ANNUAL
REPORT
AUGUST 31, 1998
FRANKLIN UNIVERSAL TRUST
Thank you for investing with Franklin Templeton. We encourage our investors
to maintain a long-term perspective and remember that all securities markets
move both up and down, as do fund share prices. We appreciate your past
support and look forward to serving your investment needs in the years ahead.
Charles B. Johnson
Chairman
Franklin Universal Trust
CONTENTS
Shareholder Letter ....................... 1
Manager's Discussion ..................... 4
Performance Summary ...................... 8
Dividend
Reinvestment and
Cash Purchase Plan ....................... 11
Annual Meeting
of Shareholders .......................... 15
Financial Highlights &
Statement of Investments ................. 17
Financial Statements ..................... 25
Notes to
Financial Statements ..................... 29
Independent
Auditor's Report......................... 33
Tax Designation .......................... 34
SHAREHOLDER LETTER
Dear Shareholder:
It's a pleasure to bring you Franklin Universal Trust's annual report for the
period ended August 31, 1998.
The U.S. economy continued its expansion during much of the period under
review, demonstrating healthy growth with few signs of inflation. Strong
consumer demand for goods, services and housing contributed to continued
growth. However, in our semiannual report for the period ended February 28,
1998, we mentioned the likelihood of U.S. economic slowdown brought on, for
the most part, by the Asian financial crisis. Soon thereafter, this came to
pass. U.S. economic growth slowed, from a torrid 5.5% annual rate in the
first three months of the year, to a diminished 1.6% annual rate in the
April-June period, reflecting weak Asian demand for goods and a buildup of
business inventories. The Asian turmoil's impact on the U.S. economy was
mixed -- it slowed the economy through a decline in American exports, while
the U.S. dollar's resulting strength helped keep inflation under control
through a decline in import prices. In addition, the recent Russian crisis
exacerbated concerns in a global market that was already fragile. Although
Russia and many of these Asian countries in crisis are implementing reforms,
it will likely take some time for their economies to recover.
Despite generally favorable domestic economic conditions for most of the
reporting period, recent global developments took a toll on U.S. markets,
which proved unable to withstand the foreign pressure. After reaching an
all-time high of 9337.97 on July 17, 1998, the Dow Jones(R) Industrial Average
suffered its second-largest point decline in its history, falling 512.61
points to 7539.07 on August 31, 1998, the close of the fund's fiscal year.
During the reporting period, the yield on the benchmark 30-year U.S. Treasury
bond hit record lows, largely in response to weak financial markets abroad.
The 30-year Treasury began the reporting period yielding 6.61% on August 31,
1997, and ended the period yielding 5.26% on August 31, 1998. Falling yields
increasingly reflected the 30-year Treasury bond's popularity and "flight to
quality" among investors fleeing Asia's and Russia's deteriorating markets.
For most of the fund's fiscal year, Franklin Universal Trust performed
favorably; however, recent weakness in the domestic equity market had a
negative effect on utility stocks and high yield bonds, two of the Trust's
major investment sectors. The following Manager's Discussion provides
specific details about your fund's performance and investment strategies.
The recent global problems contributed to dramatic U.S. market ups and downs,
which understandably create investor uncertainty. Such conditions remind us
of the importance of investing for the long term, so daily market
fluctuations and short-term volatility have minimal impact on overall
investment goals. We encourage you to discuss your financial goals with your
investment representative. He or she can address concerns about market
volatility, and help you diversify your investments and stay focused on the
long term.
As always, we appreciate your continued investment in Franklin Universal
Trust and look forward to serving your future investment needs.
Sincerely,
Charles B. Johnson
Chairman
Franklin Universal Trust
GRAPHIC MATERIAL 1 OMITTED - SEE APPENDIX AT END OF DOCUMENT
MANAGER'S DISCUSSION
Your Fund's Objective: Franklin Universal Trust seeks to provide high,
current income consistent with preservation of capital.
You will find a complete listing of the Trust's portfolio holdings, including
dollar value and number of shares or principal amount, beginning on page 18
of this report.
Despite relatively stable market conditions for the majority of the reporting
period, the environment for high yield bonds and utility equities came under
considerable pressure toward the end of the period. Deteriorating global
markets, spurred on by crises in Asia and Russia, eventually impacted prices
in the domestic market, which had managed to remain insulated for much of the
past year. Amid substantial market weakness, however, the Trust was
relatively well-positioned to take advantage of certain positive sector
fundamentals, and benefited from the strong performance of individual
securities selected for the portfolio. Franklin Universal Trust (NYSE:
FTgenerated a cumulative total return of +9.40% for the one-year period ended
August 31, 1998, based on its change in market price on the New York Stock
Exchange.
Sector Discussions
Wireless
Overall, increased subscriber growth and sustained demand for high
value-added services benefited several of the Trust's holdings within the
wireless sector. On the cellular side, Nextel Communications, Inc. performed
well due to adherence to its solid business plan, as the company continued to
roll out its nationwide network and add subscribers at a healthy pace. In
addition, the company was able to realize above-average revenue per unit
largely because of high-quality service and attractive handset designs that
captured more business users. Another noteworthy cellular holding, Sygnet
Wireless, Inc., benefited from consolidation within the rural sector, a trend
that is resulting in less competition from digital providers in Sygnet's
markets. Sygnet recently announced that it will be acquired by Dobson
Communications, and we expect Dobson will tender for the bonds, which should
improve their value.
Within the paging sector, stronger industry fundamentals benefited selected
names during the period. In particular, industry pricing power improved,
while the subscriber base continued to grow. Holdings such as Paging
Networks, Inc. and Metrocall Inc. were successful at shifting their customer
bases to higher-priced, value-added service plans that gave the providers
greater revenue than added cost.
Industrial
During the reporting period, the Trust focused mainly on strong domestic
manufacturers, which performed well relative to their foreign counterparts.
In contrast, exposure to foreign industrials was minimal. Consolidation and
leverage reduction remained two prevalent industry trends, and the fund
benefited from several publicly held companies, which can issue additional
equity to fill their financing needs. In particular, Allied Waste's
successful acquisition strategy -- focusing on the consolidation and
integration of other waste management companies -- bolstered Allied's
performance. Nortek Inc. benefited from strength in the building cycle. With
significant exposure to the robust aerospace cycle, Derlan Industries, LTD.
also performed strongly.
Broadcasting
Mergers and acquisitions continued within the broadcasting sector, and the
Trust maintained its focus on the larger consolidators and acquisition
targets within the industry, seeking to take advantage of this trend. The
purchase of LIN Television Corp., a leading network broadcast television
operator, exemplifies this strategy. Recently, LIN Television announced it
will be acquired by Chancellor Broadcasting, a company of higher credit
quality, boosting the Trust's LIN Television bonds.
