CONTENTS
Shareholder Letter.................... 1
Performance Summary
Class I.............................. 5
Class II............................. 8
Advisor Class........................ 10
Statement of Investments.............. 11
Financial Statements.................. 15
Notes to
Financial Statements.................. 19
Report of
Independent Auditors.................. 25
SHAREHOLDER LETTER
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.
Dear Shareholder:
We are pleased to bring you the annual report for the Franklin Equity Fund,
which covers the fiscal year ended June 30, 1997. During the year under review,
the U.S. economic environment was nearly ideal for equity investors. Gross
domestic product grew at a rate of approximately 3.5%, and inflation remained
under control, with the Consumer Price Index increasing only 2.3% for the
12-month period ended June 30, 1997. Unemployment fell, reaching a 23-year low
of 4.8% in May, 1997, while consumer confidence reached a 28-year high.1 In
response, major U.S. stock market averages rose to record levels, despite a
price correction of nearly 10% between mid-March and mid-April. Within this
environment, the fund's Class I shares provided a 12-month total return of
+29.75%, as discussed in the Performance Summary on page 5. This figure compared
very favorably with the +23.96% average total return of all funds in the Lipper
Growth Fund category.2
1. Source: Bloomberg.
2. Lipper Analytical Services Inc., is a nationally recognized mutual fund
investment research company.
GRAPHIC MATERIAL 1 OMITTED - SEE APPENDIX AT END OF DOCUMENT
As usual, we combined fundamental research with quantitative models (formulas
that compare financial data of many companies) in attempting to provide
investors with solid growth over time. We used our proprietary Earnings
Valuation model and other measures to discover attractive investment candidates,
then evaluated these companies based on several fundamental factors, including
quality of earnings, strength of management, market position, and potential
growth. Ultimately, we chose stocks that we believed had strong growth potential
and were available at reasonable valuations. As of June 30, 1997, the fund held
securities of 88 companies in 17 diverse industries, including software,
financials, energy, health care, electronic technology and consumer products.
Throughout the reporting period, the U.S. equity market was marked by
significant volatility. For example, the stock of Cisco Systems Inc., a
bellwether of the data-networking sector and one of the fund's core holdings,
reached a high for the reporting period of $75 on January 21st, dropped to a low
of $46 on April 25th, and then climbed back to $67 at the close of the reporting
period. This represented a fall of almost 40% from
its high, and a bounce of over 40% from its low. While volatility like this
caused consternation among some investors, we attempted to use it as an
opportunity to buy good companies at bargain prices.
During the period, we bought shares in BankBoston Corp., which is headquartered
in Boston, and operates throughout the U.S. and in 23 other countries, and First
Bank System Inc., a major regional bank with offices in 11 Midwestern states. We
also made initial purchases of stock in Electronic Arts Inc., which markets
entertainment software; Enron Corp., an international natural gas and
electricity company; Owens-Illinois Inc., a manufacturer of packaging supplies;
and Uniphase Corp., an optoelectronics company that develops laser systems and
fiber-optic telecommunication equipment.
One of our most successful holdings this year was AES Corp. New power plants in
the U.S., Argentina, Brazil, China, and India greatly increased the company's
earnings and, by the end of the reporting period, its stock price had
appreciated more than 250% since our first purchase in 1994. Although we held
this stock for over a year before making much profit, we wish all of our stocks
worked out so well.
Looking forward, we expect the stock market to remain volatile. Although
corporate earnings may not maintain their double-digit growth of recent years,
we are still bullish for several reasons. First, the aging "baby-boom"
generation will probably continue investing for its retirement years. Second,
major world economies are generally in either a growth or a recovery phase,
which tends to benefit U.S. multinational firms selling products or services
abroad. And third, we live in an increasingly global economy in which many
domestic firms have proved to be highly productive on a worldwide basis. For
example, U.S. technology companies such as Intel, Cisco, and Oracle, all
long-term holdings of the fund, have a dominant worldwide market share in their
respective fields.
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
look forward to serving your investment needs in the years to come. We welcome
any comments or suggestions you may have.
Sincerely,
Charles B. Johnson
Chairman
Franklin Equity Fund
Top 10 Holdings on 6/30/97
As a Percentage of Total Net Assets
Company % of Total
INDUSTRY Net Assets
- ---------------------------------------------------
Intel Corp. 2.4%
SEMICONDUCTORS &
SEMICONDUCTOR EQUIPMENT
Air Express
International Corp. 1.9%
TRANSPORTATION
AES Corp. 1.8%
INDUSTRIAL SERVICES
Electronic Arts Inc. 1.8%
SOFTWARE/TECHNOLOGY SERVICES
Novartis AG 1.7%
HEALTH TECHNOLOGY
Philip Morris Cos. Inc. 1.6%
CONSUMER NON-DURABLES
American International
Group Inc. 1.6%
FINANCE
Mentor Corp. 1.5%
HEALTH TECHNOLOGY
Oracle Corp. 1.5%
SOFTWARE/TECHNOLOGY SERVICES
Tellabs Inc. 1.5%
ELECTRONIC TECHNOLOGY
For a detailed listing of portfolio holdings, see page 11 of this report.
