To reduce the volume of mail shareholders receive and to reduce expenses, only
one copy of most fund reports, such as the fund's annual and semi-annual
reports, may be mailed to a household. Additional copies may be obtained,
without charge, by calling Fund Information at 1-800/DIAL BEN (1-800/342-5236).
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.
February 15, 1996
Dear Shareholder:
We are pleased to bring you this semi-annual report for the Franklin Equity
Fund, covering the six months ended December 31, 1995.
During this period, the U.S. economy continued to grow slowly with few signs of
inflation and no apparent upward pressure on wages. Gross Domestic Product (GDP)
expanded at an annual rate of approximately 3%, and the inflation rate was below
2%, as measured by the Consumer Price Index. In response, the Federal Reserve
Board lowered the federal funds rate on July 6, 1995, and again on December 19,
1995, bringing its target level down to 5.50% from the 6.00% peak reached in
February 1995. During this time, a rally in bond prices brought the 30-year U.S.
Treasury bond yield down from 6.62% on June 30, 1995 to 5.95% on December 31,
1995.
Low levels of inflation and falling interest rates encouraged the domestic
equity markets, and many major indices reached record highs during this
reporting period. For example, the unmanaged Standard & Poor's 500 Stock Index
(S&P 500)(R) rose from 544.75 to 615.93 between June 30, 1995 and December 31,
1995, and produced a total return of +14.45% during this time. Between September
and December, however, a combination of profit-taking and uncertainty regarding
competing proposals to balance the federal budget by 2002 greatly increased
market volatility. Within this environment, the Franklin Equity Fund Class I
shares provided a total return of +10.28%, as shown in the Performance Summary
on page 6.
GRAPHIC MATERIAL 1 OMMITTED - SEE APPENDIX AT END OF DOCUMENT
1. The Philadelphia Semiconductor Index, which is an index of 16 leading
semiconductor industry stocks, declined by 33.9% from its September 12, 1995
peak through December 31, 1995.
The semiconductor industry in particular was extremely volatile during the last
four months of the reporting period. Speculation that the industry had passed
the peak of its current business cycle raised concerns about whether too much
production capacity had been added, which could lead to declining product
prices. As a result, the industry's stocks lost their market leadership and
suffered a correction of over 33% between September and December 1995.1
Believing that many of these stocks were trading at extreme discounts to their
intrinsic value, and that prices for this volatile group's securities were
nearing the bottom, we started buying shares of some of these companies. For
example, SGS-Thomson Microelectronics' stock experienced a great deal of selling
pressure during this period, but in our opinion, the weakened price did not
reflect the company's positive fundamental financial condition. We therefore
took this opportunity to increase our holdings.
Despite this volatility, we remained more heavily weighted in technology stocks
than the S&P 500. We believe that they are still in a long-term secular growth
trend because computers and communications products continue to revolutionize
the way we work and play. An article in the Bank Credit Analyst of June 1995,
about long-term trends in capital spending as they relate to fundamental shifts
in society, pointed out that as the world moved from an agrarian to an
industrial-based economy in the 1880s, expenditures on railroads peaked at more
than 12% of GDP.2 As society shifts from an industrial-based to an
"information-based" economy in the 1990s, current information processing
expenditures account for only about 4% of GDP, which may indicate that there is
room for considerably higher spending. With its current holdings, the Franklin
Equity Fund should be well-positioned to benefit from this long-term trend.
New fund investments with potential for solid capital appreciation included
Procter & Gamble, Cisco Systems, Estee Lauder, and Pepsico. Although these
companies operate in disparate industries, we believe all are very
well-positioned within their respective market niches. They contribute to the
fact that, according to the Institutional Brokerage Estimate Service (I/B/E/S)
as of December 31, 1995, the weighted average estimate for growth in operating
earnings for the fund's holdings is over 20% for 1996 versus 6% for the S&P 500.
At the same time, the fund's estimated 1996 average price/earnings ratio of 15
is below that of the S&P 500.
2. "Prospects for the U.S. Long-Wave Expansion," The Bank Credit Analyst, June
1995, pp. 28-47.
One strength of the Franklin Equity Fund is its ability to use both internally
developed quantitative tools (formulas that compare financial data of many
companies) and quantitative tools generated by outside sources, in combination
with fundamental investment ideas generated within the Franklin equity research
group. Stocks of companies that are both quantitatively and fundamentally
attractive to us become new investments for the fund.
