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.
For a free brochure and prospectus, which contain more complete information,
including charges and expenses, call Franklin Fund Information, toll free, at
1-800/DIAL BEN (1-800/342-5236). Please read the prospectus carefully before you
invest or send money. To ensure the highest quality of service, telephone calls
to or from our service departments may be monitored, recorded and accessed.
These calls can be determined by the presence of a regular beeping tone.
February 18, 1997
Dear Shareholder,
We are pleased to bring you this semi-annual report for the Franklin Equity
Fund, which covers the six months ended December 31, 1996. During the period
under review, the U.S. economy experienced moderate growth with low inflation,
while interest rates, as measured by the 30-year U.S. Treasury bond, declined
from 6.87% to 6.64%. The U.S. stock market responded favorably to these
conditions, and the unmanaged Standard & Poor's 500 Stock Index(R) posted a
total return of +11.68% for the period.1 Within this environment, Class I shares
of the fund provided a six-month total return of +11.00%, as discussed in the
Performance Summary on page 5.
1. Total return includes reinvested dividends. One cannot invest directly in an
index.
During the period, we continued to combine fundamental research with
quantitative models (formulas that compare financial data of many companies) in
an attempt to provide investors with solid growth over time. We used our
proprietary Earnings Valuation model and other quantitative measures to help us
sift through the universe of companies for attractive investment candidates.
These companies were then thoroughly analyzed by Franklin's team of portfolio
managers and equity analysts who looked at several fundamental factors,
including quality of earnings, strength of management, market position, and
potential growth before making an investment. Ultimately, we chose stocks for
the fund's portfolio that we believed had solid growth potential and were
available at reasonable valuations.
GRAPHIC MATERIAL 1 OMITTED - SEE APPENDIX AT END OF DOCUMENT
On December 31, 1996, the portfolio consisted of 83 securities of companies in
such diverse industries as semiconductors, financials, health care, data
networking, energy, and consumer products. Believing that high-quality,
generally large-capitalization growth stocks would prosper even if the growth
rate of the U.S. economy slowed, we focused on such companies. Our most
important new investments included health care stocks such as Amgen, Roche
Holdings and Sandoz (which recently merged with Ciba-Geigy to form Novartis),
and technology service stocks such as Broderbund Software, Electronic Data
Systems, First Data Corp., and Sterling Commerce.
Our long-term outlook for the U.S. stock market remains bullish for a variety of
reasons. First, net inflows into equity mutual funds during 1996 exceeded $200
billion, and in our opinion, the demographics of the aging "baby-boom"
generation should continue to motivate retirement investing. Second, we believe
the world's major economies are generally in either a growth or recovery phase,
which could benefit many U.S.-based multinational firms selling products or
services abroad. Third, the ability of many U.S. firms to be highly competitive
on a worldwide basis is improving profitability and enhancing the shareholder
value of these companies. For example, innovative, domestic high-technology
companies such as Intel, Cisco, and Oracle (all large holdings of the fund) have
dominant market share in their respective fields worldwide. In our opinion, this
favorable trend could persist for some time. However, we do not believe that the
overall market, as represented by the S&P 500, will produce double-digit
earnings growth in 1997 as it did in each of the past four years, and in an
environment of slowing corporate profit growth, stable companies such as those
held by the fund are usually sought by investors -- a condition which could
benefit many of our holdings.
