UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT INVESTMENT COMPANIES
Investment Company Act file number 811-05878
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FRANKLIN VALUE INVESTORS TRUST
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(Exact name of registrant as specified in charter)
ONE FRANKLIN PARKWAY, SAN MATEO, CA 94403-1906
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(Address of principal executive offices) (Zip code)
CRAIG S. TYLE, ONE FRANKLIN PARKWAY, SAN MATEO, CA 94403-1906
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(Name and address of agent for service)
Registrant's telephone number, including area code: 650 312-2000
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Date of fiscal year end: 10/31
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Date of reporting period: 10/31/06
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ITEM 1. REPORTS TO STOCKHOLDERS.
[GRAPHIC OMITTED]
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OCTOBER 31, 2006
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Franklin Balance Sheet
Investment Fund
Franklin Large Cap
Value Fund
Franklin MicroCap
Value Fund
Franklin MidCap
Value Fund
Franklin Small Cap
Value Fund
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ANNUAL REPORT AND SHAREHOLDER LETTER VALUE
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WANT TO RECEIVE
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FRANKLIN
VALUE INVESTORS TRUST Eligible shareholders can
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franklintempleton.com.
See inside for details.
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[LOGO](R)
FRANKLIN TEMPLETON
INVESTMENTS
FRANKLIN o Templeton o Mutual Series
Franklin Templeton Investments
GAIN FROM OUR PERSPECTIVE(R)
Franklin Templeton's distinct multi-manager
structure combines the specialized expertise of
three world-class investment management groups--
Franklin, Templeton and Mutual Series.
SPECIALIZED EXPERTISE Each of our portfolio management groups operates
autonomously, relying on its own research and
staying true to the unique investment disciplines
that underlie its success.
FRANKLIN. Founded in 1947, Franklin is a
recognized leader in fixed income investing and
also brings expertise in growth- and value-style
U.S. equity investing.
TEMPLETON. Founded in 1940, Templeton pioneered
international investing and, in 1954, launched
what has become the industry's oldest global fund.
Today, with offices in over 25 countries,
Templeton offers investors a truly global
perspective.
MUTUAL SERIES. Founded in 1949, Mutual Series is
dedicated to a unique style of value investing,
searching aggressively for opportunity among what
it believes are undervalued stocks, as well as
arbitrage situations and distressed securities.
TRUE DIVERSIFICATION Because our management groups work independently
and adhere to different investment approaches,
Franklin, Templeton and Mutual Series funds
typically have distinct portfolios. That's why our
funds can be used to build truly diversified
allocation plans covering every major asset class.
RELIABILITY YOU CAN TRUST At Franklin Templeton Investments, we seek to
consistently provide investors with exceptional
risk-adjusted returns over the long term, as well
as the reliable, accurate and personal service
that has helped us become one of the most trusted
names in financial services.
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MUTUAL FUNDS | RETIREMENT PLANS | 529 COLLEGE SAVINGS PLANS | SEPARATE ACCOUNTS
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[GRAPHIC OMITTED]
Not part of the annual report
Contents
SHAREHOLDER LETTER ....................................................... 1
ANNUAL REPORT
Economic and Market Overview ............................................. 3
Franklin Balance Sheet Investment Fund ................................... 5
Franklin Large Cap Value Fund ............................................ 15
Franklin MicroCap Value Fund ............................................. 25
Franklin MidCap Value Fund ............................................... 34
Franklin Small Cap Value Fund ............................................ 44
Financial Highlights and Statements of Investments ....................... 54
Financial Statements ..................................................... 95
Notes to Financial Statements ............................................ 104
Report of Independent Registered Public Accounting Firm .................. 121
Tax Designation .......................................................... 122
Board Members and Officers ............................................... 123
Shareholder Information .................................................. 127
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Annual Report
Economic and Market Overview
During the 12 months ended October 31, 2006, the U.S. economy advanced at a
moderate but slowing pace. Although hurricane activity in the gulf coast region
weakened growth in fourth quarter 2005, gross domestic product grew an
annualized 5.6% in first quarter 2006. It then declined to annualized rates of
2.6% in the second quarter and an estimated 2.2% in the third quarter. Housing
market weakness contributed to the slowdown. Growth was supported primarily by
corporate profits and consumer and government spending. Export growth picked up
some momentum, but a record trade deficit remained. Although labor costs rose
and new job creation slowed to 1% annually, hiring generally increased and the
unemployment rate fell from 4.9% to a five-year low of 4.4%. 1
Elevated energy and other commodity prices were a primary economic concern for
much of the period. Oil prices were volatile and declined from a record high of
$77 per barrel in July to nearly $59 at period-end. Shifting oil prices appeared
to raise the anxiety level among consumers and businesses alike. Consumers
curbed spending on large purchases, such as homes and cars. Home prices fell in
many parts of the country, mortgage rates crept up, and borrowing against home
equity flattened. Lower retail prices for cars, computers and clothing in
September and October signaled that inflationary pressure appeared to be
diminishing somewhat. Inflation was still a concern, however, as the core
Consumer Price Index (CPI) rose 2.7% for the 12 months ended October 31, 2006,
which was higher than the 2.2% 10-year average. 2
The Federal Reserve Board (Fed) raised the federal funds target rate
incrementally to 5.25%. However, since June, the Fed left the rate unchanged,
citing a slowing economy, widespread cooling in the housing market and the
lagging effect of prior tightening. The Fed stated that even with lower oil
prices toward period-end, inflation risks remained.
1. Source: Bureau of Labor Statistics.
2. Source: Bureau of Labor Statistics. Core CPI excludes food and energy
costs.
Annual Report | 3
The Fed's inaction helped restore investor confidence, and equity markets
experienced dramatic rallies late in the period. Overall, the blue chip stocks
of the Dow Jones Industrial Average rose 18.47% and the broader Standard &
Poor's 500 Index (S&P 500) increased 16.33%, while the technology-heavy NASDAQ
Composite Index appreciated 13.36% for the 12 months under review. 3
Telecommunications, materials and financials stocks performed particularly well.
3. Source: Standard & Poor's Micropal. The Dow Jones Industrial Average is
price weighted based on the average market price of 30 blue chip stocks of
companies that are generally industry leaders. The S&P 500 consists of 500
stocks chosen for market size, liquidity and industry group
representation. Each stock's weight in the index is proportionate to its
market value. The S&P 500 is one of the most widely used benchmarks of
U.S. equity performance. The NASDAQ Composite Index measures all NASDAQ
domestic and international based common type stocks listed on The NASDAQ
Stock Market. The index is market value weighted and includes more than
3,000 companies.
THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS AND OPINIONS AS OF OCTOBER 31,
2006. THE INFORMATION IS NOT A COMPLETE ANALYSIS OF EVERY ASPECT OF ANY MARKET,
COUNTRY, INDUSTRY, SECURITY OR FUND. STATEMENTS OF FACT ARE FROM SOURCES
CONSIDERED RELIABLE.
4 | Annual Report
Franklin Balance Sheet Investment Fund
YOUR FUND'S GOAL AND MAIN INVESTMENTS: Franklin Balance Sheet Investment Fund
seeks high total return, of which capital appreciation and income are
components, by investing most of its assets in securities of companies that we
believe are undervalued in the marketplace at the time of purchase.
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PERFORMANCE DATA REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE FUTURE
RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU MAY HAVE
A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY DIFFER FROM
FIGURES SHOWN. PLEASE VISIT FRANKLINTEMPLETON.COM OR CALL 1-800/342-5236 FOR
MOST RECENT MONTH-END PERFORMANCE.
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This annual report for Franklin Balance Sheet Investment Fund covers the fiscal
year ended October 31, 2006.
PERFORMANCE OVERVIEW
Franklin Balance Sheet Investment Fund - Class A posted a +17.54% cumulative
total return for the 12 months under review. The Fund underperformed its
benchmark, the Russell 2000(R) Value Index, which posted a +22.90% total return
for the same period. 1 Please note the Fund employs a bottom-up stock selection
process and we invest in securities without regard to benchmark comparisons.
Although this report covers a 12-month period, our investment strategy aims for
long-term results. You can find the Fund's long-term performance data in the
Performance Summary beginning on page 8.
INVESTMENT STRATEGY
Our strategy is to buy shares of financially sound, well-established companies
at a low price-to-book value, where we have reasonable confidence that book
value will increase over several years. Book value per share is a given
company's net worth or shareholders' equity on an accounting or "book" basis,
divided by shares outstanding. We define "low price-to-book value" as the lowest
two deciles (20%) of our investable universe, which we derive from a proprietary
database for screening purposes. This strategy is not aimed at short-term
trading gains, nor do we consider the composition of any index. Rather, we try
to identify individual companies that meet our investment criteria, and we
assume at purchase that we will hold the positions for several years.
1. Source: Standard & Poor's Micropal. The Russell 2000 Value Index is market
capitalization weighted and measures performance of those Russell 2000
Index companies with lower price-to-book ratios and lower forecasted
growth values. The index is unmanaged and includes reinvested dividends.
One cannot invest directly in an index, nor is an index representative of
the Fund's portfolio.
THE DOLLAR VALUE, NUMBER OF SHARES OR PRINCIPAL AMOUNT, AND NAMES OF ALL
PORTFOLIO HOLDINGS ARE LISTED IN THE FUND'S STATEMENT OF INVESTMENTS (SOI). THE
SOI BEGINS ON PAGE 59.
Annual Report | 5
PORTFOLIO BREAKDOWN
Franklin Balance Sheet Investment Fund
Based on Total Net Assets as of 10/31/06
[THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.]
Process Industries 8.1%
Non-Energy Minerals 7.5%
Life & Health Insurance 6.7%
Producer Manufacturing 6.5%
Transportation 6.1%
Property-Casualty Insurance 6.1%
Finance, Rental & Leasing 5.9%
Utilities 5.5%
Consumer Durables 5.5%
Retail Trade 5.4%
Specialty Insurance 3.7%
Industrial Services 3.0%
Financial Conglomerates 2.4%
Consumer Services 2.3%
Other 9.8%
Short-Term Investments & Other Net Assets 15.5%
MANAGER'S DISCUSSION
On October 31, 2006, the Fund's total net assets were $5.1 billion, with
short-term investments and other net assets (cash) making up 15.5%, as compared
with total net assets of $4.7 billion with 20.1% in cash at the beginning of the
period. The Fund closed to new investors on May 1, 2002. The close does not
restrict existing shareholders from continuing to invest through exchanges and
additional purchases, including purchases made through reinvestment of dividends
and capital gains distributions, except that if an account is reduced to zero it
may not be reopened unless the Fund reopens. Net Fund outflows to existing
shareholders were $403 million during the 12-month period.
We identified eight new investment opportunities during the year under review:
American Axle & Manufacturing, a Detroit-based maker of driveline systems; Atmos
Energy, a natural gas distributor; Ashland, a specialty chemical producer and
petroleum refiner; Bob Evans Farms, a restaurant owner and operator; Bowater, a
producer of newsprint, pulp and forest products; Furniture Brands International,
a manufacturer and distributor of residential furniture; Sherritt International,
a diversified producer of oil, metals and coal; and Spansion, a maker of flash
memory components.
We also added to existing positions, including Corn Products International,
Kellwood, MBIA, M.D.C. Holdings, MeadWestvaco, MGIC Investment, Tecumseh
Products and Universal, among others. These companies have little in common
apart from satisfying our investment criteria. New cash deployed into new or
existing positions totaled $308 million during the 12 months.
Portfolio sales, mostly in response to price appreciation, totaled $507 million.
Completed takeovers included La Quinta, Russell and Tommy Hilfiger, all of them
cash deals. La Quinta and Hilfiger represented outcomes consistent with our
investment goals, while Russell was profitable but disappointing. We believed
Russell would be worth more over time. Aztar, AmerUs, and Intergraph were also
subject to all-cash takeover bids at prices consistent with our investment
goals, assuming completion. Premium Standard Farms agreed to a mostly stock
merger with larger competitor Smithfield Foods, which we consider favorable.
Takeovers aside, we eliminated five holdings: Delta Woodside, Global Industries,
Insteel Industries, Montpelier Re Holdings and Superior Industries
International. Montpelier was only a small position that we chose not to hold.
Delta Woodside and Superior suffered declining fundamentals, and their sales
generated losses for the Fund. Global and Insteel, along with the many positions
we reduced in response to price appreciation, represented outcomes consistent
with our investment goals. In all cases, the original purchases were made in
accordance with our stated investment strategy.
6 | Annual Report
Positions that contributed most to Fund performance during the year included
steel companies Nucor, United States Steel, Chaparral Steel, and Reliance Steel
& Aluminum. Three agribusiness holdings, Corn Products, Monsanto and Bunge, were
also among the top contributors, as were Trinity Industries (rail-cars), Peabody
Energy (coal), Big Lots (closeout merchandise) and buyout target Aztar (gaming).
Positions that detracted most included homebuilders Pulte Homes, D.R. Horton and
M.D.C. Holdings; Furniture Brands International; Watson Pharmaceuticals (generic
and branded drugs); and Bowater.
Thank you for your continued participation in Franklin Balance Sheet Investment
Fund. We look forward to serving your future investment needs.
[PHOTO OMITTED] /s/ Bruce C. Baughman
Bruce C. Baughman, CPA
Lead Portfolio Manager
William J. Lippman
Donald G. Taylor, CPA
Margaret McGee
Portfolio Management Team
Franklin Balance Sheet Investment Fund
THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS
AS OF OCTOBER 31, 2006, THE END OF THE REPORTING PERIOD. THE WAY WE IMPLEMENT
OUR MAIN INVESTMENT STRATEGIES AND THE RESULTING PORTFOLIO HOLDINGS MAY CHANGE
DEPENDING ON FACTORS SUCH AS MARKET AND ECONOMIC CONDITIONS. THESE OPINIONS MAY
NOT BE RELIED UPON AS INVESTMENT ADVICE OR AN OFFER FOR A PARTICULAR SECURITY.
THE INFORMATION IS NOT A COMPLETE ANALYSIS OF EVERY ASPECT OF ANY MARKET,
COUNTRY, INDUSTRY, SECURITY OR THE FUND. STATEMENTS OF FACT ARE FROM SOURCES
CONSIDERED RELIABLE, BUT THE INVESTMENT MANAGER MAKES NO REPRESENTATION OR
WARRANTY AS TO THEIR COMPLETENESS OR ACCURACY. ALTHOUGH HISTORICAL PERFORMANCE
IS NO GUARANTEE OF FUTURE RESULTS, THESE INSIGHTS MAY HELP YOU UNDERSTAND OUR
INVESTMENT MANAGEMENT PHILOSOPHY.
TOP 10 EQUITY HOLDINGS
Franklin Balance Sheet Investment Fund
10/31/06
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COMPANY % OF TOTAL
SECTOR/INDUSTRY NET ASSETS
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Bunge Ltd. 2.3%
PROCESS INDUSTRIES
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CIT Group Inc. 2.3%
FINANCE, RENTAL & LEASING
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Freddie Mac 2.2%
FINANCE, RENTAL & LEASING
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Prudential Financial Inc. 2.2%
FINANCIAL CONGLOMERATES
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Nucor Corp. 2.2%
NON-ENERGY MINERALS
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Corn Products International Inc. 2.0%
PROCESS INDUSTRIES
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Old Republic International Corp. 1.7%
PROPERTY-CASUALTY INSURANCE
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United States Steel Corp. 1.6%
NON-ENERGY MINERALS
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Pulte Homes Inc. 1.6%
CONSUMER DURABLES
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Trinity Industries Inc. 1.6%
PRODUCER MANUFACTURING
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Annual Report | 7
Performance Summary as of 10/31/06
FRANKLIN BALANCE SHEET INVESTMENT FUND
Your dividend income will vary depending on dividends or interest paid by
securities in the Fund's portfolio, adjusted for operating expenses of each
class. Capital gain distributions are net profits realized from the sale of
portfolio securities. The performance table and graphs do not reflect any taxes
that a shareholder would pay on Fund dividends, capital gain distributions, if
any, or any realized gains on the sale of Fund shares. Total return reflects
reinvestment of the Fund's dividends and capital gain distributions, if any, and
any unrealized gains or losses.
PRICE AND DISTRIBUTION INFORMATION
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CLASS A (SYMBOL: FRBSX) CHANGE 10/31/06 10/31/05
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Net Asset Value (NAV) +$7.58 $69.24 $61.66
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DISTRIBUTIONS (11/1/05-10/31/06)
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Dividend Income $0.4649
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Short-Term Capital Gain $0.0457
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Long-Term Capital Gain $2.3946
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TOTAL $2.9052
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CLASS B (SYMBOL: FBSBX) CHANGE 10/31/06 10/31/05
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Net Asset Value (NAV) +$7.40 $68.07 $60.67
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DISTRIBUTIONS (11/1/05-10/31/06)
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Dividend Income $0.0021
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Short-Term Capital Gain $0.0457
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Long-Term Capital Gain $2.3946
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TOTAL $2.4424
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CLASS C (SYMBOL: FCBSX) CHANGE 10/31/06 10/31/05
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Net Asset Value (NAV) +$7.42 $68.17 $60.75
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DISTRIBUTIONS (11/1/05-10/31/06)
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Short-Term Capital Gain $0.0457
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Long-Term Capital Gain $2.3946
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TOTAL $2.4403
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CLASS R (SYMBOL: FBSRX) CHANGE 10/31/06 10/31/05
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Net Asset Value (NAV) +$7.45 $68.78 $61.33
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DISTRIBUTIONS (11/1/05-10/31/06)
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Dividend Income $0.3602
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Short-Term Capital Gain $0.0457
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Long-Term Capital Gain $2.3946
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TOTAL $2.8005
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8 | Annual Report
Performance Summary (CONTINUED)
PRICE AND DISTRIBUTION INFORMATION (CONTINUED)
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ADVISOR CLASS (SYMBOL: FBSAX) CHANGE 10/31/06 10/31/05
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Net Asset Value (NAV) +$7.59 $69.40 $61.81
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DISTRIBUTIONS (11/1/05-10/31/06)
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Dividend Income $0.6210
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Short-Term Capital Gain $0.0457
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Long-Term Capital Gain $2.3946
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TOTAL $3.0613
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PERFORMANCE
CUMULATIVE TOTAL RETURN EXCLUDES SALES CHARGES. AVERAGE ANNUAL TOTAL RETURNS AND
VALUE OF $10,000 INVESTMENT INCLUDE MAXIMUM SALES CHARGES. CLASS A: 5.75%
MAXIMUM INITIAL SALES CHARGE; CLASS B: CONTINGENT DEFERRED SALES CHARGE (CDSC)
DECLINING FROM 4% TO 1% OVER SIX YEARS, AND ELIMINATED THEREAFTER; CLASS C: 1%
CDSC IN FIRST YEAR ONLY; CLASS R/ADVISOR CLASS: NO SALES CHARGES. THE FUND MAY
CHARGE A 2% FEE ON REDEMPTIONS MADE WITHIN SEVEN DAYS OF PURCHASE.
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CLASS A 1-YEAR 5-YEAR 10-YEAR
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Cumulative Total Return 1 +17.54% +110.99% +253.24%
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Average Annual Total Return 2 +10.78% +14.74% +12.78%
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Value of $10,000 Investment 3 $11,078 $19,886 $33,291
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Avg. Ann. Total Return (9/30/06) 4 +5.21% +14.61% +12.51%
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CLASS B 1-YEAR 5-YEAR INCEPTION (3/1/01)
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Cumulative Total Return 1 +16.65% +103.10% +104.95%
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Average Annual Total Return 2 +12.65% +15.00% +13.40%
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Value of $10,000 Investment 3 $11,265 $20,110 $20,395
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Avg. Ann. Total Return (9/30/06) 4 +6.78% +14.87% +12.93%
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CLASS C 1-YEAR 5-YEAR INCEPTION (3/1/01)
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Cumulative Total Return 1 +16.64% +103.13% +105.04%
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Average Annual Total Return 2 +15.64% +15.23% +13.50%
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Value of $10,000 Investment 3 $11,564 $20,313 $20,504
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Avg. Ann. Total Return (9/30/06) 4 +9.78% +15.10% +13.04%
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CLASS R 1-YEAR 3-YEAR INCEPTION (1/1/02)
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Cumulative Total Return 1 +17.22% +63.43% +87.78%
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Average Annual Total Return 2 +17.22% +17.79% +13.94%
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Value of $10,000 Investment 3 $11,722 $16,343 $18,778
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Avg. Ann. Total Return (9/30/06) 4 +11.34% +19.10% +13.40%
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ADVISOR CLASS 5 1-YEAR 5-YEAR 10-YEAR
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Cumulative Total Return 1 +17.82% +113.52% +257.90%
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Average Annual Total Return 2 +17.82% +16.38% +13.60%
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Value of $10,000 Investment 3 $11,782 $21,352 $35,790
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Avg. Ann. Total Return (9/30/06) 4 +11.88% +16.25% +13.33%
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PERFORMANCE DATA REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE FUTURE
RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU MAY HAVE
A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY DIFFER FROM
FIGURES SHOWN.
FOR MOST RECENT MONTH-END PERFORMANCE, SEE "FUNDS AND PERFORMANCE" AT
FRANKLINTEMPLETON.COM OR CALL 1-800/342-5236.
Annual Report | 9
Performance Summary (CONTINUED)
TOTAL RETURN INDEX COMPARISON FOR HYPOTHETICAL $10,000 INVESTMENT
Total return represents the change in value of an investment over the periods
shown. It includes any current, applicable, maximum sales charge, Fund expenses,
account fees and reinvested distributions. The unmanaged index includes
reinvestment of any income or distributions. It differs from the Fund in
composition and does not pay management fees or expenses. One cannot invest
directly in an index.
AVERAGE ANNUAL TOTAL RETURN
- ---------------------------------
CLASS A 10/31/06
- ---------------------------------
1-Year +10.78%
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5-Year +14.74%
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10-Year +12.78%
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CLASS A (11/1/96-10/31/06)
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL.]
Franklin Balance Russell 2000
Date Sheet Investment Fund Value Index 6 CPI 6
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11/1/1996 $9,425 $10,000 $10,000
11/30/1996 $9,800 $10,538 $10,019
12/31/1996 $10,026 $10,880 $10,019
1/31/1997 $10,396 $11,047 $10,051
2/28/1997 $10,568 $11,152 $10,082
3/31/1997 $10,367 $10,853 $10,107
4/30/1997 $10,318 $11,013 $10,120
5/31/1997 $10,950 $11,890 $10,114
6/30/1997 $11,561 $12,491 $10,126
7/31/1997 $12,025 $13,016 $10,139
8/31/1997 $12,089 $13,222 $10,158
9/30/1997 $12,888 $14,101 $10,183
10/31/1997 $12,521 $13,718 $10,208
11/30/1997 $12,454 $13,868 $10,202
12/31/1997 $12,631 $14,338 $10,190
1/31/1998 $12,608 $14,079 $10,208
2/28/1998 $13,358 $14,930 $10,227
3/31/1998 $13,865 $15,536 $10,246
4/30/1998 $14,050 $15,612 $10,265
5/31/1998 $13,869 $15,060 $10,284
6/30/1998 $13,762 $14,975 $10,297
7/31/1998 $13,024 $13,802 $10,310
8/31/1998 $11,626 $11,640 $10,322
9/30/1998 $11,896 $12,298 $10,335
10/31/1998 $12,128 $12,663 $10,360
11/30/1998 $12,307 $13,006 $10,360
12/31/1998 $12,554 $13,413 $10,354
1/31/1999 $12,411 $13,109 $10,379
2/28/1999 $11,720 $12,214 $10,392
3/31/1999 $11,317 $12,113 $10,423
4/30/1999 $12,058 $13,219 $10,499
5/31/1999 $12,524 $13,625 $10,499
6/30/1999 $13,308 $14,119 $10,499
7/31/1999 $13,132 $13,784 $10,531
8/31/1999 $12,514 $13,280 $10,556
9/30/1999 $12,130 $13,014 $10,606
10/31/1999 $12,002 $12,754 $10,625
11/30/1999 $12,235 $12,820 $10,632
12/31/1999 $12,361 $13,214 $10,632
1/31/2000 $11,980 $12,868 $10,663
2/29/2000 $12,272 $13,655 $10,726
3/31/2000 $12,463 $13,719 $10,815
4/30/2000 $12,605 $13,800 $10,821
5/31/2000 $12,447 $13,589 $10,834
6/30/2000 $12,814 $13,986 $10,891
7/31/2000 $13,148 $14,453 $10,916
8/31/2000 $13,730 $15,099 $10,916
9/30/2000 $13,942 $15,013 $10,973
10/31/2000 $14,220 $14,960 $10,992
11/30/2000 $14,048 $14,655 $10,998
12/31/2000 $14,891 $16,230 $10,992
1/31/2001 $15,480 $16,678 $11,061
2/28/2001 $15,563 $16,655 $11,105
3/31/2001 $15,183 $16,388 $11,131
4/30/2001 $15,936 $17,146 $11,175
5/31/2001 $16,822 $17,587 $11,226
6/30/2001 $17,098 $18,295 $11,244
7/31/2001 $17,023 $17,885 $11,213
8/31/2001 $17,178 $17,823 $11,213
9/30/2001 $15,329 $15,855 $11,263
10/31/2001 $15,778 $16,269 $11,226
11/30/2001 $16,567 $17,438 $11,207
12/31/2001 $17,527 $18,506 $11,162
1/31/2002 $17,536 $18,752 $11,188
2/28/2002 $17,930 $18,866 $11,232
3/31/2002 $18,641 $20,279 $11,295
4/30/2002 $18,899 $20,992 $11,358
5/31/2002 $18,531 $20,298 $11,358
6/30/2002 $18,426 $19,849 $11,364
7/31/2002 $17,053 $16,900 $11,377
8/31/2002 $16,961 $16,825 $11,415
9/30/2002 $15,948 $15,623 $11,434
10/31/2002 $16,229 $15,858 $11,453
11/30/2002 $16,935 $17,123 $11,453
12/31/2002 $16,482 $16,392 $11,428
1/31/2003 $16,105 $15,930 $11,478
2/28/2003 $15,531 $15,395 $11,567
3/31/2003 $15,678 $15,559 $11,636
4/30/2003 $16,616 $17,037 $11,611
5/31/2003 $17,535 $18,776 $11,592
6/30/2003 $17,811 $19,095 $11,605
7/31/2003 $18,491 $20,047 $11,617
8/31/2003 $19,144 $20,808 $11,661
9/30/2003 $18,891 $20,570 $11,699
10/31/2003 $20,206 $22,247 $11,687
11/30/2003 $20,575 $23,101 $11,655
12/31/2003 $21,357 $23,936 $11,642
1/31/2004 $21,640 $24,764 $11,699
2/29/2004 $22,255 $25,243 $11,762
3/31/2004 $22,502 $25,593 $11,838
4/30/2004 $21,757 $24,269 $11,876
5/31/2004 $22,107 $24,562 $11,946
6/30/2004 $23,274 $25,809 $11,984
7/31/2004 $22,884 $24,623 $11,965
8/31/2004 $22,839 $24,865 $11,971
9/30/2004 $23,710 $25,848 $11,996
10/31/2004 $24,222 $26,250 $12,059
11/30/2004 $26,130 $28,579 $12,066
12/31/2004 $26,762 $29,261 $12,021
1/31/2005 $26,270 $28,129 $12,047
2/28/2005 $27,148 $28,688 $12,116
3/31/2005 $26,771 $28,097 $12,211
4/30/2005 $25,636 $26,648 $12,293
5/31/2005 $26,771 $28,273 $12,280
6/30/2005 $27,556 $29,523 $12,287
7/31/2005 $29,058 $31,203 $12,344
8/31/2005 $28,696 $30,487 $12,407
9/30/2005 $28,820 $30,436 $12,558
10/31/2005 $28,323 $29,672 $12,584
11/30/2005 $29,637 $30,876 $12,483
12/31/2005 $29,680 $30,638 $12,432
1/31/2006 $31,324 $33,172 $12,527
2/28/2006 $31,295 $33,170 $12,552
3/31/2006 $32,512 $34,776 $12,622
4/30/2006 $32,916 $34,869 $12,729
5/31/2006 $32,117 $33,425 $12,792
6/30/2006 $32,271 $33,836 $12,817
7/31/2006 $31,440 $33,367 $12,855
8/31/2006 $31,810 $34,364 $12,881
9/30/2006 $32,170 $34,700 $12,817
10/31/2006 $33,291 $36,466 $12,748
AVERAGE ANNUAL TOTAL RETURN
- -------------------------------------
CLASS B 10/31/06
- -------------------------------------
1-Year +12.65%
- -------------------------------------
5-Year +15.00%
- -------------------------------------
Since Inception (3/1/01) +13.40%
- -------------------------------------
CLASS B (3/1/01-10/31/06)
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL.]
Franklin Balance Russell 2000
Date Sheet Investment Fund Value Index 6 CPI 6
- --------------------------------------------------------------------------------
3/1/2001 $10,000 $10,000 $10,000
3/31/2001 $9,755 $9,840 $10,023
4/30/2001 $10,231 $10,295 $10,063
5/31/2001 $10,793 $10,560 $10,108
6/30/2001 $10,964 $10,985 $10,125
7/31/2001 $10,905 $10,738 $10,097
8/31/2001 $10,999 $10,701 $10,097
9/30/2001 $9,810 $9,520 $10,142
10/31/2001 $10,091 $9,768 $10,108
11/30/2001 $10,587 $10,470 $10,091
12/31/2001 $11,193 $11,111 $10,051
1/31/2002 $11,193 $11,259 $10,074
2/28/2002 $11,437 $11,327 $10,114
3/31/2002 $11,884 $12,176 $10,171
4/30/2002 $12,041 $12,604 $10,228
5/31/2002 $11,800 $12,188 $10,228
6/30/2002 $11,724 $11,918 $10,233
7/31/2002 $10,844 $10,147 $10,245
8/31/2002 $10,779 $10,102 $10,279
9/30/2002 $10,130 $9,380 $10,296
10/31/2002 $10,301 $9,521 $10,313
11/30/2002 $10,743 $10,281 $10,313
12/31/2002 $10,449 $9,842 $10,290
1/31/2003 $10,202 $9,565 $10,336
2/28/2003 $9,834 $9,243 $10,415
3/31/2003 $9,919 $9,342 $10,478
4/30/2003 $10,508 $10,229 $10,455
5/31/2003 $11,080 $11,274 $10,438
6/30/2003 $11,250 $11,465 $10,449
7/31/2003 $11,669 $12,037 $10,461
8/31/2003 $12,077 $12,494 $10,501
9/30/2003 $11,910 $12,351 $10,535
10/31/2003 $12,730 $13,358 $10,523
11/30/2003 $12,951 $13,870 $10,495
12/31/2003 $13,437 $14,372 $10,484
1/31/2004 $13,603 $14,869 $10,535
2/29/2004 $13,985 $15,157 $10,592
3/31/2004 $14,130 $15,366 $10,660
4/30/2004 $13,651 $14,572 $10,694
5/31/2004 $13,862 $14,748 $10,757
6/30/2004 $14,586 $15,497 $10,791
7/31/2004 $14,330 $14,784 $10,774
8/31/2004 $14,292 $14,929 $10,779
9/30/2004 $14,831 $15,520 $10,802
10/31/2004 $15,142 $15,761 $10,859
11/30/2004 $16,322 $17,159 $10,865
12/31/2004 $16,707 $17,569 $10,825
1/31/2005 $16,388 $16,889 $10,848
2/28/2005 $16,927 $17,225 $10,910
3/31/2005 $16,683 $16,870 $10,995
4/30/2005 $15,965 $16,000 $11,069
5/31/2005 $16,663 $16,976 $11,058
6/30/2005 $17,138 $17,726 $11,064
7/31/2005 $18,062 $18,735 $11,115
8/31/2005 $17,824 $18,305 $11,172
9/30/2005 $17,891 $18,275 $11,308
10/31/2005 $17,570 $17,816 $11,331
11/30/2005 $18,375 $18,538 $11,240
12/31/2005 $18,390 $18,396 $11,195
1/31/2006 $19,396 $19,917 $11,280
2/28/2006 $19,366 $19,916 $11,303
3/31/2006 $20,106 $20,881 $11,365
4/30/2006 $20,344 $20,936 $11,462
5/31/2006 $19,835 $20,070 $11,519
6/30/2006 $19,920 $20,316 $11,542
7/31/2006 $19,393 $20,034 $11,576
8/31/2006 $19,609 $20,633 $11,598
9/30/2006 $19,820 $20,835 $11,542
10/31/2006 $20,395 $21,895 $11,479
10 | Annual Report
Performance Summary (CONTINUED)
CLASS C (3/1/01-10/31/06)
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL.]
Franklin Balance Russell 2000
Date Sheet Investment Fund Value Index 6 CPI 6
- --------------------------------------------------------------------------------
3/1/2001 $10,000 $10,000 $10,000
3/31/2001 $9,758 $9,840 $10,023
4/30/2001 $10,231 $10,295 $10,063
5/31/2001 $10,790 $10,560 $10,108
6/30/2001 $10,966 $10,985 $10,125
7/31/2001 $10,912 $10,738 $10,097
8/31/2001 $11,004 $10,701 $10,097
9/30/2001 $9,816 $9,520 $10,142
10/31/2001 $10,094 $9,768 $10,108
11/30/2001 $10,593 $10,470 $10,091
12/31/2001 $11,197 $11,111 $10,051
1/31/2002 $11,197 $11,259 $10,074
2/28/2002 $11,442 $11,327 $10,114
3/31/2002 $11,889 $12,176 $10,171
4/30/2002 $12,049 $12,604 $10,228
5/31/2002 $11,804 $12,188 $10,228
6/30/2002 $11,731 $11,918 $10,233
7/31/2002 $10,849 $10,147 $10,245
8/31/2002 $10,784 $10,102 $10,279
9/30/2002 $10,135 $9,380 $10,296
10/31/2002 $10,306 $9,521 $10,313
11/30/2002 $10,748 $10,281 $10,313
12/31/2002 $10,455 $9,842 $10,290
1/31/2003 $10,206 $9,565 $10,336
2/28/2003 $9,853 $9,243 $10,415
3/31/2003 $9,926 $9,342 $10,478
4/30/2003 $10,515 $10,229 $10,455
5/31/2003 $11,086 $11,274 $10,438
6/30/2003 $11,256 $11,465 $10,449
7/31/2003 $11,678 $12,037 $10,461
8/31/2003 $12,082 $12,494 $10,501
9/30/2003 $11,915 $12,351 $10,535
10/31/2003 $12,736 $13,358 $10,523
11/30/2003 $12,959 $13,870 $10,495
12/31/2003 $13,445 $14,372 $10,484
1/31/2004 $13,611 $14,869 $10,535
2/29/2004 $13,989 $15,157 $10,592
3/31/2004 $14,135 $15,366 $10,660
4/30/2004 $13,656 $14,572 $10,694
5/31/2004 $13,870 $14,748 $10,757
6/30/2004 $14,593 $15,497 $10,791
7/31/2004 $14,337 $14,784 $10,774
8/31/2004 $14,300 $14,929 $10,779
9/30/2004 $14,838 $15,520 $10,802
10/31/2004 $15,149 $15,761 $10,859
11/30/2004 $16,331 $17,159 $10,865
12/31/2004 $16,717 $17,569 $10,825
1/31/2005 $16,396 $16,889 $10,848
2/28/2005 $16,934 $17,225 $10,910
3/31/2005 $16,691 $16,870 $10,995
4/30/2005 $15,973 $16,000 $11,069
5/31/2005 $16,671 $16,976 $11,058
6/30/2005 $17,148 $17,726 $11,064
7/31/2005 $18,071 $18,735 $11,115
8/31/2005 $17,834 $18,305 $11,172
9/30/2005 $17,900 $18,275 $11,308
10/31/2005 $17,579 $17,816 $11,331
11/30/2005 $18,384 $18,538 $11,240
12/31/2005 $18,398 $18,396 $11,195
1/31/2006 $19,406 $19,917 $11,280
2/28/2006 $19,376 $19,916 $11,303
3/31/2006 $20,116 $20,881 $11,365
4/30/2006 $20,354 $20,936 $11,462
5/31/2006 $19,845 $20,070 $11,519
6/30/2006 $19,930 $20,316 $11,542
7/31/2006 $19,403 $20,034 $11,576
8/31/2006 $19,620 $20,633 $11,598
9/30/2006 $19,830 $20,835 $11,542
10/31/2006 $20,504 $21,895 $11,479
AVERAGE ANNUAL TOTAL RETURN
- ------------------------------------------
CLASS C 10/31/06
- ------------------------------------------
1-Year +15.64%
- ------------------------------------------
5-Year +15.23%
- ------------------------------------------
Since Inception (3/1/01) +13.50%
- ------------------------------------------
CLASS R (1/1/02-10/31/06)
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL.]
Franklin Balance Russell 2000
Date Sheet Investment Fund Value Index 6 CPI 6
- --------------------------------------------------------------------------------
1/1/2002 $10,000 $10,000 $10,000
1/31/2002 $10,013 $10,133 $10,023
2/28/2002 $10,238 $10,194 $10,062
3/31/2002 $10,643 $10,958 $10,119
4/30/2002 $10,789 $11,344 $10,175
5/31/2002 $10,576 $10,968 $10,175
6/30/2002 $10,511 $10,726 $10,181
7/31/2002 $9,724 $9,132 $10,192
8/31/2002 $9,669 $9,091 $10,226
9/30/2002 $9,090 $8,442 $10,243
10/31/2002 $9,248 $8,569 $10,260
11/30/2002 $9,649 $9,253 $10,260
12/31/2002 $9,388 $8,857 $10,238
1/31/2003 $9,170 $8,608 $10,283
2/28/2003 $8,843 $8,319 $10,362
3/31/2003 $8,929 $8,408 $10,424
4/30/2003 $9,461 $9,206 $10,402
5/31/2003 $9,982 $10,146 $10,385
6/30/2003 $10,139 $10,318 $10,396
7/31/2003 $10,520 $10,833 $10,407
8/31/2003 $10,893 $11,244 $10,447
9/30/2003 $10,746 $11,115 $10,481
10/31/2003 $11,492 $12,021 $10,470
11/30/2003 $11,697 $12,483 $10,441
12/31/2003 $12,140 $12,934 $10,430
1/31/2004 $12,297 $13,382 $10,481
2/29/2004 $12,645 $13,641 $10,538
3/31/2004 $12,780 $13,829 $10,606
4/30/2004 $12,354 $13,114 $10,640
5/31/2004 $12,550 $13,272 $10,702
6/30/2004 $13,211 $13,947 $10,736
7/31/2004 $12,985 $13,305 $10,719
8/31/2004 $12,957 $13,436 $10,724
9/30/2004 $13,451 $13,967 $10,747
10/31/2004 $13,737 $14,184 $10,804
11/30/2004 $14,814 $15,443 $10,809
12/31/2004 $15,172 $15,812 $10,770
1/31/2005 $14,887 $15,200 $10,792
2/28/2005 $15,384 $15,502 $10,855
3/31/2005 $15,167 $15,183 $10,939
4/30/2005 $14,519 $14,400 $11,013
5/31/2005 $15,159 $15,278 $11,002
6/30/2005 $15,600 $15,953 $11,007
7/31/2005 $16,447 $16,861 $11,058
8/31/2005 $16,238 $16,474 $11,115
9/30/2005 $16,306 $16,447 $11,251
10/31/2005 $16,022 $16,034 $11,273
11/30/2005 $16,757 $16,684 $11,183
12/31/2005 $16,781 $16,556 $11,138
1/31/2006 $17,706 $17,925 $11,222
2/28/2006 $17,684 $17,924 $11,245
3/31/2006 $18,370 $18,792 $11,307
4/30/2006 $18,594 $18,842 $11,404
5/31/2006 $18,138 $18,062 $11,460
6/30/2006 $18,220 $18,284 $11,483
7/31/2006 $17,747 $18,030 $11,517
8/31/2006 $17,955 $18,569 $11,539
9/30/2006 $18,154 $18,750 $11,483
10/31/2006 $18,778 $19,705 $11,420
AVERAGE ANNUAL TOTAL RETURN
- ------------------------------------------
CLASS R 10/31/06
- ------------------------------------------
1-Year +17.22%
- ------------------------------------------
3-Year +17.79%
- ------------------------------------------
Since Inception (1/1/02) +13.94%
- ------------------------------------------
Annual Report | 11
Performance Summary (CONTINUED)
AVERAGE ANNUAL TOTAL RETURN
- -------------------------------------
ADVISOR CLASS 5 10/31/06
- -------------------------------------
1-Year +17.82%
- -------------------------------------
5-Year +16.38%
- -------------------------------------
10-Year +13.60%
- -------------------------------------
ADVISOR CLASS (11/1/96-10/31/06) 5
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL.]
Franklin Balance Russell 2000
Date Sheet Investment Fund Value Index 6 CPI 6
- --------------------------------------------------------------------------------
11/1/1996 $10,000 $10,000 $10,000
11/30/1996 $10,398 $10,538 $10,019
12/31/1996 $10,639 $10,880 $10,019
1/31/1997 $11,032 $11,047 $10,051
2/28/1997 $11,215 $11,152 $10,082
3/31/1997 $11,001 $10,853 $10,107
4/30/1997 $10,949 $11,013 $10,120
5/31/1997 $11,619 $11,890 $10,114
6/30/1997 $12,268 $12,491 $10,126
7/31/1997 $12,761 $13,016 $10,139
8/31/1997 $12,828 $13,222 $10,158
9/30/1997 $13,676 $14,101 $10,183
10/31/1997 $13,287 $13,718 $10,208
11/30/1997 $13,215 $13,868 $10,202
12/31/1997 $13,403 $14,338 $10,190
1/31/1998 $13,379 $14,079 $10,208
2/28/1998 $14,174 $14,930 $10,227
3/31/1998 $14,712 $15,536 $10,246
4/30/1998 $14,909 $15,612 $10,265
5/31/1998 $14,716 $15,060 $10,284
6/30/1998 $14,604 $14,975 $10,297
7/31/1998 $13,820 $13,802 $10,310
8/31/1998 $12,337 $11,640 $10,322
9/30/1998 $12,623 $12,298 $10,335
10/31/1998 $12,870 $12,663 $10,360
11/30/1998 $13,060 $13,006 $10,360
12/31/1998 $13,321 $13,413 $10,354
1/31/1999 $13,170 $13,109 $10,379
2/28/1999 $12,436 $12,214 $10,392
3/31/1999 $12,009 $12,113 $10,423
4/30/1999 $12,795 $13,219 $10,499
5/31/1999 $13,289 $13,625 $10,499
6/30/1999 $14,122 $14,119 $10,499
7/31/1999 $13,935 $13,784 $10,531
8/31/1999 $13,279 $13,280 $10,556
9/30/1999 $12,872 $13,014 $10,606
10/31/1999 $12,736 $12,754 $10,625
11/30/1999 $12,983 $12,820 $10,632
12/31/1999 $13,117 $13,214 $10,632
1/31/2000 $12,712 $12,868 $10,663
2/29/2000 $13,022 $13,655 $10,726
3/31/2000 $13,225 $13,719 $10,815
4/30/2000 $13,376 $13,800 $10,821
5/31/2000 $13,208 $13,589 $10,834
6/30/2000 $13,597 $13,986 $10,891
7/31/2000 $13,951 $14,453 $10,916
8/31/2000 $14,569 $15,099 $10,916
9/30/2000 $14,794 $15,013 $10,973
10/31/2000 $15,089 $14,960 $10,992
11/30/2000 $14,907 $14,655 $10,998
12/31/2000 $15,802 $16,230 $10,992
1/31/2001 $16,426 $16,678 $11,061
2/28/2001 $16,515 $16,655 $11,105
3/31/2001 $16,116 $16,388 $11,131
4/30/2001 $16,914 $17,146 $11,175
5/31/2001 $17,859 $17,587 $11,226
6/30/2001 $18,153 $18,295 $11,244
7/31/2001 $18,078 $17,885 $11,213
8/31/2001 $18,247 $17,823 $11,213
9/30/2001 $16,286 $15,855 $11,263
10/31/2001 $16,763 $16,269 $11,226
11/30/2001 $17,605 $17,438 $11,207
12/31/2001 $18,626 $18,506 $11,162
1/31/2002 $18,635 $18,752 $11,188
2/28/2002 $19,064 $18,866 $11,232
3/31/2002 $19,826 $20,279 $11,295
4/30/2002 $20,105 $20,992 $11,358
5/31/2002 $19,714 $20,298 $11,358
6/30/2002 $19,606 $19,849 $11,364
7/31/2002 $18,147 $16,900 $11,377
8/31/2002 $18,058 $16,825 $11,415
9/30/2002 $16,986 $15,623 $11,434
10/31/2002 $17,284 $15,858 $11,453
11/30/2002 $18,039 $17,123 $11,453
12/31/2002 $17,558 $16,392 $11,428
1/31/2003 $17,160 $15,930 $11,478
2/28/2003 $16,554 $15,395 $11,567
3/31/2003 $16,710 $15,559 $11,636
4/30/2003 $17,715 $17,037 $11,611
5/31/2003 $18,700 $18,776 $11,592
6/30/2003 $18,998 $19,095 $11,605
7/31/2003 $19,727 $20,047 $11,617
8/31/2003 $20,428 $20,808 $11,661
9/30/2003 $20,163 $20,570 $11,699
10/31/2003 $21,570 $22,247 $11,687
11/30/2003 $21,968 $23,101 $11,655
12/31/2003 $22,812 $23,936 $11,642
1/31/2004 $23,109 $24,764 $11,699
2/29/2004 $23,776 $25,243 $11,762
3/31/2004 $24,044 $25,593 $11,838
4/30/2004 $23,248 $24,269 $11,876
5/31/2004 $23,632 $24,562 $11,946
6/30/2004 $24,883 $25,809 $11,984
7/31/2004 $24,466 $24,623 $11,965
8/31/2004 $24,423 $24,865 $11,971
9/30/2004 $25,363 $25,848 $11,996
10/31/2004 $25,919 $26,250 $12,059
11/30/2004 $27,962 $28,579 $12,066
12/31/2004 $28,647 $29,261 $12,021
1/31/2005 $28,120 $28,129 $12,047
2/28/2005 $29,070 $28,688 $12,116
3/31/2005 $28,672 $28,097 $12,211
4/30/2005 $27,462 $26,648 $12,293
5/31/2005 $28,687 $28,273 $12,280
6/30/2005 $29,532 $29,523 $12,287
7/31/2005 $31,149 $31,203 $12,344
8/31/2005 $30,766 $30,487 $12,407
9/30/2005 $30,908 $30,436 $12,558
10/31/2005 $30,378 $29,672 $12,584
11/30/2005 $31,793 $30,876 $12,483
12/31/2005 $31,846 $30,638 $12,432
1/31/2006 $33,620 $33,172 $12,527
2/28/2006 $33,594 $33,170 $12,552
3/31/2006 $34,910 $34,776 $12,622
4/30/2006 $35,348 $34,869 $12,729
5/31/2006 $34,497 $33,425 $12,792
6/30/2006 $34,667 $33,836 $12,817
7/31/2006 $33,785 $33,367 $12,855
8/31/2006 $34,188 $34,364 $12,881
9/30/2006 $34,579 $34,700 $12,817
10/31/2006 $35,790 $36,466 $12,748
ENDNOTES
INVESTING IN SMALLER COMPANIES INVOLVES ADDITIONAL RISKS, AS THE PRICE OF SUCH
SECURITIES CAN BE VOLATILE, PARTICULARLY OVER THE SHORT TERM. INVESTORS SHOULD
EXPECT FLUCTUATION IN THE VALUE OF THEIR INVESTMENT, ESPECIALLY OVER THE SHORT
TERM. THE FUND'S PROSPECTUS ALSO INCLUDES A DESCRIPTION OF THE MAIN INVESTMENT
RISKS.
CLASS A: Prior to 1/2/01, these shares were offered at a lower initial
sales charge; thus actual total returns may differ.
CLASS B: These shares have higher annual fees and expenses than Class A
shares.
CLASS C: Prior to 1/1/04, these shares were offered with an initial
sales charge; thus actual total returns would have differed.
These shares have higher annual fees and expenses than Class A
shares.
CLASS R: Shares are available to certain eligible investors as
described in the prospectus. These shares have higher annual
fees and expenses than Class A shares.
ADVISOR CLASS: Shares are available to certain eligible investors as
described in the prospectus.
1. Cumulative total return represents the change in value of an investment
over the periods indicated.
2. Average annual total return represents the average annual change in value
of an investment over the periods indicated.
3. These figures represent the value of a hypothetical $10,000 investment in
the Fund over the periods indicated.
4. In accordance with SEC rules, we provide standardized average annual total
return information through the latest calendar quarter.
5. Effective 3/1/01, the Fund began offering Advisor Class shares, which do
not have sales charges or a Rule 12b-1 plan. Performance quotations for
this class reflect the following methods of calculation: (a) For periods
prior to 3/1/01, a restated figure is used based upon the Fund's Class A
performance, excluding the effect of Class A's maximum initial sales
charge, but reflecting the effect of the Class A Rule 12b-1 fees; and (b)
for periods after 2/28/01, actual Advisor Class performance is used
reflecting all charges and fees applicable to that class. Since 3/1/01
(commencement of sales), the cumulative and average annual total returns
of Advisor Class shares were +116.84% and +14.63%.
6. Source: Standard & Poor's Micropal. The Russell 2000 Value Index is market
capitalization weighted and measures performance of those Russell 2000
Index companies with lower price-to-book ratios and lower forecasted
growth values. The Consumer Price Index (CPI), calculated by the U.S.
Bureau of Labor Statistics, is a commonly used measure of the inflation
rate.
12 | Annual Report
Your Fund's Expenses
FRANKLIN BALANCE SHEET INVESTMENT FUND
As a Fund shareholder, you can incur two types of costs:
o Transaction costs, including sales charges (loads) on Fund purchases and
redemption fees; and
o Ongoing Fund costs, including management fees, distribution and service
(12b-1) fees, and other Fund expenses. All mutual funds have ongoing
costs, sometimes referred to as operating expenses.
The following table shows ongoing costs of investing in the Fund and can help
you understand these costs and compare them with those of other mutual funds.
The table assumes a $1,000 investment held for the six months indicated.
ACTUAL FUND EXPENSES
The first line (Actual) for each share class listed in the table provides actual
account values and expenses. The "Ending Account Value" is derived from the
Fund's actual return, which includes the effect of Fund expenses.
You can estimate the expenses you paid during the period by following these
steps. OF COURSE, YOUR ACCOUNT VALUE AND EXPENSES WILL DIFFER FROM THOSE IN THIS
ILLUSTRATION:
1. Divide your account value by $1,000.
IF AN ACCOUNT HAD AN $8,600 VALUE, THEN $8,600 / $1,000 = 8.6.
2. Multiply the result by the number under the heading "Expenses Paid During
Period."
IF EXPENSES PAID DURING PERIOD WERE $7.50, THEN 8.6 X $7.50 = $64.50.
In this illustration, the estimated expenses paid this period are $64.50.
HYPOTHETICAL EXAMPLE FOR COMPARISON WITH OTHER FUNDS
Information in the second line (Hypothetical) for each class in the table can
help you compare ongoing costs of investing in the Fund with those of other
mutual funds. This information may not be used to estimate the actual ending
account balance or expenses you paid during the period. The hypothetical "Ending
Account Value" is based on the actual expense ratio for each class and an
assumed 5% annual rate of return before expenses, which does not represent the
Fund's actual return. The figure under the heading "Expenses Paid During Period"
shows the hypothetical expenses your account would have incurred under this
scenario. You can compare this figure with the 5% hypothetical examples that
appear in shareholder reports of other funds.