To illustrate the advantages of this process, consider this: in 1994, the
Federal Reserve Board was in the process of raising interest rates, the bond
market was suffering one of its worst declines in history, and stocks of
electric utility companies appeared to be "washed up" for some time to come.
Since Franklin is one of the country's largest managers of utilities stock
funds, with considerable knowledge about this sector, we were able to work
closely with our utility stock analysts and found fundamental value in a
number of these companies. Some of them also met our quantitative standards, and
we invested in several electric utility companies at that time. One of these
investments, Pinnacle West, handsomely outperformed all the rest by increasing
more than 50% between our purchases in late 1994 and the end of this reporting
period. Capital appreciation of 50% for an electric utility stock in just over
one year's time is unusually high.
Franklin Equity Fund
Top 10 Holdings on 12/31/95
As a Percentage of Total Net Assets
Company, % of Total
Industry Net Assets
1. Intel Corp. 2.61%
Electronic Technology
2. National Semiconductor Corp. 2.24%
Electronic Technology
3. Bay Networks, Inc. 2.22%
Electronic Technology
4. GTE Corp. 2.22%
Utilities
5. ECI Telecommunications, Ltd. 2.13%
Electronic Technology
6. Philip Morris Cos., Inc. 1.95%
Consumer Non-durables
7. Oracle Corp. 1.83%
Technology Services
8. Silicon Graphics, Inc. 1.78%
Electronic Technology
9. Xerox Corp. 1.77%
Producer Manufacturing
10. Omnicom Group, Inc. 1.72%
Commercial Services
For a detailed listing of portfolio holdings, see page 8 of this report.
Looking forward, we expect the slow growth environment of late 1995 to persist
throughout 1996. Although we are concerned about potentially lower corporate
profits and their effect on security prices, we believe our integrated approach
to security selection can help the fund produce above average returns over the
long term, while providing shareholders with exposure to both U.S. and foreign
equity markets.
This discussion reflects the strategies we employed for the fund during the past
six-month period, and includes our opinions as of the close of the period. Since
economic and market conditions are constantly changing, our strategies, and our
evaluations, conclusions and decisions regarding portfolio holdings, may change
in light of new circumstances as they arise. Although past performance of a
specific investment or sector cannot guarantee future performance, such
information can be useful in analyzing securities we purchase or sell for the
fund.
As always, 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
Class I Shares
The Franklin Equity Fund Class I shares reported a total return of +10.28% for
the six-month period ended December 31, 1995 and a total return of +32.94% for
the one-year period ended December 31, 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 +195% and an average annual total return of more than
+10% over the 10-year period ended December 31, 1995.
During the reporting period, Class I shareholders received distributions
totaling 3.6 cents ($0.036) per share in income dividends, 22.7 cents ($0.227)
in short-term capital gains, and 23.53 cents ($0.2353) in long-term capital
gains. As measured by net asset value, the price of the fund's Class I shares
increased from $7.24 on June 30, 1995 to $7.48 on December 31, 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.
Class II Shares
The Franklin Equity Fund Class II shares reported a total return of +9.75% for
this six-month period ended December 31, 1995 and a total return of +20.26%
since inception on May 1, 1995. Total return measures the change in value of an
investment, does not include sales charges, and assumes reinvestment of
dividends and capital gains.
During the reporting period, Class II shareholders received distributions
totaling 1.9 cents ($0.019) per share in income dividends, 22.7 cents ($0.227)
in short-term capital gains, and 23.53 cents ($0.2353) in long-term capital
gains. As measured by net asset value, the price of the fund's Class II shares
increased from $7.25 on June 30, 1995 to $7.47 on December 31, 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 12/31/95
Class II
Since
Inception
One-Year Five-Year Ten-Year (5/1/95)
Cumulative Total Return1
Class I Shares 32.94% 86.78% 195.18% --
Class II Shares -- -- -- 20.26%
Average Annual Total Return2
Class I shares 27.05% 12.26% 10.93% --
Aggregate Total Return3
Class II Shares -- -- -- 18.02%
1. Cumulative total return measures the change in value of an investment over
the periods indicated and does not include the current maximum 4.5% initial
sales charge for Class I shares, or the 1.00% initial sales charge and 1.00%
contingent deferred sales charge (CDSC) for Class II shares, applicable to
shares redeemed within the first 18 months of investment.
See note below.
