January 15, 1997
Dear Shareholder:
It is a pleasure to bring you the Franklin Principal Maturity Trust annual
report for the period ended November 30, 1996.
Interest rates fluctuated during the Trust's fiscal year. As you may know, the
Federal Reserve Board (the Fed) lowered interest rates twice in the last half of
1995 to help stimulate the U.S. economy. When the Gross Domestic Product (a
measure of the nation's economic output) posted a sluggish .3% annual growth
rate for the last quarter of 1995, the Fed lowered rates once again in late
January 1996.1
Signs of economic improvement began to show in early 1996. The government
reported that job creation in February was the strongest in eight years. Hopes
for further interest rate reductions died, and long-term rates began to rise on
investors' fears of higher inflation. The 30-year Treasury yield was 7.13% on
August 31, 1996, up significantly from 5.96% on January 1, 1996.2 The yield had
settled down to 6.36% at the close of the period, perhaps due in part to
investors' recognition of seemingly mild inflation. As measured by the rise in
the U.S. Consumer Price Index, inflation was 3.32% through November 30, 1996.3
In general, domestic equity markets performed well during the fiscal year. The
Dow Jones Industrial Average(R) ended at 6521.70 on November 29, 1996, up more
than 1,400 points from the beginning of the Trust's fiscal year (5087.13 on
December 1, 1995). This was not without some mid-year back-sliding, however,
with the Dow dipping as low as 5346.55 on July 23.1 On the other hand, prices of
most fixed-income securities (which move counter to interest rate movements)
generally remained flat or declined during the 12-month period.
The following pages contain specific information regarding the Trust's
performance over the fiscal year. As always, we appreciate your continued
support and look forward to serving your investment needs in the years ahead.
Sincerely,
Charles B. Johnson
President
1. Source: Bloomberg.
2. Source: Micropal.
3. Source: Bureau of Labor Statistics.
MANAGER'S DISCUSSION
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.
We are pleased to report that the Franklin Principal Maturity Trust generated a
cumulative total return of +17.68%, based on its change in market price on the
New York Stock Exchange over the 12-month period. Additionally, the fund
continued to pay a current monthly dividend of 4.5 cents per share, as discussed
in the Performance Summary on page 6.
Portfolio Update
In general, the Trust's portfolio consists of zero-coupon U.S. government bonds,
corporate bonds, and common and preferred stocks. The chart above shows the
portfolio breakdown as of November 30, 1996.
GRAPHIC MATERIAL 1 OMITTED - SEE APPENDIX AT END OF DOCUMENT
As you may know, zero-coupon bonds do not pay any current interest. (For tax
purposes, however, interest is accreted on an annual basis.) Instead, the
interest is paid in-full, along with principal, when the bonds mature. Most of
the zeros in the Trust have approximately five years until maturity.
We invest the portfolio's remaining assets in securities we believe are
undervalued and have the potential for attractive rates of return. In the past
12 months, we found such value in common stocks and corporate bonds selling at
discounts. These two groups of securities -- common stocks and corporate bonds
- -- were the major contributors to the Trust's favorable performance for the
fiscal year.
Specific Asset Classes & Securities
Zero-Coupon U.S. Government Bonds
Although the payment of principal and interest on these zero-coupon bonds is
guaranteed in-full upon maturity by the U.S. government, their prices are very
sensitive to interim movements in interest rates (i.e. when interest rates rise,
bond values decline). When interest rates rose during the reporting period, the
value of this portion of the Trust declined.
Corporate Bonds
In contrast, many of the Trust's corporate bonds contributed to its positive
performance during the 12-month period. For example, we initiated a new bond
position in Mesa Inc., a company which operates petroleum fields and natural-gas
processing plants in Kansas and Texas. The bond was trading at a discount at the
time of purchase, due in part to falling oil prices and to the company's high
debt level. However, in our opinion, the company had sufficient asset coverage
for its debt, and we believed oil prices would eventually stabilize and start
climbing, which they did. We purchased the bond at $88 and sold when it reached
$102.
Another new purchase was American Rice, a leading U.S. processor and marketer of
rice products. We purchased this company's first mortgage bond at a discount
($89), after it had a quarter of poor earnings. Since our purchase, the company
has turned in good performance, and the bond rose to $97 on November 30, 1996.