Annual Report | 13
Your Fund's Expenses (CONTINUED)
PLEASE NOTE THAT EXPENSES SHOWN IN THE TABLE ARE MEANT TO HIGHLIGHT ONGOING
COSTS AND DO NOT REFLECT ANY TRANSACTION COSTS, SUCH AS SALES CHARGES OR
REDEMPTION FEES. Therefore, the second line for each class is useful in
comparing ongoing costs only, and will not help you compare total costs of
owning different funds. In addition, if transaction costs were included, your
total costs would have been higher. Please refer to the Fund prospectus for
additional information on operating expenses.
- -------------------------------------------------------------------------------------------------------------------------
BEGINNING ACCOUNT ENDING ACCOUNT EXPENSES PAID DURING
CLASS A VALUE 5/1/06 VALUE 10/31/06 PERIOD* 5/1/06-10/31/06
- -------------------------------------------------------------------------------------------------------------------------
Actual $1,000 $1,011.40 $4.46
- -------------------------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,020.77 $4.48
- -------------------------------------------------------------------------------------------------------------------------
CLASS B
- -------------------------------------------------------------------------------------------------------------------------
Actual $1,000 $1,007.40 $8.25
- -------------------------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,016.99 $8.29
- -------------------------------------------------------------------------------------------------------------------------
CLASS C
- -------------------------------------------------------------------------------------------------------------------------
Actual $1,000 $1,007.40 $8.25
- -------------------------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,016.99 $8.29
- -------------------------------------------------------------------------------------------------------------------------
CLASS R
- -------------------------------------------------------------------------------------------------------------------------
Actual $1,000 $1,010.00 $5.72
- -------------------------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,019.51 $5.75
- -------------------------------------------------------------------------------------------------------------------------
ADVISOR CLASS
- -------------------------------------------------------------------------------------------------------------------------
Actual $1,000 $1,012.50 $3.20
- -------------------------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,022.03 $3.21
- -------------------------------------------------------------------------------------------------------------------------
* Expenses are equal to the annualized expense ratio for each class (A:
0.88%; B: 1.63%; C: 1.63%; R: 1.13%; and Advisor: 0.63%), multiplied by
the average account value over the period, multiplied by 184/365 to
reflect the one-half year period.
14 | Annual Report
Franklin Large Cap Value Fund
YOUR FUND'S GOAL AND MAIN INVESTMENTS: Franklin Large Cap Value Fund seeks
long-term capital appreciation by investing at least 80% of its net assets in
large capitalization companies that we believe are undervalued. We define large
capitalization companies as those with market capitalizations that are similar
in size, at the time of purchase, to those in the Russell 1000(R) Index. 1
- --------------------------------------------------------------------------------
PERFORMANCE DATA REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE FUTURE
RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU MAY HAVE
A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY DIFFER FROM
FIGURES SHOWN. PLEASE VISIT FRANKLINTEMPLETON.COM OR CALL 1-800/342-5236 FOR
MOST RECENT MONTH-END PERFORMANCE.
- --------------------------------------------------------------------------------
This annual report for Franklin Large Cap Value Fund covers the fiscal year
ended October 31, 2006.
PERFORMANCE OVERVIEW
Franklin Large Cap Value Fund - Class A posted a +16.62% cumulative total return
for the 12 months under review. The Fund underperformed its benchmark, the
Russell 1000 Value Index, which posted a +21.46% total return for the same
period. 2 Please note the Fund employs a bottom-up stock selection process and
we invest in securities without regard to benchmark comparisons. Although this
report covers a 12-month period, our investment strategy aims for long-term
results. You can find the Fund's long-term performance data in the Performance
Summary beginning on page 18.
INVESTMENT STRATEGY
We seek to maintain a diversified portfolio of large-capitalization stocks that
are attractively valued relative to the overall market, the company's industry
group or the company's historical valuation. We purchase stocks that are out of
favor in the market for reasons we believe will prove to be temporary in nature.
We believe this contrarian approach will provide favorable returns for our
shareholders over time.
1. The Russell 1000 Index is market capitalization weighted and measures
performance of the 1,000 largest companies in the Russell 3000(R) Index,
which represent approximately 92% of total market capitalization in the
Russell 3000 Index.
2. Source: Standard & Poor's Micropal. The Russell 1000 Value Index is market
capitalization weighted and measures performance of those Russell 1000
Index companies with lower price-to-book ratios and lower forecasted
growth values. The index is unmanaged and includes reinvested dividends.
One cannot invest directly in an index, nor is an index representative of
the Fund's portfolio.
THE DOLLAR VALUE, NUMBER OF SHARES OR PRINCIPAL AMOUNT, AND NAMES OF ALL
PORTFOLIO HOLDINGS ARE LISTED IN THE FUND'S STATEMENT OF INVESTMENTS (SOI). THE
SOI BEGINS ON PAGE 69.
Annual Report | 15
PORTFOLIO BREAKDOWN
Franklin Large Cap Value Fund
Based on Total Net Assets as of 10/31/06
[THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.]
Producer Manufacturing 13.7%
Consumer Non-Durables 7.5%
Major Banks 7.0%
Energy Minerals 7.0%
Technology Services 5.9%
Property-Casualty Insurance 5.3%
Health Technology 4.7%
Finance, Rental & Leasing 3.8%
Consumer Services 3.7%
Financial Conglomerates 3.5%
Process Industries 3.5%
Investment Banks & Brokers 3.3%
Regional Banks 3.3%
Commercial Services 3.0%
Multi-Line Insurance 2.6%
Investment Managers 2.2%
Specialty Insurance 2.1%
Savings Banks 2.0%
Other 6.1%
Short-Term Investments & Other Net Assets 9.8%
MANAGER'S DISCUSSION
During the year under review, forest products company Georgia-Pacific was the
largest contributor to the Fund's performance. The company was acquired in
December by privately held Koch Industries for $48 a share in cash, a 48%
premium to Georgia-Pacific's stock price at the beginning of the reporting
period. Bank of America was the second largest contributor to Fund performance,
as its stock appreciated 29% in value. Bank of America benefited from earnings
gains in its investment banking operations and other businesses sensitive to
equity market performance. Although the flat yield curve pressured results, the
company's stock benefited from the Federal Reserve Board's recent halt to
short-term interest rate increases, which may signal an improved outlook for the
bank's net interest margins. McDonald's was another significant contributor to
the Fund's performance, as the stock rose 35% in value during the period. The
company experienced solid earnings growth, and sales gains were strong
throughout the world. In addition, the company enhanced shareholder value
through share buybacks and raising its annual dividend nearly 50% to a yield of
2.39% at period-end.
Three companies in the Fund's portfolio detracted from returns. One of the
Fund's new positions, homebuilder D.R. Horton, hurt performance. The company's
shares fell 31% in value since our purchase early in the period, as softening
housing market later in the period led to fewer orders, more cancellations and
reduced earnings expectations. Despite the recent difficult environment, the
company raised its dividend 50% to a yield of 2.56% at period-end. Gannett, the
publisher of USA Today and several regional newspapers, fell 4% in value during
the period. The company reported modest declines in earnings, which primarily
reflected weak results at Newsquest, its U.K. unit. In addition, investors
seemed concerned that newspapers face challenges from alternate media, such as
the Internet, that could lead to declining readership and advertising revenues.
Integrated oil company ConocoPhillips declined 6% in value for the period. The
company's shares fell in value late in the period after oil prices and refining
margins weakened.
In addition to D.R. Horton, we added seven other new stocks to the portfolio
during the Fund's fiscal year. The new holdings were Exxon Mobil, an
international oil and gas exploration, production and refining company; R.R.
Donnelley & Sons, a commercial printer; Entergy, a diversified electric utility
with regulated, unregulated and international operations; Nike, an athletic
footwear and apparel manufacturer and marketer; Dow Chemical, a manufacturer of
commodity and specialty plastics and chemicals; Cintas, a provider of corporate
uniforms and related products and services; and Alcoa, an aluminum and related
products producer.
16 | Annual Report
We sold our entire positions in three holdings during the Fund's fiscal year:
railroad operator Burlington Northern Santa Fe, due to valuation concerns;
off-price retailer TJX, due to uncertainties about the company's future growth
prospects; and diversified industrial company Johnson Controls, largely due to
challenges facing the company's automotive interiors business.
Thank you for your continued participation in Franklin Large Cap Value Fund. We
look forward to serving your future investment needs.
[PHOTO OMITTED] /s/ Stephen T. Madonna
Stephen T. Madonna, CFA
Lead Portfolio Manager
William J. Lippman
Bruce C. Baughman, CPA
Donald G. Taylor, CPA
Margaret McGee
Portfolio Management Team
Franklin Large Cap Value Fund
THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS
AS OF OCTOBER 31, 2006, THE END OF THE REPORTING PERIOD. THE WAY WE IMPLEMENT
OUR MAIN INVESTMENT STRATEGIES AND THE RESULTING PORTFOLIO HOLDINGS MAY CHANGE
DEPENDING ON FACTORS SUCH AS MARKET AND ECONOMIC CONDITIONS. THESE OPINIONS MAY
NOT BE RELIED UPON AS INVESTMENT ADVICE OR AN OFFER FOR A PARTICULAR SECURITY.
THE INFORMATION IS NOT A COMPLETE ANALYSIS OF EVERY ASPECT OF ANY MARKET,
COUNTRY, INDUSTRY, SECURITY OR THE FUND. STATEMENTS OF FACT ARE FROM SOURCES
CONSIDERED RELIABLE, BUT THE INVESTMENT MANAGER MAKES NO REPRESENTATION OR
WARRANTY AS TO THEIR COMPLETENESS OR ACCURACY. ALTHOUGH HISTORICAL PERFORMANCE
IS NO GUARANTEE OF FUTURE RESULTS, THESE INSIGHTS MAY HELP YOU UNDERSTAND OUR
INVESTMENT MANAGEMENT PHILOSOPHY.
TOP 10 EQUITY HOLDINGS
Franklin Large Cap Value Fund
10/31/06
- ------------------------------------------------------------------------------
COMPANY % OF TOTAL
SECTOR/INDUSTRY NET ASSETS
- ------------------------------------------------------------------------------
Freddie Mac 3.8%
FINANCE, RENTAL & LEASING
- ------------------------------------------------------------------------------
Bank of America Corp. 3.8%
MAJOR BANKS
- ------------------------------------------------------------------------------
Citigroup Inc. 3.5%
FINANCIAL CONGLOMERATES
- ------------------------------------------------------------------------------
General Electric Co. 3.5%
PRODUCER MANUFACTURING
- ------------------------------------------------------------------------------
The Procter & Gamble Co. 3.4%
CONSUMER NON-DURABLES
- ------------------------------------------------------------------------------
Exxon Mobil Corp. 3.3%
ENERGY MINERALS
- ------------------------------------------------------------------------------
U.S. Bancorp 3.3%
REGIONAL BANKS
- ------------------------------------------------------------------------------
Wachovia Corp. 3.3%
MAJOR BANKS
- ------------------------------------------------------------------------------
Microsoft Corp. 3.0%
TECHNOLOGY SERVICES
- ------------------------------------------------------------------------------
The Allstate Corp. 3.0%
PROPERTY-CASUALTY INSURANCE
- ------------------------------------------------------------------------------
Annual Report | 17
Performance Summary as of 10/31/06
FRANKLIN LARGE CAP VALUE FUND
Your dividend income will vary depending on dividends or interest paid by
securities in the Fund's portfolio, adjusted for operating expenses of each
class. Capital gain distributions are net profits realized from the sale of
portfolio securities. The performance table and graphs do not reflect any taxes
that a shareholder would pay on Fund dividends, capital gain distributions, if
any, or any realized gains on the sale of Fund shares. Total return reflects
reinvestment of the Fund's dividends and capital gain distributions, if any, and
any unrealized gains or losses.
PRICE AND DISTRIBUTION INFORMATION
- ----------------------------------------------------------------------------------------------------------------------------
CLASS A (SYMBOL: FLVAX) CHANGE 10/31/06 10/31/05
- ----------------------------------------------------------------------------------------------------------------------------
Net Asset Value (NAV) +$1.89 $16.55 $14.66
- ----------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS (11/1/05-10/31/06)
- ----------------------------------------------------------------------------------------------------------------------------
Dividend Income $0.1509
- ----------------------------------------------------------------------------------------------------------------------------
Long-Term Capital Gain $0.3427
- ----------------------------------------------------------------------------------------------------------------------------
TOTAL $0.4936
- ----------------------------------------------------------------------------------------------------------------------------
CLASS B (SYMBOL: FBLCX) CHANGE 10/31/06 10/31/05
- ----------------------------------------------------------------------------------------------------------------------------
Net Asset Value (NAV) +$1.87 $16.34 $14.47
- ----------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS (11/1/05-10/31/06)
- ----------------------------------------------------------------------------------------------------------------------------
Dividend Income $0.0492
- ----------------------------------------------------------------------------------------------------------------------------
Long-Term Capital Gain $0.3427
- ----------------------------------------------------------------------------------------------------------------------------
TOTAL $0.3919
- ----------------------------------------------------------------------------------------------------------------------------
CLASS C (SYMBOL: FLCVX) CHANGE 10/31/06 10/31/05
- ----------------------------------------------------------------------------------------------------------------------------
Net Asset Value (NAV) +$1.87 $16.34 $14.47
- ----------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS (11/1/05-10/31/06)
- ----------------------------------------------------------------------------------------------------------------------------
Dividend Income $0.0512
- ----------------------------------------------------------------------------------------------------------------------------
Long-Term Capital Gain $0.3427
- ----------------------------------------------------------------------------------------------------------------------------
TOTAL $0.3939
- ----------------------------------------------------------------------------------------------------------------------------
CLASS R (SYMBOL: FLCRX) CHANGE 10/31/06 10/31/05
- ----------------------------------------------------------------------------------------------------------------------------
Net Asset Value (NAV) +$1.86 $16.42 $14.56
- ----------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS (11/1/05-10/31/06)
- ----------------------------------------------------------------------------------------------------------------------------
Dividend Income $0.1423
- ----------------------------------------------------------------------------------------------------------------------------
Long-Term Capital Gain $0.3427
- ----------------------------------------------------------------------------------------------------------------------------
TOTAL $0.4850
- ----------------------------------------------------------------------------------------------------------------------------
ADVISOR CLASS (SYMBOL: N/A) CHANGE 10/31/06 11/1/05
- ----------------------------------------------------------------------------------------------------------------------------
Net Asset Value (NAV) +$1.93 $16.56 $14.63
- ----------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS (11/1/05-10/31/06)
- ----------------------------------------------------------------------------------------------------------------------------
Dividend Income $0.2031
- ----------------------------------------------------------------------------------------------------------------------------
Long-Term Capital Gain $0.3427
- ----------------------------------------------------------------------------------------------------------------------------
TOTAL $0.5458
- ----------------------------------------------------------------------------------------------------------------------------
18 | Annual Report
Performance Summary (CONTINUED)
PERFORMANCE 1
CUMULATIVE TOTAL RETURN EXCLUDES SALES CHARGES. AVERAGE ANNUAL TOTAL RETURNS AND
VALUE OF $10,000 INVESTMENT INCLUDE MAXIMUM SALES CHARGES. CLASS A: 5.75%
MAXIMUM INITIAL SALES CHARGE; CLASS B: CONTINGENT DEFERRED SALES CHARGE (CDSC)
DECLINING FROM 4% TO 1% OVER SIX YEARS, AND ELIMINATED THEREAFTER; CLASS C: 1%
CDSC IN FIRST YEAR ONLY; CLASS R/ADVISOR CLASS: NO SALES CHARGES. THE FUND MAY
CHARGE A 2% FEE ON REDEMPTIONS MADE WITHIN SEVEN DAYS OF PURCHASE.
- ------------------------------------------------------------------------------------------------------------------
CLASS A 1-YEAR 5-YEAR INCEPTION (6/1/00)
- ------------------------------------------------------------------------------------------------------------------
Cumulative Total Return 2 +16.62% +51.42% +77.87%
- ------------------------------------------------------------------------------------------------------------------
Average Annual Total Return 3 +9.94% +7.38% +8.39%
- ------------------------------------------------------------------------------------------------------------------
Value of $10,000 Investment 4 $10,994 $14,273 $16,764
- ------------------------------------------------------------------------------------------------------------------
Avg. Ann. Total Return (9/30/06) 5 +6.66% +6.87% +8.12%
- ------------------------------------------------------------------------------------------------------------------
CLASS B 1-YEAR 5-YEAR INCEPTION (6/1/00)
- ------------------------------------------------------------------------------------------------------------------
Cumulative Total Return 2 +15.90% +46.75% +70.99%
- ------------------------------------------------------------------------------------------------------------------
Average Annual Total Return 3 +11.90% +7.68% +8.72%
- ------------------------------------------------------------------------------------------------------------------
Value of $10,000 Investment 4 $11,190 $14,475 $17,099
- ------------------------------------------------------------------------------------------------------------------
Avg. Ann. Total Return (9/30/06) 5 +8.42% +7.17% +8.46%
- ------------------------------------------------------------------------------------------------------------------
CLASS C 1-YEAR 5-YEAR INCEPTION (6/1/00)
- ------------------------------------------------------------------------------------------------------------------
Cumulative Total Return 2 +15.92% +46.86% +71.00%
- ------------------------------------------------------------------------------------------------------------------
Average Annual Total Return 3 +14.92% +7.99% +8.72%
- ------------------------------------------------------------------------------------------------------------------
Value of $10,000 Investment 4 $11,492 $14,686 $17,100
- ------------------------------------------------------------------------------------------------------------------
Avg. Ann. Total Return (9/30/06) 5 +11.43% +7.47% +8.46%
- ------------------------------------------------------------------------------------------------------------------
CLASS R 1-YEAR 3-YEAR INCEPTION (8/1/02)
- ------------------------------------------------------------------------------------------------------------------
Cumulative Total Return 2 +16.46% +38.97% +63.96%
- ------------------------------------------------------------------------------------------------------------------
Average Annual Total Return 3 +16.46% +11.59% +12.34%
- ------------------------------------------------------------------------------------------------------------------
Value of $10,000 Investment 4 $11,646 $13,897 $16,396
- ------------------------------------------------------------------------------------------------------------------
Avg. Ann. Total Return (9/30/06) 5 +12.90% +12.41% +11.99%
- ------------------------------------------------------------------------------------------------------------------
ADVISOR CLASS 6 1-YEAR 5-YEAR INCEPTION (6/1/00)
- ------------------------------------------------------------------------------------------------------------------
Cumulative Total Return 2 +17.09% +52.04% +78.59%
- ------------------------------------------------------------------------------------------------------------------
Average Annual Total Return 3 +17.09% +8.74% +9.46%
- ------------------------------------------------------------------------------------------------------------------
Value of $10,000 Investment 4 $11,709 $15,204 $17,859
- ------------------------------------------------------------------------------------------------------------------
Avg. Ann. Total Return (9/30/06) 5 +13.55% +8.22% +9.19%
- ------------------------------------------------------------------------------------------------------------------
PERFORMANCE DATA REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE FUTURE
RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU MAY HAVE
A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY DIFFER FROM
FIGURES SHOWN.
FOR MOST RECENT MONTH-END PERFORMANCE, SEE "FUNDS AND PERFORMANCE" AT
FRANKLINTEMPLETON.COM OR CALL 1-800/342-5236.
Annual Report | 19
Performance Summary (CONTINUED)
TOTAL RETURN INDEX COMPARISON FOR HYPOTHETICAL $10,000 INVESTMENT 1
Total return represents the change in value of an investment over the periods
shown. It includes any current, applicable, maximum sales charge, Fund expenses,
account fees and reinvested distributions. The unmanaged index includes
reinvestment of any income or distributions. It differs from the Fund in
composition and does not pay management fees or expenses. One cannot invest
directly in an index.
AVERAGE ANNUAL TOTAL RETURN
- ----------------------------------------------
CLASS A 10/31/06
- ----------------------------------------------
1-Year +9.94%
- ----------------------------------------------
5-Year +7.38%
- ----------------------------------------------
Since Inception (6/1/00) +8.39%
- ----------------------------------------------
CLASS A (6/1/00-10/31/06)
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL.]
Franklin Large Cap Russell 1000
Date Value Fund Value Index 7 CPI 7
- --------------------------------------------------------------------------------
6/1/2000 $9,425 $10,000 $10,000
6/30/2000 $9,001 $9,543 $10,052
7/31/2000 $9,067 $9,662 $10,076
8/31/2000 $9,623 $10,200 $10,076
9/30/2000 $9,925 $10,294 $10,128
10/31/2000 $10,481 $10,546 $10,146
11/30/2000 $10,189 $10,155 $10,152
12/31/2000 $11,147 $10,664 $10,146
1/31/2001 $11,393 $10,705 $10,210
2/28/2001 $11,355 $10,407 $10,251
3/31/2001 $11,355 $10,039 $10,274
4/30/2001 $11,878 $10,532 $10,315
5/31/2001 $12,343 $10,768 $10,362
6/30/2001 $12,030 $10,529 $10,379
7/31/2001 $12,077 $10,507 $10,350
8/31/2001 $11,783 $10,086 $10,350
9/30/2001 $11,080 $9,376 $10,397
10/31/2001 $11,071 $9,296 $10,362
11/30/2001 $11,631 $9,836 $10,344
12/31/2001 $12,002 $10,068 $10,303
1/31/2002 $11,819 $9,990 $10,327
2/28/2002 $11,867 $10,006 $10,367
3/31/2002 $12,233 $10,479 $10,426
4/30/2002 $12,050 $10,120 $10,484
5/31/2002 $12,194 $10,171 $10,484
6/30/2002 $11,414 $9,587 $10,490
7/31/2002 $10,422 $8,696 $10,501
8/31/2002 $10,518 $8,761 $10,536
9/30/2002 $9,237 $7,787 $10,554
10/31/2002 $10,094 $8,364 $10,571
11/30/2002 $10,692 $8,891 $10,571
12/31/2002 $10,139 $8,505 $10,548
1/31/2003 $9,926 $8,299 $10,595
2/28/2003 $9,752 $8,078 $10,676
3/31/2003 $9,790 $8,091 $10,741
4/30/2003 $10,479 $8,803 $10,717
5/31/2003 $11,157 $9,372 $10,700
6/30/2003 $11,254 $9,489 $10,711
7/31/2003 $11,361 $9,630 $10,723
8/31/2003 $11,477 $9,780 $10,764
9/30/2003 $11,487 $9,685 $10,799
10/31/2003 $12,020 $10,277 $10,787
11/30/2003 $12,146 $10,417 $10,758
12/31/2003 $12,770 $11,059 $10,746
1/31/2004 $13,013 $11,253 $10,799
2/29/2004 $13,364 $11,494 $10,857
3/31/2004 $13,276 $11,394 $10,927
4/30/2004 $13,140 $11,115 $10,962
5/31/2004 $13,227 $11,229 $11,026
6/30/2004 $13,422 $11,494 $11,061
7/31/2004 $13,247 $11,332 $11,044
8/31/2004 $13,461 $11,493 $11,050
9/30/2004 $13,510 $11,671 $11,073
10/31/2004 $13,636 $11,866 $11,131
11/30/2004 $14,055 $12,465 $11,137
12/31/2004 $14,483 $12,883 $11,096
1/31/2005 $14,228 $12,654 $11,120
2/28/2005 $14,365 $13,074 $11,184
3/31/2005 $14,247 $12,894 $11,271
4/30/2005 $13,963 $12,663 $11,347
5/31/2005 $14,228 $12,968 $11,335
6/30/2005 $14,120 $13,110 $11,341
7/31/2005 $14,551 $13,489 $11,394
8/31/2005 $14,404 $13,431 $11,452
9/30/2005 $14,483 $13,619 $11,592
10/31/2005 $14,375 $13,273 $11,615
11/30/2005 $14,983 $13,707 $11,522
12/31/2005 $15,011 $13,792 $11,475
1/31/2006 $15,305 $14,327 $11,563
2/28/2006 $15,366 $14,415 $11,586
3/31/2006 $15,437 $14,610 $11,650
4/30/2006 $15,882 $14,981 $11,749
5/31/2006 $15,437 $14,603 $11,808
6/30/2006 $15,386 $14,696 $11,831
7/31/2006 $15,487 $15,053 $11,866
8/31/2006 $15,933 $15,305 $11,889
9/30/2006 $16,389 $15,610 $11,831
10/31/2006 $16,764 $16,121 $11,767
AVERAGE ANNUAL TOTAL RETURN
- ----------------------------------------------
CLASS B 10/31/06
- ----------------------------------------------
1-Year +11.90%
- ----------------------------------------------
5-Year + 7.68%
- ----------------------------------------------
Since Inception (6/1/00) + 8.72%
- ----------------------------------------------
CLASS B (6/1/00-10/31/06)
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL.]
Franklin Large Cap Russell 1000
Date Value Fund Value Index 7 CPI 7
- --------------------------------------------------------------------------------
6/1/2000 $10,000 $10,000 $10,000
6/30/2000 $9,550 $9,543 $10,052
7/31/2000 $9,610 $9,662 $10,076
8/31/2000 $10,200 $10,200 $10,076
9/30/2000 $10,520 $10,294 $10,128
10/31/2000 $11,110 $10,546 $10,146
11/30/2000 $10,790 $10,155 $10,152
12/31/2000 $11,803 $10,664 $10,146
1/31/2001 $12,064 $10,705 $10,210
2/28/2001 $12,004 $10,407 $10,251
3/31/2001 $11,994 $10,039 $10,274
4/30/2001 $12,547 $10,532 $10,315
5/31/2001 $13,020 $10,768 $10,362
6/30/2001 $12,688 $10,529 $10,379
7/31/2001 $12,738 $10,507 $10,350
8/31/2001 $12,416 $10,086 $10,350
9/30/2001 $11,662 $9,376 $10,397
10/31/2001 $11,652 $9,296 $10,362
11/30/2001 $12,235 $9,836 $10,344
12/31/2001 $12,611 $10,068 $10,303
1/31/2002 $12,418 $9,990 $10,327
2/28/2002 $12,459 $10,006 $10,367
3/31/2002 $12,835 $10,479 $10,426
4/30/2002 $12,631 $10,120 $10,484
5/31/2002 $12,784 $10,171 $10,484
6/30/2002 $11,961 $9,587 $10,490
7/31/2002 $10,914 $8,696 $10,501
8/31/2002 $11,016 $8,761 $10,536
9/30/2002 $9,664 $7,787 $10,554
10/31/2002 $10,558 $8,364 $10,571
11/30/2002 $11,178 $8,891 $10,571
12/31/2002 $10,604 $8,505 $10,548
1/31/2003 $10,371 $8,299 $10,595
2/28/2003 $10,177 $8,078 $10,676
3/31/2003 $10,218 $8,091 $10,741
4/30/2003 $10,930 $8,803 $10,717
5/31/2003 $11,631 $9,372 $10,700
6/30/2003 $11,723 $9,489 $10,711
7/31/2003 $11,825 $9,630 $10,723
8/31/2003 $11,947 $9,780 $10,764
9/30/2003 $11,947 $9,685 $10,799
10/31/2003 $12,496 $10,277 $10,787
11/30/2003 $12,618 $10,417 $10,758
12/31/2003 $13,266 $11,059 $10,746
1/31/2004 $13,510 $11,253 $10,799
2/29/2004 $13,866 $11,494 $10,857
3/31/2004 $13,764 $11,394 $10,927
4/30/2004 $13,612 $11,115 $10,962
5/31/2004 $13,693 $11,229 $11,026
6/30/2004 $13,896 $11,494 $11,061
7/31/2004 $13,703 $11,332 $11,044
8/31/2004 $13,917 $11,493 $11,050
9/30/2004 $13,957 $11,671 $11,073
10/31/2004 $14,090 $11,866 $11,131
11/30/2004 $14,507 $12,465 $11,137
12/31/2004 $14,936 $12,883 $11,096
1/31/2005 $14,671 $12,654 $11,120
2/28/2005 $14,804 $13,074 $11,184
3/31/2005 $14,671 $12,894 $11,271
4/30/2005 $14,376 $12,663 $11,347
5/31/2005 $14,641 $12,968 $11,335
6/30/2005 $14,518 $13,110 $11,341
7/31/2005 $14,957 $13,489 $11,394
8/31/2005 $14,794 $13,431 $11,452
9/30/2005 $14,875 $13,619 $11,592
10/31/2005 $14,753 $13,273 $11,615
11/30/2005 $15,375 $13,707 $11,522
12/31/2005 $15,393 $13,792 $11,475
1/31/2006 $15,686 $14,327 $11,563
2/28/2006 $15,739 $14,415 $11,586
3/31/2006 $15,801 $14,610 $11,650
4/30/2006 $16,241 $14,981 $11,749
5/31/2006 $15,781 $14,603 $11,808
6/30/2006 $15,718 $14,696 $11,831
7/31/2006 $15,812 $15,053 $11,866
8/31/2006 $16,262 $15,305 $11,889
9/30/2006 $16,722 $15,610 $11,831
10/31/2006 $17,099 $16,121 $11,767
20 | Annual Report
Performance Summary (CONTINUED)
CLASS C (6/1/00-10/31/06)
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL.]
Franklin Large Cap Russell 1000
Date Value Fund Value Index 7 CPI 7
- --------------------------------------------------------------------------------
6/1/2000 $10,000 $10,000 $10,000
6/30/2000 $9,550 $9,543 $10,052
7/31/2000 $9,610 $9,662 $10,076
8/31/2000 $10,200 $10,200 $10,076
9/30/2000 $10,520 $10,294 $10,128
10/31/2000 $11,110 $10,546 $10,146
11/30/2000 $10,800 $10,155 $10,152
12/31/2000 $11,814 $10,664 $10,146
1/31/2001 $12,066 $10,705 $10,210
2/28/2001 $12,006 $10,407 $10,251
3/31/2001 $11,996 $10,039 $10,274
4/30/2001 $12,549 $10,532 $10,315
5/31/2001 $13,022 $10,768 $10,362
6/30/2001 $12,690 $10,529 $10,379
7/31/2001 $12,740 $10,507 $10,350
8/31/2001 $12,418 $10,086 $10,350
9/30/2001 $11,664 $9,376 $10,397
10/31/2001 $11,643 $9,296 $10,362
11/30/2001 $12,227 $9,836 $10,344
12/31/2001 $12,609 $10,068 $10,303
1/31/2002 $12,416 $9,990 $10,327
2/28/2002 $12,456 $10,006 $10,367
3/31/2002 $12,832 $10,479 $10,426
4/30/2002 $12,639 $10,120 $10,484
5/31/2002 $12,782 $10,171 $10,484
6/30/2002 $11,959 $9,587 $10,490
7/31/2002 $10,922 $8,696 $10,501
8/31/2002 $11,014 $8,761 $10,536
9/30/2002 $9,662 $7,787 $10,554
10/31/2002 $10,556 $8,364 $10,571
11/30/2002 $11,176 $8,891 $10,571
12/31/2002 $10,611 $8,505 $10,548
1/31/2003 $10,377 $8,299 $10,595
2/28/2003 $10,194 $8,078 $10,676
3/31/2003 $10,225 $8,091 $10,741
4/30/2003 $10,927 $8,803 $10,717
5/31/2003 $11,629 $9,372 $10,700
6/30/2003 $11,720 $9,489 $10,711
7/31/2003 $11,832 $9,630 $10,723
8/31/2003 $11,944 $9,780 $10,764
9/30/2003 $11,944 $9,685 $10,799
10/31/2003 $12,494 $10,277 $10,787
11/30/2003 $12,616 $10,417 $10,758
12/31/2003 $13,267 $11,059 $10,746
1/31/2004 $13,511 $11,253 $10,799
2/29/2004 $13,867 $11,494 $10,857
3/31/2004 $13,765 $11,394 $10,927
4/30/2004 $13,613 $11,115 $10,962
5/31/2004 $13,694 $11,229 $11,026
6/30/2004 $13,898 $11,494 $11,061
7/31/2004 $13,694 $11,332 $11,044
8/31/2004 $13,918 $11,493 $11,050
9/30/2004 $13,959 $11,671 $11,073
10/31/2004 $14,091 $11,866 $11,131
11/30/2004 $14,498 $12,465 $11,137
12/31/2004 $14,935 $12,883 $11,096
1/31/2005 $14,670 $12,654 $11,120
2/28/2005 $14,803 $13,074 $11,184
3/31/2005 $14,670 $12,894 $11,271
4/30/2005 $14,374 $12,663 $11,347
5/31/2005 $14,629 $12,968 $11,335
6/30/2005 $14,517 $13,110 $11,341
7/31/2005 $14,956 $13,489 $11,394
8/31/2005 $14,792 $13,431 $11,452
9/30/2005 $14,874 $13,619 $11,592
10/31/2005 $14,752 $13,273 $11,615
11/30/2005 $15,373 $13,707 $11,522
12/31/2005 $15,394 $13,792 $11,475
1/31/2006 $15,677 $14,327 $11,563
2/28/2006 $15,729 $14,415 $11,586
3/31/2006 $15,802 $14,610 $11,650
4/30/2006 $16,242 $14,981 $11,749
5/31/2006 $15,781 $14,603 $11,808
6/30/2006 $15,718 $14,696 $11,831
7/31/2006 $15,813 $15,053 $11,866
8/31/2006 $16,263 $15,305 $11,889
9/30/2006 $16,723 $15,610 $11,831
10/31/2006 $17,100 $16,121 $11,767
AVERAGE ANNUAL TOTAL RETURN
- ------------------------------------------------------
CLASS C 10/31/06
- ------------------------------------------------------
1-Year +14.92%
- ------------------------------------------------------
5-Year + 7.99%
- ------------------------------------------------------
Since Inception (6/1/00) + 8.72%
- ------------------------------------------------------
CLASS R (8/1/02-10/31/06)
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL.]
Franklin Large Cap Russell 1000
Date Value Fund Value Index 7 CPI 7
- --------------------------------------------------------------------------------
8/1/2002 $10,000 $10,000 $10,000
8/31/2002 $10,351 $10,076 $10,033
9/30/2002 $9,081 $8,955 $10,050
10/31/2002 $9,935 $9,619 $10,067
11/30/2002 $10,512 $10,225 $10,067
12/31/2002 $9,983 $9,781 $10,044
1/31/2003 $9,762 $9,544 $10,089
2/28/2003 $9,590 $9,289 $10,167
3/31/2003 $9,638 $9,305 $10,228
4/30/2003 $10,308 $10,124 $10,205
5/31/2003 $10,958 $10,777 $10,189
6/30/2003 $11,054 $10,912 $10,200
7/31/2003 $11,168 $11,075 $10,211
8/31/2003 $11,273 $11,247 $10,250
9/30/2003 $11,282 $11,137 $10,283
10/31/2003 $11,799 $11,819 $10,272
11/30/2003 $11,933 $11,979 $10,244
12/31/2003 $12,550 $12,718 $10,233
1/31/2004 $12,780 $12,941 $10,283
2/29/2004 $13,126 $13,219 $10,339
3/31/2004 $13,039 $13,103 $10,405
4/30/2004 $12,896 $12,783 $10,439
5/31/2004 $12,982 $12,913 $10,500
6/30/2004 $13,184 $13,218 $10,533
7/31/2004 $13,001 $13,032 $10,516
8/31/2004 $13,213 $13,217 $10,522
9/30/2004 $13,261 $13,422 $10,544
10/31/2004 $13,386 $13,645 $10,600
11/30/2004 $13,780 $14,335 $10,605
12/31/2004 $14,205 $14,815 $10,566
1/31/2005 $13,954 $14,552 $10,589
2/28/2005 $14,090 $15,035 $10,650
3/31/2005 $13,963 $14,828 $10,733
4/30/2005 $13,683 $14,563 $10,805
5/31/2005 $13,945 $14,913 $10,794
6/30/2005 $13,838 $15,077 $10,800
7/31/2005 $14,264 $15,513 $10,850
8/31/2005 $14,109 $15,445 $10,905
9/30/2005 $14,196 $15,662 $11,038
10/31/2005 $14,080 $15,264 $11,061
11/30/2005 $14,679 $15,764 $10,972
12/31/2005 $14,699 $15,860 $10,927
1/31/2006 $14,989 $16,476 $11,011
2/28/2006 $15,038 $16,577 $11,033
3/31/2006 $15,109 $16,801 $11,094
4/30/2006 $15,548 $17,228 $11,188
5/31/2006 $15,109 $16,793 $11,244
6/30/2006 $15,049 $16,901 $11,266
7/31/2006 $15,149 $17,311 $11,299
8/31/2006 $15,588 $17,601 $11,321
9/30/2006 $16,027 $17,952 $11,266
10/31/2006 $16,396 $18,540 $11,205
AVERAGE ANNUAL TOTAL RETURN
- ------------------------------------------------------
CLASS R 10/31/06
- ------------------------------------------------------
1-Year +16.46%
- ------------------------------------------------------
3-Year +11.59%
- ------------------------------------------------------
Since Inception (8/1/02) +12.34%
- ------------------------------------------------------
Annual Report | 21
Performance Summary (CONTINUED)
AVERAGE ANNUAL TOTAL RETURN
- ---------------------------------------------------
ADVISOR CLASS 6 10/31/06
- ---------------------------------------------------
1-Year +17.09%
- ---------------------------------------------------
5-Year + 8.74%
- ---------------------------------------------------
Since Inception (6/1/00) + 9.46%
- ---------------------------------------------------
ADVISOR CLASS (6/1/00-10/31/06) 6
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL.]
Franklin Large Cap Russell 1000
Date Value Fund Value Index 7 CPI 7
- --------------------------------------------------------------------------------
6/1/2000 $10,000 $10,000 $10,000
6/30/2000 $9,550 $9,543 $10,052
7/31/2000 $9,620 $9,662 $10,076
8/31/2000 $10,210 $10,200 $10,076
9/30/2000 $10,530 $10,294 $10,128
10/31/2000 $11,120 $10,546 $10,146
11/30/2000 $10,810 $10,155 $10,152
12/31/2000 $11,827 $10,664 $10,146
1/31/2001 $12,089 $10,705 $10,210
2/28/2001 $12,049 $10,407 $10,251
3/31/2001 $12,049 $10,039 $10,274
4/30/2001 $12,603 $10,532 $10,315
5/31/2001 $13,096 $10,768 $10,362
6/30/2001 $12,764 $10,529 $10,379
7/31/2001 $12,814 $10,507 $10,350
8/31/2001 $12,502 $10,086 $10,350
9/30/2001 $11,757 $9,376 $10,397
10/31/2001 $11,747 $9,296 $10,362
11/30/2001 $12,341 $9,836 $10,344
12/31/2001 $12,735 $10,068 $10,303
1/31/2002 $12,541 $9,990 $10,327
2/28/2002 $12,592 $10,006 $10,367
3/31/2002 $12,981 $10,479 $10,426
4/30/2002 $12,786 $10,120 $10,484
5/31/2002 $12,939 $10,171 $10,484
6/30/2002 $12,112 $9,587 $10,490
7/31/2002 $11,059 $8,696 $10,501
8/31/2002 $11,162 $8,761 $10,536
9/30/2002 $9,801 $7,787 $10,554
10/31/2002 $10,712 $8,364 $10,571
11/30/2002 $11,345 $8,891 $10,571
12/31/2002 $10,759 $8,505 $10,548
1/31/2003 $10,533 $8,299 $10,595
2/28/2003 $10,348 $8,078 $10,676
3/31/2003 $10,389 $8,091 $10,741
4/30/2003 $11,119 $8,803 $10,717
5/31/2003 $11,839 $9,372 $10,700
6/30/2003 $11,942 $9,489 $10,711
7/31/2003 $12,055 $9,630 $10,723
8/31/2003 $12,179 $9,780 $10,764
9/30/2003 $12,189 $9,685 $10,799
10/31/2003 $12,755 $10,277 $10,787
11/30/2003 $12,889 $10,417 $10,758
12/31/2003 $13,550 $11,059 $10,746
1/31/2004 $13,809 $11,253 $10,799
2/29/2004 $14,181 $11,494 $10,857
3/31/2004 $14,088 $11,394 $10,927
4/30/2004 $13,943 $11,115 $10,962
5/31/2004 $14,036 $11,229 $11,026
6/30/2004 $14,242 $11,494 $11,061
7/31/2004 $14,057 $11,332 $11,044
8/31/2004 $14,284 $11,493 $11,050
9/30/2004 $14,336 $11,671 $11,073
10/31/2004 $14,470 $11,866 $11,131
11/30/2004 $14,914 $12,465 $11,137
12/31/2004 $15,367 $12,883 $11,096
1/31/2005 $15,096 $12,654 $11,120
2/28/2005 $15,242 $13,074 $11,184
3/31/2005 $15,118 $12,894 $11,271
4/30/2005 $14,815 $12,663 $11,347
5/31/2005 $15,096 $12,968 $11,335
6/30/2005 $14,982 $13,110 $11,341
7/31/2005 $15,440 $13,489 $11,394
8/31/2005 $15,284 $13,431 $11,452
9/30/2005 $15,367 $13,619 $11,592
10/31/2005 $15,253 $13,273 $11,615
11/30/2005 $15,919 $13,707 $11,522
12/31/2005 $15,951 $13,792 $11,475
1/31/2006 $16,264 $14,327 $11,563
2/28/2006 $16,328 $14,415 $11,586
3/31/2006 $16,415 $14,610 $11,650
4/30/2006 $16,889 $14,981 $11,749
5/31/2006 $16,425 $14,603 $11,808
6/30/2006 $16,371 $14,696 $11,831
7/31/2006 $16,479 $15,053 $11,866
8/31/2006 $16,964 $15,305 $11,889
9/30/2006 $17,450 $15,610 $11,831
10/31/2006 $17,859 $16,121 $11,767
ENDNOTES
WHILE STOCKS HAVE HISTORICALLY OUTPERFORMED OTHER ASSET CLASSES OVER THE LONG
TERM, THEY TEND TO FLUCTUATE MORE DRAMATICALLY OVER THE SHORT TERM. THESE PRICE
MOVEMENTS MAY RESULT FROM FACTORS AFFECTING INDIVIDUAL COMPANIES, INDUSTRIES OR
THE SECURITIES MARKETS AS A WHOLE. THE FUND'S PROSPECTUS ALSO INCLUDES A
DESCRIPTION OF THE MAIN INVESTMENT RISKS.
CLASS B: These shares have higher annual fees and expenses than Class A
shares.
CLASS C: Prior to 1/1/04, these shares were offered with an initial
sales charge; thus actual total returns would have differed.
These shares have higher annual fees and expenses than Class A
shares.
CLASS R: Shares are available to certain eligible investors as
described in the prospectus. These shares have higher annual
fees and expenses than Class A shares.
ADVISOR CLASS: Shares are available to certain eligible investors as
described in the prospectus.
1. Past expense reductions by the Fund's manager increased the Fund's total
returns. If the manager had not taken this action, the Fund's total
returns would have been lower.
2. Cumulative total return represents the change in value of an investment
over the periods indicated.
3. Average annual total return represents the average annual change in value
of an investment over the periods indicated.
4. These figures represent the value of a hypothetical $10,000 investment in
the Fund over the periods indicated.
5. In accordance with SEC rules, we provide standardized average annual total
return information through the latest calendar quarter.
6. Effective 11/1/05, the Fund began offering Advisor Class shares, which do
not have sales charges or a Rule 12b-1 plan. Performance quotations for
this class reflect the following methods of calculation: (a) For periods
prior to 11/1/05, a restated figure is used based upon the Fund's Class A
performance, excluding the effect of Class A's maximum initial sales
charge, but reflecting the effect of the Class A Rule 12b-1 fees; and (b)
for periods after 10/31/05, actual Advisor Class performance is used
reflecting all charges and fees applicable to that class. Since 11/1/05
(commencement of sales), the cumulative total return of Advisor Class
shares was +17.33%.
7. Source: Standard & Poor's Micropal. The Russell 1000 Value Index is market
capitalization weighted and measures performance of those Russell 1000
Index companies with lower price-to-book ratios and lower forecasted
growth values. The Consumer Price Index (CPI), calculated by the U.S.
Bureau of Labor Statistics, is a commonly used measure of the inflation
rate.
22 | Annual Report
Your Fund's Expenses
FRANKLIN LARGE CAP VALUE FUND
As a Fund shareholder, you can incur two types of costs:
o Transaction costs, including sales charges (loads) on Fund purchases and
redemption fees; and
o Ongoing Fund costs, including management fees, distribution and service
(12b-1) fees, and other Fund expenses. All mutual funds have ongoing
costs, sometimes referred to as operating expenses.
The following table shows ongoing costs of investing in the Fund and can help
you understand these costs and compare them with those of other mutual funds.
The table assumes a $1,000 investment held for the six months indicated.
ACTUAL FUND EXPENSES
The first line (Actual) for each share class listed in the table provides actual
account values and expenses. The "Ending Account Value" is derived from the
Fund's actual return, which includes the effect of Fund expenses.
You can estimate the expenses you paid during the period by following these
steps. OF COURSE, YOUR ACCOUNT VALUE AND EXPENSES WILL DIFFER FROM THOSE IN THIS
ILLUSTRATION:
1. Divide your account value by $1,000.
IF AN ACCOUNT HAD AN $8,600 VALUE, THEN $8,600 / $1,000 = 8.6.
2. Multiply the result by the number under the heading "Expenses Paid During
Period."
IF EXPENSES PAID DURING PERIOD WERE $7.50, THEN 8.6 X $7.50 = $64.50.
In this illustration, the estimated expenses paid this period are $64.50.
HYPOTHETICAL EXAMPLE FOR COMPARISON WITH OTHER FUNDS
Information in the second line (Hypothetical) for each class in the table can
help you compare ongoing costs of investing in the Fund with those of other
mutual funds. This information may not be used to estimate the actual ending
account balance or expenses you paid during the period. The hypothetical "Ending
Account Value" is based on the actual expense ratio for each class and an
assumed 5% annual rate of return before expenses, which does not represent the
Fund's actual return. The figure under the heading "Expenses Paid During Period"
shows the hypothetical expenses your account would have incurred under this
scenario. You can compare this figure with the 5% hypothetical examples that
appear in shareholder reports of other funds.
Annual Report | 23
Your Fund's Expenses (CONTINUED)
PLEASE NOTE THAT EXPENSES SHOWN IN THE TABLE ARE MEANT TO HIGHLIGHT ONGOING
COSTS AND DO NOT REFLECT ANY TRANSACTION COSTS, SUCH AS SALES CHARGES OR
REDEMPTION FEES. Therefore, the second line for each class is useful in
comparing ongoing costs only, and will not help you compare total costs of
owning different funds. In addition, if transaction costs were included, your
total costs would have been higher. Please refer to the Fund prospectus for
additional information on operating expenses.
- ------------------------------------------------------------------------------------------------------------------------
BEGINNING ACCOUNT ENDING ACCOUNT EXPENSES PAID DURING
CLASS A VALUE 5/1/06 VALUE 10/31/06 PERIOD* 5/1/06-10/31/06
- ------------------------------------------------------------------------------------------------------------------------
Actual $1,000 $1,055.50 $6.99
- ------------------------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,018.40 $6.87
- ------------------------------------------------------------------------------------------------------------------------
CLASS B
- ------------------------------------------------------------------------------------------------------------------------
Actual $1,000 $1,052.80 $10.35
- ------------------------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,015.12 $10.16
- ------------------------------------------------------------------------------------------------------------------------
CLASS C
- ------------------------------------------------------------------------------------------------------------------------
Actual $1,000 $1,052.80 $10.30
- ------------------------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,017.64 $10.11
- ------------------------------------------------------------------------------------------------------------------------
CLASS R
- ------------------------------------------------------------------------------------------------------------------------
Actual $1,000 $1,054.60 $7.77
- ------------------------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,017.64 $7.63
- ------------------------------------------------------------------------------------------------------------------------
ADVISOR CLASS
- ------------------------------------------------------------------------------------------------------------------------
Actual $1,000 $1,057.50 $5.19
- ------------------------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,020.16 $5.09
- ------------------------------------------------------------------------------------------------------------------------
* Expenses are equal to the annualized expense ratio for each class (A:
1.35%; B: 2.00%; C: 1.99%; R: 1.50% and Advisor: 1.00%), multiplied by the
average account value over the period, multiplied by 184/365 to reflect
the one-half year period.
24 | Annual Report
Franklin MicroCap Value Fund
YOUR FUND'S GOAL AND MAIN INVESTMENTS: Franklin MicroCap Value Fund seeks high
total return, of which capital appreciation and income are components, by
investing at least 80% of its net assets in securities of companies with market
capitalizations under $400 million at the time of purchase, which we believe are
undervalued in the marketplace.
- --------------------------------------------------------------------------------
PERFORMANCE DATA REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE FUTURE
RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU MAY HAVE
A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY DIFFER FROM
FIGURES SHOWN. PLEASE VISIT FRANKLINTEMPLETON.COM OR CALL 1-800/342-5236 FOR
MOST RECENT MONTH-END PERFORMANCE.
- --------------------------------------------------------------------------------
This annual report for Franklin MicroCap Value Fund covers the fiscal year ended
October 31, 2006.
PERFORMANCE OVERVIEW
Franklin MicroCap Value Fund - Class A posted a +17.25% cumulative total return
for the 12 months under review. The Fund underperformed its benchmark, the
Russell 2000 Value Index, which posted a +22.90% total return for the same
period.1 Please note the Fund employs a bottom-up stock selection process and we
invest in securities without regard to benchmark comparisons. Although this
report covers a 12-month period, our investment strategy aims for long-term
results. You can find the Fund's long-term performance data in the Performance
Summary beginning on page 29.
1. Source: Standard & Poor's Micropal. The Russell 2000 Value Index is market
capitalization weighted and measures performance of those Russell 2000
Index companies with lower price-to-book ratios and lower forecasted
growth values. The index is unmanaged and includes reinvested dividends.
One cannot invest directly in an index, nor is an index representative of
the Fund's portfolio.
THE DOLLAR VALUE, NUMBER OF SHARES OR PRINCIPAL AMOUNT, AND NAMES OF ALL
PORTFOLIO HOLDINGS ARE LISTED IN THE FUND'S STATEMENT OF INVESTMENTS (SOI). THE
SOI BEGINS ON PAGE 73.
Annual Report | 25
PORTFOLIO BREAKDOWN
Franklin MicroCap Value Fund
Based on Total Net Assets as of 10/31/06
[THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.]
Producer Manufacturing 17.7%
Consumer Non-Durables 15.1%
Industrial Services 6.0%
Property-Casualty Insurance 5.8%
Process Industries 4.9%
Retail Trade 4.7%
Consumer Durables 3.8%
Non-Energy Minerals 3.5%
Transportation 3.5%
Savings Banks 2.6%
Real Estate Development 2.5%
Health Services 2.2%
Communications 2.2%
Other 8.0%
Short-Term Investments & Other Net Assets 17.5%
INVESTMENT STRATEGY
Our strategy is to buy shares of financially sound, well-established companies
at a low price-to-book value, where we have reasonable confidence that book
value will increase over several years. We limit purchases to companies with
market capitalizations of less than $400 million, which we define as
"micro-cap." Book value per share is a company's net worth or shareholders'
equity on an accounting or "book" basis, divided by shares outstanding. This
strategy is not aimed at short-term trading gains, nor do we consider the
composition of any index. Rather, we try to identify individual companies that
meet our investment criteria, and we assume at purchase that we will hold the
positions for several years.
