================================================================================
TABLE OF CONTENTS
<TABLE>
<S> <C>
MANAGER'S DISCUSSION .............................. 2
PERFORMANCE SUMMARY ............................... 3
STATEMENT OF INVESTMENTS .......................... 4
FINANCIAL STATEMENTS .............................. 9
NOTES TO FINANCIAL STATEMENTS ..................... 11
</TABLE>
YOUR FUND'S OBJECTIVE
The Franklin Principal Maturity Trust's primary objective is to manage a
portfolio of securities with the goal of returning $10.00 per share to investors
on or shortly before May 31, 2001, while providing high monthly income. No
assurances can be made that the fund will achieve this goal.
- --------------------------------------------------------------------------------
MUTUAL FUNDS, ANNUITIES, AND OTHER INVESTMENT PRODUCTS:
- - ARE NOT FDIC INSURED;
- - ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED BY, ANY FINANCIAL
INSTITUTION;
- - ARE SUBJECT TO INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF THE PRINCIPAL
AMOUNT INVESTED.
- --------------------------------------------------------------------------------
<PAGE>
MANAGER'S DISCUSSION
================================================================================
July 20, 1995
Dear Shareholder:
This report on the Franklin Principal Maturity Trust covers the six months ended
May 31, 1995.
In February 1995, the Federal Reserve Board raised the federal funds rate (the
rate banks charge each other for overnight loans) to 6.00% from 5.50%. This was
the seventh, and apparently the last, in a series of increases in this rate over
the previous year. However, instead of responding by losing value as they had
after most of the previous increases in 1994, bond and stock markets rallied
sharply, taking their cue from statistics that showed the U.S. economy to be
growing at a slower pace. By the end of this six-month reporting period, the
yield on the 30-year Treasury bond had dropped to 6.65% from 8.00% on November
30, 1994, while the Dow Jones Stock Index set new records almost daily, rising
725.91 points, to 4465.14 from 3739.23, during this time. The Trust reflected
these market rallies by providing a total return for the six-month period of
+4.24%.
As we stated in our last Annual Report, dated November 30, 1994, we had sold a
portion of the fund's zero-coupon securities in the spring of 1994, following
the first few interest rate hikes. We intended to replace these securities at
lower prices. This strategy was successful, and approximately half of them were
replaced before November 30, 1994, while the rest of them were bought back
during the past six months.
Zero-coupon securities pay no interest, but are purchased at a discount to face
value. As a zero-coupon security approaches maturity, its price approaches the
face value, which is realized on the maturity date. Since the entire payment
from these securities is received at maturity, their current value increases
faster, during market rallies, than the value of an interest-paying bond. These
Treasury and agency bonds suit the Trust well, because the credit of the U.S.
government is the highest available, and because these bonds will be worth
exactly 100 cents on the dollar when they mature in six years.
We made two other changes in the portfolio to take advantage of the market
rallies. First, we sold 13 out of the 15 defaulted securities previously in our
portfolio because we believed that they had reached their highest estimated
value. We still hold the remaining two issues because we think they may have
room for more capital appreciation. Second, we sold some of our cyclical stock
holdings, keeping in mind that a possible economic slowdown may hurt the
earnings of these companies.
Looking forward, we believe that the apparent slowdown in the economy will
continue, leading to higher bond prices and lower yields.
We appreciate your continued support of the Franklin Principal Maturity Trust
and look forward to serving your needs in the years to come.
Sincerely,
Charles B. Johnson
President
2
<PAGE>
PERFORMANCE SUMMARY
================================================================================
The Franklin Principal Maturity Trust's price on the New York Stock Exchange
remained unchanged at $7.125 on May 31, 1995 from $7.125 on November 30, 1994.
The Trust's net asset value per share increased to $9.06 on May 31, 1995 from
$7.70 on November 30, 1994.
The Trust distributed 28.5 cents ($0.285) per share during the reporting period.
Based on an annualization of the current monthly dividend of 4.5 cents ($0.045)
per share and the New York Stock Exchange closing share price of $7.125 on May
31, 1995, the Trust's distribution rate was 7.58%. Dividends will vary based on
the earnings of the portfolio, and past distributions are not predictive of
future trends.
The Franklin Principal Maturity Trust reported cumulative total returns of
+4.09% and -6.32% respectively, for the six-month and one-year periods ended May
31, 1995. Total return reflects the change in the Trust's price on the New York
Stock Exchange (NYSE) and assumes reinvestment of dividends and capital gains at
market price on the reinvestment date. Based on the change in net asset value
(as opposed to market price), six-month and one-year total returns for the same
period were +10.44% and -2.18%, respectively. These figures assume reinvestment
of dividends and capital gains at market price on the reinvestment date. Past
performance is not predictive of future results.
We urge you to view your investment in the Franklin Principal Maturity Trust
from a long-term investment perspective. As the chart below shows, the Trust
reported a cumulative total return of over +55% since its inception on January
19, 1989.
