benefited from an improving contribution from its
utility business, Mid-American Energy. Most significantly for its share price
value, Berkshire's cash stockpile of almost $40 billion, along with CEO Warren
Buffett's willingness to wait until a bargain emerged before deploying this
capital, positioned the company as a safe haven for investors who perceived
2007's subprime mortgage crisis as an investment opportunity rather than a
threat. By the end of 2007 Berkshire management had successfully kept its
capital mostly in reserve, for use in executing timely future transactions when
the investment climate is right.
Shares of U.K. -based BAT benefited from strong operations as well as tobacco's
traditional role as a defensive stock, and advanced 43% in local currency for
the year under review. Operationally, we believe BAT has a strong business
model. During 2007, the company's topline growth was driven by increased volume
and product mix improvement. As measured by volume and sales, BAT has a
leadership position in the growing emerging markets, where cigarette consumption
is increasing. Furthermore, BAT was able to grow its market share by refreshing
all of its main brands, updating its packaging, and launching a variety of new
products. BAT also continued to strengthen its distribution
8 | Annual Report
channels, further contributing to its market-share gains. In Europe, cigarette
pricing remained strong in 2007. At period-end, we continued to hold BAT because
we believe two positive catalysts could materialize. First, BAT has indicated
that a new cost-cutting program will be announced in 2008's first quarter, upon
completion of its most recent five-year plan. The program's scale is expected to
be significant. Second, we see potential for further corporate activity or share
buybacks given BAT's balance sheet strength.
Although many of our investments appreciated during the year, some of the Fund's
holdings underperformed. Three positions that declined in value included
financial services conglomerate Citigroup; Belgium-based Fortis, whose
operations are focused in banking, insurance and investment management; and Home
Depot, the world's largest home improvement chain.
Shares of Citigroup declined 44% in 2007 due largely to illiquidity in the
credit markets that forced the company to take meaningful mark-to-market losses
on leveraged loans and securitized products remaining on the company's balance
sheet. Further pressuring the company's stock price were concerns about certain
off-balance sheet exposures, lower capital levels stemming from write-downs, the
lingering possibility of a dividend cut, and uncertainty surrounding Citigroup's
leadership.
Fortis declined 30% in local currency as the company raised a significant amount
of capital to fund its acquisition of ABN Amro's Dutch retail banking, asset
management and private banking units. Fortis was part of a consortium with Royal
Bank of Scotland and Banco Santander, which together acquired these businesses
and by year-end had completed the largest bank acquisition in European history.
Fortis' stock price also came under pressure after the company announced weak
third quarter 2007 operating results for its banking and insurance businesses.
Home Depot shares declined 31% in 2007 as the company lowered earnings guidance
due to a weak housing market. In addition, the buyout purchase price for HD
Supply, the company's professional services division, was negotiated downward by
three private equity firms after credit markets tightened substantially.
Finally, investors should note that we maintained our currency hedging posture
of being generally hedged to the U.S. dollar for most of our non-U.S. holdings.
Since the dollar was weaker compared with most foreign currencies during 2007,
the Fund benefited to the extent it was not fully hedged.
Annual Report | 9
Thank you for your continued participation in Mutual Shares Fund. We look
forward to serving your future investment needs.
[PHOTO OMITTED] /s/ Peter A. Langerman
Peter A. Langerman
Co-Portfolio Manager
[PHOTO OMITTED] /s/ F. David Segal
F. David Segal, CFA
Co-Portfolio Manager
[PHOTO OMITTED] /s/ Debbie A. Turner
Debbie A. Turner, CFA
Assistant Portfolio Manager
Mutual Shares Fund
THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS
AS OF DECEMBER 31, 2007, 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 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.
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 12/31/07
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 12/31/07 12/31/06
- ----------------------------------------------------------------------------------------------------------
Net Asset Value (NAV) -$0.75 $25.33 $26.08
- ----------------------------------------------------------------------------------------------------------
DISTRIBUTIONS (1/1/07-12/31/07)
- ----------------------------------------------------------------------------------------------------------
Dividend Income $0.7502
- ----------------------------------------------------------------------------------------------------------
Short-Term Capital Gain $0.0273
- ----------------------------------------------------------------------------------------------------------
Long-Term Capital Gain $0.8426
- ----------------------------------------------------------------------------------------------------------
TOTAL $1.6201
- ----------------------------------------------------------------------------------------------------------
CLASS A (SYMBOL: TESIX) CHANGE 12/31/07 12/31/06
- ----------------------------------------------------------------------------------------------------------
Net Asset Value (NAV) -$0.76 $25.14 $25.90
- ----------------------------------------------------------------------------------------------------------
DISTRIBUTIONS (1/1/07-12/31/07)
- ----------------------------------------------------------------------------------------------------------
Dividend Income $0.6676
- ----------------------------------------------------------------------------------------------------------
Short-Term Capital Gain $0.0273
- ----------------------------------------------------------------------------------------------------------
Long-Term Capital Gain $0.8426
- ----------------------------------------------------------------------------------------------------------
TOTAL $1.5375
- ----------------------------------------------------------------------------------------------------------
CLASS B (SYMBOL: FMUBX) CHANGE 12/31/07 12/31/06
- ----------------------------------------------------------------------------------------------------------
Net Asset Value (NAV) -$0.75 $24.60 $25.35
- ----------------------------------------------------------------------------------------------------------
DISTRIBUTIONS (1/1/07-12/31/07)
- ----------------------------------------------------------------------------------------------------------
Dividend Income $0.4688
- ----------------------------------------------------------------------------------------------------------
Short-Term Capital Gain $0.0273
- ----------------------------------------------------------------------------------------------------------
Long-Term Capital Gain $0.8426
- ----------------------------------------------------------------------------------------------------------
TOTAL $1.3387
- ----------------------------------------------------------------------------------------------------------
CLASS C (SYMBOL: TEMTX) CHANGE 12/31/07 12/31/06
- ----------------------------------------------------------------------------------------------------------
Net Asset Value (NAV) -$0.77 $24.86 $25.63
- ----------------------------------------------------------------------------------------------------------
DISTRIBUTIONS (1/1/07-12/31/07)
- ----------------------------------------------------------------------------------------------------------
Dividend Income $0.4868
- ----------------------------------------------------------------------------------------------------------
Short-Term Capital Gain $0.0273
- ----------------------------------------------------------------------------------------------------------
Long-Term Capital Gain $0.8426
- ----------------------------------------------------------------------------------------------------------
TOTAL $1.3567
- ----------------------------------------------------------------------------------------------------------
CLASS R (SYMBOL: TESRX) CHANGE 12/31/07 12/31/06
- ----------------------------------------------------------------------------------------------------------
Net Asset Value (NAV) -$0.77 $25.00 $25.77
- ----------------------------------------------------------------------------------------------------------
DISTRIBUTIONS (1/1/07-12/31/07)
- ----------------------------------------------------------------------------------------------------------
Dividend Income $0.6325
- ----------------------------------------------------------------------------------------------------------
Short-Term Capital Gain $0.0273
- ----------------------------------------------------------------------------------------------------------
Long-Term Capital Gain $0.8426
- ----------------------------------------------------------------------------------------------------------
TOTAL $1.5024
- ----------------------------------------------------------------------------------------------------------
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 +3.30% +94.65% +142.51%
- ----------------------------------------------------------------------------------------------------------------
Average Annual Total Return 3 +3.30% +14.25% +9.26%
- ----------------------------------------------------------------------------------------------------------------
Value of $10,000 Investment 4 $10,330 $ 19,465 $ 24,251
- ----------------------------------------------------------------------------------------------------------------
Total Annual Operating Expenses 5 0.84%
- ----------------------------------------------------------------------------------------------------------------
CLASS A 1 1-YEAR 5-YEAR 10-YEAR
- ----------------------------------------------------------------------------------------------------------------
Cumulative Total Return 2 +2.97% +91.34% +134.05%
- ----------------------------------------------------------------------------------------------------------------
Average Annual Total Return 3 -2.95% +12.52% +8.23%
- ----------------------------------------------------------------------------------------------------------------
Value of $10,000 Investment 4 $ 9,705 $ 18,038 $ 22,057
- ----------------------------------------------------------------------------------------------------------------
Total Annual Operating Expenses 5 1.18%
- ----------------------------------------------------------------------------------------------------------------
CLASS B 1 1-YEAR 5-YEAR INCEPTION (1/1/99)
- ----------------------------------------------------------------------------------------------------------------
Cumulative Total Return 2 +2.25% +85.17% +121.47%
- ----------------------------------------------------------------------------------------------------------------
Average Annual Total Return 3 -1.63% +12.87% +9.24%
- ----------------------------------------------------------------------------------------------------------------
Value of $10,000 Investment 4 $ 9,837 $ 18,317 $ 22,147
- ----------------------------------------------------------------------------------------------------------------
Total Annual Operating Expenses 5 1.84%
- ----------------------------------------------------------------------------------------------------------------
CLASS C 1 1-YEAR 5-YEAR 10-YEAR
- ----------------------------------------------------------------------------------------------------------------
Cumulative Total Return 2 +2.30% +85.21% +119.46%
- ----------------------------------------------------------------------------------------------------------------
Average Annual Total Return 3 +1.33% +13.12% +8.18%
- ----------------------------------------------------------------------------------------------------------------
Value of $10,000 Investment 4 $10,133 $ 18,521 $ 21,946
- ----------------------------------------------------------------------------------------------------------------
Total Annual Operating Expenses 5 1.84%
- ----------------------------------------------------------------------------------------------------------------
CLASS R 1-YEAR 5-YEAR INCEPTION (1/1/02)
- ----------------------------------------------------------------------------------------------------------------
Cumulative Total Return 2 +2.77% +89.88% +68.60%
- ----------------------------------------------------------------------------------------------------------------
Average Annual Total Return 3 +2.77% +13.68% +8.41%
- ----------------------------------------------------------------------------------------------------------------
Value of $10,000 Investment 4 $10,277 $ 18,988 $ 16,860
- ----------------------------------------------------------------------------------------------------------------
Total Annual Operating Expenses 5 1.34%
- ----------------------------------------------------------------------------------------------------------------
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 12/31/07
- -----------------------------------------
1-Year +3.30%
- -----------------------------------------
5-Year +14.25%
- -----------------------------------------
10-Year +9.26%
- -----------------------------------------
CLASS Z (1/1/98-12/31/07) 1
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE GRAPH IN THE PRINTED MATERIAL.]
DATE Mutual Shares Fund S&P 500 6
- ------------------------------------------------------------------------------
1/1/1998 $10,000 $10,000
1/31/1998 $ 9,930 $10,111
2/28/1998 $10,503 $10,840
3/31/1998 $10,855 $11,395
4/30/1998 $10,817 $11,510
5/31/1998 $10,719 $11,312
6/30/1998 $10,672 $11,771
7/31/1998 $10,385 $11,646
8/31/1998 $ 8,919 $ 9,962
9/30/1998 $ 8,862 $10,600
10/31/1998 $ 9,444 $11,463
11/30/1998 $ 9,950 $12,157
12/31/1998 $10,045 $12,858
1/31/1999 $10,204 $13,396
2/28/1999 $10,070 $12,979
3/31/1999 $10,538 $13,498
4/30/1999 $11,355 $14,021
5/31/1999 $11,412 $13,690
6/30/1999 $11,736 $14,450
7/31/1999 $11,412 $13,999
8/31/1999 $10,972 $13,929
9/30/1999 $10,689 $13,548
10/31/1999 $11,108 $14,405
11/30/1999 $11,317 $14,698
12/31/1999 $11,552 $15,563
1/31/2000 $11,173 $14,781
2/29/2000 $10,715 $14,502
3/31/2000 $11,823 $15,920
4/30/2000 $11,699 $15,441
5/31/2000 $11,846 $15,124
6/30/2000 $11,638 $15,497
7/31/2000 $11,962 $15,255
8/31/2000 $12,568 $16,203
9/30/2000 $12,556 $15,347
10/31/2000 $12,855 $15,282
11/30/2000 $12,452 $14,078
12/31/2000 $13,150 $14,146
1/31/2001 $13,927 $14,648
2/28/2001 $13,934 $13,313
3/31/2001 $13,581 $12,469
4/30/2001 $14,133 $13,438
5/31/2001 $14,625 $13,528
6/30/2001 $14,714 $13,199
7/31/2001 $14,707 $13,069
8/31/2001 $14,372 $12,251
9/30/2001 $13,106 $11,262
10/31/2001 $13,051 $11,476
11/30/2001 $13,599 $12,357
12/31/2001 $13,981 $12,465
1/31/2002 $13,851 $12,283
2/28/2002 $13,916 $12,046
3/31/2002 $14,333 $12,499
4/30/2002 $14,420 $11,741
5/31/2002 $14,427 $11,655
6/30/2002 $13,491 $10,825
7/31/2002 $12,681 $ 9,981
8/31/2002 $12,812 $10,046
9/30/2002 $12,118 $ 8,955
10/31/2002 $12,308 $ 9,743
11/30/2002 $12,556 $10,316
12/31/2002 $12,459 $ 9,710
1/31/2003 $12,355 $ 9,456
2/28/2003 $12,155 $ 9,314
3/31/2003 $12,185 $ 9,404
4/30/2003 $12,903 $10,179
5/31/2003 $13,561 $10,715
6/30/2003 $13,766 $10,852
7/31/2003 $13,848 $11,043
8/31/2003 $14,176 $11,259
9/30/2003 $14,117 $11,139
10/31/2003 $14,639 $11,769
11/30/2003 $15,108 $11,873
12/31/2003 $15,776 $12,495
1/31/2004 $15,904 $12,725
2/29/2004 $16,317 $12,902
3/31/2004 $16,295 $12,707
4/30/2004 $16,024 $12,508
5/31/2004 $16,047 $12,679
6/30/2004 $16,314 $12,926
7/31/2004 $16,065 $12,498
8/31/2004 $16,208 $12,549
9/30/2004 $16,420 $12,684
10/31/2004 $16,616 $12,878
11/30/2004 $17,424 $13,399
12/31/2004 $17,967 $13,855
1/31/2005 $17,616 $13,518
2/28/2005 $18,154 $13,802
3/31/2005 $18,021 $13,558
4/30/2005 $17,850 $13,300
5/31/2005 $18,232 $13,724
6/30/2005 $18,438 $13,743
7/31/2005 $18,915 $14,254
8/31/2005 $18,993 $14,124
9/30/2005 $19,282 $14,239
10/31/2005 $18,899 $14,001
11/30/2005 $19,376 $14,531
12/31/2005 $19,833 $14,536
1/31/2006 $20,330 $14,921
2/28/2006 $20,462 $14,961
3/31/2006 $21,100 $15,147
4/30/2006 $21,249 $15,351
5/31/2006 $20,901 $14,909
6/30/2006 $20,914 $14,929
7/31/2006 $20,981 $15,021
8/31/2006 $21,577 $15,379
9/30/2006 $21,736 $15,775
10/31/2006 $22,517 $16,289
11/30/2006 $22,887 $16,599
12/31/2006 $23,475 $16,832
1/31/2007 $23,997 $17,086
2/28/2007 $23,772 $16,752
3/31/2007 $24,222 $16,939
4/30/2007 $24,978 $17,690
5/31/2007 $25,860 $18,307
6/30/2007 $25,706 $18,003
7/31/2007 $24,569 $17,445
8/31/2007 $24,416 $17,706
9/30/2007 $24,831 $18,368
10/31/2007 $25,363 $18,661
11/30/2007 $24,632 $17,880
12/31/2007 $24,251 $17,756
AVERAGE ANNUAL TOTAL RETURN
- -----------------------------------------
CLASS A 1 12/31/07
- -----------------------------------------
1-Year -2.95%
- -----------------------------------------
5-Year +12.52%
- -----------------------------------------
10-Year +8.23%
- -----------------------------------------
CLASS A (1/1/98-12/31/07) 1
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE GRAPH IN THE PRINTED MATERIAL.]
