Mutual funds, annuities, and other investment products:
o are not FDIC insured;
o are not deposits or obligations of, or guaranteed by, any financial
institution;
o are subject to investment risks, including possible loss of the
principal amount invested.
Your Fund's Objective:
The Franklin Equity Fund seeks capital appreciation and secondarily, current
income, by investing primarily in common stocks or securities convertible into
common stocks.
August 15, 1995
Dear Shareholder,
We are pleased to present the annual report for the Franklin Equity Fund for the
fiscal year ended June 30, 1995. We are happy to report that the fund provided a
total return of +23.78% over the past twelve months, as shown in the Performance
Summary on page 6.
The year under review was unusual because of the striking difference in market
conditions between its first and second halves. In the last half of 1994, U.S.
interest rates moved sharply higher; the bond market experienced one of the
worst declines in its history; Mexico experienced a currency crisis which caused
panic in many other emerging markets; the U.S. dollar continued its sharp
decline versus the Japanese yen and German mark; and Barings Bank PLC (a major
British bank) and Orange County, California declared bankruptcy. However, during
the first half of 1995, the U.S. stock market and your fund moved substantially
higher, due largely to an improved interest rate environment and strong
corporate earnings, which exceeded the consensus estimates of investors.
One of the most important reasons for the fund's fine performance this fiscal
year was its broad diversification across numerous industry sectors.
Semiconductor, telecommunication and computer software stocks all performed well
over the last six months of the period. Several of our semiconductor stocks,
including Intel, SGS-Thomson, Texas Instruments, and Xilinx, rose more than 50%
during this period. Our enthusiasm for this industry stems from the staggering
number of products now using integrated circuits. It took more than 30 years for
annual worldwide sales to exceed $100 billion, and now many analysts estimate
this figure will double to over $200 billion within the next five years. This
prediction suggests tremendous earnings potential over the coming years for the
companies your fund owns within this sector. Despite our belief in this strong
secular growth trend, we realize that the semiconductor industry has underlying
cyclical tendencies and would view any pullbacks in these stocks as potential
buying opportunities.
Within the telecommunications industry, we own stock in leaders such as L.M.
Ericsson, Motorola, Nokia, and Tellabs. We believe that as the global economy
becomes more information-based, and penetration rates of wireless communications
expand, these companies will continue to outperform the overall market.
One of our biggest successes in software stocks purchased during this period was
Lotus Development Corp. We selected this stock because we recognized potentially
great value in Notes, the company's workgroup communications software product.
In June, IBM unlocked this value by offering to acquire the company for double
the price we paid for the shares in your fund.
During the first half of the period, we made selective investments in electric
utility companies, believing that some stocks in this industry had become
extremely oversold as a result of the dramatic rise in interest rates at that
time. We made investments in those companies we believed were poised to benefit
from their competitive positioning within an increasingly deregulated
environment. We targeted low cost operators with solid management teams, such as
PacifiCorp, Pinnacle West, and Teco Energy.
We continue to own AES Corporation, a leading global power company involved in
developing power generation facilities in Argentina, Pakistan, India, China and
other countries. We believe it has excellent long-term growth prospects and that
its intrinsic value will be more accurately reflected in the market, as
developing countries around the world recognize the company as a source for
alternative low-cost energy.
The energy sector remains an area of long-term interest for investment because
we expect growing global demand for oil, particularly in many of the developing
countries. Our holdings in this sector, where we are overweighted relative to
the S&P 500(R), includes shares in several major integrated oil companies.
GRAPHIC MATERIAL 1 OMMITTED - SEE APPENDIX AT END OF DOCUMENT
Our holdings in homebuilder stocks performed well in the second half of the
fiscal year. Believing that most of the negative sentiment surrounding this
consumer cyclical group was already reflected in stock prices, we added to our
position in Beazer Homes during January and February. These holdings, as well as
our Lennar Corp. shares, were up over 20% from the beginning of the year. We
think they should continue to outperform the general market over the next year
or two, as lower interest rates should cause new-home purchases to pick up from
depressed levels.
In the machinery sector, the value we previously perceived in Roper Industries
finally received recognition by the market, which pushed its stock price up more
than 38% since the beginning of 1995. This company, which supplies
fluid-handling and industrial control products, remains one of the fund's
largest positions. GAZPROM, Russia's natural gas company, is a major customer,
which helps provide additional growth potential for Roper.
One area of near-term disappointment over the last few months of the period was
health service companies. Long-term care stocks came under pressure due to
concerns over changes in Medicare reimbursement, and the stock prices of health
maintenance organizations declined because of increased competition within the
industry. It is our belief, however, that these companies can help contain
medical costs in the future and therefore, we have decided to maintain our
positions in this area.
Franklin Equity Fund
Top 10 Holdings on 6/30/95
As a Percentage of Total Net Assets
Company, % of Total
Industry Net Assets
1. Intel Corp. 3.39%
Electronic Technology
2. Nokia Corp. ADR 3.20%
Electronic Technology
3. Oracle Corp. 2.13%
Technology Services
4. Roper Industries 2.04%
Producer Manufacturing
5. Philip Morris Cos., Inc. 1.99%
Consumer Non-durables
6. News Corp. 1.89%
Consumer Services
7. GTE Corp. 1.88%
Utilities
8. Citicorp 1.82%
Financials
9. Tellabs 1.82%
Electronic Technology
10. Mobil Corp. 1.81%
Energy Minerals
For a detailed listing of portfolio holdings, see page 8 of this report.
Finally, as of June 30, our investments in foreign companies were 16% of total
net assets. These investments were made primarily through American Depositary
Receipts that trade on a domestic stock exchange. If foreign companies offer
better opportunities than domestic companies, we will continue to make
appropriate investments. Of course, investing in foreign securities involves
special risks, including market and currency volatility and adverse economic,
social and political developments in the countries where the fund is invested.
These risks are discussed in the prospectus.
Looking forward, we remain confident about the future performance of the fund.
