Dear Policy Owner:
It is a pleasure to bring you the annual report for Allianz ValueLife, a
variable universal life product, and the Franklin Valuemark Funds for the period
ended December 31, 1998.
We are very pleased that Standard & Poor's(R) rating agency assigned their top
rating, AAA (extremely strong), to Allianz Life Insurance Company of North
America, which issues Allianz ValueLife. This rating confirms the company's
financial soundness and its ability to meet its obligations to policy holders
like you. Allianz Life has also received excellent ratings from A.M. Best,
Moody's and Laughlin Analytics.*
In the accompanying report from the Franklin Templeton portfolio managers, you
will find a summary covering each portfolio's performance as well as global
market conditions over the past twelve months. The portfolio performance table,
presented on the following page, shows each portfolio's change in unit price for
the year ended December 31, 1998. We encourage you to take note of the
portfolios' long-term performance illustrated by the graph accompanying each
portfolio summary within this book. The graph shows how a $10,000 hypothetical
investment would have grown since the portfolio's inception through December 31,
1998. It is important to remember that financial markets fluctuate daily, and
past investment conditions and results are not predictive of future trends.
We look to the future with confidence and believe Allianz ValueLife will
continue to be an appropriate vehicle for tax-conscious investors seeking to
meet their long-term estate planning and other financial and insurance needs. As
always, we thank you for your continued support and look forward to serving you
in the years to come.
/s/ Lowell C. Anderson
Sincerely,
Lowell C. Anderson
Chairman of the Board
Allianz Life Insurance Company of North America
*Ratings are from independent analysts of the insurance industry and are subject
to change. The ratings reflect the analysts' assessments of the insurance
company's financial condition and do not pertain to the investment portfolios,
which fluctuate with market conditions.
<PAGE>
ALLIANZ VALUELIFE
Change in Unit Prices
<TABLE>
<CAPTION>
% CHANGE
UNIT PRICE* UNIT PRICE* IN UNIT PRICE*
SUBACCOUNT NAME 12/31/97 12/31/98 12/31/97 TO 12/31/98
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Global Utilities Securities** $31.22 $34.46 +10.36%
Growth and Income $39.80 $42.80 +7.52%
High Income $24.57 $24.61 +0.17%
Income Securities $25.27 $25.50 +0.88%
Money Market $16.24 $16.96 +4.43%
Mutual Shares Securities $12.08 $12.00 -0.66%
Natural Resources Securities $12.63 $ 9.35 -25.94%
Real Estate Securities $33.03 $27.27 -17.44%
Rising Dividends $20.85 $22.13 +6.12%
Small Cap $15.16 $14.90 -1.72%
Templeton Developing Markets Equity $10.23 $ 7.96 -22.20%
Templeton Global Asset Allocation $14.03 $13.92 -0.79%
Templeton Global Growth $15.01 $16.24 +8.16%
Templeton Global Income Securities $16.99 $18.05 +6.28%
Templeton International Equity $18.40 $19.28 +4.77%
Templeton Pacific Growth $ 9.80 $ 8.45 -13.78%
U.S. Government Securities $22.28 $23.75 +6.64%
</TABLE>
The unit price is the subaccount net asset value, less any daily charges
including an annual asset charge of 0.75% and portfolio charges, divided by the
number of outstanding units at the end of the valuation period.
THE UNIT PRICE DOES NOT CONTAIN CERTAIN CHARGES, INCLUDING THE 15-YEAR SURRENDER
CHARGES (EQUAL TO THE DEFERRED ADMINISTRATIVE CHARGE PLUS THE DEFERRED SALES
LOAD) AND THE COST OF INSURANCE, DEDUCTED FROM THE POLICY ACCOUNT OR FROM
PREMIUM PAYMENTS. THESE CHARGES AND DEDUCTIONS CAN HAVE A SIGNIFICANT EFFECT ON
POLICY ACCOUNT, INSURANCE BENEFIT, AND CASH SURRENDER VALUES. SEE THE POLICY
PROSPECTUS FOR A COMPLETE DESCRIPTION OF THESE CHARGES, INCLUDING APPLICABLE
SALES CHARGES.
All unit prices were $10.00 at inception. PAST PERFORMANCE CANNOT PREDICT OR
GUARANTEE FUTURE RESULTS. Since 1982, it has been a period of generally rising
securities prices, which may not be sustained in the future. This information is
for policy owners only and may not be used as sales literature.
*The unit prices have been rounded to the nearest hundredth. Percent change is
calculated using actual unit prices.
**Prior to May 1, 1998, Utility Equity.
<PAGE>
Dear Contract Owner:
It is a pleasure to bring you the annual report for Franklin(R) Templeton(R)
Valuemark(R) Income Plus (VIP), an immediate variable annuity, and the Franklin
Valuemark Funds for the period ended December 31, 1998.
We are very pleased that Standard & Poor's(R) rating agency assigned their top
rating, AAA (extremely strong), to Allianz Life Insurance Company of North
America, which issues VIP. This rating confirms the company's financial
soundness and its ability to meet its obligations to contract holders like you.
Allianz Life has also received excellent ratings from A.M. Best, Moody's and
Laughlin Analytics.*
In the accompanying report from the Franklin Templeton portfolio managers, you
will find a summary covering each portfolio's performance as well as global
market conditions over the past twelve months. We encourage you to take note of
the portfolios' long-term performance illustrated by the graph accompanying each
portfolio summary within this book. The graph shows how a $10,000 hypothetical
investment would have grown since the portfolio's inception through December 31,
1998. It is important to remember that financial markets fluctuate daily, and
past investment conditions and results are not predictive of future trends.
We look to the future with confidence and believe Franklin Templeton Valuemark
Income Plus will continue to be an appropriate vehicle for investors seeking to
meet their long-term retirement and other financial and insurance needs. As
always, we thank you for your continued support and look forward to serving you
in the years to come.
Sincerely,
/s/ Lowell C. Anderson
Lowell C. Anderson
Chairman of the Board
Allianz Life Insurance Company of North America
*Ratings are from independent analysts of the insurance industry and are subject
to change. The ratings reflect the analysts' assessments of the insurance
company's financial condition and do not pertain to the investment portfolios,
which fluctuate with market conditions.
<PAGE>
Dear Contract Owner:
It is a pleasure to bring you the annual report for Franklin(R) Valuemark(R) IV,
a flexible-premium deferred variable annuity, and the Franklin Valuemark Funds
for the period ended December 31, 1998.
We are very pleased that Standard & Poor's(R) rating agency assigned their top
rating, AAA (extremely strong), to Allianz Life Insurance Company of North
America (in New York, Preferred Life Insurance Company of New York), which
issues Franklin Valuemark IV. This rating confirms the company's financial
soundness and its ability to meet its obligations to contract holders like you.
Allianz Life and Preferred Life have also received excellent ratings from A.M.
Best, Moody's and Laughlin Analytics.*
In the accompanying report from the Franklin Templeton portfolio managers, you
will find a summary covering each portfolio's performance as well as global
market conditions over the past twelve months. The portfolio performance table,
presented on the following page, shows average annual total returns and each
portfolio's unit price for the year ended December 31, 1998. We encourage you to
take note of the portfolios' long-term performance illustrated by the graph
accompanying each portfolio summary within this book. The graph shows how a
$10,000 hypothetical investment would have grown since the portfolio's inception
through December 31, 1998. It is important to remember that financial markets
fluctuate daily, and past investment conditions and results are not predictive
of future trends.
We look to the future with confidence and believe Franklin Valuemark IV will
continue to be an appropriate vehicle for tax-conscious investors seeking to
meet their long-term retirement and other financial and insurance needs. As
always, we thank you for your continued support and look forward to serving you
in the years to come.
Sincerely,
/s/ Lowell C. Anderson /s/ Ronald L. Wobbeking
Lowell C. Anderson Ronald L. Wobbeking
Chairman of the Board Chairman of the Board
Allianz Life Insurance Company Preferred Life Insurance Company
of North America of New York
*Ratings are from independent analysts of the insurance industry and are subject
to change. The ratings reflect the analysts' assessments of the insurance
company's financial condition and do not pertain to the investment portfolios,
which fluctuate with market conditions.
<PAGE>
FRANKLIN VALUEMARK IV
Standardized Average Annual Total Returns for the periods ended 12/31/98
With Contingent Deferred Sales Charge and Other Charges
<TABLE>
<CAPTION>
PREFERRED
LIFE
ALLIANZ LIFE SUBACCOUNT SUBACCOUNT
--------------------------------------------------------------------------------------------------
UNIT PRICE SINCE INCEPTION SINCE INCEPTION
SUBACCOUNT NAME ON 12/31/98 1-YEAR 5-YEAR INCEPTION DATE INCEPTION DATE
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Capital Growth $15.54 +12.41% -- +16.39% 05/01/96 +16.15% 06/10/96
Global Health Care
Securities(1) $10.60 -- -- -0.06% 05/01/98 +7.33% 08/17/98
Global Utilities
Securities(2) $28.08 +3.44% +9.69% +10.89% 01/24/89 +10.77% 09/06/91
Growth & Income $25.99 +0.63% +13.31% +10.02% 01/24/89 +12.33% 09/06/91
High Income $21.02 -6.67% +6.24% +7.69% 01/24/89 +9.14% 09/06/91
Income Securities $24.90 -5.96% +6.50% +9.55% 01/24/89 +9.45% 09/06/91
Money Market(1) $14.26 -2.44% +2.79% +3.55% 01/24/89 +2.76% 09/06/91
Mutual Discovery
Securities $11.20 -12.50% -- +3.05% 11/08/96 +2.52% 12/02/96
Mutual Shares Securities $11.81 -7.49% -- +5.75% 11/08/96 +5.35% 12/02/96
Natural Resources
Securities $ 8.43 -32.58% -11.34% -1.79% 01/24/89 -2.93% 09/06/91
Real Estate Securities $22.90 -24.15% +7.82% +8.62% 01/24/89 +10.79% 09/06/91
Rising Dividends $21.03 -0.76% +14.86% +11.11% 01/27/92 +11.33% 03/10/92
Small Cap $14.56 -8.54% -- +11.44% 11/01/95 +4.15% 06/10/96
Templeton Developing
Markets Equity $ 7.96 -28.87% -- -5.62% 03/15/94 -5.72% 04/25/94
Templeton Global Asset
Allocation $13.54 -7.62% -- +7.59% 05/01/95 +7.15% 08/04/95
Templeton Global Growth $16.24 +1.26% -- +10.06% 03/15/94 +10.35% 04/25/94
Templeton Global Income
Securities $17.75 -0.60% +3.32% +5.87% 01/24/89 +5.08% 09/06/91
Templeton International
Equity $18.32 -2.10% +7.88% +8.90% 01/27/92 +9.08% 03/10/92
Templeton International
Smaller Companies $ 9.34 -19.67% -- -4.65% 05/01/96 -5.53% 06/10/96
Templeton Pacific Growth $ 8.03 -20.52% -12.01% -3.51% 01/27/92 -3.55% 03/10/92
U.S. Government Securities $18.85 -0.25% +4.53% +6.60% 03/14/89 +6.26% 09/06/91
Value Securities(1) $ 7.71 -- -- -28.97% 05/01/98 -8.66% 08/17/98
Zero Coupon - 2000(1) $20.50 -0.19% +3.58% +7.53% 03/14/89 +7.21% 09/06/91
Zero Coupon - 2005(1) $24.79 +4.77% +6.01% +9.63% 03/14/89 +9.91% 09/06/91
Zero Coupon - 2010(1) $27.67 +6.65% +8.32% +10.87% 03/14/89 +12.03% 09/06/91
</TABLE>
Figures show the average annual change in value, assuming reinvestment of
dividends and capital gains. Figures are based on subaccount performance;
Franklin Valuemark IV was first available February 3, 1997. Performance reflects
all charges, including the annual contract maintenance charge and applicable
contingent deferred sales charges (CDSC). The CDSC reduces from 6% to 0% over
seven full years for each purchase payment and is adjusted for the applicable
free withdrawal privilege. Averaged returns smooth out variations in a
subaccount's returns, which can be significant; they are not the same as
year-by-year results. Results for less than one year are aggregate total return.
Results are based on past performance of the subaccounts of Allianz Life
Insurance Company of North America ("Allianz Life") and its subsidiary Preferred
Life Insurance Company of New York ("Preferred Life"). The Allianz Life and
Preferred Life subaccounts are identical except for subaccount inception dates.
Investment returns and the value of your principal will vary with market
conditions, so you may have a gain or loss when you sell your units. PAST
PERFORMANCE CANNOT PREDICT OR GUARANTEE FUTURE RESULTS. Since 1982, it has been
a period of generally rising securities prices, which may not be sustained in
the future.
1. Past expense reductions by the manager increased total return.
2. Prior to May 1, 1998, Utility Equity.
<PAGE>
Dear Contract Owner:
It is a pleasure to bring you the annual report for Franklin(R) Valuemark(R)
III, a flexible-premium deferred variable annuity, and the Franklin Valuemark
Funds for the period ended December 31, 1998.
We are very pleased that Standard & Poor's(R) rating agency assigned their top
rating, AAA (extremely strong), to Allianz Life Insurance Company of North
America, which issues Franklin Valuemark III. This rating confirms the company's
financial soundness and its ability to meet its obligations to contract holders
like you. Allianz Life has also received excellent ratings from A.M. Best,
Moody's and Laughlin Analytics.*
In the accompanying report from the Franklin Templeton portfolio managers, you
will find a summary covering each portfolio's performance as well as global
market conditions over the past twelve months. The portfolio performance table,
presented on the following page, shows standardized average annual total returns
and each portfolio's unit price for the year ended December 31, 1998. We
encourage you to take note of the portfolios' long-term performance illustrated
by the graph accompanying each portfolio summary within this book. The graph
shows how a $10,000 hypothetical investment would have grown since the
portfolio's inception through December 31, 1998. It is important to remember
that financial markets fluctuate daily, and past investment conditions and
results are not predictive of future trends.
We look to the future with confidence and believe Franklin Valuemark III will
continue to be an appropriate vehicle for tax-conscious investors seeking to
meet their long-term retirement and other financial and insurance needs. As
always, we thank you for your continued support and look forward to serving you
in the years to come.
Sincerely,
/s/ Lowell C. Anderson
Lowell C. Anderson
Chairman of the Board
Allianz Life Insurance Company of North America
*Ratings are from independent analysts of the insurance industry and are subject
to change. The ratings reflect the analysts' assessments of the insurance
company's financial condition and do not pertain to the investment portfolios,
which fluctuate with market conditions.
<PAGE>
FRANKLIN VALUEMARK III
Standardized Average Annual Total Returns for the periods ended 12/31/98
With Contingent Deferred Sales Charge and Other Charges
<TABLE>
<CAPTION>
SUBACCOUNT
INCEPTION SINCE UNIT PRICE
SUBACCOUNT NAME DATE 1-YEAR 5-YEAR INCEPTION ON 12/31/98
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Capital Growth 05/01/96 +13.42% -- +17.33% $15.57
Global Health Care Securities(1) 05/01/98 -- -- +0.90% $10.61
Global Utilities Securities(2) 01/24/89 +4.44% +10.18% +10.98% $28.31
Growth & Income 01/24/89 +1.63% +13.78% +10.11% $26.23
High Income 01/24/89 -5.68% +6.81% +7.78% $21.21
Income Securities 01/24/89 -4.97% +7.07% +9.65% $25.12
Money Market(1) 01/24/89 -1.44% +3.42% +3.64% $14.39
Mutual Discovery Securities 11/08/96 -11.52% -- +4.44% $11.23
Mutual Shares Securities 11/08/96 -6.50% -- +7.11% $11.84
Natural Resources Securities 01/24/89 -31.62% -10.30% -1.70% $ 8.51
Real Estate Securities 01/24/89 -23.17% +8.36% +8.72% $23.11
Rising Dividends 01/27/92 +0.24% +15.31% +11.34% $21.17
Small Cap 11/01/95 -7.56% -- +12.30% $14.60
Templeton Developing Markets Equity 03/15/94 -27.90% -- -4.76% $ 7.99
Templeton Global Asset Allocation 05/01/95 -6.63% -- +8.36% $13.59
Templeton Global Growth 03/15/94 +2.26% -- +10.59% $16.31
Templeton Global Income Securities 01/24/89 +0.39% +3.94% +5.96% $17.91
Templeton International Equity 01/27/92 -1.11% +8.42% +9.15% $18.44
Templeton International Smaller
Companies 05/01/96 -18.69% -- -3.40% $ 9.36
Templeton Pacific Growth 01/27/92 -19.54% -10.94% -3.12% $ 8.08
U.S. Government Securities 03/14/89 +0.75% +5.13% +6.70% $19.01
Value Securities(1) 05/01/98 -- -- -28.03% $ 7.72
Zero Coupon - 2000(1) 03/14/89 +0.81% +4.19% +7.63% $20.68
Zero Coupon - 2005(1) 03/14/89 +5.77% +6.58% +9.73% $25.00
Zero Coupon - 2010(1) 03/14/89 +7.66% +8.86% +10.98% $27.92
</TABLE>
Figures show the average annual change in value, assuming reinvestment of
dividends and capital gains. Figures are based on subaccount performance;
Franklin Valuemark III was first available January 1, 1994. Performance reflects
all charges, including the annual contract maintenance charge and applicable
contingent deferred sales charges (CDSC). The CDSC reduces from 6% to 0% over
five full years for each purchase payment and is adjusted for the applicable
free withdrawal privilege. Averaged returns smooth out variations in a
subaccount's returns, which can be significant; they are not the same as
year-by-year results. Results for less than one year are aggregate total return.
Results are based on past performance of the subaccounts. Investment returns and
the value of your principal will vary with market conditions, so you may have a
gain or loss when you sell your units. PAST PERFORMANCE CANNOT PREDICT OR
GUARANTEE FUTURE RESULTS. Since 1982, it has been a period of generally rising
securities prices, which may not be sustained in the future.
1. Past expense reductions by the manager increased total return.
2. Prior to May 1, 1998, Utility Equity.
<PAGE>
Dear Contract Owner:
It is a pleasure to bring you the annual report for Franklin(R) Valuemark(R) II,
a flexible-premium deferred variable annuity, and the Franklin Valuemark Funds
for the period ended December 31, 1998.
We are very pleased that Standard & Poor's(R) rating agency assigned their top
rating, AAA (extremely strong), to Allianz Life Insurance Company of North
America (in New York, Preferred Life Insurance Company of New York), which
issues Franklin Valuemark II. This rating confirms the company's financial
soundness and its ability to meet its obligations to contract holders like you.
Allianz Life and Preferred Life have also received excellent ratings from A.M.
Best, Moody's and Laughlin Analytics.*
In the accompanying report from the Franklin Templeton portfolio managers, you
will find a summary covering each portfolio's performance as well as global
market conditions over the past twelve months. The portfolio performance table,
presented on the following page, shows average annual total returns and each
portfolio's unit price for the year ended December 31, 1998. We encourage you to
take note of the portfolios' long-term performance illustrated by the graph
accompanying each portfolio summary within this book. The graph shows how a
$10,000 hypothetical investment would have grown since the portfolio's inception
through December 31, 1998. It is important to remember that financial markets
fluctuate daily, and past investment conditions and results are not predictive
of future trends.
We look to the future with confidence and believe Franklin Valuemark II will
continue to be an appropriate vehicle for tax-conscious investors seeking to
meet their long-term retirement and other financial and insurance needs. As
always, we thank you for your continued support and look forward to serving you
in the years to come.
Sincerely,
/s/ Lowell C. Anderson /s/ Ronald L. Wobbeking
Lowell C. Anderson Ronald L. Wobbeking
Chairman of the Board Chairman of the Board
Allianz Life Insurance Company Preferred Life Insurance Company
of North America of New York
*Ratings are from independent analysts of the insurance industry and are subject
to change. The ratings reflect the analysts' assessments of the insurance
company's financial condition and do not pertain to the investment portfolios,
which fluctuate with market conditions.
<PAGE>
FRANKLIN VALUEMARK II
Standardized Average Annual Total Returns for the periods ended 12/31/98
With Contingent Deferred Sales Charge and Other Charges
<TABLE>
<CAPTION>
ALLIANZ LIFE SUBACCOUNT
UNIT PRICE SINCE INCEPTION
SUBACCOUNT NAME ON 12/31/98 1-YEAR 5-YEAR INCEPTION DATE
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Capital Growth $15.57 +14.27% -- +17.33% 05/01/96
Global Health Care Securities(1) $10.61 -- -- +1.75% 05/01/98
Global Utilities Securities(2) $28.31 +5.29% +10.18% +10.98% 01/24/89
Growth & Income $26.23 +2.48% +13.78% +10.11% 01/24/89
High Income $21.21 -4.83% +6.81% +7.78% 01/24/89
Income Securities $25.12 -4.12% +7.07% +9.65% 01/24/89
Money Market(1) $14.39 -0.59% +3.42% +3.64% 01/24/89
Mutual Discovery Securities $11.23 -10.67% -- +4.44% 11/08/96
Mutual Shares Securities $11.84 -5.65% -- +7.11% 11/08/96
Natural Resources Securities $ 8.51 -30.77% -10.30% -1.70% 01/24/89
Real Estate Securities $23.11 -22.32% +8.36% +8.72% 01/24/89
Rising Dividends $21.17 +1.09% +15.31% +11.34% 01/27/92
Small Cap $14.60 -6.71% -- +12.30% 11/01/95
Templeton Developing Markets Equity $ 7.99 -27.05% -- -4.76% 03/15/94
Templeton Global Asset Allocation $13.59 -5.78% -- +8.36% 05/01/95
Templeton Global Growth $16.31 +3.11% -- +10.59% 03/15/94
Templeton Global Income Securities $17.91 +1.24% +3.94% +5.96% 01/24/89
Templeton International Equity $18.44 -0.26% +8.42% +9.15% 01/27/92
Templeton International Smaller
Companies $ 9.36 -17.84% -- -3.40% 05/01/96
Templeton Pacific Growth $ 8.08 -18.69% -10.94% -3.12% 01/27/92
U.S. Government Securities $19.01 +1.60% +5.13% +6.70% 03/14/89
Value Securities(1) $ 7.72 -- -- -27.18% 05/01/98
Zero Coupon - 2000(1) $20.68 +1.66% +4.19% +7.63% 03/14/89
Zero Coupon - 2005(1) $25.00 +6.62% +6.58% +9.73% 03/14/89
Zero Coupon - 2010(1) $27.92 +8.51% +8.86% +10.98% 03/14/89
</TABLE>
<TABLE>
<CAPTION>
PREFERRED LIFE
SUBACCOUNT
SINCE INCEPTION
SUBACCOUNT NAME INCEPTION DATE
- ---------------------------------------------------------------------
<S> <C> <C>
Capital Growth +17.15% 06/10/96
Global Health Care Securities(1) +9.11% 08/17/98
Global Utilities Securities(2) +10.86% 09/06/91
Growth & Income +12.43% 09/06/91
High Income +9.24% 09/06/91
Income Securities +9.55% 09/06/91
Money Market(1) -2.85% 09/06/91
Mutual Discovery Securities +3.96% 12/02/96
Mutual Shares Securities +6.75% 12/02/96
Natural Resources Securities -2.85% 09/06/91
Real Estate Securities +10.89% 09/06/91
Rising Dividends +11.56% 03/10/92
Small Cap +5.30% 06/10/96
Templeton Developing Markets Equity -4.85% 04/25/94
Templeton Global Asset Allocation +8.00% 08/04/95
Templeton Global Growth +10.89% 04/25/94
Templeton Global Income Securities +5.17% 09/06/91
Templeton International Equity +9.32% 03/10/92
Templeton International Smaller
Companies -4.21% 06/10/96
Templeton Pacific Growth -3.16% 03/10/92
U.S. Government Securities +6.36% 09/06/91
Value Securities(1) -6.87% 08/17/98
Zero Coupon - 2000(1) +7.31% 09/06/91
Zero Coupon - 2005(1) +10.01% 09/06/91
Zero Coupon - 2010(1) +12.13% 09/06/91
</TABLE>
Figures show the average annual change in value, assuming reinvestment of
dividends and capital gains. Performance reflects all charges, including the
annual contract maintenance charge and applicable contingent deferred sales
charges (CDSC). The CDSC reduces from 5% to 0% over five full years for each
purchase payment and is adjusted for the applicable free withdrawal privilege.
Averaged returns smooth out variations in a subaccount's returns, which can be
significant; they are not the same as year-by-year results. Results for less
than one year are aggregate total return. Results are based on past performance
of the subaccounts of Allianz Life Insurance Company of North America ("Allianz
Life") and its subsidiary Preferred Life Insurance Company of New York
("Preferred Life"). The Allianz Life and Preferred Life subaccounts are
identical except for subaccount inception dates. Investment returns and the
value of your principal will vary with market conditions, so you may have a gain
or loss when you sell your units. PAST PERFORMANCE CANNOT PREDICT OR GUARANTEE
FUTURE RESULTS. Since 1982, it has been a period of generally rising securities
prices, which may not be sustained in the future.
1. Past expense reductions by the manager increased total return.
2. Prior to May 1, 1998, Utility Equity.
<PAGE>
Dear Policy Owner:
It is a pleasure to bring you the annual report for Franklin(R) Valuemark(R)
Life, a single-premium variable life insurance product, and the Franklin
Valuemark Funds for the period ended December 31, 1998.
We are very pleased that Standard & Poor's(R) rating agency assigned their top
rating, AAA (extremely strong), to Allianz Life Insurance Company of North
America, which issues Franklin Valuemark Life. This rating confirms the
company's financial soundness and its ability to meet its obligations to policy
holders like you. Allianz Life has also received excellent ratings from A.M.
Best, Moody's and Laughlin Analytics.*
In the accompanying report from the Franklin Templeton portfolio managers, you
will find a summary covering each portfolio's performance as well as global
market conditions over the past twelve months. The portfolio performance table,
presented on the following page, shows each portfolio's change in unit price for
the year ended December 31, 1998. We encourage you to take note of the
portfolios' long-term performance illustrated by the graph accompanying each
portfolio summary within this book. The graph shows how a $10,000 hypothetical
investment would have grown since the portfolio's inception through December 31,
1998. It is important to remember that financial markets fluctuate daily, and
past investment conditions and results are not predictive of future trends.
We look to the future with confidence and believe Franklin Valuemark Life will
continue to be an appropriate vehicle for tax-conscious investors seeking to
meet their long-term estate planning, and other financial and insurance needs.
As always, we thank you for your continued support and look forward to serving
you in the years to come.
Sincerely,
/s/ Lowell C. Anderson
Lowell C. Anderson
Chairman of the Board
Allianz Life Insurance Company of North America
*Ratings are from independent analysts of the insurance industry and are subject
to change. The ratings reflect the analysts' assessments of the insurance
company's financial condition and do not pertain to the investment portfolios,
which fluctuate with market conditions.
<PAGE>
FRANKLIN VALUEMARK LIFE
Change in Unit Prices
<TABLE>
<CAPTION>
% CHANGE
UNIT PRICE* UNIT PRICE* IN UNIT PRICE*
SUBACCOUNT NAME 12/31/97 12/31/98 12/31/97 TO 12/31/98
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Capital Growth $13.27 $15.85 +19.39%
Global Health Care Securities** $10.00 $10.66 +6.60%
Global Utilities Securities*** $31.22 $34.46 +10.36%
Growth and Income $39.80 $42.80 +7.52%
High Income $24.57 $24.61 +0.17%
Income Securities $25.27 $25.50 +0.88%
Money Market $16.24 $16.96 +4.43%
Mutual Discovery Securities $12.07 $11.38 -5.71%
Mutual Shares Securities $12.08 $12.00 -0.66%
Natural Resources Securities $12.63 $ 9.35 -25.94%
Real Estate Securities $33.03 $27.27 -17.44%
Rising Dividends $20.85 $22.13 +6.12%
Small Cap $15.16 $14.90 -1.72%
Templeton Developing Markets Equity $10.23 $ 7.96 -22.20%
Templeton Global Asset Allocation $14.03 $13.92 -0.79%
Templeton Global Growth $15.01 $16.24 +8.16%
Templeton Global Income Securities $16.99 $18.05 +6.28%
Templeton International Equity $18.40 $19.28 +4.77%
Templeton International Smaller Companies $10.94 $ 9.53 -12.93%
Templeton Pacific Growth $ 9.80 $ 8.45 -13.78%
U.S. Government Securities $22.28 $23.75 +6.64%
Value Securities** $10.00 $ 7.75 -22.50%
Zero Coupon - 2000 $25.39 $27.09 +6.70%
Zero Coupon - 2005 $29.72 $33.20 +11.69%
Zero Coupon - 2010 $34.63 $39.34 +13.59%
</TABLE>
The unit price is the subaccount net asset value, less any daily charges
including an annual asset charge of 0.75% and portfolio charges, divided by the
number of outstanding units at the end of the valuation period.
THE UNIT PRICE DOES NOT CONTAIN CERTAIN CHARGES, INCLUDING THE 10-YEAR DEFERRED
ISSUE CHARGE (COVERING PREMIUM TAXES, SALES CHARGES AND POLICY ISSUE CHARGE) AND
THE COST OF INSURANCE, DEDUCTED FROM THE POLICY ACCOUNT OR FROM PREMIUM
PAYMENTS. THESE CHARGES AND DEDUCTIONS CAN HAVE A SIGNIFICANT EFFECT ON POLICY
ACCOUNT, INSURANCE BENEFIT, AND CASH SURRENDER VALUES. SEE THE POLICY PROSPECTUS
FOR A COMPLETE DESCRIPTION OF THESE CHARGES, INCLUDING APPLICABLE SALES CHARGES.
All unit prices were $10.00 at inception. PAST PERFORMANCE CANNOT PREDICT OR
GUARANTEE FUTURE RESULTS. Since 1982, it has been a period of generally rising
securities prices, which may not be sustained in the future. This information is
for policy owners only and may not be used as sales literature.
*The unit prices have been rounded to the nearest hundredth. Percent change is
calculated using actual unit prices.
**The subaccount began operations May 1, 1998, so figures reflect the change in
unit price from May 1, 1998, to December 31, 1998, rather than from the
reporting period of December 31, 1997, to December 31, 1998. In addition,
expense reductions by the investment managers increased returns; these
arrangements have been terminated.
***Prior to May 1, 1998, Utility Equity.
<PAGE>
Dear Contract Owner:
It is a pleasure to bring you the annual report for Franklin(R) Valuemark(R) II,
a flexible-premium deferred variable annuity, and the Franklin Valuemark Funds
for the period ended December 31, 1998.
We are very pleased that Standard & Poor's(R) rating agency assigned their top
rating, AAA (extremely strong), to Allianz Life Insurance Company of North
America (in New York, Preferred Life Insurance Company of New York), which
issues Franklin Valuemark II. This rating confirms the company's financial
soundness and its ability to meet its obligations to contract holders like you.
Allianz Life and Preferred Life have also received excellent ratings from A.M.
Best, Moody's and Laughlin Analytics.*
In the accompanying report from the Franklin Templeton portfolio managers, you
will find a summary covering each portfolio's performance as well as global
market conditions over the past twelve months. The portfolio performance table,
presented on the following page, shows average annual total returns and each
portfolio's unit price for the year ended December 31, 1998. We encourage you to
take note of the portfolios' long-term performance illustrated by the graph
accompanying each portfolio summary within this book. The graph shows how a
$10,000 hypothetical investment would have grown since the portfolio's inception
through December 31, 1998. It is important to remember that financial markets
fluctuate daily, and past investment conditions and results are not predictive
of future trends.
We look to the future with confidence and believe Franklin Valuemark II will
continue to be an appropriate vehicle for tax-conscious investors seeking to
meet their long-term retirement and other financial and insurance needs. As
always, we thank you for your continued support and look forward to serving you
in the years to come.
Sincerely,
/s/ Lowell C. Anderson /s/ Ronald L. Wobbeking
Lowell C. Anderson Ronald L. Wobbeking
Chairman of the Board Chairman of the Board
Allianz Life Insurance Company Preferred Life Insurance Company
of North America of New York
*Ratings are from independent analysts of the insurance industry and are subject
to change. The ratings reflect the analysts' assessments of the insurance
company's financial condition and do not pertain to the investment portfolios,
which fluctuate with market conditions.
<PAGE>
FRANKLIN VALUEMARK II
Standardized Average Annual Total Returns for the periods ended 12/31/98
With Contingent Deferred Sales Charge and Other Charges
<TABLE>
<CAPTION>
ALLIANZ LIFE SUBACCOUNT
UNIT PRICE SINCE INCEPTION
SUBACCOUNT NAME ON 12/31/98 1-YEAR 5-YEAR INCEPTION DATE
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Capital Growth $15.57 +14.27% -- +17.33% 05/01/96
Global Health Care Securities(1) $10.61 -- -- +1.75% 05/01/98
Global Utilities Securities(2) $28.31 +5.29% +10.18% +10.98% 01/24/89
Growth & Income $26.23 +2.48% +13.78% +10.11% 01/24/89
High Income $21.21 -4.83% +6.81% +7.78% 01/24/89
Income Securities $25.12 -4.12% +7.07% +9.65% 01/24/89
Money Market(1) $14.39 -0.59% +3.42% +3.64% 01/24/89
Mutual Discovery Securities $11.23 -10.67% -- +4.44% 11/08/96
Mutual Shares Securities $11.84 -5.65% -- +7.11% 11/08/96
Natural Resources Securities $ 8.51 -30.77% -10.30% -1.70% 01/24/89
Real Estate Securities $23.11 -22.32% +8.36% +8.72% 01/24/89
Rising Dividends $21.17 +1.09% +15.31% +11.34% 01/27/92
Small Cap $14.60 -6.71% -- +12.30% 11/01/95
Templeton Developing Markets Equity $ 7.99 -27.05% -- -4.76% 03/15/94
Templeton Global Asset Allocation $13.59 -5.78% -- +8.36% 05/01/95
Templeton Global Growth $16.31 +3.11% -- +10.59% 03/15/94
Templeton Global Income Securities $17.91 +1.24% +3.94% +5.96% 01/24/89
Templeton International Equity $18.44 -0.26% +8.42% +9.15% 01/27/92
Templeton International Smaller
Companies $ 9.36 -17.84% -- -3.40% 05/01/96
Templeton Pacific Growth $ 8.08 -18.69% -10.94% -3.12% 01/27/92
U.S. Government Securities $19.01 +1.60% +5.13% +6.70% 03/14/89
Value Securities(1) $ 7.72 -- -- -27.18% 05/01/98
Zero Coupon - 2000(1) $20.68 +1.66% +4.19% +7.63% 03/14/89
Zero Coupon - 2005(1) $25.00 +6.62% +6.58% +9.73% 03/14/89
Zero Coupon - 2010(1) $27.92 +8.51% +8.86% +10.98% 03/14/89
</TABLE>
<TABLE>
<CAPTION>
PREFERRED LIFE
SUBACCOUNT
SINCE INCEPTION
SUBACCOUNT NAME INCEPTION DATE
- ---------------------------------------------------------------------
<S> <C> <C>
Capital Growth +17.15% 06/10/96
Global Health Care Securities(1) +9.11% 08/17/98
Global Utilities Securities(2) +10.86% 09/06/91
Growth & Income +12.43% 09/06/91
High Income +9.24% 09/06/91
Income Securities +9.55% 09/06/91
Money Market(1) -2.85% 09/06/91
Mutual Discovery Securities +3.96% 12/02/96
Mutual Shares Securities +6.75% 12/02/96
Natural Resources Securities -2.85% 09/06/91
Real Estate Securities +10.89% 09/06/91
Rising Dividends +11.56% 03/10/92
Small Cap +5.30% 06/10/96
Templeton Developing Markets Equity -4.85% 04/25/94
Templeton Global Asset Allocation +8.00% 08/04/95
Templeton Global Growth +10.89% 04/25/94
Templeton Global Income Securities +5.17% 09/06/91
Templeton International Equity +9.32% 03/10/92
Templeton International Smaller
Companies -4.21% 06/10/96
Templeton Pacific Growth -3.16% 03/10/92
U.S. Government Securities +6.36% 09/06/91
Value Securities(1) -6.87% 08/17/98
Zero Coupon - 2000(1) +7.31% 09/06/91
Zero Coupon - 2005(1) +10.01% 09/06/91
Zero Coupon - 2010(1) +12.13% 09/06/91
</TABLE>
Figures show the average annual change in value, assuming reinvestment of
dividends and capital gains. Performance reflects all charges, including the
annual contract maintenance charge and applicable contingent deferred sales
charges (CDSC). The CDSC reduces from 5% to 0% over five full years for each
purchase payment and is adjusted for the applicable free withdrawal privilege.
Averaged returns smooth out variations in a subaccount's returns, which can be
significant; they are not the same as year-by-year results. Results for less
than one year are aggregate total return. Results are based on past performance
of the subaccounts of Allianz Life Insurance Company of North America ("Allianz
Life") and its subsidiary Preferred Life Insurance Company of New York
("Preferred Life"). The Allianz Life and Preferred Life subaccounts are
identical except for subaccount inception dates. Investment returns and the
value of your principal will vary with market conditions, so you may have a gain
or loss when you sell your units. PAST PERFORMANCE CANNOT PREDICT OR GUARANTEE
FUTURE RESULTS. Since 1982, it has been a period of generally rising securities
prices, which may not be sustained in the future.
1. Past expense reductions by the manager increased total return.
2. Prior to May 1, 1998, Utility Equity.
<PAGE>
Dear Policy Owner:
It is a pleasure to bring you the annual report for Franklin(R) Valuemark(R)
Life, a single-premium variable life insurance product, and the Franklin
Valuemark Funds for the period ended December 31, 1998.
We are very pleased that Standard & Poor's(R) rating agency assigned their top
rating, AAA (extremely strong), to Allianz Life Insurance Company of North
America, which issues Franklin Valuemark Life. This rating confirms the
company's financial soundness and its ability to meet its obligations to policy
holders like you. Allianz Life has also received excellent ratings from A.M.
Best, Moody's and Laughlin Analytics.*
In the accompanying report from the Franklin Templeton portfolio managers, you
will find a summary covering each portfolio's performance as well as global
market conditions over the past twelve months. The portfolio performance table,
presented on the following page, shows each portfolio's change in unit price for
the year ended December 31, 1998. We encourage you to take note of the
portfolios' long-term performance illustrated by the graph accompanying each
portfolio summary within this book. The graph shows how a $10,000 hypothetical
investment would have grown since the portfolio's inception through December 31,
1998. It is important to remember that financial markets fluctuate daily, and
past investment conditions and results are not predictive of future trends.
We look to the future with confidence and believe Franklin Valuemark Life will
continue to be an appropriate vehicle for tax-conscious investors seeking to
meet their long-term estate planning, and other financial and insurance needs.
As always, we thank you for your continued support and look forward to serving
you in the years to come.
Sincerely,
/s/ Lowell C. Anderson
Lowell C. Anderson
Chairman of the Board
Allianz Life Insurance Company of North America
*Ratings are from independent analysts of the insurance industry and are subject
to change. The ratings reflect the analysts' assessments of the insurance
company's financial condition and do not pertain to the investment portfolios,
which fluctuate with market conditions.
<PAGE>
FRANKLIN VALUEMARK LIFE
Change in Unit Prices
<TABLE>
<CAPTION>
% CHANGE
UNIT PRICE* UNIT PRICE* IN UNIT PRICE*
SUBACCOUNT NAME 12/31/97 12/31/98 12/31/97 TO 12/31/98
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Capital Growth $13.27 $15.85 +19.39%
Global Health Care Securities** $10.00 $10.66 +6.60%
Global Utilities Securities*** $31.22 $34.46 +10.36%
Growth and Income $39.80 $42.80 +7.52%
High Income $24.57 $24.61 +0.17%
Income Securities $25.27 $25.50 +0.88%
Money Market $16.24 $16.96 +4.43%
Mutual Discovery Securities $12.07 $11.38 -5.71%
Mutual Shares Securities $12.08 $12.00 -0.66%
Natural Resources Securities $12.63 $ 9.35 -25.94%
Real Estate Securities $33.03 $27.27 -17.44%
Rising Dividends $20.85 $22.13 +6.12%
Small Cap $15.16 $14.90 -1.72%
Templeton Developing Markets Equity $10.23 $ 7.96 -22.20%
Templeton Global Asset Allocation $14.03 $13.92 -0.79%
Templeton Global Growth $15.01 $16.24 +8.16%
Templeton Global Income Securities $16.99 $18.05 +6.28%
Templeton International Equity $18.40 $19.28 +4.77%
Templeton International Smaller Companies $10.94 $ 9.53 -12.93%
Templeton Pacific Growth $ 9.80 $ 8.45 -13.78%
U.S. Government Securities $22.28 $23.75 +6.64%
Value Securities** $10.00 $ 7.75 -22.50%
Zero Coupon - 2000 $25.39 $27.09 +6.70%
Zero Coupon - 2005 $29.72 $33.20 +11.69%
Zero Coupon - 2010 $34.63 $39.34 +13.59%
</TABLE>
The unit price is the subaccount net asset value, less any daily charges
including an annual asset charge of 0.75% and portfolio charges, divided by the
number of outstanding units at the end of the valuation period.
THE UNIT PRICE DOES NOT CONTAIN CERTAIN CHARGES, INCLUDING THE 10-YEAR DEFERRED
ISSUE CHARGE (COVERING PREMIUM TAXES, SALES CHARGES AND POLICY ISSUE CHARGE) AND
THE COST OF INSURANCE, DEDUCTED FROM THE POLICY ACCOUNT OR FROM PREMIUM
PAYMENTS. THESE CHARGES AND DEDUCTIONS CAN HAVE A SIGNIFICANT EFFECT ON POLICY
ACCOUNT, INSURANCE BENEFIT, AND CASH SURRENDER VALUES. SEE THE POLICY PROSPECTUS
FOR A COMPLETE DESCRIPTION OF THESE CHARGES, INCLUDING APPLICABLE SALES CHARGES.
All unit prices were $10.00 at inception. PAST PERFORMANCE CANNOT PREDICT OR
GUARANTEE FUTURE RESULTS. Since 1982, it has been a period of generally rising
securities prices, which may not be sustained in the future. This information is
for policy owners only and may not be used as sales literature.
*The unit prices have been rounded to the nearest hundredth. Percent change is
calculated using actual unit prices.
**The subaccount began operations May 1, 1998, so figures reflect the change in
unit price from May 1, 1998, to December 31, 1998, rather than from the
reporting period of December 31, 1997, to December 31, 1998. In addition,
expense reductions by the investment managers increased returns; these
arrangements have been terminated.
***Prior to May 1, 1998, Utility Equity.
<PAGE>
FRANKLIN VALUEMARK FUNDS ANNUAL REPORT TABLE OF CONTENTS
[Celebrating Over 50 years SEAL]
<TABLE>
<S> <C>
LETTER TO CONTRACT OWNERS ............................................. 2
A WORD ABOUT RISK ..................................................... 5
PORTFOLIO OBJECTIVES AND PRIMARY INVESTMENTS .......................... 6
PORTFOLIO SUMMARIES
Portfolios Seeking Capital Growth
Capital Growth Fund ................................................. 9
Global Health Care Securities Fund .................................. 11
Mutual Discovery Securities Fund .................................... 13
Natural Resources Securities Fund ................................... 14
Small Cap Fund ...................................................... 16
Templeton Developing Markets Equity Fund ............................ 18
Templeton Global Growth Fund ........................................ 21
Templeton International Equity Fund ................................. 23
Templeton International Smaller Companies Fund ...................... 25
Templeton Pacific Growth Fund ....................................... 28
Portfolios Seeking Growth and Income
Global Utilities Securities Fund .................................... 31
Growth and Income Fund .............................................. 34
Income Securities Fund .............................................. 36
Mutual Shares Securities Fund ....................................... 38
Real Estate Securities Fund ......................................... 40
Rising Dividends Fund ............................................... 42
Templeton Global Asset Allocation Fund .............................. 45
Value Securities Fund ............................................... 48
Portfolios Seeking Current Income
High Income Fund .................................................... 49
Templeton Global Income Securities Fund ............................. 51
U.S. Government Securities Fund ..................................... 54
Zero Coupon Funds ................................................... 56
Portfolio Seeking Capital Preservation and Income
Money Market Fund ................................................... 59
IMPORTANT ENDNOTES TO PERFORMANCE INFORMATION ......................... 61
INDEX DEFINITIONS ..................................................... 62
FINANCIAL HIGHLIGHTS & STATEMENT OF INVESTMENTS ....................... 68
FINANCIAL STATEMENTS .................................................. 163
NOTES TO FINANCIAL STATEMENTS ......................................... 182
INDEPENDENT AUDITORS' REPORT .......................................... 197
TAX INFORMATION ....................................................... 198
PROSPECTUS SUPPLEMENTS ................................................ 199
</TABLE>
- --------------------------------------------------------------------------------
Thank you for investing with Franklin Valuemark. We encourage our investors to
maintain a long-term perspective, and remember that all securities markets move
both up and down, as do portfolio unit prices. We appreciate your past support
and look forward to serving your investment needs in the years ahead.
- --------------------------------------------------------------------------------
FRANKLIN VALUEMARK FUNDS NOW ISSUES ANOTHER CLASS OF SHARES, WHICH IS CALLED
CLASS 2. FOR THAT REASON, THE ORIGINAL SHARE CLASS IN WHICH YOU INVEST HAS BEEN
RENAMED CLASS 1. THERE ARE NO OTHER CHANGES TO CLASS 1 SHARES, WHICH WILL
CONTINUE TO BE AVAILABLE AS BEFORE.
PLEASE RETAIN THIS DOCUMENT, INCLUDING THE ENCLOSED PROSPECTUS SUPPLEMENTS ON P.
199, WITH YOUR CURRENT PROSPECTUS, FOR REFERENCE.
- --------------------------------------------------------------------------------
<PAGE>
LETTER TO CONTRACT OWNERS
Dear Contract Owners:
Although the one-year reporting period witnessed overall positive stock market
performance for the U.S. and much of Europe, we believe the market correction in
late August, precipitated in part by Russia's debt default and currency
devaluation, proved that these markets were not immune to troubles elsewhere in
the world. The spread of emerging market problems evidently sparked fears of a
liquidity crisis in the U.S., as poor-performing loans began to negatively
affect major American bank balance sheets and prompted the bailout of a major
hedge fund. Many financial institutions curtailed their lending, creating a
"credit crunch" that adversely affected many companies.
The Federal Reserve Board (the Fed) took swift action in an effort to stimulate
growth. Over September, October and November, the Fed's monetary policy panel,
the Federal Open Market Committee, cut the federal funds target rate by 0.75%,
to 4.75%. The Fed's move attempted to provide liquidity to the financial system
and make it easier for major corporations to obtain favorable lending from
banks. This provided a positive boost to equity markets, and the Standard &
Poor's(R) 500 Stock Index (S&P 500(R)) ended the year up 28.6%, more than
recouping the losses of August and September.
With less return for their money in the fixed-income markets, investors seemed
willing to pay higher price-to-earnings (P/E) ratios for the largest
capitalization stocks. In fact, much of the rise in the S&P 500 did not come
from higher earnings, but from the rising price investors in general were
willing to pay per dollar of earnings. On December 31, 1998, the average P/E
ratio for the S&P 500 was 31.97, compared with 24.51 a year earlier, while
according to IBES International, an analyst-estimate tracking service, operating
profits for the S&P 500 companies were expected to fall about 1% for 1998. Amid
market uncertainty, investors generally fled to the perceived safety of large
capitalization stocks, and small capitalization, value stocks were generally
left behind in the rally. The Russell 2000(R) Index, which tracks small
capitalization stock performance, was down 2.6% for the year.
2
<PAGE>
European markets closely mirrored those in the U.S., ending the reporting period
up 28.9%, as shown by the Morgan Stanley Capital International(R) (MSCI) Europe
Index, which tracks 15 developed market European countries. The European
Monetary Union (EMU) members continued a policy of fiscal tightening and
monetary policy reform to meet the required membership criteria and to prepare
for the first stage of euro implementation on January 1, 1999. That
implementation is expected to involve the definition and execution of a single
monetary policy in the euro, the setting of euro conversion rates, and the
beginning of foreign exchange transactions in the euro and euro-denominated new
public debt issuance. Also, during the reporting period, Europe came closer to
having a single stock market when the Frankfurt and London stock exchanges
decided to jointly trade Europe's top blue chip shares.
The Japanese and emerging market economies, on the other hand, continued their
downward slide. In our view, Japan's economy went from bad to worse. By October
it had contracted four quarters in a row, despite various fiscal-stimulus
packages. The Nikkei average tumbled to 12,880 in October, its lowest level for
13 years, from the year's high of 17,264 in March. Much of East Asia plunged
into a recession; Russia's economy imploded; and, by the end of the year,
Brazil's economy shrank after spending $30 billion defending its currency.
As mentioned in the semiannual report, the potential upside of the ongoing
turmoil in emerging markets is positive reform, such as more open business
practices and improved treatment of non-controlling and foreign investors.
Although significant risks remain, we continue to be optimistic about the future
performance of emerging market investments. Over the long term, we feel
competition between foreign and domestic investors should drive demand and
prices higher. Although volatility is inevitable in emerging markets, the
increasing activity of bargain-hunting, private equity funds and strategic
investors may boost share prices and add stability to the asset class.
The fixed-income sector was marked by periodic but persistent crises in emerging
market countries last year, while bond yields fell (prices rose) in the world's
major industrial markets. Not surprisingly, emerging market bonds underperformed
higher-quality industrial market bonds during the reporting period. In the U.S.,
the spread between high yield or "junk" bonds and Treasury securities widened,
indicating investors' demand for higher yields to compensate them for taking on
higher risk. Meanwhile corporate bond issuance surged. Even though yield spreads
were wider,
3
<PAGE>
overall corporate borrowing costs declined, thanks to falling Treasury yields.
On December 31, 1998, the benchmark 30-year Treasury bond yielded 5.09%,
compared with 5.93% a year earlier.
It is important to remember, of course, that securities markets always have
been, and always will be, subject to volatility. No one can predict exactly how
they will perform in the future. For this reason, we urge you to exercise
patience and focus not on day-to-day market movements, but on your long-term
investment goals. As always, we appreciate your support, welcome your questions
and comments, and look forward to serving your investment needs in the years
ahead.
Sincerely,
/s/ Rupert H. Johnson, Jr.
Rupert H. Johnson, Jr.
Trustee and Vice President
Franklin Valuemark Funds
4
<PAGE>
A WORD ABOUT RISK
All of the portfolios are subject to certain risks, which will cause investment
returns and the value of your principal to increase or decrease. Generally,
investments offering the potential for higher returns are accompanied by a
higher degree of risk. Stocks and other equities, representing an ownership
interest in an individual company, historically have outperformed other asset
classes over the long term, but tend to rise and fall more dramatically over the
shorter term. Securities of smaller companies, and companies involved in
reorganization or bankruptcy, may have greater price swings and greater credit
and other risks.
Bonds and other debt obligations are affected by the creditworthiness of their
issuers, and changes in interest rates, with prices declining as interest rates
increase. High yield, lower-rated ("junk") bonds generally have greater price
swings and higher default risks than investment grade bonds. An investment in
the Money Market Fund is neither insured nor guaranteed by the U.S. government.
The portfolio attempts to maintain a stable net asset value of $1.00 per share,
but there can be no assurance that it will.
Foreign investing, especially in emerging market countries, has additional risks
such as changes in currency values, market price swings, and economic, political
or social instability. These, and other risks pertaining to specific portfolios,
such as specialized industry or geographical sectors or use of complex
securities, are discussed in the Franklin Valuemark Funds prospectus. Your
investment representative can help you determine which portfolios may be right
for you.
5
<PAGE>
PORTFOLIO OBJECTIVES AND PRIMARY INVESTMENTS
The portfolio descriptions are provided for your convenience. For more complete
information, including portfolio policies and risks, please refer to your
Franklin Valuemark Funds prospectus or contact your investment representative.
PORTFOLIOS SEEKING CAPITAL GROWTH
GLOBAL GROWTH
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
<S> <C>
GLOBAL HEALTH CARE SECURITIES FUND Seeks capital appreciation. The portfolio concentrates
its investments in U.S. and foreign equity securities
issued by large and small capitalization health care
companies, including pharmaceutical, biotechnology,
medical and health services and medical supply companies.
- --------------------------------------------------------------------------------------------------------
MUTUAL DISCOVERY SECURITIES FUND Seeks capital appreciation. Using a value-driven
approach, the portfolio invests primarily in U.S. and
foreign equity securities, including securities of small
capitalization companies; may also invest in companies
involved in mergers and bankruptcies, as well as debt
securities of any quality including "junk bonds" and
defaulted securities.
- --------------------------------------------------------------------------------------------------------
NATURAL RESOURCES SECURITIES FUND Seeks capital appreciation, with current income as a
secondary objective. The portfolio invests primarily in
securities of companies in or related to the natural
resources sector in any nation, including developing
markets.
- --------------------------------------------------------------------------------------------------------
TEMPLETON DEVELOPING MARKETS EQUITY FUND Seeks long-term capital appreciation. The portfolio
invests primarily in equity securities of issuers in
foreign countries with developing markets.
- --------------------------------------------------------------------------------------------------------
TEMPLETON GLOBAL GROWTH FUND Seeks long-term capital growth. The portfolio maintains a
flexible policy of investing in stocks and debt
obligations of companies and governments of any nation,
including developing markets.
- --------------------------------------------------------------------------------------------------------
TEMPLETON INTERNATIONAL EQUITY FUND Seeks long-term capital growth. The portfolio invests
primarily in equity securities of companies whose primary
operations are outside the U.S., including developing
markets.
- --------------------------------------------------------------------------------------------------------
TEMPLETON INTERNATIONAL SMALLER COMPANIES FUND Seeks long-term capital appreciation. The portfolio
invests primarily in equity securities of smaller
companies outside the U.S., including developing markets.
- --------------------------------------------------------------------------------------------------------
TEMPLETON PACIFIC GROWTH FUND Seeks long-term capital growth. The portfolio invests
primarily in equity securities of companies whose primary
operations are in Pacific Rim countries, most of which
have developing markets.
- --------------------------------------------------------------------------------------------------------
</TABLE>
6
<PAGE>
PORTFOLIOS SEEKING CAPITAL GROWTH (CONT.)
DOMESTIC GROWTH
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
<S> <C>
CAPITAL GROWTH FUND Seeks capital appreciation, with current income as a
secondary consideration. The portfolio invests primarily
in equity securities of large- or mid-cap U.S. companies,
and to a lesser extent in small-cap companies. The
portfolio may also invest a portion in foreign
securities, including developing markets.
- --------------------------------------------------------------------------------------------------------
SMALL CAP FUND Seeks long-term capital growth. The portfolio invests
primarily in equity securities of small capitalization
growth companies. The portfolio may also invest a portion
in foreign securities.
- --------------------------------------------------------------------------------------------------------
</TABLE>
PORTFOLIOS SEEKING GROWTH AND INCOME
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
<S> <C>
GLOBAL UTILITIES SECURITIES FUND Seeks both capital appreciation and current income. The
(Prior to May 1, 1998, portfolio concentrates its investments in securities of
the Utility Equity Fund.) issuers in the public utilities industry (such as
electricity and telecommunications companies) in any
nation, including developing markets.
- --------------------------------------------------------------------------------------------------------
GROWTH AND INCOME FUND Seeks capital appreciation, with current income as a
secondary objective. The portfolio invests primarily in
U.S. common stocks and securities convertible into common
stocks, and may invest a portion in foreign securities,
including developing markets.
- --------------------------------------------------------------------------------------------------------
INCOME SECURITIES FUND Seeks to maximize income while maintaining prospects for
capital appreciation. The portfolio invests in debt and
equity securities, including "junk bonds." The portfolio
may invest in foreign securities, including developing
markets.
- --------------------------------------------------------------------------------------------------------
MUTUAL SHARES SECURITIES FUND Seeks capital appreciation, with current income as a
secondary objective. Using a value-driven approach, the
portfolio invests primarily in domestic equities,
including common and preferred stocks and convertible
securities; may also invest in companies involved in
mergers and bankruptcies, as well as debt securities of
any quality, including "junk bonds" and defaulted
securities. The portfolio may also invest in foreign
securities.
- --------------------------------------------------------------------------------------------------------
REAL ESTATE SECURITIES FUND Seeks capital appreciation, with current income as a
secondary objective. The portfolio concentrates its
investments in real estate investment trusts (REITs) and
publicly traded securities of companies in the real
estate industry.
- --------------------------------------------------------------------------------------------------------
RISING DIVIDENDS FUND Seeks capital appreciation, with current income as a
secondary objective. The portfolio invests primarily in
the equity securities of companies that have paid
consistently rising dividends over the past ten years.
Preservation of capital is also an important
consideration. The portfolio may also invest a small
portion in foreign securities.
- --------------------------------------------------------------------------------------------------------
</TABLE>
7
<PAGE>
PORTFOLIOS SEEKING GROWTH AND INCOME (CONT.)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
<S> <C>
TEMPLETON GLOBAL ASSET ALLOCATION FUND Seeks a high level of total return. The portfolio has a
flexible policy of investing in equity securities, debt
obligations and money market instruments of companies and
governments of any nation, including developing markets.
In addition, the portfolio may invest in "junk bonds."
- --------------------------------------------------------------------------------------------------------
VALUE SECURITIES FUND Seeks long-term total return. The portfolio invests
primarily in securities of companies, which in the
portfolio manager's opinion, are selling substantially
below the underlying value of their assets or private
market value. Such companies may include small
capitalization companies, takeover candidates,
turnarounds and companies emerging from bankruptcy. The
portfolio may also invest a portion in foreign
securities.
- --------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
PORTFOLIOS SEEKING CURRENT INCOME
- --------------------------------------------------------------------------------------------------------
<S> <C>
HIGH INCOME FUND Seeks a high level of current return, with capital
appreciation as a secondary objective. The portfolio
invests in debt securities and dividend-paying common and
preferred stocks, which may include high risk securities
and "junk bonds." The portfolio may also invest in
foreign securities, including developing markets.
- --------------------------------------------------------------------------------------------------------
TEMPLETON GLOBAL INCOME SECURITIES FUND Seeks high current income, with capital appreciation as a
secondary objective. The portfolio invests in debt
securities from any nation, including developing markets.
The portfolio may also invest in lower-rated debt
securities.
- --------------------------------------------------------------------------------------------------------
U.S. GOVERNMENT SECURITIES FUND Seeks to earn income. The portfolio invests exclusively
in obligations of the U.S. government, its agencies or
instrumentalities, with an emphasis on mortgage-backed
securities.
- --------------------------------------------------------------------------------------------------------
THREE ZERO COUPON FUNDS The three zero coupon bond portfolios seek a high
(MATURITY DATES: 2000, 2005, 2010) investment return consistent with preservation of
capital. Each zero coupon portfolio seeks to return a
reasonably assured target dollar amount, predictable at
the time of the investment, on a specific date in the
future. The portfolios may not be appropriate for those
who intend to redeem units before the maturity dates.
- --------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
PORTFOLIO SEEKING CAPITAL PRESERVATION AND INCOME
- --------------------------------------------------------------------------------------------------------
<S> <C>
MONEY MARKET FUND Seeks high current income consistent with capital
preservation and liquidity. The portfolio invests in
high-quality money market instruments.
- --------------------------------------------------------------------------------------------------------
</TABLE>
8
<PAGE>
PORTFOLIO SUMMARIES
As you read the following portfolio summaries, please remember the discussions
accurately reflect our views, opinions and portfolio holdings as of December 31,
1998, the end of the reporting period. However, they are not necessarily
complete analyses of every aspect of any industry, security or investment. Keep
in mind that market and economic conditions are changing constantly, which can
be expected to affect our strategies and the portfolios' composition. Although
historical performance is no guarantee of future results, these insights may
help you understand our investment and management philosophy.
GRAPHIC MATERIAL (1)
This chart shows the top 10 industry breakdown based on the percentage of total
net assets on 12/31/98 for Capital Growth Fund.
- -------------------------------------------------------------------------------
TOP 10 INDUSTRY BREAKDOWN
Capital Growth Fund
12/31/98
<TABLE>
<CAPTION>
% OF TOTAL
SECTOR NET ASSETS
- -------------------------------------------------------
<S> <C>
Electronic Technology 16.0%
Health Technology 13.3%
Technology Services 6.3%
Finance 5.6%
Consumer Non-Durables 5.4%
Process Industries 5.3%
Retail Trade 4.4%
Utilities 4.1%
Transportation 3.3%
Consumer Services 2.9%
</TABLE>
- -------------------------------------------------------------------------------
PORTFOLIOS SEEKING CAPITAL GROWTH
CAPITAL GROWTH FUND
This marks the fourth consecutive year in which major equity market indices
posted strong gains, as demonstrated by the portfolio's +20.29% return, versus
+28.6% by the S&P 500 Stock Index, for the year ended December 31, 1998.*
However, despite domestic equity markets' healthy performance, the year under
review presented many challenges. Asian difficulties not only slowed economies
in that region, but evidently impacted the global economy as well. Numerous
reasons, including concerns regarding a potential slowing in the worldwide
economy, sparked a U.S. market sell-off beginning in mid-July. From mid-July to
early October, the S&P 500 Stock Index declined approximately 19%. Smaller
capitalization stocks fared worse as the Russell 2000 Index declined
approximately 37% from its peak in April. In late September, the Federal Reserve
Board lowered the federal funds target rate to stimulate the U.S. economy, and
followed this initial rate cut with two subsequent cuts for an overall 0.75%
reduction, which led to an equity market rally lasting through year-end.
During the year's market volatility, we stayed with the fund's core, long-term
growth, investment philosophy, seeking companies we believe have promising
growth prospects and superior management. We invest for the long term, using a
buy-and-hold strategy, which keeps turnover low, and should provide investors
with consistent growth over time.
In the past year, technology sector investments enhanced portfolio performance.
The fund's largest investment was in Cisco Systems Inc., a leading provider of
the
*Index is unmanaged and includes reinvested dividends. One cannot invest
directly in an index.
You will find a complete listing of the portfolios' securities including the
number of shares and dollar value beginning on page 72 of this report.
9
<PAGE>
networking communications equipment that enables Internet growth. Cisco shares
appreciated approximately 150% during the reporting period. The fund's
investments in Microsoft Corp., International Business Machines Corp., Applied
Materials Inc. and Compaq Computer Corp. also proved to be strong performers
during the year. Furthermore, notable non-technology sector investments such as
Amgen Inc., McDonald's Corp., Providian Financial Corp., Charles Schwab Corp.
and Wal-Mart Stores Inc. posted solid returns, with each of these stocks
appreciating more than 50% during 1998.
As is typical in any year, certain investments within the portfolio did not live
up to our expectations. In the past year, positions in companies with exposure
to the natural resources sector, including oil-related companies, performed
poorly. We think this was partly due to slack demand from Asia and related
deflationary pressures, as well as a general over-capacity situation for many
commodity products. Although it held less exposure to natural resource-related
securities than the overall market allocation, the portfolio did experience
declines in its holdings of Schlumberger Ltd., Barrett Resources Corp. and Royal
Dutch Petroleum Co. in the oil and oil services industries. The portfolio also
experienced losses in consumer products companies such as Campbell Soup, Mattel
and a consumer services company, Mirage Resorts, as these companies failed to
meet earnings expectations.
As we move into 1999, we are optimistic that the low interest-rate environment
may foster continued economic expansion in the U.S. As stated in previous
shareholder letters, we believe that the double-digit earnings growth
experienced in the recent past is not likely to continue. In addition, as of the
writing of this letter, the U.S. House of Representatives impeached the
President, hostilities continued in the Middle East and corporations worldwide
faced a potential Year 2000 computer problem. These uncertainties add risk to
the equity markets and are likely to contribute to further volatility in 1999.
We intend to weather this expected volatility by sticking closely to our
investment goal of finding outstanding growth companies for long-term
investments.
PERFORMANCE SHOWN IN THE GRAPH REFLECTS ALL FUND OPERATING EXPENSES BUT DOES NOT
INCLUDE ANY FEES, CHARGES OR EXPENSES IMPOSED BY THE VARIABLE ANNUITY AND LIFE
INSURANCE CONTRACTS THAT USE THE FRANKLIN VALUEMARK FUNDS. IF THEY HAD BEEN
INCLUDED, PERFORMANCE WOULD HAVE BEEN LOWER. SEE THE CONTRACT PROSPECTUS FOR A
COMPLETE DESCRIPTION OF THE CONTRACT EXPENSES, INCLUDING ANY APPLICABLE SALES
CHARGES. INDEX SOURCE IS STANDARD & POOR'S MICROPAL.
GRAPHIC MATERIAL (3)
This chart shows the average annual total return for the Capital Growth Fund as
of 12/31/98.
<TABLE>
<CAPTION>
Average Annual Total Return
- -----------------------------------------
<S> <C>
1-Year +20.29%
Since Inception (5/1/96) +19.72%
</TABLE>
GRAPHIC MATERIAL (2)
This graph compares the performance of Capital Growth Fund as tracked by the
growth in value of a $10,000 investment, to that of the S&P 500 and the Russell
1000 Index from 5/1/96 - 12/31/98.
Performance shown in the graph reflects all fund operating expenses but does
not include any fees, charges or expenses imposed by the variable annuity and
life insurance contracts that use the Franklin Valuemark Funds. If they had
been included, performance would have been lower. See the contract prospectus
for a complete description of the contract expenses, including any applicable
sales charges. Index source is Standard & Poor's Micropal.
TOTAL RETURN INDEX COMPARISON
Capital Growth Fund
$10,000 Investment (5/1/96-12/31/98)
[LINE GRAPH]
<TABLE>
<CAPTION>
CAPITAL GROWTH S&P500 RUSSELL 1000 INDEX
-------------- ------ ------------------
<S> <C> <C> <C> <C> <C> <C>
5/1/96 $10,000 $10,000 $10,000
5/31/96 $10,220 2.58% $10,258 2.40% $10,240
6/30/96 $10,180 0.38% $10,297 0.11% $10,251
7/31/96 $9,790 -4.42% $9,842 -4.82% $9,757
8/31/96 $10,180 2.11% $10,050 2.72% $10,023
9/30/96 $10,910 5.63% $10,615 5.62% $10,586
10/31/96 $10,880 2.76% $10,908 2.21% $10,820
11/30/96 $11,750 7.56% $11,733 7.38% $11,618
12/31/96 $11,360 -1.98% $11,501 -1.62% $11,430
1/31/97 $11,910 6.25% $12,219 5.93% $12,108
2/28/97 $11,470 0.78% $12,315 0.38% $12,154
3/31/97 $10,870 -4.11% $11,809 -4.50% $11,607
4/30/97 $11,290 5.97% $12,514 5.41% $12,235
5/31/97 $12,270 6.09% $13,276 6.40% $13,018
6/30/97 $12,479 4.48% $13,870 4.14% $13,557
7/31/97 $13,290 7.96% $14,974 8.18% $14,666
8/31/97 $12,959 -5.60% $14,136 -4.72% $13,974
9/30/97 $13,740 5.48% $14,911 5.48% $14,739
10/31/97 $13,099 -3.34% $14,413 -3.24% $14,262
11/30/97 $13,320 4.63% $15,080 4.34% $14,881
12/31/97 $13,440 1.72% $15,339 2.03% $15,183
1/31/98 $13,360 1.11% $15,509 0.74% $15,295
2/28/98 $14,381 7.21% $16,628 7.13% $16,386
3/31/98 $14,692 5.12% $17,479 5.04% $17,212
4/30/98 $14,992 1.01% $17,656 1.03% $17,389
5/31/98 $14,512 -1.72% $17,352 -2.16% $17,013
6/30/98 $15,081 4.06% $18,056 3.70% $17,643
7/31/98 $14,759 -1.07% $17,863 -1.20% $17,431
8/31/98 $12,849 -14.46% $15,280 -14.95% $14,825
9/30/98 $13,503 6.41% $16,260 6.73% $15,823
10/31/98 $14,548 8.13% $17,582 7.90% $17,073
11/30/98 $15,172 6.06% $18,647 6.19% $18,130
12/31/98 $16,167 6.56% 5.76% $19,721 6.37% $19,284
</TABLE>
PLEASE SEE IMPORTANT ENDNOTES TO PERFORMANCE INFORMATION ON PAGE 61.
10
<PAGE>
GLOBAL HEALTH CARE SECURITIES FUND
Global Health Care Securities Fund was launched on May 1, 1998, to give Franklin
Valuemark investors an opportunity to directly participate in the strong trends
driving the health care sector. We believe that this sector may be an extremely
attractive investment area over the long term, due to technology advances, the
aging global population and emerging health care systems in many populous third
world nations. Additionally, the historically stable demand for health care
products and services has generally been less affected by business cycles or
interest rates. While the federal government and managed care operators are
likely to put continuing pressure on reimbursement, as of the end of the
reporting period the health care industry's near-term outlook appeared benign,
in our view, with the worst cuts behind it. Of course, like any industry sector
fund, this portfolio is most appropriate as part of a diversified investment
program.
Global Health Care Securities Fund may concentrate a majority of its assets in
small- and mid-capitalization companies. Through rigorous fundamental analysis,
we attempt to uncover companies that are often overlooked by most investors and
offer strong growth prospects at attractive valuations. We also favor companies
that have little competition, experienced management, significant competitive
advantages and consistent earnings growth track records.
The U.S. market was extremely volatile during the reporting period. In our view,
this was primarily due to the domestic political turmoil caused by President
Clinton's impeachment and concerns about Asia's problems and their impact on the
U.S. economy. However, the year ended on a vigorous note as technology shares
rallied on strong earnings reports and rosy forecasts for the upcoming year.
Although the portfolio did post a positive +7.10% cumulative total return for
the period from inception on May 1, 1998, to December 31, 1998, it
underperformed such broader market indices as the S&P 500, as did the health
care sector, due to the strength of technology stocks.
The portfolio's largest sector for most of the year was pharmaceuticals, which
represented over 20% of total net assets at year-end. These stocks performed
exceptionally well, outpacing the S&P 500 by a wide margin. Pharmaceutical
expenditures grew at record levels in 1998 as many new drugs enjoyed successful
launches, and existing products expanded their markets. Heavy investment in
research and development should result in continued new product development and,
we think, signals an excellent long-term outlook for the sector. Our largest
pharmaceutical and overall holding was Bristol-Myers Squibb Co. We feel that
Bristol has a balanced core portfolio of drugs with several strong prospects in
the pipeline, and are particularly encouraged by the company's work on new drugs
for hypertension and hepatitis B. Also, the company made several management
changes during the period, which we feel should better position it for the
future.
GRAPHIC MATERIAL (4)
This chart shows the top 5 holdings based on the percentage of total net assets
on 12/31/98 for the Global Health Care Securities Fund.
TOP 5 HOLDINGS
Global Health Care Securities Fund
12/31/98
<TABLE>
<CAPTION>
% OF TOTAL
COMPANY NET ASSETS
- --------------------------------------------------
<S> <C>
Bristol-Meyers Squibb Co. 5.95%
Pfizer Inc. 4.88%
Serologicals Corp. 4.60%
American Home Products Corp. 4.26%
Omnicare Inc. 4.17%
</TABLE>
11
<PAGE>
Throughout the reporting period, our weighting in the pharmaceutical sector
steadily increased. Since the stocks were trading at very high valuations,
compared with their historical ranges, we purchased them on dips. Heavy buying
during the market decline in August and September paid off in the fourth quarter
of 1998 when the market rebounded strongly. As of the end of the reporting
period, valuations returned to prior levels, which led us to sell Eli Lilly &
Co., the manufacturer of Prozac. We expect this sector to be volatile in 1999 as
members of Congress are proposing a drug subsidy for seniors in the Medicare
program. The renewed prospect of price controls may spook investors who remember
the health care reform proposals that rocked the drug stocks five years ago.
Although the proposal would improve access to drugs, the Medicare program, which
is projected to be insolvent in 2008, would likely have difficulty funding such
a benefit. If health care stock prices decline as a result of this uncertainty,
we anticipate an opportunity to increase our holdings in the sector.
Two of our strongest performers during the period, Access Health Inc. and
Transitions Systems Inc., appreciated when they were acquired by larger
companies. Access Health provides health care consulting services over the phone
to health plan members and was acquired by HBO & Co., the leading provider of
health care information systems. Transitions Systems, a niche leader in the
hospital cost accounting software market, was acquired by Eclipsys Corp., an HBO
competitor. We expect consolidation to be a major health care industry theme,
with positive effects.
We did have two disappointments during the period. In August, Total Renal Care
Holdings, Inc., a leading global provider of kidney dialysis services,
unexpectedly announced that one of Medicare's fiscal intermediaries was
questioning the company's recent spike in lab test utilization. This disclosure
resulted in a one-day, 16% drop in the stock price. We concluded that this probe
would take much longer than widely believed and subsequently sold the stock at a
slight loss.
Our second disappointment was ESC Medical Systems Ltd., a manufacturer of laser
and pulsed light medical devices for hair removal and other cosmetic procedures.
In September, the company announced it would not meet earnings expectations due
to weak revenue growth in its international markets, especially in Germany and
Brazil. Over a two-day period, the stock declined nearly 70%. We believe that
such examples highlight the risk of investing in a highly volatile and rapidly
changing sector. However, through our exhaustive research process and years of
experience following the health care industry, we hope to minimize these events.
We look forward to serving your investment needs in the years to come. Our goal,
as always, is to seize upon, in a timely and disciplined fashion, the
possibilities we
12
<PAGE>
find in the health care sector, and to provide our shareholders unique
opportunities to invest in today's newest and fastest growing health care
companies.
GRAPHIC MATERIAL (5)
This graph compares the performance of Global Health Care Securities Fund as
tracked by the growth in value of a $10,000 investment, to that of the S&P 500
and the S&P Health Care Composite Index* from 5/1/98-12/31/98. *Standard &
Poor's Health Care Composite Index was added this year by the fund manager.
Performance shown in the graph reflects all fund operating expenses but does not
include any fees, charges or expenses imposed by the variable annuity and life
insurance contracts that use the Franklin Valuemark Funds. If they had been
included, performance would have been lower. See the contract prospectus for a
complete description of the contract Standard & Poor's Micropal.
TOTAL RETURN INDEX COMPARISON
Global Health Care Securities Fund
$10,000 Investment (5/1/98-12/31/98)
[LINE GRAPH}
<TABLE>
<CAPTION>
Global Health Care S & P 500 S&P Health Care
Securities Fund Composite Index
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
5/1/98 $10,000 $10,000 $10,000
5/31/98 $ 9,560 -1.72% $ 9,828 -1.93% $ 9,807
6/30/98 $10,070 4.06% $10,227 7.31% $10,524
7/31/98 $ 9,630 -1.07% $10,118 0.53% $10,580
8/31/98 $ 8,260 -14.46% $ 8,655 -11.23% $ 9,392
9/30/98 $ 9,320 6.41% $ 9,209 11.87% $10,506
10/31/98 $ 9,430 8.13% $ 9,958 3.62% $10,887
11/30/98 $10,090 6.06% $10,562 6.11% $11,552
12/31/98 $10,710 5.76% $11,170 4.31% $12,050
</TABLE>
<TABLE>
<S> <C> <C> <C>
Return 7.10% 11.70% 20.50%
</TABLE>
*Standard & Poor's Health Care Composite Index was added this year by the Fund
Manager.
MUTUAL DISCOVERY SECURITIES FUND
Mutual Discovery Securities Fund generated a -5.00% cumulative total return for
the year under review. Large-cap value stocks, which typically have held up
better than growth stocks in market downturns, generally did not do so during
last summer's two-month market correction. The Standard & Poor's 500's largest
growth stocks, such as Microsoft Corp., Dell Corp. and Intel Corp., continued
their extraordinary growth, pushing the major indices to record levels. Internet
stocks traded at levels that confounded even traditional growth investors. Some
perceived pockets of value, such as oil service companies, just got cheaper over
the course of the year. We feel the relatively weak performance of value stocks
contributed to the portfolio's flat performance during the period.
Some of our largest positions did perform well during the year. Montedison SpA,
Suez Lyonnaise des Eaux SA, MediaOne Group Inc. and Morgan Stanley Dean Witter &
Co. were all up significantly. Financial services stocks remained a major
portfolio focus. During the third quarter market correction we made a
significant investment in the brokerage sector, initiating positions in Lehman
Brothers Holdings Inc. and Bear Stearns Co. Inc., as well as various European
holding companies. We also added to our holdings in Morgan Stanley Dean Witter &
Co.
Companies involved in deals and restructurings should again present
opportunities in 1999. Two businesses we like are Investor AB, the Wallenberg
family's Swedish holding company, and Brierley Investments Ltd., a New Zealand
investment company trading at a substantial discount.
PERFORMANCE SHOWN IN THE GRAPH REFLECTS ALL FUND OPERATING EXPENSES BUT DOES NOT
INCLUDE ANY FEES, CHARGES OR EXPENSES IMPOSED BY THE VARIABLE ANNUITY AND LIFE
INSURANCE CONTRACTS THAT USE THE FRANKLIN VALUEMARK FUNDS. IF THEY HAD BEEN
INCLUDED, PERFORMANCE WOULD HAVE BEEN LOWER. SEE THE CONTRACT PROSPECTUS FOR A
COMPLETE DESCRIPTION OF THE CONTRACT EXPENSES, INCLUDING ANY APPLICABLE SALES
CHARGES. INDEX SOURCE IS STANDARD & POOR'S MICROPAL.
GRAPHIC MATERIAL (6)
This chart shows the return for the Global Health Care Securities Fund as of
12/31/98.
<TABLE>
<CAPTION>
Aggregate Total Return*
- ---------------------------------------------
<S> <C>
Since Inception (5/1/98) +7.10%
</TABLE>
*Since the fund has existed for less than one year, the figures represent the
aggregate total return since inception; therefore, average annual total returns
are not provided.
GRAPHIC MATERIAL (7)
This chart shows the top 10 holdings and their respective industry and country
based on the percentage of total net assets on 12/31/98 for the Mutual
Discovery Securities Fund.
TOP 10 HOLDINGS
Mutual Discovery Securities Fund
12/31/98
<TABLE>
<CAPTION>
COMPANY % OF TOTAL
INDUSTRY, COUNTRY NET ASSETS
- --------------------------------------------------------------------------
<S> <C>
Suez Lyonnaise des Eaux SA 3.02%
Business & Public Services, France
Kansas City Southern Industries Inc. 2.93%
Multi-Industry, US
Investor AB, A and B 2.41%
Multi-Industry, Sweden
Electrafina SA 1.91%
Energy Sources, Belgium
Cie Financiere Richemont AG, A 1.80%
Multi-Industry, Switzerland
Montedison SpA 1.65%
Multi-Industry, Italy
CGIP-Compagnie Generale
Industrie de Participation 1.63%
Multi-Industry, France
Railtrack Group Plc. 1.59%
Transportation, UK
Custos AB, A and B 1.35%
Multi-Industry, Sweden
Societe Elf Aquitaine SA, Br. 1.32%
Energy Sources, France
</TABLE>
PLEASE SEE IMPORTANT ENDNOTES TO PERFORMANCE INFORMATION ON PAGE 61.
13
<PAGE>
PERFORMANCE SHOWN IN THE GRAPH REFLECTS ALL FUND OPERATING EXPENSES BUT DOES NOT
INCLUDE ANY FEES, CHARGES OR EXPENSES IMPOSED BY THE VARIABLE ANNUITY AND LIFE
INSURANCE CONTRACTS THAT USE THE FRANKLIN VALUEMARK FUNDS. IF THEY HAD BEEN
INCLUDED, PERFORMANCE WOULD HAVE BEEN LOWER. SEE THE CONTRACT PROSPECTUS FOR A
COMPLETE DESCRIPTION OF THE CONTRACT EXPENSES, INCLUDING ANY APPLICABLE SALES
CHARGES. INDEX SOURCE IS STANDARD & POOR'S MICROPAL.
GRAPHIC MATERIAL (9)
This chart shows the average annual total return for the Mutual Discovery
Securities Fund as of 12/31/98.
<TABLE>
<CAPTION>
Average Annual Total Return
- -------------------------------------
<S> <C>
1-Year -5.00%
Since Inception (11/8/96) +7.02%
</TABLE>
Looking forward, we are confident that our disciplined value and special
situation approach, which has been deeply out of favor, will prove rewarding.
Effective, November 1, 1998, Rob Friedman and David Marcus assumed their roles
as portfolio co-managers. This change is designed to combine the benefits of our
team approach with the increased focus and accountability that portfolio
assignments create. The managers will continue to benefit from the ideas of all
the investment professionals at the firm.
GRAPHIC MATERIAL (8)
This graph compares the performance of Mutual Discovery Securities Fund as
tracked by the growth in value of a $10,000 investment, to that of the S&P 500
and the Russell 2000 Index from 11/8/96 - 12/31/98.
Performance shown in the graph reflects all fund operating expenses but does
not include any fees, charges or expenses imposed by the variable annuity and
life insurance contracts that use the Franklin Valuemark Funds. If they had
been included, performance would have been lower. See the contract prospectus
for a complete description of the contract expenses, including any applicable
sales charges. Index source is Standard & Poor's Micropal.
TOTAL RETURN INDEX COMPARISON
Mutual Discovery Securities Fund
$10,000 Investment (11/8/96-12/31/98)
[LINE GRAPH]
<TABLE>
<CAPTION>
MUTUAL DISCOVERY SECURITIES S&P500 RUSSELL 2000 INDEX
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
11/8/96 $10,000 $10,000 $10,000
11/30/96 $10,130 5.54% $10,554 3.02% $10,302
12/31/96 $10,200 -1.98% $10,345 2.62% $10,572
1/31/97 $10,660 6.25% $10,992 2.00% $10,783
2/28/97 $10,790 0.78% $11,078 -2.42% $10,523
3/31/97 $10,690 -4.11% $10,622 -4.72% $10,026
4/30/97 $10,630 5.97% $11,257 0.28% $10,054
5/31/97 $10,910 6.09% $11,942 11.12% $11,172
6/30/97 $11,325 4.48% $12,477 4.29% $11,651
7/31/97 $11,735 7.96% $13,470 4.65% $12,193
8/31/97 $11,715 -5.60% $12,716 2.29% $12,472
9/30/97 $12,356 5.48% $13,413 7.32% $13,385
10/31/97 $11,975 -3.34% $12,965 -4.39% $12,798
11/30/97 $12,025 4.63% $13,565 -0.65% $12,714
12/31/97 $12,175 1.72% $13,798 1.75% $12,937
1/31/98 $12,155 1.11% $13,952 -1.58% $12,732
2/28/98 $12,796 7.21% $14,958 7.39% $13,673
3/31/98 $13,496 5.12% $15,723 4.12% $14,237
4/30/98 $13,756 1.01% $15,882 0.55% $14,315
5/31/98 $13,896 -1.72% $15,609 -5.39% $13,543
6/30/98 $13,483 4.06% $16,243 0.21% $13,572
7/31/98 $12,971 -1.07% $16,069 -8.10% $12,473
8/31/98 $11,127 -14.46% $13,745 -19.42% $10,050
9/30/98 $10,655 6.41% $14,626 7.83% $10,837
10/31/98 $10,922 8.13% $15,816 4.08% $11,280
11/30/98 $11,485 6.06% $16,774 5.24% $11,871
12/31/98 $11,567 5.76% $17,740 6.19% $12,605
</TABLE>
NATURAL RESOURCES SECURITIES FUND
During the year under review, widespread concerns about a global economic
slowdown caused increased market volatility in the natural resources sector. We
feel the economic and political turmoil in Asia, Russia and Latin America, in
particular, caused investors to question future demand levels for a wide range
of commodities, including energy, chemicals, steel and paper. As a result,
prices tumbled, industry production levels declined and company profitability
soured. Some regions took preemptive efforts to ease monetary policy and others
strove to improve economic stability, in an effort to stimulate worldwide
commodity demand growth. In conjunction with industry efforts to curtail
production, we believe the global balance between production and consumption may
begin to improve. Additionally, historically low commodity prices pressured many
companies to lower costs through technological advances and consolidation -- a
valuable exercise in any price climate.
Generally, we invest in well-managed companies with fast-growing, highly
efficient, technologically advanced operations throughout the steel, chemical,
services, oil and gas, precious and base metal, and forest and paper sectors. We
do not base our investments solely on the assumption that commodity prices will
rise or fall. Rather, we look for companies with unique assets, healthy balance
sheets, strong market positions, technological superiority, rapid, low-cost
production growth and visible earnings growth.
PLEASE SEE IMPORTANT ENDNOTES TO PERFORMANCE INFORMATION ON PAGE 61.
14
<PAGE>
Our belief that prices and company profitability may improve significantly as
supply/demand balances move into equilibrium underlies the fund's focus on the
energy sector. As of the end of the reporting period, evidence demonstrating
OPEC production cutbacks and non-OPEC production declines, associated with the
lack of investment in marginal properties, supported our conviction that energy
companies offered significant value under recent depressed conditions. An
improvement in fundamentals may be reflected in the fourth-quarter rally from
trough levels. While oilfield service companies like Varco International Inc.,
Atwood Oceanics Inc. and Transocean Offshore Inc. underperformed during the
first three quarters of the year, they appear to have bottomed and have begun to
reverse their decline. In the case of Varco International, the company should
continue to benefit from high demand for its value-added drilling rig equipment,
which makes oil and gas drilling safer and more productive. Atwood Oceanics and
Transocean Offshore, leaders in the worldwide market for deep-water offshore
drilling, may also continue to experience rising demand for their premium rigs
capable of more cost-effective deep water drilling.
A theme that emerged among our holdings in the natural resource sector was
consolidation, as many companies strove to improve their market positions by
developing economies of scale, diversifying their product portfolios and service
capabilities, and gaining significant cost savings and integration synergies. In
the energy sector, Ocean Energy, Inc. and United Meridian Corp. (exploration and
production) merged, creating a leading, independent producer of oil and gas with
a geographically balanced portfolio. In oilfield services, Falcon Drilling Co.,
Inc. and Reading & Bates Corp. merged to create R&B Falcon Corp., a diversified
offshore drilling contractor with a full complement of drilling rigs. Paper and
forest products also saw consolidation, with Bowater Inc. successfully acquiring
Canadian-based Avenor Inc. and Korean-based Halla Pulp & Paper Co., thus
creating a low-cost global newsprint business. Finally, in the precious metals
sector, Placer Dome, Inc. recently took a stake in Getchell Resources Inc.,
increasing its exposure to lower-cost reserves. By the end of the reporting
period we sold Ocean Energy, United Meridian, R&B Falcon and Placer Dome because
we believed they no longer offered superior risk-adjusted returns compared with
other companies in the sector.
Although the portfolio has had successful periods from time to time since its
inception, performance during the reporting period suffered some
disappointments. Crude oil declined more significantly than expected, as a
number of factors, including reduced demand expectations in Asia, higher levels
of OPEC production, the return of Iraqi oil to the world market and a warmer
than normal winter season in much of the northern hemisphere, combined to
depress world markets. The 31% decline in crude oil prices during 1998
negatively impacted the fund's positions in exploration and production companies
including Gulf Canada Resources Ltd. and Nuevo
GRAPHIC MATERIAL (10)
This chart shows the top 10 holdings and their respective industry and country
based on the percentage of total net assets on 12/31/98 for the Natural
Resources Securities Fund.
TOP 10 HOLDINGS
Natural Resources Securities Fund
12/31/98
<TABLE>
<CAPTION>
COMPANY % OF TOTAL
INDUSTRY, COUNTRY NET ASSETS
- ---------------------------------------------------------------------
<S> <C>
Barrett Resources Corp. 3.8%
Energy Minerals, U.S.
AES Corp. 3.3%
Industrial Services, U.S.
Newfield Exploration Co. 3.0%
Energy Minerals, U.S.
Stillwater Mining Co. 2.9%
Non-Energy Minerals, U.S.
Enron Oil & Gas Co. 2.7%
Energy Minerals, U.S.
Weatherford International Inc. 2.5%
Producer Manufacturing, U.S.
Enron Corp. 2.5%
Utilities, U.S.
Royal Dutch Petroleum Co., ADR 2.4%
Energy Mineral, Netherlands
Texaco Inc. 2.4%
Energy Minerals, U.S.
De Beers Consolidated Mines AG, ADR 2.0%
Non-Energy Minerals, South Africa
</TABLE>
- --------------------------------------------------------------------------------
15
<PAGE>
- --------------------------------------------------------------------------------
PERFORMANCE SHOWN IN THE GRAPH REFLECTS ALL FUND OPERATING EXPENSES BUT DOES NOT
INCLUDE ANY FEES, CHARGES OR EXPENSES IMPOSED BY THE VARIABLE ANNUITY AND LIFE
INSURANCE CONTRACTS THAT USE THE FRANKLIN VALUEMARK FUNDS. IF THEY HAD BEEN
INCLUDED, PERFORMANCE WOULD HAVE BEEN LOWER. SEE THE CONTRACT PROSPECTUS FOR A
COMPLETE DESCRIPTION OF THE CONTRACT EXPENSES, INCLUDING ANY APPLICABLE SALES
CHARGES. INDEX SOURCE IS STANDARD & POOR'S MICROPAL.
GRAPHIC MATERIAL (12)
This chart shows the average annual total return for the Natural Resources
Securities Fund as of 12/31/98.
<TABLE>
<CAPTION>
Average Annual Total Return
- -----------------------------------------
<S> <C>
1-Year -25.38%
5-Year -8.81%
Since Inception (1/24/89) -0.25%
</TABLE>
- --------------------------------------------------------------------------------
Energy Co. Our focus in this sector remains on companies with superior asset
bases, low-cost operations and attractive reserve and production growth
profiles, which over time should provide significant rewards to shareholders.
The unexpectedly strong performance of the paper and forest products sector, in
which the portfolio was relatively underweighted (6.5% of total net assets),
also hurt our performance relative to broader market indices. We began to add to
the group by establishing new positions in Smurfit-Stone Container Corp. and
increasing our weighting in existing holdings like Bowater.
Despite the potential for continued volatility, our outlook for 1999 remains
positive. We hold fast to our belief that the long-term prospects for natural
resources companies remain bright, and are convinced that Natural Resources
Securities Fund is well positioned in this sector, with investments in companies
that have superior management, lower costs, and the potential to add value
throughout commodity price cycles.
GRAPHIC MATERIAL (11)
This graph compares the performance of Natural Resources Securities Fund as
tracked by the growth in value of a $10,000 investment, to that of the S&P 500
and the FT/S&P Actuaries World: Energy 50%/Basic Industries 50% Composite Index
from 1/24/89 - 12/31/98.
Performance shown in the graph reflects all fund operating expenses but does
not include any fees, charges or expenses imposed by the variable annuity and
life insurance contracts that use the Franklin Valuemark Funds. If they had
been included, performance would have been lower. See the contract prospectus
for a complete description of the contract expenses, including
any applicable sales charges. Index is a Standard & Poor Micropal.
TOTAL RETURN INDEX COMPARISON
Natural Resources Securities Fund
$10,000 Investment (1/24/89-12/31/98)
<TABLE>
<CAPTION>
FT/S&P ACTUARIES WORLD:
ENERGY 50%/BASIC
NATURAL RESOURCES INDUSTRIES 50% COMPOSITE
SECURITIES FUND S&P 500 INDEX
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
01/24/89 $10,000 $ 10,000 $10,000
01/31/89 $10,020 1.65% $ 10,165 1.14% $10,114
02/28/89 $10,080 -2.49% $ 9,912 1.32% $10,247
03/31/89 $10,150 2.33% $ 10,143 2.99% $10,553
04/30/89 $10,220 5.19% $ 10,670 1.37% $10,698
05/31/89 $10,090 4.05% $ 11,102 -3.74% $10,298
06/30/89 $10,360 -0.57% $ 11,038 -2.13% $10,079
07/31/89 $10,500 9.03% $ 12,035 8.52% $10,937
08/31/89 $10,750 1.96% $ 12,271 -2.08% $10,710
09/30/89 $11,110 -0.41% $ 12,221 2.35% $10,961
10/31/89 $11,180 -2.32% $ 11,937 -1.71% $10,774
11/30/89 $12,230 2.04% $ 12,181 4.66% $11,276
12/31/89 $12,430 2.40% $ 12,473 5.26% $11,869
01/31/90 $12,920 -6.71% $ 11,636 -3.20% $11,489
02/28/90 $12,180 1.29% $ 11,786 -2.44% $11,209
03/31/90 $12,038 2.65% $ 12,099 -5.91% $10,547
04/30/90 $11,258 -2.49% $ 11,797 -2.37% $10,297
05/31/90 $11,947 9.75% $ 12,948 9.62% $11,287
06/30/90 $11,380 -0.67% $ 12,861 -1.81% $11,083
07/31/90 $12,038 -0.32% $ 12,820 6.58% $11,812
08/31/90 $11,694 -9.04% $ 11,661 -6.70% $11,021
09/30/90 $11,501 -4.87% $ 11,093 -8.52% $10,082
10/31/90 $10,448 -0.43% $ 11,045 5.82% $10,669
11/30/90 $10,185 6.46% $ 11,759 -2.89% $10,360
12/31/90 $10,651 2.79% $ 12,087 0.57% $10,419
01/31/91 $ 9,831 4.36% $ 12,614 -0.21% $10,397
02/28/91 $10,701 7.15% $ 13,516 11.49% $11,592
03/31/91 $10,610 2.42% $ 13,843 -3.61% $11,174
04/30/91 $10,560 0.24% $ 13,876 1.95% $11,391
05/31/91 $10,853 4.31% $ 14,474 0.38% $11,435
06/30/91 $11,258 -4.58% $ 13,811 -5.14% $10,847
07/31/91 $11,382 4.66% $ 14,455 4.99% $11,388
08/31/91 $10,814 2.37% $ 14,797 -0.97% $11,278
09/30/91 $10,834 -1.67% $ 14,550 2.73% $11,586
10/31/91 $11,227 1.34% $ 14,745 2.09% $11,828
11/30/91 $11,361 -4.03% $ 14,151 -6.92% $11,009
12/31/91 $10,617 11.44% $ 15,770 4.17% $11,468
01/31/92 $11,340 -1.86% $ 15,476 -1.97% $11,242
02/29/92 $11,165 1.29% $ 15,676 -2.32% $10,982
03/31/92 $10,752 -1.95% $ 15,370 -3.62% $10,584
04/30/92 $10,607 2.94% $ 15,822 4.86% $11,099
05/31/92 $11,123 0.49% $ 15,900 4.76% $11,627
06/30/92 $11,407 -1.49% $ 15,663 -4.55% $11,098
07/31/92 $11,492 4.09% $ 16,303 -0.54% $11,038
08/31/92 $11,120 -2.05% $ 15,969 2.01% $11,260
09/30/92 $10,982 1.17% $ 16,156 -0.85% $11,164
10/31/92 $10,313 0.34% $ 16,211 -5.05% $10,600
11/30/92 $ 9,612 3.40% $ 16,762 -0.83% $10,512
12/31/92 $ 9,941 1.23% $ 16,968 0.99% $10,616
01/31/93 $ 9,867 0.84% $ 17,111 0.59% $10,679
02/28/93 $10,355 1.36% $ 17,344 4.15% $11,122
03/31/93 $11,343 2.11% $ 17,710 6.40% $11,834
04/30/93 $12,108 -2.42% $ 17,281 5.82% $12,523
05/31/93 $13,658 2.67% $ 17,742 2.18% $12,796
06/30/93 $13,737 0.29% $ 17,794 -2.39% $12,490
07/31/93 $14,957 -0.40% $ 17,723 2.48% $12,800
08/31/93 $13,823 3.79% $ 18,394 3.73% $13,277
09/30/93 $12,689 -0.77% $ 18,253 -2.01% $13,010
10/31/93 $13,887 2.07% $ 18,631 1.72% $13,234
11/30/93 $13,769 -0.95% $ 18,454 -5.69% $12,481
12/31/93 $15,471 1.21% $ 18,677 4.54% $13,048
01/31/94 $15,578 3.40% $ 19,312 7.71% $14,054
02/28/94 $14,925 -2.71% $ 18,789 -1.55% $13,836
03/31/94 $15,096 -4.36% $ 17,969 -3.50% $13,351
04/30/94 $14,390 1.28% $ 18,199 5.19% $14,044
05/31/94 $14,861 1.64% $ 18,498 0.29% $14,085
06/30/94 $14,546 -2.45% $ 18,045 -0.36% $14,034
07/31/94 $14,826 3.28% $ 18,637 3.82% $14,571
08/31/94 $15,482 4.10% $ 19,401 2.70% $14,964
09/30/94 $16,494 -2.44% $ 18,927 -1.85% $14,687
10/31/94 $15,905 2.25% $ 19,353 4.39% $15,332
11/30/94 $14,635 -3.64% $ 18,649 -5.74% $14,452
12/31/94 $15,162 1.48% $ 18,925 -0.02% $14,449
01/31/95 $13,376 2.59% $ 19,415 -1.25% $14,268
02/28/95 $13,978 3.90% $ 20,172 0.79% $14,381
03/31/95 $15,280 2.95% $ 20,767 5.24% $15,135
04/30/95 $15,431 2.94% $ 21,378 4.23% $15,775
05/31/95 $15,323 4.00% $ 22,233 -0.10% $15,759
06/30/95 $15,309 2.32% $ 22,748 -2.11% $15,427
07/31/95 $15,805 3.32% $ 23,504 4.87% $16,178
08/31/95 $15,705 0.25% $ 23,563 -2.96% $15,699
09/30/95 $15,772 4.22% $ 24,557 1.10% $15,872
10/31/95 $14,008 -0.36% $ 24,468 -2.09% $15,540
11/30/95 $15,232 4.39% $ 25,543 3.49% $16,082
12/31/95 $15,518 1.93% $ 26,036 3.73% $16,682
1/31/96 $18,086 3.40% $ 26,921 1.86% $16,992
2/29/96 $18,218 0.93% $ 27,171 0.68% $17,108
3/31/96 $18,307 0.96% $ 27,432 4.16% $17,820
4/30/96 $18,406 1.47% $ 27,835 2.69% $18,299
5/31/96 $19,111 2.58% $ 28,553 -0.42% $18,222
6/30/96 $16,850 0.38% $ 28,662 -0.29% $18,169
7/31/96 $16,500 -4.42% $ 27,395 -3.34% $17,562
8/31/96 $17,133 2.11% $ 27,973 1.88% $17,893
9/30/96 $16,173 5.63% $ 29,548 3.08% $18,444
10/31/96 $16,286 2.76% $ 30,363 2.12% $18,835
11/30/96 $16,139 7.56% $ 32,659 3.56% $19,505
12/31/96 $16,139 -1.98% $ 32,012 -0.50% $19,408
1/31/97 $15,337 6.25% $ 34,013 0.52% $19,509
2/28/97 $17,088 0.78% $ 34,278 -0.77% $19,358
3/31/97 $15,303 -4.11% $ 32,870 1.40% $19,629
4/30/97 $14,456 5.97% $ 34,832 0.01% $19,631
5/31/97 $15,348 6.09% $ 36,953 5.79% $20,768
6/30/97 $14,761 4.48% $ 38,609 3.52% $21,499
7/31/97 $14,818 7.96% $ 41,682 3.59% $22,271
8/31/97 $15,093 -5.60% $ 39,348 -4.63% $21,240
9/30/97 $16,102 5.48% $ 41,504 4.22% $22,136
10/31/97 $14,807 -3.34% $ 40,118 -5.97% $20,815
11/30/97 $13,145 4.63% $ 41,975 -3.61% $20,063
12/31/97 $13,076 1.72% $ 42,697 -1.87% $19,688
1/31/98 $12,480 1.11% $ 43,171 -0.13% $19,662
2/28/98 $13,145 7.21% $ 46,284 5.70% $20,783
3/31/98 $13,833 5.12% $ 48,653 4.22% $21,660
4/30/98 $14,371 1.01% $ 49,145 2.69% $22,243
5/31/98 $12,996 -1.72% $ 48,300 -2.12% $21,771
6/30/98 $12,107 4.06% $ 50,260 -2.77% $21,168
7/31/98 $10,793 -1.07% $ 49,723 -5.89% $19,921
8/31/98 $ 8,153 -14.46% $ 42,533 -13.63% $17,206
9/30/98 $ 9,792 6.41% $ 45,259 8.07% $18,595
10/31/98 $10,502 8.13% $ 48,939 5.13% $19,549
11/30/98 $ 9,781 6.06% $ 51,904 1.51% $19,844
12/31/98 $ 9,758 -0.24% 5.76% $ 54,894 -0.93% $19,659
</TABLE>
SMALL CAP FUND
In keeping with its philosophy, Small Cap Fund seeks growth at a reasonable
price. We look for companies with some competitive advantage, such as
intellectual property, barriers to market entry for competitors or a
faster-than-average growth trend. At the same time, we expect to pay a
reasonable price for that growth. We attempt to do this with portfolio
construction and stock selection based on bottom-up research from our equity
analysts who identify target buy and sell prices for the securities they follow.
The year under review was challenging for the small-cap world, with the small
cap market underperforming large caps by a significant amount. Small Cap Fund
returned -0.98% for the reporting period, slightly underperforming the Russell
2500
PLEASE SEE IMPORTANT ENDNOTES TO PERFORMANCE INFORMATION ON PAGE 61.
16
<PAGE>
Index's 0.38% return. However, the S&P 500 Index, which consists of 500 widely
held U.S. common stocks, returned 28.6%, reflecting investors' appetite for
large cap stocks.*
We cannot predict when small cap stocks will begin to outperform their larger
counterparts. However, it is worth noting that over the long term small cap
stocks have outperformed large caps. Normally if there are signs that the global
economy is beginning a new cyclical upturn, small caps tend to outperform the
market; we do not expect this to happen for at least six months. As of the end
of the reporting period signs of a slowing economy and significant risks
overseas persisted. Until these situations stabilize, we would not expect small
caps or value stocks to outperform the large-cap growth category. However, the
overall small-cap picture tends to obscure subcategories such as oil and gas,
which we believe are undervalued, and where the portfolio retains an overweight
position. We anticipate this area may deliver excellent returns in the next
couple of years, as we don't expect oil prices to stay this low forever. Our
growth at a reasonable price strategy influenced our purchase of some
economically sensitive stocks, including deepwater drillers, real estate
investment trusts (REITs) and semiconductor equipment manufacturers.
Technology services and electronic technology were our best-performing sectors
where we maintained a 38.4% weighting as of year-end. This group benefits from
the competitive advantages of intellectual property and continuous growth;
however, the sector can be quite volatile. Among technology companies, we see a
tremendous future specifically for data mining, which we expect to benefit from
large-scale corporate spending. This should be possible when Year 2000
expenditure is over, probably by late 1999. Data mining software enables
end-users to generate useful reports based on information in a database. One
example of this is access to real-time, instantaneous sales reporting, broken
down by region, product, broker and date.
The portfolio leveraged the data mining trend in direct and indirect ways. One
of our largest positions was in Documentum Inc., a leader in document management
software for corporations. Their product is especially useful to law firms and
pharmaceutical companies that must manage large amounts of data in text format.
Another favorite was Sapient Corp., a company that derives a large portion of
its revenues from providing Internet and intranet technology consulting
services. For fourth quarter 1998, Documentum and Sapient's earnings were about
50% and 30%, respectively. Another company we liked was Uniphase Corp., a leader
in laser technology used for dense wavelength division multiplexing (DWDM),
which increases carrying capacity for fiber-optic cable. Their fourth quarter
earnings were about 35% as of December 31, 1998.
- --------------------------------------------------------------------------------
GRAPHIC MATERIAL (13)
This chart shows the top 10 industry breakdown based on the percentage of total
net assets on 12/31/98 for the Small Cap Fund.
TOP 10 INDUSTRY BREAKDOWN
Small Cap Fund
12/31/98
<TABLE>
<CAPTION>
% OF TOTAL
INDUSTRY NET ASSETS
- -----------------------------------------------
<S> <C>
Electronic Technology 17.9%
Technology Services 20.5%
Finance 16.5%
Utilities 4.9%
Energy Minerals 4.0%
Transportation 3.8%
Industrial Services 3.6%
Consumer Services 3.6%
Health Technology 3.5%
Health Services 3.3%
</TABLE>
- --------------------------------------------------------------------------------
*Index is unmanaged and includes reinvested dividends. One cannot invest
directly in an index.
17
<PAGE>
- --------------------------------------------------------------------------------
PERFORMANCE SHOWN IN THE GRAPH REFLECTS ALL FUND OPERATING EXPENSES BUT DOES NOT
INCLUDE ANY FEES, CHARGES OR EXPENSES IMPOSED BY THE VARIABLE ANNUITY AND LIFE
INSURANCE CONTRACTS THAT USE THE FRANKLIN VALUEMARK FUNDS. IF THEY HAD BEEN
INCLUDED, PERFORMANCE WOULD HAVE BEEN LOWER. SEE THE CONTRACT PROSPECTUS FOR A
COMPLETE DESCRIPTION OF THE CONTRACT EXPENSES, INCLUDING ANY APPLICABLE SALES
CHARGES. INDEX SOURCE IS STANDARD & POOR'S MICROPAL.
GRAPHIC MATERIAL (15)
This chart shows the average annual total return for the Small Cap Fund as of
12/31/98.
<TABLE>
<CAPTION>
Average Annual Total Return
- ---------------------------------------------------
<S> <C>
1-Year -0.98%
Since Inception (11/1/95) +14.51%
</TABLE>
- --------------------------------------------------------------------------------
Of course, future growth rates will vary, but we consider these figures as well
as other information in assessing a company's future prospects.
Although we cannot predict how small caps will perform against large caps, we
are very bullish on our prospects going forward.
TOTAL RETURN INDEX COMPARISON
Small Cap Fund
$10,000 Investment (11/1/95-12/31/98)
GRAPHIC MATERIAL (14)
This graph compares the performance of Small Cap Fund as tracked by the growth
in value of a $10,000 investment, to that of the S&P 500 and the Russell 2500
Index from 11/1/95-12/31/98.
Performance shown in the graph reflects all fund operating expenses but does not
include any fees, charges or expenses imposed by the variable annuity and life
insurance contracts that use the Franklin Valuemark Funds. If they had been
included, performance would have been lower. See the contract prospectus for a
complete description of the contract expenses, including any applicable sales
charges. Index source is Standard & Poor's Micropal.
