MESSAGE FROM THE PRESIDENT
April 15, 1997
Dear Shareholder,
We are pleased to bring you the semi-annual report for Franklin Universal Trust
for the period ended February 28, 1997.
During this reporting period, the U.S. economy continued to enjoy moderate
growth. Inflation, as measured by the Consumer Price Index, grew at an
annualized rate of 3.84% during the reporting period, while interest rates
remained low.1 Combined, these two factors created a favorable environment for
both of the major investment sectors in which the Trust invests -- high yield
corporate bonds and utility stocks.
The high yield corporate bond market experienced a 56% increase in new issues in
1996 as borrowers took advantage of the low-interest rate environment. At the
same time, many high-yield securities benefited from stronger corporate earnings
and improved financial conditions. The default rate in the high yield market
decreased to 1.4% in 1996 from 3.1% in 1995.2
Uncertainty regarding deregulation prevented electric utility and
telecommunications industry stocks from fully participating in the general
market rally that lasted for most of the reporting period. Nevertheless, a
benign economic climate -- in particular low interest rates -- contributed to
solid performance in the utility sector. Indeed the sector reported a total
return of 7.26%, as measured by the S&P Utilities Index(R), during the reporting
period.3
1. Source: Bloomberg.
2. Source: Moody's Investors Service.
The Franklin Universal Trust performed favorably within this environment, and
the Manager's Discussion on page 3 provides specific details about your Trust's
performance and investment strategies.
As always, we appreciate your continued investment in the Franklin Universal
Trust and look forward to serving your future investment needs.
Sincerely,
Charles B. Johnson
President
Franklin Universal Trust
3. Source: Bloomberg.
-- Celebrating 50 Years --
This year marks 50 years of business for Franklin Templeton. Over these years,
the mutual fund industry has experienced profound changes in technology,
regulations and customer expectations. As one of the largest mutual fund
families, we are proud to be an innovative industry leader, providing people
like you with an opportunity to invest around the globe. We thank you for your
past support and look forward to serving your investment needs in the years
ahead.
MANAGER'S DISCUSSION & ANALYSIS
Your Fund's Objective:
The Franklin Universal Trust seeks to provide high current income consistent
with preservation of capital. The Franklin Universal Trust (NYSE: FT) generated
a cumulative total return of 6.33% and 9.65% for the six- and 12-month periods
ended February 28, 1997, respectively, based on its change in market price on
the New York Stock Exchange.
The Trust benefited from investments in attractively priced new issues, from
other investment opportunities in the secondary market and from solid economic
and sector fundamentals.
Sector Discussions
Wireless
The Trust continued to maintain a strong weighting in telecommunications
throughout the period. Our holdings in Millicom International Cellular, a
globally diversified cellular telephone operator, performed especially well.
High demand in the fourth quarter, particularly from Asia and Latin America,
helped the firm increase its subscription base by 101% in 1996.1 Additionally,
Nextel Communication's successful roll-out of its new digital wireless
PowerFone(R) resulted in significant capital appreciation for the portfolio.
1. Source: Bloomberg.
GRAPHIC MATERIAL 1 OMITTED - SEE APPENDIX AT END OF DOCUMENT
Food Retailing
This sector benefited from ongoing industry consolidation and cost-cutting
efforts during the reporting period. Most notably, the Trust's positions in
Ralphs Grocery Co. and Smith's Food & Drug Centers, Inc. performed well in this
climate. Dominick's Finer Foods, part of Chicago's second-largest supermarket
operator, merits mention as Moody's Investors Services, a national rating
agency, in November 1996 upgraded certain subordinated notes from B3 to B2.2
This upgrade was further supported in the fourth quarter, when Dominick's parent
company reported record sales in 1996 for the 15th consecutive year.
Automotive
Our positions in Collins & Aikman Corp. and Aetna have performed exceptionally
well in an environment of continued outsourcing and company consolidation in the
automotive sector. For example, Collins & Aikman recently sold its
floor-covering business, allowing it to concentrate on the automotive interior
trim market and to reduce its debt.
Franklin Universal Trust
Top Ten Holdings
As a percentage of Total Market Value
August 31, 1996 vs. February 28, 1997
August 31, 1996
Thermadyne Industries, Inc. 2.71%
SCANA Corp. 2.57%
Texas Utilities 2.51%
DPL Inc. 2.15%
Southern Company 2.00%
Wisconsin Energy 1.93%
CINergy Corp. 1.89%
Del Monte Corp. 1.80%
American Electric Power Co., Inc. 1.76%
Dominion Resources, Inc. 1.71%
February 28, 1997
Thermadyne Industries, Inc. 2.65%
Texas Utilities Co. 2.37%
DPL Inc. 2.15%
CINergy Corp. 2.08%
Southern Company 1.85%
Dominion Resources 1.77%
Cablevision Systems 1.77%
American Electric Power 1.70%
Acme Metals, Inc. 1.58%
Unicom Corporation 1.44%
2. Source: Bloomberg.
Chemicals
The Trust realized large profits on the sale of IMC Global Inc. securities. The
firm's debt had been upgraded in October 1996 from Ba3 to Baa2 by Moody's
following a merger with Vigoro and a joint venture with Freeport McMoRan LP.3
Combined, these factors helped to improve IMC's capital structure and bolstered
its global aspirations.
Energy
High commodity prices (especially oil and gas) and strong industry fundamentals
led to capital appreciation in our Gulf Canada Resources, Ltd. and Forcenergy,
Inc. investments. The latter develops, explores, acquires and produces oil and
natural gas. It had a strong performance in the fourth quarter of 1996, earning
$0.23 a share, as opposed to $0.01 a share in the same period a year earlier.3
Our outlook for this sector remains positive.
Utilities Stock Update
While our holdings in the utilities sector (27.7% of total net assets) as a
group contributed a solid performance during the reporting period, the on-going
issue of deregulation continues to present investors with new hazards and
opportunities each day.
Progress was made in the following key regulatory areas last year, and we expect
the progress to continue throughout 1997. First, state and federal authorities
continued to deregulate both electric and telephone utility industries over the
six months under review, thus helping to eliminate regulatory uncertainty.
Second, in the telecommunications industry, the Federal Communications
Commission adopted rules to administer the deregulation of the regional Bell
telephone companies. These rules should ensure an orderly transition to a
competitive business environment over the next five years and may increase
opportunities for certain telecommunication companies.
3. Source: Bloomberg.
Even in a difficult environment, the Trust benefited from its holdings in
companies with superior growth rates and strong competitive positions. Utility
stocks that performed well during the six- month period included: BellSouth
Corp, CINergy Corp, and SCANA Corp. We believe that utility stocks are very
attractively valued at current levels and should offer significant upside
potential as more regulatory issues are resolved. Going forward, we will focus
investments on those companies that we believe are well-positioned to take
advantage of decreasing regulation and new investment opportunities.
Defaulted Issues
As you may know, the Trust's high yields reflect the higher risks associated
with certain lower-rated securities in the portfolio. As of February 28, 1997,
the Trust held only one defaulted issue, Forstmann Textiles & Co., Inc, which
comprised 0.30% of total net assets.
What's Ahead?