FRANKLIN EQUITY FUND
TOP 10 HOLDINGS ON 12/31/96
AS A PERCENTAGE OF TOTAL NET ASSETS
% OF TOTAL
COMPANY, INDUSTRY NET ASSETS
--------------------------------------------------
INTEL CORP. 3.9%
SEMICONDUCTORS
--------------------------------------------------
AES CORP. 2.2%
INDUSTRIAL SERVICES
--------------------------------------------------
CISCO SYSTEMS INC. 2.1%
ELECTRONIC TECHNOLOGY
--------------------------------------------------
AMERICAN INTERNATIONAL GROUP INC. 1.9%
FINANCE
--------------------------------------------------
REPSOL, SA, ADR 1.8%
ENERGY/MINERALS
--------------------------------------------------
BARRETT RESOURCES CORP. 1.8%
ENERGY/MINERALS
--------------------------------------------------
PHILIP MORRIS COS. INC. 1.8%
CONSUMER NON-DURABLES
--------------------------------------------------
U.S. ROBOTICS CORP. 1.7%
ELECTRONIC TECHNOLOGY
--------------------------------------------------
NIKE INC., CLASS B 1.7%
CONSUMER NON-DURABLES
--------------------------------------------------
FELCOR SUITE HOTELS INC. 1.7%
REAL ESTATE INVESTMENT TRUSTS
--------------------------------------------------
FOR A DETAILED LISTING OF PORTFOLIO HOLDINGS, SEE PAGE 7 OF THIS REPORT.
This discussion reflects the strategies we employed for the fund during the
six-month period, and includes our opinions as of the close of the period. Since
economic and market conditions are constantly changing, our strategies,
evaluations, conclusions and decisions regarding portfolio holdings will 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
PERFORMANCE SUMMARY
CLASS I
The Franklin Equity Fund Class I reported a cumulative total return of +11.00%
for the six-month period ended December 31, 1996. Cumulative total return
measures the change in value of an investment, does not include the sales
charge, and assumes reinvestment of dividends and capital gains. As the chart to
the right illustrates, the fund delivered a cumulative total return of more than
+203% and an average annual total return of more than +11% over the 10-year
period ended December 31, 1996.
During the reporting period, shareholders received distributions totaling 2.87
cents ($0.0287) 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.
As measured by net asset value, the price of the fund's shares increased by
$0.46, from $8.26 on June 30, 1996, to $8.72 on December 31, 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 12/31/96
ONE- FIVE- TEN-
YEAR YEAR YEAR
- -------------------------------------------------
Cumulative
Total Return1 22.96% 81.23% 203.07%
Average Annual
Total Return2 17.47% 11.60% 11.22%
Value of $10,000
Investment3 $11,747 $17,311 $28,963
- -------------------------------------------------
One-Year Total Return4
12/31/92 12/31/93 12/31/94 12/31/95 12/31/96
3.59% 8.53% -1.38% 32.94% 22.96%
- --------------------------------------------------
1. Cumulative total return measures the change in value of an investment over
the periods indicated and does not include the 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 sales charge. See Note below.
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 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 subsequent 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.
PERFORMANCE SUMMARY
CLASS II
The Franklin Equity Fund Class II reported a cumulative total return of +10.58%
for the six-month period ended December 31, 1996. Cumulative 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, 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. As measured by net asset value, the price of the fund's
shares increased by $0.45, from $8.23 on June 30, 1996, to $8.68 on December 31,
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 12/31/96
SINCE
ONE- INCEPTION
YEAR (5/1/95)
- -----------------------------------------------------------
Cumulative Total Return 21.85% 46.54%
Average Annual Total Return2 19.57% 24.92%
Value of $10,000 Investment3 $11,957 $14,501
- -----------------------------------------------------------
1. Cumulative total return measures the change in value of an investment over
the periods indicated and does not include the sales charges. 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 1.00% initial sales
charge and 1.00% contingent deferred sales charge (CDSC), applicable to shares
redeemed within the first 18 months of investment. 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 charges. 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.