<TABLE>
<CAPTION>
SMALL CAP S&P500 RUSSELL 2500 INDEX
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
11/1/95 $10,000 $10,000 $10,000
11/30/95 $9,700 4.39% $10,439 4.27% $10,427
12/31/95 $10,230 1.93% $10,640 1.71% $10,605
1/31/96 $10,370 3.40% $11,002 0.71% $10,681
2/29/96 $10,850 0.93% $11,105 3.01% $11,002
3/31/96 $11,140 0.96% $11,211 2.04% $11,227
4/30/96 $12,250 1.47% $11,376 4.62% $11,745
5/31/96 $12,760 2.58% $11,669 2.71% $12,063
6/30/96 $12,154 0.38% $11,714 -3.07% $11,693
7/31/96 $11,054 -4.42% $11,196 -7.32% $10,837
8/31/96 $12,114 2.11% $11,432 5.75% $11,460
9/30/96 $12,654 5.63% $12,076 4.33% $11,957
10/31/96 $12,404 2.76% $12,409 -0.66% $11,878
11/30/96 $12,964 7.56% $13,347 4.83% $12,451
12/31/96 $13,204 -1.98% $13,083 1.37% $12,622
1/31/97 $13,494 6.25% $13,901 2.76% $12,970
2/28/97 $12,864 0.78% $14,009 -1.49% $12,777
3/31/97 $11,954 -4.11% $13,433 -4.53% $12,198
4/30/97 $12,034 5.97% $14,235 1.27% $12,353
5/31/97 $13,744 6.09% $15,102 9.21% $13,491
6/30/97 $14,269 4.48% $15,779 4.09% $14,043
7/31/97 $15,175 7.96% $17,035 5.86% $14,866
8/31/97 $15,330 -5.60% $16,081 1.39% $15,072
9/30/97 $16,813 5.48% $16,962 6.54% $16,058
10/31/97 $16,103 -3.34% $16,396 -4.49% $15,337
11/30/97 $15,721 4.63% $17,155 0.45% $15,406
12/31/97 $15,505 1.72% $17,450 1.89% $15,697
1/31/98 $15,443 1.11% $17,644 -1.53% $15,457
2/28/98 $16,659 7.21% $18,916 7.26% $16,579
3/31/98 $17,318 5.12% $19,884 4.39% $17,307
4/30/98 $17,565 1.01% $20,085 0.38% $17,373
5/31/98 $16,319 -1.72% $19,740 -4.64% $16,567
6/30/98 $16,327 4.06% $20,541 0.12% $16,586
7/31/98 $14,726 -1.07% $20,321 -6.87% $15,447
8/31/98 $11,269 -14.46% $17,383 -18.86% $12,534
9/30/98 $12,343 6.41% $18,497 7.10% $13,424
10/31/98 $13,149 8.13% $20,001 5.47% $14,158
11/30/98 $14,145 6.06% $21,213 4.95% $14,859
12/31/98 $15,353 8.54% 5.76% $22,435 6.06% $15,759
</TABLE>
TEMPLETON DEVELOPING MARKETS EQUITY FUND
The year under review was a test of faith for emerging markets investors. Early
1998 saw the renewal of currency stability in Asia, and a reduction of the
"Asian contagion" threat, a spreading of the Asian crisis, to other developing
markets. We feel the outlook for many emerging markets brightened over the short
term, as South Korea and other Asian countries restructured their long-term debt
and the International Monetary Fund (IMF) introduced aid packages. However,
Indonesia's political turmoil and Japan's currency crisis renewed concern about
the health of all emerging market economies.
While Asian countries were improving or at least stabilizing, Latin America
faced a tougher environment. Commodity prices, the driving force behind many
Latin American economies, continued to sink during the first half of 1998. The
Asian currency devaluations added to woes, increasing many investors' fears that
the Asian contagion would spread to the region and competition from cheaper
Asian products would grow. However, Latin America received at least one benefit
from the Asian crisis. Governments saw in Asia their possible future if they did
not make reforms. As a result, many Latin American governments stepped up their
privatization efforts and introduced reforms to boost government income. Toward
the end of the reporting period, most major Latin American markets were striking
a precarious balance between the negative factors abroad and more positive
domestic events.
The emerging markets crisis could well have ended as early as July 1998, if not
for Russia. In July, the IMF extended aid to the nation, despite its failed
attempt to revise
PLEASE SEE IMPORTANT ENDNOTES TO PERFORMANCE INFORMATION ON PAGE 61.
18
<PAGE>
the tax system and apparent lack of overall economic and corporate policy
improvement. Unfortunately, the extension did little to encourage the Russians
to undergo policy and practice amendments. In mid-August, the Russian central
bank, taking note of the country's deteriorating condition, announced a 90-day
moratorium on foreign debt repayment. At the same time, the central bank
announced it would restructure the domestic debt market, or GKO market, and
allow the ruble to devalue by 30%.
The international banking community appeared to view the events as the
expropriation of its investment dollars and in retaliation for the
restructuring, threatened to sue the Russian government and freeze Russian
assets. As of December, the banks and the Russian government had reportedly
reached a deal, but no details were yet available.
Speculation that the U.S. and leading European nations had a high degree of
exposure to the Russian economy, in our view, weakened the U.S. dollar and other
major currencies. This, in turn, created concerns that other emerging markets,
most notably Hong Kong, would undertake similar measures, renewing speculative
attacks on its currency. Sentiment toward emerging markets suffered immensely,
and in September, many emerging markets sank well below their lows of January
and June to near historically low levels.
We believe the effects of the Russian crisis, while at first overwhelmingly
negative, proved to have two long-term positives for emerging markets. First,
the weakness of major currencies, especially the U.S. dollar and the German
mark, helped those emerging markets with a high degree of U.S.
dollar-denominated foreign debt. The U.S. dollar fell against other major
currencies over the reporting period, thus resulting in a debt reduction for
many emerging markets. In addition, the U.S. dollar devaluation also
significantly increased the value of Japanese yen, making Japanese exports more
expensive than those of other Asian and Latin American countries and increasing
many emerging countries' competitiveness.
Second, the Russian crisis seemed to focus the international community on the
global economy's condition. When Malaysia announced unprecedented foreign
exchange restrictions locking foreign investors into the country, the U.S. and
other Group of Seven* nations acted. During the later part of the year, many
developed countries cut their prime rates, followed by some developing markets.
We think these cuts were the catalyst for the growth experienced during the last
quarter of 1998. Regional performances also improved partly due to the IMF's
offering of aid to Brazil, further appreciation of the yen against the U.S.
dollar and European adjustments prior to launching the euro.
GRAPHIC MATERIAL (16)
This chart shows the top 10 holdings and their respective industry and country
based on the percentage of total net assets on 12/31/98 for the Templeton
Developing Markets Equity Fund.
TOP 10 HOLDINGS
TEMPLETON DEVELOPING
MARKETS EQUITY FUND
12/31/98
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
COMPANY % OF TOTAL
INDUSTRY, COUNTRY NET ASSETS
- --------------------------------------------------------------------------
<S> <C>
Telefonos de Mexico SA (Telmex), L, ADR 4.9%
Telecommunications, Mexico
Akbank 2.8%
Banking, Turkey
Centrais Eletricas Brasileiras SA (Electrobas 2.5%
Utilities Electrical & Gas, Brazil
Thai Farmers Bank Public Co. Ltd. 2.4%
Banking, Thailand
Cemex SA 2.3%
Building Materials & Components, Mexico
CEZ AS 1.7%
Utilities Electrical & Gas, Czech Republic
Cheung Kong Holdings Ltd. 1.5%
Multi-Industry, Hong Kong
New World Development Co. Ltd. 1.4%
Real Estate, Hong Kong
Compania De Telecomunicaciones
De Chile SA, ADR 1.4%
Telecommunications, Chile
Molinos Rio de la Plata SA, B 1.4%
Food and Household Products, Argentina
</TABLE>
- --------------------------------------------------------------------------------
*The world's seven largest economies, the Group of Seven or "G7," are the U.S.,
Germany, Japan, France, the U.K., Italy and Canada.
19
<PAGE>
- --------------------------------------------------------------------------------
WE ARE REPLACING THE MSCI WORLD INDEX WITH THE MSCI EMERGING MARKETS FREE INDEX.
BECAUSE THE NEW INDEX INCORPORATES ONLY EMERGING MARKETS SECURITIES THAT CAN BE
FREELY PURCHASED BY FOREIGNERS, WE BELIEVE IT BETTER MATCHES THE INVESTMENTS OF
THE FUND.
PERFORMANCE SHOWN IN THE GRAPH REFLECTS ALL FUND OPERATING EXPENSES
BUT DOES NOT INCLUDE ANY FEES, CHARGES OR EXPENSES IMPOSED BY THE VARIABLE
ANNUITY AND LIFE INSURANCE CONTRACTS THAT USE THE FRANKLIN VALUEMARK FUNDS. IF
THEY HAD BEEN INCLUDED, PERFORMANCE WOULD HAVE BEEN LOWER. SEE THE CONTRACT
PROSPECTUS FOR A COMPLETE DESCRIPTION OF THE CONTRACT EXPENSES, INCLUDING ANY
APPLICABLE SALES CHARGES. INDEX SOURCES ARE MSCI AND THE INTERNATIONAL FINANCE
CORPORATION.
GRAPHIC MATERIAL (18)
This chart shows the average annual total return for the Templeton Developing
Markets Equity Fund as of 12/31/98.
<TABLE>
<CAPTION>
Average Annual Total Return
- ----------------------------------------------
<S> <C>
1-Year -21.61%
3-Year -4.53%
Since Inception (3/15/94) -3.22%
</TABLE>
- --------------------------------------------------------------------------------
The emerging markets entered a crucial time in their development, when we felt
actions by individual governments would have long-lasting effects on emerging
market values. Flushed by the recent strength and individual markets' apparent
return to good standing with investors, local governments may find it difficult
to push through tough reforms necessary for continued growth. In addition, while
investor sentiment improved drastically over the past three months, the
improvement appeared to come principally from a handful of buyers. Strategic
investors continued to move into markets, seeking to acquire assets with huge
potential at bargain prices. This change in sentiment appears to indicate many
feel a bottom was reached. However, in the case of another correction, we are
concerned that it is not likely that many of these investors would wait until it
ran its course, but would rather take profit and wait out the slump, thereby
exacerbating the correction and watering down sentiment.
Within this environment, the portfolio performed favorably relative to its
benchmark, the MSCI Emerging Markets Free Index. During the year under review we
shifted our major weightings to favor Asia's more developed markets, Hong Kong
and Singapore, and those Asian markets we expect to recover the quickest,
Thailand and Korea. We positioned the portfolio in an effort to maximize these
markets' returns based on our anticipation of a sustained recovery. Looking
ahead, we continue to be optimistic about the future performance of
emerging-market investments, despite significant risks. The threat of slowing
reform and a short-term correction remain; however, over the long term,
competition between foreign and domestic investors may drive demand and prices
higher. In addition, the increasing activity of strategic multinational
investors may boost demand for equities and add stability in general. Add to the
mix the growing number of investors bargain hunting for assets, and the
competition has the potential to become more intense over the longer term. Of
course, there are still potential problems, such as hedge funds pulling out and
government intervention. However, we feel their effects would probably be
relatively short-term and only serve to mask the actual growth being achieved by
individual companies. It is this individual growth from which we expect to
capitalize well into the future.
TOTAL RETURN INDEX COMPARISON
Templeton Developing Markets Equity Fund
$10,000 Investment (3/15/94-12/31/98)
Food and Household Products, Argentina
GRAPHIC MATERIAL (17)
This graph compares the performance of Templeton Developing Markets Equity Fund
as tracked by the growth in value of a $10,000 investment, to that of the MSCI
World Index, MSCI Emerging Markets Free Index, and IFC Investable Composite
Index from 3/15/94-12/31/98.
We are replacing the MSCI World Index with the MSCI Emerging Markets Free Index.
Because the new index incorporates only emerging markets securities that can be
freely purchased by foreigners, we believe it better matches the investments of
the fund.
Performance shown in the graph reflects all fund operating expenses but does
not include any fees, charges or expenses imposed by the variable annuity and
life insurance contracts that use the Franklin Valuemark Funds. If they had
been included, performance would have been lower. See the contract prospectus
for a complete description of the contract expenses, including any applicable
sales charges. Index sources are MSCI and the International Finance Corporation.
<TABLE>
<CAPTION>
TEMPLETON DEVELOPING MSCI WORLD INDEX MSCI EMERGING IFC INVESTABLE
MARKETS EQUITY FUND MARKETS FREE INDEX COMPOSITE INDEX
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
3/15/94 $10,000 $10,000 $10,000 $10,000
3/31/94 $10,000 $ 9,774 $ 9,512 $ 9,452
4/30/94 $10,060 $10,078 $ 9,321 $ 9,272
5/31/94 $10,040 $10,105 $ 9,640 $ 9,491
6/30/94 $9,990 $10,079 $ 9,375 $ 9,154
7/31/94 $10,250 $10,272 $ 9,958 $ 9,811
8/31/94 $10,530 $10,583 $11,193 $11,073
9/30/94 $10,520 $10,307 $11,321 $11,347
10/31/94 $10,410 $10,602 $11,116 $10,972
11/30/94 $10,000 $10,144 $10,538 $10,551
12/31/94 $ 9,560 $10,245 $ 9,692 $ 9,434
1/31/95 $ 8,910 $10,093 $ 8,661 $ 8,173
2/28/95 $ 8,780 $10,242 $ 8,439 $ 8,067
3/31/95 $ 9,150 $10,737 $ 8,492 $ 8,052
4/30/95 $ 9,540 $11,114 $ 8,873 $ 8,385
5/31/95 $ 9,800 $11,211 $ 9,345 $ 8,698
6/30/95 $ 9,855 $11,210 $ 9,373 $ 8,749
7/31/95 $10,438 $11,773 $ 9,583 $ 9,028
8/31/95 $10,167 $11,513 $ 9,358 $ 8,786
9/30/95 $10,096 $11,850 $ 9,313 $ 8,722
10/31/95 $ 9,735 $11,666 $ 8,957 $ 8,391
11/30/95 $ 9,664 $12,073 $ 8,797 $ 8,349
12/31/95 $ 9,825 $12,428 $ 9,187 $ 8,639
1/31/96 $10,880 $12,655 $ 9,840 $ 9,375
2/29/96 $10,659 $12,734 $ 9,684 $ 9,156
3/31/96 $10,860 $12,949 $ 9,759 $ 9,290
4/30/96 $11,222 $13,255 $10,149 $ 9,662
5/31/96 $11,382 $13,269 $10,104 $ 9,580
6/30/96 $11,390 $13,339 $10,167 $ 9,693
7/31/96 $10,782 $12,870 $ 9,472 $ 9,056
8/31/96 $10,957 $13,021 $ 9,715 $ 9,336
9/30/96 $11,194 $13,533 $ 9,799 $ 9,474
10/31/96 $11,184 $13,629 $ 9,538 $ 9,271
11/30/96 $11,617 $14,396 $ 9,697 $ 9,408
12/31/96 $11,947 $14,168 $ 9,741 $ 9,449
1/31/97 $12,833 $14,340 $10,406 $10,117
2/28/97 $13,214 $14,508 $10,851 $10,611
3/31/97 $12,957 $14,224 $10,566 $10,350
4/30/97 $13,101 $14,691 $10,585 $10,174
5/31/97 $13,730 $15,601 $10,888 $10,519
6/30/97 $14,275 $16,381 $11,471 $10,974
7/31/97 $14,826 $17,138 $11,642 $11,084
8/31/97 $13,449 $15,994 $10,160 $ 9,669
9/30/97 $14,243 $16,865 $10,442 $ 9,976
10/31/97 $11,573 $15,980 $ 8,729 $ 8,343
11/30/97 $10,958 $16,266 $ 8,410 $ 7,943
12/31/97 $10,905 $16,466 $ 8,613 $ 8,057
1/31/98 $ 9,951 $16,928 $ 7,937 $ 7,526
2/28/98 $11,032 $18,076 $ 8,766 $ 8,294
3/31/98 $11,499 $18,842 $ 9,146 $ 8,619
4/30/98 $11,636 $19,029 $ 9,046 $ 8,641
5/31/98 $ 9,877 $18,793 $ 7,807 $ 7,564
6/30/98 $ 8,932 $19,242 $ 6,988 $ 6,793
7/31/98 $ 8,981 $19,214 $ 7,209 $ 7,061
8/31/98 $ 6,631 $16,654 $ 5,125 $ 5,076
9/30/98 $ 7,088 $16,952 $ 5,450 $ 5,317
10/31/98 $ 8,152 $18,487 $ 6,024 $ 5,933
11/30/98 $ 8,895 $19,590 $ 6,525 $ 6,379
12/31/98 $ 8,548 $20,550 $ 6,430 $ 6,281
</TABLE>
<TABLE>
<S> <C> <C> <C> <C>
Total Return -14.52% 105.50% -35.70% -37.19%
</TABLE>
PLEASE SEE IMPORTANT ENDNOTES TO PERFORMANCE INFORMATION ON PAGE 61.
20
<PAGE>
TEMPLETON GLOBAL GROWTH FUND
For global investors, 1998 was a year of extreme volatility. During the summer,
the crisis that began in Asia spread to other emerging markets. Russia, in
particular, with its precarious debt-financing needs, came under tremendous
pressure, declared a moratorium on debt service and ultimately devalued its
currency, the ruble, seeking some stability. These developments, among other
factors, negatively influenced other developing markets, especially those in
Latin America.
Behind the volatile market activity, many of the world's economies were
relatively healthy, showing moderately strong growth with little threat of
inflation. The U.S. economic expansion continued for the sixth consecutive year,
while unemployment fell to levels not seen since the early 1970s. Many European
economies also emerged from a sluggish growth environment to post impressive
economic gains. In particular, smaller European economies, such as Finland,
Spain and the Netherlands, began to expand quite rapidly during the year, as the
delayed impact of low, long-term interest rates stimulated economic activity. By
the end of the reporting period, accelerating economic growth spread to the
larger European economies of Germany, France and Italy.
Japan was a notable exception. Approximately nine years after the Japanese stock
market bubble burst, Japanese banks were still hampered by an enormous amount of
bad debt. During the year under review, government policy-makers appeared unable
to craft a solution to Japan's banking and economic woes. At the end of the
reporting period, Japan remained in a recession and in our view had little
near-term prospects of moving again into positive growth territory. We believe
Japan's ongoing troubles contributed greatly to the emerging markets crisis. The
yen's persistent weakness and the country's poor domestic demand for exports
from other Asian markets put enormous pressure on developing Asian economies.
We sought to take advantage of the market volatility by buying out-of-favor
securities during periods of investor pessimism and selling securities that we
felt had reached their full value. In early 1998, we began to take profits in
several continental European companies, which we felt reached extreme valuations
on a historical basis. We slightly decreased our U.S. holdings as well, from
about 23% of total net assets on December 31, 1997, to 21.1% at the end of the
reporting period, because we felt value was difficult to find there. In general,
we redeployed these assets into companies we considered undervalued, many
located in the U.K., Asia and Latin America. Two important purchases during the
year were U.K.-based General Electric Co. Plc. and Mexico-based diversified
industrial company Industrias Penoles SA.
- --------------------------------------------------------------------------------
[PIE CHART]
GRAPHIC MATERIAL (19)
This chart shows in pie format the geographic distribution of the Templeton
Global Growth Fund Fund based on total net assets as of 12/31/98.
GEOGRAPHIC DISTRIBUTION
Templeton Global Growth Fund
Based on Total Net Assets
12/31/98
<TABLE>
<S> <C>
Europe 38.7%
North America 24.8%
Asia 19.6%
Latin America 6.1%
Australia/New Zealand 3.7%
Africa 0.9%
Short-term Investments & Other Net Assets 6.2%
</TABLE>
- --------------------------------------------------------------------------------
GRAPHIC MATERIAL (20)
This chart shows the cop 10 holdings and their respective industry and country
based on the percentage of total net assets on 12/31/98 for the Templeton
Global Growth Fund.
TOP 10 HOLDINGS
Templeton Global Growth Fund
12/31/98
<TABLE>
<CAPTION>
COMPANY % OF TOTAL
INDUSTRY, COUNTRY NET ASSETS
- -----------------------------------------------------------------
<S> <C>
Electrabel SA 2.4%
Utilities Electrical & Gas, Belgium
Zurich Allied AG 1.9%
Insurance, Switzerland
Iberdrola SA, Br 1.9%
Utilities Electrical & Gas, Spain
Axa-UAP 1.8%
Financial Services, France
Danzas Holding AG 1.7%
Transportation, Switzerland
Pharmacia & Upjohn Inc. 1.7%
Health & Personal Care, U.S.
National Grid Group Plc. 1.6%
Utilities Electrical & Gas, U.K
Raytheon Co., A 1.5%
Aerospace & Military Technology, U.S.
Swire Pacific Ltd., A & B 1.5%
Multi-Industry, Hong Kong
Hutchison Whampoa Ltd. 1.4%
Multi-Industry, Hong Kong
</TABLE>
- --------------------------------------------------------------------------------
21
<PAGE>
- --------------------------------------------------------------------------------
WE ARE REPLACING THE MSCI WORLD INDEX WITH THE MSCI ALL COUNTRIES WORLD FREE
INDEX. BECAUSE THE NEW INDEX INCLUDES BOTH DEVELOPED AND EMERGING MARKETS, WE
BELIEVE IT BETTER MATCHES THE INVESTMENTS OF THE FUND. PERFORMANCE SHOWN IN THE
GRAPH REFLECTS ALL FUND OPERATING EXPENSES BUT DOES NOT INCLUDE ANY FEES,
CHARGES OR EXPENSES IMPOSED BY THE VARIABLE ANNUITY AND LIFE INSURANCE CONTRACTS
THAT USE THE FRANKLIN VALUEMARK FUNDS. IF THEY HAD BEEN INCLUDED, PERFORMANCE
WOULD HAVE BEEN LOWER. SEE THE CONTRACT PROSPECTUS FOR A COMPLETE DESCRIPTION OF
THE CONTRACT EXPENSES, INCLUDING ANY APPLICABLE SALES CHARGES. INDEX SOURCE IS
MSCI.
GRAPHIC MATERIAL (22)
This chart shows the average annual total return for the Templeton Global
Growth Fund as of 12/31/98.
<TABLE>
<CAPTION>
Average Annual Total Return
- --------------------------------------------------------
<S> <C>
1-Year +8.98%
3-Year +14.48%
Since Inception (3/15/94) +12.30%
</TABLE>
- --------------------------------------------------------------------------------
Finding potential value in Asia, we increased our weighting there, from 8.9% of
the portfolio's total net assets at the beginning of the year to 19.6% on
December 31, 1998. Believing the Hong Kong market to be particularly attractive,
we increased our holdings from 3.88% to 9.1% of total net assets during the same
period. The most significant purchase during the period was Hutchison Whampoa
Ltd., one of Hong Kong's largest conglomerates, with interests ranging from
telecommunications, to retail, to ports, to infrastructure investment in China.
The management has consistently been able to unlock value for shareholders, and
we were able take a position at a sizeable discount to its net asset value. In
our opinion, the purchase price gave no account for the future growth potential
of the company's investments in Hong Kong, China or the U.K.
Unfortunately, our investments in Hong Kong and other emerging markets hurt our
recent performance. However, while we think share prices in Asia and much of the
emerging markets already sell at levels that discount the problems of falling
asset prices and tighter liquidity, many stocks in parts of Europe and the U.S.
are still buoyed by unrealistically high expectations, in our opinion. For a
long-term investor who can afford to be patient, we believe risk is minimized by
investing where expectations are already low and where share prices are
supported by value, not by momentum. Such thinking encouraged us to increase the
fund's weighting in Hong Kong, and in Asia generally.
We are confident that thorough research and focusing on value as opposed to
outlooks or trends will enhance returns over the long term. Although we are not
able to predict where the market will go next week, next month or next year, we
have a time-tested process of identifying securities that we believe are selling
at the lowest prices in relation to their long-term earnings potential or asset
value. Using our value-oriented philosophy, we believe volatility presents
opportunity, allowing us to continue implementing our value investment
discipline that historically has provided superior, long-term investment
results.
GRAPHIC MATERIAL (21)
This graph compares the performance of Templeton Global Growth Fund as tracked
by the growth in value of a $10,000 investment, to that of the MSCI World Index
and the MSCI AC World Free Index from 3/15/94-12/31/98.
We are replacing the MSCI World Index with the MSCI All Countries World Free
Index. Because the new index includes both developed and emerging markets, we
believe it better matches the investments of the fund.
Performance shown in the graph reflects all fund operating expenses but does
not include any fees, charges or expenses imposed by the variable annuity and
life insurance contracts that use the Franklin Valuemark Funds. If they had
been included, performance would have been lower. See the contract prospectus
for a complete description of the contract expenses, including any applicable
sales charges. Index source is MSCI.
TOTAL RETURN INDEX COMPARISON
Templeton Global Growth Fund
$10,000 Investment (3/15/94 - 12/31/98)
<TABLE>
<CAPTION>
TEMPLETON GLOBAL MSCI AC
GROWTH FUND MSCI WORLD INDEX WORLD FREE INDEX
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
3/15/94 $10,000 $10,000 $10,000
3/31/94 $10,030 $9,774 $9,763
4/30/94 $10,079 $10,077 $10,028
5/31/94 $10,118 $10,105 $10,088
6/30/94 $10,020 $10,079 $10,039
7/31/94 $10,295 $10,272 $10,261
8/31/94 $10,551 $10,583 $10,626
9/30/94 $10,482 $10,307 $10,377
10/31/94 $10,492 $10,602 $10,643
11/30/94 $10,285 $10,144 $10,180
12/31/94 $10,315 $10,245 $10,216
1/31/95 $10,226 $10,093 $10,008
2/28/95 $10,335 $10,242 $10,115
3/31/95 $10,335 $10,737 $10,578
4/30/95 $10,630 $11,114 $10,963
5/31/95 $10,896 $11,211 $11,084
6/30/95 $11,053 $11,209 $11,087
7/31/95 $11,498 $11,773 $11,623
8/31/95 $11,399 $11,512 $11,368
9/30/95 $11,617 $11,850 $11,681
10/31/95 $11,231 $11,666 $11,486
11/30/95 $11,310 $12,073 $11,847
12/31/95 $11,627 $12,428 $12,204
1/31/96 $12,132 $12,655 $12,475
2/29/96 $12,181 $12,734 $12,527
3/31/96 $12,379 $12,949 $12,720
4/30/96 $12,706 $13,255 $13,031
5/31/96 $12,894 $13,269 $13,044
6/30/96 $12,886 $13,339 $13,116
7/31/96 $12,416 $12,870 $12,626
8/31/96 $12,814 $13,021 $12,782
9/30/96 $12,988 $13,533 $13,254
10/31/96 $13,080 $13,629 $13,307
11/30/96 $13,672 $14,396 $14,018
12/31/96 $14,102 $14,168 $13,815
1/31/97 $14,510 $14,340 $14,047
2/28/97 $14,592 $14,508 $14,238
3/31/97 $14,561 $14,224 $13,953
4/30/97 $14,623 $14,691 $14,402
5/31/97 $15,287 $15,601 $15,261
6/30/97 $16,058 $16,381 $16,042
7/31/97 $16,684 $17,138 $16,767
8/31/97 $16,246 $15,994 $15,591
9/30/97 $17,164 $16,865 $16,422
10/31/97 $15,891 $15,980 $15,444
11/30/97 $15,839 $16,265 $15,681
12/31/97 $16,006 $16,466 $15,887
1/31/98 $15,912 $16,928 $16,236
2/28/98 $17,185 $18,076 $17,347
3/31/98 $18,103 $18,842 $18,087
4/30/98 $18,155 $19,029 $18,257
5/31/98 $17,644 $18,793 $17,910
6/30/98 $17,395 $19,242 $18,233
7/31/98 $17,407 $19,213 $18,239
8/31/98 $14,891 $16,654 $15,684
9/30/98 $14,998 $16,952 $15,996
10/31/98 $16,391 $18,487 $17,456
11/30/98 $17,135 $19,590 $18,516
12/31/98 $17,442 $20,550 $19,376
</TABLE>
<TABLE>
<S> <C> <C> <C>
Total Return 74.42% 105.50% 93.76%
</TABLE>
PLEASE SEE IMPORTANT ENDNOTES TO PERFORMANCE INFORMATION ON PAGE 61.
22
<PAGE>
TEMPLETON INTERNATIONAL EQUITY FUND
Templeton International Equity Fund ended 1998 with a +5.56% one-year cumulative
total return, compared with the MSCI All Country World ex-U.S. Free Index, which
returned 14.46% during the same period.* This disappointing performance largely
reflects most investors' preference for a narrow range of large and expensive
stocks in 1998, versus the bargain-priced, often smaller and mid-size stocks in
which the portfolio typically invests. Additionally, our exposure to Latin
American stocks undercut performance, as all of that region's markets suffered
declines in 1998. Conversely, the developed stock markets continued on a
record-breaking pace during the year, even in the face of weak earnings trends
and signs of global economic weakness. Given the high valuations in developed
markets, perilous economic conditions in many emerging markets and rising
concerns regarding the earnings outlook for many companies, the portfolio
maintained a larger than normal cash position during 1998. Although this helped
during the weak markets in the late summer and fall, for the year as a whole it
contributed to the portfolio's underperformance relative to the MSCI All Country
World ex-U.S. Free Index.
Asia's economic troubles, which began in 1997 and continued into 1998, had an
important influence on the course of global stock and bond markets during the
year. Many investors evidently sought to flee the uncertainty in the Asian stock
markets, in favor of company investments with a low probability for earnings
disappointments. As such companies infrequently met our strict value criteria,
Templeton's bargain-hunting investment style fell out of favor. This was nowhere
more obvious than in the soaring technology and Internet stocks in the U.S. and
Europe. Despite valuation levels that, in many cases, seemed out of touch with
the earnings power of these companies, their share prices continued to rise.
Left behind were many fine companies, which we think have solid, long-term
prospects for earnings growth and much lower valuations. Your portfolio
consisted of many such stocks, and we are confident that the market will
eventually recognize the value they represent.
After Russia's loan default and currency devaluation in late summer, investors
appeared to become concerned that Brazil and Venezuela might also encounter
repayment difficulties. Despite the fact that Latin America's share prices were
among the world's lowest, selling pressure in these markets became intense. The
portfolio's exposure to Brazil, in particular, and Latin America, in general,
weighed heavily on its performance. We remain confident that the stocks we hold
in this region ultimately
- --------------------------------------------------------------------------------
GRAPHIC MATERIAL (23)
This charts shows in bar format the geographic distribution of the Templeton
International Equity Fund based on total net assets as of 12/31/98.
GEOGRAPHIC DISTRIBUTION
Templeton International Equity Fund
Based on Total Net Assets
12/31/98
<TABLE>
<S> <C>
Europe 68.7%
Latin America 8.6%
Australia/New Zealand 4.1%
North America 3.8%
Asia 2.8%
Mid-East/Africa 0.9%
Short-term investments & other net assets 11.1%
</TABLE>
- --------------------------------------------------------------------------------
*Index is unmanaged and includes reinvested dividends. One cannot invest
directly in an index.
23
<PAGE>
- --------------------------------------------------------------------------------
WHAT IS BOOK VALUE?
Book value is the total net asset value of a company's securities calculated by
using the following formula: Total assets minus intangible assets, minus current
liabilities, minus any long-term liabilities and equity issues that have a prior
claim equals total net assets available for payment of the issue under
consideration.
Barron's Dictionary of Finance and Investment Terms, 1995.
- --------------------------------------------------------------------------------
should yield strong returns as investors begin to appreciate the unusually
attractive bargains available in these shares. Many Brazilian stocks we held
traded at single-digit price/earnings (P/E) multiples and below book value at
the end of the reporting period. This compared with valuations in the developed
world of mid-20s P/Es and 4-7 times book value. Additionally, these companies
have strong balance sheets and, in our opinion, are well-positioned to take
advantage of any short-term economic weakness to build long-term shareholder
value.
We found it more difficult to find attractive long-term values in many of the
Asian markets. Although it appeared that some of these economies had begun to
reach their low points, the damage done to the banking and corporate sectors
will take much time and money to repair. In particular, we were concerned that
many companies would begin to see improving sales and operating earnings in the
1999-2000 time period, but that earnings per share would not recover as much as
many analysts hoped, due to the need for new, diluting equity issues to repair
weakened balance sheets. Moreover, continued economic problems in Japan and
China could pose additional challenges for the region going forward.
Accordingly, we maintained a low weighting in Asia and added only strongly
capitalized companies like Hong Kong Telecommunications Ltd. to the portfolio.
We suspect that better bargains will emerge in Asia as the recapitalization
process moves forward. Furthermore, most Asian stocks and currencies already
rebounded sharply from the lows reached earlier in 1998 and, at valuations as of
the end of the reporting period, did not appear to take into account the large
number of potential equity issues and the earnings dilution they may cause over
the longer term.
Looking forward into 1999, we will be seeking opportunities to put the
portfolio's cash reserves to work in truly bargain-priced stocks while
maintaining an appropriate degree of diversification. This is an arduous task
when many of the world's stock markets are already trading at record levels.
Given the valuation dichotomy between large and small stocks, as well as between
growth and value shares seen in the market today, risk appeared greater in those
stocks that have performed well already, especially since investors seemed to be
significantly downplaying signs of global economic weakness and deflation. As
demonstrated by Templeton International Equity Fund's 1998 performance, we hold
few shares that fit into this momentum category. Accordingly, while any foreign
stock fund may be volatile, we believe that the fund may be somewhat insulated
from a pullback in the large, growth stocks should investors' very high
expectations for these shares be disappointed. As always, the Templeton research
24
<PAGE>
team will be scouring the world for those shares whose prices are selling at the
lowest value relative to their future earnings potential, since such shares help
reduce risk while offering the potential for attractive long-term returns.
GRAPHIC MATERIAL (24)
This graph compares the performance of Templeton International Equity Fund as
tracked by the growth in value of a $10,000 investment, to that of the MSCI All
Country World Ex-U.S. Free Index from 1/27/92-12/31/98.
Performance shown in the graph reflects all fund operating expenses but does not
include any fees, charges or expenses imposed by the variable annuity and life
insurance contracts that use the Franklin Valuemark Funds. If they had been
included, performance would have been lower. See the contract prospectus for a
complete description of the contract expenses, including any applicable sales
charges. Index source is MCSI.
TOTAL RETURN INDEX COMPARISON
Templeton International Equity Fund
$10,000 Investment (1/27/92 - 12/31/98)
<TABLE>
<CAPTION>
TEMPLETON INTERNATIONAL MSCI AC WORLD EX
EQUITY FUND U.S. FREE INDEX
- -------------------------------------------------------------------------------------
<S> <C> <C>
1/27/92 $10,000 $10,000
1/31/92 $10,000 $9,982
2/29/92 $10,000 $9,675
3/31/92 $10,000 $9,090
4/30/92 $10,010 $9,120
5/31/92 $10,270 $9,674
6/30/92 $10,040 $9,207
7/31/92 $9,760 $9,011
8/31/92 $9,860 $9,492
9/30/92 $9,740 $9,297
10/31/92 $9,570 $8,889
11/30/92 $9,670 $8,938
12/31/92 $9,760 $9,012
1/31/93 $9,630 $9,011
2/28/93 $9,770 $9,287
3/31/93 $9,930 $10,052
4/30/93 $10,200 $10,940
5/31/93 $10,410 $11,183
6/30/93 $10,218 $11,049
7/31/93 $10,419 $11,417
8/31/93 $11,132 $12,029
9/30/93 $11,042 $11,782
10/31/93 $11,694 $12,208
11/30/93 $11,403 $11,279
12/31/93 $12,547 $12,158
1/31/94 $13,461 $13,158
2/28/94 $13,230 $13,059
3/31/94 $12,748 $12,461
4/30/94 $12,868 $12,883
5/31/94 $12,939 $12,888
6/30/94 $12,601 $12,979
7/31/94 $13,117 $13,190
8/31/94 $13,512 $13,634
9/30/94 $13,249 $13,296
10/31/94 $13,466 $13,654
11/30/94 $12,889 $12,995
12/31/94 $12,656 $12,965
1/31/95 $12,393 $12,377
2/28/95 $12,576 $12,309
3/31/95 $12,535 $13,004
4/30/95 $13,091 $13,512
5/31/95 $13,334 $13,452
6/30/95 $13,629 $13,266
7/31/95 $14,207 $14,019
8/31/95 $13,902 $13,533
9/30/95 $14,207 $13,764
10/31/95 $13,797 $13,396
11/30/95 $13,829 $13,711
12/31/95 $13,997 $14,253
1/31/96 $14,470 $14,449
2/29/96 $14,806 $14,449
3/31/96 $15,037 $14,718
4/30/96 $15,478 $15,165
5/31/96 $15,699 $14,937
6/30/96 $15,720 $15,013
7/31/96 $15,241 $14,514
8/31/96 $15,698 $14,732
9/30/96 $15,854 $14,961
10/31/96 $16,143 $14,812
11/30/96 $16,756 $15,383
12/31/96 $17,213 $15,205
1/31/97 $17,514 $14,926
2/28/97 $17,792 $15,199
3/31/97 $18,048 $15,167
4/30/97 $17,892 $15,295
5/31/97 $18,572 $16,240
6/30/97 $19,594 $17,136
7/31/97 $20,107 $17,483
8/31/97 $19,690 $16,108
9/30/97 $21,085 $16,979
10/31/97 $19,666 $15,533
11/30/97 $19,201 $15,339
12/31/97 $19,225 $15,516
1/31/98 $19,105 $15,980
2/28/98 $20,310 $17,046
3/31/98 $21,645 $17,635
4/30/98 $22,182 $17,761
5/31/98 $22,027 $17,439
6/30/98 $21,798 $17,374
7/31/98 $21,889 $17,539
8/31/98 $18,607 $15,065
9/30/98 $18,123 $14,747
10/31/98 $19,339 $16,292
11/30/98 $20,189 $17,167
12/31/98 $20,294 $17,759
</TABLE>
<TABLE>
<S> <C> <C>
Total Return 102.94% 77.59%
</TABLE>
TEMPLETON INTERNATIONAL SMALLER COMPANIES FUND
Templeton International Smaller Companies Fund had a cumulative total return of
- -12.27% for the year ended December 31, 1998. This compared to a 1.26% return
for the Salomon Global ex-U.S. less than U.S. $1 billion Index.* We attribute
our underperformance versus the index to several factors. In January, Hong Kong
performed very poorly relative to other Asian markets, severely dampening the
portfolio. During the period, the portfolio was oriented to cyclical stocks,
reflecting the nature of the bargain list. Also, many higher-valued, better
quality companies among the small-cap sector were beyond our identified price
range, and such companies tended to perform best.
As of December 31, 1998, the portfolio had approximately $25 million in assets
under management, invested in 33 countries. The pie chart shows the largest
positions by geographic area: Europe with 55.5%, Asia with 19.4%, and Latin
America with 6.0%. By country, the largest positions were 16.2% in the U.K.,
9.4% in Hong Kong, and 8% each in Spain and the Netherlands.
The past year proved challenging for investors in international small-cap
stocks. Larger-capitalization equities captured the bulk of investor attention,
outperforming small-cap stocks by a large margin during a period of significant
volatility. The weak
- --------------------------------------------------------------------------------
PERFORMANCE SHOWN IN THE GRAPH REFLECTS ALL FUND OPERATING EXPENSES BUT DOES NOT
INCLUDE ANY FEES, CHARGES OR EXPENSES IMPOSED BY THE VARIABLE ANNUITY AND LIFE
INSURANCE CONTRACTS THAT USE THE FRANKLIN VALUEMARK FUNDS. IF THEY HAD BEEN
INCLUDED, PERFORMANCE WOULD HAVE BEEN LOWER. SEE THE CONTRACT PROSPECTUS FOR A
COMPLETE DESCRIPTION OF THE CONTRACT EXPENSES, INCLUDING ANY APPLICABLE SALES
CHARGES. INDEX SOURCE IS MSCI.
GRAPHIC MATERIAL (25)
This chart shows the average annual total return for the Templeton International
Equity Fund as of 12/31/98.
<TABLE>
<CAPTION>
Average Annual Total Return
- --------------------------------------
<S> <C>
1-Year +5.56%
5-Year +10.09%
Since Inception (1/27/92) +10.75%
</TABLE>
GRAPHIC MATERIAL (26)
This chart shown in pie format the geographic distribution of the Templeton
International Smaller Companies Fund based on total net assets as of 12/31/98.
GEOGRAPHIC DISTRIBUTION
Templeton International
Smaller Companies Fund
Based on Total Net Assets
12/31/98
<TABLE>
<S> <C>
Europe 55.5%
Asia 19.4%
Latin America 6.0%
North America 5.8%
Australia/New Zealand 4.7%
Mid-East/Africa 2.6%
Short-term Investments & Other Net Assets 6.0%
</TABLE>
- --------------------------------------------------------------------------------
*Index is unmanaged and includes reinvested dividends. One cannot invest
directly in an index.
PLEASE SEE IMPORTANT ENDNOTES TO PERFORMANCE INFORMATION ON PAGE 61.
25
<PAGE>
- --------------------------------------------------------------------------------
GRAPHIC MATERIAL (27)
This table shows the forecasted 1999 P/E Ratios of several countries.
FORECASTED 1999 P/E RATIOS*
<TABLE>
<CAPTION>
SMALL COMPANIES LARGE COMPANIES
- ---------------------------------------------------------------------
<S> <C> <C>
Brazil 5 8
Canada 19 16
France 14 21
Germany 15 22
Hong Kong 7 14
Japan 24 34
Mexico 6 16
Netherlands 9 23
Spain 15 21
Sweden 13 20
Switzerland 13 20
United Kingdom 11 20
</TABLE>
*Source: Salomon Smith Barney.
- --------------------------------------------------------------------------------
performance of small caps did not necessarily result from profit disappointment;
rather, we feel it was a consequence of money flowing principally to each
market's leading companies. As a result, there generally was a large disparity
in valuations between small- and large-cap stocks, with smaller companies often
trading at unusually wide discounts to larger companies in world markets. Our
analysts sought to take advantage of this trend to uncover fundamentally sound,
attractive businesses, selling at less than intrinsic value.
Europe continued to be our largest geographic exposure during 1998. Most
European equity markets appreciated sharply during the year, shrugging off
well-documented problems in Russia and reduced earnings expectations for many
companies. Small-cap stocks, however, largely failed to participate in this
strong performance and generally lagged behind large caps in trends toward
restructuring, cost-efficiency and increased attention to shareholder value.
Nevertheless, as of the end of the reporting period, we believed many European
smaller companies were beginning to take a more active approach toward cost
cutting and improved efficiency, and as a result, our outlook for shares of
European small caps was bright. Somerfield Plc., a U.K. supermarket and one of
the portfolio's largest holdings, is an example of a stock we purchased for the
portfolio at attractive valuations that benefited from the above trends.
Somerfield historically has been an inexpensive stock, with this valuation
justified by skepticism about its management's ability to increase profitability
amid competitive pressures from larger supermarkets. However, after meeting with
Somerfield management, our analysts determined that the company was poised to
reward investors by increasing profitability through cost reduction.
Somerfield's leading position in the high-end supermarket segment also made it
an attractive merger and acquisition candidate, which is exactly what occurred
in February. Kwik Save Group Plc., a large U.K. food retailer, announced a
merger with Somerfield, propelling the company into the spotlight as a premier
industry competitor.
Asia's economic woes, caused in part by last year's widespread currency
devaluations, compounded during the first half of 1998, before signs of recovery
emerged toward year-end in the form of lower interest rates, strengthening
currencies and growing surpluses in many countries. Responding to the effects of
currency devaluation, many regional governments were compelled to make difficult
policy decisions to force economic reform. In Hong Kong, the Hong Kong Monetary
Authority, backed by almost $100 billion in currency reserves, reportedly
purchased equities to defend the country's capital markets and the Hong Kong
dollar exchange rate from speculators. Although this intervention evidently
discouraged short-sellers from attacking the peg and significantly propped up
the stock market, international investors appeared to remain concerned about the
potential consequences of large-scale government equity holdings. The
portfolio's Hong Kong holdings remain restricted to those companies
26
<PAGE>
with proven management track records, strong balance sheets, minimal property
exposure and stable earnings. One such example is Li & Fung Ltd., which we found
to have a realistic strategy, a very strong balance sheet and a highly
sophisticated, forward-thinking management team. The company manages
manufacturing programs, such as virtual factories, for firms that produce
labor-intensive consumer goods like clothing. We purchased shares of Li & Fung
at a price beneath our assessment of its intrinsic value, believing it is a
flexible and efficient company that should continue to grow through acquisition
and expansion into new markets.
We continued to have difficulty finding value in Japan, where the average
company traded at a rich 31 times 1999 projected earnings as of the end of the
reporting period. This valuation compared with other Asian markets where the
price-to-earnings ratios ranged from 12.26 to 30.53. Although the Japanese stock
market represents over 21% of the world's market capitalization outside the
U.S., less than 3% of the portfolio's total net assets were invested in Japan on
December 31, 1998, because of these high valuations. Overall, we would expect to
see the portfolio's weighting in Japan increase if the new government addresses
the economy's structural problems and companies begin to provide greater
financial disclosure and focus on creating value for shareholders.
Looking ahead into 1999, we expect continued recovery throughout Asia, with a
slow and uneven pace across countries. We would seek to take advantage of the
likely stock price volatility to add to high-quality, Pacific Rim companies in
countries that are selling beneath our assessment of their intrinsic value.
The problems in Russia and the uncertainties in Asia appeared to have
repercussions in Latin America. In Brazil, markets declined sharply and capital
reportedly left the country. As money flowed out of Brazil, the central bank was
forced to defend its currency via high, short-term interest rates. This caused
severe problems for Brazil's already high fiscal deficit and drove speculation
the country would devalue its currency. An example of a Latin American small cap
we added to the portfolio was Fertilizantes Fosfatados SA, Pfd., Brazil's
leading producer of fertilizer. We think the stock had a strong financial
position as of year-end, offering a 10% dividend yield and trading at under four
times our 1999 earnings estimates.
Regarding our long-term strategy, while the sharp fall-off in many world markets
hurt short-term stock performance, investors did not always differentiate
between those companies with significant exposure to the problem areas, and
those without. This gave Templeton International Smaller Companies Fund the
opportunity to selectively add high-quality stocks, particularly in Europe and
Asia, at what we feel were attractive prices. While foreign small-cap stocks may
be volatile, we believe the portfolio's longer-term performance should benefit
from this value-oriented approach.
GRAPHIC MATERIAL (28)
This chart shows the top 10 holdings and their respective industry and country
based on the percentage of total net assets on 12/31/98 for the Templeton
International Smaller Companies Fund.
- --------------------------------------------------------------------------------
TOP TEN HOLDINGS
Templeton International Smaller Companies Fund
12/31/98
<TABLE>
<CAPTION>
COMPANY % OF TOTAL
INDUSTRY, COUNTRY NET ASSETS
- --------------------------------------------------------------------------
<S> <C>
Sa des Galeries Lafayette 3.5%
Merchandising, France
GTC Transcontinental Group Ltd., B 2.5%
Broadcasting & Publishing, Canada
VTech Holdings Ltd. 2.4%
Electric Components & Instruments, Hong Kong
Gas Y Electricidad SA, Br. 2.3%
Utilities Electrical & Gas, Spain
Hazlewood Foods Plc. 2.2%
Food & Household Products, U.K.
Somerfield Plc. 2.2%
Merchandising, U.K.
Dragados Y Construcciones SA, Br. 2.1%
Construction & Housing, Spain
Banco Pastor SA 2.0%
Banking, Spain
Li & Fung Ltd. 2.0%
Merchandising, Hong Kong
Moebel Walther AG & Pfd. 1.8%
Merchandising, Germany
</TABLE>
- --------------------------------------------------------------------------------
27
<PAGE>
- --------------------------------------------------------------------------------
WE ARE REPLACING THE SALOMON WORLD EX-U.S. EXTENDED MARKET INDEX WITH THE
SALOMON GLOBAL EX-U.S. LESS THAN $1 BILLION INDEX. THE NEW INDEX INCLUDES ALL
DEVELOPED AND EMERGING COUNTRIES, EXCEPT THE U.S., AND INCLUDES COMPANIES WITH A
TOTAL MARKET CAPITALIZATION BELOW U.S. $1 BILLION. WE BELIEVE IT BETTER MATCHES
THE PORTFOLIO'S INVESTMENTS.
PERFORMANCE SHOWN IN THE GRAPH REFLECTS ALL FUND OPERATING EXPENSES BUT DOES NOT
INCLUDE ANY FEES, CHARGES OR EXPENSES IMPOSED BY THE VARIABLE ANNUITY AND LIFE
INSURANCE CONTRACTS THAT USE THE FRANKLIN VALUEMARK FUNDS. IF THEY HAD BEEN
INCLUDED, PERFORMANCE WOULD HAVE BEEN LOWER. SEE THE CONTRACT PROSPECTUS FOR A
COMPLETE DESCRIPTION OF THE CONTRACT EXPENSES, INCLUDING ANY APPLICABLE SALES
CHARGES. INDEX SOURCE IS SALOMON SMITH BARNEY.
GRAPHIC MATERIAL (30)
This chart shows the average annual total return for the Templeton
International Smaller Companies Fund as of 12/31/98.
<TABLE>
<CAPTION>
Average Annual Total Return
- -------------------------------------------
<S> <C>
1-Year -12.27%
Since Inception (5/1/96) -1.06%
</TABLE>
- --------------------------------------------------------------------------------
We take very seriously the trust you place in us to invest your money, and go to
great lengths to assess what we believe to be each company's true value before
we buy its shares for your portfolio. Our analysts attempt to determine a
company's value by estimating its potential earnings well into the future. By
focusing on the long term, we are often able to buy what others are selling
based on short-term considerations. We believe that this approach, while
requiring patience, has the potential to reward investors.
GRAPHIC MATERIAL (29)
This graph compares the performance of Templeton International Smaller Companies
Fund as tracked by the growth in value of a $10,000 investment, to that of the
Salomon Global ex-U.S. less than $1 Billion Index and the Salomon World ex-U.S.
EMI from 5/1/96-12/31/98.
We are replacing the Salomon World ex-U.S. Extended Market Index with the
Salomon Global ex-U.S. less than $1 billion Index. The new index includes all
developed and emerging countries, except the U.S., and includes companies with a
total market capitalization below US $1 billion. We believe it better matches
the portfolio's investments.
Performance shown in the graph reflects all fund operating expenses but does not
include any fees, charges or expenses imposed by the variable annuity and life
insurance contracts that use the Franklin Valuemark Funds. If they had been
included, performance would have been lower. See the contract prospectus for a
complete description of the contract expenses, including any applicable sale
charges. Index source is Salomon Smith Barney.
TOTAL RETURN INDEX COMPARISON
Templeton International Smaller Companies Fund
$10,000 Investment (5/1/96 - 12/31/98)
<TABLE>
<CAPTION>
TEMPLETON
INTERNATIONAL SMALLER SALOMON GLOBAL EX-U.S. SALOMON WORLD EX-U.S.
COMPANIES FUND LESS THAN $1 BILLION INDEX EMI INDEX
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
5/1/96 $10,000 $10,000 $10,000
5/31/96 $10,150 $ 9,929 $ 9,922
6/30/96 $10,330 $ 9,908 $ 9,923
7/31/96 $10,210 $ 9,465 $ 9,548
8/31/96 $10,330 $ 9,637 $ 9,644
9/30/96 $10,410 $ 9,694 $ 9,698
10/31/96 $10,690 $ 9,704 $ 9,660
11/30/96 $10,890 $ 9,890 $ 9,819
12/31/96 $11,250 $ 9,721 $ 9,638
1/31/97 $11,330 $ 9,791 $ 9,430
2/28/97 $11,450 $ 10,022 $ 9,588
3/31/97 $11,490 $ 9,803 $ 9,461
4/30/97 $11,440 $ 9,611 $ 9,320
5/31/97 $11,670 $10,127 $ 9,917
6/30/97 $11,936 $10,341 $10,141
7/31/97 $12,026 $10,188 $ 9,988
8/31/97 $12,117 $ 9,652 $ 9,562
9/30/97 $12,569 $ 9,672 $ 9,732
10/31/97 $11,574 $ 9,092 $ 9,347
11/30/97 $11,232 $ 8,426 $ 8,930
12/31/97 $11,081 $ 8,170 $ 8,733
1/31/98 $10,689 $ 8,345 $ 9,097
2/28/98 $11,684 $ 9,047 $ 9,776
3/31/98 $12,227 $ 9,364 $10,235
4/30/98 $12,328 $ 9,396 $10,313
5/31/98 $12,066 $ 9,206 $10,505
6/30/98 $11,327 $ 8,739 $10,198
7/31/98 $11,105 $ 8,552 $10,128
8/31/98 $ 9,362 $ 7,292 $ 8,886
9/30/98 $ 9,066 $ 7,290 $ 8,655
10/31/98 $ 9,404 $ 7,796 $ 9,266
11/30/98 $ 9,805 $ 8,127 $ 9,563
12/31/98 $ 9,721 $ 8,273 $ 9,794
</TABLE>
<TABLE>
<S> <C> <C> <C>
Total Return -2.79% -17.27% -2.06%
</TABLE>
TEMPLETON PACIFIC GROWTH FUND
Severe economic contraction and upheaval for nearly all the Asian economies
characterized the year ended December 31, 1998. The effects of widespread
currency devaluation compelled governments across the region to make difficult
policy decisions to force economic reform. Against this backdrop, Templeton
Pacific Growth Fund's cumulative total return was -13.13% for the year, versus
2.69% for the MSCI Pacific Index.*
In the 1998 semiannual report, we outlined three core ideas that guided our
investment choices throughout the calendar year. First, we emphasized our faith
in the Singapore and Hong Kong economies' strength, owing to solid bankruptcy
laws and their respective governments' resolve to fend off currency speculation.
Shortly thereafter in August, the Hong Kong government reportedly faced down a
heavy round of speculation against the Hong Kong dollar currency peg. In our
view, its ability to fend off the speculative attack was a significant factor
fueling a dramatic stock market recovery, which significantly helped the
portfolio's performance.
*Index is unmanaged and includes reinvested dividends. One cannot invest
directly in an index.
PLEASE SEE IMPORTANT ENDNOTES TO PERFORMANCE INFORMATION ON PAGE 61.
28
<PAGE>
In Singapore, the strong government commitment ensuring that companies had funds
available to them helped fuel a rapid recovery in the stock markets.
Particularly important, we think, was the reduced amount of money commercial
banks must deposit with the Monetary Authority to guarantee solvency.
Singapore's standards previously were far above international standards, which,
in times of crisis, may have kept much-needed cash out of the economy. When we
last wrote, six months ago, the Singapore Straits Times Index was off 33.71%, in
U.S. dollar terms, for the first six months of 1998. As of the end of the
reporting period, the market had regained much of its lost ground, and was off
only 6.03% in U.S. dollar terms, for the year.
Second, in the semiannual report we stressed our belief that the Chinese
government would be able to maintain the fixed exchange rate regime throughout
the year to prevent another round of speculative devaluation across the region.
Chinese officials followed this course, in our opinion, correctly recognizing
that the regional instability resulting from devaluation would impose a far
higher cost than the localized pain of maintaining the Chinese yuan's value. In
October, the government re-emphasized its commitment to the fixed exchange rate,
and pledged to maintain it through 1999. On the down side, this commitment's
resulting cost may have slowed the pace of necessary economic reforms.
Lastly, we indicated in the semiannual report that, for the value investor, we
felt Japan was an expensive market and Japanese companies had many structural
problems the markets had not yet fully recognized. The Japanese market ended
1998 down 9.28% in local terms, in line with the decline in Japanese companies'
net profits. However, because many hedge funds covered their short positions in
the yen, the Nikkei 225 Index ended up positive in U.S. dollar terms at
year-end. The positive performance generally was in large companies whose
valuations were already very high relative to their earnings, while smaller
stocks were mainly flat for the year. We believe the portfolio underperformed
the MSCI Pacific Index because of the cautious stance we took in Japan. As of
the end of the reporting period, Japan was in a depressionary-type environment,
whereas we preferred to invest in regions or countries like Hong Kong and
Singapore that we believed had a brighter outlook and earnings visibility. 1998
was a unique year in that it saw Japan outperform Hong Kong and Singapore.
However, this superior performance was driven more by market manipulation than
by fundamentals. We choose to be underweight in this market until we see a
brighter picture.
In the first half of the year under review, we established large positions in
Hong Kong and Singapore. By contrast, in the last half of the year, we rounded
out our portfolio by increasing our weightings in non-local companies deriving a
significant amount of
GRAPHIC MATERIAL (31)
This chart shows the top 10 holdings and their respective industry and country
based on the percentage of total net assets on 12/31/98 for the Templeton
Pacific Growth Fund.
- --------------------------------------------------------------------------------
TOP 10 HOLDINGS
Templeton Pacific Growth Fund
12/31/98
<TABLE>
<CAPTION>
COMPANY % OF TOTAL
INDUSTRY,COUNTRY NET ASSETS
- -------------------------------------------------------------------------
<S> <C>
Development Bank of Singapore Ltd., fgn. 4.5%
Banking, Singapore
Singapore Airlines Ltd., fgn. 4.0%
Transportation, Singapore
City Developments Ltd. 3.9%
Real Estate, Singapore
Wacoal Corp. 3.7%
Textiles & Apparel, Japan
Daito Trust Construction Co. Ltd. 3.6%
Construction & Housing, Japan
East Japan Railway Co. 3.4%
Transportation, Japan
Cheung Kong Holdings Ltd. 3.4%
Multi-Industry, Hong Kong
Mitsubishi Heavy Industries Ltd. 3.3%
Industrial Components, Japan
Cathay Pacific Airways Ltd. 3.0%
Transportation, Hong Kong
Fuji Heavy Industries Ltd. 2.9%
Industrial Components, Japan
</TABLE>
- --------------------------------------------------------------------------------
29
<PAGE>
- --------------------------------------------------------------------------------
PERFORMANCE SHOWN IN THE GRAPH REFLECTS ALL FUND OPERATING EXPENSES BUT DOES NOT
INCLUDE ANY FEES, CHARGES OR EXPENSES IMPOSED BY THE VARIABLE ANNUITY AND LIFE
INSURANCE CONTRACTS THAT USE THE FRANKLIN VALUEMARK FUNDS. IF THEY HAD BEEN
INCLUDED, PERFORMANCE WOULD HAVE BEEN LOWER. SEE THE CONTRACT PROSPECTUS FOR A
COMPLETE DESCRIPTION OF THE CONTRACT EXPENSES, INCLUDING ANY APPLICABLE SALES
CHARGES. INDEX SOURCE IS MSCI.
GRAPHIC MATERIAL (33)
This chart shows the average annual total return for the Templeton Pacific
Growth Fund as of 12/31/98.
<TABLE>
<CAPTION>
Average Annual Total Return
- ---------------------------------------
<S> <C>
1-Year -13.13%
5-Year -9.45%
Since Inception (1/27/92) -1.68%
</TABLE>
- --------------------------------------------------------------------------------
their earnings from the Asian region. We felt that companies with international
exposure would be better equipped than local Asian companies to absorb the shock
of economic contraction, over the long term.
Looking ahead into 1999, we currently expect to see continued recovery
throughout the region, with a slow and uneven pace across countries. While in
Indonesia and Malaysia we expect further economic stagnation, in Japan, we saw
some small signs that the economy's deep problems were being worked out. The
fact that Japan's new government appeared to have grasped the depth of the task
ahead, and the possibility that political deadlock may give rise to positive
compromises toward the end of the next year were encouraging to us. In
particular, we are hopeful that, as new rules requiring greater financial
disclosure go into effect, we will be able to identify more of those companies
that follow sound financial practices. We will look to take advantage of market
dips to increase our positions in these types of companies.
In China, we expect the government will face considerably more challenges in
maintaining economic growth, while continuing structural reform. China created a
massive government stimulus package as part of its effort to increase its gross
domestic product. We do not believe it will be able to continue pumping money
into the economy without sacrificing the country's long-term economic growth
potential. Hence, we believe 1999 will be one of the toughest years for China to
date, and we anticipate flat or slightly negative earnings growth for most of
the country's companies.
We expect Singapore, Hong Kong, Thailand and Korea to see the strongest economic
performance over the coming year, and, on market dips, would look to increase
our holdings in these countries, along with Australia.
GRAPHIC MATERIAL (32)
This graph compares the performance of Pacific Growth Fund as tracked by the
growth in value of a $10,000 investment, to that of MSCI Pacific Index from
1/27/92-12/31/98.
Performance shown in the graph reflects all fund operating expenses but does
not include any fees, charges or expenses imposed by the variable annuity and
life insurance contracts that use the Franklin Valuemark Funds. If they had
been included, performance would have been lower. See the contract prospectus
for a complete description of the contract expenses, including any applicable
sales charges. Index source is Morgan Stanley Capital International.
TOTAL RETURN INDEX COMPARISON
Templeton Pacific Growth Fund
$10,000 Investment (1/27/92 - 12/31/98)
<TABLE>
<CAPTION>
TEMPLETON PACIFIC
GROWTH FUND MSCI PACIFIC INDEX
- --------------------------------------------------------------------------------
<S> <C> <C>
1/27/92 $10,000 $10,000
1/31/92 $10,000 $ 9,949
2/29/92 $10,000 $ 9,253
3/31/92 $10,000 $ 8,375
4/30/92 $10,010 $ 7,993
5/31/92 $10,210 $ 8,618
6/30/92 $10,450 $ 7,942
7/31/92 $ 9,900 $ 7,834
8/31/92 $ 9,570 $ 8,908
9/30/92 $ 9,790 $ 8,706
10/31/92 $10,230 $ 8,401
11/30/92 $10,110 $ 8,561
12/31/92 $ 9,880 $ 8,465
1/31/93 $ 9,980 $ 8,450
2/28/93 $10,330 $ 8,862
3/31/93 $10,270 $ 9,935
4/30/93 $10,920 $11,519
5/31/93 $11,290 $11,856
6/30/93 $11,100 $11,664
7/31/93 $11,230 $12,355
8/31/93 $11,770 $12,723
9/30/93 $11,840 $12,249
10/31/93 $13,110 $12,522
11/30/93 $12,970 $10,757
12/31/93 $14,610 $11,509
1/31/94 $14,720 $12,843
2/28/94 $14,300 $13,177
3/31/94 $13,330 $12,451
4/30/94 $13,520 $12,991
5/31/94 $14,080 $13,302
6/30/94 $13,704 $13,739
7/31/94 $13,956 $13,446
8/31/94 $14,549 $13,682
9/30/94 $14,006 $13,342
10/31/94 $14,100 $13,681
11/30/94 $13,194 $12,920
12/31/94 $13,325 $13,009
1/31/95 $12,359 $12,189
2/28/95 $12,872 $11,889
3/31/95 $13,194 $12,804
4/30/95 $13,376 $13,351
5/31/95 $13,899 $12,820
6/30/95 $13,643 $12,279
7/31/95 $14,170 $13,166
8/31/95 $14,005 $12,672
9/30/95 $14,263 $12,792
10/31/95 $13,694 $12,172
11/30/95 $13,767 $12,772
12/31/95 $14,387 $13,398
1/31/96 $15,556 $13,423
2/29/96 $15,504 $13,273
3/31/96 $15,535 $13,683
4/30/96 $16,228 $14,381
5/31/96 $16,280 $13,759
6/30/96 $16,136 $13,764
7/31/96 $15,259 $13,134
8/31/96 $15,638 $12,790
9/30/96 $15,866 $13,210
10/31/96 $15,357 $12,599
11/30/96 $16,180 $12,943
12/31/96 $15,985 $12,272
1/31/97 $15,736 $11,241
2/28/97 $15,801 $11,477
3/31/97 $15,205 $11,059
4/30/97 $15,303 $11,291
5/31/97 $16,169 $12,397
6/30/97 $16,461 $13,167
7/31/97 $16,737 $12,854
8/31/97 $14,034 $11,581
9/30/97 $14,354 $11,538
10/31/97 $11,717 $10,139
11/30/97 $10,691 $ 9,582
12/31/97 $10,239 $ 9,163
1/31/98 $ 9,389 $ 9,661
2/28/98 $10,691 $10,009
3/31/98 $10,393 $ 9,459
4/30/98 $ 9,676 $ 9,273
5/31/98 $ 8,341 $ 8,645
6/30/98 $ 7,532 $ 8,630
7/31/98 $ 7,295 $ 8,481
8/31/98 $ 6,063 $ 7,480
9/30/98 $ 6,632 $ 7,457
10/31/98 $ 8,290 $ 8,749
11/30/98 $ 8,882 $ 9,153
12/31/98 $ 8,894 $ 9,409
</TABLE>
<TABLE>
<S> <C> <C>
Total Return -11.06% -5.91%
</TABLE>
PLEASE SEE IMPORTANT ENDNOTES TO PERFORMANCE INFORMATION ON PAGE 61.
30
<PAGE>
PORTFOLIOS SEEKING GROWTH AND INCOME
GLOBAL UTILITIES SECURITIES FUND
(Prior to May 1, 1998, the Utility Equity Fund)
Volatility in the foreign and domestic equity markets marked the 1998 calendar
year, with slowing economic growth in Asia affecting the U.S., Europe and Latin
America. While we do not anticipate a global recession, the recent global
slowdown created a period of uncertainty where it was not uncommon for markets
to trade up or down by 5% or more in a single day. Over the reporting period,
Global Utilities Securities Fund delivered a +11.19% cumulative total return.
Our emphasis on U.S. electric utility companies helped reduce portfolio
fluctuation during the big down days throughout the year. At the same time this
caused the portfolio to underperform the Financial Times/S&P Actuaries World
Utilities Index, which had a more global distribution. In 1998, the portfolio
changed its name and objective to focus on global utilities, whereas before we
were primarily a U.S. electric utility fund. As opportunities present
themselves, we anticipate moving toward more global investments. Another drag on
our performance relative to the index was our more than 4% allocation in Latin
America and Asia, while the index favors developed countries.
Despite the shakeup in many of the markets in which we invest, we are optimistic
about global utility stocks going forward. The historically defensive nature of
utility stocks is one important reason for this confidence. While past results
may not repeat themselves, utility services have not been as sensitive to
economic slowdowns as most other industries, since electricity, telephone, gas,
water and similar services have tended to enjoy stable and predictable demand.
This has generally enabled utility companies to deliver steady earnings and
dividends even in times of economic uncertainty.
Your portfolio's industry weightings changed slightly over the period, with
electric utility companies having the heaviest weighting, comprising 66.7% of
total net assets, telecommunications companies increased almost 3% to comprise
25.1% of total net assets, while gas companies declined to 4.1%. On a regional
basis, Europe and the U.S. delivered the best returns, with Latin America and
Asia generally weaker. As shown by the chart to the right, portfolio weightings
as of December 31, 1998, reflected this.
The American electric industry fundamentally improved, not only in earnings and
cash flow projections, but also on regulatory reform. The 1990s saw the
industry's cash flow, as measured by the ratio of internal funds to total cash
construction expenditures, increase from 74.4% in 1990, to an estimated 133.4%
in 1997. The 1997 figure represented the third straight year of improvement and
the highest level of internally-generated funds ever recorded.* In general,
electric utilities appeared to use
GRAPHIC MATERIAL (34)
This chart shows in pie format the geographic distribution of the Global
Utilities Securities Fund based on total net assets as of 12/31/98.
GEOGRAPHIC DISTRIBUTION
Global Utilities Securities Fund
Based on Total Net Assets
12/31/98
<TABLE>
<S> <C>
United States 73.88%
Europe 17.85%
Latin America 2.20%
Asia 1.95%
Short-term Investments & Other Assets 4.12%
</TABLE>
*Edison Electric Institute. 1997 Annual Report of the Investor-Owned Electric
Utility Industry.
31
<PAGE>
- --------------------------------------------------------------------------------
GRAPHIC MATERIAL (35)
This chart shows the top 10 holdings based on the percentage of total net assets
on 12/21/98 for the Global Utilities Securities Fund.
TOP 10 HOLDINGS
Global Utilities Securities Fund
12/31/98
<TABLE>
<CAPTION>
% OF TOTAL
COMPANY NET ASSETS
<S> <C>
Southern Co. 3.53%
GPU Inc. 3.36%
Telecom Italia SpA 3.20%
New Century Energies Inc. 3.01%
Florida Progress Corp. 2.94%
Cinergy Corp. 2.89%
Pinnacle West Capital Corp. 2.85%
FPL Group Inc. 2.78%
PG&E Corp. 2.73%
Entergy Corp. 2.67%
</TABLE>
- --------------------------------------------------------------------------------
the excess cash flow to enhance long-term earnings growth by paying down debt,
repurchasing shares and investing in energy related businesses, factors which we
believe bode well for domestic electric utility stocks going forward.
The U.S. market continued to provide many of the portfolio's best investment
vehicles, in our opinion. During the reporting period, we purchased shares of
Montana Power Co., CMS Energy Corp. and Edison International, three electric
utilities that benefited from the above-mentioned trends. We also believed that
domestic telecommunications stocks were poised for strong growth over the next
few years, and added positions in Bell Atlantic Corp. and Intermedia
Communications Inc. Meanwhile, domestic natural gas stocks experienced great
volatility over the recent period, with many stocks trading up sharply in
September, only to fall again in October. The El Nino weather system, which
created significantly warmer weather trends, contributed to this phenomenon by
negatively impacting gas demand and pricing.
In Europe, we maintained a favorable outlook, counting on the volatility that
should result from European Monetary Union's inception in 1999 to create buying
opportunities. The 1998 calendar year presented contrasts for utilities, with
superior performance in France, Belgium and Spain and laggard returns in
Portugal and Germany. A few of our new stock ideas in this region included
Spanish electric utility Endesa SA, AEM SpA, an Italian gas distribution and
electric utility, and Equant NV, a Europe-based telecommunications network
company that we think is poised to benefit from the huge growth of data
communications and the Internet. Going forward, we feel the economic trends in
the European area should be supportive for utilities, as most economists are
forecasting lower gross domestic product growth, possibly causing investors to
prefer more defensive sectors.
We maintained a guarded outlook for Latin America in the short term, while being
more optimistic for the longer term. During the year under review, the Asian
economic crisis that began in late 1997 continued to send shock waves through
Latin America, as investors evidently feared similar economic difficulties would
spread there. Many investors reportedly withdrew capital, and speculators
attacked the Latin American/U.S. dollar exchange rates, putting several
currencies under pressure. Long-term, we view positively the region's evolution
toward a more market-oriented economic environment and believe it may continue
to provide attractive investment opportunities in the future.
32
<PAGE>
The Asian financial crisis made headlines around the world in late 1997 and
early 1998. Fortunately, we had a small weighting in Asian stock investments at
that time. In fact, we have been under-invested in Asia for the past few years,
due to concerns of over-valuation and the potential for exactly the kind of
crisis that just occurred. Your portfolio's weighting in Asia was just 1.95% of
total net assets as of year-end. Although stock prices have fallen dramatically
since the crisis started, we expect to be cautious in looking for bargains in
these markets over the coming year. While many stocks appear cheap at recent
levels, we are still concerned that economic indicators have not yet hit bottom.
In the future we will employ caution as we look for the highest return
securities with the lowest relative risk profiles.
In conclusion, we note that the year ended December 31, 1998, was a difficult
one in many parts of the world. The Asian economic crisis resulted in a
significantly higher level of volatility than investors usually encounter.
However, we believe the long-term outlook for global utility stocks is still
very robust, as many of the demographic, economic and social factors that
contributed to the high returns in the past may exist for many years ahead. We
will seek to benefit from accelerating worldwide demand for telecommunications,
electric power, gas, water and other utility services, as many foreign countries
are just now building infrastructures that will produce high levels of revenue
and earnings growth in the future.
GRAPHIC MATERIAL (36)
This graph compares the performance of Global Utilities Securities Fund as
tracked by the growth in value of a $10,000 investment, to that of S&P 500
Index, the Consumer Price Index, and the FT/S&P Actuaries World Utilities Index
from 1/24/89-12/31/98.
Performance shown in the graph reflects all fund operating expenses but does
not include any fees, charges or expenses imposed by the variable annuity and
life insurance contracts that use the Franklin Valuemark Funds. If they had
been included, performance would have been lower. See the contract prospectus
for a complete description of the contract expenses, including any applicable
sales charges. Index source is Standard & Poor's Micropal.
TOTAL RETURN INDEX COMPARISON
Global Utilities Securities Fund
$10,000 Investment (1/24/89 - 12/31/98)
<TABLE>
<CAPTION>
FT/S&P
GLOBAL ACTUARIES
UTILITIES CONSUMER WORLD
SECURITIES PRICE UTILITIES
FUND S&P500 INDEX INDEX
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1/24/89 $10,000 $ 10,000 $ 10,000 $10,000
1/31/89 $10,020 1.65% $ 10,165 0.11% $ 10,011 0.76% $10,076
2/28/89 $10,080 -2.49% $ 9,912 0.41% $ 10,052 -3.42% $9,731
3/31/89 $10,150 2.33% $ 10,143 0.58% $ 10,111 -3.16% $9,424
4/30/89 $10,210 5.19% $ 10,670 0.65% $ 10,176 4.22% $9,821
5/31/89 $10,610 4.05% $ 11,102 0.57% $ 10,234 0.21% $9,842
6/30/89 $10,730 -0.57% $ 11,038 0.24% $ 10,259 -1.26% $9,718
7/31/89 $11,260 9.03% $ 12,035 0.24% $ 10,284 11.32% $10,818
8/31/89 $11,100 1.96% $ 12,271 0.16% $ 10,300 -4.35% $10,348
9/30/89 $11,160 -0.41% $ 12,221 0.32% $ 10,333 3.79% $10,740
10/31/89 $11,260 -2.32% $ 11,937 0.48% $ 10,383 -1.42% $10,587
11/30/89 $11,500 2.04% $ 12,181 0.24% $ 10,407 5.58% $11,178
12/31/89 $12,140 2.40% $ 12,473 0.16% $ 10,424 4.85% $11,720
1/31/90 $11,680 -6.71% $ 11,636 1.03% $ 10,531 -7.60% $10,829
2/28/90 $11,750 1.29% $ 11,786 0.47% $ 10,581 -2.82% $10,524
3/31/90 $11,668 2.65% $ 12,099 0.55% $ 10,639 -4.78% $10,021
4/30/90 $11,153 -2.49% $ 11,797 0.16% $ 10,656 -2.51% $9,769
5/31/90 $11,607 9.75% $ 12,948 0.23% $ 10,681 9.98% $10,744
6/30/90 $11,678 -0.67% $ 12,861 0.54% $ 10,738 -2.87% $10,436
7/31/90 $11,839 -0.32% $ 12,820 0.38% $ 10,779 -0.57% $10,377
8/31/90 $11,103 -9.04% $ 11,661 0.92% $ 10,878 -7.81% $9,566
9/30/90 $11,113 -4.87% $ 11,093 0.84% $ 10,970 -4.93% $9,095
10/31/90 $11,899 -0.43% $ 11,045 0.60% $ 11,036 11.70% $10,159
11/30/90 $12,192 6.46% $ 11,759 0.22% $ 11,060 -0.07% $10,152
12/31/90 $12,363 2.79% $ 12,087 0.00% $ 11,060 2.07% $10,362
1/31/91 $12,232 4.36% $ 12,614 0.60% $ 11,126 1.94% $10,563
2/28/91 $12,676 7.15% $ 13,516 0.15% $ 11,143 4.71% $11,060
3/31/91 $12,888 2.42% $ 13,843 0.15% $ 11,160 -2.08% $10,830
4/30/91 $12,989 0.24% $ 13,876 0.15% $ 11,176 0.88% $10,925
5/31/91 $12,968 4.31% $ 14,474 0.30% $ 11,210 0.83% $11,016
6/30/91 $12,871 -4.58% $ 13,811 0.29% $ 11,242 -4.21% $10,552
7/31/91 $13,379 4.66% $ 14,455 0.15% $ 11,259 5.57% $11,140
8/31/91 $13,742 2.37% $ 14,797 0.29% $ 11,292 1.71% $11,331
9/30/91 $14,218 -1.67% $ 14,550 0.44% $ 11,342 3.44% $11,720
10/31/91 $14,426 1.34% $ 14,745 0.15% $ 11,359 1.40% $11,884
11/30/91 $14,706 -4.03% $ 14,151 0.29% $ 11,392 -1.60% $11,694
12/31/91 $15,276 11.44% $ 15,770 0.07% $ 11,400 7.02% $12,515
1/31/92 $14,757 -1.86% $ 15,476 0.15% $ 11,417 -4.29% $11,978
2/29/92 $14,726 1.29% $ 15,676 0.36% $ 11,458 -1.24% $11,830
3/31/92 $14,633 -1.95% $ 15,370 0.51% $ 11,516 -3.20% $11,451
4/30/92 $15,068 2.94% $ 15,822 0.14% $ 11,532 3.38% $11,838
5/31/92 $15,358 0.49% $ 15,900 0.14% $ 11,548 2.45% $12,128
6/30/92 $15,543 -1.49% $ 15,663 0.36% $ 11,590 -1.18% $11,985
7/31/92 $16,378 4.09% $ 16,303 0.21% $ 11,614 3.85% $12,447
8/31/92 $16,315 -2.05% $ 15,969 0.28% $ 11,647 2.45% $12,752
9/30/92 $16,389 1.17% $ 16,156 0.28% $ 11,679 -1.82% $12,519
10/31/92 $16,283 0.34% $ 16,211 0.35% $ 11,720 -2.07% $12,260
11/30/92 $16,304 3.40% $ 16,762 0.14% $ 11,737 2.05% $12,512
12/31/92 $16,738 1.23% $ 16,968 -0.07% $ 11,729 2.55% $12,831
1/31/93 $17,003 0.84% $ 17,111 0.49% $ 11,786 1.35% $13,004
2/28/93 $17,923 1.36% $ 17,344 0.35% $ 11,827 5.05% $13,661
3/31/93 $18,082 2.11% $ 17,710 0.35% $ 11,869 5.76% $14,447
4/30/93 $18,092 -2.42% $ 17,281 0.28% $ 11,902 1.93% $14,726
5/31/93 $18,018 2.67% $ 17,742 0.14% $ 11,919 1.74% $14,983
6/30/93 $18,459 0.29% $ 17,794 0.14% $ 11,935 1.94% $15,273
7/31/93 $18,826 -0.40% $ 17,723 0.00% $ 11,935 2.45% $15,647
8/31/93 $19,344 3.79% $ 18,394 0.28% $ 11,969 4.25% $16,312
9/30/93 $19,247 -0.77% $ 18,253 0.21% $ 11,994 -1.53% $16,063
10/31/93 $19,128 2.07% $ 18,631 0.41% $ 12,043 1.78% $16,349
11/30/93 $18,221 -0.95% $ 18,454 0.07% $ 12,051 -5.21% $15,497
12/31/93 $18,502 1.21% $ 18,677 0.00% $ 12,051 3.13% $15,982
1/31/94 $18,124 3.40% $ 19,312 0.27% $ 12,084 3.45% $16,533
2/28/94 $17,206 -2.71% $ 18,789 0.34% $ 12,125 -4.16% $15,846
3/31/94 $16,602 -4.36% $ 17,969 0.34% $ 12,166 -3.88% $15,231
4/30/94 $16,991 1.28% $ 18,199 0.14% $ 12,183 1.81% $15,507
5/31/94 $16,105 1.64% $ 18,498 0.07% $ 12,192 -1.63% $15,254
6/30/94 $15,486 -2.45% $ 18,045 0.34% $ 12,233 -2.24% $14,912
7/31/94 $16,280 3.28% $ 18,637 0.27% $ 12,266 2.62% $15,303
8/31/94 $16,439 4.10% $ 19,401 0.40% $ 12,315 2.22% $15,643
9/30/94 $16,030 -2.44% $ 18,927 0.27% $ 12,349 -2.77% $15,209
10/31/94 $16,340 2.25% $ 19,353 0.07% $ 12,357 1.46% $15,431
11/30/94 $16,431 -3.64% $ 18,649 0.13% $ 12,373 -4.07% $14,803
12/31/94 $16,363 1.48% $ 18,925 0.00% $ 12,373 -0.71% $14,698
1/31/95 $17,316 2.59% $ 19,415 0.40% $ 12,423 0.81% $14,817
2/28/95 $17,384 3.90% $ 20,172 0.40% $ 12,472 0.14% $14,838
3/31/95 $17,134 2.95% $ 20,767 0.33% $ 12,514 2.81% $15,255
4/30/95 $17,497 2.94% $ 21,378 0.33% $ 12,555 3.52% $15,792
5/31/95 $18,462 4.00% $ 22,233 0.20% $ 12,580 1.35% $16,005
6/30/95 $18,443 2.32% $ 22,748 0.20% $ 12,605 0.56% $16,095
7/31/95 $18,479 3.32% $ 23,504 0.00% $ 12,605 2.87% $16,557
8/31/95 $18,659 0.25% $ 23,563 0.26% $ 12,638 -0.32% $16,504
9/30/95 $19,716 4.22% $ 24,557 0.20% $ 12,663 4.80% $17,296
10/31/95 $20,160 -0.36% $ 24,468 0.33% $ 12,705 -0.93% $17,135
11/30/95 $20,496 4.39% $ 25,543 -0.07% $ 12,696 1.29% $17,356
12/31/95 $21,493 1.93% $ 26,036 -0.07% $ 12,687 3.38% $17,943
1/31/96 $21,877 3.40% $ 26,921 0.59% $ 12,762 1.40% $18,194
2/29/96 $21,481 0.93% $ 27,171 0.32% $ 12,803 -1.09% $17,995
3/31/96 $21,469 0.96% $ 27,432 0.52% $ 12,870 -0.94% $17,826
4/30/96 $21,025 1.47% $ 27,835 0.39% $ 12,920 2.68% $18,304
5/31/96 $21,493 2.58% $ 28,553 0.19% $ 12,944 -0.86% $18,147
6/30/96 $22,443 0.38% $ 28,662 0.06% $ 12,952 1.29% $18,381
7/31/96 $21,266 -4.42% $ 27,395 0.19% $ 12,977 -4.87% $17,486
8/31/96 $21,722 2.11% $ 27,973 0.19% $ 13,001 0.05% $17,494
9/30/96 $21,848 5.63% $ 29,548 0.32% $ 13,043 1.28% $17,718
10/31/96 $22,557 2.76% $ 30,363 0.32% $ 13,085 2.42% $18,147
11/30/96 $22,962 7.56% $ 32,659 0.19% $ 13,110 4.89% $19,034
12/31/96 $23,013 -1.98% $ 32,012 0.00% $ 13,110 2.22% $19,457
1/31/97 $23,507 6.25% $ 34,013 0.32% $ 13,151 0.79% $19,611
2/28/97 $23,481 0.78% $ 34,278 0.31% $ 13,192 0.55% $19,719
3/31/97 $22,709 -4.11% $ 32,870 0.25% $ 13,225 -2.83% $19,161
4/30/97 $22,494 5.97% $ 34,832 0.12% $ 13,241 1.46% $19,440
5/31/97 $23,924 6.09% $ 36,953 -0.06% $ 13,233 6.61% $20,725
6/30/97 $24,709 4.48% $ 38,609 0.12% $ 13,249 4.62% $21,683
7/31/97 $25,298 7.96% $ 41,682 0.12% $ 13,265 1.41% $21,988
8/31/97 $24,437 -5.60% $ 39,348 0.19% $ 13,290 -4.86% $20,920
9/30/97 $25,714 5.48% $ 41,504 0.25% $ 13,323 6.72% $22,326
10/31/97 $25,283 -3.34% $ 40,118 0.25% $ 13,357 -1.45% $22,002
11/30/97 $26,962 4.63% $ 41,975 -0.06% $ 13,349 7.00% $23,542
12/31/97 $29,172 1.72% $ 42,697 -0.12% $ 13,333 4.16% $24,521
1/31/98 $28,282 1.11% $ 43,171 0.19% $ 13,358 3.27% $25,323
2/28/98 $29,516 7.21% $ 46,284 0.19% $ 13,383 2.58% $25,977
3/31/98 $31,755 5.12% $ 48,653 0.19% $ 13,409 8.96% $28,304
4/30/98 $30,736 1.01% $ 49,145 0.18% $ 13,433 -2.18% $27,687
5/31/98 $29,990 -1.72% $ 48,300 0.18% $ 13,457 -1.16% $27,366
6/30/98 $31,071 4.06% $ 50,260 0.12% $ 13,473 3.25% $28,255
7/31/98 $30,167 -1.07% $ 49,723 0.12% $ 13,489 3.12% $29,137
8/31/98 $28,135 -14.46% $ 42,533 0.12% $ 13,506 -7.88% $26,841
9/30/98 $29,659 6.41% $ 45,259 0.12% $ 13,522 5.24% $28,247
10/31/98 $30,230 8.13% $ 48,939 0.24% $ 13,554 5.88% $29,908
11/30/98 $30,944 6.06% $ 51,904 0.00% $ 13,554 3.84% $31,057
12/31/98 $32,436 4.82% 5.76% $ 54,894 -0.06% $ 13,546 7.91% $33,513
</TABLE>
- --------------------------------------------------------------------------------
PERFORMANCE SHOWN IN THE GRAPH REFLECTS ALL FUND OPERATING EXPENSES BUT DOES NOT
INCLUDE ANY FEES, CHARGES OR EXPENSES IMPOSED BY THE VARIABLE ANNUITY AND LIFE
INSURANCE CONTRACTS THAT USE THE FRANKLIN VALUEMARK FUNDS. IF THEY HAD BEEN
INCLUDED, PERFORMANCE WOULD HAVE BEEN LOWER. SEE THE CONTRACT PROSPECTUS FOR A
COMPLETE DESCRIPTION OF THE CONTRACT EXPENSES, INCLUDING ANY APPLICABLE SALES
CHARGES. INDEX SOURCE IS STANDARD & POOR'S MICROPAL.
GRAPHIC MATERIAL (37)
This chart shows the average annual total return for the Global Utilities
Securities Funds as of 12/31/98.
<TABLE>
<CAPTION>
Average Annual Total Return
- ----------------------------------------------
<S> <C>
1-Year +11.19%
5-Year +11.88%
Since Inception (1/24/89) +12.57%
</TABLE>
PLEASE SEE IMPORTANT ENDNOTES TO PERFORMANCE INFORMATION ON PAGE 61.
33
<PAGE>
GRAPHIC MATERIAL (38)
This chart shows the top 10 holdings and their respective based on the
percentage of total net assets on 12/31/98 for the Growth and Income Fund.
TOP 10 HOLDINGS
Growth and Income Fund
12/31/98
<TABLE>
<CAPTION>
COMPANY % OF TOTAL
INDUSTRY NET ASSETS
- -----------------------------------------------------------------
<S> <C>
Bell Atlantic Corp. 3.0%
Telecommunications
Pharmacia & Upjohn Inc. 2.6%
Health Technology
Atlantic Richfield Co. 2.6%
Energy Minerals
J.C. Penney Co. Inc. 2.2%
Retail Trade
UST Inc. 2.0%
Consumer Non-Durables
Texaco Inc. 2.0%
Energy Minerals
Chevron Corp. 1.9%
Energy Minerals
Dominion Resources Inc. 1.8%
Utilities
GTE Corp. 1.8%
Telecommunications
Philip Morris Cos. Inc. 1.8%
Consumer Non-Durables
</TABLE>
GROWTH AND INCOME FUND
1998 witnessed increased volatility in the world's stock markets. In this
environment, investors generally preferred large capitalization growth stocks,
which, as they have done since 1994, outperformed traditional value stocks for
the 12-month period. Growth and Income Fund, which utilizes a value investment
discipline, reflected these trends.
In keeping with its fundamental investment approach, the portfolio seeks to
invest in stocks with attractive valuations. We look for stocks selling at
bargain prices according to measurements such as relative dividend yields, book
value, revenues and normalized earnings.* This generally entails investing in
stocks at what we feel are temporarily depressed prices. At the same time we
collect current investment returns, in the form of dividends, which can provide
a cushion against possible stock declines. Our investments typically fall into
three categories: cyclical stocks; "special situation" stocks; and traditional,
high dividend-paying stocks such as utilities, real estate investment trusts
(REITs), and energy.
As of year-end, we remained heavily weighted in traditionally high-yielding
stocks. However, we did take profits based on the strength of various energy and
telephone utility positions during the year. On the other hand, our investments
in REITs did not meet expectations. Looking forward into 1999, we believe their
performance may improve as capital market constraints have improved industry
fundamentals and many holdings offer attractive dividend yields of 7% or more.
The investment in Ford Motor Co. in late 1997 typifies our strategy for cyclical
stocks. Seeking to invest in companies with attractive dividend yields and
assets, we found Ford's adjusted dividend yield in excess of 5% and their
balance sheet appealing with over $10 per share at the time of purchase. The
company was also trading at six times estimated earnings and was spinning off
its consumer finance subsidiary at a value in excess of $16 per share. Our
investment was rewarded when Ford became one of the portfolio's best performers
in 1998, with a one-year total return gain of approximately 85%. Our
commodity-sensitive cyclical holdings did not fare as well during the year, as
the price of many commodities fell to 20-year lows. We took profits in paper and
building products producers Georgia Pacific Corp. and Millennium Chemicals,
Inc., and realized losses in Freeport McMoran Copper and Gold, Inc. and Portucel
Industrial SA, a Europe-based forest products company.
*Normalized earnings estimate a company's earnings during periods of normal
economic activity, attempting to factor out extremes produced by cyclical
strength or weakness.
34
<PAGE>
During 1998, many of our new investments fell into the "special situations"
category. Often referred to as "fallen angels," these stocks are typically
high-quality growth companies that have experienced a short-term slowing in
their businesses, but continue to maintain excellent, long-term potential.
Examples of these investments include Diebold Inc., the world's largest
automated teller machine manufacturer; Pitney Bowes Inc., a top-ranked producer
of postage meters; Federal Signal Corp., maker of safety and rescue equipment;
Pall Corp., a leading filter supplier; and Avery Dennison Corp., a global leader
in consumer label and adhesive products.
Our search for undervalued stocks also led to numerous "takeovers" among the
portfolio's 1998 holdings. Twelve of our approximately 80 positions were subject
to acquisition bids during the year. Those holdings included Chrysler Corp.;
Union Camp Corp.; Illinois Central Corp. railroad; electronics connector AMP
Inc.; utilities company PacifiCorp; financial companies Mid Ocean Ltd. and
Beneficial Corp.; oil companies Amoco Corp. and Mobil Corp.; and
telecommunications companies GTE Corp., Ameritech Corp. and Southern New England
Telecommunications Corp.
GRAPHIC MATERIAL (39)
This graph compares the performance of Growth and Income Fund as tracked by the
growth in value of a $10,000 investment, to that of S&P 500 Index, and the
Consumer Price Index from 1/24/89 12/31/98.
Looking forward, we anticipate continued high levels of financial market
volatility. Corporate America will likely face earnings growth challenges
near-term, while overall stock market valuations remain historically high.
Importantly, volatility can offer opportunities to invest in quality companies
at bargain levels, as widely fluctuating stock prices often reflect emotional
swings rather than historical fundamentals. Consistent with historical long-term
market cycles, we feel that the recent phenomenon of growth stocks outperforming
value issues will reverse, possibly soon. If this happens, we believe our
disciplined, value-oriented approach may be very well positioned for such a
market environment.
TOTAL RETURN INDEX COMPARISON
Growth and Income Fund
$10,000 Investment (1/24/89 - 12/31/98)
<TABLE>
<CAPTION>
GROWTH & CONSUMER PRICE
INCOME S&P 500 INDEX
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1/24/89 $10,000 $ 10,000 $10,000
1/31/89 $10,020 1.65% $ 10,165 0.11% $10,011
2/28/89 $10,080 -2.49% $ 9,912 0.41% $10,052
3/31/89 $10,150 2.33% $ 10,143 0.58% $10,111
4/30/89 $10,210 5.19% $ 10,670 0.65% $10,176
5/31/89 $10,280 4.05% $ 11,102 0.57% $10,234
6/30/89 $9,990 -0.57% $ 11,038 0.24% $10,259
7/31/89 $10,530 9.03% $ 12,035 0.24% $10,284
8/31/89 $11,020 1.96% $ 12,271 0.16% $10,300
9/30/89 $10,680 -0.41% $ 12,221 0.32% $10,333
10/31/89 $10,040 -2.32% $ 11,937 0.48% $10,383
11/30/89 $10,110 2.04% $ 12,181 0.24% $10,407
12/31/89 $10,290 2.40% $ 12,473 0.16% $10,424
1/31/90 $9,760 -6.71% $ 11,636 1.03% $10,531
2/28/90 $9,920 1.29% $ 11,786 0.47% $10,581
3/31/90 $10,159 2.65% $ 12,099 0.55% $10,639
4/30/90 $9,958 -2.49% $ 11,797 0.16% $10,656
5/31/90 $10,824 9.75% $ 12,948 0.23% $10,681
6/30/90 $10,693 -0.67% $ 12,861 0.54% $10,738
7/31/90 $10,623 -0.32% $ 12,820 0.38% $10,779
8/31/90 $9,736 -9.04% $ 11,661 0.92% $10,878
9/30/90 $9,343 -4.87% $ 11,093 0.84% $10,970
10/31/90 $9,242 -0.43% $ 11,045 0.60% $11,036
11/30/90 $9,776 6.46% $ 11,759 0.22% $11,060
12/31/90 $10,048 2.79% $ 12,087 0.00% $11,060
1/31/91 $10,683 4.36% $ 12,614 0.60% $11,126
2/28/91 $11,127 7.15% $ 13,516 0.15% $11,143
3/31/91 $11,147 2.42% $ 13,843 0.15% $11,160
4/30/91 $11,177 0.24% $ 13,876 0.15% $11,176
5/31/91 $11,600 4.31% $ 14,474 0.30% $11,210
6/30/91 $10,853 -4.58% $ 13,811 0.29% $11,242
7/31/91 $11,243 4.66% $ 14,455 0.15% $11,259
8/31/91 $11,623 2.37% $ 14,797 0.29% $11,292
9/30/91 $11,541 -1.67% $ 14,550 0.44% $11,342
10/31/91 $11,664 1.34% $ 14,745 0.15% $11,359
11/30/91 $11,161 -4.03% $ 14,151 0.29% $11,392
12/31/91 $12,054 11.44% $ 15,770 0.07% $11,400
1/31/92 $12,577 -1.86% $ 15,476 0.15% $11,417
2/29/92 $12,587 1.29% $ 15,676 0.36% $11,458
3/31/92 $12,125 -1.95% $ 15,370 0.51% $11,516
4/30/92 $12,146 2.94% $ 15,822 0.14% $11,532
5/31/92 $12,218 0.49% $ 15,900 0.14% $11,548
6/30/92 $11,943 -1.49% $ 15,663 0.36% $11,590
7/31/92 $12,295 4.09% $ 16,303 0.21% $11,614
8/31/92 $12,119 -2.05% $ 15,969 0.28% $11,647
9/30/92 $12,420 1.17% $ 16,156 0.28% $11,679
10/31/92 $12,658 0.34% $ 16,211 0.35% $11,720
11/30/92 $13,135 3.40% $ 16,762 0.14% $11,737
12/31/92 $13,259 1.23% $ 16,968 -0.07% $11,729
1/31/93 $13,363 0.84% $ 17,111 0.49% $11,786
2/28/93 $13,280 1.36% $ 17,344 0.35% $11,827
3/31/93 $13,653 2.11% $ 17,710 0.35% $11,869
4/30/93 $13,477 -2.42% $ 17,281 0.28% $11,902
5/31/93 $13,840 2.67% $ 17,742 0.14% $11,919
6/30/93 $13,676 0.29% $ 17,794 0.14% $11,935
7/31/93 $13,477 -0.40% $ 17,723 0.00% $11,935
8/31/93 $13,979 3.79% $ 18,394 0.28% $11,969
9/30/93 $13,896 -0.77% $ 18,253 0.21% $11,994
10/31/93 $14,105 2.07% $ 18,631 0.41% $12,043
11/30/93 $13,990 -0.95% $ 18,454 0.07% $12,051
12/31/93 $14,627 1.21% $ 18,677 0.00% $12,051
1/31/94 $15,453 3.40% $ 19,312 0.27% $12,084
2/28/94 $15,255 -2.71% $ 18,789 0.34% $12,125
3/31/94 $14,345 -4.36% $ 17,969 0.34% $12,166
4/30/94 $14,429 1.28% $ 18,199 0.14% $12,183
5/31/94 $14,471 1.64% $ 18,498 0.07% $12,192
6/30/94 $14,003 -2.45% $ 18,045 0.34% $12,233
7/31/94 $14,409 3.28% $ 18,637 0.27% $12,266
8/31/94 $14,889 4.10% $ 19,401 0.40% $12,315
9/30/94 $14,452 -2.44% $ 18,927 0.27% $12,349
10/31/94 $14,663 2.25% $ 19,353 0.07% $12,357
11/30/94 $14,118 -3.64% $ 18,649 0.13% $12,373
12/31/94 $14,332 1.48% $ 18,925 0.00% $12,373
1/31/95 $14,449 2.59% $ 19,415 0.40% $12,423
2/28/95 $15,026 3.90% $ 20,172 0.40% $12,472
3/31/95 $15,453 2.95% $ 20,767 0.33% $12,514
4/30/95 $15,912 2.94% $ 21,378 0.33% $12,555
5/31/95 $16,403 4.00% $ 22,233 0.20% $12,580
6/30/95 $16,505 2.32% $ 22,748 0.20% $12,605
7/31/95 $16,782 3.32% $ 23,504 0.00% $12,605
8/31/95 $16,982 0.25% $ 23,563 0.26% $12,638
9/30/95 $17,715 4.22% $ 24,557 0.20% $12,663
10/31/95 $17,582 -0.36% $ 24,468 0.33% $12,705
11/30/95 $18,270 4.39% $ 25,543 -0.07% $12,696
12/31/95 $19,037 1.93% $ 26,036 -0.07% $12,687
1/31/96 $19,426 3.40% $ 26,921 0.59% $12,762
2/29/96 $19,226 0.93% $ 27,171 0.32% $12,803
3/31/96 $19,426 0.96% $ 27,432 0.52% $12,870
4/30/96 $19,526 1.47% $ 27,835 0.39% $12,920
5/31/96 $19,725 2.58% $ 28,553 0.19% $12,944
6/30/96 $20,092 0.38% $ 28,662 0.06% $12,952
7/31/96 $19,348 -4.42% $ 27,395 0.19% $12,977
8/31/96 $19,621 2.11% $ 27,973 0.19% $13,001
9/30/96 $20,141 5.63% $ 29,548 0.32% $13,043
10/31/96 $20,736 2.76% $ 30,363 0.32% $13,085
11/30/96 $21,727 7.56% $ 32,659 0.19% $13,110
12/31/96 $21,739 -1.98% $ 32,012 0.00% $13,110
1/31/97 $22,358 6.25% $ 34,013 0.32% $13,151
2/28/97 $22,879 0.78% $ 34,278 0.31% $13,192
3/31/97 $22,383 -4.11% $ 32,870 0.25% $13,225
4/30/97 $22,680 5.97% $ 34,832 0.12% $13,241
5/31/97 $23,882 6.09% $ 36,953 -0.06% $13,233
6/30/97 $24,572 4.48% $ 38,609 0.12% $13,249
7/31/97 $25,841 7.96% $ 41,682 0.12% $13,265
8/31/97 $25,325 -5.60% $ 39,348 0.19% $13,290
9/30/97 $26,739 5.48% $ 41,504 0.25% $13,323
10/31/97 $25,960 -3.34% $ 40,118 0.25% $13,357
11/30/97 $27,123 4.63% $ 41,975 -0.06% $13,349
12/31/97 $27,770 1.72% $ 42,697 -0.12% $13,333
1/31/98 $27,572 1.11% $ 43,171 0.19% $13,358
2/28/98 $28,735 7.21% $ 46,284 0.19% $13,383
3/31/98 $30,295 5.12% $ 48,653 0.19% $13,409
4/30/98 $29,793 1.01% $ 49,145 0.18% $13,433
5/31/98 $29,357 -1.72% $ 48,300 0.18% $13,457
6/30/98 $29,271 4.06% $ 50,260 0.12% $13,473
7/31/98 $28,533 -1.07% $ 49,723 0.12% $13,489
8/31/98 $25,991 -14.46% $ 42,533 0.12% $13,506
9/30/98 $27,572 6.41% $ 45,259 0.12% $13,522
10/31/98 $28,976 8.13% $ 48,939 0.24% $13,554
11/30/98 $29,936 6.06% $ 51,904 0.00% $13,554
12/31/98 $30,084 0.49% 5.76% $ 54,894 -0.06% $13,546
</TABLE>
- --------------------------------------------------------------------------------
PERFORMANCE SHOWN IN THE GRAPH REFLECTS ALL FUND OPERATING EXPENSES BUT DOES NOT
INCLUDE ANY FEES, CHARGES OR EXPENSES IMPOSED BY THE VARIABLE ANNUITY AND LIFE
INSURANCE CONTRACTS THAT USE THE FRANKLIN VALUEMARK FUNDS. IF THEY HAD BEEN
INCLUDED, PERFORMANCE WOULD HAVE BEEN LOWER. SEE THE CONTRACT PROSPECTUS FOR A
COMPLETE DESCRIPTION OF THE CONTRACT EXPENSES, INCLUDING ANY APPLICABLE SALES
CHARGES. INDEX SOURCE IS STANDARD & POOR'S MICROPAL.
GRAPHIC MATERIAL (40)
This chart shows the average annual total return for Growth and Income Fund as
of 12/31/98.
<TABLE>
<CAPTION>
Average Annual Total Return
- ----------------------------------------
<S> <C>
1-Year +8.33%
5-Year +15.51%
Since Inception (1/24/89) +11.72%
</TABLE>
- --------------------------------------------------------------------------------
PLEASE SEE IMPORTANT ENDNOTES TO PERFORMANCE INFORMATION ON PAGE 61.
35
<PAGE>
GRAPHIC MATERIAL (41)
This chart shows the top 10 holdings based on the percentage of total net assets
on 12/31/98 for the Income Securities Fund.
TOP 10 HOLDINGS
Income Securities Fund
12/31/98
<TABLE>
<CAPTION>
% of Total
Issuer Net Assets
- --------------------------------------------------------------
<S> <C>
U.S. T-Bonds, Bonds 13.3%
Republic of Argentina, Bonds 6.08%
Republic of Brazil, Bonds 3.28%
Philip Morris Cos. Inc., Stock 2.25%
Republic of Korea, Bonds 2.09%
Texas Utilities Co., Stock 1.72%
New Century Energies Inc., Stock 1.56%
American Electric Power Co. Inc.,
Stock 1.55%
Cinergy Corp., Stock. 1.48%
Escom, Bonds 1.32%
</TABLE>
INCOME SECURITIES FUND
Although the 12-month period presented us with several investment opportunities,
your portfolio's sector weightings did not change significantly. The stock
weighting increased from 45% to 46.9%, and the overall bond weighting and the
cash position remained steady at 50% and less than 3%, respectively.
Our bond holdings consisted of corporate, foreign and U.S. Treasury bonds.
Corporate bonds, representing our largest fixed-income weighting, declined to
23.5% of total net assets, largely because of calls or tenders at premium prices
from issuers seeking to retire debt. Several of these calls and tenders resulted
from the acquisition of bond issuers by companies with stronger credit profiles.
Corporate bonds benefiting from merger and acquisitions activity included issues
from Calmar, Inc., Americold Corp., Ralphs Grocery Co., Food 4 Less, Inc. and
Doane Products Co. Our corporate bond sector performed well over most of the
period, but faced a challenging environment toward the end of the year, as it
became evident that economic growth would most likely slow in the foreseeable
future. Although we remained selective with respect to our investments in
corporate bonds, we were able to find several potentially attractive
investments, including new positions in oil refiner Compania de Conproca SA
S.F., Nextel Communications Inc. in telecommunications, Venetian Casino/Las
Vegas Sands in gaming, paging company MetroCall Inc., and infant and toddler
product company Evenflo Company Inc.
We added to the portfolio's U.S. Treasury holdings early in the period, as we
believed that Treasury bonds represented an attractive investment due to the
subdued inflation environment and prospects for a U.S. government budget
surplus. Treasury bonds subsequently rose in value, benefiting in our view from
these positive conditions as well as from concerns over international economic
turmoil and the potential for slowing domestic growth. As a consequence, U.S.
Treasury bonds represented 13.3% of total net assets on December 31, 1998, up
from 8.3% a year earlier.
The Asian crises, combined with economic uncertainty in other international
markets such as Russia and Latin America, apparently dealt a blow to many
countries' stock and bond markets. Seeking to take advantage of weakness in the
period, we focused on dollar-denominated bonds of countries we believed would
work with the International Monetary Fund and G7* countries to continue economic
reform and to achieve
*The world's seven largest economies, the Group of Seven or "G7," are the U.S.,
Germany, Japan, France, the U.K, Italy and Canada.
36
<PAGE>
financial stability. Consequently, we initiated positions in Korean and Russian
dollar-denominated government bonds.
The portfolio's equity sectors delivered mixed performances with utility stocks
performing well. We feel utility stocks' healthy performance was partly due to
lower interest rates and consolidation within the industry. These securities
also benefited when CalEnergy Co. Inc., an independent power producer, made an
acquisition bid for MidAmerican Energy Holdings Co. We subsequently took a
profit in our MidAmerican position, as the shares appeared fully valued. The
entry of non-traditional buyers into the utility market is a developing trend
that we expect to continue. Indeed, two more of our holdings subsequently
received buyout offers from two U.K. utility companies. We continue to believe
utility stocks offer attractive yields and value relative to the broader stock
market, as well as improving growth opportunities from companies that adapt to a
deregulated environment. In addition to solid performance from our utility
stocks, the portfolio's largest position, Philip Morris Cos. Inc., also
performed well during the year as progress was made on tobacco litigation with
the recently announced state attorneys' general settlement.
The portfolio's gold, energy and real estate stock sectors experienced declines
during the period as a result of supply and demand concerns. Gold bullion prices
fell steeply amid uncertainty related to central bank reserve selling. We added
to several existing positions on weakness, and took a position in Barrick Gold
Corp. through the purchase of Trizec Hahn Corp.'s convertible bond issue, which
is convertible into Barrick Gold common stock. Our gold positions benefited the
portfolio when the sector rebounded during September's financial market turmoil.
