-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, VRI/VSNTHtxH/rd1ZomJ0eI2nyDSwR2eXmdaOUqyB4oiiDP4uElQa223acWHahbd cwb4WyrMxIdkOq6oMqpiOQ== 0000833040-03-000014.txt : 20031112 0000833040-03-000014.hdr.sgml : 20031111 20031112114840 ACCESSION NUMBER: 0000833040-03-000014 CONFORMED SUBMISSION TYPE: N-CSR PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20030831 FILED AS OF DATE: 20031112 EFFECTIVENESS DATE: 20031112 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FRANKLIN UNIVERSAL TRUST CENTRAL INDEX KEY: 0000833040 IRS NUMBER: 943077602 STATE OF INCORPORATION: MA FISCAL YEAR END: 0831 FILING VALUES: FORM TYPE: N-CSR SEC ACT: 1940 Act SEC FILE NUMBER: 811-05569 FILM NUMBER: 03991979 BUSINESS ADDRESS: STREET 1: ONE FRANKLIN PARKWAY CITY: SAN MATEO STATE: CA ZIP: 94403-1906 BUSINESS PHONE: 650-312-2000 MAIL ADDRESS: STREET 1: ONE FRANKLIN PARKWAY CITY: SAN MATEO STATE: CA ZIP: 94403-1906 N-CSR 1 futncsrform.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM N-CSR CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT INVESTMENT COMPANIES Investment Company Act file number 811-5569 -------- FRANKLIN UNIVERSAL TRUST ------------------------ (Exact name of registrant as specified in charter) ONE FRANKLIN PARKWAY, SAN MATEO, CA 94403-1906 (Address of principal executive offices) (Zip code) MURRAY L. SIMPSON, ONE FRANKLIN PARKWAY, SAN MATEO, CA 94403-1906 ----------------------------------------------------------------- (Name and address of agent for service) Registrant's telephone number, including area code: (650) 312-2000 -------------- Date of fiscal year end: 8/31 ---- Date of reporting period: 8/31/03 ------- ITEM 1. REPORTS TO STOCKHOLDERS. [GRAPHIC OMITTED] ANNUAL REPORT AND SHAREHOLDER INFORMATION INCOME FRANKLIN UNIVERSAL TRUST [LOGO OMITTED] FRANKLIN(R) TEMPLETON(R) INVESTMENTS Franklin o Templeton o Mutual Series Franklin Templeton Investments GAIN FROM OUR PERSPECTIVE Franklin Templeton's distinct multi-manager structure combines the specialized expertise of three world-class investment management groups--Franklin, Templeton and Mutual Series. 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 leader in tax-free investing and a driving force in fixed income investing around the globe. They also bring 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 research offices in over 25 countries, they offer investors the broadest global reach in the industry. MUTUAL SERIES. Established in 1949, Mutual Series is dedicated to a unique style of value investing, searching aggressively for opportunity among undervalued stocks, arbitrage situations and distressed companies. Because our management groups work independently and adhere to distinctly different investment approaches, Franklin, Templeton and Mutual Series funds typically have a low overlap of securities. That's why our funds can be used to build truly diversified portfolios covering every major asset class. At Franklin Templeton Investments, we seek to consistently provide investors with exceptional risk-adjusted returns over the long term, as well as the reliable account services that have helped us become one of the most trusted names in financial services. SPECIALIZED EXPERTISE TRUE DIVERSIFICATION RELIABILITY YOU CAN TRUST MUTUAL FUNDS | RETIREMENT PLANS | 529 COLLEGE SAVINGS PLANS | SEPARATE ACCOUNTS [GRAPHIC OMITTED] Not part of the annual report Contents ANNUAL REPORT Franklin Universal Trust .......... 1 Performance Summary ............... 5 Annual Shareholders' Meeting ...... 6 Dividend Reinvestment and Cash Purchase Plan ................ 7 Financial Highlights & Statement of Investments .......... 10 Financial Statements .............. 17 Notes to Financial Statements ..... 21 Independent Auditors' Report .................. 26 Tax Designation ................... 27 Board Members and Officers ........ 28 Proxy Voting Policies and Procedures .................... 33 Annual Report Franklin Universal Trust YOUR TRUST'S GOAL: Franklin Universal Trust seeks to provide high, current income consistent with preservation of capital. Dear Shareholder: We are pleased to bring you this annual report for Franklin Universal Trust, which covers the period ended August 31, 2003. PERFORMANCE OVERVIEW During the year under review, the Trust's cumulative total return was +21.63% based on change in net asset value and -10.13% based on change in market price on the New York Stock Exchange, as shown in the Performance Summary on page 5. The Credit Suisse First Boston (CSFB) High Yield Index returned 23.10%, while utilities stocks, as measured by the Standard & Poor's (S&P) Utilities Index, returned 2.26% for the fiscal year ended August 31, 2003. 1 1. Source: Standard & Poor's Micropal. The CSFB High Yield Index is a trader-priced portfolio constructed to mirror the high yield debt market and includes reinvested interest. Treasuries, if held to maturity, offer a fixed rate of return and fixed principal value, their interest payments and principal are guaranteed. The S&P Utilities Index is a market capitalization-weighted index that includes utility stocks in the Standard & Poor's 500 Composite Index. 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. The indexes are unmanaged and include reinvested 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 COMPLETE LEGAL TITLES OF ALL PORTFOLIO HOLDINGS ARE LISTED IN THE TRUST'S STATEMENT OF INVESTMENTS (SOI). THE SOI BEGINS ON PAGE 11. Annual Report | 1 ECONOMIC AND MARKET OVERVIEW The economy experienced mixed results during the Trust's fiscal year. Energy prices remained at elevated levels, with crude oil ending the period at $33.75 per barrel compared with $28.22 at the beginning of the period. Natural gas prices averaged $5.24 per million BTU for the year ended August 31, 2003, nearly double the $2.78 average of the prior fiscal year. However, overall inflation remained tame, with the core Consumer Price Index, excluding food and energy, at just 1.3% annualized in August. Employment remained weak, with unemployment reaching 6.4% in June 2003 before falling slightly to 6.2% in July and 6.1% in August. To help jump-start the uneven economic recovery, the Federal Reserve Board cut the federal funds target rate 75 basis points (0.75%) during the period and the federal government implemented the biggest tax cuts since the Reagan administration. Such stimulus appeared to be taking hold, as the benchmark 10-year Treasury bond's yield declined to 45-year low levels in mid-June when the economic outlook remained cloudy, but spiked since then to one-year highs as signs of an economic recovery emerged. Furthermore, the domestic stock market, as measured by the Standard & Poor's 500 Composite Index, rose since March on expectations of improving corporate earnings. High yield bonds were strong performers during the Trust's fiscal year as signs of an economic recovery, the absence of any major new corporate scandals, and many investors' appetite for yield contributed to higher bond prices. High yield bonds began the fiscal year yielding 9.68 percentage points more than comparable Treasury bonds, which was well above the 5.84 percentage historical average, and they ended the period at a 5.93 percentage point spread. 1 The S&P Utilities Index's 2.26% return for the year masked tremendous volatility that occurred during the reporting period. From the beginning of the fiscal year until mid-February, the S&P Utilities Index declined 16.39%. Then, following the Treasury bond rally and helped by potential dividend tax rate reductions, the S&P Utilities Index returned 28.42% from mid-February through mid-June. On June 13, interest rates began to rise, negatively impacting utility stocks, and from that date through August 31, the index fell 4.77%. 1 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. [GRAPHIC OMITTED] EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC AS FOLLOWS: Portfolio Breakdown Based on Total Market Value as of 8/31/03 Corporate Bonds 67.3% Utilities Stocks 21.6% Foreign Government U.S. Dollar-Denominated Bonds 4.2% Misc. Equities & Preferred Stocks 4.0% Convertible Bonds 2.0% Natural Resources Equities & Preferred Stocks 0.6% Foreign Government Agencies 0.3% 2 | Annual Report MANAGER'S DISCUSSION During the year under review, the Trust benefited from above-normal exposure to high yield bonds and from relatively low exposure to utility stocks. High yield bond returns were driven by fundamental and technical factors. On the fundamental side, a declining default rate, renewed access to capital markets, and companies' focus on paying down debt led to an expected improvement in credit quality for high yield issuers. Technical support, in the form of inflows into the high yield asset class, came from investors seeking yield in a low nominal interest rate environment, as well as from those seeking an alternative investment to equity markets. HIGH YIELD CORPORATE BONDS The Trust benefited from its overweighted positions in the wireless (communications) and cable (consumer services) industries relative to the CSFB High Yield Index. The wireless industry rebounded from low levels reached at the end of the prior fiscal year when investors were worried about the industry's growth prospects and access to capital. The rebound was largely due to several factors, including renewed access to capital markets, fundamental credit improvement driven by debt reduction and deferral of capital expenditures, and subscriber growth. The cable industry benefited as valuations in public equity markets and private transactions stabilized and in some cases increased, implying improved support for high yield bonds in the industry. The Trust's performance in the high yield sector was impeded by relatively underweighted positions in certain industries that performed strongly during the period, such as utilities. Given the Trust's utility stock weighting and overall sector exposure, we kept high yield utility bond exposure fairly low. However, among high yield bonds utilities were one of the best-performing sectors, so the Trust's relatively underweighted utility bond exposure hindered performance. Likewise, the Trust had a relatively underweighted telecommunications (communications) industry position. Many such bonds produced solid returns as they rebounded from depressed valuations. However, due to many defaults over the past several years, there were few non-distressed companies remaining in the telecommunications industry, and given a lack of sufficient investment opportunities, the Trust was underweighted relative to the CSFB High Yield Index during the fiscal year. UTILITY STOCKS Although the Trust actively increased utility stock exposure over the course of the fiscal year, on August 31, 2003, the Trust still held a relatively low 21.6% of total market value in utilities stocks. This positioning benefited performance, as utility stocks were up only 2.26%, as measured by the S&P Utilities Index, for the year under review. 1 Utility stocks generally benefited from a focus on paying down TOP 10 HOLDINGS Based on Total Market Value 8/31/03 vs. 8/31/02 - ------------------------------------- 8/31/03 - ------------------------------------- Southern Co. 2.3% - ------------------------------------- FPL Group Inc. 2.1% - ------------------------------------- Dominion Resources Inc. 2.0% - ------------------------------------- United Mexican States 1.8% - ------------------------------------- Republic of Bulgaria 1.7% - ------------------------------------- Gulfterra Energy Partners 1.7% - ------------------------------------- Hollywood Park 1.6% - ------------------------------------- Nicor Inc. 1.6% - ------------------------------------- Legrand SA 1.6% - ------------------------------------- D.R. Horton Inc. 1.5% - ------------------------------------- - ------------------------------------- 8/31/02 - ------------------------------------- Riverwood International 2.8% - ------------------------------------- EchoStar Broadband 2.5% - ------------------------------------- FPL Group Inc. 2.5% - ------------------------------------- Anchor Glass 2.4% - ------------------------------------- DTE Energy 2.3% - ------------------------------------- Sinclair Capital 2.3% - ------------------------------------- Station Casinos Inc. 2.3% - ------------------------------------- Host Marriott LP 2.2% - ------------------------------------- Nortek Inc. 2.2% - ------------------------------------- Southern Co. 2.2% - ------------------------------------- Annual Report| 3 debt and increasing dividends, as management teams returned to the basics after poor results with non-regulated assets. There was also a technical boost from dividend tax rate reductions. However, this benefit was largely offset toward the end of the fiscal year by the increase in Treasury yields. Thank you for your participation in Franklin Universal Trust. We look forward to serving you in the future. Sincerely, /S/ CHRISTOPHER J. MOLUMPHY Christopher J. Molumphy, CFA Senior Portfolio Manager /S/ GLENN I. VOYLES Glenn I. Voyles, CFA Portfolio Manager Franklin Universal Trust THIS DISCUSSION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS AS OF AUGUST 31, 2003, THE END OF THE REPORTING PERIOD. OUR STRATEGIES AND THE TRUST'S PORTFOLIO COMPOSITION WILL CHANGE DEPENDING ON 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 TRUST. STATEMENTS OF FACT ARE FROM SOURCES CONSIDERED RELIABLE, BUT THE ADVISOR 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. 4 | Annual Report Performance Summary as of 8/31/03 Your dividend income will vary depending on dividends or interest paid by securities in the Trust's portfolio, adjusted for operating expenses. Capital gain distributions are net profits realized from the sale of portfolio securities. Total return reflects the Trust's dividend income, capital gain distributions, if any, and any unrealized gains or losses. All total returns include reinvested distributions according to the terms specified in the Trust's dividend reinvestment and cash purchase plan and do not reflect any sales charges paid at inception or brokerage commissions paid on secondary market purchases. PRICE AND DISTRIBUTION INFORMATION
- ------------------------------------------------------------------------------------------------- CHANGE 8/31/03 8/31/02 - ------------------------------------------------------------------------------------------------- Net Asset Value (NAV) +$0.54 $5.67 $5.13 - ------------------------------------------------------------------------------------------------- Market Price (NYSE) -$1.17 $5.20 $6.37 - ------------------------------------------------------------------------------------------------- DISTRIBUTIONS (9/1/02-8/31/03) - ------------------------------------------------------------------------------------------------- Dividend Income $0.4990 - -------------------------------------------------------------------------------------------------
PERFORMANCE
