UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSRS
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: 2/28/09
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ITEM 1. REPORTS TO STOCKHOLDERS.
FEBRUARY 28, 2009
SEMIANNUAL REPORT
(GRAPHIC)
FIXED INCOME
FRANKLIN UNIVERSAL TRUST
(FRANKLIN TEMPLETON INVESTMENTS(R) 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 semiannual report
Contents
SEMIANNUAL REPORT
Franklin Universal Trust ................................................. 1
Performance Summary ...................................................... 6
Important Notice to Shareholders ......................................... 7
Dividend Reinvestment and Cash Purchase Plan ............................. 8
Financial Highlights and Statement of Investments ........................ 11
Financial Statements ..................................................... 18
Notes to Financial Statements ............................................ 22
Shareholder Information .................................................. 31
Semiannual Report
Franklin Universal Trust
YOUR FUND'S GOALS AND MAIN INVESTMENTS: Franklin Universal Trust's primary
investment objective is to provide high, current income consistent with
preservation of capital. Its secondary objective is growth of income through
dividend increases and capital appreciation.
PORTFOLIO BREAKDOWN
Based on Total Investments* 2/28/09
Corporate Bonds 71.8%
Utilities Common Stocks 23.4%
Natural Resources Common Stocks 1.4%
Foreign Government & Agency Securities 0.1%
Miscellaneous Preferred Stocks 0.1%
Miscellaneous Common Stocks 0.0%**
Cash & Other Net Assets 3.2%
* 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 semiannual report for Franklin Universal Trust covers the period ended
February 28, 2009.
PERFORMANCE OVERVIEW
For the six months under review, the Fund's cumulative total returns were
-33.83% based on net asset value and -32.49% based on market price, as shown in
the Performance Summary on page 6. For comparison, the Credit Suisse (CS) High
Yield Index had a -21.71% total return, and utilities stocks, as measured by the
Standard & Poor's (S&P) 500 Utilities Index, had a -31.32% total return for the
six months ended February 28, 2009.(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. Past performance is no guarantee of future results. The
CS High Yield Index is designed to mirror the investible universe of the
U.S. dollar-denominated high yield debt market. The S&P 500 Utilities Index
is a market capitalization-weighted index that includes electric utility
stocks in the S&P 500. The indexes are unmanaged and include reinvestment
of any income or distributions. One cannot invest directly in an index, nor
is an index representative of the Fund's portfolio.
THE DOLLAR VALUE, NUMBER OF SHARES OR PRINCIPAL AMOUNT, AND NAMES OF ALL
PORTFOLIO HOLDINGS ARE LISTED IN THE FUND'S STATEMENT OF INVESTMENTS (SOI). THE
SOI BEGINS ON PAGE 12.
Semiannual Report | 1
ECONOMIC AND MARKET OVERVIEW
During the six months under review, the U.S. recession deepened. Consumer
spending receded and the Conference Board's Consumer Confidence Index fell to an
all-time low since it began in 1967 as the unemployment rate spiked and stock
markets posted steep declines. The government's abrupt conservatorship of Fannie
Mae and Freddie Mac and the failure of several blue chip banks and financial
institutions roiled equity markets. Despite far-reaching government
interventions, the nation's economic troubles worsened as manufacturing activity
weakened at its fastest pace in nearly 30 years and home prices fell at an
accelerating rate. Layoffs and furloughs mounted across many industries, and the
unemployment rate rose from 6.2% to 8.1% during the six months under review.(2)
Economic growth, as measured by gross domestic product (GDP), contracted in the
third and fourth quarters of 2008 at annualized rates of 0.5% and 6.3%,
reflecting a broad-based slowdown in consumer spending, corporate profits and
export growth.
Oil prices came under pressure and retreated dramatically from $116 per barrel
at the beginning of the period to $45 per barrel by period-end, mostly due to
weak demand and lowered growth forecasts globally. Many other commodities,
including agricultural products, and many precious and industrial metals, also
trended lower. Partially as a result of the steep price corrections, inflation
increased only slightly, and February's inflation rate was an annualized
+0.2%.(2) Core inflation, which excludes food and energy costs, rose at a 1.8%
annual rate, which was within the Federal Reserve Board's (Fed's) informal
target range of 1.5%-2.0%.2 The core personal consumption expenditures price
index reported a 12-month increase of 1.8%.(3)
A slowing economy and decelerating inflation prompted policymakers to lower
interest rates and enact a host of wide-ranging stimulus plans. During the six
months under review, the Fed lowered the federal funds target rate to a range of
0% to 0.25% from 2.00% at the start of the reporting period. Congress passed a
$787 billion fiscal stimulus package (American Recovery and Reinvestment Act)
that 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 introduced new programs
designed to shore up beleaguered banks' capital, enable freer lending to
businesses and consumers and help struggling home buyers avoid foreclosure.
(2.) Source: Bureau of Labor Statistics.
(3.) Source: Bureau of Economic Analysis.
2 | Semiannual Report
Stock markets fluctuated wildly, Treasury prices soared throughout much of the
period, and yields across the maturity spectrum fell through January 2009 before
recovering somewhat in February. Investors drove the yield on the three-month
Treasury bill to a multi-decade low, and LIBOR (London Interbank Offered Rate),
the rate banks charge one another for loans, jumped to record highs. Fixed
income spreads were generally wide relative to Treasury yields over the period
due to heightened market turbulence and risk aversion. The yield curve steepened
and the spread between the two-year and the 10-year Treasury yields increased to
202 basis points (100 basis points equal one percentage point) at the end of
February from 147 basis points at the beginning of the reporting period. The
two-year Treasury bill yield fell from 2.36% to 1.00% over the six-month period,
while the 10-year Treasury note yield declined from 3.83% to 3.02% and the
30-year Treasury bond from 4.42% to 3.71%.
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
At the beginning of this semiannual period, the financial crisis escalated as
the government seized control of Fannie Mae and Freddie Mac in early September.
Shortly thereafter, Lehman Brothers defaulted, and the government began a series
of liquidity injection "bailouts" for insurance giant American International
Group (AIG). As the economy continued to deteriorate and the financial landscape
entered a new period where government policy risk was at least as substantial as
fundamental economic risk, the Trust's primary asset classes --high yield
corporate bonds and utility stocks-- were negatively impacted and had
double-digit declines for the reporting period. With the economy weakening
rapidly, and with beleaguered credit markets shut to even higher-quality issuers
for much of the period, defaults rose and more defaults were expected as 2009
progresses. Yield spreads on high yield bonds began the period roughly eight
percentage points above Treasury securities, but rapidly soared to more than 18
percentage points before settling down somewhat to end the period at 15
percentage points. Utility stocks fared poorly but proved to be defensive on a
TOP 10 HOLDINGS
Based on Total Investments*
2/28/09 vs. 8/31/08
ISSUER 2/28/09
------ -------
FPL Group Inc. 2.2%
Entergy Corp. 2.2%
Exelon Corp. 2.2%
Dominion Resources Inc. 2.0%
Ford Motor Credit Co. LLC 1.9%
HCA Inc. 1.7%
Wind Acquisition Finance SA (Italy) 1.7%
The Southern Co. 1.6%
CenterPoint Energy Inc. 1.5%
NRG Energy Inc. 1.5%
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.
Semiannual Report | 3
relative basis, declining less than the S&P 500 Index's -41.82% total return.(4)
In addition to general investor aversion to equities of all kinds, a few
utilities cut their dividends, which added further pressure on the sector.
HIGH YIELD CORPORATE BONDS
The Fund's high yield bond component was impeded by overweighted positions in
broadcasting- and chemicals-related companies.(5) Both areas were hit hard by
the rapidly deteriorating economy. Broadcasting suffered from a severely
weakened advertising environment, as many companies pared back their ad
campaigns given the broad economic downturn. In particular, television
advertising was hurt by its high exposure to beleaguered auto manufacturers and
dealers, while radio continued to lose advertising share to other media.
Chemicals producers suffered from inventory de-stocking that exacerbated the
effects of weak demand. As prices for key chemicals' raw materials such as oil
and natural gas plummeted in value during the period, customers delayed orders
on the expectation that chemical prices would follow suit, leading to reduced
volumes. Given the high fixed costs involved in chemical production, the volume
declines resulted in sharply lower profitability for many firms. In addition,
several highly leveraged chemical companies such as LyondellBasell and Tronox
filed for Chapter 11 bankruptcy protection, further souring investor sentiment
toward the sector. The Fund was not directly impacted by LyondellBasell or
Tronox, as we held no exposure to either company during the reporting period.
On the other hand, the Fund benefited from its overweighted positions in the
health care equipment and services and pay television industries relative to the
CS High Yield Index.(6) Health care lived up to its reputation as a non-cyclical
or defensive sector, as much of its underlying demand is not tied to the
economy. Many such companies were able to improve sales, profits and cash flow
despite the recession. Likewise, the pay television industry exhibited defensive
characteristics as subscription-based businesses typically are more exposed to
competitive forces than economic pressures. People are going to watch TV no
matter the economic environment and are thus generally inclined to maintain
subscriptions -- the key source of these companies' revenue.
(4.) Source: (C) 2009 Morningstar. The S&P 500 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 is
one of the most widely used benchmarks of U.S. equity performance.
(5.) The Fund's broadcasting holdings are in the media industry, and chemicals
holdings are in the materials industry, in the SOI.
(6.) The Fund's pay television holdings are in the media industry in the SOI.