FRANKLIN EQUITY FUND
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, DECEMBER 31, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
Value
SHARES (Note 1)
COMMON STOCKS 93.8%
COMMERCIAL SERVICES 0.6%
<C> <S> <C>
50,000 Omnicom Group, Inc. ............................................... $ 2,287,500
-----------
CONSUMER DURABLES 2.0%
100,000 Callaway Golf Co. ................................................. 2,875,000
200,000 Mattel, Inc. ...................................................... 5,550,000
----------
8,425,000
----------
CONSUMER NON-DURABLES 8.8%
65,000 Gillette Co. ...................................................... 5,053,750
120,000 Nike, Inc., Class B................................................ 7,170,000
210,000 Pepsico, Inc. ..................................................... 6,142,500
65,000 Philip Morris Cos., Inc. .......................................... 7,320,625
60,000 Proctor & Gamble Co. .............................................. 6,450,000
125,000 Sara Lee Corp. .................................................... 4,656,250
----------
36,793,125
----------
CONSUMER SERVICES 1.9%
150,000a CUC International, Inc. ........................................... 3,562,500
150,000 TCA Cable TV, Inc. ................................................ 4,518,750
----------
8,081,250
----------
ELECTRONIC TECHNOLOGY 15.2%
75,000a 3Com Corp. ........................................................ 5,503,125
75,000a Ascend Communications, Inc. ....................................... 4,659,375
200,000a Cabletron Systems, Inc. ........................................... 6,650,000
140,000a Cisco Systems, Inc. ............................................... 8,907,500
50,000 Ericsson (L.M.) Telecommunications, ADR............................ 1,509,375
47,305 Lockheed Martin Corp. ............................................. 4,328,408
16,204 Lucent Technologies, Inc. ......................................... 749,435
10,000 Motorola, Inc. .................................................... 613,750
200,000a Newbridge Networks Corp. .......................................... 5,650,000
110,000 Nokia Corp., ADR................................................... 6,325,000
40,000 Raytheon Co. ...................................................... 1,925,000
250,000a Tekelec ........................................................... 3,937,500
140,000a Tellabs, Inc. ..................................................... 5,267,500
100,000a U.S. Robotics Corp. ............................................... 7,200,000
----------
63,225,968
----------
ENERGY/MINERALS 9.5%
175,000a Barrett Resources Corp. ........................................... 7,459,375
250,000 Enron Oil & Gas Co. ............................................... 6,312,500
Energy/Minerals (cont.)
45,000 Mobil Corp. ....................................................... $ 5,501,250
200,000 Repsol, SA, ADR.................................................... 7,625,000
185,000 Ultramar Diamond Shamrock Corp. ................................... 5,850,625
275,000 YPF Sociedad Anonima, ADR.......................................... 6,943,750
----------
39,692,500
----------
FINANCE 10.0%
75,000 American International Group, Inc. ................................ 8,118,750
100,000 Associates First Capital Corp. .................................... 4,412,500
65,000 Citicorp .......................................................... 6,695,000
62,900d Credit Communal Holding/Dexia (Belgium) ........................... 5,739,359
150,000 First USA, Inc. ................................................... 5,193,750
130,000 Leucadia National Corp. ........................................... 3,477,500
175,000a Risk Capital Holdings, Inc. ....................................... 3,390,625
106,666 Travelers Group, Inc. ............................................. 4,839,970
41,867,454
----------
HEALTH SERVICES 3.7%
80,000 HBO & Co. ......................................................... 4,750,000
75,000a Oxford Health Plans, Inc. ......................................... 4,392,188
75,000a PacifiCare Health Systems, Inc., Class B........................... 6,393,750
----------
15,535,938
----------
HEALTH TECHNOLOGY 6.7%
60,000 American Home Products Corp. ...................................... 3,517,500
90,000a Amgen, Inc. ....................................................... 4,893,750
100,000 Baxter International, Inc. ........................................ 4,100,000
35,000 Bristol-Myers Squibb Co. .......................................... 3,806,250
210,000 Mentor Corp. ...................................................... 6,195,000
200d Roche Holdings, AG (Switzerland)................................... 1,556,220
3,500d Novartis, AG (Switzerland) ........................................ 4,005,977
----------
28,074,697
----------
