Annual
Report
October 31, 1998
Franklin Value Investors Trust
Franklin Balance Sheet Investment Fund
Franklin MicroCap Value Fund
Franklin Value Fund
[FRANKLIN TEMPLETON LOGO]
<PAGE>
[FRANKLIN TEMPLETON 50 YEARS CELEBRATION LOGO]
Thank you for investing with Franklin Templeton. We encourage our investors to
maintain a long-term perspective and remember that all securities markets move
both up and down, as do mutual fund share prices. We appreciate your past
support and look forward to serving your investment needs in the years ahead.
[PICTURE OF WILLIAM J. LIPPMAN]
William J. Lippman
President
Franklin Value Investors Trust
<PAGE>
SHAREHOLDER LETTER
Dear Shareholder:
We are pleased to bring you Franklin Value Investors Trust's annual report for
the period ended October 31, 1998.
FOREIGN STORMS BRING RAIN
Although El Nino's effects on domestic weather subsided in June, the U.S. stock
market faced its own version of adverse elements in August. On August 31, storm
clouds rained on American stock markets, washing away much of the first half of
1998's spectacular gains. On that day the Dow Jones(R) Industrial Average (DJIA)
lost 512.61 points or 6.37% of its value.(1) Many analysts attributed this slide
to concerns about Russia's economic and political stability as well as evidence
that the Asian countries' economic problems are more deep-seated than originally
believed. At home, 1998 U.S. corporate profits, through the end of the reporting
period, fell significantly from 1997 levels. Those companies with significant
Asian exports, competing with Asian products or those in commodity businesses
like paper, oil and steel were especially hard hit.
CONTENTS
Shareholder Letter ............... 1
Fund Reports
Franklin Balance Sheet
Investment Fund .................. 5
Franklin MicroCap
Value Fund ....................... 12
Franklin Value Fund .............. 18
Financial Highlights &
Statement of Investments ......... 32
Financial Statements ............. 52
Notes to
Financial Statements ............. 56
Independent
Auditors' Report ................. 64
Tax Information .................. 65
[FUND CATEGORY PYRAMID GRAPHIC]
1. Source: Bloomberg.
<PAGE>
Responding to global financial problems, the Federal Reserve Board (the Fed)
gradually eased monetary policy in September and October. The Fed's monetary
policy panel, the Federal Open Market Committee, twice cut the federal funds
target rate by 0.25%, to 5.00%, hoping to revive growth. The Fed's move
attempted to prevent a recession by providing liquidity to the financial system
and making it easier for major corporations to obtain favorable lending from
banks. This interest-rate cut outshone lackluster earnings announcements and
fueled October's stock market rally, with the DJIA surging 749.48 points, or
9.61% for the month. Of course, this gain followed on the heels of August's
14.91% DJIA drop, which was the biggest monthly percentage decline since October
1987.
At the same time, the very factors negatively impacting the U.S. stock market --
the slowing domestic economy and Russian and Asian economic turmoil -- provided
a boost to the U.S. bond market. Foreign investors flocking to U.S. bonds,
especially U.S. Treasuries, as a "safe haven" from stock market volatility
abroad, and low inflation at home drove bond prices higher. Bond price and yield
move in an inverse relationship, so yields on long-term bonds fell to their
lowest levels in years. The benchmark 30-year U.S. Treasury bond, after falling
as low as 4.70%, ended the reporting period yielding 5.15%, compared with 6.15%
a year earlier.(1)
What is an investor to do faced with widely fluctuating markets? While the
phrase "investment value may go down as well as up" abounds in financial
literature, the stock market's unusually high gains in the past few years may
have led many investors to
2
<PAGE>
believe otherwise. Putting the 1990s into historical perspective, it is worth
noting that the average yearly gain in the S&P 500(R), which paints a broader
picture of the U.S. market than the DJIA, has been +10.51% since 1930; however,
from January 1, 1990, through June 30, 1998, the S&P 500 rose an average of
+17.81% a year.(2) Also, there have been fewer market corrections during the
1990s than previous decades, with a market correction being defined as a 10% or
greater decline over a period of days, weeks or months.
WEATHERPROOFING YOUR PORTFOLIO
In times like these, it's easy to understand why people can become emotional
about their investments. That's why I believe investors should call their
investment representatives, and plan to cover three points in their
conversations. One, review their current financial plans, recalling their goals
and why they made their investment choices in the first place. Two, discuss the
value of diversification, which can help reduce the risk that any one type of
security will have a negative impact on an overall portfolio, and check if their
investments are still properly diversified. As shown during the reporting
period, the bond and stock markets often behave differently. In each of the five
years since 1973 that stocks posted negative annual returns, bonds posted
positive returns.(3) Three, review their investment timeframe to help put recent
market declines into perspective and avoid turning what could be only a
temporary paper loss into a permanent one. Maintaining a long-term outlook is
one of the keys to weathering market volatility.
2. Source: Stocks, Bonds, Bills, and Inflation 1998 Yearbook, Ibbotson
Associates.
3. Source: For bond market statistics based on the Lehman Brothers Government/
Corporate Bond Index - Lehman Brothers; for stock measured by the S&P 500 Index
- - Standard & Poor's(R).
3
<PAGE>
"While investment success is the primary objective of investment planning, one
important by-product of a good plan can be peace of mind."
An important component of a long-term approach is setting up a regular
investment plan. Investing on a scheduled basis, regardless of market
directions, can help investors take advantage of market downturns when prices
are low, and benefit from any market rallies. We encourage you to contact your
investment representative to discuss setting up a regular investment plan. While
investment success is the primary objective of investment planning, one
important by-product of a good plan can be peace of mind.
As always, we appreciate your support, welcome your questions and comments and
look forward to serving your investment needs in the years ahead.
Cordially,
/S/ William J. Lippman
- ------------------------------
William J. Lippman
President
Franklin Value Investors Trust
4
<PAGE>
FRANKLIN BALANCE SHEET
INVESTMENT FUND
Your Fund's Goal: Franklin Balance Sheet Investment Fund seeks high total return
as well as capital appreciation by investing primarily in securities that we
believe are undervalued in the marketplace. The fund will also seek income when
deemed consistent with its goal.
We are pleased to report that as of the fund's fiscal year-end on October 31,
1998, your fund's cumulative total return was -3.14% compared with 3.63% for the
unmanaged Wilshire Small Company Value Index.(1) We use this index as the fund's
benchmark because most of the "bargains" we have found over the years have been
small companies, which dominate the category for our low price-to-book value
investment criteria. The fund's performance, as well as that of its benchmark
index, reflects Wall Street's general tendency in the past year's unsettled
market to equate safety with large size and trading liquidity. In contrast,
Franklin Balance Sheet Investment Fund looks for safety in financial strength
and low cost. The less investor "exuberance" associated with a stock when we buy
it, the safer we feel. We believe that prudent buying, where assets are
relatively cheap,
1. Source: Standard & Poor's Micropal. The index is unmanaged and includes
reinvested dividends. One cannot invest directly in an index.
You will find a complete listing of the fund's portfolio holdings, including
dollar value and number of shares or principal amount, beginning on page 33 of
this report.
5
<PAGE>
should produce superior gains over time. Although we dislike seeing our share
value decline, we find it encouraging to see so many financially strong
companies become available at attractive prices, and anticipate putting money to
work on favorable terms.
The fund ended the year with positions in 149 companies, representing 75.4% of
total net assets, and another 4.2% in closed-end funds. Our only bond holding
accounted for 0.3% of total net assets, while our cash position made up 20.1%.
The fund's net cash flow during the year remained positive at $395,729,810.
Although open only to retirement accounts and existing shareholders, the fund
generated sufficient cash flow to enable us to take advantage of new portfolio
opportunities.
The financial sector continued as the portfolio's largest industry weighting,
followed by utilities and consumer durables, as of the end of the reporting
period. We still like certain electric utilities that are confronting stranded
asset questions brought on by the move to retail competition. We also found
value in some of the retailers whom we felt investors, fearing a possible
economic slowdown, penalized too much. The portfolio holds many economically
sensitive companies that we think should survive any downturn, and could perform
nicely if the economy avoids a slump.
TOP 10 HOLDINGS
FRANKLIN BALANCE SHEET
INVESTMENT FUND
10/31/98
<TABLE>
<CAPTION>
COMPANY % OF TOTAL
INDUSTRY NET ASSETS
- -------------------------------------
<S> <C>
Entergy Corp. 3.14%
Utilities
American National 2.87%
Insurance Co.
Finance
Niagara Mohawk 2.69%
Power Corp.
Utilities
Castle & Cooke, Inc. 1.90%
Consumer Durables
CMP Group, Inc 1.87%
Utilities
Overseas Shipholding 1.86%
Group, Inc
Transportation
American General Corp. 1.85%
Finance
Charming Shoppes, Inc. 1.69%
Retail Trade
Handleman Co. 1.63%
Commercial Services
LTV Corp. 1.63%
Non-Energy Minerals
</TABLE>
6
<PAGE>
During third quarter 1998, the fund made a significant equity investment in
Galoob Toys that paid off when the company announced a deal to be bought out by
Hasbro Inc. for $12 per share, about 56% above our average purchase cost. Other
takeovers, such as Bertucci's, Inc., A.P. Green Industries, Inc., Ameriwood
Industries International Corp., and Rochester & Pittsburgh Coal Co., accounted
for much of the selling during the past few months. We reduced some positions in
companies with weakening balance sheets. Our near-term goal is to capture
opportunities among "the best of the cheap," capitalizing on the recent negative
investor sentiment toward smaller companies.
Please remember, this discussion reflects our views, opinions and portfolio
holdings as of October 31, 1998, the end of the reporting period. However,
market and economic conditions are changing constantly, which can be expected to
affect our strategies and the fund's portfolio composition. Although historical
performance is no guarantee of future results, these insights may help you
understand our investment and management philosophy.
7
<PAGE>
PERFORMANCE SUMMARY
Franklin Balance Sheet Investment Fund produced a -3.14% cumulative total return
for the one-year period ended October 31, 1998. Cumulative total return measures
the change in value of an investment, assuming reinvestment of all
distributions, and does not include the sales charge. We have always maintained
a long-term perspective when managing the fund, and we encourage shareholders to
view their investments in a similar manner. As you can see from the table on
page 11, the fund delivered a +228.25% cumulative total return since inception
on April 2, 1990.
The fund's share price, as measured by net asset value, decreased $3.36, from
$35.22 on October 31, 1997, to $31.86 on October 31, 1998. During the reporting
period, shareholders received per-share distributions consisting of dividend
income totaling 51 cents ($0.51), 66.11 cents ($0.6611) in short-term capital
gains, and $1.1369 in long-term capital gains. Distributions will vary depending
on income earned by the fund and any profits realized from the sale of
securities in the fund's portfolio. Past distributions are not indicative of
future trends.
The graph on page 10 compares the performance of the fund with that of the
Wilshire Small Company Value Index, which is composed of 250 stocks representing
nine different sectors. Keep in mind that an unmanaged market index has inherent
performance
8 Past performance is not predictive of future results.
<PAGE>
differentials in comparison with any fund. An index doesn't pay management fees
to cover salaries of securities analysts or portfolio managers, or pay
commissions or market spreads to buy and sell securities. Unlike an index,
mutual funds are never fully invested because they need cash on hand to redeem
shares. In addition, the performance shown for the fund includes the maximum
initial sales charge, all fund expenses and account fees. If operating expenses
such as Franklin Balance Sheet Investment Fund's had been applied to the index,
its performance would have been lower. Please remember that an index is simply a
measure of performance, and one cannot invest in it directly.
The performance of your fund's shares exceeded the rate of inflation, as
measured by the Consumer Price Index (CPI), keeping your purchasing power well
ahead of inflation -- a primary goal of any investment.
Past performance is not predictive of future results. 9
<PAGE>
TOTAL RETURN INDEX COMPARISON
Franklin Balance Sheet Investment Fund
$10,000 Investment (4/2/90 - 10/31/98)
[LINE GRAPH}
Franklin Value Investors Trust
Annual Report
October 31, 1998.
GRAPHIC MATERIAL (2)
This graph compares the performance Franklin Balance Sheet Investment Fund, as
tracked by the growth in value of a $10,000 investment, to that of Wilshire
Small Company Value Index and CPI from 4/2/90 -10/31/98.
<TABLE>
<CAPTION>
DATE FRANKLIN BALANCE SHEET WILSHIRE SMALL CO. CPI Wil. % CPI %
INVESTMENT FUND VALUE INDEX
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
4/2/90 $ 9,849 $10,000 $10,000
4/30/90 $ 9,547 $ 9,524 $10,016 -4.76% 0.16%
5/31/90 $ 9,947 $ 9,856 $10,039 3.49% 0.23%
6/30/90 $ 9,856 $ 9,691 $10,093 -1.68% 0.54%
7/31/90 $ 9,685 $ 9,208 $10,132 -4.98% 0.38%
8/31/90 $ 8,792 $ 8,565 $10,225 -6.99% 0.92%
9/30/90 $ 7,940 $ 7,976 $10,311 -6.87% 0.84%
10/31/90 $ 7,647 $ 7,702 $10,373 -3.44% 0.60%
11/30/90 $ 8,099 $ 8,161 $10,395 5.96% 0.22%
12/31/90 $ 8,325 $ 8,451 $10,395 3.56% 0.00%
1/31/91 $ 8,902 $ 8,854 $10,458 4.76% 0.60%
2/28/91 $ 9,764 $ 9,627 $10,473 8.74% 0.15%
3/31/91 $10,050 $ 9,942 $10,489 3.27% 0.15%
4/30/91 $10,325 $10,281 $10,505 3.41% 0.15%
5/31/91 $10,626 $10,681 $10,536 3.89% 0.30%
6/30/91 $10,468 $10,615 $10,567 -0.62% 0.29%
7/31/91 $10,571 $11,145 $10,583 4.99% 0.15%
8/31/91 $10,633 $11,582 $10,613 3.92% 0.29%
9/30/91 $10,647 $11,658 $10,660 0.66% 0.44%
10/31/91 $10,779 $11,890 $10,676 1.99% 0.15%
11/30/91 $10,709 $11,650 $10,707 -2.02% 0.29%
12/31/91 $11,246 $12,592 $10,715 8.09% 0.07%
1/31/92 $11,564 $13,029 $10,731 3.47% 0.15%
2/29/92 $11,966 $13,343 $10,769 2.41% 0.36%
3/31/92 $12,022 $13,509 $10,824 1.24% 0.51%
4/30/92 $11,930 $13,873 $10,839 2.70% 0.14%
5/31/92 $12,065 $14,130 $10,855 1.85% 0.14%
6/30/92 $12,015 $14,136 $10,894 0.04% 0.36%
7/31/92 $12,764 $14,676 $10,917 3.82% 0.21%
8/31/92 $12,379 $14,589 $10,947 -0.59% 0.28%
9/30/92 $12,221 $14,700 $10,978 0.76% 0.28%
10/31/92 $12,451 $14,829 $11,016 0.88% 0.35%
11/30/92 $13,003 $15,516 $11,032 4.63% 0.14%
12/31/92 $13,724 $16,273 $11,024 4.88% -0.07%
1/31/93 $14,031 $16,822 $11,078 3.37% 0.49%
2/28/93 $14,121 $17,205 $11,117 2.28% 0.35%
3/31/93 $14,593 $17,792 $11,156 3.41% 0.35%
4/30/93 $14,555 $17,311 $11,187 -2.70% 0.28%
5/31/93 $14,969 $17,433 $11,202 0.70% 0.14%
6/30/93 $15,150 $17,659 $11,218 1.30% 0.14%
7/31/93 $15,626 $18,016 $11,218 2.02% 0.00%
8/31/93 $16,865 $18,477 $11,250 2.56% 0.28%
9/30/93 $16,888 $18,873 $11,273 2.14% 0.21%
10/31/93 $17,411 $18,829 $11,319 -0.23% 0.41%
11/30/93 $17,100 $18,185 $11,327 -3.42% 0.07%
12/31/93 $17,233 $18,571 $11,327 2.12% 0.00%
1/31/94 $17,722 $18,738 $11,358 0.90% 0.27%
2/28/94 $17,517 $18,427 $11,397 -1.66% 0.34%
3/31/94 $16,940 $17,843 $11,435 -3.17% 0.34%
4/30/94 $17,153 $18,075 $11,451 1.30% 0.14%
5/31/94 $17,343 $17,968 $11,459 -0.59% 0.07%
6/30/94 $17,390 $17,973 $11,498 0.03% 0.34%
7/31/94 $17,802 $18,489 $11,529 2.87% 0.27%
8/31/94 $18,301 $18,927 $11,575 2.37% 0.40%
9/30/94 $18,285 $18,549 $11,607 -2.00% 0.27%
10/31/94 $18,007 $18,239 $11,615 -1.67% 0.07%
11/30/94 $17,411 $17,748 $11,630 -2.69% 0.13%
12/31/94 $17,490 $18,206 $11,630 2.58% 0.00%
1/31/95 $18,016 $18,580 $11,676 2.05% 0.40%
2/28/95 $18,817 $19,230 $11,723 3.50% 0.40%
3/31/95 $19,214 $19,128 $11,762 -0.53% 0.33%
4/30/95 $19,847 $19,664 $11,801 2.80% 0.33%
5/31/95 $20,260 $20,114 $11,824 2.29% 0.20%
6/30/95 $20,731 $20,653 $11,848 2.68% 0.20%
7/31/95 $21,227 $21,361 $11,848 3.43% 0.00%
8/31/95 $21,789 $21,874 $11,879 2.40% 0.26%
9/30/95 $22,032 $22,565 $11,902 3.16% 0.20%
10/31/95 $21,485 $22,437 $11,942 -0.57% 0.33%
11/30/95 $22,228 $23,258 $11,933 3.66% -0.07%
12/31/95 $22,745 $23,623 $11,925 1.57% -0.07%
1/31/96 $22,856 $23,809 $11,995 0.79% 0.59%
2/29/96 $23,018 $24,005 $12,034 0.82% 0.32%
3/31/96 $23,589 $24,382 $12,096 1.57% 0.52%
4/30/96 $24,196 $24,306 $12,144 -0.31% 0.39%
5/31/96 $24,666 $24,661 $12,167 1.46% 0.19%
6/30/96 $24,443 $24,727 $12,174 0.27% 0.06%
7/31/96 $23,860 $23,583 $12,197 -4.63% 0.19%
8/31/96 $24,649 $24,472 $12,220 3.77% 0.19%
9/30/96 $24,864 $25,181 $12,259 2.90% 0.32%
10/31/96 $25,122 $25,494 $12,299 1.24% 0.32%
11/30/96 $26,122 $27,089 $12,322 6.26% 0.19%
12/31/96 $26,727 $27,268 $12,322 0.66% 0.00%
1/31/97 $27,712 $27,672 $12,361 1.48% 0.32%
2/28/97 $28,171 $28,308 $12,400 2.30% 0.31%
3/31/97 $27,635 $27,547 $12,431 -2.69% 0.25%
4/30/97 $27,503 $28,051 $12,446 1.83% 0.12%
5/31/97 $29,187 $30,014 $12,438 7.00% -0.06%
6/30/97 $30,818 $31,110 $12,453 3.65% 0.12%
7/31/97 $32,055 $32,790 $12,468 5.40% 0.12%
8/31/97 $32,225 $33,154 $12,492 1.11% 0.19%
9/30/97 $34,354 $34,981 $12,523 5.51% 0.25%
10/31/97 $33,377 $34,022 $12,554 -2.74% 0.25%
11/30/97 $33,197 $34,713 $12,547 2.03% -0.06%
12/31/97 $33,669 $36,115 $12,532 4.04% -0.12%
1/31/98 $33,609 $35,086 $12,555 -2.85% 0.19%
2/28/98 $35,606 $37,567 $12,579 7.07% 0.19%
3/31/98 $36,958 $39,103 $12,603 4.09% 0.19%
4/30/98 $37,452 $38,927 $12,626 -0.45% 0.18%
5/31/98 $36,968 $37,876 $12,649 -2.70% 0.18%
6/30/98 $36,685 $37,228 $12,664 -1.71% 0.12%
7/31/98 $34,716 $34,518 $12,679 -7.28% 0.12%
8/31/98 $30,990 $30,400 $12,694 -11.93% 0.12%
9/30/98 $31,710 $31,303 $12,709 2.97% 0.12%
10/31/98 $32,329 $32,439 $12,740 3.63% 0.24%
</TABLE>
*Includes all sales charges as applicable, and represents the change in value
of an investment over the period shown. Total return assumes reinvestment of
dividends and capital gains at net asset value.
