HAREHOLDER LETTER
CONTENTS
Shareholder Letter 1
Manager's Discussion 3
Performance Summary 8
Annual Meeting of
Shareholders 10
Year 2000 Update 11
Dividend Reinvestment and
Cash Purchase Plan 13
Financial Highlights &
Statement of Investments 17
Financial Statements 24
Notes to
Financial Statements 28
Independent
Auditors' Report 31
Tax Information 32
Dear Shareholder:
It's a pleasure to bring you Franklin Universal Trust's annual report for the
period ended August 31, 1999.
Although financial markets were buffeted in 1998 by turmoil overseas, the U.S.
economy grew solidly during the 12-month period under review. In the first
quarter of 1999, the gross domestic product expanded at a 4.3% annualized rate,
although it slowed to 1.6% in the second quarter. After cutting interest rates
in the fall of 1998 to provide much-needed liquidity to the world financial
system, the Federal Reserve Board (the Fed) left rates unchanged during the
winter and spring of 1999, as the remarkable U.S. economy brushed off problems
abroad and continued its record-breaking expansion.
However, concerned that such growth might ignite inflation, the Fed changed
direction in the summer and twice increased the federal funds target rate 0.25%,
raising it to 5.25%. Moreover, Fed Chairman
Alan Greenspan stated that the Fed was poised to raise rates again unless the
economy continued to slow. Interest rates rose strongly during the year under
review as a result of the robust economy and Fed actions, with the 30-year
Treasury bond yield ending the period at 6.07%, up from 5.30% on August 31,
1998. On August 31, 1999, the Dow Jones(R) Industrial Average stood at 10829,
compared with 7539 one year earlier.
As always, we appreciate your continued investment in Franklin Universal Trust
and look forward to serving your future investment needs.
Sincerely,
/s/ C. B. Johnson
- ----------------------------
Charles B. Johnson
Chairman
Franklin Universal Trust
MANAGER'S DISCUSSION
- --------------------------------------------------------------------------------
Your Fund's Objective: Franklin Universal Trust seeks to provide high, current
income consistent with preservation of capital.
- --------------------------------------------------------------------------------
The Trust faced a difficult environment during the 12 months under review, as
financial markets around the world suffered from fears of a global credit crunch
precipitated by the Russian bond default and a major hedge fund's liquidity
crisis. As risk premiums rose into the fall of 1998, the Federal Reserve Board
(the Fed) promptly lowered interest rates, which restored liquidity and
confidence to the financial system. Financial asset prices recovered, rising
through the end of 1998. In January 1999, another potential crisis hit the
markets, as Brazil floated its currency, the real, sparking fears that it would
devalue. However, by spring it became evident the market had exaggerated the
extent of the problem, and the financial markets again recovered. The financial
markets' exceptional volatility during the Trust's fiscal year was not over,
however, as strong economic growth prompted the Fed to reverse course and raise
rates in June and again in August.
During the period under review, the general rise in interest rates had a
negative impact on utilities stocks and high yield, fixed-income assets, the two
primary asset classes in which the Trust invests. Despite the challenging
environment, the Trust's diversification among asset classes, its high dividend
yield and the strong performance of several of the portfolio's individual
securities enabled Franklin Universal Trust to have a solid performance during
the period. For the one-year period ended August 31, 1999, the Trust
outperformed a benchmark weighted 70% to the Lehman Brothers High Yield Index
and 30% to the S&P Electric Utilities Index, which mirrors the portfolio's
composition. This weighted benchmark returned 2.79%, compared with the Trust's
cumulative total return of +2.95% based on its change in market price on the
NYSE and +5.21% based on its change in net asset value.(1)
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.
PORTFOLIO BREAKDOWN
BASED ON TOTAL MARKET VALUE
8/31/99
Corporate Bonds 65.69%
Utilities Stocks 20.49%
Natural Resources Equities
& Preferred Stocks 2.36%
Convertible Bonds 0.47%
Foreign Government Agencies 0.18%
Miscellaneous Equities
& Preferred Stocks 8.82%
Cash & Equivalents 1.99%
TOP 10 HOLDINGS
Based on Total Market Value
8/31/99 vs. 8/31/98
8/31/99
- --------------------------------------------------------------------------------
Texas Utilities Co. 2.47%
Dominion Resources Inc. 2.24%
Southern Co. 1.82%
Duke Energy Corp. 1.67%
Nextel
Communications Inc. 1.63%
ZSC Specialty
Chemicals PLC 1.61%
Magnum Hunter
Resources Inc. 1.53%
Edison International 1.52%
Consolidated
Container Co. LLC 1.47%
Millicom International
Cellular SA 1.38%
8/31/98
- --------------------------------------------------------------------------------
Cinergy Corp. 2.24%
Dominion Resources Inc. 1.96%
Texas Utilities Co. 1.88%
Southern Co. 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%
SECTOR DISCUSSIONS
TELECOMMUNICATIONS
The telecommunications sector proved to be dynamic over the past year, adjusting
to rapidly changing business conditions. Competitive local exchange carriers
such as NEXTLINK Communications Inc. continued to take advantage of regulations
that give them significant pricing flexibility to take market share from the
regional bell operating companies. An emerging trend is the increasing demand
for greater carrying capacity of communications lines, or bandwidth, caused by
the explosion of Internet usage. Even with prices falling for data services,
providers benefit due to the elasticity of demand, which means that as prices
decline demand increases at a greater rate, thus driving revenue increases.
During the year under review, the Trust increased its exposure to companies such
as PSINet Inc., which should benefit from growing data traffic.
1. Index includes reinvested dividends. One cannot invest directly in an index.
CABLE
The cable sector exhibited its defensive nature in the fall, holding up well
amid the general sell-off in the financial markets. In the U.S. and the U.K.,
consolidation continued, as companies found it preferable to purchase, rather
than to build, the growth expected to come from services such as digital cable,
cable modems and cable telephony. This trend was exemplified in the U.K., where
Trust holding Diamond Holdings Plc. was acquired by NTL Inc., a stronger, public
cable operator.
