Table of Contents
Page
Message from the President 2
Manager's Discussion 3
Performance Summary 5
Dividend Reinvestment Plan 6
Results of Shareholder Meeting 7
Statement of Investments 8
Financial Statements 13
Notes to Financial Statements 15
Report of Independent Auditors 20
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.
MESSAGE FROM THE PRESIDENT
January 16, 1996
Dear Shareholder:
We're pleased to present the annual report of the Franklin Principal Maturity
Trust for the period ended November 30, 1995.
During this reporting period, a slowing U.S. economy led to lower interest
rates, as the yield on the 30-year U.S. Treasury bond dropped sharply, to 6.13%
on November 30, 1995 from 8.00% on November 30, 1994. At the same time,
corporate earnings were very strong, causing a powerful upward surge in stock
prices. In fact, the unmanaged Dow Jones Industrial Average,(R) gained 1335.26
points and ended the period at 5074.49.
While this year's economic environment proved beneficial for the Trust, no one
can predict what lies ahead for investors. All investment markets experience
volatility, which is a normal part of investing, and there's no guarantee that
the markets will continue to perform as well in the months to come.
Looking forward to 1996, we anticipate continued moderate economic growth and
subdued inflation. We believe this environment should lead to lower yields and
higher bond prices.
Please feel free to contact us if you have questions or concerns. As always, we
appreciate your support of the Franklin Principal Maturity Trust and look
forward to serving your investment needs in the years to come.
Sincerely,
Charles B. Johnson
President
MANAGER'S DISCUSSION
We positioned the Trust early in the year to take advantage of rising bond
prices by increasing its positions in zero-coupon securities maturing around May
31, 2001. These securities pay no current interest, but are purchased at a
discount to face value. As a zero-coupon bond approaches maturity, the interest
accretes and its price approaches the face value, which is fully realized on the
maturity date. Since the entire income from these interest-rate-sensitive
securities is received at maturity, their current value increases faster during
market rallies and decreases faster during market declines, than the value of a
current interest-paying bond. These bonds are ideal for the Trust because they
are guaranteed by agencies of the U.S. government. The securities we purchased
were issued by FICO and REFCO, two corporations set up by the U.S. government to
finance the savings & loan bailout, and by the Federal National Mortgage
Association (Fannie Mae), a government-sponsored corporation which purchases
mortgages from lenders and resells them to investors.
GRAPHIC MATERIAL 1 OMMITTED - SEE APPENDIX AT END OF DOCUMENT
The bond market rally also pushed many of our corporate debt holdings to what we
believed would be their maximum price levels. We responded by selling several
holdings, which lowered our exposure to corporate bonds, as of November 30,
1995, to 19.0% from 24.9% of total investments, exclud-ing liabilities in excess
of other assets.+ Specifically, we sold 13 of the 15 defaulted securities that
were in the portfolio at the beginning of the year, preferring to increase our
exposure to the better quality zero-coupon bonds referred to above.
+ Total investments exclude liabilities in excess of other assets.
The Trust also used the opportunity provided by the rally to liquidate the
majority of its bank debt holdings. During the year, we sold our positions in
five of the six companies in this category, including those in Maxwell
Communication and Phar-Mor, leaving only a position in El Paso Electric Co. Of
course, we will continue to look for securities that we believe to be
undervalued in the market. Purchases during the year included bonds issued by
Telemundo Group and Mesa Capital.
During the year, most major stock market indices achieved record levels, fueled
by declining interest rates and strong corporate profits. Since we believe that
the economy is in the later stages of the current business cycle, we reduced our
equity exposure from 22.2% to 14.3% of total investments, excluding liabilities
in excess of other assets. For example, we sold part of the Trust's equity
position in Rexene Corporation, a major petrochemical and plastics manufacturer,
and Carson Pirie Scott, a department store chain in the Midwest.
Looking forward, we believe the outlook for the economy remains positive. The
current monetary policy of the Federal Reserve Board appears to be fostering
moderate growth and low inflation, which should be advantageous to the U.S.
Treasury and Agency zero-coupon bonds held by the Trust. Plus, its equity and
corporate bonds should be bolstered by the strong earnings and improving balance
sheets of their issuing companies.
Portfolio Operations
Chauncey Lufkin is the portfolio manager and vice president of Franklin
Principal Maturity Trust. He joined Franklin in 1990 as a specialist in
restructuring and distressed securities. Prior to joining Franklin, Mr. Lufkin
worked for the special finance group of Manufacturers Hanover Trust Co. and in
the leveraged finance division at Security Pacific National Bank.
