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, 1996
Dear Shareholder,
We are pleased to bring you the 63rd annual report for the Franklin Equity Fund,
which covers the fiscal year ended June 30, 1996. This reporting period can be
viewed as two distinct periods with differing economic characteristics. During
the second half of 1995, U.S. gross domestic product (GDP) grew at a sluggish
annual rate of only 2.0%. However, in the first half of 1996, GDP rose at an
unexpectedly higher rate of about 3.0%. Within this environment, the fund's
Class I shares provided a one-year total return of +22.16%, as shown in the
Performance Summary on page 6.
Based on expectations that economic growth will slow during the second half of
1996, we increased our exposure to companies that we think should generate
growth in a weak economy and decreased our exposure to more economically
sensitive companies. Examples of "stable growth" companies in which we invested
during the fiscal year are Pepsico, Callaway Golf, Estee Lauder, and Sterling
Software. These companies produce relatively inexpensive products that should
continue to sell well even in a slow growth environment.
Telecommunications is another sector which we believe will continue to perform
well. The deregulation of this industry should encourage new forms of
communications, computing, and entertainment. Local telephone, long distance
telephone, and cable television companies will compete to provide these consumer
services. Accordingly, we have maintained or added selective investments in
computing and communications infrastructure companies such as Cisco Systems,
Glenayre Technologies, Newbridge Networks, and Tellabs. These companies should
also profit from the recent rapid growth of the internet and wide-area
networking.
GRAPHIC MATERIAL 1 OMITTED - SEE APPENDIX AT END OF DOCUMENT
We also increased our holdings in the financial sector. When interest rates
increased during the first half of 1996, stocks of several financial service
companies suffered setbacks. Believing that this created investment
opportunities, we increased our overall weighting in this sector from 9.1% on
June 30, 1995 to 11.2% on June 30, 1996. American International Group, the
world's fourth largest property and casualty company, is a good example of one
of these purchases. On June 30, 1996, its price/earnings ratio was below that of
the overall market (as measured by the Standard & Poor's 500 Stock Index(R)) and
we believe that its earnings growth over the next few years should exceed the
average earnings growth rate of the market.
Despite its high volatility, we still favor the semiconductor group as an area
of investment for the long term. In our opinion, worldwide semiconductor sales
may quadruple over the next ten years, which should result in tremendous
earnings growth for the best-positioned, well-managed companies in this sector.
During the year under review, we focused on companies which have proprietary
products, adding Linear Technology and Maxim Integrated Products to the
portfolio, while reducing our exposure to commodity-oriented companies, which
recently experienced extreme pricing pressure on their products.
Franklin Equity Fund
Top 10 Holdings on 6/30/96
As a Percentage of Total Net Assets
Company, % of Total
Industry Net Assets
1. Intel Corp. 3.17%
Semiconductors
2. Oracle Corp. 1.99%
Technology Services
3. Cisco Systems, Inc. 1.91%
Electronic Technology
4. Philip Morris Cos., Inc. 1.82%
Consumer Non-Durables
5. YPF - Sociedad Anonima, ADR 1.82%
Energy/Minerals
6. Nike, Inc. 1.80%
Consumer Non-Durables
7. Newbridge Networks Corp. 1.77%
Electronic Technology
8. Xerox Corp. 1.73%
Producer Manufacturing
9. FelCor Suite Hotels, Inc. 1.65%
Finance
10. News Corp., pfd., ADR 1.63%
Consumer Services
For a detailed listing of portfolio holdings, see page 10 of this report.
Throughout the reporting period, we remained positive about the prospects for
worldwide growth in the energy sector. The companies we own appear to be
attractively valued with good prospects for price appreciation from current
levels. For example, based on their closing price at the end of the period, two
of our holdings, Ultramar and Mobil, were yielding high dividends relative to
the average dividend of the market. This "relative dividend yield" methodology
has often proven to be a good measure of value for such companies.
In 1994, we purchased shares in several electric utilities companies after their
stock prices had declined sharply. During 1995, prices of many of these shares
rose, and in some cases, more than doubled or tripled the normal performance of
utility stocks. Concluding that some of these stocks had become overvalued, we
reduced our exposure to them. Over the past year, the percentage of our total
net assets invested in these stocks declined from 10.6% on June 30, 1995, to
7.8% on June 30, 1996.
Looking forward, our overall long-term outlook for the U.S. stock market remains
bullish for a variety of reasons. First, net inflows into equity mutual funds
during the first half of 1996 exceeded the amount invested in any previous year,
and in our opinion, the demographics of the aging "baby-boom" generation should
continue to motivate retirement investing. Second, major world economies are
generally in either a recovery or growth phase, benefiting many multinational
firms that sell products or services abroad. And third, many domestic firms are
improving profitability and proving to be highly productive on a worldwide
basis.
