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: 8/31/09
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ITEM 1. REPORTS TO STOCKHOLDERS.
AUGUST 31, 2009
ANNUAL REPORT
(GRAPHIC)
FIXED INCOME
FRANKLIN UNIVERSAL TRUST
(FRANKLIN TEMPLETON INVESTMENTS LOGO)
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
ANNUAL REPORT
Franklin Universal Trust .................................................. 1
Performance Summary ....................................................... 6
Annual Shareholders' Meeting .............................................. 7
Important Notice to Shareholders .......................................... 8
Dividend Reinvestment and Cash Purchase Plan .............................. 9
Financial Highlights and Statement of Investments ......................... 12
Financial Statements ...................................................... 19
Notes to Financial Statements ............................................. 23
Report of Independent Registered Public Accounting Firm ................... 32
Tax Designation ........................................................... 33
Board Members and Officers ................................................ 34
Shareholder Information ................................................... 39
Annual Report
Franklin Universal Trust
YOUR FUND'S GOAL 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*
8/31/09
Corporate Bonds 71.9%
Utilities Common Stocks 25.3%
Natural Resources Common Stocks 0.9%
Senior Floating Rate Interests 0.5%
Miscellaneous Preferred Stocks 0.1%
Miscellaneous Common Stocks 0.0%**
Cash & Other Net Assets 1.3%
* 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, 2009.
PERFORMANCE OVERVIEW
For the 12 months under review, the Fund's cumulative total returns were -7.75%
based on net asset value and -7.85% based on market price, as shown in the
Performance Summary on page 6. For comparison, the Credit Suisse (CS) High Yield
Index had a +3.75% total return, and utilities stocks, as measured by the
Standard & Poor's (S&P) 500 Utilities Index, had a -18.79% total return for the
same period.(1)
(1.) Source: (C) 2009 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. 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, and an index is not 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 13.
Annual Report | 1
ECONOMIC AND MARKET OVERVIEW
During the 12-month period ended August 31, 2009, economic conditions weakened
before showing signs of stabilization. Early in the period, several blue chip
banks and financial institutions failed or sought government assistance, credit
markets seized up and housing prices plummeted. In February 2009, The Conference
Board's Consumer Confidence Index fell to an all-time low since it began in 1967
as the U.S. economy faltered and as stock markets declined. Despite far-reaching
government interventions, the nation's economic troubles worsened as
manufacturing activity weakened at its fastest pace in nearly 30 years.(2)
Jobless claims mounted and the unemployment rate rose to 9.7% by period-end.(3)
The financial system, however, avoided collapse and later in the period,
government stress tests of banks were generally positive. Consumer confidence
rebounded in the second quarter of 2009 due to improved expectations. Economic
activity as measured by gross domestic product (GDP) fell, but the rate of
contraction slowed near period-end. In 2008's third quarter, GDP was an
annualized -2.7%, followed by annualized rates of -5.4%, -6.4% and an estimated
-1.0% in each of the subsequent three quarters.
Oil prices were volatile, falling from $115 per barrel at the beginning of the
period to a $31 low in December. As economic conditions improved, oil prices
rebounded to end the period at $69. Many other commodity prices followed similar
trends; therefore, as prices fell in late 2008, inflation remained muted, and
August's inflation rate was an annualized -1.5%.(3) Core inflation, which
excludes food and energy costs, rose at a 1.4% annualized rate, which was near
the Federal Reserve Board's (Fed's) informal target range of 1.5% to 2.0%.(3)
The core personal consumption expenditures price index reported a 12-month
increase of 1.3%.(4)
A slowing economy and decelerating inflation prompted policymakers to lower
interest rates and enact stimulus plans. During the period under review, the Fed
lowered the federal funds target rate from 2.00% to a range of 0% to 0.25%. The
government implemented the American Recovery and Reinvestment Act, which
included tax breaks, money for ailing state governments, aid to the poor and
unemployed, and spending on infrastructure, renewable energy, health care and
education. The Fed and U.S. Treasury Department also continued programs designed
to shore up beleaguered banks' capital, enable freer lending to businesses and
consumers, and help struggling home buyers avoid foreclosure.
(2.) Source: The Institute for Supply Management.
(3.) Source: Bureau of Labor Statistics.
(4.) Source: Bureau of Economic Analysis.
2 | Annual Report
Most Treasury prices rose during the period, and fixed income spreads were
generally wide relative to Treasury yields due to heightened market turbulence
and risk aversion. Spreads for high yield bonds hit record levels. The spread
between two-year and 10-year Treasury yields rose to 243 basis points (100 basis
points equal one percentage point) at the end of August from 147 basis points at
the beginning of the reporting period. The two-year Treasury bill yield fell
from 2.36% to 0.97% over the 12-month period, while the 10-year Treasury note
yield fell from 3.83% to 3.40%.
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.
MANAGER'S DISCUSSION
During the fiscal year, performance of the Fund's primary asset classes -- high
yield corporate bonds and utility stocks -- reflected one of the most volatile
economic environments in recent memory. The fiscal year began during the height
of the financial crisis, as the government seized control of Fannie Mae, Freddie
Mac and American International Group (AIG) and Wall Street giant Lehman Brothers
declared bankruptcy in September 2008. In the ensuing financial panic, most
asset classes including those that made up the majority of the Fund's assets,
suffered severe declines. From the beginning of the fiscal year until their
trough in mid-December, high yield bonds declined about 30%, as measured by the
CS High Yield Index.(1) Utility stocks also plummeted in September and October,
and then were range-bound until falling sharply along with the broader equity
indexes at the beginning of 2009. From the start of the fiscal year until their
trough in March, utility stocks fell almost 30%, as measured by the S&P 500
Utilities Index.(1) Even as economic news worsened, however, forward-looking
financial markets began to anticipate a recovery. Buoyed by the economic
stimulus plan and better-than-expected corporate financial results, high yield
bonds and utility stocks staged sharp rallies from their lows. The high yield
bond rally was aided by inflows from investors seeking to take advantage of
record yield spreads to Treasuries of more than 18%.(1) High yield bonds
returned 48% since their December lows, while utility stocks were up 32% since
early March.(1) Over the course of the fiscal year, high yield bonds returned
+3.75%, which masked their tremendous volatility.(1) Utility
TOP 10 HOLDINGS
Based on Total Investments*
8/31/09 vs. 8/31/08
ISSUER 8/31/09
------ -------
FPL Group Inc. 2.2%
Entergy Corp. 2.1%
Ford Motor Credit Co. LLC 2.0%
The Southern Co. 2.0%
Exelon Corp. 1.9%
CCH II LLC 1.8%
Dominion Resources Inc. 1.7%
HCA Inc. 1.7%
CenterPoint Energy Inc. 1.5%
Ameren Corp. 1.4%
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 Co. LLC 1.3%
* 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.
Annual Report | 3
stocks, meanwhile, declined 18.79%, which was roughly in line with the
performance of the S&P 500 Index.(1, 5)
HIGH YIELD CORPORATE BONDS
Performance of the Fund's high yield bond component relative to the CS High
Yield Index was impeded by an overweighted position in chemicals companies and
an underweighted position in building companies.(6) As a cyclical commodities
industry, chemicals suffered from a severe decline in demand as a result of the
global recession. The January 2009 default of LyondellBasell (not a Fund
holding), the world's third-largest chemical company, also rattled investors and
caused many to avoid the industry during the reporting period. The fundamental
outlook for the housing market remained bleak largely due to excess housing
supply and tight credit conditions that made home purchases difficult. However,
the building industry performed well as many homebuilders were able to maintain
adequate liquidity by selling land holdings and retaining operating cash flow
rather than reinvesting it in the business.
The Fund's relative performance benefited from its overweighted positions in
energy and wireless telecommunication services companies.(7) In spite of sharp
declines in oil and natural gas prices at the beginning of the fiscal year,
energy companies proved to be resilient. Investors were attracted to the
generally higher credit quality of energy issuers, and were comfortable they had
the liquidity to manage through the recession and await an eventual recovery in
demand. Many investors seemed to consider wireless telecommunication services
companies more defensive as cell phones become more utility-like and essential
to modern communication. Thus, wireless companies performed well in this fiscal
year's volatile environment.