At the close of the period, we also owned the bond of Haynes International Inc.,
which supplies high-performance alloys to aerospace and industrial markets. Due
to the growing strength of the aerospace industry, this security performed very
well over the reporting period.
Equities
Several of our equity holdings were strong performers over the 12-month period.
One example is Lone Star Industries, a producer of cement, sand, gravel and
other construction materials. At the beginning of the reporting period, Lone
Star's common stock was trading at $24.875, while at the close of the period, it
was at $37. Another stock whose price appreciated nearly 50% over the reporting
period was Emcor, a company that designs, installs and operates complex
mechanical and electrical systems. In addition, our holdings in the common stock
and warrants of Ladish Co. Inc. performed well. Ladish is another company that
supplies materials to the aerospace industry.
Of course, not every company can shine all the time. One company in which we
owned both preferred and common stock during the reporting period was Harvard
Industries, an auto-parts manufacturer that sells to the major U.S. auto
manufacturers. Because the company's earnings were hurt by a general economic
slowdown in the second half of 1996, as well as by strikes in the auto industry,
the prices of these two securities have declined in value. However, we believe
this company is well-positioned for future earnings growth, and we intend to
hold on to these two issues.
We also purchased a first mortgage bond of Harrah's Jazz Co., which the company
issued to build a new casino. Unfortunately, the company lost some of its other
financing and defaulted on these bonds. The project has been put on hold while
Harrah's Jazz Co. reorganizes. Meanwhile, alternate funding has been secured.
When the project is finished, the Trust will receive an equity stake in the new
casino, and ultimately, we expect this position to be profitable.
Going Forward
In the last two months of the fiscal year, long-term interest rates eased as
investors acted upon data suggesting moderate economic growth and low inflation
in 1997. Looking forward, we believe we may be entering a moderate interest rate
environment, which should benefit the Trust's future performance.
In the coming months, we may decrease the equity portion of the Trust, which has
appreciated in value. Our policy is to sell a security as its price appreciates
to our determined target level.
We may also seek more securities that offer high yields along with equity
enhancements. An example of this type of security is a zero-coupon bond with
warrants that provide an equity stake in a company. Additionally, we will
continue to seek undervalued convertible bonds and preferred stocks that may
provide both income and capital growth.
This discussion reflects our strategies for the Trust and includes our opinions
at the close of the reporting period. Since economic and market conditions are
constantly changing, our strategies, evaluations, conclusions and decisions
regarding the portfolio holdings discussed above may change as new circumstances
arise. Although past performance of a specific investment or sector cannot
guarantee future performance, such information can help illustrate how we
analyze the securities we purchase for the Trust.
PERFORMANCE SUMMARY
We are pleased to report that the Franklin Principal Maturity Trust's share
price on the New York Stock Exchange (NYSE) increased 75.0 cents from $7.50 on
November 30, 1995, to $8.25 on November 30, 1996. The Trust's net asset value
per share increased $1.03, from $8.54 on November 30, 1995, to $9.57 on November
30, 1996.
During the reporting period, the Trust distributed income dividends totaling
54.0 cents ($0.540) per share. Based on an annualization of November's monthly
dividend of 4.5 cents ($0.045 per share) and the NYSE closing price of $8.25 on
November 30, 1996, the Trust's distribution rate was 6.55%. Dividends will vary
based on the earnings of the portfolio, and past distributions are not
predictive of future trends.
Franklin Principal Maturity Trust
Dividend Distributions 12/1/95 -11/30/96
Dividend
Month per Share
December 4.5 cents
January 4.5 cents
February 4.5 cents
March 4.5 cents
April 4.5 cents
May 4.5 cents
June 4.5 cents
July 4.5 cents
August 4.5 cents
September 4.5 cents
October 4.5 cents
November 4.5 cents
Total 54.0 cents
The Franklin Principal Maturity Trust reported a cumulative total return of
+17.68% for the 12-month period ended November 30, 1996. Total return reflects
the change in the Trust's share price on the NYSE. Based on the change in net
asset value (as opposed to market price), the 12-month total return for the same
period was +20.03%. All total returns assume the 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 Franklin Principal Maturity Trust with a
long-term perspective. As the chart to the right shows, the Trust reported a
cumulative total return of +102.50%, based on net asset value, since its
inception on January 19, 1989.