- ------------------------------------------------------------------------------------------------- 1-YEAR 5-YEAR 10-YEAR - ------------------------------------------------------------------------------------------------- Cumulative Total Return 1 - ------------------------------------------------------------------------------------------------- Based on change in NAV +21.63% +2.84% +59.65% - ------------------------------------------------------------------------------------------------- Based on change in market price -10.13% -5.34% +53.34% - ------------------------------------------------------------------------------------------------- Average Annual Total Return 1 - ------------------------------------------------------------------------------------------------- Based on change in NAV +21.63% +0.56% +4.79% - ------------------------------------------------------------------------------------------------- Based on change in market price -10.13% -1.09% +4.37% - ------------------------------------------------------------------------------------------------- Distribution Rate 2 5.31% - -------------------------------------------------------------------------------------------------
ONGOING MARKET VOLATILITY CAN SIGNIFICANTLY AFFECT SHORT-TERM PERFORMANCE; MORE RECENT RETURNS MAY DIFFER FROM THOSE SHOWN. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE WITH MARKET CONDITIONS, AND YOU MAY HAVE A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. FOR MORE CURRENT PERFORMANCE, PLEASE CALL FRANKLIN TEMPLETON INVESTMENTS AT 1-800/342-5236. ENDNOTES SPECIAL RISKS ARE ASSOCIATED WITH FOREIGN INVESTING, INCLUDING CURRENCY VOLATILITY, ECONOMIC INSTABILITY AND POLITICAL DEVELOPMENTS OF COUNTRIES WHERE THE TRUST INVESTS. EMERGING MARKETS INVOLVE HEIGHTENED RISKS RELATED TO THE SAME FACTORS, IN ADDITION TO THOSE ASSOCIATED WITH THEIR RELATIVELY SMALL SIZE AND LESSER LIQUIDITY. 1. Total return calculations represent the cumulative and average annual changes in value of an investment over the periods indicated. 2. Distribution rate is based on an annualization of the Trust's 2.3 cent per share August dividend and the NYSE closing price of $5.20 on 8/31/03. Annual Report | Past performance does not guarantee future results. | 5 Annual Shareholders' Meeting FEBRUARY 24, 2003 At an Annual Shareholders' Meeting of Franklin Universal Trust (the "Fund") held on February 24, 2003, shareholders approved the following: 1. Regarding the election of a Board of Trustees of the Fund. - ------------------------------------------------------------------------------ TRUSTEES SHARES FOR WITHHELD OR ABSTAIN - ------------------------------------------------------------------------------ Frank H. Abbott 22,475,085.107 593,638.735 - ------------------------------------------------------------------------------ Harris J. Ashton 22,532,108.141 536,615.701 - ------------------------------------------------------------------------------ Robert F. Carlson 22,488,140.030 580,583.812 - ------------------------------------------------------------------------------ S. Joseph Fortunato 22,537,837.141 530,886.701 - ------------------------------------------------------------------------------ Edward B. Jamieson 22,488,512.030 580,211.812 - ------------------------------------------------------------------------------ Charles B. Johnson 22,524,578.141 544,145.701 - ------------------------------------------------------------------------------ Rupert H. Johnson, Jr. 22,539,282.141 529,441.701 - ------------------------------------------------------------------------------ Frank W.T. LaHaye 22,534,589.141 534,134.701 - ------------------------------------------------------------------------------ Gordon S. Macklin 22,535,403.141 533,320.701 - ------------------------------------------------------------------------------ 6 | Annual Report Dividend Reinvestment and Cash Purchase Plan The Trust's Dividend Reinvestment and Cash Purchase Plan (the "Plan") offers you a prompt and simple way to reinvest dividends and capital gain distributions in shares of the Trust. The Plan also allows you to purchase additional shares of the Trust by making voluntary cash payments. PFPC Inc. (the "Plan Agent"), P.O. Box 9223, Chelsea, MA 02150-9223, acts as your Plan Agent in administering the Plan. The complete Terms and Conditions of the Dividend Reinvestment and Cash Purchase Plan are contained in the Trust's Dividend Reinvestment and Cash Purchase Plan Brochure. A copy of that Brochure may be obtained from the Trust at the address on the back cover of this report. You are automatically enrolled in the Plan unless you elect to receive dividends or distributions in cash. If you own shares in your own name, you should notify the Plan Agent, in writing, if you wish to receive dividends or distributions in cash. If the Trust declares a dividend or capital gain distribution payable either in cash or in stock of the Trust and the market price of shares on the valuation date equals or exceeds the net asset value, the Trust will issue new shares to you at the higher of net asset value or 95% of the then current market price. If the market price is lower than net asset value and if dividends or capital gain distributions are payable only in cash, then you will receive shares purchased on the New York Stock Exchange or otherwise on the open market. If the price exceeds the net asset value before the Plan Agent has completed its purchases, the average purchase price may exceed the net asset value, resulting in fewer shares being acquired than if the Trust had issued new shares. All reinvestments are in full and fractional shares, carried to three decimal places. The Trust will not issue shares under the Plan at a price below net asset value. The Plan permits you on a voluntary basis to submit in cash payments of not less than $100 each up to a total of $5,000 per month to purchase additional shares of the Trust. It is entirely up to you whether you wish to buy additional shares with voluntary cash payments, and you do not have to send in the same amount each time if you do. These payments should be made by check or money order payable to PFPC Inc. and sent to PFPC Inc., Attn: Franklin Universal Trust, P.O. Box 9223, Chelsea, MA 02150-9223. Your cash payment will be aggregated with the payments of other participants and invested on your behalf by the Plan Agent in shares of the Trust which are purchased in the open market. The Plan Agent will invest cash payments on approximately the 5th of each month in which no dividend or distribution is payable and, during each month in which a dividend or distribution is payable, will invest cash payments beginning on the dividend payment date. UNDER NO CIRCUMSTANCES WILL INTEREST BE PAID ON YOUR FUNDS HELD BY THE PLAN AGENT. Accordingly, you should send any voluntary cash Annual Report | 7 payments which you wish to make shortly before an investment date but in sufficient time to ensure that your payment will reach the Plan Agent not less than two business days before an investment date. Payments received less than two business days before an investment date will be invested during the next month or, if there are more than 30 days until the next investment date, will be returned to you. You may obtain a refund of any cash payment by written notice, if the Plan Agent receives the written notice not less than 48 hours before an investment date. There is no direct charge to participants for reinvesting dividends and capital gain distributions, since the Plan Agent's fees are paid by the Trust. However, when shares are purchased in the open market, each participant will pay a pro rata portion of any brokerage commissions incurred. The Plan Agent will deduct a $5.00 service fee from each of your voluntary cash payments. The automatic reinvestment of dividends and capital gain distributions does not relieve you of any taxes which may be payable on dividends or distributions. In connection with the reinvestment of dividends and capital gain distributions, if the Trust issues new shares, shareholders receiving such shares generally will be treated as having a distribution equal to the market value of the shares received, and if shares are purchased on the open market, shareholders generally will be treated as having received a distribution equal to the cash distribution that would have been paid. The Trust does not issue new shares in connection with voluntary cash payments. All investments are in full and fractional shares, carried to three decimal places. If the market price exceeds the net asset value at the time the Plan Agent purchases the additional shares, you will receive shares at a price greater than the net asset value. You will receive a monthly account statement from the Plan Agent showing total dividends and capital gain distributions, date of investment, shares acquired and price per share, and total shares of record held by you and by the Plan Agent for you. You are entitled to vote all shares of record, including shares purchased for you by the Plan Agent, and, if you vote by proxy, your proxy will include all such shares. As long as you participate in the Plan, the Plan Agent will hold the shares it has acquired for you in safekeeping, in its name or in the name of its nominee. This convenience provides added protection against loss, theft or inadvertent destruction of certificates. However, you may request that a certificate representing your Plan shares be issued to you. 8 | Annual Report You may withdraw from the Plan without penalty at any time by notifying the Plan Agent, in writing, at the address above. If you withdraw, you will receive, without charge, stock certificates issued in your name for all full shares. The Plan Agent will convert any fractional shares you hold at the time of your withdrawal to cash at current market price and send you a check for the proceeds. If you hold shares in your own name, please address all notices, correspondence, questions, or other communications regarding the Plan to the Plan Agent at the address noted above. If your shares are not held in your name, you should contact your brokerage firm, bank, or other nominee for more information and to determine if your nominee will participate in the Plan on your behalf. The Trust or the Plan Agent may amend or terminate the Plan. You will receive written notice at least 90 days before the effective date of termination or of any amendment. In the case of termination, you will receive written notice at least 90 days before the record date of any dividend or capital gain distribution by the Trust. Annual Report | 9 Franklin Universal Trust FINANCIAL HIGHLIGHTS
- ----------------------------------------------------------------------------------------------------------------------------- YEAR ENDED AUGUST 31, 2003 2002 2001 2000 1999 - ----------------------------------------------------------------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year ................................ $5.13 $ 7.32 $ 8.21 $ 8.91 $ 9.28 -------------------------------------------------------- Income from investment operations: Net investment income a .......................................... .45 .65 c .73 .81 .82 Net realized and unrealized gains (losses) ....................... .59 (2.05) c (.82) (.65) (.35) -------------------------------------------------------- Total from investment operations .................................. 1.04 (1.40) (.09) .16 .47 -------------------------------------------------------- Less distributions from: Net investment income ............................................ (.50) (.79) (.80) (.80) (.84) Net realized gains ............................................... -- -- -- (.06) -- -------------------------------------------------------- Total distributions ............................................... (.50) (.79) (.80) (.86) (.84) -------------------------------------------------------- Net asset value, end of year ...................................... $5.67 $ 5.13 $ 7.32 $ 8.21 $ 8.91 -------------------------------------------------------- Market value, end of year b ....................................... $5.20 $6.370 $8.240 $7.688 $8.688 Total return (based on market value per share) .................... (10.13)% (13.68)% 19.01% (.40)% 2.95% RATIOS/SUPPLEMENTAL DATA Net assets, end of year (000's) ................................... $158,364 $141,619 $198,598 $220,742 $239,537 Ratios to average net assets: Expenses ......................................................... 3.59% 4.05% 3.29% 3.15% 2.92% Net investment income ............................................ 8.68% 10.04% c 9.38% 9.92% 8.86% Portfolio turnover rate ........................................... 65.15% 17.38% 31.60% 29.59% 31.62% Total debt outstanding at end of year (000's) ..................... $ 55,000 $ 60,000 $ 75,000 $ 75,000 $ 75,000 Asset coverage per $1,000 of debt ................................. $ 3,879 $ 3,360 $ 3,648 $ 3,948 $ 4,194 Average amount of Note per share during the year .................. $ 1.87 $ 2.65 $ 2.76 $ 2.79 $ 2.79
aBased on weighted average shares outstanding. bBased on the last sale on the New York Stock Exchange. cEffective September 1, 2001, the Fund adopted the provisions of the AICPA Audit and Accounting Guide of Investment Companies and began amortizing all premium and discount on fixed-income securities, as required. The effect of this change was as follows: Net investment income per share .......................... $(.012) Net realized and unrealized gains (losses) per share ..... .012 Ratio of net investment income to average net assets ..... (.19)% Per share data and ratios for prior periods have not been restated to reflect this change in accounting policy. 10 | See notes to financial statements. | Annual Report Franklin Universal Trust STATEMENT OF INVESTMENTS, AUGUST 31, 2003
- ---------------------------------------------------------------------------------------------------------------------------- COUNTRY SHARES/WARRANTS VALUE - ---------------------------------------------------------------------------------------------------------------------------- COMMON STOCKS AND WARRANTS 32.9% COMMUNICATIONS 3.1% BellSouth Corp. ................................................. United States 76,000 $ 1,915,200 a Call-Net Enterprises Inc., B .................................... Canada 41,958 115,385 a Dobson Communications Corp. ..................................... United States 231,710 2,131,732 a Metrocall Holdings Inc. ......................................... United States 3,508 512,168 a,c Poland Telecom Finance, wts., 144A, 12/01/07 .................... Poland 3,000 -- Vodafone Group PLC, ADR ......................................... United Kingdom 10,400 190,320 ------------ 4,864,805 ------------ CONSUMER SERVICES .1% a Prandium Inc. ................................................... United States 96,659 80,227 ------------ ELECTRONIC TECHNOLOGY a Loral Space & Communications Ltd., wts., 12/27/06 ............... United States 21,638 -- a Loral Space & Communications Ltd., wts., 1/15/07 ................ United States 5,000 50 ------------ 50 ------------ ENERGY MINERALS .1% Devon Energy Corp. .............................................. United States 3,285 169,999 a McMoRan Exploration Co. ......................................... United States 1,800 21,384 ------------ 191,383 ------------ NON-ENERGY MINERALS .7% AngloGold Ltd., ADR ............................................. South Africa 30,446 1,143,856 ------------ PRODUCER MANUFACTURING .1% a Harvard Industries Inc. ......................................... United States 109,618 548 a SHC Inc. ........................................................ United States 38,937 -- a VS Holdings ..................................................... United States 181,875 136,406 ------------ 136,954 ------------ TECHNOLOGY SERVICES .4% a Anacomp Inc., A ................................................. United States 40,300 624,650 ------------ TRANSPORTATION a Continental Airlines Inc., B .................................... United States 2,500 38,150 ------------ UTILITIES 28.4% Alliant Energy Corp. ............................................ United States 125,000 2,616,250 Ameren Corp. .................................................... United States 40,000 1,700,000 American Electric Power Co. Inc. ................................ United States 30,000 849,300 a Aquila Inc. ..................................................... United States 130,203 315,091 Atmos Energy Corp. .............................................. United States 85,000 2,069,750 CenterPoint Energy Inc. ......................................... United States 96,200 816,738 Cinergy Corp. ................................................... United States 55,000 1,882,100 Dominion Resources Inc. ......................................... United States 70,000 4,240,600 DTE Energy Co. .................................................. United States 50,000 1,745,500 Energy East Corp. ............................................... United States 42,000 906,780 Entergy Corp. ................................................... United States 28,000 1,468,600