MANAGER'S DISCUSSION
On October 31, 2006, the Fund's total net assets were $480 million, and
short-term investments and other net assets (cash) stood at 17.5%, compared with
total net assets of $443 million and 17.9% in cash at the beginning of the
period. The Fund closed to new investors (with the exception of select
retirement accounts) in January 2004. The close does not restrict existing
shareholders from continuing to invest through exchanges and additional
purchases, including purchases made through reinvestment of dividends and
capital gains distributions, except that if an account is reduced to zero it may
not be reopened unless the Fund reopens. Net Fund outflows to existing
shareholders were $33.2 million during the 12-month period.
We identified eight new investment opportunities during the year: Burnham
Holdings, a manufacturer of boilers, furnaces, radiators and air conditioning
systems; Cobra Electronics, a designer of radar and laser detectors, GPS
navigational systems and two-way radios; Intertape Polymer Group, a plastic
packaging supplier; John B. Sanfilippo & Son, a processor and distributor of
tree nuts; P&F Industries, a manufacturer and importer of tools and building
products; Schweitzer-Mauduit International, a producer of specialty papers and
reconstituted tobacco leaf; Summa Industries, a manufacturer of plastic
components for lighting, food processing and irrigation; and Tecumseh Products,
a manufacturer of compressors, engines and motors. We also added to several
existing positions, including Baldwin & Lyons, Bresler & Reiner, Central Steel &
Wire, Flexsteel Industries, Handleman, Proliance International, and Tandy Brands
Accessories. Cash deployed into new and existing holdings totaled $25.2 million.
26 | Annual Report
Proceeds from portfolio sales totaled $64.0 million. We reduced several
positions in response to price appreciation. We also recognized losses in three
food-related investments: American Italian Pasta, which we eliminated
completely; CoolBrands International, in which we retained a small position at
year-end; and Fresh Brands, which was bought out in a cash merger at a price
below our cost. Haggar and Summa Industries were also sold in cash mergers, on
favorable terms. Allen Organ embarked on an orderly liquidation, on favorable
terms, in which we retained a position in a liquidating trust. All these
investments were made in accordance with our stated investment strategy and the
results, apart from those three highlighted above, were generally consistent
with our expectations.
Positions that contributed most positively to Fund performance for the fiscal
year included metal processors Aleris International, RTI International Metals
and Insteel Industries. Other contributors included Alliance One International
(leaf tobacco), Atlantic Tele-Network (telecommunications), Brown Shoe
(footwear), Duckwall-ALCO Stores (retail), Healthcare Services Group
(housekeeping, maintenance and food services to health care facilities), Layne
Christensen (water, mineral and coal seam gas drilling) and Seneca Foods (canned
vegetables). Aleris was subject to a cash takeover bid, as were Case Pomeroy,
Fresh Brands, Green Mountain Power, Premium Standard Farms and Summa Industries.
Holding periods tend to be long in our Fund, as reflected by our portfolio
turnover rate, and performance tends not to be driven by recently established
positions.
Alliance One, one of this year's best contributors to Fund performance, was last
year's worst detractor. This year's worst detractors include CoolBrands
International, which has struggled to replace volumes lost when Weight Watchers
revoked its licensing agreement to produce Smart Ones frozen desserts. Shares of
New Orleans-based International Shipholding declined after hurricane damage
disrupted its specialized transport operations. Hardinge disappointed investors
with weaker-than-expected earnings despite improved end markets for its machine
tools.
TOP 10 EQUITY HOLDINGS
Franklin MicroCap Value Fund
10/31/06
- --------------------------------------------------------------------------------
COMPANY % OF TOTAL
SECTOR/INDUSTRY NET ASSETS
- --------------------------------------------------------------------------------
RTI International Metals Inc. 3.0%
PRODUCER MANUFACTURING
- --------------------------------------------------------------------------------
Premium Standard Farms Inc. 2.8%
CONSUMER NON-DURABLES
- --------------------------------------------------------------------------------
Hardinge Inc. 2.8%
PRODUCER MANUFACTURING
- --------------------------------------------------------------------------------
PHI Inc. 2.7%
INDUSTRIAL SERVICES
- --------------------------------------------------------------------------------
Aleris International Inc. 2.7%
NON-ENERGY MINERALS
- --------------------------------------------------------------------------------
Delta Apparel Inc. 2.6%
CONSUMER NON-DURABLES
- --------------------------------------------------------------------------------
Layne Christensen Co. 2.3%
INDUSTRIAL SERVICES
- --------------------------------------------------------------------------------
Healthcare Services Group Inc. 2.2%
HEALTH SERVICES
- --------------------------------------------------------------------------------
Alliance One International Inc. 2.2%
CONSUMER NON-DURABLES
- --------------------------------------------------------------------------------
Seneca Foods Corp. 2.0%
CONSUMER NON-DURABLES
- --------------------------------------------------------------------------------
Annual Report | 27
Thank you for your continued participation in Franklin MicroCap Value Fund. We
look forward to serving your future investment needs.
[PHOTO OMITTED] /s/ Bruce C. Baughman
Bruce C. Baughman, CPA
Lead Portfolio Manager
William J. Lippman
Donald G. Taylor, CPA
Margaret McGee
Portfolio Management Team
Franklin MicroCap Value Fund
THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS
AS OF OCTOBER 31, 2006, THE END OF THE REPORTING PERIOD. THE WAY WE IMPLEMENT
OUR MAIN INVESTMENT STRATEGIES AND THE RESULTING PORTFOLIO HOLDINGS MAY CHANGE
DEPENDING ON FACTORS SUCH AS MARKET AND ECONOMIC CONDITIONS. THESE OPINIONS MAY
NOT BE RELIED UPON AS INVESTMENT ADVICE OR AN OFFER FOR A PARTICULAR SECURITY.
THE INFORMATION IS NOT A COMPLETE ANALYSIS OF EVERY ASPECT OF ANY MARKET,
COUNTRY, INDUSTRY, SECURITY OR THE FUND. STATEMENTS OF FACT ARE FROM SOURCES
CONSIDERED RELIABLE, BUT THE INVESTMENT MANAGER MAKES NO REPRESENTATION OR
WARRANTY AS TO THEIR COMPLETENESS OR ACCURACY. ALTHOUGH HISTORICAL PERFORMANCE
IS NO GUARANTEE OF FUTURE RESULTS, THESE INSIGHTS MAY HELP YOU UNDERSTAND OUR
INVESTMENT MANAGEMENT PHILOSOPHY.
28 | Annual Report
Performance Summary as of 10/31/06
FRANKLIN MICROCAP VALUE FUND
Your dividend income will vary depending on dividends or interest paid by
securities in the Fund's portfolio, adjusted for operating expenses of each
class. Capital gain distributions are net profits realized from the sale of
portfolio securities. The performance table and graphs do not reflect any taxes
that a shareholder would pay on Fund dividends, capital gain distributions, if
any, or any realized gains on the sale of Fund shares. Total return reflects
reinvestment of the Fund's dividends and capital gain distributions, if any, and
any unrealized gains or losses.
PRICE AND DISTRIBUTION INFORMATION
- ----------------------------------------------------------------------------------------------------------------------
CLASS A (SYMBOL: FRMCX) CHANGE 10/31/06 10/31/05
- ----------------------------------------------------------------------------------------------------------------------
Net Asset Value (NAV) +$3.17 $41.32 $38.15
- ----------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS (11/1/05-10/31/06)
- ----------------------------------------------------------------------------------------------------------------------
Dividend Income $0.1899
- ----------------------------------------------------------------------------------------------------------------------
Short-Term Capital Gain $0.1954
- ----------------------------------------------------------------------------------------------------------------------
Long-Term Capital Gain $2.6554
- ----------------------------------------------------------------------------------------------------------------------
TOTAL $3.0407
- ----------------------------------------------------------------------------------------------------------------------
ADVISOR CLASS (SYMBOL: N/A) CHANGE 10/31/06 11/1/05
- ----------------------------------------------------------------------------------------------------------------------
Net Asset Value (NAV) +$3.15 $41.43 $38.28
- ----------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS (11/1/05-10/31/06)
- ----------------------------------------------------------------------------------------------------------------------
Dividend Income $0.1899
- ----------------------------------------------------------------------------------------------------------------------
Short-Term Capital Gain $0.1954
- ----------------------------------------------------------------------------------------------------------------------
Long-Term Capital Gain $2.6554
- ----------------------------------------------------------------------------------------------------------------------
TOTAL $3.0407
- ----------------------------------------------------------------------------------------------------------------------
PERFORMANCE
CUMULATIVE TOTAL RETURN EXCLUDES SALES CHARGES. AVERAGE ANNUAL TOTAL RETURNS AND
VALUE OF $10,000 INVESTMENT INCLUDE MAXIMUM SALES CHARGES. CLASS A: 5.75%
MAXIMUM INITIAL SALES CHARGE; ADVISOR CLASS: NO SALES CHARGES. THE FUND MAY
CHARGE A 2% FEE ON REDEMPTIONS MADE WITHIN SEVEN DAYS OF PURCHASE.
- ----------------------------------------------------------------------------------------------------------------------
CLASS A 1-YEAR 5-YEAR 10-YEAR
- ----------------------------------------------------------------------------------------------------------------------
Cumulative Total Return 1 +17.25% +117.26% +289.45%
- ----------------------------------------------------------------------------------------------------------------------
Average Annual Total Return 2 +10.50% +15.42% +13.89%
- ----------------------------------------------------------------------------------------------------------------------
Value of $10,000 Investment 3 $11,050 $20,480 $36,715
- ----------------------------------------------------------------------------------------------------------------------
Avg. Ann. Total Return (9/30/06) 4 +5.94% +15.65% +13.77%
- ----------------------------------------------------------------------------------------------------------------------
ADVISOR CLASS 5 1-YEAR 5-YEAR 10-YEAR
- ----------------------------------------------------------------------------------------------------------------------
Cumulative Total Return 1 +17.56% +117.83% +290.48%
- ----------------------------------------------------------------------------------------------------------------------
Average Annual Total Return 2 +17.56% +16.85% +14.59%
- ----------------------------------------------------------------------------------------------------------------------
Value of $10,000 Investment 3 $11,756 $21,783 $39,048
- ----------------------------------------------------------------------------------------------------------------------
Avg. Ann. Total Return (9/30/06) 4 +12.68% +17.08% +14.48%
- ----------------------------------------------------------------------------------------------------------------------
PERFORMANCE DATA REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE FUTURE
RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU MAY HAVE
A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY DIFFER FROM
FIGURES SHOWN.
FOR MOST RECENT MONTH-END PERFORMANCE, SEE "FUNDS AND PERFORMANCE" AT
FRANKLINTEMPLETON.COM OR CALL 1-800/342-5236.
Annual Report | 29
Performance Summary (CONTINUED)
TOTAL RETURN INDEX COMPARISON FOR HYPOTHETICAL $10,000 INVESTMENT
Total return represents the change in value of an investment over the periods
shown. It includes any current maximum sales charge, Fund expenses, account fees
and reinvested distributions. The unmanaged index includes reinvestment of any
income or distributions. It differs from the Fund in composition and does not
pay management fees or expenses. One cannot invest directly in an index.
AVERAGE ANNUAL TOTAL RETURN
- ---------------------------------------------
CLASS A 10/31/06
- ---------------------------------------------
1-Year +10.50%
- ---------------------------------------------
5-Year +15.42%
- ---------------------------------------------
10-Year +13.89%
- ---------------------------------------------
CLASS A (11/1/96-10/31/06)
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL.]
Franklin Microcap Russell 2000
Date Value Fund Value Index 6 CPI 6
- --------------------------------------------------------------------------------
11/1/1996 $9,427 $10,000 $10,000
11/30/1996 $9,739 $10,538 $10,019
12/31/1996 $9,828 $10,880 $10,019
1/31/1997 $10,122 $11,047 $10,051
2/28/1997 $10,300 $11,152 $10,082
3/31/1997 $10,101 $10,853 $10,107
4/30/1997 $9,870 $11,013 $10,120
5/31/1997 $10,446 $11,890 $10,114
6/30/1997 $10,976 $12,491 $10,126
7/31/1997 $11,380 $13,016 $10,139
8/31/1997 $11,699 $13,222 $10,158
9/30/1997 $12,847 $14,101 $10,183
10/31/1997 $12,732 $13,718 $10,208
11/30/1997 $12,632 $13,868 $10,202
12/31/1997 $12,552 $14,338 $10,190
1/31/1998 $12,434 $14,079 $10,208
2/28/1998 $12,994 $14,930 $10,227
3/31/1998 $13,682 $15,536 $10,246
4/30/1998 $14,325 $15,612 $10,265
5/31/1998 $14,112 $15,060 $10,284
6/30/1998 $13,732 $14,975 $10,297
7/31/1998 $13,212 $13,802 $10,310
8/31/1998 $11,226 $11,640 $10,322
9/30/1998 $11,204 $12,298 $10,335
10/31/1998 $11,338 $12,663 $10,360
11/30/1998 $11,657 $13,006 $10,360
12/31/1998 $11,704 $13,413 $10,354
1/31/1999 $11,807 $13,109 $10,379
2/28/1999 $11,225 $12,214 $10,392
3/31/1999 $10,831 $12,113 $10,423
4/30/1999 $11,467 $13,219 $10,499
5/31/1999 $12,043 $13,625 $10,499
6/30/1999 $12,310 $14,119 $10,499
7/31/1999 $12,467 $13,784 $10,531
8/31/1999 $12,176 $13,280 $10,556
9/30/1999 $11,334 $13,014 $10,606
10/31/1999 $11,158 $12,754 $10,625
11/30/1999 $11,271 $12,820 $10,632
12/31/1999 $11,238 $13,214 $10,632
1/31/2000 $11,660 $12,868 $10,663
2/29/2000 $11,838 $13,655 $10,726
3/31/2000 $11,930 $13,719 $10,815
4/30/2000 $11,495 $13,800 $10,821
5/31/2000 $11,554 $13,589 $10,834
6/30/2000 $11,983 $13,986 $10,891
7/31/2000 $12,128 $14,453 $10,916
8/31/2000 $12,866 $15,099 $10,916
9/30/2000 $12,833 $15,013 $10,973
10/31/2000 $12,444 $14,960 $10,992
11/30/2000 $12,227 $14,655 $10,998
12/31/2000 $12,594 $16,230 $10,992
1/31/2001 $13,739 $16,678 $11,061
2/28/2001 $14,082 $16,655 $11,105
3/31/2001 $14,664 $16,388 $11,131
4/30/2001 $15,391 $17,146 $11,175
5/31/2001 $16,796 $17,587 $11,226
6/30/2001 $16,934 $18,295 $11,244
7/31/2001 $17,331 $17,885 $11,213
8/31/2001 $17,379 $17,823 $11,213
9/30/2001 $16,337 $15,855 $11,263
10/31/2001 $16,899 $16,269 $11,226
11/30/2001 $16,940 $17,438 $11,207
12/31/2001 $17,792 $18,506 $11,162
1/31/2002 $18,289 $18,752 $11,188
2/28/2002 $18,398 $18,866 $11,232
3/31/2002 $19,407 $20,279 $11,295
4/30/2002 $20,258 $20,992 $11,358
5/31/2002 $20,510 $20,298 $11,358
6/30/2002 $20,344 $19,849 $11,364
7/31/2002 $18,412 $16,900 $11,377
8/31/2002 $18,304 $16,825 $11,415
9/30/2002 $17,353 $15,623 $11,434
10/31/2002 $17,367 $15,858 $11,453
11/30/2002 $18,247 $17,123 $11,453
12/31/2002 $18,505 $16,392 $11,428
1/31/2003 $18,398 $15,930 $11,478
2/28/2003 $17,641 $15,395 $11,567
3/31/2003 $17,557 $15,559 $11,636
4/30/2003 $17,932 $17,037 $11,611
5/31/2003 $18,918 $18,776 $11,592
6/30/2003 $19,667 $19,095 $11,605
7/31/2003 $20,700 $20,047 $11,617
8/31/2003 $21,541 $20,808 $11,661
9/30/2003 $21,832 $20,570 $11,699
10/31/2003 $23,254 $22,247 $11,687
11/30/2003 $24,164 $23,101 $11,655
12/31/2003 $25,245 $23,936 $11,642
1/31/2004 $25,596 $24,764 $11,699
2/29/2004 $25,713 $25,243 $11,762
3/31/2004 $26,540 $25,593 $11,838
4/30/2004 $26,267 $24,269 $11,876
5/31/2004 $26,275 $24,562 $11,946
6/30/2004 $27,070 $25,809 $11,984
7/31/2004 $26,556 $24,623 $11,965
8/31/2004 $26,236 $24,865 $11,971
9/30/2004 $26,766 $25,848 $11,996
10/31/2004 $26,891 $26,250 $12,059
11/30/2004 $28,630 $28,579 $12,066
12/31/2004 $29,287 $29,261 $12,021
1/31/2005 $29,238 $28,129 $12,047
2/28/2005 $30,124 $28,688 $12,116
3/31/2005 $29,427 $28,097 $12,211
4/30/2005 $28,737 $26,648 $12,293
5/31/2005 $29,312 $28,273 $12,280
6/30/2005 $30,059 $29,523 $12,287
7/31/2005 $31,963 $31,203 $12,344
8/31/2005 $31,700 $30,487 $12,407
9/30/2005 $31,897 $30,436 $12,558
10/31/2005 $31,315 $29,672 $12,584
11/30/2005 $32,152 $30,876 $12,483
12/31/2005 $32,868 $30,638 $12,432
1/31/2006 $34,529 $33,172 $12,527
2/28/2006 $34,609 $33,170 $12,552
3/31/2006 $36,698 $34,776 $12,622
4/30/2006 $36,493 $34,869 $12,729
5/31/2006 $36,058 $33,425 $12,792
6/30/2006 $35,960 $33,836 $12,817
7/31/2006 $35,027 $33,367 $12,855
8/31/2006 $35,525 $34,364 $12,881
9/30/2006 $35,853 $34,700 $12,817
10/31/2006 $36,715 $36,466 $12,748
AVERAGE ANNUAL TOTAL RETURN
- -----------------------------------------------
ADVISOR CLASS 5 10/31/06
- -----------------------------------------------
1-Year +17.56%
- -----------------------------------------------
5-Year +16.85%
- -----------------------------------------------
10-Year +14.59%
- -----------------------------------------------
ADVISOR CLASS (11/1/96-10/31/06) 5
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL.]
Franklin Microcap Russell 2000
Date Value Fund Value Index 6 CPI 6
- --------------------------------------------------------------------------------
11/1/1996 $10,000 $10,000 $10,000
11/30/1996 $10,331 $10,538 $10,019
12/31/1996 $10,425 $10,880 $10,019
1/31/1997 $10,736 $11,047 $10,051
2/28/1997 $10,925 $11,152 $10,082
3/31/1997 $10,714 $10,853 $10,107
4/30/1997 $10,469 $11,013 $10,120
5/31/1997 $11,081 $11,890 $10,114
6/30/1997 $11,643 $12,491 $10,126
7/31/1997 $12,071 $13,016 $10,139
8/31/1997 $12,410 $13,222 $10,158
9/30/1997 $13,627 $14,101 $10,183
10/31/1997 $13,505 $13,718 $10,208
11/30/1997 $13,399 $13,868 $10,202
12/31/1997 $13,313 $14,338 $10,190
1/31/1998 $13,190 $14,079 $10,208
2/28/1998 $13,782 $14,930 $10,227
3/31/1998 $14,512 $15,536 $10,246
4/30/1998 $15,194 $15,612 $10,265
5/31/1998 $14,969 $15,060 $10,284
6/30/1998 $14,566 $14,975 $10,297
7/31/1998 $14,014 $13,802 $10,310
8/31/1998 $11,907 $11,640 $10,322
9/30/1998 $11,884 $12,298 $10,335
10/31/1998 $12,026 $12,663 $10,360
11/30/1998 $12,364 $13,006 $10,360
12/31/1998 $12,414 $13,413 $10,354
1/31/1999 $12,523 $13,109 $10,379
2/28/1999 $11,906 $12,214 $10,392
3/31/1999 $11,488 $12,113 $10,423
4/30/1999 $12,164 $13,219 $10,499
5/31/1999 $12,774 $13,625 $10,499
6/30/1999 $13,057 $14,119 $10,499
7/31/1999 $13,224 $13,784 $10,531
8/31/1999 $12,916 $13,280 $10,556
9/30/1999 $12,022 $13,014 $10,606
10/31/1999 $11,836 $12,754 $10,625
11/30/1999 $11,955 $12,820 $10,632
12/31/1999 $11,921 $13,214 $10,632
1/31/2000 $12,368 $12,868 $10,663
2/29/2000 $12,556 $13,655 $10,726
3/31/2000 $12,654 $13,719 $10,815
4/30/2000 $12,192 $13,800 $10,821
5/31/2000 $12,256 $13,589 $10,834
6/30/2000 $12,710 $13,986 $10,891
7/31/2000 $12,864 $14,453 $10,916
8/31/2000 $13,647 $15,099 $10,916
9/30/2000 $13,612 $15,013 $10,973
10/31/2000 $13,200 $14,960 $10,992
11/30/2000 $12,969 $14,655 $10,998
12/31/2000 $13,358 $16,230 $10,992
1/31/2001 $14,573 $16,678 $11,061
2/28/2001 $14,937 $16,655 $11,105
3/31/2001 $15,554 $16,388 $11,131
4/30/2001 $16,326 $17,146 $11,175
5/31/2001 $17,816 $17,587 $11,226
6/30/2001 $17,961 $18,295 $11,244
7/31/2001 $18,383 $17,885 $11,213
8/31/2001 $18,435 $17,823 $11,213
9/30/2001 $17,329 $15,855 $11,263
10/31/2001 $17,925 $16,269 $11,226
11/30/2001 $17,969 $17,438 $11,207
12/31/2001 $18,872 $18,506 $11,162
1/31/2002 $19,400 $18,752 $11,188
2/28/2002 $19,515 $18,866 $11,232
3/31/2002 $20,586 $20,279 $11,295
4/30/2002 $21,488 $20,992 $11,358
5/31/2002 $21,755 $20,298 $11,358
6/30/2002 $21,580 $19,849 $11,364
7/31/2002 $19,530 $16,900 $11,377
8/31/2002 $19,416 $16,825 $11,415
9/30/2002 $18,406 $15,623 $11,434
10/31/2002 $18,421 $15,858 $11,453
11/30/2002 $19,354 $17,123 $11,453
12/31/2002 $19,629 $16,392 $11,428
1/31/2003 $19,515 $15,930 $11,478
2/28/2003 $18,713 $15,395 $11,567
3/31/2003 $18,623 $15,559 $11,636
4/30/2003 $19,020 $17,037 $11,611
5/31/2003 $20,066 $18,776 $11,592
6/30/2003 $20,861 $19,095 $11,605
7/31/2003 $21,957 $20,047 $11,617
8/31/2003 $22,849 $20,808 $11,661
9/30/2003 $23,156 $20,570 $11,699
10/31/2003 $24,666 $22,247 $11,687
11/30/2003 $25,630 $23,101 $11,655
12/31/2003 $26,778 $23,936 $11,642
1/31/2004 $27,151 $24,764 $11,699
2/29/2004 $27,274 $25,243 $11,762
3/31/2004 $28,151 $25,593 $11,838
4/30/2004 $27,862 $24,269 $11,876
5/31/2004 $27,870 $24,562 $11,946
6/30/2004 $28,714 $25,809 $11,984
7/31/2004 $28,167 $24,623 $11,965
8/31/2004 $27,828 $24,865 $11,971
9/30/2004 $28,391 $25,848 $11,996
10/31/2004 $28,524 $26,250 $12,059
11/30/2004 $30,368 $28,579 $12,066
12/31/2004 $31,064 $29,261 $12,021
1/31/2005 $31,012 $28,129 $12,047
2/28/2005 $31,952 $28,688 $12,116
3/31/2005 $31,211 $28,097 $12,211
4/30/2005 $30,480 $26,648 $12,293
5/31/2005 $31,089 $28,273 $12,280
6/30/2005 $31,882 $29,523 $12,287
7/31/2005 $33,902 $31,203 $12,344
8/31/2005 $33,623 $30,487 $12,407
9/30/2005 $33,832 $30,436 $12,558
10/31/2005 $33,214 $29,672 $12,584
11/30/2005 $34,110 $30,876 $12,483
12/31/2005 $34,878 $30,638 $12,432
1/31/2006 $36,641 $33,172 $12,527
2/28/2006 $36,734 $33,170 $12,552
3/31/2006 $38,968 $34,776 $12,622
4/30/2006 $38,761 $34,869 $12,729
5/31/2006 $38,299 $33,425 $12,792
6/30/2006 $38,204 $33,836 $12,817
7/31/2006 $37,225 $33,367 $12,855
8/31/2006 $37,762 $34,364 $12,881
9/30/2006 $38,120 $34,700 $12,817
10/31/2006 $39,048 $36,466 $12,748
30 | Annual Report
Performance Summary (CONTINUED)
ENDNOTES
THE FUND'S INVESTMENTS IN SMALLER-COMPANY SECURITIES THAT MAY HAVE LIMITED
LIQUIDITY ALSO MAY INVOLVE RISKS RELATED TO RELATIVELY SMALL REVENUES, LIMITED
PRODUCT LINES AND SMALL MARKET SHARE. HISTORICALLY, THESE SECURITIES HAVE
EXHIBITED GREATER PRICE VOLATILITY THAN LARGER-COMPANY STOCKS, ESPECIALLY OVER
THE SHORT TERM. THE FUND'S PROSPECTUS ALSO INCLUDES A DESCRIPTION OF THE MAIN
INVESTMENT RISKS.
CLASS A: Prior to 8/3/98, these shares were offered at a lower initial
sales charge; thus actual total returns may differ.
ADVISOR CLASS: Shares are available to certain eligible investors as
described in the prospectus.
1. Cumulative total return represents the change in value of an investment
over the periods indicated.
2. Average annual total return represents the average annual change in value
of an investment over the periods indicated.
3. These figures represent the value of a hypothetical $10,000 investment in
the Fund over the periods indicated.
4. In accordance with SEC rules, we provide standardized average annual total
return information through the latest calendar quarter.
5. Effective 11/1/05, the Fund began offering Advisor Class shares, which do
not have sales charges or a Rule 12b-1 plan. Performance quotations for
this class reflect the following methods of calculation: (a) For periods
prior to 11/1/05, a restated figure is used based upon the Fund's Class A
performance, excluding the effect of Class A's maximum initial sales
charge, but reflecting the effect of the Class A Rule 12b-1 fees; and (b)
for periods after 10/31/05, actual Advisor Class performance is used
reflecting all charges and fees applicable to that class. Since 11/1/05
(commencement of sales), the cumulative total return of Advisor Class
shares was +17.16%.
6. Source: Standard & Poor's Micropal. The Russell 2000 Value Index is market
capitalization weighted and measures performance of those Russell 2000
Index companies with lower price-to-book ratios and lower forecasted
growth values. The Consumer Price Index (CPI), calculated by the U.S.
Bureau of Labor Statistics, is a commonly used measure of the inflation
rate.
Annual Report | 31
Your Fund's Expenses
FRANKLIN MICROCAP VALUE FUND
As a Fund shareholder, you can incur two types of costs:
o Transaction costs, including sales charges (loads) on Fund purchases and
redemption fees; and
o Ongoing Fund costs, including management fees, distribution and service
(12b-1) fees, and other Fund expenses. All mutual funds have ongoing
costs, sometimes referred to as operating expenses.
The following table shows ongoing costs of investing in the Fund and can help
you understand these costs and compare them with those of other mutual funds.
The table assumes a $1,000 investment held for the six months indicated.
ACTUAL FUND EXPENSES
The first line (Actual) for each share class listed in the table provides actual
account values and expenses. The "Ending Account Value" is derived from the
Fund's actual return, which includes the effect of Fund expenses.
You can estimate the expenses you paid during the period by following these
steps. OF COURSE, YOUR ACCOUNT VALUE AND EXPENSES WILL DIFFER FROM THOSE IN THIS
ILLUSTRATION:
1. Divide your account value by $1,000.
IF AN ACCOUNT HAD AN $8,600 VALUE, THEN $8,600 / $1,000 = 8.6.
2. Multiply the result by the number under the heading "Expenses Paid During
Period."
IF EXPENSES PAID DURING PERIOD WERE $7.50, THEN 8.6 X $7.50 = $64.50.
In this illustration, the estimated expenses paid this period are $64.50.
HYPOTHETICAL EXAMPLE FOR COMPARISON WITH OTHER FUNDS
Information in the second line (Hypothetical) for each class in the table can
help you compare ongoing costs of investing in the Fund with those of other
mutual funds. This information may not be used to estimate the actual ending
account balance or expenses you paid during the period. The hypothetical "Ending
Account Value" is based on the actual expense ratio for each class and an
assumed 5% annual rate of return before expenses, which does not represent the
Fund's actual return. The figure under the heading "Expenses Paid During Period"
shows the hypothetical expenses your account would have incurred under this
scenario. You can compare this figure with the 5% hypothetical examples that
appear in shareholder reports of other funds.
32 | Annual Report
Your Fund's Expenses (CONTINUED)
PLEASE NOTE THAT EXPENSES SHOWN IN THE TABLE ARE MEANT TO HIGHLIGHT ONGOING
COSTS AND DO NOT REFLECT ANY TRANSACTION COSTS, SUCH AS SALES CHARGES OR
REDEMPTION FEES. Therefore, the second line for each class is useful in
comparing ongoing costs only, and will not help you compare total costs of
owning different funds. In addition, if transaction costs were included, your
total costs would have been higher. Please refer to the Fund prospectus for
additional information on operating expenses.
- -------------------------------------------------------------------------------------------------------------------------
BEGINNING ACCOUNT ENDING ACCOUNT EXPENSES PAID DURING
CLASS A VALUE 5/1/06 VALUE 10/31/06 PERIOD* 5/1/06-10/31/06
- -------------------------------------------------------------------------------------------------------------------------
Actual $1,000 $1,006.10 $5.51
- -------------------------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,019.71 $5.55
- -------------------------------------------------------------------------------------------------------------------------
ADVISOR CLASS
- -------------------------------------------------------------------------------------------------------------------------
Actual $1,000 $1,007.30 $4.30
- -------------------------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,020.92 $4.33
- -------------------------------------------------------------------------------------------------------------------------
* Expenses are equal to the annualized expense ratio for each class (A:
1.09% and Advisor: 0.85%) multiplied by the average account value over the
period, multiplied by 184/365 to reflect the one-half year period.
Annual Report | 33
Franklin MidCap Value Fund
YOUR FUND'S GOAL AND MAIN INVESTMENTS: Franklin MidCap Value Fund seeks
long-term total return by investing at least 80% of net assets in securities of
mid-capitalization companies that we believe are undervalued. We define
mid-capitalization companies as those with market capitalizations that are
similar in size, at the time of purchase, to those in the Russell MidcapTM
Index. 1
- --------------------------------------------------------------------------------
PERFORMANCE DATA REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE FUTURE
RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU MAY HAVE
A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY DIFFER FROM
FIGURES SHOWN. PLEASE VISIT FRANKLINTEMPLETON.COM OR CALL 1-800/342-5236 FOR
MOST RECENT MONTH-END PERFORMANCE.
- --------------------------------------------------------------------------------
This annual report for Franklin MidCap Value Fund covers the fiscal year ended
October 31, 2006.
PERFORMANCE OVERVIEW
Franklin MidCap Value Fund - Class A posted a +16.70% cumulative total return
for the 12 months under review. The Fund underperformed its benchmark, the
Russell Midcap Value Index, which posted a +20.51% total return for the same
period.2 Please note the Fund employs a bottom-up stock selection process and we
invest in securities without regard to benchmark comparisons. Although this
report covers a 12-month period, our investment strategy aims for long-term
results. You can find more of the Fund's performance data in the Performance
Summary beginning on page 37.
INVESTMENT STRATEGY
Our goal is to invest in mid-capitalization companies that we determine are
currently undervalued. The Fund purchases stocks that are out of favor in the
market for reasons we believe will prove to be temporary in nature. In addition,
the Fund will invest in companies with valuable intangibles not reflected in the
stock price. This strategy is not aimed at short-term trading gains, nor do we
consider the composition of any index. Rather, we try to identify attractively
priced, financially sound companies that meet our investment criteria, and we
assume at purchase that we will hold the positions for several years.
1. The Russell Midcap Index is market capitalization weighted and measures
performance of the 800 smallest companies in the Russell 1000 Index, which
represent approximately 26% of total market capitalization of the Russell
1000 Index.
2. Source: Standard & Poor's Micropal. The Russell Midcap Value Index is
market capitalization weighted and measures performance of those Russell
Midcap Index companies with lower price-to-book ratios and lower
forecasted growth values. The index is unmanaged and includes reinvested
dividends. One cannot invest directly in an index, nor is an index
representative of the Fund's portfolio.
THE DOLLAR VALUE, NUMBER OF SHARES OR PRINCIPAL AMOUNT, AND NAMES OF ALL
PORTFOLIO HOLDINGS ARE LISTED IN THE FUND'S STATEMENT OF INVESTMENTS (SOI). THE
SOI BEGINS ON PAGE 81.
34 | Annual Report
MANAGER'S DISCUSSION
During the year under review, stocks that contributed to Fund performance came
from a variety of sectors. Clothing retailer American Eagle Outfitters benefited
from a sales recovery. The company's shares were up 123% while we held them from
December 2005 to September 2006 and were the Fund's biggest contributor to
performance. In the process industries sector, pulp and paper producer
Georgia-Pacific was another strong performer. The company was acquired by
privately held Koch Industries in December 2005 at a 48% premium to
Georgia-Pacific's stock price at the beginning of the reporting period. Within
the producer manufacturing sector, Swedish car safety company Autoliv benefited
from aggressive cost reduction initiatives and market expansion, and its shares
rose 36% in value during the period.
Despite the Fund's positive return, holdings from various sectors hindered
performance. In particular, lackluster performance from some positions in the
consumer durables sector detracted from Fund performance. Shares of M.D.C.
Holdings, a geographically diversified homebuilder, fell 26% during the period
amid widespread home sales declines and disappointing earnings. Watson
Pharmaceuticals shares fell after the company announced in March its agreement
to purchase Andrx. For the reporting period, Watson's share price declined 22%.
Shares of discount retailer Dollar General declined 27% in value in an
environment of high gas prices, which had a negative effect on consumers'
disposable income.
The Fund experienced substantial net inflows during its fiscal year. Consistent
with our investment strategy, we used incoming cash to add to existing holdings,
as well as initiate positions in 15 stocks we believed were attractively valued.
Our new positions were in American Eagle Outfitters (sold by period-end),
natural gas distributor Atmos Energy, food and beverage company Dean Foods,
diversified utility company DTE Energy, Brazilian aircraft developer and
manufacturer Embraer-Empresa Bras de Aeronautica, pain medication developer Endo
Pharmaceuticals Holdings, home products manufacturer Fortune Brands, publisher
Gannett, marine contractor Helix Energy Solutions Group, confectioner The
Hershey Company, investment firm KKR Private Equity Investors, health care
services provider LifePoint Hospitals, coal company Peabody Energy, military and
commercial services company SAIC, and tool manufacturer The Stanley Works.
We liquidated six positions during the period. One resulted from the
Georgia-Pacific buyout by Koch Industries. Consistent with our investment
strategy, we sold the other five positions because we believed they were fully
valued.
PORTFOLIO BREAKDOWN
Franklin MidCap Value Fund
Based on Total Net Assets as of 10/31/06
[THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.]
Producer Manufacturing 12.6%
Consumer Non-Durables 10.1%
Consumer Durables 9.6%
Process Industries 8.9%
Utilities 6.8%
Transportation 6.6%
Property-Casualty Insurance 5.5%
Specialty Insurance 5.4%
Health Technology 5.2%
Industrial Services 4.0%
Commercial Services 2.8%
Energy Minerals 2.8%
Electronic Technology 2.5%
Investment Managers 2.0%
Regional Banks 2.0%
Other 10.1%
Short-Term Investments & Other Net Assets 3.1%
Annual Report | 35
TOP 10 EQUITY HOLDINGS
Franklin MidCap Value Fund
10/31/06
- --------------------------------------------------------------------------------
COMPANY % OF TOTAL
SECTOR/INDUSTRY NET ASSETS
- --------------------------------------------------------------------------------
Alberto-Culver Co. 3.1%
CONSUMER NON-DURABLES
- --------------------------------------------------------------------------------
Atmos Energy Corp. 3.0%
UTILITIES
- --------------------------------------------------------------------------------
Erie Indemnity Co., A 3.0%
PROPERTY-CASUALTY INSURANCE
- --------------------------------------------------------------------------------
Dean Foods Co. 2.9%
CONSUMER NON-DURABLES
- --------------------------------------------------------------------------------
SAIC Inc. 2.8%
COMMERCIAL SERVICES
- --------------------------------------------------------------------------------
Assurant Inc. 2.8%
SPECIALTY INSURANCE
- --------------------------------------------------------------------------------
J.B. Hunt Transport Services Inc. 2.7%
TRANSPORTATION
- --------------------------------------------------------------------------------
DTE Energy Co. 2.7%
UTILITIES
- --------------------------------------------------------------------------------
Bunge Ltd. 2.6%
PROCESS INDUSTRIES
- --------------------------------------------------------------------------------
Fortune Brands Inc. 2.6%
CONSUMER DURABLES
- --------------------------------------------------------------------------------
Thank you for your continued participation in Franklin MidCap Value Fund. We
look forward to serving your future investment needs.
[PHOTO OMITTED] /s/ Sam Kerner
Sam Kerner, CFA
Lead Portfolio Manager
William J. Lippman
Bruce C. Baughman, CPA
Margaret McGee
Donald G. Taylor, CPA
Stephen T. Madonna, CFA
Portfolio Management Team
Franklin MidCap Value Fund
THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS
AS OF OCTOBER 31, 2006, THE END OF THE REPORTING PERIOD. THE WAY WE IMPLEMENT
OUR MAIN INVESTMENT STRATEGIES AND THE RESULTING PORTFOLIO HOLDINGS MAY CHANGE
DEPENDING ON FACTORS SUCH AS MARKET AND ECONOMIC CONDITIONS. THESE OPINIONS MAY
NOT BE RELIED UPON AS INVESTMENT ADVICE OR AN OFFER FOR A PARTICULAR SECURITY.
THE INFORMATION IS NOT A COMPLETE ANALYSIS OF EVERY ASPECT OF ANY MARKET,
COUNTRY, INDUSTRY, SECURITY OR THE FUND. STATEMENTS OF FACT ARE FROM SOURCES
CONSIDERED RELIABLE, BUT THE INVESTMENT MANAGER MAKES NO REPRESENTATION OR
WARRANTY AS TO THEIR COMPLETENESS OR ACCURACY. ALTHOUGH HISTORICAL PERFORMANCE
IS NO GUARANTEE OF FUTURE RESULTS, THESE INSIGHTS MAY HELP YOU UNDERSTAND OUR
INVESTMENT MANAGEMENT PHILOSOPHY.
36 | Annual Report
Performance Summary as of 10/31/06
FRANKLIN MIDCAP VALUE FUND
Your dividend income will vary depending on dividends or interest paid by
securities in the Fund's portfolio, adjusted for operating expenses of each
class. Capital gain distributions are net profits realized from the sale of
portfolio securities. The performance table and graphs do not reflect any taxes
that a shareholder would pay on Fund dividends, capital gain distributions, if
any, or any realized gains on the sale of Fund shares. Total return reflects
reinvestment of the Fund's dividends and capital gain distributions, if any, and
any unrealized gains or losses.
PRICE AND DISTRIBUTION INFORMATION
- ----------------------------------------------------------------------------------------------------------------------------
CLASS A (SYMBOL: FMVAX) CHANGE 10/31/06 10/31/05
- ----------------------------------------------------------------------------------------------------------------------------
Net Asset Value (NAV) +$1.57 $11.37 $9.80
- ----------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS (11/1/05-10/31/06)
- ----------------------------------------------------------------------------------------------------------------------------
Dividend Income $0.0610
- ----------------------------------------------------------------------------------------------------------------------------
CLASS C (SYMBOL: N/A) CHANGE 10/31/06 10/31/05
- ----------------------------------------------------------------------------------------------------------------------------
Net Asset Value (NAV) +$1.51 $11.29 $9.78
- ----------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS (11/1/05-10/31/06)
- ----------------------------------------------------------------------------------------------------------------------------
Dividend Income $0.0457
- ----------------------------------------------------------------------------------------------------------------------------
CLASS R (SYMBOL: N/A) CHANGE 10/31/06 10/31/05
- ----------------------------------------------------------------------------------------------------------------------------
Net Asset Value (NAV) +$1.55 $11.35 $9.80
- ----------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS (11/1/05-10/31/06)
- ----------------------------------------------------------------------------------------------------------------------------
Dividend Income $0.0587
- ----------------------------------------------------------------------------------------------------------------------------
ADVISOR CLASS (SYMBOL: N/A) CHANGE 10/31/06 10/31/05
- ----------------------------------------------------------------------------------------------------------------------------
Net Asset Value (NAV) +$1.61 $11.42 $9.81
- ----------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS (11/1/05-10/31/06)
- ----------------------------------------------------------------------------------------------------------------------------
Dividend Income $0.0688
- ----------------------------------------------------------------------------------------------------------------------------
Annual Report | 37
Performance Summary (CONTINUED)
PERFORMANCE 1
CUMULATIVE TOTAL RETURN EXCLUDES SALES CHARGES. AVERAGE ANNUAL TOTAL RETURNS AND
VALUE OF $10,000 INVESTMENT INCLUDE MAXIMUM SALES CHARGES. CLASS A: 5.75%
MAXIMUM INITIAL SALES CHARGE; CLASS C: 1% CONTINGENT DEFERRED SALES CHARGE IN
FIRST YEAR ONLY; CLASS R/ADVISOR CLASS: NO SALES CHARGES. THE FUND MAY CHARGE A
2% FEE ON REDEMPTIONS MADE WITHIN SEVEN DAYS OF PURCHASE.
- --------------------------------------------------------------------------------------
CLASS A 1-YEAR INCEPTION (7/1/05)
- --------------------------------------------------------------------------------------
Cumulative Total Return 2 +16.70% +14.37%
- --------------------------------------------------------------------------------------
Average Annual Total Return 3 +9.97% +5.79%
- --------------------------------------------------------------------------------------
Value of $10,000 Investment 4 $10,997 $10,779
- --------------------------------------------------------------------------------------
Avg. Ann. Total Return (9/30/06) 5 +3.40% +3.79%
- --------------------------------------------------------------------------------------
CLASS C 1-YEAR INCEPTION (7/1/05)
- --------------------------------------------------------------------------------------
Cumulative Total Return 2 +15.95% +13.40%
- --------------------------------------------------------------------------------------
Average Annual Total Return 3 +14.95% +9.88%
- --------------------------------------------------------------------------------------
Value of $10,000 Investment 4 $11,495 $11,340
- --------------------------------------------------------------------------------------
Avg. Ann. Total Return (9/30/06) 5 +7.98% +8.15%
- --------------------------------------------------------------------------------------
CLASS R 1-YEAR INCEPTION (7/1/05)
- --------------------------------------------------------------------------------------
Cumulative Total Return 2 +16.47% +14.14%
- --------------------------------------------------------------------------------------
Average Annual Total Return 3 +16.47% +10.42%
- --------------------------------------------------------------------------------------
Value of $10,000 Investment 4 $11,647 $11,414
- --------------------------------------------------------------------------------------
Avg. Ann. Total Return (9/30/06) 5 +9.60% +8.73%
- --------------------------------------------------------------------------------------
ADVISOR CLASS 1-YEAR INCEPTION (7/1/05)
- --------------------------------------------------------------------------------------
Cumulative Total Return 2 +17.18% +14.96%
- --------------------------------------------------------------------------------------
Average Annual Total Return 3 +17.18% +11.01%
- --------------------------------------------------------------------------------------
Value of $10,000 Investment 4 $11,718 $11,496
- --------------------------------------------------------------------------------------
Avg. Ann. Total Return (9/30/06) 5 +10.10% +9.21%
- --------------------------------------------------------------------------------------
PERFORMANCE DATA REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE FUTURE
RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU MAY HAVE
A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY DIFFER FROM
FIGURES SHOWN.
FOR MOST RECENT MONTH-END PERFORMANCE, SEE "FUNDS AND PERFORMANCE" AT
FRANKLINTEMPLETON.COM OR CALL 1-800/342-5236.
38 | Annual Report
Performance Summary (CONTINUED)
TOTAL RETURN INDEX COMPARISON FOR HYPOTHETICAL $10,000 INVESTMENT 1
Total return represents the change in value of an investment over the periods
shown. It includes any applicable maximum sales charge, Fund expenses, account
fees and reinvested distributions. The unmanaged index includes reinvestment of
any income or distributions. It differs from the Fund in composition and does
not pay management fees or expenses. One cannot invest directly in an index.
CLASS A (7/1/05-10/31/06)
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL.]
Franklin Midcap Russell Midcap
Date Value Fund Value Index 6 CPI 6
- --------------------------------------------------------------------------------
7/1/2005 $9,425 $10,000 $10,000
7/31/2005 $9,774 $10,476 $10,046
8/31/2005 $9,595 $10,394 $10,098
9/30/2005 $9,548 $10,535 $10,221
10/31/2005 $9,237 $10,213 $10,242
11/30/2005 $9,755 $10,573 $10,159
12/31/2005 $9,775 $10,676 $10,118
1/31/2006 $10,144 $11,139 $10,195
2/28/2006 $10,192 $11,244 $10,216
3/31/2006 $10,391 $11,489 $10,272
4/30/2006 $10,448 $11,600 $10,360
5/31/2006 $10,211 $11,357 $10,411
6/30/2006 $10,249 $11,425 $10,432
7/31/2006 $10,002 $11,361 $10,463
8/31/2006 $10,324 $11,679 $10,483
9/30/2006 $10,476 $11,829 $10,432
10/31/2006 $10,779 $12,308 $10,375
AVERAGE ANNUAL TOTAL RETURN
- ---------------------------------------------------
CLASS A 10/31/06
- ---------------------------------------------------
1-Year +9.97%
- ---------------------------------------------------
Since Inception (7/1/05) +5.79%
- ---------------------------------------------------
CLASS C (7/1/05-10/31/06)
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL.]
Franklin Midcap Russell Midcap
Date Value Fund Value Index 6 CPI 6
- --------------------------------------------------------------------------------
7/1/2005 $10,000 $10,000 $10,000
7/31/2005 $10,360 $10,476 $10,046
8/31/2005 $10,170 $10,394 $10,098
9/30/2005 $10,120 $10,535 $10,221
10/31/2005 $9,780 $10,213 $10,242
11/30/2005 $10,320 $10,573 $10,159
12/31/2005 $10,335 $10,676 $10,118
1/31/2006 $10,727 $11,139 $10,195
2/28/2006 $10,767 $11,244 $10,216
3/31/2006 $10,968 $11,489 $10,272
4/30/2006 $11,029 $11,600 $10,360
5/31/2006 $10,767 $11,357 $10,411
6/30/2006 $10,798 $11,425 $10,432
7/31/2006 $10,536 $11,361 $10,463
8/31/2006 $10,868 $11,679 $10,483
9/30/2006 $11,029 $11,829 $10,432
10/31/2006 $11,340 $12,308 $10,375
AVERAGE ANNUAL TOTAL RETURN
- --------------------------------------------------
CLASS C 10/31/06
- --------------------------------------------------
1-Year +14.95%
- --------------------------------------------------
Since Inception (7/1/05) + 9.88%
- --------------------------------------------------
Annual Report | 39
Performance Summary (CONTINUED)
AVERAGE ANNUAL TOTAL RETURN
- --------------------------------------------------
CLASS R 10/31/06
- --------------------------------------------------
1-Year +16.47%
- --------------------------------------------------
Since Inception (7/1/05) +10.42%
- --------------------------------------------------
CLASS R (7/1/05-10/31/06)
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL.]
Franklin Midcap Russell Midcap
Date Value Fund Value Index 6 CPI 6
- --------------------------------------------------------------------------------
7/1/2005 $10,000 $10,000 $10,000
7/31/2005 $10,370 $10,476 $10,046
8/31/2005 $10,180 $10,394 $10,098
9/30/2005 $10,130 $10,535 $10,221
10/31/2005 $9,800 $10,213 $10,242
11/30/2005 $10,340 $10,573 $10,159
12/31/2005 $10,358 $10,676 $10,118
1/31/2006 $10,761 $11,139 $10,195
2/28/2006 $10,801 $11,244 $10,216
3/31/2006 $11,012 $11,489 $10,272
4/30/2006 $11,072 $11,600 $10,360
5/31/2006 $10,821 $11,357 $10,411
6/30/2006 $10,861 $11,425 $10,432
7/31/2006 $10,590 $11,361 $10,463
8/31/2006 $10,932 $11,679 $10,483
9/30/2006 $11,103 $11,829 $10,432
10/31/2006 $11,414 $12,308 $10,375
AVERAGE ANNUAL TOTAL RETURN
- -----------------------------------------------
ADVISOR CLASS 10/31/06
- -----------------------------------------------
1-Year +17.18%
- -----------------------------------------------
Since Inception (7/1/05) +11.01%
- -----------------------------------------------
ADVISOR CLASS (7/1/05-10/31/06)
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL.]
Franklin Midcap Russell Midcap
Date Value Fund Value Index 6 CPI 6
- --------------------------------------------------------------------------------
7/1/2005 $10,000 $10,000 $10,000
7/31/2005 $10,370 $10,476 $10,046
8/31/2005 $10,190 $10,394 $10,098
9/30/2005 $10,140 $10,535 $10,221
10/31/2005 $9,810 $10,213 $10,242
11/30/2005 $10,360 $10,573 $10,159
12/31/2005 $10,389 $10,676 $10,118
1/31/2006 $10,781 $11,139 $10,195
2/28/2006 $10,842 $11,244 $10,216
3/31/2006 $11,053 $11,489 $10,272
4/30/2006 $11,123 $11,600 $10,360
5/31/2006 $10,872 $11,357 $10,411
6/30/2006 $10,912 $11,425 $10,432
7/31/2006 $10,650 $11,361 $10,463
8/31/2006 $10,993 $11,679 $10,483
9/30/2006 $11,164 $11,829 $10,432
10/31/2006 $11,496 $12,308 $10,375
40 | Annual Report
Performance Summary (CONTINUED)
ENDNOTES
WHILE STOCKS HAVE HISTORICALLY OUTPERFORMED OTHER ASSET CLASSES OVER THE LONG
TERM, THEY TEND TO FLUCTUATE MORE DRAMATICALLY OVER THE SHORT TERM. THESE PRICE
MOVEMENTS MAY RESULT FROM FACTORS AFFECTING INDIVIDUAL COMPANIES, INDUSTRIES OR
THE SECURITIES MARKET AS A WHOLE. HISTORICALLY, MIDSIZE COMPANY SECURITIES HAVE
BEEN MORE VOLATILE IN PRICE THAN LARGER COMPANY SECURITIES, ESPECIALLY OVER THE
SHORT TERM. MIDSIZE COMPANIES MAY BE MORE SUSCEPTIBLE TO PARTICULAR ECONOMIC
EVENTS OR COMPETITIVE FACTORS THAN ARE LARGER, MORE BROADLY DIVERSIFIED
COMPANIES. IN ADDITION, THE FUND MAY INVEST UP TO 25% OF ITS TOTAL ASSETS IN
FOREIGN SECURITIES, WHICH INVOLVE SPECIAL RISKS, INCLUDING CURRENCY FLUCTUATIONS
AND ECONOMIC AND POLITICAL UNCERTAINTY. THE FUND'S PROSPECTUS ALSO INCLUDES A
DESCRIPTION OF THE MAIN INVESTMENT RISKS.