Recent economic data continue to suggest moderate economic growth accompanied by
relatively stable interest rates. Inflation appears to remain under control,
although it increased slightly. If this environment continues, high yield
corporate bonds and utility equities should remain attractive investments over
the short- to intermediate-term and bode favorably for the Franklin Universal
Trust.
Just as economic and market conditions constantly change, our strategies,
evaluations, conclusions and decisions regarding portfolio holdings discussed
previously will also 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 our selection process
for the Trust's purchases.
PERFORMANCE SUMMARY
The Franklin Universal Trust's closing price on the New York Stock Exchange
(NYSE) increased $0.125, from $9.125 on August 31, 1996, to $9.250 on February
28, 1997. The Trust's net asset value per share increased 51 cents from $9.53 on
August 31, 1996 to $10.04 on February 28, 1997.
During the reporting period, the Trust distributed income totaling 44.1 cents
($0.441) per share. This included a monthly dividend of 6.7 cents ($0.067) per
share, a long-term capital gain of 1.4 cents ($0.014) per share and a 2.5 cent
($0.025) per share income distribution in December 1996 to meet excise tax
requirements. Based on an annualization of February's monthly dividend of 6.7
cents ($0.067) per share and the NYSE closing price of $9.250 on February 28,
1997, the Trust's distribution rate was 8.69%. Dividends will vary based on the
earnings of the portfolio, and past distributions are not predictive of future
trends.
The Franklin Universal Trust reported a cumulative total return of 6.33% for the
six-month period ended February 28, 1997. Total return reflects the change in
the Trust's market price on the NYSE. Based on the change in net asset value (as
opposed to market price) the six-month total return for the same period was
10.51%. All total returns assume the reinvestment of dividends and capital gains
according to the terms specified in the Trust's dividend reinvestment plan (see
page 10). Past performance is not predictive of future results.
Franklin Universal Trust
Periods ended February 28, 1997
Since
Inception
1-Year 5-Year (9/23/88)
Cumulative Total Return1
Based on change in net asset value 12.10% 92.17% 174.93%
Based on change in market price 9.65% 90.30% 135.38%
Average Annual Total Return1
Based on change in net asset value 12.10% 13.96% 12.74%
Based on change in market price 9.65% 13.73% 10.68%
Distribution Rate2 8.69%
1. Total return calculations represent the change in value of an investment over
the periods indicated and assume reinvestment of all distributions according to
the terms specified in the Trust's dividend reinvestment plan.
2. Distribution rate is based on the annualization of the Trust's current 6.7
cent ($0.067) per share monthly dividend and the NYSE closing price of $9.250 on
February 28, 1997.
Past performance is not predictive of future results.
PORTFOLIO OPERATIONS
Christopher Molumphy
Senior Portfolio Manager
Franklin Advisers, Inc.
Christopher Molumphy has responsibility for the day-to-day management of the
Franklin Universal Trust.
Mr. Molumphy earned his Bachelor of Arts degree in economics from Stanford
University and his Master's degree in finance from the University of Chicago. He
has been with Franklin Advisers, Inc. since 1988. Mr. Molumphy is a Chartered
Financial Analyst (CFA) and a member of several securities industry
associations. He has managed the Franklin Universal Trust since 1991.
As of February 28, 1997, Morningstar awarded (for the sixty-sixth consecutive
month) the Franklin Universal Trust a five-star overall rating, measuring its
performance against a universe of 139 and 83 closed-end multisector bond funds
for the three- and five-year periods respectively.1
1Morningstar proprietary ratings reflect historical risk-adjusted performance
and are subject to change every month. Past performance is no guarantee of
future results. Morningstar ratings are calculated from the fund's three- and
five-year average annual returns in excess of 90-day Treasury bill returns with
appropriate sales charge adjustments, and a risk factor that reflects fund
performance below 90-day T-bill returns. Ten percent of the funds in an
investment category receive five stars. Ratings for specific periods ended
February 28, 1997: 4 stars for three years and 5 stars for five years. Ratings
for specific periods are combined to produce the overall star rating.
DIVIDEND REINVESTMENT PLAN
The Fund's Dividend Reinvestment Plan (the "Plan") offers you a prompt and
simple way to reinvest income dividends and capital gain distributions in shares
of the Fund. PNC Bank, National Association (the "Plan Agent"), c/o PFPC Inc.,
P.O. Box 8950, Wilmington, Delaware 19899, acts as your Plan Agent in
administering the Plan. All reinvestments are in full and fractional shares,
carried to three decimal places. The complete Terms and Conditions of the
Dividend Reinvestment Plan are contained in the Fund's prospectus, dated
September 23, 1988, used in connection with its initial public offering. A copy
of that prospectus may be obtained from the Fund at the address on the cover of
this report.
You are automatically enrolled in the Plan unless you elect to receive dividends
or distributions in cash. If you own shares in your own name, you should notify
the Plan Agent, in writing, if you wish to receive dividends or distributions in
cash.
If the Fund declares an income dividend or a capital gains distribution payable
in either the Fund's shares or in cash, you, as a participant in the Plan, will
automatically receive an equivalent amount of shares of the Fund. If the market
price per share on the valuation date equals or exceeds the net asset value per
share on that date, the Fund will issue new shares to you at the higher of the
net asset value or 95% of the market price on the valuation date. The valuation
date is generally the payment date or, if that date is not a trading day on the
New York Stock Exchange, the next preceding trading day. If the net asset value
per share exceeds the market price per share at such time, or if the Fund
declares a dividend or distribution payable only in cash, you will be deemed to
have elected to receive shares of the Fund valued at the market price on the
valuation date, purchased on your behalf by the Plan Agent in the open market.
If, before the Plan Agent has completed its purchases, the market price exceeds
the net asset value per share, the average per share purchase price paid by the
Plan Agent may exceed the net asset value per share of the Fund, resulting in
the acquisition of fewer shares than if the dividend or distribution had been
paid in shares issued by the Fund.
There is no direct charge to participants for reinvesting dividends and
distributions, since the Plan Agent's fees are paid by the Fund. However, when
shares are purchased in the open market, each participant will pay a pro rata
portion of any brokerage commissions incurred.
The automatic reinvestment of dividends and distributions does not relieve
shareholders of liability for any taxes which may be payable on such dividends
or distributions. Generally, income and capital gains resulting from dividends
and distributions received in the form of shares of the Fund are realized
notwithstanding the fact that cash is not received by shareholders.
You will receive an annual account statement from the Plan Agent, showing total
dividends and distributions, date of investment, shares acquired and price per
share, and total shares of record held by you and by the Plan Agent for you. You
are entitled to vote all shares of record, including shares purchased for you by
the Plan Agent, and, if you vote by proxy, your proxy will include all such
shares.
As long as you participate in the Plan, the Plan Agent will hold the shares it
has acquired for you in safekeeping, in non-certificated form. This convenience
provides added protection against loss, theft or inadvertent destruction of
certificates.
You may withdraw from the Plan at any time, without penalty, by notifying the
Plan Agent in writing at the address above. If you withdraw from the Plan, you
will receive a certificate issued in your name for all full shares and the Plan
Agent will convert any fractional shares you hold at the time of withdrawal to
cash at the then current market price and send you a check for the proceeds.
If you hold shares in your own name, please address all notices, correspondence,
questions, or other communications regarding the Plan to the Plan Agent at the
address noted above. If shares are not held in your name, you should contact
your brokerage firm, bank, or other nominee for more information.