Mr. Lufkin received his bachelor of arts degree from St. Lawrence University.
PERFORMANCE SUMMARY
The Franklin Principal Maturity Trust's price on the New York Stock Exchange
increased from $7.125 on November 30, 1994, to $7.50 on November 30, 1995. The
Trust's net asset value per share increased from $7.70 on November 30, 1994, to
$8.54 on November 30, 1995.
The Trust distributed 59.1 cents ($0.591) per share in income dividends 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 $7.50 on November 30, 1995, the Trust's distribution rate was 7.20%.
Dividends will vary depending on the earnings of the securities in the Trust's
portfolio, and past distributions are not predictive of future trends.
The Franklin Principal Maturity Trust reported a cumulative total return of
+14.21% for the one-year period ended November 30, 1995. Total return reflects
the change in the Trust's share price on the New York Stock Exchange (NYSE) and
assumes reinvestment of dividends and capital gains according to the terms
specified in the Trust's Dividend Reinvestment Plan. The cumulative total return
was +20.33%, based on the change in net asset value (as opposed to market
price), and assumes reinvestment of dividends and capital gains according to the
terms specified in the Trust's Dividend Reinvestment Plan. 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 demonstrates, the
Trust reported a cumulative total return of more than +68% since its inception
on January 19, 1989.
Franklin Principal Maturity Trust
Cumulative Total Returns1
Periods ended November 30, 1995
Since
Inception
1-Year 5-Year (1/19/89)
Based on change
in net asset value +20.33% +75.62% +68.92%
Based on change
in market value +14.21% +44.14% +37.96%
Distribution Rate2 7.20%
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 $7.50 on November 30, 1995. The November dividend included an
additional income distribution of 4.1 cents to meet excise tax requirements.
FRANKLIN PRINCIPAL MATURITY TRUST
Dividend Reinvestment Plan
The Fund's Dividend Reinvestment Plan offers you a prompt and simple way to
reinvest dividends and capital gain distributions in shares of the Fund. First
Data Investor Services Group ("Plan Agent"), c/o Corporate Securities, 53 State
Street, Boston, Massachusetts 02109, acts as your Plan Agent in administering
the Plan. All reinvestments are in full and fractional shares, carried to two
decimal places. The complete terms and conditions of the Plan are contained in
the Fund's prospectus, dated January 19, 1989, used in connection with its
initial public offering. A copy of that prospectus may be obtained from the Fund
at the address on the cover of this report.
You are automatically enrolled in the Plan unless you elect to receive dividends
or distributions in cash. If you own shares in your own name, you should notify
the Plan Agent, in writing, if you wish to receive dividends or distributions in
cash.
If the Fund declares a dividend or capital gain distribution, you, as a
participant in the Plan, will automatically receive an equivalent amount of
shares of the Fund purchased on your behalf by the Plan Agent in the open
market. All reinvestments are in full and fractional shares. The Fund does not
issue new shares in connection with the Plan.
There is no direct charge to participants for reinvesting dividends and
distributions, since the Plan Agent's fees are paid by the Fund. Whenever shares
are purchased through the exchange on which they are listed, each participant
will pay a pro rata portion of brokerage commissions. The automatic reinvestment
of dividends and distributions does not relieve shareholders of liability for
any taxes which may be payable on dividends or distributions. Generally, income
and capital gains resulting from dividends and distributions received in the
form of shares of the Fund, are realized notwithstanding the fact that cash is
not received by shareholders.
You will receive a monthly account statement from the Plan Agent, showing total
dividends and 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 non-certificated form. This convenience
provides added protection against loss, theft or inadvertent destruction of
certificates.
You may withdraw from the Plan at any time by notifying the Plan Agent in
writing. There is a $5 fee to withdraw from the reinvestment plan. If you
withdraw from the Plan, you will receive a certificate issued in your name for
all full shares and the Plan Agent will convert any fractional shares you hold
at the time of withdrawal to cash at the then current market price and send you
a check for the proceeds. If you prefer, the Plan Agent will sell all of your
full and fractional shares upon your withdrawal and send you 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 shares are not held in your name, you should contact
your brokerage firm, bank, or other nominee for more information.
FRANKLIN PRINCIPAL MATURITY TRUST
Annual Meeting of Shareholders
July 21, 1995
At an Annual Meeting of Shareholders of the Fund held on July 21, 1995,
shareholders of the Fund voted as follows: 1. Regarding the election of trustees
who constitute the current Board of Trustees...