We believe the Franklin Equity Fund's strategy of balancing growth and value
investing is a critical factor for achieving success in the equity markets. In
our opinion, this integrated approach to security selection should provide
shareholders with exposure to U.S. and foreign equity markets, and produce above
average returns over the long term, despite any short-term market fluctuations.
This discussion reflects the strategies we employed for the fund during the past
fiscal year, 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
as new circumstances 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
The Franklin Equity Fund Class I shares reported a cumulative total return of
+22.16% for the one-year period ended June 30, 1996. 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 to
the right illustrates, the Franklin Equity Fund's Class I shares delivered a
cumulative total return of +162.49% and an average annual total return of +9.62%
over the 10-year period ended June 30, 1996.
During the reporting period, Class I shareholders received distributions
totaling 6.2 cents ($0.062) 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 by $1.02, from $7.24 on June 30, 1995 to $8.26 on June 30, 1996. 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
Class I
Periods ended 6/30/96
One-Year Five-Year Ten-Year
- --------------------------------------------------------------------------------
Cumulative
Total Return1 22.16% 75.43% 162.49%
Average Annual
Total Return2 16.68% 10.86% 9.62%
Value of $10,000
Investment3 $11,668 $16,746 $25,064
- --------------------------------------------------------------------------------
1. Cumulative total return measures the change in value of an investment over
the periods indicated and does not include the maximum 4.5% initial sales
charge. 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 maximum 4.5% initial
sales charge. See Note below.
3. These figures represent the value of a hypothetical $10,000 investment in the
fund over the periods indicated and include the maximum 4.5% initial sales
charge. 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-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.
The graph to the right illustrates that over the past ten years, the Franklin
Equity Fund Class I shares underperformed the unmanaged Standard & Poor's 500
Stock Index (S&P 500(R)). Comparing a mutual fund with an unmanaged index,
however, is never an apples-to-apples comparison. Performance figures reported
by a general market index do not include various fees, sales charges and
operating expenses included in the fund's performance figures. If the fund's
costs had been applied to the index, the index's performance would have been
lower. Please remember that unlike indices, mutual funds are never fully
invested because they must have cash on hand to redeem shares. Also, an index is
simply a measure of performance and one cannot invest in an index directly. Past
performance is not predictive of future results.
GRAPHIC MATERIAL 2 OMITTED - SEE APPENDIX AT END OF DOCUMENT
Performance Summary
Class II
The Franklin Equity Fund Class II shares reported a cumulative total return of
+20.94% for the one-year period ended June 30, 1996. 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 2.0 cents ($0.02) 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 by $0.99, from $7.24 on June 30, 1995 to $8.23 on June 30, 1996. 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
Class II
Periods ended 6/30/96
Since
Inception
One-Year (5/1/95)
- --------------------------------------------------------------------------------
Cumulative
Total Return1 20.94% 32.51%
Average Annual
Total Return2 18.79% 25.26%
Value of $10,000
Investment3 $11,879 $13,014
- --------------------------------------------------------------------------------
1. Cumulative total return measures the change in value of an investment over
the periods indicated and does not include 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 CDSC
initial sales charge. See Note below.
3. These figures represent the value of a hypothetical $10,000 investment in the
Fund over the periods indicated and include the maximum CDSC initial sales
charge. See Note below.
Note: 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.
The graph to the right illustrates that since their inception on May 1, 1995,
the Franklin Equity Fund Class II shares underperformed the unmanaged Standard &
Poor's 500 Stock Index (S&P 500(R)). Comparing a mutual fund with an unmanaged
index, however, is never an apples-to-apples comparison. Performance figures
reported by a general market index do not include various fees, sales charges
and operating expenses included in the fund's performance figures. If the fund's
costs had been applied to the index, the index's performance would have been
lower. Please remember that unlike indices, mutual funds are never fully
invested because they must have cash on hand to redeem shares.
GRAPHIC MATERIAL 3 OMITTED - SEE APPENDIX AT END OF DOCUMENT
Also, an index is simply a measure of performance and one cannot invest in an
index directly. Past performance is not predictive of future results.
