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.
Dear Shareholder:
It's a pleasure to bring you the Franklin Principal Maturity Trust's semi-annual
report for the period ended May 31, 1997.
The expanding U.S. economy showed few signs of inflationary pressure during the
reporting period. However, the Federal Reserve (the Fed) worried that continued
growth might create new price or wage increases. In March, the Fed raised
short-term interest rates by 25 basis points, from 5.25% to 5.50%. Despite
continued low inflation, interest rates experienced a moderate increase for the
period, in part because of the Fed's small rate hike. Within this environment,
the fund generated a positive cumulative total return of +9.43%, based on its
change in market price on the New York Stock Exchange for this reporting period
ended May 31, 1997.
The fund's portfolio remained largely unchanged during the six-month period.
Anticipating continued economic growth, we maintained several holdings that
could do well in the nation's expansionary environment, including Lone Star
Cement; Carson Pirie Scott & Co., a Midwest department store chain; and Rexene,
a chemical company that produces plastics used chiefly in consumer goods. Two
positions that performed exceptionally well during the reporting period are
homebuilder, NV Ryan, and Boeing supplier, Ladish. During the period, NV Ryan
reached an attractive selling price, and we liquidated our position for a gain.
As a supplier to Boeing Co., Ladish benefited significantly from Boeing's heavy
back log of orders, and at the close of the period, we remain optimistic
regarding its future.
Although the fund enjoyed several successes over the period, not all of our
holdings performed as well as we had hoped. The fund realized a net loss on our
position in Harvard Industries. Its strong, past performance and the high yields
of its securities originally attracted us to the company. Unfortunately, Harvard
Industries was encumbered by unexpectedly heavy losses from an ill advised
takeover of another company, Doehler-Jarvis. Upon the take over, Harvard assumed
numerous non-performing contracts, eventually forcing it into Chapter 11
bankruptcy.
With our fund objective of returning $10.00 per share drawing near, we plan to
become more conservative in our portfolio selections. In the future, we intend
to focus on more defensive investments, to facilitate liquidation of the
portfolio by May 2001. With this goal in mind, we are already working on raising
the credit quality standards for the high yield bonds we own.
This discussion reflects the strategies we employed for the fund during the six
months under review, and includes our opinions as of the close of the period.
Since economic and market conditions are constantly changing, our strategies,
and our evaluations, conclusions and decisions regarding portfolio holdings, may
change as new circumstances arise. Although past performance of a specific
investment or sector cannot guarantee future performance, such information can
be useful in analyzing securities we purchase or sell for the fund.
Sincerely,
Charles B. Johnson
President
Franklin Principal Maturity Trust
GRAPHIC MATERIAL 1 OMITTED - SEE APPENDIX AT END OF DOCUMENT
Dividend Distributions
12/1/96 - 5/31/97
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
- -----------------------------
Total 27.0 cents
Past performance is not predictive of future results.
Performance Summary
We are pleased to report that the Franklin Principal
Maturity Trust's share price on the New York Stock Exchange (NYSE) increased 50
cents, from $8.25 on November 30, 1996, to $8.75 on May 31, 1997. The Trust's
net asset value per share decreased 40 cents, from $9.57, to $9.17, for the same
period.
During the reporting period, the Trust distributed income dividends totaling 27
cents ($0.27) per share. Dividends will vary based on the earnings of the
portfolio, and past distributions are not predictive of future trends.
Based on an annualization of May's monthly dividend of 4.5 cents ($0.045 per
share) and the NYSE closing price of $8.75 on May 31, 1997, the Trust's
distribution rate was 6.17%.
The Franklin Principal Maturity Trust reported a cumulative total return of
+9.43% for the six-month period ended May 31, 1997. 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 six-month total return for the same
period was -1.16%. All total returns assume the reinvestment of dividends and
capital gains at market price on the reinvestment date.
We urge you to view your investment in Franklin Principal Maturity Trust with a
long-term perspective. As the table below shows, the Trust reported a cumulative
total return of 91.43%, based on net asset value, since its inception on January
19, 1989.
Periods ended May 31, 1997
Since
Inception
1-Year 5-Year (1/19/89)
- ----------------------------------------------------------------
Cumulative Total Return 1
Based on change in net asset value 9.10% 53.68% 91.43%
Based on change in market price 22.35% 56.31% 68.28%
Average Annual Total Return 1
Based on change in net asset value 9.10% 8.97% 8.16%
Based on change in market price 22.35% 9.34% 6.49%
Distribution Rate 2 6.17%
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.