PERFORMANCE SUMMARY
Class I
The Franklin Equity Fund - Class I reported a cumulative total return of +29.75%
for the one-year period ended June 30, 1997. Cumulative total return measures
the change in value of an investment, assuming reinvestment of dividends and
capital gains distributions, and does not include the sales charge. We always
maintain a long-term perspective when managing the fund, and we encourage
shareholders to view their investments in a similar manner. As you can see from
the chart on page 7, the fund delivered a cumulative total return of more than
+184%, and an average annual total return of more than +10%, over the 10-year
period ended June 30, 1997.
The fund's share price, as measured by net asset value, increased $1.90, from
$8.26 on June 30, 1996, to $10.16 on June 30, 1997. During the reporting period,
shareholders received distributions totaling 6.07 cents ($0.0607) per share in
income dividends, 7.27 cents ($0.0727) in short-term capital gains, and 35.83
cents ($0.3583) in long-term capital gains. Distributions will vary depending on
income earned by the fund and any profits realized from the sale of securities
in the fund's portfolio, as well as the level of the fund's operating expenses.
The graph on page 6 compares the Franklin Equity Fund - Class I performance to
that of the Standard & Poor's(R) 500 Stock Index (S&P 500(R)) over the past ten
years. Of course, an unmanaged index has an inherent performance differential
over any fund. It does not pay management fees to cover salaries of securities
analysts or portfolio managers, or pay commissions or market spreads to buy and
sell securities. Unlike indices, mutual funds are never fully invested because
of the need to have cash on hand to redeem shares or pay for upcoming
investments. In addition, the fund's performance includes the maximum initial
sales charge, all fund expenses and account fees. If the fund's costs had been
applied to the index, its performance would have been lower. Please remember
that an index is simply a measure of performance and cannot be invested in
directly.
GRAPHIC MATERIAL 2 OMITTED - SEE APPENDIX AT END OF DOCUMENT
Class I
Periods ended 6/30/97
One-Year Five-Year Ten-Year
- ------------------------------------------------------------------
Cumulative Total Return1 29.75% 120.04% 184.46%
Average Annual Total Return2 23.90% 16.00% 10.52%
Value of $10,000 Investment3 $12,390 $21,001 $27,180
6/30/93 6/30/94 6/30/95 6/30/96 6/30/97
- ------------------------------------------------------------------
One-Year Total Return 49.53% 2.28% 23.78% 22.16% 29.75%
1. Cumulative total return represents the change in value of an investment over
the periods indicated and does not include the sales charge.
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 sales charge.
4. One-year total return represents the change in value of an investment over
the one-year periods ended on the specified dates and does not include the sales
charge.
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 would differ. Effective May 1, 1994, the fund eliminated the sales
charge on reinvested dividends and implemented a plan of distribution under Rule
12b-l, which affects subsequent performance.
All total return figures assume reinvestment of dividends and capital gains at
net asset value. 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.
Class II
The Franklin Equity Fund - Class II reported a cumulative total return of
+28.93% for the one-year period ended June 30, 1997. Cumulative total return
measures the change in value of an investment, assuming reinvestment of
dividends and capital gains distributions, and does not include sales charges.
We always maintain a long-term perspective when managing the fund, and we
encourage shareholders to view their investments in a similar manner. As you can
see from the chart on page 9, the fund delivered a cumulative total return of
more than +70%, and an average annual total return of more than +27%, since
inception on May 1, 1995.
The fund's share price, as measured by net asset value, increased $1.89, from
$8.23 on June 30, 1996, to $10.12 on June 30, 1997. During the reporting period,
shareholders received distributions totaling 7.27 cents ($0.0727) in short-term
capital gains, and 35.83 cents ($0.3583) in long-term capital gains.
Distributions will vary depending on income earned by the fund and any profits
realized from the sale of securities in the fund's portfolio, as well as the
level of the fund's operating expenses.
The graph on page 9 compares the Franklin Equity Fund - Class II performance to
that of the Standard & Poor's(R) 500 Stock Index (S&P500(R)) over the past two
years. Of course, such an unmanaged index has an inherent performance
differential over any fund. It does not pay management fees to cover salaries of
securities analysts or portfolio managers, or pay commissions or market spreads
to buy and sell securities. Unlike indices, mutual funds are never fully
invested because of the need to have cash on hand to redeem shares or pay for
upcoming investments. In addition, the performance shown for the fund includes
the sales charges, all fund expenses and account fees. If the fund's costs had
been applied to the index, its performance would have been lower. Please
remember that an index is simply a measure of performance and cannot be invested
in directly.
GRAPHIC MATERIAL 3 OMITTED - SEE APPENDIX AT END OF DOCUMENT
Class II
Periods ended 6/30/97
Since
Inception
One-Year (5/1/95)
- ------------------------------------------------------------------
Cumulative Total Return1 28.93% 70.85%
Average Annual Total Return2 26.69% 27.44%
Value of $10,000 Investment3 $12,669 $16,907
6/30/96 6/30/97
- ------------------------------------------------------------------
One-Year Total Return4 20.94% 28.93%
1. Cumulative total return measures the change in value of an investment over
the periods indicated and does not include sales charges.
2. Average annual total return represents the average annual change in value of
an investment over the periods indicated and includes the 1.00% initial sales
charge and 1.00% contingent deferred sales charge applicable to shares redeemed
within the first 18 months of investment.
3. These figures represent the value of a hypothetical $10,000 investment in the
fund over the periods indicated and include sales charges.
4. One-year total return represents the change in value of an investment over
the one-year periods ended on the specified dates and does not include sales
charges. 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.