GRAPHIC MATERIAL 2 OMITTED - SEE APPENDIX AT END OF DOCUMENT
Cable
During the reporting period, the cable sector outperformed the overall high
yield market. Domestic cable companies, including CSC Holdings, Inc., a Trust
position, generally enjoyed strong revenue growth and benefited from the
promotion of up-and-coming services such as digital cable, cable modems and
cable telephony. In addition, valuations improved, as non-traditional
investors entered the market for cable sector assets. On the international
side, our position in Diamond Holdings Plc., a leading U.K. cable operator,
performed well as a result of improved operating results and the announcement
that it will be acquired by NTL, the U.K.'s third-largest cable operator.
Telecommunications
The telecommunications sector continues to evolve rapidly, evidenced by the
increased merger and acquisition activity among regional bell operating
companies. In addition to consolidation, another significant industry trend
is the rise of new, alternative local service providers such as Intermedia
Communications, Inc. and NEXTLINK Communications, Inc., two of the Trust's
holdings. Such alternative providers increase access line penetration as they
grow from start-up companies to stronger, alternative sources of local
service. During the reporting period, Intermedia expanded its role in data
communications (Internet, intranet, extranet) by furthering its development
of a regionally-based data network to exploit the strong growth in this
market segment.
Electric Utilities
During the 12 months under review, the electric utility industry showed signs
of improvement as issues surrounding deregulation were clarified and several
states completed their deregulation plans. With this in mind, we focused our
investment decisions on electric utility companies we believe will do well in
a competitive environment. Such companies generally have low-cost operations,
strong management teams and domestically and internationally diversified
businesses. On August 31, 1998, our three largest electric utility holdings
were Dominion Resources, Inc., Texas Utilities Co. and Southern Company.
What's Ahead
Recent economic data suggest benign inflation, relatively stable interest
rates, and continued domestic growth, although the effects of the foreign
market volatility may temper growth rates somewhat. The recent turmoil in
global financial markets may impact the domestic high yield market in the
short term, but we believe that recent volatility should not significantly
affect this asset class's fundamentals over the long term. In addition, the
Trust's international exposure is relatively small, comprising less than 8%
of total net assets on August 31, 1998. Consequently, we remain optimistic
regarding the high yield market, in general, and Franklin Universal Trust, in
particular, and believe that there will continue to be attractive
opportunities in high yield corporate bonds and utility stocks over the short
to intermediate term.
Please remember, this discussion reflects our views, opinions and portfolio
holdings as of August 31, 1998, the end of the reporting period. However,
market and economic conditions are changing constantly, which can be expected
to affect our strategies and the fund's portfolio composition. Although
historical performance is no guarantee of future results, these insights may
help you understand our investment and management philosophy.
PERFORMANCE SUMMARY
Franklin Universal Trust's share price on the New York Stock Exchange (NYSE)
decreased 25 cents, from $9.50 on August 31, 1997, to $9.25 on August 31,
1998. The Trust's share price, as measured by net asset value, decreased 92
cents, from $10.20 to $9.28 for the same period.
During the 12-month reporting period, the Trust's distributions totaled
114.80 cents ($1.148) per share. This included a December 1997 distribution
consisting of the monthly dividend of 6.7 cents ($0.067), a long-term capital
gain of 24.02 cents ($0.2402) and a short-term capital gain of 10.38 cents
($0.1038). Distributions will vary based on the fund's income and any profits
realized from the sale of securities in the fund's portfolio. Past
distributions are not predictive of future trends.
Based on an annualization of the current monthly dividend of 6.7 cents
($0.067) and the NYSE closing price of $9.25 on August 31, 1998, the Trust's
distribution rate was 8.69%.
Franklin Universal Trust reported a +9.40% cumulative total return for the
12-month period ended August 31, 1998. 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), total return for the same period was +2.22%.
All total returns assume reinvestment of dividends and capital gains
according to the terms specified in the Trust's dividend reinvestment plan.
We urge you to view your investment in Franklin Universal Trust with a
long-term perspective. As the chart below shows, the Trust reported a
cumulative total return of +198.05%, based on net asset value, since its
inception on September 23, 1988.
Franklin Universal Trust
Periods ended 8/31/98
Since
Inception
1-Year 5-Year (9/23/88)
Cumulative Total Return1
Based on change in net asset value +2.22% +55.11% +198.05%
Based on change in market price +9.40% +61.95% +176.07%
Average Annual Total Return1
Based on change in net asset value +2.22% +9.18% +11.61%
Based on change in market price +9.40% +10.12% +10.75%
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 an annualization of the Trust's current 6.7
cent per share monthly dividend and the New York Stock Exchange closing price of
$9.25 on August 31, 1998.
PORTFOLIO OPERATIONS
Christopher Molumphy
Senior Portfolio Manager
Franklin Advisers, Inc.
Christopher 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 Franklin Universal Trust since 1991.
Jeffrey S. Carlson
Portfolio Manager
Franklin Advisers, Inc.
Mr. Carlson is a Chartered Financial Analyst and holds a Bachelor of Science
degree in finance with a minor in economics from San Jose State University.
He has been with the Franklin Templeton Group since 1991. He is a member of
several securities industry-related associations.
DIVIDEND REINVESTMENT
AND CASH PURCHASE PLAN
The Trust's Dividend Reinvestment Plan and Cash Purchase Plan (the "Plan")
offers you a prompt and simple way to reinvest income dividends and capital
gain distributions in shares of the Trust. The Plan also allows you to
purchase additional shares of the Trust by making voluntary cash payments.
First Data Investor Services Group (the "Plan Agent"), P.O. Box 8030, Boston,
Massachusetts, 02266-8030, acts as your Plan Agent in administering the Plan.
The complete Terms and Conditions of the Dividend Reinvestment and Cash
Purchase Plan are contained in the Trust's Dividend Reinvestment and Cash
Purchase Plan Brochure dated December 1997. A copy of that Brochure may be
obtained from the Trust 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 Trust declares a dividend or capital gain distribution, you, as a
participant in the Plan, will automatically receive an equivalent amount of
shares of the Trust purchased on your behalf by the Plan Agent.
The Plan permits you on a voluntary basis to submit in cash payments of not
less than $100 each up to a total of $5,000 per month to purchase additional
shares of the Trust. It is entirely up to you whether you wish to buy
additional shares with voluntary cash payments, and you do not have to send
in the same amount each time if you do. These payments should be made by
check or money order payable to Franklin Universal Trust and sent to First
Data Investor Services Group, P.O. Box 8030, Boston, Massachusetts,
02266-8030.
Your cash payment will be aggregated with the payments of other participants
and invested on your behalf by the Plan Agent in shares of the Trust which
are purchased in the open market
The Plan Agent will invest cash payments on approximately the 15th of each
month in which no dividend or distribution is payable and, during each month
in which a dividend or distribution is payable, will invest cash payments
beginning on the dividend payments date. Under no circumstances will interest
be paid on your funds held by the Plan Agent. Accordingly, you should send
any voluntary cash payments which you wish to make shortly before an
investment date but in sufficient time to ensure that your payment will reach
the Plan Agent not less than 2 business days before an investment date.
Payments received less than 2 business days before an investment date will be
invested during the next month or, if there are more than 30 days until the
next investment date, will be returned to you.