- --------------------------------------------------------------------------------
FRANKLIN PRINCIPAL MATURITY TRUST
Cumulative Total Returns(1)
Periods ended May 31, 1995
<TABLE>
<CAPTION>
Since
Inception
1-Year 5-Year (1/19/89)
- ------------------------------------------------------
<S> <C> <C> <C>
Based on change
in net asset value -2.18% 57.39% 55.04%
Based on change
in market value -6.32% 25.18% 25.74%
Distribution Rate(2) 7.58%
- ------------------------------------------------------
</TABLE>
(1) Total return calculations assume reinvestment of all distributions at market
price on the reinvestment date. Past performance is not predictive of future
results.
(2) Distribution rate is based on the annualization of the Trust's current 4.5
cents per share monthly dividend and the New York Stock Exchange closing
price of $7.125 on May 31, 1995.
3
<PAGE>
FRANKLIN PRINCIPAL MATURITY TRUST
================================================================================
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, MAY 31, 1995 (UNAUDITED)
<TABLE>
<CAPTION>
SHARES/ VALUE
WARRANTS (NOTE 1)
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS & WARRANTS 17.7%................................................
AUTOMOBILE/AUTO PARTS 1.9%
105,000 (a)Harvard Industries, Inc., Class B ............................................ $1,811,250
156,601 (a)Pullman Co. .................................................................. 1,409,409
----------
3,220,659
----------
ELECTRONICS
27,620 (a)Ampex Group, Inc. ............................................................ 63,664
----------
CHEMICALS 3.9%
574,000 (a)Rexene Corp. ................................................................. 6,457,500
----------
COMMERCIAL SERVICES 1.0%
199,691 (a)Emcor Group, Inc. ............................................................ 1,622,487
----------
FOREST/PAPER PRODUCTS .4%
407,221 (a)WTD Industries, Inc. ......................................................... 636,283
----------
HOME BUILDING 1.1%
245,194 (a)NVR, Inc. .................................................................... 1,777,657
24,000 (a)NVR, Inc., warrants........................................................... 24,000
----------
1,801,657
----------
INDUSTRIAL 4.2%
286,075 Lone Star Industries, Inc. ................................................... 6,007,575
274,444 (a,c,i)Triangle Wire & Cable Corp. .................................................. 960,554
----------
6,968,129
----------
METAL FABRICATE/HARDWARE .4%
2,844,000 (a,i)Ladish Co., Inc. ............................................................. 711,000
----------
REAL ESTATE
65,393 (a)XRC Corp. .................................................................... 57,546
----------
RETAIL 4.0%
401,510 (a)Carson Pirie Scott & Co. ..................................................... 6,725,293
----------
TECHNOLOGY/INFORMATION SYSTEMS .8%
438,408 (a)Memorex Telex, NV, ADR........................................................ 630,212
48,081 (a)Wang Laboratories, Inc. ...................................................... 625,053
----------
1,255,265
----------
TOTAL COMMON STOCKS & WARRANTS (COST $33,138,312) .................... 29,519,483
----------
PREFERRED STOCKS 1.9%
AUTOMOBILE/AUTO PARTS 1.7%
100,000 Harvard Industries, Inc., 14.25% pfd., PIK.................................... 2,762,500
----------
FINANCIAL SERVICES .2%
20,000 Nortel, Inc., pfd., Series B.................................................. 390,000
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
FRANKLIN PRINCIPAL MATURITY TRUST
================================================================================
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, MAY 31, 1995 (UNAUDITED)
(CONT.)
<TABLE>
<CAPTION>
SHARES/ VALUE
WARRANTS (NOTE 1)
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
PREFERRED STOCKS (CONT.)
FOOD RETAILING
31,250 (a,b,h)Grand Union Holdings, Inc., 12.00% pfd., Series C............................. $ 0
----------
TOTAL PREFERRED STOCKS (COST $6,233,835)................................ 3,152,500
----------
CONVERTIBLE PREFERRED STOCKS .3%
RETAIL
19,103 (a)Hills Department Store, cvt. pfd., Series A (Cost $384,448)................... 448,920
----------
FACE
AMOUNT
------
(b,h,l)BANK DEBTS 5.4%
$ 5,000,000 El Paso Electric Co., 8.117%, 05/03/99 ....................................... 3,200,000
6,895,101 Phar Mor, Inc., 6.93%, 12/31/97............................................... 5,826,361
----------
TOTAL BANK DEBTS (COST $9,726,542) ..................................... 9,026,361
----------
CORPORATE BONDS 28.6%
AIR FREIGHT .9%
2,500,000 (a,d)Evergreen International Aviation, senior notes, 13.50%, 08/15/02.............. 1,487,500
----------
CHEMICAL/FERTILIZERS 4.3%
4,000,000 (c)Acadia Partners, senior sub. notes, 13.00%, 10/01/97.......................... 4,110,000
3,000,000 Trans Resources, deb. notes, 14.50%, 09/01/96................................. 3,045,000
----------
7,155,000
----------
COMMERCIAL SERVICES 2.7%
3,566,290 Emcor Group, Inc., senior notes, PIK, Series A, 7.00%, 12/15/97 .............. 3,370,144
1,498,321 Emcor Group, Inc., senior notes, PIK, Series C, 11.00%, 12/15/01 ............. 1,123,741
----------
4,493,885
----------
ENERGY .6%
1,116,000 Synergy Group, Inc., senior sub. notes, 9.50%, 09/15/00 ...................... 1,076,940
----------
FOOD RETAILING 3.1%
2,528,000 Almac, Inc., senior sub. notes, PIK, 11.50%, 11/19/04 ........................ 333,696
3,000,000 Purity Supreme, Inc., senior notes, 11.75%, 08/01/99.......................... 3,255,000
6,000,000 Victory Markets, Inc., notes, 12.50%, 03/15/00................................ 1,530,000
----------
5,118,696
----------
FOREST/PAPER PRODUCTS 1.9%
3,520,005 WTD Industries, Inc., notes, 10.00%, 12/15/04................................. 3,009,604
204,500 WTD Industries, Inc., notes, 8.00%, 06/30/05.................................. 107,363
----------
3,116,967
----------
GAMING & LEISURE .6%
1,000,000 Showboat, Inc., senior sub. notes, 13.00%, 08/01/09 .......................... 1,055,000
----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
FRANKLIN PRINCIPAL MATURITY TRUST
================================================================================
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, MAY 31, 1995 (UNAUDITED)
(CONT.)