As you know, the managers of your fund explore many different areas for
investment opportunities. This search has led to investments not only in
large-capitalization stocks, but also small- and mid-capitalization securities.
Many sources are used to estimate future earnings growth prospects and are also
used for the determination of growth versus value. Proprietary quantitative
models are used for indications of stock price movements based on positive
earnings revisions. Coupled with fundamental analysis which explores market
share, product cycles, earnings quality and management strength, the portfolio
managers construct a diversified portfolio that meet the specific investment
objectives of the fund.
We thank you for your participation in the Franklin Equity Fund and welcome any
comments or suggestions you may have.
Sincerely,
Charles B. Johnson
Chairman
Performance Summary
As of May 1, 1995, your fund now offers two classes of shares, designated as
"Class I" and "Class II." Original shares, now designated as Class I, will
continue to have the same pricing structure, which is the standard front-end
sales charge (with breakpoints) and annual 12b-1 Plan fees. Class II shares have
a different pricing structure, with a lower initial sales charge than Class I
shares; however, they have higher annual 12b-1 Plan fees. Also, with certain
exceptions, a contingent deferred sales charge (back-end sales charge) will
generally be assessed on Class II shares redeemed within 18 months of purchase.
The different expenses borne by each class of shares will result in different
net asset values, dividends and, ultimately, different total performance. Class
II share total returns are not shown in this summary, as the Class II shares
have not been available for a sufficient period of time. Please see the
prospectus for more details regarding Class I and Class II shares.
The Franklin Equity Fund Class I shares reported a total return of +23.78% for
the one-year period ended June 30, 1995. Total return measures the change in
value of an investment, does not include the maximum initial sales charge, and
assumes reinvestment of dividends and capital gains. As the chart on page 7
illustrates, the Franklin Equity Fund's Class I shares delivered a cumulative
total return of more than +203% and an average annual total return of more than
+11% over the 10-year period.
The graph on page 7 compares the performance of Franklin Equity Fund's Class I
shares over the past 10 years with the performance of the Standard & Poor's 500
Stock Index(R) (S&P 500). As you can see, the fund's performance has lagged that
of the index. Of course, an unmanaged market index has inherent performance
differentials in comparison with any fund. An unmanaged market index, such as
the S&P 500, doesn't pay commissions or market spreads to buy and sell stocks.
It doesn't pay management fees to cover salaries of security analysts or
portfolio managers. And, unlike an unmanaged index, investment companies are
never 100% invested because of the need to have cash on hand to redeem shares.
In addition, the performance shown for the fund includes the maximum initial
sales charge, all fund expenses and account fees. If operating expenses such as
the Franklin Equity Fund's had been applied to the index, its performance would
have been lower. Please remember that an index is simply a measure of
performance, and cannot be invested in directly. Historical performance is not
predictive of future results.
GRAPHIC MATERIAL 2 OMMITTED - SEE APPENDIX AT END OF DOCUMENT
During the reporting period, Class I shareholders received distributions
totalling 7.9 cents ($0.079) per share in income dividends, 21.1 cents ($0.211)
in short-term capital gains, and 40.9 cents ($0.409) in long-term capital gains.
Class II shareholders received distributions totalling 3.5 cents ($0.035) per
share in income dividends. As measured by net asset value, the fund's Class I
share price increased from $6.53 on June 30, 1994 to $7.24 on June 30, 1995,
while the fund's Class II share price increased from $6.65 on May 1, 1995 (the
inception date for these shares) to $7.24 on June 30, 1995. Of course, past
performance cannot guarantee future results, and distributions will vary
depending on income earned by the fund, as well as any profits realized from the
sale of securities in the portfolio.
Franklin Equity Fund
Periods ended 6/30/95
Class I Shares
1-Year 5-Year 10-Year
Cumulative
Total Return1 23.78% 50.72% 203.78%
Average Annual
Total Return2 18.17% 7.55% 11.23%
1. Cumulative total returns show the change in value of an investment over the
periods indicated. For Class I shares, they do not include the current maximum
4.5% initial sales charge. See note below.
2. Average annual total returns show the average annual change in value of an
investment over the periods indicated. For Class I shares, they have been
restated to include the current maximum 4.5% initial sales charge. See note
below.
Note: Prior to July 1, 1994, Class I fund shares were offered at a lower initial
sales charge, with dividends reinvested at the offering price. Thus, actual
total returns for purchasers of shares during that period would have been
different than noted above. Effective May 1, 1994, the fund eliminated the sales
charge on reinvested dividends and implemented a plan of distribution under Rule
12b-1, which will affect future performance. All total return figures assume
reinvestment of dividends and capital gains at net asset value, and take into
account the effect of the 12b-1 Plan from the date of its implementation.
Investment return and principal value will fluctuate with market conditions, and
you may have a gain or loss when you sell your shares. Past performance is not
predictive of future results.
Note: The historical performance data shown above do not represent the fund's
Class II shares, which the fund began offering on May 1, 1995. Class II shares
are subject to different fees and expenses than Class I shares, which will
affect their performance. Please see the prospectus for more details regarding
Class I and Class II shares. 1. Includes all sales charges and represents the
change in value of an investment over the period shown. Total return assumes
reinvestment of dividends and capital gains. Past performance is not predictive
of future results.
During the reporting period, Class I shareholders received distributions
totalling 7.9 cents ($0.079) per share in income dividends, 21.1 cents ($0.211)
in short-term capital gains, and 40.9 cents ($0.409) in long-term capital gains.
Class II shareholders received distributions totalling 3.5 cents ($0.035) net
asset value, the fund's Class I share price increased from $6.53 on June 30,
1994 to $7.24 on June 30, 1995, while the fund's Class II share price increased
from $6.65 on May 1, 1995 (the inception date for these shares), to $7.25 on
June 30, 1995. Of course, past performance cannot guarantee future results, and
distributions will vary depending on income earned by the fund, as well as any
profits realized from the sale of securities in the portfolio.