Weakness in energy stocks, related to declining oil prices, also offered what we
believed were attractive long-term values. Consequently, we added to positions
in Energy Ventures Inc. (EVI) and Lomak Financing Trust convertible preferred
stocks. In the real estate sector, we initiated four real estate investment
trust (REIT) convertible security positions, representing a diverse mix of
property types with attractive dividend yields. These positions included
Meristar Hospitality Corp., Innkeepers USA Trust, Reckson Associates Realty
Corp. and Glenborough Realty Trust Inc. As of the end of the reporting period,
we believed REITS were undervalued relative to the overall stock market,
particularly in light of continued industry strength. Finally, in addition to
the previously mentioned purchases, we sold or trimmed several positions that
had appreciated during the year and
37
<PAGE>
Performance shown in the graph reflects all fund operating expenses but does not
include any fees, charges or expenses imposed by the variable annuity and life
insurance contracts that use the Franklin Valuemark Funds. If they had been
included, performance would have been lower. See the contract prospectus for a
complete description of the contract expenses, including any applicable sales
charges. Index sources are Standard & Poor's Micropal and Lipper.
GRAPHIC MATERIAL (43)
This chart shows the average annual total return for Growth and Income Fund as
of 12/31/98.
<TABLE>
<CAPTION>
Average Annual Total Return
- -------------------------------------------------
<S> <C>
1-Year +1.64%
5-Year +8.73%
Since Inception (1/24/89) +11.23%
</TABLE>
no longer fit our valuation criteria. These included Acclaim Entertainment, Inc.
convertible bonds in entertainment software and Cablevision Systems Corp.
preferred stock in cable television, both of which nearly doubled in value over
the past year.
We note that in a strong environment for equities, with the S&P 500 Index up
28.6%, the portfolio's 50.7% fixed-income weighting contributed to its lower,
+1.64% one-year cumulative total return.* Our substantial fixed-income weighting
also hurt performance relative to the Lipper Income Funds Average, which is
skewed towards funds with higher equity concentrations. The Lipper funds
typically have lower yields, meaning that they are more sensitive to movement in
the stock market. Meanwhile, the Lehman Brothers Government/Corporate Bond Index
was able to deliver superior performance mostly due to its greater weighting in
government securities, which outperformed corporate bonds during the reporting
period.
We remain selective with respect to new purchases, amid increased stock and bond
market volatility. However, we will continue to be opportunistic and utilize
fundamental research in our search for investment opportunities across markets.
As always, we remain committed to our value-oriented approach, seeking income
and growth from a diversified mix of stocks, bonds and cash.
GRAPHIC MATERIAL (42)
This graph compares the performance of Income securities Fund as tracked by the
growth in value of a $10,000 investment, to that of the Lehman brothers
Government/Corporate Bond Index, the S&P 500 Index, and the Lipper Income Funds
Objective Average Index from 1/24/89-12/31/98.
Performance shown in the graph reflects all fund operating expenses but does not
include any fees, charges or expenses imposed by the variable annuity and life
insurance contracts that use the Franklin Valuemark Funds. If they had been
included, performance would have been lower. See the contract prospectus for a
complete description of the contract expenses, including any applicable sales
charges. Index sources are Standard & Poor's Micropal and Lipper.
Inception: 1/24/89 January Proration: 31-24 = 7 days,
7/31 = 22.58%
Lipper Proration 90-24 = 66 days, 66/90 = 73.33%.
3.33 * 73.33% = 2.44%
TOTAL RETURN INDEX COMPARISON
Income Securities Fund
$10,000 Investment (1/24/89 - 12/31/98)
<TABLE>
<CAPTION>
Income Securities Lehman Brothers S&P500 Lipper Income Average
Government/Corporate Bond
Index
<S> <C> <C> <C> <C> <C> <C> <C>
1/24/89 $10,000 $10,000 $10,000 $10,000
3/31/89 $10,150 0.07% $10,007 1.43% $10,143 2.44% $10,244
6/30/89 $10,280 8.04% $10,811 8.83% $11,039 5.51% $10,809
9/30/89 $10,460 0.94% $10,913 10.71% $12,221 3.99% $11,240
12/31/89 $10,900 3.61% $11,307 2.06% $12,473 1.38% $11,395
3/31/90 $10,693 -1.14% $11,178 -3.01% $12,097 -1.80% $11,190
6/30/90 $11,030 3.60% $11,580 6.29% $12,858 3.02% $11,528
9/30/90 $10,101 0.60% $11,650 -13.74% $11,092 -5.42% $10,903
12/31/90 $10,091 5.10% $12,244 8.96% $12,085 4.44% $11,387
3/31/91 $11,754 2.69% $12,573 14.53% $13,841 8.67% $12,374
6/30/91 $12,452 1.51% $12,763 -0.23% $13,809 1.78% $12,595
9/30/91 $13,448 5.75% $13,497 5.35% $14,548 6.88% $13,461
12/31/91 $13,999 5.33% $14,216 8.38% $15,767 5.51% $14,203
3/31/92 $14,935 -1.50% $14,003 -2.53% $15,369 1.05% $14,352
6/30/92 $15,515 4.06% $14,572 1.90% $15,661 2.96% $14,777
9/30/92 $15,855 4.88% $15,283 3.15% $16,154 3.54% $15,300
12/31/92 $15,983 0.07% $15,293 5.03% $16,966 1.94% $15,597
3/31/93 $16,979 4.66% $16,006 4.37% $17,708 5.12% $16,395
6/30/93 $17,671 3.01% $16,488 0.49% $17,795 2.24% $16,763
9/30/93 $18,367 3.32% $17,035 2.58% $18,254 3.24% $17,306
12/31/93 $18,954 -0.29% $16,986 2.32% $18,677 1.04% $17,486
3/31/94 $18,151 -3.15% $16,451 -3.79% $17,969 -3.07% $16,949
6/30/94 $17,843 -1.24% $16,247 0.42% $18,045 -0.41% $16,879
9/30/94 $18,202 0.50% $16,328 4.89% $18,927 2.04% $17,224
12/31/94 $17,766 0.37% $16,388 -0.02% $18,923 -1.37% $16,988
3/31/95 $18,498 4.98% $17,204 9.74% $20,767 5.57% $17,934
6/30/95 $19,910 6.48% $18,319 9.55% $22,750 6.01% $19,012
9/30/95 $20,847 1.91% $18,669 7.95% $24,558 4.71% $19,907
12/31/95 $21,745 4.66% $19,539 6.02% $26,037 4.49% $20,801
3/31/96 $21,983 -2.34% $19,082 5.37% $27,435 1.92% $21,200
6/30/96 $22,623 0.47% $19,172 4.49% $28,667 1.82% $21,586
9/30/96 $23,003 1.77% $19,511 3.09% $29,553 1.96% $22,009
12/31/96 $24,198 3.06% $20,108 8.34% $32,017 4.72% $23,048
3/31/97 $24,395 -0.86% $19,935 2.68% $32,875 -0.05% $23,037
6/30/97 $25,804 3.64% $20,661 17.46% $38,615 7.86% $24,847
9/30/97 $27,145 3.50% $21,384 7.49% $41,508 6.02% $26,343
12/31/97 $28,333 3.21% $22,070 2.87% $42,699 1.73% $26,799
3/31/98 $29,366 1.52% $22,406 13.95% $48,655 5.39% $28,243
6/30/98 $28,696 2.62% $22,993 3.30% $50,261 0.40% $28,356
9/30/98 $28,049 4.95% $24,131 -9.95% $45,260 -4.53% $27,072
12/31/98 $28,798 0.13% $24,162 21.30% $54,894 6.46% $28,821
</TABLE>
MUTUAL SHARES SECURITIES FUND
Value investors generally, and we at Mutual Shares Securities Fund,
underperformed the various broad market indices over the reporting period, as
shown by our +.09% cumulative total return for the year ended December 31, 1998.
Large-cap value stocks, which have typically held up better than growth stocks
in market downturns, generally did not do so during last summer's two-month
market correction. The S&P
*Index is unmanaged and includes reinvested dividends. One cannot invest
directly in an index.
PLEASE SEE IMPORTANT ENDNOTES TO PERFORMANCE INFORMATION ON PAGE 61.
38
<PAGE>
500's largest growth stocks, such as Microsoft Corp., Dell Corp. and Intel
Corp., continued their extraordinary growth, pushing the major indices to record
levels. Internet stocks traded at levels that confounded even traditional growth
investors. Some perceived pockets of value, such as oil service companies, just
got cheaper over the course of the year. We feel the relatively weak performance
of value stocks contributed to the flat performance of the portfolio over the
period.
Some of our largest positions did perform well during the year. Mediaone Group
Inc. and Morgan Stanley Dean Witter & Co. were up significantly. Financial
services stocks remained a major portfolio focus. During the third-quarter
correction we made a significant investment in the brokerage sector, initiating
positions in Lehman Brothers Holdings Inc. and Bear Stearns Co. Inc., and adding
to our Morgan Stanley Dean Witter holdings. We bought our Lehman stock at a
notable discount to book value during a period when some believed the company,
with $5 billion of equity capital, was financially strapped. We were also
enthusiastic about Bank One Corp. and money manager United Asset Management
Corp., two other financial holdings.
Companies involved in deals and restructurings should again present
opportunities in 1999. Two businesses we liked, and where we added to our
holdings, were Telephone & Data Systems Inc., a wireless and wireline
telecommunication company, and diversified consumer products company U.S.
Industries Inc. Looking forward, we are confident that our disciplined value and
special situation approach, although recently out of favor, will prove
rewarding.
Effective November 1, 1998, Larry Sondike and David Marcus assumed their roles
as portfolio co-managers. This change is designed to combine the benefits of our
team approach with the increased focus and accountability that portfolio
assignments create. The managers will continue to benefit from the ideas of all
the investment professionals at the firm.
GRAPHIC MATERIAL (44)
This graph compares the performance of Mutual Shares Securities Fund as tracked
by the growth in value of a $10,000 investment, to that of S&P 500 Index, and
the Lipper Growth & Income Funds Objective Advantage Index from
11/8/96-12/31/98.
Performance shown in the graph reflects all fund operating expenses but does not
include any fees, charges or expenses imposed by the variable annuity and life
insurance contracts that use the Franklin Valuemark Funds. If they had been
included, performance would have been lower. See the contract prospectus for a
complete description of the contract expenses, including any applicable sale
scharges. Index source is Standard & Poor's Micropal and Lipper.
TOTAL RETURN INDEX COMPARISON
Mutual Shares Securities Fund
$10,000 Investment (11/8/96 - 12/31/98)
<TABLE>
<CAPTION>
Mutual Shares Securities Fund S&P500 Lipper Growth &
Income Funds
Objective Average
<S> <C> <C> <C> <C> <C> <C>
11/8/96 $10,000 $10,000 $10,000
11/30/96 $10,120 5.54% $10,554 4.77% $10,477
12/31/96 $10,350 -1.98% $10,345 -1.05% $10,367
1/31/97 $10,620 6.25% $10,992 4.31% $10,813
2/28/97 $10,730 0.78% $11,078 0.51% $10,869
3/31/97 $10,420 -4.11% $10,622 -3.57% $10,481
4/30/97 $10,510 5.97% $11,257 3.60% $10,858
5/31/97 $10,890 6.09% $11,942 6.26% $11,538
6/30/97 $11,145 4.48% $12,477 3.85% $11,982
7/31/97 $11,685 7.96% $13,470 7.36% $12,864
8/31/97 $11,625 -5.60% $12,716 -3.34% $12,434
9/30/97 $12,115 5.48% $13,413 5.07% $13,064
10/31/97 $11,805 -3.34% $12,965 -3.51% $12,606
11/30/97 $11,915 4.63% $13,565 2.68% $12,944
12/31/97 $12,185 1.72% $13,798 1.67% $13,160
1/31/98 $12,135 1.11% $13,952 0.07% $13,169
2/28/98 $12,786 7.21% $14,958 6.82% $14,067
3/31/98 $13,196 5.12% $15,723 4.42% $14,689
4/30/98 $13,316 1.01% $15,882 0.70% $14,792
5/31/98 $13,196 -1.72% $15,609 -2.08% $14,484
6/30/98 $13,114 4.06% $16,243 1.69% $14,729
7/31/98 $12,655 -1.07% $16,069 -2.59% $14,347
8/31/98 $10,840 -14.46% $13,745 -14.66% $12,244
9/30/98 $10,799 6.41% $14,626 5.29% $12,892
10/31/98 $11,513 8.13% $15,816 7.25% $13,826
11/30/98 $12,104 6.06% $16,774 5.07% $14,527
12/31/98 $12,196 0.76% 5.76% $17,740 4.46% $15,175
</TABLE>
GRAPHIC MATERIAL (45)
This chart shows the top 10 holdings and their respective industry and country
based on the percentage of total net assets on 12/31/98 for the Mutual Shares
Securities Fund.
TOP 10 HOLDINGS
Mutual Shares Securities Fund
12/31/98
<TABLE>
<CAPTION>
COMPANY % OF TOTAL
INDUSTRY, COUNTRY NET ASSETS
- -------------------------------------------------------
<S> <C>
Chase Manhattan Corp. 3.7%
Banking, U.S.
Investor AB, A&B 3.2%
Multi-Industry, Sweden
Morgan Stanley
Dean Witter & Co. 2.0%
Financial Services, U.S.
United Asset Management Corp. 2.0%
Financial Services, U.S.
Mediaone Group Inc. 1.9%
Broadcasting & Publishing, U.S.
Bank One Corp. 1.9%
Banking, U.S.
General Motors Corp. 1.8%
Automobiles, U.S.
RJR Nabisco Holdings Corp. 1.7%
Beverages & Tobacco, U.S.
Tele-Communications Inc., A 1.6%
Telecommunications, U.S.
Suez Lyonnaise des Eaux SA 1.6%
Business & Public Services,
France
</TABLE>
PERFORMANCE SHOWN IN THE GRAPH REFLECTS ALL FUND OPERATING EXPENSES BUT DOES NOT
INCLUDE ANY FEES, CHARGES OR EXPENSES IMPOSED BY THE VARIABLE ANNUITY AND LIFE
INSURANCE CONTRACTS THAT USE THE FRANKLIN VALUEMARK FUNDS. IF THEY HAD BEEN
INCLUDED, PERFORMANCE WOULD HAVE BEEN LOWER. SEE THE CONTRACT PROSPECTUS FOR A
COMPLETE DESCRIPTION OF THE CONTRACT EXPENSES, INCLUDING ANY APPLICABLE SALES
CHARGES. INDEX SOURCES ARE STANDARD & POOR'S MICROPAL AND LIPPER.
GRAPHIC MATERIAL (46)
This chart shows the average annual total return for the Mutual Shares
Securities Fund as of 12/31/98.
<TABLE>
<CAPTION>
Average Annual Total Return
- -------------------------------------------------
<S> <C>
1-Year +0.09%
Since Inception (11/8/96) +9.70%
</TABLE>
39
<PAGE>
GRAPHIC MATERIAL (47)
This chart shows the top 10 holdings and their respective security type based
on the percentage of total net assets on 12/31/98 for the Real Estate
Securities Fund.
TOP 10 HOLDINGS
Real Estate Securities Fund
12/31/98
<TABLE>
<CAPTION>
SECURITY % OF TOTAL
SECURITY TYPE NET ASSETS
- ----------------------------------------------------
<S> <C>
Equity Residential
Properties Trust 3.67%
Equity REIT - Apartments
Security Capital Group Inc. 3.44%
Diversified Property Type
Equity Office Properties Trust 3.37%
Equity REIT - Office
Pacific Retail Trust 3.28%
Equity REIT - Retail -
Community Centers
Arden Realty Inc. 3.13%
Equity REIT - Office
Simon Property Group Inc. 3.03%
Equity REIT - Retail -
Regional Malls
FelCor Lodging Trust Inc. 2.94%
Equity REIT - Hotels
Archstone Communities Trust 2.87%
Equity REIT - Apartments
Starwood Hotels & Resorts
Worldwide Inc. 2.81%
Equity REIT - Hotels
Host Marriott Corp. 2.79%
Hotels
</TABLE>
REAL ESTATE SECURITIES FUND
During the 12-month reporting period, the real estate industry benefited from
strong operating fundamentals and low interest rates. Unfortunately, the
sector's stock performance was a different story. After strong returns in 1997,
real estate securities suffered a substantial decline in 1998. Real estate
investment trusts' (REITs') inability to access the capital markets apparently
fueled concerns about a slowdown in acquisition activity, which, along with
uncertainty about the U.S. economy, negatively affected investor sentiment and
contributed to weak REIT stock prices. The 1998 real estate sector was in our
opinion a clear example of negative investor sentiment overriding operating
fundamentals. While we cannot predict future market direction, we believe that
1999 earnings visibility may be excellent for the real estate industry relative
to the overall market, given strong sector fundamentals and stable cash flows
derived from real estate leases. Additionally, as a result of lower stock
prices, REITs traded at the most attractive valuations seen in the last several
years.
For the year under review, Real Estate Securities Fund delivered a -16.82%
cumulative total return, comparable to the portfolio's benchmark, the unmanaged
Wilshire Real Estate Securities Index, which posted a -17.63% total return for
the same period. However, the fund substantially underperformed the S&P 500
Index, which consists of 500 widely held U.S. common stocks and had a return of
28.6% for the period, reflecting investors preference for large-cap stocks at
the expense of real estate securities.*
As discussed in prior shareholder reports, our portfolio strategy is to focus on
property types and geographic regions with strong supply and demand
fundamentals, while attempting to identify those management teams with intensive
property management and capital markets experience. Accordingly, we maintained
the majority of our investments in the diversified, hotel, apartment, office and
industrial property sectors, where we saw the most attractive stock valuations
and anticipated the strongest cash flow growth.
The diversified property sector represented the portfolio's largest property
type-weighting, representing 20.0% of total net assets on December 31, 1998.
This sector's stocks have real estate portfolios diversified by property type
and location. We recently added to two of the group's positions, Security
Capital Group Inc. and Glenborough
*Indices are unmanaged and include reinvested dividends. One cannot invest
directly in an index.
40
<PAGE>
Realty Trust Inc., placing them among our top 15 portfolio holdings. We felt
these stocks' weakness at the end of the reporting period provided an excellent
opportunity to increase our position in these well-managed, highly diversified
companies.
Given the reduced domestic economic risk, we believe that office stocks
represent an attractive combination of favorable supply and demand fundamentals
and attractive valuations. As of December 31, 1998, the office sector
represented 18.1% of total net assets. The portfolio initiated positions in two
new stocks, Brandywine Realty Trust, a suburban Philadelphia office REIT, and
TriNet Corporate Realty Trust Inc., a national triple net lease office REIT. At
the purchase date, both stocks traded at seven times 1999 expected funds from
operations (FFO) and offered dividend yields in excess of 9%.
Our third largest property sector, hotels, represented 17.4% of total net assets
at year end. Changing legislation, concerns about excess supply and a potential
recession seemed to hit this group the hardest in 1998. We took advantage of
this weakness to add to three positions -- Starwood Hotels & Resorts Worldwide
Inc., MeriStar Hospitality Corp., and Host Marriott Corp. -- which also took
their place among our largest positions. Hotel stocks may benefit from the
Federal Reserve Board's interest-rate cuts and the recent credit crunch, which
in our view would significantly reduce the amount of new industry construction.
We believe these companies, offering compelling valuations at the time of
purchase, should retain their excellent growth prospects under any corporate
structure.
The portfolio's homebuilding and manufactured homes sectors significantly
outperformed the overall real estate market during the past year. This superior
performance mainly resulted from lower interest rates and record home-buying
levels across the country, in our view. Consequently, the homebuilders continued
to trade at relatively high valuations, leading us to sell our remaining
positions in this sector, including Cavalier Homes Inc., Clayton Homes Inc. and
Southern Energy Homes Inc.
Looking ahead, the unique combination of steady growth and favorable valuations
in the current market sustains our enthusiasm for investing in REITs. We remain
committed to real estate stocks and REITs, as this market sector grows in
capitalization
WHAT IS A TRIPLE NET LEASE?
A lease that stipulates that the tenant, and not the landlord, is responsible
for all costs including maintenance, taxes and insurance.
41
<PAGE>
PERFORMANCE SHOWN IN THE GRAPH REFLECTS ALL FUND OPERATING EXPENSES BUT DOES NOT
INCLUDE ANY FEES, CHARGES OR EXPENSES IMPOSED BY THE VARIABLE ANNUITY AND LIFE
INSURANCE CONTRACTS THAT USE THE FRANKLIN VALUEMARK FUNDS. IF THEY HAD BEEN
INCLUDED, PERFORMANCE WOULD HAVE BEEN LOWER. SEE THE CONTRACT PROSPECTUS FOR A
COMPLETE DESCRIPTION OF THE CONTRACT EXPENSES, INCLUDING ANY APPLICABLE SALES
CHARGES. INDEX SOURCE IS STANDARD & POOR'S MICROPAL.
GRAPHIC MATERIAL (49)
This chart shows the average annual total return for the Real Estate Securities
Fund as of 12/31/98.
<TABLE>
<CAPTION>
Average Annual Total Return
- ------------------------------------------
<S> <C>
1-Year -16.82%
5-Year +10.03%
Since Inception (1/24/89) +10.30%
</TABLE>
and diversity. In addition to our direct experience in real estate and real
estate securities management, we are well-positioned with our team of over 30
equity and credit analysts to evaluate the merits of the new REITs being formed
by a variety of U.S. corporations. Going forward, we will maintain our focus on
top-quality real estate companies that create significant cash flow growth and
shareholder value.
GRAPHIC MATERIAL (48)
This graph compares the performance of Real Estate Securities Fund as tracked by
the growth in value of a $10,000 investment, to that of S&P 500 Index, and the
Wilshire Real Estate Securities Index from 1/24/89-12/31/98.
Performance shown in the graph reflects all fund operating expenses but does not
include any fees, charges or expenses imposed by the variable annuity and life
insurance contracts that use the Franklin Valuemark Funds. If they had been
included, performance would have been lower. See the contract prospectus for a
complete description of the contract expenses, including any applicable sales
charges. Index source is Standard & Poor's Micropal.
TOTAL RETURN INDEX COMPARISON
Real Estate Securities Fund
$10,000 Investment (1/24/89 - 12/31/98)
<TABLE>
<CAPTION>
Real Estate Securities S&P 500 Wilshire Real Estate
Securities Index
<S> <C> <C> <C> <C> <C> <C> <C>
1/24/89 $10,000 $ 10,000 $ 10,000
1/31/89 $10,020 $ 10,165 1.65% $ 10,037 0.37%
2/28/89 $10,080 $ 9,912 -2.49% $ 10,063 0.26%
3/31/89 $10,150 $ 10,143 2.33% $ 10,133 0.70%
4/30/89 $10,220 $ 10,670 5.19% $ 10,318 1.82%
5/31/89 $10,290 $ 11,102 4.05% $ 10,495 1.72%
6/30/89 $10,540 $ 11,038 -0.57% $ 10,613 1.12%
7/31/89 $10,850 $ 12,035 9.03% $ 10,948 3.16%
8/31/89 $10,990 $ 12,271 1.96% $ 10,832 -1.06%
9/30/89 $10,750 $ 12,221 -0.41% $ 10,808 -0.22%
10/31/89 $10,450 $ 11,937 -2.32% $ 10,268 -5.00%
11/30/89 $10,490 $ 12,181 2.04% $ 10,115 -1.49%
12/31/89 $10,480 $ 12,473 2.40% $ 10,111 -0.04%
1/31/90 $10,170 $ 11,636 -6.71% $ 9,634 -4.71%
2/28/90 $10,150 $ 11,786 1.29% $ 9,631 -0.04%
3/31/90 $10,249 $ 12,099 2.65% $ 9,608 -0.23%
4/30/90 $10,107 $ 11,797 -2.49% $ 9,422 -1.94%
5/31/90 $10,178 $ 12,948 9.75% $ 9,381 -0.44%
6/30/90 $10,259 $ 12,861 -0.67% $ 9,398 0.19%
7/31/90 $10,137 $ 12,820 -0.32% $ 9,038 -3.83%
8/31/90 $9,427 $ 11,661 -9.04% $ 7,983 -11.68%
9/30/90 $8,808 $ 11,093 -4.87% $ 7,058 -11.59%
10/31/90 $8,564 $ 11,045 -0.43% $ 6,549 -7.20%
11/30/90 $9,102 $ 11,759 6.46% $ 6,816 4.07%
12/31/90 $9,224 $ 12,087 2.79% $ 6,728 -1.29%
1/31/91 $10,158 $ 12,614 4.36% $ 7,383 9.73%
2/28/91 $10,381 $ 13,516 7.15% $ 7,817 5.88%
3/31/91 $11,081 $ 13,843 2.42% $ 8,513 8.91%
4/30/91 $11,274 $ 13,876 0.24% $ 8,444 -0.81%
5/31/91 $11,406 $ 14,474 4.31% $ 8,575 1.55%
6/30/91 $11,096 $ 13,811 -4.58% $ 8,152 -4.93%
7/31/91 $11,233 $ 14,455 4.66% $ 8,118 -0.42%
8/31/91 $11,191 $ 14,797 2.37% $ 8,020 -1.21%
9/30/91 $11,413 $ 14,550 -1.67% $ 7,928 -1.14%
10/31/91 $11,265 $ 14,745 1.34% $ 7,750 -2.25%
11/30/91 $11,180 $ 14,151 -4.03% $ 7,493 -3.32%
12/31/91 $11,909 $ 15,770 11.44% $ 8,076 7.78%
1/31/92 $12,987 $ 15,476 -1.86% $ 8,456 4.71%
2/29/92 $12,628 $ 15,676 1.29% $ 8,435 -0.25%
3/31/92 $12,396 $ 15,370 -1.95% $ 8,253 -2.16%
4/30/92 $12,216 $ 15,822 2.94% $ 8,116 -1.66%
5/31/92 $12,501 $ 15,900 0.49% $ 8,148 0.40%
6/30/92 $12,390 $ 15,663 -1.49% $ 7,903 -3.01%
7/31/92 $12,886 $ 16,303 4.09% $ 7,932 0.37%
8/31/92 $12,746 $ 15,969 -2.05% $ 7,812 -1.51%
9/30/92 $12,929 $ 16,156 1.17% $ 8,109 3.80%
10/31/92 $13,135 $ 16,211 0.34% $ 8,196 1.07%
11/30/92 $13,286 $ 16,762 3.40% $ 8,267 0.86%
12/31/92 $13,804 $ 16,968 1.23% $ 8,673 4.92%
1/31/93 $14,365 $ 17,111 0.84% $ 9,276 6.95%
2/28/93 $14,883 $ 17,344 1.36% $ 9,725 4.84%
3/31/93 $15,854 $ 17,710 2.11% $ 10,378 6.71%
4/30/93 $15,228 $ 17,281 -2.42% $ 9,789 -5.67%
5/31/93 $15,099 $ 17,742 2.67% $ 9,635 -1.57%
6/30/93 $15,619 $ 17,794 0.29% $ 9,888 2.62%
7/31/93 $15,925 $ 17,723 -0.40% $ 10,089 2.03%
8/31/93 $16,351 $ 18,394 3.79% $ 10,298 2.08%
9/30/93 $17,192 $ 18,253 -0.77% $ 10,765 4.53%
10/31/93 $17,072 $ 18,631 2.07% $ 10,463 -2.81%
11/30/93 $16,013 $ 18,454 -0.95% $ 10,006 -4.36%
12/31/93 $16,428 $ 18,677 1.21% $ 9,994 -0.12%
1/31/94 $16,723 $ 19,312 3.40% $ 10,294 3.00%
2/28/94 $17,411 $ 18,789 -2.71% $ 10,715 4.09%
3/31/94 $16,799 $ 17,969 -4.36% $ 10,219 -4.63%
4/30/94 $17,072 $ 18,199 1.28% $ 10,334 1.12%
5/31/94 $17,334 $ 18,498 1.64% $ 10,548 2.08%
6/30/94 $16,965 $ 18,045 -2.45% $ 10,341 -1.97%
7/31/94 $16,932 $ 18,637 3.28% $ 10,364 0.23%
8/31/94 $16,876 $ 19,401 4.10% $ 10,357 -0.07%
9/30/94 $16,600 $ 18,927 -2.44% $ 10,184 -1.67%
10/31/94 $16,009 $ 19,353 2.25% $ 9,811 -3.66%
11/30/94 $15,435 $ 18,649 -3.64% $ 9,428 -3.91%
12/31/94 $16,903 $ 18,925 1.48% $ 10,159 7.75%
1/31/95 $16,285 $ 19,415 2.59% $ 9,830 -3.23%
2/28/95 $16,572 $ 20,172 3.90% $ 10,138 3.13%
3/31/95 $16,693 $ 20,767 2.95% $ 10,197 0.58%
4/30/95 $16,649 $ 21,378 2.94% $ 10,123 -0.72%
5/31/95 $17,323 $ 22,233 4.00% $ 10,459 3.31%
6/30/95 $17,616 $ 22,748 2.32% $ 10,641 1.74%
7/31/95 $17,982 $ 23,504 3.32% $ 10,812 1.61%
8/31/95 $18,370 $ 23,563 0.25% $ 10,944 1.22%
9/30/95 $18,895 $ 24,557 4.22% $ 11,145 1.84%
10/31/95 $18,507 $ 24,468 -0.36% $ 10,800 -3.10%
11/30/95 $18,815 $ 25,543 4.39% $ 10,912 1.04%
12/31/95 $19,865 $ 26,036 1.93% $ 11,545 5.80%
1/31/96 $20,311 $ 26,921 3.40% $ 11,704 1.38%
2/29/96 $20,573 $ 27,171 0.93% $ 11,936 1.98%
3/31/96 $20,596 $ 27,432 0.96% $ 12,033 0.81%
4/30/96 $20,653 $ 27,835 1.47% $ 12,087 0.45%
5/31/96 $21,064 $ 28,553 2.58% $ 12,356 2.23%
6/30/96 $21,291 $ 28,662 0.38% $ 12,603 2.00%
7/31/96 $21,124 $ 27,395 -4.42% $ 12,491 -0.89%
8/31/96 $22,135 $ 27,973 2.11% $ 13,022 4.25%
9/30/96 $22,835 $ 29,548 5.63% $ 13,348 2.50%
10/31/96 $23,288 $ 30,363 2.76% $ 13,709 2.71%
11/30/96 $24,050 $ 32,659 7.56% $ 14,278 4.15%
12/31/96 $26,385 $ 32,012 -1.98% $ 15,802 10.67%
1/31/97 $26,718 $ 34,013 6.25% $ 16,028 1.43%
2/28/97 $26,683 $ 34,278 0.78% $ 16,037 0.06%
3/31/97 $26,885 $ 32,870 -4.11% $ 16,092 0.34%
4/30/97 $26,194 $ 34,832 5.97% $ 15,572 -3.23%
5/31/97 $27,147 $ 36,953 6.09% $ 16,036 2.98%
6/30/97 $28,388 $ 38,609 4.48% $ 16,832 4.96%
7/31/97 $29,159 $ 41,682 7.96% $ 17,385 3.29%
8/31/97 $29,122 $ 39,348 -5.60% $ 17,257 -0.74%
9/30/97 $31,958 $ 41,504 5.48% $ 18,958 9.86%
10/31/97 $30,764 $ 40,118 -3.34% $ 18,152 -4.25%
11/30/97 $31,311 $ 41,975 4.63% $ 18,517 2.01%
12/31/97 $31,846 $ 42,697 1.72% $ 18,930 2.23%
1/31/98 $31,498 $ 43,171 1.11% $ 18,663 -1.41%
2/28/98 $31,336 $ 46,284 7.21% $ 18,424 -1.28%
3/31/98 $32,008 $ 48,653 5.12% $ 18,787 1.97%
4/30/98 $31,137 $ 49,145 1.01% $ 18,196 -3.15%
5/31/98 $30,826 $ 48,300 -1.72% $ 18,021 -0.96%
6/30/98 $30,412 $ 50,260 4.06% $ 17,925 -0.53%
7/31/98 $28,312 $ 49,723 -1.07% $ 16,678 -6.96%
8/31/98 $25,335 $ 42,533 -14.46% $ 14,945 -10.39%
9/30/98 $26,690 $ 45,259 6.41% $ 15,782 5.60%
10/31/98 $26,265 $ 48,939 8.13% $ 15,566 -1.37%
11/30/98 $26,651 $ 51,904 6.06% $ 15,858 1.88%
12/31/98 $26,491 -0.60% $ 54,894 5.76% $ 15,594 -1.67%
</TABLE>
RISING DIVIDENDS FUND
We base our investment strategy on the belief that companies with consistently
rising dividends should, over time, also realize stock price appreciation. We
select portfolio securities based on several criteria: consistent and
substantial dividend increases, strong balance sheets and relatively low
price-earnings ratios. We seek fundamentally sound companies that meet our
standards and attempt to acquire them at attractive prices, often when they are
out of favor with other investors.
As discussed in our semiannual report, we believe the soft global economy
negatively impacted the U.S. economy's manufacturing sector, but actually helped
the consumer sector. Global weakness played an important role in contributing to
inflation's decline, as well as being a factor in enabling consumer interest
rates, such as mortgage rates, to fall. As a result, in our view of these
developments, consumer spending remained strong, while many manufacturers
suffered through near-recessionary conditions, and most consumer-oriented stocks
performed better than manufacturers' stocks.
Three of the portfolio's 1998 top-five performing holdings were retailers, led
by Wal-Mart Stores Inc., which more than doubled during the year. Other
retailers
PLEASE SEE IMPORTANT ENDNOTES TO PERFORMANCE INFORMATION ON PAGE 61.
42
<PAGE>
having exceptional performance were Family Dollar Stores Inc., the portfolio's
largest position, and Rite Aid Corp., a leading national drugstore chain. During
the year, all three companies enjoyed strong sales growth at the individual
store level, while successfully expanding or renovating their store base.
Becton, Dickinson and Co. and Myers Industries Inc. were two other strong
performers during the reporting period. Becton, Dickinson increased sales
growth, largely through a series of complementary acquisitions. Myers benefited
from lower resin prices in 1998, compared with 1997. Also, late in the year,
Myers made what we felt to be a very attractive acquisition, which considerably
enhanced the company's prospects in Europe.
Most of the worst-performing stocks during the year were already highlighted in
the semiannual report. These were mainly smaller, manufacturing-oriented
companies such as Flowserve Corp., M. A. Hanna Co. and Watts Industries Inc. The
industrial slowdown negatively impacted them, causing them to report weaker than
expected quarterly earnings. DIMON Inc., a tobacco leaf processor, also
continued to disappoint and was forced to cut its dividend in November.
Teleflex Inc., a diversified manufacturer of products and services for the
aerospace, automotive, marine, medical, and industrial markets, was a
significant portfolio addition. As of the end of the reporting period, it had a
remarkable record of 23 consecutive years of revenue and earnings growth, in
addition to 21 years of dividend growth. Two other positions we added to the
portfolio were Diebold Inc. and Reynolds and Reynolds Co. Diebold, a well known
automated teller machine manufacturer, has increased its dividend for an
exceptional 45 straight years. Reynolds and Reynolds is a leading provider of
information management systems primarily used by automobile dealerships.
Positions we added to during the year included Pall Corp., Bemis Co. Inc., West
Co. Inc., Leggett & Platt Inc. and ReliaStar Financial Corp. Pall, which has
increased its dividend for 24 years, makes filtration devices for a variety of
industries with a particular emphasis on blood filtration products. Bemis, a
manufacturer of flexible packaging for the food industry, has increased its
dividend for 14 years. West, which after year-end changed its name to West
Pharmaceutical Services, provides a variety of products and services to the
pharmaceutical industry. Leggett & Platt, a leading manufacturer of furniture
components and commercial fixtures, has increased its dividend for 27 years.
ReliaStar, a provider of a broad range of insurance related investment products,
has 27 years of dividend increases.
GRAPHIC MATERIAL (50)
This chart shows the top 10 holdings and their respective industry based on the
percentage of total net assets on 12/31/98 for the Rising Dividends Fund.
TOP 10 HOLDINGS
Rising Dividends Fund
12/31/98
<TABLE>
<CAPTION>
COMPANY % OF TOTAL
INDUSTRY NET ASSETS
- --------------------------------------------------
<S> <C>
Family Dollar Stores Inc. 6.52%
Retail Trade
Pall Corp. 4.50%
Process Industries
West Co. Inc. 3.72%
Health Technology
Wallace Computer
Services Inc. 3.35%
Commercial Services
Leggett & Platt Inc. 3.07%
Consumer Durables
Bemis Co. Inc. 2.70%
Process Industries
ReliaStar Financial Corp. 2.60%
Insurance
Kaydon Corp. 2.59%
Producer Manufacturing
Alberto-Culver Co. 2.53%
Consumer Non-Durables
First Union Corp. 2.51%
Finance
</TABLE>
43
<PAGE>
PERFORMANCE SHOWN IN THE GRAPH REFLECTS ALL FUND OPERATING EXPENSES BUT DOES NOT
INCLUDE ANY FEES, CHARGES OR EXPENSES IMPOSED BY THE VARIABLE ANNUITY AND LIFE
INSURANCE CONTRACTS THAT USE THE FRANKLIN VALUEMARK FUNDS. IF THEY HAD BEEN
INCLUDED, PERFORMANCE WOULD HAVE BEEN LOWER. SEE THE CONTRACT PROSPECTUS FOR A
COMPLETE DESCRIPTION OF THE CONTRACT EXPENSES, INCLUDING ANY APPLICABLE SALES
CHARGES. INDEX SOURCE IS STANDARD & POOR'S MICROPAL.
GRAPH MATERIAL (52)
This chart shows the average annual total return for the Rising Dividends Fund
as of 12/31/98.
<TABLE>
<CAPTION>
Average Annual Total Return
- -------------------------------------------
<S> <C>
1-Year +6.92%
5-Year +17.06%
Since Inception (1/27/92) +12.98%
</TABLE>
Portfolio positions we eliminated included Allied Group, Inc.; Merck & Co.,
Inc.; Nike, Inc. and Rockwell International Corp. Allied Group was acquired by
Nationwide Mutual Insurance Co. We sold Merck as it became less attractively
valued than other alternative investments. Nike's operating results suffered as
falling demand for its products led to excess inventory, and Rockwell no longer
met the portfolio's dividend requirement.
Notable dividend increases over the reporting period came from National Commerce
Bancorp. (+38.5%), First Union Corp. (+27%), Mercury General Corp. (+20.7%),
Alberto-Culver Co. (+20%), Myers Industries, Inc. (+20%) and ReliaStar Financial
Corp. (+19.4%).
As shown on the table on page 43, our 10 largest positions on December 31, 1998,
comprised 34.1% of the fund's total net assets. The following statistical
average demonstrates how these companies would, in the aggregate, respond to the
fund's screening criteria. On average, these 10 companies have raised their
dividends 19 years in a row, and by 283% in the last 10 years. Their most recent
dividend increases averaged 13.5%, for a yield of 1.8% on December 31, 1998, and
a dividend payout ratio of 34%. Long-term debt averaged 23% of capitalization,
and the average price-earnings ratio was 19.8 versus 27.2 for that of the
unmanaged Standard & Poor's 500 Stock Index on the same date. In our opinion,
these companies represent the portfolio's high quality from a fundamental
standpoint. We also believe that, over the long haul, companies that increase
cash payments to shareholders, year after year, may be superior builders of
wealth.
TOTAL RETURN INDEX COMPARISON
Rising Dividends Fund
$10,000 Investment (1/27/92 - 12/31/98)
GRAPHIC MATERIAL (51)
This graph compares the performance of Rising Dividends Fund as tracked by the
growth in value of a $10,000 investment, to that of Wilshire Mid Cap Company
Growth Index from 1/27/92 - 12/31/98.
GRAPHIC MATERIAL (51)
This graph compares the performance of Rising Dividends Fund as tracked by the
growth in value of a $10,000 investment, to that of Wilshire Mid Cap Company
growth Index from 1/27/92-12/31/98.
Performance shown in the graph reflects all fund operating expenses but does not
include any fees, charges or expenses imposed by the variable annuity and life
insurance contracts that use the Franklin Valuemark Funds. If they had been
included, performance would have been lower. See the contract prospectus for a
complete description of the contract expenses, including any applicable sales
charges. Index source is Standard & Poor's Micropal.
<TABLE>
<CAPTION>
Rising Dividends Wilshire MidCap
Growth Index
<S> <C> <C> <C> <C>
1/27/92 $10,000 $ 10,000
1/31/92 $10,000 0.39% $ 10,039
2/29/92 $10,000 1.69% $ 10,208
3/31/92 $9,930 -3.99% $ 9,801
4/30/92 $9,980 -2.38% $ 9,568
5/31/92 $10,130 -1.25% $ 9,448
6/30/92 $9,990 -4.54% $ 9,019
7/31/92 $10,350 5.48% $ 9,513
8/31/92 $10,240 -2.09% $ 9,315
9/30/92 $10,410 1.75% $ 9,478
10/31/92 $10,540 4.08% $ 9,864
11/30/92 $10,860 7.66% $ 10,620
12/31/92 $10,980 3.06% $ 10,945
1/31/93 $10,860 2.26% $ 11,192
2/28/93 $10,670 -3.37% $ 10,815
3/31/93 $10,760 3.07% $ 11,147
4/30/93 $10,390 -4.18% $ 10,681
5/31/93 $10,530 5.70% $ 11,290
6/30/93 $10,418 0.66% $ 11,364
7/31/93 $10,418 -0.89% $ 11,263
8/31/93 $10,588 5.07% $ 11,834
9/30/93 $10,588 2.51% $ 12,131
10/31/93 $10,749 0.53% $ 12,196
11/30/93 $10,478 -1.56% $ 12,005
12/31/93 $10,598 5.53% $ 12,669
1/31/94 $10,739 3.53% $ 13,116
2/28/94 $10,378 0.53% $ 13,186
3/31/94 $9,916 -5.95% $ 12,401
4/30/94 $9,936 0.40% $ 12,451
5/31/94 $10,077 -1.53% $ 12,261
6/30/94 $10,050 -5.04% $ 11,643
7/31/94 $10,152 2.44% $ 11,927
8/31/94 $10,580 8.56% $ 12,948
9/30/94 $10,335 -0.79% $ 12,845
10/31/94 $10,309 2.44% $ 13,159
11/30/94 $10,064 -4.43% $ 12,576
12/31/94 $10,166 1.66% $ 12,785
1/31/95 $10,441 0.02% $ 12,787
2/28/95 $10,747 6.00% $ 13,554
3/31/95 $10,982 3.69% $ 14,055
4/30/95 $11,063 1.49% $ 14,264
5/31/95 $11,441 1.64% $ 14,498
6/30/95 $11,564 6.29% $ 15,410
7/31/95 $11,814 8.40% $ 16,704
8/31/95 $12,012 1.53% $ 16,960
9/30/95 $12,408 2.79% $ 17,433
10/31/95 $12,304 -3.52% $ 16,819
11/30/95 $12,939 5.25% $ 17,702
12/31/95 $13,190 0.36% $ 17,766
1/31/96 $13,450 1.73% $ 18,073
2/29/96 $13,648 3.74% $ 18,749
3/31/96 $13,648 1.21% $ 18,976
4/30/96 $13,617 5.93% $ 20,102
5/31/96 $13,992 2.99% $ 20,703
6/30/96 $14,145 -5.45% $ 19,574
7/31/96 $13,731 -8.56% $ 17,899
8/31/96 $14,007 7.29% $ 19,204
9/30/96 $14,730 4.73% $ 20,112
10/31/96 $15,166 -2.83% $ 19,543
11/30/96 $16,219 5.63% $ 20,643
12/31/96 $16,379 -1.32% $ 20,370
1/31/97 $16,709 2.90% $ 20,961
2/28/97 $17,177 -1.89% $ 20,565
3/31/97 $16,645 -6.11% $ 19,309
4/30/97 $17,070 3.42% $ 19,969
5/31/97 $18,389 8.27% $ 21,620
6/30/97 $19,054 3.47% $ 22,371
7/31/97 $20,670 7.07% $ 23,952
8/31/97 $20,250 -0.77% $ 23,768
9/30/97 $21,312 6.58% $ 25,332
10/31/97 $20,792 -4.77% $ 24,123
11/30/97 $21,290 0.59% $ 24,266
12/31/97 $21,789 0.85% $ 24,472
1/31/98 $21,689 -0.70% $ 24,301
2/28/98 $23,438 8.24% $ 26,303
3/31/98 $24,113 1.60% $ 26,724
4/30/98 $24,036 0.70% $ 26,911
5/31/98 $23,161 -5.62% $ 25,398
6/30/98 $22,898 -0.60% $ 25,246
7/31/98 $22,113 -5.94% $ 23,746
8/31/98 $18,589 -20.29% $ 18,928
9/30/98 $19,515 4.95% $ 19,865
10/31/98 $21,599 7.91% $ 21,437
11/30/98 $22,383 5.78% $ 22,676
12/31/98 $23,297 4.08% 6.76% $ 24,208
</TABLE>
PLEASE SEE IMPORTANT ENDNOTES TO PERFORMANCE INFORMATION ON PAGE 61.
44
<PAGE>
TEMPLETON GLOBAL ASSET ALLOCATION FUND
In the U.S., we believe that interest rates and earnings primarily drove stock
market valuations and have little doubt that it was lower interest rates that
dominated equity markets in 1998. The catalyst for lower rates was widely
believed to come from an unusual source: Russia's Treasury default and
subsequent currency devaluation in August 1998, which prompted a domino effect
through emerging markets and culminated in the bailout of a major hedge fund.
This set the stage for the Federal Reserve Board to cut the federal funds target
rate three times in the fall, to 4.75%, to stimulate growth. After September's
sharp decline, the liquidity surge resulting from the rate cuts helped propel
the S&P 500 to new highs in fourth quarter 1998.
Looking ahead, we believe investors will be disappointed by the American
market's equity returns, considering the stretched valuations and poor earnings
outlook we see as of December 31, 1998. We expect 1998 earnings growth for the
S&P 500 will turn out to have been flat, and attribute equity returns of over
20% entirely to the price-to-earnings (P/E) multiples' expansion from 24.5 to
32. Previously reported corporate profits trended down from S&P second quarter
1998 profits, up only 4%, to third quarter profits, which were down 3%. Although
the U.S. remained our largest single country weighting, we were underweight in
U.S. equities versus the other benchmarks, preferring to invest in other regions
where companies trade at lower multiples. The average P/E ratio for the
portfolio's U.S. holdings was only 16.1 at the end of the reporting period. We
took advantage of price strength to eliminate our positions in three highly
rated stocks: IBM Corp., Merrill Lynch & Co. Inc. and Morgan Stanley Dean Witter
& Co. At the same time we were able to find new bargains in defense company
Raytheon Co. and disability provider UNUM Corp.
European stock markets started 1998 off with a bang, as investors marked up
equity prices, reportedly in anticipation of converging interest rates,
export-led economic growth and corporate restructuring. However, most of these
gains vanished abruptly in the third quarter as markets followed the U.S.
downward in response to this summer's emerging market contagion. Investors
evidently perceived Europe's banks as being highly exposed to emerging markets.
As in the U.S., European nations lowered interest rates, helping to spark
another rally across equity markets. Contrary to our outlook for the U.S., we
were optimistic regarding European prospects for 1999. We anticipate economic
growth may come from private consumption, continued corporate restructuring and
a burgeoning equity culture. The portfolio's largest European weighting remained
the U.K., with an 11.1% asset allocation at year-end. We believe
GRAPHIC MATERIAL (53)
This chart shows in pie format the asset allocation of Templeton Global Asset
Allocation Fund based on total net assets as of 12/31/98.
ASSET ALLOCATION
Templeton Global Asset Allocation Fund
Based on Total Net Assets
12/31/98
<TABLE>
<CAPTION>
<S> <C>
Equity Securities 60.4%
Fixed-Income Securities 32.5%
Short-term investments & other net assets 7.1%
</TABLE>
45
<PAGE>
TOP FIVE COUNTRY HOLDINGS
Templeton Global
Asset Allocation Fund
GRAPHIC MATERIAL (54)
This chart shows the top 5 countries based on the percentage of total net
assets on 12/31/98 for the Templeton Global Asset Allocation Fund.
<TABLE>
<CAPTION>
% OF TOTAL
12/31/98 NET ASSETS
- ---------------------------------------------------------
<S> <C>
United States 29.2%
United Kingdom 11.1%
Hong Kong 6.0%
France 5.7%
Italy 4.5%
</TABLE>
TOP FIVE INDUSTRIES
Templeton Global
Asset Association Fund
GRAPHIC MATERIAL (55)
This chart shows the top five industry breakdown based on the percentage of
total net assets on 12/31/98 for the Templeton Global Asset Allocation Fund.
<TABLE>
<CAPTION>
% OF TOTAL
12/31/98 NET ASSETS
- ---------------------------------------------------------
<S> <C>
Insurance 11.1%
Multi-Industry 6.1%
Financial Services 4.5%
Transportation 4.2%
Utilities Electrical & Gas 4.1%
</TABLE>
the U.K. market is undervalued and that corporate profits may benefit from a
weaker currency and lower interest rates. These rates, despite having been cut
three times in as many months, still remain the highest among the G7* countries.
As of December 31, 1998, our U.K. equity holdings yielded close to 6% and traded
at only 14 times 1998 earnings. New U.K. portfolio holdings include General
Electric Co. Plc., a fast growing defense and telecom company with a strong
balance sheet, as well as airplane engine manufacturer Rolls-Royce Plc.
Japanese bargains continued to elude us as we patiently waited for further bank
restructuring and appropriate fiscal policies. Japan's non-performing loans may
be as high as 30% of its gross domestic product (GDP), and the government has
been slow to restructure the sector. We don't expect to feel more optimistic
about Japan until we see tangible evidence of bank restructuring that would
include liquidation of the weaker banks and recapitalization of the stronger
banks. In our opinion, the Japanese government, having experienced four
successive quarters of negative economic growth, needs to lower income taxes to
stimulate private consumption, which makes up two-thirds of their gross domestic
product. With this in mind, we added to three Japanese retailers that we felt
were trading at undemanding valuations: Matsuzakaya Co. Ltd., Best Denki Co.
Ltd. and Laox Co. Ltd.
1998 was a disappointing year for most emerging equity and debt markets. Despite
minor Asian rallies at the beginning of the year, the defining point for this
asset class appeared to be Russia's August loan default and currency
devaluation. In the wake of these events, the third quarter International
Finance Corporation (IFC) Emerging Market Index performance was the worst on
record. The emerging market fixed-income sector was not spared, as yield spreads
rose as high as 15% above U.S. Treasuries. Although the portfolio weightings in
emerging market equities and debt securities held back performance during the
year, we remain cautiously optimistic for the future. There would appear to be
value in emerging markets with the Morgan Stanley Capital International Emerging
Markets Free (MSCI EMF) Index trading 32% off one-year highs and the index
trading on 11.5 times 1999 estimated earnings, which are expected to grow by
15%, according to Morgan Stanley Dean Witter. The crucial question remains the
timing of any recovery. We think that a few catalysts were put in place by
year-end, including lower G7* interest rates, Korean and Thai economic recovery,
continued International Monetary Fund (IMF) support for specific emerging
markets and the unwinding of hedge fund positions. With this in mind, we
purchased Bangkok Bank Public Co. Ltd. in Thailand; Hong Kong property developer
Cheung Kong Holdings Ltd.; Industrias Penoles SA, a low-cost mining company in
Mexico and Banco Bradesco SA BBD, Pfd. in Brazil.
*The world's seven largest economies, the Group of Seven or "G7," are the U.S.,
Germany, Japan, France, the U.K., Italy and Canada.
46
<PAGE>
The fixed-income sector was marked by periodic but persistent crises in emerging
market countries, while bond yields fell in the world's major industrial
markets. Not surprisingly, emerging market bonds underperformed higher-quality
industrial market bonds during the reporting period.
Your portfolio attempted to maximize return during the period by allocating
about 83.17% of its assets to intermediate- and long-term bonds in the
industrial markets and about 16.83% of its assets to the highest quality and
most liquid bonds available in the emerging markets. The portfolio management
team believed that this combination of bonds offered the opportunity for higher
long-term returns at the cost of modestly higher short-term volatility.
We believe the three main reasons for the portfolio's weak performance in 1998
were an overweight position in emerging market debt and equity markets, an
underweight position in the U.S. and foreign currencies' weakness against the
U.S. dollar, which is the base currency for the portfolio. Also, our 32.5%
weighting in global bonds skewed performance against our comparison index, MSCI
World, which only tracks equities. We are cautiously optimistic that these
factors which have hurt performance in the past may benefit the portfolio in
1999. We have already outlined that we think there is value in emerging markets
and that the catalysts to realize this value are almost in place. We also
mentioned that we expect the U.S. markets may disappoint in 1999 due to
excessive valuations and overly optimistic earnings expectations. Finally, we
think that the U.S. dollar may weaken over the medium term as the single
European currency, the euro, gains in strength and concerns mount regarding the
U.S. trade deficit's size.
TOTAL RETURN INDEX COMPARISON
Templeton Global Asset Allocation Fund
$10,000 Investment (5/1/95 - 12/31/98)
GRAPHIC MATERIAL (56)
This graph compares the performance of Templeton Global Asset Allocation Fund
as tracked by the growth in value of a $10,000 investment, to that of the MSCI
World Index and the JP Morgan Global Government Bond Index from 5/1/95 -
12/31/98.
Performance shown in the graph reflects all fund operating expenses but does
not include any fees, charges or expenses imposed by the variable annuity and
life insurance contracts that use the Franklin Valuemark Funds. If they had
been included, performance would have been lower. See the contract prospectus
for a complete description of the contract expenses, including any applicable
sales charges. Index sources are MSCI and J.P. Morgan.
<TABLE>
<CAPTION>
Templeton Global Asset Allocation MSCI World Index JP Morgan Global Government Bond Index
Fund
<S> <C> <C> <C> <C>
5/01/95 $10,000 $10,000 $10,000
5/31/95 $10,060 $10,088 $10,279
6/30/95 $10,120 $10,086 $10,343
7/31/95 $10,330 $10,593 $10,392
8/31/95 $10,280 $10,359 $10,103
9/30/95 $10,380 $10,663 $10,331
10/31/95 $10,310 $10,497 $10,432
11/30/95 $10,420 $10,863 $10,548
12/31/95 $10,690 $11,183 $10,679
1/31/96 $11,066 $11,387 $10,569
2/29/96 $11,137 $11,458 $10,508
3/31/96 $11,208 $11,651 $10,491
4/30/96 $11,411 $11,927 $10,453
5/31/96 $11,513 $11,940 $10,463
6/30/96 $11,569 $12,002 $10,555
7/31/96 $11,396 $11,581 $10,749
8/31/96 $11,640 $11,716 $10,794
9/30/96 $11,915 $12,177 $10,853
10/31/96 $12,047 $12,264 $11,069
11/30/96 $12,587 $12,953 $11,227
12/31/96 $12,810 $12,748 $11,148
1/31/97 $13,024 $12,904 $10,870
2/28/97 $13,136 $13,054 $10,794
3/31/97 $13,055 $12,799 $10,712
4/30/97 $13,085 $13,219 $10,652
5/31/97 $13,502 $14,038 $10,903
6/30/97 $14,009 $14,739 $11,027
7/31/97 $14,760 $15,421 $10,987
8/31/97 $14,655 $14,392 $10,973
9/30/97 $15,396 $15,175 $11,217
10/31/97 $14,342 $14,379 $11,455
11/30/97 $14,228 $14,636 $11,317
12/31/97 $14,311 $14,816 $11,305
1/31/98 $14,228 $15,232 $11,418
2/28/98 $15,020 $16,265 $11,503
3/31/98 $15,531 $16,954 $11,417
4/30/98 $15,563 $17,122 $11,592
5/31/98 $15,073 $16,910 $11,642
6/30/98 $14,712 $17,314 $11,674
7/31/98 $14,802 $17,288 $11,706
8/31/98 $12,510 $14,985 $12,030
9/30/98 $12,781 $15,253 $12,658
10/31/98 $13,662 $16,635 $12,941
11/30/98 $14,192 $17,627 $12,795
12/31/98 $14,305 $18,491 $13,036
Total Return 43.05% 84.91% 30.36%
</TABLE>
PERFORMANCE SHOWN IN THE GRAPH REFLECTS ALL FUND OPERATING EXPENSES BUT DOES NOT
INCLUDE ANY FEES, CHARGES OR EXPENSES IMPOSED BY THE VARIABLE ANNUITY AND LIFE
INSURANCE CONTRACTS THAT USE THE FRANKLIN VALUEMARK FUNDS. IF THEY HAD BEEN
INCLUDED, PERFORMANCE WOULD HAVE BEEN LOWER. SEE THE CONTRACT PROSPECTUS FOR A
COMPLETE DESCRIPTION OF THE CONTRACT EXPENSES, INCLUDING ANY APPLICABLE SALES
CHARGES. INDEX SOURCES ARE MSCI AND J.P. MORGAN.
GRAPHIC MATERIAL (57)
This chart shows the average annual total return for the Templeton Global Asset
Allocation Fund as of 12/31/98.
<TABLE>
<CAPTION>
Average Annual Total Return
- -----------------------------------------
<S> <C>
1-Year -0.04%
3-Year +10.20%
Since Inception (5/1/95) +10.25%
</TABLE>
PLEASE SEE IMPORTANT ENDNOTES TO PERFORMANCE INFORMATION ON PAGE 61.
47
<PAGE>
GRAPHIC MATERIAL (58)
This chart shows the top 10 holdings and their respective industry based on the
percentage of total net assets on 12/31/98 for the Value Securities Fund.
TOP 10 HOLDINGS
Value Securities Fund
12/31/98
<TABLE>
<CAPTION>
COMPANY % OF TOTAL
INDUSTRY NET ASSETS
- -------------------------------------------------------
<S> <C>
Tropical Sportswear
International Corp. 5.09%
Consumer Non-Durables
JLG Industries Inc. 2.95%
Producer Manufacturing
Superior Industries
International Inc. 2.28%
Producer Manufacturing
Tidewater Inc. 2.06%
Transportation
The Timberland Co. 2.02%
Consumer Non-Durables
Wolverine World Wide Inc. 1.84%
Consumer Non-Durables
The Reynolds & Reynolds Co. 1.78%
Commercial Services
Holophane Corp. 1.71%
Producer Manufacturing
Timken Co. 1.68%
Producer Manufacturing
Rowan Cos. Inc. 1.66%
Industrial Services
</TABLE>
VALUE SECURITIES FUND
Over the past year, the stock performance of small and large capitalization
companies was widely divergent, perhaps by the greatest amount in recent
history. This was further accentuated by the market's focus on growth rather
than value stocks. Accordingly, Value Securities Fund, with its emphasis on
small cap and value stocks, was doubly punished in the 1998 calendar year.
Value stocks are those securities that fall out of favor, sometimes because
their industry is at the wrong end of its cycle or the company is undergoing
what we hope are temporary problems. Some companies fall under the Wall Street
radar screen and receive no coverage because they are too small or too illiquid
for the major research organizations. However, if these companies have strong
balance sheets and their fundamentals are sound, such orphans are often our
favorites. In short, we follow self-made millionaire and legendary,
early-20th-century stock trader Bernard Baruch's investment advice and buy
"straw hats in the winter." Sooner or later we believe value will prevail and a
diversified portfolio of these unloved wallflowers, carefully selected, could
turn out to be the belles of the ball. We are convinced many of our value
holdings will return to favor; the unanswerable question is when.
Oil drillers and oil service companies were two examples of this wallflower
status in the portfolio at the end of the 12-month reporting period. These
stocks traded at very attractive valuations by historical standards,
understandably so because oil's $12 per-barrel price fell far short of $20, the
approximate 15-year average. Asian problems, the slowdown in the developed world
economies, and oversupply resulting from lack of discipline among OPEC and other
oil-exporting countries contributed to this oil price downturn. These conditions
produced compelling valuations for some companies. In our opinion, at a
price-to-earnings (P/E) ratio of 8 and book value of 1.25 times its price for
Tidewater Inc., and an 8.5 P/E ratio and a price-to-book ratio of 1.1 for Rowan
Cos. Inc., their stock prices struck us as too great a bargain to last. When the
price of a barrel of oil starts to move back toward its normal range, these ugly
ducklings could look like swans again.
48
<PAGE>
The two essentials for success in value investment are careful selection and
patience. The stock price turnaround does not come according to the investor's
schedule, but when it does come the results are gratifying. We plan to stay the
course with our value philosophy and urge our shareholders to do likewise.
This graph compares the performance of the Value Securities Fund as tracked by
the growth in value of a $10,000 investment, to that of Wilshire Small Company
Value Index from 5/1/98-12/31/98.
Performance shown in the graph reflects all fund operating expenses but does not
include any fees, charges or expenses imposed by the variable annuity and life
insurance contracts that use the Franklin Valuemark Funds. If they had been
included, performance would have been lower. See the contract prospectus for a
complete description of the contract expenses, including any applicable sales
charges. Index source is Standard & Poor's Micropal.
TOTAL RETURN INDEX COMPARISON
Value Securities Fund
$10,000 Investment (5/1/98 - 12/31/98)
<TABLE>
<CAPTION>
Value Securities Wilshire Small
Value Index
<S> <C> <C> <C> <C>
5/1/98 $10,000 $10,000
5/31/98 $9,760 -2.70% $9,730
6/30/98 $9,140 -1.71% $9,564
7/31/98 $8,240 -7.28% $8,867
8/31/98 $6,970 -11.93% $7,810
9/30/98 $7,240 2.97% $8,041
10/31/98 $7,670 3.63% $8,333
11/30/98 $7,690 2.87% $8,573
12/31/98 $7,790 1.30% 2.95% $8,825
</TABLE>
PORTFOLIOS SEEKING CURRENT INCOME
HIGH INCOME FUND
The past year proved to be challenging for the high yield market. In third
quarter 1998, global markets experienced severe disruption attributed to the
expanding global economic crisis. Much of this occurred after Russia declared a
moratorium on foreign debt payments and effectively devalued the ruble. Amid
concern over economic problems in Russia, as well as in Asia, credit spreads
widened dramatically, including within the high yield market. Fortunately, the
fourth quarter of 1998 saw a return of strength and stability to the market, a
signal that we believe may portend favorably for 1999.
During 1998, we made sector allocation adjustments with the primary emphasis on
increasing exposure to those industries that we think should pose limited
downside risk during an economic deceleration. In particular, we increased the
telecommunications sector weighting, favoring those companies with their own
networks, strong management teams and superior access to capital markets. We
maintained a healthy exposure to competitive local exchange carriers (CLECs),
where we focused on providers of diversified services, which generally have the
ability to cross-sell
PERFORMANCE SHOWN IN THE GRAPH REFLECTS ALL FUND OPERATING EXPENSES BUT DOES NOT
INCLUDE ANY FEES, CHARGES OR EXPENSES IMPOSED BY THE VARIABLE ANNUITY AND LIFE
INSURANCE CONTRACTS THAT USE THE FRANKLIN VALUEMARK FUNDS. IF THEY HAD BEEN
INCLUDED, PERFORMANCE WOULD HAVE BEEN LOWER. SEE THE CONTRACT PROSPECTUS FOR A
COMPLETE DESCRIPTION OF THE CONTRACT EXPENSES, INCLUDING ANY APPLICABLE SALES
CHARGES. INDEX SOURCE IS STANDARD & POOR'S MICROPAL.
GRAPHIC MATERIAL (60)
This chart shows the aggregate total return for the Value Securities Fund as of
12/31/98.
Aggregate Total Return*
Since Inception (5/1/98) -22.10%
*Since the portfolio existed for less than one year, the figure represents
aggregate total return from inception; therefore, average annual total return is
not provided.
49
PLEASE SEE IMPORTANT ENDNOTES TO PERFORMANCE INFORMATION ON PAGE 61.
<PAGE>
GRAPHIC MATERIAL (61)
This chart shows the industry breakdown based on the percentage of total net
assets on 12/31/98 for the High Income Fund.
INDUSTRY BREAKDOWN
High Income Fund
12/31/98
<TABLE>
<CAPTION>
% OF TOTAL
INDUSTRY NET ASSETS
- -------------------------------------------------
<S> <C>
Consumer Services 25.6%
Telecommunications 20.8%
Process Industries 7.7%
Consumer Non-Durables 5.2%
Health Services 4.9%
Producer Manufacturing 4.5%
Transportation 4.1%
Energy Minerals 3.9%
Commercial Services 3.6%
Industrial Services 3.0%
Electronic Technology 2.6%
Consumer Durables 2.6%
Utilities 2.5%
Non-Energy Minerals 2.0%
Retail Trade 1.1%
Technology Services 1.1%
Cash and Equivalents 4.8%
</TABLE>
higher-margin products and reduce turnover rates. Noteworthy CLEC holdings
include Nextlink Communications Inc. and Intermedia Communications Inc. We also
initiated a holding in Level 3 Communications Inc., as it is building a
state-of-the-art global network.
Telecommunications made up 20.8% of the portfolio's total net assets on December
31, 1998. The industry benefited from customer demand and increased market
penetration, which is causing industry revenues to grow despite pricing
pressures. Our investments in mobile telephony providers represent our focus on
companies which we believe to have strong growth prospects and a defensible
market position. We maintained large positions in Nextel Communications Inc.;
Sprint Spectrum LP, which became majority owned by Sprint Corp. during the year;
and Sygnet Wireless Inc., which was purchased by Dobson Communications Co., and
subsequently offered to buy the bonds at a healthy premium. Within paging, we
initiated a position in Metrocall Inc., a strong consolidator in the industry,
while taking profits in Paging Network Inc.
We reduced our weighting to the industrial services sector, to 3% of total net
assets at the end of the period, from 8.2% on December 31, 1997. We focused on
non-cyclical companies such as Allied Waste North America Inc., whose bonds were
redeemed through a tender offer during the year, providing an attractive gain to
the portfolio. We also maintained solid allocations to the cable, media and
broadcasting sectors. We think cable is defensive in nature, and we preferred
industry leaders such as Cablevision Systems Corp. (CSC Holdings), domestically,
and Telewest Communications Plc. in the U.K. Similarly, we prefer industry
leaders in the broadcasting and media sectors, such as positions in Chancellor
Media Corp., a radio broadcaster, and Outdoor Systems Inc., the largest outdoor
advertiser in the U.S.
Looking forward, we believe attractive opportunities remain in high yield
corporate bonds over the short-to-intermediate term. Recent economic data
suggests benign inflation, and the Federal Reserve Board has gradually shifted
from a tightening to an easing bias. In addition, corporate profits continued to
exhibit resiliency. Although the recent turmoil in global financial markets may
affect the high yield market in the short term, we believe that recent
volatility should not significantly affect high yield
50
<PAGE>
bond fundamentals over the long term. Consequently, we remain optimistic
regarding the high yield market generally and High Income Fund specifically.
GRAPHIC MATERIAL (62)
This graph compares the performance of the High Income Fund as tracked by the
growth in value of a $10,000 investment, to that of the CS First Boston High
Yield Index and the Consumer Price Index from 1/24/89 - 12/31/98.
Performance shown in the graph reflects all fund operating expenses but does not
include any fees, charges or expenses imposed by the variable annuity and life
insurance contracts that use the Franklin Valuemark Funds. If they had been
included, performance would have been lower. See the contract prospectus for a
complete description of the contract expenses, including any applicable sales
charges. Index source is Standard & Poor's Micropal.
TOTAL RETURN INDEX COMPARISON
High Income Fund
$10,000 Investment (1/24/89 - 12/31/98)
<TABLE>
<CAPTION>
High Income CS First Boston Consumer
High Yield Price Index
<S> <C> <C> <C> <C> <C> <C>
1/24/89 $10,000 $ 10,000 $ 10,000
1/31/89 $10,020 0.45% $ 10,045 0.11% $ 10,011
2/28/89 $10,080 0.46% $ 10,092 0.41% $ 10,052
3/31/89 $10,150 -0.72% $ 10,019 0.58% $ 10,111
4/30/89 $10,220 -0.24% $ 9,995 0.65% $ 10,176
5/31/89 $10,290 2.38% $ 10,233 0.57% $ 10,234
6/30/89 $10,300 1.44% $ 10,380 0.24% $ 10,259
7/31/89 $10,330 0.22% $ 10,403 0.24% $ 10,284
8/31/89 $10,370 -0.01% $ 10,402 0.16% $ 10,300
9/30/89 $10,300 -2.27% $ 10,166 0.32% $ 10,333
10/31/89 $10,070 -2.50% $ 9,912 0.48% $ 10,383
11/30/89 $10,050 0.20% $ 9,931 0.24% $ 10,407
12/31/89 $10,130 -0.45% $ 9,887 0.16% $ 10,424
1/31/90 $9,920 -3.52% $ 9,539 1.03% $ 10,531
2/28/90 $9,770 -1.85% $ 9,362 0.47% $ 10,581
3/31/90 $9,924 2.88% $ 9,632 0.55% $ 10,639
4/30/90 $9,831 0.42% $ 9,672 0.16% $ 10,656
5/31/90 $9,893 2.08% $ 9,874 0.23% $ 10,681
6/30/90 $10,152 3.15% $ 10,185 0.54% $ 10,738
7/31/90 $10,379 3.23% $ 10,514 0.38% $ 10,779
8/31/90 $9,893 -4.62% $ 10,028 0.92% $ 10,878
9/30/90 $9,251 -7.63% $ 9,263 0.84% $ 10,970
10/31/90 $8,879 -2.51% $ 9,030 0.60% $ 11,036
11/30/90 $9,076 2.01% $ 9,212 0.22% $ 11,060
12/31/90 $9,251 0.48% $ 9,256 0.00% $ 11,060
1/31/91 $9,345 2.74% $ 9,510 0.60% $ 11,126
2/28/91 $9,934 8.63% $ 10,330 0.15% $ 11,143
3/31/91 $10,286 6.20% $ 10,971 0.15% $ 11,160
4/30/91 $10,566 4.15% $ 11,426 0.15% $ 11,176
5/31/91 $10,659 0.50% $ 11,483 0.30% $ 11,210
6/30/91 $10,907 2.62% $ 11,784 0.29% $ 11,242
7/31/91 $11,168 3.38% $ 12,182 0.15% $ 11,259
8/31/91 $11,372 1.82% $ 12,404 0.29% $ 11,292
9/30/91 $11,519 2.27% $ 12,686 0.44% $ 11,342
10/31/91 $11,803 3.31% $ 13,105 0.15% $ 11,359
11/30/91 $11,939 0.80% $ 13,210 0.29% $ 11,392
12/31/91 $12,007 0.73% $ 13,307 0.07% $ 11,400
1/31/92 $12,392 4.07% $ 13,848 0.15% $ 11,417
2/29/92 $12,608 2.43% $ 14,185 0.36% $ 11,458
3/31/92 $12,778 1.49% $ 14,396 0.51% $ 11,516
4/30/92 $12,857 0.08% $ 14,408 0.14% $ 11,532
5/31/92 $13,038 1.36% $ 14,604 0.14% $ 11,548
6/30/92 $13,161 0.99% $ 14,748 0.36% $ 11,590
7/31/92 $13,411 1.54% $ 14,975 0.21% $ 11,614
8/31/92 $13,637 1.38% $ 15,182 0.28% $ 11,647
9/30/92 $13,744 0.65% $ 15,281 0.28% $ 11,679
10/31/92 $13,577 -1.04% $ 15,122 0.35% $ 11,720
11/30/92 $13,839 1.50% $ 15,349 0.14% $ 11,737
12/31/92 $13,993 1.13% $ 15,522 -0.07% $ 11,729
1/31/93 $14,255 2.73% $ 15,946 0.49% $ 11,786
2/28/93 $14,481 1.98% $ 16,261 0.35% $ 11,827
3/31/93 $14,695 2.11% $ 16,605 0.35% $ 11,869
4/30/93 $14,754 0.57% $ 16,699 0.28% $ 11,902
5/31/93 $14,897 1.46% $ 16,943 0.14% $ 11,919
6/30/93 $15,206 1.81% $ 17,250 0.14% $ 11,935
7/31/93 $15,317 1.04% $ 17,429 0.00% $ 11,935
8/31/93 $15,403 0.85% $ 17,577 0.28% $ 11,969
9/30/93 $15,403 0.57% $ 17,677 0.21% $ 11,994
10/31/93 $15,921 1.83% $ 18,001 0.41% $ 12,043
11/30/93 $16,020 1.26% $ 18,228 0.07% $ 12,051
12/31/93 $16,192 1.26% $ 18,457 0.00% $ 12,051
1/31/94 $16,537 1.78% $ 18,786 0.27% $ 12,084
2/28/94 $16,414 0.15% $ 18,814 0.34% $ 12,125
3/31/94 $15,637 -2.94% $ 18,261 0.34% $ 12,166
4/30/94 $15,415 -1.34% $ 18,016 0.14% $ 12,183
5/31/94 $15,465 0.57% $ 18,119 0.07% $ 12,192
6/30/94 $15,587 -0.67% $ 17,998 0.34% $ 12,233
7/31/94 $15,561 0.47% $ 18,082 0.27% $ 12,266
8/31/94 $15,678 0.72% $ 18,212 0.40% $ 12,315
9/30/94 $15,730 0.40% $ 18,285 0.27% $ 12,349
10/31/94 $15,762 0.07% $ 18,298 0.07% $ 12,357
11/30/94 $15,658 -1.16% $ 18,086 0.13% $ 12,373
12/31/94 $15,827 1.06% $ 18,278 0.00% $ 12,373
1/31/95 $16,086 1.05% $ 18,469 0.40% $ 12,423
2/28/95 $16,708 2.46% $ 18,924 0.40% $ 12,472
3/31/95 $16,877 1.13% $ 19,138 0.33% $ 12,514
4/30/95 $17,369 2.22% $ 19,562 0.33% $ 12,555
5/31/95 $17,849 2.82% $ 20,114 0.20% $ 12,580
6/30/95 $17,942 0.66% $ 20,247 0.20% $ 12,605
7/31/95 $18,191 1.55% $ 20,561 0.00% $ 12,605
8/31/95 $18,247 0.28% $ 20,618 0.26% $ 12,638
9/30/95 $18,441 1.15% $ 20,855 0.20% $ 12,663
10/31/95 $18,691 1.11% $ 21,087 0.33% $ 12,705
11/30/95 $18,636 0.47% $ 21,186 -0.07% $ 12,696
12/31/95 $18,955 1.27% $ 21,455 -0.07% $ 12,687
1/31/96 $19,315 1.90% $ 21,863 0.59% $ 12,762
2/29/96 $19,510 0.53% $ 21,979 0.32% $ 12,803
3/31/96 $19,371 -0.27% $ 21,919 0.52% $ 12,870
4/30/96 $19,468 0.54% $ 22,038 0.39% $ 12,920
5/31/96 $19,621 0.81% $ 22,216 0.19% $ 12,944
6/30/96 $19,669 0.22% $ 22,265 0.06% $ 12,952
7/31/96 $19,867 0.90% $ 22,465 0.19% $ 12,977
8/31/96 $20,218 1.09% $ 22,710 0.19% $ 13,001
9/30/96 $20,705 1.72% $ 23,101 0.32% $ 13,043
10/31/96 $20,904 0.84% $ 23,295 0.32% $ 13,085
11/30/96 $21,285 1.56% $ 23,658 0.19% $ 13,110
12/31/96 $21,590 1.95% $ 24,120 0.00% $ 13,110
1/31/97 $21,727 0.73% $ 24,296 0.32% $ 13,151
2/28/97 $22,108 1.88% $ 24,752 0.31% $ 13,192
3/31/97 $21,559 -1.12% $ 24,475 0.25% $ 13,225
4/30/97 $21,819 0.89% $ 24,693 0.12% $ 13,241
5/31/97 $22,322 2.01% $ 25,189 -0.06% $ 13,233
6/30/97 $22,634 1.36% $ 25,532 0.12% $ 13,249
7/31/97 $23,233 2.12% $ 26,073 0.12% $ 13,265
8/31/97 $23,283 0.54% $ 26,214 0.19% $ 13,290
9/30/97 $23,750 1.98% $ 26,733 0.25% $ 13,323
10/31/97 $23,567 -0.01% $ 26,730 0.25% $ 13,357
11/30/97 $23,850 0.71% $ 26,920 -0.06% $ 13,349
12/31/97 $24,066 0.91% $ 27,165 -0.12% $ 13,333
1/31/98 $24,399 1.70% $ 27,627 0.19% $ 13,358
2/28/98 $24,549 0.78% $ 27,842 0.19% $ 13,383
3/31/98 $24,832 0.50% $ 27,982 0.19% $ 13,409
4/30/98 $24,982 0.75% $ 28,192 0.18% $ 13,433
5/31/98 $24,966 0.30% $ 28,276 0.18% $ 13,457
6/30/98 $25,018 0.21% $ 28,336 0.12% $ 13,473
7/31/98 $25,183 0.70% $ 28,534 0.12% $ 13,489
8/31/98 $23,481 -6.79% $ 26,596 0.12% $ 13,506
9/30/98 $23,462 -0.01% $ 26,594 0.12% $ 13,522
10/31/98 $22,877 -1.99% $ 26,065 0.24% $ 13,554
11/30/98 $24,359 5.07% $ 27,386 0.00% $ 13,554
12/31/98 $24,304 -0.23% -0.23% $ 27,323 -0.06% $ 13,546
</TABLE>
TEMPLETON GLOBAL INCOME SECURITIES FUND
During the year under review, raw material and commodity prices steadily
declined, generally benefiting developed markets while hurting emerging
countries. The price declines contributed to a very positive global inflation
environment, allowing bond yields in the world's major industrial markets to
fall to historically low levels. At the same time, the situation also helped
create a great degree of distress in many emerging markets, as commodities play
a key role in many of these countries' economies. As a result, the period
witnessed intermittent yet continuing crises develop in emerging countries
around the world.
These divergent market trends meant that portfolio managers had to be selective
about their investment allocations. In general, global bond investors reacted to
these conditions by progressively reducing their exposure to emerging markets
debt securities, preferring to increase their holdings of high-quality,
industrial market government bonds.
Behind the volatile market activity, many of the world's economies were
relatively healthy, showing moderately strong growth. U.S. economic expansion
continued for the sixth consecutive year, while unemployment fell to levels not
seen since the early
PERFORMANCE SHOWN IN THE GRAPH REFLECTS ALL FUND OPERATING EXPENSES BUT DOES NOT
INCLUDE ANY FEES, CHARGES OR EXPENSES IMPOSED BY THE VARIABLE ANNUITY AND LIFE
INSURANCE CONTRACTS THAT USE THE FRANKLIN VALUEMARK FUNDS. IF THEY HAD BEEN
INCLUDED, PERFORMANCE WOULD HAVE BEEN LOWER. SEE THE CONTRACT PROSPECTUS FOR A
COMPLETE DESCRIPTION OF THE CONTRACT EXPENSES, INCLUDING ANY APPLICABLE SALES
CHARGES. INDEX SOURCE IS STANDARD & POOR'S MICROPAL.
GRAPHIC MATERIAL (63)
This chart shows the average annual total return for the High Income Fund as of
12/31/98.
<TABLE>
<CAPTION>
Average Annual Total Return
- -------------------------------------------
<S> <C>
1-Year +0.99%
5-Year +8.46%
Since Inception (1/24/89) +9.35%
</TABLE>
GRAPHIC MATERIAL (64)
This chart shows in pie format the geographic distribution of Templeton Global
Income Securities Fund based on total net assets as of 12/31/98.
GEOGRAPHIC DISTRIBUTION
Templeton Global Income Securities Fund
Based on Total Net Assets
12/31/98
<TABLE>
<CAPTION>
<S> <C>
North America 42.9%
Europe 35.6%
Latin America 8.7%
Australia/New Zealand 8.1%
Asia 0.3%
Short-term Investments
& Other Net Assets 4.4%
</TABLE>
PLEASE SEE IMPORTANT ENDNOTES TO PERFORMANCE INFORMATION ON PAGE 61.
51
<PAGE>
1970s. European economies also emerged from a sluggish growth environment to
post impressive economic gains. Against this background, most European central
banks reduced official interest rates through December, bringing the beginning
short-term rates for the new European Central Bank (ECB) to 3.0% in 1999. The
ECB expects rates to stay at these levels for quite some time, but if growth
continues to falter into 1999, we think the ECB may have to act again to stop
the region from falling into a recession.
Consumer price inflation in the U.S. and Europe was rather tame during the
period, surprising many economists because economic growth at the recent pace
often generates at least modest price pressures. The relatively soft price
environment was much of the reason for global interest-rate declines.
Japan was an exception to this healthy global environment. Government
policy-makers seemed unable to craft a solution to Japan's banking and economic
woes. In our view, the country's ongoing troubles contributed greatly to the
emerging markets crisis during the 12-month reporting period. The yen's
persistent weakness and country's poor domestic demand for exports from other
Asian markets put enormous pressure on developing Asian economies.
In the summer, the crisis seemed to spread out of Asia and affect some other
emerging markets. In particular, Russia, with its precarious debt-financing
needs, came under tremendous pressure. Russia declared a moratorium on debt
service and ultimately devalued its currency, the ruble, seeking some stability.
In the wake of these events, the debt instruments of other developing markets,
especially those in Latin and Central America, fell in value.
Templeton Global Income Securities Fund attempted to maximize its return during
the reporting period by allocating approximately 91% of its assets to
intermediate- and long-term bonds in the industrial markets and about 9% of its
assets to the highest-quality and most-widely traded bonds in the emerging
markets. We believed this combination of bonds offered the greatest opportunity
for higher, long-term returns at the cost of only modestly higher, short-term
volatility.
Overall, the portfolio's allocation to emerging markets exerted a drag on
performance. Emerging market bonds underperformed higher-quality industrial
market bonds during the period and this, in turn, caused the fund to
underperform its benchmark,
52
<PAGE>
the J.P. Morgan Global Government Bond Index. However, the portfolio management
team believes that the fund's emerging-markets positions should offer more
favorable returns over the next three to five years, but may be volatile in the
meantime.
The portfolio's country allocations changed moderately during the year under
review. The allocation to North America increased by 6.2%, while the European
region remained stable at 35.6% of total net assets. Within Europe, however, we
increased our exposure to Denmark (2.7%), Germany (11.8%), Belgium (4.8%) and
the U.K. (8.5%) and decreased our positions in Italy (5.1%) and Sweden (2.7%) at
the end of the period. We began the period with 21% invested in the emerging
markets, primarily in Latin America, and ended the period with less than 10%
exposure. These allocation changes reflected our views of slower growth in 1999
and continued uncertainty in the emerging markets going into next year.
The largest change in the fund's allocation involved the amount of foreign
currency hedging in regard to the portfolio's European holdings. We typically
undertook currency hedging activities to minimize the loss of value of the
portfolio's non-U.S. dollar-denominated bonds when the U.S. dollar's value rose
in relation to European currencies. At the end of the reporting period, the
portfolio's net U.S. dollar exposure, the value of the portfolio's securities
plus the effect of foreign currency hedging, stood at 50.5%, down from 73.7% at
the end of the previous fiscal year. The decrease in foreign currency hedging
was primarily the result of the management team's expectation that the U.S.
dollar will continue to depreciate through the first half of 1999.
Outside of the continued uncertainty in the emerging markets, we believe the
critical issue for global interest rates will remain concern about the balance
between global growth and inflation. The trend in global economic growth for
1999 is clearly toward a weaker performance than in the last few years. The
extent of the weakness may largely depend on developments in the U.S., where
growth in 1998 is likely to be approximately 3.5% and according to many
economists is expected to be around 2% next year. In turn, the U.S. economy is
dependent to a large degree on stability in Latin America. Problems there could
further depress U.S. exports and growth in general, possibly resulting in a
negative effect on European economic performance.
We believe that global inflation will likely be quite tame in the period ahead
and that global economic growth may decline modestly, but not far enough to go
into
53
<PAGE>
PERFORMANCE SHOWN IN THE GRAPH REFLECTS ALL FUND OPERATING EXPENSES BUT DOES NOT
INCLUDE ANY FEES, CHARGES OR EXPENSES IMPOSED BY THE VARIABLE ANNUITY AND LIFE
INSURANCE CONTRACTS THAT USE THE FRANKLIN VALUEMARK FUNDS. IF THEY HAD BEEN
INCLUDED, PERFORMANCE WOULD HAVE BEEN LOWER. SEE THE CONTRACT PROSPECTUS FOR A
COMPLETE DESCRIPTION OF THE CONTRACT EXPENSES, INCLUDING ANY APPLICABLE SALES
CHARGES. INDEX SOURCES ARE J.P. MORGAN AND STANDARD & POOR'S MICROPAL.
GRAPHIC MATERIAL (66)
This chart shows the average annual total return for the Templeton Global
Income Securities Fund as of 12/31/98.
<TABLE>
<CAPTION>
Average Annual Total Return
- -----------------------------------------
<S> <C>
1-Year +7.08%
5-Year +5.56%
Since Inception (1/24/89) +7.52%
</TABLE>
INVESTMENT HOLDINGS
U.S. Government Securities Fund
Based on Total Net Assets
12/31/98
GRAPHIC MATERIAL (67)
This chart shows in pie format the investment holdings of the U.S. Government
Securities Fund based on total net assets as of 12/31/98.
<TABLE>
<CAPTION>
<S> <C>
Mortgage-Backed Securities 75.8%
Agency Notes and Bonds 23.1%
Cash & Equivalents 1.1%
</TABLE>
recession. If this happens, it would be a very promising environment for
high-quality bonds and would make us positive for the intermediate-term outlook
for the portfolio.
GRAPHIC MATERIAL (65)
This graph compares the performance of the Templeton Global Income Securities
Fund as tracked by the growth in value of a $10,000 investment, to that of the
JP Morgan Global Government Bond Index and the Consumer Price Index from
1/24/89 - 12/31/98.
Performance shown in the graph reflects all fund operating expenses but does not
include any fees, charges or expenses imposed by the variable annuity and life
insurance contracts that use the Franklin Valuemark Funds. If they had been
included, performance would have been lower. See the contract prospectus for a
complete description of the contract expenses, including any applicable sales
charges. Index sources are J.P. Morgan and Standard & Poor's Micropal.
TOTAL RETURN INDEX COMPARISON
Templeton Global Income Securities Fund
$10,000 Investment (1/24/89 - 12/31/98)
<TABLE>
<CAPTION>
Templeton Global Income JP Morgan Global Consumer Price Index
Securities Fund Government Bond Index
<S> <C> <C> <C>
1/24/89 $10,000 $10,000 $10,000
1/31/89 $10,020 $9,977 $10,012
2/28/89 $10,080 $9,961 $10,052
3/31/89 $10,150 $9,877 $10,110
4/30/89 $10,220 $10,039 $10,176
5/31/89 $10,290 $9,931 $10,234
6/30/89 $10,330 $10,157 $10,259
7/31/89 $10,510 $10,561 $10,285
8/31/89 $10,610 $10,249 $10,301
9/30/89 $10,600 $10,411 $10,333
10/31/89 $10,570 $10,545 $10,384
11/30/89 $10,760 $10,639 $10,408
12/31/89 $10,930 $10,763 $10,424
1/31/90 $10,920 $10,602 $10,531
2/28/90 $10,850 $10,488 $10,581
3/31/90 $10,965 $10,423 $10,639
4/30/90 $10,944 $10,382 $10,656
5/31/90 $11,138 $10,714 $10,681
6/30/90 $11,454 $10,908 $10,738
7/31/90 $11,729 $11,229 $10,779
8/31/90 $11,627 $11,141 $10,878
9/30/90 $11,617 $11,245 $10,969
10/31/90 $11,688 $11,690 $11,035
11/30/90 $11,882 $11,896 $11,060
12/31/90 $12,004 $12,028 $11,060
1/31/91 $12,147 $12,301 $11,126
2/28/91 $12,412 $12,313 $11,143
3/31/91 $12,147 $11,928 $11,159
4/30/91 $12,320 $12,072 $11,175
5/31/91 $12,463 $12,082 $11,208
6/30/91 $12,359 $11,921 $11,242
7/31/91 $12,605 $12,173 $11,258
8/31/91 $12,648 $12,426 $11,291
9/30/91 $12,982 $12,879 $11,341
10/31/91 $13,154 $13,006 $11,357
11/30/91 $13,132 $13,218 $11,390
12/31/91 $13,486 $13,886 $11,399
1/31/92 $13,454 $13,614 $11,415
2/29/92 $13,464 $13,575 $11,457
3/31/92 $13,475 $13,449 $11,515
4/30/92 $13,604 $13,561 $11,531
5/31/92 $13,871 $13,946 $11,547
6/30/92 $13,868 $14,327 $11,589
7/31/92 $14,014 $14,642 $11,614
8/31/92 $13,846 $15,032 $11,646
9/30/92 $13,197 $15,017 $11,679
10/31/92 $13,477 $14,642 $11,721
11/30/92 $13,253 $14,383 $11,737
12/31/92 $13,432 $14,519 $11,729
1/31/93 $13,533 $14,765 $11,787
2/28/93 $13,734 $15,003 $11,828
3/31/93 $14,148 $15,233 $11,870
4/30/93 $14,574 $15,511 $11,903
5/31/93 $14,809 $15,609 $11,919
6/30/93 $14,778 $15,622 $11,936
7/31/93 $14,825 $15,628 $11,935
8/31/93 $15,155 $16,091 $11,969
9/30/93 $15,107 $16,261 $11,993
10/31/93 $15,461 $16,253 $12,044
11/30/93 $15,155 $16,134 $12,052
12/31/93 $15,673 $16,299 $12,051
1/31/94 $15,967 $16,453 $12,085
2/28/94 $15,602 $16,272 $12,127
3/31/94 $15,131 $16,198 $12,168
4/30/94 $15,119 $16,185 $12,185
5/31/94 $15,178 $16,051 $12,192
6/30/94 $14,572 $16,242 $12,233
7/31/94 $14,804 $16,395 $12,266
8/31/94 $14,926 $16,353 $12,317
9/30/94 $14,914 $16,433 $12,349
10/31/94 $15,001 $16,679 $12,358
11/30/94 $15,001 $16,469 $12,374
12/31/94 $14,891 $16,508 $12,374
1/31/95 $14,793 $16,841 $12,423
2/28/95 $15,026 $17,276 $12,473
3/31/95 $15,294 $18,155 $12,514
4/30/95 $15,636 $18,444 $12,555
5/31/95 $16,015 $18,958 $12,580
6/30/95 $16,087 $19,077 $12,605
7/31/95 $16,189 $19,167 $12,605
8/31/95 $15,986 $18,635 $12,639
9/30/95 $16,341 $19,054 $12,662
10/31/95 $16,607 $19,241 $12,704
11/30/95 $16,747 $19,455 $12,695
12/31/95 $17,077 $19,696 $12,687
1/31/96 $17,000 $19,494 $12,761
2/29/96 $16,797 $19,380 $12,803
3/31/96 $16,848 $19,350 $12,869
4/30/96 $16,975 $19,279 $12,918
5/31/96 $17,064 $19,298 $12,943
6/30/96 $17,293 $19,467 $12,951
7/31/96 $17,362 $19,825 $12,976
8/31/96 $17,582 $19,908 $13,001
9/30/96 $17,857 $20,017 $13,042
10/31/96 $18,214 $20,415 $13,083
11/30/96 $18,654 $20,706 $13,108
12/31/96 $18,723 $20,562 $13,108
1/31/97 $18,489 $20,048 $13,149
2/28/97 $18,407 $19,909 $13,189
3/31/97 $18,338 $19,758 $13,222
4/30/97 $18,434 $19,647 $13,237
5/31/97 $18,586 $20,110 $13,229
6/30/97 $18,787 $20,339 $13,245
7/31/97 $18,920 $20,264 $13,261
8/31/97 $18,861 $20,239 $13,286
9/30/97 $19,216 $20,688 $13,320
10/31/97 $18,979 $21,127 $13,353
11/30/97 $19,053 $20,873 $13,345
12/31/97 $19,186 $20,850 $13,329
1/31/98 $19,408 $21,060 $13,353
2/28/98 $19,601 $21,216 $13,380
3/31/98 $19,689 $21,057 $13,406
4/30/98 $19,734 $21,380 $13,431
5/31/98 $19,704 $21,472 $13,455
6/30/98 $19,699 $21,532 $13,471
7/31/98 $19,747 $21,591 $13,487
8/31/98 $18,901 $22,187 $13,503
9/30/98 $19,907 $23,346 $13,519
10/31/98 $20,322 $23,869 $13,552
11/30/98 $20,497 $23,599 $13,552
12/31/98 $20,545 $24,043 $13,546
Total Return 105.45% 140.43% 35.46%
</TABLE>
U.S. GOVERNMENT SECURITIES FUND
During the 12-month reporting period, low inflation and strong growth, driven
primarily by robust consumer demand, characterized the U.S. economy.
Internationally, disruptions in overseas markets occurred throughout the year,
as the Asian financial crisis, which began during the summer of 1997,
strengthened its grip on many economies. The combination of low inflation in the
U.S. and the troubles in foreign financial markets evidently made U.S. Treasury
securities a safe haven for many investors, helping to push yields lower during
most of the reporting period. The 30-year Treasury bond yield declined 84 basis
points, from 5.93% on December 31, 1997, to 5.09% one year later, but dropped as
low as 4.72% in the beginning of October.
In August, the Asian crisis appeared to have spread beyond the Pacific Rim and
to have taken hold in Russia, which devalued the ruble and defaulted on its
foreign debt payments. This event further shook financial markets worldwide,
causing many investors to shun virtually all types of securities except for the
most widely traded U.S. Treasury issues. Amid this flight-to-quality mentality,
the yields on many U.S. Treasuries fell far more than the yields on other
products, such as mortgage pass-through securities (pass-throughs), offering
opportunities to purchase mortgage-backed securities at what we felt were very
attractive levels.
Beginning with the Russian debt crisis, and culminating with the well-publicized
bailout of a major hedge fund, the availability of capital in the U.S. economy
declined. This string of events appeared to reduce Wall Street's desire to
commit capital to the fixed-income markets, especially in secondary market
activity, where profit margins tend to be lower. We believe this pullback
increased volatility in the fixed-income
PLEASE SEE IMPORTANT ENDNOTES TO PERFORMANCE INFORMATION ON PAGE 61.
54
<PAGE>
markets, and created more restrictive lending conditions in the U.S. These
problems were magnified, as the global slowdown worked its way into the U.S.
economy. Manufacturing sector weakness, which worsened throughout the year,
finally trickled into the service sector in the third quarter, notably impacting
financial firms. Concerned about the combination of these factors leading to
slower economic growth, the Federal Reserve Board (the Fed) lowered the federal
funds target rate three times, totaling 0.75% from September through November,
to 4.75%. The Fed's willingness to step in and provide liquidity evidently
boosted investor confidence, and caused spreads between mortgage pass-throughs
and Treasuries to narrow somewhat.
Mortgage pass-throughs underperformed comparable U.S. Treasury securities during
the reporting period, due to the extent of the flight-to-quality mentality, in
our opinion. Still, lower-coupon mortgage pass-throughs benefited from price
appreciation during the year. The portfolio increased its exposure to
lower-coupon Federal National Mortgage Association (FNMA or Fannie Mae), Federal
Home Loan Mortgage Corporation (FHLMC or Freddie Mac) and Government National
Mortgage Association (GNMA or Ginnie Mae) pass-throughs, and reduced its
exposure to higher-coupon pass-throughs during the 12 months under review. In
general, lower-coupon mortgage pass-throughs have less prepayment risk in a
declining interest-rate environment than higher-coupon pass-throughs. Therefore,
we believe that the fund is well-positioned to weather any increase in
prepayments that may come as a result of the very low mortgage rates seen during
1998's third and fourth quarters.
Going forward, we anticipate that interest rates, in general, may move slightly
lower as the world's central banks shift their focus from battling inflation to
guarding against deflation. However, in spite of this deflationary environment,
we will also remain vigilant regarding any increase in interest rates. U.S.
Government Securities Fund will maintain its fiscally responsible strategy of
investing to provide a steady level of income for the fund's shareholders. In an
effort to achieve this goal, we will continue to invest predominately in U.S.
government mortgage-backed and agency securities.
GRAPHIC MATERIAL (68)
This graph compares the performance of the U.S. Government Securities Fund as
tracked by the growth in value of a $10,000 investment, to that of the Lehman
Brothers Intermediate Government Bond Index and the Consumer Price Index from
3/14/89 - 12/31/98.
Performance shown in the graph reflects all fund operating expenses but does not
include any fees, charges or expenses imposed by the variable annuity and life
insurance contracts that use the Franklin Valuemark Funds. If they had been
included, performance would have been lower. See the contract prospectus for a
complete description of the contract expenses, including any applicable sales
charges. Index source is Standard & Poor's Micropal.
TOTAL RETURN INDEX COMPARISON
U.S. Government Securities Fund
$10,000 Investment (3/14/89 - 12/31/98)
<TABLE>
<CAPTION>
U.S. Gov't Securities Lehman Brothers Consumer
Fund Intermediate Government Price Index
Bond Index
<S> <C> <C> <C> <C> <C> <C> <C>
3/14/89 $10,000 $10,000 $10,000
3/31/89 $10,000 0.26% $ 10,026 0.32% $ 10,032
4/30/89 $10,000 2.02% $ 10,228 0.65% $ 10,097
5/31/89 $10,000 1.93% $ 10,426 0.57% $ 10,155
6/30/89 $10,050 2.55% $ 10,692 0.24% $ 10,179
7/31/89 $10,190 2.03% $ 10,909 0.24% $ 10,203
8/31/89 $10,080 -1.35% $ 10,761 0.16% $ 10,220
9/30/89 $10,140 0.48% $ 10,813 0.32% $ 10,252
10/31/89 $10,370 2.10% $ 11,040 0.48% $ 10,302
11/30/89 $10,470 0.99% $ 11,149 0.24% $ 10,326
12/31/89 $10,540 0.29% $ 11,182 0.16% $ 10,343
1/31/90 $10,420 -0.62% $ 11,112 1.03% $ 10,449
2/28/90 $10,480 0.37% $ 11,153 0.47% $ 10,498
3/31/90 $10,510 0.12% $ 11,167 0.55% $ 10,556
4/30/90 $10,398 -0.33% $ 11,130 0.16% $ 10,573
5/31/90 $10,671 2.14% $ 11,368 0.23% $ 10,597
6/30/90 $10,793 1.32% $ 11,518 0.54% $ 10,655
7/31/90 $10,964 1.40% $ 11,680 0.38% $ 10,695
8/31/90 $10,894 -0.36% $ 11,637 0.92% $ 10,794
9/30/90 $10,974 0.89% $ 11,741 0.84% $ 10,884
10/31/90 $11,096 1.39% $ 11,904 0.60% $ 10,950
11/30/90 $11,318 1.51% $ 12,084 0.22% $ 10,974
12/31/90 $11,480 1.38% $ 12,251 0.00% $ 10,974
1/31/91 $11,652 1.03% $ 12,377 0.60% $ 11,039
2/28/91 $11,753 0.61% $ 12,452 0.15% $ 11,056
3/31/91 $11,813 0.55% $ 12,521 0.15% $ 11,073
4/30/91 $11,904 1.03% $ 12,650 0.15% $ 11,089
5/31/91 $11,995 0.56% $ 12,721 0.30% $ 11,122
6/30/91 $12,011 0.08% $ 12,731 0.29% $ 11,155
7/31/91 $12,178 1.08% $ 12,868 0.15% $ 11,171
8/31/91 $12,398 1.90% $ 13,113 0.29% $ 11,204
9/30/91 $12,649 1.70% $ 13,336 0.44% $ 11,253
10/31/91 $12,806 1.14% $ 13,488 0.15% $ 11,270
11/30/91 $12,890 1.17% $ 13,646 0.29% $ 11,303
12/31/91 $13,235 2.43% $ 13,977 0.07% $ 11,311
1/31/92 $13,046 -0.96% $ 13,843 0.15% $ 11,328
2/29/92 $13,162 0.31% $ 13,886 0.36% $ 11,368
3/31/92 $13,067 -0.40% $ 13,830 0.51% $ 11,426
4/30/92 $13,172 0.90% $ 13,955 0.14% $ 11,442
5/31/92 $13,465 1.49% $ 14,163 0.14% $ 11,458
6/30/92 $13,672 1.44% $ 14,367 0.36% $ 11,500
7/31/92 $13,953 1.92% $ 14,643 0.21% $ 11,524
8/31/92 $14,116 1.02% $ 14,792 0.28% $ 11,556
9/30/92 $14,278 1.38% $ 14,996 0.28% $ 11,588
10/31/92 $14,040 -1.20% $ 14,816 0.35% $ 11,629
11/30/92 $14,072 -0.41% $ 14,755 0.14% $ 11,645
12/31/92 $14,332 1.29% $ 14,946 -0.07% $ 11,637
1/31/93 $14,635 1.86% $ 15,224 0.49% $ 11,694
2/28/93 $14,895 1.47% $ 15,448 0.35% $ 11,735
3/31/93 $14,971 0.37% $ 15,505 0.35% $ 11,776
4/30/93 $15,057 0.78% $ 15,626 0.28% $ 11,809
5/31/93 $15,101 -0.27% $ 15,583 0.14% $ 11,826
6/30/93 $15,374 1.45% $ 15,809 0.14% $ 11,842
7/31/93 $15,476 0.20% $ 15,841 0.00% $ 11,842
8/31/93 $15,702 1.49% $ 16,077 0.28% $ 11,875
9/30/93 $15,702 0.41% $ 16,143 0.21% $ 11,900
10/31/93 $15,781 0.24% $ 16,182 0.41% $ 11,949
11/30/93 $15,577 -0.49% $ 16,102 0.07% $ 11,957
12/31/93 $15,724 0.41% $ 16,168 0.00% $ 11,957
1/31/94 $15,928 0.99% $ 16,328 0.27% $ 11,990
2/28/94 $15,611 -1.37% $ 16,105 0.34% $ 12,030
3/31/94 $15,058 -1.46% $ 15,870 0.34% $ 12,071
4/30/94 $14,911 -0.65% $ 15,767 0.14% $ 12,088
5/31/94 $14,934 0.07% $ 15,778 0.07% $ 12,097
6/30/94 $14,839 0.02% $ 15,781 0.34% $ 12,138
7/31/94 $15,209 1.31% $ 15,987 0.27% $ 12,171
8/31/94 $15,197 0.29% $ 16,034 0.40% $ 12,219
9/30/94 $14,887 -0.83% $ 15,901 0.27% $ 12,252
10/31/94 $14,818 0.02% $ 15,904 0.07% $ 12,261
11/30/94 $14,818 -0.44% $ 15,834 0.13% $ 12,277
12/31/94 $15,009 0.33% $ 15,886 0.00% $ 12,277
1/31/95 $15,343 1.63% $ 16,145 0.40% $ 12,326
2/28/95 $15,761 1.93% $ 16,457 0.40% $ 12,375
3/31/95 $15,845 0.55% $ 16,547 0.33% $ 12,416
4/30/95 $16,084 1.16% $ 16,739 0.33% $ 12,457
5/31/95 $16,788 2.82% $ 17,211 0.20% $ 12,482
6/30/95 $16,879 0.64% $ 17,321 0.20% $ 12,507
7/31/95 $16,828 0.05% $ 17,330 0.00% $ 12,507
8/31/95 $17,046 0.82% $ 17,472 0.26% $ 12,539
9/30/95 $17,225 0.67% $ 17,589 0.20% $ 12,565
10/31/95 $17,455 1.10% $ 17,783 0.33% $ 12,606
11/30/95 $17,686 1.22% $ 18,000 -0.07% $ 12,597
12/31/95 $17,929 0.99% $ 18,178 -0.07% $ 12,588
1/31/96 $18,045 0.84% $ 18,331 0.59% $ 12,663
2/29/96 $17,737 -1.06% $ 18,136 0.32% $ 12,703
3/31/96 $17,609 -0.46% $ 18,053 0.52% $ 12,769
4/30/96 $17,494 -0.29% $ 18,000 0.39% $ 12,819
5/31/96 $17,417 -0.05% $ 17,991 0.19% $ 12,843
6/30/96 $17,667 1.02% $ 18,175 0.06% $ 12,851
7/31/96 $17,709 0.31% $ 18,231 0.19% $ 12,875
8/31/96 $17,681 0.11% $ 18,251 0.19% $ 12,900
9/30/96 $18,026 1.29% $ 18,487 0.32% $ 12,941
10/31/96 $18,412 1.64% $ 18,790 0.32% $ 12,983
11/30/96 $18,688 1.21% $ 19,017 0.19% $ 13,007
12/31/96 $18,577 -0.54% $ 18,915 0.00% $ 13,007
1/31/97 $18,660 0.38% $ 18,987 0.32% $ 13,049
2/28/97 $18,702 0.16% $ 19,017 0.31% $ 13,089
3/31/97 $18,605 -0.57% $ 18,908 0.25% $ 13,122
4/30/97 $18,881 1.13% $ 19,122 0.12% $ 13,138
5/31/97 $19,060 0.78% $ 19,271 -0.06% $ 13,130
6/30/97 $19,271 0.86% $ 19,437 0.12% $ 13,146
7/31/97 $19,694 1.84% $ 19,795 0.12% $ 13,161
8/31/97 $19,563 -0.38% $ 19,719 0.19% $ 13,186
9/30/97 $19,826 1.09% $ 19,934 0.25% $ 13,219
10/31/97 $20,059 1.17% $ 20,168 0.25% $ 13,253
11/30/97 $20,117 0.22% $ 20,212 -0.06% $ 13,245
12/31/97 $20,307 0.81% $ 20,376 -0.12% $ 13,229
1/31/98 $20,526 1.30% $ 20,641 0.19% $ 13,254
2/28/98 $20,555 -0.11% $ 20,618 0.19% $ 13,279
3/31/98 $20,628 0.31% $ 20,682 0.19% $ 13,304
4/30/98 $20,730 0.48% $ 20,781 0.18% $ 13,328
5/31/98 $20,905 0.69% $ 20,924 0.18% $ 13,352
6/30/98 $21,032 0.67% $ 21,065 0.12% $ 13,368
7/31/98 $21,095 0.38% $ 21,145 0.12% $ 13,384
8/31/98 $21,394 1.89% $ 21,544 0.12% $ 13,400
9/30/98 $21,786 2.33% $ 22,046 0.12% $ 13,416
10/31/98 $21,661 0.17% $ 22,084 0.24% $ 13,449
11/30/98 $21,739 -0.31% $ 22,015 0.00% $ 13,449
12/31/98 $21,818 0.36% 0.39% $ 22,101 -0.06% $ 13,440
</TABLE>
PERFORMANCE SHOWN IN THE GRAPH REFLECTS ALL FUND OPERATING EXPENSES BUT DOES NOT
INCLUDE ANY FEES, CHARGES OR EXPENSES IMPOSED BY THE VARIABLE ANNUITY AND LIFE
INSURANCE CONTRACTS THAT USE THE FRANKLIN VALUEMARK FUNDS. IF THEY HAD BEEN
INCLUDED, PERFORMANCE WOULD HAVE BEEN LOWER. SEE THE CONTRACT PROSPECTUS FOR A
COMPLETE DESCRIPTION OF THE CONTRACT EXPENSES, INCLUDING ANY APPLICABLE SALES
CHARGES. INDEX SOURCE IS STANDARD & POOR'S MICROPAL.