4 | Semiannual Report
UTILITY STOCKS
We reduced the Fund's utility exposure as utility stocks generally declined more
than high yield corporate bonds during the six-month period. Several companies
within the utilities sector implemented dividend cuts, as those with large
capital expenditure requirements opted to conserve cash in light of an extremely
difficult financing and credit environment. During 2007, dividend payout ratios
from the utilities sector fell to their lowest level in 15 years, and the
industry responded with positive dividend growth in 2008. According to our
analysis, we believe most utilities should be able to withstand the weak economy
for some time without resorting to dividend cuts. Our longer-term outlook for
the industry remains favorable, and most companies in the industry possess
strong balance sheets. The Fund's utilities holdings tend to be from regulated,
dividend-paying companies, and therefore can benefit from utility investments'
defensive appeal during periods of market turbulence.
Thank you for your continued participation in Franklin Universal Trust. We look
forward to serving your future investment needs.
Sincerely,
(PHOTO OF CHRISTOPHER J. MOLUMPHY)
/s/ Christopher J. Molumphy
Christopher J. Molumphy, CFA
Senior Portfolio Manager
(PHOTO OF GLENN I. VOYLES)
/s/ Glenn I. Voyles
Glenn I. Voyles, CFA
Portfolio Manager
Franklin Universal Trust
THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS
AS OF FEBRUARY 28, 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.
Semiannual Report | 5
Performance Summary as of 2/28/09
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 gain
distributions, if any, or any realized gains on the sale of Fund shares.
PRICE AND DISTRIBUTION INFORMATION
SYMBOL: FT CHANGE 2/28/09 8/31/08
---------- ------ ------- -------
Net Asset Value (NAV) -$2.58 $4.38 $6.96
Market Price (NYSE) -$2.24 $3.91 $6.15
DISTRIBUTIONS (9/1/08-2/28/09)
Dividend Income $0.228
PERFORMANCE
6-MONTH 1-YEAR 5-YEAR 10-YEAR
------- ------- ------ -------
Cumulative Total Return(1)
Based on change in NAV(2) -33.83% -33.43% -6.62% +9.23%
Based on change in market price(3) -32.49% -34.29% -4.26% +4.25%
Average Annual Total Return(1)
Based on change in NAV(2) -33.83% -33.43% -1.36% +0.89%
Based on change in market price(3) -32.49% -34.29% -0.87% +0.42%
Distribution Rate(4) 11.66%
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. Six-month
return has not been annualized.
(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 February dividend and the NYSE closing price of $3.91 on 2/28/09.
6 | Semiannual Report
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.
Semiannual Report | 7
Dividend Reinvestment and Cash Purchase Plan
The Fund's Dividend Reinvestment and Cash Purchase Plan (Plan) offers you a
prompt and simple way to reinvest dividends and capital gain distributions in
shares of the Fund. The Plan also allows you to purchase additional shares of
the Fund by making voluntary cash payments. PNC Global Investment Services (Plan
Agent), P.O. Box 6006, Carol Stream, IL 60197-6006, acts as your Plan Agent in
administering the Plan. The complete Terms and Conditions of the Dividend
Reinvestment and Cash Purchase Plan are contained in the Fund's Dividend
Reinvestment and Cash Purchase Plan Brochure. A copy of that Brochure may be
obtained from the Fund at the address on the back cover of this report.
You are automatically enrolled in the Plan unless you elect to receive dividends
or distributions in cash. If you own shares in your own name, you should notify
the Plan Agent, in writing, if you wish to receive dividends or distributions in
cash.
If the Fund declares a dividend or capital gain distribution payable either in
cash or in stock of the Fund and the market price of shares on the valuation
date equals or exceeds the net asset value, the Fund will issue new shares to
you at the higher of net asset value or 95% of the then current market price.
Whenever the Fund declares a distribution from capital gains or an income
dividend payable in either cash or shares, if the net asset value per share of
the Fund's common stock exceeds the market price per share on the valuation
date, the Plan Agent shall apply the amount of such dividend or distribution
payable to participants to the purchase of shares (less their pro rata share of
brokerage commissions incurred with respect to open market purchases in
connection with the reinvestment of such dividend or distribution). If the price
exceeds the net asset value before the Plan Agent has completed its purchases,
the average purchase price may exceed the net asset value, resulting in fewer
shares being acquired than if the Fund had issued new shares. All reinvestments
are in full and fractional shares, carried to three decimal places. The Fund
will not issue shares under the Plan at a price below net asset value.
The Plan permits you on a voluntary basis to submit in cash payments of not less
than $100 each up to a total of $5,000 per month to purchase additional shares
of the Fund. It is entirely up to you whether you wish to buy additional shares
with voluntary cash payments, and you do not have to send in the same amount
each time if you do. These payments should be made by check or money order
payable to PNC Global Investment Services and sent to PNC Global Investment
Services, Attn: Franklin Universal Trust, P.O. Box 6006, Carol Stream, IL
60197-6006.
8 | Semiannual Report
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
Semiannual Report | 9
the Plan Agent for you. You are entitled to vote all shares of record, including
shares purchased for you by the Plan Agent, and, if you vote by proxy, your
proxy will include all such shares.
As long as you participate in the Plan, the Plan Agent will hold the shares it
has acquired for you in safekeeping, in its name or in the name of its nominee.
This convenience provides added protection against loss, theft or inadvertent
destruction of certificates. However, you may request that a certificate
representing your Plan shares be issued to you.
You may withdraw from the Plan without penalty at any time by notifying the Plan
Agent, in writing, at the address above. If you withdraw, you will receive,
without charge, stock certificates issued in your name for all full shares. The
Plan Agent will convert any fractional shares you hold at the time of your
withdrawal to cash at current market price and send you a check for the
proceeds.
If you hold shares in your own name, please address all notices, correspondence,
questions, or other communications regarding the Plan to the Plan Agent at the
address noted above. If your shares are not held in your name, you should
contact your brokerage firm, bank, or other nominee for more information and to
determine if your nominee will participate in the Plan on your behalf.
The 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.
10 | Semiannual Report
Franklin Universal Trust
FINANCIAL HIGHLIGHTS
SIX MONTHS ENDED YEAR ENDED AUGUST 31,
FEBRUARY 28, 2009 -----------------------------------------------------
(UNAUDITED) 2008 2007 2006 2005 2004
----------------- -------- -------- -------- -------- --------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period ............. $ 6.96 $ 7.41 $ 7.09 $ 7.12 $ 6.48 $ 5.67
-------- -------- -------- -------- -------- --------
Income from investment operations:
Net investment income(a) ...................... 0.16 0.49 0.47 0.45 0.45 0.43
Net realized and unrealized gains (losses) .... (2.51) (0.49) 0.29 (0.05) 0.59 0.74
-------- -------- -------- -------- -------- --------
Total from investment operations ................. (2.35) -- 0.76 0.40 1.04 1.17
-------- -------- -------- -------- -------- --------
Less distributions from net investment income .... (0.23) (0.46) (0.46) (0.44) (0.40) (0.36)
-------- -------- -------- -------- -------- --------
Repurchase of shares ............................. -- 0.01 0.02 0.01 -- --
-------- -------- -------- -------- -------- --------
Net asset value, end of period ................... $ 4.38 $ 6.96 $ 7.41 $ 7.09 $ 7.12 $ 6.48
-------- -------- -------- -------- -------- --------
Market value, end of period(b) ................... $ 3.91 $ 6.15 $ 6.68 $ 6.52 $ 6.22 $ 5.65
-------- -------- -------- -------- -------- --------
Total return (based on market value
per share)(c) ................................. (32.49)% (1.35)% 9.38% 12.48% 17.49% 15.79%
RATIOS TO AVERAGE NET ASSETS(d)
Expenses(e) ...................................... 5.14%(f) 2.50% 2.24% 2.27% 2.32% 2.47%
Net investment income ............................ 6.48% 6.51% 6.15% 6.47% 6.49% 6.85%
SUPPLEMENTAL DATA
Net assets, end of period (000's) ................ $110,148 $174,843 $190,968 $194,724 $198,861 $180,850
Portfolio turnover rate .......................... 9.14% 18.52% 29.30% 32.95% 34.60% 46.35%
Total debt outstanding at end of period (000's) .. $ 42,000 $ 65,000 $ 55,000 $ 55,000 $ 55,000 $ 55,000
Asset coverage per $1,000 of debt ................ $ 3,623 $ 3,690 $ 4,472 $ 4,540 $ 4,616 $ 4,288
Average amount of senior fixed rate Notes per
share during the period ....................... $ 1.93 $ 2.18 $ 2.06 $ 1.97 $ 1.97 $ 1.97
(a) Based on average daily shares outstanding.
(b) Based on the last sale on the NYSE Euronext (formerly the New York Stock
Exchange).
(c) Total return is not annualized for periods less than one year.
(d) Ratios are annualized for periods less than one year.
(e) Benefit of expense reduction rounds to less than 0.01%.
(f) Total expense ratio excluding Note prepayment fees and issuance costs is
3.66%. See Note 3.
The accompanying notes are an integral part of these financial statements.