<TABLE>
<CAPTION>
For (%) % of Voted Withheld %
<S> <C> <C> <C> <C> <C>
Frank H. Abbott, III.................. 17,112,888 83.63 97.61 418,632 2.39
Harris J. Ashton...................... 17,148,024 83.80 97.81 383,496 2.19
S. Joseph Fortunato................... 17,149,389 83.81 97.82 382,131 2.18
David W. Garbellano................... 17,105,327 83.59 97.57 426,193 2.43
Edward B. Jamieson.................... 17,154,217 83.83 97.85 377,303 2.15
Charles B. Johnson.................... 17,175,090 83.93 97.97 356,430 2.03
Rupert H. Johnson, Jr................. 17,223,418 84.17 98.24 308,102 1.76
Frank W.T. LaHaye..................... 17,138,578 83.76 97.76 392,942 1.92
Gordon S. Macklin..................... 17,139,802 83.76 97.77 391,718 2.23
2. Regarding the ratification of the selection of Coopers & Lybrand L.L.P.,
Certified Public Accountants, as the independent auditors for the Fund for the
fiscal year ending November 30, 1995...
For (%) % of Voted Abstain (%) Against (%)
17,127,054 83.70 97.69 314,037 1.79 90,430 .52
</TABLE>
<TABLE>
<CAPTION>
FRANKLIN PRINCIPAL MATURITY TRUST
Statement of Investments in Securities and Net Assets, November 30, 1995
Shares,
Warrants Value
& Rights (Note 1)
Common Stocks, Warrants & Rights 19.9%
Automobile/Auto Parts2.5%
<S> <C> <C>
105,000 a Harvard Industries, Inc., Class B............................................. $ 2,835,000
156,601 a Pullman Co. .................................................................. 1,507,285
-------------
4,342,285
-------------
Chemicals3.1%
564,000 a Rexene Corp. ................................................................. 5,499,000
-------------
Commercial Services1.2%
227,991 a Emcor Group, Inc. ............................................................ 2,137,416
-------------
Electronics
27,620 a Ampex Group, Inc. ............................................................ 96,670
-------------
Forest/Paper Products.2%
407,221 a WTD Industries, Inc. ......................................................... 305,416
-------------
Home Building1.4%
245,194 a NVR, Inc. .................................................................... 2,390,641
24,000 a NVR, Inc., warrants .......................................................... 51,000
-------------
2,441,641
-------------
Industrial4.4%
286,075 Lone Star Industries, Inc. ................................................... 7,116,116
274,444a,c,i Triangle Wire & Cable Corp. .................................................. 548,888
-------------
7,665,004
-------------
Machine/Construction
8,000 a Terex Corp., rights .......................................................... 16,000
-------------
Metal Fabricate/Hardware1.0%
2,844,000 a,i Ladish Co., Inc. ............................................................. 1,706,400
-------------
Real Estate
65,393 a XRC Corp. .................................................................... 45,775
-------------
Retail4.6%
401,510 a Carson Pirie Scott & Co. ..................................................... 7,980,011
Technology/Information Systems.8%
438,407 a Memorex Telex, NV, ADR........................................................ 383,606
48,081 a Wang Laboratories, Inc. ...................................................... 859,448
1,209 a Wang Laboratories cvt, warrants .............................................. 145,080
-------------
1,388,134
-------------
Transportation.7%
95,363 a Trans World Airlines, Inc. ................................................... 1,144,356
-------------
Total Common Stocks, Warrants & Rights (Cost $34,907,622)..................... 34,768,108
-------------
Preferred Stocks2.2%..........................................................
