SHAREHOLDER LETTER
Your Fund's Goal: Franklin Equity Fund seeks capital appreciation and
secondarily, current income, by investing primarily in common stocks or
securities convertible into common stocks.
Dear Shareholder:
This semiannual report of Franklin Equity Fund covers the six months ended
December 31, 1998. During this time, Asia and Russia experienced economic
turmoil, but the U.S. economy remained healthy, with gross domestic product
increasing at an annualized rate of 4.7%. The consumer price index rose only
0.55% during the reporting period, and unemployment was low, averaging around
4.5%.(1) Although the U.S. stock market suffered a major correction in late
summer, it rebounded after the Federal Reserve Board lowered interest rates in
September, October and November.
Within this environment, Franklin Equity Fund - Class I posted a +0.16%
six-month cumulative total return, as discussed in the Performance Summary on
page 4, but provided a +24.09% cumulative total return for the last three months
of the period. It outperformed the Russell 2000(R) Index, which posted a -7.12%
six month total return, but underperformed the Standard and Poor's(R) 500 Stock
Index, which delivered a +9.23% total return for the same period.(2) This
1. Source: Bloomberg.
2. Source: Standard & Poor's Micropal. Indices are unmanaged and include
reinvested dividends. One cannot invest directly in an index.
You will find a complete listing of the fund's portfolio holdings, including
dollar value and number of shares or principal amount, beginning on page 9 of
this report.
CONTENTS
Shareholder Letter ................ 1
Performance Summary ............... 4
Financial Highlights &
Statement of Investments .......... 6
Financial Statements .............. 13
Notes to
Financial Statements .............. 16
FUND CATEGORY
[PYRAMID GRAPHIC]
PORTFOLIO BREAKDOWN
Based on Total Net Assets
12/31/98
Electronic Technology 20.1%
Finance 13.1%
Health Technology 10.0%
Consumer Non-Durables 7.2%
Telecommunications 5.9%
Technology Services 5.3%
Energy Minerals 5.3%
Transportation 3.9%
Utilities 3.8%
Short-Term Investments
& Other Net Assets 5.9%
Other Sectors 19.5%
underperformance was due partly to the fund's substantial holdings of small and
mid-cap stocks, which lagged the performance of expensive large-cap growth
stocks during the six months under review. Rather than purchasing such growth
stocks, we remained committed to our value-conscious philosophy for growth-stock
investing, believing that our performance would recover in the long term.
The fund's performance was also hampered by exposure to the energy and financial
sectors. Oil prices slumped, reducing earnings prospects for oil companies, and
many of our financial holdings fell in value due to concerns that these
companies might experience security-trading losses and foreign-debt writeoffs in
the future.
During the period under review, we maintained a considerable proportion of the
fund's portfolio in technology sectors. Many of our electronic technology
shares, including Cisco Systems Inc. and Lucent Technologies Inc., appreciated
substantially and we established positions in HNC Software Inc., a major
supplier of fraud detection and consumer analysis software. We increased our
exposure to the utilities sector by acquiring shares of Montana Power Co., a
company poised to benefit from the growth in telecommunications through its
fiber optic subsidiary, Touch America. We also added to our health technology
holdings by purchasing stock of Amgen Inc., a manufacturer of drugs designed to
treat cancer, anemia and kidney failure, and raised our health services exposure
by acquiring shares of Cardinal Health Inc., a leading wholesale distributor of
pharmaceuticals and related healthcare products. In our opinion, these sectors
should continue to grow as demand increases for Internet services, credit card
usage, communications bandwidth and health care services.
2
Looking forward, we believe that the savings and retirement plans of aging
"baby-boomers" should provide positive cash flows to U.S. capital markets, as
well as boost demand for health care services and products. We also feel that
stabilization of foreign economies, low inflation, and modest interest rates may
help support the growing global economy, creating opportunities for many
domestic firms, particularly technology companies that make products to enhance
productivity. Although the impeachment of President Clinton, foreign turmoil and
Year 2000 computer compliance issues may result in market volatility, we believe
that over the long term, our growth-at-a-reasonable-price investment discipline
should provide our shareholders with positive returns and conscientious risk
management.
This discussion reflects our views and opinions as of December 31, 1998, the end
of the reporting period. However, market and economic conditions are changing
constantly, which may affect our strategies and portfolio holdings. Although
past performance is not predictive of future results, these insights may help
you understand our investment and management philosophy.