2. Distribution rate is based on the annualization of the Trust's May 4.5 cents
per share monthly dividend and the New York Stock Exchange closing price of
$8.75 on May 31, 1997.
Franklin Principal Maturity Trust
Statement of Investments in Securities and Net Assets, May 31, 1997 (unaudited)
<TABLE>
<CAPTION>
SHARES/ VALUE
WARRANTS (NOTE 1)
<S> <C> <C>
Common Stocks & Warrants 26.4%
Aerospace/Defense 7.4%
2,144,000 a,g Ladish Co., Inc. ........................................................... $ 4,824,000
895 a,g Ladish Co., Inc., warrants ................................................. 9,176,979
5,000 a Sabreliner Corp., warrants ................................................. 37,500
-------------
14,038,479
-------------
Chemicals 3.8%
4,942 a Lanesborough Corp. ......................................................... 49
475,000 Rexene Corp. ............................................................... 7,065,625
-------------
7,065,674
-------------
Commercial Services 1.8%
227,991 a Emcor Group, Inc. .......................................................... 3,284,507
-------------
Electronics 0.1%
27,620 a Ampex Group, Inc. .......................................................... 177,804
-------------
Forest/Paper Products 0.4%
357,221 a WTD Industries, Inc. ....................................................... 781,421
-------------
Industrial 6.3%
286,075 Lone Star Industries, Inc. ................................................. 11,371,481
274,444 a,c,gTriangle Wire & Cable Corp. ................................................ 411,666
-------------
11,783,147
-------------
Real Estate
65,393 a XRC Corp. .................................................................. 654
-------------
Retail 5.2%
300,510 a Carson Pirie Scott & Co. ................................................... 9,691,448
456 a Hills Stores Co. ........................................................... 2,166
-------------
9,693,614
-------------
Technology/Information Systems 0.5%
48,081 a Wang Laboratories, Inc. .................................................... 985,661
-------------
Utilities 0.9%
248,077 a El Paso Electric Co. ....................................................... 1,767,549
-------------
Wireless/Telecommunications
13,500 a International Wireless Communication, warrants ............................. 135
-------------
Total Common Stocks & Warrants (Cost $23,412,986) .................... 49,578,645
-------------
Preferred Stocks 3.1%
Automotive 0.1%
203,479 a Harvard Industries, Inc., 14.25% pfd., PIK ................................. 152,609
-------------
Cable Television 2.9%
56,590 a Cablevision Systems Corp., Series M, 11.125% pfd., PIK ..................... 5,390,198
-------------
Financial Services 0.1%
20,000 Nortel, Inversora, SA, pfd., Series B ...................................... 270,000
-------------
Total Preferred Stocks (Cost $10,004,331) ............................ 5,812,807
-------------
Convertible Preferred Stocks
19,498 a Hills Stores Co., cvt. pfd., Series A (Cost $392,397) ...................... 96,271
-------------
Bank Debt 2.0%.............................................................