MEDIA AND BROADCASTING
The media sector enjoyed a solid performance over the Trust's fiscal year. The
main factor was the healthy advertising environment, driven by the strong
domestic economy. Consolidation was also a positive factor in this sector, as
Trust holding Fox/Liberty Networks LLC was acquired by a subsidiary of News
Corp. Overseas Ltd., a large investment-grade company. On the broadcasting side,
deregulation loosened ownership restrictions, opening up the opportunity for
ownership of both TV and radio stations. Trust holding Sinclair Capital took
advantage of this to expand its ownership base and grow its business.
INDUSTRIAL
The industrial sector performed well during the period, buoyed by the robust
U.S. economy and an active mergers and acquisitions (M&A) market. In addition,
companies in this historically cyclical sector took advantage of their strong
operating results to pay down debt and improve their balance sheets. Three Trust
holdings exemplified this trend over the annual reporting period.
International Comfort Products was purchased by the Carrier division of United
Technologies Corp., Falcon Building Products Inc. sold its air pressure and
power washing unit at an attractive valuation and Terex Corp. continued to use
equity to fund acquisitions, enabling the company to grow without increasing its
financial leverage.
ELECTRIC UTILITIES
Electric utilities underperformed high yield bonds for the year under review,
due to their high correlation to the 30-year Treasury bond, which saw its price
decline as its yield rose. On a fundamental basis, we believe the outlook for
the sector continues to improve. Deregulation opened up opportunities for
utilities to improve their earnings growth rates, and with many companies now
decreasing their dividend payout ratios, their correlation to the 30-year
Treasury should also decline. Seeking to take advantage of continuing
deregulation, the Trust invested in utilities located in states that have passed
or are in the process of passing restructuring plans for deregulation that will
enable the utilities to increase their cash flows.
WHAT'S AHEAD
Despite a year of highly volatile and generally rising interest rates, the
domestic economy's outlook remains favorable. Economic growth is expected to
continue, although at slower rates than those of the past year. Inflation should
remain in check, as most industries still lack the power to increase prices.
While the Fed has recently taken action to prevent the economy from overheating,
we believe the interest rate increases are largely behind us. As we have seen
during the year under review, international events can impact domestic financial
markets over the short term. However, over the long term, valuations of high
yield bonds and utility stocks remain attractive on a historical basis, and we
believe fundamentals are still favorable for the Trust's asset classes.
Please remember, this discussion reflects our views, opinions and portfolio
holdings as of August 31, 1999. However, market and economic conditions are
changing constantly, which can be expected to affect our strategies and the
Trust'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 AS OF 8/31/99
Distributions will vary based on earnings of the Trust's portfolio and any
profits realized from the sale of the portfolio's securities. Past distributions
are not indicative of future trends. All total returns include reinvested
distributions according to the terms specified in the Trust's dividend
reinvestment and cash purchase plan.
PRICE AND DISTRIBUTION INFORMATION
CHANGE 8/31/99 8/31/98
- ------------------------------------------------------
Net Asset Value -$0.37 $8.91 $9.28
Market Price (NYSE) -$0.562 $8.688 $9.25
DISTRIBUTIONS (9/1/98 - 8/31/99)
--------------------------------
Dividend Income $0.844
PERFORMANCE
INCEPTION
1-YEAR 5-YEAR 10-YEAR (9/23/88)
- --------------------------------------------------------------------------------
Cumulative Total Return(1)
Based on change in net asset value +5.21% +66.84% +180.03% +214.17%
Based on change in market price +2.95% +74.33% +164.43% +184.97%
Average Annual Total Return(1)
Based on change in net asset value +5.21% +10.78% +10.85% +11.03%
Based on change in market price +2.95% +11.76% +10.21% +10.05%
Distribution Rate(2) 9.25%
1. Total return calculations represent the cumulative and average annual change
in value of an investment over the periods indicated.
2. Distribution rate is based on an annualization of the Trust's current $0.067
cent per share monthly dividend and the NYSE closing price of $8.688 on August
31, 1999.
Since markets can go down as well as up, investment return and principal value
will fluctuate with market conditions, currency volatility, and the economic,
social and political climates of countries where the Trust invests. Emerging
markets involve heightened risks related to the same factors, in addition to
those associated with their relatively small size and lesser liquidity. You may
have a gain or loss when you sell your shares.
Past performance is not predictive of future results.
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 and a member of several securities industry
associations. He has managed Franklin Universal Trust since 1991.
GLENN I. VOYLES
Portfolio Manager
Franklin Advisers, Inc.
- --------------------------------------------------------------------------------
Glenn Voyles is a Chartered Financial Analyst and holds a Bachelor of Arts
degree in economics from Stanford University. He joined Franklin Templeton in
1993. He is a member of Security Analysts of San Francisco (SASF) and the
Association for Investment Management and Research (AIMR).
ANNUAL MEETING OF SHAREHOLDERS
At an Annual Meeting of Shareholders of Franklin Universal Trust (the "Fund")
held on May 27, 1999, shareholders approved the following:
1. Regarding the election of the nominees for Trustees:
<TABLE>
<CAPTION>
WITHHELD BROKER
SHARES FOR SHARES AGAINST OR ABSTAIN NON VOTE
- ---------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Frank H. Abbott 22,767,297.750 0 280,024.960 0
Harris J. Ashton 22,788,251.230 0 259,071.480 0
S. Joseph Fortunato 22,784,947.620 0 262,375.090 0
Edward B. Jamieson 22,787,472.862 0 259,849.848 0
Charles B. Johnson 22,786,615.846 0 260,706.864 0
Rupert H. Johnson, Jr. 22,793,072.093 0 254,250.617 0
Frank W. T. LaHaye 22,781,887.348 0 265,435.362 0
Gordon S. Macklin 22,781,012.797 0 266,309.913 0
</TABLE>
2. Regarding the ratification of the selection of PricewaterhouseCoopers LLP, as
independent auditors for the Fund for the current fiscal year:
<TABLE>
<CAPTION>
WITHHELD BROKER
SHARES FOR SHARES AGAINST OR ABSTAIN NON VOTE
- ---------------------------------------------------------------------------------
<S> <C> <C> <C>
22,722,390.736 58,591.715 266,340.259 0
</TABLE>
3. Regarding granting the proxy holders the authority to vote upon any other
business that may legally come before the meeting:
<TABLE>
<CAPTION>
WITHHELD BROKER
SHARES FOR OR ABSTAIN NON VOTE
- ---------------------------------------------------------------------------------
<S> <C> <C>
22,231,806.153 815,516.557 0
</TABLE>
FRANKLIN TEMPLETON
IS READY FOR YEAR 2000
Year 2000 Readiness Disclosure as of 9/30/99
WE ARE READY!