CLASS C: These shares have higher annual fees and expenses than Class A
shares.
CLASS R: Shares are available to certain eligible investors as
described in the prospectus. These shares have higher annual
fees and expenses than Class A shares.
ADVISOR CLASS: Shares are available to certain eligible investors as
described in the prospectus.
1. The Fund's manager and administrator have agreed in advance to limit their
respective fees and to assume as their own expense certain expenses
otherwise payable by the Fund. If the manager and administrator had not
taken this action, the Fund's total returns would have been lower. After
10/31/07, the manager and administrator may end this arrangement at any
time, upon notice to the Fund's Board of Trustees.
2. Cumulative total return represents the change in value of an investment
over the periods indicated.
3. Average annual total return represents the average annual change in value
of an investment over the periods indicated.
4. These figures represent the value of a hypothetical $10,000 investment in
the Fund over the periods indicated.
5. In accordance with SEC rules, we provide standardized average annual total
return information through the latest calendar quarter.
6. Source: Standard & Poor's Micropal. The Russell Midcap Value Index is
market capitalization weighted and measures performance of those Russell
Midcap Index companies with lower price-to-book ratios and lower
forecasted growth values. The Consumer Price Index (CPI), calculated by
the U.S. Bureau of Labor Statistics, is a commonly used measure of the
inflation rate.
Annual Report | 41
Your Fund's Expenses
FRANKLIN MIDCAP VALUE FUND
As a Fund shareholder, you can incur two types of costs:
o Transaction costs, including sales charges (loads) on Fund purchases and
redemption fees; and
o Ongoing Fund costs, including management fees, distribution and service
(12b-1) fees, and other Fund expenses. All mutual funds have ongoing
costs, sometimes referred to as operating expenses.
The following table shows ongoing costs of investing in the Fund and can help
you understand these costs and compare them with those of other mutual funds.
The table assumes a $1,000 investment held for the six months indicated.
ACTUAL FUND EXPENSES
The first line (Actual) for each share class listed in the table provides actual
account values and expenses. The "Ending Account Value" is derived from the
Fund's actual return, which includes the effect of Fund expenses.
You can estimate the expenses you paid during the period by following these
steps. OF COURSE, YOUR ACCOUNT VALUE AND EXPENSES WILL DIFFER FROM THOSE IN THIS
ILLUSTRATION:
1. Divide your account value by $1,000.
IF AN ACCOUNT HAD AN $8,600 VALUE, THEN $8,600 / $1,000 = 8.6.
2. Multiply the result by the number under the heading "Expenses Paid During
Period."
IF EXPENSES PAID DURING PERIOD WERE $7.50, THEN 8.6 X $7.50 = $64.50.
In this illustration, the estimated expenses paid this period are $64.50.
HYPOTHETICAL EXAMPLE FOR COMPARISON WITH OTHER FUNDS
Information in the second line (Hypothetical) for each class in the table can
help you compare ongoing costs of investing in the Fund with those of other
mutual funds. This information may not be used to estimate the actual ending
account balance or expenses you paid during the period. The hypothetical "Ending
Account Value" is based on the actual expense ratio for each class and an
assumed 5% annual rate of return before expenses, which does not represent the
Fund's actual return. The figure under the heading "Expenses Paid During Period"
shows the hypothetical expenses your account would have incurred under this
scenario. You can compare this figure with the 5% hypothetical examples that
appear in shareholder reports of other funds.
42 | Annual Report
Your Fund's Expenses (CONTINUED)
PLEASE NOTE THAT EXPENSES SHOWN IN THE TABLE ARE MEANT TO HIGHLIGHT ONGOING
COSTS AND DO NOT REFLECT ANY TRANSACTION COSTS, SUCH AS SALES CHARGES OR
REDEMPTION FEES. Therefore, the second line for each class is useful in
comparing ongoing costs only, and will not help you compare total costs of
owning different funds. In addition, if transaction costs were included, your
total costs would have been higher. Please refer to the Fund prospectus for
additional information on operating expenses.
- ------------------------------------------------------------------------------------------------------------------
BEGINNING ACCOUNT ENDING ACCOUNT EXPENSES PAID DURING
CLASS A VALUE 5/1/06 VALUE 10/31/06 PERIOD* 5/1/06-10/31/06
- ------------------------------------------------------------------------------------------------------------------
Actual $1,000 $1,031.80 $7.17
- ------------------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,018.15 $7.12
- ------------------------------------------------------------------------------------------------------------------
CLASS C
- ------------------------------------------------------------------------------------------------------------------
Actual $1,000 $1,028.20 $10.28
- ------------------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,015.07 $10.21
- ------------------------------------------------------------------------------------------------------------------
CLASS R
- ------------------------------------------------------------------------------------------------------------------
Actual $1,000 $1,030.90 $7.88
- ------------------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,017.44 $7.83
- ------------------------------------------------------------------------------------------------------------------
ADVISOR CLASS
- ------------------------------------------------------------------------------------------------------------------
Actual $1,000 $1,033.50 $5.38
- ------------------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,019.91 $5.35
- ------------------------------------------------------------------------------------------------------------------
* Expenses are equal to the annualized expense ratio, net of expense
waivers, for each class (A: 1.40%; C: 2.01%; R: 1.54%; and Advisor:
1.05%), multiplied by the average account value over the period,
multiplied by 184/365 to reflect the one-half year period.
Annual Report | 43
Franklin Small Cap Value Fund
YOUR FUND'S GOAL AND MAIN INVESTMENTS: Franklin Small Cap Value Fund seeks
long-term capital appreciation by investing at least 80% of net assets in the
securities of small-capitalization companies that we believe are undervalued. We
define small-capitalization companies as those with market capitalizations less
than $2.5 billion at the time of purchase. Effective November 1, 2006, the Fund
will define small-cap companies as those with market capitalizations less than
$3.5 billion at the time of purchase.
- --------------------------------------------------------------------------------
PERFORMANCE DATA REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE FUTURE
RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU MAY HAVE
A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY DIFFER FROM
FIGURES SHOWN. PLEASE VISIT FRANKLINTEMPLETON.COM OR CALL 1-800/342-5236 FOR
MOST RECENT MONTH-END PERFORMANCE.
- --------------------------------------------------------------------------------
This annual report for Franklin Small Cap Value Fund covers the fiscal year
ended October 31, 2006.
PERFORMANCE OVERVIEW
Franklin Small Cap Value Fund - Class A posted a +17.73% cumulative total return
for the 12 months under review. The Fund underperformed its benchmark, the
Russell 2500TM Value Index, which posted a +19.87% total return for the same
period.1 Please note the Fund employs a bottom-up stock selection process and we
invest in securities without regard to benchmark comparisons. Although this
report covers a 12-month period, our investment strategy aims for long-term
results. You can find the Fund's long-term performance data in the Performance
Summary beginning on page 47.
INVESTMENT STRATEGY
We seek to invest in small-capitalization companies that we believe are selling
below their underlying worth. We manage a diversified portfolio of companies we
consider fundamentally sound, purchased at what we think are attractive prices,
often when they are out of favor with other investors. Portfolio securities are
selected without regard to benchmark comparisons and are based on several
criteria, such as low price relative to earnings, book value or cash flow. We
also consider stocks with recent sharp price declines that have the potential
for good long-term earnings or that possess valuable intangibles not reflected
in the stock price.
1. Source: Standard & Poor's Micropal. The Russell 2500 Value Index is market
capitalization weighted and measures performance of those Russell 2500
Index companies with lower price-to-book ratios and lower forecasted
growth values. The index is unmanaged and includes reinvested dividends.
One cannot invest directly in an index, nor is an index representative of
the Fund's portfolio.
THE DOLLAR VALUE, NUMBER OF SHARES OR PRINCIPAL AMOUNT, AND NAMES OF ALL
PORTFOLIO HOLDINGS ARE LISTED IN THE FUND'S STATEMENT OF INVESTMENTS (SOI). THE
SOI BEGINS ON PAGE 89.
44 | Annual Report
MANAGER'S DISCUSSION
During the period under review, the producer manufacturing sector was the most
significant contributor to Fund performance. In absolute terms, the portfolio's
best performing stocks were retailers Gymboree (+163%) and Christopher & Banks
(+103%), mainly due to strong sales and profit margin trends, and Steel Dynamics
(+97%), as steel demand and prices remained robust. Other top performers
included United States Steel (+87%) and Brown Shoe (+82%).
Despite the Fund's positive performance, several stocks negatively impacted the
Fund's return during the reporting period. Although the retail sector had two of
the portfolio's best performing stocks, it also included weak performers. Among
the decliners were Pier 1 Imports (-34%), Hot Topic (-32%) and new holding
Tuesday Morning (-29%), as declining demand hurt sales.
The Fund experienced significant net inflows during its fiscal year. Consistent
with our investment strategy, we used the proceeds to initiate 15 positions in
stocks we considered attractively valued. The new positions were road building
equipment and components manufacturer Astec Industries; natural gas distributor
Atmos Energy; restaurant owner and operator Bob Evans Farms; newsprint
manufacturer Bowater; identifications solutions manufacturer Brady Corp.; North
American oil and gas distributor holdings company Energen; electro-optic
technology manufacturer Gentex; marine contractor and operator of offshore oil
and gas properties Helix Energy Solutions; single-family homebuilder M.D.C.
Holdings; wood-to-wood and wood-to-concrete connection designer and manufacturer
Simpson Manufacturing; closeout furniture retailer Tuesday Morning; oil and gas
driller Unit Corp.; lumber products manufacturer Universal Forest Products;
apparel manufacturer Warnaco Group; and motor homes manufacturer Winnebago
Industries. We also added significantly to several existing positions, including
business and industrial services company ABM Industries; convenience store
owner, operator and franchiser Casey's General Stores; home-builder M/I Homes;
owner, operator and franchiser of hair and retail products salons Regis Corp.;
and truck trailer and transportation equipment manufacturer Wabash National.
The Fund liquidated twelve positions during the fiscal year, seven resulting
from takeovers and the others because we believed they were fully valued. The
past year was an exciting period for takeover activity in the Fund with buyout
bids announced by eight Fund holdings. In early November 2005, La Quinta
announced that Blackstone Group made a cash bid to acquire the company at a 37%
premium to the stock price prior to the announcement. Linens `n Things announced
a cash deal proposed by Apollo Management to buy the company at a 6% premium to
the stock price prior to the announcement. Hughes Supply announced that Home
Depot made a cash bid to acquire the company at a
PORTFOLIO BREAKDOWN
Franklin Small Cap Value Fund
Based on Total Net Assets as of 10/31/06
[THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.]
Producer Manufacturing 21.3%
Consumer Durables 10.3%
Retail Trade 8.7%
Process Industries 7.5%
Industrial Services 5.5%
Transportation 5.2%
Non-Energy Minerals 5.1%
Property-Casualty Insurance 5.0%
Consumer Non-Durables 4.3%
Energy Minerals 3.4%
Electronic Technology 3.1%
Utilities 2.2%
Other 8.3%
Short-Term Investments & Other Net Assets 10.1%
Annual Report | 45
TOP 10 EQUITY HOLDINGS
Franklin Small Cap Value Fund
10/31/06
- -------------------------------------------------------------------------------
COMPANY % OF TOTAL
SECTOR/INDUSTRY NET ASSETS
- -------------------------------------------------------------------------------
Steel Dynamics Inc. 2.0%
NON-ENERGY MINERALS
- -------------------------------------------------------------------------------
Regis Corp. 1.7%
RETAIL TRADE
- -------------------------------------------------------------------------------
Avocent Corp. 1.7%
ELECTRONIC TECHNOLOGY
- -------------------------------------------------------------------------------
Thor Industries Inc. 1.6%
CONSUMER DURABLES
- -------------------------------------------------------------------------------
Mueller Industries Inc. 1.6%
PRODUCER MANUFACTURING
- -------------------------------------------------------------------------------
M/I Homes Inc. 1.5%
CONSUMER DURABLES
- -------------------------------------------------------------------------------
Aspen Insurance Holdings Ltd. 1.5%
PROPERTY-CASUALTY INSURANCE
- -------------------------------------------------------------------------------
Wabash National Corp. 1.4%
PRODUCER MANUFACTURING
- -------------------------------------------------------------------------------
Graco Inc. 1.4%
PRODUCER MANUFACTURING
- -------------------------------------------------------------------------------
Mine Safety Appliances Co. 1.4%
PRODUCER MANUFACTURING
- -------------------------------------------------------------------------------
21% premium to the stock price prior to the announcement. Finally, four firms
bid for Aztar a total of 11 times since mid-March 2006 with bids beginning at
$38 cash per share and ending the reporting period at $54 cash per share. The
initial bid for Aztar resulted in a 24% increase to the stock price prior to the
announcement. By period-end a bid had led to a 76% rise in the stock price since
the first takeover offer.
Other takeovers included Berkshire Hathaway's $18 cash per share offer for
Russell Corp., a 35% premium over the prior day's closing price. In August 2006,
two more holdings announced cash takeover deals. Computer services provider
Reynolds & Reynolds announced that Universal Computer Systems bid $40 per share
in cash, a 14% increase over the prior day's closing price, and Intrawest Corp.,
a resorts and adventure travel firm, announced that Fortress Investment Group
offered to buy the company for $35 per share in cash, a 32% gain over the
previous day's closing price. Toward the end of the reporting period, JLG
Industries, in which we initiated a position more than nine years ago, announced
that Oshkosh Truck bid $28 per share cash, a 35% premium over the prior day's
closing price. We view the merger and acquisition interest in the Fund's
portfolio as a measure of confirmation of our value stock selection.
Thank you for your continued participation in Franklin Small Cap Value Fund. We
look forward to serving your future investment needs.
[PHOTO OMITTED] /s/ William J. Lippman
William J. Lippman
Lead Portfolio Manager
Bruce C. Baughman, CPA
Donald G. Taylor, CPA
Margaret McGee
Portfolio Management Team
Franklin Small Cap Value Fund
THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS
AS OF OCTOBER 31, 2006, THE END OF THE REPORTING PERIOD. THE WAY WE IMPLEMENT
OUR MAIN INVESTMENT STRATEGIES AND THE RESULTING PORTFOLIO HOLDINGS MAY CHANGE
DEPENDING ON FACTORS SUCH AS MARKET AND ECONOMIC CONDITIONS. THESE OPINIONS MAY
NOT BE RELIED UPON AS INVESTMENT ADVICE OR AN OFFER FOR A PARTICULAR SECURITY.
THE INFORMATION IS NOT A COMPLETE ANALYSIS OF EVERY ASPECT OF ANY MARKET,
COUNTRY, INDUSTRY, SECURITY OR THE FUND. STATEMENTS OF FACT ARE FROM SOURCES
CONSIDERED RELIABLE, BUT THE INVESTMENT MANAGER MAKES NO REPRESENTATION OR
WARRANTY AS TO THEIR COMPLETENESS OR ACCURACY. ALTHOUGH HISTORICAL PERFORMANCE
IS NO GUARANTEE OF FUTURE RESULTS, THESE INSIGHTS MAY HELP YOU UNDERSTAND OUR
INVESTMENT MANAGEMENT PHILOSOPHY.
46 | Annual Report
Performance Summary as of 10/31/06
FRANKLIN SMALL CAP VALUE FUND
Your dividend income will vary depending on dividends or interest paid by
securities in the Fund's portfolio, adjusted for operating expenses of each
class. Capital gain distributions are net profits realized from the sale of
portfolio securities. The performance table and graphs do not reflect any taxes
that a shareholder would pay on Fund dividends, capital gain distributions, if
any, or any realized gains on the sale of Fund shares. Total return reflects
reinvestment of the Fund's dividends and capital gain distributions, if any, and
any unrealized gains or losses.
PRICE AND DISTRIBUTION INFORMATION
- ------------------------------------------------------------------------------------------------------------------------
CLASS A (SYMBOL: FRVLX) CHANGE 10/31/06 10/31/05
- ------------------------------------------------------------------------------------------------------------------------
Net Asset Value (NAV) +$5.86 $45.27 $39.41
- ------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS (11/1/05-10/31/06)
- ------------------------------------------------------------------------------------------------------------------------
Dividend Income $0.0974
- ------------------------------------------------------------------------------------------------------------------------
Long-Term Capital Gain $0.9138
- ------------------------------------------------------------------------------------------------------------------------
TOTAL $1.0112
- ------------------------------------------------------------------------------------------------------------------------
CLASS B (SYMBOL: FBVAX) CHANGE 10/31/06 10/31/05
- ------------------------------------------------------------------------------------------------------------------------
Net Asset Value (NAV) +$5.43 $43.43 $38.00
- ------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS (11/1/05-10/31/06)
- ------------------------------------------------------------------------------------------------------------------------
Long-Term Capital Gain $0.9138
- ------------------------------------------------------------------------------------------------------------------------
CLASS C (SYMBOL: FRVFX) CHANGE 10/31/06 10/31/05
- ------------------------------------------------------------------------------------------------------------------------
Net Asset Value (NAV) +$5.36 $42.99 $37.63
- ------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS (11/1/05-10/31/06)
- ------------------------------------------------------------------------------------------------------------------------
Long-Term Capital Gain $0.9138
- ------------------------------------------------------------------------------------------------------------------------
CLASS R (SYMBOL: FVFRX) CHANGE 10/31/06 10/31/05
- ------------------------------------------------------------------------------------------------------------------------
Net Asset Value (NAV) +$5.85 $45.07 $39.22
- ------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS (11/1/05-10/31/06)
- ------------------------------------------------------------------------------------------------------------------------
Dividend Income $0.0025
- ------------------------------------------------------------------------------------------------------------------------
Long-Term Capital Gain $0.9138
- ------------------------------------------------------------------------------------------------------------------------
TOTAL $0.9163
- ------------------------------------------------------------------------------------------------------------------------
ADVISOR CLASS (SYMBOL: FVADX) CHANGE 10/31/06 10/31/05
- ------------------------------------------------------------------------------------------------------------------------
Net Asset Value (NAV) +$6.04 $46.46 $40.42
- ------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS (11/1/05-10/31/06)
- ------------------------------------------------------------------------------------------------------------------------
Dividend Income $0.2314
- ------------------------------------------------------------------------------------------------------------------------
Long-Term Capital Gain $0.9138
- ------------------------------------------------------------------------------------------------------------------------
TOTAL $1.1452
- ------------------------------------------------------------------------------------------------------------------------
Annual Report | 47
Performance Summary (CONTINUED)
PERFORMANCE
CUMULATIVE TOTAL RETURN EXCLUDES SALES CHARGES. AVERAGE ANNUAL TOTAL RETURNS AND
VALUE OF $10,000 INVESTMENT INCLUDE MAXIMUM SALES CHARGES. CLASS A: 5.75%
MAXIMUM INITIAL SALES CHARGE; CLASS B: CONTINGENT DEFERRED SALES CHARGE (CDSC)
DECLINING FROM 4% TO 1% OVER SIX YEARS, AND ELIMINATED THEREAFTER; CLASS C: 1%
CDSC IN FIRST YEAR ONLY; CLASS R/ADVISOR CLASS: NO SALES CHARGES. THE FUND MAY
CHARGE A 2% FEE ON REDEMPTIONS MADE WITHIN SEVEN DAYS OF PURCHASE.
- -----------------------------------------------------------------------------------------------------------------------------
CLASS A 1-YEAR 5-YEAR 10-YEAR
- -----------------------------------------------------------------------------------------------------------------------------
Cumulative Total Return 1 +17.73% +107.95% +184.13%
- -----------------------------------------------------------------------------------------------------------------------------
Average Annual Total Return 2 +10.97% +14.41% +10.35%
- -----------------------------------------------------------------------------------------------------------------------------
Value of $10,000 Investment 3 $11,097 $19,601 $26,774
- -----------------------------------------------------------------------------------------------------------------------------
Avg. Ann. Total Return (9/30/06) 4 +2.96% +15.17% +10.06%
- -----------------------------------------------------------------------------------------------------------------------------
CLASS B 1-YEAR 5-YEAR INCEPTION (1/1/99)
- -----------------------------------------------------------------------------------------------------------------------------
Cumulative Total Return 1 +16.98% +101.26% +143.01%
- -----------------------------------------------------------------------------------------------------------------------------
Average Annual Total Return 2 +12.98% +14.78% +12.00%
- -----------------------------------------------------------------------------------------------------------------------------
Value of $10,000 Investment 3 $11,298 $19,926 $24,301
- -----------------------------------------------------------------------------------------------------------------------------
Avg. Ann. Total Return (9/30/06) 4 +4.48% +15.55% +11.53%
- -----------------------------------------------------------------------------------------------------------------------------
CLASS C 1-YEAR 5-YEAR 10-YEAR
- -----------------------------------------------------------------------------------------------------------------------------
Cumulative Total Return 1 +16.96% +101.28% +166.17%
- -----------------------------------------------------------------------------------------------------------------------------
Average Annual Total Return 2 +15.96% +15.02% +10.28%
- -----------------------------------------------------------------------------------------------------------------------------
Value of $10,000 Investment 3 $11,596 $20,128 $26,617
- -----------------------------------------------------------------------------------------------------------------------------
Avg. Ann. Total Return (9/30/06) 4 +7.49% +15.77% +9.99%
- -----------------------------------------------------------------------------------------------------------------------------
CLASS R 1-YEAR 3-YEAR INCEPTION (8/1/02)
- -----------------------------------------------------------------------------------------------------------------------------
Cumulative Total Return 1 +17.54% +64.92% +98.77%
- -----------------------------------------------------------------------------------------------------------------------------
Average Annual Total Return 2 +17.54% +18.15% +17.55%
- -----------------------------------------------------------------------------------------------------------------------------
Value of $10,000 Investment 3 $11,754 $16,492 $19,877
- -----------------------------------------------------------------------------------------------------------------------------
Avg. Ann. Total Return (9/30/06) 4 +9.03% +19.86% +16.73%
- -----------------------------------------------------------------------------------------------------------------------------
ADVISOR CLASS 5 1-YEAR 5-YEAR 10-YEAR
- -----------------------------------------------------------------------------------------------------------------------------
Cumulative Total Return 1 +18.13% +111.59% +196.81%
- -----------------------------------------------------------------------------------------------------------------------------
Average Annual Total Return 2 +18.13% +16.17% +11.49%
- -----------------------------------------------------------------------------------------------------------------------------
Value of $10,000 Investment 3 $11,813 $21,159 $29,681
- -----------------------------------------------------------------------------------------------------------------------------
Avg. Ann. Total Return (9/30/06) 4 +9.57% +16.93% +11.19%
- -----------------------------------------------------------------------------------------------------------------------------
PERFORMANCE DATA REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE FUTURE
RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU MAY HAVE
A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY DIFFER FROM
FIGURES SHOWN.
FOR MOST RECENT MONTH-END PERFORMANCE, SEE "FUNDS AND PERFORMANCE" AT
FRANKLINTEMPLETON.COM OR CALL 1-800/342-5236.
48 | Annual Report
Performance Summary (CONTINUED)
TOTAL RETURN INDEX COMPARISON FOR HYPOTHETICAL $10,000 INVESTMENT
Total return represents the change in value of an investment over the periods
shown. It includes any current, applicable, maximum sales charge, Fund expenses,
account fees and reinvested distributions. The unmanaged index includes
reinvestment of any income or distributions. It differs from the Fund in
composition and does not pay management fees or expenses. One cannot invest
directly in an index.
CLASS A (11/1/96-10/31/06)
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL.]
Franklin Small Cap Russell 2500
Date Value Fund Value Index 6 CPI 6
- ------------------------------------------------------------------------------
11/1/1996 $9,423 $10,000 $10,000
11/30/1996 $10,099 $10,591 $10,019
12/31/1996 $10,614 $10,821 $10,019
1/31/1997 $11,057 $11,098 $10,051
2/28/1997 $11,125 $11,221 $10,082
3/31/1997 $10,724 $10,909 $10,107
4/30/1997 $10,623 $11,119 $10,120
5/31/1997 $11,613 $11,895 $10,114
6/30/1997 $12,350 $12,455 $10,126
7/31/1997 $13,268 $13,135 $10,139
8/31/1997 $13,668 $13,202 $10,158
9/30/1997 $14,512 $14,005 $10,183
10/31/1997 $13,893 $13,592 $10,208
11/30/1997 $13,746 $13,882 $10,202
12/31/1997 $13,731 $14,402 $10,190
1/31/1998 $13,504 $14,156 $10,208
2/28/1998 $14,123 $15,033 $10,227
3/31/1998 $14,612 $15,776 $10,246
4/30/1998 $14,561 $15,767 $10,265
5/31/1998 $13,635 $15,270 $10,284
6/30/1998 $12,993 $15,212 $10,297
7/31/1998 $11,606 $14,240 $10,310
8/31/1998 $9,510 $12,004 $10,322
9/30/1998 $9,703 $12,706 $10,335
10/31/1998 $10,215 $13,273 $10,360
11/30/1998 $10,306 $13,701 $10,360
12/31/1998 $10,469 $14,125 $10,354
1/31/1999 $10,350 $13,718 $10,379
2/28/1999 $9,350 $13,015 $10,392
3/31/1999 $9,436 $12,995 $10,423
4/30/1999 $10,378 $14,278 $10,499
5/31/1999 $10,721 $14,569 $10,499
6/30/1999 $11,332 $15,077 $10,499
7/31/1999 $11,035 $14,789 $10,531
8/31/1999 $10,624 $14,221 $10,556
9/30/1999 $9,933 $13,774 $10,606
10/31/1999 $9,870 $13,787 $10,625
11/30/1999 $9,961 $13,863 $10,632
12/31/1999 $10,384 $14,336 $10,632
1/31/2000 $9,533 $13,739 $10,663
2/29/2000 $9,756 $13,977 $10,726
3/31/2000 $10,618 $15,005 $10,815
4/30/2000 $10,846 $14,999 $10,821
5/31/2000 $11,121 $14,972 $10,834
6/30/2000 $10,824 $14,916 $10,891
7/31/2000 $10,944 $15,240 $10,916
8/31/2000 $11,749 $16,038 $10,916
9/30/2000 $11,709 $15,943 $10,973
10/31/2000 $11,915 $15,933 $10,992
11/30/2000 $11,566 $15,730 $10,998
12/31/2000 $12,691 $17,316 $10,992
1/31/2001 $13,388 $17,558 $11,061
2/28/2001 $13,657 $17,411 $11,105
3/31/2001 $13,547 $16,974 $11,131
4/30/2001 $14,445 $17,940 $11,175
5/31/2001 $14,908 $18,491 $11,226
6/30/2001 $14,489 $18,669 $11,244
7/31/2001 $14,266 $18,545 $11,213
8/31/2001 $14,065 $18,385 $11,213
9/30/2001 $11,930 $16,344 $11,263
10/31/2001 $12,875 $16,694 $11,226
11/30/2001 $13,613 $17,979 $11,207
12/31/2001 $14,610 $19,003 $11,162
1/31/2002 $14,490 $19,177 $11,188
2/28/2002 $15,017 $19,416 $11,232
3/31/2002 $16,258 $20,619 $11,295
4/30/2002 $16,676 $20,972 $11,358
5/31/2002 $16,264 $20,627 $11,358
6/30/2002 $15,633 $19,900 $11,364
7/31/2002 $13,450 $17,596 $11,377
8/31/2002 $13,404 $17,690 $11,415
9/30/2002 $12,080 $16,243 $11,434
10/31/2002 $12,694 $16,476 $11,453
11/30/2002 $13,421 $17,678 $11,453
12/31/2002 $13,204 $17,126 $11,428
1/31/2003 $12,476 $16,609 $11,478
2/28/2003 $12,075 $16,201 $11,567
3/31/2003 $12,080 $16,310 $11,636
4/30/2003 $13,118 $17,787 $11,611
5/31/2003 $14,166 $19,432 $11,592
6/30/2003 $14,482 $19,781 $11,605
7/31/2003 $14,585 $20,640 $11,617
8/31/2003 $15,250 $21,470 $11,661
9/30/2003 $14,820 $21,319 $11,699
10/31/2003 $16,155 $22,947 $11,687
11/30/2003 $16,550 $23,883 $11,655
12/31/2003 $17,473 $24,821 $11,642
1/31/2004 $17,559 $25,625 $11,699
2/29/2004 $18,138 $26,145 $11,762
3/31/2004 $18,338 $26,354 $11,838
4/30/2004 $17,794 $24,974 $11,876
5/31/2004 $18,040 $25,477 $11,946
6/30/2004 $19,135 $26,489 $11,984
7/31/2004 $18,625 $25,422 $11,965
8/31/2004 $18,321 $25,741 $11,971
9/30/2004 $19,381 $26,554 $11,996
10/31/2004 $19,697 $27,034 $12,059
11/30/2004 $21,456 $29,245 $12,066
12/31/2004 $21,808 $30,176 $12,021
1/31/2005 $21,427 $29,205 $12,047
2/28/2005 $22,512 $29,935 $12,116
3/31/2005 $21,871 $29,535 $12,211
4/30/2005 $20,757 $28,431 $12,293
5/31/2005 $21,779 $30,009 $12,280
6/30/2005 $22,281 $31,109 $12,287
7/31/2005 $23,735 $32,775 $12,344
8/31/2005 $23,643 $32,179 $12,407
9/30/2005 $23,481 $32,214 $12,558
10/31/2005 $22,743 $31,264 $12,584
11/30/2005 $23,972 $32,545 $12,483
12/31/2005 $23,799 $32,512 $12,432
1/31/2006 $25,756 $34,651 $12,527
2/28/2006 $25,680 $34,698 $12,552
3/31/2006 $26,868 $35,914 $12,622
4/30/2006 $27,034 $36,056 $12,729
5/31/2006 $26,058 $34,808 $12,792
6/30/2006 $26,289 $35,005 $12,817
7/31/2006 $25,431 $34,519 $12,855
8/31/2006 $25,520 $35,438 $12,881
9/30/2006 $25,650 $35,800 $12,817
10/31/2006 $26,774 $37,477 $12,748
AVERAGE ANNUAL TOTAL RETURN
- ----------------------------------------------
CLASS A 10/31/06
- ----------------------------------------------
1-Year +10.97%
- ----------------------------------------------
5-Year +14.41%
- ----------------------------------------------
10-Year +10.35%
- ----------------------------------------------
CLASS B (1/1/99-10/31/06)
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL.]
Franklin Small Cap Russell 2500
Date Value Fund Value Index 6 CPI 6
- ------------------------------------------------------------------------------
1/1/1999 $10,000 $10,000 $10,000
1/31/1999 $9,880 $9,712 $10,024
2/28/1999 $8,925 $9,214 $10,037
3/31/1999 $9,007 $9,200 $10,067
4/30/1999 $9,891 $10,108 $10,140
5/31/1999 $10,213 $10,314 $10,140
6/30/1999 $10,786 $10,674 $10,140
7/31/1999 $10,502 $10,470 $10,171
8/31/1999 $10,098 $10,068 $10,195
9/30/1999 $9,438 $9,751 $10,244
10/31/1999 $9,373 $9,761 $10,262
11/30/1999 $9,454 $9,814 $10,268
12/31/1999 $9,853 $10,149 $10,268
1/31/2000 $9,040 $9,727 $10,299
2/29/2000 $9,247 $9,895 $10,360
3/31/2000 $10,060 $10,623 $10,445
4/30/2000 $10,262 $10,619 $10,451
5/31/2000 $10,524 $10,600 $10,464
6/30/2000 $10,235 $10,560 $10,519
7/31/2000 $10,344 $10,789 $10,543
8/31/2000 $11,097 $11,354 $10,543
9/30/2000 $11,053 $11,287 $10,598
10/31/2000 $11,244 $11,280 $10,616
11/30/2000 $10,911 $11,136 $10,622
12/31/2000 $11,969 $12,259 $10,616
1/31/2001 $12,619 $12,430 $10,683
2/28/2001 $12,859 $12,326 $10,726
3/31/2001 $12,751 $12,017 $10,750
4/30/2001 $13,591 $12,701 $10,793
5/31/2001 $14,017 $13,091 $10,842
6/30/2001 $13,613 $13,217 $10,860
7/31/2001 $13,400 $13,129 $10,830
8/31/2001 $13,204 $13,016 $10,830
9/30/2001 $11,196 $11,571 $10,879
10/31/2001 $12,074 $11,819 $10,842
11/30/2001 $12,762 $12,729 $10,824
12/31/2001 $13,684 $13,453 $10,781
1/31/2002 $13,564 $13,577 $10,805
2/28/2002 $14,049 $13,746 $10,848
3/31/2002 $15,206 $14,598 $10,909
4/30/2002 $15,588 $14,847 $10,970
5/31/2002 $15,195 $14,603 $10,970
6/30/2002 $14,600 $14,088 $10,976
7/31/2002 $12,549 $12,457 $10,988
8/31/2002 $12,500 $12,524 $11,025
9/30/2002 $11,261 $11,499 $11,043
10/31/2002 $11,823 $11,664 $11,062
11/30/2002 $12,500 $12,515 $11,062
12/31/2002 $12,287 $12,125 $11,037
1/31/2003 $11,600 $11,759 $11,086
2/28/2003 $11,223 $11,470 $11,171
3/31/2003 $11,223 $11,547 $11,239
4/30/2003 $12,183 $12,593 $11,214
5/31/2003 $13,149 $13,757 $11,196
6/30/2003 $13,433 $14,004 $11,208
7/31/2003 $13,520 $14,612 $11,220
8/31/2003 $14,131 $15,200 $11,263
9/30/2003 $13,722 $15,093 $11,300
10/31/2003 $14,955 $16,245 $11,287
11/30/2003 $15,315 $16,908 $11,257
12/31/2003 $16,155 $17,572 $11,245
1/31/2004 $16,226 $18,141 $11,300
2/29/2004 $16,755 $18,510 $11,361
3/31/2004 $16,925 $18,658 $11,434
4/30/2004 $16,417 $17,681 $11,470
5/31/2004 $16,635 $18,036 $11,538
6/30/2004 $17,634 $18,753 $11,574
7/31/2004 $17,154 $17,998 $11,556
8/31/2004 $16,865 $18,224 $11,562
9/30/2004 $17,830 $18,799 $11,586
10/31/2004 $18,114 $19,139 $11,647
11/30/2004 $19,718 $20,705 $11,653
12/31/2004 $20,035 $21,364 $11,611
1/31/2005 $19,669 $20,676 $11,635
2/28/2005 $20,653 $21,193 $11,702
3/31/2005 $20,057 $20,910 $11,794
4/30/2005 $19,029 $20,128 $11,873
5/31/2005 $19,953 $21,245 $11,861
6/30/2005 $20,401 $22,024 $11,867
7/31/2005 $21,719 $23,203 $11,922
8/31/2005 $21,621 $22,781 $11,983
9/30/2005 $21,468 $22,806 $12,129
10/31/2005 $20,773 $22,133 $12,154
11/30/2005 $21,889 $23,041 $12,056
12/31/2005 $21,721 $23,017 $12,007
1/31/2006 $23,495 $24,532 $12,099
2/28/2006 $23,411 $24,564 $12,123
3/31/2006 $24,480 $25,426 $12,190
4/30/2006 $24,620 $25,526 $12,294
5/31/2006 $23,719 $24,642 $12,355
6/30/2006 $23,915 $24,782 $12,379
7/31/2006 $23,114 $24,438 $12,416
8/31/2006 $23,187 $25,089 $12,441
9/30/2006 $23,288 $25,345 $12,379
10/31/2006 $24,301 $26,532 $12,312
AVERAGE ANNUAL TOTAL RETURN
- -----------------------------------------------
CLASS B 10/31/06
- -----------------------------------------------
1-Year +12.98%
- -----------------------------------------------
5-Year +14.78%
- -----------------------------------------------
Since Inception (1/1/99) +12.00%
- -----------------------------------------------
Annual Report | 49
Performance Summary (CONTINUED)
AVERAGE ANNUAL TOTAL RETURN
- ---------------------------------------
CLASS C 10/31/06
- ---------------------------------------
1-Year +15.96%
- ---------------------------------------
5-Year +15.02%
- ---------------------------------------
10-Year +10.28%
- ---------------------------------------
CLASS C (11/1/96-10/31/06)
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL.]
Franklin Small Cap Russell 2500
Date Value Fund Value Index 6 CPI 6
- ------------------------------------------------------------------------------
10/1/1996 $10,000 $10,000 $10,000
11/30/1996 $10,712 $10,591 $10,019
12/31/1996 $11,240 $10,821 $10,019
1/31/1997 $11,711 $11,098 $10,051
2/28/1997 $11,770 $11,221 $10,082
3/31/1997 $11,342 $10,909 $10,107
4/30/1997 $11,228 $11,119 $10,120
5/31/1997 $12,270 $11,895 $10,114
6/30/1997 $13,044 $12,455 $10,126
7/31/1997 $14,003 $13,135 $10,139
8/31/1997 $14,420 $13,202 $10,158
9/30/1997 $15,301 $14,005 $10,183
10/31/1997 $14,646 $13,592 $10,208
11/30/1997 $14,479 $13,882 $10,202
12/31/1997 $14,456 $14,402 $10,190
1/31/1998 $14,215 $14,156 $10,208
2/28/1998 $14,858 $15,033 $10,227
3/31/1998 $15,363 $15,776 $10,246
4/30/1998 $15,303 $15,767 $10,265
5/31/1998 $14,318 $15,270 $10,284
6/30/1998 $13,639 $15,212 $10,297
7/31/1998 $12,180 $14,240 $10,310
8/31/1998 $9,969 $12,004 $10,322
9/30/1998 $10,174 $12,706 $10,335
10/31/1998 $10,702 $13,273 $10,360
11/30/1998 $10,792 $13,701 $10,360
12/31/1998 $10,960 $14,125 $10,354
1/31/1999 $10,827 $13,718 $10,379
2/28/1999 $9,776 $13,015 $10,392
3/31/1999 $9,861 $12,995 $10,423
4/30/1999 $10,839 $14,278 $10,499
5/31/1999 $11,189 $14,569 $10,499
6/30/1999 $11,823 $15,077 $10,499
7/31/1999 $11,509 $14,789 $10,531
8/31/1999 $11,068 $14,221 $10,556
9/30/1999 $10,344 $13,774 $10,606
10/31/1999 $10,271 $13,787 $10,625
11/30/1999 $10,362 $13,863 $10,632
12/31/1999 $10,790 $14,336 $10,632
1/31/2000 $9,903 $13,739 $10,663
2/29/2000 $10,126 $13,977 $10,726
3/31/2000 $11,020 $15,005 $10,815
4/30/2000 $11,249 $14,999 $10,821
5/31/2000 $11,533 $14,972 $10,834
6/30/2000 $11,213 $14,916 $10,891
7/31/2000 $11,334 $15,240 $10,916
8/31/2000 $12,161 $16,038 $10,916
9/30/2000 $12,113 $15,943 $10,973
10/31/2000 $12,318 $15,933 $10,992
11/30/2000 $11,956 $15,730 $10,998
12/31/2000 $13,115 $17,316 $10,992
1/31/2001 $13,828 $17,558 $11,061
2/28/2001 $14,093 $17,411 $11,105
3/31/2001 $13,973 $16,974 $11,131
4/30/2001 $14,890 $17,940 $11,175
5/31/2001 $15,355 $18,491 $11,226
6/30/2001 $14,921 $18,669 $11,244
7/31/2001 $14,685 $18,545 $11,213
8/31/2001 $14,468 $18,385 $11,213
9/30/2001 $12,264 $16,344 $11,263
10/31/2001 $13,224 $16,694 $11,226
11/30/2001 $13,979 $17,979 $11,207
12/31/2001 $14,987 $19,003 $11,162
1/31/2002 $14,860 $19,177 $11,188
2/28/2002 $15,392 $19,416 $11,232
3/31/2002 $16,660 $20,619 $11,295
4/30/2002 $17,076 $20,972 $11,358
5/31/2002 $16,642 $20,627 $11,358
6/30/2002 $15,995 $19,900 $11,364
7/31/2002 $13,749 $17,596 $11,377
8/31/2002 $13,701 $17,690 $11,415
9/30/2002 $12,336 $16,243 $11,434
10/31/2002 $12,958 $16,476 $11,453
11/30/2002 $13,695 $17,678 $11,453
12/31/2002 $13,465 $17,126 $11,428
1/31/2003 $12,717 $16,609 $11,478
2/28/2003 $12,306 $16,201 $11,567
3/31/2003 $12,294 $16,310 $11,636
4/30/2003 $13,345 $17,787 $11,611
5/31/2003 $14,401 $19,432 $11,592
6/30/2003 $14,715 $19,781 $11,605
7/31/2003 $14,812 $20,640 $11,617
8/31/2003 $15,482 $21,470 $11,661
9/30/2003 $15,035 $21,319 $11,699
10/31/2003 $16,382 $22,947 $11,687
11/30/2003 $16,774 $23,883 $11,655
12/31/2003 $17,698 $24,821 $11,642
1/31/2004 $17,771 $25,625 $11,699
2/29/2004 $18,356 $26,145 $11,762
3/31/2004 $18,544 $26,354 $11,838
4/30/2004 $17,982 $24,974 $11,876
5/31/2004 $18,224 $25,477 $11,946
6/30/2004 $19,317 $26,489 $11,984
7/31/2004 $18,791 $25,422 $11,965
8/31/2004 $18,477 $25,741 $11,971
9/30/2004 $19,534 $26,554 $11,996
10/31/2004 $19,842 $27,034 $12,059
11/30/2004 $21,599 $29,245 $12,066
12/31/2004 $21,946 $30,176 $12,021
1/31/2005 $21,547 $29,205 $12,047
2/28/2005 $22,624 $29,935 $12,116
3/31/2005 $21,970 $29,535 $12,211
4/30/2005 $20,845 $28,431 $12,293
5/31/2005 $21,855 $30,009 $12,280
6/30/2005 $22,345 $31,109 $12,287
7/31/2005 $23,791 $32,775 $12,344
8/31/2005 $23,682 $32,179 $12,407
9/30/2005 $23,513 $32,214 $12,558
10/31/2005 $22,757 $31,264 $12,584
11/30/2005 $23,972 $32,545 $12,483
12/31/2005 $23,793 $32,512 $12,432
1/31/2006 $25,737 $34,651 $12,527
2/28/2006 $25,638 $34,698 $12,552
3/31/2006 $26,815 $35,914 $12,622
4/30/2006 $26,969 $36,056 $12,729
5/31/2006 $25,979 $34,808 $12,792
6/30/2006 $26,195 $35,005 $12,817
7/31/2006 $25,323 $34,519 $12,855
8/31/2006 $25,397 $35,438 $12,881
9/30/2006 $25,508 $35,800 $12,817
10/31/2006 $26,617 $37,477 $12,748
AVERAGE ANNUAL TOTAL RETURN
- ------------------------------------------------
CLASS R 10/31/06
- ------------------------------------------------
1-Year +17.54%
- ------------------------------------------------
3-Year +18.15%
- ------------------------------------------------
Since Inception (8/1/02) +17.55%
- ------------------------------------------------
CLASS R (8/1/02-10/31/06)
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL.]
Franklin Small Cap Russell 2500
Date Value Fund Value Index 6 CPI 6
- ----------------------------------------------------------------------------
8/1/2002 $10,000 $10,000 $10,000
8/31/2002 $9,966 $10,054 $10,033
9/30/2002 $8,977 $9,231 $10,050
10/31/2002 $9,433 $9,363 $10,067
11/30/2002 $9,974 $10,046 $10,067
12/31/2002 $9,808 $9,733 $10,044
1/31/2003 $9,267 $9,439 $10,089
2/28/2003 $8,969 $9,207 $10,167
3/31/2003 $8,969 $9,269 $10,228
4/30/2003 $9,740 $10,108 $10,205
5/31/2003 $10,516 $11,043 $10,189
6/30/2003 $10,746 $11,242 $10,200
7/31/2003 $10,822 $11,730 $10,211
8/31/2003 $11,317 $12,202 $10,250
9/30/2003 $10,997 $12,115 $10,283
10/31/2003 $11,985 $13,041 $10,272
11/30/2003 $12,279 $13,573 $10,244
12/31/2003 $12,961 $14,106 $10,233
1/31/2004 $13,021 $14,563 $10,283
2/29/2004 $13,451 $14,858 $10,339
3/31/2004 $13,596 $14,977 $10,405
4/30/2004 $13,187 $14,193 $10,439
5/31/2004 $13,370 $14,478 $10,500
6/30/2004 $14,180 $15,054 $10,533
7/31/2004 $13,801 $14,448 $10,516
8/31/2004 $13,575 $14,629 $10,522
9/30/2004 $14,359 $15,091 $10,544
10/31/2004 $14,593 $15,364 $10,600
11/30/2004 $15,893 $16,620 $10,605
12/31/2004 $16,147 $17,149 $10,566
1/31/2005 $15,864 $16,598 $10,589
2/28/2005 $16,666 $17,012 $10,650
3/31/2005 $16,190 $16,785 $10,733
4/30/2005 $15,363 $16,157 $10,805
5/31/2005 $16,117 $17,054 $10,794
6/30/2005 $16,486 $17,679 $10,800
7/31/2005 $17,558 $18,626 $10,850
8/31/2005 $17,490 $18,287 $10,905
9/30/2005 $17,370 $18,307 $11,038
10/31/2005 $16,817 $17,767 $11,061
11/30/2005 $17,726 $18,495 $10,972
12/31/2005 $17,600 $18,476 $10,927
1/31/2006 $19,043 $19,692 $11,011
2/28/2006 $18,981 $19,719 $11,033
3/31/2006 $19,854 $20,410 $11,094
4/30/2006 $19,977 $20,491 $11,188
5/31/2006 $19,253 $19,781 $11,244
6/30/2006 $19,420 $19,893 $11,266
7/31/2006 $18,784 $19,617 $11,299
8/31/2006 $18,845 $20,140 $11,321
9/30/2006 $18,937 $20,345 $11,266
10/31/2006 $19,877 $21,298 $11,205
50 | Annual Report
Performance Summary (CONTINUED)
ADVISOR CLASS (11/1/96-10/31/06) 5
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL.]
Franklin Small Cap Russell 2500
Date Value Fund Value Index 6 CPI 6
- ----------------------------------------------------------------------------
11/1/1996 $10,000 $10,000 $10,000
11/30/1996 $10,717 $10,591 $10,019
12/31/1996 $11,264 $10,821 $10,019
1/31/1997 $11,835 $11,098 $10,051
2/28/1997 $11,908 $11,221 $10,082
3/31/1997 $11,482 $10,909 $10,107
4/30/1997 $11,374 $11,119 $10,120
5/31/1997 $12,440 $11,895 $10,114
6/30/1997 $13,232 $12,455 $10,126
7/31/1997 $14,227 $13,135 $10,139
8/31/1997 $14,662 $13,202 $10,158
9/30/1997 $15,572 $14,005 $10,183
10/31/1997 $14,909 $13,592 $10,208
11/30/1997 $14,758 $13,882 $10,202
12/31/1997 $14,745 $14,402 $10,190
1/31/1998 $14,514 $14,156 $10,208
2/28/1998 $15,178 $15,033 $10,227
3/31/1998 $15,708 $15,776 $10,246
4/30/1998 $15,659 $15,767 $10,265
5/31/1998 $14,666 $15,270 $10,284
6/30/1998 $13,978 $15,212 $10,297
7/31/1998 $12,492 $14,240 $10,310
8/31/1998 $10,244 $12,004 $10,322
9/30/1998 $10,458 $12,706 $10,335
10/31/1998 $11,005 $13,273 $10,360
11/30/1998 $11,109 $13,701 $10,360
12/31/1998 $11,291 $14,125 $10,354
1/31/1999 $11,163 $13,718 $10,379
2/28/1999 $10,091 $13,015 $10,392
3/31/1999 $10,189 $12,995 $10,423
4/30/1999 $11,212 $14,278 $10,499
5/31/1999 $11,579 $14,569 $10,499
6/30/1999 $12,246 $15,077 $10,499
7/31/1999 $11,928 $14,789 $10,531
8/31/1999 $11,481 $14,221 $10,556
9/30/1999 $10,740 $13,774 $10,606
10/31/1999 $10,679 $13,787 $10,625
11/30/1999 $10,783 $13,863 $10,632
12/31/1999 $11,242 $14,336 $10,632
1/31/2000 $10,324 $13,739 $10,663
2/29/2000 $10,569 $13,977 $10,726
3/31/2000 $11,505 $15,005 $10,815
4/30/2000 $11,756 $14,999 $10,821
5/31/2000 $12,063 $14,972 $10,834
6/30/2000 $11,738 $14,916 $10,891
7/31/2000 $11,873 $15,240 $10,916
8/31/2000 $12,748 $16,038 $10,916
9/30/2000 $12,712 $15,943 $10,973
10/31/2000 $12,938 $15,933 $10,992
11/30/2000 $12,565 $15,730 $10,998
12/31/2000 $13,797 $17,316 $10,992
1/31/2001 $14,557 $17,558 $11,061
2/28/2001 $14,845 $17,411 $11,105
3/31/2001 $14,733 $16,974 $11,131
4/30/2001 $15,715 $17,940 $11,175
5/31/2001 $16,224 $18,491 $11,226
6/30/2001 $15,769 $18,669 $11,244
7/31/2001 $15,535 $18,545 $11,213
8/31/2001 $15,320 $18,385 $11,213
9/30/2001 $13,002 $16,344 $11,263
10/31/2001 $14,029 $16,694 $11,226
11/30/2001 $14,840 $17,979 $11,207
12/31/2001 $15,926 $19,003 $11,162
1/31/2002 $15,803 $19,177 $11,188
2/28/2002 $16,382 $19,416 $11,232
3/31/2002 $17,743 $20,619 $11,295
4/30/2002 $18,204 $20,972 $11,358
5/31/2002 $17,761 $20,627 $11,358
6/30/2002 $17,077 $19,900 $11,364
7/31/2002 $14,693 $17,596 $11,377
8/31/2002 $14,650 $17,690 $11,415
9/30/2002 $13,208 $16,243 $11,434
10/31/2002 $13,880 $16,476 $11,453
11/30/2002 $14,680 $17,678 $11,453
12/31/2002 $14,446 $17,126 $11,428
1/31/2003 $13,652 $16,609 $11,478
2/28/2003 $13,220 $16,201 $11,567
3/31/2003 $13,232 $16,310 $11,636
4/30/2003 $14,372 $17,787 $11,611
5/31/2003 $15,525 $19,432 $11,592
6/30/2003 $15,869 $19,781 $11,605
7/31/2003 $15,992 $20,640 $11,617
8/31/2003 $16,725 $21,470 $11,661
9/30/2003 $16,258 $21,319 $11,699
10/31/2003 $17,729 $22,947 $11,687
11/30/2003 $18,167 $23,883 $11,655
12/31/2003 $19,184 $24,821 $11,642
1/31/2004 $19,282 $25,625 $11,699
2/29/2004 $19,929 $26,145 $11,762
3/31/2004 $20,151 $26,354 $11,838
4/30/2004 $19,559 $24,974 $11,876
5/31/2004 $19,836 $25,477 $11,946
6/30/2004 $21,044 $26,489 $11,984
7/31/2004 $20,490 $25,422 $11,965
8/31/2004 $20,163 $25,741 $11,971
9/30/2004 $21,333 $26,554 $11,996
10/31/2004 $21,691 $27,034 $12,059
11/30/2004 $23,632 $29,245 $12,066
12/31/2004 $24,026 $30,176 $12,021
1/31/2005 $23,610 $29,205 $12,047
2/28/2005 $24,816 $29,935 $12,116
3/31/2005 $24,120 $29,535 $12,211
4/30/2005 $22,895 $28,431 $12,293
5/31/2005 $24,033 $30,009 $12,280
6/30/2005 $24,587 $31,109 $12,287
7/31/2005 $26,196 $32,775 $12,344
8/31/2005 $26,104 $32,179 $12,407
9/30/2005 $25,941 $32,214 $12,558
10/31/2005 $25,127 $31,264 $12,584
11/30/2005 $26,495 $32,545 $12,483
12/31/2005 $26,310 $32,512 $12,432
1/31/2006 $28,489 $34,651 $12,527
2/28/2006 $28,406 $34,698 $12,552
3/31/2006 $29,722 $35,914 $12,622
4/30/2006 $29,920 $36,056 $12,729
5/31/2006 $28,847 $34,808 $12,792
6/30/2006 $29,109 $35,005 $12,817
7/31/2006 $28,169 $34,519 $12,855
8/31/2006 $28,278 $35,438 $12,881
9/30/2006 $28,425 $35,800 $12,817
10/31/2006 $29,681 $37,477 $12,748
AVERAGE ANNUAL TOTAL RETURN
- ---------------------------------------------
ADVISOR CLASS 5 10/31/06
- ---------------------------------------------
1-Year +18.13%
- ---------------------------------------------
5-Year +16.17%
- ---------------------------------------------
10-Year +11.49%
- ---------------------------------------------
ENDNOTES
THE FUND'S INVESTMENTS IN SMALLER-COMPANY STOCKS INVOLVE SPECIAL RISKS AS SUCH
STOCKS HAVE HISTORICALLY EXHIBITED GREATER PRICE VOLATILITY THAN LARGE-COMPANY
STOCKS, PARTICULARLY OVER THE SHORT TERM. IN ADDITION, SMALLER COMPANIES OFTEN
HAVE RELATIVELY SMALL REVENUES, LIMITED PRODUCT LINES AND A SMALL MARKET SHARE.