Semiannual Report | 11
Franklin Universal Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2009 (UNAUDITED)
COUNTRY SHARES VALUE
-------------- -------------- ------------
COMMON STOCKS 34.3%
AUTOMOBILES & COMPONENTS 0.0%(a)
(b) Harvard Industries Inc. .................................................... United States 109,618 $ 1,096
------------
COMMERCIAL & PROFESSIONAL SERVICES 0.0%
(b,c) VS Holdings Inc. ........................................................... United States 181,875 --
------------
ENERGY 1.1%
Spectra Energy Corp. ....................................................... United States 92,350 1,200,550
------------
MATERIALS 0.8%
AngloGold Ashanti Ltd., ADR ................................................ South Africa 30,446 908,204
------------
UTILITIES 32.4%
Alliant Energy Corp. ....................................................... United States 55,000 1,272,150
Ameren Corp. ............................................................... United States 60,000 1,426,800
American Electric Power Co. Inc. ........................................... United States 50,000 1,402,500
Atmos Energy Corp. ......................................................... United States 45,000 982,350
CenterPoint Energy Inc. .................................................... United States 226,600 2,338,512
Constellation Energy Group ................................................. United States 20,000 395,200
Dominion Resources Inc. .................................................... United States 100,000 3,018,000
Duke Energy Corp. .......................................................... United States 124,700 1,679,709
Edison International ....................................................... United States 63,000 1,714,860
Entergy Corp. .............................................................. United States 50,000 3,369,500
Exelon Corp. ............................................................... United States 70,000 3,305,400
FirstEnergy Corp. .......................................................... United States 50,000 2,128,000
FPL Group Inc. ............................................................. United States 75,000 3,399,750
Pinnacle West Capital Corp. ................................................ United States 60,000 1,575,600
Progress Energy Inc. ....................................................... United States 40,000 1,416,800
Public Service Enterprise Group Inc. ....................................... United States 50,000 1,364,500
Sempra Energy .............................................................. United States 48,500 2,016,145
The Southern Co. ........................................................... United States 80,000 2,424,800
Westar Energy Inc. ......................................................... United States 27,300 461,370
------------
35,691,946
------------
TOTAL COMMON STOCKS (COST $37,867,625)...................................... 37,801,796
------------
PREFERRED STOCKS (COST $214,420) 0.1%
DIVERSIFIED FINANCIALS 0.1%
(d) Preferred Blocker Inc., 9.00%, pfd., 144A................................... United States 604 103,171
------------
PRINCIPAL
AMOUNT(e)
--------------
CORPORATE BONDS 99.2%
AUTOMOBILES & COMPONENTS 3.1%
Ford Motor Credit Co. LLC,
7.80%, 6/01/12........................................................... United States 2,000,000 1,085,224
senior note, 9.875%, 8/10/11............................................. United States 3,000,000 1,745,298
(d) TRW Automotive Inc., senior note, 144A, 7.25%, 3/15/17...................... United States 2,000,000 570,000
------------
3,400,522
------------
CAPITAL GOODS 5.0%
(d) Allison Transmission Inc., senior note, 144A, 11.00%, 11/01/15.............. United States 2,000,000 980,000
L-3 Communications Corp., senior sub. note, 6.375%, 10/15/15................ United States 1,700,000 1,615,000
12 | Semiannual Report
Franklin Universal Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2009 (UNAUDITED) (CONTINUED)
PRINCIPAL
COUNTRY AMOUNT(e) VALUE
-------------- -------------- ------------
CORPORATE BONDS (CONTINUED)
CAPITAL GOODS (CONTINUED)
RBS Global & Rexnord Corp., senior note, 9.50%, 8/01/14..................... United States 2,000,000 $ 1,700,000
RSC Equipment Rental Inc., senior note, 9.50%, 12/01/14..................... United States 2,200,000 1,188,000
------------
5,483,000
------------
COMMERCIAL & PROFESSIONAL SERVICES 3.1%
ARAMARK Corp., senior note, 8.50%, 2/01/15.................................. United States 1,400,000 1,281,000
Iron Mountain Inc., senior sub. note, 8.75%, 7/15/18........................ United States 1,300,000 1,300,000
JohnsonDiversey Inc., senior sub. note, B, 9.625%, 5/15/12.................. United States 1,000,000 840,000
------------
3,421,000
------------
CONSUMER DURABLES & APPAREL 4.9%
Jarden Corp., senior sub. note, 7.50%, 5/01/17.............................. United States 2,000,000 1,570,000
Jostens IH Corp., senior sub. note, 7.625%, 10/01/12........................ United States 1,400,000 1,312,500
KB Home, senior note,
6.25%, 6/15/15........................................................... United States 1,200,000 924,000
7.25%, 6/15/18........................................................... United States 800,000 612,000
Visant Holding Corp., senior note, 8.75%, 12/01/13.......................... United States 1,100,000 1,017,500
------------
5,436,000
------------
CONSUMER SERVICES 4.6%
(c,f) Atherton Franchise Capital, 13.073%, 12/01/08............................... United States 721,603 7,216
(d) Fontainebleau Las Vegas, 144A, 10.25%, 6/15/15.............................. United States 1,600,000 112,000
Host Hotels & Resorts LP, senior note, M, 7.00%, 8/15/12.................... United States 1,000,000 835,000
MGM MIRAGE, senior note,
6.875%, 4/01/16.......................................................... United States 2,000,000 900,000
7.50%, 6/01/16........................................................... United States 1,200,000 489,000
Pinnacle Entertainment Inc., senior sub. note, 8.25%, 3/15/12............... United States 1,000,000 895,000
Royal Caribbean Cruises Ltd., senior note,
8.00%, 5/15/10........................................................... United States 1,200,000 978,000
6.875%, 12/01/13......................................................... United States 800,000 436,000
(f,g) Station Casinos Inc.,
senior note, 7.75%, 8/15/16.............................................. United States 1,100,000 335,500
senior sub. note, 6.50%, 2/01/14......................................... United States 100,000 3,500
senior sub. note, 6.875%, 3/01/16........................................ United States 1,200,000 42,000
------------
5,033,216
------------
DIVERSIFIED FINANCIALS 1.5%
(d) GMAC LLC, senior note, 144A, 6.875%, 8/28/12................................ United States 2,849,000 1,642,220
------------
ENERGY 16.4%
Chesapeake Energy Corp., senior note, 6.25%, 1/15/18........................ United States 2,500,000 1,956,250
Compagnie Generale de Geophysique-Veritas, senior note,
7.50%, 5/15/15........................................................... France 400,000 315,000
7.75%, 5/15/17........................................................... France 600,000 468,000
Copano Energy LLC, senior note,
8.125%, 3/01/16.......................................................... United States 1,500,000 1,278,750
(d) 144A, 7.75%, 6/01/18..................................................... United States 500,000 392,500
El Paso Corp., senior note, 12.00%, 12/12/13................................ United States 1,200,000 1,284,000
Mariner Energy Inc., senior note, 7.50%, 4/15/13............................ United States 2,500,000 1,900,000
Semiannual Report | 13
Franklin Universal Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2009 (UNAUDITED) (CONTINUED)
PRINCIPAL
COUNTRY AMOUNT(e) VALUE
-------------- -------------- ------------
CORPORATE BONDS (CONTINUED)
ENERGY (CONTINUED)
MarkWest Energy Partners LP, senior note, 6.875%, 11/01/14.................. United States 2,000,000 $ 1,415,000
(d) Petroplus Finance Ltd., senior note, 144A, 6.75%, 5/01/14................... Switzerland 2,000,000 1,560,000
Plains Exploration & Production Co., senior note, 7.625%, 6/01/18........... United States 1,900,000 1,662,500
Quicksilver Resources Inc., senior note, 8.25%, 8/01/15..................... United States 2,000,000 1,640,000
(d) SandRidge Energy Inc., senior note, 144A, 8.00%, 6/01/18.................... United States 1,900,000 1,491,500
Tesoro Corp., senior note, 6.50%, 6/01/17................................... United States 2,500,000 1,937,500
The Williams Cos. Inc., senior note, 8.75%, 3/15/32......................... United States 800,000 749,770
------------
18,050,770
------------
FOOD, BEVERAGE & TOBACCO 3.4%
Altria Group Inc., senior bond, 9.25%, 8/06/19.............................. United States 800,000 817,300
Dean Foods Inc., senior note, 7.00%, 6/01/16................................ United States 1,400,000 1,337,000
Smithfield Foods Inc., senior note, 7.75%,
5/15/13.................................................................. United States 700,000 455,000
7/01/17.................................................................. United States 1,000,000 605,000
(d,h) Tyson Foods Inc., senior note, 144A, 10.50%, 3/01/14........................ United States 500,000 473,750
------------
3,688,050
------------
HEALTH CARE EQUIPMENT & SERVICES 10.4%
FMC Finance III SA, senior note, 6.875%, 7/15/17............................ Germany 2,000,000 1,975,000
(d) Fresenius US Finance II, senior note, 144A, 9.00%, 7/15/15.................. Germany 700,000 735,000
HCA Inc.,
senior note, 6.50%, 2/15/16.............................................. United States 2,500,000 1,687,500