2. Average annual total return represents the average annual change in value of
an investment over the periods indicated and includes the current maximum 4.5%
initial sales charge. See note below. 3. Figures represent aggregate total
returns, which include the 1.00% initial sales charge and represent the change
in value of an investment since the inception date of these shares. It also
includes the 1.00% CDSC applicable to shares redeemed within 18 months of
purchase. Since Class II shares have existed for less than one year, average
annual total returns are not provided. See note below.
Note: Prior to July 1, 1994, Class I 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-l, 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. Class
II shares are subject to different fees and expenses, which will affect their
performance. Please see the prospectus for more details regarding Class I and
Class II shares. 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.
FRANKLIN EQUITY FUND
Statement of Investments in Securities and Net Assets, December 31, 1995
(unaudited)
<TABLE>
<CAPTION>
Value
Shares (Note 1)
Common Stocks 94.2%
Advertising 1.7%
<S> <C> <C>
160,000 Omnicom Group, Inc. .......................................................... $ 5,960,000
-------------
Aerospace/Defense 1.7%
50,000 Lockheed Martin Corp.......................................................... 3,950,000
40,000 Raytheon Co. ................................................................. 1,890,000
-------------
5,840,000
-------------
Beverages 0.7%
45,000 Pepsico, Inc. ................................................................ 2,514,375
-------------
Broadcasting & Cable TV 2.0%
150,000 TCA Cable TV, Inc. ........................................................... 4,143,750
120,000 a Telewest Communications, Plc., ADR............................................ 2,895,000
-------------
7,038,750
-------------
Chemical, Specialty 0.9%
50,000 Vigoro Corp................................................................... 3,087,500
-------------
Computer/Peripherals 3.3%
50,000 a Komag, Inc.................................................................... 2,306,250
161,100 a Lexmark International Group Inc., Class A..................................... 2,940,075
225,000 a Silicon Graphics, Inc. ....................................................... 6,187,500
-------------
11,433,825
-------------
Computer Software 4.3%
75,000 a Business Objects S.A., ADR.................................................... 3,628,125
75,000 a Informix Corp. ............................................................... 2,250,000
150,000 a Oracle Corp. ................................................................. 6,356,250
75,000 a Sybase, Inc. ................................................................. 2,700,000
-------------
14,934,375
-------------
Data Networking 4.0%
187,500 a Bay Networks, Inc. ........................................................... 7,710,938
25,000 a Cabletron Systems, Inc........................................................ 2,025,000
35,000 a Cisco Systems, Inc. .......................................................... 2,611,875
30,000 a 3Com Corp..................................................................... 1,398,750
-------------
13,746,563
-------------
Drugs 2.0%
25,000 American Home Products Corp. ................................................. 2,425,000
35,000 Bristol-Myers Squibb Co. ..................................................... 3,005,625
145,800 a Noven Pharmaceuticals, Inc. .................................................. 1,640,250
-------------
7,070,875
-------------
Electronics/Electrical Equipment 3.3%
60,000 a Applied Materials, Inc. ...................................................... $ 2,362,500
80,000 a Bell & Howell Holdings Co. ................................................... 2,240,000
50,000 Motorola, Inc. ............................................................... 2,850,000
100,000 Nokia Corp., ADR.............................................................. 3,887,500
-------------
11,340,000
-------------
Entertainment 1.0%
131,250 Gaylord Entertainment Co. .................................................... 3,642,187
-------------
Financial/Banks 4.9%
55,100 a,d Christiania Bank, ADR......................................................... 1,278,744
65,000 Citicorp...................................................................... 4,371,250
72,400 First Chicago Corp. .......................................................... 2,859,800
75,000 First USA, Inc. .............................................................. 3,328,125
40,000 J.P. Morgan & Co., Inc. ...................................................... 3,210,000
52,500 a,d Nordbanken AB, ADR............................................................ 1,809,947
-------------
16,857,866
-------------
Forest Products/Paper 1.0%
400,000 a Asia Pacific Resources International Holdings, Ltd. .......................... 1,900,000
270,000 a,d Portucel Industrial, SA....................................................... 1,596,456
-------------
3,496,456
-------------
Home Building 1.9%
100,000 a Beazer Homes USA, Inc. ....................................................... 2,062,500
175,000 Lennar Corp. ................................................................. 4,396,875
-------------
6,459,375
-------------
Hospital Management/Services 5.0%
125,000 a Health Management, Inc. ...................................................... 1,656,250
125,000 a Humana, Inc. ................................................................. 3,421,875
200,000 a OrNda HealthCorp ............................................................. 4,650,000
50,000 a Quantum Health Resources, Inc. ............................................... 490,625
100,000 a Sun Healthcare Group, Inc. ................................................... 1,350,000
125,000 U.S. Healthcare, Inc. ........................................................ 5,812,500
-------------
17,381,250
-------------
Household Products 1.4%
60,000 Proctor & Gamble Co. ......................................................... 4,980,000
-------------
Insurance 4.3%
130,000 Leucadia National Corp. ...................................................... 3,250,000
80,000 Prudential Reinsurance Holdings, Inc. ........................................ 1,870,000
125,000 a Risk Capital Holdings, Inc. .................................................. 2,921,875
Insurance (cont.)