FRANKLIN UNIVERSAL TRUST
Statement of Investments in Securities and Net Assets, February 28, 1997
(unaudited)
<TABLE>
<CAPTION>
Shares,
Warrants Value
& Rights (Note 2)
Common Stocks, Warrants & Rights 33.5%
Automotive
<S> <C> <C>
60,800 aHarvard Industries, Inc., Class B ............................................ $ 129,200
-------------
Cable Television
11,370 aWireless One, Inc., warrants ................................................. 50
-------------
Containers & Packaging 0.1%
46,137 aGaylord Container Corp., warrants ............................................ 297,007
-------------
Energy 0.8%
9,000 aMcMoRan Oil & Gas Co. ........................................................ 35,438
14,935 aSanta Fe Energy Resources, Inc. .............................................. 192,288
66,600 Ultramar Diamond Shamrock Corp. ............................................... 2,031,300
-------------
2,259,026
-------------
Financial Services
15,180 aWestfed Holdings, Inc., Series B ............................................. --
-------------
Food & Beverages 0.2%
25,267 aBeatrice Foods, Inc........................................................... 540,082
Health Care 0.6%
4,066 aKendall International, Inc., Class A, warrants ............................... 560,263
4,348 aKendall International, Inc., Class B, warrants ............................... 577,381
2,456 aKendall International, Inc., rights .......................................... 338,418
-------------
1,476,062
-------------
Industrial 0.1%
7,254 aThermadyne Industries, Inc. .................................................. 202,205
-------------
Lodging
752 aHost Marriott Corp. .......................................................... 13,536
752 Marriott International, Inc. .................................................. 39,856
-------------
53,392
-------------
Metals & Mining2.4%
228,000 Driefontein Consolidated Mines, Ltd., ADR ..................................... 2,622,000
131,350 Free State Consolidated Gold Mines, Ltd., ADR ................................. 1,173,941
15,000 Freeport-McMoRan, Inc. ........................................................ 408,750
4,500 Freeport-McMoRan Copper & Gold, Inc. .......................................... 146,813
63,156 Freeport-McMoRan Copper & Gold, Inc., Class B ................................. 2,147,304
4,000 aGulf States Steel, warrants .................................................. 20,000
-------------
6,518,808
-------------
Technology/Information Systems
84,885 aMemorex Telex N.V., ADR ...................................................... 8,489
-------------
Transportation 0.2%
5,446 aContinental Airlines, Inc., Class A .......................................... $ 155,211
15,160 aContinental Airlines, Inc., Class B .......................................... 433,955
-------------
589,166
-------------
Utilities 27.7%
138,600 American Electric Power Co., Inc. ............................................. 5,786,550
205,600 CINergy Corp. ................................................................. 7,093,200
79,700 Delmarva Power & Light Co. .................................................... 1,544,188
150,000 Dominion Resources, Inc. ...................................................... 6,037,500
298,000 DPL, Inc. ..................................................................... 7,338,250
80,000 Duke Power Co. ................................................................ 3,540,000
74,600 Edison International .......................................................... 1,603,900
35,300 New England Electric System ................................................... 1,231,088
90,000 New Jersey Resources Corp. .................................................... 2,587,500
175,000 New York State Electric & Gas Corp. ........................................... 4,068,750
47,200 OGE Energy Corp. .............................................................. 1,988,300
140,000 PECO Energy Co. ............................................................... 3,150,000
77,000 Pinnacle West Capital Corp. ................................................... 2,406,250
100,000 Public Service Co. of Colorado ................................................ 3,900,000
109,200 SCANA Corp. ................................................................... 2,852,850
289,300 Southern Co. .................................................................. 6,292,275
200,200 Texas Utilities Co. ........................................................... 8,083,075
220,000 Unicom Corp. .................................................................. 4,895,000
-------------
74,398,676
-------------
Wireless/Telecommunications1.4%
40,600 BellSouth Corp. ............................................................... 1,903,125
130 fNippon Telegraph & Telephone Corp.(Japan) .................................... 925,723
15,300 SBC Communications, Inc. ...................................................... 879,750
-------------
3,708,598
-------------
Total Common Stocks, Warrants & Rights (Cost $77,715,178) ............... 90,180,761
-------------
Partnership Units0.1%
Financial Services
5 a,bPG Partners, L.P., Preference Units (Cost $146,226) ........................ 367,575
-------------
Preferred Stocks9.3%
Automotive0.2%
69,017 Harvard Industries, Inc., 14.25% pfd., PIK .................................... 448,611
-------------
Cable Television1.1%
33,034 Cablevision Systems Corp., 11.125% pfd., PIK, Series L ........................ $ 3,030,870
-------------
Consumer Products0.7%
270,000 RJR Nabisco Holdings, $0.6012 cvt. pfd., Series C ............................. 1,923,750
-------------
Financial Services2.2%
40,000 California Federal Bank, 11.50% pfd............................................ 4,630,000
45,000 Security Capital Pacific, 1.75% cvt. pfd., Series A ........................... 1,423,125
49,806 Westfed Holdings, Inc., 15.50% cum. senior pfd., Series A ..................... 498
-------------
6,053,623
-------------
Forest & Paper Products1.5%
4,000,000 cAsia Pulp & Paper Co., Ltd., 12.00% pfd....................................... 4,020,000
-------------
Health Care 0.8%
2,000 Fresenius Medical Care AG, 9.00% pfd........................................... 2,055,000
-------------
Media and Broadcasting1.7%
2,483 PanAmSat Corp.,12.75% pfd., PIK ............................................... 3,085,508
142,190 Triathlon Broadcasting Co., 9.00% cvt. pfd..................................... 1,421,900
-------------
4,507,408
-------------
Wireless/Telecommunications1.1%
40,000 Nortel Inversora, 10.00% cvt. pfd.............................................. 1,875,000
20,000 cQUALCOMM, Inc., 5.75% cvt. pfd................................................ 990,000
-------------
2,865,000
-------------
Total Preferred Stocks (Cost $29,246,362) ............................... 24,904,262
-------------
Face
Amount
Non-Convertible Bonds 80.0%
Automotive 4.4%
$2,600,000 Aetna Industries, Inc., senior notes, 11.875%, 10/01/06 ....................... 2,821,000
2,000,000 Collins & Aikman Corp., senior sub. notes, 11.50%, 04/15/06 ................... 2,250,000
4,000,000 Harvard Industries, Inc., senior notes, 12.00%, 07/15/04 ...................... 2,520,000
3,800,000 SPX Corp., senior sub. notes, 11.75%, 06/01/02 ................................ 4,199,000
-------------
11,790,000
-------------
Cable Television5.4%
5,000,000 Bell Cablemedia, Plc., senior disc. notes, zero coupon to 07/15/99,
(original accretion rate 11.95%), 11.95% thereafter, 07/15/04 ................ 4,400,000
3,000,000 Cablevision Systems Corp., senior sub. deb., 9.875%, 04/01/23 ................. 2,992,500
1,000,000 Comcast Corp., senior sub. deb., 9.50%, 01/15/08 .............................. 1,055,000
3,000,000 Tele-Communications, Inc., senior deb., 9.80%, 02/01/12 ....................... 3,335,913
Cable Television (cont.)