<TABLE>
<CAPTION>
FRANKLIN EQUITY FUND
Statement of Investments in Securities and Net Assets, June 30, 1996
Value
Shares (Note 1)
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Common Stocks 89.7%
Commercial Services 1.5%
120,000 Omnicom Group, Inc.............................................................. $ 5,580,000
-----------
Consumer Durables 3.8%
150,000 Callaway Golf Co. .............................................................. 4,987,500
150,000 Lennar Corp. ................................................................... 3,750,000
187,500 Mattel, Inc. ................................................................... 5,367,188
-----------
14,104,688
-----------
Consumer Non-Durables 9.6%
100,000 Estee Lauder Cos., Class A...................................................... 4,225,000
65,000 Gillette Co. ................................................................... 4,054,375
65,000 Nike, Inc., Class B............................................................. 6,678,750
120,000 Pepsico, Inc. .................................................................. 4,245,000
65,000 Philip Morris Cos., Inc. ....................................................... 6,760,000
60,000 Proctor & Gamble Co. ........................................................... 5,437,500
125,000 Sara Lee Corp. ................................................................. 4,046,875
-----------
35,447,500
-----------
Consumer Services 4.8%
85,000 a CUC International, Inc. ........................................................ 3,017,500
137,812 Gaylord Entertainment Co. ...................................................... 3,893,203
254,900 a Host Marriott Services Corp. ................................................... 1,848,025
212,700 a Red Lion Hotels, Inc. .......................................................... 4,466,700
150,000 TCA Cable TV, Inc. ............................................................. 4,537,500
-----------
17,762,928
-----------
Electronic Technology 16.2%
50,000 a 3Com Corp. ..................................................................... 2,287,500
50,000 a Bay Networks, Inc. ............................................................. 1,287,500
75,000 a Cabletron Systems, Inc. ........................................................ 5,146,875
125,000 a Cisco Systems, Inc. ............................................................ 7,078,125
75,000 a Cognex Corp. ................................................................... 1,209,375
150,000 ECI Telecommunications, Ltd. .................................................. 3,487,500
75,000 Ericsson, (L.M.) Telephone Co., ADR............................................. 1,612,500
100,000 a Glenayre Technologies, Inc. ................................................... 5,000,000
100,000 a Komag, Inc. .................................................................... 2,637,500
50,000 Lockheed Martin Corp. .......................................................... 4,200,000
35,000 Motorola, Inc. ................................................................. 2,200,625
100,000 a Newbridge Networks Corp. ....................................................... 6,550,000
50,000 Nokia Corp., ADR ............................................................... 1,850,000
40,000 Raytheon Co. ................................................................... 2,065,000
225,000 a Silicon Graphics, Inc. ......................................................... 5,400,000
Electronic Technology (cont.)
225,000 a Tekelec......................................................................... $ 2,953,125
75,000 a Tellabs, Inc. ................................................................. 5,015,625
-----------
59,981,250
-----------
Energy/Minerals 8.1%
175,000 a Barrett Resources Corp. ........................................................ 5,206,250
190,300 Enron Oil & Gas Co. ............................................................ 5,304,613
35,000 Mobil Corp. .................................................................... 3,924,375
150,000 Repsol, S.A., ADR............................................................... 5,212,500
125,000 Ultramar Corp. ................................................................. 3,625,000
300,000 YPF, Sociedad Anonima, ADR...................................................... 6,750,000
-----------
30,022,738
-----------
Finance 11.2%
60,000 American International Group, Inc. ............................................. 5,917,500
100,000 a Associates First Capital Corp. ................................................. 3,762,500
65,000 Citicorp........................................................................ 5,370,625
200,000 FelCor Suite Hotels, Inc. ...................................................... 6,100,000
75,000 First USA, Inc. ............................................................... 4,125,000
130,000 Leucadia National Corp. ........................................................ 3,185,000
70,000 PMI Group, Inc. ............................................................... 2,975,000
125,000 a Risk Capital Holdings, Inc. .................................................... 2,453,125
127,900 Travelers/Aetna Property Casualty Corp., Class A................................ 3,629,163
90,000 Travelers Group, Inc. .......................................................... 4,106,250
-----------
41,624,163
-----------
Health Services 3.6%
80,000 HBO & Co. ...................................................................... 5,420,000
75,000 a Oxford Health Plans, Inc. ...................................................... 3,084,375
75,000 a PacifiCare Health Systems, Inc., Class B........................................ 5,081,250
-----------
13,585,625
-----------
Health Technology 2.0%