WE'VE DONE A LOT TO PREPARE!
The enormous scope of this project encompassed practically every
computer-dependent record and process within the company. Naturally, our Y2K
plan focused first on readying "mission-critical" systems -- those that are
necessary for our core business functions. As of September 30, 1999, all our
mission-critical systems that could affect our shareholders were certified as
Y2K compliant.
Our business operations rely greatly on a complex, worldwide network of computer
systems owned and managed by third parties. We continue to work with these
outside companies and your fund's transfer agent to confirm their preparedness
for Year 2000.
WE HAVE CONTINGENCY PLANS.
Our company recognizes that even our extensive testing cannot guarantee the
absence of difficulties associated with the Y2K transition. Therefore, we are
developing and integrating worldwide contingency plans.
HOW DOES YEAR 2000 AFFECT OUR
PORTFOLIO MANAGERS' INVESTMENT STRATEGIES?
All our portfolio managers recognize the importance of Year 2000 and its
potential to impact the issuers and industries in which we invest, as well as
the U.S. and world economy as a whole. As long-term investors, we seek to make
and hold investments in companies we believe are well-managed, with good
prospects for the future. In our experience, such companies are more likely to
have sufficient Y2K programs in place.
Technological changes are ever-present in our industry, and we believe we have
the experience and skills necessary to realize and to react to any challenges
that may arise due to this transition. Once again, Franklin Templeton is ready
for Year 2000, and we look forward to moving into the new millennium with you.
For additional information on Franklin Templeton's Y2K efforts, check our Web
site at www.franklintempleton.com.
Franklin Templeton is confident it is well-positioned to meet the challenges of
Y2K.
These statements should be considered Year 2000 Readiness Disclosures, as such
term is understood under the "Year 2000 Information and Readiness Disclosure
Act." This information is not intended as a representation or warranty and does
not create a legal obligation on part of Franklin Resources, Inc. and its
affiliates to the recipient.
DIVIDEND REINVESTMENT AND CASH PURCHASE PLAN
The Trust's Dividend Reinvestment and Cash Purchase Plan (the "Plan") offers you
a prompt and simple way to reinvest 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. PNC Bank, N.A. (the "Plan Agent"),
Attn: Franklin Universal Trust, P.O. Box 8950, 400 Bellevue Parkway, Wilmington,
Delaware 19809, 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.
A copy of that Brochure may be obtained from the Trust at the address on the
back 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 payable either in
cash or in stock of the Trust and the market price of shares on the valuation
date equals or exceeds the net asset value, the Trust will issue new shares to
you at the higher of net asset value or 95% of the then current market price. If
the market price is lower than net asset value and if dividends or capital gain
distributions are payable only in cash, then you will receive shares purchased
on the New York Stock Exchange or otherwise on the open market. If the price
exceeds the net asset value before the Plan Agent has completed its purchases,
the average purchase price may exceed the net asset value, resulting in fewer
shares being acquired than if the Trust had issued new shares. All reinvestments
are in full and fractional shares, carried to three decimal places. The Trust
will not issue shares under the Plan at a price below net asset value.
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 PNC Bank, N.A. and sent to PNC Bank, N.A., Attn: Franklin Universal
Trust, P.O. Box 8950, 400 Bellevue Parkway, Wilmington, Delaware 19809.
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 5th 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 payment 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 two business days before an investment date. Payments received less than
two 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 Plan Agent receives the written notice not less than 48 hours before an
investment date.
There is no direct charge to participants for reinvesting dividends and capital
gain 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 dividends or distributions. In
connection with the reinvestment of dividends and capital gain distributions, if
the Trust issues new shares, shareholders receiving such shares generally will
be treated as having a distribution equal to the market value of the shares
received, and if shares are purchased on the open market, shareholders generally
will be treated as having received a distribution equal to the cash distribution
that would have been paid.
The Trust does not issue new shares in connection with voluntary cash payments.
All investments are in full and fractional shares, carried to three decimal
places. If the market price exceeds the net asset value at the time the Plan
Agent purchases the additional shares, you will receive shares at a price
greater than the net asset value.
You will receive a monthly account statement from the Plan Agent showing total
dividends and capital gain 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 without penalty at any time by notifying the Plan
Agent, in writing, at the address above. If you withdraw, you will receive,
without charge, stock certificates issued in your name for all full shares. 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 your 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.
The Trust or the Plan Agent may amend or terminate the Plan. You will receive
written notice at least 90 days before the effective date of termination or of
any amendment. In the case of termination, you will receive written notice at
least 90 days before the record date of any dividend or capital gain
distribution by the Trust.
FRANKLIN UNIVERSAL TRUST
Financial Highlights
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
----------------------------------------------------
1999(3) 1998 1997 1996 1995
----------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year $9.28 $10.20 $9.53 $9.36 $8.71
----------------------------------------------------
Income from investment operations:
Net investment income .82 .85 .86 .82 .85
Net realized and unrealized gains (losses) (.35) (.63) .65 .20 .61
----------------------------------------------------
Total from investment operations .47 .22 1.51 1.02 1.46
----------------------------------------------------
Less distributions from:
Net investment income (.84) (.80) (.83) (.85) (.81)
Net realized gain -- (.34) (.01) -- --
----------------------------------------------------
Total distributions (.84) (1.14) (.84) (.85) (.81)
Net asset value, end of year $8.91 $9.28 $10.20 $9.53 $9.36
----------------------------------------------------
Market value, end of year(1) $8.688 $9.250 $9.500 $9.125 $8.875
----------------------------------------------------
Total return (based on market value per share)(2) 2.95% 9.40% 14.00% 12.84% 20.42%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) $239,537 $248,419 $273,173 $255,200 $250,734
Ratios to average net assets:
Expenses 2.92% 2.63% 2.72% 2.80% 2.97%
Net investment income 8.86% 8.29% 8.74% 8.56% 9.59%
Portfolio turnover rate 31.62% 36.66% 51.48% 19.24% 27.41%
Total debt outstanding at end of year (000's) $75,000 $75,000 $74,987 $74,974 $74,961
Asset coverage per $1,000 of debt $4,194 $4,312 $4,643 $4,404 $4,345
Average amount of notes per share during the year $2.79 $2.80 $2.80 $2.80 $2.80
</TABLE>
(1) Based on the last sale on the New York Stock Exchange.