INDUSTRIAL SERVICES 2.2%
200,000a AES Corp. ......................................................... 9,300,000
----------
PROCESS INDUSTRIES 1.1%
175,000 Pittston Brink's Group ............................................ 4,725,000
----------
PRODUCER MANUFACTURING 2.4%
250,000 Mark IV Industries, Inc. .......................................... $ 5,656,250
80,000 Roper Industries, Inc. ............................................ 3,130,000
29,300a U.S. Filter Corp. ................................................. 930,275
----------
9,716,525
----------
REAL ESTATE INVESTMENT TRUST 1.7%
200,000 FelCor Suite Hotels, Inc. ......................................... 7,075,000
----------
RETAIL TRADE 1.5%
175,000a Borders Group, Inc. ............................................... 6,278,125
----------
SEMICONDUCTORS 9.2%
60,000a Applied Materials, Inc. ........................................... 2,156,250
300,000a Exar Corp. ........................................................ 4,650,000
125,000 Intel Corp. ....................................................... 16,367,188
100,000 Linear Technology Corp. ........................................... 4,387,500
75,000a SGS-Thomson Microelectronics, Inc., ADR............................ 5,250,000
150,000a Xilinx, Inc. ...................................................... 5,521,875
----------
38,332,813
----------
SOFTWARE/TECHNOLOGY SERVICES 7.3%
110,000 Adobe Systems, Inc. ............................................... 4,111,250
75,000a Broderbund Software, Inc. ......................................... 2,231,250
125,000 Electronic Data Systems Corp. ..................................... 5,406,250
160,000 First Data Corp.................................................... 5,840,000
150,000a Oracle Corp. ...................................................... 6,262,500
100,000a Sterling Commerce, Inc. ........................................... 3,525,000
100,000a Sterling Software, Inc. ........................................... 3,162,500
----------
30,538,750
----------
TRANSPORTATION 3.0%
170,000 Air Express International Corp. ................................... 5,482,500
200,000 Pittston Burlington Group ......................................... 4,000,000
135,000 Southwest Airlines Co. ............................................ 2,986,875
----------
12,469,375
----------
UTILITIES 7.0%
175,000a AirTouch Communications, Inc. ..................................... 4,418,750
50,000 AT&T Corp. ........................................................ 2,175,000
66,500d Deutsche Telekom, AG (Germany) .................................... 1,398,294
125,000 GTE Corp. ......................................................... 5,687,500
150,000 PacifiCorp ........................................................ 3,075,000
275,000 PG & E Corp. ...................................................... 5,775,000
Utilities (cont.)
100,000 TECO Energy, Inc. ................................................. $ 2,412,500
112,500 Williams Cos., Inc. ............................................... 4,218,750
-----------
29,160,794
-----------
TOTAL COMMON STOCKS (COST $281,636,663)...................... 391,579,814
-----------
FACE
AMOUNT
CONVERTIBLE BONDS 1.9%
$ 3,625,000c Altera Corp., sub. notes, 5.75%, 06/15/02 ......................... 5,623,278
2,000,000c,e Omnicom Group, Inc., sub. notes, 4.25%, 01/03/07 .................. 2,045,000
400,000 U.S. Filter Corp., sub. notes, 4.50%, 12/15/01 .................... 408,500
----------
TOTAL CONVERTIBLE BONDS (COST $6,099,313)........................ 8,076,778
----------
TOTAL LONG TERM INVESTMENTS (COST $287,735,976).................. 399,656,592
-----------
<S> <C> <C>
RECEIVABLES FROM REPURCHASE AGREEMENTS 4.9%
20,031,763b Joint Repurchase Agreements, 6.59%, 01/02/97, (Maturity Value $20,384,902)
(Cost $20,377,441)
Aubrey G. Lanston & Co., Inc., (Maturity Value $2,554,570)
Collateral: U.S. Treasury Notes, 6.00% - 8.625%, 08/15/97 - 09/30/98
Bear, Sterns & Co., (Maturity Value $2,554,570)
Collateral: U.S. Treasury Notes, 5.125% - 8.75%, 10/15/97 - 06/30/01
CIBC Wood Gundy Securities Corp., (Maturity Value $2,554,570)
Collateral: U.S. Treasury Notes, 5.75% - 6.25%, 07/13/98 - 12/31/98
Daiwa Securities America, Inc., (Maturity Value $2,554,570)
Collateral: U.S. Treasury Notes, 6.00% - 9.125%, 05/15/97 - 08/15/01
Donaldson, Luftkin & Jenrenette Securities Corp., (Maturity Value $2,554,570)
Collateral: U.S. Treasury Notes, 6.00% - 8.875%, 11/15/97 - 11/15/01
SBC Warburg, Inc., (Maturity Value $2,502,912)
Collateral: U.S. Treasury Notes, 6.25% - 7.875%, 11/15/98 - 04/30/01
The Nikko Securities Co. International, Inc., (Maturity Value $2,554,570)
Collateral: U.S. Treasury Notes, 6.25% - 7.875%, 11/15/98 - 04/30/01
UBS Securities, L.L.C., (Maturity Value $2,554,570)
Collateral: U.S. Treasury Notes, 6.25% - 8.50%, 06/30/98 - 05/31/01 ........... 20,377,441