DATE Mutual Shares Fund S&P 500 6
- ------------------------------------------------------------------------------
1/1/1998 $ 9,424 $10,000
1/31/1998 $ 9,348 $10,111
2/28/1998 $ 9,889 $10,840
3/31/1998 $10,217 $11,395
4/30/1998 $10,177 $11,510
5/31/1998 $10,080 $11,312
6/30/1998 $10,031 $11,771
7/31/1998 $ 9,758 $11,646
8/31/1998 $ 8,381 $ 9,962
9/30/1998 $ 8,322 $10,600
10/31/1998 $ 8,867 $11,463
11/30/1998 $ 9,340 $12,157
12/31/1998 $ 9,425 $12,858
1/31/1999 $ 9,575 $13,396
2/28/1999 $ 9,444 $12,979
3/31/1999 $ 9,884 $13,498
4/30/1999 $10,643 $14,021
5/31/1999 $10,692 $13,690
6/30/1999 $10,997 $14,450
7/31/1999 $10,687 $13,999
8/31/1999 $10,269 $13,929
9/30/1999 $10,003 $13,548
10/31/1999 $10,392 $14,405
11/30/1999 $10,584 $14,698
12/31/1999 $10,803 $15,563
1/31/2000 $10,443 $14,781
2/29/2000 $10,014 $14,502
3/31/2000 $11,047 $15,920
4/30/2000 $10,925 $15,441
5/31/2000 $11,063 $15,124
6/30/2000 $10,864 $15,497
7/31/2000 $11,162 $15,255
8/31/2000 $11,723 $16,203
9/30/2000 $11,706 $15,347
10/31/2000 $11,987 $15,282
11/30/2000 $11,603 $14,078
12/31/2000 $12,253 $14,146
1/31/2001 $12,973 $14,648
2/28/2001 $12,973 $13,313
3/31/2001 $12,638 $12,469
4/30/2001 $13,154 $13,438
5/31/2001 $13,607 $13,528
6/30/2001 $13,687 $13,199
7/31/2001 $13,681 $13,069
8/31/2001 $13,361 $12,251
9/30/2001 $12,178 $11,262
10/31/2001 $12,127 $11,476
11/30/2001 $12,625 $12,357
12/31/2001 $12,981 $12,465
1/31/2002 $12,860 $12,283
2/28/2002 $12,914 $12,046
3/31/2002 $13,296 $12,499
4/30/2002 $13,369 $11,741
5/31/2002 $13,376 $11,655
6/30/2002 $12,501 $10,825
7/31/2002 $11,752 $ 9,981
8/31/2002 $11,868 $10,046
9/30/2002 $11,228 $ 8,955
10/31/2002 $11,392 $ 9,743
11/30/2002 $11,623 $10,316
12/31/2002 $11,527 $ 9,710
1/31/2003 $11,431 $ 9,456
2/28/2003 $11,239 $ 9,314
3/31/2003 $11,266 $ 9,404
4/30/2003 $11,926 $10,179
5/31/2003 $12,530 $10,715
6/30/2003 $12,711 $10,852
7/31/2003 $12,787 $11,043
8/31/2003 $13,084 $11,259
9/30/2003 $13,022 $11,139
10/31/2003 $13,506 $11,769
11/30/2003 $13,928 $11,873
12/31/2003 $14,545 $12,495
1/31/2004 $14,657 $12,725
2/29/2004 $15,040 $12,902
3/31/2004 $15,012 $12,707
4/30/2004 $14,761 $12,508
5/31/2004 $14,775 $12,679
6/30/2004 $15,018 $12,926
7/31/2004 $14,781 $12,498
8/31/2004 $14,906 $12,549
9/30/2004 $15,102 $12,684
10/31/2004 $15,277 $12,878
11/30/2004 $16,011 $13,399
12/31/2004 $16,508 $13,855
1/31/2005 $16,177 $13,518
2/28/2005 $16,667 $13,802
3/31/2005 $16,537 $13,558
4/30/2005 $16,379 $13,300
5/31/2005 $16,731 $13,724
6/30/2005 $16,910 $13,743
7/31/2005 $17,343 $14,254
8/31/2005 $17,408 $14,124
9/30/2005 $17,675 $14,239
10/31/2005 $17,314 $14,001
11/30/2005 $17,747 $14,531
12/31/2005 $18,156 $14,536
1/31/2006 $18,606 $14,921
2/28/2006 $18,728 $14,961
3/31/2006 $19,300 $15,147
4/30/2006 $19,430 $15,351
5/31/2006 $19,109 $14,909
6/30/2006 $19,116 $14,929
7/31/2006 $19,170 $15,021
8/31/2006 $19,719 $15,379
9/30/2006 $19,858 $15,775
10/31/2006 $20,561 $16,289
11/30/2006 $20,894 $16,599
12/31/2006 $21,420 $16,832
1/31/2007 $21,891 $17,086
2/28/2007 $21,685 $16,752
3/31/2007 $22,081 $16,939
4/30/2007 $22,759 $17,690
5/31/2007 $23,570 $18,307
6/30/2007 $23,415 $18,003
7/31/2007 $22,379 $17,445
8/31/2007 $22,229 $17,706
9/30/2007 $22,602 $18,368
10/31/2007 $23,083 $18,661
11/30/2007 $22,412 $17,880
12/31/2007 $22,057 $17,756
14 | Annual Report
Performance Summary (CONTINUED)
CLASS B (1/1/99-12/31/07) 1
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE GRAPH IN THE PRINTED MATERIAL.]
DATE Mutual Shares Fund S&P 500 6
- ------------------------------------------------------------------------------
1/1/1999 $10,000 $10,000
1/31/1999 $10,127 $10,418
2/28/1999 $ 9,978 $10,094
3/31/1999 $10,439 $10,498
4/30/1999 $11,232 $10,905
5/31/1999 $11,283 $10,647
6/30/1999 $11,596 $11,238
7/31/1999 $11,263 $10,887
8/31/1999 $10,815 $10,833
9/30/1999 $10,528 $10,536
10/31/1999 $10,935 $11,203
11/30/1999 $11,127 $11,431
12/31/1999 $11,352 $12,104
1/31/2000 $10,971 $11,496
2/29/2000 $10,511 $11,278
3/31/2000 $11,587 $12,382
4/30/2000 $11,458 $12,009
5/31/2000 $11,593 $11,763
6/30/2000 $11,380 $12,053
7/31/2000 $11,689 $11,864
8/31/2000 $12,270 $12,601
9/30/2000 $12,246 $11,936
10/31/2000 $12,524 $11,886
11/30/2000 $12,125 $10,949
12/31/2000 $12,792 $11,002
1/31/2001 $13,538 $11,392
2/28/2001 $13,531 $10,354
3/31/2001 $13,178 $ 9,698
4/30/2001 $13,708 $10,451
5/31/2001 $14,166 $10,521
6/30/2001 $14,241 $10,265
7/31/2001 $14,227 $10,164
8/31/2001 $13,884 $ 9,528
9/30/2001 $12,657 $ 8,759
10/31/2001 $12,590 $ 8,926
11/30/2001 $13,109 $ 9,610
12/31/2001 $13,465 $ 9,694
1/31/2002 $13,331 $ 9,553
2/28/2002 $13,380 $ 9,369
3/31/2002 $13,768 $ 9,721
4/30/2002 $13,838 $ 9,132
5/31/2002 $13,838 $ 9,064
6/30/2002 $12,929 $ 8,419
7/31/2002 $12,143 $ 7,763
8/31/2002 $12,257 $ 7,813
9/30/2002 $11,585 $ 6,964
10/31/2002 $11,749 $ 7,577
11/30/2002 $11,985 $ 8,023
12/31/2002 $11,876 $ 7,552
1/31/2003 $11,768 $ 7,354
2/28/2003 $11,574 $ 7,244
3/31/2003 $11,588 $ 7,314
4/30/2003 $12,264 $ 7,917
5/31/2003 $12,875 $ 8,334
6/30/2003 $13,059 $ 8,440
7/31/2003 $13,131 $ 8,589
8/31/2003 $13,428 $ 8,756
9/30/2003 $13,355 $ 8,663
10/31/2003 $13,848 $ 9,153
11/30/2003 $14,275 $ 9,234
12/31/2003 $14,894 $ 9,718
1/31/2004 $15,003 $ 9,897
2/29/2004 $15,387 $10,034
3/31/2004 $15,344 $ 9,883
4/30/2004 $15,075 $ 9,728
5/31/2004 $15,082 $ 9,861
6/30/2004 $15,321 $10,053
7/31/2004 $15,073 $ 9,720
8/31/2004 $15,197 $ 9,759
9/30/2004 $15,387 $ 9,865
10/31/2004 $15,554 $10,016
11/30/2004 $16,297 $10,421
12/31/2004 $16,785 $10,776
1/31/2005 $16,449 $10,513
2/28/2005 $16,934 $10,734
3/31/2005 $16,792 $10,544
4/30/2005 $16,628 $10,344
5/31/2005 $16,971 $10,673
6/30/2005 $17,147 $10,689
7/31/2005 $17,573 $11,086
8/31/2005 $17,633 $10,985
9/30/2005 $17,887 $11,074
10/31/2005 $17,513 $10,889
11/30/2005 $17,939 $11,301
12/31/2005 $18,348 $11,305
1/31/2006 $18,788 $11,604
2/28/2006 $18,906 $11,636
3/31/2006 $19,472 $11,781
4/30/2006 $19,590 $11,939
5/31/2006 $19,260 $11,595
6/30/2006 $19,255 $11,611
7/31/2006 $19,303 $11,683
8/31/2006 $19,837 $11,961
9/30/2006 $19,964 $12,269
10/31/2006 $20,665 $12,669
11/30/2006 $20,984 $12,909
12/31/2006 $21,506 $13,091
1/31/2007 $21,979 $13,289
2/28/2007 $21,773 $13,029
3/31/2007 $22,171 $13,174
4/30/2007 $22,852 $13,758
5/31/2007 $23,665 $14,238
6/30/2007 $23,509 $14,001
7/31/2007 $22,470 $13,567
8/31/2007 $22,319 $13,771
9/30/2007 $22,694 $14,286
10/31/2007 $23,178 $14,513
11/30/2007 $22,503 $13,906
12/31/2007 $22,147 $13,810
AVERAGE ANNUAL TOTAL RETURN
- -----------------------------------------
CLASS B 1 12/31/07
- -----------------------------------------
1-Year -1.63%
- -----------------------------------------
5-Year +12.87%
- -----------------------------------------
Since Inception (1/1/99) +9.24%
- -----------------------------------------
CLASS C (1/1/98-12/31/07) 1
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE GRAPH IN THE PRINTED MATERIAL.]
DATE Mutual Shares Fund S&P 500 6
- ------------------------------------------------------------------------------
1/1/1998 $10,000 $10,000
1/31/1998 $ 9,920 $10,111
2/28/1998 $10,487 $10,840
3/31/1998 $10,827 $11,395
4/30/1998 $10,779 $11,510
5/31/1998 $10,671 $11,312
6/30/1998 $10,614 $11,771
7/31/1998 $10,322 $11,646
8/31/1998 $ 8,855 $ 9,962
9/30/1998 $ 8,793 $10,600
10/31/1998 $ 9,363 $11,463
11/30/1998 $ 9,857 $12,157
12/31/1998 $ 9,945 $12,858
1/31/1999 $10,094 $13,396
2/28/1999 $ 9,951 $12,979
3/31/1999 $10,407 $13,498
4/30/1999 $11,201 $14,021
5/31/1999 $11,252 $13,690
6/30/1999 $11,564 $14,450
7/31/1999 $11,231 $13,999
8/31/1999 $10,788 $13,929
9/30/1999 $10,502 $13,548
10/31/1999 $10,903 $14,405
11/30/1999 $11,101 $14,698
12/31/1999 $11,325 $15,563
1/31/2000 $10,940 $14,781
2/29/2000 $10,482 $14,502
3/31/2000 $11,560 $15,920
4/30/2000 $11,431 $15,441
5/31/2000 $11,565 $15,124
6/30/2000 $11,353 $15,497
7/31/2000 $11,660 $15,255
8/31/2000 $12,239 $16,203
9/30/2000 $12,215 $15,347
10/31/2000 $12,492 $15,282
11/30/2000 $12,094 $14,078
12/31/2000 $12,761 $14,146
1/31/2001 $13,502 $14,648
2/28/2001 $13,496 $13,313
3/31/2001 $13,145 $12,469
4/30/2001 $13,671 $13,438
5/31/2001 $14,133 $13,528
6/30/2001 $14,210 $13,199
7/31/2001 $14,190 $13,069
8/31/2001 $13,855 $12,251
9/30/2001 $12,624 $11,262
10/31/2001 $12,564 $11,476
11/30/2001 $13,072 $12,357
12/31/2001 $13,432 $12,465
1/31/2002 $13,300 $12,283
2/28/2002 $13,349 $12,046
3/31/2002 $13,739 $12,499
4/30/2002 $13,809 $11,741
5/31/2002 $13,809 $11,655
6/30/2002 $12,898 $10,825
7/31/2002 $12,120 $ 9,981
8/31/2002 $12,226 $10,046
9/30/2002 $11,560 $ 8,955
10/31/2002 $11,723 $ 9,743
11/30/2002 $11,957 $10,316
12/31/2002 $11,850 $ 9,710
1/31/2003 $11,743 $ 9,456
2/28/2003 $11,544 $ 9,314
3/31/2003 $11,565 $ 9,404
4/30/2003 $12,233 $10,179
5/31/2003 $12,851 $10,715
6/30/2003 $13,031 $10,852
7/31/2003 $13,096 $11,043
8/31/2003 $13,396 $11,259
9/30/2003 $13,325 $11,139
10/31/2003 $13,811 $11,769
11/30/2003 $14,240 $11,873
12/31/2003 $14,856 $12,495
1/31/2004 $14,963 $12,725
2/29/2004 $15,350 $12,902
3/31/2004 $15,314 $12,707
4/30/2004 $15,042 $12,508
5/31/2004 $15,049 $12,679
6/30/2004 $15,291 $12,926
7/31/2004 $15,040 $12,498
8/31/2004 $15,162 $12,549
9/30/2004 $15,356 $12,684
10/31/2004 $15,521 $12,878
11/30/2004 $16,262 $13,399
12/31/2004 $16,753 $13,855
1/31/2005 $16,415 $13,518
2/28/2005 $16,900 $13,802
3/31/2005 $16,761 $13,558
4/30/2005 $16,591 $13,300
5/31/2005 $16,937 $13,724
6/30/2005 $17,111 $13,743
7/31/2005 $17,531 $14,254
8/31/2005 $17,598 $14,124
9/30/2005 $17,849 $14,239
10/31/2005 $17,472 $14,001
11/30/2005 $17,900 $14,531
12/31/2005 $18,307 $14,536
1/31/2006 $18,752 $14,921
2/28/2006 $18,861 $14,961
3/31/2006 $19,430 $15,147
4/30/2006 $19,555 $15,351
5/31/2006 $19,220 $14,909
6/30/2006 $19,211 $14,929
7/31/2006 $19,258 $15,021
8/31/2006 $19,793 $15,379
9/30/2006 $19,919 $15,775
10/31/2006 $20,618 $16,289
11/30/2006 $20,941 $16,599
12/31/2006 $21,453 $16,832
1/31/2007 $21,922 $17,086
2/28/2007 $21,696 $16,752
3/31/2007 $22,089 $16,939
4/30/2007 $22,750 $17,690
5/31/2007 $23,545 $18,307
6/30/2007 $23,377 $18,003
7/31/2007 $22,328 $17,445
8/31/2007 $22,169 $17,706
9/30/2007 $22,530 $18,368
10/31/2007 $22,991 $18,661
11/30/2007 $22,311 $17,880
12/31/2007 $21,946 $17,756
AVERAGE ANNUAL TOTAL RETURN
- -----------------------------------------
CLASS C 1 12/31/07
- -----------------------------------------
1-Year +1.33%
- -----------------------------------------
5-Year +13.12%
- -----------------------------------------
10-Year +8.18%
- -----------------------------------------
Annual Report | 15
Performance Summary (CONTINUED)
AVERAGE ANNUAL TOTAL RETURN
- -----------------------------------------
CLASS R 12/31/07
- -----------------------------------------
1-Year +2.77%
- -----------------------------------------
5-Year +13.68%
- -----------------------------------------
Since Inception (1/1/02) +8.41%
- -----------------------------------------
CLASS R (1/1/02-12/31/07)
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE GRAPH IN THE PRINTED MATERIAL.]