**Source: Standard and Poor's Micropal. Index is unmanaged and includes
reinvested dividends. One cannot invest directly in an index.
10 Past performance is not predictive of future results.
<PAGE>
PERFORMANCE
Franklin Balance Sheet Investment Fund
Periods ended 10/31/98
<TABLE>
<CAPTION>
SINCE
INCEPTION
1-YEAR 5-YEAR (4/2/90)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Cumulative Total Return(1) -3.14% +85.68% +228.25%
Average Annual Total Return(2) -4.60% +12.83% +14.65%
Value of $10,000 Investment(3) $9,540 $18,289 $32,329
</TABLE>
<TABLE>
<CAPTION>
10/31/94 10/31/95 10/31/96 10/31/97 10/31/98
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
One-Year Total Returns(4) +3.42% +19.32% +16.93% +32.86% -3.14%
- --------------------------------------------------------------------------------
</TABLE>
1. Cumulative total return measures the change in value of an investment over
the periods indicated and does not include the sales charge.
2. Average annual total return represents the average annual change in value of
an investment over the periods indicated and includes the maximum 1.50% initial
sales charge.
3. These figures represent the value of a hypothetical $10,000 investment in the
fund over the periods indicated and include the sales charge.
4. One-year total return represents the change in value of an investment over
the periods ended on the specified dates and does not include the sales charge.
Past expense reductions by the fund's manager increased the fund's total
returns. All total return calculations assume reinvestment of dividends and
capital gains at net asset value. Since markets can go down as well as up,
investment return and principal value will fluctuate with market conditions, and
you may have a gain or loss when you sell your shares.
EFFECTIVE FEBRUARY 1, 1998, THE FUND'S 12b-1 FEE WAS REDUCED TO 0.25%.
Franklin Balance Sheet Investment Fund paid distributions derived from long-term
capital gains of $1.1369 per share in December 1997. The fund hereby designates
such distributions as capital gain dividends per Internal Revenue Code Section
852 (b)(3).
Past performance is not predictive of future results. 11
<PAGE>
FRANKLIN MICROCAP VALUE FUND
- ---------------
Your Fund's Goal: Franklin MicroCap Value Fund seeks high total return by
investing primarily in securities of companies with market capitalizations under
$100 million at the time of purchase, and which we believe are undervalued in
the marketplace. The fund will also seek income when deemed consistent with its
goal.
- ---------------
Franklin MicroCap Value Fund follows the same investment strategy as Franklin
Balance Sheet Investment Fund, but is generally limited to companies with market
capitalizations below $100 million. The fund closed to all but retirement
accounts and existing investors in 1996.
We believe the micro-cap universe is the value investor's natural domain. There
are a multitude of companies in every industry that are just too small to be
economically worthwhile for Wall Street research, or to interest large-scale
institutional investors. The withdrawal of institutional attention from
micro-cap companies accelerated during the past year's unsettled market, as
investors typically equated larger size with safety. This led to a drop in
prices, and our share value declined as a result. Nevertheless, positive
occurrences over the reporting period, such as the acquisitions of Bertucci's,
Inc., American Waste Services and Ameriwood Industries International Corp.,
generated substantial
You will find a complete listing of the fund's portfolio holdings, including
dollar value and number of shares or principal amount, beginning on page 40 of
this report.
12
<PAGE>
gains for the fund. These successes encourage us, and we believe our portfolio
contains many companies with good management, solid balance sheets, and a strong
likelihood of either improving profits or being acquired at a premium.
New or increased positions during the reporting period include Sparton Corp.,
Acorn Products, Inc., Seneca Foods Corp., Atlantic Tele-Network, Inc., Bangor
Hydro-Electric Co., Bresler & Reiner, Inc., Green Mountain Power Corp., ECC
International Corp., Maynard Oil Co. and Flanders Corp.
As discussed in the performance summary on page 14, Franklin MicroCap Value Fund
ended its fiscal year with a cumulative total return of -10.95% versus 3.63% for
its benchmark, the Wilshire Small Company Value Index.(1) Although there are no
guarantees, we believe our conservative value strategy should continue to yield
quality micro-cap companies with promising upside potential.
Please remember, this discussion reflects our views, opinions and portfolio
holdings as of October 31, 1998, the end of the reporting period. However,
market and economic conditions are changing constantly, which can be expected to
affect our strategies and the fund's portfolio composition. Although historical
performance is no guarantee of future results, these insights may help you
understand our investment and management philosophy.
TOP 10 HOLDINGS
FRANKLIN MICROCAP VALUE FUND
10/31/98
<TABLE>
<CAPTION>
COMPANY % OF TOTAL
INDUSTRY NET ASSETS
- --------------------------------------------
<S> <C>
Spaghetti Warehouse, Inc. 2.15%
Consumer Services
Crowley Maritime Corp. 1.95%
Transportation
Moore Products Co. 1.76%
Electronic Technology
Maynard Oil Co. 1.76%
Energy Minerals
United Retail Group, Inc. 1.75%
Retail Trade
Garan, Inc. 1.70%
Consumer Non-Durables
M/I Schottenstein 1.66%
Homes, Inc.
Consumer Durables
MidCity Financial Corp. 1.64%
Finance
Atlantic Tele-Network, Inc. 1.63%
Utilities
Bayonne Bancshares, Inc. 1.60%
Finance
</TABLE>
1. Source: Standard & Poor's Micropal. The index is unmanaged and includes
reinvested dividends. One cannot invest directly in an index.
13
<PAGE>
PERFORMANCE SUMMARY
Franklin MicroCap Value Fund produced a -10.95% cumulative total return for the
one-year period ended October 31, 1998. Cumulative total return measures the
change in value of an investment, assuming reinvestment of all distributions,
and does not include the sales charge. We have always maintained a long-term
perspective when managing the fund, and we encourage shareholders to view their
investments in a similar manner. As you can see from the table on page 17, the
fund delivered a +48.79% cumulative total return since inception on December 12,
1995.
The fund's share price, as measured by net asset value, decreased $4.02, from
$24.29 on October 31, 1997, to $20.27 on October 31, 1998. During the reporting
period, shareholders received per-share distributions consisting of dividend
income totaling 0.8 cents ($0.008), 69.13 cents ($0.6913) in short-term capital
gains, and 79.17 cents ($0.7917) in long-term capital gains. Distributions will
vary depending on income earned by the fund and any profits realized from the
sale of securities in the fund's portfolio. Past distributions are not
indicative of future trends.
The graph on page 16 compares the performance of the fund with that of the
Wilshire Small Company Value Index, which is composed of 250 stocks representing
nine different sectors. Keep in mind that an unmanaged market index has inherent
performance
14 Past performance is not predictive of future results.
<PAGE>
differentials in comparison with any fund. An index doesn't pay management fees
to cover salaries of securities analysts or portfolio managers, or pay
commissions or market spreads to buy and sell securities. Unlike an index,
mutual funds are never fully invested because they need cash on hand to redeem
shares. In addition, the performance shown for the fund includes the maximum
initial sales charge, all fund expenses and account fees. If operating expenses
such as Franklin MicroCap Value Fund's had been applied to the index, its
performance would have been lower. Please remember that an index is simply a
measure of performance, and one cannot invest in it directly.
Past performance is not predictive of future results.
15
<PAGE>
TOTAL RETURN INDEX COMPARISON
Franklin MicroCap Value Fund
$10,000 Investment (12/12/95 - 10/31/98)
[LINE GRAPH]
GRAPHIC MATERIAL (4)
This graph compares the performance Franklin MicroCap Value Fund, as tracked by
the growth in value of a $10,000 investment, to that of Wilshire Small Company
Value Index from 12/12/95 - 10/31/98.
<TABLE>
<CAPTION>
DATE FRANKLIN MICROCAP VALUE WILSHIRE SMALL COMPANY Wilshire Small
FUND VALUE INDEX Value $T
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
12/12/95 $ 9,422 $10,000
12/31/95 $ 9,560 $10,096 0.96%
1/31/96 $ 9,585 $10,176 0.79%
2/29/96 $ 9,856 $10,259 0.82%
3/31/96 $10,629 $10,420 1.57%
4/30/96 $11,139 $10,388 -0.31%
5/31/96 $11,429 $10,540 1.46%
6/30/96 $11,416 $10,568 0.27%
7/31/96 $11,082 $10,079 -4.63%
8/31/96 $11,246 $10,459 3.77%
9/30/96 $11,499 $10,762 2.90%
10/31/96 $11,657 $10,896 1.24%
11/30/96 $12,042 $11,578 6.26%
12/31/96 $12,152 $11,654 0.66%
1/31/97 $12,515 $11,826 1.48%
2/28/97 $12,735 $12,098 2.30%
3/31/97 $12,489 $11,773 -2.69%
4/30/97 $12,204 $11,988 1.83%
5/31/97 $12,917 $12,828 7.00%
6/30/97 $13,571 $13,296 3.65%
7/31/97 $14,070 $14,014 5.40%
8/31/97 $14,466 $14,169 1.11%
9/30/97 $15,885 $14,950 5.51%
10/31/97 $15,742 $14,540 -2.74%
11/30/97 $15,619 $14,836 2.03%
12/31/97 $15,520 $15,435 4.04%
1/31/98 $15,375 $14,995 -2.85%
2/28/98 $16,066 $16,055 7.07%
3/31/98 $16,917 $16,712 4.09%
4/30/98 $17,712 $16,637 -0.45%
5/31/98 $17,449 $16,188 -2.70%
6/30/98 $16,979 $15,911 -1.71%
7/31/98 $16,336 $14,752 -7.28%
8/31/98 $13,881 $12,992 -11.93%
9/30/98 $13,853 $13,378 2.97%
10/31/98 $14,019 $13,864 3.63%
</TABLE>
*Includes all sales charges as applicable, and represents the change in
value of an investment over the period shown. Total return assumes reinvestment
of dividends and capital gains at net asset value.
**Source: Standard and Poor's Micropal. Index is unmanaged and includes
reinvested dividends. One cannot invest directly in an index.
Past performance is not predictive of future results.
16
<PAGE>
PERFORMANCE
Franklin MicroCap Value Fund
Periods ended 10/31/98
<TABLE>
<CAPTION>
SINCE
INCEPTION
1-YEAR (12/12/95)
- ------------------------------------------------------------------------
<S> <C> <C>
Cumulative Total Return(1) -10.95% +48.79%
Average Annual Total Return(2) -16.06% +12.41%
Value of $10,000 Investment(3) $8,394 $14,019
</TABLE>
1. Cumulative total return represents the change in value of an investment over
the periods indicated and does not include the sales charge.
2. Average annual total return represents the average annual change in value of
an investment over the periods indicated and has been restated to reflect the
current, maximum 5.75% initial sales charge; thus actual returns may differ.
Prior to August 3, 1998, fund shares were offered at a lower initial sales
charge.
3. These figures represent the value of a hypothetical $10,000 investment in the
fund over the periods indicated and have been restated to reflect the current,
maximum 5.75% initial sales charge; thus actual returns may differ. Prior to
August 3, 1998, fund shares were offered at a lower initial sales charge.
Past expense reductions by the fund's manager increased the fund's total
returns. All total return calculations assume reinvestment of dividends and
capital gains at net asset value. Since markets can go down as well as up,
investment return and principal value will fluctuate with market conditions, and
you may have a gain or loss when you sell your shares.
Franklin Microcap Value Fund paid distributions derived from long-term capital
gains of 79.17 cents ($0.7917) per share in December 1997. The fund hereby
designates such distributions as capital gain dividends per Internal Revenue
Code Section 852 (b)(3).
Past performance is not predictive of future results. 17
<PAGE>
FRANKLIN VALUE FUND
- -------------------------------------------------------------------------------
Your Fund's Goal: Franklin Value Fund seeks long-term total return by investing
in the securities of companies that we believe are undervalued. The fund will
seek income when deemed consistent with its goal.
- -------------------------------------------------------------------------------
As you will note in the Performance Summary on page 21, Franklin Value Fund's
Class I shares produced a -26.48% cumulative total return for the one-year
period ended October 31, 1998. By comparison, the unmanaged Wilshire Small
Company Value Index, the fund's benchmark, returned 3.63% for the same
period.(1)
The fund seeks investments of varying sizes that meet its value criteria, such
as low price to earnings ratio, low price to cash flow or book value, or a
"bargain" status such as fallen angels. These are former growth companies that
have suffered sharp price declines, but still possess attractive, long-term
potential. In most cases these value companies are under a temporary cloud that
we believe will dissipate. Although we never know for sure when or if a buyout
will occur, whether a company's fundamentals will improve or if Wall Street will
once again love a company it previously rejected, we do believe that with
patience, our approach will prevail. We emphasize that patience is an essential
ingredient for success in value investing.
1. Source: Standard & Poor's Micropal. The index is unmanaged and includes
reinvested dividends. One cannot invest directly in an index.
You will find a complete listing of the fund's portfolio holdings, including
dollar value and number of shares or principal amount, beginning on page 48 of
this report.
18
<PAGE>
TOP 10 HOLDINGS
FRANKLIN VALUE FUND
10/31/98
<TABLE>
<CAPTION>
COMPANY % OF TOTAL
INDUSTRY NET ASSETS
- --------------------------------------------------
<S> <C>
Tropical Sportswear 3.69%
International Corp.
Consumer Non-Durables
DIMON, Inc. 3.16%
Consumer Non-Durables
JLG Industries, Inc. 3.11%
Producer Manufacturing
Tidewater, Inc. 2.88%
Transportation
MMI Companies, Inc. 2.18%
Finance
Rowan Companies, Inc. 1.96%
Industrial Services
Motor Cargo Industries, Inc. 1.92%
Transportation
Wolverine World Wide, Inc. 1.67%
Consumer Non-Durables
Standard Commercial Corp. 1.60%
Consumer Non-Durables
Syms Corp. 1.55%
Retail Trade
</TABLE>
The fund's Statement of Investments on page 48 shows that Franklin Value Fund
holds a selection of value companies with market capitalizations ranging from
micro-cap-sized Ridgeview, Inc., a $9 million sports apparel manufacturer, to
Household International, Inc., a $16 billion financial services provider. During
the reporting period, we established positions in Allied Group Inc., a
midwestern property and casualty insurance underwriter, which was subsequently
acquired by Nationwide Mutual Insurance Co. at an 82% premium to the fund's
average purchase price. The fund also acquired Footstar, Inc., a footwear and
apparel retailer with 550 stores in 45 states, which was spun off from Melville
Corp. in 1996. At approximately 9.7 times 1998 earnings estimates, Footstar
appears to offer unusual appreciation potential. Santa Fe International Corp.,
an international oil and gas drilling organization with no long-term debt,
selling at less than 7.5 times this year's earnings estimate, was another recent
addition.