$5,000,000 Wireless One, Inc., senior disc. notes, zero coupon to 08/01/01, (original accretion
rate 13.50%), 13.50% thereafter, 08/01/06 .................................... $ 2,262,500
1,000,000 Wireless One, Inc. units, zero coupon to 08/01/01, (original accretion rate 13.50%),
13.50% thereafter, 08/01/06................................................... 445,000
-------------
14,490,913
-------------
Consumer Products3.5%
2,750,000 Coleman Holdings, Inc., senior secured disc. notes, (original accretion rate
10.875%), 0.00%, 05/27/98 .................................................... 2,461,250
1,750,000 E&S Holdings Corp., senior sub. notes, Series AI, 10.375%, 10/01/06 ........... 1,846,250
1,500,000 Revlon Worldwide Corp., senior secured disc. notes, Series B, (original accretion
rate 12.00%), 0.00%, 03/15/98 ................................................ 1,411,875
1,500,000 RJR Nabisco, Inc., senior notes, 9.25%, 08/15/13 .............................. 1,571,250
2,000,000 Sealy Corp., senior sub. notes, 9.50%, 05/01/03 ............................... 2,075,000
-------------
9,365,625
-------------
Containers & Packaging 3.6%
1,000,000 Container Corp. of America, guaranteed senior notes, Series A, 11.25%, 05/01/04 1,098,750
3,000,000 Container Corp. of America, senior notes, 9.75%, 04/01/03 ..................... 3,225,000
3,000,000 Owens-Illinois, Inc., senior sub. notes, 9.75%, 08/15/04 ...................... 3,165,000
2,100,000 cUS Can Corp., senior sub. notes, 10.125%, 10/15/06 ........................... 2,252,250
-------------
9,741,000
-------------
Energy 2.5%
900,000 Dawson Production Services, Inc., senior notes, 9.375%, 02/01/07 .............. 927,000
2,000,000 Forcenergy, Inc., senior sub. notes, 9.50%, 11/01/06 .......................... 2,112,500
3,500,000 Gulf Canada Resources, Ltd., senior sub. deb., 9.25%, 01/15/04 ................ 3,723,125
-------------
6,762,625
-------------
Financial Services 1.4%
3,300,000 cFirst Nationwide Escrow, senior sub. notes, 10.625%, 10/01/03 ................ 3,671,250
-------------
Food & Beverages 5.0%
790,000 Beatrice Foods, Inc., sub. notes, 1.00%, 11/19/26 ............................. 110,600
600,000 Curtice-Burns Foods, Inc., senior sub. notes, 12.25%, 02/01/05 ................ 652,500
4,326,690 cDel Monte Corp., sub. notes, PIK, 12.25%, 09/01/02 ........................... 4,413,224
850,000 Doane Products Co., senior notes, 10.625%, 03/01/06 ........................... 913,750
300,000 Dr Pepper Bottling Co. of Texas, senior sub. notes, 10.25%, 02/15/00 .......... 314,625
2,000,000 cInternational Home Foods, senior sub. notes, 10.375%, 11/01/06 ............... 2,090,000
2,800,000 PMI Acquisition Corp., guaranteed senior sub. notes, 10.25%, 09/01/03 ......... 2,933,000
2,000,000 Specialty Foods Corp., senior unsecured notes, Series B, 10.25%, 08/15/01 ..... 1,955,000
-------------
13,382,699
-------------
Food Retailing 4.1%
$2,000,000 Bruno's, Inc., senior sub. notes, 10.50%, 08/01/05 ............................ $ 2,095,000
1,000,000 Dominick's Finer Foods, senior sub. notes, 10.875%, 05/01/05 .................. 1,113,750
1,100,000 P & C Food Markets, Inc., senior sub. notes, 11.50%, 10/15/01 ................. 954,250
1,000,000 Penn Traffic Co., senior notes, 8.625%, 12/15/03 .............................. 825,000
2,000,000 Penn Traffic Co., senior notes, 10.375%, 10/01/04 ............................. 1,695,000
1,000,000 Ralphs Grocery Co., sub. notes, 10.45%, 06/15/04 .............................. 1,087,500
3,000,000 Smith's Food & Drug Centers, Inc., senior sub. notes, 11.25%, 05/15/07 ........ 3,390,000
-------------
11,160,500
-------------
Forest & Paper Products 6.6%
1,751,106 Fort Howard Corp., sub. deb., 11.00%, 01/02/02 ................................ 1,838,662
4,000,000 Rapp International Finance, company guaranteed, secured notes, 13.25%, 12/15/05 4,060,000
1,000,000 REPAP New Brunswick, senior notes, 9.875%, 07/15/00 ........................... 1,005,000
2,000,000 REPAP New Brunswick, senior notes, 10.625%, 04/15/05 .......................... 2,020,000
1,000,000 REPAP New Brunswick, senior notes, FRN, 8.875%, 07/15/00 ...................... 985,000
1,500,000 REPAP Wisconsin, Inc., senior secured notes, 9.25%, 02/01/02 .................. 1,503,750
500,000 REPAP Wisconsin, Inc., senior secured notes, 9.875%, 05/01/06 ................. 495,000
2,200,000 S.D. Warren Co., senior sub.notes, 12.00%, 12/15/04 ........................... 2,450,250
3,000,000 Tjiwi Kimia International, guaranteed senior notes, 13.25%, 08/01/01 .......... 3,412,500
-------------
17,770,162
-------------
Gaming & Leisure 3.8%
4,000,000 Aztar Corp., senior sub. notes, 13.75%, 10/01/04 .............................. 4,575,000
1,000,000 Players International, Inc., senior notes, 10.875%, 04/15/05 .................. 1,056,250
4,000,000 Showboat, Inc., senior sub. notes, 13.00%, 08/01/09 ........................... 4,590,000
-------------
10,221,250
-------------
Health Care 3.9%
4,000,000 Abbey Healthcare Group, Inc., senior sub. notes, 9.50%, 11/01/02 .............. 4,240,000
1,500,000 Maxxim Medical, Inc., senior sub. notes, 10.50%, 08/01/06 ..................... 1,560,000
2,500,000 Tenet Healthcare Corp., senior sub. notes, 10.125%, 03/01/05 .................. 2,768,750
2,000,000 Tenet Healthcare Corp., senior sub. notes, 8.625%, 01/15/07 ................... 2,050,000
-------------
10,618,750
-------------
Industrial 7.7%
1,200,000 cAllied Waste North America, senior sub. notes, 10.25%, 12/01/06 .............. 1,282,500
3,000,000 American Standard, Inc., S.F., deb., 9.25%, 12/01/16 .......................... 3,127,500
1,000,000 American Standard, Inc., S.F., senior sub. deb., zero coupon to 06/01/98, (original
accretion rate 10.50%), 10.50% thereafter, 06/01/05 .......................... 960,000
2,000,000 cDerlan Industries, Ltd., senior notes, 10.00%, 01/15/07 ...................... 2,055,000
2,400,000 Inter-City Products Corp., senior secured notes, 9.75%, 03/01/00 .............. 2,472,000
Industrial (cont.)