(2) Total return is not annualized for periods less than one year.
(3) Based on average shares outstanding.
See notes to financial statements.
FRANKLIN UNIVERSAL TRUST
STATEMENT OF INVESTMENTS, AUGUST 31, 1999
<TABLE>
<CAPTION>
SHARES/
COUNTRY WARRANTS VALUE
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS AND WARRANTS 32.9%
COMMERCIAL SERVICES
(a)Sodexho Marriott Services Inc. ................. United States 188 $ 2,656
----------
CONSUMER NON-DURABLES .6%
Nabisco Group Holdings Corp. ................... United States 54,000 958,500
(a)R.J. Reynolds Tobacco Holdings Inc. ............ United States 18,000 493,875
----------
1,452,375
----------
CONSUMER SERVICES
Marriott International Inc., A ................. United States 1,504 51,512
----------
ENERGY MINERALS 1.1%
(a)McMoRan Exploration Co. ........................ United States 1,800 36,338
(a)Santa Fe Snyder Corp. .......................... United States 14,935 145,616
Ultramar Diamond Shamrock Corp. ................ United States 66,600 1,739,925
Weatherford International Inc. ................. United States 23,692 844,028
----------
2,765,907
----------
INDUSTRIAL SERVICES .1%
(a)R&B Falcon Corp., 144A, wts., 5/01/09 .......... United States 1,250 225,000
----------
NON-ENERGY MINERALS .8%
AngloGold Ltd., ADR ............................ South Africa 30,446 787,790
Freeport-McMoRan Copper & Gold Inc., A ......... United States 4,500 64,688
Freeport-McMoRan Copper & Gold Inc., B ......... United States 63,156 1,014,443
(a)Gulf States Steel Inc., wts., 4/15/03 .......... United States 4,000 80
----------
1,867,001
----------
PROCESS INDUSTRIES .2%
(a)Gaylord Container Corp., wts., 11/01/02 ........ United States 46,137 377,747
----------
PRODUCER MANUFACTURING .4%
(a)Harvard Industries Inc. ........................ United States 109,618 876,944
----------
TELECOMMUNICATIONS 3.2%
BellSouth Corp. ................................ United States 81,200 3,674,300
GTE Corp. ...................................... United States 25,000 1,715,625
(a)Loral Space & Communications Ltd., wts., 1/15/07 United States 5,000 43,572
(a)Poland Telecom Finance, wts., 144A, 12/01/07 ... Poland 3,000 12,750
U.S. West Inc. ................................. United States 45,500 2,377,375
----------
7,823,622
----------
UTILITIES 26.5%
American Electric Power Co. Inc. ............... United States 93,300 3,387,956
Cinergy Corp. .................................. United States 105,000 3,189,375
CMS Energy Corp. ............................... United States 12,900 510,356
Conectiv Inc. .................................. United States 104,700 2,244,506
Dominion Resources Inc. ........................ United States 150,000 6,937,500
DTE Energy Co. ................................. United States 50,000 1,971,875
Duke Energy Corp. .............................. United States 90,000 5,175,000
Edison International ........................... United States 185,600 4,709,600
Florida Progress Corp. ......................... United States 50,000 2,343,750
</TABLE>
FRANKLIN UNIVERSAL TRUST
STATEMENT OF INVESTMENTS, AUGUST 31, 1999 (CONT.)
<TABLE>
<CAPTION>
SHARES/
COUNTRY WARRANTS VALUE
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS AND WARRANTS (CONT.)
UTILITIES (CONT.)
FPL Group Inc. ................................. United States 22,525 $ 1,216,350
Montana Power Co. .............................. United States 112,400 3,477,375
New Century Energies Inc. ...................... United States 50,000 1,806,250
New England Electric System .................... United States 48,600 2,536,313
Northwestern Corp. ............................. United States 92,000 2,277,000
PECO Energy Co. ................................ United States 70,000 2,843,750
Pinnacle West Capital Corp. .................... United States 77,000 2,926,000
SCANA Corp. .................................... United States 80,000 2,000,000
Southern Co. ................................... United States 208,800 5,650,650
Texas Utilities Co. ............................ United States 141,500 5,721,906
Unicom Corp. ................................... United States 66,000 2,549,250
-----------
63,474,762
-----------
TOTAL COMMON STOCKS AND WARRANTS
(COST $65,230,336) ........................... 78,917,526
-----------
PREFERRED STOCKS 3.1%
CONSUMER SERVICES 1.7%
Sinclair Capital, 11.625%, pfd. ................ United States 40,000 4,060,000
-----------
INDUSTRIAL SERVICES .5%
R&B Falcon Corp., 13.875%, pfd., PIK ........... United States 1,297 1,175,000
-----------
PROCESS INDUSTRIES .9%
Asia Pulp & Paper Co. Ltd., pfd., 12.00%,
12/29/49 ..................................... Indonesia 4,000,000 2,280,000
-----------
TOTAL PREFERRED STOCKS (COST $9,237,981) ....... 7,515,000
-----------
CONVERTIBLE PREFERRED STOCKS 4.9%
CONSUMER NON-DURABLES 1.2%
Ralston Purina Group, 7.00%, cvt. pfd., ........ United States 61,000 2,928,000
-----------
REAL ESTATE INVESTMENT TRUST .6%
Archstone Communities Trust, $1.75, cvt. pfd., A United States 45,000 1,288,125
-----------
TRANSPORTATION .8%
Union Pacific Capital Trust, 6.25%, cvt. pfd. .. United States 40,000 1,855,000
-----------
UTILITIES 2.3%
CMS Energy Trust I, 7.75%, cvt. pfd. ........... United States 70,000 3,657,500
Texas Utilities Co., 9.25%, cvt. pfd. .......... United States 37,200 1,934,400
-----------
5,591,900
-----------
TOTAL CONVERTIBLE PREFERRED STOCKS
(COST $11,951,822) ........................... 11,663,025
-----------
PRINCIPAL
AMOUNT*
---------
BONDS 85.8%
COMMERCIAL SERVICES 7.3%
American Commercial Lines LLC, senior note, B,
10.25%, 6/30/08 .............................. United States $2,500,000 2,468,750
AmeriServe Food Distribution Inc., senior sub
note, 8.875%, 10/15/06 ....................... United States 1,000,000 850,000
AmeriServe Food Distribution Inc., senior sub
note, 10.125%, 7/15/07 ....................... United States 3,000,000 2,250,000
</TABLE>
FRANKLIN UNIVERSAL TRUST
STATEMENT OF INVESTMENTS, AUGUST 31, 1999 (CONT.)
