<PAGE>
YOUR FUND'S OBJECTIVE:
The Franklin Equity Fund seeks capital appreciation with current income by
investing primarily in common stocks or securities convertible into common
stocks.
February 15, 1995
Dear Shareholder,
This report for the Franklin Equity Fund covers the six months ended December
31, 1994, a challenging period for equity investors. In response to rapid
economic growth in the fourth quarter of 1993, the U.S. Federal Reserve Board
began raising short-term interest rates in February 1994 as a pre-emptive move
against inflation. Over the course of the year, it raised the federal funds rate
six times, from 3.0% to 5.5%. As a result, interest rates rose worldwide, which
increased investor uncertainty and led to volatility and, in some cases,
declines in global stock markets.
Although these rate increases caused some of the fund's cyclical holdings (those
whose share prices vary according to the current stage of the economy) to
decline in value, we decided to be patient with this sector. One example is
National Steel, which traded at less than four times estimated 1995 earnings on
December 31, 1994. We think its earnings could be higher in succeeding years,
and we believe investors will eventually recognize the fundamental value
represented by such cyclical stocks.
Over the past six months, several investments in the computer software industry
produced good results for your fund. These include FTP Software, which develops
communications software for interactive environments such as the Internet;
Parametric Technology, a leader in computer-aided mechanical design software;
and Sybase, a premier database software company. We are likely to maintain
investments in the computer software area because of its rapid and dynamic
growth in this age of information technology.
Another sector that performed well for the fund recently is health care. During
1993, the prospect of increased government regulation weighed heavily on this
sector. However, as it
<PAGE>
became evident during the second half of 1994 that the Administration's health
care reform plan would not be enacted by Congress, the share price of a number
of health care companies began to rebound, which had a positive impact on your
fund's performance.
During the period, regional airlines lost favor with the market and we decided
to cut our losses. For example, we took an early loss on our holdings of
Atlantic Southeast, a regional airline, before the stock continued down almost
another 50%. Later, we purchased a small position in Southwest Airlines after it
experienced a similar decline. We continue to hold these shares, believing it to
be a premier company that excels at keeping its costs among the lowest in its
industry.
We maintained an overweighted position in natural resource companies because we
believe this sector will benefit as the demand for energy increases worldwide.
Our top positions include Mobil, Chevron, and YPF, an Argentinian oil company,
which should benefit from demand for oil throughout Latin America. We are also
optimistic about AES Corporation, currently involved in the development of power
generation facilities around the world, with newer projects underway in India
and China.
One of our major, long-term strategic decisions was to invest in technology
companies involved in developing the world's communications infrastructure.
Purchases of domestic stocks in this sector included Colonial Data Technologies,
Tellabs and Xilinx. Since much infrastructure development is expected to occur
overseas, 8.61% of the fund was invested in foreign technology companies,
including Nokia, a leading wireless communications company based in Finland, ECI
Telecommunications, an Israel-based company producing advanced
telecommunications equipment, and Ericsson, a leading international supplier of
communications systems and services based in Sweden.
"GRAPHIC MATERIAL (1) OMITTED - SEE APPENDIX"
2
<PAGE>
While the fund's prospectus allows us to invest up to 100% of the fund in
companies anywhere in the world, there is currently no intention of having
foreign companies exceed 25% of the portfolio during 1995. 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 funds are invested. These risks are discussed in the
prospectus.
Looking forward, our outlook for the equity markets remains positive. While some
volatility should be expected, the growth of free trade worldwide and the
dominance of American technology in the information revolution gives us reason
to be optimistic about the long-term prospects for the companies in the fund's
portfolio.