FRANKLIN EQUITY FUND
Statement of Investments in Securities and Net Assets, June 30, 1995
<TABLE>
<CAPTION>
Value
Shares (Note 1)
Common Stocks 87.9%
Advertising 1.5%
<S> <C> <C>
80,000 Omnicom Group, Inc. ......................................................... $ 4,850,000
------------
Aerospace/Defense 1.8%
60,000 Lockheed Martin Corp. ....................................................... 3,787,500
25,000 Raytheon Co. ................................................................ 1,940,625
------------
5,728,125
------------
Auto Parts .2%
20,000 a APS Holding Corp., Class A .................................................. 527,500
------------
Broadcasting & Cable TV 2.1%
150,000 TCA Cable TV, Inc. .......................................................... 4,050,000
100,000 a Telewest Communications, Plc., ADR .......................................... 2,575,000
------------
6,625,000
------------
Chemical, Specialty .9%
70,000 Vigoro Corp. ................................................................ 2,905,000
------------
Computer/Peripherals 3.1%
100,000 a Bay Networks, Inc. .......................................................... 4,137,500
65,000 a Cabletron Systems, Inc. ..................................................... 3,461,250
50,000 a Compaq Computer Corp. ....................................................... 2,268,750
------------
9,867,500
------------
Computer Software 4.0%
15,500 a Baan Co., N.V. .............................................................. 478,563
40,000 a Lotus Development Corp. ..................................................... 2,550,000
175,000 a Oracle Corp. ................................................................ 6,759,375
100,000 a Sybase, Inc. ................................................................ 2,937,500
------------
12,725,438
------------
Drugs 3.6%
25,000 American Home Products Corp. ................................................ 1,934,375
50,000 Bristol-Myers Squibb Co. .................................................... 3,406,250
24,699 a Chiron Corp. ................................................................ 1,605,435
50,000 a Elan Corporation, Plc., ADR ................................................. 2,037,500
125,000 a Noven Pharmaceuticals, Inc. ................................................. 968,750
40,000 Teva Pharmaceutical Industries, Ltd., ADR ................................... 1,500,000
------------
11,452,310
------------
Electronics/Electrical Equipment 4.1%
40,000 a Applied Materials, Inc. ..................................................... 3,465,000
100,000 a Bell & Howell Holdings Co. .................................................. 2,025,000
Electronics/Electrical Equipment (cont.)
110,000 a General Instrument Corp. .................................................... $ 4,221,250
50,000 Motorola, Inc. .............................................................. 3,356,250
------------
13,067,500
------------
Entertainment 1.0%
131,250 Gaylord Entertainment Co. ................................................... 3,314,063
------------
Financial/Banks 6.8%
100,000 Citicorp. ................................................................... 5,787,500
60,000 First Chicago Corp. ......................................................... 3,592,500
75,000 First USA, Inc. ............................................................. 3,328,125
50,000 J.P. Morgan & Co., Inc. ..................................................... 3,506,250
120,000 Travelers Group, Inc. ....................................................... 5,250,000
------------
21,464,375
------------
Forest Products/Paper 2.3%
400,000 a Asia Pacific Resources International Holdings, Ltd. ......................... 3,650,000
100,000 Pope & Talbot, Inc. ......................................................... 1,625,000
270,000 a,e Portucel Industrial, SA ..................................................... 1,928,583
------------
7,203,583
------------
Home Building 2.1%
125,000 a Beazer Homes USA, Inc. ...................................................... 2,078,125
250,000 Lennar Corp. ................................................................ 4,687,500
------------
6,765,625
------------
Hospital Management/Services 4.0%
60,000 a Apria Healthcare Group, Inc. ................................................ 1,695,000
125,000 a Health Management, Inc. ..................................................... 1,343,750
125,000 a Humana, Inc. ................................................................ 2,203,125
100,000 a Physician Corp. of America .................................................. 1,362,500
100,000 a Quantum Health Resources, Inc. .............................................. 1,650,000
175,000 a Sun Healthcare Group, Inc. .................................................. 2,756,250
60,000 U.S. Healthcare, Inc. ....................................................... 1,837,500
------------
12,848,125
------------
Insurance 2.3%
80,000 Leucadia National Corp. ..................................................... 4,040,000
74,700 The PMI Group, Inc. ......................................................... 3,240,113
------------
7,280,113
------------
Machinery 2.0%
185,000 Roper Industries, Inc. ...................................................... 6,475,000
------------
Mining 1.3%
100,000 Barrick Gold Corp. .......................................................... $ 2,525,000
100,000 a Magma Copper Co. ............................................................ 1,625,000
------------
4,150,000
------------
Multiform Industries .9%
125,000 Pittston Services Group ..................................................... 3,000,000
------------
Natural Gas, Diversified 1.3%
120,000 Williams Cos., Inc. ......................................................... 4,185,000
------------
Office/Business Equipment 1.5%
40,000 Xerox Corp. ................................................................. 4,690,000
------------
Oil & Gas Exploration 2.4%
125,000 a Barrett Resources Corp. ..................................................... 2,906,250
125,000 Enron Oil & Gas Co. ......................................................... 2,718,750
100,000 Parker & Parsley Petroleum Co. .............................................. 1,962,500
------------
7,587,500
------------
Oil Refiners .9%
115,000 Ultramar Corp. .............................................................. 2,903,750
------------
Oilfield Services .7%
50,000 a Western Atlas, Inc. ......................................................... 2,218,750
------------
Petroleum 6.0%
25,000 Amoco Corp. ................................................................. 1,665,625
85,000 Chevron Corp. ............................................................... 3,963,125
60,000 Mobil Corp. ................................................................. 5,760,000
80,000 Repsol, S.A., ADR ........................................................... 2,530,000
275,000 YPF, Sociedad Anonima, ADR .................................................. 5,190,625
------------
19,109,375
------------
Retail, Special Lines .7%
150,000 a Borders Group, Inc. ......................................................... 2,156,250
------------
Retail Stores 1.6%
50,000 May Department Stores Co. ................................................... 2,081,250
60,000 Penney (J.C.) Co., Inc. ..................................................... 2,880,000
------------
4,961,250
------------
Semiconductors 6.9%
170,000 Intel Corp. ................................................................. 10,763,125
200,000 a National Semiconductor Corp. ................................................ 5,550,000
60,000 a SGS-Thomson Microelectronics, Inc., ADR ..................................... 2,437,500
Semiconductors (cont.)