-----------
TOTAL INVESTMENTS (COST $308,113,417) 100.6% ........................ 420,034,033
LIABILITIES IN EXCESS OF OTHER ASSETS (0.6)% ........................ (2,414,556)
------------
NET ASSETS 100% ..................................................... $417,619,477
============
At December 31, 1996, the net unrealized appreciation based on
the cost of investments for income tax purposes of $308,180,483
was as follows:
Aggregate gross unrealized appreciation for all investments in which
there was an excess of value over tax cost..................................... $114,077,385
Aggregate gross unrealized depreciation for all investments in which
there was an excess of tax cost over value .................................... (2,223,835)
------------
Net unrealized appreciation .................................................. $111,853,550
============
</TABLE>
PORTFOLIO ABBREVIATIONS:
L.L.C. - Limited Liability Corp.
a Non-income producing.
b Face amount for repurchase agreements is for the underlying collateral.
See Note 1(g) regarding joint repurchase agreements.
c Purchased in a private placement transaction; resale may only be to qualified
institutional buyers.
d Securities traded in foreign currency and valued in U.S. dollars.
e See Note 1(h) regarding securities purchased on a when-issued or delayed
delivery basis.
The accompanying notes are an integral part of these
financial statements.
FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1996 (UNAUDITED)
Assets:
<S> <C>
Investments in securities, at value (identified cost $287,735,976).............................. $399,656,592
Receivables from repurchase agreements, at value and cost....................................... 20,377,441
Cash............................................................................................ 192,292
Receivables:
Dividends and interest......................................................................... 522,532
Capital shares sold............................................................................ 204,974
-----------
Total assets............................................................................... 420,953,831
Liabilities: ===========
Payables:
Investment securities purchased:
Regular delivery.............................................................................. 809,522
When-issued basis (Note 1).................................................................... 2,000,000
Capital shares repurchased..................................................................... 64,470
Management fees................................................................................ 179,435
Distribution fees.............................................................................. 139,889
Shareholder servicing costs.................................................................... 51,890
Accrued expenses and other liabilities.......................................................... 89,148
------------
Total liabilities.......................................................................... 3,334,354
------------
Net assets, at value............................................................................. $417,619,477
============
Net assets consist of:
Undistributed net investment income............................................................. $ 43,865
Unrealized appreciation on investments and translation of assets and liabilities denominated in
foreign currencies.............................................................................. 111,920,676
Undistributed net realized gain from investments ............................................... 9,665,206
Class I capital shares.......................................................................... 290,063,878
Class II capital shares......................................................................... 5,925,852
------------
Net assets, at value............................................................................. $417,619,477
============
CLASS I SHARES:
Net assets, at value ........................................................................... $411,151,404
============
Shares outstanding.............................................................................. 47,143,230
===========
Net asset value per share*...................................................................... $8.72
===========
CLASS II SHARES:
Net assets, at value............................................................................ $ 6,468,073
===========
Shares outstanding.............................................................................. 744,945
===========
Net asset value per share*...................................................................... $8.68
===========
*Redemption price per share is equal to net asset value less any applicable
contingent deferred sales charge.