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
- --------------------------------------------------------------------------------
FRANKLIN EQUITY FUND
Top 10 Holdings on 12/31/94
As a Percentage of Total Net Assets
<TABLE>
<CAPTION>
COMPANY %OF TOTAL
INDUSTRY NET ASSETS
- --------------------------------------------------------------------------------
<S> <C>
Mobil Corp 2.49%
Energy Minerals
- --------------------------------------------------------------------------------
Chevron Corp 2.47%
Energy Minerals
- --------------------------------------------------------------------------------
Intel Corp 2.36%
Electronic Technology
- --------------------------------------------------------------------------------
Roper Industries, Inc 2.33%
Producer Manufacturing
- --------------------------------------------------------------------------------
YPF Sociedad Anonima, ADR 2.17%
Energy Minerals
- --------------------------------------------------------------------------------
Philip Morris Cos., Inc 2.12%
Consumer Non-durables
- --------------------------------------------------------------------------------
Nokia Corp., pfd., ADR 2.07%
Electronic Technology
- --------------------------------------------------------------------------------
GTE Corp 1.96%
Utilities
- --------------------------------------------------------------------------------
Omnicom Group, Inc 1.91%
Commercial Services
- --------------------------------------------------------------------------------
National Semiconductor Corp 1.80%
Electronic Technology
- --------------------------------------------------------------------------------
</TABLE>
FOR A DETAILED LISTING OF PORTFOLIO HOLDINGS, SEE PAGE 5 OF THIS REPORT.
3
<PAGE>
PERFORMANCE SUMMARY
The Franklin Equity Fund reported a total return of +2.69% for the six-month
period ended December 31, 1994. For the one-year period ended December 31, 1994,
total return was -1.38%. Total return measures the change in value of an
investment over the periods indicated. It does not include the maximum initial
sales charge and assumes reinvestment of dividends and capital gains.
We have always maintained a long-term perspective when managing the fund, and we
encourage shareholders to view their investments in a similar manner. As the
table to the right illustrates, the Franklin Equity Fund has enjoyed a
cumulative total return of more than 195% and an average annual total return of
more than 10% over the 10-year period.
During the reporting period, shareholders received distributions totalling 4
cents ($0.04) 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. The fund's
share price, as measured by net asset value, decreased from $6.53 on June 30,
1994 to $6.04 on December 31, 1994. 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 December 31, 1994
<TABLE>
<CAPTION>
1-YEAR 5-YEAR 10-YEAR
- ---------------------------------------------------------------
<S> <C> <C> <C>
Cumulative
Total Return(1) -1.38% 27.91% 195.20%
Average Annual
Total Return(2) -5.80% 4.09% 10.92%
- ---------------------------------------------------------------
</TABLE>
1. Cumulative total returns show the change in value of an investment over the
periods indicated and do not include the current maximum 4.5% initial sales
charge.
2. Average annual total returns represent the average annual change in value of
an investment over the periods indicated and have been restated to reflect the
current, maximum 4.5% initial sales charge.
Note: Prior to July 1, 1994, 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 cannot
guarantee future results.
4
<PAGE>
FRANKLIN EQUITY FUND
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, DECEMBER 31, 1994
(UNAUDITED)
<TABLE>
<CAPTION>
VALUE
SHARES (NOTE 1)
- ------------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS 93.1%
ADVERTISING 1.9%
100,000 Omnicom Group, Inc. ................................. $ 5,175,000
-----------
AEROSPACE/DEFENSE 1.6%
60,000 Martin Marietta Corp. ............................... 2,662,500
25,000 Raytheon Co. ........................................ 1,596,875
-----------
4,259,375
APPAREL 1.1% -----------
60,000 V.F. Corp. .......................................... 2,917,500
-----------
AUTOMOBILES 1.1%
60,000 Chrysler Corp........................................ 2,940,000
-----------
BROADCASTING & CABLE TV 2.2%
150,000 TCA Cable TV, Inc.................................... 3,262,500
100,000 (a)Telewest Communications, Plc., ADR .................. 2,650,000
-----------
5,912,500
-----------
CHEMICAL, SPECIALTY 1.3%
100,000 (a)Methane Corp. ....................................... 1,300,000
70,000 Vigoro Corp. ........................................ 2,100,000
-----------
3,400,000
-----------
COMMERCIAL SERVICES 1.2%
150,000 Dial Corp. .......................................... 3,187,500
-----------
COMPUTER/PERIPHERALS 1.2%
80,000 (a)Compaq Computer Corp. ............................... 3,160,000
-----------
COMPUTER SOFTWARE 4.3%
150,000 (a)FTP Software, Inc. .................................. 4,743,750
50,000 (a)Parametric Technology Co. ........................... 1,725,000
600,000 (a)Structural Dynamics Research Corp. .................. 3,225,000
40,000 (a)Sybase, Inc. ........................................ 2,080,000
-----------
11,773,750
-----------
DRUGS 6.6%
75,000 American Home Products Corp. ........................ 4,706,250
75,000 Bristol-Myers Squibb Co. ............................ 4,340,625
40,000 (a)Chiron Corp. ........................................ 3,215,000
30,000 (a)Elan Corporation, Plc., ADR ......................... 1,068,750
110,000 (a)Noven Pharmaceuticals, Inc. ......................... 1,361,250
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
FRANKLIN EQUITY FUND
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, DECEMBER 31, 1994
(UNAUDITED) (CONT.)