Annual Report | 11 Franklin Universal Trust STATEMENT OF INVESTMENTS, AUGUST 31, 2003 (CONTINUED)
- ---------------------------------------------------------------------------------------------------------------------------- COUNTRY SHARES/WARRANTS VALUE - ---------------------------------------------------------------------------------------------------------------------------- COMMON STOCKS AND WARRANTS (CONT.) UTILITIES (CONT.) Exelon Corp. .................................................... United States 52,000 $3,062,800 FirstEnergy Corp. ............................................... United States 75,000 2,194,500 FPL Group Inc. .................................................. United States 70,000 4,330,200 Nicor Inc. ...................................................... United States 98,000 3,331,020 NiSource Inc. ................................................... United States 36,000 696,240 ONEOK Inc. ...................................................... United States 22,600 474,374 Pepco Holdings Inc. ............................................. United States 68,000 1,181,160 Pinnacle West Capital Corp. ..................................... United States 76,000 2,606,800 Progress Energy Inc. ............................................ United States 70,000 2,834,300 Southern Co. .................................................... United States 170,000 4,824,600 TXU Corp. ....................................................... United States 39,600 871,200 ------------ 45,017,903 ------------ TOTAL COMMON STOCKS AND WARRANTS (COST $53,873,796) ............. 52,097,978 ------------ PREFERRED STOCKS COMMUNICATIONS a Metrocall Holdings Inc., 15.00%, pfd., A ........................ United States 3,024 34,020 ------------ PROCESS INDUSTRIES a Asia Pulp & Paper Co. Ltd., 12.00%, 2/15/04 ..................... Indonesia 4,000,000 40,000 ------------ TOTAL PREFERRED STOCKS (COST $4,006,502) 74,020 ------------ CONVERTIBLE PREFERRED STOCKS 1.6% COMMUNICATIONS .5% a Dobson Communications Corp., F, cvt. pfd. ....................... United States 3,600 738,000 ------------ CONSUMER DURABLES 1.1% Ford Motor Co. Capital Trust II, 6.50%, cvt. pfd. ............... United States 40,800 1,831,920 ------------ TOTAL CONVERTIBLE PREFERRED STOCKS (COST $2,291,203) ............ 2,569,920 ------------ ------------------------------------------------- COUNTRY PRINCIPAL AMOUNT E VALUE ------------------------------------------------- BONDS 94.1% COMMERCIAL SERVICES .1% b Key3Media Group Inc., senior sub. note, 11.25%, 6/15/11 ......... United States $5,000,000 $ 75,000 ------------ COMMUNICATIONS 8.5% Dobson/Sygnet Communications Co., senior note, 12.25%, 12/15/08 . United States 2,000,000 2,150,000 Millicom International Cellular SA, 144A, 11.00%, 6/01/06 ....... Luxembourg 2,880,000 2,930,400 Nextel Communications Inc., senior note, 7.375%, 8/01/15 ........ United States 3,000,000 3,022,500 Nextel Partners Inc., senior note, 144A, 8.125%, 7/01/11 ........ United States 1,600,000 1,552,000 b Nextlink Communications Inc., senior note, 9.625%, 10/01/07 ..... United States 2,000,000 12,500 b Nextlink Communications Inc., senior note, 9.00%, 3/15/08 ....... United States 2,000,000 12,500 b Poland Telecom Finance B, 14.00%, 12/01/07 ...................... Poland 3,000,000 300 Triton PCS Inc., senior note, 144A, 8.50%, 6/01/13 .............. United States 1,300,000 1,397,500 US West Communications Inc., 6.875%, 9/15/33 .................... United States 2,800,000 2,380,000 ------------ 13,457,700 ------------
12 | Annual Report Franklin Universal Trust STATEMENT OF INVESTMENTS, AUGUST 31, 2003 (CONTINUED)
- ---------------------------------------------------------------------------------------------------------------------------- COUNTRY PRINCIPAL AMOUNT E VALUE - ---------------------------------------------------------------------------------------------------------------------------- BONDS (CONT.) CONSUMER DURABLES 3.2% D.R. Horton Inc., senior note, 8.50%, 4/15/12 ................... United States $ 3,000,000 $ 3,210,000 General Motors, 8.25%, 7/15/23 .................................. United States 1,800,000 1,798,688 b,c Spalding Inc., 144A, PIK, 9.50%, 5/01/08 ........................ United States 918,410 -- ------------ 5,008,688 ------------ CONSUMER NON-DURABLES 1.9% Revlon Consumer Products Corp., 8.125%, 2/01/06 ................. United States 1,700,000 1,096,500 Revlon Consumer Products Corp., senior note, 9.00%, 11/01/06 .... United States 400,000 258,000 Revlon Consumer Products Corp., senior sub. note, 8.625%, 2/01/08 United States 1,400,000 644,000 Smithfield Foods Inc., senior note, 144A, 7.75%, 5/15/13 ........ United States 1,000,000 1,035,000 ------------ 3,033,500 ------------ CONSUMER SERVICES 22.6% b,c Atherton Franchise Capital, LP, 13.073%, 12/01/08 ............... United States 765,361 420,949 CanWest Media Inc., senior sub. note, 10.625%, 5/15/11 .......... Canada 2,100,000 2,341,500 b Century Communications Corp., senior disc. note, B, zero cpn., 1/15/08 ....................................................... United States 5,000,000 2,018,750 Charter Communications Holdings LLC, senior disc. note, zero cpn. to 4/01/04, 9.92% thereafter, 4/01/11 ............... United States 3,000,000 2,100,000 Corrections Corp of America, senior note, 7.50%, 5/01/11 ........ United States 2,300,000 2,346,000 Dex Media West, senior sub. note, 144A, 9.875%, 8/15/13 ......... United States 2,400,000 2,688,000 Diamond Holdings PLC, senior note, 9.125%, 2/01/08 .............. United Kingdom 2,000,000 1,950,000 DIRECTV Holdings/Finance, senior note, 144A, 8.375%, 3/15/13 .... United States 2,000,000 2,195,000 Echostar DBS Corp., senior note, 10.375%, 10/01/07 .............. United States 2,500,000 2,778,125 Hollywood Park, senior sub. note, B, 9.25%, 2/15/07 ............. United States 3,300,000 3,349,500 Host Marriott LP, senior note, 9.50%, 1/15/07 ................... United States 2,500,000 2,662,500 Park Place Entertainment Corp., senior sub. note, 7.875%, 3/15/10 United States 2,400,000 2,574,000 Royal Caribbean Cruises, senior note, 8.00%, 5/15/10 ............ United States 1,200,000 1,254,000 Six Flags Inc., senior note, 9.50%, 2/01/09 ..................... United States 3,000,000 2,835,000 Station Casinos Inc., senior note, 8.375%, 2/15/08 .............. United States 2,400,000 2,562,000 Telewest Communications PLC, senior disc. note, zero cpn. to 4/15/04, 9.25% thereafter, 4/15/09 ............................ United Kingdom 1,500,000 521,250 Telewest Communications PLC, senior disc. note, zero cpn. to 2/01/05, 11.375% thereafter, 2/01/10 .......................... United Kingdom 3,500,000 1,172,500 ------------ 35,769,074 ------------ DISTRIBUTION SERVICES b Ameriserve Food Distribution Inc., senior note, 8.875%, 10/15/06 United States 1,000,000 500 b Ameriserve Food Distribution Inc., 10.125%, 7/15/07 ............. United States 2,700,000 -- ------------ 500 ------------ ELECTRONIC TECHNOLOGY 2.0% Flextronics International Ltd., 144A, 6.50%, 5/15/13 ............ United States 2,500,000 2,406,250 Vought Aircraft Industries Inc., senior note, 144A, 8.00%, 7/15/11 United States 800,000 816,000 ------------ 3,222,250 ------------
Annual Report | 13 Franklin Universal Trust STATEMENT OF INVESTMENTS, AUGUST 31, 2003 (CONTINUED)
- ---------------------------------------------------------------------------------------------------------------------------- COUNTRY PRINCIPAL AMOUNT E VALUE - ---------------------------------------------------------------------------------------------------------------------------- BONDS (CONT.) ENERGY MINERALS 3.2% Arch Western Finance, senior note, 144A, 6.75%, 7/01/13 ......... United States $2,000,000 $ 1,985,000 Vintage Petroleum, senior sub. note, 7.875%, 5/15/11 ............ United States 3,000,000 3,045,000 ------------ 5,030,000 ------------ FINANCE 1.1% Ventas Realty LP/Capital Corp., 9.00%, 5/01/12 .................. United States 1,700,000 1,823,250 ------------ GOVERNMENT BONDS 5.8% Eskom, E168, utility deb., 11.00%, 6/01/08 ...................... South Africa 4,350,000 ZAR 614,222 Federation of Russia, 3.00%, 5/14/06 ............................ Russia 1,300,000 1,243,125 Republic of Bulgaria, FRN, 1.9375%, 7/28/11 ..................... Bulgaria 3,800,000 3,610,000 United Mexican States, 11.375%, 9/15/16 ......................... Mexico 2,750,000 3,768,875 ------------ 9,236,222 ------------ HEALTH SERVICES 2.5% b Magellan Health Services Inc., senior sub. note, 9.00%, 2/15/08 . United States 4,000,000 1,980,000 Tenet Healthcare Corp., 7.375%, 2/01/13 ......................... United States 2,000,000 1,975,000 ------------ 3,955,000 ------------ INDUSTRIAL SERVICES 6.7% Allied Waste North America Inc., senior sub. note, B, 10.00%, 8/01/09 ....................................................... United States 2,000,000 2,175,000 Grant Prideco Escrow, 9.00%, 12/15/09 ........................... United States 1,000,000 1,057,500 Gulfterra Energy Partners, 10.625%, 12/01/12 .................... United States 3,000,000 3,468,750 Universal Compression Inc., senior note, 144A, 7.25%, 5/15/10 ... United States 800,000 812,000 URS Corp., senior sub. note, 12.25%, 5/01/09 .................... United States 3,000,000 3,045,000 ------------ 10,558,250 ------------ NON-ENERGY MINERALS 1.1% Louisiana Pacific Corp., senior sub. note, 10.875%, 11/15/08 .... United States 700,000 806,750 b Ormet Corp., senior secured note, 144A, 11.00%, 8/15/08 ......... United States 4,000,000 980,000 ------------ 1,786,750 ------------ PROCESS INDUSTRIES 14.7% Applied Extrusion Technologies Inc., senior note, 10.75%, 7/01/11 United States 900,000 603,000 Avecia Group PLC, senior note, 11.00%, 7/01/09 .................. United Kingdom 3,000,000 2,565,000 Consolidated Container Co. LLC, senior disc. note, 10.125%, 7/15/09 United States 4,500,000 2,497,500 Equistar Chemicals, senior note, 144A, 10.625%, 5/01/11 ......... United States 1,700,000 1,700,000 FiberMark Inc., senior note, 10.75%, 4/15/11 .................... United States 3,000,000 2,220,000 Graham Packaging Co., senior sub. note, B, 8.75%, 1/15/08 ....... United States 600,000 594,000 Graham Packaging Co., senior sub. note, 144A, 8.75%, 1/15/08 .... United States 2,100,000 2,079,000 Graphic Packaging International, senior note, 144A, 8.50%, 8/15/11 United States 2,700,000 2,835,000 Huntsman ICI Chemicals, senior disc. note, zero cpn., 12/31/09 .. United States 7,500,000 2,925,000 IMC Global Inc., senior note, 144A, 10.875%, 8/01/13 ............ United States 3,000,000 3,090,000
14 | Annual Report Franklin Universal Trust STATEMENT OF INVESTMENTS, AUGUST 31, 2003 (CONTINUED)
- ---------------------------------------------------------------------------------------------------------------------------- COUNTRY PRINCIPAL AMOUNT E VALUE - ---------------------------------------------------------------------------------------------------------------------------- BONDS (CONT.) PROCESS INDUSTRIES (CONT.) b Pindo Deli Finance Mauritius Ltd., senior note, 11.75%, 10/01/17 Indonesia $3,000,000 $ 795,000 United Industries Corp., senior sub. note, 9.875%, 4/01/09 ...... United States 1,300,000 1,332,500 ------------ 23,236,000 ------------ PRODUCER MANUFACTURING 10.7% Case New Holland Inc., senior note, 144A, 9.25%, 8/01/11 ........ Netherlands 3,000,000 3,176,250 Cummins Inc., senior note, 144A, 9.50%, 12/01/10 ................ United States 700,000 791,000 Legrand SA, senior note, 144A, 10.50%, 2/15/13 .................. France 3,000,000 3,315,000 NMHG Holding Co., senior note, 10.00%, 5/15/09 .................. United States 1,800,000 1,953,000 Nortek Inc., senior note, B, 9.125%, 9/01/07 .................... United States 3,000,000 3,075,000 Rexnord Corp., 10.125%, 12/15/12 ................................ United States 500,000 540,000 TRW Automotive Inc., senior note, 144A, 9.375%, 2/15/13 ......... United States 1,700,000 1,895,500 TRW Automotive Inc., senior note, 144A, 11.00%, 2/15/13 ......... United States 500,000 575,000 Westinghouse Air Brake, senior note, 144A, 6.875%, 7/31/13 ...... United States 1,700,000 1,691,500 ------------ 17,012,250 ------------ RETAIL TRADE 1.7% Rite Aid Corp., 144A, 6.125%, 12/15/08 .......................... United States 3,000,000 2,685,000 ------------ TECHNOLOGY SERVICES .1% b PSINet Inc., 10.50%, 12/01/06 ................................... United States 700,000 40,250 b PSINet Inc., 11.00%, 8/01/09 .................................... United States 3,250,000 186,875 ------------ 227,125 ------------ TRANSPORTATION 3.2% Great Lakes Dredge & Dock Corp., senior sub. note, 11.25%, 8/15/08 United States 1,800,000 1,899,000 Laidlaw International Inc., senior note, 144A, 10.75%, 6/15/11 .. United States 3,000,000 3,157,500 ------------ 5,056,500 ------------ UTILITIES 5.0% AES Corp., senior note, 9.375%, 9/15/10 ......................... United States 2,600,000 2,509,000 Calpine Corp., senior sub. note, 8.75%, 7/15/13 ................. United States 2,500,000 2,362,500 Dynegy Holdings Inc., senior note, 8.75%, 2/15/12 ............... United States 2,600,000 2,223,000 PG&E Corp., senior secured note, 144A, 6.875%, 7/15/08 .......... United States 800,000 816,000 ------------ 7,910,500 ------------ TOTAL BONDS (COST $177,640,688) ................................. 149,083,559 ------------ CONVERTIBLE BONDS 2.6% Millicom International Cellular SA, 144A, PIK, cvt., 2.00%, 6/01/06 ....................................................... Luxembourg 326,000 1,209,053 Nortel Networks Corp., cvt., 4.25%, 9/01/08 ..................... Canada 2,100,000 1,769,250 Trizec Hahn Corp., cvt., senior deb., 3.00%, 1/29/21 ............ Canada 1,500,000 1,080,000 ------------ TOTAL CONVERTIBLE BONDS (COST $3,043,176) ....................... 4,058,303 ------------ TOTAL LONG TERM INVESTMENTS (COST $240,855,365) ................. 207,883,780 ------------
Annual Report | 15 Franklin Universal Trust STATEMENT OF INVESTMENTS, AUGUST 31, 2003 (CONTINUED)
- ---------------------------------------------------------------------------------------------------------------------------- COUNTRY SHARES VALUE - ---------------------------------------------------------------------------------------------------------------------------- SHORT TERM INVESTMENT (COST $4,370,039) 2.8% d Franklin Institutional Fiduciary Trust Money Market Portfolio ... United States 4,370,039 $ 4,370,039 ------------ TOTAL INVESTMENTS (COST $245,225,404) 134.0% .................... 212,253,819 OTHER ASSETS, LESS LIABILITIES (34.0)% .......................... (53,889,987) ------------ NET ASSETS 100.0% ............................................... $ 158,363,832 ------------