(i) senior secured note, PIK, 9.625%, 11/15/16............................... United States 1,000,000 837,500
Tenet Healthcare Corp., senior note, 7.375%, 2/01/13........................ United States 2,500,000 2,125,000
(i,j) U.S. Oncology Holdings Inc., senior note, PIK, FRN, 8.334%, 3/15/12......... United States 2,149,000 1,316,262
(i) United Surgical Partners International Inc., senior sub. note, PIK, 9.25%,
5/01/17.................................................................. United States 2,000,000 1,370,000
Vanguard Health Holding Co. II LLC, senior sub. note, 9.00%, 10/01/14....... United States 1,500,000 1,380,000
------------
11,426,262
------------
MATERIALS 9.3%
Crown Americas Inc., senior note, 7.75%, 11/15/15........................... United States 2,000,000 2,025,000
Freeport-McMoRan Copper & Gold Inc., senior note, 8.375%, 4/01/17........... United States 1,700,000 1,468,285
Huntsman International LLC, senior sub. note, 7.875%, 11/15/14.............. United States 2,000,000 960,000
(d) Ineos Group Holdings PLC, senior secured note, 144A, 8.50%, 2/15/16......... United Kingdom 3,500,000 227,500
(d) MacDermid Inc., senior sub. note, 144A, 9.50%, 4/15/17...................... United States 1,800,000 720,000
Nalco Co., senior sub. note, 8.875%, 11/15/13............................... United States 2,000,000 1,945,000
NewPage Corp., senior secured note, 10.00%, 5/01/12......................... United States 2,000,000 615,000
Novelis Inc., senior note, 7.25%, 2/15/15................................... Canada 1,700,000 539,750
Owens-Brockway Glass Container Inc., senior note, 6.75%, 12/01/14........... United States 1,500,000 1,455,000
Smurfit Kappa Funding PLC, senior sub. note, 7.75%, 4/01/15................. Ireland 500,000 293,750
------------
10,249,285
------------
MEDIA 11.5%
CanWest Media Inc., senior sub. note, 8.00%, 9/15/12........................ Canada 2,000,000 300,000
(g) CCH I LLC, senior secured note, 11.00%, 10/01/15............................ United States 800,000 35,578
(g) CCH II LLC, senior note, 10.25%, 9/15/10.................................... United States 3,000,000 2,289,063
14 | Semiannual Report
Franklin Universal Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2009 (UNAUDITED) (CONTINUED)
PRINCIPAL
COUNTRY AMOUNT(e) VALUE
-------------- -------------- ------------
CORPORATE BONDS (CONTINUED)
MEDIA (CONTINUED)
CSC Holdings Inc., senior note,
6.75%, 4/15/12........................................................... United States 800,000 $ 772,000
(d) 144A, 8.50%, 4/15/14..................................................... United States 300,000 289,500
Dex Media Inc.,
senior disc. note, 9.00%, 11/15/13....................................... United States 200,000 14,000
senior note, B, 8.00%, 11/15/13.......................................... United States 400,000 28,000
Dex Media West Finance, senior sub. note, 9.875%, 8/15/13................... United States 2,342,000 380,575
DIRECTV Holdings LLC, senior note, 7.625%, 5/15/16.......................... United States 2,000,000 1,930,000
EchoStar DBS Corp., senior note, 7.125%, 2/01/16............................ United States 2,000,000 1,815,000
Idearc Inc., senior note, 8.00%, 11/15/16................................... United States 2,500,000 50,000
Lamar Media Corp., senior sub. note, B, 6.625%, 8/15/15..................... United States 2,500,000 1,575,000
LIN Television Corp., senior sub. note, 6.50%, 5/15/13...................... United States 1,500,000 787,500
Quebecor Media Inc., senior note, 7.75%, 3/15/16............................ Canada 2,200,000 1,804,000
R.H. Donnelley Corp., senior note, A-3, 8.875%, 1/15/16..................... United States 100,000 5,250
Radio One Inc., senior sub. note, 6.375%, 2/15/13........................... United States 1,700,000 418,625
(d,i) Univision Communications Inc., senior note, 144A, PIK, 9.75%,
3/15/15.................................................................. United States 2,500,000 200,000
------------
12,694,091
------------
RETAILING 0.8%
Michaels Stores Inc., senior note, 10.00%, 11/01/14......................... United States 2,500,000 865,625
------------
SEMICONDUCTORS & SEMICONDUCTOR EQUIPMENT 0.1%
Freescale Semiconductor Inc., senior note, 8.875%, 12/15/14................. United States 800,000 148,000
------------
SOFTWARE & SERVICES 2.5%
First Data Corp., senior note, 9.875%, 9/24/15.............................. United States 1,300,000 721,500
SunGard Data Systems Inc.,
senior note, 9.125%, 8/15/13............................................. United States 900,000 769,500
senior sub. note, 10.25%, 8/15/15........................................ United States 1,900,000 1,311,000
------------
2,802,000
------------
TECHNOLOGY HARDWARE & EQUIPMENT 1.4%
Celestica Inc., senior sub. note, 7.625%, 7/01/13........................... Canada 400,000 360,000
(d,f) Nortel Networks Ltd., senior note, 144A, 10.75%, 7/15/16.................... Canada 2,000,000 285,000
Sanmina-SCI Corp.,
(d,j) senior note, 144A, FRN, 4.746%, 6/15/14.................................. United States 700,000 336,000
senior sub. note, 6.75%, 3/01/13......................................... United States 1,100,000 445,500
senior sub. note, 8.125%, 3/01/16........................................ United States 400,000 142,000
------------
1,568,500
------------
TELECOMMUNICATION SERVICES 11.2%
Crown Castle International Corp., senior note, 9.00%, 1/15/15............... United States 800,000 784,000
(d) Digicel Group Ltd., senior note, 144A, 8.875%, 1/15/15...................... Jamaica 2,000,000 1,500,000
Inmarsat Finance PLC, senior note, 10.375%, 11/15/12........................ United Kingdom 1,500,000 1,537,500
Intelsat Bermuda Ltd., senior note, 11.25%, 6/15/16......................... Bermuda 500,000 473,750
(d) Intelsat Subsidiary Holding Co. Ltd., senior note, 144A, 8.50%, 1/15/13..... Bermuda 2,000,000 1,910,000
MetroPCS Wireless Inc., senior note, 9.25%, 11/01/14........................ United States 2,000,000 1,900,000
Semiannual Report | 15
Franklin Universal Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2009 (UNAUDITED) (CONTINUED)
PRINCIPAL
COUNTRY AMOUNT(e) VALUE
-------------- -------------- ------------
CORPORATE BONDS (CONTINUED)
TELECOMMUNICATION SERVICES (CONTINUED)
Qwest Communications International Inc., senior note, 7.50%, 2/15/14........ United States 2,000,000 $ 1,705,000
(d) Wind Acquisition Finance SA, senior note, 144A, 10.75%, 12/01/15............ Italy 2,500,000 2,518,750
------------
12,329,000
------------
TRANSPORTATION 1.1%
(d) Ceva Group PLC, senior note, 144A, 10.00%, 9/01/14.......................... United Kingdom 1,500,000 1,162,500
------------
UTILITIES 8.9%
(d) The AES Corp., senior note, 144A, 8.00%, 6/01/20............................ United States 1,500,000 1,252,500
Aquila Inc., senior note, 11.875%, 7/01/12.................................. United States 1,300,000 1,372,436
Dynegy Holdings Inc., senior note, 8.75%, 2/15/12........................... United States 2,000,000 1,680,000
Edison Mission Energy, senior note, 7.00%, 5/15/17.......................... United States 2,300,000 1,955,000
NRG Energy Inc., senior note, 7.375%,
2/01/16.................................................................. United States 1,800,000 1,665,000
1/15/17.................................................................. United States 700,000 649,250
Texas Competitive Electric Holdings Co. LLC, senior note, A, 10.25%,
11/01/15................................................................. United States 2,500,000 1,275,000
------------
9,849,186
------------
TOTAL CORPORATE BONDS (COST $159,960,122)................................... 109,249,227
------------
FOREIGN GOVERNMENT AND AGENCY SECURITIES
(COST $215,559) 0.1%
Eskom Holdings Ltd., 11.00%, 6/01/09........................................ South Africa 783,333 ZAR 77,804
------------
TOTAL INVESTMENTS BEFORE SHORT TERM INVESTMENTS
(COST $198,257,726)...................................................... 147,231,998
------------
SHARES
--------------
SHORT TERM INVESTMENTS (COST $2,802,488) 2.5%
MONEY MARKET FUNDS 2.5%
(k) Franklin Institutional Fiduciary Trust Money Market Portfolio, 0.25%........ United States 2,802,488 2,802,488
------------
TOTAL INVESTMENTS (COST $201,060,214) 136.2%................................ 150,034,486
NOTES PAYABLE (38.1)%....................................................... (42,000,000)
OTHER ASSETS, LESS LIABILITIES 1.9%......................................... 2,113,423
------------
NET ASSETS 100.0%........................................................... $110,147,909
============
16 | Semiannual Report
Franklin Universal Trust
STATEMENT OF INVESTMENTS, FEBRUARY 28, 2009 (UNAUDITED) (CONTINUED)
See Abbreviations on page 30.
(a) Rounds to less than 0.1% of net assets.
(b) Non-income producing for the twelve months ended February 28, 2009.
(c) See Note 10 regarding restricted and illiquid securities.
(d) 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 February 28, 2009,
the aggregate value of these securities was $18,461,891, representing
16.76% of net assets.
(e) The principal amount is stated in U.S. dollars unless otherwise indicated.
(f) See Note 9 regarding defaulted securities.
(g) See Note 11 regarding other considerations.
(h) Security purchased on a delayed delivery basis. See Note 1(c).
(i) Income may be received in additional securities and/or cash.
(j) The coupon rate shown represents the rate at period end.
(k) See Note 8 regarding investments in the Franklin Institutional Fiduciary
Trust Money Market Portfolio. The rate shown is the annualized seven-day
yield at period end.
The accompanying notes are an integral part of these financial statements.