10,000 Texas Instruments, Inc. ..................................................... $ 1,338,750
20,000 a Xilinx, Inc. ................................................................ 1,880,000
------------
21,969,375
------------
Shoes 1.3%
50,000 Nike, Inc., Class B ......................................................... 4,200,000
------------
Telecommunications 10.0%
60,000 a AirTouch Communications, Inc. ............................................... 1,710,000
60,000 AT&T Corp. .................................................................. 3,187,500
325,000 ECI Telecommunications, Ltd. ................................................ 4,448,438
160,000 Ericsson, (L.M.) Telephone Co., ADR ......................................... 3,200,000
175,000 GTE Corp. ................................................................... 5,971,875
75,000 a Newbridge Networks Corp. .................................................... 2,643,750
100,000 Telefonica de Argentina, SA, ADS ............................................ 2,475,000
75,000 Telefonos de Mexico, SA, ADR ................................................ 2,221,875
120,000 a Tellabs, Inc. ............................................................... 5,775,000
------------
31,633,438
------------
Tobacco 2.0%
85,000 Philip Morris Cos., Inc. .................................................... 6,321,875
------------
Toiletries & Cosmetics .4%
20,000 Avon Products, Inc. ......................................................... 1,340,000
------------
Toys & School Supplies 1.0%
120,000 Mattel, Inc. ................................................................ 3,120,000
------------
Transportation 1.4%
25,000 a Fritz Companies, Inc. ....................................................... 1,467,187
125,000 Southwest Airlines Co. ...................................................... 2,984,374
------------
4,451,561
------------
Utilities 5.8%
225,000 AES Corp. ................................................................... 4,275,000
225,000 Pacificorp .................................................................. 4,218,750
200,000 Pinnacle West Capital Corp. ................................................. 4,900,000
225,000 Teco Energy, Inc. ........................................................... 4,921,874
------------
18,315,624
------------
Total Common Stocks (Cost $241,721,441) ............................... 279,413,005
------------
300,000 News Corp., pfd., ADR ....................................................... $ 6,000,000
170,000 a Nokia Corp., pfd., ADR ...................................................... 10,136,250
------------
Total Preferred Stocks (Cost $11,608,745) ............................ 16,136,250
------------
Total Common Stocks and Preferred Stocks (Cost $253,330,186) ......... 295,549,255
------------
Face
Amount
---------
Bonds 1.3%
$ 3,900,000 e Altera Corp., sub. notes, 5.75%, 06/15/02 (Cost $3,900,000) ................. 4,119,375
------------
b Short Term Investments
Certificate of Deposit 1.6%
5,000,000 Societe Generale, New York Branch, 6.00%, 08/04/95 (Cost $5,000,000) ........ 4,999,650
------------
Total Investments before Repurchase Agreements (Cost $262,230,186)..... 304,668,280
------------
c Receivables from Repurchase Agreements 5.5%
12,904,398 d Joint Repurchase Agreement, 6.22%, 07/03/95 (Maturity Value $12,610,151)
Collateral: U.S. Treasury Bills, 10/19/95 - 06/27/96
U.S. Treasury Notes, 3.875% - 8.625%, 09/30/95 - 02/15/00 ................. 12,603,618
4,836,000 Lehman Bros. Securities, Inc., 6.20%, 07/03/95 (Maturity Value $4,838,499)
Collateral: U.S. Treasury Notes, 8.875%, 07/15/95 .......................... 4,836,000
------------
Total Receivables from Repurchase Agreements (Cost $17,439,618)....... 17,439,618
------------
Total Investments (Cost $279,669,804) 101.4% .................... 322,107,898
Liabilities in Excess of Other Assets, Net (1.4)% ............... (4,302,379)
------------
Net Assets 100.0% ............................................... $317,805,519
============
At June 30, 1995, the net unrealized appreciation based on the cost of investments
for income tax purposes of $280,199,620 was as follows:
Aggregate gross unrealized appreciation for all investments in which there was an
excess of value over tax cost ........................................... $ 58,288,729
Aggregate gross unrealized depreciation for all investments in which there was an
excess of tax cost over value ........................................... (16,380,451)
------------
Net unrealized appreciation ............................................... $ 41,908,278
============
</TABLE>
aNon-income producing.
bCertain short-term securities are traded on a discount basis; the rates shown
are the discount rates at the time of purchase by the Fund. Other securities
bear interest at the rates shown, payable at fixed dates or upon maturity.
cFace amount for repurchase agreements is for the underlying collateral.
dSee Note 1(e) regarding Joint Repurchase Agreement.
eSee Note 6 regarding Rule 144A securities.
The accompanying notes are an integral part of these financial statements.