</TABLE>
The accompanying notes are an integral part of these financial statements.
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED DECEMBER 31, 1996 (UNAUDITED)
Investment income:
<S> <C> <C>
Dividends............................................................................. $2,403,261
Interest.............................................................................. 752,478
----------
Total income..................................................................... $ 3,155,739
---------
Expenses:
Management fees (Note 5).............................................................. 988,589
Distribution fees - Class I (Note 5).................................................. 347,914
Distribution fees - Class II (Note 5)................................................. 26,210
Shareholder servicing costs (Note 5).................................................. 223,989
Reports to shareholders............................................................... 137,818
Registration and filing fees.......................................................... 23,812
Professional fees..................................................................... 19,942
Directors' fees and expenses.......................................................... 12,548
Custodian fees........................................................................ 524
Other................................................................................. 11,853
--------
Total expenses................................................................... 1,793,199
----------
Net investment income............................................................ 1,362,540
----------
Realized and unrealized gain (loss) from investments and foreign currency:
Net realized gain (loss) on:
Investments.......................................................................... 9,653,000
Foreign currency transactions........................................................ (30,721)
Net unrealized appreciation on investments............................................ 29,167,096
----------
Net realized and unrealized gain from investments and foreign currency................. 38,789,375
---------
Net increase in net assets resulting from operations................................... $40,151,915
===========
</TABLE>
STATEMENTS OF CHANGES IN NET ASSETS FOR THE SIX MONTHS ENDED DECEMBER 31, 1996
(UNAUDITED) AND THE YEAR ENDED JUNE 30, 1996
<TABLE>
<CAPTION>
SIX MONTHS YEAR
ENDED ENDED
DECEMBER 31, 1996 JUNE 30, 1996
---------------- -------------
Increase (decrease) in net assets:
Operations:
<S> <C> <C>
Net investment income....................................................... $ 1,362,540 $ 2,489,958
Net realized gain from investments and foreign currency transactions........ 9,622,279 25,749,129
Net unrealized appreciation on investments.................................. 29,167,096 40,315,485
------------ -----------
Net increase in net assets resulting from operations.................... 40,151,915 68,554,572
Distributions to shareholders from:
Undistributed net investment income:
Class I..................................................................... (1,287,453) (2,720,379)
Class II.................................................................... (501) (4,684)
Net realized capital gains:
Class I..................................................................... (19,326,369) (19,945,149)
Class II.................................................................... (302,949) (103,886)
Increase in net assets from capital share transactions (Note 3 ).............. 27,574,667 7,224,174
------------- ----------
Net increase in net assets.............................................. 46,809,310 53,004,648
Net assets:
Beginning of period.......................................................... 370,810,167 317,805,519
------------- ----------
End of period (including undistributed net investment income of $43,865 at
12/31/96) ................................................................... $417,619,477 $370,810,167
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
1. SIGNIFICANT ACCOUNTING POLICIES
Franklin Equity Fund (the Fund) is an open-end, diversified management
investment company (mutual fund), registered under the Investment Company Act of
1940, as amended. The investment objective of the Fund is capital growth.
The Fund offers two classes of shares, Class I and Class II. Effective January
1, 1997, the Fund will offer Advisor Class shares only to qualified investors.
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. 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 representatative market as determined by the manager. The Fund may utilize
a pricing service, bank or broker/dealer experienced in such matters to perform
any of the pricing functions, under procedures approved by the Board of
Directors (the Board). Securities for which market quotations are not available
are valued in accordance with procedures established by the Board.