Automobile/Auto Parts1.5%
99,004 Harvard Industries, Inc., 14.25% pfd., PIK.................................... $ 2,623,606
-------------
Financial Services .2%
20,000 Nortel, Inc., pfd., Series B.................................................. 310,000
-------------
Transportation.5%
13,587 Trans World Airlines, Inc., 12.00% pfd. ...................................... 944,297
-------------
Total Preferred Stocks (Cost $3,743,936)...................................... 3,877,903
-------------
Convertible Preferred Stocks.1%
19,103 a Hills Department Store, cvt. pfd., Series A (Cost $384,448)................... 223,266
-------------
Face
Amount
Bank Debts 3.0%
$ 5,000,000b,d,h,kEl Paso Electric Co., 8.118%, 05/03/99....................................... 3,250,000
1,549,542b,h,k Gateway Group, Ltd., 10.90%, 09/01/98 ........................................ 2,063,274
-------------
Total Bank Debts (Cost $6,446,445)............................................ 5,313,274
-------------
Corporate Bonds23.0%
Air Freight.7%
1,500,000 a,d Evergreen International Aviation, senior notes, 13.50%, 08/15/02 ............. 1,245,000
-------------
Chemical/Fertilizers1.8%
3,000,000 Trans Resources, deb. notes, 14.50%, 09/01/96 ................................ 3,090,000
-------------
Commercial Services2.0%
2,000,000 Emcor Group, Inc., senior notes, PIK, Series A, 7.00%, 12/15/97 .............. 1,960,000
1,779,200 Emcor Group, Inc., senior notes, PIK, Series C, 11.00%, 12/15/01 ............. 1,543,456
-------------
3,503,456
-------------
Financial Services2.4%
4,000,000 c Acadia Partners, senior sub. notes, 13.00%, 10/01/97 ......................... 4,190,000
-------------
Food Retailing1.2%
2,528,000 d Almac, Inc., senior sub. notes, PIK, 11.50%, 11/19/04 ........................ 632,000
7,500,000 d Victory Markets, Inc., notes, 12.50%, 03/15/00 ............................... 1,537,500
-------------
2,169,500
-------------
Forest/Paper Products.1%
204,329 WTD Industries, Inc., notes, 8.00%, 06/30/05 ................................. 104,208
-------------
Gaming & Leisure .3%
2,000,000 d Harrah's Jazz Co., first mortgage, 14.25%, 11/15/01 .......................... 550,000
-------------
Home Building 1.1%
2,535,000 Waxman Industries, S.F., senior sub. notes, 13.75%, 06/01/99 ................. 1,989,975
-------------
Industrial 5.8%
$ 5,000,000 Great Dane Holdings, Inc., senior notes, 14.50%, 01/01/06 .................... $ 4,500,000
8,500,000 Haynes International, Inc., senior sub. notes, 13.50%, 08/15/99 .............. 5,397,500
29,200 Sellco Corp., sub. notes, PIK, 12.00%, 12/15/04 .............................. 5,694
9,000 Lone Star Industries, Inc., senior notes, 10.00%, 07/31/03 ................... 9,068
149,000 Thermadyne Industries, Inc., senior sub. notes, 10.25%, 05/01/02 ............. 151,235
207,000 Thermadyne Industries, Inc., sub. notes, 10.75%, 11/01/03 .................... 208,035
-------------
10,271,532
-------------
Machine/Construction1.0%
2,000,000 c Terex Corp., senior secured notes, 13.75%, 05/15/02 .......................... 1,716,000
-------------
Media & Broadcasting1.2%
2,144,200 Telemundo Group, senior notes, 10.25%, 12/30/01 .............................. 2,112,037
-------------
Retail3.3%
80,000 Hills Department Store, senior notes, 10.25%, 09/30/03 ....................... 72,800
2,000,000 Levitz Furniture, senior notes, 12.375%, 04/15/97 ............................ 1,840,000
3,500,000 Levitz Furniture, senior sub. notes, 9.625%, 7/15/03 ......................... 1,977,500
3,200,000 Rickel Home Centers, units, 13.50%, 12/15/01 ................................. 1,888,000
-------------
5,778,300
-------------
Tobacco1.8%
74,000 c Liggett Group, senior secured notes, Series C, 19.75%, 02/01/99 .............. 68,080
3,750,000 Liggett Group, S.F., senior secured notes, 11.50%, 02/01/99 .................. 3,046,875
-------------
3,114,955
-------------
Utilities.3%
500,000 Midland CoGeneration Venture, S.F., secured lease obligation bonds,
Series A, 11.75%, 07/23/05 .................................................. 518,395
-------------
Total Corporate Bonds (Cost $53,174,930)............................................ 40,353,358
-------------
Foreign Government Bonds1.7%
4,350,000 e ESCOM, E168, utility deb. (South Africa), 11.00%, 06/01/08 ................... 959,200
2,158,000 Republic of Ecuador, deb. notes, 3.00%, 02/27/15 ............................. 712,140
2,000,000 Republic of Ecuador, deb. notes, 3.00%, 02/28/25 ............................. 680,000
1,100,000 Republic of Ecuador, deb. notes, 7.25%, 02/28/25 ............................. 543,125
-------------
Total Foreign Government Bonds (Cost $4,151,912).............................. 2,894,465