As always, we thank you for your participation in 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,
/s/ Conrad B. Hermann
Conrad B. Herrmann
Portfolio Manager
Franklin Equity Fund
TOP 10 SECTORS
12/31/98
% OF TOTAL
SECTOR NET ASSETS
- ------------------------------------------------
Electronic Technology 20.1%
Finance 13.1%
Health Technology 10.0%
Consumer Non-Durables 7.2%
Telecommunications 5.9%
Energy Minerals 5.3%
Technology Services 5.3%
Transportation 3.9%
Utilities 3.8%
Industrial Services 3.4%
TOP 10 HOLDINGS
12/31/98
COMPANY, % OF TOTAL
INDUSTRY NET ASSETS
- ------------------------------------------------------
Cisco Systems Inc. 3.9%
Electronic Technology
Intel Corp. 2.4%
Electronic Technology
AirTouch Communications Inc. 2.0%
Telecommunications
Providian Financial Corp. 2.0%
Finance
AES Corp. 1.8%
Industrial Services
Enron Corp. 1.8%
Utilities
Nokia Corp., ADR (Finland) 1.7%
Electronic Technology
Synopsys Inc. 1.7%
Electronic Technology
Swisscom AG (Switzerland) 1.6%
Telecommunications
Electronic Arts Inc. 1.6%
Consumer Durables
3
CLASS I:
Subject to the current,maximum 5.75% initial sales charge.Prior to August
3,1998,fund shares were offered at a lower initial sales charge,thus actual
returns may differ. Effective May 1,1994,the fund eliminated the sales charge on
reinvested dividends and implemented a Rule 12b-1 Plan,which affects subsequent
performance.
CLASS II:
Subject to 1% initial sales charge and 1% contingent deferred sales charge for
shares redeemed within 18 months of investment. These shares have higher annual
fees and expenses than Class I shares.
ADVISOR CLASS:
No initial sales charge or Rule 12b-1 fees and are available to a limited class
of investors.
PERFORMANCE SUMMARY AS OF 12/31/98
Distributions will vary based on earnings of the fund's portfolio and any
profits realized from the sale of the portfolio's securities. Past distributions
are not indicative of future trends. All total returns include reinvested
distributions at net asset value.
PRICE AND DISTRIBUTION INFORMATION (7/1/98 - 12/31/98)
CLASS I Change 12/31/98 6/30/98
- ----------------------------------------------------------------------------
Net Asset Value -$0.60 $10.39 $10.99
Distributions
------------------------------------------
Long-Term Capital Gain $0.4151
Short-Term Capital Gain $0.1611
TOTAL $0.5762
CLASS II Change 12/31/98 6/30/98
- ----------------------------------------------------------------------------
Net Asset Value -$0.64 $10.27 $10.91
Distributions
------------------------------------------
Long-Term Capital Gain $0.4151
Short-Term Capital Gain $0.1611
TOTAL $0.5762
Advisor Class Change 12/31/98 6/30/98
- ----------------------------------------------------------------------------
Net Asset Value -$0.59 $10.41 $11.00
Distributions
------------------------------------------
Long-Term Capital Gain $0.4151
Short-Term Capital Gain $0.1611
TOTAL $0.5762
Franklin Equity Fund paid distributions derived from long-term capital gains of
41.51 cents ($0.4151) per share in December 1998. The fund hereby designates
such distributions as capital gain dividends per Internal Revenue Code 852
(b)(3).
4 Past performance is not predictive of future results.
Performance
<TABLE>
<CAPTION>
Class I 1-Year 5-Year 10-Year
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cumulative Total Return(1) +13.19% +131.05% +250.93%
Average Annual Total Return(2) +6.73% +16.83% +12.71%
Value of $10,000 Investment(3) $10,673 $21,766 $33,092
12/31/94 12/31/95 12/31/96 12/31/97 12/31/98
- ------------------------------------------------------------------------------------------------
One-Year
Total Return(4) -1.38% +32.94% +22.96% +26.62% +13.19%
Inception
Class II 1-Year 3-Year (5/1/95)
- ------------------------------------------------------------------------------------------------
Cumulative Total Return(1) +12.35% +72.20% +107.09%
Average Annual Total Return(2) +10.22% +19.44% +21.60%
Value of $10,000 Investment(3) $11,022 $17,038 $20,494
12/31/96 12/31/97 12/31/98
- ------------------------------------------------------------------------------------------------
One-Year Total Return(4) +21.85% +25.79% +12.35%
Advisor Class(5) 1-Year 5-Year 10-Year
- ------------------------------------------------------------------------------------------------
Cumulative Total Return(1) +13.48% +132.05% +252.46%
Average Annual Total Return(2) +13.48% +18.34% +13.43%
Value of $10,000 Investment(3) $11,348 $23,205 $35,246
12/31/94 12/31/95 12/31/96 12/31/97 12/31/98
- ------------------------------------------------------------------------------------------------
One-Year
Total Return(4) -1.38% +32.94% +22.96% +26.85% +13.48%
</TABLE>
1. Cumulative total return represents 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 applicable, maximum
sales charges for that class.
3. These figures represent the value of a hypothetical $10,000 investment in the
fund over the periods indicated and include the current applicable, maximum
sales charges for that class.
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
charges.
