UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT INVESTMENT COMPANIES
Investment Company Act file number: 811-05569
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FRANKLIN UNIVERSAL TRUST
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(Exact name of registrant as specified in charter)
ONE FRANKLIN PARKWAY, SAN MATEO, CA 94403-1906
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(Address of principal executive offices) (Zip code)
CRAIG S. TYLE, ONE FRANKLIN PARKWAY, SAN MATEO, CA 94403-1906
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(Name and address of agent for service)
Registrant's telephone number, including area code: (650) 312-2000
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Date of fiscal year end: 8/31
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Date of reporting period: 8/31/08
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ITEM 1. REPORTS TO STOCKHOLDERS.
AUGUST 31, 2008
ANNUAL REPORT
INCOME
FRANKLIN UNIVERSAL TRUST
(FRANKLIN TEMPLETON INVESTMENTS(R) LOGO)
(GRAPHIC)
FRANKLIN - Templeton - Mutual Series
Franklin Templeton Investments
GAIN FROM OUR PERSPECTIVE(R)
Franklin Templeton's distinct multi-manager
structure combines the specialized expertise of
three world-class investment management
groups--Franklin, Templeton and Mutual Series.
SPECIALIZED EXPERTISE Each of our portfolio management groups operates
autonomously, relying on its own research and
staying true to the unique investment disciplines
that underlie its success.
FRANKLIN. Founded in 1947, Franklin is a recognized
leader in fixed income investing and also brings
expertise in growth- and value-style U.S. equity
investing.
TEMPLETON. Founded in 1940, Templeton pioneered
international investing and, in 1954, launched what
has become the industry's oldest global fund. Today,
with offices in over 25 countries, Templeton offers
investors a truly global perspective.
MUTUAL SERIES. Founded in 1949, Mutual Series is
dedicated to a unique style of value investing,
searching aggressively for opportunity among what it
believes are undervalued stocks, as well as
arbitrage situations and distressed securities.
TRUE DIVERSIFICATION Because our management groups work independently and
adhere to different investment approaches, Franklin,
Templeton and Mutual Series funds typically have
distinct portfolios. That's why our funds can be
used to build truly diversified allocation plans
covering every major asset class.
RELIABILITY YOU CAN TRUST At Franklin Templeton Investments, we seek to
consistently provide investors with exceptional
risk-adjusted returns over the long term, as well as
the reliable, accurate and personal service that has
helped us become one of the most trusted names in
financial services.
MUTUAL FUNDS | RETIREMENT PLANS | 529 COLLEGE SAVINGS PLANS | SEPARATE ACCOUNTS
(GRAPHIC)
Not part of the annual report
Contents
CEO'S MESSAGE ............................................................ 1
ANNUAL REPORT
Franklin Universal Trust ................................................. 4
Performance Summary ...................................................... 8
Annual Shareholders' Meeting ............................................. 9
Important Notice to Shareholders ......................................... 10
Dividend Reinvestment and Cash Purchase Plan ............................. 11
Financial Highlights and Statement of Investments ........................ 14
Financial Statements ..................................................... 21
Notes to Financial Statements ............................................ 25
Report of Independent Registered Public Accounting Firm .................. 33
Tax Designation .......................................................... 34
Board Members and Officers ............................................... 35
Shareholder Information .................................................. 39
A Message from Gregory E. Johnson,
President and Chief Executive Officer of Franklin Resources, Inc.
October 12, 2008
Dear Shareholder:
The enclosed annual report for Franklin Universal Trust covers the 12 months
ended August 31, 2008, but I would like to add some comments on market events
that occurred in September and early October. Recent market volatility has been
jarring to everyone, including those of us who have worked in financial markets
for many years. Bank lending around the world has seized up, and the fallout has
impacted venerable firms alongside broader stock and bond indexes.
This environment is bound to provoke great concern, but it's equally important
to put the latest market developments in perspective. That's why I'd like to
offer a few thoughts on these events, our company's approach to investing and
the strong health of our organization.
A key point to recognize is that global financial turmoil is being addressed by
global action. Central banks around the world have coordinated their efforts to
cut interest rates and supply liquidity to frozen funding markets. A number of
governments have also intervened to rescue major financial institutions or find
an orderly way for them to be acquired. Here in the U.S., the Federal Reserve
and Treasury Department have moved rapidly to establish new programs for easing
money-market pressures and handling troubled financial assets. The outcome of
all of these efforts may take a while to be realized, but I believe that the
latest actions here and abroad mark a significant turning point.
Not part of the annual report | 1
It's also important to remember that as daunting as current market conditions
may be, we have navigated through other periods of market volatility. U.S. stock
markets recorded three bear markets during the 1960s as the nation grappled with
the Vietnam War and a turbulent economy.(1) The quintupling of oil prices in
1973 led to a deep U.S. recession and a stock market plunge of 45.1% from
January 1973 through December 1974.(1) And the "Black Monday" stock market crash
of 1987 remains the largest single day percentage decline in the history of the
Dow Jones Industrial Average.(2)
Advice applicable throughout these upheavals remains true today. The late Sir
John Templeton, writing 15 years ago, ended a list of his core investment
principles with these thoughts: "Do not be fearful or negative too often. . . .
For 100 years optimists have carried the day in U.S. stocks. Even in the dark
'70s, many professional money managers -- and many individual investors too --
made money in stocks . . . . In this century or the next it's still 'Buy low,
sell high.'"(3)
Sir John knew that these simple concepts were difficult to execute in the face
of pessimism. Nonetheless, that is precisely how our Franklin, Templeton and
Mutual Series portfolio managers are contending with today's challenging
environment. They are using their expertise to sort through investment
opportunities, avoiding those firms that have become merely cheap and
identifying those firms best positioned to be eventual winners. This kind of
rigorous, bottom-up, security-by-security analysis is the fundamental investment
discipline practiced across our global platform.
These asset management strengths are also the core of our business. Unlike
financial firms that have dominated recent headlines, Franklin Templeton derives
its revenue primarily from investment management, not investment banking or
securities brokerage. Additionally, our assets under management are diversified
by fund objective, investment clientele, management brand and geographic region.
Diversified positioning helps our firm maintain healthy operating margins even
when volatile markets reduce assets under management. It is also important to
note that maintaining a strong balance sheet has been a pillar of our management
strategy. We have a substantial pool of cash and investments and low levels of
debt, and we are in the enviable position of not having to depend on credit to
meet our operating needs. In fact, our strong
(1.) Source: Ned Davis Research, Inc.
(2.) Source: NYSE Euronext. The Dow Jones Industrial Average is price weighted
based on the average market price of 30 blue chip stocks of companies that
are generally industry leaders.
(3.) Source: "16 Rules for Investment Success" by Sir John Templeton.
2 | Not part of the annual report
franchise, sound capitalization and minimal leverage led Standard & Poor's to
recently raise its credit ratings on Franklin Resources, Inc. (BEN) to the
highest level currently applied to a publicly traded asset manager.(4)
Franklin Templeton's six-decade growth into a premier global asset manager has
given us the conviction that although conditions on the ground remain
challenging, there are ample reasons to be optimistic about eventual market
stabilization and recovery. Being able to take advantage of markets shaken by
maximum pessimism has helped our firm develop into an organization that
stretches across 29 countries and manages assets for more than 20 million
shareholder accounts.
In the enclosed annual report for Franklin Universal Trust, the portfolio
managers discuss market conditions, investment decisions and Fund performance
during the 12 months ended August 31, 2008. The report contains additional
performance data and financial information. Our website, FRANKLINTEMPLETON.COM,
offers more timely discussions, daily prices, portfolio holdings and other
information. We encourage you to discuss your concerns with your financial
advisor, who can review your overall portfolio, reassess your goals and help you
stay focused on the long term. As times like these illustrate, all securities
markets fluctuate, as do fund share prices.
We are grateful for the trust you have placed in Franklin Templeton and remain
focused on serving your investment needs.
Sincerely,
/s/ Gregory E. Johnson
----------------------------------------
Gregory E. Johnson
President and Chief Executive Officer
Franklin Resources, Inc.
THIS LETTER REFLECTS OUR ANALYSIS AND OPINIONS AS OF OCTOBER 12, 2008. THE
INFORMATION IS NOT A COMPLETE ANALYSIS OF EVERY ASPECT OF ANY MARKET, COUNTRY,
INDUSTRY, SECURITY OR FUND. STATEMENTS OF FACT ARE FROM SOURCES CONSIDERED
RELIABLE.
(4.) Source: Standard & Poor's press release, October 6, 2008.
Not part of the annual report | 3
Annual Report
Franklin Universal Trust
YOUR FUND'S GOALS AND MAIN INVESTMENTS: Franklin Universal Trust's primary
investment objective is to provide high, current income consistent with
preservation of capital. Its secondary objective is growth of income through
dividend increases and capital appreciation.
PORTFOLIO BREAKDOWN
Based on Total Investments*
8/31/08
Corporate Bonds 64.4%
Utilities Common Stocks 27.2%
Natural Resources Common Stocks 1.5%
Foreign Government & Agency Securities 0.0%**
Miscellaneous Common Stocks 0.0%**
Cash & Other Net Assets 6.9%
* Percentage of total investments of the Fund. Total investments of the Fund
include long-term and short-term investments and other net assets,
excluding long-term debt issued by the Fund.
** Rounds to less than 0.1% of total investments.
Dear Shareholder:
This annual report for Franklin Universal Trust covers the fiscal year ended
August 31, 2008.
PERFORMANCE OVERVIEW
For the 12 months under review, the Fund's cumulative total returns were -0.12%
based on net asset value and -1.35% based on market price, as shown in the
Performance Summary on page 8. For comparison, the Credit Suisse (CS) High Yield
Index had a -1.07% return, and utilities stocks, as measured by the Standard &
Poor's (S&P) 500 Utilities Index, returned +0.22% for the year ended August 31,
2008.(1)
ECONOMIC AND MARKET OVERVIEW
During the 12 months ended August 31, 2008, the U.S. economy continued to
expand, albeit at a sluggish pace. Gross domestic product growth decelerated
sharply and registered a -0.2% annualized growth rate in the fourth quarter of
2007 from a fairly robust growth rate of 4.8% in the preceding quarter. Ongoing
weakness in the financial, labor and housing markets and waning investor and
consumer confidence led to a pullback in consumer spending. These factors as
well as upward inflationary pressures from a weakening U.S. dollar and
increasing food, energy and commodity prices weighed on the overall economy.
(1.) Source: (C) 2008 Morningstar. All Rights Reserved. The information
contained herein: (1) is proprietary to Morningstar and/or its content
providers; (2) may not be copied or distributed; and (3) is not warranted
to be accurate, complete or timely. Neither Morningstar nor its content
providers are responsible for any damages or losses arising from any use of
this information. Past performance is no guarantee of future results. The
CS High Yield Index is designed to mirror the investible universe of the
U.S. dollar-denominated high yield debt market. The S&P 500 Utilities Index
is a market capitalization-weighted index that includes electric utility
stocks in the S&P 500. The indexes are unmanaged and include reinvestment
of any income or distributions. One cannot invest directly in an index, nor
is an index representative of the Fund's portfolio.
THE DOLLAR VALUE, NUMBER OF SHARES OR PRINCIPAL AMOUNT, AND NAMES OF ALL
PORTFOLIO HOLDINGS ARE LISTED IN THE FUND'S STATEMENT OF INVESTMENTS (SOI). THE
SOI BEGINS ON PAGE 15.
4 | Annual Report
The retrenchment continued in the first quarter of 2008 as the economy grew at a
0.9% annualized rate. Economic growth, however, improved in the second quarter
and expanded at a 2.8% annualized rate, reflecting strong exports, an increase
in nonresidential structures and a slight uptick in consumer spending.
Volatile oil prices reached a historical high in July, topping $146 per barrel,
before retreating to $124 by period-end. August's overall inflation rate was an
annual 5.4%, largely due to higher food and energy costs. Core inflation, which
excludes such costs, rose at a more moderate 2.5% annual rate; however, this
level was above the Federal Reserve Board's (Fed's) informal target range of
1.5%-2.0%.(2) The core personal consumption expenditures price index reported a
12-month increase of 2.6%.(3)
The Fed acted aggressively to restore liquidity and confidence to unsettled
financial markets and cut interest rates seven times over the 12-month period,
bringing the federal funds target rate to 2.00%. The Fed also implemented a
series of unconventional measures aimed at easing strained credit conditions.
However, since April 30, the Fed has held rates steady and indicated growing
concerns about inflation as it must balance the risks of a slowing economy and
mounting inflationary pressures.
Despite the Fed's actions, U.S. Treasuries rallied and financial stocks
continued to sell off for most of the reporting period. Fixed income spreads
generally widened relative to Treasury yields over the period due to heightened
market turbulence. Investors continued to seek the relative safety of short- and
intermediate-term U.S. Treasury securities as Treasury yields declined and the
yield curve steepened. Short-term, two- and five-year yields declined
significantly, with the two-year bill yielding 2.36% at the end of August, down
from 4.15% a year earlier. Over the same period, the 10-year U.S. Treasury note
yield declined from 4.54% to 3.83%.
INVESTMENT STRATEGY
We invest primarily in two asset classes: high yield bonds and utility stocks.
Within the high yield portion of the portfolio, we use fundamental research to
invest in a diversified portfolio of bonds. Within the utility portion of the
portfolio, we focus on companies with attractive dividend yields and with a
history of increasing their dividends.
(2.) Source: Bureau of Labor Statistics.
(3.) Source: Bureau of Economic Analysis.
Annual Report | 5
TOP 10 HOLDINGS
Based on Total Investments*
8/31/08 vs. 8/31/07
ISSUER 8/31/08
------------------------------------ -------
Exelon Corp. 3.2%
The Southern Co. 2.4%
Entergy Corp. 2.2%
FPL Group Inc. 2.1%
FirstEnergy Corp. 2.1%
Dominion Resources Inc. 1.8%
Public Service Enterprise Group Inc. 1.5%
Constellation Energy Group 1.5%
CenterPoint Energy Inc. 1.5%
Ford Motor Credit LLC 1.3%
8/31/07
-------
Exelon Corp. 3.0%
The Southern Co. 2.5%
FPL Group Inc. 2.4%
Edison International 2.3%
Entergy Corp. 2.1%
FirstEnergy Corp. 1.9%
Constellation Energy Group 1.9%
Dominion Resources Inc. 1.7%
Public Service Enterprise Group Inc. 1.7%
CenterPoint Energy Inc. 1.5%
* Percentage of total investments of the Fund. Total investments of the Fund
include long-term and short-term investments and other net assets,
excluding long-term debt issued by the Fund.
MANAGER'S DISCUSSION
The Fund's primary asset classes, high yield corporate bonds and utility stocks,
were impacted by the difficult financial environment that was prevalent for much
of the Fund's fiscal year. High yield bonds had a -1.07% return as measured by
the CS High Yield Index, while the S&P 500 Utilities Index returned +0.22%.(1)
As the credit crunch that began in the summer of 2007 continued and worsened,
the high yield bond market succumbed to the risk aversion that affected most
financial markets. Spreads on high yield bonds widened significantly over
Treasury securities during the fiscal year, ending the period 3.4 percentage
points higher than they began the period.(1) As a result, debt financing costs
increased for most companies, and several were unable to access the high yield
market altogether. The inability to refinance debt led to a number of defaults
during the period. At period-end, the 12-month default rate remained below the
historical average; however, we believe defaults may increase over the coming
year as the credit crunch continues to impact economic growth. Utility stocks
benefited from their defensive characteristics in a difficult market and
economic environment. Although utility sector stocks delivered a small positive
return, they significantly outperformed the overall equity market during the
Fund's fiscal year. In addition to their defensive appeal, many utility stocks
also benefited from the decline in interest rates during the period.