-------------
g Zero Coupon/Step-up Bonds87.8%
Oil/Gas2.0%
4,000,000 Mesa Inc., disc. notes, zero coupon to 06/30/95, (original accretion rate 12.75%),
12.75% thereafter, 06/30/98 ................................................. 3,540,000
-------------
U.S. Government & Its Agencies85.8%
$10,850,000 FICO Strip, 03/07/01 ......................................................... $ 8,014,851
12,520,000 FICO Strip, 04/06/01 ......................................................... 9,202,487
5,211,000 FICO Strip, 05/02/01 ......................................................... 3,812,889
1,116,000 FICO Strip, 05/11/01 ......................................................... 815,329
5,253,000 FICO Strip, 05/30/01 ......................................................... 3,825,323
7,348,000 FNMA Strip, 02/01/01 ......................................................... 5,461,004
8,100,000 GTC Trust Certificates-Israel, Series 1D, 05/15/01 ........................... 5,943,683
27,226,000 f GTC Trust Certificates-Israel, Series 2F, 05/15/01 ........................... 19,978,112
40,000,000 REFCO Strip, 04/15/01 ........................................................ 29,674,194
85,249,000 f U.S. Treasury Strips, 05/15/01 ............................................... 63,170,008
-------------
149,897,880
-------------
Total Zero Coupon/Step-up Bonds (Cost $144,860,445)........................... 153,437,880
-------------
Total Long Term Investments (Cost $247,669,738)............................... 240,868,254
-------------
Short Term Investments1.3%
5,000,000 a,d McCrory Corp., deb., (original accretion rate 5.883%), 0.00%, 12/31/95
(Cost $2,800,000)............................................................ 2,250,000
-------------
Total Investments before Repurchase Agreements (Cost $250,469,738)............ 243,118,254
-------------
j Receivables from Repurchase Agreements 1.0%
1,569,339 Joint Repurchase Agreement, 5.90 %, 12/01/95 (Cost $1,590,283)
Bear Stearns & Co. Inc., (Maturity Value $241,460)
Collateral: U.S. Treasury Bills, 03/14/96
U.S. Treasury Notes, 5.50% - 8.875%, 04/30/97 - 12/31/99
Chase Manhattan Bank N.A., (Maturity Value $241,460)
Collateral: U.S. Treasury Notes, 5.25% - 7.50%, 12/31/96 - 07/31/98
Daiwa Securities America, Inc., (Maturity Value $241,460)
Collateral: U.S. Treasury Notes, 5.625% - 7.875%, 01/31/96 - 11/30/99
Donaldson, Lufkin, & Jenrette, (Maturity Value $241,460)
Collateral: U.S. Treasury Notes, 5.875% - 8.00%, 12/31/96 - 11/30/99
Nikko Securities Co. International, Inc., (Maturity Value $241,460)
Collateral: U.S. Treasury Notes, 5.50% - 8.50%, 04/30/97 - 03/31/00
Swiss Bank Corp., (Maturity Value $241,460)
Collateral: U.S. Treasury Notes, 6.125%, 05/31/97
UBS Securities Inc., (Maturity Value $141,781)
Collateral: U.S. Treasury Bills, 06/27/96
U.S. Treasury Notes, 5.375% - 5.50%, 11/30/97 - 11/15/98 .................... 1,590,283
-------------
Total Investments (Cost $252,060,021)140.0%................................... 244,708,537
-------------
Liabilities in Excess of Other Assets, Net(40.0)%............................. (69,903,508)
-------------
Net Assets 100.0%.............................................................. $174,805,029
=============
At November, 30, 1995, the net unrealized depreciation based
on the cost of investments for income tax purposes of $252,105,650 was as
follows:
Aggregate gross unrealized appreciation for all investments in which there was an
excess of value over tax cost............................................... $16,893,439
Aggregate gross unrealized depreciation for all investments in which there was an
excess of tax cost over value............................................... (24,290,552)
-------------
Net unrealized depreciation................................................... $(7,397,113)
=============
</TABLE>
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
aNon-income producing.
bSee Note 6 regarding restricted securities.
cSee Note 7 regarding Rule 144A securities.
dSee Note 9 regarding credit risk and defaulted securities.
eFace amount stated in foreign currencies and value is stated in U.S. dollars.
fSecurity is designated as collateral for reverse repurchase agreement
transactions.
gZero coupon/step-up bonds. The current effective yield may vary.
The original accretion rate will remain constant.
hSee Note 2(a) regarding securities valued by the Board of Trustees.
iSee Note 11 regarding holdings of 5% voting securities.
jFace amount for repurchase agreements is for the underlying collateral. See
Note 2(f) regarding Joint Repurchase Agreement. kInvestments 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.