$ 4,550,000 Musicland Group, 7.1875% - 7.25%, revolving (Cost $3,578,734) .............. $ 3,685,500
-------------
Corporate Bonds 20.1%
Aerospace/Defense 1.6%
3,000,000 Sabreliner Corp., senior notes, 12.50%, 04/15/03 ........................... 3,015,000
-------------
Automotive 1.8%
4,500,000 c Exide Corp., senior sub. notes, 2.90%, 12/15/05 ............................ 2,761,875
2,000,000 a,d Harvard Industries, Inc., senior notes, 12.00%, 07/15/04 ................... 690,000
-------------
3,451,875
-------------
Chemicals 2.1%
7,700,000 Lanesborough Corp., senior notes, 10.00%, 04/15/00 ......................... 3,927,000
-------------
Electronics 2.7%
4,936,373 c Merisel, Inc., senior notes, 11.50%, 01/31/98 .............................. 5,059,783
-------------
Food & Beverages 2.7%
5,000,000 American Rice, Inc., mortgage, secured notes, 13.00%, 07/31/02 ............. 5,150,000
-------------
Food Retailing 0.2%
2,528,000 Almac, Inc., senior sub. notes, PIK, 11.50%, 11/18/04 ...................... 176,960
7,500,000 a,d Victory Markets, Inc., notes, 12.50%, 03/15/00 ............................. 225,000
-------------
401,960
-------------
Gaming & Leisure 3.2%
12,000,000 a,d Harrah's Jazz Co., first mortgage, 14.25%, 11/15/01 ........................ 5,700,000
-------------
Oil/Gas 1.2%
2,000,000 TransAmerican Refining Corp., first mortgage, Series 2, 16.50%
coupon to 08/15/98, 16.00% thereafter, 02/15/02 .......................... 2,230,000
-------------
Retail 0.2%
2,000,000 a,d Rickel Home Centers, units, 13.50%, 12/15/01 ............................... 380,000
-------------
Telecommunications 1.6%
3,000,000 c Comcast Cellular Corp., senior notes, 9.50%, 05/01/07 ...................... 3,007,500
-------------
Tobacco 2.8%
2,000,000 Liggett Group, senior notes, Series C, 19.75%, 02/01/99 .................... 1,300,000
74,000 Liggett Group, senior secured notes, Series C, 19.75%, 02/01/99 ............ 48,100
6,750,000 Liggett Group, S.F., senior secured notes, 11.50%, 02/01/99 ................ 3,915,000
-------------
5,263,100
-------------
Total Corporate Bonds (Cost $51,322,098) ............................. 37,586,218
-------------
Foreign Government Bonds 0.4%
4,350,000 e ESCOM, E168, utility deb. (South Africa), 11.00%, 06/01/08 (Cost $1,036,311) 761,433
-------------
Zero Coupon Bonds 89.8%
10,850,000 FICO Strips, 03/07/01 ...................................................... 8,490,666
12,520,000 FICO Strips, 04/06/01 ...................................................... 9,743,426
5,211,000 FICO Strips, 05/02/01 ...................................................... 4,035,487
1,116,000 FICO Strips, 05/11/01 ...................................................... 862,801
5,253,000 FICO Strips, 05/30/01 ...................................................... 4,047,042
7,348,000 FNMA Strips, 02/01/01 ...................................................... 5,792,347
$ 8,100,000 GTC Trust Certificates-Israel, Series 1D, 05/15/01 ......................... $ 6,271,927
27,226,000 f GTC Trust Certificates-Israel, Series 2F, 05/15/01 ......................... 21,081,418
13,500,000 International Wireless Communication, senior disc. notes,
(original accretion rate 14.00%), 08/15/01 ................................ 7,222,500
500,000 a,d McCrory Corp., deb., 07/15/94 .............................................. 12,188
5,500,000 Orion Network Systems, Inc., units, zero coupon
to 01/15/02, (original accretion rate 12.50%), 12.50%
thereafter, 01/15/07 ...................................................... 3,203,750
40,000,000 REFCO Strips, 04/15/01 ..................................................... 31,250,194
85,249,000 f U.S. Treasury Strips, 05/15/01 ............................................. 66,388,165
-------------
Total Zero Coupon Bonds (Cost $167,371,231) .......................... 168,401,911
-------------
Total Long Term Investments (Cost $257,118,088) ...................... 265,922,785
-------------
b Receivables from Repurchase Agreements 3.4%
6,352,754 Joint Repurchase Agreement, 5.518%, 06/02/97 (Maturity Value $6,364,154) (Cost $6,361,229)
B.A. Securities, Inc., (Maturity Value $507,302)
Collateral: U.S. Treasury Notes, 5.75% - 5.875%, 10/31/98 - 11/30/01
Barclays de Zoete Wedd Securities, Inc., (Maturity Value $450,525)
Collateral: U.S. Treasury Notes, 5.875% - 9.25%, 08/15/98 - 10/31/01
Bear, Stearns & Co., Inc., (Maturity Value $600,703)
Collateral: U.S. Treasury Notes, 5.625% - 6.875%, 06/30/98 - 03/31/02
CIBC Wood Gundy Securities Corp., ($600,703)
Collateral: U.S. Treasury Notes, 5.00% - 9.25%, 06/30/98 - 02/15/99