<TABLE>
<CAPTION>
FACE VALUE
AMOUNT (NOTE 1)
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CORPORATE BONDS (CONT.)
HOME BUILDING 1.4%
$ 2,535,000 Waxman Industries, S.F., senior sub. notes, 13.75%, 06/01/99.................. $ 2,395,575
-----------
INDUSTRIAL 6.3%
4,000,000 Great Dane Holdings, Inc., senior notes, 14.50%, 01/01/06..................... 4,000,000
8,500,000 Haynes International, Inc., senior sub. notes, 13.50%, 08/15/99............... 5,992,500
9,000 Lone Star Industries, Inc., senior notes, 10.00%, 07/31/03.................... 9,101
1,148,715 Sellco Corp., sub. notes, PIK, 12.00%, 12/15/04............................... 149,333
149,000 Thermadyne Industries, Inc., senior sub. notes, 10.25%, 05/01/02.............. 146,765
207,000 Thermadyne Industries, Inc., sub. notes, 10.75%, 11/01/03..................... 201,825
-----------
10,499,524
-----------
MACHINE/CONSTRUCTION 1.2%
2,000,000 (c)Terex Corp., senior secured notes, 13.75%, 05/15/02 .......................... 1,970,000
-----------
MEDIA & BROADCASTING 1.1%
2,144,200 Telemundo Group, senior notes, 10.25%, 12/30/01............................... 1,919,059
-----------
RETAIL 1.1%
1,825,710 Carson Pirie Scott & Co., sub. notes, 13.00%, 03/28/05........................ 1,837,121
-----------
TOBACCO 2.4%
74,000 (c)Liggett Group, senior secured notes, Series C, 16.50%, 02/01/99............... 71,040
5,250,000 Liggett Group, S.F., senior secured notes, 11.50%, 02/01/99................... 3,937,500
-----------
4,008,540
-----------
TRANSPORTATION .7%
4,366,000 Trans World Airlines, Inc., notes, PIK, 8.00%, 11/03/00....................... 1,129,703
-----------
UTILITIES .3%
500,000 Midland CoGeneration Venture, S.F., secured lease obligation bonds, Series A,
11.75%, 07/23/05 ........................................................... 521,175
-----------
TOTAL CORPORATE BONDS (COST $57,853,466)............................. 47,784,685
-----------
CONVERTIBLE CORPORATE BONDS
RETAIL
80,000 Hills Department Store, cvt. senior notes, 10.25%, 09/30/03 (Cost $80,000).... 78,800
-----------
FOREIGN GOVERNMENT BONDS 1.5%
4,350,000 (e)ESCOM, E168, utility deb. (South Africa), 11.00%, 06/01/08.................... 817,081
1,422,000 Republic of Ecuador, deb. notes, 3.00%, 02/27/15.............................. 499,478
1,100,000 Republic of Ecuador, deb. notes, 7.25%, 02/22/25.............................. 572,000
2,000,000 Republic of Ecuador, deb. notes, 3.00%, 02/28/25.............................. 645,000
-----------
TOTAL FOREIGN GOVERNMENT BONDS (COST $3,943,395)..................... 2,533,559
-----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
6
<PAGE>
FRANKLIN PRINCIPAL MATURITY TRUST
================================================================================
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, MAY 31, 1995 (UNAUDITED)
(CONT.)