70,000 American Home Products Corp. ................................................... 4,208,750
35,000 Bristol-Myers Squibb Co. ....................................................... 3,150,000
-----------
7,358,750
-----------
Industrial Services 1.5%
200,000 a AES Corp. ...................................................................... 5,650,000
-----------
Non-Energy Minerals .3%
148,000 a Asia Pacific Resources International Holdings, Ltd. ............................ 1,110,000
-----------
Process Industries 1.4%
175,000 Pittston Brink's Group ......................................................... $ 5,096,875
-----------
Producer Manufacturing 2.8%
80,000 Roper Industries, Inc. ......................................................... 3,900,000
120,000 Xerox Corp. .................................................................... 6,420,000
-----------
10,320,000
-----------
Retail Trade 1.1%
125,000 a Borders Group, Inc. ............................................................ 4,031,250
-----------
Semiconductors 7.8%
60,000 a Applied Materials, Inc. ........................................................ 1,830,000
300,000 a Exar Corp. ..................................................................... 3,900,000
160,000 Intel Corp. .................................................................... 11,750,000
75,000 Linear Technology Corp. ........................................................ 2,250,000
25,000 a Maxim Integrated Products, Inc. ................................................ 682,813
100,000 a SGS-Thomson Microelectronics, Inc., ADR......................................... 3,587,500
150,000 a Xilinx, Inc. ................................................................... 4,762,500
-----------
28,762,813
-----------
Technology Services 4.0%
100,000 Adobe Systems, Inc. ............................................................ 3,587,500
187,500 a Oracle Corp. ................................................................... 7,394,531
50,000 a Sterling Software, Inc. ........................................................ 3,850,000
-----------
14,832,031
-----------
Transportation 2.2%
200,000 Pittston Burlington Group....................................................... 4,325,000
135,000 Southwest Airlines Co. ......................................................... 3,931,875
-----------
8,256,875
-----------
Utilities 7.8%
125,000 a AirTouch Communications, Inc. .................................................. 3,531,250
50,000 AT&T Corp. ..................................................................... 3,100,000
125,000 GTE Corp. ...................................................................... 5,593,750
200,000 Pacificorp ..................................................................... 4,450,000
200,000 Pacific Gas & Electric Co. ..................................................... 4,650,000
150,000 Teco Energy, Inc. .............................................................. 3,787,500
75,000 Williams Cos., Inc. ............................................................ 3,712,500
-----------
28,825,000
-----------
Total Common Stocks (Cost $250,283,216)................................... 332,352,486
-----------
Preferred Stock 1.6%...........................................................
300,000 News Corp., pfd., ADR (Cost $5,315,125)......................................... $ 6,037,500
-----------
Face
Amount
--------
Convertible Bonds 1.0%
$ 3,625,000 c Altera Corp., sub. notes, 5.75%, 06/15/02 (Cost $3,699,313)..................... 3,661,248
-----------
Total Long Term Investments (Cost $259,297,654)........................... 342,051,234
-----------
20,395,845 b Receivables from Repurchase Agreements 5.5%
Joint Repurchase Agreement, 5.439%, 07/1/96, (Maturity Value $20,499,234)
(Cost $20,489,946)
Chase Securities, Inc., (Maturity Value $2,946,045)
Collateral: U.S. Treasury Notes, 5.375%, 11/30/97
Daiwa Securities America, Inc., (Maturity Value $2,946,045)
Collateral: U.S. Treasury Notes, 5.25% - 8.875%, 12/31/97 - 08/31/00
Donaldson, Lufkin & Jenrette Securities Corp., (Maturity Value $2,822,964)
Collateral: U.S. Treasury Bills, 05/29/97
U.S. Treasury Notes, 5.125% - 6.75%, 07/31/97 - 07/31/00
Fuji Securities, Inc., (Maturity Value $2,946,045)
Collateral: U.S. Treasury Notes, 5.50% - 8.875%, 07/31/97 - 02/15/99
Lehman Brothers, Inc., (Maturity Value $2,946,045)
Collateral: U.S. Treasury Notes, 5.625% - 11.75%, 09/30/99 - 02/15/01
SBC Warburg, Inc., (Maturity Value $2,946,045)
Collateral: U.S. Treasury Notes, 5.75%, 09/30/97
UBS Securities, L.L.C., (Maturity Value $2,946,045)
Collateral: U.S. Treasury Notes, 6.50% - 8.875%, 11/15/98 - 11/30/99......... 20,489,946
-----------
Total Investments (Cost $279,787,600) 97.8%....................... 362,541,180
Other Assets and Liabilities, Net 2.2%............................ 8,268,987
-----------
Net Assets 100%................................................... $370,810,167
===========
At June 30, 1996, the net unrealized appreciation based on the cost of investments
for income tax purposes of $279,847,166 was as follows:
Aggregate gross unrealized appreciation for all investments in which there was an
excess of value over tax cost................................................ $ 89,089,762
Aggregate gross unrealized depreciation for all investments in which there was an
excess of tax cost over value................................................ (6,395,748)
-----------
Net unrealized appreciation................................................... $ 82,694,014
===========
aNon-income producing.
bFace amount for repurchase agreements is for the underlying collateral. See note 1(f) regarding joint repurchase agreement.
cPurchased in a private placement transaction; resale may only be to qualified institutional buyers.