You may obtain a refund of any cash payment by written notice, if the written
notice is received by the Plan Agent not less than 48 hours before an
investment date.
There is no direct charge to participants for reinvesting dividends and
distributions, since the Plan Agent's fees are paid by the Trust. However,
when shares are purchased in the open market, each participant will pay a pro
rata portion of any brokerage commissions incurred. The Plan Agent will
deduct a $5.00 service fee from each of your voluntary cash payments.
The automatic reinvestment of dividends and capital gain distributions does
not relieve you of any taxes which may be payable on such dividends or
distributions. In connection with the reinvestment of dividends and capital
gain distributions, shareholders generally will be treated as having received
a distribution equal to the cash distribution that you have been paid.
The Trust does not issue new shares in connection with the Plan. All
investments are in full and fractional shares, carried to three decimal
places. If the market price exceeds the net asset value you will receive
shares that were purchased at a price greater than net asset value per share
in connection with purchases through the Plan.
You will receive a monthly 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 its name or in the name of its
nominee. This convenience provides added protection against loss, theft or
inadvertent destruction of certificates. However, you may request that a
certificate representing your Plan shares be issued to you.
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 may specify either: (a) that you wish to receive, without charge, stock
certificates issued in your name for full shares; or (b) that you prefer the
Plan Agent to sell your shares and send your proceeds less brokerage
commissions and a $5.00 fee. The Plan Agent will convert any fractional
shares you hold at the time of your withdrawal to cash at 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 and to determine if your nominee will participate in the Plan on
your behalf.
Annual Meeting of Shareholders
At an Annual Meeting of Shareholders of Franklin Universal Trust (the "Fund")
held on August 26, 1998, shareholders of the Fund voted as follows:
1. Regarding the election of the nominees for Trustees:
<TABLE>
<CAPTION>
% of Out- % of Out- % of Out-
standing % of Shares standing Withheld standing Broker
Shares For Shares Voted Against Shares Or Abstain Shares Non Vote
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Frank H. Abbott 17,960,262.634 67.06 97.48 0 0 465,033.810 2.52 0
Harris J. Ashton 17,992,092.060 67.18 97.65 0 0 433,204.384 2.35 0
S. Joseph Fortunato 18,022,076.839 67.29 97.81 0 0 403,219.605 2.19 0
Edward B. Jamieson 18,019,252.442 67.29 97.80 0 0 406,044.002 2.20 0
Charles B. Johnson 18,032,503.138 67.34 97.87 0 0 392,793.306 2.13 0
Rupert H. Johnson, Jr. 18,045,306.089 67.39 97.94 0 0 379,990.355 2.06 0
Frank W. T. LaHaye 18,000,543.629 67.22 97.69 0 0 424,752.815 2.31 0
Gordon S. Macklin 18,000,138.490 67.22 97.69 0 0 425,157.954 2.31 0
2. Regarding the ratification of the selection of PricewaterhouseCoopers LLP, as
independent auditors for the Fund for the current fiscal year:
% of Out- % of Out- % of Out-
standing % Shares standing Withheld standing Broker
Shares For Shares of Voted Against Shares Or Abstain Shares Non Vote
- -------------------------------------------------------------------------------------------------------------
<C> <C> <C> <C> <C> <C> <C> <C>
17,919,514.152 66.92 97.25 105,859.256 0.40 399,923.036 1.49 0
3. Regarding the proposal to eliminate the Fund's fundamental investment
restriction regarding the purchase and sale of oil, gas, mineral and/or real
estate interests:
% of Out- % of Out- % of Out-
standing % Shares standing Withheld standing Broker
Shares For Shares of Voted Against Shares Or Abstain Shares Non Vote
- -------------------------------------------------------------------------------------------------------------
<C> <C> <C> <C> <C> <C> <C> <C>
13,408,495.816 50.07 72.77 842,069.276 3.14 822,592.352 3.07 3,352,139.000
4. Regarding the proposal to eliminate the Fund's fundamental investment
restriction regarding short sales of securities:
% of Out- % of Out- % of Out-
standing % Shares standing Withheld standing Broker
Shares For Shares of Voted Against Shares Or Abstain Shares Non Vote
- -------------------------------------------------------------------------------------------------------------
<C> <C> <C> <C> <C> <C> <C> <C>
13,040,091.123 48.69 70.77 1,184,920.880 4.42 848,142.441 3.17 3,352,142.000
5. Regarding the proposal to amend the Fund's fundamental investment restriction
regarding lending:
% of Out- % of Out- % of Out-
standing % Shares standing Withheld standing Broker
Shares For Shares of Voted Against Shares Or Abstain Shares Non Vote
- -------------------------------------------------------------------------------------------------------------
<C> <C> <C> <C> <C> <C> <C> <C>
13,112,714.993 48.97 71.17 1,082,694.409 4.04 877,746.042 3.28 3,352,141.000
6. Regarding granting the proxy holders the authority to vote upon any other
business that may legally come before the meeting:
% of Out- % of Out- % of Out-
standing % Shares standing Withheld standing Broker
Shares For Shares of Voted Against Shares Or Abstain Shares Non Vote
- -------------------------------------------------------------------------------------------------------------
<C> <C> <C> <C> <C> <C> <C> <C>
17,259,155.213 64.45 93.67 0 0 1,166,141.231 4.35 0
</TABLE>
<TABLE>
<CAPTION>
Franklin Universal Trust
Financial Highlights
Year Ended August 31,
----------------------------------------------
1998 1997 1996 1995 1994
----------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share operating performance
(for a share outstanding throughout the year)
Net asset value, beginning of year ...................... $10.20 $ 9.53 $9.36 $8.71 $9.81
----------------------------------------------
Income from investment operations:
Net investment income .................................. .85 .86 .82 .85 .84
Net realized and unrealized gains (losses) ............. (.63) .65 .20 .61 (1.08)
----------------------------------------------
Total from investment operations ........................ .22 1.51 1.02 1.46 (.24)
==============================================
Less distributions from:
Net investment income .................................. (.80) (.83) (.85) (.81) (.86)
Net realized gain ...................................... (.34) (.01) -- -- --
----------------------------------------------
Total distributions ..................................... (1.14) (.84) (.85) (.81) (.86)
----------------------------------------------
Net asset value, end of year ............................ $ 9.28 $10.20 $9.53 $9.36 $8.71
==============================================
Market value per share, end of year1 .................... $9.250 $9.500 $9.125 $8.875 $8.125
==============================================
Total return (based on market value per share)2 ......... 9.40% 14.00% 12.84% 20.42% (5.60)%
Ratios/supplemental data
Net assets, end of year (000's) ......................... $248,419 $273,173 $255,200 $250,734 $233,302
Ratios to average net assets:
Expenses ............................................... 2.63% 2.72% 2.80% 2.97% 3.01%
Expenses excluding interest expense .................... 1.09% 1.12% 1.16% 1.19% 1.27%
Net investment income .................................. 8.29% 8.74% 8.56% 9.59% 9.22%
Portfolio turnover rate ................................. 36.66% 51.48% 19.24% 27.41% 36.76%
Total debt outstanding at end of year (000's) ........... $75,000 $74,987 $74,974 $74,961 $74,948
Asset coverage per $1,000 of debt ....................... $ 4,312 $ 4,643 $ 4,404 $ 4,345 $ 4,113
Average amount of notes per share during the year ....... $2.80 $2.80 $2.80 $2.80 $2.80
</TABLE>
1Based on the last sale on the New York Stock Exchange.