FRANKLIN PRINCIPAL MATURITY TRUST
Financial Statements
Statement of Assets and Liabilities
November 30, 1995
Assets:
Investments in securities, at value
(identified cost $250,469,738) $243,118,254
Receivables from repurchase
agreements, at value and cost 1,590,283
Receivables:
Interest and dividends 2,211,398
Investment securities sold 851,792
--------------
Total assets 247,771,727
--------------
Liabilities:
Payables:
Reverse repurchase agreements (Note 2) 70,726,790
Distributions payable to shareholders 1,759,783
Accrued interest (Note 2) 328,413
Management fees 87,312
Shareholder servicing costs 11,000
Accrued expenses and other liabilities 53,400
--------------
Total liabilities 72,966,698
--------------
Net assets, at value $174,805,029
==============
Net assets consist of:
Undistributed net investment income $533,928
Net unrealized depreciation on
investments and translation of
assets and liabilities denominated
in foreign currencies (7,351,798)
Net realized loss from investments
and foreign currency
transactions (3,734,945)
Capital shares 204,626
Additional paid-in capital 185,153,218
--------------
Net assets, at value $174,805,029
==============
Net asset value per share
($174,805,029 O 20,462,600 shares
of beneficial interest outstanding) $8.54
==============
Statement of Operations
for the year ended November 30, 1995
Investment income:
Interest (Note 2) $15,587,852
Dividends 403,635
--------------
Total income $15,991,487
Expenses:
Management fees (Note 4) 999,478
Shareholder servicing costs 86,992
Professional fees 99,213
Reports to shareholders 20,579
Custodian fees 19,627
Trustees' fees and expenses 14,657
Other 57,971
--------------
Operating expenses 1,298,517
Interest expense (Note 2) 4,228,649
--------------
Total expenses 5,527,166
--------------
Net investment income 10,464,321
--------------
Realized and unrealized gain (loss)
from investments and foreign currencies:
Net realized gain (loss) from:
Investments (3,355,758)
Foreign currency transactions 16,718
Net unrealized appreciation
(depreciation) on:
Investments 22,269,464
Translation of assets and
liabilities denominated
in foreign currencies (4,159)
--------------
Net realized and unrealized
gain on investments
and foreign currencies 18,926,265
--------------
Net increase in net assets
resulting from operations $29,390,586
==============
The accompanying notes are an integral part of these financial statements.
FRANKLIN PRINCIPAL MATURITY TRUST
Financial Statements (cont.)
Statements of Changes in Net Assets
for the years ended November 30, 1995 and 1994
1995 1994
--------- ---------
Increase (decrease) in net assets:
Operations:
Net investment income $ 10,464,321 $ 10,993,289
Net realized loss from
investments and foreign
currency transactions (3,339,040) (294,808)
Net unrealized appre-
ciation (depreciation)
on investments and translation of
assets and liabilities denom-
inated in foreign
currencies 22,265,305 (35,895,185)
--------- ---------
Net increase
(decrease) in
net assets
resulting from
operations 29,390,586 (25,196,704)
Distributions to share-
holders from:
Undistributed net
investment income (12,093,398) (12,074,213)
Undistributed net
realized capital gain -- (2,116,600)
--------- ---------
Net increase
(decrease) in
net assets 17,297,188 (39,387,517)
Net assets:
Beginning of year 157,507,841 196,895,358
--------- ---------
End of year (including
undistributed net
investment income of
$533,928 at 11/30/95
and $2,090,458
at 11/30/94) $174,805,029 $157,507,841
========= =========
Statement of Cash Flows
for the year ended November 30, 1995
Interest and dividends received $7,973,509
Interest expense paid (3,723,734)
Operating expenses paid (1,268,002)
--------------
Cash provided - operating activities 2,981,773
--------------
Investment purchases (941,940,095)
Investment sales 879,410,028
--------------
Cash used - investing activities (62,530,067)
--------------
Net increase in reverse repurchase
agreement transactions 65,759,515
Distributions to shareholders (11,356,743)
--------------
Cash provided - financing activities 54,402,772
--------------
Net decrease in cash (5,145,522)
Cash at beginning of period 5,145,522
--------------
Cash at end of period $ --
==============
The accompanying notes are an integral part of these financial statements.
FRANKLIN PRINCIPAL MATURITY TRUST
Notes to Financial Statements
NOTE 1 - ORGANIZATION
Franklin Principal Maturity Trust (the Fund) 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.
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 asked prices. Other
securities for which market quotations are readily available are valued at
current market value, 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 Investment 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 Board).
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.