$2,000,000 cIntertek Finance, Plc., senior sub. notes, 10.25%, 11/01/06 .................. $ 2,097,500
3,631,000 Thermadyne Industries, Inc., senior notes, 10.25%, 05/01/02 ................... 3,703,620
5,035,000 Thermadyne Industries, Inc., sub. notes, 10.75%, 11/01/03 ..................... 5,123,112
-------------
20,821,232
-------------
Lodging 2.3%
4,000,000 John Q. Hammons Hotels, first mortgage, 8.875%, 02/15/04 ...................... 4,030,000
2,000,000 Red Roof Inns, senior notes, 9.625%, 12/15/03 ................................. 2,057,500
-------------
6,087,500
-------------
Media & Broadcasting 3.0%
2,000,000 American Media Operation, senior sub. notes, 11.625%, 11/15/04 ................ 2,170,000
1,000,000 Hollinger International Publishing, senior sub. notes, 9.25%, 02/01/06 ........ 1,015,000
1,000,000 Jacor Communications Co., guaranteed, senior sub. notes, 9.75%, 12/15/06....... 1,062,500
4,000,000 PanAmSat Capital Corp., L.P., senior sub. disc. notes, zero coupon to 08/01/98,
(original accretion rate 11.375%), 11.375% thereafter, 08/01/03 .............. 3,800,000
-------------
8,047,500
-------------
Metals & Mining 4.5%
5,000,000 Acme Metals, Inc., guaranteed senior secured disc. notes, zero coupon to 08/01/97,
(original accretion rate 13.50%), 13.50% thereafter, 08/01/04 ................ 5,375,000
3,000,000 Envirosource, Inc., senior notes, 9.75%, 06/15/03 ............................. 2,947,500
4,000,000 Gulf States Steel, units, 13.50%, 04/15/03 .................................... 3,880,000
-------------
12,202,500
-------------
Restaurants 2.7%
1,971,880 bAtherton Franchise Capital, L.P., 11.00%, 05/01/06 ........................... 1,656,378
2,000,000 Family Restaurants, Inc., senior notes, 9.75%, 02/01/02 ....................... 1,590,000
1,500,000 Flagstar Corp., senior notes, 10.875%, 12/01/02 ............................... 1,458,750
2,500,000 Foodmaker, Inc., S.F., senior sub. notes, 9.25%, 03/01/99 ..................... 2,575,000
-------------
7,280,128
-------------
Technology/Information Systems 1.6%
2,000,000 ADT Operations, Ltd., guaranteed senior sub. notes, 9.25%, 08/01/03 ........... 2,127,500
2,000,000 cCelestica International, Inc., senior sub. notes, 10.50%, 12/31/06 ........... 2,175,000
-------------
4,302,500
-------------
Textiles & Apparel 0.7%
1,000,000 cCollins & Aikman Floor Covering, senior sub. notes. 10.00%, 01/15/07 ......... 1,032,500
1,550,000 a,b,eForstmann Textile & Co., Inc., S.F., senior sub. notes, 14.75%, 04/15/99 . 798,250
-------------
1,830,750
-------------
Transportation 0.5%
$ 400,000 cNewport News Shipbuilding, senior notes, 8.625%, 12/01/06..................... $ 416,000
800,000 cNewport News Shipbuilding, senior sub. notes, 9.25%, 12/01/06................. 842,000
-------------
1,258,000
-------------
Utilities 2.4%
1,000,000 AES China Generating Co., notes, 10.125%, 12/15/06 ............................ 1,057,500
2,000,000 El Paso Electric Co., first mortgage, Series E, 9.40%, 05/01/11 ............... 2,180,000
736,068 Midland Funding II, S.F., deb., Series C, 10.33%, 07/23/02 .................... 810,595
2,000,000 Midland Funding II, S.F., secured lease obligation, Series A, 11.75%, 07/23/05 2,305,000
-------------
6,353,095
-------------
Wireless/Telecommunications 10.4%
6,000,000 Arch Communications Group, Inc., senior disc. notes, zero coupon to 03/15/01,
(original accretion rate 10.875%), 10.875% thereafter, 03/15/08 .............. 3,090,000
6,000,000 Comcast Cellular Corp., senior sub. deb., Series B, (original accretion rate 11.37%),
0.00%, 03/05/00 .............................................................. 4,380,000
6,000,000 Millicom International Cellular, SA, senior disc. notes, zero coupon to 06/01/00,
(original accretion rate 13.50%), 13.50% thereafter, 06/01/06 ................ 4,005,000
3,000,000 Nextel Communications, senior disc. notes, (original accretion rate 9.75%), 0.00%,
08/15/04 ..................................................................... 2,227,500
5,000,000 Orion Network Systems, units, zero coupon to 01/15/02, (original accretion rate
12.50%), 12.50% thereafter, 01/15/07 ......................................... 2,850,000
4,000,000 Paging Network, Inc., senior sub. notes, 10.00%, 10/15/08 ..................... 3,962,500
4,000,000 Rogers Cantel Mobile Communications, Inc., senior secured deb., 9.75%, 06/01/16 4,280,000
3,000,000 Sygnet Wireless, Inc., senior notes, 11.50%, 10/01/06 ......................... 3,180,000
-------------
27,975,000
-------------
Total Non-Convertible Bonds (Cost $205,444,472) ......................... 215,132,979
-------------
Convertible Bonds 3.4%
Electronics 0.6%
1,500,000 cDovatron International, Inc., cvt. sub. notes, 6.00%, 10/15/02 ............... 1,485,000
-------------
Financial Services 0.3%
1,000,000 cPeregrine Investment Finance, cvt. guaranteed, 4.50%, 12/01/00 ............... 907,500
-------------
Health Care 0.5%
900,000 cU.S. Diagnostic Labs, Inc., cvt., sub. deb., 9.00%, 03/31/03 ................. 1,229,624
-------------
Metals & Mining 0.7%
1,900,000 cDayton Mining Corp., cvt. sub. deb., 7.00%, 04/01/02 ......................... 1,976,000
-------------
Retail 0.5%
1,400,000 cRent-Way, Inc., cvt. sub. deb., 7.00%, 02/01/07 .............................. 1,323,000
-------------
Technology/Information Systems 0.8%
$ 450,000 cAdaptec, Inc., cvt., sub. notes, 4.75%, 02/01/04 ............................. $ 457,874
1,700,000 cHMT Technology Corp., cvt. sub. notes, 5.75%, 01/15/04 ....................... 1,734,000
-------------
2,191,874
-------------
Total Convertible Bonds (Cost $9,188,625) ............................... 9,112,998
-------------
Total Bonds (Cost $214,633,097) ......................................... 224,245,977
-------------
Foreign Government Agencies 0.3%
4,350,000 dESCOM, E168, utility deb. (South Africa), 11.00%, 06/01/08 (Cost $1,034,574).. 757,215
-------------
Total Long Term Investments (Cost $322,775,437).......................... 340,455,790
-------------
gReceivables from Repurchase Agreements 0.1%
354,665 Joint Repurchase Agreement, 5.353%, 03/03/97, (Maturity Value $356,082)
(Cost $355,923)
Aubrey G. Lanston & Co., Inc., (Maturity Value $23,256)
Collateral: U.S. Treasury Notes, 5.875% - 6.50%, 02/15/00 - 08/31/01
Bear, Stearns & Co., Inc., (Maturity Value $35,981)
Collateral: U.S. Treasury Bills, 07/17/97
U.S. Treasury Notes, 5.75% - 8.75%, 09/30/97 - 07/31/01
CIBC Wood Gundy Securities, Inc., (Maturity Value $35,981)
Collateral: U.S. Treasury Notes, 6.00% - 6.125%, 05/15/98 - 09/30/98
Citicorp Securities, Inc., (Maturity Value $8,997)
Collateral: U.S. Treasury Notes, 5.875%, 11/15/99