Franklin Principal Maturity Trust
Periods ended November 30, 1996
Since
Inception
1-Year 5-Year (1/19/89)
Cumulative
Total Return1
Based on change
in net asset value 20.03% 74.29% 102.5%
Based on change
in market price 17.68% 56.26% 62.35%
Average Annual
Total Return1
Based on change
in net asset value 20.03% 11.75% 9.39%
Based on change
in market price 17.68% 9.34% 6.36%
Distribution Rate:26.55%
1. Total return calculations represent the change in value of an investment over
the periods indicated and 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
cent per share monthly dividend and the New York Stock Exchange closing price of
$9.49 on November 30, 1996.
DIVIDEND REINVESTMENT PLAN
The Fund's Dividend Reinvestment Plan (the "Plan") offers you a prompt and
simple way to reinvest dividends and/or capital gain distributions in shares of
the Fund. First Data Investor Services Group (the "Plan Agent"), 53 State St.,
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
Statement of Investments in Securities and Net Assets, November 30, 1996
<TABLE>
<CAPTION>
Shares/ Value
Warrants (Note 1)
Common Stocks & Warrants 24.6%
Aerospace/Defense5.9%
<C> <S> <C>
2,144,000 a,gLadish Co., Inc. .......................................................... $ 4,020,000
895 a,gLadish Co., Inc., warrants ................................................ 7,498,263
5,000 aSabreliner Corp., warrants .................................................. 25,000
-------------
11,543,263
-------------
Automotive0.3%
105,000 aHarvard Industries, Inc., Class B ........................................... 525,000
-------------
Chemicals3.2%
475,000 Rexene Corp. ................................................................. 6,293,750
-------------
Commercial Services1.6%
227,991 aEmcor Group, Inc. ........................................................... 3,134,876
-------------
Electronics0.1%
27,620 aAmpex Group, Inc. ........................................................... 283,105
-------------
Forest/Paper Products0.5%
357,221 aWTD Industries, Inc. ........................................................ 870,726
-------------
Home Building0.8%
161,165 aNVR, Inc. ................................................................... 1,631,796
-------------
Industrial5.6%
286,075 Lone Star Industries, Inc. ................................................... 10,584,775
274,444 a,c,gTriangle Wire & Cable Corp. ............................................. 411,666
-------------
10,996,441
-------------
Real Estate
65,393 aXRC Corp. ................................................................... 3,924
-------------
Retail5.3%
401,510 aCarson Pirie Scott & Co. .................................................... 10,389,071
456 aHills Stores Co. ............................................................ 3,021
-------------
10,392,092
-------------
Technology/Information Systems0.5%
48,081 aWang Laboratories, Inc. ..................................................... 1,015,711
-------------
Utilities0.8%
248,077 aEl Paso Electric Co. ........................................................ 1,472,957
-------------
Wireless/Telecommunications
13,500 aInternational Wireless Communication, warrants .............................. 124
-------------
Total Common Stocks & Warrants (Cost $27,757,874)............................. 48,163,765
-------------
Preferred Stocks 4.8%........................................................
Automotive 2.3%
273,479 aHarvard Industries, Inc., 14.25% pfd., PIK .................................. $ 4,409,849
-------------
Cable Television2.4%
53,570 aCablevision Systems Corp., Series M, 11.125% pfd., PIK ...................... 4,740,945
-------------
Financial Services0.1%
20,000 Nortel, Inc., pfd., Series B ................................................. 240,000
-------------
Total Preferred Stocks (Cost $11,585,023)..................................... 9,390,794
-------------
Convertible Preferred Stocks0.1%
19,498 aHills Stores Co., cvt. pfd., Series A (Cost $392,397) ....................... 135,267
-------------
Face
Amount
Corporate Bonds24.8%
Aerospace/Defense1.9%
$ 4,000,000 Sabreliner Corp., senior notes, 12.50%, 04/15/03 ............................. 3,780,000
-------------