2Total return is not annualized.
See notes to financial statements.
<TABLE>
<CAPTION>
Franklin Universal Trust
Statement of Investments, August 31, 1998
SHARES,
WARRANTS
& RIGHTS VALUE
<S> <C> <C>
a,b Common Stocks, Warrants and Rights 30.3%
Automotive
a Harvard Industries, Inc., Class B ................................................. 60,800 $ 24,320
-------------
Cable Television
a Wireless One, Inc., wts. .......................................................... 6,000 --
-------------
Consumer Products .5%
RJR Nabisco Holdings Corp. ........................................................ 54,000 1,171,125
-------------
Containers & Packaging
a Gaylord Container Corp., wts. ..................................................... 46,137 132,644
-------------
Energy .7%
a McMoRan Oil & Gas Co. ............................................................. 9,000 27,000
Montana Power Co................................................................... 2,600 101,400
a Santa Fe Energy Resources, Inc. ................................................... 14,935 112,013
Ultramar Diamond Shamrock Corp. ................................................... 66,600 1,540,125
-------------
1,780,538
-------------
Health Care 1.2%
a Kendall International, Inc., Class A, wts. ........................................ 4,066 1,105,939
a Kendall International, Inc., Class B, wts. ........................................ 4,348 1,160,206
a Kendall International, Inc., rts. ................................................. 2,456 668,024
-------------
2,934,169
-------------
Lodging
a Host Marriott Corp. ............................................................... 752 10,528
Marriott International, Inc., Class A ............................................. 1,504 42,206
a Sodexho Marriott Services, Inc..................................................... 188 4,676
-------------
57,410
-------------
Metals & Mining .8%
Anglogold, Ltd., Sponsored ADR (South Africa) ..................................... 30,446 494,748
Driefontein Consolidated Mines, Ltd., Sponsored ADR (South Africa) ................ 228,000 769,500
Freeport-McMoRan Copper & Gold, Inc., Class A ..................................... 4,500 51,187
Freeport-McMoRan Copper & Gold, Inc., Class B ..................................... 63,156 734,189
a Gulf States Steel, wts. ........................................................... 4,000 6,000
-------------
2,055,624
Real Estate
a Security Capital Group, Inc., Class B, wts. ....................................... 3,190 69
-------------
Telecommunications 1.6%
BellSouth Corp. ................................................................... 40,600 2,783,638
a Loral Orion Network Systems, Inc., wts. ........................................... 5,000 37,644
Telecom New Zealand, Ltd. (New Zealand)............................................ 79,200 1,108,800
-------------
3,930,082
-------------
Utilities 25.5%
American Electric Power Co., Inc. ................................................. 123,600 5,592,900
CINergy Corp. ..................................................................... 205,600 7,144,600
Conectiv, Inc...................................................................... 79,700 1,623,888
Utilities (cont.)
Dominion Resources, Inc. .......................................................... 150,000 $ 6,253,125
DPL, Inc. ......................................................................... 217,000 3,906,000
Duke Energy Corp. ................................................................. 70,000 4,366,250
Edison International .............................................................. 74,600 2,121,438
Florida Progress Corp.............................................................. 50,000 2,109,375
New Century Energies, Inc. ........................................................ 100,000 4,612,500
New England Electric System ....................................................... 35,300 1,425,238
New Jersey Resources Corp. ........................................................ 90,000 3,031,875
OGE Energy Corp. .................................................................. 90,000 2,480,625
Pinnacle West Capital Corp. ....................................................... 77,000 3,325,438
SCANA Corp. ....................................................................... 109,200 3,351,075
Southern Co. ...................................................................... 208,800 5,872,500
Texas Utilities Co. ............................................................... 141,500 6,013,750
-------------
63,230,577
-------------
Total Common Stocks, Warrants & Rights (Cost $54,406,049) ......................... 75,316,558
-------------
Partnership Units
Financial Services
a,bPG Partners, L.P., Preference Units (Cost $0) ..................................... 5 136,663
-------------
Preferred Stocks 8.9%
Automotive
a Harvard Industries, Inc., 14.25% pfd., PIK ........................................ 69,017 25,881
-------------
Broadcasting 2.2%
Sinclair Capital, 11.625% pfd. .................................................... 40,000 4,100,000
Triathlon Broadcasting Co., 9.00% cvt. pfd. ....................................... 142,190 1,475,221
-------------
5,575,221
-------------
Consumer Products .7%
Ralston Purina Co., 7.00% cvt. pfd. ............................................... 31,000 1,643,000
-------------
Financial Services .8%
Archstone Communities Trust, $1.75 cvt. pfd., Series A ............................ 45,000 1,186,875
DECS Trust, 8.50% cvt. pfd. ....................................................... 77,200 810,600
-------------
1,997,475
-------------
Lodging .2%
Hilton Hotels Corp., 8.00% cvt. pfd. .............................................. 28,000 535,500
-------------
Paper & Forest Products .7%
Asia Pulp & Paper Co., Ltd., 12.00% pfd. (Indonesia) .............................. 4,000,000 1,810,000
-------------
Telecommunications .6%
Nortel Inversora, SA, 10.00% cvt. pfd., MEDS (Argentina) .......................... 35,000 1,540,000
-------------
Transportation 1.1%
CNF Trust I, Series A, 5.00% cvt. pfd. ............................................ 15,800 816,663
Union Pacific Corp., 144A, 6.25% cvt. pfd. ........................................ 40,000 1,760,000
-------------
2,576,663
-------------
Utilities 2.6%
b CMS Energy Corp., 7.75% cvt. pfd. ................................................. 70,000 $ 4,383,050
Texas Utilities Co., 9.25% cvt. pfd................................................ 37,200 1,955,325