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
FRANKLIN EQUITY FUND
Financial Statements
Statement of Assets and Liabilities
June 30, 1996
Assets:
<S> <C>
Investments in securities, at value (identified cost $259,297,654)............................. $342,051,234
Receivables from repurchase agreements, at value and cost...................................... 20,489,946
Cash........................................................................................... 41,264
Receivables:
Dividends and interest........................................................................ 440,824
Investment securities sold.................................................................... 8,201,067
Capital shares sold........................................................................... 235,502
-----------
Total assets.............................................................................. 371,459,837
-----------
Liabilities:
Payables:
Capital shares repurchased.................................................................... 275,327
Management fees............................................................................... 159,870
Distribution fees............................................................................. 124,122
Shareholder servicing costs................................................................... 37,798
Accrued expenses and other liabilities......................................................... 52,553
-----------
Total liabilities......................................................................... 649,670
-----------
Net assets, at value........................................................................... $370,810,167
===========
Net assets consist of:
Net unrealized appreciation on investments.................................................... $ 82,753,580
Undistributed net realized gain............................................................... 19,641,524
Class I capital shares........................................................................ 264,492,798
Class II capital shares....................................................................... 3,922,265
-----------
Net assets, at value........................................................................... $370,810,167
===========
Class I Shares:
Net assets, at value......................................................................... $366,602,587
===========
Shares outstanding........................................................................... 44,403,465
===========
Net asset value per share*................................................................... $8.26
===========
Maximum offering price per share (100/95.5 of $8.26)......................................... $8.65
===========
Class II Shares:
Net assets, at value......................................................................... $ 4,207,580
===========
Shares outstanding........................................................................... 511,272
===========
Net asset value per share*................................................................... $8.23
===========
Maximum offering price per share (100/99 of $8.23)........................................... $8.31
===========
*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.
</TABLE>
<TABLE>
<CAPTION>
FRANKLIN EQUITY FUND Financial Statements (cont.)
Statement of Operations
for the year ended June 30, 1996
Investment income:
<S> <C>
Dividends...................................................................................... $4,468,166
Interest (Note 1).............................................................................. 1,356,862
-----------
Total income.............................................................................. $ 5,825,028
-----------
Expenses:
Management fees (Note 5)....................................................................... 1,832,299
Distribution fees - Class I (Note 5)........................................................... 667,512
Distribution fees - Class II (Note 5).......................................................... 21,889
Shareholder servicing costs (Note 5)........................................................... 434,125
Reports to shareholders........................................................................ 226,082
Professional fees.............................................................................. 46,967
Registration fees.............................................................................. 41,543
Directors' fees and expenses................................................................... 24,082
Custodian fees................................................................................. 20,389
Other.......................................................................................... 20,182
-----------
Total expenses............................................................................ 3,335,070
-----------
Net investment income.................................................................... 2,489,958
-----------
Realized and unrealized gain from investments:
Net realized gain............................................................................. 25,749,129
Net unrealized appreciation................................................................... 40,315,485
-----------
Net realized and unrealized gain on investments................................................. 66,064,614
-----------
Net increase in net assets resulting from operations............................................ $68,554,572
===========
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
FRANKLIN EQUITY FUND
Financial Statements (cont.)
Statements of Changes in Net Assets
for the years ended June 30, 1996 and 1995
1996 1995
------------ ------------
Increase (decrease) in net assets:
Operations:
<S> <C> <C>
Net investment income......................................................... $ 2,489,958 $ 3,481,376
Net realized gain from security transactions.................................. 25,749,129 14,019,016
Net unrealized appreciation on investments.................................... 40,315,485 44,784,881
------------ ------------
Net increase in net assets resulting from operations...................... 68,554,572 62,285,273
Distributions to shareholders from undistributed net investment income:
Class I........................................................................ (2,720,379) (3,378,248)
Class II....................................................................... (4,684) (594)
Distributions to shareholders from net realized capital gain:
Class I........................................................................ (19,945,149) (26,013,031)
Class II....................................................................... (103,886) --
Increase in net assets from capital share transactions (Note 3)................. 7,224,174 5,031,719
------------ ------------
Net increase in net assets................................................ 53,004,648 37,925,119
Net assets:
Beginning of year.............................................................. 317,805,519 279,880,400
------------ ------------
End of year (including undistributed net investment income of $171,690 - 1995). $370,810,167 $317,805,519
============ ============
The accompanying notes are an integral part of these financial statements.
</TABLE>
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 investment objective of the Fund is capital growth.
The Fund offers two classes of shares, Class I and Class II. Class I shares are
sold with a higher front-end sales charge than Class II shares. Each class of
shares may be subject to a contingent deferred sales charge and 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. 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.
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 and losses differ for financial statement and tax
purposes primarily due to differing treatment of wash sale transactions.
e. Accounting Estimates:
The preparation of the financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the amounts of income and expense during
the reporting period. Actual results could differ from those estimates.
1. SIGNIFICANT ACCOUNTING POLICIES (cont.)
f. Repurchase Agreement:
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 June 30, 1996, all
outstanding repurchase agreements held by the Fund had been entered into on June
28, 1996.
2. DISTRIBUTIONS AND CAPITAL LOSS CARRYOVERS
At June 30, 1996, for tax purposes, the Fund had accumulated net realized gains
of $19,703,038.