Semiannual Report | 17
Franklin Universal Trust
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
February 28, 2009 (unaudited)
Assets:
Investments in securities:
Cost - Unaffiliated issuers ............................... $198,257,726
Cost - Sweep Money Fund (Note 8) .......................... 2,802,488
------------
Total cost of investments ................................. $201,060,214
============
Value - Unaffiliated issuers .............................. $147,231,998
Value - Sweep Money Fund (Note 8) ......................... 2,802,488
------------
Total value of investments ................................ 150,034,486
Receivables:
Investment securities sold ................................ 6,159
Dividends and interest .................................... 3,537,297
Note issuance costs (Note 3) ................................. 248,365
------------
Total assets ........................................... 153,826,307
------------
Liabilities:
Payables:
Investment securities purchased ........................... 482,330
Affiliates ................................................ 98,389
Distributions to shareholders ............................. 955,012
Senior fixed rate Notes (Note 3) ............................. 42,000,000
Accrued expenses and other liabilities ....................... 142,667
------------
Total liabilities ...................................... 43,678,398
------------
Net assets, at value ................................ $110,147,909
============
Net assets consist of:
Paid-in capital .............................................. $235,784,083
Undistributed net investment income .......................... 1,583,639
Net unrealized appreciation (depreciation) ................... (51,025,728)
Accumulated net realized gain (loss) ......................... (76,194,085)
------------
Net assets, at value ................................ $110,147,909
============
Shares outstanding ........................................... 25,131,894
============
Net asset value per share .................................... $ 4.38
============
The accompanying notes are an integral part of these financial statements.
18 | Semiannual Report
Franklin Universal Trust
FINANCIAL STATEMENTS (CONTINUED)
STATEMENT OF OPERATIONS
for the six months ended February 28, 2009 (unaudited)
Investment income:
Dividends:
Unaffiliated issuers ...................................... $ 1,060,373
Sweep Money Fund (Note 8) ................................. 26,291
Interest ..................................................... 7,019,110
------------
Total investment income ................................ 8,105,774
------------
Expenses:
Management fees (Note 4a) .................................... 638,083
Interest expense (Note 3) .................................... 1,439,454
Transfer agent fees .......................................... 29,466
Custodian fees (Note 5) ...................................... 2,023
Reports to shareholders ...................................... 22,675
Professional fees ............................................ 59,246
Trustees' fees and expenses .................................. 11,378
Amortization of Note issuance costs (Note 3) ................. 172,722
Note prepayment fees (Note 3) ................................ 1,701,222
Other ........................................................ 29,315
------------
Total expenses ......................................... 4,105,584
Expense reductions (Note 5) ............................ (326)
------------
Net expenses ........................................ 4,105,258
------------
Net investment income ............................ 4,000,516
------------
Realized and unrealized gains (losses):
Net realized gain (loss) from:
Investments ............................................... (7,954,117)
Foreign currency transactions ............................. (991)
------------
Net realized gain (loss) ......................... (7,955,108)
------------
Net change in unrealized appreciation (depreciation)
on investments ............................................ (55,010,434)
------------
Net realized and unrealized gain (loss) ......................... (62,965,542)
------------
Net increase (decrease) in net assets resulting from
operations ................................................... $(58,965,026)
============
The accompanying notes are an integral part of these financial statements.
Semiannual Report | 19
Franklin Universal Trust
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF CHANGES IN NET ASSETS
SIX MONTHS ENDED
FEBRUARY 28, 2009 YEAR ENDED
(UNAUDITED) AUGUST 31, 2008
----------------- ---------------
Increase (decrease) in net assets:
Operations:
Net investment income ..................................... $ 4,000,516 $ 12,245,801
Net realized gain (loss) from investments and foreign
currency transactions .................................. (7,955,108) 3,145,826
Net change in unrealized appreciation (depreciation) on
investments and translation of other assets and
liabilities denominated in foreign currencies .......... (55,010,434) (15,591,142)
------------- -------------
Net increase (decrease) in net assets resulting from
operations ....................................... (58,965,026) (199,515)
------------- -------------
Distributions to shareholders from net investment income ..... (5,730,072) (11,502,730)
Capital share transactions from repurchase of shares
(Note 2) .................................................. -- (4,422,626)
------------- -------------
Net increase (decrease) in net assets ............... (64,695,098) (16,124,871)
Net assets:
Beginning of period .......................................... 174,843,007 190,967,878
------------- -------------
End of period ................................................ $ 110,147,909 $ 174,843,007
============= =============
Undistributed net investment income included in net assets:
End of period ................................................ $ 1,583,639 $ 3,313,195
============= =============
The accompanying notes are an integral part of these financial statements.
20 | Semiannual Report
Franklin Universal Trust
FINANCIAL STATEMENTS (CONTINUED)
STATEMENT OF CASH FLOWS
for the six months ended February 28, 2009 (unaudited)
Cash flow from operating activities:
Dividends and interest received .............................. $ 8,379,040
Operating expenses paid ...................................... (800,233)
Interest expense paid ........................................ (1,439,454)
Purchases of long-term investments ........................... (15,033,237)
Sales and maturities of long-term investments ................ 28,876,759
Net investments .............................................. 10,537,408
------------
Cash provided - operating activities ...................... 30,520,283
------------
Cash flow from financing activities:
Prepayment of Notes .......................................... (23,000,000)
Note prepayment fees ......................................... (1,701,222)
Payment of Note issuance costs ............................... (108,989)
Distributions to shareholders ................................ (5,730,072)
------------
Cash used - financing activities .......................... 30,540,283
------------
Net increase (decrease) in cash ................................. (20,000)
Cash at beginning of period ..................................... 20,000
------------
Cash at end of period ........................................... $ --
============
RECONCILIATION OF NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATING
ACTIVITIES TO NET CASH PROVIDED BY OPERATING ACTIVITIES
for the six months ended February 28, 2009 (unaudited)
Net increase (decrease) in net assets resulting from operating
activities ................................................... $(58,965,026)
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 ....................... 172,722
Net amortization income ................................... (256,698)
Reinvested dividends from Sweep Money Fund ................ (26,291)
Other investment transactions ............................. 443,606
Decrease in dividends and interest receivable ............. 221,638
Decrease in other liabilities ............................. (117,362)
Decrease in cost of investments ........................... 32,336,038
Decrease in unrealized appreciation on investments ........ 55,010,434
Note prepayment fees ...................................... 1,701,222
------------
Net cash provided by operating activities ....................... $ 30,520,283
============
The accompanying notes are an integral part of these financial statements.
Semiannual Report | 21
Franklin Universal Trust
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
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
Securities listed on a securities exchange or on the NASDAQ National Market
System are valued at the last quoted sale price or the official closing price of
the day, respectively. Over-the-counter securities and listed securities for
which there is no reported sale are valued within the range of the most recent
quoted bid and ask prices. Securities that trade in multiple markets or on
multiple exchanges are valued according to the broadest and most representative
market. Investments in open-end mutual funds are valued at the closing net asset
value.
Corporate debt securities and government securities generally trade in the
over-the-counter market rather than on a securities exchange. The Fund may
utilize independent pricing services, quotations from bond dealers, and
information with respect to bond and note transactions, to assist in determining
a current market value for each security. The Fund's pricing services may use
valuation models or matrix pricing which considers information with respect to
comparable bond and note transactions, quotations from bond dealers, or by
reference to other securities that are considered comparable in such
characteristics as rating, interest rate and maturity date, option adjusted
spread models, prepayment projections, interest rate spreads and yield curves,
to determine current value.
Foreign securities are valued as of the close of trading on the foreign stock
exchange on which the security is primarily traded, or the NYSE, whichever is
earlier. If no sale is reported at that time, the foreign security will be
valued within the range of the most recent quoted bid and ask prices. The value
is then converted into its U.S. dollar equivalent at the foreign exchange rate
in effect at the close of the NYSE on the day that the value of the foreign
security is determined.
The Fund has procedures to determine the fair value of individual securities and
other assets for which market prices are not readily available or which may not
be reliably priced. Methods for valuing these securities may include:
fundamental analysis, matrix pricing, discounts from market prices of similar
securities, or discounts applied due to the nature and duration of restrictions
on the disposition of the securities. Due to the inherent uncertainty of
valuations of such securities, the fair values may differ significantly from the
values that would have been used had a ready market for such investments
existed. Occasionally, events occur between the time at which trading in a
security is completed and the close of the NYSE that might call into question
the availability (including the reliability) of the value of a portfolio
security held by the Fund. If such an event occurs, the securities may be valued
using fair value procedures, which may include the use of independent pricing
services. All security valuation procedures are approved by the Fund's Board of
Trustees.
22 | Semiannual Report
Franklin Universal Trust
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
B. FOREIGN CURRENCY TRANSLATION
Portfolio securities and other assets and liabilities denominated in foreign
currencies are translated into U.S. dollars based on the exchange rate of such
currencies against U.S. dollars on the date of valuation. Purchases and sales of
securities, income and expense items denominated in foreign currencies are
translated into U.S. dollars at the exchange rate in effect on the transaction
date. Occasionally, events may impact the availability or reliability of foreign
exchange rates used to convert the U.S. dollar equivalent value. If such an
event occurs, the foreign exchange rate will be valued at fair value using
procedures established and approved by the Fund's Board of Trustees.
The Fund does not separately report the effect of changes in foreign exchange
rates from changes in market prices on securities held. Such changes are
included in net realized and unrealized gain or loss from investments on the
Statement of Operations.