5. On January 2, 1997, the fund began selling Advisor Class shares to certain
eligible investors as described in the prospectus. This share class does not
have sales charges or a Rule 12b-1 plan. Performance quotations have been
calculated as follows: (a) For periods prior to January 2, 1997, figures reflect
Class I performance, excluding the effect of the Class I sales charge, but
including the effect of Rule 12b-1 fees and other Class I expenses; and (b) for
periods after January 1, 1997, figures reflect actual Advisor Class performance,
including the deduction of all fees and expenses applicable only to that class.
Since January 2, 1997 (commencement of sales), the cumulative total return of
Advisor Class shares was 45.62%.
Since markets can go down as well as up, 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.
5
FRANKLIN EQUITY FUND
Financial Highlights
<TABLE>
<CAPTION>
CLASS I
------------------------------------------------------------------------------
SIX MONTHS ENDED YEAR ENDED JUNE 30,
DECEMBER 31, 1998 ------------------------------------------------------------
(UNAUDITED) 1998 1997 1996 1995 1994
------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period ............. $10.99 $10.16 $8.26 $7.24 $6.53 $7.25
------------------------------------------------------------------------------
Income from investment operations:
Net investment income .......................... .04 .05 .05 .06 .08 .10
Net realized and unrealized gains (losses) ..... (.06) 2.08 2.34 1.48 1.33 .11
------------------------------------------------------------------------------
Total from investment operations ................ (.02) 2.13 2.39 1.54 1.41 .21
------------------------------------------------------------------------------
Less distributions from:
Net investment income .......................... -- (.05) (.06) (.06) (.08) (.10)
Net realized gains ............................. (.58) (1.25) (.43) (.46) (.62) (.83)
------------------------------------------------------------------------------
Total distributions ............................. (.58) (1.30) (.49) (.52) (.70) (.93)
==============================================================================
Net asset value, end of period ................... $10.39 $10.99 $10.16 $8.26 $7.24 $6.53
==============================================================================
Total return* ................................... .16% 22.43% 29.75% 22.16% 23.78% 2.32%
RATIOS/SUPPLEMENTAL DATA
Net assets,end of period (000's) ................ $635,266 $613,835 $462,972 $366,602 $317,463 $279,880
Ratios to average net assets:
Expenses ....................................... .94%** .90% .91% .95% .95% .79%
Net investment income .......................... .82%** .48% .61% .72% 1.21% 1.27%
Portfolio turnover rate ......................... 15.96% 38.00% 53.67% 59.86% 86.20% 95.18%
</TABLE>
* Total return does not reflect sales commissions or the contingent deferred
sales charge,and is not annualized. Prior to May 1, 1994,dividends from net
investment income were reinvested at the offering price.
** Annualized
6
FRANKLIN EQUITY FUND
Financial Highlights (continued)
<TABLE>
<CAPTION>
CLASS II
----------------------------------------------------------------------
SIX MONTHS ENDED YEAR ENDED JUNE 30,
DECEMBER 31, 1998 -------------------------------------------------
(UNAUDITED) 1998 1997 1996 1995(1)
----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period ................ $10.91 $10.12 $8.23 $7.24 $6.65
----------------------------------------------------------------------
Income from investment operations:
Net investment income (loss) ....................... -- (.01) (.02) .02 .01
Net realized and unrealized gains (losses) ......... (.06) 2.05 2.34 1.45 .62
----------------------------------------------------------------------
Total from investment operations .................... (.06) 2.04 2.32 1.47 .63
----------------------------------------------------------------------
Less distributions from:
Net investment income .............................. -- -- -- (.02) (.04)
Net realized gains ................................. (.58) (1.25) (.43) (.46) --
----------------------------------------------------------------------
Total distributions ................................. (.58) (1.25) (.43) (.48) (.04)
======================================================================
Net asset value, end of period ...................... $10.27 $10.91 $10.12 $8.23 $7.24
======================================================================
Total return* ....................................... (.21%) 21.47% 28.93% 20.94% 9.42%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) ................... $45,936 $35,717 $9,554 $4,208 $342
Ratios to average net assets:
Expenses ........................................... 1.70%** 1.69% 1.72% 1.77% 1.77%(**)
Net investment income (loss) ....................... .04%** (.28%) (.22%) (.10%) .74%(**)
Portfolio turnover rate ............................. 15.96% 38.00% 53.67% 59.86% 86.20%
</TABLE>
* Total return does not reflect sales commissions or the contingent deferred
sales charge, and is not annualized.
** Annualized
(1) For the period May 1, 1995 (effective date) to June 30, 1995.