<TABLE>
<CAPTION>
FACE VALUE
AMOUNT (NOTE 1)
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
(g)ZERO COUPON BONDS 84.1%
U.S. GOVERNMENT & ITS AGENCIES
$12,520,000 FICO Strip, 04/06/01................................................................. $ 8,677,924
5,211,000 FICO Strip, 05/02/01................................................................. 3,594,240
1,116,000 FICO Strip, 05/11/01................................................................. 768,459
5,253,000 FICO Strip, 05/30/01................................................................. 3,604,645
7,348,000 FNMA Strip, 02/01/01 ................................................................ 5,179,340
8,100,000 GTC Trust Certificates-Israel, Series 1D, 05/15/01................................... 5,599,019
27,226,000 (f)GTC Trust Certificates-Israel, Series 2F, 05/15/01................................... 18,819,615
50,000,000 REFCO Strip, 04/15/01................................................................ 34,911,743
85,249,000 (f)U.S. Treasury Strips, 05/15/01....................................................... 59,472,676
------------
TOTAL ZERO COUPON BONDS (COST $135,125,761).................................. 140,627,661
------------
TOTAL LONG TERM INVESTMENTS (COST $246,485,759).............................. 233,171,969
------------
SHORT TERM INVESTMENTS
CORPORATE BONDS 1.0%
5,000,000 (a,d)McCrory Corp., deb., (original accretion rate 5.883%), 12/31/95 (Cost $2,800,000) 1,750,000
------------
TOTAL INVESTMENTS BEFORE REPURCHASE AGREEMENTS (COST $249,285,759)........... 234,921,969
------------
(j,k)Receivables from Repurchase Agreements .3%
523,319 Joint Repurchase Agreement, 6.15%, 06/01/95 (Maturity Value $514,426)
(COST $514,338)
Collateral: U.S. Treasury Bills, 08/24/95
U.S. Treasury Notes, 4.00% - 8.50%, 01/31/96 - 10/31/99 ........................ 514,338
------------
TOTAL INVESTMENTS (COST $249,800,097) 140.8%.............................. 235,436,307
LIABILITIES IN EXCESS OF OTHER ASSETS, NET(40.8)%........................ (68,233,816)
------------
NET ASSETS 100.0%........................................................ $167,202,491
============
At May 31, 1995, the net unrealized depreciation based on the cost of investments
for income tax purposes of $249,826,347 was as follows:
Aggregate gross unrealized appreciation for all investments in which there was
an excess of value over tax cost.................................................. $ 11,782,873
Aggregate gross unrealized depreciation for all investments in which there was
an excess of tax cost over value.................................................. (26,172,913)
------------
Net unrealized depreciation........................................................ $(14,390,040)
============
</TABLE>
The accompanying notes are an integral part of these financial statements.
7
<PAGE>
FRANKLIN PRINCIPAL MATURITY TRUST
================================================================================
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, MAY 31, 1995 (UNAUDITED)
(CONT.)
- --------------------------------------------------------------------------------
PORTFOLIO ABBREVIATIONS:
FICO - Financing Corp.
FNMA - Federal National Mortgage Association
GTC - Government Trust Certificates
REFCO - Resolution Funding Corp.
PIK - Payment-in-Kind
S.F. - Sinking Fund
(a) Non-income producing.
(b) See Note 6 regarding restricted securities.
(c) See Note 7 regarding Rule 144A securities.
(d) See Note 9 regarding credit risk and defaulted securities.
(e) Face amount stated in foreign currencies, value in U.S. dollars.
(f) A portion of these securities is designated as collateral for reverse
repurchase agreement transactions.
(g) Zero coupon bonds. The current effective yield may vary. The original
accretion rate will remain constant.
(h) Securities are valued in accordance with procedures approved by the Board of
Trustees.
(i) See Note 10 regarding holdings of 5% voting securities.
(j) Face amount for repurchase agreements is for the underlying collateral.
(k) See Note 2f regarding Joint Repurchase Agreement.
(l) Investments described as bank debts are loan participations acquired by the
Fund from banks or finance companies (lenders). Loan participations are
interests in floating or variable rate loans to U.S. corporations,
partnerships and other entities (borrowers) in which the Fund has a
contractual relationship solely with the lender for payment of principal and
interest upon receipt by the lender of such payments from the borrower. The
companies listed are the borrowers of the bank debts in which the Fund has
acquired participation.
The accompanying notes are an integral part of these financial statements.