70,000 The PMI Group, Inc. .......................................................... $ 3,167,500
60,000 Travelers Group, Inc. ........................................................ 3,772,500
-------------
14,981,875
-------------
Lodging 1.0%
200,000 a Red Lion Hotels, Inc. ........................................................ 3,500,000
-------------
Machinery 1.3%
125,000 Roper Industries, Inc. ....................................................... 4,593,750
-------------
Mining 0.6%
75,000 Barrick Gold Corp. ........................................................... 1,978,125
-------------
Multiform Industries 1.1%
125,000 Pittston Services Group....................................................... 3,921,875
-------------
Natural Gas, Diversified 1.3%
100,000 Williams Cos., Inc. .......................................................... 4,387,500
-------------
Office/Business Equipment 1.8%
45,000 Xerox Corp. .................................................................. 6,165,000
-------------
Oil & Gas Exploration 3.2%
125,000 a Barrett Resources Corp. ...................................................... 3,671,875
190,300 Enron Oil & Gas Co. .......................................................... 4,567,200
50,000 Parker & Parsley Petroleum Co. ............................................... 1,100,000
75,000 a Union Pacific Resources Group, Inc. .......................................... 1,903,125
-------------
11,242,200
-------------
Oil Refiners 0.9%
125,000 Ultramar Corp. ............................................................... 3,218,750
-------------
Petroleum 5.0%
70,000 Chevron Corp. ................................................................ 3,675,000
35,000 Mobil Corp. .................................................................. 3,920,000
115,000 Repsol, S.A., ADR............................................................. 3,780,625
275,000 YPF, Sociedad Anonima, ADR.................................................... 5,946,875
-------------
17,322,500
-------------
Real Estate Investment Trusts 1.4%
175,000 FelCor Suite Hotels, Inc. .................................................... 4,856,250
-------------
Recreational Products 1.5%
225,000 Callaway Golf Co. ............................................................ 5,090,625
-------------
Retail, Special Lines 0.7%
125,000 a Borders Group, Inc. .......................................................... 2,312,500
-------------
Retail Stores 0.3%
75,000 Intimate Brands, Inc. ........................................................ 1,125,000
-------------
Semiconductors 7.3%
38,500 AVX Corp. .................................................................... $ 1,020,250
160,000 Intel Corp.................................................................... 9,080,000
350,000 a National Semiconductor Corp. ................................................. 7,787,500
125,000 a SGS-Thomson Microelectronics, Inc., ADR....................................... 5,078,125
80,000 a Xilinx, Inc. ................................................................. 2,440,000
-------------
25,405,875
-------------
Shoes 1.6%
80,000 Nike, Inc., Class B........................................................... 5,570,000
-------------
Telecommunications 9.9%
125,000 a AirTouch Communications, Inc. ................................................ 3,531,250
60,000 AT&T Corp. ................................................................... 3,885,000
100,000 a DSC Communications Corp. ..................................................... 3,687,500
325,000 ECI Telecommunications, Ltd. ................................................. 7,414,063
175,000 Ericsson, (L.M.) Telephone Co., ADR........................................... 3,412,500
175,000 GTE Corp. .................................................................... 7,700,000
200,000 a Tekelec....................................................................... 2,100,000