HIGH YIELD CORPORATE BONDS
The Fund benefited from its overweighted positions in the pay television and
wireless communications industries relative to the CS High Yield Index.(4) The
pay TV sector rallied as a number of companies successfully accessed the high
yield market despite the ongoing credit crunch. In addition, pay TV exhibited
defensive characteristics that many investors sought during the turbulent market
environment. Similarly, the wireless communications industry benefited from its
more defensive nature as consumers seemed to increasingly consider cell phones a
necessity. Merger and acquisition activity also buoyed the industry's
valuations.
The Fund's high yield sector performance was hindered by an overweighted
position in the broadcasting sector and an underweighted position in the metals
and mining sector.(5) The broadcasting sector was hurt by a weak advertising
environment, as well as the market's aversion to the sector's many highly
leveraged companies. The Fund remained underweighted in the metals and mining
sector because sector spreads were well below those of the overall index, and
(4.) The Fund's pay television holdings are in the media sector, and wireless
communications holdings are in the telecommunication services sector in the
SOI.
(5.) The Fund's broadcasting holdings are in the media sector, and metals and
mining holdings are in the materials sector in the SOI.
6 | Annual Report
also because a potential global economic slowdown cast doubt on the
sustainability of the favorable fundamental environment. During the reporting
period, however, fundamentals held up well, and the sector was one of the
index's strongest performers.
UTILITY STOCKS
The Fund's utility exposure remained fairly constant throughout the fiscal year,
as we used periods of relative outperformance to pare back exposure and invest
more in the relatively cheaper high yield sector. The utility sector benefited
from a continuing favorable fundamental outlook. Utilities generally enjoyed
strong balance sheets and increased capital expenditures to invest in core,
regulated businesses. The Fund's utility investments tend to be in regulated,
dividend-paying companies. Therefore, the Fund benefited from the utility
sector's defensive appeal in a period of market turbulence.
Thank you for your continued participation in Franklin Universal Trust. We look
forward to serving your future investment needs.
Sincerely,
(PHOTO OF CHRISTOPHER J. MOLUMPHY)
/s/ Christopher J. Molumphy
----------------------------------------
Christopher J. Molumphy, CFA
Senior Portfolio Manager
(PHOTO OF GLENN I. VOYLES)
/s/ Glenn I. Voyles
----------------------------------------
Glenn I. Voyles, CFA
Portfolio Manager
Franklin Universal Trust
THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS
AS OF AUGUST 31, 2008, THE END OF THE REPORTING PERIOD. THE WAY WE IMPLEMENT OUR
MAIN INVESTMENT STRATEGIES AND THE RESULTING PORTFOLIO HOLDINGS MAY CHANGE
DEPENDING ON FACTORS SUCH AS MARKET AND ECONOMIC CONDITIONS. THESE OPINIONS MAY
NOT BE RELIED UPON AS INVESTMENT ADVICE OR AN OFFER FOR A PARTICULAR SECURITY.
THE INFORMATION IS NOT A COMPLETE ANALYSIS OF EVERY ASPECT OF ANY MARKET,
COUNTRY, INDUSTRY, SECURITY OR THE FUND. STATEMENTS OF FACT ARE FROM SOURCES
CONSIDERED RELIABLE, BUT THE INVESTMENT MANAGER MAKES NO REPRESENTATION OR
WARRANTY AS TO THEIR COMPLETENESS OR ACCURACY. ALTHOUGH HISTORICAL PERFORMANCE
IS NO GUARANTEE OF FUTURE RESULTS, THESE INSIGHTS MAY HELP YOU UNDERSTAND OUR
INVESTMENT MANAGEMENT PHILOSOPHY.
Annual Report | 7
Performance Summary as of 8/31/08
Your dividend income will vary depending on dividends or interest paid by
securities in the Fund's portfolio, adjusted for operating expenses. Capital
gain distributions are net profits realized from the sale of portfolio
securities. Total return reflects reinvestment of the Fund's dividends and
capital gain distributions, if any, and any unrealized gains or losses. Total
returns do not reflect any sales charges paid at inception or brokerage
commissions paid on secondary market purchases. The performance table does not
reflect any taxes that a shareholder would pay on Fund dividends, capital gains
distributions, if any, or any realized gains on the sale of Fund shares.
PRICE AND DISTRIBUTION INFORMATION
SYMBOL: FT CHANGE 8/31/08 8/31/07
------------------------------ ------ ------- -------
Net Asset Value (NAV) -$0.45 $6.96 $7.41
Market Price (NYSE) -$0.53 $6.15 $6.68
DISTRIBUTIONS (9/1/07-8/31/08)
Dividend Income $0.4560
PERFORMANCE
1-YEAR 5-YEAR 10-YEAR
------ ------ -------
Cumulative Total Return(1)
Based on change in NAV(2) -0.12% +65.66% +70.33%
Based on change in market price(3) -1.35% +65.03% +56.36%
Average Annual Total Return(1)
Based on change in NAV(2) -0.12% +10.62% +5.47%
Based on change in market price(3) -1.35% +10.54% +4.57%
Distribution Rate(4) 7.41%
PERFORMANCE DATA REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE FUTURE
RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU MAY HAVE
A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY DIFFER FROM
FIGURES SHOWN.
ENDNOTES
THE RISKS ASSOCIATED WITH HIGHER-YIELDING, LOWER-RATED SECURITIES INCLUDE HIGHER
RISK OF DEFAULT AND LOSS OF PRINCIPAL. THESE SECURITIES CARRY A GREATER DEGREE
OF CREDIT RISK RELATIVE TO INVESTMENT GRADE SECURITIES. IN ADDITION TO OTHER
FACTORS, SECURITIES ISSUED BY UTILITY COMPANIES ARE PARTICULARLY SENSITIVE TO
INTEREST RATE MOVEMENTS. THE FUND'S SHARE PRICE AND YIELD WILL BE AFFECTED BY
INTEREST RATE MOVEMENTS. SPECIAL RISKS ARE ASSOCIATED WITH FOREIGN INVESTING,
INCLUDING CURRENCY VOLATILITY, ECONOMIC INSTABILITY AND POLITICAL DEVELOPMENTS
OF COUNTRIES WHERE THE FUND INVESTS. EMERGING MARKETS INVOLVE HEIGHTENED RISKS
RELATED TO THE SAME FACTORS, IN ADDITION TO THOSE ASSOCIATED WITH THEIR
RELATIVELY SMALL SIZE AND LESSER LIQUIDITY.
(1.) Total return calculations represent the cumulative and average annual
changes in value of an investment over the periods indicated.
(2.) Assumes reinvestment of distributions based on net asset value.
(3.) Assumes reinvestment of distributions based on the dividend reinvestment
and cash purchase plan.
(4.) Distribution rate is based on an annualization of the Fund's 3.8 cent per
share August dividend and the NYSE closing price of $6.15 on 8/31/08.
8 | Annual Report
Annual Shareholders' Meeting
MARCH 14, 2008
An annual shareholders' meeting of Franklin Universal Trust (Fund) was held on
March 14, 2008. At the meeting, the holders of 14,619,403 shares of the Fund's
common stock were represented in person or by proxy, constituting a quorum.
Shareholders took the following actions at the meeting:
1. Regarding the election of the Board of Trustees of the Fund.
SHARES % OF SHARES % OF
NOMINEES FOR VOTED WITHHELD VOTED ELECTED
------------------------- --------- ----- -------- ----- -------
Harris J. Ashton ........ 9,629,256 65.87% 579,911 3.97% Yes
Robert F. Carlson ....... 9,630,874 65.88% 578,293 3.96% Yes
Sam Ginn ................ 9,633,948 65.90% 575,219 3.93% Yes
Edith E. Holiday ........ 9,636,322 65.91% 572,845 3.92% Yes
Edward B. Jamieson ...... 9,641,010 65.95% 568,157 3.89% Yes
Charles B. Johnson ...... 9,632,333 65.89% 576,834 3.95% Yes
Rupert H. Johnson, Jr. .. 9,642,083 65.95% 567,084 3.88% Yes
Franklin W. T. LaHaye ... 9,632,247 65.89% 576,920 3.95% Yes
Frank A. Olson .......... 9,626,873 65.85% 582,294 3.98% Yes
Larry D. Thompson ....... 9,640,510 65.94% 568,657 3.89% Yes
John B. Wilson .......... 9,641,000 65.95% 568,167 3.89% Yes
Andrew Dakos ............ 4,221,262 28.87% 188,974 1.29% No
Phillip Goldstein ....... 4,222,622 28.88% 187,614 1.28% No
Gerald Hellerman ........ 4,222,022 28.88% 188,214 1.29% No
Rajeev Das .............. 4,218,860 28.86% 191,376 1.31% No
Glenn Goodstein ......... 4,220,814 28.87% 189,422 1.30% No
Steve Samuels ........... 4,221,031 28.87% 189,205 1.29% No
2. Regarding the Shareholder Proposal.
SHARES SHARES
SHARES FOR % OF VOTED AGAINST % OF VOTED ABSTAINING % OF VOTED
---------- ---------- ------- ---------- ---------- ----------
5,369,003 36.73% 8,911,282 60.95% 339,110 2.32%
Annual Report | 9
Important Notice to Shareholders
SHARE REPURCHASE PROGRAM
The Fund's Board previously authorized an open-market share repurchase program,
pursuant to which the Fund may purchase Fund shares, from time to time, up to
10% of the Fund's common shares in open-market transactions, at the discretion
of management. This authorization remains in effect.
10 | Annual Report
Dividend Reinvestment and Cash Purchase Plan
The Fund's Dividend Reinvestment and Cash Purchase Plan (Plan) offers you a
prompt and simple way to reinvest dividends and capital gain distributions in
shares of the Fund. The Plan also allows you to purchase additional shares of
the Fund by making voluntary cash payments. PNC Global Investment Services (Plan
Agent), P.O. Box 6006, Carol Stream, IL 60197-6006, 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 Fund's Dividend
Reinvestment and Cash Purchase Plan Brochure. A copy of that Brochure may be
obtained from the Fund 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 Fund declares a dividend or capital gain distribution payable either in
cash or in stock of the Fund and the market price of shares on the valuation
date equals or exceeds the net asset value, the Fund will issue new shares to
you at the higher of net asset value or 95% of the then current market price.
Whenever the Fund declares a distribution from capital gains or an income
dividend payable in either cash or shares, if the net asset value per share of
the Fund's common stock exceeds the market price per share on the valuation
date, the Plan Agent shall apply the amount of such dividend or distribution
payable to participants to the purchase of shares (less their pro rata share of
brokerage commissions incurred with respect to open market purchases in
connection with the reinvestment of such dividend or distribution). 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 Fund had issued new shares. All reinvestments
are in full and fractional shares, carried to three decimal places. The Fund
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 Fund. 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 Global Investment Services and sent to PNC Global Investment
Services, Attn: Franklin Universal Trust, P.O. Box 6006, Carol Stream, IL
60197-6006.
Annual Report | 11
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 Fund that 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 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 Fund. 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 Fund 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 Fund 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
12 | Annual Report
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 Fund 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 Fund.
Annual Report | 13
Franklin Universal Trust
FINANCIAL HIGHLIGHTS
YEAR ENDED AUGUST 31,
----------------------------------------------------
2008 2007 2006 2005 2004
-------- -------- -------- -------- --------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ................................... $ 7.41 $ 7.09 $ 7.12 $ 6.48 $ 5.67
-------- -------- -------- -------- --------
Income from investment operations:
Net investment income(a) .......................................... 0.49 0.47 0.45 0.45 0.43
Net realized and unrealized gains (losses) ........................ (0.49) 0.29 (0.05) 0.59 0.74
-------- -------- -------- -------- --------
Total from investment operations ..................................... -- 0.76 0.40 1.04 1.17
-------- -------- -------- -------- --------
Less distributions from net investment income ........................ (0.46) (0.46) (0.44) (0.40) (0.36)
-------- -------- -------- -------- --------
Repurchase of shares ................................................. 0.01 0.02 0.01 -- --
-------- -------- -------- -------- --------
Net asset value, end of year ......................................... $ 6.96 $ 7.41 $ 7.09 $ 7.12 $ 6.48
======== ======== ======== ======== ========
Market value, end of year(b) ......................................... $ 6.15 $ 6.68 $ 6.52 $ 6.22 $ 5.65
======== ======== ======== ======== ========
Total return (based on market value per share) ....................... (1.35)% 9.38% 12.48% 17.49% 15.79%
RATIOS TO AVERAGE NET ASSETS
Expenses(c) .......................................................... 2.50% 2.24% 2.27% 2.32% 2.47%
Net investment income ................................................ 6.51% 6.15% 6.47% 6.49% 6.85%
SUPPLEMENTAL DATA
Net assets, end of year (000's) ...................................... $174,843 $190,968 $194,724 $198,861 $180,850
Portfolio turnover rate .............................................. 18.52% 29.30% 32.95% 34.60% 46.35%
Total debt outstanding at end of year (000's) ........................ $ 65,000 $ 55,000 $ 55,000 $ 55,000 $ 55,000
Asset coverage per $1,000 of debt .................................... $ 3,690 $ 4,472 $ 4,540 $ 4,616 $ 4,288
Average amount of senior fixed rate notes per share during the year .. $ 2.18 $ 2.06 $ 1.97 $ 1.97 $ 1.97
(a) Based on average daily shares outstanding.
(b) Based on the last sale on the New York Stock Exchange.
(c) Benefit of expense reduction rounds to less than 0.01%.
The accompanying notes are an integral part of these financial statements.