8
<PAGE>
FRANKLIN PRINCIPAL MATURITY TRUST
================================================================================
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
MAY 31, 1995 (UNAUDITED)
<TABLE>
<CAPTION>
<S> <C>
Assets:
Investments in securities, at value
(identified cost $249,285,759) $ 234,921,969
Receivables from repurchase
agreements, at value and cost 514,338
Cash 529,194
Receivables:
Interest and dividends 2,044,775
-------------
Total assets 238,010,276
-------------
Liabilities:
Payables:
Reverse repurchase agreements
(Note 2) 69,588,095
Distributions payable to shareholders 920,817
Accrued interest (Note 2) 154,173
Management fees 82,654
Shareholder servicing costs 12,381
Accrued expenses and other liabilities 49,665
-------------
Total liabilities 70,807,785
-------------
Net assets, at value $ 167,202,491
=============
Net assets consist of:
Undistributed net investment income $ 1,459,500
Unrealized depreciation on investments
and translation of assets and liabilities
denominated in foreign currencies (14,361,089)
Net realized loss from investments and
foreign currency transactions (5,253,764)
Capital shares 204,626
Additional paid-in capital 185,153,218
-------------
Net assets, at value $ 167,202,491
=============
Net asset value per share
($167,202,491 O 20,462,600 shares
of capital stock outstanding) $ 8.17
=============
</TABLE>
STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED MAY 31, 1995 (UNAUDITED)
<TABLE>
<CAPTION>
<S> <C> <C>
Investment income:
Interest (Note 2) $ 7,801,850
Dividends 66,317
------------
Total income $ 7,868,167
Expenses:
Management fees (Note 4) 482,005
Shareholder servicing costs 40,983
Professional fees 31,484
Reports to shareholders 21,674
Custodian fees 13,287
Trustees' fees and expenses 7,810
Other 25,547
------------
Operating expenses 622,790
Interest expense (Note 2) 2,168,981
------------
Total expenses 2,791,771
------------
Net investment income 5,076,396
------------
Realized and unrealized gain
(loss) from investments and
foreign currency:
Net realized gain (loss) from:
Investments (4,922,152)
Foreign currency transactions 13,921
Net unrealized appreciation
(depreciation) on:
Investments 15,257,157
Translation of assets and
liabilities denominated in
foreign currencies (1,143)
------------
Net realized and unrealized
gain on investments
and foreign currency 10,347,783
------------
Net increase in net assets
resulting from operations $ 15,424,179
============
</TABLE>
The accompanying notes are an integral part of these financial statements.
9
<PAGE>
FRANKLIN PRINCIPAL MATURITY TRUST
================================================================================
FINANCIAL STATEMENTS (CONT.)
STATEMENTS OF CHANGES IN NET ASSETS
FOR THE SIX MONTHS ENDED MAY 31, 1995 (UNAUDITED)
AND THE YEAR ENDED NOVEMBER 30, 1994
<TABLE>
<CAPTION>
SIX MONTHS YEAR ENDED
ENDED NOVEMBER 30,
MAY 31, 1995 1994
------------- -------------
<S> <C> <C>
Increase (decrease)
in net assets:
Operations:
Net investment
income $ 5,076,396 $ 10,993,290
Net realized loss
from investments
and foreign currency
transactions (4,908,231) (294,809)
Net unrealized appre-
ciation (depreciation)
on investments and
translation of assets
and liabilities denom-
inated in foreign
currencies 15,256,014 (35,895,185)
---------- ----------
Net increase
(decrease) in
net assets 15,424,179 (25,196,704)
Distributions to
shareholders from:
Undistributed net
investment income (5,729,529) (12,074,213)
Net realized capital
gain -- (2,116,600)
------------- -------------
Net increase
(decrease) in
net assets 9,694,650 (39,387,517)
Net assets:
Beginning of period 157,507,841 196,895,358
------------- -------------
End of period (including
undistributed net
investment income of
$1,459,500 - 5/31/95
and $2,090,458 -
11/30/94) $ 167,202,491 $ 157,507,841
============= =============
</TABLE>
STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED MAY 31, 1995 (UNAUDITED)
<TABLE>
<S> <C>
Interest and dividends received $ 5,343,791
Interest expense paid (631,566)
Operating expenses paid (1,514,527)
-------------
Cash provided - operating activities 3,197,698
-------------
Investment purchases (565,630,646)
Investment sales 499,296,145
-------------
Cash provided - investing activities (66,334,501)
-------------
Net increase in reverse repurchase
agreement transactions 64,352,316
Distributions to shareholders (5,831,841)
-------------
Cash used - financing activities 58,520,475
-------------
Net decrease in cash (4,616,328)
Cash at beginning of period 5,145,522
-------------
Cash at end of period $ 529,194
=============
</TABLE>
The accompanying notes are an integral part of these financial statements.
10
<PAGE>
FRANKLIN PRINCIPAL MATURITY TRUST
================================================================================
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1 - ORGANIZATION
Franklin Principal Maturity Trust (the OFund") was organized as a Massachusetts
business trust on November 22, 1988, and is registered as a diversified,
closed-end management investment company under the Investment Company Act of
1940. Costs of $48,000 incurred by the Fund in connection with its organization
were amortized on a straight-line basis over a period of five years from January
19, 1989, (the effective date of registration); offering costs of $817,342 were
charged to capital.
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES
a. SECURITY VALUATION
Portfolio securities listed on a securities exchange or on the NASDAQ National
Market System for which market quotations are readily available are valued at
the last quoted sale price of the day or, if there is no such reported sale,
within the range of the most recent quoted bid and ask prices. Other securities
for which market quotations are readily available are valued at current market
values, obtained from pricing services, which are based on a variety of factors,
including recent trades, institutional size trading in similar types of
securities (considering yield, risk and maturity) and/or developments related to
specific securities. Portfolio securities which are traded both in the
over-the-counter market and on a securities exchange are valued according to the
broadest and most representative market as determined by the Manager. Other
securities for which market quotations are not available, if any, are valued in
accordance with procedures established by the Board of Trustees.