Daiwa Securities America, Inc., (Maturity Value $600,703)
Collateral: U.S. Treasury Notes, 5.50% - 6.75%, 07/31/98 - 08/31/01
Donaldson, Lufkin & Jenrette Securities Corp., ($600,703)
Collateral: U.S. Treasury Notes 5.625% - 7.75%, 01/31/98 - 01/31/00
Fuji Securities, Inc., (Maturity Value $600,703)
Collateral: U.S. Treasury Notes, 5.50% - 8.875%, 11/15/97 - 12/31/00
Sanwa Securities (USA) Co., L.P., (Maturity Value $600,703)
Collateral: U.S. Treasury Bills, 05/28/98
U.S. Treasury Notes 5.25% - 8.875%, 07/31/98 - 04/30/02
SBC Warburg, Inc., (Maturity Value $600,703)
Collateral: U.S. Treasury Notes 6.75%, 05/31/99
The Nikko Securities Co. International, Inc., (Maturity Value $600,703)
Collateral: U.S. Treasury Notes, 5.125% - 9.125%, 10/31/98 - 05/15/02
UBS Securities, L.L.C., (Maturity Value $600,703)
Collateral: U.S. Treasury Notes, 6.00% - 6.75%, 05/31/98 - 10/31/01 ....... 6,361,229
-------------
Total Investments (Cost $263,479,317) 145.2% .................... 272,284,014
Liabilities in Excess of Other Assets (45.2)% ................... (84,725,305)
-------------
Net Assets 100.0% ............................................... $187,558,709
=============
At May 31, 1997, the net unrealized appreciation based on
the cost of investments for income tax purposes of
$263,532,871 was as follows:
Aggregate gross unrealized appreciation for all investments in which there
was an excess of value over tax cost ....................................... $ 32,550,387
Aggregate gross unrealized depreciation for all investments in which there
was an excess of tax cost over value ...................................... (23,799,244)
-------------
Net unrealized appreciation .............................................. $ 8,751,143
=============
</TABLE>
PORTFOLIO ABREVIATIONS:
FICO - Financing Corp.
FNMA - Federal National Mortgage Association
GTC - Government Trust Certificates
L.L.C.- Limited Liability Corp.
L.P. - Limited Partnership
PIK - Payment-in-Kind
REFCO - Resolution Funding Corp.
S.F. - Sinking Fund
a Non-income producing.
b Face amount for repurchase agreements is for the underlying collateral. See
Note 1g regarding joint repurchase agreement.
c Purchased in a private placement transaction; resale may only be to qualified
institutional buyers.
d See Note 7 regarding defaulted securities.
e Face amount is stated in foreign currency and value is stated in U.S. dollars.
f These securities are designated as collateral for reverse repurchase agreement
transactions.
g See Note 8 regarding holdings of 5% voting securities.
The accompanying notes are an integral part of these financial statements.
Financial Statements
<TABLE>
<CAPTION>
Statement of Assets and Liabilities
May 31, 1997 (unaudited)
<S> <C>
Assets:
Investments in securities, at value (identified cost $257,118,088) $265,922,785
Receivables from repurchase agreements, at value and cost 6,361,229
Interest and dividends receivable 1,397,489
-------------
Total assets 273,681,503
-------------
Liabilities
Payables:
Investment securities purchased 94,500
Reverse repurchase agreements (Note 1) 84,664,220
Distributions to shareholders 920,817
Accrued interest (Note 1) 333,954
Management fees 92,425
Shareholder servicing costs 12,282
Accrued expenses and other liabilities 4,596
-------------
Total liabilities 86,122,794
-------------
Net assets, at value $187,558,709
=============
Net assets consist of:
Undistributed net investment income $ 239,443
Net unrealized appreciation on investments
and translation of assets and liabilities denominated
in foreign currencies 8,805,325
Accumulated net realized loss from investments
and foreign currency transactions (8,060,824)
Capital shares 186,574,765
-------------
Net assets, at value $187,558,709
=============
Net assets per share ($187,558,709 / 20,462,600
shares of capital stock outstanding) $9.17
=============
</TABLE>
<TABLE>
<CAPTION>
Statement of Operations
for the six months ended May 31, 1997 (unaudited)
<S> <C> <C>
Investment income:
Interest (Note 1) $9,003,679
Dividends 44,045
-------------
Total income $9,047,724
Expenses:
Management fees (Note 3) 565,609
Shareholder servicing costs 41,004
Professional fees 28,949
Reports to shareholders 17,098
Trustees' fees and expenses 7,315
Custodian fees 1,454
Other 7,238
-------------
Operating expenses 668,667
Interest expense (Note 1) 2,355,916
-------------
Total expenses 3,024,583
-------------
Net investment income 6,023,141
-------------
Realized and unrealized gain (loss) from investments and foreign currencies:
Net realized loss from:
Investments (2,592,342)
Foreign currency transactions (1,446)