THE FUND'S PROSPECTUS ALSO INCLUDES A DESCRIPTION OF THE MAIN INVESTMENT RISKS.
CLASS A: Prior to 8/3/98, these shares were offered at a lower initial
sales charge; thus actual total returns may differ.
CLASS B: These shares have higher annual fees and expenses than Class A
shares.
CLASS C: Prior to 1/1/04, these shares were offered with an initial
sales charge; thus actual total returns would have differed.
These shares have higher annual fees and expenses than Class A
shares.
CLASS R: Shares are available to certain eligible investors as
described in the prospectus. These shares have higher annual
fees and expenses than Class A shares.
ADVISOR CLASS: Shares are available to certain eligible investors as
described in the prospectus.
1. Cumulative total return represents the change in value of an investment
over the periods indicated.
2. Average annual total return represents the average annual change in value
of an investment over the periods indicated.
3. These figures represent the value of a hypothetical $10,000 investment in
the Fund over the periods indicated.
4. In accordance with SEC rules, we provide standardized average annual total
return information through the latest calendar quarter.
5. Effective 1/2/97, the Fund began offering Advisor Class shares, which do
not have sales charges or a Rule 12b-1 plan. Performance quotations for
this class reflect the following methods of calculation: (a) For periods
prior to 1/2/97, a restated figure is used based upon the Fund's Class A
performance, excluding the effect of Class A's maximum initial sales
charge, but reflecting the effect of the Class A Rule 12b-1 fees; and (b)
for periods after 1/1/97, actual Advisor Class performance is used
reflecting all charges and fees applicable to that class. Since 1/2/97
(commencement of sales), the cumulative and average annual total returns
of Advisor Class shares were +163.51% and +10.36%.
6. Source: Standard & Poor's Micropal. The Russell 2500 Value Index is market
capitalization weighted and measures performance of those Russell 2500
Index companies with lower price-to-book ratios and lower forecasted
growth values. The Consumer Price Index (CPI), calculated by the U.S.
Bureau of Labor Statistics, is a commonly used measure of the inflation
rate.
Annual Report | 51
YOUR FUND'S EXPENSES
FRANKLIN SMALL CAP VALUE FUND
As a Fund shareholder, you can incur two types of costs:
o Transaction costs, including sales charges (loads) on Fund purchases and
redemption fees; and
o Ongoing Fund costs, including management fees, distribution and service
(12b-1) fees, and other Fund expenses. All mutual funds have ongoing
costs, sometimes referred to as operating expenses.
The following table shows ongoing costs of investing in the Fund and can help
you understand these costs and compare them with those of other mutual funds.
The table assumes a $1,000 investment held for the six months indicated.
ACTUAL FUND EXPENSES
The first line (Actual) for each share class listed in the table provides actual
account values and expenses. The "Ending Account Value" is derived from the
Fund's actual return, which includes the effect of Fund expenses.
You can estimate the expenses you paid during the period by following these
steps. OF COURSE, YOUR ACCOUNT VALUE AND EXPENSES WILL DIFFER FROM THOSE IN THIS
ILLUSTRATION:
1. Divide your account value by $1,000.
IF AN ACCOUNT HAD AN $8,600 VALUE, THEN $8,600 / $1,000 = 8.6.
2. Multiply the result by the number under the heading "Expenses Paid During
Period."
IF EXPENSES PAID DURING PERIOD WERE $7.50, THEN 8.6 X $7.50 = $64.50.
In this illustration, the estimated expenses paid this period are $64.50.
HYPOTHETICAL EXAMPLE FOR COMPARISON WITH OTHER FUNDS
Information in the second line (Hypothetical) for each class in the table can
help you compare ongoing costs of investing in the Fund with those of other
mutual funds. This information may not be used to estimate the actual ending
account balance or expenses you paid during the period. The hypothetical "Ending
Account Value" is based on the actual expense ratio for each class and an
assumed 5% annual rate of return before expenses, which does not represent the
Fund's actual return. The figure under the heading "Expenses Paid During Period"
shows the hypothetical expenses your account would have incurred under this
scenario. You can compare this figure with the 5% hypothetical examples that
appear in shareholder reports of other funds.
52 | Annual Report
YOUR FUND'S EXPENSES (CONTINUED)
PLEASE NOTE THAT EXPENSES SHOWN IN THE TABLE ARE MEANT TO HIGHLIGHT ONGOING
COSTS AND DO NOT REFLECT ANY TRANSACTION COSTS, SUCH AS SALES CHARGES OR
REDEMPTION FEES. Therefore, the second line for each class is useful in
comparing ongoing costs only, and will not help you compare total costs of
owning different funds. In addition, if transaction costs were included, your
total costs would have been higher. Please refer to the Fund prospectus for
additional information on operating expenses.
- --------------------------------------------------------------------------------------------------------------------------------
BEGINNING ACCOUNT ENDING ACCOUNT EXPENSES PAID DURING
CLASS A VALUE 5/1/06 VALUE 10/31/06 PERIOD* 5/1/06-10/31/06
- --------------------------------------------------------------------------------------------------------------------------------
Actual $1,000 $ 990.40 $6.22
- --------------------------------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,018.95 $6.31
- --------------------------------------------------------------------------------------------------------------------------------
CLASS B
- --------------------------------------------------------------------------------------------------------------------------------
Actual $1,000 $ 987.00 $9.62
- --------------------------------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,015.53 $9.75
- --------------------------------------------------------------------------------------------------------------------------------
CLASS C
- --------------------------------------------------------------------------------------------------------------------------------
Actual $1,000 $ 986.90 $9.62
- --------------------------------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,015.53 $9.75
- --------------------------------------------------------------------------------------------------------------------------------
CLASS R
- --------------------------------------------------------------------------------------------------------------------------------
Actual $1,000 $ 989.50 $7.12
- --------------------------------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,018.05 $7.22
- --------------------------------------------------------------------------------------------------------------------------------
ADVISOR CLASS
- --------------------------------------------------------------------------------------------------------------------------------
Actual $1,000 $ 992.10 $4.62
- --------------------------------------------------------------------------------------------------------------------------------
Hypothetical (5% return before expenses) $1,000 $1,020.57 $4.69
- --------------------------------------------------------------------------------------------------------------------------------
* Expenses are equal to the annualized expense ratio for each class (A:
1.24%; B: 1.92%; C: 1.92%; R: 1.42%; and Advisor: 0.92%), multiplied by
the average account value over the period, multiplied by 184/365 to
reflect the one-half year period.
Annual Report | 53
Franklin Value Investors Trust
FINANCIAL HIGHLIGHTS
FRANKLIN BALANCE SHEET INVESTMENT FUND
------------------------------------------------------------------------------
YEAR ENDED OCTOBER 31,
CLASS A 2006 2005 2004 2003 2002
------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ............... $ 61.66 $ 53.95 $ 45.47 $ 37.01 $ 37.21
------------------------------------------------------------------------------
Income from investment operations a:
Net investment income b ......................... 0.77 0.34 0.33 0.13 0.25
Net realized and unrealized gains (losses) ...... 9.71 8.71 8.63 8.83 0.87
------------------------------------------------------------------------------
Total from investment operations ................. 10.48 9.05 8.96 8.96 1.12
------------------------------------------------------------------------------
Less distributions from:
Net investment income ........................... (0.46) (0.43) (0.17) (0.25) (0.15)
Net realized gains .............................. (2.44) (0.91) (0.31) (0.25) (1.17)
------------------------------------------------------------------------------
Total distributions .............................. (2.90) (1.34) (0.48) (0.50) (1.32)
------------------------------------------------------------------------------
Redemption fees .................................. -- d -- d -- d -- --
------------------------------------------------------------------------------
Net asset value, end of year ..................... $ 69.24 $ 61.66 $ 53.95 $ 45.47 $ 37.01
==============================================================================
Total return c ................................... 17.54% 16.93% 19.87% 24.51% 2.85%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) .................. $4,435,704 $4,164,516 $3,716,567 $3,031,714 $2,333,862
Ratios to average net assets:
Expenses ........................................ 0.90% e 0.91% e 0.91% e 1.00% 0.92%
Net investment income ........................... 1.17% 0.57% 0.67% 0.35% 0.63%
Portfolio turnover rate .......................... 7.44% 3.91% 7.03% 13.36% 10.59%
a The amount shown for a share outstanding throughout the period may not
correlate with the Statement of Operations for the period due to the
timing of sales and repurchase of the Fund shares in relation to income
earned and/or fluctuating market value of the investments of the Fund.
b Based on average daily shares outstanding.
c Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable.
d Amount rounds to less than $0.01 per share.
e Benefit of expense reduction rounds to less than 0.01%.
54 | The accompanying notes are an integral part of these financial statements.
| Annual Report
Franklin Value Investors Trust
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN BALANCE SHEET INVESTMENT FUND
-------------------------------------------------------------------
YEAR ENDED OCTOBER 31,
CLASS B 2006 2005 2004 2003 2002
-------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ..................... $ 60.67 $ 53.13 $ 44.97 $ 36.64 $ 37.04
-------------------------------------------------------------------
Income from investment operations a:
Net investment income (loss) b ........................ 0.26 (0.11) (0.06) (0.15) (0.08)
Net realized and unrealized gains (losses) ............ 9.58 8.58 8.53 8.74 0.91
-------------------------------------------------------------------
Total from investment operations ....................... 9.84 8.47 8.47 8.59 0.83
-------------------------------------------------------------------
Less distributions from:
Net investment income ................................. -- d (0.02) -- (0.01) (0.06)
Net realized gains .................................... (2.44) (0.91) (0.31) (0.25) (1.17)
-------------------------------------------------------------------
Total distributions .................................... (2.44) (0.93) (0.31) (0.26) (1.23)
-------------------------------------------------------------------
Redemption fees ........................................ -- e -- e -- e -- --
-------------------------------------------------------------------
Net asset value, end of year ........................... $ 68.07 $ 60.67 $ 53.13 $ 44.97 $ 36.64
===================================================================
Total return c ......................................... 16.65% 16.03% 18.94% 23.58% 2.08%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ........................ $127,037 $122,795 $114,891 $103,877 $89,241
Ratios to average net assets:
Expenses .............................................. 1.66% f 1.67% f 1.69% f 1.75% 1.67%
Net investment income (loss) .......................... 0.41% (0.19)% (0.11)% (0.40)% (0.12)%
Portfolio turnover rate ................................ 7.44% 3.91% 7.03% 13.36% 10.59%
a The amount shown for a share outstanding throughout the period may not
correlate with the Statement of Operations for the period due to the
timing of sales and repurchase of the Fund shares in relation to income
earned and/or fluctuating market value of the investments of the Fund.
b Based on average daily shares outstanding.
c Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable.
d Includes a dividend distribution in the amount of $0.0021.
e Amount rounds to less than $0.01 per share.
f Benefit of expense reduction rounds to less than 0.01%.
Annual Report |
The accompanying notes are an integral part of these financial statements. | 55
Franklin Value Investors Trust
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN BALANCE SHEET INVESTMENT FUND
--------------------------------------------------------------------
YEAR ENDED OCTOBER 31,
CLASS C 2006 2005 2004 2003 2002
--------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ..................... $ 60.75 $ 53.18 $ 45.01 $ 36.67 $ 37.06
--------------------------------------------------------------------
Income from investment operations a:
Net investment income (loss) b ........................ 0.27 (0.11) (0.06) (0.15) (0.08)
Net realized and unrealized gains (losses) ............ 9.59 8.59 8.54 8.74 0.92
--------------------------------------------------------------------
Total from investment operations ....................... 9.86 8.48 8.48 8.59 0.84
--------------------------------------------------------------------
Less distributions from:
Net investment income ................................. -- -- -- -- (0.06)
Net realized gains .................................... (2.44) (0.91) (0.31) (0.25) (1.17)
--------------------------------------------------------------------
Total distributions .................................... (2.44) (0.91) (0.31) (0.25) (1.23)
--------------------------------------------------------------------
Redemption fees ........................................ -- d -- d -- d -- --
--------------------------------------------------------------------
Net asset value, end of year ........................... $ 68.17 $ 60.75 $ 53.18 $ 45.01 $ 36.67
====================================================================
Total return c ......................................... 16.64% 16.04% 18.95% 23.57% 2.10%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ........................ $139,885 $135,939 $129,399 $127,925 $118,219
Ratios to average net assets:
Expenses .............................................. 1.65% e 1.67% e 1.69% e 1.75% 1.67%
Net investment income (loss) .......................... 0.42% (0.19)% (0.11)% (0.40)% (0.12)%
Portfolio turnover rate ................................ 7.44% 3.91% 7.03% 13.36% 10.59%
a The amount shown for a share outstanding throughout the period may not
correlate with the Statement of Operations for the period due to the
timing of sales and repurchase of the Fund shares in relation to income
earned and/or fluctuating market value of the investments of the Fund.
b Based on average daily shares outstanding.
c Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable.
d Amount rounds to less than $0.01 per share.
e Benefit of expense reduction rounds to less than 0.01%.
56 | The accompanying notes are an integral part of these financial statements.
| Annual Report
Franklin Value Investors Trust
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN BALANCE SHEET INVESTMENT FUND
--------------------------------------------------------------
YEAR ENDED OCTOBER 31,
CLASS R 2006 2005 2004 2003 2002 f
--------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ......................... $ 61.33 $ 53.69 $ 45.30 $ 36.92 $39.98
--------------------------------------------------------------
Income from investment operations a:
Net investment income b ................................... 0.60 0.18 0.20 0.03 0.07
Net realized and unrealized gains (losses) ................ 9.65 8.67 8.59 8.82 (3.07)
--------------------------------------------------------------
Total from investment operations ........................... 10.25 8.85 8.79 8.85 (3.00)
--------------------------------------------------------------
Less distributions from:
Net investment income ..................................... (0.36) (0.30) (0.09) (0.22) (0.06)
Net realized gains ........................................ (2.44) (0.91) (0.31) (0.25) --
--------------------------------------------------------------
Total distributions ........................................ (2.80) (1.21) (0.40) (0.47) (0.06)
--------------------------------------------------------------
Redemption fees ............................................ -- d -- d -- d -- --
--------------------------------------------------------------
Net asset value, end of year ............................... $ 68.78 $ 61.33 $ 53.69 $ 45.30 $36.92
==============================================================
Total return c ............................................. 17.22% 16.62% 19.55% 24.26% (7.53)%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ............................ $51,157 $30,810 $21,020 $13,336 $7,754
Ratios to average net assets:
Expenses .................................................. 1.16% e 1.17% e 1.19% e 1.25% 1.17% g
Net investment income ..................................... 0.91% 0.31% 0.39% 0.10% 0.38% g
Portfolio turnover rate .................................... 7.44% 3.91% 7.03% 13.36% 10.59%
a The amount shown for a share outstanding throughout the period may not
correlate with the Statement of Operations for the period due to the
timing of sales and repurchase of the Fund shares in relation to income
earned and/or fluctuating market value of the investments of the Fund.
b Based on average daily shares outstanding.
c Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable, and is not annualized for periods less than
one year.
d Amount rounds to less than $0.01 per share.
e Benefit of expense reduction rounds to less than 0.01%.
f For the period January 1, 2002 (effective date) to October 31, 2002.
g Annualized.
Annual Report |
The accompanying notes are an integral part of these financial statements. | 57
Franklin Value Investors Trust
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN BALANCE SHEET INVESTMENT FUND
-----------------------------------------------------------------
YEAR ENDED OCTOBER 31,
ADVISOR CLASS 2006 2005 2004 2003 2002
-----------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ..................... $ 61.81 $ 54.05 $ 45.54 $ 37.06 $ 37.21
-----------------------------------------------------------------
Income from investment operations a:
Net investment income b ............................... 0.93 0.46 0.44 0.23 0.31
Net realized and unrealized gains (losses) ............ 9.72 8.75 8.65 8.83 0.91
-----------------------------------------------------------------
Total from investment operations ....................... 10.65 9.21 9.09 9.06 1.22
-----------------------------------------------------------------
Less distributions from:
Net investment income ................................. (0.62) (0.54) (0.27) (0.33) (0.20)
Net realized gains .................................... (2.44) (0.91) (0.31) (0.25) (1.17)
-----------------------------------------------------------------
Total distributions .................................... (3.06) (1.45) (0.58) (0.58) (1.37)
-----------------------------------------------------------------
Redemption fees ........................................ -- c -- c -- c -- --
-----------------------------------------------------------------
Net asset value, end of year ........................... $ 69.40 $ 61.81 $ 54.05 $ 45.54 $ 37.06
=================================================================
Total return ........................................... 17.82% 17.20% 20.17% 24.80% 3.11%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ........................ $333,372 $260,209 $26,701 $22,189 $15,193
Ratios to average net assets:
Expenses .............................................. 0.66% d 0.67% d 0.69% d 0.75% 0.67%
Net investment income ................................. 1.41% 0.81% 0.89% 0.60% 0.88%
Portfolio turnover rate ................................ 7.44% 3.91% 7.03% 13.36% 10.59%
a The amount shown for a share outstanding throughout the period may not
correlate with the Statement of Operations for the period due to the
timing of sales and repurchase of the Fund shares in relation to income
earned and/or fluctuating market value of the investments of the Fund.
b Based on average daily shares outstanding.
c Amount rounds to less than $0.01 per share.
d Benefit of expense reduction rounds to less than 0.01%.
58 | The accompanying notes are an integral part of these financial statements.
| Annual Report
Franklin Value Investors Trust
STATEMENT OF INVESTMENTS, OCTOBER 31, 2006
- ------------------------------------------------------------------------------------------------------------------------------------
FRANKLIN BALANCE SHEET INVESTMENT FUND SHARES VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS 84.5%
CLOSED END MUTUAL FUNDS 1.4%
Apollo Investment Corp. .............................................................. 200,000 $ 4,312,000
a Emerging Markets Telecommunications Fund ............................................. 250,000 4,000,000
H&Q Healthcare Investors ............................................................. 150,000 2,538,000
John Hancock Bank and Thrift Opportunity Fund ........................................ 1,650,000 16,170,000
Latin America Equity Fund Inc. ....................................................... 222,015 8,947,204
The Mexico Fund Inc. (Mexico) ........................................................ 620,800 22,913,728
New Ireland Fund Inc. (Ireland) ...................................................... 135,000 4,140,450
Petroleum & Resources Corp. .......................................................... 150,000 5,155,500
-------------
TOTAL CLOSED END MUTUAL FUNDS (COST $38,030,843) ..................................... 68,176,882
-------------
COMMON STOCKS 83.0%
COMMERCIAL SERVICES 0.9%
Kelly Services Inc., A ............................................................... 1,506,800 43,365,704
-------------
CONSUMER DURABLES 5.5%
D.R. Horton Inc. ..................................................................... 2,200,000 51,546,000
b Furniture Brands International Inc. .................................................. 2,675,000 49,755,000
Hasbro Inc. .......................................................................... 1,650,000 42,768,000
Lennar Corp., A ...................................................................... 480,000 22,790,400
Lennar Corp., B ...................................................................... 48,000 2,136,480
M.D.C. Holdings Inc. ................................................................. 583,300 29,083,338
Pulte Homes Inc. ..................................................................... 2,600,000 80,574,000
-------------
278,653,218
-------------
CONSUMER NON-DURABLES 1.7%
a Alliance One International Inc. ...................................................... 2,504,200 12,070,244
Kellwood Co. ......................................................................... 786,000 24,051,600
Premium Standard Farms Inc. .......................................................... 1,282,700 24,679,148
Universal Corp. ...................................................................... 730,000 26,878,600
-------------
87,679,592
-------------
CONSUMER SERVICES 2.3%
a Aztar Corp. .......................................................................... 750,000 40,177,500
Bob Evans Farms Inc. ................................................................. 323,300 10,963,103
a,b Champps Entertainment Inc. ........................................................... 920,000 5,906,400
a Vail Resorts Inc. .................................................................... 1,525,000 58,941,250
-------------
115,988,253
-------------
DISTRIBUTION SERVICES 1.0%
Applied Industrial Technologies Inc. ................................................. 1,406,250 40,415,625
Handleman Co. ........................................................................ 1,000,000 8,000,000
-------------
48,415,625
-------------
ELECTRONIC TECHNOLOGY 1.7%
a ESCO Technologies Inc. ............................................................... 1,236,800 53,701,856
a FSI International Inc. ............................................................... 600,000 3,516,000
a Spansion Inc., A ..................................................................... 1,415,987 20,191,975
a Standard Microsystems Corp. .......................................................... 376,700 11,613,661
-------------
89,023,492
-------------
Annual Report | 59
Franklin Value Investors Trust
STATEMENT OF INVESTMENTS, OCTOBER 31, 2006 (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------------
FRANKLIN BALANCE SHEET INVESTMENT FUND SHARES VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
COMMON STOCKS (CONTINUED)
ENERGY MINERALS 1.1%
Peabody Energy Corp. ............................................................... 1,336,000 $ 56,071,920
-------------
FINANCE/RENTAL/LEASING 5.9%
CIT Group Inc. ..................................................................... 2,210,000 115,030,500
a,b Dollar Thrifty Automotive Group Inc. ............................................... 1,763,067 70,804,771
Freddie Mac ........................................................................ 1,640,000 113,143,600
-------------
298,978,871
-------------
FINANCIAL CONGLOMERATES 2.4%
Principal Financial Group Inc. ..................................................... 225,000 12,710,250
Prudential Financial Inc. .......................................................... 1,450,000 111,548,500
-------------
124,258,750
-------------
HEALTH TECHNOLOGY 0.8%
a Watson Pharmaceuticals Inc. ........................................................ 1,500,000 40,365,000
-------------
INDUSTRIAL SERVICES 3.0%
a Bristow Group Inc. ................................................................. 900,000 29,880,000
a Hanover Compressor Co. ............................................................. 1,500,000 27,780,000
a PHI Inc. ........................................................................... 77,500 2,464,112
a PHI Inc., non-voting ............................................................... 152,000 4,819,920
a Quanta Services Inc. ............................................................... 1,200,000 21,960,000
a Universal Compression Holdings Inc. ................................................ 850,000 51,221,000
a,b Xanser Corp. ....................................................................... 2,800,000 16,548,000
-------------
154,673,032
-------------
LIFE/HEALTH INSURANCE 6.7%
American National Insurance Co. .................................................... 647,500 75,110,000
AmerUs Group Co. ................................................................... 325,000 22,256,000
FBL Financial Group Inc., A ........................................................ 525,000 18,558,750
Genworth Financial Inc., A ......................................................... 1,600,000 53,504,000
Kansas City Life Insurance Co. ..................................................... 250,220 13,999,809
Manulife Financial Corp. (Canada) .................................................. 1,000,000 32,430,000
MetLife Inc. ....................................................................... 401,000 22,909,130
National Western Life Insurance Co., A ............................................. 150,000 35,977,500
Presidential Life Corp. ............................................................ 380,000 8,968,000
StanCorp Financial Group Inc. ...................................................... 1,200,000 54,828,000
-------------
338,541,189
-------------
NON-ENERGY MINERALS 7.5%
Chaparral Steel Co. ................................................................ 900,000 37,431,000
Nucor Corp. ........................................................................ 1,905,000 111,271,050
Reliance Steel & Aluminum Co. ...................................................... 1,950,200 66,989,370
Sherritt International Corp. (Canada) .............................................. 3,253,500 33,217,613
Texas Industries Inc. .............................................................. 800,000 49,680,000
United States Steel Corp. .......................................................... 1,225,000 82,810,000
-------------
381,399,033
-------------
60 | Annual Report
Franklin Value Investors Trust
STATEMENT OF INVESTMENTS, OCTOBER 31, 2006 (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------------
FRANKLIN BALANCE SHEET INVESTMENT FUND SHARES VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
COMMON STOCKS (CONTINUED)
PROCESS INDUSTRIES 8.1%
Ashland Inc. ....................................................................... 245,894 $ 14,532,335
Bowater Inc. ....................................................................... 1,436,650 30,040,352
Bunge Ltd. ......................................................................... 1,812,000 116,167,320
Corn Products International Inc. ................................................... 2,817,600 101,968,944
MeadWestvaco Corp. ................................................................. 1,570,000 43,206,400
Monsanto Co. ....................................................................... 1,350,000 59,697,000
a PolyOne Corp. ...................................................................... 1,375,000 11,275,000
Westlake Chemical Corp. ............................................................ 1,046,900 33,029,695
-------------
409,917,046
-------------
PRODUCER MANUFACTURING 6.4%
A.O. Smith Corp. ................................................................... 893,600 31,418,976
American Axle & Manufacturing Holdings Inc. ........................................ 1,225,000 22,968,750
CNH Global NV (Netherlands) ........................................................ 1,605,000 42,821,400
Lennox International Inc. .......................................................... 871,000 23,482,160
Mueller Industries Inc. ............................................................ 600,000 22,002,000
Oshkosh Truck Corp. ................................................................ 960,000 43,401,600
a,b Tecumseh Products Co., A ........................................................... 1,085,000 18,228,000
a,b Tecumseh Products Co., B ........................................................... 310,000 5,180,100
Timken Co. ......................................................................... 1,215,000 36,510,750
Trinity Industries Inc. ............................................................ 2,200,000 79,332,000
-------------
325,345,736
-------------
PROPERTY-CASUALTY INSURANCE 6.1%
Aspen Insurance Holdings Ltd. ...................................................... 154,300 3,829,726
E-L Financial Corp. Ltd. (Canada) .................................................. 104,666 53,710,736
IPC Holdings Ltd. .................................................................. 1,773,800 53,284,952
Midland Co. ........................................................................ 385,000 17,994,900
Old Republic International Corp. ................................................... 3,875,000 87,303,750
RLI Corp. .......................................................................... 489,400 26,530,374
Selective Insurance Group Inc. ..................................................... 650,000 35,912,500
The St. Paul Travelers Cos. Inc. ................................................... 575,000 29,399,750
-------------
307,966,688
-------------
REGIONAL BANKS 0.1%
UMB Financial Corp. ................................................................ 186,800 6,698,648
-------------
RETAIL TRADE 5.4%
a Big Lots Inc. ...................................................................... 2,000,000 42,160,000
The Cato Corp., A .................................................................. 450,000 10,300,500
a Charming Shoppes Inc. .............................................................. 4,425,000 65,490,000
Dillard's Inc., A .................................................................. 1,171,800 35,353,206
Fred's Inc. ........................................................................ 400,000 5,232,000
Haverty Furniture Cos. Inc. ........................................................ 920,000 14,536,000
Saks Inc. .......................................................................... 1,750,000 33,845,000
a,b Syms Corp. ......................................................................... 1,430,000 27,756,300
a Zale Corp. ......................................................................... 1,422,400 41,022,016
-------------
275,695,022
-------------
Annual Report | 61
Franklin Value Investors Trust
STATEMENT OF INVESTMENTS, OCTOBER 31, 2006 (CONTINUED)
- ----------------------------------------------------------------------------------------------------------------------------------
FRANKLIN BALANCE SHEET INVESTMENT FUND SHARES VALUE
- ----------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
COMMON STOCKS (CONTINUED)
SAVINGS BANKS 0.5%
Farmers & Merchants Bank of Long Beach ............................................... 2,200 $ 13,832,500
First Niagara Financial Group Inc. ................................................... 100,000 1,432,000
Hudson City Bancorp Inc. ............................................................. 900,000 12,357,000
--------------
27,621,500
--------------
SPECIALTY INSURANCE 3.7%
Assurant Inc. ........................................................................ 825,700 43,481,362
MBIA Inc. ............................................................................ 200,000 12,404,000
MGIC Investment Corp. ................................................................ 530,585 31,177,175
The PMI Group Inc. ................................................................... 1,325,000 56,511,250
Radian Group Inc. .................................................................... 850,000 45,305,000
--------------
188,878,787
--------------
TECHNOLOGY SERVICES 0.6%
a Intergraph Corp. ..................................................................... 740,000 32,330,600
--------------
TRANSPORTATION 6.1%
a ABX Air Inc. ......................................................................... 1,825,000 10,493,750
a Alaska Air Group Inc. ................................................................ 1,350,600 54,226,590
Burlington Northern Santa Fe Corp. ................................................... 570,000 44,192,100
a Crowley Maritime Corp. ............................................................... 4,240 7,950,000
a Kansas City Southern ................................................................. 722,500 20,511,775
a Mesa Air Group Inc. .................................................................. 450,000 4,005,000
Norfolk Southern Corp. ............................................................... 1,358,600 71,421,602
Overseas Shipholding Group Inc. ...................................................... 756,000 47,287,800
Teekay Shipping Corp. (Bahamas) ...................................................... 1,240,000 50,976,400
--------------
311,065,017
--------------
UTILITIES 5.5%
Atmos Energy Corp. ................................................................... 833,600 25,616,528
Entergy Corp. ........................................................................ 790,000 67,805,700
Northeast Utilities .................................................................. 1,550,000 38,765,500
PNM Resources Inc. ................................................................... 1,863,300 52,470,528
a Sierra Pacific Resources ............................................................. 5,010,000 75,951,600
Xcel Energy Inc. ..................................................................... 878,000 19,377,460
--------------
279,987,316
--------------
TOTAL COMMON STOCKS (COST $2,115,390,772) ............................................ 4,222,920,039
--------------
----------------
PRINCIPAL AMOUNT
----------------
CORPORATE BOND (COST $5,532,908) 0.1%
PRODUCER MANUFACTURING 0.1%
Mueller Industries Inc., 6.00%, 11/01/14 ............................................. $ 5,604,000 5,183,700
--------------
TOTAL LONG TERM INVESTMENTS (COST $2,158,954,523) .................................... 4,296,280,621
--------------
----------------
SHARES
----------------
SHORT TERM INVESTMENTS 15.8%
MONEY MARKET FUND (COST $180,864,323) 3.6%
c Franklin Institutional Fiduciary Trust Money Market Portfolio, 4.96% ................. 180,864,323 180,864,323
--------------
62 | Annual Report
Franklin Value Investors Trust
STATEMENT OF INVESTMENTS, OCTOBER 31, 2006 (CONTINUED)
- ----------------------------------------------------------------------------------------------------------------------------------
FRANKLIN BALANCE SHEET INVESTMENT FUND PRINCIPAL AMOUNT VALUE
- ----------------------------------------------------------------------------------------------------------------------------------
SHORT TERM INVESTMENTS (CONTINUED)
REPURCHASE AGREEMENT (COST $622,811,887) 12.2%
d Joint Repurchase Agreement, 5.264%, 11/01/06 (Maturity Value $622,902,955) .......... $622,811,887 $ 622,811,887
ABN AMRO Bank, N.V., New York Branch (Maturity Value $58,640,084)
Banc of America Securities LLC (Maturity Value $58,640,084)
Barclays Capital Inc. (Maturity Value $58,640,084)
Bear, Stearns & Co. Inc. (Maturity Value $46,910,822)
BNP Paribas Securities Corp. (Maturity Value $58,640,084)
Deutsche Bank Securities Inc. (Maturity Value $58,640,084)
Greenwich Capital Markets Inc. (Maturity Value $58,640,084)
Lehman Brothers Inc. (Maturity Value $48,231,377)
Merrill Lynch Government Securities Inc. (Maturity Value $58,640,084)
Morgan Stanley & Co. Inc. (Maturity Value $58,640,084)
UBS Securities LLC (Maturity Value $58,640,084)
Collateralized by U.S. Government Agency Securities, 2.625% - 7.25%,
11/03/06 - 7/18/11; e U.S. Treasury Bills, 3/15/07; and
U.S. Treasury Notes, 3.375% - 6.125%, 3/15/07 - 2/15/29
--------------
TOTAL INVESTMENTS (COST $2,962,630,733) 100.3% ...................................... 5,099,956,831
OTHER ASSETS, LESS LIABILITIES (0.3)% ............................................... (12,801,851)
--------------
NET ASSETS 100.0% ................................................................... $5,087,154,980
==============
a Non-income producing for the twelve months ended October 31, 2006.
b See Note 9 regarding holdings of 5% voting securities.
c See Note 7 regarding investments in the Franklin Institutional Fiduciary
Trust Money Market Portfolio. The rate shown is the annualized seven-day
yield at period end.
d See Note 1(c) regarding joint repurchase agreement.
e The security is traded on a discount basis with no stated coupon rate.
Annual Report |
The accompanying notes are an integral part of these financial statements. | 63
Franklin Value Investors Trust
FINANCIAL HIGHLIGHTS
FRANKLIN LARGE CAP VALUE FUND
-----------------------------------------------------------------
YEAR ENDED OCTOBER 31,
CLASS A 2006 2005 2004 2003 2002
-----------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ........................... $ 14.66 $ 14.01 $ 12.40 $ 10.48 $ 11.66
-----------------------------------------------------------------
Income from investment operations a:
Net investment income b ..................................... 0.20 0.13 0.08 0.07 0.07
Net realized and unrealized gains (losses) .................. 2.18 0.63 1.58 1.92 (1.08)
-----------------------------------------------------------------
Total from investment operations ............................. 2.38 0.76 1.66 1.99 (1.01)
-----------------------------------------------------------------
Less distributions from:
Net investment income ....................................... (0.15) (0.08) (0.05) (0.07) (0.07)
Net realized gains .......................................... (0.34) (0.03) -- -- (0.10)
-----------------------------------------------------------------
Total distributions .......................................... (0.49) (0.11) (0.05) (0.07) (0.17)
-----------------------------------------------------------------
Redemption fees .............................................. -- d -- d -- d -- --
-----------------------------------------------------------------
Net asset value, end of year ................................. $ 16.55 $ 14.66 $ 14.01 $ 12.40 $ 10.48
=================================================================
Total return c ............................................... 16.62% 5.42% 13.45% 19.08% (8.82)%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) .............................. $184,225 $156,841 $127,267 $59,600 $32,825
Ratios to average net assets:
Expenses .................................................... 1.33% e 1.29% e 1.31% 1.38% 1.42%
Net investment income ....................................... 1.29% 0.91% 0.59% 0.60% 0.64%
Portfolio turnover rate ...................................... 34.36% 25.33% 21.69% 27.47% 15.33%
a The amount shown for a share outstanding throughout the period may not
correlate with the Statement of Operations for the period due to the
timing of sales and repurchase of the Fund shares in relation to income
earned and/or fluctuating market value of the investments of the Fund.
b Based on average daily shares outstanding.
c Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable.
d Amount rounds to less than $0.01 per share.
e Benefit of expense reduction rounds to less than 0.01%.
64 | The accompanying notes are an integral part of these financial statements.
| Annual Report
Franklin Value Investors Trust
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN LARGE CAP VALUE FUND
--------------------------------------------------------------
YEAR ENDED OCTOBER 31,
CLASS B 2006 2005 2004 2003 2002
--------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ............................ $ 14.47 $ 13.85 $ 12.29 $ 10.39 $11.58
--------------------------------------------------------------
Income from investment operations a:
Net investment income (loss) b ............................... 0.10 0.04 (0.01) (0.01) --
Net realized and unrealized gains (losses) ................... 2.16 0.61 1.58 1.92 (1.07)
--------------------------------------------------------------
Total from investment operations .............................. 2.26 0.65 1.57 1.91 (1.07)
--------------------------------------------------------------
Less distributions from:
Net investment income ........................................ (0.05) -- f (0.01) (0.01) (0.02)
Net realized gains ........................................... (0.34) (0.03) -- -- (0.10)
--------------------------------------------------------------
Total distributions ........................................... (0.39) (0.03) (0.01) (0.01) (0.12)
--------------------------------------------------------------
Redemption fees ............................................... -- d -- d -- d -- --
--------------------------------------------------------------
Net asset value, end of year .................................. $ 16.34 $ 14.47 $ 13.85 $ 12.29 $10.39
==============================================================
Total return c ................................................ 15.90% 4.71% 12.76% 18.35% (9.38)%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ............................... $22,120 $22,072 $21,794 $10,865 $4,975
Ratios to average net assets:
Expenses ..................................................... 1.98% e 1.94% e 1.96% 2.04% 2.07%
Net investment income (loss) ................................. 0.64% 0.26% (0.06)% (0.06)% (0.01)%
Portfolio turnover rate ....................................... 34.36% 25.33% 21.69% 27.47% 15.33%
a The amount shown for a share outstanding throughout the period may not
correlate with the Statement of Operations for the period due to the
timing of sales and repurchase of the Fund shares in relation to income
earned and/or fluctuating market value of the investments of the Fund.
b Based on average daily shares outstanding.
c Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable.
d Amount rounds to less than $0.01 per share.
e Benefit of expense reduction rounds to less than 0.01%.
f Includes a dividend distribution in the amount of $0.0024.
Annual Report |
The accompanying notes are an integral part of these financial statements. | 65
Franklin Value Investors Trust
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN LARGE CAP VALUE FUND
---------------------------------------------------------------
YEAR ENDED OCTOBER 31,
CLASS C 2006 2005 2004 2003 2002
---------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ........................... $ 14.47 $ 13.85 $ 12.28 $ 10.39 $ 11.57
---------------------------------------------------------------
Income from investment operations a:
Net investment income (loss) b .............................. 0.10 0.04 (0.01) (0.01) --
Net realized and unrealized gains (losses) .................. 2.16 0.61 1.58 1.91 (1.07)
---------------------------------------------------------------
Total from investment operations ............................. 2.26 0.65 1.57 1.90 (1.07)
---------------------------------------------------------------
Less distributions from:
Net investment income ....................................... (0.05) -- -- (0.01) (0.01)
Net realized gains .......................................... (0.34) (0.03) -- -- (0.10)
---------------------------------------------------------------
Total distributions .......................................... (0.39) (0.03) -- (0.01) (0.11)
---------------------------------------------------------------
Redemption fees .............................................. -- d -- d -- d -- --
---------------------------------------------------------------
Net asset value, end of year ................................. $ 16.34 $ 14.47 $ 13.85 $ 12.28 $ 10.39
===============================================================
Total return c ............................................... 15.92% 4.69% 12.78% 18.35% (9.34)%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) .............................. $63,983 $59,929 $57,966 $32,592 $17,738
Ratios to average net assets:
Expenses .................................................... 1.97% e 1.94% e 1.96% 2.06% 2.04%
Net investment income (loss) ................................ 0.65% 0.26% (0.06)% (0.08)% 0.02%
Portfolio turnover rate ...................................... 34.36% 25.33% 21.69% 27.47% 15.33%
a The amount shown for a share outstanding throughout the period may not
correlate with the Statement of Operations for the period due to the
timing of sales and repurchase of the Fund shares in relation to income
earned and/or fluctuating market value of the investments of the Fund.
b Based on average daily shares outstanding.
c Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable.
d Amount rounds to less than $0.01 per share.
e Benefit of expense reduction rounds to less than 0.01%.
66 | The accompanying notes are an integral part of these financial statements.
| Annual Report
Franklin Value Investors Trust
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN LARGE CAP VALUE FUND
----------------------------------------------------------
YEAR ENDED OCTOBER 31,
CLASS R 2006 2005 2004 2003 2002 f
----------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year .......................... $14.56 $13.93 $12.34 $10.48 $10.55
----------------------------------------------------------
Income from investment operations a:
Net investment income b .................................... 0.17 0.11 0.06 0.05 0.01
Net realized and unrealized gains (losses) ................. 2.17 0.61 1.59 1.90 (0.08)
----------------------------------------------------------
Total from investment operations ............................ 2.34 0.72 1.65 1.95 (0.07)
----------------------------------------------------------
Less distributions from:
Net investment income ...................................... (0.14) (0.06) (0.06) (0.09) --
Net realized gains ......................................... (0.34) (0.03) -- -- --
----------------------------------------------------------
Total distributions ......................................... (0.48) (0.09) (0.06) (0.09) --
----------------------------------------------------------
Redemption fees ............................................. -- d -- d -- d -- --
----------------------------------------------------------
Net asset value, end of year ................................ $16.42 $14.56 $13.93 $12.34 $10.48
==========================================================
Total return c .............................................. 16.46% 5.19% 13.44% 18.77% (0.66)%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ............................. $7,717 $6,896 $3,414 $ 826 $ 65
Ratios to average net assets:
Expenses ................................................... 1.48% e 1.44% e 1.46% 1.54% 1.59% g
Net investment income ...................................... 1.14% 0.76% 0.44% 0.44% 0.47% g
Portfolio turnover rate ..................................... 34.36% 25.33% 21.69% 27.47% 15.33%
a The amount shown for a share outstanding throughout the period may not
correlate with the Statement of Operations for the period due to the
timing of sales and repurchase of the Fund shares in relation to income
earned and/or fluctuating market value of the investments of the Fund.
b Based on average daily shares outstanding.
c Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable, and is not annualized for periods less than
one year.
d Amount rounds to less than $0.01 per share.
e Benefit of expense reduction rounds to less than 0.01%.
f For the period August 1, 2002 (effective date) to October 31, 2002.
g Annualized.
Annual Report |
The accompanying notes are an integral part of these financial statements. | 67
Franklin Value Investors Trust
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN LARGE CAP VALUE FUND
-----------
YEAR ENDED
OCTOBER 31,
ADVISOR CLASS 2006 c
-----------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ................................ $14.63
------
Income from investment operations a:
Net investment income b .......................................... 0.24
Net realized and unrealized gains (losses) ....................... 2.23
------
Total from investment operations .................................. 2.47
------
Less distributions from:
Net investment income ............................................ (0.20)
Net realized gains ............................................... (0.34)
------
Total distributions ............................................... (0.54)
------
Redemption fees ................................................... -- d
------
Net asset value, end of year ...................................... $16.56
======
Total return ...................................................... 17.09%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ................................... $1,989
Ratios to average net assets:
Expenses ......................................................... 0.98% e
Net investment income ............................................ 1.64%
Portfolio turnover rate ........................................... 34.36%
a The amount shown for a share outstanding throughout the period may not
correlate with the Statement of Operations for the period due to the
timing of sales and repurchase of the Fund shares in relation to income
earned and/or fluctuating market value of the investments of the Fund.
b Based on average daily shares outstanding.
c For the period November 1, 2005 (effective date) to October 31, 2006.
d Amount rounds to less than $0.01 per share.
e Benefit of expense reduction rounds to less than 0.01%.
68 | The accompanying notes are an integral part of these financial statements.
| Annual Report
Franklin Value Investors Trust
STATEMENT OF INVESTMENTS, OCTOBER 31, 2006
- ----------------------------------------------------------------------------------------------------------------------------------
FRANKLIN LARGE CAP VALUE FUND SHARES VALUE
- ----------------------------------------------------------------------------------------------------------------------------------
COMMON STOCKS 90.2%
COMMERCIAL SERVICES 3.0%
Cintas Corp. ....................................................................... 69,000 $ 2,856,600
R. R. Donnelley & Sons Co. ......................................................... 164,300 5,563,198
-------------
8,419,798
-------------
CONSUMER DURABLES 1.5%
D.R. Horton Inc. ................................................................... 177,000 4,147,110
-------------
CONSUMER NON-DURABLES 7.5%
H.J. Heinz Co. ..................................................................... 23,000 969,680
Kimberly-Clark Corp. ............................................................... 104,000 6,918,080
NIKE Inc., B ....................................................................... 39,000 3,583,320
The Procter & Gamble Co. ........................................................... 150,000 9,508,500
-------------
20,979,580
-------------
CONSUMER SERVICES 3.7%
Gannett Co. Inc. ................................................................... 66,600 3,938,724
McDonald's Corp. ................................................................... 153,000 6,413,760
-------------
10,352,484
-------------
ELECTRONIC TECHNOLOGY 0.9%
Hewlett-Packard Co. ................................................................ 68,000 2,634,320
-------------
ENERGY MINERALS 7.0%
BP PLC, ADR (United Kingdom) ....................................................... 41,000 2,751,100
ConocoPhillips ..................................................................... 52,800 3,180,672
Exxon Mobil Corp. .................................................................. 130,000 9,284,600
Occidental Petroleum Corp. ......................................................... 92,000 4,318,480
-------------
19,534,852
-------------
FINANCE/RENTAL/LEASING 3.8%
Freddie Mac ........................................................................ 156,000 10,762,440
-------------
FINANCIAL CONGLOMERATES 3.5%
Citigroup Inc. ..................................................................... 198,000 9,931,680
-------------
HEALTH TECHNOLOGY 4.7%
Abbott Laboratories ................................................................ 141,400 6,717,914
Becton Dickinson and Co. ........................................................... 52,000 3,641,560
Pfizer Inc. ........................................................................ 107,000 2,851,550
-------------
13,211,024
-------------
INVESTMENT BANKS/BROKERS 3.3%
Lehman Brothers Holdings Inc. ...................................................... 61,000 4,748,240
Morgan Stanley ..................................................................... 57,000 4,356,510
-------------
9,104,750
-------------
INVESTMENT MANAGERS 2.2%
Mellon Financial Corp. ............................................................. 157,000 6,091,600
-------------
LIFE/HEALTH INSURANCE 1.2%
MetLife Inc. ....................................................................... 57,000 3,256,410
-------------
MAJOR BANKS 7.0%
Bank of America Corp. .............................................................. 195,000 10,504,650
Wachovia Corp. ..................................................................... 164,000 9,102,000
-------------
19,606,650
-------------
Annual Report | 69
Franklin Value Investors Trust
STATEMENT OF INVESTMENTS, OCTOBER 31, 2006 (CONTINUED)
- ----------------------------------------------------------------------------------------------------------------------------------
FRANKLIN LARGE CAP VALUE FUND SHARES VALUE
- ----------------------------------------------------------------------------------------------------------------------------------
COMMON STOCKS (CONTINUED)
MULTI-LINE INSURANCE 2.6%
American International Group Inc. ...................................................... 109,900 $ 7,381,983
-------------
NON-ENERGY MINERALS 0.9%
Alcoa Inc. ............................................................................. 91,000 2,630,810
-------------
PROCESS INDUSTRIES 3.5%
The Dow Chemical Co. ................................................................... 115,000 4,690,850
Praxair Inc. ........................................................................... 84,478 5,089,799
-------------
9,780,649
-------------
PRODUCER MANUFACTURING 13.7%
3M Co. ................................................................................. 91,000 7,174,440
General Electric Co. ................................................................... 278,000 9,760,580
Illinois Tool Works Inc. ............................................................... 166,100 7,961,173
Masco Corp. ............................................................................ 261,000 7,216,650
United Technologies Corp. .............................................................. 94,000 6,177,680
-------------
38,290,523
-------------
PROPERTY-CASUALTY INSURANCE 5.3%
The Allstate Corp. ..................................................................... 136,000 8,344,960
Chubb Corp. ............................................................................ 121,700 6,468,355
-------------
14,813,315
-------------
REGIONAL BANKS 3.3%
U.S. Bancorp ........................................................................... 269,000 9,102,960
-------------
SAVINGS BANKS 2.0%
Washington Mutual Inc. ................................................................. 131,000 5,541,300
-------------
SPECIALTY INSURANCE 2.1%
Ambac Financial Group Inc. ............................................................. 71,100 5,936,140
-------------
TECHNOLOGY SERVICES 5.9%
International Business Machines Corp. .................................................. 87,000 8,032,710
Microsoft Corp. ........................................................................ 294,000 8,440,740
-------------
16,473,450
-------------
UTILITIES 1.6%
Entergy Corp. .......................................................................... 53,000 4,548,990
-------------
TOTAL COMMON STOCKS (COST $205,200,514) ................................................ 252,532,818
-------------
SHORT TERM INVESTMENT (COST $27,111,462) 9.7%
MONEY MARKET FUND 9.7%
a Franklin Institutional Fiduciary Trust Money Market Portfolio, 4.96% ................... 27,111,462 27,111,462
-------------
TOTAL INVESTMENTS (COST $232,311,976) 99.9% ............................................ 279,644,280
OTHER ASSETS, LESS LIABILITIES 0.1% .................................................... 389,162
-------------
NET ASSETS 100.0% ...................................................................... $ 280,033,442
=============
See Selected Portfolio Abbreviation on page 94.
a See Note 7 regarding investments in the Franklin Institutional Fiduciary
Trust Money Market Portfolio. The rate shown is the annualized seven-day
yield at period end.
70 | The accompanying notes are an integral part of these financial statements.
| Annual Report
Franklin Value Investors Trust
FINANCIAL HIGHLIGHTS
FRANKLIN MICROCAP VALUE FUND
-----------------------------------------------------------------
YEAR ENDED OCTOBER 31,
CLASS A 2006 2005 2004 2003 2002
-----------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ......................... $ 38.15 $ 34.48 $ 30.41 $ 24.09 $ 24.64
-----------------------------------------------------------------
Income from investment operations a:
Net investment income (loss) b ............................ 0.48 0.18 0.05 (0.04) (0.01)
Net realized and unrealized gains (losses) ................ 5.73 5.32 4.65 7.80 0.68
-----------------------------------------------------------------
Total from investment operations ........................... 6.21 5.50 4.70 7.76 0.67
-----------------------------------------------------------------
Less distributions from:
Net investment income ..................................... (0.19) (0.05) -- -- (0.08)
Net realized gains ........................................ (2.85) (1.78) (0.63) (1.44) (1.14)
-----------------------------------------------------------------
Total distributions ........................................ (3.04) (1.83) (0.63) (1.44) (1.22)
-----------------------------------------------------------------
Redemption fees ............................................ -- d -- d -- d -- --
-----------------------------------------------------------------
Net asset value, end of year ............................... $ 41.32 $ 38.15 $ 34.48 $ 30.41 $ 24.09
=================================================================
Total return c ............................................. 17.25% 16.45% 15.64% 33.90% 2.77%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ............................ $473,837 $443,037 $418,464 $310,995 $230,562
Ratios to average net assets:
Expenses .................................................. 1.11% e 1.10% e 1.12% e 1.23% 1.18%
Net investment income (loss) .............................. 1.22% 0.48% 0.13% (0.16)% (0.02)%
Portfolio turnover rate .................................... 6.47% 13.86% 11.38% 13.35% 28.35%
a The amount shown for a share outstanding throughout the period may not
correlate with the Statement of Operations for the period due to the
timing of sales and repurchase of the Fund shares in relation to income
earned and/or fluctuating market value of the investments of the Fund.
b Based on average daily shares outstanding.
c Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable.
d Amount rounds to less than $0.01 per share.
e Benefit of expense reduction rounds to less than 0.01%.