CURRENCY ABBREVIATIONS | ZAR - South African Rand aNon-income producing bThe fund discontinues accruing income on defaulted securities. See Note 8. cSee Note 9 regarding restricted securities. dSee Note 7 regarding investments in the Franklin Institutional Fiduciary Trust Money Market Portfolio. eThe principal amount is stated in U.S. dollars unless otherwise indicated. 16 | See notes to financial statements. | Annual Report Franklin Universal Trust FINANCIAL STATEMENTS STATEMENT OF ASSETS AND LIABILITIES August 31, 2003
Assets: Investments in securities: Cost ...................................................................................................... $245,225,404 ------------ Value ..................................................................................................... 212,253,819 Receivables: Dividends and interest .................................................................................... 3,033,260 Note issuance costs (Note 3) ............................................................................... 200,000 ------------ Total assets .......................................................................................... 215,487,079 ------------ Liabilities: Payables: Affiliates ................................................................................................ 128,293 Note (Note 3) ............................................................................................. 55,000,000 Funds advanced by custodian ............................................................................... 1,282,871 Distributions to shareholders .............................................................................. 642,259 Other liabilities .......................................................................................... 69,824 ------------ Total liabilities ..................................................................................... 57,123,247 Net assets, at value ................................................................................. $158,363,832 ------------ Net assets consist of: Undistributed net investment income ........................................................................ $ (1,669,032) Net unrealized appreciation (depreciation) ................................................................. (32,971,026) Accumulated net realized gain (loss) ....................................................................... (61,811,535) Capital shares ............................................................................................. 254,815,425 ------------ Net assets, at value ................................................................................. $158,363,832 ------------ Net asset value per share ($158,363,832 (DIVIDE) 27,924,294 shares outstanding) ............................. $5.67 ------------
Annual Report | See notes to financial statements. | 17 Franklin Universal Trust FINANCIAL STATEMENTS (CONTINUED) STATEMENT OF OPERATIONS for the year ended August 31, 2003
Investment income: Dividends ................................................................................................. $ 2,756,704 Interest .................................................................................................. 14,904,902 ------------ Total investment income .............................................................................. 17,661,606 ------------ Expenses: Management fees (Note 4) .................................................................................. 1,459,614 Transfer agent fees ....................................................................................... 87,378 Custodian fees ............................................................................................ 10,463 Reports to shareholders ................................................................................... 29,497 Professional fees ......................................................................................... 66,465 Trustees' fees and expenses ............................................................................... 19,835 Amortization of note issuance costs (Note 3) .............................................................. 39,915 Note prepayment fee (Note 3) .............................................................................. 313,467 Other ..................................................................................................... 47,424 ------------ Expenses before interest expense ..................................................................... 2,074,058 Interest expense (Note 3) ............................................................................ 3,096,720 ------------ Total expenses ...................................................................................... 5,170,778 ------------ Net investment income .............................................................................. 12,490,828 ------------ Realized and unrealized gains (losses): Net realized gain (loss) from: Investments .............................................................................................. (21,443,831) Foreign currency transactions ............................................................................ 2,963 ------------ Net realized gain (loss) (21,440,868) Net unrealized appreciation (depreciation) on: Investments .............................................................................................. 37,996,015 Translation of assets and liabilities denominated in foreign currencies .................................. 846 ------------ Net unrealized appreciation (depreciation) ........................................................... 37,996,861 ------------ Net realized and unrealized gain (loss) .................................................................... 16,555,993 ------------ Net increase (decrease) in net assets resulting from operations ............................................ $ 29,046,821 ------------
18 | See notes to financial statements. | Annual Report Franklin Universal Trust FINANCIAL STATEMENTS (CONTINUED) STATEMENTS OF CHANGES IN NET ASSETS for the years ended August 31, 2003 and 2002
2003 2002 ----------------------------- Increase (decrease) in net assets: Operations: Net investment income .................................................................... $ 12,490,828 $ 17,785,714 Net realized gain (loss) from investments and foreign currency transactions .............. (21,440,868) (30,694,923) Net unrealized appreciation (depreciation) on investments and translation of assets and liabilities denominated in foreign currencies ....................................... 37,996,861 (25,828,050) ----------------------------- Net increase (decrease) in net assets resulting from operations ...................... 29,046,821 (38,737,259) Distributions to shareholders from net investment income .................................. (13,869,575) (21,551,095) Capital share transactions (Note 2) ....................................................... 1,567,138 3,309,340 ----------------------------- Net increase (decrease) in net assets ................................................ 16,744,384 (56,979,014) Net assets: Beginning of year ......................................................................... 141,619,448 198,598,462 ----------------------------- End of year ............................................................................... $158,363,832 $141,619,448 ----------------------------- Undistributed net investment income included in net assets: End of year ............................................................................... $ (1,669,032) $ (709,967) -----------------------------
Annual Report | See notes to financial statements. | 19 Franklin Universal Trust FINANCIAL STATEMENTS (CONTINUED) STATEMENT OF CASH FLOWS for the year ended August 31, 2003
Cash flow from operating activities: Dividends and interest received .......................................................................... $ 15,904,854 Operating expenses paid .................................................................................. (1,676,273) Interest expense paid .................................................................................... (3,096,720) -------------- Cash provided - operations .............................................................................. 11,131,861 -------------- Cash flow from investing activities: Investment purchases ..................................................................................... (316,791,929) Investment sales and maturities .......................................................................... 321,271,235 -------------- Cash provided - investments ............................................................................. 4,479,306 -------------- Cash flow from financing activities: Prepayment of Note ....................................................................................... (8,313,467) Proceeds from Note maturity .............................................................................. (52,000,000) Note issuance ............................................................................................ 55,000,000 Payment of Note issuance costs ........................................................................... (172,729) Distributions to shareholders ............................................................................ (11,660,178) -------------- Cash used - financing ................................................................................... (17,146,374) -------------- Net change in cash ........................................................................................ (1,535,207) Cash at beginning of year ................................................................................. 252,336 -------------- Cash at end of year ....................................................................................... $ (1,282,871) -------------- RECONCILIATION OF NET INVESTMENT INCOME TO NET CASH PROVIDED BY OPERATIONS FOR THE YEAR ENDED AUGUST 31, 2003 Net investment income ..................................................................................... $ 12,490,828 Amortization income ...................................................................................... (2,365,637) Amortization of note issuance costs ...................................................................... 39,915 Decrease in dividends and interest receivable ............................................................ 608,885 Note issuance cost liability ............................................................................. 27,271 Decrease in liabilities .................................................................................. 17,132 Note prepayment fee ...................................................................................... 313,467 -------------- Cash provided - operations ................................................................................ $ 11,131,861 --------------
20 | See notes to financial statements. | Annual Report Franklin Universal Trust NOTES TO FINANCIAL STATEMENTS 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES Franklin Universal Trust (the Fund) is registered under the Investment Company Act of 1940 as a diversified, closed-end investment company. The Fund has two classes of securities: senior fixed-rate note (the Note) and shares of beneficial interest (the Shares). The Fund seeks high current income consistent with preservation of capital. The following summarizes the Fund's significant accounting policies. A. SECURITY VALUATION Securities listed or traded on a recognized national exchange or NASDAQ are valued at the last reported sales price. Over-the-counter securities and listed securities for which no sale is reported are valued within the range of the latest quoted bid and asked prices. Restricted securities and securities for which market quotations are not readily available are valued at fair value as determined by management in accordance with procedures established by the Board of Trustees. B. FOREIGN CURRENCY TRANSLATION Portfolio securities and other assets and liabilities denominated in foreign currencies are translated into U.S. dollars based on the exchange rate of such currencies against U.S. dollars on the date of valuation. Purchases and sales of securities and income items denominated in foreign currencies are translated into U.S. dollars at the exchange rate in effect on the transaction date. The Fund does not separately report the effect of changes in foreign exchange rates from changes in market prices on securities held. Such changes are included in net realized and unrealized gain or loss from investments. Realized foreign exchange gains or losses arise from sales of foreign currencies, currency gains or losses realized between the trade and settlement dates on securities transactions and the difference between the recorded amounts of dividends, interest, and foreign withholding taxes and the U.S. dollars equivalent of the amounts actually received or paid. Net unrealized foreign exchange gains and losses arise from changes in foreign exchange rates on foreign denominated assets and liabilities other than investments in securities held at the end of the reporting period. C. SECURITIES PURCHASED ON A WHEN-ISSUED OR DELAYED DELIVERY BASIS The Fund may purchase securities on a when-issued or 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. INCOME TAXES No provision has been made for income taxes because the Fund's policy is to qualify as a regulated investment company under the Internal Revenue Code and to distribute substantially all of its tax-able income. Annual Report | 21 Franklin Universal Trust NOTES TO FINANCIAL STATEMENTS (CONTINUED) 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) E. SECURITY TRANSACTIONS, INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS Security transactions are accounted for on trade date. Realized gains and losses on security transactions are determined on a specific identification basis. Certain income from foreign securities is recorded as soon as information is available to the Fund. Interest income and estimated expenses are accrued daily. Discounts and premiums on securities purchased are amortized over the lives of the respective securities. Dividend income and distributions to shareholders are recorded on the ex-dividend date. F. ACCOUNTING ESTIMATES The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the amounts of income and expense during the reporting period. Actual results could differ from those estimates. G. GUARANTEES AND INDEMNIFICATIONS Under the Fund's organizational documents, its officers and trustees are indemnified against certain liability arising out of the performance of their duties to the Funds. Additionally, in the normal course of business, the Fund enters into contracts with service providers that contain general indemnification clauses. The Fund's maximum exposure under these arrangements is unknown, as this would involve future claims that may be made against the Fund that have not yet occurred. However, based on experience, the Fund expects the risk of loss to be remote. 2. SHARES OF BENEFICIAL INTEREST At August 31, 2003, there were unlimited number of shares authorized ($0.01 par value). Transactions in the Fund's shares were as follows:
------------------------------------------------- AUGUST 31, 2003 AUGUST 31, 2002 SHARES AMOUNT SHARES AMOUNT ------------------------------------------------- Shares issued in reinvestment of distributions 309,686 $1,567,138 465,453 $3,309,340
3. SENIOR FIXED-RATE NOTES During the year ended August 31, 2003, the Fund had a $52,000,000 senior note outstanding, bearing interest at 5.94% per year. On September 6, 2002, the Fund retired $8,000,000 of the principal amount and paid a prepayment fee of $313,467, as is disclosed in the accompanying financial statements. On August 29, 2003, this Note matured and was paid in full. 22 | Annual Report Franklin Universal Trust NOTES TO FINANCIAL STATEMENTS (CONTINUED) 3. SENIOR FIXED-RATE NOTES (CONTINUED) On August 29, 2003, the Fund issued $55 million principal amount of a new class of five-year senior note (the Note). The Note is a general unsecured obligation of the Fund and ranks senior to Trust shares and all existing or future unsecured indebtedness of the Fund. The Note bears interest, payable semi-annually, at the rate of 4.14% per year, to maturity on August 29, 2008. The Note was issued in a private placement, and is not available for resale; therefore, no market value can be obtained for the Note. The Fund is required to maintain on a monthly basis a specified discounted asset value for its portfolio in compliance with guidelines established by Standard & Poor's Corporation, and is required to maintain asset coverage for the Note of at least 300%. The Fund has met these requirements during the year ended August 31, 2003. The issuance costs of $200,000 incurred by the Fund are deferred and amortized on an interest method basis over the term of the Note. 4. TRANSACTIONS WITH AFFILIATES Certain officers and trustees of the Fund are also officers or directors of the following entities: - ------------------------------------------------------------------------------ ENTITY AFFILIATION - ------------------------------------------------------------------------------ Franklin Advisers, Inc. (Advisers) Investment manager Franklin Templeton Services, LLC (FT Services) Administrative manager The Fund pays an investment management fee to Advisers of .75% per year of the average weekly net assets of the Fund excluding the principal amount of the Note. Under an agreement with Advisers, FT Services provides administrative services to the Fund. The fee is paid by Advisers based on average daily net assets, and is not an additional expense of the Fund. 5. INCOME TAXES At August 31, 2003, the Fund has tax basis capital losses of $47,455,063, which may be carried over to offset future capital gains. Such losses expire as follows: Capital loss carryovers expiring in: 2008 ............................................. $ 5,088,195 2009 ............................................. 1,167,255 2010 ............................................. 6,827,086 2011 ............................................. 34,372,527 ----------- $47,455,063 ----------- Annual Report | 23 Franklin Universal Trust NOTES TO FINANCIAL STATEMENTS (CONTINUED) 5. INCOME TAXES (CONTINUED) At August 31, 2003, the Fund has deferred capital losses occurring subsequent to October 31, 2002 of $14,356,472. For tax purposes, such losses will be reflected in the year ending August 31, 2004. Tax character of distributions paid during the years ended August 31, 2003 and 2002, was as follows: -------------------------- 2003 2002 -------------------------- Distributions paid from: Ordinary income .......................... $13,869,575 $21,551,095 Long-term capital gain ................... -- -- -------------------------- $13,869,575 $21,551,095 -------------------------- At August 31, 2003, the cost of investments, net unrealized appreciation (depreciation), undistributed ordinary income and undistributed long-term capital gains for income tax purposes were as follows: Cost of investments ...................................... $245,383,200 ------------- Unrealized appreciation .................................. $ 19,836,811 Unrealized depreciation .................................. (52,966,192) ------------- Net unrealized appreciation (depreciation) ............... $(33,129,381) ------------- Undistributed ordinary income ............................ $ 437,605 Undistributed capital gains .............................. -- ------------- Distributable earnings ................................... $ 437,605 ------------- Net investment income differs for financial statement and tax purposes primarily due to differing treatments of defaulted securities, foreign currency transactions, and bond discounts and premiums. Net realized capital losses differ for financial statement and tax purposes primarily due to differing treatment of foreign currency transactions, and bond discounts and premiums. 6. INVESTMENT TRANSACTIONS Purchases and sales of securities (excluding short-term securities) for the year ended August 31, 2003 aggregated $125,124,836 and $129,254,799 respectively. 7. SWEEP MONEY FUND The Fund may invest in the Franklin Institutional Fiduciary Trust Money Market Portfolio (the 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 fees paid by the Sweep Money Fund. The Fund earned $30,732 of dividend income from investment in the Sweep Money Fund for the year ended August 31, 2003. 24 | Annual Report Franklin Universal Trust NOTES TO FINANCIAL STATEMENTS (CONTINUED) 8. CREDIT RISK AND DEFAULTED SECURITIES The Fund has 70.5% of its portfolio invested in below investment grade and comparable quality unrated high yield securities, which tend to be more sensitive to economic conditions than higher rated securities. The risk of loss due to default by the issuer may be significantly greater for the holders of high yielding securities because such securities are generally unsecured and are often subordinated to other creditors of the issuer. The Fund held defaulted securities and other securities for which the income has been deemed uncollectible. The Fund discontinues accruing income on these securities and provides an estimate for losses on interest receivable. At August 31, 2003, the value of these securities was $6,522,624 representing 4.1% of the Fund's net assets. For information as to specific securities, see the accompanying Statement of Investments. 9. RESTRICTED SECURITIES At August 31, 2003, investments in securities included issues that are restricted or illiquid. Restricted securities are often purchased in private placement transactions, are not registered under the Securities Act of 1933, may have contractual restrictions on resale, and are valued under methods approved by the Board of Trustees as reflecting fair value. A security may also be considered illiquid if it lacks a readily available market or if its valuation has not changed for a certain period of time. At August 31, 2003, the Fund held investments in restricted and illiquid securities that were valued under approved methods by the Trustees, as follows:
- ----------------------------------------------------------------------------------------------------- PRINCIPAL ACQUISITION AMOUNT/SHARES ISSUER DATE COST VALUE - ----------------------------------------------------------------------------------------------------- $765,361 Atherton Franchise Capital, LP, 13.073%, 12/01/08 ........................... 4/28/94 $765,361 $420,949 3,000 Poland Telecom Finance, wts., 144A, 12/01/07 .................................... 11/24/97 18,000 -- 918,410 Spalding Inc., 144A, PIK, 9.50%, 5/01/08 ..................................... 4/29/02 345,591 -- -------- TOTAL RESTRICTED SECURITIES (.27% of Net Assets) $420,949 --------
10. OTHER CONSIDERATIONS Advisers, as the Fund's manager, may serve as a member of various bondholders' steering committees, on credit committees or may represent the Funds in certain corporate restructuring negotiations. Currently the manager serves in one or more of these capacities for Century Communications, Magellan Health Services and Ormet Corp. As a result of this involvement, Advisers may be in possession of certain material non-public information. If the Fund's Manager, while in possession of such information, seeks to sell any of its holdings in these securities it will comply with all applicable federal securities laws. Annual Report | 25 Franklin Universal Trust INDEPENDENT AUDITORS' REPORT TO THE BOARD OF TRUSTEES AND SHAREHOLDERS OF FRANKLIN UNIVERSAL TRUST In our opinion, the accompanying statement of assets and liabilities, including the statement of investments, and the related statement of operations, of changes in net assets, and of cash flows and the financial highlights present fairly, in all material respects, the financial position of Franklin Universal Trust (the "Fund") at August 31, 2003, the results of its operations and its cash flows for the year then ended, the changes in its net assets for each of the two years in the period then ended and the financial highlights for each of the periods presented, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Fund's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with auditing standards generally accepted in the United States of America which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at August 31, 2003 by correspondence with the custodian and brokers, provide a reasonable basis for the opinion expressed above. PricewaterhouseCoopers LLP San Francisco, California October 6, 2003 26 | Annual Report Franklin Universal Trust TAX DESIGNATION (UNAUDITED) Under Section 854(b)(2) of the Internal Revenue Code (Code), the Fund hereby designates up to a maximum of $1,901,531 as qualified dividends for purposes of the maximum rate under Section 1(h)(11) of the Code for the fiscal year ended August 31, 2003. In January 2004, shareholders will receive Form 1099-DIV which will include their share of qualified dividends distributed during the calendar year 2003. Shareholders are advised to check with their tax advisors for information on the treatment of these amounts on their individual income tax returns. Under Section 854(b)(2) of the Internal Revenue Code, the Fund hereby designates 15.28% of the ordinary income dividends as income qualifying for the dividends received deduction for the fiscal year ended August 31, 2003. Annual Report | 27 Board Members and Officers The name, age and address of the officers and board members, as well as their affiliations, positions held with the Trust, principal occupations during the past five years and number of portfolios overseen in the Franklin Templeton Investments fund complex are shown below. Each board member will serve until that person's successor is elected and qualified. INDEPENDENT BOARD MEMBERS
- ----------------------------------------------------------------------------------------------------------------------------------- NUMBER OF PORTFOLIOS IN LENGTH OF FUND COMPLEX OVERSEEN NAME, AGE AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD - ----------------------------------------------------------------------------------------------------------------------------------- FRANK H. ABBOTT, III (82) Trustee Since 1988 115 None One Franklin Parkway San Mateo, CA 94403-1906 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: President and Director, Abbott Corporation (an investment company); and FORMERLY, Director, MotherLode Gold Mines Consolidated (gold mining) (until 1996) and Vacu-Dry Co. (food processing) (until 1996). - ----------------------------------------------------------------------------------------------------------------------------------- HARRIS J. ASHTON (71) Trustee Since 1988 142 Director, Bar-S Foods (meat packing One Franklin Parkway company). San Mateo, CA 94403-1906 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Director of various companies; and FORMERLY, Director, RBC Holdings, Inc. (bank holding company) (until 2002); and President, Chief Executive Officer and Chairman of the Board, General Host Corporation (nursery and craft centers) (until 1998). - ----------------------------------------------------------------------------------------------------------------------------------- ROBERT F. CARLSON (75) Trustee Since 2000 52 None One Franklin Parkway San Mateo, CA 94403-1906 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Vice President and past President, Board of Administration, California Public Employees Retirement Systems (CALPERS); and FORMERLY, member and Chairman of the Board, Sutter Community Hospitals; member, Corporate Board, Blue Shield of California; and Chief Counsel, California Department of Transportation. - ----------------------------------------------------------------------------------------------------------------------------------- S. JOSEPH FORTUNATO (71) Trustee Since 1989 143 None One Franklin Parkway San Mateo, CA 94403-1906 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Attorney; and FORMERLY, member of the law firm of Pitney, Hardin, Kipp & Szuch. - ----------------------------------------------------------------------------------------------------------------------------------- FRANK W.T. LAHAYE (74) Trustee Since 1988 115 Director, The California Center for Land One Franklin Parkway Recycling (redevelopment). San Mateo, CA 94403-1906 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: General Partner, Las Olas L.P. (Asset Management); and FORMERLY, Chairman, Peregrine Venture Management Company (venture capital). - -----------------------------------------------------------------------------------------------------------------------------------
28 | Annual Report
- ----------------------------------------------------------------------------------------------------------------------------------- NUMBER OF PORTFOLIOS IN LENGTH OF FUND COMPLEX OVERSEEN NAME, AGE AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD - ----------------------------------------------------------------------------------------------------------------------------------- GORDON S. MACKLIN (75) Trustee Since 1993 142 Director, White Mountains One Franklin Parkway Insurance Group, Ltd. (holding San Mateo, CA 94403-1906 company); Martek Biosciences Corporation; MedImmune, Inc. (biotechnology); Overstock.com (Internet services); and Spacehab, Inc. (aerospace services); and FORMERLY, Director, MCI Communication Corporation (subsequently known as MCI WorldCom, Inc. and WorldCom, Inc.) (communications services) (1988-2002). PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Deputy Chairman, White Mountains Insurance Group, Ltd. (holding company); and FORMERLY, Chairman, White River Corporation (financial services) (1993-1998) and Hambrecht & Quist Group (investment banking) (1987-1992); and President, National Association of Securities Dealers, Inc. (1970-1987). - ----------------------------------------------------------------------------------------------------------------------------------- INTERESTED BOARD MEMBERS AND OFFICERS - ----------------------------------------------------------------------------------------------------------------------------------- NUMBER OF PORTFOLIOS IN LENGTH OF FUND COMPLEX OVERSEEN NAME, AGE AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD - ----------------------------------------------------------------------------------------------------------------------------------- **EDWARD B. JAMIESON (55) Trustee, Trustee and 8 None One Franklin Parkway President and President since San Mateo, CA 94403-1906 Chief 1993 and Chief Executive Executive Officer- Officer- Investment Investment Management Management since 2002 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Executive Vice President and Portfolio Manager, Franklin Advisers, Inc.; and officer and/or trustee, as the case may be, of other subsidiaries of Franklin Resources, Inc. and of five of the investment companies in Franklin Templeton Investments. - ----------------------------------------------------------------------------------------------------------------------------------- **CHARLES B. JOHNSON (70) Trustee and Trustee since 142 None One Franklin Parkway Chairman of 1988 and San Mateo, CA 94403-1906 the Board Chairman of the Board since 1993 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Chairman of the Board, Chief Executive Officer, Member - Office of the Chairman and Director, Franklin Resources, Inc.; Vice President, Franklin Templeton Distributors, Inc.; Director, Fiduciary Trust Company International; and officer and/or director or trustee, as the case may be, of some of the other subsidiaries of Franklin Resources, Inc. and of 46 of the investment companies in Franklin Templeton Investments. - -----------------------------------------------------------------------------------------------------------------------------------