-------------
6,338,375
-------------
Total Preferred Stocks (Cost $26,948,155).......................................... 22,042,115
-------------
Principal
Amount*
Non-Convertible Bonds 87.0%
Automotive 4.5%
Aetna Industries, Inc., senior notes, 11.875%, 10/01/06 ........................... $2,600,000 2,717,000
Collins & Aikman Corp., senior sub. notes, 11.50%, 4/15/06 ........................ 2,000,000 2,130,000
a,cHarvard Industries, Inc., senior notes, 12.00%, 7/15/04 .......................... 4,000,000 1,500,000
Key Plastics, Inc., Series B, senior sub notes, 10.25%, 3/15/07 ................... 1,500,000 1,451,250
Oshkosh Truck Corp., senior sub. notes, 8.75%, 3/01/08 ............................ 1,500,000 1,447,500
Talon Automotive Group, senior sub. notes, 144A, 9.625%, 5/01/08 .................. 2,250,000 2,058,750
-------------
11,304,500
-------------
Broadcasting 3.0%
Chancellor Media Corp., senior sub. notes, 8.75%, 6/15/07 ......................... 4,000,000 3,940,000
LIN Holdings Corp., senior disc. notes, 144A, zero coupon to
3/01/03, 10.00% thereafter, 3/01/08 ............................................... 2,400,000 1,500,000
LIN Television Corp., senior sub. notes, 144A, 8.375%, 3/01/08 .................... 2,100,000 2,005,500
-------------
7,445,500
-------------
Cable Television 2.5%
CSC Holdings, Inc., senior sub. deb., 9.875%, 4/01/23 ............................. 3,000,000 3,195,000
Diamond Holdings, Plc., senior notes, 9.125%, 2/01/08 (United Kingdom)............. 3,000,000 2,992,500
Wireless One, Inc., senior disc. notes, zero coupon to 8/01/01, 13.50% thereafter, 8/01/06 2,400,000 72,000
-------------
6,259,500
-------------
Chemicals 1.3%
Huntsman Corp., senior sub. notes, 144A, 9.50%, 7/01/07 ........................... 3,500,000 3,360,000
-------------
Consumer Products 2.9%
E&S Holdings Corp., senior sub. notes, Series AI, 10.375%, 10/01/06 ............... 1,750,000 940,625
Revlon Consumer Products Corp., senior sub. notes, 8.625%, 2/01/08 ................ 4,000,000 3,800,000
RJR Nabisco, Inc., senior notes, 9.25%, 8/15/13 ................................... 1,500,000 1,635,989
Windmere-Durable Holdings, Inc., senior sub. notes, 10.00%, 7/31/08 ............... 900,000 868,500
-------------
7,245,114
-------------
Containers & Packaging 3.4%
Anchor Glass, first mortgage, 11.25%, 4/01/05 ..................................... 4,000,000 4,180,000
Container Corp. of America, senior notes, 9.75%, 4/01/03 .......................... 3,000,000 3,060,000
Graham Packaging Co., senior sub. notes, 144A, 8.75%, 1/15/08 ..................... 800,000 764,000
Graham Packaging Holdings, senior disc. notes, 144A, zero coupon to
1/15/03, 10.75% thereafter, 1/15/09 .............................................. 600,000 354,000
-------------
8,358,000
-------------
Energy 6.9%
Abraxas Petroleum Corp., senior notes, 11.50%, 11/01/04 ........................... $3,300,000 $ 2,755,500
Chesapeake Energy Corp., senior notes, 144A, 9.625%, 5/01/05 ...................... 750,000 618,750
Clark R&M, Inc., senior sub. notes, 8.875%, 11/15/07 .............................. 4,000,000 3,620,000
Dailey International, Inc., senior notes, Series B, 9.50%, 2/15/08 ................ 1,250,000 1,012,500
Dawson Production Services, Inc., senior notes, 9.375%, 2/01/07 ................... 900,000 886,500
Forcenergy, Inc., senior sub. notes, 9.50%, 11/01/06 .............................. 2,000,000 1,730,000
Magnum Hunter Resources, Inc., senior notes, 10.00%, 6/01/07 ...................... 5,000,000 4,575,000
Nuevo Energy Co., senior sub. notes, 144A, 8.875%, 6/01/08 ........................ 1,000,000 917,500
Rutherford-Moran Oil Corp., senior sub. notes, 10.75%, 10/01/04 ................... 1,000,000 927,500
-------------
17,043,250
-------------
Food & Beverages 1.8%
Compania Alimentos Fargo, senior notes, 144A, 13.25%, 8/01/08 (Argentina).......... 1,000,000 710,000
Packaged Ice, Inc., senior notes, 144A, 9.75%, 2/01/05 ............................ 2,000,000 1,985,000
Specialty Foods Corp., senior unsecured notes, Series B, 10.25%, 8/15/01 .......... 2,000,000 1,735,000
-------------
4,430,000
-------------
Food Retailing 2.8%
Fleming Cos., Inc., senior sub. notes, 10.50%, 12/01/04 ........................... 4,000,000 4,000,000
Penn Traffic Co., senior notes, 8.625%, 12/15/03 .................................. 1,000,000 655,000
Penn Traffic Co., senior notes, 10.375%, 10/01/04 ................................. 2,000,000 1,330,000
Shoppers Food Warehouse Corp., senior notes, 9.75%, 6/15/04 ....................... 1,000,000 1,080,000
-------------
7,065,000
-------------
Gaming & Leisure 1.5%
Regal Cinemas Inc., senior sub. notes, 144A, 9.50%, 6/1/08......................... 4,000,000 3,810,000
-------------
Health Care 3.2%
Abbey Healthcare Group, Inc., senior sub. notes, 9.50%, 11/01/02 .................. 4,000,000 3,710,000
Magellan Health Services, Inc., senior sub. notes, 144A, 9.00%, 2/15/08 ........... 2,300,000 1,874,500
Vencor, Inc., senior sub. notes, 144A, 9.875%, 5/1/05 ............................. 3,200,000 2,336,000
-------------
7,920,500
-------------
Industrial 11.2%
Allied Waste Industries, Inc., senior disc. notes, zero coupon to 6/01/02,
11.30% thereafter, 6/01/07 ....................................................... 5,000,000 3,650,000
Derlan Industries, Ltd., senior notes, 10.00%, 1/15/07 ............................ 2,000,000 1,990,000
Falcon Building Products, Inc., senior disc.notes, Series B, zero coupon to
6/15/02, 10.50% thereafter, 6/15/07 .............................................. 2,000,000 1,230,000
Falcon Building Products, Inc., senior unsecured sub. notes, Series B, 9.5%, 6/15/07 2,000,000 1,780,000
International Comfort Products, senior notes, 144A, 8.625%, 5/15/08 ............... 4,000,000 3,730,000
Intertek Finance, Plc., senior sub. notes, Series B, 10.25%,
11/01/06 (United Kingdom) ........................................................ 2,800,000 2,765,000
LES, Inc., senior sub. notes, 144A, 9.25%, 6/01/08 ................................ 3,500,000 3,465,000
Nortek, Inc., senior notes, 9.125%, 9/01/07 ....................................... 2,000,000 1,870,000
Nortek, Inc., senior notes, 144A, 8.875%, 8/01/08 ................................. 1,000,000 945,000
Simonds Industries, Inc., senior sub. notes, 144A, 10.25%, 7/01/08 ................ 2,000,000 1,960,000
Terex Corp., senior sub. notes, 144A, 8.875%, 4/01/08 ............................. 2,650,000 2,464,500
Universal Compression, Inc., senior disc. notes, 144A,