UTILITY STOCKS
During the Fund's fiscal year, utilities holdings performed in line with the
overall equity market. Whereas utilities' implied defensiveness was a benefit
during the early months of the recession, a growing market expectation of an
improving economy produced fairly significant underperformance during the stock
market recovery beginning in March. Based on our research, we continue to hold a
(5.) Source: (C) 2009 Morningstar. The S&P 500 Index consists of 500 stocks
chosen for market size, liquidity and industry group representation. Each
stock's weight in the index is proportionate to its market value. The S&P
500 Index is one of the most widely used benchmarks of U.S. equity
performance.
(6.) The Fund's chemicals holdings are in the materials industry, and building
holdings are in the consumer durables and apparel industry, in the SOI.
(7.) The Fund's wireless telecommunication services holdings are in the
telecommunication services industry in the SOI.
4 | Annual Report
relatively favorable fundamental outlook of the utilities industry. Utilities
generally enjoy strong balance sheets and continue to invest capital into core,
infrastructure-based projects. Federal and state policies such as increasing
energy efficiency and limiting greenhouse gas emissions could benefit electric
utilities over the next several years as these companies work with policymakers
to implement a better energy infrastructure. Overall, the Fund's utility
holdings tended to be regulated, dividend-paying utilities.
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, 2009, 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 | 5
Performance Summary as of 8/31/09
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 8/31/09 8/31/08
---------- ------ ------- -------
Net Asset Value (NAV) -$1.11 $5.85 $6.96
Market Price (NYSE) -$1.07 $5.08 $6.15
DISTRIBUTIONS (9/1/08-8/31/09)
Dividend Income $0.4560
PERFORMANCE
1-YEAR 5-YEAR 10-YEAR
------ ------- -------
Cumulative Total Return(1)
Based on change in NAV(2) -7.75% +26.32% +49.53%
Based on change in market price(3) -7.85% +31.44% +40.04%
Average Annual Total Return(1)
Based on change in NAV(2) -7.75% +4.78% +4.11%
Based on change in market price(3) -7.85% +5.62% +3.42%
Distribution Rate(4) 8.98%
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 $5.08 on 8/31/09.
6 | Annual Report
Annual Shareholders' Meeting
APRIL 3, 2009
An annual shareholders' meeting of Franklin Universal Trust (Fund) was held on
April 3, 2009. At the meeting, the holders of 22,718,360 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
-------- ---------- ----- --------- -----
Harris J. Ashton ............. 21,014,367 92.50% 1,703,993 7.50%
Robert F. Carlson ............ 20,992,198 92.40% 1,726,162 7.60%
Sam Ginn ..................... 21,017,463 92.51% 1,700,897 7.49%
Edith E. Holiday ............. 21,018,425 92.52% 1,699,935 7.48%
Edward B. Jamieson ........... 21,056,730 92.69% 1,661,630 7.31%
Charles B. Johnson ........... 21,028,443 92.56% 1,689,917 7.44%
Rupert H. Johnson, Jr. ....... 21,039,761 92.61% 1,678,599 7.39%
Frank W.T. LaHaye ............ 21,035,362 92.59% 1,682,998 7.41%
Frank A. Olson ............... 21,001,939 92.44% 1,716,421 7.56%
Larry D. Thompson ............ 21,033,329 92.58% 1,685,031 7.42%
John B. Wilson ............... 21,041,136 92.62% 1,677,224 7.38%
2. Regarding the Shareholder Proposal to liquidate the Fund or convert it into
an open-end fund.
SHARES SHARES
SHARES FOR % OF VOTED AGAINST % OF VOTED ABSTAINING % OF VOTED
---------- ---------- --------- ---------- ---------- ----------
4,248,443 36.26% 7,467,691 63.74% 304,564 2.53%
Annual Report | 7
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.
8 | 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 Servicing
(Plan Agent), P.O. Box 43027, Providence, RI 02940-3027, 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
Servicing, P.O. Box 6006, Carol Stream, IL 60197-6006, Attn: Franklin Universal
Trust.
Annual Report | 9
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 shares
purchased for you by the Plan Agent, and, if you vote by proxy, your proxy will
include all such shares.
10 | Annual Report
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 | 11
Franklin Universal Trust
FINANCIAL HIGHLIGHTS
YEAR ENDED AUGUST 31,
--------------------------------------------------------
2009 2008 2007 2006 2005
-------- -------- -------- -------- --------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year .............. $ 6.96 $ 7.41 $ 7.09 $ 7.12 $ 6.48
-------- -------- -------- -------- --------
Income from investment operations:
Net investment income(a) ..................... 0.35 0.49 0.47 0.45 0.45
Net realized and unrealized gains (losses) ... (1.00) (0.49) 0.29 (0.05) 0.59
-------- -------- -------- -------- --------
Total from investment operations ................ (0.65) -- 0.76 0.40 1.04
-------- -------- -------- -------- --------
Less distributions from net investment income ... (0.46) (0.46) (0.46) (0.44) (0.40)
-------- -------- -------- -------- --------
Repurchase of shares ............................ -- 0.01 0.02 0.01 --
-------- -------- -------- -------- --------
Net asset value, end of year .................... $ 5.85 $ 6.96 $ 7.41 $ 7.09 $ 7.12
======== ======== ======== ======== ========
Market value, end of year(b) .................... $ 5.08 $ 6.15 $ 6.68 $ 6.52 $ 6.22
======== ======== ======== ======== ========
Total return (based on market value per share) .. (7.85)% (1.35)% 9.38% 12.48% 17.49%
RATIOS TO AVERAGE NET ASSETS
Expenses(c) ..................................... 4.89%(d) 2.50% 2.24% 2.27% 2.32%
Net investment income ........................... 6.98% 6.51% 6.15% 6.47% 6.49%
SUPPLEMENTAL DATA
Net assets, end of year (000's) ................. $147,066 $174,843 $190,968 $194,724 $198,861
Portfolio turnover rate ......................... 24.78% 18.52% 29.30% 32.95% 34.60%
Total debt outstanding at end of year (000's) ... $ 42,000 $ 65,000 $ 55,000 $ 55,000 $ 55,000
Asset coverage per $1,000 of debt ............... $ 4,502 $ 3,690 $ 4,472 $ 4,540 $ 4,616
Average amount of senior fixed rate Notes per
share during the year ........................ $ 1.80 $ 2.18 $ 2.06 $ 1.97 $ 1.97
(a) Based on average daily shares outstanding.
(b) Based on the last sale on the NYSE Euronext (formerly the New York Stock
Exchange).
(c) Benefit of expense reduction rounds to less than 0.01%.
(d) Total expense ratio excluding Note prepayment fees and issuance costs is
3.44%. See Note 3.
The accompanying notes are an integral part of these financial statements.