DATE Mutual Shares Fund S&P 500 6
- ------------------------------------------------------------------------------
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 $10,027
4/30/2002 $10,315 $ 9,420
5/31/2002 $10,320 $ 9,350
6/30/2002 $ 9,643 $ 8,684
7/31/2002 $ 9,065 $ 8,007
8/31/2002 $ 9,150 $ 8,060
9/30/2002 $ 8,657 $ 7,184
10/31/2002 $ 8,782 $ 7,816
11/30/2002 $ 8,956 $ 8,276
12/31/2002 $ 8,880 $ 7,790
1/31/2003 $ 8,805 $ 7,586
2/28/2003 $ 8,662 $ 7,472
3/31/2003 $ 8,678 $ 7,545
4/30/2003 $ 9,182 $ 8,166
5/31/2003 $ 9,648 $ 8,596
6/30/2003 $ 9,792 $ 8,706
7/31/2003 $ 9,846 $ 8,859
8/31/2003 $10,076 $ 9,032
9/30/2003 $10,022 $ 8,936
10/31/2003 $10,391 $ 9,442
11/30/2003 $10,717 $ 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 $11,545 $10,194
4/30/2004 $11,351 $10,034
5/31/2004 $11,362 $10,172
6/30/2004 $11,544 $10,370
7/31/2004 $11,360 $10,026
8/31/2004 $11,457 $10,067
9/30/2004 $11,608 $10,176
10/31/2004 $11,738 $10,332
11/30/2004 $12,304 $10,750
12/31/2004 $12,680 $11,115
1/31/2005 $12,431 $10,844
2/28/2005 $12,803 $11,073
3/31/2005 $12,703 $10,877
4/30/2005 $12,581 $10,670
5/31/2005 $12,847 $11,010
6/30/2005 $12,984 $11,025
7/31/2005 $13,312 $11,435
8/31/2005 $13,362 $11,331
9/30/2005 $13,562 $11,423
10/31/2005 $13,284 $11,232
11/30/2005 $13,618 $11,657
12/31/2005 $13,934 $11,661
1/31/2006 $14,275 $11,970
2/28/2006 $14,362 $12,003
3/31/2006 $14,803 $12,152
4/30/2006 $14,898 $12,315
5/31/2006 $14,651 $11,961
6/30/2006 $14,649 $11,977
7/31/2006 $14,690 $12,051
8/31/2006 $15,106 $12,338
9/30/2006 $15,214 $12,655
10/31/2006 $15,750 $13,068
11/30/2006 $16,000 $13,316
12/31/2006 $16,405 $13,503
1/31/2007 $16,767 $13,707
2/28/2007 $16,603 $13,439
3/31/2007 $16,908 $13,590
4/30/2007 $17,423 $14,192
5/31/2007 $18,041 $14,687
6/30/2007 $17,920 $14,443
7/31/2007 $17,122 $13,995
8/31/2007 $17,007 $14,205
9/30/2007 $17,288 $14,736
10/31/2007 $17,652 $14,970
11/30/2007 $17,135 $14,344
12/31/2007 $16,860 $14,245
ENDNOTES
VALUE SECURITIES MAY NOT INCREASE IN PRICE AS ANTICIPATED OR MAY DECLINE FURTHER
IN VALUE. THE FUND'S INVESTMENTS IN FOREIGN SECURITIES INVOLVE SPECIAL RISKS.
FOREIGN SECURITIES RISKS INCLUDE CURRENCY FLUCTUATIONS, AND ECONOMIC AND
POLITICAL UNCERTAINTIES. THE FUND MAY ALSO INVEST IN COMPANIES ENGAGED IN
MERGERS, REORGANIZATIONS OR LIQUIDATIONS, WHICH INVOLVE SPECIAL RISKS AS PENDING
DEALS MAY NOT BE COMPLETED ON TIME OR ON FAVORABLE TERMS, 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. Figures are as stated in the Fund's prospectus current as of the date of this
report.
6. 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 7/1/07 VALUE 12/31/07 PERIOD* 7/1/07-12/31/07
- ------------------------------------------------------------------------------------------------------------------------------------
Actual $1,000 $ 943.40 $3.62
- ------------------------------------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,021.48 $3.77
- ------------------------------------------------------------------------------------------------------------------------------------
CLASS A
- ------------------------------------------------------------------------------------------------------------------------------------
Actual $1,000 $ 942.00 $5.14
- ------------------------------------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,019.91 $5.35
- ------------------------------------------------------------------------------------------------------------------------------------
CLASS B
- ------------------------------------------------------------------------------------------------------------------------------------
Actual $1,000 $ 938.60 $8.55
- ------------------------------------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,016.38 $8.89
- ------------------------------------------------------------------------------------------------------------------------------------
CLASS C
- ------------------------------------------------------------------------------------------------------------------------------------
Actual $1,000 $ 938.80 $8.50
- ------------------------------------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,016.43 $8.84
- ------------------------------------------------------------------------------------------------------------------------------------
CLASS R
- ------------------------------------------------------------------------------------------------------------------------------------
Actual $1,000 $ 940.80 $6.07
- ------------------------------------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,018.95 $6.31
- ------------------------------------------------------------------------------------------------------------------------------------
* Expenses are calculated using the most recent expense ratio, annualized for
each class (Z: 0.74%; A: 1.05%; B: 1.75%; C: 1.74%; and R: 1.24%), 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 2007 2006 2005 2004 2003
----------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ...................... $ 26.08 $ 23.95 $ 23.05 $ 20.99 $ 16.84
----------------------------------------------------------------------
Income from investment operations a:
Net investment income b .............................. 0.70 0.42 0.47 0.35 0.24
Net realized and unrealized gains (losses) ........... 0.17 3.90 1.92 2.52 4.23
----------------------------------------------------------------------
Total from investment operations ........................ 0.87 4.32 2.39 2.87 4.47
----------------------------------------------------------------------
Less distributions from:
Net investment income ................................ (0.75) (0.52) (0.29) (0.39) (0.32)
Net realized gains ................................... (0.87) (1.67) (1.20) (0.42) --
----------------------------------------------------------------------
Total distributions ..................................... (1.62) (2.19) (1.49) (0.81) (0.32)
----------------------------------------------------------------------
Redemption fees ......................................... -- d -- d -- d -- d --
----------------------------------------------------------------------
Net asset value, end of year ............................ $ 25.33 $ 26.08 $ 23.95 $ 23.05 $ 20.99
======================================================================
Total return ............................................ 3.30% 18.37% 10.39% 13.89% 26.62%
RATIOS TO AVERAGE NET ASSETS
Expenses c .............................................. 0.75% e 0.84% e 0.81% e 0.81% e 0.84%
Expenses - excluding dividend expense
on securities sold short ................................ 0.74% e 0.76% e 0.76% e 0.80% e 0.81%
Net investment income ................................... 2.57% 1.63% 1.99% 1.62% 1.28%
SUPPLEMENTAL DATA
Net assets, end of year (000's) ......................... $13,262,561 $11,577,506 $ 8,951,080 $7,240,641 $5,782,145
Portfolio turnover rate ................................. 40.57% 33.40% 21.57% 33.22% 54.65%
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 repurchases 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.
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 2007 2006 2005 2004 2003
----------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ...................... $ 25.90 $ 23.82 $ 22.94 $ 20.90 $ 16.78
----------------------------------------------------------------------
Income from investment operations a:
Net investment income b .............................. 0.61 0.32 0.39 0.27 0.17
Net realized and unrealized gains (losses) ........... 0.17 3.88 1.91 2.51 4.21
----------------------------------------------------------------------
Total from investment operations ........................ 0.78 4.20 2.30 2.78 4.38
----------------------------------------------------------------------
Less distributions from:
Net investment income ................................ (0.67) (0.45) (0.22) (0.32) (0.26)
Net realized gains ................................... (0.87) (1.67) (1.20) (0.42) --
----------------------------------------------------------------------
Total distributions ..................................... (1.54) (2.12) (1.42) (0.74) (0.26)
----------------------------------------------------------------------
Redemption fees ......................................... -- e -- e -- e -- e --
----------------------------------------------------------------------
Net asset value, end of year ............................ $ 25.14 $ 25.90 $ 23.82 $ 22.94 $ 20.90
======================================================================
Total return c .......................................... 2.97% 17.98% 9.98% 13.50% 26.18%
RATIOS TO AVERAGE NET ASSETS
Expenses d .............................................. 1.07% f 1.18% f 1.16% f 1.16% f 1.19%
Expenses - excluding dividend expense
on securities sold short ............................. 1.06% f 1.10% f 1.11% f 1.15% f 1.16%
Net investment income ................................... 2.25% 1.29% 1.64% 1.27% 0.93%
SUPPLEMENTAL DATA
Net assets, end of year (000's) ......................... $ 8,469,264 $ 6,761,779 $ 4,211,238 $2,940,029 $2,257,336
Portfolio turnover rate ................................. 40.57% 33.40% 21.57% 33.22% 54.65%
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 repurchases 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.
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 2007 2006 2005 2004 2003
----------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ...................... $ 25.35 $ 23.35 $ 22.50 $ 20.54 $ 16.53
----------------------------------------------------------------------
Income from investment operations a:
Net investment income b .............................. 0.41 0.16 0.23 0.13 0.04
Net realized and unrealized gains (losses) ........... 0.18 3.78 1.88 2.44 4.14
----------------------------------------------------------------------
Total from investment operations ........................ 0.59 3.94 2.11 2.57 4.18
----------------------------------------------------------------------
Less distributions from:
Net investment income ................................ (0.47) (0.27) (0.06) (0.19) (0.17)
Net realized gains ................................... (0.87) (1.67) (1.20) (0.42) --
----------------------------------------------------------------------
Total distributions ..................................... (1.34) (1.94) (1.26) (0.61) (0.17)
----------------------------------------------------------------------
Redemption fees ......................................... -- e -- e -- e -- e --
----------------------------------------------------------------------
Net asset value, end of year ............................ $ 24.60 $ 25.35 $ 23.35 $ 22.50 $ 20.54
======================================================================
Total return c .......................................... 2.25% 17.21% 9.31% 12.70% 25.41%
RATIOS TO AVERAGE NET ASSETS
Expenses d .............................................. 1.75% f 1.84% f 1.81% f 1.81% f 1.84%
Expenses - excluding dividend expense on securities
sold short ........................................... 1.74% f 1.76% f 1.76% f 1.80% f 1.81%
Net investment income 1.57% 0.63% 0.99% 0.62% 0.28%
SUPPLEMENTAL DATA
Net assets, end of year (000's) ......................... $ 586,289 $ 659,186 $ 612,007 $ 588,401 $ 444,671
Portfolio turnover rate ................................. 40.57% 33.40% 21.57% 33.22% 54.65%
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 repurchases 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.
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 2007 2006 2005 2004 2003
----------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ...................... $ 25.63 $ 23.48 $ 22.76 $ 20.75 $ 16.68
----------------------------------------------------------------------
Income from investment operations a:
Net investment income b .............................. 0.42 0.16 0.23 0.13 0.05
Net realized and unrealized gains (losses) ........... 0.17 3.82 1.89 2.49 4.17
----------------------------------------------------------------------
Total from investment operations ........................ 0.59 3.98 2.12 2.62 4.22
----------------------------------------------------------------------
Less distributions from:
Net investment income ................................ (0.49) (0.16) (0.20) (0.19) (0.15)
Net realized gains ................................... (0.87) (1.67) (1.20) (0.42) --
----------------------------------------------------------------------
Total distributions ..................................... (1.36) (1.83) (1.40) (0.61) (0.15)
----------------------------------------------------------------------
Redemption fees ......................................... -- e -- e -- e -- e --
----------------------------------------------------------------------
Net asset value, end of year ............................ $ 24.86 $ 25.63 $ 23.48 $ 22.76 $20.75
======================================================================
Total return c .......................................... 2.30% 17.18% 9.27% 12.77% 25.37%
RATIOS TO AVERAGE NET ASSETS
Expenses d .............................................. 1.75% f 1.84% f 1.81% f 1.81% f 1.84%
Expenses - excluding dividend expense
on securities sold short ................................ 1.74% f 1.76% f 1.76% f 1.80% f 1.81%
Net investment income ................................... 1.57% 0.63% 0.99% 0.62% 0.28%
SUPPLEMENTAL DATA
Net assets, end of year (000's) ......................... $ 2,617,083 $ 2,387,517 $ 1,834,009 $1,551,111 $1,272,590
Portfolio turnover rate ................................. 40.57% 33.40% 21 .57% 33.22% 54.65%
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 repurchases 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.