75,000 a Tellabs, Inc. ................................................................ 2,775,000
-------------
34,505,313
-------------
Tobacco 2.0%
75,000 Philip Morris Cos., Inc. ..................................................... 6,787,500
-------------
Toiletries & Cosmetics 1.7%
45,000 Gillette Co. ................................................................. 2,345,625
100,000 a Estee Lauder Cos., Class A.................................................... 3,487,500
-------------
5,833,125
-------------
Toys & School Supplies 1.3%
150,000 Mattel, Inc. ................................................................. 4,612,500
-------------
Transportation 0.9%
135,000 Southwest Airlines Co. ....................................................... 3,138,750
-------------
Utilities 6.0%
225,000 a AES Corp. .................................................................... 5,371,875
225,000 Pacificorp.................................................................... 4,781,250
175,000 Pinnacle West Capital Corp. .................................................. 5,031,250
225,000 Teco Energy, Inc. ............................................................ 5,765,625
-------------
20,950,000
-------------
Total Common Stocks (Cost $265,287,324)................................. 327,282,410
-------------
Preferred Stocks 1.7%
300,000 News Corp., pfd., ADR (Cost $5,315,125)....................................... 5,775,000
-------------
Total Common Stocks and Preferred Stocks (Cost $270,602,449)............ 333,057,410
-------------
Bonds 1.0%
$ 2,900,000 d Altera Corp., sub. notes, 5.75%, 06/15/02 (Cost $2,900,000)................... $ 3,349,500
-------------
Total Long Term Investments (Cost $273,502,449)......................... 336,406,910
-------------
11,763,449 b Receivables from Repurchase Agreements 3.5%
c Joint Repurchase Agreement, 5.745%, 1/2/96 (Maturity Value $12,251,895)
(Cost $12,244,079)........................................................... 12,244,079
Bear Stearns & Co., Inc. (Maturity Value $1,864,902)
Collateral: U.S. Treasury Notes, 5.75% - 8.875%, 2/29/96 - 08/31/00
Daiwa Securities America, Inc. (Maturity Value $1,062,483)
Collateral: U.S. Treasury Bills, 08/22/96
U.S. Treasury Notes, 5.125% - 6.25%, 08/31/96 - 06/30/98
Donaldson, Lufkin & Jenrette Securities Corp. (Maturity Value $1,864,902)
Collateral: U.S. Treasury Notes, 5.125% - 8.75%, 03/31/97 - 11/30/99
Fuji Government Securities (Maturity Value $1,864,902)
Collateral: U.S. Treasury Notes, 7.50%, 12/31/96 - 10/31/99
Lehman Brothers, Inc. (Maturity Value $1,864,902)
Collateral: U.S. Treasury Notes, 5.75% - 8.75%, 09/30/97 - 09/30/00
SBC Capital Markets, Inc. (Maturity Value $1,864,902)
Collateral: U.S. Treasury Notes, 7.50%, 10/31/99
UBS Securities, Inc. (Maturity Value $1,864,902)
Collateral: U.S. Treasury Notes, 6.75% - 7.75%, 04/30/97 - 01/31/00
-------------
Total Investments (Cost $285,746,528) 100.4%....................... 348,650,989
Liabilities in Excess of Other Assets, Net (0.4%).................. (1,233,607)
-------------
Net Assets 100%.................................................... $347,417,382
=============
At December 31, 1995, the net unrealized appreciation based on the cost of
investments for income tax purposes of $286,276,344 was as follows:
Aggregate gross unrealized appreciation for all investments in which there
was an excess of value over tax cost....................................... $ 73,010,705
Aggregate gross unrealized depreciation for all investments in which there
was an excess of tax cost over value....................................... (10,636,060)
-------------
Net unrealized appreciation ................................................ $ 62,374,645
=============
aNon-income producing.
bFace amount for repurchase agreements is for the underlying collateral.
cSee Note 1(e) regarding joint repurchase agreement.
dSee Note 6 regarding Rule 144A securities.