GRAPHIC MATERIAL (69)
This chart shows the average annual total return for US Government Securities
Fund as of 12/31/98.
<TABLE>
<CAPTION>
Average Annual Total Return
- --------------------------------------------
<S> <C>
1-Year +7.44%
5-Year +6.77%
Since Inception (3/14/89) +8.29%
</TABLE>
55
PLEASE SEE IMPORTANT ENDNOTES TO PERFORMANCE INFORMATION ON PAGE 61.
<PAGE>
ZERO COUPON 2000 FUND
ZERO COUPON 2005 FUND
ZERO COUPON 2010 FUND
During the past year, the domestic economy had the best of all worlds: continued
growth in an environment of subdued inflation and falling interest rates. Higher
income levels coupled with a robust real estate market and increasing stock
prices helped fuel the consumer sector, which seemed to be the primary driver of
domestic growth. Consumption also appeared to buoy the labor market, with the
unemployment rate reaching 4.5% for 1998, the lowest in 28 years. The overall
economy, as measured by U.S. Gross Domestic Product, grew 3.9% in 1998, well
above the Federal Reserve Board's (the Fed's) targeted long-term growth rate of
2.50%.* Inflation as measured by the Consumer Price Index year-over-year is up
only 1.6%.
Tempering growth, overcapacity in manufacturing worldwide and U.S. export-sector
declines stood in stark contrast to consumer-sector gains. The emerging markets
crisis that prevailed for much of the reporting period hampered U.S.
manufacturers and produced record trade deficits. The export sector reportedly
was hard hit as increased competition from low-cost imports exacerbated rising
domestic wage costs and limited their pricing power. With many world currencies
in turmoil, an ensuing "flight to quality" fueled tremendous demand for U.S.
Treasuries, a traditional safe haven in times of market and political turmoil.
Citing a growing credit crisis as a threat to the recent economic expansion, the
Fed cut the federal funds target rate three times over seven weeks, for a total
of 75 basis points (0.75%), bringing it to 4.75% on November 17, 1998. This
revitalized the credit markets and spurred equity prices in the process.
Reflecting strong appeal for dollar-denominated bills, notes and bonds, yields
for short-, medium- and long-term Treasuries fell dramatically for the year. The
yield on 10-year Treasuries, a reasonable proxy for the Zero Coupon 2010 Fund,
declined from 5.67% on January 2, 1998, to 4.65% on December 31, 1998, falling
as low as 4.16% on October 5, 1998, before rebounding. The yield on the 5-year
Treasury note followed a similar pattern, falling from 5.63% on January 2, 1998,
to 4.56% on December 31, 1998.
*Source: Bureau of Labor Statistics.
56
<PAGE>
\The Zero Coupon portfolios invest primarily in securities issued by government
sponsored agencies. There is only the slightest amount of additional risk in
these securities relative to direct obligations of the U.S. government, in our
opinion. Due to the inverse relationship zero coupon bonds have with interest
rates, all three portfolios benefited from the declining interest rates during
the year. Because long-term interest rates fell the most and also because
longer-term portfolios are generally more interest-rate sensitive, Zero Coupon
2010 Fund fared best, gaining +14.5% on the year. Zero Coupon 2005 Fund, which
holds middle-term maturities, enjoyed a +12.5% return on the year, while Zero
Coupon 2000 Fund managed a +7.5% performance. Keep in mind that, with a little
less than one year to target maturity for the 2000 portfolio, it will begin to
take on characteristics similar to a money market fund. As the target maturity
date of December 2000 approaches, this portfolio will become increasingly less
sensitive to changes in interest rates, which will serve to reduce the
portfolio's risk but also diminish any chances for capital appreciation.
Going forward, we anticipate that future interest-rate changes will continue to
be the dominant factor in determining the portfolio's returns. Although
underlying concerns linger regarding the economy's strength, we find ourselves
in a profound environment of low inflation and interest rates that so far have
helped propel consumer spending. Should growth slow, however, the Fed may make
further changes to the federal funds target rate.
GRAPHIC MATERIAL (70)
This graph compares the performance of the Zero Coupon 2000 Fund as tracked by
the growth in value of a $10,000 investment, to that of the Merrill Lynch Zero
Coupon 5-Year Bond Total Return Index, the Consumer Price Index, and Merrill
Lynch Zero Coupon 1-Year Bond Total Return Index, from 3/14/89 - 12/31/98.
We are adding the Merrill Lynch Zero Coupon 1 Year Bond Total Return Index,
reflecting short-term bond performance as the portfolio nears its 2000 target
date.
Performance shown in the graph reflects all fund operating expenses but does not
include any fees, charges or expenses imposed by the variable annuity and life
insurance contracts that use the Franklin Valuemark Funds. If they had been
included, performance would have been lower. See the contract prospectus for a
complete description of the contract expenses, including any applicable sales
charges. Index source is Standard & Poor's Micropal.
TOTAL RETURN INDEX COMPARISON
Zero Coupon 2000 Fund
$10,000 Investment (3/14/98 - 12/31/98)
<TABLE>
<CAPTION>
Merrill Lynch Merrill Lynch
Zero Coupon 2000 Fund Zero Coupon 1-Year Bond Zero Coupon 5-Year Bond Consumer
Total Return Index Total Return Index Price Index
<S> <C> <C> <C> <C> <C> <C> <C> <C>
3/14/89 $10,000 $10,000 $10,000 $10,000
3/31/89 $10,000 0.33% $10,033 0.40% $10,040 0.32% $10,032
4/30/89 $10,000 1.17% $10,150 2.17% $10,258 0.65% $10,097
5/31/89 $9,990 1.16% $10,268 3.06% $10,572 0.57% $10,155
6/30/89 $10,560 1.49% $10,421 3.60% $10,952 0.24% $10,179
7/31/89 $10,790 1.11% $10,537 3.59% $11,346 0.24% $10,203
8/31/89 $10,460 -0.10% $10,526 -2.85% $11,022 0.16% $10,220
9/30/89 $10,480 0.65% $10,595 0.41% $11,067 0.32% $10,252
10/31/89 $10,910 1.12% $10,713 2.92% $11,391 0.48% $10,302
11/30/89 $11,010 0.83% $10,802 1.27% $11,535 0.24% $10,326
12/31/89 $11,080 0.53% $10,860 0.08% $11,544 0.16% $10,343
1/31/90 $10,610 0.44% $10,907 -1.71% $11,347 1.03% $10,449
2/28/90 $10,600 0.60% $10,973 0.10% $11,358 0.47% $10,498
3/31/90 $10,592 0.58% $11,036 -0.01% $11,357 0.55% $10,556
4/30/90 $10,170 0.51% $11,093 -1.02% $11,241 0.16% $10,573
5/31/90 $10,664 1.14% $11,219 3.04% $11,583 0.23% $10,597
6/30/90 $10,932 0.81% $11,310 1.63% $11,772 0.54% $10,655
7/31/90 $11,076 1.03% $11,426 1.77% $11,980 0.38% $10,695
8/31/90 $10,582 0.66% $11,502 -1.31% $11,823 0.92% $10,794
9/30/90 $10,715 0.64% $11,576 0.95% $11,936 0.84% $10,884
10/31/90 $10,973 0.97% $11,688 2.05% $12,180 0.60% $10,950
11/30/90 $11,518 0.79% $11,780 2.67% $12,506 0.22% $10,974
12/31/90 $11,734 0.97% $11,894 1.73% $12,722 0.00% $10,974
1/31/91 $11,868 0.90% $12,001 1.02% $12,852 0.60% $11,039
2/28/91 $11,889 0.66% $12,081 0.35% $12,897 0.15% $11,056
3/31/91 $11,868 0.73% $12,169 0.37% $12,944 0.15% $11,073
4/30/91 $12,064 0.80% $12,266 1.59% $13,150 0.15% $11,089
5/31/91 $12,054 0.58% $12,337 0.31% $13,191 0.30% $11,122
6/30/91 $11,987 0.38% $12,384 -0.21% $13,163 0.29% $11,155
7/31/91 $12,147 0.77% $12,480 1.43% $13,352 0.15% $11,171
8/31/91 $12,615 0.97% $12,601 2.98% $13,749 0.29% $11,204
9/30/91 $13,072 0.78% $12,699 2.56% $14,101 0.44% $11,253
10/31/91 $13,157 0.83% $12,804 1.57% $14,323 0.15% $11,270
11/30/91 $13,338 0.96% $12,927 1.71% $14,568 0.29% $11,303
12/31/91 $13,933 1.13% $13,073 2.39% $14,916 0.07% $11,311
1/31/92 $13,487 0.35% $13,119 -1.66% $14,668 0.15% $11,328
2/29/92 $13,572 0.33% $13,162 0.17% $14,693 0.36% $11,368
3/31/92 $13,465 0.11% $13,177 -1.00% $14,546 0.51% $11,426
4/30/92 $13,519 0.91% $13,297 0.85% $14,670 0.14% $11,442
5/31/92 $13,848 0.53% $13,367 2.49% $15,035 0.14% $11,458
6/30/92 $14,249 0.63% $13,451 2.18% $15,363 0.36% $11,500
7/31/92 $14,880 0.83% $13,563 2.86% $15,802 0.21% $11,524
8/31/92 $15,080 0.36% $13,612 1.63% $16,060 0.28% $11,556
9/30/92 $15,501 0.69% $13,706 2.20% $16,413 0.28% $11,588
10/31/92 $15,102 -0.15% $13,685 -2.20% $16,052 0.35% $11,629
11/30/92 $14,947 0.12% $13,702 -1.12% $15,872 0.14% $11,645
12/31/92 $15,379 0.69% $13,796 1.86% $16,168 -0.07% $11,637
1/31/93 $15,789 0.70% $13,893 3.06% $16,662 0.49% $11,694
2/28/93 $16,387 0.38% $13,946 2.35% $17,054 0.35% $11,735
3/31/93 $16,587 0.26% $13,982 0.43% $17,127 0.35% $11,776
4/30/93 $16,664 0.44% $14,043 1.19% $17,331 0.28% $11,809
5/31/93 $16,653 -0.04% $14,038 -0.51% $17,243 0.14% $11,826
6/30/93 $17,308 0.48% $14,105 2.27% $17,634 0.14% $11,842
7/31/93 $17,412 0.29% $14,146 0.08% $17,648 0.00% $11,842
8/31/93 $17,863 0.48% $14,214 2.35% $18,063 0.28% $11,875
9/30/93 $17,979 0.28% $14,254 0.49% $18,151 0.21% $11,900
10/31/93 $18,129 0.23% $14,287 0.05% $18,160 0.41% $11,949
11/30/93 $17,701 0.20% $14,315 -1.01% $17,977 0.07% $11,957
12/31/93 $17,863 0.41% $14,374 0.53% $18,072 0.00% $11,957
1/31/94 $18,176 0.44% $14,437 1.41% $18,327 0.27% $11,990
2/28/94 $17,528 -0.17% $14,413 -2.34% $17,898 0.34% $12,030
3/31/94 $16,938 0.01% $14,414 -2.58% $17,437 0.34% $12,071
4/30/94 $16,729 -0.08% $14,402 -1.22% $17,224 0.14% $12,088
5/31/94 $16,729 0.25% $14,438 0.07% $17,236 0.07% $12,097
6/30/94 $16,720 0.38% $14,493 -0.21% $17,200 0.34% $12,138
7/31/94 $17,050 0.65% $14,588 1.84% $17,516 0.27% $12,171
8/31/94 $17,050 0.42% $14,649 0.33% $17,574 0.40% $12,219
9/30/94 $16,720 0.11% $14,665 -1.70% $17,275 0.27% $12,252
10/31/94 $16,633 0.35% $14,716 -0.21% $17,239 0.07% $12,261
11/30/94 $16,548 -0.10% $14,701 -0.79% $17,103 0.13% $12,277
12/31/94 $16,658 0.33% $14,750 0.90% $17,257 0.00% $12,277
1/31/95 $16,988 1.09% $14,911 1.93% $17,590 0.40% $12,326
2/28/95 $17,514 1.01% $15,061 1.90% $17,924 0.40% $12,375
3/31/95 $17,612 0.66% $15,161 0.41% $17,997 0.33% $12,416
4/30/95 $17,869 0.65% $15,259 1.56% $18,278 0.33% $12,457
5/31/95 $18,798 1.12% $15,430 4.76% $19,148 0.20% $12,482
6/30/95 $18,951 0.56% $15,517 0.82% $19,305 0.20% $12,507
7/31/95 $18,823 0.38% $15,576 -0.49% $19,211 0.00% $12,507
8/31/95 $19,040 0.72% $15,688 0.96% $19,395 0.26% $12,539
9/30/95 $19,181 0.26% $15,729 0.76% $19,542 0.20% $12,565
10/31/95 $19,526 0.61% $15,824 1.57% $19,849 0.33% $12,606
11/30/95 $19,858 0.68% $15,932 1.86% $20,218 -0.07% $12,597
12/31/95 $20,101 0.63% $16,032 1.26% $20,473 -0.07% $12,588
1/31/96 $20,331 0.64% $16,135 1.09% $20,696 0.59% $12,663
2/29/96 $19,935 0.17% $16,163 -1.90% $20,303 0.32% $12,703
3/31/96 $19,692 0.21% $16,196 -1.27% $20,045 0.52% $12,769
4/30/96 $19,539 0.28% $16,242 -1.13% $19,819 0.39% $12,819
5/31/96 $19,449 0.44% $16,313 -0.49% $19,722 0.19% $12,843
6/30/96 $19,680 0.52% $16,398 1.47% $20,012 0.06% $12,851
7/31/96 $19,735 0.47% $16,475 0.01% $20,014 0.19% $12,875
8/31/96 $19,707 0.55% $16,566 -0.26% $19,962 0.19% $12,900
9/30/96 $20,033 0.64% $16,672 1.85% $20,331 0.32% $12,941
10/31/96 $20,480 0.76% $16,799 2.43% $20,825 0.32% $12,983
11/30/96 $20,792 0.59% $16,898 1.88% $21,216 0.19% $13,007
12/31/96 $20,588 0.19% $16,930 -1.43% $20,913 0.00% $13,007
1/31/97 $20,656 0.50% $17,014 0.25% $20,965 0.32% $13,049
2/28/97 $20,656 0.36% $17,076 -0.06% $20,953 0.31% $13,089
3/31/97 $20,494 0.21% $17,111 -1.28% $20,684 0.25% $13,122
4/30/97 $20,724 0.65% $17,223 1.53% $21,001 0.12% $13,138
5/31/97 $20,900 0.67% $17,338 0.91% $21,192 -0.06% $13,130
6/30/97 $21,076 0.51% $17,427 1.08% $21,421 0.12% $13,146
7/31/97 $21,513 0.76% $17,559 3.07% $22,079 0.12% $13,161
8/31/97 $21,396 0.30% $17,612 -1.23% $21,807 0.19% $13,186
9/30/97 $21,629 0.56% $17,710 1.52% $22,138 0.25% $13,219
10/31/97 $21,877 0.60% $17,817 1.76% $22,528 0.25% $13,253
11/30/97 $21,891 0.24% $17,859 0.00% $22,528 -0.06% $13,245
12/31/97 $22,051 0.56% $17,959 1.17% $22,792 -0.12% $13,229
1/31/98 $22,372 0.65% $18,076 1.83% $23,209 0.19% $13,254
2/28/98 $22,328 0.18% $18,109 -0.42% $23,111 0.19% $13,279
3/31/98 $22,386 0.42% $18,185 0.17% $23,151 0.19% $13,304
4/30/98 $22,503 0.51% $18,277 0.43% $23,250 0.18% $13,328
5/31/98 $22,649 0.45% $18,360 0.82% $23,441 0.18% $13,352
6/30/98 $22,777 0.46% $18,444 0.83% $23,635 0.12% $13,368
7/31/98 $22,889 0.46% $18,529 0.23% $23,690 0.12% $13,384
8/31/98 $23,225 0.85% $18,686 3.23% $24,455 0.12% $13,400
9/30/98 $23,594 0.91% $18,856 3.43% $25,294 0.12% $13,416
10/31/98 $23,690 0.52% $18,955 -0.16% $25,253 0.24% $13,449
11/30/98 $23,642 0.24% $19,000 -0.73% $25,069 0.00% $13,449
12/31/98 $23,706 0.27% 0.40% $19,076 0.53% $25,202 -0.06% $13,440
</TABLE>
WE ARE ADDING THE MERRILL LYNCH ZERO COUPON 1-YEAR BOND TOTAL RETURN INDEX,
REFLECTING SHORT-TERM BOND PERFORMANCE AS THE PORTFOLIO NEARS ITS 2000 TARGET
DATE.
PERFORMANCE SHOWN IN THE GRAPH REFLECTS ALL FUND OPERATING EXPENSES BUT DOES NOT
INCLUDE ANY FEES, CHARGES OR EXPENSES IMPOSED BY THE VARIABLE ANNUITY AND LIFE
INSURANCE CONTRACTS THAT USE THE FRANKLIN VALUEMARK FUNDS. IF THEY HAD BEEN
INCLUDED, PERFORMANCE WOULD HAVE BEEN LOWER. SEE THE CONTRACT PROSPECTUS FOR A
COMPLETE DESCRIPTION OF THE CONTRACT EXPENSES, INCLUDING ANY APPLICABLE SALES
CHARGES. INDEX SOURCE IS STANDARD & POOR'S MICROPAL.
GRAPHIC MATERIAL (71)
This chart shows the average annual total return for the Zero Coupon 2000 Fund
as of 12/31/98.
<TABLE>
<CAPTION>
Average Annual Total Return
- ------------------------------------------
<S> <C>
1-Year +7.50%
5-Year +5.82%
Since Inception (3/14/89) +9.21%
</TABLE>
57
PLEASE SEE IMPORTANT ENDNOTES TO PERFORMANCE INFORMATION ON PAGE 61.
<PAGE>
WE ARE ADDING THE MERRILL LYNCH ZERO COUPON 5-YEAR BOND TOTAL RETURN INDEX,
REFLECTING SHORTER-TERM BOND PERFORMANCE AS THE PORTFOLIO NEARS ITS 2005 TARGET
DATE.
PERFORMANCE SHOWN IN THE GRAPH REFLECTS ALL FUND OPERATING EXPENSES BUT
DOES NOT INCLUDE ANY FEES, CHARGES OR EXPENSES IMPOSED BY THE VARIABLE ANNUITY
AND LIFE INSURANCE CONTRACTS THAT USE THE FRANKLIN VALUEMARK FUNDS. IF THEY HAD
BEEN INCLUDED, PERFORMANCE WOULD HAVE BEEN LOWER. SEE THE CONTRACT PROSPECTUS
FOR A COMPLETE DESCRIPTION OF THE CONTRACT EXPENSES, INCLUDING ANY APPLICABLE
SALES CHARGES. INDEX SOURCE IS STANDARD & POOR'S MICROPAL.
GRAPHIC MATERIAL (73)
This chart shows the average annual total return for the Zero Coupon 2005 Fund
as of 12/31/98.
<TABLE>
<CAPTION>
Average Annual Total Return
- -----------------------------------------
<S> <C>
1-Year +12.53%
5-Year +8.24%
Since Inception (3/14/89) +11.35%
</TABLE>
GRAPHIC MATERIAL (72)
This graph compares the performance of the Zero Coupon 2005 Fund as tracked by
the in value of a $10,000 investment , to that of the Merrill Lynch Zero Coupon
10-Year Bond Total Return Index, the Consumer Price Index, and the Merrill Lynch
Zero Coupon 5 Year Bond Total Return Index, from 3/14/89 - 12/31/98.
We are adding the Merrill Lynch Zero Coupon 5-Year Bond Total return Index,
reflecting shorter-term bond performance as the portfolio nears its 2005 target
date.
Performance shown in the graph reflects all fund operating expenses but does not
include any fees, charges or expenses imposed by the variable annuity and life
insurance contracts that use the Franklin Valuemark Funds. If they had been
included, performance would have been lower. See the contract prospectus for a
complete description of the contract expenses, including any applicable sales
charges. Index source is Standard & Poor's Micropal.
TOTAL RETURN INDEX COMPARISON
Zero Coupon 2005 Fund
$10,000 Investment (3/14/89 - 12/31/98)
[Line Graph]
<TABLE>
<CAPTION>
Merrill Lynch Zero Merrill Lynch Zero
Zero Coupon Coupon 10-Year Bond Coupon 5-Year Bond Consumer
2005 Fund Total Return Index Total Retunr Index Price Index
<S> <C> <C> <C> <C> <C> <C> <C> <C>
3/14/89 $10,000 $10,000 $10,000 $10,000
3/31/89 $10,000 0.40% $10,040 0.64% $10,064 0.32% $10,032
4/30/89 $10,000 2.17% $10,258 2.74% $10,339 0.65% $10,097
5/31/89 $10,070 3.06% $10,572 4.09% $10,762 0.57% $10,155
6/30/89 $11,310 3.60% $10,952 5.97% $11,405 0.24% $10,179
7/31/89 $11,290 3.59% $11,346 2.71% $11,714 0.24% $10,203
8/31/89 $10,850 -2.85% $11,022 -3.02% $11,360 0.16% $10,220
9/30/89 $10,870 0.41% $11,067 0.42% $11,408 0.32% $10,252
10/31/89 $11,500 2.92% $11,391 4.09% $11,874 0.48% $10,302
11/30/89 $11,580 1.27% $11,535 0.83% $11,973 0.24% $10,326
12/31/89 $11,530 0.08% $11,544 -0.01% $11,972 0.16% $10,343
1/31/90 $10,630 -1.71% $11,347 -4.06% $11,486 1.03% $10,449
2/28/90 $10,640 0.10% $11,358 -0.22% $11,460 0.47% $10,498
3/31/90 $10,598 -0.01% $11,357 -0.08% $11,451 0.55% $10,556
4/30/90 $10,024 -1.02% $11,241 -2.80% $11,131 0.16% $10,573
5/31/90 $10,746 3.04% $11,583 4.78% $11,663 0.23% $10,597
6/30/90 $11,065 1.63% $11,772 2.37% $11,939 0.54% $10,655
7/31/90 $11,171 1.77% $11,980 1.09% $12,069 0.38% $10,695
8/31/90 $10,290 -1.31% $11,823 -4.73% $11,498 0.92% $10,794
9/30/90 $10,502 0.95% $11,936 1.14% $11,629 0.84% $10,884
10/31/90 $10,746 2.05% $12,180 3.23% $12,005 0.60% $10,950
11/30/90 $11,521 2.67% $12,506 4.35% $12,527 0.22% $10,974
12/31/90 $11,840 1.73% $12,722 2.25% $12,809 0.00% $10,974
1/31/91 $11,978 1.02% $12,852 1.01% $12,938 0.60% $11,039
2/28/91 $11,978 0.35% $12,897 0.13% $12,955 0.15% $11,056
3/31/91 $11,893 0.37% $12,944 0.71% $13,047 0.15% $11,073
4/30/91 $12,127 1.59% $13,150 1.63% $13,260 0.15% $11,089
5/31/91 $11,999 0.31% $13,191 -0.12% $13,244 0.30% $11,122
6/30/91 $11,857 -0.21% $13,163 -0.70% $13,151 0.29% $11,155
7/31/91 $12,066 1.43% $13,351 1.76% $13,383 0.15% $11,171
8/31/91 $12,663 2.98% $13,749 3.97% $13,914 0.29% $11,204
9/30/91 $13,292 2.56% $14,101 3.44% $14,393 0.44% $11,253
10/31/91 $13,237 1.57% $14,323 0.48% $14,462 0.15% $11,270
11/30/91 $13,303 1.71% $14,568 1.41% $14,666 0.29% $11,303
12/31/91 $14,065 2.39% $14,916 5.47% $15,468 0.07% $11,311
1/31/92 $13,579 -1.66% $14,668 -4.18% $14,821 0.15% $11,328
2/29/92 $13,612 0.17% $14,693 0.60% $14,910 0.36% $11,368
3/31/92 $13,513 -1.00% $14,546 -1.29% $14,718 0.51% $11,426
4/30/92 $13,480 0.85% $14,670 -0.42% $14,656 0.14% $11,442
5/31/92 $13,976 2.49% $15,035 2.91% $15,083 0.14% $11,458
6/30/92 $14,216 2.18% $15,363 2.34% $15,436 0.36% $11,500
7/31/92 $15,016 2.86% $15,802 4.63% $16,150 0.21% $11,524
8/31/92 $15,132 1.63% $16,060 1.13% $16,333 0.28% $11,556
9/30/92 $15,711 2.20% $16,413 3.10% $16,839 0.28% $11,588
10/31/92 $15,143 -2.20% $16,052 -2.91% $16,349 0.35% $11,629
11/30/92 $15,271 -1.12% $15,872 -0.09% $16,334 0.14% $11,645
12/31/92 $15,793 1.86% $16,168 3.46% $16,899 -0.07% $11,637
1/31/93 $16,291 3.06% $16,662 3.99% $17,574 0.49% $11,694
2/28/93 $17,196 2.35% $17,054 3.91% $18,261 0.35% $11,735
3/31/93 $17,358 0.43% $17,127 0.28% $18,312 0.35% $11,776
4/30/93 $17,346 1.19% $17,331 1.40% $18,568 0.28% $11,809
5/31/93 $17,346 -0.51% $17,243 -0.55% $18,466 0.14% $11,826
6/30/93 $18,520 2.27% $17,634 5.49% $19,480 0.14% $11,842
7/31/93 $18,724 0.08% $17,648 0.82% $19,640 0.00% $11,842
8/31/93 $19,360 2.35% $18,063 3.82% $20,390 0.28% $11,875
9/30/93 $19,564 0.49% $18,151 1.19% $20,633 0.21% $11,900
10/31/93 $19,840 0.05% $18,160 0.42% $20,719 0.41% $11,949
11/30/93 $19,084 -1.01% $17,977 -3.33% $20,029 0.07% $11,957
12/31/93 $19,300 0.53% $18,072 0.88% $20,206 0.00% $11,957
1/31/94 $19,864 1.41% $18,327 2.92% $20,796 0.27% $11,990
2/28/94 $18,748 -2.34% $17,898 -4.77% $19,804 0.34% $12,030
3/31/94 $17,728 -2.58% $17,436 -5.14% $18,786 0.34% $12,071
4/30/94 $17,452 -1.22% $17,224 -1.57% $18,491 0.14% $12,088
5/31/94 $17,416 0.07% $17,236 -0.50% $18,398 0.07% $12,097
6/30/94 $17,301 -0.21% $17,200 -0.75% $18,260 0.34% $12,138
7/31/94 $17,833 1.84% $17,516 2.87% $18,784 0.27% $12,171
8/31/94 $17,783 0.33% $17,574 0.17% $18,816 0.40% $12,219
9/30/94 $17,136 -1.70% $17,275 -3.60% $18,139 0.27% $12,252
10/31/94 $17,034 -0.21% $17,239 -0.73% $18,007 0.07% $12,261
11/30/94 $17,136 -0.79% $17,103 0.48% $18,093 0.13% $12,277
12/31/94 $17,453 0.90% $17,257 1.74% $18,408 0.00% $12,277
1/31/95 $17,846 1.93% $17,590 2.64% $18,894 0.40% $12,326
2/28/95 $18,442 1.90% $17,924 3.85% $19,621 0.40% $12,375
3/31/95 $18,594 0.41% $17,997 0.69% $19,757 0.33% $12,416
4/30/95 $19,013 1.56% $18,278 1.95% $20,142 0.33% $12,457
5/31/95 $20,662 4.76% $19,148 8.38% $21,830 0.20% $12,482
6/30/95 $20,812 0.82% $19,305 1.32% $22,118 0.20% $12,507
7/31/95 $20,442 -0.49% $19,211 -1.65% $21,753 0.00% $12,507
8/31/95 $20,879 0.96% $19,395 1.98% $22,184 0.26% $12,539
9/30/95 $21,249 0.76% $19,542 1.65% $22,550 0.20% $12,565
10/31/95 $21,831 1.57% $19,849 2.53% $23,120 0.33% $12,606
11/30/95 $22,427 1.86% $20,218 3.06% $23,828 -0.07% $12,597
12/31/95 $22,996 1.26% $20,473 2.44% $24,409 -0.07% $12,588
1/31/96 $23,075 1.09% $20,696 0.21% $24,460 0.59% $12,663
2/29/96 $21,977 -1.90% $20,303 -4.75% $23,298 0.32% $12,703
3/31/96 $21,633 -1.27% $20,045 -1.92% $22,851 0.52% $12,769
4/30/96 $21,236 -1.13% $19,819 -2.35% $22,314 0.39% $12,819
5/31/96 $20,998 -0.49% $19,722 -0.64% $22,171 0.19% $12,843
6/30/96 $21,466 1.47% $20,011 2.24% $22,668 0.06% $12,851
7/31/96 $21,466 0.01% $20,013 -0.03% $22,661 0.19% $12,875
8/31/96 $21,270 -0.26% $19,961 -1.08% $22,416 0.19% $12,900
9/30/96 $21,844 1.85% $20,331 2.97% $23,082 0.32% $12,941
10/31/96 $22,712 2.43% $20,825 3.95% $23,994 0.32% $12,983
11/30/96 $23,383 1.88% $21,216 3.56% $24,848 0.19% $13,007
12/31/96 $22,880 -1.43% $20,913 -2.74% $24,167 0.00% $13,007
1/31/97 $22,796 0.25% $20,965 -0.40% $24,071 0.32% $13,049
2/28/97 $22,768 -0.06% $20,953 0.01% $24,073 0.31% $13,089
3/31/97 $22,292 -1.28% $20,684 -2.88% $23,380 0.25% $13,122
4/30/97 $22,796 1.53% $21,001 2.69% $24,009 0.12% $13,138
5/31/97 $23,034 0.91% $21,192 1.18% $24,292 -0.06% $13,130
6/30/97 $23,374 1.08% $21,421 1.77% $24,722 0.12% $13,146
7/31/97 $24,480 3.07% $22,078 5.68% $26,126 0.12% $13,161
8/31/97 $23,927 -1.23% $21,807 -2.96% $25,353 0.19% $13,186
9/30/97 $24,480 1.52% $22,138 2.89% $26,085 0.25% $13,219
10/31/97 $25,093 1.76% $22,528 3.12% $26,899 0.25% $13,253
11/30/97 $25,123 0.00% $22,528 0.51% $27,037 -0.06% $13,245
12/31/97 $25,482 1.17% $22,792 1.95% $27,564 -0.12% $13,229
1/31/98 $26,035 1.83% $23,209 2.07% $28,134 0.19% $13,254
2/28/98 $25,885 -0.42% $23,111 -0.59% $27,968 0.19% $13,279
3/31/98 $25,915 0.17% $23,150 0.06% $27,985 0.19% $13,304
4/30/98 $26,005 0.43% $23,250 0.35% $28,083 0.18% $13,328
5/31/98 $26,408 0.82% $23,441 1.59% $28,530 0.18% $13,352
6/30/98 $26,719 0.83% $23,635 1.82% $29,049 0.12% $13,368
7/31/98 $26,719 0.23% $23,690 0.11% $29,081 0.12% $13,384
8/31/98 $27,672 3.23% $24,455 5.03% $30,544 0.12% $13,400
9/30/98 $28,852 3.43% $25,294 5.44% $32,205 0.12% $13,416
10/31/98 $28,707 -0.16% $25,253 -1.81% $31,622 0.24% $13,449
11/30/98 $28,497 -0.73% $25,069 0.36% $31,736 0.00% $13,449
12/31/98 $28,674 0.62% 0.53% $25,202 0.34% $31,844 -0.06% $13,440
</TABLE>
THE GRAPH SHOWS THE MERRILL LYNCH ZERO COUPON 20- AND 10-YEAR BOND TOTAL RETURN
INDICES, REFLECTING THE PORTFOLIO'S CHANGING COMPOSITION AS IT MOVES TOWARD ITS
2010 TARGET DATE.
PERFORMANCE SHOWN IN THE GRAPH REFLECTS ALL FUND OPERATING EXPENSES BUT DOES NOT
INCLUDE ANY FEES, CHARGES OR EXPENSES IMPOSED BY THE VARIABLE ANNUITY AND LIFE
INSURANCE CONTRACTS THAT USE THE FRANKLIN VALUEMARK FUNDS. IF THEY HAD BEEN
INCLUDED, PERFORMANCE WOULD HAVE BEEN LOWER. SEE THE CONTRACT PROSPECTUS FOR A
COMPLETE DESCRIPTION OF THE CONTRACT EXPENSES, INCLUDING ANY APPLICABLE SALES
CHARGES. INDEX SOURCE IS STANDARD & POOR'S MICROPAL.
GRAPHIC MATERIAL (75)
This chart shows the top 10 holidays based on the percentage of total net assets
on 12/31/98 for the Money Market Fund.
<TABLE>
<CAPTION>
Average Annual Total Return
- ----------------------------------------------
<S> <C>
1-Year +14.45%
5-Year +10.54%
Since Inception (3/14/89) +12.61%
</TABLE>
GRAPHIC MATERIAL (74)
This graph compares the performance of the Zero Coupon 2010 Fund as tracked by
the growth in value of a $10,000 investment, to that of the Merrill Lynch Zero
Coupon 10-Year Bond Total Return Index, the Consumer Price Index, and the
Merrill Lynch Zero Coupon 20-Year Bond Total Return Index from
3/14/89 - 12/31/98.
The graph shows the Merrill Lynch Zero Coupon 20- and 10-Year Bod Total Return
Indices, reflecting the portfolio's changing composition as it moves toward its
2010 target date.
Performance shown in the graph reflects all fund operating expenses but
does not include any fees, charges or expenses imposed by the variable annuity
and life insurance contracts that use the Franklin Valumark Funds. If they had
been included, performance would have been lower. see the contract prospectus
for a complete description of the contract expenses, including any applicable
sales charges. Index source is Standard & Poor's Micropal.
TOTAL RETURN INDEX COMPARISON
Zero Coupon 2010 Fund
$10,000 Investment (3/14/89 - 12/31/98)
<TABLE>
<CAPTION>
Merrill Lynch Zero Merrill Lynch Zero Consumer
Zero Coupon Coupon 10-Year Bond Coupon 20-Year Bond Price
2010 Fund Total Return Index Total Return Index Index
<S> <C> <C> <C> <C> <C> <C> <C>
3/14/89 $10,000 $10,000 $10,000 $10,000
3/31/89 $10,000 0.64% $10,064 1.09% $10,109 0.32% $10,032
4/30/89 $10,000 2.74% $10,339 3.81% $10,494 0.65% $10,097
5/31/89 $10,000 4.09% $10,762 6.90% $11,219 0.57% $10,155
6/30/89 $11,290 5.97% $11,405 10.43% $12,389 0.24% $10,179
7/31/89 $11,250 2.71% $11,714 0.57% $12,460 0.24% $10,203
8/31/89 $10,790 -3.02% $11,360 -4.96% $11,842 0.16% $10,220
9/30/89 $10,860 0.42% $11,408 0.88% $11,947 0.32% $10,252
10/31/89 $11,630 4.09% $11,874 6.69% $12,747 0.48% $10,302
11/30/89 $11,720 0.83% $11,973 1.78% $12,974 0.24% $10,326
12/31/89 $11,610 -0.01% $11,972 -0.52% $12,907 0.16% $10,343
1/31/90 $10,580 -4.06% $11,486 -7.52% $11,936 1.03% $10,449
2/28/90 $10,530 -0.22% $11,460 -2.23% $11,669 0.47% $10,498
3/31/90 $10,400 -0.08% $11,451 -0.95% $11,559 0.55% $10,556
4/30/90 $9,652 -2.80% $11,131 -5.95% $10,871 0.16% $10,573
5/31/90 $10,617 4.78% $11,663 9.78% $11,934 0.23% $10,597
6/30/90 $11,064 2.37% $11,939 4.13% $12,427 0.54% $10,655
7/31/90 $11,136 1.09% $12,069 -0.41% $12,376 0.38% $10,695
8/31/90 $9,912 -4.73% $11,498 -11.02% $11,012 0.92% $10,794
9/30/90 $10,150 1.14% $11,629 2.08% $11,241 0.84% $10,884
10/31/90 $10,358 3.23% $12,005 2.90% $11,567 0.60% $10,950
11/30/90 $11,271 4.35% $12,527 9.01% $12,609 0.22% $10,974
12/31/90 $11,676 2.25% $12,809 2.64% $12,941 0.00% $10,974
1/31/91 $11,853 1.01% $12,938 2.05% $13,206 0.60% $11,039
2/28/91 $11,811 0.13% $12,955 -0.90% $13,087 0.15% $11,056
3/31/91 $11,666 0.71% $13,047 0.73% $13,183 0.15% $11,073
4/30/91 $11,946 1.63% $13,260 1.81% $13,421 0.15% $11,089
5/31/91 $11,686 -0.12% $13,244 -1.15% $13,267 0.30% $11,122
6/30/91 $11,412 -0.70% $13,151 -2.01% $13,000 0.29% $11,155
7/31/91 $11,619 1.76% $13,383 2.09% $13,273 0.15% $11,171
8/31/91 $12,362 3.97% $13,914 5.90% $14,056 0.29% $11,204
9/30/91 $13,061 3.44% $14,393 5.16% $14,782 0.44% $11,253
10/31/91 $12,864 0.48% $14,462 -1.57% $14,550 0.15% $11,270
11/30/91 $12,744 1.41% $14,666 0.83% $14,671 0.29% $11,303
12/31/91 $13,749 5.47% $15,468 8.08% $15,856 0.07% $11,311
1/31/92 $13,246 -4.18% $14,821 -4.35% $15,166 0.15% $11,328
2/29/92 $13,290 0.60% $14,910 0.45% $15,233 0.36% $11,368
3/31/92 $13,235 -1.29% $14,718 -1.62% $14,987 0.51% $11,426
4/30/92 $13,050 -0.42% $14,656 -1.81% $14,716 0.14% $11,442
5/31/92 $13,759 2.91% $15,083 4.23% $15,338 0.14% $11,458
6/30/92 $13,776 2.34% $15,436 0.28% $15,382 0.36% $11,500
7/31/92 $14,598 4.63% $16,150 6.73% $16,416 0.21% $11,524
8/31/92 $14,679 1.13% $16,333 -0.33% $16,361 0.28% $11,556
9/30/92 $14,923 3.10% $16,839 0.84% $16,498 0.28% $11,588
10/31/92 $14,378 -2.91% $16,349 -2.08% $16,154 0.35% $11,629
11/30/92 $14,772 -0.09% $16,334 2.34% $16,532 0.14% $11,645
12/31/92 $15,467 3.46% $16,899 4.24% $17,233 -0.07% $11,637
1/31/93 $15,792 3.99% $17,574 3.29% $17,800 0.49% $11,694
2/28/93 $16,707 3.91% $18,261 6.15% $18,895 0.35% $11,735
3/31/93 $17,054 0.28% $18,312 -0.70% $18,762 0.35% $11,776
4/30/93 $16,881 1.40% $18,568 1.23% $18,993 0.28% $11,809
5/31/93 $16,985 -0.55% $18,466 0.97% $19,178 0.14% $11,826
6/30/93 $18,058 5.49% $19,480 7.84% $20,681 0.14% $11,842
7/31/93 $18,664 0.82% $19,640 4.37% $21,585 0.00% $11,842
8/31/93 $19,617 3.82% $20,390 6.44% $22,976 0.28% $11,875
9/30/93 $19,778 1.19% $20,633 -0.32% $22,903 0.21% $11,900
10/31/93 $20,162 0.42% $20,719 1.83% $23,322 0.41% $11,949
11/30/93 $19,332 -3.33% $20,029 -4.02% $22,384 0.07% $11,957
12/31/93 $19,407 0.88% $20,206 -0.35% $22,305 0.00% $11,957
1/31/94 $20,186 2.92% $20,796 4.00% $23,197 0.27% $11,990
2/28/94 $18,788 -4.77% $19,804 -6.86% $21,605 0.34% $12,030
3/31/94 $17,662 -5.14% $18,786 -6.29% $20,246 0.34% $12,071
4/30/94 $17,365 -1.57% $18,491 -2.58% $19,723 0.14% $12,088
5/31/94 $17,092 -0.50% $18,398 -3.06% $19,119 0.07% $12,097
6/30/94 $16,872 -0.75% $18,260 -1.59% $18,816 0.34% $12,138
7/31/94 $17,747 2.87% $18,784 6.34% $20,008 0.27% $12,171
8/31/94 $17,389 0.17% $18,816 -3.03% $19,402 0.40% $12,219
9/30/94 $16,580 -3.60% $18,139 -5.62% $18,312 0.27% $12,252
10/31/94 $16,467 -0.73% $18,007 -0.58% $18,206 0.07% $12,261
11/30/94 $16,759 0.48% $18,093 2.44% $18,650 0.13% $12,277
12/31/94 $17,277 1.74% $18,408 3.71% $19,342 0.00% $12,277
1/31/95 $17,728 2.64% $18,894 3.85% $20,088 0.40% $12,326
2/28/95 $18,259 3.85% $19,621 3.14% $20,719 0.40% $12,375
3/31/95 $18,445 0.69% $19,757 1.24% $20,975 0.33% $12,416
4/30/95 $18,949 1.95% $20,142 2.21% $21,440 0.33% $12,457
5/31/95 $21,297 8.38% $21,830 14.50% $24,549 0.20% $12,482
6/30/95 $21,402 1.32% $22,118 1.35% $24,881 0.20% $12,507
7/31/95 $20,841 -1.65% $21,753 -2.82% $24,178 0.00% $12,507
8/31/95 $21,456 1.98% $22,184 3.95% $25,134 0.26% $12,539
9/30/95 $21,976 1.65% $22,550 2.90% $25,862 0.20% $12,565
10/31/95 $23,002 2.53% $23,120 5.56% $27,300 0.33% $12,606
11/30/95 $23,781 3.06% $23,828 3.76% $28,326 -0.07% $12,597
12/31/95 $24,670 2.44% $24,409 4.64% $29,640 -0.07% $12,588
1/31/96 $24,615 0.21% $24,460 -0.96% $29,355 0.59% $12,663
2/29/96 $22,728 -4.75% $23,298 -9.22% $26,648 0.32% $12,703
3/31/96 $22,181 -1.92% $22,851 -3.82% $25,631 0.52% $12,769
4/30/96 $21,593 -2.35% $22,314 -3.62% $24,702 0.39% $12,819
5/31/96 $21,388 -0.64% $22,171 0.01% $24,706 0.19% $12,843
6/30/96 $22,047 2.24% $22,668 3.48% $25,565 0.06% $12,851
7/31/96 $22,003 -0.03% $22,661 -0.26% $25,499 0.19% $12,875
8/31/96 $21,516 -1.08% $22,416 -3.31% $24,655 0.19% $12,900
9/30/96 $22,386 2.97% $23,082 4.98% $25,884 0.32% $12,941
10/31/96 $23,639 3.95% $23,994 6.58% $27,586 0.32% $12,983
11/30/96 $24,729 3.56% $24,848 6.20% $29,297 0.19% $13,007
12/31/96 $24,007 -2.74% $24,167 -4.62% $27,942 0.00% $13,007
1/31/97 $23,653 -0.40% $24,071 -1.81% $27,435 0.32% $13,049
2/28/97 $23,609 0.01% $24,073 -0.26% $27,364 0.31% $13,089
3/31/97 $22,902 -2.88% $23,380 -4.70% $26,077 0.25% $13,122
4/30/97 $23,639 2.69% $24,009 4.08% $27,140 0.12% $13,138
5/31/97 $23,933 1.18% $24,292 1.29% $27,491 -0.06% $13,130
6/30/97 $24,453 1.77% $24,722 3.29% $28,395 0.12% $13,146
7/31/97 $26,337 5.68% $26,126 11.42% $31,638 0.12% $13,161
8/31/97 $25,254 -2.96% $25,353 -5.72% $29,827 0.19% $13,186
9/30/97 $26,180 2.89% $26,085 5.17% $31,370 0.25% $13,219
10/31/97 $27,200 3.12% $26,899 5.98% $33,245 0.25% $13,253
11/30/97 $27,420 0.51% $27,037 2.82% $34,182 -0.06% $13,245
12/31/97 $27,985 1.95% $27,564 2.73% $35,114 -0.12% $13,229
1/31/98 $28,675 2.07% $28,134 2.28% $35,913 0.19% $13,254
2/28/98 $28,409 -0.59% $27,968 -1.51% $35,372 0.19% $13,279
3/31/98 $28,424 0.06% $27,985 0.50% $35,549 0.19% $13,304
4/30/98 $28,487 0.35% $28,083 -0.02% $35,543 0.18% $13,328
5/31/98 $29,162 1.59% $28,530 3.22% $36,688 0.18% $13,352
6/30/98 $29,859 1.82% $29,049 4.29% $38,263 0.12% $13,368
7/31/98 $29,708 0.11% $29,081 -1.47% $37,699 0.12% $13,384
8/31/98 $31,187 5.03% $30,544 6.69% $40,221 0.12% $13,400
9/30/98 $32,768 5.44% $32,205 3.02% $41,435 0.12% $13,416
10/31/98 $31,944 -1.81% $31,622 -4.13% $39,722 0.24% $13,449
11/30/98 $32,062 0.36% $31,736 3.84% $41,249 0.00% $13,449
12/31/98 $32,028 0.34% $31,844 -1.27% $40,724 -0.06% $13,440
Total Return 220.28% 218.44% 307.24% 34.40%
</TABLE>
58
PLEASE SEE IMPORTANT ENDNOTES TO PERFORMANCE INFORMATION ON PAGE 61.
<PAGE>
PORTFOLIO SEEKING CAPITAL PRESERVATION AND INCOME
MONEY MARKET FUND
The domestic economy continued to grow at a healthy pace during the period under
review. Higher income levels coupled with a robust real estate market and
increasing stock prices helped fuel the consumer sector, which was the primary
driver of domestic growth. Consumption also appeared to buoy the labor market,
with the unemployment rate reaching 4.5% for 1998, the lowest in 28 years. The
overall economy, as measured by U.S. Gross Domestic Product, grew 3.9% in 1998,
while many fourth quarter projections remain above the Federal Reserve Board's
(the Fed's) targeted long-term growth rate of 2.50%.(1)
Meanwhile, exports were hit hard by the emerging markets crisis that prevailed
for much of the reporting period, hampering the U.S. manufacturing sector and
producing record trade deficits. As a result, gains in the consumer sector stood
in stark contrast to declines in the manufacturing and export sectors. Increased
competition from low-cost imports exacerbated rising domestic wage costs and a
weakening U.S. export sector.
The extent of problems in emerging economies apparently took the financial
community by surprise. Many institutional investors became averse to virtually
any security with credit risk, which paralyzed the credit markets. An ensuing
"flight to quality" fueled tremendous demand for U.S. Treasuries, a traditional
safe haven in times of market and political turmoil. The yield on three-month
Treasury bills, usually a reasonable proxy for the fund, declined from 5.35% on
January 2, 1998, to 4.48% on December 31, 1998, falling as low as 3.65% on
October 16, 1998, before rebounding.(2) Put into a historical context,
three-month Treasury yields have averaged 4.91% over the past five years,
fluctuating from as low as 2.92% on January 26, 1994, to as high as 5.88% on
February 1, 1995. The "credit crunch" prompted the Fed to cut the federal funds
target rate three times over seven weeks, for a total of 75 basis points
(0.75%), bringing it to 4.75% on November 17, 1998. This revitalized the credit
markets and spurred equity prices in the process. Reflecting lower short-term
interest rates, the fund's seven-day yield during the reporting period declined
from 5.28% on January 2, 1998, to 3.38% on December 31, 1998.
TOP 10 HOLDINGS
Money Market Fund
12/31/98
GRAPHIC MATERIAL (76)
This chart shows the average annual total return for the Zero Coupon 2010 Fund
as of 12/31/98.
<TABLE>
<CAPTION>
% OF TOTAL
SECURITY NAME NET ASSETS
- -------------------------------------------------------
<S> <C>
U.S. Treasury Repo 4.81%
General Electric Capital Corp. 4.81%
National Rural Utilities
Coop. Finance Corp. 4.21%
Campbell Soup Co. 4.05%
Province of British Columbia 4.04%
American Express
Credit Corp. 3.61%
Walt Disney Co. 3.61%
Associates Corp. of
North America 3.60%
Coca Cola Co. 3.60%
Dupont De Nemours Co. 3.60%
</TABLE>
1. Source: Bureau of Labor Statistics.
2. Bond prices are inversely related to their yields. An increase in price
leads to a corresponding decrease in yield.
59
<PAGE>
We continue to invest the fund's assets in only high quality money market
securities. For example, over 75% of the paper purchased by the fund carries
long-term credit ratings of "AA" or higher by Standard & Poor's and Moody's, two
national credit rating agencies.(3) Consistent with the fund's goal of providing
shareholders with a higher-quality and conservative investment vehicle, we do
not invest the fund's cash in derivatives or other potentially volatile
securities that we believe involve undue risk.
Going forward, underlying concerns linger regarding the economy's strength.
Balanced against these concerns, however, remains a profound environment of low
inflation and interest rates that have so far helped propel consumer spending.
Additionally, should economic growth slow, the Fed may make further changes to
the federal funds target rate.
3. This does not indicate Standard & Poor's and Moody's ratings of the fund.
60
<PAGE>
IMPORTANT ENDNOTES TO
PERFORMANCE INFORMATION
Total return of the portfolio is the percentage change in value of a
hypothetical $10,000 investment over the indicated periods and includes
reinvestment of dividends and capital gains. Inception dates of the portfolios
may have preceded the effective dates of the subaccounts, contracts, or their
availability in all states. Performance data is historical and cannot predict or
guarantee future results. Principal value and investment return will fluctuate
with market conditions, and you may have a gain or loss when you withdraw your
money.
When reviewing the index comparisons, please keep in mind that indices have a
number of inherent performance differentials over the Valuemark portfolios.
First, unlike the Valuemark portfolios, which must hold a minimum amount of cash
to maintain liquidity, indices do not have a cash component. Second, the
Valuemark portfolios are actively managed and, thus, are subject to management
fees to cover salaries of securities analysts or portfolio managers in addition
to other expenses. Indices are unmanaged and do not include any commissions or
other expenses typically associated with investing in securities. Third, indices
often contain a different mix of securities than the portfolio to which they are
compared. Additionally, please remember that indices are simply a measure of
performance and cannot be invested in directly.
61
<PAGE>
INDEX DEFINITIONS
<TABLE>
<CAPTION>
INDEX DEFINITION
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C>
CONSUMER PRICE INDEX Measure of the average change in prices for a fixed basket of goods and
services regularly bought by consumers in the United States, published by the
Bureau of Labor Statistics.
- ---------------------------------------------------------------------------------------------------------------------------
CREDIT SUISSE FIRST BOSTON The index is an unmanaged, trader-priced portfolio constructed to mirror the
HIGH YIELD (CSFB HY) INDEX high yield debt market. The index has several modules representing different
sectors of the high yield market including a cash paying module, a zerofix
module, a pay-in-kind module, and a defaulted module. The modular nature of the
index allows customization of data to meet client needs. The index is divided
into other categories including industry, rating, seniority, liquidity, market
value, security price range, yield range and other sector divisions. The CSFB HY
Index follows a total of 250 sectors. CS First Boston has maintained the index
since January 1986. While the index is priced and run weekly, monthly returns
are typically used for performance attribution.
- ---------------------------------------------------------------------------------------------------------------------------
FINANCIAL TIMES/ Franklin Templeton customizes this index using 50% of the Financial
S&P ACTUARIES WORLD Times/S&P Actuaries World Energy Index and 50% of the Financial Times/S&P
(ENERGY 50%/ Actuaries World Basic Industries Index. Both indices are compiled by the
BASIC INDUSTRIES 50%) Financial Times, Goldman Sachs & Co. and Wood Mackenzie & Co., Ltd. in
COMPOSITE INDEX conjunction with the Institute of Actuaries and the Faculty of
Franklin Templeton Actuaries. The index includes electric utilities, waterworks supply and
customizes this Index telephone utilities. The indices are weighted arithmetic averages of the
market prices of the elements that make them up. They also adjust for the
intervening price changes of these elements.
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
62
<PAGE>
<TABLE>
<CAPTION>
INDEX DEFINITION
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C>
FINANCIAL TIMES/ This index is compiled by the Financial Times, Goldman Sachs & Co. and Wood
S&P ACTUARIES WORLD Mackenzie & Co., Ltd. in conjunction with the Institute of Actuaries and
UTILITIES INDEX the Faculty of Actuaries. The utilities sector includes electric utilities,
waterworks supply, natural gas utilities and telephone companies. The
indices are weighted arithmetic averages of the market prices of the
elements that make them up. They also adjust for the intervening price
changes of these elements. This is a total return index in $U.S.
- ---------------------------------------------------------------------------------------------------------------------------
INTERNATIONAL FINANCE The index tracks the emerging stock markets of three world regions based on
CORPORATION'S (IFC) market capitalization weighting. Those regions are Latin America, Asia and
INVESTABLE COMPOSITE INDEX Europe/Mideast/Africa. As of the end of May 1997, the regional weights of
the IFC Composite Index were distributed accordingly: Asia, 40%; Latin
America, 38%; and Europe/Mideast/Africa, 22%.
- ---------------------------------------------------------------------------------------------------------------------------
JP MORGAN GLOBAL GOVERNMENT The index comprises 13 markets, including Australia, Belgium, Canada, Denmark,
BOND INDEX (UNHEDGED) France, Germany, Italy, Japan, Netherlands, Spain, Sweden, the U.K. and the U.S.
Each country's weight is determined by the total market capitalization in $U.S.
of all the bonds in that country's traded index. The J.P. Morgan Global
Government Bond Total Return Index includes only actively traded, fixed-rate
bonds with a remaining maturity of one year or longer. The index is unhedged and
expressed in terms of $U.S.
- ---------------------------------------------------------------------------------------------------------------------------
LEHMAN BROTHERS The index includes securities in the Lehman Brothers Government and Corporate
GOVERNMENT/CORPORATE indices. These securities must have at least $100 million par amount
BOND INDEX outstanding and must be rated investment grade (Baa3 or better) by Moody's
Investors Service. If a Moody's rating is not available, the Standard & Poor's
or Fitch rating is used. These must be fixed-rate securities, although they can
carry a coupon that steps up or changes according to a predetermined schedule,
and they must be dollar-denominated and non-convertible.
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
63
<PAGE>
<TABLE>
<CAPTION>
INDEX DEFINITION
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C>
LEHMAN BROTHERS This index includes securities issued by the U.S. government or its agencies
INTERMEDIATE GOVERNMENT with maturities from one up to, but not including 10 years. These securities
BOND INDEX must have at least $100 million par amount outstanding and must be rated
investment grade (Baa3 or better) by Moody's Investors Service. If a Moody's
rating is not available, the Standard & Poor's or Fitch rating is used. These
must be fixed-rate securities, although they can carry a coupon that steps up
or changes according to a predetermined schedule, and they must be
dollar-denominated and non-convertible.
- ---------------------------------------------------------------------------------------------------------------------------
LIPPER GROWTH & INCOME This is an equally weighted average calculation of perform-
FUNDS OBJECTIVE AVERAGE ance figures for all funds within the Lipper Growth and Income Funds
Objective Category, which is defined as all mutual funds that combine a
growth of earnings orientation and an income requirement for level and/or
rising dividends. As of 9/23/98, there were 30 funds in this category.
- ---------------------------------------------------------------------------------------------------------------------------
LIPPER INCOME FUNDS This is an equally weighted average calculation of perform-
OBJECTIVE AVERAGE ance figures for all funds within the Lipper Income Funds Objective
Category, which is defined as all mutual funds that normally seek a high
level of current income through investing in income-producing stocks, bonds
and money market instruments. As of 9/23/98, there were 10 funds in this
category.
- ---------------------------------------------------------------------------------------------------------------------------
MERRILL LYNCH TREASURY The indices include zero coupon bonds that pay no interest and are issued at a
ZERO COUPON 1-, 5-, 10- discount from redemption price.
20 YEAR BOND
TOTAL RETURN INDICES
- ---------------------------------------------------------------------------------------------------------------------------
MORGAN STANLEY CAPITAL The index represents both developed and emerging markets around the world.
INTERNATIONAL (MSCI) "Free" in the title reflects the actual buying opportunities for global
ALL COUNTRIES - investors by taking into account local market restrictions on share
WORLD FREE INDEX ownership by foreigners. The MSCI indices define the local market for each
country by constructing a matrix of all listed securities, sorting the
matrix by industry, and seeking to capture 60% of the market capitalization
for each group by selecting the most investable stocks in each industry.
The index applies full market capitalization weights to each included
stock.
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
64
<PAGE>
<TABLE>
<CAPTION>
INDEX DEFINITION
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C>
MORGAN STANLEY CAPITAL The index comprises 48 countries around the world, both
INTERNATIONAL (MSCI) developed and emerging markets, except the U.S. "Free" in
ALL COUNTRIES - WORLD the title reflects the actual buying opportunities for global
EX-U.S. FREE INDEX investors by taking into account local market restrictions on share ownership
by foreigners. The MSCI indices define the local market for each country by
constructing a matrix of all listed securities, sorting the matrix by
industry, and seeking to capture 60% of the market capitalization for each
group by selecting the most investable stocks in each industry. The index
applies full market capitalization weights to each included stock.
- ---------------------------------------------------------------------------------------------------------------------------
MORGAN STANLEY CAPITAL This is a market capitalization-weighted equity index com-
INTERNATIONAL (MSCI) prising 26 of the 48 countries in the MSCI universe. "Free"
EMERGING MARKETS FREE INDEX denotes investment opportunities in the developing world available to foreign
investors. EMF performance data is calculated in $US and local currency. The
MSCI indices define the local market for each country by constructing a matrix
of all listed securities, sorting the matrix by industry, and seeking to
capture 60% of the market cap for each group by selecting the most investable
stocks in each industry. The index applies full market cap weights to each
included stock.
- ---------------------------------------------------------------------------------------------------------------------------
MORGAN STANLEY CAPITAL The index comprises five developed market countries or
INTERNATIONAL (MSCI) regions in the Pacific: Australia, Hong Kong, Japan, New
PACIFIC INDEX Zealand and Singapore. The MSCI indices define the local market for each
country by constructing a matrix of all listed securities, sorting the
matrix by industry, and seeking to capture 60% of the market capitalization
for each group by selecting the most investable stocks in each industry.
The index applies full market capitalization weights to each included
stock.
- ---------------------------------------------------------------------------------------------------------------------------
MORGAN STANLEY CAPITAL The index comprises the developed markets of 22 countries
INTERNATIONAL (MSCI) around the world. The MSCI indices define the local market
WORLD INDEX for each country by constructing a matrix of all listed securities, sorting
the matrix by industry, and seeking to capture 60% of the market cap for
each group by selecting the most investable stocks in each industry. The
index applies full market cap weights to each included stock.
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
65
<PAGE>
<TABLE>
<CAPTION>
INDEX DEFINITION
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C>
RUSSELL 1000 INDEX Published by Frank Russell Company, the index measures the performance of the
1,000 largest companies in the Russell 3000 Index, representing 89% of the
market capitalization of the Russell 3000. The Russell 3000 contains the 3,000
largest companies incorporated in the U.S. and its territories. As of the
latest reconstitution, the average market capitalization of the companies in
the Russell 1000 was approximately $9.9 billion; the median market
capitalization was approximately $3.7 billion. The smallest company in the
index had an approximate market capitalization of $1,404.7 million.
- ---------------------------------------------------------------------------------------------------------------------------
RUSSELL 2500 INDEX Published by Frank Russell Company, the index measures the performance of the
2,500 smallest companies in the Russell 3000 Index, representing approximately
22% of the total market capitalization of the companies in the Russell 3000.
The Russell 3000 contains the 3,000 largest companies incorporated in the U.S.
and its territories. As of the latest reconstitution, the average market
capitalization of the Russell 2500 was approximately $931 million; the median
market capitalization was approximately $630 million. The largest company in
the index had an approximate market capitalization of $3.7 billion.
- ---------------------------------------------------------------------------------------------------------------------------
SALOMON GLOBAL EX-U.S. This is a total-capitalization weighted index that includes
LESS THAN $1 BILLION INDEX all developed and emerging countries, except the U.S., and includes companies
with a total market capitalization below U.S. $1 billion.
- ---------------------------------------------------------------------------------------------------------------------------
SALOMON WORLD EX-U.S. This is a comprehensive float-weighted equity index consisting of every
EXTENDED MARKET INDEX (EMI) company with an investable market capitalization of over $100 million in
22 countries, except the U.S. The broad market index (BMI) is segregated
into the primary market index (PMI) and extended market index (EMI),
consisting of large and small capitalization issues, respectively.
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
66
<PAGE>
<TABLE>
<CAPTION>
INDEX DEFINITION
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C>
STANDARD & POOR'S 500 The S&P 500 consists of 500 widely held domestic common stocks, consisting of
(S&P 500) four broad sectors: industrials, utilities, financials and transportation. It
is a market value-weighted index, where the stock price is multiplied by the
number of shares outstanding, with each stock affecting the index in proportion
to its market value. This index, calculated by Standard & Poor's, is a total
return index with dividends reinvested.
- ---------------------------------------------------------------------------------------------------------------------------
STANDARD & POOR'S This is a capitalization-weighted index of all of the stocks in
HEALTH CARE COMPOSITE INDEX the Standard & Poor's 500 that are involved in the business of health care
related products or services. The index was with a base level of 100 as of
January 14, 1987.
- ---------------------------------------------------------------------------------------------------------------------------
WILSHIRE MID CAP COMPANY This index overlaps the top 750 and the next 1,750 of
GROWTH INDEX Wilshire Asset Management's Wilshire 2500 universe (the top 2,500 companies
and 99% of the market capitalization of the Wilshire 5000). Wilshire
includes companies that have market capitalizations ranging from $300
million to $1.3 billion. The portfolio contains from 125-500 securities.
- ---------------------------------------------------------------------------------------------------------------------------
WILSHIRE REAL ESTATE This is a market capitalization-weighted index of publicly
SECURITIES INDEX traded real estate securities, such as real estate investment trusts
(REITs), Real Estate Operating Companies (REOCs) and partnerships. The
index is composed of companies whose charter is the equity ownership and
operation of commercial real estate. The index rebalances monthly and
returns are calculated on a buy-and-hold basis.
- ---------------------------------------------------------------------------------------------------------------------------
WILSHIRE SMALL COMPANY The index is created by screening the bottom 1,750 large
VALUE INDEX companies of Wilshire Asset Management's Wilshire 2500 universe (the top
companies and 99% of the market capitalization of the Wilshire 5000). These
companies have market capitalizations of at least $70 million. Wilshire
excludes companies with high price/earnings ratios, low yields, or high
price/book ratios. The portfolio contains from 125-500 securities.
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
67
<PAGE>
FRANKLIN VALUEMARK FUNDS
Financial Highlights
<TABLE>
<CAPTION>
PER SHARE OPERATING PERFORMANCE
- -------------------------------------------------------------------------------------------------------------------
DISTRI-
NET ASSET NET NET DISTRIBUTIONS BUTIONS
VALUE, INVEST- REALIZED & TOTAL FROM FROM NET FROM NET TOTAL NET ASSET
PERIOD BEGINNING MENT UNREALIZED INVESTMENT INVESTMENT REALIZED DISTRI- VALUE, END TOTAL
ENDED OF PERIOD INCOME GAINS (LOSSES) OPERATIONS INCOME GAINS BUTIONS OF PERIOD RETURN+
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
CAPITAL GROWTH FUND
1996(4) $10.00 $ .03 $ 1.33 $ 1.36 $ -- $ -- $ -- $11.36 13.60%
1997 11.36 .06 2.02 2.08 (.02) -- (.02) 13.42 18.31
1998 13.42 .10 2.62 2.72 (.06) -- (.06) 16.08 20.29
GLOBAL HEALTH CARE SECURITIES FUND
19986 10.00 .03 .68 .71 -- -- -- 10.71 7.10
GLOBAL UTILITIES SECURITIES FUND
1994 17.14 .95 (2.94) (1.99) (.62) (.11) (.73) 14.42 (11.56)
1995 14.42 .84 3.54 4.38 (.90) -- (.90) 17.90 31.35
1996 17.90 .91 .29 1.20 (.92) -- (.92) 18.18 7.07
1997 18.18 .90 3.54 4.44 (.96) (1.33) (2.29) 20.33 26.76
1998 20.33 .76 1.41 2.17 (.83) (1.22) (2.05) 20.45 11.19
GROWTH AND INCOME FUND
1994 13.99 .19 (.47) (.28) (.09) (.20) (.29) 13.42 (3.41)
1995 13.42 .41 3.92 4.33 (.20) (.41) (.61) 17.14 32.83
1996 17.14 .62 1.64 2.26 (.41) (1.44) (1.85) 17.55 14.19
1997 17.55 .67 4.05 4.72 (.64) (.62) (1.26) 21.01 27.74
1998 21.01 .69 .99 1.68 (.69) (1.64) (2.33) 20.36 8.33
HIGH INCOME FUND
1994 13.13 .88 (1.18) (.30) (.55) (.07) (.62) 12.21 (2.26)
1995 12.21 1.06 1.30 2.36 (.91) -- (.91) 13.66 19.76
1996 13.66 1.20 .56 1.76 (1.20) (.06) (1.26) 14.16 13.90
1997 14.16 1.33 .22 1.55 (1.22) (.04) (1.26) 14.45 11.47
1998 14.45 1.43 (1.25) .18 (1.27) (.08) (1.35) 13.28 .99
INCOME SECURITIES FUND
1994 15.80 .82 (1.80) (.98) (.44) (.07) (.51) 14.31 (6.27)
1995 14.31 1.16 1.96 3.12 (.89) (.07) (.96) 16.47 22.40
1996 16.47 1.32 .44 1.76 (.87) (.15) (1.02) 17.21 11.28
1997 17.21 1.40 1.38 2.78 (1.33) (.29) (1.62) 18.37 17.09
1998 18.37 1.37 (1.07) .30 (1.42) (.33) (1.75) 16.92 1.64
MONEY MARKET FUND
1994 1.00 .04 -- .04 (.04) -- (.04) 1.00 3.82
1995 1.00 .06 -- .06 (.06) -- (.06) 1.00 5.74
1996 1.00 .05 -- .05 (.05) -- (.05) 1.00 5.16
1997 1.00 .05 -- .05 (.05) -- (.05) 1.00 5.24
1998 1.00 .05 -- .05 (.05) -- (.05) 1.00 5.22
MUTUAL DISCOVERY SECURITIES FUND
1996(5) 10.00 .02 .19 .21 -- -- -- 10.21 2.10
1997 10.21 .13 1.84 1.97 (.01) -- (.01) 12.17 19.25
1998 12.17 .20 (.76) (.56) (.17) (.15) (.32) 11.29 (5.00)
MUTUAL SHARES SECURITIES FUND
1996(5) 10.00 .02 .33 .35 -- -- -- 10.35 3.50
1997 10.35 .13 1.71 1.84 (.01) -- (.01) 12.18 17.73
1998 12.18 .28 (.25) .03 (.13) (.12) (.25) 11.96 .09
</TABLE>
<TABLE>
<CAPTION>
RATIOS/SUPPLEMENTAL DATA
--------------------------------------------------------------
RATIO OF NET
NET RATIO OF INVESTMENT
ASSETS, END EXPENSES INCOME PORTFOLIO
OF PERIOD TO AVERAGE TO AVERAGE TURNOVER
(000'S) NET ASSETS NET ASSETS RATE
- ----------------------------------------------------------------
<S> <C> <C> <C>
$ 44,667 .77%* .96%* 3.91%
109,355 .77 .72 19.90
220,952 .77 1.00 12.17
8,990 .84* .84* 40.80
1,155,110 .52 5.58 11.74
1,423,446 .50 5.14 13.27
1,202,290 .50 4.20 29.69
1,129,904 .50 3.91 17.00
986,755 .50 3.15 33.85
517,877 .54 1.81 99.21
889,487 .52 3.30 116.54
1,077,989 .50 4.06 23.01
1,338,476 .49 3.53 36.71
1,318,743 .49 3.27 27.32
255,036 .60 9.45 22.94
360,904 .56 9.63 20.65
446,096 .54 9.63 27.16
496,036 .53 9.64 36.38
446,609 .53 9.96 41.71
1,000,002 .54 7.27 13.33
1,266,538 .51 8.05 33.14
1,350,659 .50 7.96 15.28
1,406,787 .50 7.53 14.68
1,185,840 .49 6.94 12.22
518,618 .46(7) 4.05 --
429,547 .40(7) 5.58 --
408,930 .43(7) 5.04 --
367,449 .45(7) 5.11 --
414,341 .45(7) 5.08 --
15,418 1.37* 2.11* .14
198,653 1.06 1.19 55.93
224,656 1.00 1.94 93.99
27,677 1.00* 2.56* 1.31
387,787 .80 2.10 49.01
482,444 .77 2.60 70.19
</TABLE>
68
<PAGE>
FRANKLIN VALUEMARK FUNDS
Financial Highlights (continued)
<TABLE>
<CAPTION>
PER SHARE OPERATING PERFORMANCE
- -----------------------------------------------------------------------------------------------------------------
DISTRI-
NET ASSET NET NET DISTRIBUTIONS BUTIONS
VALUE, INVEST- REALIZED & TOTAL FROM FROM NET FROM NET TOTAL NET ASSET
PERIOD BEGINNING MENT UNREALIZED INVESTMENT INVESTMENT REALIZED DISTRI- VALUE, END TOTAL
ENDED OF PERIOD INCOME GAINS (LOSSES) OPERATIONS INCOME GAINS BUTIONS OF PERIOD RETURN+
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NATURAL RESOURCES SECURITIES FUND
1994 $14.46 .16 $ (.45) $ (.29) $ (.08) $-- $ (.08) $14.09 (2.01)%
1995 14.09 .22 .12 .34 (.20) (.15) (.35) 14.08 2.35
1996 14.08 .15 .44 .59 (.20) (.18) (.38) 14.29 4.00
1997 14.29 .15 (2.83) (2.68) (.20) -- (.20) 11.41 (18.98)
1998 11.41 .15 (3.02) (2.87) (.15) -- (.15) 8.39 (25.38)
REAL ESTATE SECURITIES FUND
1994 15.04 .38 .06 .44 (.17) -- (.17) 15.31 2.89
1995 15.31 .78 1.83 2.61 (.52) -- (.52) 17.40 17.53
1996 17.40 .79 4.74 5.53 (.78) -- (.78) 22.15 32.82
1997 22.15 .72 3.72 4.44 (.67) (.32) (.99) 25.60 20.70
1998 25.60 1.45 (5.60) (4.15) (.94) (.58) (1.52) 19.93 (16.82)
RISING DIVIDENDS FUND
1994 10.57 .26 (.69) (.43) (.17) -- (.17) 9.97 (4.08)
1995 9.97 .27 2.66 2.93 (.24) -- (.24) 12.66 29.74
1996 12.66 .25 2.77 3.02 (.28) -- (.28) 15.40 24.18
1997 15.40 .22 4.77 4.99 (.26) (.45) (.71) 19.68 33.03
1998 19.68 .23 1.07 1.30 (.22) (2.65) (2.87) 18.11 6.92
SMALL CAP FUND
1995(3) 10.00 .03 .21 .24 -- -- -- 10.24 2.30
1996 10.24 .02 2.95 2.97 (.01) -- (.01) 13.20 28.95
1997 13.20 .01 2.24 2.25 (.03) (.37) (.40) 15.05 17.42
1998 15.05 .07 (.20) (.13) (.01) (1.19) (1.20) 13.72 (.98)
TEMPLETON DEVELOPING MARKETS EQUITY FUND
1994(1) 10.00 .07 (.51) (.44) -- -- -- 9.56 (4.40)
1995 9.56 .09 .18 .27 (.04) (.01) (.05) 9.78 2.77
1996 9.78 .12 1.97 2.09 (.10) (.18) (.28) 11.59 21.59
1997 11.59 .18 (1.10) (.92) (.15) (.23) (.38) 10.29 (8.72)
1998 10.29 .20 (2.35) (2.15) (.29) (.94) (1.23) 6.91 (21.61)
TEMPLETON GLOBAL ASSET ALLOCATION FUND
1995(2) 10.00 .18 .52 .70 (.18) -- (.18) 10.52 7.01
1996 10.52 .34 1.75 2.09 (.01) (.01) (.02) 12.59 19.84
1997 12.59 .42 1.04 1.46 (.26) (.07) (.33) 13.72 11.71
1998 13.72 .61 (.59) .02 (.49) (.58) (1.07) 12.67 (.04)
TEMPLETON GLOBAL GROWTH FUND
1994(1) 10.15 .07 .26 .33 -- -- -- 10.48 3.25
1995 10.48 .16 1.17 1.33 (.06) -- (.06) 11.75 12.72
1996 11.75 .25 2.22 2.47 (.21) (.21) (.42) 13.80 21.28
1997 13.80 .33 1.53 1.86 (.24) (.08) (.32) 15.34 13.50
1998 15.34 .35 .98 1.33 (.41) (1.49) (1.90) 14.77 8.98
TEMPLETON GLOBAL INCOME SECURITIES FUND
1994 13.31 .86 (1.52) (.66) (.33) (.13) (.46) 12.19 (4.99)
1995 12.19 .29 1.47 1.76 (.49) -- (.49) 13.46 14.68
1996 13.46 1.02 .17 1.19 (1.04) -- (1.04) 13.61 9.56
1997 13.61 1.05 (.73) .32 (.96) -- (.96) 12.97 2.55
1998 12.97 1.07 (.19) .88 (.98) -- (.98) 12.87 7.08
</TABLE>
<TABLE>
<CAPTION>
RATIOS/SUPPLEMENTAL DATA
----------------------------------------------
RATIO OF NET
NET RATIO OF INVESTMENT
ASSETS, END EXPENSES INCOME PORTFOLIO
OF PERIOD O AVERAGE TO AVERAGE TURNOVER
(000'S) NET ASSETS NET ASSETS RATE
- --------------------------------------------------
<S> <C> <C> <C>
$125,078 .68% 1.63% 7.66%
105,109 .66 1.40 15.66
109,579 .65 1.00 21.77
74,924 .69 1.00 85.22
45,927 .64 1.21 64.68
195,697 .62 4.00 11.73
213,473 .59 4.74 22.15
322,721 .57 4.80 10.32
440,554 .54 3.59 11.62
282,290 .54 5.44 13.21
309,929 .80 2.71 24.07
463,253 .78 2.72 18.72
597,424 .76 1.96 27.97
780,298 .74 1.24 37.04
751,869 .72 1.20 26.44
13,301 .90* 2.70* 16.04
170,969 .77 .63 63.72
313,462 .77 .06 64.07
315,460 .77 .51 53.01
98,189 1.53* 1.85* 1.15
158,084 1.41 2.01 19.96
272,098 1.49 1.68 12.42
279,680 1.42 1.57 20.59
162,433 1.41 2.04 36.58
14,729 .90* 3.84* 30.00
56,274 .86 4.21 52.35
93,402 .94 4.22 61.93
81,670 .84 4.32 59.03
158,856 1.14* 2.49* 7.14
338,755 .97 2.46 30.92
579,877 .93 2.20 12.32
758,445 .88 2.49 24.81
747,080 .88 2.27 32.30
254,311 .71 7.99 79.38
243,194 .64 7.59 152.89
221,722 .61 7.30 140.96
185,016 .62 7.03 181.61
150,941 .63 6.86 84.17
</TABLE>
69
<PAGE>
FRANKLIN VALUEMARK FUNDS
Financial Highlights (continued)
<TABLE>
<CAPTION>
PER SHARE OPERATING PERFORMANCE
- -------------------------------------------------------------------------------------------------------------------
DISTRI-
NET ASSET NET NET DISTRIBUTIONS BUTIONS
VALUE, INVEST- REALIZED & TOTAL FROM FROM NET FROM NET TOTAL NET ASSET
PERIOD BEGINNING MENT UNREALIZED INVESTMENT INVESTMENT REALIZED DISTRI- VALUE, END TOTAL
ENDED OF PERIOD INCOME GAINS (LOSSES) OPERATIONS INCOME GAINS BUTIONS OF PERIOD RETURN+
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
TEMPLETON INTERNATIONAL EQUITY FUND
1994 $12.50 $ .19 $ (.07) $ .12 $ (.04) $ (.07) $ (.11) $12.51 .87%
1995 12.51 .37 .94 1.31 (.22) (.28) (.50) 13.32 10.59
1996 13.32 .40 2.58 2.98 (.38) (.47) (.85) 15.45 22.98
1997 15.45 .30 1.51 1.81 (.45) (.69) (1.14) 16.12 11.69
1998 16.12 .56 .42 .98 (.53) (1.05) (1.58) 15.52 5.56
TEMPLETON INTERNATIONAL SMALLER COMPANIES FUND
1996(4) 10.00 .10 1.15 1.25 -- -- -- 11.25 12.50
1997 11.25 .23 (.39) (.16) (.07) -- (.07) 11.02 (1.50)
1998 11.02 .25 (1.52) (1.27) (.25) (.30) (.55) 9.20 (12.27)
TEMPLETON PACIFIC GROWTH FUND
1994 14.61 .22 (1.50) (1.28) (.03) (.06) (.09) 13.24 (8.79)
1995 13.24 .33 .71 1.04 (.26) (.11) (.37) 13.91 7.97
1996 13.91 .21 1.34 1.55 (.44) (.26) (.70) 14.76 11.10
1997 14.76 .29 (5.49) (5.20) (.28) -- (.28) 9.28 (35.95)
1998 9.28 .21 (1.52) (1.31) (.35) (.11) (.46) 7.51 (13.13)
U.S. GOVERNMENT SECURITIES FUND
1994 13.92 .96 (1.59) (.63) (.67) (.05) (.72) 12.57 (4.55)
1995 12.57 .93 1.46 2.39 (.96) -- (.96) 14.00 19.46
1996 14.00 .75 (.31) .44 (.97) -- (.97) 13.47 3.62
1997 13.47 1.00 .21 1.21 (.76) -- (.76) 13.92 9.31
1998 13.92 .99 .01 1.00 (1.03) -- (1.03) 13.89 7.44
VALUE SECURITIES FUND
1998(6) 10.00 .02 (2.23) (2.21) -- -- -- 7.79 (22.10)
ZERO COUPON FUND - 2000
1994 15.44 .68 (1.71) (1.03) (.69) (.10) (.79) 13.62 (6.76)
1995 13.62 .75 2.03 2.78 (.67) -- (.67) 15.73 20.67
1996 15.73 .98 (.65) .33 (.86) (.01) (.87) 15.19 2.43
1997 15.19 1.15 (.12) 1.03 (1.06) (.02) (1.08) 15.14 7.11
1998 15.14 1.22 (.15) 1.07 (1.21) (.19) (1.40) 14.81 7.50
ZERO COUPON FUND - 2005
1994 16.08 .71 (2.24) (1.53) (.60) (.19) (.79) 13.76 (9.60)
1995 13.76 .78 3.53 4.31 (.69) -- (.69) 17.38 31.76
1996 17.38 .96 (1.13) (.17) (.86) -- (.86) 16.35 (.50)
1997 16.35 1.14 .63 1.77 (1.06) (.01) (1.07) 17.05 11.37
1998 17.05 1.01 1.03 2.04 (1.10) (.25) (1.35) 17.74 12.53
ZERO COUPON FUND - 2010
1994 15.68 .55 (2.27) (1.72) (.63) (.31) (.94) 13.02 (10.97)
1995 13.02 .76 4.75 5.51 (.49) -- (.49) 18.04 42.79
1996 18.04 1.02 (1.65) (.63) (.88) (.24) (1.12) 16.29 (2.69)
1997 16.29 1.02 1.54 2.56 (1.01) (.01) (1.02) 17.83 16.57
1998 17.83 1.09 1.39 2.48 (1.11) (.15) (1.26) 19.05 14.45
</TABLE>
<TABLE>
<CAPTION>
RATIOS/SUPPLEMENTAL DATA
-----------------------------------------------
RATIO OF NET
NET RATIO OF INVESTMENT
ASSETS, END EXPENSES INCOME PORTFOLIO
OF PERIOD TO AVERAGE TO AVERAGE TURNOVER
(000'S) NET ASSETS NET ASSETS RATE
- --------------------------------------------------
<S> <C> <C> <C>
$ 785,124 .99% 2.17% 12.22%
850,117 .92 2.87 16.42
1,108,099 .89 3.07 27.52
1,161,430 .89 3.01 26.96
955,900 .88 2.90 5.98
16,255 1.16* 2.51* --
32,201 1.06 2.74 21.38
24,999 1.10 2.26 18.45
375,832 1.07 2.04 4.29
331,936 1.01 2.08 36.06
356,759 .99 1.51 12.85
165,404 1.03 1.97 11.87
98,769 1.10 2.60 12.55
579,039 .53 6.87 18.25**
643,165 .52 6.72 18.68**
843,858 .51 6.66 12.93***
765,084 .50 6.49 16.84
710,832 .50 6.22 31.34
9,013 .83* .95* 22.79
94,230 .407 6.37 --
137,357 .407 6.14 1.63
129,601 .407 6.14 .58
111,650 .407 6.47 6.16
93,543 .407 6.67 17.70
51,499 .407 6.53 2.00
83,222 .407 6.19 1.72
82,603 .407 6.15 2.06
77,296 .407 6.16 4.52
84,487 .407 5.82 3.87
45,361 .407 6.57 4.34
85,633 .407 6.41 31.45
78,816 .407 6.24 16.10
85,515 .407 6.21 12.20
93,515 .407 5.55 15.92
</TABLE>
* Annualized
** The portfolio turnover rate excludes mortgage dollar roll transactions.
** The portfolio turnover rate excludes transactions related to the
liquidation of the Investment Grade Intermediate Bond Fund and the
Adjustable U.S. Government Fund and mortgage dollar roll transactions.
+ Total return is not annualized.
70
<PAGE>
FRANKLIN VALUEMARK FUNDS
Financial Highlights (continued)
(1) For the period March 15, 1994 (effective date) to December 31, 1994.
(2) For the period April 19, 1995 (seed date) to December 31, 1995.
(3) For the period November 1, 1995 (effective date) to December 31, 1995.
(4) For the period May 1, 1996 (effective date) to December 31, 1996.
(5) For the period November 8, 1996 (effective date) to December 31, 1996.
(6) For the period May 1, 1998 (effective date) to December 31, 1998.
(7) During the periods indicated below, Franklin Advisers, Inc., the investment
manager, agreed to waive in advance a portion of its management fees
incurred by the Funds in the Trust. Had such action not been taken, the
ratio of expenses to average net assets would have been as follows:
<TABLE>
<CAPTION>
MONEY MARKET FUND ZERO COUPON FUND - 2000 ZERO COUPON FUND - 2005 ZERO COUPON FUND - 2010
<S> <C> <C> <C> <C> <C> <C> <C>
1994 ................. .54% 1994 ................ .66% 1994 ................ .68% 1994 ................. .68%
1995 ................. .53 1995 ................ .63 1995 ................ .66 1995 ................. .66
1996 ................. .53 1996 ................ .62 1996 ................ .65 1996 ................. .65
1997 ................. .53 1997 ................ .63 1997 ................ .65 1997 ................. .65
1998 ................. .53 1998 ................ .66 1998 ................ .66 1998 ................. .66
</TABLE>
See notes to financial statements.
71
<PAGE>
FRANKLIN VALUEMARK FUNDS
STATEMENT OF INVESTMENTS, DECEMBER 31, 1998
<TABLE>
<CAPTION>
CAPITAL GROWTH FUND SHARES VALUE
- -------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS 84.7%
COMMERCIAL SERVICES 2.5%
(a)Concord EFS Inc. 40,000 $ 1,695,000
Equifax Inc. 70,000 2,393,125
(a)Robert Half International Inc. 30,000 1,340,625
----------
5,428,750
----------
CONSUMER DURABLES 2.3%
(a)Electronic Arts Inc. 60,000 3,367,500
Mattel Inc. 70,000 1,596,875
----------
4,964,375
----------
CONSUMER NON-DURABLES 5.4%
Campbell Soup Co. 30,000 1,650,000
The Coca-Cola Co. 7,000 468,125
Hershey Foods Corp. 20,000 1,243,750
Nike Inc., B 35,000 1,419,688
PepsiCo Inc. 30,000 1,228,125
Philip Morris Cos. Inc. 60,000 3,210,000
The Procter & Gamble Co. 30,000 2,739,375
----------
11,959,063
----------
CONSUMER SERVICES 2.9%
(a)Mirage Resorts Inc. 110,000 1,643,125
Time Warner Inc. 64,000 3,972,000
The Walt Disney Co. 27,000 810,000
----------
6,425,125
----------
ELECTRONIC TECHNOLOGY 16.0%
(a)3Com Corp. 55,000 2,464,688
(a)Applied Materials Inc. 35,000 1,494,063
(a)Cisco Systems Inc. 60,750 5,638,359
Compaq Computer Corp. 100,000 4,193,750
Hewlett-Packard Co. 55,000 3,757,188
Intel Corp. 25,000 2,964,063
International Business Machines Corp. 20,000 3,695,000
Linear Technology Corp. 16,000 1,433,000
Molex Inc. 63,437 2,418,536
(a)Uniphase Corp. 35,000 2,428,125
United Technologies Corp. 20,000 2,175,000
(a)Xilinx Inc. 40,000 2,605,000
----------
35,266,772
----------
ENERGY MINERALS 1.9%
(a)Barrett Resources Corp. (Netherlands) 58,200 1,396,800
Royal Dutch Petroleum Co., N.Y. shs., ADR 60,000 2,872,500
----------
4,269,300
----------
FINANCE 5.6%
Associates First Capital Corp., A 70,000 2,966,250
Charles Schwab Corp. 52,500 2,949,843
Fannie Mae 40,000 2,960,000
Providian Financial Corp. 45,000 3,375,000
----------
12,251,093
----------
</TABLE>
<PAGE>
FRANKLIN VALUEMARK FUNDS
STATEMENT OF INVESTMENTS, DECEMBER 31, 1998 (CONT.)
<TABLE>
<CAPTION>
CAPITAL GROWTH FUND SHARES VALUE
- -----------------------------------------------------------------------------
COMMON STOCKS (CONT.)
HEALTH SERVICES 1.2%
<S> <C> <C>
Omnicare Inc. 75,000 $ 2,606,250
-----------
HEALTH TECHNOLOGY 13.3%
Abbott Laboratories 50,000 2,450,000
American Home Products Corp. 60,000 3,378,750
(a)Amgen Inc. 45,000 4,705,312
Baxter International Inc. 50,000 3,215,625
(a)Boston Scientific Corp. 80,000 2,145,000
Bristol-Myers Squibb Co. 35,000 4,683,437
Eli Lilly and Co. 25,000 2,221,875
Johnson & Johnson 35,000 2,935,625
Mentor Corp. 85,000 1,992,187
Merck & Co. Inc. 11,000 1,624,562
-----------
29,352,373
-----------
INDUSTRIAL SERVICES 1.3%
(a)Republic Services Inc., A 60,000 1,106,250
Schlumberger Ltd. 40,000 1,845,000
-----------
2,951,250
-----------
INSURANCE 2.6%
American International Group Inc. 25,000 2,415,625
Citigroup Inc. 50,000 2,475,000
SunAmerica Inc. 10,000 811,250
-----------
5,701,875
-----------
NON-ENERGY MINERALS .7%
De Beers Consolidated Mines AG, ADR (South Africa) 125,000 1,593,750
-----------
PROCESS INDUSTRIES 5.3%
Air Products & Chemicals Inc. 70,000 2,800,000
Millipore Corp. 60,000 1,706,250
(a)Owens-Illinois Inc. 80,000 2,450,000
Pall Corp. 110,000 2,784,375
Sigma-Aldrich Corp. 70,000 2,056,250
-----------
11,796,875
-----------
PRODUCER MANUFACTURING 2.8%
Avery Dennison Corp. 60,000 2,703,750
Emerson Electric Co. 40,000 2,420,000
Minnesota Mining and Manufacturing Co. 15,000 1,066,875
-----------
6,190,625
-----------
RETAIL TRADE 4.4%
Albertson's Inc. 40,000 2,547,500
McDonald's Corp. 40,000 3,065,000
Wal-Mart Stores Inc. 50,000 4,071,875
-----------
9,684,375
-----------
TECHNOLOGY SERVICES 6.3%
Automatic Data Processing Inc. 32,000 2,566,000
(a)Cambridge Technology Partners Inc. 80,000 1,770,000
(a)Computer Sciences Corp. 50,000 3,221,875
(a)Microsoft Corp. 14,000 1,941,625
(a)Oracle Corp. 35,000 1,509,375
(a)Synopsys Inc. 55,000 2,983,750
-----------
13,992,625
-----------
</TABLE>
73
<PAGE>
FRANKLIN VALUEMARK FUNDS
STATEMENT OF INVESTMENTS, DECEMBER 31, 1998 (CONT.)
<TABLE>
<CAPTION>
CAPITAL GROWTH FUND SHARES VALUE
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (CONT.)
TELECOMMUNICATIONS 2.8%
(a)AirTouch Communications Inc. ............................................... 60,000 $ 4,327,500
GTE Corp. .................................................................... 30,000 1,950,000
-----------
6,277,500
-----------
TRANSPORTATION 3.3%
Air Express International Corp. .............................................. 150,000 3,262,500
Expeditors International of Washington Inc. .................................. 60,000 2,520,000
Southwest Airlines Co. ....................................................... 70,000 1,570,625
-----------
7,353,125
-----------
UTILITIES 4.1%
(a)AES Corp.................................................................... 65,000 3,079,375
CMS Energy Corp. .............................................................. 60,000 2,906,250
Enron Corp. .................................................................. 40,000 2,282,500
MCN Energy Group Inc. ........................................................ 40,000 762,500
-----------
9,030,625
-----------
TOTAL LONG TERM INVESTMENTS (COST $142,185,516) .............................. 187,095,726
-----------
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT
------
<S> <C> <C>
(f) REPURCHASE AGREEMENT 15.1%
Joint Repurchase Agreement, 4.681%, 1/04/99 (Maturity Value $33,481,709) (COST $33,464,304) $33,464,304 33,464,304
Barclays Capital Inc. (Maturity Value $1,700,279)
Bear, Stearns & Co. Inc. (Maturity Value $440,814)
Chase Securities Inc. (Maturity Value $3,463,532)
CIBC Oppenheimer Corp. (Maturity Value $3,463,532)
Donaldson, Lufkin & Jenrette Securities Corp. (Maturity Value $3,463,532)
Dresdner Kleinwort Benson, North America LLC (Maturity Value $3,463,532)
Goldman, Sachs & Co. (Maturity Value $944,600)
Greenwich Capital Markets Inc. (Maturity Value $3,463,532)
Lehman Brothers Inc. (Maturity Value $629,732)
NationsBanc Montgomery Securities LLC (Maturity Value $3,463,532)
Paine Webber Inc. (Maturity Value $1,889,200)
Paribas Corp. (Maturity Value $3,463,532)
Warburg Dillon Read LLC (Maturity Value $3,632,360)
Collateralized by U.S. Treasury Bills & Notes
------------
TOTAL INVESTMENTS (COST $175,649,820) 99.8% ................................................ 220,560,030
OTHER ASSETS, LESS LIABILITIES .2% ......................................................... 391,608
------------
NET ASSETS 100.0% .......................................................................... $220,951,638
============
</TABLE>
(a) Non-income producing.
(f) See Note 1(c) regarding joint repurchase agreements.
See notes to financial statements.
74
<PAGE>
FRANKLIN VALUEMARK FUNDS
STATEMENT OF INVESTMENTS, DECEMBER 31, 1998
<TABLE>
<CAPTION>
GLOBAL HEALTH CARE SECURITIES FUND SHARES VALUE
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS 82.6%
HEALTH SERVICES 36.0%
(a)American Dental Partners Inc. ............................................................ 15,200 $ 175,750
Cardinal Health Inc. ....................................................................... 2,950 223,831
(a)Curative Health Services Inc. ............................................................ 8,500 284,750
HBO & Co. .................................................................................. 8,055 231,078
(a)Healthcare Recoveries Inc. ............................................................... 11,500 195,500
(a)New American Healthcare Corp. ............................................................ 24,000 268,500
Omnicare Inc. .............................................................................. 10,800 375,300
(a)PAREXEL International Corp. .............................................................. 10,700 267,500
(a)Pediatrix Medical Group Inc. ............................................................. 3,400 203,788
(a)Pharmaceutical Product Development Inc. .................................................. 9,000 270,562
(a)Renal Care Group Inc. .................................................................... 10,000 288,125
(a)Tenet Healthcare Corp. ................................................................... 6,900 181,125
(a)Total Renal Care Holdings Inc. ........................................................... 2,200 65,038
(a)Transitions Systems Inc. ................................................................. 14,000 210,000
---------
3,240,847
---------
HEALTH TECHNOLOGY 46.6%
American Home Products Corp. ............................................................... 6,800 382,925
(a)Amgen Inc. ............................................................................... 1,700 177,756
Baxter International Inc. .................................................................. 4,800 308,700
Bristol-Myers Squibb Co. ................................................................... 4,000 535,250
(a)ESC Medical Systems Ltd. (Israel) ........................................................ 9,500 99,750
(a)Genentech Inc. ........................................................................... 2,200 175,313
(a)Inhale Therapeutic Systems Inc. .......................................................... 9,300 306,900
(a)Ligand Pharmaceuticals Inc., B ........................................................... 11,000 127,875
Medtronic Inc. ............................................................................. 2,200 163,350
(a)Molecular Devices Corp. .................................................................. 8,400 182,700
(a)OrthoLogic Corp. ......................................................................... 46,000 153,815
Pfizer Inc. ................................................................................ 3,500 439,030
Pharmacia & Upjohn Inc. .................................................................... 3,000 169,875
Schering-Plough Corp. ...................................................................... 3,000 165,750
(a)Serologicals Corp. ....................................................................... 13,800 414,000
SmithKline Beecham PLC, ADR (United Kingdom) ............................................... 3,000 208,500
(a)Zonagen Inc. ............................................................................. 9,100 174,038
---------
4,185,527
---------
TOTAL LONG TERM INVESTMENTS (COST $6,550,381) .............................................. 7,426,374
---------
</TABLE>
75
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STATEMENT OF INVESTMENTS, DECEMBER 31, 1998 (CONT.)
<TABLE>
<CAPTION>
PRINCIPAL
GLOBAL HEALTH CARE SECURITIES FUND AMOUNT VALUE
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
(f)REPURCHASE AGREEMENT 19.7%
Joint Repurchase Agreement, 4.681%, 1/04/99 (Maturity Value $1,770,149) (COST $1,769,229) ... $1,769,229 $ 1,769,229
Barclays Capital Inc. (Maturity Value $89,892)
Bear, Stearns & Co. Inc. (Maturity Value $23,305)
Chase Securities Inc. (Maturity Value $183,114)
CIBC Oppenheimer Corp. (Maturity Value $183,114)
Donaldson, Lufkin & Jenrette Securities Corp. (Maturity Value $183,114)
Dresdner Kleinwort Benson, North America LLC (Maturity Value $183,114)
Goldman, Sachs & Co. (Maturity Value $49,940)
Greenwich Capital Markets Inc. (Maturity Value $183,114)
Lehman Brothers Inc. (Maturity Value $33,293)
NationsBanc Montgomery Securities LLC (Maturity Value $183,114)
Paine Webber Inc. (Maturity Value $99,880)
Paribas Corp. (Maturity Value $183,114)
Warburg Dillon Read LLC (Maturity Value $192,041)
Collateralized by U.S. Treasury Bills & Notes
----------
TOTAL INVESTMENTS (COST $8,319,610) 102.3% .................................................. 9,195,603
OTHER ASSETS, LESS LIABILITIES (2.3%) ....................................................... (205,278)
----------
NET ASSETS 100.0% ........................................................................... $8,990,325
==========
</TABLE>
(a) Non-income producing.
(f) See Note 1(c) regarding joint repurchase agreements.
76
See notes to financial statements.
<PAGE>
FRANKLIN VALUEMARK FUNDS
STATEMENT OF INVESTMENTS, DECEMBER 31, 1998
<TABLE>
<CAPTION>
GLOBAL UTILITIES SECURITIES FUND COUNTRY SHARES VALUE
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS 92.4%
(a)Advanced Fibre Communications Inc. ..................................... United States 600,000 $ 6,562,500
(a)AEM SpA ................................................................ Italy 4,745,000 11,300,346
(a)AES Corp. .............................................................. United States 550,000 26,056,250
AGL Resources Inc. ....................................................... United States 143,500 3,309,469
(a)AirTouch Communications Inc. ........................................... United States 246,100 17,749,963
American Electric Power Co. Inc. ......................................... United States 200,000 9,412,500
Beijing Datang Power Generation Co. Ltd. ................................. China 3,291,000 987,650
Bell Atlantic Corp. ...................................................... United States 350,000 18,550,000
BSES Ltd., GDR, 144A ..................................................... India 158,600 2,022,150
Central & South West Corp. ............................................... United States 647,400 17,763,038
Cinergy Corp. ............................................................ United States 829,800 28,524,375
CMS Energy Corp. ......................................................... United States 325,000 15,742,188
Coastal Corp. ............................................................ United States 280,000 9,782,500
Companhia Paranaense de Energia-Copel, ADR ............................... Brazil 83,300 593,513
Duke Energy Corp. ........................................................ United States 310,000 19,859,375
Edison International ..................................................... United States 838,600 23,375,975
Electricidade de Portugal SA ............................................. Portugal 324,000 7,133,498
Endesa SA ................................................................ Spain 718,400 19,063,295
Enron Corp. .............................................................. United States 450,000 25,678,125
Entergy Corp. ............................................................ United States 846,200 26,337,975
(a)Equant NV, N.Y. shs .................................................... Netherlands 305,700 20,730,281
Espoon Sahko Oyj, 144A, ADS .............................................. Finland 195,000 4,659,915
Florida Progress Corp. ................................................... United States 647,700 29,025,057
(a)Fortum Corp. ........................................................... Finland 939,300 5,843,494
FPL Group Inc. ........................................................... United States 445,800 27,472,425
(a)Global TeleSystems Group Inc. .......................................... United States 306,400 17,081,800
GPU Inc. ................................................................. United States 750,000 33,140,625
(a)Grupo Iusacell SA, D ................................................... Mexico 55,600 35,097
(a)Grupo Iusacell SA, L, ADR .............................................. Mexico 105,140 749,123
GTE Corp. ................................................................ United States 150,000 9,750,000
Hellenic Telecommunications Organization SA .............................. Greece 432,111 11,495,186
Hongkong Electric Holdings Ltd. .......................................... Hong Kong 1,250,000 3,791,668
(a)ICG Communications Inc. ................................................ United States 1,060,000 22,790,000
(a)Intermedia Communications Inc. ......................................... United States 316,600 5,461,350
(a)Korea Telecom Corp. .................................................... South Korea 200 6,320
(a)MCI WorldCom Inc. ...................................................... United States 150,000 10,762,500
MDU Resources Group Inc. ................................................. United States 616,800 16,229,550
(a)Millicom International Cellular SA ..................................... Luxembourg 140,000 4,882,500
Montana Power Co. ........................................................ United States 297,100 16,804,719
New Century Energies Inc. ................................................ United States 610,065 29,740,669
New Jersey Resources Corp. ............................................... United States 210,000 8,295,000
(a)Nextel Communications Inc. ............................................. United States 465,000 10,985,625
Nippon Telegraph & Telephone Corp. ....................................... Japan 1,180 9,121,986
NIPSCO Industries Inc. ................................................... United States 504,800 15,364,850
Northern States Power Co. ................................................ United States 423,600 11,754,900
Northwestern Corp. ....................................................... United States 363,000 9,596,813
PacifiCorp ............................................................... United States 411,000 8,656,688
(a)Panafon Hellenic Telecom SA ............................................ Greece 41,000 1,098,018
PG&E Corp. ............................................................... United States 855,150 26,937,225
Pinnacle West Capital Corp. .............................................. United States 663,000 28,094,625
Portugal Telecom SA ...................................................... Portugal 239,400 10,976,406
(a)Primus Telecommunications Group Inc. ................................... United States 226,500 3,737,250
SBC Communications Inc. .................................................. United States 150,000 8,043,750
SCANA Corp. .............................................................. United States 400,000 12,900,000
Sempra Energy ............................................................ United States 780,000 19,792,500
(a)Sonera Group Oyi ....................................................... Finland 163,800 2,943,832
Southern Co. ............................................................. United States 1,198,290 34,825,303
(a)Sprint Corp. ........................................................... United States 300,000 6,937,500
</TABLE>
77
<PAGE>
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STATEMENT OF INVESTMENTS, DECEMBER 31, 1998 (CONT.)
<TABLE>
<CAPTION>
GLOBAL UTILITIES SECURITIES FUND COUNTRY SHARES VALUE
COMMON STOCKS (CONT.) ------------ -------- ------------
<S> <C> <C> <C>
(a)Swisscom AG ............................................................ Switzerland 47,700 $ 19,969,057
TECO Energy Inc. ......................................................... United States 600,000 16,912,500
Telecom Italia SpA ....................................................... Italy 5,028,372 31,601,488
Telefonica SA, ADR ....................................................... Spain 88,351 11,960,568
(a)TeleWest Communications PLC, ADR ....................................... United Kingdom 62,633 1,769,382
Tokyo Electric Power Co. ................................................. Japan 135,000 3,339,096
Transportadora de Gas del Sur SA, ADR .................................... Argentina 370,000 3,746,250
VEBA AG .................................................................. Germany 267,500 15,851,495
Viag AG .................................................................. Germany 6,200 3,666,547
Washington Gas Light Co. ................................................. United States 287,500 7,798,438
Washington Water Power Co. ............................................... United States 224,000 4,312,000
Western Resources Inc. ................................................... United States 8,700 289,271
------------
TOTAL COMMON STOCKS (COST $714,629,056) .................................. 911,535,327
------------
CONVERTIBLE PREFERRED STOCKS 3.5%
(c)CMS Energy Corp., 7.75%, cvt. pfd ...................................... United States 175,000 10,325,000
Nortel Inversora SA, 10.00%, cvt. pfd .................................... Argentina 320,000 16,640,000
Texas Utilities Co., 9.25%, cvt. pfd ..................................... United States 136,600 7,700,825
------------
TOTAL CONVERTIBLE PREFERRED STOCKS (COST $33,864,125) .................... 34,665,825
------------
TOTAL LONG TERM INVESTMENTS (COST $748,493,181) 95.9% .................... 946,201,152
------------
PRINCIPAL
AMOUNT
---------
(g)REPURCHASE AGREEMENT 2.9%
NationsBanc Montgomery Securities LLC, 4.00%, 1/04/99
(Maturity Value $29,062,911) (COST $29,050,000) .................... United States $29,050,000 29,050,000
Collateralized by U.S. Treasury Notes ------------
TOTAL INVESTMENTS (COST $777,543,181) 98.8% ............................ 975,251,152
OTHER ASSETS, LESS LIABILITIES 1.2% .................................... 11,504,044
------------
NET ASSETS 100.0% ...................................................... $986,755,196
============
</TABLE>
(a) Non-income producing.
(c) See Note 8 regarding restricted securities.
(g) See Note 1(c) regarding repurchase agreements.
See notes to financial statements.
78
<PAGE>
FRANKLIN VALUEMARK FUNDS
STATEMENT OF INVESTMENTS, DECEMBER 31, 1998
<TABLE>
<CAPTION>
GROWTH AND INCOME FUND COUNTRY SHARES VALUE
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS 93.7%
COMMERCIAL SERVICES .8%
The Dun & Bradstreet Corp. ................................ United States 335,200 $ 10,579,750
------------
CONSUMER DURABLES 4.7%
Eastman Kodak Co. ......................................... United States 262,000 18,864,000
Ford Motor Co. ............................................ United States 372,500 21,861,094
General Motors Corp. ...................................... United States 288,000 20,610,000
------------
61,335,094
------------
CONSUMER NON-DURABLES 10.2%
Anheuser-Busch Cos. Inc. .................................. United States 330,000 21,656,250
DIMON Inc. ................................................ United States 949,800 7,064,138
Fortune Brands Inc. ....................................... United States 405,100 12,811,288
General Mills Inc. ........................................ United States 263,500 20,487,125
H.J. Heinz Co. ............................................ United States 283,000 16,024,875
Philip Morris Cos. Inc. ................................... United States 437,800 23,422,300
RJR Nabisco Holdings Corp. ................................ United States 248,560 7,379,125
UST Inc. .................................................. United States 745,000 25,981,875
------------
134,826,976
------------
ELECTRONIC TECHNOLOGY .6%
AMP Inc. .................................................. United States 139,560 7,265,843
EG&G Inc. ................................................. United States 15,000 417,188
------------
7,683,031
------------
ENERGY MINERALS 11.6%
Amoco Corp. ............................................... United States 136,400 8,235,150
Atlantic Richfield Co. .................................... United States 520,000 33,930,000
Chevron Corp. ............................................. United States 309,000 25,627,681
Exxon Corp. ............................................... United States 167,000 12,211,875
Mobil Corp. ............................................... United States 154,000 13,417,250
Texaco Inc. ............................................... United States 486,400 25,718,400
Ultramar Diamond Shamrock Corp. ........................... United States 447,800 10,859,150
YPF SA, ADR ............................................... Argentina 802,000 22,405,875
------------
152,405,381
------------
FINANCE 8.1%
Bank One Corp. ............................................ United States 276,210 14,103,973
BankBoston Corp. .......................................... United States 367,000 14,290,063
Household International Inc. .............................. United States 100,000 3,962,500
J.P. Morgan & Co. Inc. .................................... United States 120,900 12,702,056
Mercantile Bancorporation Inc. ............................ United States 266,703 12,301,676
National City Corp. ....................................... United States 275,000 19,937,500
PNC Bank Corp. ............................................ United States 322,900 17,476,963
Westpac Banking Corp. Ltd. ................................ Australia 1,763,651 11,812,553
------------
106,587,284
------------
HEALTH TECHNOLOGY 4.3%
Glaxo Wellcome PLC, ADR ................................... United Kingdom 320,800 22,295,600
Pharmacia & Upjohn Inc. ................................... United States 615,000 34,824,375
------------
57,119,975
------------
INDUSTRIAL SERVICES .5%
(h)Browning-Ferris Industries Inc........................... United States 225,000 6,398,438
------------
INSURANCE 6.7%
Exel Ltd. ................................................. Bermuda 249,348 18,701,100
Lincoln National Corp. .................................... United States 250,400 20,485,850
Safeco Corp. .............................................. United States 422,300 18,132,506
Scor ...................................................... France 197,000 13,030,593
St. Paul Cos. Inc. ........................................ United States 472,000 16,402,000
Zenith National Insurance Corp. ........................... United States 101,200 2,340,250
------------
89,092,299
------------
</TABLE>
79
<PAGE>
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STATEMENT OF INVESTMENTS, DECEMBER 31, 1998 (CONT.)