FRANKLIN EQUITY FUND
Financial Statements
Statement of Assets and Liabilities
June 30, 1995
<TABLE>
<CAPTION>
Assets:
<S> <C>
Investments in securities, at value (identified cost $262,230,186).............................. $304,668,280
Receivables from repurchase agreements,at value and cost ....................................... 17,439,618
Cash............................................................................................ 863
Receivables:
Dividends and interest......................................................................... 399,239
Investment securities sold..................................................................... 820,283
Capital shares sold............................................................................ 54,443
------------
Total assets............................................................................... 323,382,726
------------
Liabilities:
Payables:
Investment securities purchased................................................................ 391,030
Capital shares repurchased..................................................................... 33,236
Payable upon return of securities loaned (Note 7) ............................................. 4,845,705
Management fees................................................................................ 140,004
Distribution fees.............................................................................. 105,214
Shareholder servicing costs.................................................................... 23,000
Accrued expenses and other liabilities........................................................... 39,018
------------
Total liabilities.......................................................................... 5,577,207
------------
Net assets, at value............................................................................. $317,805,519
============
Net assets consist of:
Undistributed net investment income............................................................. 171,690
Unrealized appreciation on investments ......................................................... 42,438,094
Accumulated net realized gain .................................................................. 14,004,846
Class I capital shares.......................................................................... 260,859,551
Class II capital shares......................................................................... 331,338
------------
Net assets, at value............................................................................. $317,805,519
============
Computation of net asset value and offering price per share:
Class I Shares:
Net asset value* ($317,463,277 O 43,818,510 shares of capital stock outstanding)............... $7.24
============
Maximum offering price (100/95.5 of $7.24)..................................................... $7.58
============
Class II Shares:
Net asset value* ($342,242 O 47,239 shares of capital stock outstanding)....................... $7.24
============
Maximum offering price (100/99 of $7.24)....................................................... $7.31
============
*Redemption price per share is equal to net asset value less any applicable
contingent deferred sales charge.
The accompanying notes are an integral part of these financial statements.
FRANKLIN EQUITY FUND
Financial Statements (cont.)
Statement of Operations
for the year ended June 30, 1995
Investment income:
Dividends............................................................................. $5,166,822
Interest.............................................................................. 1,049,780
------------
Total income..................................................................... $6,216,602
Expenses:
Management fees (Note 5).............................................................. 1,546,727
Distribution fees - Class I (Note 5).................................................. 524,111
Distribution fees - Class II (Note 5)................................................. 212
Shareholder servicing costs (Note 5).................................................. 272,492
Reports to shareholders............................................................... 243,331
Registration fees..................................................................... 40,398
Professional fees..................................................................... 36,879
Custodian fees........................................................................ 26,238
Directors' fees and expenses.......................................................... 24,165
Other................................................................................. 20,673
------------
Total expenses................................................................... 2,735,226
------------
Net investment income........................................................... 3,481,376
------------
Realized and unrealized gain on investments:
Net realized gain on investments...................................................... 14,019,016
Net unrealized appreciation on investments............................................ 44,784,881
------------
Net realized and unrealized gain on investments....................................... 58,803,897
------------
Net increase in net assets resulting from operations................................... $62,285,273
============
The accompanying notes are an integral part of these financial statements.
FRANKLIN EQUITY FUND
Financial Statements (cont.)
Statements of Changes in Net Assets
for the years ended June 30, 1995 and 1994
1995 1994
------------ ----------
Increase (decrease) in net assets:
Operations:
<S> <C> <C>
Net investment income......................................................... $ 3,481,376 $ 4,078,433
Net realized gain from security transactions (Note 1)......................... 14,019,016 43,486,304
Net unrealized appreciation (depreciation) on investments..................... 44,784,881 (38,366,022)
------------ ----------
Net increase in net assets resulting from operations...................... 62,285,273 9,198,715
Distributions to shareholders from undistributed net investment income:
Class I........................................................................ (3,378,248) (4,360,241)
Class II....................................................................... (594) --
Distributions to Class I shareholders from undistributed net capital gain....... (26,013,031) (34,433,434)
Increase (decrease) in net assets from capital share transactions (Note 3 )..... 5,031,719 (36,279,318)
------------ ----------
Net increase (decrease) in net assets 37,925,119 (65,874,278)
Net assets:
Beginning of year.............................................................. 279,880,400 345,754,678
------------ ----------
End of year (including undistributed net investment income of $171,690 - 1995 and
$69,156 - 1994)................................................................ $317,805,519 $279,880,400
============ ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
FRANKLIN EQUITY FUND
Notes to Financial Statements
1. SIGNIFICANT ACCOUNTING POLICIES
Franklin Equity Fund (the Fund) is an open-end, diversified management
investment company (mutual fund), registered under the Investment Company Act of
1940 as amended.
The Fund offers two classes of shares, Class I and Class II. Class I shares are
sold with a higher front-end sales charge. Class II shares are sold with a lower
front-end sales charge, but may be subject to a contingent deferred sales
charge. Each class of shares has the same rights, except with respect to the
effect of the respective sales charges, the distribution fees borne by each
class, voting rights on matters affecting a single class, and the exchange
privilege of each class.
The offering of Class II shares began May 1, 1995, at which time all previously
outstanding shares became Class I shares. Realized and unrealized gains or
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.
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. The
policies are in conformity with generally accepted accounting principles for
investment companies.
a. Security Valuation: Portfolio securities listed on a securities exchange or
on the NASDAQ National Market System for which market quotations are readily
available are valued at the last quoted sale price of the day or, if there is no
such reported sale, within the range of the most recent quoted bid and ask
prices. Other securities for which market quotations are readily available are
valued at current market values, obtained from pricing services, which are based
on a variety of factors, including recent trades, institutional size trading in
similar types of securities (considering yield, risk and maturity) and/or
developments related to specific securities. Portfolio securities which are
traded both in the over-the-counter market and on a securities exchange are
valued according to the broadest and most representative market as determined by
the Manager. Other securities for which market quotations are not available, if
any, are valued in accordance with procedures established by the Board of
Directors.
b. Income Taxes: The Fund intends to continue to qualify for the tax treatment
applicable to regulated investment companies under the Internal Revenue Code and
to make the requisite distributions to its shareholders which will be sufficient
to relieve it from income and excise taxes. Therefore, no income tax provision
is required.
c. Security Transactions: Security transactions are accounted for on the date
the securities are purchased or sold (trade date). Realized gains and losses on
security transactions are determined on the basis of specific identification for
both financial statement and income tax purposes.