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 2007 2006 2005 2004 2003
----------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ...................... $ 25.77 $ 23.72 $ 22.85 $ 20.83 $ 16.75
----------------------------------------------------------------------
Income from investment operations a:
Net investment income b .............................. 0.55 0.28 0.35 0.24 0.13
Net realized and unrealized gains (losses) ........... 0.18 3.86 1.91 2.50 4.21
----------------------------------------------------------------------
Total from investment operations ........................ 0.73 4.14 2.26 2.74 4.34
----------------------------------------------------------------------
Less distributions from:
Net investment income ................................ (0.63) (0.42) (0.19) (0.30) (0.26)
Net realized gains ................................... (0.87) (1.67) (1.20) (0.42) --
----------------------------------------------------------------------
Total distributions ..................................... (1.50) (2.09) (1.39) (0.72) (0.26)
----------------------------------------------------------------------
Redemption fees ......................................... -- e -- e -- e -- e --
----------------------------------------------------------------------
Net asset value, end of year ............................ $ 25.00 $ 25.77 $ 23.72 $ 22.85 $ 20.83
======================================================================
Total return c .......................................... 2.77% 17.73% 9.88% 13.32% 26.02%
RATIOS TO AVERAGE NET ASSETS
Expenses d .............................................. 1.25% f 1.34% f 1.31% f 1.31% f 1.34%
Expenses - excluding dividend expense on securities
sold short ........................................... 1.24% f 1.26% f 1.26% f 1.30% f 1.31%
Net investment income ................................... 2.07% 1.13% 1.49% 1.12% 0.78%
SUPPLEMENTAL DATA
Net assets, end of year (000's) ......................... $ 297,777 $ 188,646 $ 109,305 $ 74,763 $ 46,933
Portfolio turnover rate ................................. 40.57% 33.40% 21.57% 33.22% 54.65%
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 repurchases 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.
f Benefit of expense reduction rounds to less than 0.01%.
Annual Report |
The accompanying notes are an integral part of these financial statements. | 23
Mutual Shares Fund
STATEMENT OF INVESTMENTS, DECEMBER 31, 2007
- ------------------------------------------------------------------------------------------------------------------------------------
SHARES/WARRANTS/
COUNTRY CONTRACTS VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS 92.6%
COMMON STOCKS AND OTHER EQUITY INTERESTS 88.8%
AEROSPACE & DEFENSE 0.1%
a GenCorp Inc. .................................................. United States 2,073,770 $ 24,180,158
------------------
AIR FREIGHT & LOGISTICS 1.1%
Deutsche Post AG .............................................. Germany 6,618,501 225,144,510
TNT NV ........................................................ Netherlands 1,436,113 59,206,108
------------------
284,350,618
------------------
AIRLINES 0.5%
a ACE Aviation Holdings Inc., A ................................. Canada 2,376,693 67,803,016
a,b ACE Aviation Holdings Inc., A, 144A ........................... Canada 121,088 3,454,435
a Northwest Airlines Corp. ...................................... United States 2,823,975 40,975,877
a,c Northwest Airlines Corp., Contingent Distribution ............. United States 111,348,000 3,757,995
------------------
115,991,323
------------------
AUTO COMPONENTS 0.8%
a,c Collins & Aikman Products Co., Contingent Distribution ........ United States 3,850,387 1,703,796
a Goodyear Tire & Rubber Co. .................................... United States 4,294,179 121,181,731
a Lear Corp. .................................................... United States 2,563,001 70,892,608
------------------
193,778,135
------------------
AUTOMOBILES 2.0%
Daimler AG .................................................... Germany 1,413,460 136,573,538
General Motors Corp. .......................................... United States 7,060,014 175,723,749
Harley-Davidson Inc. .......................................... United States 1,652,699 77,197,570
a,d,e,f,g International Automotive Components Group Brazil LLC .......... Brazil 6,069,096 42,156,730
a,d,e,f,g International Automotive Components Group Japan LLC ........... Japan 1,104,272 9,902,453
a,d,e,f,g International Automotive Components Group LLC ................. Luxembourg 25,796,752 27,367,774
a,d,e,f,g International Automotive Components Group NA LLC .............. United States 19,434,979 26,723,096
------------------
495,644,910
------------------
BEVERAGES 2.0%
Brown-Forman Corp., A ......................................... United States 125,460 9,389,426
Brown-Forman Corp., B ......................................... United States 606,036 44,913,328
Coca-Cola Enterprises Inc. .................................... United States 8,021,543 208,800,764
Pernod Ricard SA .............................................. France 1,031,416 237,971,629
------------------
501,075,147
------------------
BUILDING PRODUCTS 0.3%
a Armstrong World Industries Inc. ............................... United States 408,961 16,403,426
a,c Armstrong World Industries Inc., Contingent Distribution ...... United States 45,410,075 170,288
a Owens Corning Inc. ............................................ United States 3,320,705 67,144,655
------------------
83,718,369
------------------
CAPITAL MARKETS 0.2%
Legg Mason Inc. ............................................... United States 762,241 55,757,929
------------------
24 | Annual Report
Mutual Shares Fund
STATEMENT OF INVESTMENTS, DECEMBER 31, 2007 (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------------
SHARES/WARRANTS/
COUNTRY CONTRACTS VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
COMMON STOCKS AND OTHER EQUITY INTERESTS (CONTINUED)
CHEMICALS 0.9%
a,c Dow Corning Corp., Contingent Distribution .................... United States 612,630,547 $ 9,185,607
Koninklijke DSM NV ............................................ Netherlands 1,088,980 51,378,930
Linde AG ...................................................... Germany 1,240,940 163,874,289
------------------
224,438,826
------------------
COMMERCIAL BANKS 6.0%
a Banco Popolare SpA ............................................ Italy 4,088,405 90,450,831
a,f Centennial Bank Holdings Inc. ................................. United States 5,731,834 33,130,000
Commerce Bancorp Inc. ......................................... United States 3,284,520 125,271,593
Danske Bank AS ................................................ Denmark 5,051,544 197,484,277
a,d,e,f Elephant Capital Holdings Ltd. ................................ Japan 26,671 17,564,991
Intesa Sanpaolo SpA ........................................... Italy 20,444,175 161,408,464
Mitsubishi UFJ Financial Group Inc. ........................... Japan 5,473,223 51,387,387
a,d,e NCB Warrant Holdings Ltd., A .................................. Japan 124,040 7,359,521
Societe Generale, A ........................................... France 943,712 136,246,996
Sumitomo Mitsui Financial Group Inc. .......................... Japan 6,130 46,010,043
Swedbank AB, A ................................................ Sweden 2,629,481 74,422,727
U.S. Bancorp .................................................. United States 14,071,550 446,630,997
UnionBanCal Corp. ............................................. United States 1,002,800 49,046,948
Wachovia Corp. ................................................ United States 2,015,943 76,666,312
------------------
1,513,081,087
------------------
COMMERCIAL SERVICES & SUPPLIES 0.0% h
a Comdisco Holding Co. Inc. ..................................... United States 2,088 19,022
a,c Comdisco Holding Co. Inc., Contingent Distribution ............ United States 95,431,240 --
------------------
19,022
------------------
COMMUNICATIONS EQUIPMENT 1.6%
Motorola Inc. ................................................. United States 19,122,930 306,731,797
Telefonaktiebolaget LM Ericsson, B ............................ Sweden 36,236,735 85,075,651
Telefonaktiebolaget LM Ericsson, B, ADR ....................... Sweden 163,600 3,820,060
------------------
395,627,508
------------------
COMPUTERS & PERIPHERALS 1.4%
a,d,e,f DecisionOne Corp. ............................................. United States 1,879,100 --
a,d,e,f DecisionOne Corp., wts., 6/08/17 .............................. United States 1,031,766 --
a Dell Inc. ..................................................... United States 11,369,730 278,672,082
a Lexmark International Inc., A ................................. United States 2,487,110 86,700,655
------------------
365,372,737
------------------
CONSUMER FINANCE 1.3%
a,d,e Cerberus CG Investor I LLC .................................... United States 49,252,400 41,469,365
a,d,e Cerberus CG Investor II LLC ................................... United States 49,252,400 41,469,365
a,d,e Cerberus CG Investor III LLC .................................. United States 24,626,200 20,734,682
a,d,e Cerberus FIM Investors Auto Finance LLC ....................... United States 15,536,148 8,335,624
a,d,e Cerberus FIM Investors Commercial Finance LLC ................. United States 1,294,114 694,332
a,d,e Cerberus FIM Investors Commercial Mortgage LLC ................ United States 2,425,617 1,301,419
a,d,e Cerberus FIM Investors Insurance LLC .......................... United States 11,863,844 6,365,319
Annual Report | 25
Mutual Shares Fund
STATEMENT OF INVESTMENTS, DECEMBER 31, 2007 (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------------
SHARES/WARRANTS/
COUNTRY CONTRACTS VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
COMMON STOCKS AND OTHER EQUITY INTERESTS (CONTINUED)
CONSUMER FINANCE (CONTINUED)
a,d,e Cerberus FIM Investors Rescap LLC ............................. United States 22,088,027 $ 11,850,909
SLM Corp. ..................................................... United States 9,622,710 193,801,379
------------------
326,022,394
------------------
CONTAINERS & PACKAGING 0.4%
Temple-Inland Inc. ............................................ United States 4,336,720 90,420,612
------------------
DIVERSIFIED CONSUMER SERVICES 0.3%
H&R Block Inc. ................................................ United States 4,194,388 77,889,785
------------------
DIVERSIFIED FINANCIAL SERVICES 2.0%
Citigroup Inc. ................................................ United States 4,925,840 145,016,730
Fortis ........................................................ Belgium 13,066,900 344,770,772
a Fortis VVPR Strip ............................................. Belgium 5,226,760 76,277
a Guaranty Financial Group Inc. ................................. United States 1,365,873 21,853,971
a,c Marconi Corp., Contingent Distribution ........................ United Kingdom 77,739,439 --
------------------
511,717,750
------------------
DIVERSIFIED TELECOMMUNICATION SERVICES 2.2%
a,d,e,f,g AboveNet Inc. ................................................. United States 810,649 40,532,450
a,d,f,g AboveNet Inc., stock grants, grant price $20.95,
expiration date 9/09/13 ....................................... United States 1,065 44,144
a,d,e,f,g AboveNet Inc., wts., 9/08/08 .................................. United States 29,283 1,382,158
a,d,e,f,g AboveNet Inc., wts., 9/08/10 .................................. United States 34,449 1,504,732
Embarq Corp. .................................................. United States 1,513,102 74,943,942
a,c,e Global Crossing Holdings Ltd., Contingent Distribution ........ United States 105,649,309 --
Koninklijke (Royal) KPN NV .................................... Netherlands 3,531,102 64,104,733
Telefonica SA ................................................. Spain 4,251,926 137,876,167
Verizon Communications Inc. ................................... United States 5,166,818 225,738,278
------------------
546,126,604
------------------
ELECTRIC UTILITIES 0.8%
E.ON AG ....................................................... Germany 684,019 145,351,265
Exelon Corp. .................................................. United States 628,000 51,269,920
------------------
196,621,185
------------------
ELECTRONIC EQUIPMENT & INSTRUMENTS 0.7%
Tyco Electronics Ltd. ......................................... United States 5,025,352 186,591,320
------------------
ENERGY EQUIPMENT & SERVICES 1.0%
a Seadrill Ltd. ................................................. Bermuda 5,877,230 143,294,319
a,i Transocean Inc. ............................................... United States 818,987 117,237,989
------------------
260,532,308
------------------
FOOD & STAPLES RETAILING 3.6%
Carrefour SA .................................................. France 2,710,739 210,810,808
CVS Caremark Corp. ............................................ United States 6,785,286 269,715,118
Kroger Co. .................................................... United States 6,275,091 167,607,681
Wal-Mart Stores Inc. .......................................... United States 5,423,910 257,798,442
------------------
905,932,049
------------------
26 | Annual Report
Mutual Shares Fund
STATEMENT OF INVESTMENTS, DECEMBER 31, 2007 (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------------
SHARES/WARRANTS/
COUNTRY CONTRACTS VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
COMMON STOCKS AND OTHER EQUITY INTERESTS (CONTINUED)
FOOD PRODUCTS 3.7%
Cadbury Schweppes PLC ......................................... United Kingdom 20,153,076 $ 248,668,002
General Mills Inc. ............................................ United States 1,037,600 59,143,200
Groupe Danone ................................................. France 1,342,702 120,311,587
Kraft Foods Inc., A ........................................... United States 6,304,684 205,721,839
Nestle SA ..................................................... Switzerland 653,170 299,725,027
------------------
933,569,655
------------------
HEALTH CARE EQUIPMENT & SUPPLIES 1.0%
Covidien Ltd. ................................................. United States 4,006,372 177,442,216
Hillenbrand Industries Inc. ................................... United States 1,462,406 81,499,886
------------------
258,942,102
------------------
HEALTH CARE PROVIDERS & SERVICES 2.3%
a,f Community Health Systems Inc. ................................. United States 4,806,000 177,149,160
a,d,e,f,g Kindred Healthcare Inc. ....................................... United States 2,860,528 67,883,190
a,d,e,f,g Kindred Healthcare Inc., stock grants:
grant price $18.15, expiration date 7/17/11 ................ United States 9,997 55,793
grant price $19.87, expiration date 1/01/12 ................ United States 2,999 11,579
grant price $6.94, expiration date 1/01/13 ................. United States 2,986 50,138
grant price $19.87, expiration date 1/01/14 ................ United States 2,230 8,610
grant price $21.33, expiration date 1/10/15 ................ United States 1,238 2,973
grant price $22.08, expiration date 1/10/16 ................ United States 619 1,022
a MDS Inc. ...................................................... Canada 2,178,151 42,061,603
a PharMerica Inc. ............................................... United States 1,047,022 14,532,665
Quest Diagnostics Inc. ........................................ United States 2,635,400 139,412,660
a,f Tenet Healthcare Corp. ........................................ United States 25,881,411 131,477,568
------------------
572,646,961
------------------
HOTELS, RESTAURANTS & LEISURE 0.2%
a Trump Entertainment Resorts Inc. .............................. United States 1,823,378 7,840,525
Wyndham Worldwide Corp. ....................................... United States 1,845,958 43,490,771
------------------
51,331,296
------------------
HOUSEHOLD DURABLES 0.8%
f,j Beazer Homes USA Inc. ......................................... United States 2,147,880 15,958,748
Koninklijke Philips Electronics NV ............................ Netherlands 4,391,737 189,196,077
------------------
205,154,825
------------------
INDEPENDENT POWER PRODUCERS & ENERGY TRADERS 1.4%
Constellation Energy Group .................................... United States 3,333,700 341,804,261
------------------
INDUSTRIAL CONGLOMERATES 4.1%
Keppel Corp. Ltd. ............................................. Singapore 16,278,934 146,814,764
g Orkla ASA ..................................................... Norway 24,350,543 471,597,138
Siemens AG .................................................... Germany 2,072,525 327,920,547
Tyco International Ltd. ....................................... United States 2,541,832 100,783,639
------------------
1,047,116,088
------------------
Annual Report | 27
Mutual Shares Fund
STATEMENT OF INVESTMENTS, DECEMBER 31, 2007 (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------------
SHARES/WARRANTS/
COUNTRY CONTRACTS VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
COMMON STOCKS AND OTHER EQUITY INTERESTS (CONTINUED)
INSURANCE 8.3%
a Alleghany Corp. ............................................... United States 348,651 $ 140,157,702
Allianz SE .................................................... Germany 635,950 137,429,139
American International Group Inc. ............................. United States 2,696,200 157,188,460
a Berkshire Hathaway Inc., A .................................... United States 1,590 225,144,000
a Berkshire Hathaway Inc., B .................................... United States 121,410 574,997,760
a Conseco Inc. .................................................. United States 4,553,790 57,195,602
Hartford Financial Services Group Inc. ........................ United States 649,800 56,656,062
Old Republic International Corp. .............................. United States 6,101,302 94,021,064
a,d,e Olympus Re Holdings Ltd. ...................................... United States 202,380 662,835
Prudential Financial Inc. ..................................... United States 948,700 88,267,048
The Travelers Cos. Inc. ....................................... United States 1,385,982 74,565,832
f White Mountains Insurance Group Ltd. .......................... United States 729,457 374,977,371