<TABLE>
<CAPTION>
GROWTH AND INCOME FUND COUNTRY SHARES VALUE
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS (Cont.)
NON-ENERGY MINERALS 3.5%
British Steel PLC, ADR .................................... United Kingdom 490,000 $ 7,166,250
Carpenter Technology Corp. ................................ United States 126,300 4,286,306
De Beers Consolidated Mines AG, ADR ....................... South Africa 753,000 9,600,750
Georgia Pacific Corp. (Timber Group) ...................... United States 341,700 8,136,731
Weyerhaeuser Co. .......................................... United States 325,000 16,514,063
-----------
45,704,100
-----------
PROCESS INDUSTRIES 5.9%
Dow Chemical Co. .......................................... United States 164,300 14,941,031
Imperial Chemical Industries PLC, ADR ..................... United Kingdom 474,400 16,574,350
Pall Corp. ................................................ United States 754,600 19,100,813
Potlatch Corp. ............................................ United States 277,400 10,229,125
Union Camp Corp. .......................................... United States 250,000 16,875,000
-----------
77,720,319
-----------
PRODUCER MANUFACTURING 6.1%
Avery Dennison Corp. ...................................... United States 204,500 9,215,281
Cooper Industries Inc. .................................... United States 192,300 9,170,306
Dana Corp. ................................................ United States 66,600 2,722,275
Diebold Inc. .............................................. United States 379,500 13,543,406
Federal Signal Corp. ...................................... United States 655,000 17,930,625
General Electric Co. ...................................... United States 92,200 9,410,163
Minnesota Mining & Manufacturing Co. ...................... United States 150,500 10,704,313
Pitney Bowes Inc. ......................................... United States 125,000 8,257,813
-----------
80,954,182
-----------
REAL ESTATE 5.7%
Arden Realty Inc. ......................................... United States 639,200 14,821,450
Equity Residential Properties Trust ....................... United States 465,300 18,815,569
FelCor Lodging Trust Inc. ................................. United States 693,100 15,984,619
Glenborough Realty Trust Inc. ............................. United States 350,000 7,131,250
Simon Property Group Inc. ................................. United States 652,700 18,601,950
-----------
75,354,838
-----------
RETAIL TRADE 2.2%
J.C. Penney Co. Inc. ...................................... United States 616,900 28,917,188
-----------
TELECOMMUNICATIONS 7.7%
Ameritech Corp. ........................................... United States 292,000 18,505,500
Bell Atlantic Corp. ....................................... United States 739,632 39,200,496
GTE Corp. ................................................. United States 374,500 24,342,500
U.S. West Inc. ............................................ United States 308,100 19,910,963
-----------
101,959,459
-----------
UTILITIES 15.1%
(h)Baltimore Gas & Electric Co. ............................ United States 306,000 9,447,750
Cinergy Corp. ............................................. United States 539,000 18,528,125
Consolidated Natural Gas Co. .............................. United States 317,000 17,118,000
Dominion Resources Inc. ................................... United States 521,000 24,356,750
GPU Inc. .................................................. United States 425,300 18,792,944
MCN Energy Group Inc. ..................................... United States 740,000 14,106,250
National Fuel Gas Co. ..................................... United States 365,800 16,529,588
New Century Energies Inc. ................................. United States 333,000 16,233,750
OGE Energy Corp. .......................................... United States 588,000 17,052,000
PacifiCorp ................................................ United States 603,000 12,700,688
PG&E Corp. ................................................ United States 395,700 12,464,550
Sempra Energy ............................................. United States 877,685 22,271,257
-----------
199,601,652
-----------
</TABLE>
80
<PAGE>
FRANKLIN VALUEMARK FUNDS
STATEMENT OF INVESTMENTS, DECEMBER 31, 1998 (CONT.)
<TABLE>
<CAPTION>
PRINCIPAL
GROWTH AND INCOME FUND COUNTRY AMOUNT VALUE
- -----------------------------------------------------------------------------------------------------------------------------------
U.S. GOVERNMENT AGENCY SECURITIES 1.9%
<S> <C> <C> <C>
Freddie Mac, notes, 0.00%, 6/04/99 (COST $24,488,806) ........................ United States $25,000,000 $ 24,489,325
--------------
TOTAL LONG TERM INVESTMENTS (COST $1,015,815,938) ............................ 1,260,729,291
--------------
(f)REPURCHASE AGREEMENT 4.4%
Joint Repurchase Agreement, 4.681%, 1/04/99
(Maturity Value $58,486,106) (COST $58,455,701) ............................ United States 58,455,701 58,455,701
Barclays Capital Inc. (Maturity Value $2,970,060)
Bear Stearns & Co. Inc. (Maturity Value $770,015)
Chase Securities Inc. (Maturity Value $6,050,125)
CIBC Oppenheimer Corp. (Maturity Value $6,050,125)
Donaldson, Lufkin & Jenrette Securities Corp. (Maturity Value $6,050,125)
Dresdner Kleinwort Benson, North America LLC (Maturity Value $6,050,125)
Goldman, Sachs & Co. (Maturity Value $1,650,033)
Greenwich Capital Markets Inc. (Maturity Value $6,050,125)
Lehman Brothers Inc. (Maturity Value $1,100,022)
NationsBanc Montgomery Securities LLC (Maturity Value $6,050,125)
Paine Webber Inc. (Maturity Value $3,300,068)
Paribas Corp. (Maturity Value $6,050,125)
Warburg Dillon Read LLC (Maturity Value $6,345,033)
Collateralized by U.S. Treasury Bills & Notes
--------------
TOTAL SHORT TERM INVESTMENTS (COST $82,944,507) .............................. 82,945,026
--------------
TOTAL INVESTMENTS (COST $1,074,271,639) 100.0% ............................... 1,319,184,992
OTHER ASSETS, LESS LIABILITIES ............................................... (441,719)
--------------
NET ASSETS 100.0% ............................................................ $1,318,743,273
--------------
</TABLE>
(f) See Note 1(c) regarding joint repurchase agreements.
(h) Sufficient collateral has been segregated for securities traded on a
when-issued or delayed delivery basis.
See notes to financial statements.
81
<PAGE>
FRANKLIN VALUEMARK FUNDS
STATEMENT OF INVESTMENTS, DECEMBER 31, 1998
<TABLE>
<CAPTION>
SHARES/
HIGH INCOME FUND COUNTRY WARRANTS VALUE
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
(a) COMMON STOCKS AND WARRANTS
CONSUMER SERVICES
Foodmaker Inc. ............................................................... United States 210 $ 4,633
Wireless One Inc., wts., 8/01/01 ............................................. United States 5,000 --
-----------
4,633
-----------
NON-ENERGY MINERALS
Gulf States Steel, wts., 4/15/03 ............................................. United States 5,000 5,000
-----------
TELECOMMUNICATIONS
International Wireless Communications, wts., 8/15/01 ......................... United States 7,800 39
Nextel Communications Inc., wts., 4/25/99 .................................... United States 6,500 65
Poland Telecom Finance, 144A, wts., 12/01/07 ................................. Poland 8,000 32,000
-----------
32,104
-----------
UTILITIES
Empire Gas Corp., wts., 7/15/04 .............................................. United States 6,900 34,500
Loral Orion Network System, wts., 1/15/07 .................................... United States 1,500 12,671
Nextel International Inc., wts., 4/15/07 ..................................... United States 7,000 35,000
-----------
82,171
-----------
TOTAL COMMON STOCKS AND WARRANTS (COST $237,249) ............................. 123,908
-----------
PREFERRED STOCKS .3%
Fresenius Medical Care AG, 9.00%, pfd. (COST $1,300,000) ..................... Germany 1,300 1,352,000
-----------
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT*
-------
<S> <C> <C> <C>
BONDS 93.4%
COMMERCIAL SERVICES 3.6%
Borg-Warner Security Corp., senior sub. note, 9.625%, 3/15/07 ................ United States $ 4,000,000 4,340,000
Fleming Cos. Inc., senior sub. note, B, 10.50%, 12/01/04 ..................... United States 2,000,000 1,900,000
Fleming Cos. Inc., senior sub. note, B, 10.625%, 7/31/07 ..................... United States 2,000,000 1,875,000
Intertek Finance PLC, senior sub. note, B, 10.25%, 11/01/06 .................. United Kingdom 3,700,000 3,348,500
Outdoor Systems Inc., senior sub. note, 8.875%, 6/15/07 ...................... United States 4,250,000 4,568,750
-----------
16,032,250
-----------
CONSUMER DURABLES 2.6%
E&S Holdings Corp., senior sub. note, B, 10.375%, 10/01/06 ................... United States 3,000,000 1,515,000
Pillowtex Corp., senior sub. note, B, 9.00%, 12/15/07 ........................ United States 2,900,000 3,001,500
Sealy Mattress Co., senior disc. note, B, zero cpn. to 12/15/02,
10.875% thereafter, 12/15/07 ............................................. United States 1,500,000 900,000
Sealy Mattress Co., senior sub. note, B, 9.875%, 12/15/07 .................... United States 1,000,000 965,000
True Temper Sports Inc., senior sub. note, 144A, 10.875%, 12/01/08 ........... United States 4,000,000 3,980,000
Windmere-Durable Holdings Inc., senior sub. note, 10.00%, 7/31/08 ............ United States 1,200,000 1,128,000
-----------
11,489,500
-----------
CONSUMER NON-DURABLES 3.9%
Compania Alimentos Fargo SA, senior note, 144A, 13.25%, 8/01/08 .............. Argentina 1,250,000 956,250
Doane Pet Care Co., senior sub. note, 144A, 9.75%, 5/15/07 ................... United States 2,197,000 2,257,418
International Home Foods, senior sub. note, 10.375%, 11/01/06 ................ United States 1,600,000 1,740,000
Packaged Ice Inc., senior sub. note, B, 9.75%, 2/01/05 ....................... United States 2,600,000 2,665,000
RC/Arbys Corp., senior secured note, 9.75%, 8/01/00 .......................... United States 4,000,000 3,940,000
RJR Nabisco Inc., senior note, 9.25%, 8/15/13 ................................ United States 3,000,000 3,080,022
Styling Technology Corp., senior sub. note, 10.875%, 7/01/08 ................. United States 3,000,000 2,865,000
-----------
17,503,690
-----------
CONSUMER SERVICES 25.6%
Advanstar Communications, senior sub. note, 9.25%, 5/01/08 ................... United States 5,000,000 5,050,000
Ascent Entertainment Group Inc., senior disc. note, zero cpn. to
12/15/02, 11.875% thereafter, 12/15/04 .................................... United States 3,000,000 1,815,000
Benedek Broadcasting, senior note, 11.875%, 3/01/05 .......................... United States 2,500,000 2,675,000
Century Communications Corp., senior sub. note, 9.50%, 3/01/05 ............... United States 3,000,000 3,345,000
Chancellor Media Corp., senior note, 144A, 8.00%, 11/01/08 ................... United States 3,500,000 3,578,750
</TABLE>
82
<PAGE>
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STATEMENT OF INVESTMENTS, DECEMBER 31, 1998 (CONT.)
<TABLE>
<CAPTION>
PRINCIPAL
HIGH INCOME FUND COUNTRY AMOUNT* VALUE
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
BONDS (CONT.)
CONSUMER SERVICES (CONT.)
Chancellor Media Corp., senior sub. note, 144A, 9.00%, 10/01/08 ........ United States $ 4,500,000 $ 4,736,250
Circus Circus Enterprises Inc., senior sub. note, 9.25%, 12/01/05 ...... United States 1,000,000 1,015,000
CSC Holdings Inc., B, 8.125%, 8/15/09 .................................. United States 1,500,000 1,585,200
CSC Holdings Inc., senior sub. deb., 10.50%, 5/15/16 ................... United States 3,000,000 3,540,000
CSC Holdings Inc., senior sub. deb., 9.875%, 4/01/23 ................... United States 4,500,000 5,028,750
Diamond Cable Communication Co. PLC, senior disc. note, zero cpn to
12/15/00, 11.75% thereafter, 12/15/05 .............................. United Kingdom 2,700,000 2,247,750
Diamond Cable Communication Co. PLC, senior disc. note, zero cpn to
2/15/02, 10.75% thereafter, 2/15/07.................................. United Kingdom 1,500,000 1,057,500
Diamond Holdings PLC, 9.125%, 2/01/08 .................................. United Kingdom 3,000,000 2,880,000
Eldorado Resorts LLC, senior sub. note, 10.50%, 8/15/06 ................ United States 1,000,000 1,045,000
Fox Family Worldwide Inc., senior disc. note, zero cpn to 11/01/02,
10.25% thereafter, 11/01/07 ......................................... United States 1,000,000 630,000
Fox Family Worldwide Inc., senior note, 9.25%, 11/01/07 ................ United States 1,500,000 1,492,500
Friendly Ice Cream Corp., senior note, 10.50%, 12/01/07 ................ United States 8,000,000 8,140,000
Granite Broadcasting Corp., senior sub. note, A, 10.375%, 5/15/05 ...... United States 6,500,000 6,597,500
Hammons (John Q) Hotels, first mortgage, 8.875%, 2/15/04 ............... United States 1,000,000 925,000
Hammons (John Q) Hotels, first mortgage, 9.75%, 10/01/05 ............... United States 1,500,000 1,410,000
Hard Rock Hotel Inc., senior sub. note, B, 9.25%, 4/01/05 .............. United States 400,000 402,000
Harrah's Operating Co. Inc., senior sub. note, 7.875%, 12/15/05 ........ United States 4,500,000 4,488,750
Hollinger International Publishing, senior sub. note, 9.25%, 3/15/07 ... United States 4,500,000 4,770,000
La Petite Academy Inc., senior note, B, 10.00%, 5/15/08 ................ United States 5,000,000 4,975,000
Lin Holdings Corp., senior disc. note, zero cpn. to 3/01/03,
10.00% thereafter, 3/01/08 ......................................... United States 2,600,000 1,833,000
Lin Television Corp., senior sub. note, 8.375%, 3/01/08 ................ United States 2,800,000 2,814,000
Prime Hospitality Corp., senior sub. note, B, 9.75%, 4/01/07 ........... United States 3,000,000 3,075,000
Protection One Alarm, Monitoring Inc., senior sub. note, 144A,
8.125%, 1/15/09 ................................................ United States 5,000,000 5,000,000
Red Roof Inns Inc., senior note, 9.625%, 12/15/03 ...................... United States 2,310,000 2,367,750
Regal Cinemas Inc., senior sub. note, 9.50%, 6/01/08 ................... United States 5,000,000 5,225,000
Rio Hotel & Casino Inc., senior sub. note, 10.625%, 7/15/05 ............ United States 3,000,000 3,285,000
Rogers Cablesystems Inc., senior disc. deb., 9.65%, 1/15/14 ............ Canada 5,700,000 CAD 3,949,551
SFX Broadcasting Inc., senior sub. note, B, 10.75%, 5/15/06 ............ United States 1,304,000 1,434,400
Sinclair Broadcast Group Inc., senior sub. note, 10.00%, 9/30/05 ....... United States 2,500,000 2,662,500
Six Flags Entertainment Corp., senior note, 8.875%, 4/01/06 ............ United States 2,250,000 2,317,500
TeleWest Communications PLC, senior disc. deb., zero cpn to
10/01/00, 11.00% thereafter, 10/01/07 .............................. United Kingdom 8,000,000 6,720,000
Wireless One Inc., senior disc. note, zero cpn. to 8/01/01,
13.50% thereafter, 8/01/06 .......................................... United States 2,000,000 60,000
-----------
114,173,651
-----------
ELECTRONIC TECHNOLOGY 2.6%
Amphenol Corp., senior sub. note, 9.875%, 5/15/07 ...................... United States 1,000,000 1,025,000
Exide Electronics Group Inc., senior sub. note, B, 11.50%, 3/15/06 ..... United States 2,000,000 2,340,000
L-3 Communications Corp., senior sub. note, 10.375%, 5/01/07 ........... United States 3,500,000 3,858,750
L-3 Communications Corp., senior sub. note, 144A, 8.00%, 8/01/08 ....... United States 750,000 759,375
Telecommunication Techniques Co., senior sub. note, 9.75%, 5/15/08 ..... United States 3,500,000 3,465,000
-----------
11,448,125
-----------
ENERGY MINERALS 3.9%
Abraxas Petroleum Corp., senior note, D, 11.50%, 11/01/04 .............. United States 4,300,000 3,268,000
Clark R&M Inc., senior sub. note, 8.875%, 11/15/07 ..................... United States 5,000,000 4,475,000
Forcenergy Inc., senior sub. note, 9.50%, 11/01/06 ..................... United States 800,000 620,000
Mesa Operating Co., zero cpn. to 7/01/01, 11.625% thereafter, 7/01/06 .. United States 1,800,000 1,381,500
Nuevo Energy Co., senior sub. note, B, 8.875%, 6/01/08 ................. United States 1,300,000 1,267,500
P&L Coal Holdings Corp., senior note, B, 8.875%, 5/15/08 ............... United States 1,000,000 1,025,000
P&L Coal Holdings Corp., senior sub. note, B, 9.625%, 5/15/08 .......... United States 4,500,000 4,567,500
Pogo Producing Co., senior sub. note, B, 8.75%, 5/15/07 ................ United States 1,000,000 955,000
-----------
17,559,500
-----------
HEALTH SERVICES 4.6%
Abbey Healthcare Group, senior sub. note, 9.50%, 11/01/02 .............. United States 7,770,000 7,692,300
Magellan Health Services Inc., senior sub. note, 9.00%, 2/15/08 ........ United States 2,750,000 2,433,750
</TABLE>
83
<PAGE>
FRANKLIN VALUEMARK FUNDS
STATEMENT OF INVESTMENTS, DECEMBER 31, 1998 (CONT.)
<TABLE>
<CAPTION>
PRINCIPAL
HIGH INCOME FUND COUNTRY AMOUNT* VALUE
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
BONDS (CONT.)
HEALTH SERVICES (CONT.)
Pharmerica Inc., senior sub. note, 8.375%, 4/01/08 ...................... United States $ 1,250,000 $ 1,125,000
Tenet Healthcare Corp., senior note, 8.625%, 12/01/03 ................... United States 2,400,000 2,534,882
Tenet Healthcare Corp., senior sub. note, 8.625%, 1/15/07 ............... United States 3,250,000 3,412,500
Vencor Operation Inc., senior sub. note, 9.875%, 5/01/05 ................ United States 4,200,000 3,465,000
----------
20,663,432
----------
INDUSTRIAL SERVICES 3.0%
Allied Waste North America Inc., senior note, 144A, 7.875%, 1/01/09 ..... United States 5,500,000 5,568,750
Dailey International Inc., senior note, B, 9.50%, 2/15/08 ............... United States 1,550,000 689,750
Safety Kleen Services, 9.25%, 6/01/08 ................................... United States 4,500,000 4,657,500
Universal Compression Inc., senior disc. note, zero cpn. to
2/15/03, 9.875% thereafter, 2/15/08 .................................. United States 4,650,000 2,673,750
----------
13,589,750
----------
NON-ENERGY MINERALS 2.0%
Algoma Steel Inc., first mortgage, 12.375%, 7/15/05 ..................... Canada 4,000,000 3,060,000
Bear Island Paper Company LLC, senior note, B, 10.00%, 12/01/07 ......... United States 1,800,000 1,809,000
LTV Corp., senior note, 8.20%, 9/15/07 .................................. United States 4,500,000 4,095,000
----------
8,964,000
----------
PROCESS INDUSTRIES 7.7%
Applied Extrusion Technology, senior note, B, 11.50%, 4/01/02 ........... United States 3,750,000 3,928,125
Asia Pulp & Paper Co. Ltd., 12.00%, 2/15/04 ............................. Indonesia 4,500,000 2,610,000
Climachen Inc., senior sub. note, B, 10.75%, 12/01/07 ................... United States 1,200,000 1,212,000
Container Corp., senior note, A, 11.25%, 5/01/04 ........................ United States 2,500,000 2,612,500
Four M Corp., senior note, B, 12.00%, 6/01/06 ........................... United States 7,700,000 5,890,500
Graham Packaging Holdings, senior disc. note, B, zero cpn. to
1/15/03, 10.75% thereafter, 1/15/09 .................................. United States 900,000 616,500
Huntsman Corp., senior sub. note, 144A, 9.50%, 7/01/07 .................. United States 1,000,000 997,500
Huntsman Corp., senior sub. note, 144A, 9.50%, 7/01/07 .................. United States 3,500,000 3,500,000
Plastic Containers Inc., senior note, B, 10.00%, 12/15/06 ............... United States 1,000,000 1,045,000
(b)Polysindo International Finance Co. BV, 9.375%, 7/30/07 ................ Indonesia 4,250,000 1,243,125
Purina Mills Inc., senior sub. note, 9.00%, 3/15/10 ..................... United States 2,600,000 2,665,000
Radnor Holdings Inc., senior note, 10.00%, 12/01/03 ..................... United States 5,000,000 5,050,000
Repap New Brunswick, senior note, 9.00%, 6/01/04 ........................ Canada 2,000,000 1,820,000
Tjiwi Kimia Finance Mauritius, senior note, 10.00%, 8/01/04 ............. Indonesia 2,000,000 1,070,000
----------
34,260,250
----------
PRODUCER MANUFACTURING 4.5%
Aetna Industries Inc., senior note, 11.875%, 10/01/06 ................... United States 700,000 738,500
Goss Graphic Systems Inc., senior sub. note, 12.00%, 10/15/06 ........... United States 3,200,000 1,776,000
Nortek Inc., senior sub. note, 9.875%, 3/01/04 .......................... United States 5,500,000 5,720,000
Oshkosh Truck Corp., senior sub. note, 8.75%, 3/01/08 ................... United States 2,000,000 2,010,000
Simonds Industries Ind., senior sub. note, 144A, 10.25%, 7/01/08 ........ United States 2,750,000 2,818,750
Talon Automotive Group Inc., senior sub. note, B, 9.625%, 5/01/08 ....... United States 2,900,000 2,769,500
Terex Corp., senior sub. note, 8.875%, 4/01/08 .......................... United States 3,550,000 3,514,500
Trench Electric & Trench Inc., senior sub. deb., 10.25%, 12/15/07 ....... Canada 750,000 708,750
----------
20,056,000
----------
RETAIL TRADE 1.1%
Hollywood Entertainment Corp., senior sub. note, B, 10.625%, 8/15/04 .... United States 4,000,000 4,060,000
Shoppers Food Warehouse Corp., senior note, 9.75%, 6/15/04 .............. United States 750,000 821,250
----------
4,881,250
----------
TECHNOLOGY SERVICES 1.1%
Anacomp Inc., senior sub. note, D, 10.875%, 4/01/04 ..................... United States 4,000,000 4,140,000
Decisionone Corp., senior sub. note, 9.75%, 8/01/07 ..................... United States 1,000,000 465,000
Decisionone Holding Corp., senior disc. deb., zero cpn. to 8/01/02,
11.50% thereafter, 8/01/08 .......................................... United States 2,500,000 512,500
----------
5,117,500
----------
</TABLE>
84
<PAGE>
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STATEMENT OF INVESTMENTS, DECEMBER 31, 1998 (CONT.)
<TABLE>
<CAPTION>
PRINCIPAL
HIGH INCOME FUND COUNTRY AMOUNT* VALUE
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
BONDS (CONT.)
TELECOMMUNICATIONS 20.6%
Arch Communications Group, senior disc. note, zero cpn. to 3/15/01,
10.875% thereafter, 3/15/08 .......................................... United States $ 6,000,000 $ 3,570,000
Dobson/Sygnet, Communications Co., senior note, A, 144A, 12.25%, 12/15/08 United States 4,500,000 4,545,000
Flag Ltd., senior note, 8.25%, 1/30/08 .................................. Bermuda 1,000,000 995,000
Global Crossing Holdings Ltd., senior note, 9.625%, 5/15/08 ............. Bermuda 5,000,000 5,287,500
ICO Global Communications, 15.00%, 8/01/05 .............................. Bermuda 5,000,000 3,750,000
IntelCom Group Inc., senior secured disc. note, zero cpn. to
5/01/01, 12.50% thereafter, 5/01/06 .................................. United States 3,250,000 2,421,250
Intermedia Communications Inc., senior disc. note, B, zero cpn. to
7/15/02, 11.25% thereafter, 7/15/07 .................................. United States 5,000,000 3,425,000
Iridium LLC/CAP, senior note, D, 10.875%, 7/15/05 ....................... Bermuda 5,350,000 4,574,250
IXC Communications Inc., senior sub. note, 9.00%, 4/15/08 ............... United States 2,250,000 2,250,000
Level 3 Communications Inc, senior disc. note, 144A, zero cpn
to 12/01/03, 10.50% thereafter, 12/01/08 ............................. United States 3,000,000 1,702,500
Level 3 Communications Inc., senior note, 9.125%, 5/01/08 ............... United States 5,000,000 4,962,500
McCaw International Ltd., senior disc. note, zero cpn. to 4/15/02,
13.00% thereafter, 4/15/07 ........................................... United States 7,000,000 3,937,500
Metrocall Inc., senior sub, note, 144A, 11.00%, 9/15/08 ................. United States 5,000,000 5,025,000
Millicom International Cellular SA, senior disc. note, zero cpn
to 6/01/01, 13.50% thereafter, 6/01/06 ............................... Luxembourg 9,300,000 6,603,000
Netia Holdings BV, senior disc. note, B, zero cpn. to
11/01/01, 11.25% thereafter, 11/01/07 ................................ Poland 2,000,000 1,145,000
Netia Holdings BV, senior note, B, 10.25%, 11/01/07 ..................... Poland 1,300,000 1,108,250
Nextel Communications Inc., senior disc. note, zero cpn
to 9/15/02, 10.65% thereafter, 9/15/07 ............................... United States 7,000,000 4,497,500
Nextel Communications Inc., senior disc. note, zero cpn
to 10/31/02, 9.75% thereafter, 10/31/07 .............................. United States 3,000,000 1,830,000
NEXTLINK Communications Inc., senior note, 9.625%, 10/01/07 ............. United States 1,400,000 1,344,000
NEXTLINK Communications Inc., senior note, 9.00%, 3/15/08 ............... United States 3,600,000 3,357,000
Northeast Optic Network Inc., senior note, 12.75%, 8/15/08 .............. United States 3,500,000 3,430,000
Orion Network Systems Inc., senior disc. note, zero cpn
to 1/15/02. 12.50% thereafter, 1/15/07 ............................... United States 1,500,000 945,000
Poland Telecom Finance, senior note, B, 14.00%, 12/01/07 ................ Poland 8,000,000 7,320,000
Rogers Cantel Mobile, senior secured deb., 9.75%, 6/01/16 ............... Canada 3,000,000 3,225,000
RSL Communications PLC, A, 144A, 12.00%, 11/01/08 ....................... United Kingdom 1,500,000 1,545,000
Sprint Spectrum LP, senior disc. note, zero cpn
to 8/15/01, 12.50% thereafter, 8/15/06 ............................... United States 10,000,000 9,050,000
-----------
91,845,250
-----------
TRANSPORTATION 4.1%
American Commercial Lines LLC, senior note, 10.25%, 6/30/08 ............. United States 3,100,000 3,162,000
Eletson Holdings, first mortgage, 9.25%, 11/15/03 ....................... Greece 1,600,000 1,528,000
Gearbulk Holding Ltd., senior note, 11.25%, 12/01/04 .................... Bermuda 4,500,000 4,770,000
GS Superhighway (Holdings) Ltd., senior note, 10.25%, 8/15/07 ........... Hong Kong 6,000,000 2,880,000
MRS Logistica SA, B, 144A, 10.625%, 8/15/05 ............................. Brazil 5,000,000 2,525,000
The Holt Group Inc., senior note, 144A, 9.75%, 1/15/06 .................. United States 5,250,000 3,648,750
-----------
18,513,750
-----------
UTILITIES 2.5%
AES Corp., senior sub. note, 8.50%, 11/01/07 ............................ United States 1,000,000 1,017,500
El Paso Electric Co., first mortgage, D, 8.90%, 2/01/06 ................. United States 2,500,000 2,856,250
Empire Gas Corp., senior secured note, 7.00%
to 7/15/99, 12.875% thereafter, 7/15/04 .............................. United States 5,000,000 3,900,000
Hermes Europe Railtel BV, senior note, 11.50%, 8/15/07 .................. Netherlands 2,000,000 2,130,000
Niagara Mohawk Power Corp., senior disc. note, H, zero cpn
to 7/01/03, 8.50% thereafter, 7/01/10 ................................ United States 1,500,000 1,140,000
-----------
11,043,750
-----------
TOTAL BONDS (COST $442,737,128) ......................................... 417,141,648
-----------
ZERO COUPON BONDS 1.5%
CONSUMER NON-DURABLES 1.3%
Revlon Worldwide Corp., senior disc. note, B, 3/15/01 ................... United States 10,000,000 5,750,000
-----------
TELECOMMUNICATIONS .2%
(b),(c) International Wireless Communications,
senior disc. note, 8/15/01 ........................................... United States 7,800,000 682,500
-----------
TOTAL ZERO COUPON BONDS (COST $13,142,703) .............................. 6,432,500
-----------
TOTAL LONG TERM INVESTMENTS (COST $457,417,080) ......................... 425,050,056
-----------
</TABLE>
85
<PAGE>
FRANKLIN VALUEMARK FUNDS
STATEMENT OF INVESTMENTS, DECEMBER 31, 1998 (CONT.)
<TABLE>
<CAPTION>
PRINCIPAL
HIGH INCOME FUND COUNTRY AMOUNT* VALUE
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
(f) REPURCHASE AGREEMENT 3.0%
Joint Repurchase Agreement 4.681%, 1/04/99
(Maturity Value $13,394,669) (COST $13,387,706) ...................... United States $ 13,387,706 $ 13,387,706
Barclays Capital Inc. (Maturity Value $680,213)
Bear, Stearns & Co. Inc. (Maturity Value $176,352)
Chase Securities Inc. (Maturity Value $1,385,618)
CIBC Oppenheimer Corp. (Maturity Value $1,385,618)
Donald, Lufkin & Jenrette Securities Corp. (Maturity Value $1,385,618)
Dresdner Kleinwort Benson, North America LLC (Maturity Value $1,385,618)
Goldman, Sachs & Co. (Maturity Value $377,897)
Greenwich Capital Markets Inc. (Maturity Value $1,385,618)
Lehman Brothers Inc. (Maturity Value $251,928)
NationsBanc Montgomery Securities LLC (Maturity Value $1,385,618)
Paine Webber Inc. (Maturity Value $755,793)
Paribas Corp. (Maturity Value $1,385,618)
Warburg Dillon Read LLC (Maturity Value $1,453,160)
Collateralized by U.S. Treasury Bills & Notes
------------
TOTAL INVESTMENTS (COST $470,804,786) 98.2% ............................. 438,437,762
OTHER ASSETS, LESS LIABILITIES 1.8% ..................................... 8,170,743
------------
NET ASSETS 100.0% ....................................................... $446,608,505
------------
</TABLE>
See currency abbreviations on page 162.
(*) Securities traded in U.S. Dollars unless otherwise indicated.
(a) Non-income producing.
(b) See Note 7 regarding defaulted securities.
(c) See Note 8 regarding restricted securities.
(f) See Note 1(c) regarding joint repurchase agreements.
86
See notes to financial statements.
<PAGE>
FRANKLIN VALUEMARK FUNDS
STATEMENT OF INVESTMENTS, DECEMBER 31, 1998
<TABLE>
<CAPTION>
INCOME SECURITIES FUND SHARES VALUE
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS 38.6%
CONSUMER DURABLES .3%
General Motors Corp. ............................................................... 55,000 $ 3,935,938
-------------
CONSUMER NON-DURABLES 2.2%
Philip Morris Cos. Inc. ............................................................ 450,000 24,075,000
RJR Nabisco Holdings Corp. ......................................................... 60,000 1,781,250
-------------
25,856,250
-------------
ELECTRONIC TECHNOLOGY .1%
(a)Anacomp Inc. ..................................................................... 85,000 1,583,125
-------------
ENERGY MINERALS 2.2%
Athabasca Oil Sands Trust (Canada) ................................................. 576,500 6,305,469
BP Prudhoe Bay Royalty Trust ....................................................... 50,000 237,500
Canadian Oil Sands Trust Units (Canada) ............................................ 500,000 5,777,995
Enron Oil & Gas Co. ................................................................ 340,000 5,865,000
Pioneer Natural Resources Co. ...................................................... 302,226 2,644,478
(a)Santa Fe Energy Resources Inc. ................................................... 279,642 2,062,360
Snyder Oil Corp. ................................................................... 30,000 399,375
Ultramar Diamond Shamrock Corp. .................................................... 125,000 3,031,250
-------------
26,323,427
-------------
NON-ENERGY MINERALS 1.3%
Anglo American Platinum Corp. Ltd., ADR (South Africa) ............................. 223,161 3,061,345
AngloGold Ltd., ADR (South Africa) ................................................. 395,000 7,727,188
De Beers Consolidated Mines AG, ADR (South Africa) ................................. 40,000 510,000
Freeport-McMoRan Copper & Gold Inc., A ............................................. 110,000 1,065,625
Impala Platinum Holdings Ltd., ADR (South Africa) .................................. 216,500 2,944,205
-------------
15,308,363
-------------
PROCESS INDUSTRIES .2%
(a)Dan River Inc., A ................................................................ 173,256 2,035,758
-------------
PRODUCER MANUFACTURING .6%
(a)Harvard Industries Inc. .......................................................... 137,330 1,047,139
McDermott International Inc. ....................................................... 260,000 6,418,750
-------------
7,465,889
-------------
REAL ESTATE 1.7%
Equity Residential Properties Trust ................................................ 150,000 6,065,625
FelCor Lodging Trust Inc. .......................................................... 275,000 6,342,188
Gables Residential Trust ........................................................... 150,000 3,478,125
Meditrust Cos. ..................................................................... 120,160 1,817,420
Simon Property Group Inc. .......................................................... 102,900 2,932,650
-------------
20,636,008
-------------
TELECOMMUNICATIONS .4%
U.S. West Inc. ..................................................................... 70,000 4,523,750
-------------
UTILITIES 29.6%
American Electric Power Co. Inc. ................................................... 390,000 18,354,375
Central & South West Corp. ......................................................... 500,000 13,718,750
Cinergy Corp. ...................................................................... 511,000 17,565,625
Conectiv Inc. ...................................................................... 500,000 12,250,000
Dominion Resources Inc. ............................................................ 325,000 15,193,750
Edison International ............................................................... 425,000 11,846,875
Energy East Corp. .................................................................. 125,000 7,062,500
Entergy Corp. ...................................................................... 500,000 15,562,500
FirstEnergy Corp. .................................................................. 300,000 9,768,750
Florida Progress Corp. ............................................................. 390,000 17,476,875
FPL Group Inc. ..................................................................... 192,700 11,875,138
GPU Inc. ........................................................................... 320,000 14,140,000
</TABLE>
87
<PAGE>
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STATEMENT OF INVESTMENTS, DECEMBER 31, 1998 (CONT.)
<TABLE>
<CAPTION>
INCOME SECURITIES FUND SHARES VALUE
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (CONT.)
UTILITIES (CONT.)
Hawaiian Electric Industries Inc. .................................................. 142,000 $ 5,715,500
Houston Industries Inc. ............................................................ 315,000 10,119,375
KeySpan Energy Corp. ............................................................... 352,000 10,912,000
Nevada Power Co. ................................................................... 175,000 4,550,000
New Century Energies Inc. .......................................................... 380,000 18,525,000
New England Electric System ........................................................ 330,000 15,881,250
Northern States Power Co. .......................................................... 210,000 5,827,500
PacifiCorp ......................................................................... 120,000 2,527,500
PECO Energy Co. .................................................................... 400,000 16,650,000
PG&E Corp. ......................................................................... 450,000 14,175,000
Potomac Electric Power Co. ......................................................... 300,000 7,893,750
Public Service Enterprise Group Inc. ............................................... 320,000 12,800,000
SCANA Corp. ........................................................................ 150,000 4,837,500
Sempra Energy ...................................................................... 525,000 13,321,875
Southern Co. ....................................................................... 480,000 13,950,000
Texas Utilities Co. ................................................................ 437,450 20,423,447
Western Resources Inc. ............................................................. 215,000 7,148,750
------------
350,073,585
------------
TOTAL COMMON STOCKS (COST $369,133,416) ............................................ 457,742,093
------------
PREFERRED STOCKS .1%
Freeport-McMoRan Copper & Gold Inc., 0.00%, pfd., Gold (COST $3,846,805) ........... 108,800 1,618,400
------------
CONVERTIBLE PREFERRED STOCKS 7.9%
CONSUMER SERVICES 1.0%
CSC Holdings Inc., 8.50%, cvt. pfd., I ............................................. 75,000 5,653,125
Host Marriott Corp., 6.75%, cvt. pfd., 144A ........................................ 100,000 4,100,000
MediaOne Group Inc., 6.25%, cvt. pfd. .............................................. 30,000 1,995,000
------------
11,748,125
------------
ENERGY MINERALS 1.0%
Chesapeake Energy Corp., 7.00%, cvt. pfd., 144A .................................... 85,000 871,250
Devon Financing Trust, $3.25, cvt. pfd., 144A ...................................... 60,000 3,438,750
Lomak Financing Trust, 5.75%, cvt. pfd. ............................................ 10,000 181,250
Lomak Financing Trust, 5.75% cvt. pfd., 144A ....................................... 120,000 2,175,000
Nuevo Energy Co., 5.75%, cvt. pfd., A .............................................. 140,000 4,497,500
Patina Oil & Gas Corp., 7.125%, cvt. pfd. .......................................... 39,525 706,509
------------
11,870,259
------------
NON-ENERGY MINERALS 1.4%
Armco Inc., $3.625, cvt. pfd., B ................................................... 65,000 2,827,500
Battle Mountain Gold Co., $3.25, cvt. pfd. ......................................... 66,300 2,477,963
Coeur D'Alene Mines Corp., 7.00%, cvt. pfd. ........................................ 135,000 911,250
Cyprus Amax Minerals Co., $4.00, cvt. pfd., A ...................................... 55,000 1,938,750
Hecla Mining Co., 7.00%, cvt. pfd., B .............................................. 70,000 2,660,000
Kinam Gold Inc., $3.75, cvt. pfd., B ............................................... 150,000 5,400,000
------------
16,215,463
------------
PRODUCER MANUFACTURING .3%
EVI Inc., 5.00% cvt. pfd., 144A .................................................... 125,000 3,718,750
------------
REAL ESTATE 2.6%
Archstone Communities Trust, $1.75, cvt. pfd., A ................................... 400,000 10,700,000
Glenborough Realty Trust, 7.75%, cvt. pfd., A ...................................... 355,000 6,478,750
Innkeepers USA Trust, 8.625%, cvt. pfd., A ......................................... 175,000 3,543,750
Prologis Trust, 7.00%, cvt. pfd., B ................................................ 135,000 3,560,625
Reckson Associates Realty Corp., 7.625%, cvt. pfd., A .............................. 180,000 3,802,500
Vornado Realty Trust, 6.50%, cvt. pfd., A .......................................... 60,000 2,910,000
------------
30,995,625
------------
</TABLE>
88
<PAGE>
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STATEMENT OF INVESTMENTS, DECEMBER 31, 1998 (CONT.)
<TABLE>
<CAPTION>
INCOME SECURITIES FUND SHARES VALUE
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CONVERTIBLE PREFERRED STOCKS (CONT.)
TELECOMMUNICATIONS .6%
Nortel Inversora SA, 10.00%, cvt. pfd. (Argentina) ................................. 150,000 $ 7,800,000
-------------
TRANSPORTATION .2%
Union Pacific Capital Trust, 6.25%, cvt. pfd. ...................................... 40,000 1,840,000
-------------
UTILITIES .8%
(c)CMS Energy Corp., 7.75%, cvt. pfd. ............................................... 160,000 9,440,000
-------------
TOTAL CONVERTIBLE PREFERRED STOCKS (COST $108,833,059) ............................. 93,628,222
-------------
PRINCIPAL
AMOUNT*
-------
<S> <C> <C>
BONDS 17.2%
CONSUMER DURABLES .2%
E&S Holdings Corp., senior sub. note, B, 10.375%, 10/01/06 ......................... $ 3,750,000 1,893,750
-------------
CONSUMER NON-DURABLES 3.4%
Compania Alimentos Fargo SA, senior note, 144A, 13.25%, 8/01/08 (Argentina) ........ 2,000,000 1,530,000
Del Monte Corp., senior sub. note, B, 12.25%, 4/15/07 .............................. 4,000,000 4,500,000
Doane Pet Care Co., senior sub. note, 144A, 9.75%, 5/15/07 ......................... 2,197,000 2,257,418
Evenflo Company Inc., senior note, 144A, 11.75%, 8/15/06 ........................... 2,000,000 2,070,000
Hartmarx Corp., senior sub. note, 144A, 10.875%, 1/15/02 ........................... 8,300,000 8,341,500
International Home Foods, senior sub. note, 10.375%, 11/01/06 ...................... 4,100,000 4,458,750
Playtex Family Products Corp., senior sub. note, 9.00%, 12/15/03 ................... 8,000,000 8,320,000
RJR Nabisco Inc., senior note, 9.25%, 8/15/13 ...................................... 5,000,000 5,133,370
Specialty Foods Corp., senior note, B, 10.25%, 8/15/01 ............................. 4,000,000 3,660,000
The William Carter Co., senior sub. note, A, 10.375%, 12/01/06 ..................... 500,000 547,500
-------------
40,818,538
-------------
CONSUMER SERVICES 4.0%
AMF Bowling Worldwide Inc., senior sub. note, B, 10.875%, 3/15/06 .................. 650,000 529,750
Aztar Corp., senior sub. note, 11.00%, 10/01/02 .................................... 9,000,000 9,225,000
Benedek Broadcasting, senior note, 11.875%, 3/01/05 ................................ 2,000,000 2,140,000
Continental Cablevision Inc., senior sub. deb., 9.50%, 8/01/13 ..................... 8,000,000 9,537,328
CSC Holdings Inc., senior sub. deb., 9.875%, 4/01/23 ............................... 4,000,000 4,470,000
Eldorado Resorts LLC, senior sub. note, 10.50%, 8/15/06 ............................ 500,000 522,500
Hard Rock Hotel Inc., senior sub. note, B, 9.25%, 4/01/05 .......................... 500,000 502,500
Harvey's Casino Resorts, senior sub. note, 10.625%, 6/01/06 ........................ 2,200,000 2,387,000
Helicon Group, S.F., senior secured note, B, 11.00%, 11/01/03 ...................... 7,300,000 7,628,500
Rio Hotel & Casino Inc., senior sub. note, 10.625%, 7/15/05 ........................ 8,000,000 8,760,000
Venetian Casino/Las Vegas Sands, mortgage note, 12.25%, 11/15/04 ................... 2,000,000 1,860,000
-------------
47,562,578
-------------
ELECTRONIC TECHNOLOGY .9%
Anacomp Inc., senior sub. note, B, 10.875%, 4/01/04 ................................ 6,000,000 6,210,000
Maxtor Corp., cvt. sub. deb., 5.75%, 3/01/12 ....................................... 1,500,000 967,500
Samsung Electronics America Inc., A, 9.75%, 5/01/03 ................................ 4,000,000 3,860,000
-------------
11,037,500
-------------
ENERGY MINERALS 2.1%
Bellwether Exploration Co., senior sub. note, 10.875%, 4/01/07 ..................... 1,000,000 975,000
Conproca SA, S.F., senior secured note, 144A, 12.00%, 6/16/10 (Mexico) ............. 9,000,000 8,415,000
Denbury Management Inc., senior sub. note, 9.00%, 3/01/08 .......................... 4,000,000 3,380,000
Gerrity Oil & Gas Corp., senior sub. note, 11.75%, 7/15/04 ......................... 9,835,000 9,884,175
Mesa Operating Co., senior sub. note, 10.625%, 7/01/06 ............................. 1,000,000 1,107,500
Plains Resources Inc., senior sub. note, B, 10.25%, 3/15/06 ........................ 1,000,000 1,010,000
-------------
24,771,675
-------------
</TABLE>
89
<PAGE>
FRANKLIN VALUEMARK FUNDS
STATEMENT OF INVESTMENTS, DECEMBER 31, 1998 (CONT.)
<TABLE>
<CAPTION>
PRINCIPAL
INCOME SECURITIES FUND AMOUNT* VALUE
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
BONDS (CONT.)
FINANCE .3%
IBJ Preferred Capital Co. LLC, A, 8.79%, 12/29/49 .................................. $ 4,000,000 $ 3,320,000
-------------
HEALTH TECHNOLOGY .5%
Dade International Inc., senior sub. note, B, 11.125%, 5/01/06 ..................... 3,000,000 3,345,000
ICN Pharmaceuticals Inc., senior note, B, 9.25%, 8/15/05 ........................... 3,000,000 3,090,000
-------------
6,435,000
-------------
INDUSTRIAL SERVICES .2%
First Wave Marine Inc., senior note, 11.00%, 2/01/08 ............................... 1,000,000 935,000
Great Lakes Dredge & Dock Corp., senior sub. note, 144A, 11.25%, 8/15/08 ........... 1,000,000 1,030,000
-------------
1,965,000
-------------
NON-ENERGY MINERALS .3%
Trizec Hahn Corp., cvt. senior deb., 3.00%, 1/29/21 (Canada) ....................... 5,500,000 4,063,125
-------------
PROCESS INDUSTRIES 3.2%
Applied Extrusion Technology, senior note, B, 11.50%, 4/01/02 ...................... 6,000,000 6,285,000
Asia Pulp & Paper Co. Ltd., 12.00%, 12/29/49 (Indonesia) ........................... 5,000,000 2,900,000
Consoltex Group Inc., senior sub. note, B, 11.00%, 10/01/03 ........................ 10,000,000 10,200,000
Four M Corp., senior note, B, 12.00%, 6/01/06 ...................................... 2,000,000 1,530,000
Packaging Resources Inc., senior note, 11.625%, 5/01/03 ............................ 3,000,000 3,165,000
Printpack Inc., senior sub. note, B, 10.625%, 8/15/06 .............................. 3,000,000 2,955,000
RBX Corp., senior sub. note, B, 11.25%, 10/15/05 ................................... 10,000,000 1,650,000
Riverwood International, senior sub. note, 10.875%, 4/01/08 ........................ 5,000,000 4,550,000
Tjiwi Kimia Finance Mauritius, senior note, 10.00%, 8/01/04 (Indonesia) ............ 6,500,000 3,477,500
U.S. Can Corp., senior sub. note, B, 10.125%, 10/15/06 ............................. 300,000 309,000
UCC Investors, senior note, 10.50%, 5/01/02 ........................................ 725,000 786,625
-------------
37,808,125
-------------
PRODUCER MANUFACTURING 1.1%
Collins & Aikman Corp., senior sub. note, 11.50%, 4/15/06 .......................... 4,000,000 4,180,000
Nortek Inc., senior sub. note, 9.875%, 3/01/04 ..................................... 2,000,000 2,080,000
Outsourcing Services Group, senior sub. note, 144A, 10.875%, 3/01/06 ............... 2,000,000 1,910,000
Thermadyne Industries Inc., sub. note, 10.75%, 11/01/03 ............................ 2,696,000 2,709,480
Trench Electric & Trench Inc., senior sub. deb., 10.25%, 12/15/07 (Canada) ......... 1,350,000 1,275,750
-------------
12,155,230
-------------
TELECOMMUNICATIONS .6%
Metrocall Inc., senior sub. note, 144A, 11.00%, 9/15/08 ............................ 3,000,000 3,015,000
Paging Network, senior sub. note, 10.125%, 8/01/07 ................................. 3,000,000 2,910,000
Telewest Communications PLC, senior note, 144A, 11.25%, 11/01/08 (United Kingdom) .. 1,000,000 1,125,000
-------------
7,050,000
-------------
UTILITIES .4%
Midland Funding Corp. I, C-94, 10.33%, 7/23/02 ..................................... 2,732,274 2,902,041
Texas-New Mexico Power Co., secured deb., 10.75%, 9/15/03 .......................... 2,000,000 2,151,978
-------------
5,054,019
-------------
TOTAL BONDS (COST $213,066,723) .................................................... 203,934,540
-------------
CONVERTIBLE BONDS 4.3%
ELECTRONIC TECHNOLOGY .7%
BEA Systems, Inc., cvt., 4.00%, 6/15/05 ............................................ 750,000 461,250
Trans-Lux Corp., cvt. sub. note, 7.50%, 12/01/06 ................................... 8,000,000 7,800,000
-------------
8,261,250
-------------
ENERGY MINERALS 1.1%
Oryx Energy Co., cvt. sub. deb., 7.50%, 5/15/14 .................................... 9,000,000 8,865,000
Swift Energy Co., cvt. sub. note, 6.25%, 11/15/06 .................................. 5,000,000 3,562,500
-------------
12,427,500
-------------
</TABLE>
90
<PAGE>
FRANKLIN VALUEMARK FUNDS
STATEMENT OF INVESTMENTS, DECEMBER 31, 1998 (CONT.)
<TABLE>
<CAPTION>
PRINCIPAL
INCOME SECURITIES FUND AMOUNT* VALUE
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CONVERTIBLE BONDS (CONT.)
HEALTH SERVICES .3%
Continucare Corp., cvt. sub. note, 144A, 8.00%, 10/31/02 ........................... $ 9,500,000 $ 3,135,000
Medical Care International Inc., cvt. sub. deb., 6.75%, 10/01/06 ................... 1,000,000 880,000
-------------
4,015,000
-------------
INDUSTRIAL SERVICES .2%
Air & Water Technology Corp., cvt. sub. deb., 8.00%, 5/15/15 ....................... 3,660,000 2,433,900
-------------
NON-ENERGY MINERALS .6%
Ashanti Capital Ltd., cvt., 5.50%, 3/15/03 (Ghana) ................................. 5,000,000 3,925,000
Coeur D'Alene Mines Corp., cvt. senior sub. deb., 6.00%, 6/10/02 ................... 100,000 59,000
Coeur D'Alene Mines Corp., cvt. sub. deb., 6.375%, 1/31/04 ......................... 6,000,000 3,480,000
-------------
7,464,000
-------------
PROCESS INDUSTRIES .3%
APP Finance VI Mauritius, cvt., 11/18/12 (Singapore) ............................... 11,500,000 1,681,875
FMC Corp., cvt. senior sub. deb., 6.75%, 1/16/05 ................................... 1,800,000 1,638,000
-------------
3,319,875
-------------
PRODUCER MANUFACTURING .2%
Exide Corp., cvt. senior sub. note, 144A, 2.90%, 12/15/05 .......................... 4,000,000 2,360,000
-------------
REAL ESTATE .8%
Meristar Hospitality Corp., cvt. sub. note, 4.75%, 10/15/04 ........................ 5,500,000 3,994,375
The Macerich Co., cvt., 144A, 7.25%, 12/15/02 ...................................... 5,500,000 5,280,000
-------------
9,274,375
-------------
RETAIL TRADE .1%
Drug Emporium Inc., S.F., cvt. sub. deb., 7.75%, 10/01/14 .......................... 1,180,000 985,300
-------------
TOTAL CONVERTIBLE BONDS (COST $63,374,773) ......................................... 50,541,200
-------------
ZERO COUPON/STEP-UP BONDS 2.2%
AMF Bowling Worldwide Inc., senior disc. note, B, zero cpn. to 3/15/01,
12.25% thereafter, 3/15/06 ......................................................... 2,438,000 1,407,945
Marcus Cable Co., zero cpn. to 6/15/00, 14.25% thereafter, 12/15/05 ................ 14,000,000 13,335,000
Mesa Operating Co., zero cpn. to 7/01/01,11.625% thereafter, 7/01/06 ............... 1,300,000 997,750
Nextel Communications Inc., senior disc. note, zero cpn. to 2/15/03,
9.95% thereafter, 2/15/08 .......................................................... 8,200,000 4,899,500
Nextel International Inc., senior disc. note, zero cpn. to 4/15/03,
12.125% thereafter, 4/15/08 ........................................................ 5,000,000 2,300,000
Revlon Worldwide Corp., senior disc. note, B, 3/15/01 .............................. 6,000,000 3,450,000
-------------
TOTAL ZERO COUPON/STEP-UP BONDS (COST $27,628,177) ................................. 26,390,195
-------------
U.S. GOVERNMENT SECURITIES 13.3%
U.S. Treasury Bond, 7.125%, 2/15/23 ................................................ 20,000,000 24,681,260
U.S. Treasury Bond, 6.25%, 8/15/23 ................................................. 86,000,000 96,239,418
U.S. Treasury Bond, 6.00%, 2/15/26 ................................................. 23,000,000 25,105,949
U.S. Treasury Note, 6.375%, 8/15/02 ................................................ 11,000,000 11,605,000
-------------
TOTAL U.S. GOVERNMENT SECURITIES (COST $135,751,766) ............................... 157,631,627
-------------
FOREIGN GOVERNMENT AND AGENCY SECURITIES 13.7%
Escom, E168, utility deb., 11.00%, 6/01/08 (South Africa) .......................... 120,000,000 ZAR 15,145,974
Republic of Argentina, FRN, 5.75%, 3/31/23 ......................................... 100,000,000 72,187,500
Republic of Brazil, FRN, 6.75%, 1/01/01 ............................................ 6,150,000 5,581,125
Republic of Brazil, FRN, 6.125%, 4/15/06 ........................................... 15,360,000 9,945,600
Republic of Brazil, FRN, 5.50%, 4/15/24 ............................................ 39,000,000 23,400,000
Republic of Korea, 8.875%, 4/15/08 ................................................. 24,000,000 24,780,000
Republic of South Africa, 12.00%, 2/28/05 .......................................... 50,000,000 ZAR 7,182,015
Russia Ministry of Finance, 11.75%, 6/10/03 ........................................ 9,000,000 2,599,983
Russia Ministry of Finance, 10.00%, 6/26/07 ........................................ 8,000,000 2,280,000
-------------
TOTAL FOREIGN GOVERNMENT AND AGENCY SECURITIES (COST $160,240,931) ................. 163,102,197
-------------
TOTAL LONG TERM INVESTMENTS (COST $1,081,875,650) .................................. 1,154,588,474
-------------
</TABLE>
91
<PAGE>
FRANKLIN VALUEMARK FUNDS
STATEMENT OF INVESTMENTS, DECEMBER 31, 1998 (CONT.)
<TABLE>
<CAPTION>
PRINCIPAL
INCOME SECURITIES FUND AMOUNT* VALUE
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
REPURCHASE AGREEMENT .8%
Joint Repurchase Agreement, 4.681%, 1/04/99 (Maturity Value $9,203,381) (COST $9,198,596) ...... $ 9,198,596 $ 9,198,596
Barclays Capital Inc. (Maturity Value $467,370)
Bear, Stearns & Co. Inc. (Maturity Value $121,171)
Chase Securities Inc. (Maturity Value $952,048)
CIBC Oppenheimer Corp. (Maturity Value $952,048)
Donaldson, Lufkin & Jenrette Securities Corp. (Maturity Value $952,048)
Dresdner Kleinwort Benson, North America LLC (Maturity Value $952,048)
Goldman, Sachs & Co. (Maturity Value $259,650)
Greenwich Capital Markets Inc. (Maturity Value $952,048)
Lehman Brothers Inc. (Maturity Value $173,100)
NationsBanc Montgomery Securities LLC (Maturity Value $952,048)
Paine Webber Inc. (Maturity Value $519,299)
Paribas Corp. (Maturity Value $952,048)
Warburg Dillon Read LLC (Maturity Value $998,455)
Collateralized by U.S. Treasury Bills & Notes ............................................... --------------
TOTAL INVESTMENTS (COST $1,091,074,246) 98.1% .................................................. 1,163,787,070
OTHER ASSETS, LESS LIABILITIES 1.9% ............................................................ 22,052,817
--------------
NET ASSETS 100.0% .............................................................................. $1,185,839,887
==============
</TABLE>
See currency abbreviations on page 162.
*Securities traded in U.S. dollars unless otherwise indicated.
(a)Non-income producing.
(c)See Note 8 regarding restricted securities.
(f)See Note 1(c) regarding joint repurchase agreements.
92 See notes to financial statements.
<PAGE>
FRANKLIN VALUEMARK FUNDS
STATEMENT OF INVESTMENTS, DECEMBER 31, 1998
<TABLE>
<CAPTION>
PRINCIPAL
MONEY MARKET FUND AMOUNT VALUE
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CERTIFICATES OF DEPOSIT 19.3%
Bank of America NT & SA, 5.10%, 3/05/99 ............................................ $ 5,000,000 $ 5,000,000
Bayerische Vereinsbank, New York Branch, 4.95%, 5/18/99 - 5/19/99 .................. 10,000,000 10,000,000
Commerzbank AG, New York Branch, 5.43%, 1/26/99 .................................... 5,000,000 5,000,034
Deutsche Bank AG, New York Branch, 5.685%, 6/03/99 ................................. 4,850,000 4,851,929
Dresdner Bank AG, New York Branch, 5.09%, 4/07/99 .................................. 5,000,000 5,000,130
Landesbank Hessen Thuringen, New York Branch, 5.27%, 1/12/99 ....................... 5,000,000 5,000,008
National Westminster Bank, New York Branch, 5.745%, 4/06/99 ........................ 5,000,000 4,997,823
Rabobank Nederland, NV, New York Branch, 5.70%, 4/20/99 ............................ 5,000,000 4,997,591
Societe Generale, New York Branch, 5.56% - 5.58%, 1/19/99 - 1/22/99 ................ 10,000,000 9,999,784
Swiss Bank Corp., New York Branch, 5.81%, 4/29/99 .................................. 5,000,000 4,999,381
Toronto Dominion Bank, New York Branch, 4.94% - 5.59%, 2/09/99 - 6/15/99 ........... 10,000,000 10,000,000
UBS AG, New York Branch, 5.11%, 1/14/99 - 1/15/99 .................................. 10,000,000 10,000,000
-----------
TOTAL CERTIFICATES OF DEPOSIT (COST $79,846,680) ................................... 79,846,680
-----------
(d)COMMERCIAL PAPER 63.9%
AIG Funding Inc., 5.35%, 1/12/99 - 1/13/99 ......................................... 10,000,000 9,982,910
American Express Credit Corp., 5.00% - 5.30%, 1/04/99 - 3/04/99 .................... 15,000,000 14,951,796
Associates Corp. of North America, 5.01% - 5.35%, 1/25/99 - 2/03/99 ................ 15,000,000 14,936,938
Bellsouth Telecommunications Inc., 5.15%, 2/24/99 .................................. 5,000,000 4,961,375
Campbell Soup Co., 4.97% - 5.07%, 3/17/99 - 3/29/99 ................................ 17,000,000 16,801,474
Canada Bills, 4.83%, 5/11/99 ....................................................... 5,000,000 4,912,792
Canadian Imperial Holdings Inc., 4.94%, 4/12/99 .................................... 5,000,000 4,930,703
Canadian Wheat Board, 5.05%, 2/05/99 ............................................... 5,000,000 4,975,451
Chevron U.K. Investment PLC, 4.87% - 4.90%, 5/14/99 - 5/21/99 ...................... 15,000,000 14,722,774
CIESCO, L.P., 5.00% - 5.125%, 1/06/99 - 1/08/99 .................................... 10,000,000 9,991,545
Coca Cola Co., 5.07%, 2/17/99 - 2/19/99 ............................................ 15,000,000 14,898,600
Commerzbank US Finance Inc., 5.45%, 2/12/99 ........................................ 5,000,000 4,968,208
Dupont (E.I.) De Nemours & Co., 4.90% - 5.16%, 1/07/99 - 4/14/99 ................... 15,000,000 14,896,986
Export Development Corp., 4.95%, 1/20/99 ........................................... 5,000,000 4,986,937
General Electric Capital Corp., 5.34% - 5.48%, 1/14/99 - 1/25/99 ................... 20,000,000 19,943,982
International Lease Finance Corp., 5.12%, 2/04/99 .................................. 5,000,000 4,975,822
J. P. Morgan & Co. Inc., 4.94%, 4/13/99 ............................................ 5,000,000 4,930,017
Merrill Lynch & Co. Inc., 5.31% - 5.33%, 1/11/99 - 1/29/99 ......................... 10,000,000 9,971,947
Motorola Inc., 5.07% - 5.12%, 1/26/99 - 1/28/99 .................................... 10,000,000 9,963,210
National Rural Utilities Cooperative Finance Corp., 4.94% - 5.12%, 2/08/99 - 4/16/99 17,575,000 17,428,611
Province of Alberta, 5.34%, 1/20/99 ................................................ 10,000,000 9,971,817
Province of British Columbia, 4.80% - 5.29%, 3/08/99 - 6/09/99 ..................... 17,000,000 16,721,887
Societe Generale N.A. Inc., 5.30%, 1/21/99 ......................................... 5,000,000 4,985,278
Toyota Motor Credit Corp., 5.15% - 5.36%, 1/15/99 - 2/05/99 ........................ 10,000,000 9,964,543
Walt Disney Co., 5.15%, 1/26/99 - 1/28/99 .......................................... 15,000,000 14,944,208
-----------
TOTAL COMMERCIAL PAPER (COST $264,719,811) ......................................... 264,719,811
-----------
U.S. GOVERNMENT AGENCY SECURITIES 11.7%
Federal Farm Credit Bank, 4.80%, 4/30/99 ............................................ 10,000,000 9,841,333
Federal Home Loan Bank, 4.72% - 4.81%, 5/26/99 - 6/16/99 ........................... 10,099,000 9,891,155
Freddie Mac, 4.78% - 4.86%, 3/26/99 - 5/14/99 ...................................... 14,439,000 14,247,210
Fannie Mae, 4.72% - 4.74%, 6/10/99 ................................................. 15,000,000 14,684,444
-----------
TOTAL U.S. GOVERNMENT AGENCY SECURITIES (COST $48,664,142) ......................... 48,664,142
===========
TOTAL INVESTMENTS BEFORE REPURCHASE AGREEMENTS (COST $393,230,633) ................. 393,230,633
===========
</TABLE>
93
<PAGE>
FRANKLIN VALUEMARK FUNDS
STATEMENT OF INVESTMENTS, DECEMBER 31, 1998 (CONT.)
<TABLE>
<CAPTION>
PRINCIPAL
MONEY MARKET FUND AMOUNT VALUE
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
(g)REPURCHASE AGREEMENTS 4.8%
NationsBanc Montgomery Securities LLC, 4.50%, 1/04/99 (Maturity Value $9,959,977)
Collateralized by U.S. Treasury Notes ......................................... $ 9,955,000 $ 9,955,000
Warburg Dillon Read LLC, 4.75%, 1/04/99 (Maturity Value $9,960,254)
Collateralized by U.S. Treasury Notes ......................................... 9,955,000 9,955,000
------------
TOTAL REPURCHASE AGREEMENTS (COST $19,910,000) .................................. 19,910,000
------------
TOTAL INVESTMENTS (COST $413,140,633) 99.7% ..................................... 413,140,633
OTHER ASSETS, LESS LIABILITIES .3% .............................................. 1,200,125
------------
NET ASSETS 100.0% ............................................................... $414,340,758
============
</TABLE>
(d)Securities are traded on a discount basis; the rates shown are the discount
rates at the time of purchase by the Fund.
(g)See Note 1(c) regarding repurchase agreements.
94 See notes to financial statements.
<PAGE>
FRANKLIN VALUEMARK FUNDS
STATEMENT OF INVESTMENTS, DECEMBER 31, 1998
<TABLE>
<CAPTION>
SHARES/
MUTUAL DISCOVERY SECURITIES FUND COUNTRY WARRANTS VALUE
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS AND WARRANTS 79.8%
AUTOMOBILES .7%
General Motors Corp. ................................................. United States 20,000 $ 1,431,250
Volvo AB, B .......................................................... Sweden 5,000 114,733
------------
1,545,983
------------
BANKING 3.6%
Banca Nazionale del Lavoro SpA, di Risp .............................. Italy 484,000 1,354,895
Bank One Corp. ....................................................... United States 10,700 546,369
BankAmerica Corp. .................................................... United States 10,738 645,622
Crestar Financial Corp. .............................................. United States 2,700 194,400
Kapital Holding ...................................................... Denmark 12,740 630,544
Merita AS ............................................................ Finland 130,600 830,533
UST Corp., Inc. ...................................................... United States 85,000 2,002,813
Vermont Financial Services Corp. ..................................... United States 58,100 1,931,825
------------
8,137,001
------------
BEVERAGES & TOBACCO 3.6%
Farmer Brothers Co. .................................................. United States 7,000 1,498,000
Heineken Holding NV, A ............................................... Netherlands 8,917 427,628
Kita Kyushu Coca-Cola Bottling Co. Ltd. .............................. Japan 36,700 1,151,755
Mikuni Coca-Cola Bottling Co. ........................................ Japan 35,000 749,335
Philip Morris Companies. Inc. ........................................ United States 34,000 1,819,000
RJR Nabisco Holdings Corp. ........................................... United States 82,000 2,434,375
Shikoku Coca-Cola Bottling Co. Ltd. .................................. Japan 1,300 15,893
------------
8,095,986
------------
BROADCASTING & PUBLISHING 5.3%
Alma Media OYJ, Series 2 ............................................. Finland 39,100 1,274,144
(a)Capstar Broadcasting Corp., A ....................................... United States 4,100 93,788
(a)Chancellor Media Corp., A ........................................... United States 27,800 1,330,925
Dow Jones & Co. Inc. ................................................. United States 39,500 1,900,938
(a)Mediaone Group Inc. ................................................. United States 19,000 893,000
(a) Modern Times Group AB .............................................. Sweden 72,000 1,065,903
NV Holdingsmij de Telegraaf .......................................... Netherlands 83,150 2,237,478
Seat Pagine Gialle SpA ............................................... Italy 2,469,000 1,897,109
United News & Media Plc. ............................................. United Kingdom 106,280 920,368
Washington Post Co., B ............................................... United States 500 288,969
------------
11,902,622
------------
BUSINESS & PUBLIC SERVICES 5.5%
Corporate Services Group Plc., A ..................................... United Kingdom 893,191 2,251,367
IFIL Finanziaria Partecipazioni SpA .................................. Italy 324,000 1,356,761
Ratin AS, B .......................................................... Denmark 365 77,422
Sophus Berendsen AS, B ............................................... Denmark 53,118 1,844,462
Suez Lyonnaise des Eaux SA ........................................... France 32,968 6,775,136
(a)Suez Lyonnaise des Eaux SA, fgn. .................................... France 8,300 242
------------
12,305,390
------------
CHEMICALS 2.9%
(a) Bush Boake Allen Inc. .............................................. United States 55,000 1,938,750
Chemfirst Inc. ....................................................... United States 43,000 849,250
Morton International Inc. ............................................ United States 75,100 1,839,950
Olin Corp. ........................................................... United States 16,100 455,831
Yule Catto & Company Plc. ............................................ United Kingdom 318,144 1,323,284
------------
6,407,065
------------
DATA PROCESSING & REPRODUCTION .4%
(a)National Processing Inc. ............................................ United States 34,000 187,000
Tecnost Mael SpA ..................................................... Italy 201,100 663,446
------------
850,446
------------
</TABLE>
95
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STATEMENT OF INVESTMENTS, DECEMBER 31, 1998 (CONT.)
<TABLE>
<CAPTION>
SHARES/
MUTUAL DISCOVERY SECURITIES FUND COUNTRY WARRANTS VALUE
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS AND WARRANTS (CONT.)
ELECTRICAL & ELECTRONICS 2.3%
Philips Electronics NV ............................................... Netherlands 28,100 $ 1,886,609
------------
Philips Electronics NV, ADR .......................................... Netherlands 5,300 358,744
Racal Electronics Plc. ............................................... United Kingdom 349,303 2,016,607
(a)Wang Laboratories Inc., A ........................................... United States 28,100 779,775
------------
5,041,735
------------
ELECTRONIC COMPONENTS & INSTRUMENTS .2%
(a)Amphenol Corp., A ................................................... United States 10,032 302,841
(a)NBS Technologies Inc. ............................................... Canada 54,600 56,875
------------
359,716
------------
ENERGY EQUIPMENT & SERVICES 3.7%
Baker Hughes Inc. .................................................... United States 54,900 971,044
(a)BJ Services Co. ..................................................... United States 73,000 1,140,625
(a) Cie Generale De Geophysique SA ..................................... France 8,600 501,418
(a) Cie Generale De Geophysique SA, ADR ................................ France 30,000 326,250
(a) Cooper Cameron Corp. ............................................... United States 37,500 918,750
ISIS SA .............................................................. France 8,278 591,265
(a) Noble Drilling Corp. ............................................... United States 66,100 855,169
Transocean Offshore Inc. ............................................. United States 42,900 1,150,256
(a) Veritas DGC Inc. ................................................... United States 100,400 1,305,200
(a) Weatherford International Inc. ..................................... United States 27,000 523,125
------------
8,283,102
------------
ENERGY SOURCES 4.0%
(a) Conoco Inc., A ..................................................... United States 15,000 313,125
Electrafina SA ....................................................... Belgium 32,809 4,297,653
(a) Ocean Energy Inc. .................................................. United States 52,900 333,931
(a) Santa Fe Energy Resources Inc. ..................................... United States 147,700 1,089,288
Societe Elf Aquitaine SA, Br. ........................................ France 21,300 2,463,177
Societe Elf Aquitaine SA, ADR ........................................ France 9,000 509,625
------------
9,006,799
------------
FINANCIAL SERVICES 7.8%
(a) Amerin Corp. ....................................................... United States 200 4,725
Bankers Trust Corp. .................................................. United States 4,500 384,469
Bear Stearns Co. Inc. ................................................ United States 19,700 736,288
(a) Cir Cie Industriali Riunite SpA Torino ............................. Italy 500,900 562,279
(a) Cir Cie Industriali Riunite SpA Torino, Di Risp .................... Italy 132,400 142,201
CIT Group Inc., A .................................................... United States 34,500 1,097,531
Corporacion Financiera Alba SA ....................................... Spain 13,850 2,316,551
Electra Investment Trust Plc. ........................................ United Kingdom 139,500 1,270,714
Greenpoint Financial Corp. ........................................... United States 21,500 755,188
Household International Inc. ......................................... United States 45,200 1,791,050
Indymac Mortgage Holdings Inc. ....................................... United States 30,700 324,269
(c)Laser Mortgage Management Inc. ...................................... United States 94,000 511,125
Lehman Brothers Holdings Inc. ........................................ United States 42,100 1,855,031
(a) Mercury European Privitization Trust Plc., wts. .................... United Kingdom 540,000 552,533
Metris Cos. Inc. ..................................................... United States 14,600 734,563
Morgan Stanley Dean Witter & Co. ..................................... United States 17,000 1,207,000
Pargesa Holdings SA .................................................. Switzerland 700 1,105,934
Pioneer Group Inc. ................................................... United States 60,600 1,196,850
Sunamerica Inc. ...................................................... United States 13,200 1,070,850
------------
17,619,151
------------
FOOD & HOUSEHOLD PRODUCTS 1.5%
Hillsdown Holdings Plc. .............................................. United Kingdom 859,900 1,087,304
(a) Rubbermaid Inc ..................................................... United States 10,700 336,381
(a) Scott's Restaurants Inc. ........................................... Canada 18,800 86,901
</TABLE>
96
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STATEMENT OF INVESTMENTS, DECEMBER 31, 1998 (CONT.)
<TABLE>
<CAPTION>
SHARES/
MUTUAL DISCOVERY SECURITIES FUND COUNTRY WARRANTS VALUE
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS AND WARRANTS (CONT.)
FOOD & HOUSEHOLD PRODUCTS (CONT.)
(a)Scott's Restaurants Inc., C ......................................... Canada 50,000 $ 224,609
U.S. Industries Inc. ................................................. United States 83,500 1,555,188
-----------
3,290,383
-----------
HEALTH & PERSONAL CARE .1%
(a) Ventas Inc. ........................................................ United States 25,700 313,219
-----------
INDUSTRIAL COMPONENTS 3.0%
BTR Plc. ............................................................. United Kingdom 382,200 782,141
Charter Plc. ......................................................... United Kingdom 137,000 743,066
DT Industries Inc. ................................................... United States 100,000 1,575,000
Konin Emballage Ind Van Leer ......................................... Netherlands 2,400 50,514
Lucas Varity Plc. .................................................... United Kingdom 665,000 2,190,666
Lucas Varity Plc., ADR ............................................... United Kingdom 11,500 385,250
(a)Owens-Illinois Inc. ................................................. United States 31,600 967,750
-----------
6,694,387
-----------
INSURANCE 1.6%
(a) Alleghany Corp. .................................................... United States 2,020 379,508
Allmerica Financial Corp. ............................................ United States 1,500 86,813
Assurances Generales de France AGF ................................... France 16,912 1,010,566
Berkeley W R Corp. ................................................... United States 21,800 742,563
(a) Companhia de Seguros Mundial Confianca SA .......................... Portugal 14,600 464,342
Provident Companies Inc. ............................................. United States 3,500 145,250
Sampo Insurance Co. Plc., A .......................................... Finland 22,000 838,567
-----------
3,667,609
-----------
LEISURE & TOURISM 1.0%
(a) Promus Hotel Corp. ................................................. United States 16,700 540,663
Thistle Hotels Plc. .................................................. United Kingdom 988,135 1,767,316
-----------
2,307,979
-----------
MACHINERY & ENGINEERING 2.7%
(a) Gardner Denver Inc. ................................................ United States 70,000 1,032,500
IMI Plc. ............................................................. United Kingdom 169,400 669,370
Siebe Plc. ........................................................... United Kingdom 196,100 769,979
(a) Sulzer AG .......................................................... Switzerland 600 365,198
TT Group Plc. ........................................................ United Kingdom 546,250 1,940,344
United Dominion Industries Ltd. ...................................... Canada 65,600 1,336,600
-----------
6,113,991
-----------
MERCHANDISING 1.3%
(a) Federated Department Stores Inc. ................................... United States 12,600 548,888
FKI Plc. ............................................................. United Kingdom 710,500 1,589,922
(a) Toys R Us Inc. ..................................................... United States 50,300 848,813
-----------
2,987,623
-----------
METALS & MINING 1.5%
(a) Olympic Steel Inc. ................................................. United States 35,300 176,500
(a) Stillwater Mining Co. .............................................. United States 22,600 926,600
Trelleborg AB, B ..................................................... Sweden 279,300 2,274,149
-----------
3,377,249
-----------
MULTI-INDUSTRY 18.6%
Aker RGI ASA, A ...................................................... Norway 69,500 729,755
Albatros Investissement SA ........................................... France 11,800 422,470
(a) Berkshire-Hathaway Inc., A ......................................... United States 21 1,470,000
Brierley Investments Ltd. ............................................ New Zealand 4,767,154 1,082,849
CGIP-Compagnie Generale Industrie de Participation ................... France 66,330 3,657,162
Cie Financiere Richemont AG, A ....................................... Switzerland 2,861 4,045,185
</TABLE>
97
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STATEMENT OF INVESTMENTS, DECEMBER 31, 1998 (CONT.)
<TABLE>
<CAPTION>
SHARES/
MUTUAL DISCOVERY SECURITIES FUND COUNTRY WARRANTS VALUE
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS AND WARRANTS (CONT.)
MULTI-INDUSTRY (CONT.)
Custos AB, A ............................................................. Sweden 72,400 $ 1,429,100
Custos AB, B ............................................................. Sweden 81,540 1,594,425
Financiere Et Industrielle Gaz Et Eaux SA ................................ France 7,410 393,965
Forvaltnings AB Ratos, B ................................................. Sweden 168,200 1,182,783
Inchcape Plc. ............................................................ United Kingdom 462,800 989,432
Investor AB, A ........................................................... Sweden 24,150 1,075,545
Investor AB, B ........................................................... Sweden 95,850 4,327,901
Invik & Co. AB, B ........................................................ Sweden 13,500 1,099,213
Kansas City Southern Industries Inc. ..................................... United States 134,000 6,591,125
Kinnevik AB, B ........................................................... Sweden 37,887 888,072
Lagardere S.C.A .......................................................... France 36,870 1,567,546
Montedison SpA ........................................................... Italy 2,800,000 3,713,654
Rieber & Son AS, B ....................................................... Norway 100,000 741,567
(a)Saab AB, B .............................................................. Sweden 184,100 1,930,531
(a)Societe Europeenne de Communication SA, ADR ............................. Sweden 18,000 326,250
Ste Eurafrance ........................................................... France 1,633 1,081,612
Tomkins Plc. ............................................................. United Kingdom 293,718 1,382,950
-----------
41,723,092
-----------
REAL ESTATE 2.2%
(a)Asticus AB .............................................................. Sweden 49,285 483,377
Castellum AB ............................................................. Sweden 79,400 862,000
First Union Real Estate Equity & Mtg. Investments, SBI ................... United States 69,000 405,375
LNR Property Corp. ....................................................... United States 38,200 761,613
LNR Property Corp., B .................................................... United States 39,000 777,563
Security Capital European Realty ......................................... United States 11,745 234,900
(a)Security Capital US Realty, A ........................................... Luxembourg 79,800 790,020
Starwood Hotels & Resorts Trust .......................................... United States 26,500 601,219
-----------
4,916,067
-----------
TELECOMMUNICATIONS 2.9%
(a)Embratel Participacoes SA ............................................... Brazil 18,770,000 163,116
(a)Tele Celular Sul Participacoes SA ....................................... Brazil 18,952,000 17,568
(a)Tele Centro Oeste Celular Participacoes SA .............................. Brazil 18,770,000 14,758
(a)Tele Centro Sul Participacoes SA ........................................ Brazil 19,906,100 131,801
(a)Tele Norte Leste Participacoes SA, ADR .................................. Brazil 19,655,300 161,049
(a) Tele Sudeste Celular Participacoes SA .................................. Brazil 18,770,000 52,819
Telecom Italia SpA ....................................................... Italy 199,700 1,703,868
Telecom Italia SpA, di Risp .............................................. Italy 159,000 999,257
(a)Tele-Communications Inc., A ............................................. United States 28,400 1,570,875
(a)Telemig Celular Participacoes SA ........................................ Brazil 18,770,000 13,205
Telephone & Data Systems Inc. ............................................ United States 31,000 1,393,063
(a)Telesp Celular Participacoes SA ......................................... Brazil 18,770,000 80,781
(a)Telesp Participacoes SA ................................................. Brazil 17,843,900 228,910
-----------
6,531,070
-----------
TRANSPORTATION 2.8%
ASG AB, B ................................................................ Sweden 27,900 528,344
BTL AB, B ................................................................ Sweden 319,500 1,261,319
Florida East Coast Industries Inc. ....................................... United States 26,200 921,913
Golden Ocean Group Ltd., wts., 8/31/01 ................................... United States 615 --
Railtrack Group Plc. ..................................................... United Kingdom 136,576 3,572,040
Smit Internationale NV ................................................... Netherlands 1,183 26,034
-----------
6,309,650
-----------
</TABLE>
98
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STATEMENT OF INVESTMENTS, DECEMBER 31, 1998 (CONT.)
<TABLE>
<CAPTION>
SHARES/
MUTUAL DISCOVERY SECURITIES FUND COUNTRY WARRANTS VALUE
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS AND WARRANTS (CONT.)
UTILITIES ELECTRICAL & GAS .6%
(a)Citizens Utilities Co., B ............................................. United States 168,512 $ 1,369,160
VEBA AG ................................................................ Germany 200 11,852
------------
1,381,012
------------
TOTAL COMMON STOCKS AND WARRANTS (COST $175,271,239) 179,168,327
============
PREFERRED STOCKS .8%
(a)Embratel Participacoes SA, ADR, pfd. .................................. Brazil 21,400 298,262
(a)Tele Celular Sul Participacoes SA, ADR, pfd. .......................... Brazil 2,140 37,316
(a)Tele Centro Oeste Celular Participacoes SA, ADR, pfd. ................. Brazil 7,126 20,933
(a)Tele Centro Sul Participacoes SA, ADR, pfd. ........................... Brazil 8,280 346,207
(a)Tele Norte Leste Participacoes SA, ADR, pfd. .......................... Brazil 36,000 447,750
(a)Tele Sudeste Celular Participacoes SA, ADR, pfd. ...................... Brazil 4,280 88,542
(a)Telemig Celular Participacoes SA, ADR, pfd. ........................... Brazil 1,070 22,738
(a)Telesp Celular Participacoes SA, ADR, pfd. ............................ Brazil 8,560 149,800
(a)Telesp Participacoes SA, ADR, pfd. .................................... Brazil 19,700 435,863
------------
TOTAL PREFERRED STOCKS (COST $2,512,751) 1,847,411
------------
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT*
-------
BONDS 1.6%
Compania Siderurgica De Guadalajara SA De CV:
<S> <C> <C> <C>
10.50%, 11/15/07 .................................................... Mexico $ 70,000 38,500
144A,10.50%, 11/15/07 ............................................... Mexico 40,000 22,000
Eurotunnel Finance Ltd.:
Equity Note 12/31/03 ................................................ United Kingdom 188,008 GBP 90,712
Participating Loan Note 4/30/40 ..................................... United Kingdom 90,000 GBP 49,414
Eurotunnel Plc.:
12/31/12, Tier 1 .................................................... United Kingdom 269,214 GBP 376,241
12/31/18, Tier 2 .................................................... United Kingdom 311,578 GBP 404,344
12/31/25, Tier 3 .................................................... United Kingdom 160,000 GBP 177,024
12/31/50, Resettable Advance R5 ..................................... United Kingdom 202,650 GBP 124,749
Stabilization Advance S8 Tier 1 ..................................... United Kingdom 34,736 GBP 10,114
Stabilization Advance S8 Tier 2 ..................................... United Kingdom 21,269 GBP 4,954
Eurotunnel SA:
12/31/18, Tier 2 (Libor) ............................................ France 678,266 FRF 94,706
12/31/18, Tier 2 (Pibor) ............................................ France 121,735 FRF 16,998
Fine Host Corp., 144A, 5.00%, 11/01/04 ................................. United States 910,000 700,700
Golden Ocean Group Ltd., 144A, 10.00%, 8/31/01 ......................... United States 570,000 159,600
MCII Holdings, 0/12.00%, 11/15/02 ...................................... United States 100,000 83,000
Security Capital US Realty, 2.00%, 5/22/03 ............................. Luxembourg 586,000 462,940
Southwest Royalties Inc., B, 10.50%, 10/15/04 .......................... United States 460,000 186,300
TFM SA de CV
144A, 10.25%, 6/15/07 ............................................... Mexico 250,000 212,500
144A, zero cpn. to 6/15/02, 11.75% thereafter, 6/15/09 .............. Mexico 450,000 234,000
Tribasa Toll Road Trust I, 144A, 10.50%, 12/01/11 ...................... Mexico 187,526 113,922
------------
TOTAL BONDS (COST $4,105,836) 3,562,718
------------
BONDS & NOTES IN REORGANIZATION 1.5%
(a)Alpargatas SA Industrial y Comercial:
11.75%, 8/18/98 ..................................................... Argentina 150,000 24,000
9.00%, 2/20/99 ...................................................... Argentina 320,000 48,000
Bank Claim .......................................................... Argentina 425,000 63,750
(a)Banque Pallas Stern, 3/24/00 .......................................... France 1,410,000 FRF 153,969
(a)Brunos Inc., Bank Claim:
Revolver Commitment .................................................. United States 84,000 54,600
Tranche A ............................................................ United States 138,000 89,700
Tranche B ............................................................ United States 85,000 55,250
</TABLE>
99
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STATEMENT OF INVESTMENTS, DECEMBER 31, 1998 (CONT.)
<TABLE>
<CAPTION>
PRINCIPAL
MUTUAL DISCOVERY SECURITIES FUND COUNTRY AMOUNT* VALUE
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
BONDS & NOTES IN REORGANIZATION (CONT.)
(a)Buenos Aires Embotelladora SA:
8.50%, 12/29/00, ...................................................... Argentina $ 50,000 $ 21,000
144A, 8.50%, 12/29/00 ................................................. Argentina 84,000 35,280
Bank Claim ............................................................ Argentina 1,853,634 704,381
(a)Credit Leasing, Bank Claim .............................................. Japan 45,482,299 JPY 64,010
(a)Dow Corning Corp., 9.375%, 2/20/99 ...................................... United States 300,000 393,000
(a)Koninklijke Nederlandse Vliegtuigenfabriek Fokke, Trade Claim ........... Netherlands 950,000 NLG 384,718
Mercury Finance Co., Bank Claim, MTN:
8.15%, 5/14/97 ........................................................ United States 220,873 198,786
7.33%, 6/29/99 ........................................................ United States 126,874 114,187
7.42%, 6/29/00 ........................................................ United States 154,676 139,208
Mercury Finance Co., Commercial Paper:
1/31/97 ............................................................... United States 40,471 36,424
2/07/97 ............................................................... United States 6,810 6,129
2/11/97 ............................................................... United States 229,914 206,923
2/18/97 ............................................................... United States 500,847 450,762
2/20/97 ............................................................... United States 7,495 6,745
3/17/97 ............................................................... United States 19,622 17,659
4/11/97 ............................................................... United States 4,285 3,857
4/18/97 ............................................................... United States 12,001 10,801
4/22/97 ............................................................... United States 6,857 6,171
4/24/97 ............................................................... United States 10,285 9,257
6/29/98 ............................................................... United States 55,529 49,976
4/05/01 ............................................................... United States 60,265 54,239
(a)Nippon Credit Bank Ltd., Bank Claim ..................................... Japan 23,138,740 JPY 32,776
(a) Nippon Total Finance, Bank Claim ....................................... Japan 21,981,960 JPY 11,593
-----------
TOTAL BONDS & NOTES IN REORGANIZATION (COST $4,583,023) 3,447,151
-----------
TOTAL LONG TERM INVESTMENTS (COST $186,472,849) 188,025,607
-----------
(d)SHORT TERM INVESTMENTS 12.1%
Fannie Mae, 4.45% to 5.37%, with maturities to 6/30/99 ................... United States 20,600,000 20,303,134
Federal Home Loan Bank, 4.62% to 4.68% with maturities to 6/21/99 ........ United States 4,500,000 4,415,202
Federal Home Loan Mortgage Corp., 4.96%, 3/29/99 ......................... United States 2,500,000 2,469,715
-----------
TOTAL SHORT TERM INVESTMENTS (COST $27,187,686) 27,188,051
-----------
TOTAL INVESTMENTS BEFORE REPURCHASE AGREEMENT (COST $213,660,535) 215,213,658
-----------
(g)REPURCHASE AGREEMENT (COST 2,300,000) 1.0%
Bank of New York Co. Inc., 4.25%, 1/04/99 (Maturity Value $2,300,272)
Collateralized by U.S. Treasury Notes & Bonds ........................... United States 2,300,000 2,300,000
-----------
TOTAL INVESTMENTS (COST $215,960,535) 96.8% .............................. 217,513,658
SECURITIES SOLD SHORT (4.1%) ............................................. (9,311,593)
OPTIONS WRITTEN .......................................................... (113)
NET EQUITY IN FORWARD CONTRACTS (.5%) .................................... (1,003,049)
OTHER ASSETS, LESS LIABILITIES 7.8% ...................................... 17,457,274
-----------
TOTAL NET ASSETS 100.0% $224,656,177
============
</TABLE>
100
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STATEMENT OF INVESTMENTS, DECEMBER 31, 1998 (CONT.)
<TABLE>
<CAPTION>
MUTUAL DISCOVERY SECURITIES FUND COUNTRY SHARES VALUE
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
SECURITIES SOLD SHORT
American International Group Inc. ....................................... United States 11,300 $1,091,862
AT&T Corp. .............................................................. United States 22,500 1,693,125
(a)Cap Gemini SA .......................................................... France 14,150 2,272,126
Carrefour Supermarche SA ................................................ France 1,528 1,154,028
(a) DST Systems Inc. ...................................................... United States 21,000 1,198,312
Edison SpA .............................................................. Italy 47,900 564,769
Newell Co. .............................................................. United States 8,550 352,687
Suntrust Banks Inc. ..................................................... United States 3,000 229,500
Telecom Italia Mobile SpA ............................................... Italy 100,800 745,971
(a) Tele-Communications Inc., Liberty Media Group, A ...................... United States 200 9,213
----------
TOTAL SECURITIES SOLD SHORT (PROCEEDS $7,799,126) $9,311,593
==========
OPTIONS WRITTEN COUNTRY CONTRACTS VALUE
- ---------------------------------------------------------------------------------------------------------------------
Bankers Trust Corp., January/90/Call (PREMIUMS RECEIVED $1,346) ......... United States 9 $ 113
----------
</TABLE>
See currency abbreviations on page 162.
*Securities traded in U.S. dollars unless otherwise indicated.
(a)Non-income Producing.
(c)See Note 8 regarding restricted securities.
(d)Securities are traded on a discount basis; the rates shown are the discount
rates at the time of purchase by the Fund.
(g)See Note 1(c) regarding repurchase agreements.
101
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<TABLE>
<CAPTION>
MUTUAL SHARES SECURITIES FUND COUNTRY SHARES VALUE
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS 78.9%
AEROSPACE & MILITARY TECHNOLOGY 1.5%
(a)Coltec Industries Inc. ............. United States 153,800 $ 2,999,100
General Motors Corp., H ............ United States 12,000 476,250
(a)Hexcel Corp. ....................... United States 42,000 351,750
Lockheed Martin Corp. .............. United States 14,400 1,220,400
Northrop Grumman Corp. ............. United States 28,700 2,098,688
-----------
7,146,188
-----------
APPLIANCES & HOUSEHOLD DURABLES .5%
Premark International Inc. ......... United States 66,200 2,292,175
-----------
AUTOMOBILES 2.4%
Borg-Warner Automotive Inc. ........ United States 52,900 2,952,481
(a)General Motors Corp. ............... United States 118,300 8,465,844
Volvo AB, B ........................ Sweden 4,300 98,670
-----------
11,516,995
-----------
BANKING 7.8%
Bank One Corp. ..................... United States 176,800 9,027,850
Bankamerica Corp. .................. United States 24,478 1,471,740
Chase Manhattan Corp. .............. United States 260,200 17,709,862
Crestar Financial Corp. ............ United States 4,900 352,800
First Union Corp. .................. United States 123,882 7,533,574
National City Corp. ................ United States 24,500 1,776,250
-----------
37,872,076
-----------
BEVERAGES & TOBACCO 4.7%
Heineken Holding NV, A ............. Netherlands 41,950 2,011,776
Philip Morris Cos. Inc. ............ United States 130,000 6,955,000
RJR Nabisco Holdings Corp. ......... United States 281,700 8,362,969
UST Inc. ........................... United States 157,500 5,492,813
-----------
22,822,558
-----------
BROADCASTING & PUBLISHING 6.3%
Central Newspapers Inc., A ......... United States 59,200 4,229,100
Daily Mail & General Trust Plc., A . United Kingdom 25,300 1,194,599
Dow Jones & Co. Inc. ............... United States 76,500 3,681,562
(a)Mediaone Group Inc. ................ United States 197,600 9,287,200
Readers Digest Association Inc., A . United States 37,600 947,050
Scripps Co., A ..................... United States 82,000 4,079,500
United News & Media Plc ............ United Kingdom 182,768 1,582,743
Washington Post Co., B ............. United States 9,000 5,201,438
-----------
30,203,192
-----------
BUILDING MATERIALS & COMPONENTS .8%
(a)American Standard Cos. Inc. ........ United States 110,900 3,992,400
-----------
BUSINESS & PUBLIC SERVICES 2.2%
(a)Healthsouth Corp. .................. United States 201,200 3,106,025
Suez Lyonnaise des Eaux SA ......... France 37,200 7,644,839
-----------
10,750,864
-----------
CHEMICALS 2.2%
(a)Cytec Industries Inc. .............. United States 92,600 1,967,750
Morton International Inc. .......... United States 213,600 5,233,200
Olin Corp. ......................... United States 114,000 3,227,625
-----------
10,428,575
-----------
ELECTRICAL & ELECTRONICS .9%
Philips Electronics NV ............. Netherlands 30,000 2,030,625
(a)Wang Laboratories Inc., A .......... United States 85,900 2,383,725
-----------
4,414,350
-----------
</TABLE>
102
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STATEMENT OF INVESTMENTS, DECEMBER 31, 1998 (CONT.)
<TABLE>
<CAPTION>
MUTUAL SHARES SECURITIES FUND COUNTRY SHARES VALUE
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS (CONT.)
ENERGY EQUIPMENT & SERVICES 2.2%
Baker Hughes Inc. .................. United States 162,500 $ 2,874,219
(a)Cooper Cameron Corp. ............... United States 112,700 2,761,150
(a)Seacor Smit Inc. ................... United States 20,000 988,750
Transocean Offshore Inc. ........... United States 76,300 2,045,794
(a)Weatherford International Inc. ..... United States 94,250 1,826,094
-----------
10,496,007
-----------
ENERGY SOURCES 2.7%
Amoco Corp. ........................ United States 9,000 543,375
(a)Conoco Inc., A ..................... United States 50,000 1,043,750
(a)Ocean Energy Inc. .................. United States 205,000 1,294,063
Shell Transport & Trading Co. Plc .. United Kingdom 553,300 3,387,645
(a)Smith International Inc. ........... United States 24,200 609,538
Societe Elf Aquitaine SA, Br ....... France 51,500 5,955,569
-----------
12,833,940
-----------
FINANCIAL SERVICES 9.8%
Bankers Trust Corp. ................ United States 9,800 837,287
Bear Stearns Co. Inc. .............. United States 100,300 3,748,712
CIT Group Inc., A .................. United States 75,000 2,385,937
Corporacion Financiera Alba SA ..... Spain 8,400 1,404,984
Finova Group Inc. .................. United States 37,300 2,011,869
Greenpoint Financial Corp. ......... United States 94,600 3,322,825
Household International Inc. ....... United States 168,030 6,658,189
(a)Ifil Finanziaria Partecipazioni SpA Italy 348,900 971,622
(c)Laser Mortgage Management Inc. ..... United States 215,000 1,169,062
Lehman Brothers Holdings Inc. ...... United States 91,400 4,027,312
Morgan Stanley Dean Witter & Co. ... United States 133,600 9,485,600
Sunamerica Inc. .................... United States 28,500 2,312,063
United Asset Management Corp. ...... United States 362,000 9,412,000
-----------
47,747,462
-----------
FOOD & HOUSEHOLD PRODUCTS 1.5%
(a)Rubbermaid Inc. .................... United States 16,200 509,288
U.S. Industries Inc. ............... United States 201,700 3,756,663
Van Melle NV ....................... Netherlands 44,997 3,045,036
-----------
7,310,987
-----------
FOREST PRODUCTS & PAPER 1.4%
Bowater Inc. ....................... United States 7,200 298,350
Greif Brothers Corp., A ............ United States 1,800 52,537
Rayonier Inc. ...................... United States 107,400 4,933,688
(a)Smurfit-Stone Container Corp. ...... United States 3,170 --
St. Joe Co. ........................ United States 57,000 1,335,938
-----------
6,620,513
-----------
HEALTH & PERSONAL CARE 2.4%
(a)Beverly Enterprises Inc. ........... United States 60,000 405,000
(a)Foundation Health Systems, A ....... United States 172,170 2,055,279
(a)Pacificare Health Systems Inc., A .. United States 35,000 2,546,250
(a)Pacificare Health Systems Inc., B .. United States 19,400 1,542,300
(a)Tenet Healthcare Corp. ............. United States 100,000 2,625,000
Ventas Inc. ........................ United States 205,600 2,505,750
-----------
11,679,579
-----------
INDUSTRIAL COMPONENTS 3.5%
Aeroquip Vickers Inc. .............. United States 54,700 1,637,581
BTR Plc ............................ United Kingdom 801,000 1,639,181
Charter Plc ........................ United Kingdom 179,966 976,107
</TABLE>
103
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STATEMENT OF INVESTMENTS, DECEMBER 31, 1998 (CONT.)
<TABLE>
<CAPTION>
MUTUAL SHARES SECURITIES FUND COUNTRY SHARES VALUE
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS (CONT.)
INDUSTRIAL COMPONENTS (CONT.)
(a)Lear Corp. ....................................... United States 122,100 $ 4,700,850
Lucas Varity Plc ................................. United Kingdom 1,236,819 4,074,373
Lucas Varity Plc., ADR ........................... United Kingdom 36,500 1,222,750
(a)Owens-Illinois Inc. .............................. United States 87,800 2,688,875
-----------
16,939,717
-----------
INSURANCE 3.0%
(a)Alleghany Corp. .................................. United States 13,085 2,458,344
Allmerica Financial Corp. ........................ United States 3,400 196,775
AON Corp. ........................................ United States 14,900 825,087
Argonaut Group Inc. .............................. United States 12,589 308,430
Fund American Enterprises Holdings Inc. .......... United States 25,000 3,501,562
Hartford Financial Services Group Inc. ........... United States 38,100 2,090,737
Provident Companies Inc. ......................... United States 8,500 352,750
Sampo Insurance Co. Plc., A ...................... Finland 46,300 1,764,802
Torchmark Corp. .................................. United States 79,900 2,821,469
-----------
14,319,956
-----------
LEISURE & TOURISM 1.8%
Hilton Hotels Corp. .............................. United States 252,500 4,829,062
(a)Promus Hotel Corp. ............................... United States 116,600 3,774,925
-----------
8,603,987
-----------
MACHINERY & ENGINEERING .6%
New Holland NV ................................... Netherlands 98,800 1,352,325
Siebe Plc ........................................ United Kingdom 410,800 1,612,991
-----------
2,965,316
-----------
MERCHANDISING 1.9%
(a)Federated Department Stores Inc. ................. United States 78,100 3,402,231
(a)Payless Shoesource Inc. .......................... United States 48,300 2,288,213
(a)Toys R Us Inc. ................................... United States 200,670 3,386,306
-----------
9,076,750
-----------
METALS & MINING .3%
Allegheny Teledyne Inc. .......................... United States 84,580 1,728,604
-----------
MULTI-INDUSTRY 6.4%
(a)Berkshire-Hathaway Inc., A ....................... United States 50 3,500,000
CGIP-Compagnie Generale Industrie de Participation France 42,210 2,327,285
Cie Financiere Richemont AG, Br., A .............. Switzerland 2,330 3,294,401
Edperbrascan Corp., A ............................ Canada 120,000 1,664,062
Investor AB, A ................................... Sweden 173,240 7,715,419
Investor AB, B ................................... Sweden 171,800 7,757,260
Kansas City Southern Industries Inc. ............. United States 58,000 2,852,875
Lagardere SCA .................................... France 40,462 1,720,262
-----------
30,831,564
-----------
REAL ESTATE 1.4%
(a)Alexander's Inc. ................................. United States 8,000 625,500
(a)Cadillac Fairview Corp. .......................... Canada 80,000 1,471,354
(a,c)Security Capital European Realty ................. United States 23,055 461,100
Starwood Hotels & Resorts Trust .................. United States 181,200 4,110,975
-----------
6,668,929
-----------
TELECOMMUNICATIONS 7.3%
(a)Embratel Participacoes SA ........................ Brazil 46,280,000 402,185
Media General Inc., A ............................ United States 35,200 1,865,600
(a)Tele Celular Sul Participacoes SA ................ Brazil 46,666,000 43,258
(a)Tele Centro Oeste Celular Participacoes SA ....... Brazil 46,280,000 36,388
</TABLE>
104
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STATEMENT OF INVESTMENTS, DECEMBER 31, 1998 (CONT.)
<TABLE>
<CAPTION>
MUTUAL SHARES SECURITIES FUND COUNTRY SHARES VALUE
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS (CONT.)
TELECOMMUNICATIONS (CONT.)
(a)Tele Centro Sul Participacoes SA .................... Brazil 49,081,400 $ 324,975
(a)Tele Norte Leste Participacoes SA ................... Brazil 48,157,700 394,588
(a)Tele Sudeste Celular Participacoes SA ............... Brazil 46,280,000 130,231
Telecom Italia SpA .................................. Italy 409,800 3,496,470
Telecom Italia SpA, di Risp ......................... Italy 354,600 2,228,532
(a)Telecommunications Inc.- TCI Ventures Group, A ...... United States 271,600 6,399,575
(a)Tele-Communications Inc., A ......................... United States 141,500 7,826,719
(a)Telemig Celular Participacoes SA .................... Brazil 46,280,000 32,558
Telephone & Data Systems Inc. ....................... United States 153,700 6,906,894
(a)Telesp Celular Participacoes SA ..................... Brazil 46,280,000 199,177
(a)Telesp Participacoes SA ............................. Brazil 43,964,400 563,996
(a)US Cellular Corp. ................................... United States 115,000 4,370,000
------------
35,221,146
------------
TEXTILES & APPAREL .5%
Liz Claiborne Inc. .................................. United States 74,200 2,341,938
------------
TRANSPORTATION 2.5%
Burlington Northern Santa Fe Corp. .................. United States 71,000 2,396,250
Florida East Coast Industries Inc. .................. United States 90,000 3,166,875
(a,c)Golden Ocean Group Ltd., wts., 8/31/01 .............. United States 1,120 --
Railtrack Group Plc ................................. United Kingdom 219,152 5,731,752
Xtra Corp. .......................................... United States 13,800 570,975
------------
11,865,852
------------
UTILITIES ELECTRICAL & GAS .4%
(a)Calenergy Co. Inc. .................................. United States 63,100 2,188,781
VEBA AG ............................................. Germany 400 23,703
------------
2,212,484
------------
TOTAL COMMON STOCKS (COST $356,657,317) ............. 380,904,104
------------
PREFERRED STOCKS .9%
Apartment Investment & Management Co., cvt., pfd .... United States 26,855 993,635
(a)Embratel Participacoes SA, ADR, pfd ................. Brazil 38,850 541,472
(a)Tele Celular Sul Participacoes SA, ADR, pfd ......... Brazil 3,885 67,745
(a)Tele Centro Oeste Celular Participacoes SA, ADR, pfd Brazil 12,937 38,002
(a)Tele Centro Sul Participacoes SA, ADR, pfd .......... Brazil 16,970 709,558
(a)Tele Norte Leste Participacoes SA, ADR, pfd ......... Brazil 65,650 816,522
(a)Tele Sudeste Celular Participacoes SA, ADR, pfd ..... Brazil 7,770 160,742
(a)Telemig Celular Participacoes SA, ADR, pfd .......... Brazil 1,942 41,267
(a)Telesp Celular Participacoes SA, ADR, pfd ........... Brazil 15,540 271,950
(a)Telesp Participacoes SA, ADR, pfd ................... Brazil 35,750 790,969
------------
TOTAL PREFERRED STOCKS (COST $5,990,168) ............ 4,431,862
------------
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT*
-----------
<S> <C> <C> <C>
CORPORATE BONDS & NOTES 3.0%
Abraxas Petroleum Corp., 11.50%, 11/01/04 ........... United States $ 80,000 60,800
Eurotunnel Finance Ltd.:
Equity Note 12/31/03 ............................. United Kingdom 481,602 GBP 232,368
Participating Loan Note 4/30/40 .................. United Kingdom 220,000 GBP 120,789
Eurotunnel Plc.:
12/31/12, Tier 1 ................................. United Kingdom 537,877 GBP 751,712
12/31/18, Tier 2 ................................. United Kingdom 613,800 GBP 796,546
12/31/25, Tier 3 ................................. United Kingdom 285,008 GBP 315,332
12/31/50, Resettable Advance R5 .................. United Kingdom 408,583 GBP 251,519
Stabilization Advance S8 Tier 1 .................. United Kingdom 70,825 GBP 20,621
Stabilization Advance S8 Tier 2 .................. United Kingdom 43,325 GBP 10,092
</TABLE>
105
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STATEMENT OF INVESTMENTS, DECEMBER 31, 1998 (CONT.)
<TABLE>
<CAPTION>
PRINCIPAL
MUTUAL SHARES SECURITIES FUND COUNTRY AMOUNT* VALUE
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CORPORATE BONDS & NOTES (CONT.)