The value of a foreign security is determined as of the close of trading on the
foreign exchange on which it is traded or as of the close of trading on the New
York Stock Exchange, if that is earlier, and that value is then converted into
its U.S. dollar equivalent at the foreign exchange rate in effect at noon, New
York time, on the day the value of the foreign security is determined. If no
sale is reported at that time, the mean between the current bid and asked price
is used. Occasionally, events which affect the values of foreign securities and
foreign exchange rates may occur between the times at which they are determined
and the close of the exchange and will, therefore, not be reflected in the
computation of the Fund's net asset value. If events materially affect the value
of these foreign securities occur during such period, then these securities will
be valued at fair value as determined by management and approved in good faith
by the Board of Trustees.
The fair values of securities restricted as to resale, if any, are determined
following procedures established by the Board of Trustees - see Note 6.
b. INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS
Dividend income and distributions to shareholders are recorded on the
ex-dividend date. Interest income and estimated expenses are accrued daily. Bond
discount, if any, are amortized as required by the Internal Revenue Code.
Net realized capital gains or losses differ for financial statement and tax
purposes primarily due to differing treatment of wash sale transactions.
Net investment income differs for financial statement and tax purposes primarily
due to differing treatments of defaulted securities - see Note 9.
c. SECURITY TRANSACTIONS
Security transactions are accounted for on the date the securities are purchased
or sold (trade date). Realized gains and losses on security transactions are
determined on the basis of specific identification for both financial statement
and income tax purposes.
11
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FRANKLIN PRINCIPAL MATURITY TRUST
================================================================================
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONT.)
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (cont.)
d. INCOME TAXES
The Fund intends to continue to qualify for the tax treatment applicable to
regulated investment companies under the Internal Revenue Code and to make the
requisite distributions to its shareholders which will be sufficient to relieve
it from income and excise taxes.
e. FOREIGN CURRENCY TRANSLATION
The accounting records of the Fund are maintained in U.S. dollars. All assets
and liabilities denominated in foreign currencies are translated into U.S.
dollars at the rate of exchange of such currencies against U.S. dollars on the
date of the valuation. Purchases and sales of securities, income and expenses
are translated at the rate of exchange quoted on the respective date that such
transactions are recorded. Differences between income and expense amounts
recorded and collected or paid are recognized when reported by the custodian
bank.
The Fund does not isolate that portion of the results of operations resulting
from changes in foreign exchange rates on investments from fluctuations arising
from changes in market prices of securities held. Such fluctuations are included
with the net realized and unrealized gain or loss from investments.
Reported net realized foreign exchange gains or losses arise from sales and
maturities of short-term securities, sales of foreign currencies, currency gains
or losses realized between the trade date and settlement dates on securities
transactions, the difference between the amounts of dividends, interest, and
foreign withholding taxes recorded on the Fund's books, and the U.S. dollar
equivalent of the amounts actually received or paid. Net unrealized foreign
exchange gains and losses arise from changes in the value of assets and
liabilities other than investments in securities at semi-fiscal year end,
resulting from changes in exchange rates.
f. REPURCHASE AGREEMENTS
The Fund may enter into a Joint Repurchase Agreement whereby its uninvested cash
balance is deposited into a joint cash account to be used to invest in one or
more repurchase agreements with government securities dealers recognized by the
Federal Reserve Board and/or member banks of the Federal Reserve system. The
value and face amount of the Joint Repurchase Agreement are allocated to the
Fund based on its pro-rata interest.
In a repurchase agreement, the Fund purchases a U.S. government security from a
dealer or bank subject to an agreement to resell it at a mutually agreed upon
price and date. Such a transaction is accounted for as a loan by the Fund to the
seller, collateralized by the underlying security. The transaction requires the
initial collateralization of the seller's obligation by U.S. government
securities with market value, including accrued interest, of at least 102% of
the dollar amount invested by the Fund, with the value of the underlying
security marked to market daily to maintain coverage of at least 100%. The
collateral is delivered to the Fund's custodian and held until resold to the
dealer or bank. At May 31, 1995, all outstanding joint repurchase agreements
held by the Fund had been entered into on that date.
g. REVERSE REPURCHASE AGREEMENTS
During the period ended May 31, 1995, the Fund entered into reverse repurchase
agreements with certain brokers. Under a reverse repurchase, the Fund sells
securities and agrees to repurchase them at a mutually agreed upon date and
price. Such a transaction is accounted for as a borrowing by the Fund,
collateralized by the securities for which the Fund retains possession. The
difference between the selling price and the repurchase price is accounted for
as interest expense. At May 31, 1995, the outstanding reverse repurchase
agreements, which were entered into on May 17, 1995 and May 31,
12
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FRANKLIN PRINCIPAL MATURITY TRUST
================================================================================
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONT.)
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONT.)
g. REVERSE REPURCHASE AGREEMENTS (CONT.)