12 | Annual Report
Franklin Universal Trust
STATEMENT OF INVESTMENTS, AUGUST 31, 2009
COUNTRY SHARES VALUE
-------------- ---------- ------------
COMMON STOCKS 33.6%
AUTOMOBILES & COMPONENTS 0.0%(a)
(b, c) Harvard Industries Inc. ................................................ United States 109,618 $ 1,096
------------
COMMERCIAL & PROFESSIONAL SERVICES 0.0%
(b, d) VS Holdings Inc. ....................................................... United States 181,875 --
------------
ENERGY 1.2%
Spectra Energy Corp. ................................................... United States 92,350 1,738,027
------------
UTILITIES 32.4%
Alliant Energy Corp. ................................................... United States 85,000 2,238,900
Ameren Corp. ........................................................... United States 60,000 1,618,200
American Electric Power Co. Inc. ....................................... United States 75,000 2,357,250
Atmos Energy Corp. ..................................................... United States 45,000 1,225,800
CenterPoint Energy Inc. ................................................ United States 226,600 2,809,840
Constellation Energy Group ............................................. United States 20,000 633,000
Dominion Resources Inc. ................................................ United States 100,000 3,308,000
Duke Energy Corp. ...................................................... United States 160,000 2,478,400
Edison International ................................................... United States 63,000 2,104,830
Entergy Corp. .......................................................... United States 50,000 3,950,000
Exelon Corp. ........................................................... United States 70,000 3,501,400
FirstEnergy Corp. ...................................................... United States 50,000 2,256,500
FPL Group Inc. ......................................................... United States 75,000 4,213,501
Great Plains Energy Inc. ............................................... United States 32,600 571,152
Pinnacle West Capital Corp. ............................................ United States 70,000 2,303,700
Progress Energy Inc. ................................................... United States 45,000 1,778,850
Public Service Enterprise Group Inc. ................................... United States 50,000 1,583,500
Sempra Energy .......................................................... United States 48,500 2,433,245
The Southern Co. ....................................................... United States 120,000 3,744,000
Westar Energy Inc. ..................................................... United States 27,300 560,196
Wisconsin Energy Corp. ................................................. United States 20,000 909,400
Xcel Energy Inc. ....................................................... United States 60,000 1,185,000
------------
47,764,664
------------
TOTAL COMMON STOCKS (COST $42,693,906) ................................. 49,503,787
------------
PREFERRED STOCKS (COST $214,420) 0.2%
DIVERSIFIED FINANCIALS 0.2%
(e) Preferred Blocker Inc., 9.00%, pfd., 144A .............................. United States 604 281,030
------------
PRINCIPAL
AMOUNT(f)
----------
(g, h) SENIOR FLOATING RATE INTERESTS (COST $1,000,000) 0.6%
MATERIALS 0.6%
Novelis Corp., U.S Term Loan, 2.27% - 2.60%, 7/07/14 ................... United States $1,000,000 914,000
------------
CORPORATE BONDS 92.4%
AUTOMOBILES & COMPONENTS 3.8%
Ford Motor Credit Co. LLC,
7.80%, 6/01/12 ...................................................... United States 2,000,000 1,851,638
senior note, 9.875%, 8/10/11 ........................................ United States 2,000,000 1,990,000
(e) TRW Automotive Inc., senior note, 144A, 7.25%, 3/15/17 ................. United States 2,000,000 1,690,000
------------
5,531,638
------------
Annual Report | 13
Franklin Universal Trust
STATEMENT OF INVESTMENTS, AUGUST 31, 2009 (CONTINUED)
PRINCIPAL
COUNTRY AMOUNT(f) VALUE
-------------- ---------- ------------
CORPORATE BONDS (CONTINUED)
CAPITAL GOODS 5.6%
(e) Allison Transmission Inc., senior note, 144A, 11.00%, 11/01/15 ......... United States $2,000,000 $ 1,810,000
Case New Holland Inc., senior note,
7.125%, 3/01/14 ..................................................... United States 1,000,000 960,000
(e) 144A, 7.75%, 9/01/13 ................................................ United States 500,000 495,000
L-3 Communications Corp., senior sub. note, 6.375%, 10/15/15 ........... United States 1,200,000 1,137,000
RBS Global & Rexnord Corp., senior note, 9.50%, 8/01/14 ................ United States 2,000,000 1,850,000
RSC Equipment Rental Inc., senior note, 9.50%, 12/01/14 ................ United States 2,200,000 1,980,000
------------
8,232,000
------------
COMMERCIAL & PROFESSIONAL SERVICES 2.5%
ARAMARK Corp., senior note, 8.50%, 2/01/15 ............................. United States 1,000,000 975,000
(e) Casella Waste Systems Inc., senior secured note, 144A, 11.00%,
7/15/14 ............................................................. United States 500,000 522,500
(e) Clean Harbors Inc., senior secured note, 144A, 7.625%, 8/15/16 ......... United States 300,000 302,250
Iron Mountain Inc., senior sub. note, 8.75%, 7/15/18 ................... United States 900,000 921,375
JohnsonDiversey Inc., senior sub. note, B, 9.625%, 5/15/12 ............. United States 1,000,000 1,020,000
------------
3,741,125
------------
CONSUMER DURABLES & APPAREL 3.3%
Jarden Corp., senior sub. note, 7.50%, 5/01/17 ......................... United States 2,000,000 1,935,000
Jostens IH Corp., senior sub. note, 7.625%, 10/01/12 ................... United States 400,000 404,000
KB Home, senior note,
6.25%, 6/15/15 ...................................................... United States 700,000 640,500
7.25%, 6/15/18 ...................................................... United States 800,000 732,000
Visant Holding Corp., senior note, 8.75%, 12/01/13 ..................... United States 1,100,000 1,116,500
------------
4,828,000
------------
CONSUMER SERVICES 4.8%
(d, i) Atherton Franchise Capital, 13.073%, 12/01/08 .......................... United States 721,603 7,216
(e, i) Fontainebleau Las Vegas, 144A, 10.25%, 6/15/15 ......................... United States 1,600,000 64,000
(e) Harrah's Operating Escrow, senior secured note, 144A, 11.25%,
6/01/17 ............................................................. United States 1,500,000 1,533,750
Host Hotels & Resorts LP, senior note, M, 7.00%, 8/15/12 ............... United States 1,000,000 990,000
MGM MIRAGE, senior note,
6.875%, 4/01/16 ..................................................... United States 1,500,000 1,080,000
7.50%, 6/01/16 ...................................................... United States 1,200,000 864,000
Pinnacle Entertainment Inc.,
(e) senior note, 144A, 8.625%, 8/01/17 .................................. United States 500,000 495,000
senior sub. note, 8.25%, 3/15/12 .................................... United States 323,000 324,615
Royal Caribbean Cruises Ltd., senior note,
6.875%, 12/01/13 .................................................... United States 800,000 696,000
11.875%, 7/15/15 .................................................... United States 500,000 525,000
(i) Station Casinos Inc.,
senior note, 7.75%, 8/15/16 ......................................... United States 1,100,000 347,875
senior sub. note, 6.50%, 2/01/14 .................................... United States 100,000 4,000
senior sub. note, 6.875%, 3/01/16 ................................... United States 1,200,000 48,000
------------
6,979,456
------------
14 | Annual Report
Franklin Universal Trust
STATEMENT OF INVESTMENTS, AUGUST 31, 2009 (CONTINUED)
PRINCIPAL
COUNTRY AMOUNT(f) VALUE
-------------- ---------- ------------
CORPORATE BONDS (CONTINUED)
DIVERSIFIED FINANCIALS 1.7%
(e) GMAC LLC, senior note, 144A, 6.875%, 8/28/12 ........................... United States $2,849,000 $ 2,507,120
------------
ENERGY 12.9%
(e) Arch Coal Inc., senior note, 144A, 8.75%, 8/01/16 ...................... United States 200,000 201,000
Berry Petroleum Co., senior note, 10.25%, 6/01/14 ...................... United States 700,000 734,125
Bill Barrett Corp., senior note, 9.875%, 7/17/16 ....................... United States 200,000 209,000
Chesapeake Energy Corp., senior note, 6.25%, 1/15/18 ................... United States 2,000,000 1,750,000
Compagnie Generale de Geophysique-Veritas, senior note,
7.50%, 5/15/15 ...................................................... France 400,000 382,000
7.75%, 5/15/17 ...................................................... France 600,000 570,000