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.
1. SIGNIFICANT ACCOUNTING POLICIES (CONT.)
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 and foreign currency
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 arises
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. REPURCHASE AGREEMENTS:
The Fund may enter into a joint repurchase agreement whereby its uninvested cash
balance is deposited into a joint cash account to be used to invest in one or
more repurchase agreements with government securities dealers recognized by the
Federal Reserve Board and/or member banks of the Federal Reserve System. The
value and face amount of the joint repurchase agreement are allocated to the
Fund based on its pro-rata interest. A repurchase agreement is accounted for as
a loan by the Fund to the seller, collateralized by underlying U.S. government
securities, which are delivered to the Fund's custodian. The market value,
including accrued interest, of the initial collateralization is required to be
at least 102% of the dollar amount invested by the Fund, with the value of the
underlying securities marked to market daily to maintain coverage of at least
100%. At December 31, 1996, all outstanding repurchase agreements held by the
Fund had been entered into on that date.
H. SECURITIES PURCHASED ON A WHEN-ISSUED OR DELAYED DELIVERY BASIS:
The Fund may purchase securities on a when-issued or delayed delivery basis,
with payment and delivery scheduled for a future date. These transactions are
subject to market fluctuations and are subject to the risk that the value at
delivery may be more or less than the trade date purchase price. Although the
Fund will generally purchase these securities with the intention of holding the
securites, it may sell the securities before the settlement date. These
securities are identified on the accompanying Statement of Investments in
Securites and Net Assets. The Fund has set aside sufficient investment
securities as collateral for these purchase commitments.
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 December 31,
1996 by $67,066.
3. CAPITAL STOCK
At December 31, 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 Advisor Class shares. Advisor Class
shares will become available for sale on January 1, 1997. Transactions in the
Fund's shares for the six months ended December 31, 1996 and for the year ended
June 30, 1996 were as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
DECEMBER 31, 1996 JUNE 30, 1996
-------------------- ---------------------
CLASS I SHARES: SHARES AMOUNT SHARES AMOUNT
-------- ---------- --------- ----------
<S> <C> <C> <C> <C>
Shares sold ........................................ 5,879,095 $50,232,688 10,429,328 $80,970,898
Shares issued in reinvestment of distributions ..... 2,130,953 19,029,436 2,810,022 20,880,395
Shares redeemed .................................... (5,270,283) (43,691,044) (12,654,395) (98,218,044)
-------- ---------- --------- ----------
Net increase ....................................... 2,739,765 $25,571,080 584,955 $ 3,633,249
======== ========== ========= ==========
Class II Shares:
Shares sold ........................................ 327,139 $ 2,745,484 554,667 $ 4,314,434
Shares issued in reinvestment of distributions ..... 30,206 268,532 12,982 95,849
Shares redeemed .................................... (123,672) (1,010,429) (103,616) (819,358)
-------- ---------- --------- ----------
Net increase ....................................... 233,673 $ 2,003,587 464,033 $ 3,590,925
======== ========== ========= ==========
</TABLE>
4. PURCHASES AND SALES OF SECURITIES
Purchases and sales of securities (excluding purchases and sales of short-term
securities) for the six months ended December 31, 1996, aggregated $100,622,425
and $81,572,554, 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% Over $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.