For tax purposes, the aggregate cost of securities is higher (and unrealized
appreciation is lower) than for financial reporting purposes at June 30, 1996 by
$59,566.
3. CAPITAL STOCK
At June 30, 1996, there were 5,000,000,000 shares of no par value capital stock
authorized, of which 2,000,000,000 shares each were designated as Class I and
Class II, respectively. On June 18, 1996, the Board approved the designation of
the remaining 1,000,000,000 shares as Class Z. Class Z shares are not yet
available for sale.
<TABLE>
<CAPTION>
Year Ended June 30,
------------------------------------------------------
1996 1995
------------------------ ------------------------
Shares Amount Shares Amount
---------- ---------- ---------- ----------
Class I Shares:
<S> <C> <C> <C> <C>
Shares sold....................................... 10,429,328 $80,970,898 23,839,463 $156,890,862
Shares issued in reinvestment of distributions.... 2,810,022 20,880,395 4,466,261 26,959,491
Shares redeemed................................... (12,654,395) (98,218,044) (27,344,588) (179,149,972)
---------- ---------- ---------- ----------
Net increase...................................... 584,955 $ 3,633,249 961,136 $ 4,700,381
========== ========== ========== ==========
Class II Shares:*
Shares sold....................................... 554,667 $ 4,314,434 48,089 $ 337,598
Shares issued in reinvestment of distributions.... 12,982 95,849 86 594
Shares redeemed................................... (103,616) (819,358) (936) (6,854)
---------- ---------- ---------- ----------
Net increase...................................... 464,033 $ 3,590,925 47,239 $ 331,338
========== ========== ========== ==========
*For the year ended June 30, 1996 and the period May 1, 1995 (effective date) to June 30, 1995.
</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, 1996, aggregated $196,122,851 and
$219,663,470, respectively.
5. TRANSACTIONS WITH AFFILIATES AND RELATED PARTIES
a. Management Agreement:
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 as follows:
Annualized Fee Rate Average Daily Net Assets
------------------- ------------------------
0.625% First $100 million
0.50% Over $100 million, up to and including $250 million
0.45% Over $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 year ended June 30, 1996, the
Fund's expenses did not exceed
these limitations.
b. Shareholder Services Agreement:
Under the terms of a shareholder service agreement with Franklin/Templeton
Investor Services, Inc. (Investor Services), the Fund pays costs on a per
shareholder account basis. Shareholder servicing costs incurred by the Fund for
the year ended June 30, 1996, aggregated $434,125, of which $419,876 was paid to
Investor Services.
c. Distribution Plans and Underwriting Agreement:
Under the terms of distribution plans pursuant to Rule 12b-1 of the Investment
Company Act of 1940 (the Plans), the Fund reimburses 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 Fund's shares. The Plans do not permit nor require payments of excess
costs after termination.
In its capacity as underwriter for the shares of the Fund, Distributors 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. Distributors may also make payments, out
of its own resources, to dealers for certain sales of the Fund's shares.
Commissions received by Distributors and the amounts paid to other dealers, and
any applicable contingent deferred sales charges for the year ended June 30,
1996, were as follows:
Class I Class II
------- --------
Total commissions received...................... $587,143 $35,971
Paid to other dealers........................... $558,082 $54,718
Contingent deferred sales charges............... -- $ 883
5. TRANSACTIONS WITH AFFILIATES AND RELATED PARTIES (cont.)
d. Other Affiliates and Related Party Transactions:
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. LOANS OF PORTFOLIO SECURITIES
During the year ended June 30, 1996, 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 $10,553 for the year ended June 30, 1996.
At June 30, 1996, there were no loaned securities in the Fund.
7. FINANCIAL HIGHLIGHTS
Selected data for each share of capital stock outstanding throughout each period
are as follows:
<TABLE>
<CAPTION>
Class I Shares: Year Ended June 30,
_____________________________________________________
1996 1995 1994 1993 1992
_______ _______ _______ _______ _______
Per Share Operating Performance
<S> <C> <C> <C> <C> <C>
Net asset value at beginning of period................. $7.24 $6.53 $7.25 $7.12 $7.36
_______ _______ _______ _______ _______
Net investment income.................................. .06 .08 .10 .12 .14
Net realized and unrealized gain on securities......... 1.484 1.329 .107 .557 .089
_______ _______ _______ _______ _______
Total from investment operations....................... 1.544 1.409 .207 .677 .229
_______ _______ _______ _______ _______
Less distributions:
From net investment income............................ (.062) (.079) (.103) (.119) (.142)
From capital gains.................................... (.462) (.620) (.824) (.428) (.327)
_______ _______ _______ _______ _______
Total distributions.................................... (.524) (.699) (.927) (.547) (.469)
_______ _______ _______ _______ _______
Net asset value at end of period....................... $8.26 $7.24 $6.53 $7.25 $7.12
_______ _______ _______ _______ _______
_______ _______ _______ _______ _______
Total Return**......................................... 22.16% 23.78% 2.28% 9.53% 3.36%
Ratio/Supplemental Data
Net assets at end of period (in 000)................... $366,602 $317,463 $279,880 $345,755 $364,826
Ratio of expenses to average net assets................ .95% .95% .79% .69% .70%
Ratio of net investment income to average net assets... .72% 1.21% 1.27% 1.67% 1.86%
Portfolio turnover rate................................ 59.86% 86.20% 95.18% 51.12% 49.19%