Automotive4.1%
4,500,000 cExide Corp., senior sub. notes, 2.90%,12/15/05 .............................. 2,745,000
6,000,000 Harvard Industries, Inc., senior notes, 12.00%, 07/15/04 ..................... 5,250,000
-------------
7,995,000
-------------
Chemicals1.8%
4,100,000 Lanesborough Corp., senior notes, 10.00%, 04/15/00 ........................... 3,444,000
-------------
Food & Beverages2.6%
5,000,000 American Rice, Inc., mortgage, secured notes, 13.00%, 07/31/02................ 4,850,000
170,000 Doane Products Co., senior notes, 10.625%, 03/01/06 .......................... 181,900
-------------
5,031,900
-------------
Food Retailing0.3%
2,528,000 Almac, Inc., senior sub. notes, PIK, 11.50%, 11/18/04 ........................ 164,320
7,500,000 a,dVictory Markets, Inc., notes, 12.50%, 03/15/00 ............................ 487,500
-------------
651,820
-------------
Gaming & Leisure1.4%
5,000,000 a,dHarrah's Jazz Co., first mortgage, 14.25%, 11/15/01........................ 2,725,000
-------------
Industrial3.4%
5,000,000 Great Dane Holdings, Inc., senior notes, 14.50%, 01/01/06 .................... 5,037,500
1,600,000 Intertek Finance, Plc., senior sub. notes, 10.25%, 11/01/06 .................. 1,642,000
9,000 Lone Star Industries, Inc., senior notes, 10.00%, 07/31/03 ................... 9,146
-------------
6,688,646
-------------
Oil/Gas1.0%
$ 2,000,000 TransAmerican Refining Corp., first mortgage, Series 2, 16.50% coupon
to 08/15/98, 16.00% thereafter, 02/15/02.................................... $ 2,005,000
-------------
Retail2.1%
6,000,000 Levitz Furniture, senior sub. notes, 9.625%, 07/15/03 ........................ 3,150,000
2,000,000 a,dRickel Home Centers, units, 13.50%, 12/15/01 .............................. 870,000
-------------
4,020,000
-------------
Semiconductors1.4%
2,500,000 cXilinx, Inc., sub. notes, 5.25%, 11/01/02.................................... 2,737,500
-------------
Technology/Information Systems1.9%
4,000,000 U.S. Banknote Corp., senior notes, Series B, 11.625%, 08/01/02 ............... 3,780,000
-------------
Tobacco2.9%
2,000,000 Liggett Group, senior notes, Series C, 19.75%, 02/01/99....................... 1,360,000
74,000 Liggett Group, senior secured notes, Series C, 19.75%, 02/01/99 .............. 50,320
6,750,000 Liggett Group, S.F., senior secured notes, 11.50%, 02/01/99 .................. 4,218,750
-------------
5,629,070
-------------
Total Corporate Bonds (Cost $57,082,196) ..................................... 48,487,936
-------------
Foreign Government Bonds0.4%
4,350,000 eESCOM, E168, utility deb. (South Africa), 11.00%, 06/01/08 (Cost $1,032,280) 696,453
-------------
Zero Coupon Bonds85.3%
10,850,000 FICO Strips, 03/07/01 ........................................................ 8,444,706
12,520,000 FICO Strips, 04/06/01 ........................................................ 9,695,148
5,211,000 FICO Strips, 05/02/01 ........................................................ 4,016,644
1,116,000 FICO Strips, 05/11/01 ........................................................ 858,867
5,253,000 FICO Strips, 05/30/01 ........................................................ 4,029,361
7,348,000 FNMA Strips, 02/01/01 ........................................................ 5,746,297
8,100,000 GTC Trust Certificates-Israel, Series 1D, 05/15/01 ........................... 6,242,879
27,226,000 fGTC Trust Certificates-Israel, Series 2F, 05/15/01 .......................... 20,983,782
13,500,000 International Wireless Communication, senior disc. notes, (original accretion
rate 14.00%), 08/15/01....................................................... 7,425,000
5,000,000 a,dMcCrory Corp., deb., 07/15/94.............................................. 2,225,000
40,000,000 REFCO Strips, 04/15/01 ....................................................... 31,110,798
85,249,000 fU.S. Treasury Strips, 05/15/01 .............................................. 66,143,929
-------------
Total Zero Coupon Bonds (Cost $161,171,950) .................................. 166,922,411
-------------
Total Long Term Investments (Cost $259,021,720)............................... 273,796,626
-------------
bReceivables from Repurchase Agreements2.8%...................................