Copano Energy LLC, senior note, 8.125%, 3/01/16 ........................ United States 1,000,000 962,500
El Paso Corp., senior note, 12.00%, 12/12/13 ........................... United States 1,200,000 1,368,000
(g) Enterprise Products Operating LLP, junior sub. note, FRN, 7.034%,
1/15/68 ............................................................. United States 1,200,000 985,461
Mariner Energy Inc., senior note, 7.50%, 4/15/13 ....................... United States 1,500,000 1,425,000
MarkWest Energy Partners LP, senior note, 6.875%, 11/01/14 ............. United States 2,000,000 1,840,000
(e) Petroplus Finance Ltd., senior note, 144A, 6.75%, 5/01/14 .............. Switzerland 1,000,000 915,000
Plains Exploration & Production Co., senior note, 7.625%, 6/01/18 ...... United States 1,900,000 1,805,000
Quicksilver Resources Inc., senior note, 8.25%, 8/01/15 ................ United States 2,000,000 1,890,000
(e) SandRidge Energy Inc., senior note, 144A, 8.00%, 6/01/18 ............... United States 1,900,000 1,729,000
Tesoro Corp., senior note, 6.50%, 6/01/17 .............................. United States 1,500,000 1,327,500
The Williams Cos. Inc., senior note, 8.75%, 3/15/32 .................... United States 800,000 902,702
------------
18,996,288
------------
FOOD & STAPLES RETAILING 1.7%
(e) Duane Reade Inc., senior secured note, 144A, 11.75%, 8/01/15 ........... United States 400,000 406,000
(e) Rite Aid Corp., senior secured note, 144A, 9.75%, 6/12/16 .............. United States 900,000 956,250
SUPERVALU Inc., senior note, 8.00%, 5/01/16 ............................ United States 1,200,000 1,186,500
------------
2,548,750
------------
FOOD, BEVERAGE & TOBACCO 1.8%
(e) Alliance One International Inc., senior note, 144A, 10.00%, 7/15/16 .... United States 200,000 198,500
(e) Dole Food Co. Inc, senior note, 144A, 13.875%, 3/15/14 ................. United States 1,000,000 1,145,000
(e) JBS USA LLC, senior note, 144A, 11.625%, 5/01/14 ....................... United States 1,200,000 1,266,000
------------
2,609,500
------------
HEALTH CARE EQUIPMENT & SERVICES 8.3%
FMC Finance III SA, senior note, 6.875%, 7/15/17 ....................... Germany 1,500,000 1,425,000
(e) Fresenius US Finance II, senior note, 144A, 9.00%, 7/15/15 ............. Germany 700,000 763,000
HCA Inc.,
senior note, 6.50%, 2/15/16 ......................................... United States 2,500,000 2,187,500
(j) senior secured note, PIK, 9.625%, 11/15/16 .......................... United States 1,051,000 1,064,138
Tenet Healthcare Corp., senior note, 7.375%, 2/01/13 ................... United States 1,700,000 1,572,500
(j) United Surgical Partners International Inc., senior sub. note, PIK,
9.25%, 5/01/17 ...................................................... United States 2,000,000 1,780,000
(g, j) US Oncology Holdings Inc., senior note, PIK, FRN, 6.904%, 3/15/12 ...... United States 2,237,000 1,912,635
Vanguard Health Holding Co. II LLC, senior sub. note, 9.00%, 10/01/14 .. United States 1,500,000 1,481,250
------------
12,186,023
------------
Annual Report | 15
Franklin Universal Trust
STATEMENT OF INVESTMENTS, AUGUST 31, 2009 (CONTINUED)
PRINCIPAL
COUNTRY AMOUNT(f) VALUE
-------------- ---------- ------------
CORPORATE BONDS (CONTINUED)
MATERIALS 11.4%
(e) Anglo American Capital PLC, senior note, 144A, 9.375%, 4/08/14 ......... United Kingdom $ 700,000 $ 798,755
ArcelorMittal, senior note, 9.85%, 6/01/19 ............................. Luxembourg 1,000,000 1,143,934
Ball Corp., senior note,
7.125%, 9/01/16 ..................................................... United States 200,000 201,000
7.375%, 9/01/19 ..................................................... United States 200,000 200,500
Crown Americas Inc., senior note, 7.75%, 11/15/15 ...................... United States 1,400,000 1,393,000
Freeport-McMoRan Copper & Gold Inc., senior note, 8.375%, 4/01/17 ...... United States 1,500,000 1,565,937
Huntsman International LLC, senior sub. note, 7.875%, 11/15/14 ......... United States 2,000,000 1,790,000
(e) Ineos Group Holdings PLC, senior secured note, 144A, 8.50%, 2/15/16 .... United Kingdom 2,500,000 1,162,500
(e) MacDermid Inc., senior sub. note, 144A, 9.50%, 4/15/17 ................. United States 1,800,000 1,521,000
Nalco Co., senior sub. note, 8.875%, 11/15/13 .......................... United States 2,000,000 2,030,000
NewPage Corp., senior secured note, 10.00%, 5/01/12 .................... United States 2,000,000 1,095,000
(e) Novelis Inc., senior note, 144A, 11.50%, 2/15/15 ....................... Canada 250,000 243,125
Owens-Brockway Glass Container Inc., senior note, 6.75%, 12/01/14 ...... United States 1,500,000 1,466,250
Solo Cup Co.,
(e) senior secured note, 144A, 10.50%, 11/01/13 ......................... United States 300,000 316,500
senior sub. note, 8.50%, 2/15/14 .................................... United States 900,000 830,250
Teck Resources Ltd., senior secured note, 10.75%, 5/15/19 .............. Canada 900,000 1,029,375
------------
16,787,126
------------
MEDIA 11.6%
(i, k) CanWest Media Inc., senior sub. note, 8.00%, 9/15/12 ................... Canada 2,000,000 1,095,000
(i, k) CCH I LLC, senior secured note, 11.00%, 10/01/15 ....................... United States 800,000 116,000
(i, k) CCH II LLC, senior note, 10.25%, 9/15/10 ............................... United States 3,000,000 3,348,750
CSC Holdings Inc., senior note,
6.75%, 4/15/12 ...................................................... United States 800,000 808,000
(e) 144A, 8.50%, 4/15/14 ................................................ United States 300,000 306,000
(i, k) Dex Media Inc.,
senior disc. note, 9.00%, 11/15/13 .................................. United States 200,000 39,000
senior note, B, 8.00%, 11/15/13 ..................................... United States 500,000 97,500
(i, k) Dex Media West Finance, senior sub. note, 9.875%, 8/15/13 .............. United States 2,342,000 497,675
DIRECTV Holdings LLC, senior note, 7.625%, 5/15/16 ..................... United States 1,500,000 1,586,250
EchoStar DBS Corp., senior note, 7.125%, 2/01/16 ....................... United States 1,500,000 1,447,500
(i) Idearc Inc., senior note, 8.00%, 11/15/16 .............................. United States 1,800,000 146,250
Lamar Media Corp., senior sub. note, B, 6.625%, 8/15/15 ................ United States 2,000,000 1,760,000
LIN Television Corp., senior sub. note, 6.50%, 5/15/13 ................. United States 1,500,000 1,222,500
Quebecor Media Inc., senior note, 7.75%, 3/15/16 ....................... Canada 2,200,000 2,084,500
(k) Radio One Inc., senior sub. note, 6.375%, 2/15/13 ...................... United States 1,700,000 569,500
(e, j) Univision Communications Inc., senior note, 144A, PIK, 10.50%,
3/15/15 ............................................................. United States 1,000,000 645,000
(e) UPC Holding BV, senior note, 144A, 9.875%, 4/15/18 ..................... Netherlands 300,000 303,387
(e) WMG Acquisition Corp., senior secured note, 144A, 9.50%, 6/15/16 ....... United States 900,000 936,000
------------
17,008,812
------------
REAL ESTATE 0.2%
Forest City Enterprises Inc., senior note, 7.625%, 6/01/15 ............. United States 400,000 253,000
------------
RETAILING 1.6%
Michaels Stores Inc., senior note, 10.00%, 11/01/14 .................... United States 2,500,000 2,400,000
------------
16 | Annual Report
Franklin Universal Trust
STATEMENT OF INVESTMENTS, AUGUST 31, 2009 (CONTINUED)
PRINCIPAL
COUNTRY AMOUNT(f) VALUE
-------------- ---------- ------------
CORPORATE BONDS (CONTINUED)
SEMICONDUCTORS & SEMICONDUCTOR EQUIPMENT 0.4%
Freescale Semiconductor Inc., senior note, 8.875%, 12/15/14 ............ United States $ 800,000 $ 544,000
------------
SOFTWARE & SERVICES 2.3%
First Data Corp., senior note, 9.875%, 9/24/15 ......................... United States 1,300,000 1,118,000
SunGard Data Systems Inc.,
senior note, 9.125%, 8/15/13 ........................................ United States 900,000 895,500
senior sub. note, 10.25%, 8/15/15 ................................... United States 1,400,000 1,393,000
------------
3,406,500
------------
TECHNOLOGY HARDWARE & EQUIPMENT 2.1%
Jabil Circuit Inc., senior note, 7.75%, 7/15/16 ........................ United States 200,000 197,750
(i) Nortel Networks Ltd., senior note, 10.75%, 7/15/16 ..................... Canada 2,000,000 935,000
Sanmina-SCI Corp.,
(e, g) senior note, 144A, FRN, 3.379%, 6/15/14 ............................. United States 700,000 616,000
senior sub. note, 6.75%, 3/01/13 .................................... United States 1,100,000 1,012,000
senior sub. note, 8.125%, 3/01/16 ................................... United States 400,000 347,000