Advisor Class
Franklin Equity Fund - Advisor Class reported an aggregate total return of
+18.47% for the six-month period from inception on January 1, 1997 through June
30, 1997. Aggregate total return measures the change in value of an investment,
assuming reinvestment of dividends and capital gains.
The fund's share price, as measured by net asset value, increased $1.55, from
$8.62 on January 2, 1997 (day of commencement of sales), to $10.17 on June 30,
1997. During this same period, shareholders received regular dividend income of
4.09 cents ($0.0409) per share. Distributions will vary depending on income
earned by the fund and any profits realized from the sale of securities in the
fund's portfolio, as well as the level of the fund's operating expenses.
Advisor Class
Period ended 6/30/97
Since
Inception
(1/1/97)
- --------------------------------------------------
Aggregate Total Return1 18.47%
Value of $10,000 Investment2 $11,847
1. Aggregate total return represents the change in value of an investment over
the period indicated. Since Advisor Class shares have existed for less than one
year, average annual total returns are not provided.
2. This figure represents the value of a hypothetical $10,000 investment in the
Fund over the period indicated.
All calculations assume that all dividends and capital gains distributions were
reinvested when paid. Investment return and principal value will fluctuate with
market conditions, so that your shares, when redeemed, may be worth more or less
than their initial cost.
Past performance is not predictive of future results.
FRANKLIN EQUITY FUND
Statement of Investments in Securities and Net Assets, June 30, 1997
<TABLE>
<CAPTION>
VALUE
SHARES (NOTE1)
- -------------------------------------------------------------------------------------------------------------
Common Stocks 88.5%
Commercial Services 0.6%
<S> <C>
50,000 Omnicom Group, Inc. $ 3,081,250
------------
Consumer Durables 1.4%
200,000 Mattel, Inc. 6,775,000
------------
Consumer Non-Durables 7.5%
65,000 Gillette Co. 6,158,750
100,000 Nike, Inc., Class B 5,837,500
150,000 Pepsico, Inc. 5,634,375
170,000 Philip Morris Cos., Inc. 7,543,750
40,000 Proctor & Gamble Co. 5,650,000
125,000 Sara Lee Corp. 5,203,125
------------
36,027,500
------------
Consumer Services 2.3%
175,000 a CUC International, Inc. 4,517,188
150,000 a CapStar Hotel Co. 4,800,000
50,000 TCA Cable TV, Inc. 1,881,250
------------
11,198,438
------------
Electronic Technology 11.3%
122,500 a 3Com Corp. 5,512,500
75,000 a Ascend Communications, Inc. 2,953,125
50,000 a Cabletron Systems, Inc. 1,415,625
100,000 a Cisco Systems, Inc. 6,712,500
173,000 a Komag, Inc. 2,832,875
47,305 Lockheed Martin Corp. 4,899,024
16,204 Lucent Technologies, Inc. 1,167,701
10,000 Motorola, Inc. 760,000
150,000 a Newbridge Networks Corp. 6,525,000
75,000 Nokia Corp., ADR 5,531,250
100,000 a Tekelec 3,537,500
125,000 a Tellabs, Inc. 6,984,375
90,000 a Uniphase Corp. 5,242,500
------------
54,073,975
------------
Energy/Minerals 7.4%
225,000 a Barrett Resources Corp. 6,735,938
125,000 Enron Oil & Gas Co. 2,265,625
90,000 Mobil Corp. 6,288,750
150,000 Repsol, SA, ADR 6,365,625
210,000 Ultramar Diamond Shamrock Corp. 6,851,250
225,000 YPF, SA, ADR 6,918,750
------------
35,425,938
------------
Finance 9.3%
50,000 American International Group, Inc. 7,468,750
115,000 Associates First Capital Corp. 6,382,500
50,000 BankBoston Corp. 3,603,125
Finance (cont.)