Realized foreign exchange gains or losses arise from sales of foreign
currencies, currency gains or losses realized between the trade and settlement
dates on securities transactions and the difference between the recorded amounts
of dividends, interest, and foreign withholding taxes and the U.S. dollar
equivalent of the amounts actually received or paid. Net unrealized foreign
exchange gains and losses arise from changes in foreign exchange rates on
foreign denominated assets and liabilities other than investments in securities
held at the end of the reporting period.
C. SECURITIES PURCHASED ON A DELAYED DELIVERY BASIS
The Fund may purchase securities on a delayed delivery basis, with payment and
delivery scheduled for a future date. These transactions are subject to market
fluctuations and are subject to the risk that the value at delivery may be more
or less than the trade date purchase price. Although the Fund will generally
purchase these securities with the intention of holding the securities, it may
sell the securities before the settlement date. Sufficient assets have been
segregated for these securities.
D. FOREIGN CURRENCY CONTRACTS
When the Fund purchases or sells foreign securities it may enter into foreign
exchange contracts to minimize foreign exchange risk from the trade date to the
settlement date of the transactions. A foreign exchange contract is an agreement
between two parties to exchange different currencies at an agreed upon exchange
rate at a future date. Realized and unrealized gains and losses on these
contracts are included in the Statement of Operations.
The risks of these contracts include movement in the values of the foreign
currencies relative to the U.S. dollar and the possible inability of the
counterparties to fulfill their obligations under the contracts, which may be in
excess of the amount reflected in the Statement of Assets and Liabilities.
Semiannual Report | 23
Franklin Universal Trust
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
E. INCOME TAXES
No provision has been made for U.S. income taxes because it is the Fund's policy
to qualify as a regulated investment company under the Internal Revenue Code and
to distribute to shareholders substantially all of its taxable income and net
realized gains.
The Fund has reviewed the tax positions, taken on federal income tax returns,
for each of the three open tax years and as of February 28, 2009, and has
determined that no provision for income tax is required in the Fund's financial
statements.
F. SECURITY TRANSACTIONS, INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS
Security transactions are accounted for on trade date. Realized gains and losses
on security transactions are determined on a specific identification basis.
Interest income and estimated expenses are accrued daily. Amortization of
premium and accretion of discount on debt securities are included in interest
income. Dividend income is recorded on the ex-dividend date except that certain
dividends from foreign securities are recognized as soon as the Fund is notified
of the ex-dividend date. Distributions to shareholders are recorded on the
ex-dividend date and are determined according to income tax regulations (tax
basis). Distributable earnings determined on a tax basis may differ from
earnings recorded in accordance with accounting principles generally accepted in
the United States of America. These differences may be permanent or temporary.
Permanent differences are reclassified among capital accounts to reflect their
tax character. These reclassifications have no impact on net assets or the
results of operations. Temporary differences are not reclassified, as they may
reverse in subsequent periods.
G. ACCOUNTING ESTIMATES
The preparation of financial statements in accordance with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the amounts of income
and expenses during the reporting period. Actual results could differ from those
estimates.
H. GUARANTEES AND INDEMNIFICATIONS
Under the Trust's organizational documents, its officers and trustees are
indemnified by the Trust against certain liabilities arising out of the
performance of their duties to the Trust. Additionally, in the normal course of
business, the Trust, on behalf of the Fund, enters into contracts with service
providers that contain general indemnification clauses. The Trust's maximum
exposure under these arrangements is unknown as this would involve future claims
that may be made against the Trust that have not yet occurred. Currently, the
Trust expects the risk of loss to be remote.
24 | Semiannual Report
Franklin Universal Trust
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
2. SHARES OF BENEFICIAL INTEREST
At February 28, 2009, there were an unlimited number of shares authorized ($0.01
par value). During the period ended February 28, 2009 and year ended August 31,
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 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.
PERIOD ENDED YEAR ENDED
FEBRUARY 28, 2009 AUGUST 31, 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 million 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 may prepay the Notes at par at any
time; therefore, market value approximates the principal amount of the Notes.
The Fund is required to maintain on a monthly basis a specified discounted asset
value for its portfolio in compliance with guidelines established in the Note
Agreement, and is required under the 1940 Act to maintain asset coverage for the
Notes of at least 300%. The issuance costs of $421,087 initially incurred by the
Fund are deferred and amortized on an interest method basis over the term of the
Notes.
For the period ended February 28, 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 repayment of $8,000,000 of the Notes, together with a make whole premium
of $951,222. Upon this early repayment, the asset coverage requirement under the
Notes was met. On October 27, 2008, the Fund made another partial repayment of
$10,000,000 of the Notes, together with an additional make whole premium of
$500,000. An additional repayment of $5,000,000 of the Notes, together with a
make whole premium of $250,000 was made on October 30, 2008. Upon completion of
these early repayments, the balance of the Notes was
Semiannual Report | 25
Franklin Universal Trust
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
3. SENIOR FIXED RATE NOTES (CONTINUED)
reduced to $42,000,000. In connection with the early Notes repayments, the Fund
expensed $145,034 of previously incurred Note issuance costs.
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 period ended February 28, 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, 2008, the capital loss carryforwards were as
follows:
Capital loss carryforwards expiring in:
2009................................ $ 328,908
2010................................ 6,827,086
2011................................ 34,372,527
2012................................ 18,676,213
2013................................ 3,246,257
2014................................ 4,662,560
-----------
$68,113,551
===========
26 | Semiannual Report
Franklin Universal Trust
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
6. INCOME TAXES (CONTINUED)
For tax purposes, realized currency losses occurring subsequent to October 31,
may be deferred and treated as occurring on the first day of the following
fiscal year. At August 31, 2008, the Fund deferred realized currency losses of
$125,426.
At February 28, 2009, the cost of investments and net unrealized appreciation
(depreciation) for income tax purposes were as follows:
Cost of investments ......................... $201,486,626
============
Unrealized appreciation ..................... $ 9,024,415
Unrealized depreciation ..................... (60,476,555)
------------
Net unrealized appreciation (depreciation) .. $(51,452,140)
============
Net investment income differs for financial statement and tax purposes primarily
due to differing treatments of defaulted securities, foreign currency
transactions, pass-through entity income, payments-in-kind, bond discounts and
premiums and Note issuance costs.
Net realized gains (losses) differ for financial statement and tax purposes
primarily due to differing treatments of foreign currency transactions, and bond
discounts and premiums.
7. INVESTMENT TRANSACTIONS
Purchases and sales of investments (excluding short term securities) for the
period ended February 28, 2009, aggregated $15,515,567 and $28,646,919,
respectively.
8. INVESTMENTS IN FRANKLIN INSTITUTIONAL FIDUCIARY TRUST MONEY MARKET PORTFOLIO
The Fund may invest in the Franklin Institutional Fiduciary Trust Money Market
Portfolio (Sweep Money Fund), an open-end investment company managed by
Advisers. Management fees paid by the Fund are reduced on assets invested in the
Sweep Money Fund, in an amount not to exceed the management and administrative
fees paid by the Sweep Money Fund.
9. CREDIT RISK AND DEFAULTED SECURITIES
The Fund has 72.88% of its portfolio invested in high yield or other securities
rated below investment grade. These securities may be more sensitive to economic
conditions causing greater price volatility and are potentially subject to a
greater risk of loss due to default than higher rated securities.
The Fund held defaulted securities and/or other securities for which the income
has been deemed uncollectible. At February 28, 2009, the aggregate value of
these securities was $673,216, representing 0.45% of the Fund's portfolio. The
Fund discontinues accruing income on securities for
Semiannual Report | 27
Franklin Universal Trust
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
9. CREDIT RISK AND DEFAULTED SECURITIES (CONTINUED)
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 February 28, 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 (0.01% of Net Assets) $7,216
======
11. OTHER CONSIDERATIONS
Officers, directors or employees of the Fund's Investment Manager, may serve
from time to time as members of bondholders' steering committees or official
creditors' committees. Such participation may result in the possession by the
Investment Manager of material non-public information which, pursuant to the
Fund's policies and the requirements of applicable securities laws, could
prevent the Fund from trading in the securities of such companies for limited or
extended periods of time.
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.
28 | Semiannual Report
Franklin Universal Trust
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
12. FAIR VALUE MEASUREMENTS (CONTINUED)
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 February 28, 2009, in
valuing the Fund's assets and liabilities carried at fair value:
LEVEL 1 LEVEL 2 LEVEL 3 TOTAL
----------- ------------ --------- ------------
ASSETS:
Investments in Securities $40,604,284 $109,422,986 $7,216 $150,034,486
LIABILITIES:
Senior Fixed Rate Notes -- 42,000,000 -- 42,000,000
At February 28, 2009, the reconciliation of assets in which significant
unobservable inputs (Level 3) were used in determining fair value, is as
follows:
INVESTMENTS
IN SECURITIES
-------------
Beginning Balance - September 1, 2008 .................... $ 7,611
Net realized gain (loss) .............................. (3,384,733)
Net change in unrealized appreciation (depreciation) .. 3,388,384
Net purchases (sales) ................................. (4,046)
Transfers in and/or out of Level 3 .................... --
-----------
Ending Balance ........................................... $ 7,216
===========
Net change in unrealized appreciation (depreciation)
attributable to assets still held at end of period .... $ --
===========
Semiannual Report | 29
Franklin Universal Trust
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
13. NEW ACCOUNTING PRONOUNCEMENTS
In March 2008, FASB issued FASB Statement No. 161, "Disclosures about Derivative
Instruments and Hedging Activities, an amendment of FASB Statement No. 133"
(SFAS 161), which expands disclosures about derivative investments and hedging
activities. SFAS 161 is effective for fiscal years and interim periods beginning
after November 15, 2008. The Fund believes applying the various provisions of
SFAS 161 will not have a material impact on its financial statements.