------------
3,107,750
------------
TELECOMMUNICATION SERVICES 8.6%
(e) CC Holdings GS V LLC, senior secured note, 144A, 7.75%, 5/01/17 ........ United States 300,000 304,500
Crown Castle International Corp., senior note, 9.00%, 1/15/15 .......... United States 800,000 836,000
(e) Digicel Group Ltd., senior note, 144A, 8.875%, 1/15/15 ................. Jamaica 2,000,000 1,795,000
Inmarsat Finance PLC, senior note, 10.375%, 11/15/12 ................... United Kingdom 1,500,000 1,563,750
Intelsat Bermuda Ltd., senior note, 11.25%, 6/15/16 .................... Bermuda 500,000 523,750
Intelsat Subsidiary Holding Co. Ltd., senior note, 8.50%, 1/15/13 ...... Bermuda 1,500,000 1,518,750
MetroPCS Wireless Inc., senior note, 9.25%, 11/01/14 ................... United States 2,000,000 1,972,500
Qwest Communications International Inc., senior note, 7.50%, 2/15/14 ... United States 2,000,000 1,940,000
(e) SBA Telecommunications Inc., senior note, 144A, 8.25%, 8/15/19 ......... United States 600,000 606,000
(e) Wind Acquisition Finance SA, senior note, 144A, 10.75%, 12/01/15 ....... Italy 1,500,000 1,620,000
------------
12,680,250
------------
TRANSPORTATION 0.9%
(e) Ceva Group PLC, senior note, 144A, 10.00%, 9/01/14 ..................... United Kingdom 1,500,000 1,299,375
------------
UTILITIES 6.9%
The AES Corp., senior note, 8.00%, 6/01/20 ............................. United States 1,500,000 1,410,000
Ameren Corp., senior note, 8.875%, 5/15/14 ............................. United States 900,000 980,872
Aquila Inc., senior note, 11.875%, 7/01/12 ............................. United States 1,300,000 1,476,401
CMS Energy Corp., senior note, 8.75%, 6/15/19 .......................... United States 700,000 746,169
Dynegy Holdings Inc., senior note, 8.75%, 2/15/12 ...................... United States 2,000,000 2,000,000
NRG Energy Inc., senior note, 7.375%,
2/01/16 ............................................................. United States 1,800,000 1,725,750
1/15/17 ............................................................. United States 200,000 191,000
Texas Competitive Electric Holdings Co. LLC, senior note, A, 10.25%,
11/01/15 ............................................................ United States 2,500,000 1,668,750
------------
10,198,942
------------
TOTAL CORPORATE BONDS (COST $150,578,433) ............................ 135,845,655
------------
TOTAL INVESTMENTS BEFORE SHORT TERM INVESTMENTS
(COST $194,486,759) ............................................... 186,544,472
------------
Annual Report | 17
Franklin Universal Trust
STATEMENT OF INVESTMENTS, AUGUST 31, 2009 (CONTINUED)
COUNTRY SHARES VALUE
-------------- ---------- ------------
SHORT TERM INVESTMENTS (COST $140,042) 0.1%
MONEY MARKET FUNDS 0.1%
(l) Institutional Fiduciary Trust Money Market Portfolio, 0.00% ............ United States 140,042 $ 140,042
------------
TOTAL INVESTMENTS (COST $194,626,801) 126.9% ........................... 186,684,514
NOTES PAYABLE (28.6)% .................................................. (42,000,000)
OTHER ASSETS, LESS LIABILITIES 1.7% .................................... 2,381,339
------------
NET ASSETS 100.0% ...................................................... $147,065,853
============
See Abbreviations on page 31.
(a) Rounds to less than 0.1% of net assets.
(b) Non-income producing.
(c) Security has been deemed illiquid because it may not be able to be sold
within seven days. At August 31, 2009, the value of this security was
$1,096, representing less than 0.01% of net assets.
(d) See Note 10 regarding restricted securities.
(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, 2009,
the aggregate value of these securities was $29,753,542, representing
20.23% of net assets.
(f) The principal amount is stated in U.S. dollars unless otherwise indicated.
(g) The coupon rate shown represents the rate at period end.
(h) See Note 1(c) regarding senior floating rate interests.
(i) See Note 9 regarding defaulted securities.
(j) Income may be received in additional securities and/or cash.
(k) See Note 11 regarding other considerations.
(l) See Note 8 regarding investments in the Institutional Fiduciary Trust Money
Market Portfolio. The rate shown is the annualized seven-day yield at
period end.
The accompanying notes are an integral part of these financial statements.
18 | Annual Report
Franklin Universal Trust
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
August 31, 2009
Assets:
Investments in securities:
Cost - Unaffiliated issuers ............................... $194,486,759
Cost - Sweep Money Fund (Note 8) .......................... 140,042
------------
Total cost of investments ................................. $194,626,801
============
Value - Unaffiliated issuers .............................. $186,544,472
Value - Sweep Money Fund (Note 8) ......................... 140,042
------------
Total value of investments ................................ 186,684,514
Receivables:
Investment securities sold ................................ 346,092
Dividends and interest .................................... 3,021,957
Note issuance costs (Note 3) ................................. 229,577
------------
Total assets ........................................... 190,282,140
------------
Liabilities:
Payables:
Affiliates ................................................ 118,423
Distributions to shareholders ............................. 955,012
Senior fixed rate Notes (Note 3) ............................. 42,000,000
Accrued expenses and other liabilities ....................... 142,852
------------
Total liabilities ...................................... 43,216,287
------------
Net assets, at value ................................ $147,065,853
============
Net assets consist of:
Paid-in capital .............................................. $235,458,220
Undistributed net investment income .......................... 654,999
Net unrealized appreciation (depreciation) ................... (7,942,287)
Accumulated net realized gain (loss) ......................... (81,105,079)
------------
Net assets, at value ................................ $147,065,853
============
Shares outstanding .............................................. 25,131,894
============
Net asset value per share ....................................... $ 5.85
============
The accompanying notes are an integral part of these financial statements.
Annual Report | 19
Franklin Universal Trust
FINANCIAL STATEMENTS (CONTINUED)
STATEMENT OF OPERATIONS
for the year ended August 31, 2009
Investment income:
Dividends:
Unaffiliated issuers ...................................... $ 2,239,553
Sweep Money Fund (Note 8) ................................. 26,890
Interest ..................................................... 12,791,342
------------
Total investment income ................................ 15,057,785
------------
Expenses:
Management fees (Note 4a) .................................... 1,277,304
Interest expense (Note 3) .................................... 2,672,154
Transfer agent fees .......................................... 94,337
Custodian fees (Note 5) ...................................... 2,999
Reports to shareholders ...................................... 38,679
Professional fees ............................................ 146,190
Trustees' fees and expenses .................................. 17,376
Amortization of Note issuance costs (Note 3) ................. 198,369
Note prepayment fees (Note 3) ................................ 1,701,222
Other ........................................................ 58,655
------------
Total expenses ......................................... 6,207,285
Expense reductions (Note 5) ............................ (348)
------------
Net expenses ........................................ 6,206,937
------------
Net investment income ............................ 8,850,848
------------
Realized and unrealized gains (losses):
Net realized gain (loss) from:
Investments ............................................... (13,244,052)
Foreign currency transactions ............................. 3,186
------------
Net realized gain (loss) ......................... (13,240,866)
------------
Net change in unrealized appreciation (depreciation)
on investments ............................................ (11,926,993)
------------
Net realized and unrealized gain (loss) ......................... (25,167,859)
------------
Net increase (decrease) in net assets resulting from
operations ................................................... $(16,317,011)
============
The accompanying notes are an integral part of these financial statements.