zero coupon to 2/15/03, 9.875%, 2/15/08 .......................................... 3,550,000 2,076,750
-------------
27,926,250
-------------
Information and Technology 1.3%
Anacomp, Inc., senior sub. notes, 144A, 10.875%, 4/01/04 .......................... $3,100,000 $ 3,123,250
-------------
Lodging 1.6%
Prime Hospitality Corp., senior sub. notes, Series B, 9.75%, 4/01/07 .............. 4,000,000 3,880,000
-------------
Media 5.1%
Big Flower Press Holdings, Inc., senior sub. notes, 8.875%, 7/01/07 ............... 1,500,000 1,470,000
Fox Kids Worldwide, Inc., senior disc. notes, zero coupon to 11/01/02,
10.25% thereafter, 11/01/07 ...................................................... 850,000 480,250
Fox Kids Worldwide, Inc., senior notes, 9.25%, 11/01/07 ........................... 1,250,000 1,118,750
Fox/Liberty Networks, L.L.C., senior disc. notes, zero
coupon to 8/15/02, 9.75% thereafter, 8/15/07 ..................................... 4,000,000 2,440,000
Hollinger International Publishing, senior sub. notes, 9.25%, 2/01/06 ............. 1,000,000 1,005,000
Outdoor Systems, Inc., senior sub. notes, 8.875%, 6/15/07 ......................... 4,500,000 4,545,000
Six Flags Entertainment Corp., senior notes, 8.875%, 4/01/06 ...................... 1,750,000 1,664,688
-------------
12,723,688
-------------
Metals & Mining 7.6%
Envirosource, Inc., senior notes, 9.75%, 6/15/03 .................................. 4,000,000 3,780,000
LTV Corp., senior notes, 8.20%, 9/15/07 ........................................... 4,000,000 3,660,000
Ormet Corp., senior secured notes, 144A, 11.00%, 8/15/08 .......................... 4,000,000 3,680,000
P & L Coal Holdings Corp., senior notes, 144A, 8.875%, 5/15/08 .................... 500,000 492,500
P & L Coal Holdings Corp., senior sub. notes, 144A, 9.625%, 5/15/08 ............... 3,500,000 3,412,500
Sheffield Steel Corp., first mortgage, 11.50%, 12/01/05 ........................... 4,000,000 3,760,000
-------------
18,785,000
-------------
Paper & Forest Products 1.2%
Fort Howard Corp., sub. deb., 11.00%, 1/02/02 ..................................... 1,679,061 1,670,666
Pindo Deli Financial Mauritius, notes, 11.75%, 10/01/17 (Indonesia) ............... 3,000,000 1,290,000
-------------
2,960,666
-------------
Restaurants 3.3%
Advantica Restaurant Group, senior notes, 11.25%, 1/15/08 ......................... 1,598,325 1,574,350
AmeriServ Food Distributions, Inc., senior notes, 8.875%, 10/15/06 ................ 1,000,000 907,500
AmeriServ Food Distributions, Inc., senior sub. notes, 10.125%, 7/15/07 ........... 3,000,000 2,722,500
b Atherton Franchise Capital, L.P., 11.00%, 5/01/06 ................................. 1,706,698 1,433,621
Family Restaurants, Inc., senior notes, 9.75%, 2/01/02 ............................ 2,000,000 1,490,000
-------------
8,127,971
-------------
Retail .8%
Specialty Retailers, Inc., notes, Series B, 8.50%, 7/15/05 ........................ 2,000,000 1,880,000
-------------
Telecommunications 5.0%
Flag, Ltd., senior notes, 144A, 8.25%, 1/30/08 (Bermuda)........................... 800,000 740,000
Intermedia Communications, Inc., senior disc. notes, Series B, zero coupon to 7/15/02, 11.25%
thereafter, 7/15/07 .............................................................. 5,000,000 3,425,000
IXC Communications Inc., senior sub. notes, 9.00%, 4/15/08 ........................ 1,750,000 1,592,500
NEXTLINK Communications, Inc., senior notes, 9.625%, 10/01/07 ..................... 2,000,000 1,870,000
NEXTLINK Communications, Inc., senior notes, 9.00%, 3/15/08 ....................... 2,000,000 1,805,000
Poland Telecom Finance, units, 14.00%, 12/01/07 (Poland) .......................... 3,000,000 3,105,000
-------------
12,537,500
-------------
Textiles & Apparel 1.3%
Collins & Aikman Floor Covering, Inc., senior sub. notes, Series B, 10.00%, 1/15/07 $3,300,000 $ 3,250,500
-------------
Transportation 1.2%
American Commercial Lines, 144A, 10.25%, 6/30/08 .................................. 2,500,000 2,412,500
Great Lakes Dredge & Dock Corp., senior sub. notes, 144A, 11.25%, 8/15/08 ......... 500,000 480,000
-------------
2,892,500
-------------
Utilities .8%
AES Corp., senior sub. notes, 8.50%, 11/01/07 ..................................... 2,000,000 1,910,000
-------------
Wireless 12.8%
Arch Communications Group, Inc., senior disc. notes, zero coupon to
3/15/01, 10.875% thereafter, 3/15/08 ............................................. 6,000,000 2,790,000
Comcast Cellular Corp., senior notes, Series B, 9.50%, 5/01/07 .................... 4,000,000 3,880,000
Metrocall, Inc., senior sub. notes, 9.75%, 11/01/07 ............................... 4,000,000 3,780,000
Millicom International Cellular, SA, senior disc. notes, zero coupon to
6/01/00,13.50% thereafter,
6/01/06 (Luxembourg) ............................................................. 6,000,000 4,380,000
Nextel Communications, Inc., senior disc. notes, zero coupon to 2/15/99,
9.75% thereafter, 8/15/04 ........................................................ 5,000,000 4,875,000
Orion Network Systems, Inc., units, senior disc. notes,
zero coupon to 1/15/02, 12.50% thereafter, 1/15/07 ................................ 5,000,000 3,600,000
Paging Network, Inc., senior sub. notes, 10.00%, 10/15/08 ......................... 4,000,000 3,900,000
Sygnet Wireless, Inc., senior notes, 11.50%, 10/01/06 ............................. 4,000,000 4,540,000
-------------
31,745,000
-------------
Total Non-Convertible Bonds (Cost $232,410,942) ................................... 215,983,689
-------------
Convertible Bonds 1.7%
Information and Technology .7%
Dovatron International, Inc., cvt. sub. notes, 6.00%, 10/15/02 .................... 2,000,000 1,850,000
-------------
Real Estate Investment Trust 1.0%
Macerich Co., cvt. sub. notes, 144A, 7.25%, 12/15/02 .............................. 2,750,000 2,612,500
-------------
Total Convertible Bonds (Cost $4,967,625).......................................... 4,462,500
-------------
Foreign Government Agencies .2%
ESCOM, E168, utility deb., 11.00%, 6/01/08 (South Africa) (Cost $1,047,150) ....... 4,350,000 ZAR 417,990
-------------
Total Bonds (Cost $238,425,717).................................................... 220,864,179
-------------
d Repurchase Agreements .5%
Joint Repurchase Agreement, 5.748%, 9/01/98, (Maturity Value $1,166,561) (Cost $1,166,374) $1,166,374 $ 1,166,374
BancAmerica Robertson Stephens
Barclays Capital Group, Inc.
Bear, Stearns & Co., Inc.
BT Alex Brown, Inc.
Chase Securities, Inc.