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
FRANKLIN EQUITY FUND
Financial Statements
Statement of Assets and Liabilities
December 31, 1995 (unaudited)
Assets:
<S> <C>
Investments in securities, at value (identified cost $273,502,449).............................. $336,406,910
Receivables from repurchase agreements, at value and cost....................................... 12,244,079
Cash............................................................................................ 26,000
Receivables:
Dividends and interest......................................................................... 430,776
Capital shares sold............................................................................ 197,316
Prepaid expenses................................................................................ 11,595
-------------
Total assets............................................................................... 349,316,676
-------------
Liabilities:
Payables:
Investment securities purchased................................................................ 1,406,113
Capital shares repurchased..................................................................... 201,992
Management fees................................................................................ 151,134
Distribution fees.............................................................................. 109,569
Shareholder servicing costs.................................................................... 29,695
Accrued expenses and other liabilities.......................................................... 791
-------------
Total liabilities.......................................................................... 1,899,294
-------------
Net assets, at value............................................................................. $347,417,382
=============
Net assets consist of:
Accumulated distributions in excess of net investment income.................................... $(33,686)
Net unrealized appreciation on investments...................................................... 62,904,461
Undistributed net realized gain................................................................. 4,422,601
Class I capital shares.......................................................................... 278,160,079
Class II capital shares......................................................................... 1,963,927
-------------
Net assets, at value............................................................................. $347,417,382
=============
Net asset value per share for Class I*
($345,467,717 / 46,172,097 shares outstanding).................................................. $7.48
=============
Net asset value per share for Class II*
($1,949,665 / 261,143 shares outstanding)....................................................... $7.47
=============
</TABLE>
*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.
<TABLE>
<CAPTION>
FRANKLIN EQUITY FUND
Financial Statements (cont.)
Statement of Operations
for the six months ended December 31, 1995 (unaudited)
Investment income:
<S> <C> <C>
Dividends............................................................................. $2,215,250
Interest.............................................................................. 713,300
-------------
Total income..................................................................... $ 2,928,550
-------------
Expenses:
Management fees (Note 5).............................................................. 884,454
Distribution fees - Class I (Note 5)................................................. 313,399
Distribution fees - Class II (Note 5)................................................ 5,984
Shareholder servicing costs (Note 5)................................................. 190,293
Reports to shareholders............................................................... 111,178
Registration fees..................................................................... 20,075
Professional fees..................................................................... 17,642
Custodian fees........................................................................ 12,638
Directors' fees and expenses.......................................................... 11,087
Other................................................................................. 9,270
-------------
Total expenses................................................................... 1,576,020
-------------
Net investment income.......................................................... 1,352,530
-------------
Realized and unrealized gain from investments:
Net realized gain from investments.................................................... 10,479,093
Net unrealized appreciation on investments............................................ 20,466,367
-------------
Net realized and unrealized gain on investments........................................ 30,945,460
-------------
Net increase in net assets resulting from operations................................... $32,297,990
=============
</TABLE>
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 six months ended December 31, 1995 (unaudited)
and the year ended June 30, 1995
<TABLE>
<CAPTION>
Six Months Year
Ended Ended
December 31, 1995 June 30, 1995
------------ ----------
Increase in net assets:
Operations:
<S> <C> <C>
Net investment income......................................................... $1,352,530 $3,481,376
Net realized gain from security transactions (Note 1)......................... 10,479,093 14,019,016
Net unrealized appreciation on investments.................................... 20,466,367 44,784,881
------------ ----------
Net increase in net assets resulting from operations...................... 32,297,990 62,285,273
Distributions to shareholders from undistributed net investment income:
Class I........................................................................ (1,519,771) (3,378,248)
Class II....................................................................... (4,449) (594)
Distributions to shareholders from undistributed net capital gain:
Class I........................................................................ (19,948,499) (26,013,031)
Class II....................................................................... (112,839) --
Distributions to shareholders in excess of net investment income:
Class I (Note 1)............................................................... (33,497) --
Class II (Note 1).............................................................. (189) --
Increase in net assets from capital share transactions (Note 3 )................ 18,933,117 5,031,719
------------ ----------
Net increase in net assets................................................ 29,611,863 37,925,119
Net assets:
Beginning of period............................................................ 317,805,519 279,880,400
------------ ----------
End of period (including accumulated distributions in excess of
net investment income of $(33,686) at 12/31/95 and
undistributed net investment income of $171,690 at 6/30/95)................... $347,417,382 $317,805,519
============ ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
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 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 for which market quotations are readily available are valued at
the last sale price or, if there is no sale price, within the range of the most
recent quoted bid and asked prices. Other securities are valued based on a
variety of factors, including yield, risk, maturity, trade activity and recent
developments related to the 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. The Fund may utilize a pricing service, bank or broker/dealer
experienced in such matters to perform any of the pricing functions, under
procedures approved by the Board of Directors (the Board). Securities for which
market quotations are not available are valued in accordance with procedures
established by the Board.
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.
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.
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.
The distributions in excess of net investment income are not expected to result
in a tax-basis return of capital as of the Fund's fiscal year-end.