<TABLE>
<CAPTION>
VALUE
SHARES (NOTE 1)
- ----------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (CONT.)................................
DRUGS (CONT.)
50,000 Teva Pharmaceutical Industries, Ltd., ADR ........... $ 1,209,375
50,000 Zeneca Group, Plc., ADR ............................. 2,056,250
-----------
17,957,500
-----------
ELECTRONICS/ELECTRICAL EQUIPMENT 1.0%
60,000 (a)Applied Materials, Inc. ............................. 2,535,000
40,000 (a)Megatest Corp. ...................................... 258,750
-----------
2,793,750
-----------
ENTERTAINMENT .8%
100,000 Gaylord Entertainment Co. ........................... 2,275,000
-----------
FINANCIAL/BANKS 5.4%
25,000 Bankers Trust New York Corp. ........................ 1,384,375
80,000 Chemical Banking Corp. .............................. 2,870,000
85,000 Citicorp ............................................ 3,516,875
60,000 First Chicago Corp. ................................. 2,865,000
70,000 J.P. Morgan & Co., Inc. ............................. 3,920,000
-----------
14,556,250
-----------
FOREST PRODUCTS/PAPER .7%
120,000 Pope & Talbot, Inc. ................................. 1,905,000
-----------
HOME BUILDING 1.5%
100,000 (a)Beazer Homes USA, Inc. .............................. 1,162,500
195,000 Lennar Corp. ........................................ 3,022,500
-----------
4,185,000
-----------
HOSPITAL MANAGEMENT/SERVICES 3.3%
57,200 (a)Homedco Group, Inc. ................................. 2,152,150
100,000 (a)Humana, Inc. ........................................ 2,262,500
100,000 (a)Physician Corp. of America .......................... 2,050,000
60,000 U.S. Healthcare, Inc. ............................... 2,475,000
-----------
8,939,650
-----------
INSURANCE 1.3%
80,000 Leucadia National Corp. ............................. 3,560,000
-----------
MACHINERY 3.3%
50,000 (a)Clark Equipment Co. ................................. 2,712,500
250,000 Roper Industries, Inc. .............................. 6,312,500
-----------
9,025,000
-----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
6
<PAGE>
FRANKLIN EQUITY FUND
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, DECEMBER 31, 1994
(UNAUDITED) (CONT.)
<TABLE>
<CAPTION>
VALUE
SHARES (NOTE 1)
- ------------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (CONT.)................................