14 | Annual Report
Franklin Universal Trust
STATEMENT OF INVESTMENTS, AUGUST 31, 2008
COUNTRY SHARES VALUE
------------- ------- ----------
COMMON STOCKS 39.4%
AUTOMOBILES & COMPONENTS 0.0%(a)
(b) Harvard Industries Inc. ............................................... United States 109,618 $ 1,096
----------
COMMERCIAL & PROFESSIONAL SERVICES 0.0%(a)
(b, c) VS Holdings Inc. ...................................................... United States 181,875 --
----------
ENERGY 0.9%
Spectra Energy Corp. .................................................. United States 62,350 1,649,781
----------
MATERIALS 1.2%
AngloGold Ashanti Ltd., ADR ........................................... South Africa 30,446 819,606
Barrick Gold Corp. .................................................... Canada 35,800 1,243,334
----------
2,062,940
----------
UTILITIES 37.3%
Alliant Energy Corp. .................................................. United States 55,000 1,922,250
Ameren Corp. .......................................................... United States 60,000 2,511,600
American Electric Power Co. Inc. ...................................... United States 50,000 1,952,000
Atmos Energy Corp. .................................................... United States 85,000 2,340,900
CenterPoint Energy Inc. ............................................... United States 226,600 3,598,408
Constellation Energy Group ............................................ United States 55,000 3,669,050
Dominion Resources Inc. ............................................... United States 100,000 4,353,000
Duke Energy Corp. ..................................................... United States 124,700 2,174,768
Edison International .................................................. United States 63,000 2,892,960
Entergy Corp. ......................................................... United States 50,000 5,169,500
Exelon Corp. .......................................................... United States 100,000 7,596,000
FirstEnergy Corp. ..................................................... United States 70,000 5,084,800
FPL Group Inc. ........................................................ United States 85,000 5,105,100
Pinnacle West Capital Corp. ........................................... United States 76,000 2,674,440
Progress Energy Inc. .................................................. United States 30,000 1,310,400
Public Service Enterprise Group Inc. .................................. United States 90,000 3,669,300
Sempra Energy ......................................................... United States 48,500 2,809,120
The Southern Co. ...................................................... United States 155,000 5,814,050
Westar Energy Inc. .................................................... United States 27,300 618,345
----------
65,265,991
----------
TOTAL COMMON STOCKS (COST $45,406,525) ................................ 68,979,808
----------
PRINCIPAL AMOUNT(d)
-------------------
CORPORATE BONDS 88.3%
AUTOMOBILES & COMPONENTS 2.8%
Ford Motor Credit Co. LLC,
7.80%, 6/01/12 ..................................................... United States 2,000,000 1,486,438
senior note, 9.875%, 8/10/11 ....................................... United States 2,000,000 1,642,774
(e) TRW Automotive Inc., senior note, 144A, 7.25%, 3/15/17 ................ United States 2,000,000 1,730,000
------------
4,859,212
------------
CAPITAL GOODS 5.8%
(e) Allison Transmission Inc., senior note, 144A, 11.00%, 11/01/15 ........ United States 2,000,000 1,850,000
DRS Technologies Inc., senior sub. note, 7.625%, 2/01/18 .............. United States 1,800,000 1,903,500
L-3 Communications Corp., senior sub. note, 6.375%, 10/15/15 .......... United States 1,700,000 1,636,250
RBS Global & Rexnord Corp., senior note, 9.50%, 8/01/14 ............... United States 2,000,000 1,960,000
Annual Report | 15
Franklin Universal Trust
STATEMENT OF INVESTMENTS, AUGUST 31, 2008 (CONTINUED)
COUNTRY PRINCIPAL AMOUNT(d) VALUE
-------------- ------------------- ------------
CORPORATE BONDS (CONTINUED)
CAPITAL GOODS (CONTINUED)
RSC Equipment Rental Inc., senior note, 9.50%, 12/01/14 ............... United States 2,200,000 $ 1,771,000
TransDigm Inc., senior sub. note, 7.75%, 7/15/14 ...................... United States 1,100,000 1,075,250
------------
10,196,000
------------
COMMERCIAL & PROFESSIONAL SERVICES 3.5%
Allied Waste North America Inc., senior secured note, 6.875%, 6/01/17 . United States 1,000,000 990,000
ARAMARK Corp., senior note, 8.50%, 2/01/15 ............................ United States 2,000,000 2,025,000
Iron Mountain Inc., senior sub. note, 8.75%, 7/15/18 .................. United States 2,000,000 2,055,000
JohnsonDiversey Inc., senior sub. note, B, 9.625%, 5/15/12 ............ United States 1,000,000 1,022,500
------------
6,092,500
------------
CONSUMER DURABLES & APPAREL 3.4%
Jarden Corp., senior sub. note, 7.50%, 5/01/17 ........................ United States 2,000,000 1,790,000
Jostens IH Corp., senior sub. note, 7.625%, 10/01/12 .................. United States 1,400,000 1,375,500
KB Home, senior note,
6.25%, 6/15/15 ..................................................... United States 1,200,000 1,008,000
7.25%, 6/15/18 ..................................................... United States 800,000 672,000
Visant Holding Corp., senior note, 8.75%, 12/01/13 .................... United States 1,100,000 1,053,250
------------
5,898,750
------------
CONSUMER SERVICES 5.1%
(c, f) Atherton Franchise Capital, 13.073%, 12/01/08 ......................... United States 721,603 7,216
(e) Fontainebleau Las Vegas, 144A, 10.25%, 6/15/15 ........................ United States 1,600,000 764,000
Host Hotels & Resorts LP, senior note, M, 7.00%, 8/15/12 .............. United States 1,500,000 1,410,000
MGM MIRAGE, senior note,
6.875%, 4/01/16 .................................................... United States 2,000,000 1,595,000
7.50%, 6/01/16 ..................................................... United States 500,000 410,000
OSI Restaurant Partners Inc., senior note, 10.00%, 6/15/15 ............ United States 1,300,000 721,500
Pinnacle Entertainment Inc., senior sub. note, 8.25%, 3/15/12 ......... United States 1,000,000 980,000
Royal Caribbean Cruises Ltd., senior note,
8.00%, 5/15/10 ..................................................... United States 1,200,000 1,213,500
6.875%, 12/01/13 ................................................... United States 800,000 709,000
Station Casinos Inc., senior sub. note,
6.50%, 2/01/14 ..................................................... United States 300,000 136,500
6.875%, 3/01/16 .................................................... United States 2,200,000 968,000
------------
8,914,716
------------
DIVERSIFIED FINANCIALS 1.5%
GMAC LLC, 6.875%, 8/28/12 ............................................. United States 4,500,000 2,641,910
------------
ENERGY 11.1%
Chesapeake Energy Corp., senior note, 6.25%, 1/15/18 .................. United States 2,500,000 2,300,000
Compagnie Generale de Geophysique-Veritas, senior note,
7.50%, 5/15/15 ..................................................... France 400,000 400,000
7.75%, 5/15/17 ..................................................... France 600,000 600,000
Copano Energy LLC, senior note,
8.125%, 3/01/16 .................................................... United States 1,500,000 1,462,500
(e) 144A, 7.75%, 6/01/18 ............................................... United States 500,000 467,500
16 | Annual Report
Franklin Universal Trust
STATEMENT OF INVESTMENTS, AUGUST 31, 2008 (CONTINUED)
COUNTRY PRINCIPAL AMOUNT(d) VALUE
-------------- ------------------- ------------
CORPORATE BONDS (CONTINUED)
ENERGY (CONTINUED)
Mariner Energy Inc., senior note, 7.50%, 4/15/13 ...................... United States 2,500,000 $ 2,350,000
MarkWest Energy Partners LP, senior note, 6.875%, 11/01/14 ............ United States 2,000,000 1,890,000
(e) Petroplus Finance Ltd., senior note, 144A, 6.75%, 5/01/14 ............. Switzerland 2,000,000 1,820,000
Plains Exploration & Production Co., senior note, 7.625%, 6/01/18 ..... United States 1,900,000 1,800,250
Quicksilver Resources Inc., senior note, 8.25%, 8/01/15 ............... United States 2,000,000 1,945,000
(e) SandRidge Energy Inc., senior note, 144A, 8.00%, 6/01/18 .............. United States 900,000 848,250
Tesoro Corp., senior note, 6.50%, 6/01/17 ............................. United States 1,500,000 1,263,750
The Williams Cos. Inc., senior note,
7.625%, 7/15/19 .................................................... United States 600,000 628,162
7.875%, 9/01/21 .................................................... United States 700,000 736,508
8.75%, 3/15/32 ..................................................... United States 800,000 902,394
------------
19,414,314
------------
FOOD, BEVERAGE & TOBACCO 1.7%
Dean Foods Inc., senior note, 7.00%, 6/01/16 .......................... United States 1,400,000 1,302,000
Dole Food Co. Inc., senior note, 7.25%, 6/15/10 ....................... United States 100,000 93,000
Smithfield Foods Inc., senior note, 7.75%,
5/15/13 ............................................................ United States 700,000 654,500
7/01/17 ............................................................ United States 1,000,000 900,000
------------
2,949,500
------------
HEALTH CARE EQUIPMENT & SERVICES 7.3%
FMC Finance III SA, senior note, 6.875%, 7/15/17 ...................... Germany 2,500,000 2,412,500
HCA Inc., senior note, 6.50%, 2/15/16 ................................. United States 2,500,000 2,093,750
Tenet Healthcare Corp., senior note, 7.375%, 2/01/13 .................. United States 2,500,000 2,359,375
(g, h) U.S. Oncology Holdings Inc., senior note, FRN, PIK, 7.949%, 3/15/12 ... United States 2,107,000 1,696,135
(h) United Surgical Partners International Inc., senior sub. note, PIK,
9.25%, 5/01/17 ..................................................... United States 2,000,000 1,740,000
Vanguard Health Holding Co. II LLC, senior sub. note, 9.00%, 10/01/14 . United States 2,500,000 2,468,750
------------
12,770,510
------------
MATERIALS 9.7%
Crown Americas Inc., senior note, 7.75%, 11/15/15 ..................... United States 2,500,000 2,575,000
Freeport-McMoRan Copper & Gold Inc., senior note, 8.375%, 4/01/17 ..... United States 1,700,000 1,804,769
Huntsman International LLC, senior sub. note, 7.875%, 11/15/14 ........ United States 2,000,000 1,870,000
(e) Ineos Group Holdings PLC, senior secured note, 144A, 8.50%, 2/15/16 ... United Kingdom 2,500,000 1,612,500
(e) MacDermid Inc., senior sub. note, 144A, 9.50%, 4/15/17 ................ United States 1,300,000 1,196,000
Nalco Co., senior sub. note, 8.875%, 11/15/13 ......................... United States 2,000,000 2,090,000
NewPage Corp., senior secured note, 10.00%, 5/01/12 ................... United States 2,000,000 1,950,000
Novelis Inc., senior note, 7.25%, 2/15/15 ............................. Canada 1,700,000 1,585,250
Owens-Brockway Glass Container Inc., senior note, 6.75%, 12/01/14 ..... United States 1,500,000 1,496,250
Smurfit Kappa Funding PLC, senior sub. note, 7.75%, 4/01/15 ........... Ireland 800,000 708,000
------------
16,887,769
------------
MEDIA 12.5%
CanWest Media Inc., senior sub. note, 8.00%, 9/15/12 .................. Canada 2,000,000 1,727,500
CCH I LLC, senior secured note, 11.00%, 10/01/15 ...................... United States 800,000 618,000
CCH II LLC, senior note, 10.25%, 9/15/10 .............................. United States 2,500,000 2,412,500
CSC Holdings Inc., senior note, 6.75%, 4/15/12 ........................ United States 800,000 784,000
Annual Report | 17
Franklin Universal Trust
STATEMENT OF INVESTMENTS, AUGUST 31, 2008 (CONTINUED)
COUNTRY PRINCIPAL AMOUNT(d) VALUE
-------------- ------------------- ------------
CORPORATE BONDS (CONTINUED)
MEDIA (CONTINUED)
Dex Media West Finance, senior sub. note, 9.875%, 8/15/13 ............. United States 2,342,000 $ 1,809,195
(e) DIRECTV Holdings LLC, senior note, 144A, 7.625%, 5/15/16 .............. United States 2,500,000 2,506,250
EchoStar DBS Corp., senior note, 7.125%, 2/01/16 ...................... United States 2,000,000 1,850,000
Idearc Inc., senior note, 8.00%, 11/15/16 ............................. United States 2,500,000 1,143,750
Lamar Media Corp., senior sub. note, B, 6.625%, 8/15/15 ............... United States 2,500,000 2,228,125
LIN Television Corp., senior sub. note, 6.50%, 5/15/13 ................ United States 1,500,000 1,237,500
Quebecor Media Inc., senior note, 7.75%, 3/15/16 ...................... Canada 2,200,000 2,079,000
R.H. Donnelley Corp., senior note, A-3, 8.875%, 1/15/16 ............... United States 700,000 371,000
Radio One Inc., senior sub. note, 6.375%, 2/15/13 ..................... United States 1,700,000 1,219,750
(e, h) Univision Communications Inc., senior note, 144A, PIK, 9.75%,
3/15/15 ............................................................ United States 2,500,000 1,800,000
------------
21,786,570
------------
RETAILING 2.2%
Dollar General Corp., senior note, 10.625%, 7/15/15 ................... United States 2,000,000 2,015,000
Michaels Stores Inc., senior note, 10.00%, 11/01/14 ................... United States 2,500,000 1,887,500
------------
3,902,500
------------
SEMICONDUCTORS & SEMICONDUCTOR EQUIPMENT 0.4%
Freescale Semiconductor Inc., senior note, 8.875%, 12/15/14 ........... United States 800,000 652,000
------------
SOFTWARE & SERVICES 2.3%
(e) First Data Corp., senior note, 144A, 9.875%, 9/24/15 .................. United States 1,300,000 1,122,875
(f, i) PSINet Inc.,
10.50%, 12/01/06 ................................................... United States 700,000 70
senior note, 11.00%, 8/01/09 ....................................... United States 3,250,000 325
SunGard Data Systems Inc.,
senior note, 9.125%, 8/15/13 ....................................... United States 900,000 918,000
senior sub. note, 10.25%, 8/15/15 .................................. United States 1,900,000 1,923,750
------------
3,965,020
------------
TECHNOLOGY HARDWARE & EQUIPMENT 2.6%
Celestica Inc., senior sub. note,
7.875%, 7/01/11 .................................................... Canada 1,000,000 1,007,500
7.625%, 7/01/13 .................................................... Canada 400,000 386,000
(e) Nortel Networks Ltd., senior note, 144A, 10.75%, 7/15/16 .............. Canada 1,300,000 1,209,000
Sanmina-SCI Corp.,
(e, g) senior note, 144A, FRN, 5.526%, 6/15/14 ............................ United States 700,000 651,000
senior sub. note, 6.75%, 3/01/13 ................................... United States 1,100,000 998,250
senior sub. note, 8.125%, 3/01/16 .................................. United States 400,000 363,000
------------
4,614,750
------------
18 | Annual Report
Franklin Universal Trust
STATEMENT OF INVESTMENTS, AUGUST 31, 2008 (CONTINUED)
COUNTRY PRINCIPAL AMOUNT(d) VALUE
-------------- ------------------- ------------
CORPORATE BONDS (CONTINUED)
TELECOMMUNICATION SERVICES 7.9%
(e) Digicel Group Ltd., senior note, 144A, 8.875%, 1/15/15 ................ Jamaica 2,000,000 $ 1,882,600
Inmarsat Finance II PLC, senior note, zero cpn. to 11/15/08,
10.375% thereafter, 11/15/12 ....................................... United Kingdom 1,500,000 1,535,625
Intelsat Bermuda Ltd., senior note, 11.25%, 6/15/16 ................... Bermuda 500,000 526,875
(e) Intelsat Subsidiary Holding Co. Ltd., senior note, 144A, 8.50%,
1/15/13 ............................................................ Bermuda 2,000,000 1,990,000
MetroPCS Wireless Inc., senior note, 9.25%, 11/01/14 .................. United States 2,000,000 1,992,500
Qwest Communications International Inc., senior note, 7.50%, 2/15/14 .. United States 2,000,000 1,830,000
(e) Wind Acquisition Finance SA, senior note, 144A, 10.75%, 12/01/15 ...... Italy 2,500,000 2,575,000
Windstream Corp., senior note, 8.625%, 8/01/16 ........................ United States 1,500,000 1,492,500
------------
13,825,100
------------
TRANSPORTATION 0.8%
(e) Ceva Group PLC, senior note, 144A, 10.00%, 9/01/14 .................... United Kingdom 1,500,000 1,470,000
------------
UTILITIES 7.7%
(e) The AES Corp., senior note, 144A, 8.00%, 6/01/20 ...................... United States 2,000,000 1,925,000
Aquila Inc., senior note, 11.875%, 7/01/12 ............................ United States 1,500,000 1,741,365
Dynegy Holdings Inc., senior note, 8.75%, 2/15/12 ..................... United States 2,000,000 2,030,000
Edison Mission Energy, senior note, 7.00%, 5/15/17 .................... United States 2,300,000 2,213,750
NRG Energy Inc., senior note, 7.375%,
2/01/16 ............................................................ United States 1,800,000 1,782,000
1/15/17 ............................................................ United States 700,000 686,000
PNM Resources Inc., senior note, 9.25%, 5/15/15 ....................... United States 600,000 612,000
(e) Texas Competitive Electric Holdings Co. LLC, senior note, 144A, 10.25%,
11/01/15 ........................................................... United States 2,500,000 2,506,250
------------
13,496,365
------------
TOTAL CORPORATE BONDS (COST $173,813,180) ............................. 154,337,486
FOREIGN GOVERNMENT AND AGENCY SECURITIES
(COST $213,727)0.1%
------------
Eskom Holdings Ltd., 11.00%, 6/01/09 .................................. South Africa 783,333 ZAR 100,842
------------
TOTAL INVESTMENTS BEFORE SHORT TERM INVESTMENTS
(COST $219,433,432) ................................................ 223,418,136
------------
SHARES
-------------------
SHORT TERM INVESTMENTS 7.6%
MONEY MARKET FUND (COST $8,814,527) 5.0%
(j) Franklin Institutional Fiduciary Trust Money Market Portfolio, 2.15% .. United States 8,814,527 8,814,527
Annual Report | 19
Franklin Universal Trust
STATEMENT OF INVESTMENTS, AUGUST 31, 2008 (CONTINUED)
COUNTRY PRINCIPAL AMOUNT(d) VALUE
-------------- ------------------- ------------
SHORT TERM INVESTMENTS (CONTINUED)
REPURCHASE AGREEMENTS (COST $4,499,078) 2.6%
(k) Joint Repurchase Agreement, 2.043%, 9/02/08
(Maturity Value $4,500,100) ........................................ United States 4,499,078 $ 4,499,078
ABN AMRO Bank NV, New York Branch (Maturity Value $450,010)
Banc of America Securities LLC (Maturity Value $450,010)
Barclays Capital Inc. (Maturity Value $450,010)
BNP Paribas Securities Corp. (Maturity Value $450,010)
Credit Suisse Securities (USA) LLC (Maturity Value $450,010)
Deutsche Bank Securities Inc. (Maturity Value $450,010)
Dresdner Kleinwort Securities LLC (Maturity Value $450,010)
Lehman Brothers Inc. (Maturity Value $450,010)
Merrill Lynch Government Securities Inc. (Maturity Value
$450,010)
UBS Securities LLC (Maturity Value $450,010)
Collateralized by U.S. Government Agency Securities,
2.07%-6.25%, 9/02/08-6/03/13; (l)U.S. Government Agency
Discount Notes, 12/08/08-8/01/12; (l)U.S. Treasury Bill,
12/04/08; and U.S. Treasury Notes, 4.75%-4.875%,
11/15/08-5/15/09
------------
TOTAL INVESTMENTS (COST $232,747,037) 135.4% .......................... $236,731,741
NOTES PAYABLE (37.2)% ................................................. (65,000,000)
OTHER ASSETS, LESS LIABILITIES 1.8% ................................... 3,111,266
------------
NET ASSETS 100.0% ..................................................... $174,843,007
============
CURRENCY ABBREVIATIONS
ZAR - South African Rand
SELECTED PORTFOLIO ABBREVIATIONS
ADR - American Depository Receipt
FRN - Floating Rate Note
PIK - Payment-In-Kind
(a) Rounds to less than 0.1% of net assets.