<TABLE>
<CAPTION>
PRINCIPAL
COUNTRY AMOUNT* VALUE
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
BONDS (CONT.)
COMMERCIAL SERVICES (CONT.)
Big Flower Press Holdings Inc., senior sub
note, 8.875%, 7/01/07 ............................ United States $1,500,000 $ 1,447,500
Fleming Cos. Inc., senior sub. note, B, 10.50%,
12/01/04 ......................................... United States 4,000,000 3,790,000
Intertek Finance PLC, senior sub. note, B,
10.25%, 11/01/06 ................................. United Kingdom 2,800,000 2,632,000
Lodgian Finance Corp., senior sub. note, 144A,
12.25%, 7/15/09 .................................. United States 4,000,000 4,020,000
-----------
17,458,250
-----------
CONSUMER DURABLES 2.0%
E&S Holdings Corp., senior sub. note, B, 10.375%,
10/01/06 ......................................... United States 1,750,000 901,250
Revlon Consumer Products Corp., senior sub. note,
8.625%, 2/01/08 .................................. United States 3,500,000 2,918,125
Windmere-Durable Holdings Inc., senior sub. note,
10.00%, 7/31/08 .................................. United States 900,000 886,500
-----------
4,705,875
-----------
CONSUMER NON-DURABLES 3.6%
Compania Alimentos Fargo SA, 13.25%, 8/01/08 ....... Argentina 1,000,000 752,500
Packaged Ice Inc., senior sub. note, B, 9.75%,
2/01/05 .......................................... United States 2,000,000 1,890,000
Primier International Foods, senior note, 144A,
12.00%, 9/01/09 .................................. United States 4,000,000 4,080,000
Specialty Foods Corp., senior note, 11.25%,
8/15/01 .......................................... United States 2,000,000 1,977,180
Specialty Foods Corp., zero cpn. to 6/15/05,
11.00% thereafter, 12/15/09 ...................... United States 95,787 --
-----------
8,699,680
-----------
CONSUMER SERVICES 13.9%
Advantica Restaurant Group, senior note, 11.25%,
1/15/08 .......................................... United States 1,598,325 1,490,438
(b)Atherton Franchise Capital, LP, 11.00%, 5/01/06 .... United States 1,596,281 1,340,876
Chancellor Media Corp., senior note, 8.00%,
11/01/08 ......................................... United States 2,000,000 1,910,000
Chancellor Media Corp., senior sub. note, B,
8.75%, 6/15/07 ................................... United States 2,000,000 1,962,500
Charter Communications Holdings LLC, senior disc.
note, 144A, zero cpn. to 4/01/04, 9.92%
thereafter, 4/01/11 .............................. United States 4,750,000 2,850,000
CSC Holdings Inc., senior sub. deb., 9.875%,
4/01/23 .......................................... United States 3,000,000 3,082,500
Diamond Holdings PLC, senior note, 9.125%,
2/01/08 .......................................... United Kingdom 3,000,000 2,962,500
Falcon Building Products Inc., senior sub. disc.
note, B, zero cpn. to 6/15/02, 10.50%
thereafter, 6/15/07 .............................. United States 2,000,000 1,410,000
Family Restaurant Inc., senior note, 9.75%,
2/01/02 .......................................... United States 2,000,000 950,000
Fox/Liberty Networks LLC, senior disc. note, zero
cpn. to 8/15/02, 9.75% thereafter, 8/15/07 ....... United States 4,000,000 3,160,000
Hollinger International Inc., senior sub. note,
9.25%, 2/01/06 ................................... United States 1,000,000 1,000,000
Horseshoe Gaming Holding Corp., senior sub. note,
144A, 8.625%, 5/15/09 ............................ United States 4,000,000 3,840,000
LIN Holdings Corp., senior disc. note, zero cpn
to 3/01/03, 10.00% thereafter, 3/01/08 ........... United States 2,000,000 1,300,000
Regal Cinemas Inc., senior sub. note, 9.50%,
6/01/08 .......................................... United States 4,000,000 2,860,000
Six Flags Entertainment Corp., senior unsecured
note, 8.875%, 4/01/06 ............................ United States 2,250,000 2,182,500
Telewest Communications PLC, senior disc. note,
144A, zero cpn. to 4/15/04, 9.25% thereafter,
4/15/09 .......................................... United Kingdom 1,500,000 915,000
-----------
33,216,314
-----------
ELECTRONIC TECHNOLOGY .8%
Derlan Industries Ltd., senior note, 10.00%, 1/15/07 Canada 2,000,000 1,970,000
-----------
ENERGY MINERALS 6.4%
Abraxas Petroleum Corp., senior note, D, 11.50%,
11/01/04 ......................................... United States 3,300,000 2,343,000
Clark R&M Inc., senior sub. note, 8.875%, 11/15/07 . United States 4,000,000 3,340,000
Magnum Hunter Resources Inc., senior note, 10.00%,
6/01/07 .......................................... United States 5,000,000 4,750,000
</TABLE>
FRANKLIN UNIVERSAL TRUST
STATEMENT OF INVESTMENTS, AUGUST 31, 1999 (CONT.)