During the first six months of the reporting period, the deteriorating global
economic environment exerted a strong influence on U.S. financial markets. The
Asian crisis spread to Russia and appeared to be affecting Latin America as
well. This added to the slowdown in corporate profit growth for many U.S.
companies, raising the probability for a recession in this country.
Disappointing earnings reports and expectations caused lower equity prices and
greatly increased stock market volatility. The performance disparity between
large-cap and small-cap stocks became even more pronounced during the last three
months of the reporting period. In a drastically declining market, investors
19
<PAGE>
continued to show their preference for the large, more liquid household names
and severely punished smaller stocks that exhibited even the mildest hint of a
cloud. In this environment, many of the fund's small-cap value stocks delivered
unrewarding performances.
Looking forward, in a financial environment subject to overseas market turmoil
and its increasing impact on U.S. companies, Franklin Value Fund continues to
seek out stocks that have been beaten down to valuation levels not seen in
several years. We direct our focus for new purchases toward larger, more liquid
companies whose operations and revenues are more closely tied to the domestic
economy. Even though the U.S. economy slowed down considerably in third quarter
1998 since the beginning of the year, it still appears far more vigorous than
its overseas counterparts. Accordingly, we remain confident that our value
investing approach has the potential to serve our shareholders well.
Please remember, this discussion reflects our views, opinions and portfolio
holdings as of October 31, 1998, the end of the reporting period. However,
market and economic conditions are changing constantly, which can be expected to
affect our strategies and the fund's portfolio composition. Although historical
performance is no guarantee of future results, these insights may help you
understand our investment and management philosophy.
20
<PAGE>
PERFORMANCE SUMMARY
CLASS I
Franklin Value Fund - Class I produced a -26.48% cumulative total return for the
one-year period ended October 31, 1998. Cumulative total return measures the
change in value of an investment, assuming reinvestment of all distributions,
and does not include the sales charge. We have always maintained a long-term
perspective when managing the fund, and we encourage shareholders to view their
investments in a similar manner. As you can see from the table on page 23, the
fund delivered a +24.32% cumulative total return since inception on March 11,
1996.
The fund's share price, as measured by net asset value, decreased $6.70, from
$24.68 on October 31, 1997, to $17.98 on October 31, 1998. During the reporting
period, shareholders received per-share distributions consisting of dividend
income totaling 1.2 cents ($0.012), 17.66 cents ($0.1766) in short-term capital
gains, and 3.14 cents ($0.0314) in long-term capital gains. Distributions will
vary depending on income earned by the fund and any profits realized from the
sale of securities in the fund's portfolio. Past distributions are not
indicative of future trends.
The graph on page 22 compares the performance of the fund with that of the
Wilshire Small Company Value Index, which is composed of 250 stocks representing
nine different sectors. Keep in mind that an unmanaged market index has inherent
performance
Past performance is not predictive of future results. 21
<PAGE>
TOTAL RETURN INDEX COMPARISON
Franklin Value Fund - Class I
$10,000 Investment (3/11/96 - 10/31/98)
[LINE GRAPH]
GRAPHIC MATERIAL (6)
This graph compares the performance of Franklin Value Fund - Class I, as tracked
by the growth in value of a $10,000 investment, to that of Wilshire Small
Company Value Index from 3/11/96 - 10/31/98.
<TABLE>
<CAPTION>
DATE FRANKLIN VALUE FUND WILSHIRE SMALL COMPANY Wilshire Small
- CLASS I VALUE INDEX Value $T
- ----------------------------------------------------------------------------------
<S> <C> <C> <C>
3/11/96 $ 9,422 $10,000
3/31/96 $ 9,541 $10,101 1.01%
4/30/96 $10,025 $10,070 -0.31%
5/31/96 $10,295 $10,217 1.46%
6/30/96 $10,088 $10,244 0.27%
7/31/96 $ 9,717 $ 9,770 -4.63%
8/31/96 $10,308 $10,138 3.77%
9/30/96 $10,629 $10,432 2.90%
10/31/96 $10,806 $10,562 1.24%
11/30/96 $11,581 $11,223 6.26%
12/31/96 $12,171 $11,297 0.66%
1/31/97 $12,680 $11,464 1.48%
2/28/97 $12,757 $11,728 2.30%
3/31/97 $12,298 $11,412 -2.69%
4/30/97 $12,182 $11,621 1.83%
5/31/97 $13,317 $12,435 7.00%
6/30/97 $14,163 $12,888 3.65%
7/31/97 $15,215 $13,584 5.40%
8/31/97 $15,673 $13,735 1.11%
9/30/97 $16,641 $14,492 5.51%
10/31/97 $15,931 $14,095 -2.74%
11/30/97 $15,764 $14,381 2.03%
12/31/97 $15,746 $14,962 4.04%
1/31/98 $15,485 $14,536 -2.85%
2/28/98 $16,196 $15,563 7.07%
3/31/98 $16,756 $16,200 4.09%
4/30/98 $16,697 $16,127 -0.45%
5/31/98 $15,635 $15,692 -2.70%
6/30/98 $14,899 $15,423 -1.71%
7/31/98 $13,310 $14,300 -7.28%
8/31/98 $10,906 $12,594 -11.93%
9/30/98 $11,127 $12,968 2.97%
10/31/98 $11,713 $13,439 3.63%
</TABLE>
GRAPHIC MATERIAL (7)
This graph compares the performance of Franklin Value Fund - Class II, as
tracked by the growth in value of a $10,000 investment, to that of Wilshire
Small Company Value Index from 9/3/96- 10/31/98.
<TABLE>
<CAPTION>
DATE FRANKLIN VALUE FUND WILSHIRE SMALL COMPANY Wilshire Small
- CLASS II VALUE INDEX Value $T
- ------------------------------------------------------------------------------------
<S> <C> <C> <C>
9/3/96 $ 9,903 $10,000
9/30/96 $10,241 $10,290 2.90%
10/31/96 $10,405 $10,418 1.24%
11/30/96 $11,146 $11,070 6.26%
12/31/96 $11,695 $11,143 0.66%
1/31/97 $12,185 $11,308 1.48%
2/28/97 $12,247 $11,568 2.30%
3/31/97 $11,801 $11,257 -2.69%
4/30/97 $11,683 $11,463 1.83%
5/31/97 $12,767 $12,265 7.00%
6/30/97 $13,572 $12,713 3.65%
7/31/97 $14,570 $13,399 5.40%
8/31/97 $15,003 $13,548 1.11%
9/30/97 $15,920 $14,294 5.51%
10/31/97 $15,239 $13,903 -2.74%
11/30/97 $15,065 $14,185 2.03%
12/31/97 $15,041 $14,758 4.04%
1/31/98 $14,791 $14,337 -2.85%
2/28/98 $15,460 $15,351 7.07%
3/31/98 $15,985 $15,979 4.09%
4/30/98 $15,922 $15,907 -0.45%
5/31/98 $14,897 $15,478 -2.70%
6/30/98 $14,191 $15,213 -1.71%
7/31/98 $12,673 $14,105 -7.28%
8/31/98 $10,373 $12,423 -11.93%
9/30/98 $10,586 $12,792 2.97%
10/31/98 $11,135 $13,256 3.63%
</TABLE>
The historical performance data shown pertains only to the fund's Class I
shares. The fund offers other share classes subject to different fees and
expenses, which affect their performance. See the prospectus for details.
*Includes all sales charges as applicable, and represents the change in value
of an investment over the period shown. Total return assumes reinvestment of
dividends and capital gains at net asset value.
**Source: Standard and Poor's Micropal. Index is unmanaged and includes
reinvested dividends. One cannot invest directly in an index.
differentials in comparison with any fund. An index doesn't pay
management fees to cover salaries of securities analysts or portfolio managers,
or pay commissions or market spreads to buy and sell securities. Unlike an
index, mutual funds are never fully invested because they need cash on hand to
redeem shares. In addition, the performance shown for the fund includes the
maximum initial sales charge, all fund expenses and account fees. If operating
expenses such as Franklin Value Fund's had been applied to the index, its
performance would have been lower. Please remember that an index is simply a
measure of performance, and one cannot invest in it directly.
22 Past performance is not predictive of future results.
<PAGE>
PERFORMANCE
Franklin Value Fund - Class I
Periods ended 10/31/98
<TABLE>
<CAPTION>
SINCE
INCEPTION
1-YEAR (3/11/96)
- --------------------------------------------------------------------------------
<S> <C> <C>
Cumulative Total Return(1) -26.48% +24.32%
Average Annual Total Return(2) -30.71% +6.17%
Value of $10,000 Investment(3) $6,929 $11,713
</TABLE>
1. Cumulative total return represents the change in value of an investment over
the periods indicated and does not include the sales charge.
2. Average annual total return represents the average annual change in value of
an investment over the periods indicated and has been restated to reflect the
current, maximum 5.75% initial sales charge; thus actual returns may differ.
Prior to August 3, 1998, fund shares were offered at a lower initial sales
charge.
3. These figures represent the value of a hypothetical $10,000 investment in the
fund over the periods indicated and have been restated to reflect the current,
maximum 5.75% initial sales charge; thus actual returns may differ. Prior to
August 3, 1998, fund shares were offered at a lower initial sales charge.
The fund's manager has agreed in advance to waive a portion of its management
fees, which increases total return to shareholders. If the manager had not taken
this action, the fund's total return would have been lower. The fee waiver may
be discontinued at any time upon notice to the fund's Board of Trustees.
Franklin Value Fund - Class I paid distributions derived from long-term capital
gains of 3.14 cents ($0.0314) per share in December 1997. The fund hereby
designates such distributions as capital gain dividends per Internal Revenue
Code Section 852 (b)(3).
Past performance is not predictive of future results. 23
<PAGE>
CLASS II
Franklin Value Fund - Class II produced a -26.93% cumulative total return for
the one-year period ended October 31, 1998. Cumulative total return measures the
change in value of an investment, assuming reinvestment of all distributions and
does not include sales charges. We have always maintained a long-term
perspective when managing the fund, and we encourage shareholders to view their
investments in a similar manner. As you can see from the table on page 27, the
fund delivered a +12.45% cumulative total return since inception on September 3,
1996.
The fund's share price, as measured by net asset value, decreased $6.77, from
$24.59 on October 31, 1997, to $17.82 on October 31, 1998. During the reporting
period, shareholders received per-share distributions consisting of 17.66 cents
($0.1766) in short-term capital gains, and 3.14 cents ($0.0314) in long-term
capital gains. Distributions will vary depending on income earned by the fund
and any profits realized from the sale of securities in the fund's portfolio.
Past distributions are not indicative of future trends.
The graph on page 26 compares the performance of the fund with that of the
Wilshire Small Company Value Index, which is composed of 250 stocks representing
nine different sectors. Keep in mind that an unmanaged market index has inherent
performance differentials in comparison with any fund. An index doesn't pay
management fees to cover salaries of securities analysts or portfolio managers,
or pay commissions or market spreads to buy and sell securities. Unlike an
index, mutual funds are never fully
24 Past performance is not predictive of future results.
<PAGE>
invested because they need cash on hand to redeem shares. In addition, the
performance shown for the fund includes sales charges, all fund expenses and
account fees. If operating expenses such as Franklin Value Fund's had been
applied to the index, its performance would have been lower. Please remember
that an index is simply a measure of performance, and one cannot invest in it
directly.
Past performance is not predictive of future results. 25
<PAGE>
TOTAL RETURN INDEX COMPARISON
Franklin Value Fund - Class II
$10,000 Investment (9/3/96 - 10/31/98)
[LINE GRAPH]
GRAPHIC MATERIAL (8)
This graph compares the performance of Franklin Value - Advisor Class, as
tracked by the growth in value of a $10,000 investment, to that of Wilshire
Small Company Value Index from 3/11/96- 10/31/98.
<TABLE>
<CAPTION>
DATE FRANKLIN VALUE FUND - WILSHIRE SMALL COMPANY Wilshire Small
ADVISOR CLASS VALUE INDEX Value $T
- ------------------------------------------------------------------------------------
<S> <C> <C> <C>
3/11/96 $10,000 $10,000
3/31/96 $10,127 $10,101 1.01%
4/30/96 $10,640 $10,070 -0.31%
5/31/96 $10,927 $10,217 1.46%
6/30/96 $10,707 $10,244 0.27%
7/31/96 $10,312 $ 9,770 -4.63%
8/31/96 $10,940 $10,138 3.77%
9/30/96 $11,281 $10,432 2.90%
10/31/96 $11,469 $10,562 1.24%
11/30/96 $12,291 $11,223 6.26%
12/31/96 $12,918 $11,297 0.66%
1/31/97 $13,464 $11,464 1.48%
2/28/97 $13,546 $11,728 2.30%
3/31/97 $13,063 $11,412 -2.69%
4/30/97 $12,940 $11,621 1.83%
5/31/97 $14,152 $12,435 7.00%
6/30/97 $15,053 $12,888 3.65%
7/31/97 $16,185 $13,584 5.40%
8/31/97 $16,679 $13,735 1.11%
9/30/97 $17,716 $14,492 5.51%
10/31/97 $16,961 $14,095 -2.74%
11/30/97 $16,789 $14,381 2.03%
12/31/97 $16,775 $14,962 4.04%
1/31/98 $16,512 $14,536 -2.85%
2/28/98 $17,267 $15,563 7.07%
3/31/98 $17,870 $16,200 4.09%
4/30/98 $17,814 $16,127 -0.45%
5/31/98 $16,685 $15,692 -2.70%
6/30/98 $15,902 $15,423 -1.71%
7/31/98 $14,211 $14,300 -7.28%
8/31/98 $11,654 $12,594 -11.93%
9/30/98 $11,897 $12,968 2.97%
10/31/98 $12,520 $13,439 3.63%
</TABLE>
The historical performance data shown pertains only to the fund's Class II
shares. The fund offers other share classes subject to different fees and
expenses, which affect their performance. See the prospectus for details.
*Includes all sales charges as applicable, and represents the change in value
of an investment over the period shown. Total return assumes reinvestment of
dividends and capital gains at net asset value.
**Source: Standard and Poor's Micropal. Index is unmanaged and includes
reinvested dividends. One cannot invest directly in an index.
Past performance is not predictive of future results.
26
<PAGE>
PERFORMANCE
Franklin Value Fund - Class II
Periods ended 10/31/98
<TABLE>
<CAPTION>
SINCE
INCEPTION
1-YEAR (9/3/96)
- ------------------------------------------------------------------------
<S> <C> <C>
Cumulative Total Return(1) -26.93% +12.45%
Average Annual Total Return(2) -28.38% +5.11%
Value of $10,000 Investment(3) $7,162 $11,135
</TABLE>
1. Cumulative total return measures the change in value of an investment over
the periods indicated and does not include sales charges.
2. Average annual total return represents the average annual change in value of
an investment over the periods indicated and includes the maximum 1.0% initial
sales charge and the 1.0% contingent deferred sales charge, as applicable.
3. These figures represent a hypothetical $10,000 investment in the fund over
the periods indicated and include sales charges.
The fund's manager has agreed in advance to waive a portion of its management
fees, which increases total return to shareholders. If the manager had not taken
this action, the fund's total return would have been lower. The fee waiver may
be discontinued at any time upon notice to the fund's Board of Trustees.
Franklin Value Fund - Class II paid distributions derived from long-term capital
gains of 3.14 cents ($0.0314) per share in December 1997. The fund hereby
designates such distributions as capital gain dividends per Internal Revenue
Code Section 852 (b)(3).
Past performance is not predictive of future results. 27
<PAGE>
ADVISOR CLASS
Franklin Value Fund - Advisor Class produced a -26.18% cumulative total return
for the one-year period ended October 31, 1998. Cumulative total return measures
the change in value of an investment, assuming reinvestment of all
distributions. We have always maintained a long-term perspective when managing
the fund, and we encourage shareholders to view their investments in a similar
manner. As you can see from the table on page 31, the fund delivered a +25.20%
cumulative total return since inception on March 11, 1996.
The fund's share price, as measured by net asset value, decreased $6.65, from
$24.72 on October 31, 1997, to $18.07 on October 31, 1998. During the reporting
period, shareholders received per-share distributions consisting of dividend
income totaling 2.8 cents ($0.028), 17.66 cents ($0.1766) in short-term capital
gains, and 3.14 cents ($0.0314) in long-term capital gains. Distributions will
vary depending on income earned by the fund and any profits realized from the
sale of securities in the fund's portfolio. Past distributions are not
indicative of future trends.
The graph on page 30 compares the performance of the fund with that of the
Wilshire Small Company Value Index, which is composed of 250 stocks representing
nine different sectors. Keep in mind that an unmanaged market index has inherent
performance differentials in comparison with any fund. An index doesn't pay
management fees to cover salaries of securities analysts or portfolio managers,
or pay commissions or market spreads to buy
28 Past performance is not predictive of future results.
<PAGE>
and sell securities. Unlike an index, mutual funds are never fully invested
because they need cash on hand to redeem shares. In addition, the performance
shown for the fund includes all fund expenses and account fees. If operating
expenses such as Franklin Value Fund's had been applied to the index, its
performance would have been lower. Please remember that an index is simply a
measure of performance, and one cannot invest in it directly.
Past performance is not predictive of future results. 29
<PAGE>
TOTAL RETURN INDEX COMPARISON
Franklin Value Fund - Advisor Class
$10,000 Investment (3/11/96 - 10/31/98)
[LINE GRAPH]
GRAPHIC MATERIAL (8)
This graph compares the performance of Franklin Value - Advisor Class, as
tracked by the growth in value of a $10,000 investment, to that of Wilshire
Small Company Value Index from 3/11/96- 10/31/98.