45,000 Citicorp $ 5,425,313
70,000 First Bank System, Inc. 5,976,250
37,900 a Hartford Life, Inc., Class A 1,421,250
245,000 a HomeSide, Inc. 5,359,375
175,000 a Risk Capital Holdings, Inc. 3,675,000
86,666 Travelers Group, Inc. 5,465,375
------------
44,776,938
------------
Health Services 3.3%
80,000 HBO & Co. 5,510,000
75,000 a Oxford Health Plans, Inc. 5,381,250
75,000 a PacifiCare Health Systems, Inc., Class B 4,790,625
------------
15,681,875
------------
Health Technology 8.0%
100,000 a Amgen, Inc. 5,812,500
100,000 Baxter International, Inc. 5,225,000
70,000 Bristol-Myers Squibb Co. 5,670,000
250,000 Mentor Corp. 7,406,250
5,000 d Novartis, AG (Switzerland) 7,983,567
700 d Roche Holdings, AG (Switzerland) 6,328,997
------------
38,426,314
------------
Industrial Services 3.2%
125,000 a AES Corp. 8,843,750
90,000 a Allied Waste Industries, Inc. 1,563,750
78,400 a Santa Fe International Corp. 2,665,600
60,000 a United Waste Systems, Inc. 2,460,000
------------
15,533,100
------------
Non-Energy Minerals 1.1%
117,400 Carpenter Technology Corp. 5,371,050
------------
Process Industries 3.2%
3,500 a,d Ciba Specialty Chemicals, AG, (Switzerland) 323,519
216,900 a Owens-Illinois, Inc. 6,723,900
125,000 Pittston Brink's Group 3,750,000
100,000 a UCAR International, Inc. 4,575,000
------------
15,372,419
------------
Producer Manufacturing 4.2%
150,000 a Atchison Casting Corp. 2,493,750
200,000 a General Cable Corp. 5,125,000
262,500 Mark IV Industries, Inc. 6,300,000
100,000 Roper Industries, Inc. 5,187,500
29,300 a U.S. Filter Corp. 798,425
------------
19,904,675
------------
Real Estate 1.4%
175,000 FelCor Suite Hotels, Inc. $ 6,518,750
------------
Semiconductors & Semiconductor Equipment 5.1%
60,000 a Applied Materials, Inc. 4,248,750
80,000 Intel Corp. 11,345,000
85,000 Linear Technology Corp. 4,398,750
85,000 a Xilinx, Inc. 4,170,313
------------
24,162,813
------------
Software/Technology Services 8.8%
150,000 Adobe Systems, Inc. 5,259,375
75,000 a Broderbund Software, Inc. 1,851,563
250,000 a Electronic Arts, Inc 8,406,250
100,000 Electronic Data Systems Corp. 4,100,000
125,000 First Data Corp. 5,492,188
140,000 a Oracle Corp. 7,052,500
30,000 d SAP, AG (Germany) 6,017,547
119,200 a Sterling Commerce, Inc. 3,918,700
------------
42,098,123
------------
Transportation 3.6%
225,000 Air Express International Corp. 8,943,750
175,000 Pittston Burlington Group 4,921,875
135,000 Southwest Airlines Co. 3,493,125
------------
17,358,750
------------
Utilities 6.8%
200,000 a AirTouch Communications, Inc. 5,475,000
150,000 Enron Corp. 6,121,875
125,000 GTE Corp. 5,484,375
175,000 PG & E Corp. 4,243,750
400,000 a Paging Network, Inc. 3,512,520
100,000 TECO Energy, Inc. 2,556,250
112,500 Williams Cos., Inc. 4,921,872
------------
32,315,642
------------
Total Common Stocks (Cost $290,988,134) 424,102,550
------------
</TABLE>
<TABLE>
<CAPTION>
FACE
AMOUNT
Convertible Bonds 1.9%
<S> <C>
$1,550,000 c Altera Corp., sub. notes, 5.75%, 06/15/02 3,262,750
2,000,000 c Omnicom Group, Inc., sub. notes, 4.25%, 01/03/07 2,392,500
3,400,000 U.S. Filter Corp., sub. notes, 4.50%, 12/15/01 3,319,250
------------
Total Convertible Bonds (Cost $7,084,313) 8,974,500
------------
Total Long Term Investments (Cost $298,072,447) 433,077,050
------------
bReceivables from Repurchase Agreements 10.9%
$52,320,687 Joint Repurchase Agreement, 5.884%, 07/01/97,
(Maturity Value $52,344,847) (Cost $52,336,292)
Aubrey G. Lanston & Co., Inc., (Maturity Value $5,188,185)
Collateral: U.S. Treasury Notes, 6.00% - 8.25%, 04/15/98 - 08/15/99
Barclays de Zoete Wedd Securities, Inc., (Maturity Value $5,188,185)
Collateral: U.S. Treasury Notes, 5.25% - 7.125%, 12/31/97 - 02/28/01
Chase Securities, Inc., (Maturity Value $3,057,089)
Collateral: U.S. Treasury Notes, 5.875%, 01/31/99
CIBC Wood Gundy Securities Corp., (Maturity Value $5,188,185)
Collateral: U.S. Treasury Notes, 5.375% - 6.875%, 11/30/97 - 07/31/99
Daiwa Securities America, Inc., (Maturity Value $5,188,185)
Collateral: U.S. Treasury Notes, 5.875% - 7.75%, 03/31/99 - 08/31/01
Donaldson, Lufkin & Jenrette Securities Corp., (Maturity Value $2,594,093)
Collateral: U.S. Treasury Notes, 5.00% - 6.25%, 09/30/97 - 07/31/98
Fuji Securities, Inc., (Maturity Value $5,188,185)
Collateral: U.S. Treasury Notes, 4.75% - 7.125%, 02/28/98 - 03/31/01
Sanwa Securities (USA) Co., L.P., (Maturity Value $5,188,185)
Collateral: U.S. Treasury Notes, 6.50% - 8.875%, 11/15/98 - 06/30/01
SBC Warburg, Inc., (Maturity Value $5,188,185)
Collateral: U.S. Treasury Notes, 5.50%, 11/15/98
The Nikko Securities Co. International, Inc., (Maturity Value $5,188,185)
Collateral: U.S. Treasury Notes, 5.125% - 7.875%, 12/31/98 - 08/15/01
UBS Securities, L.L.C., (Maturity Value $5,188,185)
Collateral: U.S. Treasury Notes, 5.00% - 6.00%, 07/31/98 - 04/15/00 $ 52,336,292
------------
Total Investments (Cost $350,408,739) 101.3% 485,413,342
Liabilities in excess of Other Assets (1.3%) (5,996,928)
------------
Net Assets 100% $479,416,414
============
At June 30, 1997, the net unrealized appreciation based on the
cost of investments for income tax purposes of $350,698,610 was as follows:
Aggregate gross unrealized appreciation for all investments in which there
was an excess of value over tax cost $138,514,533
Aggregate gross unrealized depreciation for all investments in which there
was an excess of tax cost over value (3,799,801)
------------
Net unrealized appreciation $134,714,732
============
</TABLE>
PORTFOLIO ABBREVIATIONS:
L.L.C. - Limited Liability Corp.