20 | Annual Report
Franklin Universal Trust
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF CHANGES IN NET ASSETS
YEAR ENDED AUGUST 31,
---------------------------
2009 2008
------------ ------------
Increase (decrease) in net assets:
Operations:
Net investment income ..................................... $ 8,850,848 $ 12,245,801
Net realized gain (loss) from investments and foreign
currency transactions .................................. (13,240,866) 3,145,826
Net change in unrealized appreciation (depreciation) on
investments and translation of other
assets and liabilities denominated in
foreign currencies ..................................... (11,926,993) (15,591,142)
------------ ------------
Net increase (decrease) in net assets resulting from
operations ....................................... (16,317,011) (199,515)
------------ ------------
Distributions to shareholders from net investment income ..... (11,460,143) (11,502,730)
Capital share transactions from repurchase of shares
(Note 2) .................................................. -- (4,422,626)
------------ ------------
Net increase (decrease) in net assets ............... (27,777,154) (16,124,871)
Net assets:
Beginning of year ............................................ 174,843,007 190,967,878
------------ ------------
End of year .................................................. $147,065,853 $174,843,007
============ ============
Undistributed net investment income included in net assets:
End of year .................................................. $ 654,999 $ 3,313,195
============ ============
The accompanying notes are an integral part of these financial statements.
Annual Report | 21
Franklin Universal Trust
FINANCIAL STATEMENTS (CONTINUED)
STATEMENT OF CASH FLOWS
for the year ended August 31, 2009
Cash flow from operating activities:
Dividends and interest received .......................................... $ 15,561,742
Operating expenses paid .................................................. (1,616,487)
Interest expense paid .................................................... (2,672,154)
Purchases of long-term investments ....................................... (42,217,232)
Sales and maturities of long-term investments ............................ 54,000,891
Net sales of short-term investments ...................................... 13,200,453
------------
Cash provided - operating activities .................................. 36,257,213
============
Cash flow from financing activities:
Prepayment of Notes ...................................................... (23,000,000)
Note prepayment fees ..................................................... (1,701,222)
Payment of Note issuance costs ........................................... (115,848)
Distributions to shareholders ............................................ (11,460,143)
------------
Cash used - financing activities ...................................... (36,277,213)
============
Net increase (decrease) in cash ............................................. (20,000)
Cash at beginning of year ................................................... 20,000
------------
Cash at end of year ......................................................... $ --
============
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, 2009
Net increase (decrease) in net assets resulting from operating activities ... $(16,317,011)
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 ................................... 198,369
Net amortization income ............................................... (540,626)
Reinvested dividends from Sweep Money Fund ............................ (26,890)
Other investment transactions ......................................... 450,343
Decrease in dividends and interest receivable ......................... 736,978
Decrease in other liabilities ......................................... (97,143)
Decrease in cost of investments ....................................... 38,224,978
Decrease in unrealized appreciation on investments .................... 11,926,993
Note prepayment fees .................................................. 1,701,222
------------
Net cash provided by operating activities ................................... $ 36,257,213
============
The accompanying notes are an integral part of these financial statements.
22 | 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 closed-end investment company.
The following summarizes the Fund's significant accounting policies.
A. SECURITY VALUATION
Equity and other 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. Certain equity securities are valued based upon
fundamental characteristics or relationships to similar securities. Investments
in open-end mutual funds are valued at the closing net asset value.
Corporate debt 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.
Senior secured corporate loans with floating or variable interest rates
generally trade in the over-the-counter market rather than on a securities
exchange. The Fund may utilize independent pricing services, quotations from
loan dealers and other financial institutions, 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 use independent market quotations
from loan dealers or financial institutions and may incorporate valuation
methodologies that consider multiple bond characteristics such as dealer quotes,
issuer type, coupon, maturity, weighted average maturity, interest rate spreads
and yield curves, cash flow and credit risk/quality analysis, to determine
current value.
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 based upon the underlying investment book value,
anticipated future cash flows, market changes in comparable or similar
securities, 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
Annual Report | 23
Franklin Universal Trust
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
A. SECURITY VALUATION (CONTINUED)
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.
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. SENIOR FLOATING RATE INTERESTS
Senior secured corporate loans pay interest at rates which are periodically
reset by reference to a base lending rate plus a spread. These base lending
rates are generally the prime rate offered by a designated U.S. bank or the
London InterBank Offered Rate (LIBOR). Senior secured corporate loans often
require prepayment of principal from excess cash flows or at the discretion of
the borrower. As a result, actual maturity may be substantially less than the
stated maturity.
Senior secured corporate loans in which the Fund invests are generally readily
marketable, but may be subject to some restrictions on resale.
D. 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.
24 | Annual Report
Franklin Universal Trust
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
D. INCOME TAXES (CONTINUED)
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, 2009, and has
determined that no provision for income tax is required in the Fund's financial
statements.
E. 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.
F. 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.
G. 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
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, 2009, there were an unlimited number of shares authorized ($0.01
par value). During the years ended August 31, 2009 and 2008 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
Annual Report | 25
Franklin Universal Trust
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SHARES OF BENEFICIAL INTEREST (CONTINUED)
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.
Transactions in the Fund's shares were as follows:
YEAR ENDED AUGUST 31,
------------------------------------
2009 2008
-------------- -------------------
SHARES AMOUNT SHARES AMOUNT
------ ------ ------- ----------
Shares repurchased ................................... -- -- 648,100 $4,422,626
Weighted average discount of market price to net asset
value of shares repurchased ....................... -- 11.34%
3. SENIOR FIXED RATE NOTES
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 trust 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.
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 issuance costs of $427,946 incurred by the Fund are
deferred and amortized on an interest method basis over the term of the Notes.
Subject to certain restrictions and make whole premiums, the Fund may prepay the
Notes at any time. At August 31, 2009, if the Notes were fully prepaid, the make
whole premium related to the current balance of the Notes would have been
approximately $5,371,000.
For the year ended August 31, 2009, 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 prepayment of
$8,000,000 of the Notes, together with a make whole premium of $951,222. Upon
this early prepayment, the asset coverage requirement under the Notes was met.
On October 27, 2008, the Fund made another partial prepayment of $10,000,000 of
the Notes, together with an additional make whole premium of $500,000. An
additional prepayment of $5,000,000 of the Notes, together with a make whole
premium of $250,000 was made on October 30, 2008. Upon completion of these early
prepayments, the balance of the Notes was reduced to $42,000,000. In connection
with the early Notes prepayments, the Fund expensed $145,034 of previously
incurred Note issuance costs.
Based on the Notes' current credit rating, remaining time to maturity, stated
coupon rates, and other covenants, at August 31, 2009, the estimated fair value
of the Notes was approximately $45,295,000.
26 | Annual Report
Franklin Universal Trust
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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, 2009, the
custodian fees were reduced as noted in the Statement of Operations.
6. INCOME TAXES
For tax purposes, capital losses may be carried over to offset future capital
gains, if any. At August 31, 2009, the capital loss carryforwards were as
follows:
Capital loss carryforwards expiring in:
2010 ............................... $ 6,827,086
2011 ............................... 37,932,623
2012 ............................... 18,676,213
2013 ............................... 3,096,550
2014 ............................... 4,643,995
2017 ............................... 1,679,183
-----------
$72,855,650
===========
On August 31, 2009, the Fund had expired capital loss carryforwards of $325,863,
which were reclassified to paid-in capital.
Annual Report | 27
Franklin Universal Trust
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. INCOME TAXES (CONTINUED)
For tax purposes, realized capital losses and 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, 2009, the Fund deferred realized
capital losses and realized currency losses of $8,134,479 and $114,950,
respectively.
The tax character of distributions paid during the years ended August 31, 2009
and 2008, was as follows:
2009 2008
----------- -----------
Distributions paid from ordinary income: .. $11,460,143 $11,502,730
At August 31, 2009, the cost of investments, net unrealized appreciation
(depreciation), and undistributed ordinary income for income tax purposes were
as follows:
Cost of investments ....................................... $195,229,709
============
Unrealized appreciation ................................... $ 16,962,682
Unrealized depreciation ................................... (25,507,877)
------------
Net unrealized appreciation (depreciation) ................ $ (8,545,195)
============
Distributable earnings - undistributed ordinary income .... $ 3,259,975
============
Net investment income differs for financial statement and tax purposes primarily
due to differing treatments of defaulted securities, foreign currency
transactions, payments-in-kind, bond discounts and premiums, corporate actions,
and Note issuance costs.