<TABLE>
<CAPTION>
DATE FRANKLIN VALUE FUND - WILSHIRE SMALL COMPANY Wilshire Small
ADVISOR CLASS VALUE INDEX Value $T
- ------------------------------------------------------------------------------------
<S> <C> <C> <C>
3/11/96 $10,000 $10,000
3/31/96 $10,127 $10,101 1.01%
4/30/96 $10,640 $10,070 -0.31%
5/31/96 $10,927 $10,217 1.46%
6/30/96 $10,707 $10,244 0.27%
7/31/96 $10,312 $ 9,770 -4.63%
8/31/96 $10,940 $10,138 3.77%
9/30/96 $11,281 $10,432 2.90%
10/31/96 $11,469 $10,562 1.24%
11/30/96 $12,291 $11,223 6.26%
12/31/96 $12,918 $11,297 0.66%
1/31/97 $13,464 $11,464 1.48%
2/28/97 $13,546 $11,728 2.30%
3/31/97 $13,063 $11,412 -2.69%
4/30/97 $12,940 $11,621 1.83%
5/31/97 $14,152 $12,435 7.00%
6/30/97 $15,053 $12,888 3.65%
7/31/97 $16,185 $13,584 5.40%
8/31/97 $16,679 $13,735 1.11%
9/30/97 $17,716 $14,492 5.51%
10/31/97 $16,961 $14,095 -2.74%
11/30/97 $16,789 $14,381 2.03%
12/31/97 $16,775 $14,962 4.04%
1/31/98 $16,512 $14,536 -2.85%
2/28/98 $17,267 $15,563 7.07%
3/31/98 $17,870 $16,200 4.09%
4/30/98 $17,814 $16,127 -0.45%
5/31/98 $16,685 $15,692 -2.70%
6/30/98 $15,902 $15,423 -1.71%
7/31/98 $14,211 $14,300 -7.28%
8/31/98 $11,654 $12,594 -11.93%
9/30/98 $11,897 $12,968 2.97%
10/31/98 $12,520 $13,439 3.63%
</TABLE>
The historical performance data shown pertains only to the fund's Advisor
Class shares. The fund offers other share classes subject to different fees
and expenses, which affect their performance. See the prospectus for details.
*On January 2, 1997, the fund began selling Advisor Class shares to certain
eligible investors as described in the prospectus. This share class does not
have sales charges or a Rule 12b-1 plan. Performance quotations have been
calculated as follows: (a) For periods prior to January 2, 1997, figures
reflect the fund's Class I performance, excluding the effect of the Class I
sales charge, but including the effect of Class I expenses, including Rule
12b-1 fees; and (b) for periods after January 1, 1997, figures reflect actual
Advisor Class performance, including the deduction of all fees and expenses
applicable only to that class.
**Source: Standard and Poor's Micropal. Index is unmanaged and includes
reinvested dividends. One cannot invest directly in an index.
Past performance is not predictive of future results.
30
<PAGE>
PERFORMANCE
Franklin Value Fund - Advisor Class
Periods ended 10/31/98
<TABLE>
<CAPTION>
SINCE
INCEPTION
1-YEAR (3/11/96)*
- ----------------------------------------------------------------------
<S> <C> <C>
Cumulative Total Return(1) -26.18% +25.20%
Average Annual Total Return(1) -26.18% +8.88%
Value of $10,000 Investment(2) $7,382 $12,520
</TABLE>
* On January 2, 1997, the fund began selling Advisor Class shares to certain
eligible investors as described in the prospectus. This share class does not
have sales charges or a Rule 12b-1 plan. Performance quotations have been
calculated as follows: (a) For periods prior to January 2, 1997, figures reflect
the fund's Class I performance, excluding the effect of the Class I sales
charge, but including the effect of Class I expenses, including Rule 12b-1 fees;
and (b) for periods after January 1, 1997, figures reflect actual Advisor Class
performance, including the deduction of all fees and expenses applicable only to
that class. Since January 2, 1997 (commencement of sales), the cumulative total
return of Advisor Class shares was -1.26%.
1. Cumulative total return represents the change in value of an investment over
the periods indicated. Average annual total return represents the average annual
change in value of an investment over the periods indicated.
2. These figures represent the value of a hypothetical $10,000 investment in the
fund over the periods indicated.
The fund's manager has agreed in advance to waive a portion of its management
fees, which increases total return to shareholders. If the manager had not taken
this action, the fund's total return would have been lower. The fee waiver may
be discontinued at any time upon notice to the fund's Board of Trustees.
Franklin Value Fund - Advisor Class paid distributions derived from long-term
capital gains of 3.14 cents ($0.0314) per share in December 1997. The fund
hereby designates such distributions as capital gain dividends per Internal
Revenue Code Section 852 (b)(3).
Past performance is not predictive of future results. 31
<PAGE>
FRANKLIN VALUE INVESTORS TRUST
Financial Highlights
FRANKLIN BALANCE SHEET INVESTMENT FUND
<TABLE>
<CAPTION>
Class I
------------------------------------------------------------------
Year Ended October 31,
------------------------------------------------------------------
1998 1997 1996 1995 1994
------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ................. $ 35.22 $ 29.15 $ 26.34 $ 22.68 $ 22.97
------------------------------------------------------------------
Income from investment operations:
Net investment income ............................. .50 .48 .47 .30 .23
Net realized and unrealized gains (losses) ........ (1.55) 8.40 3.85 3.98 .51
------------------------------------------------------------------
Total from investment operations ................... (1.05) 8.88 4.32 4.28 .74
------------------------------------------------------------------
Less distributions from:
Net investment income ............................. (.51) (.46) (.44) (.27) (.26)
Net realized gains ................................ (1.80) (2.35) (1.07) (.35) (.77)
------------------------------------------------------------------
Total distributions ................................ (2.31) (2.81) (1.51) (.62) (1.03)
------------------------------------------------------------------
Net asset value, end of year ....................... $ 31.86 $ 35.22 $ 29.15 $ 26.34 $ 22.68
==================================================================
Total return* ...................................... (3.14%) 32.86% 16.93% 19.32% 3.42%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) .................... $ 1,467,207 $ 1,222,953 $ 657,002 $ 387,540 $134,255
Ratio to average net assets:
Expenses .......................................... .93% 1.08% 1.08% 1.17% 1.19%
Expenses excluding waiver and payments by affiliate .93% 1.08% 1.08% 1.17% 1.34%
Net investment income ............................. 1.47% 1.59% 1.69% 1.30% .99%
Portfolio turnover rate ............................ 11.81% 24.63% 35.46% 28.63% 24.96%
</TABLE>
*Total return does not reflect sales commissions or the contingent deferred
sales charge, and is not annualized. Prior to May 1, 1994, dividends from net
investment income were invested at the offering price.
See notes to financial statements.
32
<PAGE>
FRANKLIN VALUE INVESTORS TRUST
STATEMENT OF INVESTMENTS, OCTOBER 31, 1998
<TABLE>
<CAPTION>
FRANKLIN BALANCE SHEET INVESTMENT FUND SHARES VALUE
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CLOSED END MUTUAL FUNDS 4.2%
Central European Equity Fund ................................................. 225,000 $ 2,939,063
Emerging Markets Infrastructure Fund, Inc. ................................... 300,000 2,081,250
Growth Fund of Spain, Inc. ................................................... 275,000 6,067,188
H & Q Healthcare Investors ................................................... 150,000 2,062,500
INVESCO Global Health Sciences Fund .......................................... 325,000 6,337,500
Irish Investment Fund, Inc. .................................................. 135,000 2,413,125
John Hancock Bank and Thrift Opportunity Fund ................................ 1,150,000 13,440,625
Latin America Investment Fund, Inc. .......................................... 175,000 1,553,125
Latin American Equity Fund, Inc. ............................................. 175,000 1,345,313
Liberty All Star Growth Fund ................................................. 150,000 1,650,000
Mexico Fund .................................................................. 625,000 7,031,250
Morgan Grenfell Smallcap Fund, Inc. .......................................... 123,800 1,114,200
Petroleum & Resources Corp. .................................................. 60,000 1,995,000
Royce Global Trust, Inc. ..................................................... 160,000 740,000
Royce Micro-Cap Trust ........................................................ 50,000 443,750
Royce Value Trust ............................................................ 52,500 718,594
Scudder New Europe Fund, Inc. ................................................ 325,000 6,093,750
Swiss Helvetia Fund .......................................................... 250,000 3,734,375
-----------
TOTAL CLOSED END MUTUAL FUNDS (COST $56,029,527) ............................. 61,760,608
-----------
COMMON STOCKS 74.9%
COMMERCIAL SERVICES 3.4%
a,d Handleman Co. ................................................................ 2,409,000 23,939,438
d Nash-Finch Co. ............................................................... 1,000,000 15,125,000
Noland Co. ................................................................... 47,800 1,075,500
Unisource Worldwide, Inc. .................................................... 1,000,000 9,187,500
-----------
49,327,438
-----------
CONSUMER DURABLES 6.9%
d Allen Organ Co., Class B ..................................................... 83,000 2,905,000
a,d Audiovox Corp., Class A ...................................................... 1,720,000 9,460,000
a Baldwin Piano & Organ Co. .................................................... 130,200 1,293,863
a Beazer Homes USA, Inc. ....................................................... 216,700 3,832,881
a,d Castle & Cooke, Inc. ......................................................... 1,782,400 27,850,000
d Dixie Group, Inc. ............................................................ 600,000 3,450,000
Engle Homes, Inc. ............................................................ 350,000 4,506,250
a Jan Bell Marketing, Inc. ..................................................... 443,700 2,135,306
d M.D.C. Holdings, Inc. ........................................................ 735,000 12,908,438
a OroAmerica, Inc. ............................................................. 92,000 816,500
a Powerhouse Technologies, Inc . ............................................... 122,500 1,209,688
d Pulaski Furniture Corp. ...................................................... 192,000 4,176,000
a Schuler Homes, Inc. .......................................................... 537,400 3,694,625
a Treadco, Inc. ................................................................ 43,000 268,750
a,d U.S. Home Corp. .............................................................. 660,000 20,872,500
a Washington Homes, Inc. ....................................................... 231,600 1,129,050
-----------
100,508,851
-----------
</TABLE>
33
<PAGE>
FRANKLIN VALUE INVESTORS TRUST
STATEMENT OF INVESTMENTS, OCTOBER 31, 1998 (cont.)
<TABLE>
<CAPTION>
FRANKLIN BALANCE SHEET INVESTMENT FUND SHARES VALUE
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (cont.)
CONSUMER NON-DURABLES 2.5%
Block Drug Co., Inc., Class A ................................................ 20,000 $ 722,500
d Chic By H.I.S., Inc. ......................................................... 756,000 2,787,750
a,d Cyrk, Inc. ................................................................... 1,187,400 10,686,600
DIMON, Inc. .................................................................. 56,400 729,675
d Garan, Inc. .................................................................. 285,100 7,733,338
Genesee Corp., Class B ....................................................... 117,900 2,888,550
d Haggar Corp. ................................................................. 850,000 11,103,125
a Hampton Industries, Inc. ..................................................... 81,180 547,965
-----------
37,199,503
-----------
CONSUMER SERVICES 3.6%
a,d Aztar Corp. .................................................................. 3,400,000 17,637,500
a Casino Data Systems .......................................................... 800,000 1,550,000
a,d Homebase, Inc. ............................................................... 3,300,000 22,275,000
a,d Unique Casual Restaurants, Inc. .............................................. 985,000 4,925,000
a,d VICORP Restaurants, Inc. ..................................................... 480,000 6,780,000
-----------
53,167,500
-----------
ELECTRONIC TECHNOLOGY 2.6%
a,d Aydin Corp. .................................................................. 270,000 2,126,250
a Centigram Communications Corp. ............................................... 243,400 1,612,525
a Cidco, Inc. .................................................................. 435,000 842,813
a,d ESCO Electronics Corp. ....................................................... 840,000 10,500,000
a Espey Manufacturing & Electronics Corp. ...................................... 15,000 193,125
a FSI International, Inc. ...................................................... 900,000 5,850,000
a Intergraph Corp. ............................................................. 1,150,000 7,475,000
a,d Standard Microsystems Corp. .................................................. 1,375,000 9,281,250
-----------
37,880,963
-----------
ENERGY MINERALS 1.5%
a,d Crown Central Petroleum Corp., Class B ....................................... 500,000 4,750,000
Kentucky River Coal Corp. .................................................... 418 1,327,150
a,d Maynard Oil Co. .............................................................. 268,000 2,772,138
Ultramar Diamond Shamrock Corp. .............................................. 483,000 13,010,813
-----------
21,860,101
-----------
FINANCE 21.3%
a,d ACMAT Corp., Class A ......................................................... 295,000 4,535,625
Ameriana Bancorp, Inc. ....................................................... 6,000 108,000
American General Corp. ....................................................... 397,283 27,213,886
a American Indemnity Financial Corp. ........................................... 90,000 1,091,250
American National Insurance Co. .............................................. 501,000 42,084,000
AmerUs Life Holdings, Inc., Class A .......................................... 89,400 2,156,775
Amwest Insurance Group, Inc. ................................................. 82,170 1,119,566
Argonaut Group, Inc. ......................................................... 161,000 4,095,438
Baldwin & Lyons, Class B ..................................................... 98,877 2,271,086
a Calumet Bancorp, Inc. ........................................................ 105,000 3,163,125
Capital Re Corp. ............................................................. 10,000 183,125
</TABLE>
34
<PAGE>
FRANKLIN VALUE INVESTORS TRUST
STATEMENT OF INVESTMENTS, OCTOBER 31, 1998 (cont.)
<TABLE>
<CAPTION>
FRANKLIN BALANCE SHEET INVESTMENT FUND SHARES VALUE
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (cont.)
FINANCE (cont.)
Chartwell Re Corp. ........................................................... 225,000 $ 5,596,875
a,d Echelon International Corp., Inc. ............................................ 500,000 10,375,000
a Farm Family Holdings, Inc. ................................................... 150,000 5,025,000
Farmers & Merchants Bank of Long Beach ....................................... 2,400 6,876,000
FBL Financial Group, Inc., Class A ........................................... 884,000 22,486,750
d Fidelity Bancorp, Inc. ....................................................... 144,500 2,998,375
Fidelity Financial of Ohio, Inc. ............................................. 93,000 1,261,313
First Defiance Financial Corp. ............................................... 300,000 4,275,000
GA Financial, Inc. ........................................................... 198,700 2,781,800
Guarantee Life Companies, Inc. ............................................... 400,000 7,700,000
Kansas City Life Insurance Co. ............................................... 800 66,800
LandAmerica Financial Group, Inc. ............................................ 152,500 7,920,469
Lehman Brothers Holdings, Inc. ............................................... 85,000 3,224,688
d Merchants Group, Inc. ........................................................ 257,800 5,252,675
Meridian Insurance Group, Inc. ............................................... 272,000 4,352,000
MMI Companies, Inc. .......................................................... 443,000 7,115,688
a National Western Life Insurance Co., Class A ................................. 99,000 11,583,000
a PBOC Holdings, Inc. .......................................................... 169,400 1,630,475
Presidential Life Corp. ...................................................... 728,000 13,195,000
Price Enterprises, Inc. ...................................................... 109,873 535,631
a Professionals Group Inc. ..................................................... 184,350 5,438,325
a Provident Financial Holdings, Inc. ........................................... 10,000 155,000
PXRE Corp. ................................................................... 425,700 10,802,138
a Quaker City Bancorp, Inc. .................................................... 137,500 2,062,500
a Risk Capital Holdings, Inc. .................................................. 582,100 12,078,575
Rouse Co. .................................................................... 367,800 10,321,388
a Scor (France) ................................................................ 350,000 20,066,583
a SCPIE Holdings, Inc. ......................................................... 528,300 16,575,413
d Stewart Information Services Corp. ........................................... 400,000 20,050,000
Westco Bancorp, Inc. ......................................................... 69,000 2,225,250
-----------
312,049,587
-----------
HEALTH SERVICES .7%
a Trigon Healthcare, Inc. ...................................................... 273,300 10,248,750
-----------
INDUSTRIAL SERVICES .7%
d Ecology and Environment, Inc., Class A ....................................... 260,000 2,405,000
a EMCON ........................................................................ 200,000 700,000
a Harding Lawson Associates Group, Inc. ........................................ 135,800 1,086,400
a Matrix Service Co. ........................................................... 457,500 1,887,188
Petroleum Helicopters, Inc., Non Voting ...................................... 220,000 3,575,000
Petroleum Helicopters, Inc., Voting .......................................... 77,500 1,201,250
-----------
10,854,838
-----------
NON-ENERGY MINERALS 3.0%
British Steel, Plc. (United Kingdom) ......................................... 10,000,000 17,248,874
a Devcon International Corp. ................................................... 216,200 418,888
LTV Corp. .................................................................... 3,900,000 23,887,500
</TABLE>
35
<PAGE>
FRANKLIN VALUE INVESTORS TRUST
STATEMENT OF INVESTMENTS, OCTOBER 31, 1998 (cont.)
<TABLE>
<CAPTION>
FRANKLIN BALANCE SHEET INVESTMENT FUND SHARES VALUE
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCK (cont.)
NON-ENERGY MINERALS (CONT.)