L.P. - Limited Partnership
aNon-income producing.
bFace amount for repurchase agreements is for the underlying collateral. See
note 1(g) regarding joint repurchase agreement.
cPurchased in a private placement transaction; resale may only be to qualified
institutional buyers.
dSecurities are traded in foreign currency and value is stated in U.S. dollars.
The accompanying notes are an integral part of these financial statements.
FRANKLIN EQUITY FUND
Financial Statements
Statement of Assets and Liabilities
June 30, 1997
<TABLE>
<CAPTION>
Assets:
<S> <C>
Investments in securities, at value (identified cost $298,072,447) $433,077,050
Receivables from repurchase agreements, at value and cost 52,336,292
Cash 106,031
Receivables:
Dividends and interest 350,589
Capital shares sold 320,681
------------
Total assets 486,190,643
------------
Liabilities:
Payables:
Investment securities purchased 5,696,008
Capital shares repurchased 92,197
Management fees 200,530
Distribution fees 157,776
Shareholder servicing costs 55,000
Other payables to shareholders 514,317
Accrued expenses and other liabilities 58,401
------------
Total liabilities 6,774,229
------------
Net assets, at value $479,416,414
============
Net assets consist of:
Net unrealized appreciation on investments $135,004,603
Accumulated net realized gain from investments 53,546,968
Class I capital shares 276,515,301
Class II capital shares 7,811,127
Advisor Class capital shares 6,538,415
------------
Net assets, at value $479,416,414
============
</TABLE>
<TABLE>
<CAPTION>
FRANKLIN EQUITY FUND
Financial Statements (continued)
Statement of Assets and Liabilities (cont.)
June 30, 1997
Class I shares:
<S> <C>
Net assets, at value $462,972,364
=============
Shares outstanding 45,553,767
=============
Net asset value per share* $10.16
=============
Maximum offering price per share (100/95.5 of $10.16) $10.64
=============
Class II shares:
Net assets, at value $ 9,554,454
=============
Shares outstanding 944,444
=============
Net asset value per share* $10.12
=============
Maximum offering price per share (100/99 of $10.12) $10.22
=============
Advisor Class shares:
Net assets, at value $ 6,889,596
=============
Shares outstanding 677,536
=============
Net asset value and offering price per share $10.17
=============
</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.
FRANKLIN EQUITY FUND
Financial Statements (continued)
Statement of Operations
for the year ended June 30, 1997
<TABLE>
<CAPTION>
Investment income:
<S> <C>
Dividends, net of foreign taxes and fees withheld of $120,456 $ 4,462,213
Interest 1,790,506
-----------
Total income 6,252,719
-----------
Expenses:
Management fees (Note 5) 2,108,910
Distribution fees - Class I (Note 5) 756,243
Distribution fees - Class II (Note 5) 64,664
Shareholder servicing costs (Note 5) 537,115
Reports to shareholders 171,834
Registration and filing fees 64,396
Professional fees 38,261
Directors' fees and expenses 22,666
Custodian fees 13,712
Other 14,971
------------
Total expenses 3,792,772
------------
Net investment income 2,459,947
------------
Realized and unrealized gain (loss) from investments and foreign currencies:
Net realized gain (loss) from:
Investments 53,856,828
Foreign currency transactions (24,333)
Net unrealized appreciation from investments 52,251,082
------------
Net realized and unrealized gain from investments and foreign currencies 106,083,577
------------
Net increase in net assets resulting from operations $108,543,524
============
</TABLE>
The accompanying notes are an integral part of these financial statements.
FRANKLIN EQUITY FUND
Financial Statements (continued)
<TABLE>
<CAPTION>
Statements of Changes in Net Assets
for the years ended June 30, 1997 and 1996
1997 1996
-----------------------------------------
Increase (decrease) in net assets:
Operations:
<S> <C> <C>
Net investment income $ 2,459,947 $ 2,489,958
Net realized gain from investments and foreign currency transactions 53,832,495 25,749,129
Net unrealized appreciation on investments 52,251,082 40,315,485
-----------------------------------------
Net increase in net assets resulting from operations 108,543,524 68,554,572
Distributions to shareholders from:
Undistributed net investment income:
Class I (2,742,841) (2,720,379)
Class II (499) (4,684)
Advisor Class (13,857) --
Net realized capital gains:
Class I (19,328,932) (19,945,149)
Class II (302,817) (103,886)
Increase in net assets from capital share transactions (Note 3) 22,451,669 7,224,174
----------------------------------------
Net increase in net assets 108,606,247 53,004,648
Net assets (there is no undistributed net investment income at beginning or end of the year):
Beginning of year 370,810,167 317,805,519
----------------------------------------
End of year $479,416,414 $370,810,167
========================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
FRANKLIN EQUITY FUND
Notes to Financial Statements
1. SIGNIFICANT ACCOUNTING POLICIES
Franklin Equity Fund (the Fund) is an open-end, diversified management
investment company (mutual fund) registered under the Investment Company Act of
1940, as amended. The Fund seeks to provide capital growth.
The Fund offers three classes of shares, Class I, Class II and Advisor Class.