(b) Non-income producing for the twelve months ended August 31, 2008.
(c) See Note 10 regarding restricted and illiquid securities.
(d) The principal amount is stated in U.S. dollars unless otherwise indicated.
(e) Security was purchased pursuant to Rule 144A under the Securities Act of
1933 and may be sold in transactions exempt from registration only to
qualified institutional buyers or in a public offering registered under the
Securities Act of 1933. These securities have been deemed liquid under
guidelines approved by the Fund's Board of Trustees. At August 31, 2008,
the aggregate value of these securities was $29,926,225, representing
17.12% of net assets.
(f) See Note 9 regarding defaulted securities.
(g) The coupon rate shown represents the rate at period end.
(h) Income may be received in additional securities and/or cash.
(i) Security has been deemed illiquid because it may not be able to be sold
within seven days. At August 31, 2008, the aggregate value of these
securities was $395, representing less than 0.01% of net assets.
(j) See Note 8 regarding investments in the Franklin Institutional Fiduciary
Trust Money Market Portfolio. The rate shown is the annualized seven-day
yield at period end.
(k) See Note 1(c) regarding repurchase agreement.
(l) A portion of the security is traded on a discount basis with no stated
coupon rate.
The accompanying notes are an integral part of these financial statements.
20 | Annual Report
Franklin Universal Trust
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
August 31, 2008
Assets:
Investments in securities:
Cost - Unaffiliated issuers ............................... $219,433,432
Cost - Sweep Money Fund (Note 8) .......................... 8,814,527
Cost - Repurchase agreements .............................. 4,499,078
------------
Total cost of investments ................................. $232,747,037
============
Value - Unaffiliated issuers .............................. $223,418,136
Value - Sweep Money Fund (Note 8) ......................... 8,814,527
Value - Repurchase agreements ............................. 4,499,078
------------
Total value of investments ................................ 236,731,741
Cash ......................................................... 20,000
Receivables:
Investment securities sold ................................ 235,999
Dividends and interest .................................... 3,758,935
Note issuance costs (Note 3) ................................. 409,762
------------
Total assets ........................................... 241,156,437
------------
Liabilities:
Payables:
Affiliates ................................................ 143,784
Distributions to shareholders ............................. 955,012
Senior fixed rate notes (Note 3) ............................. 65,000,000
Accrued expenses and other liabilities ....................... 214,634
------------
Total liabilities ...................................... 66,313,430
------------
Net assets, at value ................................ $174,843,007
============
Net assets consist of:
Paid-in capital .............................................. $235,784,083
Undistributed net investment income .......................... 3,313,195
Net unrealized appreciation (depreciation) ................... 3,984,706
Accumulated net realized gain (loss) ......................... (68,238,977)
------------
Net assets, at value ................................ $174,843,007
============
Shares outstanding ........................................... 25,131,894
============
Net asset value per share .................................... $ 6.96
============
The accompanying notes are an integral part of these financial statements.
Annual Report | 21
Franklin Universal Trust
FINANCIAL STATEMENTS (CONTINUED)
STATEMENT OF OPERATIONS
for the year ended August 31, 2008
Investment income:
Dividends:
Unaffiliated issuers ...................................... $ 2,427,229
Sweep Money Fund (Note 8) ................................. 121,300
Interest ..................................................... 14,398,372
------------
Total investment income ................................ 16,946,901
------------
Expenses:
Management fees (Note 4a) .................................... 1,811,569
Interest expense (Note 3) .................................... 2,277,000
Transfer agent fees .......................................... 222,574
Custodian fees (Note 5) ...................................... 4,089
Reports to shareholders ...................................... 51,552
Professional fees ............................................ 182,857
Trustees' fees and expenses .................................. 32,921
Amortization of note issuance costs (Note 3) ................. 43,409
Other ........................................................ 77,985
------------
Total expenses ......................................... 4,703,956
Expense reductions (Note 5) ............................ (2,856)
------------
Net expenses ........................................ 4,701,100
------------
Net investment income ............................ 12,245,801
------------
Realized and unrealized gains (losses):
Net realized gain (loss) from:
Investments ............................................... 3,157,055
Foreign currency transactions ............................. (11,229)
------------
Net realized gain (loss) ......................... 3,145,826
------------
Net change in unrealized appreciation (depreciation) on:
Investments ............................................... (15,591,798)
Translation of other assets and liabilities denominated in
foreign currencies ..................................... 656
------------
Net change in unrealized appreciation
(depreciation) ................................ (15,591,142)
------------
Net realized and unrealized gain (loss) ......................... (12,445,316)
------------
Net increase (decrease) in net assets resulting from operations . $ (199,515)
============
The accompanying notes are an integral part of these financial statements.
22 | Annual Report
Franklin Universal Trust
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF CHANGES IN NET ASSETS
YEAR ENDED AUGUST 31,
---------------------------
2008 2007
------------ ------------
Increase (decrease) in net assets:
Operations:
Net investment income ..................................... $ 12,245,801 $ 12,445,928
Net realized gain (loss) from investments and foreign
currency transactions .................................. 3,145,826 2,829,968
Net change in unrealized appreciation (depreciation)
on investments and translation of other assets and
liabilities denominated in foreign currencies .......... (15,591,142) 4,787,313
------------ ------------
Net increase (decrease) in net assets resulting from
operations .......................................... (199,515) 20,063,209
------------ ------------
Distributions to shareholders from net investment income ..... (11,502,730) (12,153,252)
Capital share transactions from repurchase of shares
(Note 2) .................................................. (4,422,626) (11,666,494)
------------ ------------
Net increase (decrease) in net assets .................. (16,124,871) (3,756,537)
Net assets:
Beginning of year ............................................ 190,967,878 194,724,415
------------ ------------
End of year .................................................. $174,843,007 $190,967,878
============ ============
Undistributed net investment income included in net assets:
End of year .................................................. $ 3,313,195 $ 2,621,423
============ ============
The accompanying notes are an integral part of these financial statements.
Annual Report | 23
Franklin Universal Trust
FINANCIAL STATEMENTS (CONTINUED)
STATEMENT OF CASH FLOWS
for the year ended August 31, 2008
Cash flow from operating activities:
Dividends and interest received .............................. $ 16,651,821
Operating expenses paid ...................................... (2,262,148)
Interest expense paid ........................................ (2,277,000)
Purchases of long-term investments ........................... (43,901,404)
Sales and maturities of long-term investments ................ 48,617,553
Net purchases of short-term investments ...................... (11,632,438)
------------
Cash provided - operating activities ...................... 5,196,384
------------
Cash flow from financing activities:
Repayment of notes ........................................... (55,000,000)
Note issuance ................................................ 65,000,000
Payment of note issuance costs ............................... (312,098)
Open-market shares repurchased ............................... (4,584,903)
Distributions to shareholders ................................ (11,528,277)
------------
Cash used - financing activities .......................... (6,425,278)
------------
Net increase (decrease) in cash ................................. (1,228,894)
Cash at beginning of year ....................................... 1,248,894
------------
Cash at end of year ............................................. $ 20,000
============
RECONCILIATION OF NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATING
ACTIVITIES TO NET CASH PROVIDED BY OPERATING ACTIVITIES
For the year ended August 31, 2008
Net increase (decrease) in net assets resulting from
operating activities ......................................... $ (199,515)
Adjustments to reconcile net increase (decrease) in net
assets resulting from operating activities to net cash
provided by operating activities:
Amortization of note issuance costs ....................... 43,409
Net amortization income ................................... (302,977)
Reinvested dividends from Sweep Money Fund ................ (121,300)
Other investment transactions ............................. 147,189
Increase in dividends and interest receivable ............. (17,992)
Note issuance cost liability .............................. 97,664
Increase in other liabilities ............................. 20,879
Increase in cost of investments ........................... (10,062,115)
Decrease in unrealized appreciation on investments ........ 15,591,142
------------
Net cash provided by operating activities ....................... $ 5,196,384
============
The accompanying notes are an integral part of these financial statements.
24 | Annual Report
Franklin Universal Trust
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Franklin Universal Trust (Fund) is registered under the Investment Company Act
of 1940, as amended, (1940 Act) as a diversified, closed-end investment company.
The following summarizes the Fund's significant accounting policies.
A. SECURITY VALUATION
Securities listed on a securities exchange or on the NASDAQ National Market
System are valued at the last quoted sale price or the official closing price of
the day, respectively. Over-the-counter securities and listed securities for
which there is no reported sale are valued within the range of the most recent
quoted bid and ask prices. Securities that trade in multiple markets or on
multiple exchanges are valued according to the broadest and most representative
market. Investments in open-end mutual funds are valued at the closing net asset
value.
Corporate debt securities and government securities generally trade in the
over-the-counter market rather than on a securities exchange. The Fund may
utilize independent pricing services, quotations from bond dealers, and
information with respect to bond and note transactions, to assist in determining
a current market value for each security. The Fund's pricing services may use
valuation models or matrix pricing which considers information with respect to
comparable bond and note transactions, quotations from bond dealers, or by
reference to other securities that are considered comparable in such
characteristics as rating, interest rate and maturity date, option adjusted
spread models, prepayment projections, interest rate spreads and yield curves,
to determine current value.
Foreign securities are valued as of the close of trading on the foreign stock
exchange on which the security is primarily traded, or the NYSE, whichever is
earlier. If no sale is reported at that time, the foreign security will be
valued within the range of the most recent quoted bid and ask prices. The value
is then converted into its U.S. dollar equivalent at the foreign exchange rate
in effect at the close of the NYSE on the day that the value of the foreign
security is determined.
The Fund has procedures to determine the fair value of individual securities and
other assets for which market prices are not readily available or which may not
be reliably priced. Methods for valuing these securities may include:
fundamental analysis, matrix pricing, discounts from market prices of similar
securities, or discounts applied due to the nature and duration of restrictions
on the disposition of the securities. Due to the inherent uncertainty of
valuations of such securities, the fair values may differ significantly from the
values that would have been used had a ready market for such investments
existed. Occasionally, events occur between the time at which trading in a
security is completed and the close of the NYSE that might call into question
the availability (including the reliability) of the value of a portfolio
security held by the Fund. If such an event occurs, the securities may be valued
using fair value procedures, which may include the use of independent pricing
services. All security valuation procedures are approved by the Fund's Board of
Trustees.
Annual Report | 25
Franklin Universal Trust
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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, income and expense items denominated in foreign currencies are
translated into U.S. dollars at the exchange rate in effect on the transaction
date. Occasionally, events may impact the availability or reliability of foreign
exchange rates used to convert the U.S. dollar equivalent value. If such an
event occurs, the foreign exchange rate will be valued at fair value using
procedures established and approved by the Fund's Board of Trustees.
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 on the
Statement of Operations.
Realized foreign exchange gains or losses arise from sales of foreign
currencies, currency gains or losses realized between the trade and settlement
dates on securities transactions and the difference between the recorded amounts
of dividends, interest, and foreign withholding taxes and the U.S. dollar
equivalent of the amounts actually received or paid. Net unrealized foreign
exchange gains and losses arise from changes in foreign exchange rates on
foreign denominated assets and liabilities other than investments in securities
held at the end of the reporting period.
C. JOINT REPURCHASE AGREEMENT
The Fund may enter into a joint repurchase agreement whereby its uninvested cash
balance is deposited into a joint cash account with other funds managed by the
investment manager or an affiliate of the investment manager and is used to
invest in one or more repurchase agreements. The value and face amount of the
joint repurchase agreement are allocated to the funds based on their pro-rata
interest. A repurchase agreement is accounted for as a loan by the fund to the
seller, collateralized by securities which are delivered to the fund's
custodian. The market value, including accrued interest, of the initial
collateralization is required to be at least 102% of the dollar amount invested
by the funds, with the value of the underlying securities marked to market daily
to maintain coverage of at least 100%. The joint repurchase agreement held by
the Fund at year end had been entered into on August 29, 2008. The joint
repurchase agreement is valued at cost.