Annual Report | 29
- ----------------------------------------------------------------------------------------------------------------------------------- NUMBER OF PORTFOLIOS IN LENGTH OF FUND COMPLEX OVERSEEN NAME, AGE AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD - ----------------------------------------------------------------------------------------------------------------------------------- **RUPERT H. JOHNSON, JR. (63) Trustee and Trustee and 125 None One Franklin Parkway Senior Vice Senior Vice San Mateo, CA 94403-1906 President President since 1988 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Vice Chairman, Member - Office of the Chairman and Director, Franklin Resources, Inc.; Vice President and Director, Franklin Templeton Distributors, Inc.; Director, Franklin Advisers, Inc. and Franklin Investment Advisory Services, Inc.; Senior Vice President, Franklin Advisory Services, LLC; and officer and/or director or trustee, as the case may be, of some of the other subsidiaries of Franklin Resources, Inc. and of 49 of the investment companies in Franklin Templeton Investments. - ----------------------------------------------------------------------------------------------------------------------------------- HARMON E. BURNS (58) Vice President Since 1988 Not Applicable None One Franklin Parkway San Mateo, CA 94403-1906 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Vice Chairman, Member - Office of the Chairman and Director, Franklin Resources, Inc.; Vice President and Director, Franklin Templeton Distributors, Inc.; Executive Vice President, Franklin Advisers, Inc.; Director, Franklin Investment Advisory Services, Inc.; and officer and/or director or trustee, as the case may be, of some of the other subsidiaries of Franklin Resources, Inc. and of 49 of the investment companies in Franklin Templeton Investments. - ----------------------------------------------------------------------------------------------------------------------------------- MARTIN L. FLANAGAN (43) Vice President Since 1995 Not Applicable None One Franklin Parkway San Mateo, CA 94403-1906 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: President, Franklin Resources, Inc.; Senior Vice President and Chief Financial Officer, Franklin Mutual Advisers, LLC; Executive Vice President, Chief Financial Officer and Director, Templeton Worldwide, Inc.; Executive Vice President and Chief Operating Officer, Templeton Investment Counsel, LLC; President and Director, Franklin Advisers, Inc.; Executive Vice President, Franklin Investment Advisory Services, Inc. and Franklin Templeton Investor Services, LLC; Chief Financial Officer, Franklin Advisory Services, LLC; Chairman, Franklin Templeton Services, LLC; and officer and/or director or trustee, as the case may be, of some of the other subsidiaries of Franklin Resources, Inc. and of 49 of the investment companies in Franklin Templeton Investments. - -----------------------------------------------------------------------------------------------------------------------------------
30 | Annual Report
- ----------------------------------------------------------------------------------------------------------------------------------- NUMBER OF PORTFOLIOS IN LENGTH OF FUND COMPLEX OVERSEEN NAME, AGE AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD - ----------------------------------------------------------------------------------------------------------------------------------- JIMMY D. GAMBILL (56) Senior Vice Since 2002 Not Applicable None 500 East Broward Blvd. President and Suite 2100 Chief Executive Fort Lauderdale, Officer- Finance and FL 33394-3091 Administration PRINCIPAL OCCUPATION DURING PAST 5 YEARS: President, Franklin Templeton Services, LLC; Senior Vice President, Templeton Worldwide, Inc.; and officer of 51 of the investment companies in Franklin Templeton Investments. - ----------------------------------------------------------------------------------------------------------------------------------- DAVID P. GOSS (56) Vice President Since 2000 Not Applicable None One Franklin Parkway San Mateo, CA 94403-1906 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Associate General Counsel, Franklin Resources, Inc.; officer and director of one of the subsidiaries of Franklin Resources, Inc.; officer of 51 of the investment companies in Franklin Templeton Investments; and FORMERLY, President, Chief Executive Officer and Director, Property Resources Equity Trust (until 1999) and Franklin Select Realty Trust (until 2000). - ----------------------------------------------------------------------------------------------------------------------------------- BARBARA J. GREEN (55) Vice President Since 2000 Not Applicable None One Franklin Parkway San Mateo, CA 94403-1906 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Vice President and Deputy General Counsel, Franklin Resources, Inc.; Secretary and Senior Vice President, Templeton Worldwide, Inc.; Secretary, Franklin Mutual Advisers, LLC; and officer of some of the other subsidiaries of Franklin Resources, Inc. and of 51 of the investment companies in Franklin Templeton Investments; and FORMERLY, Deputy Director, Division of Investment Management, Executive Assistant and Senior Advisor to the Chairman, Counselor to the Chairman, Special Counsel and Attorney Fellow, U.S. Securities and Exchange Commission (1986-1995); Attorney, Rogers & Wells (until 1986); and Judicial Clerk, U.S. District Court (District of Massachusetts) (until 1979). - -----------------------------------------------------------------------------------------------------------------------------------
Annual Report | 31
- ----------------------------------------------------------------------------------------------------------------------------------- NUMBER OF PORTFOLIOS IN LENGTH OF FUND COMPLEX OVERSEEN NAME, AGE AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD - ----------------------------------------------------------------------------------------------------------------------------------- KIMBERLEY H. MONASTERIO (39) Treasurer and Treasurer since Not Applicable None One Franklin Parkway Chief 2000 and Chief San Mateo, CA 94403-1906 Financial Financial Officer Officer since 2002 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Senior Vice President, Franklin Templeton Services, LLC; and officer of 51 of the investment companies in Franklin Templeton Investments. - ----------------------------------------------------------------------------------------------------------------------------------- MURRAY L. SIMPSON (66) Vice President Since 2000 Not Applicable None One Franklin Parkway and Secretary San Mateo, CA 94403-1906 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Executive Vice President and General Counsel, Franklin Resources, Inc.; officer and/or director, as the case be, of some of the subsidiaries of Franklin Resources, Inc. and of 51 of the investment companies in Franklin Templeton Investments; and FORMERLY, Chief Executive Officer and Managing Director, Templeton Franklin Investment Services (Asia) Limited (until 2000); and Director, Templeton Asset Management Ltd. (until 1999). - -----------------------------------------------------------------------------------------------------------------------------------
*We base the number of portfolios on each separate series of the U.S. registered investment companies within the Franklin Templeton Investments fund complex. These portfolios have a common investment adviser or affiliated investment advisers. **Charles B. Johnson and Rupert H. Johnson, Jr. are considered interested persons of the Trust under the federal securities laws due to their positions as officers and directors and major shareholders of Franklin Resources, Inc. (Resources), which is the parent company of the Trust's adviser and distributor. Edward B. Jamieson is considered an interested person of the Trust under the federal securities laws due to his position as an officer of Franklin Advisers, Inc., which is the Trust's adviser. Note: Charles B. Johnson and Rupert H. Johnson, Jr. are brothers. THE SARBANES-OXLEY ACT OF 2002 AND RULES ADOPTED BY THE SECURITIES AND EXCHANGE COMMISSION REQUIRE THE TRUST TO DISCLOSE WHETHER THE TRUST'S AUDIT COMMITTEE INCLUDES AT LEAST ONE MEMBER WHO IS AN AUDIT COMMITTEE FINANCIAL EXPERT WITHIN THE MEANING OF SUCH ACT AND RULES. THE FUND'S BOARD OF TRUSTEES HAVE DETERMINED THAT THERE IS AT LEAST ONE SUCH FINANCIAL EXPERT ON THE AUDIT COMMITTEE AND HAS DESIGNATED FRANK W.T. LAHAYE AS ITS AUDIT COMMITTEE FINANCIAL EXPERT. THE BOARD BELIEVES THAT MR. LAHAYE QUALIFIES AS SUCH AN EXPERT IN VIEW OF HIS EXTENSIVE BUSINESS BACKGROUND AND EXPERIENCE, INCLUDING SERVICE AS PRESIDENT AND DIRECTOR OF MCCORMICK SELPH ASSOCIATES FROM 1954 THROUGH 1965; DIRECTOR AND CHAIRMAN OF TELEDYNE CANADA LTD. FROM 1966 THROUGH 1971; DIRECTOR AND CHAIRMAN OF QUARTERDECK CORPORATION FROM 1982 THROUGH 1998; AND SERVICES AS A DIRECTOR OF VARIOUS OTHER PUBLIC COMPANIES INCLUDING U.S. TELEPHONE INC. (1981-1984), FISHER IMAGING INC. (1991-1998) AND DIGITAL TRANSMISSIONS SYSTEMS (1995-1999). IN ADDITION, MR. LAHAYE SERVED FROM 1981 TO 2000 AS A DIRECTOR AND CHAIRMAN OF PEREGRINE VENTURE MANAGEMENT CO., A VENTURE CAPITAL FIRM, AND HAS BEEN A MEMBER AND CHAIRMAN OF THE FUND'S AUDIT COMMITTEE SINCE ITS INCEPTION. AS A RESULT OF SUCH BACKGROUND AND EXPERIENCE, THE BOARD OF TRUSTEES BELIEVES THAT MR. LAHAYE HAS ACQUIRED AN UNDERSTANDING OF GENERALLY ACCEPTED ACCOUNTING PRINCIPLES AND FINANCIAL STATEMENTS, THE GENERAL APPLICATION OF SUCH PRINCIPLES IN CONNECTION WITH THE ACCOUNTING ESTIMATES, ACCRUALS AND RESERVES, AND ANALYZING AND EVALUATING FINANCIAL STATEMENTS THAT PRESENT A BREADTH AND LEVEL OF COMPLEXITY OF ACCOUNTING ISSUES GENERALLY COMPARABLE TO THOSE OF THE FUND, AS WELL AS AN UNDERSTANDING OF INTERNAL CONTROLS AND PROCEDURES FOR FINANCIAL REPORTING AND AN UNDERSTANDING OF AUDIT COMMITTEE FUNCTIONS. MR. LAHAYE IS AN INDEPENDENT DIRECTOR AS THAT TERM IS DEFINED UNDER THE RELEVANT STOCK EXCHANGE RULES AND SECURITIES AND EXCHANGE COMMISSION RULES AND RELEASES. 32 | Annual Report Franklin Universal Trust PROXY VOTING POLICIES AND PROCEDURES The Fund 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 1-954/847-2268 or by sending a written request to: Franklin Templeton Companies, LLC, 500 East Broward Boulevard, Suite 1500, Fort Lauderdale, FL 33394, Attention: Proxy Group. Annual Report | 33 This page intentionally left blank. This page intentionally left blank. This page intentionally left blank. Literature Request For a brochure and prospectus, which contains more complete information, including charges and expenses, call Franklin Templeton Investments at 1-800/DIAL BEN(R) (1-800/342-5236). Please read the prospectus carefully before investing or sending money. 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. FRANKLIN TEMPLETON INVESTMENTS INTERNATIONAL Mutual European Fund Templeton China World Fund Templeton Developing Markets Trust Templeton Foreign Fund Templeton Foreign Smaller Companies Fund Templeton International (Ex EM) Fund GLOBAL Franklin Global Aggressive Growth Fund Franklin Global Growth Fund Mutual Discovery Fund Templeton Capital Accumulator Fund Templeton Global Long-Short Fund Templeton Global Opportunities Trust Templeton Global Smaller Companies Fund Templeton Growth Fund Templeton World Fund GROWTH Franklin Aggressive Growth Fund Franklin Capital Growth Fund Franklin Flex Cap Growth Fund Franklin Small-Mid Cap Growth Fund Franklin Small Cap Growth Fund II 1 VALUE Franklin Balance Sheet Investment Fund 2 Franklin Equity Income Fund Franklin Large Cap Value Fund Franklin MicroCap Value Fund 3 Franklin Small Cap Value Fund Mutual Beacon Fund Mutual Qualified Fund Mutual Shares Fund BLEND Franklin Blue Chip Fund Franklin Convertible Securities Fund Franklin Growth Fund Franklin Rising Dividends Fund Franklin U.S. Long-Short Fund 4 SECTOR Franklin Biotechnology Discovery Fund Franklin DynaTech Fund Franklin Global Communications Fund Franklin Global Health Care Fund Franklin Gold and Precious Metals Fund Franklin Natural Resources Fund Franklin Real Estate Securities Fund Franklin Utilities Fund Franklin Technology Fund Mutual Financial Services Fund ASSET ALLOCATION Franklin Templeton Conservative Target Fund Franklin Templeton Growth Target Fund Franklin Templeton Moderate Target Fund Franklin Templeton Corefolio Allocation Fund Franklin Templeton Founding Funds Allocation Fund INCOME Franklin Adjustable U.S. Government Securities Fund 5 Franklin's AGE High Income Fund Franklin Federal Money Fund 5, 6 Franklin Floating Rate Daily Access Fund Franklin Floating Rate Trust 7 Franklin Income Fund Franklin Money Fund 5, 6 Franklin Short-Intermediate U.S. Government Securities Fund 5 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 TAX-FREE INCOME 8 Double Tax-Free Income Fund Federal Intermediate-Term Tax-Free Income Fund Federal Limited-Term Tax-Free Income Fund Federal Tax-Free Income Fund High Yield Tax-Free Income Fund Insured Tax-Free Income Fund 9 Tax-Exempt Money Fund 5, 6 STATE-SPECIFIC TAX-FREE INCOME 8 Alabama Arizona California 10 Colorado Connecticut Florida 10 Georgia Kentucky Louisiana Maryland Massachusetts 9 Michigan 9 Minnesota 9 Missouri New Jersey New York 10 North Carolina Ohio 9 Oregon Pennsylvania Tennessee Virginia VARIABLE INSURANCE PRODUCTS FUNDS Franklin Templeton Variable Insurance Products Trust 11 1. The fund is closed to new investors. Existing shareholders can continue adding to their accounts. 2. The fund is only open to existing shareholders as well as select retirement plans. 3. Effective June 30, 2003, the fund reopened to all new investors. 4. Upon reaching approximately $350 million in assets, the fund will close to all investors. 5. An investment in the fund is neither insured nor guaranteed by the U.S. government or by any other entity or institution. 6. No assurance exists that the fund's $1.00 per share price will be maintained. It is possible to lose money by investing in the fund. 7. 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. 