MINING 1.6%
100,000 American Barrick Resources Corp. .................... $ 2,225,000
125,000 (a)Magma Copper Co. .................................... 2,093,750
-----------
4,318,750
-----------
MULTIFORM INDUSTRIES 1.5%
150,000 Pittston Co. ........................................ 3,975,000
-----------
NATURAL GAS, DIVERSIFIED 2.3%
100,000 (a)Barrett Resources Corp. ............................. 2,050,000
100,000 Enron Oil & Gas Co. ................................. 1,875,000
90,000 Williams Cos., Inc. ................................. 2,261,250
-----------
6,186,250
-----------
OIL REFINERS 1.6%
175,000 Ultramar Corp. ...................................... 4,462,500
-----------
OILFIELD SERVICES 1.2%
130,000 (a)Hornbeck Offshore Services, Inc. .................... 1,625,000
40,000 (a)Western Atlas, Inc. ................................. 1,505,000
-----------
3,130,000
-----------
PETROLEUM 9.3%
50,000 Amoco Corp. ......................................... 2,956,250
150,000 Chevron Corp. ....................................... 6,693,750
80,000 Mobil Corp. ......................................... 6,740,000
150,000 Parker & Parsley Petroleum Co. ...................... 3,075,000
275,000 YPF, Sociedad Anonima, ADR .......................... 5,878,125
-----------
25,343,125
-----------
RETAIL, SPECIAL LINES .2%
50,000 Ross Stores, Inc. ................................... 562,500
-----------
RETAIL STORES 3.1%
200,000 (a)MacFrugals Bargains Closeouts, Inc. ................. 4,000,000
50,000 May Department Stores Co. ........................... 1,687,500
60,000 Penney (J.C.) Co., Inc. ............................. 2,677,500
-----------
8,365,000
-----------
SEMICONDUCTORS 8.3%
40,000 (a)Exar Corp. .......................................... 980,000
100,000 Integrated Device Technology, Inc. .................. 2,950,000
100,000 Intel Corp. ......................................... 6,387,500
250,000 (a)National Semiconductor Corp. ........................ 4,875,000
100,000 (a)SGS-Thomson Microelectronics, Inc., ADR ............. 2,275,000
</TABLE>
The accompanying notes are an integral part of these financial statements.
7
<PAGE>
FRANKLIN EQUITY FUND
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, DECEMBER 31, 1994
(UNAUDITED) (CONT.)
<TABLE>
<CAPTION>
VALUE
SHARES (NOTE 1)
- ------------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (CONT.)
SEMICONDUCTORS (CONT.)
50,000 Texas Instruments, Inc. ............................. $ 3,743,750
20,000 (a)Xilinx, Inc. ........................................ 1,185,000
-----------
22,396,250
-----------
SHOES 1.4%
50,000 Nike, Inc., Class B ................................. 3,731,250
-----------
STEEL .8%
150,000 (a)National Steel Corp., Class B ....................... 2,175,000
-----------
TELECOMMUNICATIONS 9.5%
30,000 AT&T Corp. .......................................... 1,507,500
40,000 (a)Colonial Data Technologies Corp. .................... 605,000
350,000 ECI Telecommunications, Ltd. ........................ 4,768,750
50,000 Ericsson, (L.M.) Telephone Co., ADR ................. 2,756,250
175,000 GTE Corp. ........................................... 5,315,625
25,000 (a)Newbridge Networks Corp. ............................ 956,250
80,000 Pacific Telesis Group ............................... 2,280,000
35,000 Telefonica de Argentina, SA, ADS .................... 1,855,000
60,000 Telefonos de Mexico, SA, ADR ........................ 2,460,000
60,000 (a)Tellabs, Inc. ....................................... 3,345,000
-----------
25,849,375
-----------
TOBACCO 2.1%
100,000 Philip Morris Cos., Inc. ............................ 5,750,000
-----------
TOILETRIES & COSMETICS 1.1%
50,000 Avon Products, Inc. ................................. 2,987,500
-----------
TOYS & SCHOOL SUPPLIES 1.0%
110,000 Mattel, Inc. ........................................ 2,763,750
-----------
TRANSPORTATION 2.7%
230,000 (a)Chicago & Northwestern Holdings Corp. ............... 4,427,500
43,000 (a)Fritz Companies, Inc. ............................... 2,021,000
50,000 Southwest Airlines Co. .............................. 837,500
-----------
7,286,000
-----------
UTILITIES 5.6%
190,000 AES Corp. ........................................... 3,705,000
200,000 PacifiCorp .......................................... 3,625,000
</TABLE>
The accompanying notes are an integral part of these financial statements.
8
<PAGE>
FRANKLIN EQUITY FUND
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, DECEMBER 31, 1994
(UNAUDITED) (CONT.)
<TABLE>
<CAPTION>
VALUE
SHARES (NOTE 1)
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (cont.)
UTILITIES (cont.)