$ 5,406,860 Joint Repurchase Agreement, 5.678%, 12/02/96, (Maturity Value $5,434,022)
(Cost $5,431,452)
B.A. Securities, Inc., (Maturity Value $601,728)
Collateral: U.S. Treasury Notes, 5.75% - 6.625%, 03/31/97 - 09/30/97
Bear, Stearns & Co., Inc., (Maturity Value $620,198)
Collateral: U.S. Treasury Bills, 12/19/96 - 05/29/97
U.S. Treasury Notes, 5.125% - 8.50%, 04/15/97 - 11/15/98
B.T. Securities Corp., (Maturity Value $601,728)
Collateral: U.S. Treasury Notes, 5.875%, 11/15/99
CIBC Wood Gundy Securities Corp., (Maturity Value $601,728)
Collateral: U.S. Treasury Notes, 6.625% - 7.25%, 02/15/98 - 06/30/01
Daiwa Securities America, Inc., (Maturity Value $601,728)
Collateral: U.S. Treasury Notes, 6.125%, 08/31/98
Fuji Securities, Inc., (Maturity Value $601,728)
Collateral: U.S. Treasury Notes, 5.50% - 8.00%, 01/15/97 - 08/31/00
Greenwich Capital Markets, Inc., (Maturity Value $601,728)
Collateral: U.S. Treasury Notes, 6.00% - 6.25%, 05/31/98 - 08/31/00
SBC Warburg, Inc., (Maturity Value $601,728)
Collateral: U.S. Treasury Notes, 5.875%, 03/31/99
UBS Securities, L.L.C., (Maturity Value $601,728)
Collateral: U.S. Treasury Notes, 6.125% - 7.25%, 05/31/97 - 07/31/98.......... $ 5,431,452
-------------
Total Investments (Cost $264,453,172)142.8% .................................. 279,228,078
Liabilities in Excess of Other Assets (42.8)%................................. (83,605,553)
-------------
Net Assets100.0%.............................................................. $195,622,525
=============
At November 30, 1996, the net unrealized appreciation based on
the cost of investments for income tax purposes of
$264,506,726 was as follows:
Aggregate gross unrealized appreciation for all investments in which there was
an excess of value over tax cost............................................. $ 30,511,184
Aggregate gross unrealized depreciation for all investments in which there was
an excess of tax cost over value............................................. (15,789,832)
-------------
Net unrealized appreciation................................................... $ 14,721,352
=============
</TABLE>
PORTFOLIO ABBREVIATIONS:
FICO - Financing Corp.
FNMA - Federal National Mortgage Association
GTC - Government Trust Certificates
L.L.C. - Limited Liability Corp.
PIK - Payment-in-Kind
REFCO - Resolution Funding Corp.
S.F. - Sinking Fund
aNon-income producing.
bFace amount for repurchase agreements is for the underlying collateral. See
Note 2g regarding joint repurchase agreement.
cPurchased in a private placement transaction; resale may only be to qualified
institutional buyers.
dSee Note 8 regarding defaulted securities.
eFace amount is stated in foreign currency and value is stated in U.S. dollars.
fA portion of this security is designated as collateral for reverse repurchase
agreement transactions.
gSee Note 9 regarding holdings of 5% voting securities.
The accompanying notes are an integral part of these financial statements.
FRANKLIN PRINCIPAL MATURITY TRUST
Financial Statements
Statement of Assets and Liabilities
November 30, 1996
Assets:
Investments in securities, at value
(identified cost $259,021,720) $273,796,626
Receivables from repurchase
agreements, at value and cost 5,431,452
Interest and dividends receivable 1,880,075
--------------
Total assets 281,108,153
--------------
Liabilities
Payables:
Reverse repurchase agreements
(Note 2) 84,101,845
Distributions to shareholders 920,817
Accrued interest (Note 2) 316,550
Management fees 97,466
Shareholder servicing costs 11,000
Accrued expenses and other liabilities 37,950
--------------
Total liabilities 85,485,628
--------------
Net assets, at value $195,622,525
==============
Net assets consist of:
Accumulated distributions in excess
of net investment income $ (258,792)
Net unrealized appreciation on
investments and translation of
assets and liabilities denominated
in foreign currencies 14,773,588
Net realized loss from investments (5,467,036)
Capital shares 186,574,765
--------------
Net assets, at value $195,622,525
==============
Net asset per share
($195,622,525 / 20,462,600 shares
of capital stock outstanding) $9.56
==============
Statement of Operations
for the year ended November 30, 1996
Investment income:
Interest (Note 2) $16,968,485
Dividends 189,444
--------------
Total income $17,157,929
Expenses:
Management fees (Note 4) 1,111,254
Shareholder servicing costs 91,494
Professional fees 58,967
Reports to shareholders 34,479
Custodian fees 8,762
Trustees' fees and expenses 13,892
Other 40,459
--------------
Operating expenses 1,359,307
Interest expense (Note 2) 4,312,125
--------------
Total expenses 5,671,432
--------------
Net investment income 11,486,497
--------------
Realized and unrealized gain
(loss) from investments and
foreign currency:
Net realized loss from:
Investments (1,731,583)