ABBREVIATIONS
CURRENCY
ZAR - South African Rand
SELECTED PORTFOLIO
ADR - American Depository Receipt
FRN - Floating Rate Note
PIK - Payment-in-kind
30 | Semiannual Report
Franklin Universal Trust
SHAREHOLDER INFORMATION
BOARD REVIEW OF INVESTMENT MANAGEMENT AGREEMENT
At a meeting held February 24, 2009, the Board of Trustees (Board), including a
majority of non-interested or independent Trustees, approved renewal of the
investment management agreement for Franklin Universal Trust (Fund). In reaching
this decision, the Board took into account information furnished throughout the
year at regular Board meetings, as well as information prepared specifically in
connection with the annual renewal review process. Information furnished and
discussed throughout the year included investment performance reports on the
Fund, information on its share price discount to net asset value, and other
related financial information, as well as periodic reports on legal, compliance,
pricing, brokerage commissions and execution and other services provided by the
Investment Manager (Manager) and its affiliates. Information furnished
specifically in connection with the renewal process included a report prepared
by Lipper, Inc. (Lipper), an independent organization, as well as additional
material, including a Fund profitability analysis report prepared by management.
The Lipper report compared the Fund's investment performance and expenses with
those of other funds deemed comparable to the Fund as selected by Lipper. The
Fund profitability analysis report discussed the profitability to Franklin
Templeton Investments from its overall U.S. fund operations, as well as on an
individual fund-by-fund basis. Included with such profitability analysis report
was information on a fund-by-fund basis listing portfolio managers and other
accounts they manage, as well as information on management fees charged by the
Manager and its affiliates including management's explanation of differences
where relevant, and a three-year expense analysis with an explanation for any
increase in expense ratios. Additional material accompanying such report was a
memorandum prepared by management describing project initiatives and capital
investments relating to the services provided to the Fund by the Franklin
Templeton Investments organization, as well as a memorandum relating to
economies of scale. Such material also discussed some of the actions taken by
management in coping with problems arising out of the past year's financial
upheaval.
In considering such materials, the independent Trustees received assistance and
advice from and met separately with independent counsel. In approving
continuance of the investment management agreement for the Fund, the Board,
including a majority of independent Trustees, determined that the existing
management fee structure was fair and reasonable and that continuance of the
investment management agreement was in the best interests of the Fund and its
shareholders. While attention was given to all information furnished, the
following discusses some primary factors relevant to the Board's decision.
NATURE, EXTENT AND QUALITY OF SERVICE. The Board was satisfied with the nature
and quality of the overall services provided by the Manager and its affiliates
to the Fund and its shareholders. In addition to investment performance and
expenses discussed later, the Board's opinion was based, in part, upon periodic
reports furnished them showing that the investment policies and restrictions for
the Fund were consistently complied with as well as other reports periodically
furnished the Board covering matters such as the compliance of portfolio
managers and other management personnel with the code of ethics adopted
throughout the Franklin Templeton fund complex, the adherence to fair value
pricing procedures established by the Board, and the accuracy
Semiannual Report | 31
Franklin Universal Trust
SHAREHOLDER INFORMATION (CONTINUED)
BOARD REVIEW OF INVESTMENT MANAGEMENT AGREEMENT (CONTINUED)
of net asset value calculations. Favorable consideration was given to
management's efforts and expenditures in establishing back-up systems and
recovery procedures to function in the event of a natural disaster, it being
noted by the Board that such systems and procedures had functioned smoothly
during the Florida hurricanes and blackouts experienced in recent years. Among
other factors taken into account by the Board were the manager's best execution
trading policies, including a favorable report by an independent portfolio
trading analytical firm. Consideration was also given to the experience of the
Fund's portfolio management team, the number of accounts managed and general
method of compensation. In this latter respect, the Board noted that a primary
factor in management's determination of the level of a portfolio manager's bonus
compensation was the relative investment performance of the funds he or she
managed and that a portion of such bonus was required to be invested in a
predesignated list of funds within such person's fund management area so as to
be aligned with the interests of Fund shareholders. Particular attention was
given to the overall performance and actions taken by the Manager and its
affiliates in response to problems arising out of the market turmoil and
financial crisis experienced during the past year. In this respect, the Board
noted that management's independent credit analysis and diligent risk management
procedures had prevented any structured investment products or other volatile
instruments from being held in the portfolios of any of the money market funds
within the Franklin Templeton complex, including the sweep money fund utilized
by the Fund as part of its cash management. The Board also took into account,
among other things, the strong financial position of the Manager's parent
company and its commitment to the mutual fund business. The Board also noted
that during the past year Franklin Templeton Investments, like many other fund
managers, had announced a hiring freeze and implemented employee reductions and
the Board discussed with management the nature of such reductions and steps
being taken to minimize any negative impact on the nature and quality of
services being provided the Fund.
INVESTMENT PERFORMANCE. The Board placed significant emphasis on the investment
performance of the Fund in view of its importance to shareholders. Consideration
was given to performance reports and discussions with portfolio managers at
Board meetings during the year, as well as the Lipper report furnished for the
agreement renewals. The Lipper report prepared for the Fund showed its
investment performance in comparison with a performance universe consisting of
the Fund and all leveraged closed-end high current yield funds as selected by
Lipper during 2008, as well as the previous 10 years ended December 31, 2008.
Such report considered both income return and total return on a net asset value
basis without regard to market discounts or premiums to accurately reflect
investment performance. The Lipper report showed the Fund's income return to be
the lowest in such performance universe for the one-year period and on an
annualized basis for each of the previous three-, five- and 10-year periods, as
well. In discussing such performance, management pointed out the Fund's mandate
to invest between 20 and 30 percent of its assets in utilities stocks differed
from the Lipper performance universe, which included pure high yield funds, and
that its relative income performance within such universe reflected such
difference. The Board believed such explanation was reasonable and noted that
the Fund's income return exceeded 6% in 2008 and on an annualized basis also
exceeded 6% for the previous three- and five-year
32 | Semiannual Report
Franklin Universal Trust
SHAREHOLDER INFORMATION (CONTINUED)
BOARD REVIEW OF INVESTMENT MANAGEMENT AGREEMENT (CONTINUED)
periods and exceeded 8% for the previous 10-year period as shown by the Lipper
report. Consistent with the market sell-off that occurred in 2008, the Fund and
all other funds within its performance universe experienced losses on a total
return basis during 2008. On a comparative basis, the Fund's Lipper report
showed the Fund's total return to be in the second-highest quintile of its
performance universe in 2008 and the highest quintile of such universe for each
of the previous three-, five- and 10-year periods on an annualized basis. The
Board noted such favorable comparative performance.
COMPARATIVE EXPENSES. Consideration was given to a comparative analysis of the
management fee and total expense ratio of the Fund compared with a Lipper
expense group consisting of the Fund and seven other leveraged closed-end high
current yield funds as selected by Lipper. Lipper expense data is based upon
historical information taken from each fund's most recent annual report and, as
a result of the severe decline in mutual fund industry assets during the last
quarter of 2008, is based on asset levels that are higher than the level
currently existing for most funds. While recognizing the limitations inherent in
Lipper's methodology and recognizing that current expense ratios may increase as
assets decline, the Board believed that the independent analysis conducted by
Lipper remained an appropriate measure of comparative expenses. In reviewing
comparative costs, Lipper provides information on the Fund's contractual
investment management fee in comparison with the contractual investment
management fee rate that would have been charged by other funds within its
Lipper expense group assuming they were similar in size to the Fund, as well as
the actual total expenses of the Fund in comparison with those of its Lipper
expense group. The Lipper contractual investment management fee analysis
considers administrative fees to be part of investment management fees and
showed the Fund's contractual management fee rate to be the second least
expensive in its Lipper expense group and its actual total expenses to also be
the second least expensive in such expense group. The Board found such expenses
to be acceptable.
MANAGEMENT PROFITABILITY. The Board also considered the level of profits
realized by the Manager and its affiliates in connection with the operation of
the Fund. In this respect, the Board reviewed the Fund profitability analysis
that addresses the overall profitability of Franklin Templeton's U.S. fund
business, as well as its profits in providing management and other services to
the Fund during the 12-month period ended September 30, 2008, being the most
recent fiscal year end for Franklin Resources, Inc., the Manager's parent.
During such period, the assets of the Franklin Templeton U.S. fund business were
significantly higher than currently existing, and to such extent the
profitability analysis does not reflect current fund operations. While taking
this into account in assessing the significance of the Fund profitability
analysis, the Board recognized such analysis was made at a given point in time
and that the decline in assets and effect on profitability would be reflected in
the profitability analysis covering Franklin Resources' 2009 fiscal year period.