Net realized capital gains differ for financial statement and tax purposes
primarily due to differing treatments of wash sale transactions.
d. Investment Income, Expenses and Distributions: Dividend income and
distributions to shareholders are recorded on the ex-dividend date. Interest
income and estimated expenses are accrued daily.
e. Repurchase Agreements: The Fund may enter into a Joint Repurchase Agreement
whereby its uninvested cash balance is deposited into a joint cash account to be
used to invest in one or more repurchase agreements with government securities
dealers recognized by the Federal Reserve Board and/or member banks of the
Federal Reserve System. The value and face amount of the Joint Repurchase
Agreement are allocated to the Fund based on its pro-rata interest.
1. SIGNIFICANT ACCOUNTING POLICIES (cont.)
e. Repurchase Agreements (cont.)
In a repurchase agreement, the Fund purchases a U.S. government security from a
dealer or bank subject to an agreement to resell it at a mutually agreed upon
price and date. Such a transaction is accounted for as a loan by the Fund to the
seller, collateralized by the underlying security. The transaction requires the
initial collateralization of the seller's obligation by U.S. government
securities with market value, including accrued interest, of at least 102% of
the dollar amount invested by the Fund, with the value of the underlying
security marked to market daily to maintain coverage of at least 100%. The
collateral is delivered to the Fund's custodian and held until resold to the
dealer or bank. At June 30, 1995, the outstanding joint repurchase agreements
held by the Fund had been entered into on that date.
2. DISTRIBUTIONS
At June 30, 1995 for tax purposes, the Fund had accumulated undistributed net
realized capital gains of $14,534,662.
For tax purposes, the aggregate cost of securities is higher (and unrealized
appreciation is lower) than for financial reporting purposes at June 30, 1995 by
$529,816.
3. CAPITAL STOCK
At June 30, 1995, there was 5,000,000,000 shares of no par value capital stock
authorized, of which 2,000,000,000 was allocated to Class I and Class II shares
respectively, and 1,000,000,000 was reserved for future allocation. Transactions
in the Fund's Class I and Class II shares capital stock were as follows:
<TABLE>
<CAPTION>
Class I Shares: Year Ended June 30,
1995 1994
---------------------- ----------------------
Shares Amount Shares Amount
--------- ----------- --------- -----------
<S> <C> <C> <C> <C>
Shares sold...................................... 1,665,660 $ 10,894,657 2,049,264 $ 14,306,753
Shares issued in reinvestment of distributions... 4,466,261 26,959,491 5,049,835 34,562,962
Shares redeemed.................................. (5,063,063) (33,101,575) (7,611,250) (54,438,166)
Changes from exercise of exchange privilege:
Shares sold..................................... 22,173,803 145,996,205 53,117,221 374,441,701
Shares redeemed................................. (22,281,525) (146,048,397) (57,452,558) (405,152,568)
--------- ----------- --------- -----------
Net increase (decrease).......................... 961,136 $ 4,700,381 (4,847,488) $ (36,279,318)
========= =========== ========= ===========
Class II Shares: May 1, 1995 to June 30, 1995
Shares Amount
--------- -----------
<S> <C> <C>
Shares sold..................................................................... 42,125 $295,488
Shares issued in reinvestment of distributions.................................. 86 594
Changes from exercise of exchange privilege:
Shares sold.................................................................... 5,964 42,110
Shares redeemed................................................................ (936) (6,854)
---------- -----------
Net increase ................................................................... 47,239 $331,338
========== ===========
</TABLE>
4. PURCHASES AND SALES OF SECURITIES
Purchases and sales of securities (excluding purchases and sales of short-term
securities) for the year ended June 30, 1995 aggregated $230,923,832, and
$249,490,678, respectively.
5. TRANSACTIONS WITH AFFILIATES AND RELATED PARTIES
Franklin Advisers, Inc., under terms of an agreement, provides investment
advice, administrative services, office space, and facilities to the Fund, and
receives fees computed monthly on the net assets of the Fund at the last day of
the month at an annualized rate of 5/8 of 1% of the first $100 million of net
assets, 1/2 of 1% of net assets in excess of $100 million up to $250 million and
45/100 of 1% of net assets in excess of $250 million. Fees incurred by the Fund
aggregated $1,546,727 for the year ended June 30, 1995. The terms of the
management agreement provide that annual aggregate expenses of the Fund be
limited to the extent necessary to comply with the limitations set forth in the
laws, regulations and administrative interpretations of the states in which the
Fund's shares are registered. For the year ended June 30, 1995, the Fund's
expenses did not exceed these limitations..
In its capacity as underwriter for the shares of the Fund, Franklin/Templeton
Distributors, Inc. receives commissions on sales of the Fund's capital stock.
Commissions are deducted from the gross proceeds received from the sale of the
capital stock of the Fund and as such are not expenses of the Fund.
Franklin/Templeton Distributors, Inc. may also make payments, out of its own
resources, to the dealers for certain sales of Class I and Class II shares.
Commissions received by Franklin/Templeton Distributors, Inc. and the amounts
paid to other dealers for the year ended June 30, 1995 were as follows:
<TABLE>
<CAPTION>
Class I Class II
------- -----
<S> <C> <C>
Total commissions received......................................... $439,626 $2,948
======= =====
Paid to other dealers.............................................. $391,737 $5,896
======= =====
</TABLE>
Under the terms of a shareholder services agreement with Franklin/Templeton
Investor Services, Inc., the Fund pays costs on a per shareholder account basis.
Such costs incurred for the year ended June 30, 1995 aggregated $272,492, of
which $261,488 was paid to Franklin/Templeton Investor Services, Inc.
Under the terms of a Distribution Plan pursuant to Rule 12b-1 of the Investment
Company Act of 1940, which was effective May 1, 1994 for Class I shares, and
which became effective for Class II shares on May 1, 1995, Class I and II shares
will reimburse Franklin/Templeton Distributors, Inc. in an amount up to a
maximum of 0.25% and 1.00% per annum, respectively, of the average daily net
assets of each class for costs incurred in the promotion, offering and marketing
of the Class I and II shares. Fees incurred by the classes under the agreement
aggregated $524,323 for the year ended June 30, 1995.