<TABLE>
<CAPTION>
PRINCIPAL
COUNTRY AMOUNT* VALUE
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
BONDS (CONT.)
ENERGY MINERALS (CONT.)
Nuevo Energy Co., senior sub. note, B, 8.875%,
6/01/08 ........................................ United States $1,000,000 $ 1,005,000
P&L Coal Holdings Corp., senior note, B, 8.875%,
5/15/08 ........................................ United States 500,000 496,250
P&L Coal Holdings Corp., senior sub. note, B,
9.625%, 5/15/08 ................................ United States 3,500,000 3,430,000
-----------
15,364,250
-----------
HEALTH SERVICES 3.2%
Abbey Healthcare Group, senior sub. note, 9.50%,
11/01/02 ....................................... United States 4,000,000 3,995,000
Magellan Health Services Inc., senior sub. note,
9.00%, 2/15/08 ................................. United States 2,300,000 1,989,500
Omnicare Inc., cvt. sub. deb., 5.00%, 12/01/07 ... United States 1,000,000 680,000
(b,c)Vencor Operating Inc., senior sub. note, 9.875%,
5/01/05 .......................................... United States 3,200,000 880,000
-----------
7,544,500
-----------
INDUSTRIAL SERVICES 4.4%
Allied Waste North America Inc., senior note, B,
7.875%, 1/01/09 ................................ United States 3,700,000 3,367,000
Envirosource Inc., senior note, 9.75%, 6/15/03 ... United States 1,650,000 1,080,750
Envirosource Inc., senior note, B, 9.75%, 6/15/03 United States 1,000,000 655,000
Great Lakes Dredge & Dock Corp., senior sub
note, 11.25%, 8/15/08 .......................... United States 500,000 506,875
R&B Falcon Corp., senior note, 12.25%, 3/15/06 ... United States 1,400,000 1,477,000
RBF Finance Co., senior note, 11.375%, 3/15/09 ... United States 1,200,000 1,272,000
Universal Compression Inc., senior disc. note,
zero cpn. to 2/15/03, 9.875% thereafter, 2/15/08 United States 3,550,000 2,183,250
-----------
10,541,875
-----------
NON-ENERGY MINERALS 2.2%
LTV Corp., senior note, 8.20%, 9/15/07 ........... United States 4,000,000 3,720,000
Sheffield Steel Corp., first mortgage, B,
11.50%, 12/01/05 ............................... United States 2,000,000 1,610,000
-----------
5,330,000
-----------
PROCESS INDUSTRIES 10.8%
Anchor Glass, first mortgage, 11.25%, 4/01/05 .... United States 4,000,000 4,020,000
Consolidated Container Co. LLC, senior sub.
note, 144A, 10.125%, 7/15/09 ................... United States 4,500,000 4,545,000
Container Corp. of America, senior note, A,
9.75%, 4/01/03 ................................. United States 3,000,000 3,030,000
Huntsman ICI Chemicals, 144A, 12/31/09 ........... United States 7,500,000 1,950,000
Lyondell Chemical Co., 9.875%, 5/01/07 ........... United States 1,850,000 1,850,000
Ormet Corp., senior secured note, 144A, 11.00%,
8/15/08 ........................................ United States 4,000,000 3,780,000
Pindo Deli Finance Mauritius, senior note,
11.75%, 10/01/17 ............................... Indonesia 3,000,000 1,725,000
ZSC Specialty Chemicals PLC, 144A, 11.00%,
7/01/09 ........................................ United Kingdom 5,000,000 5,000,000
-----------
25,900,000
-----------
PRODUCER MANUFACTURING 6.5%
American Axle & Manufacturing Inc., 9.75%,
3/01/09 ....................................... United States 2,000,000 2,020,000
Collins & Aikman Corp., senior sub. note, B,
10.00%, 1/15/07 ............................... United States 3,300,000 3,333,000
Falcon Building Products Inc., senior sub. note,
B, 9.50%, 6/15/07 ............................. United States 2,000,000 1,950,000
Nortek Inc., 8.875%, 8/01/08 ..................... United States 1,000,000 967,500
Nortek Inc., senior note, B, 9.125%, 9/01/07 ..... United States 2,000,000 1,965,000
Talon Automotive Group Inc., senior sub. note,
B, 9.625%, 5/01/08 ............................ United States 2,250,000 1,901,250
Terex Corp., 8.875%, 4/01/08 ..................... United States 1,000,000 947,500
Terex Corp., senior sub. note, 8.875%, 4/01/08 ... United States 2,650,000 2,510,875
-----------
15,595,125
-----------
</TABLE>
FRANKLIN UNIVERSAL TRUST
STATEMENT OF INVESTMENTS, AUGUST 31, 1999 (CONT.)
<TABLE>
<CAPTION>
PRINCIPAL
COUNTRY AMOUNT* VALUE
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
BONDS (CONT.)