CIBC Wood Gundy Securities Corp.
Donaldson, Lufkin & Jenrette Securities Corp.
Dresdner Kleinwort Benson North America, L.L.C.
Greenwich Capital Markets, Inc.
Paribas Corp.
SBC Warburg Dillon Read, Inc.
Collateralized by U.S. Treasury Bills & Notes ..................................
Total Investments (Cost $320,946,295) 128.6%....................................... $319,525,889
Other Assets, less Liabilities (28.6)% ............................................ (71,107,304)
-------------
Net Assets 100.0%.................................................................. $248,418,585
=============
</TABLE>
CURRENCY ABBREVIATIONS:
ZAR - South African Rand
PORTFOLIO ABBREVIATIONS:
MEDS - Mandatorially Exchangeable Debt Security
*Securities traded in U.S. dollars unless otherwise indicated.
aNon-income producing.
bSee Note 8 regarding restricted securities.
cSee Note 7 regarding defaulted securities.
dInvestment is through participation in a joint account with other funds managed
by the investment advisor. At August 31, 1998, all repurchase agreements had
been entered into on that date.
<TABLE>
<CAPTION>
Franklin Universal Trust
Financial Statements
Statement of Assets and Liabilities
August 31, 1998
Assets:
<S> <C>
Investments in securities, at value (cost $320,946,295) ............................... $319,525,889
Receivables:
Investment securities sold ........................................................... 366,170
Dividends and interest ............................................................... 5,849,798
Note issuance costs (Note 3) .......................................................... 199,128
---------------
Total assets ..................................................................... 325,940,985
---------------
Liabilities:
Payables:
Investment securities purchased ........................................................ 101,530
Affiliates ............................................................................. 209,639
Notes (Note 3) ......................................................................... 75,000,000
Accrued interest (Note 3) .............................................................. 2,125,804
Other liabilities ..................................................................... 85,427
---------------
Total liabilities ................................................................ 77,522,400
---------------
Net assets, at value ............................................................ $248,418,585
===============
Net assets consist of:
Undistributed net investment income ................................................... $ 3,322,857
Net unrealized depreciation ........................................................... (1,421,916)
Accumulated net realized loss ......................................................... (347,898)
Capital shares ........................................................................ 246,865,542
---------------
Net assets, at value ............................................................. $248,418,585
Net asset value per share ($248,418,585 / 26,779,333 shares outstanding) ............... $9.28
===============
See notes to financial statements.
Statement of Operations
for the year ended August 31, 1998
<S> <C> <C>
Investment income:
Dividends ............................................................................. $ 5,691,288
Interest .............................................................................. 24,347,598
---------------
Total investment income .......................................................... $ 30,038,886
Expenses:
Management fees (Note 4) .............................................................. 2,623,488
Transfer agent fees ................................................................... 60,215
Custodian fees ........................................................................ 4,115
Reports to shareholders ............................................................... 62,947
Professional fees ..................................................................... 52,256
Trustees' fees and expenses ........................................................... 17,827
Amortization of note issuance costs ................................................... 124,929
Other ................................................................................. 47,750
---------------
Total expenses ................................................................... 2,993,527
Interest expense (Note 3) ........................................................ 4,248,229
--------------
Net expenses .................................................................... 7,241,756
--------------
Net investment income .......................................................... 22,797,130
--------------
Realized and unrealized loss:
Net realized loss from:
Investments .......................................................................... (316,959)
Foreign currency transactions ........................................................ (3,995)
---------------
Net realized loss ................................................................ (320,954)
Net unrealized depreciation on:
Investments .......................................................................... (16,486,959)
Translation of assets and liabilities denominated in foreign currencies .............. (858)
---------------
Net unrealized depreciation ...................................................... (16,487,817)
--------------
Net realized and unrealized loss ....................................................... (16,808,771)
--------------
Net increase in net assets resulting from operations ................................... $ 5,988,359
==============
</TABLE>
See notes to financial statements.
<TABLE>
<CAPTION>
Statements of Changes in Net Assets
for the years ended August 31, 1998 and 1997
1998 1997
--------------------------
<S> <C> <C>
Increase (decrease) in net assets:
Operations:
Net investment income ..................................................... $ 22,797,130 $ 23,006,827
Net realized gain (loss) from investments and foreign currency transactions (320,954) 9,444,319
Net unrealized appreciation (depreciation) on
investments and translation of assets
and liabilities denominated in foreign currencies ........................ (16,487,817) 8,096,901
--------------------------
Net increase in net assets resulting from operations .................. 5,988,359 40,548,047
Distributions to shareholders from:
Net investment income ..................................................... (21,530,584) (22,200,067)
Net realized gains ........................................................ (9,212,090) (374,911)
--------------------------
Total distributions to shareholders ........................................ (30,742,674) (22,574,978)
--------------------------
Net increase (decrease) in net assets ................................. (24,754,315) 17,973,069
Net assets:
Beginning of year .......................................................... 273,172,900 255,199,831
--------------------------
End of year ................................................................ $248,418,585 $273,172,900
=========================
Undistributed net investment income included in net assets
End of year ................................................................ $ 3,322,857 $ 2,066,401
=========================
See notes to financial statements.
Statement of Cash Flows
for the year ended August 31, 1998
Dividends and interest received ........................................................... $ 24,871,530
Operating expenses paid ................................................................... (3,066,398)
Interest expense paid ..................................................................... (4,218,750)
----------------
Cash provided - operations ............................................................... 17,586,382
================
Investment purchases ...................................................................... (860,002,151)
Investment sales .......................................................................... 873,199,307
----------------
Cash provided - investments .............................................................. 13,197,156
================
Distributions to shareholders ............................................................. (30,742,674)
----------------
Cash used - financing activities ......................................................... (30,742,674)
================
Net increase in cash ...................................................................... 40,864
Cash at beginning of year ................................................................. (40,864)
----------------
Cash at end of year ....................................................................... $ --
================
Reconciliation of Net Investment Income to Net Cash Provided by Operations
for the year ended August 31, 1998
Net investment income ..................................................................... $22,797,130
Less amortization income ................................................................. (4,410,692)
Less increase in dividends and interest receivable ....................................... (684,118)
Less increase in other assets and liabilities ............................................ (115,938)
----------------
Cash provided by operations ............................................................... $17,586,382
================
</TABLE>
See notes to financial statements.
FRANKLIN UNIVERSAL TRUST
Notes to Financial Statements
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Franklin Universal Trust (the Fund) is registered under the Investment
Company Act of 1940 as a closed-end, diversified investment company. The Fund
has two classes of securities: senior fixed-rate notes (the Notes) and shares
of beneficial interest (the Shares). The Fund seeks high current income
consistent with preservation of capital. 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. Restricted securities and
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 Trustees.
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. dollars 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
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. Bond
discount is amortized on an income tax basis. Dividend income and
distributions to shareholders are recorded on the ex-dividend date.
e. Accounting Estimates:
The preparation of the financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the amounts of income and expense during
the reporting period. Actual results could differ from those estimates.