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 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
and securities restricted as to resale, are valued in accordance with procedures
established by the Board.
The value of a foreign security is determined as of the earlier of the close of
trading on the foreign exchange on which it is traded or the close of trading on
the New York Stock Exchange. That value is then converted into its U.S. dollar
equivalent at the foreign exchange rate in effect at noon, New York time, on the
day the value of the foreign security is determined. If no sale is reported at
that time, the mean between the current bid and asked prices is used.
Occasionally, events which affect the values of foreign securities and foreign
exchange rates may occur between the times at which they are determined and the
close of the exchange and will, therefore, not be reflected in the computation
of the Fund's net asset value, unless material. If events which materially
affect the value of these foreign securities occur during such period, these
securities will be 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.
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.
Net realized capital gains and losses differ for financial statement and tax
purposes primarily due to differing treatments of wash sale transactions.
e. Accounting Estimates:
The preparation of 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 expenses during the reporting
period. Actual results could differ from those estimates.
f. Foreign Currency Translation:
The accounting records of the Fund are maintained in U.S. dollars. All assets
and liabilities denominated in foreign currencies are translated into U.S.
dollars at the rate of exchange of the currencies against U.S. dollars on the
valuation date. Purchases and sales of securities, income and expenses are
translated at the rate of exchange quoted on the day that the transactions are
recorded. Differences between income and expense amounts recorded and collected
or paid are recognized when reported by the custodian.
The Fund does not isolate that portion of the results of operations resulting
from changes in foreign exchange rates on investments from fluctuations arising
from changes in market prices of securities held. Such fluctuations are included
with the net realized and unrealized gain or loss from investments.
Realized foreign exchange gains or losses arise from sales and maturities of
short-term securities, sales of foreign currencies, gains or losses realized
between the trade and settlement dates on security transactions, the difference
between the amounts of dividends, interest, and foreign withholding taxes
recorded on the Fund's books and the U.S. dollar equivalent of the amounts
actually received or paid. Net unrealized appreciation or depreciation on
translation of assets and liabilities denominated in foreign currencies arise
from changes in the value of assets and liabilities, other than investments in
securities at the end of the reporting period, resulting from changes in
exchange rates.
g. Joint 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 June 30, 1997, all outstanding repurchase agreements held by the Fund
had been entered into on that date.
2. DISTRIBUTIONS
At June 30, 1997, for tax purposes, the Fund had accumulated capital gains of
$53,836,840.
For tax purposes, the aggregate cost of securities is higher (and unrealized
appreciation is lower) than for financial reporting purposes at June 30, 1997 by
$289,871.
3. CAPITAL STOCK
At June 30, 1997, there were 2,000,000,000 Class I shares, 2,000,000,000 Class
II shares, and 1,000,000,000 Advisor Class shares of no par value capital stock
authorized. Transactions in the Fund's shares for the years ended June 30, 1997
and 1996 were as follows:
<TABLE>
<CAPTION>
1997 1996
--------------------------------------------------------
Shares Amount Shares Amount
--------------------------------------------------------
Class I Shares:
<S> <C> <C> <C> <C>
Shares sold 12,390,036 $110,637,538 10,429,328 $80,970,898
Shares issued in reinvestment of distributions 2,264,152 20,354,201 2,810,022 20,880,395
Shares redeemed (13,503,886) (118,967,300) (12,654,395) (98,218,044)
---------------------------------------------------------
Net increase 1,150,302 $ 12,024,439 584,955 $ 3,633,249
=========================================================
Class II Shares:
Shares sold 709,987 $ 6,305,367 554,667 $ 4,314,434
Shares issued in reinvestment of distributions 30,191 268,397 12,982 95,849
Shares redeemed (307,006) (2,684,949) (103,616) (819,358)
---------------------------------------------------------
Net increase 433,172 $ 3,888,815 464,033 $ 3,590,925
=========================================================
</TABLE>
1997
----------------------------
Shares Amount
----------------------------
Advisor Class*:
Shares sold 732,158 $ 7,035,865
Shares issued in reinvestment of distributions 1,393 13,857
Shares redeemed (56,015) (511,307)
----------------------------
Net increase 677,536 $ 6,538,415
============================
*For the period January 2, 1997 (effective date of Advisor Class) to June 30,
1997.
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, 1997, aggregated $205,193,113 and
$219,779,517, 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 based on the net assets of the
Fund on the last day of the month as follows:
Annualized Fee Rate Month End Net Assets
- ------------------------------------------------------------------------------
0.625% First $100 million
0.50% Over $100 million, up to and including $250 million
0.45% In excess of $250 million
Under an agreement with Advisers, Franklin Templeton Services, Inc. (FT
Services) provides administrative services and facilities for the Fund. The fee
is paid by Advisers and computed monthly based on average daily net assets. It
is not a separate expense of the Fund.
b. Shareholder Services Agreement:
Under the terms of a shareholder services 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, 1997, aggregated $537,115, of which $530,519 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 of the Fund, 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. Fees incurred by the Fund under the Plans
aggregated $820,907 for the year ended June 30, 1997.
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, the amounts paid to other dealers and any
applicable contingent deferred sales charges (CDSC) for the year ended June 30,
1997, were as follows:
Total commissions received, including CDSC $706,061
Paid to other dealers $672,302
CDSC $ 3,842
d. Other Affiliates and Related Party Transactions:
Certain officers and directors of the Fund are also officers and/or directors of
Distributors, Advisers, FT Services, and Investor Services, all wholly-owned
subsidiaries of Franklin Resources, Inc.