Daiwa Securities America, Inc., (Maturity Value $35,981)
Collateral: U.S. Treasury Notes, 5.875% - 9.125%, 08/15/98 - 05/15/00
Donaldson, Lufkin & Jenrette Securities Corp., (Maturity Value $35,981)
Collateral: U.S. Treasury Notes, 4.75% - 6.375%, 07/31/97 - 01/15/99
Fuji Securities, Inc., (Maturity Value $35,981)
Collateral: U.S. Treasury Notes, 5.50% - 7.25%, 05/31/97 - 03/31/01
Greenwich Capital Markets, Inc., (Maturity Value $35,981)
Collateral: U.S. Treasury Notes, 7.75%, 11/30/99 - 01/31/00
Nomura Securities International, Inc., (Maturity Value $35,981)
Collateral: U.S. Treasury Notes, 5.50%, 09/30/97
SBC Warburg, Inc., (Maturity Value $35,981)
Collateral: U.S. Treasury Notes, 7.125% - 8.625%, 08/15/97 - 09/30/99
UBS Securities, L.L.C., (Maturity Value $35,981)
Collateral: U.S. Treasury Notes, 6.125% - 7.125%, 05/31/97 - 04/30/01 ....... 355,923
-------------
Total Investments (Cost $323,131,360)126.7% ......................... 340,811,713
Liabilities in Excess of Other Assets(26.7)%......................... (71,825,251)
-------------
Net Assets100.0% $268,986,462
=============
At February 28,1997 the net unrealized appreciation based on the cost of
investments for income tax purposes of $323,162,299 was as follows:
Aggregate gross unrealized appreciation for all investments in which there was an
excess of value over tax cost ................................................ $ 35,355,716
Aggregate gross unrealized depreciation for all investments in which there was an
excess of tax cost over value ................................................ (17,706,302)
-------------
Net unrealized appreciation ................................................. $ 17,649,414
=============
</TABLE>
PORTFOLIO ABBREVIATIONS:
FRN - Floating Rate Notes
L.L.C. - Limited Liability Corp.
L.P. - Limited Partnership
PIK - Payment-in-Kind
S.F. - Sinking Fund
aNon-income producing.
bSee Note 8 regarding restricted securities.
cPurchased in a private placement transaction; resale may only be to qualified
institutional buyers.
dFace amount is stated in foreign currency and value is stated in U.S. dollars.
eSee Note 9 regarding credit risk and defaulted securities.
fSecurities traded in foreign currency and valued in U.S. dollars.
gFace amount for repurchase agreements is for the underlying collateral.
See Note 2(g) regarding joint repurchase
agreement.
The accompanying notes are an integral part of these financial statements.
FRANKLIN UNIVERSAL TRUST
Financial Statements
Statement of Assets and Liabilities
February 28, 1997 (unaudited)
Assets:
Investments in securities, at value
(identified cost $322,775,437) $340,455,790
Receivables from repurchase
agreements, at value and cost 355,923
Dividends and interest receivable 5,474,333
Unamortized note issuance
costs (Note 3) 186,085
--------------
Total assets 346,472,131
--------------
Liabilities:
Payables:
Notes (Note 3) 74,980,425
Accrued interest (Note 3) 2,109,375
Management fees 226,243
Accrued expenses and other liabilities 169,626
--------------
Total liabilities 77,485,669
--------------
Net assets, at value $268,986,462
==============
Net assets consist of:
Undistributed net investment income $ 1,579,092
Net unrealized appreciation on
investments and translation of
assets and liabilities denominated
in foreign currencies 17,681,026
Accumulated net realized gain
from investments and foreign
currency transactions 2,855,202
Capital shares 246,871,142
--------------
Net assets, at value $268,986,462
==============
Net asset value per share:
($268,986,462 / 26,779,333 shares
of beneficial interest outstanding) $10.04
==============
Statement of Operations
for the six months ended February 28, 1997 (unaudited)
Investment income:
Dividends, net of foreign
taxes withheld of $442 $ 2,721,056
Interest 12,709,035
--------------
Total income $15,430,091
Expenses:
Management fees (Note 6) 1,290,583
Shareholder servicing costs 107,373
Amortization of note
issuance costs (Note 3) 62,028
Professional fees 21,844
Reports to shareholders 25,523
Trustees' fees and expenses 11,001
Custodian fees 4,412
Other 28,160
--------------
Operating expenses 1,550,924
Interest expense (Note 3) 2,115,900
--------------
Total expenses 3,666,824
--------------
Net investment income 11,763,267
--------------
Realized and unrealized gain
(loss) from investments and
foreign currency:
Net realized gain (loss) from:
Investments 3,122,541
Foreign currency
transactions (1,517)
Net unrealized appreciation on:
Investments 10,710,951
Translation of assets
and liabilities denominated
in foreign currency 1,075
--------------
Net realized and unrealized
gain from investments and
foreign currency 13,833,050
--------------
Net increase in net assets
resulting from operations $25,596,317
==============
The accompanying notes are an integral part of these financial statements.
FRANKLIN UNIVERSAL TRUST
Financial Statements (cont.)
Statements of Changes in Net Assets
for the six months ended February 28, 1997 (unaudited)
and for the year ended August 31, 1996
Six months Year
ended ended
2/28/97 8/31/96
--------- -----------
Increase in net assets:
Operations:
Net investment income $ 11,763,267 $ 22,022,608
Net realized gain from
invesments and foreign
currency transactions 3,121,024 4,578,673
Net unrealized appre-
ciation on investments
and translation of assets
and liabilities denomi-
nated in foreign currency 10,712,026 520,346
---------- ----------
Net increase in net
assets resulting
from operations 25,596,317 27,121,627
Distributions to
shareholders from:
Undistributed net
investment income (11,434,775) (22,655,316)
Undistributed net
realized capital gains (374,911) --
---------- ----------
Net increase in
net assets 13,786,631 4,466,311
Net assets:
Beginning of period 255,199,831 250,733,520
---------- ----------
End of period (including
undistributed net
investment income of
$1,579,092 at 2/28/97
and $1,252,117 at
8/31/96) $268,986,462 $255,199,831
========= ===========
Statement of Cash Flows
for the six months ended February 28, 1997 (unaudited)
Interest and dividends received $ 11,054,575
Operating expenses paid (1,384,059)
Interest expense paid (2,109,375)
--------------
Cash provided - operations 7,561,141
--------------
Investment purchases (295,860,661)
Investment sales 300,109,206
--------------
Cash provided - investments 4,248,545
--------------
Distributions to shareholders (11,809,686)
--------------
Cash used - financing activities (11,809,686)
--------------
Net change in cash --
Cash at beginning of period --
--------------
Cash at end of period $ --
==============
The accompanying notes are an integral part of these financial statements.