The fair values of securities restricted as to resale, if any, are determined
following procedures established by the Board.
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, is 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 and foreign currency
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.
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. Therefore, no income tax provision is required.
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 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 appreciation
or depreciation on translation of assets and liabilities denominated in foreign
currencies arises from changes in the value of assets and liabilities other than
investments in securities at 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 November 30, 1995, all outstanding joint repurchase
agreements held by the Fund had been entered into on that date.
g. Reverse Repurchase Agreements
During the year ended November 30, 1995, the Fund entered into reverse
repurchase agreements with certain brokers. Under a reverse repurchase
agreement, 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 securities for which the Fund retains possession.
The difference between the selling price and the repurchase price is accounted
for as interest expense. At November 30, 1995, the outstanding reverse
repurchase agreements, which were entered into on November 1, 1995 and November
21, 1995, and collateralized by zero coupon bonds issued by the U.S. government
or its agencies, will mature within 61 days and are as follows:
<TABLE>
<CAPTION>
Amount of Weighted Weighted Cost of Value of
Counterparty Agreements Average Rate Average Maturity Collateral Collateral
- -------- -------- -------- ---------- -------- --------
<S> <C> <C> <C> <C> <C>
Bear Stearns $70,726,790 5.88% 32 days $64,297,432 $83,148,120
</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 year ended November 30, 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
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (cont.)
h. Interest Rate Swap Agreements (cont.)
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.
The terms of the interest rate swap agreements outstanding at November 30, 1995
are as follows:
<TABLE>
<CAPTION>
Maturity Notional Fixed-Payment Rate Variable Payment Rate
Date Principal Amount Paid by the Fund Received 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 reset every three months based on the London
Interbank Offered Rate (LIBOR) at pre-established dates. The differential to be
received or paid on interest rate swap agreements is accrued daily as interest
income or interest expense. Income recognized by the fund for the year ending
November 30, 1995 aggregated $164,571. At November 30, 1995, the dollar-weighted
averages of the fixed and variable rates were 4.97% and 5.92%, respectively. If
terminated at November 30, 1995, the interest rate swap agreements would
generate a gain of approximately $52,304.
NOTE 3 - DISTRIBUTIONS AND CAPITAL LOSS CARRYOVERS
At November 30, 1995, for tax purposes, the Fund had capital loss carryover of
$3,689,316 expiring in 2003.
For tax purposes, the aggregated cost of securities and unrealized depreciation
is higher than for financial reporting purposes at November 30, 1995 by $45,629.
NOTE 4 - TRANSACTIONS WITH AFFILIATES AND RELATED PARTIES
Franklin Advisers, Inc. (Advisers) under the terms of a management agreement,
provides investment advice, administrative services, office space and facilities
to the Fund, and receives fees of 0.60% per annum 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 $999,478 for the year ended November 30, 1995.
Certain officers and trustees of the Fund are also officers and/or directors of
Advisers, a wholly-owned subsidiary of Franklin Resources, Inc.
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 November 30, 1995, the Fund has 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.
NOTE 6 - RESTRICTED SECURITIES (cont.)
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 November 30, 1995, the
Fund held the following restricted securities with a value aggregating
$5,313,274, representing 3.04% of the Fund's net assets:
<TABLE>
<CAPTION>
Face
Amount Security Acquisition Date Cost Value
_______ __________________________________ . _____________ _______ _______
<C> <C> <C> <C> <C>
$ 5,000,000 El Paso Electric Co., bank debt .................. 02/25/94 4,275,000 3,250,000
1,549,542 Gateway Group Ltd., bank debt..................... 09/08/95 2,171,445 2,063,274
</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 November 30, 1995, the Fund held 144A
securities with a value aggregating $6,522,968 representing 3.73% 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 year ended November 30, 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 $7,482,548.
NOTE 9 - CREDIT RISK AND DEFAULTED SECURITIES
Although the Fund has a diversified portfolio, 28.5% of its portfolio is
invested in lower rated and comparable quality unrated high yield securities.
Investments in high 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 yield
securities, because such securities are generally unsecured and are often
subordinated to other creditors of the issuer. At November 30, 1995, the Fund
held 6 defaulted securities issued by 6 separate companies with a value
aggregating $9,464,500, representing 5.4% 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.
NOTE 10 - OTHER CONSIDERATIONS
Advisers may serve as a member of various bondholders' committees, representing
bondholders' interests in certain corporate restructuring negotiations.
Currently the manager serves on the bondholders' committee for Victory Markets.