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. A repurchase
agreement is accounted for as a loan by the Fund, to the seller, collateralized
by underlying U.S. government securities, which are delivered to the Fund's
custodian. The market value, including accrued interest, of the initial
collateralization is required to be at least 102% of the dollar amount invested
by the Fund, with the value of the underlying securities marked to market daily
to maintain coverage of at least 100%. At December 31, 1995, all outstanding
repurchase agreements held by the Fund had been entered into on December 29,
1995.
2. DISTRIBUTIONS
At June 30, 1995, for tax purposes, the Fund had accumulated net realized 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 December 31,
1995 by $529,816.
3. CAPITAL STOCK
At December 31, 1995, there were 5,000,000,000 shares of no par value capital
stock authorized, of which 2,000,000,000 each were allocated to Class I and
Class II shares respectively, and 1,000,000,000 were reserved for future
allocation. Transactions in the Fund's capital stock were as follows:
<TABLE>
<CAPTION>
Class I Shares:
Six Months Ended Year Ended
December 31, 1995 June 30, 1995
---------------------- ----------------------
Shares Amount Shares Amount
--------- ----------- --------- -----------
<S> <C> <C> <C> <C>
Shares sold...................................... 879,500 $ 6,721,465 1,665,660 $ 10,894,657
Shares issued in reinvestment of distributions... 2,682,219 19,821,633 4,466,261 26,959,491
Shares redeemed.................................. (2,129,771) (16,282,180) (5,063,063) (33,101,575)
Changes from exercise of exchange privilege:
Shares sold..................................... 3,999,973 30,536,208 22,173,803 145,996,205
Shares redeemed................................. (3,078,334) (23,496,598) (22,281,525) (146,048,397)
--------- ----------- --------- -----------
Net increase..................................... 2,353,587 $ 17,300,528 961,136 $ 4,700,381
========= =========== ========= ===========
Class II Shares:
Six Months Ended Period
December 31, 1995 May 1, 1995 to June 30, 1995
---------------------- ----------------------
Shares Amount Shares Amount
--------- ----------- --------- -----------
Shares sold...................................... 208,974 $1,600,270 42,125 $295,488
Shares issued in reinvestment of distributions... 12,932 95,437 86 594
Shares redeemed.................................. (3,630) (27,943) -- --
Changes from exercise of exchange privilege:
Shares sold..................................... 12,025 91,044 5,964 42,110
Shares redeemed................................. (16,397) (126,219) (936) (6,854)
--------- ----------- --------- -----------
Net increase .................................... 213,904 $1,632,589 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 six months ended December 31, 1995 aggregated $95,403,842
and $89,610,673, respectively.
5. TRANSACTIONS WITH AFFILIATES AND RELATED PARTIES
Under the terms of a management agreement, Franklin Advisers, Inc., (Advisers)
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 the 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. For the six months ended December 31,
1995, the Fund's expenses did not exceed these limitations.
Pursuant to a shareholder service agreement with Franklin/Templeton Investor
Services, Inc., (Investor Services) the Fund pays costs on a per shareholder
account basis. Such costs incurred for the six months ended December 31, 1995
aggregated $190,293, all of which was paid to Investor Services.
Under the terms of distribution plans pursuant to Rule 12b-1 of the Investment
Company Act of 1940 (the Plans), which were effective May 1, 1994 for Class I
shares and May 1, 1995 for Class II shares, Class I and II shares will reimburse
Franklin/Templeton Distributors, Inc. ("Distributors") in an amount up to a
maximum of 0.25% per annum for Class I and 1.00% per annum for Class II of the
average daily net assets of such class, for costs incurred in the promotion,
offering and marketing of the Class I and II shares. Fees incurred under the
Plans aggregated $319,383 for the six months ended December 31, 1995.
In its capacity as underwriter for the shares of the Fund, Distributors received
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. Distributors may also make payments, out
of its own resources, to dealers for certain sales of Class I and Class II
shares. Commissions received by Distributors and the amounts paid to other
dealers for the six months ended December 31, 1995 were as follows:
Class I Class II
------- ------
Total commissions received............ $258,908 $16,462
======= ======
Paid to other dealers................. $230,949 $28,066
======= ======
Distributors also received contingent deferred sales charges relating to
transactions in the Fund in the amount of $129 for Class II.
Certain officers and directors of the Fund are also officers and/or directors of
Distributors, Advisers, and Investor Services, 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 Fund values these
securities as disclosed in Note 1. At December 31, 1995 the Fund held 144A
securities with a value aggregating $8,034,647 representing 2.3% 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 six months ended December 31, 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 102% 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 $5,681 for the six months ended December 31, 1995, and, as of that
date, there were no loaned securities in the Fund.