Net unrealized appreciation (depreciation) on:
Investments (5,970,209)
Translation of assets and liabilities of denominated in foreign currencies 1,946
-------------
Net realized and unrealized loss on investments and foreign currencies (8,562,051)
-------------
Net decrease in net assets resulting from operations $(2,538,910)
=============
</TABLE>
<TABLE>
<CAPTION>
Statement of Changes in Net Assets for the six months ended May 31, 1997
(unaudited) and the year ended November 30, 1996
Six months Year ended
ended 5/31/97 11/30/96
<S> <C> <C>
Increase (decrease) in net assets:
Operations:
Net investment income $ 6,023,141 $ 11,486,497
Net realized loss from investments and foreign
currency transactions (2,593,788) (1,744,583)
Net unrealized appreciation (depreciation) on investments
and translation of assets and liabilities
denominated in foreign currencies (5,968,263) 22,125,386
-------------------------
Net increase (decrease) in net assets resulting from operations (2,538,910) 31,867,300
Distributions to shareholders:
From undistributed net investment income (5,524,906) (10,791,012)
In excess of net investment income -- (258,792)
-------------------------
Net increase (decrease) in net assets (8,063,816) 20,817,496
Net assets:
Beginning of period 195,622,525 174,805,029
-------------------------
End of period (including undistributed net investment
income of $239,443 at 5/31/97
and accumulated distributions in excess of net investment
income of $258,792 at 11/30/96) $187,558,709 $195,622,525
=========================
</TABLE>
<TABLE>
<CAPTION>
<S> <C>
Statement of Cash Flows
for the six months ended May 31, 1997 (unaudited)
Interest and dividends received $ 2,167,759
Interest expense paid (2,338,512)
Operating expenses paid (706,980)
-------------
Cash used - operations (877,733)
-------------
Investment purchases (915,961,370)
Investment sales 921,801,634
-------------
Cash provided - investments 5,840,264
-------------
Net increase in reverse repurchase agreement transactions 562,375
Distributions to shareholders (5,524,906)
-------------
Cash used - financing activities (4,962,531)
-------------
Net increase in cash --
Cash at beginning of period --
-------------
Cash at end of period $ --
=============
</TABLE>
The accompanying notes are an integral part of these financial statements.
Notes to Financial Statements (unaudited)
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES
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.
The following is a summary of significant accounting policies consistently
followed by the Trust in the preparation of its financial statements. The
policies are in conformity with generally accepted accounting principles for
investment companies.
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. 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 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.
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (cont.)
d. Investment Income, Expenses, and Distribution (cont.)
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.
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 assets and liabilities other than investments in
securities at the end of the reporting period, resulting from changes in
exchange rates.
g. Joint 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 May 31, 1997, all outstanding repurchase agreements held by the Fund
had been entered into on May 30, 1997.
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (cont.)
h. Reverse Repurchase Agreements
During the period ended May 31, 1997, 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
Investment in Securities and Net Assets. The difference between the selling
price and the repurchase price is accounted for as interest expense. At May 31,
1997, the outstanding reverse repurchase agreement, which was entered into on
May 7, 1997, and collateralized by zero coupon bonds issued by the U.S.
government or its agencies, will mature within 28 days and is as follows:
Amount of Weighted Weighted Cost of Value of
Counterparty Agreements Average Rate Average Maturity Collateral Collateral
- ------------------------------------------------------------------------------
Bear Stearns $84,664,220 5.68% 28 days $86,318,532 $87,469,583
NOTE 2 - 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 May 31, 1997 by
$53,554.
NOTE 3 - 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 of 0.45%
of its average weekly net assets until May 31, 2001 (the anticipated termination
of the Fund).
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 based on the average daily net assets. It is
not a separate expense of the Fund.