Annual Report |
The accompanying notes are an integral part of these financial statements. | 71
Franklin Value Investors Trust
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN MICROCAP VALUE FUND
-----------
YEAR ENDED
OCTOBER 31,
ADVISOR CLASS 2006 c
-----------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ............................. $38.28
------
Income from investment operations a:
Net investment income b ....................................... 0.61
Net realized and unrealized gains (losses) .................... 5.58
------
Total from investment operations ............................... 6.19
------
Less distributions from:
Net investment income ......................................... (0.19)
Net realized gains ............................................ (2.85)
------
Total distributions ............................................ (3.04)
------
Redemption fees ................................................ -- d
------
Net asset value, end of year ................................... $41.43
======
Total return ................................................... 17.56%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ................................ $6,298
Ratios to average net assets:
Expenses ...................................................... 0.87% e
Net investment income ......................................... 1.46%
Portfolio turnover rate ........................................ 6.47%
a The amount shown for a share outstanding throughout the period may not
correlate with the Statement of Operations for the period due to the
timing of sales and repurchase of the Fund shares in relation to income
earned and/or fluctuating market value of the investments of the Fund.
b Based on average daily shares outstanding.
c For the period November 1, 2005 (effective date) to October 31, 2006.
d Amount rounds to less than $0.01 per share.
e Benefit of expense reduction rounds to less than 0.01%.
72 | The accompanying notes are an integral part of these financial statements.
| Annual Report
Franklin Value Investors Trust
STATEMENT OF INVESTMENTS, OCTOBER 31, 2006
- ------------------------------------------------------------------------------------------------------------------------------------
FRANKLIN MICROCAP VALUE FUND SHARES VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS 82.5%
COMMON STOCKS 78.9%
COMMERCIAL SERVICES 1.6%
Courier Corp. ...................................................................... 200,000 $ 7,844,000
-------------
COMMUNICATIONS 2.2%
Atlantic Tele-Network Inc. ......................................................... 542,800 10,497,752
-------------
CONSUMER DURABLES 3.8%
a,b Allen Organ Co., Escrow Account .................................................... 94,800 1,544,292
Bassett Furniture Industries Inc. .................................................. 133,100 2,198,812
a Cavalier Homes Inc. ................................................................ 432,000 1,330,560
a Chromcraft Revington Inc. .......................................................... 200,000 1,900,000
Cobra Electronics Corp. ............................................................ 32,480 296,867
a The Dixie Group Inc. ............................................................... 405,000 5,459,400
Flexsteel Industries Inc. .......................................................... 225,000 2,839,500
a National R.V. Holdings Inc. ........................................................ 295,000 914,500
a,c Rockford Corp. ..................................................................... 575,000 1,851,500
-------------
18,335,431
-------------
CONSUMER NON-DURABLES 13.5%
a Alliance One International Inc. .................................................... 2,186,700 10,539,894
Brown Shoe Co. Inc. ................................................................ 247,500 9,642,600
a CoolBrands International Inc. (Canada) ............................................. 930,000 393,559
c Delta Apparel Inc. ................................................................. 680,000 12,580,000
a John B. Sanfilippo & Son Inc. ...................................................... 195,000 2,061,150
Premium Standard Farms Inc. ........................................................ 700,000 13,468,000
a Seneca Foods Corp., A .............................................................. 256,600 6,543,300
a Seneca Foods Corp., B .............................................................. 121,500 3,247,087
c Tandy Brands Accessories Inc. ...................................................... 540,000 6,307,200
-------------
64,782,790
-------------
DISTRIBUTION SERVICES 1.3%
The Coast Distribution System Inc. ................................................. 66,800 663,324
a GTSI Corp. ......................................................................... 298,249 2,675,294
Handleman Co. ...................................................................... 360,000 2,880,000
-------------
6,218,618
-------------
ELECTRONIC TECHNOLOGY 1.7%
c Espey Manufacturing & Electronics Corp. ............................................ 156,000 2,691,000
a Ladish Co. Inc. .................................................................... 53,000 1,654,660
Printronix Inc. .................................................................... 130,000 1,567,800
Sparton Corp. ...................................................................... 242,252 2,083,367
-------------
7,996,827
-------------
HEALTH SERVICES 2.2%
Healthcare Services Group Inc. ..................................................... 390,600 10,616,508
-------------
INDUSTRIAL SERVICES 6.0%
Ecology and Environment Inc., A .................................................... 205,000 2,101,250
a Exponent Inc. ...................................................................... 140,000 2,534,000
a Layne Christensen Co. .............................................................. 376,686 11,100,937
Annual Report | 73
Franklin Value Investors Trust
STATEMENT OF INVESTMENTS, OCTOBER 31, 2006 (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------------
FRANKLIN MICROCAP VALUE FUND SHARES VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
COMMON STOCKS (CONTINUED)
INDUSTRIAL SERVICES (CONTINUED)
a PHI Inc. ........................................................................... 17,600 $ 559,592
a PHI Inc., non-voting ............................................................... 394,499 12,509,563
-------------
28,805,342
-------------
NON-ENERGY MINERALS 3.5%
a Aleris International Inc. .......................................................... 250,603 12,908,561
a,c Continental Materials Corp. ........................................................ 99,500 2,626,800
The Monarch Cement Co. ............................................................. 42,444 1,273,320
-------------
16,808,681
-------------
PROCESS INDUSTRIES 2.9%
a,c American Pacific Corp. ............................................................. 610,000 4,416,400
a Intertape Polymer Group Inc. (Canada) .............................................. 250,000 1,457,500
a Mercer International Inc. (Germany) ................................................ 761,400 7,385,580
Schweitzer-Mauduit International Inc. .............................................. 34,724 800,735
-------------
14,060,215
-------------
PRODUCER MANUFACTURING 17.7%
Alamo Group Inc. ................................................................... 105,000 2,436,000
Burnham Holdings Inc., A ........................................................... 43,000 731,000
Central Steel and Wire Co. ......................................................... 6,355 3,940,100
CIRCOR International Inc. .......................................................... 247,500 8,160,075
a Gehl Co. ........................................................................... 300,000 8,562,000
Gibraltar Industries Inc. .......................................................... 356,099 7,517,250
c Hardinge Inc. ...................................................................... 900,991 13,370,706
Insteel Industries Inc. ............................................................ 124,560 2,234,606
a,c Nashua Corp. ....................................................................... 477,930 2,987,063
a Northwest Pipe Co. ................................................................. 333,000 9,950,040
a P & F Industries Inc., A ........................................................... 6,857 84,684
a,c Proliance International Inc. ....................................................... 823,800 3,558,816
a RTI International Metals Inc. ...................................................... 237,000 14,532,840
Smith Investment Co. ............................................................... 42,400 2,565,200
a Tecumseh Products Co., A ........................................................... 230,000 3,864,000
a Tecumseh Products Co., B ........................................................... 12,799 213,871
-------------
84,708,251
-------------
PROPERTY-CASUALTY INSURANCE 5.8%
a,c ACMAT Corp., A ..................................................................... 392,800 9,034,400
Baldwin & Lyons Inc., B ............................................................ 228,264 5,905,190
Mercer Insurance Group Inc. ........................................................ 25,000 602,000
c Merchants Group Inc. ............................................................... 160,800 4,897,164
Safety Insurance Group Inc. ........................................................ 51,000 2,550,510
a United America Indemnity Ltd. ...................................................... 217,168 4,986,177
-------------
27,975,441
-------------
REAL ESTATE DEVELOPMENT 2.5%
Bresler & Reiner Inc. .............................................................. 205,000 5,678,500
Case, Pomeroy & Co. Inc., A ........................................................ 220 391,600
Case, Pomeroy & Co. Inc., cvt., B .................................................. 533 938,080
74 | Annual Report
Franklin Value Investors Trust
STATEMENT OF INVESTMENTS, OCTOBER 31, 2006 (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------------
FRANKLIN MICROCAP VALUE FUND SHARES VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
COMMON STOCKS (CONTINUED)
REAL ESTATE DEVELOPMENT (CONTINUED)
a Griffin Land & Nurseries Inc. .............................................................. 173,000 $ 4,847,460
a,b LandCo Real Estate LLC, Liquidating Trust .................................................. 94,800 240,792
-------------
12,096,432
-------------
REAL ESTATE INVESTMENT TRUST 1.6%
Arbor Realty Trust Inc. .................................................................... 270,000 7,506,000
-------------
RETAIL TRADE 4.7%
a,c Duckwall-ALCO Stores Inc. .................................................................. 230,000 9,027,500
Haverty Furniture Cos. Inc. ................................................................ 147,000 2,322,600
c S&K Famous Brands Inc. ..................................................................... 255,500 3,449,250
Village Super Market Inc., A ............................................................... 115,175 7,947,075
-------------
22,746,425
-------------
SAVINGS BANKS 2.6%
Beverly Hills Bancorp Inc. ................................................................. 700,000 5,873,000
First Defiance Financial Corp. ............................................................. 235,000 6,796,200
-------------
12,669,200
-------------
TRANSPORTATION 3.5%
a Crowley Maritime Corp. ..................................................................... 2,342 4,391,250
a,c International Shipholding Corp. ............................................................ 474,800 5,745,080
OMI Corp. .................................................................................. 120,000 2,678,400
Providence and Worcester Railroad Co. ...................................................... 205,000 3,972,900
-------------
16,787,630
-------------
UTILITIES 1.8%
Central Vermont Public Service Corp. ....................................................... 26,400 595,848
Green Mountain Power Corp. ................................................................. 201,700 6,783,171
a Maine & Maritimes Corp. .................................................................... 27,100 436,988
a SEMCO Energy Inc. .......................................................................... 130,000 741,000
-------------
8,557,007
-------------
TOTAL COMMON STOCKS (COST $199,514,948) .................................................... 379,012,550
-------------
CONVERTIBLE PREFERRED STOCKS 1.6%
CONSUMER NON-DURABLES 1.6%
a Seneca Foods Corp., cvt. participating pfd. ................................................ 200,000 5,100,000
a Seneca Foods Corp., cvt. participating pfd., Series 2003 ................................... 100,000 2,550,000
-------------
TOTAL CONVERTIBLE PREFERRED STOCKS (COST $4,905,000) ....................................... 7,650,000
-------------
----------------
PRINCIPAL AMOUNT
----------------
CONVERTIBLE BOND (COST $7,000,000) 2.0%
PROCESS INDUSTRIES 2.0%
d Mercer International Inc., cvt., senior sub. note, 144A, 8.50%, 10/15/10 (Germany) ......... $ 7,000,000 9,415,000
-------------
TOTAL LONG TERM INVESTMENTS (COST $211,419,948) ............................................ 396,077,550
-------------
Annual Report | 75
Franklin Value Investors Trust
STATEMENT OF INVESTMENTS, OCTOBER 31, 2006 (CONTINUED)
- ----------------------------------------------------------------------------------------------------------------------------------
FRANKLIN MICROCAP VALUE FUND SHARES VALUE
- ----------------------------------------------------------------------------------------------------------------------------------
SHORT TERM INVESTMENT (COST $85,112,021) 17.7%
MONEY MARKET FUND 17.7%
e Franklin Institutional Fiduciary Trust Money Market Portfolio, 4.96% .................... 85,112,021 $ 85,112,021
-------------
TOTAL INVESTMENTS (COST $296,531,969) 100.2% ............................................ 481,189,571
OTHER ASSETS, LESS LIABILITIES (0.2)% ................................................... (1,054,189)
-------------
NET ASSETS 100.0% ....................................................................... $ 480,135,382
=============
a Non-income producing for the twelve months ended October 31, 2006.
b See Note 8 regarding restricted securities.
c See Note 9 regarding holdings of 5% voting securities.
d Security was purchased pursuant to Rule 144A under the Securities Act of
1933 and may be sold in transactions exempt from registration only to
qualified institutional buyers or in a public offering registered under
the Securities Act of 1933. These securities have been deemed liquid under
guidelines approved by the Trust's Board of Trustees. At October 31, 2006,
the value of this security was $9,415,000, representing 1.96% of net
assets.
e See Note 7 regarding investments in the Franklin Institutional Fiduciary
Trust Money Market Portfolio. The rate shown is the annualized seven-day
yield at period end.
76 | The accompanying notes are an integral part of these financial statements.
| Annual Report
Franklin Value Investors Trust
FINANCIAL HIGHLIGHTS
FRANKLIN MIDCAP VALUE FUND
---------------------------
YEAR ENDED PERIOD ENDED
OCTOBER 31, OCTOBER 31,
CLASS A 2006 2005 f
---------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ....................................... $ 9.80 $ 10.00
----------------------
Income from investment operations a:
Net investment income b ................................................. 0.04 0.01
Net realized and unrealized gains (losses) .............................. 1.59 (0.21)
----------------------
Total from investment operations ......................................... 1.63 (0.20)
----------------------
Less distributions from net investment income ............................ (0.06) --
----------------------
Redemption fees .......................................................... -- d -- d
----------------------
Net asset value, end of year ............................................. $ 11.37 $ 9.80
======================
Total return c ........................................................... 16.70% (2.00)%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) .......................................... $42,677 $11,804
Ratios to average net assets:
Expenses before waiver and payments by affiliates ....................... 1.97% 2.57% g
Expenses net of waiver and payments by affiliates ....................... 1.40% e 1.40% g
Net investment income ................................................... 0.38% 0.37% g
Portfolio turnover rate .................................................. 10.96% 0.00%
a The amount shown for a share outstanding throughout the period may not
correlate with the Statement of Operations for the period due to the
timing of sales and repurchase of the Fund shares in relation to income
earned and/or fluctuating market value of the investments of the Fund.
b Based on average daily shares outstanding.
c Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable, and is not annualized for periods less than
one year.
d Amount rounds to less than $0.01 per share.
e Benefit of expense reduction rounds to less than 0.01%.
f For the period July 1, 2005 (commencement of operations) to October 31,
2005.
g Annualized.
Annual Report |
The accompanying notes are an integral part of these financial statements. | 77
Franklin Value Investors Trust
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN MIDCAP VALUE FUND
----------------------------
YEAR ENDED PERIOD ENDED
OCTOBER 31, OCTOBER 31,
CLASS C 2006 2005 f
----------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ............................... $ 9.78 $10.00
-----------------------
Income from investment operations a:
Net investment income (loss) b .................................. (0.03) (0.01)
Net realized and unrealized gains (losses) ...................... 1.59 (0.21)
-----------------------
Total from investment operations ................................. 1.56 (0.22)
-----------------------
Less distributions from net investment income .................... (0.05) --
-----------------------
Redemption fees .................................................. -- d -- d
-----------------------
Net asset value, end of year ..................................... $11.29 $ 9.78
=======================
Total return c ................................................... 15.95% (2.20)%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) .................................. $9,406 $3,275
Ratios to average net assets:
Expenses before waiver and payments by affiliates ............... 2.60% 3.22% g
Expenses net of waiver and payments by affiliates ............... 2.03% e 2.05% g
Net investment income (loss) .................................... (0.25)% (0.28)% g
Portfolio turnover rate .......................................... 10.96% 0.00%
a The amount shown for a share outstanding throughout the period may not
correlate with the Statement of Operations for the period due to the
timing of sales and repurchase of the Fund shares in relation to income
earned and/or fluctuating market value of the investments of the Fund.
b Based on average daily shares outstanding.
c Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable, and is not annualized for periods less than
one year.
d Amount rounds to less than $0.01 per share.
e Benefit of expense reduction rounds to less than 0.01%.
f For the period July 1, 2005 (commencement of operations) to October 31,
2005.
g Annualized.
78 | The accompanying notes are an integral part of these financial statements.
| Annual Report
Franklin Value Investors Trust
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN MIDCAP VALUE FUND
---------------------------------
YEAR ENDED PERIOD ENDED
OCTOBER 31, OCTOBER 31,
CLASS R 2006 2005 f
---------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ................................. $ 9.80 $10.00
---------------------------
Income from investment operations a:
Net investment income b ........................................... 0.02 0.01
Net realized and unrealized gains (losses) ........................ 1.59 (0.21)
---------------------------
Total from investment operations ................................... 1.61 (0.20)
---------------------------
Less distributions from net investment income ...................... (0.06) --
---------------------------
Redemption fees .................................................... -- d -- d
---------------------------
Net asset value, end of year ....................................... $11.35 $ 9.80
===========================
Total return c ..................................................... 16.47% (2.00)%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) .................................... $ 133 $ 36
Ratios to average net assets:
Expenses before waiver and payments by affiliates ................. 2.12% 2.72% g
Expenses net of waiver and payments by affiliates ................. 1.55% e 1.55% g
Net investment income ............................................. 0.23% 0.22% g
Portfolio turnover rate ............................................ 10.96% 0.00%
a The amount shown for a share outstanding throughout the period may not
correlate with the Statement of Operations for the period due to the
timing of sales and repurchase of the Fund shares in relation to income
earned and/or fluctuating market value of the investments of the Fund.
b Based on average daily shares outstanding.
c Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable, and is not annualized for periods less than
one year.
d Amount rounds to less than $0.01 per share.
e Benefit of expense reduction rounds to less than 0.01%.
f For the period July 1, 2005 (commencement of operations) to October 31,
2005.
g Annualized.
Annual Report |
The accompanying notes are an integral part of these financial statements. | 79
Franklin Value Investors Trust
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN MIDCAP VALUE FUND
--------------------------------
YEAR ENDED PERIOD ENDED
OCTOBER 31, OCTOBER 31,
ADVISOR CLASS 2006 2005 f
--------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ...................................... $ 9.81 $10.00
---------------------------
Income from investment operations a:
Net investment income b ................................................ 0.08 0.03
Net realized and unrealized gains (losses) ............................. 1.60 (0.22)
---------------------------
Total from investment operations ........................................ 1.68 (0.19)
---------------------------
Less distributions from net investment income ........................... (0.07) --
---------------------------
Redemption fees ......................................................... -- d -- d
---------------------------
Net asset value, end of year ............................................ $11.42 $ 9.81
===========================
Total return c .......................................................... 17.18% (1.90)%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ......................................... $ 777 $ 434
Ratios to average net assets:
Expenses before waiver and payments by affiliates ...................... 1.62% 2.22% g
Expenses net of waiver and payments by affiliates ...................... 1.05% e 1.05% g
Net investment income .................................................. 0.73% 0.72% g
Portfolio turnover rate ................................................. 10.96% 0.00%
a The amount shown for a share outstanding throughout the period may not
correlate with the Statement of Operations for the period due to the
timing of sales and repurchase of the Fund shares in relation to income
earned and/or fluctuating market value of the investments of the Fund.
b Based on average daily shares outstanding.
c Total return is not annualized for periods less than one year.
d Amount rounds to less than $0.01 per share.
e Benefit of expense reduction rounds to less than 0.01%.
f For the period July 1, 2005 (commencement of operations) to October 31,
2005.
g Annualized.
80 | The accompanying notes are an integral part of these financial statements.
| Annual Report
Franklin Value Investors Trust
STATEMENT OF INVESTMENTS, OCTOBER 31, 2006
- ----------------------------------------------------------------------------------------------------------------------------------
FRANKLIN MIDCAP VALUE FUND SHARES VALUE
- ----------------------------------------------------------------------------------------------------------------------------------
COMMON STOCKS 96.9%
COMMERCIAL SERVICES 2.8%
a SAIC Inc. .............................................................................. 75,200 $ 1,504,000
-------------
CONSUMER DURABLES 9.6%
Fortune Brands Inc. .................................................................... 17,900 1,377,405
Hasbro Inc. ............................................................................ 32,800 850,176
Leggett & Platt Inc. ................................................................... 24,600 574,410
Lennar Corp., A ........................................................................ 6,300 299,124
M.D.C. Holdings Inc. ................................................................... 8,600 428,796
Pulte Homes Inc. ....................................................................... 8,900 275,811
The Stanley Works ...................................................................... 26,700 1,272,255
-------------
5,077,977
-------------
CONSUMER NON-DURABLES 10.1%
Alberto-Culver Co. ..................................................................... 32,200 1,636,082
a Dean Foods Co. ......................................................................... 36,100 1,512,229
The Hershey Co. ........................................................................ 15,000 793,650
McCormick & Co. Inc. ................................................................... 26,700 998,580
a Timberland Co., A ...................................................................... 13,500 389,475
-------------
5,330,016
-------------
CONSUMER SERVICES 1.0%
Gannett Co. Inc. ....................................................................... 8,800 520,432
-------------
DISTRIBUTION SERVICES 0.8%
W.W. Grainger Inc. ..................................................................... 5,700 414,846
-------------
ELECTRONIC TECHNOLOGY 2.5%
Embraer-Empresa Brasileira de Aeronautica SA, ADR (Brazil) ............................. 32,200 1,340,486
-------------
ENERGY MINERALS 2.8%
Peabody Energy Corp. ................................................................... 28,700 1,204,539
Pioneer Natural Resources Co. .......................................................... 7,100 289,183
-------------
1,493,722
-------------
FINANCE/RENTAL/LEASING 1.5%
CIT Group Inc. ......................................................................... 15,200 791,160
-------------
HEALTH SERVICES 1.7%
a LifePoint Hospitals Inc. ............................................................... 26,100 926,550
-------------
HEALTH TECHNOLOGY 5.2%
a Endo Pharmaceuticals Holdings Inc. ..................................................... 41,600 1,187,264
Hillenbrand Industries Inc. ............................................................ 18,100 1,062,108
a Watson Pharmaceuticals Inc. ............................................................ 19,400 522,054
-------------
2,771,426
-------------
INDUSTRIAL SERVICES 4.0%
ENSCO International Inc. ............................................................... 25,800 1,263,426
a Helix Energy Solutions Group Inc. ...................................................... 26,695 862,248
-------------
2,125,674
-------------
INSURANCE BROKERS/SERVICES 0.7%
Arthur J. Gallagher & Co. .............................................................. 14,200 395,470
-------------
Annual Report | 81
Franklin Value Investors Trust
STATEMENT OF INVESTMENTS, OCTOBER 31, 2006 (CONTINUED)
- ----------------------------------------------------------------------------------------------------------------------------------
FRANKLIN MIDCAP VALUE FUND SHARES VALUE
- ----------------------------------------------------------------------------------------------------------------------------------
COMMON STOCKS (CONTINUED)
INVESTMENT MANAGERS 2.0%
a KKR Private Equity Investors LP (Guernsey Islands) ................................... 48,800 $ 1,061,400
-------------
LIFE/HEALTH INSURANCE 1.4%
American National Insurance Co. ...................................................... 2,100 243,600
Protective Life Corp. ................................................................ 11,000 486,750
-------------
730,350
-------------
NON-ENERGY MINERALS 1.3%
Nucor Corp. .......................................................................... 5,600 327,096
United States Steel Corp. ............................................................ 5,400 365,040
-------------
692,136
-------------
PROCESS INDUSTRIES 8.9%
Airgas Inc. .......................................................................... 9,900 374,319
Bemis Co. Inc. ....................................................................... 18,900 635,418
Bunge Ltd. ........................................................................... 21,700 1,391,187
Cabot Corp. .......................................................................... 11,800 466,690
MeadWestvaco Corp. ................................................................... 35,700 982,464
Sigma-Aldrich Corp. .................................................................. 11,300 848,743
-------------
4,698,821
-------------
PRODUCER MANUFACTURING 12.6%
Autoliv Inc. (Sweden) ................................................................ 23,800 1,353,506
Carlisle Cos. Inc. ................................................................... 10,600 887,114
Dover Corp. .......................................................................... 22,900 1,087,750
Graco Inc. ........................................................................... 16,000 652,160
Oshkosh Truck Corp. .................................................................. 29,800 1,347,258
Roper Industries Inc. ................................................................ 28,500 1,363,725
-------------
6,691,513
-------------
PROPERTY-CASUALTY INSURANCE 5.5%
Cincinnati Financial Corp. ........................................................... 10,600 483,890
Erie Indemnity Co., A ................................................................ 31,000 1,570,150
Mercury General Corp. ................................................................ 3,600 186,372
Montpelier Re Holdings Ltd. (Bermuda) ................................................ 8,000 142,000
Old Republic International Corp. ..................................................... 23,875 537,904
-------------
2,920,316
-------------
REGIONAL BANKS 2.0%
Mercantile Bankshares Corp. .......................................................... 23,250 1,048,110
-------------
RETAIL TRADE 1.7%
Dollar General Corp. ................................................................. 19,400 272,182
Family Dollar Stores Inc. ............................................................ 20,600 606,670
-------------
878,852
-------------
SPECIALTY INSURANCE 5.4%
Assurant Inc. ........................................................................ 27,700 1,458,682
MGIC Investment Corp. ................................................................ 8,200 481,832
The PMI Group Inc. ................................................................... 10,400 443,560
Radian Group Inc. .................................................................... 8,500 453,050
-------------
2,837,124
-------------
82 | Annual Report
Franklin Value Investors Trust
STATEMENT OF INVESTMENTS, OCTOBER 31, 2006 (CONTINUED)
- ----------------------------------------------------------------------------------------------------------------------------------
FRANKLIN MIDCAP VALUE FUND SHARES VALUE
- ----------------------------------------------------------------------------------------------------------------------------------
COMMON STOCKS (CONTINUED)
TRANSPORTATION 6.6%
J.B. Hunt Transport Services Inc. ...................................................... 65,200 $ 1,410,928
Overseas Shipholding Group Inc. ........................................................ 21,000 1,313,550
Teekay Shipping Corp. (Bahamas) ........................................................ 19,100 785,201
-------------
3,509,679
-------------
UTILITIES 6.8%
Atmos Energy Corp. ..................................................................... 52,300 1,607,179
DTE Energy Co. ......................................................................... 31,000 1,408,330
Northeast Utilities .................................................................... 22,600 565,226
-------------
3,580,735
-------------
TOTAL COMMON STOCKS (COST $48,106,866) ................................................. 51,340,795
-------------
SHORT TERM INVESTMENT (COST $996,389) 1.9%
MONEY MARKET FUND 1.9%
b Franklin Institutional Fiduciary Trust Money Market Portfolio, 4.96% ................... 996,389 996,389
-------------
TOTAL INVESTMENTS (COST $49,103,255) 98.8% ............................................. 52,337,184
OTHER ASSETS, LESS LIABILITIES 1.2% .................................................... 656,305
-------------
NET ASSETS 100.0% ...................................................................... $ 52,993,489
=============
See Selected Portfolio Abbreviation on page 94.
a Non-income producing for the twelve months ended October 31, 2006.
b See Note 7 regarding investments in the Franklin Institutional Fiduciary
Trust Money Market Portfolio. The rate shown is the annualized seven-day
yield at period end.
Annual Report |
The accompanying notes are an integral part of these financial statements. | 83
Franklin Value Investors Trust
FINANCIAL HIGHLIGHTS
FRANKLIN SMALL CAP VALUE FUND
--------------------------------------------------------------------
YEAR ENDED OCTOBER 31,
CLASS A 2006 2005 2004 2003 2002
--------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ....................... $ 39.41 $ 34.37 $ 28.19 $ 22.15 $ 22.49
--------------------------------------------------------------------
Income from investment operations a:
Net investment income (loss) b .......................... 0.17 0.15 0.30 (0.02) 0.02
Net realized and unrealized gains (losses) .............. 6.70 5.15 5.88 6.06 (0.33)
--------------------------------------------------------------------
Total from investment operations ......................... 6.87 5.30 6.18 6.04 (0.31)
--------------------------------------------------------------------
Less distributions from:
Net investment income ................................... (0.10) (0.26) -- -- --
Net realized gains ...................................... (0.91) -- -- -- --
Tax return of capital ................................... -- -- -- -- (0.03)
--------------------------------------------------------------------
Total distributions ...................................... (1.01) (0.26) -- -- (0.03)
--------------------------------------------------------------------
Redemption fees .......................................... -- d -- d -- d -- --
--------------------------------------------------------------------
Net asset value, end of year ............................. $ 45.27 $ 39.41 $ 34.37 $ 28.19 $ 22.15
====================================================================
Total return c ........................................... 17.73% 15.46% 21.92% 27.27% (1.41)%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) .......................... $703,238 $486,563 $296,000 $200,181 $140,202
Ratios to average net assets:
Expenses ................................................ 1.22% e 1.29% e 1.35% e 1.44% 1.37%
Net investment income (loss) ............................ 0.40% 0.39% 0.95% (0.07)% 0.09%
Portfolio turnover rate .................................. 17.39% 12.73% 17.38% 14.14% 12.74%
a The amount shown for a share outstanding throughout the period may not
correlate with the Statement of Operations for the period due to the
timing of sales and repurchase of the Fund shares in relation to income
earned and/or fluctuating market value of the investments of the Fund.
b Based on average daily shares outstanding.
c Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable.
d Amount rounds to less than $0.01 per share.
e Benefit of expense reduction rounds to less than 0.01%.
84 | The accompanying notes are an integral part of these financial statements.
| Annual Report
Franklin Value Investors Trust
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN SMALL CAP VALUE FUND
---------------------------------------------------------------
YEAR ENDED OCTOBER 31,
CLASS B 2006 2005 2004 2003 2002
---------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ....................... $ 38.00 $ 33.20 $ 27.41 $ 21.67 $ 22.13
---------------------------------------------------------------
Income from investment operations a:
Net investment income (loss) b .......................... (0.12) (0.09) 0.09 (0.17) (0.14)
Net realized and unrealized gains (losses) .............. 6.46 4.97 5.70 5.91 (0.32)
---------------------------------------------------------------
Total from investment operations ......................... 6.34 4.88 5.79 5.74 (0.46)
---------------------------------------------------------------
Less distributions from:
Net investment income ................................... -- (0.08) -- -- --
Net realized gains ...................................... (0.91) -- -- -- --
---------------------------------------------------------------
Total distributions ...................................... (0.91) (0.08) -- -- --
---------------------------------------------------------------
Redemption fees .......................................... -- d -- d -- d -- --
---------------------------------------------------------------
Net asset value, end of year ............................. $ 43.43 $ 38.00 $ 33.20 $ 27.41 $ 21.67
===============================================================
Total return c ........................................... 16.98% 14.68% 21.12% 26.49% (2.08)%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) .......................... $79,482 $76,575 $65,551 $47,551 $29,535
Ratios to average net assets:
Expenses ................................................ 1.90% e 1.94% e 2.00% e 2.09% 2.02%
Net investment income (loss) ............................ (0.28)% (0.26)% 0.30% (0.72)% (0.56)%
Portfolio turnover rate .................................. 17.39% 12.73% 17.38% 14.14% 12.74%
a The amount shown for a share outstanding throughout the period may not
correlate with the Statement of Operations for the period due to the
timing of sales and repurchase of the Fund shares in relation to income
earned and/or fluctuating market value of the investments of the Fund.
b Based on average daily shares outstanding.
c Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable.
d Amount rounds to less than $0.01 per share.
e Benefit of expense reduction rounds to less than 0.01%.
Annual Report |
The accompanying notes are an integral part of these financial statements. | 85
Franklin Value Investors Trust
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN SMALL CAP VALUE FUND
-------------------------------------------------------------------
YEAR ENDED OCTOBER 31,
CLASS C 2006 2005 2004 2003 2002
-------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ....................... $ 37.63 $ 32.86 $ 27.13 $ 21.46 $ 21.90
-------------------------------------------------------------------
Income from investment operations a:
Net investment income (loss) b .......................... (0.11) (0.09) 0.08 (0.17) (0.13)
Net realized and unrealized gains (losses) .............. 6.38 4.92 5.65 5.84 (0.31)
-------------------------------------------------------------------
Total from investment operations ......................... 6.27 4.83 5.73 5.67 (0.44)
-------------------------------------------------------------------
Less distributions from:
Net investment income ................................... -- (0.06) -- -- --
Net realized gains ...................................... (0.91) -- -- -- --
-------------------------------------------------------------------
Total distributions ...................................... (0.91) (0.06) -- -- --
-------------------------------------------------------------------
Redemption fees .......................................... -- d -- d -- d -- --
-------------------------------------------------------------------
Net asset value, end of year ............................. $ 42.99 $ 37.63 $ 32.86 $ 27.13 $ 21.46
===================================================================
Total return c ........................................... 16.96% 14.69% 21.12% 26.42% (2.01)%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) .......................... $240,395 $186,490 $136,805 $109,353 $81,186
Ratios to average net assets:
Expenses ................................................ 1.90% e 1.94% e 2.00% e 2.10% 1.99%
Net investment income (loss) ............................ (0.28)% (0.26)% 0.30% (0.73)% (0.53)%
Portfolio turnover rate .................................. 17.39% 12.73% 17.38% 14.14% 12.74%
a The amount shown for a share outstanding throughout the period may not
correlate with the Statement of Operations for the period due to the
timing of sales and repurchase of the Fund shares in relation to income
earned and/or fluctuating market value of the investments of the Fund.
b Based on average daily shares outstanding.
c Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable.
d Amount rounds to less than $0.01 per share.
e Benefit of expense reduction rounds to less than 0.01%.
86 | The accompanying notes are an integral part of these financial statements.
| Annual Report
Franklin Value Investors Trust
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN SMALL CAP VALUE FUND
-----------------------------------------------------------
YEAR ENDED OCTOBER 31,
CLASS R 2006 2005 2004 2003 2002 g
-----------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year .............................. $ 39.22 $ 34.24 $ 28.13 $22.14 $23.34
-----------------------------------------------------------
Income from investment operations a:
Net investment income (loss) b ................................. 0.10 0.09 0.31 (0.07) (0.04)
Net realized and unrealized gains (losses) ..................... 6.66 5.14 5.80 6.06 (1.16)
-----------------------------------------------------------
Total from investment operations ................................ 6.76 5.23 6.11 5.99 (1.20)
-----------------------------------------------------------
Less distributions from:
Net investment income .......................................... -- d (0.25) -- -- --
Net realized gains ............................................. (0.91) -- -- -- --
-----------------------------------------------------------
Total distributions ............................................. (0.91) (0.25) -- -- --
-----------------------------------------------------------
Redemption fees ................................................. -- e -- e -- e -- --
-----------------------------------------------------------
Net asset value, end of year .................................... $ 45.07 $ 39.22 $ 34.24 $28.13 $22.14
===========================================================
Total return c .................................................. 17.54% 15.24% 21.72% 27.06% (5.14)%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ................................. $56,811 $31,550 $24,951 $6,914 $1,097
Ratios to average net assets:
Expenses ....................................................... 1.40% f 1.44% f 1.50% f 1.59% 1.52% h
Net investment income (loss) ................................... 0.22% 0.24% 0.80% (0.22)% (0.06)% h
Portfolio turnover rate ......................................... 17.39% 12.73% 17.38% 14.14% 12.74%
a The amount shown for a share outstanding throughout the period may not
correlate with the Statement of Operations for the period due to the
timing of sales and repurchase of the Fund shares in relation to income
earned and/or fluctuating market value of the investments of the Fund.
b Based on average daily shares outstanding.
c Total return does not reflect sales commissions or contingent deferred
sales charges, if applicable, and is not annualized for periods less than
one year.
d Includes a dividend distribution in the amount of $0.0025.
e Amount rounds to less than $0.01 per share.
f Benefit of expense reduction rounds to less than 0.01%.
g For the period August 1, 2002 (effective date) to October 31, 2002.
h Annualized.
Annual Report |
The accompanying notes are an integral part of these financial statements. | 87
Franklin Value Investors Trust
FINANCIAL HIGHLIGHTS (CONTINUED)
FRANKLIN SMALL CAP VALUE FUND
--------------------------------------------------------------
YEAR ENDED OCTOBER 31,
ADVISOR CLASS 2006 2005 2004 2003 2002
--------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year .............................. $ 40.42 $ 35.21 $ 28.78 $ 22.53 $22.82
--------------------------------------------------------------
Income from investment operations a:
Net investment income b ........................................ 0.32 0.29 0.44 0.07 0.10
Net realized and unrealized gains (losses) ..................... 6.86 5.28 5.99 6.18 (0.34)
--------------------------------------------------------------
Total from investment operations ................................ 7.18 5.57 6.43 6.25 (0.24)
--------------------------------------------------------------
Less distributions from:
Net investment income .......................................... (0.23) (0.36) -- -- --
Net realized gains ............................................. (0.91) -- -- -- --
Tax return of capital .......................................... -- -- -- -- (0.05)
--------------------------------------------------------------
Total distributions ............................................. (1.14) (0.36) -- -- (0.05)
--------------------------------------------------------------
Redemption fees ................................................. -- c -- c -- c -- --
--------------------------------------------------------------
Net asset value, end of year .................................... $ 46.46 $ 40.42 $ 35.21 $ 28.78 $22.53
==============================================================
Total return .................................................... 18.13% 15.84% 22.34% 27.74% (1.07)%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ................................. $56,912 $37,852 $26,701 $13,089 $9,586
Ratios to average net assets:
Expenses ....................................................... 0.90% d 0.94% d 1.00% d 1.09% 1.02%
Net investment income .......................................... 0.72% 0.74% 1.30% 0.28% 0.44%
Portfolio turnover rate ......................................... 17.39% 12.73% 17.38% 14.14% 12.74%
a The amount shown for a share outstanding throughout the period may not
correlate with the Statement of Operations for the period due to the
timing of sales and repurchase of the Fund shares in relation to income
earned and/or fluctuating market value of the investments of the Fund.
b Based on average daily shares outstanding.
c Amount rounds to less than $0.01 per share.
d Benefit of expense reduction rounds to less than 0.01%.
88 | The accompanying notes are an integral part of these financial statements.
| Annual Report
Franklin Value Investors Trust
STATEMENT OF INVESTMENTS, OCTOBER 31, 2006
- ----------------------------------------------------------------------------------------------------------------------------------
FRANKLIN SMALL CAP VALUE FUND SHARES VALUE
- ----------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS 89.9%
COMMON STOCKS 89.8%
COMMERCIAL SERVICES 0.8%
ABM Industries Inc. .............................................................. 454,067 $ 9,017,771
-------------
CONSUMER DURABLES 10.3%
Bassett Furniture Industries Inc. ................................................ 284,000 4,691,680
Briggs & Stratton Corp. .......................................................... 356,500 9,087,185
D.R. Horton Inc. ................................................................. 75,000 1,757,250
Ethan Allen Interiors Inc. ....................................................... 241,000 8,584,420
Hooker Furniture Corp. ........................................................... 615,000 8,696,100
a La-Z-Boy Inc. .................................................................... 767,000 9,395,750
M/I Homes Inc. ................................................................... 478,000 17,169,760
M.D.C. Holdings Inc. ............................................................. 123,600 6,162,696
Monaco Coach Corp. ............................................................... 787,500 9,402,750
b Russ Berrie and Co. Inc. ......................................................... 544,600 8,256,136
Thor Industries Inc. ............................................................. 418,500 18,338,670
Winnebago Industries Inc. ........................................................ 469,000 15,613,010
-------------
117,155,407
-------------
CONSUMER NON-DURABLES 4.3%
b Alliance One International Inc. .................................................. 387,000 1,865,340
Brown Shoe Co. Inc. .............................................................. 390,000 15,194,400
Lancaster Colony Corp. ........................................................... 60,000 2,433,000
b NBTY Inc. ........................................................................ 350,000 9,737,000
b Timberland Co., A ................................................................ 286,500 8,265,525
b The Warnaco Group Inc. ........................................................... 539,000 11,448,360
-------------
48,943,625
-------------
CONSUMER SERVICES 0.5%
b Aztar Corp. ...................................................................... 65,000 3,482,050
Bob Evans Farms Inc. ............................................................. 63,400 2,149,894
-------------
5,631,944
-------------
ELECTRONIC TECHNOLOGY 3.1%
b Avocent Corp. .................................................................... 522,500 19,180,975
Cohu Inc. ........................................................................ 620,000 12,263,600
Diebold Inc. ..................................................................... 95,000 4,149,600
-------------
35,594,175
-------------
ENERGY MINERALS 3.4%
Arch Coal Inc. ................................................................... 263,600 9,128,468
CONSOL Energy Inc. ............................................................... 310,000 10,970,900
Peabody Energy Corp. ............................................................. 277,200 11,634,084
Pioneer Natural Resources Co. .................................................... 90,000 3,665,700
b Unit Corp. ....................................................................... 76,300 3,539,557
-------------
38,938,709
-------------
FINANCE/RENTAL/LEASING 0.5%
b Dollar Thrifty Automotive Group Inc. ............................................. 140,000 5,622,400
-------------
HEALTH SERVICES 0.4%
Pharmaceutical Product Development Inc. .......................................... 141,500 4,478,475
-------------
Annual Report | 89
Franklin Value Investors Trust
STATEMENT OF INVESTMENTS, OCTOBER 31, 2006 (CONTINUED)
- -------------------------------------------------------------------------------------------------------------------------------
FRANKLIN SMALL CAP VALUE FUND SHARES VALUE
- -------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
COMMON STOCKS (CONTINUED)
HEALTH TECHNOLOGY 1.7%
b Adams Respiratory Therapeutics Inc. .................................. 12,600 $ 543,060
STERIS Corp. ......................................................... 401,600 9,786,992
West Pharmaceutical Services Inc. .................................... 226,700 9,530,468
-------------
19,860,520
-------------
INDUSTRIAL SERVICES 5.5%
b Atwood Oceanics Inc. ................................................. 105,000 4,851,000
b Bristow Group Inc. ................................................... 294,000 9,760,800
b EMCOR Group Inc. ..................................................... 146,000 8,635,900
ENSCO International Inc. ............................................. 69,000 3,378,930
b Global Industries Ltd. ............................................... 295,000 4,897,000
b Helix Energy Solutions Group Inc. .................................... 165,000 5,329,500
b Lone Star Technologies Inc. .......................................... 200,000 9,656,000
b Oil States International Inc. ........................................ 264,000 7,666,560
Rowan Cos. Inc. ...................................................... 235,800 7,871,004
-------------
62,046,694
-------------
INSURANCE BROKERS/SERVICES 0.8%
Arthur J. Gallagher & Co. ............................................ 310,000 8,633,500
-------------
LIFE/HEALTH INSURANCE 1.5%
American National Insurance Co. ...................................... 56,800 6,588,800
Presidential Life Corp. .............................................. 65,000 1,534,000
Protective Life Corp. ................................................ 82,500 3,650,625
StanCorp Financial Group Inc. ........................................ 123,000 5,619,870
-------------
17,393,295
-------------
NON-ENERGY MINERALS 5.1%
Reliance Steel & Aluminum Co. ........................................ 399,400 13,719,390
Steel Dynamics Inc. .................................................. 387,200 23,274,592
United States Steel Corp. ............................................ 99,000 6,692,400
Universal Forest Products Inc. ....................................... 313,000 14,203,940
-------------
57,890,322
-------------
PROCESS INDUSTRIES 7.5%
Airgas Inc. .......................................................... 295,600 11,176,636
AptarGroup Inc. ...................................................... 162,000 8,895,420
Bowater Inc. ......................................................... 306,950 6,418,324
Bunge Ltd. ........................................................... 203,000 13,014,330
Cabot Corp. .......................................................... 283,200 11,200,560
Glatfelter ........................................................... 521,600 7,636,224
b Mercer International Inc. (Germany) .................................. 465,000 4,510,500
RPM International Inc. ............................................... 692,400 13,259,460
Westlake Chemical Corp. .............................................. 299,700 9,455,535
-------------
85,566,989
-------------
PRODUCER MANUFACTURING 21.2%
A.O. Smith Corp. ..................................................... 115,500 4,060,980
American Woodmark Corp. .............................................. 312,300 11,551,977
Apogee Enterprises Inc. .............................................. 783,000 12,598,470
b Astec Industries Inc. ................................................ 70,100 2,235,489
90 | Annual Report
Franklin Value Investors Trust
STATEMENT OF INVESTMENTS, OCTOBER 31, 2006 (CONTINUED)
- ----------------------------------------------------------------------------------------------------------------------------------
FRANKLIN SMALL CAP VALUE FUND SHARES VALUE
- ----------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
COMMON STOCKS (CONTINUED)
PRODUCER MANUFACTURING (CONTINUED)
Baldor Electric Co. .............................................................. 500 $ 16,040
Brady Corp., A ................................................................... 375,000 13,875,000
Carlisle Cos. Inc. ............................................................... 91,700 7,674,373
CIRCOR International Inc. ........................................................ 250,000 8,242,500
CNH Global NV (Netherlands) ...................................................... 174,000 4,642,320
b Genlyte Group Inc. ............................................................... 120,000 9,271,200
Gentex Corp. ..................................................................... 188,700 3,002,217
Gibraltar Industries Inc. ........................................................ 574,000 12,117,140
Graco Inc. ....................................................................... 395,300 16,112,428
JLG Industries Inc. .............................................................. 138,000 3,815,700
Kennametal Inc. .................................................................. 215,000 13,267,650
b Mettler-Toledo International Inc. (Switzerland) .................................. 165,000 11,327,250
Mine Safety Appliances Co. ....................................................... 417,200 15,778,504
Mueller Industries Inc. .......................................................... 496,000 18,188,320
Nordson Corp. .................................................................... 134,500 6,193,725
b Powell Industries Inc. ........................................................... 107,900 2,586,363
Roper Industries Inc. ............................................................ 300,000 14,355,000
Simpson Manufacturing Co. Inc. ................................................... 115,600 3,281,884
Superior Industries International Inc. ........................................... 455,400 7,696,260
Teleflex Inc. .................................................................... 174,500 10,853,900
Timken Co. ....................................................................... 69,600 2,091,480
Wabash National Corp. ............................................................ 1,150,500 16,141,515
Watts Water Technologies Inc., A ................................................. 261,300 9,725,586
-------------
240,703,271
-------------
PROPERTY-CASUALTY INSURANCE 5.0%
Aspen Insurance Holdings Ltd. .................................................... 682,000 16,927,240
IPC Holdings Ltd. ................................................................ 524,000 15,740,960
Montpelier Re Holdings Ltd. (Bermuda) ............................................ 864,700 15,348,425
RLI Corp. ........................................................................ 162,100 8,787,441
-------------
56,804,066
-------------
REAL ESTATE INVESTMENT TRUST 0.6%
Arbor Realty Trust Inc. .......................................................... 253,500 7,047,300
-------------
REGIONAL BANKS 1.0%
Chemical Financial Corp. ......................................................... 182,455 5,457,229
Peoples Bancorp Inc. ............................................................. 194,700 5,720,286
-------------
11,177,515
-------------
RETAIL TRADE 8.7%
Casey's General Stores Inc. ...................................................... 628,500 15,253,695
Christopher & Banks Corp. ........................................................ 365,000 9,851,350
Dillard's Inc., A ................................................................ 92,700 2,796,759
b Gymboree Corp. ................................................................... 149,500 6,945,770
Annual Report | 91
Franklin Value Investors Trust
STATEMENT OF INVESTMENTS, OCTOBER 31, 2006 (CONTINUED)
- ----------------------------------------------------------------------------------------------------------------------------------
FRANKLIN SMALL CAP VALUE FUND SHARES VALUE
- ----------------------------------------------------------------------------------------------------------------------------------
LONG TERM INVESTMENTS (CONTINUED)
COMMON STOCKS (CONTINUED)
RETAIL TRADE (CONTINUED)
b Hot Topic Inc. ................................................................. 574,300 $ 5,806,173
The Men's Wearhouse Inc. ....................................................... 168,000 6,694,800
Pier 1 Imports Inc. ............................................................ 523,500 3,423,690
Regis Corp. .................................................................... 514,000 19,300,700
Tuesday Morning Corp. .......................................................... 835,000 13,777,500
b West Marine Inc. ............................................................... 795,000 13,451,400
b Zale Corp. ..................................................................... 46,200 1,332,408
--------------
98,634,245
--------------
SAVINGS BANKS 0.3%
First Indiana Corp. ............................................................ 118,750 3,030,500
--------------
SPECIALTY INSURANCE 0.2%
The PMI Group Inc. ............................................................. 60,000 2,559,000
--------------
TRANSPORTATION 5.2%
b Genesee & Wyoming Inc. ......................................................... 487,600 13,696,684
b Kansas City Southern ........................................................... 150,500 4,272,695
OMI Corp. ...................................................................... 301,600 6,731,712
Overseas Shipholding Group Inc. ................................................ 185,000 11,571,750
SkyWest Inc. ................................................................... 406,300 10,831,958
Teekay Shipping Corp. (Bahamas) ................................................ 189,000 7,769,790
Tidewater Inc. ................................................................. 90,000 4,475,700
--------------
59,350,289
--------------
UTILITIES 2.2%
Atmos Energy Corp. ............................................................. 171,200 5,260,976
Energen Corp. .................................................................. 264,100 11,308,762
b Sierra Pacific Resources ....................................................... 540,700 8,197,012
--------------
24,766,750
--------------
TOTAL COMMON STOCKS (COST $779,752,025) ........................................ 1,020,846,762
--------------
----------------
PRINCIPAL AMOUNT
----------------
CORPORATE BOND (COST $1,302,267) 0.1%
PRODUCER MANUFACTURING 0.1%
Mueller Industries Inc., 6.00%, 11/01/14 ....................................... $ 1,319,000 1,220,075
--------------
TOTAL LONG TERM INVESTMENTS (COST $781,054,292) ................................ 1,022,066,837
--------------
----------------
SHARES
----------------
SHORT TERM INVESTMENTS 9.0%
MONEY MARKET FUND (COST $92,558,913) 8.1%
c Franklin Institutional Fiduciary Trust Money Market Portfolio, 4.96% ........... 92,558,913 92,558,913
--------------
92 | Annual Report
Franklin Value Investors Trust
STATEMENT OF INVESTMENTS, OCTOBER 31, 2006 (CONTINUED)
- ----------------------------------------------------------------------------------------------------------------------------------
FRANKLIN SMALL CAP VALUE FUND PRINCIPAL AMOUNT VALUE
- ----------------------------------------------------------------------------------------------------------------------------------
SHORT TERM INVESTMENTS (CONTINUED)
INVESTMENTS FROM CASH COLLATERAL RECEIVED FOR LOANED SECURITIES 0.9%
d,e REPURCHASE AGREEMENTS 0.9%
Banc of America Securities LLC, 5.32%, 11/01/06 (Maturity Value $1,388,205)
Collateralized by U.S. Government Agency Securities, 5.00%, 3/01/34 - 7/01/35 ...... $ 1,388,000 $ 1,388,000
Barclays Capital Inc., 5.32%, 11/01/06 (Maturity Value $1,815,268)
Collateralized by U.S. Government Agency Securities, 3.50% - 9.50%,
1/01/07 - 10/01/46 ................................................................ 1,815,000 1,815,000
Citigroup Global Markets Inc., 5.30% - 5.32%, 11/01/06 (Maturity Value $2,429,358)
Collateralized by U.S. Government Agency Securities, 3.466% - 10.00%,
3/01/08 - 9/01/45; f U.S. Treasury Bills, 12/05/06 - 5/15/30 ...................... 2,429,000 2,429,000
Deutsche Bank Securities Inc., 5.31%, 11/01/06 (Maturity Value $1,552,229)
Collateralized by U.S. Government Agency Securities, 4.00% - 7.00%,
7/01/10 - 9/01/36 ................................................................. 1,552,000 1,552,000
JPMorgan Securities Inc., 5.33%, 11/01/06 (Maturity Value $104,015)
Collateralized by U.S. Government Agency Securities, 5.50% - 6.00%,
9/01/21 - 9/01/36 ................................................................. 104,000 104,000
Morgan Stanley & Co. Inc., 5.32%, 11/01/06 (Maturity Value $2,429,359)
Collateralized by U.S. Government Agency Securities, 2.62% - 8.28%,
11/22/06 - 10/01/46; f U.S. Treasury Bills, 11/01/06 - 7/24/07 .................... 2,429,000 2,429,000
--------------
TOTAL INVESTMENTS FROM CASH COLLATERAL RECEIVED FOR LOANED SECURITIES
(COST $9,717,000) .................................................................. 9,717,000
--------------
TOTAL INVESTMENTS (COST $883,330,205) 98.9% .......................................... 1,124,342,750
OTHER ASSETS, LESS LIABILITIES 1.1% .................................................. 12,493,935
--------------
NET ASSETS 100.0% .................................................................... $1,136,836,685
==============
a A portion or all of the security is on loan as of October 31, 2006. See
Note 1(e).
b Non-income producing for the twelve months ended October 31, 2006.
c See Note 7 regarding investments in the Franklin Institutional Fiduciary
Trust Money Market Portfolio. The rate shown is the annualized seven-day
yield at period end.
d See Note 1(e) regarding securities on loan.
e See Note 1(c) regarding repurchase agreements.
f The security is traded on a discount basis with no stated coupon rate.