See notes to financial statements. 7
FRANKLIN EQUITY FUND
Financial Highlights (continued)
<TABLE>
<CAPTION>
ADVISOR CLASS
----------------------------------------------
SIX MONTHS ENDED YEAR ENDED JUNE 30,
DECEMBER 31, 1998 --------------------------
(UNAUDITED) 1998 1997(2)
----------------------------------------------
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value,beginning of period ............................. $11.00 $10.17 $8.62
----------------------------------------------
Income from investment operations:
Net investment income .......................................... .04 .07 .03
Net realized and unrealized gains (losses) ..................... (.05) 2.08 1.56
----------------------------------------------
Total from investment operations ................................ (.01) 2.15 1.59
----------------------------------------------
Less distributions from:
Net investment income .......................................... -- (.07) (.04)
Net realized gains ............................................. (.58) (1.25) --
----------------------------------------------
Total distributions ............................................. (.58) (1.32) (.04)
==============================================
Net asset value,end of period ................................... $10.41 $11.00 $10.17
==============================================
Total return* ................................................... .25% 22.61% 18.47%
RATIOS/SUPPLEMENTAL DATA
Net assets,end of period (000's) ................................ $25,032 $16,911 $6,890
Ratios to average net assets:
Expenses ....................................................... .70%** .69% .72%(**)
Net investment income .......................................... 1.10%** .71% .79%(**)
Portfolio turnover rate ......................................... 15.96% 38.00% 53.67%
</TABLE>
* Total return does not reflect sales commissions or the contingent deferred
sales charge and is not annualized.
** Annualized
(2) For the period January 2, 1997 (effective date) to June 30, 1997.
8 See notes to financial statements.
FRANKLIN EQUITY FUND
STATEMENT OF INVESTMENTS, DECEMBER 31, 1998 (UNAUDITED)
<TABLE>
<CAPTION>
SHARES VALUE
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS 93.0%
(a)COMMERCIAL SERVICES 1.4%
Concord EFS Inc. ............................................................. 125,000 $ 5,296,875
Sylvan Learning Systems Inc. ................................................. 150,000 4,575,000
------------
9,871,875
------------
CONSUMER DURABLES 2.4%
(a)Electronic Arts Inc. ....................................................... 200,000 11,225,000
Mattel Inc. .................................................................. 250,000 5,703,125
------------
16,928,125
------------
CONSUMER NON-DURABLES 7.2%
ConAgra Inc. ................................................................. 200,000 6,300,000
Gillette Co. ................................................................. 130,000 6,280,625
Nike Inc.,B .................................................................. 115,000 4,664,688
PepsiCo Inc. ................................................................. 150,000 6,140,625
Philip Morris Cos.Inc ........................................................ 170,000 9,095,000
Procter & Gamble Co. ......................................................... 100,000 9,131,250
Sara Lee Corp. ............................................................... 250,000 7,046,875
Wolverine World Wide Inc. .................................................... 152,600 2,021,950
------------
50,681,013
------------
(a)CONSUMER SERVICES 1.4%
Apollo Group Inc.,A .......................................................... 80,000 2,710,000
Clear Channel Communications Inc. ............................................ 100,000 5,450,000
Fox Entertainment Group Inc., A .............................................. 80,000 2,015,000
------------
10,175,000
------------
ELECTRONIC TECHNOLOGY 20.1%
(a)3Com Corp. ................................................................. 175,000 7,842,188
(a)Altera Corp. ............................................................... 150,582 9,166,679
(a)Applied Materials Inc. ..................................................... 125,000 5,335,938
(a)Cisco Systems Inc. ......................................................... 300,000 27,843,740
Intel Corp. .................................................................. 140,000 16,598,750
Linear Technology Corp. ...................................................... 125,000 11,195,313
(a)Loral Space & Communications Ltd. .......................................... 200,000 3,562,500
Lucent Technologies Inc. ..................................................... 100,000 11,000,000
Motorola Inc. ................................................................ 85,000 5,190,313
Nokia Corp.,ADR (Finland) .................................................... 100,000 12,043,750
(a)Synopsys Inc. .............................................................. 215,000 11,663,750
(a)Tekelec .................................................................... 232,600 3,852,438
(a)Tellabs Inc. ............................................................... 100,000 6,856,250
(a)Xilinx Inc. ................................................................ 150,000 9,768,750
------------
141,920,359
------------
ENERGY MINERALS 5.3%
(a)Barrett Resources Corp. .................................................... 246,300 5,911,200
(a)Conoco Inc.,A .............................................................. 152,300 3,179,263
Mobil Corp. .................................................................. 100,000 8,712,500
Texaco Inc. .................................................................. 125,000 6,609,375
</TABLE>
9
FRANKLIN EQUITY FUND
STATEMENT OF INVESTMENTS, DECEMBER 31, 1998 (UNAUDITED) (CONT.)
<TABLE>
<CAPTION>
SHARES VALUE
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (CONT.)
ENERGY MINERALS (CONT.)