Average commission rate***............................. .0548 -- -- -- --
</TABLE>
7. FINANCIAL HIGHLIGHTS (cont.)
Class II Shares: 1996 1995+
_______ _______
Per Share Operating Performance
Net asset value at beginning of period................. $7.24 $6.65
_______ _______
Net investment income.................................. .02 .01
Net realized and unrealized gain on securities......... 1.452 .615
_______ _______
Total from investment operations....................... 1.472 .625
_______ _______
Less distributions:
From net investment income............................ (.020) (.035)
From capital gains.................................... (.462) --
_______ _______
Total distributions.................................... (.482) (.035)
_______ _______
Net asset value at end of period....................... $8.23 $7.24
_______ _______
_______ _______
Total Return**......................................... 20.94% 9.42%
Ratio/Supplemental Data
Net assets at end of period (in 000's)................. $4,208 $342*
Ratio of expenses to average net assets................ 1.77% 1.77%*
Ratio of net investment income to average net assets... (.10%) .74%*
Portfolio turnover rate................................ 59.86% 86.20%
Average commission rate***............................. .0548 --
*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 contingent deferred sales charge, and assumes reinvestment of
dividends and capital gains at net asset value. Prior to May 1, 1994, dividends
were reinvested at the maximum offering price, and capital gains at net asset
value. Effective May 1, 1994, with the implementation of the Rule 12b-1
distribution plan for Class I shares, the sales charge on reinvested dividends
was eliminated.
***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.
+For the period May 1, 1995 to June 30, 1995.
Under IRC 854(b)(2) of the Internal Revenue Code, the Fund hereby designates
22.98% of ordinary income dividends (including short-term capital gain
distributions) paid by the Fund as income qualifying for the dividends received
deduction for the year ended June 30, 1996.
The amount reported above is an estimated percentage and should be used for
information purposes only. Information on the final percentage that qualified
for this deduction for calendar year 1996 will be available shortly after the
end of this calendar year.
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 the
Franklin Equity Fund (the Fund), including the statement of investments in
securities and net assets, as of June 30, 1996, 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 periods presented. 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 include confirmation of securities owned as of June
30, 1996, 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 the
Fund as of June 30, 1996, 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 periods presented, in
conformity with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
San Francisco, California
August 6, 1996
Franklin Equity Fund Annual Report Dated 6/30/96
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 as a
percentage of the fund's total net assets.
<TABLE>
<CAPTION>
Portfolio Breakdown on 6/30/96
<S> <C>
Transportation 2.2%
Health Care 5.7%
Electronic Technology 16.1%
Commercial & Industrial Services 3.0%
Retail & Consumer 20.9%
Utilities 7.8%
Process Industries & Manufacturing 4.2%
Technology Services 4.0%
Semiconductors 8.8%
Financials 11.2%
Minerals 8.4%
Short-Term Obligations & Other Net Assets 7.7%
</TABLE>
GRAPHIC MATERIAL (2)
The following line graph hypothetically compares the performance of the fund's
Class I Shares with the S&P 500 Stock Index, based on a $10,000 investment from
7/1/86 to 6/30/96.