Eurotunnel SA:
12/31/12, Tier 1 (Libor) .......................... France $ 1,302,207 FRF $ 195,814
12/31/12, Tier 1, (Pibor) ......................... France 303,200 FRF 45,592
12/31/18, Tier 2 (Libor) .......................... France 3,094,027 FRF 432,018
12/31/18, Tier 2, (Pibor) ......................... France 675,534 FRF 94,325
12/31/25, Tier 3 (Libor) .......................... France 2,441,156 FRF 288,418
12/31/25, Tier 3 (Pibor) .......................... France 1,062,791 FRF 125,567
12/31/50, Resettable Advance R4 ................... France 1,873,514 FRF 120,738
Stabilization Advance S6 Tier 1 (Pibor) ........... France 73,006 FRF 2,287
Stabilization Advance S7 Tier 1 (Libor) ........... France 73,985 FRF 2,318
Stabilization Advance S6 Tier 2 ................... France 101,090 FRF 2,533
Fine Host Corp., cvt., 144A, 5.00%, 11/01/04 ......... United States 2,535,000 1,951,950
Golden Ocean Group Ltd., 144A, 10.00%, 8/31/01 ....... United States 1,050,000 294,000
Hechinger Co., 6.95%, 10/15/03 ....................... United States 1,622,000 1,046,190
HIH Capital Ltd., cvt., 7.50%, 9/25/06 ............... United Kingdom 1,235,000 778,050
Kelly Oil & Gas Company:
10.375%, 10/15/06 ................................. United States 330,000 245,850
Series D, 10.375%, 10/15/06 ....................... United States 220,000 163,900
Korea Electric Power Corp.:
6.375%, 12/01/03 .................................. South Korea 57,000 48,592
6.75%, 8/01/27 .................................... South Korea 500,000 417,500
MCII Holdings, 0/12.00%, 11/15/02 .................... United States 175,000 145,250
Pratama Datakom Asia BV:
Reg S, 12.75%, 7/15/05 ............................ Indonesia 140,000 34,650
144A, 12.75%, 7/15/05 ............................. Indonesia 665,000 164,587
Roil Limited, 144A, 12.779%, 12/05/02 ................ Cayman Islands 2,610,000 809,100
Security Capital US Realty, cvt., 144A, 2.00%, 5/22/03 Luxembourg 3,372,000 2,663,880
Southwest Royalties Inc., B, 10.50%, 10/15/04 ........ United States 835,000 338,175
Specialty Foods Corp., B, 11.25%, 8/15/03 ............ United States 1,375,000 687,500
TFM SA DE CV:
144A, 10.25%, 6/15/07 ............................. Mexico 250,000 212,500
144A, zero coupon to 6/15/02, 11.75%, 6/15/09 ..... Mexico 885,000 460,200
Tribasa Toll Road Trust I, 10.50%, 12/01/11 .......... Mexico 168,773 102,530
-----------
TOTAL CORPORATE BONDS AND NOTES (COST $17,757,547) ... 14,433,793
-----------
BONDS & NOTES IN REORGANIZATION 1.8%
(a)Alpargatas SA Industrial Y Comercial:
Bank Claim ........................................ Argentina 820,000 123,000
11.75%, 8/18/98 ................................... Argentina 290,000 46,400
9.00%, 2/20/99 .................................... Argentina 610,000 91,500
(a)American Pad & Paper Co., Bank Claim ................. United States 263,200 239,512
(a)APS Inc., Bank Claim ................................. United States 172,732 76,002
(a)Barney's Inc.:
7.18%, 6/15/00 .................................... United States 2,500,000 237,500
8.32%, 6/15/00 .................................... United States 1,000,000 95,000
(a)Brunos Inc., Bank Claim:
Revolver Committment .............................. United States 160,000 104,000
Tranche A ......................................... United States 285,000 185,250
Tranche B ......................................... United States 175,000 113,750
(a)Credit Leasing, Bank Claim ........................... Japan 95,962,673 JPY 135,054
(a)Dictaphone Corporation, Bank Claim:
2/20/99 ........................................... United States 218,000 194,020
9/10/99 ........................................... United States 81,000 70,875
(a)Dow Corning Corp.:
9.375%, 2/01/08 ................................... United States 550,000 720,500
Bank Debt #1 ...................................... United States 100,000 131,000
(a)FPA Medical Management Inc.:
Bank Claim ........................................ United States 110,000 10,450
Term Loan ......................................... United States 130,100 12,360
</TABLE>
106
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STATEMENT OF INVESTMENTS, DECEMBER 31, 1998 (CONT.)
<TABLE>
<CAPTION>
PRINCIPAL
MUTUAL SHARES SECURITIES FUND COUNTRY AMOUNT* VALUE
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
BONDS & NOTES IN REORGANIZATION (CONT.)
(a)Koninklijke Ned Vlieg Fokker NV, Trade Claim .............................. Netherlands $ 520,000 NLG $ 210,582
Mercury Finance Co.; Bank Claim, MTN:
8.15%, 5/14/97 ......................................................... United States 425,163 382,646
7.33%, 6/29/99 ......................................................... United States 71,884 64,695
7.42%, 6/29/00 ......................................................... United States 257,793 232,014
Mercury Finance Co., Commercial Paper:
2/04/97 ................................................................ United States 17,026 15,323
2/11/97 ................................................................ United States 365,899 329,309
2/18/97 ................................................................ United States 773,419 696,077
2/20/97 ................................................................ United States 13,627 12,264
3/17/97 ................................................................ United States 35,839 32,255
4/11/97 ................................................................ United States 8,572 7,715
4/16/97 ................................................................ United States 691,786 622,607
4/18/97 ................................................................ United States 24,001 21,601
4/22/97 ................................................................ United States 13,714 12,342
4/24/97 ................................................................ United States 20,571 18,513
2/20/99 ................................................................ United States 80,943 72,848
6/29/99 ................................................................ United States 31,462 28,315
4/05/01 ................................................................ United States 34,145 30,730
(a)Nippon Credit Bank Ltd., Bank Claim ....................................... Japan 48,820,209 JPY 69,155
(a)Nippon Total Finance, Bank Claim .......................................... Japan 46,379,531 JPY 24,459
(a)Peregrine Investments Holdings Ltd., zero cpn., 2/28/99 ................... Hong Kong 5,000,000 JPY 3,989
(a)PIV Investment Finance (Cayman) Ltd., 2/20/99 ............................. Hong Kong 12,060,000 2,592,900
(a)Ritvik Holdings:
Bank Claim ............................................................. United States 137,000 109,600
Bank Claim, Term Loan B ................................................ United States 55,000 44,000
(a)Ventas Inc., Bank Claim, Tranche D ........................................ United States 248,000 235,600
-------------
TOTAL BONDS & NOTES IN REORGANIZATION (COST $8,696,314) ................... 8,455,712
-------------
TOTAL LONG TERM INVESTMENTS (COST $389,101,346) ........................... 408,225,471
-------------
(d)SHORT TERM INVESTMENTS 15.0%
Fannie Mae, 4.45% to 5.37% with maturities to 6/30/99 ..................... United States 55,865,000 55,239,866
Federal Home Loan Bank, 4.62% to 5.37% with maturities to 6/21/99 ......... United States 13,500,000 13,358,267
Federal Home Loan Mortgage Corp., 4.93% to 5.10% with maturities to 3/22/99 United States 4,000,000 3,967,539
-------------
TOTAL SHORT TERM INVESTMENTS (COST $72,549,860) ........................... 72,565,672
-------------
TOTAL INVESTMENTS (COST $461,651,206) 99.6% ............................... 480,791,143
SECURITIES SOLD SHORT (3.7%) .............................................. (17,992,108)
OPTIONS WRITTEN ........................................................... (150)
NET EQUITY IN FORWARD CONTRACTS ........................................... (46,462)
OTHER ASSETS, LESS LIABILITIES 4.1% ....................................... 19,691,264
-------------
TOTAL NET ASSETS 100.0% ................................................... $ 482,443,687
-------------
</TABLE>
107
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STATEMENT OF INVESTMENTS, DECEMBER 31, 1998 (CONT.)
<TABLE>
<CAPTION>
MUTUAL SHARES SECURITIES FUND COUNTRY SHARES VALUE
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
SECURITIES SOLD SHORT
American International Group Inc. ............................ United States 24,700 $ 2,386,637
Apartment Investment & Management Co. ........................ United States 12,600 468,562
AT&T Corp. ................................................... United States 109,200 8,217,300
BP Amoco Plc., ADR ........................................... United Kingdom 1,900 180,500
(a)Cap Gemini SA ................................................ France 7,100 1,140,077
Carrefour Supermarche SA ..................................... France 675 509,796
(a)DST Systems Inc. ............................................. United States 6,300 359,494
Newell Co. ................................................... United States 12,750 525,938
Suntrust Banks Inc. .......................................... United States 4,800 367,200
Telecom Italia Mobile SpA .................................... Italy 270,700 2,003,316
(a)Tele-Communications Inc., Liberty Media Group, A ............. United States 39,800 1,833,288
----------
TOTAL SECURITIES SOLD SHORT (PROCEEDS $15,319,353) ........... 17,992,108
----------
</TABLE>
<TABLE>
<CAPTION>
OPTIONS WRITTEN COUNTRY SHARES VALUE
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Bankers Trust Corp., January/90/Call (PREMIUM RECEIVED $1,795) United States 12 $ 150
-----------
</TABLE>
See currency abbreviations on page 162.
* Securities traded in U.S. dollars unless otherwise indicated.
(a)Non-income Producing.
(c)See Note 8 regarding restricted securities.
(d)Securities are traded on a discount basis; the rates shown are the discount
rates at the time of purchase by the Fund.
See notes to financial statements.
108
<PAGE>
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STATEMENT OF INVESTMENTS, DECEMBER 31, 1998
<TABLE>
<CAPTION>
SHARES/
NATURAL RESOURCES SECURITIES FUND COUNTRY WARRANTS VALUE
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS AND WARRANTS 91.9%
ENERGY MINERALS 27.4%
Atlantic Richfield Co. .................. United States 13,900 $ 906,975
(a)Barrett Resources Corp. ................. United States 73,300 1,759,200
(a)Basin Exploration Inc. .................. United States 53,600 673,350
Chesapeake Energy Corp. ................. United States 210,000 183,750
(a)Conoco Inc., A .......................... United States 20,000 417,500
Enron Oil & Gas Co. ..................... United States 72,500 1,250,625
(a)Gulf Canada Resources Ltd. .............. Canada 190,200 558,713
Mobil Corp. ............................. United States 2,500 217,813
(a)Newfield Exploration Co. ................ United States 66,000 1,377,750
(a)Nuevo Energy Co. ........................ United States 54,500 626,750
Royal Dutch Petroleum Co., N.Y. shs., ADR Netherlands 23,000 1,101,125
Texaco Inc. ............................. United States 20,800 1,099,800
Tosco Corp. ............................. United States 20,000 517,500
Ultramar Diamond Shamrock Corp. ......... United States 17,000 412,250
Unocal Corp. ............................ United States 22,000 642,125
YPF SA, ADR ............................. Argentina 30,000 838,125
-----------
12,583,351
-----------
FINANCE 7.4%
Alexandria Real Estate Equities Inc. .... United States 21,800 674,438
Glenborough Realty Trust Inc. ........... United States 34,400 700,900
(a)Security Capital Group Inc., B .......... United States 51,500 698,469
Starwood Hotels & Resorts ............... United States 30,000 680,625
(a)United Rentals Inc. ..................... United States 18,800 622,750
-----------
3,377,182
-----------
INDUSTRIAL SERVICES 15.9%
(a)AES Corp. ............................... United States 32,200 1,525,475
(a)Atwood Oceanics Inc. .................... United States 24,000 408,000
(a)Cal Dive International Inc. ............. United States 39,800 825,850
(a)Casella Waste Systems Inc., A ........... United States 12,600 467,775
Diamond Offshore Drilling Inc. .......... United States 23,000 544,813
Halliburton Co. ......................... United States 19,000 562,875
(a)Marine Drilling Cos. Inc. ............... United States 36,000 276,750
Schlumberger Ltd. ....................... United States 17,000 784,125
Transocean Offshore Inc. ................ United States 26,000 697,125
(a)Tuboscope Inc. .......................... United States 54,000 438,750
(a)Varco International Inc. ................ United States 102,000 790,500
-----------
7,322,038
-----------
NON-ENERGY MINERALS 17.9%
Aluminum Co. of America ................. United States 7,100 529,394
Barrick Gold Corp. ...................... Canada 40,195 783,803
Canyon Resources Corp., wts., 3/20/99 ... United States 105,000 --
Carpenter Technology Corp. .............. United States 4,400 149,325
De Beers Consolidated Mines AG, ADR ..... South Africa 71,800 915,450
Franco-Nevada Mining Corp. Ltd. ......... Canada 42,400 810,182
(a)Freeport-McMoRan Copper & Gold Inc., A .. United States 13,718 132,893
Newmont Mining Corp. .................... United States 30,955 559,125
Nucor Corp. ............................. United States 11,200 484,400
Phelps Dodge Corp. ...................... United States 8,300 422,263
Pohang Iron & Steel Co. Ltd., ADR ....... South Korea 35,600 600,750
Potash Corp. of Saskatchewan Inc. ....... Canada 11,100 709,013
Rio Tinto, PLC .......................... United Kingdom 68,429 794,667
(a)Stillwater Mining Co., 144A ............. United States 48,450 1,324,300
-----------
8,215,565
-----------
</TABLE>
109
<PAGE>
FRANKLIN VALUEMARK FUNDS
STATEMENT OF INVESTMENTS, DECEMBER 31, 1998 (CONT.)
<TABLE>
<CAPTION>
SHARES/
NATURAL RESOURCES SECURITIES FUND COUNTRY WARRANTS VALUE
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS AND WARRANTS (CONT.)
PROCESS INDUSTRIES 11.5%
(a)Asia Pulp & Paper Co. Ltd. ADR ......................................... Indonesia 75,000 $ 614,063
Bemis Co. Inc. ......................................................... United States 3,500 132,781
Bowater Inc. ........................................................... United States 9,000 372,938
E. I. du Pont de Nemours and Co. ....................................... United States 5,000 265,313
Monsanto Co. ........................................................... United States 5,900 280,250
(a)Owens-Illinois Inc. .................................................... United States 27,100 829,938
Praxair Inc. ........................................................... United States 24,100 849,525
Sigma-Aldrich Corp. .................................................... United States 29,600 869,500
(a)Smurfit-Stone Container Corp. .......................................... United States 43,100 681,519
Willamette Industries Inc. ............................................. United States 11,000 368,499
------------
5,264,326
------------
PRODUCER MANUFACTURING 4.2%
Avery Dennison Corp. ................................................... United States 16,500 743,531
(a)Weatherford Intl. Inc. ................................................. United States 60,400 1,170,250
------------
1,913,781
------------
UTILITIES 7.6%
Baltimore Gas and Electric Co. ......................................... United States 14,700 453,862
Enron Corp. ............................................................ United States 19,900 1,135,543
KN Energy Inc. ......................................................... United States 26,100 632,924
Montana Power Co. ...................................................... United States 5,100 288,468
Northwestern Corp. ..................................................... United States 19,700 520,818
Washington Gas Light Co. ............................................... United States 17,400 471,974
------------
3,503,589
------------
TOTAL COMMON STOCKS AND WARRANTS (COST $52,441,663) .................... 42,179,832
------------
CONVERTIBLE PREFERRED STOCKS .8%
(a)Monsato Co., 6.50%, cvt. pfd. (COST $308,000) .......................... United States 7,700 377,300
------------
TOTAL LONG TERM INVESTMENTS (COST $52,749,663) ......................... 42,557,132
------------
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT
<S> <C> <C> <C>
(f)REPURCHASE AGREEMENT 7.6%
Joint Repurchase Agreement, 4.681%, 1/04/99 (Maturity Value $3,491,091)
(COST $3,489,276) ..................................................... United States $ 3,489,276 3,489,276
Barclays Capital Inc. (Maturity Value $177,286)
Bear, Stearns & Co. Inc. (Maturity Value $45,963)
Chase Securities Inc. (Maturity Value $361,138)
CIBC Oppenheimer Corp. (Maturity Value $361,138)
Donaldson, Lufkin & Jenrette Securities Corp. (Maturity Value $361,138)
Dresdner Kleinwort Benson, North America LLC (Maturity Value $361,138)
Goldman, Sachs & Co. (Maturity Value $98,492)
Greenwich Capital Markets Inc. (Maturity Value $361,138)
Lehman Brothers Inc. (Maturity Value $65,660)
NationsBanc Montgomery Securities LLC (Maturity Value $361,138)
Paine Webber Inc. (Maturity Value $196,984)
Paribas Corp. (Maturity Value $361,138)
Warburg Dillon Read LLC (Maturity Value $378,740)
Collateralized by U.S. Treasury Bills & Notes
------------
TOTAL INVESTMENTS (COST $56,238,939) 100.3% ............................ 46,046,408
OTHER ASSETS, LESS LIABILITIES (.3%) ................................... (119,362)
------------
NET ASSETS 100.0% ...................................................... $ 45,927,046
============
</TABLE>
(a)Non-income producing.
(f)See Note 1(c) regarding joint repurchase agreements.
See notes to financial statements.
110
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STATEMENT OF INVESTMENTS, DECEMBER 31, 1998
<TABLE>
<CAPTION>
REAL ESTATE SECURITIES FUND SHARES VALUE
- ----------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS 97.1%
EQUITY REIT - APARTMENTS 14.8%
Archstone Communities Trust ................. 399,535 $ 8,090,584
Avalonbay Communities Inc. .................. 100,000 3,425,000
Camden Property Trust ....................... 239,773 6,234,098
Charles E. Smith Residential Realty Inc. .... 89,000 2,859,125
Equity Residential Properties Trust ......... 256,000 10,352,000
Gables Residential Trust .................... 70,000 1,623,125
Irvine Apartment Communities Inc. ........... 155,600 4,959,750
Post Properties Inc. ........................ 110,000 4,228,125
-----------
41,771,807
-----------
EQUITY REIT - DIVERSIFIED PROPERTY TYPE 14.8%
Colonial Properties Trust ................... 201,700 5,370,263
Crescent Real Estate Equities Co. ........... 127,650 2,935,950
Duke Realty Investments Inc. ................ 255,000 5,928,750
Glenborough Realty Trust Inc. ............... 385,000 7,844,375
Liberty Property Trust ...................... 290,000 7,141,250
Spieker Properties Inc. ..................... 200,000 6,925,000
Vornado Realty Trust ........................ 166,000 5,602,500
-----------
41,748,088
-----------
EQUITY REIT - HEALTH CARE 2.4%
Health Care Property Investors Inc. ......... 55,000 1,691,250
OMEGA Healthcare Investors Inc. ............. 168,000 5,071,500
-----------
6,762,750
-----------
EQUITY REIT - HOTELS 11.9%
FelCor Lodging Trust Inc. ................... 360,000 8,302,500
Innkeepers USA Trust ........................ 322,600 3,810,713
MeriStar Hospitality Corp. .................. 410,000 7,610,625
Patriot American Hospitality Inc. ........... 544,508 3,267,051
(a)Starwood Hotels & Resorts Worldwide Inc. .... 350,000 7,940,625
Winston Hotels Inc. ......................... 323,900 2,651,931
-----------
33,583,445
-----------
EQUITY REIT - INDUSTRIAL 4.1%
Cabot Industrial Trust ...................... 180,000 3,678,750
Meridian Industrial Trust Inc. .............. 237,000 5,569,500
ProLogis Trust .............................. 113,979 2,365,064
-----------
11,613,314
-----------
EQUITY REIT - OFFICE 18.1%
Alexandria Real Estate Equities Inc. ........ 221,000 6,837,188
Arden Realty Inc. ........................... 380,600 8,825,163
Brandywine Realty Trust ..................... 290,000 5,183,750
Equity Office Properties Trust .............. 396,008 9,504,192
Highwoods Properties Inc. ................... 180,000 4,635,000
Mack-Cali Realty Corp. ...................... 170,000 5,248,750
SL Green Realty Corp. ....................... 147,000 3,178,875
TriNet Corporate Realty Trust Inc. .......... 285,000 7,623,750
-----------
51,036,668
-----------
EQUITY REIT - RESIDENTIAL COMMUNITIES 3.2%
Manufactured Home Communities Inc. .......... 180,000 4,511,250
Sun Communities Inc. ........................ 130,000 4,525,625
-----------
9,036,875
-----------
EQUITY REIT - RETAIL - COMMUNITY CENTERS 7.2%
Burnham Pacific Properties Inc. ............. 267,600 3,227,925
Developers Diversified Realty Corp. ......... 23,000 408,250
</TABLE>
111
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STATEMENT OF INVESTMENTS, DECEMBER 31, 1998 (CONT.)
<TABLE>
<CAPTION>
REAL ESTATE SECURITIES FUND SHARES VALUE
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (CONT.)
EQUITY REIT - RETAIL - COMMUNITY CENTERS (CONT.)
Kimco Realty Corp. ..................................................... 190,000 $ 7,540,625
(c)Pacific Retail Trust ................................................... 866,067 9,249,595
------------
20,426,395
------------
EQUITY REIT - RETAIL - REGIONAL MALLS 5.3%
Mills Corp. ............................................................ 102,800 2,043,150
Simon Property Group Inc. .............................................. 300,000 8,550,000
The Macerich Co. ....................................................... 170,000 4,356,250
------------
14,949,400
------------
EQUITY REIT - STORAGE 4.6%
Public Storage Inc. .................................................... 110,000 2,976,875
Storage Trust Realty ................................................... 331,000 7,737,125
Storage USA Inc. ....................................................... 67,200 2,171,400
------------
12,885,400
------------
DIVERSIFIED PROPERTY TYPE 5.2%
(a)Crescent Operating Inc. ................................................ 27,500 130,625
(a)Security Capital Group Inc. Class B .................................... 715,200 9,699,900
(a)Security Capital US Realty ............................................. 500,000 4,950,000
------------
14,780,525
------------
HOTELS 5.5%
(a,e)Candlewood Hotel Co. Inc. .............................................. 650,000 3,412,500
Crestline Capital Corp. ................................................ 57,000 833,625
(a)Host Marriott Corp. .................................................... 570,000 7,873,125
(a)MeriStar Hotels & Resorts Inc. ......................................... 350,000 918,750
(a)Prime Hospitality Corp. ................................................ 224,500 2,371,280
------------
15,409,280
------------
TOTAL LONG TERM INVESTMENTS (COST $257,934,343) ........................ 274,003,947
------------
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT*
-----------
<S> <C> <C>
(f)REPURCHASE AGREEMENT 1.8%
Joint Repurchase Agreement, 4.681%, 1/04/99 (Maturity Value $5,103,713)
(COST $5,101,060) .................................................... $ 5,101,060 5,101,060
Barclays Capital Inc. (Maturity Value $259,178)
Bear, Stearns & Co. Inc. (Maturity Value $67,194)
Chase Securities Inc. (Maturity Value $527,956)
CIBC Oppenheimer Corp. (Maturity Value $527,956)
Donaldson, Lufkin & Jenrette Securities Corp. (Maturity Value $527,956)
Dresdner Kleinwort Benson, North America LLC (Maturity Value $527,956)
Goldman, Sachs & Co. (Maturity Value $143,988)
Greenwich Capital Markets Inc. (Maturity Value $527,956)
Lehman Brothers Inc. (Maturity Value $95,992)
NationsBanc Montgomery Securities LLC (Maturity Value $527,956)
Paine Webber Inc. (Maturity Value $287,977)
Paribas Corp. (Maturity Value $527,956)
Warburg Dillon Read LLC (Maturity Value $553,692)
Collateralized by U.S. Treasury Bills & Notes
------------
TOTAL INVESTMENTS (COST $263,035,403) 98.9% ............................ 279,105,007
------------
OTHER ASSETS, LESS LIABILITIES 1.1% .................................... 3,185,400
------------
NET ASSETS 100.0% ...................................................... $282,290,407
============
</TABLE>
(a)Non-income producing.
(c)See Note 8 regarding restricted securities.
(e)See Note 9 regarding Holding of 5% Voting Securities.
(f)See Note 1(c) regarding joint repurchase agreements.
See notes to financial statements.
112
<PAGE>
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STATEMENT OF INVESTMENTS, DECEMBER 31, 1998
<TABLE>
<CAPTION>
RISING DIVIDENDS FUND SHARES VALUE
- -----------------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS 97.5%
COMMERCIAL SERVICES 7.3%
Ennis Business Forms Inc. ........................ 390,600 $ 3,881,588
Reynolds and Reynolds Co., A ..................... 556,000 12,753,250
Standard Register Co. ............................ 421,400 13,037,061
Wallace Computer Services Inc. ................... 955,900 25,211,862
------------
54,883,761
------------
CONSUMER DURABLES 4.8%
Leggett & Platt Inc. ............................. 1,049,000 23,078,000
Newell Co. ....................................... 313,700 12,940,125
------------
36,018,125
------------
CONSUMER NON-DURABLES 6.8%
Alberto-Culver Co., A ............................ 752,100 18,990,525
Block Drug Co. Inc., A ........................... 195,240 8,468,516
DIMON Inc. ....................................... 633,000 4,707,938
Philip Morris Cos. Inc. .......................... 120,000 6,420,000
Universal Corp. .................................. 356,300 12,515,038
------------
51,102,017
------------
ELECTRONIC TECHNOLOGY 2.0%
Cohu Inc. ........................................ 395,200 8,694,400
Hewlett-Packard Co. .............................. 89,900 6,141,294
------------
14,835,694
------------
ENERGY MINERALS .8%
Royal Dutch Petroleum Co., N.Y. shs. (Netherlands) 124,300 5,950,863
------------
FINANCE 15.3%
Fannie Mae ....................................... 147,000 10,878,000
First Union Corp. ................................ 310,026 18,853,456
Mercantile Bankshares Corp. ...................... 232,525 8,952,213
National Commerce Bancorp ........................ 921,400 17,333,838
State Street Corp. ............................... 147,400 10,253,513
TrustCo Bank Corp., N.Y. shs ..................... 384,580 11,537,400
US Bancorp ....................................... 358,500 12,726,750
Washington Mutual Inc. ........................... 431,400 16,474,088
Wilmington Trust Corp. ........................... 130,000 8,011,250
------------
115,020,508
------------
HEALTH TECHNOLOGY 4.4%
Becton, Dickinson and Co. ........................ 25,800 1,101,338
Superior Uniform Group Inc. ...................... 265,800 3,854,100
(e)West Co. Inc. .................................... 784,300 27,989,706
------------
32,945,144
------------
INSURANCE 11.8%
American Heritage Life Investment Corp. .......... 159,900 3,907,556
American International Group Inc. ................ 120,050 11,599,830
Chubb Corp. ...................................... 173,000 11,223,375
Harleysville Group Inc. .......................... 135,600 3,500,175
Mercury General Corp. ............................ 345,000 15,115,312
MMI Cos. Inc. .................................... 622,500 10,426,875
ReliaStar Financial Corp. ........................ 424,600 19,584,675
RLI Corp ......................................... 267,856 8,906,212
St. Paul Cos. Inc. ............................... 130,000 4,517,500
------------
88,781,510
------------
NON-ENERGY MINERALS .6%
Nucor Corp. ...................................... 108,000 4,671,000
------------
</TABLE>
113
<PAGE>
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STATEMENT OF INVESTMENTS, DECEMBER 31, 1998 (CONT.)
<TABLE>
<CAPTION>
RISING DIVIDENDS FUND SHARES VALUE
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (CONT.)
PROCESS INDUSTRIES 11.9%
Bemis Co. Inc. ............................................ 534,500 $ 20,277,594
Brady Corp., A ............................................ 155,700 4,194,169
Donaldson Co. Inc. ........................................ 176,200 3,656,150
Hanna (M.A.) Co. .......................................... 626,900 7,718,706
Millipore Corp. ........................................... 242,900 6,907,469
Pall Corp. ................................................ 1,338,100 33,870,656
The Sherwin-Williams Co. .................................. 452,000 13,277,500
------------
89,902,244
------------
PRODUCER MANUFACTURING 18.7%
Avery Dennison Corp. ...................................... 216,700 9,765,044
Baldor Electric Co. ....................................... 458,333 9,281,243
Diebold Inc. .............................................. 314,000 11,205,875
Dover Corp. ............................................... 349,600 12,804,100
Flowserve Corp. ........................................... 109,000 1,805,313
General Electric Co. ...................................... 69,600 7,103,550
Graco Inc. ................................................ 174,600 5,150,700
Hubbell Inc., B ........................................... 281,700 10,704,600
Kaydon Corp. .............................................. 485,900 19,466,369
Kimball International Inc., B ............................. 605,900 11,512,100
Myers Industries Inc. ..................................... 443,260 12,716,020
Superior Industries International Inc. .................... 244,700 6,805,719
Teleflex Inc. ............................................. 243,300 11,100,563
Watts Industries Inc., A .................................. 677,000 11,255,125
------------
140,676,321
------------
RETAIL TRADE 11.8%
Family Dollar Stores Inc. ................................. 2,229,800 49,055,600
Rite Aid Corp. ............................................ 302,000 14,967,875
Schultz Sav-O Stores Inc. ................................. 188,900 3,116,850
The Limited Inc. .......................................... 261,000 7,601,625
Wal-Mart Stores Inc. ...................................... 168,200 13,697,788
------------
88,439,738
------------
TRANSPORTATION 1.3%
Circle International Group Inc. ........................... 477,900 9,796,950
------------
TOTAL COMMON STOCKS (COST $561,028,731) ................... 733,023,875
------------
CONVERTIBLE PREFERRED STOCKS .2%
American Heritage Corp., 8.50%, cvt. pfd. (COST $1,210,000) 24,200 1,612,325
------------
TOTAL LONG TERM INVESTMENTS ($562,238,731) ................ 734,636,200
------------
</TABLE>
114
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STATEMENT OF INVESTMENTS, DECEMBER 31, 1998 (CONT.)
<TABLE>
<CAPTION>
PRINCIPAL
RISING DIVIDENDS FUND AMOUNT VALUE
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
(f)REPURCHASE AGREEMENT 2.5%
Joint Repurchase Agreement, 4.681%, 1/04/99 (Maturity Value $18,552,247) (COST $18,542,602) $ 18,542,602 $ 18,542,602
Barclays Capital Inc. (Maturity Value $942,126)
Bear, Stearns & Co. Inc. (Maturity Value $244,255)
Chase Securities Inc. (Maturity Value $1,919,146)
CIBC Oppenheimer Corp. (Maturity Value $1,919,146)
Donaldson, Lufkin & Jenrette Securities Corp. (Maturity Value $1,919,146)
Dresdner Kleinwort Benson, North America LLC (Maturity Value $1,919,146)
Goldman, Sachs & Co. (Maturity Value $523,404)
Greenwich Capital Markets Inc. (Maturity Value $1,919,146)
Lehman Brothers Inc. (Maturity Value $348,937)
NationsBanc Montgomery Securities (Maturity Value $1,919,146)
Paine Webber Inc. (Maturity Value $1,046,808)
Paribas Corp. (Maturity Value $1,919,146)
Warburg Dillon Read LLC (Maturity Value $2,012,695)
Collateralized by U.S. Treasury Bills & Notes
-------------
TOTAL INVESTMENTS (COST $580,781,333) 100.2% ............................................. 753,178,802
OTHER ASSETS, LESS LIABILITIES (.2%) ...................................................... (1,309,806)
-------------
NET ASSETS 100.0% ......................................................................... $ 751,868,996
=============
</TABLE>
(e)See Note 9 regarding Holding of 5% Voting Securities.
(f)See Note 1(c) regarding joint repurchase agreements.
See notes to financial statements.
115
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STATEMENT OF INVESTMENTS, DECEMBER 31, 1998
<TABLE>
<CAPTION>
SMALL CAP FUND SHARES VALUE
- ----------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS 93.6%
COMMERCIAL SERVICES 2.8%
(a)24/7 Media Inc. ....................... 34,800 $ 974,400
(a)Applied Graphics Technologies Inc. .... 93,700 1,546,050
Norrell Corp. ......................... 82,100 1,210,975
(a)NOVA Corp. ............................ 55,900 1,939,031
(a)RemedyTemp Inc., A .................... 29,500 446,188
(a)SOS Staffing Services Inc. ............ 75,500 547,375
(a)Sylvan Learning Systems Inc. .......... 74,100 2,260,050
-----------
8,924,069
-----------
CONSUMER DURABLES .8%
(a)Activision Inc. ....................... 125,700 1,398,413
(a)Electronic Arts Inc. .................. 20,000 1,122,500
Ethan Allen Interiors Inc. ............ 2,500 102,500
-----------
2,623,413
-----------
CONSUMER NON-DURABLES 3.0%
Alberto-Culver Co., A ................. 23,300 588,325
(a)Consolidated Cigar Holdings Inc. ...... 115,900 2,049,981
(a)Sola International Inc. ............... 24,400 420,900
(a)Tommy Hilfiger Corp. .................. 73,800 4,428,000
(a)Tropical Sportswear International Corp. 38,900 1,395,538
Wolverine World Wide Inc. ............. 55,000 728,750
-----------
9,611,494
-----------
(a)CONSUMER SERVICES 3.6%
DeVry Inc. ............................ 77,800 2,382,625
Jones Intercable Inc. ................. 2,100 73,763
Jones Intercable Inc., A .............. 29,100 1,036,688
The Marquee Group Inc. ................ 160,800 723,600
MeriStar Hotels & Resorts Inc. ........ 120,000 315,000
Prime Hospitality Corp. ............... 238,000 2,513,875
Rio Hotel & Casino Inc. ............... 62,400 990,600
SFX Entertainment Inc., A ............. 40,000 2,195,000
Vail Resorts Inc. ..................... 47,200 1,038,400
-----------
11,269,551
-----------
(a)ELECTRONIC TECHNOLOGY 17.9%
Advanced Energy Industries Inc. ....... 126,200 3,155,000
Coherent Inc. ......................... 178,400 2,218,850
Com21 Inc. ............................ 70,400 1,478,400
DuPont Photomasks Inc. ................ 400 16,975
Etec Systems Inc. ..................... 66,100 2,644,000
Excel Switching Corp. ................. 3,100 117,800
Flextronics International Ltd. ........ 20,000 1,712,500
FLIR Systems Inc. ..................... 90,000 2,092,500
Fvc.com Inc. .......................... 24,000 378,000
Gemstar International Group Ltd. ...... 57,000 3,263,250
H.T.E. Inc. ........................... 131,800 659,000
Harmonic Lightwaves Inc. .............. 77,700 1,456,875
Itron Inc. ............................ 67,400 484,438
Jabil Circuit Inc. .................... 34,200 2,552,175
Komag Inc. ............................ 317,800 3,297,175
Ladish Co. Inc. ....................... 61,800 517,575
Level One Communications Inc. ......... 80,000 2,840,000
Mettler-Toledo International Inc. ..... 110,000 3,086,875
Natural MicroSystems Corp. ............ 82,000 597,067
Novellus Systems Inc. ................. 40,000 1,980,000
Perceptron Inc. ....................... 85,000 563,125
</TABLE>
116
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STATEMENT OF INVESTMENTS, DECEMBER 31, 1998 (CONT.)
<TABLE>
<CAPTION>
SMALL CAP FUND SHARES VALUE
- ----------------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (CONT.)
(a)ELECTRONIC TECHNOLOGY (CONT.)
Photronics Inc. ................................... 8,400 $ 201,338
PMC-Sierra Inc. ................................... 58,000 3,661,250
Rainbow Technologies Inc. ......................... 73,950 1,391,184
Sanmina Corp. ..................................... 26,800 1,675,000
Security Dynamics Technologies Inc. ............... 185,700 4,271,100
SIPEX Corp. ....................................... 10,600 372,325
Tekelec ........................................... 187,400 3,103,813
Transcrypt International Inc. ..................... 67,300 189,281
TriStar Aerospace Co. ............................. 31,400 219,800
Uniphase Corp. .................................... 59,200 4,107,000
Waters Corp. ...................................... 6,600 575,850
Xylan Corp. ....................................... 84,900 1,491,043
-----------
56,370,564
-----------
ENERGY MINERALS 4.0%
(a)Barrett Resources Corp. ........................... 153,900 3,693,600
(a)Denbury Resources Inc. ............................ 85,800 348,563
Devon Energy Corp. ................................ 22,400 687,400
(a)Newfield Exploration Co. .......................... 135,800 2,834,825
Range Resources Corp. ............................. 125,000 429,688
Snyder Oil Corp. .................................. 128,200 1,706,663
(a)Titan Exploration Inc. ............................ 243,200 1,596,000
(a)Tom Brown Inc. .................................... 139,700 1,401,373
-----------
12,698,112
-----------
FINANCE 6.4%
(a)Affiliated Managers Group Inc. .................... 37,100 1,108,363
Allied Capital Corp. .............................. 30,000 519,375
Bank United Corp., A .............................. 50,000 1,962,500
Espirito Santo Financial Group SA, ADR (Luxembourg) 125,700 2,459,006
(a)E*Trade Group Inc. ................................ 40,000 1,871,252
EVEREN Capital Corp. .............................. 84,000 1,911,000
Federated Investors Inc., B ....................... 122,900 2,227,563
Freedom Securities Corp. .......................... 26,300 397,788
(a)Golden State Bancorp Inc. ......................... 118,000 1,961,750
(a)Hambrecht & Quist Group ........................... 20,000 453,750
(a)HealthCare Financial Partners Inc. ................ 29,100 1,160,363
Heller Financial Inc. ............................. 49,000 1,439,375
Silicon Valley Bancshares ......................... 97,400 1,658,849
Westamerica Bancorp ............................... 27,900 1,025,325
-----------
20,156,259
-----------
(a)HEALTH SERVICES 3.3%
American Dental Partners Inc. ..................... 22,300 257,844
Medaphis Corp. .................................... 44,900 147,330
New American Healthcare Corp. ..................... 37,100 415,056
PAREXEL International Corp. ....................... 65,000 1,625,000
Pediatrix Medical Group Inc. ...................... 8,900 533,444
Pharmaceutical Product Development Inc. ........... 100,000 3,006,250
Renal Care Group Inc. ............................. 94,650 2,727,103
Total Renal Care Holdings Inc. .................... 15,933 471,019
Transitions Systems Inc. .......................... 70,900 1,063,500
-----------
10,246,546
-----------
HEALTH TECHNOLOGY 3.5%
(a)DepoTech Corp. .................................... 83,600 193,325
(a)Heska Corp. ....................................... 50,300 223,206
(a)Incyte Pharmaceuticals Inc. ....................... 12,500 467,188
</TABLE>
117
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STATEMENT OF INVESTMENTS, DECEMBER 31, 1998 (CONT.)
<TABLE>
<CAPTION>
SMALL CAP FUND SHARES VALUE
- --------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (CONT.)
HEALTH TECHNOLOGY (CONT.)
(a)Inhale Therapeutic Systems ............... 84,300 $ 2,781,900
Mentor Corp. ............................. 57,300 1,342,969
(a)Neurogen Corp. ........................... 64,200 1,123,500
(a)OrthoLogic Corp. ......................... 245,000 819,231
(a)Serologicals Corp. ....................... 138,750 4,162,500
-----------
11,113,819
-----------
INDUSTRIAL SERVICES 3.6%
(a)Atwood Oceanics Inc. ..................... 3,400 57,800
(a)Catalytica Inc. .......................... 193,733 3,487,194
(a)Core Laboratories, NV (Netherlands) ...... 110,400 2,111,400
(a)Marine Drilling Cos. Inc. ................ 71,100 546,581
Safety-Kleen Corp. ....................... 12,500 176,563
(a)Tuboscope Inc. ........................... 121,300 985,563
(a)U.S. Liquids Inc. ........................ 74,800 1,683,000
Varco International Inc. ................. 300,800 2,331,200
-----------
11,379,301
-----------
INSURANCE 4.0%
(a)Amerin Corp. ............................. 58,200 1,374,975
Executive Risk Inc. ...................... 45,000 2,472,188
Financial Security Assurance Holdings Ltd. 63,000 3,417,750
HCC Insurance Holdings Inc. .............. 22,300 393,038
Life USA Holding Inc. .................... 47,200 607,700
Reinsurance Group of America Inc. ........ 24,400 1,708,000
(a)Risk Capital Holdings Inc. ............... 125,000 2,718,750
-----------
12,692,401
-----------
NON-ENERGY MINERALS .6%
Carpenter Technology Corp. ............... 51,600 1,751,175
-----------
PROCESS INDUSTRIES .7%
ChemFirst Inc. ........................... 85,100 1,680,725
(a)CUNO Inc. ................................ 12,000 195,000
Optical Coating Laboratory Inc. .......... 16,700 434,200
-----------
2,309,925
-----------
PRODUCER MANUFACTURING 3.0%
(a)Gentex Corp. ............................. 137,800 2,756,000
(a)Gibraltar Steel Corp. .................... 116,700 2,654,925
JLG Industries Inc. ...................... 111,400 1,740,625
Reliance Steel & Aluminum Co. ............ 9,000 248,625
Roper Industries Inc. .................... 107,400 2,188,275
-----------
9,588,450
-----------
REAL ESTATE 5.9%
Arden Realty Inc. ........................ 100,000 2,318,750
Camden Property Trust .................... 110,000 2,860,000
Colonial Properties Trust ................ 28,400 756,150
Cornerstone Properties Inc. .............. 8,000 125,000
FelCor Lodging Trust Inc. ................ 102,000 2,352,375
Glenborough Realty Trust Inc. ............ 64,100 1,306,038
Innkeepers USA Trust ..................... 218,900 2,585,756
MeriStar Hospitality Corp. ............... 130,000 2,413,125
OMEGA Healthcare Investors Inc. .......... 27,400 827,138
SL Green Realty Corp. .................... 30,900 668,213
Storage Trust Realty ..................... 66,400 1,552,100
Winston Hotels Inc. ...................... 98,000 802,375
-----------
18,567,020
-----------
</TABLE>
118
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STATEMENT OF INVESTMENTS, DECEMBER 31, 1998 (CONT.)
<TABLE>
<CAPTION>
SMALL CAP FUND SHARES VALUE
- ------------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (CONT.)
(a)RETAIL TRADE 1.3%
Beyond.com Corp. .............................. 90,000 $ 1,867,500
Guitar Center Inc. ............................ 85,000 2,093,125
-----------
3,960,625
-----------
(a)TECHNOLOGY SERVICES 20.5%
Actuate Software Corp. ........................ 17,600 347,600
Affiliated Computer Services Inc., A .......... 174,800 7,866,000
Aspen Technology Inc. ......................... 8,600 124,700
Brightpoint Inc. .............................. 25,900 356,125
Brio Technology Inc. .......................... 22,000 389,125
Cambridge Technology Partners Inc. ............ 47,300 1,046,513
Check Point Software Technologies Ltd. ........ 11,700 536,006
Concord Communications Inc. ................... 30,000 1,702,500
Documentum Inc. ............................... 37,000 1,977,188
DoubleClick Inc. .............................. 25,300 1,152,731
Entrust Technologies Inc. ..................... 55,200 1,317,900
Envoy Corp. ................................... 60,600 3,529,950
Harbinger Corp. ............................... 44,150 353,200
HNC Software Inc. ............................. 92,700 3,748,556
i2 Technologies Inc. .......................... 116,000 3,523,500
Information Advantage Inc. .................... 17,400 131,588
Integrated Systems Inc. ....................... 125,700 1,877,644
International Network Services ................ 83,800 5,572,700
Intuit Inc. ................................... 80,800 5,858,000
Micromuse Inc. ................................ 60,000 1,170,000
Sapient Corp. ................................. 63,200 3,539,200
Sterling Commerce Inc. ........................ 6,058 272,610
Synopsys Inc. ................................. 109,000 5,913,250
Transaction Systems Architects Inc. ........... 72,000 3,600,000
The Vantive Corp. ............................. 132,300 1,058,400
VERITAS Software Corp. ........................ 45,000 2,697,188
Visio Corp. ................................... 40,000 1,462,500
Whittman-Hart Inc. ............................ 21,900 604,988
Wind River Systems Inc. ....................... 60,700 2,852,900
-----------
64,582,562
-----------
(a)TELECOMMUNICATIONS 4.9%
ICG Communications Inc. ....................... 156,000 3,354,000
Intermedia Communications Inc. ................ 121,200 2,090,700
Millicom International Cellular SA (Luxembourg) 62,400 2,176,200
Paging Network Inc. ........................... 174,800 819,375
Primus Telecommunications Group Inc. .......... 132,500 2,186,250
Rural Cellular Corp., A ....................... 139,300 1,462,650
Western Wireless Corp., A ..................... 148,100 3,258,200
-----------
15,347,375
-----------
TRANSPORTATION 3.8%
Air Express International Corp. ............... 100,000 2,175,000
(a)Atlantic Coast Airlines Holdings .............. 171,000 4,275,000
C.H. Robinson Worldwide Inc. .................. 112,600 2,920,563
Expeditors International of Washington Inc. ... 54,800 2,301,600
Mesaba Holdings Inc. .......................... 12,900 266,063
-----------
11,938,226
-----------
TOTAL LONG TERM INVESTMENTS (COST $278,870,540) 295,130,887
-----------
</TABLE>
119
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STATEMENT OF INVESTMENTS, DECEMBER 31, 1998 (CONT.)
<TABLE>
<CAPTION>
PRINCIPAL
SMALL CAP FUND AMOUNT VALUE
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
(f)REPURCHASE AGREEMENT 9.0%
Joint Repurchase Agreement, 4.681%, 1/04/99 (Maturity Value $28,550,183) (COST $28,535,341) $28,535,341 $ 28,535,341
Barclays Capital Inc. (Maturity Value $1,449,736)
Bear, Stearns & Co. Inc. (Maturity Value $375,995)
Chase Securities Inc. (Maturity Value $2,953,431)
CIBC Oppenheimer Corp. (Maturity Value $2,953,431)
Donaldson, Lufkin & Jenrette Securities Corp. (Maturity Value $2,953,431)
Dresdner Kleinwort Benson, North America LLC (Maturity Value $2,953,431)
Goldman, Sachs & Co. (Maturity Value $805,377)
Greenwich Capital Markets Inc. (Maturity Value $2,953,431)
Lehman Brothers Inc. (Maturity Value $537,013)
NationsBanc Montgomery Securities LLC (Maturity Value $2,953,431)
Paine Webber Inc. (Maturity Value $1,610,755)
Paribas Corp. (Maturity Value $2,953,431)
Warburg Dillon Read LLC (Maturity Value $3,097,290)
Collateralized by U.S. Treasury Bills & Notes
------------
TOTAL INVESTMENTS (COST $307,405,881) 102.6% 323,666,228
OTHER ASSETS, LESS LIABILITIES (2.6%) (8,206,370)
------------
NET ASSETS 100.0% $315,459,858
------------
</TABLE>
(a)Non-income producing.
(f)See Note 1(c) regarding joint repurchase agreements.
See notes to financial statements.
120
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<TABLE>
<CAPTION>
SHARES/
WARRANTS
TEMPLETON DEVELOPING MARKETS EQUITY FUND INDUSTRY & RIGHTS VALUE
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS, WARRANTS AND RIGHTS 99.7%
ARGENTINA 6.3%
Astra Cia Argentina de Petroleo SA ..................... Energy Sources 65,000 $ 76,769
(a)Atanor Cia Nacional Para la Industria Quimica SA, D .... Chemicals 524,163 299,042
Banco de Galicia y Buenos Aires SA, B .................. Banking 63,765 280,819
Banco Frances SA ....................................... Banking 21,500 152,788
(a)Buenos Aires Embotelladora SA, B, ADR .................. Beverages & Tobacco 56,200 562
(a)Capex SA, A ............................................ Utilities Electrical & Gas 48,735 279,503
Molinos Rio de la Plata SA, B .......................... Food & Household Products 936,348 2,202,400
Nobleza Piccardo Sdad Industrial Comercial y Financial.. Beverages & Tobacco 48,472 164,953
Perez Companc SA, B .................................... Energy Sources 254,195 1,076,213
Quilmes Industrial SA, ADR ............................. Beverages & Tobacco 137,400 1,279,538
Siderca SA, A .......................................... Metals & Mining 192,490 219,636
(a)Sociedad Comercial del Plata Cadelplata Come ........... Multi-Industry 1,662,960 1,173,443
Telecom Argentina Stet-France SA, ADR .................. Telecommunications 11,900 327,250
Telefonica de Argentina SA, B, ADR ..................... Telecommunications 17,210 480,804
Transportadora de Gas del Sur SA, B .................... Utilities Electrical & Gas 102,030 202,201
Transportadora de Gas del Sur SA, B, ADR ............... Utilities Electrical & Gas 7,100 71,888
YPF Sociedad Anonima, ADR .............................. Energy Sources 67,893 1,896,761
-----------
10,184,570
-----------
BRAZIL 11.3%
Aracruz Celulose SA, ADR ............................... Forest Products & Paper 119,000 952,000
Banco Bradesco SA BBD .................................. Banking 135,190,083 707,140
Banco Bradesco SA BBD, pfd. ............................ Banking 110,232,124 611,260
(a)Banco Bradesco SA BBD, rts. ............................ Banking 6,018,004 1,534
(a)Banco Bradesco SA BBD, rts., pfd. ...................... Banking 4,569,026 2,602
Banco do Brasil SA ..................................... Banking 87,754,976 486,620
Banco do Brazil SA, pfd. ............................... Banking 33,350,000 223,575
Brasmotor SA, pfd. ..................................... Multi-Industry 4,019,000 399,156
Centrais Eletricas Brasileiras SA (Electrobras) ........ Utilities Electrical & Gas 96,602,000 1,663,002
Centrais Eletricas Brasileiras SA (Electrobras),B, pfd. Utilities Electrical & Gas 128,691,000 2,471,038
(a)Centrais Geradoras Do Sul Do Brasil SA, B, pfd. ........ Utilities Electrical & Gas 209,667,000 260,294
Cia Cervejaria Brahma, pfd. ............................ Beverages & Tobacco 416,000 181,790
Cia Energetica de Minas Gerais Cemig, Br., pfd. ........ Utilities Electrical & Gas 30,921,000 588,606
(a)Cia Mesbla SA, pfd. .................................... Merchandising 7,400,000 1,837
(a)Cia Mesbla SA, rts. .................................... Merchandising 14,694,386 730
Cia Vale do Rio Doce, A, pfd. .......................... Metals & Mining 43,900 563,170
(a)Companhia Energetica do Ceara, pfd. .................... Utilities Electrical & Gas 23,320,000 57,902
Companhia Paranaense De Energia-Copel, ADR ............. Utilities Electrical & Gas 12,000 85,500
Companhia Siderurgica Nacional Sid Nacional CSN ........ Metals & Mining 40,323,000 901,073
Copene-Petroquimica do Nordeste SA, A, pfd. ............ Chemicals 3,069,700 350,605
Duratex SA, pfd. ....................................... Forest Products & Paper 56,354,800 1,539,175
Investimentos Itau SA, pfd. ............................ Multi-Industry 2,222,200 1,232,257
(a)Mannesmann SA .......................................... Machinery & Engineering 2,121,500 131,688
(a)Mannesmann SA, pfd. .................................... Machinery & Engineering 309,200 14,843
Petroleo Brasileiro SA, pfd. ........................... Energy Sources 18,817,000 2,133,606
Souza Cruz SA .......................................... Beverages & Tobacco 34,000 219,491
(a)Telecomunicacoes Brasileiras SA, unit .................. Telecommunications 29,560,000 1,321,117
(a)Telecomunicacoes Brasileiras SA, unit, pfd. ............ Telecommunications 10,191,000 747,298
Unibanco Uniao de Bamncos Brasileiros SA, unit ......... Banking 15,439,000 536,675
-----------
18,385,584
-----------
CHILE 3.6%
Cia Cervecerias Unidas SA, ADR ......................... Beverages & Tobacco 15,000 288,750
Compania De Telecomunicaciones De Chile SA, ADR ........ Telecommunications 110,000 2,275,625
Empresa Nacional de Electricidad SA, ADR ............... Electrical & Electronics 155,100 1,764,263
Enersis SA, ADR ........................................ Utilities Electrical & Gas 39,600 1,022,175
Quinenco SA, ADR ....................................... Multi-Industry 47,900 383,200
Sociedad Quimica y Minera de Chile SA, ADR ............. Chemicals 3,000 101,063
-----------
5,835,076
-----------
</TABLE>
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STATEMENT OF INVESTMENTS, DECEMBER 31, 1998 (CONT.)
<TABLE>
<CAPTION>
SHARES/
WARRANTS
TEMPLETON DEVELOPING MARKETS EQUITY FUND INDUSTRY & RIGHTS VALUE
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS, WARRANTS AND RIGHTS (CONT.)
CHINA 1.9%
China Resources Enterprises Ltd. ........................ Multi-Industry 207,000 $ 323,302
(a)China Southern Glass Co. Ltd., B ........................ Building Materials & Components 1,765,445 161,795
China Vanke Co. Ltd., B ................................. Real Estate 2,857,867 785,731
Chiwan Wharf Holdings Ltd., B ........................... Transportation 1,132,000 116,893
Guangshen Railway Co. Ltd., H ........................... Transportation 1,187,000 137,894
Guangshen Railway Co. Ltd., H, ADR ...................... Transportation 12,700 76,200
Shandong Huaneng Power Development Co. Ltd., ADR ........ Utilities Electrical & Gas 96,500 440,281
(a)Shanghai Dazhong Taxi Shareholding Co. Ltd., B .......... Transportation 569,300 240,245
(a)Shanghai Jin Jiang Tower Co. Ltd., B .................... Leisure & Tourism 1,891,600 166,461
(a)Shanghai Lujiaxui Finance & Trade Zn Dev Stock Co Ltd., B Real Estate 284,900 91,738
Shanghai Petrochemical Co. Ltd., H ...................... Chemicals 2,540,000 229,501
(a)Shanghai Tyre & Rubber Co. Ltd., B ...................... Industrial Components 1,472,570 147,257
(a)Shanghai Vacuum Electron Devices Co. Ltd., B ............ Appliances & Household Durables 580,433 67,330
Shanghai Yaohua Pilkington Glass, B ..................... Building Materials & Components 477,600 40,596
-----------
3,025,224
-----------
COLOMBIA 1.3%
Bavaria SA .............................................. Beverages & Tobacco 228,607 1,152,268
Cementos Argos SA ....................................... Building Materials & Components 262,000 746,637
Compania Nacional de Chocolates SA ...................... Food & Household Products 64,363 278,664
-----------
2,177,569
-----------
CROATIA
Pliva D D, GDR, Reg S ................................... Health & Personal Care 3,900 64,740
-----------
CZECH REPUBLIC 2.6%
(a)CEZ AS .................................................. Utilities Electrical & Gas 128,080 2,830,632
(a)SPT Telecom AS .......................................... Telecommunications 66,310 1,011,288
Tabak AS ................................................ Beverages & Tobacco 250 69,844
Unipetrol ............................................... Chemicals 208,938 375,700
-----------
4,287,464
-----------
GHANA 1.0%
Ashanti Goldfields Co. Ltd., GDR, Reg S ................. Metals & Mining 167,364 1,569,038
-----------
HONG KONG 7.3%
Cheung Kong Holdings Ltd. ............................... Multi-Industry 337,000 2,425,086
Citic Pacific Ltd. ...................................... Multi-Industry 552,000 1,189,893
Dairy Farm International Holdings Ltd. .................. Merchandising 221,772 255,038
Hang Lung Development Co. Ltd. .......................... Real Estate 1,021,000 1,093,846
Hong Kong & Shanghai Hotels Ltd. ........................ Leisure & Tourism 568,000 403,240
Hong Kong Electric Holdings Ltd. ........................ Utilities Electrical & Gas 180,400 547,214
HSBC Holdings Plc ....................................... Banking 66,155 1,648,058
Hutchison Whampoa Ltd. .................................. Multi-Industry 41,000 289,748
IMC Holdings Ltd. ....................................... Transportation 66,000 6,389
Jardine Matheson Holdings Ltd. .......................... Multi-Industry 217,015 559,899
New World Development Co. Ltd. .......................... Real Estate 911,231 2,293,589
(a)Semi-Tech Co. Ltd. ...................................... Appliances & Household Durables 1,452,071 59,978
Sun Hung Kai Properties Ltd. ............................ Real Estate 138,739 1,011,811
Yue Yuen Industrial (Holdings) Ltd. ..................... Recreation & Other Consumer Goods 67,200 129,243
-----------
11,913,032
-----------
HUNGARY 1.4%
Borsodchem RT ........................................... Chemicals 19,330 502,789
Borsodchem RT, GDR, Reg S ............................... Chemicals 13,000 338,325
(a)Danubius Hotel and SpA RT ............................... Leisure & Tourism 3,000 62,844
Gedeon Richter Ltd. ..................................... Health & Personal Care 12,950 551,877
Mol Magyar Olay-Es Gazipari RT .......................... Energy Sources 7,330 201,043
Tiszai Vegyi Kombinat RT ................................ Chemicals 44,001 592,689
-----------
2,249,567
-----------
</TABLE>
122
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STATEMENT OF INVESTMENTS, DECEMBER 31, 1998 (CONT.)
<TABLE>
<CAPTION>
SHARES/
WARRANTS
TEMPLETON DEVELOPING MARKETS EQUITY FUND INDUSTRY & RIGHTS VALUE
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS, WARRANTS AND RIGHTS (CONT.)
INDIA 3.0%
Arvind Mills Ltd. ............................ Textiles & Apparel 143,000 $ 130,057
Bajaj Auto Ltd. .............................. Automobiles 9,800 120,204
(a)Bank of Baroda ............................... Banking 95,700 111,697
(a)Bharat Petroleum Corp. Ltd. .................. Energy Sources 30,000 164,626
Bombay Dyeing & Manufacturing Co. Ltd. ....... Chemicals 2,200 3,000
Cummins India Ltd. ........................... Machinery & Engineering 4,000 28,944
Grasim Industries Ltd. ....................... Multi-Industry 22,900 97,158
Grasim Industries Ltd., GDR .................. Multi-Industry 26,000 118,300
Great Eastern Shipping Co. Ltd. .............. Transportation 297,800 161,527
Gujarat Industries Power Ltd. ................ Energy Equipment & Services 52,100 30,343
Hindustan Organic Chemicals Ltd. ............. Chemicals 25,900 4,815
Hindustan Petroleum Corporation Ltd. ......... Energy Sources 39,400 217,970
ICICI Ltd. ................................... Financial Services 182,480 202,034
India Cements Ltd. ........................... Building Materials & Components 40,900 31,135
(a)India Cements Ltd., GDR ...................... Building Materials & Components 3,051 2,288
Indian Aluminium Co. Ltd. .................... Metals & Mining 45,000 96,256
Indian Petrochemicals Corp. Ltd. ............. Chemicals 204,200 275,334
(a)Indian Rayon & Industries Ltd. ............... Multi-Industry 30,525 80,809
Indian Rayon & Industries Ltd., GDR .......... Multi-Industry 10,669 26,939
Indo Gulf Corp. Ltd. ......................... Chemicals 142,300 93,591
Industrial Development Bank of India ......... Banking 166,300 142,639
Larsen & Toubro Ltd. ......................... Multi-Industry 157,500 594,846
Larsen and Toubro Ltd., GDR, Reg S ........... Multi-Industry 15,875 121,841
Mahanagar Telephone Nigam Ltd. ............... Telecommunications 12,400 53,456
National Aluminium Co. Ltd. .................. Metals & Mining 617,100 273,726
Oriental Bank of Commerce .................... Banking 294,800 259,100
Reliance Industries Ltd. ..................... Chemicals 115,400 325,321
Satyam Computers Services Ltd. ............... Data Processing & Reproduction 2,200 37,662
(a)Shipping Corporation of India Ltd. ........... Transportation 179,200 88,554
Steel Authority of India Ltd. ................ Metals & Mining 74,100 9,852
Steel Authority of India Ltd., GDR, Reg S .... Metals & Mining 22,000 43,450
Tata Chemicals Ltd. .......................... Chemicals 69,350 165,312
Tata Engineering & Locomotive Co. Telco ...... Machinery & Engineering 147,500 565,756
(a)Tata Hydro-Electric Power Company ............ Utilities Electrical & Gas 20,000 37,462
Tata Iron & Steel Co., Ltd. .................. Metals & Mining 10,000 27,626
Thermax Ltd. ................................. Energy Equipment & Services 2,200 7,403
Videsh Sanchar Nigam Ltd., GDR ............... Telecommunications 5,000 61,250
----------
4,812,283
----------
INDONESIA 3.2%
(a)Asia Pulp & Paper Co. Ltd., ADR .............. Forest Products & Paper 91,700 750,794
(a)PT Barito Pacific Timber TBK ................. Forest Products & Paper 3,211,000 141,365
(a)PT BBL Dharmala Finance TBK, fgn. ............ Financial Services 150,000 26,415
(a)PT BDNI Capital Corp., fgn. .................. Financial Services 411,000 9,047
(a)PT Charoen Pokphand Indonesia ................ Food & Household Products 1,733,750 32,712
PT Gudang Garamm ............................. Beverages & Tobacco 118,000 172,918
(a)PT Indah Kiat Pulp & Paper Corp. ............. Forest Products & Paper 1,747,000 477,953
(a)PT Indocement Tunggal Prakarsa ............... Building Materials & Components 1,396,500 557,722
(a)PT Indofoods Sukses Makmurr .................. Food & Household Products 684,020 348,463
PT Indosat ................................... Telecommunications 197,000 258,330
(a)PT Inter-Pacific Bank, fgn. .................. Banking 15,000 377
PT Semen Gresik (Persero) .................... Building Materials & Components 444,000 463,547
(a)PT Sinar Mas Agro Resources & Technology Corp. Food & Household Products 745,800 159,479
(a)PT Sinar Mas Multi Artha, fgn. ............... Financial Services 98,250 20,700
(a)PT Summarecon Agung .......................... Real Estate 668,069 12,605
PT Telekomunikasi Indonesia (Persero), B ..... Telecommunications 1,558,500 529,302
PT Timah ..................................... Metals & Mining 1,002,000 677,453
(a)PT Tjiwi Kimia ............................... Forest Products & Paper 2,251,926 587,767
----------
5,226,949
----------
</TABLE>
123
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STATEMENT OF INVESTMENTS, DECEMBER 31, 1998 (CONT.)
<TABLE>
<CAPTION>
SHARES/
WARRANTS
TEMPLETON DEVELOPING MARKETS EQUITY FUND INDUSTRY & RIGHTS VALUE
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS, WARRANTS AND RIGHTS (CONT.)
ISRAEL .4%
(a)Clal Industries Ltd. ....................... Multi-Industry 104,802 $ 511,401
Koor Industries Ltd. ....................... Multi-Industry 1,466 127,920
-----------
639,321
-----------
JORDAN .1%
Jordan Cement Factories Ltd. ............... Building Materials & Components 36,000 156,742
-----------
MALAYSIA 2.8%
AMMB Holdings Bhd. ......................... Financial Services 129,000 121,405
Boustead Holdings Bhd. ..................... Food & Household Products 384,000 240,391
Cosway Corporation Bhd. .................... Appliances & Household Durables 453,000 143,696
Edaran Otomobil Nasional Bhd. .............. Automobiles 3,000 3,781
Federal Flour Mills Bhd. ................... Food & Household Products 103,000 80,492
Genting Bhd. ............................... Leisure & Tourism 311,400 539,688
Hong Leong Industries Bhd. ................. Multi-Industry 336,200 168,797
Hong Leong Industries Bhd., wts. ........... Multi-Industry 38,000 3,991
Hong Leong Properties Bhd. ................. Real Estate 474,000 78,664
Island & Peninsula Bhd. .................... Real Estate 458,000 292,489
Kian Joo Can Factory Bhd. .................. Industrial Components 85,000 99,995
(a)Leader Universal Holdings Bhd. ............. Industrial Components 982,000 216,606
Malaysian Airlines System Bhd. ............. Transportation 197,000 86,080
Malaysian International Shipping Corp., fgn. Transportation 207,666 218,125
(a)MBF Capital Bhd. ........................... Financial Services 107,000 19,219
Oriental Holdings Bhd. ..................... Automobiles 39,000 47,928
Perlis Plantations Bhd. .................... Multi-Industry 360,500 295,352
Perusahaan Otomobil Nasional Bhd. .......... Automobiles 214,000 258,495
PPB Oil Palms Bhd. ......................... Multi-Industry 625 382
Public Bank Bhd. ........................... Banking 368,000 154,614
Public Bank Bhd., fgn. ..................... Banking 31,000 12,048
Renong Bhd. ................................ Multi-Industry 1,608,000 310,774
Resorts World Bhd. ......................... Leisure & Tourism 756,000 695,611
Shangri La Hotels (Malaysia) Bhd. .......... Leisure & Tourism 1,010,000 269,461
Tanjong Plc. ............................... Recreation & Other Consumer Goods 189,000 214,401
Technology Resources Industries Bhd. ....... Multi-Industry 104,000 43,258
-----------
4,615,743
-----------
MEXICO 10.3%
Cemex SA ................................... Building Materials & Components 54,810 118,320
Cemex SA, B ................................ Building Materials & Components 1,454,500 3,654,633
(a)Cifra SA de CV, V .......................... Merchandising 209,000 253,589
Coca Cola Femsa SA de CV, L, ADR ........... Beverages & Tobacco 67,300 891,725
Cydea SA de CV, A .......................... Multi-Industry 69,938 63,644
DESC SA de CV DESC, B ...................... Multi-Industry 460,170 394,564
(a)Grupo Financiero Banamex Accival SA de CV, B Banking 461,000 605,966
(a)Grupo Financiero Banamex Accival SA de CV, L Banking 992,137 1,143,616
Grupo Financiero Bancomer SA de CV, L ...... Banking 1,300,370 184,077
Grupo Financiero Serfin SA de CV, B ........ Banking 2,607,816 232,040
Panamerican Beverages Inc., A .............. Food & Household Products 5,900 128,694
Telefonos de Mexico SA (Telmex), L, ADR .... Telecommunications 163,200 7,945,800
Vitro SA De CV ............................. Food & Household Products 699,849 1,026,068
-----------
16,642,736
-----------
PAKISTAN .6%
Pakistan Telecommunications Corp., A ....... Telecommunications 2,700,000 1,031,156
-----------
PERU .9%
Telefonica Del Peru SA, B, ADR ............. Telecommunications 109,500 1,389,281
-----------
PHILIPPINES 1.6%
(a)A Soriano Corp. ............................ Multi-Industry 2,414,000 51,506
Ayala Corp. ................................ Multi-Industry 393,500 139,091
(a)Filinvest Development Corp. ................ Real Estate 2,817,000 92,693
(a)Keppel Philippine Holdings Inc., B ......... Machinery & Engineering 638,000 11,481
</TABLE>
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- -------------------------------------------------------------------------------------------------------------------
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COMMON STOCKS, WARRANTS AND RIGHTS (CONT.)
PHILIPPINES (CONT.)
(a)Petron Corp. .............................. Energy Sources 4,498,000 $ 491,427
Philippine Long Distance Telephone Co., ADR Telecommunications 58,000 1,504,375
RFM Corp. ................................. Food & Household Products 497,090 76,672
San Miguel Corp., B ....................... Food & Household Products 90,500 174,486
(a)Southeast Asia Cement Holdings Inc. ....... Building Materials & Components 10,600,000 130,797
----------
2,672,528
----------
POLAND 2.1%
Bank Handlowy W Warszawie SA, GDR, Reg S .. Banking 5,500 71,225
Bank Przemyslowo-Handlowy SA .............. Banking 15,088 894,104
Bank Rozwoju Eksportu SA .................. Banking 736 16,985
Bank Slaski SA W Katowicach ............... Banking 3,000 155,556
Big Bank Gdanski SA, G .................... Banking 1,172,050 1,051,840
Big Bank Gdanski SA, GDR, Reg S ........... Banking 12,333 167,112
Gorazdze SA ............................... Building Materials & Components 8,385 140,944
Polifarb Cieszyn Wroclaw SA ............... Chemicals 18,149 43,175
(a)Rolimpex SA ............................... Wholesale & International Trade 49,753 80,795
Warta SA .................................. Insurance 28,395 582,462
Wielkopolski Bank Kredytowy SA ............ Banking 14,742 92,819
Zaklady Piwowarskie W Zywcu SA ............ Beverages & Tobacco 780 93,333
----------
3,390,350
----------
RUSSIA .2%
Irkutskenergo ............................. Utilities Electrical & Gas 439,500 19,668
Irkutskenergo, ADR ........................ Utilities Electrical & Gas 7,000 15,663
(a)JSC Gorkovsky Augomobile Plant ............ Automobiles 1,310 23,908
Lukoil Holdings, ADR ...................... Energy Sources 3,360 54,432
Mosenergo ................................. Utilities Electrical & Gas 2,052,000 41,040
Mosenergo, ADR ............................ Utilities Electrical & Gas 3,000 5,625
Rostelekom ................................ Telecommunications 2,000 1,460
Rostelecom, ADR ........................... Telecommunications 11,900 49,831
Unified Energy Systems .................... Utilities Electrical & Gas 610,600 18,623
Unified Energy Systems, ADR ............... Utilities Electrical & Gas 12,000 36,828
(a)Vimpel Communications, ADR ................ Telecommunications 5,200 67,275
----------
334,353
----------
SINGAPORE 9.7%
Acer Computer International Ltd. .......... Electrical & Electronics 116,000 58,000
Acma Ltd. ................................. Electrical & Electronics 120,000 52,727
Asia Pacific Breweries Ltd. ............... Beverages & Tobacco 26,000 53,891
City Developments Ltd. .................... Real Estate 367,500 1,592,500
Cycle & Carriage Ltd. ..................... Automobiles 67,000 229,423
Delgro Corp. .............................. Transportation 50,000 64,848
First Capital Corp. Ltd. .................. Real Estate 323,000 215,333
Fraser and Neave Ltd. ..................... Beverages & Tobacco 441,000 1,288,255
G P Batteries International Ltd. .......... Electrical & Electronics 49,000 104,533
Hai Sun Hup Group Ltd. .................... Transportation 1,315,000 330,742
Hind Hotels International Ltd. ............ Leisure & Tourism 344,000 235,588
(a)Hong Leong Finance Ltd., fgn. ............. Financial Services 35,000 67,030
(a)Inchcape Marketing Services Ltd. .......... Broadcasting & Publishing 377,000 205,636
Inchcape Motors Ltd. ...................... Wholesale & International Trade 163,000 188,685
Isetan (Singapore) Ltd. ................... Merchandising 75,500 68,636
Jurong Shipyard Ltd. ...................... Machinery & Engineering 224,000 984,242
Keppel Corp., Ltd. ........................ Transportation 698,000 1,869,794
Metro Holdings Ltd. ....................... Wholesale & International Trade 147,000 138,091
Natsteel Ltd. ............................. Metals & Mining 1,007,000 1,104,648
(a)Neptune Orient Lines Ltd. ................. Transportation 339,000 108,891
(a)Osprey Maritime Ltd. ...................... Transportation 359,000 110,964
Osprey Maritime Ltd., 2.50%, cvt., pfd. ... Transportation 96,120 29,127
Overseas Chinese Banking Corp. Ltd., fgn. . Banking 302,000 2,049,939
Overseas Union Enterprise Ltd. ............ Leisure & Tourism 195,400 388,432
</TABLE>
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COMMON STOCKS, WARRANTS AND RIGHTS (CONT.)
SINGAPORE (CONT.)
Robinson & Co., Ltd. ................................. Merchandising 21,200 $ 47,539
(a)Sembcorp Industries Ltd. ............................. Multi-Industry 1,240,769 1,413,725
United Industrial Corporation Ltd. ................... Real Estate 1,371,000 548,400
United Overseas Bank Ltd., fgn. ...................... Banking 325,000 2,087,879
WBL Corp. Ltd. ....................................... Multi-Industry 135,000 86,727
-----------
15,724,225
-----------
SLOVAK REPUBLIC .4%
Nafta Gbely AS ....................................... Utilities Electrical & Gas 4,800 41,711
Slovnaft AS .......................................... Chemicals 28,010 502,012
Vychodoslovenske Zeleziarne AS ....................... Metals & Mining 20,000 97,217
-----------
640,940
-----------
SOUTH AFRICA 7.7%
Amalgamated Banks of South Africa Ltd. ............... Banking 14,800 70,192
Anglo American Gold Investment Co. Ltd. .............. Metals & Mining 1,700 63,576
Anglo American Industrial Corp. Ltd. ................. Multi-Industry 65,155 991,266
Anglo-American Corp. of South Africa Ltd. ............ Metals & Mining 31,500 887,799
Barlow Ltd. .......................................... Multi-Industry 194,000 745,298
CG Smith Ltd. ........................................ Multi-Industry 600,000 1,361,608
De Beers/Centenary Linked Units ...................... Misc Materials & Commodities 64,400 821,045
Iscor Ltd. ........................................... Metals & Mining 3,395,912 611,902
Liberty Life Association of Africa Ltd. .............. Insurance 41,900 576,924
Nedcor Ltd. .......................................... Financial Services 3,500 59,615
Palabora Mining Co. Ltd. ............................. Metals & Mining 114,000 629,807
Rembrandt Group Ltd. ................................. Multi-Industry 156,170 955,696
Reunert Ltd. ......................................... Electrical & Electronics 63,300 88,234
Sappi Ltd. ........................................... Forest Products & Paper 305,851 1,182,799
Sasol Ltd. ........................................... Energy Sources 336,000 1,270,834
South African Breweries Ltd. ......................... Beverages & Tobacco 94,370 1,589,744
Tiger Oats Ltd. ...................................... Food & Household Products 9,700 95,636
Tongaat-Hulett Group Ltd. ............................ Multi-Industry 82,443 539,553
Voltex Holdings Ltd. ................................. Electrical & Electronics 27,381 9,309
-----------
12,550,837
-----------
SOUTH KOREA 3.9%
BYC Co. Ltd. ......................................... Textiles & Apparel 2,760 105,580
(a)Cho Hung Bank Co. Ltd., GDR, Reg S ................... Banking 54,000 51,300
(a)Daegu Bank Co. Ltd. .................................. Banking 17,498 62,571
Daewoo Electric Components Co. Ltd. .................. Electronic Components & Instruments 9,000 37,422
Hana Bank ............................................ Banking 12,535 138,641
Hana Bank, GDR, Reg S ................................ Banking 82,687 1,039,789
(a)Hotel Shilla Co. ..................................... Leisure & Tourism 13,240 78,174
Korea Electric Power Corp. ........................... Utilities Electrical & Gas 74,900 1,856,150
Saehan Precision Co. Ltd. ............................ Electrical & Electronics 4,234 66,899
Samsung Display Devices Ltd. ......................... Electrical & Electronics 26,266 1,295,280
Samsung Electronics Co. Ltd. ......................... Electrical & Electronics 4,275 286,896
(a)Samsung Heavy Industries Co. Ltd. .................... Machinery & Engineering 94,984 540,283
Shin Poong Paper Manufacturing Co. Ltd. .............. Forest Products & Paper 5,521 45,683
Shin Young Wocoal Inc. ............................... Textiles & Apparel 1,610 59,178
Sindo Ricoh Co. ...................................... Appliances & Household Durables 3,980 142,651
(a)Tong Yang Merchant Bank .............................. Financial Services 88,915 505,762
-----------
6,312,259
-----------
SRI LANKA .2%
National Development Bank of Sri Lanka ............... Banking 130,000 243,168
-----------
THAILAND 8.0%
Advanced Info Service Public Co. Ltd., fgn. .......... Telecommunications 87,300 518,971
(a)American Standard Sanitaryware (THB) PUB Co. Ltd. fgn. Building Materials & Components 30,800 230,989
Ayudhya Insurance Public Co. Ltd., fgn. .............. Insurance 44,100 154,747
(a)Bangkok Bank Public Co. Ltd. ......................... Banking 922,400 1,320,072
</TABLE>
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COMMON STOCKS, WARRANTS AND RIGHTS (CONT.)
THAILAND (CONT.)
(a)Bangkok Expressway Public Co. Ltd., fgn. ............ Transportation 101,000 $ 101,459
Bangkok Insurance Public Co. Ltd. ................... Insurance 37,000 137,471
Bangkok Insurance Public Co. Ltd., fgn. ............. Insurance 4,900 23,634
BEC World Public Co Ltd., fgn. ...................... Telecommunications 20,000 110,087
(a)Charoen Pokphand Feedmill Public Co. Ltd. ........... Food & Household Products 133,776 162,917
(a)Charoen Pokphand Feedmill Public Co. Ltd., fgn. ..... Food & Household Products 331,224 405,655
(a)Dusit Thani Public Company Ltd., fgn. ............... Leisure & Tourism 74,500 78,693
(a)Hana Microelectronics Co. Ltd., fgn. ................ Electrical & Electronics 160,400 388,474
(a)Hua Thai Manufacturing Public Co. Ltd., fgn. ........ Textiles & Apparel 16,000 26,641
Industrial Finance Corp. of Thailand ................ Financial Services 167,000 67,793
Industrial Finance Corp. of Thailand, fgn. .......... Financial Services 1,358,700 560,905
(a)Italian-Thai Development Public Co. Ltd., fgn. ...... Construction & Housing 109,700 220,396
(a)Jasmine International Public Co. Ltd., fgn. ......... Telecommunications 667,000 167,048
(a)Karat Sanitaryware Public Co. Ltd., fgn. ............ Building Materials & Components 39,683 4,369
(a)Regional Container Lines Public Co. Ltd. ............ Transportation 17,992 9,408
Regional Container Lines Public Co. Ltd., fgn. ...... Transportation 294,008 145,649
Saha Pathanapibul Public Co. Ltd., fgn. ............. Food & Household Products 80,700 82,177
Saha Union Public Co. Ltd., fgn. .................... Multi-Industry 476,300 199,906
(a)Serm Suk Public Co. Ltd. ............................ Food & Household Products 46,300 236,374
(a)Siam Cement Public Co. Ltd. ......................... Building Materials & Components 68,100 1,049,567
(a)Siam Commercial Bank Ltd., fgn. ..................... Banking 106,800 63,930
Siam Makro Public Company Ltd., fgn. ................ Merchandising 376,000 734,719
(a)Thai Airways International Public Co. Ltd., fgn. .... Transportation 519,700 672,242
(a)Thai Asahi Glass Public Co. Ltd. .................... Building Materials & Components 102,510 18,056
(a)Thai Farmers Bank Public Co. Ltd. ................... Banking 1,988,200 2,927,445
(a)Thai Farmers Bank Public Co. Ltd., fgn. ............. Banking 565,800 996,593
(a)Thai Petrochemical Industry Public Co. Ltd., fgn. ... Chemicals 469,520 77,532
Thai Rayon Public Co. Ltd. .......................... Textiles & Apparel 41,906 41,231
Thai Rayon Public Co. Ltd., fgn. .................... Textiles & Apparel 3,394 3,339
Thai Wacoal Public Co. Ltd., fgn. ................... Textiles & Apparel 8,200 9,704
(a)Total Access Communication Public Co. Ltd. .......... Telecommunications 415,000 713,800
(a)United Communications Industries, fgn. .............. Telecommunications 509,700 273,542
-----------
12,935,535
-----------
TURKEY 5.5%
Akbank .............................................. Banking 222,995,556 4,524,957
Alarko Sanayii ve Ticaret SA ........................ Appliances & Household Durables 3,833,998 173,223
(a)Alcatel Teletas ..................................... Telecommunications 1,482,000 62,259
(a)Anadolu Anonim Turk Sigorta Sirketi, Br. ............ Insurance 18,049,000 208,874
Arcelik AS, Br. ..................................... Appliances & Household Durables 12,151,456 350,597
Beko Elektronik AS .................................. Appliances & Household Durables 6,561,005 86,329
Erciyas Biracilik ................................... Food & Household Products 2,386,000 158,865
(a)Eregli Demir ve Celik Fabrikalari AS ................ Metals & Mining 11,013,000 453,928
Haci Omer Sabanci Holding AS, ADR, 144A ............. Multi-Industry 384,200 1,440,750
(a)Netas Northern Electric Telekomunic Asyon AS ........ Electrical & Electronics 5,781,000 106,309
Petkim Petrokimya Holding AS ........................ Chemicals 182,000 82,229
Tat Konserve Sanayii AS ............................. Food & Household Products 3,970,928 141,639
(a)Tofas Turk Otomobil Fabrikasi AS .................... Automobiles 21,581,035 195,009
(a)Turkiye Garanti Bankasi AS .......................... Banking 34,037,662 841,768
(a)Turkiye Is Bankasi AS, C ............................ Banking 2,888,000 75,084
-----------
8,901,820
-----------
VENEZUELA 2.4%
Ceramica Carabobo CA, A ............................. Building Materials & Components 330,484 27,808
Ceramica Carabobo CA, A, ADR ........................ Building Materials & Components 29,950 25,201
Compania Anonima Nacional Telefonos de Venezuela, ADR Telecommunications 47,000 837,188
Electricidad de Caracas SAICA SACA .................. Utilities Electrical & Gas 2,874,842 1,241,085
(a)Manufacturera de Aparatos Domesticos Madoda SA, A ... Appliances & Household Durables 10,000 3,525
Mavesa SA, ADR ...................................... Food & Household Products 326,800 1,225,500
Siderurgica Venezolana Sivensa Saica Services, ADR, A Metals & Mining 34,708 162,471
</TABLE>
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- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS, WARRANTS AND RIGHTS (CONT.)
VENEZUELA (CONT.)
Venezolana de Cementos-Vencemos, #1 .................... Building Materials & Components 333,151 $ 218,361
Venezolana de Cementos-Vencemos, #2 .................... Building Materials & Components 348,826 231,725
------------
3,972,864
------------
TOTAL INVESTMENTS (COST $228,078,693) 99.7% ............ 161,884,954
OTHER ASSETS, LESS LIABILITIES .3% ..................... 548,333
------------
TOTAL NET ASSETS 100.0% ................................ $162,433,287
============
</TABLE>
(a)Non-income producing.
See notes to financial statements.
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TEMPLETON GLOBAL ASSET ALLOCATION FUND COUNTRY SHARES VALUE
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS 58.7%
AEROSPACE & MILITARY TECHNOLOGY 4.1%
Alvis Plc .................................... United Kingdom 140,990 $ 457,417
Boeing Co. ................................... United States 21,217 692,205
Hong Kong Aircraft Engineering Co. Ltd. ...... Hong Kong 363,200 496,940
Kaman Corp., A ............................... United States 40,300 647,319
Raytheon Co., A .............................. United States 17,615 910,475
Rolls-Royce Plc .............................. United Kingdom 25,276 104,502
----------
3,308,858
----------
APPLIANCES & HOUSEHOLD DURABLES .6%
Laox Co. Ltd. ................................ Japan 70,000 515,071
----------
AUTOMOBILES .2%
General Motors Corp. ......................... United States 2,700 193,219
----------
BANKING 1.7%
(a)Bangkok Bank Public Co. Ltd., fgn ............ Thailand 312,000 644,007
Banque Nationale de Paris .................... France 9,193 757,334
----------
1,401,341
----------
BUILDING MATERIALS & COMPONENTS 1.5%
Caradon Plc .................................. United Kingdom 295,300 501,133
Gujarat Ambuja Cements Ltd. .................. India 35,600 217,891
Gujarat Ambuja Cements Ltd., GDR, 144A ....... India 14,600 96,360
Plettac AG ................................... Germany 5,192 411,470
----------
1,226,854
BUSINESS & PUBLIC SERVICES .8%
Columbia HCA Healthcare Corp. ................ United States 13,600 336,600
(a)Humana Inc. .................................. United States 18,200 324,188
----------
660,788
----------
CHEMICALS 1.1%
Beijing Yanhua Petrochemical Company Ltd., ADR China 69,740 278,960
Rhone-Poulenc SA, A .......................... France 9,870 508,147
Shanghai Petrochemical Co. Ltd., H ........... China 834,000 75,356
----------
862,463
----------
DATA PROCESSING & REPRODUCTION 1.4%
(a)3Com Corp. ................................... United States 25,400 1,138,238
ELECTRICAL & ELECTRONICS 3.3%
General Electric Co. Plc ..................... United Kingdom 184,900 1,661,193
Motorola Inc. ................................ United States 4,310 263,179
Philips Electronics NV ....................... Netherlands 11,300 758,672
----------
2,683,044
----------
ENERGY EQUIPMENT & SERVICES .8%
Sunoco Inc. .................................. United States 17,500 631,094
ENERGY SOURCES .8%
MOL Magyar Olay-Es Gazipari RT, GDS, 144A .... Hungary 12,107 334,456
Rao Gazprom, Reg S, ADR ...................... Russia 14,201 120,353
Societe Elf Aquitaine SA, br. ................ France 1,805 208,734
----------
663,543
FINANCIAL SERVICES 2.4%
Axa-UAP ...................................... France 11,271 1,634,297
ING Groep NV ................................. Netherlands 5,146 313,964
(a)Waddell & Reed Financial Inc. ................ United States 1,274 30,178
----------
1,978,439
----------
</TABLE>
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<TABLE>
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- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS (CONT.)
FOOD & HOUSEHOLD PRODUCTS 2.2%
Archer-Daniels Midland Co. ......................... United States 29,547 $ 507,839
IBP Inc. ........................................... United States 43,300 1,261,113
----------
1,768,952
----------
FOREST PRODUCTS & PAPER 1.2%
Cartiere Burgo SpA ................................. Italy 34,500 223,201
Georgia Pacific Corp. .............................. United States 2,500 146,406
Mo Och Domsjoe AB, B ............................... Sweden 9,575 208,491
(a)Repap Enterprises Inc. ............................. Canada 4,876,190 269,841
Stora Enso OY, R ................................... Finland 10,000 100,723
----------
948,662
----------
INDUSTRIAL COMPONENTS 2.1%
BTR Plc ............................................ United Kingdom 347,993 712,139
Goodyear Tire & Rubber Co. ......................... United States 3,600 181,575
Madeco Manufacturera de Cobre SA, ADR .............. Chile 18,685 156,487
Weir Group Plc ..................................... United Kingdom 123,370 410,515
Yamato Kogyo Co. Ltd. .............................. Japan 37,000 214,521
----------
1,675,237
----------
INSURANCE 9.1%
Ace Ltd. ........................................... Bermuda 25,200 867,825
HIH Insurance Ltd. ................................. Australia 467,961 619,972
National Mutual Asia Ltd. .......................... Hong Kong 489,000 366,091
Partnerre Ltd. ..................................... Bermuda 17,500 800,625
Reinsurance Australia Corp. Ltd. ................... Australia 365,191 560,199
SCOR SA ............................................ France 18,000 1,190,613
Torchmark Corp. .................................... United States 22,400 791,000
UNUM Corp. ......................................... United States 18,530 1,081,689
Waddell & Reed Financial Inc. ...................... United States 5,485 127,526
Zurich Allied AG ................................... Switzerland 1,390 1,029,217
----------
7,434,757
----------
LEISURE & TOURISM .4%
Mandarin Oriental International Ltd. ............... Singapore 524,000 330,120
MACHINERY & ENGINEERING 1.6%
Makita Corp. ....................................... Japan 59,000 658,520
Mckechnie Group Plc ................................ United Kingdom 101,800 610,580
----------
1,269,100
----------
MERCHANDISING 1.7%
Best Denki Co. Ltd. ................................ Japan 24,000 181,915
David Jones Ltd. ................................... Australia 345,909 381,894
Hudson's Bay Co. ................................... Canada 20,200 254,473
Matsuzakaya Co. Ltd. ............................... Japan 115,000 602,527
----------
1,420,809
----------
METALS & MINING 2.7%
Angang New Steel Company Ltd., H, 144A ............. China 2,022,000 138,328
Anglo American Platinum Corp. Ltd. ................. South Africa 402 5,515
Companhia Siderurgica Nacional Sid Nacional CSN .... Brazil 16,300,000 364,246
Companhia Siderurgica Nacional Sid Nacional CSN, ADR Brazil 7,700 173,250
Elkem ASA, A ....................................... Norway 49,700 593,608
Industrias Penoles SA .............................. Mexico 168,200 510,212
Pohang Iron & Steel Co. Ltd. ....................... South Korea 6,690 426,122
----------
2,211,281
----------
</TABLE>
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- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS (CONT.)
MULTI-INDUSTRY 6.1%
Alfa SA de CV, A ......................... Mexico 127,251 $ 358,336
Broken Hill Proprietary Co. Ltd. ......... Australia 75,894 559,480
Cheung Kong Holdings Ltd. ................ Hong Kong 172,000 1,237,730
Elementis Plc ............................ United Kingdom 79,859 110,943
Hunting Plc .............................. United Kingdom 261,410 537,129
Hutchison Whampoa Ltd. ................... Hong Kong 79,000 558,295
Pilkington Plc ........................... United Kingdom 454,300 449,727
(a)Saab AB, B ............................... Sweden 54,400 570,456
Swire Pacific Ltd., B .................... Hong Kong 945,000 628,191
-----------
5,010,287
-----------
REAL ESTATE 2.2%
Highwood Properties Inc. ................. United States 16,600 427,450
Hon Kwok Land Investment Co. Ltd. ........ Hong Kong 1,226,456 115,565
(a)Intrawest Corp. .......................... Canada 15,200 255,807
Rouse Co. ................................ United States 13,500 371,250
Summit Properties Inc. ................... United States 15,000 258,750
Union du Credit Bail Immobilier Unibail .. France 2,500 364,738
-----------
1,793,560
-----------
RECREATION & OTHER CONSUMER GOODS .4%
Yue Yuen Industrial (Holdings) Ltd. ...... Hong Kong 190,140 365,689
-----------
TELECOMMUNICATIONS 2.0%
Hong Kong Telecommunications Ltd. ........ Hong Kong 436,000 762,567
Rostelecom, ADR .......................... Russia 25,300 105,944
Telecom Argentina Stet-France SA, ADR .... Argentina 4,000 110,000
Telefonica de Argentina SA, B, ADR ....... Argentina 13,120 366,540
Telefonos de Mexico SA (Telmex), L, ADR .. Mexico 6,709 326,644
-----------
1,671,695
-----------
TEXTILES & APPAREL .4%
(a)Fruit of the Loom Inc., A ................ United States 12,450 171,966
(a)Yizheng Chemical Fibre Co. Ltd., H ....... China 1,332,000 122,072
-----------
294,038
-----------
TRANSPORTATION 4.2%
British Airways Plc ...................... United Kingdom 71,020 480,911
Danzas Holding AG ........................ Switzerland 2,300 971,241
Great Eastern Shipping Co. Ltd., GDR, 144A India 86,700 249,263
(a)Landstar System Inc. ..................... United States 13,000 529,750
Sea Containers Ltd., A ................... United Kingdom 7,000 209,563
Singapore Airlines Ltd., fgn ............. Singapore 102,000 748,000
Tranz Rail Holdings Ltd., ADR ............ New Zealand 40,380 272,565
-----------
3,461,293
-----------
UTILITIES ELECTRICAL & GAS 3.7%
Entergy Corp. ............................ United States 30,200 939,975
Hong Kong Electric Holdings Ltd. ......... Hong Kong 130,000 394,333
Korea Electric Power Corp. ............... South Korea 39,730 984,577
Mosenergo, ADR ........................... Russia 21,297 39,932
Mosenergo, ADR, 144A ..................... Russia 30,000 60,000
National Grid Group Plc .................. United Kingdom 79,730 634,073
-----------
3,052,890
-----------
TOTAL COMMON STOCKS (COST $48,842,771) ... 47,971,322
-----------
</TABLE>
131
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STATEMENT OF INVESTMENTS, DECEMBER 31, 1998 (CONT.)
<TABLE>
<CAPTION>
TEMPLETON GLOBAL ASSET ALLOCATION FUND COUNTRY SHARES VALUE
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
PREFERRED STOCKS 1.7%
Banco Bradesco SA BBD, pfd ............................ Brazil 121,758,350 $ 675,176
(a)Banco Bradesco SA BBD, rts., pfd ...................... Brazil 5,046,779 2,874
Cia Energetica de Minas Gerais Cemig, ADR, pfd ........ Brazil 9,178 174,716
Cia Vale do Rio Doce, A, pfd .......................... Brazil 13,400 171,902
Cia Vale do Rio Doce, A, ADR, pfd ..................... Brazil 15,100 193,710
Coteminas Cia Tecidos Norte de Minas, pfd ............. Brazil 599,000 64,449
Empresa Nacional de Comercio Redito Participacoe, pfd . Brazil 275,000 410
Intrawest Corp., pfd .................................. Canada 10,273 12,039
Usinas Siderugicas de Minas Gerais, ADR, pfd .......... Brazil 28,300 62,538
----------
TOTAL PREFERRED STOCKS (COST $2,443,217) .............. 1,357,814
----------
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT*
-----------------
<S> <C> <C> <C>
BONDS 32.5%
Bepensa SA, 144A, 9.75%, 9/30/04 ...................... Mexico $ 110,000 101,750
Bridas Corp., Yankee, 12.50%, 11/18/99 ................ Argentina 100,000 102,500
Buoni Poliennali Del Tesoro:
10.50%, 7/15/00 .................................... Italy 1,125,000,000 ITL 749,117
7.75%, 11/01/06 .................................... Italy 1,400,000,000 ITL 1,058,740
Cemex SA, 144A, 10.75%, 7/15/00 ....................... Mexico 200,000 204,000
Fannie Mae, 6.00%, 5/15/08 ............................ United States 465,000 491,536
Federal Republic of Germany, 5.25%, 2/21/01 ........... Germany 1,200,000 DEM 751,585
Government of Australia, 6.75%, 11/15/06 .............. Australia 1,205,000 AUD 825,545
Government of Belgium, 6.25%, 3/28/07 ................. Belgium 27,350,000 BEF 923,111
Government of Canada:
9.00%, 12/01/04 .................................... Canada 1,315,000 CAD 1,037,292
10.25%, 3/15/14 .................................... Canada 295,000 CAD 296,911
9.00%, 6/01/25 ..................................... Canada 245,000 CAD 244,451
Government of Italy, cvt., 5.00%, 6/28/01 ............. Italy 890,000 1,665,413
Government of New Zealand:
6.50%, 2/15/00 ..................................... New Zealand 610,000 NZD 327,221
7.00%, 7/15/09 ..................................... New Zealand 540,000 NZD 320,102
Hypothekenbank In Essen AG, 5.25%, 1/22/08 ............ Germany 2,430,000 DEM 1,562,226
Kingdom of Denmark, 7.00%, 12/15/04 ................... Denmark 3,000,000 DKK 543,436
Kingdom of Sweden, 10.25%, 5/05/03 .................... Sweden 5,000,000 SEK 777,167
Phillipine Long Distance Telephone Co., 9.25%, 6/30/06 Philippines 270,000 258,525
Poland Communications Inc., 9.875%, 11/01/03 .......... Poland 400,000 348,000
Protexa Construcciones SA de CV, 144A, 12.125%, 7/24/02 Mexico 100,000 80,000
PT Indah Kiat Finance Mauritius Ltd., 10.00%, 7/01/07 . Indonesia 300,000 163,500
Republic of Argentina, Reg S, 11.75%, 2/12/07 ......... Argentina 100,000 ARS 85,702
Republic of Ecuador:
Reg S, 11.25%, 4/25/02 ............................. Ecuador 450,000 416,250
144A, 11.25%, 4/25/02 .............................. Ecuador 275,000 254,375
Republic of Peru, FRN, 4.00%, 3/07/17 ................. Peru 80,000 50,600
Republic of Turkey, Reg S, 9.875%, 2/23/05 ............ Turkey 35,000 30,820
Republic of Venezuela:
Reg S, 9.125%, 6/18/07 ............................. Venezuela 600,000 421,500
144A, 9.125%, 6/18/07 .............................. Venezuela 100,000 70,250
Sei Holdings IX Inc., 144A, 11.00%, 11/30/00 .......... Trinidad and Tobago 170,000 175,100
U. S. Treasury Bond, 5.25%, 11/15/28 .................. United States 2,287,000 2,344,885
U.S. Treasury Notes:
8.50%, 2/15/00 ..................................... United States 880,000 916,300
6.25%, 8/31/00 ..................................... United States 1,010,000 1,035,881
4.625%, 11/30/00 ................................... United States 3,495,000 3,498,278
7.25%, 8/15/04 ..................................... United States 576,000 648,000
6.125%, 11/15/27 ................................... United States 479,000 536,630
</TABLE>
132
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STATEMENT OF INVESTMENTS, DECEMBER 31, 1998 (CONT.)
<TABLE>
<CAPTION>
PRINCIPAL
TEMPLETON GLOBAL ASSET ALLOCATION FUND COUNTRY AMOUNT* VALUE
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
BONDS (CONT.)
United Kingdom:
6.50%, 12/07/03 ................................................. United Kingdom $ 880,000 GBP $ 1,603,546
7.50%, 12/07/06 ................................................. United Kingdom 280,000 GBP 558,090
United Mexican States:
9.75%, 2/06/01 .................................................. Mexico 620,000 636,275
11.375%, 9/15/16 ................................................ Mexico 430,000 447,200
------------
TOTAL BONDS (COST $25,790,601) ..................................... 26,561,810
------------
TOTAL INVESTMENTS BEFORE REPURCHASE AGREEMENTS (COST $77,076,589) .. 75,890,946
------------
(g)REPURCHASE AGREEMENTS 6.4%
Merrill Lynch & Co. Inc., 4.75%, 1/04/99 (Maturity Value $2,501,319)
Collateralized by U.S. Treasury Notes & Bonds ..................... United States 2,500,000 2,500,000
Morgan Stanley Inc., 4.65%, 1/04/99 (Maturity Value $2,712,401)
Collateralized by U.S. Treasury Notes & Bonds ..................... United States 2,711,000 2,711,000
------------
TOTAL REPURCHASE AGREEMENTS (COST $5,211,000) ...................... 5,211,000
------------
TOTAL INVESTMENTS (COST $82,287,589) 99.3% ......................... 81,101,946
NET EQUITY IN FORWARD CONTRACTS .................................... (836)
OTHER ASSETS, LESS LIABILITIES .7% ................................. 568,508
------------
TOTAL NET ASSETS 100.0% ............................................. $ 81,669,618
------------
</TABLE>
See currency abbreviations on page 162.
* Securities traded in U.S. dollars unless otherwise indicated.
(a)Non-income producing.
(g)See Note 1(c) regarding repurchase agreements.
See notes to financial statements.
133
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STATEMENT OF INVESTMENTS, DECEMBER 31, 1998
<TABLE>
<CAPTION>
SHARES/
TEMPLETON GLOBAL GROWTH FUND COUNTRY RIGHTS VALUE
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS 89.7%
AEROSPACE & MILITARY TECHNOLOGY 3.2%
Boeing Co. ................................................................... United States 210,769 $ 6,876,339
(a) Fairchild Corp., A ........................................................... United States 204,957 3,228,073
(a) General Motors Corp., H ...................................................... United States 66,000 2,619,375
Raytheon Co., A .............................................................. United States 222,644 11,507,912
------------
24,231,699
APPLIANCES & HOUSEHOLD DURABLES .3% ------------
Laox Co. Ltd. ................................................................ Japan 329,000 2,420,833
------------
AUTOMOBILES 4.6%
Autoliv Inc., SDR ............................................................ Sweden 246,100 8,835,044
Fiat SpA ..................................................................... Italy 1,919,720 6,666,285
Ford Motor Co. ............................................................... United States 90,000 5,281,875
General Motors Corp. ......................................................... United States 60,000 4,293,750
Volkswagen AG ................................................................ Germany 63,000 5,098,703
Volvo AB, B .................................................................. Sweden 171,900 3,944,509
------------
34,120,166
------------
BANKING 3.3%
Alpha Credit Bank ............................................................ Greece 50,369 5,255,426
Alpha Credit Bank, 144A ...................................................... Greece 8,147 850,046
Guoco Group Ltd. ............................................................. Hong Kong 1,633,000 2,750,737
HSBC Holdings Plc. ........................................................... Hong Kong 354,924 8,841,890
(a) Kookmin Bank ................................................................. South Korea 293,927 2,397,858
(a) Shinhan Bank Co. Ltd. ........................................................ South Korea 169,682 1,298,188
Singapore Finance Ltd., fgn. ................................................. Singapore 1,141,000 1,044,188
Unibanco Uniao de Bancos Brasileiros SA, GDR ................................. Brazil 149,000 2,151,188
------------
24,589,521
------------
BROADCASTING & PUBLISHING .7%
Houghton Mifflin Co. ......................................................... United States 105,600 4,989,600
------------
BUILDING MATERIALS & COMPONENTS 2.8%
Caradon Plc. ................................................................. United Kingdom 2,752,600 4,671,245
Nichiha Corp. ................................................................ Japan 193,500 1,768,604
Okumura Corp. ................................................................ Japan 2,093,000 9,296,037
Owens Corning ................................................................ United States 100,600 3,565,013
(a) Siam City Cement Public Co. Ltd., fgn. ....................................... Thailand 771,063 1,729,507
------------
21,030,406
------------
BUSINESS & PUBLIC SERVICES 1.0%
(a) Humana Inc. .................................................................. United States 250,000 4,453,125
Lex Service Plc. ............................................................. United Kingdom 466,666 2,965,917
------------
7,419,042
------------
CHEMICALS .4%
European Vinyls Corporation Evc International NV ............................. Netherlands 56,500 448,580
Kemira OY .................................................................... Finland 395,500 2,850,999
------------
3,299,579
------------
CONSTRUCTION & HOUSING .3%
Daito Trust Construction Co. Ltd. ............................................ Japan 274,700 2,384,143
------------
DATA PROCESSING & REPRODUCTION 1.6%
(a) 3Com Corp. ................................................................... United States 220,600 9,885,638
(a) Newbridge Networks Corp. ..................................................... Canada 74,000 2,247,750
------------
12,133,388
------------
ELECTRICAL & ELECTRONICS 4.1%
ABB AB, A .................................................................... Sweden 350,000 3,734,980
Alcatel SA, ADR .............................................................. France 69,112 1,688,925
Catic Shenzhen Holdings Ltd., H .............................................. China 9,945,000 596,912
</TABLE>
134
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STATEMENT OF INVESTMENTS, DECEMBER 31, 1998 (CONT.)
<TABLE>
<CAPTION>
SHARES/
TEMPLETON GLOBAL GROWTH FUND COUNTRY RIGHTS VALUE
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS (CONT.)
ELECTRICAL & ELECTRONICS (CONT.)
Dongfang Electrical Machinery Co. Ltd., H .................................... China 5,506,000 $ 326,924
General Electric Co. Plc. .................................................... United Kingdom 1,160,300 10,424,457
Hitachi Ltd. ................................................................. Japan 603,500 3,745,124
Matsushita Electric Industrial Co. Ltd. ...................................... Japan 200,000 3,544,326
Motorola Inc. ................................................................ United States 100,000 6,106,250
------------
30,167,898
------------
ELECTRONIC COMPONENTS & INSTRUMENTS .3%
BICC Plc. .................................................................... United Kingdom 1,397,152 1,638,786
(a) Nanjing Panda Electronics Co. Ltd., H ........................................ China 17,794,000 803,885
------------
2,442,671
------------
ENERGY SOURCES 4.5%
MOL Magyar Olay-Es Gazipari RT, GDS, 144A .................................... Hungary 256,358 7,081,890
Norsk Hydro AS ............................................................... Norway 117,000 3,923,546
(a) Petron Corp. ................................................................. Philippines 8,101,033 885,074
(a) Ranger Oil Ltd. .............................................................. Canada 273,050 1,208,815
(a) Renaissance Energy Ltd. ...................................................... Canada 254,800 2,894,701
Shell Transport & Trading Co. Plc. ........................................... United Kingdom 608,900 3,728,063
Societe Elf Aquitaine SA, Br. ................................................ France 41,972 4,853,731
Valero Energy Corp., new ..................................................... United States 81,000 1,721,250
YPF Sociedad Anonima, ADR .................................................... Argentina 257,700 7,199,494
------------
33,496,564
------------
FINANCIAL SERVICES 4.0%
Axa-UAP ...................................................................... France 92,702 13,441,807
ICICI Ltd., GDR, 144A ........................................................ India 396,700 2,638,055
ING Groep NV ................................................................. Netherlands 105,188 6,417,662
Morgan Stanley Dean Witter & Co. ............................................. United States 103,100 7,320,100
------------
29,817,624
------------
FOOD & HOUSEHOLD PRODUCTS 3.3%
Archer-Daniels Midland Co. ................................................... United States 625,065 10,743,305
IBP Inc. ..................................................................... United States 272,543 7,937,815
Northern Foods Plc. .......................................................... United Kingdom 2,208,797 5,163,231
Showa Sangyo Co. ............................................................. Japan 506,000 1,067,624
------------
24,911,975
------------
FOREST PRODUCTS & PAPER 3.1%
(a) Asia Pacific Resources International Hldgs. Ltd., A .......................... Indonesia 534,975 367,795
Assidomaen AB ................................................................ Sweden 192,100 3,033,482
Carter Holt Harvey Ltd. ...................................................... New Zealand 940,712 844,784
Georgia Pacific Corp. ........................................................ United States 34,000 1,991,125
Georgia Pacific Timber Group ................................................. United States 34,000 809,625
Metsa Serla OY, B ............................................................ Finland 270,000 2,159,616
Munksjo AB ................................................................... Sweden 722,500 4,991,488
Primex Forest Products Ltd. .................................................. Canada 195,000 774,414
Stora Enso OY, R ............................................................. Finland 559,700 5,637,457
UPM-Kymmene Corp. ............................................................ Finland 88,000 2,467,907
------------
23,077,693
------------
HEALTH & PERSONAL CARE 2.4%
Medeva Plc. .................................................................. United Kingdom 1,614,200 2,846,771
Nycomed Amersham Plc. ........................................................ United Kingdom 140,690 978,681
Pacific Chemical Co. Ltd. .................................................... South Korea 100,000 1,613,306
Pharmacia & Upjohn Inc. ...................................................... United States 218,900 12,395,213
------------
17,833,971
------------
</TABLE>
135
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STATEMENT OF INVESTMENTS, DECEMBER 31, 1998 (CONT.)
<TABLE>
<CAPTION>
SHARES/
TEMPLETON GLOBAL GROWTH FUND COUNTRY RIGHTS VALUE
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS (CONT.)