Zurich Financial Services AG .................................. Switzerland 352,340 103,382,501
------------------
2,084,645,376
------------------
IT SERVICES 0.6%
a Alliance Data Systems Corp. ................................... United States 1,947,340 146,031,027
------------------
LEISURE EQUIPMENT & PRODUCTS 0.8%
Mattel Inc. ................................................... United States 10,209,130 194,381,835
------------------
MACHINERY 0.2%
f Federal Signal Corp. .......................................... United States 3,360,800 37,708,176
a,d,e Motor Coach Industries International Inc., wts., 5/27/09 ...... United States 12 --
------------------
37,708,176
------------------
MARINE 0.6%
A.P. Moller - Maersk AS ....................................... Denmark 15,130 161,086,603
------------------
MEDIA 7.5%
a Adelphia Recovery Trust ....................................... United States 99,967,609 6,997,733
a,c Adelphia Recovery Trust, Arahova Contingent Value Vehicle,
Contingent Distribution ....................................... United States 12,005,115 6,182,634
a Cablevision Systems Corp., A .................................. United States 2,617,495 64,128,628
a,c Century Communications Corp., Contingent Distribution ......... United States 33,138,000 --
Clear Channel Communications Inc. ............................. United States 2,595,770 89,605,980
a Comcast Corp., A .............................................. United States 19,942,140 361,351,577
a Liberty Media Holding Corp.-Capital, A ........................ United States 1,271,417 148,107,366
News Corp., A ................................................. United States 21,263,802 435,695,303
a Sun-Times Media Group Inc., A ................................. United States 1,929,706 4,245,353
a Time Warner Cable Inc., A ..................................... United States 2,237,958 61,767,641
Time Warner Inc. .............................................. United States 15,148,228 250,097,244
a,e,f TVMAX Holdings Inc. ........................................... United States 257,217 --
a Viacom Inc., B ................................................ United States 4,820,631 211,722,114
Virgin Media Inc. ............................................. United Kingdom 9,133,425 156,546,904
WPP Group PLC ................................................. United Kingdom 7,014,952 90,181,187
------------------
1,886,629,664
------------------
METALS & MINING 2.2%
Alcoa Inc. .................................................... United States 3,577,590 130,760,915
i Anglo American PLC ............................................ United Kingdom 1,771,843 108,433,360
28 | Annual Report
Mutual Shares Fund
STATEMENT OF INVESTMENTS, DECEMBER 31, 2007 (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------------
SHARES/WARRANTS/
COUNTRY CONTRACTS VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
COMMON STOCKS AND OTHER EQUITY INTERESTS (CONTINUED)
METALS & MINING (CONTINUED)
ArcelorMittal ................................................. Netherlands 2,718,615 $ 210,352,114
a,d,e,f Esmark Inc. ................................................... United States 8,341,744 106,081,958
------------------
555,628,347
------------------
MULTI-UTILITIES 1.4%
Energy East Corp. ............................................. United States 3,668,160 99,810,634
NorthWestern Corp. ............................................ United States 723,649 21,347,645
a,c NorthWestern Corp., Contingent Distribution ................... United States 21,699,220 1,538,560
RWE AG ........................................................ Germany 1,302,182 183,287,720
Suez SA ....................................................... France 796,241 54,114,073
------------------
360,098,632
------------------
MULTILINE RETAIL 0.4%
a,j Sears Holdings Corp. .......................................... United States 1,068,680 109,058,794
------------------
OIL, GAS & CONSUMABLE FUELS 2.0%
a,e Apco Oil Corp. ................................................ United States 9,200 --
BP PLC ........................................................ United Kingdom 9,485,110 115,905,608
BP PLC, ADR ................................................... United Kingdom 46,400 3,395,088
Royal Dutch Shell PLC, A ...................................... United Kingdom 5,944,947 249,428,046
Total SA, B ................................................... France 1,523,752 126,372,156
------------------
495,100,898
------------------
PAPER & FOREST PRODUCTS 3.9%
a Domtar Corp. .................................................. United States 12,896,820 99,176,546
International Paper Co. ....................................... United States 9,480,806 306,988,498
MeadWestvaco Corp. ............................................ United States 4,116,457 128,845,104
Mondi Ltd. .................................................... South Africa 236,911 2,238,323
Mondi PLC ..................................................... United Kingdom 158,720 1,340,317
Weyerhaeuser Co. .............................................. United States 6,165,330 454,631,434
------------------
993,220,222
------------------
PHARMACEUTICALS 2.7%
Bristol-Myers Squibb Co. ...................................... United States 3,834,520 101,691,470
Novartis AG ................................................... Switzerland 2,427,900 133,050,291
Pfizer Inc. ................................................... United States 11,568,920 262,961,552
Sanofi-Aventis ................................................ France 1,451,967 133,450,084
a Valeant Pharmaceuticals International ......................... United States 3,520,835 42,144,395
Watson Pharmaceuticals Inc. ................................... United States 6,400 173,696
------------------
673,471,488
------------------
REAL ESTATE 1.5%
a,f Alexander's Inc. .............................................. United States 326,675 115,397,944
a,e Canary Wharf Group PLC ........................................ United Kingdom 14,262,931 142,548,853
Link REIT ..................................................... Hong Kong 18,210,494 39,418,979
j The St. Joe Co. ............................................... United States 1,052,935 37,389,722
Ventas Inc. ................................................... United States 1,072,765 48,542,616
------------------
383,298,114
------------------
Annual Report | 29
Mutual Shares Fund
STATEMENT OF INVESTMENTS, DECEMBER 31, 2007 (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------------
SHARES/WARRANTS/
COUNTRY CONTRACTS VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
COMMON STOCKS AND OTHER EQUITY INTERESTS (CONTINUED)
REAL ESTATE MANAGEMENT & DEVELOPMENT 0.1%
a Forestar Real Estate Group .................................... United States 1,365,873 $ 32,220,949
------------------
SEMICONDUCTORS & SEMICONDUCTOR EQUIPMENT 1.0%
a LSI Corp. ..................................................... United States 24,355,334 129,326,823
Maxim Integrated Products Inc. ................................ United States 4,365,000 115,585,200
------------------
244,912,023
------------------
SOFTWARE 2.2%
a BEA Systems Inc. .............................................. United States 8,200,790 129,408,466
Microsoft Corp. ............................................... United States 10,837,929 385,830,273
a NAVTEQ Corp. .................................................. United States 666,900 50,417,640
------------------
565,656,379
------------------
SPECIALTY RETAIL 0.9%
The Home Depot Inc. ........................................... United States 8,465,150 228,051,141
------------------
THRIFTS & MORTGAGE FINANCE 1.0%
Hudson City Bancorp Inc. ...................................... United States 11,930,969 179,203,154
Sovereign Bancorp Inc. ........................................ United States 7,375,654 84,082,456
------------------
263,285,610
------------------
TOBACCO 8.8%
Altadis SA .................................................... Spain 4,442,253 322,260,073
Altria Group Inc. ............................................. United States 5,137,730 388,309,633
British American Tobacco PLC .................................. United Kingdom 12,181,486 475,608,697
British American Tobacco PLC, ADR ............................. United Kingdom 70,550 5,542,408
Imperial Tobacco Group PLC .................................... United Kingdom 6,933,289 373,607,814
Japan Tobacco Inc. ............................................ Japan 30,953 185,415,451
KT&G Corp. .................................................... South Korea 2,102,036 178,977,906
Reynolds American Inc. ........................................ United States 4,494,420 296,451,943
------------------
2,226,173,925
------------------
TRANSPORTATION INFRASTRUCTURE 0.0% h
a Groupe Eurotunnel SA, wts., 12/30/11 .......................... France 2,855,237 958,362
------------------
TOTAL COMMON STOCKS AND OTHER EQUITY INTERESTS
(COST $18,190,596,286) ..................................... 22,407,072,529
------------------
PREFERRED STOCKS 0.4%
AUTO COMPONENTS 0.1%
d,e Dana Holding Corp., 4.00%, cvt. pfd., B ....................... United States 163,322 16,332,200
------------------
DIVERSIFIED TELECOMMUNICATION SERVICES 0.0% h
d PTV Inc., 10.00%, pfd., A ..................................... United Kingdom 199,566 239,479
------------------
THRIFTS & MORTGAGE FINANCE 0.3%
a Washington Mutual Inc., 7.75%, cvt. pfd., R ................... United States 77,900 68,941,500
------------------
TOTAL PREFERRED STOCKS (COST $92,796,401) ..................... 85,513,179
------------------
30 | Annual Report
Mutual Shares Fund
STATEMENT OF INVESTMENTS, DECEMBER 31, 2007 (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------------
SHARES/WARRANTS/
COUNTRY CONTRACTS VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
OPTIONS PURCHASED 0.4%
CALL OPTIONS 0.0% h
a,d Owens Corning Inc., exercise price $37.50, expiration date
1/02/08, shares ............................................ United States 911,589 $ 45,580
------------------
PUT OPTIONS 0.4%
a Dow Jones EUROSTOXX 50, exercise price $4,088.73,
expiration date 6/20/08, contracts ......................... United States 180,000 23,924,214
a S&P 500 Index, exercise price $1,250.00, expiration date
6/21/08, contracts ......................................... United States 2,954 8,093,960
a S&P 500 Index, exercise price $1,375.00, expiration date
6/21/08, contracts ......................................... United States 11,134 59,010,200
------------------
91,028,374
------------------
TOTAL OPTIONS PURCHASED (COST $73,389,888) .................... 91,073,954
------------------
------------------
PRINCIPAL AMOUNT k
------------------
CORPORATE BONDS & NOTES 2.8%
b ACE Aviation Holdings Inc., cvt., 144A, 4.25%, 6/01/35 ........ Canada 5,190,000 CAD 5,901,585
d,e Cerberus CG Investor I LLC, 12.00%, 7/31/14 ................... United States 49,252,400 41,469,365
d,e Cerberus CG Investor II LLC, 12.00%, 7/31/14 .................. United States 49,252,400 41,469,365
d,e Cerberus CG Investor III LLC, 12.00%, 7/31/14 ................. United States 24,626,200 20,734,682
d,e Cerberus FIM Investors Auto Finance LLC, 12.00%, 11/22/13 ..... United States 46,576,742 24,989,862
d,e Cerberus FIM Investors Commercial Finance LLC, 12.00%,
11/22/13 ................................................... United States 3,882,344 2,082,997
d,e Cerberus FIM Investors Commercial Mortgage LLC, 12.00%,
11/22/13 ................................................... United States 7,276,853 3,904,256
d,e Cerberus FIM Investors Insurance LLC, 12.00%, 11/22/13 ........ United States 35,591,534 19,095,958
d,e Cerberus FIM Investors Rescap LLC, 12.00%, 11/22/13 ........... United States 66,264,075 35,552,725
d,e,f DecisionOne Corp.,
12.00%, 4/15/10 ............................................ United States 2,322,817 2,322,817
l FRN, 9.50%, 5/12/09 ........................................ United States 433,342 433,342
Groupe Eurotunnel SA, cvt.,
3.00%, 6/28/09 ............................................. France 53,400 EUR 171,444
3.00%, 6/28/09 ............................................. France 43,989 GBP 192,289
3.00%, 7/28/10 ............................................. France 18,944,500 EUR 54,602,144
3.00%, 7/28/10 ............................................. France 11,239,769 GBP 44,107,400
6.00%, 7/28/10 ............................................. France 45,720,800 EUR 89,741,961
6.00%, 7/28/10 ............................................. France 28,063,345 GBP 74,997,828
sub bond, T1, 3.00%, 7/28/08 ............................... France 53,400 EUR 190,927
sub bond, T1, 3.00%, 7/28/08 ............................... France 43,989 GBP 214,140
d,e,f,g International Automotive Components Group NA LLC, 9.00%,
4/01/17 .................................................... United States 5,851,000 5,851,000
d,e,l Motor Coach Industries International Inc., FRN, 18.081%,
12/01/08 ................................................... United States 65,739,207 65,081,814
Annual Report | 31
Mutual Shares Fund
STATEMENT OF INVESTMENTS, DECEMBER 31, 2007 (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------------
COUNTRY PRINCIPAL AMOUNT k VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
CORPORATE BONDS & NOTES (CONTINUED)
d,e,l Revel Entertainment Group LLC,
first lien loan, FRN, 9.43%, 5/30/08 ....................... United States 52,000,000 $ 51,740,000
second lien loan, FRN, 12.43%, 5/30/08 ..................... United States 52,000,000 51,480,000
Trump Entertainment Resorts Inc., 8.50%, 5/20/15 .............. United States 36,590,212 28,037,250
e,f TVMAX Holdings Inc., PIK,
11.50%, 2/28/08 ............................................ United States 632,919 443,043
14.00%, 2/28/08 ............................................ United States 1,595,750 1,117,025
Wimar OPCO LLC/Finance Corp., senior sub. note, 9.625%,
12/15/14 ................................................... United States 76,355,000 48,867,200
------------------
TOTAL CORPORATE BONDS & NOTES (COST $804,982,188) ............. 714,792,419
------------------
CORPORATE BONDS & NOTES IN REORGANIZATION 0.2%
b Calpine Corp., senior secured note, 144A,
8.50%, 7/15/10 ............................................. United States 9,955,000 10,701,625
9.875%, 12/01/11 ........................................... United States 3,502,000 3,677,100
8.75%, 7/15/13 ............................................. United States 5,253,000 5,673,240
m Dana Corp.,
6.50%, 3/01/09 ............................................. United States 7,931,000 5,987,905
5.85%, 1/15/15 ............................................. United States 29,532,000 21,706,020
7.00%, 3/01/29 ............................................. United States 6,376,000 4,813,880
senior note, 7.00%, 3/15/28 ................................ United States 1,638,000 1,203,930
e,m Safety Kleen Services, senior sub. note, 9.25%, 6/01/08 ....... United States 85,000 425
------------------
TOTAL CORPORATE BONDS & NOTES IN REORGANIZATION
(COST $51,385,337) ......................................... 53,764,125
------------------
COMPANIES IN LIQUIDATION 0.0% h
e Peregrine Investments Holdings Ltd.,
6.70%, 1/15/98 ............................................. Hong Kong 95,000,000 JPY 6,389
6.70%, 6/30/00 ............................................. Hong Kong 250,000,000 JPY 16,814
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 $--) ..................... 481,153
------------------
TOTAL LONG TERM INVESTMENTS
(COST $19,213,150,101) ..................................... 23,352,697,359
------------------
SHORT TERM INVESTMENTS 8.1%
U.S. GOVERNMENT AND AGENCY SECURITIES 7.6%
n,o FHLB, 1/02/08 - 12/09/08 ...................................... United States 1,757,893,000 1,743,363,337
n U.S. Treasury Bill, 4/24/08 - 5/01/08 ......................... United States 170,500,000 168,728,278
------------------
TOTAL U.S. GOVERNMENT AND AGENCY SECURITIES
(COST $1,909,992,819) ...................................... 1,912,091,615
------------------
TOTAL INVESTMENTS BEFORE MONEY MARKET FUND
(COST $21,123,142,919) ..................................... 25,264,788,974
------------------
p INVESTMENTS FROM CASH COLLATERAL RECEIVED FOR LOANED
SECURITIES 0.5% MONEY MARKET FUND (COST $136,033,986)
q Bank of New York Institutional Cash Reserve Fund, 5.06% ....... United States 136,033,986 136,033,986
------------------
32 | Annual Report
Mutual Shares Fund
STATEMENT OF INVESTMENTS, DECEMBER 31, 2007 (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------------
COUNTRY CONTRACTS/SHARES VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS (COST $21,259,176,906) 100.7% ............... $ 25,400,822,960
OPTIONS WRITTEN 0.0% h ........................................ (8,207,237)
SECURITIES SOLD SHORT (0.4)% .................................. (95,163,478)
NET UNREALIZED LOSS ON FORWARD EXCHANGE
CONTRACTS (0.2)% ........................................... (53,546,052)
OTHER ASSETS, LESS LIABILITIES (0.1)% ......................... (10,932,707)
------------------
NET ASSETS 100.0% ............................................. $ 25,232,973,486
------------------
r OPTIONS WRITTEN 0.0% h
ENERGY EQUIPMENT & SERVICES 0.0% h
a Transocean Inc., Feb. 120.00 Calls, 2/16/08 ................... United States 4,807 6,970,150
a Transocean Inc., Feb. 130.00 Calls, 2/16/08 ................... United States 956 682,584
------------------
7,652,734
------------------
METALS & MINING 0.0% h
Anglo American PLC, Mar. 34.00 Calls, 3/20/08 ................. United Kingdom 215,500 554,503
------------------
TOTAL OPTIONS WRITTEN (PREMIUMS RECEIVED $5,478,661) .......... 8,207,237
------------------
s SECURITIES SOLD SHORT (PROCEEDS $99,183,041)
COMMERCIAL BANKS 0.4%
Toronto-Dominion Bank ......................................... Canada 1,360,450 $ 95,163,478
------------------
CURRENCY ABBREVIATIONS
CAD - Canadian Dollar
EUR - Euro
GBP - British Pound
JPY - Japanese Yen
SELECTED PORTFOLIO ABBREVIATIONS
ADR - American Depository Receipt
FHLB - Federal Home Loan Bank
FRN - Floating Rate Note
PIK - Payment-In-Kind
REIT - Real Estate Investment Trust
Annual Report | 33
Mutual Shares Fund
STATEMENT OF INVESTMENTS, DECEMBER 31, 2007 (CONTINUED)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
a Non-income producing for the twelve months ended December 31, 2007.