Rouge Industries, Inc., Class A .............................................. 100,000 $ 937,500
a Zemex Corp. .................................................................. 197,982 1,311,631
-----------
43,804,393
-----------
PROCESS INDUSTRIES 2.7%
a,d American Pacific Corp. ....................................................... 421,100 3,000,338
Corn Products International, Inc. ............................................ 259,400 7,392,900
d Delta Woodside Industries, Inc. .............................................. 2,400,000 13,500,000
Mercer International Inc. (Switzerland) ...................................... 650,000 3,859,375
Mine Safety Appliances Co. ................................................... 13,100 920,275
a Orange-co, Inc. .............................................................. 234,000 1,711,125
Terra Industries, Inc. ....................................................... 1,090,000 8,175,000
Thomaston Mills, Inc., Class A ............................................... 205,600 668,200
-----------
39,227,213
-----------
PRODUCER MANUFACTURING 5.9%
a,d Cherry Corp., Class A ........................................................ 408,900 5,469,038
a,d Cherry Corp., Class B ........................................................ 271,000 3,319,750
d Commonwealth Industries, Inc. ................................................ 1,300,000 9,831,250
a Global Industrial Technologies, Inc. ......................................... 1,100,000 9,556,250
d Insteel Industries, Inc. ..................................................... 580,000 3,008,750
d Monarch Machine Tool Co. ..................................................... 250,000 1,656,250
a Nashua Corp. ................................................................. 299,100 4,579,969
d Oshkosh Truck Corp., Class B ................................................. 460,400 12,603,450
d Pitt-Des Moines, Inc. ........................................................ 360,000 8,145,000
Tecumseh Products Co., Class A ............................................... 114,000 5,928,000
Tecumseh Products Co., Class B ............................................... 400,000 20,800,000
d TransPro, Inc. ............................................................... 370,000 2,289,375
-----------
87,187,082
-----------
RETAIL TRADE 6.5%
Cato Corp., Class A .......................................................... 750,000 9,984,375
a,d Charming Shoppes, Inc. ....................................................... 6,600,000 24,750,000
DEB Shops, Inc. .............................................................. 51,000 462,188
a,d Designs, Inc. ................................................................ 1,200,000 1,200,000
a Evans, Inc. .................................................................. 201,100 113,119
d Fred's, Inc. ................................................................. 850,000 11,103,125
a,d Good Guys, Inc. .............................................................. 987,500 4,937,500
Haverty Furniture Co., Inc. .................................................. 200,000 3,775,000
a,d Jacobson Stores, Inc. ........................................................ 298,100 2,086,700
a Kmart Corp. .................................................................. 590,000 8,333,750
a,d Lechters, Inc. ............................................................... 861,600 2,800,200
a Little Switzerland, Inc. ..................................................... 192,000 588,000
a PriceSmart Inc. .............................................................. 133,350 2,000,250
a,d Syms Corp. ................................................................... 1,110,000 11,169,375
a United Retail Group, Inc. .................................................... 565,600 5,302,500
d Wolohan Lumber Co. ........................................................... 520,000 6,630,000
-----------
95,236,082
-----------
</TABLE>
36
<PAGE>
FRANKLIN VALUE INVESTORS TRUST
STATEMENT OF INVESTMENTS, OCTOBER 31, 1998 (cont.)
<TABLE>
<CAPTION>
FRANKLIN BALANCE SHEET INVESTMENT FUND SHARES VALUE
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCK (cont.)
TECHNOLOGY SERVICES .1%
a Government Technology Services, Inc. ......................................... 212,800 $ 904,400
------------
TRANSPORTATION 3.8%
a Crowley Maritime Corp. ....................................................... 4,440 6,908,640
d International Shipholding Corp. .............................................. 660,000 10,601,250
a,d KLLM Transport Services, Inc. ................................................ 322,000 2,616,250
a Mesa Air Group, Inc. ......................................................... 870,300 4,405,894
a OMI Corp. .................................................................... 500,000 1,875,000
Overseas Shipholding Group, Inc. ............................................. 1,550,000 27,318,750
a,d TransFinancial Holdings, Inc. ................................................ 270,000 1,552,500
-------------
55,278,284
-------------
UTILITIES 9.8%
CMP Group, Inc. .............................................................. 1,491,600 27,501,375
Conectiv, Inc. ............................................................... 215,000 4,918,125
Entergy Corp. ................................................................ 1,600,000 46,000,000
a,d Kaneb Services, Inc. ......................................................... 3,200,000 14,600,000
a Niagara Mohawk Power Corp. ................................................... 2,700,000 39,487,500
a Northeast Utilities .......................................................... 741,400 11,584,375
-------------
144,091,375
-------------
COMPANY IN LIQUIDATION
a Strawbridge & Clothier ....................................................... 330,500 --
-------------
TOTAL COMMON STOCKS (COST $1,036,980,107) .................................... 1,098,826,360
-------------
PREFERRED STOCKS .5%
CONSUMER SERVICES
a Craig Corp., pfd. ............................................................ 9,700 72,750
-------------
FINANCE .5%
Price Enterprises Inc., pfd. ................................................. 533,400 7,100,888
-------------
TOTAL PREFERRED STOCKS (COST $7,011,950) ..................................... 7,173,638
-------------
<CAPTION>
PRINCIPAL
AMOUNT
----------
<S> <C> <C>
BONDS .3%
Hechinger Co., senior notes, 6.95%, 10/15/03 (COST $4,846,798) ...............$ 7,000,000 4,795,000
-------------
TOTAL LONG TERM INVESTMENTS (COST $1,104,868,382) ............................ 1,172,555,606
-------------
</TABLE>
37
<PAGE>
FRANKLIN VALUE INVESTORS TRUST
STATEMENT OF INVESTMENTS, OCTOBER 31, 1998 (CONT.)
<TABLE>
<CAPTION>
PRINCIPAL
FRANKLIN BALANCE SHEET INVESTMENT FUND AMOUNT VALUE
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
c REPURCHASE AGREEMENT 20.1%
Joint Repurchase Agreement, 5.350%, 11/02/98, (Maturity Value $295,102,279) (COST $294,970,775) .. $294,970,775 $ 294,970,775
Barclays Capital Group, Inc. (Maturity Value $30,330,612)
Chase Securities, Inc. (Maturity Value $30,330,612)
CIBC Wood Gundy Securities Corp. (Maturity Value $30,330,612)
Deutsche Morgan Grenfell/C.J. Lawrence, Inc. (Maturity Value $30,330,612)
Donaldson, Lufkin & Jenrette Securities Corp. (Maturity Value $30,330,612)
Dresdner Kleinwort Benson, North America, L.L.C. (Maturity Value $22,126,771)
Greenwich Capital Markets, Inc. (Maturity Value $30,330,612)
NationsBanc Montgomery Securities, L.L.C. (Maturity Value $30,330,612)
Paribas Corp. (Maturity Value $30,330,612)
SBC Warburg Dillon Read, Inc. (Maturity Value $30,330,612)
Collateralized by U.S. Treasury Bills and Notes
--------------
TOTAL INVESTMENTS (COST $1,399,839,157) 100.0% ................................................... 1,467,526,381
OTHER ASSETS, LESS LIABILITIES ................................................................... (319,213)
--------------
NET ASSETS 100.0% ................................................................................ $1,467,207,168
==============
</TABLE>
a Non-income producing.
c See Note 1(d) regarding joint repurchase agreement.
d See Note 6 regarding holdings of 5% voting securities.
See notes to financial statements.
38
<PAGE>
FRANKLIN VALUE INVESTORS TRUST
Financial Highlights
FRANKLIN MICROCAP VALUE FUND
<TABLE>
<CAPTION>
CLASS I
----------------------------------------------
YEAR ENDED OCTOBER 31,
----------------------------------------------
1998 1997 1996(1)
----------------------------------------------
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ......................... $24.29 $18.44 $15.00
--------------------------------------------
Income from investment operations:
Net investment income (loss) .............................. (.02) (.01) .14
Net realized and unrealized gains (losses) ................ (2.51) 6.33 3.41
--------------------------------------------
Total from investment operations ........................... (2.53) 6.32 3.55
--------------------------------------------
Less distributions from:
Net investment income ..................................... (0.01) (.07) (.11)
Net realized gains ........................................ (1.48) (.40) --
--------------------------------------------
Total distributions ........................................ (1.49) (.47) (.11)
--------------------------------------------
Net asset value, end of year ............................... $20.27 $24.29 $18.44
============================================
Total return* .............................................. (10.95%) 35.05% 23.72%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ............................ $175,635 $191,638 $119,664
Ratios to average net assets:
Expenses .................................................. 1.21% 1.22% 1.24%**
Net investment income (loss) .............................. (.11%) (.05%) 1.28%**
Portfolio turnover rate .................................... 31.91% 21.33% 14.15%
</TABLE>
*Total return does not reflect sales commissions or the contingent deferred
sales charge, and is not annualized.
**Annualized
(1) For the period December 12, 1995 (effective date) to October 31, 1996.
See notes to financial statements.
39
<PAGE>
FRANKLIN VALUE INVESTORS TRUST
STATEMENT OF INVESTMENTS, OCTOBER 31, 1998
<TABLE>
<CAPTION>
FRANKLIN MICROCAP VALUE FUND SHARES VALUE
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS 92.2%
COMMERCIAL SERVICES 2.2%
a,d Allou Health and Beauty, Inc., Class A ........................................ 457,000 $ 2,742,000
Noland Co. .................................................................... 48,500 1,091,250
-----------
3,833,250
-----------
CONSUMER DURABLES 10.0%
a Acorn Products, Inc. .......................................................... 160,000 1,500,000
Allen Organ Co., Class B ...................................................... 42,000 1,470,000
a Baldwin Piano & Organ Co. ..................................................... 55,800 554,513
a Beazer Homes USA, Inc. ........................................................ 35,000 619,063
Dixie Group, Inc. ............................................................. 100,000 575,000
Engle Homes, Inc. ............................................................. 100,000 1,287,500
a Jan Bell Marketing, Inc. ...................................................... 283,600 1,364,825
Liberty Homes, Inc., Class A .................................................. 13,200 156,750
M/I Schottenstein Homes, Inc. ................................................. 140,000 2,922,500
a,d Oriole Homes Corp., Class B ................................................... 359,500 1,168,375
a OroAmerica, Inc. .............................................................. 51,300 455,288
a,d Powerhouse Technologies, Inc. ................................................. 107,000 1,056,625
Pulaski Furniture Corp. ....................................................... 80,000 1,740,000
a,d Treadco, Inc. ................................................................. 261,400 1,633,750
a Washington Homes, Inc. ........................................................ 238,500 1,162,688
-----------
17,666,877
-----------
CONSUMER NON-DURABLES 5.4%
a Chic By H.I.S., Inc. .......................................................... 194,100 715,744
Garan, Inc. ................................................................... 110,000 2,983,750
Genesee Corp., Class A ........................................................ 600 14,700
Genesee Corp., Class B ........................................................ 36,000 882,000
a Hampton Industries, Inc. ...................................................... 221,320 1,493,910
a Norton McNaughton, Inc. ....................................................... 341,200 1,236,850
a,d Seneca Foods Corp., Class A ................................................... 175,600 2,151,100
-----------
9,478,054
-----------
CONSUMER SERVICES 3.4%
a Casino Data Systems ........................................................... 775,000 1,501,563
a,d Spaghetti Warehouse, Inc. ..................................................... 550,000 3,781,242
a Unique Casual Restaurants, Inc. ............................................... 150,000 750,000
-----------
6,032,805
-----------
ELECTRONIC TECHNOLOGY 6.2%
a Aehr Test Systems ............................................................. 125,000 593,750
a Aydin Corp. ................................................................... 210,000 1,653,750
a Datron Systems, Inc. .......................................................... 120,000 750,000
a,d ECC International Corp. ....................................................... 800,000 1,800,000
a,d Espey Manufacturing & Electronics Corp. ....................................... 93,000 1,197,375
d Moore Products Co. ............................................................ 134,700 3,098,100
a SPACEHAB, Inc. ................................................................ 137,700 1,170,450
a Sparton Corp. ................................................................. 100,000 618,750
-----------
10,882,175
-----------
</TABLE>
40
<PAGE>
FRANKLIN VALUE INVESTORS TRUST
STATEMENT OF INVESTMENTS, OCTOBER 31, 1998 (cont.)
<TABLE>
<CAPTION>
FRANKLIN MICROCAP VALUE FUND SHARES VALUE
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (cont.)
ENERGY MINERALS 4.5%
Case Pomery & Co. Inc., Class B ............................................... 500 $ 588,750
a Crystal Oil Co. ............................................................... 50,000 1,887,500
Home-Stake Oil & Gas Co. ...................................................... 50,000 268,750
Kentucky River Coal Corp. ..................................................... 650 2,063,750
a,d Maynard Oil Co. ............................................................... 298,500 3,087,624
----------
7,896,374
----------
FINANCE 18.4%
a,d ACMAT Corp., Class A .......................................................... 150,000 2,306,250
a,d Allstate Financial Corp. ...................................................... 209,000 692,313
a American Indemnity Financial Corp. ............................................ 70,000 848,750
Amwest Insurance Group, Inc. .................................................. 174,900 2,383,013
Bayonne Bancshares, Inc. ...................................................... 188,005 2,808,325
a Bresler & Reiner, Inc. ........................................................ 74,500 2,207,063
a Farm Family Holdings, Inc. .................................................... 40,000 1,340,000
FFD Financial Corp. ........................................................... 35,000 542,500
Fidelity Financial of Ohio, Inc. .............................................. 116,000 1,573,250
GA Financial, Inc. ............................................................ 150,300 2,104,200
a HF Bancorp, Inc. .............................................................. 100,000 1,675,000
Little Falls Bancorp, Inc. .................................................... 70,000 1,054,375
Merchants Group, Inc. ......................................................... 500 10,188
Meridian Insurance Group, Inc. ................................................ 128,000 2,048,000
MidCity Financial Corp. ....................................................... 550 2,879,250
National Security Group, Inc. ................................................. 9,500 133,000
Old Guard Group, Inc. ......................................................... 160,000 2,290,000
PAULA Financial ............................................................... 40,000 317,500
Peoples Home Savings Bank ..................................................... 25,000 351,563
a Professionals Group Inc. ...................................................... 92,450 2,727,275
a Quaker City Bancorp, Inc. ..................................................... 90,000 1,350,000
Somerset Group, Inc. .......................................................... 40,000 720,000
----------
32,361,815
----------
HEALTH SERVICES .7%
a,d American Physicians Service Group, Inc. ....................................... 247,000 1,265,875
----------
INDUSTRIAL SERVICES 7.6%
d Ecology and Environment, Inc., Class A ........................................ 110,000 1,017,500
a,d EMCON ......................................................................... 650,000 2,275,000
a,d GZA GeoEnvironmental Technologies, Inc. ....................................... 310,000 1,472,500
a,d Harding Lawson Associates Group, Inc. ......................................... 304,900 2,439,200
a Matrix Service Co. ............................................................ 132,100 544,913
NSC Corp. ..................................................................... 485,000 485,000
Petroleum Helicopters, Inc., Non Voting ....................................... 113,000 1,836,250
Petroleum Helicopters, Inc., Voting ........................................... 17,600 272,800
a,d Roy F. Weston, Inc., Class A .................................................. 633,000 1,661,625
a,d TEI, Inc. ..................................................................... 955,000 1,432,500
----------
13,437,288
----------
</TABLE>
41
<PAGE>
FRANKLIN VALUE INVESTORS TRUST
STATEMENT OF INVESTMENTS, OCTOBER 31, 1998 (cont.)
<TABLE>
<CAPTION>
FRANKLIN MICROCAP VALUE FUND SHARES VALUE
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (cont.)
NON-ENERGY MINERALS 2.5%
a,d Devcon International Corp. .................................................... 175,000 $ 339,063
a,d Kentucky Electric Steel, Inc. ................................................. 450,000 1,575,000
a Zemex Corp. ................................................................... 382,773 2,535,874
----------
4,449,937
----------
PROCESS INDUSTRIES 3.8%
a American Pacific Corp. ........................................................ 300,000 2,137,500
a,d Concord Fabrics, Inc., Class A ................................................ 148,800 985,800
a Flanders Corp. ................................................................ 200,000 750,000
a Griffin Land & Nurseries, Inc. ................................................ 94,600 1,229,800
a Orange-co, Inc. ............................................................... 150,000 1,096,875
Thomaston Mills, Inc., Class A ................................................ 128,800 418,600
----------
6,618,575
----------
PRODUCER MANUFACTURING 8.2%
a,d Aerovox, Inc. ................................................................. 530,000 1,590,000
a,d Art's-Way Manufacturing Co., Inc. ............................................. 82,500 556,875
a,d Athey Products Corp. .......................................................... 200,000 762,500
a Bridgeport Machines, Inc. ..................................................... 132,700 962,075
a Continental Materials Corp. ................................................... 50,000 1,706,250
Insteel Industries, Inc. ...................................................... 260,000 1,348,750
Monarch Machine Tool Co. ...................................................... 101,000 669,125
a Napco Security Systems, Inc. .................................................. 33,000 144,375
a Nashua Corp. .................................................................. 142,900 2,188,156
Pitt-Des Moines, Inc. ......................................................... 90,000 2,036,250
TAB Products Co. .............................................................. 15,000 111,563
a,d Temtex Industries, Inc. ....................................................... 265,500 829,688
a Todd Shipyards Corp. .......................................................... 2,500 13,125
TransPro, Inc. ................................................................ 230,000 1,423,125
----------
14,341,857
----------
RETAIL TRADE 8.8%
a Catherines Stores Corp. ....................................................... 149,500 1,270,750
DEB Shops, Inc. ............................................................... 130,000 1,178,125
a Designs, Inc. ................................................................. 700,000 700,000
a Jacobson Stores, Inc. ......................................................... 87,200 610,400
a Jos. A. Bank Clothiers, Inc. .................................................. 33,500 198,906
a Lechters, Inc. ................................................................ 640,000 2,080,000
a Little Switzerland, Inc. ...................................................... 290,000 888,125
a S & K Famous Brands, Inc. ..................................................... 60,000 615,000
a Syms Corp. .................................................................... 100,600 1,012,288
a Trak Auto Corp. ............................................................... 54,000 428,625
a United Retail Group, Inc. ..................................................... 328,000 3,075,000
a,d Village Super Market, Inc., Class A ........................................... 95,000 1,425,000
Wolohan Lumber Co. ............................................................ 138,000 1,759,500
Zions Co-Op Mercantile Institution ............................................ 9,400 140,413
----------
15,382,132
----------
</TABLE>
42
<PAGE>
FRANKLIN VALUE INVESTORS TRUST
STATEMENT OF INVESTMENTS, OCTOBER 31, 1998 (cont.)