As a result of this involvement in this committee, Advisers may be in possession
of certain material non-public information. Advisers has not, nor does it intend
to sell, any of its holdings in these securities while in possession of material
non-public information in contravention of the Federal Securities laws.
NOTE 11 - 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 November 30,
1995, which amounted to $2,255,288. See the accompanying Statement of
Investments in Securities and Net Assets for specific information on such
securities.
NOTE 12 - SUBSEQUENT EVENTS
On December 15, 1995, the Board of Trustees declared the following per share
distribution:
<TABLE>
<CAPTION>
From Undistributed
Record Date Payment Date Net Investment Income
------------------- ----------------- --------------------
<S> <C> <C>
December 29, 1995 January 15, 1996 $.045
</TABLE>
NOTE 13 - FINANCIAL HIGHLIGHTS
Selected data for each share of beneficial interest outstanding throughout each
year are as follows:
<TABLE>
<CAPTION>
Year ended November 30,
1995 1994 1993 1992 1991
------ ------ ------ ------ ------
PER SHARE OPERATING PERFORMANCE
<S> <C> <C> <C> <C> <C>
Net asset value at beginning of year....................... $7.70 $9.62 $8.09 $8.06 $7.36
------ ------ ------ ------ ------
Net investment income...................................... .520 .540 .517 .456 .736
Net realized and unrealized gain (loss)
on investments............................................ .911 (1.766) 1.568 .214 .757
------ ------ ------ ------ ------
Total from investment operations........................... 1.431 (1.226) 2.085 .670 1.493
------ ------ ------ ------ ------
Less distributions:
From net investment income................................ (.591) (.590) (.517) (.456) (.729)
From paid-in capital...................................... -- -- -- (.184) (.064)
In excess of net investment income........................ -- -- (.038) -- --
From capital gains........................................ -- (.104) -- -- --
------ ------ ------ ------ ------
Total distributions........................................ (.591) (.694) (.555) (.640) (.793)
------ ------ ------ ------ ------
Net asset value at end of year............................. $8.54 $7.70 $9.62 $8.09 $8.06
====== ====== ====== ====== ======
TOTAL RETURN+.............................................. 14.21% (8.50%) 21.17% 4.88% 10.30%
RATIOS/SUPPLEMENTAL DATA
Net assets at end of year (in 000's)....................... $174,805 $157,508 $196,895 $165,637 $164,934
Ratio of expenses to average net assets.................... 3.32% 2.60% 2.98% 3.27% 4.06%
Ratio of net investment income to
average net assets........................................ 6.33% 5.86% 5.74% 5.51% 9.41%
Portfolio turnover rate.................................... 30.57% 45.19% 70.91% 61.69% 49.91%
Closing market price per share at end of yeara............. $7.50 $7.125 $8.50 $7.50 $7.75
</TABLE>
+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.
aBased on last sale on the New York Stock Exchange.
Under IRC 854(b)(2) of the Internal Revenue Code, the Fund hereby designates
2.19% as the percentage amount of its ordinary income dividends paid by the Fund
during the fiscal year ended November 30, 1995, as income qualifying for the
dividends received deduction.
FRANKLIN PRINCIPAL MATURITY TRUST
Report of Independent Auditors
To the Shareholders and Board of Trustees
of Franklin Principal Maturity Trust:
We have audited the accompanying statement of assets and liabilities of Franklin
Principal Maturity Trust (the Fund), including the statement of investments in
securities and net assets, as of November 30, 1995, and the related statements
of operations and cash flows for the year then ended, the statements of changes
in net assets for each of the two years in the period then ended, and the
financial highlights for each of the five years in the period then ended. These
financial statements and financial highlights are the responsibility of the
Fund's management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
November 30, 1995, by correspondence with the custodian and brokers. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Franklin Principal Maturity Trust as of November 30, 1995, 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 five years in the period then ended, in conformity
with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
San Francisco, California
January 2, 1996
Franklin Principal Maturity Trust
APPENDIX
DESCRIPTION OF GRAPHIC MATERIAL OMITTED FROM EDGAR FILING
(PURSUANT TO ITEM 304 (a) OF REGULATION S-T)
GRAPHIC MATERIAL (1)
This chart shows in pie chart format the fund's securities breakdown by sector,
as a percentage of the fund's total investments.
<TABLE>
<CAPTION>
Portfolio Breakdown on 11/30/95
<S> <C>
Treasury/Agency Zero-Coupon Bonds 61.7%
Corporate Bonds 19.0%
Common Stocks 14.3%
Other Stocks & Bonds 5.0%
</TABLE>