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, 2007, the aggregate value of
these securities was $29,407,985, representing 0.12% of net assets.
c 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.
d See Note 9 regarding restricted securities.
e Security has been deemed illiquid because it may not be able to be sold within
seven days. At December 31, 2007 the aggregate value of these securities was
$1,008,603,900, representing 4.00% of net assets.
f See Note 11 regarding holdings of 5% voting securities.
g See Note 12 regarding other considerations.
h Rounds to less than 0.1% of net assets.
i A portion or all of the security is held in connection with written option
contracts open at year end.
j A portion or all of the security is on loan as of December 31, 2007. See Note
1(g).
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 8 regarding defaulted securities.
n The security is traded on a discount basis with no stated coupon rate.
o Security or a portion of the security has been segregated as collateral for
securities sold short. At December 31, 2007, the value of securities and or cash
pledged amounted to $79,513,640.
p See Note 1(g) regarding securities on loan.
q The rate shown is the annualized seven-day yield at period end.
r See Note 1(e) regarding written options.
s See Note 1(f) regarding securities sold short.
34 | THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
| ANNUAL REPORT
Mutual Shares Fund
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
December 31, 2007
Assets:
Investments in securities:
Cost - Unaffiliated issuers .............................................................. $20,273,762,116
Cost - Non-controlled affiliated issuers (Note 11) ....................................... 985,414,790
================
Total cost of investments ................................................................ $21,259,176,906
================
Value - Unaffiliated issuers (includes securities loaned in the amount of $132,421,913) .. $24,163,582,975
Value - Non-controlled affiliated issuers (Note 11) ...................................... 1,237,239,985
----------------
Total value of investments ............................................................... 25,400,822,960
Cash ....................................................................................... 15,006,153
Cash on deposits with brokers for securities sold short .................................... 98,422,229
Foreign currency, at value (cost $48,740,963) .............................................. 49,136,557
Receivables:
Investment securities sold ............................................................... 7,149,191
Capital shares sold ...................................................................... 29,711,218
Dividends and interest ................................................................... 58,637,098
Unrealized gain on forward exchange contracts (Note 7) ..................................... 43,420,582
----------------
Total assets ......................................................................... 25,702,305,988
----------------
Liabilities:
Payables:
Investment securities purchased .......................................................... 51,437,939
Capital shares redeemed .................................................................. 53,493,721
Affiliates ............................................................................... 24,373,361
Options written, at value (premiums received $5,478,661) ................................... 8,207,237
Securities sold short, at value (proceeds $99,183,041) ..................................... 95,163,478
Payable upon return of securities loaned ................................................... 136,033,986
Unrealized loss on forward exchange contracts (Note 7) ..................................... 96,966,634
Accrued expenses and other liabilities ..................................................... 3,656,146
----------------
Total liabilities .................................................................... 469,332,502
----------------
Net assets, at value .............................................................. $25,232,973,486
================
Net assets consist of:
Paid-in capital ............................................................................ $20,923,816,010
Undistributed net investment income ........................................................ 12,854,602
Net unrealized appreciation (depreciation) ................................................. 4,090,069,844
Accumulated net realized gain (loss) ....................................................... 206,233,030
----------------
Net assets, at value .............................................................. $25,232,973,486
================
ANNUAL REPORT |
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS. | 35
Mutual Shares Fund
FINANCIAL STATEMENTS (CONTINUED)
STATEMENT OF ASSETS AND LIABILITIES (CONTINUED)
December 31, 2007
CLASS Z:
Net assets, at value ....................................................................... $13,262,560,738
================
Shares outstanding ......................................................................... 523,558,002
================
Net asset value and maximum offering price per share a ..................................... $ 25.33
================
CLASS A:
Net assets, at value ....................................................................... $ 8,469,263,959
================
Shares outstanding ......................................................................... 336,849,642
================
Net asset value per share a ................................................................ $ 25.14
================
Maximum offering price per share (net asset value per share / 94.25%) ...................... $ 26.67
================
CLASS B:
Net assets, at value ....................................................................... $ 586,288,991
================
Shares outstanding ......................................................................... 23,837,661
================
Net asset value and maximum offering price per share a ..................................... $ 24.60
================
CLASS C:
Net assets, at value ....................................................................... $ 2,617,082,813
================
Shares outstanding ......................................................................... 105,261,931
================
Net asset value and maximum offering price per share a ..................................... $ 24.86
================
CLASS R:
Net assets, at value ....................................................................... $ 297,776,985
================
Shares outstanding ......................................................................... 11,911,893
================
Net asset value and maximum offering price per share a ..................................... $ 25.00
================
a Redemption price is equal to net asset value less contingent deferred sales
charges, if applicable, and redemption fees retained by the Fund.
36 | THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
| ANNUAL REPORT
Mutual Shares Fund
FINANCIAL STATEMENTS (CONTINUED)
STATEMENT OF OPERATIONS
for the year ended December 31, 2007
Investment income:
Dividends: (net of foreign taxes of $26,623,595)
Unaffiliated issuers ...................................................................... $ 551,014,301
Non-controlled affiliated issuers (Note 11) ............................................... 107,008,693
Interest: (net of foreign taxes of $5,508)
Unaffiliated issuers ...................................................................... 156,847,006
Non-controlled affiliated issuers (Note 11) ............................................... 909,471
Income from securities loaned ............................................................... 4,557,109
----------------
Total investment income ................................................................. 820,336,580
----------------
Expenses:
Management fees (Note 3a) ................................................................... 136,431,266
Administrative fees (Note 3b) ............................................................... 18,791,131
Distribution fees: (Note 3c)
Class A ................................................................................... 26,204,210
Class B ................................................................................... 6,453,715
Class C ................................................................................... 26,362,657
Class R ................................................................................... 1,299,161
Transfer agent fees (Note 3e) ............................................................... 21,272,810
Custodian fees (Note 4) ..................................................................... 2,435,026
Reports to shareholders ..................................................................... 1,472,358
Registration and filing fees ................................................................ 578,905
Professional fees ........................................................................... 2,681,697
Directors' fees and expenses ................................................................ 576,351
Dividends on securities sold short .......................................................... 1,360,484
Other ....................................................................................... 730,028
----------------
Total expenses .......................................................................... 246,649,799
Expense reductions (Note 4) ............................................................. (169,199)
----------------
Net expenses .......................................................................... 246,480,600
----------------
Net investment income ............................................................... 573,855,980
----------------
Realized and unrealized gains (losses):
Net realized gain (loss) from:
Investments
Unaffiliated issuers .................................................................... 1,269,577,197
Non-controlled affiliated issuers (Note 11) ............................................. 211,399,449
Written options ........................................................................... 5,898,983
Foreign currency transactions ............................................................. (381,137,541)
Securities sold short ..................................................................... (38,721,279)
Synthetic equity swaps .................................................................... 10,756,542
----------------
Net realized gain (loss) .............................................................. 1,077,773,351
----------------
Net change in unrealized appreciation (depreciation) on:
Investments ............................................................................... (1,046,305,706)
Translation of assets and liabilities denominated in foreign currencies ................... (7,694,377)
----------------
Net change in unrealized appreciation (depreciation) .................................. (1,054,000,083)
----------------
Net realized and unrealized gain (loss) ....................................................... 23,773,268
----------------
Net increase (decrease) in net assets resulting from operations ............................... $ 597,629,248
================
ANNUAL REPORT |
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS. | 37
Mutual Shares Fund
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF CHANGES IN NET ASSETS
-----------------------------------
YEAR ENDED DECEMBER 31,
-----------------------------------
2007 2006
-----------------------------------
Increase (decrease) in net assets:
Operations:
Net investment income ................................................................. $ 573,855,980 $ 250,771,297
Net realized gain (loss) from investments, written options, securities sold short,
synthetic equity swaps and foreign currency transactions ........................... 1,077,773,351 1,277,505,915
Net change in unrealized appreciation (depreciation) on investments and translation of
assets and liabilities denominated in foreign currencies and deferred taxes ........ (1,054,000,083) 1,560,870,117
-----------------------------------
Net increase (decrease) in net assets resulting from operations ................. 597,629,248 3,089,147,329
-----------------------------------
Distributions to shareholders from:
Net investment income:
Class Z ............................................................................ (371,465,429) (213,013,305)
Class A ............................................................................ (212,840,426) (102,518,920)
Class B ............................................................................ (10,736,304) (6,728,719)
Class C ............................................................................ (48,872,902) (14,229,042)
Class R ............................................................................ (7,033,626) (2,664,653)
Net realized gains:
Class Z ............................................................................ (430,826,291) (688,410,621)
Class A ............................................................................ (277,318,724) (398,575,406)
Class B ............................................................................ (19,938,898) (41,096,225)
Class C ............................................................................ (87,332,680) (145,013,204)
Class R ............................................................................ (9,674,981) (11,224,212)
-----------------------------------
Total distributions to shareholders ...................................................... (1,476,040,261) (1,623,474,307)
-----------------------------------
Capital share transactions: (Note 2)
Class Z ............................................................................ 2,129,113,775 1,805,196,748
Class A ............................................................................ 2,027,885,005 2,143,360,560
Class B ............................................................................ (59,185,727) (4,818,299)
Class C ............................................................................ 316,218,501 379,010,165
Class R ............................................................................ 122,655,907 68,529,010
-----------------------------------
Total capital share transactions ......................................................... 4,536,687,461 4,391,278,184
-----------------------------------
Redemption fees .......................................................................... 62,755 44,080
-----------------------------------
Net increase (decrease) in net assets ........................................... 3,658,339,203 5,856,995,286
Net assets:
Beginning of year ........................................................................ 21,574,634,283 15,717,638,997
-----------------------------------
End of year .............................................................................. $25,232,973,486 $21,574,634,283
-----------------------------------
Undistributed net investment income (distributions in excess of net investment income)
included in net assets:
End of year .............................................................................. $ 12,854,602 $ (1,937,133)
-----------------------------------
38 | The accompanying notes are an integral part of these financial statements.
| Annual Report
Mutual Shares Fund
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Franklin Mutual Series Fund Inc. (Series Fund) is registered under the
Investment Company Act of 1940, as amended, (1940 Act) as an open-end investment
company, consisting of six separate funds. The Mutual Shares Fund (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.
Annual Report | 39
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.
40 | Annual Report
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.
Annual Report | 41
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 or index 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 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.
42 | Annual Report
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 it is the Fund's policy
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 of
America. 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 per share
distributions, by class, are generally due to differences in class specific
expenses.
Annual Report | 43
Mutual Shares 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 Funds' 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, 2007, there were 1.9 billion shares authorized ($0.001 par
value). Transactions in the Fund's shares were as follows:
----------------------------------------------------------------
YEAR ENDED DECEMBER 31,
2007 2006
----------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
----------------------------------------------------------------
CLASS Z SHARES:
Shares sold ........................................... 72,422,280 $1,980,323,230 58,989,808 $1,512,255,054
Shares issued in reinvestment of distributions ........ 29,171,280 744,740,385 32,352,206 830,332,879
Shares redeemed ....................................... (21,942,690) (595,949,840) (21,118,207) (537,391,185)
----------------------------------------------------------------
Net increase (decrease) ............................... 79,650,870 $2,129,113,775 70,223,807 $1,805,196,748
================================================================
44 | Annual Report
Mutual Shares Fund
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. CAPITAL STOCK (CONTINUED)
----------------------------------------------------------------
YEAR ENDED DECEMBER 31,
2007 2006
----------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
----------------------------------------------------------------
CLASS A SHARES:
Shares sold ........................................... 105,204,071 $ 2,849,290,589 96,505,572 $2,449,217,770
Shares issued in reinvestment of
distributions ...................................... 17,844,203 452,010,160 18,089,962 461,565,811
Shares redeemed ....................................... (47,245,938) (1,273,415,744) (30,363,019) (767,423,021)
----------------------------------------------------------------
Net increase (decrease) ............................... 75,802,336 $ 2,027,885,005 84,232,515 $2,143,360,560
================================================================
CLASS B SHARES:
Shares sold ........................................... 605,798 $ 16,017,441 857,349 $ 21,132,869
Shares issued in reinvestment of
distributions ...................................... 1,151,048 28,532,034 1,794,285 44,688,168
Shares redeemed ....................................... (3,923,216) (103,735,202) (2,862,654) (70,639,336)
----------------------------------------------------------------
Net increase (decrease) ............................... (2,166,370) $ (59,185,727) (211,020) $ (4,818,299)
================================================================
CLASS C SHARES:
Shares sold ........................................... 20,396,970 $ 544,643,345 19,735,859 $ 494,085,976
Shares issued in reinvestment of
distributions ...................................... 4,871,395 122,037,887 5,691,658 144,004,696
Shares redeemed ....................................... (13,168,608) (350,462,731) (10,380,456) (259,080,507)
----------------------------------------------------------------
Net increase (decrease) ............................... 12,099,757 $ 316,218,501 15,047,061 $ 379,010,165
================================================================
CLASS R SHARES:
Shares sold ........................................... 6,274,351 $ 169,055,165 3,617,851 $ 91,221,363
Shares issued in reinvestment of
distributions ...................................... 658,955 16,589,087 542,562 13,771,339
Shares redeemed ....................................... (2,341,149) (62,988,345) (1,448,897) (36,463,692)
----------------------------------------------------------------
Net increase (decrease) ............................... 4,592,157 $ 122,655,907 2,711,516 $ 68,529,010
================================================================
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
Annual Report | 45
Mutual Shares 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
- --------------------------------------------------------------------------------
0.600% 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% Over $20 billion, up to and including $25 billion
0.490%* Over $25 billion, up to and including $30 billion
0.480%** Over $30 billion, up to and including $35 billion
0.470%** In excess of $35 billion
* Breakpoint added effective July 1, 2007.