<TABLE>
<CAPTION>
FRANKLIN MICROCAP VALUE FUND SHARES VALUE
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (cont.)
TECHNOLOGY SERVICES 2.0%
a,d Government Technology Services, Inc. .......................................... 473,000 $ 2,010,250
a Interlink Computer Sciences, Inc. ............................................. 380,000 1,425,000
-----------
3,435,250
-----------
TRANSPORTATION 4.1%
a Crowley Maritime Corp. ........................................................ 2,200 3,423,200
Providence and Worchester Railroad Co. ........................................ 159,400 1,773,325
a,d TransFinancial Holdings, Inc. ................................................. 336,000 1,932,000
-----------
7,128,525
-----------
UTILITIES 4.4%
a,d Atlantic Tele-Network, Inc. ................................................... 300,000 2,868,750
a Bangor Hydro-Electric Co. ..................................................... 100,000 1,193,750
Citizens Electric Co. ......................................................... 4,600 304,750
Green Mountain Power Corp. .................................................... 100,000 1,437,500
d Maine Public Service Co. ...................................................... 120,000 1,875,000
-----------
7,679,750
-----------
TOTAL COMMON STOCKS (COST $160,710,356) ....................................... 161,890,539
-----------
PREFERRED STOCKS
a Craig Corp. (Cost $59,211) .................................................... 8,400 63,000
-----------
TOTAL LONG TERM INVESTMENTS (COST $160,769,567) ............................... 161,953,539
-----------
</TABLE>
43
<PAGE>
FRANKLIN VALUE INVESTORS TRUST
STATEMENT OF INVESTMENTS, OCTOBER 31, 1998 (CONT.)
<TABLE>
<CAPTION>
PRINCIPAL
FRANKLIN MICROCAP VALUE FUND AMOUNT VALUE
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
c REPURCHASE AGREEMENT 6.3% ................................................................... $ 11,084,587 $ 11,084,587
------------
Joint Repurchase Agreement, 5.350%, 11/02/98, (Maturity Value $11,089,529) (COST $11,084,587)
Barclays Capital Group, Inc. (Maturity Value $1,139,827)
Chase Securities, Inc. (Maturity Value $1,139,827)
CIBC Wood Gundy Securities Corp. (Maturity Value $1,139,827)
Deutsche Morgan Grenfell/C.J. Lawrence, Inc. (Maturity Value $1,139,827)
Donaldson, Lufkin & Jenrette Securities Corp. (Maturity Value $1,139,827)
Dresdner Kleinwort Benson North America, L.L.C. (Maturity Value $831,086)
Greenwich Capital Markets, Inc. (Maturity Value $1,139,827)
NationsBanc Montgomery Securities, L.L.C. (Maturity Value $1,139,827)
Paribas Corp. (Maturity Value $1,139,827)
SBC Warburg Dillon Read, Inc. (Maturity Value $1,139,827)
Collateralized by U.S. Treasury Bills and Notes
------------
TOTAL INVESTMENTS (COST $171,854,154) 98.5% .................................................... 173,038,126
OTHER ASSETS, LESS LIABILITIES 1.5% ............................................................ 2,597,245
------------
NET ASSETS 100.0% .............................................................................. $175,635,371
============
</TABLE>
a Non-income producing.
c See Note 1(d) regarding joint repurchase agreement.
d See Note 6 regarding holdings of 5% voting securities.
See notes to financial statements.
44
<PAGE>
FRANKLIN VALUE INVESTORS TRUST
Financial Highlights
FRANKLIN VALUE FUND
<TABLE>
<CAPTION>
CLASS I
-------------------------------
YEAR ENDED OCTOBER 31,
-------------------------------
1998 1997 1996(2)
-------------------------------
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year .......................................... $24.68 $17.15 $15.00
-------------------------------
Income from investment operations:
Net investment income (loss) ............................................... (.03) .08 .05
Net realized and unrealized gains (losses) ................................. (6.45) 7.90 2.15
-------------------------------
Total from investment operations ............................................ (6.48) 7.98 2.20
-------------------------------
Less distributions from:
Net investment income ...................................................... (.01) (.08) (.05)
Net realized gains ......................................................... (.21) (.37) --
-------------------------------
Total distributions ......................................................... (.22) (.45) (.05)
-------------------------------
Net asset value, end of year ................................................ $17.98 $24.68 $17.15
===============================
Total return* ............................................................... (26.48%) 47.43% 14.69%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ............................................. $98,288 $78,897 $7,828
Ratios to average net assets:
Expenses ................................................................... 1.32% 1.32% 1.35%**
Expenses excluding waiver and payments by affiliate ........................ 1.38% 1.41% 2.87%**
Net investment income (loss) ............................................... (.16%) .27% .57%**
Portfolio turnover rate ..................................................... 36.88% 13.92% 32.52%
</TABLE>
* Total return does not reflect sales commissions or contingent deferred sales
charge, and is not annualized.
** Annualized
(2) For the period March 11, 1996 (effective date) to October 31, 1996.
45
<PAGE>
FRANKLIN VALUE INVESTORS TRUST
Financial Highlights (continued)
FRANKLIN VALUE FUND (CONT.)
<TABLE>
<CAPTION>
Class II
-----------------------------
Year Ended October 31,
-----------------------------
1998 1997 1996(3)
-----------------------------
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year .......................................... $24.59 $17.14 $16.38
---------------------------
Income from investment operations:
Net investment income (loss) ............................................... (.13) (.02) .01
Net realized and unrealized gains (losses) ................................. (6.43) 7.84 .76
---------------------------
Total from investment operations ............................................ (6.56) 7.82 .77
---------------------------
Less distributions from:
Net investment income ...................................................... -- -- (.01)
Net realized gains ......................................................... (.21) (.37) --
---------------------------
Total distributions ......................................................... (.21) (.37) (.01)
---------------------------
Net asset value, end of year ................................................ $17.82 $24.59 $17.14
===========================
Total return* ............................................................... (26.93%) 46.40% 4.68%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ............................................. $41,694 $21,554 $434
Ratios to average net assets:
Expenses ................................................................... 1.97% 1.87% 2.00%**
Expenses excluding waiver and payments by affiliate ........................ 2.03% 1.96% 3.52%**
Net investment loss ........................................................ (.81%) (.30%) (.08%)**
Portfolio turnover rate ..................................................... 36.88% 13.92% 32.52%
</TABLE>
* Total return does not reflect sales commissions or contingent deferred sales
charge, and is not annualized.
** Annualized
(3)For the period September 1, 1996 (effective date) to October 31, 1996.
46
<PAGE>
FRANKLIN VALUE INVESTORS TRUST
Financial Highlights (continued)
FRANKLIN VALUE FUND (CONT.)
<TABLE>
<CAPTION>
ADVISOR CLASS
----------------------
YEAR ENDED OCTOBER 31,
----------------------
1998 1997(4)
----------------------
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ................................................. $24.72 $18.75
------------------
Income from investment operations:
Net investment income ............................................................. .04 .10
Net realized and unrealized gains (losses) ........................................ (6.45) 5.95
------------------
Total from investment operations ................................................... (6.41) 6.05
------------------
Less distributions from:
Net investment income ............................................................. (.03) (.08)
Net realized gains ................................................................ (.21) --
------------------
Total distributions ................................................................ (.24) (.08)
------------------
Net asset value, end of year ....................................................... $18.07 $24.72
==================
Total return* ...................................................................... (26.18%) 32.35%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) .................................................... $4,739 $4,495
Ratios to average net assets:
Expenses .......................................................................... 0.97% .98%**
Expenses excluding waiver and payments by affiliate ............................... 1.03% 1.07%**
Net investment income ............................................................. 0.19% .59%**
Portfolio turnover rate ............................................................ 36.88% 13.92%
</TABLE>
* Total return is not annualized.
** Annualized
(4) For the period January 1, 1997 (effective date) to October 31, 1997.
See notes to financial statements.
47
<PAGE>
FRANKLIN VALUE INVESTORS TRUST
STATEMENT OF INVESTMENTS, OCTOBER 31, 1998
<TABLE>
<CAPTION>
SHARES/
FRANKLIN VALUE FUND WARRANTS VALUE
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCK, WARRANTS & RIGHTS 95.3%
COMMERCIAL SERVICES 2.9%
a Corrections Corp. of America .................................................. 80,000 $ 1,540,000
a Kevco, Inc. ................................................................... 41,900 371,863
Nash-Finch Co. ................................................................ 24,000 363,000
a Rush Enterprises, Inc. ........................................................ 63,000 716,625
Unisource Worldwide, Inc. ..................................................... 132,400 1,216,425
------------
4,207,913
------------
CONSUMER DURABLES 8.6%
a Acorn Products, Inc. .......................................................... 64,000 600,000
a Cannondale Corp. .............................................................. 203,200 2,209,800
Coachmen Industries, Inc. ..................................................... 67,000 1,549,375
D.R. Horton, Inc. ............................................................. 78,000 1,238,250
a Ekco Group, Inc. .............................................................. 81,100 293,988
a,d Engel General Developers, Ltd. ................................................ 237,000 977,625
Engle Homes, Inc. ............................................................. 38,000 489,250
Flexsteel Industries, Inc. .................................................... 46,200 485,100
M/I Schottenstein Homes, Inc. ................................................. 49,900 1,041,663
Mattel, Inc. .................................................................. 40,000 1,435,000
a RockShox, Inc. ................................................................ 108,800 312,800
a Sola International, Inc. ...................................................... 58,000 1,112,875
a TBC Corp. ..................................................................... 107,500 745,781
------------
12,491,507
------------
CONSUMER NON-DURABLES 11.2%
a Chic By H.I.S., Inc. .......................................................... 20,000 73,750
DIMON, Inc. ................................................................... 354,000 4,579,875
a Ridgeview, Inc. ............................................................... 137,800 396,175
Schweitzer-Mauduit International, Inc. ........................................ 62,300 1,133,081
Standard Commercial Corp. ..................................................... 302,000 2,321,625
a Tropical Sportswear International Corp. ....................................... 267,000 5,340,000
Wolverine World Wide, Inc. .................................................... 185,000 2,416,563
------------
16,261,069
------------
CONSUMER SERVICES .6%
a Aztar Corp. ................................................................... 168,000 871,500
------------
ELECTRONIC TECHNOLOGY 10.5%
a Aehr Test Systems ............................................................. 212,000 1,007,000
a Alliant Techsystems, Inc. ..................................................... 22,600 1,582,000
Astro-Med, Inc. ............................................................... 93,700 585,625
a Dunn Computer Corp. ........................................................... 98,000 281,750
Elbit Systems, Ltd. (Israel) .................................................. 134,700 1,557,469
a ESCO Electronics Corp. ........................................................ 43,000 537,500
a FLIR Systems, Inc. ............................................................ 52,700 889,313
a Hurco Companies, Inc. ......................................................... 34,200 207,338
a Komag, Inc. ................................................................... 90,000 506,250
a Ladish Co., Inc. .............................................................. 210,000 1,798,125
a NCR Corp. ..................................................................... 56,000 1,883,000
</TABLE>
48
<PAGE>
FRANKLIN VALUE INVESTORS TRUST
STATEMENT OF INVESTMENTS, OCTOBER 31, 1998 (CONT.)
<TABLE>
<CAPTION>
SHARES/
FRANKLIN VALUE FUND WARRANTS VALUE
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCK, WARRANTS & RIGHTS (CONT.)
ELECTRONIC TECHNOLOGY (CONT.)
a RadiSys Corp. ................................................................. 31,500 $ 606,375
a Read-Rite Corp. ............................................................... 100,000 1,075,000
a SPACEHAB, Inc. ................................................................ 209,700 1,782,450
a Spectralink Corp. ............................................................. 22,300 52,963
United Industrial Corp. ....................................................... 75,500 783,313
----------
15,135,471
----------
ENERGY MINERALS 1.4%
a Nuevo Energy Co. .............................................................. 94,000 1,991,625
----------
FINANCE 14.6%
a Acceptance Insurance Companies, Inc. .......................................... 65,000 1,275,625
a American Safety Insurance Group, Ltd. ......................................... 190,000 1,852,500
Executive Risk, Inc. .......................................................... 18,100 859,750
Household International, Inc. ................................................. 42,000 1,535,625
a Matrix Capital Corp. .......................................................... 118,400 1,406,000
MMI Companies, Inc. ........................................................... 196,000 3,148,250
PAULA Financial ............................................................... 20,000 158,750
a PBOC Holdings, Inc. ........................................................... 100,000 962,500
Penn-America Group, Inc. ...................................................... 160,000 1,510,000
Presidential Life Corp. ....................................................... 26,800 485,750
a Professionals Group Inc. ...................................................... 62,000 1,829,000
a Seibels Bruce Group, Inc. ..................................................... 312,000 1,170,000
a Symons International Group, Inc. .............................................. 115,500 721,875
Terra Nova (Bermuda) Holdings, Ltd., Class A .................................. 33,000 915,750
The Centris Group, Inc. ....................................................... 173,700 1,639,294
The PMI Group, Inc. ........................................................... 33,700 1,699,744
----------
21,170,413
----------
HEALTH SERVICES .6%
a Cohr, Inc. .................................................................... 300,000 900,000
----------
HEALTH TECHNOLOGY 3.0%
a DepoTech Corp. ................................................................ 600,000 881,280
a Matrix Pharmaceutical, Inc. ................................................... 98,200 245,500
a OrthoLogic Corp. .............................................................. 403,000 1,259,375
West Co., Inc. ................................................................ 68,300 2,027,656
----------
4,413,811
----------
INDUSTRIAL SERVICES 8.2%
a Atwood Oceanics, Inc. ......................................................... 69,000 1,940,625
Butler Manufacturing Co. ...................................................... 27,100 609,750
a Cliffs Drilling Co. ........................................................... 90,000 2,058,750
a Cogeneration Corp. of America ................................................. 3,000 26,812
a Conrad Industries, Inc. ....................................................... 99,500 696,500
ENSCO International, Inc. ..................................................... 135,000 1,814,063
a Perini Corp. .................................................................. 177,000 1,017,750
a Rowan Companies, Inc. ......................................................... 195,000 2,839,688
Santa Fe International Corp. .................................................. 50,000 921,875
----------
11,925,813
----------
</TABLE>
49
<PAGE>
FRANKLIN VALUE INVESTORS TRUST
STATEMENT OF INVESTMENTS, OCTOBER 31, 1998 (CONT.)
<TABLE>
<CAPTION>
SHARES/
FRANKLIN VALUE FUND WARRANTS VALUE
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCK, WARRANTS & RIGHTS (CONT.)
NON-ENERGY MINERALS 3.0%
Carpenter Technology Corp. .................................................... 45,000 $ 1,577,813
LTV Corp. ..................................................................... 260,000 1,592,500
a Lone Star Technologies, Inc. .................................................. 105,000 1,115,625
------------
4,285,938
------------
PROCESS INDUSTRIES 2.4%
M. A. Hanna Co. ............................................................... 70,000 1,028,125
RPM, Inc. ..................................................................... 66,000 1,109,625
Sherwin-Williams Co. .......................................................... 10,500 264,469
Tuscarora, Inc. ............................................................... 53,400 694,200
a Valley National Gases, Inc. ................................................... 45,000 315,000
------------
3,411,419
------------
PRODUCER MANUFACTURING 13.2%
a Atchison Casting Corp. ........................................................ 168,800 1,614,150
Baldor Electric Co. ........................................................... 15,600 327,600
Commercial Intertech Corp. .................................................... 42,000 748,125
Commonwealth Industries, Inc. ................................................. 119,400 902,963
a Denison International Plc, ADR (United Kingdom) ............................... 31,600 466,100
Easco, Inc. ................................................................... 108,300 961,163
Flowserve Corp. ............................................................... 22,000 396,000
a Global Industrial Technologies, Inc. .......................................... 133,100 1,156,306
Haskel International, Inc., Class A ........................................... 148,500 1,633,500
a Holophane Corp. ............................................................... 23,500 500,844
JLG Industries, Inc. .......................................................... 272,000 4,505,000
a Keystone Consolidated Industries, Inc. ........................................ 85,600 599,200
a Morgan Products, Ltd. ......................................................... 220,000 550,000
Myers Industries, Inc. ........................................................ 41,200 988,800
Patrick Industries, Inc. ...................................................... 91,600 1,396,900
Superior Industries International, Inc. ....................................... 31,000 811,813
Watts Industries, Inc., Class A ............................................... 84,000 1,543,500
------------
19,101,964
------------
RETAIL TRADE 4.6%
a Brookstone, Inc. .............................................................. 106,400 1,216,950
a Duckwall-Alco Stores, Inc. .................................................... 122,200 1,374,750
a Footstar, Inc. ................................................................ 25,700 671,413
a Little Switzerland, Inc. ...................................................... 31,000 94,938
Schultz Sav-O Stores, Inc. .................................................... 63,250 1,012,000
a Syms Corp. .................................................................... 222,600 2,239,913
------------
6,609,964
------------
TECHNOLOGY SERVICES 2.5%
a Interlink Computer Sciences, Inc. ............................................. 104,000 390,000
a Manchester Equipment Co., Inc. ................................................ 21,700 69,169
Reynolds & Reynolds Co., Class A .............................................. 104,500 1,881,000
a Ultrak, Inc. .................................................................. 166,000 1,307,250
------------
3,647,419
------------
</TABLE>
50
<PAGE>
FRANKLIN VALUE INVESTORS TRUST
STATEMENT OF INVESTMENTS, OCTOBER 31, 1998 (CONT.)