6. FINANCIAL HIGHLIGHTS
Selected data for each share of capital stock outstanding throughout each period
are as follows:
<TABLE>
<CAPTION>
Year Ended June 30,
------------------------------------------------
Class I Shares: 1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------
Per Share Operating Performance
<S> <C> <C> <C> <C> <C>
Net asset value at beginning of period $8.26 $7.24 $6.53 $7.25 $7.12
------------------------------------------------
Net investment income .05 .06 .08 .10 .12
Net realized and unrealized gain on securities 2.342 1.484 1.329 .107 .557
------------------------------------------------
Total from investment operations 2.392 1.544 1.409 .207 .677
------------------------------------------------
Less distributions:
From net investment income (.061) (.062) (.079) (.103) (.119)
From capital gains (.431) (.462) (.620) (.824) (.428)
------------------------------------------------
Total distributions (.492) (.524) (.699) (.927) (.547)
------------------------------------------------
Net asset value at end of period $10.16 $8.26 $7.24 $6.53 $7.25
================================================
Total Return** 29.75% 22.16% 23.78% 2.28% 9.53%
Ratio/Supplemental Data
Net assets at end of period (in 000's) $462,972 $366,602 $317,463 $279,880 $345,755
Ratio of expenses to average net assets .91% .95% .95% .79% .69%
Ratio of net income to average net assets .61% .72% 1.21% 1.27% 1.67%
Portfolio turnover rate 53.67% 59.86% 86.20% 95.18% 51.12%
Average commission rate*** .0641 .0548 -- -- --
</TABLE>
<TABLE>
<CAPTION>
Class II Shares: 1997 1996 1995+
- ----------------------------------------------------------------------------------------
Per Share Operating Performance
<S> <C> <C> <C>
Net asset value at beginning of period $8.23 $7.24 $6.65
----------------------------
Net investment income (.02) .02 .01
Net realized and unrealized gain on securities 2.341 1.452 .615
----------------------------
Total from investment operations 2.321 1.472 .625
----------------------------
Less distributions:
From net investment income -- (.020) (.035)
From capital gains (.431) (.462) --
----------------------------
Total distributions (.431) (.482) (.035)
Net asset value at end of period $10.12 $8.23 $7.24
============================
Total Return** 28.93% 20.94% 9.42%
Ratio/Supplemental Data
Net assets at end of period (in 000's) $9,554 $4,208 $342
Ratio of expenses to average net assets 1.72% 1.77% 1.77%*
Ratio of net income to average net assets (.22%) (.10%) .74%*
Portfolio turnover rate 53.67% 59.86% 86.20%
Average commission rate*** .0641 .0548 --
</TABLE>
Advisor Class: 1997++
- ---------------------------------------------------------------------
Per Share Operating Performance
Net asset value at beginning of period $8.62
--------
Net investment income .03
Net realized and unrealized gain on securities 1.561
--------
Total from investment operations 1.591
--------
Less distributions:
From net investment income (.041)
--------
Net asset value at end of period $10.17
========
Total Return** 18.47%
Ratio/Supplemental Data
Net assets at end of period (in 000's) $6,890
Ratio of expenses to average net assets .72%*
Ratio of net income to average net assets .79%*
Portfolio turnover rate 53.67%
Average commission rate*** .0641
*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 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 (effective date) to June 30, 1995. ++For
the period January 2, 1997 (effective date) to June 30, 1997.
Under Section 854(b)(2) of the Internal Revenue Code, the Fund hereby designates
57.66% of its ordinary income dividends paid (including short-term capital gain
distributions, if any) as income qualifying for the dividends received deduction
for the fiscal year ended June 30, 1997.
FRANKLIN EQUITY FUND
Report of Independent Accountants
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 including the statement of investments in securities and
net assets, as of June 30, 1997, 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 included confirmation of securities owned as of June
30, 1997, by correspondence with the custodian. 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
Franklin Equity Fund as of June 30, 1997, 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 its financial highlights for each of the periods
presented, in conformity with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
San Francisco, California
August 4, 1997
Franklin Equity Fund Annual Report June 30, 1997.
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 format the portfolio breakdown of the fund's
securities on June 30, 1997, based on total net assets.
Portfolio Breakdown on June 30, 1997
Electronic Technology 11.3%
Finance 9.3%
Software/Technology Services 8.8%
Health Technology 8.0%
Consumer Non-Durables 7.5%
Energy/Minerals 7.4%
Other Sectors 38.1%
Cash & Equivalents 9.6%
GRAPHIC MATERIAL (2)
The following line graph hypothetically compares the performance of the
Franklin Equity Fund Class I shares to that of the S&P 500 Stock Index, based
on a $10,000 investment from 7/1/87 to 6/30/97.