RETAIL TRADE 1.2%
Penn Traffic Co., 11.00%, 6/29/09 ............. United States $ 409,650 $ 352,297
Shoppers Food Warehouse Corp., senior note,
9.75%, 6/15/04 .............................. United States 1,000,000 1,041,250
Specialty Retailers Inc., senior note, B,
8.50%, 7/15/05 .............................. United States 2,000,000 1,410,000
------------
2,803,547
------------
TECHNOLOGY SERVICES 1.3%
Anacomp Inc., senior sub. note, D, 10.875%,
4/01/04 ..................................... United States 3,100,000 3,146,500
------------
TELECOMMUNICATIONS 21.1%
Arch Communications Group, senior disc. note,
zero cpn. to 3/15/01, 10.875% thereafter,
3/15/08 ..................................... United States 6,000,000 2,190,000
Call-Net Enterprises Inc., senior note, 9.375%,
5/15/09 ..................................... Canada 3,750,000 3,487,500
Crown Castle International Corp., senior disc
note, 144A, zero cpn. to 8/01/04, 11.25%
thereafter, 8/01/11 ......................... United States 5,000,000 2,837,500
Dobson/Sygnet Communications Co., 12.25%,
12/15/08 .................................... United States 4,000,000 4,210,000
Global Telesystems Group Inc., cvt., 5.75%,
7/01/10 ..................................... United States 600,000 779,250
Intermedia Communications Inc., senior disc
note, B, zero cpn. to 7/15/02, 11.25%
thereafter, 7/15/07 ......................... United States 5,000,000 3,425,000
Level 3 Communications Inc., zero cpn to
12/01/03, 10.50% thereafter, 12/01/08 ....... United States 7,000,000 3,990,000
Loral Space & Communications Ltd., senior
disc. note, zero cpn. to 1/15/02, 12.50%
thereafter, 1/15/07 ......................... United States 5,000,000 2,675,000
Metrocall Inc., senior sub. note, 9.75%,
11/01/07 .................................... United States 4,000,000 2,780,000
Millicom International Cellular SA, senior
disc. note, zero cpn. to 6/01/01, 13.50%
thereafter, 6/01/06 ......................... Luxembourg 6,000,000 4,260,000
Nextel Communications Inc., senior disc
note, 9.75%, 8/15/04 ........................ United States 5,000,000 5,037,500
NEXTLINK Communications Inc., senior note,
9.625%, 10/01/07 ............................ United States 2,000,000 1,950,000
NEXTLINK Communications Inc., senior note,
9.00%, 3/15/08 .............................. United States 2,000,000 1,885,000
Paging Network Inc., senior sub. note, 8.875%,
2/01/06 ..................................... United States 3,000,000 1,695,000
Paging Network Inc., senior sub. note,
10.00%, 10/15/08 ............................ United States 1,000,000 585,000
Poland Telecom Finance, senior note, B,
14.00%, 12/01/07 ............................ Poland 3,000,000 2,707,500
PSINet Inc., senior note, 144A, 11.00%,
8/01/09 ..................................... United States 3,250,000 3,209,375
United Pan-Europe Communications, 144A, zero
cpn. to 8/01/04, 12.50% thereafter, 8/01/09 . Netherlands 5,250,000 2,940,000
------------
50,643,625
------------
UTILITIES 1.1%
AES Corp., senior note, 9.50%, 6/01/09 ........ United States 2,000,000 2,000,000
ESCOM, E168, utility deb., 11.00%, 6/01/08 .... South Africa 4,350,000 ZAR 556,982
------------
2,556,982
------------
TOTAL BONDS (COST $228,161,503) ............... 205,476,523
------------
TOTAL LONG TERM INVESTMENTS (COST $314,581,642) 303,572,074
------------
</TABLE>
FRANKLIN UNIVERSAL TRUST
STATEMENT OF INVESTMENTS, AUGUST 31, 1999 (CONT.)
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
- ------------------------------------------------------------------------------------
<S> <C> <C>
(d)REPURCHASE AGREEMENT 2.6%
Joint Repurchase Agreement, 5.442%, 9/01/99
(Maturity Value $6,169,694)
(COST $6,168,762) ................................. $6,168,762 $ 6,168,762
Barclays Capital Inc.
Bear, Stearns & Co.
CIBC Oppenheimer Corp.
Donaldson, Lufkin & Jenrette Securities Corp.
Dresdner Kleinwort Benson, North America LLC
Paine Webber Inc.
Paribas Corp.
UBS Securities LLC
Collateralized by U.S. Treasury Bills and Notes
------------
TOTAL INVESTMENTS (COST $320,750,404) 129.3% ........ 309,740,836
OTHER ASSETS, LESS LIABILITIES (29.3%) .............. (70,203,808)
------------
NET ASSETS 100.0% ................................... $239,537,028
============
CURRENCY ABBREVIATION:
ZAR - South African Rand
</TABLE>
* The principal amount is stated in U.S. dollars unless otherwise indicated.
(a) Non-Income producing
(b) See Note 8 regarding restricted securities.
(c) See Note 7 regarding defaulted securities.
(d) Investment is through participation in a joint account with other funds
managed by the investment advisor. At August 31, 1999, all repurchase
agreements had been entered into on that date.
See notes to financial statements.
FRANKLIN UNIVERSAL TRUST
Financial Statements
STATEMENT OF ASSETS AND LIABILITIES
AUGUST 31, 1999
<TABLE>
<S> <C>
Assets:
Investments in securities, at value (cost $320,750,404) .............. $309,740,836
Receivables from dividends and interest .............................. 4,951,461
Note issuance costs (Note 3) ......................................... 159,325
------------
Total assets ..................................................... 314,851,622
------------
Liabilities:
Payables:
Affiliates ......................................................... 197,254
Notes (Note 3) ..................................................... 75,000,000
Other liabilities .................................................... 117,340
------------
Total liabilities ................................................ 75,314,594
------------
Net assets, at value ........................................... $239,537,028
============
Net assets consist of:
Undistributed net investment income .................................. $ 2,766,868
Net unrealized depreciation .......................................... (11,009,490)
Accumulated net realized loss ........................................ (193,603)
Capital shares ....................................................... 247,973,253
------------
Net assets, at value ........................................... $239,537,028
------------
Net asset value per share ($239,537,028 / 26,897,361 shares outstanding) $8.91
============
</TABLE>
See notes to financial statements.
FRANKLIN UNIVERSAL TRUST
Financial Statements (continued)
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED AUGUST 31, 1999
<TABLE>
<CAPTION>
<S> <C>
Investment income:
Dividends ............................................................. $ 5,285,416
Interest .............................................................. 24,092,383
------------
Total investment income ........................................... 29,377,799
------------
Expenses:
Management fees (Note 4) .............................................. 2,433,336
Transfer agent fees ................................................... 113,628
Custodian fees ........................................................ 3,542
Reports to shareholders ............................................... 97,845
Professional fees ..................................................... 61,208
Trustees' fees and expenses ........................................... 16,038
Amortization of note issuance costs ................................... 39,803
Other ................................................................. 55,792
------------
Expenses before interest expense .................................. 2,821,192
Interest expense (Note 3) ......................................... 4,455,000
------------
Total expenses .................................................. 7,276,192
------------
Net investment income ......................................... 22,101,607
------------
Realized and unrealized gains (losses):
Net realized gain from:
Investments ......................................................... 154,295
Foreign currency transactions ....................................... 175
------------
Net realized gain ............................................... 154,470
Net unrealized appreciation (depreciation) on:
Investments ........................................................... (9,589,162)
Translation of assets and liabilities denominated in foreign currencies 1,588
------------
Net unrealized depreciation ..................................... (9,587,574)
------------
Net realized and unrealized loss ........................................ (9,433,104)
------------
Net increase in net assets resulting from operations .................... $ 12,668,503
============
</TABLE>
See notes to financial statements.