INDUSTRIAL COMPONENTS 1.5%
BTR Plc. ..................................................................... United Kingdom 4,101,275 $ 8,392,926
BTR Plc., fgn. ............................................................... United Kingdom 109,687 215,285
Yamato Kogyo Co. Ltd. ........................................................ Japan 466,000 2,701,809
------------
11,310,020
------------
INSURANCE 5.7%
Ace Ltd. ..................................................................... Bermuda 121,500 4,184,156
HIH Insurance Ltd. ........................................................... Australia 2,244,429 2,973,501
Partnerre Ltd. ............................................................... Bermuda 127,900 5,851,425
Reliastar Financial Corp. .................................................... United States 48,000 2,214,000
Torchmark Corp. .............................................................. United States 240,000 8,475,000
UNUM Corp. ................................................................... United States 81,100 4,734,213
Zurich Allied AG ............................................................. Switzerland 19,500 14,438,660
------------
42,870,955
------------
LEISURE & TOURISM .9%
Kuoni Reisen Holding AG, B ................................................... Switzerland 1,710 6,785,220
------------
MACHINERY & ENGINEERING 2.9%
First Tractor Company Ltd., H ................................................ China 6,860,000 1,567,292
Laird Group Plc. ............................................................. United Kingdom 1,783,700 4,881,768
Makita Corp. ................................................................. Japan 653,000 7,288,360
VA Technologie AG ............................................................ Austria 25,900 2,245,563
Valmet (OY) .................................................................. Finland 392,800 5,275,191
------------
21,258,174
------------
MERCHANDISING 2.6%
Best Denki Co. Ltd. .......................................................... Japan 65,000 492,686
Coles Myer Ltd. .............................................................. Australia 1,070,971 5,616,326
Matsuzakaya Co. Ltd. ......................................................... Japan 51,000 267,207
Sa des Galeries Lafayette .................................................... France 5,388 5,787,118
Safeway Plc. ................................................................. United Kingdom 231,198 1,153,009
(a) Sobeys Canada Inc. ........................................................... Canada 174,886 1,935,587
W.H. Smith Group ............................................................. United Kingdom 513,810 4,103,299
------------
19,355,232
------------
METALS & MINING 4.9%
Anglo American Platinum Corp. Ltd. ........................................... South Africa 377,265 5,175,349
Boehler-Uddeholm AG .......................................................... Austria 93,200 4,340,118
Chongqing Iron & Steel Ltd., H ............................................... China 9,783,000 479,853
Companhia Siderurgica Nacional Sid Nacional CSN .............................. Brazil 129,100,000 2,884,916
Industrias Penoles SA ........................................................ Mexico 930,000 2,821,031
Iscor Ltd. ................................................................... South Africa 9,558,700 1,722,361
Outokumpu OY, A .............................................................. Finland 342,200 3,176,403
Pechiney SA, A ............................................................... France 84,279 2,753,378
Pechiney SA, ADR ............................................................. France 112,708 1,817,417
Pohang Iron & Steel Co. Ltd. ................................................. South Korea 100,000 6,369,543
(a) RGC Ltd. ..................................................................... Australia 1,074,643 1,812,614
WMC Ltd. ..................................................................... Australia 1,040,856 3,140,973
------------
36,493,956
------------
MULTI-INDUSTRY 6.2%
Beijing Datang Power Generation Co. Ltd., H .................................. China 6,860,000 2,058,731
Broken Hill Proprietary Co. Ltd. ............................................. Australia 564,031 4,157,955
Cheung Kong Holdings Ltd. .................................................... Hong Kong 1,180,000 8,491,400
Hutchison Whampoa Ltd. ....................................................... Hong Kong 1,523,000 10,763,077
Jardine Strategic Holdings Ltd. .............................................. Hong Kong 800,000 1,160,000
La Cemento Nacional CA, GDR, 144A ............................................ Ecuador 3,600 388,800
La Cemento Nacional SA, GDR, Reg S ........................................... Ecuador 400 43,200
Pacific Dunlop Ltd. .......................................................... Australia 2,149,000 3,479,756
</TABLE>
136
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STATEMENT OF INVESTMENTS, DECEMBER 31, 1998 (CONT.)
<TABLE>
<CAPTION>
SHARES/
TEMPLETON GLOBAL GROWTH FUND COUNTRY RIGHTS VALUE
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS (CONT.)
MULTI-INDUSTRY (CONT.)
a Saab AB, B ................................................................... Sweden 296,997 $ 3,114,405
Saha Union Public Co. Ltd., fgn. ............................................. Thailand 4,138,400 1,736,909
Swire Pacific Ltd., A ........................................................ Hong Kong 2,292,000 10,265,888
Swire Pacific Ltd., B ........................................................ Hong Kong 1,304,000 866,837
------------
46,526,958
------------
REAL ESTATE 5.1%
China Resources Beijing Land Ltd. ............................................ China 4,652,000 1,158,909
General Growth Properties .................................................... United States 164,500 6,230,438
Hang Lung Development Co. Ltd. ............................................... Hong Kong 3,624,000 3,882,565
Highwood Properties Inc. ..................................................... United States 164,900 4,246,175
Intrawest Corp. .............................................................. Canada 119,700 2,014,482
Inversiones y Representacion SA .............................................. Argentina 1,156,326 3,171,187
Inversiones y Representacion SA, GDR ......................................... Argentina 2,374 66,014
National Health Investors Inc. ............................................... United States 123,400 3,046,438
New World Development Co. Ltd. ............................................... Hong Kong 1,639,000 4,125,399
Rouse Co. .................................................................... United States 80,000 2,200,000
Union du Credit Bail Immobilier Unibail ...................................... France 32,029 4,672,879
Weeks Corp. .................................................................. United States 115,000 3,241,563
------------
38,056,049
------------
RECREATION & OTHER CONSUMER GOODS .1%
Fila Holding SpA, ADR ........................................................ Italy 60,600 469,650
------------
TELECOMMUNICATIONS 3.6%
AT&T Corp. ................................................................... United States 60,300 4,537,575
Hong Kong Telecommunications Ltd. ............................................ Hong Kong 4,420,546 7,731,569
Northern Telecom, Ltd. ....................................................... Canada 138,000 6,917,250
PT Indosat, ADR .............................................................. Indonesia 31,100 379,031
Telecom Argentina Stet-France SA, ADR ........................................ Argentina 100,000 2,750,000
Telefonos de Mexico SA (Telmex), L, ADR ...................................... Mexico 92,900 4,523,069
------------
26,838,494
------------
TEXTILES & APPAREL .8%
Courtaulds Textiles Plc. ..................................................... United Kingdom 734,300 1,918,062
Dawson International Plc. .................................................... United Kingdom 1,434,880 286,475
a Fruit of the Loom Inc., A .................................................... United States 136,500 1,885,406
Tae Kwang Industrial Co. Ltd. ................................................ South Korea 1,000 338,462
a Yizheng Chemical Fibre Co. Ltd., H ........................................... China 13,356,000 1,224,016
------------
5,652,421
------------
TRANSPORTATION 5.0%
British Airways Plc. ......................................................... United Kingdom 1,013,532 6,863,115
Danzas Holding AG ............................................................ Switzerland 30,110 12,714,816
Helikopter Services Group ASA ................................................ Norway 101,300 478,645
Koninklijke Frans Maas Groep NV .............................................. Netherlands 160,970 4,931,942
Koninklijke Nedlloyd Groep NV ................................................ Netherlands 260,670 3,541,901
a Landstar System Inc. ......................................................... United States 48,900 1,992,675
Singapore Airlines Ltd., fgn. ................................................ Singapore 944,600 6,927,067
------------
37,450,161
------------
UTILITIES ELECTRICAL & GAS 10.5%
Bses Ltd., GDR, 144A ......................................................... India 202,200 2,578,050
Electrabel SA ................................................................ Belgium 40,900 17,977,368
Entergy Corp. ................................................................ United States 283,900 8,836,388
a Evn AG ....................................................................... Austria 35,400 5,014,678
Hong Kong Electric Holdings Ltd. ............................................. Hong Kong 2,944,000 8,930,137
Iberdrola SA, Br. ............................................................ Spain 744,700 13,953,709
Korea Electric Power Corp. ................................................... South Korea 212,500 5,266,112
National Grid Group Plc. ..................................................... United Kingdom 1,507,900 11,991,951
</TABLE>
137
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STATEMENT OF INVESTMENTS, DECEMBER 31, 1998 (CONT.)
<TABLE>
<CAPTION>
SHARES/
TEMPLETON GLOBAL GROWTH FUND COUNTRY RIGHTS VALUE
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
a COMMON STOCKS (CONT.)
UTILITIES ELECTRICAL & GAS (CONT.)
National Power Plc. .......................................................... United Kingdom 2,000 $ 17,669
Transportadora de Gas del Sur SA, B, ADR ..................................... Argentina 386,900 3,917,363
------------
78,483,425
------------
TOTAL COMMON STOCKS (COST $619,818,334) 669,917,488
============
PREFERRED STOCKS AND RIGHTS 2.3%
Banco Bradesco SA, pfd. ...................................................... Brazil 451,500,022 2,503,662
a Banco Bradesco SA BBD, rts., pfd. ............................................ Brazil 18,714,288 10,656
Centrais Eletricas Brasileiras SA (Electrobras), ADR, pfd. ................... Brazil 176,400 1,693,557
a Centrais Geradoras Do Sul Do Brasil SA, ADR, pfd. ............................ Brazil 17,640 109,489
Coteminas Cia Tecidos Norte de Minas, pfd. ................................... Brazil 1,952,000 210,023
a Embratel Participacoes SA, ADR, pfd. ......................................... Brazil 98,400 1,371,450
Empresa Nacional de Comercio Redito Participacoes, pfd. ...................... Brazil 1,952,000 2,908
News Corp. Ltd., pfd. ........................................................ Australia 903,781 5,504,539
a Tele Celular Sul Participacoes SA, ADR, pfd. ................................. Brazil 9,840 171,585
a Tele Centro Oeste Celular Participacoes SA, ADR, pfd. ........................ Brazil 32,800 96,350
a Tele Centro Sul Participacoes SA, ADR, pfd. .................................. Brazil 19,680 822,870
a Tele Leste Celular Participacoes SA, ADR, pfd. ............................... Brazil 1,968 55,842
a Tele Nordeste Celular Participacoes SA, ADR, pfd. ............................ Brazil 4,920 91,020
a Tele Norte Celular Participacoes SA, ADR, pfd. ............................... Brazil 1,968 44,403
a Tele Norte Leste Participacoes SA, ADR, pfd. ................................. Brazil 98,400 1,223,850
a Tele Sudeste Celular Participacoes SA, ADR, pfd. ............................. Brazil 19,680 407,130
Telecomunicacoes Brasileiras SA (Telebras), ADR, pfd. ........................ Brazil 98,400 10,763
a Telemig Celular Participacoes SA, ADR, pfd. .................................. Brazil 4,920 104,550
a Telesp Celular Participacoes SA, ADR, pfd. ................................... Brazil 39,360 688,800
a Telesp Participacoes SA, ADR, pfd. ........................................... Brazil 98,400 2,177,100
------------
TOTAL PREFERRED STOCKS AND RIGHTS (COST $22,367,259).......................... 17,300,547
------------
<CAPTION>
PRINCIPAL
AMOUNT*
-----------
<S> <C> <C> <C>
BONDS 1.8%
Alfa SA de CV:
cvt., 8.00%, 9/15/00 ...................................................... Mexico $ 1,650,000 1,551,000
cvt., 144A, 8.00%, 9/15/00 ................................................ Mexico 2,710,000 2,547,400
Government of Italy, cvt., 5.00%, 6/28/01 .................................... Italy 4,950,000 9,262,688
------------
TOTAL BONDS (COST $12,833,850) ............................................... 13,361,088
------------
TOTAL INVESTMENTS BEFORE REPURCHASE AGREEMENTS (COST $655,019,443) 700,579,123
============
g REPURCHASE AGREEMENTS 5.7%
Merrill Lynch & Co. Inc., 4.75%, 1/04/99 (Maturity Value $25,013,194)
Collateralized by U.S. Treasury Notes & Bonds ............................... United States 25,000,000 25,000,000
Morgan Stanley Inc., 4.65%, 1/04/99 (Maturity Value $17,678,129)
Collateralized by U.S. Treasury Notes & Bonds ............................... United States 17,669,000 17,669,000
------------
TOTAL REPURCHASE AGREEMENTS (COST $42,669,000)................................ 42,669,000
------------
TOTAL INVESTMENTS (COST $697,688,443) 99.5%................................... 743,248,123
OTHER ASSETS, LESS LIABILITIES .5%............................................ 3,832,231
------------
TOTAL NET ASSETS 100.0%....................................................... $747,080,354
============
</TABLE>
* Securities traded in U.S. dollars unless otherwise indicated.
a Non-income producing.
g See Note 1(c) regarding repurchase agreements.
See notes to financial statements.
138
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STATEMENT OF INVESTMENTS, DECEMBER 31, 1998
<TABLE>
<CAPTION>
PRINCIPAL
TEMPLETON GLOBAL INCOME SECURITIES FUND AMOUNT* VALUE
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LONG TERM INVESTMENTS 95.6%
ARGENTINA 1.1%
Republic of Argentina, 10.95%, 11/01/99 ...................................... $ 1,645,000 $ 1,677,900
------------
AUSTRALIA 4.0%
Government of Australia, 6.75%, 11/15/06 ..................................... 8,810,000 AUD 6,035,730
------------
BELGIUM 4.8%
Kingdom of Belgium, 6.25%, 3/28/07 ........................................... 213,440,000 BEF 7,203,979
------------
BRAZIL .6%
Government of Brazil, FRN, 6.1875%, 4/15/09 .................................. 1,510,000 835,219
------------
CANADA 8.8%
Government of Canada:
7.25%, 6/01/03 ............................................................ 2,025,000 CAD 1,445,225
7.50%, 12/01/03 ........................................................... 2,025,000 CAD 1,472,278
10.25%, 2/01/04 ........................................................... 2,025,000 CAD 1,636,387
9.00%, 12/01/04 ........................................................... 2,025,000 CAD 1,597,351
8.75%, 12/01/05 ........................................................... 2,025,000 CAD 1,615,794
7.00%, 12/01/06 ........................................................... 1,315,000 CAD 974,033
10.25%, 3/15/14 ........................................................... 2,025,000 CAD 2,038,118
8.00%, 6/01/23 ............................................................ 2,025,000 CAD 1,820,984
9.00%, 6/01/25 ............................................................ 725,000 CAD 723,376
------------
13,323,546
------------
DENMARK 2.7%
Kingdom of Denmark:
9.00%, 11/15/00 ........................................................... 6,600,000 DKK 1,131,577
8.00%, 5/15/03 ............................................................ 15,995,000 DKK 2,918,531
------------
4,050,108
------------
GERMANY 11.8%
Federal Republic of Germany, 5.25%, 2/21/01 .................................. 17,855,000 DEM 11,182,959
Hypothekenbank In Essen AG, 5.25%, 1/22/08 ................................... 10,325,000 DEM 6,637,854
------------
17,820,813
------------
ITALY 5.1%
Buoni Poliennali del Tesoro:
10.50%, 7/15/00 ........................................................... 4,400,000,000 ITL 2,929,879
7.75%, 11/01/06 ........................................................... 6,400,000,000 ITL 4,839,952
------------
7,769,831
------------
MEXICO 5.6%
United Mexican States:
9.75%, 2/06/01 ............................................................ 6,560,000 6,732,200
9.875%, 1/15/07 ........................................................... 1,700,000 1,685,125
------------
8,417,325
------------
NEW ZEALAND 4.1%
Government of New Zealand:
6.50%, 2/15/00 ............................................................ 6,035,000 NZD 3,237,347
7.00%, 7/15/09 ............................................................ 5,050,000 NZD 2,993,546
------------
6,230,893
------------
PERU .5%
Republic of Peru, FRN, 4.00%, 3/07/17 ........................................ 1,300,000 822,250
------------
SWEDEN 2.7%
Kingdom of Sweden, 10.25%, 5/05/03 ........................................... 26,000,000 SEK 4,041,267
------------
TURKEY .3%
Republic of Turkey, 9.875%, 2/23/05 .......................................... 535,000 471,106
------------
UNITED KINGDOM 8.5%
United Kingdom:
6.50%, 12/07/03 ........................................................... 5,400,000 GBP 9,839,940
7.50%, 12/07/06 ........................................................... 1,500,000 GBP 2,989,768
------------
12,829,708
------------
</TABLE>
139
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STATEMENT OF INVESTMENTS, DECEMBER 31, 1998 (CONT.)
<TABLE>
<CAPTION>
PRINCIPAL
TEMPLETON GLOBAL INCOME SECURITIES FUND AMOUNT* VALUE
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LONG TERM INVESTMENTS (CONT.)
UNITED STATES 34.1%
U.S. Treasury Bond, 5.25%, 11/15/28 .......................................... $ 24,500,000 $ 25,120,169
U.S. Treasury Notes:
4.625%, 11/30/00 .......................................................... 14,810,000 14,823,892
7.25%, 8/15/04 ............................................................ 6,519,000 7,333,873
6.125%, 11/15/27 .......................................................... 3,702,000 4,147,399
------------
51,425,333
------------
VENEZUELA .9%
Republic of Venezuela, 144A, 9.125%, 6/18/07 ................................. 1,940,000 1,362,850
------------
TOTAL LONG TERM INVESTMENTS (COST $141,515,105) 144,317,858
------------
g REPURCHASE AGREEMENT (COST $3,960,000) 2.6%
Morgan Stanley Inc., 4.65%, 1/04/99 (Maturity Value $3,962,046)
Collateralized by U.S. Treasury Notes & Bonds ............................... 3,960,000 3,960,000
------------
TOTAL INVESTMENTS (COST $145,475,105) 98.2% 148,277,858
NET EQUITY IN FORWARD CONTRACTS (8,133)
OTHER ASSETS, LESS LIABILITIES 1.8% 2,671,012
------------
TOTAL NET ASSETS 100.0% $150,940,737
============
</TABLE>
See Currency abbreviations on page 162.
* Securities traded in U.S. dollars unless otherwise indicated.
g See Note 1(c) regarding repurchase agreements.
See notes to financial statements.
140
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STATEMENT OF INVESTMENTS, DECEMBER 31, 1998
<TABLE>
<CAPTION>
SHARES/
WARRANTS
TEMPLETON INTERNATIONAL EQUITY FUND COUNTRY & RIGHTS VALUE
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
a COMMON STOCKS, WARRANTS AND RIGHTS 87.2%
AEROSPACE & MILITARY TECHNOLOGY .1%
Hong Kong Aircraft Engineering Co. Ltd. ...................................... Hong Kong 513,400 $ 702,448
------------
APPLIANCES & HOUSEHOLD DURABLES 2.6%
Electrolux AB, B ............................................................. Sweden 1,160,000 19,963,483
Fisher & Paykel Ltd. ......................................................... New Zealand 1,321,125 4,780,515
------------
24,743,998
------------
AUTOMOBILES 2.6%
Autoliv Inc., SDR ............................................................ Sweden 317,000 11,380,370
Fiat SpA ..................................................................... Italy 3,391,410 11,776,772
Volvo AB, B .................................................................. Sweden 91,500 2,099,608
------------
25,256,750
------------
BANKING 10.8%
Banco Popular Espanol SA ..................................................... Spain 62,400 4,712,075
BPI Socieda de Gestora de Participacoes Socias SA ............................ Portugal 321,978 10,926,722
Credit Commercial de France CCF .............................................. France 128,800 11,966,489
Deutsche Bank AG ............................................................. Germany 407,000 24,015,346
Foreningssparbanken AB, A .................................................... Sweden 163,000 4,222,902
a Kookmin Bank ................................................................. South Korea 96,678 788,703
Merita Ltd., A ............................................................... Finland 1,254,500 7,977,821
National Bank of Canada ...................................................... Canada 447,000 7,217,188
National Westminster Bank Plc. ............................................... United Kingdom 641,668 12,362,558
Svenska Handelsbanken, A ..................................................... Sweden 155,400 6,556,638
Unibanco Uniao de Bancos Brasileiros SA, GDR ................................. Brazil 548,700 7,921,856
Unibanco Uniao de Bancos Brasileiros SA, unit ................................ Brazil 28,412,000 987,630
Union Bank of Norway, Primary Capital Cert. .................................. Norway 199,000 3,865,599
------------
103,521,527
------------
BROADCASTING & PUBLISHING 2.1%
Cordiant Communications Group Plc. ........................................... United Kingdom 3,561,500 6,340,246
NV Holdingsmij de Telegraaf .................................................. Netherlands 504,000 13,562,104
------------
19,902,350
------------
BUILDING MATERIALS & COMPONENTS 3.5%
Anglian Group Plc. ........................................................... United Kingdom 2,536,000 9,198,037
Cie de Saint Gobain .......................................................... France 13,292 1,877,374
Hepworth Plc. ................................................................ United Kingdom 1,330,100 3,551,802
Pioneer International Ltd. ................................................... Australia 7,462,117 15,790,273
a Siam City Cement Public Co. Ltd., fgn. ....................................... Thailand 405,100 908,646
Unione Cementi Marchino Emiliane (Unicem), di Risp ........................... Italy 468,000 2,402,522
------------
33,728,654
------------
BUSINESS & PUBLIC SERVICES .9%
Esselte AB, B ................................................................ Sweden 158,500 2,600,669
Lex Service Plc. ............................................................. United Kingdom 902,000 5,732,701
------------
8,333,370
------------
CHEMICALS 1.6%
Akzo Nobel NV ................................................................ Netherlands 129,200 5,886,183
DSM NV ....................................................................... Netherlands 19,000 1,807,162
Imperial Chemical Industries Plc. ............................................ United Kingdom 857,000 7,400,100
------------
15,093,445
------------
CONSTRUCTION & HOUSING 2.7%
Dragados y Construcciones SA ................................................. Spain 378,000 13,952,026
a Fairview Holdings Plc. ....................................................... United Kingdom 623,475 912,833
Sirti SpA .................................................................... Italy 1,833,800 11,073,250
------------
25,938,109
------------
</TABLE>
141
<PAGE>
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STATEMENT OF INVESTMENTS, DECEMBER 31, 1998 (CONT.)
<TABLE>
<CAPTION>
SHARES/
WARRANTS
TEMPLETON INTERNATIONAL EQUITY FUND COUNTRY & RIGHTS VALUE
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS, WARRANTS AND RIGHTS (CONT.)
ELECTRICAL & ELECTRONICS 3.3%
General Electric Co. Plc. .................................................... United Kingdom 1,920,000 $ 17,249,813
Philips Electronics NV ....................................................... Netherlands 219,307 14,724,081
------------
31,973,894
------------
ENERGY SOURCES 4.0%
Societe Elf Aquitaine SA ..................................................... France 148,024 17,117,809
Total SA, B .................................................................. France 62,039 6,285,861
YPF Sociedad Anonima ......................................................... Argentina 25,100 702,177
YPF Sociedad Anonima, ADR .................................................... Argentina 495,000 13,829,063
------------
37,934,910
------------
FINANCIAL SERVICES 3.6%
ING Groep NV ................................................................. Netherlands 563,685 34,391,183
------------
FOOD & HOUSEHOLD PRODUCTS 1.3%
Hillsdown Holdings Plc. ...................................................... United Kingdom 1,246,950 1,576,711
McBride Plc. ................................................................. United Kingdom 1,000,000 1,663,755
Tate & Lyle Plc. ............................................................. United Kingdom 1,540,500 8,586,099
a Terranova Foods Plc. ......................................................... United Kingdom 623,475 1,151,414
------------
12,977,979
------------
FOREST PRODUCTS & PAPER 3.1%
Carter Holt Harvey Ltd. ...................................................... New Zealand 3,243,400 2,912,659
Cartiere Burgo SpA ........................................................... Italy 696,200 4,504,138
Enso OY, R ................................................................... Finland 186,900 1,882,510
Fletcher Challenge Ltd. Forestry Division .................................... New Zealand 6,020,000 2,003,444
Mayr-Melnhof Karton AG ....................................................... Austria 39,400 1,842,504
a PT Indah Kiat Pulp & Paper Corp. TBK ......................................... Indonesia 9,724,297 2,660,421
a PT Indah Kiat Pulp & Paper Corp. TBK, wts., 4/13/01 .......................... Indonesia 782,553 143,222
a PT Indah Kiat Pulp & Paper Corp. TBK, wts., 7/11/02 .......................... Indonesia 818,888 111,245
Sappi Ltd. ................................................................... South Africa 722,582 2,794,397
Stora Kopparbergs Bergslags AB, B ............................................ Sweden 804,250 8,929,717
Unipapel SA .................................................................. Spain 104,400 1,514,105
------------
29,298,362
------------
HEALTH & PERSONAL CARE 4.4%
Internatio-Muller NV ......................................................... Netherlands 240,308 5,954,240
Novartis AG .................................................................. Switzerland 2,506 4,926,247
Nycomed Amersham Plc. ........................................................ United Kingdom 4,245,505 29,313,446
Nycomed Amersham Plc., fgn. .................................................. United Kingdom 248,300 1,727,248
------------
41,921,181
------------
INDUSTRIAL COMPONENTS 1.3%
BTR Plc. ..................................................................... United Kingdom 3,416,237 6,991,052
Granges AB ................................................................... Sweden 191,000 2,756,915
Meggitt Plc. ................................................................. United Kingdom 1,487,610 3,069,023
------------
12,816,990
------------
INSURANCE 5.5%
Ace Ltd. ..................................................................... Bermuda 682,500 23,503,594
Baloise-Holding .............................................................. Switzerland 7,380 7,656,716
GIO Australia Holdings Ltd. .................................................. Australia 1,549,534 5,094,181
Muenchner Rueckversicherungs-Gesellschaft .................................... Germany 33,000 16,147,334
------------
52,401,825
------------
LEISURE & TOURISM 1.5%
Kuoni Reisen Holding AG, B ................................................... Switzerland 3,570 14,165,635
------------
</TABLE>
142
<PAGE>
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STATEMENT OF INVESTMENTS, DECEMBER 31, 1998 (CONT.)
<TABLE>
<CAPTION>
SHARES/
WARRANTS
TEMPLETON INTERNATIONAL EQUITY FUND COUNTRY & RIGHTS VALUE
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS, WARRANTS AND RIGHTS (CONT.)
MACHINERY & ENGINEERING 1.2%
Bucher Holding AG, br. ....................................................... Switzerland 12,800 $ 10,251,183
IHC Caland NV ................................................................ Netherlands 26,130 1,086,023
------------
11,337,206
------------
MERCHANDISING 4.0%
David Jones Ltd. ............................................................. Australia 2,463,527 2,719,809
Hudson's Bay Co. ............................................................. Canada 357,000 4,497,363
Safeway Plc. ................................................................. United Kingdom 1,695,778 8,457,024
a Sobeys Canada Inc. ........................................................... Canada 104,695 1,158,734
Somerfield Plc. .............................................................. United Kingdom 1,552,716 10,346,273
Storehouse Plc. .............................................................. United Kingdom 3,314,000 7,553,748
a Vendex NV .................................................................... Netherlands 132,886 3,228,860
------------
37,961,811
------------
METALS & MINING 2.7%
Anglo American Platinum Corp. Ltd. ........................................... South Africa 417,465 5,726,816
Boehler Uddeholm AG .......................................................... Austria 33,000 1,536,737
Boehler Uddeholm AG, 144A .................................................... Austria 27,055 1,259,892
British Steel Plc. ........................................................... United Kingdom 4,033,200 6,156,661
Companhia Siderurgica Nacional CSN, ADR ...................................... Brazil 276,365 6,218,213
Grupo Mexico SA de CV, B ..................................................... Mexico 1,983,600 5,214,722
Pohang Iron & Steel Co. Ltd. ................................................. South Korea 10,450 665,617
------------
26,778,658
------------
MISCELLANEOUS MATERIALS & COMMODITIES .5%
Korea Chemical Co. Ltd. ...................................................... South Korea 57,900 2,089,696
Unitor ASA ................................................................... Norway 295,000 2,865,205
------------
4,954,901
------------
MULTI-INDUSTRY 1.6%
Cheung Kong Holdings Ltd. .................................................... Hong Kong 188,600 1,357,185
Elementis Plc. ............................................................... United Kingdom 3,336,000 4,634,490
Jardine Strategic Holdings Ltd. .............................................. Hong Kong 2,574,940 3,733,663
Swire Pacific Ltd., B ........................................................ Hong Kong 7,937,100 5,276,203
------------
15,001,541
------------
REAL ESTATE .1%
Hang Lung Development Co. Ltd. ............................................... Hong Kong 779,000 834,580
------------
RECREATION & OTHER CONSUMER GOODS 1.1%
Swatch Group AG, br. ......................................................... Switzerland 15,400 9,530,397
Yue Yuen Industrial (Holdings) Ltd. .......................................... Hong Kong 394,800 759,304
------------
10,289,701
------------
TELECOMMUNICATIONS 11.5%
British Telecommunications Plc. .............................................. United Kingdom 1,446,000 21,808,485
Hong Kong Telecommunications Ltd. ............................................ Hong Kong 1,238,479 2,166,109
Nokia AB, A .................................................................. Finland 310,000 37,958,684
a Telecomunicacoes Brasileiras SA (Telebras), ADR .............................. Brazil 177,300 12,887,494
Telefonica del Peru SA, B .................................................... Peru 2,445,602 3,076,375
Telefonica del Peru SA, B, ADR ............................................... Peru 251,900 3,195,981
Telefonica SA ................................................................ Spain 646,100 28,772,188
a Telefonica SA, rts. .......................................................... Spain 646,100 574,532
------------
110,439,848
------------
TEXTILES & APPAREL .2%
a Yizheng Chemical Fibre Co. Ltd., H ........................................... China 19,340,200 1,772,441
------------
TRANSPORTATION .7%
Air New Zealand Ltd., B ...................................................... New Zealand 2,322,000 3,655,263
Helikopter Services Group ASA ................................................ Norway 134,000 633,154
</TABLE>
143
<PAGE>
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STATEMENT OF INVESTMENTS, DECEMBER 31, 1998 (CONT.)
<TABLE>
<CAPTION>
SHARES/
WARRANTS
TEMPLETON INTERNATIONAL EQUITY FUND COUNTRY & RIGHTS VALUE
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS, WARRANTS AND RIGHTS (CONT.)
TRANSPORTATION (CONT.)
Mayne Nickless Ltd., A ....................................................... Australia 478,210 $ 1,774,527
Tranz Rail Holdings Ltd., ADR ................................................ New Zealand 47,765 322,414
------------
6,385,358
------------
UTILITIES ELECTRICAL & GAS 8.7%
BG Plc. ...................................................................... United Kingdom 2,566,588 16,215,985
a Centrais Eletricas Brasileiras SA (Electrobras) .............................. Brazil 363,450,000 6,256,785
Centrais Geradoras Do Sul Do Brasil SA (Gerasul) ............................. Brazil 363,450,000 475,275
a Centrica Plc. ................................................................ United Kingdom 1,290,000 2,591,590
Compania Sevillana de Electricidad SA ........................................ Spain 246,970 3,390,062
Iberdrola SA, Br. ............................................................ Spain 1,517,800 28,439,559
Korea Electric Power Corp. ................................................... South Korea 66,000 1,635,593
Shandong Huaneng Power Development Co. Ltd., ADR ............................. China 338,300 1,543,494
Thames Water Group Plc. ...................................................... United Kingdom 896,939 17,355,296
Transportadora de Gas del Sur SA, B, ADR ..................................... Argentina 516,300 5,227,532
------------
83,131,171
------------
TOTAL COMMON STOCKS, WARRANTS AND RIGHTS (COST $662,736,790) 833,989,826
------------
PREFERRED STOCKS AND RIGHTS 1.7%
Banco Bradesco SA, pfd. ...................................................... Brazil 525,200,000 2,912,344
a Banco Bradesco SA BBD, rts., pfd. ............................................ Brazil 21,769,089 12,396
Banco Itau SA, pfd. .......................................................... Brazil 4,209,000 2,055,260
News Corp. Ltd., pfd. ........................................................ Australia 3,486 21,232
Petrobras-Petroleo Brasileiro SA, pfd. ....................................... Brazil 60,000,000 6,803,228
Usinas Siderurgicas de Minas, ADR, 144A, pfd. ................................ Brazil 1,851,400 4,091,238
------------
TOTAL PREFERRED STOCKS AND RIGHTS (COST $24,653,583) ......................... 15,895,698
------------
TOTAL INVESTMENTS BEFORE REPURCHASE AGREEMENTS (COST $687,390,373) ........... 849,885,524
------------
<CAPTION>
PRINCIPAL
AMOUNT*
-----------
<S> <C> <C> <C>
g REPURCHASE AGREEMENTS 11.4%
Merrill Lynch & Co. Inc., 4.75%, 1/04/99 (Maturity Value $40,021,111)
Collateralized by U.S. Treasury Notes & Bonds ............................... United States $40,000,000 40,000,000
Morgan Stanley Inc., 4.65%, 1/04/99 (Maturity Value $33,469,284)
Collateralized by U.S. Treasury Notes & Bonds ............................... United States 33,452,000 33,452,000
Warburg Dillon Read LLC, 4.75%, 1/04/99 (Maturity Value $35,818,894)
Collateralized by U.S. Treasury Notes & Bonds ............................... United States 35,800,000 35,800,000
TOTAL REPURCHASE AGREEMENTS (COST $109,252,000) .............................. 109,252,000
TOTAL INVESTMENTS (COST $796,642,373) 100.3% ................................. 959,137,524
OTHER ASSETS, LESS LIABILITIES (.3%) ......................................... (3,237,422)
------------
TOTAL NET ASSETS 100.0% $955,900,102
============
</TABLE>
* Securities traded in U.S. dollars unless otherwise indicated.
a Non-income Producing.
g See Note 1(c) regarding repurchase agreements.
See notes to financial statements.
144
<PAGE>
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STATEMENT OF INVESTMENTS, DECEMBER 31, 1998
<TABLE>
<CAPTION>
TEMPLETON INTERNATIONAL SMALLER COMPANIES FUND COUNTRY SHARES VALUE
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS 90.6%
APPLIANCES & HOUSEHOLD DURABLES 1.8%
Email Ltd. ................................................................... Australia 44,964 $ 64,286
Fisher & Paykel Ltd. ......................................................... New Zealand 70,222 254,100
Guangdong Kelon Electrical Holdings Ltd., H .................................. China 92,000 81,939
Guangdong Kelon Electrical Holdings Ltd., H, 144A ............................ China 40,000 35,626
Shenzhen Konka Electronic Group Co. Ltd., B .................................. China 17,000 8,580
------------
444,531
------------
AUTOMOBILES 1.8%
Bilia AB, A .................................................................. Sweden 28,100 192,399
Volvo AB, B .................................................................. Sweden 11,600 266,180
------------
458,579
------------
BANKING 7.1%
Banco de Valencia SA ......................................................... Spain 3,272 98,025
Banco Pastor SA .............................................................. Spain 8,000 502,486
Bank Austria AG, 144A ........................................................ Austria 6,000 305,264
Commercial International Bank Ltd., GDR, 144A ................................ Egypt 17,550 134,258
Fokus Bank AS ................................................................ Norway 44,000 436,015
Unibanco Uniao de Bancos Brasileiros SA, GDR ................................. Brazil 10,235 147,768
Union Bank of Norway, Primary Capital Cert. .................................. Norway 7,170 139,278
------------
1,763,094
------------
BROADCASTING & PUBLISHING 2.5%
GTC Transcontinental Group Ltd., B ........................................... Canada 63,300 618,164
------------
BUILDING MATERIALS & COMPONENTS 6.5%
Caradon Plc. ................................................................. United Kingdom 117,500 199,401
Cementos Diamante SA, ADR, 144A .............................................. Colombia 26,900 47,075
Cristaleria Espanola SA, Br. ................................................. Spain 1,291 87,284
Det Danske Traelastkompagni AS ............................................... Denmark 3,752 253,494
Gujarat Ambuja Cements Ltd. .................................................. India 47,500 290,726
Mirgor SA Comercial Industrial Financiera Inmobi, C, ADR ..................... Argentina 24,300 25,515
Sarna Kunststoff Holding AG .................................................. Switzerland 52 74,772
Schuttersveld NV ............................................................. Netherlands 11,146 264,292
a Siam City Cement Public Co. Ltd., fgn. ....................................... Thailand 67,621 151,675
Suez Cement Co., GDR, 144A ................................................... Egypt 16,450 235,235
------------
1,629,469
------------
BUSINESS & PUBLIC SERVICES 3.7%
Kardex AG, Br. ............................................................... Switzerland 1,494 411,707
Lex Service Plc. ............................................................. United Kingdom 54,100 343,835
Scribona AB, B ............................................................... Sweden 19,045 68,842
a Sifo Group AB ................................................................ Sweden 19,045 89,283
------------
913,667
------------
CHEMICALS 1.8%
Energia e Industrias Aragonesas Eia SA ....................................... Spain 34,500 234,958
Yule Catto & Company Plc. .................................................... United Kingdom 53,100 220,863
------------
455,821
------------
CONSTRUCTION & HOUSING 2.7%
Dragados y Construcciones SA, br. ............................................ Spain 14,155 522,463
a Fairview Holdings Plc. ....................................................... United Kingdom 25,000 36,603
Hollandsche Beton Groep NV ................................................... Netherlands 9,600 118,676
------------
677,742
------------
</TABLE>
145
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STATEMENT OF INVESTMENTS, DECEMBER 31, 1998 (CONT.)
<TABLE>
<CAPTION>
TEMPLETON INTERNATIONAL SMALLER COMPANIES FUND COUNTRY SHARES VALUE
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS (CONT.)
ELECTRICAL & ELECTRONICS 2.7%
Dongfang Electrical Machinery Co. Ltd., H .................................... China 179,000 $ 10,628
Techtronic Industries Co. Ltd. ............................................... Hong Kong 1,791,000 319,027
Varitronix International Ltd. ................................................ Hong Kong 187,500 350,931
------------
680,586
------------
ELECTRONIC COMPONENTS & INSTRUMENTS 2.8%
Swisslog Holding AG .......................................................... Switzerland 1,000 94,649
VTech Holdings Ltd. .......................................................... Hong Kong 136,000 593,346
------------
687,995
------------
FINANCIAL SERVICES 3.3%
Dah Sing Financial Holdings Ltd. ............................................. Hong Kong 134,800 330,595
Housing Development Finance Corp. Ltd. ....................................... India 2,250 115,343
Industrial Credit & Inv. Corp. of India (ICICI) .............................. India 170,000 188,217
a Morgan Stanley Growth Fund ................................................... India 1,275,000 180,016
------------
814,171
------------
FOOD & HOUSEHOLD PRODUCTS 7.3%
a Charoen Pokphand Feedmill Public Co. Ltd., fgn. .............................. Thailand 71,300 87,322
Hazlewood Foods Plc. ......................................................... United Kingdom 252,600 561,053
Hillsdown Holdings Plc. ...................................................... United Kingdom 50,000 63,223
Illovo Sugar Ltd. ............................................................ South Africa 187,000 198,674
McBride Plc. ................................................................. United Kingdom 64,100 106,647
National Foods Ltd. .......................................................... Australia 182,091 323,888
Perkins Foods Plc. ........................................................... United Kingdom 189,240 437,640
a Terranova Foods Plc. ......................................................... United Kingdom 25,000 46,169
------------
1,824,616
------------
FOREST PRODUCTS & PAPER 2.5%
Crown-Van Gelder Papierfabrieken NV .......................................... Netherlands 6,115 96,122
a Empaques Ponderosa SA de CV, B ............................................... Mexico 151,800 79,200
Munksjo AB ................................................................... Sweden 12,995 89,778
Primex Forest Products Ltd. .................................................. Canada 90,000 357,422
------------
622,522
------------
HEALTH & PERSONAL CARE 2.3%
Internatio-Muller NV ......................................................... Netherlands 5,844 144,800
Ono Pharmaceutical Co. Ltd. .................................................. Japan 12,000 368,085
a Skyepharma Plc. .............................................................. United Kingdom 55,600 72,616
------------
585,501
------------
INDUSTRIAL COMPONENTS 5.6%
Granges AB ................................................................... Sweden 14,679 211,878
Otra NV ...................................................................... Netherlands 23,500 306,789
Sylea SA ..................................................................... France 4,447 245,985
Weir Group Plc. .............................................................. United Kingdom 120,900 402,296
Yamato Kogyo Co. Ltd. ........................................................ Japan 41,000 237,713
------------
1,404,661
------------
INSURANCE 1.0%
HIH Insurance Ltd. ........................................................... Australia 193,879 256,858
------------
MACHINERY & ENGINEERING 1.9%
Arcadis NV ................................................................... Netherlands 37,875 296,671
Laird Group Plc. ............................................................. United Kingdom 62,000 169,686
------------
466,357
------------
MERCHANDISING 16.3%
David Jones Ltd. ............................................................. Australia 243,000 268,279
Giordano International Ltd. .................................................. Hong Kong 933,000 174,623
Li & Fung Ltd. ............................................................... Hong Kong 241,000 499,280
</TABLE>
146
<PAGE>
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STATEMENT OF INVESTMENTS, DECEMBER 31, 1998 (CONT.)
<TABLE>
<CAPTION>
TEMPLETON INTERNATIONAL SMALLER COMPANIES FUND COUNTRY SHARES VALUE
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS (CONT.)
MERCHANDISING (CONT.)
Makro Atacadista SA, ADR, 144A ............................................... Brazil 37,500 $ 260,708
Moebel Walther AG ............................................................ Germany 7,506 290,668
Northwest Company Fund ....................................................... Canada 31,365 306,299
Sa des Galeries Lafayette .................................................... France 810 870,001
Safeway Plc. ................................................................. United Kingdom 58,559 292,040
Samas-Groep NV ............................................................... Netherlands 11,125 199,179
a Sobeys Canada Inc. ........................................................... Canada 15,477 171,295
Somerfield Plc. .............................................................. United Kingdom 82,800 551,724
Storehouse ................................................................... United Kingdom 88,185 201,004
------------
4,085,100
------------
METALS & MINING 4.2%
Arbed SA ..................................................................... Luxembourg 3,240 217,863
Boehler-Uddeholm AG .......................................................... Austria 4,993 232,513
Elkem ASA, A ................................................................. Norway 23,850 284,860
Pohang Iron & Steel Co. Ltd. ................................................. South Korea 2,625 167,200
PT Timah ..................................................................... Indonesia 204,000 137,925
------------
1,040,361
------------
MULTI-INDUSTRY 3.2%
a Amer Group Ltd., A ........................................................... Finland 11,300 119,396
La Cemento Nacional CA, GDR, 144A ............................................ Ecuador 575 62,100
Nagron Nationaal Grondbezit NV ............................................... Netherlands 7,400 216,081
Saha Union Public Co. Ltd., fgn. ............................................. Thailand 201,000 84,361
Wagon Plc. ................................................................... United Kingdom 34,300 128,400
Zehnder Holding AG, br. ...................................................... Switzerland 465 189,589
------------
799,927
------------
REAL ESTATE 1.6%
Inversiones y Representacion SA .............................................. Argentina 144,868 397,296
------------
TELECOMMUNICATIONS .2%
a Digital Telecommunications Philippines Inc. .................................. Philippines 2,198,000 53,679
------------
TEXTILES & APPAREL .9%
Gamma Holding NV ............................................................. Netherlands 3,000 139,074
Inner Mongolia Erdos Cashmere Products Co. Ltd., B ........................... China 497,000 64,610
a Yizheng Chemical Fibre Co. Ltd., H ........................................... China 326,000 29,876
------------
233,560
------------
TRANSPORTATION 2.4%
a Anangel-American Shipholdings Ltd., ADR ...................................... Greece 35,000 179,375
Helikopter Services Group ASA ................................................ Norway 16,400 77,490
Orient Overseas International Ltd. ........................................... Hong Kong 362,000 93,453
a Osprey Maritime Ltd. ......................................................... Singapore 350,000 108,182
Stolt Nielsen SA, ADR ........................................................ Norway 15,000 153,750
------------
612,250
------------
UTILITIES ELECTRICAL & GAS 2.9%
Gas y Electricidad SA, Br. ................................................... Spain 5,700 571,225
Guangdong Electric Power Development Co Ltd., B .............................. China 338,520 92,198
Transportadora de Gas del Sur SA, B, ADR ..................................... Argentina 7,000 70,875
------------
734,298
------------
WHOLESALE & INTERNATIONAL TRADE 1.6%
Dahl International AB ........................................................ Sweden 9,550 94,254
Dahl International AB, 144A .................................................. Sweden 6,300 62,178
Eurodis Electron Plc. ........................................................ United Kingdom 150,000 233,342
------------
389,774
------------
TOTAL COMMON STOCKS (COST $25,678,008) 22,650,579
------------
</TABLE>
147
<PAGE>
FRANKLIN VALUEMARK FUNDS
STATEMENT OF INVESTMENTS, DECEMBER 31, 1998 (CONT.)
<TABLE>
<CAPTION>
TEMPLETON INTERNATIONAL SMALLER COMPANIES FUND COUNTRY SHARES VALUE
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
PREFERRED STOCKS 3.4%
Ballast Nedam NV, ctf., cvt., pfd. ........................................... Netherlands 6,700 $ 217,776
Cia Brasileira de Petroleo Ipiranga, pfd. .................................... Brazil 25,141,000 139,412
Fertilizantes Fosfatados SA, pfd. ............................................ Brazil 41,995,000 107,746
Moebel Walther AG, pfd. ...................................................... Germany 4,550 154,339
Weg SA, pfd. ................................................................. Brazil 507,200 243,473
------------
TOTAL PREFERRED STOCKS (COST $1,359,938)...................................... 862,746
------------
TOTAL INVESTMENTS BEFORE REPURCHASE AGREEMENTS (COST $27,037,946)............. 23,513,325
------------
<CAPTION>
PRINCIPAL
AMOUNT*
-----------
<S> <C> <C> <C>
g REPURCHASE AGREEMENTS 5.9%
Merrill Lynch & Co. Inc., 4.75%, 1/04/99 (Maturity Value $750,396)
Collateralized by U.S. Treasury Notes & Bonds ................................ United States $750,000 750,000
Morgan Stanley Inc., 4.65%, 1/04/99 (Maturity Value $718,371)
Collateralized by U.S. Treasury Notes & Bonds ................................ United States 718,000 718,000
------------
TOTAL REPURCHASE AGREEMENTS (COST $1,468,000)................................. 1,468,000
------------
TOTAL INVESTMENTS (COST $28,505,946) 99.9%.................................... 24,981,325
OTHER ASSETS, LESS LIABILITIES .1%............................................ 18,119
------------
TOTAL NET ASSETS 100.0%....................................................... $ 24,999,444
------------
</TABLE>
* Securities traded in U.S. dollars unless otherwise indicated.
a Non-income producing.
g See Note 1(c) regarding repurchase agreements.
See notes to financial statements.
148
<PAGE>
FRANKLIN VALUEMARK FUNDS
STATEMENT OF INVESTMENTS, DECEMBER 31, 1998
<TABLE>
<CAPTION>
SHARES/
TEMPLETON PACIFIC GROWTH FUND COUNTRY WARRANTS VALUE
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS AND WARRANTS 101.1%
APPLIANCES & HOUSEHOLD DURABLES 1.1%
Sony Corp. ................................. Japan 15,100 $ 1,101,711
-----------
BANKING 11.2%
Development Bank of Singapore Ltd., fgn. ... Singapore 495,000 4,470,000
HSBC Holdings Plc. ......................... Hong Kong 39,000 971,571
Overseas Union Bank Ltd., fgn. ............. Singapore 472,560 2,062,080
(a) Philippine National Bank ................... Philippines 962,500 1,484,576
PT Bank Bali, fgn. ......................... Indonesia 4,168,220 196,614
PT Bank Pan Indonesia TBK .................. Indonesia 6,182,625 311,075
Singapore Finance Ltd., fgn. ............... Singapore 213,000 194,927
(a) Thai Farmers Bank Public Co. Ltd. .......... Thailand 36,570 53,845
(a) Thai Farmers Bank Public Co. Ltd., fgn. .... Thailand 733,440 1,291,872
-----------
11,036,560
-----------
BROADCASTING & PUBLISHING 3.2%
(a) Inchcape Marketing Services Ltd. ........... Singapore 1,240,000 676,364
South China Morning Post Ltd. .............. Hong Kong 4,888,000 2,507,961
-----------
3,184,325
-----------
BUILDING MATERIALS & COMPONENTS 2.1%
Okumura Corp. .............................. Japan 467,000 2,074,176
-----------
CHEMICALS
Fauji Fertilizer Co. Ltd. .................. Pakistan 10,000 9,206
-----------
CONSTRUCTION & HOUSING 8.7%
Daito Trust Construction Co. Ltd. .......... Japan 409,000 3,549,743
Road King Infrastructure Ltd. .............. Hong Kong 3,831,977 2,819,358
Toda Corp. ................................. Japan 470,000 2,279,167
-----------
8,648,268
-----------
ELECTRICAL & ELECTRONICS
Hitachi Ltd. ............................... Japan 800 4,965
-----------
FINANCIAL SERVICES 2.5%
Commerce Asset-Holding Bhd. ................ Malaysia 1,572,000 970,890
(a) Commerce Asset-Holding Bhd., wts. .......... Malaysia 163,750 16,512
Industrial Finance Corp. of Thailand, fgn. . Thailand 2,783,133 1,148,947
Public Finance Bhd., fgn. .................. Malaysia 928,000 327,512
-----------
2,463,861
-----------
FOREST PRODUCTS & PAPER 2.6%
Carter Holt Harvey Ltd. .................... New Zealand 2,411,800 2,165,860
(a) PT Inti Indorayon Utama .................... Indonesia 129,000 8,113
(a) PT Tjiwi Kimia TBK ......................... Indonesia 1,388,741 362,470
(a) PT Tjiwi Kimia TBK, wts. ................... Indonesia 192,880 22,563
-----------
2,559,006
-----------
INDUSTRIAL COMPONENTS 6.2%
Fuji Heavy Industries Ltd. ................. Japan 577,000 2,890,115
Mitsubishi Heavy Industries Ltd. ........... Japan 824,000 3,214,184
-----------
6,104,299
-----------
INSURANCE 2.9%
National Mutual Asia Ltd. .................. Hong Kong 3,860,000 2,889,800
-----------
LEISURE & TOURISM 1.2%
Toei Co. Ltd. .............................. Japan 397,000 1,175,514
-----------
MERCHANDISING .7%
Takashimaya Co. Ltd. ....................... Japan 81,418 686,423
-----------
METALS & MINING 1.5%
Capral Aluminum Ltd. ....................... Australia 1,083,098 1,514,649
-----------
</TABLE>
149
<PAGE>
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STATEMENT OF INVESTMENTS, DECEMBER 31, 1998 (CONT.)
<TABLE>
<CAPTION>
SHARES/
TEMPLETON PACIFIC GROWTH FUND COUNTRY WARRANTS VALUE
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS AND WARRANTS (CONT.)
MISCELLANEOUS MATERIALS & COMMODITIES 2.3%
Golden Hope Plantations Bhd. ............................. Malaysia 2,607,000 $ 2,245,407
-------------
MULTI-INDUSTRY 15.8%
Broken Hill Proprietary Co. Ltd. ......................... Australia 211,000 1,555,462
Cheung Kong Holdings Ltd. ................................ Hong Kong 460,800 3,315,964
Hicom Holdings Bhd. ...................................... Malaysia 1,634,000 542,350
Hutchison Whampoa Ltd. ................................... Hong Kong 216,000 1,526,477
Jardine Matheson Holdings Ltd. ........................... Hong Kong 632,031 1,630,640
SIME Darby Bhd. .......................................... Malaysia 1,798,800 1,647,554
Swire Pacific Ltd., A .................................... Hong Kong 645,000 2,888,961
Wheelock and Company Ltd. ................................ Hong Kong 3,100,000 2,480,880
-------------
15,588,288
-------------
REAL ESTATE 6.5%
City Developments Ltd. ................................... Singapore 888,600 3,850,600
(a) Filinvest Land Inc. ...................................... Philippines 5,675,000 320,951
Hon Kwok Land Investment Co. Ltd. ........................ Hong Kong 5,940,438 559,750
New World Development Co. Ltd. ........................... Hong Kong 658,978 1,658,662
-------------
6,389,963
-------------
TELECOMMUNICATIONS 4.7%
Hong Kong Telecommunications Ltd. ........................ Hong Kong 1,353,033 2,366,465
Pakistan Telecommunications Corp., A, PTC ................ Pakistan 5,906,900 2,255,902
-------------
4,622,367
-------------
TEXTILES & APPAREL 6.9%
Nisshinbo Industries Inc. ................................ Japan 700,000 2,445,035
(a) PT Indorama Synthetics ................................... Indonesia 3,657,384 655,569
(a) PT Panasia Indosyntec .................................... Indonesia 3,423,000 75,349
Wacoal Corp. ............................................. Japan 280,000 3,606,738
-------------
6,782,691
-------------
TRANSPORTATION 15.6%
Cathay Pacific Airways Ltd. .............................. Hong Kong 3,000,000 2,981,703
East Japan Railway Co. ................................... Japan 600 3,356,383
Great Eastern Shipping Co. Ltd., GDR ..................... India 156,100 448,788
Guangshen Railway Co. Ltd., H, ADR ....................... China 142,800 856,800
GZI Transport Ltd., 144A ................................. China 1,008,000 197,768
(a) GZI Transport Ltd., 144A, wts. ........................... China 201,600 260
Hitachi Zosen Corp. ...................................... Japan 843,000 1,165,851
Hong Kong Ferry Holdings Co. Ltd. ........................ Hong Kong 745,000 865,468
Malaysian International Shipping Corp., fgn. ............. Malaysia 1,467,267 1,541,166
Singapore Airlines Ltd., fgn. ............................ Singapore 544,600 3,993,733
-------------
15,407,920
-------------
UTILITIES ELECTRICAL & GAS 3.9%
CLP Holdings Ltd. ........................................ Hong Kong 579,500 2,887,308
Shandong Huaneng Power Development Co. Ltd., ADR ......... China 225,000 1,026,563
-------------
3,913,871
-------------
WHOLESALE & INTERNATIONAL TRADE 1.5%
Inchcape Motors Ltd. ..................................... Singapore 1,240,000 1,435,394
-------------
TOTAL COMMON STOCKS AND WARRANTS (COST $173,534,980) ..... 99,838,664
-------------
PREFERRED STOCKS .2%
Osprey Maritime Ltd., cvt., 2.50%, pfd. (COST $234,713) .. Singapore 763,000 231,212
-------------
TOTAL INVESTMENTS (COST $173,769,693) 101.3% ............. 100,069,876
OTHER ASSETS, LESS LIABILITIES (1.3%) .................... (1,300,491)
-------------
TOTAL NET ASSETS 100.0% .................................. $ 98,769,385
=============
</TABLE>
(a) Non-income producing.
See notes to financial statements.
150
<PAGE>
FRANKLIN VALUEMARK FUNDS
STATEMENT OF INVESTMENTS, DECEMBER 31, 1998
<TABLE>
<CAPTION>
PRINCIPAL
U.S. GOVERNMENT SECURITIES FUND AMOUNT VALUE
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
MORTGAGE-BACKED SECURITIES 75.8%
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION (GNMA) - FIXED RATE 50.5%
GNMA II, 5.50%, 9/20/28 ....................................................... $ 1,201,771 $ 1,157,951
(h) GNMA II, 5.50%, 1/01/29 ....................................................... 1,915,000 1,925,000
GNMA I, SF, 6.00%, 11/15/23 - 11/15/28 ........................................ 19,258,380 19,123,120
GNMA II, 6.00%, 1/20/24 - 10/20/28 ............................................ 62,362,635 50,721,915
(h) GNMA II, 6.00%, 1/01/29 ....................................................... 11,000,000 10,841,875
GNMA I, SF, 6.50%, 5/15/23 - 9/15/28 .......................................... 64,179,406 64,915,181
GNMA II, 6.50%, 1/20/26 - 3/20/28 ............................................. 32,266,772 32,458,632
GNMA I, SF, 7.00%, 3/15/22 - 5/15/28 .......................................... 71,405,323 73,173,795
GNMA I, SF, 7.25%, 11/15/25 ................................................... 1,484,601 1,522,587
GNMA, PL, 7.25%, 5/15/22 - 8/15/22 ............................................ 2,178,218 2,210,170
GNMA I, SF, 7.50%, 2/15/17 - 5/15/28 .......................................... 32,548,120 33,605,421
GNMA II, 7.50%, 11/20/16 - 11/20/26 ........................................... 23,164,494 23,785,377
GNMA I, SF, 8.00%, 4/15/05 - 6/15/25 .......................................... 18,933,004 19,755,967
GNMA II, 8.00%, 2/20/16 - 8/20/26 ............................................. 1,895,192 1,969,618
GNMA I, SF, 8.25%, 4/15/25 .................................................... 859,622 908,722
GNMA I, SF, 8.50%, 8/15/21 - 12/15/24 ......................................... 5,807,603 6,192,045
GNMA I, SF, 9.00%, 4/15/16 - 2/15/21 .......................................... 2,434,812 2,619,102
GNMA I, SF, 9.50%, 7/15/16 - 12/15/21 ......................................... 5,629,226 6,089,662
GNMA II, 9.50%, 4/20/25 ....................................................... 647,240 695,217
GNMA I, SF, 10.00%, 8/15/17 - 8/15/21 ......................................... 4,846,010 5,347,212
------------
359,018,569
------------
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION (GNMA) - ADJUSTABLE RATE 1.1%
GNMA, Cap 11.50%, Margin 1.50% + CMT, Resets Annually, 7.00%, 7/20/17 ......... 2,498,460 2,538,151
GNMA, Cap 11.50%, Margin 2.50% + CMT, Resets Annually, 8.00%, 7/20/25 ......... 1,405,575 1,457,759
GNMA, Cap 14.00%, Margin 1.50% + CMT, Resets Annually, 6.875%, 1/20/16 ........ 3,843,760 3,898,545
------------
7,894,455
------------
FEDERAL NATIONAL MORTGAGE ASSOCIATION (FNMA) - FIXED RATE 8.4%
FNMA, 6.00%, 10/01/23 - 10/01/28 .............................................. 25,658,910 25,360,412
FNMA, 6.50%, 1/01/24 - 6/01/24 ................................................ 13,197,629 13,307,044
FNMA, 7.00%, 5/01/24 .......................................................... 1,465,149 1,497,593
FNMA, PL, 7.00%, 3/17/35 ...................................................... 4,860,811 4,864,628
FNMA, 7.50%, 4/01/23 - 8/01/25 ................................................ 6,289,578 6,469,010
FNMA, 8.00%, 7/01/16 - 2/01/25 ................................................ 7,223,614 7,505,472
FNMA, 8.50%, 10/01/19 - 2/01/22 ............................................... 531,906 561,772
------------
59,565,931
------------
FEDERAL NATIONAL MORTGAGE ASSOCIATION (FNMA) - ADJUSTABLE RATE 5.1%
FNMA, Cap 12.49%, Margin 2.00% + CMT, Resets Annually, 7.406%, 2/01/19 ........ 3,290,861 3,365,586
FNMA, Cap 12.819%, Margin 2.127% + CMT, Resets Annually, 7.438%, 9/01/18 ...... 4,626,971 4,749,436
FNMA, Cap 12.93%, Margin 2.24% + CMT, Resets Annually, 7.088%, 2/01/27 ........ 5,375,113 5,525,915
FNMA, Cap 13.313%, Margin 2.126% + CMT, Resets Annually, 7.425%, 7/01/19 ...... 3,133,438 3,207,575
FNMA, Cap 13.644%, Margin 2.011% + CMT, Resets Annually, 7.351%, 1/01/18 ...... 10,213,522 10,445,699
FNMA, Cap 14.625%, Margin 1.25% + COFI, Resets Monthly, 6.132%, 6/01/02 ....... 4,691,068 4,699,607
FNMA, Cap 14.808%, Margin 1.825% + 3CMT, Resets Tri-Annually, 7.331%, 7/01/20 . 1,535,979 1,563,275
FNMA, Cap 15.156%, Margin 2.284% + 3CMT, Resets Tri-Annually, 8.170%, 3/01/20 . 2,574,926 2,649,746
------------
36,206,839
------------
FEDERAL HOME LOAN MORTGAGE CORP. (FHLMC) - FIXED RATE 9.5%
FHLMC, 6.00%, 1/01/24 - 8/01/28 ............................................... 9,737,875 9,631,639
FHLMC, 6.50%, 6/01/08 - 1/01/24 ............................................... 17,714,531 17,891,137
FHLMC, 7.00%, 4/01/24 ......................................................... 13,394,280 13,688,958
FHLMC, PL, 7.00%, 9/17/31 ..................................................... 18,370,074 18,392,118
FHLMC, 7.50%, 11/01/22 - 5/01/24 .............................................. 4,129,276 4,248,734
FHLMC, 8.00%, 5/01/16 - 5/01/22 ............................................... 2,457,983 2,555,460
</TABLE>
151
<PAGE>
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STATEMENT OF INVESTMENTS, DECEMBER 31, 1998 (CONT.)
<TABLE>
<CAPTION>
PRINCIPAL
U.S. GOVERNMENT SECURITIES FUND AMOUNT VALUE
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
MORTGAGE-BACKED SECURITIES (CONT.)
FEDERAL HOME LOAN MORTGAGE CORP. (FHLMC) - FIXED RATE (CONT.)
FHLMC, 8.50%, 4/01/18 - 3/01/22 ........................................... $ 750,228 $ 789,012
FHLMC, 9.00%, 3/01/03 ..................................................... 401,459 415,678
------------
67,612,736
------------
FEDERAL HOME LOAN MORTGAGE CORP. (FHLMC) - ADJUSTABLE RATE 1.2%
FHLMC, Cap 10.99%, Margin 2.225% + CMT, Resets Annually, 8.011%, 6/01/22 .. 1,848,216 1,877,171
FHLMC, Cap 12.522%, Margin 2.105% + CMT, Resets Annually, 7.618%, 6/01/22 . 2,831,202 2,881,643
FHLMC, Cap 13.458%, Margin 2.195% + CMT, Resets Annually, 7.818%, 2/01/19 . 4,037,506 4,107,718
------------
8,866,532
------------
TOTAL MORTGAGE-BACKED SECURITIES (COST $522,774,699) ...................... 539,165,062
------------
OTHER AGENCY SECURITIES 22.2%
Federal Agriculture Mortgage Corp., 7.23%, 1/17/07 ........................ 5,000,000 5,294,515
Federal Farm Credit Bank, 5.80%, 9/16/03 .................................. 5,000,000 4,979,875
Federal Home Loan Bank, 0.00%, 8/15/22 .................................... 17,500,000 3,040,643
Federal Home Loan Bank, 0.00%, 1/23/23 .................................... 10,000,000 1,865,720
FICO, Strip, 0.00%, 3/07/02 ............................................... 10,000,000 8,556,040
FICO, Strip, 0.00%, 5/11/02 ............................................... 1,925,000 1,631,295
FICO, Strip, 0.00%, 5/11/13 ............................................... 10,000,000 4,377,890
FICO, Strip, 1, 0.00%, 5/11/09 ............................................ 1,758,000 1,005,374
FICO, Strip, 13, 0.00%, 6/27/09 ........................................... 11,024,000 6,250,685
FICO, Strip, 16, 0.00%, 4/05/09 ........................................... 3,202,000 1,843,596
FICO, Strip, 16, 0.00%, 10/05/10 .......................................... 4,745,000 2,470,883
FICO, Strip, A, 0.00%, 2/08/09 ............................................ 2,060,000 1,198,572
Housing Urban Development, 96-A, 7.63%, 8/01/14 ........................... 5,000,000 5,540,410
Housing Urban Development, 96-A, 7.66%, 8/01/15 ........................... 5,000,000 5,526,885
Small Business Administration, 6.00%, 9/01/18 ............................. 10,000,000 10,090,778
Small Business Administration, 6.45%, 12/01/15 ............................ 4,167,587 4,279,227
Small Business Administration, 6.70%, 12/01/16 ............................ 4,580,379 4,756,808
Small Business Administration, 6.85%, 7/01/17 ............................. 4,769,943 4,984,525
Small Business Administration, Cap 10.85%,
Margin Prime - 0.40%, Resets Quarterly, 8.10%, 6/25/19 .................... 5,907,985 6,201,538
Small Business Administration, Cap 10.875%,
Margin Prime - 0.125%, Resets Quarterly, 8.375%, 3/25/18 .................. 5,562,143 5,901,087
Student Loan Marketing Association, 0.00%, 5/15/14 ........................ 15,000,000 5,061,000
Tennessee Valley Authority, 0.00%, 4/15/03 ................................ 10,000,000 8,070,060
Tennessee Valley Authority, 0.00%, 4/15/42 ................................ 6,000,000 2,814,720
Tennessee Valley Authority, 0.00%, 7/15/43 ................................ 7,000,000 5,359,970
Tennessee Valley Authority, 5.88%, 4/01/36 ................................ 10,000,000 10,496,990
Tennessee Valley Authority, 6.125%, 7/15/03 ............................... 5,000,000 5,086,754
Tennessee Valley Authority, 6.235%, 7/15/45 ............................... 19,249,000 20,197,647
Tennessee Valley Authority, 7.25%, 7/15/43 ................................ 10,000,000 10,787,340
------------
TOTAL OTHER AGENCY SECURITIES (COST $146,222,419) ......................... 157,670,827
------------
U.S. GOVERNMENT SECURITIES .9%
U.S. Treasury, Strip, 0.00%, 2/15/19 (COST $5,196,200) .................... 20,000,000 6,546,580
------------
TOTAL LONG TERM INVESTMENTS (COST $674,193,318) ........................... 703,382,469
------------
</TABLE>
152
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STATEMENT OF INVESTMENTS, DECEMBER 31, 1998 (CONT.)
<TABLE>
<CAPTION>
PRINCIPAL
U.S. GOVERNMENT SECURITIES FUND AMOUNT VALUE
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
(f) REPURCHASE AGREEMENT 2.2%
Joint Repurchase Agreement, 4.681%, 1/04/99 (Maturity Value $15,368,660) (COST $15,360,671) .. $15,360,671 $ 15,360,671
Barclays Capital Inc. (Maturity Value $780,456)
Bear, Stearns & Co. Inc. (Maturity Value $202,341)
Chase Securities Inc. (Maturity Value $1,589,819)
CIBC Oppenheimer Corp. (Maturity Value $1,589,819)
Donaldson, Lufkin & Jenrette Securities Corp. (Maturity Value $1,589,819)
Dresdner Kleinwort Benson, North America LLC (Maturity Value $1,589,819)
Goldman, Sachs & Co. (Maturity Value $433,587)
Greenwich Capital Markets Inc. (Maturity Value $1,589,819)
Lehman Brothers Inc. (Maturity Value $289,058)
NationsBanc Montgomery Securities LLC (Maturity Value $1,589,819)
Paine Webber Inc. (Maturity Value $867,173)
Paribas Corp. (Maturity Value $1,589,819)
Warburg Dillon Read LLC (Maturity Value $1,667,312)
Collateralized by U.S. Treasury Bills & Notes
-------------
TOTAL INVESTMENTS (COST $689,553,989) 101.1% ................................................. 718,743,140
OTHER ASSETS, LESS LIABILITIES (1.1%) ........................................................ (7,911,217)
-------------
NET ASSETS 100.0% ............................................................................ $ 710,831,923
=============
</TABLE>
(f) See Note 1(c) regarding joint repurchase agreements.
(h) Sufficient collateral has been segregated for securities traded on a
when-issue or delayed delivery basis.
See notes to financial statements.
153
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STATEMENT OF INVESTMENTS, DECEMBER 31, 1998
<TABLE>
<CAPTION>
VALUE SECURITIES FUND SHARES VALUE
- -----------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS 88.4%
COMMERCIAL SERVICES 3.4%
(a) Corrections Corp. of America .............. 4,000 $ 70,500
(a) Kevco Inc. ................................ 300 2,175
Reynolds and Reynolds Co., A .............. 7,000 160,563
(a) Rush Enterprises Inc. ..................... 1,200 13,200
Unisource Worldwide Inc. .................. 9,000 65,250
----------
311,688
----------
CONSUMER DURABLES 6.1%
(a) Acorn Products Inc. ....................... 4,000 28,000
(a) Cannondale Corp. .......................... 8,700 78,300
Coachmen Industries Inc. .................. 3,000 78,750
D.R. Horton Inc. .......................... 2,500 57,500
(a) EKCO Group Inc. ........................... 2,100 7,875
Engle Homes Inc. .......................... 3,000 45,938
Flexsteel Industries Inc. ................. 6,000 77,250
M/I Schottenstein Homes Inc. .............. 3,000 66,000
(a) RockShox Inc. ............................. 600 1,538
(a) TBC Corp. ................................. 15,000 106,875
----------
548,026
----------
CONSUMER NON-DURABLES 13.7%
DIMON Inc. ................................ 14,500 107,844
Schweitzer-Mauduit International Inc. ..... 3,000 46,313
(a) Sola International Inc. ................... 7,500 129,375
Standard Commercial Corp. ................. 16,400 140,425
(a) The Timberland Co., A ..................... 4,000 182,250
(a) Tropical Sportswear International Corp. ... 12,800 459,200
Wolverine World Wide Inc. ................. 12,500 165,625
----------
1,231,032
----------
ELECTRONIC TECHNOLOGY 8.0%
(a) Alliant Techsystems Inc. .................. 1,000 82,438
Astro-Med Inc. ............................ 100 544
Elbit Systems (Israel) Ltd. ............... 7,500 90,000
(a) ESCO Electronics Corp. .................... 600 5,438
(a) FLIR Systems Inc. ......................... 4,000 93,000
(a) Komag Inc. ................................ 2,500 25,938
(a) Ladish Co. Inc. ........................... 13,000 108,875
(a) NCR Corp. ................................. 2,500 104,375
(a) Read-Rite Corp. ........................... 2,100 31,041
(a) SPACEHAB Inc. ............................. 10,000 105,000
United Industrial Corp. ................... 8,000 78,500
----------
725,149
----------
ENERGY MINERALS 1.1%
(a) Nuevo Energy Co. .......................... 8,800 101,200
----------
FINANCE 1.9%
Household International Inc. .............. 2,500 99,063
(a) PBOC Holdings Inc. ........................ 7,100 72,775
----------
171,838
----------
HEALTH TECHNOLOGY 1.9%
(a) DepoTech Corp. ............................ 4,900 11,331
(a) OrthoLogic Corp. .......................... 10,000 33,438
The West Co. Inc. ......................... 3,500 124,906
----------
169,675
----------
</TABLE>
154
<PAGE>
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STATEMENT OF INVESTMENTS, DECEMBER 31, 1998 (CONT.)
<TABLE>
<CAPTION>
VALUE SECURITIES FUND SHARES VALUE
- ----------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (CONT.)
INDUSTRIAL SERVICES 6.4%
(a) Atwood Oceanics Inc. ..................... 5,000 $ 85,000
ENSCO International Inc. ................. 10,000 106,875
(a) Perini Corp. ............................. 11,000 56,375
(a) R&B Falcon Corp. ......................... 11,900 90,738
(a) Rowan Cos. Inc. .......................... 15,000 150,000
Santa Fe International Corp. ............. 6,000 87,750
----------
576,738
----------
INSURANCE 11.1%
(a) Acceptance Insurance Cos. Inc. ........... 4,500 91,125
(a) American Safety Insurance Group Ltd. ..... 12,500 120,313
The Centris Group Inc. ................... 10,000 97,500
Executive Risk Inc. ...................... 1,900 104,381
Penn-America Group Inc. .................. 10,000 90,625
The PMI Group Inc. ....................... 2,500 123,438
Presidential Life Corp. .................. 5,000 99,375
(a) Professional Group Inc. .................. 2,200 68,200
(a) The Seibels Bruce Group Inc. ............. 9,000 30,375
(a) Symons International Group Inc. .......... 10,000 72,500
Terra Nova (Bermuda) Holdings Ltd., A .... 4,000 101,000
----------
998,832
----------
NON-ENERGY MINERALS 3.1%
Carpenter Technology Corp. ............... 3,500 118,781
(a) Lone Star Technologies Inc. .............. 7,000 70,875
LTV Corp. ................................ 15,000 87,188
----------
276,844
----------
PROCESS INDUSTRIES 2.6%
RPM Inc. ................................. 9,000 144,000
Tuscarora Inc. ........................... 6,600 88,275
----------
232,275
----------
PRODUCER MANUFACTURING 18.3%
(a) Atchison Casting Corp. ................... 9,000 83,250
Baldor Electric Co. ...................... 7,000 141,750
Commercial Intertech Corp. ............... 400 5,175
Commonwealth Industries Inc. ............. 6,500 60,938
Dana Corp. ............................... 3,000 122,625
EASCO Inc. ............................... 10,000 77,500
Flowserve Corp. .......................... 1,600 26,500
(a) Global Industrial Technologies Inc. ...... 7,000 74,813
(a) Holophane Corp. .......................... 6,000 154,125
JLG Industries Inc. ...................... 17,000 265,625
(a) Keystone Consolidated Industries Inc. .... 4,400 35,750
Myers Industries Inc. .................... 4,000 114,750
Patrick Industries Inc. .................. 5,000 76,875
Superior Industries International Inc. ... 7,400 205,813
Timken Co. ............................... 8,000 151,000
Watts Industries Inc., A ................. 3,000 49,875
----------
1,646,364
----------
RETAIL TRADE 2.4%
(a) Duckwall-Alco Stores Inc. ................ 6,000 79,500
Haverty Furniture Co. Inc. ............... 100 2,100
Schultz Sav-O Stores Inc. ................ 3,000 49,500
(a) Syms Corp. ............................... 10,000 90,000
----------
221,100
----------
</TABLE>
155
<PAGE>
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STATEMENT OF INVESTMENTS, DECEMBER 31, 1998 (CONT.)
<TABLE>
<CAPTION>
VALUE SECURITIES FUND SHARES VALUE
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (CONT.)
TECHNOLOGY SERVICES 1.8%
(a) Brightpoint Inc. ............................................................................ 5,500 $ 75,625
(a) Manchester Equipment Co. Inc. ............................................................... 800 2,750
(a) Ultrak Inc. ................................................................................. 11,000 81,125
-----------
159,500
-----------
TRANSPORTATION 6.6%
(a) Alaska Air Group Inc. ....................................................................... 200 8,850
(a) Conrad Industries Inc. ...................................................................... 2,000 7,813
Delta Air Lines Inc. ........................................................................ 2,500 130,000
(a) Eagle USA Airfreight Inc. ................................................................... 2,800 68,600
(a) Fritz Cos. Inc. ............................................................................. 5,000 54,063
Kenan Transport Co. ......................................................................... 4,000 134,000
(a) Motor Cargo Industries Inc. ................................................................. 800 6,400
Tidewater Inc. .............................................................................. 8,000 185,492
-----------
595,218
-----------
TOTAL COMMON STOCKS (COST $8,367,867) ....................................................... 7,965,479
-----------
PRINCIPAL
AMOUNT
---------
(f) REPURCHASE AGREEMENT 13.9%
Joint Repurchase Agreement, 4.681%, 1/04/99 (Maturity Value $1,252,577) (COST $1,251,926) .. $1,251,926 1,251,926
Barclays Capital Inc. (Maturity Value $63,609)
Bear, Stearns & Co. Inc. (Maturity Value $16,491)
Chase Securities Inc. (Maturity Value $129,573)
CIBC Oppenheimer Corp. (Maturity Value $129,573)
Donaldson, Lufkin & Jenrette Securities Corp. (Maturity Value $129,573)
Dresdner Kleinwort Benson, North America LLC (Maturity Value $129,573)
Goldman, Sachs & Co. (Maturity Value $35,339)
Greenwich Capital Markets Inc. (Maturity Value $129,573)
Lehman Brothers Inc. (Maturity Value $23,560)
NationsBanc Montgomery Securities LLC (Maturity Value $129,573)
Paine Webber Inc. (Maturity Value $70,677)
Paribas Corp. (Maturity Value $129,573)
Warburg Dillon Read LLC (Maturity Value $135,890)
Collateralized by U.S. Treasury Bills & Notes
-----------
TOTAL INVESTMENTS (COST $9,619,793) 102.3% ............................................................. 9,217,405
OTHER ASSETS, LESS LIABILITIES (2.3%) .................................................................. (203,934)
-----------
NET ASSETS 100.0% ...................................................................................... $ 9,013,471
===========
</TABLE>
(a) Non-income producing.
(f) See Note 1(c) regarding joint repurchase agreements.
See notes to financial statements.
156
<PAGE>
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STATEMENT OF INVESTMENTS, DECEMBER 31, 1998
<TABLE>
<CAPTION>
PRINCIPAL
ZERO COUPON FUND - 2000 AMOUNT VALUE
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
U.S. GOVERNMENT &AGENCY SECURITIES 97.1%
Chattanooga Valley Corp., 1/01/01 ..................................................... $ 65,000 $ 58,528
FHLB, Strip, A-1, 2/25/01 ............................................................. 7,567,000 6,807,326
FHLB, Strip, A-1, 8/25/01 ............................................................. 2,884,000 2,529,455
FHLB, Strip, A-1, 2/25/02 ............................................................. 465,000 397,999
FHLMC, Strip, 5/15/00 ................................................................. 16,175,000 15,165,179
FICO, Strip, 1, 11/11/00 .............................................................. 1,139,000 1,040,847
FICO, Strip, 7, 2/03/01 ............................................................... 1,000,000 902,783
FICO, Strip, 12, 12/06/00 ............................................................. 17,390,000 15,834,117
FICO, Strip, 15, 9/07/00 .............................................................. 148,000 136,438
FICO, Strip, 17, 10/05/00 ............................................................. 5,875,000 5,395,224
FICO, Strip, 10/06/00 ................................................................. 6,200,000 5,692,945
FICO, Strip, D, 9/26/00 ............................................................... 4,965,000 4,565,387
FNMA, Strip, 11/22/99 ................................................................. 3,800,000 3,642,840
FNMA, Strip, 1, 2/12/00 ............................................................... 500,000 474,031
FNMA, Strip, 1, 2/01/01 ............................................................... 1,875,000 1,693,879
FNMA, Strip, 8/12/01 .................................................................. 3,000,000 2,639,379
REFCO, Strip, 1/15/01 ................................................................. 5,195,000 4,723,398
Tennessee Valley Authority, Strip, 7/15/00 ............................................ 3,320,000 3,081,219
Tennessee Valley Authority, Strip, 10/15/00 ........................................... 2,500,000 2,291,970
Tennessee Valley Authority, Strip, 4/15/01 ............................................ 10,500,000 9,385,194
Tennessee Valley Authority, Strip, 4/15/02 ............................................ 1,000,000 850,211
U.S. Treasury, Strip, QO, 11/15/00 .................................................... 1,110,375 1,015,778
U.S. Treasury, Strip, QO, 2/15/01 ..................................................... 2,778,750 2,509,977
------------
TOTAL U.S. GOVERNMENT & AGENCY SECURITIES (COST $85,976,752) .......................... 90,834,104
------------
OTHER SECURITIES - "AAA" RATED 2.2%
Interamerican Development Bank, Strip, 12/16/00 ....................................... 220,000 200,166
International Bank for Reconstruction and Development, 2/15/00 ........................ 405,000 382,309
International Bank for Reconstruction and Development, 8/15/00 ........................ 945,000 868,856
International Bank for Reconstruction and Development, 2/15/01 ........................ 735,000 657,556
------------
TOTAL OTHER SECURITIES - "AAA" RATED (COST $1,985,654) ................................ 2,108,887
------------
TOTAL LONG TERM INVESTMENTS (COST $87,962,406) ........................................ 92,942,991
============
(f) REPURCHASE AGREEMENT .7%
Joint Repurchase Agreement, 4.681%, 1/04/99 (Maturity Value $645,610) (COST $645,274) . 645,274 645,274
Barclays Capital Inc. (Maturity Value $32,786)
Bear, Stearns & Co. Inc. (Maturity Value $8,500)
Chase Securities Inc. (Maturity Value $66,785)
CIBC Oppenheimer Corp. (Maturity Value $66,785)
Donaldson, Lufkin & Jenrette Securities Corp. (Maturity Value $66,785)
Dresdner Kleinwort Benson, North America LLC (Maturity Value $66,785)
Goldman, Sachs & Co. (Maturity Value $18,214)
Greenwich Capital Markets Inc. (Maturity Value $66,785)
Lehman Brothers Inc. (Maturity Value $12,144)
NationsBanc Montgomery Securities LLC (Maturity Value $66,785)
Paine Webber Inc. (Maturity Value $36,429)
Paribas Corp. (Maturity Value $66,785)
Warburg Dillon Read LLC (Maturity Value $70,042)
Collateralized by U. S. Treasury Bills & Notes
------------
TOTAL INVESTMENTS (COST $88,607,680) 100.0% ........................................... 93,588,265
OTHER ASSETS, LESS LIABILITIES ........................................................ (45,439)
------------
NET ASSETS 100.0% ..................................................................... $ 93,542,826
============
</TABLE>
(f) See Note 1(c) regarding joint repurchase agreements.
See notes to financial statements.
157
<PAGE>
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STATEMENT OF INVESTMENTS, DECEMBER 31, 1998
<TABLE>
<CAPTION>
PRINCIPAL
ZERO COUPON FUND - 2005 AMOUNT VALUE
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
U.S. GOVERNMENT & AGENCY SECURITIES 95.8%
FHLB, Strip, A-1, 8/25/02 .......................................... $ 1,000,000 $ 834,026
FHLB, Strip, A-1, 2/25/04 .......................................... 9,110,000 7,037,994
FHLB, Strip, A-1P, 2/25/04 ......................................... 800,000 618,046
FICO, Strip, 3/26/05 ............................................... 5,000,000 3,642,105
FICO, Strip, 10/06/05 .............................................. 11,400,000 8,092,598
FICO, Strip, 1, 5/11/05 ............................................ 3,500,000 2,532,030
FICO, Strip, 1, 11/11/05 ........................................... 829,000 586,295
FICO, Strip, 12, 12/06/05 .......................................... 11,055,000 7,785,749
FICO, Strip, 13, 12/27/05 .......................................... 2,755,000 1,933,037
FICO, Strip, 15, 9/07/05 ........................................... 2,620,000 1,865,760
FICO, Strip, 19, 12/06/05 .......................................... 10,000,000 7,042,740
FICO, Strip, D, 9/26/05 ............................................ 6,799,000 4,831,879
FICO, Strip, E, 11/02/05 ........................................... 3,509,000 2,484,025
FNMA, Strip, 8/01/04 ............................................... 450,000 342,069
FNMA, Strip, 2/12/06 ............................................... 250,000 174,448
FNMA, Strip, 2/12/08 ............................................... 120,000 74,752
FNMA, Strip, 1, 2/01/05 ............................................ 6,000,000 4,417,896
FNMA, Strip, 1, 2/12/05 ............................................ 1,000,000 734,877
FNMA, Strip, 1, 8/12/05 ............................................ 875,000 626,316
FNMA, Strip, 1, 2/01/06 ............................................ 4,307,000 3,011,205
FNMA, Strip, 1, 8/01/06 ............................................ 530,000 361,541
FNMA, Strip, 1, 2/01/08 ............................................ 1,730,000 1,080,717
REFCO, Strip, 1/15/06 .............................................. 6,500,000 4,620,896
REFCO, Strip, 4/15/06 .............................................. 3,000,000 2,104,731
Tennessee Valley Authority, Strip, 10/15/04 ........................ 6,200,000 4,641,822
Tennessee Valley Authority, Strip, 4/15/05 ......................... 2,260,000 1,640,746
Tennessee Valley Authority, Strip, 10/15/05 ........................ 1,000,000 709,108
U.S. Treasury, Strip, 2/15/06 ...................................... 9,950,000 7,100,270
-----------
TOTAL U.S. GOVERNMENT & AGENCY SECURITIES (COST $67,881,940) ....... 80,927,678
-----------
OTHER SECURITIES - "AAA" RATED 3.9%
Exxon Capital Corp., 11/15/04 ...................................... 1,500,000 1,111,674
International Bank for Reconstruction and Development, 2/15/07 ..... 459,000 290,422
International Bank for Reconstruction and Development, 8/15/07 ..... 2,500,000 1,539,763
International Bank for Reconstruction and Development, 2, 2/15/07 .. 541,000 342,305
-----------
TOTAL OTHER SECURITIES - "AAA" RATED (COST $2,939,551) ............. 3,284,164
-----------
TOTAL LONG TERM INVESTMENTS (COST $70,821,491) ..................... 84,211,842
-----------
</TABLE>
158
<PAGE>
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STATEMENT OF INVESTMENTS, DECEMBER 31, 1998 (CONT.)
<TABLE>
<CAPTION>
PRINCIPAL
ZERO COUPON FUND - 2005 AMOUNT VALUE
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
(f) REPURCHASE AGREEMENT .4%
Joint Repurchase Agreement, 4.681%, 1/04/99 (Maturity Value $382,848) (COST $382,649) .. $ 382,649 $ 382,649
Barclays Capital Inc. (Maturity Value $19,442)
Bear, Stearns & Co. Inc. (Maturity Value $5,040)
Chase Securities Inc. (Maturity Value $39,604)
CIBC Oppenheimer Corp. (Maturity Value $39,604)
Donaldson, Lufkin & Jenrette Securities Corp. (Maturity Value $39,604)
Dresdner Kleinwort Benson, North America LLC (Maturity Value $39,604)
Goldman, Sachs & Co. (Maturity Value $10,801)
Greenwich Capital Markets Inc. (Maturity Value $39,604)
Lehman Brothers Inc. (Maturity Value $7,201)
NationsBanc Montgomery Securities LLC (Maturity Value $39,604)
Paine Webber Inc. (Maturity Value $21,602)
Paribas Corp. (Maturity Value $39,604)
Warburg Dillon Read LLC (Maturity Value $41,534)
Collateralized by U.S. Treasury Bills & Notes
------------
TOTAL INVESTMENTS (COST $71,204,140) 100.1% ............................................ 84,594,491
OTHER ASSETS, LESS LIABILITIES (.1%) ................................................... (107,106)
------------
NET ASSETS 100.0% ...................................................................... $ 84,487,385
============
</TABLE>
(f) See Note 1(c) regarding joint repurchase agreements.
See notes to financial statements.
159
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STATEMENT OF INVESTMENTS, DECEMBER 31, 1998
<TABLE>
<CAPTION>
PRINCIPAL
ZERO COUPON FUND - 2010 AMOUNT VALUE
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
U.S. GOVERNMENT & AGENCY SECURITIES 94.6%
FICO, Strip, 3/26/10 ................................................. $ 860,000 $ 463,538
FICO, Strip, 1, 11/11/10 ............................................. 16,246,000 8,404,787
FICO, Strip, 3, 5/30/10 .............................................. 2,000,000 1,065,000
FICO, Strip, 4, 10/06/10 ............................................. 1,528,000 795,544
FICO, Strip, 8, 8/03/10 .............................................. 3,021,000 1,590,381
FICO, Strip, 11, 2/08/11 ............................................. 2,837,000 1,443,060
FICO, Strip, 12, 6/06/09 ............................................. 4,550,000 2,589,937
FICO, Strip, 12, 12/06/10 ............................................ 7,500,000 3,861,720
FICO, Strip, 19, 6/06/10 ............................................. 9,800,000 5,212,718
FICO, Strip, 19, 12/06/10 ............................................ 2,080,000 1,070,984
FICO, Strip, A, 8/08/10 .............................................. 7,000,000 3,681,874
FICO, Strip, D, 9/26/10 .............................................. 860,000 448,588
FICO, Strip, GEN, 10/06/10 ........................................... 4,040,000 2,103,402
FICO, Strip, GEN, 4/06/11 ............................................ 5,000,000 2,516,895
FNMA, Strip, 8/12/09 ................................................. 1,975,000 1,117,858
FNMA, Strip, 8/12/10 ................................................. 1,230,000 651,638
FNMA, Strip, 1, 2/01/10 .............................................. 5,000,000 2,742,750
FNMA, Strip, 1, 8/01/10 .............................................. 8,250,000 4,379,075
FNMA, Strip, 1, 2/01/11 .............................................. 4,450,000 2,285,262
FNMA, Strip, 1, 2/01/12 .............................................. 3,281,000 1,576,127
REFCO, Strip, 10/15/10 ............................................... 20,000,000 10,688,840
REFCO, Strip, 1/15/11 ................................................ 8,000,000 4,204,280
SLMA, 5/15/14 ........................................................ 8,650,000 2,918,510
Tennessee Valley Authority, Strip, 1/01/10 ........................... 412,000 215,001
Tennessee Valley Authority, Strip, 4/15/10 ........................... 12,000,000 6,449,028
Tennessee Valley Authority, Strip, 10/15/10 .......................... 1,320,000 686,314
Tennessee Valley Authority, Strip, 4/15/11 ........................... 9,525,000 4,785,255
Tennessee Valley Authority, Strip, 10/15/11 .......................... 7,295,000 3,543,780
U.S. Treasury, Strip, 11/15/10 ....................................... 12,800,000 6,930,112
-----------
TOTAL U.S. GOVERNMENT & AGENCY SECURITIES (COST $69,037,726) ......... 88,422,258
-----------
OTHER SECURITIES - "AAA" RATED 5.5%
International Bank for Reconstruction and Development, 2/15/11 ....... 1,392,000 668,276
International Bank for Reconstruction and Development, 2/15/12 ....... 2,800,000 1,250,612
International Bank for Reconstruction and Development, 2/15/13 ....... 3,287,000 1,365,837
International Bank for Reconstruction and Development, 8/15/13 ....... 4,100,000 1,646,797
International Bank for Reconstruction and Development, 2, 2/15/11 .... 500,000 240,041
-----------
TOTAL OTHER SECURITIES - "AAA" RATED (COST $4,272,695) ............... 5,171,563
-----------
TOTAL LONG TERM INVESTMENTS (COST $73,310,421) ....................... 93,593,821
-----------
</TABLE>
160
<PAGE>
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STATEMENT OF INVESTMENTS, DECEMBER 31, 1998 (CONT.)
<TABLE>
<CAPTION>
PRINCIPAL
ZERO COUPON FUND - 2010 AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
(f) REPURCHASE AGREEMENT
Joint Repurchase Agreement, 4.681%, 1/04/99 (Maturity Value $53,432) (COST $53,404) .. $ 53,404 $ 53,404
Barclays Capital Inc. (Maturity Value $2,713)
Bear, Stearns & Co. Inc. (Maturity Value $703)
Chase Securities Inc. (Maturity Value $5,527)
CIBC Oppenheimer Corp. (Maturity Value $5,527)
Donaldson, Lufkin & Jenrette Securities Corp. (Maturity Value $5,527)
Dresdner Kleinwort Benson, North America LLC (Maturity Value $5,527)
Goldman, Sachs & Co. (Maturity Value $1,507)
Greenwich Capital Markets Inc. (Maturity Value $5,527)
Lehman Brothers Inc. (Maturity Value $1,006)
NationsBanc Montgomery Securities LLC (Maturity Value $5,527)
Paine Webber Inc. (Maturity Value $3,016)
Paribas Corp. (Maturity Value $5,527)
Warburg Dillon Read LLC (Maturity Value $5,798)
Collateralized by U.S. Treasury Bills & Notes
------------
TOTAL INVESTMENTS (COST $73,363,825) 100.1% .......................................... 93,647,225
OTHER ASSETS, LESS LIABILITIES (.1%) ................................................. (132,090)
------------
NET ASSETS 100.0% .................................................................... $ 93,515,135
============
</TABLE>
(f) See Note 1(c) regarding joint repurchase agreements.
See notes to financial statements.
161
<PAGE>
FRANKLIN VALUEMARK FUNDS
STATEMENT OF INVESTMENTS, DECEMBER 31, 1998
CURRENCY ABBREVIATIONS
AUD - Australian Dollar
ARS - Argentinian Peso
BEF - Belgian Franc
CAD - Canadian Dollar
DEM - German Mark
DKK - Danish Krone
FRF - French Franc
GBP - British Pound
ITL - Italian Lira
JPY - Japanese Yen
NLG - Dutch Guilder
NZD - New Zealand Dollar
SEK - Swedish Krona
ZAR - South African Rand
See notes to financial statements.
162
<PAGE>
FRANKLIN VALUEMARK FUNDS
Financial Statements
STATEMENTS OF ASSETS AND LIABILITIES
DECEMBER 31, 1998
<TABLE>
<CAPTION>
GLOBAL
CAPITAL HEALTH CARE GLOBAL UTILITIES GROWTH AND HIGH
GROWTH FUND SECURITIES FUND SECURITIES FUND INCOME FUND INCOME FUND
----------- --------------- ---------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Assets:
Investments in securities:
Cost ...................................... $ 142,185,516 $ 6,550,381 $748,493,181 $1,015,815,938 $ 457,417,080
--------------------------------------------------------------------------------
Value ..................................... 187,095,726 7,426,374 946,201,152 1,260,729,291 425,050,056
Repurchase agreements, at value and cost ... 33,464,304 1,769,229 29,050,000 58,455,701 13,387,706
Cash ....................................... -- 24,221 1,128 -- --
Receivables:
Investment securities sold ................ -- -- 17,328,213 1,034,588 --
Capital shares sold ....................... 539,496 -- 23,688 60,036 2,058
Dividends and interest .................... 128,922 235 1,403,733 3,784,327 8,844,805
--------------------------------------------------------------------------------
Total assets .......................... 221,228,448 9,220,059 994,007,914 1,324,063,943 447,284,625
--------------------------------------------------------------------------------
Liabilities:
Payables:
Investment securities purchased ........... -- 222,739 5,063,024 3,781,601 --
Capital shares redeemed ................... 135,121 -- 1,733,597 960,778 456,857
Affiliates ................................ 134,817 5,107 393,731 524,357 194,902
Other liabilities .......................... 6,872 1,888 62,366 53,934 24,361
--------------------------------------------------------------------------------
Total liabilities ..................... 276,810 229,734 7,252,718 5,320,670 676,120
--------------------------------------------------------------------------------
Net assets, at value ................. $ 220,951,638 $ 8,990,325 $986,755,196 $1,318,743,273 $ 446,608,505
--------------------------------------------------------------------------------
Net assets consist of:
Undistributed net investment income ........ $ 1,509,991 $ 25,087 $ 32,999,590 $ 43,273,575 $ 48,138,649
Net unrealized appreciation (depreciation) . 44,910,210 875,993 197,707,971 244,907,533 (32,367,488)
Accumulated net realized gain (loss) ....... (3,520,262) (261,450) 79,916,030 119,084,055 12,077,601
Capital shares ............................. 178,051,699 8,350,695 676,131,605 911,478,110 418,759,743
--------------------------------------------------------------------------------
Net assets, at value ................. $ 220,951,638 $ 8,990,325 $986,755,196 $1,318,743,273 $ 446,608,505
--------------------------------------------------------------------------------
Shares outstanding .......................... 13,740,476 839,490 48,260,709 64,782,428 33,620,945
--------------------------------------------------------------------------------
Net asset value and offering price per share
(net asset value divided by shares
outstanding) ............................... $ 16.08 $ 10.71 $ 20.45 $ 20.36 $ 13.28
--------------------------------------------------------------------------------
</TABLE>
See notes to financial statements.
163
<PAGE>
FRANKLIN VALUEMARK FUNDS
Financial Statements (continued)
STATEMENTS OF ASSETS AND LIABILITIES (CONT.)
DECEMBER 31, 1998
<TABLE>
<CAPTION>
MUTUAL MUTUAL NATURAL
INCOME MONEY DISCOVERY SHARES RESOURCES
SECURITIES MARKET SECURITIES SECURITIES SECURITIES
FUND FUND FUND FUND FUND
----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Assets:
Investments in securities:
Cost .............................................. $1,081,875,650 $393,230,633 $ 213,660,535 $ 461,651,206 $ 52,749,663
----------------------------------------------------------------------------
Value ............................................. 1,154,588,474 393,230,633 215,213,658 480,791,143 42,557,132
Repurchase agreements, at value and cost ........... 9,198,596 19,910,000 2,300,000 -- 3,489,276
Cash ............................................... 3,298,193 323 11,594,947 5,893,637 14,658
Receivables:
Investment securities sold ........................ 4,325,719 -- 3,129,620 5,369,292 --
Capital shares sold ............................... -- 715,833 9,758 256,702 --
Dividends and interest ............................ 15,023,429 1,825,107 547,562 1,277,197 55,020
Unrealized gain on forward exchange contracts
(Note 6) ........................................... -- -- 846,014 758,135 --
Deposits with brokers for securities sold short .... -- -- 3,687,114 10,517,653 --
----------------------------------------------------------------------------
Total assets .................................. 1,186,434,411 415,681,896 237,328,673 504,863,759 46,116,086
----------------------------------------------------------------------------
Liabilities:
Payables:
Investment securities purchased ................... 35,056 -- 687,510 2,925,780 159,484
Capital shares redeemed ........................... -- 1,146,955 612,719 292,482 --
Affiliates ........................................ 478,706 179,699 178,262 298,913 23,882
Securities sold short, at value (proceeds $7,799,126
and $15,319,353) ................................... -- -- 9,311,593 17,992,108 --
Options written, at value (premiums received
$1,346 and $1,795) ................................. -- -- 113 150 --
Unrealized loss on forward exchange contracts
(Note 6) ........................................... -- -- 1,849,063 804,597 --
Other liabilities .................................. 80,762 14,484 33,236 106,042 5,674
----------------------------------------------------------------------------
Total liabilities ............................. 594,524 1,341,138 12,672,496 22,420,072 189,040
----------------------------------------------------------------------------
Net assets, at value ......................... $1,185,839,887 $414,340,758 $ 224,656,177 $ 482,443,687 $ 45,927,046
----------------------------------------------------------------------------
Net assets consist of:
Undistributed net investment income ................ $ 82,921,968 $ -- $ 4,105,301 $ 11,568,707 $ 727,057
Net unrealized appreciation (depreciation) ......... 72,712,190 -- (961,160) 16,640,674 (10,192,531)
Accumulated net realized gain (loss) ............... 28,754,109 -- (11,697,678) (9,697,437) (23,406,478)
Capital shares ..................................... 1,001,451,620 414,340,758 233,209,714 463,931,743 78,798,998
----------------------------------------------------------------------------
Net assets, at value ......................... $1,185,839,887 $414,340,758 $ 224,656,177 $ 482,443,687 $ 45,927,046
----------------------------------------------------------------------------
Shares outstanding .................................. 70,073,792 414,340,758 19,904,649 40,335,247 5,476,199
----------------------------------------------------------------------------
Net asset value and offering price per share
(net asset value divided by shares
outstanding) ....................................... $ 16.92 $ 1.00 $ 11.29 $ 11.96 $ 8.39
----------------------------------------------------------------------------
</TABLE>
See notes to financial statements.
164
<PAGE>
FRANKLIN VALUEMARK FUNDS
Financial Statements (continued)
STATEMENTS OF ASSETS AND LIABILITIES (CONT.)
DECEMBER 31, 1998
<TABLE>
<CAPTION>
REAL TEMPLETON TEMPLETON
ESTATE RISING DEVELOPING GLOBAL ASSET
SECURITIES DIVIDENDS SMALL CAP MARKETS ALLOCATION
FUND FUND FUND EQUITY FUND FUND
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Assets:
Investments in securities:
Cost ............................................ $ 257,934,343* $ 562,238,731+ $ 278,870,540 $ 228,078,693 $ 77,076,589
-----------------------------------------------------------------------------
Value ........................................... 274,003,947* 734,636,200+ 295,130,887 161,884,954 75,890,946
Repurchase agreements, at value and cost ......... 5,101,060 18,542,602 28,535,341 -- 5,211,000
Cash ............................................. 166,718 -- -- -- 9,233
Receivables:
Investment securities sold ...................... 228,992 261,806 142,902 73,880 --
Capital shares sold ............................. 22,557 273,634 34,933 -- --
Dividends and interest .......................... 3,147,834 1,178,912 429,691 1,135,358 697,076
Unrealized gain on forward exchange contracts
(Note 6) ......................................... -- -- -- -- 1,481
-----------------------------------------------------------------------------
Total assets ................................ 282,671,108 754,893,154 324,273,754 163,094,192 81,809,736
-----------------------------------------------------------------------------
Liabilities:
Payables:
Investment securities purchased ................. -- 1,917,039 -- -- --
Capital shares redeemed ......................... 237,504 643,226 292,126 197,597 19,390
Affiliates ...................................... 129,748 439,909 186,568 172,434 55,242
Funds advanced by custodian ...................... -- -- -- 213,410 --
Payable upon return of securities loaned (Note 10) -- -- 8,322,542 -- --
Unrealized loss on forward exchange contracts
(Note 6) ......................................... -- -- -- -- 2,317
Other liabilities ................................ 13,449 23,984 12,660 77,464 63,169
-----------------------------------------------------------------------------
Total liabilities ........................... 380,701 3,024,158 8,813,896 660,905 140,118
-----------------------------------------------------------------------------
Net assets, at value ....................... $ 282,290,407 $ 751,868,996 $ 315,459,858 $ 162,433,287 $ 81,669,618
-----------------------------------------------------------------------------
Net assets consist of:
Undistributed net investment income .............. $ 18,909,704 $ 9,359,456 $ 1,532,535 $ 3,107,117 $ 2,772,913
Net unrealized appreciation (depreciation) ....... 16,069,604 172,397,469 16,260,347 (66,193,739) (1,180,331)
Accumulated net realized gain (loss) ............. 24,496,142 93,364,473 (334,864) (36,634,757) 3,482,850
Capital shares ................................... 222,814,957 476,747,598 298,001,840 262,154,666 76,594,186
-----------------------------------------------------------------------------
Net assets, at value ....................... $ 282,290,407 $ 751,868,996 $ 315,459,858 $ 162,433,287 $ 81,669,618
-----------------------------------------------------------------------------
Shares outstanding ................................ 14,164,554 41,526,463 22,999,329 23,505,375 6,446,500
-----------------------------------------------------------------------------
Net asset value and offering price per share
(net asset value divided by shares
outstanding) ..................................... $ 19.93 $ 18.11 $ 13.72 $ 6.91 $ 12.67
-----------------------------------------------------------------------------
</TABLE>
* Includes non-controlled affiliated issuer in the amount of $6,286,337 and
$3,412,500 for cost and value, respectively.
+ Includes non-controlled affiliated issuer in the amount of $22,139,964 and
$27,989,706 for cost and value, respectively.
See notes to financial statements.
165
<PAGE>
FRANKLIN VALUEMARK FUNDS
Financial Statements (continued)
STATEMENTS OF ASSETS AND LIABILITIES (CONT.)
DECEMBER 31, 1998
<TABLE>
<CAPTION>
TEMPLETON
TEMPLETON TEMPLETON TEMPLETON INTERNATIONAL TEMPLETON
GLOBAL GLOBAL INCOME INTERNATIONAL SMALLER PACIFIC
GROWTH FUND SECURITIES FUND EQUITY FUND COMPANIES FUND GROWTH FUND
----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Assets:
Investments in securities:
Cost ....................................... $ 655,019,443 $ 141,515,105 $ 687,390,373 $ 27,037,946 $ 173,769,693
----------------------------------------------------------------------------
Value ...................................... 700,579,123 144,317,858 849,885,524 23,513,325 100,069,876
Repurchase agreements, at value and cost .... 42,669,000 3,960,000 109,252,000 1,468,000 --
Cash ........................................ 9,339 1,874 -- 7,190 --
Receivables:
Investment securities sold ................. 3,758,570 -- 480,000 -- 607,835
Capital shares sold ........................ -- 913 -- -- --
Dividends and interest ..................... 1,686,886 2,906,410 2,753,257 71,891 675,679
Unrealized gain on forward exchange contracts
(Note 6) .................................... -- 10,712 -- -- --
----------------------------------------------------------------------------
Total assets ........................... 748,702,918 151,197,767 962,370,781 25,060,406 101,353,390
----------------------------------------------------------------------------
Liabilities:
Payables:
Investment securities purchased ............ 417,525 -- 3,696,126 6,555 --
Capital shares redeemed .................... 585,215 122,674 1,753,180 26,991 85,873
Affiliates ................................. 519,850 72,212 658,812 21,402 102,410
Funds advanced by custodian ................. -- -- 55,867 -- 2,323,184
Unrealized loss on forward exchange contracts
(Note 6) .................................... -- 18,845 -- -- --
Other liabilities ........................... 99,974 43,299 306,694 6,014 72,538
----------------------------------------------------------------------------
Total liabilities ...................... 1,622,564 257,030 6,470,679 60,962 2,584,005
----------------------------------------------------------------------------
Net assets, at value .................. $ 747,080,354 $ 150,940,737 $ 955,900,102 $ 24,999,444 $ 98,769,385
----------------------------------------------------------------------------
Net assets consist of:
Undistributed net investment income ......... $ 14,679,029 $ 4,943,426 $ 30,263,329 $ 620,960 $ --
Net unrealized appreciation (depreciation) .. 45,559,680 2,852,819 162,495,151 (3,524,621) (73,618,565)
Accumulated net realized gain (loss) ........ 75,861,313 (3,498,798) 24,069,715 (2,543,970) (24,677,894)
Capital shares .............................. 610,980,332 146,643,290 739,071,907 30,447,075 197,065,844
----------------------------------------------------------------------------
Net assets, at value .................. $ 747,080,354 $ 150,940,737 $ 955,900,102 $ 24,999,444 $ 98,769,385
----------------------------------------------------------------------------
Shares outstanding ........................... 50,584,398 11,725,182 61,584,184 2,718,508 13,152,815
----------------------------------------------------------------------------
Net asset value and offering price per share
(net asset value divided by shares
outstanding) ................................ $ 14.77 $ 12.87 $ 15.52 $ 9.20 $ 7.51
----------------------------------------------------------------------------
</TABLE>
See notes to financial statements.
166
<PAGE>
FRANKLIN VALUEMARK FUNDS
Financial Statements (continued)
STATEMENTS OF ASSETS AND LIABILITIES (CONT.)
DECEMBER 31, 1998
<TABLE>
<CAPTION>
U.S. VALUE
GOVERNMENT SECURITIES ZERO COUPON ZERO COUPON ZERO COUPON
SECURITIES FUND FUND FUND - 2000 FUND - 2005 FUND - 2010
----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Assets:
Investments in securities:
Cost ..................................... $ 674,193,318 $ 8,367,867 $ 87,962,406 $ 70,821,491 $ 73,310,421
----------------------------------------------------------------------------
Value .................................... 703,382,469 7,965,479 92,942,991 84,211,842 93,593,821
Repurchase agreements, at value and cost .. 15,360,671 1,251,926 645,274 382,649 53,404
Receivables:
Investment securities sold ............... -- 22,247 -- -- --
Capital shares sold ...................... -- 133,540 -- 14,850 43,524
Dividends and interest ................... 5,488,362 5,341 -- -- --
----------------------------------------------------------------------------
Total assets ......................... 724,231,502 9,378,533 93,588,265 84,609,341 93,690,749
----------------------------------------------------------------------------
Liabilities:
Payables:
Investment securities purchased .......... 12,745,746 358,183 -- -- --
Capital shares redeemed .................. 328,206 -- 2,404 92,839 56,949
Affiliates ............................... 295,171 4,994 34,865 21,567 110,539
Other liabilities ......................... 30,456 1,885 8,170 7,550 8,126
----------------------------------------------------------------------------
Total liabilities .................... 13,399,579 365,062 45,439 121,956 175,614
----------------------------------------------------------------------------
Net assets, at value ................ $ 710,831,923 $ 9,013,471 $ 93,542,826 $ 84,487,385 $ 93,515,135
----------------------------------------------------------------------------
Net assets consist of:
Undistributed net investment income ....... $ 45,248,069 $ 28,176 $ 6,716,921 $ 4,635,667 $ 4,906,277
Net unrealized appreciation (depreciation) 29,189,151 (402,388) 4,980,585 13,390,351 20,283,400
Accumulated net realized gain (loss) ...... (12,922,414) (90,040) 1,751,873 453,275 2,226,393
Capital shares ............................ 649,317,117 9,477,723 80,093,447 66,008,092 66,099,065
----------------------------------------------------------------------------
Net assets, at value ................ $ 710,831,923 $ 9,013,471 $ 93,542,826 $ 84,487,385 $ 93,515,135
----------------------------------------------------------------------------
Shares outstanding ......................... 51,193,736 1,156,792 6,315,319 4,761,895 4,908,874
----------------------------------------------------------------------------
Net asset value and offering price per share
(net asset value / shares outstanding) .... $ 13.89 $ 7.79 $ 14.81 $ 17.74 $ 19.05
----------------------------------------------------------------------------
</TABLE>
See notes to financial statements.