FRANKLIN UNIVERSAL TRUST
Notes to Financial Statements (unaudited)
NOTE 1 - ORGANIZATION
Franklin Universal Trust (the Fund) was organized as a Massachusetts business
trust on April 26, 1988, and is registered as a diversified, closed-end
management investment company under the Investment Company Act of 1940. The Fund
has two classes of securities: senior fixed-rate notes (the Notes) and shares of
beneficial interest (the Shares). The Fund seeks to provide high current income
consistent with preservation of capital.
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES
a. Security Valuation:
Portfolio securities listed on a securities exchange or on the NASDAQ for which
market quotations are readily available are valued at the last sale price or, if
there is no sale price, within the range of the most recent quoted bid and asked
prices. Other securities are valued based on a variety of factors, including
yield, risk, maturity, trade activity and recent developments related to the
securities. Portfolio securities which are traded both in the over the counter
market and on a securities exchange are valued according to the broadest and
most representative market as determined by the Manager. The Fund may utilize a
pricing service, bank or broker/dealer experienced in such matters to perform
any of the pricing functions, under procedures approved by the Board of Trustees
(the Board). Securities for which market quotations are not available and
securities restricted as to resale, are valued in accordance with procedures
established by the Board.
The value of a foreign security is determined as of the earlier of the close of
trading on the foreign exchange on which it is traded or the close of trading on
the New York Stock Exchange. That value is then converted into its U.S. dollar
equivalent at the foreign exchange rate in effect at noon, New York time, on the
day the value of the foreign security is determined. If no sale is reported at
that time, the mean between the current bid and asked prices is used.
Occasionally, events which affect the values of foreign securities and foreign
exchange rates may occur between the times at which they are determined and the
close of the exchange and will, therefore, not be reflected in the computation
of the Fund's net asset value, unless material. If events which materially
affect the value of these foreign securities occur during such period, these
securities will be valued in accordance with procedures established by the
Board.
b. Income Taxes:
The Fund intends to continue to qualify for the tax treatment applicable to
regulated investment companies under the Internal Revenue Code and to make the
requisite distributions to its shareholders which will be sufficient to relieve
it from income and excise taxes.
c. Security Transactions:
Security transactions are accounted for on the date the securities are purchased
or sold (trade date). Realized gains and losses on security transactions are
determined on the basis of specific identification.
d. Investment Income, Expenses and Distributions:
Dividend income and distributions to shareholders are recorded on the
ex-dividend date. Interest income and estimated expenses are accrued daily.
Original issue discount is amortized as required by the Internal Revenue Code.
Net investment income differs for financial statement and tax purposes primarily
due to differing treatments of foreign currency transactions and defaulted
securities - see Note 9. Net realized capital gains and losses differ for
financial statement and tax purposes primarily due to differing treatments of
wash sale and foreign currency transactions.
.
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (cont.)
e. Accounting Estimates:
The preparation of the financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the amounts of income and expenses during
the reporting period. Actual results could differ from those estimates.
f. Foreign Currency Translation:
The accounting records of the Fund are maintained in U.S. dollars. All assets
and liabilities denominated in foreign currencies are translated into U.S.
dollars at the rate of exchange of the currencies against U.S. dollars on the
valuation date. Purchases and sales of securities, income and expenses are
translated at the rate of exchange quoted on the day that the transactions are
recorded. Differences between income and expense amounts recorded and collected
or paid are recognized when reported by the custodian.
The Fund does not isolate that portion of the results of operations resulting
from changes in foreign exchange rates on investments from fluctuations arising
from changes in market prices of securities held. Such fluctuations are included
with the net realized and unrealized gain or loss from investments.
Realized foreign exchange gains or losses arise from sales and maturities of
short-term securities, sales of foreign currencies, gains or losses realized
between the trade and settlement dates on security transactions, the difference
between the amounts of dividends, interest, and foreign withholding taxes
recorded on the Fund's books and the U.S. dollar equivalent of the amounts
actually received or paid. Net unrealized appreciation or depreciation on
translation of assets and liabilities denominated in foreign currencies arise
from changes in the value of assets and liabilities other than investments in
securities at the end of the reporting period, resulting from changes in
exchange rates.
g. 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 February 28, 1997, all outstanding repurchase agreements held by the
Fund had been entered into on that date.
NOTE 3 - SENIOR FIXED-RATE NOTES
On August 30, 1993, the Fund issued $75 million aggregate principal amount of a
new class of five-year senior notes and received proceeds of $74,522,250 after
deduction of underwriting commissions and discounts. The Notes are general
unsecured obligations of the Fund and rank senior to all existing or future
unsecured indebtedness of the Fund. The Notes are senior to the Shares and, in
any liquidation of the Fund, the Notes must be paid in full before any payments
would be made with respect to the Shares.
NOTE 3 - SENIOR FIXED-RATE NOTES (cont.)
The Notes carry a rating by Standard & Poor's Corporation of "AAA" and bear
interest, payable semi-annually, at the rate of 5.625% per annum, to maturity on
September 1, 1998. The market value of the Notes as of February 28, 1997, is
$74,385,000. Under the Investment Company Act of 1940, the Fund is required to
maintain asset coverage for the Notes of at least 300%. In addition, pursuant to
the agreement with respect to the Notes, the Fund is required to maintain on a
semi-monthly basis a specified discounted asset value for its portfolio that
equals or exceeds an amount determined under guidelines established by Standard
& Poor's Corporation. The Fund has met these requirements during the six months
ended February 28, 1997.
The costs of $620,282 incurred by the Fund in connection with the issuance of
the Notes are deferred and amortized on a straight-line basis over the term of
the notes.
The discount relating to the issuance of these Notes, which amounted to $65,250,
is being amortized to interest expense over a period of five years from August
30, 1993.
NOTE 4 - NET REALIZED CAPITAL GAINS - TAX BASIS
At August 31, 1996, for tax purposes, the Fund had accumulated net realized
gains of $138,511. For tax purposes, the aggregate cost of securities is higher
(and unrealized appreciation is lower) than for financial statement purposes at
February 28, 1997 by $30,939.
NOTE 5 - TRUST SHARES
At February 28, 1997, there was an unlimited number of $.01 par value shares of
beneficial interest authorized. At February 28, 1997, no shares were issued
pursuant to the Fund's Dividend Reinvestment Plan; all reinvested dividends were
satisfied with previously issued shares purchased in the open market pursuant to
such Plan.
NOTE 6 - 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 weekly and payable monthly at an
annualized rate of 0.75% of the Fund's average weekly net assets (total assets
less liabilities other than the principal amount of the Notes).
Under an agreement with Advisers, Franklin Templeton Services, Inc. (FT
Services) provides administrative services and facilities for the Fund. The fee
is paid by Advisers and computed monthly based on average daily net assets. It
is not a separate expense of the Fund.
b. Other Affiliated Parties and Transactions
Certain officers and trustees of the Fund are also officers and/or directors of
Advisers and FT Services, both wholly-owned subsidiaries of Franklin Resources,
Inc.
NOTE 7 - STATEMENT OF CASH FLOWS
The Fund's financial statements for the six months ended February 28, 1997
include a Statement of Cash Flows in compliance with SFAS 102. Cash provided
from operations differs from net investment income because of amortization of
bond discount, amortization of note issuance costs, commissions and discounts,
bonds paid-in-kind, stock dividends and semi-annual income and expense accrual
changes aggregating $4,202,126.