Annual Report |
The accompanying notes are an integral part of these financial statements. | 93
Franklin Value Investors Trust
STATEMENT OF INVESTMENTS, OCTOBER 31, 2006
SELECTED PORTFOLIO ABBREVIATION
ADR - American Depository Receipt
94 | The accompanying notes are an integral part of these financial statements.
| Annual Report
Franklin Value Investors Trust
FINANCIAL STATEMENTS
STATEMENTS OF ASSETS AND LIABILITIES
October 31, 2006
----------------------------------------------------
FRANKLIN FRANKLIN FRANKLIN
BALANCE SHEET LARGE CAP MICROCAP
INVESTMENT FUND VALUE FUND VALUE FUND
----------------------------------------------------
Assets:
Investments in securities:
Cost - Unaffiliated issuers ............................................. $1,970,750,291 $ 205,200,514 $ 161,098,616
Cost - Non-controlled affiliated issuers (Note 8) ....................... 188,204,232 -- 50,321,332
Cost - Sweep Money Fund (Note 7) ........................................ 180,864,323 27,111,462 85,112,021
Cost - Repurchase agreements ............................................ 622,811,887 -- --
----------------------------------------------------
Total cost of investments ............................................... $2,962,630,733 $ 232,311,976 $ 296,531,969
====================================================
Value - Unaffiliated issuers ............................................ $4,102,102,050 $ 252,532,818 $ 313,534,671
Value - Non-controlled affiliated issuers (Note 8) ...................... 194,178,571 -- 82,542,879
Value - Sweep Money Fund (Note 7) ....................................... 180,864,323 27,111,462 85,112,021
Value - Repurchase agreements ........................................... 622,811,887 -- --
----------------------------------------------------
Total value of investments .............................................. 5,099,956,831 279,644,280 481,189,571
Receivables:
Investment securities sold .............................................. -- 1,689,665 --
Capital shares sold ..................................................... 4,721,668 539,621 466,778
Dividends and interest .................................................. 2,998,056 292,516 89,304
----------------------------------------------------
Total assets ...................................................... 5,107,676,555 282,166,082 481,745,653
----------------------------------------------------
Liabilities:
Payables:
Investment securities purchased ......................................... 1,468,270 1,233,550 325,066
Capital shares redeemed ................................................. 14,002,005 512,053 798,451
Affiliates .............................................................. 3,399,618 324,737 405,021
Unaffiliated transfer agent fees ........................................ 1,503,525 28,433 42,932
Accrued expenses and other liabilities ................................... 148,157 33,867 38,801
----------------------------------------------------
Total liabilities ................................................. 20,521,575 2,132,640 1,610,271
----------------------------------------------------
Net assets, at value ............................................ $5,087,154,980 $ 280,033,442 $ 480,135,382
====================================================
Net assets consist of:
Paid-in capital .......................................................... $2,594,654,708 $ 216,396,750 $ 264,253,418
Undistributed net investment income ...................................... 43,095,449 2,187,021 5,762,258
Net unrealized appreciation (depreciation) ............................... 2,137,326,098 47,332,304 184,657,602
Accumulated net realized gain (loss) ..................................... 312,078,725 14,117,367 25,462,104
----------------------------------------------------
Net assets, at value ............................................ $5,087,154,980 $ 280,033,442 $ 480,135,382
====================================================
CLASS A:
Net assets, at value ..................................................... $4,435,703,568 $ 184,224,763 $ 473,837,092
====================================================
Shares outstanding ....................................................... 64,064,491 11,128,362 11,466,344
====================================================
Net asset value per sharea ............................................... $ 69.24 $ 16.55 $ 41.32
====================================================
Maximum offering price per share (net asset value per share / 94.25%) .... $ 73.46 $ 17.56 $ 43.84
====================================================
a Redemption price is equal to net asset value less contingent deferred
sales charges, if applicable, and redemption fees retained by the Fund.
Annual Report |
The accompanying notes are an integral part of these financial statements. | 95
Franklin Value Investors Trust
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF ASSETS AND LIABILITIES (CONTINUED)
October 31, 2006
-----------------------------------------------------
FRANKLIN FRANKLIN FRANKLIN
BALANCE SHEET LARGE CAP MICROCAP
INVESTMENT FUND VALUE FUND VALUE FUND
-----------------------------------------------------
CLASS B:
Net assets, at value ................................................... $ 127,037,070 $ 22,119,943 --
=====================================================
Shares outstanding ..................................................... 1,866,173 1,353,911 --
=====================================================
Net asset value and maximum offering price per share a ................. $ 68.07 $ 16.34 --
=====================================================
CLASS C:
Net assets, at value ................................................... $ 139,884,908 $ 63,982,807 --
=====================================================
Shares outstanding ..................................................... 2,052,133 3,916,438 --
=====================================================
Net asset value and maximum offering price per share a ................. $ 68.17 $ 16.34 --
=====================================================
CLASS R:
Net assets, at value ................................................... $ 51,157,177 $ 7,716,517 --
=====================================================
Shares outstanding ..................................................... 743,738 469,857 --
=====================================================
Net asset value and maximum offering price per share a ................. $ 68.78 $ 16.42 --
=====================================================
ADVISOR CLASS:
Net assets, at value ................................................... $ 333,372,257 $ 1,989,412 $ 6,298,290
=====================================================
Shares outstanding ..................................................... 4,803,577 120,116 152,020
=====================================================
Net asset value and maximum offering price per share a ................. $ 69.40 $ 16.56 $ 41.43
=====================================================
a Redemption price is equal to net asset value less contingent deferred
sales charges, if applicable, and redemption fees retained by the Fund.
96 | The accompanying notes are an integral part of these financial statements.
| Annual Report
Franklin Value Investors Trust
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF ASSETS AND LIABILITIES (CONTINUED)
October 31, 2006
------------------------------------
FRANKLIN FRANKLIN
MIDCAP SMALL CAP
VALUE FUND VALUE FUND
------------------------------------
Assets:
Investments in securities:
Cost - Unaffiliated issuers ...................................................... $ 48,106,866 $ 781,054,292
Cost - Sweep Money Fund (Note 7) ................................................. 996,389 92,558,913
Cost - Repurchase agreements ..................................................... -- 9,717,000
------------------------------------
Total cost of investments ........................................................ $ 49,103,255 $ 883,330,205
====================================
Value - Unaffiliated issuers a ................................................... $ 51,340,795 $1,022,066,837
Value - Sweep Money Fund (Note 7) ................................................ 996,389 92,558,913
Value - Repurchase agreements .................................................... -- 9,717,000
------------------------------------
Total value of investments ....................................................... 52,337,184 1,124,342,750
Cash .............................................................................. -- 8,575,000
Receivables:
Investment securities sold ....................................................... 632,002 14,324,000
Capital shares sold .............................................................. 209,560 4,045,733
Dividends and interest ........................................................... 11,338 566,795
------------------------------------
Total assets ............................................................... 53,190,084 1,151,854,278
------------------------------------
Liabilities:
Payables:
Investment securities purchased .................................................. 141,202 1,281,897
Capital shares redeemed .......................................................... 7,686 2,562,240
Affiliates ....................................................................... 31,824 1,208,241
Unaffiliated transfer agent fees ................................................. 6,373 136,761
Payable upon return of securities loaned .......................................... -- 9,717,000
Accrued expenses and other liabilities ............................................ 9,510 111,454
------------------------------------
Total liabilities .......................................................... 196,595 15,017,593
------------------------------------
Net assets, at value ..................................................... $ 52,993,489 $1,136,836,685
====================================
Net assets consist of:
Paid-in capital ................................................................... $ 48,905,069 $ 811,727,408
Undistributed net investment income ............................................... 84,229 1,872,231
Net unrealized appreciation (depreciation) ........................................ 3,233,929 241,012,545
Accumulated net realized gain (loss) .............................................. 770,262 82,224,501
------------------------------------
Net assets, at value ..................................................... $ 52,993,489 $1,136,836,685
====================================
CLASS A:
Net assets, at value .............................................................. $ 42,676,835 $ 703,237,686
====================================
Shares outstanding ................................................................ 3,751,938 15,533,248
====================================
Net asset value per share b ....................................................... $ 11.37 $ 45.27
====================================
Maximum offering price per share (net asset value per share / 94.25%) ............. $ 12.06 $ 48.03
====================================
a The Franklin Small Cap Value Fund includes $9,155,944 of securities
loaned.
b Redemption price is equal to net asset value less contingent deferred
sales charges, if applicable, and redemption fees retained by the Fund.
Annual Report |
The accompanying notes are an integral part of these financial statements. | 97
Franklin Value Investors Trust
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF ASSETS AND LIABILITIES (CONTINUED)
October 31, 2006
----------------------------------
FRANKLIN FRANKLIN
MIDCAP SMALL CAP
VALUE FUND VALUE FUND
----------------------------------
CLASS B:
Net assets, at value .................................................................... -- $ 79,481,588
==================================
Shares outstanding ...................................................................... -- 1,830,201
==================================
Net asset value and maximum offering price per share a .................................. -- $ 43.43
==================================
CLASS C:
Net assets, at value .................................................................... $ 9,406,323 $ 240,395,123
==================================
Shares outstanding ...................................................................... 832,791 5,591,965
==================================
Net asset value and maximum offering price per share a .................................. $ 11.29 $ 42.99
==================================
CLASS R:
Net assets, at value .................................................................... $ 133,412 $ 56,810,570
==================================
Shares outstanding ...................................................................... 11,750 1,260,371
==================================
Net asset value and maximum offering price per share a .................................. $ 11.35 $ 45.07
==================================
ADVISOR CLASS:
Net assets, at value .................................................................... $ 776,919 $ 56,911,718
==================================
Shares outstanding ...................................................................... 68,005 1,224,938
==================================
Net asset value and maximum offering price per share a .................................. $ 11.42 $ 46.46
==================================
a Redemption price is equal to net asset value less contingent deferred
sales charges, if applicable, and redemption fees retained by the Fund.
98 | The accompanying notes are an integral part of these financial statements.
| Annual Report
Franklin Value Investors Trust
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF OPERATIONS
for the year ended October 31, 2006
----------------------------------------------------
FRANKLIN FRANKLIN FRANKLIN
BALANCE SHEET LARGE CAP MICROCAP
INVESTMENT FUND VALUE FUND VALUE FUND
----------------------------------------------------
Investment income:
Dividends:
Unaffiliated issuers .................................................... $ 61,685,274 $ 5,624,728 $ 4,406,036
Non-controlled affiliated issuers (Note 8) .............................. 1,213,281 -- 2,263,962
Sweep Money Fund (Note 7) ............................................... 7,719,107 1,200,077 3,694,346
Interest ................................................................. 31,711,234 -- 595,158
Income from securities loaned - net ...................................... 51,471 -- --
Other income (Note 9) .................................................... 193,245 386 2,264
---------------------------------------------------
Total investment income ........................................... 102,573,612 6,825,191 10,961,766
---------------------------------------------------
Expenses:
Management fees (Note 3a) ................................................ 21,983,230 1,340,856 3,248,206
Administrative fees (Note 3b) ............................................ -- 519,908 --
Distribution fees: (Note 3c)
Class A ................................................................. 10,508,805 591,644 1,112,710
Class B ................................................................. 1,276,836 219,253 --
Class C ................................................................. 1,410,339 592,927 --
Class R ................................................................. 212,691 37,213 --
Transfer agent fees (Note 3e) ............................................ 9,460,872 478,509 614,143
Custodian fees (Note 4) .................................................. 103,411 4,718 8,297
Reports to shareholders .................................................. 295,399 43,149 72,650
Registration and filing fees ............................................. 266,707 100,087 63,600
Professional fees ........................................................ 121,247 39,315 46,968
Trustees' fees and expenses .............................................. 239,167 12,262 22,466
Other .................................................................... 116,616 9,447 15,995
---------------------------------------------------
Total expenses .................................................... 45,995,320 3,989,288 5,205,035
Expense reductions (Note 4) ....................................... (9,745) (379) (5,070)
---------------------------------------------------
Net expenses .................................................... 45,985,575 3,988,909 5,199,965
---------------------------------------------------
Net investment income .......................................... 56,588,037 2,836,282 5,761,801
---------------------------------------------------
Realized and unrealized gains (losses):
Net realized gain (loss) from:
Investments
Unaffiliated Issuers .................................................. 243,715,267 14,289,026 21,963,106
Non-controlled affiliated issuers (Note 8) ............................ 65,387,253 -- 3,609,613
Closed-end funds distributions .......................................... 3,839,199 -- --
Foreign currency transactions ........................................... (66,992) -- 2,403
---------------------------------------------------
Net realized gain (loss) ....................................... 312,874,727 14,289,026 25,575,122
---------------------------------------------------
Net change in unrealized appreciation (depreciation) on investments ...... 420,475,081 22,244,595 42,049,166
---------------------------------------------------
Net realized and unrealized gain (loss) ................................... 733,349,808 36,533,621 67,624,288
---------------------------------------------------
Net increase (decrease) in net assets resulting from operations ........... $ 789,937,845 $ 39,369,903 $ 73,386,089
===================================================
Annual Report |
The accompanying notes are an integral part of these financial statements. | 99
Franklin Value Investors Trust
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF OPERATIONS (CONTINUED)
for the year ended October 31, 2006
-------------------------------------
FRANKLIN FRANKLIN
MIDCAP SMALL CAP
VALUE FUND VALUE FUND
-------------------------------------
Investment income:
Dividends:
Unaffiliated issuers ............................................................. $ 519,990 $ 10,879,656
Sweep Money Fund (Note 7) ........................................................ 90,206 4,605,429
Interest .......................................................................... -- 80,706
Income from securities loaned - net ............................................... -- 761,524
Other income (Note 9) ............................................................. -- 37,751
-------------------------------------
Total investment income .................................................... 610,196 16,365,066
-------------------------------------
Expenses:
Management fees (Note 3a) ......................................................... 249,174 6,514,143
Administrative fees (Note 3b) ..................................................... 68,329 --
Distribution fees: (Note 3c)
Class A .......................................................................... 95,100 1,991,804
Class B .......................................................................... -- 815,672
Class C .......................................................................... 62,447 2,203,220
Class R .......................................................................... 425 220,087
Transfer agent fees (Note 3e) ..................................................... 73,808 2,037,702
Custodian fees (Note 4) ........................................................... 655 18,413
Reports to shareholders ........................................................... 8,619 245,035
Registration and filing fees ...................................................... 53,306 159,488
Professional fees ................................................................. 30,156 43,167
Trustees' fees and expenses ....................................................... 280 44,301
Amortization of offering costs .................................................... 70,684 --
Other ............................................................................. 1,632 25,545
-------------------------------------
Total expenses ............................................................. 714,615 14,318,577
Expense reductions (Note 4) ................................................ (12) (7,210)
Expenses waived/paid by affiliates (Note 3f) ............................... (196,848) --
-------------------------------------
Net expenses ............................................................. 517,755 14,311,367
-------------------------------------
Net investment income ................................................... 92,441 2,053,699
-------------------------------------
Realized and unrealized gains (losses):
Net realized gain (loss) from:
Investments ...................................................................... 770,262 82,385,597
Foreign currency transactions .................................................... 32 (282)
-------------------------------------
Net realized gain (loss) ................................................ 770,294 82,385,315
-------------------------------------
Net change in unrealized appreciation (depreciation) on investments ............... 3,712,790 66,605,357
-------------------------------------
Net realized and unrealized gain (loss) ............................................ 4,483,084 148,990,672
-------------------------------------
Net increase (decrease) in net assets resulting from operations .................... $ 4,575,525 $ 151,044,371
=====================================
100 | The accompanying notes are an integral part of these financial statements.
| Annual Report
Franklin Value Investors Trust
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF CHANGES IN NET ASSETS
---------------------------------------------------------------------------
FRANKLIN BALANCE SHEET FRANKLIN LARGE CAP
INVESTMENT FUND VALUE FUND
---------------------------------------------------------------------------
YEAR ENDED OCTOBER 31, YEAR ENDED OCTOBER 31,
2006 2005 2006 2005
---------------------------------------------------------------------------
Increase (decrease) in net assets:
Operations:
Net investment income ............................ $ 56,588,037 $ 24,359,298 $ 2,836,282 $ 1,697,246
Net realized gain (loss) from investments and
foreign currency transactions .................. 312,874,727 180,261,607 14,289,026 5,615,212
Net change in unrealized appreciation
(depreciation) on investments .................. 420,475,081 483,173,141 22,244,595 3,725,806
---------------------------------------------------------------------------
Net increase (decrease) in net assets
resulting from operations ......... 789,937,845 687,794,046 39,369,903 11,038,264
---------------------------------------------------------------------------
Distributions to shareholders from:
Net investment income:
Class A ........................................ (30,134,369) (30,398,708) (1,623,294) (758,969)
Class B ........................................ (4,205) (35,432) (74,198) (3,897)
Class C ........................................ -- -- (209,593) --
Class R ........................................ (183,104) (114,469) (67,705) (16,268)
Advisor Class .................................. (2,639,091) (259,441) (10,120) --
Net realized gains:
Class A ........................................ (158,162,988) (64,294,761) (3,686,581) (283,898)
Class B ........................................ (4,885,995) (1,960,902) (516,819) (48,227)
Class C ........................................ (5,405,726) (2,195,578) (1,402,885) (128,769)
Class R ........................................ (1,240,439) (345,811) (163,054) (7,633)
Advisor Class .................................. (10,370,636) (437,910) (17,076) --
---------------------------------------------------------------------------
Total distributions to shareholders ............... (213,026,553) (100,043,012) (7,771,325) (1,247,661)
---------------------------------------------------------------------------
Capital share transactions: (Note 2)
Class A ........................................ (235,516,707) (95,100,775) 6,751,040 23,525,176
Class B ........................................ (10,438,738) (8,167,736) (2,604,940) (701,684)
Class C ........................................ (12,361,198) (11,420,870) (3,219,669) (639,229)
Class R ........................................ 15,618,374 6,732,590 (51,703) 3,318,815
Advisor Class .................................. 38,650,520 225,886,377 1,818,426 --
---------------------------------------------------------------------------
Total capital share transactions .................. (204,047,749) 117,929,586 2,693,154 25,503,078
---------------------------------------------------------------------------
Redemption fees ................................... 21,619 10,736 3,521 4,601
---------------------------------------------------------------------------
Net increase (decrease) in net assets ... 372,885,162 705,691,356 34,295,253 35,298,282
Net assets:
Beginning of year ................................. 4,714,269,818 4,008,578,462 245,738,189 210,439,907
---------------------------------------------------------------------------
End of year ....................................... $ 5,087,154,980 $ 4,714,269,818 $ 280,033,442 $ 245,738,189
===========================================================================
Undistributed net investment income included in
net assets:
End of year ...................................... $ 43,095,449 $ 19,142,425 $ 2,187,021 $ 1,335,649
===========================================================================
Annual Report |
The accompanying notes are an integral part of these financial statements. | 101
Franklin Value Investors Trust
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
-------------------------------------------------------------------
FRANKLIN FRANKLIN
MICROCAP VALUE FUND MIDCAP VALUE FUND
-------------------------------------------------------------------
YEAR ENDED OCTOBER 31, YEAR ENDED OCTOBER 31,
2006 2005 2006 2005 a
-------------------------------------------------------------------
Increase (decrease) in net assets:
Operations:
Net investment income .................................... $ 5,761,801 $ 2,134,149 $ 92,441 $ 7,869
Net realized gain (loss) from investments and foreign
currency transactions .................................. 25,575,122 32,413,489 770,294 --
Net change in unrealized appreciation
(depreciation) on investments .......................... 42,049,166 32,420,196 3,712,790 (478,861)
-------------------------------------------------------------------
Net increase (decrease) in net assets
resulting from operations ........................ 73,386,089 66,967,834 4,575,525 (470,992)
-------------------------------------------------------------------
Distributions to shareholders from:
Net investment income:
Class A ................................................ (2,139,633) (555,267) (92,384) --
Class C ................................................ -- -- (18,177) --
Class R ................................................ -- -- (232) --
Advisor Class .......................................... (17,879) -- (3,626) --
Net realized gains:
Class A ................................................ (32,120,419) (21,457,599) -- --
Advisor Class .......................................... (268,393) -- -- --
-------------------------------------------------------------------
Total distributions to shareholders ....................... (34,546,324) (22,012,866) (114,419) --
-------------------------------------------------------------------
Capital share transactions: (Note 2)
Class A ................................................ (7,634,691) (20,384,451) 27,314,789 12,137,709
Class C ................................................ -- -- 5,323,696 3,394,984
Class R ................................................ -- -- 87,880 35,904
Advisor Class .......................................... 5,888,410 -- 256,474 450,463
-------------------------------------------------------------------
Total capital share transactions .......................... (1,746,281) (20,384,451) 32,982,839 16,019,060
-------------------------------------------------------------------
Redemption fees ........................................... 5,344 2,332 789 687
-------------------------------------------------------------------
Net increase (decrease) in net assets .............. 37,098,828 24,572,849 37,444,734 15,548,755
Net assets:
Beginning of year ......................................... 443,036,554 418,463,705 15,548,755 --
-------------------------------------------------------------------
End of year ............................................... $ 480,135,382 $ 443,036,554 $ 52,993,489 $ 15,548,755
===================================================================
Undistributed net investment income included in net assets:
End of year ............................................... $ 5,762,258 $ 2,156,645 $ 84,229 $ 35,492
===================================================================
a For the period July 1, 2005 (commencement of operations) to October 31,
2005.
102 | The accompanying notes are an integral part of these financial statements.
| Annual Report
Franklin Value Investors Trust
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
--------------------------------------
FRANKLIN
SMALL CAP VALUE FUND
--------------------------------------
YEAR ENDED OCTOBER 31,
2006 2005
--------------------------------------
Increase (decrease) in net assets:
Operations:
Net investment income $ ............................................................ 2,053,699 $ 1,302,219
Net realized gain (loss) from investments and foreign currency transactions ........ 82,385,315 37,438,678
Net change in unrealized appreciation (depreciation) on investments ................ 66,605,357 50,464,536
--------------------------------------
Net increase (decrease) in net assets resulting from operations ............ 151,044,371 89,205,433
--------------------------------------
Distributions to shareholders from:
Net investment income:
Class A .......................................................................... (1,249,291) (2,351,320)
Class B .......................................................................... -- (163,617)
Class C .......................................................................... -- (274,385)
Class R .......................................................................... (2,137) (186,528)
Advisor Class .................................................................... (230,228) (280,803)
Net realized gains:
Class A .......................................................................... (11,713,986) --
Class B .......................................................................... (1,831,922) --
Class C .......................................................................... (4,598,215) --
Class R .......................................................................... (777,290) --
Advisor Class .................................................................... (909,171) --
--------------------------------------
Total distributions to shareholders ................................................. (21,312,240) (3,256,653)
--------------------------------------
Capital share transactions: (Note 2)
Class A .......................................................................... 137,426,230 143,154,563
Class B .......................................................................... (7,760,789) 1,336,098
Class C .......................................................................... 26,073,793 28,919,792
Class R .......................................................................... 19,764,560 2,795,976
Advisor Class .................................................................... 12,562,742 6,856,053
--------------------------------------
Total capital share transactions .................................................... 188,066,536 183,062,482
--------------------------------------
Redemption fees ..................................................................... 8,660 11,407
--------------------------------------
Net increase (decrease) in net assets ...................................... 317,807,327 269,022,669
Net assets:
Beginning of year ................................................................... 819,029,358 550,006,689
--------------------------------------
End of year ......................................................................... $ 1,136,836,685 $ 819,029,358
======================================
Undistributed net investment income included in net assets:
End of year ......................................................................... $ 1,872,231 $ 1,300,470
======================================
Annual Report |
The accompanying notes are an integral part of these financial statements. | 103
Franklin Value Investors Trust
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Franklin Value Investors Trust (the Trust) is registered under the Investment
Company Act of 1940 (1940 Act) as a diversified, open-end investment company,
consisting of five funds (the Funds). The classes of shares offered within each
of the Funds are indicated below. Effective November 1, 2005, the Franklin Large
Cap Value Fund and the Franklin MicroCap Value Fund began offering a new class
of shares, Advisor Class. Each class of shares differs by its initial sales
load, contingent deferred sales charges, distribution fees, voting rights on
matters affecting a single class and its exchange privilege.
- ------------------------------------------------------------------------------------------------------------------------
CLASS A, CLASS C, CLASS A, CLASS B, CLASS C,
CLASS A & ADVISOR CLASS CLASS R & ADVISOR CLASS CLASS R & ADVISOR CLASS
- ------------------------------------------------------------------------------------------------------------------------
Franklin MicroCap Value Fund Franklin MidCap Value Fund Franklin Balance Sheet Investment Fund
Franklin Large Cap Value Fund
Franklin Small Cap Value Fund
The following summarizes the Funds' significant accounting policies.
A. SECURITY VALUATION
Securities listed on a securities exchange or on the NASDAQ National Market
System are valued at the last quoted sale price or the official closing price of
the day, respectively. Over-the-counter securities and listed securities for
which there is no reported sale are valued within the range of the most recent
quoted bid and ask prices. Securities that trade in multiple markets or on
multiple exchanges are valued according to the broadest and most representative
market. Investments in open-end mutual funds are valued at the closing net asset
value.
Foreign securities are valued as of the close of trading on the foreign stock
exchange on which the security is primarily traded, or the NYSE, whichever is
earlier. If no sale is reported at that time, the foreign security will be
valued within the range of the most recent quoted bid and ask prices. The value
is then converted into its U.S. dollar equivalent at the foreign exchange rate
in effect at the close of the NYSE on the day that the value of the foreign
security is determined.
The Trust has procedures to determine the fair value of individual securities
and other assets for which market prices are not readily available or which may
not be reliably priced. Methods for valuing these securities may include:
fundamental analysis, matrix pricing, discounts from market prices of similar
securities, or discounts applied due to the nature and duration of restrictions
on the disposition of the securities. Due to the inherent uncertainty of
valuations of such securities, the fair values may differ significantly from the
values that would have been used had a ready market for such investments
existed. Occasionally, events occur between the time at which trading in a
security is completed and the close of the NYSE that might call into question
the availability (including the reliability) of the value of a portfolio
security held by the fund. The investment manager monitors price movements
following the close of trading in foreign stock markets through a series of
country specific market proxies (such as baskets of
104 | Annual Report
Franklin Value Investors Trust
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
A. SECURITY VALUATION (CONTINUED)
American Depository Receipts, futures contracts and exchange traded funds).
These price movements are measured against established trigger thresholds for
each specific market proxy to assist in determining if an event has occurred. If
such an event occurs, the securities may be valued using fair value procedures,
which may include the use of independent pricing services. All security
valuation procedures are approved by the Trust's Board of Trustees.
B. FOREIGN CURRENCY TRANSLATION
Portfolio securities and other assets and liabilities denominated in foreign
currencies are translated into U.S. dollars based on the exchange rate of such
currencies against U.S. dollars on the date of valuation. Purchases and sales of
securities, income and expense items denominated in foreign currencies are
translated into U.S. dollars at the exchange rate in effect on the transaction
date. Occasionally, events may impact the availability or reliability of foreign
exchange rates used to convert the U.S. dollar equivalent value. If such an
event occurs, the foreign exchange rate will be valued at fair value using
procedures established and approved by the Trust's Board of Trustees.
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 on the
Statement of Operations.
Realized foreign exchange gains or losses arise from sales of foreign
currencies, currency gains or losses realized between the trade and settlement
dates on securities transactions and the difference between the recorded amounts
of dividends, interest, and foreign withholding taxes and the U.S. dollar
equivalent of the amounts actually received or paid. Net unrealized foreign
exchange gains and losses arise from changes in foreign exchange rates on
foreign denominated assets and liabilities other than investments in securities
held at the end of the reporting period.
C. REPURCHASE AGREEMENTS
The Funds may enter into repurchase agreements. Repurchase agreements are
accounted for as a loan by the Fund to the seller, collateralized by securities
which are delivered to the Fund's custodian. The market value, including accrued
interest, of the initial collateralization is required to be at least 102% of
the dollar amount invested by the Funds, with the value of the underlying
securities marked to market daily to maintain coverage of at least 100%. The
Funds may also enter into joint repurchase agreements whereby their uninvested
cash balance is deposited into a joint cash account with other funds managed by
the investment manager or an affiliate of the investment manager and is 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. Repurchase agreements are valued at cost. At October 31, 2006, all
repurchase agreements held by the Funds had been entered into on that date.
Annual Report | 105
Franklin Value Investors Trust
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
D. FOREIGN CURRENCY CONTRACTS
When the Funds purchase or sell foreign securities they may enter into foreign
exchange contracts to minimize foreign exchange risk from the trade date to the
settlement date of the transactions. A foreign exchange contract is an agreement
between two parties to exchange different currencies at an agreed upon exchange
rate on a specified date. Realized and unrealized gains and losses on these
contracts are included in the Statements of Operations.
The risks of these contracts include movement in the values of the foreign
currencies relative to the U.S. dollar and the possible inability of the
counterparties to fulfill their obligations under the contracts, which may be in
excess of the amount reflected in the Statements of Assets and Liabilities.
E. SECURITIES LENDING
The Funds may loan securities to certain brokers through a securities lending
agent for which they receive initial cash collateral against the loaned
securities in an amount equal to at least 102% of the market value of the loaned
securities. Collateral is maintained over the life of the loan in an amount not
less than 100% of the market value of loaned securities, as determined at the
close of fund business each day. Any additional collateral required due to
changes in security values is delivered to the fund on the next business day.
The collateral is invested in short-term instruments as noted in the Statement
of Investments. The funds receive interest income from the investment of cash
collateral, adjusted by lender fees and broker rebates. The funds bear the risk
of loss with respect to the investment of the collateral and the securities
loaned. The securities lending agent has agreed to indemnify the funds in the
case of default of any securities borrower. At October 31, 2006, only the
Franklin Small Cap Value Fund had securities on loan.
F. INCOME TAXES
No provision has been made for U.S. income taxes because each fund intends to
qualify as a regulated investment company under the Internal Revenue Code and to
distribute to shareholders substantially all of its taxable income and net
realized gains.
G. 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. Dividend income is
recorded on the ex-dividend date except that certain dividends from foreign
securities are recognized as soon as the Funds are notified of the ex-dividend
date. Distributions to shareholders are recorded on the ex-dividend date and are
determined according to income tax regulations (tax basis). Distributable
earnings determined on a tax basis
106 | Annual Report
Franklin Value Investors Trust
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
G. SECURITY TRANSACTIONS, INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS
(CONTINUED)
may differ from earnings recorded in accordance with accounting principles
generally accepted in the United States. These differences may be permanent or
temporary. Permanent differences are reclassified among capital accounts to
reflect their tax character. These reclassifications have no impact on net
assets or the results of operations. Temporary differences are not reclassified,
as they may reverse in subsequent periods.
Common expenses incurred by the Trust are allocated among the Funds based on the
ratio of net assets of each fund to the combined net assets of the Trust. Fund
specific expenses are charged directly to the fund that incurred the expense.
Realized and unrealized gains and losses and net investment income, other than
class specific expenses, are allocated daily to each class of shares based upon
the relative proportion of net assets of each class. Differences in class-level
expenses may result in payment of different per share distributions by class.
H. OFFERING COSTS
Offering costs are amortized on a straight line basis over twelve months.
I. ACCOUNTING ESTIMATES
The preparation of financial statements in accordance with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the amounts of income
and expenses during the reporting period. Actual results could differ from those
estimates.
J. REDEMPTION FEES
A short term trading redemption fee will be imposed, with some exceptions, on
any Fund shares that are redeemed or exchanged within seven calendar days
following their purchase date. The redemption fee is 2% of the amount redeemed.
Such fees are retained by the Funds and accounted for as an addition to paid-in
capital.
K. GUARANTEES AND INDEMNIFICATIONS
Under the Trust's organizational documents, its officers and trustees are
indemnified by the Trust against certain liabilities arising out of the
performance of their duties to the Trust. Additionally, in the normal course of
business, the Trust enters into contracts with service providers that contain
general indemnification clauses. The Trust's maximum exposure under these
arrangements is unknown as this would involve future claims that may be made
against the Trust that have not yet occurred. Currently, the Trust expects the
risk of loss to be remote.
Annual Report | 107
Franklin Value Investors Trust
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SHARES OF BENEFICIAL INTEREST
At October 31, 2006, there were an unlimited number of shares authorized ($0.01
par value). Transactions in the Funds' shares were as follows:
---------------------------------------------------------------------------
FRANKLIN BALANCE FRANKLIN LARGE CAP
SHEET INVESTMENT FUND VALUE FUND
---------------------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
---------------------------------------------------------------------------
CLASS A SHARES:
Year ended October 31, 2006
Shares sold ........................... 12,891,805 $ 845,679,287 2,814,004 $ 43,496,209
Shares issued in reinvestment
of distributions ..................... 2,866,520 178,326,273 315,567 4,720,880
Shares redeemed ....................... (19,232,574) (1,259,522,267) (2,697,428) (41,466,049)
---------------------------------------------------------------------------
Net increase (decrease) ............... (3,474,249) $ (235,516,707) 432,143 $ 6,751,040
===========================================================================
Year ended October 31, 2005
Shares sold ........................... 20,387,291 $ 1,195,979,456 4,618,633 $ 67,248,977
Shares issued in reinvestment
of distributions ..................... 1,484,887 86,004,645 61,568 904,432
Shares redeemed ....................... (23,218,527) (1,377,084,876) (3,064,788) (44,628,233)
---------------------------------------------------------------------------
Net increase (decrease) ............... (1,346,349) $ (95,100,775) 1,615,413 $ 23,525,176
===========================================================================
CLASS B SHARES:
Year ended October 31, 2006
Shares sold ........................... 23,446 $ 1,520,327 147,257 $ 2,254,773
Shares issued in reinvestment
of distributions ..................... 73,065 4,498,614 34,956 519,099
Shares redeemed ....................... (254,183) (16,457,679) (353,458) (5,378,812)
---------------------------------------------------------------------------
Net increase (decrease) ............... (157,672) $ (10,438,738) (171,245) $ (2,604,940)
===========================================================================
Year ended October 31, 2005
Shares sold ........................... 50,086 $ 2,872,084 257,282 $ 3,705,185
Shares issued in reinvestment
of distributions ..................... 32,330 1,854,779 3,163 46,124
Shares redeemed ....................... (221,047) (12,894,599) (309,004) (4,452,993)
---------------------------------------------------------------------------
Net increase (decrease) ............... (138,631) $ (8,167,736) (48,559) $ (701,684)
===========================================================================
CLASS C SHARES:
Year ended October 31, 2006
Shares sold ........................... 84,896 $ 5,511,020 836,352 $ 12,933,004
Shares issued in reinvestment
of distributions ..................... 80,627 4,970,581 98,108 1,456,901
Shares redeemed ....................... (351,032) (22,842,799) (1,159,282) (17,609,574)
---------------------------------------------------------------------------
Net increase (decrease) ............... (185,509) $ (12,361,198) (224,822) $ (3,219,669)
===========================================================================
Year ended October 31, 2005
Shares sold ........................... 121,812 $ 7,049,019 1,135,106 $ 16,358,626
Shares issued in reinvestment
of distributions ..................... 34,963 2,008,638 7,899 115,170
Shares redeemed ....................... (352,369) (20,478,527) (1,188,216) (17,113,025)
---------------------------------------------------------------------------
Net increase (decrease) ............... (195,594) $ (11,420,870) (45,211) $ (639,229)
===========================================================================
108 | Annual Report
Franklin Value Investors Trust
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SHARES OF BENEFICIAL INTEREST (CONTINUED)
------------------------------------------------------------------------
FRANKLIN BALANCE FRANKLIN LARGE CAP
SHEET INVESTMENT FUND VALUE FUND
------------------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
------------------------------------------------------------------------
CLASS R SHARES:
Year ended October 31, 2006
Shares sold ............................... 368,266 $ 24,000,456 188,951 $ 2,898,064
Shares issued in reinvestment
of distributions ......................... 22,961 1,422,195 15,529 230,759
Shares redeemed ........................... (149,863) (9,804,277) (208,144) (3,180,526)
------------------------------------------------------------------------
Net increase (decrease) ................... 241,364 $ 15,618,374 (3,664) $ (51,703)
========================================================================
Year ended October 31, 2005
Shares sold ............................... 236,030 $ 14,082,484 294,019 $ 4,264,897
Shares issued in reinvestment
of distributions ......................... 7,972 460,280 1,635 23,900
Shares redeemed ........................... (133,125) (7,810,174) (67,218) (969,982)
------------------------------------------------------------------------
Net increase (decrease) ................... 110,877 $ 6,732,590 228,436 $ 3,318,815
========================================================================
ADVISOR CLASS SHARES:
Year ended October 31, 2006 a
Shares sold ............................... 2,723,265 $ 178,515,659 143,524 $ 2,203,695
Shares issued in reinvestment
of distributions ......................... 10,335 643,072 1,774 26,469
Shares redeemed ........................... (2,140,148) (140,508,211) (25,182) (411,738)
------------------------------------------------------------------------
Net increase (decrease) ................... 593,452 $ 38,650,520 120,116 $ 1,818,426
========================================================================
Year ended October 31, 2005
Shares sold ............................... 4,770,213 $ 290,077,672
Shares issued in reinvestment
of distributions ......................... 9,305 539,040
Shares redeemed ........................... (1,063,451) (64,730,335)
--------------------------------
Net increase (decrease) ................... 3,716,067 $ 225,886,377
================================
-------------------------------------------------------------------
FRANKLIN MICROCAP FRANKLIN MIDCAP
VALUE FUND VALUE FUND
-------------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
-------------------------------------------------------------------
CLASS A SHARES:
Year ended October 31, 2006
Shares sold ..................................... 1,265,501 $ 50,308,408 2,900,257 $ 31,140,083
Shares issued in reinvestment
of distributions ............................... 845,219 31,146,329 7,469 77,315
Shares redeemed ................................. (2,257,232) (89,089,428) (360,030) (3,902,609)
-------------------------------------------------------------------
Net increase (decrease) ......................... (146,512) $ (7,634,691) 2,547,696 $ 27,314,789
===================================================================
Year ended October 31, 2005 b
Shares sold ..................................... 1,234,369 $ 45,023,987 1,252,652 $ 12,622,895
Shares issued in reinvestment
of distributions ............................... 567,488 19,754,272 -- --
Shares redeemed ................................. (2,325,605) (85,162,710) (48,410) (485,186)
-------------------------------------------------------------------
Net increase (decrease) ......................... (523,748) $ (20,384,451) 1,204,242 $ 12,137,709
===================================================================
Annual Report | 109
Franklin Value Investors Trust
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SHARES OF BENEFICIAL INTEREST (CONTINUED)
-----------------------------------------------------------------------
FRANKLIN MICROCAP FRANKLIN MIDCAP
VALUE FUND VALUE FUND
-----------------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
-----------------------------------------------------------------------
CLASS C SHARES:
Year ended October 31, 2006
Shares sold ................................... 599,713 $ 6,423,322
Shares issued in reinvestment
of distributions ............................. 1,602 16,568
Shares redeemed ............................... (103,336) (1,116,194)
------------------------------
Net increase (decrease) ....................... 497,979 $ 5,323,696
==============================
Year ended October 31, 2005 b
Shares sold ................................... 341,093 $ 3,457,069
Shares redeemed ............................... (6,281) (62,085)
------------------------------
Net increase (decrease) ....................... 334,812 $ 3,394,984
==============================
CLASS R SHARES:
Year ended October 31, 2006
Shares sold ................................... 10,104 $ 110,266
Shares issued in reinvestment
of distributions ............................. 17 174
Shares redeemed ............................... (2,041) (22,560)
------------------------------
Net increase (decrease) ....................... 8,080 $ 87,880
==============================
Year ended October 31, 2005 b
Shares sold ................................... 3,670 $ 35,904
------------------------------
Net increase (decrease) ....................... 3,670 $ 35,904
==============================
ADVISOR CLASS SHARES:
Year ended October 31, 2006 a
Shares sold ................................... 192,966 $ 7,492,655 27,657 $ 298,445
Shares issued in reinvestment
of distributions ............................. 7,745 285,477 336 3,482
Shares redeemed ............................... (48,691) (1,889,722) (4,173) (45,453)
-----------------------------------------------------------------------
Net increase (decrease) ....................... 152,020 $ 5,888,410 23,820 $ 256,474
=======================================================================
Year ended October 31, 2005 b
Shares sold ................................... 48,069 $ 489,504
Shares redeemed ............................... (3,884) (39,041)
------------------------------
Net increase (decrease) ....................... 44,185 $ 450,463
==============================
a For the period November 1, 2005 (effective date) to October 31, 2006 for
the Franklin Large Cap Value Fund and the Franklin MicroCap Value Fund.
b For the period July 1, 2005 (commencement of operations) to October 31,
2005 for the Franklin MidCap Value Fund.
110 | Annual Report
Franklin Value Investors Trust
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SHARES OF BENEFICIAL INTEREST (CONTINUED)
---------------------------------
FRANKLIN SMALL CAP
VALUE FUND
---------------------------------
SHARES AMOUNT
---------------------------------
CLASS A SHARES:
Year ended October 31, 2006
Shares sold ............................................................... 6,027,552 $ 260,324,245
Shares issued in reinvestment of distributions ............................ 291,303 11,850,223
Shares redeemed ........................................................... (3,130,472) (134,748,238)
---------------------------------
Net increase (decrease) ................................................... 3,188,383 $ 137,426,230
=================================
Year ended October 31, 2005
Shares sold ............................................................... 5,949,227 $ 227,465,776
Shares issued in reinvestment of distributions ............................ 57,572 2,157,240
Shares redeemed ........................................................... (2,273,669) (86,468,453)
---------------------------------
Net increase (decrease) ................................................... 3,733,130 $ 143,154,563
=================================
CLASS B SHARES:
Year ended October 31, 2006
Shares sold ............................................................... 129,249 $ 5,415,513
Shares issued in reinvestment of distributions ............................ 43,570 1,710,113
Shares redeemed ........................................................... (357,625) (14,886,415)
---------------------------------
Net increase (decrease) ................................................... (184,806) $ (7,760,789)
=================================
Year ended October 31, 2005
Shares sold ............................................................... 334,000 $ 12,174,487
Shares issued in reinvestment of distributions ............................ 4,204 152,777
Shares redeemed ........................................................... (297,780) (10,991,166)
---------------------------------
Net increase (decrease) ................................................... 40,424 $ 1,336,098
=================================
CLASS C SHARES:
Year ended October 31, 2006
Shares sold ............................................................... 1,576,345 $ 64,957,367
Shares issued in reinvestment of distributions ............................ 105,445 4,097,599
Shares redeemed ........................................................... (1,045,944) (42,981,173)
---------------------------------
Net increase (decrease) ................................................... 635,846 $ 26,073,793
=================================
Year ended October 31, 2005
Shares sold ............................................................... 1,896,798 $ 69,431,851
Shares issued in reinvestment of distributions ............................ 6,647 239,191
Shares redeemed ........................................................... (1,110,750) (40,751,250)
---------------------------------
Net increase (decrease) ................................................... 792,695 $ 28,919,792
=================================
CLASS R SHARES:
Year ended October 31, 2006
Shares sold ............................................................... 845,521 $ 36,449,462
Shares issued in reinvestment of distributions ............................ 17,017 690,435
Shares redeemed ........................................................... (406,551) (17,375,337)
---------------------------------
Net increase (decrease) ................................................... 455,987 $ 19,764,560
=================================
Year ended October 31, 2005
Shares sold ............................................................... 671,655 $ 25,703,878
Shares issued in reinvestment of distributions ............................ 4,935 184,254
Shares redeemed ........................................................... (600,803) (23,092,156)
---------------------------------
Net increase (decrease) ................................................... 75,787 $ 2,795,976
=================================
Annual Report | 111
Franklin Value Investors Trust
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SHARES OF BENEFICIAL INTEREST (CONTINUED)
---------------------------
FRANKLIN SMALL CAP
VALUE FUND
---------------------------
SHARES AMOUNT
---------------------------
ADVISOR CLASS SHARES:
Year ended October 31, 2006
Shares sold ............................................................... 705,180 $ 30,889,448
Shares issued in reinvestment of distributions ............................ 13,043 542,985
Shares redeemed ........................................................... (429,816) (18,869,691)
---------------------------
Net increase (decrease) ................................................... 288,407 $ 12,562,742
===========================
Year ended October 31, 2005
Shares sold ............................................................... 602,547 $ 23,144,910
Shares issued in reinvestment of distributions ............................ 3,920 150,168
Shares redeemed ........................................................... (428,353) (16,439,025)
---------------------------
Net increase (decrease) ................................................... 178,114 $ 6,856,053
===========================
3. TRANSACTIONS WITH AFFILIATES
Franklin Resources, Inc. is the holding company for various subsidiaries that
together are referred to as Franklin Templeton Investments. Certain officers and
trustees of the Trust are also officers and/or directors of the following
subsidiaries:
- --------------------------------------------------------------------------------------------------
SUBSIDIARY AFFILIATION
- --------------------------------------------------------------------------------------------------
Franklin Advisory Services, LLC (Advisory Services) Investment manager
Franklin Templeton Services, LLC (FT Services) Administrative manager
Franklin Templeton Distributors, Inc. (Distributors) Principal underwriter
Franklin Templeton Investor Services, LLC (Investor Services) Transfer agent
A. MANAGEMENT FEES
The Franklin Balance Sheet Investment Fund pays an investment management fee to
Advisory Services based on the average daily net assets of the fund as follows:
- --------------------------------------------------------------------------------
ANNUALIZED FEE RATE NET ASSETS
- --------------------------------------------------------------------------------
0.625% Up to and including $100 million
0.500% Over $100 million, up to and including $250 million
0.450% Over $250 million, up to and including $10 billion
0.440% Over $10 billion, up to and including $12.5 billion
0.420% Over $12.5 billion, up to and including $15 billion
0.400% In excess of $15 billion
112 | Annual Report
Franklin Value Investors Trust
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. TRANSACTIONS WITH AFFILIATES (CONTINUED)
A. MANAGEMENT FEES (CONTINUED)
The Franklin Large Cap Value Fund pays an investment management fee to Advisory
Services based on the average daily net assets of the fund as follows:
- --------------------------------------------------------------------------------
ANNUALIZED FEE RATE NET ASSETS
- --------------------------------------------------------------------------------
0.550% Up to and including $500 million
0.450% Over $500 million, up to and including $1 billion
0.400% Over $1 billion, up to and including $1.5 billion
0.350% Over $1.5 billion, up to and including $6.5 billion
0.325% Over $6.5 billion, up to and including $11.5 billion
0.300% Over $11.5 billion, up to and including $16.5 billion
0.290% Over $16.5 billion, up to and including $19 billion
0.280% Over $19 billion, up to and including $21.5 billion
0.270% In excess of $21.5 billion
The Franklin MicroCap Value Fund pays an investment management fee to Advisory
Services of 0.75% per year of the average daily net assets of the fund.
The Franklin MidCap Value Fund pays an investment management fee to Advisory
Services based on the average daily net assets of the fund as follows:
- --------------------------------------------------------------------------------
ANNUALIZED FEE RATE NET ASSETS
- --------------------------------------------------------------------------------
0.750% Up to and including $500 million
0.650% Over $500 million, up to and including $1 billion
0.600% Over $1 billion, up to and including $1.5 billion
0.550% Over $1.5 billion, up to and including $6.5 billion
0.525% Over $6.5 billion, up to and including $11.5 billion
0.500% Over $11.5 billion, up to and including $16.5 billion
0.490% Over $16.5 billion, up to and including $19 billion
0.480% Over $19 billion, up to and including $21.5 billion
0.470% In excess of $21.5 billion
The Franklin Small Cap Value Fund pays an investment management fee to Advisory
Services based on the average daily net assets of the fund as follows:
- --------------------------------------------------------------------------------
ANNUALIZED FEE RATE NET ASSETS
- --------------------------------------------------------------------------------
0.750% Up to and including $500 million
0.625% Over $500 million, up to and including $1 billion
0.500% In excess of $1 billion
B. ADMINISTRATIVE FEES
The Franklin Large Cap Value Fund and the Franklin MidCap Value Fund pay an
administrative fee to FT Services of 0.20% per year of the average daily net
assets of each of the funds.
Annual Report | 113
Franklin Value Investors Trust
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. TRANSACTIONS WITH AFFILIATES (CONTINUED)
B. ADMINISTRATIVE FEES (CONTINUED)
Under an agreement with Advisory Services, FT Services provides administrative
services to the Franklin Balance Sheet Investment Fund, the Franklin MicroCap
Value Fund, and the Franklin Small Cap Value Fund. The fee is paid by Advisory
Services based on average daily net assets, and is not an additional expense of
the funds.
C. DISTRIBUTION FEES
The Trust's Board of Trustees has adopted distribution plans for each share
class, with the exception of Advisor Class shares, pursuant to Rule 12b-1 under
the 1940 Act. Under the funds' Class A reimbursement distribution plans, the
funds reimburse Distributors for costs incurred in connection with the sale and
distribution of each fund's shares up to a certain percentage per year of their
average daily net assets as follows:
---------------------------------------------
FRANKLIN FRANKLIN FRANKLIN
BALANCE SHEET MICROCAP SMALL CAP
INVESTMENT FUND VALUE FUND VALUE FUND
---------------------------------------------
Class A ............ 0.25% 0.25% 0.35%
Under the Class A reimbursement distribution plans, costs exceeding the maximum
for the current plan year cannot be reimbursed in subsequent periods.