Net realized gains (losses) differ for financial statement and tax purposes
primarily due to differing treatments of foreign currency transactions,
payments-in-kind, bond discounts and premiums, and corporate actions.
7. INVESTMENT TRANSACTIONS
Purchases and sales of investments (excluding short term securities) for the
year ended August 31, 2009, aggregated $42,217,232 and $54,110,984,
respectively.
8. INVESTMENTS IN INSTITUTIONAL FIDUCIARY TRUST MONEY MARKET PORTFOLIO
The Fund may invest in the 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.
28 | Annual Report
Franklin Universal Trust
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
9. CREDIT RISK AND DEFAULTED SECURITIES
At August 31, 2009, the Fund had 72.37% of its portfolio invested in high yield,
senior secured floating rate notes, 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, 2009, the aggregate value of these
securities was $6,746,266, representing 3.61% 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.
At August 31, 2009, 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. OTHER CONSIDERATIONS
From time to time, officers, directors or employees of the Fund's Investment
Manager may have discussions or enter into agreements with issuers, underwriters
or creditors' committees which, pursuant to the Fund's policies and requirements
of applicable securities laws, could prevent the Fund from trading in the
securities of such company for limited or extended periods of time.
Annual Report | 29
Franklin Universal Trust
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
12. FAIR VALUE MEASUREMENTS
The Fund adopted Financial Accounting Standards Board (FASB) Statement No. 157,
"Fair Value Measurement" (SFAS 157), on September 1, 2008. SFAS 157 defines fair
value, establishes a framework for measuring fair value, and expands disclosures
about fair value measurements. The Fund has determined that the implementation
of SFAS 157 did not have a material impact on the Fund's financial statements.
SFAS 157 establishes a fair value hierarchy that distinguishes between market
data obtained from independent sources (observable inputs) and the Fund's own
market assumptions (unobservable inputs). These inputs are used in determining
the value of the Fund's investments and are summarized in the following fair
value hierarchy:
- Level 1 - quoted prices in active markets for identical securities
- Level 2 - other significant observable inputs (including quoted prices
for similar securities, interest rates, prepayment speed, credit risk,
etc.)
- Level 3 - significant unobservable inputs (including the Fund's own
assumptions in determining the fair value of investments)
The inputs or methodology used for valuing securities are not an indication of
the risk associated with investing in those securities.
The following is a summary of the inputs used as of August 31, 2009, in valuing
the Fund's assets and liabilities carried at fair value:
LEVEL 1 LEVEL 2 LEVEL 3 TOTAL
----------- ------------ ------- ------------
ASSETS:
Investments in Securities:
Equity Investments:(a)
Automobiles & Components $ -- $ -- $1,096 $ 1,096
Commercial & Professional Services -- -- --(b) --(b)
Diversified Financials -- 281,030 -- 281,030
Other Equity Investments(c) 49,502,691 -- -- 49,502,691
Senior Floating Rate Interests -- 914,000 -- 914,000
Corporate Bonds -- 135,838,439 7,216 135,845,655
Short Term Investments 140,042 -- -- 140,042
----------- ------------ ------ ------------
Total Investments in Securities $49,642,733 $137,033,469 $8,312 $186,684,514
=========== ============ ====== ============
(a) Includes common and preferred stock as well as other equity investments.
(b) Includes security determined to have no value at August 31, 2009.
(c) For detailed industry descriptions, see the accompanying Statement of
Investments.
30 | Annual Report
Franklin Universal Trust
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
12. FAIR VALUE MEASUREMENTS (CONTINUED)
At August 31, 2009, the reconciliation of assets in which significant
unobservable inputs (Level 3) were used in determining fair value, is as
follows:
NET CHANGE
NET CHANGE IN UNREALIZED
IN APPRECIATION
NET UNREALIZED NET TRANSFER (DEPRECIATION)
BEGINNING REALIZED APPRECIATION PURCHASES IN (OUT) OF ENDING ON ASSETS HELD
BALANCE GAIN (LOSS) (DEPRECIATION) (SALES) LEVEL 3 BALANCE AT YEAR END
--------- ----------- -------------- --------- ----------- ------- --------------
ASSETS
Equity Investments:
Automobiles & Components ... $ -- $ -- $ -- $ -- $1,096 $1,096 $--
Commercial & Professional
Services ................ --(a) -- -- -- -- --(a) --
Corporate Bonds .............. 7,611 (3,384,733) 3,388,384 (4,046) -- 7,216 --
------ ----------- ---------- ------- ------ ------ ---
Total ............................ $7,611 $(3,384,733) $3,388,384 $(4,046) $1,096 $8,312 $--
====== =========== ========== ======= ====== ====== ===
(a) Includes security determined to have no value at August 31, 2009.
13. SUBSEQUENT EVENTS
The Fund has evaluated subsequent events through October 20, 2009, the issuance
date of the financial statements, and determined that no events have occurred
that require disclosure.
ABBREVIATIONS
SELECTED PORTFOLIO
FRN - Floating Rate Note
PIK - Payment-in-kind
Annual Report | 31
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, 2009, 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, 2009 by
correspondence with the custodian, provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
San Francisco, California
October 20, 2009
32 | Annual Report
Franklin Universal Trust
TAX DESIGNATION (UNAUDITED)
Under Section 854(b)(2) of the Internal Revenue Code (Code), the Fund designates
14.67% of the ordinary income dividends as income qualifying for the dividends
received deduction for the fiscal year ended August 31, 2009.
Under Section 854(b)(2) of the Code, the Fund designates the maximum amount
allowable but no less than $2,142,705 as qualified dividends for purposes of the
maximum rate under Section 1(h)(11) of the Code for the fiscal year ended August
31, 2009. Distributions, including qualified dividend income, paid during
calendar year 2009 will be reported to shareholders on Form 1099-DIV in January
2010. 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 $7,302,814 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, 2009.
Annual Report | 33
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 134 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 111 None
One Franklin Parkway
San Mateo, CA 94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Retired; and FORMERLY, Vice President, senior member and President, Board of Administration, California Public Employees Retirement
Systems (CALPERS) (1971-2008); 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 111 ICO Global Communications
One Franklin Parkway (Holdings) Limited (satellite
San Mateo, CA 94403-1906 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 134 Hess Corporation (exploration and
One Franklin Parkway refining of oil and gas), H.J.
San Mateo, CA 94403-1906 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).
34 | 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
------------------- --------------- ------------------ ----------------------- ----------------------------------
FRANK W.T. LAHAYE (1929) Trustee Since 1988 111 None
One Franklin Parkway
San Mateo, CA 94403-1906
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 134 Hess Corporation (exploration and
One Franklin Parkway refining of oil and gas).
San Mateo, CA 94403-1906
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 142 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 111 None
One Franklin Parkway Independent 2006 and since
San Mateo, CA 94403-1906 Trustee 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 and Strategy, Staples, Inc. (office supplies) (1992-1996); Senior 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 since 1993 and
San Mateo, CA 94403-1906 and 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.
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
------------------- --------------- ------------------ ----------------------- ----------------------------------
**CHARLES B. JOHNSON (1933) Trustee and Trustee since 134 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 41
of the investment companies in Franklin Templeton Investments.
**RUPERT H. JOHNSON, JR. (1940) Trustee and Since 1988 52 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 43 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
45 of the investment companies in Franklin Templeton Investments; and FORMERLY, Director of Compliance, Franklin Resources, Inc.
(1994-2001).
LAURA F. FERGERSON (1962) Chief Since March 2009 Not Applicable Not Applicable
One Franklin Parkway Executive
San Mateo, CA 94403-1906 Officer -
Finance and
Administration
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Vice President, Franklin Templeton Services, LLC; officer of 45 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).