5. TRANSACTIONS WITH AFFILIATES AND RELATED PARTIES (CONT.)
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 six months ended December 31, 1996, aggregated $223,989 of which $206,580
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, the amounts paid to other dealers, and any
applicable contingent deferred sales charges for the six months ended December
31, 1996, were as follows:
CLASS I CLASS II
------- ------
Total commissions received............. $263,693 $17,322
Paid to other dealers.................. $245,394 $23,378
Contingent deferred sales charges...... -- $ 1,743
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. FINANCIAL HIGHLIGHTS
Selected data for each share of capital stock outstanding throughout each period
are as follows:
<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEAR ENDED JUNE 30,
-----------------------------------------
CLASS I SHARES: 12/31/96 1996 1995 1994 1993 1992
------- ------- ------- ------- ------- -------
PER SHARE OPERATING PERFORMANCE
<S> <C> <C> <C> <C> <C> <C>
Net asset value at beginning of period...... $8.26 $7.24 $6.53 $7.25 $7.12 $7.36
------- ------- ------- ------- ------- -------
Net investment income....................... .030 .060 .080 .100 .120 .140
Net realized and unrealized gain on securities .890 1.484 1.329 .107 .557 .089
------- ------- ------- ------- ------- -------
Total from investment operations............ .920 1.544 1.409 .207 .677 .229
------- ------- ------- ------- ------- -------
Less distributions:
From net investment income................. (.029) (.062) (.079) (.103) (.119) (.142)
From capital gains......................... (.431) (.462) (.620) (.824) (.428) (.327)
------- ------- ------- ------- ------- -------
Total distributions......................... (.460) (.524) (.699) (.927) (.547) (.469)
------- ------- ------- ------- ------- -------
Net asset value at end of period............ $8.72 $8.26 $7.24 $6.53 $7.25 $7.12
======= ======= ======= ======= ======= =======
Total Return**.............................. 11.00% 22.16% 23.78% 2.28% 9.53% 3.36%
</TABLE>
6. FINANCIAL HIGHLIGHTS (CONT.)
<TABLE>
<CAPTION>
Six Months
Ended Year Ended June 30,
-----------------------------------------
Class I Shares: (cont.) 12/31/96 1996 1995 1994 1993 1992
------- ------- ------- ------- ------- -------
Ratio/Supplemental Data
<S> <C> <C> <C> <C> <C> <C>
Net assets at end of period (in 000's)...... $411,151 $366,602 $317,463 $279,880 $345,755 $364,826
Ratio of expenses to average net assets..... .93%* .95% .95% .79% .69% .70%
Ratio of net investment income to average
net assets................................. .72%* .72% 1.21% 1.27% 1.67% 1.86%
Portfolio turnover rate..................... 22.67% 59.86% 86.20% 95.18% 51.12% 49.19%
Average commission rate***.................. .0602 .0548 -- -- -- --
</TABLE>
Six Months
Ended
CLASS II SHARES: 12/31/96 1996 1995+
------- ------- -------
PER SHARE OPERATING PERFORMANCE
Net asset value at beginning of period...... $8.23 $7.24 $6.65
------- ------- -------
Net investment income....................... -- .020 .010
Net realized and unrealized gain on securities .881 1.452 .615
------- ------- -------
Total from investment operations............ .881 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............ $8.68 $8.23 $7.24
======= ======= =======
TOTAL RETURN**.............................. 10.58% 20.94% 9.42%
RATIO/SUPPLEMENTAL DATA
Net assets at end of period (in 000's)...... $6,468 $4,208 $342
Ratio of expenses to average net assets..... 1.84%* 1.77% 1.77%*
Ratio of net investment income to average
net assets................................. .03%* .00% .74%*
Portfolio turnover rate..................... 22.67% 59.86% 86.20%
Average commission rate***.................. .0602 .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 the 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.
Franklin Equity Fund Semi-Annual Report December 31, 1996.
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 December 31, 1996, based on total net assets.
Portfolio Breakdown on 12/31/96
Transportation 3.0%
Real Estate Investment Trusts 1.7%
Health Care 10.4%
Electronic Technology 15.2%
Commercial & Industrial Services 3.3%
Utilities 7.0%
Software/Technology Services 7.3%
Process Industries & Manufacturing 3.6%
Retail & Consumer 14.2%
Semiconductors 10.5%
Finance 10.0%
Energy & Materials 9.5%
Short-Term Obligations & 4.3%
Other Net Assets