Ultramar Diamond Shamrock Corp. .............................................. 225,000 $ 5,456,250
YPF SA,ADR (Argentina) ....................................................... 275,000 7,682,813
------------
37,551,401
------------
FINANCE 13.1%
Ace Ltd.(Bermuda) ............................................................ 200,000 6,887,500
American International Group Inc. ............................................ 112,500 10,870,313
ARM Financial Group Inc.,A ................................................... 125,000 2,773,438
Associates First Capital Corp.,A ............................................. 250,000 10,593,750
BankBoston Corp. ............................................................. 150,000 5,840,625
Citigroup Inc. ............................................................... 190,000 9,405,000
Espirito Santo Financial Group SA,ADR (Luxemburg) ............................ 425,000 8,314,063
Federated Investors Inc.,B ................................................... 375,000 6,796,875
Household International Inc. ................................................. 75,000 2,971,875
Providian Financial Corp. .................................................... 187,500 14,062,500
(a)Security Capital Group Inc.,B .............................................. 150,000 2,034,375
U.S.Bancorp .................................................................. 195,000 6,922,500
Washington Mutual Inc. ....................................................... 125,000 4,773,438
------------
92,246,252
------------
HEALTH SERVICES 2.7%
Cardinal Health Inc. ......................................................... 80,000 6,070,000
HBO & Co. .................................................................... 265,000 7,602,188
Omnicare Inc. ................................................................ 150,000 5,212,500
------------
18,884,688
------------
HEALTH TECHNOLOGY 10.0%
American Home Products Corp. ................................................. 75,000 4,223,438
(a)Amgen Inc. ................................................................. 75,000 7,842,188
Baxter International Inc. .................................................... 150,000 9,646,875
Bristol-Myers Squibb Co. ..................................................... 70,000 9,366,875
Mentor Corp. ................................................................. 75,000 1,757,813
Novartis AG (Switzerland) .................................................... 5,000 9,828,904
Roche Holding AG (Switzerland) ............................................... 700 8,541,682
(a)Serologicals Corp. ......................................................... 300,000 9,000,000
(a)Uniphase Corp. ............................................................. 145,000 10,059,375
------------
70,267,150
------------
INDUSTRIAL SERVICES 3.4%
(a)AES Corp. .................................................................. 275,000 13,028,125
(a)Varco International Inc. ................................................... 300,000 2,325,000
Waste Management Inc. ........................................................ 140,000 6,527,500
(a)Weatherford International Inc. ............................................. 100,000 1,937,500
------------
23,818,125
------------
NON-ENERGY MINERALS 1.3%
Carpenter Technology Corp. ................................................... 150,000 5,090,625
De Beers,ADR (South Africa) .................................................. 325,000 4,143,750
------------
9,234,375
------------
</TABLE>
10
FRANKLIN EQUITY FUND
Statement of Investments, December 31, 1998 (unaudited) (cont.)
<TABLE>
<CAPTION>
SHARES VALUE
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (CONT.)
PROCESS INDUSTRIES 1.9%
Ecolab Inc. .................................................................. 60,500 $ 2,189,344
General Electric Co. ......................................................... 10,000 1,020,625
(a)Owens-Illinois Inc. ........................................................ 225,000 6,890,625
Praxair Inc. ................................................................. 100,000 3,525,000
------------
13,625,594
------------
PRODUCER MANUFACTURING .4%
Roper Industries Inc. ........................................................ 150,000 3,056,250
------------
REAL ESTATE 1.1%
MeriStar Hospitality Corp. ................................................... 250,000 4,640,625
(a)Starwood Hotels & Resorts .................................................. 125,000 2,835,938
------------
7,476,563
------------
RETAIL TRADE 2.4%
Albertson's Inc. ............................................................. 140,000 8,916,250
(a)Hollywood Entertainment Corp. .............................................. 300,000 8,175,000
------------
17,091,250
------------
TECHNOLOGY SERVICES 5.3%
(a)EMC Corp. .................................................................. 30,000 2,550,000
(a)Equant NV,N.Y.shs.(Netherlands) ............................................ 139,600 9,466,625
(a)HNC Software Inc. .......................................................... 175,000 7,076,563
(a)i2 Technologies Inc. ....................................................... 50,000 1,518,750
(a)Oracle Corp. ............................................................... 150,000 6,468,750
SAP AG (Germany) ............................................................. 20,000 8,645,533
(a)Xoom Inc. .................................................................. 58,200 1,920,600
------------
37,646,821
------------
TELECOMMUNICATIONS 5.9%
(a)AirTouch Communications Inc. ............................................... 200,000 14,425,000
Bell Atlantic Corp. .......................................................... 60,000 3,180,000
GTE Corp. .................................................................... 75,000 4,875,000
Portugal Telecom SA (Portugal) ............................................... 175,000 8,023,689
(a)Swisscom AG (Switzerland) .................................................. 27,300 11,428,831
------------
41,932,520
------------
TRANSPORTATION 3.9%
Air Express International Corp. .............................................. 250,000 5,437,500
C.H.Robinson Worldwide Inc. .................................................. 275,000 7,132,813
Expeditors International of Washington Inc. .................................. 200,000 8,400,000
Southwest Airlines Co. ....................................................... 303,750 6,815,391
------------
27,785,704
------------
UTILITIES 3.8%
Enron Corp. .................................................................. 225,000 12,839,063
Montana Power Co. ............................................................ 122,800 6,945,875
</TABLE>
11
FRANKLIN EQUITY FUND
Statement of Investments, December 31, 1998 (unaudited) (cont.)