D. FOREIGN CURRENCY CONTRACTS
When the Fund purchases or sells foreign securities it may enter into foreign
exchange contracts to minimize foreign exchange risk from the trade date to the
settlement date of the transactions. A foreign exchange contract is an agreement
between two parties to exchange different currencies at an agreed upon exchange
rate at a future date. Realized and unrealized gains and losses on these
contracts are included in the Statement of Operations.
26 | Annual Report
Franklin Universal Trust
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
D. FOREIGN CURRENCY CONTRACTS (CONTINUED)
The risks of these contracts include movement in the values of the foreign
currencies relative to the U.S. dollar and the possible inability of the
counterparties to fulfill their obligations under the contracts, which may be in
excess of the amount reflected in the Statement of Assets and Liabilities.
E. INCOME TAXES
No provision has been made for U.S. income taxes because it is the Fund's policy
to qualify as a regulated investment company under the Internal Revenue Code and
to distribute to shareholders substantially all of its taxable income and net
realized gains.
The Fund has reviewed the tax positions, taken on federal income tax returns,
for each of the three open tax years and as of August 31, 2008, and has
determined that no provision for income tax is required in the Fund's financial
statements.
F. 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. Amortization of
premium and accretion of discount on debt securities are included in interest
income. Dividend income is recorded on the ex-dividend date. Distributions to
shareholders are recorded on the ex-dividend date and are determined according
to income tax regulations (tax basis). Distributable earnings determined on a
tax basis may differ from earnings recorded in accordance with accounting
principles generally accepted in the United States of America. These differences
may be permanent or temporary. Permanent differences are reclassified among
capital accounts to reflect their tax character. These reclassifications have no
impact on net assets or the results of operations. Temporary differences are not
reclassified, as they may reverse in subsequent periods.
G. ACCOUNTING ESTIMATES
The preparation of financial statements in accordance with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the amounts of income
and expenses during the reporting period. Actual results could differ from those
estimates.
H. GUARANTEES AND INDEMNIFICATIONS
Under the Fund's organizational documents, its officers and trustees are
indemnified by the Fund against certain liabilities arising out of the
performance of their duties to the Fund. Additionally, in the normal course of
business, the Fund enters into contracts with service providers that contain
Annual Report | 27
Franklin Universal Trust
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
H. GUARANTEES AND INDEMNIFICATIONS (CONTINUED)
general indemnification clauses. The Fund's maximum exposure under these
arrangements is unknown as this would involve future claims that may be made
against the Fund that have not yet occurred. Currently, the Fund expects the
risk of loss to be remote.
2. SHARES OF BENEFICIAL INTEREST
At August 31, 2008, there were an unlimited number of shares authorized ($0.01
par value). During the years ended August 31, 2008 and 2007 there were no shares
issued; all reinvested distributions were satisfied with previously issued
shares purchased in the open market.
In January 2006, the Fund's Board of Trustees authorized an initial open-market
share repurchase program that resulted in the Fund repurchasing 10% of the
Fund's outstanding shares in open-market transactions through February 1, 2008.
In December 2007, the Fund's Board of Trustees authorized, at the investment
manager's discretion, the repurchase of an additional 10% of the Fund's
outstanding shares in open market transactions. This authorization remains in
effect.
YEAR ENDED AUGUST 31,
----------------------------------------------
2008 2007
-------------------- -----------------------
SHARES AMOUNT SHARES AMOUNT
------- ---------- --------- -----------
Shares repurchased ......................... 648,100 $4,422,626 1,681,800 $11,666,494
Weighted average discount of market price to
net asset value of shares repurchased ... 11.34% 8.78%
3. SENIOR FIXED RATE NOTES
During the year ended August 31, 2008, the Fund had a $55,000,000 senior note
outstanding, bearing interest at 4.14% per year. The issuance cost of $200,000
incurred by the Fund was deferred and amortized on an interest method basis over
the term of the note. On August 29, 2008, the note matured and was paid in full.
On August 29, 2008, the Fund issued $65,000,000 principal amount of a new class
of five-year senior fixed rate notes (Notes). The Notes are general unsecured
obligations of the Fund and rank senior to Fund shares and all existing or
future unsecured indebtedness of the Fund.
The Notes bear interest, payable semi-annually, at the rate of 5.87% per year,
to maturity on August 28, 2013. Subject to certain restrictions and premiums,
the Fund may prepay the Notes at any time. Based on the Notes current credit
rating, remaining time to maturity, stated coupon rates, and other covenants, as
of August 31, 2008, the estimated fair value of the Notes is $65,000,000.
28 | Annual Report
Franklin Universal Trust
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. SENIOR FIXED RATE NOTES (CONTINUED)
The Fund is required to maintain on a monthly basis a specified discounted asset
value for its portfolio in compliance with guidelines established in the Notes
agreement, and is required under the 1940 Act to maintain asset coverage for the
Notes of at least 300%. The Fund has met these requirements during the year
ended August 31, 2008.
The issuance costs of $409,762 incurred by the Fund on the Notes are deferred
and amortized on an interest method basis over their term.
4. TRANSACTIONS WITH AFFILIATES
Franklin Resources, Inc. is the holding company for various subsidiaries that
together are referred to as Franklin Templeton Investments. Certain officers and
trustees of the Fund are also officers and/or directors of the following
subsidiaries:
SUBSIDIARY AFFILIATION
---------------------------------------------- -------------------------------
Franklin Advisers, Inc. (Advisers) Investment manager
Franklin Templeton Services, LLC (FT Services) Administrative manager
A. MANAGEMENT FEES
The Fund pays an investment management fee to Advisers of 0.75% per year of the
average weekly managed assets. Managed assets are defined as the Fund's gross
asset value minus the sum of accrued liabilities, other than the principal
amount of the Notes.
B. ADMINISTRATIVE FEES
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. EXPENSE OFFSET ARRANGEMENT
The Fund has entered into an arrangement with its custodian whereby credits
realized as a result of uninvested cash balances are used to reduce a portion of
the Fund's custodian expenses. During the year ended August 31, 2008, the
custodian fees were reduced as noted in the Statement of Operations.
Annual Report | 29
Franklin Universal Trust
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. INCOME TAXES
For tax purposes, capital losses may be carried over to offset future capital
gains, if any. At August 31, 2008, the capital loss carryforwards were as
follows:
Capital loss carryforwards expiring in:
2009 ..... $ 328,908
2010 ..... 6,827,086
2011 ..... 34,372,527
2012 ..... 18,676,213
2013 ..... 3,246,257
2014 ..... 4,662,560
-----------
$68,113,551
===========
During the year ended August 31, 2008, the Fund utilized $3,275,581 of capital
loss carryforwards.
For tax purposes, realized currency losses occurring subsequent to October 31,
may be deferred and treated as occurring on the first day of the following
fiscal year. At August 31, 2008, the Fund deferred realized currency losses of
$125,426.
The tax character of distributions paid during the years ended August 31, 2008
and 2007 was as follows:
2008 2007
----------- -----------
Distributions paid from ordinary income ..... $11,502,730 $12,153,252
At August 31, 2008, the cost of investments, net unrealized appreciation
(depreciation), and undistributed ordinary income for income tax purposes were
as follows:
Cost of investments ..................................... $ 233,190,970
-------------
Unrealized appreciation ................................. $ 29,424,700
Unrealized depreciation ................................. (25,883,929)
-------------
Net unrealized appreciation (depreciation) .............. $ 3,540,771
=============
Distributable earnings - undistributed ordinary income .. $ 4,712,137
=============
Net investment income differs for financial statement and tax purposes primarily
due to differing treatments of pass-through entity income, payments-in-kind,
foreign currency transactions, bond discounts and premiums and Note offering
costs.
Net realized gains (losses) differ for financial statement and tax purposes
primarily due to differing treatments of foreign currency transactions, and bond
discounts and premiums.
30 | Annual Report
Franklin Universal Trust
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. INVESTMENT TRANSACTIONS
Purchases and sales of investments (excluding short term securities) for the
year ended August 31, 2008, aggregated $43,901,404 and $48,853,552,
respectively.
8. INVESTMENTS IN FRANKLIN INSTITUTIONAL FIDUCIARY TRUST MONEY MARKET PORTFOLIO
The Fund may invest in the Franklin Institutional Fiduciary Trust Money Market
Portfolio (Sweep Money Fund), an open-end investment company managed by
Advisers. Management fees paid by the Fund are reduced on assets invested in the
Sweep Money Fund, in an amount not to exceed the management and administrative
fees paid by the Sweep Money Fund.
9. CREDIT RISK AND DEFAULTED SECURITIES
The Fund has 64.46% of its portfolio invested in high yield or other securities
rated below investment grade. These securities may be more sensitive to economic
conditions causing greater price volatility and are potentially subject to a
greater risk of loss due to default than higher rated securities.
The Fund held defaulted securities and/or other securities for which the income
has been deemed uncollectible. At August 31, 2008, the aggregate value of these
securities was $7,611, representing less than 0.01% of the Fund's portfolio. The
Fund discontinues accruing income on securities for which income has been deemed
uncollectible and provides an estimate for losses on interest receivable. The
securities have been identified on the accompanying Statement of Investments.
10. RESTRICTED SECURITIES
The Fund may invest in securities that are restricted under the Securities Act
of 1933 (1933 Act) or which are subject to legal, contractual, or other agreed
upon restrictions on resale. Restricted securities are often purchased in
private placement transactions, and cannot be sold without prior registration
unless the sale is pursuant to an exemption under the 1933 Act. Disposal of
these securities may require greater effort and expense, and prompt sale at an
acceptable price may be difficult. The Fund may have registration rights for
restricted securities. The issuer generally incurs all registration costs.
Annual Report | 31
Franklin Universal Trust
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
10. RESTRICTED SECURITIES (CONTINUED)
At August 31, 2008, the Fund held investments in restricted securities,
excluding 144A securities deemed to be liquid, valued in accordance with
procedures approved by the Fund's Board of Trustees as reflecting fair value, as
follows:
PRINCIPAL AMOUNT/ ACQUISITION
SHARES ISSUER DATE COST VALUE
----------------- ---------------------------------------------------- ----------- -------- ------
721,603 Atherton Franchise Capital, 13.073%, 12/01/08 ...... 4/28/94 $721,603 $7,216
181,875 VS Holdings Inc. ................................... 12/06/01 181,875 --
------
TOTAL RESTRICTED SECURITIES (0.00% of Net Assets)(a) $7,216
======
(a) Rounds to less than 0.01% of net assets.
11. NEW ACCOUNTING PRONOUNCEMENTS
In September 2006, the Financial Accounting Standards Board (FASB) issued FASB
Statement No. 157, "Fair Value Measurement" (SFAS 157), which defines fair
value, establishes a framework for measuring fair value, and expands disclosures
about fair value measurements. SFAS 157 is effective for fiscal years beginning
after November 15, 2007, and interim periods within those fiscal years. The Fund
believes the adoption of SFAS 157 will have no material impact on its financial
statements.
In March 2008, FASB issued FASB Statement No. 161, "Disclosures about Derivative
Instruments and Hedging Activities, an amendment of FASB Statement No. 133"
(SFAS 161), which expands disclosures about derivative investments and hedging
activities. SFAS 161 is effective for fiscal years and interim periods beginning
after November 15, 2008. The Fund is currently evaluating the impact, if any, of
applying the various provisions of SFAS 161.
12. SUBSEQUENT EVENT
Subsequent to August 31, 2008, the Fund incurred realized and unrealized losses
related to the broader market downturn. As a result of these losses, the Fund no
longer met certain asset coverage requirements contained in the Notes agreement,
which are consistent with the 300% asset coverage requirements under the 1940
Act. On October 14, 2008, the Fund made an early partial repayment of $8,000,000
of the Notes, together with a make whole premium of $951,222. Upon this early
repayment, the asset coverage requirement under the Notes was met. On October
27, 2008, the Fund made another partial repayment of $10,000,000 of the Notes,
together with an additional make whole premium of $500,000. An additional
repayment of $5,000,000 of the Notes, together with an estimated make whole
premium of $250,000, is anticipated to take place on or before October 31, 2008.
Upon completion of these early repayments, the balance of the Notes will be
reduced to $42,000,000. In connection with the early Notes repayments, the Fund
expensed $143,442 of previously incurred note issuance costs.
32 | Annual Report
Franklin Universal Trust
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
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, 2008, the results of its operations for the
year then ended, the changes in its net assets for each of the two years in the
period then ended, its cash flows for the year then ended and the financial
highlights for each of the five years in the period then ended, in conformity
with accounting principles generally accepted in the United States of America.
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 the standards of the Public Company Accounting Oversight Board (United
States). Those standards 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, 2008 by
correspondence with the custodian, provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
San Francisco, California
October 27, 2008
Annual Report | 33
Franklin Universal Trust
TAX DESIGNATION (UNAUDITED)
Under Section 854(b)(2) of the Internal Revenue Code (Code), the Fund designates
15.88% of the ordinary income dividends as income qualifying for the dividends
received deduction for the fiscal year ended August 31, 2008.
Under Section 854(b)(2) of the Code, the Fund designates the maximum amount
allowable but no less than $2,429,106 as qualified dividends for purposes of the
maximum rate under Section 1(h)(11) of the Code for the fiscal year ended August
31, 2008. Distributions, including qualified dividend income, paid during
calendar year 2008 will be reported to shareholders on Form 1099-DIV in January
2009. Shareholders are advised to check with their tax advisors for information
on the treatment of these amounts on their individual income tax returns.
Under Section 871(k)(1)(C) of the Code, the Fund designates the maximum amount
allowable but no less than $8,932,361 as interest related dividends for purposes
of the tax imposed under Section 871(a)(1)(A) of the Code for the fiscal year
ended August 31, 2008.
34 | Annual Report
Franklin Universal Trust
BOARD MEMBERS AND OFFICERS
The name, year of birth and address of the officers and board members, as well
as their affiliations, positions held with the Fund, principal occupation during
the past five years and number of portfolios overseen in the Franklin Templeton
Investments fund complex are shown below. Generally, each board member serves
until that person's successor is elected and qualified.
INDEPENDENT BOARD MEMBERS
NUMBER OF PORTFOLIOS IN
NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN
AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
-------------------------------- --------------- ------------------ ----------------------- --------------------------------
HARRIS J. ASHTON (1932) Trustee Since 1988 143 Bar-S Foods (meat packing
One Franklin Parkway company).
San Mateo, CA 94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Director of various companies; and FORMERLY, Director, RBC Holdings, Inc. (bank holding company) (until 2002); and President,
Chief Executive Officer and Chairman of the Board, General Host Corporation (nursery and craft centers) (until 1998).
ROBERT F. CARLSON (1928) Trustee Since 2000 122 None
One Franklin Parkway
San Mateo, CA 94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Retired; and FORMERLY, Vice President, senior member and past President, Board of Administration, California Public Employees
Retirement Systems (CALPERS) (1971 - January 2008); member and Chairman of the Board, Sutter Community Hospitals; member,
Corporate Board, Blue Shield of California; and Chief Counsel, California Department of Transportation.
SAM GINN (1937) Trustee Since 2007 122 Chevron Corporation (global
One Franklin Parkway energy company) and ICO Global
San Mateo, CA 94403-1906 Communications (Holdings)
Limited (satellite company).
PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Private investor; and FORMERLY, Chairman of the Board, Vodafone AirTouch, PLC (wireless
company); Chairman of the Board and Chief Executive Officer, AirTouch Communications (cellular communications) (1993-1998) and
Pacific Telesis Groups (telephone holding company) (1988-1994).
EDITH E. HOLIDAY (1952) Trustee Since 2004 143 Hess Corporation (exploration
One Franklin Parkway and refining of oil and gas),
San Mateo, CA 94403-1906 H.J. Heinz Company (processed
foods and allied products), RTI
International Metals, Inc.
(manufacture and distribution of
titanium), Canadian National
Railway (railroad) and White
Mountains Insurance Group, Ltd.
(holding company).
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Director or Trustee of various companies and trusts; and FORMERLY, Assistant to the President of the United States and Secretary of
the Cabinet (1990-1993); General Counsel to the United States Treasury Department (1989-1990); and Counselor to the Secretary and
Assistant Secretary for Public Affairs and Public Liaison-United States Treasury Department (1988-1989).
Annual Report | 35
NUMBER OF PORTFOLIOS IN
NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN
AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
-------------------------------- --------------- ------------------ ----------------------- --------------------------------
FRANK W.T. LAHAYE (1929) Trustee Since 1988 122 Center for Creative Land
One Franklin Parkway Recycling (brownfield
San Mateo, CA 94403-1906 redevelopment).
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
General Partner, Las Olas L.P. (Asset Management); and FORMERLY, Chairman, Peregrine Venture Management Company (venture capital).
FRANK A. OLSON (1932) Trustee Since 2005 143 Hess Corporation (exploration
One Franklin Parkway and refining of oil and gas) and
San Mateo, CA 94403-1906 Sentient Jet (private jet
service).
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Chairman Emeritus, The Hertz Corporation (car rental) (since 2000) (Chairman of the Board (1980-2000) and Chief Executive Officer
(1977-1999)); and FORMERLY, Chairman of the Board, President and Chief Executive Officer, UAL Corporation (airlines).
LARRY D. THOMPSON (1945) Trustee Since 2007 143 None
One Franklin Parkway
San Mateo, CA 94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Senior Vice President - Government Affairs, General Counsel and Secretary, PepsiCo, Inc. (consumer products); and FORMERLY,
Director, Delta Airlines (aviation) (2003-2005) and Providian Financial Corp. (credit card provider) (1997-2001); Senior Fellow of
The Brookings Institution (2003-2004); Visiting Professor, University of Georgia School of Law (2004); and Deputy Attorney General,
U.S. Department of Justice (2001-2003).
JOHN B. WILSON (1959) Lead Trustee since 122 None
One Franklin Parkway Independent 2006 and Lead
San Mateo, CA 94403-1906 Trustee Independent
Trustee since
January 2008
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
President and Founder, Hyannis Port Capital, Inc. (real estate and private equity investing); serves on private and non-profit
boards; and FORMERLY, Chief Operating Officer and Executive Vice President, Gap, Inc. (retail) (1996-2000); Chief Financial Officer
and Executive Vice President - Finance Strategy, Staples, Inc. (office supplies) (1992-1996); Executive Vice President - Corporate
Planning, Northwest Airlines, Inc. (airlines) (1990-1992); and Vice President and Partner, Bain & Company (consulting firm)
(1986-1990).
INTERESTED BOARD MEMBERS AND OFFICERS
NUMBER OF PORTFOLIOS IN
NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN
AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
-------------------------------- --------------- ------------------ ----------------------- --------------------------------
**EDWARD B. JAMIESON (1948) Trustee, Trustee, President 1 None
One Franklin Parkway President and since 1993 and
San Mateo, CA 94403-1906 Chief Chief Executive
Executive Officer -
Officer - Investment
Investment Management
Management since 2002
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
President, Chief Investment Officer and Director, Franklin Advisers, Inc.; Executive Vice President, Franklin Templeton
Institutional, LLC; and officer and/or trustee, as the case may be, of some of the other subsidiaries of Franklin Resources, Inc.
and of four of the investment companies in Franklin Templeton Investments.
36 | Annual Report
NUMBER OF PORTFOLIOS IN
NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN
AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
-------------------------------- --------------- ------------------ ----------------------- --------------------------------
**CHARLES B. JOHNSON (1933) Trustee and Trustee since 143 None
One Franklin Parkway Chairman of 1988 and
San Mateo, CA 94403-1906 the Board Chairman of the
Board since 1993
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Chairman of the Board, Member - Office of the Chairman and Director, Franklin Resources, Inc.; Director; Templeton Worldwide, Inc.;
and officer and/or director or trustee, as the case may be, of some of the other subsidiaries of Franklin Resources, Inc. and of 42
of the investment companies in Franklin Templeton Investments.
**RUPERT H. JOHNSON, JR. (1940) Trustee and Since 1988 56 None
One Franklin Parkway Senior Vice
San Mateo, CA 94403-1906 President
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Vice Chairman, Member - Office of the Chairman and Director, Franklin Resources, Inc.; Director, Franklin Advisers, Inc. and
Templeton Worldwide, Inc.; Senior Vice President, Franklin Advisory Services, LLC; and officer and/or director or trustee, as the
case may be, of some of the other subsidiaries of Franklin Resources, Inc. and of 44 of the investment companies in Franklin
Templeton Investments.
JAMES M. DAVIS (1952) Chief Since 2004 Not Applicable Not Applicable
One Franklin Parkway Compliance
San Mateo, CA 94403-1906 Officer
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Director, Global Compliance, Franklin Resources, Inc.; officer of some of the other subsidiaries of Franklin Resources, Inc. and
of 46 of the investment companies in Franklin Templeton Investments; and FORMERLY, Director of Compliance, Franklin Resources,
Inc. (1994-2001).
LAURA F. FERGERSON (1962) Treasurer, Treasurer since Not Applicable Not Applicable
One Franklin Parkway Chief Financial 2004, Chief
San Mateo, CA 94403-1906 Officer and Financial Officer
Chief and Chief
Accounting Accounting Officer
Officer since February
2008
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Vice President, Franklin Templeton Services, LLC; officer of 46 of the investment companies in Franklin Templeton Investments; and
FORMERLY, Director and member of Audit and Valuation Committees, Runkel Funds, Inc. (2003-2004); Assistant Treasurer of most of
the investment companies in Franklin Templeton Investments (1997-2003); and Vice President, Franklin Templeton Services, LLC
(1997-2003).
JIMMY D. GAMBILL (1947) Vice President Since February Not Applicable Not Applicable
500 East Broward Blvd. 2008
Suite 2100
Fort Lauderdale, FL 33394-3091
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
President, Franklin Templeton Services, LLC; Senior Vice President, Templeton Worldwide, Inc.; and officer of some of the other
subsidiaries of Franklin Resources, Inc. and of 46 of the investment companies in Franklin Templeton Investments.
DAVID P. GOSS (1947) Vice President Since 2000 Not Applicable Not Applicable
One Franklin Parkway
San Mateo, CA 94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Senior Associate General Counsel, Franklin Templeton Investments; officer and director of one of the subsidiaries of Franklin
Resources, Inc.; and officer of 46 of the investment companies in Franklin Templeton Investments.
Annual Report | 37
NUMBER OF PORTFOLIOS IN
NAME, YEAR OF BIRTH LENGTH OF FUND COMPLEX OVERSEEN
AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
-------------------------------- --------------- ------------------ ----------------------- --------------------------------
KAREN L. SKIDMORE (1952) Vice President Since 2006 Not Applicable Not Applicable
One Franklin Parkway and Secretary
San Mateo, CA 94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Senior Associate General Counsel, Franklin Templeton Investments; and officer of 30 of the investment companies in Franklin
Templeton Investments.
CRAIG S. TYLE (1960) Vice President Since 2005 Not Applicable Not Applicable
One Franklin Parkway
San Mateo, CA 94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
General Counsel and Executive Vice President, Franklin Resources, Inc.; officer of some of the other subsidiaries of Franklin
Resources, Inc. and of 46 of the investment companies in Franklin Templeton Investments; and FORMERLY, Partner, Shearman &
Sterling, LLP (2004-2005); and General Counsel, Investment Company Institute (ICI) (1997-2004).
GALEN G. VETTER (1951) Senior Vice Since February Not Applicable Not Applicable
500 East Broward Blvd. President and 2008
Suite 2100 Chief
Fort Lauderdale, FL 33394-3091 Executive
Officer -
Finance and
Administration
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Senior Vice President, Franklin Templeton Services, LLC; officer of some of the other subsidiaries of Franklin Resources, Inc. and
of 46 of the investment companies in Franklin Templeton Investments; and FORMERLY, Managing Director, RSM McGladrey, Inc.
(1999-2004); and Partner, McGladrey & Pullen, LLP (1979-1987 and 1991-2004).
* We base the number of portfolios on each separate series of the U.S.
registered investment companies within the Franklin Templeton Investments
fund complex. These portfolios have a common investment manager or
affiliated investment managers.
** Charles B. Johnson and Rupert H. Johnson, Jr. are considered to be
interested persons of the Fund under the federal securities laws due to
their positions as officers and directors and major shareholders of
Franklin Resources, Inc., which is the parent company of the Fund's
investment manager and distributor. Edward B. Jamieson is considered to be
an interested person of the Fund under the federal securities laws due to
his position as officer and director of the Fund's investment manager.
Note: Charles B. Johnson and Rupert H. Johnson, Jr. are brothers.
Note 2: Officer information is current as of the date of this report. It is
possible that after this date, information about officers may change.
THE SARBANES-OXLEY ACT OF 2002 AND RULES ADOPTED BY THE SECURITIES AND EXCHANGE
COMMISSION REQUIRE THE FUND TO DISCLOSE WHETHER THE FUND'S AUDIT COMMITTEE
INCLUDES AT LEAST ONE MEMBER WHO IS AN AUDIT COMMITTEE FINANCIAL EXPERT WITHIN
THE MEANING OF SUCH ACT AND RULES. THE FUND'S BOARD OF TRUSTEES HAS DETERMINED
THAT THERE IS AT LEAST ONE SUCH FINANCIAL EXPERT ON THE AUDIT COMMITTEE AND HAS
DESIGNATED JOHN B. WILSON AS ITS AUDIT COMMITTEE FINANCIAL EXPERT. THE BOARD
BELIEVES THAT MR. WILSON QUALIFIES AS SUCH AN EXPERT IN VIEW OF HIS EXTENSIVE
BUSINESS BACKGROUND AND EXPERIENCE, INCLUDING SERVICE AS CHIEF FINANCIAL OFFICER
OF STAPLES, INC. FROM 1992 TO 1996. MR. WILSON HAS BEEN A MEMBER AND CHAIRMAN OF
THE FUND'S AUDIT COMMITTEE SINCE 2006. AS A RESULT OF SUCH BACKGROUND AND
EXPERIENCE, THE BOARD OF TRUSTEES BELIEVES THAT MR. WILSON HAS ACQUIRED AN
UNDERSTANDING OF GENERALLY ACCEPTED ACCOUNTING PRINCIPLES AND FINANCIAL
STATEMENTS, THE GENERAL APPLICATION OF SUCH PRINCIPLES IN CONNECTION WITH THE
ACCOUNTING ESTIMATES, ACCRUALS AND RESERVES, AND ANALYZING AND EVALUATING
FINANCIAL STATEMENTS THAT PRESENT A BREADTH AND LEVEL OF COMPLEXITY OF
ACCOUNTING ISSUES GENERALLY COMPARABLE TO THOSE OF THE FUND, AS WELL AS AN
UNDERSTANDING OF INTERNAL CONTROLS AND PROCEDURES FOR FINANCIAL REPORTING AND AN
UNDERSTANDING OF AUDIT COMMITTEE FUNCTIONS. MR. WILSON IS AN INDEPENDENT TRUSTEE
AS THAT TERM IS DEFINED UNDER THE RELEVANT SECURITIES AND EXCHANGE COMMISSION
RULES AND RELEASES OR THE LISTING STANDARDS APPLICABLE TO THE FUND.
38 | Annual Report
Franklin Universal Trust
SHAREHOLDER INFORMATION
PROXY VOTING POLICIES AND PROCEDURES
The Fund's investment manager has established Proxy Voting Policies and
Procedures (Policies) that the Fund uses to determine how to vote proxies
relating to portfolio securities. Shareholders may view the Fund's complete
Policies online at franklintempleton.com. Alternatively, shareholders may
request copies of the Policies free of charge by calling the Proxy Group collect
at (954) 527-7678 or by sending a written request to: Franklin Templeton
Companies, LLC, 500 East Broward Boulevard, Suite 1500, Fort Lauderdale, FL
33394, Attention: Proxy Group. Copies of the Fund's proxy voting records are
also made available online at franklintempleton.com and posted on the U.S.
Securities and Exchange Commission's website at sec.gov and reflect the most
recent 12-month period ended June 30.
QUARTERLY STATEMENT OF INVESTMENTS
The Fund files a complete statement of investments with the U.S. Securities and
Exchange Commission for the first and third quarters for each fiscal year on
Form N-Q. Shareholders may view the filed Form N-Q by visiting the Commission's
website at sec.gov. The filed form may also be viewed and copied at the
Commission's Public Reference Room in Washington, DC. Information regarding the
operations of the Public Reference Room may be obtained by calling (800)
SEC-0330.
CERTIFICATIONS
The Fund's Chief Executive Officer - Finance and Administration is required by
the New York Stock Exchange's Listing Standards to file annually with the
Exchange a certification that he is not aware of any violation by the Fund of
the Exchange's Corporate Governance Standards applicable to the Fund. The Fund
has filed such certification.
In addition, the Fund's Chief Executive Officer - Finance and Administration and
Chief Financial Officer and Chief Accounting Officer are required by the rules
of the U.S. Securities and Exchange Commission to provide certain certifications
with respect to the Fund's Form N-CSR and Form N-CSRS (which include the Fund's
annual and semiannual reports to shareholders) that are filed semiannually with
the Commission. The Fund has filed such certifications with its Form N-CSRS for
the six months ended February 28, 2008. Additionally, the Fund expects to file,
on or about October 30, 2008, such certifications with its Form N-CSR for the
year ended August 31, 2008.
Annual Report | 39
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Literature Request
LITERATURE REQUEST. TO RECEIVE A BROCHURE AND PROSPECTUS, PLEASE CALL US AT
(800) DIAL BEN/(800) 342-5236 OR VISIT FRANKLINTEMPLETON.COM. INVESTORS SHOULD
CAREFULLY CONSIDER A FUND'S INVESTMENT GOALS, RISKS, CHARGES AND EXPENSES BEFORE
INVESTING. THE PROSPECTUS CONTAINS THIS AND OTHER INFORMATION. PLEASE CAREFULLY
READ THE PROSPECTUS BEFORE INVESTING. TO ENSURE THE HIGHEST QUALITY OF SERVICE,
WE MAY MONITOR, RECORD AND ACCESS TELEPHONE CALLS TO OR FROM OUR SERVICE
DEPARTMENTS. THESE CALLS CAN BE IDENTIFIED BY THE PRESENCE OF A REGULAR BEEPING
TONE.