200,000 Pinnacle West Capital Corp. ........................................................ $ 3,950,000
200,000 Teco Energy, Inc. .................................................................. 4,025,000
------------
15,305,000
------------
TOTAL COMMON STOCKS (COST $247,283,562) ...................................... 252,510,025
------------
PREFERRED STOCKS 2.1%
75,000 (a)Nokia Corp., pfd., ADR (Cost $5,541,145) ........................................... 5,625,000
------------
TOTAL COMMON STOCKS AND PREFERRED STOCKS (COST $252,824,707) ................. 258,135,025
------------
</TABLE>
<TABLE>
<CAPTION>
FACE
AMOUNT
------
<S> <C> <C>
(b)SHORT TERM INVESTMENTS
BANKERS' ACCEPTANCES 2.2%
$5,850,000 Mitsubishi Bank, Ltd., New York Branch, 6.12%, 01/18/95 (Cost $5,833,094)........... 5,833,094
------------
COMMERCIAL PAPER 1.8%
5,000,000 Westpac Capital Corp., 6.15%, 02/03/95 (Cost $4,971,812) ........................... 4,971,812
------------
TOTAL INVESTMENTS BEFORE REPURCHASE AGREEMENTS (COST $ 263,629,613)........... 268,939,931
------------
(c)(d)RECEIVABLES FROM REPURCHASE AGREEMENTS 1.7%
4,943,232 Joint Repurchase Agreement, 5.838%, 01/03/95 (Maturity Value $4,791,150)
(COST $4,788,044)
Collateral: U.S. Treasury Notes, 3.875% - 11.50%, 02/15/95 - 09/30/99 ............ 4,788,044
------------
TOTAL INVESTMENTS (COST $268,417,657) 100.9% ........................ 273,727,975
LIABILITIES IN EXCESS OF OTHER ASSETS, NET (.9)% .................... (2,544,784)
------------
NET ASSETS 100.0% ................................................... $271,183,191
============
At December 31, 1994, the net unrealized appreciation based on
the cost of investments for income tax purposes of $268,419,825 was as follows:
Aggregate gross unrealized appreciation for all investments in which there was an
excess of value over tax cost ................................................... $ 24,532,502
Aggregate gross unrealized depreciation for all investments in which there was an
excess of tax cost over value ................................................... (19,224,352)
------------
Net unrealized appreciation ...................................................... $ 5,308,150
============
</TABLE>
(a) Non-income producing.
(b) Certain 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.
(c) Face amount for repurchase agreements is for the underlying collateral.
(d) See Note 1(e) regarding Joint Repurchase Agreement.
The accompanying notes are an integral part of these financial statements.
9
<PAGE>
FRANKLIN EQUITY FUND
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1994 (UNAUDITED)
<TABLE>
<S> <C>
Assets:
Investment in securities, at value
(identified cost $263,629,613) $268,939,931
Receivables from repurchase
agreements at value and cost 4,788,044
Cash 264
Receivables:
Dividends and interest 583,203
Investment securities sold 1,307,718
Capital shares sold 403,981
Prepaid expenses 6,504
------------
Total assets 276,029,645
------------
Liabilities:
Payables:
Investment securities purchased 4,029,744
Capital shares repurchased 413,857
Distribution fees 158,977
Management fees 122,558
Shareholder servicing costs 49,362
Accrued expenses and other liabilities 71,956
------------
Total liabilities 4,846,454
------------
Net assets, at value $271,183,191
============
Net assets consist of:
Undistributed net investment income $ 72,932
Unrealized appreciation on investments 5,310,318
Accumulated net realized loss (2,034,907)
Capital shares 267,834,848
------------
Net assets, at value $271,183,191
============
Net asset value per share
($271,183,191 / 44,919,456 shares
of capital stock outstanding) $6.04
============
</TABLE>
STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED DECEMBER 31, 1994 (UNAUDITED)
<TABLE>
<S> <C>
Investment income:
Dividends $ 2,666,352
Interest 500,103
------------
Total income $ 3,166,455
Expenses:
Management fees (Note 5) 764,856
Distribution fees (Note 5) 311,348
Shareholder servicing costs
(Note 5) 165,000
Reports to shareholders 157,157
Professional fees 18,287
Custodian fees 12,792
Directors' fees and expenses 12,768
Other 42,058
------------
Total expenses 1,484,266
------------
Net investment income 1,682,189
------------
Realized and unrealized gain
(loss) on investments:
Net realized loss (2,016,672)
Net unrealized appreciation
during the period 7,657,105
Net realized and unrealized ------------
gain on investments 5,640,433
Net increase in net assets ------------
resulting from operations $ 7,322,622
============
</TABLE>
The accompanying notes are an integral part of these financial statements.