<TABLE>
<CAPTION>
SHARES VALUE
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (CONT.)
UTILITIES (CONT.)
PG&E Corp. ................................................................... 125,000 $ 3,937,500
TECO Energy Inc. ............................................................. 100,000 2,818,750
------------
26,541,188
------------
TOTAL COMMON STOCKS (COST $432,148,597) ...................................... 656,734,253
------------
PRINCIPAL
AMOUNT
------
CONVERTIBLE BONDS 1.1%
Omnicom Group Inc.,cvt.sub.deb,144A,4.25%,1/03/07 ............................ $2,000,000 3,816,000
Omnicom Group Inc.,cvt.sub.deb.,4.25%,1/03/07 ................................ 2,000,000 3,767,500
------------
TOTAL CONVERTIBLE BONDS (COST $4,595,000) .................................... 7,583,500
------------
(b)REPURCHASE AGREEMENT 5.2%
Joint Repurchase Agreement,4.681%,1/04/99,(Maturity Value $36,756,693)
(COST $36,737,585) .......................................................... 36,737,585 36,737,585
Barclays Capital Inc.
Bear,Stearns & Co.Inc.
Chase Securities Inc.
CIBC Oppenheimer Corp.
Donaldson,Lufkin & Jenrette Securities Corp.
Dresdner Kleinwort Benson,North America LLC
Goldman,Sachs & Co.
Greenwich Capital Markets Inc.
Lehman Brothers Inc.
NationsBanc Montgomery Securities LLC
Paine Webber Inc.
Paribas Corp.
Warburg Dillon Read LLC
Collateralized by U.S.Treasury Bills and Notes
TOTAL INVESTMENTS (COST $473,481,182) 99.3% .................................. 701,055,338
OTHER ASSETS,LESS LIABILITIES .7% ............................................ 5,178,542
------------
NET ASSETS 100.0% ............................................................ $706,233,880
============
</TABLE>
(a) Non-income producing.
(b) Investment is through participation in a joint account with other funds
managed by the investment advisor. At December 31, 1998, all repurchase
agreements had been entered into on that date.
12 See notes to financial statements.
FRANKLIN EQUITY FUND
Financial Statements
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1998 (UNAUDITED)
<TABLE>
<CAPTION>
<S> <C>
Assets:
Investments in securities,at value (cost $473,481,182) ........................... $701,055,338
Cash ............................................................................. 7,243,263
Receivables:
Investment securities sold ...................................................... 1,195,748
Capital shares sold ............................................................. 198,909
Dividends and interest .......................................................... 607,533
------------
Total assets ................................................................ 710,300,791
------------
Liabilities:
Payables:
Investment securities purchased ................................................. 1,787,475
Capital shares redeemed ......................................................... 885,339
Affiliates ...................................................................... 601,463
Shareholders .................................................................... 750,935
Other liabilities ................................................................ 41,699
------------
Total liabilities ........................................................... 4,066,911
------------
Net assets,at value ........................................................ $706,233,880
------------
Net assets consist of:
Undistributed net investment income .............................................. $ 2,407,022
Net unrealized appreciation ...................................................... 227,574,156
Accumulated net realized loss .................................................... (28,664,240)
Capital shares ................................................................... 504,916,942
------------
Net assets, at value ........................................................ $706,233,880
------------
CLASS I:
Net asset value per share ($635,265,848 / 61,124,012 shares outstanding)* ........ $10.39
============
Maximum offering price per share ($10.39 / 94.25%) ............................... $11.02
============
CLASS II:
Net asset value per share ($45,936,206 / 4,472,758 shares outstanding)* .......... $10.27
============
Maximum offering price per share ($10.27 / 99.00%) ............................... $10.37
============
ADVISOR CLASS:
Net asset value and maximum offering price per share ($25,031,826 / 2,403,703
shares outstanding) ............................................................. $10.41
============
</TABLE>
* Redemption price is equal to net asset value less any applicable contingent
deferred sales charge.