Foreign currency transactions (13,000)
Net unrealized appreciation (depreciation) on:
Investments 22,126,388
Translation of assets and
liabilities denominated
in foreign currencies (1,002)
--------------
Net realized and unrealized
gain on investments and
foreign currency 20,380,803
Net increase in net assets
resulting from operations $31,867,300
==============
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, 1996 and 1995
1996 1995
--------- ---------
Increase (decrease) in net assets:
Operations:
Net investment income $ 11,486,497 $ 10,464,321
Net realized loss from
investments and foreign
currency transactions (1,744,583) (3,339,040)
Net unrealized appre-
ciation on investments
and translation of
assets and liabilities
denominated in
foreign currencies 22,125,386 22,265,305
--------- ---------
Net increase in
net assets
resulting from
operations 31,867,300 29,390,586
Distributions to
shareholders from:
Undistributed net
investment income: (10,791,012) (12,093,398)
In excess of net
investment income (258,792) --
--------- ---------
Net increase
in net assets 20,817,496 17,297,188
Net assets:
Beginning of year 174,805,029 157,507,841
--------- ---------
End of year (including
accumulated distributions
in excess of net investment
income of $258,792 at
11/30/96 and undistributed
net investment income of
$533,928 at 11/30/95) $195,622,525 $174,805,029
========= =========
Statement of Cash Flows
for the year ended November 30, 1996
Interest and dividends received $ 11,182,949
Interest expense paid (3,930,798)
Operating expenses paid (1,367,524)
--------------
Cash provided - operations 5,884,627
--------------
Investment purchases (1,242,155,754)
Investment sales 1,235,142,242
--------------
Cash used - investments (7,013,512)
--------------
Net increase in reverse repurchase
agreement transactions 13,017,656
Distributions to shareholders (11,888,771)
--------------
Cash provided - financing activities 1,128,885
Net increase in cash --
Cash at beginning of period --
--------------
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. The Fund seeks to provide investors with high current income.
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES
a. Security Valuation
Portfolio securities listed on a securities exchange or on the NASDAQ for which
market quotations are readily available are valued at the last sale price or, if
there is no sale price, within the range of the most recent quoted bid and asked
prices. Other securities are valued based on a variety of factors, including
yield, risk, maturity, trade activity and recent developments related to the
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. The Fund may utilize a
pricing service, bank or broker/dealer experienced in such matters to perform
any of the pricing functions, under procedures approved by the Board of Trustees
(the Board). Securities for which market quotations are not available, and
securities restricted as to resale, are valued in accordance with procedures
established by the Board.
The value of a foreign security is determined as of the earlier of the close of
trading on the foreign exchange on which it is traded or the close of trading on
the New York Stock Exchange. 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 prices 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, unless material. If events which materially
affect the value of these foreign securities occur during such period, these
securities will be valued in accordance with procedures established by the
Board.
b. 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.
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.
d. 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.
Original issue discount 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 and
foreign currency transactions - see Note 8.
A portion of the distributions received by the Fund may be characterized as tax
basis return of capital (ROC) distributions which are not recorded as dividend
income, but reduce the cost basis of the securities. ROC distributions exceeding
the cost basis of the securities are recognized by the Fund as capital gain.
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (cont.)
e. Accounting Estimates
The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of the
financial statements and the amounts of income and expense during the reporting
period. Actual results could differ from those estimates.
f. 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 the currencies against U.S. dollars on the
valuation date. Purchases and sales of securities, income and expenses are
translated at the rate of exchange quoted on the day that the transactions are
recorded. Differences between income and expense amounts recorded and collected
or paid are recognized when reported by the custodian.
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.