FRANKLIN UNIVERSAL TRUST
Financial Statements (continued)
STATEMENTS OF CHANGES IN NET ASSETS
FOR THE YEARS ENDED AUGUST 31, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Increase (decrease) in net assets:
Operations:
Net investment income ....................................... $ 22,101,607 $ 22,797,130
Net realized gain (loss) from investments and
foreign currency transactions ............................. 154,470 (320,954)
Net unrealized depreciation on investments and translation
of assets and liabilities denominated in foreign currencies (9,587,574) (16,487,817)
------------- -------------
Net increase in net assets resulting from operations .... 12,668,503 5,988,359
Distributions to shareholders from:
Net investment income ....................................... (22,657,771) (21,530,584)
Net realized gains .......................................... -- (9,212,090)
------------- -------------
Total distributions to shareholders ........................... (22,657,771) (30,742,674)
Capital share transactions (Note 2) ........................... 1,107,711 --
------------- -------------
Net decrease in net assets .............................. (8,881,557) (24,754,315)
Net assets:
Beginning of year ............................................. 248,418,585 273,172,900
------------- -------------
End of year ................................................... $ 239,537,028 $ 248,418,585
============= =============
Undistributed net investment income included in net assets:
End of year ................................................... $ 2,766,868 $ 3,322,857
============= =============
</TABLE>
See notes to financial statements.
FRANKLIN UNIVERSAL TRUST
Financial Statements (continued)
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED AUGUST 31, 1999
<TABLE>
<S> <C>
Cash flow from operating activities:
Dividends and interest received ........................ $ 25,999,122
Operating expenses paid ................................ (2,761,861)
Interest expense paid .................................. (6,580,804)
---------------
Cash provided - operations ......................... 16,656,457
===============
Cash flow from investing activities:
Investment purchases ................................... (1,092,087,345)
Investment sales and maturities ........................ 1,096,980,948
---------------
Cash provided - investments ........................ 4,893,603
===============
Cash flow from financing activities:
Cash distributions ..................................... (21,550,060)
---------------
Cash used - financing .............................. (21,550,060)
===============
Net change in cash ....................................... --
Cash at beginning of year ................................ --
---------------
Cash at end of year ...................................... $ --
===============
RECONCILIATION OF NET INVESTMENT INCOME TO NET CASH
PROVIDED BY OPERATIONS FOR THE YEAR ENDED AUGUST 31, 1999
Net investment income .................................... $ 22,101,607
Amortization income .................................... (4,277,014)
Amortization of note issuance costs .................... 39,803
Decrease in dividends and interest receivable .......... 898,337
Decrease in interest payable ........................... (2,125,804)
Increase in other liabilities .......................... 19,528
---------------
Cash provided - operations ............................... $ 16,656,457
===============
</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 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 to
distribute substantially 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 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.
FRANKLIN UNIVERSAL TRUST
Notes to Financial Statements (continued)
2. SHARES OF BENEFICIAL INTEREST
At August 31, 1999, there were an unlimited number of shares authorized ($0.01
par value). During the year ended August 31, 1999, 118,028 shares were issued
for $1,107,711 from reinvested distributions; all other 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 Notes bear interest, payable semi-annually, at the rate of 5.94% per year,
to maturity on August 31, 2003. The Notes were issued in a private placement,
and are not available for resale; therefore, no market value can be obtained for
the Notes. 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, 1999.
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, 1999, the net unrealized depreciation based on the cost of
investments for income tax purposes of $320,781,343 was as follows:
Unrealized appreciation ......... $ 21,012,502
Unrealized depreciation ......... (32,053,009)
------------
Net unrealized depreciation ..... $(11,040,507)
============
At August 31, 1999, the Fund had deferred capital loss occurring subsequent to
October 31, 1998 of $3,702,327. For tax purposes, such loss will be reflected in
the year ending August 31, 2000.
Net investment income differs for financial statement and tax purposes primarily
due to differing treatments of defaulted securities and foreign currency
transactions.
FRANKLIN UNIVERSAL TRUST
Notes to Financial Statements (continued)
5. INCOME TAXES (CONT.)
Net realized capital losses 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, 1999 aggregated $100,047,567 and $109,647,671, respectively.
7. CREDIT RISK AND DEFAULTED SECURITIES
The Fund has 65.14% 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, 1999, the
Fund held one defaulted security with a value of $880,000 representing .37% 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
Consumer Services, Process Industries and Telecommunications industries. Such
concentration may subject the Fund more significantly to economic changes
occurring within those 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, 1999 are as follows:
<TABLE>
<CAPTION>
PRINCIPAL ACQUISITION
AMOUNT ISSUER DATE COST VALUE
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
1,596,281 Atherton Franchise Capital,
LP, 11.00%, 5/01/06 ............ 4/28/94 $1,596,281 $1,340,876
3,200,000 Vencor Operating Inc., senior
sub. note, 9.875%, 5/01/05 ..... 4/27/98 3,200,000 880,000
----------
Total Restricted Securities
(.93% of Net Assets) ....... $2,220,876
==========
</TABLE>
FRANKLIN UNIVERSAL TRUST
Independent Auditors' 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
Fund (the "Fund") at August 31, 1999, 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, 1999 by correspondence with the custodian and brokers, provide a reasonable
basis for the opinion expressed above.
PricewaterhouseCoopers LLP
San Francisco, California
October 5, 1999
FRANKLIN UNIVERSAL TRUST
Tax Information
Under Section 854(b)(2) of the Internal Revenue Code, the Fund hereby designates
16.73% of the ordinary income dividends as income qualifying for the dividends
received deduction for the fiscal year ended August 31, 1999.