Under the funds' compensation distribution plans, the funds pay Distributors for
costs incurred in connection with the sale and distribution of each fund's
shares up to a certain percentage per year of their average daily net assets of
each class as follows:
----------------------------------------------------------
FRANKLIN FRANKLIN FRANKLIN FRANKLIN
BALANCE SHEET LARGE CAP MIDCAP SMALL CAP
INVESTMENT FUND VALUE FUND VALUE FUND VALUE FUND
----------------------------------------------------------
Class A ............ -- 0.35% 0.35% --
Class B ............ 1.00% 1.00% -- 1.00%
Class C ............ 1.00% 1.00% 1.00% 1.00%
Class R ............ 0.50% 0.50% 0.50% 0.50%
D. SALES CHARGES/UNDERWRITING AGREEMENTS
Distributors has advised the Funds of the following commission transactions
related to the sales and redemptions of the Funds' shares for the year:
----------------------------------------------
FRANKLIN FRANKLIN FRANKLIN
BALANCE SHEET LARGE CAP MICROCAP
INVESTMENT FUND VALUE FUND VALUE FUND
----------------------------------------------
Sales charges retained net of commissions paid to unaffiliated
broker/dealers .............................................. $ 60,633 $102,859 $ 30,201
Contingent deferred sales charges retained ................... $144,774 $ 26,003 $ 31,964
114 | Annual Report
Franklin Value Investors Trust
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. TRANSACTIONS WITH AFFILIATES (CONTINUED)
D. SALES CHARGES/UNDERWRITING AGREEMENTS (CONTINUED)
----------------------------
FRANKLIN FRANKLIN
MIDCAP SMALL CAP
VALUE FUND VALUE FUND
----------------------------
Sales charges retained net of commissions paid to unaffiliated
broker/dealers .............................................. $109,013 $582,891
Contingent deferred sales charges retained ................... $ 5,348 $150,020
E. TRANSFER AGENT FEES
The Funds paid transfer agent fees as noted in the Statements of Operations of
which the following amounts were retained by Investor Services:
--------------------------------------------------------------------------------
FRANKLIN FRANKLIN FRANKLIN FRANKLIN FRANKLIN
BALANCE SHEET LARGE CAP MICROCAP MIDCAP SMALL CAP
INVESTMENT FUND VALUE FUND VALUE FUND VALUE FUND VALUE FUND
--------------------------------------------------------------------------------
Transfer agent fees .................. $3,777,430 $326,098 $395,863 $44,849 $1,305,259
F. VOLUNTARY WAIVER AND EXPENSE REIMBURSEMENTS
FT Services agreed in advance to voluntarily waive administrative fees for the
Franklin MidCap Value Fund. Additionally, Advisory Services agreed in advance to
voluntarily waive management fees for the Franklin MidCap Value Fund. Total
expenses waived by FT Services and Advisory Services are not subject to
reimbursement by the fund subsequent to the fund's fiscal year end.
4. EXPENSE OFFSET ARRANGEMENT
The Funds have entered into an arrangement with their custodian whereby credits
realized as a result of uninvested cash balances are used to reduce a portion of
the Funds' custodian expenses. During the year ended October 31, 2006, the
custodian fees were reduced as noted in the Statements of Operations.
5. INCOME TAXES
The tax character of distributions paid during the years ended October 31, 2006
and 2005, was as follows:
-------------------------------------------------------------
FRANKLIN BALANCE FRANKLIN LARGE CAP
SHEET INVESTMENT FUND VALUE FUND
-------------------------------------------------------------
2006 2005 2006 2005
-------------------------------------------------------------
Distributions paid from:
Ordinary Income ........................... $ 36,332,897 $ 35,572,990 $ 1,984,910 $ 779,134
Long term capital gain .................... 176,693,656 64,470,022 5,786,415 468,527
-------------------------------------------------------------
$213,026,553 $100,043,012 $ 7,771,325 $ 1,247,661
=============================================================
Annual Report | 115
Franklin Value Investors Trust
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. INCOME TAXES (CONTINUED)
------------------------------------------------------------------------
FRANKLIN MICROCAP FRANKLIN MIDCAP
VALUE FUND VALUE FUND
------------------------------------------------------------------------
2006 2005 2006 2005
------------------------------------------------------------------------
Distributions paid from:
Ordinary Income .......................... $ 4,377,503 $ 1,557,835 $ 114,419 $ --
Long term capital gain ................... 30,168,821 20,455,031 -- --
------------------------------------------------------------------------
$34,546,324 $22,012,866 $ 114,419 $ --
========================================================================
-------------------------------
FRANKLIN SMALL CAP
VALUE FUND
-------------------------------
2006 2005
-------------------------------
Distributions paid from:
Ordinary Income .......................... $ 1,481,656 $ 3,256,653
Long term capital gain ................... 19,830,584 --
-------------------------------
$21,312,240 $ 3,256,653
===============================
At October 31, 2006, the cost of investments, net unrealized appreciation
(depreciation), undistributed ordinary income and undistributed long term
capital gains for income tax purposes were as follows:
-----------------------------------------------------------
FRANKLIN FRANKLIN FRANKLIN
BALANCE SHEET LARGE CAP MICROCAP
INVESTMENT FUND VALUE FUND VALUE FUND
-----------------------------------------------------------
Cost of investments ..................................... $ 2,963,276,505 $ 232,342,086 $ 296,641,824
===========================================================
Unrealized appreciation ................................. 2,204,055,280 48,172,296 192,923,315
Unrealized depreciation ................................. (67,374,954) (870,102) $ (8,375,568)
-----------------------------------------------------------
Net unrealized appreciation (depreciation) .............. $ 2,136,680,326 $ 47,302,194 184,547,747
===========================================================
Undistributed ordinary income ........................... $ 43,394,211 $ 3,271,015 $ 5,762,257
Undistributed long term capital gains ................... 312,425,735 13,063,483 25,571,957
-----------------------------------------------------------
Distributable earnings .................................. $ 355,819,946 $ 16,334,498 $ 31,334,214
===========================================================
--------------------------------------
FRANKLIN FRANKLIN
MIDCAP SMALL CAP
VALUE FUND VALUE FUND
--------------------------------------
Cost of investments ..................................... $ 49,103,255 $ 883,431,808
======================================
Unrealized appreciation ................................. 4,466,336 292,422,617
Unrealized depreciation ................................. (1,232,407) (51,511,675)
--------------------------------------
Net unrealized appreciation (depreciation) .............. $ 3,233,929 $ 240,910,942
======================================
Undistributed ordinary income ........................... $ 854,491 $ 10,841,422
Undistributed long term capital gains ................... -- 73,356,915
--------------------------------------
Distributable earnings .................................. $ 854,-91 $ 84,198,337
======================================
Net investment income differs for financial statement and tax purposes primarily
due to differing treatments of foreign currency transactions, partnership
adjustments and offering costs.
116 | Annual Report
1
Franklin Value Investors Trust
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. INCOME TAXES (CONTINUED)
Net realized gains (losses) differ for financial statement and tax purposes
primarily due to differing treatments of wash sales and foreign currency
transactions.
6. INVESTMENT TRANSACTIONS
Purchases and sales of investments (excluding short term securities) for the
year ended October 31, 2006, were as follows:
-----------------------------------------------------------------------------------------------
FRANKLIN FRANKLIN FRANKLIN FRANKLIN FRANKLIN
BALANCE SHEET LARGE CAP MICROCAP MIDCAP SMALL CAP
INVESTMENT FUND VALUE FUND VALUE FUND VALUE FUND VALUE FUND
-----------------------------------------------------------------------------------------------
Purchases ........ $308,331,684 $80,710,029 $25,240,136 $37,121,131 $278,218,412
Sales ............ $507,420,446 $88,487,799 $58,736,900 $3,533,552 $157,720,720
7. INVESTMENTS IN FRANKLIN INSTITUTIONAL FIDUCIARY TRUST MONEY MARKET PORTFOLIO
The Funds may invest in the Franklin Institutional Fiduciary Trust Money Market
Portfolio (the Sweep Money Fund), an open-end investment company managed by
Franklin Advisers, Inc. (an affiliate of the investment manager). Management
fees paid by the Funds are reduced on assets invested in the Sweep Money Fund,
in an amount not to exceed the management and administrative fees paid by the
Sweep Money Fund.
8. RESTRICTED SECURITIES
Certain Funds may invest in securities that are restricted under the Securities
Act of 1933 (the 1933 Act) or which are subject to legal, contractual, or other
agreed upon restrictions or resale. Restricted securities are often purchased in
private placement transactions, and cannot be sold without prior registration
unless the sale is pursuant to an exemption under the 1933 Act. Disposal of
these securities may require greater effort and expense, and prompt sale at an
acceptable price may be difficult. The fund has registration rights for certain
restricted securities held at the period end. The issuer generally incurs all
registration costs.
At October 31, 2006, the Franklin MicroCap Value Fund held investments in
restricted securities, excluding 144A securities deemed to be liquid, valued in
accordance with procedures approved by the fund's Board of Trustees as
reflecting fair value, as follows:
- ----------------------------------------------------------------------------------------------------------
ACQUISITION
SHARES ISSUER DATE COST VALUE
- ----------------------------------------------------------------------------------------------------------
94,800 Allen Organ Co., Escrow Account ............ 9/07/06 $ 1,544,292 $ 1,544,292
94,800 LandCo Real Estate LLC,
Liquidating Trust ........................ 9/07/06 240,792 240,792
-----------
TOTAL RESTRICTED SECURITIES (0.00% a of Net Assets) ........................... $ 1,785,084
===========
a Rounds to less than 0.01% of net assets.
Annual Report | 117
Franklin Value Investors Trust
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
9. HOLDINGS OF 5% VOTING SECURITIES OF PORTFOLIO COMPANIES
The Investment Company Act of 1940 defines "affiliated companies" to include
investments in portfolio companies in which a fund owns 5% or more of the
outstanding voting securities. Investments in "affiliated companies" for the
Franklin Balance Sheet Investment Fund and the Franklin MicroCap Value Fund for
the year ended October 31, 2006 were as shown below.
- -----------------------------------------------------------------------------------------------------------------------------------
NUMBER OF NUMBER OF
SHARES HELD SHARES HELD VALUE REALIZED
AT BEGINNING GROSS GROSS AT END AT END INVESTMENT CAPITAL
NAME OF ISSUER OF YEAR ADDITIONS REDUCTIONS OF YEAR OF YEAR INCOME GAIN (LOSS)
- -----------------------------------------------------------------------------------------------------------------------------------
FRANKLIN BALANCE SHEET INVESTMENT FUND
NON-CONTROLLED AFFILIATES
Aztar Corp. ........................... 2,800,000 -- 2,050,000 750,000 $ a $ -- $70,166,250
Champps Entertainment Inc. ............ 920,000 -- -- 920,000 5,906,400 -- --
Delta Woodside Industries Inc. ........ 555,000 -- 555,000 -- a -- (7,365,245)
Dollar Thrifty Automotive Group Inc. .. 1,800,000 -- 36,933 1,763,067 70,804,771 -- 987,927
Furniture Brands International Inc. ... -- 2,675,000 -- 2,675,000 49,755,000 766,105 --
Haverty Furniture Cos. Inc. ........... 920,000 -- -- 920,000 a 248,400 --
Russell Corp. ......................... 1,630,000 47,703 1,677,703 -- a 198,776 1,598,321
Syms Corp. ............................ 1,430,000 -- -- 1,430,000 27,756,300 -- --
Tecumesh Products Co., A .............. 778,900 306,100 -- 1,085,000 18,228,000 -- --
Tecumesh Products Co., B .............. 300,000 10,000 -- 310,000 5,180,100 -- --
Xanser Corp. .......................... 2,800,000 -- -- 2,800,000 16,548,000 -- --
-------------------------------------
TOTAL AFFILIATED SECURITIES (3.82% of Net Assets) .......................................... $194,178,571 $1,213,281 $65,387,253
=====================================
FRANKLIN MICROCAP VALUE FUND
NON-CONTROLLED AFFILIATES
ACMAT Corp., A ........................ 392,800 -- -- 392,800 $ 9,034,400 $ -- $ --
American Pacific Corp. ................ 659,000 41,000 90,000 610,000 4,416,400 -- 186,507
Continental Materials Corp. ........... 99,500 -- -- 99,500 2,626,800 -- --
CoolBrands International Inc. ......... 3,000,000 -- 2,070,000 930,000 a -- (4,363,569)
Delta Apparel Inc. .................... 680,000 -- -- 680,000 12,580,000 122,400 --
Duckwall-ALCO Stores Inc. ............. 330,000 -- 100,000 230,000 9,027,500 -- 2,207,040
Ecology and Environment Inc., A ....... 215,000 -- 10,000 205,000 a 73,450 19,566
Espey Manufacturing & Electronics Corp. 156,000 b -- -- 156,000 2,691,000 62,010 --
Fresh Brands Inc. ..................... 900,000 -- 900,000 -- -- -- (2,667,020)
Haggar Corp. .......................... 419,035 -- 419,035 -- -- -- 7,689,909
Hardinge Inc. ......................... 925,600 -- 24,609 900,991 13,370,706 108,857 149,707
International Shipholding Corp. ....... 474,800 -- -- 474,800 5,745,080 -- --
Merchants Group Inc. .................. 190,000 -- 29,200 160,800 4,897,164 183,300 341,021
Nashua Corp. .......................... 477,930 -- -- 477,930 2,987,063 -- --
Proliance International Inc. .......... 398,800 425,000 -- 823,800 3,558,816 -- --
Rockford Corp. ........................ 575,000 -- -- 575,000 1,851,500 -- --
S&K Famous Brands Inc. ................ 260,000 -- 4,500 255,500 3,449,250 1,533,000 46,452
Tandy Brands Accessories Inc. ......... 394,700 145,300 -- 540,000 6,307,200 55,404 --
Village Super Market Inc., A .......... 115,175 -- -- 115,175 a 125,541 --
-------------------------------------
TOTAL AFFILIATED SECURITIES (17.19% of Net Assets) ......................................... $ 82,542,879 $2,263,962 $ 3,609,613
=====================================
a As of October 31, 2006, no longer an affiliate.
b Reflects a 2:1 stock split during the year. Balance as of October 31, 2005
was 78,000.
118 | Annual Report
Franklin Value Investors Trust
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
10. REGULATORY MATTERS
As part of various investigations by a number of federal, state, and foreign
regulators and governmental entities, relating to certain practices in the
mutual fund industry, including late trading, market timing and marketing
support payments to securities dealers who sell fund shares, Franklin Resources,
Inc. and certain of its subsidiaries (collectively, the "Company"), entered into
settlements with certain of those regulators.
Specifically, the Company entered into settlements with the Securities and
Exchange Commission ("SEC") concerning market timing (the "August 2, 2004 SEC
Order") and marketing support payments to securities dealers who sell fund
shares (the "December 13, 2004 SEC Order") and with the California Attorney
General's Office ("CAGO") concerning marketing support payments to securities
dealers who sell fund shares (the "CAGO Settlement"). Under the terms of the
settlements with the SEC and the CAGO, the Company retained an Independent
Distribution Consultant ("IDC") to develop separate plans for the distribution
of the respective settlement monies. The CAGO approved the distribution plan
pertaining to the distribution of the monies owed under the CAGO settlement
agreement, and in March 2005, the disbursement of monies to the relevant funds
in accordance with the terms and conditions of that settlement was completed.
On June 23, 2006, the SEC approved the IDC's proposed plan of distribution
arising from the December 13, 2004 SEC Order. The relevant funds recorded the
settlement as other income and disbursement of the settlement monies to the
designated funds in accordance with the terms and conditions of the SEC's order
and the plan was completed in September 2006.
The IDC has also completed a proposed Plan of Distribution under the August 2,
2004 SEC Order resolving the SEC's market timing investigation and has submitted
that plan to the SEC staff, where it is under review. The SEC has announced the
following expected schedule with respect to the market timing Plan of
Distribution. The SEC anticipates that Notice of the Plan will be published on
or after November 15, 2006. After publication and comment, the proposed
Distribution Plan will be submitted to the SEC for approval. When the SEC
approves the proposed Distribution Plan, with modifications as appropriate,
distributions will begin pursuant to that Plan.
In addition, the Company, as well as most of the mutual funds within Franklin
Templeton Investments and certain current or former officers, directors, and/or
employees, have been named in private lawsuits (styled as shareholder class
actions, or as derivative actions on behalf of either the named funds or
Franklin Resources, Inc.) relating to the industry practices referenced above,
as well as to allegedly excessive advisory fees, commissions, and/or 12b-1 fees.
The lawsuits were filed in different courts throughout the country. Many of
those suits are now pending in a multi-district litigation in the United States
District Court for the District of Maryland.
Annual Report | 119
Franklin Value Investors Trust
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
10. REGULATORY MATTERS (CONTINUED)
The Company and fund management strongly believe that the claims made in each of
the private lawsuits referenced above are without merit and intend to defend
against them vigorously. The Company cannot predict with certainty the eventual
outcome of these lawsuits, nor whether they will have a material negative impact
on the Company. If it is determined that the Company bears responsibility for
any unlawful or inappropriate conduct that caused losses to the Trust, it is
committed to making the Trust or its shareholders whole, as appropriate.
11. NEW ACCOUNTING PRONOUNCEMENTS
In July 2006, the Financial Accounting Standards Board (FASB) issued FASB
Interpretation No. 48, "Accounting for Uncertainty in Income Taxes - an
Interpretation of FASB Statement No. 109" ("FIN 48"), which clarifies the
accounting for uncertainty in tax positions taken or expected to be taken in a
tax return. FIN 48 provides guidance on the measurement, recognition,
classification and disclosure of tax positions, along with accounting for the
related interest and penalties. FIN 48 is effective for fiscal years beginning
after December 15, 2006, and is to be applied to all open tax years as of the
date of effectiveness. We have not yet completed our evaluation of the impact,
if any, of adopting FIN 48 on the Trust's financial statements.
In September 2006, FASB issued FASB Statement No. 157, "Fair Value Measurement"
("SFAS 157"), which defines fair value, establishes a framework for measuring
fair value, and expands disclosures about fair value measurements. SFAS 157 is
effective for fiscal years beginning after November 15, 2007, and interim
periods within those fiscal years. The Trust believes the adoption of SFAS 157
will have no material impact on its financial statements.
120 | Annual Report
Franklin Value Investors Trust
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
TO THE BOARD OF TRUSTEES AND SHAREHOLDERS 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 of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of Franklin Balance Sheet Investment
Fund, Franklin Large Cap Value Fund, Franklin MicroCap Value Fund, Franklin
MidCap Value Fund and Franklin Small Cap Value Fund (each separate portfolios of
Franklin Value Investors Trust, hereafter referred to as the "Funds") at October
31, 2006, 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 accounting principles generally accepted in the United States of
America. These financial statements and financial highlights (hereafter referred
to as "financial statements") are the responsibility of the Funds' 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 the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements 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, 2006 by
correspondence with the custodian and brokers, provide a reasonable basis for
our opinion.
PricewaterhouseCoopers LLP
San Francisco, California
December 19, 2006
Annual Report | 121
Franklin Value Investors Trust
TAX DESIGNATION (UNAUDITED)
Under Section 852(b)(3)(C) of the Internal Revenue Code (Code), the funds
designate the maximum amount allowable but no less than the following amounts as
long term capital gain dividends for the fiscal year ended October 31, 2006:
---------------------------------------------------------------
FRANKLIN FRANKLIN FRANKLIN FRANKLIN
BALANCE SHEET LARGE CAP MICROCAP SMALL CAP
INVESTMENT FUND VALUE FUND VALUE FUND VALUE FUND
---------------------------------------------------------------
$312,191,488 $13,070,576 $25,572,717 $73,360,901
Under Section 871(k)(2)(C) of the Code, the funds designate the maximum amount
allowable but no less than the following amounts as a short term capital gain
dividend for purposes of the tax imposed under Section 871(a)(1)(A) of the Code
for the fiscal year ended October 31, 2006:
-------------------------------------------------------------
FRANKLIN FRANKLIN FRANKLIN FRANKLIN
BALANCE SHEET LARGE CAP MIDCAP SMALL CAP
INVESTMENT FUND VALUE FUND VALUE FUND VALUE FUND
-------------------------------------------------------------
$311,729 $1,083,994 $770,262 $9,024,696
Under Section 854(b)(2) of the Code, the Funds 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, 2006:
-------------------------------------------------------------------------
FRANKLIN FRANKLIN FRANKLIN FRANKLIN FRANKLIN
BALANCE SHEET LARGE CAP MICROCAP MIDCAP SMALL CAP
INVESTMENT FUND VALUE FUND VALUE FUND VALUE FUND VALUE FUND
-------------------------------------------------------------------------
100% 100% 100% 100% 100%
Under Section 854(b)(2) of the Code, the Funds designate the maximum amount
allowable but no less than the following maximum amounts as qualified dividends
for purposes of the maximum rate under Section 1(h)(11) of the Code for the
fiscal year ended October 31, 2006:
-------------------------------------------------------------------------
FRANKLIN FRANKLIN FRANKLIN FRANKLIN FRANKLIN
BALANCE SHEET LARGE CAP MICROCAP MIDCAP SMALL CAP
INVESTMENT FUND VALUE FUND VALUE FUND VALUE FUND VALUE FUND
-------------------------------------------------------------------------
$61,735,469 $5,706,248 $6,470,298 $521,064 $10,529,227
In January 2007, shareholders will receive Form 1099-DIV which will include
their share of qualified dividends distributed during the calendar year 2006.
Shareholders are advised to check with their tax advisors for information on the
treatment of these amounts on their individual income tax returns.
Under Section 871(k)(1)(C) of the Code, the Funds designate the maximum amount
allowable but no less than the following maximum amounts as interest related
dividends for purposes of the tax imposed under Section 871(a)(1)(A) of the Code
for the fiscal year ended October 31, 2006:
------------------------------------------------------------------------
FRANKLIN FRANKLIN FRANKLIN FRANKLIN FRANKLIN
BALANCE SHEET LARGE CAP MICROCAP MIDCAP SMALL CAP
INVESTMENT FUND VALUE FUND VALUE FUND VALUE FUND VALUE FUND
------------------------------------------------------------------------
$21,824,589 $554,425 $1,942,232 $60,945 $2,036,972
122 | Annual Report
Franklin Value Investors Trust
BOARD MEMBERS AND OFFICERS
The name, year of birth and address of the officers and board members, as well
as their affiliations, positions held with the Trust, principal occupations
during the past five years and number of portfolios overseen in the Franklin
Templeton Investments fund complex are shown below. Each board member will serve
until that person's successor is elected and qualified.
INDEPENDENT BOARD MEMBERS
- ------------------------------------------------------------------------------------------------------------------------------------
NUMBER OF PORTFOLIOS IN
NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN
AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- ------------------------------------------------------------------------------------------------------------------------------------
FRANK T. CROHN (1924) Trustee Since 1989 6 FORMERLY, Director, Unity Mutual Life
One Franklin Parkway Insurance Company (until May 2006).
San Mateo, CA 94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Chairman, Eastport Lobster & Fish Company; and FORMERLY, Chief Executive Officer and Chairman, Financial Benefit Life Insurance
Company (insurance and annuities) (until 1996); Chief Executive Officer, National Benefit Life Insurance Co. (insurance)
(1963-1982); and Director, AmVestors Financial Corporation (until 1997).
- ------------------------------------------------------------------------------------------------------------------------------------
BURTON J. GREENWALD (1929) Trustee Since 2001 13 Director, Fiduciary Emerging Markets
One Franklin Parkway Bond Fund PLC and Fiduciary
San Mateo, CA 94403-1906 International Ireland Limited.
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Managing Director, B.J. Greenwald Associates (management consultants to the financial services industry); and FORMERLY, Chairman,
Fiduciary Trust International Funds; Executive Vice President, L.F. Rothschild Fund Management, Inc.; President and Director, Merit
Mutual Funds; President, Underwriting Division and Director, National Securities & Research Corporation; Governor, Investment
Company Institute and Chairman, ICI Public Information Committee.
- ------------------------------------------------------------------------------------------------------------------------------------
CHARLES RUBENS II (1930) Trustee Since 1989 13 None
One Franklin Parkway
San Mateo, CA 94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Private investor.
- ------------------------------------------------------------------------------------------------------------------------------------
LEONARD RUBIN (1925) Trustee Since 1989 13 None
One Franklin Parkway
San Mateo, CA 94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Partner in LDR Equities, LLC (manages personal investments); and FORMERLY, President, F.N.C. Textiles, Inc.; and Chairman of the
Board, Carolace Embroidery Co., Inc. (until 1996).
- ------------------------------------------------------------------------------------------------------------------------------------
ROBERT E. WADE (1946) Trustee Since 2004 30 Director, El Oro and Exploration Co.,
One Franklin Parkway p.l.c. (investments) and ARC Wireless
San Mateo, CA 94403-1906 Solutions, Inc. (wireless components
and network products).
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Practicing attorney.
- ------------------------------------------------------------------------------------------------------------------------------------
Annual Report | 123
INTERESTED BOARD MEMBERS AND OFFICERS
- ------------------------------------------------------------------------------------------------------------------------------------
NUMBER OF PORTFOLIOS IN
NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN
AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- ------------------------------------------------------------------------------------------------------------------------------------
**WILLIAM J. LIPPMAN (1925) Trustee, Trustee and 13 None
One Parker Plaza, 9th Floor President and President since
Fort Lee, NJ 07024 Chief 1989 and Chief
Executive Executive Officer
Officer - - Investment
Investment Management
Management since 2002
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
President, Franklin Advisory Services, LLC; Director, Templeton Worldwide, Inc.; and officer and/or director or trustee, as the case
may be, of four of the investment companies in Franklin Templeton Investments.
- ------------------------------------------------------------------------------------------------------------------------------------
HARMON E. BURNS (1945) Vice President Since 1989 Not Applicable Not Applicable
One Franklin Parkway
San Mateo, CA 94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Vice Chairman, Member - Office of the Chairman and Director, Franklin Resources, Inc.; Vice President and Director, Franklin
Templeton Distributors, Inc.; Executive Vice President, Franklin Advisers, Inc.; and officer and/or director or trustee, as the case
may be, of some of the other subsidiaries of Franklin Resources, Inc. and of 44 of the investment companies in Franklin Templeton
Investments.
- ------------------------------------------------------------------------------------------------------------------------------------
JAMES M. DAVIS (1952) Chief Chief Compliance Not Applicable Not Applicable
One Franklin Parkway Compliance Officer since
San Mateo, CA 94403-1906 Officer and 2004 and Vice
Vice President President - AML
- AML Compliance since
Compliance February 2006
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Director, Global Compliance, Franklin Resources, Inc.; officer of 46 of the investment companies in Franklin Templeton Investments;
and FORMERLY, Director of Compliance, Franklin Resources, Inc. (1994-2001).
- ------------------------------------------------------------------------------------------------------------------------------------
LAURA FERGERSON (1962) Treasurer Since 2004 Not Applicable Not Applicable
One Franklin Parkway
San Mateo, CA 94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Vice President, Franklin Templeton Services, LLC; officer of 30 of the investment companies in Franklin Templeton Investments; and
FORMERLY, Director and member of Audit and Valuation Committees, Runkel Funds, Inc. (2003-2004); Assistant Treasurer of most of the
investment companies in Franklin Templeton Investments (1997-2003); and Vice President, Franklin Templeton Services, LLC
(1997-2003).
- ------------------------------------------------------------------------------------------------------------------------------------
JIMMY D. GAMBILL (1947) Senior Vice Since 2002 Not Applicable Not Applicable
500 East Broward Blvd. President and
Suite 2100 Chief
Fort Lauderdale, FL 33394-3091 Executive
Officer -
Finance and
Administration
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
President, Franklin Templeton Services, LLC; Senior Vice President, Templeton Worldwide, Inc.; and officer of 46 of the investment
companies in Franklin Templeton Investments.
- ------------------------------------------------------------------------------------------------------------------------------------
124 | Annual Report
- ------------------------------------------------------------------------------------------------------------------------------------
NUMBER OF PORTFOLIOS IN
NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN
AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- ------------------------------------------------------------------------------------------------------------------------------------
DAVID P. GOSS (1947) Vice President Since 2000 Not Applicable Not Applicable
One Franklin Parkway
San Mateo, CA 94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Senior Associate General Counsel, Franklin Templeton Investments; officer and director of one of the subsidiaries of Franklin
Resources, Inc.; and officer of 46 of the investment companies in Franklin Templeton Investments.
- ------------------------------------------------------------------------------------------------------------------------------------
STEVEN J. GRAY (1955) Secretary Since 2005 Not Applicable Not Applicable
One Franklin Parkway
San Mateo, CA 94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Senior Associate General Counsel, Franklin Templeton Investments; and officer of 41 of the investment companies in Franklin
Templeton Investments.
- ------------------------------------------------------------------------------------------------------------------------------------
BARBARA J. GREEN (1947) Vice President Since 2000 Not Applicable Not Applicable
One Franklin Parkway
San Mateo, CA 94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Vice President, Deputy General Counsel and Secretary, Franklin Resources, Inc.; Secretary and Senior Vice President, Templeton
Worldwide, Inc.; Secretary, Franklin Advisers, Inc., Franklin Advisory Services, LLC, Franklin Investment Advisory Services, LLC,
Franklin Mutual Advisers, LLC, Franklin Templeton Alternative Strategies, Inc., Franklin Templeton Investor Services, LLC, Franklin
Templeton Services, LLC, Franklin Templeton Distributors, Inc., Templeton Investment Counsel, LLC, and Templeton/Franklin Investment
Services, Inc.; and officer of some of the other subsidiaries of Franklin Resources, Inc. and of 46 of the investment companies in
Franklin Templeton Investments; and FORMERLY, Deputy Director, Division of Investment Management, Executive Assistant and Senior
Advisor to the Chairman, Counselor to the Chairman, Special Counsel and Attorney Fellow, U.S. Securities and Exchange Commission
(1986-1995); Attorney, Rogers & Wells (until 1986); and Judicial Clerk, U.S. District Court (District of Massachusetts) (until
1979).
- ------------------------------------------------------------------------------------------------------------------------------------
RUPERT H. JOHNSON, JR. (1940) Vice President Since 1989 Not Applicable Not Applicable
One Franklin Parkway
San Mateo, CA 94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Vice Chairman, Member - Office of the Chairman and Director, Franklin Resources, Inc.; Vice President and Director, Franklin
Templeton Distributors, Inc.; Director, Franklin Advisers, Inc.; Senior Vice President, Franklin Advisory Services, LLC; and officer
and/or director or trustee, as the case may be, of some of the other subsidiaries of Franklin Resources, Inc. and of 44 of the
investment companies in Franklin Templeton Investments.
- ------------------------------------------------------------------------------------------------------------------------------------
KAREN L. SKIDMORE (1952) Vice President Since March 2006 Not Applicable Not Applicable
One Franklin Parkway
San Mateo, CA 94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Senior Associate General Counsel, Franklin Templeton Investments; Vice President and Secretary, Templeton Funds Annuity Company; and
officer of 30 of the investment companies in Franklin Templeton Investments.
- ------------------------------------------------------------------------------------------------------------------------------------
Annual Report | 125
- ------------------------------------------------------------------------------------------------------------------------------------
NUMBER OF PORTFOLIOS IN
NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN
AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
- ------------------------------------------------------------------------------------------------------------------------------------
CRAIG S. TYLE (1960) Vice President Since 2005 Not Applicable Not Applicable
One Franklin Parkway
San Mateo, CA 94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
General Counsel and Executive Vice President, Franklin Resources, Inc.; officer of 46 of the investment companies in Franklin
Templeton Investments; and FORMERLY, Partner, Shearman & Sterling, LLP (2004-2005); and General Counsel, Investment Company
Institute (ICI) (1997-2004).
- ------------------------------------------------------------------------------------------------------------------------------------
GALEN G. VETTER (1951) Chief Financial Since 2004 Not Applicable Not Applicable
500 East Broward Blvd. Officer and
Suite 2100 Chief
Fort Lauderdale, FL 33394-3091 Accounting
Officer
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Senior Vice President, Franklin Templeton Services, LLC; officer of 46 of the investment companies in Franklin Templeton
Investments; and FORMERLY, Managing Director, RSM McGladrey, Inc. (1999-2004); and Partner, McGladrey & Pullen, LLP (1979-1987 and
1991-2004).
- ------------------------------------------------------------------------------------------------------------------------------------
* We base the number of portfolios on each separate series of the U.S.
registered investment companies within the Franklin Templeton Investments
fund complex. These portfolios have a common investment manager or
affiliated investment managers.
** William J. Lippman is considered to be an interested person of the Trust
under the federal securities laws due to his position as an officer of
some of the subsidiaries of Franklin Resources, Inc., which is the parent
company of the Trust's investment manager and distributor.
Note 1: Prior to October 31, 2006, Michael O. Magdol ceased to be an officer of
the Trust.
Note 2: Subsequent to October 31, 2006, Harmon E. Burns ceased to be an officer
of the Trust.
THE SARBANES-OXLEY ACT OF 2002 AND RULES ADOPTED BY THE SECURITIES AND EXCHANGE
COMMISSION REQUIRE THE FUND TO DISCLOSE WHETHER THE FUND'S AUDIT COMMITTEE
INCLUDES AT LEAST ONE MEMBER WHO IS AN AUDIT COMMITTEE FINANCIAL EXPERT WITHIN
THE MEANING OF SUCH ACT AND RULES. THE FUND'S BOARD OF TRUSTEES HAVE DETERMINED
THAT THERE IS AT LEAST ONE SUCH FINANCIAL EXPERT ON THE AUDIT COMMITTEE AND HAS
DESIGNATED FRANK T. CROHN AS ITS AUDIT COMMITTEE FINANCIAL EXPERT. THE BOARD
BELIEVES THAT MR. CROHN, WHO CURRENTLY IS A DIRECTOR OF VARIOUS COMPANIES AND
CHAIRS THE FUND'S AUDIT COMMITTEE, QUALIFIES AS SUCH AN EXPERT IN VIEW OF HIS
BUSINESS BACKGROUND AND EXPERIENCE, WHICH INCLUDES SERVICE AS CHIEF EXECUTIVE
OFFICER OF NATIONAL BENEFIT LIFE INSURANCE COMPANY (1963-1982), CHIEF EXECUTIVE
OFFICER OF FINANCIAL BENEFIT LIFE INSURANCE COMPANY (1982-1996), AND SERVICE AS
A DIRECTOR OF AMVESTORS FINANCIAL CORPORATION UNTIL 1997. AS A RESULT OF SUCH
BACKGROUND AND EXPERIENCE, THE BOARD OF TRUSTEES BELIEVES THAT MR. CROHN HAS
ACQUIRED AN UNDERSTANDING OF GENERALLY ACCEPTED ACCOUNTING PRINCIPLES AND
FINANCIAL STATEMENTS, THE GENERAL APPLICATION OF SUCH PRINCIPLES IN CONNECTION
WITH THE ACCOUNT- ING ESTIMATES, ACCRUALS AND RESERVES, AND ANALYZING AND
EVALUATING FINANCIAL STATEMENTS THAT PRESENT A BREADTH AND LEVEL OF COMPLEXITY
OF ACCOUNTING ISSUES GENERALLY COMPARABLE TO THOSE OF THE FUND, AS WELL AS AN
UNDERSTANDING OF INTERNAL CONTROLS AND PROCEDURES FOR FINANCIAL REPORTING AND AN
UNDERSTANDING OF AUDIT COMMITTEE FUNCTIONS. MR. CROHN IS AN INDEPENDENT TRUSTEE
AS THAT TERM IS DEFINED UNDER THE RELEVANT SECURITIES AND EXCHANGE COMMISSION
RULES AND RELEASES.
THE STATEMENT OF ADDITIONAL INFORMATION (SAI) INCLUDES ADDITIONAL INFORMATION
ABOUT THE BOARD MEMBERS AND IS AVAILABLE, WITHOUT CHARGE, UPON REQUEST.
SHAREHOLDERS MAY CALL 1-800/DIAL BEN (1-800/342-5236) TO REQUEST THE SAI.
126 | Annual Report
Franklin Value Investors Trust
SHAREHOLDER INFORMATION
PROXY VOTING POLICIES AND PROCEDURES
The Trust has established Proxy Voting Policies and Procedures ("Policies") that
the Trust uses to determine how to vote proxies relating to portfolio
securities. Shareholders may view the Trust's complete Policies online at
franklintempleton.com. Alternatively, shareholders may request copies of the
Policies free of charge by calling the Proxy Group collect at 1-954/527-7678 or
by sending a written request to: Franklin Templeton Companies, LLC, 500 East
Broward Boulevard, Suite 1500, Fort Lauderdale, FL 33394, Attention: Proxy
Group. Copies of the Trust's proxy voting records are also made available online
at franklintempleton.com and posted on the U.S. Securities and Exchange
Commission's website at sec.gov and reflect the most recent 12-month period
ended June 30.
QUARTERLY STATEMENT OF INVESTMENTS
The Trust files a complete statement of investments with the U.S. Securities and
Exchange Commission for the first and third quarters for each fiscal year on
Form N-Q. Shareholders may view the filed Form N-Q by visiting the Commission's
website at sec.gov. The filed form may also be viewed and copied at the
Commission's Public Reference Room in Washington, DC. Information regarding the
operations of the Public Reference Room may be obtained by calling
1-800/SEC-0330.
Annual Report | 127
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Literature Request
LITERATURE REQUEST. TO RECEIVE A BROCHURE AND PROSPECTUS, PLEASE CALL US AT
1-800/DIAL BEN(R) (1-800/342-5236) OR VISIT FRANKLINTEMPLETON.COM. INVESTORS
SHOULD CAREFULLY CONSIDER A FUND'S INVESTMENT GOALS, RISKS, CHARGES AND EXPENSES
BEFORE INVESTING. THE PROSPECTUS CONTAINS THIS AND OTHER INFORMATION. PLEASE
CAREFULLY READ THE PROSPECTUS BEFORE INVESTING. To ensure the highest quality of
service, we may monitor, record and access telephone calls to or from our
service departments. These calls can be identified by the presence of a regular
beeping tone.
FRANKLIN TEMPLETON INVESTMENTS
INTERNATIONAL
Mutual European Fund
Templeton BRIC Fund
Templeton China World Fund
Templeton Developing Markets Trust
Templeton Foreign Fund
Templeton Foreign Smaller Companies Fund
Templeton International (Ex EM) Fund
GLOBAL
Mutual Discovery Fund
Templeton Global Long-Short Fund
Templeton Global Opportunities Trust
Templeton Global Smaller Companies Fund
Templeton Growth Fund
Templeton World Fund
GROWTH
Franklin Aggressive Growth Fund
Franklin Capital Growth Fund
Franklin Flex Cap Growth Fund
Franklin Small-Mid Cap Growth Fund
Franklin Small Cap Growth Fund II 1
VALUE
Franklin Balance Sheet Investment Fund 2
Franklin Equity Income Fund
Franklin Large Cap Value Fund
Franklin MicroCap Value Fund 2
Franklin MidCap Value Fund
Franklin Small Cap Value Fund
Mutual Beacon Fund
Mutual Qualified Fund
Mutual Recovery Fund 3
Mutual Shares Fund
BLEND
Franklin Balanced Fund
Franklin Blue Chip Fund
Franklin Convertible Securities Fund
Franklin Growth Fund
Franklin Rising Dividends Fund
Franklin U.S. Long-Short Fund
SECTOR
Franklin Biotechnology Discovery Fund
Franklin DynaTech Fund
Franklin Global Communications Fund
Franklin Global Health Care Fund
Franklin Global Real Estate Fund
Franklin Gold and Precious Metals Fund
Franklin Natural Resources Fund
Franklin Real Estate Securities Fund
Franklin Technology Fund
Franklin Utilities Fund
Mutual Financial Services Fund
ASSET ALLOCATION
Franklin Templeton Corefolio Allocation Fund
Franklin Templeton Founding Funds Allocation Fund
Franklin Templeton Perspectives Allocation Fund
TARGET FUNDS
Franklin Templeton Conservative Target Fund
Franklin Templeton Growth Target Fund
Franklin Templeton Moderate Target Fund
RETIREMENT TARGET FUNDS
Franklin Templeton 2015 Retirement Target Fund
Franklin Templeton 2025 Retirement Target Fund
Franklin Templeton 2035 Retirement Target Fund
Franklin Templeton 2045 Retirement Target Fund
INCOME
Franklin Adjustable U.S. Government Securities Fund 4
Franklin Floating Rate Daily Access Fund
Franklin High Income Fund 5
Franklin Income Fund
Franklin Limited Maturity U.S. Government Securities Fund 4
Franklin Low Duration Total Return Fund
Franklin Real Return Fund
Franklin Strategic Income Fund
Franklin Strategic Mortgage Portfolio
Franklin Templeton Hard Currency Fund
Franklin Total Return Fund
Franklin U.S. Government Securities Fund 4
Templeton Global Bond Fund
Templeton Income Fund
TAX-FREE INCOME 6
NATIONAL FUNDS
Double Tax-Free Income Fund
Federal Tax-Free Income Fund
High Yield Tax-Free Income Fund
Insured Tax-Free Income Fund 7
LIMITED-TERM FUNDS
California Limited-Term Tax-Free Income Fund
Federal Limited-Term Tax-Free Income Fund
New York Limited-Term Tax-Free Income Fund
INTERMEDIATE-TERM FUNDS
California Intermediate-Term Tax-Free Income Fund
Federal Intermediate-Term Tax-Free Income Fund
New York Intermediate-Term Tax-Free Income Fund
STATE-SPECIFIC
Alabama Michigan 7
Arizona Minnesota 7
California 8 Missouri
Colorado New Jersey
Connecticut New York 8
Florida 8 North Carolina
Georgia Ohio 7
Kentucky Oregon
Louisiana Pennsylvania
Maryland Tennessee
Massachusetts 7 Virginia
INSURANCE FUNDS
Franklin Templeton Variable Insurance Products Trust 9
1. The fund is closed to new investors. Existing shareholders can continue
adding to their accounts.
2. The fund is only open to existing shareholders and select retirement
plans.
3. The fund is a continuously offered, closed-end fund. Shares may be
purchased daily; there is no daily redemption. However, each quarter,
pending board approval, the fund will authorize the repurchase of 5%-25%
of the outstanding number of shares. Investors may tender all or a portion
of their shares during the tender period.
4. An investment in the fund is neither insured nor guaranteed by the U.S.
government or by any other entity or institution.
5. Effective 10/1/06, Franklin's AGE High Income Fund changed its name to
Franklin High Income Fund. The fund's investment goal and strategy
remained the same.
6. For investors subject to the alternative minimum tax, a small portion of
fund dividends may be taxable. Distributions of capital gains are
generally taxable.
7. Portfolio of insured municipal securities.
8. These funds are available in two or more variations, including long-term
portfolios, portfolios of insured securities, a high-yield portfolio (CA)
and limited-term, intermediate-term and money market portfolios (CA and
NY).
9. The funds of the Franklin Templeton Variable Insurance Products Trust are
generally available only through insurance company variable contracts.
09/06 Not part of the annual report
[LOGO](R)
FRANKLIN TEMPLETON One Franklin Parkway
INVESTMENTS San Mateo, CA 94403-1906
o WANT TO RECEIVE THIS DOCUMENT FASTER VIA EMAIL?
Eligible shareholders can sign up for eDelivery at
franklintempleton.com. See inside for details.
ANNUAL REPORT AND SHAREHOLDER LETTER
FRANKLIN VALUE INVESTORS TRUST
INVESTMENT MANAGER
Franklin Advisory Services, LLC
One Parker Plaza
Ninth Floor
Fort Lee, NJ 07024
DISTRIBUTOR
Franklin Templeton Distributors, Inc.
1-800/DIAL BEN(R)
franklintempleton .com
SHAREHOLDER SERVICES
1-800/632 -2301
Authorized for distribution only when accompanied or preceded by a prospectus.
Investors should carefully consider a fund's investment goals, risks, charges
and expenses before investing. The prospectus contains this and other
information; please read it carefully before investing.
To ensure the highest quality of service, telephone calls to or from our service
departments may be monitored, recorded and accessed. These calls can be
identified by the presence of a regular beeping tone.
FVIT A2006 12/06
ITEM 2. CODE OF ETHICS.
(a) The Registrant has adopted a code of ethics that applies to its principal
executive officers and principal financial and accounting officer.
(c) N/A
(d) N/A
(f) Pursuant to Item 12(a)(1), the Registrant is attaching as an exhibit a copy
of its code of ethics that applies to its principal executive officers and
principal financial and accounting officer.
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.
(a)(1) The Registrant has an audit committee financial expert serving on its
audit committee.
(2) The audit committee financial expert is Frank T. Crohn and he is
"independent" as defined under the relevant Securities and Exchange Commission
Rules and Releases.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
(a) Audit Fees
The aggregate fees paid to the principal accountant for professional services
rendered by the principal accountant for the audit of the registrant's annual
financial statements or for services that are normally provided by the principal
accountant in connection with statutory and regulatory filings or engagements
were $174,845 for the fiscal year ended October 31, 2006 and $134,481 for the
fiscal year ended October 31, 2005.
(b) Audit-Related Fees
There were no fees paid to the principal accountant for assurance and related
services rendered by the principal accountant to the registrant that are
reasonably related to the performance of the audit of the registrant's financial
statements and are not reported under paragraph (a) of Item 4.
There were no fees paid to the principal accountant for assurance and related
services rendered by the principal accountant to the registrant's investment
adviser and any entity controlling, controlled by or under common control with
the investment adviser that provides ongoing services to the registrant that are
reasonably related to the performance of the audit of their financial
statements.
(c) Tax Fees
There were no fees paid to the principal accountant for professional services
rendered by the principal accountant to the registrant for tax compliance, tax
advice and tax planning.
There were no fees paid to the principal accountant for professional services
rendered by the principal accountant to the registrant's investment adviser and
any entity controlling, controlled by or under common control with the
investment adviser that provides ongoing services to the registrant for tax
compliance, tax advice and tax planning.
(d) All Other Fees
The aggregate fees paid to the principal accountant for products and services
rendered by the principal accountant to the registrant not reported in
paragraphs (a)-(c) of Item 4 were $3,724 for the fiscal year ended October 31,
2006 and $0 for the fiscal year ended October 31, 2005. The services for which
these fees were paid included review of materials provided to the fund Board in
connection with the investment management contract renewal process.
The aggregate fees paid to the principal accountant for products and services
rendered by the principal accountant to the registrant's investment adviser and
any entity controlling, controlled by or under common control with the
investment adviser that provides ongoing services to the registrant not reported
in paragraphs (a)-(c) of Item 4 were $172,137 for the fiscal year ended October
31, 2006 and $4,500 for the fiscal year ended October 31, 2005. The services for
which these fees were paid included review of materials provided to the fund
Board in connection with the investment management contract renewal process and
the review of the ICI transfer agent survey.
(e) (1) The registrant's audit committee is directly responsible for approving
the services to be provided by the auditors, including:
(i) pre-approval of all audit and audit related services;
(ii) pre-approval of all non-audit related services to be provided to the
Fund by the auditors;
(iii)pre-approval of all non-audit related services to be provided to the
registrant by the auditors to the registrant's investment adviser or to any
entity that controls, is controlled by or is under common control with the
registrant's investment adviser and that provides ongoing services to the
registrant where the non-audit services relate directly to the operations or
financial reporting of the registrant; and
(iv) establishment by the audit committee, if deemed necessary or
appropriate, as an alternative to committee pre-approval of services to be
provided by the auditors, as required by paragraphs (ii) and (iii) above, of
policies and procedures to permit such services to be pre-approved by other
means, such as through establishment of guidelines or by action of a designated
member or members of the committee; provided the policies and procedures are
detailed as to the particular service and the committee is informed of each
service and such policies and procedures do not include delegation of audit
committee responsibilities, as contemplated under the Securities Exchange Act of
1934, to management; subject, in the case of (ii) through (iv), to any waivers,
exceptions or exemptions that may be available under applicable law or rules.
(e) (2) None of the services provided to the registrant described in paragraphs
(b)-(d) of Item 4 were approved by the audit committee pursuant to paragraph
(c)(7)(i)(C) of Rule 2-01 of regulation S-X.
(f) No disclosures are required by this Item 4(f).
(g) The aggregate non-audit fees paid to the principal accountant for services
rendered by the principal accountant to the registrant and the registrant's
investment adviser and any entity controlling, controlled by or under common
control with the investment adviser that provides ongoing services to the
registrant were $175,861 for the fiscal year ended October 31, 2006 and $4,500
for the fiscal year ended October 31, 2005.
(h) The registrant's audit committee of the board has considered whether the
provision of non-audit services that were rendered to the registrant's
investment adviser (not including any sub-adviser whose role is primarily
portfolio management and is subcontracted with or overseen by another investment
adviser), and any entity controlling, controlled by, or under common control
with the investment adviser that provides ongoing services to the registrant
that were not pre-approved pursuant to paragraph (c)(7)(ii) of Rule 2-01 of
Regulation S-X is compatible with maintaining the principal accountant's
independence.
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS. N/A
ITEM 6. SCHEDULE OF INVESTMENTS. N/A
ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR
CLOSED-END MANAGEMENT INVESTMENT COMPANIES. N/A
ITEM 8. PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT
COMPANIES. N/A
ITEM 9. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT
INVESTMENT COMPANY AND AFFILIATED PURCHASERS. N/A
ITEM 10. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. There have
been no changes to the procedures by which shareholders may recommend nominees
to the Registrant's Board of Trustees that would require disclosure herein.
ITEM 11. CONTROLS AND PROCEDURES.
(A) EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES. The Registrant maintains
disclosure controls and procedures that are designed to ensure that information
required to be disclosed in the Registrant's filings under the Securities
Exchange Act of 1934 and the Investment Company Act of 1940 is recorded,
processed, summarized and reported within the periods specified in the rules and
forms of the Securities and Exchange Commission. Such information is accumulated
and communicated to the Registrant's management, including its principal
executive officer and principal financial officer, as appropriate, to allow
timely decisions regarding required disclosure. The Registrant's management,
including the principal executive officer and the principal financial officer,
recognizes that any set of controls and procedures, no matter how well designed
and operated, can provide only reasonable assurance of achieving the desired
control objectives.
Within 90 days prior to the filing date of this Shareholder Report on Form
N-CSR, the Registrant had carried out an evaluation, under the supervision and
with the participation of the Registrant's management, including the
Registrant's principal executive officer and the Registrant's principal
financial officer, of the effectiveness of the design and operation of the
Registrant's disclosure controls and procedures. Based on such evaluation, the
Registrant's principal executive officer and principal financial officer
concluded that the Registrant's disclosure controls and procedures are
effective.
(B) CHANGES IN INTERNAL CONTROLS. There have been no significant changes in the
Registrant's internal controls or in other factors that could significantly
affect the internal controls subsequent to the date of their evaluation in
connection with the preparation of this Shareholder Report on Form N-CSR.
ITEM 12. EXHIBITS.
(a) (1) Code of Ethics
(a) (2) Certifications pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
of Jimmy D. Gambill, Chief Executive Officer - Finance and Administration, and
Galen G. Vetter, Chief Financial Officer
(b) Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 of
Jimmy D. Gambill, Chief Executive Officer - Finance and Administration, and
Galen G. Vetter, Chief Financial Officer
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
FRANKLIN VALUE INVESTORS TRUST
By /S/JIMMY D. GAMBILL
-------------------
Jimmy D. Gambill
Chief Executive Officer - Finance and Administration
Date December 27, 2006
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
By /S/JIMMY D. GAMBILL
-------------------
Jimmy D. Gambill
Chief Executive Officer - Finance and Administration
Date December 27, 2006
By /S/GALEN G. VETTER
------------------
Galen G. Vetter
Chief Financial Officer
Date December 27, 2006