GASTON GARDEY (1967) Treasurer, Since March 2009 Not Applicable Not Applicable
One Franklin Parkway Chief Financial
San Mateo, CA 94403-1906 Officer and
Chief
Accounting
Officer
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Director, Fund Accounting, Franklin Templeton Investments; and officer of 27 of the investment companies in Franklin Templeton
Investments.
ALIYA S. GORDON (1973) Vice President Since March 2009 Not Applicable Not Applicable
One Franklin Parkway
San Mateo, CA 94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Associate General Counsel, Franklin Templeton Investments; officer of 45 of the investment companies in Franklin Templeton
Investments; and FORMERLY, Litigation Associate, Steefel, Levitt & Weiss, LLP (2000-2004).
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
------------------- --------------- ------------------ ----------------------- ----------------------------------
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/or director, as the case may be, of some of the other
subsidiaries of Franklin Resources, Inc. and of 45 of the investment companies in Franklin Templeton Investments.
STEVEN J. GRAY (1955) Vice President Since August 2009 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; Vice President, Franklin Templeton Distributors, Inc.; and officer
of 45 of the investment companies in Franklin Templeton Investments.
ROBERT C. ROSSELOT (1960) Vice President Since August 2009 Not Applicable Not Applicable
500 East Broward Blvd.
Suite 2100
Fort Lauderdale, FL 33394-3091
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Senior Associate General Counsel, Franklin Templeton Investments; Assistant Secretary, Franklin Resources, Inc.; Vice President and
Secretary, Templeton Investment Counsel, LLC; Vice President, Secretary and Trust Officer, Fiduciary Trust International of the
South; and officer of 45 of the investment companies in Franklin Templeton Investments.
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 45 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
------------------- --------------- ------------------ ----------------------- ----------------------------------
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 45 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).
* 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 she 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, 2009. Additionally, the Fund expects to file,
on or about October 30, 2009, such certifications with its Form N-CSR for the
year ended August 31, 2009.
Annual Report | 39
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Franklin Templeton Funds
LITERATURE REQUEST. TO RECEIVE A 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.
VALUE
Franklin All Cap Value Fund
Franklin Balance Sheet Investment Fund
Franklin Large Cap Value Fund
Franklin MicroCap Value Fund(1)
Franklin MidCap Value Fund
Franklin Small Cap Value Fund
Mutual Beacon Fund
Mutual Quest Fund
Mutual Recovery Fund(2)
Mutual Shares Fund
BLEND
Franklin Focused Core Equity Fund
Franklin Large Cap Equity Fund
Franklin Rising Dividends Fund
GROWTH
Franklin Flex Cap Growth Fund
Franklin Growth Fund
Franklin Growth Opportunities Fund
Franklin Small Cap Growth Fund
Franklin Small-Mid Cap Growth Fund
SECTOR
Franklin Biotechnology Discovery Fund
Franklin DynaTech Fund
Franklin Global Real Estate Fund
Franklin Gold & Precious Metals Fund
Franklin Natural Resources Fund
Franklin Real Estate Securities Fund
Franklin Utilities Fund
Mutual Financial Services Fund
GLOBAL
Mutual Global Discovery Fund
Templeton Global Long-Short Fund
Templeton Global Opportunities Trust
Templeton Global Smaller Companies Fund
Templeton Growth Fund
Templeton World Fund
INTERNATIONAL
Franklin India Growth Fund
Franklin International Growth Fund
Franklin International Small Cap Growth Fund
Mutual European Fund
Mutual International 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
Templeton Frontier Markets Fund
HYBRID
Franklin Balanced Fund
Franklin Convertible Securities Fund
Franklin Equity Income Fund
Franklin Income Fund
Templeton Income 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
FIXED INCOME
Franklin Adjustable U.S. Government Securities Fund(3)
Franklin Floating Rate Daily Access Fund
Franklin High Income Fund
Franklin Limited Maturity U.S. Government Securities Fund(3)
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(3)
Templeton Global Bond Fund
Templeton Global Total Return Fund
Templeton International Bond Fund
TAX-FREE INCOME(4)
NATIONAL
Double Tax-Free Income Fund
Federal Tax-Free Income Fund
High Yield Tax-Free Income Fund
Insured Tax-Free Income Fund(5)
LIMITED-/INTERMEDIATE-TERM
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(6)
Colorado
Connecticut
Florida
Georgia
Kentucky
Louisiana
Maryland
Massachusetts(7)
Michigan(7)
Minnesota(7)
Missouri
New Jersey
New York(6)
North Carolina
Ohio(7)
Oregon
Pennsylvania
Tennessee
Virginia
INSURANCE FUNDS
Franklin Templeton Variable Insurance Products Trust(8)
(1.) The fund is closed to new investors. Existing shareholders and select
retirement plans can continue adding to their accounts.
(2.) 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.
(3.) An investment in the fund is neither insured nor guaranteed by the U.S.
government or by any other entity or institution.
(4.) For investors subject to the alternative minimum tax, a small portion of
fund dividends may be taxable. Distributions of capital gains are generally
taxable.
(5.) The fund invests primarily in insured municipal securities.
(6.) 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.
(7.) The Board of Trustees approved the elimination of the non-fundamental
policy requiring the fund to invest at least 80% of net assets in insured
municipal securities and the removal of the word "Insured" from the fund
name. The changes became effective 2/17/09.
(8.) The funds of the Franklin Templeton Variable Insurance Products Trust are
generally available only through insurance company variable contracts.
04/09 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 Servicing
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 A2009 10/09
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 $31,450 for the fiscal year ended August 31, 2009 and $32,714 for the
fiscal year ended August 31, 2008.
(b) Audit-Related Fees
There were no 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.
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 $6,000 for the fiscal year ended
August 31, 2009 and $0 for the fiscal year ended August 31, 2008. 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 $0 for the fiscal year ended August 31, 2009
and $141 for the fiscal year ended August 31, 2008. 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 $0 for the fiscal year ended August 31,
2009 and $283,936 for the fiscal year ended August 31, 2008. 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 $6,000 for the fiscal year ended August 31, 2009 and $284,077
for the fiscal year ended August 31, 2008.
(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, Frank A. Olson 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. As a matter of policy, the
officers, directors/trustees and employees of 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,
distributor, broker dealer 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 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 the manager's
recommendation regarding the vote for approval. If the conflict is not resolved
by the Fund, the Proxy Group may refer the matter, along with the recommended
course of action by the manager, if any, 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. Where the Proxy Group or 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 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 any one of Sections 12(d)(1)(E), (F), or (G) 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 that the manager
considers in determining how proxies should be voted. However, the manager does
not consider recommendations from management to be 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. 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 the 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.
ANTI-TAKEOVER MECHANISMS AND RELATED ISSUES. The manager generally opposes
anti-takeover measures since they tend to reduce shareholder rights. However, as
with all proxy issues, the manager conducts an independent review of each
anti-takeover proposal. 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. In addition, 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 realizes that a company's financing
decisions have a significant impact on its shareholders, particularly when they
involve the issuance of additional shares of common or preferred stock or the
assumption of additional debt. The manager will review, on a case-by-case basis,
proposals by companies to increase authorized shares and the purpose for the
increase. 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 they would 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 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
the manager's proxy voting decisions for international investments. However, the
manager must be 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 (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 30, 2009, 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 8 11,425.1 5 1,609.6 2 356.4
-------------------------------------------------------------------------------
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 helps 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
Franklin 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 Franklin 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 Franklin Resources stock
or restricted shares or units of one or more mutual funds, and options
to purchase common shares of Franklin 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 Laura F. Fergerson, Chief Executive Officer - Finance and Administration, and
Gaston Gardey, Chief Financial Officer and Chief Accounting Officer
(B) Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 of
Laura F. Fergerson, Chief Executive Officer - Finance and Administration, and
Gaston Gardey, 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/LAURA F. FERGERSON
------------------------------------
Laura F. Fergerson
Chief Executive Officer - Finance and
Administration
Date: October 28, 2009
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/LAURA F. FERGERSON
------------------------------------
Laura F. Fergerson
Chief Executive Officer - Finance and
Administration
Date: October 28, 2009
By /s/GASTON GARDEY
------------------------------------
Gaston Gardey
Chief Financial Officer and
Chief Accounting Officer
Date: October 28, 2009