<TABLE>
<CAPTION>
SHARES/
FRANKLIN VALUE FUND WARRANTS VALUE
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCK, WARRANTS & RIGHTS (CONT.)
TRANSPORTATION 8.0%
a Eagle USA Airfreight, Inc. .................................................... 89,900 $ 1,151,842
a Fritz Companies, Inc. ......................................................... 71,000 630,122
Kenan Transport Co. ........................................................... 70,150 2,104,500
a Motor Cargo Industries, Inc. .................................................. 319,200 2,773,050
Teekay Shipping Corp. (Canada) ................................................ 40,000 700,000
Tidewater, Inc. ............................................................... 147,000 4,161,934
------------
11,521,448
------------
TOTAL COMMON STOCK, WARRANTS & RIGHTS (COST $183,979,822) ..................... 137,947,274
------------
<CAPTION>
PRINCIPAL
AMOUNT
----------
<S> <C> <C>
CORPORATE BONDS 0.2%
Hechinger Co., senior notes, 6.95%, 10/15/03 (Cost $287,500) .................. $ 500,000 342,500
-------------
CONVERTIBLE CORPORATE BONDS 0.5%
SPACEHAB, Inc., cvt. sub. notes, 144A, 8.00%, 10/15/07 (Cost $1,000,000) ...... 1,000,000 785,000
-------------
TOTAL BONDS (COST $1,287,500) ................................................. 1,127,500
-------------
TOTAL LONG TERM INVESTMENTS (COST $185,267,322) ............................... 139,074,774
-------------
c REPURCHASE AGREEMENT 3.7%
Joint Repurchase Agreement, 5.350%, 11/02/98 (Maturity Value $5,421,803)
(COST $5,419,387) ........................................................... 5,419,387 5,419,387
Barclays Capital Group, Inc. (Maturity Value $557,027)
Chase Securities, Inc. (Maturity Value $557,027)
CIBC Wood Gundy Securities Corp. (Maturity Value $557,027)
Deutsche Morgan Grenfell/C.J. Lawrence, Inc. (Maturity Value $557,027)
Donaldson, Lufkin & Jenrette Securities Corp. (Maturity Value $557,027)
Dresdner Kleinwort Benson, North America, L.L.C. (Maturity Value $406,147)
Greenwich Capital Markets, Inc. (Maturity Value $557,027)
NationsBanc Montgomery Securities, L.L.C. (Maturity Value $557,027)
Paribas Corp. (Maturity Value $557,027)
SBC Warburg Dillon Read, Inc. (Maturity Value $557,027)
Collateralized by U.S. Treasury Bills and Notes
-------------
TOTAL INVESTMENTS (COST $190,686,709) 99.7% ................................... 144,494,161
OTHER ASSETS, LESS LIABILITIES .3% ............................................ 226,427
-------------
NET ASSETS 100.0% ............................................................. $ 144,720,588
=============
</TABLE>
a Non-income producing
c See Note 1(d) regarding joint repurchase agreement.
See notes to financial statements.
51
<PAGE>
FRANKLIN VALUE INVESTORS TRUST
Financial Statements
Statements of Assets and Liabilities
October 31, 1998
<TABLE>
<CAPTION>
Franklin Franklin Franklin
Balance Sheet MicroCap Value
Investment Fund Value Fund Fund
-----------------------------------------------------
<S> <C> <C> <C>
Assets:
Investments in securities:
Cost- Unaffiliated issuers .............. $ 686,516,742 $ 106,892,398 $ 185,267,322
Cost- Non-controlled affiliated issuers . 418,351,640 53,877,169 --
====================================================
Value- Unaffiliated issuers ............. 777,950,441 113,316,397 139,074,774
Value- Non-controlled affiliated issuers 394,605,165 48,637,142 --
Repurchase agreements, at value and cost . 294,970,775 11,084,587 5,419,387
Cash ..................................... 766,441 -- 107,022
Receivables:
Investment securities sold .............. 560,187 2,475,742 967,358
Capital shares sold ..................... 3,967,371 826,673 407,675
Dividends and interest .................. 744,972 24,859 24,626
Other assets ............................. -- -- 1,400
----------------------------------------------------
Total assets ............................ 1,473,565,352 176,365,400 146,002,242
====================================================
Liabilities:
Payables:
Investment securities purchased ......... 3,075,471 94,351 440,800
Capital shares redeemed ................. 1,009,867 308,158 372,387
Affiliates .............................. 1,627,001 262,467 338,772
Shareholders ............................ 545,495 51,585 99,040
Other liabilities ........................ 100,350 13,468 30,655
----------------------------------------------------
Total liabilities ....................... 6,358,184 730,029 1,281,654
----------------------------------------------------
Net assets, at value ................... $1,467,207,168 $ 175,635,371 $ 144,720,588
====================================================
Net assets consist of:
Undistributed net investment income ...... $ 2,965,881 $ -- $ --
Net unrealized appreciation (depreciation) 67,687,224 1,183,972 (46,192,548)
Accumulated net realized gain ............ 53,822,593 13,317,028 693,783
Capital shares ........................... 1,342,731,470 161,134,371 190,219,353
----------------------------------------------------
Net assets, at value ................... $1,467,207,168 $ 175,635,371 $ 144,720,588
====================================================
</TABLE>
See notes to financial statements.
52
<PAGE>
FRANKLIN VALUE INVESTORS TRUST
Financial Statements (continued)
Statements of Assets and Liabilities (cont.)
October 31, 1998
<TABLE>
<CAPTION>
Franklin Franklin Franklin
Balance Sheet MicroCap Value
Investment Fund Value Fund Fund
----------------------------------------------------
<S> <C> <C> <C>
Class I:
Net assets, at value $ 1,467,207,168 $ 175,635,371 $98,287,512
----------------------------------------------------
Shares outstanding 46,051,441 8,666,162 5,465,994
----------------------------------------------------
Net asset value per share* $ 31.86 $ 20.27 $ 17.98
----------------------------------------------------
Maximum offering price (net assets value divided by
98.5%, 94.25%, and 94.25%, respectively) $ 32.35 $ 21.51 $ 19.08
----------------------------------------------------
Class II:
Net assets, at value -- -- $41,693,680
----------------------------------------------------
Shares outstanding -- -- 2,339,992
----------------------------------------------------
Net asset value per share* -- -- $ 17.82
----------------------------------------------------
Maximum offering price (net asset value divided by 99%) -- -- $ 18.00
----------------------------------------------------
Advisor Class:
Net assets, at value -- -- $ 4,739,396
----------------------------------------------------
Shares outstanding -- -- 262,233
----------------------------------------------------
Net asset value per share and maximum offering price per share -- -- $ 18.07
----------------------------------------------------
</TABLE>
* Redemption price is equal to net asset value less any applicable contingent
deferred sales charge.
See notes to financial statements.
53
<PAGE>
FRANKLIN VALUE INVESTORS TRUST
Financial Statements (continued)
Statements of Operations
for the year ended October 31, 1998
<TABLE>
<CAPTION>
Franklin Franklin Franklin
Balance Sheet MicroCap Value
Investment Fund Value Fund Fund
-----------------------------------------------------
<S> <C> <C> <C>
Investment income:
Dividends:
Unaffiliated issuers* $ 16,113,007 $ 1,464,577 $ 1,341,954
Non-controlled affiliated issuers (Note 6) 3,783,272 182,355 --
Interest 15,400,170 600,160 516,874
-----------------------------------------------------
Total investment income 35,296,449 2,247,092 1,858,828
-----------------------------------------------------
Expenses:
Management fees (Note 3) 6,868,491 1,528,066 1,200,877
Distribution fees (Note 3)
Class I 4,255,930 532,540 400,403
Class II -- -- 412,396
Transfer agent fees (Note 3) 1,866,604 298,511 278,374
Custodian fees 55,322 2,918 3,421
Reports to shareholders 261,186 45,917 47,701
Registration and filing fees 223,615 36,298 94,702
Professional fees 46,486 8,485 7,108
Trustees' fees and expenses 28,647 4,112 3,084
Other 14,440 5,737 6,907
-----------------------------------------------------
Total expenses 13,620,721 2,462,584 2,454,973
Expenses waived/paid by affiliate (Note 3) -- -- (95,483)
Net expenses 13,620,721 2,462,584 2,359,490
-----------------------------------------------------
Net investment income (losses) 21,675,728 (215,492) (500,662)
-----------------------------------------------------
Realized and unrealized gains (losses):
Net realized gains (losses) from:
Investments in unaffiliated issuers 14,361,281 13,385,788 692,004
Investments in non-controlled affiliated issuers (Note 6) 32,957,836 242,097 --
Closed-end funds distributions 6,515,025 -- --
Foreign currency transactions (60,212) -- 866
-----------------------------------------------------
Net realized gain 53,773,930 13,627,885 692,870
-----------------------------------------------------
Net unrealized appreciation (depreciation) on:
Investments (140,503,771) (36,789,537) (54,892,244)
Translation of assets and liabilities denominated in foreign currencies 1,418 -- --
-----------------------------------------------------
Net unrealized depreciation (140,502,353) (36,789,537) (54,892,244)
-----------------------------------------------------
Net realized and unrealized loss (86,728,423) (23,161,652) (54,199,374)
-----------------------------------------------------
Net decrease in net assets resulting from operations $ (65,052,695) $ (23,377,144) $ (54,700,036)
=====================================================
</TABLE>
* Net of foreign taxes of $ 358,716 and $ 7,500 for the Franklin Balance Sheet
Investment Fund and Franklin Value Fund, respectively.
See notes to financial statements.
54
<PAGE>
FRANKLIN VALUE INVESTORS TRUST
Financial Statements (continued)
Statements of Changes in Net Assets
for the years ended October 31, 1998 and 1997
<TABLE>
<CAPTION>
Franklin Balance Franklin MicroCap
Sheet Investment Fund Value Fund
-----------------------------------------------------------------------------------
1998 1997 1998 1997
-----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Increase (decrease) in net assets:
Operations:
Net investment
income (loss) ....................... $ 21,675,728 $ 14,167,799 $ (215,492) $ (78,345)
Net realized gain from
investments and foreign
currency transactions ............... 53,773,930 65,350,389 13,627,885 12,151,934
Net unrealized appreciation
(depreciation) on investments
and translation of assets
and liabilities denominated
in foreign currencies ............... (140,502,353) 165,462,247 (36,789,537) 33,546,997
-----------------------------------------------------------------------------------
Net increase (decrease)
in net assets resulting
from operations ..................... (65,052,695) 244,980,435 (23,377,144) 45,620,586
Distributions to shareholders from:
Net investment income:
Class I ............................ (21,386,657) (12,631,986) (64,132) (152,942)
Advisor Class ...................... -- -- -- --
Net realized gains:
Class I ............................ (65,036,050) (53,996,143) (11,892,928) (2,930,586)
Class II ........................... -- -- -- --
Advisor Class ...................... -- -- -- --
-----------------------------------------------------------------------------------
Total distributions to
shareholders ........................ (86,422,707) (66,628,129) (11,957,060) (3,083,528)
Capital share transactions
(Note 2)
Class I ............................ 395,729,810 387,598,329 19,331,621 29,437,190
Class II ........................... -- -- -- --
Advisor Class ...................... -- -- -- --
-----------------------------------------------------------------------------------
Total capital share transactions ..... 395,729,810 387,598,329 19,331,621 29,437,190
-----------------------------------------------------------------------------------
Net increase in net assets ........ 244,254,408 565,950,635 (16,002,583) 71,974,248
Net assets:
Beginning of year ................... 1,222,952,760 657,002,125 191,637,954 119,663,706
-----------------------------------------------------------------------------------
End of year ......................... $ 1,467,207,168 $ 1,222,952,760 $ 175,635,371 $ 191,637,954
===================================================================================
Undistributed net investment
income included in net
assets:
End of year ........................ $ 2,965,881 $ 2,723,942 $ -- $ --
===================================================================================
</TABLE>
<TABLE>
<CAPTION>
Franklin
Value Fund
------------------------------------
1998 1997
------------------------------------
<S> <C> <C>
Increase (decrease) in net assets:
Operations:
Net investment
income (loss) ....................... $ (500,662) $ 72,999
Net realized gain from
investments and foreign
currency transactions ............... 692,870 1,067,208
Net unrealized appreciation
(depreciation) on investments
and translation of assets
and liabilities denominated
in foreign currencies ............... (54,892,244) 8,386,549
------------------------------------
Net increase (decrease)
in net assets resulting
from operations ..................... (54,700,036) 9,526,756
Distributions to shareholders from:
Net investment income:
Class I ............................ (43,246) (66,816)
Advisor Class ...................... (5,419) (3,903)
Net realized gains:
Class I ............................ (750,851) (192,201)
Class II ........................... (237,831) (10,143)
Advisor Class ...................... (40,254) --
------------------------------------
Total distributions to
shareholders ........................ (1,077,601) (273,063)
Capital share transactions
(Note 2)
Class I ............................ 57,685,763 63,130,877
Class II ........................... 35,364,755 20,208,077
Advisor Class ...................... 2,051,351 4,091,936
------------------------------------
Total capital share transactions ..... 95,551,869 87,430,890
------------------------------------
Net increase in net assets ........ 39,774,232 96,684,583
Net assets:
Beginning of year ................... 104,946,356 8,261,773
------------------------------------
End of year ......................... $ 144,720,588 $ 104,946,356
====================================
Undistributed net investment
income included in net
assets:
End of year ........................ $ -- $ 4,129
====================================
</TABLE>
See notes to financial statements.
55
<PAGE>
FRANKLIN VALUE INVESTORS TRUST
Notes to Financial Statements
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
a. ORGANIZATION:
Franklin Value Investors Trust (the Trust) is registered under the Investment
Company Act of 1940 as an open-end, non-diversified investment company,
consisting of three series (the Funds). The Funds' investment objectives are
growth and income.
The following summarizes the Funds' significant accounting policies.
b. 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.
c. 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.
d. JOINT REPURCHASE AGREEMENT:
The Funds may enter into a joint repurchase agreement whereby its uninvested
cash balance is 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 interest. A
repurchase agreement is accounted for as a loan by the Fund to the seller,
collateralized by securities which are delivered to the Fund's custodian. The
market value, including accrued interest, of the initial collateralization is
required to be at least 102% of the dollar amount invested by the Funds, with
the value of the underlying securities marked to market daily to maintain
coverage of at least 100%. At October 31, 1998, all outstanding repurchase
agreements held by the Funds had been entered into on October 30th.
56
<PAGE>
FRANKLIN VALUE INVESTORS TRUST
Notes to Financial Statements (continued)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (cont.)
e. 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
distribute all of its taxable income.
f. 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.
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.
Realized and unrealized gains and losses and net investment income, other than
class specific expenses, are allocated daily to each class of shares based upon
the relative proportion of net assets of each class.
g. 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
The classes of shares offered within each of the Funds are indicated below. The
shares differ by their initial sales load, distribution fees, voting rights on
matters affecting a single class and the exchange privilege of each class.
<TABLE>
<CAPTION>
CLASS I CLASS I, CLASS II, & ADVISOR CLASS
--------------------------------------------------------------------------------
<S> <C>
Franklin Balance Sheet Investment Fund Franklin Value Fund
Franklin MicroCap Value Fund
</TABLE>
57
<PAGE>
FRANKLIN VALUE INVESTORS TRUST
Notes to Financial Statements (continued)
2. SHARES OF BENEFICIAL INTEREST (cont.)
At October 31, 1998, there were an unlimited number of shares authorized ($.01
par value). Transactions in the funds' shares were as follows:
<TABLE>
<CAPTION>
Franklin Balance Franklin MicroCap Franklin
Sheet Investment Fund Value Fund Value Fund
------------------------------------------------------------------------------------------
Class I Shares: Shares Amount Shares Amount Shares Amount
------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Year ended October 31, 1998
Shares sold ................. 18,222,491 $ 633,618,542 2,069,052 $ 48,313,995 5,324,861 $ 124,490,260
Shares issued in reinvestment
of distributions ............ 2,376,759 78,351,007 486,486 10,804,862 30,315 723,006
Shares redeemed ............. (9,270,237) (316,239,739) (1,778,377) (39,787,236) (3,086,439) (67,527,503)
------------------------------------------------------------------------------------------
Net increase ................ 11,329,013 $ 395,729,810 777,161 $ 19,331,621 2,268,737 $ 57,685,763
==========================================================================================
Year ended October 31, 1997
Shares sold ................. 14,624,224 $ 470,566,560 2,302,643 $ 48,279,959 3,359,946 $ 77,528,012
Shares issued in reinvestment
of distributions ............ 2,029,002 58,119,661 148,129 2,750,756 12,980 240,426
Shares redeemed ............. (4,466,272) (141,087,892) (1,050,071) (21,593,525) (632,076) (14,637,561)
------------------------------------------------------------------------------------------
Net increase ................ 12,186,954 $ 387,598,329 1,400,701 $ 29,437,190 2,740,850 $ 63,130,877
==========================================================================================
</TABLE>
<TABLE>
<S> <C> <C>
Class II Shares:
Year ended October 31, 1998
Shares sold .................................................................................. 2,011,944 $ 46,831,107
Shares issued in reinvestment of distributions ............................................... 9,086 215,872
Shares redeemed .............................................................................. (557,458) (11,682,224)
-----------------------------
Net increase ................................................................................. 1,463,572 $ 35,364,755
=============================
Year ended October 31, 1997
Shares sold .................................................................................. 886,618 $ 21,017,778
Shares issued in reinvestment of distributions ............................................... 446 8,061
Shares redeemed .............................................................................. (35,962) (817,762)
-----------------------------
Net increase ................................................................................. 851,102 $ 20,208,077
=============================
Advisor Class:
Year ended October 31, 1998
Shares sold .................................................................................. 306,114 $ 7,058,256
Shares issued in reinvestment of distributions ............................................... 1,904 45,486
Shares redeemed .............................................................................. (227,624) (4,602,391)
-----------------------------
Net increase ................................................................................. 80,394 $ 2,501,351
=============================
Year ended October 31, 1997*
Shares sold .................................................................................. 217,368 $ 4,869,043
Shares issued in reinvestment of distributions ............................................... 187 3,903
Shares redeemed .............................................................................. (35,716) (781,010)
-----------------------------
Net increase ................................................................................. 181,839 $ 4,091,936
=============================
</TABLE>
*Effective date of Advisor Class shares was January 2, 1997.