<TABLE>
<CAPTION>
Period Ending Fund Index
<S> <C> <C>
7/1/86 $9,548 $10,000
7/31/86 $8,898 $9,441
8/31/86 $9,400 $10,142
9/30/86 $8,711 $9,303
10/31/86 $9,185 $9,840
11/30/86 $9,501 $10,079
12/31/86 $9,180 $9,822
1/31/87 $10,355 $11,145
2/28/87 $11,048 $11,585
3/31/87 $11,314 $11,920
4/30/87 $11,018 $11,814
5/31/87 $10,915 $11,916
6/30/87 $11,433 $12,518
7/31/87 $12,069 $13,153
8/31/87 $12,572 $13,643
9/30/87 $12,291 $13,345
10/31/87 $8,944 $10,470
11/30/87 $8,194 $9,607
12/31/87 $9,064 $10,339
1/31/88 $9,388 $10,774
2/29/88 $10,493 $11,276
3/31/88 $10,595 $10,927
4/30/88 $10,681 $11,049
5/31/88 $10,578 $11,144
6/30/88 $11,380 $11,655
7/31/88 $11,176 $11,611
8/31/88 $10,640 $11,216
9/30/88 $11,122 $11,694
10/31/88 $11,381 $12,019
11/30/88 $11,053 $11,847
12/31/88 $11,363 $12,055
1/31/89 $12,120 $12,937
2/28/89 $11,891 $12,615
3/31/89 $12,050 $12,909
4/30/89 $12,561 $13,579
5/31/89 $13,107 $14,129
6/30/89 $12,702 $14,048
7/31/89 $13,547 $15,317
8/31/89 $14,184 $15,617
9/30/89 $13,820 $15,553
10/31/89 $12,929 $15,192
11/30/89 $13,057 $15,502
12/31/89 $13,307 $15,874
1/31/90 $12,425 $14,809
2/28/90 $12,669 $15,000
3/31/90 $13,269 $15,397
4/30/90 $12,744 $15,014
5/31/90 $13,851 $16,478
6/30/90 $13,612 $16,367
7/31/90 $13,517 $16,315
8/31/90 $11,828 $14,840
9/30/90 $11,049 $14,117
10/31/90 $10,518 $14,057
11/30/90 $11,486 $14,965
12/31/90 $12,114 $15,382
1/31/91 $13,366 $16,053
2/28/91 $14,232 $17,201
3/31/91 $14,406 $17,617
4/30/91 $14,329 $17,659
5/31/91 $15,080 $18,420
6/30/91 $14,288 $17,577
7/31/91 $14,695 $18,396
8/31/91 $14,987 $18,832
9/30/91 $14,734 $18,517
10/31/91 $14,559 $18,766
11/30/91 $13,880 $18,009
12/31/91 $15,352 $20,070
1/31/92 $15,434 $19,696
2/29/92 $15,722 $19,950
3/31/92 $15,228 $19,561
4/30/92 $15,146 $20,136
5/31/92 $15,105 $20,235
6/30/92 $14,780 $19,934
7/31/92 $15,174 $20,749
8/31/92 $14,925 $20,324
9/30/92 $15,112 $20,561
10/31/92 $15,091 $20,631
11/30/92 $15,734 $21,333
12/31/92 $15,903 $21,595
1/31/93 $16,014 $21,776
2/28/93 $15,747 $22,073
3/31/93 $16,236 $22,538
4/30/93 $15,770 $21,993
5/31/93 $16,236 $22,580
6/30/93 $16,199 $22,646
7/31/93 $15,975 $22,555
8/31/93 $16,713 $23,410
9/30/93 $16,467 $23,230
10/31/93 $17,003 $23,710
11/30/93 $17,316 $23,485
12/31/93 $17,259 $23,769
1/31/94 $17,764 $24,578
2/28/94 $17,815 $23,911
3/31/94 $16,829 $22,869
4/30/94 $17,006 $23,162
5/31/94 $16,905 $23,542
6/30/94 $16,575 $22,965
7/31/94 $16,803 $23,718
8/31/94 $17,489 $24,690
9/30/94 $17,133 $24,088
10/31/94 $17,412 $24,630
11/30/94 $17,006 $23,733
12/31/94 $17,020 $24,085
1/31/95 $17,020 $24,708
2/28/95 $17,640 $25,672
3/31/95 $18,316 $26,429
4/30/95 $18,739 $27,206
5/31/95 $19,500 $28,295
6/30/95 $20,517 $28,951
7/31/95 $21,367 $29,912
8/31/95 $21,509 $29,987
9/30/95 $22,274 $31,253
10/31/95 $21,764 $31,140
11/30/95 $22,416 $32,507
12/31/95 $22,626 $33,135
1/31/96 $23,141 $34,261
2/29/96 $23,534 $34,580
3/31/96 $23,534 $34,912
4/30/96 $24,744 $35,425
5/31/96 $25,228 $36,339
6/30/96 $25,064 $36,477
</TABLE>
GRAPHIC MATERIAL (3)
The following line graph hypothetically compares the performance of the fund's
Class II Shares with the S&P 500 Stock Index, based on a $10,000 investment from
5/1/95 to 6/30/96.
<TABLE>
<CAPTION>
Period Ending Fund Index
<S> <C> <C>
5/1/95 $9,896 $10,000
5/31/95 $10,298 $10,400
6/30/95 $10,843 $10,641
7/31/95 $11,262 $10,995
8/31/95 $11,322 $11,022
9/30/95 $11,726 $11,487
10/31/95 $11,457 $11,446
11/30/95 $11,786 $11,948
12/31/95 $11,901 $12,179
1/31/96 $12,156 $12,593
2/29/96 $12,363 $12,710
3/31/96 $12,347 $12,832
4/30/96 $12,968 $13,021
5/31/96 $13,124 $13,357
6/30/96 $13,014 $13,407
</TABLE>