<TABLE>
<CAPTION>
8. FINANCIAL HIGHLIGHTS
Selected data for each share of capital stock outstanding throughout each period
are as follows:
Class I Shares:
Six Months
Year Ended June 30,
Ended _____________________________________
12/31/95 1995 1994 1993 1992 1991
-------- ------- ------- ------- ------- -------
Per Share Operating Performance
<S> <C> <C> <C> <C> <C> <C>
Net asset value at beginning of period............ $7.24 $6.53 $7.25 $7.12 $7.36 $7.17
-------- ------- ------- ------- ------- -------
Net investment income............................. .03 .08 .10 .12 .14 .15
Net realized and unrealized gain on securities.... .708 1.329 .107 .557 .089 .190
-------- ------- ------- ------- ------- -------
Total from investment operations.................. .738 1.409 .207 .677 .229 .340
-------- ------- ------- ------- ------- -------
Less distributions:
From net investment income....................... (.035) (.079) (.103) (.119) (.142) (.150)
From capital gains............................... (.462) (.620) (.824) (.428) (.327) --
In excess of net investment income............... (.001) -- -- -- -- --
-------- ------- ------- ------- ------- -------
Total distributions............................... (.498) (.699) (.927) (.547) (.469) (.150)
-------- ------- ------- ------- ------- -------
Net asset value at end of period.................. $7.48 $7.24 $6.53 $7.25 $7.12 $7.36
======== ======= ======= ======= ======= =======
Total Return**.................................... 10.28% 23.78% 2.28% 9.53% 3.36% 4.87%
Ratios/Supplemental Data
Net assets at end of year (in 000's).............. $345,468 $317,463 $279,880 $345,755 $364,826 $374,993
Ratio of expenses to average net assets........... .94%* .95% .79% .69% .70% .69%
Ratio of net investment income to average
net assets....................................... .81%* 1.21% 1.27% 1.67% 1.86% 2.29%
Portfolio turnover rate........................... 28.52% 86.20% 95.18% 51.12% 49.19% 56.76%
Average commission rate***........................ .0555 -- -- -- -- --
8. FINANCIAL HIGHLIGHTS (cont.)
Class II Shares: Six Months
Ended May 1, 1995 to
12/31/95 June 30, 1995
-------- -----------
Per Share Operating Performance
<S> <C> <C>
Net asset value at beginning of period................................................ $7.24 $6.65
-------- -----------
Net investment income................................................................. .01 .01
Net realized and unrealized gain on securities........................................ .701 .615
-------- -----------
Total from investment operations...................................................... .711 .625
-------- -----------
Less distributions
From net investment income........................................................... (.018) (.035)
From capital gains................................................................... (.462) --
In excess of net investment income................................................... (.001) --
-------- -----------
Total distributions................................................................... (.481) (.035)
-------- -----------
Net asset value at end of period...................................................... $7.47 $7.24
======== ===========
Total Return**........................................................................ 9.75% 9.42%
Ratios/Supplemental Data
Net assets at end of year (in 000's).................................................. $1,950 $342
Ratio of expenses to average net assets............................................... 1.76%* 1.77%*
Ratio of net investment income to average net assets.................................. .65%* .74%*
Portfolio turnover rate............................................................... 28.52% 86.20%
Average commission rate***............................................................ .0555 --
*Annualized.
**Total return measures the change in value of an investment over the periods
indicated. It is not annualized. It does not include the maximum front-end 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.
***Represents the average broker commission rate per share paid by the Fund in
connection with the execution of the Fund's portfolio transactions in equity
securities.
</TABLE>
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 portfolio breakdown on December
31, 1995 as a percentage of the fund's total net assets.
<TABLE>
<CAPTION>
Franklin Equity Fund
Portfolio Breakdown on 12/31/95
<S> <C>
Transportation 0.89%
Health Care 7.03%
Electronic Technology 17.10%
Commercial & Industrial Services 3.27%
Retail & Consumer 18.77%
Utilities 10.08%
Process Industries & Manufacturing 6.12%
Technology Services 4.30%
Semiconductors 8.93%
Financials 10.56%
Minerals 9.71%
Short-Term Obligations & Other Net Assets 3.24%
</TABLE>