10
<PAGE>
FRANKLIN EQUITY FUND
FINANCIAL STATEMENTS (cont.)
STATEMENTS OF CHANGES IN NET ASSETS
FOR THE SIX MONTHS ENDED DECEMBER 31, 1994 (UNAUDITED)
AND THE YEAR ENDED JUNE 30, 1994
<TABLE>
<CAPTION>
SIX MONTHS YEAR
ENDED ENDED
DECEMBER 31, 1994 JUNE 30, 1994
----------------- -------------
<S> <C> <C>
Increase (decrease) in net assets:
Operations:
Net investment income....................................................... $ 1,682,189 $ 4,078,433
Net realized gain (loss) on investments..................................... (2,016,672) 43,486,304
Net unrealized appreciation (depreciation) during the period................ 7,657,105 (38,366,022)
------------ ------------
Net increase in net assets resulting from operations.................... 7,322,622 9,198,715
Distributions to shareholders from:
Undistributed net investment income.......................................... (1,678,413) (4,360,241)
Net realized capital gains................................................... (26,017,096) (34,433,434)
Increase (decrease) in net assets from capital share transactions (Note 3).... 11,675,678 (36,279,318)
------------ ------------
Net decrease in net assets.............................................. (8,697,209) (65,874,278)
Net assets:
Beginning of period.......................................................... 279,880,400 345,754,678
------------ ------------
End of period................................................................ $271,183,191 $279,880,400
============ ============
Undistributed net investment income included in net assets:
Beginning of period......................................................... $ 69,156 $ 350,964
============ ============
End of period............................................................... $ 72,932 $ 69,156
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
11
<PAGE>
FRANKLIN EQUITY FUND
NOTES TO FINANCIAL STATEMENTS (unaudited)
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 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 a pricing service, 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.
Short-term securities and similar investments with remaining maturities of 60
days or less are valued at amortized cost, which approximates value.
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.
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.
Net realized capital gains differ for financial statement and tax purposes
primarily due to losses deferred for wash sales transactions.
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.
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 December 31, 1994, the outstanding joint repurchase
agreements held by the Fund had been entered into on December 30, 1994.
12
<PAGE>
FRANKLIN EQUITY FUND
NOTES TO FINANCIAL STATEMENTS (unaudited) (cont.)
2. DISTRIBUTIONS
At June 30, 1994 for tax purposes, the Fund had accumulated undistributed net
realized capital gains of $26,001,029.
For tax purposes, the aggregate cost of securities is higher (and unrealized
appreciation is lower) than for financial reporting purposes at December 31,
1994 by $2,168.
3. CAPITAL STOCK
At December 31, 1994, there were 5,000,000,000 shares of no par value capital
stock authorized, and capital paid in aggregated $267,834,848. Transactions in
capital stock were as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
DECEMBER 31, 1994 JUNE 30, 1994
---------------------------- ----------------------------
SHARES AMOUNT SHARES AMOUNT
----------- ------------- ----------- ------------
<S> <C> <C> <C> <C>
Shares sold...................................... 881,071 $ 5,730,082 2,049,264 $ 14,306,753
Shares issued in reinvestment of distributions... 4,241,703 25,407,815 5,049,835 34,562,962
Shares redeemed.................................. (2,442,431) (16,054,774) (7,611,250) (54,438,166)
Changes from exercise of exchange privilege:
Shares sold..................................... 16,115,552 107,362,041 53,117,221 374,441,701
Shares redeemed................................. (16,733,814) (110,769,486) (57,452,558) (405,152,568)
----------- ------------- ----------- -----------
Net increase (decrease).......................... 2,062,081 $ 11,675,678 (4,847,488) $(36,279,318)
=========== ============= =========== ============
</TABLE>
4. PURCHASES AND SALES OF SECURITIES
Purchases and sales of securities (excluding purchases and sales of short-term
securities) for the period ended December 31, 1994 aggregated $135,412,881, and
$142,349,579, 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. 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. There was no limitation on the Fund expenses under
this provision for the six months ended December 31, 1994.