Certain officers and directors of the Fund are also officers and/or directors of
Franklin/Templeton Distributors, Inc., Franklin Advisers, Inc., and
Franklin/Templeton Investor Services, Inc., all wholly-owned subsidiaries of
Franklin Resources, Inc.
6. RULE 144A SECURITIES
Rule 144A provides a non-exclusive safe harbor exemption from the registration
requirements of the Securities Act of 1933 for specified resales of restricted
securities to qualified institutional investors. The Funds value these
securities as disclosed in Note 1. At June 30, 1995 the Fund held 144A
securities with a value aggregating $6,047,958 representing 1.9% of the Fund's
net assets. See the accompanying statement of investments in securities and net
assets for specific information on such securities.
7. LOANS OF PORTFOLIO SECURITIES
During the year ended June 30, 1995, the Fund loaned securities to certain
brokers for which it received cash collateral against the loaned securities in
an amount equal to at least 100% of the market value of the loaned securities.
The cash collateral received is invested by the Fund in short-term instruments
and any interest income in excess of a predetermined rebate to the brokers is
kept by the Fund as interest income. Interest income from this source amounted
to $48,719 for the year ended June 30, 1995.
At June 30, 1995, the value of the loaned securities amounted to $4,601,250. The
Fund has received sufficient cash collateral to meet these commitments.
8. FINANCIAL HIGHLIGHTS
Selected data for each share of capital stock outstanding throughout each year
are as follows:
<TABLE>
<CAPTION>
Class I Shares: Year Ended June 30,
----------------------------------------
1995 1994 1993 1992 1991
---------- ------- ------- ------- -------
Per Share Operating Performance
<S> <C> <C> <C> <C> <C>
Net asset value at beginning of year.................... $6.53 $7.25 $7.12 $7.36 $7.17
---------- ------- ------- ------- -------
Net investment income................................... .08 .10 .12 .14 .15
Net realized and unrealized gains on securities......... 1.329 .107 .557 .089 .190
---------- ------- ------- ------- -------
Total from investment operations........................ 1.409 .207 .677 .229 .340
---------- ------- ------- ------- -------
Less distributions:
Distributions from net investment income................ (.079) (.103) (.119) (.142) (.150)
Distributions from net capital gains.................... (.620) (.824) (.428) (.327) --
---------- ------- ------- ------- -------
Total distributions..................................... (.699) (.927) (.547) (.469) (.150)
---------- ------- ------- ------- -------
Net asset value at end of year.......................... $7.24 $6.53 $7.25 $7.12 $7.36
========== ======= ======= ======= =======
Total return**.......................................... 23.78% 2.28% 9.53% 3.36% 4.87%
Ratios and Supplemental Data
Net assets at end of year (in 000's).................... $317,463 $279,880 $345,755 $364,826 $374,993
Ratio of expenses to average net assets................. .95% .79% .69% .70% .69%
Ratio of net investment income to average net assets.... 1.21% 1.27% 1.67% 1.86% 2.29%
Portfolio turnover rate................................. 86.20% 95.18% 51.12% 49.19% 56.76%
8. FINANCIAL HIGHLIGHTS (cont.)
Class II Shares: May 1, 1995 to
June 30, 1995
----------
Per Share Operating Performance
<S> <C>
Net asset value at beginning of period........................................................... $6.65
----------
Net investment income............................................................................ .010
Net realized and unrealized gains on securities.................................................. .615
----------
Total from investment operations................................................................. .625
Less distributions from net investment income.................................................... (.035)
----------
Net asset value at end of period................................................................. $7.24
============
Total return**................................................................................... 9.42%
Ratios and Supplemental Data
Net assets at end of year (in 000's)............................................................. $342
Ratio of expenses to average net assets.......................................................... 1.77%+
Ratio of net investment income to average net assets............................................. .74%+
Portfolio turnover rate.......................................................................... 86.20%
**Total return measures the change in value of an investment over the periods
indicated, and is not annualized. It does not include the maximum initial sales
charge or the deferred contingent sales charge and assumes reinvestment of
dividends and capital gains, if any, at net asset value. Prior to May 1, 1994,
dividends were reinvested at the maximum offering price.
+Annualized
Of the income dividends paid by the Fund during the year ended June 30, 1995,
100% qualified for the 70% dividends-received deduction for corporations. The
fund hereby designates these amounts as dividends qualifying for the
dividends-received deduction under IRC Section 854(b)(2).
</TABLE>
FRANKLIN EQUITY FUND
Report of Independent Auditors
To the Shareholders and Board of Directors
of Franklin Equity Fund:
We have audited the accompanying statement of assets and liabilities of Franklin
Equity Fund, including the statement of investments in securities and net
assets, as of June 30, 1995, and the related statement of operations for the
year then ended, the statements of changes in net assets for each of the two
years in the period then ended, and the financial highlights for each of the
five years in the period then ended. These financial statements and financial
highlights are the responsibility of the Fund's management. Our responsibility
is to express an opinion on these financial statements and financial highlights
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of June
30, 1995 by correspondence with the custodian and brokers. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Franklin Equity Fund as of June 30, 1995, the results of its operations for the
year then ended, the changes in its net assets for each of the two years in the
period then ended, and the financial highlights for each of the five years in
the period then ended, in conformity with generally accepted accounting
principles.
COOPERS & LYBRAND L.L.P.
San Francisco, California
August 4, 1995
Franklin Equity Fund
APPENDIX
DESCRIPTION OF GRAPHIC MATERIAL OMITTED FROM EDGAR FILING
(PURSUANT TO ITEM 304 (a) of REGULATION S-T)
GRAPHIC MATERIAL (1)
This chart shows in pie chart format the fund's securities breakdown by sector
as a percentage of the fund's total net assets.