In reviewing the analysis, attention was given to the methodology followed in
allocating costs to the Fund, it being recognized that allocation methodologies
are inherently subjective and various allocation methodologies may each be
reasonable while producing different results. In this respect, the Board noted
that, while being continuously refined and reflecting changes in the manager's
own
Semiannual Report | 33
Franklin Universal Trust
SHAREHOLDER INFORMATION (CONTINUED)
BOARD REVIEW OF INVESTMENT MANAGEMENT AGREEMENT (CONTINUED)
cost accounting, such allocation methodology was consistent with that followed
in profitability report presentations made in prior years and that the Fund's
independent registered public accounting firm had been engaged by the Manager to
perform certain procedures on a biennial basis, specified and approved by the
Manager and the Fund's Board solely for their purposes and use in reference to
the profitability analysis. In reviewing and discussing such analysis,
management discussed with the Board its belief that costs incurred in
establishing the infrastructure necessary for the type of fund operations
conducted by the Manager and its affiliates may not be fully reflected in the
expenses allocated to the Fund in determining its profitability, as well as the
fact that the level of profits, to a certain extent, reflected operational costs
savings and efficiencies initiated by management. In addition, the Board
considered a third-party study comparing the profitability of the Manager's
parent on an overall basis as compared to other publicly held managers broken
down to show profitability from management operations exclusive of distribution
expenses, as well as profitability including distribution expenses. The Board
also considered the extent to which the Manager and its affiliates might derive
ancillary benefits from fund operations, including potential benefits resulting
from allocation of fund brokerage and the use of commission dollars to pay for
research. Based upon its consideration of all these factors, the Board
determined that the level of profits realized by the Manager and its affiliates
from providing services to the Fund was not excessive in view of the nature,
quality and extent of services provided.
ECONOMIES OF SCALE. The Board also considered whether the Manager realizes
economies of scale as the Fund grows larger and the extent to which any such
benefit is shared with the Fund and its shareholders. The Board believed that a
manager's ability to realize economies of scale and the sharing of such benefit
is a more relevant consideration in the case of an open-end fund whose size
increases as a result of the continuous sale of its shares. A closed-end
investment company such as the Fund does not continuously offer shares, and
growth following its initial public offering will primarily result from market
appreciation, which benefits its shareholders. While believing economies of
scale to be less of a factor in the context of a closed-end fund, the Board
believes at some point an increase in size may lead to economies of scale that
should be shared with the Fund and its shareholders and intends to monitor
future growth of the Fund accordingly.
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.
34 | Semiannual Report
Franklin Universal Trust
SHAREHOLDER INFORMATION (CONTINUED)
QUARTERLY STATEMENT OF INVESTMENTS
The Fund files a complete statement of investments with the U.S. Securities and
Exchange Commission for the first and third quarters for each fiscal year on
Form N-Q. Shareholders may view the filed Form N-Q by visiting the Commission's
website at sec.gov. The filed form may also be viewed and copied at the
Commission's Public Reference Room in Washington, DC. Information regarding the
operations of the Public Reference Room may be obtained by calling (800)
SEC-0330.
CERTIFICATIONS
The Fund's Chief Executive Officer - Finance and Administration is required by
the New York Stock Exchange's Listing Standards to file annually with the
Exchange a certification that he is not aware of any violation by the Fund of
the Exchange's Corporate Governance Standards applicable to the Fund. The Fund
has filed such certification.
In addition, the Fund's Chief Executive Officer - Finance and Administration and
Chief Financial Officer and Chief Accounting Officer are required by the rules
of the U.S. Securities and Exchange Commission to provide certain certifications
with respect to the Fund's Form N-CSR and Form N-CSRS (which include the Fund's
annual and semiannual reports to shareholders) that are filed semiannually with
the Commission. The Fund has filed such certifications with its Form N-CSR for
the year ended August 31, 2008. Additionally, the Fund expects to file, on or
about April 30, 2009, such certifications with its Form N-CSRS for the six
months ended February 28, 2009.
Semiannual Report | 35
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Literature Request
LITERATURE REQUEST. TO RECEIVE A BROCHURE AND PROSPECTUS, PLEASE CALL US AT
(800) DIAL BEN/(800) 342-5236 OR VISIT FRANKLINTEMPLETON.COM. INVESTORS SHOULD
CAREFULLY CONSIDER A FUND'S INVESTMENT GOALS, RISKS, CHARGES AND EXPENSES BEFORE
INVESTING. THE PROSPECTUS CONTAINS THIS AND OTHER INFORMATION. PLEASE CAREFULLY
READ THE PROSPECTUS BEFORE INVESTING. TO ENSURE THE HIGHEST QUALITY OF SERVICE,
WE MAY MONITOR, RECORD AND ACCESS TELEPHONE CALLS TO OR FROM OUR SERVICE
DEPARTMENTS. THESE CALLS CAN BE IDENTIFIED BY THE PRESENCE OF A REGULAR BEEPING
TONE.
FRANKLIN TEMPLETON FUNDS
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 Qualified 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 Capital Growth Fund(1)
Franklin Flex Cap Growth Fund
Franklin Growth Fund
Franklin Growth Opportunities Fund(3)
Franklin Small Cap Growth Fund(4)
Franklin Small-Mid Cap Growth Fund
SECTOR
Franklin Biotechnology Discovery Fund
Franklin DynaTech Fund
Franklin Global Real Estate Fund
Franklin Gold and Precious Metals Fund
Franklin Natural Resources Fund
Franklin Real Estate Securities Fund
Franklin Utilities Fund
Mutual Financial Services Fund
GLOBAL
Mutual 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
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 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(5)
Franklin Floating Rate Daily Access Fund
Franklin High Income Fund
Franklin Limited Maturity U.S. Government Securities Fund(5)
Franklin Low Duration Total Return Fund
Franklin Real Return Fund
Franklin Strategic Income Fund
Franklin Strategic Mortgage Portfolio
Franklin Templeton Hard Currency Fund
Franklin Total Return Fund
Franklin U.S. Government Securities Fund(5)
Templeton Global Bond Fund
Templeton Global Total Return Fund
Templeton International Bond Fund
TAX-FREE INCOME(6)
NATIONAL FUNDS
Double Tax-Free Income Fund
Federal Tax-Free Income Fund
High Yield Tax-Free Income Fund
Insured Tax-Free Income Fund(7)
LIMITED-/INTERMEDIATE-TERM FUNDS
California Intermediate-Term Tax-Free Income Fund
Federal Intermediate-Term Tax-Free Income Fund
Federal Limited-Term Tax-Free Income Fund
New York Intermediate-Term Tax-Free Income Fund
STATE-SPECIFIC
Alabama
Arizona
California(8)
Colorado
Connecticut
Florida
Georgia
Kentucky
Louisiana
Maryland
Massachusetts(7)
Michigan(7)
Minnesota(7)
Missouri
New Jersey
New York(8)
North Carolina
Ohio(7)
Oregon
Pennsylvania
Tennessee
Virginia
INSURANCE FUNDS
Franklin Templeton Variable Insurance Products Trust(9)
(1.) The fund is closed to new investors. Existing shareholders and select
retirement plans can continue adding to their accounts.
(2.) 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.) Effective 11/1/07, Franklin Aggressive Growth Fund changed its name to
Franklin Growth Opportunities Fund. The fund's investment goal and strategy
remained the same.
(4.) Effective 3/31/08, Franklin Small Cap Growth Fund II changed its name to
Franklin Small Cap Growth Fund. The fund's investment goal and strategy
remained the same.
(5.) An investment in the fund is neither insured nor guaranteed by the U.S.
government or by any other entity or institution.
(6.) For investors subject to the alternative minimum tax, a small portion of
fund dividends may be taxable. Distributions of capital gains are generally
taxable.
(7.) The fund invests primarily in insured municipal securities.
(8.) These funds are available in four or more variations, including long-term
portfolios, intermediate-term portfolios, portfolios of insured securities,
a high-yield portfolio (CA only) and money market portfolios.
(9.) The funds of the Franklin Templeton Variable Insurance Products Trust are
generally available only through insurance company variable contracts.
12/08 Not part of the semiannual report
One Franklin Parkway
(FRANKLIN TEMPLETON INVESTMENTS(R) LOGO) San Mateo, CA 94403-1906
SEMIANNUAL REPORT
FRANKLIN UNIVERSAL TRUST
INVESTMENT MANAGER
Franklin Advisers, Inc.
(800) DIAL BEN(R)
TRANSFER AGENT
PNC Global Investment Services
P.O. Box 43027
Providence, RI 02940-3027
To ensure the highest quality of service, telephone calls to or from our service
departments may be monitored, recorded and accessed. These calls can be
identified by the presence of a regular beeping tone.
FUT S2009 04/09
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. N/A
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS.
Members of the Audit Committee are: Robert F. Carlson, Frank W.T. LaHaye,
and John B. Wilson.
ITEM 6. SCHEDULE OF INVESTMENTS. N/A
ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END
MANAGEMENT INVESTMENT COMPANIES.
The board of trustees of the Fund has delegated the authority to vote proxies
related to the portfolio securities held by the Fund to the Fund's manager
Franklin Advisers, Inc. in accordance with the Proxy Voting Policies and
Procedures (Policies) adopted by the manager.
The manager has delegated its administrative duties with respect to the voting
of proxies to the Proxy Group within Franklin Templeton Companies, LLC (Proxy
Group), an affiliate and wholly owned subsidiary of Franklin Resources, Inc. All
proxies received by the Proxy Group will be voted based upon the manager's
instructions and/or policies. The manager votes proxies solely in the interests
of the Fund and its shareholders.
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 of directors 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 will consider
withholding 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 COMPANIES.
N/A
ITEM 9. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT
COMPANY AND AFFILIATED PURCHASERS.
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: April 27, 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: April 27, 2009
By /s/GASTON GARDEY
----------------------------------
Gaston Gardey
Chief Financial Officer and
Chief Accounting Officer
Date: April 27, 2009