1995, mature within 61 days and are collateralized by zero coupon bonds issued
by the U.S. government or its agencies. Such agreements are:
<TABLE>
<CAPTION>
AMOUNT OF WEIGHTED WEIGHTED COST OF VALUE OF
COUNTERPARTY AGREEMENT AVERAGE RATE AVERAGE MATURITY COLLATERAL COLLATERAL
- ------------ ----------- ------------ ---------------- -----------
<S> <C> <C> <C> <C> <C>
Bear Stearns $69,588,095 6.06% 27 days $61,138,838 $69,841,276
</TABLE>
The Fund has entered into various interest rate swap agreements in order to
convert its interest rate exposure on a portion of the reverse repurchase
agreements from a current short-term rate to a long-term fixed rate. See Note
2h.
h. INTEREST RATE SWAP AGREEMENTS
During the period ended May 31, 1995, the Fund entered into various interest
rate swap agreements. As part of the Fund's asset and liability management,
these agreements are used as a hedge for the interest rate exposure on its
reverse repurchase agreements - see Note 2g. The Fund is exposed to credit risk
in the event of non-performance by the counterparty to the interest rate swap
agreements. Notional principal amounts specified in these agreements often are
used to express the volume of these transactions, but the amounts potentially
subject to such credit risk are limited to the accrued interest. To minimize the
risk, the Fund's policy requires all counterparties to have a minimum credit
rating of A.
Terms of the interest rate swap agreements outstanding at May 31, 1995 are as
follows:
<TABLE>
<CAPTION>
NOTIONAL FIXED-PAYMENT VARIABLE PAYMENT
MATURITY PRINCIPAL RATE PAID RATE RECEIVED
DATE AMOUNT BY THE FUND BY THE FUND
-------- --------- ------------- ----------------
<S> <C> <C> <C>
01/19/96 $5,000,000 5.240% 3 month LIBOR
01/22/96 5,000,000 5.150 3 month LIBOR
03/05/96 5,000,000 4.515 3 month LIBOR
</TABLE>
The variable payment rate is based on the London Interbank Offered Rate (LIBOR).
The rate is reset every three months based on the LIBOR at a preset reference
date. The differential to be paid or received on interest rate swap agreements
is accrued daily as interest income. Such income recognized by the fund for the
period ending May 31, 1995 aggregated $87,286. At May 31, 1995, the
dollar-weighted averages of the fixed and variable rates were 4.97% and 6.25%,
respectively.
If terminated at May 31, 1995, the interest rate swap agreements would generate
a gain of approximately $133,563.
NOTE 3 - DISTRIBUTIONS AND CAPITAL LOSS CARRYOVERS
At November 30, 1994, for tax purposes, the Fund had an accumulated net realized
loss of $342,927 expiring in 2002.
For income tax purposes, the aggregate cost of securities and unrealized
depreciation is higher for financial statement purposes at May 31, 1995 by
$26,250.
NOTE 4 - TRANSACTIONS WITH AFFILIATES AND RELATED PARTIES
Franklin Advisers, Inc., under the terms of a management agreement, provides
investment advice, administrative services, office space and facilities to the
Fund, and receives fees computed weekly and payable monthly at 0.60% of the
Fund's average weekly net assets from June 1, 1993 through May 31, 1997; and
0.45% of the Fund's average weekly net assets from June 1, 1997 until May 31,
2001 (the anticipated termination of the Fund). Fees incurred by the Fund
aggregated $482,005 for the period ended May 31, 1995. Certain officers and
trustees of the Fund are also officers and/or directors of Franklin Advisers,
Inc., a wholly owned subsidiary of Franklin Resources, Inc.
13
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FRANKLIN PRINCIPAL MATURITY TRUST
================================================================================
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONT.)
NOTE 5 - TRUST SHARES
As a result of its initial public offering, 20,355,000 shares of beneficial
interest were sold at a price of $10.00 per share. The Fund received proceeds
from the sale of $189,301,500, after underwriting discounts of $.70 per share.
At May 31, 1995, there was an unlimited number of shares of $.01 par value
authorized.
NOTE 6 - RESTRICTED SECURITIES
A restricted security is a security which has not been registered with the
Securities and Exchange Commission pursuant to the Securities Act of 1933. The
Fund may purchase restricted securities through a private offering and they
cannot be sold without prior registration under the Securities Act of 1933
unless such sale is pursuant to an exemption therefrom. Subsequent costs of
registration of such securities are borne by the issuer. A secondary market
exists for certain privately placed securities. The Fund values these restricted
securities as disclosed in Note 2. At May 31, 1995, the Fund held restricted
securities with a value aggregating $9,026,361, representing 5.4% of the Fund's
net assets. Such securities are:
<TABLE>
<CAPTION>
Shares Security Acquisition Date Cost Value
------ ----------------------------------------------------- ------------------ ---------- --------
<S> <C> <C> <C> <C>
31,250 Grand Union Holding, Inc., 12.00% pfd., Series C .... 11/01/93 & 01/24/94 $3,343,750 $ 0
</TABLE>
<TABLE>
<CAPTION>
FACE
AMOUNT
- -----------
<S> <C> <C> <C> <C>
$ 5,000,000 El Paso Electric Co., bank debt .................. 02/25/94 4,275,000 3,200,000
6,895,101 Phar Mor, Inc., bank debt......................... 09/13/93 & 09/13/94 5,451,542 5,826,361
</TABLE>
NOTE 7 - RULE 144A SECURITIES
Rule 144A provides a non-exclusive safe harbor exemption from the registration
requirements of the Securities Act of 1933 for specified resales of restricted
securities to qualified institutional investors. The Fund values these
securities as disclosed in Note 2. At May 31, 1995, the Fund held 144A
securities with a value aggregating $7,111,594 representing 4.3% of the Fund's
net assets. See the accompanying statement of investments in securities and net
assets for specific information on such securities.