FRANKLIN TEMPLETON FUNDS
INTERNATIONAL
Franklin India Growth Fund
Franklin International Growth Fund
Franklin International Small Cap Growth Fund
Mutual European Fund
Templeton BRIC Fund
Templeton China World Fund
Templeton Developing Markets Trust
Templeton Emerging Markets Small Cap Fund
Templeton Foreign Fund
Templeton Foreign Smaller Companies Fund(1)
GLOBAL
Mutual Discovery Fund
Templeton Global Long-Short Fund
Templeton Global Opportunities Trust
Templeton Global Smaller Companies Fund(1)
Templeton Growth Fund
Templeton World Fund
GROWTH
Franklin Capital Growth Fund
Franklin Flex Cap Growth Fund
Franklin Growth Opportunities Fund(2)
Franklin Small Cap Growth Fund(3)
Franklin Small-Mid Cap Growth Fund
VALUE
Franklin All Cap Value Fund
Franklin Balance Sheet Investment Fund
Franklin Equity Income Fund
Franklin Large Cap Value Fund
Franklin MicroCap Value Fund(1)
Franklin MidCap Value Fund
Franklin Small Cap Value Fund
Mutual Beacon Fund
Mutual Qualified Fund
Mutual Recovery Fund(4)
Mutual Shares Fund
BLEND
Franklin Balanced Fund
Franklin Convertible Securities Fund
Franklin Focused Core Equity Fund
Franklin Growth Fund
Franklin Large Cap Equity Fund
Franklin Rising Dividends Fund
SECTOR
Franklin Biotechnology Discovery Fund
Franklin DynaTech Fund
Franklin Global Real Estate Fund
Franklin Gold and Precious Metals Fund
Franklin Natural Resources Fund
Franklin Real Estate Securities Fund
Franklin Utilities Fund
Mutual Financial Services Fund
ASSET ALLOCATION
Franklin Templeton Corefolio(R) Allocation Fund
Franklin Templeton Founding Funds Allocation Fund
Franklin Templeton Perspectives Allocation Fund
Franklin Templeton Conservative Target Fund
Franklin Templeton Growth Target Fund
Franklin Templeton Moderate Target Fund
Franklin Templeton 2015 Retirement Target Fund
Franklin Templeton 2025 Retirement Target Fund
Franklin Templeton 2035 Retirement Target Fund
Franklin Templeton 2045 Retirement Target Fund
INCOME
Franklin Adjustable U.S. Government Securities Fund(5)
Franklin Floating Rate Daily Access Fund
Franklin High Income Fund
Franklin Income Fund
Franklin Limited Maturity U.S. Government Securities Fund(5)
Franklin Low Duration Total Return Fund
Franklin Real Return Fund
Franklin Strategic Income Fund
Franklin Strategic Mortgage Portfolio
Franklin Templeton Hard Currency Fund
Franklin Total Return Fund
Franklin U.S. Government Securities Fund(5)
Templeton Global Bond Fund
Templeton Global Total Return Fund
Templeton Income Fund
Templeton International Bond Fund
TAX-FREE INCOME(6)
NATIONAL FUNDS
Double Tax-Free Income Fund
Federal Tax-Free Income Fund
High Yield Tax-Free Income Fund
Insured Tax-Free Income Fund(7)
LIMITED-/INTERMEDIATE-TERM FUNDS
California Intermediate-Term Tax-Free Income Fund
Federal Intermediate-Term Tax-Free Income Fund
Federal Limited-Term Tax-Free Income Fund
New York Intermediate-Term Tax-Free Income Fund
STATE-SPECIFIC
Alabama
Arizona
California(8)
Colorado
Connecticut
Florida
Georgia
Kentucky
Louisiana
Maryland
Massachusetts(7)
Michigan(7)
Minnesota(7)
Missouri
New Jersey
New York(8)
North Carolina
Ohio(7)
Oregon
Pennsylvania
Tennessee
Virginia
INSURANCE FUNDS
Franklin Templeton Variable Insurance Products Trust(9)
(1.) The fund is closed to new investors. Existing shareholders and select
retirement plans can continue adding to their accounts.
(2.) Effective 11/1/07, Franklin Aggressive Growth Fund changed its name to
Franklin Growth Opportunities Fund. The fund's investment goal and strategy
remained the same.
(3.) Effective 3/31/08, Franklin Small Cap Growth Fund II changed its name to
Franklin Small Cap Growth Fund. The fund's investment goal and strategy
remained the same.
(4.) The fund is a continuously offered, closed-end fund. Shares may be
purchased daily; there is no daily redemption. However, each quarter,
pending board approval, the fund will authorize the repurchase of 5%-25% of
the outstanding number of shares. Investors may tender all or a portion of
their shares during the tender period.
(5.) An investment in the fund is neither insured nor guaranteed by the U.S.
government or by any other entity or institution.
(6.) For investors subject to the alternative minimum tax, a small portion of
fund dividends may be taxable. Distributions of capital gains are generally
taxable.
(7.) The fund invests primarily in insured municipal securities.
(8.) These funds are available in four or more variations, including long-term
portfolios, intermediate-term portfolios, portfolios of insured securities,
a high-yield portfolio (CA only) and money market portfolios.
(9.) The funds of the Franklin Templeton Variable Insurance Products Trust are
generally available only through insurance company variable contracts.
10/08 Not part of the annual report
(FRANKLIN TEMPLETON INVESTMENTS(R) LOGO) One Franklin Parkway
San Mateo, CA 94403-1906
ANNUAL REPORT
FRANKLIN UNIVERSAL TRUST
INVESTMENT MANAGER
Franklin Advisers, Inc.
(800) DIAL BEN(R)
TRANSFER AGENT
PNC Global Investment Services
P.O. Box 43027
Providence, RI 02940-3027
To ensure the highest quality of service, telephone calls to or from our service
departments may be monitored, recorded and accessed. These calls can be
identified by the presence of a regular beeping tone.
FUT A2008 10/08
ITEM 2. CODE OF ETHICS.
(a) The Registrant has adopted a code of ethics that applies to its principal
executive officers and principal financial and accounting officer.
(c) N/A
(d) N/A
(f) Pursuant to Item 12(a)(1), the Registrant is attaching as an exhibit a copy
of its code of ethics that applies to its principal executive officers and
principal financial and accounting officer.
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.
(a)(1) The Registrant has an audit committee financial expert serving on its
audit committee.
(2) The audit committee financial expert is John B. Wilson and he is
"independent" as defined under the relevant Securities and Exchange Commission
Rules and Releases.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
(a) Audit Fees
The aggregate fees paid to the principal accountant for professional services
rendered by the principal accountant for the audit of the registrant's annual
financial statements or for services that are normally provided by the principal
accountant in connection with statutory and regulatory filings or engagements
were $31,362 for the fiscal year ended August 31, 2008 and $28,565 for the
fiscal year ended August 31, 2007.
(b) Audit-Related Fees
The aggregate fees paid to the principal accountant for assurance and related
services rendered by the principal accountant to the registrant that are
reasonably related to the performance of the audit of the registrant's financial
statements and are not reported under paragraph (a) of Item 4 were $10,100 for
the fiscal year ended August 31, 2008 and $9,522 for the fiscal year ended
August 31, 2007. The services for which these fees were paid included
attestation services.
There were no fees paid to the principal accountant for assurance and related
services rendered by the principal accountant to the registrant's investment
adviser and any entity controlling, controlled by or under common control with
the investment adviser that provides ongoing services to the registrant that are
reasonably related to the performance of the audit of their financial
statements.
(c) Tax Fees
There were no fees paid to the principal accountant for professional services
rendered by the principal accountant to the registrant for tax compliance, tax
advice and tax planning.
The aggregate fees paid to the principal accountant for professional services
rendered by the principal accountant to the registrant's investment adviser and
any entity controlling, controlled by or under common control with the
investment adviser that provides ongoing services to the registrant for tax
compliance, tax advice and tax planning were $0 for the fiscal year ended August
31, 2008 and $46,000 for the fiscal year ended August 31, 2007. The services for
which these fees were paid included tax compliance and advice.
(d) All Other Fees
The aggregate fees paid to the principal accountant for products and services
rendered by the principal accountant to the registrant not reported in
paragraphs (a)-(c) of Item 4 were $141 for the fiscal year ended August 31, 2008
and $0 for the fiscal year ended August 31, 2007. The services for which these
fees were paid include review of materials provided to the fund Board in
connection with the investment management contract renewal process.
The aggregate fees paid to the principal accountant for products and services
rendered by the principal accountant to the registrant's investment adviser and
any entity controlling, controlled by or under common control with the
investment adviser that provides ongoing services to the registrant not reported
in paragraphs (a)-(c) of Item 4 were $283,936 for the fiscal year ended August
31, 2008 and $0 for the fiscal year ended August 31, 2007. The services for
which these fees were paid include review of materials provided to the fund
Board in connection with the investment management contract renewal process.
(e) (1) The registrant's audit committee is directly responsible for approving
the services to be provided by the auditors, including:
(i) pre-approval of all audit and audit related services;
(ii) pre-approval of all non-audit related services to be provided to
the Fund by the auditors;
(iii) pre-approval of all non-audit related services to be provided to
the registrant by the auditors to the registrant's investment adviser or to any
entity that controls, is controlled by or is under common control with the
registrant's investment adviser and that provides ongoing services to the
registrant where the non-audit services relate directly to the operations or
financial reporting of the registrant; and
(iv) establishment by the audit committee, if deemed necessary or
appropriate, as an alternative to committee pre-approval of services to be
provided by the auditors, as required by paragraphs (ii) and (iii) above, of
policies and procedures to permit such services to be pre-approved by other
means, such as through establishment of guidelines or by action of a designated
member or members of the committee; provided the policies and procedures are
detailed as to the particular service and the committee is informed of each
service and such policies and procedures do not include delegation of audit
committee responsibilities, as contemplated under the Securities Exchange Act of
1934, to management; subject, in the case of (ii) through (iv), to any waivers,
exceptions or exemptions that may be available under applicable law or rules.
(e) (2) None of the services provided to the registrant described in paragraphs
(b)-(d) of Item 4 were approved by the audit committee pursuant to paragraph
(c)(7)(i)(C) of Rule 2-01 of regulation S-X.
(f) No disclosures are required by this Item 4(f).
(g) The aggregate non-audit fees paid to the principal accountant for services
rendered by the principal accountant to the registrant and the registrant's
investment adviser and any entity controlling, controlled by or under common
control with the investment adviser that provides ongoing services to the
registrant were $294,177 for the fiscal year ended August 31, 2008 and $55,522
for the fiscal year ended August 31, 2007.
(h) The registrant's audit committee of the board has considered whether the
provision of non-audit services that were rendered to the registrant's
investment adviser (not including any sub-adviser whose role is primarily
portfolio management and is subcontracted with or overseen by another investment
adviser), and any entity controlling, controlled by, or under common control
with the investment adviser that provides ongoing services to the registrant
that were not pre-approved pursuant to paragraph (c)(7)(ii) of Rule 2-01 of
Regulation S-X is compatible with maintaining the principal accountant's
independence.
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS. Members of the Audit Committee
are: Robert F. Carlson, Frank W. T. LaHaye and John B. Wilson.
ITEM 6. SCHEDULE OF INVESTMENTS. N/A
ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END
MANAGEMENT INVESTMENT COMPANIES.
The board of trustees of the Fund has delegated the authority to vote proxies
related to the portfolio securities held by the Fund to the Fund's manager
Franklin Advisers, Inc. in accordance with the Proxy Voting Policies and
Procedures (Policies) adopted by the manager.
The manager has delegated its administrative duties with respect to the voting
of proxies to the Proxy Group within Franklin Templeton Companies, LLC (Proxy
Group), an affiliate and wholly owned subsidiary of Franklin Resources, Inc. All
proxies received by the Proxy Group will be voted based upon the manager's
instructions and/or policies.
To assist it in analyzing proxies, the manager subscribes to RiskMetrics Group
(RiskMetrics), an unaffiliated third party corporate governance research service
that provides in-depth analyses of shareholder meeting agendas, vote
recommendations, recordkeeping and vote disclosure services. In addition, the
manager subscribes to Glass, Lewis & Co., LLC (Glass Lewis), an unaffiliated
third party analytical research firm, to receive analyses and vote
recommendations on the shareholder meetings of publicly held U.S. companies.
Although RiskMetrics' and/or Glass Lewis' analyses are thoroughly reviewed and
considered in making a final voting decision, the manager does not consider
recommendations from RiskMetrics, Glass Lewis or any other third party to be
determinative of the manager's ultimate decision. The manager votes proxies
solely in the interests of the Fund and its shareholders. As a matter of policy,
the officers, directors/trustees and employees of the Fund, the manager and the
Proxy Group will not be influenced by outside sources whose interests conflict
with the interests of the Fund and its shareholders. Efforts are made to resolve
all conflicts in the interests of the manager's clients. Material conflicts of
interest are identified by the Proxy Group based upon analyses of client, broker
and vendor lists, information periodically gathered from directors and officers,
and information derived from other sources, including public filings. In
situations where a material conflict of interest is identified, the Proxy Group
will refer the matter, along with the recommended course of action by the
manager to an interdepartmental Proxy Review Committee (which may include
portfolio managers and/or research analysts employed by the manager), for
evaluation and voting instructions. The Proxy Review Committee may defer to the
voting recommendation of RiskMetrics, Glass Lewis or those of another
independent third party provider of proxy services; or send the proxy directly
to the Fund with a recommendation regarding the vote for approval. Where the
Proxy Review Committee refers a matter to the Fund, it may rely upon the
instructions of a representative of the Fund, such as the board of trustees or a
committee of the board.
Where a material conflict of interest has been identified, but the items on
which the manager's vote recommendations differ from Glass Lewis, RiskMetrics,
or another independent third party provider of proxy services relate
specifically to (1) shareholder proposals regarding social or environmental
issues or political contributions, (2) "Other Business" without describing the
matters that might be considered, or (3) items the manager wishes to vote in
opposition to the recommendations of an issuer's management, the Proxy Group may
defer to the vote recommendations of the manager rather than sending the proxy
directly to the Fund for approval.
To avoid certain potential conflicts of interest, the manager will employ echo
voting, if possible, in the following instances: (1) when the Fund invests in an
underlying fund in reliance on Section 12(d)(1) of the 1940 Act, or pursuant to
an SEC exemptive order; (2) when the Fund invests uninvested cash in affiliated
money market funds pursuant to an SEC exemptive order ("cash sweep
arrangement"); or (3) when required pursuant to the Fund's governing documents
or applicable law. Echo voting means that the investment manager will vote the
shares in the same proportion as the vote of all of the other holders of the
Fund's shares.
The recommendation of management on any issue is a factor which the manager
considers in determining how proxies should be voted, but is not determinative
of the manager's ultimate decision. As a matter of practice, the votes with
respect to most issues are cast in accordance with the position of the company's
management. Each issue, however, is considered on its own merits, and the
manager will not support the position of the company's management in any
situation where it deems that the ratification of management's position would
adversely affect the investment merits of owning that company's shares.
MANAGER'S PROXY VOTING POLICIES AND PRINCIPLES The manager has adopted general
proxy voting guidelines, which are summarized below. These guidelines are not an
exhaustive list of all the issues that may arise and the manager cannot
anticipate all future situations. In all cases, each proxy will be considered
based on the relevant facts and circumstances.
BOARD OF DIRECTORS. The manager supports an independent board of directors, and
prefers that key committees such as audit, nominating, and compensation
committees be comprised of independent directors. The manager will generally
vote against management efforts to classify a board and will generally support
proposals to declassify the board of directors. The manager may withhold votes
from directors who have attended less than 75% of meetings without a valid
reason. While generally in favor of separating Chairman and CEO positions, the
manager will review this issue as well as proposals to restore or provide for
cumulative voting on a case-by-case basis, taking into consideration factors
such as the company's corporate governance guidelines or provisions and
performance.