** Breakpoint added effective January 1, 2008.
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%
46 | Annual Report
Mutual Shares 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 charges retained net of commissions paid to
unaffiliated broker/dealers .................................. $11,000,701
Contingent deferred sales charges retained ...................... $ 839,111
E. TRANSFER AGENT FEES
For the year ended December 31, 2007, the Fund paid transfer agent fees of
$21,272,810, of which $11,072,490 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, 2007, the
custodian fees were reduced as noted in the Statement of Operations.
5. INCOME TAXES
The Fund has reviewed the tax positions taken on federal income tax returns, for
each of the three open tax years and as of December 31, 2007 and has determined
that no provision for income tax is required in the Fund's financial statements.
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, 2007, the Fund deferred realized currency losses of
$1,174,236.
The tax character of distributions paid during the years ended December 31, 2007
and 2006, was as follows:
-------------------------------
2007 2006
-------------------------------
Distributions paid from:
Ordinary income .......................... $ 676,893,393 $ 532,733,473
Long term capital gain ................... 799,146,868 1,090,740,834
-------------------------------
$1,476,040,261 $1,623,474,307
===============================
Annual Report | 47
Mutual Shares Fund
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. INCOME TAXES (CONTINUED)
At December 31, 2007, 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 ......................................... $21,284,619,856
================
Unrealized appreciation ..................................... $ 5,782,087,662
Unrealized depreciation ..................................... (1,665,884,558)
----------------
Net unrealized appreciation (depreciation) .................. $ 4,116,203,104
================
Undistributed ordinary income ............................... $ 164,194,654
Undistributed long term capital gains ....................... 31,487,653
----------------
Distributable earnings ...................................... $ 195,682,307
================
Net investment income (loss) 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,
synthetic equity swaps, pass-through entity income, 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, synthetic equity swaps, pass-through
entity income, 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, 2007, aggregated
$12,833,815,053 and $9,252,026,093, respectively.
Transactions in options written during the year ended December 31, 2007, were as
follows:
--------------------------
NUMBER OF PREMIUMS
CONTRACTS RECEIVED
--------------------------
Options outstanding at
December 31, 2006 .............................. 1,764 $ 200,656
Options written ................................... 1,336,927 12,751,519
Options expired ................................... (1,112,918) (4,343,763)
Options exercised ................................. -- --
Options closed .................................... (4,510) (3,129,751)
--------------------------
Options outstanding at
December 31, 2007 .............................. 221,263 $ 5,478,661
==========================
48 | Annual Report
Mutual Shares Fund
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. FORWARD EXCHANGE CONTRACTS
At December 31, 2007, the Fund had the following forward exchange contracts
outstanding:
--------------------------------------------------------
CONTRACT SETTLEMENT UNREALIZED UNREALIZED
AMOUNT DATE GAIN LOSS
--------------------------------------------------------
CONTRACTS TO BUY
15,977,550 Norwegian Krone .......... $ 2,900,000 2/19/08 $ 36,017 $ --
2,046,047,927 Japanese Yen ............. 18,031,196 3/19/08 474,653 --
CONTRACTS TO SELL
1,115,169,808 Norwegian Krone .......... 204,816,351 1/09/08 -- (333,017)
21,600,000 British Pound ............ 42,812,410 1/10/08 -- (93,021)
208,102,939 British Pound ............ 421,629,992 1/10/08 8,261,321 --
429,971,052 Euro ..................... 595,714,928 1/14/08 -- (31,928,812)
972,640,182 Swedish Krona ............ 152,048,705 1/15/08 1,592,927 --
111,566,807 Singapore Dollar ......... 75,109,918 1/24/08 -- (2,433,267)
177,167,427 Euro ..................... 247,587,631 2/13/08 -- (11,128,696)
142,500,322 Euro ..................... 208,103,624 2/13/08 11,421 --
322,430,642 Norwegian Krone .......... 58,894,448 2/19/08 -- (355,052)
547,200,000 Norwegian Krone .......... 100,993,407 2/19/08 440,537 --
412,506,504 Euro ..................... 612,300,243 2/25/08 9,878,278 --
13,153,683 Swiss Franc .............. 11,470,502 3/07/08 -- (182,507)
342,046,056 Swiss Franc .............. 305,976,138 3/07/08 2,953,356 --
356,277,521 British Pound ............ 720,819,383 3/10/08 14,260,248 --
209,551,783 Euro ..................... 294,319,588 3/13/08 -- (11,712,427)
34,892,379 Euro ..................... 51,672,508 3/13/08 715,246 --
25,415,349,672 Japanese Yen ............. 226,318,554 3/19/08 -- (3,562,978)
105,800,000 Canadian Dollar .......... 105,816,327 3/26/08 -- (739,706)
4,200,000 Canadian Dollar .......... 4,547,374 3/26/08 317,361 --
3,602,637,500 Korean Won ............... 3,850,000 3/27/08 -- (18,604)
70,567,370,505 Korean Won ............... 77,325,500 3/27/08 1,548,458 --
945,603,962 Danish Krone ............. 179,798,173 4/23/08 -- (5,366,961)
346,348,386 Euro ..................... 488,869,653 4/24/08 -- (16,868,763)
330,842,864 Euro ..................... 470,797,992 5/19/08 -- (12,236,035)
53,100,000 Euro ..................... 78,989,701 5/19/08 1,463,149 --
2,780,000 Euro ..................... 4,051,850 5/28/08 -- (6,788)
143,418,347 Euro ..................... 210,850,027 5/28/08 1,467,610 --
----------------------------
UNREALIZED GAIN (LOSS) ON FORWARD EXCHANGE CONTRACTS ............... 43,420,582 (96,966,634)
----------------------------
NET UNREALIZED LOSS ON FORWARD EXCHANGE CONTRACTS ......... $(53,546,052)
=============
Annual Report | 49
Mutual Shares Fund
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
8. CREDIT RISK AND 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, 2007, the aggregate value of these securities was $33,712,160,
representing 0.13% of the Fund's net assets. For information as to specific
securities, see the accompanying Statement of Investments.
9. RESTRICTED SECURITIES
The Fund may invest in securities that are restricted under the Securities Act
of 1933 (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, 2007, 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
CONTRACTS ISSUER DATES COST VALUE
- -----------------------------------------------------------------------------------------------------------------------------
810,649 AboveNet Inc. ................................... 10/02/01 - 12/12/07 $ 40,690,364 $ 40,532,450
1,065 AboveNet Inc., stock grant, grant price $20.95,
expiration date 9/09/13 ...................... 4/17/06 - 9/08/06 -- 44,144
29,283 AboveNet Inc., wts., 9/08/08 .................... 10/02/01 - 9/07/07 3,354,118 1,382,158
34,449 AboveNet Inc., wts., 9/08/10 .................... 10/02/01 - 9/07/07 3,603,181 1,504,732
49,252,400 Cerberus CG Investor I LLC ...................... 7/26/07 49,252,400 41,469,365
49,252,400 Cerberus CG Investor I LLC, 12.00%, 7/31/14 ..... 7/26/07 49,252,400 41,469,365
49,252,400 Cerberus CG Investor II LLC ..................... 7/26/07 49,252,400 41,469,365
49,252,400 Cerberus CG Investor II LLC, 12.00%, 7/31/14 .... 7/26/07 49,252,400 41,469,365
24,626,200 Cerberus CG Investor III LLC .................... 7/26/07 24,626,200 20,734,682
24,626,200 Cerberus CG Investor III LLC, 12.00%, 7/31/14 ... 7/26/07 24,626,200 20,734,682
15,536,148 Cerberus FIM Investors Auto Finance LLC ......... 11/20/06 15,536,148 8,335,624
46,576,742 Cerberus FIM investors Auto Finance LLC, 12.00%,
11/22/13 ..................................... 11/20/06 46,576,742 24,989,862
1,294,114 Cerberus FIM Investors Commercial Finance LLC ... 11/20/06 1,294,114 694,332
3,882,344 Cerberus FIM Investors Commercial Finance LLC,
12.00%, 11/22/13 ............................. 11/20/06 3,882,344 2,082,997
2,425,617 Cerberus FIM Investors Commercial Mortgage LLC .. 11/20/06 2,425,617 1,301,419
50 | Annual Report
Mutual Shares Fund
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
9. RESTRICTED SECURITIES (CONTINUED)
- -----------------------------------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT/
SHARES/WARRANTS/ ACQUISITION
CONTRACTS ISSUER DATES COST VALUE
- -----------------------------------------------------------------------------------------------------------------------------
7,276,853 Cerberus FIM Investors Commercial Mortgage
LLC, 12.00%, 11/22/13 ........................ 11/20/06 $ 7,276,853 $ 3,904,256
11,863,844 Cerberus FIM Investors Insurance LLC ............ 11/20/06 11,863,844 6,365,319
35,591,534 Cerberus FIM Investors Insurance LLC, 12.00%,
11/22/13 ..................................... 11/20/06 35,591,534 19,095,958
22,088,027 Cerberus FIM Investors Rescap LLC ............... 11/20/06 22,088,025 11,850,909
66,264,075 Cerberus FIM Investors Rescap LLC, 12.00%,
11/22/13 ..................................... 11/20/06 66,264,077 35,552,725
163,322 Dana Holding Corp., 4.00%, cvt., pfd., B ........ 12/27/07 16,332,200 16,332,200
1,879,100 DecisionOne Corp. ............................... 3/12/99 - 7/18/00 1,313,384 --
2,322,817 DecisionOne Corp., 12.00%, 4/15/10 .............. 3/12/99 - 10/17/07 4,349,337 2,322,817
433,342 DecisionOne Corp., FRN, 9.50%, 5/12/09 .......... 7/09/07 433,342 433,342
1,031,766 DecisionOne Corp., wts., 6/08/17 ................ 7/07/07 -- --
26,671 Elephant Capital Holdings Ltd. .................. 8/29/03 - 3/22/07 950,326 17,564,991
8,341,744 Esmark Inc. ..................................... 11/08/04 - 11/28/07 154,505,847 106,081,958
6,069,096 International Automotive Components Group Brazil
LLC .......................................... 4/13/06 - 8/21/06 3,634,723 42,156,730
1,104,272 International Automotive Components Group Japan
LLC .......................................... 9/26/06 - 3/27/07 9,595,797 9,902,453
25,796,752 International Automotive Components Group LLC ... 1/12/06 - 10/16/06 25,809,409 27,367,774
19,434,979 International Automotive Components Group NA
LLC .......................................... 3/30/07 - 10/10/07 19,402,009 26,723,096
5,851,000 International Automotive Components Group NA
LLC, 9.00%, 4/01/17 .......................... 3/30/07 5,938,765 5,851,000
2,860,528 Kindred Healthcare Inc. ......................... 4/28/99 - 3/29/06 26,248,306 67,883,190
Kindred Healthcare Inc., stock grants:
9,997 grant price $18.15, expiration date 7/17/11 .. 7/17/02 - 7/17/05 -- 55,793
2,999 grant price $19.87, expiration date 1/01/12 .. 1/01/03 - 1/01/06 -- 11,579
2,986 grant price $6.94, expiration date 1/01/13 ... 1/01/04 - 1/03/07 -- 50,138
2,230 grant price $19.87, expiration date 1/01/14 .. 1/01/05 - 1/03/07 -- 8,610
1,238 grant price $21.33, expiration date 1/10/15 .. 1/06/06 - 1/09/07 -- 2,973
619 grant price $22.08, expiration date 1/10/16 .. 1/09/07 -- 1,022
65,739,207 Motor Coach Industries International Inc., FRN,
18.08%, 12/01/08 ............................. 5/27/04 - 11/30/07 65,739,206 65,081,814
12 Motor Coach Industries International Inc., wts.,
5/27/09 ...................................... 3/30/07 -- --
120,040 NCB Warrant Holdings Ltd., A .................... 12/16/05 -- 7,359,521
202,380 Olympus Re Holdings Ltd. ........................ 12/19/01 20,238,000 662,835
911,589 Owens Corning Inc., exercise price $37.50,
expiration date 1/02/08, shares a ............ 12/20/06 95,400 45,580
199,566 PTV Inc., 10.00%, pfd., A ....................... 12/07/01 - 3/06/02 598,698 239,479
52,000,000 Revel Entertainment Group LLC, first lien loan,
FRN, 9.43%, 5/30/08 .......................... 12/20/07 51,902,909 51,740,000
52,000,000 Revel Entertainment Group LLC, second lien loan,
FRN, 12.43%, 5/30/08 ......................... 12/20/07 51,706,092 51,480,000
--------------
TOTAL RESTRICTED SECURITIES (3.43% of Net
Assets) ............................................................................. $ 864,342,604
==============
a The Fund also invests in unrestricted securities of the issuer, valued at
$67,144,655 as of December 31, 2007.
10. UNFUNDED CAPITAL COMMITMENTS
At December 31, 2007, the Fund had aggregate unfunded capital commitments to
investments of $55,215,000.
Annual Report | 51
Mutual Shares 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, 2007, were as shown below.