8. For investors subject to the alternative minimum tax, a small portion of these dividends may be taxable. Distributions of capital gains are generally taxable. 9. Portfolio of insured municipal securities. 10. These funds are available in two or more variations, including long-term portfolios, portfolios of insured securities, a high-yield portfolio (CA) and limited-term, intermediate-term and money market portfolios (CA and NY). 11. The funds of the Franklin Templeton Variable Insurance Products Trust are generally available only through insurance company variable contracts. 09/03 Not part of the annual report [LOGO OMITTED] FRANKLIN(R) TEMPLETON(R) INVESTMENTS One Franklin Parkway San Mateo, CA 94403-1906 ANNUAL REPORT AND SHAREHOLDER INFORMATION FRANKLIN UNIVERSAL TRUST INVESTMENT MANAGER Franklin Advisers, Inc. 1-800/DIAL BEN(R) TRANSFER AGENT PFPC Inc. 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 A2003 10/03 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 10(A), THE REGISTRANT IS ATTACHING AS AN EXHIBIT A COPY OF ITS CODE OF ETHICS THAT APPLIES TO ITS PRINCIPAL EXECUTIVE OFFICERS 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 IF FRANK W.T. LAHAYE 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. N/A ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END MANAGEMENT INVESTMENT COMPANIES. The board of trustees of the Trust has delegated the authority to vote proxies related to the portfolio securities held by the Fund to the Fund's manager, Franklin Advisers, Inc., in accordance with the Proxy Voting Policies and Procedures (Policies) adopted by the manager. The manager has delegated its administrative duties with respect to the voting of proxies to the Proxy Group within Franklin Templeton Companies, LLC (Proxy Group), an affiliate and wholly owned subsidiary of Franklin Resources, Inc. All proxies received by the Proxy Group will be voted based upon the manager's instructions and/or policies. To assist it in analyzing proxies, the manager subscribes to Institutional Shareholder Services (ISS), an unaffiliated third party corporate governance research service that provides in-depth analyses of shareholder meeting agendas, vote recommendations, recordkeeping and vote disclosure services. Although ISS' analyses are thoroughly reviewed and considered in making a final voting decision, the manager does not consider recommendations from ISS or any other third party to be determinative of the manager's ultimate decision. The manager votes proxies solely in the interests of the Fund and its shareholders. As a matter of policy, the officers, directors and employees of the Fund, the manager and the Proxy Group will not be influenced by outside sources whose interests conflict with the interests of the Fund and its shareholders. All conflicts are resolved in the interests of the manager's clients. In situations where the manager perceives a material conflict of interest, the manager may: disclose the conflict to the Fund's Board of Directors; defer to the voting recommendation of the Fund's Board of Directors, ISS or those of another independent third party provider of proxy services; or take such other action in good faith (in consultation with counsel) which would protect the interests of the Fund and its shareholders. The recommendation of management on any issue is a factor which the manager considers in determining how proxies should be voted, but is not determinative of the manager's ultimate decision. As a matter of practice, the votes with respect to most issues are cast in accordance with the position of the company's management. Each issue, however, is considered on its own merits, and the manager will not support the position of the company's management in any situation where it deems that the ratification of management's position would adversely affect the investment merits of owning that company's shares. ADVISER'S PROXY VOTING POLICIES AND PRINCIPLES The manager has adopted general proxy voting guidelines, which are summarized below. These guidelines are not an exhaustive list of all the issues that may arise and the manager cannot anticipate all future situations. In all cases, each proxy will be considered based on the relevant facts and circumstances. BOARD OF DIRECTORS The manager supports an independent board of directors, and prefers that key committees such as audit, nominating, and compensation committees be comprised of independent directors. The manager will generally vote against management efforts to classify a board and will generally support proposals to declassify the board of directors. The manager may withhold votes from directors who have attended less than 75% of meetings without a valid reason. While generally in favor of separating Chairman and CEO positions, the manager will review this issue as well as proposals to restore or provide for cumulative voting on a case-by-case basis taking into consideration factors such as the company's corporate governance guidelines or provisions and performance. MANAGEMENT & DIRECTOR COMPENSATION A company's equity-based compensation plan should be in alignment with its shareholders' long-term interests. 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 ISS quantitative model utilized to assess such plans. The manager will generally oppose plans that have the potential to be excessively dilutive, and will almost always oppose plans that are structured to allow the repricing of underwater options, or plans that have an automatic share replenishment "evergreen" feature. The manager will generally support employee stock option plans in which the purchase price is at least 85% of fair market value, and when potential dilution is 10% or less. Severance compensation arrangements will be reviewed on a case-by-case basis, although the manager will generally oppose "golden parachutes" that are considered to be excessive. The manager will normally support proposals that require a percentage of directors' compensation to be in the form of common stock, as it aligns their interests with those of shareholders. The manager will review on a case-by-case basis any shareholder proposals to adopt policies on expensing stock option plans. ANTI-TAKEOVER MECHANISMS AND RELATED ISSUES The manager generally opposes anti-takeover measures since they tend to reduce shareholder rights. On occasion, the manager may vote with management when the research analyst has concluded that the proposal is not onerous and would not harm the Fund or its shareholders' interests. The manager generally supports proposals that require shareholder rights' plans ("poison pills") to be subject to a shareholder vote and will closely evaluate such plans on a case-by-case basis to determine whether or not they warrant support. The manager will generally vote against any proposal to issue stock that has unequal or subordinate voting rights. The manager generally opposes any supermajority voting requirements as well as the payment of "greenmail." The manager generally supports "fair price" provisions and confidential voting. CHANGES TO CAPITAL STRUCTURE The manager will review, on a case-by-case basis, proposals by companies to increase authorized shares and the purpose for the increase and proposals seeking preemptive rights. The manager will generally not vote in favor of dual-class capital structures to increase the number of authorized shares where that class of stock would have superior voting rights. The manager will generally vote in favor of the issuance of preferred stock in cases where the company specifies the voting, dividend, conversion and other rights of such stock and the terms of the preferred stock issuance are deemed reasonable. MERGERS AND CORPORATE RESTRUCTURING Mergers and acquisitions will be subject to careful review by the research analyst to determine whether each will be beneficial to shareholders. The manager will analyze various economic and strategic factors in making the final decision on a merger or acquisition. Corporate restructuring and reincorporation proposals are also subject to a thorough examination on a case-by-case basis. SOCIAL AND CORPORATE POLICY ISSUES The manager will generally give management discretion with regard to social, environmental and ethical issues, although the manager may vote in favor of those that are believed to have significant economic benefits or implications for the Fund and its shareholders. GLOBAL CORPORATE GOVERNANCE Many of the tenets discussed above are applied to proxy voting decisions for international companies. However, the manager must be more flexible in these instances and must be mindful of the varied market practices of each region. The manager will attempt to process every vote it receives for all domestic and foreign proxies. 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. 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 on-line at www.franklintempleton.com. Alternatively, shareholders may request copies of the Policies free of charge by calling the Proxy Group collect at 1-954-847-2268 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 will also be made available on-line at www.franklintempleton.com and posted on the SEC website at www.sec.gov no later than August 31, 2004 and will reflect the twelve-month period beginning July 1, 2003, and ending June 30, 2004 ITEM 9. 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 10. EXHIBITS. (A) CODE OF ETHICS FOR PRINCIPAL EXECUTIVE AND SENIOR FINANCIAL OFFICERS. (B)(1) CERTIFICATIONS PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 OF JIMMY D. GAMBILL, CHIEF EXECUTIVE OFFICER - FINANCE AND ADMINISTRATION, AND KIMBERLEY H. MONASTERIO, CHIEF FINANCIAL OFFICER (B(2) CERTIFICATIONS PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 OF JIMMY D. GAMBILL, CHIEF EXECUTIVE OFFICER - FINANCE AND ADMINISTRATION, AND KIMBERLEY H. MONASTERIO, CHIEF FINANCIAL 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/Jimmy D. Gambill Chief Executive Officer - Finance and Administration Date October 31, 2003 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/Jimmy D. Gambill Chief Executive Officer - Finance and Administration Date October 31, 2003 By /s/Kimberley H. Monasterio Chief Financial Officer Date October 31, 2003 EX-99.CODE ETH 3 codeofethics.txt EXHIBIT (A) FRANKLIN TEMPLETON FUNDS CODE OF ETHICS FOR PRINCIPAL EXECUTIVE AND SENIOR FINANCIAL OFFICERS I. COVERED OFFICERS AND PURPOSE OF THE CODE This code of ethics (the "Code")1 is for the investment companies within the complex registered with the United States Securities & Exchange Commission ("SEC") (collectively, "FT Funds") applies to each FT Fund's Principal Executive Officers, Principal Financial Officer and Principal Accounting Officer (the "Covered Officers" each of whom are set forth in Exhibit A) for the purpose of promoting: o Honest and ethical conduct, including the ethical handling of actual or apparent conflicts of interest between personal and professional relationships; o Full, fair, accurate, timely and understandable disclosure in reports and documents that a registrant files with, or submits to, the SEC and in other public communications made by or on behalf of the FT Funds; o Compliance with applicable laws and governmental rules and regulations; o The prompt internal reporting of violations of the Code to an appropriate person or persons identified in the Code; and o Accountability for adherence to the Code. Each Covered Officer should adhere to a high standard of business ethics and should be sensitive to situations that may give rise to actual as well as apparent conflicts of interest. II. COVERED OFFICERS SHOULD HANDLE ETHICALLY ACTUAL AND APPARENT CONFLICTS OF INTEREST OVERVIEW. A "conflict of interest" occurs when a Covered Officer's private interest interferes with the interests of, or his service to, the FT Funds. For example, a conflict of interest would arise if a Covered Officer, or a member of his family, receives improper personal benefits as a result of his position with the FT Funds. Certain conflicts of interest arise out of the relationships between Covered Officers and the FT Funds and already are subject to conflict of interest provisions in the Investment Company Act of 1940 ("Investment Company Act") and the Investment Advisers Act of 1940 ("Investment Advisers Act"). For example, Covered Officers may not individually engage in certain transactions (such as the purchase or sale of securities or other property) with the FT Funds because of their status as "affiliated persons" of the FT Funds. The FT Funds' and the investment advisers' compliance programs and procedures are designed to prevent, or identify and correct, violations of these provisions. This Code does not, and is not intended to, repeat or replace these programs and procedures, and such conflicts fall outside of the parameters of this Code. Although typically not presenting an opportunity for improper personal benefit, conflicts arise from, or as a result of, the contractual relationship between the FT Funds, the investment advisers and the fund administrator of which the Covered Officers are also officers or employees. As a result, this Code recognizes that the Covered Officers will, in the normal course of their duties (whether formally for the FT Funds, for the adviser, the administrator, or for all three), be involved in establishing policies and implementing decisions that will have different effects on the adviser, administrator and the FT Funds. The participation of the Covered Officers in such activities is inherent in the contractual relationship between the FT Funds, the adviser, and the administrator and is consistent with the performance by the Covered Officers of their duties as officers of the FT Funds. Thus, if performed in conformity with the provisions of the Investment Company Act and the Investment Advisers Act, such activities will be deemed to have been handled ethically. In addition, it is recognized by the FT Funds' Boards of Directors ("Boards") that the Covered Officers may also be officers or employees of one or more other investment companies covered by this or other codes. Other conflicts of interest are covered by the Code, even if such conflicts of interest are not subject to provisions in the Investment Company Act and the Investment Advisers Act. The following list provides examples of conflicts of interest under the Code, but Covered Officers should keep in mind that these examples are not exhaustive. The overarching principle is that the personal interest of a Covered Officer should not be placed improperly before the interest of the FT Funds. Each Covered Officer must: o Not use his personal influence or personal relationships improperly to influence investment decisions or financial reporting by the FT Funds whereby the Covered Officer would benefit personally to the detriment of the FT Funds; o Not cause the FT Funds to take action, or fail to take action, for the individual personal benefit of the Covered Officer rather than the benefit the FT Funds; o Not retaliate against any other Covered Officer or any employee of the Funds or their affiliated persons for reports of potential violations that are made in good faith; o Report at least annually the following affiliations or other relationships:/2 o all directorships for public companies and all companies that are required to file reports with the SEC; o any direct or indirect business relationship with any independent directors; o any direct or indirect business relationship with any independent public accounting firm; and o any direct or