RATIFICATION OF AUDITORS OF PORTFOLIO COMPANIES. In light of several high
profile accounting scandals, the manager will closely scrutinize the role and
performance of auditors. On a case-by-case basis, the manager will examine
proposals relating to non-audit relationships and non-audit fees. The manager
will also consider, on a case-by-case basis, proposals to rotate auditors, and
will vote against the ratification of auditors when there is clear and
compelling evidence of accounting irregularities or negligence.
MANAGEMENT AND DIRECTOR COMPENSATION. A company's equity-based compensation plan
should be in alignment with its shareholders' long-term interests. The manager
believes that executive compensation should be directly linked to the
performance of the company. The manager evaluates plans on a case-by-case basis
by considering several factors to determine whether the plan is fair and
reasonable, including the RiskMetrics quantitative model utilized to assess such
plans and/or the Glass Lewis evaluation of the plans. The manager will generally
oppose plans that have the potential to be excessively dilutive, and will almost
always oppose plans that are structured to allow the repricing of underwater
options, or plans that have an automatic share replenishment "evergreen"
feature. The manager will generally support employee stock option plans in which
the purchase price is at least 85% of fair market value, and when potential
dilution is 10% or less.
Severance compensation arrangements will be reviewed on a case-by-case basis,
although the manager will generally oppose "golden parachutes" that are
considered to be excessive. The manager will normally support proposals that
require a percentage of directors' compensation to be in the form of common
stock, as it aligns their interests with those of shareholders. The manager will
review on a case-by-case basis any shareholder proposals to adopt policies on
expensing stock option plans.
ANTI-TAKEOVER MECHANISMS AND RELATED ISSUES. The manager generally opposes
anti-takeover measures since they tend to reduce shareholder rights. On
occasion, the manager may vote with management when the research analyst has
concluded that the proposal is not onerous and would not harm the Fund or its
shareholders' interests. The manager generally supports proposals that require
shareholder rights' plans ("poison pills") to be subject to a shareholder vote
and will closely evaluate such plans on a case-by-case basis to determine
whether or not they warrant support. The manager will generally vote against any
proposal to issue stock that has unequal or subordinate voting rights. The
manager generally opposes any supermajority voting requirements as well as the
payment of "greenmail." The manager generally supports "fair price" provisions
and confidential voting.
CHANGES TO CAPITAL STRUCTURE. The manager will review, on a case-by-case basis,
proposals by companies to increase authorized shares and the purpose for the
increase and proposals seeking preemptive rights. The manager will generally not
vote in favor of dual-class capital structures to increase the number of
authorized shares where that class of stock would have superior voting rights.
The manager will generally vote in favor of the issuance of preferred stock in
cases where the company specifies the voting, dividend, conversion and other
rights of such stock and the terms of the preferred stock issuance are deemed
reasonable.
MERGERS AND CORPORATE RESTRUCTURING. Mergers and acquisitions will be subject to
careful review by the research analyst to determine whether each will be
beneficial to shareholders. The manager will analyze various economic and
strategic factors in making the final decision on a merger or acquisition.
Corporate restructuring and reincorporation proposals are also subject to a
thorough examination on a case-by-case basis.
SOCIAL AND CORPORATE POLICY ISSUES. The manager will generally give management
discretion with regard to social, environmental and ethical issues, although the
manager may vote in favor of those that are believed to have significant
economic benefits or implications for the Fund and its shareholders.
GLOBAL CORPORATE GOVERNANCE. Many of the tenets discussed above are applied to
proxy voting decisions for international companies. However, the manager must be
more flexible in these instances and must be mindful of the varied market
practices of each region.
The manager will attempt to process every proxy it receives for all domestic and
foreign issuers. However, there may be situations in which the manager cannot
process proxies, for example, where a meeting notice was received too late, or
sell orders preclude the ability to vote. If a security is on loan, the manager
may determine that it is not in the best interests of the Fund to recall the
security for voting purposes. Also, the manager may abstain from voting under
certain circumstances or vote against items such as "Other Business" when the
manager is not given adequate information from the company.
Shareholders may view the complete Policies online at franklintempleton.com.
Alternatively, shareholders may request copies of the Policies free of charge by
calling the Proxy Group collect at 1-954/527-7678 or by sending a written
request to: Franklin Templeton Companies, LLC, 500 East Broward Boulevard, Suite
1500, Fort Lauderdale, FL 33394, Attention: Proxy Group. Copies of the Fund's
proxy voting records are available online at franklintempleton.com and posted on
the SEC website at WWW.SEC.GOV. The proxy voting records are updated each year
by August 31 to reflect the most recent 12-month period ended June 30.
ITEM 8. PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANY AND
AFFILIATED PURCHASERS.
(a)(1) As of October 31, 2008, the portfolio managers of the Fund are as
follows:
CHRISTOPHER J. MOLUMPHY CFA, DIRECTOR AND Executive Vice President OF ADVISERS
Mr. Molumphy has been a portfolio manager of the Fund since 1991. He has primary
responsibility for the investments of the Fund. Mr. Molumphy has final authority
over all aspects of the Fund's investment portfolio, including but not limited
to, purchases and sales of individual securities, portfolio risk assessment, and
the management of daily cash balances in accordance with anticipated management
requirements. The degree to which he may perform these functions, and the nature
of these functions, may change from time to time. He joined Franklin Templeton
Investments in 1988.
GLENN I. VOYLES CFA, Vice President OF ADVISERS
Mr. Voyles has been a manager of the Fund since 1999, providing research and
advice on the purchases and sales of individual securities, and portfolio risk
assessment for the global income component of the Fund. He joined Franklin
Templeton Investments in 1993.
CFA and Chartered Financial Analyst are trademarks owned by CFA Institute.
(a)(2) This section reflects information about the portfolio managers as of the
fiscal year ended August 31, 2008.
The following table shows the number of other accounts managed by each portfolio
manager and the total assets in the accounts managed within each category:
-------------------------------------------------------------------------------
NAME NUMBER ASSETS NUMBER ASSETS NUMBER ASSETS
OF OTHER OF OTHER OF OTHER OF OTHER OF OF
REGISTERED REGISTERED POOLED POOLED OTHER OTHER
INVESTMENT INVESTMENT INVESTMENT INVESTMENT ACCOUNTS ACCOUNTS
COMPANIES COMPANIES VEHICLES VEHICLES MANAGED/1 MANAGED
MANAGED MANAGED MANAGED/1 MANAGED (X $1
(X $1 (X $1 MILLION)/1
MILLION) MILLION)/1
-------------------------------------------------------------------------------
Christopher J.
Molumphy 9 10,141.9 5 1,333.9 2 363.6
-------------------------------------------------------------------------------
Glenn I. Voyles 0 N/A 0 N/A 0 N/A
-------------------------------------------------------------------------------
1. The various pooled investment vehicles and accounts listed are managed by a
team of investment professionals. Accordingly, the individual managers listed
would not be solely responsible for managing such listed amounts.
Portfolio managers that provide investment services to the Fund may also provide
services to a variety of other investment products, including other funds,
institutional accounts and private accounts. The advisory fees for some of such
other products and accounts may be different than that charged to the Fund and
may include performance based compensation. This may result in fees that are
higher (or lower) than the advisory fees paid by the Fund. As a matter of
policy, each fund or account is managed solely for the benefit of the beneficial
owners thereof. As discussed below, the separation of the trading execution
function from the portfolio management function and the application of
objectively based trade allocation procedures help to mitigate potential
conflicts of interest that may arise as a result of the portfolio managers
managing accounts with different advisory fees.
CONFLICTS. The management of multiple funds, including the Fund, and accounts
may also give rise to potential conflicts of interest if the funds and other
accounts have different objectives, benchmarks, time horizons, and fees as the
portfolio manager must allocate his or her time and investment ideas across
multiple funds and accounts. The manager seeks to manage such competing
interests for the time and attention of portfolio managers by having portfolio
managers focus on a particular investment discipline. Most other accounts
managed by a portfolio manager are managed using the same investment strategies
that are used in connection with the management of the Fund. Accordingly,
portfolio holdings, position sizes, and industry and sector exposures tend to be
similar across similar portfolios, which may minimize the potential for
conflicts of interest. As noted above, the separate management of the trade
execution and valuation functions from the portfolio management process also
helps to reduce potential conflicts of interest. However, securities selected
for funds or accounts other than the Fund may outperform the securities selected
for the Fund. Moreover, if a portfolio manager identifies a limited investment
opportunity that may be suitable for more than one fund or other account, the
Fund may not be able to take full advantage of that opportunity due to an
allocation of that opportunity across all eligible funds and other accounts. The
manager seeks to manage such potential conflicts by using procedures intended to
provide a fair allocation of buy and sell opportunities among funds and other
accounts.
The structure of a portfolio manager's compensation may give rise to potential
conflicts of interest. A portfolio manager's base pay and bonus tend to increase
with additional and more complex responsibilities that include increased assets
under management. As such, there may be an indirect relationship between a
portfolio manager's marketing or sales efforts and his or her bonus.
Finally, the management of personal accounts by a portfolio manager may give
rise to potential conflicts of interest. While the funds and the manager have
adopted a code of ethics which they believe contains provisions reasonably
necessary to prevent a wide range of prohibited activities by portfolio managers
and others with respect to their personal trading activities, there can be no
assurance that the code of ethics addresses all individual conduct that could
result in conflicts of interest.
The manager and the Fund have adopted certain compliance procedures that are
designed to address these, and other, types of conflicts. However, there is no
guarantee that such procedures will detect each and every situation where a
conflict arises.
COMPENSATION. The manager seeks to maintain a compensation program that is
competitively positioned to attract, retain and motivate top-quality investment
professionals. Portfolio managers receive a base salary, a cash incentive bonus
opportunity, an equity compensation opportunity, and a benefits package.
Portfolio manager compensation is reviewed annually and the level of
compensation is based on individual performance, the salary range for a
portfolio manager's level of responsibility and Franklin Templeton guidelines.
Portfolio managers are provided no financial incentive to favor one fund or
account over another. Each portfolio manager's compensation consists of the
following three elements:
BASE SALARY Each portfolio manager is paid a base salary.
ANNUAL BONUS Annual bonuses are structured to align the interests of
the portfolio manager with those of the Fund's shareholders. Each
portfolio manager is eligible to receive an annual bonus. Bonuses
generally are split between cash (50% to 65%) and restricted shares
of Resources stock (17.5% to 25%) and mutual fund shares (17.5%
to 25%). The deferred equity-based compensation is intended to build a
vested interest of the portfolio manager in the financial performance
of both Resources and mutual funds advised by the manager. The
bonus plan is intended to provide a competitive level of annual bonus
compensation that is tied to the portfolio manager achieving
consistently strong investment performance, which aligns the financial
incentives of the portfolio manager and Fund shareholders. The Chief
Investment Officer of the manager and/or other officers of the manager,
with responsibility for the Fund, have discretion in the granting of
annual bonuses to portfolio managers in accordance with Franklin
Templeton guidelines. The following factors are generally used in
determining bonuses under the plan:
o INVESTMENT PERFORMANCE. Primary consideration is given to the
historic investment performance over the 1, 3 and 5 preceding
years of all accounts managed by the portfolio manager. The
pre-tax performance of each fund managed is measured relative
to a relevant peer group and/or applicable benchmark as
appropriate.
o NON-INVESTMENT PERFORMANCE. The more qualitative contributions
of a portfolio manager to the manager's business and the
investment management team, including professional knowledge,
productivity, responsiveness to client needs and
communication, are evaluated in determining the amount of any
bonus award.
o RESPONSIBILITIES. The characteristics and complexity of funds
managed by the portfolio manager are factored in the manager's
appraisal.
ADDITIONAL LONG-TERM EQUITY-BASED COMPENSATION Portfolio managers
may also be awarded restricted shares or units of Resources stock
or restricted shares or units of one or more mutual funds, and options
to purchase common shares of Resources stock. Awards of such
deferred equity-based compensation typically vest over time, so as to
create incentives to retain key talent.
Portfolio managers also participate in benefit plans and programs available
generally to all employees of the manager.
OWNERSHIP OF FUND SHARES. The manager has a policy of encouraging portfolio
managers to invest in the funds they manage. Exceptions arise when, for example,
a fund is closed to new investors or when tax considerations or jurisdictional
constraints cause such an investment to be inappropriate for the portfolio
manager. The following is the dollar range of Fund shares beneficially owned by
each portfolio manager (such amounts may change from time to time):
Dollar Range of Fund
Shares Beneficially
Portfolio Manager Owned
----------------------------------------------------------------------
Christopher J. Molumphy None
----------------------------------------------------------------------
Glenn I. Voyles None
----------------------------------------------------------------------
ITEM 9. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT
COMPANY AND AFFILIATED PURCHASERS. N/A
ITEM 10. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There have been no changes to the procedures by which shareholders may recommend
nominees to the Registrant's Board of Trustees that would require disclosure
herein.
ITEM 11. CONTROLS AND PROCEDURES.
(A) EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES. The Registrant maintains
disclosure controls and procedures that are designed to ensure that information
required to be disclosed in the Registrant's filings under the Securities
Exchange Act of 1934 and the Investment Company Act of 1940 is recorded,
processed, summarized and reported within the periods specified in the rules and
forms of the Securities and Exchange Commission. Such information is accumulated
and communicated to the Registrant's management, including its principal
executive officer and principal financial officer, as appropriate, to allow
timely decisions regarding required disclosure. The Registrant's management,
including the principal executive officer and the principal financial officer,
recognizes that any set of controls and procedures, no matter how well designed
and operated, can provide only reasonable assurance of achieving the desired
control objectives.
Within 90 days prior to the filing date of this Shareholder Report on Form
N-CSR, the Registrant had carried out an evaluation, under the supervision and
with the participation of the Registrant's management, including the
Registrant's principal executive officer and the Registrant's principal
financial officer, of the effectiveness of the design and operation of the
Registrant's disclosure controls and procedures. Based on such evaluation, the
Registrant's principal executive officer and principal financial officer
concluded that the Registrant's disclosure controls and procedures are
effective.
(B) CHANGES IN INTERNAL CONTROLS. There have been no significant changes in the
Registrant's internal controls or in other factors that could significantly
affect the internal controls subsequent to the date of their evaluation in
connection with the preparation of this Shareholder Report on Form N-CSR.
ITEM 12. EXHIBITS.
(a)(1) Code of Ethics
(a) (2) Certifications pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
of Galen G. Vetter, Chief Executive Officer - Finance and Administration, and
Laura F. Fergerson, Chief Financial Officer and Chief Accounting Officer
(b) Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 of
Galen G. Vetter, Chief Executive Officer - Finance and Administration, and Laura
F. Fergerson, Chief Financial Officer and Chief Accounting Officer
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
FRANKLIN UNIVERSAL TRUST
By /s/GALEN G. VETTER
-----------------------------------
Galen G. Vetter
Chief Executive Officer - Finance and
Administration
Date: October 28, 2008
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
By /s/GALEN G. VETTER
-----------------------------------
Galen G. Vetter
Chief Executive Officer - Finance and
Administration
Date: October 28, 2008
By /s/LAURA F. FERGERSON
------------------------------------
Laura F. Fergerson
Chief Financial Officer and
Chief Accounting Officer
Date: October 28, 2008