2. SHARES OF BENEFICIAL INTEREST
At August 31, 1998, there were an unlimited number of shares authorized
($0.01 par value). During the period ended August 31, 1998, there were no
share transactions; all reinvested distributions were satisfied with
previously issued shares purchased in the open market.
3. SENIOR FIXED-RATE NOTES
On August 24, 1998, the Fund issued $75 million principal amount of a new
class of five-year senior notes (the Notes). The Notes are general unsecured
obligations of the Fund and rank senior to Trust shares and all existing or
future unsecured indebtedness of the Fund. The proceeds of the Notes were
deposited in an irrevocable trust account and used to defease previously
issued notes maturing on September 1, 1998.
The Notes bear interest, payable semi-annually, at the rate of 5.94% per
year, to maturity on August 31, 2003. The Fund is required to maintain on a
monthly basis a specified discounted asset value for its portfolio in
compliance with guidelines established by Standard & Poor's Corporation, and
is required to maintain asset coverage for the Notes of at least 300%. The
Fund has met these requirements during the year ended August 31, 1998.
The issuance costs of $200,000 incurred by the Fund are deferred and
amortized on a straight line basis over the term of the Notes.
4. TRANSACTIONS WITH AFFILIATES
Certain officers and trustees of the Fund are also officers or directors of
Franklin Advisers, Inc. (Advisers) and Franklin Templeton Services, Inc. (FT
Services), the Fund's investment manager and administrative manager,
respectively.
The Fund pays an investment management fee to Advisers of .75% per year of
the average weekly net assets of the Fund excluding the principal amount of
the Notes.
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.
5. INCOME TAXES
At August 31, 1998, the net unrealized appreciation based on the cost of
investments for income tax purposes of $320,977,234 was as follows:
Unrealized appreciation .......$ 29,892,219
Unrealized depreciation ....... (31,343,564)
Net Unrealized appreciation ...$ (1,451,345)
At August 31, 1998, the Fund had tax basis capital losses of $316,959 which
may be carried over to offset future capital gains. Such losses expire in
2006.
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 wash sales and foreign currency
transactions.
6. INVESTMENT TRANSACTIONS
Purchases and sales of securities (excluding short-term securities) for the
year ended August 31, 1998 aggregated $126,489,214 and $138,163,568,
respectively.
7. CREDIT RISK AND DEFAULTED SECURITIES
The Fund has 66.58% of its portfolio invested in lower rated and comparable
quality unrated high yield securities, which 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 August 31, 1998, the
Fund held one defaulted security with a value aggregating $1,500,000
representing .6% of the Fund's net assets. For information as to specific
securities, see the accompanying Statement of Investments.
For financial reporting purposes, the Fund discontinues accruing income on
defaulted bonds and provides an estimate for losses on interest receivable.
The Fund has investments in excess of 10% of its total net assets in the
Industrial and the Wireless industries. Such concentration may subject the
Fund more significantly to economic changes occurring within these industries.
8. RESTRICTED SECURITIES
The Fund may purchase securities through a private offering that generally
cannot be resold to the public without prior registration under the
Securities Act of 1933. The costs of registering such securities are paid by
the issuer. Restricted securities held at August 31, 1998 are as follows:
<TABLE>
<CAPTION>
Face Acquisition
Amount Issuer Date Cost Value
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1,706,698 Atherton Franchise Capital, L.P., 11.00%, 5/01/06 .............. 4/28/94 $1,706,698 $1,433,621
Shares
70,000 CMS Energy Corp., 7.75% cvt. pfd ............................... 6/18/97 3,500,000 4,383,050
Units
5 PG Partners, L.P., Preference Units ............................ 3/31/93 -- 136,663
Total Restricted Securities (2.40% of Net Assets) ......................... $5,953,334
</TABLE>
9. OTHER CONSIDERATIONS
Advisers, as the Fund's manager, may serve as a member of various credit
committees, representing credit interests in certain corporate restructuring
negotiations. Currently, the manager serves on the credit committee for
Harvard Industries. As a result of this involvement, Advisers may be in
possession of certain material non-public information. The Fund's manager has
not nor does it intend to sell any of its holdings in this security while in
possession of this information.
FRANKLIN UNIVERSAL TRUST
Independent Auditor's Report
To the Board of Trustees and Shareholders of
Franklin Universal Trust
In our opinion, the accompanying statement of assets and liabilities,
including the statement of investments, and the related statements of
operations, of changes in net assets, and of cash flows and the financial
highlights present fairly, in all material respects, the financial position
of Franklin Universal Trust (the "Fund") at August 31, 1998, the results of
its operations and its cash flows for the year then ended, the changes in its
net assets for each of the two years in the period then ended and the
financial highlights for each of the periods presented, in conformity with
generally accepted accounting principles. These financial statements and
financial highlights (hereafter referred to as "financial statements") are
the responsibility of the Fund's management; our responsibility is to express
an opinion on these financial statements based on our audits. We conducted
our audits of these financial statements in accordance with generally
accepted auditing standards which require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits, which included confirmation of securities at August
31, 1998 by correspondence with the custodian and brokers, provide a
reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
San Francisco, California
September 28, 1998
FRANKLIN UNIVERSAL TRUST
Tax Designation
Under Section 854(b)(2) of the Internal Revenue Code, the Fund hereby
designates 22.96% of the ordinary dividends as income qualifying for the
dividends received deduction for the fiscal year ended August 31, 1998.
Franklin Universal Trust
Annual Report
August 31, 1998
APPENDIX
DESCRIPTION OF GRAPHIC MATERIAL OMITTED FROM EDGAR FILING (PURSUANT TO ITEM
304 (a) OF REGULATION S-T)
GRAPHIC MATERIAL (1)
This chart shows in bar format the Portfolio Breakdown based on total market
value as of 8/31/98.
Corporate Bonds 67.59%
Utilities Stock 19.82%
Miscellaneous Equities & Preferred Stock 9.52%
Convertible Bonds 1.40%
Natural Resources Equities & Preferred Stock 1.17%
Foreign Government Agencies .13%
Cash & Equivalents .37%
GRAPHIC MATERIAL (2)
This chart shows the top 10 holdings as a percentage of total market value as
of 8/31/97 and 8/31/98.
8/31/97
Thermadyne Industries, Inc. 2.66%
Cablevision Systems Corp. 2.04%
CINergy Corp. 1.97%
DPL Inc. 1.91%
Southern Company 1.76%
Acme Metals, Inc. 1.65%
Collins & Aikman, Inc. 1.64%
Dominion Resources, Inc. 1.56%
American Electric Power Co., Inc. 1.56%
Comcast Corp. 1.51%
8/31/98
CINergy Corp. 2.24%
Dominion Resources, Inc. 1.96%
Texas Utilities Company 1.88%
Southern Company 1.84%
American Electric Power Co., Inc. 1.75%
Nextel Communications, Inc. 1.53%
New Century Energies, Inc. 1.44%
Magnum Hunter Resources, Inc. 1.43%
Outdoor Systems, Inc. 1.42%
Sygnet Wireless, Inc. 1.42%