167
<PAGE>
FRANKLIN VALUEMARK FUNDS
Financial Statements (continued)
STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
GLOBAL
HEALTH GLOBAL
CARE UTILITIES
CAPITAL SECURITIES SECURITIES GROWTH AND HIGH
GROWTH FUND FUND* FUND INCOME FUND INCOME FUND
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Investment income:+
Dividends ..................................... $ 1,068,089 $ 5,185 $ 37,119,920 $ 46,208,572 $ 244,920
Interest ...................................... 1,612,127 45,137 1,161,718 4,365,468 50,773,641
-----------------------------------------------------------------------------
Total investment income .................. 2,680,216 50,322 38,281,638 50,574,040 51,018,561
-----------------------------------------------------------------------------
Expenses:
Management fees (Note 3) ...................... 1,140,016 18,119 4,965,295 6,301,582 2,439,509
Administrative fees (Note 3) .................. -- 4,471 -- -- --
Custodian fees ................................ 1,615 22 99,063 47,225 8,924
Reports to shareholders ....................... 15,378 498 108,980 139,864 50,903
Professional fees ............................. 6,705 1,712 36,523 53,497 17,850
Trustees' fees and expenses ................... 1,008 21 7,236 9,160 3,354
Other ......................................... 961 392 24,903 12,909 34,077
-----------------------------------------------------------------------------
Total expenses ........................... 1,165,683 25,235 5,242,000 6,564,237 2,554,617
-----------------------------------------------------------------------------
Net investment income ................... 1,514,533 25,087 33,039,638 44,009,803 48,463,944
-----------------------------------------------------------------------------
Realized and unrealized gains (losses):
Net realized gain (loss) from:
Investments .................................. (3,325,719) (261,450) 79,996,534 119,205,524 12,088,286
Foreign currency transactions ................ -- -- 11,911 (50,228) (224,547)
-----------------------------------------------------------------------------
Net realized gain (loss) ................. (3,325,719) (261,450) 80,008,445 119,155,296 11,863,739
Net unrealized appreciation (depreciation) on:
Investments .................................. 31,691,954 875,993 (5,717,447) (59,408,790) (53,339,220)
Translation of assets and liabilities
denominated in foreign currencies ........... -- -- 2,364 3,934 13,234
-----------------------------------------------------------------------------
Net unrealized appreciation (depreciation) 31,691,954 875,993 (5,715,083) (59,404,856) (53,325,986)
-----------------------------------------------------------------------------
Net realized and unrealized gain (loss) ........ 28,366,235 614,543 74,293,362 59,750,440 (41,462,247)
-----------------------------------------------------------------------------
Net increase in net assets resulting
from operations ............................... $ 29,880,768 $ 639,630 $ 107,333,000 $ 103,760,243 $ 7,001,697
-----------------------------------------------------------------------------
</TABLE>
* For the period May 1, 1998 (effective date) to December 31, 1998.
+ Net of foreign taxes of $13,205, $57, $425,340 and $351,522 for the Capital
Growth Fund, the Global Health Care Securities Fund, the Global Utilities
Securities Fund, and the Growth and Income Fund, respectively.
See notes to financial statements.
168
<PAGE>
FRANKLIN VALUEMARK FUNDS
Financial Statements (continued)
STATEMENTS OF OPERATIONS (CONT.)
FOR THE YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
MUTUAL MUTUAL NATURAL
INCOME DISCOVERY SHARES RESOURCES
SECURITIES MONEY SECURITIES SECURITIES SECURITIES
FUND MARKET FUND FUND FUND FUND
------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Investment income:+
Dividends ..................................... $ 31,421,627 $ -- $ 4,294,930 $ 8,857,531 $ 805,210
Interest ...................................... 65,763,832 21,340,606 2,702,240 7,107,398 346,769
------------------------------------------------------------------------
Total investment income .................. 97,185,459 21,340,606 6,997,170 15,964,929 1,151,979
------------------------------------------------------------------------
Expenses:
Management fees (Note 3) ...................... 6,133,729 1,986,485 1,904,631 2,841,641 388,527
Administrative fees (Note 3) .................. -- -- 351,377 669,378 --
Custodian fees ................................ 96,395 3,786 91,000 51,300 1,725
Reports to shareholders ....................... 136,588 40,329 22,600 36,000 4,916
Professional fees ............................. 53,391 13,749 3,100 12,900 2,736
Trustees' fees and expenses ................... 8,537 2,687 1,200 2,400 436
Other ......................................... 35,233 4,865 3,058 13,311 2,477
------------------------------------------------------------------------
Total expenses ........................... 6,463,873 2,051,901 2,376,966 3,626,930 400,817
Expenses waived/paid by affiliate (Note 3) -- (315,182) -- -- --
------------------------------------------------------------------------
Net expenses ............................ 6,463,873 1,736,719 2,376,966 3,626,930 400,817
------------------------------------------------------------------------
Net investment income .................. 90,721,586 19,603,887 4,620,204 12,337,999 751,162
------------------------------------------------------------------------
Realized and unrealized gains (losses):
Net realized gain (loss) from:
Investments .................................. 28,796,475 (371) (10,611,221) (9,941,502) (16,971,708)
Foreign currency transactions ................ (7,046,358) -- (715,707) 438,970 (17,206)
------------------------------------------------------------------------
Net realized gain (loss) ................. 21,750,117 (371) (11,326,928) (9,502,532) (16,988,914)
Net unrealized appreciation (depreciation) on:
Investments .................................. (93,215,595) -- (10,438,388) (8,452,402) (1,662,180)
Translation of assets and liabilities
denominated in foreign currencies ........... 11,645 -- (2,128,595) (514,841) 3
------------------------------------------------------------------------
Net unrealized depreciation .............. (93,203,950) -- (12,566,983) (8,967,243) (1,662,177)
------------------------------------------------------------------------
Net realized and unrealized loss ............... (71,453,833) (371) (23,893,911) (18,469,775) (18,651,091)
------------------------------------------------------------------------
Net increase (decrease) in net assets
resulting from operations ..................... $ 19,267,753 $ 19,603,516 $(19,273,707) $ (6,131,776) $(17,899,929)
------------------------------------------------------------------------
</TABLE>
+ Net of foreign taxes of $52,282, $513,671, $342,801, and $35,332 for the
Income Securities Fund, the Mutual Discovery Securities Fund, the Mutual Shares
Securities Fund, and the Natural Resources Securities Fund, respectively.
See notes to financial statements.
169
<PAGE>
FRANKLIN VALUEMARK FUNDS
Financial Statements (continued)
STATEMENTS OF OPERATIONS (CONT.)
FOR THE YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
TEMPLETON TEMPLETON
REAL ESTATE DEVELOPING GLOBAL ASSET
SECURITIES RISING SMALL CAP MARKETS ALLOCATION
FUND DIVIDENDS FUND FUND EQUITY FUND FUND
------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Investment income:+
Dividends ............................ $ 21,149,114 $ 14,098,193* $ 2,319,218 $ 6,153,898 $ 2,000,965
Interest ............................. 911,621 907,840 1,708,834 1,121,539 2,647,941
------------------------------------------------------------------------------
Total investment income ......... 22,060,735 15,006,033 4,028,052 7,275,437 4,648,906
------------------------------------------------------------------------------
Expenses:
Management fees (Note 3) ............. 1,911,113 5,508,829 2,365,309 2,633,409 585,747
Administrative fees (Note 3) ......... -- -- -- -- 135,172
Custodian fees ....................... 3,730 7,834 4,422 268,600 22,000
Reports to shareholders .............. 40,125 82,436 34,998 30,500 10,200
Professional fees .................... 14,409 28,662 13,196 30,100 4,200
Trustees' fees and expenses .......... 2,538 5,309 2,123 1,100 700
Other ................................ 4,389 8,313 4,592 5,617 654
------------------------------------------------------------------------------
Total expenses .................. 1,976,304 5,641,383 2,424,640 2,969,326 758,673
------------------------------------------------------------------------------
Net investment income .......... 20,084,431 9,364,650 1,603,412 4,306,111 3,890,233
------------------------------------------------------------------------------
Realized and unrealized gains (losses):
Net realized gain (loss) from:
Investments ......................... 24,686,332 93,670,542 (193,079) (27,190,328) 3,090,420
Foreign currency transactions ....... -- -- (36,347) (499,650) (372,191)
------------------------------------------------------------------------------
Net realized gain (loss) ........ 24,686,332 93,670,542 (229,426) (27,689,978) 2,718,229
Net unrealized (depreciation) on:
Investments .......................... (114,230,527) (58,097,205) (8,381,265) (32,987,790) (7,245,483)
Translation of assets and liabilities
denominated in foreign currencies ... -- -- -- -- (100,044)
------------------------------------------------------------------------------
Net unrealized depreciation ..... (114,230,527) (58,097,205) (8,381,265) (32,987,790) (7,345,527)
------------------------------------------------------------------------------
Net realized and unrealized gain loss . (89,544,195) 35,573,337 (8,610,691) (60,677,768) (4,627,298)
------------------------------------------------------------------------------
Net increase (decrease) in net assets
resulting from operations ............ $ (69,459,764) $ 44,937,987 $ (7,007,279) $ (56,371,657) $ (737,065)
------------------------------------------------------------------------------
</TABLE>
* Includes non-controlled affiliated issuer in the amount of $255,193.
+ Net of foreign taxes of $38,811, $445,131, $32,708 and $183,011 for the Rising
Dividends Fund, the Small Cap Fund, the Templeton Developing Markets Equity
Fund, and the Templeton Global Asset Allocation Fund, respectively.
See notes to financial statements.
170
<PAGE>
FRANKLIN VALUEMARK FUNDS
Financial Statements (continued)
STATEMENTS OF OPERATIONS (CONT.)
FOR THE YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
TEMPLETON
GLOBAL TEMPLETON
TEMPLETON INCOME TEMPLETON INTERNATIONAL TEMPLETON
GLOBAL SECURITIES INTERNATIONAL SMALLER PACIFIC
GROWTH FUND FUND EQUITY FUND COMPANIES FUND GROWTH FUND
---------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Investment income:+
Dividends ..................................... $ 19,581,841 $ 243 $ 31,699,971 $ 933,588 $ 4,230,810
Interest ...................................... 4,859,793 12,503,384 10,196,096 95,262 52,701
---------------------------------------------------------------------------
Total investment income .................. 24,441,634 12,503,627 41,896,067 1,028,850 4,283,511
---------------------------------------------------------------------------
Expenses:
Management fees (Note 3) ...................... 6,409,332 959,858 8,900,761 259,908 1,142,027
Administrative fees (Note 3) .................. -- -- -- 45,867 --
Custodian fees ................................ 269,500 57,636 634,000 27,731 87,500
Reports to shareholders ....................... 104,500 24,000 159,300 2,250 26,000
Professional fees ............................. 29,900 8,900 49,800 1,900 8,000
Trustees' fees and expenses ................... 4,600 1,400 7,300 50 850
Other ......................................... 3,682 2,961 25,789 58 7,214
---------------------------------------------------------------------------
Total expenses ........................... 6,821,514 1,054,755 9,776,950 337,764 1,271,591
---------------------------------------------------------------------------
Net investment income ................... 17,620,120 11,448,872 32,119,117 691,086 3,011,920
---------------------------------------------------------------------------
Realized and unrealized gains (losses):
Net realized gain (loss) from:
Investments .................................. 75,957,066 (3,425,137) 24,331,207 (2,302,755) (24,293,928)
Foreign currency transactions ................ 196,827 (2,195,341) (325,036) (31,341) 144,285
---------------------------------------------------------------------------
Net realized gain (loss) ................. 76,153,893 (5,620,478) 24,006,171 (2,334,096) (24,149,643)
Net unrealized appreciation (depreciation) on:
Investments .................................. (33,429,013) 6,156,507 3,813,638 (2,246,892) (1,884,835)
Translation of assets and liabilities
denominated in foreign currencies ........... -- (736,758) -- 22,578 81,252
---------------------------------------------------------------------------
Net unrealized appreciation (depreciation) (33,429,013) 5,419,749 3,813,638 (2,224,314) (1,803,583)
---------------------------------------------------------------------------
Net realized and unrealized gain (loss) ........ 42,724,880 (200,729) 27,819,809 (4,558,410) (25,953,226)
---------------------------------------------------------------------------
Net increase (decrease) in net assets
resulting from operations ..................... $ 60,345,000 $ 11,248,143 $ 59,938,926 $ (3,867,324) $(22,941,306)
---------------------------------------------------------------------------
</TABLE>
+ Net of foreign taxes of $1,986,307, $3,957,832, $117,899 and $355,098 for the
Templeton Global Growth Fund, Templeton International Equity Fund, the Templeton
International Smaller Companies Fund and the Templeton Pacific Growth Fund,
respectively.
See notes to financial statements.
171
<PAGE>
FRANKLIN VALUEMARK FUNDS
Financial Statements (continued)
STATEMENTS OF OPERATIONS (CONT.)
FOR THE YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
U.S.
GOVERNMENT VALUE
SECURITIES SECURITIES ZERO COUPON ZERO COUPON ZERO COUPON
FUND FUND* FUND - 2000 FUND - 2005 FUND - 2010
-----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Investment income:
Dividends ..................................... $ -- $ 26,282 $ -- $ -- $ --
Interest ...................................... 49,026,676 26,594 7,174,486 4,958,805 5,265,740
-----------------------------------------------------------------------
Total investment income .................. 49,026,676 52,876 7,174,486 4,958,805 5,265,740
-----------------------------------------------------------------------
Expenses:
Management fees (Note 3) ...................... 3,530,641 17,968 639,490 498,204 552,900
Administrative fees (Note 3) .................. -- 4,433 -- -- --
Custodian fees ................................ 7,184 33 1,062 1,223 886
Reports to shareholders ....................... 74,069 450 10,627 8,756 9,681
Professional fees ............................. 25,721 1,619 4,986 4,295 4,526
Trustees' fees and expenses ................... 5,051 20 706 551 610
Other ......................................... 34,751 177 11,858 10,626 11,935
-----------------------------------------------------------------------
Total expenses ........................... 3,677,417 24,700 668,729 523,655 580,538
Expenses waived/paid by affiliate (Note 3) -- -- (261,500) (205,730) (226,405)
-----------------------------------------------------------------------
Net expenses ............................ 3,677,417 24,700 407,229 317,925 354,133
-----------------------------------------------------------------------
Net investment income .................. 45,349,259 28,176 6,767,257 4,640,880 4,911,607
-----------------------------------------------------------------------
Realized and unrealized gains (losses):
Net realized gain (loss) from investments ..... 2,808,941 (90,040) 1,752,805 454,474 2,320,295
Net unrealized appreciation (depreciation) on
investments ................................... 3,506,133 (402,388) (1,138,823) 4,293,862 4,482,254
-----------------------------------------------------------------------
Net realized and unrealized gain (loss) ........ 6,315,074 (492,428) 613,982 4,748,336 6,802,549
-----------------------------------------------------------------------
Net increase (decrease) in net assets
resulting from operations ..................... $ 51,664,333 $ (464,252) $ 7,381,239 $ 9,389,216 $ 11,714,156
-----------------------------------------------------------------------
</TABLE>
* For the period May 1, 1998 (effective date) to December 31, 1998.
See notes to financial statements.
172
<PAGE>
FRANKLIN VALUEMARK FUNDS
Financial Statements (continued)
STATEMENTS OF CHANGES IN NET ASSETS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
GLOBAL
HEALTH CARE
SECURITIES
CAPITAL GROWTH FUND FUND GLOBAL UTILITIES SECURITIES FUND
-------------------------------------------------------------------------------
1998 1997 1998* 1998 1997
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Increase (decrease) in net assets:
Operations:
Net investment income ................... $ 1,514,533 $ 538,149 $ 25,087 $ 33,039,638 $ 42,454,900
Net realized gain (loss) from
investments and foreign
currency transactions .................. (3,325,719) (58,087) (261,450) 80,008,445 61,850,100
Net unrealized appreciation
(depreciation) on investments
and translation of assets and
liabilities denominated in
foreign currencies ..................... 31,691,954 11,235,806 875,993 (5,715,083) 150,455,147
-------------------------------------------------------------------------------
Net increase in net assets
resulting from operations .......... 29,880,768 11,715,868 639,630 107,333,000 254,760,147
Distributions to shareholders from:
Net investment income ................... (539,187) (109,761) -- (42,481,848) (54,348,880)
Net realized gains ...................... -- -- -- (61,944,426) (75,198,357)
-------------------------------------------------------------------------------
Total distributions to shareholders ...... (539,187) (109,761) -- (104,426,274) (129,547,237)
Capital share transactions (Note 2) ...... 82,255,070 53,082,169 8,350,695 (146,055,631) (197,599,129)
-------------------------------------------------------------------------------
Net increase (decrease) in net assets 111,596,651 64,688,276 8,990,325 (143,148,905) (72,386,219)
Net assets:
Beginning of year ........................ 109,354,987 44,666,711 -- 1,129,904,101 1,202,290,320
-------------------------------------------------------------------------------
End of year .............................. $ 220,951,638 $ 109,354,987 $ 8,990,325 $ 986,755,196 $ 1,129,904,101
-------------------------------------------------------------------------------
Undistributed net investment income
included in net assets:
End of year ............................. $ 1,509,991 $ 534,645 $ 25,087 $ 32,999,590 $ 42,429,889
-------------------------------------------------------------------------------
</TABLE>
* For the period May 1, 1998 (effective date) to December 31, 1998.
See notes to financial statements.
173
<PAGE>
FRANKLIN VALUEMARK FUNDS
Financial Statements (continued)
STATEMENTS OF CHANGES IN NET ASSETS (CONT.)
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
GROWTH AND INCOME FUND HIGH INCOME FUND INCOME SECURITIES FUND
-----------------------------------------------------------------------------------------------
1998 1997 1998 1997 1998 1997
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Increase (decrease) in net
assets:
Operations:
Net investment income $ 44,009,803 $ 42,540,625 $ 48,463,944 $ 44,024,339 $ 90,721,586 $ 102,082,393
Net realized gain from
investments
and foreign currency
transactions 119,155,296 102,492,523 11,863,739 2,599,594 21,750,117 24,171,050
Net unrealized appreciation
(depreciation) on investments
and translation of assets and
liabilities denominated in
foreign currencies (59,404,856) 149,143,638 (53,325,986) 2,724,359 (93,203,950) 88,386,427
-----------------------------------------------------------------------------------------------
Net increase in net
assets resulting from
operations 103,760,243 294,176,786 7,001,697 49,348,292 19,267,753 214,639,870
Distributions to shareholders
from:
Net investment income (43,569,458) (39,059,424) (44,113,847) (37,006,747) (102,762,930) (99,613,761)
Net realized gains (102,500,145) (37,881,070) (2,617,950) (1,213,933) (24,268,308) (21,398,124)
-----------------------------------------------------------------------------------------------
Total distributions to
shareholders (146,069,603) (76,940,494) (46,731,797) (38,220,680) (127,031,238) (121,011,885)
Capital share transactions
(Note 2) 22,576,507 43,250,826 (9,697,227) 38,812,695 (113,183,247) (37,500,786)
-----------------------------------------------------------------------------------------------
Net increase (decrease) in
net assets (19,732,853) 260,487,118 (49,427,327) 49,940,307 (220,946,732) 56,127,199
Net assets:
Beginning of year 1,338,476,126 1,077,989,008 496,035,832 446,095,525 1,406,786,619 1,350,659,420
-----------------------------------------------------------------------------------------------
End of year $1,318,743,273 $1,338,476,126 $446,608,505 $496,035,832 $1,185,839,887 $1,406,786,619
-----------------------------------------------------------------------------------------------
Undistributed net investment
income included in net assets:
End of year $ 43,273,575 $ 42,883,458 $ 48,138,649 $ 44,013,099 $ 82,921,968 $ 102,009,670
-----------------------------------------------------------------------------------------------
</TABLE>
See notes to financial statements.
174
<PAGE>
FRANKLIN VALUEMARK FUNDS
Financial Statements (continued)
STATEMENTS OF CHANGES IN NET ASSETS (CONT.)
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
MUTUAL DISCOVERY MUTUAL SHARES
MONEY MARKET FUND SECURITIES FUND SECURITIES FUND
---------------------------------------------------------------------------------------------
1998 1997 1998 1997 1998 1997
---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Increase (decrease) in net assets:
Operations:
Net investment income ............ $ 19,603,887 $ 20,721,147 $ 4,620,204 $ 2,280,806 $ 12,337,999 $ 4,433,846
Net realized gain (loss) from
investments and foreign
currency transactions ........... (371) -- (11,326,928) 3,239,880 (9,502,532) 4,245,422
Net unrealized appreciation
(depreciation) on investments
and translation of assets and
liabilities denominated in
foreign currencies .............. -- -- (12,566,983) 11,417,973 (8,967,243) 25,039,574
---------------------------------------------------------------------------------------------
Net increase (decrease) in
net assets resulting from
operations .................. 19,603,516 20,721,147 (19,273,707) 16,938,659 (6,131,776) 33,718,842
Distributions to shareholders from:
Net investment income ............ (19,603,516) (20,721,147) (3,306,778) (49,403) (5,124,853) (87,831)
Net realized gains ............... -- -- (3,076,305) -- (4,478,333) --
---------------------------------------------------------------------------------------------
Total distributions to
shareholders ..................... (19,603,516) (20,721,147) (6,383,083) (49,403) (9,603,186) (87,831)
Capital share transactions
(Note 2) .......................... 46,891,619 (41,480,674) 51,660,205 166,345,776 110,391,317 326,479,399
---------------------------------------------------------------------------------------------
Net increase (decrease) in
net assets .................. 46,891,619 (41,480,674) 26,003,415 183,235,032 94,656,355 360,110,410
Net assets:
Beginning of year ................. 367,449,139 408,929,813 198,652,762 15,417,730 387,787,332 27,676,922
---------------------------------------------------------------------------------------------
End of year ....................... $ 414,340,758 $ 367,449,139 $ 224,656,177 $ 198,652,762 $ 482,443,687 $ 387,787,332
---------------------------------------------------------------------------------------------
Undistributed net investment income
included in net assets:
End of year ...................... $ -- $ -- $ 4,105,301 $ 2,888,764 $ 11,568,707 $ 4,591,164
---------------------------------------------------------------------------------------------
</TABLE>
See notes to financial statements.
175
<PAGE>
FRANKLIN VALUEMARK FUNDS
Financial Statements (continued)
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
NATURAL RESOURCES REAL ESTATE RISING
SECURITIES FUND SECURITIES FUND DIVIDENDS FUND
---------------------------------------------------------------------------------------------
1998 1997 1998 1997 1998 1997
---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Increase (decrease) in net assets:
Operations:
Net investment income ............ $ 751,162 $ 936,102 $ 20,084,431 $ 13,879,598 $ 9,364,650 $ 8,597,527
Net realized gain (loss) from
investments and foreign
currency transactions ............. (16,988,914) (6,076,012) 24,686,332 9,523,858 93,670,542 105,385,082
Net unrealized appreciation
(depreciation) on investments
and translation of assets and
liabilities denominated in
foreign currencies ................ (1,662,177) (13,803,725) (114,230,527) 50,445,063 (58,097,205) 80,215,085
------------- ------------- ------------- ------------- ------------- -------------
Net increase (decrease) in
net assets resulting from
operations ........................ (17,899,929) (18,943,635) (69,459,764) 73,848,519 44,937,987 194,197,694
Distributions to shareholders from:
Net investment income ............ (946,913) (1,423,769) (15,362,062) (10,951,988) (8,600,227) (9,956,520)
Net realized gains ............... -- -- (9,509,537) (5,229,900) (105,391,578) (17,001,263)
------------- ------------- ------------- ------------- ------------- -------------
Total distributions to
shareholders ...................... (946,913) (1,423,769) (24,871,599) (16,181,888) (113,991,805) (26,957,783)
Capital share transactions
(Note 2) .......................... (10,150,422) (14,286,871) (63,932,493) 60,166,437 40,625,030 15,634,172
------------- ------------- ------------- ------------- ------------- -------------
Net increase (decrease) in
net assets ........................ (28,997,264) (34,654,275) (158,263,856) 117,833,068 (28,428,788) 182,874,083
Net assets:
Beginning of year ................. 74,924,310 109,578,585 440,554,263 322,721,195 780,297,784 597,423,701
------------- ------------- ------------- ------------- ------------- -------------
End of year ....................... $ 45,927,046 $ 74,924,310 $ 282,290,407 $ 440,554,263 $ 751,868,996 $ 780,297,784
============= ============= ============= ============= ============= =============
Undistributed net investment income
included in net assets:
End of year ...................... $ 727,057 $ 940,017 $ 18,909,704 $ 14,187,335 $ 9,359,456 $ 8,595,033
============= ============= ============= ============= ============= =============
</TABLE>
See notes to financial statements.
176
<PAGE>
FRANKLIN VALUEMARK FUNDS
Financial Statements (continued)
STATEMENTS OF CHANGES IN NET ASSETS (CONT.)
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
TEMPLETON TEMPLETON
SMALL CAP FUND DEVELOPING MARKETS EQUITY FUND GLOBAL ASSET ALLOCATION FUND
---------------------------------------------------------------------------------------------
1998 1997 1998 1997 1998 1997
--------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Increase (decrease) in net assets:
Operations:
Net investment income .............. $ 1,603,412 $ 154,966 $ 4,306,111 $ 5,379,345 $ 3,890,233 $ 3,416,577
Net realized gain (loss) from
investments and foreign
currency transactions ............... (229,426) 25,783,381 (27,689,978) 14,814,772 2,718,229 3,506,166
Net unrealized appreciation
(depreciation) on investments
and translation of assets and
liabilities denominated in
foreign currencies .................. (8,381,265) 14,228,539 (32,987,790) (53,104,360) (7,345,527) 1,145,033
------------- ------------- ------------- ------------- ------------- -------------
Net increase (decrease) in
net assets resulting from
operations .......................... (7,007,279) 40,166,886 (56,371,657) (32,910,243) (737,065) 8,067,776
Distributions to shareholders from:
Net investment income .............. (201,399) (573,457) (7,007,398) (3,987,427) (3,274,568) (1,548,504)
Net realized gains ................. (25,854,889) (6,796,191) (22,786,132) (6,324,884) (3,894,373) (446,684)
------------- ------------- ------------- ------------- ------------- -------------
Total distributions to
shareholders ........................ (26,056,288) (7,369,648) (29,793,530) (10,312,311) (7,168,941) (1,995,188)
Capital share transactions
(Note 2) ............................ 35,061,886 109,695,331 (31,081,577) 50,804,184 (3,826,198) 31,055,108
------------- ------------- ------------- ------------- ------------- -------------
Net increase (decrease) in
net assets .......................... 1,998,319 142,492,569 (117,246,764) 7,581,630 (11,732,204) 37,127,696
Net assets:
Beginning of year ................... 313,461,539 170,968,970 279,680,051 272,098,421 93,401,822 56,274,126
------------- ------------- ------------- ------------- ------------- -------------
End of year ......................... $ 315,459,858 $ 313,461,539 $ 162,433,287 $ 279,680,051 $ 81,669,618 $ 93,401,822
============= ============= ============= ============= ============= =============
Undistributed net investment income
included in net assets:
End of year ........................ $ 1,532,535 $ 160,082 $ 3,107,117 $ 4,921,147 $ 2,772,913 $ 2,954,949
============= ============= ============= ============= ============= =============
</TABLE>
See notes to financial statements.
177
<PAGE>
FRANKLIN VALUEMARK FUNDS
Financial Statements (continued)
STATEMENTS OF CHANGES IN NET ASSETS (CONT.)
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
TEMPLETON GLOBAL TEMPLETON GLOBAL TEMPLETON INTERNATIONAL
GROWTH FUND INCOME SECURITIES FUND EQUITY FUND
---------------------------------------------------------------------------------------------
1998 1997 1998 1997 1998 1997
---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Increase (decrease) in net assets:
Operations:
Net investment income ............ $ 17,620,120 $ 17,575,343 $ 11,448,872 $ 14,187,376 $ 32,119,117 $ 36,435,795
Net realized gain (loss) from
investments and foreign
currency transactions ............. 76,153,893 73,768,401 (5,620,478) (228,933) 24,006,171 71,056,314
Net unrealized appreciation
(depreciation) on investments
and translation of assets and
liabilities denominated in
foreign currencies ................ (33,429,013) (9,386,358) 5,419,749 (9,238,900) 3,813,638 24,358,754
------------ ------------ ------------ ------------- -------------- ---------------
Net increase in net
assets resulting from
operations ........................ 60,345,000 81,957,386 11,248,143 4,719,543 59,938,926 131,850,863
Distributions to shareholders from:
Net investment income ............ (20,206,508) (11,070,041) (12,370,027) (14,522,463) (34,702,026) (32,476,317)
Net realized gains ............... (73,600,973) (3,690,014) -- -- (69,708,108) (49,797,020)
------------ ------------ ------------ ------------- -------------- ---------------
Total distributions to
shareholders ...................... (93,807,481) (14,760,055) (12,370,027) (14,522,463) (104,410,134) (82,273,337)
Capital share transactions
(Note 2) .......................... 22,098,260 111,369,857 (32,953,553) (26,903,375) (161,058,239) 3,752,649
------------ ------------ ------------ ------------- -------------- ---------------
Net increase (decrease) in
net assets ........................ (11,364,221) 178,567,188 (34,075,437) (36,706,295) (205,529,447) 53,330,175
Net assets:
Beginning of year ................. 758,444,575 579,877,387 185,016,174 221,722,469 1,161,429,549 1,108,099,374
------------ ------------ ------------ ------------- -------------- ---------------
End of year ....................... $747,080,354 $758,444,575 $150,940,737 $ 185,016,174 $ 955,900,102 $ 1,161,429,549
============ ============ ============ ============= ============== ===============
Undistributed net investment
income included in net assets:
End of year ...................... $ 14,679,029 $ 17,068,595 $ 4,943,426 $ 11,163,308 $ 30,263,329 $ 33,171,270
============ ============ ============ ============= ============== ===============
</TABLE>
See notes to financial statements.
178
<PAGE>
FRANKLIN VALUEMARK FUNDS
Financial Statements (continued)
STATEMENTS OF CHANGES IN NET ASSETS (CONT.)
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
TEMPLETON INTERNATIONAL TEMPLETON PACIFIC U.S. GOVERNMENT
SMALLER COMPANIES FUND GROWTH FUND SECURITIES FUND
---------------------------------------------------------------------------------------------
1998 1997 1998 1997 1998 1997
---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Increase (decrease) in net assets:
Operations:
Net investment income ............ $ 691,086 $ 770,264 $ 3,011,920 $ 5,575,047 $ 45,349,259 $ 50,859,278
Net realized gain (loss) from
investments and foreign
currency transactions ............. (2,334,096) 573,090 (24,149,643) 5,990,468 2,808,941 84,959
Net unrealized appreciation
(depreciation) on investments
and translation of assets and
liabilities denominated in
foreign currencies ................ (2,224,314) (2,404,379) (1,803,583) (112,006,306) 3,506,133 18,636,570
------------- ----------- ------------- ------------- ------------ -------------
Net increase (decrease) in
net assets resulting from
operations ........................ (3,867,324) (1,061,025) (22,941,306) (100,440,791) 51,664,333 69,580,807
Distributions to shareholders from:
Net investment income ............ (741,651) (155,776) (5,322,439) (5,815,823) (50,958,932) (42,870,826)
Net realized gains ............... (858,571) -- (1,619,542) -- -- --
------------- ----------- ------------- ------------- ------------ -------------
Total distributions to
shareholders ...................... (1,600,222) (155,776) (6,941,981) (5,815,823) (50,958,932) (42,870,826)
Capital share transactions
(Note 2) .......................... (1,733,715) 17,162,468 (36,751,143) (85,098,729) (54,957,919) (105,483,057)
------------- ----------- ------------- ------------- ------------ -------------
Net increase (decrease) in
net assets ........................ (7,201,261) 15,945,667 (66,634,430) (191,355,343) (54,252,518) (78,773,076)
Net assets:
Beginning of year ................. 32,200,705 16,255,038 165,403,815 356,759,158 765,084,441 843,857,517
------------- ----------- ------------- ------------- ------------ -------------
End of year ....................... $ 24,999,444 $32,200,705 $ 98,769,385 $ 165,403,815 $710,831,923 $ 765,084,441
============= =========== ============= ============= ============ =============
Undistributed net investment
income included in net assets:
End of year ...................... $ 620,960 $ 716,993 $ -- $ 1,603,896 $ 45,248,069 $ 50,857,742
============= ============= ============= ============= ============= =============
</TABLE>
See notes to financial statements.
179
<PAGE>
FRANKLIN VALUEMARK FUNDS
Financial Statements (continued)
STATEMENTS OF CHANGES IN NET ASSETS (CONT.)
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
VALUE
SECURITIES FUND ZERO COUPON FUND - 2000
----------------------------------------------------
1998* 1998 1997
----------------------------------------------------
<S> <C> <C> <C>
Increase (decrease) in net assets:
Operations:
Net investment income ............................................. $ 28,176 $ 6,767,257 $ 7,759,046
Net realized gain (loss) from investments ......................... (90,040) 1,752,805 1,248,982
Net unrealized depreciation on investments ........................ (402,388) (1,138,823) (926,957)
------------- ------------- -------------
Net increase (decrease) in net assets resulting from operations (464,252) 7,381,239 8,081,071
Distributions to shareholders from:
Net investment income ............................................. -- (7,809,331) (8,152,085)
Net realized gains ................................................ -- (1,249,416) (184,468)
------------- ------------- -------------
Total distributions to shareholders ................................ -- (9,058,747) (8,336,553)
Capital share transactions (Note 2) ................................ 9,477,723 (16,430,117) (17,695,009)
------------- ------------- -------------
Net increase (decrease) in net assets ......................... 9,013,471 (18,107,625) (17,950,491)
Net assets:
Beginning of year .................................................. -- 111,650,451 129,600,942
------------- ------------- -------------
End of year ........................................................ $ 9,013,471 $ 93,542,826 $ 111,650,451
============= ============= =============
Undistributed net investment income included in net assets:
End of year ........................................................ $ 28,176 $ 6,716,921 $ 7,759,277
============= ============= =============
</TABLE>
* For the period May 1, 1998 (effective date) to December 31, 1998.
See notes to financial statements.
180
<PAGE>
FRANKLIN VALUEMARK FUNDS
Financial Statements (continued)
STATEMENTS OF CHANGES IN NET ASSETS (CONT.)
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
ZERO COUPON FUND - 2005 ZERO COUPON FUND - 2010
------------------------------------------------------------------
1998 1997 1998 1997
------------------------------------------------------------------
<S> <C> <C> <C> <C>
Increase (decrease) in net assets:
Operations:
Net investment income ................................... $ 4,640,880 $ 4,790,147 $ 4,911,607 $ 4,883,560
Net realized gain from investments ...................... 454,474 1,112,714 2,320,295 1,001,612
Net unrealized appreciation on investments .............. 4,293,862 2,363,992 4,482,254 6,324,375
------------ ------------ ------------ ------------
Net increase in net assets resulting from operations 9,389,216 8,266,853 11,714,156 12,209,547
Distributions to shareholders from:
Net investment income ................................... (4,795,119) (4,939,956) (4,888,749) (4,878,501)
Net realized gains ...................................... (1,109,296) (17,170) (676,395) (39,001)
------------ ------------ ------------ ------------
Total distributions to shareholders ...................... (5,904,415) (4,957,126) (5,565,144) (4,917,502)
Capital share transactions (Note 2) ...................... 3,707,073 (8,617,685) 1,851,397 (593,065)
------------ ------------ ------------ ------------
Net increase (decrease) in net assets ............... 7,191,874 (5,307,958) 8,000,409 6,698,980
Net assets:
Beginning of year ........................................ 77,295,511 82,603,469 85,514,726 78,815,746
------------ ------------ ------------ ------------
End of year .............................................. $ 84,487,385 $ 77,295,511 $ 93,515,135 $ 85,514,726
============ ============ ============ ============
Undistributed net investment income included in net assets:
End of year .............................................. $ 4,635,667 $ 4,789,906 $ 4,906,277 $ 4,883,419
============ ============ ============ ============
</TABLE>
See notes to financial statements.
181
<PAGE>
FRANKLIN VALUEMARK FUNDS
Notes to Financial Statements
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Franklin Valuemark Funds (the Trust) is registered under the Investment Company
Act of 1940, as an open-end investment company, consisting of twenty-five series
(the Funds). All Funds are diversified except the Global Health Care Securities
Fund, the Templeton Global Income Securities Fund and the Value Securities Fund.
Shares of the Funds are sold only to insurance company separate accounts to fund
the benefits of variable life insurance policies or variable annuity contracts
issued by Allianz Life Insurance Company of North America (Allianz Life) and its
affiliates. The Funds and their investment objectives are:
<TABLE>
<CAPTION>
CAPITAL GROWTH GROWTH AND INCOME
- -------------------------------------------------------------------------------------------
<S> <C>
Capital Growth Fund Global Utilities Securities Fund
Global Health Care Securities Fund Growth and Income Fund
Mutual Discovery Securities Fund Income Securities Fund
Natural Resources Securities Fund Mutual Shares Securities Fund
Small Cap Fund Real Estate Securities Fund
Templeton Developing Markets Equity Fund Rising Dividends Fund
Templeton Global Growth Fund Templeton Global Asset Allocation Fund
Templeton International Equity Fund Value Securities Fund
Templeton International Smaller Companies Fund
Templeton Pacific Growth Fund
</TABLE>
<TABLE>
<CAPTION>
CURRENT INCOME CAPITAL PRESERVATION AND INCOME
- ----------------------------------------------------------------
<S> <C>
High Income Fund Money Market Fund
Templeton Global Income Securities Fund
U.S. Government Securities Fund
Zero Coupon Fund - 2000
Zero Coupon Fund - 2005
Zero Coupon Fund - 2010
</TABLE>
Effective May 1, 1998, the name of the Utility Equity Fund changed to the Global
Utilities Securities Fund. The portfolio's investment objectives and other
policies did not change.
Effective May 1, 1998, the Global Health Care Securities Fund and the Value
Securities Fund commenced operations.
The following summarizes the Funds' significant accounting policies.
a. SECURITY VALUATION
Securities listed or traded on a recognized national exchange or NASDAQ are
valued at the latest reported sales price. Over-the-counter securities and
listed securities for which no sale is reported are valued within the range of
the latest quoted bid and asked prices. Restricted securities and securities for
which market quotations are not readily available are valued at fair value as
determined by management in accordance with procedures established by the Board
of Trustees (the Board).
Securities in the Money Market Fund are valued at amortized cost which
approximates value.
b. FOREIGN CURRENCY TRANSLATION
Portfolio securities and other assets and liabilities denominated in foreign
currencies are translated into U.S. dollars based on the exchange rate of such
currencies against U.S. dollars on the date of valuation. Purchases and sales of
securities and income items denominated in foreign currencies are translated
into U.S. dollars at the exchange rate in effect on the transaction date.
The Funds do not separately report the effect of changes in foreign exchange
rates from changes in market prices on securities held. Such changes are
included in net realized and unrealized gain or loss from investments.
Realized foreign exchange gains or losses arise from sales of foreign
currencies, currency gains or losses realized between the trade and settlement
dates on securities transactions and the difference between the recorded amounts
of dividends, interest, and foreign withholding taxes and the U.S. dollar
equivalent of the amounts actually received or paid. Net unrealized foreign
exchange gains and losses arise from changes in foreign exchange rates on
foreign denominated assets and liabilities other than investments in securities
held at the end of the reporting period.
182
<PAGE>
FRANKLIN VALUEMARK FUNDS
Notes to Financial Statements (continued)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONT.)
c. REPURCHASE AGREEMENTS
Certain Funds may enter into a joint repurchase agreement whereby their
uninvested cash balances are deposited into a joint cash account to be used to
invest in one or more repurchase agreements. The value and face amount of the
joint repurchase agreement are allocated to the Funds based on their pro-rata
interests. Certain Funds may enter into repurchase agreements which are
accounted for as a loan by the Funds to the seller, collateralized by securities
which are delivered to the Funds' custodian. The market value, including accrued
interest, of the initial collateralization is required to be at least 102% of
the dollar amount invested by the Funds, with the value of the underlying
securities marked to market daily to maintain coverage of at least 100%. At
December 31, 1998, all outstanding repurchase agreements held by the Funds had
been entered into on that date.
d. FORWARD EXCHANGE CONTRACTS
The Mutual Discovery Securities Fund, the Mutual Shares Securities Fund, the
Templeton Global Asset Allocation Fund and the Templeton Global Income
Securities Fund may enter into forward exchange contracts to hedge against
foreign exchange risks. These contracts are valued daily and the Funds' equity
therein are included in the Statements of Assets and Liabilities. Realized and
unrealized gains and losses are included in the Statements of Operations.
e. OPTIONS
In order to produce incremental income or protect against changes in the value
of the underlying securities, the Mutual Discovery Securities Fund and the
Mutual Shares Securities Fund may write put and covered call options.
Premiums received by the Funds upon writing put or covered call options are
recorded as an asset and an equivalent liability which is subsequently adjusted
daily to equal the current market value of the option written. The Funds will
realize a gain or loss upon the expiration or closing of the option transaction.
When an option is exercised, the proceeds on sales for a written call option or
the purchase cost for a written put option is adjusted by the amount of the
premium received or paid. The risk in writing a call option is that the Funds
give up the opportunity for profit if the market price of the security increases
and the option is exercised. The risk in writing a put option is that the Funds
may incur a loss if the market price of the security decreases and the option is
exercised. All collateral covering written options are held in a segregated
account by the custodian bank.
f. SECURITIES SOLD SHORT
The Mutual Discovery Securities Fund and the Mutual Shares Securities Fund are
engaged in selling securities short, which obligates the Funds to replace a
security borrowed with the same security at current market value. The Funds
would incur a loss if the price of the security increases between the date of
the short sale and the date on which the Funds replaces the borrowed security.
The Funds would realize a gain if the price of the security declines between
those dates.
The Funds are 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 Funds must maintain a deposit for the broker
consisting of cash and securities having a value equal to a specified percentage
of the value of the securities sold short.
g. INCOME TAXES
No provision has been made for income taxes because each Fund's policy is to
qualify as a regulated investment company under the Internal Revenue Code and to
distribute all of its taxable income.
h. 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. Bond discount is
amortized on an income tax basis. Dividend income and distributions to
shareholders are recorded on the ex-dividend date. For the Money Market Fund,
distributions from net investment income and capital gains or losses are
normally declared daily. Such distributions are reinvested in additional shares
of the Fund.
183
<PAGE>
FRANKLIN VALUEMARK FUNDS
NOTES TO FINANCIAL STATEMENTS (continued)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONT.)
h. SECURITY TRANSACTIONS, INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS (CONT.)
Common expenses incurred by the Trust are allocated among the Funds based on the
ratio of net assets of each Fund to the combined net assets. Other expenses are
charged to each Fund on a specific identification basis.
Distributions received by the Trust from securities may be a return of capital
(ROC). Such distributions reduce the cost basis of the securities, and any
distributions in excess of the cost basis are recognized as capital gains.
I. ACCOUNTING ESTIMATES
The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of the
financial statements and the amounts of income and expense during the reporting
period. Actual results could differ from those estimates.
2. SHARES OF BENEFICIAL INTEREST
During the year ended December 31, 1998, the Trust offered a single class of
shares, Class 1. Effective January 6, 1999, the Funds (except the Zero Coupon
Fund - 2000, the Zero Coupon Fund - 2005 and the Zero Coupon Fund - 2010) began
offering a new class of shares, Class 2. The shares differ by their distribution
fees, voting rights on matters affecting a single class and the exchange
privilege of each class.
At December 31, 1998, there were an unlimited number of shares authorized ($.01
par value). Transactions in the Funds' shares were as follows:
<TABLE>
<CAPTION>
CAPITAL GROWTH FUND GLOBAL HEALTH CARE SECURITIES FUND*
--------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
--------------------------------------------------------------
Year ended December 31, 1998
<S> <C> <C> <C> <C>
Shares sold ................................... 9,664,745 $140,653,465 1,315,108 $12,754,095
Shares issued in reinvestment of distributions 37,058 539,187 -- --
Shares redeemed ............................... (4,111,363) (58,937,582) (475,618) (4,403,400)
------------------------------------------------------------
Net increase (decrease) ....................... 5,590,440 $ 82,255,070 839,490 $ 8,350,695
------------------------------------------------------------
Year ended December 31, 1997
Shares sold ................................... 7,609,203 $ 95,467,235
Shares issued in reinvestment of distributions 8,739 109,761
Shares redeemed ............................... (3,398,734) (42,494,827)
Net increase (decrease) ....................... 4,219,208 $ 53,082,169
----------------------------
</TABLE>
<TABLE>
<CAPTION>
GLOBAL UTILITIES SECURITIES FUND
---------------------------------
SHARES AMOUNT
-------------------------------
Year ended December 31, 1998
<S> <C> <C>
Shares sold ................................... 2,621,862 $ 52,650,625
Shares issued in reinvestment of distributions 5,388,353 104,426,274
Shares redeemed ............................... (15,318,738) (303,132,530)
----------------------------
Net increase (decrease) ....................... (7,308,523) $(146,055,631)
----------------------------
Year ended December 31, 1997
Shares sold ................................... 1,963,946 $ 36,229,864
Shares issued in reinvestment of distributions 7,553,775 129,547,236
Shares redeemed ............................... (20,093,040) (363,376,229)
---------------------------
Net increase (decrease) ....................... (10,575,319) $(197,599,129)
----------------------------
</TABLE>
<TABLE>
<CAPTION>
GROWTH AND INCOME FUND HIGH INCOME FUND
SHARES AMOUNT SHARES AMOUNT
---------------------------------------------------------
Year ended December 31, 1998
<S> <C> <C> <C> <C>
Shares sold ................................... 9,617,417 $198,201,953 12,350,296 $169,850,148
Shares issued in reinvestment of distributions 7,392,186 146,069,603 3,423,575 46,731,797
Shares redeemed ............................... (15,929,952) (321,695,049) (16,477,344) (226,279,172)
----------------------------------------------------------
Net increase (decrease) ....................... 1,079,651 $ 22,576,507 (703,473) $ (9,697,227)
----------------------------------------------------------
Year ended December 31, 1997
Shares sold ................................... 11,852,804 $227,366,997 15,001,724 $213,493,612
Shares issued in reinvestment of distributions 4,094,758 76,940,493 2,802,103 38,220,680
Shares redeemed ............................... (13,651,515) (261,056,664) (14,990,766) (212,901,597)
----------------------------------------------------------
Net increase (decrease) ....................... 2,296,047 $ 43,250,826 2,813,061 $ 38,812,695
----------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
INCOME SECURITIES FUND
SHARES AMOUNT
---------------------------
Year ended December 31, 1998
<S> <C> <C>
Shares sold .................................. 5,561,398 $ 97,914,458
Shares issued in reinvestment of distributions 7,512,196 127,031,238
Shares redeemed .............................. (19,594,845) (338,128,943)
Net increase (decrease) ...................... (6,521,251) $(113,183,247)
Year ended December 31, 1997
Shares sold .................................. 8,990,147 $157,499,453
Shares issued in reinvestment of distributions 7,246,221 121,011,885
Shares redeemed .............................. (18,135,171) (316,012,124)
Net increase (decrease) ...................... (1,898,803) $(37,500,786)
---------------------------
</TABLE>
184
<PAGE>
FRANKLIN VALUEMARK FUNDS
Notes to Financial Statements (continued)
2. SHARES OF BENEFICIAL INTEREST (CONT.)
<TABLE>
<CAPTION>
MUTUAL DISCOVERY
MONEY MARKET FUND SECURITIES FUND
SHARES AMOUNT SHARES AMOUNT
------------------------------------------------------------------
<S> <C> <C> <C> <C>
Year ended December 31, 1998
Shares sold ..................................... 748,602,052 $748,602,052 7,041,503 $ 90,113,407
Shares issued in reinvestment of distributions .. 19,603,629 19,603,629 482,835 6,383,083
Shares redeemed ................................. (721,314,062) (721,314,062) (3,946,113) (44,836,285)
---------------------------------------------------------------
Net increase .................................... 46,891,619 $ 46,891,619 3,578,225 $ 51,660,205
---------------------------------------------------------------
Year ended December 31, 1997
Shares sold ..................................... 748,100,457 $748,100,457 17,092,095 $192,828,736
Shares issued in reinvestment of distributions .. 20,721,280 20,721,280 4,419 49,403
Shares redeemed ................................. (810,302,411) (810,302,411) (2,280,587) (26,532,363)
---------------------------------------------------------------
Net increase (decrease) ......................... (41,480,674) $(41,480,674) 14,815,927 $166,345,776
---------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
MUTUAL SHARES
SECURITIES FUND
SHARES AMOUNT
--------------------------
<S> <C> <C>
Year ended December 31, 1998
Shares sold ................................... 12,012,852 $150,206,617
Shares issued in reinvestment of distributions 760,950 9,603,186
Shares redeemed ............................... (4,280,005) (49,418,486)
---------------------------
Net increase .................................. 8,493,797 $110,391,317
---------------------------
Year ended December 31, 1997
Shares sold ................................... 31,512,828 $353,477,935
Shares issued in reinvestment of distributions 7,793 87,831
Shares redeemed ............................... (2,353,072) (27,086,367)
---------------------------
Net increase (decrease) ....................... 29,167,549 $326,479,399
---------------------------
</TABLE>
<TABLE>
<CAPTION>
NATURAL RESOURCES REAL ESTATE
SECURITIES FUND SECURITIES FUND
------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
------------------------------------------------------
<S> <C> <C> <C> <C>
Year ended December 31, 1998
Shares sold ................................... 3,505,454 $36,314,081 1,938,333 $ 46,066,967
Shares issued in reinvestment of distributions 91,844 946,913 1,117,322 24,871,599
Shares redeemed ............................... (4,685,716) (47,411,416) (6,098,998) (134,871,059)
---------------------------------------------------------
Net increase (decrease) ....................... (1,088,418) $(10,150,422) (3,043,343)$ (63,932,493)
---------------------------------------------------------
Year ended December 31, 1997
Shares sold ................................... 3,255,526 $44,002,036 5,979,601 $139,175,365
Shares issued in reinvestment of distributions 107,292 1,423,769 722,405 16,181,889
Shares redeemed ............................... (4,466,321) (59,712,676) (4,062,121) (95,190,817)
---------------------------------------------------------
Net increase (decrease) ....................... (1,103,503) $(14,286,871) 2,639,885 $ 60,166,437
---------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
RISING
DIVIDENDS FUND
-------------------------
SHARES AMOUNT
-------------------------
<S> <C> <C>
Shares sold ................................... 10,051,992 $190,031,986
Shares issued in reinvestment of distributions 6,443,856 113,991,805
Shares redeemed ............................... (14,609,606) (263,398,761)
---------------------------
Net increase (decrease) ....................... 1,886,242 $ 40,625,030
---------------------------
Year ended December 31, 1997
Shares sold ................................... 9,172,221 $162,728,294
Shares issued in reinvestment of distributions 1,563,677 26,957,783
Shares redeemed ............................... (9,887,381) (174,051,905)
---------------------------
Net increase (decrease) ....................... 848,517 $ 15,634,172
---------------------------
</TABLE>
<TABLE>
<CAPTION>
TEMPLETON DEVELOPING
SMALL CAP FUND MARKETS EQUITY FUND
-----------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
-----------------------------------------------------------
<S> <C> <C> <C> <C>
Year ended December 31, 1998
Shares sold ..................................... 10,354,452 $146,238,628 6,171,249 $ 49,413,698
Shares issued in reinvestment of distributions .. 1,866,496 26,056,288 4,042,542 29,793,530
Shares redeemed ................................. (10,047,779) (137,233,030) (13,892,294) (110,288,805)
------------------------------------------------------------
Net increase (decrease) ......................... 2,173,169 $ 35,061,886 (3,678,503 $ (31,081,577)
------------------------------------------------------------
Year ended December 31, 1997 .....................
Shares sold ..................................... 15,767,713 $223,364,294 10,816,139 $ 137,500,694
Shares issued in reinvestment of distributions .. 542,684 7,369,648 774,197 10,312,311
Shares redeemed ................................. (8,440,306) (121,038,611) (7,874,889) (97,008,821)
------------------------------------------------------------
Net increase .................................... 7,870,091 $109,695,331 3,715,447 $ 50,804,184
------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
TEMPLETON GLOBAL ASSET
ALLOCATION FUND
---------------------------
SHARES AMOUNT
---------------------------
<S> <C> <C>
Year ended December 31, 1998
Shares sold ..................................... 1,163,365 $15,880,669
Shares issued in reinvestment of distributions .. 556,595 7,168,941
Shares redeemed ................................. (2,081,709) (26,875,808)
--------------------------
Net increase (decrease) ......................... (361,749) $(3,826,198)
--------------------------
Year ended December 31, 1997
Shares sold ..................................... 2,863,159 $38,251,762
Shares issued in reinvestment of distributions .. 149,676 1,995,188
Shares redeemed ................................. (673,877) (9,191,842)
--------------------------
Net increase .................................... 2,338,958 $31,055,108
--------------------------
</TABLE>
185
<PAGE>
FRANKLIN VALUEMARK FUNDS
Notes to Financial Statements (continued)
2. SHARES OF BENEFICIAL INTEREST (CONT.)
<TABLE>
<CAPTION>
TEMPLETON TEMPLETON GLOBAL
GLOBAL GROWTH FUND INCOME SECURITIES FUND
---------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
---------------------------------------------------------
<S> <C> <C> <C> <C>
Year ended December 31, 1998
Shares sold ..................................... 6,659,421 $103,474,286 884,521 $ 11,354,195
Shares issued in reinvestment of distributions .. 6,496,363 93,807,481 1,004,061 12,370,027
Shares redeemed ................................. (12,002,187) (175,183,507) (4,428,598) (56,677,775)
-----------------------------------------------------------
Net increase (decrease) ......................... 1,153,597 $ 22,098,260 (2,540,016) $(32,953,553)
-----------------------------------------------------------
Year ended December 31, 1997
Shares sold ..................................... 13,313,319 $200,497,392 1,379,330 $18,167,921
Shares issued in reinvestment of distributions .. 971,695 14,760,055 1,145,305 14,522,463
Shares redeemed ................................. (6,882,077) (103,887,590) (4,546,864) (59,593,759)
Net increase (decrease) ......................... 7,402,937 $111,369,857 (2,022,229) $(26,903,375)
-----------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
TEMPLETON
INTERNATIONAL EQUITY FUND
---------------------------
SHARES AMOUNT
----------------------------
<S> <C> <C>
Year ended December 31, 1998
Shares sold .................................... 6,071,020 $ 98,428,488
Shares issued in reinvestment of distributions .. 6,374,245 104,410,134
Shares redeemed ................................. (22,907,488) (363,896,861)
--------------------------------
Net increase (decrease) ......................... (10,462,223) $(161,058,239)
--------------------------------
Year ended December 31, 1997
Shares sold ..................................... 18,290,362 $299,526,246
Shares issued in reinvestment of distributions .. 5,084,879 82,273,337
Shares redeemed ................................. (23,047,242) (378,046,934)
--------------------------------
Net increase (decrease) ......................... 327,999 $3,752,649
--------------------------------
</TABLE>
<TABLE>
<CAPTION>
TEMPLETON
INTERNATIONAL SMALLER TEMPLETON
COMPANIES FUND PACIFIC GROWTH FUND
---------------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
---------------------------------------------------------------------
<S> <C> <C> <C> <C>
Year ended December 31, 1998
Shares sold ..................................... 1,335,385 $13,968,902 12,315,500 $ 91,136,520
Shares issued in reinvestment of distributions .. 147,758 1,600,222 1,116,074 6,941,981
Shares redeemed ................................. (1,687,180) (17,302,839) (18,106,232) (134,829,644)
----------------------------------------------------------------------
Net decrease .................................... (204,037) $(1,733,715) (4,674,658) $(36,751,143)
----------------------------------------------------------------------
Year Ended December 31, 1997
Shares sold ..................................... 2,609,483 $30,517,402 6,602,123 $ 85,539,550
Shares issued in reinvestment of distributions .. 13,269 155,776 396,714 5,815,823
Shares redeemed ................................. (1,145,466) (13,510,710) (13,342,125) (176,454,102)
----------------------------------------------------------------------
Net increase (decrease) ......................... 1,477,286 $17,162,468 (6,343,288) $(85,098,729)
----------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
U.S. GOVERNMENT
SECURITIES FUND
---------------------------
SHARES AMOUNT
---------------------------
<S> <C> <C>
Year ended December 31, 1998
Shares sold ..................................... 10,470,243 $144,337,382
Shares issued in reinvestment of distributions .. 3,808,590 50,958,932
Shares redeemed ................................. (18,034,303) (250,254,233)
----------------------------
Net decrease .................................... (3,755,470) $(54,957,919)
----------------------------
Year Ended December 31, 1997
Shares sold ..................................... 6,114,131 $ 83,399,898
Shares issued in reinvestment of distributions .. 3,245,331 42,870,826
Shares redeemed ................................. (17,077,659) (231,753,781)
----------------------------
Net increase (decrease) ......................... (7,718,197) $(105,483,057)
----------------------------
</TABLE>
<TABLE>
<CAPTION>
VALUE SECURITIES FUND* ZERO COUPON FUND - 2000
-----------------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
-----------------------------------------------------------------------
<S> <C> <C> <C> <C>
Year ended December 31, 1998
Shares sold ........................................ 1,367,931 $11,279,710 646,397 $ 9,539,377
Shares issued in reinvestment of distributions -- -- 637,042 9,058,747
Shares redeemed .................................... (211,139) (1,801,987) (2,343,411) (35,028,241)
-------------------------------------------------------------------
Net increase (decrease) ............................ 1,156,792 $ 9,477,723 (1,059,972) $(16,430,117)
-------------------------------------------------------------------
Year ended December 31, 1997
Shares sold ........................................ 510,404 $ 7,615,267
Shares issued in reinvestment of distributions ..... 575,729 8,336,552
Shares redeemed .................................... (2,241,078) (33,646,828)
-----------------------------------
Net decrease ....................................... (1,154,945) $(17,695,009)
-----------------------------------
</TABLE>
<TABLE>
<CAPTION>
ZERO COUPON FUND - 2005
----------------------------
SHARES AMOUNT
----------------------------
<S> <C> <C>
Year ended December 31, 1998
Shares sold ........................................ 977,903 $16,942,756
Shares issued in reinvestment of distributions 357,194 5,904,415
Shares redeemed .................................... (1,107,098) (19,140,098)
----------------------------
Net increase (decrease) ............................ 227,999 $ 3,707,073
----------------------------
Year ended December 31, 1997
Shares sold ........................................ 597,716 $ 9,749,533
Shares issued in reinvestment of distributions ..... 315,539 4,957,126
Shares redeemed .................................... (1,431,881) (23,324,344)
----------------------------
Net decrease ....................................... (518,626) $(8,617,685)
----------------------------
</TABLE>
186
<PAGE>
FRANKLIN VALUEMARK FUNDS
Notes to Financial Statements (continued)
2. SHARES OF BENEFICIAL INTEREST (CONT.)
<TABLE>
<CAPTION>
ZERO COUPON FUND - 2010
-----------------------
SHARES AMOUNT
-----------------------
Year ended December 31, 1998
<S> <C> <C>
Shares sold ..................................... 2,622,702 $48,365,327
Shares issued in reinvestment of distributions .. 314,060 5,565,143
Shares redeemed ................................. (2,825,253) (52,079,073)
--------------------------
Net increase .................................... 111,509 $ 1,851,397
--------------------------
Year ended December 31, 1997
Shares sold ..................................... 1,745,371 $28,766,689
Shares issued in reinvestment of distributions .. 313,017 4,917,502
Shares redeemed ................................. (2,100,095) (34,277,256)
--------------------------
Net decrease .................................... (41,707) $ (593,065)
--------------------------
</TABLE>
*For the period May 1, 1998 (effective date) to December 31, 1998.
3. TRANSACTIONS WITH AFFILIATES
Certain officers and trustees of the Trust are also officers and/or directors of
the following entities:
<TABLE>
<CAPTION>
ENTITY AFFILIATION
---------------------------------------------------------------------------
<S> <C>
Franklin Templeton Services, Inc. (FT Services) Administrative manager
Franklin Advisers, Inc. (Advisers) Investment manager
Franklin Advisory Services, Inc. (Advisory Services) Investment manager
Franklin Mutual Advisers, Inc. (Franklin Mutual) Investment manager
Templeton Asset Management Ltd. (TAML) Investment manager
Templeton Global Advisors Ltd. (TGAL) Investment manager
Templeton Investment Counsel, Inc. (TICI) Investment manager
Franklin/Templeton Investor Services, Inc. (Investor Services) Transfer Agent
</TABLE>
The Funds pay an investment management fee to Advisers based on the average net
assets of the Funds, except the Capital Growth Fund, the Global Health Care
Securities Fund, the Mutual Discovery Securities Fund, the Mutual Shares
Securities Fund, the Rising Dividends Fund, the Small Cap Fund, the Templeton
Developing Markets Equity Fund, the Templeton Global Asset Allocation Fund, the
Templeton Global Growth Fund, the Templeton International Equity Fund, the
Templeton International Smaller Companies Fund, the Templeton Pacific Growth
Fund, and the Value Securities Fund as follows:
<TABLE>
<CAPTION>
ANNUALIZED FEE RATE DAILY NET ASSETS
-------------------------------------
<S> <C>
.625% First $100 million
.50% over $100 million, up to and including $250 million
.45% over $250 million, up to and including $10 billion
</TABLE>
Fees are further reduced on net assets over $10 billion.
Under a subadvisory agreement, TICI provides subadvisory services to the
Templeton Global Income Securities Fund and receives fees from Advisers based on
the average daily net assets of the Fund.
The Templeton International Equity Fund and the Templeton Pacific Growth Fund
pay an investment management fee to Advisers based on the average net assets of
the Funds as follows:
<TABLE>
<CAPTION>
ANNUALIZED FEE RATE DAILY NET ASSETS
-------------------------------------
<S> <C>
1.00% First $100 million
.90% over $100 million, up to and including $250 million
.80% over $250 million, up to and including $500 million
</TABLE>
Fees are further reduced on net assets over $500 million.
187
<PAGE>
FRANKLIN VALUEMARK FUNDS
Notes to Financial Statements (continued)
3. TRANSACTIONS WITH AFFILIATES (CONT.)
Under a subadvisory agreement, TICI provides subadvisory services to the
Templeton International Equity Fund and the Templeton Pacific Growth Fund, and
receives fees from Advisers based on the average daily net assets of each Fund.
The Capital Growth Fund and the Small Cap Fund pay an investment management fee
to Advisers based on the average net assets of the Funds as follows:
<TABLE>
<CAPTION>
ANNUALIZED FEE RATE DAILY NET ASSETS
-------------------------------------------
<S> <C>
.75% First $500 million
.625% over $500 million, up to and including $1 billion
.50% over $1 billion
</TABLE>
The Global Health Care Securities Fund and Value Securities Fund pay an
investment management fee to Advisers based on the average net assets of the
Funds as follows:
<TABLE>
<CAPTION>
ANNUALIZED FEE RATE DAILY NET ASSETS
-------------------------------------------
<S> <C>
.60% First $200 million
.50% over $200 million, up to and including $1.3 billion
.40% over $1.3 billion
</TABLE>
The Rising Dividends Fund pays an investment management fee to Advisory Services
based on the average net assets of the Fund as follows:
<TABLE>
<CAPTION>
ANNUALIZED FEE RATE DAILY NET ASSETS
---------------------------------------------
<S> <C>
.75% First $500 million
.625% over $500 million, up to and including $1 billion
.50% over $1 billion
</TABLE>
The Templeton Global Growth Fund pays an investment management fee to TGAL based
on the average net assets of the Fund as follows:
<TABLE>
<CAPTION>
ANNUALIZED FEE RATE DAILY NET ASSETS
-------------------------------------------
<S> <C>
1.00% First $100 million
.90% over $100 million, up to and including $250 million
.80% over $250 million, up to and including $500 million
</TABLE>
Fees are further reduced on net assets over $500 million.
The Templeton Global Asset Allocation Fund pays an investment management fee to
TGAL based on the average net assets of the Fund as follows:
<TABLE>
<CAPTION>
ANNUALIZED FEE RATE DAILY NET ASSETS
-------------------------------------------
<S> <C>
.65% First $200 million
.585% over $200 million, up to and including $1.3 billion
.52% over $1.3 billion
</TABLE>
Under a subadvisory agreement, TICI provides subadvisory services to the
Templeton Global Asset Allocation Fund and receives from TGAL fees based on the
average daily net assets of the Fund.
The Templeton International Smaller Companies Fund pays an investment management
fee to TICI based on the average daily net assets of the Fund as follows:
<TABLE>
<CAPTION>
ANNUALIZED FEE RATE DAILY NET ASSETS
-------------------------------------------
<S> <C>
.85% First $200 million
.765% over $200 million, up to and including $1.3 billion
.68% over $1.3 billion
</TABLE>
188
<PAGE>
FRANKLIN VALUEMARK FUNDS
Notes to Financial Statements (continued)
3. TRANSACTIONS WITH AFFILIATES (CONT.)
The Mutual Discovery Securities Fund and the Mutual Shares Securities Fund pay
an investment management fee to Franklin Mutual of .80% and .60%, respectively,
per year of the average daily net assets of each Fund.
The Templeton Developing Markets Equity Fund pays an investment management fee
to TAML of 1.25% per year of the average daily net assets of the Fund.
Under an agreement with their respective investment managers, FT Services
provides administrative services to the Funds, except for the Global Health Care
Securities Fund, the Mutual Discovery Securities Fund, the Mutual Shares
Securities Fund, the Templeton Global Asset Allocation Fund, the Templeton
International Smaller Companies Fund, and the Value Securities Fund. The fee is
paid by Advisers based on the average daily net assets, and is not an additional
expense of the Funds.
The Global Health Care Securities Fund, the Mutual Discovery Securities Fund,
the Mutual Shares Securities Fund, the Templeton Global Asset Allocation Fund,
the Templeton International Smaller Companies Fund, and the Value Securities
Fund pay administrative fees to FT Services based on the average daily net
assets of each Fund as follows:
<TABLE>
<CAPTION>
ANNUALIZED FEE RATE DAILY NET ASSETS
-------------------------------------------
<S> <C>
.15% First $200 million
.135% over $200 million, up to and including $700 million
.10% over $700 million, up to and including $1.2 billion
</TABLE>
Fees are further reduced on net assets over $1.2 billion.
Advisers agreed in advance to waive the management fees for the Money Market
Fund, the Zero Coupon Fund - 2000, the Zero Coupon Fund - 2005, and the Zero
Coupon Fund - 2010, through December 31, 1998, as noted in the Statements of
Operations.
Distribution plans are included in the management agreements of the Funds. No
payments were made by any Fund as a result of the plans.
Investor Services, under terms of an agreement, performs shareholder servicing
for the Funds and is not paid by the Funds for the services.
4. INCOME TAXES
At December 31, 1998, the Funds had tax basis capital losses, which may be
carried over to offset future capital gains. Such losses expire as follows:
<TABLE>
<CAPTION>
GLOBAL
CAPITAL HEALTH CARE MONEY MUTUAL DISCOVERY MUTUAL SHARES
GROWTH FUND SECURITIES FUND MARKET FUND SECURITIES FUND SECURITIES FUND
---------------------------------------------------------------------------------
Capital loss carryovers expiring in:
<S> <C> <C> <C> <C> <C>
2000 ............................... $ -- $ -- $ 418 $ -- $ --
2001 ............................... -- -- 523 -- --
2002 ............................... -- -- 7,568 -- --
2004 ............................... 52,275 -- -- -- --
2005 ............................... 72,043 -- -- -- --
2006 ............................... 3,304,340 239,954 371 12,201,956 9,766,336
---------------------------------------------------------------------------
$3,428,658 $239,954 $8,880 $12,201,956 $9,766,336
---------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
NATURAL RESOURCES
SECURITIES FUND
---------------
<S> <C>
2000 ............................... $ --
2001 ............................... --
2002 ............................... --
2004 ............................... 146,066
2005 ............................... 3,313,053
2006 ............................... 14,821,804
-----------
$18,280,923
-----------
</TABLE>
189
<PAGE>
FRANKLIN VALUEMARK FUNDS
Notes to Financial Statements (continued)
4. INCOME TAXES (CONT.)
<TABLE>
<CAPTION>
TEMPLETON TEMPLETON
DEVELOPING TEMPLETON INTERNATIONAL TEMPLETON
MARKETS GLOBAL INCOME SMALLER PACIFIC
EQUITY FUND SECURITIES FUND COMPANIES FUND GROWTH FUND
----------------------------------------------------------------------
<S> <C> <C> <C> <C>
Capital loss carryovers expiring in:
2002 .................................. $ -- $ -- $ -- $ --
2003 .................................. -- 1,035,267 -- --
2005 .................................. -- -- -- --
2006 .................................. 21,632,762 -- 2,543,971 24,460,805
------------------------------------------------------------------
$21,632,762 $1,035,267 $2,543,971 $24,460,805
------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
U.S. GOVERNMENT VALUE
SECURITIES FUND SECURITIES FUND
----------------------------------
<S> <C> <C>
Capital loss carryovers expiring in:
2002 .................................. $11,604,729 $ --
2003 .................................. 826,481 --
2005 .................................. 169,754 --
2006 -- 64,007
---------------------------
$12,600,964 $64,007
---------------------------
</TABLE>
At December 31, 1998, the following Funds had deferred capital losses and/or
deferred currency losses occurring subsequent to October 31, 1998. For tax
purposes, such losses will be reflected in the year ending December 31, 1999.
<TABLE>
<CAPTION>
TEMPLETON TEMPLETON
MUTUAL DISCOVERY MUTUAL SHARES NATURAL RESOURCES SMALL CAP DEVELOPING MARKETS GLOBAL ASSET
SECURITIES FUND SECURITIES FUND SECURITIES FUND FUND EQUITY FUND ALLOCATION FUND
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$812,344 $187,467 $5,103,017 $542,078 $7,956,080 $1,267,941
</TABLE>
<TABLE>
<CAPTION>
TEMPLETON TEMPLETON
GLOBAL INCOME PACIFIC VALUE
SECURITIES FUND GROWTH FUND SECURITIES FUND
- -------------------------------------------------
<S> <C> <C>
$3,913,734 $217,089 $7,486
</TABLE>
Net investment income differs for financial statement and tax purposes primarily
due to differing treatments of defaulted securities, foreign currency
transactions and passive foreign investment company shares.
Net realized capital gains (losses) differ for financial statement and tax
purposes primarily due to differing treatments of wash sales, foreign currency
transactions and passive foreign investment company shares.
At December 31, 1998, the net unrealized appreciation (depreciation) based on
the cost of investments for income tax purposes were as follows:
<TABLE>
<CAPTION>
GLOBAL
CAPITAL HEALTH CARE GLOBAL UTILITIES GROWTH AND HIGH
GROWTH FUND SECURITIES FUND SECURITIES FUND INCOME FUND INCOME FUND
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Investments at cost .......................... $175,741,424 $8,341,106 $777,543,181 $1,074,294,598 $470,804,786
--------------------------------------------------------------------------------
Unrealized appreciation ...................... 49,774,320 1,091,375 227,578,820 287,053,376 11,535,188
Unrealized depreciation ...................... (4,955,714) (236,878) (29,870,849) (42,162,982) (43,902,212)
--------------------------------------------------------------------------------
Net unrealized appreciation (depreciation) ... $ 44,818,606 $ 854,497 $197,707,971 $ 244,890,394 $(32,367,024)
--------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
MUTUAL NATURAL REAL ESTATE
INCOME DISCOVERY MUTUAL SHARES RESOURCES SECURITIES
SECURITIES FUND SECURITIES FUND SECURITIES FUND SECURITIES FUND FUND
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Investments at cost .......................... $1,091,074,246 $218,469,434 $461,755,822 $ 56,261,477 $263,035,403
---------------------------------------------------------------------------------
Unrealized appreciation ...................... 182,286,142 21,829,765 52,429,218 2,541,006 34,420,668
Unrealized depreciation ...................... (109,573,318) (22,785,541) (33,393,897) (12,756,075) (18,351,064)
---------------------------------------------------------------------------------
Net unrealized appreciation (depreciation) ... $ 72,712,824 $ (955,776) $ 19,035,321 $(10,215,069) $ 16,069,604
---------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
TEMPLETON TEMPLETON
RISING DEVELOPING GLOBAL ASSET TEMPLETON
DIVIDENDS SMALL CAP MARKETS ALLOCATION GLOBAL GROWTH
FUND FUND EQUITY FUND FUND FUND
---------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Investments at cost ............................... $581,130,657 $307,405,881 $235,244,643 $82,288,215 $697,688,443
---------------------------------------------------------------------------
Unrealized appreciation ........................... 209,282,281 63,912,068 14,946,397 10,184,177 156,671,182
Unrealized depreciation ........................... (37,234,136) (47,651,721) (88,306,086) (11,370,446) (111,111,502)
---------------------------------------------------------------------------
Net unrealized appreciation (depreciation) ........ $172,048,145 $ 16,260,347 $(73,359,689) $(1,186,269) $ 45,559,680
---------------------------------------------------------------------------
</TABLE>
190
<PAGE>
FRANKLIN VALUEMARK FUNDS
Notes to Financial Statements (continued)
4. INCOME TAXES (CONT.)
<TABLE>
<CAPTION>
TEMPLETON U.S.
TEMPLETON TEMPLETON INTERNATIONAL TEMPLETON GOVERNMENT
GLOBAL INCOME INTERNATIONAL SMALLER PACIFIC SECURITIES
SECURITIES FUND EQUITY FUND COMPANIES FUND GROWTH FUND FUND
---------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Investments at cost ............................... $145,477,766 $796,642,373 $28,505,946 $173,769,693 $689,553,989
--------------------------------------------------------------------------
Unrealized appreciation ........................... 5,214,267 284,020,124 3,666,164 4,494,062 30,080,582
Unrealized depreciation ........................... (2,414,175) (121,524,973) (7,190,785) (78,193,879) (891,431)
--------------------------------------------------------------------------
Net unrealized appreciation (depreciation) ........ $ 2,800,092 $162,495,151 $(3,524,621) $(73,699,817) $ 29,189,151
--------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
VALUE ZERO COUPON ZERO COUPON ZERO COUPON
SECURITIES FUND FUND - 2000 FUND - 2005 FUND - 2010
--------------------------------------------------------------
<S> <C> <C> <C> <C>
Investments at cost ................................. $9,638,340 $88,607,680 $71,204,140 $73,456,189
--------------------------------------------------------------
Unrealized appreciation ............................. 630,480 4,980,585 13,390,351 20,191,036
Unrealized depreciation ............................. (1,051,415) -- -- --
--------------------------------------------------------------
Net unrealized appreciation (depreciation) .......... $ (420,935) $ 4,980,585 $13,390,351 $20,191,036
--------------------------------------------------------------
</TABLE>
5. INVESTMENT TRANSACTIONS
Purchases and sales of securities (excluding short-term securities) for the
period ended December 31, 1998 were as follows:
<TABLE>
<CAPTION>
GLOBAL
CAPITAL HEALTH CARE GLOBAL UTILITIES GROWTH AND HIGH
GROWTH FUND SECURITIES FUND* SECURITIES FUND INCOME FUND INCOME FUND
-----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Purchases .............................. $83,963,247 $8,350,468 $345,990,937 $345,845,538 $194,867,824
Sales .................................. $14,984,784 $1,538,637 $569,441,686 $420,710,446 $203,682,362
</TABLE>
<TABLE>
<CAPTION>
INCOME MUTUAL DISCOVERY MUTUAL SHARES NATURAL RESOURCES REAL ESTATE
SECURITIES FUND SECURITIES FUND SECURITIES FUND SECURITIES FUND SECURITIES FUND
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Purchases .............................. $153,409,105 $182,577,184 $393,391,211 $38,212,231 $ 47,342,473
Sales .................................. $273,993,364 $226,345,216 $258,543,897 $47,971,600 $109,718,566
</TABLE>
<TABLE>
<CAPTION>
TEMPLETON
DEVELOPING TEMPLETON TEMPLETON
RISING SMALL CAP MARKETS GLOBAL ASSET GLOBAL GROWTH
DIVIDENDS FUND FUND EQUITY FUND ALLOCATION FUND FUND
--------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Purchases .............................. $200,557,881 $170,640,706 $ 70,250,809 $44,586,774 $227,707,490
Sales .................................. $266,149,791 $154,234,535 $102,356,111 $45,975,579 $223,605,870
</TABLE>
<TABLE>
<CAPTION>
TEMPLETON U.S.
TEMPLETON TEMPLETON INTERNATIONAL TEMPLETON GOVERNMENT
GLOBAL INCOME INTERNATIONAL SMALLER PACIFIC SECURITIES
SECURITIES FUND EQUITY FUND COMPANIES FUND GROWTH FUND FUND
-------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Purchases .............................. $134,227,237 $ 54,558,359 $5,279,351 $14,613,597 $224,436,050
Sales .................................. $170,505,788 $130,992,436 $6,714,347 $51,871,766 $291,443,353
</TABLE>
<TABLE>
<CAPTION>
VALUE ZERO COUPON ZERO COUPON ZERO COUPON
SECURITIES FUND FUND - 2000 FUND - 2005 FUND - 2010
------------------------------------------------------------
<S> <C> <C> <C> <C>
Purchases ............................................. $9,461,629 $17,945,900 $3,063,330 $13,934,098
Sales ................................................. $1,003,722 $44,461,447 $5,908,354 $17,745,411
</TABLE>
*For the period May 1, 1998 (effective date) to December 31, 1998.
191
<PAGE>
FRANKLIN VALUEMARK FUNDS
Notes to Financial Statements (continued)
5. INVESTMENT TRANSACTIONS (CONT.)
Transactions in call options written during the period ended December 31, 1998
were as follows:
MUTUAL DISCOVERY SECURITIES FUND
<TABLE>
<CAPTION>
NUMBER OF
CONTRACTS PREMIUM
------------------------
<S> <C> <C>
Options outstanding at December 31, 1997 . -- $ --
Options written .......................... 9 1,346
Options expired .......................... -- --
Options closed ........................... -- --
Options exercised ........................ -- --
------------------------
Options outstanding at December 31, 1998 . 9 $1,346
------------------------
</TABLE>
MUTUAL SHARES SECURITIES FUND
<TABLE>
<CAPTION>
NUMBER OF
CONTRACTS PREMIUM
----------------------
<S> <C> <C>
Options outstanding at December 31, 1997 . -- $ --
Options written ........................... 12 1,795
Options expired ........................... -- --
Options closed ............................ -- --
Options exercised ......................... -- --
----------------------
Options outstanding at December 31, 1998 .. 12 $1,795
----------------------
</TABLE>
6. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
Each of the Funds listed below has been a party to financial instruments with
off-balance-sheet risk, primarily forward exchange contracts, in order to
minimize the impact on the Funds from adverse changes in the relationship
between the U.S. dollar and foreign currencies and interest rates. These
instruments involve market risk in excess of the amount recognized on the
Statements of Assets and Liabilities. Some of these risks have been minimized by
offsetting contracts. Risks arise from the possible inability of counterparties
to meet the terms of their contracts, future movement in currency values and
interest rates and contract positions that are not exact offsets. The contract
amount indicates the extent of the Funds' involvement in such contracts.
A forward exchange contract is an agreement between two parties to exchange
different currencies at a specific rate at an agreed future date. At December
31, 1998, the Funds have outstanding forward exchange contracts for the sale or
purchase of currencies as set out below. The contracts are reported in the
financial statements at the Funds' net equity, as measured by the difference
between the forward exchange rates at the reporting date and the forward
exchange rates at the day of entry into the contract.
MUTUAL DISCOVERY SECURITIES FUND
<TABLE>
<CAPTION>
IN UNREALIZED
CONTRACTS TO SELL EXCHANGE FOR SETTLEMENT DATE GAIN (LOSS)
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
4,001,767 British Pound ......................................... U.S.$ 6,658,941 5/20/99 U.S.$ 21,361
858,070 British Pound ......................................... 1,452,632 1/20/99 25,994
181,897 Canadian Dollar ....................................... 123,354 1/13/99 4,927
24,031,159 Danish Krone .......................................... 3,869,752 4/27/99 81,887
4,650,080 Dutch Guilder ......................................... 2,500,043 3/17/99 12,930
15,741,776 French Franc .......................................... 2,863,066 1/19/99 42,350
12,354,985 French Franc .......................................... 2,218,130 2/11/99 1,791
1,998,595,445 Italian Lira .......................................... 1,235,865 4/02/99 18,272
2,277,014 New Zealand Dollar .................................... 1,225,512 2/17/99 21,887
906,057 Norwegian Krone ....................................... 122,000 3/10/99 3,784
121,171,307 Spanish Peseta ........................................ 879,327 1/19/99 23,345
65,092,418 Swedish Krona ......................................... 8,354,822 3/18/99 296,835
29,738,334 Swedish Krona ......................................... 3,696,451 2/17/99 19,987
17,022,073 Swedish Krona ......................................... 2,185,314 4/19/99 75,032
8,592,405 Swedish Krona ......................................... 1,072,549 3/15/99 9,027
1,065,217 Swedish Krona ......................................... 136,847 1/21/99 5,309
6,142,559 Swiss Franc ........................................... 4,534,929 3/10/99 31,253
--------- ------
U.S.$43,129,534 U.S.$ 695,971
----------- -------------
</TABLE>
192
<PAGE>
FRANKLIN VALUEMARK FUNDS
Notes to Financial Statements (continued)
6. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK (CONT.)
MUTUAL DISCOVERY SECURITIES FUND (CONT.)
<TABLE>
<CAPTION>
IN UNREALIZED
CONTRACTS TO BUY EXCHANGE FOR SETTLEMENT DATE GAIN (LOSS)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1,424,115 British Pound .................................. U.S. $ 2,344,275 1/20/99 U.S. $ 23,476
7,389,580 Canadian Dollar ................................ 4,776,317 1/13/99 34,757
793,945 Danish Krone ................................... 124,560 4/27/99 584
23,937,428 French Franc ................................... 4,279,661 1/19/99 9,607
4,637,703,355 Italian Lira ................................... 2,746,160 4/02/99 79,241
300,000 New Zealand Dollar ............................. 156,201 2/17/99 2,378
----------- -----------
U.S. $14,427,174 U.S. $ 150,043
----------- -----------
Unrealized gain on forward foreign currency contracts ............. U.S. $ 846,014
-----------
CONTRACTS TO SELL
- -------------------------------------------------------------------
2,118,309 Australian Dollar .............................. U.S. $ 1,259,589 1/06/99 U.S. $ (39,761)
118,478,225 Belgian Franc .................................. 3,425,049 1/12/99 (23,934)
14,779,941 British Pound .................................. 23,973,064 1/20/99 (600,236)
7,852,937 Canadian Dollar ................................ 5,094,940 1/13/99 (17,808)
4,767,834 Dutch Guilder .................................. 2,537,229 2/10/99 (8,527)
10,330,365 Finnish Markka ................................. 2,025,165 2/03/99 (18,536)
44,708,803 French Franc ................................... 7,840,899 1/27/99 (173,605)
22,664,983 French Franc ................................... 3,792,668 1/19/99 (268,595)
16,200,879,697 Italian Lira ................................... 9,327,150 4/02/99 (542,744)
194,232,686 Japanese Yen ................................... 1,694,013 3/23/99 (46,964)
16,583,945 Norwegian Krone ................................ 2,119,950 3/10/99 (43,813)
64,324,619 Portugese Escudo ............................... 374,766 3/17/99 (3,407)
----------- -----------
U.S. $63,464,482 U.S. $(1,787,930)
----------- -----------
CONTRACTS TO BUY
- -------------------------------------------------------------------
1,572,608 Australian Dollar .............................. U.S. $ 995,292 1/06/99 U.S. $ (30,670)
871,138 British Pound .................................. 1,459,475 1/20/99 (11,112)
379,465 British Pound .................................. 634,769 5/20/99 (5,365)
7,723,500 Danish Krone ................................... 1,220,429 4/27/99 (3,027)
10,403,550 Norwegian Krone ................................ 1,368,345 3/10/99 (10,959)
----------- -----------
U.S. $ 5,678,310 U.S. $ (61,133)
----------- -----------
Unrealized loss on forward foreign currency contracts ............. (1,849,063)
----------
Net unrealized loss on forward foreign currency contracts ... U.S. $(1,003,049)
-----------
</TABLE>
MUTUAL SHARES SECURITIES FUND
<TABLE>
<CAPTION>
IN UNREALIZED
CONTRACTS TO SELL EXCHANGE FOR SETTLEMENT DATE GAIN (LOSS)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
4,628,544 British Pound .................................. U.S. $ 7,701,897 5/20/99 U.S. $ 24,707
271,399 British Pound .................................. 452,951 6/18/99 2,924
265,000 British Pound .................................. 442,020 1/20/99 1,428
13,367,244 Canadian Dollar ................................ 8,882,775 1/29/99 179,540
5,190,062 Dutch Guilder .................................. 2,790,356 3/17/99 14,432
32,069,148 French Franc ................................... 5,757,477 2/11/99 4,650
21,552,387 French Franc ................................... 3,867,963 1/19/99 6,063
2,203,476 French Franc ................................... 399,260 2/26/99 3,705
995,378,319 Italian Lira ................................... 611,770 4/02/99 5,362
18,005,166 Spanish Peseta ................................. 127,551 1/19/99 359
34,047,868 Swedish Krona .................................. 4,250,033 3/15/99 35,771
31,199,959 Swedish Krona .................................. 4,004,615 3/18/99 142,278
22,259,585 Swedish Krona .................................. 2,882,439 4/19/99 122,845
11,000,000 Swedish Krona .................................. 1,364,697 2/17/99 4,798
3,330,461 Swiss Franc .................................... 2,455,187 3/10/99 13,319
----------- --------
U.S. $45,990,991 U.S. $562,181
----------- --------
</TABLE>
193
<PAGE>
FRANKLIN VALUEMARK FUNDS
Notes to Financial Statements (continued)
6. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK (CONT.)
MUTUAL SHARES SECURITIES FUND (CONT.)
<TABLE>
<CAPTION>
IN UNREALIZED
CONTRACTS TO BUY EXCHANGE FOR SETTLEMENT DATE GAIN (LOSS)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1,200,000 British Pound ..................................... U.S. $ 1,980,060 5/20/99 U.S. $ 10,335
232,983 British Pound ..................................... 380,927 1/20/99 6,433
8,771,175 Canadian Dollar ................................... 5,672,981 1/29/99 37,818
6,984,525 Finnish Markka .................................... 1,379,109 2/03/99 2,670
1,889,660,721 Italian Lira ...................................... 1,062,683 4/02/99 88,544
----------- ---------
U.S. $10,475,760 U.S. $145,800
----------- ---------
Net unrealized gain on offsetting forward foreign currency contracts . 50,154
---------
Unrealized gain on forward foreign currency contracts ............. U.S. $758,135
---------
CONTRACTS TO SELL
- ----------------------------------------------------------------------
8,948,435 British Pound ..................................... U.S. $14,514,361 1/20/99 U.S. $(363,412)
1,343,045 Dutch Guilder ..................................... 714,709 2/10/99 (2,402)
16,683,518 Finnish Markka .................................... 3,270,637 2/03/99 (29,936)
10,686,679 French Franc ...................................... 1,788,266 1/19/99 (126,644)
5,114,831 French Franc ...................................... 897,024 1/27/99 (19,861)
7,048,009,404 Italian Lira ...................................... 4,064,062 4/02/99 (229,722)
----------- ---------
U.S. $25,249,059 U.S. $(771,977)
----------- ---------
CONTRACTS TO BUY
- ----------------------------------------------------------------------
750,000 British Pound ..................................... U.S. $ 1,245,413 5/20/99 U.S. $ (1,416)
229,946 British Pound ..................................... 385,570 1/20/99 (3,258)
968,788 Finnish Markka .................................... 192,986 2/03/99 (1,326)
----------- ---------
U.S. $ 1,823,969 U.S. $ (6,000)
----------- ---------
Net unrealized loss on offsetting forward foreign currency contracts . (26,620)
---------
Unrealized loss on forward foreign currency contracts ............. (804,597)
---------
Net unrealized loss on forward foreign currency contracts ...... U.S. $ (46,462)
---------
</TABLE>
TEMPLETON GLOBAL ASSET ALLOCATION FUND
<TABLE>
<CAPTION>
IN UNREALIZED
CONTRACTS TO SELL EXCHANGE FOR SETTLEMENT DATE GAIN (LOSS)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
125,000 British Pound ................................... U.S. $209,250 1/29/99 U.S. $ 1,481
CONTRACTS TO SELL
- --------------------------------------------------------------------
225,000 British Pound ................................... U.S. $371,700 1/25/99 U.S. $ (2,317)
----------
Net unrealized loss on forward foreign currency contracts .... U.S. $ (836)
----------
</TABLE>
TEMPLETON GLOBAL INCOME SECURITIES FUND
<TABLE>
<CAPTION>
IN UNREALIZED
CONTRACTS TO SELL EXCHANGE FOR SETTLEMENT DATE GAIN (LOSS)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
900,000 British Pound ................................... U.S. $1,506,600 01/29/99 U.S. $10,712
CONTRACTS TO SELL
- --------------------------------------------------------------------
1,825,000 British Pound ................................... U.S. $3,014,900 01/25/99 U.S. $(18,845)
--------
Net unrealized loss on forward foreign currency contracts .... U.S. $ (8,133)
--------
</TABLE>
194
<PAGE>
FRANKLIN VALUEMARK FUNDS
Notes to Financial Statements (continued)
7. CREDIT RISK AND DEFAULTED SECURITIES
The High Income Fund and the Income Securities Fund have 94.9% and 29.5%,
respectively, of their portfolios invested in lower rated and comparable quality
unrated high yield securities, which tend to be more sensitive to economic
conditions than higher rated securities. The risk of loss due to default by the
issuer may be significantly greater for the holders of high yielding securities
because such securities are generally unsecured and are often subordinated to
other creditors of the issuer. At December 31, 1998 the High Income Fund held
defaulted securities with a value aggregating $1,925,625 representing .4% of the
Fund's net assets. For information as to specific securities, see the
accompanying Statement of Investments.
For financial reporting purposes, the Funds discontinue accruing income on
defaulted bonds and provide an estimate for losses on interest receivable.
The High Income Fund has investments in excess of 10% of its total net assets in
the Consumer Services and Telecommunications industries. Such concentration may
subject the Fund more significantly to economic changes occurring within that
industry.
8. RESTRICTED SECURITIES
The Funds may purchase securities through a private offering that generally
cannot be resold to the public without prior registration under the Securities
Act of 1933. The costs of registering such securities are paid by the issuer.
Restricted securities held at December 31,1998 are as follows:
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNTS/SHARES ISSUER ACQUISITION DATE COST VALUE
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
GLOBAL UTILITIES SECURITIES FUND
$ 175,000 CMS Energy Corp., 7.75%, cvt. pfd. (1.05% of Net Assets) .... 6/18/97 $8,750,000 $10,325,000
-----------
HIGH INCOME FUND
$7,800,000 International Wireless Communications, senior disc.
note, 8/15/01 (.15% of Net Assets) .......................... 8/09/96 $3,965,050 $ 682,500
-----------
INCOME SECURITIES FUND
$ 160,000 CMS Energy Corp., 7.75%, cvt. pfd. (.80% of Net Assets) ..... 6/18/97 $8,000,000 $ 9,440,000
-----------
MUTUAL DISCOVERY SECURITIES FUND
615 Golden Ocean Group Ltd., wts., 8/31/01 ...................... 8/25/97 $ 375 $ --
94,000 Laser Mortgage Management, Inc. ............................. 11/26/97 1,410,000 511,125
11,745 Security Capital European Realty ............................ 4/08/98 234,900 234,900
-----------
Total Restricted Securities (.33% of Net Assets) .......................... $ 746,725
-----------
MUTUAL SHARES SECURITIES FUND
1,120 Golden Ocean Group Ltd., wts., 8/31/01 ...................... 8/25/97 $ 1,611 $ --
215,000 Laser Mortgage Management Inc. .............................. 11/26/97 3,225,000 1,169,062
23,055 Security Capital European Realty ............................ 11/02/98 461,100 461,100
-----------
Total Restricted Securities (.34% of Net Assets) .......................... $ 1,630,162
-----------
REAL ESTATE SECURITIES FUND
866,067 Pacific Retail Trust (3.28% of Net Assets) .................. 8/30/96-4/30/97 $9,791,134 $ 9,249,595
-----------
</TABLE>
195
<PAGE>
FRANKLIN VALUEMARK FUNDS
Notes to Financial Statements (continued)
9. HOLDING OF 5% VOTING SECURITIES OF PORTFOLIO COMPANIES
The Investment Company Act of 1940 defines "affiliated companies" as investments
in portfolio companies in which the Fund owns 5% or more of the outstanding
voting securities. Investments in "affiliated companies", at December 31, 1998
were as follows:
<TABLE>
<CAPTION>
NUMBER OF NUMBER OF
SHARES HELD AT GROSS GROSS SHARES HELD AT VALUE AT DIVIDEND
NAME OF ISSUER BEGINNING OF PERIOD ADDITIONS REDUCTIONS END OF PERIOD END OF PERIOD INCOME
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
REAL ESTATE SECURITIES FUND
Candlewood Hotel Co. Inc. ..... 650,000 -- -- 650,000 $ 3,412,500 None
RISING DIVIDENDS FUND
West Co. Inc. ................. 172,900 611,400 -- 784,300 $27,989,706 $255,193
</TABLE>
10. LENDING OF PORTFOLIO SECURITIES
The Small Cap Fund loans securities to certain brokers for which it receives
cash collateral against the loaned securities in an amount equal to at least
102% of the market value of the loaned securities. Net interest income from the
investment of the cash collateral received was $298,185 for the period ended
December 31, 1998. The value of the loaned securities was $7,875,252 at December
31, 1998.
11. OTHER CONSIDERATIONS
Advisers, as the High Income Fund and the Income Securities Fund manager, may
serve as a member of various credit committees, representing credit interests in
certain corporate restructuring negotiations. Currently, Advisers serves on the
credit committees for International Wireless Communications. As a result of this
involvement, Advisers may be in possession of certain material non-public
information. Advisers has not nor does it intend to sell any of its holdings in
these securities while in possession of this information.
196
<PAGE>
FRANKLIN VALUEMARK FUNDS
Independent Auditors' Report
TO THE SHAREHOLDERS AND BOARD OF TRUSTEES OF
FRANKLIN VALUEMARK FUNDS
In our opinion, the accompanying statements of assets and liabilities, including
the statements of investments, and the related statements of operations and
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of each of the funds constituting the
Franklin Valuemark Funds, (hereafter referred to as the "Fund") at December 31,
1998, the results of each of their operations for the year then ended, the
changes in each of their net assets for each of the two years in the period then
ended and each of their financial highlights for each of the periods presented,
in conformity with generally accepted accounting principles. These financial
statements and financial highlights (hereafter referred to as "financial
statements") are the responsibility of the Fund's management; our responsibility
is to express an opinion on these financial statements based on our audits. We
conducted our audits of these financial statements in accordance with generally
accepted auditing standards which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits, which included confirmation of securities at December 31, 1998 by
correspondence with the custodian and brokers, provide a reasonable basis for
the opinion expressed above.
PricewaterhouseCoopers LLP
San Francisco, California
February 4, 1999
197
<PAGE>
FRANKLIN VALUEMARK FUNDS
Tax Information
Under Section 852(b)(3)C) of the Internal Revenue Code, the Funds hereby
designate the following amounts as capital gain dividends for the fiscal year
ended December 31, 1998:
<TABLE>
<CAPTION>
CAPITAL GAINS
20% RATE GAIN
-------------
<S> <C>
Global Utilities Securities Fund .............. $ 73,661,402
Growth and Income Fund Fund ................... 115,134,923
High Income Fund .............................. 11,999,469
Income Securities Fund ........................ 28,954,072
Real Estate Securities Fund ................... 23,903,974
Rising Dividends Fund ......................... 85,244,094
Small Cap Fund ................................ 220,650
Templeton Global Asset Allocation Fund ........ 4,579,385
Templeton Global Growth Fund .................. 72,351,509
Templeton International Equity Fund ........... 22,477,825
Zero Coupon Funds - 2000 ...................... 1,717,748
Zero Coupon Funds - 2005 ...................... 454,474
Zero Coupon Funds - 2010 ...................... 1,744,159
</TABLE>
Under Section 854(b)(2) of the Internal Revenue Code, the Funds hereby designate
the following percentage amounts of the ordinary income dividends as income
qualifying for the dividends received deduction for the fiscal year ended
December 31, 1998.
<TABLE>
<CAPTION>
HIGH INCOME
CAPITAL GROWTH AND GLOBAL UTILITIES INCOME SECURITIES MUTUAL DISCOVERY
GROWTH FUND INCOME FUND SECURITIES FUND FUND FUND SECURITIES FUND
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
100.00% 50.69% 50.82% .55% 25.21% 14.35%
</TABLE>
<TABLE>
<CAPTION>
NATURAL RISING
MUTUAL SHARES RESOURCES REAL ESTATE DIVIDENDS
SECURITIES FUND SECURITIES FUND SECURITIES FUND FUND
- ------------------------------------------------------------------
<S> <C> <C> <C>
70.47% 30.19% 14.07% 60.34%
</TABLE>
<TABLE>
<CAPTION>
TEMPLETON TEMPLETON
SMALL CAP GLOBAL ASSET GLOBAL
FUND ALLOCATION FUND GROWTH FUND
- -------------------------------------------
<S> <C> <C>
5.86% 3.43% 9.22%
</TABLE>
198
<PAGE>
FVF *A98
SUPPLEMENT DATED JANUARY 15, 1999
TO THE PROSPECTUSES DATED MAY 1, 1998
OF
FRANKLIN(R) VALUEMARK(R) II, III & IV
FLEXIBLE PAYMENT VARIABLE ANNUITIES
ALLIANZ LIFE VARIABLE ACCOUNT B AND
PREFERRED LIFE VARIABLE ACCOUNT C
I. YEAR 2000 Allianz Life and Preferred Life have initiated programs to ensure
that all of the computer systems utilized to provide services and administer
policies will function properly in the year 2000. An assessment of the total
expected costs specifically related to the year 2000 conversion has been
completed; the total amounts to be expensed over the next two years are not
expected to have a significant effect on either Allianz Life's or Preferred
Life's financial position or results of operations. Allianz Life and Preferred
Life believe they have taken steps that are reasonably designed to address the
potential failure of computer systems used by their service providers and to
ensure their year 2000 program is completed on a timely basis.
II. The shares of Franklin Valuemark Funds, in which the Contracts invest, have
been renamed as Class 1 shares. No other changes were made to the Class 1
shares.
III. The following changes are made to the sections entitled "Trust Annual
Expenses" or "Franklin Valuemark Funds' Annual Expenses" in the prospectus:
a) The following chart restates information about certain Portfolios, as
indicated below:
<TABLE>
<CAPTION>
MANAGEMENT TOTAL
AND PORTFOLIO OTHER ANNUAL
PORTFOLIO ADMINISTRATION FEES EXPENSES EXPENSES
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Zero Coupon Fund - 2000(5) ..... .60% .03% .63%
Zero Coupon Fund - 2005(5) ..... .62% .03% .65%
Zero Coupon Fund - 2010(5) ..... .62% .03% .65%
</TABLE>
b) The footnotes are restated as follows:
(4)For the year ended December 31, 1997, Franklin Advisers, Inc. ("Advisers")
agreed in advance to waive a portion of its management fees and, if
necessary, to pay certain expenses of the Fund. With this reduction,
management fees and total annual expenses, including management and portfolio
administration fees, paid by the Portfolio represented .43% and .45% of the
Portfolio's average net assets, respectively. The voluntary expense reduction
was discontinued by Advisers effective January 1, 1999.
(5)For the year ended December 31, 1997, Advisers agreed in advance to waive
a portion of its management fees and, if necessary, to pay certain expenses
of the Fund. With this reduction, management fees and total annual expenses,
including management and portfolio administration fees, represented .37% and
.40% of each Portfolio's average net assets, respectively. The voluntary
expense reduction was discontinued by Advisers effective January 1, 1999.
c) The Examples for certain Portfolios are restated, as indicated below:
FRANKLIN VALUEMARK II EXAMPLES
If the Contract is fully surrendered at the end of the applicable time period
and no prior surrenders have occurred, the Contract Owner would have incurred
the following expenses on a $1,000 investment, assuming a 5% rate of return
on assets compounded annually:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Zero Coupon Fund - 2000 ... $ 64 $ 89 $118 $246
Zero Coupon Fund - 2005 ... $ 64 $ 89 $119 $248
Zero Coupon Fund - 2010 ... $ 64 $ 89 $119 $248
</TABLE>
If the Contract is not surrendered at the end of the applicable time period
and no prior surrenders have occurred or is annuitized, the Contract Owner
would have incurred the following expenses on a $1,000 investment, assuming a
5% annual return on assets compounded annually:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Zero Coupon Fund - 2000 ... $ 22 $ 67 $114 $246
Zero Coupon Fund - 2005 ... $ 22 $ 67 $115 $248
Zero Coupon Fund - 2010 ... $ 22 $ 67 $115 $248
</TABLE>
199
<PAGE>
FRANKLIN VALUEMARK III EXAMPLES
If the Contract is fully surrendered at the end of the applicable time period
and no prior surrenders have occurred, the Contract Owner would have incurred
the following expenses on a $1,000 investment, assuming a 5% rate of return
on assets compounded annually:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Zero Coupon Fund - 2000 ... $ 73 $ 89 $118 $246
Zero Coupon Fund - 2005 ... $ 73 $ 89 $118 $248
Zero Coupon Fund - 2010 ... $ 73 $ 89 $118 $248
</TABLE>
If the Contract is not surrendered at the end of the applicable time period
and no prior surrenders have occurred or is annuitized, the Contract Owner
would have incurred the following expenses on a $1,000 investment, assuming a
5% annual return on assets compounded annually:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Zero Coupon Fund - 2000 ... $ 22 $ 67 $114 $246
Zero Coupon Fund - 2005 ... $ 22 $ 67 $115 $248
Zero Coupon Fund - 2010 ... $ 22 $ 67 $115 $248
</TABLE>
FRANKLIN VALUEMARK IV EXAMPLES
You would pay the following expenses on a $1,000 investment, assuming a 5%
annual return on your money if you surrender your contract at the end of each
time period:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Zero Coupon Fund - 2000 ... $ 83 $120 $153 $255
Zero Coupon Fund - 2005 ... $ 83 $121 $154 $257
Zero Coupon Fund - 2010 ... $ 83 $121 $154 $257
</TABLE>
You would pay the following expenses on a $1,000 investment, assuming a 5%
annual return on your money, if your Contract is not surrendered or is
annuitized:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Zero Coupon Fund - 2000 ... $ 23 $ 69 $119 $255
Zero Coupon Fund - 2005 ... $ 23 $ 70 $120 $257
Zero Coupon Fund - 2010 ... $ 23 $ 70 $120 $257
</TABLE>
200
<PAGE>
SUPPLEMENT DATED JANUARY 15, 1999
TO THE PROSPECTUS DATED MAY 1, 1998
OF
FRANKLIN(R) VALUEMARK(R) FUNDS
CLASS 1 SHARES
I. Beginning December 28, 1998, the Trust has two classes of shares: Class 1 and
Class 2. All previously issued shares have been renamed Class 1 shares, and no
other changes have been made to Class 1 shares. This prospectus offers only
Class 1 shares.
II. The section "General Information" is amended by:
a) Changing the title "Voting Privileges and Other Rights" to "Trust
Organization, Voting Privileges and Rights" and substituting paragraph one
with the following discussion:
The Trust is an open-end management investment company, commonly called a
mutual fund. It was organized as a Massachusetts business trust and is
registered with the SEC. The Trust currently offers two classes of shares of
each Portfolio: Class 1 and Class 2. All shares purchased before the initial
offering of Class 2 shares of a Portfolio on December 28, 1998 are considered
Class 1 shares. After that date, all shares will be designated either Class 1
or Class 2. Class 2 shares have a Rule 12b-1 distribution plan and are
currently subject to fees of .30% per year of Class 2's average daily net
assets which will affect the performance of Class 2 shares. Class 1 shares do
not bear any Rule 12b-1 fees. Additional series and classes of shares may be
offered in the future.
III. The section "Management" is amended by:
a) Under "Managers - Manager Services and Fees," adding the following footnote
to the expense information table:
Effective January 1, 1999, Advisers has discontinued its voluntary fee
waivers for the Money Fund, Zero Coupon Fund - 2000, Zero Coupon Fund - 2005,
Zero Coupon Fund - 2010.
b) Under "Portfolio Operations," replacing the information for the portfolios
listed below with the following, and deleting the biographical information
which is no longer relevant:
Templeton Global Asset Allocation Fund
The Portfolio is managed by:
Dale Winner
Jeffrey Everett
Sean Farrington
Beginning January 1, 1999, the Portfolio's investments in debt obligations
are managed by a team of Templeton Global Bond Managers, a division of
Templeton Investment Counsel, Inc.
Templeton Global Income Securities Fund
Beginning January 1, 1999, the Portfolio is managed by a team of Templeton
Global Bond Managers, a division of Templeton Investment Counsel, Inc.
Please note that certain of the Portfolios discussed in the Trust Prospectus may
not be currently available in connection with a Contract. You should refer to
the prospectus of the specific insurance product that accompanies the Trust
prospectus.
201
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