NOTE 8 - STATEMENT OF CASH FLOWS
The Fund's financial statements for the period ended May 31, 1995 include a
statement of cash flows in compliance with SFAS 102. Cash provided from
operations differs from net investment income because of amortization of bond
discount and premium, bonds paid-in-kind, year-end income and expense accrual
changes amounting to $1,878,698.
NOTE 9 - CREDIT RISK AND DEFAULTED SECURITIES
Although the Fund has a diversified portfolio, 34.7% of its portfolio invested
in lower rated and comparable quality unrated high yield securities. Investments
in higher yield securities are accompanied by a greater degree of credit risk
and such lower quality securities tend to be more sensitive to economic
conditions than higher rated securities. The risk of loss due to default by the
issuer may be significantly greater for the holders of high yielding securities,
because such securities are generally unsecured and are often subordinated to
other creditors of the issuer. At May 31, 1995, the Fund held 2 defaulted
securities issued by 2 separate companies with a value aggregating $3,237,500,
representing 1.9% of the Fund's net assets. For information as to specific
securities, see the accompanying statement of investments in securities and net
assets.
For financial reporting purposes, it is the Fund's accounting practice to
discontinue accrual of income and provide an estimate for probable losses due to
unpaid interest income on defaulted bonds for the current reporting period.
14
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FRANKLIN PRINCIPAL MATURITY TRUST
================================================================================
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONT.)
NOTE 10 - HOLDINGS OF 5% VOTING SECURITIES OF PORTFOLIO COMPANIES
Investments of 5% or more of an issuer's outstanding voting securities held by
the Fund, are defined in the Investment Company Act of 1940 as affiliated
companies. The Fund had investments in such affiliated companies at May 31,
1995, which amounted to $1,671,554. See the accompanying statement of
investments in securities and net assets for specific information on such
securities.
NOTE 11 - FINANCIAL HIGHLIGHTS
Selected data for each share of beneficial interest outstanding throughout each
period are as follows:
<TABLE>
<CAPTION>
Year ended November 30,
---------------------------------------------------------------
1995** 1994 1993 1992 1991 1990
-------- --------- -------- -------- --------- ---------
PER SHARE OPERATING PERFORMANCE
<S> <C> <C> <C> <C> <C> <C>
Net asset value at beginning of period ........... $ 7.70 $ 9.62 $ 8.09 $ 8.06 $ 7.36 $ 8.60
-------- --------- -------- -------- --------- ---------
Net investment income ............................ .250 .540 .517 .456 .736 .950
Net realized and unrealized gain (loss)
on investments .................................. .505 (1.766) 1.568 .214 .757 (1.180)
-------- --------- -------- -------- --------- ---------
Total from investment operations ................. .755 (1.226) 2.085 .670 1.493
-------- --------- -------- -------- --------- ---------
Less distributions:
From net investment income ...................... (.285) (.590) (.517) (.456) (.729) (1.002)
From paid-in capital ............................ -- -- -- (.184) (.064) (.008)
In excess of net investment income .............. -- -- (.038) -- -- --
From capital gains .............................. -- (.104) -- -- -- --
-------- --------- -------- -------- --------- ---------
Total distributions .............................. (.285) (1.920) (.640) (.793) (1.010)
-------- --------- -------- -------- --------- ---------
Net asset value at end of period ................. $ 8.17 $ 7.70 $ 9.62 $ 8.09 $ 8.06 $ 7.36
======== ========= ======== ======== ========= =========
TOTAL RETURN +.................................... 2.08% (8.50%) 21.17% 4.88% 10.30% (11.90)%
RATIOS/SUPPLEMENTAL DATA
Net assets at end of period (in 000's) ........... $167,202 $157,508 $196,895 $165,637 $164,934 $150,601
Ratio of expenses to average net assets .......... 3.48%* 2.60% 2.98% 3.27% 4.06% 4.49%
Ratio of net investment income to
average net assets .............................. 6.35%* 5.86% 5.74% 5.51% 9.41% 11.96%
Portfolio turnover rate .......................... 23.36% 45.19% 70.91% 61.69% 49.91% 28.96%
Closing market price per share at end of year++... $ 7.125 $ 7.125 $ 8.50 $ 7.50 $ 7.75 $ 7.75
</TABLE>
** For the six months ended May 31, 1995.
+ Total return measures the change in the market price of an investment over
the periods indicated, assuming reinvestment of dividends and capital gains,
if any, at market price.
* Annualized.
++ Based on last sale on the New York Stock Exchange.
- --------------------------------------------------------------------------------
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