<TABLE>
<CAPTION>
Portfolio Breakdown on June 30, 1995
<S> <C>
Transportation 1.40%
Commercial & Industrial Services 3.73%
Technology Services 4.00%
Electronic Technology 24.84%
Health Care 7.66%
Process Industries & Manufacturing 8.27%
Financials 9.05%
Natural Resources 10.62%
Utilities 10.64%
Retail & Consumer 14.12%
Short-Term Obligations & Other Net Assets 5.67%
</TABLE>
GRAPHIC MATERIAL (2)
The following line graph hypothetically compares the performance of the Franklin
Equity Fund to that of the S&P 500 Stock Index, based on a $10,000 investment
from 7/1/85 to 6/30/95.
<TABLE>
<CAPTION>
Period Ending Equity Fund S&P 500
<S> <C> <C>
7/1/85 $9,543 $ 10,000
7/31/85 $9,543 $ 9,985
8/31/85 $9,438 $ 9,900
9/30/85 $9,103 $ 9,590
10/31/85 $9,549 $ 10,033
11/30/85 $10,329 $ 10,722
12/31/85 $10,831 $ 11,241
1/31/86 $10,942 $ 11,303
2/28/86 $11,972 $ 12,148
3/31/86 $12,779 $ 12,826
4/30/86 $12,591 $ 12,681
5/31/86 $13,229 $ 13,355
6/30/86 $13,492 $ 13,581
7/31/86 $12,572 $ 12,822
8/31/86 $13,282 $ 13,773
9/30/86 $12,309 $ 12,634
10/31/86 $12,978 $ 13,363
11/30/86 $13,424 $ 13,688
12/31/86 $12,971 $ 13,339
1/31/87 $14,631 $ 15,136
2/28/87 $15,611 $ 15,734
3/31/87 $15,987 $ 16,188
4/30/87 $15,569 $ 16,044
5/31/87 $15,423 $ 16,184
6/30/87 $16,154 $ 17,001
7/31/87 $17,053 $ 17,863
8/31/87 $17,764 $ 18,529
9/30/87 $17,367 $ 18,123
10/31/87 $12,638 $ 14,220
11/30/87 $11,578 $ 13,048
12/31/87 $12,808 $ 14,041
1/31/88 $13,264 $ 14,632
2/29/88 $14,827 $ 15,314
3/31/88 $14,971 $ 14,841
4/30/88 $15,092 $ 15,005
5/31/88 $14,947 $ 15,134
6/30/88 $16,080 $ 15,829
7/31/88 $15,791 $ 15,769
8/31/88 $15,035 $ 15,233
9/30/88 $15,716 $ 15,882
10/31/88 $16,081 $ 16,323
11/30/88 $15,618 $ 16,090
12/31/88 $16,056 $ 16,370
1/31/89 $17,126 $ 17,568
2/28/89 $16,802 $ 17,131
3/31/89 $17,026 $ 17,530
4/30/89 $17,748 $ 18,440
5/31/89 $18,520 $ 19,186
6/30/89 $17,947 $ 19,077
7/31/89 $19,142 $ 20,800
8/31/89 $20,042 $ 21,207
9/30/89 $19,528 $ 21,120
10/31/89 $18,269 $ 20,630
11/30/89 $18,449 $ 21,051
12/31/89 $18,802 $ 21,557
1/31/90 $17,556 $ 20,110
2/28/90 $17,901 $ 20,369
3/31/90 $18,749 $ 20,909
4/30/90 $18,007 $ 20,389
5/31/90 $19,571 $ 22,377
6/30/90 $19,234 $ 22,227
7/31/90 $19,100 $ 22,155
8/31/90 $16,712 $ 20,153
9/30/90 $15,613 $ 19,171
10/31/90 $14,861 $ 19,089
11/30/90 $16,230 $ 20,322
12/31/90 $17,117 $ 20,889
1/31/91 $18,886 $ 21,800
2/28/91 $20,110 $ 23,358
3/31/91 $20,355 $ 23,924
4/30/91 $20,246 $ 23,981
5/31/91 $21,308 $ 25,015
6/30/91 $20,188 $ 23,869
7/31/91 $20,764 $ 24,981
8/31/91 $21,176 $ 25,573
9/30/91 $20,819 $ 25,146
10/31/91 $20,572 $ 25,483
11/30/91 $19,612 $ 24,456
12/31/91 $21,691 $ 27,254
1/31/92 $21,808 $ 26,747
2/29/92 $22,215 $ 27,092
3/31/92 $21,517 $ 26,564
4/30/92 $21,401 $ 27,342
5/31/92 $21,343 $ 27,476
6/30/92 $20,883 $ 27,067
7/31/92 $21,441 $ 28,174
8/31/92 $21,089 $ 27,596
9/30/92 $21,353 $ 27,919
10/31/92 $21,323 $ 28,014
11/30/92 $22,232 $ 28,966
12/31/92 $22,471 $ 29,323
1/31/93 $22,628 $ 29,569
2/28/93 $22,251 $ 29,971
3/31/93 $22,941 $ 30,604
4/30/93 $22,282 $ 29,863
5/31/93 $22,941 $ 30,660
6/30/93 $22,889 $ 30,749
7/31/93 $22,573 $ 30,626
8/31/93 $23,615 $ 31,787
9/30/93 $23,268 $ 31,542
10/31/93 $24,025 $ 32,195
11/30/93 $24,467 $ 31,889
12/31/93 $24,386 $ 32,275
1/31/94 $25,101 $ 33,372
2/28/94 $25,172 $ 32,468
3/31/94 $23,779 $ 31,052
4/30/94 $24,029 $ 31,450
5/31/94 $23,887 $ 31,966
6/30/94 $23,420 $ 31,183
7/31/94 $23,743 $ 32,205
8/31/94 $24,711 $ 33,526
9/30/94 $24,209 $ 32,708
10/31/94 $24,603 $ 33,444
11/30/94 $24,030 $ 32,226
12/31/94 $24,049 $ 32,703
1/31/95 $24,049 $ 33,550
2/28/95 $24,925 $ 34,859
3/31/95 $25,881 $ 35,887
4/30/95 $26,478 $ 36,942
5/31/95 $27,553 $ 38,420
6/30/95 $28,990 $ 39,311
</TABLE>