Period Ending Fund S&P 500
DATE FRANKLIN EQUITY S&P 500 STOCK
FUND CLASS I INDEX
7/1/87 $9,555 $10,000
7/31/87 $10,087 $10,507
8/31/87 $10,508 $10,899
9/30/87 $10,272 $10,660
10/31/87 $7,476 $8,364
11/30/87 $6,848 $7,675
12/31/87 $7,576 $8,259
1/31/88 $7,846 $8,607
2/29/88 $8,770 $9,008
3/31/88 $8,855 $8,729
4/30/88 $8,927 $8,826
5/31/88 $8,841 $8,902
6/30/88 $9,511 $9,311
7/31/88 $9,340 $9,275
8/31/88 $8,893 $8,960
9/30/88 $9,296 $9,342
10/31/88 $9,512 $9,601
11/30/88 $9,238 $9,464
12/31/88 $9,497 $9,630
1/31/89 $10,130 $10,335
2/28/89 $9,939 $10,077
3/31/89 $10,071 $10,312
4/30/89 $10,498 $10,847
5/31/89 $10,954 $11,287
6/30/89 $10,616 $11,222
7/31/89 $11,323 $12,236
8/31/89 $11,855 $12,475
9/30/89 $11,551 $12,424
10/31/89 $10,806 $12,136
11/30/89 $10,912 $12,384
12/31/89 $11,121 $12,681
1/31/90 $10,384 $11,830
2/28/90 $10,588 $11,983
3/31/90 $11,090 $12,300
4/30/90 $10,651 $11,994
5/31/90 $11,576 $13,163
6/30/90 $11,377 $13,075
7/31/90 $11,298 $13,033
8/31/90 $9,885 $11,855
9/30/90 $9,235 $11,278
10/31/90 $8,790 $11,229
11/30/90 $9,600 $11,955
12/31/90 $10,124 $12,288
1/31/91 $11,171 $12,824
2/28/91 $11,895 $13,741
3/31/91 $12,040 $14,073
4/30/91 $11,976 $14,107
5/31/91 $12,603 $14,715
6/30/91 $11,941 $14,041
7/31/91 $12,282 $14,695
8/31/91 $12,525 $15,044
9/30/91 $12,314 $14,792
10/31/91 $12,168 $14,991
11/30/91 $11,601 $14,387
12/31/91 $12,830 $16,032
1/31/92 $12,899 $15,734
2/29/92 $13,140 $15,937
3/31/92 $12,727 $15,626
4/30/92 $12,658 $16,086
5/31/92 $12,624 $16,165
6/30/92 $12,352 $15,924
7/31/92 $12,682 $16,575
8/31/92 $12,474 $16,235
9/30/92 $12,630 $16,425
10/31/92 $12,613 $16,481
11/30/92 $13,150 $17,041
12/31/92 $13,291 $17,251
1/31/93 $13,384 $17,396
2/28/93 $13,161 $17,632
3/31/93 $13,570 $18,005
4/30/93 $13,180 $17,569
5/31/93 $13,570 $18,038
6/30/93 $13,539 $18,090
7/31/93 $13,352 $18,018
8/31/93 $13,968 $18,701
9/30/93 $13,763 $18,557
10/31/93 $14,211 $18,941
11/30/93 $14,472 $18,761
12/31/93 $14,424 $18,988
1/31/94 $14,847 $19,634
2/28/94 $14,889 $19,101
3/31/94 $14,065 $18,269
4/30/94 $14,213 $18,502
5/31/94 $14,129 $18,806
6/30/94 $13,853 $18,345
7/31/94 $14,044 $18,947
8/31/94 $14,616 $19,724
9/30/94 $14,319 $19,242
10/31/94 $14,553 $19,675
11/30/94 $14,213 $18,959
12/31/94 $14,225 $19,240
1/31/95 $14,225 $19,738
2/28/95 $14,743 $20,508
3/31/95 $15,308 $21,113
4/30/95 $15,662 $21,734
5/31/95 $16,298 $22,603
6/30/95 $17,147 $23,127
7/31/95 $17,858 $23,895
8/31/95 $17,976 $23,955
9/30/95 $18,616 $24,966
10/31/95 $18,190 $24,876
11/30/95 $18,734 $25,968
12/31/95 $18,910 $26,469
1/31/96 $19,340 $27,369
2/29/96 $19,669 $27,624
3/31/96 $19,669 $27,889
4/30/96 $20,680 $28,299
5/31/96 $21,085 $29,029
6/30/96 $20,948 $29,139
7/31/96 $19,528 $27,851
8/31/96 $20,390 $28,439
9/30/96 $21,759 $30,040
10/31/96 $21,962 $30,869
11/30/96 $23,738 $33,203
12/31/96 $23,253 $32,545
1/31/97 $24,800 $34,580
2/28/97 $24,000 $34,849
3/31/97 $23,253 $33,417
4/30/97 $24,480 $35,412
5/31/97 $26,533 $37,569
6/30/97 $27,180 $39,252
GRAPHIC MATERIAL (3)
The following line graph hypothetically compares the performance of the
Franklin Equity Fund Class II shares to that of the S&P 500 Stock Index,
based on a $10,000 investment from 5/1/95 to 6/30/97.
Period Ending Fund S&P 500
DATE FRANKLIN EQUITY S&P 500 STOCK
FUND CLASS II INDEX
------------- -----
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 $13,223 $13,357
6/30/96 $13,113 $13,407
7/31/96 $12,221 $12,815
8/31/96 $12,747 $13,085
9/30/96 $13,607 $13,822
10/31/96 $13,719 $14,203
11/30/96 $14,818 $15,277
12/31/96 $14,501 $14,975
1/31/97 $15,453 $15,911
2/28/97 $14,969 $16,035
3/31/97 $14,484 $15,376
4/30/97 $15,236 $16,294
5/31/97 $16,506 $17,286
6/30/97 $16,907 $18,060