Realized foreign exchange gains or losses arise from sales and maturities of
short-term securities, sales of foreign currencies, gains or losses realized
between trade and settlement dates on security transactions, the difference
between the amounts of dividends and 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 such assets and liabilities, other than investments
in securities at the end of the reporting period, resulting from changes in
exchange rates.
g. 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 dealer 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. A repurchase agreement is accounted for as
a loan by the Fund to the seller, collateralized by underlying U.S. government
securities, which are delivered to the Fund's custodian. The market value,
including accrued interest, of the initial collateralization is required to be
at least 102% of the dollar amount invested by the Fund, with the value of the
underlying securities marked to market daily to maintain coverage of at least
100%. At November 30, 1996, all outstanding repurchase agreements held by the
Fund had been entered into on November 29, 1996.
h. Reverse Repurchase Agreements
During the year ended November 30, 1996, 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 as identified on the accompanying
Statement of Investments in Securities and Net Assets. The difference between
the selling
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (cont.)
h. Reverse Repurchase Agreements (cont.)
price and the repurchase price is accounted for as interest expense. At November
30, 1996, the outstanding reverse repurchase agreements, which were entered into
on November 5, 1996, and collateralized by zero coupon bonds issued by the U.S.
government or its agencies, will mature within 28 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 $84,101,845 5.42% 28 days $64,297,133 $87,127,711
</TABLE>
The Fund has entered into various interest rate swap agreements in order to
convert its interest exposure on a portion of the reverse repurchase agreements
from a current short-term rate to a long-term fixed rate. See Note 2i.
i. Interest Rate Swap Agreements
During the year ended November 30, 1996, 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 2h. 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 potential
subject to such credit risk are limited to the accrued interest. To minimize the
risk, the Fund's policy required all counterparties to have a minimum credit
rating of A. At November 30, 1996, the Fund had no outstanding interest rate
swaps.
NOTE 3 - DISTRIBUTIONS AND CAPITAL LOSS CARRYOVERS
At November 30, 1996, for tax purposes, the Fund had capital loss carryovers as
follows:
Expiring in:2002...................... 121,933
2003...................... 3,346,388
--------------
3,468,321
==============
In addition, from November 1, 1996 through November 30, 1996, the Fund incurred
approximately $1,945,161 of net realized capital losses. As permitted by tax
regulations, the Fund intends to elect to defer these losses and treat them as
having arisen in the year ended November 30, 1997.
For tax purposes, the aggregated cost of securities is higher (and unrealized
appreciation is lower) than for financial reporting purposes at November 30,
1996 by $53,554.
NOTE 4 - TRANSACTIONS WITH AFFILIATES AND RELATED PARTIES
a. Management Agreement
Under the terms of a management agreement, Franklin Advisers, Inc. (Advisers)
provides investment advice, administrative services, office space and facilities
to the Fund, and receives fees computed weekly and payable monthly at an
annualized rate of 0.60% of the Fund's average weekly net assets from June 1,
1993 through May 31, 1997. After May 31, 1997, the Fund will pay fees at an
annualized rate of 0.45% of its average weekly net assets from June 1, 1997
until May 31, 2001 (the anticipated termination of the Fund).
NOTE 4 - TRANSACTIONS WITH AFFILIATES AND RELATED PARTIES (cont.)
a. Management Agreement (cont.)
Under an agreement with Advisers, Franklin Templeton Services, Inc. (FT
Services) provides administrative services and facilities for the Fund. The fee
is paid by Advisers and computed monthly based on the average daily net assets.
It is not a separate expense of the Fund.
b. Other Affiliates and Related Party Transactions
Certain officers and trustees of the Trust are also officers and/or directors of
Advisers and FT Services, all wholly-owned subsidiaries 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, 1996, the Fund has an unlimited number of shares of beneficial
interest authorized with a par value of $.01.
NOTE 6 - PURCHASES AND SALES OF SECURITIES
Purchases and sales of securities (excluding purchases and sales of short-term
securities) for the year ended November 30, 1996 aggregated $70,283,691 and
$75,886,209, respectively.
NOTE 7 - STATEMENT OF CASH FLOWS
The Fund's financial statements for the year ended November 30, 1996 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, commissions and discounts, bonds paid-in-kind, stock dividends and
year-end income and expense accrual changes aggregating $5,601,870.