See notes to financial statements 13
FRANKLIN EQUITY FUND
Financial Statements (continued)
STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED DECEMBER 31, 1998 (UNAUDITED)
<TABLE>
<CAPTION>
<S> <C>
Investment income:
(net of foreign taxes of $14,000)
Dividends ...................................................................... $ 3,512,487
Interest ....................................................................... 1,928,290
------------
Total investment income ................................................... 5,440,777
------------
Expenses:
Management fees (Note 3) ....................................................... 1,518,293
Distribution fees (Note 3)
Class I ....................................................................... 672,352
Class II ...................................................................... 194,989
Transfer agent fees (Note 3) ................................................... 439,298
Custodian fees ................................................................. 15,048
Reports to shareholders ........................................................ 103,573
Registration and filing fees ................................................... 46,188
Professional fees .............................................................. 21,403
Directors' fees and expenses ................................................... 12,158
Other .......................................................................... 10,453
------------
Total expenses ............................................................ 3,033,755
------------
Net investment income .................................................... 2,407,022
------------
Realized and unrealized gains (losses):
Net realized gain (loss) from:
Investments ................................................................. (28,421,585)
Foreign currency transactions ............................................... 33,632
------------
Net realized loss ......................................................... (28,387,953)
Net unrealized appreciation on investments .................................... 27,602,940
------------
Net realized and unrealized loss ................................................ (785,013)
------------
Net increase in net assets resulting from operations ............................ $ 1,622,009
============
</TABLE>
14 See notes to financial statements.
FRANKLIN EQUITY FUND
Financial Statements (continued)
STATEMENT OF CHANGES IN NET ASSETS
FOR THE SIX MONTHS ENDED DECEMBER 31, 1998 (UNAUDITED)
AND THE YEAR ENDED JUNE 30, 1998
<TABLE>
<CAPTION>
SIX MONTHS YEAR
ENDED ENDED
DECEMBER 31, 1998 JUNE 30, 1998
-----------------------------------
<S> <C> <C>
Increase (decrease) in net assets:
Operations:
Net investment income ........................................................... $ 2,407,022 $ 2,665,937
Net realized gain (loss) from investments and foreign currency transactions ..... (28,387,953) 45,956,120
Net unrealized appreciation on investments ...................................... 27,602,940 64,966,613
-----------------------------------
Net increase in net assets resulting from operations .......................... 1,622,009 113,588,670
Distributions to shareholders from:
Net investment income:
Class I ........................................................................ -- (2,815,157)
Class II ....................................................................... -- --
Advisor Class .................................................................. -- (101,907)
Net realized gains:
Class I ......................................................................... (33,108,076) (59,592,831)
Class II ........................................................................ (2,427,924) (1,764,595)
Advisor Class ................................................................... (1,147,942) (1,486,880)
-----------------------------------
Total distributions to shareholders .............................................. (36,683,942) (65,761,370)
Capital share transactions: (Note 2)
Class I ......................................................................... 53,230,824 105,330,108
Class II ........................................................................ 12,109,651 24,428,866
Advisor Class ................................................................... 9,492,312 9,460,338
-----------------------------------
Total capital share transactions ................................................. 74,832,787 139,219,312
Net increase in net assets .................................................... 39,770,854 187,046,612
Net assets:
Beginning of period .............................................................. 666,463,026 479,416,414
-----------------------------------
End of period .................................................................... $ 706,233,880 $ 666,463,026
===================================
Undistributed net investment income included in net assets:
End of period .................................................................... $ 2,407,022 $ --
===================================
</TABLE>
See notes to financial statements. 15
FRANKLIN EQUITY FUND
Notes to Financial Statements (unaudited)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Franklin Equity Fund (the Fund) is registered under the Investment Company Act
of 1940 as a diversified, open-end investment company. The Fund seeks to provide
capital growth. The following summarizes the Fund's significant accounting
policies.
a. SECURITY VALUATION:
Securities listed or traded on a recognized national exchange or NASDAQ are
valued at the latest reported sales price. Over-the-counter securities and
listed securities for which no sale is reported are valued within the range of
the latest quoted bid and asked prices. Securities for which market quotations
are not readily available are valued at fair value as determined by management
in accordance with procedures established by the Board of Directors.
b. FOREIGN CURRENCY TRANSLATION:
Portfolio securities and other assets and liabilities denominated in foreign
currencies are translated into U.S. dollars based on the exchange rate of such
currencies against U.S. dollars on the date of valuation. Purchases and sales of
securities and income items denominated in foreign currencies are translated
into U.S. dollars at the exchange rate in effect on the transaction date.
The Fund does not separately report the effect of changes in foreign exchange
rates from changes in market prices on securities held. Such changes are
included in net realized and unrealized gain or loss from investments.
Realized foreign exchange gains or losses arise from sales of foreign
currencies, currency gains or losses realized between the trade and settlement
dates on securities transactions and the difference between the recorded amounts
of dividends, interest, and foreign withholding taxes and the U.S. dollar
equivalent of the amounts actually received or paid. Net unrealized foreign
exchange gains and losses arise from changes in foreign exchange rates on
foreign denominated assets and liabilities other than investments in securities
held at the end of the reporting period.
c. INCOME TAXES:
No provision has been made for income taxes because the Fund's policy is to
qualify as a regulated investment company under the Internal Revenue Code and to
distribute all of its taxable income.
d. SECURITY TRANSACTIONS, INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS:
Security transactions are accounted for on trade date. Realized gains and losses
on security transactions are determined on a specific identification basis.