NOTE 3 - TRANSACTIONS WITH AFFILIATES AND RELATED PARTIES (cont.)
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 4 - TRUST SHARES
As a result of its initial public offering, 20,355,000 shares of beneficial
interest were sold at a price of $10.00 per share. The Fund received proceeds
from the sale of $189,301,500, after underwriting discounts of $.70 per share.
At May 31, 1997, the Fund has an unlimited number of shares at $.01 par value
authorized.
NOTE 5 - PURCHASES AND SALES OF SECURITIES
Purchases and sales of securities (excluding purchases and sales of short-term
securities) for the period ended May 31, 1997 aggregated $21,243,082 and
$26,886,434, respectively.
NOTE 6 - STATEMENT OF CASH FLOWS
The Fund's financial statements for the period ended May 31, 1997 include a
Statement of Cash Flows in compliance with SFAS 102. Cash used 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 $6,900,874.
NOTE 7 - CREDIT RISK AND DEFAULTED SECURITIES
The Fund has 21.2% 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 May 31, 1997, the Fund held five defaulted securities with a value
aggregating $7,007,188, representing 3.74% 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 8 - 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. The Fund had investments in such affiliated
companies at May 31, 1997 with an aggregate value in the amount of $14,412,645.
There were no transactions made in such affiliated issues for the six months
ended May 31, 1997.
NOTE 9 - 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 Harvard
Industries. As a result of this involvement in this committee, Advisers may be
in the 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 10 - FINANCIAL HIGHLIGHTS
Selected data for each share of beneficial interest outstanding throughout each
period are as follows:
<TABLE>
<CAPTION>
Year ended November 30,
------------------------------------------------------
1997* 1996 1995 1994 1993 1992
------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Per Share Operating Performance:
Net asset value at beginning of period $9.56 $8.54 $7.70 $9.62 $8.09 $8.06
------------------------------------------------------
Net investment income 0.30 0.56 0.52 0.54 0.52 0.46
Net realized and unrealized
gain (loss) on securities (0.42) 1.00 0.91 (1.77) 1.57 0.21
------------------------------------------------------
Total from investment operations (0.12) 1.56 1.43 (1.23) 2.09 0.67
------------------------------------------------------
Less distributions from:
Net investment income (0.27) (0.53) (0.59) (0.59) (0.52) (0.46)
Paid-in capital -- -- -- -- -- (0.18)
In excess of net investment income -- (0.01) -- -- (0.04) --
Capital gains -- -- -- (0.10) -- --
------------------------------------------------------
Total distributions (0.27) (0.54) (0.59) (0.69) (0.56) (0.64)
------------------------------------------------------
Net asset value at end of period $9.17 $9.56 $8.54 $7.70 $9.62 $8.09
======================================================
Market value per share at end of period+ $8.750 $8.250 $7.500 $7.125 $8.500 $7.500
Total Return++ 9.43% 17.69% 14.21% (8.50)% 21.17% 4.88%
</TABLE>
NOTE 10 - FINANCIAL HIGHLIGHTS (cont.)
<TABLE>
<CAPTION>
Year ended November 30,
------------------------------------------------------
1997* 1996 1995 1994 1993 1992
------------------------------------------------------
Ratios/Supplemental Data
<S> <C> <C> <C> <C> <C> <C>
Net assets at end of period (in 000's) $187,559 $195,623 $174,805 $157,508 $196,895 $165,637
Ratio of expenses to average net assets 3.21%** 3.06% 3.32% 2.60% 2.98% 3.27%
Ratio of net investment income
to average net assets 6.45%** 6.20% 6.33% 5.86% 5.74% 5.51%
Portfolio turnover rate 7.98% 27.37% 30.57% 45.19% 70.91% 61.69%
Average commission rate+++ 0.0600 0.0564 -- -- -- --
</TABLE>
*For the six months ended May 31, 1997.
**Annualized
+Based on the last sale on the New York Stock Exchange
++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.
Franklin Prinicpal Maturity Trust Semi-Annual Report May 31, 1997
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 format the composition of the fund's securities on
May 31, 1997, based on total market value.
Portfolio Composition
Treasury/Agency Zero-CouponBonds 58.1%
Common Stocks 18.3%
Corporate Bonds 14.2%
Corporate Zero-Coupon Bonds 3.8%
Other 5.6%