- ------------------------------------------------------------------------------------------------------------------------------------
NUMBER OF NUMBER OF
SHARES/ SHARES/
WARRANTS/ WARRANTS/
CONTRACTS/ CONTRACTS/
PRINCIPAL AMOUNT PRINCIPAL AMOUNT VALUE AT REALIZED
HELD AT BEGINNING GROSS GROSS HELD AT END OF END OF INVESTMENT CAPITAL
NAME OF ISSUER OF YEAR ADDITIONS REDUCTIONS YEAR YEAR INCOME GAIN
- ------------------------------------------------------------------------------------------------------------------------------------
NON-CONTROLLED AFFILIATES
AboveNet Inc. ................. 763,805 46,844 -- 810,649 $ 40,532,450 $ -- $ --
AboveNet Inc., Contingent
Distribution ............... 106,869,000 -- 106,869,000 -- -- -- 2,696,513
AboveNet Inc., stock grant,
grant price $20.95,
expiration date 9/09/13 ..... 1,065 -- -- 1,065 44,144 -- --
AboveNet Inc., wts., 9/08/08 .. 25,659 3,624 -- 29,283 1,382,158 -- --
AboveNet Inc., wts., 9/08/10 .. 30,186 4,263 -- 34,449 1,504,732 -- --
Alexander's Inc. .............. 326,675 -- -- 326,675 115,397,944 -- --
Anchor Resources LLC .......... 123,013 -- 123,013 -- -- -- 456,492
Beazer Homes USA Inc. ......... -- 2,147,880 -- 2,147,880 15,958,748 558,161 --
Centennial Bank Holdings Inc.,
144A ........................ 3,845,467 1,886,367 -- 5,731,834 33,130,000 -- --
Community Health Systems
Inc. ........................ -- 4,806,000 -- 4,806,000 177,149,160 -- --
DecisionOne Corp. ............. 1,879,100 -- -- 1,879,100 -- -- --
DecisionOne Corp., 12.00%,
4/15/10 .................... 2,187,193 135,624 -- 2,322,817 2,322,817 269,842 --
DecisionOne Corp., FRN,
9.50%, 5/12/09 ............. -- 433,342 -- 433,342 433,342 22,168 --
DecisionOne Corp., wts.,
6/08/17 .................... -- 1,031,766 -- 1,031,766 -- -- --
Elephant Capital Holdings
Ltd. ....................... 25,721 950 -- 26,671 17,564,991 -- --
Esmark Inc. ................... 16,598 8,325,146 -- 8,341,744 106,081,958 398,352 --
Esmark Inc., 8.00%, cvt.,
pfd., A ..................... 60,419 1,321 61,740 -- -- 3,694,676 764,824
Federal Signal Corp. .......... 3,360,800 -- -- 3,360,800 37,708,176 806,592 --
Florida East Coast
Industries Inc. ............ 4,423,071 -- 4,423,071 -- -- 95,715,256 167,498,447
International Automotive
Components Group Brazil
LLC ........................ 6,069,096 -- -- 6,069,096 42,156,730 -- --
International Automotive
Components Group Japan
LLC ........................ 953,142 151,130 -- 1,104,272 9,902,453 -- --
International Automotive
Components Group LLC ....... 25,796,752 -- -- 25,796,752 27,367,774 -- --
International Automotive
Components Group NA LLC .... -- 19,434,979 -- 19,434,979 26,723,096 -- --
International Automotive
Components Group NA LLC,
9.00%, 4/01/17 ............. -- 5,851,000 -- 5,851,000 5,851,000 352,014 --
52 | Annual Report
Mutual Shares Fund
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
11. HOLDINGS OF 5% VOTING SECURITIES OF PORTFOLIO COMPANIES (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------------
NUMBER OF NUMBER OF
SHARES/ SHARES/
WARRANTS/ WARRANTS/
CONTRACTS/ CONTRACTS/
PRINCIPAL AMOUNT PRINCIPAL AMOUNT VALUE AT REALIZED
HELD AT BEGINNING GROSS GROSS HELD AT END END OF INVESTMENT CAPITAL
NAME OF ISSUER OF YEAR ADDITIONS REDUCTIONS OF YEAR YEAR INCOME GAIN
- ------------------------------------------------------------------------------------------------------------------------------------
Kindred Healthcare Inc. ........ 2,860,528 -- -- 2,860,528 $ 67,883,190 $ -- $ --
Kindred Healthcare Inc., stock
grants:
grant price $18.15,
expiration date 7/17/11 ... 7,640 2,357 -- 9,997 55,793 -- --
grant price $19.87,
expiration date 1/01/12 ... 2,292 707 -- 2,999 11,579 -- --
grant price $6.94,
expiration date 1/01/13 ... 1,714 1,272 -- 2,986 50,138 -- --
grant price $19.87,
expiration date 1/01/14 ... 1,136 1,094 -- 2,230 8,610 -- --
grant price $21.33,
expiration date 1/10/15 ... 473 765 -- 1,238 2,973 -- --
grant price $22.08,
expiration date 1/10/16 ... -- 619 -- 619 1,022 -- --
OPTI Canada .................... 4,085,890 -- 4,085,890 -- -- -- 39,924,103
Tenet Healthcare Corp. ......... -- 25,881,411 -- 25,881,411 131,477,568 -- --
TVMAX Holdings Inc. ............ 257,217 -- -- 257,217 -- -- --
TVMAX Holdings Inc., PIK,
11.50%, 2/28/08 ............. 446,378 205,320 18,779 632,919 443,043 58,327 --
TVMAX Holdings Inc., PIK,
14.00%, 2/28/08 ............. 1,385,745 210,005 -- 1,595,750 1,117,025 207,120 --
White Mountains Insurance
Group Ltd. .................. 729,657 -- 200 729,457 374,977,371 5,835,656 59,070
-----------------------------------------
TOTAL NON-CONTROLLED AFFILIATES (4.90% of Net Assets) ................................. $1,237,239,985 $107,918,164 $211,399,449
=========================================
12. OTHER CONSIDERATIONS
Officers, directors or employees of the Fund's Investment Manager, may serve
from time to time as members of boards of directors of companies in which the
Fund invests. Such participation may result in the possession by the Investment
Manager of material non-public information which, pursuant to the Fund's
policies and the requirements of applicable securities laws, could prevent the
Fund from trading in the securities of such companies for limited or extended
periods of time.
13. REGULATORY AND LITIGATION 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 and governmental
entities. Specifically, the Company entered into settlements with the SEC, among
others, concerning market timing and marketing support.
Annual Report | 53
Mutual Shares Fund
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
13. REGULATORY AND LITIGATION MATTERS (CONTINUED)
On June 6, 2007, the SEC posted for public comment the proposed plan of
distribution for the market timing settlement. Once the SEC approves the final
plan of distribution, disbursements of settlement monies will be made promptly
to individuals who were shareholders of the designated funds during the relevant
period, 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.
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.
14. NEW ACCOUNTING PRONOUNCEMENT
In September 2006, Financial Accounting Standards Board (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 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 Funds constituting the Franklin Mutual Series
Fund Inc.) (the "Fund"), including the statement of investments, as of December
31, 2007, 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, 2007, 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, 2007,
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 14, 2008
Annual Report | 55
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 $793,654,300 as a long
term capital gain dividend for the fiscal year ended December 31, 2007.
Under Section 871(k)(2)(C) of the Code, the Fund designates the maximum amount
allowable but no less than $180,242,809 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, 2007.
Under Section 854(b)(2) of the Code, the Fund designates the maximum amount
allowable but no less than $611,450,592 as qualified dividends for purposes of
the maximum rate under Section 1(h)(11) of the Code for the fiscal year ended
December 31, 2007. In January 2008, shareholders will receive Form 1099-DIV
which will include their share of qualified dividends distributed during the
calendar year 2007. 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 854(b)(2) of the Code, the Fund designates 59.00% of the ordinary
income dividends as income qualifying for the dividends received deduction for
the fiscal year ended December 31, 2007.
56 | Annual Report
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 None
c/o Franklin Mutual Advisers, LLC
101 John F. Kennedy Parkway
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; a director to numerous
financial publishing organizations; and FORMERLY, Vice Director, Salomon Center, Stern School of Business, New York University.
- ------------------------------------------------------------------------------------------------------------------------------------
ANN TORRE BATES (1958) Director Since 1994 7 SLM Corporation (Sallie Mae)
c/o Franklin Mutual Advisers, LLC and Allied Capital Corporation
101 John F. Kennedy Parkway (financial services).
Short Hills, NJ 07078-2789
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 14 Franklin Templeton Emerging
c/o Franklin Mutual Advisers, LLC Markets Debt Opportunities Fund
101 John F. Kennedy Parkway PLC and Fiduciary International
Short Hills, NJ 07078-2789 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
c/o Franklin Mutual Advisers, LLC
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).
- ------------------------------------------------------------------------------------------------------------------------------------
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
- ------------------------------------------------------------------------------------------------------------------------------------
CHARLES RUBENS II (1930) Director Since 1998 14 None
c/o Franklin Mutual Advisers, LLC
101 John F. Kennedy Parkway
Short Hills, NJ 07078-2789
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Private investor.
- ------------------------------------------------------------------------------------------------------------------------------------
ROBERT E. WADE (1946) Director and Director since 34 El Oro and Exploration Co.,
c/o Franklin Mutual Advisers, LLC Chairman 1991 and P.l.c. (investments) and ARC
101 John F. Kennedy Parkway of the Board Chairman of the Wireless Solutions, Inc.
Short Hills, NJ 07078-2789 Board since 2005 (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
- ------------------------------------------------------------------------------------------------------------------------------------
** GREGORY E. JOHNSON (1961) Director Since April 2007 92 None
One Franklin Parkway
San Mateo, CA 94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Director, President and Chief Executive Officer, Franklin Resources, Inc.; President, Templeton Worldwide, Inc.; Director, Templeton
Asset Management Ltd.; and officer and/or director or trustee, as the case may be, of some of the other subsidiaries of Franklin
Resources, Inc. and of 33 of the investment companies in Franklin Templeton Investments.
- ------------------------------------------------------------------------------------------------------------------------------------
** PETER A. LANGERMAN (1955) Director, Director since 7 None
c/o Franklin Mutual Advisers, LLC President April 2007 and
101 John F. Kennedy Parkway and Chief President and
Short Hills, NJ 07078-2702 Executive Chief Executive
Officer - Officer -
Investment Investment
Management Management
since 2005
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Chairman of the Board, Chief Executive Officer and President, Franklin Mutual Advisers, LLC; officer and/or director, as the case
may be, of three of the investment companies in Franklin Templeton investments; and FORMERLY, Director, New Jersey's Division of
Investment.
- ------------------------------------------------------------------------------------------------------------------------------------
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.
- ------------------------------------------------------------------------------------------------------------------------------------
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
- ------------------------------------------------------------------------------------------------------------------------------------
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 Compliance
- AML since 2006
Compliance
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.
- ------------------------------------------------------------------------------------------------------------------------------------
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.
- ------------------------------------------------------------------------------------------------------------------------------------
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; Secretary, Franklin Advisory Services, LLC, Franklin Mutual
Advisers, LLC and Franklin Templeton Distributors, Inc.; and officer of 41 of the investment companies in Franklin Templeton
Investments.
- ------------------------------------------------------------------------------------------------------------------------------------
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 18 of the investment companies in Franklin Templeton Investments; and
FORMERLY, Vice President, JPmorgan Chase (2000-2004) and American General Financial Group (1991-2000).
- ------------------------------------------------------------------------------------------------------------------------------------
Annual Report | 59
- ------------------------------------------------------------------------------------------------------------------------------------
NUMBER OF PORTFOLIOS IN
NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN
AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- ------------------------------------------------------------------------------------------------------------------------------------
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 some of the other subsidiaries of Franklin Resources, Inc. and
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.
** Gregory E. Johnson is considered to be an interested person of the Fund under
the federal securities laws due to his position as an officer and director of
Franklin Resources, Inc., which is the parent company of the Fund's investment
manager and distributor. Peter A. Langerman is considered to be an interested
person of the Fund under the federal securities laws due to his position as an
officer of Franklin Mutual Advisers, LLC, which is the Fund's investment
manager.
Note 1: Officer information is current as of the date of this report. It is
possible that after this date, information about officers may change.
Note 2: Prior to December 31, 2007, William J. Lippman, Leonard Rubin and Anne
M. Tatlock ceased to be directors of the Fund.
THE FUND'S BOARD 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.
60 | Annual Report
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.
Annual Report | 61
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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 FUNDS
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 1
GLOBAL
Mutual Discovery Fund
Templeton Global Long-Short Fund
Templeton Global Opportunities Trust
Templeton Global Smaller Companies Fund 1
Templeton Growth Fund
Templeton World Fund
GROWTH
Franklin Capital Growth Fund
Franklin Flex Cap Growth Fund
Franklin Growth Opportunities Fund 2
Franklin Small Cap Growth Fund II 3
Franklin Small-Mid Cap Growth Fund
VALUE
Franklin All Cap Value Fund
Franklin Balance Sheet Investment Fund 1
Franklin Equity Income Fund
Franklin Large Cap Value Fund
Franklin MicroCap Value Fund 1
Franklin MidCap Value Fund
Franklin Small Cap Value Fund
Mutual Beacon Fund
Mutual Qualified Fund
Mutual Recovery Fund 4
Mutual Shares Fund
BLEND
Franklin Balanced Fund
Franklin Convertible Securities Fund
Franklin Focused Core Equity Fund
Franklin Growth Fund
Franklin Rising Dividends 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(R) Allocation Fund
Franklin Templeton Founding Funds Allocation Fund
Franklin Templeton Perspectives Allocation Fund
Franklin Templeton Conservative Target Fund
Franklin Templeton Growth Target Fund
Franklin Templeton Moderate Target Fund
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 5
Franklin Floating Rate Daily Access Fund
Franklin High Income Fund
Franklin Income Fund
Franklin Limited Maturity
U.S. Government Securities Fund 5
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 5
Templeton Global Bond Fund
Templeton Income Fund
Templeton International Bond 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
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 and select
retirement plans can continue adding to their accounts.
2. Effective 11/1/07, Franklin Aggressive Growth Fund changed its name to
Franklin Growth Opportunities Fund. The fund's investment goal and strategy
remained the same.
3. The fund is closed to new investors. Existing shareholders can continue
adding to their accounts.
4. 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.
5. An investment in the fund is neither insured nor guaranteed by the U.S.
government or by any other entity or institution.
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. The fund invests primarily in 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.
12/07 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 A2007 02/08
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 $478,519 for the fiscal year ended December 31, 2007 and $520,429 for the
fiscal year ended December 31, 2006.
(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 $0 for the fiscal year ended
December 31, 2007 and $33,924 for the fiscal year ended December 31, 2006. 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 not 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 other than
services reported in paragraphs (a)-(c) of Item 4 were $109,538 for the fiscal
year ended December 31, 2007 and $0 for the fiscal year ended December 31, 2006.
The services for which these fees were paid included compiling a gap analysis
for the implementation of Markets in Financial Instruments Directive.
(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 $109,538 for the fiscal year ended December 31, 2007 and $33,924
for the fiscal year ended December 31, 2006.
(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 Galen G. Vetter, Chief Executive Officer - Finance and Administration, and
Laura Fergerson, Chief Financial Officer and Chief Accounting Officer
(b) Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 of
Galen G. Vetter, Chief Executive Officer - Finance and Administration, and Laura
Fergerson, Chief Financial Officer and Chief Accounting 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/GALEN G. VETTER
-------------------------------
Galen G. Vetter
Chief Executive Officer -
Finance and Administration
Date February 27, 2008
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/GALEN G. VETTER
-------------------------------
Galen G. Vetter
Chief Executive Officer -
Finance and Administration
Date February 27, 2008
By /s/LAURA FERGERSON
-------------------------------
Laura Fergerson
Chief Financial Officer and
Chief Accounting Officer
Date February 27, 2008