58
<PAGE>
FRANKLIN VALUE INVESTORS TRUST
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. TRANSACTIONS WITH AFFILIATES
Certain officers and trustees of the Trust are also officers and/or directors of
Franklin Advisory Services, Inc. (Advisory Services), Franklin/Templeton
Distributors, Inc. (Distributors), Franklin Templeton Services, Inc. (FT
Services), and Franklin/Templeton Investor Services, Inc. (Investor Services),
the Funds' investment manager, principal underwriter, administrative manager,
and transfer agent, respectively.
The Franklin Balance Sheet Investment Fund pays an investment management fee to
Advisory Services based on the average net assets of the Fund as follows:
Annualized
Fee Rate Daily Net Assets
----------------------------------------------------------------
.625% First $100 million
.500% Over $100 million, up to and including $250 million
.450% Over $250 million, up to and including $10 billion
Fees are further reduced on net assets over $10 billion
The Franklin MicroCap Value Fund pays an investment management fee to Advisory
Services of .750% per year of the average daily net assets of the Fund.
The Franklin Value Fund pays an investment management fee to Advisory Services
based on the average net assets of the Fund as follows:
Annualized
Fee Rate Daily Net Assets
----------------------------------------------------------------
.750% First $500 million
.625% Over $500 million, up to and including $1 billion
.500% In excess of $1 billion
Under an agreement with Advisory Services, FT Services provides administrative
services to the Funds. The fee is paid by Advisory Services based on average
daily net assets, and is not an additional expense of the Funds.
Advisory Services agreed in advance to waive management fees for the Franklin
Value Fund, as noted in the Statement of Operations.
The Franklin Value Fund reimburses Distributors up to .35% and 1.00% per year of
the average daily net assets of Class I and Class II, respectively, and the
Franklin Balance Sheet Investment Fund and the Franklin MicroCap Fund reimburse
Distributors up to .25% per year of the average daily net assets of Class I for
costs incurred in marketing the Funds' shares.
59
<PAGE>
FRANKLIN VALUE INVESTORS TRUST
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. TRANSACTIONS WITH AFFILIATES (cont.)
Distributors received (paid) net commissions on sales of the Funds' shares, and
received contingent deferred sales charges for the year as follows:
<TABLE>
<CAPTION>
FRANKLIN FRANKLIN FRANKLIN
BALANCE SHEET MICROCAP VALUE
INVESTMENT FUND VALUE FUND FUND
----------------------------------------------
<S> <C> <C> <C>
Net commissions received (paid) .... $(1,479,392) $101,417 $(285,283)
Contingent deferred sales charges .. $ 2,019 $ -- $ 32,447
</TABLE>
The Funds paid transfer agent fees of $2,443,489, of which $1,414,566 was paid
to Investor Services.
4. INCOME TAXES
At October 31, 1998, the net unrealized appreciation (depreciation) based on the
cost of investments for income tax purposes was as follows:
<TABLE>
<CAPTION>
FRANKLIN FRANKLIN FRANKLIN
BALANCE SHEET MICROCAP VALUE
INVESTMENT FUND VALUE FUND FUND
----------------------------------------------------------
<S> <C> <C> <C>
Investments at cost ....... $ 1,399,840,720 $ 171,877,623 $ 190,686,709
==========================================================
Unrealized appreciation ... $ 220,129,011 $ 24,651,022 $ 7,679,851
Unrealized depreciation ... (152,443,350) (23,490,519) (53,872,399)
==========================================================
Net unrealized appreciation
(depreciation) ........... $ 67,685,661 $ 1,160,503 $ (46,192,548)
==========================================================
</TABLE>
Net investment income differs for financial statement and tax purposes primarily
due to differing treatments of foreign currency transactions. Net realized
capital gains differ for financial statement and tax purposes primarily due to
differing treatment of wash sales and foreign currency transactions.
5. INVESTMENT TRANSACTIONS
Purchases and sales of securities (excluding short-term securities) for the year
ended October 31, 1998 were as follows:
<TABLE>
<CAPTION>
FRANKLIN FRANKLIN FRANKLIN
BALANCE SHEET MICROCAP VALUE
INVESTMENT FUND VALUE FUND FUND
-------------------------------------------------
<S> <C> <C> <C>
Purchases .... $351,650,765 $61,463,193 $152,600,935
Sales ........ $141,562,253 $61,176,224 $ 55,454,838
</TABLE>
60
<PAGE>
FRANKLIN VALUE INVESTORS TRUST
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. HOLDINGS OF 5% VOTING SECURITIES OF PORTFOLIO ISSUERS
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 October 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 OCTOBER 31, 1997 ADDITIONS REDUCTIONS OCTOBER 31, 1998 OCTOBER 31, 1998 INCOME
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
FRANKLIN BALANCE SHEET
INVESTMENT FUND
ACMAT Corp., Class A ................... 295,000 -- -- 295,000 $ 4,535,625 $ --
A.P. Green Industries, Inc. ............ 521,300 -- 521,300 -- * 41,704
Allen Organ Co., Class B ............... 83,000 -- -- 83,000 2,905,000 46,480
American Pacific Corp. ................. 421,100 -- -- 421,100 3,000,338 --
Audiovox Corp., Class A ................ 1,053,900 666,100 -- 1,720,000 9,460,000 --
Aydin Corp. ............................ 270,000 -- -- 270,000 2,126,250 --
Aztar Corp. ............................ 3,210,000 190,000 -- 3,400,000 17,637,500 --
Binks Sames Corp. ...................... 149,300 -- 149,300 -- * 14,930
Buttrey Food and Drug Stores Co. ....... 467,700 -- 467,700 -- * --
Castle & Cooke, Inc. ................... 1,270,000 512,400 -- 1,782,400 27,850,000 --
Charming Shoppes, Inc. ................. -- 6,600,000 -- 6,600,000 24,750,000 --
Cherry Corp., Class A .................. 408,900 -- -- 408,900 5,469,038 --
Cherry Corp., Class B .................. 271,000 -- -- 271,000 3,319,750 --
Chic By H.I.S., Inc. ................... 756,000 -- -- 756,000 2,787,750 7,560
Commonwealth Industries, Inc. .......... 1,127,300 172,700 -- 1,300,000 9,831,250 246,495
Crown Central Petroleum Corp., Class B . 500,000 -- -- 500,000 4,750,000 --
Cyrk, Inc. ............................. 1,171,000 16,400 -- 1,187,400 10,686,600 --
Delta Woodside Industries, Inc. ........ 2,267,500 132,500 -- 2,400,000 13,500,000 238,675
Designs, Inc. .......................... 848,000 352,000 -- 1,200,000 1,200,000 --
Dixie Group, Inc. ...................... 600,000 -- -- 600,000 3,450,000 90,000
Echelon International Corp., Inc. ...... 490,000 10,000 -- 500,000 10,375,000 --
Ecology and Environmental, Inc., Class A 260,000 -- -- 260,000 2,405,000 83,200
Enex Resources Corp. ................... 104,500 -- 104,500 -- * 26,125
ESCO Electronics Corp. ................. 840,000 -- -- 840,000 10,500,000 --
Farah, Inc. ............................ 649,300 -- 649,300 -- * --
Fidelity Bancorp, Inc. ................. 144,500 -- -- 144,500 2,998,375 57,800
First Financial Bancorp, Inc. .......... 24,000 -- 24,000 -- * --
Fred's, Inc. ........................... 712,000 138,000 -- 850,000 11,103,125 151,500
Garan, Inc. ............................ 285,100 -- -- 285,100 7,733,338 342,120
Good Guys, Inc. ........................ 737,500 250,000 -- 987,500 4,937,500 --
Haggar Corp. ........................... 850,000 -- -- 850,000 11,103,125 170,000
Handleman Co. .......................... 1,115,000 1,294,000 -- 2,409,000 23,939,438 --
Homebase, Inc. ......................... 1,483,900 1,816,100 -- 3,300,000 22,275,000 --
Insteel Industries, Inc. ............... 565,300 14,700 -- 580,000 3,008,750 139,200
International Shipholding Corp. ........ 652,300 7,700 -- 660,000 10,601,250 165,000
Jacobson Stores, Inc. .................. 298,100 -- -- 298,100 2,086,700 --
KLLM Transport Services, Inc. .......... -- 322,000 322,000 2,616,250 --
Kaneb Services, Inc. ................... 2,463,000 737,000 -- 3,200,000 14,600,000 --
</TABLE>
61
<PAGE>
FRANKLIN VALUE INVESTORS TRUST
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. HOLDINGS OF 5% VOTING SECURITIES OF PORTFOLIO ISSUERS (cont.)
<TABLE>
<CAPTION>
NUMBER OF NUMBER OF
SHARES HELD AT GROSS GROSS SHARES HELD AT VALUE AT DIVIDEND
NAME OF ISSUER OCTOBER 31, 1997 ADDITIONS REDUCTIONS OCTOBER 31, 1998 OCTOBER 31, 1998 INCOME
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
FRANKLIN BALANCE SHEET
INVESTMENT FUND (CONT.)
Lechters, Inc. ........................ -- 861,600 -- 861,600 $ 2,800,200 $ --
M.D.C. Holdings, Inc. ................. 1,069,300 -- 334,300 735,000 * 136,158
Maynard Oil Co. ....................... -- 268,000 -- 268,000 2,772,138 --
Merchants Group, Inc. ................. 257,800 -- -- 257,800 5,252,675 51,560
Monarch Machine Tool Co. .............. 250,000 -- -- 250,000 1,656,250 50,000
Nash-Finch Co. ........................ 699,100 300,900 -- 1,000,000 15,125,000 632,754
Oshkosh Truck Corp., Class B .......... 483,000 -- 22,600 460,400 12,603,450 235,850
Pitt-Des Moines, Inc. ................. 177,500 182,500 -- 360,000 * 261,813
Pulaski Furniture Corp. ............... 192,000 -- -- 192,000 4,176,000 130,560
Rochester & Pittsburgh Coal Co. ....... 172,000 -- 172,000 -- * 78,000
Ryland Group, Inc. .................... 834,800 -- 834,800 -- * 56,992
Standard Microsystems Corp. ........... 700,000 675,000 -- 1,375,000 9,281,250 --
Stewart Information Services Corp. .... 465,000 -- 65,000 400,000 20,050,000 131,656
Syms Corp. ............................ -- 1,110,000 -- 1,110,000 11,169,375 --
TransFinancial Holdings, Inc. ......... -- 270,000 -- 270,000 1,552,500 --
TransPro, Inc. ........................ 25,300 344,700 -- 370,000 2,289,375 51,540
U.S. Home Corp. ....................... 700,800 -- 40,800 660,000 * --
Unique Casual Restaurants, Inc. ....... 764,500 220,500 -- 985,000 4,925,000 --
VICORP Restaurants, Inc. .............. -- 480,000 -- 480,000 6,780,000 --
Wolohan Lumber Co. .................... 520,000 -- -- 520,000 6,630,000 145,600
---------------------------
TOTAL NON-CONTROLLED AFFILIATED ISSUERS $394,605,165 $3,783,272
===========================
FRANKLIN MICROCAP VALUE FUND
ACMAT Corp., Class A .................. 150,000 -- -- 150,000 $ 2,306,250 $ --
Aerovox, Inc. ......................... 291,600 238,400 -- 530,000 1,590,000 --
Allou Health and Beauty, Inc., Class A 407,000 50,000 -- 457,000 2,742,000 --
Allstate Financial Corp. .............. 209,000 -- -- 209,000 692,313 --
American Physicians Service Group, Inc. 247,000 -- -- 247,000 1,265,875 --
Art's-Way Manufacturing Co., Inc. ..... 82,500 -- -- 82,500 556,875 --
Athey Products Corp. .................. 154,000 46,000 -- 200,000 762,500 --
Atlantic Tele-Network, Inc. ........... -- 300,000 -- 300,000 2,868,750 --
Concord Fabrics, Inc., Class A ........ 148,800 -- -- 148,800 * --
Devcon International Corp. ............ 230,000 -- 55,000 175,000 * --
ECC International Corp. ............... -- 800,000 -- 800,000 1,800,000 --
Ecology and Environment, Inc., Class A 110,000 -- -- 110,000 1,017,500 35,200
EMCON ................................. 650,000 -- -- 650,000 2,275,000 --
Espey Manufacturing & Electronics Corp. 93,000 -- -- 93,000 1,197,375 --
Gantos, Inc. .......................... 500,000 -- 500,000 -- * --
Government Technology Services, Inc. .. 400,200 72,800 -- 473,000 * --
GZA GeoEnvironmental Technologies, Inc. 235,000 75,000 -- 310,000 1,472,500 --
Harding Lawson Associates Group, Inc. . 304,900 -- -- 304,900 2,439,200 --
High-Lo Automotive, Inc. .............. 809,800 -- 809,800 -- * --
</TABLE>
62
<PAGE>
FRANKLIN VALUE INVESTORS TRUST
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. HOLDINGS OF 5% VOTING SECURITIES OF PORTFOLIO ISSUERS (cont.)
<TABLE>
<CAPTION>
NUMBER OF NUMBER OF
SHARES HELD AT GROSS GROSS SHARES HELD AT VALUE AT DIVIDEND
NAME OF ISSUER OCTOBER 31, 1997 ADDITIONS REDUCTIONS OCTOBER 31, 1998 OCTOBER 31, 1998 INCOME
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
FRANKLIN MICROCAP
VALUE FUND (CONT.)
Kentucky Electric Steel, Inc. ......... 450,000 -- -- 450,000 $1,575,000 $ --
Maine Public Service Co. .............. 42,200 77,800 -- 120,000 1,875,000 93,275
Maynard Oil Co. ....................... -- 298,500 -- 298,500 3,087,624 --
Moore Products Co. .................... 134,700 -- -- 134,700 3,098,100 53,880
Oriole Homes Corp., Class B ........... 360,000 -- 500 359,500 1,168,375 --
Powerhouse Technologies, Inc.** ....... 527,000 -- 420,000 107,000 * --
River Oaks Furniture, Inc. ............ 394,600 -- 394,600 -- * --
Roy F. Weston, Inc., Class A .......... 570,300 62,700 -- 633,000 1,661,625 --
Seneca Foods Corp., Class A ........... -- 175,600 -- 175,600 2,151,100 --
Spaghetti Warehouse, Inc. ............. 310,000 240,000 -- 550,000 3,781,242 --
TEI, Inc. ............................. -- 1,000,000 45,000 955,000 1,432,500 --
Temtex Industries, Inc. ............... 265,500 -- -- 265,500 829,688 --
TransFinancial Holdings, Inc. ......... 336,000 -- -- 336,000 1,932,000 --
Treadco, Inc. ......................... 222,200 39,200 -- 261,400 1,633,750 --
Village Super Market, Inc., Class A ... 23,000 72,000 -- 95,000 1,425,000 --
-------------------------
TOTAL NON-CONTROLLED AFFILIATED ISSUERS $48,637,142 $ 182,355
=========================
FRANKLIN VALUE FUND
Engel General Developers, Ltd. ........ 248,000 -- 11,000 237,000 * --
=========================
</TABLE>
*As of October 31, 1998 no longer an affiliate.
**Name change on January 9, 1998, previously known as Video Lottery
Technologies, Inc.
63
<PAGE>
FRANKLIN VALUE INVESTORS TRUST
INDEPENDENT AUDITORS' REPORT
TO THE SHAREHOLDERS AND BOARD OF TRUSTEES OF
FRANKLIN VALUE INVESTORS TRUST
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 Value Investors Trust, (hereafter referred to as the "Trust") at
October 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 the 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 Trust'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 October
31, 1998 by correspondence with the custodian and brokers, provide a reasonable
basis for the opinion expressed above.
PricewaterhouseCoopers LLP
San Francisco, California
December 9, 1998
64
<PAGE>
FRANKLIN VALUE INVESTORS TRUST
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 October 31, 1998.
<TABLE>
<S> <C>
Franklin Balance Sheet Investment Fund $47,164,662
Franklin MicroCap Value Fund $ 8,343,987
Franklin Value Fund $ 692,005
</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
October 31, 1998.
<TABLE>
<CAPTION>
FRANKLIN FRANKLIN FRANKLIN
BALANCE SHEET MICROCAP VALUE
INVESTMENT FUND VALUE FUND FUND
------------------------------------------
<S> <C> <C>
34.19% 29.36% 100.00%
</TABLE>
<PAGE>