NOTE 8 - CREDIT RISK AND DEFAULTED SECURITIES
The Fund has 26.0% 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 rated 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, 1996, the Fund held four defaulted securities with a value
aggregating $6,307,500, representing 3.22% 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 9 - HOLDINGS OF 5% VOTING SECURITIES OF PORTFOLIO COMPANIES
Investments in portfolio companies, 5% or more of whose outstanding voting
securities are held by the Fund, are defined in the Investment Company Act of
1940 as affiliated companies. During the year ended November 30, 1996, the Fund
sold 700,000 shares of common stock and acquired 895 warrants of Ladish Co.,
Inc. The Fund had investments in affiliated companies at November 30, 1996 with
an aggregate value in the amount of $11,929,929.
NOTE 10 - SUBSEQUENT EVENTS
On December 12, 1996, the Board of Trustees declared the following per share
distribution:
From Undistributed
Record Date Payment Date Net Investment Income
-------------- ------------ --------------
December 31, 1996 January 15, 1997 $0.045
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,
1996 1995 1994 1993 1992
------ ------ ------ ------ ------
Per Share Operating Performance:
<S> <C> <C> <C> <C> <C>
Net asset value at beginning of period................. $8.54 $7.70 $9.62 $8.09 $8.06
------ ------ ------ ------ ------
Net investment income................................. 0.561 0.520 0.540 0.517 0.456
Net realized and unrealized gain (loss)
on securities......................................... 0.999 0.911 (1.766) 1.568 0.214
------ ------ ------ ------ ------
Total from investment operations....................... 1.560 1.431 (1.226) 2.085 0.670
------ ------ ------ ------ ------
Less distributions from:
Net investment income................................. (0.527) (0.591) (0.590) (0.517) (0.456)
Paid-in capital....................................... -- -- -- -- (0.184)
In excess of net investment income.................... (0.013) -- -- (0.038) --
Capital gains......................................... -- -- (0.104) -- --
------ ------ ------ ------ ------
Total distributions.................................... (0.540) (0.591) (0.694) (0.555) (0.640)
------ ------ ------ ------ ------
Net asset value at end of period....................... $9.56 $8.54 $7.70 $9.62 $8.09
====== ====== ====== ====== ======
Total Return+.......................................... 17.69% 14.21% (8.50%) 21.17% 4.88%
Ratios/Supplemental Data
Net assets at end of period (in 000's)................. $195,623 $174,805 $157,508 $196,895 $165,637
Ratio of expenses to average net assets................ 3.06% 3.32% 2.60% 2.98% 3.27%
Ratio of net investment income to
average net assets.................................... 6.20% 6.33% 5.86% 5.74% 5.51%
Portfolio turnover rate................................ 27.37% 30.57% 45.19% 70.91% 61.69%
Average commission rate++.............................. 0.0564 -- -- -- --
Market value per share at end of period+++............. $8.250 $7.50 $7.125 $8.50 $7.50
</TABLE>
+Total return measures the change in the market price of an investment over the
periods indicated. It is not annualized. It reflects the change in market value
of the capital shares, and assumes reinvestment of dividends and capital gains
in accordance with the dividend reinvestment plan.
++Represents the average broker commission rate per share paid by the Fund in
connection with the execution of the Fund's portfolio transactions in equity
securities.
+++Based on the last sale on the New York Stock Exchange.
Under Section 854(b)(2) of the Internal Revenue Code, the Fund hereby designates
1.11% of its ordinary income dividends paid (including short term capital gain
distributions) by the Fund as income qualifying for the dividends received
deduction for the year ended November 30, 1996.
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 statements of assets and liabilities of
Franklin Principal Maturity Trust (the Fund) including the Fund's statements of
investments in securities and net assets, as of November 30, 1996, 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 periods presented. 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, 1996, by correspondence with the custodian. 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, 1996, the results of its
operations and its cash flows for the year then ended, the changes in its net
assets for each of the two years in the period then ended, and the financial
highlights for each of the periods presented, in conformity with generally
accepted accounting principles.
COOPERS & LYBRAND L.L.P.
San Francisco, California
January 13, 1997
Franklin Principal Maturity Trust Annual Report November 30, 1996.
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 portfolio's composition on November 30,
1996, as a percentage of total portfolio market value.
<TABLE>
<CAPTION>
Portfolio Composition on November 30, 1996
<S> <C>
Treasury/Agency Zero-Coupon Bonds 47.5%
Corporate Bonds 21.2%
Common Stocks 17.6%
Foreign Government Bonds 10.0%
Other 3.7%
</TABLE>