indirect interest in any transaction with any FT Fund that will benefit the officer (not including benefits derived from the advisory, sub-advisory, distribution or service agreements with affiliates of Franklin Resources). There are some conflict of interest situations that should always be approved in writing by FT's General Counsel or Deputy General Counsel, if material. Examples of these include/3: o Service as a director on the board of any public or private Company; o The receipt of any gifts in excess of $100; o The receipt of any entertainment from any Company with which the FT Funds has current or prospective business dealings unless such entertainment is business related, reasonable in cost, appropriate as to time and place, and not so frequent as to raise any question of impropriety. Notwithstanding the foregoing, the Covered Officers must obtain prior approval for any entertainment with a value in excess of $1000. o Any ownership interest in, or any consulting or employment relationship with, any of the FT Fund's service providers, other than an investment adviser, principal underwriter, administrator or any affiliated person thereof; o A direct or indirect financial interest in commissions, transaction charges or spreads paid by the FT Funds for effecting portfolio transactions or for selling or redeeming shares other than an interest arising from the Covered Officer's employment, such as compensation or equity ownership. FT's General Counsel or Deputy General Counsel will provide a report to the FT Funds Audit Committee of any approvals granted at the next regularly scheduled meeting. III. DISCLOSURE AND COMPLIANCE o Each Covered Officer should familiarize himself with the disclosure requirements generally applicable to the FT Funds; o Each Covered Officer should not knowingly misrepresent, or cause others to misrepresent, facts about the FT Funds to others, whether within or outside the FT Funds, including to the FT Funds' directors and auditors, and to governmental regulators and self-regulatory organizations; o Each Covered Officer should, to the extent appropriate within his area of responsibility, consult with other officers and employees of the FT Funds, the adviser and the administrator with the goal of promoting full, fair, accurate, timely and understandable disclosure in the reports and documents the FT Funds file with, or submit to, the SEC and in other public communications made by the FT Funds; and o It is the responsibility of each Covered Officer to promote compliance with the standards and restrictions imposed by applicable laws, rules and regulations. IV. REPORTING AND ACCOUNTABILITY Each Covered Officer must: o Upon adoption of the Code (or thereafter as applicable, upon becoming a Covered Officer), affirm in writing to the Board that he has received, read, and understands the Code (see Exhibit B); o Annually thereafter affirm to the Board that he has complied with the requirements of the Code; and o Notify FT's General Counsel or Deputy General Counsel promptly if he knows of any violation of this Code. Failure to do so is itself is a violation of this Code. FT's General Counsel and Deputy General Counsel are responsible for applying this Code to specific situations in which questions are presented under it and have the authority to interpret this Code in any particular situation.4 However, the Independent Directors of the respective fund will consider any approvals or waivers5 sought by any Chief Executive Officers of the Funds. The FT Funds will follow these procedures in investigating and enforcing this Code: o FT's General Counsel or Deputy General Counsel will take all appropriate action to investigate any potential violations reported to him; o If, after such investigation, FT's General Counsel or Deputy General Counsel believes that no violation has occurred, FT's General Counsel is not required to take any further action; o Any matter that FT's General Counsel or Deputy General Counsel believes is a violation will be reported to the Independent Directors of the appropriate FT Fund; o If the Independent Directors concur that a violation has occurred, it will inform and make a recommendation to the Board of the appropriate Funds, which will consider appropriate action, which may include review of, and appropriate modifications to, applicable policies and procedures; notification to appropriate personnel of the investment adviser or its board; or a recommendation to dismiss the Covered Officer; o The Independent Directors will be responsible for granting waivers, as appropriate; and o Any changes to or waivers of this Code will, to the extent required, are disclosed as provided by SEC rules. V. OTHER POLICIES AND PROCEDURES This Code shall be the sole code of ethics adopted by the FT Funds for purposes of Section 406 of the Sarbanes-Oxley Act and the rules and forms applicable to registered investment companies there under. Insofar as other policies or procedures of the FT Funds, the FT Funds' advisers, principal underwriter, or other service providers govern or purport to govern the behavior or activities of the Covered Officers who are subject to this Code, they are superseded by this Code to the extent that they overlap or conflict with the provisions of this Code. The FT Code of Ethics and Policy Statement On Insider Trading, adopted by the FT Funds, FT investment advisers and FT Fund's principal underwriter pursuant to Rule 17j-l under the Investment Company Act and more detailed policies and procedures set forth in FT's Employee Handbook are separate requirements applying to the Covered Officers and others, and are not part of this Code. VI. AMENDMENTS Any amendments to this Code, other than amendments to Exhibit A, must be approved or ratified by a majority vote of the FT Funds' Board including a majority of independent directors. VII. CONFIDENTIALITY All reports and records prepared or maintained pursuant to this Code will be considered confidential and shall be maintained and protected accordingly. Except as otherwise required by law or this Code, such matters shall not be disclosed to anyone other than the FT Funds' Board and their counsel. VIII. INTERNAL USE The Code is intended solely for the internal use by the FT Funds and does not constitute an admission, by or on behalf of any FT Funds, as to any fact, circumstance, or legal conclusion. EXHIBIT A Persons Covered by the Franklin Templeton Funds Code of Ethics FRANKLIN GROUP OF FUNDS Edward b. Jamieson, President and Chief Executive Officer - Investment Management Charles B. Johnson, President and Chief Executive Officer - Investment Management Gregory E. Johnson, President and Chief Executive Officer - Investment Management Rupert H. Johnson, Jr. President and Chief Executive Officer - Investment Management William J. Lippman, President and Chief Executive Officer - Investment Management Christopher Molumphy President and Chief Executive Officer - Investment Management Jimmy D. Gambill, Senior Vice President and Chief Executive Officer - Finance and Administration Kimberley H. Monasterio Treasurer & Chief Financial Officer FRANKLIN MUTUAL SERIES FUNDS David Winters Chairman of the Board, President, Chief Executive Officer-Investment Management Jimmy D. Gambill Senior Vice President and Chief Executive Officer- Finance and Administration Bruce S. Rosenberg Treasurer & Chief Financial Officer TEMPLETON GROUP OF FUNDS Jeffrey A. Everett President and Chief Executive Officer - Investment Management Martin L. Flanagan President and Chief Executive Officer - Investment Management Mark Mobius President and Chief Executive Officer - Investment Management Christopher J. Molumphy President and Chief Executive Officer - Investment Management Gary P. Motyl President and Chief Executive Officer - Investment Management Donald F. Reed President and Chief Executive Officer - Investment Management Jimmy D. Gambill, Senior Vice President and Chief Executive Officer - Finance and Administration Bruce S. Rosenberg Treasurer & Chief Financial Officer EXHIBIT B ACKNOWLEDGMENT FORM FRANKLIN TEMPLETON FUNDS CODE OF ETHICS FOR PRINCIPAL EXECUTIVE AND SENIOR FINANCIAL OFFICERS. INSTRUCTIONS: 1. Complete all sections of this form. 2. Print the completed form, sign, and date. 3. Submit completed form to FT's General Counsel within 10 days of becoming a Covered Officer and by January 30th of each subsequent year. INTER-OFFICE MAIL: Murray Simpson, General Counsel, Legal SM-920/2 TELEPHONE: (650) 312-7331 Fax: (650) 312-2221 E-MAIL: Simpson, Murray (internal address); mlsimpson@frk.com (external address) - ---------------------------------------------------------------------------- COVERED OFFICER'S NAME: - ---------------------------------------------------------------------------- TITLE: - ---------------------------------------------------------------------------- DEPARTMENT: - ---------------------------------------------------------------------------- LOCATION: - ---------------------------------------------------------------------------- CERTIFICATION FOR YEAR ENDING: - ---------------------------------------------------------------------------- TO: FT GENERAL COUNSEL, LEGAL DEPARTMENT I hereby acknowledge receipt of a copy of Franklin Templeton Fund's code of ethics for Principal Executive Officers and Senior Financial Officers (the "Code") that I have read and understand. I will comply fully with all provisions of the Code to the extent they apply to me during the period of my employment. I further understand and acknowledge that any violation of the Code may subject me to disciplinary action, including termination of employment -------------------- --------------------- Signature Date signed 1 Item 2 of Form N-CSR requires a registered management investment company to disclose annually whether, as of the end of the period covered by the report, it has adopted a code of ethics that applies to the registrant's principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions, regardless of whether these officers are employed by the registrant or a third party. If the registrant has not adopted such a code of ethics, it must explain why it has not done so. The registrant must also: (1) file with the SEC a copy of the code as an exhibit to its annual report; (2) post the text of the code on its Internet website and disclose, in its most recent report on Form N-CSR, its Internet address and the fact that it has posted the code on its Internet website; or (3) undertake in its most recent report on Form N-CSR to provide to any person without charge, upon request, a copy of the code and explain the manner in which such request may be made. Disclosure is also required of amendments to, or waivers (including implicit waivers) from, a provision of the code in the registrant's annual report on Form N-CSR or on its website. If the registrant intends to satisfy the requirement to disclose amendments and waivers by posting such information on its website, it will be required to disclose its Internet address and this intention. 2 Reporting of these affiliations or other relationships may be made separately by completing the Directors and Officers Questionnaire and returning to FT's General Counsel or Deputy General Counsel. 3 Any activity or relationship that would present a conflict for a Covered Officer would likely also present a conflict for the Covered Officer if a member of the Covered Officer's immediate family engages in such an activity or has such a relationship. The Cover Person should also obtain written approval by FT's General Counsel in such situations. 4 FT's General Counsel and Deputy General Counsel are authorized to consult, as appropriate, with members of the Audit Committee, counsel to the FT Funds and counsel to the Independent Directors, and are encouraged to do so. 5 Item 2 of Form N-CSR defines "waiver" as "the approval by the registrant of a material departure from a provision of the code of ethics" and "implicit waiver," which must also be disclosed, as "the registrant's failure to take action within a reasonable period of time regarding a material departure from a provision of the code of ethics that has been made known to an executive officer" of the registrant. EX-99.CERT 4 futjimg302.txt EXHIBIT (B)(1) CERTIFICATIONS I, Jimmy D. Gambill, certify that: 1. I have reviewed this report on Form N-CSR of Franklin Universal Trust; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations, changes in net assets, and cash flows (if the financial statements are required to include a statement of cash flows) of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of a date within 90 days prior to the filing date of this report based on such evaluation; and (c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal half-year (the registrant's second fiscal half-year in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize, and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. October 15, 2003 /S/JIMMY D. GAMBILL Chief Executive Officer - Finance and Administration I, Kimberley H. Monasterio, certify that: 1. I have reviewed this report on Form N-CSR of Franklin Universal Trust; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations, changes in net assets, and cash flows (if the financial statements are required to include a statement of cash flows) of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of a date within 90 days prior to the filing date of this report based on such evaluation; and (c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal half-year (the registrant's second fiscal half-year in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize, and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. October 15, 2003 /S/KIMBERLEY H. MONASTERIO Treasurer and Chief Financial Officer EX-99.906 5 futjimg906.txt EXHIBIT (B)(2) CERTIFICATIONS CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURUSANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 I, Jimmy D. Gambill, Chief Executive Officer of the Franklin Universal Trust (the "Registrant"), certify, pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge: 1. The periodic report on Form N-CSR of the Registrant for the period ended 8/31/03 (the "Form N-CSR") fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Form N-CSR fairly presents, in all material respects, the financial condition and results of operations of the Registrant. Dated: October 15, 2003 /S/JIMMY D. GAMBILL Chief Executive Officer - Finance and Administration A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to Registrant and will be retained by Registrant and furnished to the Securities and Exchange Commission or its staff upon request. CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURUSANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 I, Kimberley H. Monasterio, Chief Financial Officer of the Franklin Universal Trust (the "Registrant"), certify, pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge: 1. The periodic report on Form N-CSR of the Registrant for the period ended 8/31/03 (the "Form N-CSR") fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Form N-CSR fairly presents, in all material respects, the financial condition and results of operations of the Registrant. Dated: October 15, 2003 /S/KIMBERLEY H. MONASTERIO Treasurer and Chief Financial Officer A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to Registrant and will be retained by Registrant and furnished to the Securities and Exchange Commission or its staff upon request. -----END PRIVACY-ENHANCED MESSAGE-----