NOTE 8 - RESTRICTED SECURITIES
A restricted security is a security which has not been registered with the
Securities and Exchange Commission pursuant to the Securities Act of 1933. The
Fund may purchase restricted securities through a private offering and they
cannot be sold without prior registration under the Securities Act of 1933
unless such sale is pursuant to an exemption therefrom. Subsequent costs of
registration of such securities are borne by the issuer. A secondary market
exists for certain privately placed securities. The Fund values these restricted
securities as disclosed in Note 2. At February 28, 1997, the Fund held
restricted securities with a value aggregating $2,822,204, representing 1.05% of
the Fund's net assets. Such securities are:
<TABLE>
<CAPTION>
Face Acquisition
Amount Security Date Cost Value
-------- -------------------------------------------- ------- -------- --------
<S> <C> <C> <C> <C>
$1,971,880 Atherton Franchise Capital, L.P., 11.00%, 05/01/06......... 04/28/94 $1,971,880 $1,656,379
1,550,000 Forstmann Textile & Co., Inc., S.F., senior
sub. notes, 14.75%, 04/15/99.............................. 05/08/91 893,188 798,250
Units
--------
5 PG Partners, L.P. Preference Units ........................ 03/31/93 146,226 367,575
</TABLE>
NOTE 9 - CREDIT RISK AND DEFAULTED SECURITIES
The Fund has 71.40% of its portfolio invested in lower rated and comparable
quality unrated high yield securities. Investments in high yield securities are
accompanied by a greater degree of credit risk and such lower rated securities
tend to be more sensitive to economic conditions than higher rated securities.
The risk of loss due to default by the issuer may be significantly greater for
the holders of high yielding securities, because such securities are generally
unsecured and are often subordinated to other creditors of the issuer. At
February 28, 1997, the Fund held one defaulted security with a value aggregating
$798,250, representing 0.30% of the Fund's net assets. For more information as
to specific security, see the accompanying Statement of Investments in
Securities and Net Assets.
There are certain credit risks due to the manner in which the Fund is invested.
The Fund has investments in excess of 10% of its total net assets in the
Wireless Telecommunications Industry.
NOTE 10 - OTHER CONSIDERATIONS
As the Investment Advisor of the Fund, Advisers may serve as a member of various
credit committees, representing credit interests in certain corporate
restructuring negotiations. Currently, Advisers serves on the credit committee
for Forstmann Textile & Co., Inc. and therefore may be in possession of certain
material non-public information. Advisers has not sold, nor does it intend to
sell, any of the Fund's holdings in this security while in possession of
material non-public information in contravention of the Federal Securities Laws.
NOTE 11 - FINANCIAL HIGHLIGHTS
Selected data for a share of beneficial interest outstanding throughout the
period are as follows:
<TABLE>
<CAPTION>
Six Months Ended Year Ended August 31,
February 28, 1997 1996 1995 1994 1993 1992
----------- ------- ------- ------ ------- --------
Per Share Operating Performance:
<S> <C> <C> <C> <C> <C> <C>
Net asset value at beginning of period ...... $ 9.53 $9.36 $8.71 $9.81 $8.94 $7.50
----------- ------- ------- ------ -------- -------
Net investment income ...................... 0.44 0.82 0.85 0.84 0.88 0.80
Net realized and unrealized gain
(loss) on securities ...................... 0.51 0.20 0.61 (1.08) 0.74 1.47
----------- ------- ------- ------ ------- --------
Total from investment operations ............ 0.95 1.02 1.46 (0.24) 1.62 2.27
----------- ------- ------- ------ ------- --------
Less distributions from:
Net investment income ...................... (0.43) (0.85) (0.81) (0.86) (0.75) (0.80)
Capital gains .............................. (0.01) -- -- -- -- --
Return of capital .......................... -- -- -- -- -- (0.03)
----------- ------- ------- ------ -------- -------
Total distributions ......................... (0.44) (0.85) (0.81) (0.86) (0.75) (0.83)
----------- ------- ------- ------ -------- -------
Net asset value at end of period ............ $10.04 $9.53 $9.36 $8.71 $9.81 $8.94
=========== ======= ======= ====== ======== =======
Market value per share at end of period1 .... $ 9.25 $9.125 $8.875 $8.125 $9.50 $8.50
=========== ======= ======= ====== ======== =======
Total Investment Return:
Based on market value per share2 ........... 6.33% 12.84% 20.42% (5.60)% 21.16% 32.39%
Ratio to Average Net Assets:
Expenses ................................... 2.15%+ 2.17% 2.26% 2.30% 3.24% 3.36%
Net investment income ...................... 6.91%+ 6.63% 7.30% 7.04% 7.39% 7.28%
Supplemental Data:
Net assets at end of period (in 000's) ..... $268,986 $255,200 $250,734 $233,302 $262,793 $239,486
Portfolio turnover rate .................... 22.13% 19.24% 27.41% 36.76% 39.49% 30.44%
Average commission rate3 ................... $ 0.0500 $ 0.0528 -- -- -- --
Total debt outstanding at
end of period (in 000's) .................. $ 74,980 $ 74,974 $ 74,961 $ 74,948 $ 74,523 $ 71,475
Asset coverage per $1,000 of debt .......... $ 3,587 $ 3,404 $ 3,345$ 3,113$ 3,526$ 3,351
(For Notes outstanding throughout the year)
Year Face Amount of Average Monthly Average Average Amount of
Ended Notes Outstanding Face Amount of Monthly Shares Notes Per Share
August 31, End of Year Notes Outstanding Outstanding During the Year
------- ------------ ------------ ----------- ------------
<S> <C> <C> <C> <C>
1992 $71,600,000 $71,600,000 26,779,333 $2.67
1993 75,000,000 71,883,333 26,779,333 2.68
1994 75,000,000 75,000,000 26,779,333 2.80
1995 75,000,000 75,000,000 26,779,333 2.80
1996 75,000,000 75,000,000 26,779,333 2.80
19974 75,000,000 75,000,000 26,779,333 2.80
</TABLE>
1Based on the last sale on the New York Stock Exchange.
2Total return measures the change in value of an investment over the periods
indicated. It is not annualized. It reflects the change in market value of the
capital shares, and assumes reinvestment of dividends and capital gains in
accordance with the dividend reinvestment plan.
3Represents 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.
4For the six months ended February 28, 1997.
+Annualized.
ranklin Universal Trust Semi-Annual Report February 28, 1997.
APPENDIX
DESCRIPTION OF GRAPHIC MATERIAL OMITTED FROM EDGAR FILING (PURSUANT TO ITEM 304
(a)OF REGULATION S-T)
GRAPHIC MATERIAL (1)
This bar chart shows the comparison of the portfolio's holdings between 8/31/96
and 2/28/97, based on total market value.
Portfolio Breakdown on 8/31/96 vs. 2/28/97
Corporate Bonds 63.12% 64.68%
Utilities 21.83% 23.62%
Miscellaneous 9.36% 6.99%
Convertible Bonds 2.67% 1.61%
Natural Resources Equities & 2.58% 2.73%
Preferred Stocks
Foreign Government Agencies 0.22% 0.23%
Partnership Units 0.11% 0.12%
Cash & Equivalents 0.11% 0.02%