Interest income and estimated expenses are accrued daily. Dividend income and
distributions to shareholders are recorded on the ex-dividend date.
Realized and unrealized gains and 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.
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 expense during the reporting
period. Actual results could differ from those estimates.
16
FRANKLIN EQUITY FUND
Notes to Financial Statements (unaudited) (continued)
2. CAPITAL STOCK
During the period ended December 31, 1998 the Fund offered three classes of
shares: Class I, Class II, and Advisor Class. Effective January 1, 1999, Class I
and Class II were renamed Class A and Class C, respectively, and the fund began
offering a new class of shares, Class B. The shares differ by their initial
sales load, distribution fees, voting rights on matters affecting a single class
and the exchange privilege of each class.
At December 31, 1998, there were 5 billion shares authorized (no par value), of
which 2 billion shares each were designated as Class I and Class II, and 1
billion shares were designated as Advisor Class. Transactions in the Fund's
shares were as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
DECEMBER 31, 1998 JUNE 30, 1998
------------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
------------------------------------------------------------------
<S> <C> <C> <C> <C>
Class I Shares
Shares sold ............................................... 18,567,728 $ 184,482,034 22,473,770 $ 238,141,732
Shares issued on reinvestment of distributions ............ 3,137,159 30,430,236 5,802,636 57,378,546
Shares redeemed ........................................... (16,412,934) (161,681,446) (17,998,114) (190,190,170)
------------------------------------------------------------------
Net increase .............................................. 5,291,953 $ 53,230,824 10,278,292 $ 105,330,108
==================================================================
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
DECEMBER 31, 1998 JUNE 30, 1998
------------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
------------------------------------------------------------------
<S> <C> <C> <C> <C>
Class II Shares
Shares sold ............................................... 2,135,519 $ 21,099,769 3,076,695 $ 32,410,808
Shares issued on reinvestment of distributions ............ 234,445 2,248,329 162,921 1,603,453
Shares redeemed ........................................... (1,170,771) (11,238,447) (910,495) (9,585,395)
------------------------------------------------------------------
Net increase .............................................. 1,199,193 $ 12,109,651 2,329,121 $ 24,428,866
==================================================================
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
DECEMBER 31, 1998 JUNE 30, 1998
------------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
------------------------------------------------------------------
<S> <C> <C> <C> <C>
Advisor Class Shares
Shares sold ............................................... 1,684,482 $ 17,170,073 1,602,804 $ 17,239,578
Shares issued on reinvestment of distributions ............ 117,333 1,139,312 160,504 1,588,337
Shares redeemed ........................................... (935,674) (8,817,073) (903,282) (9,367,577)
------------------------------------------------------------------
Net increase .............................................. 866,141 $ 9,492,312 860,026 $ 9,460,338
==================================================================
</TABLE>
3. TRANSACTIONS WITH AFFILIATES
Certain officers and directors of the Fund are also officers and/or directors of
Franklin Advisers, Inc. (Advisers), Franklin Templeton Services, Inc. (FT
Services), Franklin/Templeton Distributors, Inc. (Distributors), and
Franklin/Templeton Investor Services, Inc. (Investor Services), the Fund's
investment manager, administrative manager, principal underwriter and transfer
agent, respectively.
17
FRANKLIN EQUITY FUND
Notes to Financial Statements (unaudited) (continued)
3. TRANSACTIONS WITH AFFILIATES (cont.)
The Fund pays an investment management fee to Advisers based on the average net
assets of the Fund as follows:
Annualized
Fee Rate Month-End Net Assets
-----------------------------------------------------------------
.625% First $100 million
.500% Over $100 million,up to and including $250 million
.450% In excess of $250 million
Under an agreement with Advisers, FT Services provides administrative services
to the Fund. The fee is paid by Advisers based on average daily net assets, and
is not an additional expense of the Fund.
The Fund reimburses Distributors up to .25% and 1.00% per year of its average
daily net assets of Class I and Class II, respectively, for costs incurred in
marketing the Fund's shares.
Distributors paid net commissions on sales of Fund shares, and received
contingent deferred sales charges for the period of $100,716 and $21,257,
respectively.
The Fund paid transfer agent fees of $487,656 of which $448,337 was paid to
Investor Services.
4. INCOME TAXES
At December 31, 1998, the net unrealized appreciation based on the cost of
investments for income tax purposes of $475,227,112 was as follows:
Unrealized appreciation .................. $251,075,313
Unrealized depreciation .................. (25,247,087)
------------
Net unrealized appreciation .............. $225,828,226
============
Net investment income differs for financial statement and tax purposes primarily
due to differing treatments of foreign currency transactions. Net realized
capital gains differ for financial statement and tax purposes primarily due to
differing treatment of foreign currency transactions and wash sales.
5. INVESTMENT TRANSACTIONS
Purchases and sales of securities (excluding short-term securities) for the
period ended December 31, 1998 aggregated $120,495,033 and $90,166,968,
respectively.
18
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