In its capacity as underwriter for the shares of the Fund, Franklin/Templeton
Distributors, Inc. received commissions on sales of the Fund's capital stock for
the six months ended December 31, 1994 totalling $206,214 of which $183,418 was
paid to other dealers. 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.
Under the terms of a shareholder services agreement with Franklin/Templeton
Investor Services, Inc., the Fund pays costs on a per shareholder account basis.
Shareholder servicing costs incurred for the six months ended December 31, 1994
were $165,000, of which $133,326 was paid to Franklin/Templeton Investor
Services, Inc.
13
<PAGE>
FRANKLIN EQUITY FUND
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONT.)
5. TRANSACTIONS WITH AFFILIATES AND RELATED PARTIES (CONT.)
Effective May 1, 1994, the Fund implemented a plan of distribution under Rule
12b-1 of the Investment Company Act of 1940, pursuant to which the Fund will
reimburse Franklin/Templeton Distributors, Inc. in an amount up to a maximum of
0.25% per annum of the Fund's average daily net assets for costs incurred in the
promotion, offering and marketing of the Fund's shares. Fees incurred by the
Fund under the agreement aggregated $311,348 for the six months ended December
31, 1994.
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. FINANCIAL HIGHLIGHTS
Selected data for each share of capital stock outstanding throughout each period
are as follows:
<TABLE>
<CAPTION>
SIX MONTHS YEAR ENDED JUNE 30,
ENDED ---------------------------------------------
12/31/94 1994 1993 1992 1991 1990
---------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value at beginning of period............. $6.53 $7.25 $7.12 $7.36 $7.17 $7.21
------ ------ ------ ----- ------ ------
Net investment income.............................. .040 .100 .120 .140 .150 .170
Net realized and unrealized gains on securities.... .130 .107 .557 .089 .190 .344
------ ------ ------ ----- ------ ------
Total from investment operations................... .170 .207 .677 .229 .340 .514
------ ------ ------ ----- ------ ------
Less distributions:
Distributions from net investment income........... (.040) (.103) (.119) (.142) (.150) (.296)
Distributions from net capital gains............... (.620) (.824) (.428) (.327) -- (.258)
------ ------ ------ ----- ------ ------
Total distributions................................ (.660) (.927) (.547) (.469) (.150) (.554)
------ ------ ------ ----- ------ ------
Net asset value at end of period................... $6.04 $6.53 $7.25 $7.12 $7.36 $7.17
====== ====== ====== ====== ====== ======
- ---------------------------------------------------------------------------------------------------------------
TOTAL RETURN**..................................... 2.69% 2.28% 9.53% 3.36% 4.87% 7.00%
- ----------------------------------------------------------------------------------------------------------------
RATIOS AND SUPPLEMENTAL DATA
Net assets at end of year (in 000's)............... $271,183 $279,880 $345,755 $364,826 $374,993 $419,422
Ratio of expenses to average net assets............ 1.06%* .79% .69% .70% .69% .69%
Ratio of net investment income to average net assets 1.20%* 1.27% 1.67% 1.86% 2.29% 2.51%
Portfolio turnover rate............................ 51.78% 95.18% 51.12% 49.19% 56.76% 42.71%
</TABLE>
*Annualized
**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 and assumes reinvestment of dividends at the offering price and capital
gains, if any, at net asset value. Effective May 1, 1994, with the
implementation of the Rule 12b-1 distribution plan as discussed in Note 5, the
existing sales charge on reinvested income dividends has been eliminated.
14
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 12/31/94
<S> <C>
Financials 6.68
Technology 23.02
Minerals 14.83
Process Industries & Manufacturing 7.91
Health Care 9.92
Utilities 10.06
Commercial & Industrial Services 4.43
Retail & Consumer 15.63
Transportation 2.71
Short-Term Assets & 4.81
</TABLE>
